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When China Owns Our Utilities

June 27, 2005

When China Owns Our Utilities

How Repeal of the Public Utility Holding Company Act Will Allow China or Other Foreign Countries to Buy and Control U.S. Electric and Natural Gas Utilities

WASHINGTON, D.C. – The proposed purchase of the U.S.-based oil company Unocal by the Chinese government-owned company CNOOC is raising plenty of national security concerns in Congress. But if Chinese ownership of Unocal represents a security concern, then lawmakers should seriously reconsider the wisdom of passing energy legislation that repeals the Public Utility Holding Company Act (PUHCA), the only barrier preventing China or other countries from owning gas and electric utilities.

PUHCA currently prevents foreign governments or companies from acquiring U.S. electric and natural gas utilities. Such foreign ownership could represent major security concerns because of the potential for massive economic disruption and even nuclear proliferation. The Senate is poised on Tuesday to approve a wide-ranging energy bill that includes the repeal of PUHCA. The House bill also repeals the 1935 law, which regulates utility finances and ownership and limits utility mergers.

“If the Senate goes ahead with repealing PUHCA when it votes on the energy bill, then it is asking for trouble when China or some other country wants to purchase our biggest utility companies,” said Public Citizen President Joan Claybrook. “Imagine the potential for chaos if a foreign power – especially an unpredictable, potentially hostile state like China – had the controls to our electricity grid or, worse yet, the keys to the deadly nuclear materials located at our commercial nuclear reactors.”

If PUHCA is repealed, not only the Chinese, but any other foreign government or company will be able to acquire and control U.S. utilities, and there will be no federal agency to regulate their activities. The Federal Energy Regulatory Commission (FERC) has no jurisdiction at this time over the owners of electric and natural gas utilities, and neither of the proposed energy bills would give FERC jurisdiction over foreign holding companies. The Securities and Exchange Commission currently regulates the financial activities of multi-state utility holding companies, but that authority would be nullified by the repeal of PUHCA.

China, for example, could acquire U.S. utilities such as Pacific Gas & Electric Co., the Southern Co. or American Electric Power Co. (or all of them, with current PUHCA’s limits on non-contiguous utilities mergers gone) and no U.S. agency would have any utility regulatory control over the Chinese holding company, much less the country. The same would be true of any other foreign country or company.

“If the United States is in a delicate situation now, in trying to determine whether Chinese control over Unocal presents national security concerns, at a time when the Chinese own large amounts of our country’s debt, just wait until the U.S. government has to decide why China – as opposed to, say, Scottish Power or England’s National Grid – should not be allowed to buy our public utilities that now own or might in the future build nuclear reactors,” said Lynn Hargis, an attorney for Public Citizen who formerly specialized in legal work involving PUHCA .

Though foreign ownership of utilities has been prohibited by PUHCA since 1935, regulatory loopholes have recently been exploited to allow some foreign companies to purchase U.S. assets.

In 1992, Congress passed a “foreign company” exemption to PUHCA, allowing American companies to acquire electric and natural gas utilities abroad by having such utilities declared to be “foreign utility companies” under PUHCA. Some foreign utility holding companies, such as Scottish Power, declared all their own electric and natural gas utilities to be “foreign utility companies” under PUHCA, thereby allowing their owners to acquire U.S. utilities for the first time since 1935, as long as they registered with the SEC under PUHCA. This gave the SEC substantial control over the foreign utility owners’ financial transactions with the U.S. utilities. Even so, the SEC has suggested several times in rulemakings that perhaps Congress did not intend in 1992 to allow foreign companies, much less foreign countries, to own U.S. public utilities. Congress has maintained silence on the question, and the pending energy bill proposes to repeal PUHCA altogether.