File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
New Century Energies, Inc.
1225 Seventeenth Street
Denver, Colorado 80202
__________________________________
(Name of company filing this statement
and address of principal executive offices)
None
__________________________________
(Name of top registered holding company)
Richard C. Kelly Doyle R. Bunch II
President and Treasurer Chairman and Secretary
1225 Seventeenth Street Tyler at Sixth
Denver, Colorado 80202 Amarillo, Texas 79101
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders
and communications in connection with this Application-
Declaration to:
William S. Lamb, Esq. Gary W. Wolf, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Cahill Gordon & Reindel
125 West 55th Street 80 Pine Street
New York, New York 10019 New York, New York 10005
Patricia T. Smith, Esq.
William M. Dudley, Esq.
Public Service Company of Colorado
1225 Seventeenth Street
Denver, Colorado 80202
TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transaction . . . . . . . . 1
A. Introduction . . . . . . . . . . . . . . . . . . . 1
1. General Request . . . . . . . . . . . . . . . 2
2. Overview of the Transaction . . . . . . . . . 2
B. Description of the Parties to the Transaction . . . 3
1. General Description . . . . . . . . . . . . . 3
a. PSCo . . . . . . . . . . . . . . . . . . 3
b. SPS . . . . . . . . . . . . . . . . . . . 5
c. NCE and its Subsidiaries . . . . . . . . 6
i. NCE . . . . . . . . . . . . . . . . 6
ii. PSCo Merger Corp . . . . . . . . . . 7
iii. SPS Merger Corp. . . . . . . . . . 7
iv. NC Services . . . . . . . . . . . . 7
v. NC Hold . . . . . . . . . . . . . . 8
vi. WestGas Interstate, Inc. . . . . . . 8
2. Description of Facilities . . . . . . . . . . 8
a. PSCo . . . . . . . . . . . . . . . . . . 8
i. General . . . . . . . . . . . . . . 8
ii. Electric Generating Facilities and
Resources . . . . . . . . . . . . . 9
iii. Electric Transmission Facilities . . 11
iv. Gas Facilities . . . . . . . . . . . 12
v. Other . . . . . . . . . . . . . . . 12
b. SPS . . . . . . . . . . . . . . . . . . . 13
i. General . . . . . . . . . . . . . . 13
ii. Electric Generating Facilities . . . 13
iii. Electric Transmission Facilities . . 14
iv. Other . . . . . . . . . . . . . . . 15
3. Non-Utility . . . . . . . . . . . . . . . . . 15
a. PSCo . . . . . . . . . . . . . . . . . . 15
b. SPS . . . . . . . . . . . . . . . . . . . 16
C. Description of Transaction . . . . . . . . . . . . 18
1. Background and Negotiations Leading to the
Proposed Transaction . . . . . . . . . . . . . 18
2. Merger Agreement . . . . . . . . . . . . . . . 21
D. PSCo and SPS Benefit Plans . . . . . . . . . . . . 22
E. Management and Operations of NCE Following the
Merger . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . 24
Item 3. Applicable Statutory Provisions . . . . . . . . . . 25
A. Legal Analysis . . . . . . . . . . . . . . . . . . 26
1. Section 10(b) . . . . . . . . . . . . . . . . 28
a. Section 10(b)(1) . . . . . . . . . . . . 29
i. Interlocking Relationships . . . . . 29
ii. Concentration of Control . . . . . . 29
b. Section 10(b)(2) -- Fairness of
Consideration . . . . . . . . . . . . . . 32
c. Section 10(b)(2) -- Reasonableness of
Fees . . . . . . . . . . . . . . . . . . 33
d. Section 10(b)(3) . . . . . . . . . . . . 35
2. Section 10(c) . . . . . . . . . . . . . . . . 37
a. Section 10(c)(1) . . . . . . . . . . . . 37
i. Retention of Gas Operations . . . . 38
ii. Other Businesses . . . . . . . . . . 46
I. Direct Subsidiary of NCE . . . . . . 47
II. Subsidiaries of NC Hold . . . . . . 47
III. Subsidiaries and Operations of
PSCo . . . . . . . . . . . . . . . 55
b. Section 10(c)(2) . . . . . . . . . . . . 58
i. Efficiencies and Economies . . . . . 58
ii. Integrated Public Utility System . . 62
3. Section 10(f) . . . . . . . . . . . . . . . . 68
4. Other Applicable Provisions - Section
9(a)(1) . . . . . . . . . . . . . . . . . . . 69
B. NC Services . . . . . . . . . . . . . . . . . . . . 70
C. UE . . . . . . . . . . . . . . . . . . . . . . . . 74
D. QPS . . . . . . . . . . . . . . . . . . . . . . . . 75
E. Other Services . . . . . . . . . . . . . . . . . . 77
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . 77
A. Antitrust . . . . . . . . . . . . . . . . . . . . . 78
B. Federal Power Act . . . . . . . . . . . . . . . . . 78
C. State Public Utility Regulation . . . . . . . . . . 78
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . 80
Item 6. Exhibits and Financial Statements . . . . . . . . . 80
A. Exhibits . . . . . . . . . . . . . . . . . . . . . 80
B. Financial Statements . . . . . . . . . . . . . . . 82
Item 7. Information as to Environmental Effects . . . . . . 83
Item 1. Description of Proposed Transaction
A. Introduction
This Application/Declaration seeks approvals relating
to the proposed combination of Public Service Company of Colorado
("PSCo") and Southwestern Public Service Company ("SPS"),
pursuant to which PSCo and SPS will become wholly owned
subsidiaries of New Century Energies, Inc. ("NCE"), a new
Delaware holding company (the "Transaction"). Following the
consummation of the Transaction, NCE will register with the
Securities and Exchange Commission (the "Commission") as a
holding company under the Public Utility Holding Company Act of
1935 (the "Act").
The Transaction is expected to produce substantial
benefits to the public, investors and consumers, and meets all
applicable standards of the Act. Among other things, PSCo and
SPS believe that the Transaction will allow the shareholders of
each of the companies to participate in a larger, financially
stronger company, that, through a pooling of the equity,
management, human resources and technical expertise of each
company, will be able to achieve increased financial stability
and strength, greater opportunities for earnings and dividend
growth, reduction of operating costs, deferral of certain capital
expenditures, efficiencies of operation, better use of facilities
for the benefit of customers, seasonal diversity of demand,
improved ability to use new technologies, greater retail and
industrial sales diversity and improved capability to make
wholesale power purchases and sales. In this regard, PSCo and
SPS believe that synergies created by the Transaction will
generate substantial cost savings to NCE which would not be
available absent the Transaction. PSCo and SPS have estimated
the dollar value of certain synergies resulting from the
Transaction to be approximately $770 million, net of costs to
achieve the savings, over the first 10-year period from 1997 to
2006. The expected Transaction benefits are discussed in further
detail in Item 3.A.2.b.i. below.
The shareholders of PSCo and SPS are scheduled to vote
on approval of the Transaction at their respective meetings to be
held on January 31, 1996. PSCo and SPS have submitted
applications requesting approval of the Transaction and/or
related matters to (i) the Public Utility Commission of the State
of Colorado (the "CPUC"), (ii) the Public Utility Commission of
the State of New Mexico (the "NMPUC"), (iii) the Public Service
Commission of the State of Wyoming (the "WPSC"), (v) the Public
Utility Commission of the State of Texas ("PUCT"), (vi) the
Kansas Corporation Commission (the "KCC"), (vii) the Federal
Energy Regulatory Commission (the "FERC") and (viii) the Nuclear
Regulatory Commission (the "NRC"). PSCo will also request the
approval of the Municipality of Brighton, Colorado as required
under the franchise granted by the municipality to PSCo.
Finally, both companies will make the required filings with the
Antitrust Division of the U.S. Department of Justice (the "DOJ")
and the Federal Trade Commission (the "FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"). See Item 4 below for additional detail
regarding these regulatory approvals. Apart from the approval of
the Commission under the Act, the foregoing approvals are the
only regulatory approvals required for the Transaction. In order
to permit timely consummation of the Transaction and the
realization of the substantial benefits it is expected to
produce, NCE requests that the Commission's review of this
Application/Declaration commence and proceed as expeditiously as
practicable.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, NCE
hereby requests authorization and approval of the Commission to
acquire, by means of the mergers described below, all of the
issued and outstanding common stock of PSCo, SPS and Cheyenne
Light, Fuel and Power Company, a Wyoming public utility company
and currently a wholly owned subsidiary of PSCo ("Cheyenne").
NCE also hereby requests that the Commission approve (i) the
acquisition by NCE of all of the outstanding voting securities of
New Century Services, Inc. ("NC Services"), New Century Hold Co.
("NC Hold") and West Gas Interstate, Inc., currently a non-
utility subsidiary of PSCO that is engaged in the gas
transportation business ("WGI"), under Section 9(a)(1) of the
Act; (ii) the acquisition by NC Hold of the outstanding voting
securities of all of SPS's, and certain of PSCo's, non-utility
subsidiaries under Section 9(a)(1) of the Act; (iii) NC Services
as a subsidiary service company in accordance with the provisions
of Rule 88 of the Act and the Service Agreement and the
Non-Utility Service Agreement as a basis for NC Services to
comply with Section 13 of the Act and the Commission's rules
thereunder; (iv) Utility Engineering Corporation ("UE"), which
following the consummation of the Transaction will be an indirect
subsidiary of NCE, as a subsidiary service company in accordance
with the provisions of Rule 88 of the Act and the UE Service
Agreement and the UE Non-Utility Service Agreement as a basis for
UE to comply with Section 13 of the Act and the Commission's
rules thereunder; (v) certain additional affiliate transactions
as being in accordance with the provisions of Section 13 of the
Act and (vi) the issuance of NCE Common Stock in connection with
the Transaction.
2. Overview of the Transaction
Pursuant to an Agreement and Plan of Reorganization,
dated as of August 22, 1995, as amended on December 8, 1995 (the
"Merger Agreement"), PSCo Merger Corp., a Colorado corporation
and a wholly-owned subsidiary of NCE ("PSCo Merger Corp."), will
be merged with and into PSCo, with PSCo continuing as the
surviving corporation (the "PSCo Merger"), and SPS Merger Corp.,
a New Mexico corporation and a wholly-owned subsidiary of NCE,
will be merged with and into SPS, with SPS as the surviving
corporation (the "SPS Merger"). As a result of the PSCo Merger
and the SPS Merger, and the declaration of a dividend by PSCo to
NCE of all of the stock of Cheyenne, PSCo, SPS and Cheyenne will
become operating subsidiaries of NCE, and NCE will be a holding
company within the meaning of the Act.
In addition, WGI will become a direct subsidiary of
NCE (by the declaration of a dividend by PSCo to NCE of WGI's
stock), as will NC Services and NC Hold (which will be newly
formed corporations). Upon consummation of the Transaction, the
non-utility subsidiaries of SPS will become subsidiaries of NC
Hold, and certain of the non-utility subsidiaries of PSCo will
become subsidiaries of NC Hold while others will remain
subsidiaries of PSCo (as described below). NCE is also
requesting approval of the terms of (1) the Service Agreement
among NC Services and the operating utility subsidiaries of NCE,
(2) the Non-Utility Service Agreement between NC Services and the
non-utility subsidiaries of NCE, (3) the UE Service Agreement
among UE and the utility subsidiaries of NCE and (4) the UE Non-
Utility Service Agreement among UE and the non-utility
subsidiaries of NCE. NCE is also requesting approval of the
acquisition by NC Hold of the outstanding capital stock of
certain of the non-utility subsidiaries of PSCo and of SPS. The
two SPS subsidiaries, Quixx Corporation ("Quixx") and UE will be
transferred through the sale by SPS of all of the outstanding
common stock of such subsidiaries to NC Hold in exchange for debt
of NC Hold. The subsidiaries of PSCo to be transferred to NC
Hold will be transferred by a declaration of a dividend of their
stock to NCE and subsequent capital contribution of their stock
to NC Hold. A chart of the proposed corporate structure of NCE
following consummation of the Transaction is attached hereto as
Exhibit E-6.
The common shareholders of PSCo and SPS will receive
one and 0.95 of one share of common stock, par value of $1.00 per
share, of NCE ("NCE Common Stock"), respectively, and will become
common shareholders of NCE (see Item 1.C.2 below). The
Transaction will have no effect on the shares of preferred stock
of PSCo and SPS issued and outstanding at the time of the
consummation of the Transaction, each series of which and each
share of which will remain unchanged. A copy of the Merger
Agreement is incorporated by reference as Exhibit B-1 hereto.
B. Description of the Parties to the Transaction
1. General Description
a. PSCo
PSCo was incorporated under the laws of the State of
Colorado in 1924 and is a public utility holding company exempt
from regulation by the Commission under the Act (except for
Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act
and Rule 2 thereunder. Pursuant to Rule 2, PSCo has filed a
statement with the Commission on Form U-3A-2 for the year ended
December 31, 1994, which was subsequently amended and which is
incorporated by reference as Exhibits H-3 and H-4 hereto.
PSCo and Cheyenne are primarily engaged in providing
electric and gas service in Colorado and Cheyenne, Wyoming. As
of December 31, 1994, PSCo provided electric utility service to
1.1 million customers, and Cheyenne provided electric utility
service to 33,000 customers in the Cheyenne area. In addition,
PSCo and Cheyenne provided gas utility service to approximately
920,000 and 26,000 customers, respectively. Maps of PSCo's and
Cheyenne's service territory are attached as Exhibits E-3 and E-4
respectively.
PSCo is subject to regulation as a public utility under
the Colorado Public Utilities Law as to retail electric and gas
rates and other matters by the CPUC. PSCo and Cheyenne are also
subject to regulation by the FERC with respect to the
classification of accounts, rates for any wholesale sales of
electricity, the interstate transmission of electric power and
energy, interconnection agreements, issuances of securities not
regulated by state commissions and acquisitions and sales of
certain utility properties under the Federal Power Act. Cheyenne
is subject to regulation in connection with its electric and gas
retail sales and other matters by the WPSC. In addition, PSCo
and Cheyenne are subject to regulation by the FERC under the
Natural Gas Act of 1935, as amended. PSCo is also currently
subject to regulation by the NRC in connection with its ownership
of the Fort St. Vrain nuclear generating facility. This facility
ceased operations on August 29, 1989 and is in the process of
being decommissioned in accordance with the terms of orders
issued by the NRC.
PSCo directly owns a majority of the issued and
outstanding common stock of nine non-utility companies. In
addition, PSCo has a controlling interest in six small water and
ditch companies, a general partner interest in a partnership
engaged in gas storage and minority interests in a number of
limited partnerships.
The common stock, par value of $5.00 per share, of PSCo
("PSCo Common Stock") is listed on the New York Stock Exchange
("NYSE"), the Chicago Stock Exchange and the Pacific Stock
Exchange. As of December 12, 1995, there were 63,350,157 shares
of PSCo Common Stock and 2,888,652 shares of PSCo preferred stock
outstanding. PSCo's principal executive office is located at
1225 Seventeenth Street, Denver, Colorado 80202. A copy of the
Restated Articles of Incorporation of PSCo is incorporated by
reference as Exhibit A-3.
For the year ended December 31, 1994, PSCo's operating
revenues on a consolidated basis were approximately $2.06
billion, of which approximately $1.4 billion were derived from
electric operations, $625 million from gas operations and $33
million from other operations. Consolidated assets of PSCo and
its subsidiaries at December 31, 1994 were approximately $4.2
billion, consisting of approximately $2.5 billion in identifiable
electric utility property, plant and equipment; approximately
$675 million in identifiable gas utility property, plant and
equipment; and approximately $990 million in other corporate
assets.
A more detailed summary of information concerning PSCo
and its subsidiaries is contained in PSCo's Annual Report on Form
10-K and Statement on Form U-3A-2 for the year ended December 31,
1994, as amended, copies of which are incorporated by reference
as Exhibits H-1, H-3 and H-4, respectively, and PSCo's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1995, June
30, 1995 and September 30, 1995 copies of which are incorporated
by reference as Exhibits H-5, H-6 and H-7, respectively.
b. SPS
SPS, incorporated under the laws of the State of New
Mexico in 1921, is a public utility company as defined in the
Act. SPS is engaged in the generation, transmission,
distribution and sale of electric energy. It serves a population
of approximately one million in a 52,000 square-mile area of the
Panhandle and south plains of Texas, eastern and southeastern New
Mexico, the Oklahoma Panhandle and southwestern Kansas. SPS
provides electric energy to 46 communities with a population of
2,000 or more: 35 in Texas, 9 in New Mexico and 1 each in
Oklahoma and Kansas. Approximately 56 percent of SPS's operating
revenues during fiscal 1995, excluding sales to other utilities,
were derived from operations in Texas. A map of SPS's service
area is attached as Exhibit E-3.
As a public utility under the laws of the states of
Texas, New Mexico, Kansas and Oklahoma, SPS is regulated by the
PUCT, NMPUC, KCC and the Oklahoma Corporation Commission (the
"OCC"), respectively, as to its retail rates, services,
accounts, depreciation, and acquisitions and sales of utility
properties, and in other respects. In addition, issuances of
securities by SPS are regulated by the NMPUC and the KCC, and the
issuances of securities secured by a lien on Oklahoma property is
regulated by the OCC. SPS is also subject to regulation by the
FERC with respect to borrowings and the issuance of securities
not regulated by the state commissions listed above, the
classification of accounts, rates to any wholesale customers, the
interstate transmission of electric power and energy,
interconnection agreements, and acquisitions and sales of certain
utility properties under the Federal Power Act.
SPS also owns all of the issued and outstanding common
stock of two corporations engaged in non-utility businesses,
which are described in more detail below.
The common stock of SPS, par value $1.00 per share (the
"SPS Common Stock"), is listed on the NYSE, the Chicago Stock
Exchange and the Pacific Stock Exchange. As of December 12,
1995, there were 40,917,908 shares of SPS Common Stock
outstanding. All outstanding shares of SPS Preferred Stock have
been redeemed or repurchased. SPS redeemed and repurchased these
shares to facilitate obtaining the required vote at the SPS
Annual Meeting to be held on January 31, 1996 for the approval of
the Transaction and for the modernization of the preferred stock
provisions in the SPS Restated Articles of Incorporation (the
"SPS Articles"), including eliminating the covenants imposed by
the current provisions. SPS may issue one or more series of
preferred stock following the SPS Annual Meeting, subject to
obtaining the necessary regulatory approvals. SPS's principal
executive office is located at SPS Tower, Tyler at Sixth,
Amarillo, Texas 79101. A copy of the SPS Articles and a copy of
the proposed amendment to such Articles to be voted upon at the
January 31, 1996 Annual Meeting of Shareholders are incorporated
by reference as Exhibits A-4 and C-1, respectively.
On a consolidated basis, SPS's operating revenues for
the year ended August 31, 1995 were approximately $834 million,
and its total assets at August 31, 1995 were approximately $1.9
billion.
More detailed information concerning SPS is contained
in the Annual Report of SPS on Form 10-K for the year ended
August 31, 1995 and the Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995, which are incorporated by
reference as Exhibits H-2 and H-8, respectively.
c. NCE and its Subsidiaries
i. NCE
NCE was incorporated under the laws of the State of
Delaware on August 21, 1995 to become a holding company for PSCo
and SPS following the Transaction and for the purpose of
facilitating the Transaction. NCE filed a Restated Certificate
of Incorporation on December 11, 1995. NCE has, and prior to the
consummation of the Transaction will have, no operations other
than those contemplated by the Merger Agreement to accomplish the
Transaction. Upon consummation of the Transaction, NCE will be a
public utility holding company and will own all of the issued and
outstanding common stock of PSCo, SPS, Cheyenne, NC Services, NC
Hold and WGI. NC Hold will, in turn, own all of the issued and
outstanding common stock of the SPS non-utility subsidiaries and
certain of the PSCo non-utility subsidiaries described in Item
1.B.3. below. At present, the common stock of NCE, which
consists of 200 issued and outstanding shares, is owned by PSCo
and SPS, each of which owns 100 shares. A copy of the Restated
Certificate of Incorporation of NCE is attached as Exhibit A-1.
ii. PSCo Merger Corp.
Solely for the purpose of facilitating the Transaction
proposed herein, PSCo Merger Corp. will be incorporated under the
laws of the State of Colorado prior to the consummation of the
Transaction. The authorized capital stock of PSCo Merger Corp.
will consist of 100 shares of common stock, no par value ("PSCo
Merger Corp. Common Stock"), all of which will be held by NCE.
PSCo Merger Corp. has not had, and prior to the closing of the
Transaction will not have, any operations other than the
activities contemplated by the Merger Agreement necessary to
accomplish the combination of PSCo Merger Corp. and PSCo as
herein described.
iii. SPS Merger Corp.
Solely for the purpose of facilitating the Transaction
proposed herein, SPS Merger Corp. will be incorporated under the
laws of the State of New Mexico prior to the consummation of the
Transaction. The authorized capital stock of SPS Merger Corp.
will consist of 100 shares of common stock, no par value ("SPS
Merger Corp. Common Stock"), all of which will be held by NCE.
SPS Merger Corp. has not had, and prior to the closing of the
Transaction will not have, any operations other than the
activities contemplated by the Merger Agreement necessary to
accomplish the combination of SPS Merger Corp. and SPS as herein
described.
iv. NC Services
Prior to the consummation of the Transaction, NC
Services will be incorporated in Delaware to serve as the service
company for the NCE system. NC Services will provide PSCo, SPS,
Cheyenne and the other companies of the NCE system with a variety
of administrative, management and support services.
NC Services will enter into a service agreement with
PSCo, SPS and Cheyenne (the "Service Agreement"). (A copy of the
form of Service Agreement as well as an appendix entitled
"Description of Services and Determination of Charges for
Services" is filed as Exhibit B-2).
For the direct and indirect non-utility subsidiaries of
NCE, NC Services will enter into one or more separate service
agreements (the "Non-Utility Service Agreement"). (A copy of the
form of Non-Utility Service Agreement as well as an appendix
entitled "Description of Services and Determination of Charges
for Services" is filed as Exhibit B-3).
The authorized capital stock NC Services will consist
of 1,000 shares of common stock, par value $.01 per share. Upon
consummation of the Transaction, all issued and outstanding
shares of NC Services common stock will be held by NCE.
v. NC Hold
Prior to the consummation of the Transaction, NC Hold
will be incorporated in Delaware to serve as a holding company
for (and directly or indirectly acquire the outstanding capital
stock of) the following non-utility subsidiary companies of PSCo
and SPS: e prime, inc. ("e prime"), Young Gas Storage Company,
Inc. ("Young Gas"), Natural Fuels Corporation Company ("Natural
Fuels"), Quixx and UE. These companies are described below in
Item 1.B.3.
The authorized capital stock of NC Hold will consist of
1,000 shares of common stock, par value $.01 per share. Upon
consummation of the Transaction, all issued and outstanding
shares of NC Hold common stock will be held by NCE. NC Hold will
also have issued debt to SPS in connection with its acquisition
of UE and Quixx as more fully described in Item 3.A.4 below.
vi. WestGas Interstate, Inc.
WGI is a natural gas transmission company operating in
Colorado and Wyoming that will be a wholly-owned subsidiary of
NCE following consummation of the Transaction. WGI's interstate
pipeline system consists of approximately 0.23 miles of 8-inch
pipe, 11.45 miles of 4-inch pipe, a 300 foot 8-inch discharge
main, and a meter station. The facilities extend from PSCo's
Chalk Bluffs meter station in Weld County, Colorado,
approximately two miles south of the Wyoming border, north to the
WestGas Paraffin Meadows meter station in Laramie County,
Wyoming. This meter station is interconnected with the Cheyenne
distribution system, approximately four miles south of the City
of Cheyenne, Wyoming.
The system's peak day capacity is 13 MMcf, and annual
throughput is 2,900 MMcf. Annual revenues are approximately
$109,000. WGI currently serves the following four customers
only: Cheyenne, Associated Interstate Pipeline Company, Enron
Power Marketing, Inc., and Frontier Oil and Refining Company.
2. Description of Facilities
a. PSCo
i. General
For the year ended December 31, 1994, PSCo and its
utility subsidiaries sold the following amount of electric energy
(at retail or wholesale) and distributed the following amount of
natural or manufactured gas at retail:
PSCo
Kwh of electric energy sold . . . . . . . . 23,270,399,589
Mcf of gas distributed at retail . . . . . . . . 144,561,732
Cheyenne
Kwh of electric energy sold . . . . . . . . . . 763,593,221
Mcf of gas distributed at retail . . . . . . . . . 5,066,104
ii. Electric Generating Facilities and Resources
As of December 31, 1994, PSCo had a total net
generating capability of approximately 3186 MW available from the
following units:
Arapahoe: Arapahoe is located in Denver, Colorado and has
an installed gross capacity of 262 MW and a net dependable
capacity of 246 MW. Its major fuel source is coal.
Cabin Creek: A pumped storage hydro station located near
Georgetown, Colorado and has a total capacity of 324 MW at
maximum load and a net dependable capacity of 162 MW.
Cameo: Cameo is located near Grand Junction, Colorado and
has an installed gross capacity of 77 MW and a net
dependable capacity of 72.7 MW. Its major fuel source is
coal.
Cherokee: Cherokee is located in Denver, Colorado and has
an installed gross capacity of 784 MW and a net dependable
capacity of 723 MW. Its major fuel source is coal.
Comanche: Comanche is located near Pueblo, Colorado and has
an installed gross capacity of 725 MW and a net dependable
capacity of 660 MW. Its major fuel source is coal.
Craig: Craig is located near Craig, Colorado and is
comprised of three units, two of which are owned by PSCo.
The total installed gross capacity of the units is 894 MW,
of which PSCo has a 9.72% undivided ownership interest.
PSCo's share in the installed gross capacity is 86.89 MW.
Its share in the net dependable capacity is 83.20 MW. Its
major fuel source is coal.
Hayden: Hayden, located near Hayden, Colorado is comprised
of two units, Units 1 and 2, which have gross maximum
capabilities of 202.1 MW and 285.96 MW, respectively. PSCo
has a 75.5% undivided ownership interest in Unit 1 and a
37.4% undivided ownership interest in Unit 2. Its total
share in the installed gross capacity of these units is
259.47 MW. Its total share in the net dependable capacity
is 236.90 MW. Its major fuel source is coal.
Pawnee: Pawnee is located near Brush, Colorado and has an
installed gross capacity of 530 MW and a net dependable
capacity of 495 MW. Its major fuel source is coal.
Valmont Unit 5: Valmont is located near Boulder, Colorado
and has an installed gross capacity of 188 MW and a net
dependable capacity of 178 MW. Its major fuel source is
coal.
Zuni: Zuni is located in Denver, Colorado and has an
installed gross capacity of 115 MW and a net dependable
capacity of 107 MW. Its major fuel source is coal.
PSCo has six combustion turbine units at various
locations. The total installed gross capacity of these
units is 209 MW. The units' net dependable capacity is 171
MW.
In addition to Cabin Creek, PSCo has 14 hydro units at
various locations, including one station (two units) not
owned by PSCo but operated by it under contract. These
units have a total installed gross capacity of 52.70 MW.
The units' net dependable capacity is 35.90 MW. Seasonal
hydro plant net dependable capabilities are based upon
average water conditions and limitations for each particular
season. The individual plant seasonal capabilities are
sometimes limited by less than design water flow.
PSCo has seven diesel generators at various locations
with a total of 15.5 MW installed gross capacity and net
dependable capacity.
PSCo purchases capacity and energy from various
regional utilities as well as Qualifying Facilities ("QFs"),
as that term is defined in the Public Utility Regulatory
Policies Act of 1978 ("PURPA") in order to meet energy needs
of its customers. Together, PSCo and Cheyenne purchased
approximately 37% of the total electric system energy input
for 1994.
PSCo's 1995 summer peak load, which occurred on
August 11, 1995, was 4262.2 MW and its 1995 winter peak load,
which occurred on January 4, 1995, was 3927.8 MW.
Cheyenne does not generate any electricity, but
purchases all of its electric energy requirements from an
unaffiliated electric utility. Cheyenne does own five small
diesel generating units (nameplate rating of 2 MW each) which are
held on cold standby and which have been contractually placed
under the control of the unaffiliated electric utility company
that supplies all of Cheyenne's electric energy requirements.
iii. Electric Transmission Facilities
PSCo's transmission system is located primarily within
Colorado although small portions of two jointly owned lines are
located in New Mexico and Nebraska, both along the Colorado
border. As of December 31, 1994, PSCo's transmission system
consisted of approximately 182 circuit miles of 345 KV overhead
lines; 1,832 circuit miles of 230 KV lines; 15 circuit miles of
230 KV underground lines; 65 circuit miles of 138 KV overhead
lines; 965 circuit miles of 115 KV underground lines; 19 circuit
miles of 115 KV underground lines; 355 circuit miles of 69 KV
overhead lines; 170 circuit miles of 44 KV overhead lines; and
1 circuit mile of 44 KV underground lines. PSCo jointly owns
with other utilities approximately 347 circuit miles of 345 KV
overhead lines and 330 miles of 230 KV overhead lines, of which
PSCo's share is 182 miles and 114 miles, respectively, which
shares are included in the amounts referred to above.
The system is interconnected with the systems of the
following utilities with which PSCo has major firm purchase power
contracts; capacity and energy are provided primarily by
generating sources in the locations indicated:
Utility Location
Basin Electric Power Cooperative Southeast Wyoming
PacifiCorp West & Northwest U.S.
Northwest Colorado
Platte River Power Authority Northcentral Colorado
Tri-State Southeast Wyoming and
Northwest Colorado
PSCo has wheeling agreements with the above, and with
other utilities and public power agencies, which are utilized to
provide capacity and energy to PSCo's system from time to time.
PSCo's transmission system also interconnects with the
system of the Western Area Power Administration ("WAPA").
PSCo is a member of the Western Systems Coordinating
Council (the "WSCC"), an interstate network of transmission
facilities which are owned by public entities and investor-owned
utilities. WSCC is the regional reliability council providing
planning and coordination for member electric power systems in
the Western United States. PSCo is also a member of the Western
Systems Power Pool (the "WSPP") which is an economic power pool
that operates an electronic bulletin board and acts as a
clearinghouse for bulk power transactions among over 90 member
utilities and marketers. The WSPP Agreement, to which PSCo is a
signatory, provides for the sale and purchase of capacity, energy
and transmission services at market-based rates with a cost-based
floor and ceiling.<F1>
Cheyenne owns two 115 KV transmission line segments
that total 25.5 miles in length that fall within and are operated
by WAPA's Loveland control area.
____________________
<F1> SPS is also a member of the WSPP, as described in Item b.iii
below.
iv. Gas Facilities
The gas property of PSCo at December 31, 1994 consisted
chiefly of approximately 14,619 miles of distribution mains
ranging in size from 0.50 to 30 inches and related equipment.
The Denver distribution system consisted of 8,100 miles of mains.
The gas property of Cheyenne at December 31, 1994
consisted chiefly of approximately 532 miles of
distribution/transmission mains ranging in size from 1 to 16
inches and related equipment.
v. Other
PSCo owns and operates four underground gas storage
facilities Rountup, Asbury, Fruita (all conventional depleted gas
reservoirs) and Leyden (a converted mined cavern). These
combined facilities have a maximum working volume of 18,974,000
Mcf, and a maximum daily sendout capacity of 252,000 Mcf/day.
PSCo's steam heating property at December 31, 1994
consisted of 10.5 miles of transmission, distribution and service
lines in the business district of Denver, including a steam
transmission line connecting the steam heating system with PSCo's
Zuni electric power plant. Steam is supplied from boilers
installed at PSCo's Denver Steam Plant, which has a capability of
295,000 pounds of steam per hour under sustained load. An
additional 300,000 pounds of steam per hour is available from
PSCo's Zuni electric generating plant on a peak demand basis.
PSCo also owns service and office facilities in Denver and other
communities located throughout its service territory.
In addition PSCo and its subsidiaries own other
property, plant and equipment supporting their electric and gas
utility functions. PSCo's former nuclear generating station,
Fort St. Vrain, located near Platteville, Colorado ceased
operations on August 29, 1989.
b. SPS
i. General
For the year ended August 31, 1995, SPS sold 20.3
billion kwh of electric energy (at retail and wholesale).
ii. Electric Generating Facilities
At December 31, 1995 SPS had a total of 4135 MW net
generation capability.
SPS's steam generation stations have a combined net
capability of 3990 MW. These stations are:
Harrington: Harrington, located near Amarillo, TX, has a
net capability of 1066 MW. Its principal fuel source is
coal.
Tolk: Tolk, located near Muleshoe, TX, has a net capability
of 1080 MW. Its principal fuel source is coal.
Jones: Jones, located near Lubbock, TX, has a net
capability of 486 MW. Its principal fuel source is natural
gas.
Plant X: Plant X, located near Earth, TX, has a net
capability of 442 MW. Its principal fuel source is natural
gas.
Nichols: Nichols, located near Amarillo, TX, has a net
capability of 457 MW. Its principal fuel source is natural
gas.
Cunningham: Cunningham, located near Hobbs, NM, has a net
capability of 267 MW. Its principal fuel source is natural
gas.
Maddox: Maddox, located near Hobbs, NM, has a net
capability of 118 MW. Its principal fuel source is natural
gas.
Moore County: Moore County, located near Sunray, TX, has a
net capability of 48 MW. Its principal fuel source is
natural gas.
CZ-2: CZ-2, located near Pampa, TX, has a net capability of
26 MW. Its principal fuel source is purchased steam.
SPS's other electric generation facilities -- gas
turbines and diesel engines -- have a total net capability of 145
MW. These stations are:
Carlsbad (gas turbine): Carlsbad, located in Carlsbad, NM,
has a net capability of 16 MW.
CZ-1 (gas turbine): CZ-1, located near Pampa, TX, has a net
capability of 10 MW.
Maddox (gas turbine): Maddox, located near Hobbs, NM, has a
net capability of 76 MW.
Riverview (gas turbine): Riverview, located near Borger,
TX, has a net capability of 25 MW.
Tucumcari (diesel engine): Tucumcari, located in Tucumcari,
NM, has a net capability of 15 MW.
SPS's summer peak load for the calendar year 1995,
which occurred on July 28, 1995, was 3952 MW and its 1995 winter
peak load, which occurred on February 28, 1995, was 2486 MW.
iii. Electric Transmission Facilities
As of December 31, 1994, SPS's transmission system
consisted of 319 circuit miles of 345 KV lines, 1,551 circuit
miles of 230 KV lines, 2,317 circuit miles of 138 KV lines and
1,827 circuit miles of 69 KV lines. SPS is in the southwest
corner of the Eastern Interconnection of the United States and is
a member of the Southwest Power Pool ("SPP"), one of the seven
reliability councils on the Eastern Interconnection. SPS is
bordered to the south and southeast by the Electric Reliability
Council of Texas ("ERCOT") and to the west by the WSCC. SPS is
not interconnected with ERCOT.
SPS is connected with utilities west of its service
territory through two high voltage direct current (HVDC)
interconnections in New Mexico and has four interconnecting
transmission lines with utilities of the SPP. These
interconnections are described in the following table:
Voltage (kilovolts)
Other
Location Interconnecting Utility The Company Utility
Near Artesia, NM El Paso Electric Co.
and Texas-New Mexico
Power Co. 230* 345
Near Clovis, NM Public Service Company
of New Mexico 230* 345
Near Oklaunion, Public Service Company
TX of Oklahoma 345 345
Near Elk City Public Service Company
OK of Oklahoma 230 230
Near Shamrock West Texas Utilities
TX 115 115
Near Guymon, OK West Plains Energy 115 115
*These are HVDC interconnections owned by the
interconnecting utilities. SPS has scheduling capabilities
over these facilities through the WSPP agreement and
pursuant to agreements with the interconnecting utilities.
Transactions with the SPP are handled through interties
near Elk City and Guymon, Oklahoma, and Shamrock and Oklaunion,
Texas. These interties allow SPS to sell energy to or to
purchase energy from the eastern electrical grid. Sales through
eastern interties accounted for 2.0% of fiscal 1995 total sales.
HVDC interconnections link SPS with the western
electrical grid of the United States. SPS purchases and sells
energy through HVDC interties near Artesia and Clovis, New
Mexico. Sales through these interties accounted for 4.1% of
fiscal 1995 total sales.
iv. Other
In addition, SPS and its subsidiaries own property,
plant and equipment supporting their electric utility functions.
3. Non-Utility
a. PSCo
PSCo has nine non-utility subsidiaries, eight of which
are wholly-owned: WGI, e prime, 1480 Welton, Inc. ("1480
Welton"), PS Colorado Credit Corporation ("PSCCC"), P.S.R.
Investments, Inc. ("PSRI"), Fuel Resources Development Co.
("Fuelco"), Young Gas and Green and Clear Lakes Company ("Green
and Clear Lakes"). In addition, PSCo owns 80% of the capital
stock of Natural Fuels.
WGI is a natural gas transmission company operating in
Colorado and Wyoming (see Item I.B.1.c.vi.); e prime will offer
energy related products and services to energy-using customers
and to selected segments of the utility industry; Fuelco has been
engaged in the exploration for, and the development and
production of, natural gas and oil, principally in Colorado; 1480
Welton is a real estate company which owns certain of PSCo's real
estate interests for use in its utility business; PSRI owns and
manages company owned life insurance (COLI) policies on certain
past and present employees, the benefits from which are to
provide future funding for general corporate purposes; PSCCC is a
company that finances (factors) certain of PSCo's current assets;
Young Gas holds a 47.5% interest in a partnership which owns an
underground gas storage facility; Green and Clear Lakes owns
water rights and storage facilities for water used at PSCo's
Georgetown Hydroelectric Station; and Natural Fuels sells
compressed natural gas as a transportation fuel to retail
markets, converts vehicles for natural gas usage, constructs
fueling facilities and sells miscellaneous fueling facility
equipment. PSCo also holds a controlling interest in several
other relatively small ditch and water companies whose capital
requirements are not significant and which are not consolidated
in PSCo's financial statements or statistical data.
Together, at December 31, 1994, PSCo's non-utility
subsidiaries and investments constituted less than three percent
of the consolidated book value of the assets of both PSCo and its
subsidiaries.
A corporate chart of PSCo and its subsidiaries, showing
their non-utility interests, is filed as Exhibit E-4.
b. SPS
SPS wholly owns two direct non-utility subsidiaries, UE
and Quixx. UE is a wholly owned subsidiary formed in 1986. It
is engaged in engineering, design, construction management and
other miscellaneous services, employing approximately 120
employees. UE's assets at August 31, 1995, were approximately
$42.3 million and total revenues for fiscal year 1995 were $38.5
million. Although SPS is UE's major client, UE is also involved
in other projects for nonaffiliate customers, providing general
engineering and design services. UE also works jointly with
Quixx on cogeneration projects.
Quixx is a wholly owned subsidiary formed in 1986. Its
primary business is investing in and developing cogeneration and
energy-related projects. Quixx also holds water rights and
certain other non-utility assets. Quixx employs approximately 70
employees. Quixx's assets at August 31, 1995 were approximately
$86.4 million and total revenues for fiscal year 1995 were $16.2
million.
UE has two affiliates as follows: S.A. Garza
Engineers, Inc. ("Sage"), in which UE holds a 39% convertible
preferred stock interest and a 12% common stock interest, is
involved in municipal water and wastewater projects, civil works,
surveying and environmental services and may in the future
provide services to NCE's utility subsidiaries; and Vista
Environmental Services, L.L.C., 49% of which is owned by UE,
performs environmental consulting services, client-regulatory
interfacing, complete site assessments, due diligence, waste
management planning, remedial action design and implementation,
groundwater valuation, mineral surveys, and on-site field
supervision in both the private and governmental sectors and is
providing site remediation services, and will continue to provide
site remediation and other services, to SPS.
Quixx has five wholly owned subsidiaries, four of which
hold partnership interests in various energy-related limited
partnerships. In addition, Quixx directly holds interests in
five other entities. The following is a description of Quixx's
subsidiaries and affiliates:
Quixx holds a 25% limited partnership interest in BCH
Energy Limited Partnership ("BCH"), which is constructing a
waste-to-energy cogeneration facility located near Fayetteville,
North Carolina to provide steam to a Du Pont De Nemours & Company
("Du Pont") plant near Fayetteville and electric power to
Carolina Power & Light.
Quixx holds a 95% interest in Vedco Louisville L.L.C.,
which owns a facility consisting of two gas-fired boilers
providing steam to a Du Pont plant in Louisville, Kentucky.
Quixx Jamaica, Inc., a wholly owned subsidiary of
Quixx, holds a 99% limited partnership interest in KES Jamaica,
L.P. which owns a 42.3 megawatt oil-fired combustion turbine
power plant located in Montego Bay, Jamaica, W.I. and sells
electricity to Jamaica Power Services.
Quixx holds a 32-1/3% limited partnership interest and,
through Quixx Carolina, Inc., a wholly owned subsidiary of Quixx,
a 1% general partnership interest in Carolina Energy, Limited
Partnership ("Carolina Energy"), which will develop, own and
operate solid waste fueled cogeneration facilities in Wilson and
Lenoir Counties, North Carolina, which will provide steam to a Du
Pont plant and will sell electric power to Carolina Power &
Light.
Quixx holds a 24.67% limited liability partnership
interest and, through Quixx WPP94, Inc., a wholly owned
subsidiary of Quixx, a 0.33% general partnership interest in
Windpower Partners, 1994, L.P., which owns a 35 megawatt
windplant in Texas and sells the electricity to the City of
Austin and the Lower Colorado River Authority.
Quixx Power Services, Inc., a wholly owned subsidiary
of Quixx, will operate and maintain generation facilities in
various locations, including the BCH and Carolina Energy
cogeneration facilities.
Amarillo Railcar Services, a railcar maintenance
facility owned and operated by Quixx, provides inspection, light
and heavy maintenance and storage for unit trains. A majority of
these services are provided for railcars that transport coal for
use by SPS.
Quixx holds a 50% general partnership interest in
Lindsay Cogeneration Limited Partnership, which intends to
construct and operate an on site cogeneration facility to be
utilized to remediate brine contamination of groundwater as
mandated by California.
Quixx holds a 1% general partnership interest and,
through Quixx Resources, Inc., a wholly owned subsidiary of
Quixx, a 99% limited partnership interest in Quixx WRR, L.P.,
which will hold all of Quixx's water rights located in Roberts,
Gray, Hutchinson and Carson Counties, Texas.
In addition, Quixx has royalty interests in coal and
other minerals produced and to be produced from certain New
Mexico properties owned by the Pittsburgh and Midway Coal Mining
Company. Quixx also finances sales of heat pumps and markets
other non-utility goods and services.
Together, SPS's non-utility subsidiaries constituted
approximately 13 percent of the consolidated book value of the
assets of SPS and it subsidiaries at August 31, 1995.
A corporate chart of SPS and its subsidiaries, showing
their non-utility interests, is filed as Exhibit E-5.
C. Description of Transaction
1. Background and Negotiations Leading to the Proposed
Transaction
PSCo and SPS have had numerous discussions over the
past several years related to various means of better utilizing
their facilities, including pursuing possibilities to enter into
joint ventures for the construction of various generation and
transmission facilities. In addition, PSCo and SPS share the
view that fundamental changes in the electric energy industry are
inevitable and that such changes are leading to greater
competition in a once monopolistic industry.
The Energy Policy Act of 1992 (the "1992 Act") granted
the FERC the authority to order electric utilities to provide
transmission service to other utilities and to other buyers and
sellers of electricity in the wholesale market. The 1992 Act
also created a new class of power producers, exempt wholesale
generators ("EWGs"), which are exempt from regulation under the
Act. The exemption from regulation under the Act of EWGs has
increased the number of entrants into the wholesale electric
generation market, thus increasing competition in the wholesale
segment of the electric utility industry.
Commencing in December 1993, pursuant to its authority
under the 1992 Act, the FERC issued a number of orders in spe-
cific cases directing utilities to provide transmission services.
Under the FERC's evolving transmission policies, utilities are
being required to offer transmission services to third parties on
a basis comparable to service that the utilities provide
themselves. On April 7, 1995, the FERC issued a notice of
proposed rule making under which it proposed to implement on a
comprehensive basis the comparable transmission service policies
it has developed in specific cases. The FERC's actions to date
and its transmission rulemaking proceeding have increased the
availability of transmission services, thus creating greater
competition in the wholesale power market.
In addition, state regulatory bodies in certain states
have initiated proceedings to review the basic structure of the
industry. These bodies are considering proposals to require some
measure of competition in the retail portion of the industry.
With the passage of the 1992 Act and the rapidly
changing utility environment in general, both PSCo and SPS began
investigating their individual strategic options related to the
new competitive landscape. Both companies reached the same
conclusions:
1. A key to future success would be to become a
quality low cost provider;
2. Size would be a key factor related to the various
options that could be provided to meet customer
demands and further reduce costs; and
3. Financial strength would be essential in the
changing environment.
On March 29, 1995, following an electric utility
industry meeting in Washington, D.C., senior management from both
PSCo and SPS met to discuss a variety of business opportunities
the two companies could jointly pursue as part of the changing
environment, including a possible merger.
Soon after this meeting, PSCo engaged the law firm of
LeBoeuf, Lamb, Greene & MacRae, L.L.P. to advise it with respect
to the potential business combination and SPS engaged the law
firm of Cahill Gordon & Reindel ("Cahill Gordon") to advise it
with respect to the potential business combination.
On May 12, 1995, certain PSCo employees met with
certain SPS employees to discuss, among other items, (i) the
hiring of Deloitte & Touche LLP ("Deloitte & Touche") to assist
the managements of PSCo and SPS in preparing a detailed synergy
analysis; (ii) establishing a timetable to investigate a
possible merger; (iii) the financial and operational modeling and
analysis that would be required; and (iv) the exchange of
preliminary information requests. On May 12, 1995, a
Confidentiality and Standstill Agreement was signed between PSCo
and SPS. Pursuant to that agreement, the two companies and their
representatives agreed to provide non-public information to each
other with a view toward exploring a possible business
combination.
Following those preliminary discussions, PSCo engaged
Barr Devlin & Co. Incorporated ("Barr Devlin") to act as its
financial advisor in connection with a possible business
combination with SPS and SPS engaged Dillon, Read & Co. Inc.
("Dillon Read") to act as its financial advisor in connection
with the possible business combination with PSCo.
During the months of June, July and August of 1995,
PSCo and SPS management personnel and representatives of Deloitte
& Touche had numerous meetings in Dallas and Denver to analyze
all aspects of the synergy study (i.e., operations and
maintenance, capacity deferrals, fuel savings, other corporate
programs, etc.). In these meetings, PSCo and SPS management
personnel, with the assistance of Deloitte & Touche, analyzed
potential savings which would be created by the Transaction and
which could not be obtained absent the Transaction and savings
which would be accelerated as result of the merging of the
operations of the two companies. Costs of achieving the merger-
related savings as well as savings which were already planned to
be achieved through other means were also identified and
quantified so that the synergy savings would be a "net" amount.
In addition, preliminary due diligence activities and financial
and operating modeling assumptions were discussed, and
conferences were held between the respective financial advisors
and counsel with respect to merger-related matters. In July,
representatives of LeBoeuf Lamb and Cahill Gordon began drafting
the Merger Agreement. Throughout this period, the Boards of
Directors of PSCo and SPS discussed various aspects of the
Transaction and the status of the negotiations.
On August 22, 1995, the PSCo Board met to review and
approve the Mergers. Barr Devlin rendered its written fairness
opinion, provided the PSCo Board with information supporting that
opinion and discussed in detail the analysis underlying its
opinion. The PSCo management and its legal advisors also made
presentations reviewing the transaction, including valuation
issues, legal issues, and issues concerning the Merger Agreement
and related documents. After the presentations, the PSCo Board
approved the Merger Agreement and related documents.
On August 22, 1995, the SPS Board met to approve the
Mergers. SPS management and its legal and financial advisors
made presentations reviewing the transaction (valuation, legal,
Merger Agreement and related documents). Dillon Read delivered
its fairness opinion to the SPS Board. After the presentations,
final negotiations were held with representatives of PSCo
regarding the conversion ratio. At the conclusion of those
discussions and negotiations, the SPS Board unanimously approved
the Merger Agreement and related documents.
Additional information regarding the background of the
Transaction is set forth in the NCE Registration Statement on
Form S-4 (Exhibit C-1 hereto).
2. Merger Agreement
The Merger Agreement provides for SPS Merger Corp. to
be merged with and into SPS, and PSCo Merger Corp. to be merged
with and into PSCo. The Merger Agreement is incorporated by
reference as Exhibit B-1.
Under the terms of the Merger Agreement, upon
consummation of the Transaction:
- each issued and outstanding share of PSCo Common
Stock,<F2> together with appurtenant rights, shall
be converted into the right to receive one share of NCE
Common Stock (the "PSCo Conversion Ratio");
- each issued and outstanding share of SPS Common
Stock,<F3> together with appurtenant rights, shall
be converted into the right to receive 0.95 of one
share of NCE Common Stock (the "SPS Conversion Ratio"
and, together with the PSCo Conversion Ratio, the
"Conversion Ratios");
- each share of PSCo Merger Corp. Common Stock issued and
outstanding prior to the Transaction will be converted
into one share of Common Stock of PSCo as the surviving
corporation;
- each share of SPS Merger Corp. Common Stock issued and
outstanding prior to the Transaction will be converted
into one share of Common Stock of SPS as the surviving
corporation; and
- all shares of capital stock of NCE issued and
outstanding immediately prior to the Transaction will
be cancelled.
The shares of preferred stock of PSCo and SPS outstanding at the
time of the consummation of the Transaction will remain preferred
stock of PSCo and SPS, respectively. The Transaction is
conditioned on being tax-free to PSCo and SPS shareholders
(except as to dissenters' rights and fractional shares.) Based
on the capitalization and the Conversion Ratios of PSCo and SPS
on December 1, 1995 the shareholders of PSCo and SPS would own
securities representing approximately 62.0% and 38.0%,
respectively, of the outstanding shares of common stock.
The Transaction is subject to customary closing
conditions, including the receipt of the requisite shareholder
approvals of PSCo and SPS and all necessary governmental
approvals, including the approval of the Commission.
The Transaction is designed to qualify as a tax-free
reorganization under Section 351 of the Internal Revenue Code of
1986, as amended. PSCo and SPS believe that the Transaction will
be treated as a "pooling of interests" for accounting purposes.
D. PSCo and SPS Benefit Plans
PSCo and SPS currently have ten plans which involve the
issuance of shares of the companies' common stock to
participating employees, or, in the case of Dividend Investment
Plans, shareholders, as follows: the PSCo Employee Savings and
Stock Ownership Plan, the PSCo Omnibus Incentive Plan, the PSCo
Annual Incentive Plan, the PSCo Long Term Incentive Plan, the
PSCo Automatic Dividend Reinvestment and Common Stock Purchase
Plan, the SPS 1989 Stock Incentive Plan, the SPS Employee
Investment Plan, the SPS Dividend Reinvestment and Cash Payment
Plan for Employees and the SPS Dividend Reinvestment and Cash
Payment Plan for Shareholders.
It is anticipated that for an undetermined period of
time after the consummation of the Transaction all, such PSCo and
SPS plans, except the dividend reinvestment plans, will be
maintained on substantially the same terms, except that shares of
NCE Common Stock will be used instead of PSCo Common Stock and
SPS Common Stock. It is also anticipated that the PSCo Dividend
Reinvestment Plan and the two SPS Dividend Reinvestment Plans
____________________
<F2> Other than treasury and certain other shares which will be
cancelled, fractional shares and shares held by holders who
dissent in compliance with Colorado law.
<F3> Other than those shares which will be cancelled, fractional
shares and shares held by holders who dissent in compliance
with New Mexico law.
will be terminated in connection with the consummation of the
Transaction to be replaced by an NCE dividend reinvestment plan
(the "NCE DRIP"). NCE will seek authorization from the
Commission as required in connection with NCE shares to be issued
under the PSCo or the SPS plans or the NCE DRIP.
At some point subsequent to the consummation of the
Transaction, it is intended that certain of the stock-based plans
of NCE (the "NCE Stock-Based Benefit Plans") will replace the
PSCo or SPS benefit plans with a similar name. It is intended
that each of the NCE Stock-Based Benefit Plans will contain
substantially the same provisions as the existing PSCo or SPS
plans with similar name. All of the NCE Stock-Based Benefit
Plans will be adopted and approved by PSCo and SPS, as the
shareholders of NCE, prior to the consummation of the
Transaction. Again, NCE will seek authorization from the
Commission as required in connection with NCE shares to be issued
under the NCE Stock Based Benefit Plans.
E. Management and Operations of NCE Following the Merger
The NCE Board of Directors and officers currently are
Doyle R. Bunch II, Executive Vice-President of SPS and Richard C.
Kelly, Senior Vice-President, Finance, Treasurer and Chief
Financial Officer of PSCo. Messrs. Bunch and Kelly will resign
from their current positions as directors and officers of NCE
upon consummation of the Transaction. Pursuant to the Merger
Agreement, upon consummation of the Transaction the NCE Board
will consist of 14 members, eight designated by PSCo and six by
SPS. As of the date hereof, PSCo and SPS had not determined
which individuals, in addition to Bill D. Helton, Chairman of the
Board of Directors and Chief Executive Officer of SPS, and Wayne
H. Brunetti, President, Chief Executive Officer and Chief
Operating Officer of PSCo, will be designated to serve as
directors of NCE upon consummation of the Transaction. Upon
consummation of the Transaction, the NCE Board of Directors shall
have four committees as follows: an audit committee, a
compensation committee, a finance committee and a nominating and
civic responsibility committee. PSCo and SPS each shall
designate the chairmen of two of these committees. In addition to
the chairmen, each committee shall consist of two members
designated by PSCo and two members designated by SPS. The Merger
Agreement provides that for four and one-half years following
consummation of the Transaction, these arrangements concerning
the NCE Board of Directors and its committees may not be modified
unless the terms of such modification are approved by a vote of
two-thirds of the NCE Board of Directors.
Initially, Mr. Helton will be Chairman of the Board of
Directors and Chief Executive Officer of NCE and Mr. Brunetti
will be NCE's Vice-Chairman of the Board, President and Chief
Operating Officer. Mr. Helton and Mr. Brunetti will each have an
employment agreement with NCE following the consummation of the
Transaction. The forms of these employment agreements are
attached as Annexes VI and VII to NCE's Registration Statement on
Form S-4 incorporated by reference herein as Exhibit C-1.
The Merger Agreement provides that NCE shall maintain
(i) its corporate offices in Denver, Colorado and (ii)
significant operating offices in Amarillo, Texas. Such provision
cannot be modified for four and one-half years following the
consummation of the Transaction unless the terms of such
modification are approved by a vote of two-thirds of the NCE
Board of Directors.
Following consummation of the Transaction, the
activities of NCE will be governed by its Restated Certificate of
Incorporation and Restated Bylaws, attached hereto as Exhibits A-
1 and A-2 respectively.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or
incurred, directly or indirectly, in connection with the
Transactions, including the solicitation of proxies, registration
of securities of NCE under the Securities Act of 1933, and other
related matters, are estimated as follows:
Commission filing fee relating to
Application/Declaration on Form U-1 . . . . $ 2,000
Commission filing fee for the
Registration Statement on Form S-4 . . . . *
Accountants' fees . . . . . . . . . . . . . *
Legal fees and expenses relating to the Act *
Other legal fees and expenses . . . . . . . *
Shareholder communication and proxy
solicitation . . . . . . . . . . . . . . *
NYSE listing fee . . . . . . . . . . . . . *
Exchanging, printing, and engraving of
stock certificates . . . . . . . . . . . . *
Investment bankers' fees and expenses
Barr Devlin & Co. Incorporated . . . . . *
Dillon, Read & Co. Inc. . . . . . . . . . *
Consulting fees related to human
resource issues, public relations,
regulatory support, and other
matters relating to the
Transaction . . . . . . . . . . . . . . . *
Expenses related to integrating
the operations of the merged company
and miscellaneous . . . . . . . . . . . . *
TOTAL
* To be filed by amendment.
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's
rules thereunder are or may be directly or indirectly applicable
to the proposed transaction:
Section of the Act Transactions to which section or rule is
or may be applicable
4, 5 Registration of NCE as a holding company
following the consummation of the
Transaction
6(a), 7 Issuance of NCE Common Stock in the
Transaction in exchange for shares of
PSCo and SPS Common Stock; issuance to
NC Hold of stock of certain non-utility
subsidiaries of PSCo and SPS; issuance
by NC Hold of debt to SPS; issuance by
NC Hold of stock to NCE; issuance by NC
Services of stock to NCE
9(a)(2), 10(a), Acquisition by NCE of common stock
(b), (c) and (f) of PSCo, SPS and Cheyenne
9(a)(1), 10 Acquisition by NCE of stock of WGI, NC
Services and NC Hold; acquisition by NC
Hold of stock of certain non-utility
subsidiaries of PSCo and SPS;
acquisition by SPS of debt of NC Hold
8, 11(b), 21 Retention by NCE of gas operations and
other businesses of PSCo and Cheyenne
13 Approval of the Service Agreement and
services provided to utility affiliates
thereunder by NC Services; approval of
the Non-Utility Service Agreement and
services provided to non-utility
affiliates thereunder by NC Services;
approval of the UE Service Agreement and
services provided to utility affiliates
thereunder by UE; approval of the UE
Non-Utility Service Agreement and
services provided to non-utility
affiliates thereunder by UE; approval of
the performance of certain services
between the NCE system companies
Rules
80-91 NC Services charges to NCE system
companies; UE charges to NCE system
companies; certain NCE system companies'
charges to other NCE system companies
87(a)(3) Services among NCE system companies
88 Approval of NC Services and UE as
subsidiary service companies
93, 94 Accounts, records and annual reports by
NC Services and UE
To the extent that other sections of the Act or the Commission's
rules thereunder are deemed applicable to the Transaction, such
sections and rules should be considered to be set forth in this
Item 3.
A. Legal Analysis
Section 9(a)(2) makes it unlawful, without approval of
the Commission under Section 10, "for any person . . . to
acquire, directly or indirectly, any security of any public
utility company, if such person is an affiliate . . . of such
company and of any other public utility or holding company, or
will by virtue of such acquisition become such an affiliate."
Under the definition set forth in Section 2(a)(11)(A), an
"affiliate" of a specified company means "any person that
directly or indirectly owns, controls, or holds with power to
vote, 5 per centum or more of the outstanding voting securities
of such specified company," and "any company 5 per centum or more
of whose outstanding voting securities are owned, controlled, or
held with power to vote, directly or indirectly, by such
specified company."
PSCo, SPS and Cheyenne are public utility companies as
defined in Section 2(a)(5) of the Act. Because NCE will acquire
more than five percent of the voting securities of each of PSCo,
SPS and Cheyenne as a result of the Transaction, and because
PSCo, SPS and Cheyenne will become "affiliates" of NCE as a
result of the Transaction, NCE must obtain the approval of the
Commission for the Transaction under Sections 9(a)(2) and 10 of
the Act. The statutory standards to be considered by the
Commission in evaluating the proposed transaction are set forth
in Sections 10(b), 10(c) and 10(f) of the Act.
As set forth more fully below, the Transaction complies
with all of the applicable provisions of Section 10 of the Act
and should be approved by the Commission. Thus:
- the consideration to be paid in the Transaction is fair
and reasonable;
- the Transaction will not create detrimental
interlocking relations or concentration of control;
- the Transaction will not result in an unduly
complicated capital structure for the NCE system;
- the Transaction is in the public interest and the
interests of investors and consumers;
- the Transaction is consistent with Sections 8 and 11 of
the Act; and
- the Transaction will comply with all applicable state
laws.
Furthermore, this Transaction also provides an
opportunity for the Commission to follow certain of the
interpretive recommendations made by the Division of Investment
Management (the "Division") in the report issued by the Division
in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report"). While the Transaction and the
requests contained in this Application/Declaration are well
within the precedent of transactions approved by the Commission
as consistent with the Act prior to the 1995 Report and thus
could be approved without any reference to the 1995 Report, a
number of the recommendations contained therein serve to
strengthen the Applicants' analysis and would facilitate the
creation of a new holding company better able to compete in the
rapidly evolving utility industry. The Division's overall
recommendation that the Commission "act administratively to
modernize and simplify holding company regulation. . . and
minimize regulatory overlap, while protecting the interests of
consumers and investors,"<F4> should be used in reviewing
this Application/Declaration since, as demonstrated below, the
Transaction will benefit both consumers and shareholders of NCE
and the other federal and state regulatory authorities with
jurisdiction over this Transaction will have approved it as in
the public interest. In addition, although discussed in more
detail in each applicable item below, the specific
recommendations of the Division with regard to financing
transactions,<F5> utility ownership<F6> and
diversification are applicable<F7> to this Transaction.
____________________
<F4> Letter of the Division of Investment Management to the
Securities and Exchange Commission, 1995 Report.
<F5> E.g., the reduced regulatory burdens associated with routine
financings. 1995 Report at 50.
<F6> E.g., the Commission should apply a more flexible
interpretation of the integration requirements under the
Act; interconnection through power pools, reliability
councils and wheeling arrangements can satisfy the physical
interconnection requirement of section 2(a)(29); the
geographic requirements of section 2(a)(29) should be
interpreted flexibly, recognizing technical advances
consistent with the purposes and provisions of the Act; the
Commission's analysis should focus on whether the resulting
system will be subject to effective regulation; the
Commission should liberalize its interpretation of the "A-B-
C" clauses and permit combination systems where the affected
states agree, and the Commission should "watchfully defer"
to the work of other regulators. 1995 Report at 71-7.
<F7> E.g., the Commission should promulgate rules to reduce the
regulatory burdens associated with energy-related
diversification and the Commission should adopt a more
flexible approach in considering all other requests to enter
into diversified activities. 1995 Report at 88-90.
1. Section 10(b)
Section 10(b) provides that, if the requirements of
Section 10(f) are satisfied, the Commission shall approve an
acquisition under Section 9(a) unless:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the
public interest or the interests of investors or consumers;
(2) in case of the acquisition of securities or
utility assets, the consideration, including all fees,
commissions, and other remuneration, to whomsoever paid, to
be given, directly or indirectly, in connection with such
acquisition is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of
the utility assets to be acquired or the utility assets
underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the
capital structure of the holding company system of the
applicant or will be detrimental to the public interest or
the interests of investors or consumers or the proper
functioning of such holding company system.
a. Section 10(b)(1)
i. Interlocking Relationships
By its nature, any merger results in new links between
theretofore unrelated companies. However, these links are not
the types of interlocking relationships targeted by
Section 10(b)(1), which was primarily aimed at preventing
business combinations unrelated to operating synergies.
The Merger Agreement provides for the Board of
Directors of NCE to be composed of members drawn from the Boards
of Directors of both PSCo and SPS. This is necessary to
integrate PSCo and SPS fully into the NCE system and will
therefore be in the public interest and the interests of
investors and consumers. Forging such relations is beneficial to
the protected interests under the Act and thus are not prohibited
by Section 10(b)(1).
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of
concentration and bigness" while preserving the "opportunities
for economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and reserves
and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system.
American Electric Power Co., 46 SEC 1299, 1309 (1978). In
applying Section 10(b)(1) to utility acquisitions, the Commission
must determine whether the acquisition will create "the type of
structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., 43 SEC 693, 700 (1968).
As discussed below, the PSCo-SPS strategic alliance will not
create a "huge, complex, and irrational system," but rather will
afford the opportunity to achieve economies of scale and
efficiencies which are expected to benefit investors and
consumers. American Electric Power Co., 46 SEC 1299, 1307
(1978).
Size: If approved, the NCE system will serve
approximately 1.5 million electric customers in six states and
946,000 gas customers in Colorado and Wyoming. As of and for the
year ended December 31, 1994: (1) the combined assets of PSCo
and SPS would have totaled approximately $6 billion; (2) combined
operating revenues of PSCo and SPS would have totaled
approximately $2.8 billion; and (3) combined owned generating
capacity totaled would have totaled approximately 7,248 MW.
By comparison, the Commission has approved a number of
acquisitions involving significantly larger operating utilities.
See, e.g., CINergy Corp., HCAR No. 26146 (Oct. 21, 1994)
(combination of Cincinnati Gas Electric Co. and PSI Resources;
combined assets at time of acquisition of approximately $7.9
billion); Entergy Corp., 55 HCAR No. 25952 (Dec. 17, 1993)
(acquisition of Gulf States Utilities; combined assets at time of
acquisition in excess of $21 billion); Northeast Utilities, HCAR
No. 25221 (Dec. 21, 1990) (acquisition of Public Service of New
Hampshire; combined assets at time of acquisition of
approximately $9 billion); Centerior Energy Corp., HCAR No. 24073
(April 29, 1986) (combination of Cleveland Electric Illuminating
and Toledo Edison; combined assets at time of acquisition of
approximately $9.1 billion); American Electric Power Co., 46 SEC
1299 (1978) (acquisition of Columbus and Southern Ohio Electric
combined assets at time of acquisition of close to $9 billion).
As the following table demonstrates, seven of the
fifteen registered electric utility holding company systems are
larger than NCE will be following the Transaction in terms of
assets, operating revenues, customers and/or sales of
electricity:<F8>
Total Operating Electric Sales in
System Assets Revenues Customers KWH
Total ($ Millions) ($ Millions) (Thousands) (Millions)
Southern 27,042 8,297 3,507 139,991
AEP 15,713 5,505 2,773 114,080
Entergy 22,613 5,798 2,360 97,452
CSW 10,909 3,623 1,661 57,334
GPU 9,210 3,650 1,949 42,658
Northeast 10,585 3,643 1,680 40,159
CINergy 7,720 2,796 1,221 50,579
NCE 6,018 2,881 1,476 44,229
In addition, NCE will be smaller than two of the registered
holding companies to be formed as a result of recently announced
mergers, specifically the merger of Wisconsin Energy Corp. and
Northern States Power Company (combined 1994 year-end assets of
approximately $10,362 million and operating revenues of $4,180
million) and Union Electric Company and CIPSCO, Inc. (combined 1994
year-end assets of approximately $8,402 million and operating revenues
of $2,850 million).
NCE will be a mid to small-size registered holding company,
and its operations would not exceed the economies of scale of current
electric generation and transmission technology or provide undue power
or control to NCE in the region in which it will provide service.
Efficiencies and economies: As noted above, the Commission
has rejected a mechanical size analysis under Section 10(b)(1) in
favor of assessing the size of the resulting system with reference to
the efficiencies and economies that can be achieved through the
integration and coordination of utility operations. More recent
pronouncements of the Commission confirm that size is not
determinative. Thus, in Centerior Energy Corp., HCAR No. 24073 (April
29, 1986), the Commission stated flatly that a "determination of
whether to prohibit enlargement of a system by acquisition is to be
made on the basis of all the circumstances, not on the basis of size
alone." In addition, in the 1995 Report, the Division recommended
that the Commission approach its analysis on merger and acquisition
transactions in a flexible manner with emphasis on whether the
Transaction creates an entity subject to effective regulation and is
beneficial for shareholders and customers as opposed to focusing on
rigid, mechanical tests.<F9>
By virtue of the Transaction, NCE will be in a position to
realize the "opportunities for economies of scale, the elimination of
duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations"
described by the Commission in American Electric Power Co. 46 SEC
1299, 1309. Among other things, the Transaction is expected to yield
significant capital expenditure savings through the deferral or
elimination of certain capacity requirements and a reduction in
reserve margin; savings through greater purchasing power; labor cost
savings; administrative and general savings; and cost-of-capital
savings. These expected economies and efficiencies from the combined
utility operations are described in greater detail below and are
projected to result in net savings of approximately $770 million over
the first ten years alone.
Competitive Effects: As the Commission noted in Northeast
Utilities, HCAR No. 25221 (Dec. 21, 1990), the "antitrust
ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal
and state administrative agencies regulate the rates charged
consumers." PSCo and SPS will file Notification and Report Forms with
the DOJ and FTC pursuant to the HSR Act describing the effects of the
Transaction on competition in the relevant market and it is a
condition to the consummation of the Transaction that the applicable
waiting periods under the HSR Act shall have expired or been
terminated.
In addition, the competitive impact of the Transaction is
being fully considered by the FERC before it approves the Transaction.
A detailed explanation of the reasons why the Transaction will not
threaten competition in even the most narrowly drawn geographic and
product markets is set forth in the prepared testimony of Dr. Robert
Spann, filed with the FERC on behalf of PSCo and SPS, a copy of which
is filed as Exhibit D-1.2.1 The application filed by PSCo and SPS
with the FERC is filed as Exhibit D-1.1.
For these reasons, the Transaction will not "tend toward
interlocking relations or the concentration of control" of public
utility companies, of a kind or to the extent detrimental to the
public interest or the interests of investors or customers within the
meaning of Section 10(b)(1).
b. Section 10(b)(2) -- Fairness of Consideration
Section 10(b)(2) requires the Commission to determine
whether the consideration to be given by NCE to the holders of PSCo
Common Stock and SPS Common Stock in connection with the Transaction
is reasonable and whether it bears a fair relation to investment in
and earning capacity of the utility assets underlying the securities
being acquired.<F10> Market prices at which securities are
traded have always been strong indicators as to values. As shown in
the table below, most quarterly price data, high and low, in the years
1994 and 1995, to date, for PSCo and SPS Common Stock provide support
for this conversion ratio.
____________________
<F8> Amounts are as of December 31, 1994 or for the year ended
December 31, 1994.
<F9> 1995 Report at 73-4.
<F10> The shares of PSCo preferred stock and SPS preferred
stock outstanding at the time of the consummation of
the Transaction will remain outstanding preferred stock
of PSCo and SPS, respectively.
PSCo SPS*
High Low Dividends High Low Dividends
1994
First Quarter $ 32 1/8 $ 28 1/2 $ 0.50 $ 30 7/8 $ 27 5/8 $ 0.55
Second Quarter 29 3/4 25 3/8 0.50 29 1/8 23 3/4 0.55
Third Quarter 27 7/8 24 3/4 0.50 27 1/4 24 7/8 0.55
Fourth Quarter 30 1/8 25 7/8 0.50 28 25 3/8 0.55
1995
First Quarter 31 1/2 29 0.51 29 3/8 26 1/2 0.55
Second Quarter 32 7/9 29 1/4 0.51 29 7/8 27 3/4 0.55
Third Quarter 34 1/2 30 5/8 0.51 32 7/8 28 5/8 0.55
Fourth Quarter** 35 33 1/8 -- 33 1/8 32 0.55
____________________
* The information is provided for calendar quarters. Fiscal
quarters for SPS end on the last day of each November, February, May
and August.
** Through December 8, 1995.
On August 22, 1995, the last full trading day before the
public announcement of the execution and delivery of the Merger
Agreement, the closing price per share on the NYSE Consolidated Tape
of (i) PSCo Common Stock was $31 1/2 and (ii) SPS Common Stock was $29
3/8, a ratio of 1 to 0.93.
The fairness of the Transaction's consideration is also
evidenced by the fact that the Transaction is a pure stock-for-stock
exchange and qualifies for treatment as a pooling of interests for
accounting purposes. As set forth more fully above, each share of
PSCo Common Stock will be converted into the right to receive one
share of NCE Common Stock, and each share of SPS Common Stock will be
converted into the right to receive 0.95 of one share of NCE Common
Stock. The Transaction will therefore involve no "acquisition
adjustment" or other write-up of the assets of SPS or PSCo.
In addition, the Conversion Ratios are the product of
extensive and vigorous arms-length negotiations between PSCo and SPS.
These negotiations were preceded by months of due diligence, analysis
and evaluation of the assets, liabilities and business prospects of
each of the respective companies. See NCE Registration Statement on
Form S-4 (Exhibit C-1 hereto).
Finally, nationally-recognized investment bankers for each
of PSCo and SPS have reviewed extensive information concerning the
companies and analyzed the Conversion Ratios employing a variety of
valuation methodologies, and have opined that the Conversion Ratios
are fair, from a financial point of view, to the respective holders of
PSCo Common Stock and SPS Common Stock. The investment bankers'
analyses and opinions are attached as Annexes II and III to NCE's
Registration Statement on Form S-4 and are described on pages 33-43 of
the Form S-4 (Exhibit C-1 hereto).
In light of these opinions and an analysis of all relevant
factors, including the benefits that may be realized as a result of
the Transaction, NCE believes that the Conversion Ratios fall within
the range of reasonableness, and the consideration for the Transaction
bears a fair relation to the sums invested in, and the earning
capacity of, the utility assets of PSCo and SPS.
c. Section 10(b)(2) -- Reasonableness of Fees
NCE believes that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the
Transaction relative to other transactions and the anticipated
benefits of the Transaction to the public, investors and consumers;
that they are consistent with recent precedent; and that they meet the
standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, PSCo
and SPS together expect to incur a combined total of approximately $18
million in fees<F11>, commissions and expenses in connection with
the Transaction. By contrast, Cincinnati Gas & Electric Company and
PSI Resources incurred $47.12 million in fees in connection with their
reorganization as subsidiaries of CINergy, Northeast Utilities alone
incurred $46.5 million in fees and expenses in connection with its
acquisition of Public Service of New Hampshire and Entergy alone
incurred $38 million in fees in connection with its recent acquisition
of Gulf States Utilities -- which amounts all were approved as
reasonable by the Commission. See CINergy, HCAR No. 26146 (Oct. 21,
1994); Northeast Utilities, HCAR No. 25548 (June 3, 1992); Entergy
Corp., HCAR No. 25952 (Dec. 17, 1993).
With respect to financial advisory fees, PSCo and SPS
believe that the fees payable to their investment bankers are fair and
reasonable for similar reasons.
Pursuant to the terms of Barr Devlin's engagement, PSCo has
agreed to pay Barr Devlin for its services in connection with the
Transaction: (i) a financial advisory retainer fee of $100,000 payable
upon signing the June 5, 1995 engagement letter; (ii) an initial
financial advisory progress fee of $1,000,000 payable upon execution
of the Merger Agreement; (iii) a second financial advisory progress
fee of $1,000,000 payable upon PSCo shareholder approval of the Merger
Agreement, and (iv) a transaction fee based on the aggregate
consideration to be received by SPS and holders of SPS Common Stock in
connection with the Transaction on the consummation of the
Transaction, ranging from 0.45 percent of such aggregate consideration
(for a transaction with an aggregate consideration of $1,000,000,000)
to 0.41 percent of such aggregate consideration (for a transaction
with an aggregate consideration of $2,000,000,000). All retainer fees
payable during the term of the engagement and all financial advisory
progress fees would be credited against any transaction fee payable to
Barr Devlin. PSCo has agreed to reimburse Barr Devlin for its out-of-
pocket expenses, including fees and expenses of legal counsel and
other advisors engaged with the consent of PSCo, and to indemnify Barr
Devlin against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of its engagement.
Pursuant to the engagement letter between SPS and Dillon
Read, SPS has paid Dillon Read the following amounts: $200,000 upon
the execution of the engagement letter and $450,000 upon the rendering
of Dillon Read's fairness opinion to the SPS Board. In addition, SPS
has agreed to pay Dillon Read $200,000 upon the affirmative vote of
SPS shareholders in favor of the Transaction, $100,000 on April 30,
1996, and $100,000 every six months thereafter until the Transaction
is consummated or Dillon Read's engagement has been terminated. SPS
has also agreed to pay Dillon Read a fee upon consummation of the
Transaction equal to 0.37 percent of the aggregate amount of
consideration received by SPS's common shareholders, less the $850,000
and the $100,000 semi-annual payments mentioned above which will have
previously been paid.
The investment banking fees of PSCo and SPS reflect the
competition of the marketplace, in which investment banking firms
actively compete with each other to act as financial advisors to
merger partners.
PSCo has agreed to reimburse Barr Devlin for its out-of-
pocket expenses, including fees and expenses of legal counsel and
other advisors engaged with the consent of PSCo, and to indemnify Barr
Devlin against certain liabilities, including liabilities under the
federal securities laws, relating to or arising out of its engagement.
SPS has agreed to reimburse Dillon Read for its out-of-
pocket expenses, including fees and expenses of legal counsel and
other advisors engaged with the consent of SPS, and to indemnify
Dillon Read against certain liabilities, including liabilities under
the federal securities laws, relating to or arising out of its
engagement.
d. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine
whether the Transaction will unduly complicate NCE's capital structure
or will be detrimental to the public interest, the interests of
investors or consumers or the proper functioning of NCE's system.
Capital structure: The corporate capital structure of NCE
after the Transaction will not be unduly complicated and will be
substantially similar to capital structures approved by the Commission
in other orders. See, e.g., CINergy, HCAR No. 26146 (Oct. 21, 1994);
Centerior Energy Corp., HCAR No. 24073 (April 29, 1986); Midwest
Resources, et al., HCAR No. 25159 (Sept. 26, 1990); Entergy Corp.,
HCAR No. 25952 (Dec. 17, 1993); Northeast Utilities, HCAR No. 25548
(June 3, 1992).
In the Transaction, the shareholders of PSCo and SPS will
receive NCE Common Stock. NCE will own 100% of the common stock of
PSCo and SPS and there will be no minority common stock interest
remaining in either company. Each share of PSCo and SPS preferred
stock outstanding at the time of the consummation of the Transaction
will remain outstanding preferred stock of PSCo and SPS, respectively.
The debt securities of PSCo and SPS outstanding at the time of the
consummation of the Transaction will likewise remain outstanding
without change. The only voting securities of NCE which will be
publicly held after the transaction will be NCE Common Stock. NCE
will have the ability to issue, subject to the approval of the
Commission, preferred stock, the terms of which, including any voting
rights, may be set by NCE's Board of Directors as has been authorized
by the Commission with regard to other registered holding companies.
See, e.g., The Columbia Gas System, Inc., HCAR No. 26361 (Aug. 25,
1995) (approving restated charter, including preferred stock whose
terms, including voting rights, can be established by the board of
directors). The only class of voting securities of NCE's direct and
indirect non-utility subsidiaries will be common stock and, in all but
one case, all issued and outstanding shares of such common stock will
be held by NCE or a subsidiary of NCE. NCE will hold 80% of the
common stock of Natural Fuels. In addition, NC Hold will have issued
debt to SPS in connection with its acquisition of the outstanding
voting securities of Quixx and UE as more fully described in
Item 3.A.4.ii below.
Set forth below are summaries of the historical capital
structure of PSCo as of December 31, 1994 and of SPS as of August 31,
1995 and the pro forma consolidated capital structure of NCE as of
September 30, 1995:
PSCo and SPS Historical Capital Structures*
(dollars in millions)
PSCo SPS
Common Stock Equity $1,267 $721
Preferred stock not
subject to Mandatory
redemption 140 73
Preferred stock subject
to mandatory redemption 45 --
Long-term Debt 1,181 583
Short-term Debt 325 --
Total $2,958 $1,490
NCE Pro Forma Consolidated Capital Structure*
(dollars in millions)
(unaudited)
Common Stock Equity $2,033
Preferred stock not
subject to mandatory
redemption 213
Preferred stock subject
to mandatory 41
redemption
Long-Term Debt 1,662
Short-Term Debt 326
Total $4,275
* All $73 million of SPS's preferred stock has been retired.
SPS may issue new preferred shares in 1996 and information
with regard to such shares will be supplied by amendment.
The pro forma consolidated capital structure of NCE has
been adjusted to reflect future nonrecurring charges
directly related to the Transaction, which result in,
among other things, the recognition of additional current
liabilities and a reduction in retained earnings.
NCE's pro forma consolidated common equity to total capitalization
ratio of 48% (which percent does not change after excluding the $73
million of SPS preferred stock recently retired) comfortably exceeds
the "traditionally acceptable 30% level." Northeast Utilities, 47 SEC
Docket at 1279, 1284 (1990).
Protected interests: As set forth more fully in Item
3.A.2.b.i (Efficiencies and Economies), Item 3.A.2.b.ii (Integrated
Public Utility System) and elsewhere in this Application/Declaration,
the Transaction is expected to result in substantial cost savings and
synergies, and will integrate and improve the efficiency of the PSCo
and SPS utility systems. The Transaction will therefore be in the
public interest and the interests of investors and consumers, and will
not be detrimental to the proper functioning of the resulting holding
company system.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the
provisions of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any
other interest, which is unlawful under the provisions of
Section 8 or is detrimental to the carrying out of the provisions
of Section 11<F12>; or
(2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public
utility system . . . .
____________________
<F11> This number is a preliminary estimate only, and will be
updated as necessary.
<F12> By their terms, Sections 8 and 11 only apply to
registered holding companies and are therefore
inapplicable at present to NCE, since it is not now a
registered holding company. The following discussion
of Sections 8 and 11 is included only because, under
the present transaction structure, M-P will register as
a holding company after consummation of the
Transaction.
a. Section 10(c)(1)
Section 10(c)(1) requires that an acquisition be lawful
under Section 8. Section 8 prohibits registered holding companies
from acquiring, owning interests in or operating both a gas and an
electric utility serving substantially the same area if state law
prohibits it. As discussed below, the Transaction does not raise any
issue under Section 8 or, accordingly, the first clause of
Section 10(c)(1). Indeed, Section 8 indicates that a registered
holding company may own both gas and electric utilities where, as
here, the relevant state utility commissions support such an
arrangement.
Section 10(c)(1) also requires that the transactions not be
detrimental to carrying out the provisions of Section 11.
Section 11(a) of the Act requires the Commission to examine the
corporate structure of registered holding companies to ensure that
unnecessary complexities are eliminated and voting powers are fairly
and equitably distributed. As described above, the Transaction will
not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered
holding company system to limit its operations "to a single integrated
public utility system, and to such other businesses as are reasonably
incidental, or economically necessary or appropriate to the operations
of such integrated public utility system," a combination integrated
gas and electric system within a registered holding company is
permissible under Section 8. Additionally, Section 11(b)(1) provides
that "one or more additional integrated public utility systems" may be
retained if, as here, certain criteria are met. Section 11(b)(2)
directs the Commission "to ensure that the corporate structure or
continued existence of any company in the holding company system does
not unduly or unnecessarily complicate the structure, or unfairly or
inequitably distribute voting power among security holders, of such
holding company system."
As detailed below, the Transaction will not be detrimental
to the carrying out of the provisions of Section 11.
i. Retention of Gas Operations
NCE's retention of the gas operations of PSCo is lawful
under Section 8 of the Act and would not be detrimental to the
carrying out of Section 11 of the Act.
Section 8: Section 8 of the Act provides that
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single
company of the utility assets of an electric utility company
and a gas utility company serving substantially the same
territory, it shall be unlawful for a registered holding
company, or any subsidiary company thereof . . . (1) to take
any step, without the express approval of the state
commission of such state, which results in its having a
direct or indirect interest in an electric utility company
and a gas company serving substantially the same territory;
or (2) if it already has any such interest, to acquire,
without the express approval of the state commission, any
direct or indirect interest in an electric utility company
or gas utility company serving substantially the same
territory as that served by such companies in which it
already has an interest. (emphasis added).
On its face, the section indicates that, with the approval
of the relevant state utility commissions, registered holding company
systems can include both electric and gas utility systems. A careful
reading of the section indicates that the thrust of the section is to
preclude the use by registered holding companies of separate gas and
electric utility companies with overlapping service territories in
order to circumvent any state law restrictions on the ownership of gas
and electric assets by the same company. Thus, two types of
combination registered holding companies are implicitly acceptable
under the statute absent such state objection -- a registered holding
company system that includes combination companies and a system that
includes separate gas and electric companies.
NCE believes that a reemphasis by the Commission on
Section 8, which would allow registered combination companies pending
state support, is consistent both with the Act and its policy
objectives. Indeed, over time the Commission has in fact emphasized
different aspects of Section 8 and its interplay with Section 11 --
initially allowing registered holding companies to own both gas and
electric systems under Section 8, then focusing on Section 11 as
controlling determinations regarding combination companies, and
requiring the second system to meet a strict interpretation of the
requirements set forth in clauses A, B and C of Section 11(b)(1).
In its early decisions, the Commission adhered to the
concept that the decision as to whether or not to allow combination
companies is one that states should make (although the Commission
might have to implement it in certain cases) and, where such systems
were permissible, the role of the Commission was to ensure that both
such systems are integrated as defined in the Act. The Commission's
most notable decision in this line is In the Matter of American Water
Works and Electric Company, Incorporated, 2 SEC 972 (1937). In this
case, the Commission approved the applicant's voluntary reorganization
plan under Section 11(e) of the Act and permitted the newly
reorganized registered holding company to retain its electric and its
gas operations, specifically noting that while the Act does not
contain a definition of single integrated utility in the context of a
combination company:
We believe, however, that it is proper to regard such a
combined property as a single integrated system, provided
that all of the electric properties are integrated and all
of the properties, both gas and electric, are in fairly
close geographic proximity and are so related that
substantial economies may be effectuated by their
coordination under common control. The question of public
policy as to the common ownership of gas and electric
facilities in the same territory is apparently left by the
statute to the decision of the states.<F13>
Thus, since the combination company did not violate state policy,
there was no need for the Commission to exercise jurisdiction to
implement state policy.
By the early 1940's, however, the Commission switched its
focus to Section 11 and adopted a narrow interpretation of the
standards contained therein as the controlling factor with regard to
combination registered holding companies.<F14> In connection
with its analysis of combination companies under Section 11, the
Commission frequently noted a policy concern existing at that time
which advocated separating the management of gas and electric
utilities based on the belief that the gas utility business tended to
be overlooked by combination company management who focused on the
electric business. Therefore, gas utilities would benefit from having
separate management focused entirely on the gas utility
business.<F15> However, both the legislative history of the Act
and recent changes in the utility industry indicate that it is a
propitious time for the Commission to reemphasize the provisions of
Section 8 of the Act and allow combination registered holding
companies where, as in this case, they are permitted under relevant
state law.
A review of the legislative history of Section 8 clarifies
this intent. In its report, the Senate Committee on Interstate
Commerce noted that the provision in Section 8 concerning combination
companies "is concerned with competition in the field of distribution
of gas and electric energy - a field which is essentially a question
of State policy, but which becomes a proper subject of Federal action
where the extra-State device of a holding company is used to
circumvent state policy." The Report of the Committee on Interstate
Commerce, S. Rep. No. 621 at 31 (1935). In addition, attached to the
above-referenced committee report is the Report of the National Power
Policy Committee on Public-Utility Holding Companies,<F16> which
sets forth a recommended policy that: "Unless approval of a State
commission can be obtained the commission should not permit the use of
the holding-company form to combine a gas and electric utility serving
the same territory where local law prohibits their combination in a
single entity." This does not prohibit combination companies where
such approvals can be obtained.
Much more recently, in the 1995 Report, the Division noted
"it does not appear that the SEC's precedent concerning additional
systems precludes the SEC from relaxing its interpretation of
Section 11(b)(1)(A)" and "that the utility industry is evolving toward
the creation of one-source energy companies that will provide their
customers with whatever type of energy supply they want, whether
electricity or gas," and recommended that the Commission interpret
Section 11(b)(1) of the Act to allow registered holding companies to
hold both gas and electric operations as long as each affected state
utility regulatory commission approves of the existence of such a
company.<F17> This change in the industry whereby, among other
things, customers are increasingly seeking the most economic means of
meeting their energy needs, and not simply their gas needs or their
electric needs, is evidenced by the transformation of traditional
utilities into energy service companies as well as the growth of new
energy providers such as marketers and even the treatment of energy as
a commodity for arbitrage transactions.
Another important factor in favor of focusing on state
commission determinations regarding combination companies is that one
of the primary goals of Congress in enacting the Act was to simplify
the corporate structures of holding company systems to enable states
to regulate the production and distribution of energy. Section 8
provides that the Act may be used as a tool to further state policy
when state policy prohibits combined electric and gas operations, and
implicitly allows such combination companies where consistent with
state policy. This is consistent with the general policy of the Act
that local regulators are in the best position to assess the needs of
their communities. The Act was never intended to supplant local
regulation but, rather, was intended to create conditions under which
local regulation was possible. Section 21 of the Act, which further
codifies this legislative intent, states: "Nothing in [the Act] shall
affect . . . the jurisdiction of any other commission, board, agency,
or officer of . . . any State, or political subdivision of any State,
over any person, security, or contract, insofar as such jurisdiction
does not conflict with any provision of [the Act] . . . ."
The legislative history reveals that Section 21 of the Act
was further intended "to insure the autonomy of state commissions
[and] nothing in the [Act] shall exempt any public utility from
obedience to the requirements of state regulatory law." The Report of
the Committee on Interstate Commerce, S. Rep. No. 621 at 10 (1935).
Thus, the Act should not be used as a tool to override state policy,
particularly when the holding company involved is subject to both
state and federal regulation and when the affected state regulatory
commissions have indicated their support for the combined electric and
gas operations in one holding company system.
Finally, this reemphasis on Section 8 fits within the
overall regulatory scheme of the Act. First, Section 11 of the Act is
flexible and was designed to change as the policy concerns over the
regulation of utility holding companies changed.<F18> As
discussed below, the utility industry and the regulation of that
industry has changed dramatically in recent years and it is
competitive forces (the very thing that the Act was designed to
promote) that are pushing holding companies to offer alternative forms
of energy. Second, a registered holding company would still be
required to demonstrate that any acquisition or transaction by which
it would become a combination company would not be detrimental to the
carrying out of the provisions of Section 11 of the Act. In other
words, its electric system would have to constitute an integrated
electric system and that its gas system would have to constitute an
integrated gas system and both systems must be capable of being
operated efficiently. Thus, the standards of Section 11 would still
have to be met, but the construction of those standards should take
into account the fundamental policy of the Act and allow local
regulators to make the major determination with regard to combination
companies.
NCE as a combination company is permissible pursuant to the
terms of Section 8 of the Act and is in the public interest. First,
the combination of electric and gas operations in PSCo and Cheyenne is
lawful under all applicable state laws. NCE will not be using its
holding company structure to circumvent any state regulations. In
addition, in their applications for approval of the Transaction by
both the Colorado and Wyoming regulatory commissions -- who have, and
will continue to have, direct jurisdiction over the NCE system's gas
operations located in their respective states -- PSCo and Cheyenne
have asked these commissions to indicate their support for NCE as a
combination electric and gas utility company through the retention of
PSCo's and Cheyenne's gas operations. Based on preliminary
discussions with the staffs of these commissions, the parties expect
that these Commissions will be supportive of such retention. In
addition, the existence of both gas and electric systems in the NCE
holding company system will allow NCE's customers greater choice to
meet their energy needs, especially given the fact that the electric
and gas systems operate in substantially the same territory.
Moreover, the prior fear that a holding company such as NCE would be
able to greatly emphasize one form of energy over the other based on
its own agenda has dissipated both because of the competitive nature
of the energy market, which requires utilities to meet customer demand
for energy above all else, and because state regulators will have
____________________
<F13> IN THE MATTER OF AMERICAN WATER WORKS AND ELECTRIC
COMPANY, INCORPORATED, 2 SEC at 983, n.3.
<F14> SEE, E.G., IN THE MATTER OF COLUMBIA GAS & ELECTRIC
CORPORATION, 8 SEC 443 at 463 (1941); In the Matter of
United Gas Improvement Company, HCAR No. 2692 (April
15, 1941); SECURITIES AND EXCHANGE COMMISSION v. NEW
ENGLAND ELECTRIC SYSTEM, 384 U.S. 176 (1966). It
should be noted that the Commission continued to give
primacy to state utility commission determinations in
making decisions regarding combination exempt holding
companies. SEE, E.G., In the Matter of Northern States
Power Company, HCAR No. 12655 (Sept. 16, 1954);
DELMARVA POWER & LIGHT CO., 46 S.E.C. 710 (1976); WPL
HOLDINGS, HCAR No. 24590 (Feb. 26, 1988).
<F15> SEE, E.G., IN THE MATTER OF THE PHILADELPHIA COMPANY,
28 SEC 35, 48 (1948); IN THE MATTER OF THE NORTH
AMERICAN COMPANY, 11 SEC 169, 179-80 (195); In the
Matter of Illinois Power Company, HCAR No. 16574 (Jan.
2, 1970).
<F16> The National Power Policy Committee was an committee
appointed by President Franklin D. Roosevelt consisting
of representatives from various government departments
concerned with power problems and instructed to report
to Congress on the coordination of government policy
relating to such problems. Its members were Harold L.
Ickes, Frank R. McNinch, Elwood Mead, T.W. Norcross,
Morris L. Cooke, Robert E. Healy, David E. Lilienthal
and Edward M. Markham.
<F17> 1995 Report at 15-6.
<F18> MISSISSIPPI VALLEY GENERATING CO., 36 SEC 159 (1955)
(noting that Congress intended the concept of
integration to be flexible); UNITIL Corporation, HCAR
No 25524 (April 24, 1992) (noting that section 11
contains a flexible standard designed to accommodate
changes in the industry).
sufficient control over, and would be unlikely to approve, a
combination company that attempts to undertake such practices.
Even if the Act were not interpreted as generally permitting
combination gas and electric systems, Section 11 contains additional
provisions that permit the retention by PSCo and Cheyenne of their
respective gas systems. Section 11(b)(1) of the Act permits a
registered holding company to control one or more additional
integrated public utility systems -- i.e., gas as well as electric --
if:
(A) each of such additional systems cannot be operated as
an independent system without the loss of substantial economies
which can be secured by the retention of control by such holding
company of such system;
(B) all of such additional systems are located in one
state, adjoining states, or a contiguous foreign country; and
(C) the continued combination of such systems under the
control of such holding company is not so large (considering the
state of the art and the area or region affected) as to impair
the advantages of localized management, efficient operation, or
the effectiveness of regulation.
In the 1995 Report, the Division recommended that the
Commission "liberalize its interpretation of the `A-B-C'
clauses."<F19> Historically, as a "guide" to determining whether
lost economies are "substantial" under Section 11(b)(1)(A), under its
previous narrow interpretation of this section, the Commission has
given consideration to four ratios, which measure the projected loss
of economies as a percentage of: (1) total gas operating revenues;
(2) total gas expense or "operating revenue deductions"; (3) gross gas
income; and (4) net gas income or net gas utility operating income.
Although the Commission has declined to draw a bright-line numerical
test under Section 11(b)(1)(A), under its previous narrow
interpretation of this Section it indicated that cost increases
resulting in a 6.78% loss of operating revenues, a 9.72% increase in
operating revenue deductions, a 25.44% loss of gross income and a
42.46% loss of net income would afford an "impressive basis for
finding a loss of substantial economies." Engineers Public Service
Co., 12 SEC 41, 59 (1942) (citation omitted).
Here, the lost economies that would be experienced if the
gas properties of PSCo and Cheyenne were to be operated on a
stand-alone basis meet, and in most instances, exceed these numbers,
without any increase in benefits to consumers. These lost economies
result from the need to replicate services, the loss of economies of
scale, the costs of reorganization, and other factors, and are
described more fully in the Analysis of the Economic Impact of a
Divestiture of the Gas Operations of PSCo and its Cheyenne Subsidiary
(the "Divestiture Study") (Exhibit J-1 hereto).
As set forth in the Divestiture Study, divestiture of the
gas operations of PSCo and Cheyenne into stand-alone companies would
result in lost economies of $43,605,187 for PSCo and $1,682,723 for
Cheyenne. These lost economies compare with gas operating revenues of
$677,326,418 for PSCo and $15,630,080 for Cheyenne; gas operating
revenue deductions of $607,599,384 for PSCo and $13,681,672 for
Cheyenne; gas gross income of $69,727,034 for PSCo and $1,948,408 for
Cheyenne, and gas net income of $51,266,520 for PSCo and $1,530,526
for Cheyenne.
On a percentage basis, the lost economies amount to 6.44% of
gas operating revenue, 7.18% of gas operating revenue deductions,
62.54% of gross gas income and 85.06% of net gas income for PSCo as
well as 10.77% of gas operating revenues; 12.30% of gas operating
revenue deductions, and 86.36% of gross gas income and 109.94% of net
gas income for Cheyenne. The percent losses in net gas income alone
that will be suffered by the PSCo and Cheyenne gas system if operated
on a stand-alone basis exceed the 30% loss in the New England Electric
System case that the Commission has described as the highest loss of
net income in any past divestiture order.<F20> The percentage
loss that would be suffered by PSCo in gas operating revenue and gross
gas income exceeds the percentage loss in the majority of
diversification orders issued by the Commission in the past. The
percentage loss that would be suffered by Cheyenne in gross gas income
also exceeds the percentage loss in the majority of diversification
orders issued by the Commission. The applicable percentages here and
in past cases are summarized in Exhibit J-3.
____________________
<F19> 1995 Report at 74.
<F20> NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888 (1964), aff'd,
384 U.S. 176 (1966) and 390 U.S. 207 (1968).
In order to recover these lost economies the PSCo gas
division would need to increase its revenue from rates by $44,607,669
or 6.62% and the Cheyenne gas division would need to increase rate
revenue by $1,775,439 or 11.38%. These increases on rate revenues
would have a direct and immediate negative impact on the rates charged
to consumers for gas services. In addition, the customers of the PSCo
and Cheyenne gas business who are also customers of their respective
electric utility business will experience a doubling of their postage
costs to pay two separate bills. The total estimated increase in such
postage costs is $3.84 per customer, per year or $3,580,032 in the
aggregate ($3,478,637 for PSCo's gas customers and $101,395 for
Cheyenne's gas customers).
Moreover, it should be noted that the divestiture of PSCo's
and Cheyenne's gas business will result in increased labor and postage
costs to both companies' electric system. Specifically, it is
estimated that the cost to PSCo's customers would be approximately
$44.9 million, or 3.42% of its electric revenues, and the cost to
Cheyenne's customers would be approximately $1.0 million, or 2.86% of
its electric revenues.
Finally, divestiture of PSCo's and Cheyenne's gas operations
would cause a significant, although difficult to quantify, amount of
damage to NCE's customers, NCE's regulators and NCE's ability to
compete in the marketplace. Such non-quantifiable costs to customers
involve the additional expenses of doing business with two utilities
instead of one (i.e., additional telephone calls for service and
billing inquiries, and costs of providing access to meters and other
facilities for two utilities) and costs associated with making the
entities supply information to shareholders and publish the reports
required by the 1934 Act. Similarly, regulatory costs involve
additional duties for the staffs of the CPUC and the WPSC as a result
of dealing with an additional utility. These additional duties would
largely be the result of duplicating existing functions, such as
separate requests for approval of financing and rate case requests.
NCE's competitive position in the market would also suffer because as
the utility industry moves toward a complete energy services concept,
competitive companies must be able to offer customers a range of
options to meet their energy needs. Divestiture of gas operations
would render NCE unable to offer its customers a significant and
important option, namely gas services, and could damage NCE's long-
term competitive potential.
(B) and (C) clauses: The remaining requirements of
Section 11(b)(1) are met because the gas operations of PSCo are
located in adjoining states (Colorado and Wyoming) and because the
continued combination of the gas operations under NCE is not so large
(considering the state of the art and the area or region affected) as
to impair the advantages of localized management, efficient operation
or the effectiveness of regulation. The gas systems are confined to a
relatively small area. Moreover, as the Commission has recognized
elsewhere, the determinative consideration is not size alone or size
in an absolute sense, either big or small, but size in relation to its
effect, if any, on localized management, efficient operation and
effective regulation. From these perspectives, it is clear that the
continued combination of the gas operations under NCE is not too
large. With respect to localized management, management will remain
geographically close to both gas operations, thereby preserving the
advantages of localized management. From the standpoint of regulatory
effectiveness, each gas operation is organized in a separate
corporation by regulatory jurisdiction which facilitates state
regulation. In addition, it is expected that the relevant state
regulatory authorities will indicate their support for the retention
of the gas system by NCE and thereby indicating that they can continue
to regulate this system effectively. Finally, as detailed above, the
gas operations of PSCo and Cheyenne enjoy substantial economies as
part of the PSCo system, and will realize additional economies as a
result of the Transaction as part of the NCE System. Far from
impairing the advantages of efficient operation, the continued
combination of the gas operations under NCE will facilitate and
enhance the efficiency of gas operations. For further discussion of
the requirements of Section 11(b)(1)(C), see the legal memorandum
filed as Exhibit J-2 hereto. In addition, as previously noted, the
parties have requested, and expect to receive a statement by the two
affected state utility commissions that they do not object to
retention of the gas system in the NCE system, which, as discussed in
the 1995 Report, is the prerequisite for potential liberalization of
the retention standard.
ii. Other Businesses
As a result of the Transaction, the non-utility businesses
and interests of PSCo and SPS described in Item 1.B.3. above will
become businesses and interests of NCE. From PSCo, NCE will hold the
following non-utility subsidiaries indirectly through NC Hold:
e prime, Young Gas and Natural Fuels. NCE will hold the following
non-utility subsidiaries through PSCo: Green & Clear Lakes, 1480
Welton, PSRI, PSCCC, Fuelco and the water and ditch companies and will
hold WGI directly. In addition, PSCo will continue to operate certain
of its non-utility businesses directly.
From SPS, NCE will hold the following non-utility
subsidiaries indirectly through NC Hold: UE and Quixx. In addition,
the subsidiaries, affiliates and associates of UE and Quixx will
become indirect subsidiaries, affiliates and associates, respectively,
of NCE.
Corporate charts showing the non-utility subsidiaries of
PSCo and SPS are filed as Exhibits E-4 and E-5. A corporate chart
showing the projected arrangement of these subsidiaries under NCE is
filed as Exhibit E-6.
Standard for retention: Section 11(b)(1) permits a
registered holding company to retain "such other businesses as are
reasonably incidental, or economically necessary or appropriate, to
the operations of [an] integrated public utility system." Under the
cases interpreting Section 11, an interest is retainable if (1) there
is an operating or functional relationship between the operations of
the utility system and the non-utility business sought to be retained,
and retention is in the public interest,<F21> or if (2) the
business evolved out of the system's utility business, the investment
is not significant in relation to the system's total financial
resources, and the investment has the potential to produce benefits
for investors and/or consumers.<F22> In addition, the Commission
has stated that "retainable non-utility interests should occupy a
clearly subordinate position to the integrated system constituting the
primary business of the registered holding company."<F23> As set
forth more fully below, the non-utility business interests that NCE
will hold directly or through PSCo and NC Hold all meet the
Commission's standards for retention.
I. Direct Subsidiary of NCE
WGI: WGI transports gas from the PSCo gas system to
Cheyenne. As discussed previously, this gas pipeline subsidiary
ensures access to natural gas supplies for the gas utility operations
of Cheyenne and, thus, is functionally related to such utility
operations. The Commission's decisions recognize functional
relationship of gas pipelines to the gas utility business and the
retainability of gas transmission interests in connection with gas
utility operations. See, e.g., CNG Transmission Corp., HCAR No.
25239, (Jan. 9, 1991); Gas Related Activities Act of 1990, Sec.2(a).
WGI does provide gas transportation services for three other area gas
utilities.
II. Subsidiaries of NC Hold
UE: UE is engaged in engineering, design, construction,
management and related services. UE will provide such services to
system companies as well as to unaffiliated third parties. Clearly,
the engineering, construction and design of utility plants is
functionally related to the core utility operations of NCE. A utility
company must be able to construct or otherwise acquire additional
capacity as needed and UE's ability to do so is one of the reasons SPS
has remained a strong low-cost provider of power in the retail and
wholesale markets. The retention of UE as a separate subsidiary that
offers services to third parties has allowed SPS, and will allow NCE,
to keep its power plant and utility construction operations active
even when the affiliated utility system is not expanding its own
capacity. As a non-regulated subsidiary, UE will be able to compete
in the developing independent power market due to its ability to
accomplish plant construction quickly and at a competitive price.
Moreover, the Commission has authorized registered holding companies
to engage in a number of similar businesses, including engineering,
development, construction, management and related services. See,
e.g., Central and South West Corp., HCAR No. 26280 (Apr. 26, 1995)
(authorizing Central and South West Services engineering and
construction department to provide services to third parties); Entergy
Corporation, HCAR No. 26322 (June 30, 1995) (authorizing Energy
Enterprises, Inc. to provide development, design, engineering,
construction, maintenance and management services to domestic and
foreign power projects); New England Electric System, HCAR No. 26017
(Apr. 1, 1994) (authorizing New England Electric Resources, Inc. to
provide consulting services, including engineering, design and
construction, to nonaffiliates for profit); General Public Utilities
Corp., HCAR No. 25108 (June 26, 1990) (authorizing engineering and
management services by Energy Initiatives, Incorporated). The
activities of UE will be similar to those approved by the Commission
and thus, UE is retainable. In addition concurrently with the 1995
Report, the Commission released for public comment a proposed new Rule
58 (60 Fed. Reg. 33,642 (June 28, 1995)), which would exempt
acquisitions or transactions of energy-related businesses from the
prior approval requirements of Sections 9(a)(1) and 10. As proposed,
energy related activities include the sale of technical, operational,
management and other similar kinds of services and expertise developed
in the course of utility operations in such areas as power plant and
transmission system engineering, development, design and
rehabilitation; construction; maintenance and operation. Thus, the
Division has indicated that it believes these operations are
functionally related businesses under Section 11 of the Act.
Quixx: The primary business of Quixx is investment in IPPs,
QFs, EWGs, foreign utility companies ("FUCOs") and other energy-
related projects. Section 32 of the Act exempts EWGs from the
provisions of the Act while Section 33 of the Act exempts FUCOs from
the provisions of the Act, thereby allowing registered holding
companies to obtain interests in such entities. Moreover, the
Commission has authorized the formation and financing of a number of
non-utility subsidiaries of registered holding companies in order to
invest in and hold securities of IPPs, QFs, FUCOs and EWGs. Unless
____________________
<F21> SEE, E.G., MICHIGAN CONSOLIDATED GAS CO., 44 SEC 361,
365 (1970), AFF'D, 444 F.2d 913 (D.C. Cir. 1971)
(QUOTING GENERAL PUBLIC UTILITIES CORP., 32 SEC 807,
839 (1951)); UNITED LIGHT AND RAILWAYS CO., 35 SEC 516,
519 (1954).
<F22> CSW CREDIT, INC., HCAR No. 25995 (1994); JERSEY CENTRAL
POWER & LIGHT CO., HCAR No. 24348 (March 18, 1987).
<F23> UNITED LIGHT AND RAILWAYS CO., 35 SEC at 519.
otherwise authorized by the Commission, any IPP in which Quixx invests
shall constitute a part of NCE's "integrated public utility system"
within the meaning of Section 2(a)(29) of the Act. See, e.g.,
Northeast Utilities, HCAR No. 25977 (Jan. 24, 1994) (authorizing
Charter Oak Energy and COE Development Corporation); Central and
Southwest Corp., HCAR No. 26156 (Nov. 3, 1994) (authorizing CSW to
form, acquire, finance and own securities of FUCOs); Central and
Southwest Corporation, HCAR No. 26155 (Nov. 2, 1994) (authorizing
investment in a joint venture which will construct, own and operate
IPPs, QFs and EWGs). In addition, proposed Rule 58 lists the
ownership of QF's as an energy related activity. Thus, Quixx's
principal operations are retainable under the Act. In addition, most
of Quixx's subsidiaries and affiliates are IPPs, QFs, EWGs or FUCOs
and are thus retainable under Section 11 as demonstrated by the
Commission's precedent.
In addition to its primary business, Quixx through Quixx
WRR, L.P. holds interests in certain water rights in Texas, which may
be retained based on the same argument discussed in connection with
the Ditch Companies below. It should be noted that Quixx has entered
into an agreement to sell approximately 40% of its water rights.
Subject to the satisfaction of various conditions, the sale is
scheduled to close in 1996. Quixx also provides financing for heat
pump acquisitions by SPS customers. This activity is functionally
related to the utility business, was developed in the course of SPS's
utility business and is de minimus in amount, contributing $1.2
million in income representing interest on heat pump financing
contracts for the twelve months ended December 31, 1995. Rule 48 of
the Act contains exemptions from the financing approval requirements
for certain system companies to finance the acquisition of utility
appliance such as water pumps for the customers of the operating
utility companies within the holding company system. Although not
directly applicable to Quixx, this rule does indicate that such
activity is permissible for a registered holding company system and it
functionally related to utility operations. Similarly, proposed Rule
58's safe harbor for utility appliances businesses for registered
holding company systems and for businesses developed in the course of
utility operations indicates this business is functionally related
within the meaning of Section 11(b)(1) of the Act. Finally, the
Commission has authorized financing and leasing of utility equipment
for customers. See Central and South West Corporation, HCAR No. 26367
(Sept. 1, 1995); Entergy Corporation , HCAR No. 25718 (Dec. 28, 1992).
See also, Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995)
(authorizing CNG's subsidiary, CNGF, to finance the purchase of
certain gas equipment, including "New Technology Equipment" and
"Alternate Fuel Equipment," by customers who would, in turn, purchase
gas from CNG System subsidiaries).
Amarillo Railcar Services, a division of Quixx should also
be retainable. The Commission has authorized electric utility
subsidiaries of registered holding companies to construct, finance,
acquire, and operate unit train repair and maintenance facilities
generally where the railcars were used to service the utility by
transporting coal. In the Matter of Southwestern Electric Power
Company (subsidiary of CSW), HCAR Nos. 19643; 19468 (Aug. 9, 1976;
April 6, 1976, respectively); In the Matter of Ohio Power Company
(subsidiary of American Electric Power Company), HCAR Nos. 22977;
21886; 21173 (June 17, 1983; Jan. 16, 1981; Aug. 3, 1979,
respectively). The operations of Amarillo Railcar are incident to,
and were developed as a result of, utility operations and expertise in
connection with the transportation of coal. Although a majority of
Amarillo Railcar Services' work involves railcars that transport coal
for use by NCE system utility companies, it is also a general railcar
maintenance operation that provides services to unaffiliated third
parties. Amarillo Railcar's net revenues in the fiscal year ended
August 31, 1995 were $1,555,000, which accounted for only two-tenths
of one percent of SPS's overall revenues. It is a small operation
that developed from utility operations, incurs very little cost at
this point and is beneficial to shareholders and, thus, is retainable.
Quixx also holds a royalty interest in coal and other
minerals produced from certain properties owned by the Pittsburgh and
Midway Coal Mining Company. The Commission has approved of the
acquisition of coal and mineral rights by registered holding companies
or their utility subsidiaries, see, e.g., In the Matter of Alabama
Power Company (subsidiary of The Southern Company), HCAR No. 10258
(November 30, 1950); In the Matter of The Youghiogeny and Ohio Coal
Company, HCAR No. 19587 (June 21, 1976), as well as the transfer of
such rights between subsidiaries, see, e.g., The Columbia Gas System,
Inc. et al., HCAR No. 35-24881 (May 5, 1989); National Fuel Gas Supply
Corporation, et al., HCAR No. 35-24491 (November 4, 1987). Therefore
the Commission should not object to the retention of royalty interests
in the coal and mineral production of the Pittsburgh and Midway Coal
Mining Co. These rights were acquired in settlement of litigation
over an acquisition and are de minimus, contributing $489,000 in
revenues from royalty payments on coal for the twelve months ended
December 31, 1995.
Quixx Power Services, Inc., a wholly owned subsidiary of
Quixx ("QPS"), will operate and maintain generation facilities in
various locations, including two cogeneration facilities in which
Quixx holds an equity interest, the BCH and the Carolina Energy
facilities. QPS will perform similar operation and maintenance
services for unaffiliated projects. The expertise needed to provide
such services is listed as an "energy-related" activity in proposed
Rule 58. The services to be provided are consistent with the type of
activities approved in various "consulting services" cases such as The
Southern Company HCAR No. 26132 (July 17, 1981) and American Electric
Power Company, HCAR 22468 (April 21, 1982) (each authorizing the
creation of a consulting subsidiary to render management, technical
and training services to non-affiliated entities). In addition, QPS'
activities are de minimus, accounting for revenues of $609,000 for the
twelve months ended December 31, 1995.
e prime: e prime is, or intends to, engage in energy
related activities and consumer services. Because e prime is a start-
up company formed in 1995, many of these activities are in their
preliminary phases. It is anticipated that e prime will further
develop some or all of these activities, or alternatively, the
activities described hereunder may be conducted by Quixx or another
NCE system company. The energy-related activities e prime is, or
intends to, engage in include: electric and gas brokering and
marketing; energy consulting and project development services;
construction, operation and ownership of electric generation and gas
storage facilities; and construction, operation and ownership of
equipment and facilities to gather and disseminate energy-related
management information. Other consumer service activities e prime is,
or intends to, engage in include: information processing and other
technology based services.
e prime is currently engaged in purchasing gas from, and
reselling it to, utility and non-utility companies at negotiated rates
reflecting market conditions. e prime intends to conduct similar
activities in connection with its marketing of electricity and has
filed an application with the FERC requesting all requisite approvals
and waivers to act as a power marketer. Unless authorized by the by
FERC, the marketing or brokering of power by e prime will not involve
purchases from and sales to associated companies in the NCE system.
Both power and gas marketing services will be offered to third
parties. The electric power and gas marketing activities of e prime
are functionally related to NCE's core utility system. NCE believes
that entering into the power and gas marketing businesses is a
significant step in allowing NCE to compete in the utility industry
and thus is in the best interest of investors and consumers. As a
result of e prime's activities, various sources of competitively
priced electricity and gas will become more readily available to the
wholesale electric power and gas market in general. All consumers of
electric power and gas will thus benefit as the alternatives for
supply of electricity and gas increase and competition among electric
suppliers grows.
In addition, e prime's brokering and marketing activities
are consistent with the requirements of Section 11(b)(1) as the
Division has recommended it to be interpreted. In the 1995 Report,
the Division recommended that the Commission adopt a flexible approach
for requests by registered holding companies to engage in diversified
activities, and especially those activities that the Division deemed
to be "energy-related." Moreover, in proposed Rule 58, the
definition of energy-related activities includes "the brokering and
marketing of energy commodities, including but not limited to
electricity and natural or manufactured gas." Additionally, as noted
in the 1995 Report, the Commission has authorized various registered
holding companies to engage in gas and some power marketing activities
in the past. See 1995 Report at 12, citing Consolidated Natural Gas
Co., HCAR No. 24329 (Feb. 27, 1987) (authorizing gas marketing
subsidiary) and Entergy Co., HCAR No. 25848 (June 8, 1993)
(authorizing sale of consulting services to non-affiliates, including
sale of expertise relating to brokering of power); Northeast
Utilities, HCAR No. 26359 (Aug. 18, 1995) (authorizing certain power
marketing activities). Thus, the marketing activities of e prime may
be retained consistent with the requirements of the Act.
e prime also provides consulting services for project
development and energy cost control to commercial and industrial
customers and may engage in general demand side management activities.
The expertise needed to provide such services is listed as an "energy-
related" activity in proposed Rule 58. As discussed in detail with
regard to the retention of UE, the Commission has authorized
registered holding company subsidiaries to engage in utility-related
consulting services numerous times in the past. See also, UNITIL
Corporation, HCAR No. 25816 (May 24, 1993) (authorizing subsidiary to
engage in consulting and other services on energy related matters),
Central and South West Corporation, HCAR No. 26367 (Sept. 1, 1995)
(authorizing subsidiary to engage in energy and demand side management
services to commercial and industrial customers) and American Electric
Power Company, HCAR No. 26267 (April 5, 1995) (authorizing subsidiary
to provide demand-side management services).
e prime is constructing or owns and operates electric
generation and gas storage facilities, directly or indirectly, and is
continuing to evaluate additional projects. The categories of
electric generation facilities in which e prime may have an interest
are QFs, EWGs, FUCOs and IPPs. In connection therewith, e prime may
conduct preliminary development activities include project due
diligence and design; design review; market studies; site inspection;
preparation of bid proposals (including the posting of bid bonds, cash
deposits or similar instruments); application or required permits or
authorizations, acquisition of options on sites and other rights;
negotiation and execution of contractual commitments with owners of
existing facilities, equipment vendors and other project contractors;
negotiating of financing commitments with lenders and co-investors;
and other activities required in preparation for the acquisition or
financing of one of the listed entities. The Commission previously
has authorized such activities by companies in a registered holding
company system (See The Southern Company, HCAR No. 26212 (Dec. 30,
1994)). Managerial and technical services provided to such entities
by e prime may include project development, engineering, design,
construction and construction management, operating fuel management,
testing, maintenance and administrative and technical support, all of
which, again, have been previously authorized (See American Electric
Power Company, HCAR No. 26267 (April 5, 1995); Entergy Corporation
HCAR No. 26322 (June 30, 1995)). As discussed with regard to the
retention of Quixx, investments in the listed entities have also been
permitted frequently by the Commission and are also listed as an
energy-related activity in proposed Rule 58. e prime may hold these
interests directly, or indirectly through entities whose sole purpose
is to hold such entities. e prime will not acquire an interest in an
IPP unless it forms part of NCE's "integrated public utility system"
within the meaning of Section 2(a)(29) of the Act unless authorized by
the Commission or the Act. It should be noted that e prime may
purchase an interest in a QF that is currently owned by an independent
third party and is selling power to PSCo. Although the sale of power
is not subject to the Commission's jurisdiction as power sales are
excluded from the definition of goods in Rule 80 of the Act, such
sales and the rates charged are subject to the jurisdiction of the
other regulatory entities, which in this specific case is the CPUC.
A potential business expansion by e prime is marketing
information processing equipment and facilities and other technology
based services, including metering and billing, to utilities and non-
utility companies at market based rates. e prime is also continuing
to evaluate other similar consumer services. Again, these services
are ones in which other registered holding company subsidiaries have
been authorized to engage. Central and South West Corporation, HCAR
No. 26250 (Mar. 14, 1995) (authorizing provisions of metering, billing
and collecting services to unaffiliated water and gas utilities); The
Southern Company, HCAR No. 26221 (Jan. 25, 1995) (authorizing
subsidiary to offer automated billing services to nonaffiliate
utilities). Additionally, some of the technology utilized in these
services was developed in utility operations and the Commission has
previously permitted registered holding company subsidiaries to market
to third parties technology developed in the course of the operation
of affiliated utilities. See Southern Company HCAR No. 26211 (Dec.
30, 1994) (allowing marketing to third parties of communications
network capacity initially developed for utility subsidiaries); Jersey
Central Power & Light Company, HCAR No. 24348 (March 18, 1987)
(allowing licensing to third party utilities of computer theft
prevention technology initially developed for company's own use).
Young Gas: Effective February 1, 1996 as the result of a
contribution of Young Gas' shares from PSCo, e prime will own all of
the outstanding shares of Young Gas. Young Gas owns 47.5% interest in
a partnership which owns a gas storage facility which stores gas
primarily for use in PSCo's gas operations. The rates charged to PSCo
for such services by the partnership are determined in accordance with
FERC regulations and are cost-based. The partnership provides
services to third parties at FERC determined rates as well. The
Commission has recognized the functional relationship of gas storage
facilities to a holding company system's utility business. In
National Fuel Gas Company, HCAR No. 25437 (Dec. 20, 1991), the
Commission authorized the registered holding company: (1) to acquire a
wholly owned subsidiary to market natural gas and to assist in
transporting and storing natural gas, and (2) to acquire a 50%
interest in a partnership engaged in purchasing, storing,
transporting, and marketing natural gas throughout the United States.
See also, Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995)
(describing CNG System as comprised of, inter alia, CNG Energy
Services Corporation, which gas marketing subsidiary "sells gas and
related services such as storage . . . to System [companies] and
nonassociates . . ."). Just as the Commission recognized, the
benefits and functional relations to utility operations of gas storage
subsidiaries, the Commission should also permit retention of Young
Gas. Gas storage is also an enumerated energy or gas related activity
in proposed Rule 58. Furthermore, it is clear under the Gas Related
Activity Act, gas storage is a permitted activity.
Natural Fuels: This 80% subsidiary engages in the sale of
compressed natural gas for use as a transportation fuel, converts
vehicles for natural gas usage, constructs fueling facilities and
sells fueling facility equipment. Natural Fuels offers services to
third parties. The Commission previously has authorized other
registered holding companies to form subsidiaries to engage in the
activities that are carried out by Natural Fuels. In Consolidated
Natural Gas Co., HCAR No. 25615, (Aug. 27, 1992), Consolidated Natural
Gas Company and its wholly owned subsidiary, CNG Energy Co., sought
authorization for CNG Energy's Natural Gas Vehicle Division to engage
in, inter alia, the following activities: (1) buying and reselling
equipment necessary to transform vehicles from gasoline to natural gas
and/or combined natural gas and gasoline operation ("Conversion
Equipment"); (2) installing and/or maintaining Conversion Equipment on
customer vehicles and providing training on the use, installation and
maintenance thereof; (3) designing, constructing, owning, leasing,
selling and/or maintaining refueling stations or mobile refueling
operations for the refueling of natural gas vehicles; and (4) entering
into various joint arrangements with unrelated companies or
individuals to engage in these activities. The retention of Natural
Fuels should thus be authorized. See also, Consolidated Natural Gas
Co., HCAR No. 26234 (Feb. 23, 1995) (authorizing CNG's subsidiary,
CNGF, to finance the purchase of certain gas equipment, including "New
Technology Equipment" and "Alternate Fuel Equipment," by customers who
would, in turn, purchase gas from CNG System subsidiaries). This
business is also an enumerated energy related business in proposed
Rule 58.
III. Subsidiaries and Operations of PSCo
1480 Welton: 1480 Welton holds certain of PSCo's real
estate used or intended to be used in the utility business of PSCo, is
functionally related to the utility operation of PSCo and is
retainable. 1480 Welton does not hold interests in any other types of
properties, nor does it offer services to non-system companies. The
Commission has permitted a number of registered holding company
systems to establish and/or retain real estate subsidiaries. See,
e.g., UNITIL Corporation, HCAR No. 35-25524 (April 24, 1992) (UNITIL
Realty); The Southern Company, HCAR No. 21898 (January 27, 1981)
(Alabama Property Co. subsidiary of Alabama Power Co.); America
Electric Power, HCAR No. 7615 (August 2, 1947) (Franklin Real Estate
Co. and Indiana Franklin Realty Co.).
PSCCC: PSCCC engages in financing and factoring of certain
of PSCo's assets. The Commission has authorized the acquisition of
interests in similar credit companies by registered holding companies.
See Central and South West Corporation, HCAR No. 23767 (July 19,
1985). Following consummation of the Transaction, PSCCC may engage in
factoring and similar transactions with other companies in the NCE
holding company system, including SPS, on the same terms as
transactions with PSCo. PSCCC will provide services to unaffiliated
third parties. However, it should be noted that, consistent with the
requirements of the Commission's order in Central and South West
Corporation (HCAR No. 25995 (March 2, 1994)), PSCCC currently does not
derive more than 50% of its revenues from operations outside the PSCo
system and, following consummation of the Transaction, will not derive
more than 50% of its revenues from operations outside the NCE system
without prior specific authorization from the Commission, unless Rule
58 is adopted.
Fuelco: Fuelco is engaged in natural gas and oil
exploration and production. The Commission has approved the oil and
gas exploration and development activities of New England Energy
Incorporated ("NEEI"), the subsidiary of New England Electric System.
New England Energy Incorporated, HCAR No. 23988 (Jan. 13, 1986); New
England Energy Incorporated, HCAR No. 21862 (Dec. 30, 1980). Fuelco
is functionally related to utility operations and is thus retainable.
In addition, PSCo, it should be noted that PSCo does intend to divest
Fuelco as soon as practicable.
Green and Clear Lakes and Ditch companies: Green and Clear
Lakes stores water for use by a PSCo hydroelectric facility, a
business that clearly is functionally related to utility operations.
The Ditch companies own utility water rights that are also clearly
functionally related to utility operations. Indeed, at the time of the
break-up of the Cities Service holding company system, the Commission
noted that the Ditch companies could be retained by PSCo under the
standards of Section 11(b)(1). In the Matter of Cities Service Power &
Light Company, HCAR No. 4489 (Aug. 18, 1943).
PSRI: PSRI owns certain life insurance policies acquired
prior to 1986 on certain PSCo employees and retirees. PSRI does not
intend to acquire any new policies or engage in any other active
business. However, divestiture or the early winding-down of PSRI
could have adverse tax consequences for PSCo. In addition, PSRI
accounts for only 1.2% of PSCo's consolidated revenue in the year
ended December 31, 1994.
Steam heating business (division of PSCo): The steam
heating business of PSCo, which is located exclusively in its service
territory and primarily in the downtown Denver area, serves 120
customers and has annual revenues of approximately $7.2 million. The
retention of this business will further NCE's ability to be an energy
service company providing consumers with all options to meet their
energy needs. Although much of the steam is supplied from boilers at
PSCo's Denver steam plant, the steam system is connected to the Zuni
plant as well and approximately one-quarter of the steam heating
business requirements are met through steam produced by this electric
generation plant in the course of its ordinary operation. The
Commission has previously approved of the retention of steam heating
operations under Section 11(b)(1). See North American Company, 11 SEC
194 (1942); In the Matter of the Philadelphia Company, HCAR No. 8242
(June 2, 1948).
Of course, PSCo is aware that the Commission in 1943 in the
Service case found similar operations of PSCo to be non-
retainable.<F24> That fact, however, is not dispositive here as,
unlike at that time, the system is now connected with a PSCo
generation facility and uses the steam produced by a facility also
used for electric generation and the nature of utility services has
changed since that time. The retention of steam heating operations
will allow NCE to offer customers this additional option to meet their
energy needs, thereby, allowing NCE to compete effectively in the
energy-services business. Moreover, steam heating also is an
enumerated "energy-related" business in proposed Rule 58. Thus, this
steam heating business of PSCo is reasonably incidental to NCE's
utility operations and may be retained. PSCo also intends to utilize
and market the capacity and expertise developed in its thermal
operations in different situations such as by offering chilled water
services to existing customers, providing services to maintain
customer's heating and cooling plants and offering steam cleaning
services, all of which qualify as energy related under proposed
Rule 58.
____________________
<F24> The Commission did not require divestiture of the
operations in 1943 as it recognized they were
unprofitable and PSCo was unlikely to be able to divest
them.
Telecommunications operations: PSCo currently leases excess
capacity on the fiber optic cable it already has in place for utility
operations. PSCo's fiber optic cable contains 48 fibers but PSCo only
uses 6 of the fibers for its utility operations. PSCo now leases some
of the excess capacity (approximately 14 fibers) at market based rates
to an unaffiliated third parties engaged in telecommunications
operations. As previously mentioned in the discussion of e prime, the
Commission has allowed companies in registered holding company systems
to market technology or excess capacity in technology developed for
utility operations which allows the utility to recover the costs of
developing the technology and has the potential for making a profit.
Indeed, the Commission has specifically approved of the licensing of
excess capacity in fiber optic lines. See Central and South West
Corporation, HCAR No. 26061 (June 3, 1994) and The Southern Company,
HCAR No. 26221 (Jan. 25, 1995). In this case, little or no additional
investment by PSCo is needed in order for it to recover its costs on
this utility equipment. Moreover, the owning of telecommunications
operations and leasing fiber optic capacity is an energy-related
activity in proposed Rule 58. Similarly, PSCo may lease excess
capacity on its paging system, a system developed for utility
operations the cost of which, with little additional investment, can
be recovered.
Energy conservation and demand side management activities:
PSCo is also engaged in energy conservation and demand side management
services. The focus of PSCo's program is currently upon the customer
rebates required by the CPUC. PSCo intends to expand its operations
to include such activities as energy audits to establish efficiency
solutions and provide financing for customers (including federal
government agencies); the provision of services to home offices and
the development and marketing of software to monitor energy usage by
both industrial and residential customers. Again, demand side
management activities have been authorized by the Commission, are
closely related to the operation of a utility and are energy-related
as defined in proposed Rule 58.
Commercialization of electro-technologies and intellectual
property: PSCo also markets non-utility products and services
developed through electric utility operations. For example, PSCo
currently provides relay testing services for customers and may lease
or sell surge protection equipment to unaffiliated third parties as
well as install, own and operate photovoltaic cells and commercialize
other electro-technologies that become available to it. Similarly,
PSCo may sell or enter into royalty arrangements with regard to
intellectual property owned or developed by PSCo in its utility
operations. Such commercialization activities are energy related
activities as defined in Rule 58 and, as discussed with regard to e
prime's proposed meter reading services, commercialization of
technology developed in utility operations has been previously
authorized by the Commission (See also American Electric Power
Company, HCAR No. 22468 (April 21, 1982) (authorizing sale and
licensing of intellectual property developed by utility system
companies)). PSCo may also provide home safety monitoring services to
customers which would monitor gas leakage and other safety concerns.
Electric and gas vehicle products and services: PSCo is
currently engaged in a pilot-program to develop fueling sites for
natural gas vehicles. The fueling units will be owned by PSCo, but
installed at commercial customer sites. PSCo may expand its
activities to include the distribution or sale of LNG vehicles, the
sale of gas compressors for fueling stations and the development of
LNG fueling services and may enter into the business of electric
powered-vehicle operation including investments in related technology.
Such activities are energy related activities as defined in Rule 58
and most of them have been authorized by the Commission (see
discussion of Natural Fuels above). In addition, PSCo may enter into
the LNG production and delivery services.
Sale and servicing of electric and gas appliances: PSCo's
appliance service operations provide repair services and warranties to
customers in connection with certain household appliances and may
involve the leasing of certain large appliances (i.e. HVAC system.
lighting system, chillers) to industrial customers. Such activities
are energy related activities as defined in Rule 58.
b. Section 10(c)(2)
The Transaction will tend toward the economical and
efficient development of an integrated public utility system, thereby
serving the public interest, as required by Section 10(c)(2) of the
Act.
i. Efficiencies and Economies
The Transaction will produce economies and efficiencies more
than sufficient to satisfy the standards of Section 10(c)(2),
described above. Although some of the anticipated economies and
efficiencies will be fully realizable only in the longer term, they
are properly considered in determining whether the standards of
Section 10(c)(2) have been met. See American Electric Power Co., 46
SEC 1299, 1320-1321 (1978). Some potential benefits cannot be
precisely estimated; nevertheless they too are entitled to be
considered: "[S]pecific dollar forecasts of future savings are not
necessarily required; a demonstrated potential for economies will
suffice even when these are not precisely quantifiable." Centerior
Energy Corp., HCAR No. 24073 (April 29, 1986) (citation omitted).
PSCo and SPS have estimated the nominal dollar net value of
synergies from the Transaction to be approximately $770 million over
the first 10-year period from 1997 to 2006. The Transaction is
expected to yield several types of presently quantifiable benefits:
(1) capital expenditure savings; (2) production cost savings; (3)
labor cost savings; and (4) administrative and general savings. The
amount of savings currently estimated in each of these categories, on
a nominal dollar basis, is summarized in the table below:
Category Amount
Corporate Programs $ 82.7M
Non-fuel Purchasing Economies 19.1M
Capacity Deferrals 160.1M
Fuel Savings 163.4M
Labor 389.5M
Less: Pre-merger Initiatives (2.1M)
Less: Costs to Achieve (43.0M)
Net Total Estimated Savings $769.7M
_______
These expected savings far exceed the savings claimed in a
number of recent acquisitions approved by the Commission. See, e.g.,
Kansas Power and Light Co., HCAR No. 25465 (Feb. 5, 1992) (expected
savings of $140 million over five years); IE Industries, HCAR
No. 25325 (June 3, 1991) (expected savings of $91 million over ten
years); Midwest Resources, HCAR No. 25159 (Sept. 26, 1990) (estimated
savings of $25 million over five years). These savings categories are
described in greater detail below.
Corporate Programs: These are savings related to insurance
costs, outside services, shareholder services, advertising and
other general and administrative overheads. The aggregate cost
of these items for the companies on a stand-alone basis is
greater than the cost will be to the combined new company. An
example would be the hiring of one outside professional service
(external auditors, attorneys, consultants, etc.) instead of two.
Non-Fuel Purchasing Economies: These are the savings which
will result from the new, larger company having greater
purchasing power. The new company will be able to coordinate its
purchasing needs, buy in greater quantity, negotiate with vendors
and receive larger discounts.
Capacity Deferrals: This refers to the savings created by
deferring the construction of additional generating capacity.
For these deferrals to be achieved, the two systems must be
integrated via a HVDC interconnection and transmission line.
Because of load diversity (the two systems peak at different
times) the new company's peak load is less than the sum of the
peak loads of the two individual companies. This load diversity
requires less total capacity; allowing the new company to defer
generation expansion and the associated costs to the ratepayer.
The amount of projected capacity deferral savings is net of the
estimated fincremental merger-related cost of the HVDC
interconnection and transmission line (approximately $112
million). See Item 3.A.2.b.ii.I for details of the
interconnection and line.
Fuel Savings: These are savings which result from the new,
larger company having greater purchasing power. The new company
will be able to negotiate contracts to procure and transport fuel
in larger quantities, and at much larger discounts than either
PSCo or SPS would on a stand-alone basis. Additionally, once the
two systems are directly interconnected, the new company's
operators will be able to dispatch and generate the power in the
most economic manner, as certain plants are more economical than
others.
Labor Cost Savings: PSCo and SPS estimate that a net
reduction in labor costs of approximately $389.5 million on a
nominal dollar basis can be achieved as a result of the
Transaction through elimination of approximately 550-600 full
time equivalent duplicative positions in certain corporate and
administrative functions. This assumes a one-year period will be
required to achieve the personnel reductions.
(less)
Pre-Merger Initiatives: The level of employees of both
companies combined compared with the level of employees needed
for the new company indicates that 550-600 full-time duplicate
positions be eliminated through the merger process. There is,
however, a level of employee reduction which will occur
regardless of the merger. This figure is a part of the total
labor savings amount above, and is removed from the savings
estimates to avoid double counting of savings for forecasting
purposes
Costs to Achieve: This consists of merger costs such as
investment bankers' fees, attorney and accountant fees, and
severance and other employee reduction-related costs. Item 2
provides details of some of these components and their amounts.
Additional Expected Benefits: In addition to the benefits
described above, there are other benefits which, while presently
difficult to quantify, are nonetheless substantial. These other
benefits include competitive rates and services, increased size and
stability, diversification of service territory, coordination of
diversification programs, complementary operational functions and
complementary management.
- Competitive Rates and Services NCE will be able to meet
the challenges of the increasingly competitive environment
in the utility industry more effectively than either PSCo or
SPS standing alone. The Transaction will create financial
and operational benefits for customers in the form of lower
rates and better service over the long-term.
- Increased Size and Stability As a larger entity,
shareholders will benefit over the long-term from the NCE's
greater financial strength and financial flexibility. NCE
will be better able to take advantage of future strategic
opportunities and to reduce its exposure to changes in
economic conditions in any segment of the business.
- Diversification of Service Territory The combined service
territories of PSCo and SPS will be larger and more
geographically diverse than the independent service
territories of each entity, reducing NCE's exposure to
changes in economic, competitive or climatic conditions in
any given sector of the combined service territory.
- Coordination of Diversification Programs PSCo and SPS each
have complementary nonregulated subsidiary businesses, and
NCE, as a stronger financial entity, should be able to
manage and pursue these subsidiary businesses more
efficiently and effectively as a result of access to
lower-cost capital and efficiencies achievable through
greater size.
- Complementary Operational Functions The combination of
PSCo, with expertise in customer service applications and
energy services as well as natural gas utility operations,
and SPS, a low-cost power producer with recognized expertise
in engineering services, wholesale power marketing and
utility generation projects, will allow NCE to offer
customers a more complete menu of service options and a
better operational balance.
- Complementary Management The managements of PSCo and SPS
have complementary strengths which will provide NCE with a
strong and capable management team, facilitating the merger
of similar corporate cultures and achieving cooperation and
coordination in an efficient manner.
ii. Integrated Public Utility System
I. Electric System
As applied to electric utility companies, the term
"integrated public utility system" is defined in Section 2(a)(29)(A)
of the Act as:
a system consisting of one or more units of generating
plants and/or transmission lines and/or distributing
facilities, whose utility assets, whether owned by one or
more electric utility companies, are physically
interconnected or capable of physical interconnection and
which under normal conditions may be economically operated
as a single interconnected and coordinated system confined
in its operation to a single area or region, in one or more
states, not so large as to impair (considering the state of
the art and the area or region affected) the advantages of
localized management, efficient operation, and the
effectiveness of regulation.
On the basis of this statutory definition, the Commission has
established four standards that must be met before the Commission will
find that an integrated public utility system will result from a
proposed acquisition of securities:
(1) the utility assets of the system are physically
interconnected or capable of physical interconnection;
(2) the utility assets, under normal conditions, may be
economically operated as a single interconnected and coordinated
system;
(3) the system must be confined in its operations to a single
area or region; and
(4) the system must not be so large as to impair (considering
the state of the art and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation.
Environmental Action, Inc. v. Securities and Exch. Comm'n, 895 F.2d
1255, 1263 (9th Cir. 1990) (citing In re Electric Energy, Inc., 38 SEC
658, 668 (1958)). The Transaction satisfies all four of these
requirements. It should be noted that in the 1995 Report, the
Division recommended that the Commission "respond realistically to the
changes in the utility industry and interpret more flexibly each piece
of the integration requirement."<F25>
At the moment, PSCo and SPS have the ability to exchange
power over a transmission tie owned by Public Service Company of New
Mexico ("PNM"). In the past, the two companies have exchanged
electric energy utilizing these facilities. Facilitating the current
transmission and exchange of power between the parties is
participation by PSCo, SPS and PNM in the WSPP, which provides for,
among other things, the exchange of bulk power.
The Section 2(a)(29) standard will be met in this
Transaction, however, as the NCE system is capable of interconnection
through the construction of a new transmission tie line, construction
of which is planned within five years of the effective time of the
Transaction. PSCo and SPS currently intend to complete the
interconnect between the two companies by the year 2001. The
estimated length of the tie line is approximately 300 miles, running
from near Amarillo, Texas to Southeastern Colorado. The transmission
tie line voltage is expected to be 345 KV. Following completion of
the line, the PSCo and SPS systems will be operated as a single
interconnected system. It is currently estimated that the costs
associated with constructing the interconnection line amount to $149
million, of which $112 million are incremental costs attributable to
the Transaction.
Since SPS operates in the Eastern Interconnection and is a
member of the SPP and PSCo is in the Western Interconnection and is a
member of the WSCC, the interconnect must include a HVDC back-to-back
terminal between the two systems. This HVDC terminal, which will
synchronously connect the two companies, is currently expected to be
rated at 400 MW and allow for capacity and energy transfers between
the two systems.
This additional interconnect will further the economic
operation of the NCE system by enabling it to achieve additional
production-related synergies. Indeed, the plans for the line's
construction are not related to any requirement of the Act, but rather
to the substantial benefits that will accrue as a result of the line.
The production-related benefits of the interconnect were determined in
three areas: capacity deferral savings, joint dispatch savings and
fuel energy savings. The process used to estimate these savings
involved modeling each company's system and determining its costs on a
stand-alone basis and then on a combined basis. The savings were
based on a comparison of the individual system costs to those
determined on a combined basis. The representation of the individual
systems was based on each company's most recent resource plan,
modified to account for any major changes in assumptions since the
plan was developed, and the most recent fuel forecasts. The combined
system expansion plan was based on the reduced capacity requirements
of the combined system and accounted for the expected fuel synergy
savings. The development of these costs considered production costs
as well as investment-related costs. Benefits attributed to joint
dispatch savings were developed within the combined system model and
coincide with the in-service date of a new transmission line between
the two companies. Overall, it is anticipated that the electric
production-related savings from the merger of PSCo and SPS will
aggregate approximately $270 million (net of the cost of the line).
To achieve this level of savings, the tie-line will need to be
constructed. Additional savings are likely to be realized over time.
Additional information regarding electric production-savings can be
found in Exhibit D-1.2.2. attached hereto.
The Commission has previously indicated that a single
integrated system exists even based solely on a planned, future
interconnection, provided that such physical interconnection is
"contemplated or . . . possible within the reasonably near future" and
not just something that "might occur in the remote future, and whose
occurrence has not been foreshadowed by any facts shown in the
record."<F26> The benefits to be derived by the new transmission
line are also a factor in determining whether the system is capable of
physical interconnection.<F27> The fact that the Commission has
indicated that, absent special circumstances, the "reasonably near
future" mentioned above, should not exceed 10 years,<F28> is not
an issue in this case as the parties do have definite plans to
construct an interconnection that will be in service and generating
economies within 5 years of the consummation of the Transaction.
In addition, Cheyenne forms a single integrated system with
the NCE system. With regard to electric properties and as set forth
above,<F29> the key to a single integrated system, is that the
utility assets are "physically interconnected or capable of
interconnection." Historically both Cheyenne and PSCo were part of
the Cities Service Power and Light Company holding company system.
When the Commission ordered the break-up of that system in the mid-
1940s, it issued orders organizing the various systems within the
Cities Services system as independent systems. At that time, the
Commission specifically examined the relationship between the electric
utility operations of PSCo and Cheyenne and held that together they
constituted a single integrated system within the meaning of
Section 2(a)(29) of the Act.<F30> The Commission noted that the
two systems were interconnected via "a transmission line which
functions as an important tie between the companies although it is
owned, not in the system, but by the United States Bureau of
Reclamation."<F31> Moreover, although the Commission initially
postponed any finding on the issue of PSCo's retention of combination
gas and electric utility properties, it did examine the PSCo and
Cheyenne gas operations as one unit.<F32> PSCo and Cheyenne
continue to form such an integrated system and the addition of NCE as
a holding company above these entities does not alter that fact, nor
does the fact that the NCE system includes SPS utility properties
since, as described above, PSCo and SPS will be interconnected and
PSCo and Cheyenne are interconnected. Thus, the entire system is, or
is capable of being, integrated.
The specific physical interconnection via electric
transmission ties between PSCo and Cheyenne is as follows: 115KV
transmission lines owned by WAPA connect with the Cheyenne system via
the Happy Jack, Cheyenne and Archer substations. WAPA transmission
lines also interconnect with PSCo transmission lines. One of these
WAPA owned lines connects PSCo and Cheyenne, running directly from a
WAPA-PSCo interconnection to a WAPA-Cheyenne interconnection. Indeed,
the Applicants believe that this line is the same line referred to in
the Cities Service decision previously discussed.<F33> It should
be noted that Cheyenne was receiving electricity from PSCo via this
line at the time of the Cities Service decision, while today, as a
result of a competitive bid process to supply the Cheyenne system,
Cheyenne obtains all of its electricity requirements from an
unaffiliated electric utility over different transmission lines. This
fact should not alter the above analysis because (1) the two systems
remain physically interconnected and have been efficiently operated as
a single, integrated utility system and (2) the Act's purposes are
being met, as competition has been allowed to flourish in the PSCo
holding company system where the winner of a competitive bid,
regardless of other corporate relationships, supplies the Cheyenne
system. PSCo did bid to supply the Cheyenne system and, had it been
successful, could have supplied Cheyenne with its needs using the WAPA
line.
____________________
<F25> 1995 Report at 71.
<F26> In the Matter of the North American Company and Its
Subsidiaries, HCAR No. 4505 (Apr. 15, 1942). See Also,
In the Matter of Hudson River Power Corporation, HCAR
No. 2415 (Dec. 9, 1940) (integration standard not met
where "the record discloses no definite plan for
bringing about any such interconnection"); In the
Matter of Cities Service Power & Light Corporation,
HCAR No. 5256 (Aug. 30, 1944) (integration standard met
where "Derby contemplates the construction of such
interconnection facilities").
<F27> In one instance, the Commission noted that while "we
are not aware of any plans for undertaking these
interconnections in the near future ... [w]e find ...
no occasion to doubt the validity of the estimates of
benefits to be derived therefrom," in its holding that
such facilities were considered capable of
interconnection. In the Matter of Cities Service Power
& Light Company, HCAR No. 4489 (Aug. 18, 1943).
<F28> See, In the Matter of Union Electric Company, HCAR No.
18368 (Apr. 10, 1974) (holding that in the absence of
special circumstances, physical interconnection that
might be built in ten years if economical does not meet
integration requirement).
<F29> The issue of Cheyenne's gas properties is discussed
under Item 3.A.2.a.i. (Retention of Gas Operations).
<F30> Cities Service Power & Light Company And Its Subsidiary
Companies, HCAR No. 4489 (August 18, 1943) ("We find
that the properties of the Cheyenne company and the
Arvda company, together with the main body of the
Public Service properties in northern Colorado, form a
single integrated electric utility system").
<F31> ID.
<F32> ID.
<F33> SEE SUPRA note 20.
The NCE electric system will operate in a single area or
region. The system will operate in six contiguous states in the
greater southwest region of the United States. It should be noted
that in the 1995 Report, the Division has stated that the evaluation
of the "single area or region" portion of the integration requirement
"should be made... in light of the effect of technological advances on
the ability to transmit electric energy economically over longer
distance, and other developments in the industry, such as brokers and
marketers, that affect the concept of geographic
integration."<F34> The 1995 Report also recommends primacy be
given to "demonstrated economies and efficiencies to satisfy the
integration requirements."<F35> As set forth in Item 3.A.2.b.i,
the Transaction will result in economies and efficiencies for the
utilities and, in turn, their customers.
Moreover, the NCE electric system will not be so large as to
impair the advantages of localized management, efficient operations,
and the effectiveness of regulation. After the Transaction, PSCo, SPS
and Cheyenne will maintain their current headquarters as subsidiary
headquarters and as local operating headquarters for the areas they
presently serve, while NCE maintains system headquarters in both
Denver (corporate offices) and Amarillo (operating offices). This
structure will preserve all the benefits of localized management PSCo,
SPS and Cheyenne presently enjoy while simultaneously allowing for the
efficiencies and economies that will derive from their strategic
alliance. Furthermore, as described earlier, the system will
facilitate efficient operation.
Additionally, the NCE system will not impair the
effectiveness of state regulation. PSCo, SPS and Cheyenne will
continue their separate existence as before and their utility
operations will remain subject to the same regulatory authorities by
which they are presently regulated, namely the CPUC, WPSC, PUCT,
NMPUC, KCC, OCC, the FERC and, until the decommissioning of the Fort
St. Vrain facility is complete, the NRC. PSCo and SPS are working
closely with the CPUC, WPSC, NMPUC, PUCT, KCC and OCC as well as the
FERC and the NRC to ensure they are well informed about this
Transaction and this Transaction will not be consummated unless all
required regulatory approvals are obtained. Pursuant to the
recommendations contained in the 1995 Report, this last factor is
significant as the Division stated therein "when the affected state
and local regulators concur, the [Commission] should interpret the
integration standard flexibly to permit non-traditional systems if the
standards of the Act are otherwise met,"<F36> especially since
this Transaction will result in a system similar to the traditional
registered holding company system.
II. Gas Utility System
Section 2(a)(29)(B) defines an "integrated public utility
system" as applied to gas utility companies:
[A] system consisting of one or more gas utility companies
which are so located and related that substantial economies
may be effectuated by being operated as a single coordinated
system confined in its operation to a single area or region,
in one or more States, not so large as to impair
(considering the state of the art and the area or region
affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation: Provided,
that gas utility companies deriving natural gas from a
common source of supply may be deemed to be included in a
single area or region.
The NCE gas utility system will meet the standard set forth in
Section 2(a)(29)(B) and, therefore, will satisfy the requirements of
Sections 10(c)(1) and (2) and should be approved by the Commission.
First, both the Commission's limited precedent and current
technological realities indicate that the NCE gas utility system will
operate as a coordinated system confined in its operation to a single
area or region because it will derive natural gas from a common source
of supply. None of the Act, the Commission's orders and rulings or
no-action letters of the Commission's staff provide a definition as to
what constitutes a "common source of supply." Nevertheless, the
Commission has not traditionally required that the pipeline facilities
of an integrated system be interconnected,<F37> and instead has
looked to such issues as from whom the distribution companies within
the system receive much, although not all, of their gas
supply.<F38> The Commission also has considered purchases of gas
from a common pipeline<F39> as well as from different pipeline's
when the gas originates from the same gas field in determining a
common source of supply.<F40> Since the time of most of these
decisions, the state of the art in the industry has developed to allow
efficient operation of systems whose gas supplies derive from many
sources.
____________________
<F34> 1995 Report at 72-74.
<F35> 1995 Report at 73.
<F36> 1995 Report at 74.
<F37> See In the Matter of Penzoil Company, HCAR No. 15963
(1968) (finding an integrated system where facilities
both connected with an unaffiliated transmission
company but not each other). See also, American
Natural Gas Company, HCAR 15620 (1966) ("It is clear
the integrated or coordinated operations of a gas
system under the Act may exist in the absence of such
interconnection").
<F38> See, e.g., In the Matter of Philadelphia Company and
Standard Power and Light Company, HCAR No. 8242 (1948)
("most of the gas used by these companies in their
operations is obtained from common sources of supply");
Consolidated Natural Gas Company, HCAR No. 25040 (1990)
(finding integrated system where each company derived
natural gas from two transmission companies, although
one such company also received gas from other sources).
<F39> In the Matter of the North American Company, HCAR
No. 10320 (1950) (finding Panhandle Eastern pipeline to
be a common source of supply).
<F40> See In the Matter of Central Power Company and
Northwestern Public Service Company, HCAR 2471 (1941),
in which the Commission declared an integrated system
to exist where two entities purchase from different
pipeline companies since "both pipelines run out of the
Otis field, side by side, and are interconnected at
various points in their transmission system; and that
they are within two miles of each other at Kearney."
PSCo's and Cheyenne's gas operations form an integrated
utility system in accordance with the requirements of
Section 2(a)(29)(B). The two operations are physically connected
through the WestGas Interstate transmission pipeline (owned by WGI)
which connects to the PSCo transmission system at Chalk Bluffs,
Colorado near the Colorado, Wyoming border and runs to Cheyenne,
Wyoming. Through this system, PSCo and Cheyenne derive gas from
common sources of supply. PSCo and Cheyenne also derive gas from
common sources through the Colorado Interstate Gas Co. transmission
system, to which both companies are connected. The gas utility
operations of PSCo and Cheyenne are limited to the Colorado/Wyoming
area and have been operated efficiently and economically as a single
integrated utility for decades.
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply
in respect to such acquisition have been complied with, except
where the Commission finds that compliance with such State laws
would be detrimental to the carrying out of the provisions of
section 11.
As described in Item 4 of this Application/Declaration, and as
evidenced by the applications before the CPUC, WPSC, PUCT, NMPUC and
the KCC all relating to the Transaction, NCE intends to comply with
all applicable state laws related to the proposed transaction.
4. Other Applicable Provisions - Section 9(a)(1)
NCE is also requesting authorization from the Commission
under Section 9(a)(1) of the Act for the acquisition by it of the
voting securities of NC Services and NC Hold as part of the
Transaction. Section 9(a)(1) of the Act requires a registered holding
company or any subsidiary thereof to obtain authorization from the
Commission before acquiring "any securities or utility assets or any
other interest in any business." In order to approve an acquisition
under Section 9(a)(1), the Commission must find that such acquisition
meets the standards of Section 10 of the Act, which in turn requires
compliance with Section 8 and 11 of the Act. Although NCE will not
become a registered holding company until consummation of the
Transaction and thus Section 9(a)(1) is not applicable to it until
that time, because NCE will become subject to Section 9(a)(1) and the
exact chronology of the formation of NC Hold and NC Services has not
been determined, NCE is requesting the Commission's authorization for
these transactions.
The acquisition by NCE of the common stock of NC Services,
making it a wholly owned subsidiary of NCE, will allow NCE to create a
subsidiary service company and capture economies of scale from the
centralization of administrative and general services to be provided
to system companies. Since the cost of such services are considered
in rate cases, the benefits realized as a result of NC Services will
accrue to NCE's ratepayers. Virtually every registered holding
company has a subsidiary service company performing many of the same
functions as NC Services will perform. The acquisition of NC Services
is in the public interest, will not unduly complicate the capital
structure of NCE and will not cause the NCE system to violate any
other provision of the Act. NC Services' only class of authorized
stock will be its common stock, all of which will be owned by NCE.
The operation of NC Services, and the allocation of cost for its
operation, is discussed in detail in Item 3.B below.
NCE is also requesting authorization to acquire all of the
issued and outstanding common stock of NC Hold, which will serve as an
intermediate holding company for certain of the system's non-utility
subsidiaries. NCE believes that an intermediate holding company
provides a clearer separation between the system's utility and non-
utility operations of the system and allows for centralization of the
operation of the non-utility operations. Although NC Hold will have
issued and outstanding debt to SPS (in connection with NC Hold's
acquisition of UE and Quixx) as part of the Transaction, this should
not unduly complicate the NCE system's capital structure. While NC
Hold will have a board of directors, appointed officers and, possibly,
employees, it also will receive services from NC Services. Costs for
any work performed for NC Hold by NC Services will be charged to NC
Hold in accordance with the appropriate allocation method set forth in
the Non-Utility Service Agreement.
Finally, NC Hold requests authorization under
Section 9(a)(1) of the Act to acquire all of the issued and
outstanding common stock of e prime, UE, Quixx, Young Gas and Natural
Fuels. As discussed in Item 3.A.2.a.ii above, each of these
businesses may be retained by the NCE system under the Act. NCE
believes that the reorganization of these non-utility businesses as
subsidiaries of NC Hold instead of as subsidiaries of either PSCo or
SPS directly, will be beneficial to ratepayers by insulating the
operating utilities from the results of operations of these entities.
NC Hold will directly or indirectly acquire the securities of certain
current PSCo subsidiaries via an equity contribution from NCE. In
order to maintain the current equity capitalization of SPS, NC Hold
will issue debt to SPS in exchange for the securities of UE and Quixx.
The debt will have a twenty year maturity and bear interest at a fixed
rate, with interest payments to be made semi-annually. The interest
rate will be determined at the time of issuance based on the then
prevailing rate which would be charged by an unaffiliated third party.
The principal will be repaid in twenty equal annual installments. NC
Hold will have the option to prepay the entire obligation, including
accrued and unpaid interest, at any time without any prepayment
premium. NC Hold expects to have sufficient earnings to service the
debt based on the expected earnings of UE and Quixx. See Exhibit J-4.
If necessary, NC Hold will also have available the earnings of its
other subsidiaries.
B. NC Services
As described in Item 1.B.1.c.v, NC Services will provide
PSCo, SPS and Cheyenne, pursuant to the Services Agreement, and the
non-utility subsidiaries of the NCE system, pursuant to the Non-
Utility Services Agreement, with a variety of administrative,
management and support services, including services relating to
electric power planning, transportation, materials management,
facilities and real estate, accounting, budgeting and financial
forecasting, finance and treasury, rates and regulation, legal,
internal audit, corporate communications, environmental, fuel
procurement, corporate planning, investor relations, human resources,
marketing and customer services, information systems and general
administrative and executive management services. In accordance with
the Service Agreement, services provided by NC Services will be
directly assigned, distributed or allocated by activity, project,
program, work order or other appropriate basis. To accomplish this,
employees of NC Services will record transactions utilizing the
existing data capture and accounting systems of each client company.
Costs of NC Services will be accumulated in accounts of NC Services
and directly assigned, distributed and allocated to the appropriate
client company in accordance with the guidelines set forth in the
Service Agreement. SPS and PSCo are currently developing the system
and procedures necessary to implement the Service Agreement.
It is anticipated that NC Services will be staffed by
transfer of personnel from PSCo, SPS and their subsidiaries. NC
Services' accounting and cost allocation methods and procedures are
structured so as to comply with the Commission standards for service
companies in registered holding-company systems. NC Services' billing
system uses the "Uniform System of Accounts for Mutual Service
Companies and Subsidiary Service Companies" established by the
Commission for service companies of registered holding-company
systems.
As compensation for services, the Service Agreement provides
for the client companies to: "pay to [NC Services] all costs which
reasonably can be identified and related to particular services
performed by [NC Services] for or on its behalf." Where more than one
company is involved in or has received benefits from a service
performed, the Service Agreement provides that "costs will be directly
assigned, distributed or allocated, between or among such companies on
a basis reasonably related to the service performed to the extent
reasonably practicable," in accordance with the methods set forth in
Appendix A to the Service Agreement. Thus, charges for all services
provided by NC Services to affiliated utility companies will be on an
"at cost" basis as determined under Rules 90 and 91 of the Act. The
Non-Utility Service Agreement contains provisions similar to those of
the Service Agreement, except as set forth in detail below in this
Item 3.B. The Non-Utility Service Agreement also permits charges for
certain services to be at fair market value to the extent authorized
by the Commission. Thus, except for the requested exceptions
discussed below, services provided by NC Services to non-utility
affiliates pursuant to the Non-Utility Service Agreement will also be
charged on an "at cost" basis as determined under Rules 90 and 91 of
the Act.
Section 13(b) of the Act allows the Commission to exempt
transactions, by rule, regulation or order, from the provisions of
Section 13(b) and the rules promulgated thereunder if such
transactions:
(1) are with any associate company which does not derive,
directly or indirectly, any material part of its income from
sources within the United States and which is not a public
utility company operating within the United States or (2)
involve special or unusual circumstances or are not in the
ordinary course of business.
The Commission has utilized this exemptive power in the past under
certain circumstances<F41> and recently with some frequency to
generally allow non-utility subsidiaries of registered holding
companies to provide services to certain FUCOs, EWGs and QFs at
market-based rates.<F42> In addition, in the 1995 Report, the
Division recommended that "the SEC should also issue exemptive orders
under Section 13 allowing more nonutility subsidiaries to charge
market rates to nonutility affiliates."<F43> The Commission's
principal concern under Section 13 of the Act is to protect the
utility companies in a holding company system from abusive cross-
subsidization transactions with affiliates. Exemptions from Rules 90
and 91 for purely non-utility transactions will not interfere with
this mandate as all services to utility subsidiaries will be at cost
in accordance with Rules 90 and 91, but will benefit the holding
company system by allowing it to offer competitively priced services
based on market considerations. Thus, NC Services hereby requests
that the Commission grant an exemption from the provisions of Rules 90
and 91, and the at-cost requirement contained therein, for the
following transactions: Services provided to associate FUCOs and EWGs
that derive no part of their income, directly or indirectly, from the
generation, transmission or distribution of electric energy for sale
or the distribution of natural gas at retail in the United States; and
services provided to an associated EWG, QF or IPP, provided that the
purchaser of the electricity sold by such entity is not an associate
company of NCE. No services will be provided at market-based rates to
a QF, IPP or EWG selling electricity to PSCo, SPS or Cheyenne unless
authorized by the Act or the Commission.
No change in the organization of NC Services, the type and
character of the companies to be serviced, the methods of allocating
costs to associate companies, or in the scope or character of the
services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder, shall be made unless and until NC
Services shall first have given the Commission written notice of the
proposed change not less than 60 days prior to the proposed
effectiveness of any such change. If, upon the receipt of any such
notice, the Commission shall notify NC Services within the 60-day
period that a question exists as to whether the proposed change is
consistent with the provisions of Section 13 of the Act, or of any
rule, regulation or order thereunder, then the proposed change shall
not become effective unless and until NC Services shall have filed
with the Commission an appropriate declaration regarding such proposed
change and the Commission shall have permitted such declaration to
become effective.
NCE believes that the Service Agreement and the Non-Utility
Service Agreement are structured so as to comply with Section 13 of
the Act and the Commission's rules and regulations thereunder.
Rule 88: Rule 88 provides that "[a] finding by the
Commission that a subsidiary company of a registered holding company .
. . is so organized and conducted, or to be conducted, as to meet the
requirements of Section 13(b) of the Act with respect to reasonable
assurance of efficient and economical performance of services or
construction or sale of goods for the benefit of associate companies,
at cost fairly and equitably allocated among them (or as permitted by
Rule 90), will be made only pursuant to a declaration filed with the
Commission on Form U-13-1, as specified" in the instructions for that
form, by such company or the persons proposing to organize it.
Notwithstanding the foregoing language, the Commission has on at least
two recent occasions made findings under Section 13(b) based on
information set forth in an Application/Declaration on Form U-1,
without requiring the formal filing of a Form U-13-1. See CINergy
Corp., HCAR No. 26146 (Oct. 21, 1994); UNITIL Corp., HCAR No. 25524
(April 24, 1992). In this Application/Declaration, NCE has submitted
substantially the same applicable information as would have been
submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find
that NC Services is so organized and its business will be so conducted
as to meet the requirements of Section 13(b), and that the filing of a
Form U-13-1 is unnecessary, or, alternatively, that this
Application/Declaration should be deemed to constitute a filing on
Form U-13-1 for purposes of Rule 88.
C. UE
NCE also requests that the Commission find that UE is so
organized and to be conducted as to meet the requirements of
Section 13(b), and that the filing of a Form U-13-1 is unnecessary,
or, alternatively, that this Application/Declaration should be deemed
to constitute a filing on Form U-13-1 for purposes of Rule 88.
As previously discussed, following consummation of the
Transaction, UE will be a design, engineering and consulting service
subsidiary of NC Hold directly, and indirectly of NCE. It is
anticipated that virtually all design and engineering services for
PSCo, SPS and Cheyenne will be provided by UE on an "at cost" basis as
determined under Rules 90 and 91 of the Act and as further described
in the form of UE Service Agreement between UE and its utility
affiliates attached hereto as Exhibit B-4. UE will also provide
necessary engineering services to non-utility affiliates and the form
of UE Non-Utility Service Agreement between UE and its non-utility
affiliates, attached hereto, as Exhibit B-5, contains a cost
allocation formula designed to ensure compliance with such rules. The
procedural methods relating to UE's provision of services to
affiliates are set forth in Exhibit B-7 hereto. UE will provide such
services to unaffiliated companies on market-based rates.
The UE Non-Utility Services Agreement also permits charges
for certain services at fair market value to the extent authorized by
the Commission. Thus, except for certain requested exceptions
discussed below, services provided by UE to non-utility affiliates
pursuant to the UE Non-Utility Services Agreement will be charged on
an "at cost" basis as determined under Rules 90 and 91 of the Act.
NCE hereby requests that the Commission grant an exemption
from the provisions of Rules 90 and 91, and the at-cost requirement
contained therein, for services provided by UE to associated QFs,
IPPs, EWGs and FUCOs meeting the criteria set forth above in Item 3.B.
UE intends to provide the following services to these entities:
operations and management services, which include development,
engineering, design, construction and construction management, pre-
operational start-up, testing and commissioning, long-term operations
and maintenance, fuel procurement, management and supervision,
technical training, administrative support, and any other managerial
or technical services required to operate and maintain electric power
facilities, to developers, owners and operators of domestic and
foreign power projects, including power projects that Quixx, its
subsidiaries, or other associated companies may develop on its own or
in collaboration with third parties, and to other associated
companies, except as described below.<F44>
No services will be provided at market-based rates to
entities or associated companies which sell electricity to PSCo, SPS
or Cheyenne unless authorized by the Act or the Commission.
NCE believes that significant advantages can be gained by
centralizing most design and engineering personnel in the NCE system
in this special purpose subsidiary service company as the NCE system
will benefit from the economies of scale that come with centralization
in general, while at the same time the pre-existing reputation and
good-will associated with UE will be maintained, allowing it to
continue to compete in the marketplace for third party contracts on
the same basis as prior to the Transaction. The Commission has
recognized a number of special purpose subsidiary service companies in
the past.<F45>
D. QPS
QPS is a wholly owned subsidiary of Quixx, organized to
operate and maintain generation facilities. QPS will operate and
maintain generation facilities in various locations and is currently
under contract to operate and manage two cogeneration facilities in
which Quixx has an interest of less than a majority: the BCH waste-
to-energy cogeneration facility and the Carolina Energy solid waste
fueled cogeneration facility. In both instances, and in future
similar situations, QPS will provide operations and management
services to these "technical" affiliates (i.e., entities which have
more than 5% of their voting securities owned by a NCE subsidiary but
which have one or more other non-affiliated, independent security
holders holding a percentage of the voting power equal to or greater
than that held by the applicable NCE subsidiary) which will include
development, engineering design, construction and construction
management, pre-operational start-up, testing and commissioning, long-
term operations and maintenance, fuel procurement, management and
supervision, technical training, administrative support, and any other
managerial or technical services required to operate and maintain
electric power facilities.
NCE hereby requests that the Commission grant an exemption
from the provisions of Rules 90 and 91, and the at-cost requirement
contained therein, for the provision of such services to these
"technical" affiliates. The Commission's principal concern under
Section 13 of the Act is to protect the utility companies in a holding
company system from abusive cross-subsidization transactions with
affiliates. The Commission has granted exceptions to allow for fair
market pricing of such services under certain circumstances and NCE
requests an exemption from the provisions of Rules 90 and 91 as
described above in Item 3.B. With respect to the existing contracts
and in future instances, QPS will be providing services to developers,
owners and operators of various power projects, including power
projects that Quixx, its subsidiaries or other associated companies
may develop on their own or in collaboration with third parties, and
to other associated companies. In similar circumstances, the
Commission has authorized exemptions from the at-cost standard of
Section 13.<F46>
Even if the entities for which QPS will provide services do
not meet these requirements, QPS should be allowed an exemption for
the "at-cost" standard because these situations involve special or
unusual circumstances. The Commission has granted such exemptions in
joint venture situations based upon a consideration of what is
necessary or appropriate for the public interest and in light of the
abuses the Act was intended to prevent.<F47> In the existing
contracts and in future ventures where one of NCE's associated
companies owns an interest of less than a majority and one or more of
the other partners owns an interest equal to or greater than the
interest owned by the NCE associated company, despite the interests
that Quixx, its subsidiaries, or other associated companies may have
in the ventures, the terms of QPS provisions of services were and will
be made freely and openly by parties dealing at arms' length and
subject to the checks and balances of a competitive system. In each
case, the partners had and will have economic and competitive
incentive to negotiate their own best possible price. Consequently, a
situation in which abusive cross-subsidization could occur does not
exist. No services will be provided at market-based rates to entities
or associated companies which sell electricity to PSCo, SPS or
Cheyenne unless authorized by the Act or the Commission. Thus, the
concern of the Act with abusive affiliate transactions is not an issue
in this instance.
E. Other Services
As previously mentioned, e prime may provided intra-system
services to associated QFs, IPPs, EWG, and FUCOS as well as
administrative and consulting services to Young Gas Storage Co., Ltd.,
the partnership that owns the Young Gas Storage facility and in which
Young Gas holds a 47.5% interest.
NCE hereby requests that the Commission grant an exemption
from the provisions of Rules 90 and 91, and the at-cost requirement
contained therein, for services provided by e prime to associated QFs,
IPPs, EWGs and FUCOs meeting the criteria set forth above in Item 3.B.
No services will be provided at market-based rates to entities or
associated companies which sell electricity to PSCo, SPS or Cheyenne
unless authorized by the Act or the Commission.
In addition, NCE requests an exemption from the provision of
Rules 90 and 91 for e prime to continue to provide services to Young
Gas Storage Co., Ltd. at market based rates. Similar to the situation
with QPS, the NCE system will only hold a 47.5% interest in Young Gas
Storage Co., Ltd. and must negotiate on an arms length basis with the
majority owner (the Coastal Corporation) with regard to the provision
of such services. Thus, the concern of the Act with abusive affiliate
transactions is not an issue in this instance.
PSCo, SPS and Cheyenne may also provide to one another
services incidental to their utility businesses, such as power plant
maintenance overhauls, power plant and storm outage emergency repairs
and services of personnel with specialized expertise related to the
____________________
<F41> See, e.g., New England Electric System, HCAR No. 22309
(Dec. 9, 1981) (utility permitted to enter into lease
with affiliated joint venture with lease payments based
on market price); EUA Cogenex Corporation, HCAR No.
263731 (Sept. 14, 1995) (authorizing service companies
of two registered holding companies to provide services
to affiliated joint venture at market based rates in
certain circumstances).
<F42> See, e.g., Entergy Corporation, HCAR No. 26322 (June
30, 1995); General Public Utilities Corporation, HCAR
No. 26307 (June 14, 1995) and The Southern Company,
HCAR No. 26212 (Dec. 30, 1994).
<F43> 1995 Report at 102.
<F44> See, e.g., Entergy Corporation, HCAR No. 26322 (June
30, 1995) (authorizing operations and management
services including design and long-term operations) and
American Electric Power Company, HCAR No. 26267 (April
5, 1995) (authorizing provision of services including
engineering and construction services to certain
affiliated and non-affiliated entities involved in
projects relating to the generation, transmission, and
distribution of electric power).
<F45> See, e.g., American Electric Power Company, HCAR No.
22468 (April 21, 1982) (consulting subsidiary); Entergy
Corp., HCAR No. 25718 (Dec. 28, 1992) (subsidiary
engaged in energy management services and development
of efficient lighting technology); Northeast
Utilities, HCAR No. 25565 (June 29, 1992) (subsidiary
servicing nuclear power project).
<F46> See, e.g., Entergy Corporation, HCAR No. 26322 (June
30, 1995) (authorizing fair market prices for the
provision of operations and management services,
including long-term operations and maintenance, to
certain power projects, including those developed by
associate companies).
<F47> See, e.g., New England Electric System, HCAR No. 22309
(December 9, 1981).
operation of the utility (i.e., services by an industrial lighting
specialist or waste disposal specialist). These services will be
provided at cost in accordance with the standards of the Act and the
Commission's rules and regulations thereunder. Moreover, the computer
system developed by PSCo (the "CIS System") will remain an asset of
PSCo following the transaction. While all required system personnel
involved in the operation of the CIS System will be employees of the
service company and all charges for their labor will be subject to the
terms of the Service Agreement and the Non-Utility Service Agreement,
PSCo will charge other system companies for the use of the CIS System
at cost.
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals
that NCE has obtained or expects to obtain in connection with the
Transaction.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide
that certain transactions (including the Transaction) may not be
consummated until certain information has been submitted to the DOJ
and FTC and specified HSR Act waiting period requirements have been
satisfied. PSCo and SPS will submit Notification and Report Forms and
all required information to the DOJ and FTC and the Transaction will
not be consummated unless the applicable waiting period has expired or
has been terminated.
The expiration of the HSR Act waiting period does not
preclude the Antitrust Division or the FTC from challenging the
Transaction on antitrust grounds; however, Applicant believes that the
Transaction will not violate Federal antitrust laws. If the
Transaction is not consummated within twelve months after the
expiration or earlier termination of the initial HSR Act waiting
period, PSCo and SPS would be required to submit new information to
the Antitrust Division and the FTC, and a new HSR Act waiting period
would have to expire or be earlier terminated before the Transaction
could be consummated.
B. Federal Power Act
Section 203 of the Federal Power Act of 1935, as amended
(the "Federal Power Act"), provides that no public utility shall sell
or otherwise dispose of its jurisdictional facilities or directly or
indirectly merge or consolidate such facilities with those of any
other person or acquire any security of any other public utility,
without first having obtained authorization from the FERC. PSCo and
SPS submitted a joint application for approval of the Transaction to
the FERC on November 9, 1995.
C. State Public Utility Regulation
Colorado: PSCo is subject to the CPUC. Pursuant to Rule 55
of the CPUC's Rules of Practice and Procedure, PSCo filed an
application with the CPUC requesting approval of the Merger Agreement
on November 9, 1995. The application is required to demonstrate,
among other things, that the approval sought is not contrary to the
public interest. In addition, the CPUC will consider the rate making
treatment associated with the Transaction. Failure to obtain
favorable treatment could have a material adverse effect. NCE and
PSCo have requested that the CPUC also indicate that it does not
object to the retention of PSCO's and Cheyenne's Gas System in the NCE
structure.
Wyoming: Cheyenne is subject to the jurisdiction of the
WPSC. Pursuant to Section 37-1-104 of the Wyoming Revised Statutes,
any reorganization of a public utility requires prior approval of the
WPSC. The statute defines reorganization as a transaction which
results in a change in the ownership of a majority of the voting
capital stock of a public utility and precludes the WPSC from
approving any reorganization that adversely affects the utility's
ability to serve the public. Pursuant to Section 209 of the WPSC's
Rules of Practice and Procedure, Cheyenne filed an application for
approval of the applicable portions of the Merger Agreement on
November 9, 1995. In addition, the WPSC will consider the rate making
treatment associated with the Transaction. Failure to obtain
favorable treatment could have a material adverse effect. NCE and
PSCo have requested that the WPSC also indicate that it does not
object to the retention of PSCO's and Cheyenne's Gas System in the NCE
structure.
New Mexico: SPS is subject to the jurisdiction of the
NMPUC. Pursuant to the New Mexico Public Utility Act and the NMPUC's
Rules of Practice and Procedure, SPS filed an application with the
NMPUC requesting approval of the Merger Agreement on November 9, 1995.
The NMPUC will approve the consummation of the Transaction if it finds
that they are not unlawful or inconsistent with the public interest
and will not interfere with the provision by SPS of reasonable and
proper utility service at fair, just and reasonable rates. In
addition, the NMPUC will consider the rate making treatment associated
with the Transaction. Failure to obtain favorable treatment could
have a material adverse effect.
Texas: SPS must report the Transaction to the PUCT under
Section 1.251 of the Public Utility Regulatory Act of 1995 and obtain
a finding that the Transaction is in the public interest. SPS
submitted such report to the PUCT on November 9, 1995. While a
finding that the Transaction is not in the public interest does not
prohibit the consummation of the SPS Merger, if the PUCT makes such a
finding it is required to take the effect of the Transaction into
consideration in future ratemaking proceedings and disallow the effect
of the Transaction if it will unreasonably affect rates or services.
Rate treatment resulting from a finding that the Transaction was not
in the public interest could materially and adversely affect SPS.
Kansas: SPS is subject to the jurisdiction of the KCC,
pursuant to the Kansas Public Utility Act. On November 9, 1995, SPS
filed an application with the KCC requesting authority for the
issuance of common stock by SPS to NCE pursuant to the Merger
Agreement. The application is required to describe the purposes for
which the common stock is to be issued and state that such issuance is
necessary and required and will be sold for such purposes. The KCC
issued its order granting the requested authority to SPS on
November 28, 1995.
NCE may also be subject to the KCC pursuant to the Kansas
Holding Companies Act ("KHCA"). The KHCA states that no foreign
holding company shall acquire control of a Kansas public utility
without first entering into an agreement to keep the KCC fully
informed as to transactions between the utility and the holding
company and to submit to the jurisdiction of the KCC insofar as such
transactions affect the rates or charges to be made by the utility.
NCE has entered into such an agreement with the KCC.
Oklahoma: SPS is subject to the jurisdiction of the OCC.
However, no approval or authorization of any Oklahoma public
regulatory body, including the OCC, of the Merger Agreement is
required.
Item 5. Procedure
The Commission is respectfully requested to issue and
publish not later than February 22, 1996 the requisite notice under
Rule 23 with respect to the filing of this Application/Declaration,
such notice to specify a date not later than March 19, 1996 by which
comments may be entered and a date not later than March 22, 1996 as
the date after which an order of the Commission granting and
permitting this Application/Declaration to become effective may be
entered by the Commission.
It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval
of the proposed Transaction. The Division of Investment Management
may assist in the preparation of the Commission's decision. There
should be no waiting period between the issuance of the Commission's
order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
A. Exhibits
A-1 Restated Certificate of Incorporation of NCE (filed as
Annex VIII to the Registration Statement on Form S-4 on
December 13, 1995 (Registration No. 33-64951), and
incorporated herein by reference).
A-2 Restated Bylaws of NCE (filed as Annex IX to the
Registration Statement on Form S-4 on December 13, 1995
(Registration No. 33-64951), and incorporated herein by
reference).
A-3 Restated Articles of Incorporation of PSCo (filed as
Exhibit 3(a) to the PSCo Annual Report on Form 10-K for
the year ended December 31, 1990 (File No 1-3280) and
incorporated herein by reference).
A-4 Restated Articles of Incorporation of SPS (filed as
Exhibit 3 to the SPS Form 10-Q for the quarter ended
May 31, 1990 (File No. 1-3789) and incorporated herein
by reference) and proposed amendment thereto (filed as
Annex X to the Registration Statement on Form S-4 on
December 13, 1995 (Registration No. 33-64951, and
incorporated herein by reference).
B-1 Merger Agreement, as amended (filed as Annex I to the
Registration Statement on Form S-4 on December 13, 1995
(Registration No. 33-64951), and incorporated herein by
reference).
B-2 Form of Service Agreement between NC Services, Inc. and
utility affiliates (to be filed by amendment).
B-3 Form of Service Agreement between NC Services, Inc. and
non-utility affiliates (to be filed by amendment).
B-4 Form of Service Agreement between UE and its utility
affiliates (to be filed by amendment).
B-5 Form of Service Agreement between UE and its non-
utility affiliates (to be filed by amendment).
B-6 Summary of Procedures for NC Services (to be filed by
amendment).
B-7 Summary of Procedures for UE (to be filed by
amendment).
C-1 Registration Statement of NCE on Form S-4 (filed on
December 13, 1995 (Registration No 33-64951) and
incorporated herein by reference).
C-2 Joint Proxy Statement and Prospectus (included in
Exhibit C-1).
D-1.1 Joint Application of PSCo and SPS before the FERC.
D-1.2.1 Testimony of Dr. Robert Spann to the FERC (to be filed
by amendment).
D-1.2.2 Testimony of Matt P. Harris to the FERC.
D-1.3 Order of the FERC dated __________ (to be filed by
amendment).
D-2.1 Application of PSCo before the CPUC.
D-2.2 CPUC Order dated __________ (to be filed by amendment).
D-3.1 Application of PSCo to the WPSC.
D-3.2 WPSC Order dated __________ (to be filed by amendment).
D-4.1 Application of SPS to the NMPUC.
D-4.2 NMPUC Order dated __________ (to be filed by
amendment).
D-5.1 Notification of SPS to the PUCT.
D-5.2 PUCT Finding dated __________ (to be filed by
amendment).
D-6.1 Application of SPS to the KCC.
D-6.2 KCC Order dated November 28, 1995.
E-1 Map of service areas of SPS, PSCo and Cheyenne.
E-2 Map of PSCo and Cheyenne transmission system.
E-3 Map of SPS transmission system.
E-4 PSCo corporate chart.
E-5 SPS corporate chart.
E-6 NCE corporate chart.
F-1 Opinion of counsel (to be filed by amendment).
F-2 Past-tense opinion of counsel (to be filed by
amendment).
G-1 Opinion of Barr Devlin & Co Incorporated (filed as
Annex II to the Registration Statement on Form S-4 on
December 13, 1995 (Registration No. 33-64951), and
incorporated herein by reference).
G-2 Opinion of Dillon, Read & Co. Inc. (filed as Annex II
to the Registration Statement on Form S-4 on December
13, 1995 (Registration No. 33-64951), and incorporated
herein by reference).
H-1 Annual Report of PSCo on Form 10-K for the year ended
December 31, 1994 (filed on March 3, 1995 (File No. 1-
3280) and incorporated herein by reference).
H-2 Annual Report of SPS on Form 10-K for the year ended
August 31, 1995 (filed on November 21, 1995 (File No 1-
3789) and incorporated herein by reference).
H-3 Statement of PSCo on Form U-3A-2 for the year ended
December 31, 1994 (filed on February 23, 1995 and
incorporated herein by reference).
H-4 Amendment to Statement of PSCo on Form U-3A-2 for the
year ended December 31, 1994 (filed on March 29, 1995
and incorporated herein by reference).
H-5 PSCo Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 (filed on May 10, 1995 (File No.
1-3280) and incorporated herein by reference).
H-6 PSCo Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995 (filed on August 10, 1995 (File No.
1-3280) and incorporated herein by reference).
H-7 PSCo Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 (filed on November 14, 1995
(File No. 1-3280) and incorporated herein by
reference).
H-8 SPS Quarterly Report on Form 10-Q for the quarter ended
November 30, 1995 (filed on January 16, 1996) (File No.
1-3789) and incorporated herein by reference).
I-1 Proposed Form of Notice.
J-1 Analysis of the Economic Impact of a Divestiture of The
Gas Operations of Public Service Company of Colorado
and its Subsidiaries.
J-2 Legal Memorandum of LeBoeuf, Lamb, Greene & MacRae,
L.L.P. and exhibits thereto.
J-3 Table of Estimated Losses of Economies in Prior
Decisions on Divestiture and Retention of Gas
Operations (to be filed by amendment).
J-4 Memorandum on NC Hold debt service (to be filed by
amendment).
B. Financial Statements
FS-1 NCE Unaudited Pro Forma Condensed Consolidated Balance
Sheets as of September 30, 1995 (see Registration
Statement on Form S-4 of NCE (Exhibit C-1 hereto) at p.
75-76).
FS-2 NCE Unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended December 31,
1994 and the nine months ended September 30, 1995.
(See Registration Statement on Form S-4 of NCE (Exhibit
C-1 hereto) at pp. 77-78)).
FS-3 SPS Consolidated Balance Sheet as of August 31, 1995
(see Annual Report of SPS on Form 10-K for the year
ended August 31, 1995 (Exhibit H-2 hereto), at p. 23).
FS-4 SPS Consolidated Statements of Income for its last
three fiscal years (see Annual Report of SPS on Form
10-K for the year ended August 31, 1995 (Exhibit H-2
hereto), at p. 26).
FS-7 PSCo Consolidated Balance Sheet as of December 31, 1994
(see Annual Report of PSCo on Form 10-K for the year
ended December 31, 1994 (Exhibit H-1 hereto), at p.
46).
FS-8 PSCo Consolidated Statement of Income for its last
three fiscal years (see Annual Report of PSCo on Form
10-K for the year ended December 31, 1994 (Exhibit H-1
hereto), at p. 47).
Item 7. Information as to Environmental Effects
The Transaction neither involves a "major federal action"
nor "significantly affects the quality of the human environment" as
those terms are used in Section 102(2)(C) of the National
Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. The only
federal actions related to the Transaction pertain to the Commission's
declaration of the effectiveness of NCE's Registration Statement on
Form S-4, the expiration of the applicable waiting period under the
HSR Act, FERC approval of the application filed by NCE with the FERC
under the Federal Power Act, and Commission approval of this
Application/Declaration. Consummation of the Transaction will not
result in changes in the operations of PSCo, Cheyenne or SPS that
would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this
matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this
Application/Declaration of New Century Energies, Inc. to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: January 29, 1996
New Century Energies, Inc.
By: /s/ Doyle R. Bunch II
Doyle R. Bunch II
Chairman and Secretary
/s/ Richard C. Kelly
Richard C. Kelly
President and Treasurer
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Public Service Company of Colorado )
and ) Docket No. EC96-___-000
Southwestern Public Service Company )
JOINT APPLICATION FOR AUTHORIZATION
AND APPROVAL OF MERGER
Alan J. Statman
Barry S. Spector
Michael J. Thompson
WRIGHT & TALISMAN, P.C.
1200 G Street, N.W.
Suite 600
Washington, D.C. 20005
(202) 393-1200
Attorneys for the Applicants
William M. Dudley
Associate General Counsel
Public Service Company
of Colorado
1225 17th Street
Suite 600
Denver, Colorado 80201-0840
Attorney for
Public Service Company of
Colorado
November 9, 1995
TABLE OF CONTENTS
PAGE
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 1
II. OVERVIEW OF THE TRANSACTION . . . . . . . . . . . . . . 2
III. THE MERGER IS IN THE PUBLIC INTEREST . . . . . . . . . . 5
A. Introduction And Summary . . . . . . . . . . . . . 5
B. The Commonwealth Edison Factors . . . . . . . . . . 8
1. Impact on Costs and Rates . . . . . . . . . . 8
2. The "Pooling" Method of Accounting Will Be
Used . . . . . . . . . . . . . . . . . . . . . 12
3. The Purchase Price Was Negotiated at Arm's
Length and Is Reasonable . . . . . . . . . . . 13
4. The Merger Was Not the Result of Coercion . . 13
5. The Merger Will Not Adversely Affect
Competition . . . . . . . . . . . . . . . . . 14
6. There Will Continue To Be Effective
Regulation of PSCo, Cheyenne, and SPS . . . . 21
C. Comparable Transmission Tariffs Are Already On
File With the Commission . . . . . . . . . . . . . 23
IV. REQUEST FOR EXPEDITED APPROVAL WITHOUT A HEARING . . . . 25
V. AUTHORIZATIONS AND WAIVERS REQUESTED . . . . . . . . . . 26
VI. INFORMATION REQUIRED BY THE COMMISSION'S REGULATIONS . . 28
VII. REQUIRED EXHIBITS . . . . . . . . . . . . . . . . . . . 34
VIII.CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . 35
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Public Service Company of Colorado )
and ) Docket No. EC96-___-000
Southwestern Public Service Company )
JOINT APPLICATION FOR AUTHORIZATION
AND APPROVAL OF MERGER
I. INTRODUCTION
Public Service Company of Colorado ("PSCo"), on behalf
of itself and Cheyenne Light, Fuel and Power Company
("Cheyenne"), a wholly-owned subsidiary owning jurisdictional
facilities, and Southwestern Public Service Company ("SPS")
(jointly "Applicants") submit this Joint Application pursuant to
section 203 of the Federal Power Act ("FPA"), 16 U.S.C. Section
824b, and Part 33 of the Commission's regulations, 18 C.F.R.
Part 33. Applicants seek authorization and approval of the merger
and reorganization of PSCo and SPS into a holding company
(temporarily named M-P New Co.) and the resulting consolidation
of facilities subject to the Commission's jurisdiction (the
"Merger Transaction").
The Merger Transaction will take place in accordance
with the Agreement and Plan of Reorganization, dated August 22,
1995, between PSCo and SPS (the "Merger Agreement"). A copy of
the Merger Agreement is included with the Testimony of Richard C.
Kelly, which accompanies this application. <F1>
The Joint Application consists of three volumes.
Volume I consists of a transmittal letter and this Joint
Application, containing the information and exhibits required by
Sections 33.2 and 33.3 of the Commission's regulations. Volumes II
and III contain Applicants' case-in-chief, consisting of the direct
testimony of six witnesses and accompanying schedules.
Workpapers also accompany the application.
As detailed in the case-in-chief, the Merger
Transaction satisfies all applicable standards for approvals of
mergers as established by Commission precedent. The merger is,
accordingly, "consistent with the public interest" within the
meaning of section 203 of the FPA. Applicants therefore request
that the Commission approve the Merger Transaction expeditiously
and without an evidentiary hearing so that they can complete the
merger by September 6, 1996, and achieve the substantial benefits
projected to result from the merger as early as possible.
II. OVERVIEW OF THE TRANSACTION
The Merger Transaction is a "merger of equals" between
utilities located on opposite sides of the division between the
Eastern and Western Interconnections. PSCo, incorporated in
Colorado and located on the western side, is a combination
electric and gas utility providing electric services to
approximately one million customers in Colorado, including the
population centers of Denver and Boulder. PSCo is a member of
the Western Systems Coordinating Council. PSCo's wholly-owned
subsidiary, Cheyenne, a Wyoming corporation and also a
combination electric and gas utility, provides electric services
to approximately 33,000 customers in and around Cheyenne,
Wyoming. SPS, incorporated in New Mexico and located on the
eastern side, is an electric utility whose service area
encompasses portions of southeastern New Mexico, the South Plains
and Panhandle areas of Texas, the Oklahoma Panhandle, and
southwestern Kansas. SPS provides service to approximately
368,000 customers, and it is a member of the Southwest Power
Pool.
As specified in the Merger Agreement, PSCo, SPS, and
Cheyenne will become operating companies of a new holding
company, temporarily called M-P New Co., a Delaware corporation,
which will be a registered holding company subject to regulation
by the Securities and Exchange Commission ("SEC"). A new service
company will be organized as a subsidiary of the holding company
to provide certain administrative, management, and support
services to PSCo, SPS, Cheyenne, and the holding company's other
subsidiaries. Additionally, an intermediate holding company
subsidiary will be formed to own the shares of certain existing
PSCo and SPS subsidiaries. <F2>
Under this holding company structure, PSCo, SPS, and
Cheyenne each will continue to serve their existing service
territories. Although the service company will consolidate and
perform corporate support and administrative functions that are
currently performed by PSCo (on behalf of itself and Cheyenne)
and SPS individually, there will be no immediate operational
changes in how the companies serve their customers. PSCo,
Cheyenne, and SPS will continue to meet their customers' needs
from their own generation and purchased power resources, as they
do today. By the year 2001, PSCo and SPS plan to connect their
systems by constructing a 400-MW high-voltage direct-current tie
and an approximately 300-mile 345-kv transmission line. When the
two systems are connected, PSCo and SPS will begin coordinated
electric operations.
At the corporate level, restructuring will be
effectuated by the conversion of stock. Common stock holders of
PSCo and SPS will convert their respective shares of PSCo and SPS
stock for rights to shares of common stock in the new holding
company. Each share of PSCo stock will be converted to a right
to receive one share of the new holding company's stock. Each
share of SPS stock will be converted to a right to receive 95% of
one share of the holding company's stock. These rights then will
be exchanged for holding company stock. As a result, the common
stockholders of PSCo and SPS will own all of the outstanding
shares of the stock of the new holding company. The preferred
____________________
<F1> See Testimony of Richard C. Kelly, Exh. APP-1, Schedule
RCK-2.
<F2> A diagram of the new corporate structure is included in the
Testimony of Richard C. Kelly, Exh. APP-1, Schedule RCK-3.
stockholders and debt holders of each company at the time of the
merger will be unaffected.
Applicants are undertaking the Merger Transaction
because they believe it will produce benefits to their customers
and shareholders that cannot be realized through separate
planning and operation of their existing electric utility
systems. The cost savings from the merger -- projected to be
approximately $770 million in the first ten years -- will result
in rates for Applicants' electric and gas customers which are
lower than they otherwise would have been. <F3> Moreover,
Applicants believe that the resulting lower-cost, more efficient
company will better be able to compete in the nation's
increasingly competitive electric power markets. The savings and
other efficiencies projected to result from the merger are
attributable to many factors. These are summarized below and are
detailed in the testimony accompanying the application.
For these and other reasons set forth herein,
Applicants request that the Commission find that the proposed
merger will be consistent with the public interest in accordance
with section 203 of the FPA and grant all necessary
authorizations to effectuate the merger.
III. THE MERGER IS IN THE PUBLIC INTEREST
A. Introduction And Summary
The standards for approval of a merger under section
203 are well established. "[I]f the Commission finds that the
proposed . . . consolidation . . . will be consistent with the
public interest, it shall approve the same." 16 U.S.C.
Section 824b(a)(1988). The merging entities need only show that
"the proposed merger is compatible with the public interest." <F4>
They "need not show a positive benefit of the merger." <F5>
In Commonwealth Edison Co., <F6> the Commission set
forth six factors that it considers in determining whether a
proposed merger is in the public interest: (1) the effect of the
merger on Applicants' operating costs and rate levels; (2) the
contemplated accounting treatment; (3) the reasonableness of the
purchase price; (4) whether the merger was the result of
coercion; (5) the impact of the merger on competition; and (6)
whether the merger impairs effective regulation by the Commission
or the appropriate state regulatory authorities. More recently,
the Commission has further required that merging companies
provide "comparable transmission services" on their
systems. <F7>
As discussed below and in detail in the testimony
accompanying this application, the merger satisfies each of the
Commonwealth factors. Moreover, in its review of recent utility
mergers, the Commission has focused primarily on two factors: (1)
the impact of the merger on costs and rates; and (2) the impact
of the merger on competition. Neither of these matters requires
an evidentiary hearing in this case.
Among other benefits, as noted, in the initial ten
years following the merger, there will be net cost savings to the
merging companies of approximately $770 million. Such savings
will enable Applicants to provide reliable, competitive service
at lower rates than otherwise would have occurred absent the
merger. Even if Applicants' estimate of $770 million in net cost
savings is disputed in amount, there can be no question from the
evidence submitted that significant, merger-related savings will
be realized. Moreover, as discussed below, Applicants are
providing a "hold harmless" commitment to wholesale customers,
further obviating any need for a hearing.
The merger of these two moderately-sized utilities also
will have no adverse effect on competition. The merged company
will rank only about 30th in size nationally, based on total
electric revenues. The accompanying testimony of Dr. Robert M.
Spann, Vice President of Charles River Associates, demonstrates
that the proposed merger will not adversely affect competition in
any relevant transmission or generation market. <F8> Both PSCo
and SPS already have filed comparable-service, open-access
transmission tariffs, which the Commission has accepted and
placed into effect. <F9>
These and other matters pertinent to the Commission's
review of the merger are discussed in more detail below.
B. The Commonwealth Edison Factors
1. Impact on Costs and Rates
The merger will have a positive impact on Applicants'
costs and rates. Applicants have submitted the testimony of
Thomas J. Flaherty, National Partner for Utilities Consulting of
Deloitte & Touche Consulting Group, in which Mr. Flaherty
demonstrates that, as a result of the merger, in the first ten
years after the transaction, Applicants can achieve approximately
$815 million in cost savings. After netting out the costs that
will be incurred to accomplish the merger, the total projected
net savings are approximately $770 million.
The projected savings and costs to achieve them are
summarized by Mr. Flaherty as follows: <F10>
Total Savings
1997 - 2006
Savings Category ($ millions)
Corporate and Operations Labor $389.5
Corporate and Administrative Programs 82.7
Purchasing Economies (Non-Fuel) 19.1
Fuel Procurement-Electric 144.1
Fuel Procurement-Gas LDC 53.0
Capacity Deferral 160.1 <F11>
Joint Dispatch (33.7) <F12>
Total Savings 814.8
Less: Costs to Achieve (25.0)
Transaction Costs (18.0)
Premerger Initiatives (2.1)
Net Savings $769.7
On a net present value basis, which the Commission
often considers in merger cases, the ten-year savings are $488
million. <F13> Especially considering the relatively modest
size of PSCo and SPS, these are substantial savings. <F14>
As Mr. Flaherty testifies, the projected cost savings
reflect only those savings created by or attributable to the
merger. The projected savings reflect the creation of cost
reduction or cost avoidance opportunities through the ability to
consolidate separate, stand-alone operations into a single
entity. The Commission in its past evaluation of mergers has not
limited its benefit findings to savings that can be created only
by the proposed merger. <F15> Yet, here, even if the
____________________
<F3> Approximately $53 million of the savings will directly
benefit PSCo's local gas distribution customers, while the
remaining $717 million will primarily benefit electric
customers.
<F4> Pacific Power & Light Co. v FPC, 111 F.2d 1014, 1016 (9th
Cir. 1940); see also Northeast Utils. Serv. Co. v. FERC, 993
F.2d 937 (1st Cir. 1993); Entergy Servs., Inc., 65 FERC
Paragraph 61,332 (1993), order on reh'g, 67 FERC Paragraph
61,192 (1994).
<F5> Utah Power & Light Co., 47 FERC Paragraph 61,209, at 61,750
(1989), remanded on other grounds, Environmental Action v.
FERC, 939 F.2d 1057 (D.C. Cir. 1991); see also Entergy
Servs., Inc., 62 FERC Paragraph 61,073, at 61,370 (1993).
<F6> 36 FPC 927 (1966), aff'd sub nom. Utility Users League v.
FPC, 394 F.2d 16 (7th Cir), cert. denied, 393 U.S. 953
(1968).
<F7> El Paso Elec. Co., 68 FERC Paragraph 61,181, at 61,914-15
(1994). See also Southwestern Pub. Serv. Co., 71 FERC
Paragraph 61,318, at 62,241 (1995).
<F8> In fact, the Commission recently specifically concluded
that SPS lacks any generation market power. Southwestern Pub.
Serv. Co., 72 FERC Paragraph 61,208, at 61,966-67 (1995). It
reached a similar conclusion as to PSCo in 1992. Public
Serv. Co. of Colorado, 58 FERC Paragraph 61,322 (1992).
<F9> Southwestern Pub. Serv. Co., 72 FERC Paragraph 61,104 (1995);
Public Serv. Co. of Colorado, 73 FERC Paragraph 61,071 (1995).
<F10> See Testimony of Thomas J. Flaherty, Exh. APP-3 and
Schedule TJF-2.
<F11> The cost of the transmission line which will interconnect
Applicants' systems has been accounted for in the capacity
deferral savings. See Flaherty, Exh. APP-3, at 57-58.
<F12> By combining their dispatch, the companies achieve lower
energy costs than on a stand-alone basis. However, because
Applicants are deferring a capacity addition that would have
been fueled by low-cost coal, saving $160 million, energy
costs are $33 million higher as compared to the stand-alone
scenarios. Combined, however, fuel procurement savings for
electric operations, capacity deferral savings, and joint
dispatch savings are projected to be $270.5 million.
<F13> Flaherty, Exh. APP-3, at 26 and Schedule TJF-2.
<F14> Cf. Midwest Power Sys., Inc., 71 FERC Paragraph 61,386 (1995)
(present value merger savings of $270 million over ten
years); El Paso Elec. Co. 68 FERC Paragraph 61,181 (1994)
(nominal merger savings of $420 million over ten years).
<F15> See Midwest Power Sys., Inc., 71 FERC Paragraph 61,386, at
62,507 (1995); Northeast Utils. Serv. Co., 56 FERC Paragraph
61,269, at 61,995 (1991) ("[A] claimed benefit should be
attributable to the merger even though the benefit could be
achieved without the merger."), order on reh'g, 58 FERC
Paragraph 61,070 (1992), aff'd in rel. part & remanded on
other grounds, 993 F.2d 937 (1st Cir. 1993) (citing Utah
Power & Light Co., 45 FERC Paragraph 61,095, at 61,299
(1988)); Commonwealth Edison Co., 36 FPC 927, 931 (1966),
aff'd sub nom. Utility Users League v. FPC, 394 F.2d 16
(7th Cir.), cert. denied, 393 U.S. 953 (1968).
Commission were to consider only those benefits that cannot be
achieved any other way, <F16> the merger would satisfy that
even stricter standard.
Consolidation and integration will enable PSCo and SPS:
to eliminate duplicative functions and positions (saving $389.5
million), combine or avoid similar corporate activities (saving
$82.7 million), and combine and reduce external purchases of
goods and services (saving $19.1 million). The companies will be
able to lower the cost of fuel procurement through combined
purchases (saving $144.1 million for electric operations and $53
million for gas operations). And, with the construction of an
interconnection between the systems, the companies will be able
more effectively to coordinate planning and construction, defer
generation, and more economically dispatch generation resources
(saving $126.4 million). While the exact level of merger savings
that will be achieved cannot be predicted with
precision, <F17> there can be no question that substantial
savings will result. No further showing is required, <F18>
and an evidentiary hearing on this issue is not necessary.
Moreover, as described in the testimony of David T.
Hudson, Applicants are proposing a "hold harmless" commitment for
the first five years after the effective date of the merger. In
any general rate increase filing by either PSCo or SPS, neither
company will seek to collect certain defined, merger-related
costs, except to the extent the costs are offset by merger-
related benefits. <F19> The Commission has relied on "hold
harmless" conditions in the past in determining not to set for
hearing the issue of a merger's effect on costs and
rates. <F20>
2. The "Pooling" Method of Accounting Will Be Used
As explained in the testimony of Robert D. Dickerson,
Secretary and Treasurer for SPS, the merger will be accounted for
by using the pooling-of-interests method of accounting, as
provided for under the Generally Accepted Accounting Principles
in Accounting Principles Board Opinion No. 16 - Business
Combinations. The merger meets the criteria for the pooling
method of accounting. No additional ownership rights are being
acquired by one group of shareholders to the exclusion of
another. Rather, a pooling of ownership interests will be
accomplished by the exchange of common stock in the respective
companies for the shares of common stock in the new holding
company.
Consistent with Commission precedent, because the
merger transaction meets the criteria of the pooling-of-interests
method of accounting, there is no need for a hearing to address
accounting issues. <F21>
3. The Purchase Price Was Negotiated at Arm's Length and
Is Reasonable
The Merger Agreement was negotiated at arm's length
between PSCo and SPS, and has been approved by the Board of
Directors of each company. Under the Merger Agreement, neither
company is "purchasing" the other. Rather, the merger
transaction is a merger of equals, whereby the common
stockholders of PSCo and SPS will exchange their shares for stock
in the new holding company. The rate of exchange for common
stock -- each share of PSCo common stock converted to one share
of common stock in the holding company, and each share of SPS
stock converted to 95% of one share of common stock in the
holding company -- was negotiated by the merging companies and
approved by their respective directors. <F22> When merger
negotiations are at arms length, there is no need for a hearing
on the reasonableness of the purchase price. <F23>
4. The Merger Was Not the Result of Coercion
Neither company coerced the other into entering the
Merger Agreement. Each company recognized the potential long-
term benefits from joining the two companies and freely agreed to
the merger. <F24> Moreover, because the shareholders of each
company must approve the Merger Agreement, neither company can
coerce the other into consummating the transaction.
5. The Merger Will Not Adversely Affect Competition
The Commission has developed a well-defined framework
for assessing market power in merger and other cases. The
Commission's "primary concern" is whether "customers have genuine
alternatives to buying the seller's product" in markets for
wholesale bulk power and for transmission services. <F25>
Although the Commission does not rely on any particular measures
of market shares or concentration, it has held that market shares
of less than 20% demonstrate a lack of market power. <F26>
The Commission examines whether eliminating an existing
competitor through a proposed merger will increase concentration
and, thus, potentially create or enhance market power in
transmission and bulk power markets. However, if the evidence
shows that pre-merger competition between the merging companies
is only de minimis, the merger's elimination of a competitor has
no adverse effect on competition. Entergy Servs., Inc., 62 FERC
Paragraph 61,073, at 61,374 (1993).
Commissioners Massey and Hoecker, in their concurring
opinion in Midwest Power Systems, Inc., 71 FERC Paragraph 61,386
(1995), have urged the Commission to reexamine its merger policy
in the light of changed circumstances in the electric industry.
Id. at 62,512 (Concurring Opinion of Commissioners Massey and
Hoecker). The commissioners observed that the principal
competitive effect of mergers of utilities today is likely to be
to increase concentration in generation markets. Sometimes the
increase in concentration will be competitively significant and
sometimes it will not, they noted. Id. The commissioners also
pointed out that, in some instances, "bigger may be better" with
respect to horizontal mergers of transmission systems, providing
enhanced market access to others. Id. at 62,513. <F27>
Applicants are submitting the testimony of Dr. Robert
M. Spann, an independent economist with Charles River Associates,
who evaluates the potential effects of Applicants' merger on
competition. Dr. Spann employs the analytical framework which
the Commission has developed in its prior merger decisions and
also employs other widely-accepted analytical methods to address
concerns and questions that a merger may present.
As discussed in detail in the testimony, Dr. Spann
concludes that the merger of PSCo and SPS would not create or
enhance market power in any relevant market for transmission
services or for sales of bulk power at wholesale. PSCo and SPS
are relatively small participants in a large geographic market in
which buyers and sellers have numerous transmission options and
many alternatives for acquiring bulk power supplies. Moreover,
____________________
<F16> See Midwest Power Sys., Inc., 71 FERC at 62,513
(Commissioners Massey and Hoecker, concurrence).
<F17> Capacity, fuel procurement, and dispatch savings are
particularly difficult to forecast with precision because
they depend on future company loads and future fuel prices.
Therefore, Applicants conducted sensitivity studies on these
projected savings. These studies show a likely range of
combined capacity deferral, fuel procurement, and joint
dispatch savings for electric operations (net of the costs
of the new transmission line), over a wide variety of future
conditions, of between $174 million and $280 million,
confirming the reasonableness of the projections in this
area. See Testimony of Matt P. Harris, Exh. APP-5, at 45
and Schedule MPH-15.
<F18> Entergy Servs., Inc., 65 FERC Paragraph 61,322, at 62,475
(1993). See also Midwest Power Sys., Inc., 71 FERC Paragraph
61,386 (1995).
<F19> See Testimony of David T. Hudson, Exh. APP-4, at 15-16.
<F20> See Cincinnati Gas & Elec. Co., 64 FERC Paragraph 61,237, at
62,714 (1993), vacated on other grounds, 66 FERC Paragraph
61,028, reinstated, 69 FERC Paragraph 61,005 (1994). As a
general matter, however, the Commission does not require
hold harmless conditions when the applicants have shown that
a merger is otherwise consistent with the public interest.
Entergy Servs., Inc., 65 FERC at 62,474 (1993). Because
Applicants have shown substantial benefits, the Commission
does not have to examine the extent of the voluntary hold
harmless commitment. Id.
<F21> Southern California Edison Co., 47 FERC Paragraph 61,196, order
on reh'g, 49 FERC Paragraph 61,091 (1989). Moreover, because
pooling-of-interests accounting will be used, no acquisition
premium will be paid or recorded.
<F22> See Testimony of Richard C. Kelly, Exh. APP-1, at 21-22.
<F23> See Midwest Power Sys., Inc., 71 FERC Paragraph 61,386, at
62,510 (1995).
<F24> See Testimony of Richard C. Kelly, Exh. APP-1, at 10-11.
<F25> Public Serv. Co. of Indiana, Inc., 51 FERC Paragraph 61,367,
at 62,205, order on reh'g, 52 FERC Paragraph 61,260 (1990);
see also Cincinnati Gas & Elec. Co., 64 FERC at 62,727; see
also UtiliCorp United, Inc., 56 FERC Paragraph 61,031, at
61,120 (1991).
<F26> See, e.g., Louisville Gas & Elec. Co., 62 FERC Paragraph
61,016, at 61,146 (1993). The Commission also recently
concluded that a market share between 20% and 25% in a few
markets (based on total generation resources) does not
demonstrate market power, when market shares are below 20%
in all markets with respect to uncommitted capacity.
Southwestern Pub. Serv. Co., 72 FERC Paragraph 61,208, at
61,966 (1995).
<F27> Because the PSCo and SPS systems are not contiguous and are
not currently interconnected, this merger will not
immediately have a "bigger is better" effect on
transmission. However, Applicants plan to interconnect
their systems by 2001, and their systems will then be
subject to all Commission policies applicable to comparable-
service, open-access transmission over multi-system
companies.
both companies already have filed with the Commission comparable-
service, open-access transmission tariffs, which are now in
effect. <F28> As recently as September 1, 1995, the
Commission expressly found that one of the merging companies,
SPS, does not currently possess market power in generation.
<F29> In an earlier proceeding, the Commission made the same
finding as to PSCo. <F30>
As to transmission markets, PSCo and SPS do not
currently compete with each other. As physically separated
companies operating in different electric grids, there are
virtually no transactions for which transmission service over the
PSCo system would be a viable substitute for transmission service
over the SPS system or vice versa. Indeed, Public Service
Company of New Mexico ("PNM") is the only utility whose
interconnections with both companies enable it to substitute the
services of one for the other, and it has substantial generation
resources of its own, is interconnected with numerous other
sellers of power, and has numerous transmission paths available
to it for purchases of power from companies other than PSCo and
SPS. <F31> The proposed merger therefore would not create or
enhance market power in any transmission markets.
Further, in Colorado, unlike many other regions of the
country, there are multiple owners of transmission facilities
throughout the state. In many cases, sellers of power have
several alternative transmission providers from which to choose.
See Testimony of Matt P. Harris, Exh. APP-5, at 21; Spann
Testimony, Exh. APP-6, at 35-36.
Regarding the Commission's principal focus in merger
proceedings, markets for short-term capacity sales, <F32>
Dr. Spann concludes that the merger would not increase
concentration in, and the merged company would not have a
substantial share of, short-term capacity markets. This
conclusion holds whether the relevant geographic market is
defined, as Dr. Spann recommends, as the entire Western Systems
Coordinating Council (where Applicants' market share will be only
about 6% based on total generation and 3% based on uncommitted
generation) or more narrowly as only those entities (Tier 1
entities) that are directly interconnected with one or both of
the merging companies. <F33>
The Applicants' shares of their Tier 1 markets fall
below the Commission's 20% threshold in all but two cases. The
two exceptions are the merged company's share of the market
represented by the transmission-dependent entities ("TDE's") to
which SPS provides full requirements service within its service
territory and its share of the market represented by the City of
Lubbock, Texas. In each of these cases, the merged company would
hold just a 21% share of the Tier 1 market based on total
resources. Moreover, when the analysis is based on uncommitted
resources, Applicants' short-term market share is zero, because
SPS has no short-term uncommitted capacity and PSCo is not and
will not be connected to these markets in the short-
term. <F34>
Dr. Spann also finds that the merger would not create
or enhance market power in any relevant market for short-term
energy sales. Even though the absence of useful reported data
forces him to exclude from his analysis the very substantial
sales of non-firm energy in the Western Interconnection that are
made by the Western Area Power Administration (Western) and other
public entities, Dr. Spann finds that the merged company would
have a market share for short-term, non-firm energy sales of only
approximately 12% and that the merger would not significantly
increase concentration. The merger would have an even smaller
effect on concentration in the market for short-term sales of
firm power.
Dr. Spann further concludes that the merger would not
create or enhance market power in long-term markets. <F35>
Applicants do not control sites for new generating facilities or
any other key inputs for new generating resources. <F36>
While PSCo and Cheyenne are engaged in the transportation and
sale of natural gas in Colorado and Wyoming, these operations are
subject to regulation by the Colorado Public Utilities Commission
and the Public Service Commission of Wyoming. Certain sales and
transportation services also are subject to the non-
discriminatory access provisions of the FERC's
regulations. <F37> This regulation precludes the merged
company from using its natural gas facilities to block entry by
competing generators of power. The merger would not, in any
event, increase the Applicants' control of natural gas
transportation facilities.
Dr. Spann notes that entry into generation markets is
occurring today in the service areas of both PSCo and SPS, as
well as throughout the relevant geographic market. This provides
the best evidence that Applicants do not control, and will be
unable to erect, barriers to entry in generation markets.
Thus, this merger is plainly among the transactions
which Commissioners Massey and Hoecker noted would be
competitively insignificant. In fact, Dr. Spann analyzed the
Applicants' merger even under the hypothetical assumption that no
transmission service would be available on Applicants' systems.
Even under that highly conservative hypothetical, the merger
still would not materially increase concentration in any relevant
market, confirming the absence of a competitive issue of
consequence in this case. Market shares are still below the
Commission's threshold. There is no need for an evidentiary
hearing regarding effects on competition.
6. There Will Continue To Be Effective Regulation of PSCo,
Cheyenne, and SPS
Following completion of the merger, PSCo, Cheyenne, and
SPS will continue to be regulated at both the state and federal
levels. PSCo's retail rates and services will continue to be
regulated by the Colorado Public Utilities Commission, as they
are now. Its wholesale electric operations and transmission
services will continue to be regulated by the FERC. Likewise,
Cheyenne will continue to be regulated at the retail level by the
Public Service Commission of Wyoming. <F38>
____________________
<F28> Southwestern Pub. Serv. Co., 72 FERC Paragraph 61,104 (1995);
Public Serv. Co. of Colorado, 73 FERC 61,071 (1995).
<F29> Southwestern Pub. Serv. Co., 72 FERC Paragraph 61,208, at
61,966-967 (1995).
<F30> Public Serv. Co. of Colorado, 58 FERC Paragraph 61,332, at
62,038 (1992).
<F31> See Testimony of Robert W. Spann, Exh. APP-6, at 43. Both
PSCo and SPS also are interconnected with WestPlains Energy;
but each is connected with a different, electrically
separated service area of WestPlains. SPS interconnects
with WestPlains's Kansas service area, while PSCo
interconnects with WestPlains's Colorado service area.
WestPlains's Kansas and Colorado service areas are not
interconnected. Accordingly, WestPlains cannot substitute
transmission service of one of the merger applicants for
transmission service of the other. See Testimony of Robert
W. Spann, Exh. APP-6, at 52-53.
<F32> The Commission distinguishes between short-term and long-
term markets for bulk power. See, e.g., Northeast, 56 FERC
at 62,003. In short-term markets, the critical factor is
the merger's effects on concentration and market share based
on uncommitted capacity, i.e., capacity that is surplus to
existing peak demands, plus required reserves. Kansas City
Power & Light Co., 67 FERC Paragraph 61,183, at 61,556 (1994).
Because not all capacity is always needed to meet existing
loads, concentration and shares of total capacity are also
considered, but are less important. Id. at 61,556 n.11.
<F33> The Commission includes in its analysis both geographic
markets defined according to the usual principles of
antitrust economics and narrower, individual "Tier 1"
markets. Each Tier 1 market is comprised of one of the
utilities with which any or all of the merger applicants is
directly interconnected. Entergy Servs., Inc., 58 FERC
Paragraph 61,234, at 61,757, order on reh'g, 60 FERC
Paragraph 61,168 (1992), remanded on other grounds sub.
nom. Cajun Elec. Power Coop. v. FERC, 28 F.3d 173
(D.C. Cir. 1994). The Commission focuses on the narrowest
reasonable geographic markets, represented by Tier 1
utilities, because it regards such utilities as the most
vulnerable to any market power that the merged company
might possess. Id.; Public Serv. Co. of Colorado, 58 FERC
Paragraph 61,322, at 62,038 (1992).
<F34> In any event, the Commission in merger cases addresses only
"the specific anticompetitive harms directly resulting from
the proposed merger." Entergy, 62 FERC at 61,376. The
TDE's and Lubbock's markets are not affected by the merger.
These markets are connected only to SPS, which already
serves them; they are not first-tier markets of PSCo.
<F35> In assessing the effects of a merger on long-term
generation markets, the Commission focuses on whether the
merged company will control or will be able to erect barriers
to entry for competing producers and sellers of power. Public
Serv. Co. of Indiana, 51 FERC at 62,208. The Commission
examines the merged company's potential control of sites for
new generation, of key inputs to power generation, such as
fuel, and of transportation of key inputs. Midwest Power
Sys., Inc., 71 FERC 61,386, at 62,510 (1995).
<F36> Hudson Testimony, Exh. App-4, at 20-21; Harris Testimony,
Exh. App-5, at 25.
<F37> Both companies hold blanket certificates under 18 C.F.R.
Section 284.224 (1995). Public Serv. Co. of Colorado, 61
FERC Paragraph 62,012 (1992); Cheyenne Light, Fuel & Power
Co., 67 FERC Paragraph 62,095 (1994).
<F38> PSCo also will remain subject to regulation by the Nuclear
Regulatory Commission with respect to the decommissioning of
its Fort St. Vrain Nuclear Electric Generating Station.
PSCo and Cheyenne's intrastate natural gas operations will
continue to be regulated by the Colorado and Wyoming
Commissions, and their interstate transportation will
continue to be regulated by the FERC.
Similarly, SPS's retail rates and service will continue
to be regulated by the municipalities it serves in Texas, the
Public Utility Commission of Texas, the New Mexico Public Utility
Commission, and the Kansas and Oklahoma Corporation Commissions,
just as they are regulated today. Southwestern's wholesale sales
of electricity and transmission service will continue to be
regulated by the FERC.
The new holding company will be subject to further
federal regulation as a registered holding company under PUHCA.
This will engender increased regulatory oversight, as many of the
transactions between and among the holding company and its
subsidiaries will require prior approval of the SEC. <F39>
Furthermore, state regulatory bodies will examine the
merger. The Colorado Public Utilities Commission and the New
Mexico Public Utility Commission must approve the merger. The
Public Utility Commission of Texas will review the merger to
assess its effect in future ratemaking proceedings. The Public
Service Commission of Wyoming must approve the corporate
reorganization. And, the Kansas Corporation Commission must
authorize the issuance of common stock certificates by SPS
pursuant to the merger. <F40> As the Commission stated in
Entergy, "the interests of [the] states vis-a-vis state
regulation can be protected by those state commissions." <F41>
C. Comparable Transmission Tariffs Are Already On File With the
Commission
Commission policy requires all merging utilities to
provide transmission service under open-access, comparable-
service transmission tariffs. <F42> Moreover, in its Notice
of Proposed Rulemaking concerning open-access transmission, the
Commission further has proposed that all utilities provide
comparable, open-access transmission services. <F43>
PSCo, Cheyenne, and SPS already have on file with the
Commission comparable-service, open-access tariffs. Southwestern
Pub. Serv. Co., 72 FERC Paragraph 61,104 (1995); Public Serv. Co.
of Colorado, 73 FERC Paragraph 61,071 (1995). These tariffs are
in effect today. Until such time as the Applicants connect their
two systems, Applicants will provide service under their respective
accepted tariffs, as they may be modified by the requirements of
the final rule in the NOPR proceeding. <F44> After the two
systems are physically connected, which is currently planned by
the year 2001, the Applicants will provide transmission service
under a tariff or tariffs conforming to then-effective Commission
regulations and policies concerning transmission services offered
by multi-system companies.
Because PSCo, Cheyenne, and SPS already have tariffs on
file, and because the NOPR proceeding will apply to all
utilities, there are no material transmission access issues to be
addressed in a hearing on this merger. As the Commission has
said, when the Commission issues its final rule in the NOPR
proceeding, it will resolve what it believes "is sufficient to
mitigate transmission market power." American Elec. Power Serv.
Corp., 72 FERC Paragraph 61,287, at 62,237 (1995). At that time,
"[a]ll of the tariffs that are currently on file with the Commission,
or will be on file prior to the effective date of a final rule, will
be brought up to conformance, as necessary, to be consistent with
the minimum non-discriminatory transmission access requirements
specified in the final rule." Id. Through implementation of
their existing tariffs and compliance with the Commission's final
rule in the NOPR proceeding, Applicants' transmission market
power will be mitigated.
IV. REQUEST FOR EXPEDITED APPROVAL WITHOUT A HEARING
Applicants respectfully request that the Commission act
on this Joint Application as expeditiously as possible. As the
Commission has stated in connection with another merger
proceeding, it "cannot ignore the need to act as expeditiously as
possible given the commercial realities and time pressures
presented in corporate matters subject to our jurisdiction."
Northeast Utils. Serv. Co., 58 FERC Paragraph 61,070, at 61,202
(1992), aff'd in rel. part & remanded on other grounds, 993 F.2d 937
(1st Cir. 1993). Here, too, expedition is appropriate to enable
ratepayers of the Applicants to realize merger benefits as
quickly as possible. <F45>
Expedition is particularly appropriate here because the
Commission should be able to complete its consideration of the
Joint Application without the need for a trial-type evidentiary
hearing. It is well established that section 203 of the FPA does
not require such a hearing. Midwest Power Sys., Inc., 71 FERC
Paragraph 61,386 (1995); UtiliCorp United, Inc., 56 FERC Paragraph
61,031 (1991). An evidentiary hearing is required only when
there are material issues of disputed fact that must be resolved
to determine whether the proposed merger is consistent with the
public interest. <F46>
As demonstrated by this Joint Application and the
accompanying testimony and exhibits, the merger of PSCo and SPS
unquestionably meets all of the Commonwealth factors and will
produce significant cost savings. Moreover, Applicants' hold-
harmless commitment further enables the Commission to act without
a hearing. The merger has no adverse competitive effects.
Accordingly, expedited review of the merger transaction without
an evidentiary hearing is appropriate and in the public interest.
V. AUTHORIZATIONS AND WAIVERS REQUESTED
In view of the foregoing, and the testimony and
exhibits which accompany this application, the Applicants request
that the Commission grant all necessary authorizations for the
Merger Transaction, including:
(a) approval of the indirect disposition and
consolidation of the jurisdictional facilities of PSCo, Cheyenne,
and SPS, resulting from the reorganization under the Merger
Agreement in which M-P New Co. will become the holder of all of
the common stock of PSCo, Cheyenne, and SPS; and
(b) all other necessary authorizations to complete the
Merger Transaction.
Except as described below, the Applicants believe they
have complied fully with all requirements of the FPA and Part 33
of the Commission's regulations regarding section 203
applications. However, to the extent necessary, the Applicants
request a waiver of any applicable requirements which the
Commission deems have not been met.
The following limited waiver requests are also made:
(1) Applicants request a waiver of the requirement to
file a separate copy of Exhibit G, applications and exhibits
filed with other regulatory bodies, for each of six states
affected. See 18 C.F.R. Section 33.3 (1995). Applicants already
have provided the original state applications to the respective
state jurisdictions considering the merger. These applications,
and related testimony and exhibits, are voluminous and largely
repetitive of this application. Accordingly, Applicants request
permission to file only six copies of Exhibit G.
(2) To the extent interested parties request
Applicants to provide copies of the application, or the
Commission otherwise requires service of the application,
Applicants request that they not be required to provide copies of
Exhibit G, which, as noted, is voluminous. Exhibit G will be
available to other parties at the Commission's offices.
Applicants also commit to making available a copy of Exhibit G
____________________
<F39> "[T]he fact that the forum to resolve certain issues will
be [at the federal level] rather than before a state
commission, does not suggest any diminishment of effective
regulation." Entergy Servs. Inc., 62 FERC Paragraph 61,073,
at 61,374 (1993).
<F40> SPS also serves Oklahoma on a small scale (SPS's Oklahoma
load is only 0.8% of its total load). Oklahoma does not
require review or approval of this transaction; this lack of
review, however, is not an impediment to effective
regulation. Cf. Midwest Power Sys., Inc., 71 FERC at 62,511
n.42.
<F41> Entergy Servs., Inc., 62 FERC Paragraph 61,073, at 61,374
(1993). See also Kansas Power & Light Co., 54 FERC Paragraph
61,077, at 61,254-55 (1991).
<F42> El Paso, 68 FERC Paragraph 61,181, at 61,914 (1994).
<F43> Promoting Wholesale Competition through Open Access Non-
Discriminatory Transm. Servs. by Pub. Utils.; Recovery of
Stranded Costs by Pub. Utils. & Transmitting Utils., IV FERC
Stats. & Regs., Proposed Regs. Paragraph 32,514 (1995) ("NOPR").
<F44> PSCo, Cheyenne, and SPS's tariffs substantially conform to
existing Commission comparable service policies, as
confirmed by the Commission's placing them in effect without
significant modification. In any event, prior to the
merger, the tariffs will be amended to conform to the final
rule in the NOPR proceeding.
<F45> See Kansas Power & Light Co., 54 FERC Paragraph 61,077, at 61,252
(1991).
<F46> Entergy Servs., Inc., 64 FERC Paragraph 61,001, at 61,009 (1993)
("The Commission need not conduct an evidentiary hearing
when there are no such disputed issues of material fact, and
that even when there are disputed issues, the Commission
need not conduct such a hearing if the issues may be
adequately resolved on the written record.") (citing Moreau
v. FERC 982 F.2d 556, 568 (D.C. Cir. 1973)).
for inspection at counsel's office in Washington, D.C., and at
the companies' headquarters in Denver, Colorado, and Amarillo,
Texas.
VI. INFORMATION REQUIRED BY THE COMMISSION'S REGULATIONS
The following information is submitted by the
Applicants in accordance with section 33 of the Commission's
Regulations, 18 C.F.R. Section 33 (1995).
(a) Names and addresses of principal business offices
The following are the names and principal business
offices of the Applicants:
1. Public Service Company of Colorado
1225 17th Street
Denver, CO 80202
Telephone: (303) 571-7511
Cheyenne Light, Fuel and Power Company
108 West 18th Street
Cheyenne, WY 82001
(307) 778-2100
2. Southwestern Public Service Company
600 Tyler
P.O. Box 1261
Amarillo, Texas 79170
Telephone: (806) 378-2121
(b) Name and address of persons authorized to receive
notices and communications in respect to application
The following persons are authorized to receive notices
and communications with respect to this Joint Application:
Alan J. Statman
Barry S. Spector
Wright & Talisman, P.C.
1200 G Street, N.W., Suite 600
Washington, D.C. 20005-3802
(202) 393-1200
Attorneys for the Applicants
William M. Dudley
Associate General Counsel
Public Service Company of Colorado
1225 17th Street
Suite 600
Denver, CO 80202
(303) 294-2500
Attorney for Public Service Company of
Colorado
Additionally, the Applicants request that the foregoing
be placed on the official service list for this proceeding and
that, in addition, the following be placed on the service list:
Jerry Diller
David T. Hudson
Southwestern Public Service Company
600 Tyler
P.O. Box 1261
Amarillo, Texas 79170
Fredric C. Stoffel
Public Service Company of Colorado
1225 17th Street, Suite 600
P.O. Box 840
Denver, CO 80202
(c) Designation of the territories served, by counties and
states
1. PSCo
PSCo serves customers in the following counties in
Colorado: Adams, Alamosa, Arapahoe, Boulder, Chaffee, Clear
Creek, Conejos, Costilla, Denver, Eagle, Garfield, Gilpin,
Jefferson, Lake, Logan, Mesa, Morgan, Park, Rio Grande, Saguche,
Summit, and Weld.
Cheyenne
Cheyenne serves customers in Laramie County, Wyoming.
2. SPS
Southwestern serves customers in the following
counties.
New Mexico counties: Chaves, Curry, Eddy, Lea, Quay,
and Roosevelt counties.
Texas counties: Andrews, Armstrong, Bailey, Briscoe,
Carson, Castro, Cochran, Crosby, Dallam, Dawson, Deaf Smith,
Donley, Floyd, Gaines, Garza, Gray, Hale, Hansford, Hartley,
Hemphill, Hockley, Hutchinson, Lamb, Lubbock, Lynn, Moore,
Oldham, Parmer, Potter, Randall, Roberts, Sherman, Swisher,
Terry, Wheeler, Yoakum, Lipscomb, and Ochiltree counties.
Oklahoma counties: Beaver, Cimarron, and Texas
counties.
Kansas counties: Morton County.
(d) Description of jurisdictional transmission facilities.
1. PSCo
PSCo owns approximately 3,300 circuit miles of
transmission. Further information regarding the facilities owned
or operated by PSCo is contained in the Testimony of Mr. Matt P.
Harris, Exh. APP-5.
Cheyenne
Cheyenne owns two 115 kv transmission line segments
that total 25.5 miles in length.
2. SPS
SPS owns approximately 6,000 circuit miles of
transmission. Further information regarding the facilities owned
or operated by SPS is contained in the Testimony of David T.
Hudson, Exh. APP-4.
(e) Description of the Merger Transaction and statement as
to consideration
Under the Merger Agreement, the reorganization will be
accomplished as follows. First, PSCo and SPS will each merge
into separate operating utility subsidiaries of a new holding
company, temporarily called M-P New Co. At the same time,
Cheyenne and West Gas Interstate, Inc., a subsidiary of PSCo,
will become operating subsidiaries of the holding company. Two
additional subsidiaries will be created: a service company to
provide services to the other subsidiaries of the holding
company; and an intermediate holding company to hold the shares
of existing non-utility subsidiaries of PSCo and SPS.
There is no consideration being exchanged between PSCo
and SPS because the Merger Transaction is a merger of equals with
an exchange of stock for stock in the holding company, rather
than a purchase of one company by the other.
The Merger Transaction and the stock exchange is
further described in the Testimony of Richard C. Kelly,
Exh. APP-1.
(f) Description of facilities to be merged
The Testimony of Matt P. Harris, Exh. APP-5, describes
the facilities owned and operated by PSCo and Cheyenne. All of
the operating facilities of PSCo and Cheyenne are included in the
Merger Transaction.
The Testimony of David T. Hudson, Exh. APP-4, describes
the facilities owned and operated by SPS. All of the operating
facilities of SPS are included in the Merger Transaction.
PSCo, Cheyenne, and SPS will continue to use their
facilities after the merger to provide retail, wholesale, and
transmission services, as they are used today.
(g) Statement of the cost of the jurisdictional facilities
involved in the merger
The Merger Transaction will involve the disposition of
all of the jurisdictional and non-jurisdictional facilities of
the Applicants. The jurisdictional facilities have been
accounted for, and will continue to be accounted for, based on
original cost, in accordance with the Commission's Uniform System
of Accounts. Statements of the utility plant in service and the
cost thereof are included as part of Exhibit C.
(h) Effect of the proposed transaction upon any contract
for the purchase, sale, or interchange of electric
energy.
The Merger Transaction will have no impact or effect
upon any contract for the purchase, sale, or interchange of
electric energy.
(i) Other required regulatory approvals
State Approvals
As the Testimony of Richard C. Kelly, Exh. APP-1,
discusses, approval of the Merger Transaction is required by the
Colorado Public Utilities Commission, the New Mexico Public
Utility Commission, and the Public Service Commission of Wyoming.
In addition, the Public Utility Commission of Texas must review
the merger to assess its effect in future ratemaking proceedings.
The Kansas Corporation Commission must authorize the issuance of
common stock certificates by SPS.
Federal Approvals
At the federal level, approval is required by this
Commission. Also at the federal level, the Securities and
Exchange Commission must approve the merger and the issuance of
the securities for the utility holding company formed under the
Merger Transaction. The merger also will be reviewed by the
Federal Trade Commission and the Department of Justice under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Nuclear Regulatory Commission (NRC) approval is required to
reflect PSCo becoming an operating subsidiary of the holding
company continuing to own and hold NRC licenses for the Fort St.
Vrain Nuclear Electric Generating Station.
(j) The facts relied upon by applicants to show that the
Merger Transaction is consistent with the public
interest
A description of the benefits to the public is included
in Section III, above, and the Testimony of Richard C. Kelly,
Exh. APP-1, the Testimony of Thomas J. Flaherty, Exh. APP-3, as
well as the supporting testimony of Applicants' other witnesses.
(k) Description of franchises held
A list of the franchises held is included in Exhibit J.
(l) Form of notice
A form of Notice suitable for publication in the
Federal Register accompanies this Joint Application.
VII. REQUIRED EXHIBITS
Attached to this Joint Application are copies of the
exhibits required by Section 33.3 of the Commission's Regulations.
EXHIBIT A - Resolutions of directors.
EXHIBIT B - Statement of measure of control or ownership
exercised by or over each party to the transaction as to any
public utility, bank, trust company, banking association, firm
that is authorized to participate in marketing of securities of a
public utility, or any company supplying electric equipment to
such party.
EXHIBIT C - Balance sheets and plant schedules for most recent
12-month period, on actual and pro forma basis.
EXHIBIT D - Statement of all known contingent liabilities.
EXHIBIT E - Income statement for most recent 12-month period, on
actual and pro forma basis.
EXHIBIT F - Analysis of Retained earnings.
EXHIBIT G - Copies of each application and exhibit filed with
other regulatory bodies.
EXHIBIT H - Agreement and Plan of Reorganization.
EXHIBIT I - Map of territory.
EXHIBIT J- List of franchises and expiration dates.
VIII. CONCLUSION
The Applicants respectfully request that the Commission
expeditiously approve the Merger Transaction without an
evidentiary hearing.
Respectfully submitted,
PUBLIC SERVICE COMPANY
OF COLORADO AND SOUTHWESTERN
PUBLIC SERVICE COMPANY
Alan J. Statman
Barry S. Spector
Michael J. Thompson
WRIGHT & TALISMAN, P.C.
1200 G Street, N.W.
Suite 600
Washington, D.C. 20005
(202) 393-1200
Attorneys for the Applicants
William M. Dudley
Associate General Counsel
Public Service Company
of Colorado
1225 17th Street
Suite 600
Denver, Colorado 80201-0840
Attorney for
Public Service Company of
Colorado
November 9, 1995
Exhibit No. APP-5
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Public Service Company of )
Colorado and Southwestern ) Docket No. EC96-___
Public Service Company )
Direct Testimony
Of
MATT P. HARRIS
On Behalf Of:
Applicants
November 9, 1995
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Public Service Company of )
Colorado and Southwestern ) Docket No. EC96-___
Public Service Company )
Direct Testimony
Of
MATT P. HARRIS
TABLE OF CONTENTS
Page
I. INTRODUCTION AND QUALIFICATIONS . . . . . . . . . 1
II. SUMMARY OF TESTIMONY . . . . . . . . . . . . . . 4
III. PSCO'S OPERATIONS AND RESOURCES . . . . . . . . . 5
IV. PSCo WHOLESALE CUSTOMERS AND SERVICES . . . . . . 17
VI. PSCo'S RESOURCE PLANNING . . . . . . . . . . . . 21
VII. THE CHEYENNE LIGHT, FUEL & POWER COMPANY . . . . 26
VIII. PRODUCTION-RELATED BENEFITS FROM THE MERGER . . . 27
GLOSSARY OF ACRONYMS AND DEFINED TERMS
ACRONYM DEFINED TERMS
CCPG Colorado Coordinated Planning Group
Cheyenne Cheyenne Light, Fuel & Power Company
CPUC Colorado Public Utilities Commission
DSM Demand-side Management
FERC Federal Energy Regulatory Commission
IPP Inland Power Pool
IRP Integrated Resource Planning
kV kilovolt
MEAN Municipal Energy Agency of Nebraska
MW Megawatts
MWh Megawatt Hours
PRPA Platte River Power Authority
PSCo Public Service Company of Colorado
QF Qualifying Facilities
SPS Southwestern Public Service Company
TOT defined transmission path
Tri-State Tri-State Generation and Transmission Association,
Inc.
Western Western Area Power Administration
WRTA Western Regional Transmission Association
WSCC Western Systems Coordinating Council
WSPP Western Systems Power Pool
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Public Service Company of )
Colorado and Southwestern ) Docket No. EC96-___
Public Service Company )
DIRECT TESTIMONY
OF
MATT P. HARRIS
I. INTRODUCTION AND QUALIFICATIONS
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Matt P. Harris. My business address is 5909 E.
38th Avenue, Denver, Colorado 80207.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am employed by Public Service Company of Colorado ("PSCo")
as the Unit Manager, Loads and Resources Planning.
Q. PLEASE BRIEFLY DESCRIBE YOUR RESPONSIBILITIES IN THAT
POSITION.
A. My primary responsibilities are to develop PSCo's Integrated
Resource Plan and to perform a variety of other generation
planning studies (i.e., production costing, expansion
planning, and generation system reliability studies).
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND.
A. I graduated form San Jose State University, San Jose,
California, in December 1985, with a Bachelor of Science
degree in Mechanical Engineering.
Q. PLEASE DESCRIBE YOUR PROFESSIONAL EXPERIENCE.
A. Before beginning work at PSCo, I was employed by Sierra
Pacific Power Company as a Planning Engineer. My
responsibilities included the engineering and economic
analysis of demand-side management programs and performing
supply-side planning studies. I participated in the
development of Sierra's 1989 Integrated Resource Plan and
its 1990 Request for Proposal for supply-side resources.
Between January 1986, and March 1987, I was employed by
Pacific Gas and Electric Company as an Energy Management
Representative. I was responsible for implementing DSM
programs for commercial, industrial, and agricultural
customers.
In July 1991, I began my employment with PSCo as a Senior
Planning Engineer. In this capacity, I played a key role in
the development of PSCo's first Integrated Resource Plan and
was also responsible for performing detailed production
costing studies of PSCo's generation system, performing
generation system reliability studies, expansion planning
studies, and marginal pricing studies for use in DSM
evaluations, and in the development of power sales proposals
to other utilities. I was promoted to my current position
of Unit Manager, Loads and Resources Planning, in October
1994.
Q. HAVE YOU ATTENDED OR TAKEN ANY SPECIAL COURSES OR SEMINARS
REGARDING PUBLIC UTILITIES?
A. Yes. I have completed the Utility Resource Planning course
offered by the University of California at Berkeley. I have
also completed Power Technologies' Reliability Analysis
Techniques for Resource Planning course. In addition to
these courses, I have taken several courses in utility
production costing and expansion planning models.
Q. DO YOU HOLD A PROFESSIONAL LICENSE?
A. Yes. I am a registered Professional Engineer in the State
of Nevada.
Q. HAVE YOU TESTIFIED BEFORE ANY REGULATORY AUTHORITIES?
A. Yes. I have testified before the Colorado Public Utilities
Commission ("CPUC") several times in the past two years
regarding: PSCo's 1993 Integrated Resource Plan; PSCo's 1994
Phase II rate case; and PSCo's recommendations to the CPUC
in their Notice of Proposed Rulemaking regarding QF and IRP
Rules.
II. SUMMARY OF TESTIMONY
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to provide the following
information:
- A profile of PSCo's service territory, operations and
resources, including generating units, transmission
facilities, and pooling arrangements;
- A description of PSCo's activities in the bulk power
market, including off-system sales and purchases, and a
description of PSCo's transmission services;
- A description of PSCo's resource planning process,
including load forecasts and integrated resource
planning ("IRP");
- A description of the system of PSCo's wholly-owned
affiliate, Cheyenne Light, Fuel & Power Company
("Cheyenne"); and
- - A description of the projected production-related cost
benefits resulting from the combination of PSCo and
Southwestern Public Service Company ("SPS") and how these
benefits were quantified.
III. PSCO'S OPERATIONS AND RESOURCES
A. SERVICE TERRITORY
Q. WOULD YOU PLEASE DESCRIBE PSCo's ELECTRIC SERVICE AREA.
A. PSCo provides electric service to about 1.08 million
customers in the state of Colorado. While PSCo's service
territory covers only about 10 percent of the state, it
includes about 80 percent of the total population. PSCo's
service territory includes many of the major load centers in
Colorado, including the cities of Denver and Boulder.
Schedule MPH-1 shows PSCo's service area.
Q. PLEASE DESCRIBE PSCo'S SYSTEM LOAD PROFILE?
A. PSCo's summer peak demand in 1994 was 4,011 MW. PSCo's
annual system load factor is approximately 69 percent. The
summer and winter peaks are fairly close. However, PSCo's
resource needs are driven by the summer peak demand because
of the decreased capability of some its generating resources
in the summer.
Q. PLEASE DESCRIBE PSCo'S ENERGY SALES.
A. PSCo's total energy sales during the year ending December
31, 1994, were approximately 23,270,400 Megawatt-hours
("MWh"), including all wholesale and non-firm sales. The
breakdown of sales by revenue class is 25.5 percent
residential, 37.2 percent small commercial and industrial,
23.3 percent large commercial and industrial, 13.1 percent
resale, and 0.9 percent other.
B. PSCo'S GENERATING RESOURCES
Q. PLEASE DESCRIBE PSCo'S EXISTING GENERATING RESOURCES.
A. PSCo's electrical system includes 3,176.35 MW of installed
generating capacity, consisting of 2694.8 MW of coal-fired
generation, 107 MW of gas-fired generation, 171 MW of
oil/gas-fired combustion turbines, 5.5 MW of diesel
generators, 162 MW of pumped storage hydro, and 36.05 MW of
conventional hydroelectric generation. Schedules MPH-2A,
MPH-2B, and MPH-2C list each of PSCo's generating plants and
show each plant's primary fuel type, nameplate rating, and
net dependable capacity. Except for the Hayden and Craig
plants, PSCo wholly owns the listed plants. Schedule MPH-3
lists jointly-owned units, the owners of each unit and their
ownership percentage, the amount of capacity available to
each owner, and the operator of each unit. PSCo-owned
resources make up 63.2 percent of its total resource
capability.
Q. PLEASE DESCRIBE PSCo'S POWER PURCHASE RESOURCES.
A. In addition to PSCo-owned generation, the company has
several power purchase contracts. Some of these contracts
are with other utilities, while others are with Qualifying
Facilities ("QF") under the Public Utility Regulatory
Policies Act of 1978. PSCo currently purchases 1000 MW of
power from four other utilities in the region: Tri-State
Generation and Transmission ("Tri-State") (425 MW); Platte
River Power Authority ("PRPA") (224 MW); Basin Electric
Power Cooperative (175 MW); and PacifiCorp (176 MW). These
purchases are pursuant to long-term power purchase
agreements and account for 20.4 percent of PSCo's total
resource capability. PSCo also currently purchases an
additional 593 MW of power from 33 different QFs under long-
term purchase agreements. QF purchases account for 12.1
percent of PSCo's total resource capability.
Q. IS PSCo PLANNING ANY SIGNIFICANT RESOURCE ADDITIONS?
A. Yes. PSCo is now in the process of repowering its Fort St.
Vrain plant as a 471 MW combined-cycle facility. Fort St.
Vrain was originally a nuclear-powered steam generation
plant. It ceased operations in 1989, and the nuclear
portion of the facility is now being decommissioned.
Through the repowering now underway, the existing steam
turbine will be powered by steam produced by two heat
recovery steam generators attached to two natural gas-fired
combustion turbines.
The repowering project is to be completed in three
phases, beginning with the first 130 MW combustion turbine
in 1996 (Phase 1A). A heat recovery steam generator (Phase
1B) then will be installed to produce steam for the steam
turbine and begin the plant's combined-cycle mode of
operation. This phase is currently scheduled to be in
service in 1999 and will increase the total plant capacity
to 232 MW. In the second phase (Phase 2), PSCo will build a
second combustion turbine and heat recovery steam generator
to bring the total plant capacity to 471 MW. This phase is
currently scheduled to be in service in 2000.
In addition, PSCo's most recent forecast shows that in
the next ten years the company plans to: construct a third
combustion turbine and heat recovery steam generator (Phase
3) at the Fort St. Vrain site in 2001 to bring the total
plant capacity to 685 MW; repower an existing coal-fired
steam plant to a combined-cycle plant in 2003; repower a
previously retired steam plant to a simple-cycle plant in
2004; and construct a new coal plant in 2005.
PSCo's future resource additions are summarized in Schedule
MPH-4.
C. PSCo'S TRANSMISSION SYSTEM
Q. PLEASE DESCRIBE PSCo'S TRANSMISSION SYSTEM.
A. PSCo owns and maintains approximately 3,268 circuit-miles of
transmission lines located primarily in Colorado. These
transmission lines include 1,640 circuit-miles of 230 kV
lines, 65 circuit-miles of 138 kV lines, 1,015 circuit-miles
of 115 kV lines, 378 circuit-miles of 69 kV lines, and 170
circuit-miles of 44 kV lines. Additionally, PSCo jointly
owns an additional 263 circuit-miles of transmission lines,
consisting of 112 circuit-miles of 345 kV lines and 151
circuit-miles of 230 kV lines. PSCo's jointly-owned 345 kV
transmission lines are located in western Colorado along a
corridor running from the Craig generating station to the
San Juan substation in New Mexico. PSC's jointly-owned 230
kV transmission lines are located in southeastern Colorado
(connecting the Lamar substation to the Midway substation),
southern Colorado (connecting the Poncha substation to the
San Luis Valley substation), and northeastern Colorado
(connecting the Craig generating station to the Wolcott,
Gore Pass, and Blue River substations).
Q. DO ANY OTHER UTILITIES OWN TRANSMISSION FACILITIES IN THE
SAME REGION AS PSCo?
A. Yes. Schedule MPH-5 is a map of bulk transmission facilities
in Colorado, including those of PSCo. Several utilities own
and operate bulk transmission facilities in Colorado. In
addition to PSCo, the principal transmission-owning
utilities are Western Area Power Administration ("Western"),
Tri-State, Platte River Power Authority ("PRPA"), and the
City of Colorado Springs.
The bulk transmission facilities of PSCo and these other
entities are highly integrated within Colorado. Because
transmission facilities in the region are highly integrated,
the utilities in the region have defined various
transmission paths and, through operating agreements, have
agreed upon the transfer capability of the paths and the
rights of each utility to use these paths. These
transmission paths are commonly referred to as TOT paths.
TOT path flows, which are the sum of power flowing over the
individual lines owned by multiple entities, have been
defined to provide an indication of reliable operating
limits. If actual loading exceeds a TOT path limit, then
several utilities must work together to reschedule
generation and power transfers to reduce the loading on that
TOT path. Through the ownership of transmission lines that
constitute a defined transmission path, each utility has
defined capacity rights to use a percentage of the maximum
TOT transmission path rating.
Q. CAN YOU ELABORATE ON THIS CONCEPT WITH EXAMPLES?
A. Yes. TOT 5 is a path across the Continental Divide used
primarily to transfer power from western Colorado to eastern
Colorado. Loads in western Colorado (approximately 500 MW)
are much smaller than western Colorado generation (exceeding
2,300 MW). Most of the generation not used to service local
loads in western Colorado is exported over the TOT 5 path to
the heavy load areas in eastern Colorado. In addition,
power can be imported from Utah or the Arizona/New Mexico
region over the TOT 5 path into eastern Colorado. TOT 5 is
comprised of eight individual transmission lines, which are
owned by four entities, including PSCo. The current TOT 5
transmission path simultaneous rating is 1680 MW. PSCo has
the right to use 479 MW, or 28.5 percent, of the TOT 5
transmission path rating.
Two other transmission paths, TOT 3 and TOT 7, govern
imports of power from the north into eastern Colorado. TOT
3, connecting Wyoming and Nebraska with northern Colorado,
is a transmission path that defines the amount of power that
can be transferred into eastern Colorado from the north.
TOT 3 consists of six transmission lines owned by four
utilities. PSCo has the right to use only 4 percent of the
TOT 3 transmission path rating. TOT 7 is a transmission
path located south of the TOT 3 transmission path and also
defines the amount of power that can be transferred both
into and within eastern Colorado. The TOT 7 transmission
path consists of three transmission lines owned by PSCo and
PRPA. PSCo has the right to use 58 percent of the TOT 7
transmission path rating.
Two other transmission paths, TOT 1A and TOT 2A, govern
power transfers through Colorado's western and southern
borders. TOT 1A connects northwestern Colorado with Utah.
PSCo has no ownership in the transmission lines constituting
this path. TOT 2A is the north to south transmission path
from the southwestern corner of Colorado to New Mexico. PSCo
has the right to use 10 percent of the TOT 2A transmission
path rating.
Q. CAN YOU PROVIDE AN EXAMPLE OF HOW THE TOT ALLOCATIONS AFFECT
PSCo OPERATIONS?
A. The generation that PSCo owns or purchases in western
Colorado and imports into eastern Colorado exceeds the
company's simultaneous TOT 5 allocation. PSCo must maintain
firm transmission paths for generation resources it relies
upon to meet its firm customer demand. Therefore, to meet
its firm load obligations, PSCo purchases 180 MW of TOT 5
wheeling rights from Western.
Q. PLEASE DESCRIBE ANY PLANNED ADDITIONS TO PSCo'S TRANSMISSION
SYSTEM AS A RESULT OF THE MERGER.
A. PSCo is not currently interconnected with SPS. As described
by Witness Hudson, PSCo plans to interconnect with SPS
through a high-voltage, direct-current transmission tie and
an approximately 300-mile 345 kV transmission line in 2001.
D. COORDINATION AND POOLING ARRANGEMENTS
Q. WHAT POOLING AND COORDINATION ARRANGEMENTS HAS PSCo ENTERED
INTO?
A. PSCo has joined the following pools and regional
transmission associations: the Western Systems Coordinating
Council ("WSCC"); the Inland Power Pool ("IPP"); the Western
Systems Power Pool ("WSPP"); the Colorado Coordinated
Planning Group ("CCPG"); and the Western Regional
Transmission Association ("WRTA").
Q. PLEASE DESCRIBE THE WSCC.
A. PSCo is a member of the WSCC, which is the regional
reliability council providing planning and reliability
coordination for the entire Western Interconnection. PSCo
currently plans its installed reserve capacity based on the
WSCC Power Supply Design Criteria. Membership in the WSCC
does not include any type of power pooling arrangements or
contractual interchange agreements.
Q. PLEASE DESCRIBE THE IPP.
A. PSCo also is a member of the IPP, which is a reserve sharing
pool of twenty-three utilities located in a five-state
region covering Wyoming, Colorado, Utah, New Mexico, and
Arizona. The intent of the IPP is, as a group, to meet or
exceed WSCC reliability criteria and to promote the
efficient and economic use of generation facilities,
transmission facilities, and interconnections. The IPP
sharing of reserves is designed to enable the members as a
group to carry fewer reserves than would otherwise be
required by WSCC reliability criteria. The IPP's membership
is diverse, consisting of investor owned-utilities,
cooperatives, municipals, and Western.
Q. PLEASE DESCRIBE THE WSPP.
A. The WSPP is an economic power pool that operates an
electronic bulletin board and acts as a clearinghouse for
bulk power transactions among over 90 member utilities and
marketers located predominantly throughout the western
United States. The WSPP Agreement provides for the sale and
purchase of capacity, energy, and transmission services at
market-based rates with a cost-based floor and ceiling.
PSCo is a signatory to the WSPP Agreement and is currently
making spot market sales and purchases in accordance with
its terms.
Q. PLEASE DESCRIBE THE CCPG.
A. The CCPG was created in response to an agreement reached by
PSCo, Tri-State, and the Colorado Association of Municipal
Utilities regarding the acquisition of Colorado-Ute assets
in 1992. The agreement resolved transmission access issues
as described in the "Joint Transmission Access Principles."
The CCPG is a coordinated planning organization formed as a
result of these principles. The CCPG operates much like a
regional transmission group, meeting at least twice a year
to discuss transmission issues and to coordinate
transmission planning activities.
Q. PLEASE DESCRIBE WRTA.
A. WRTA is a regional transmission group formed in May 1995, as
a voluntary organization of utilities, marketers,
transmission dependent utilities, non-utility members, and
state regulatory commissions in the Western Interconnection.
WRTA was formed for the purpose of facilitating the
efficient use of transmission facilities, coordinating the
planning of future transmission facilities, and accelerating
the resolution of disputes concerning transmission. PSCo is
a member of WRTA.
IV. PSCo WHOLESALE CUSTOMERS AND SERVICES
Q. PLEASE DESCRIBE GENERALLY PSCo'S WHOLESALE POWER
TRANSACTIONS.
A. PSCo sells wholesale power to nine requirements customers
located throughout Colorado. In addition to these
requirements customers, PSCo engages in non-firm energy
transactions with many different utilities throughout the
Rocky Mountain Region and several Western states.
Q. PLEASE ELABORATE ON THE ELECTRIC SERVICES PSCo PROVIDES ITS
REQUIREMENTS CUSTOMERS.
A. PSCo provides long-term firm and peaking services to its
nine requirements customers. The requirements customers are
a diverse group consisting of four municipal utilities, four
rural electric cooperatives, and one investor-owned utility.
These customers are provided wholesale services under
individual contracts with associated specific FERC rate
schedules. The rural electric cooperatives and municipals
also receive an allocation of Western preference power.
Some of the requirements customers also purchase short-term
firm and non-firm wholesale services from other utilities.
Q. HOW WILL THE MERGER IMPACT PSCo'S OPERATIONS?
A. PSCo will largely operate as it does today and will continue
to operate its own generation, transmission, and
distribution systems. Increased negotiating leverage from
the merger will enable PSCo to obtain significant fuel
procurement savings. In the year 2001, as Witness Hudson
describes, PSCo and SPS plan to interconnect their two
systems. When the two systems are interconnected, the
companies will take advantage of additional savings from
joint dispatch and capacity deferrals.
Q. HOW WILL PSCo'S WHOLESALE CUSTOMERS BE AFFECTED BY PSCo'S
MERGER WITH SPS?
A. The wholesale services offered by PSCo will be favorably
impacted by the substantial cost savings which result from
the merger and which reduce the companies' cost of service.
These cost savings are described in greater detail by
Witness Flaherty and by myself later in this testimony.
Further, as Witness Hudson describes in his testimony, PSCo
and SPS are offering to wholesale customers a hold-harmless
commitment for the first five years following the effective
date of the merger.
V. TRANSMISSION SERVICES
Q. PLEASE DESCRIBE THE TRANSMISSION SERVICES OFFERED BY PSCo.
A. PSCo provides firm and non-firm service under individual
transmission service contracts with Western, Tri-State, and
PacifiCorp. In addition, since December 1992, PSCo has
provided transmission service, similar to network
transmission service, for Holy Cross Electric Association
under a Transmission Integration and Equalization Agreement.
PSCo also has had on file with FERC since April 1992, an
open-access transmission tariff which provides for point-to-
point transmission services. Wholesale transmission service
is provided under the open-access transmission service
tariff for the Municipal Energy Agency of Nebraska ("MEAN").
On June 26, 1995, and August 18, 1995, PSCo and its wholly
owned subsidiary, Cheyenne Light, Fuel & Power Company
("Cheyenne"), submitted for filing with the FERC new Point-
to-Point Transmission Service Tariffs and Network
Integration Transmission Service Tariffs. These comparable-
service, open-access tariffs have been accepted for filing,
with an effective date of August 25, 1995, and set for
hearing regarding rate levels in Docket No. ER95-1268-000.
A non-firm service agreement has recently been executed
between PSCo and a power marketer under these tariffs.
Q. DO PURCHASERS AND SELLERS OF BULK POWER IN COLORADO HAVE
TRANSMISSION ALTERNATIVES TO THE USE OF PSCo'S SYSTEM?
A. In many instances, yes. Western and Tri-State have extensive
transmission networks within Colorado and provide
transmission service to many buyers and sellers of wholesale
power within the state. The transmission systems of PRPA,
WestPlains Energy, and the City of Colorado Springs also
provide wholesale transmission services within the state.
In fact, PSCo is dependent on the transmission systems of
Western, Tri-State, and PRPA to serve portions of its own
retail and wholesale loads.
VI. PSCo'S RESOURCE PLANNING
Q. HOW DOES PSCO FORECAST FUTURE CUSTOMER LOADS?
A. On an annual basis, a task force within PSCo analyzes
current and projected customer use in the development of its
demand and energy forecast. This process is supported by
econometric and analytical modeling tools. In developing
its corporate load forecasts, PSCo develops forecasts of
energy and demand for both its retail and wholesale
customers. Each forecast is developed to meet a twenty-year
planning horizon as required by the Integrated Resource
Planning ("IRP") rules of the Colorado Public Utilities
Commission ("CPUC").
Q. PLEASE DESCRIBE PSCo'S INTEGRATED RESOURCE PLANNING PROCESS.
A. PSCo's integrated resource planning process is a
comprehensive analysis process designed to meet the
requirements of the CPUC IRP Rules. The CPUC issued its IRP
Rules in December of 1992. The IRP Rules require utilities
in Colorado to develop a Preferred Resource Plan every three
years, which is to be submitted for CPUC approval. The
rules further require that utilities file an Annual Progress
Report on their efforts to implement their approved
Preferred Resource Plan one and two years thereafter. PSCo
filed its first IRP in October of 1993 and its Annual
Progress Reports in October of 1994 and 1995.
Q. PLEASE ELABORATE ON PSCo'S PREFERRED RESOURCE PLAN.
A. PSCo developed its Preferred Resource Plan, commonly
referred to as its "1993 IRP", using accepted utility
practices and with the input received through the public
participation process as set out in the CPUC IRP rules. The
starting point of the analysis is the company's forecast of
its customers' energy and demand requirements over the
required twenty-year planning period. This forecast,
combined with the appropriate level of reserve capacity, is
compared to the capability of the existing resources to
determine the company's expected resource needs. To meet
future resource needs, PSCo considered both demand and
supply-side resources consistent with the requirements of
the CPUC IRP rules. As part of the development of the 1993
IRP, PSCo conducted a Request for Information, in which
seventy-three responses were received from third parties
offering proposals to meet all or a portion of PSCo's
forecasted needs. PSCo's Preferred Resource Plan was
developed by considering various criteria, including total
resource costs, utility revenue requirements, electricity
prices, environmental impacts, the company's financial
health, and system reliability. Associated with the
resource plan was the company's Short-term Action Plan
detailing its more near-term resource requirements.
Q. WOULD YOU PLEASE SUMMARIZE THE RESOURCE COMMITMENTS THAT
WERE INCLUDED IN THE SHORT-TERM ACTION PLAN.
A. The most significant resource in this plan was the
repowering of Fort St. Vrain, which I discussed previously.
Also as part of the 1993 IRP Short-term Action Plan, PSCo
committed to completing two 50 MW DSM bidding pilot programs
as well as other DSM activities, and to participate in a
wind farm project near Arlington, Wyoming.
Q. WAS THIS PLAN SUBMITTED TO THE CPUC FOR APPROVAL?
A. Yes. PSCo submitted its Preferred Resource Plan and
associated Short-term Action Plan to the CPUC in October
1993. The CPUC conducted hearings on the plan in 1994, and
thereafter approved it. Subsequent to that approval, PSCo
sought and obtained the necessary certificates of public
convenience and necessity for the repowering of Fort St.
Vrain and PSCo's interest (10.5 MW) in the Arlington Wind
Project.
Q. ARE THERE ANY ASPECTS OF THE 1994 ANNUAL PROGRESS REPORT OF
NOTE?
A. Yes. In developing its 1994 Annual Progress Report, PSCo
evaluated the impact of its 1994 demand and energy forecast
on the schedule for the repowering of Fort St. Vrain and the
other resources included in the Preferred Resource Plan
later in the planning period. Schedule MPH-6 shows the
Preferred Resource Plan as presented in the 1994 Annual
Progress Report. As a result of the 1994 load forecast, the
in-service dates of several resources were changed from the
years shown in the Preferred Resource Plan contained in
PSCo's 1993 IRP.
Q. ARE THERE SUFFICIENT GENERATION SITES AVAILABLE FOR
DEVELOPMENT BEYOND THOSE SITES IDENTIFIED IN PSCo's
PREFERRED RESOURCE PLAN?
A. Yes. There are numerous sites available for development by
PSCo or by others. Three neighboring utilities (PRPA,
Westplains Energy, and the City of Colorado Springs) have
identified five future sites for potential development. In
addition, in two recent solicitations for future generation
resources, PSCo received seventy-three proposals and
Westplains Energy received four proposals, indicating the
ready availability of generation sites in the region.
VII. THE CHEYENNE LIGHT, FUEL & POWER COMPANY
Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF CHEYENNE'S ELECTRIC
SYSTEM.
A. Cheyenne's electric system serves approximately 33,000
residential, commercial, and industrial retail electric
customers in a certificated area of approximately 960 square
miles in and around Cheyenne, Wyoming. Cheyenne is normally
a winter peaking system, although occasionally a peak is
reached during the summer. In 1994, the Cheyenne system had
a peak load of 129 MW and sold 763,593 MWh to its retail
customers. Cheyenne has no wholesale customers.
Cheyenne purchases 100 percent of its system power and
energy requirements from PacifiCorp on a full requirements
basis. While Cheyenne does own five small diesel generating
units (nameplate rating of 2 MW each), these units are held
on cold standby and have been contractually placed under the
control of PacifiCorp to be used on an emergency basis only.
Q. WOULD YOU DESCRIBE CHEYENNE'S TRANSMISSION SYSTEM?
A. Cheyenne's transmission system consists of two 115 kV
transmission line segments that total 25.5 miles in length.
The primary purpose of these transmission lines is to
deliver power purchased from PacifiCorp and wheeled through
Western's transmission system to Cheyenne's distribution
substations. These two line segments fall within, and are
operated by, Western's Loveland Control area. Cheyenne is
not interconnected with PSCo.
Q. HOW DOES CHEYENNE PROCURE ITS POWER SUPPLY?
A. In regards to power supply, PSCo and Cheyenne operate their
respective systems and procure resources independently of
each other. Cheyenne most recently selected its power
supplier through an RFP process. While PSCo was a bidder in
the RFP, Cheyenne conducted an independent competitive
procurement process in which it selected PacifiCorp as the
power supplier.
VIII. PRODUCTION-RELATED BENEFITS FROM THE MERGER
A. OVERVIEW
Q. WHAT WAS YOUR ROLE IN THE DEVELOPMENT OF PRODUCTION-RELATED
BENEFITS OF THE MERGER?
A. I worked with both Deloitte and Touche and SPS in the
development of the production-related benefits. Using a
combined resource plan and certain fuel procurement savings
developed by Deloitte and Touche, I worked with SPS to
develop the production-related savings achievable from the
merger.
Q. PLEASE DESCRIBE THE PRODUCTION-RELATED BENEFITS.
A. The production-related benefits were determined in three
areas: capacity deferral savings; joint dispatch savings;
and fuel procurement savings. The process used to estimate
these savings involved defining each company's resource plan
and production-related costs on a stand-alone basis and then
on a combined basis. The savings were based on a comparison
of the stand-alone costs to those determined on a combined
basis for a study period of ten years (1997-2006).
Q. HOW WERE THE STAND-ALONE RESOURCE PLANS AND COSTS DEFINED?
A. The representations of the individual systems were based on
each company's most recent resource plan, modified to
account for any major changes since the plan was developed,
and the most recent fuel forecasts. PSCo's resource plan was
based on its 1994 Annual Progress Report filed with the CPUC
in October, 1994, with modifications. The modifications
reflected known changes to the plan, which have now been
incorporated into PSCo's 1995 Annual Progress Report, filed
with the CPUC in October 1995. PSCo's stand-alone resource
plan is shown in Schedule MPH-7. SPS's stand-alone resource
plan is described in Witness Hudson's testimony and is shown
in his Schedule DTH-4. The stand-alone production-related
costs are based on each company's stand-alone plan. These
costs were developed using the PROSCREEN production costing
and expansion planning model, a widely used software package
licensed by Energy Management Associates, Inc., and
considered both the operating costs and investment-related
costs of each company's stand-alone resource plans.
Q. HOW WERE THE COMBINED RESOURCE PLAN AND PRODUCTION-RELATED
COSTS DEVELOPED?
A. Based on the reduced capacity requirements of the combined
system (discussed below), Deloitte and Touche developed a
combined system resource plan. The combined system resource
plan is shown in Witness Flaherty's Schedule TJF-4. For
convenience, I have included a copy of Schedule TJF-4 in my
testimony as Schedule MPH-8. In addition to this combined
resource plan, fuel procurement synergies created by the
increased negotiating leverage of the combined companies
were developed. Using the combined companies' resource
plan, the fuel prices that result from fuel procurement
synergies, and the synergies enabled by the construction of
a new 400 MW transmission line between the two companies in
the year 2001, we developed the combined production-related
costs. As in the stand-alone cases, production-related
costs were developed using the PROSCREEN production costing
and expansion planning model.
Q. WHAT CONCLUSIONS WERE REACHED?
A. Capacity deferral benefits were determined to be $160
million over a ten-year period, net of the costs of the
transmission line added in the year 2001. Fuel savings,
including fuel procurement savings and joint dispatch
savings, were determined to be $110 million over the same
period.
B. REDUCED CAPACITY REQUIREMENTS
Q. HOW ARE THE TWO COMPANIES ABLE TO REDUCE THEIR CAPACITY
REQUIREMENTS THROUGH THE MERGER?
A. The reduced capacity requirements reflect savings from load
diversity between the two systems and reduced reserve
margins resulting from a reduction in PSCo's reserve
requirements in the combined case.
Q. PLEASE DESCRIBE THE REDUCED CAPACITY REQUIREMENTS
ATTRIBUTABLE TO LOAD DIVERSITY BETWEEN THE TWO SYSTEMS.
A. Both systems are summer peaking utilities. Each company,
however, serves different types of customers. PSCo, for
example, serves customers with more diverse load
characteristics that in turn lead to its high system load
factor. PSCo's relatively high system load factor is a
result of low residential air-conditioning loads, moderate
winter heating loads, and a diverse mix of commercial and
industrial loads. In addition, PSCo provides wholesale
power to its four rural electric cooperatives whose winter
loads are significantly higher than their summer loads. In
contrast, SPS has a lower load factor attributable to high
summer air-conditioning and agriculture loads. Another
distinguishing characteristic of the two systems is the
difference in time zones. PSCo operates in the Mountain
Time Zone while SPS operates in the Central Time Zone.
Schedule MPH-9 provides a three-year summary of peak load
data for the two companies and shows the combined companies'
coincident peak demand (adjusted to account for the
different time zones). Each company's peak load occurred on
different days of the month and, in two cases, occurred in
different months of the summer season. The review of peak
load data was limited to three years of historical data
because, beginning in April 1992, PSCo's loads reflect the
addition of four new wholesale customers as a result of the
Colorado-Ute acquisition.
Q. WHAT ARE THE ACTUAL AMOUNTS OF CAPACITY SAVINGS RELATED TO
LOAD DIVERSITY?
A. The 1994 summer peak demand for PSCo was 4011 MW. The 1994
summer peak demand for SPS was 3692 MW. The arithmetic
total of these two individual peak demands was 7703 MW.
However, the coincident peak demand for the two systems --
accounting for differing time zones -- was 7591 MW. The
diversity in loads for the two systems in 1994 was 112 MW.
Performing a similar analysis over the three-year period
(1992-1994), the average diversity between the two systems
was 98 MW or 1.3 percent of the combined individual peak
demands of the two systems.
Q. WHAT LOAD DIVERSITY WAS USED TO DEVELOP THE CAPACITY
SAVINGS?
A. A one percent load diversity savings was used in determining
the overall capacity deferral-related benefits of the
merger. The one percent load diversity savings was applied
to the arithmetic sum of the projected coincident peak
demands of each company over the ten-year study period
beginning with the in-service date of the new transmission
line in the year 2001. The result is a load diversity
savings equal to 84 MW in 2001 increasing to 92 MW in 2006.
Schedule MPH-10 shows the load diversity savings used in
each year of the ten-year study period.
Q. WHEN CAN THE COMBINED COMPANIES TAKE ADVANTAGE OF THE LOAD
DIVERSITY SAVINGS?
A. The combined companies can take advantage of the one percent
load diversity savings when the new transmission line is in
service in the year 2001.
Q. PLEASE DESCRIBE THE APPROACH USED TO DETERMINE THE REDUCED
CAPACITY REQUIREMENTS ATTRIBUTABLE TO A REDUCTION IN RESERVE
MARGINS.
A. As a result of the merger, and beginning with the in-service
date of the new transmission line, PSCo should be able to
reduce its reserve margin criteria from its current minimum
reserve requirements used in the stand-alone case to at
least a 15 percent reserve margin in the combined case.
Currently, reserve margins are higher for PSCo as described
below. SPS's reserve margin is 15 percent in both the
stand-alone and combined cases.
Q. PLEASE DISCUSS THE BASIS FOR LOWERING PSCo'S RESERVE MARGIN
IN THE COMBINED CASE?
A. The reason for a lower PSCo reserve margin in the combined
case is that the installation of the new 400 MW transmission
line between the systems will enable delivery of power to
eastern Colorado from the available generation resources of
SPS.
Although PSCo is a member of the IPP which allows PSCo
to meet WSCC reliability criteria on a combined utility
basis (i.e., jointly with the 23 members of the IPP), PSCo
recently has been following WSCC reliability criteria on an
individual basis instead, primarily for three reasons: (1)
PSCo's concern over the quality of reserves carried by
members of the IPP; (2) the region becoming more in balance
between load and available generation thus reducing overall
reserve levels; and (3) PSCo's heavy reliance on the import
of power from the west and north into eastern Colorado. The
WSCC reliability criteria that PSCo follows because of these
concerns (largest risk plus 5 percent load responsibility)
equates to a reserve margin of 16.9 percent in 1997,
gradually decreasing to 15.1 percent in 2006.
With the installation of a 400 MW transmission line into
eastern Colorado, connecting PSCo to SPS's generation
resources, the above concerns are lessened considerably. As
a result, PSCo believes that it can at least reduce its
installed reserves to 15 percent between 2001 and 2006. It
may in fact be able to reduce its reserves further to the
even lower levels permitted by the IPP.
Q. WHAT ARE THE CAPACITY REDUCTIONS ENABLED BY PSCo FOLLOWING A
15 PERCENT RESERVE MARGIN?
A. Schedule MPH-11 shows the reduced PSCo requirements from
following a 15 percent reserve margin requirement. By
following a 15 percent reserve margin requirement, PSCo's
required reserves in 2001 are reduced from 720 MW to 675 MW,
a 45 MW savings. The savings gradually reduce to 6 MW in
2006. As noted, the reserve requirements may be able to be
reduced significantly more under IPP reserve obligations;
so, these projected savings are conservative.
Q. WHAT ARE THE TOTAL CAPACITY DEFERRAL SAVINGS ATTRIBUTABLE TO
BOTH THE ONE PERCENT LOAD DIVERSITY SAVINGS AND PSCo'S
REDUCED RESERVE MARGIN?
A. As noted, the capacity deferral savings are $160 million. A
comparison of the stand-alone resource plans to the combined
companies' resource plan that is enabled by the load
diversity and reduced reserve requirements is shown in
Schedules MPH-12A, MPH-12B, MPH-12C, and MPH-12D. A
comparison of the investment-related and other fixed costs
of the stand-alone and combined resource plans, using the
PROSCREEN model, is shown in Schedule MPH-13.
C. FUEL SAVINGS
Q. PLEASE DESCRIBE THE FUEL SAVINGS ATTRIBUTABLE TO THE MERGER.
A. The fuel savings attributable to the merger can be broken
down into savings related to fuel procurement and savings
attributable to the joint-dispatch of the combined systems.
The fuel savings are as follows:
Cumulative Savings
($ million)
Fuel Savings (1997-2006)
1. Fuel Procurement-PSCo $112.1
Transportation
2. Fuel Procurement- $32.2
Other
3. Joint Dispatch -$33.7
4. Total $110.6
Q. PLEASE DISCUSS THE PSCo FUEL TRANSPORTATION SAVINGS OF $112
MILLION.
A. These fuel procurement savings are based on a reduction in
coal transportation costs at PSCo's Pawnee and Comanche
coal-fired steam plants. The reductions reflect the
increased purchasing strength of the combined companies.
Both PSCo and SPS transport coal to several of their plants
from the Powder River Basin over the Burlington Northern
railroad.
The Powder River Basin covers a geographic area that
encompasses southeastern Montana and northeastern Wyoming.
The railroad's freight charge to transport coal is typically
a function of the amount of coal needed by the plants and
the distance from the mine to the plant. The cost of
transporting coal is generally expressed by utilities on a
mils per ton-mile basis.
As a result of the merger, the combined companies will
become one of the largest utility shippers of coal out of
the Powder River Basin on a tonnage basis, as well as one of
the largest shippers on the Burlington Northern railroad.
Separately, PSCo purchases approximately 4 million tons of
coal per year for its Comanche and Pawnee coal-fired
stations from the Amax Coal Company. SPS purchases 7-8
million tons of coal per year for its Tolk and Harrington
coal-fired stations from the ARCO Thunder Basin Coal
Company. Combined, the companies will purchase 11-12
million tons of coal per year from the Powder River Basin.
Further, the distance between the mine and PSCo's
plants is relatively short in comparison to SPS's plants.
For example, the distance from the mine to PSCo's Pawnee and
Comanche plants is 368 miles and 575 miles, respectively.
For SPS's Harrington and Tolk plants, the distance is 901
miles and 1003 miles, respectively. SPS's greater ton-mile
requirement results in a much lower ton-mile rate. In
contrast, PSCo's ton-mile requirements, on a stand-alone
basis, produce a transportation rate that is higher than
SPS's.
PSCo's contract with the Burlington Northern railroad
expires in the year 2000. The increased leverage the
combined company will have in negotiating coal
transportation rates at that time, based on the combined
high ton-mile requirements, will allow PSCo to reduce its
coal transportation costs as part of a combined company. As
part of the combined companies, PSCo should achieve more
market-based transportation rates for its Pawnee and
Comanche plants. PSCo expects to reduce coal transportation
rates to its Pawnee plant from 25 mils per ton-mile to 15
mils per ton-mile beginning in the year 2000. Similarly,
PSCo expects to reduce the coal transportation rate to its
Comanche plant from 20 mils per ton-mile to 15 mils per ton-
mile. The resulting savings are $112 million, based on
PSCo's annual requirement of 1,926 million ton-miles in the
combined case. Absent the leverage of the combined high
ton-mile requirements of PSCo and SPS, PSCo could not
achieve these savings.
Q. PLEASE DESCRIBE THE OTHER FUEL PROCUREMENT SAVINGS RESULTING
FROM THE MERGER.
A. As discussed in Witness Flaherty's testimony, the companies
are also expected to have increased negotiating leverage for
fuel commodities, both natural gas and coal, due to the
increased volumes of fuel purchased on a combined basis.
Gas prices are projected to decrease by 1.0 percent and coal
prices by 0.5 percent on a total $/mmBtu basis. Applying
these fuel price savings in the PROSCREEN model results in
additional fuel procurement savings of $32 million.
Q. PLEASE DESCRIBE THE COMPUTATION OF THESE OTHER FUEL
PROCUREMENT SAVINGS IN GREATER DETAIL.
A. In the studies, a 1.0 percent reduction in gas prices was
reflected in both PSCo's and SPS's existing and future gas-
fired plants as a straight percentage reduction in the fuel
price of each plant for the study period. The 0.5 percent
reduction in coal prices was reflected as a straight
percentage reduction in the fuel price of the combined
companies' coal-fired plants receiving coal from the Powder
River Basin. The reduction in coal prices was applied to
PSCo's Pawnee and Comanche plant and SPS's Tolk and
Harrington plants beginning in the year 2003.
Q. FINALLY, PLEASE DESCRIBE THE JOINT-DISPATCH SAVINGS.
A. The joint-dispatch savings reflect the benefits that can be
achieved by the companies sharing the energy from their
generation resources after PSCo and SPS are interconnected
in 2001. Whenever the incremental costs of SPS's generation
are lower than the incremental costs of PSCo's generation,
SPS energy can be transferred to PSCo across the new 400 MW
tie. Similarly, whenever PSCo's incremental costs are lower
than SPS's incremental costs, PSCo energy can be transferred
to SPS.
As noted, through the PROSCREEN model, the companies were
able to compare the costs of operating the companies'
generation resources on a stand-alone and combined basis.
By isolating the effects of the lower coal transportation
costs and other fuel procurement costs, we were able to
determine the remaining effect of the joint dispatch of the
two systems.
Q. WHAT WERE THE LEVELS OF JOINT DISPATCH SAVINGS?
A. Schedule MPH-14 shows the year-by-year energy transfers
expected to take place as a result of the joint dispatch
that will begin in 2001 when the new transmission line is in
service. Energy is transferred between the two companies
only when it produces savings. As can be seen, in every
year, both companies benefit from the ability to transfer
energy between the two companies, thereby reducing operating
costs.
Q. WHAT IS THE DOLLAR IMPACT OF JOINT DISPATCH INDICATED BY THE
PROSCREEN MODEL?
A. The year-by-year changes in operating costs as a result of
joint dispatch when comparing the stand-alone operation to
the combined operations are as follows:
Joint Dispatch
Year Savings
($000)
2001 $5,942
2002 $8,763
2003 $1,362
2004 $4,668
2005 ($25,481)
2006 ($28,921)
Total ($33,667)
Q. WHY ARE THE JOINT DISPATCH SAVINGS NEGATIVE IN 2005 AND
2006?
A. The total costs of owning and operating the system include
both the operating costs of generating resources and
investment-related costs. The mix of resources included in
each utility's resource plan, both on an individual and
combined basis, determines the relative savings of operating
costs and investment-related costs. For example, by
deferring a coal plant, you expect a large reduction in
investment-related costs due to a coal plant's relatively
high investment costs. However, by deferring a coal plant,
operating costs tend to increase since coal plants offer
lower operating costs compared to simple-cycle or combined-
cycle gas-fired plants. The combination of operating costs
and investment-related costs must always be examined. In
the case of the PSCo and SPS merger, the deferral of a large
coal plant late in the study period (2005) results in a
large reduction in investment-related costs, but also
increases operating costs somewhat for the reasons I have
described above. Therefore, in 2005 and 2006, the joint
dispatch savings, viewed in isolation, are negative. The
net impact of capacity deferrals and joint dispatch costs,
however, is an overall large reduction in the total costs of
owning and operating the combined systems.
D. REASONABLENESS OF PRODUCTION SAVINGS
Q. WHAT OTHER TYPES OF ANALYSES WERE PERFORMED THAT LEAD YOU TO
BELIEVE THAT THE PRODUCTION-RELATED SAVINGS CAN BE REALIZED?
A. Sensitivity analyses on two key variables -- load forecasts
and fuel prices -- were performed to test the validity of
the savings.
Q. PLEASE DESCRIBE THE SENSITIVITY ANALYSES.
A. Low load growth and high load growth cases were developed
for each company. Similarly, low fuel price and high fuel
price assumptions were developed for each company's
generating units. Then, several combinations (i.e., low,
base, and high) of scenarios with differing load and fuel
price forecasts were investigated to determine production-
related savings. In total, eight additional scenario's
(i.e., low load with low fuel price, low load with high fuel
prices, high load with low fuel prices, etc.) were
developed. Using PROSCREEN, we compared production-related
costs developed under each scenario on a stand-alone basis
to the production-related costs resulting from combining the
two companies.
Q. WHAT WAS THE RESULT OF THE SENSITIVITY ANALYSES?
A. Over each combination of fuel and load forecasts, there are
substantial production-related savings. The savings range
from a low of $174.2 million to a high of $280.0 million
over the ten-year study period. Schedule MPH-15 shows the
savings associated with each sensitivity analysis performed.
Q. WHAT DO YOU CONCLUDE FROM THE SENSITIVITY ANALYSES?
A. Over a wide range of assumptions, there will be production-
related savings from the merger. For example, if load
growth is higher than expected and fuel prices escalate
faster than expected, then the savings will not be able to
be realized from deferring PSCo's coal plant in 2005, thus
reducing capacity deferral savings. However, in such an
event, the availability of the coal plant in 2005 provides
the opportunity to achieve much greater joint dispatch
savings, as would be expected. While the companies believe
their base case assumptions are the most probable to occur,
even if other scenarios prevail, there will be substantial
production-related savings from the merger.
Q. ARE THERE ANY OTHER REASONS THAT YOU CONSIDER THE
PRODUCTION-RELATED SAVINGS TO BE REASONABLE?
A. Yes. Because of time constraints, we did not quantify
several items that are likely to cause the savings to be
even greater.
Q. WHAT FACTORS WERE NOT INCLUDED IN THE ANALYSIS?
A. Several factors were not included. Most significant is the
potential reduction in PSCo's reserve margin to those
permitted by the IPP as a result of the new transmission
line and PSCo's resulting access to SPS's generation
resources. The potential further reduction in PSCo reserve
margins, previously discussed, may result in over a 200 MW
decrease in the company's installed reserves. In our
analysis, we reduced reserves by only between 6 and 45 MW.
Second, SPS's Utility Engineering subsidiary offers PSCo
access to low-cost engineering and construction services at
cost. The cost of future PSCo generation resources will
reflect these low costs, but we did not quantify that
benefit.
Third, there are potential fuel savings available to SPS
from access to other low-priced producers in the WSCC Rocky
Mountain Power Area. The new transmission line increases
SPS's access to this low coal-priced energy. We did not
quantify this benefit.
Q. WILL THE PRODUCTION-RELATED SAVINGS BENEFIT BOTH THE
CUSTOMERS OF PSCo AND SPS?
A. Yes. Customers of both companies will benefit since each
company will experience savings resulting from the deferral
of future generation resources, from fuel savings
attributable to the joint dispatch of the companies'
resources, and from fuel procurement savings that result
from the increased negotiating power of the combined
companies.
Q. DOES THIS CONCLUDE YOUR TESTIMONY AT THIS TIME?
A. Yes.
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF COLORADO
* * *
IN THE MATTER OF THE APPLICATION )
OF PUBLIC SERVICE COMPANY OF )
COLORADO FOR COMMISSION )
AUTHORIZATION (1) TO MERGE WITH ) DOCKET NO.________
SOUTHWESTERN PUBLIC SERVICE )
COMPANY THROUGH THE FORMATION )
OF A REGISTERED PUBLIC UTILITY )
HOLDING COMPANY AND FOR ISSUANCE )
OF SECURITIES IN CONJUNCTION )
THEREWITH AND (2) TO IMPLEMENT )
A FIVE-YEAR REGULATORY )
PLAN WHICH INCLUDES AN EARNINGS )
SHARING MECHANISM; FOR )
ESTABLISHMENT OF A PROCEDURAL )
SCHEDULE; AND FOR SUCH OTHER RELIEF)
AS MAY BE APPROPRIATE OR NECESSARY )
APPLICATION
I. INTRODUCTION
Public Service Company of Colorado ("PSCo") submits this
application for the following purposes. Pursuant to Rule 55 of
the Commission s Rules of Practice and Procedure, PSCo seeks
Commission authorization (1) to merge with Southwestern Public
Service Company ("SPS") through the formulation of a registered
public utility holding company and (2) for the issuance of
securities in conjunction with the merger.<F1> The new
holding company is currently named M-P New Co. and is
incorporated in Delaware. Upon completion of the merger
transaction, M-P New Co. will be subject to the jurisdiction of
the Securities and Exchange Commission ("SEC") as a registered
holding company under the Public Utility Holding Company Act of
1935 ("PUHCA"), 15 U.S.C. Section 79a et seq., and the SEC's
regulations thereto, 17 C.F.R. Section 250 et seq. Under this
structure, PSCo will be an operating company of M-P New Co. and
thereby retain its separate corporate identity. PSCo will remain
subject to the jurisdiction of this Commission. In order to
effectuate the merger transaction, PSCo will cancel all
outstanding common stock and issue new common stock to M-P New
Co.<F2>
____________________
<F1> With respect to its request for authorization to issue
securities in conjunction with the merger, PSCo has attempted to
comply with the information requested in Rule 56 of the
Commission s Rules of Practice and Procedure. The nature of the
transaction contemplated herein is such that Rule 56 appears not
to be applicable. Nevertheless, PSCo has attempted to provide
the information to the extent practicable. To the extent the
information provided is not consistent with the information
requested, PSCo requests a waiver of compliance for good cause
shown.
<F2> The term merger is used for the sake of convenience and
not as a technical legal description of the business combination.
PSCo and SPS will not merge into one another; they will
reorganize as wholly-owned subsidiaries of a registered public
utility holding company.
In conjunction with this request for authorization to merge
and issue securities, PSCo also seeks Commission authorization to
implement a five-year regulatory plan which includes an earnings
sharing mechanism. The plan also includes a five-year moratorium
on base electric rates, amortization of PSCo's share of the costs
to achieve the merger over the five-year period, continued use of
the Energy Cost Adjustment ("ECA") clause, and a Quality of
Service Program.
Under PUHCA, M-P New Co. will have to obtain SEC approval to
retain PSCo's gas and steam operations. The applicable PUHCA
requirements are discussed in more detail subsequently herein.
PSCo requests that the Commission indicate its preference that
the SEC not order divestiture of PSCo's gas or steam operations.
PSCo also seeks a procedural schedule which results in a
final Commission decision becoming effective no later than
September 4, 1996. Consistent with that goal, PSCo specifically
requests that a prehearing conference be scheduled promptly, and
believes it should be no later than the week of January 8, 1996.
PSCo believes it has complied with all applicable Commission
rules. To the extent waivers from any rules are necessary, PSCo
requests that such waivers be granted. Finally, PSCo requests
that it be granted such other relief that is appropriate or
necessary.
In support of this Application, PSCo states as follows:
II. BACKGROUND REGARDING PSCO AND SPS
1. PSCo, a Colorado corporation with corporate headquarters
in Denver, is an operating public utility engaged principally in
the generation, purchase, transmission, distribution and sale of
electricity, and in the purchase, transmission, distribution,
sale and transportation of natural gas. PSCo provides
electricity to approximately one million electric customers and
gas to approximately 900,000 gas customers. Seventy-five percent
of the electric customers and sixty-eight percent of the gas
customers are in the Denver metropolitan area. PSCo's retail
electric and gas sales are subject to the jurisdiction of the
Commission. PSCo owns an extensive transmission system, and
makes wholesale sales and provides third-party transmission
services, which are subject to the jurisdiction of the Federal
Energy Regulatory Commission ("FERC").
At year-end 1994, PSCo and its subsidiaries owned property,
plant, and equipment totaling approximately $3.3 billion. Total
revenues from electric, gas, and other operations were
approximately $2.1 billion, with net income totaling
approximately $170 million. PSCo and its subsidiaries employ
approximately 5,000 people.
2. PSCo wholly owns Cheyenne Light, Fuel and Power Company
("Cheyenne"), which is also a combination electric and gas
utility. Cheyenne s electric system serves over 33,000 retail
customers in an area of approximately 960 square miles in and
around Cheyenne, Wyoming. While Cheyenne has a small amount of
transmission facilities and has an open-access transmission
system on file with the FERC, its system essentially operates as
a distribution system. Cheyenne has no electric wholesale
customers. Cheyenne serves 26,000 retail gas customers.
At year-end 1994, Cheyenne owned total property, plant, and
equipment of approximately $49.5 million. Cheyenne had
consolidated revenues totaling approximately $51.9 million, with
net income of approximately $3.0 million. Cheyenne employs
approximately 95 people. Cheyenne maintains its corporate
headquarters in Cheyenne, Wyoming.
3. SPS, a New Mexico corporation with corporate
headquarters in Amarillo, Texas, is an electric utility,
providing service to about 368,000 customers in a territory of
approximately 52,000 square miles in the Panhandle and South
Plains regions of Texas, eastern New Mexico, the Oklahoma
Panhandle, and southwestern Kansas. SPS's service territory is
primarily agricultural, with large areas of oil and gas
production. SPS, like PSCo, has an extensive transmission
system. SPS derives a high percentage of its revenues from FERC-
jurisdictional wholesale sales (approximately 33%).
At August 1995, SPS and its subsidiaries owned total
property, plant, and equipment of approximately $1.6 billion.
SPS had consolidated revenues totaling approximately $889
million, with net income of approximately $119.5 million. SPS
employs approximately 2,000 people. In addition to its corporate
headquarters in Amarillo, SPS maintains division offices in
Roswell, New Mexico and Lubbock,Texas.
III. OVERVIEW OF THE TRANSACTION AND
RESULTING CORPORATE STRUCTURE
4. On August 22, 1995, SPS and PSCo entered into an
Agreement and Plan of Reorganization ("Agreement") to engage in a
business combination as peer firms in a merger of equals. This
Agreement presents among other things, the representations and
warranties of the two companies, the structure of the merger, and
the required conditions precedent to closing.
Pursuant to the Agreement, PSCo and SPS have formed a
Delaware corporation, temporarily named M-P New Co., that upon
consummation of the reorganization will serve as a publicly
traded holding company under PUHCA. Upon receipt of all
regulatory and stockholder approvals, discussed in greater detail
below, M-P New Co. will form two wholly-owned subsidiaries, one a
Colorado corporation ("PSCo Merger Corp.") and the other a New
Mexico corporation ("SPS Merger Corp.").
PSCo Merger Corp. and SPS Merger Corp. will simultaneously
merge with and into PSCo and SPS, respectively. PSCo and SPS
will survive the mergers as wholly-owned separate operating
utility subsidiaries of M-P New Co. Cheyenne and Westgas
Interstate, currently subsidiaries of PSCo, will also become
separate utility subsidiaries of M-P New Co. Additionally, two
more subsidiaries will be created. A service company subsidiary,
M-P Services Co., will be organized to provide services to the
subsidiaries of M-P New Co. Also, a subsidiary will be formed to
hold the shares of the existing non-utility subsidiaries of SPS
and PSCo. Some subsidiaries of PSCo will be retained under PSCo
because their primary business purpose is tied to PSCo, and also
to take into account certain tax considerations.
5. Under this holding company structure, PSCo, Cheyenne,
and SPS will retain their corporate identities and will continue
their independent operations. M-P Services will provide various
services to PSCo and SPS and the other M-P New Co. subsidiaries.
Through the formation and operation of M-P Services, various
functions now performed separately by or on behalf of these
companies will be consolidated to eliminate duplicative efforts.
Any activities that M-P Services performs on behalf of PSCo, SPS,
or any other subsidiary of M-P New Co. will be governed by
service agreements. The SEC must approve the terms and
conditions of any service agreements, including the cost
allocation mechanisms contained therein.
6. The restructuring of PSCo and SPS will be effectuated by
the conversion of stock. Common stock holders of each company
will convert their respective shares of stock for rights to
shares of common stock in M-P New Co. Each share of PSCo stock
will be converted to a right to receive one share of M-P New Co.
stock, and each share of SPS stock will be converted to a right
to receive 95% of one share of M-P New Co. stock. As a result of
the exchange, the common stock holders of PSCo and SPS will then
own all of the outstanding shares of the stock in M-P New Co.
The preferred stock holders and debt holders of each company will
be unaffected by the merger.
After the exchange of shares occurs, the existing common
stock of PSCo and SPS will be canceled. New common stock of PSCo
and SPS will be issued to M-P New Co. The number of shares to be
issued by PSCo will be equivalent to the number of shares of PSCo
stock issued and outstanding on the date of consummation of the
merger transaction.
IV. RATIONALE FOR THE MERGER
7. The PSCo and SPS merger was negotiated and is now being
submitted for regulatory approval in an increasingly competitive
electric environment. In this environment, customers have more
options for their power supply needs, either through open-access
transmission or through self-build proposals. This environment
has put increasing pressure on utilities to control costs and to
take steps to give themselves flexibility to respond to market
forces. The PSCo and SPS merger brings together two utilities
with complementary strengths, which should enable the combined
company to meet these goals. For example, in addition to its
fast growing service area, PSCo brings to the combined company
its natural gas utility operations, and its experience in
developing innovative approaches to information technology and
energy services. Also by way of example, SPS brings to the
combined company well-recognized generation operations and
engineering expertise, and success with wholesale markets and
non-regulated generation projects. SPS is ranked best in the
nation in non-fuel production O&M costs per kwh, according to the
Utility Data Institute.
8. PSCo and SPS expect to realize the following benefits
from the merger:
Competitive rates and services
Increased size and stability
Diversification of service territory
More economical use of generation capacity
Savings in the procurement of goods and services
Complementary diversification programs
Complementary operational functions
Complementary management
Reductions in administrative costs.
9. Although the final total will be affected by a number of
different variables and factors, PSCo and SPS are projecting net
savings resulting from the merger of approximately $770 million
over a ten-year period commencing in 1997. These savings are
summarized as follows:
Total Savings
1997 - 2006
Savings Category ($ millions)
Corporate and Operations Labor $389.5
Corporate and Administrative Programs 82.7
Purchasing Economies (Non-Fuel) 19.1
Fuel Procurement 197.1
- Electric: 144.1
- Gas LDC: 53.0
Capacity Deferral 160.1<F3>
Joint Dispatch (33.7)<F4>
______
Total Savings 814.8
Less: Costs to Achieve (25.0)
Transaction Costs (18.0)
Premerger Initiatives (2.1)
______
Net Savings $769.7
____________________
<F3> This figure is net of the costs of the transmission line
that will be constructed to interconnect PSCo and SPS, which is
described below.
<F4> By combining dispatch functions, the companies achieve
lower energy costs than on a stand-alone basis. However, because
PSCo and SPS are deferring coal capacity additions, saving $160
million, energy costs are $33 million higher with the merger than
in the stand-alone scenarios. Combined, however, capacity
deferral and joint dispatch savings from the merger are $126.4
million.
10. Following is a chart showing the years in which the
savings of $770 million are projected to be achieved:
Savings Before
Costs to Achieve
1997-2006
Year ($ Millions)
1997 $ 40
1998 $ 43
1999 $ 48
2000 $ 69
2001 $ 63
2002 $ 84
2003 $ 93
2004 $111
2005 $103
2006 $160
11. PSCo and SPS are not directly interconnected at
present. In order to integrate their operations and achieve
certain of the projected cost savings from the merger noted
above, PSCo and SPS are planning to construct a 345 kV
interconnection, including a 400 MW high voltage direct current
tie, around the year 2001. PSCo is not at this time seeking a
certificate of public convenience and necessity from the
Commission authorizing it to construct this line.
V. REQUIRED REGULATORY APPROVALS
12. The merger of PSCo and SPS is conditioned upon the
receipt of various approvals and the occurrence of various
events. Initially, shareholders' approvals by both PSCo and SPS
are required and a special meeting of shareholders will be held
on January 31, 1996. Approval of the merger is recommended by
the boards of Directors of PSCo and SPS.
13. The requisite regulatory approvals include those PSCo
is requesting from the Commission in this Application. Cheyenne
is seeking from the Public Service Commission of Wyoming approval
of the reorganization of PSCo's ownership. SPS is requesting
approvals from the New Mexico Public Utility Commission, the
Texas Public Utility Commission and the Kansas Corporation
Commission.
14. At the federal level, approval to merge facilities is
required by the FERC for both PSCo and SPS. Nuclear Regulatory
Commission ("NRC") approval will be required for PSCo to reflect
that after the merger PSCo will become an operating subsidiary of
the holding company continuing to own the Fort St. Vrain Nuclear
Electric Generating Station and to hold NRC licenses connected
with the facility.
The Federal Trade Commission and the Department of Justice
will review the merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Also at the federal level, M-P New Co. must register its
securities to be issued to the existing shareholders of PSCo and
SPS with the SEC. After the merger, M-P New Co. must register
with the SEC as a holding company under PUHCA. As noted above,
SEC approval will also be required with respect to the foundation
of M-P Services, and the cost allocation methodologies it
utilizes.
VI. REGULATORY PLAN TO SHARE BENEFITS
FROM THE MERGER WITH CUSTOMERS
15. An essential aspect of the regulatory approvals
necessary to accomplish the merger is the approval of regulatory
plans pursuant to which PSCo and SPS will share the benefits of
the merger with their customers. In developing its proposed
plan, PSCo considered and worked in, to the greatest extent
possible, the regulatory initiatives that had been underway in
Colorado. PSCo's plan, as summarized below and described in
greater detail in the testimony filed in support of this
Application, should be evaluated in that context.
16. This plan is designed to meet four principal
objectives, namely: (1) to provide for an equitable and
reasonable savings distribution between customers and
shareholders; (2) to provide for tangible benefits to be
delivered to customers and shareholders; (3) to provide for a
more flexible regulatory framework; and (4) to provide for
certainty of regulatory treatment.
17. The primary features of the Colorado regulatory plan
are as follows:
The plan is based on a five-year planning period.
PSCo is proposing a five-year rate moratorium on base
electric rates. During that period, PSCo shall not
increase base electric rates.
The plan retains PSCo's ability to file new rate designs
within the five year moratorium period. PSCo reserves
the right to file a general gas and/or steam rate case
PSCo is proposing an earnings test that provides for sharing
earnings between customers and shareholders on a 50/50
basis for all earnings over 12.5% return on equity.
The earnings test is based on PSCo's total CPUC
jurisdictional earnings of the electric, gas and steam
departments.
For purposes of calculating earnings in the earnings test,
PSCo is proposing a five-year amortization of PSCo's
share of the costs to achieve the merger.
The plan maintains the ECA clause as the means of passing on
the reduction in fuel costs that are anticipated to
result from the merger.
The plan includes PSCo's proposed Quality of Service
Program, which is designed to assess important aspects
of PSCo's service relative to sustained customer
complaints received by the Commission, phone response
time at PSCo's customer inquiry center, response time
to customer-initiated gas odor complaints, and electric
service availability. PSCo is proposing that strong
performance will allow it to use an enhanced rate of
return threshold in its earnings sharing mechanism,
while poor performance will require that it credit
customers up to $4 million annually.
VII. RETENTION OF GAS OPERATIONS
18. Section 11(b)(1) of PUHCA directs the SEC to take
action to limit the operations of each registered holding company
system to a single integrated public-utility system, which the
SEC has interpreted to mean a single gas utility system or a
single electric utility system, but not both. On this basis, the
SEC has required the divestiture of gas and electric properties.
19. Section 11(b)(1), however, also permits registered
holding companies to retain "additional systems" if three
criteria are met, namely: (1) the additional system cannot be
operated as an independent system without the loss of substantial
economies; (2) the additional system is located in one or more
adjoining states or a contiguous country; and (3) the combination
of such systems under the control of a single holding company is
not so large as to impair the advantages of localized management.
While the SEC has applied these criteria -- commonly referred to
as the "A-B-C clauses" -- restrictively in the past by requiring
that a registered system demonstrate that divestiture would
result in a "substantial hardship to investors and consumers were
its relationship with the holding company terminated,"
Philadelphia Co., 28 S.E.C. 35, 46 (1948), the SEC is now
proposing to liberalize its interpretation of the A-B-C clauses
to permit registered holding companies to own gas and electric
utility systems where the affected states agree. See SEC Report
on the Regulation of Public Utility Holding Companies, June 1995,
at 74-76. Attachment 1 to this application is the relevant
chapter from this report. Accordingly, PSCo requests that the
Commission indicate its preference that the SEC not order
divestiture of PSCo's gas operations.
20. The SEC may also look at the retention by PSCo of its
steam operations. PSCo also requests that the Commission
indicate its preference that the SEC not order divestiture of
PSCo's steam operations.
VIII. TESTIMONY SUBMITTED IN SUPPORT OF THE APPLICATION
21. With this Application, PSCo has submitted extensive
testimony and exhibits explaining various aspects about the
merger and the associated rate plan that PSCo is proposing in
conjunction with the merger. In support of this Application,
PSCo is sponsoring the following witnesses:
Richard C. Kelly, Senior Vice President, Finance, Treasurer
and Chief Financial Officer, PSCo. Mr. Kelly will
provide an overview of the merger, including a
discussion of PSCo and SPS, the rationale behind the
merger, how the merger is to be effectuated, and the
resulting corporate structure. Mr. Kelly will also
discuss the financial aspects of the merger.
Fredric C. Stoffel, Manager, Rates & Regulatory Affairs,
PSCo. Mr. Stoffel will describe in detail the Colorado
regulatory plan that PSCo is proposing in conjunction
with this Application to seek authority to merge with
SPS.
W. Wayne Brown, Controller and Corporate Secretary, PSCo.
Mr. Brown will testify regarding the accounting
treatment for the merger under the pooling of interests
methodology of Generally Accepted Accounting
Principles.
Teresa S. Madden, Corporate Accounting Manager, PSCo. Ms.
Madden will provide a description of the services that
M-P Services is expected to provide to PSCo, SPS, and
Cheyenne as operating company subsidiaries of M-P New
Co., and how costs are to be charged or allocated from
M-P Services to those and other subsidiary companies.
William C. Weeden, Senior Utility Advisor at Reid & Priest
and formerly Associate Director, Office of Public
Utility Regulation, Division of Investment Management
at the SEC. Mr. Weeden will discuss the SEC's
regulation of registered holding companies and its
effect on the Commission's regulation.
Thomas J. Flaherty, National Partner for Utilities
Consulting, Deloitte & Touche LLP. Mr. Flaherty will
provide support for the $770 million in cost savings
that are expected to be achieved through the merger of
PSCo and SPS over a ten-year period beginning in 1997.
This support will include a detailed discussion of the
types of savings that are likely to be achieved.
David T. Hudson, Manager of Rate and Economic Research in
the Rates and Regulation Department, SPS. Mr. Hudson
will provide background information regarding the SPS
system.
Matt P. Harris, Unit Manager, Loads & Resources Planning,
PSCo. Mr. Harris will provide a description of PSCo's
electric production and transmission systems, and the
projected production cost savings arising from the
merger.
Deborah A. Blair, Unit Manager, Revenue Requirements, Rates
& Regulatory Affairs, PSCo. Ms. Blair will discuss the
earnings sharing mechanism that PSCo is proposing and
how the quality of service performance measures that
PSCo is proposing will tie into the earnings sharing
mechanism.
James F. Forchtner, Manager of Business Processes, PSCo.
Mr. Forchtner will discuss the performance measures
that PSCo is proposing to use to evaluate its service.
Steven T. Brown, Manager, Planning and Business Services,
PSCo. Mr. Brown will provide information on the
prudency of PSCo's investment in its customer
information system.
IX. INFORMATION REQUIRED BY RULE 55
Rule 55 of the Commission s Rules of Practice and Procedure
requires the provision of certain information when fixed
utilities subject to its jurisdiction seek to obtain, extend, or
transfer certificates of public convenience and necessity,
including where utilities seek to transfer assets, obtain a
controlling interest in another utility, stock transfer, or
merger. As has been noted above, due to the effectuation of the
PSCo/SPS merger through the formation of a holding company, PSCo
will retain its corporate identity. Moreover, as an out-of-state
utility, SPS does not have any certificates of public convenience
and necessity in the State of Colorado. Thus, the merger does
not involve the direct transfer or extension of any certificates
of public convenience and necessity.
Regardless, PSCo believes that Rule 55 is the appropriate
rule to follow in seeking the Commission's approval of its merger
with SPS and the associated regulatory plan. Therefore, although
Rule 55 does not appear crafted to elicit information regarding a
merger to be effectuated through the formation of a new holding
company, PSCo will respond to all applicable requests for
information set out in Rule 55. Moreover, although Rule 55 does
not appear to require the provision of information regarding SPS
or M-P New Co., since they are not applicants in this proceeding,
such information will be provided where appropriate.
(1) Applicant's Name and Complete Address
Public Service Company of Colorado
1225 17th Street
Denver, Colorado 80202
Although SPS and M-P New Co. are not applicants in this
proceeding, their addresses are as follows:
Southwestern Public Service Company
P.O. Box 1261
Amarillo, Texas 79710
M-P New Co.
1225 17th Street
Denver, Colorado 80202
(A) Statement regarding Corporate Status
PSCo is a Colorado corporation, with its corporate
headquarters in Denver. Attachment 2 lists the names of PSCo's
directors, officers, and Colorado agent for service. A copy of
PSCo's Restated Articles of Incorporation dated July 9, 1990 has
been previously filed with the Commission in Docket No. 90A-498S.
A copy of the amendment to PSCo's Restated Articles of
Incorporation was filed on October 19, 1994
SPS is a New Mexico corporation with its principal office in
Texas. It does not have an office or conduct any business in
Colorado. Attachment 3 lists the names of SPS's directors,
officers, and Colorado agent for service. Attachment 4 is SPS's
Articles of Incorporation.
M-P New Co. is a Delaware corporation. Upon the completion
of the merger, its principal office will be located in Denver,
Colorado. Attachment 5 lists the names of M-P New Co.'s
directors, officers, and Colorado agent for service.
(B) Out-of-State Applicants' Authority to Do Business in
Colorado
Not applicable.
(C) Partnership Status
Not applicable.
(2) Applicant's Representatives to Receive Notice and Inquiries
PSCo requests that any notices, inquiries, or other
communications, including pleadings submitted by intervening
parties, be submitted to the following:
Fredric C. Stoffel
Public Service Company of Colorado
1225 17th Street, Suite 1000
Denver, Colorado 80202
(303) 294-2013
William M. Dudley, Esq.
Associate General Counsel
Public Service Company of Colorado
1225 17th Street, Suite 600
Denver, Colorado 80202
(303) 294-2500
James K. Tarpey, Esq.
LeBoeuf, Lamb, Greene & MacRae L.L.P
633 17th Street, Suite 2800
Denver, Colorado 80202
(303) 291-2600
Although SPS is not an applicant and will not intervene in
this proceeding, PSCo requests that the following SPS
representative be placed on the official service list in this
proceeding:
Gerald J. Diller
Vice President, Rates and Regulations
Tyler at 6th, Suite 2002
Amarillo, Texas 79101
(806) 378-2822
(3) Authority Sought
PSCo seeks Commission authorization to merge with SPS and to
issue securities in conjunction therewith; and to implement a
regulatory plan. The authorization sought, together with the
other relief requested, is more fully set forth in the
Application.
PSCo is not proposing to change the types of utility
services that it is providing, nor is it proposing to change its
service area. PSCo has described its operations in Paragraph 1.
Maps showing PSCo's electric and gas service areas are included
as Attachment 6 to this Application.
(4) Statement Regarding Affiliates
Attachment 7 to this Application shows the corporate
structure of M-P New Co. after the combination. Attachment 8
lists the subsidiaries of M-P New Co. and provides a brief
description of them. PSCo's present subsidiaries are denoted by
asterisks on Attachment 8.
None of PSCo's affiliates hold authority duplicating in any
respect the authority PSCo seeks in the Application.
(5) Feasibility Study
The testimony and exhibits that PSCo has submitted in
support of this Application -- in particular the testimony and
schedules of Messrs. Flaherty and Harris discussing projected
cost savings -- establishes the feasibility of the merger between
PSCo and SPS.
(6) Copy of Proposed Tariff
Proposed tariff changes to implement the regulatory plan
that PSCo is proposing in this Application are included as
Schedule DAB-3 of the testimony of Ms. Blair
(7) Balance Sheets
A copy of the most recent balance sheet available for a
period ending not earlier than six months before the date of
filing of this Application is included as Attachment 9.
(8) Statement of Income and Retained Earnings
Statements of income and retained earnings for a period
ending not earlier than six months before the date of filing of
this Application is included as Attachment 10.
(9) Statement regarding Public Utilities Providing Service Near
Area
Not applicable.
(10) Statement Regarding Qualifications to Conduct Proposed
Utility Operations
This section is inapplicable since PSCo is retaining its
corporate identity and is not proposing to change the utility
operations that it currently provides.
(11) Statement of Facts Regarding Necessity for Certificate of
PC&N
Not applicable.
(12) Statement that the Merger Is Not Contrary to the Public
Interest
As discussed in this Application and in the testimony and
exhibits that PSCo has submitted in support of this Application,
the merger of PSCo and SPS through the formation of a holding
company brings together two utilities with complementary
strengths. The result should be a larger, stronger company that
will be more efficient than either company standing alone.
Moreover, the merged companies should have greater flexibility to
respond to an increasingly competitive electric market. The
synergies that will be achieved through the merger are projected
to result in cost savings of approximately $770 million (net of
costs to achieve) over a ten-year period beginning in 1997.
These facts demonstrate that PSCo's merger with SPS would not be
contrary to the public interest.
PSCo will present additional evidence at hearing, as
necessary, to establish the facts supporting the proposed merger.
(13) Information Required for Applications to Transfer
Certificates
Not applicable.
(14) Information Required for Applications to Exercise Franchise
Rights
Not applicable.
(15) Statement regarding Preferred Hearing Location
PSCo prefers that the hearing on this application be held in
Denver. PSCo has no preferred alternative choices.
(16) Statement regarding Authority to Operate
PSCo understands that the mere filing of the Application
does not, by itself, constitute authority to operate.
(17) Statement regarding the Filing of Tariffs and Operations
If the Commission grants the authority requested in this
Application, PSCo will file necessary tariffs and will operate in
accordance with all applicable Commission Rules and Regulations.
(18) Affidavit
Attachment 11 to this Application is an affidavit signed by
Mr. Kelly, stating that the contents of this Application and
supporting documentation are true, accurate, and correct, to the
best of his knowledge and belief.
X. INFORMATION REQUIRED BY RULE 56
Approval of the merger is being sought in this Application,
and the securities to be issued in conjunction therewith are an
integral part of the merger transaction. The securities will be
issued to M-P New Co. and not to the public; PSCo will not be
required to file a registration statement with the SEC. The
issuance of securities should only be authorized together with
approval of the merger transaction; it should not be issued
separately and it should not be issued within 30 days of the
filing of this Application. Finally, the Commission will issue
notice of the Application, as contemplated by Rule 55. It would
be confusing for separate notice of the securities to be given
under Rule 56.
PSCo will provide the information requested under Rule 56.
However PSCo requests a determination that Rule 56 does not
apply. Alternatively, PSCo requests that the notice requirement
of Rule 56 be waived.
(1) Applicant's Name and Complete Address
The information requested is set forth in response to
information requested under Rule 55.
(2) Applicant's Representatives
The information requested is set forth in response to
information requested under Rule 55.
(3) Statement Regarding Affiliates
The information requested is set forth in response to
information requested under Rule 55.
(4) Applicant's Existing Operations
This information is set forth in paragraph 1 of this
Application.
(5) Capital Stock
Under its Restated Articles of Incorporation, amended May
11, 1994, the authorized capital stock of PSCo consists of
$1,200,000,000 divided into 160,000,000 shares of Common Stock,
par value $5 per share (the "PSCo stock, par value $5"; which
term shall include the Rights appertaining thereto), 3,000,000
shares of Cumulative Preferred Stock, par value $100 each (the
"Cumulative Preferred Stock ($100)"), and 4,000,000 shares of
Cumulative Preferred Stock, par value $25 each (the "Cumulative
Preferred Stock ($25)"). Of such authorized PSCo stock, par
value $5, there were 62,923,493 shares issued and outstanding as
of June 30, 1995. The Cumulative Preferred Stock ($100) is
authorized to be issued in one or more series, and there were
issued and outstanding as of June 30, 1995, the following:
Series Shares
4.20% 100,000
4-1/4% 175,000
4-1/2% 65,000
4.64% 160,000
4.90% 150,000
4.90% (2nd Series) 150,000
7.15% 250,000
7.50% 216,000
8.40% 236.412
The Cumulative Preferred Stock ($25) is authorized to be issued
in one or more series, and there were issued and outstanding as
of June 30, 1995, 1,400,000 shares of the 8.40% Series.
(6) Long-Term Indebtedness
Pursuant to the Indenture dated as of December 1, 1939,
between PSCo and First Trust of New York, National Association,
as successor Trustee, as amended and supplemented (the "1939
Indenture"), PSCo has issued and there were outstanding as of
June 30, 1995, $599,750,000 principal amount of first Mortgage
Bonds issued in series. There were also outstanding as of June
30, 1995, $151,500,000 principal amount of Medium Term Notes. A
condensed description of the 1939 Indenture and of the
outstanding bonds issued thereunder is included as Attachment
12. A copy of the 1939 Indenture has been previously filed with
the Commission.
Pursuant to the Indenture dated as of October 1, 1993,
between the PSCo and First Trust of New York, National
Association, as successor trustee, as supplemented (the "1993
Indenture"), PSCo has issued and there were outstanding as of
June 30, 1995, $347,167,000 principal amount of First Collateral
Trust Bonds issued in series. A condensed description of the
1993 Indenture and of the outstanding securities issued
thereunder is included as Attachment 13. A copy of the 1993
Indenture has been previously filed with the Commission.
(7) Short-Term Indebtedness
At June 30, 1995, PSCo had short-term indebtedness of $93.5
million in commercial paper at a weighted average interest cost
of 6.18%.
(8) Statement of Interest Changes
A schedule setting forth the amount of interest charges
accrued by PSCo for the twelve months ended June 30, 1995, and
the rates thereof is included as Attachment 14.
(9) Statement of Dividends Declared
Included as Attachment 15 is a schedule setting forth the
rates and amounts of dividends declared by PSCo for the years
ended December 31, 1991, 1992, 1993 and 1994 and for the six
months ended June 30, 1995.
(10)(11) Balance Sheet and Statement of Income
A per books balance sheet of PSCo at June 30, 1995, and a
per books statement of its income, retained earnings and cash
flows for the twelve months then ended are included as
Attachments 9 and 10, respectively. For further information
relative to PSCo's financial condition, reference is hereby made
to the annual reports filed by PSCo with the Commission.
(12) Statement of Uses
A description of PSCo's proposed construction program is not
included in this application because the authority sought in this
application is the approval of a merger transaction and the
issuance of PSCo stock, par value $1 per share to M-P New Co.
which is required to effectuate the merger transaction.
Accordingly, the securities issuance is related to the merger
transaction and not to raising capital to fund PSCo's
construction program.
As part of the approval of the merger transaction, PSCo
requests authority to issue shares of PSCo stock, par value $1
per share to M-P New Co. The number of shares to be issued will
be equivalent to the number of shares of PSCo stock, par value $5
issued and outstanding on the date of the consummation of the
merger transaction. It is estimated that, if the merger
transaction is consummated on or about September 6, 1996,
approximately 64,500,000 shares of PSCo stock, par value $5 will
be issued and outstanding on such date.
The estimated cost of canceling the outstanding PSCo stock,
par value $5 and issuing PSCo stock, $1 par value will be
negligible. The costs associated with the merger transaction are
included in the testimony filed as part of the merger
application.
(13) Statement Regarding Financial Status
Because of the credit rating of SPS and PSCo, PSCo
anticipates that the consummation of the merger transaction will
positively affect PSCo's financial status, credit worthiness, as
measured by Standard and Poor's Corporation and Moody's Investor
Service, and its overall credit rating, which in the long term
will enable PSCo to attract capital at the lowest overall cost
and maintain its financial integrity.
(14) Securities To Be Issued
See paragraph (12) above.
(15) Registration Statement
PSCo is not required to file a registration statement with
the SEC for the PSCo stock, par value $1. M-P New Co. will file
a registration statement with the SEC to register the M-P New Co.
stock.
(16) Resolution
Included as Attachment 16 is a certified extract of
resolutions from the minutes of the meeting of the PSCo's Board
of Directors on August 22, 1995, authorizing, among other
matters, its proper officers to execute and file this
Application, or to cause such Application to be executed and
filed.
(17) Statement of Capital Structure
The capital structure of PSCo will be the same at the time
of the consummation of the merger transaction as it is
immediately prior to such consummation. Consequently, a pro
forma capital structure is not included in this application.
(18) Statement of Estimated Cost of Financing
The estimated cost will be negligible for the reasons set
forth in paragraph (12).
(19) Notice
For the reasons set forth earlier herein, notice of
publication is not included.
(20) Affidavits
See Attachment 11 for the Affidavit of Mr. Kelly.
XI. RELIEF REQUESTED
Public Service Company respectfully requests that the
Commission:
authorize Public Service to merge with Southwestern Public
Service Company through the formation of a registered public
utility holding company and for the issuance of securities
in conjunction therewith;
authorize the implementation of Public Service Company five-year
regulatory plan;
establish a procedural schedule which results in a final
Commission decision becoming effective no later than
September 4, 1996;
indicate its preference that the SEC should not order divestiture
of PSCo's gas or steam operations;
schedule a prehearing conference promptly, which Public Service
believes should be no later than the week of January 8,
1996;
grant, to the extent necessary, waivers from applicable
Commission rules; and
grant to Public Service such other relief as may be necessary or
appropriate.
Date: November 9, 1995
Respectively submitted
/s/
James K. Tarpey, #1709
LeBoeuf, Lamb, Greene & MacRae
L.L.P.
633 17th Street, Suite 2800
Denver, Colorado 80202
(303) 291-2600
William M. Dudley
Associate General Counsel
1225 17th Street, Suite 600
Denver, Colorado 80202
(303) 294-2500
BEFORE THE PUBLIC SERVICE COMMISSION OF WYOMING
APPLICATION OF CHEYENNE LIGHT, FUEL )
AND POWER COMPANY FOR AUTHORITY )
TO ENGAGE IN A REORGANIZATION )
INVOLVING THE TRANSFER OF A ) DOCKET NO.________
CONTROLLING INTEREST IN A PUBLIC )
UTILITY )
APPLICATION
Pursuant to Wyoming Statute Section 37-1-104 (1995) and
Section 209 of the Rules of Practice and Procedure of the Public
Service Commission of Wyoming ("Commission"), the applicant,
Cheyenne Light, Fuel and Power Company ("Cheyenne"), respectfully
shows the Commission as follows:<F1>
1. Cheyenne is a public utility furnishing both electric
and natural gas service in the City of Cheyenne, State of
Wyoming, and in a major portion of Laramie County, Wyoming.
Cheyenne also distributes natural gas to customers in the
communities of Pine Bluffs, Burns, and Carpenter located in the
eastern portion of Laramie County.
2.a. Cheyenne desires to engage in a reorganization that
involves the transfer of control of Cheyenne from Public Service
Company of Colorado ("PSCo") to M-P New Co., a Delaware
corporation. This reorganization is to occur as part of a merger
between PSCo and Southwestern Public Service Company, ("SPS").
2.b. On August 22, 1995, SPS and PSCo entered into an
Agreement and Plan of Reorganization ("Agreement") to engage in a
business combination as peer firms in a merger of equals.<F2>
This Agreement presents the representations and warranties of the
two companies, the structure of the merger, and the required
conditions precedent to closing. A copy of the Agreement is
included as Attachment 1 to this application.
Pursuant to the Agreement, PSCo and SPS have formed a
Delaware corporation, temporarily named M-P New Co., that upon
consummation of the reorganization will serve as a publicly
traded holding company under the PUHCA. Upon receipt of all
regulatory and stockholder approvals, M-P New Co. will form two
wholly-owned subsidiaries, one a Colorado corporation ("PSCo
Merger Corp.") and the other a New Mexico corporation ("SPS
Merger Corp.")
PSCo Merger Corp. and SPS Merger Corp. will simultaneously
merge with and into PSCo and SPS, respectively. PSCo and SPS
will survive the mergers as wholly-owned separate operating
utility subsidiaries of M-P New Co. Cheyenne and WestGas
Interstate, currently subsidiaries of PSCo, will also become
separate utility subsidiaries of M-P New Co. Additionally, two
more subsidiaries will be created. A service company subsidiary,
M-P Services Co., will be organized to provide services to the
subsidiaries of M-P New Co. Also, a subsidiary will be formed to
hold the shares of the existing non-utility subsidiaries of SPS
and PSCo. Attachment 2 to this Application is an organizational
diagram of M-P New Co. Attachment 3 lists the subsidiaries of M-
P New Co. and provides a brief description of their activities.
2.c. Under this holding company structure, Cheyenne, PSCo,
and SPS will retain their corporate identities and will continue
their independent operations. M-P Services will provide various
services to PSCo and SPS and the other M-P New Co. subsidiaries,
including Cheyenne. Through the formation and operation of M-P
Services, various functions now performed separately by or on
behalf of these companies will be consolidated to eliminate
duplicative efforts. M-P Services will perform the
administrative and support functions that PSCo currently provides
to Cheyenne. Any activities that M-P Services performs on behalf
of Cheyenne, PSCo, SPS, or any other subsidiary of M-P New Co.
will be governed by service agreements. The Securities and
Exchange Commission ("SEC") must approve the formation of M-P
Services and the terms and conditions of any service agreements.
2.d. The restructuring of PSCo and SPS will be effectuated
by the conversion of stock. Common stock holders of each company
will convert their respective shares of stock for rights to
shares of common stock in M-P New Co. Each share of PSCo stock
will be converted to a right to receive one share of M-P New Co.
Stock, and each share of SPS stock will be converted to a right
to receive 95% of one share of M-P New Co. stock. As a result of
the exchange, the common stock holders of PSCo and SPS will then
own all of the outstanding shares of the stock in M-P New Co.
The preferred stock holders and debt holders of each company
will be unaffected by the merger.
After the exchange of shares occurs, the existing stock of
PSCo and SPS will be cancelled. New stock of PSCo and SPS will
be issued to M-P New Co. The Cheyenne stock, which is currently
wholly-owned by PSCo, will be transferred to M-P Holding Co.
3.a. As stated above, M-P New Co. is a Delaware corporation
and will be a registered holding company, subject to the
regulation of the SEC under PUHCA upon the effectuation of the
merger.
3.b. PSCo, a Colorado corporation with corporate
headquarters in Denver, is an operating public utility engaged
principally in the generation, purchase, transmission,
distribution and sale of electricity, and in the purchase,
transmission, distribution, sale and transportation of natural
gas. PSCo provides electricity to approximately 1 million
electric customers and gas to approximately 900,000 gas
customers. Seventy-five percent of the electric customers and
sixty-eight percent of the gas customers are in the Denver
metropolitan area.
At year-end 1994, PSCo and its subsidiaries, including
Cheyenne, owned property, plant, and equipment totaling
approximately $3.3 billion. Total revenues from electric, gas,
and other operations were approximately $2.1 billion, with net
income totaling approximately $170 million. PSCo and its
subsidiaries employ approximately 5000 people.
3.c. SPS, a New Mexico corporation with corporate
headquarters in Amarillo, Texas, is an electric utility,
providing service to about 368,000 customers in a territory of
approximately 52,000 square miles in the Panhandle and South
Plains regions of Texas, eastern New Mexico, the Oklahoma
Panhandle, and southwestern Kansas.
At August 1995, SPS and its subsidiaries owned total
property, plant, and equipment of approximately $1.6 billion.
SPS had consolidated revenues totaling approximately $889
million, with net income of approximately $119.5 million. SPS
employs approximately 2,000 people. In addition to its corporate
headquarters in Amarillo, SPS maintains division offices in
Roswell, New Mexico and Lubbock, Texas.
4.a. PSCo wholly owns Cheyenne which is also a combination
electric and gas utility. Cheyenne's electric system serves over
33,000 retail customers in an area of approximately 960 square
miles in and around Cheyenne, Wyoming. While Cheyenne has a
small amount of transmission facilities and has an open-access
transmission system on file with the FERC, its system essentially
operates as a distribution system. Cheyenne has no electric
wholesale customers. Cheyenne serves 26,000 retail gas
customers.
At year-end 1994, Cheyenne owned total property, plant, and
equipment of approximately $49.5 million. Cheyenne had
consolidated revenues totaling approximately $51.9 million with
net income of approximately $3.0 million. Cheyenne employs
approximately 95 people. Cheyenne maintains its corporate
headquarters in Cheyenne, Wyoming.
4.b. Under the holding company structure, Cheyenne will
retain its separate corporate identity. Therefore, it will
retain its existing filed rates, rules, regulations, and
classifications of service. The merger should have no impact on
the service of Cheyenne.
5.a. Cheyenne has previously filed with the Commission
copies of its latest FERC Form No. 1-F, Annual Report of Nonmajor
Public Utilities and Licenses, and annual report, which show its
financial condition.
5.b. Pro forma financial statements of M-P New Co. are
presented in Mr. Wayne Brown's testimony. The business
combination merges two managerially and financially strong
companies which will result in even greater financial strength
____________________
<F1> To the extent possible, Cheyenne will follow the format
set out in Form No. 5 of the Commission's rules.
<F2> The term "merger" is used for the sake of convenience and
not as a technical legal description of the business
combination. As described more fully herein, PSCo and SPS
will not merge into one another; they will reorganize as
wholly-owned subsidiaries of a registered public utility
holding company.
and integrity than could be achieved by each company
individually.
6. The merger between PSCo and SPS, of which the proposed
transaction is a part, shall necessarily have an impact on those
two utilities. However, as stated above, the merger should not
directly affect Cheyenne, which will continue its independent
operations. There may, on the other hand, be an indirect impact
on Cheyenne. PSCo and SPS are seeking to merge because of the
substantial anticipated savings that are anticipated to result
from the merger -- approximately $770 million over a ten-year
period beginning in 1997. A portion of these savings will be
allocated to Cheyenne in the form of lower costs for
administrative and other support services.
7. The proposed transaction will otherwise have no impact
on the operations of any other utility in the state of Wyoming.
8. There is one aspect of regulation under PUHCA that
Cheyenne requests that the Commission specifically address in its
order on this application. Section 11(b)(1) of PUHCA directs the
SEC to take action to limit the operations of each registered
holding company system to a single integrated public-utility
system, which the SEC has interpreted to mean a single gas
utility system or a single electric utility system, but not both.
On this basis, the SEC has required the divestiture of gas and
electric properties.
Section 11(b)(1), however, also permits registered holding
companies to retain "additional systems" if three criteria are
met, namely: (1) if the additional system cannot be operated as
an independent system without the loss of substantial economies;
(2) the additional system is located in one or more adjoining
states or a contiguous country; and (3) the combination of such
systems under the control of a single holding company is not so
large as to impair the advantages of localized management. While
the SEC has applied these criteria -- commonly referred to as the
"A-B-C clauses" -- restrictively in the past by requiring that a
registered system demonstrate that divestiture would result in a
"substantial hardship to investors and consumers were its
relationship with the holding company terminated," Philadelphia
Co., 28 S.E.C. 35, 46 (1948), the SEC is now proposing to
liberalize its interpretation of the A-B-C clauses to permit
registered holding companies to own gas and electric utility
systems where the affected states agree. See SEC Report on the
Regulation of Public Utility Holding Companies, June 1995, at 74-
76. Attachment 4 to this application is the relevant chapter
from this report.
Accordingly, Cheyenne requests that the Commission, in
acting on this application, indicate its preference that the SEC
should not order divestiture of Cheyenne's gas operations.
9. In support of this application, Cheyenne is submitting
the testimony and exhibits of the following witnesses:
Richard L. Kaysen, Vice President and General
Manager of Cheyenne. Mr. Kaysen will discuss the
effects of the merger and reorganization on Cheyenne.
Richard C. Kelly, Senior Vice President, Finance,
Treasurer and Chief Financial Officer, PSCo. Mr. Kelly
will provide an overview of the merger of PSCo and SPS,
including a discussion of PSCo and SPS, the rationale
behind the merger, how the merger is to be effectuated,
and the resulting corporate structure. Mr. Kelly will
also discuss the financial aspects of the merger.
W. Wayne Brown, Controller and Corporate
Secretary, PSCo. Mr. Brown will testify regarding the
accounting treatment for the merger under the pooling
of interests methodology of Generally Accepted
Accounting Principles.
Teresa S. Madden, Corporate Accounting Manager,
PSCo. Ms. Madden will provide a description of the
services that M-P Services is expected to provide to
PSCo, SPS, and Cheyenne as operating company
subsidiaries of M-P New Co., and how costs are to be
charged or allocated from M-P Services to those and
other subsidiary companies.
William C. Weeden, Senior Utility Advisor at Reid
& Priest and formerly Associate Director, Office of
Public Utility Regulation, Division of Investment
Management at the SEC. Mr. Weeden will discuss the
SEC's regulation of registered holding companies and
its effect on the Commission's regulation.
Thomas J. Flaherty, National Partner for Utilities
Consulting, Deloitte & Touche LLP. Mr. Flaherty will
provide support for the $770 million in cost savings
that are expected to be achieved through the merger of
PSCo and SPS over a ten-year period beginning in 1997.
This support will include a detailed discussion of the
types of savings that are likely to be achieved.
David T. Hudson, Manager of Rate and Economic
Research in the Rates and Regulations Department, SPS.
Mr. Hudson will provide background information
regarding the SPS system.
Matt P. Harris, Unit Manager, Loads & Resources
Planning, PSCo. Mr. Harris will provide a description
of PSCo's electric production and transmission systems,
and the projected production cost savings arising from
the merger.
10. Cheyenne requests that the following persons be placed
on the official service list in this proceeding:
William M. Dudley, Esq.
Associate General Counsel
Public Service Company of Colorado
1225 17th Street, Suite 600
Denver, CO 80202
(303) 294-2500
Richard L. Kaysen
Vice President and General Manager
Cheyenne Light, Fuel and Power Company
108 West 18th Street
Cheyenne, WY 82001
(307) 778-2100
John A. Sundahl, Esq.
Sundahl, Powers, Kapp & Martin
P.O. Box 328
Cheyenne, WY 82003
WHEREFORE, Cheyenne Light, Fuel and Power Company prays that
the Public Service Commission of Wyoming make its order
authorizing Cheyenne to engage in the reorganization involving
the transfer of a controlling interest of Cheyenne from PSCo to
M-P New Co.
Dated this 9th day of November, 1995.
CHEYENNE LIGHT, FUEL AND
POWER COMPANY
BY /s/
Richard L. Kaysen
Vice President and General
Manager
AFFIDAVIT
STATE OF WYOMING )
)
COUNTY OF LARAMIE )
Richard L. Kaysen, being duly sworn, deposes and says that
he is Vice President and General Manager of Cheyenne Light, Fuel
and Power Company, and that he has read the foregoing
application, knows the contents thereof, and that the matters set
forth therein as to Cheyenne Light, Fuel and Power Company are
true and correct to the best of his knowledge and belief.
__________________________________
Richard L. Kaysen
Subscribed and sworn to before me this ____ day of November,
1995.
___________________________________
Notary Public
BEFORE THE NEW MEXICO PUBLIC UTILITY COMMISSION
IN THE MATTER OF THE APPLICATION )
OF SOUTHWESTERN PUBLIC SERVICE )
COMPANY FOR APPROVALS AND )
AUTHORIZATIONS TO (i) MERGE WITH )
PUBLIC SERVICE COMPANY OF )
COLORADO AND TO REORGANIZE AND )
FORM A HOLDING COMPANY, (ii) )
DIVEST ITS NON-UTILITY SUBSIDIARIES, )
(iii) ISSUE SECURITIES TO THE HOLDING ) CASE NO. ________
COMPANY, (iv) AMEND ITS GENERAL )
DIVERSIFICATION PLAN, AND (v) )
OBTAIN ALL OTHER APPROVALS AND )
AUTHORIZATIONS NECESSARY TO )
EFFECTUATE THE MERGER, REORGANIZATION )
AND RELATED TRANSACTIONS, )
)
SOUTHWESTERN PUBLIC SERVICE COMPANY, )
)
APPLICANT. )
APPLICATION
___________
Applicant Southwestern Public Service Company ("SPS")
respectfully applies to the New Mexico Public Utility Commission
("NMPUC" or the "Commission"), pursuant to the New Mexico Public
Utility Act ("PUA"), for the following approvals and authoriza-
tions: (1) approval of SPS's merger with Public Service Company
of Colorado ("PSCo") and their reorganization and formation of a
public utility holding company to be temporarily called "M-P New
Co.";<F1> (2) approval of SPS's divestiture and transfer to M-
P New Co. of SPS's wholly owned subsidiaries Quixx Corporation
("Quixx") and Utility Engineering Corporation ("UE"); (3)
authorization of SPS's issuance of common stock certificates to
M-P New Co. pursuant to the August 22, 1995 Agreement and Plan of
Reorganization among SPS, PSCo, and M-P New Co. (the "Merger
Agreement"); (4) approval of SPS's proposed Class II transactions
associated with the proposed merger, reorganization, formation of
a holding company, and divestiture (collectively the "Transac-
tions"), and approval of SPS's Amended General Diversification
Plan ("Amended GDP"), which reflects the affiliated interests
resulting from the Transactions; (5) approval of SPS's proposed
regulatory plan that provides for the sharing of benefits and
savings resulting from the Transactions between SPS's customers
and shareholders; and (6) granting such other approvals,
authorizations and relief as may be necessary and appropriate to
effectuate the merger and the related Transactions.
____________________
<F1> The name "M-P New Co." will be changed when PSCo and
SPS agree upon a permanent name. SPS joined with PSCo
to form M-P New Co. on August 22, 1995. SPS and PSCo
each made a de minimus capital contribution of $100 to
M-P New Co. for 50 percent of its stock. This stock
will be canceled pursuant to the Merger Agreement
immediately prior to the SPS Merger and the PSCo
Merger.
INTRODUCTION
1. SPS is a New Mexico corporation which owns, operates
and controls plant, property, and facilities that provide genera-
tion, transmission, distribution, and sale of electric energy to
the public in portions of New Mexico, Texas, Oklahoma, and Kansas
(i.e., retail service), and to purchasers for resale (i.e.,
wholesale service).
A. SPS is a public utility in New Mexico as defined
in Section 62-3-3 of the PUA, and SPS is subject to the jurisdic-
tion and authority of the NMPUC.
B. SPS's principal office in New Mexico is located at
111 E. Fifth Street, Roswell, New Mexico 88201, and its principal
corporate office is located at Tyler at Sixth Street, Post Office
Box 1261, Amarillo, Texas 79170.
C. SPS's corporate representatives and attorneys who
should receive all notices, pleadings, discovery requests and
responses, and other documents related to this case are:
Gerald J. Diller
Vice President, Rates and Regulations
Post Office Box 1261
Amarillo, Texas 79170
(806) 378-2819/FAX: (806) 378-2820
David T. Hudson
Manager, Rate and Economic Research
Post Office Box 1261
Amarillo, Texas 79170
(806) 378-2824/FAX: (806) 378-2820
Jeffrey L. Fornaciari, Esq.
Hinkle, Cox, Eaton, Coffield & Hensley
Post Office Box 2068
Santa Fe, New Mexico 87504-2068
(505) 982-4554/FAX: (505) 982-8623
2. PSCo, a Colorado corporation, is an operating public
utility that, along with its wholly owned subsidiary, Cheyenne
Light, Fuel and Power Company ("Cheyenne"), is engaged in the
generation, transmission, distribution and sale of electricity to
the public. PSCo's operations are wholly within Colorado, and
Cheyenne's operations are wholly within Wyoming. PSCo and
Cheyenne also engage in the purchase, transmission, distribution,
sale and transportation of natural gas to the public in portions
of Colorado and Wyoming. PSCo owns all or a majority of the
common stock of eleven subsidiaries, including Cheyenne.
A. PSCo's and Cheyenne's principal executive offices
are located at 1225 Seventeenth Street, Denver, Colorado 80202.
B. PSCo's corporate representatives and attorneys who
should receive all notices, pleadings, discovery requests and
responses, and other documents in this case are:
Fredric C. Stoffel
Manager, Rates and Regulatory Affairs
Public Service Company of Colorado
Suite 1000
Post Office Box 840
Denver, Colorado 80202
(303) 294-2013/FAX: (303) 294-2194
William M. Dudley, Esq.
Associate General Counsel
Public Service Company of Colorado
Suite 600
Post Office Box 840
Denver, Colorado 80202
(303) 294-2500/FAX: (303) 294-7782
3. SPS currently engages in diversified businesses and
activities through its wholly owned corporate subsidiaries Quixx
and UE, pursuant to its General Diversification Plan ("GDP")
approved by the NMPUC on April 9, 1986 in NMPUC Case No. 1972.
4. M-P New Co., a Delaware corporation, was created to
become a holding company for SPS and PSCo and their respective
subsidiaries following the merger. After the merger, M-P New
Co. will be a public utility holding company registered with the
Securities and Exchange Commission ("SEC") under the Public
Utility Holding Company Act of 1935 ("PUHCA"), and it will not
have any public utility operations. M-P New Co.'s principal
executive offices will be located at 1225 Seventeenth Street,
Denver, Colorado 80202.
DESCRIPTION OF THE MERGER AND
REORGANIZATION AND RELATED TRANSACTIONS
5. The Merger Agreement provides for:
A. The merger of SPS Merger Corp., a New Mexico
corporation and a wholly owned subsidiary of M-P New Co. (which
M-P New Co. will create for the sole purpose of facilitating the
merger), with and into SPS, and SPS will be the surviving corpo-
ration (the "SPS Merger");
B. The merger of PSCo Merger Corp., a Colorado
corporation and a wholly owned subsidiary of M-P New Co. (which
M-P New Co. will create for the sole purpose of facilitating the
merger), with and into PSCo, and PSCo will be the surviving
corporation (the "PSCo Merger") (the SPS Merger and PSCo Merger
will be collectively referred to as the "merger");
C. The conversion of all issued and outstanding
shares of SPS common stock, $1.00 par value per share ("SPS
Common Stock"), and PSCo common stock, $5.00 par value per share
("PSCo Common Stock"), into shares of M-P New Co. common stock,
$1.00 par value per share (the "M-P Common Stock");
D. The cancellation of all shares of capital stock of
M-P New Co. which are issued and outstanding immediately prior to
the merger; and
E. Upon the consummation of the merger, the cancella-
tion of: (i) each share of SPS Common Stock outstanding immedi-
ately prior to the merger and the conversion thereof into the
right to receive 0.95 of one share of M-P New Co. Common Stock,
resulting in the holders of SPS Common Stock becoming holders of
M-P New Co. Common Stock; and (ii) each share of PSCo Common
Stock outstanding immediately prior to the merger and the conver-
sion thereof into a right to receive one share of M-P New Co.
Common Stock, resulting in the holders of PSCo Common Stock
becoming holders of M-P New Co. Common Stock.
6. As a result of the merger, SPS and PSCo will become
wholly owned electric utility operating subsidiaries of M-P New
Co., and SPS will continue its corporate existence and will
continue to operate as an electric public utility subject to the
PUA and the regulatory authority of the NMPUC. SPS will not
transfer, or sell any of its public utility system or facilities
to M-P New Co. and it will not modify or abandon its service
facilities in New Mexico. SPS will, however, divest its owner-
ship interests in Quixx and UE and transfer those subsidiaries to
M-P New Co. or to another subsidiary of the holding company
(i.e., M-P Intermediate Holding Company) ("M-P Intermediate").
7. Following the merger, M-P New Co. will become a public
utility holding company and an affiliated interest of SPS as
those terms are defined in Sections 62-3-3(A) and 62-3-3(M) of
the PUA. M-P New Co. will be a registered electric utility
holding company pursuant to PHUCA, and, accordingly, it will be
subject to the regulatory jurisdiction of the SEC. M-P New Co.
will not own, operate or control any of SPS's public utility
plant, property, or facilities used for the generation, transmis-
sion, distribution or sale of electricity for light, heat, power
or other uses to or for the public, and M-P New Co. will not in
any way act as a public utility in New Mexico or in any other
state.
REQUESTED APPROVALS AND AUTHORIZATIONS FOR THE
MERGERS, REORGANIZATION AND RELATED TRANSACTIONS
8. The Merger Agreement, which is attached as Schedule
DRB-3 to the testimony of SPS witness Doyle R. Bunch II, provides
the terms and conditions of the merger. As described above, the
merger will not change SPS's legal status as a public utility
under the PUA, and SPS will continue its corporate existence and
will continue to operate as an electric public utility subject to
the PUA and the regulatory authority of the NMPUC. In order to
effectuate the Merger Agreement and to accomplish the Transac-
tions required to implement the merger, SPS requests the
Commission to enter its order granting the following approvals
and authorizations of:
A. The merger between SPS and PSCo pursuant to
Sections 62-6-12 and 62-6-13 of the PUA;
B. The reorganization of the merged SPS and PSCo and
formation of a holding company (i.e., M-P New Co.) as defined in
Section 62-3-3(M) of the PUA and pursuant to Section 62-6-19 of
the PUA and NMPUC Rule 450;
C. The issuance of securities necessary to effectuate
and implement SPS's merger, reorganization and formation of a
holding company, as defined in Section 62-3-3(K) of the PUA and
pursuant to Sections 62-6-6, 62-6-7 and 62-6-19 of the PUA and
NMPUC Rule 450;
D. SPS's divestiture of Quixx and UE and its transfer
of those subsidiaries to M-P New Co. or M-P Intermediate as
defined in Section 62-3-3(K)(4) of the PUA and pursuant to
Section 62-6-19 of the PUA and NMPUC Rule 450;
E. The amendments to SPS's GDP necessary to reflect
the GDP modifications that will result from the merger (i.e., the
reorganization, formation of holding company, divestiture of
SPS's subsidiaries, and the creation of new affiliated interests
based on the holding company structure) as defined in Sections
62-3-3(A) of the PUA and pursuant to Section 62-6-19 of the PUA
and NMPUC Rule 450; and
F. SPS's regulatory plan for sharing merger benefits
and savings between SPS's customers and shareholders, pursuant to
Sections 62-6-12 and 62-6-13 of the PUA.
BENEFITS AND FEATURES OF MERGER AND OTHER TRANSACTIONS
9. The following benefits and features relate to the
merger and the Transactions:
A. The Merger. The merger and the Transactions
related thereto will produce substantial benefits for SPS, its
customers, and its shareholders, as well as for New Mexico and
the other states in which SPS engages in public utility
operations. The merger and the Transactions are lawful and are
consistent with the public interest. The merger and Transactions
are projected to reduce SPS's and PSCo's future costs of admin-
istration and operation and result in net benefits and cost
savings of approximately $770 million (i.e., on a nominal basis)
over 10 years. The cost savings resulting from the merger will
be realized in the areas of corporate operations, labor, corp-
orate and administrative programs, purchasing economies (non-
fuel), fuel procurement, capacity deferral and joint dispatch,
and the projected cost savings will result in lower future costs
than would have otherwise been required had the merger not
occurred. Accordingly, the benefits of the merger greatly
outweigh any detriments, and the merger and the Transactions are
consistent with the public interest in accordance with Section
62-6-13 of the PUA.
B. Reorganization and Formation of a Holding Company
The merger and reorganization of SPS and PSCo into a holding
company structure will produce administrative, operational, and
financial synergies which will reduce SPS's and PSCo's costs,
will result in substantial cost savings and benefits, and will
satisfy the requirements of Section 62-6-19 of the PUA and NMPUC
Rule 450. Additionally, the merger, reorganization, and form-
ation of a holding company will create a combined company that
will be operationally and financially stronger than either SPS
and PSCo on a stand alone basis, and the Transactions will also
promote each company's mission in the developing competitive
market place by separating the financial and operational bases of
the operating utility company subsidiary businesses and the
competitive non-regulated subsidiary businesses. Accordingly,
SPS will continue its corporate existence and will continue to
operate as an electric public utility. SPS's preferred stock-
holders, creditors and holders of its first mortgage bonds at the
time of closing will not be affected by the merger and the
Transactions. The NMPUC will continue its supervision and
regulation of SPS pursuant to Section 62-6-19 of the PUA and
NMPUC Rule 450 and will continue to assure that SPS's relation-
ship with any affiliated interests, i.e., the holding company and
its other subsidiaries, will not have an adverse and material
effect on SPS's ability to provide reasonable and proper service
at fair, just, and reasonable rates.
C. The Issuance of Securities. As previously noted
herein, the Merger Agreement contemplates a Plan of Merger among
SPS, M-P New Co. and SPS Merger Corp., which provides for the
merger of SPS Merger Corp. with and into SPS pursuant to New
Mexico laws, and provides that SPS will be the surviving corpora-
tion. Each share of SPS Merger Corp. common stock outstanding
immediately before the SPS Merger will be converted into one
share of SPS Common Stock. As a result, SPS will become a wholly
owned subsidiary of M-P New Co. SPS will subsequently issue a
new certificate to M-P New Co. evidencing its ownership of all of
the issued and outstanding shares of SPS Common Stock. SPS will
receive no proceeds from the issuance of the certificate repre-
senting the SPS Common Stock to M-P New Co. The issuance of the
certificate evidences the ownership by M-P New Co. of all of the
issued and outstanding SPS Common Stock by operation of law
immediately after the SPS Merger. The proposed securities
issuance may be considered a Class II transaction as described in
Section 62-3-3(K) of the PUA, and, if so, it (a) satisfies the
requirement of Section 62-6-19 of the PUA in that it will not
adversely and materially affect SPS's rates or services, and (b)
satisfies all other requirements of Section 62-6-7 of the PUA in
that it: (i) is consistent with the public interest, (ii) is for
purposes that are permitted by the PUA, (iii) does not have any
unusual features, and (iv) contemplates that the amount of the
proposed securities issuance, plus the aggregate amount of SPS's
securities outstanding, will not exceed the fair value of SPS's
properties and business.
D. The Divestiture of SPS's Subsidiaries. SPS will
divest itself of Quixx and UE and transfer those subsidiaries to
M-P New Co. or M-P Intermediate. SPS's divestiture of Quixx and
UE will satisfy the requirements of NMPUC Rule 450.7(b)(11) in
that: (i) the divestiture will not affect SPS's utility opera-
tions, financial viability, cost of capital and adequacy of
service for a period of ten years following the divestiture, and
(ii) SPS will receive a promissory note issued by M-P Intermedi-
ate which is in an amount equal to the fair market value of Quixx
and UE. The proceeds of the divestiture are more fully described
in Section XI of the Amended GDP attached as Application Exhibit
"A."
E. The Termination Fees. The Merger Agreement
requires that certain fees be paid upon termination of the Merger
Agreement under certain circumstances. The aggregate termination
fees under these provisions may not exceed $60 million (plus out-
of-pocket expenses of up to $10 million) and, to the extent
legally possible within six months, that portion of such payment
which does not constitute reimbursement of out-of-pocket expenses
shall be paid in common stock of the paying party.
F. Amendments to SPS's GDP. SPS has prepared an
Amended GDP, which is attached to this Application as Exhibit A,
in accordance with NMPUC Rule 450.7(b). The Amended GDP incorpo-
rates the changes in SPS's GDP that will result from the merger
and the related reorganization, the formation of M-P New Co., and
SPS's divestiture of Quixx and UE. The Amended GDP identifies
and describes all of SPS's newly created affiliated interests
which will result from the Transactions.
G. SPS's Representations in Connection with the
Amended GDP. In accordance with NMPUC Rule 450.7(c), SPS repre-
sents that: (i) SPS's books and records will be kept separately
from those of M-P New Co. and its other subsidiaries: (ii) in
accordance with Sections 62-6-17 and 62-6-19 of the PUA, the
Commission and its Staff will have access to the books, records,
accounts or documents of the holding company and the holding
company's other subsidiaries which are affiliated interests of
SPS and which participate with SPS in any Class I or II transac-
tions: (iii) the NMPUC's supervision and regulation of SPS will
not be obstructed, hindered, diminished, impaired or unduly
complicated by the merger, reorganization, formation of M-P New
Co. or the divestiture of Quixx and UE; (iv) SPS will not pay
excessive dividends to M-P New Co. following the merger and
related reorganization: (v) SPS will not, without prior Commis-
sion approval: (a) loan its funds or securities or transfer
similar assets to an affiliated interest: or (b) purchase debt
instruments of, or guarantee or assume liabilities of, any
affiliated interest: (vi) when requested by the Commission, SPS
will have an allocation study (which will not be charged to
ratepayers) or a management audit (which also will not be charged
to ratepayers) performed by a consulting firm(s) under the
Commission's direction;
H. Regulatory Plan. SPS seeks approval of the regulatory
plan which is fully described in the testimony of SPS witness
David T. Hudson. The regulatory plan includes the following
components: (i) it is based on a five-year transition period:
(ii) SPS's customers and shareholders will share on a 50/50 basis
the non-fuel and non-purchased power operation and maintenance
expense savings realized during the five-year transition period;
(iii) SPS will amortize its share of the costs to complete the
merger during the five-year transition period; (iv) fuel cost
savings will be realized by customers through the fuel cost
recovery mechanism; (v) customers will realize capital and rate
base investment savings through the base rate process; (vi) SPS
will institute an experimental performance-based ratemaking
program which incorporates a rate of return on equity adder as a
function of performance; and (vii) SPS will hold its customers
harmless from merger-related net cost increases during the five-
year transition period.
I. The Pooling of Interest Method of Accounting for the
Merger. SPS seeks the NMPUC's approval of its use of the pooling
of interest method of accounting and the requisite journal
entries for accounting entries to reflect the merger and other
related transactions.
10. SPS includes and incorporates as if fully set forth
herein the direct testimony, which has been concurrently filed
with this Application, of the following witnesses: Doyle R. Bunch
II (i.e., overview of the transactions contemplated by the Merger
Agreement); David T. Hudson (i.e., SPS's operations and resourc-
es, resource planning, and regulatory plan); Robert D. Dickerson
(i.e., the accounting treatment for the merger and related
transactions); James D. Steinhilper (i.e., the financial aspects
of the merger and related Transactions and the issuance of
securities); Teresa S. Madden (i.e., the creation and functions
of M-P Service Company and affiliated accounting); Thomas J.
Flaherty (i.e., merger benefits and synergies); Matt P. Harris
(i.e., PSCo's electrical operations and the production cost
savings); Gerald J. Diller (i.e., the diversification related
requests for approval); William C. Weeden (i.e., the implications
of the merger in relation to SEC/NMPUC jurisdiction and authori-
ty); James K. Mitchell (i.e., the implications of the merger in
relation to FERC/NMPUC jurisdiction and authority); and Charles
J. Cicchetti (i.e., overview of current restructuring in the
electric utility industry and evaluation of SPS/PSCo. merger and
proposed organization of the holding company).
11. SPS will serve a copy of the Application and supporting
direct testimony on the parties to its last rate case (i.e.,
NMPUC Case No. 2573), and it will also publish notice of its
filing of the Application in accordance with the requirements of
the PUA and the NMPUC Rules of Practice and Procedure. SPS's
proposed form of Certificate of Service is attached as Applica-
tion Exhibit "B" and its proposed form of Notice is attached as
Application Exhibit "C".
WHEREFORE, SPS respectfully requests that the Commission
enter its final order granting the following relief:
A. Approving SPS's merger with PSCo and their reorga-
nization and formation of a public utility holding company (i.e.,
M-P New Co.);
B. Approving SPS's divestiture and transfer to M-P
New Co. of SPS's wholly owned subsidiaries Quixx and UE;
C. Authorizing SPS's issuance of common stock certif-
icates to M-P New Co. pursuant to the Merger Agreement;
D. Approving SPS's Class II transactions associated
with the merger, reorganization, formation of a holding company,
and divestiture, and SPS's Amended GDP;
E. Approving SPS's proposed regulatory plan; and
F. Granting such other approvals, authorizations and
relief as the Commission deems necessary and appropriate to
effectuate the merger and related Transactions.
Respectfully submitted,
HINKLE, COX, EATON,
COFFIELD & HENSLEY, P.L.L.C.,LTD.-
CO.
___________________________________
Jeffrey L. Fornaciari
Post Office Box 2068
Santa Fe, New Mexico 87504-2068
(505) 982-4554
Attorneys for Southwestern Public
Service Company
DOCKET NO. ______________
APPLICATION OF SOUTHWESTERN )
PUBLIC SERVICE COMPANY REGARDING ) PUBLIC UTILITY COMMISSION
PROPOSED BUSINESS COMBINATION )
WITH PUBLIC SERVICE COMPANY ) OF TEXAS
OF COLORADO )
APPLICATION
of
SOUTHWESTERN PUBLIC SERVICE COMAPNY
November 9, 1995
DOCKET NO. ______________
APPLICATION OF SOUTHWESTERN )
PUBLIC SERVICE COMPANY REGARDING ) PUBLIC UTILITY COMMISSION
PROPOSED BUSINESS COMBINATION )
WITH PUBLIC SERVICE COMPANY ) OF TEXAS
OF COLORADO )
APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY
REGARDING PROPOSED BUSINESS COMBINATION WITH
PUBLIC SERVICE COMPANY OF COLORADO
SOUTHWESTERN PUBLIC SERVICE COMPANY ("SPS") files this
Application pursuant to Section 1.251 of the Texas Public Utility
Regulatory Act of 1995 ("PURA"). SPS proposes to combine with
PUBLIC SERVICE COMPANY OF COLORADO ("PSCo") whereby both
utilities will become wholly-owned subsidiaries of M-P New Co.
This Application seeks (1) a determination by the Public Utility
Commission of Texas ("PUCT") that the proposed transaction is
consistent with the public interest, and (2) approval of the
proposed regulatory plan. In support of its Application, SPS
shows the following:
JURISDICTION.
SPS is a public utility under Sections 1.004 and 2.0011(1)
of PURA. The PUCT has jurisdiction over this matter pursuant to
Sections 1.101, 1.251, and 2.201 of PURA.
I. PARTIES AFFECTED.
SPS and its customers are the only parties who will be
affected by granting the requested relief.
II. IDENTITY OF PARTIES TO THE TRANSACTION.
A. SPS
SPS is a public utility incorporated in New Mexico. Its
principal business is the generation, transmission, distribution,
and sale of electricity. SPS serves approximately one million
people in a 52,000-square-mile area encompassing eastern and
southeastern New Mexico, the south plains and Panhandle of Texas,
the Oklahoma Panhandle, and southwestern Kansas. SPS also makes
wholesale sales of electricity.
SPS has two wholly owned subsidiaries: Utility Engineering
Corporation ("UEC") and Quixx Corporation ("QUIXX"). UEC
provides engineering services and construction management to
utilities and a variety of other industries. Quixx invests in
non-utility power generation projects and other non-regulated
businesses that are consistent with SPS s experience and
expertise. These subsidiaries represent approximately 5 percent
of the consolidated total assets of SPS.
At the end of fiscal 1995, SPS and its subsidiaries owned
total property, plant, and equipment assets of $1.6 billion, had
total revenues of $889 million, and a consolidated net income of
$119 million. QUIXX and UEC accounted for approximately
$55 million of these total revenues, which are reflected in other
income and deductions on SPS's income statement. Also at that
time, SPS had 2,022 employees in its utilities operations with
187 additional employees in its subsidiary operations. SPS
maintains its corporate headquarters in Amarillo, Texas, with
division offices in Roswell, New Mexico, and Amarillo and
Lubbock, Texas.
SPS is regulated by the municipalities it serves in Texas,
the PUCT, the New Mexico Public Utility Commission ("MPUC"), and
the Corporation Commissions of Oklahoma and Kansas for its
electric facilities, rates, accounts, services, and issuance of
securities. It is also regulated by the Federal Energy
Regulatory Commission ("FERC") for wholesale electric sales and
transmission services.
For purposes of this proceeding, SPS's representatives are
as follows:
Gerald J. Diller
Vice President, Rates and Regulation
David T. Hudson
Manager of Rate and Economic Research
Tyler at 6th, Suite 2002
Amarillo, Texas 79101
(806) 378-2822; FAX (806) 378-2820
Jerry Shackelford, Esq.
Hinkle, Cox, Eaton, Coffield & Hensley, P.L.L.C.
P.O. Box 9238
1700 Bank One Center
Amarillo, Texas 79105-9238
(806) 372-5569; FAX (806) 372-9761
B. PSCo
PSCo is an operating utility incorporated in Colorado. Its
principal business is the generation, purchase, transmission,
distribution, and sale of electricity, and the purchase,
transmission, distribution, sale, and transportation of natural
gas. PSCo provides electricity, gas, or both in an area having
an estimated population of 2.8 million, of whom approximately 2.1
million are in the Denver metropolitan area. PSCo's operations
are wholly in Colorado.
PSCo owns all of the capital stock of Cheyenne Light, Fuel
and Power Company ("Cheyenne"), an electric and gas utility
operating principally in Cheyenne, Wyoming. Cheyenne's assets
make up approximately 1.4 percent of the consolidated assets of
PSCo. Cheyenne has approximately 33,000 electric customers and
26,000 gas customers. PSCo also owns a number of non-utility
subsidiaries which represent approximately 6.9 percent of the
consolidated assets of PSCo, including e prime, inc., created in
January 1995 to offer energy related products and services to
energy-using customers and to selected segments of the utility
industry. A list of the subsidiaries of SPS and PSCo is attached
as Schedule DRB-1 to Doyle Bunch's direct testimony.
At the end of 1994, PSCo and its subsidiaries owned
property, plant, and equipment assets totalling $3.3 billion.
Total revenues were $2.1 billion from electric, gas, and other
operations with a net income of $170 million. Also at that time,
PSCo and its subsidiaries employed 5,160 persons, of whom
approximately 370 were transferred to an outside company in
February 1995 as part of an agreement to out-source the company's
information technology systems and network infrastructure. PSCo
maintains its corporate offices in Denver, Colorado.
PSCo is regulated by the Colorado Public Utility Commission
("CPUC") for its facilities, rates, accounts, services, and
issuance of securities. It is also regulated by the FERC for its
wholesale electric operations and the transportation of natural
gas in interstate commerce. PSCo is also subject to regulation
by the Nuclear Regulatory Commission for decommissioning its Fort
St. Vrain Nuclear Electric Generating Station, which PSCo is now
in the process of converting to a 471 MW gas-fueled
combined-cycle facility. Additionally, Cheyenne, is regulated by
the Wyoming Public Service Commission ("WPSC").
C. M-P New Co.
M-P New Co. is a Delaware corporation which was created to
become a holding company for SPS, PSCo, and their respective
subsidiaries following the business combination. After the
business combination is completed, M-P New Co. will operate as a
public utility holding company registered under the Public
Utility Holding Company Act of 1935 ("PUHCA"). Prior to that, M-
P New Co. will have no operations except for activities related
to completing the business combination. The principal executive
offices of M-P New Co. are located at 1225 Seventeenth Street,
Denver, Colorado 80202.
III. APPLICABLE SECTION OF PURA.
SPS files this Application in accordance with Section 1.251
of PURA. This section provides in part:
Sec. 1.251. REPORT OF SALE, MERGER, ETC.;
INVESTIGATION, DISALLOWANCE OF TRANSACTION.
(b) All transactions involving the sale
of 50 percent or more of the stock
of a public utility shall also be
reported to the commission within a
reasonable time. On the filing of
report with the commission, the
commission shall investigate the
same with or without public hearing
to determine whether the action is
consistent with the public
interest. In reaching its
determination, the commission shall
take into consideration the
reasonable value of the property,
facilities, or securities to be
acquired, disposed of, merged,
transferred, or consolidated and
whether such a transaction will
adversely affect the health or
safety of customers or employees,
result in the transfer of jobs of
Texas citizens to workers domiciled
outside the State of Texas, or
result in the decline of service,
that the public utility will
receive consideration equal to the
reasonable value of the assets when
it sells, leases, or transfers
assets, and that the transaction is
consistent with the public
interest.
As a public utility regulated by the PUCT, SPS is required
by Section 1.251(b) to report its plan to combine with another
public utility or to sell 50 percent or more of its stock. The
proposed business combination of SPS and PSCo includes
transactions covered by PURA Section 1.251(b). SPS requests that
the PUCT determine that the combination is consistent with the
public interest. Also, SPS has completed the form promulgated by
the PUCT, which is required whenever a utility is involved in a
sale, transfer, or merger. This form is attached as Application
Schedule-1.
If the business combination is approved consistent with the
agreement between the companies, SPS will continue to operate as
a public utility in Texas and remain under the regulatory
authority of the PUCT. However, it will do so as a subsidiary of
the registered public utility holding company, temporarily named
M-P New Co., subject to the jurisdiction of the Securities and
Exchange Commission ("SEC") under the PUHCA. Thus, following the
business combination, SPS will continue to be a public utility
under PURA Section 2.0011(1).
IV. THE PROPOSED BUSINESS COMBINATION.
On August 22, 1995, SPS and PSCo entered into an Agreement
and Plan of Reorganization ("Agreement") to engage in a business
combination as peer firms in a "merger of equals." This
Agreement presents the representations and warranties of the two
companies, the structure of the combination, and the required
conditions precedent to closing. The Agreement is attached as
Schedule DRB-2 to Doyle Bunch's direct testimony.
Pursuant to the Agreement, SPS and PSCo have formed a
Delaware corporation, temporarily named M-P New Co., that upon
consummation of the combination will serve as a publicly traded
holding company registered under the PUHCA. The Articles of
Incorporation of M-P New Co. are attached as Schedule DRB-3 to
Doyle Bunch's direct testimony. Upon receipt of all regulatory
and stockholder approvals, M-P New Co. will form two wholly owned
subsidiaries, one a New Mexico corporation ("SPS Merger Corp.")
and the other a Colorado corporation ("PSCo Merger Corp.").
SPS Merger Corp. and PSCo Merger Corp. will simultaneously
merge with and into SPS and PSCo, respectively. SPS and PSCo
will survive the mergers as wholly owned separate operating
utility subsidiaries of M-P New Co. Cheyenne and WestGas
Interstate, currently subsidiaries of PSCo, will also become
separate utility subsidiaries of M-P New Co. Additionally, two
more subsidiaries will be created. A service company subsidiary
will be organized to provide services to the subsidiaries of M-P
New Co. Also, a subsidiary will be formed to hold the shares of
most of the existing non-utility subsidiaries of PSCo and SPS.
Some subsidiaries of PSCo will be retained under PSCo because
their primary purpose is tied to PSCo, and also to take into
account certain tax considerations. An organizational chart of
M-P New Co. is attached as Schedule DRB-4 to Doyle Bunch's direct
testimony.
A Board of Directors will be elected for M-P New Co., which
will be made up of 14 directors, 8 to be designated by PSCo and 6
by SPS. Mr. Bill D. Helton, currently Chairman of the Board and
Chief Executive Officer of SPS, will become Chairman of the Board
and Chief Executive Officer of the holding company. Mr. Wayne H.
Brunetti, currently President and Chief Operating Officer of
PSCo, will become President, Chief Operating Officer, and Vice
Chairman of the Board of Directors of the holding company. The
corporate offices of the holding company and PSCo will be
maintained in Denver, Colorado, with SPS's corporate offices
remaining in Amarillo, Texas.
The testimony of witnesses filed in support of this
Application at times refers to the proposed business combination
as the "merger of SPS and PSCo." The term "merger" is used for
the sake of convenience, and not as a technical legal description
of the business combination. As explained above and in the
supporting testimony, SPS and PSCo will not merge into one
another, but will reorganize as wholly owned subsidiaries of a
registered public utility holding company.
V. SHAREHOLDER APPROVALS.
A joint proxy statement and prospectus will be provided to
all shareholders of SPS and PSCo explaining the proposed business
combination and announcing a meeting of shareholders to be held
on January 31, 1996. The purpose of the proxy statement and
prospectus is to solicit the vote of shareholders to approve the
business combination, which is recommended by both SPS's and
PSCo's Boards of Directors. For SPS, approval of the business
combination requires an affirmative vote by two-thirds of all
holders of common and preferred stock, each voting as a separate
class. For PSCo, approval of the business combination by
shareholders requires an affirmative vote by two-thirds of all
eligible holders of PSCo common and preferred stock voting
together as a single class.
VI. REGULATORY APPROVAL NEEDED.
At the state level, SPS needs regulatory approval in Texas,
New Mexico, and Kansas. The PUCT must find that the business
combination is consistent with the public interest. The NMPUC
must find that the business combination is not contrary to the
public interest. These authorities must also give satisfactory
approval of the regulatory plans proposed by SPS. Additionally,
the Kansas Corporation Commission must authorize the issuance of
common stock by SPS to M-P New Co.
PSCo needs state regulatory approval in Colorado and
Wyoming. The CPUC must find that the business combination is not
contrary to the public interest. The CPUC must also give
satisfactory approval to the Colorado regulatory plan proposed by
PSCo. The WPSC, which has jurisdiction over PSCo's subsidiary,
Cheyenne, must approve the reorganization of Cheyenne.
At the federal level, approval to combine facilities is
required by the FERC for both SPS and PSCo. SPS and PSCo must
file information with the Federal Trade Commission and the
Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Nuclear Regulatory
Commission approval may be required for PSCo to transfer the
license for its on-site fuel storage facility at the Fort St.
Vrain Nuclear Electric Generating Station from its current
ownership to PSCo as a subsidiary of the holding company.
Also at the federal level, M-P New Co. must register its
securities to be issued to the existing shareholders of SPS and
PSCo with the SEC. After the business combination, M-P New Co.
must also register with the SEC as a holding company under the
PUHCA.
VII. BENEFITS OF THE BUSINESS COMBINATION.
SPS believes that the business combination with PSCo will
provide opportunities to achieve benefits for shareholders and
customers that would not be available if the two companies remain
as separate enterprises. SPS and PSCo have estimated a potential
net savings of $770 million to be achieved over a ten-year period
as the result of the business combination. The savings are
expected to be derived through labor reductions, reduced
operation and maintenance costs, reductions in corporate and
administrative programs, reduced fuel cost and non-fuel
purchases, economies of scale, deferral of future electric
generating capacity, and joint dispatch opportunities. The
construction of a tie line between the existing transmission
systems of the two utilities will be necessary to accomplish some
of these synergies. The estimated cost of the tie line has been
deducted from the savings figure cited above.
Benefits that SPS and PSCo expect to realize from the
business combination include:
Competitive Rates and Services - SPS's
customers will enjoy rates lower than they
would have been otherwise and better service
over the long term because of this business
combination. SPS and PSCo will be able to
meet the challenges of the increasingly
competitive environment in the utility
industry more effectively than either
standing alone.
Increased Size and Stability - As a larger
entity, SPS's shareholders and customers will
benefit over the long term from the combined
entities' greater financial strength and
financial flexibility. SPS will be better
able to take advantage of future strategic
opportunities and to reduce exposure to
economic changes in any segment of its
business.
Diversification of Service Territory - The
combined service territories of SPS and PSCo
will be larger and more geographically
diverse than the independent service
territories of either entity, reducing
exposure to changes in economic, competitive,
or climatic conditions in any given sector of
the combined service territory. In addition,
the more rapid economic growth currently
experienced in the PSCo service territory
provides opportunities to take advantage of
low-cost generating options.
More Economical Use of Generation Capacity -
PSCo and SPS expect to add generation
capacity in the next decade. Construction of
a transmission line linking SPS and PSCo
territories will permit joint operation with
a resulting lower generation capacity
requirement. This will allow SPS and PSCo to
defer capital expenditures to construct
additional generation capacity and to
dispatch generation assets more economically.
Purchasing Savings - The larger entities will
have improved bargaining position in the
purchase of fuel, supplies, equipment, and
material, thus lowering costs.
Complementary Diversification Programs - SPS
and PSCo each have complementary, non-
regulated subsidiary businesses. As a
stronger financial entity, M-P New Co. will
be able to manage and pursue these subsidiary
businesses more efficiently and effectively
through access to lower-cost capital and
efficiencies achievable through greater size.
Complementary Operational Functions - The
combination of SPS, a low-cost power producer
with recognized expertise in engineering
services, wholesale power marketing, and non-
utility generation products, and PSCo, with
expertise in customer-service applications,
energy services, and natural gas utility
operations, will allow SPS to offer its
customers a more complete menu of service
options and a better operational balance.
Complementary Management - The managements of
SPS and PSCo have complementary strengths
which provide a strong, capable management
team. In addition, the companies have
comparable corporate cultures committed to
providing quality service and a future vision
for customer expectations which will allow
the efficient integration of the corporations
and least cost planning. The business
combination will maximize the potential for
utilizing the strengths of SPS and PSCo.
Reduced Administrative Costs - It is
anticipated that by combining staff functions
there will be fewer employees than the
current total at PSCo and SPS. To the extent
possible, these work-force reductions will be
accomplished through hiring freezes, normal
attrition, and early retirement programs. In
addition, savings in areas such as insurance,
legal, audit, and consulting fees will be
realized.
VIII. EFFECTS ON CUSTOMERS, EMPLOYEES, AND QUALITY OF
SERVICE.
Customers will benefit from the reduced costs of capital
resulting from the financially stronger company. Strong credit
quality and diminished needs for external financing will reduce
capital costs. Additionally, efficiencies will be created as a
direct result of the business combination and from the combined
expertise of the two companies. The efficiencies will produce
cost reductions that will allow SPS to achieve lower rates than
otherwise would have been possible in the long term, thus making
SPS more competitive. Improved and expanded services will also
be more readily available for our existing customers and for the
new customers SPS hopes to attract. Also, customers will benefit
from the common utilization of assets, deferred capital
expenditures, and improved utilization of available generation.
Finally, SPS is agreeing to hold its customers harmless from
net cost increases resulting from the business combination over
the five-year transition period.
A broad range of opportunities will be created for SPS's
employees, both immediately and over the long term. A larger
corporation will create access to future job openings in each
subsidiary. A financially stronger company will create access to
future job openings as new business opportunities are pursued.
The effectiveness of the combined companies and the ability to
compete in the increasingly competitive electric industry will
translate into greater opportunities and rewarding challenges for
SPS's employees.
In the short term, SPS's employee reductions will create the
efficiencies necessary to make SPS more competitive. To the
extent possible, these reductions will be achieved through a
hiring freeze, normal attrition, and voluntary early retirement
programs. The total reduction in employees at SPS and PSCo is
targeted at approximately 550-600.
Some employees may be relocated as a result of consolidating
staff functions in Denver and in Amarillo. The movement of
employees between these locations will be kept to a minimum.
However, needed operations, maintenance, and service employees
will continue to be maintained at each of the operating
companies.
SPS consistently ranks as one of the least-cost providers of
electric service in the nation. Additionally, SPS's customers
enjoy a high quality of service. SPS is dedicated to continuing
its practice of providing inexpensive, high-quality service. The
business combination will not result in a decline in the overall
quality of service to SPS's customers.
Additionally, SPS has a very good record for customer and
employee health and safety. After the business combination, SPS
intends to maintain its policy of providing its employees a safe
place to work and its customers the best, safest electric service
possible.
IX. EFFECT ON STAKEHOLDERS.
Overall, SPS's stakeholders: its customers, employees,
regulators, communities, and investors, will benefit from this
business combination. The benefits listed above will translate
into a better company. A larger, stronger company will provide
stability and flexibility to give market-staying power with
competitive prices. SPS and PSCo are committed to achieving all
the benefits listed previously. SPS's dedication in the past to
its customers, investors, employees, and communities will only be
strengthened by the business combination with PSCo.
X. PROPOSED REGULATORY PLAN.
The Agreement between SPS and PSCo to combine their
operations is conditioned upon receiving regulatory approval from
the PUCT as well as from all other regulatory authorities with
jurisdiction over this transaction. The business combination
will achieve savings that will benefit SPS's customers.
Because a transaction of this significance cannot be
undertaken if doubt exists about whether it will ultimately
receive regulatory authorization, this Application seeks prior
regulatory approval of the terms and conditions of the
transaction that SPS and PSCo have agreed upon.
SPS has developed a regulatory plan, in which it proposes
the following: (1) a five-year transition period for the
business combination; (2) a 50-50 sharing between SPS and its
customers of the non-fuel and non-purchased power operation and
maintenance expense savings over the five-year transition period;
(3) amortization of SPS's cost to complete the business
combination over the five-year transition period; (4) an
experimental performance-based ratemaking plan which incorporates
a return-on-equity adder as a function of performance; and (5)
SPS's customers held harmless from net cost increases resulting
from the business combination during the five-year transition
period.
After the five-year transition period, customers will
receive the full operation and maintenance expense savings
resulting from the business combination through the traditional
ratemaking process.
XI. NOTICE.
The proposed combination of SPS and PSCo has received
widespread publicity in SPS's service area. Nonetheless, SPS
believes that publication of notice regarding this proceeding is
appropriate. SPS proposes to publish notice once a week for four
consecutive weeks in a newspaper of general circulation in each
county in SPS's Texas service area. Additionally, SPS will
provide direct notice to its Texas customers by bill inserts.
The form of notice which SPS proposes is attached as Application
Schedule-2.
XII. REQUEST FOR PROTECTIVE ORDER.
SPS anticipates that it may need to furnish, either in
workpapers or in responses to Requests for Information, highly
sensitive and confidential information, the disclosure of which
to third parties would either place SPS, PSCo, or both at a
severe competitive disadvantage or cause SPS or PSCo to violate
contractual confidentiality obligations. SPS has provided a
proposed Protective Order, attached as Application Schedule-3.
The proposed Protective Order is similar to the order entered in
Docket No. 14499. SPS requests that the Presiding Officer enter
a protective order in this docket that reflects the same terms as
set forth in Application Schedule-3.
XIII. REQUESTED PUCT ACTION.
SPS seeks the PUCT's determination that the proposed
combination of SPS and PSCo is consistent with the public
interest. SPS also requests the PUCT's approval of the proposed
regulatory plan and determination that it is just and reasonable.
Because of the benefits this transaction will produce for its
customers and shareholders, SPS requests that the PUCT issue a
final and appealable order containing the requested
determinations no later than September 4, 1996.
WHEREAS, PREMISES CONSIDERED, SPS requests that the PUCT
review this Application for the proposed combination of SPS and
PSCo and determine that this transaction is consistent with the
public interest, that the regulatory plan proposed by SPS is just
and reasonable, and that the PUCT undertake its investigation of
the proposed transaction expeditiously and make its final
determinations no later than September 4, 1996, so that the
proposed transaction can be consummated and the benefits of the
savings resulting from SPS's combination with PSCo can be
implemented as soon as possible.
Respectfully submitted,
HINKLE, COX, EATON, COFFIELD
& HENSLEY, P.L.L.C.
By:
Jerry F. Shackelford
Texas Bar No. 18070000
Steven D. Arnold
Texas Bar No. 01345480
Bradley G. Bishop
Texas Bar No. 00790308
1700 Bank One Center (zip 79101)
P.O. Box 9238
Amarillo, Texas 79105-9238
(806) 372-5569
FAX (806) 372-9761
ATTORNEYS FOR SOUTHWESTERN PUBLIC
SERVICE COMPANY
APPLICATION SCHEDULE-1
to
APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY
REGARDING PROPOSED BUSINESS COMBINATION WITH
PUBLIC SERVICE COMPANY OF COLORADO
COMMISSION-PROMULGATED
APPLICATION FOR SALE, TRANSFER, OR MERGER
PUBLIC UTILITY COMMISSION OF TEXAS (Commission Use Only)
7800 Shoal Creek Blvd., Suite 450N Docket No.
__________
Austin, Texas 78757 File No.____________
(512) 458-0100
APPLICATION FOR SALE, TRANSFER, OR MERGER
This Form should be used by public utilities for:
1) seeking authority to sell, assign, or lease a
Certificate of Convenience and Necessity or any rights
obtained under a certificate;
2) reporting the sale, acquisition, lease, or rental by or
to any public utility of any plant as an operating
system or unit for a total consideration in excess of
$100,000;
3) reporting the merger or consolidation of two or more
public utilities; and
4) reporting the purchase by one public utility of voting
stock in another public utility.
See Sections 2.261, 1.251, and 1.252 of the Public Utility
Regulatory Act of 1995, S.B. 319, and 373, 74th Leg., R.S. 1995.
1. Subject of report:
_____ Sale, transfer, or lease of an entire Certificate
of Convenience and Necessity
_____ Sale, transfer, or lease of a portion of
Applicant's service area or facilities to which it
is certificated (including certificate rights)
_____ Sale, transfer, or lease of a utility plant as an
operating system or unit for more than $100,000
(including certificate rights)
X Merger or consolidation of public utilities [PURA
Section 1.251(b)]
Although many of the questions are not applicable to this
transaction, this form is completed to the extent possible.
_____ Purchase by a public utility of voting stock in
another public utility
List all counties in which the utility's service area will be
affected by this transaction:
Not applicable.
2. Applicant: Southwestern Public Service Company ("SPS").
Mark one:
X Applicant holds Certificate of Convenience and
Necessity No. 30153.
_____ Applicant does not hold a certificate from the
Public Utility Commission.
The Applicant is the:
_____ Seller (transferor or lessor)
_____ Purchaser (transferee or lessee)
X One of the merging or consolidating utilities
_____ Other (please explain)
_______________________________________________
_________________________________________________________________
Business Address Business Telephone
6th & Tyler Streets, P.O. Box 1261 (806) 378-2121
(Street Address must be entered here; (Area Code-Number)
P.O. Box may also be entered)
Amarillo Potter Texas 79170
(City) (County) (State & Zip Code)
3. Applicant is a(n) New Mexico corporation
(Individual, Partnership, Corporation,
Cooperative, Corporation, Water Supply
Corporation, Political Subdivision,
Municipally Owned Utility)
4. If applicable, list the names, addresses, and offices of all
partners or all officers of Applicant.
Officers:
Bill D. Helton, Chairman of the Board and Chief Executive Officer
David M. Wilks, President and Chief Operating Officer
Doyle R. Bunch, II, Executive Vice President,
Accounting and Corporate Development
Kenneth L. Ladd, Jr., Senior Vice President
John L. Anderson, Vice President, Personnel
Robert D. Dickerson, Secretary and Treasurer
Gerald J. Diller, Vice President, Rates and Regulation
Gary L. Gibson, Vice President, Marketing
Henry M. Hamilton, Vice President, Production
Carl E. Jeans, Vice President, Management Systems
John McAfee, Vice President, Engineering and Operations
Mary Pullum, Assistant Secretary
The address for each of the officers is 6th and Tyler
Streets, P.O. Box 1261, Amarillo, TX 79170.
5. If applicable, list names, addresses, and positions of
Applicant's five largest shareholders.
SPS's Five Largest Shareholders:
(1) Cede & Co.
7 Hanover Street
Bowling Green Station
New York, New York 10005-2808
(2) Steak & Co.
c/o Boatmen's First National Bank of Amarillo
ATTN: Trust Department
Box 1331
Amarillo, Texas 79180-0001
(3) Palo & Co.
First National Bank of Amarillo
ATTN: Trust Department
P.O. Box 500409
St. Louis, Missouri 63150-0409
(4) Ameritrust - Company Agent for Dividend Reinvestment
Plan Participants
P.O. Box 6477
Cleveland, Ohio 44101-1477
(5) Kray & Co.
One Financial Place
440 South LaSalle Street
Chicago, Illinois 60605-1000
6. Applicant designates the following person to be contacted
with respect to any question regarding filing:
Gerald J. Diller
Vice President, Rates and Regulations
David T. Hudson
Manager of Rate and Economic Research
Southwestern Public Service Company
600 S. Tyler, Suite 2002
Amarillo, Texas 79101
(806) 378-2822; FAX (806) 378-2820
7. If Applicant is represented by an attorney:
Jerry F. Shackelford
Hinkle, Cox, Eaton, Coffield & Hensley
1700 Bank One Center
P.O. Box 9238
Amarillo, Texas 79105-9238
(806) 372-5569; FAX (806) 372-9761
8. Does Applicant presently have a tariff on file with the
Commission?
X Yes. If Yes, date of filing: September 23, 1993
_____ No. If No, attach a written schedule of present
rates and services. (Use forms or format required
by Commission's Tariff Clerk.)
9. Please indicate the proposed effect of this transaction on
rates to be charged affected customers:
X All customers will be charged the same rates as
they were charged before the transaction. See
additional explanation below.
_____ (Some) (all) customers will be charged different
rates than they were charged before the
transaction. If so, please explain.
_______________________________________________________
_______________________________________________________
_____ Applicant intends to file with the Commission an
application to change rates of (some) (all) of its
customers as a result of this transaction. If so,
please
explain:__________________________________________
__________________________________________________
_____ Other. Please explain.
The rates that SPS's customers are charged will not increase
as a result of this business combination. To the contrary,
the savings created by the business combination of SPS and
Public Service Company of Colorado will ultimately result in
rates for SPS's customers that will be lower than they would
have been without the business combination. Furthermore,
the regulatory plan SPS is asking this Commission to approve
includes a commitment by SPS to hold its customers harmless
from net cost increases as a result of the business
combination over a five-year transition period following the
business combination.
10. Other party to this transaction:
Public Service Company of Colorado ("PSCo")
1225 17th Street
Denver, Colorado 80202
(303) 294-8989
_____ The other party holds Certificate of Convenience
and Necessity No. _______.
X The other party does not hold a Certificate of
Convenience and Necessity.
The other party is the:
_____ Seller (transferor or lessor)
_____ Purchaser (transferee or lessee)
X One of the merging or consolidating utilities
_____ Other (please
explain)__________________________________________
_________________________________________________
Business Address Business Telephone
1225 17th Street (303) 294-8989
(Street Address must be entered here; (Area Code-Number)
P.O. Box may also be entered)
Denver Denver Colorado 80202
(City) (County) (State & Zip Code)
If there are more than two parties to this transaction,
please attach sheets providing the information required in
Questions No. 9 through 16 for each party.
11. Other party is a(n) Colorado corporation
(Individual, Partnership, Corporation,
Cooperative, Corporation, Water Supply
Corporation, Political Subdivision,
Municipally Owned Utility)
12. If applicable, list the names, addresses, and offices of all
partners or all officers of other party.
Officers
D. D. Hock Chairman of the Board and Chief Executive Officer
Wayne E. Brunetti President and Chief Operating Officer
Richard C. Kelly Senior Vice President of Finance,
Treasurer, and Chief Financial
Officer
Patricia T. Smith Senior Vice President and General Counsel
W. Wayne Brown Controller and Secretary
A. Clegg Crawford Vice President, Engineering and Operations Support
Ross C. King Vice President, Gas and Electric Distribution
Earl E. McLaughlin, Jr. Vice President, Retail Energy Services
Ralph Sargent, III Vice President, Production and Systems Operations
Marilyn E. Taylor Vice President, Human Resources
The address for each of the officers is 1225 17th Street,
Denver, Colorado 80202, (303) 294-8989
13. If applicable, list names, addresses and positions of other
party's five largest shareholders.
PSCo's Five Largest Shareholders:
(1) CEDE & Co.
c/o Depository Trust Co.
P.O. Box 20
Bowling Green Station
New York, New York 10276
(2) Stanley & Co.
c/o Public Service Company of Colorado
P.O. Box 860
Denver, Colorado 80201
(3) Dentru & Co.
Norwest Bank
1700 Broadway
Denver, Colorado 80274
(4) Kray & Co.
One Financial Plaza
440 S. Leslie
Chicago, Illinois 60605
(5) Philadep & Co.
1900 Market Street, 2nd Floor
Philadelphia, Pennsylvania 19103
14. The other party designates the following person to be
contacted with respect to any question regarding filing:
Fredric C. Stofel
Manager, Rates and Regulatory Affairs
Public Service Company of Colorado
1225 17th Street
Denver, Colorado 80202
(303) 294-2013
15. If the other party has retained an engineer:
Not applicable.
The PUCT should be informed of any change of engineer prior
to the completion of a project in progress.
16. If the other party is represented by an attorney:
William M. Dudley
Associate General Counsel
Public Service Company of Colorado
Suite 600
P.O. Box 840
Denver, Colorado 80201-0840
(303) 294-2500
17. List all neighboring utilities, cities, political
subdivisions, or other parties directly affected by this
application. (Use separate sheet if needed).
Not applicable.
Applicant represents to the Public Utility Commission that
each of the above parties and all other parties to this
transaction were notified of the nature of this application
and its filing with the Commission, and that each of the
above parties by that notification has an opportunity to
protest the application (See page 9). Other parties to this
transaction have been furnished copies of this application.
18. Please describe the nature of the transaction. Indicate if
it involves the transfer of certificated facilities and/or
service area.
The proposed transaction is the business combination of SPS
and PSCo.
On August 22, 1995, SPS and PSCo entered into an Agreement
and Plan of Reorganization ("Agreement") to engage in a
business combination as peer firms in a merger of equals.
This Agreement presents the representations and warranties
of the two companies, the structure of the business
combination and the required conditions precedent to
closing. The Agreement is attached as Schedule DRB-2 to
Doyle Bunch's direct testimony.
Pursuant to the Agreement, SPS and PSCo have formed a
Delaware corporation, temporarily named M-P New Co., that
upon consummation of the reorganization will serve as a
publicly traded holding company under the Public Utility
Holding Company Act of 1935. The Articles of Incorporation
of M-P New Co. are attached as Schedule DRB-3 to Doyle
Bunch's direct testimony. Upon receipt of all regulatory
and stockholder approvals, M-P New Co. will form two wholly
owned subsidiaries, one a New Mexico corporation ("SPS
Merger Corp.") and the other a Colorado corporation ("PSCo
Merger Corp.").
SPS Merger Corp. and PSCo Merger Corp. will simultaneously
merge with and into SPS and PSCo, respectively. SPS and
PSCo will survive the mergers as wholly owned separate
operating utility subsidiaries of M-P New Co. Cheyenne
Light, Fuel and Power Company and WestGas Interstate,
currently subsidiaries of PSCo, will also become separate
utility subsidiaries of M-P New Co. Additionally, two more
subsidiaries will be created. A service company subsidiary
will be organized to provide services to the subsidiaries of
M-P New Co. Also, a subsidiary will be formed to hold the
shares of most of the existing non-utility subsidiaries of
PSCo and SPS. An organizational chart of M-P New Co. is
attached as Schedule DRB-4 to Doyle Bunch's direct
testimony.
A Board of Directors will be elected for M-P New Co., which
will be made up of 14 directors, 8 to be designated by PSCo
and 6 by SPS. Mr. Bill D. Helton, currently Chairman of the
Board and Chief Executive Officer of SPS, will become
Chairman of the Board and Chief Executive Officer of the
holding company. Mr. Wayne H. Brunetti, currently President
and Chief Operating Officer of PSCo, will become President,
Chief Operating Officer, and Vice Chairman of the Board of
Directors of the holding company. The corporate offices of
the holding company and PSCo will be maintained in Denver,
Colorado, with SPS's corporate offices remaining in
Amarillo, Texas.
This transaction does not involve the transfer of
certificated facilities and/or service areas.
19. If the transaction involves the transfer of certificated
facilities and/or service area, please describe the
qualifications of the purchaser (or transferee) to provide
adequate utility service.
Not applicable.
20. State the purchase price $ Not applicable and/or the
other consideration for the transaction:
Neither SPS nor PSCo is "purchasing" the other. This
business combination is a "merger of equals." The common
stockholders of SPS and PSCo will exchange their shares for
common stock in M-P New Co., the newly formed holding
company. The rate of exchange for common stock is as
follows: each share of PSCo's stock will be converted to a
right to receive one share of M-P New Co. stock. Each share
of SPS's stock will be converted to a right to receive 95
percent of one share of M-P New Co. stock. This conversion
ratio was negotiated between SPS and PSCo and approved by
their respective directors.
21. If applicable, state the original cost of plant to be sold
or merged, as recorded on books of Seller (or merging
companies):
Not applicable. As explained in No. 20, this transaction
does not involve the purchase of assets; it entails the
exchange of SPS's current stock for stock in M-P New Co.,
the newly formed holding company. The cost of electric
plant as shown on SPS's books will not be changed as a
result of the transaction.
22. If applicable, state the amount of accumulated depreciation
and the date of acquisition:
Not applicable. See response to No. 21.
23. If applicable, state the amount recorded as plant
acquisition adjustment on books of selling company(ies):
$____________________________________________________<F1>
Not applicable. SPS does not contemplate recording an
acquisition adjustment as a result of this business
combination.
24. Complete the following proposed entries in books of
purchasing (or surviving) company to record purchase (or
merger):
Utility plant in service
___________________________________________
Plant acquisition adjustment
___________________________________________
Extraordinary loss on purchase______________
_____________________________________________
Accumulated depreciation plant
___________________________________________
Cash
___________________________________________
Notes payable
___________________________________________
Mortgage payable
___________________________________________
Other list
___________________________________________
(Additional entries may be made - the above are suggested
only and are not intended to pose descriptive limitations)
Not applicable. See testimony of Robert D. Dickerson.
25. If utility plant in service is traded for utility plant in
service, give details of original cost - accumulated
depreciation, and reasons for or justification of the trade:
Not applicable. See testimony of Robert D. Dickerson.
26. Provide analysis of tax consequences in transaction and
recognition given in books of parties concerned:
The business combination is structured to qualify as a
tax-free exchange as described in Section 351 of the
Internal Revenue Code. Assuming the business
combination qualifies, no gain or loss will be
recognized by SPS or PSCo as a result of this business
combination.
27. Describe type of plant facilities, and number of connections
affected by this application.
No plant facilities or connections in SPS's Texas
service territory will be affected by this transaction.
See response to No. 18.
28. Describe the location of plant facilities involved in this
application with respect to streets, highways, cities, known
landmarks, water courses, coordinates of transmitter sites,
etc.:
Not applicable. See response to No. 27.
29. Regarding the utility being sold, provide details of the
following:
a. Planned or needed capital improvements;
b. Estimated cost of such improvements;
c. Whether required to make such improvements by a federal
or state agency;
d. Any time limits imposed for such improvements.
Not applicable.
30. Please describe anticipated impact of this transaction on
the quality of utility service. Please explain anticipated
changes in quality of service.
The high quality of service enjoyed by SPS's customers
will continue, if not improve, as a result of this
business combination. The business combination is
expected to produce a financially stronger, more
competitive company. As a result, the only anticipated
change would be an enhancement of SPS's quality of
service.
31. If a merger or combination is sought by this application,
please provide the following:
a. A balance sheet for each entity;
b. An income statement for each entity;
c. Articles of Incorporation of a newly created entity;
d. A preliminary prospectus if stock of a newly created
entity is to be publicly held.
____________________
<F1> Note: Applicant is advised that under present Commission
policy total recovery of plant acquisition adjustment in
subsequent rate proceedings is not assured, but is dependent
upon certain factors in a rate case.
a. The balance sheets for each entity are attached as
Schedule RDD-1 to Robert D. Dickerson's direct
testimony.
b. The income statements for each entity are attached as
Schedule RDD-1 to Robert D. Dickerson's direct
testimony.
c. The Articles of Incorporation of M-P New Co. is
attached as Schedule DRB-3 to Doyle Bunch's direct
testimony.
d. No prospectus is available at this time.
If the Affiant to this form is any person other than the
sole owner, partner, officer of the applicant or its
attorney, a properly verified Power of Attorney must be
enclosed. OATH
STATE OF TEXAS :
:
COUNTY OF POTTER :
I, DAVID T. HUDSON, being duly sworn, file this application
as Manager of Rate and Economic Research (indicate relationship
to Applicant, that is, owner, member of partnership, title as
officer of corporation, or other authorized representative of
Applicant); in such capacity, I am qualified and authorized to
file and verify such application, am personally familiar with the
documents filed with this application, and have complied with all
the requirements contained in the application; all such
statements made and matters set forth therein with respect to
Applicant are true and correct. Statements about other parties
are made on information and belief. I further state that the
application is made in good faith, that notice of its filing was
given to all other parties to the transaction, and that this
application does not duplicate any filing presently before the
Commission.
__________________________________________
AFFIANT
(Applicant's Authorized Representative)
SUBSCRIBED AND SWORN TO BEFORE ME, a Notary Public in and
for the State and County above-named, this _____ day of November,
1995.
__________________________________________
Notary Public
APPLICATION SCHEDULE-2
to
APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY
REGARDING PROPOSED BUSINESS COMBINATION WITH
PUBLIC SERVICE COMPANY OF COLORADO
PROPOSED FORM OF PUBLIC NOTICE
PUBLIC NOTICE
On November 9, 1995, Southwestern Public Service Company
("SPS") filed an Application with the Public Utility Commission
of Texas ("PUCT") regarding the proposed business combination
with Public Service Company of Colorado ("PSCo"). The PUCT is
required by Section 1.251 of the Public Utility Regulatory Act of
1995, to investigate this proposal and to determine whether it is
consistent with the public interest. The Application seeks a
determination by the PUCT that the combination is consistent with
the public interest. If the PUCT makes the requested
determination and otherwise approves the proposal, SPS will
continue to operate as a public utility in Texas and remain under
the regulatory authority of the PUCT, but will do so as a wholly-
owned subsidiary of M-P New Co., a public utility holding
company. SPS is not seeking to change rates in its Application.
SPS seeks the PUCT's approval of a regulatory plan proposing: (1)
a five-year transition period for the business combination; (2) a
50/50 sharing between SPS and its customers of the non-fuel and
non-purchased power operation and maintenance expense savings
produced by the business combination over the five-year
transition period; (3) amortization of SPS's costs to complete
the business combination over the five-year transition period;
(4) an experimental performance based ratemaking plan which
incorporates a return-on-equity adder as a function of
performance in various service areas; and (5) SPS's customers
held harmless from net cost increases resulting from the business
combination during the five-year transition period.
This filing has been assigned Docket No. ____________.
Persons who wish to intervene or comment upon these proceedings
should notify the Public Utility Commission of Texas as soon as
possible, as an intervention deadline will be imposed. A request
to intervene or for further information, should be mailed to the
Public Utility Commission of Texas, 7800 Shoal Creek Blvd.,
Austin, Texas 78757. Further information may also be obtained by
calling the Public Utility Commission of Texas' Consumer Affairs
Office at (512) 458-0256, or (512) 458-0221 for text telephone.
The deadline for intervention in the proceeding is 45 days after
the date the Application was filed with the Public Utility
Commission of Texas.
APPLICATION SCHEDULE-3
to
APPLICATION OF SOUTHWESTERN PUBLIC SERVICE COMPANY
REGARDING PROPOSED BUSINESS COMBINATION WITH
PUBLIC SERVICE COMPANY OF COLORADO
PROPOSED PROTECTIVE ORDER
DOCKET NO. ____________
APPLICATION OF SOUTHWESTERN )
PUBLIC SERVICE COMPANY ) PUBLIC UTILITY COMMISSION
REGARDING PROPOSED BUSINESS ) OF TEXAS
COMBINATION WITH PUBLIC )
SERVICE COMPANY OF COLORADO )
PROTECTIVE ORDER
This protective order shall govern the use of all
information deemed confidential or highly sensitive by a party
responding to discovery requests, including information whose
confidentiality is currently under dispute.
It is ORDERED that:
1. (a) Any party or person producing or filing a
document, including, but not limited to, records stored or
encoded on a computer disk or other similar electronic storage
medium, in this proceeding may designate that document, or any
portion of it, as confidential pursuant to this Protective Order
by typing or stamping on its face "PROTECTED MATERIALS PROVIDED
PURSUANT TO PROTECTIVE ORDER ISSUED IN DOCKET NO. _______"
(hereinafter referred to as "protected materials").
(b) However, protected materials shall not include any
information or document contained in the public files of the
Public Utility Commission of Texas (hereinafter referred to as
the "PUCT") or any other federal or state agency, court, or local
government authority subject to the Open Records Act. Protected
materials also shall not include documents or information which
at the time of, or prior to, disclosure in these proceedings is
or was public knowledge, or which becomes public knowledge other
than through disclosure in violation of this Protective Order.
2. A "party" is a party to this docket, including the
General Counsel and the PUCT Staff.
3. Except as otherwise provided in this paragraph, a party
shall be permitted access to protected materials only through its
authorized representatives. "Authorized representatives" of a
party include its counsel of record in this proceeding and
associated attorneys, paralegals, engineers, economists,
statisticians, accountants, consultants, or other persons
employed or retained by the party and directly engaged in these
proceedings, provided the person has signed the certification
required by Paragraph 4.
The term "Highly Sensitive Protected Materials" is a subset
of "protected materials" and refers to information which a
responding party claims includes (a) the prices, economics, terms
or conditions of capacity or energy contracts, proposals, or
opportunities; (b) securities, dividend, or
competitively-sensitive financial information, or (c) other
highly sensitive information, so that access to such information
by employees of the reviewing party would expose the responding
party to an unreasonable risk of harm. Documents so classified
by a producing party shall bear the designation "HIGHLY SENSITIVE
PROTECTED MATERIALS PROVIDED PURSUANT TO PROTECTIVE ORDER ISSUED
IN DOCKET NO. _____."
Highly Sensitive Protected Materials shall be made available
for inspection only at the Austin, Texas, address specified
pursuant to Paragraph 6, unless they are a part of a response
that exceeds eight linear feet in length, in which case they
shall be made available for inspection only at the place where
the documents are located in accordance with P.U.C. PROC. R.
22.144(h)(3). No copies shall be made of any Highly Sensitive
Protected Materials.
The General Counsel's authorized representatives shall be
allowed: to make handwritten notes of Highly Sensitive Protected
Materials; to use data contained in Highly Sensitive Materials
for analyses; and, as provided in Paragraph 8, to present
testimony and related exhibits concerning Highly Sensitive
Protected Materials. Other persons authorized to view Highly
Sensitive Protected Materials may make limited handwritten notes
of Highly Sensitive Protected Materials, provided that the notes
are restricted to a description of the document and a general
characterization of its subject matter; handwritten notes shall
not include any information contained in Highly Sensitive
Protected Materials. With the exception of the General Counsel,
the authorized representatives for the purpose of access to
Highly Sensitive Protected Materials must be persons who are
either outside counsel for the reviewing party or who are outside
consultants for the reviewing party working under the direction
of the reviewing party's counsel. General Counsel's authorized
representatives for the purpose of access to these materials
shall consist of its counsel of record in this docket and
associated attorneys, paralegals, engineers, economists,
statisticians, accountants, consultants, or other persons
employed or retained by General Counsel and directly engaged in
this docket.
4. Each person who inspects the protected materials shall,
before such inspection, agree in writing to the following
certification:
I certify my understanding that the protected
materials are provided to me pursuant to the
terms and restrictions of the Protective
Order in Public Utility Commission of Texas
Docket No. _____, and that I have been given
a copy of it and have read the Protective
Order and agree to be bound by it. I
understand that the contents of the protected
materials, any notes, memoranda, or any other
form of information regarding or derived
from the protected materials shall not be
disclosed to anyone other than in accordance
with the Protective Order and shall be used
only for the purpose of the proceeding in
Docket No. _____. I acknowledge that the
obligations imposed by this certification are
pursuant to an order of the Public Utility
Commission of Texas. Provided, however, if
the information contained in the protected
materials is obtained from independent
sources, the understanding stated herein
shall not apply.
A copy of each signed certification shall be provided to
counsel for the party asserting confidentiality. Except for
Highly Sensitive Protected Material, any authorized
representative may disclose protected materials to any other
person who is an authorized representative or is qualified to be
an authorized representative, provided that, if the person to
whom disclosure is to be made has not executed and provided for
delivery of a signed certification to the party asserting
confidentiality, the certification shall be executed prior to any
disclosure. In the event that any authorized representative to
whom protected materials are disclosed ceases to be engaged in
these proceedings, access to protected materials by that person
shall be terminated, and all notes or memoranda or other
information derived from protected material shall be destroyed or
returned to the party on whose behalf that person was acting.
Any person who has agreed to the foregoing certification shall
continue to be bound by the provisions of this Protective Order
for the duration thereof, even if no longer engaged in these
proceedings.
Parties asserting confidentiality shall maintain a list of
persons who sign a certification pursuant to this paragraph and
provide a copy of this list to the other parties and provide
revised lists when persons are added to or deleted from the list.
5. Except for Highly Sensitive Protected Materials and
voluminous protected materials, the party asserting
confidentiality shall provide a party one copy of the protected
materials. Except for Highly Sensitive Protected Materials, a
party may make further copies of protected materials for use in
this proceeding pursuant to this Protective Order, but a record
shall be maintained as to the documents reproduced and the number
of copies made, and upon request, the party shall promptly
provide the party asserting confidentiality a copy of that
record. Parties may take handwritten notes or derive other
information from the protected materials provided in response to
this Paragraph 5, subject to the conditions of Paragraphs 3 and
7.
6. (a) Voluminous protected materials shall be made
available for inspection between the hours of 9:00 a.m. and 4:30
p.m., Monday through Friday (except holidays), as provided in
P.U.C. PROC. R. 22.144(h). A party shall notify the other
parties of the precise address in Austin, Texas, at which
voluminous data of less than eight linear feet will be produced
simultaneously with the production of such data.
The protected materials may be reviewed only during the
"reviewing period," which shall commence upon issuance of this
Protective Order and continue until conclusion of the evidentiary
record in this proceeding.
(b) Subject to Paragraphs 3 and 7, parties may take
handwritten notes regarding the information contained in
protected materials made available for inspection pursuant to
Paragraph 6(a), or they may make photographic or mechanical
copies of the protected materials. Only one copy of the
materials designated in the notice shall be reproduced. Parties
shall make a diligent, good-faith effort to limit the amount of
photographic or mechanical copying requested to only that which
is appropriate for purposes of this proceeding. Notwithstanding
the foregoing provisions of this Paragraph 6(b) but expressly
subject to Paragraphs 3 and 7, a party may make further copies of
reproduced materials for use in this proceeding pursuant to the
Protective Order, but a record shall be maintained as to the
documents reproduced and the number of copies made, and upon
request, the party shall provide the party asserting
confidentiality a copy of that record. Only that information
which is relevant to this proceeding may be extracted from these
materials.
7. All protected materials shall be made available to the
parties solely for the purpose of this proceeding. Protected
materials, as well as a party's notes, memoranda, or other
information regarding, or derived from, the protected materials
are to be treated confidentially by the parties and shall not be
disclosed or used by the party except as permitted and provided
in this Protective Order. Information derived from or describing
the protected materials shall be maintained in a secure place and
shall not be placed in the public or general files of the party
except in accordance with the provisions of this Protective
Order. A party must take all reasonable precautions to insure
that the protected materials, including handwritten notes and
analyses made from the protected materials, are not viewed or
taken by any person other than an authorized representative of
the party.
8. (a) If a party tenders for filing any written
testimony, exhibit, brief, or other submission that quotes from
protected materials or discloses the confidential content of
protected materials, the confidential portion of such testimony,
exhibit, brief, or other submission shall be filed and served in
sealed envelopes or other appropriate containers endorsed to the
effect that they are sealed pursuant to this Protective Order.
Such documents shall be marked "PROTECTED MATERIAL" and shall be
filed under seal with the presiding officer and served under seal
to the parties. The presiding officer may subsequently, on his
or her own motion or on motion of a party, issue a ruling
respecting whether or not the inclusion, incorporation, or
reference to protected materials is such that the written
testimony, exhibit, brief, or other submission should remain
under seal.
(b) Any party or person giving testimony in this
proceeding may designate that portion of his or her testimony
deemed to be confidential material in accordance with Paragraph 1
of this Protective Order by advising the presiding officer of
such fact. In that event, the presiding officer shall, on a
case-by-case basis, devise procedures which are fair to all
parties without unduly burdening the record in this docket.
(c) All protected materials filed with the PUCT, the
presiding officer, or any other judicial or administrative body
in support of or as a part of a motion, other pleading, brief, or
other document shall be filed and served in sealed envelopes or
other appropriate containers.
9. Each party shall have the right to seek changes in this
Protective Order as appropriate from the presiding officer, the
PUCT, or the courts.
10. (a) During the pendency of Docket No. _____ at the
PUCT, if a party wishes to disclose protected materials to any
person to whom disclosure is not authorized by this Protective
Order, or wishes to have changed the designation of certain
information or material as protected materials by alleging, for
example, that such information or material has entered the public
domain, such party shall first file and serve on all parties
written notice of such proposed disclosure or request for change
in designation, identifying with particularity each of such
protected materials. If the party asserting confidentiality
wishes to contest such proposed disclosure or request for change
in designation, that party shall file with the PUCT its objection
to such proposal, with supporting sworn affidavits, if any, and
may file a request for a prehearing conference, within five (5)
working days after receiving such notice of proposed disclosure
or request for change in designation. Failure of that party to
file such an objection or request within this period shall be
deemed a waiver of objection to the proposed disclosure or
request for change in designation. Responses to such an
objection, with supporting affidavits, if any, shall be filed
within five (5) working days after receipt of the objection. If
the party seeking to prevent disclosure wishes to submit the
material in question for in-camera inspection, it shall do so no
later than five (5) working days after filing its objection to
disclosure. If that party files such an objection, the presiding
officer will determine whether the proposed disclosure or change
in designation is appropriate. The burden is on the party
asserting confidentiality to show that such proposed disclosure
or change in designation should not be made.
If the presiding officer determines that such proposed
disclosure or change in designation should be made, disclosure
shall not take place earlier than five (5) days after such
determination to permit the opportunity for appeal. No party
waives any right to seek additional administrative or judicial
remedies concerning such presiding officer's ruling. As long as
the period for filing the pleadings described above for
consideration by the presiding officer or for challenging the
determination of the presiding officer has not expired and while
a challenge is pending, the protected materials shall maintain
the confidential treatment and status provided for in this
Protective Order.
(b) If a party appeals the presiding officer's order,
to permit the opportunity for further appeal all protected
materials shall be afforded the confidential treatment and status
provided for in this Protective Order for a period of ten (10)
working days from: (i) the date of an unfavorable order from the
PUCT, or (ii) if the PUCT does not rule on the appeal of the
presiding officer's order, the date the appeal of the presiding
officer's order is overruled by operation of law. Nothing in
this provision, however, shall preclude a party from seeking and
obtaining an appropriate order continuing the protection of the
challenged materials during the pendency of any appeal.
(c) No later than four (4) working days before the
hearing in this docket begins, every party intending to offer
into evidence a document or part of a document claimed to be
confidential shall so indicate by written filing, listing all
such documents or portions thereof. On the first day of the
hearing, each party shall bring to the hearing room a copy of all
documents or excerpts thereof indicated on that party's list.
The confidential status of such documents or excerpts, as well as
of any pre-filed testimony submitted under seal, and appropriate
procedures relating to such materials, will be considered at the
hearing on the merits.
11. Nothing in this Protective Order shall be construed as
precluding any party from objecting to the use of protected
materials on grounds other than confidentiality, including the
lack of required relevance. Nothing in this Protective Order
shall be construed as an agreement by any party that the
protected materials are entitled to confidential treatment.
12. All notices, applications, responses, or other
correspondence shall be made in a manner which protects protected
materials from unauthorized disclosure.
13. Each party must, no later than thirty (30) days
following conclusion of these proceedings, return to the party
asserting confidentiality or destroy all copies of the protected
materials provided by that party pursuant to this Protective
Order and all copies reproduced by a reviewing party pursuant to
Paragraph 5 or 6(b), and counsel for each party must provide to
the party asserting confidentiality a verified certification
that, to the best of his or her knowledge, information, and
belief, all copies of notes, memoranda, and other documents
regarding or derived from the protected materials (including
copies of protected materials) that have not been so returned, if
any, have been destroyed, other than notes, memoranda, or other
documents which contain information in a form which, if made
public, would not cause disclosure of protected materials.
Promptly following the conclusion of these proceedings, counsel
for the party asserting confidentiality will send a written
notice to all other parties, reminding them of their obligations
under this paragraph. Nothing in this paragraph shall prohibit
counsel for each party from retaining two (2) copies of any filed
testimony, brief, motion for rehearing, or other pleading which
refers to the protected materials provided that any such
protected materials retained by counsel shall remain subject to
the provisions of this Protective Order. As used in this
paragraph, "conclusion of these proceedings" refers to the
exhaustion of available appeals, or the running of the time for
the making of such appeals, as provided by applicable law.
14. This Protective Order is subject to the requirements of
the Open Records Act, the Open Meetings Act, and any other
applicable law, provided that parties subject to those acts will
give the party asserting confidentiality notice, if possible
under those acts, prior to disclosure pursuant to those acts.
SIGNED AT AUSTIN, TEXAS, the _____ day of
____________________, 1995.
_________________________________________
ADMINISTRATIVE LAW JUDGE
BEFORE THE STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS
IN THE MATTER OF THE APPLICATION )
OF SOUTHWESTERN PUBLIC SERVICE COMPANY )
FOR A CERTIFICATE PURSUANT TO K.S.A. ) Docket No. 193, 653-U
66-125. )
APPLICATION
Southwestern Public Service Company, a New Mexico
corporation ("SPS"), hereby applies, pursuant to K.S.A. 66-125
for a Certificate authorizing it to issue and deliver a
certificate representing [100] shares of its common stock, $1 par
value per share (the "SPS Common Stock"), to M-P New Co., a
Delaware corporation ("Newco"),<F1> in connection with a
reorganization of SPS and Public Service Company of Colorado, a
Colorado corporation ("PSCo"), pursuant to an Agreement and Plan
of Reorganization dated as of August 22, 1995, among SPS, PSCo,
and Newco (the "Merger Agreement").
1. The address of SPS's principal corporate office is
SPS Tower, Tyler at Sixth Streets, P.O. Box 1261, Amarillo, Texas
79170.
2. SPS is engaged principally in the business of
generating, transmitting, distributing, and selling electic
energy to the public in various parts of New Mexico, Texas,
Oklahoma, and Kansas. SPS is a public utility within Kansas and
holds appropriate Certificates of Convenience and Authority
granted by this Commission. SPS serves approximately 1,500
customers within Kansas.
3. PSCo is an operating public utility engaged,
together with its subsidiaries, primarily in the generation,
purchase, transmission, distribution and sale of electricity and
in the purchase, transmission, distribution, sale and
transportation of natural gas in Colorado and Wyoming. Its
corporate office is located at 1225 Seventeenth Street, Denver,
Colorado 80202.
4. The Merger Agreement contemplates a Plan of Merger
among SPS, Newco, and SPS Merger Corp., a New Mexico corporation
and wholly owned subsidiary of Newco ("SPS Merger Corp."), which
provides for the merger of SPS Merger Corp. with and into SPS
pursuant to the laws of New Mexico, with SPS to be the surviving
corporation of the merger (the "SPS Merger"). Each share of SPS
Merger Corp. outstanding immediately before the SPS Merger will
be converted into one share of SPS Common Stock. Each
certificate which immediately before the SPS Merger represents
outstanding shares of SPS Merger Corp. common stock shall, on and
after the SPS Merger, be deemed for all purposes to represent the
number of shares of SPS Common Stock into which the shares of SPS
Merger Corp. common stock represented by such certificate shall
have been converted. As a result, SPS will become a wholly owned
subsidiary of Newco.<F2> SPS will subsequently issue a new
certificate to Newco evidencing its ownership of all of the
issued and outstanding shares of SPS Common Stock.
5. SPS will receive no proceeds from the issuance of
the certificate representing the SPS Common Stock to Newco. The
issuance of the certificate evidences the ownership by Newco of
all of the issued and outstanding SPS Common Stock by operation
of law immediately after the SPS Merger.
6. Upon the consummation of the SPS Merger, each
share of SPS Common Stock outstanding immediately prior to the
SPS Merger will be canceled and converted into the right to
receive 0.95 of one share of common stock, $1 par value per
share, of Newco (the "Newco Common Stock"). As a result, holders
of SPS Common Stock will become holders of Newco Common Stock.
7. As indicated above, SPS must deliver to Newco
appropriate certificates representing the number of shares of SPS
Common Stock resulting from the conversion of SPS Merger Corp.
common stock into SPS Common Stock. Such certificates, in the
opinion of counsel, are securities within the definition of
K.S.A. 66-125 and require the Commission's authorization. The
amount and character of the proposed certificates and the terms
on which they are to be issued are reflected in the Joint Proxy
Statement filed herewith on a confidential basis.
8. The proposed securities transactions are necessary
and required for and will be used for the purposes set forth
herein.
WHEREFORE, Applicant (SPS) prays that the Commission
approve this Application and thereafter issue an appropriate
Order and Certificate pursuant to K.S.A. 66-125 authorizing
applicant to issue and deliver the Certificates described in this
Application, upon the special terms and conditions set forth
therein.
Respectfully submitted,
SOUTHWESTERN PUBLIC SERVICE COMPANY
By:/s/James L. Grimes, Jr.
James L. Grimes, Jr. - #04592
FOULSTON & SIEFKIN L.L.P.
1515 Bank IV Tower
Topeka, Kansas 66603
(913) 233-3600
VERIFICATION
STATE OF TEXAS )
) SS:
COUNTY OF POTTER )
Doyle R. Bunch II, being duly sworn upon his oath,
deposes and states that he is Executive Vice President,
Accounting and Corporate Development, of Southwestern Public
Service Company, Applicant herein; that he has read and is
familiar with the foregoing Application filed herewith; and that
the statements made therein are true to the best of his
knowledge, information and belief.
/s/Doyle R. Bunch II
Doyle R. Bunch II
Subscribed and sworn to before me this 3rd day of
November, 1995.
/s/Gwen Birtciel
Notary Public
____________________
<F1> The name "M-P New Co." will be changed when PSCo and SPS
agree upon a permanent name. SPS joined with PSCo to form
Newco on August 21, 1995. SPS and PSCo each made a capital
contribution of $100 to Newco for 50 percent of its stock.
This stock will be canceled pursuant to the Merger Agreement
in connection with the SPS Merger and the PSCo Merger.
<F2> Similar action will be taken by PSCo whereby PSCo Merger
Corp., a Colorado corporation and wholly owned subsidiary of
Newco, will be merged with and into PSCo, with PSCo to be
the surviving corporation and a wholly owned subsidiary of
Newco. The then existing shareholders of PSCo Common Stock
will become shareholders of Newco.
THE STATE CORPORATION COMMISSION
OF THE STATE OF KANSAS
Before Commissioners: Susan M. Seltsam, Chair
F. S. Jack Alexander
Timothy E. McKee
In The Matter Of The Application Of )
Southwestern Public Service Company For ) Docket No. 193,653-U
A Certificate Pursuant To K.S.A. 66-125.)
ORDER AND CERTIFICATE
NOW comes the above-captioned matter before the State
Corporation Commission of the State of Kansas (Commission) for
consideration and determination. Having reviewed its files and
records and being duly advised in the premises, the Commission
finds and concludes as follows:
BACKGROUND
1. On November 9, 1995, Southwestern Public Service
Company (SPS) filed an application requesting authority from the
Commission to issue and deliver 100 shares of SPS common stock,
$1.00 par value, to M-P New Co. (Newco).
2. The purpose of the transfer is to facilitate the merger
of SPS, Newco, and SPS Merger Corp., a New Mexico corporation and
wholly owned subsidiary of Newco.
3. The Merger Agreement provides for the Merger of SPS
Merger Corp. with and into SPS pursuant to the laws of New
Mexico, with SPS to be the surviving corporation of the merger.
Each share of SPS Merger Corp. outstanding immediately before the
merger will be converted into one share of SPS Common Stock. As
a result SPS will become a wholly owned subsidiary of Newco.
4. SPS must deliver to Newco appropriate certificates
representing the number of shares of SPS common stock resulting
from the conversion of SPS Merger Corp. common stock into SPS
Common Stock. Such certificates are securities within the
definition of K.S.A. 66-125 and require the Commission's
authorization.
5. The proposed securities transactions are necessary and
required.
FINDINGS AND CONCLUSIONS
6. The Commission finds and concludes that SPS is a
corporation duly organized under the laws of the State of New
Mexico, having its principal office in Amarillo, Texas. The
Commission further finds that SPS is a public utility engaged in
the business of generating, distributing, and selling electric
energy to the public within the meaning of the Kansas Statutes,
Rules and Regulations, and is therefore subject to the
jurisdiction of the Commission. SPS serves the public in various
parts of New Mexico, Texas, Oklahoma, and Kansas.
7. The Commission notes that K.S.A. 66-125(b)(1)(A)
through (B) sets forth the information required to be provided to
the Commission in order for the Commission to issue a
certificate. The Commission finds that the above information
satisfies the requirements of the statute. Therefore, the
Commission shall issue its certificate permitting SPS to issue
and deliver 100 shares of common stock, $1.00 par value of M-P
New Co.
8. The Commission finds that granting SPS authority to
issue and deliver the above described shares of common stock does
not reduce or restrict the Commission's authority over the
security issuances for the following reasons: 1) approval of a
securities filing does not guarantee the utility and specific
rate treatment; and 2) if the utility uses the proceeds to
acquire additional utility property, the Commission retains its
authority to investigate the effect of the transaction on Kansas
ratepayers.
9. The Commission concludes that in order to remain fully
informed of SPS' debt and equity financing activities, SPS shall
be required to file the details of the transaction with the
Commission as soon as possible after closing. The information
should include the type of security sold, amount of capital
raised through the sale, specific terms and conditions of the
instrument, and the general use of the proceeds. Each filing
should be addressed to the Executive Director and reference this
docket number.
IT IS, THEREFORE, BY THE COMMISSION CONSIDERED AND
CERTIFIED:
1. SPS has requested authority to issue and deliver 100
shares of common stock, $1.00 par value to M-P New Co.;
2. The statements contained in SPS' Application and
otherwise provided to Staff (so far as required by law to be
contained therein) have been ascertained to be true;
3. The authority requested by SPS in its Application may
be granted without a hearing.
IT IS, THEREFORE, BY THE COMMISSION ORDERED THAT:
The authority requested by SPS in its Application shall be
and is hereby granted in full. SPS is hereby issued the
certificate as set forth in this Order and Certificate with
respect to the issuance of 100 shares of common stock in
accordance with K.S.A. 66-125.
The parties have fifteen (15) days from the date of this
Order, plus an additional three (3) days, if service of this
Order is by mail, to file for reconsideration regarding the
decision herein.
The Commission retains jurisdiction of the subject matter
and the parties for the purpose of entering such further order or
orders as it may deem necessary and proper.
BY THE COMMISSION IT IS SO ORDERED.
Seltsam, Chr.; Alexander, Com.; McKee, Com.
Dated: November 28, 1995
/s/
JUDITH McCONNELL
EXECUTIVE DIRECTOR
CGA:tdh
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
Filing under the Public Utility Holding Company Act of 1935
January 30, 1996
New Century Energies, Inc. (70- )
New Century Energies, Inc. ("NCE"), 1225 17th Street,
Denver, Colorado 80202, a Delaware corporation not currently
subject to the Act, has filed an application-declaration under
sections 5, 6(a), 7, 8, 9(a)(1), 9(a)(2), 10, 11, 13 and rules
80-91 and 93-94 thereunder.
The application-declaration seeks approvals relating to the
proposed combination (the "Transaction") of Public Service
Company of Colorado ("PSCo"), a Colorado combination electric and
gas public-utility holding company exempt from registration under
section 3(a)(2) of the Act pursuant to rule 2, and Southwestern
Public Service Company ("SPS"), an electric public-utility
company organized in the state of New Mexico, by which PSCo and
SPS, would become wholly owned subsidiaries of NCE. In addition,
PSCo's combination electric and gas public-utility subsidiary,
Cheyenne Light, Fuel and Power Company ("Cheyenne"), a Wyoming
corporation, would become a direct wholly-owned subsidiary of
NCE. Following the transaction, NCE would register with the
Commission under section 5 the Act. NCE also seeks approvals in
connection with services to be rendered by NC Services, Inc. ("NC
Services"), NCE's newly formed service company subsidiary as well
as intra-system engineering services to be performed by Utility
Engineering Corporation ("UE"), currently a subsidiary of SPS,
and certain other intra-system services. NCE also seeks
approvals with regard to the formation of a new NCE subsidiary
that will hold certain of the NCE system's non-utility assets,
the issuance of common stock by such subsidiary and by NC
Services and the retention of gas operations of PSCo and certain
other non-utility businesses.
PSCo and Cheyenne are primarily engaged in providing
electric and gas service in Colorado and Cheyenne, Wyoming. As
of December 31, 1994, PSCo provided electric utility service to
1.1 million customers, and Cheyenne provided service to 33,000
customers in the Cheyenne area. In addition, PSCo and Cheyenne
provided gas utility service to approximately 920,000 and 26,000
customers, respectively. As of December 12, 1995, there were
63,150,357 shares of PSCo common stock, par value $5.00 per
share, and 2,888,652 shares of PSCo preferred stock outstanding.
PSCo's principal executive office is located in Denver, Colorado.
On a consolidated basis, for the year ended December 31, 1994,
PSCo's operating revenues were approximately $2.06 billion, of
which approximately $1.4 billion were derived from electric
operations, $625 million from gas operations and $33 million
from other operation. Consolidated assets of PSCo were
approximately $4.2 billion, consisting of $2.5 billion in
identifiable electric utility property, plant, and equipment and
$675 million in identifiable gas utility property, plant, and
equipment, and $990 million in other corporate assets.
PSCo has nine direct and indirect non-utility subsidiaries,
eight of which are wholly-owned, and controlling interests in
several small water and ditch companies. These non-utility
companies are: West Gas Interstate, Inc., a natural gas
transmission company operating in Colorado and Wyoming; e prime,
inc. which offers energy related products and services to energy-
using customers and to selected segments of the utility industry;
Fuel Resources Development Co. which is engaged in the
exploration for, and the development and production of, natural
gas and oil, principally in Colorado; 1480 Welton, Inc. a real
estate company which owns certain of PSCo's real estate interests
for use in its utility business; P.S.R. Investments, Inc. which
owns and manages company owned life insurance (COLI) policies on
certain past and present employees, the benefits from which are
to provide future funding for general corporate purposes; PS
Colorado Credit Corporation, a company that finances (factors)
certain of PSCo's current assets; Young Gas Storage Company which
holds a 47.5% interest in partnership which owns an underground
gas storage facility; Green and Clear Lakes Company which owns
water rights and storage facilities for water used at PSCo's
Georgetown Hydroelectric Station; and Natural Fuels Company, in
which PSCO holds an 80% interest, which sells compressed natural
gas as a transportation fuel to retail markets, converts vehicles
for natural gas usage, constructs fueling facilities and sells
miscellaneous fueling facility equipment.
SPS, incorporated under the laws of New Mexico, is a public
utility company engaged in the generation, transmission,
distribution and sale of electric energy. It serves a population
of approximately one million in a 52,000 square-mile area of the
Panhandle and south plains of Texas, eastern and southeastern New
Mexico, the Oklahoma Panhandle and southwestern Kansas. As of
December 12, 1995 there were 40,917,908 shares of SPS common
stock , par value $1.00 per share, outstanding. All shares of
SPS preferred stock outstanding on that date have been redeemed
or repurchased. SPS's principal corporate office is located in
Amarillo,Texas. On a consolidated basis, for the year ended
August 31, 1995, SPS's operating revenues were approximately $834
million, and its total assets were approximately $1.9 billion.
SPS has two non-utility subsidiaries, UE and Quixx
Corporation ("Quixx"). UE is engaged in engineering, design,
construction management and other miscellaneous services. The
primary business of Quixx is investing in and developing
cogeneration and energy related projects. Quixx also holds
certain other non-utility assets. Both UE and Quixx hold
interests in subsidiaries and affiliates as part of their
business operations.
NCE was incorporated in Delaware on August 21, 1995 to
become a holding company over PSCo and SPS following the proposed
merger. At present, the common stock of NCE, which consists of
200 issued and outstanding shares, is owned by PSCo and SPS.
Each company owns 100 shares.
PSCo Merger Corp. will be incorporated under the laws of the
State of Colorado prior to the consummation of the Transaction.
The only authorized capital stock of PSCo Merger Corp. will be
common stock, no par value and all outstanding shares will be
held by NCE. PSCo Merger Corp. has not had, and prior to the
closing of the Transaction will not have, any operations other
than the activities contemplated by the Merger Agreement
necessary to accomplish the combination of PSCo Merger Corp. and
PSCo.
SPS Merger Corp. will be incorporated under the laws of the
State of New Mexico prior to the consummation of the Transaction.
The only authorized capital stock of SPS Merger Corp. will be
common stock, no par value, and all outstanding shares will be
held by NCE. SPS Merger Corp. has not had, and prior to the
closing of the Transaction will not have, any operations other
than the activities contemplated by the Merger Agreement
necessary to accomplish the combination of SPS Merger Corp. and
SPS.
Pursuant to an Agreement and Plan of Reorganization, dated
as of August 22, 1995, as amended on December 8, 1995 ("Merger
Agreement"), PSCo Merger Corp. will be merged with and into PSCo
with PSCo continuing as the surviving corporation and SPS Merger
Corp. will be merged with and into SPS, with SPS as the surviving
corporation. As a result of these mergers, and the declaration
of a dividend by PSCo to NCE of all of the stock of Cheyenne,
PSCo, SPS and Cheyenne will become operating subsidiaries of NCE,
and NCE will be a holding company within the meaning of the Act.
Specifically, upon consummation of the proposed transaction:
(1) each issued and outstanding share of PSCo common stock,
together with the appurtenant rights (other than treasury and
certain other shares which will be cancelled, fractional shares
and shares held by holders who dissent in compliance with
Colorado law) will be converted into the right to receive one
share of NCE common stock, par value $1.00 per share ("PSCo
Conversion Ratio"); (2) each issued and outstanding share of SPS
common stock, together with the appurtenant right, (other than
treasury and certain other shares which will be cancelled,
fractional shares and shares held by holders who dissent in
compliance with New Mexico law) will be converted into the right
to receive 0.95 of one share of NCE common stock ("SPS Conversion
Ratio"); (3) each share of PSCo Merger Corp. common stock issued
and outstanding prior to the transaction will be converted into
the right to receive one share of common stock of PSCo as the
surviving corporation; (4) each share of SPS Merger Corp. common
stock issued and outstanding prior to the transaction will be
converted into the right to receive one share of common stock of
SPS as the surviving corporation and (5) all shares of capital
stock of NCE issued and outstanding immediately prior to the
transaction will be cancelled. The shares of preferred stock of
PSCo and SPS outstanding at the time of the consummation of the
Transaction will remain preferred stock of PSCo and SPS,
respectively. NCE states that the transaction is expected to be
tax-free to PSCo and SPS shareholders (except as to dissenters'
rights and fractional shares). Based on the capitalization of
PSCo and SPS on December 1, 1995, the shareholders of PSCo and
SPS would own securities representing approximately 62.0% and
38.0%, respectively, of the outstanding voting power of NCE. NCE
states that the proposed merger qualifies for treatment as a
pooling of interests.
Following the merger, PSCo, SPS and Cheyenne will become
direct public utility subsidiaries of NCE and the non-utility
subsidiaries of PSCo and SPS will become either direct or
indirect non-utility subsidiaries of NCE. The Merger Agreement
provides that NCE's principal corporate office will be in Denver,
Colorado, with significant operating offices in Amarillo, Texas.
NCE's board of directors will consist of a total of 14 directors,
8 of whom will be designated by PSCo and 6 of whom will be
designated by SPS.
NCE also requests authorizations with respect to the
activities of NC Services, which will be incorporated in Delaware
to serve as the service company for the NCE system after the
proposed merger. NC Services will be a direct subsidiary of NCE.
NCE proposes that NC Services provide companies in the NCE
system with a variety of administrative, management, and support
services. It is anticipated that NC Services will be staffed by
a transfer of personnel from the current employee rosters of
PSCo, SPS, and their subsidiaries. NCE states that NC Services'
accounting and cost allocation methods and procedures will comply
with the Commission's standards for service companies in
registered holding-company systems, and that NC Services' billing
system will use the Commission's "Uniform System of Accounts for
Mutual Service Companies and Subsidiary Service Companies."
Except as permitted by the Act or the Commission, all services
provided by NC Services to affiliated companies will be on an "at
cost" basis as determined by Rules 90 and 91 of the Act. NCE has
requested an exemption from Rules 90 and 91 in connection with
the provision of services by NC Services to certain affiliated
Qualifying Facilities ("QFs"), Independent Power Projects
("IPPs"), Exempt Wholesale Generators ("EWGS"), and Foreign
Utility Companies ("FUCOs").
NCE requests authorizations with respect to the intra-system
service activities of UE. NCE proposes that UE will provide
design, engineering and related technical and management services
to NCE system companies. NCE states that UE's accounting and
cost allocation methods and procedures will comply with the
Commission's standards for service companies in registered
holding-company systems, and that UE's billing system will use
the Commission's "Uniform System of Accounts for Mutual Service
Companies and Subsidiary Service Companies." Except as permitted
by the Act or the Commission, all services provided by UE to
affiliated companies will be on an "at cost" basis as determined
by Rules 90 and 91 of the Act. NCE has requested an exemption
from Rules 90 and 91 in connection with the provision of services
by UE to certain affiliated QFs, IPPs, EWGs and FUCOs.
NCE has also requested an exemption from Rules 90 and 91 in
connection with the provision of services by certain other system
companies to certain affiliated QFs, IPPs, EWGs and FUCOs.
NCE requests authority to form a new subsidiary, NC Hold Co.
("NC Hold"), which will be incorporated in Delaware, to hold
certain of the NCE system's non-utility interests. At the
consummation of the Transaction, all outstanding shares of NC
Hold common stock will be held by NCE. NC Hold will acquire the
common stock of certain of PSCo's non-utility subsidiaries and
the common stock of SPS's non-utility subsidiaries.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
EXHIBIT J-3
LEGAL MEMORANDUM ON THE RETENTION OF GAS
DIVISION BY NEW CENTURY ENERGIES, INC.
INTRODUCTION
The combination of Public Service Company of
Colorado ("PSCo") and Southwestern Public Service Company
("SPS") in a merger of equals transaction (the "Transaction")
will result in PSCo and SPS becoming wholly owned subsidiaries
of New Century Energies, Inc. ("NCE"), a holding company which
will be registered under the Public Utility Holding Company
Act of 1935 (the "Act"). NCE has filed an
Application/Declaration on Form U-1 (the "Application")
seeking the approval of the Securities and Exchange Commission
(the "Commission") under the Act for the Transaction and
related matters. In addition, the Application seeks the
Commission's authorization for PSCo and its subsidiary,
Cheyenne Light, Fuel and Power Company ("Cheyenne"), to retain
their gas utility systems following the consummation of the
Transaction.<F1> This memorandum supplements the
Application with respect to legal issues related to NCE's
request for authority to retain these gas systems following
its registration as a holding company under the Act.
SUMMARY
Both the legislative history of the Act as well as
the Commission's early interpretation of the Act indicate that
the purpose of the Act was to facilitate the process by which
state utility regulatory commissions determine whether or not
registered combination gas and electric holding company
systems are permissible, and not to impose a more restrictive
federal view. In addition, as the Commission has noted in a
number of prior decisions, the Act is intended to provide for
a flexible regulatory scheme that is capable of adapting to
changes in the utility industry. The industry is in the
process of its most radical change (from regulation to
competition) since that which occurred as a result of the
adoption of the Act and it is clear that the industry is
currently evolving in a direction that requires utility
company systems to offer their customers a range of energy
options in order to remain competitive. Thus, the Commission
should analyze the retention of PSCo's and Cheyenne's gas
systems by focusing on those sections of the Act (Sections 8
and 21) that give primacy to state utility commission
decisions with regard to combination registered holding
companies and should "watchfully defer" to such local decision
makers who are in the optimum position to regulate the
combination utility. Under such analysis, NCE must be allowed
to retain the gas systems of PSCo and Cheyenne as long as the
Colorado Public Utilities Commission (the "CPUC") and the
Wyoming Public Service Commission (the "WPSC") who have, and
will continue to have, direct jurisdiction over the NCE's gas
operations in their respective states, permit the continued
existence of a combination system.
Even if the Commission chooses not to focus on state
commission determinations, Section 11 of the Act contains
additional provisions that permit the retention of PSCo's and
Cheyenne's gas systems -- namely, the so-called A-B-C clauses
(the "A-B-C Clauses") of Section 11(b)(1) under which the
Commission in the past has permitted retention of an
additional gas or electric utility system in addition to the
large electric utility system within a registered holding
company system. Again, the standards set forth in this
section should be read in light of the current changes in the
utility industry. In any event, NCE without a doubt meets
these standards with regard to the retention of the gas
operations discussed herein.
DISCUSSION
I. Section 8
1. General
Section 8 of the Act states:
Whenever a state law prohibits, or requires approval
or authorization of, the ownership or operation by a
single company of the utility assets of an electric
utility company and a gas utility company serving
substantially the same territory, it shall be
unlawful for a registered holding company, or any
subsidiary thereof ... (1) to take any step, without
the express approval of the State commission of such
State, which results in it having a direct or
indirect interest in an electric utility company and
a gas utility company serving substantially the same
territory; or (2) if it already has any such
interest, to acquire, without the express approval
of the State commission, any direct or indirect
interest in an electric utility company or gas
utility company serving substantially the same
territory as that served by such companies which it
already has an interest.
On its face, this section indicates that, with approval of the
relevant state utility commissions, a registered holding
company can include a combination of electric and gas utility
systems. A careful reading of the section indicates that the
thrust of the section is to preclude the use by a holding
company of separate gas and electric utility subsidiary
companies with overlapping service territories in order to
circumvent any state law restrictions on the ownership of gas
and electric assets by the same company. Nevertheless, over
time the Commission has adopted different interpretations of
this section -- initially allowing registered holding
companies to own both gas and electric systems pending
relevant state approvals under Section 8, then focusing on
Section 11 as controlling determinations regarding such
combination companies and, requiring the "additional system"
to meet a strict interpretation of the A-B-C Clauses.
2. Early Cases
In its early decisions, the Commission adhered to
the concept that the decision as to whether or not to allow a
particular combination company is one that the affected states
should make (although the Commission may have to implement the
states' decisions in certain cases) and, where such systems
were permissible, the role of the SEC is to ensure that both
such systems are integrated as defined in the Act. The
Commission's most notable decision in this line is In the
Matter of American Water Works and Electric Company,
Incorporated, 2 SEC 972 (1937). In this case, the Commission
approved the applicant's voluntary reorganization plan under
Section 11(e) of the Act and permitted the newly reorganized
registered holding company to retain both its electric and its
gas operations. While specifically noting that the Act does
not contain a definition of single integrated utility in the
context of a combination company, the Commission stated in
this case that:
We believe, however, that it is proper to regard
such a combined property as a single integrated
system, provided that all of the electric properties
are integrated and all of the properties, both gas
and electric, are in fairly close geographic
proximity and are so related that substantial
economies may be effectuated by their coordination
under common control. The question of public policy
as to the common ownership of gas and electric
facilities in the same territory is apparently left
by the statute to the decision of the
states.<F2>
Thus, since the combination company did not violate state
policy, there was no need for the Commission to exercise
jurisdiction to implement state policy by requiring
divestiture of gas and electric operations. In this case the
Commission's concern, under the Act, was that each system was
an integrated system and otherwise met the standards of
Section 11 of the Act.
3. Other Cases
By the 1940's, however, the Commission de-emphasized
its role as the implementer of state policy on combination
companies and focused on a narrow interpretation of the
standards of Section 11 as the basis for a policy, adopted and
implemented in simplification proceedings, that the Commission
should not allow registered holding companies to own both gas
and electric companies unless the smaller system qualified for
retention under the A-B-C Clauses. At this point, the
Commission revisited and reinterpreted the American Water
Works decision by noting that it could also have been viewed
as a permissible retention under the A-B-C Clauses.<F3>
Thus, most Section 11 proceedings involving the question of
combination companies from that time forward discussed
retention of the gas system solely in the context of whether
or not it was a permissible "additional system" meeting the
requirements of the A-B-C Clauses.<F4> In connection with
this analysis, the Commission noted a policy concern existing
at that time which advocated separating the management of gas
utility operations from the management of electric utility
operations. This policy was based on the belief that gas
utilities benefitted from having a separate management
focusing their entire energy on the gas business, as opposed
to being part of a combination company where management tended
to focus on electric utility operations at the expense of gas
utility operations.<F5> In other words, there was a
perception of internal management competition between gas and
electric operations that could be detrimental to the gas
operations and, in turn, to consumers.
The Supreme Court addressed the interplay between
Sections 8 and 11 of the Act in its decision Securities and
Exchange Commission v. New England Electric System ("NEES"),
384 U.S. 176 (1966). In this decision, the Court noted:
To some extent, local policy was expected to govern,
with Section 8 serving to prevent circumvention of
that policy ... At the same time, Section 11 was
expected to assist in imposing restrictions with
regard to the combination of gas and electricity in
one system. Discussing the interplay between
Section 8 and Section 11, the Senate Committee noted
that Section 8 only applied to future acquisitions
[and] "the policy upon which this section was based
was essential in any Federal legislation in utility
holding companies; it did not think that the section
should make it unlawful to retain (up to the time
that section 11 may require divestment) interests in
businesses in which the companies were lawfully
engaged on the date of enactment of this
title."<F6>
The Commission's policy with regard to exempt
combination holding companies gives primacy to state
determinations. In prior cases, the Commission has considered
whether or not it could approve transactions and grant
exemptions to combination holding companies under the Act as
being in the public interest in light of the dictates of
Section 11(b)(1) and its single integrated utility
requirement. In a 1954 decision granting an exemption from
the Act, the Commission considered whether or not the holding
company was eligible for the exemption because it conducted
both gas and electric utility operations and such operations
could be considered detrimental to the public interest as
violative of Section 11(b)(1). In this case the Commission
first decided that "the mere existence of the combined
electric and gas operations does not of itself require the
denial of an exemption."<F7> The final decision on
whether or not the combined system was in the public interest
was based on the concept that:
competition in the field of distribution of gas and
electric energy is essentially a question of state
policy. The considered conclusions of the local
authorities, deriving their power from specific
state legislation, should be given great weight in
determining whether the public interest would be
adversely affected by the retention of combined
operations. In the absence of a compelling showing
in the record to the contrary, we would not be
warranted in rejecting the appraisal of such
authorities that the local public interest ... is
served by retention of the combined
operations.<F8>
____________________
<F1> PSCo is an operating electric and gas public utility
company as well as a holding company as a result of its
ownership of all of the outstanding common stock of
Cheyenne, an electric and gas public utility company
organized in and operating in the state of Wyoming. In
the case of both PSCo and Cheyenne, the electric utility
operations are much larger than the gas utility
operations. PSCo is currently exempt from registration
under the Act pursuant to Section 3(a)(2) of the Act and
Rule 2 thereunder.
<F2> Id., at 983 n.3.
<F3> See, e.g., In the matter of Columbia Gas & Electric
Corporation, 8 SEC 443 at 463 (1941); In the Matter of
United Gas Improvement Company, HCAR No. 2692 (April 15,
1941).
<F4> See, e.g., In the Matter of the North American Company,
11 SEC 194, 216 (1942); In the Matter of Engineers Public
Service Company, 12 SEC 41, 56 (1942); UNITIL
Corporation, HCAR No. 25524 (April 24, 1992).
<F5> See In the Matter of the Philadelphia Company, 28 SEC 35,
48 (1948); In the Matter of the North American Company,
18 SEC 169, 179-80 (1950); In the Matter of Illinois
Power Company, HCAR No. 16574 (Jan. 2, 1970).
<F6> Id., at 183 n.14. The dissenting opinion in this case
specifically disputed this discussion, noting that "the
House and Senate Committees in identical language
expressly stated that common ownership of competing forms
of energy was a field which is essentially a question of
state policy; the present Section 8 was enacted to
support this approach by using federal power to limit
common ownership only where it is contrary to state law."
Id. at 190 (Harlan dissenting).
<F7> In the Matter of Northern States Power Company, HCAR No.
12655, 36 SEC 1 (Sept. 16, 1954).
<F8> Id. at 8 (citations omitted).
The Commission made a number of similar
determinations in subsequent decisions relating to exempt
holding companies.<F9> For example, in a 1988 case
involving Section 9(a)(2) approval of an acquisition and
subsequent exemption, the Commission reviewed its precedent
and determined:
the judgement of a state's legislature and public-
service commission as to what will benefit their
constituents is entitled to considerable deference
.... we do not believe that the pro-competitive
thrust of the Act expresses an absolute Federal
policy against combination gas and electric
operations .... Neither the Act nor the NEES
decisions require that the [SEC] adopt such an
inflexible rule.<F10>
4. Legislative History and Recent Developments
A review of the legislative history of the Act
together with the recent evolution of the utility industry
indicates that now is a propitious time for the Commission to
revisit its interpretations and allow combination registered
holding companies where permitted under relevant state law
without violating the spirit of the remaining sections of the
Act.
As embodied throughout Section 1 of the Act, one of
the principle "evils" that the Act was designed to remedy was
that multistate holding companies with activities "extending
over many States are not susceptible of effective control by
any State and make difficult, if not impossible, effective
State regulation of public utility companies." Thus, the Act
attempts to simplify the corporate structures of holding
company systems to enable states to regulate the production
and distribution of energy. In general, the Act is not
concerned with those types of holding companies that can
indeed be effectively regulated on the state level and
provides exemptions for them in Sections 3(a)(1)<F11> and
Section 3(a)(2).<F12> The Act creates federal
jurisdiction to regulate those holding companies that could
otherwise escape state and local regulation, but no indication
exists that it should be used to override effective state
regulatory policy.<F13>
Section 8 in particular provides for the use of the
Act as a tool to further state policy with regard to
combination companies within registered holding company
systems by prohibiting such companies where state law
prohibits them and, implicitly, allowing such companies where
state law and state regulatory officials do not object. A
review of the legislative history of Section 8 clarifies this
intent. In its 1935 report, the Senate Committee in
Interstate Commerce noted that the provision in Section 8
concerning combination gas and electric companies "is
concerned with competition in the field of distribution of gas
and electric energy -- a field which is essentially a question
of State policy, but which becomes a proper subject of Federal
action where the extra-State device of a holding company is
used to circumvent state policy."<F14> Conversely, when
the holding company is not attempting to circumvent state
policy, there does not appear to be any need for the federal
government to exercise its jurisdiction. As noted in the
report of the National Power Policy Committee on public-
Utility Holding Companies, which is attached to the Senate
report cited above, the policy of Section 8 is:
Unless approval of a State commission can be
obtained, the [SEC] should not permit the use of the
holding-company form to combine a gas and an
electric utility servicing the same territory where
local law prohibits their combination in a single
entity;
but not to prohibit them where such approval can be obtained.
Recent changes in the competitive nature of the
utility industry indicate that any conceived need for
regulation by the Commission due to a concern that the
managements of combination companies may emphasize one form of
energy over the other has been eliminated by market forces
providing customers the ability to select the form and
supplier of their energy needs which in turn mandates that
utility companies offer a range of options to compete
effectively. As the Division of Investment Management
indicated in its recent report entitled the Regulation of
Public-Utility Holding Companies, "the utility industry is
evolving toward the creation of one-source energy companies
that will provide their customers with whatever type of energy
supply they want, whether electricity or gas."<F15>
Thus, now that the fundamental restructuring of holding
company systems has been completed<F16> and the industry
is undergoing structural changes that will shift control over
certain matters from utilities to consumers able to choose
services offered by competing utilities, the Commission should
reemphasize the provisions of Section 8 and the initial policy
impetus of the Act by allowing combination registered holding
companies to compete in the market as long as they can be
effectively regulated on the state level. The Commission
should again use the Act as a tool to implement state policy
rather than as a device to impose additional unneeded and
burdensome protections.
This would not conflict with earlier interpretations
of the Act. First, Section 11 is flexible and was designed to
change as the policy concerns over the regulation of utility
holding companies changed.<F17> Clearly, the utility
industry and the regulation of that industry has changed
dramatically in recent years and it is competitive forces (the
very thing that the Act was designed to promote) that are
pushing holding companies to offer alternative forms of
energy.<F18> Second, a registered holding company would
still be required to demonstrate that any acquisition or
transaction by which it would become a combination company
would not be detrimental to the carrying out of the provisions
of Section 11 of the Act. In other words, its electric system
would have to constitute an integrated electric system and
that its gas system would have to constitute an integrated gas
system and both systems would have to be capable of efficient
operation. As discussed in Section II below, the Section 11
standards are met by the Transaction.
In addition, nothing in the Supreme Court's NEES
decision discussed above requires a different conclusion.
First, as the Commission noted in its Union Electric decision,
the Supreme Court's NEES decision attached "great weight... to
[the Commission's] expertise in the administration of the
Act." 45 SEC at 509 n.77. The NEES decision therefore leaves
the Commission free to apply its expertise to administer the
Act in light of changes in legal, regulatory and economic
circumstances which were not foreseen at the time of the NEES
decisions, including market and regulatory changes which has
"substantially changed" the Act. As is clear, and the 1995
Report substantiates, the reform of the industry so as to be
competitively based is as "substantial" a change as has
occurred since that which was imposed by the adoption of the
Act.
Thus, NCE as a combination company is permissible
pursuant to the terms of Section 8 of the Act and is in the
public interest. First, the combination of electric and gas
operations of PSCo and Cheyenne is lawful under both Colorado
and Wyoming law, and PSCo in its applications to the CPUC and
WPSC requesting their approval of the Transaction has
requested that they indicate that they do not object to the
continuance of this system. Moreover, the existence of both
gas and electric systems in NCE's holding company system will
allow NCE's customers greater choice to meet their energy
needs, especially given that the electric and gas operations
occur in substantially the same service territory, and will
allow NCE to remain competitive with other utility companies.
Indeed, the local regulators have effectively regulated this
system as a combination gas and electric utility for decades.
Finally, any concern that a holding company such as NCE would
emphasize one form of energy over the other based on a single
management's agenda is now unwarranted because of the
increasingly competitive nature of the energy market. The
market requires utilities to focus on customer demands for
flexible energy supplies and, as a result of open-access to
gas lines, forces gas providers like PSCo and Cheyenne to pre-
empt and react to competitors. Furthermore, state regulatory
authorities who approve of the combination company have
sufficient authority to prevent energy preferences.
II. Section 11
NCE meets the standards for retention of the gas
operations of PSCo and Cheyenne pursuant to Section 11 of the
Act as well. Under the A-B-C Clauses, a registered holding
company is entitled to retain one or more additional
integrated public utility systems if:
(A) each of such additional systems cannot be
operated as an independent system without the loss of
substantial economies which can be secured by the retention of
control by such holding company of such system;
(B) all of such additional systems are located in
one state, adjoining states, or a contiguous foreign country;
and
(C) the continued combination of such systems under
the control of such holding company is not so large
(considering the state of the art and the area or region so
affected) as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation.
In fact, the Commission has held that the retention
of existing gas properties is governed by less stringent
standards than the acquisition of new gas
properties,<F19> and has allowed at least two registered
electric systems to retain long-standing gas utility
properties without a showing of compliance with the A-B-C
Clauses, subject to re-examination by the Commission when more
information became available.<F20>
In its Application and supporting exhibits, PSCo and
NCE have shown that clause (A) above will be satisfied because
the gas divisions of PSCo and of Cheyenne will both suffer
substantial losses of economy if they are separated from the
NCE system and are operated on a stand-alone basis. This
evidence is presented in the "Analysis of the Economic Impact
of the Divestiture of PSCo's Gas Operations and its Regulated
Gas Subsidiary" conducted by management of PSCo (the
"Divestiture Study"), Exhibit J-1 to the Application. In
addition, following the effectiveness of the transaction, NCE
will satisfy the criteria of clause (B) as its gas utility
operations will be confined to the contiguous states of
Colorado and Wyoming. Finally, the NCE gas system will not be
so large as to impair local management, efficient operation or
effective regulation. Additional detail regarding clauses (A)
and (C) follow.
1. Loss of Substantial Economies
____________________
<F9> See, e.g., Delmarva Power & Light Co., 46 S.E.C. 710
(1976); Wisconsin Energy Corp., HCAR No. 24267 (Dec. 18,
1986).
<F10> WPL Holdings, HCAR No. 24590 (Feb. 26, 1988).
<F11> This exemption applies where the holding company and
all material utility subsidiaries are incorporated
in and operate predominantly in the same state.
<F12> This exemption applies where the holding company is
predominantly a utility company whose operations do
not extend beyond the state in which it is
incorporated and states contiguous thereto.
<F13> Indeed, Section 21 of the Act specifically indicates
that "nothing in [the Act] shall affect ... the
jurisdiction of an other commission, board, agency,
or officer of ... any State ... insofar as such
jurisdiction does not conflict with any provision of
[the Act]."
<F14> The Report of the Committee on Interstate Commerce,
S. Rep. No. 621 at 31 (1935).
<F15> The Division of Investment Management, The
Regulation of Public-Utility Holding Companies at
15-16 (1995) (the "1995 Report").
<F16> The 1995 Report at 63 (citing the SEC Annual Report
of 1952 reporting that the simplification
proceedings required under the Act were nearly
completed).
<F17> Mississippi Valley Generating Co., 36 SEC 159 (1955)
(noting that Congress intended the concept of
integration to be flexible); UNITIL Corporation,
HCAR No. 25524 (April 24, 1992) (noting that section
11 contains a flexible standard designed to
accommodate changes in the industry).
<F18> See the 1995 Report for a discussion of the recent
changes in the industry and the regulation thereof.
<F19> See, e.g., Wisconsin's Environmental Decade, Inc. v.
SEC, 882 F.2d 523, 527-28 (D.C. Cir. 1989); Delmarva
Power & Light Co., HCAR 35-19717, 46 SEC 710, 715
(Oct. 19, 1976) (distinguishing between stricter
standards applicable to the acquisition of new
combination properties and the mere "continued
existence of a combination company which had been in
operation for thirty years"); Columbia Gas &
Electric Corp., HCAR 35-2477, 8 SEC 443, 462-463
(Jan. 10, 1941); Union Electric Company, HCAR 35-
18368, 45 SEC 489, 503-506 (April 10, 1974)
("acquisitions are measured by standards more
stringent than those governing retainability of
existing properties"), aff'd without op. sub nom.,
City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C.
Cir. 1975); and American Gas and Electric Co., HCAR
35-6639, 22 SEC 808
(May 17, 1946).
<F20> See Middle South Utilities, Inc. et al., HCAR 35-
11782 (March 20, 1953), 35 SEC 1, 14-15 (1953) (gas
properties retained by New Orleans Public Service
Inc.); and The North American Company, HCAR 35-
10320, 32 SEC 169 (Dec. 28, 1950) and Union Electric
Company of Missouri, HCAR 35-12262, 35 SEC 483 (Dec.
15, 1953) (retention by Union Electric Company of
Missouri of gas properties of Missouri Power & Light
Company and Missouri Edison Company, respectively).
The starting point for any attempt to define "loss
of substantial economies" is a line of cases beginning with
New England Electric System ("NEES"), HCAR 35-15035, 41 SEC
888 (March 19, 1964) and culminating in SEC v. New England
Electric System ("NEES"), 390 U.S. 207 (1968), the second of
two Supreme Court opinions. The Supreme Court, in attempting
to flesh out the concept of substantial economies, accepted
the formulation developed in The North American Company, HCAR
35-3446, 11 SEC 194 (April 14, 1942), aff'd, 133 F.2d 148,
aff'd as to constitutionality, 327 U.S. 687 (1946), that the
loss must be such that it would be "likely to cause a serious
impairment of the system." 390 U.S. at 211. In accepting the
"serious impairment test," the Supreme Court rejected a very
generous "business judgment" test adopted by the First Circuit
when it reviewed the Commission's order in NEES.
The NEES Commission opinion made clear that the
Commission believed that the issue was not the total estimated
loss, but the proportion of operations that such loss
represents. As the Commission stated therein: "we have
previously pointed out that the test of the substantiality of
the estimated loss is not in absolute terms but rather in
relation to total revenues, expenses and income." 41 SEC at
897. See also Philadelphia Company, HCAR 35-8242, 28 SEC 35,
49 (June 1, 1948); General Public Utilities Corporation, HCAR
35-10982, 32 SEC 807, 837 (Dec. 28, 1951). The Commission
then compared the anticipated proportionate losses that would
have been suffered by New England Electric System with the
anticipated losses in other divestiture cases decided by the
Commission and held that the anticipated losses of New England
Electric System were no more substantial than in previous
cases where divestiture had been ordered.<F21> The
Supreme Court expressly approved the Commission's use of loss
ratios in comparable cases. 390 U.S. at 216. The use of
comparisons to other holding companies' anticipated losses was
also used by the Commission in General Public Utilities Corp.,
32 SEC at 8837.
The examination of the NEES case and the other cases
which the Commission used for comparison reveals that the
losses in those cases are not of the magnitude of the losses
that the PSCo and Cheyenne gas divisions would suffer if
divested, and that the "serious impairment" test is met.
The total lost economies of $41,810,868 that an
independent PSCo gas division would suffer represent 6.17
percent of the total gas operating revenues of $677,326,418,
and the total lost economies to be suffered by an independent
Cheyenne gas division amount to $[543,931] or [3.48] percent
of its total operating revenues of $15,630,080. In the NEES
case the loss of economies represented only 4.83 percent of
operating revenues. Of the cases considered by the
Commission, the lost economies in this case exceed, on a
percentage basis, the loss of economies to gas operating
revenues in The Philadelphia Company (3.00 percent), General
Public Utilities Corp. (4.87 percent) and Middle South
Utilities, Inc. (5.18 percent) cases.
More importantly, in NEES, the company estimated it
would suffer a reduction in gross income and net income that
would have been approximately 23.28 percent and 29.94 percent,
respectively. As is extensively documented in the Divestiture
Study, the losses that a separate PSCo gas division would
incur will result in a decrease in gross gas income of 39.96
percent and gas income of 81.56 percent. Similarly, Cheyenne
would suffer a loss of 27.98 percent in gross gas income and
35.54 percent in net gas income. These numbers exceed the
comparable estimated losses in the Engineers Public Service
Company (20.85 percent in gross gas income and 25.25 percent
in net gas income); The North American Company (21.68 percent
in gross gas income and 24.34 percent in net gas income), The
Philadelphia Company (14.03 percent in gross gas income) and
Middle South Utilities, Inc. (23.68 percent in gross gas
income) cases.
The Supreme Court in NEES, 390 U.S. at 215, held
that the Commission did not err in deciding that the decline
in rate of return on base rates from 6.4 percent to 5.2
percent was not sufficient to constitute a loss of substantial
economies.<F22> The Court also approved the Commission's
use of projected return comparisons with that of other gas
companies in the area. NEES would have tied for the second
lowest rate of return on rate base. In the present situation,
the effect is again more dramatic than it was in NEES. The
new PSCo company would only have a projected return on rate
base of 2.89 percent -- approximately half of what NEES would
have had and a rather substantial decrease from the 9.31
percent rate of return over the 12 months ended ________.
Cheyenne's gas operation, on a stand-alone basis, would have a
projected rate of return of [7.71 percent] -- down from 9.62
percent for the same period.
In the three areas considered most important by the
Commission -- net income, operating revenues and return on
rate base -- an independent PSCo gas division and an
independent Cheyenne gas division would suffer losses of
economies that would be more substantial than in the majority
of previous cases where divestiture was ordered.
2. Size of Additional System
Under clause (C), the dispositive consideration in
evaluating the size of a system is not size alone or size in
an absolute sense, either big or small, but size in relation
to its effect, if any, on localized management, efficient
operation and effective regulation. The statutory language
makes clear that the size of the additional system(s) is not
to be considered abstractly or mechanistically, on the basis
of preconceived notions of "appropriate" size limitations.
Rather, the express terms of Section 11(b)(1)(C) mandate a
flexible test based on the specific facts and circumstances at
hand. To this end, the Act requires that the Commission
assess the size of the additional system with reference both
to the impact on localized management, efficient operations,
and the effectiveness of regulation and to "the state of the
act and the area or region affected."
The Commission's decisions recognize these
principles. In the relatively few instances where it has
squarely addressed Clause (C), the Commission has stated that
the applicable inquiry is similar to that involved in applying
the size standards of Section 2(a)(29), which defines
"integrated" electric and gas systems using substantially
identical language.<F23> Commission decisions construing
the size criteria of Section 2(a)(29)(A) firmly establish that
sheer size is not dispositive and that the Commission must
take into account all relevant circumstances<F24> and
must "exercise its best judgment as to the maximum size of a
holding company in a particular area, considering the state of
the art and the area or region affected."<F25>
As discussed in more detail below, from these
perspectives -- i.e., a flexible fact-specific perspective in
which size is evaluated in relation both to its effect (if
any) on localized management, efficient operation and
effectiveness of regulation and to the "state of the art" and
the area or region affected -- it is clear that the continued
combination of gas and electric operations under NCE is not
prohibitively large under Section 11(b)(1)(C).
(a) The continued combination of gas and electric
operations under NCE will preserve the effectiveness of
regulation.
From the standpoint of regulatory effectiveness,
PSCo's gas division and Cheyenne's gas division are each
organized in separate corporations by regulatory
jurisdictions, which facilitate state regulation. Following
consummation of the Transaction, all Colorado gas operations
will continue to be conducted through PSCo and all Wyoming gas
operations through Cheyenne, both of which will continue to be
separate corporations, although Cheyenne will become a direct
subsidiary of NCE instead of PSCo. Thus, the effective state
regulatory scheme currently in place will continue unaltered
after the consummation of the Transaction. As previously
mentioned, both the CPUC and the WPSC will have indicated that
they do not object to this structure, confirming that they
believe they will continue to have effective regulatory
control over these gas operations.
(b) Localized management: The Commission's past
decisions on "localized management" have evaluated localized
management in terms of such factors as responsiveness to local
needs,<F26> whether management and directors were drawn
from local utilities,<F27> the preservation of corporate
identities,<F28> the ease of communication,<F29> and
other factors.
In addition, the Commission has held that so long as
there is evidence as to the local nature of important policy
determinations, the advantages of localized management are not
necessarily impaired by central control. The North American
Co., 11 SEC at 237. The localization of policy determinations
can be effectively achieved where management's time and
efforts are concentrated in the area served by the principal
system (here, the electric system). Southern Union Gas Co. et
al., HCAR 35-3802, 12 SEC 116, 142 (Sep. 19, 1942). It can
also be achieved where the systems are in close proximity to
each other. Engineers Public Service Co., HCAR 35-3796, 12
SEC 41, 66 (Sep. 16, 1942).
The retention of the gas properties under NCE
satisfies all of these considerations. Retention of the PSCo
gas properties would preserve the local nature of important
policy determinations in relation to those gas services, since
____________________
<F21> A table of anticipated losses in previous decisions
was attached to the Commission's decision and is
reproduced as Exhibit J-2 to the Application.
<F22> The Court of Appeals had overturned the Commission's
order by relying upon an estimated return of 4.1
percent and an average in Massachusetts of 5.9
percent. 376 F.2d 107, 114. The Supreme Court did
not decide whether such a reduction would be a
substantial loss, but rather found that the Court of
Appeals had used an improperly low figure and that
when additional tax deductions were considered the
proper figure was 5.2 percent.
<F23> See The North American Company, 11 SEC at 214
(footnote omitted):
The language of Clause (C) finds an almost identical
counterpart in the definition of an integrated
electric utility system contained in
Section 2(a)(29)(A). That definition describes a
system having certain physical characteristics and
which is, further --
...confined in its operations to a
single area or region, in one or more
States, not so large as to impair
(considering the state of the art and
the area or region affected) the
advantages of localized management,
efficient operation, and the
effectiveness of regulation.
Similar language appearing in different sections of
a statute is normally to be given the same meaning.
The use of this similar language in
Section 2(a)(29)(A) and in Clause (C) of
Section 11(b)(1), in our opinion, casts considerable
light on the meaning of the size standards of
Clause (C) and would seem to indicate that similar
considerations are involved in applying the size
standards of Clause (C) to a combination of
principal and additional systems, as are involved in
applying the size standards of Section 2(a)(29)(A)
to determine the maximum limits of a single
integrated system.
See also Lone Star Gas Corp. et al., HCAR 35-3865, 12 SEC
286, 295 (Oct. 22, 1942); Cities Service Power & Light
Co., HCAR 35-7615, 14 SEC 28, 59 (Aug. 17, 1943); The
Commonwealth & Southern Co., HCAR 35-4489, 26 SEC 464,
488-489 (Aug. 1, 1947).
<F24> See, e.g., Energy Corp., 55 SEC Docket 2035, 2040
(1993); Centerior Energy Corp., HCAR 35-24073, 35
SEC Docket 769, 771 (April 29, 1986); American
Electric Power Company, Inc., HCAR 35-20633, 46 SEC
1299, 1309 (July 21, 1978).
<F25> American Electric Power Company, Inc., 46 SEC at
1309.
<F26> Entergy Corp., HCAR 35-25952, 55 SEC Docket 2035,
2046 n.83 (Dec. 17, 1993); American Electric Power
Co., HCAR 35-20633, 15 SEC Docket 375, 383 (July 21,
1978) (advantages of localized management evaluated
in terms of whether an enlarged system could be
"responsive to local needs"); General Public
Utilities Corp. et al., HCAR 35-13116, 37 SEC 28, 36
(March 2, 1956) (localized management evaluated in
terms of "local problems and matters involving
relations with consumers").
<F27> See Centerior Energy Corp., 35 SEC Docket at 775
(advantages of localized management would not be
compromised by the affiliation of two electric
utilities under a new holding company because the
new holding company's "management [would be] drawn
from the present management" of the two utilities):
Northeast Utilities, HCAR 25221, 47 SEC Docket 1270,
1285 (Dec. 21, 1990) (advantages of localized
management would be preserved in part because the
board of New Hampshire utility, which was to be
acquired by an out-of-state holding company,
included "four New Hampshire residents").
<F28> See Northeast Utilities, 47 SEC Docket at 1285
(utilities "will be maintained as separate New
Hampshire corporations.. . . [t]herefore the
advantages of localized management will be
preserved"); Columbia Gas System, Inc., HCAR 35-
24599, 40 SEC Docket 654, 656 (March 15, 1988)
(benefits of local management maintained where the
utility to be added would be a separate subsidiary).
<F29> See American Electric Power Co., 15 SEC Docket at
383-84 (distance of corporate headquarters from
local management was a "less important factor in
determining what is in the public interest" given
the "present-day ease of communication and
transportation").
the principal corporate office of the holding company will be
located in Denver, which is the central location within the
gas service territory. This location of the principal
corporate office ensures that the company will be "responsive
to local needs and local public feeling" of its gas customers,
Lone Star Gas Corp., 12 SEC 286 (1942), since the decision
making body of the company will most likely be aware of the
issues of the population in the area of its residence.
In addition, the Cheyenne gas division will continue
to recognize economies of scale from certain centralized
functions such as rate operations and billing, while the day-
to-day operation of its system will continue to be located in
Cheyenne, in the midst of its customers. By contrast, if the
gas operations of Cheyenne were divested, and acquired by
another company not currently a part of the community, such an
acquiror would likely not be as sensitive to the needs and
desires of the area as Cheyenne. The danger of such an
acquisition is especially real here, since the Cheyenne gas
system on a stand-alone basis would be relatively small, and
the loss of economies occasioned by divestiture would be
substantial, thereby rendering the company especially
vulnerable to acquisition.
Finally, the gas properties of PSCo and Cheyenne are
located almost entirely within the electric service area of
PSCo and Cheyenne. While the Commission has never required
that additional systems must be entirely within the area
served by the principal system, a substantial overlap of
service territories has assisted in determining that a
combination is not too large. See, e.g., Engineers Public
Service Co., 12 SEC 41 (1942) (finding a combination to be not
too large when the additional system was entirely within the
principal service territory); New England Electric System, 41
SEC at 892 (finding that where 75 percent of the gas franchise
area was located within the electric franchise area, no
substantial question under clause C was raised). As a result,
the continued combination of the gas and electric systems
under the control of NCE will not be so large as to impair the
advantages of localized management.
(c) Efficiency of operation: The foregoing
geographic and management factors also ensure that the
continued combination of gas and electric properties under NCE
will not impair the efficiency of gas and electric operation.
Indeed, as set forth in NCE's Application, the Transaction is
expected to result in significant efficiencies, a portion of
which will directly benefit gas operations. By contrast, as
described more fully in the divestiture impact analysis
submitted by NCE in support of its Application, a forced
divestiture of the PSCo and Cheyenne gas systems would result
in a loss of substantial economies that can be preserved by
the continued operation of those gas system under the control
of NCE.
3. Recent Developments
As previously mentioned, the Commission and courts
have recognized that the Act must be interpreted "in the light
of contemporary circumstances" and "changing economic and
regulatory climates." Union Electric Co., 45 SEC at 503 &
n.52, aff'd sub nom. City of Cape Girardeau v. SEC, 521 F.2d
324 (D.C. Cir. 1975). See also The Southern Company, HCAR 35-
25639, 50 SEC 1328, 1337 (Sep. 23, 1992) (citing Union
Electric with approval). Section 11(b)(1)(C) itself calls on
the Commission to consider the "state of the art" and thereby
requires that advances in communications and changes wrought
by intervening legal and regulatory developments must be
considered by the Commission, and the Supreme Court's SEC v.
New England Electric System decision permits the Commission to
exercise its discretion in interpreting the Act to account for
such changes. As set forth in section I-4 above, changes in
the economic and regulatory climate are rapidly rendering the
old labels of "gas utility company" and "electric utility
company" obsolete, have effectively eliminated many of the
policy concerns underlying the old hostility to registered
combination utility systems, and have established competing
policy priorities. Accordingly, it is appropriate for the
Commission to reflect the radical developments in the utility
industry and permit the request of NCE to become a combination
utility.
CONCLUSION
For the reasons set forth above, and in NCE's
Application and supporting exhibits, it is respectfully
submitted that the Commission should allow NCE to retain the
gas utility operations of PSCo and Cheyenne following the
consummation of the Transaction and the registration of NCE as
a holding company under the Act.
EXHIBIT J-1
PUBLIC SERVICE COMPANY OF COLORADO
CHEYENNE LIGHT, FUEL AND POWER COMPANY
ANALYSIS OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS OPERATIONS OF
PSCO AND ITS CHEYENNE SUBSIDIARY
This Study was undertaken by the management and staff of Public
Service Company of Colorado (PSCo). The objective of the study
is to quantify the economic impact on shareholders and customers
of divesting PSCo of its Colorado natural gas assets and
business, and of divesting Cheyenne Light, Fuel and Power Company
(Cheyenne), a wholly-owned subsidiary of PSCo, of its natural gas
assets and business.
January 26, 1996
I. EXECUTIVE SUMMARY
Public Service Company of Colorado's (PSCo) management and staff
have undertaken this "Analysis of the Economic Impact of a
Divestiture of the Gas Operations of PSCO and Its Cheyenne
Subsidiary" (Study) in order to quantify the economic impact on
its shareholders and its customers of spinning off its and
Cheyenne Light, Fuel and Power Company's (Cheyenne's) natural gas
assets and businesses. PSCo is currently an exempt holding
company under the Public Utility Holding Company Act of 1935
(PUHCA) providing electric and natural gas service in a major
portion of the State of Colorado. Cheyenne is a wholly-owned
subsidiary of PSCo providing electric and natural gas service in
and around Cheyenne, Wyoming.
The Study quantifies the economic impacts of operating the
following two entities as independent, stand-alone companies if
they were disaggregated from PSCo's combined businesses:
- The Colorado portion of PSCo's gas business spun-
off into a new organization called, for the
purpose of this Study, NewGasCo-Colo; and
- Cheyenne's gas business spun-off into a new
organization called, for the purpose of this
Study, NewGasCo-Wyo.
The Study evaluates the increased costs or "lost economies"
associated with divestiture of these businesses from two
perspectives shareholders and customers. The effect on
shareholders is the direct result of the increased costs or lost
economies resulting from a spin-off or divestiture, absent
regulatory rate relief to recoup these lost economies. The
effect on customers assumes recovery of these lost economies
through rate increases, and is divided into two parts. The
potential effects on customers have first been evaluated in terms
of increased revenue requirements and rates, and second in terms
of the impact of other quantifiable and non-quantifiable costs.
The projected impacts on the shareholders of the lost economies
resulting from the spin-off of PSCo's gas business into NewGasCo-
Colo and the spin-off of Cheyenne's gas business into NewGasCo-
Wyo, assuming no rate adjustments to recover the lost economies
and associated incomes taxes, are shown in Table I-1.
TABLE I-1
ANNUAL SHAREHOLDER IMPACT OF LOST ECONOMIES
NEWGASCO-COLO NEWGASCO-WYO
LOST ECONOMIES AS A PERCENT OF:
Total Gas Operating Revenue 6.44% 10.77%
Total Gas Operating Revenue
Deductions 7.18% 12.30%
Gross Gas Income 62.54% 86.36%
Net Gas Income 85.06% 109.94%
In Table I-1, Total Gas Operating Revenue is the sum of rate and
other revenue for the 12 months ending June 30, 1995 (Base
Case).<F1> Total Gas Operating Revenue Deductions includes
all operation and maintenance expenses, administrative and
general expenses, depreciation and all taxes, except income
taxes. Gross Gas Income is the difference between Total Gas
Operating Revenue and Total Gas Operating Revenue Deductions.
Net Gas Income is Gross Gas Income minus Income Taxes.
Alternatively, and assuming that each organization is allowed to
increase its rate revenue to recover these lost economies and
attendant income taxes through rate increases, the projected
impact on PSCo's and Cheyenne's customers is shown in Table I-2.
TABLE I-2
ANNUAL GAS CUSTOMER IMPACT OF LOST ECONOMIES
RATE REVENUE NEWGASCO-COLO NEWGASCO-WYO
Pre Spin-off $674,013,500 $15,607,321
Post Spin-off $718,621,169 $17,382,760
Increase $ 44,607,669 $ 1,775,439
Percent Increase 6.62% 11.38%
In addition to the foregoing impacts, the following table sets
forth the impact on the remaining electric companies (comprised
of PSCo's and Cheyenne's current electric businesses). This
impact is primarily due to the expense of additional employees
required to perform the multitude of functions accomplished by
employees who currently work for both the electric and gas
businesses and assumes that pass through of the lost economies
and attendant income taxes is allowed by the appropriate
regulatory agencies.
TABLE I-3
ANNUAL ELECTRIC CUSTOMER IMPACT OF LOST ECONOMIES
RATE REVENUE PSCO REMAINING ELECTRIC CHEYENNE REMAINING ELECTRIC
Pre Spin-off $1,313,022,822 $35,297,354
Post Spin-off $1,357,892,731 $36,307,879
Increase $44,869,909 $1,010,525
Percent Increase 3.42% 2.86%
If, on the other hand, the foregoing organizations were not spun-
off from PSCo and Cheyenne, the merger was implemented as
proposed, and assuming a rate decrease to pass on the potential
merger benefits primarily relating to savings in gas costs, the
impact on gas customers is shown in Table I-4.
TABLE I-4
ANNUAL GAS CUSTOMER IMPACT OF POTENTIAL
MERGER BENEFITS
RATE REVENUE PSCO GAS CHEYENNE GAS
Pre Merger $674,013,500 $15,607,321
Post Merger 668,891,526 15,453,495
Decrease 5,121,974 153,826
Percent Decrease 0.76% 0.99%
Finally, both PSCo's and Cheyenne's gas customers would incur
increased personal costs such as postage on a separate envelope
and additional check costs to mail payments to two utilities
rather than one. This does not include additional customer
confusion resulting from doing business with two utilities rather
than one. The increased postage expense alone of $3.84 per
customer per year for all customers is shown in Table 1-5.
TABLE I-5
OTHER ANNUAL CUSTOMER IMPACTS
PSCO POSTAGE CHEYENNE POSTAGE
$3,478,637 $101,395
II. CONCLUSIONS
The spin-off of PSCo's and Cheyenne's current gas businesses into
two stand-alone companies is estimated to result in a substantial
increase in costs and therefore a substantial decrease in
earnings to PSCo shareholders absent rate relief to recoup these
decreased earnings. Without an increase in rates, the immediate
negative effect on shareholders earnings would be substantial.
For example, the earnings contribution relating to PSCo's and
Cheyenne's gas businesses would be decreased by approximately 85
percent and 110 percent, respectively, as shown in Table I-1.
Such a decline would make ownership of shares in these stand-
alone companies unattractive.
The pass through of these cost increases to customers in Colorado
and Wyoming will result in a significant increase in the level of
cost borne by these customers with no attendant increase in the
level or quality of service. The rate increases required to
provide the level of revenue needed to cover costs to operate the
NewGasCos (NewGasCo-Colo and NewGasCo-Wyo) will be significant,
amounting to approximately $46.4 million, as shown in Table I-2.
Such rate increases would make the NewGasCos less competitive at
a time when competition in the energy industry is rapidly
increasing due to Federal Energy Regulatory Commission (FERC)
Order 636 and other FERC and state regulatory initiatives.
The potential by-pass of Local Distribution Companies (LDCs) is
becoming a reality that LDCs must face daily, along with the
commensurate possibility of a decreasing customer base, resultant
rate increases, and potential stranded costs. The FERC has
sanctioned the bypass of LDC systems by interstate pipelines in
recent years in the interest of competition. In addition,
natural gas service continues to compete with alternative fuels.
The focus on competition is beginning to require the unbundling
of LDC services. This trend is occurring as state commissions,
LDCs, and their customers, call for a change in the way LDCs do
business. While the objectives of these groups are not always
consistent, the result will likely be the same increased
competition. LDCs already face fierce price competition, and
must remain competitive to avoid shareholder losses and a reduced
customer base. As a result of the increased costs discussed
herein, bundled or unbundled services may become uncompetitive as
the pass through of these increases could potentially result in
rates that few customers would pay when compared to other
competitive options they may have.
In addition, the FERC's ongoing electric Notice of Proposed
Rulemaking Promoting Wholesale Competition Through Open Access
Nondiscriminatory Transmission Services by Public Utilities (RM
95-8-000, et. al.) and state retail wheeling initiatives are
expected to increase competition in the electric industry. The
lost economies estimated for PSCo's and Cheyenne's remaining
electric companies, if divestiture of gas operations were
required, would also have an adverse impact on their ability to
successfully compete in the electric industry. A forced
divestiture as a result of the proposed merged company would
result in the remaining companies becoming less competitive than
they would be as part of a merged company. A graphic comparison
of typical residential and commercial gas bills in Colorado and
Cheyenne, Wyoming, illustrating the loss of each NewGasCo's
relative position as compared to other utilities resulting from a
spin-off, is contained in Table VIII-1, page 29.
As opposed to the negative results of the economic impact, two
positive conclusions were noted.
- - First, it is expected that after divestiture, the two
segments of PSCo's business analyzed in this Study would
continue to be managed locally, as they currently are.
PSCo's gas business would continue to be managed from and
based in Denver and from the other local/regional parts of
Colorado where management is currently based. Cheyenne's
gas business would continue to be locally based in the City
of Cheyenne, Wyoming. Therefore, the benefits and costs of
localized management will continue to be realized.
- - Second, it is expected that after divestiture the Colorado
Public Utilities Commission (CPUC) and the Wyoming Public
Service Commission (WPSC) would continue to have and
exercise the same jurisdictional authority over the
regulated businesses as they do today. PSCo's gas business
would continue to be regulated primarily by the CPUC, and
Cheyenne's gas business would continue to be regulated
primarily by the WPSC. Therefore, the state commissions
will continue as the primary agencies responsible for the
regulation of the LDCs.<F2>
However, it should be noted that these same conditions (continued
local management and state regulatory jurisdiction) would exist
if the gas businesses remain with the new merged entity.
As previously discussed in the Executive Summary, there is a
combination of approximately $46.4 million in revenue increases
needed for the NewGasCos, shown in Table I-2, and an additional
$45.9 million in revenue increases as a result of lost economies,
including income taxes, that will impact the remaining PSCo and
Cheyenne electric companies, and potentially their customers
shown in Table I-3. Therefore, the total revenue increases that
would be required is approximately $92.3 million.
Based on the foregoing conclusions, PSCo believes that spinning
off the gas businesses would adversely impact PSCo's shareholders
and both electric and gas customers. Therefore, PSCo recommends
that it is in the best interests of its shareholders and
customers that PSCo and Cheyenne retain their existing gas assets
and businesses.
III. SPIN-OFF ASSUMPTIONS
The Study assumes that two segments of PSCo's current business
can, in fact, be spun-off into stand-alone companies. These two
potential stand-alone businesses are currently part of the
combined companies as described below:<F3>
- - Within Colorado, PSCo is primarily a combination electric
and gas utility, engaged in the generation, purchase,
transmission, distribution and sale of electricity, and in
the purchase, transmission, distribution, sale and
transportation of natural gas.
PSCo's Colorado gas business includes an extensive
transmission and distribution system serving numerous
communities throughout Colorado. PSCo's gas system serves
over 900,000 residential, commercial, industrial, and
transportation customers. Total annual gas revenues are
approximately $656 million. Annual gas deliveries are
nearly 220,000 million cubic feet (MMcf). The Study assumes
that the Colorado gas portion of PSCo is spun-off into a
stand-alone gas company NewGasCo-Colo.
PSCo's Colorado electric business, which includes
generation, transmission, and distribution facilities
located statewide, provides service to nearly 1.1 million
____________________
<F1> The dollar amounts contained in the study are expressed in
1995 dollars.
<F2> PSCo also understands, based on preliminary discussions with
the CPUC and WPSC, that these regulatory agencies support
the retention of these gas businesses post-merger.
<F3> For a comparison of PSCo s and Cheyenne s gas operations
relative to other utilities based on 1994 data, see Appendix
A.
customers throughout a large portion of Colorado. Total
annual electric revenues are approximately $1.3 billion and
annual sales are nearly 24 million megawatt hours (Mwh).
- - PSCo's wholly-owned subsidiary, Cheyenne, operates a
combination electric and gas business in the City of
Cheyenne, Wyoming and in a significant portion of Laramie
County, Wyoming. Cheyenne is engaged in the purchase,
transmission, distribution and sale of electricity, and in
the purchase, distribution, sale and transportation of
natural gas.
The Cheyenne gas distribution system serves over 26,500
customers. Total annual gas revenues are approximately
$15.2 million. Annual gas deliveries are nearly 20,000
MMcf. The Study assumes that the gas portion of Cheyenne is
spun-off into a stand-alone gas company NewGasCo-Wyo.
The Cheyenne electric system consists of electric
transmission and distribution facilities and serves over
33,000 customers. Total annual electric revenues are
approximately $35.5 million and annual sales are
approximately 776,000 Mwh.
The Study assumes that it would be possible to spin-off PSCo's
Colorado gas business and its Cheyenne gas business from their
respective combined gas and electric businesses for the following
reasons:
- The electric and gas systems are physically separate;
- A large number of personnel who are directly involved
in the day-to-day operations of the electric and gas
physical plant ("systems") are dedicated electric-only
or gas-only;
- The regulatory treatment of the respective electric and
gas revenue requirements and tariff filings is, for the
most part, handled separately; and,
- In other parts of the country, stand-alone electric and
gas companies routinely share overlapping service
territories.
In addition, the Study analyzes the NewGasCo-Colo and NewGasCo-
Wyo organizations as two stand-alone companies rather than one
combined-gas company for the following reasons:
- Cheyenne is a wholly-owned subsidiary of PSCo with
separate management and its own Board of Directors;
- PSCo's Colorado gas business and Cheyenne's gas
business are currently regulated by different state
commissions. PSCo's is regulated by the CPUC, while
Cheyenne's is regulated by the WPSC;<F4>
- The PSCo and Cheyenne gas systems can be operated
independently;<F5> and,
- A significant number of personnel who oversee and
maintain the operation of the two systems are employees
of PSCo-only or Cheyenne-only.
IV. GENERAL STUDY ASSUMPTIONS
The assumptions, information and data utilized in the analyses
undertaken in this Study are based on the energy industry
expertise and experience possessed by the management and staff of
PSCo and Cheyenne. Employees with experience in all major facets
of the operations of PSCo and Cheyenne were consulted and
provided input. The Study's aggregate conclusions are the result
of many independent inputs and analyses from highly qualified
individuals throughout the companies.
Fortunately, much of the base information and data required for
the Study was already in existence. For example, PSCo, with the
assistance of Edgar Dunn & Company a nationally recognized
management consulting firm recently completed a restructuring
of the organization.<F6> During that restructuring, national
utility benchmarking information on compensation, benefits, and
organizational structure were obtained and evaluated. This Study
was able to draw on that data and information, and the experience
garnered during the reorganization, for the purpose of developing
the stand-alone companies. Further, the Base Cases for the Study
are founded upon sales, revenues, costs, and rates of return from
rate of return studies recently filed with the CPUC and
WPSC.<F7>
An exhaustive analysis of every cost component that may be
associated with a divestiture was not made. As a result of
discussions with numerous personnel at PSCo and Cheyenne, the
major cost components associated with a divestiture were
identified, quantified, and included in the Study results.
The remainder of this section discusses the major assumptions
that were employed in developing the Study.
A. For the purposes of developing the impacts of a spin-off on
the various organizations, it is assumed that each of the
organizations to be spun-off will operate as an independent,
stand-alone company. Therefore, they will have all of the
necessary management and personnel, along with the computer
systems, facilities, equipment, materials and supplies
required to operate as stand-alone companies.
B. For the purpose of determining the staffing requirements of
each stand-alone company, the guiding principle was that a
sufficient number of employees be included in order to
assure that all present functions applicable to the stand-
alone organization are performed, and that the present level
and quality of service remain unchanged.
C. Labor costs are based on an assessment of straight-time,
overtime, and pension and benefit costs for each employee of
the stand-alone organizations, less an adjustment to
capitalize wages associated with on-going construction to
serve new and existing customers.
D. Unless otherwise discussed, the non-labor costs will remain
essentially unchanged from those costs allocated to the
organization to be spun-off. All gas related costs, such as
the cost of gas, have been included in each gas
organization's costs. Allocated costs such as accounting,
billing, rents, materials and supplies, for example, are
assumed to be the same after the spin-off as before.
E. Annual facility costs relating to the additional employees
required to maintain the current levels of service have been
incorporated into the analyses.
F. For the purpose of showing the final impact on each
company's customers, it is assumed that full pass-through of
all of the lost economies, including income taxes, will be
allowed in a formal rate proceeding after divestiture, and
that the current rate levels remain unchanged until that
time.
G. For the purposes of developing the impact of the spin-off on
each organization, a comparison is made to a Base Case. The
Base Case for each company is a pro forma rate of return
study, or cost of service study, for the twelve months ended
June 30, 1995, as discussed earlier, including all currently
approved regulatory cost of service allowances, principles,
and adjustments, such as adjustments for the authorized rate
of return and annualized wage increases.
H. It is assumed that each organization will be subject to the
regulation of the same state & federal agencies that
presently regulate each organization.
I. If there currently exists a contract for services from
independent third-parties, the contract will continue for
the spun-off organizations.
J. Only the categories of costs that are expected to change
significantly were analyzed. Clearly many other costs
beyond those presented in this Study will be impacted by a
divestiture. Footnotes throughout the Study highlight
instances in which analysts contributing to the project
pointed out additional costs which were not quantified.
V. NEWGASCO-COLO ANALYSIS
A detailed study has been undertaken to analyze the potential
impact on both the shareholders and customers of PSCo if it were
ordered to divest its Colorado gas business. In order to
accomplish that study, the management of PSCo provided estimates
of the staffing levels of a NewGasCo-Colo, as well as any other
operational and administrative changes that would have to be made
in order to maintain the same level and quality of service to its
gas customers after a spin-off of the gas business.
A. Specific Assumptions
In addition to the General Study Assumptions cited earlier, the
following specific assumptions have been incorporated into the
analysis of the spin-off of the gas operations of PSCo into a
NewGasCo-Colo.
1. Labor Assumptions
a. The PSCo organization as of September 30, 1995 was
used as the template for developing the NewGasCo-
Colo organization structure.
b. Where practical, some management positions were
combined, eliminated or replaced with non-
management positions. Some further consolidation
of management positions may be possible,
particularly within the staff organizations.
However, the overall span of control (the ratio of
non-management employees to management employees)
for NewGasCo-Colo is only slightly smaller than
the span of control in the PSCo organization. As
of September 30, 1995, PSCo had 421 management and
4,279 non-management employees, yielding a span of
control of 10.2 employees per manager. NewGasCo-
Colo has 185 management and 1,784 non-management
employees, resulting in a span of control of 9.6
(i.e., more managers per non-management employee
than the organization). This smaller span of
control is due to the following:
1) A duplicate executive organization due to the
need of having a separate set of executives
for the new organization;
2) Management employees required in the
geographic areas, but with a lower non-
management employee count due to the
elimination of electric responsibilities;
and,
3) The number of management personnel required
in the staff organizations possessing
technical expertise and background with some
decrease in non-management staff size due to
the elimination of support for electric
functions.
c. To provide an equivalent quality of customer
service an analysis was made of the Customer
Accounts and Service Organization to determine the
number of employees required for the customer
service area of NewGasCo-Colo. The staffing
percentages required in the NewGasCo-Colo compared
to the current combined company for the following
functional areas of the Customer Accounts and
Service Organization are as follows:
Credit 100 percent
Personal Account Representatives 100 percent
Billing 100 percent
Remittance 100 percent
Collection 75 percent
Call Center 86 percent
A 100 percent factor, for example, would result
in a doubling of the number of existing employees,
as the electric business would also require the
same number of employees as the spun-off gas
organization to accomplish the same function.
These functions are accomplished by a relatively
small number of personnel and a spin-off of gas
responsibilities would not affect the number of
employees required to accomplish electric-only
functions.
d. In order to determine the number of meter readers
required, the average number of gas meters per
meter reader in Pueblo, Colorado was compared to
total gas meters in the entire NewGasCo-Colo
service territory. Currently, in Pueblo, PSCo
provides only gas service and therefore the meter
readers read only gas meters, rather than both gas
and electric. The customer density in and around
Pueblo approximates the gas customer density in
the rest of Colorado.
____________________
<F4> Both PSCo and Cheyenne are regulated to a minor extent by
the FERC under the provisions of limited jurisdiction
certificates pursuant to Section 7(c) of the Natural Gas Act
of 1938.
<F5> As discussed in the Application/Declaration on Form U-1 of
New Century Energies to which this Study is an exhibit, the
PSCo and Cheyenne gas systems together constitute an
integrated public utility system within the meaning of
Section 2 (a) (29) of the Public Utility Holding Company Act
of 1935.
<F6> The savings anticipated to be realized from the
reorganization have been taken into account in both the PSCo
Base Case and the NewGasCo-Colo impact analysis contained in
this Study.
<F7> The NewGasCo-Colo Base Case is essentially the rate of
return study for PSCo s gas business contained in Exhibit
DAB-1 to PSCo s merger applications filed with the CPUC on
November 9, 1995. The NewGasCo-Wyo Base Case is based on
the rate of return study filed with the WPSC in Cheyenne s
October 1, 1995 Gas Cost Adjustment, Docket No. 30005-GP-95-
37. Both studies are based on the 12 months ended June 30,
1995.
e. Executive salaries were based on national survey
data.<F8>
f. All non-executive salaries are based on current
PSCo average compensation for the appropriate job
level.
g. Pensions and benefits are estimated as a percent
of the labor cost. Currently, pension and
benefits average an additional cost of
approximately 37.6 percent above the base cost of
labor. Therefore, after the base cost of labor
was determined, an additional 37.6 percent was
added to include pension and benefit costs.
h. The cost of overtime varies depending upon the
time of year, work load, and job classifications.
The overtime cost assumptions utilized are
comparable with the percent of overtime cost
currently experienced by PSCo.<F9>
2. Operations & Maintenance (O&M) and Administrative and
General Assumptions (A&G):
a. Annual facility costs relating to the additional
employees required to operate the stand-alone
companies have been incorporated into the Study.
b. Separate arrangements will be made for external
auditing of the books and accounts of NewGasCo-
Colo.
c. Executive and administrative support from PSCo
would cease upon any divestiture, and these
functions have been provided for in the NewGasCo-
Colo organizational structure.
d. Separate gas bills will be provided the customers
of NewGasCo-Colo.
3. Capital Expenditure and Cost Assumptions
a. With the exception of a new Call Center which
would need to be constructed in order to handle
customer orders and bill inquiries, estimated at
$20.0 million, no additional capital expenditures
will be made by NewGasCo-Colo as a direct
consequence of spinning off the gas facilities
from PSCo. This, of course, does not include
planned capital expenditures to be made in the
normal course of business in order to maintain
existing levels of service and provide service to
new customers.
b. In the event PSCo was required to divest its gas
operations, and assuming the assets were spun-off
into a new stand-alone corporation, the
requirements of the existing indentures would
result in the need to recapitalize at market rates
in effect at the time of the spin-off.
Additionally, costs associated with the issuance
of securities would be incurred and ultimately
included in the NewGasCo-Colo cost of service.
The current capital structure of PSCo is used for
the purpose of analyzing capital costs for
NewGasCo-Colo. This structure is approximately
equal to the capital structure approved by the
CPUC in PSCo's most recent rate proceeding, Docket
No. 93S-001EG. As of June 30, 1995, PSCo's gas
rate base was capitalized as follows:
Ratio Cost Composite Cost
Long Term Debt 40.39% 7.66% 3.09%
Preferred Stock 7.80% 6.65% 0.52%
Common Equity 51.81% 11.00% 5.70%
Total: 100.00% 9.31%
This Study assumes that NewGasCo-Colo would have
access to capital at a cost similar to that of
PSCo. The difference expected from the rates
listed above would result from replacing embedded
average debt and preferred costs with those
available at the time the new company is
capitalized.<F10> The existing debt financing
supporting PSCo's assets is primarily thirty-year
utility bonds rated BBB+ at an average imbedded
rate of 7.66 percent. The estimated rate on new
comparable debt securities in 1997 is 8.03 percent.
Using this forecasted rate and adjusting for issuance
costs of approximately 1.5 percent of proceeds to
be rolled in and amortized over the life of the
bonds, the cost of debt for NewGasCo-Colo would be
8.16 percent. An additional cost of $250,000
would be incurred in executing a new indenture.
The market rate for utility sinking fund preferred
stock in 1997 is forecast to be 7.22 percent,
compared to the existing 6.65 percent imbedded
cost. The cost to issue preferred stock would be
approximately 2 percent of proceeds. As in the
case of long term debt, these costs would be
recovered as additional cost of capital and
amortized over the life of the outstanding stock.
The effective cost of preferred stock including
issuance costs would be 7.40 percent.
The cost of common equity is 11.00 percent which
was established by the CPUC on October 14, 1993 in
PSCo's most recent rate proceeding, Docket No.
93S-001EG. Common equity would not require the
sale of new securities, as new stock certificates
would be issued to current shareholders of PSCo.
This would require some 78,000 certificates at a
cost of approximately $780,000. This cost would
be charged as a transition cost to be recovered
over 30 years.
4. Transition Cost Assumptions Transition costs, such as
the renegotiation of gas-only franchises with the
numerous cities and towns in which PSCo provides
service, as well as upfront costs related to the
creation of new indenture agreements, would be incurred
and amortized over the appropriate life of the
asset.<F11>
B. Organization of NewGasCo-Colo
The functional organization chart of NewGasCo-Colo is
contained in Appendix B.
Design of NewGasCo-Colo Organization The PSCo organization
at September 30, 1995 was used as the pattern for developing
the NewGasCo-Colo organization structure. The
organizational structure is the result of the recent major
restructuring completed with the assistance of Edgar Dunn &
Company, a nationally recognized management consulting firm.
In order to develop the new structure for the stand-alone
company, management representing each organization was
contacted for input regarding staffing levels.
Board of Directors The Board of Directors is assumed to
consist of nine directors based on the size and scope of
NewGasCo-Colo.
Chief Executive Officer(CEO) The CEO reports to the Board
of Directors and is responsible for overseeing the entire
Company. The CEO oversees three direct-report executives
(Chief Operating Officer; Chief Financial Officer; and
General Counsel) and is responsible for Corporate
Communications and Audit Services. The Executive
Organization totals 23 employees, and is composed of 8
executives, 2 managers, and 13 non-management personnel.
Chief Operating Officer (COO) The COO reports directly to
the CEO and is responsible for the overall operating
activities of the Company. The COO oversees the work of
three executives (Marketing, Planning and Supply;
Engineering and Technical Support; and Operations and
Customer Service), and in addition directs the Managers of
Business Processes and Information Technology and a
secretary. The organization managed by the COO totals 1,767
employees, and is composed of 146 managers, and 1,621 non-
management personnel.
Vice President, Marketing, Planning and Supply The Vice
President (VP) of Marketing, Planning and Supply is
responsible for residential marketing, wholesale
marketing, sales to large commercial and industrial
customers, market research, measurement, program
development and evaluation, business support, the
natural gas vehicle program, acquiring interstate gas
transportation, forecasting gas requirements, making
sales gas purchases, and gas system control
coordination. Marketing, Planning and Supply totals
129 employees, composed of 16 management and 113 non-
management personnel.
Vice President, Engineering and Technical Support The
VP of Engineering and Technical Support is responsible
for all major engineering functions such as system
design (pipelines, storage reservoirs, and
compressors), safety, environmental training,
purchasing, contracts, material management,
transportation, and facilities maintenance.
Engineering and Technical Support totals 252 employees,
composed of 27 management and 225 non-management
personnel.
Vice President, Operations and Customer Service The VP
of Operations and Customer Service is responsible for
the day-to-day interface with customers, customer
accounts, regional management, pipeline construction,
distribution system support services, meter reading,
credit and billing, and customer information service.
Operations and Customer Service is the largest
department, totaling 1,363 employees, composed of 99
management and 1,264 non-management personnel.
Manager, Business Processes The Manager of Business
Processes is responsible for reviewing and recommending
improvements to on-going business practices and
procedures. Business Processes totals four employees
and is composed of one management and three non-
management personnel.
Manager, Information Technology The Manager of
Information Technology is responsible for asset
management, technology management, and business
planning. Information Technology totals 18 employees,
and is composed of three management and 15 non-
management personnel. The day-to-day operations,
maintenance, software development, and equipment
refresh functions will continue to be under contract
with a third-party information technology provider.
Chief Financial Officer (CFO) The CFO reports directly
to the CEO and is responsible for rate, regulatory,
finance, treasury, and accounting functions. The CFO
oversees the work of four managers (Rates and
Regulation; Investor Relations; Treasury; and the
Controller/Corporate Secretary.) The organization
managed by the CFO totals 113 employees, and is
composed of 18 management and 95 non-management
personnel.
General Counsel The General Counsel reports directly to
the CEO and oversees the VP of Human Resources, the
Associate Legal Counsel, the Governmental Affairs
Group, and the Unit Manager of Risk Management. The
General Counsel is responsible for governmental
affairs, legal services, and liability risk management,
and, through the VP of Human Resources, oversees
company staffing, compensation, training, benefits,
health services, and employee relations. The
organization managed by the General Counsel totals 66
employees, and is composed of 11 management and 55 non-
management personnel.
C. Annual Cost Increases
Based upon the foregoing general and specific assumptions, and
the staffing requirements of the organizational structure, the
following increased annual costs have been developed for
NewGasCo-Colo:
1. Labor Costs $21,099,644
2. Pension and Benefits 11,880,673
3. Facility Costs 2,361,310
4. Postage Expense 1,788,667
5. Board of Director's Fees 189,000
6. Reporting Costs 670,660
7. Payroll Taxes 1,196,435
8. Call Center Deprecation 440,000
9. Capitalized Labor Depreciation 45,623
Total: $39,672,012
____________________
<F8> Neither an Employee Incentive Plan (EIP), nor a Management
Incentive Plan has been included when determining the
NewGasCo-Colo cost of labor. Note, however, that it is
estimated that a plan similar to the present PSCo plan could
result in the following additional annual costs:
EIP per employee $1000 per year
Middle Management at Target 15 percent of base salaries
Unit Managers at Target 10 percent of base salaries
<F9> Shift differential pay, overtime meal pay, and other premium
pay types (i.e., time and one half for holidays) have not
been included in determining the payroll cost for NewGasCo-
Colo. An analysis of these costs based on historic
statistics indicates that these costs could be as high as
one percent of total labor costs or approximately $1.0
million per year.
<F10> It is probable that the level of investor risk for
NewGasCo-Colo will be higher than PSCo because of the
reduced asset base and relative volatility of cash
flows. As a result, it would in all probability
receive a lower bond rating and higher debt costs.
However, no separate study was made to quantify the
effect of a lower bond rating, and therefore, no
impact was included.
<F11> Retraining costs have not been included as it is
assumed all new employees will be fully qualified and
receive minimal on-the-job training.
D. Capital Cost Increases
Using the forecasted 1997 marginal rates for debt and preferred
stock and the allowed cost of equity as discussed earlier, and
recasting the cost of capitalizing the gas assets using PSCo's
existing capital structure as a proxy for NewGasCo-Colo results
in the following:
Ratio Cost Composite Cost
Long Term Debt 40.39% 8.16% 3.30%
Preferred Stock 7.80% 7.40% 0.58%
Common Equity 51.81% 11.00% 5.70%
Total: 100.00% 9.58%
The actual interest rates and preferred stock yields in effect at
the time of divestiture could be substantially higher or lower
than the forecasts employed here.<F12>
Applying the foregoing capital cost to NewGasCo-Colo results in
the following increased annual capital costs:
1. Increased Borrowing Cost $1,486,784
2. Capital Expenditure 1,874,615
3. Capitalized Labor 188,551
4. Capitalized Transition 259,172
Total: $3,809,122
E. Transition Cost Increases
The following is a summary of the principal transition costs that
will be incurred as a result of a spin-off of the gas business of
PSCo and their annual costs:
Annual
Asset Cost Increase
1. Renegotiation of Franchises $1,794,400 $ 89,720
2. New Indenture 250,000 8,333
3. Stock Certificates 780,000 26,000
Total: $2,824,400 $124,053
F. Total Lost Economies
Summarizing the foregoing increased annual costs, capital costs,
and amortized transition costs which were developed in the Base
Case Study yields the following total lost economies before the
effect of income taxes:
Total Lost Economies: $43,605,187
G. Income Taxes
Recovery of the foregoing lost economies in a general rate
proceeding would also require an increase to recover income taxes
associated with the lost economies. The following is a summary
of the revenue effect of income taxes:
Total Income Taxes: $1,002,482
H. Base Case - 12 Months Ended June 30, 1995
The following is a summary of the key components of the Base Case
(the definition of each item is the same as in the Executive
Summary):
1. Total Gas Operating Revenue $677,326,418
2. Total Gas Operating Revenue Deductions $607,599,384
3. Gross Gas Income $69,727,034
4. Net Gas Income $51,266,520
I. Comparison of the Total Lost Economies of NewGasCo-Colo to
the Base Case
The Total Lost Economies, before the effect of income taxes as a
percent of the key components of the Base Case are:
1. Percent of Total Gas Operating Revenue 6.44%
2. Percent of Total Gas Operating Revenue Deductions 7.18%
3. Percent of Gross Gas Income 62.54%
4. Percent of Net Gas Income 85.06%
J. Comparison of Rates of Return on Rate Base
The following is a comparison of the rates of return on rate base
for the gas operations before and after an assumed spin-off:
1. Pro Forma Rate of Return - Existing 6.89%
2. Pro Forma Rate of Return - Base Case 9.31%
3. Pro Forma Rate of Return after Spin-off 2.47%
4. Required Rate of Return based on NewGasCo-Colo
Cost of Capital 9.58%
VI. NEWGASCO-WYO ANALYSIS
As was the case with PSCo, a detailed study has been undertaken
to analyze the potential impact on both the shareholders and
customers of Cheyenne if it were ordered to divest the gas
business.
In order to accomplish that study, the management of Cheyenne
provided estimates of the staffing levels of a NewGasCo-Wyo, as
well as any other operational and administrative changes that
would have to be made in order to maintain the same level and
quality of service to its gas customers after a spin-off of the
gas properties.
A. Specific Assumptions
In addition to the General Study Assumptions cited earlier, the
following specific assumptions have been incorporated into the
analysis of the spin-off of the gas operations of Cheyenne into a
NewGasCo-Wyo.
1. Labor Assumptions:
a. As was the case with NewGasCo-Colo, the Cheyenne
organization at September 30, 1995 was used as the
template for developing the NewGasCo-Wyo
organization structure.
b. In order to maintain the same quality of service
after the divestiture as before, a detailed
analysis of the staffing requirements for
NewGasCo-Wyo was made by Cheyenne management and
PSCo Human Resources personnel. The following is
a summary of their analysis of the staffing
requirements for NewGasCo-Wyo:
A total of 57 employees would be required to
operate NewGasCo-Wyo. Thirty-two employees
of Cheyenne would be transferred to the new
organization. The employees transferred
include one manager and 31 non-management
employees. An additional 25 employees would
have to be hired in order for NewGasCo-Wyo to
provide the same level of service as before
the divestiture. These additional employees
would include: one President, two managers
and 22 non-management employees.
c. Executive salaries are based on national survey
data. Since the size of the organization is
smaller than NewGasCo-Colo, the executive salaries
are less for NewGasCo-Wyo.<F13>
d. All non-executive salaries are based on current
Cheyenne average compensation for the appropriate
job level.
e. After the base cost of labor was determined, an
additional 37.6 percent was added to determine
pension and benefit costs. This percent is based
on PSCo's approximate current percentage in order
to keep benefits similar for NewGasCo-Wyo.
f. The cost of overtime varies depending upon the
time of year, work load, and job classifications.
The overtime cost assumptions utilized are
comparable with the percent of overtime cost
currently experienced for PSCo.<F14>
2. Operation & Maintenance and Administrative and General
Assumptions:
a. In addition to the General Study Assumptions cited
earlier, it is assumed that certain minor
administrative functions now performed by
employees of PSCo and billed to Cheyenne will be
contracted out on an as-needed basis, and further,
it is assumed that the cost to NewGasCo-Wyo would
be substantially the same after a divestiture as
before. For example, the short- and long-term
financing for Cheyenne is currently being
accomplished by employees of the Long-term Finance
Department of PSCo, and if divestiture of
Cheyenne's gas operations were ordered, and such
financing were required, arrangements would have
to be made with another organization possessing
the same or similar financial expertise.
b. Annual facility costs relating to the additional
employees required to operate NewGasCo-Wyo have
been incorporated into the Study.
c. Separate arrangements will be made for external
auditing of the books and accounts of NewGasCo-
Wyo.
d. In like manner, legal assistance, billing and
record-keeping assistance would be contracted out,
and it is assumed that NewGasCo-Wyo would be able
to acquire these services for substantially the
same fees as it is currently paying PSCo.
e. Operations support provided by PSCo, such as
controlling the operation of the gas distribution
system, would have to be transferred to NewGasCo-
Wyo. However, it is assumed that this support
could be accomplished for the same cost as
currently incurred by NewGasCo-Wyo.
f. Executive and administrative support from PSCo
would cease upon any divestiture, and these
functions have been provided for in the NewGasCo-
Wyo organizational structure.
g. Separate gas bills will be provided the customers
of NewGasCo-Wyo.
3. Capital Expenditure and Cost Assumptions
a. No additional capital expenditures will be made by
NewGasCo-Wyo as a direct consequence of spinning
off the gas facilities from Cheyenne. This, of
course, does not include planned capital
expenditures to be made in the normal course of
business in order to maintain existing levels of
service and provide service to new customers.
b. Financing costs for Cheyenne would similarly be
affected by a required spin-off of their gas
operations as was PSCo. The current capital
structure of Cheyenne is used for the purpose of
analyzing capital costs for NewGasCo-Wyo. This
structure is approximately equal to the capital
structure approved by the WPSC in the most recent
rate proceeding, Docket No. 30005-GR-92-19. As of
June 30, 1995 Cheyenne's gas rate base was
capitalized as follows:
Recapitalizing NewGasCo-Wyo would involve issuing
new long-term debt at marginal rates. Cheyenne
debt is currently rated BBB. The forecasted rate
for such debt in 1997 is 8.20 percent. Issuance
expenses of 1.5 percent of proceeds amortized over
____________________
<F12> Additional financing costs, not quantified in this
study, would arise from the short-term borrowing costs
incurred by the stand-alone gas company. Because gas
purchases are highly seasonal, the company would
experience great volatility in its cash position. At
the same time the book value of the assets of the
company are much lower than those of the combined
utility predecessor. As a result, the new company
would be perceived as riskier and would be subject to
higher short-term rates. However, these costs have not
been quantified due to their uncertain nature.
<F13> Neither an Employee Incentive Plan (EIP), nor a
Management Incentive Plan has been included when
determining the NewGasCo-Wyo cost of labor. Note,
however, that it is estimated that a plan similar to
the present PSCo plan could result in the following
additional annual costs:
EIP per employee $1000 per year
Middle Management at Target 15 percent of base salaries
Unit Managers at Target 10 percent of base salaries
<F14> Shift differential pay, overtime meal pay, and other
premium pay types (i.e., time and one half for
holidays) have not been included in determining the
payroll cost for NewGasCo-Wyo. An analysis of these
costs based on historic statistics indicates that these
costs could be as high as one percent of total labor
costs or approximately $22,000 per year.
thirty years would result in an all-inclusive rate
of 8.34 percent.<F15>
The cost of common equity is 11.66 percent which
was established by the WPSC on November 9, 1992 in
Cheyenne's most recent gas rate proceeding, Docket
No. 30005-GR-92-19. Common equity would not
require the sale of new securities; however, new
stock certificates would be issued to current
shareholders of PSCo. Assuming that a lesser
number of shares were issued than is currently
outstanding on a per-shareholder basis, this would
require some 39,000 certificates at a cost of
approximately $390,000. This cost would be
charged as a transition cost to be recovered over
30 years.
As in the case of PSCo, a new indenture would be
required at an estimated cost of $250,000. This
cost would be included in transition costs to be
recovered over 30 years.
4. Transition Cost Assumptions Transition costs, such as
the renegotiation of gas-only franchises with the City
of Cheyenne, and the Towns of Burns and Pine Bluffs
would be amortized over the appropriate life of the
asset.<F16>
B. Organization of NewGasCo-Wyo
The functional organization chart of NewGasCo-Wyo is contained in
Appendix D. The new structure is composed of a seven-member
Board of Directors, a President, and four managers. The
organization managed by the President totals 56 employees and is
composed of four managers and 52 non-management personnel.
The Manager of Operations will have the day-to-day responsibility
for all new gas construction, including the installation of mains
and services to new customers, as well as the installation of the
meters and associated equipment for such service. In addition,
this manager will have the responsibility for maintaining all gas
facilities as well as inspecting the facilities on a routine
basis. Operations totals 25 employees, composed of one manager
and 24 non-management employees.
The Manager of Operations Support will be in charge of the
engineering and mapping functions, in addition to the purchasing
and storing of the various equipment, materials, and supplies
required for the operation of NewGasCo-Wyo. This manager will
also supervise the trouble dispatch team and be responsible for
the maintenance of NewGasCo-Wyo's vehicles. Operations Support
totals 14 employees, composed of one manager and 13 non-
management employees.
The Manager of Customer Service will be responsible for
marketing, meter reading, billing, and collection functions, in
addition to the acquisition of natural gas, and the accounting
and reporting required by the various state and federal agencies.
Clerical support will also be this manager's responsibility.
Customer Service includes 12 employees in addition to the
manager.
The Manager of Rates and Regulations will be responsible for all
regulatory activities, including the development and filing of
periodic rate cases with the WPSC and all regulatory reporting
requirements. This department will have three employees in
addition to the manager.
C. Annual Cost Increases
Based upon the foregoing general and specific assumptions, and
the staffing requirements of the organizational structure, the
following increased annual costs have been developed for
NewGasCo-Wyo:
1. Labor Costs $ 551,779
2. Pension and Benefits 314,705
3. Facility Costs 120,475
4. Auditing Costs - External Auditor 10,000
5. Postage Expense 41,192
6. Board of Director's Fees 77,000
7. Reporting Costs 345,020
8. Payroll Taxes 52,341
9. Capitalized Labor Depreciation 6,961
Total: $1,519,473
D. Capital Cost Increases
Using the capital structure, allowed cost of equity and increased
debt costs for NewGasCo-Wyo discussed earlier, the resulting
weighted composite cost of capital for the stand-alone gas
company would be:
Ratio Cost Composite Cost
Long Term Debt 52.72% 8.34% 4.40%
Common Equity 47.28% 11.66% 5.51%
Total: 100.00% 9.91%
Applying the foregoing capital cost to NewGasCo-Wyo results in
the following increased capital costs:<F17>
1. Increased Borrowing Cost $ 46,139
2. Capitalized Labor 26,684
3. Capitalized Transition 66,394
Total: $139,217
E. Transition Cost Increases
The following is a summary of the principal transition costs that
will be incurred as a result of a spin-off of the gas business of
Cheyenne and their annual costs:
Annual
Asset Cost Increase
1. Renegotiation of Franchises $54,000 $ 2,700
2. New Indenture 250,000 8,333
3. Stock Certificates 390,000 13,000
Total: $694,000 $24,033
F. Total Lost Economies
Summarizing the foregoing increased annual costs, capital costs,
and amortized transition costs as developed in the Base Case
Study, yields the following total lost economies before the
effect of income taxes:
Total Lost Economies: $1,682,723
G. Income and Franchise Taxes
Recovery of the foregoing lost economies in a general rate
proceeding would also require an increase to recover income and
franchise taxes associated with the lost economies. The
following is a summary of the revenue effect of income and
franchise taxes:
Total Income and Franchise Taxes: $92,716
H. Base Case - 12 Months Ended June 30, 1995
The following is a summary of the key components of the Base Case
(the definition of each item is the same as in the Executive
Summary):
1. Total Gas Operating Revenue $15,630,080
2. Total Gas Operating Revenue Deductions $13,681,672
3. Gross Gas Income $1,948,408
4. Net Gas Income $1,530,526
I. Comparison of the Lost Economies of NewGasCo-Wyo to the Base
Case
The Total Lost Economies, before the effect of income taxes, as a
percent of the key components of the Base Case are:
1. Percent of Total Gas Operating Revenue 10.77%
2. Percent of Total Gas Operating Revenue Deductions 12.30%
3. Percent of Gross Gas Income 86.36%
4. Percent of Net Gas Income 109.94%
J. Comparison of Rates of Return on Rate Base
The following is a comparison of the rates of return on rate base
for the gas operations before and after an assumed spin-off:
1. Pro Forma Rate of Return - Existing 7.97%
2. Pro Forma Rate of Return - Base Case 9.62%
3. Pro Forma Rate of Return after spin-off 3.13%
4. Required Rate of Return based on NewGasCo-Wyo
Cost of Capital 9.91%
VII. OTHER CUSTOMER IMPACTS
A. Quantifiable Postage Costs
Customers who currently pay their monthly bill with one
check and one stamp will be required to use two
separate checks and two separate stamps in paying the
remaining electric company and the NewGasCo. For the
gas and electric customers of the existing PSCo and
Cheyenne companies, the doubling of postage cost alone,
not counting check and envelope costs, will result in a
total annual out-of-pocket cost increase to customers
of over $3.5 million. These annual postage costs are
broken downs as follows:
Postage Costs
NewGasCo-Colo Customers $3,478,637
NewGasCo-Wyo Customers $101,395
Total: $3,580,032
B. Non-quantifiable
In addition to the quantifiable increased costs or lost
economies which have been evaluated and included in the
Study, there are other non-quantifiable costs which have not
been included. The reason for not attempting to quantify
these costs is that a meaningful estimate of these costs is
beyond the scope of PSCo's present analysis. However these
costs do exist, and the following are a few examples of
these non-quantifiable costs.
- The cost of additional regulation for both the
CPUC and WPSC. The staffs of these agencies would
undoubtedly experience additional duties and
responsibilities as a result of dealing with an
additional utility.
- The cost to customers as a result of doing
business with two utilities instead of one,
including additional telephone calls for service
questions or bill inquiries.
- The cost to customers of providing access to
meters and other facilities for two utilities.
- The cost to customers, especially contractors and
builders, of dealing with two utilities rather
than one.
VIII. BILL COMPARISON OF NEWGASCO-COLO AND NEWGASCO-WYO TO
OTHER UTILITIES
The following is a comparison of average monthly bills for
various utilities with which PSCo competes. The average bills
are based on PSCo 1994 statistics and rates in effect as of
October 1, 1995.
TABLE VIII-1
BILL COMPARISON OF NEWGASCO-COLO
AND NEWGASCO-WYO TO OTHER UTILITIES
TOTAL AVERAGE
MONTHLY CHARGE
NAME OF UTILITY
(Ranked in ascending
order of Total Average
Monthly Residential CITY RESIDENTIAL COMMERCIAL
Charge)
CHEYENNE CHEYENNE $28.57 $142.57
NEWGASCO-WYO CHEYENNE $31.81 $158.77
CITY OF COLORADO
COLORADO SPRINGS SPRINGS $33.00 $181.84
CITY OF FORT MORGAN $33.42 $168.29
FORT MORGAN
ATMOS ENERGY CO GREELEY $33.76 $182.81
PEOPLES (DIVISION OF CASTLE ROCK $34.95 $184.88
UTILICORP)
PSCO DENVER $35.16 $172.66
CITIZENS UTILITIES LA JUNTA $36.66 $192.62
NEWGASCO-COLO DENVER $37.49 $184.09
JULESBERG/
KN ENERGY OVID $39.68 $220.66
TRINIDAD TRINIDAD $43.06 $229.31
TOWN OF RANGELY RANGELY $43.64 $227.64
KN ENERGY (ROCKY MTN GLENWOOD
NATURAL GAS) SPRINGS $48.67 $252.27
____________________
<F15> As discussed in the NewGasCo-Colo analysis, and for the
same reasons, no additional premium is assumed on debt
even though it would have only one-third the asset base
of the existing company.
<F16> Retraining costs have not been included as it is
assumed all new employees will be fully qualified and
receive minimal on-the-job training.
<F17> The stand-alone gas company would experience higher
short-term borrowing rates much as expected for the
NewGasCo-Colo; however, these costs have not been
quantified due to their uncertain nature.
IX. EFFECT ON REMAINING ELECTRIC COMPANIES
A. PSCO
As a result of any divestiture, the remaining NewElectricCo-Colo
would experience increased costs in addition to those experienced
by NewGasCo-Colo. These increased costs, as outlined earlier,
are largely the result of increased labor costs associated with
the additional personnel required to replace those who are
currently working in both gas and electric operations.
Additional postage costs would also be incurred since electric
billings would no longer share postage with the gas billings.
The total of these additional costs is $46.2 million, which
equates to approximately 3.5 percent of electric rate revenues.
A summary of the increased annual costs, capital costs, and
amortized transition costs applicable to NewElectricCo-Colo is as
follows:
1. Labor Costs $25,851,085
2. Pensions and Benefits 9,055,651
3. Facility Costs 2,361,310
4. Postage Expense 1,881,494
5. Reporting Costs 172,510
6. Payroll Taxes 1,244,022
7. Capitalized Labor Depreciation 99,076
8. Increased Borrowing Cost 5,168,480
9. Capitalized Labor 356,765
Total: $46,190,393
B. Cheyenne
Similarly, the remaining NewElectricCo-Wyo would experience
additional costs due to labor and postage. The additional labor
is due to replacing those personnel who currently work in both
gas and electric operations. The total of these additional costs
is $0.9 million, which is approximately 2.7 percent of electric
rate revenues.
A summary of the increased annual costs, capital costs, and
amortized transition costs applicable to NewElectricCo-Wyo is as
follows:
1. Labor Costs $462,769
2. Pensions and Benefits 263,940
3. Facility Costs 14,457
4. Postage Expense 41,191
5. Payroll Taxes 43,897
6. Capitalized Labor Depreciation 5,837
7. Increased Borrowing Cost 87,034
8. Capitalized Labor 22,379
Total: $941,504
APPENDIX A
COMPARISON OF
PSCO AND CHEYENNE GAS TO REGIONAL GAS UTILITIES
1994 FINANCIAL
NET
1994 PLANT
NAME OF UTILITY GAS OPERATING OPERATING OPERATING AT
(Alphabetical NUMBER OF SALES REVENUES REVENUES INCOME 12/31/94
Order) STATE(S) CUSTOMERS (MMCF) ($000) ($/MCF) ($000) ($000)
Cheyenne Light,
Fuel and Power
Company WY 25,765 4,946 $13,799 $2.79 $1,506 $19,009
Gas Company of
New Mexico NM 345,678 56,541 $302,104 $5.34 $24,913 $250,867
KS, NB,
KN Energy, Inc. CO, WY 230,000 69,100 $320,557 $4.64 $48,304 $562,315
Montana power MT 131,316 20,845 $107,812 $5.17 $20,461 $289,968
Montana-Dakota MT, ND,
Utilities Co. SD 192,150 30,113 $155,319 $5.16 $3,948 $83,434
Mountain Fuel
Supply Company UT, WY 572,174 83,116 $378,260 $4.55 $34,046 $459,784
Public Service
Company of
Colorado CO 933,361 150,107 $624,922 $4.16 $36,915 $543,698
Source: Pipeline & Gas Journal, September 1995
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