File No. 70-8787
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO THE
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 . . . . . . . . . . . . . . . . 6
iii. SPS . . . . . . . . . . . . . . . . 7
iv. Cheyenne . . . . . . . . . . . . . . 7
v. PSCo Merger Corp . . . . . . . . . . 7
vi. SPS Merger Corp. . . . . . . . . . . 7
vii. NC Services . . . . . . . . . . . . 8
viii. NC Hold . . . . . . . . . . . . . 8
ix. WestGas Interstate, Inc. . . . . . . 9
2. Description of Facilities . . . . . . . . . . 9
a. PSCo . . . . . . . . . . . . . . . . . . 9
i. General . . . . . . . . . . . . . . 9
ii. Electric Generating Facilities and
Resources . . . . . . . . . . . . . 9
iii. Electric Transmission Facilities . . 11
iv. Gas Facilities . . . . . . . . . . . 13
v. Other . . . . . . . . . . . . . . . 13
b. SPS . . . . . . . . . . . . . . . . . . . 13
i. General . . . . . . . . . . . . . . 13
ii. Electric Generating Facilities . . . 13
iii. Electric Transmission Facilities . . 15
iv. Other . . . . . . . . . . . . . . . 16
3. Non-Utility . . . . . . . . . . . . . . . . . 16
a. PSCo . . . . . . . . . . . . . . . . . . 16
b. SPS . . . . . . . . . . . . . . . . . . . 17
C. Description of Transaction . . . . . . . . . . . . 20
1. Background and Negotiations Leading to the
Proposed Transaction . . . . . . . . . . . . . 20
2. Merger Agreement . . . . . . . . . . . . . . . 22
D. PSCo and SPS Benefit Plans . . . . . . . . . . . . 24
E. Management and Operations of NCE Following the
Merger . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . 25
Item 3. Applicable Statutory Provisions . . . . . . . . . . 26
A. Legal Analysis . . . . . . . . . . . . . . . . . . 27
1. Section 10(b) . . . . . . . . . . . . . . . . 29
a. Section 10(b)(1) . . . . . . . . . . . . 30
i. Interlocking Relationships . . . . . 30
ii. Concentration of Control . . . . . . 30
b. Section 10(b)(2) -- Fairness of
Consideration . . . . . . . . . . . . . . 33
c. Section 10(b)(2) -- Reasonableness of
Fees . . . . . . . . . . . . . . . . . . 36
d. Section 10(b)(3) . . . . . . . . . . . . 37
2. Section 10(c) . . . . . . . . . . . . . . . . 39
a. Section 10(c)(1) . . . . . . . . . . . . 40
i. Retention of Gas Operations . . . . 41
ii. Other Businesses . . . . . . . . . . 49
I. Direct Subsidiary of NCE . . . 50
II. Subsidiaries of NC Hold . . . . 50
III. Subsidiaries and Operations
of PSCo . . . . . . . . . . . 58
b. Section 10(c)(2) . . . . . . . . . . . . 61
i. Efficiencies and Economies . . . . . 61
ii. Integrated Public Utility System . . 65
I. Electric System . . . . . . . . 65
II. Gas Utility System . . . . . . 70
3. Section 10(f) . . . . . . . . . . . . . . . . 72
4. Other Applicable Provisions - Section
9(a)(1) . . . . . . . . . . . . . . . . . . . 72
B. Intra-System Provision of Services . . . . . . . . 74
1. NC Services . . . . . . . . . . . . . . . . . 74
2. UE . . . . . . . . . . . . . . . . . . . . . . 78
3. QPS and UE Carolina . . . . . . . . . . . . . 80
4. Other Services . . . . . . . . . . . . . . . . 81
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . 83
A. Antitrust . . . . . . . . . . . . . . . . . . . . . 83
B. Federal Power Act . . . . . . . . . . . . . . . . . 83
C. State Public Utility Regulation . . . . . . . . . . 84
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . 85
Item 6. Exhibits and Financial Statements . . . . . . . . . 86
A. Exhibits . . . . . . . . . . . . . . . . . . . . . 86
B. Financial Statements . . . . . . . . . . . . . . . 88
Item 7. Information as to Environmental Effects . . . . . . 88
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 both approved the
Transaction at their respective meetings 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").
The NRC approved the Transaction on February 22, 1996. 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, 1995, which is incorporated by reference as Exhibit
H-3 hereto.
PSCo and Cheyenne are primarily engaged in providing
electric and gas service in Colorado and Cheyenne, Wyoming. As
of December 31, 1995, PSCo provided electric utility service to
1.1 million customers, and Cheyenne provided electric utility
service to 34,000 customers in the Cheyenne area. In addition,
PSCo and Cheyenne provided gas utility service to approximately
935,000 and 27,000 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 31, 1995, there were 63,358,128 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, 1995, PSCo's operating
revenues on a consolidated basis were approximately $2.11
billion, of which approximately $1.45 billion were derived from
electric operations, $625 million from gas operations and $37
million from other operations. Consolidated assets of PSCo and
its subsidiaries at December 31, 1995 were approximately $4.4
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 $10 billion 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 for the year ended December 31, 1995 and Statement on Form
U-3A-2 for the year ended December 31, 1995, copies of which are
incorporated by reference as Exhibits H-1 and H-3, 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 and no shares of Preferred Stock. SPS may issue one
or more series of preferred stock prior to the consummation of
the Transaction, 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
Restated Articles of Incorporation is incorporated by reference
as Exhibit A-4.
On a consolidated basis, SPS's operating revenues for
the calendar year ended December 31, 1995 were approximately $853
million, and its total assets at December 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
Following the consummation of the Transaction, PSCo
will become a direct subsidiary of NCE. PSCo's utility
operations and facilities are described in Item 1.B.2.a. below
and its non-utility subsidiaries and operations are described in
Item 1.B.3.a. below. Under current plans, all of PSCo's existing
non-utility subsidiaries will become either direct or indirect
subsidiaries of NCE as explained in greater detail under Item
3.A.2.a.ii. below. The following existing PSCo subsidiaries will
remain subsidiaries of PSCo: 1480 Welton, Inc. ("1480 Welton"),
PS Colorado Credit Corporation ("PSCCC"), P.S.R. Investments,
Inc. ("PSRI"), Fuel Resources Development Company ("Fuelco"),
Green and Clear Lakes Company ("Green and Clear Lakes"), and
several small water and ditch companies described in more detail
in Item 3.A.2.a.ii. The remaining existing non-utility
subsidiaries of PSCo will become subsidiaries of NC Hold, except
WGI which will become a direct subsidiary of NCE.
iii. SPS
Following the consummation of the Transaction, SPS will
become a direct subsidiary of NCE. SPS's utility operations and
facilities are described in Item 1.B.2.b. below and SPS's non-
utility subsidiaries are described in Item 1.B.3.b. below. Under
current plans, all of SPS's existing non-utility subsidiaries
will become indirect subsidiaries of NCE through NC Hold, as
explained in greater detail under Item 3.A.2.a.ii. below.
iv. Cheyenne
Following the consummation of the Transaction, Cheyenne
will become a direct subsidiary of NCE. Cheyenne's utility
operations and facilities are described in Item 1.B.2.a. below.
Cheyenne does not currently own any interest in any non-utility
subsidiaries.
v. 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.
vi. 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.
vii. 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.
viii. 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"), Natural Fuels Corporation
Company ("Natural Fuels"), Quixx and UE. Quixx has the following
subsidiaries and affiliates: BCH Energy Limited Partnership,
Vedco Louisville, L.L.C., Quixx Jamaica, Inc., Quixx Carolina,
Inc., Carolina Energy Limited Partnership, Quixx WPP94, Inc.,
Windpower Partners 1994, L.P., Quixx Power Services, Inc.,
Amarillo Railcar Services, Lindsay Cogeneration Limited
Partnership, Quixx Resources, Inc. and Quixx WRR, L.P. UE has
two affiliates as follows: S.A. Garza Engineers, Inc. and
Environmental Services, L.L.C. and one subsidiary, Utility
Engineering Carolina, PLLC. UE intends to create two new wholly
owned subsidiaries, Universal Utility Services Corporation
("Utility Services") and Precision Resource Company ("PRC"). e
prime has one subsidiary, Young Gas Storage Company, Inc. ("Young
Gas"). 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.
ix. 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 1995 revenues were
approximately $104,000. 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, 1995, 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 . . . . . . . . 23,649,058,597
Mcf of gas distributed at retail . . . . . . . . 148,646,374
Cheyenne
Kwh of electric energy sold . . . . . . . . . . 805,091,065
Mcf of gas distributed at retail . . . . . . . . . 5,251,043
ii. Electric Generating Facilities and Resources
As of December 31, 1995, PSCo had a total net
generating capability of approximately 3313 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 86.90 MW.
Its share in the net dependable capacity is 83.20 MW. Its
major fuel source is coal.
Fort St. Vrain: Fort St. Vrain is located near Platteville,
Colorado and will have installed capacity of 130 MW and a
net dependable capacity of 126 MW when it comes on line,
which occured in May 1996.
Hayden: Hayden, located near Hayden, Colorado is comprised
of two units, Units 1 and 2, which have gross maximum
capabilities of 202.01 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 53.35 MW.
The units' net dependable capacity is 36.55 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 1995.
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, 1995, PSCo's transmission system
consisted of approximately 112 circuit miles of 345 KV overhead
lines; 1,864 circuit miles of 230 KV lines; 15 circuit miles of
230 KV underground lines; 65 circuit miles of 138 KV overhead
lines; 996 circuit miles of 115 KV underground lines; 20 circuit
miles of 115 KV underground lines; 355 circuit miles of 69 KV
overhead lines; 143 circuit miles of 44 KV overhead lines; and
1 circuit mile of 44 KV underground lines. PSCo jointly owns
with other utilities approximately 342 circuit miles of 345 KV
overhead lines and 360 miles of 230 KV overhead lines, of which
PSCo's share is 112 miles and 147 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>
____________________
<F1> SPS is also a member of the WSPP, as described in Item b.iii
below.
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.
iv. Gas Facilities
The gas property of PSCo at December 31, 1995 consisted
chiefly of approximately 14,977 miles of distribution mains
ranging in size from 0.50 to 30 inches and related equipment.
The Denver distribution system consisted of 8,522 miles of mains.
The gas property of Cheyenne at December 31, 1995
consisted chiefly of approximately 534 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, 1995
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 13 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, 1995, SPS's transmission system
consisted of 319 circuit miles of 345 KV lines, 1,524 circuit
miles of 230 KV lines, 2,364 circuit miles of 138 KV lines and
1,843 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)
The Other
Location Interconnecting Utility Company Utility
Near Artesia, NM El Paso Electric Co. 230* 345
and Texas-New Mexico
Power Co.
Near Clovis, NM Public Service Company 230* 345
of New Mexico
Near Oklaunion, TX Public Service Company 345 345
of Oklahoma
Near Elk City, OK Public Service Company 230 230
of Oklahoma
Near Shamrock, TX West Texas Utilities 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 eight direct non-utility subsidiaries, seven
of which are wholly-owned: WGI, e prime, 1480 Welton, PSCCC,
PSRI, Fuelco and Green and Clear Lakes. In addition, PSCo owns
80% of the capital stock of Natural Fuels. e prime, in turn, has
one subsidiary: Young Gas.
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 greater than 50% interest in several
other relatively small ditch and water companies: namely East
Boulder Ditch Company, Hillcrest Ditch and Reservoir Company,
United Water Company, Consolidated Extension Canal Company,
Enterprise Ditch Company and Las Animas Consolidated Canal
Company as well as a less than 50% interest in the following
small ditch and water companies: Fisher Ditch Water Company,
Baugh Lateral Ditch Company, Beenan Irrigating Ditch and Milling
Company and Jones and Donelley Ditch Company (collectively, the
"Ditch Companies"). These Ditch Companies' capital requirements
are not significant and are not consolidated in PSCo's financial
statements or statistical data.<F2>
____________________
<F2> The aggregate revenues of the five Ditch Companies in which
PSCo holds a 50% or greater interest at December 31, 1994
were $103,031. Their aggregate assets at that time were
$84,049.
Together, at December 31, 1995, 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. No assets of Quixx or UE are presently, or will
following the consummation of the Transaction be, included in the
rate base of any public utility company within the NCE system.
UE is a wholly owned subsidiary formed in 1986. It is engaged in
a variety of engineering, design, construction, management and
other miscellaneous services, employing approximately 120
employees. UE's assets at December 31, 1995, were approximately
$43.4 million and total revenues for calendar year 1995 were
$29.8 million. SPS is one of UE's major clients. UE is also
involved in other projects for nonaffiliate customers, providing
general engineering, development, design and rehabilitation
services and management, construction, maintenance, operation and
other related services. UE also works jointly with Quixx on
cogeneration and other independent power and related 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 December 31, 1995 were
approximately $86.0 million and total revenues for calendar year
1995 were $19.7 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
and surveying services and may in the future provide services to
NCE's utility subsidiaries and non-utility subsidiaries and
affiliates; and Vista Environmental Services, L.L.C., 49% of
which is owned by UE, performs environmental consulting services,
client-regulatory interfacing, 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
and may in the future provide such services to NCE's utility
subsidiaries and non-utility subsidiaries and affiliates.
UE currently has three wholly owned subsidiaries,
Utility Engineering Carolina PLLC ("UE Carolina"), Utility
Services and PRC.
UE Carolina provides engineering, design and
construction related services to the North Carolina energy
projects (described below). UE Carolina was formed as a special
purpose subsidiary to comply with North Carolina requirements
with respect to its qualification to do business in such state.
Utility Services will provide services related to the
engineering, design, and construction of cooling towers for power
plants, as well as plant construction, distribution, operation
and maintenance activity, resource recovery, plant and facility
ownership and leasing, and wood product fabrication. Such
services may be provided to utility and non-utility subsidiaries
and affiliates.
PRC will provide a resource database service. The
database will be comprised of names of people who can be
dispatched to provide temporary services to various projects.
Such services may be provided to utility and non-utility
subsidiaries and affiliates.
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 is developing, and will
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. ("QPS"), 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.
On January 31, 1996, the shareholders of PSCo and SPS,
respectively, met and voted to approve the Transaction.
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,<F3> 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,<F4> 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.
____________________
<F3> 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.
<F4> Other than those shares which will be cancelled, fractional
shares and shares held by holders who dissent in compliance
with New Mexico law.
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
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,"<F5> 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,<F6> utility ownership<F7> and
diversification are applicable<F8> to this Transaction.
____________________
<F5> Letter of the Division of Investment Management to the
Securities and Exchange Commission, 1995 Report.
<F6> E.g., the reduced regulatory burdens associated with routine
financings. 1995 Report at 50.
<F7> 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.
<F8> 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, 1995: (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 $2.9 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 $9 billion).
As the following table demonstrates, seven of the
fifteen registered electric utility holding company systems are
larger than NCE will be following the Transaction in terms of
assets, operating revenues, customers and/or sales of
electricity:<F9>
Total Operating Electric Sales in
System Assets Revenues Customers KWH
Total ($ 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
____________________
<F9> Amounts are as of December 31, 1994 or for the year ended
December 31, 1994.
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.<F10>
____________________
<F10> 1995 Report at 73-4.
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.<F11> 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,
for PSCo and SPS Common Stock provide support for this conversion
ratio.
____________________
<F11> 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*
PSCo SPS*
High Low Dividends High Low Dividends
1994
First $32 1/8 $28 1/2 $0.50 $30 7/8 $27 5/8 $0.55
Quarter
Second 29 3/4 25 3/8 0.50 29 1/8 23 3/4 0.55
Quarter
Third 27 7/8 24 3/4 0.50 27 1/4 24 7/8 0.55
Quarter
Fourth 30 1/8 25 7/8 0.50 28 25 3/8 0.55
Quarter
1995
First 31 1/2 29 0.51 29 3/8 26 1/2 0.55
Quarter
Second 32 7/8 29 1/4 0.51 29 7/8 27 3/4 0.55
Quarter
Third 34 1/2 30 5/8 0.51 32 7/8 28 5/8 0.55
Quarter
Fourth 35 7/8 33 3/8 0.51 33 7/8 32 0.55
Quarter
* The information is provided for calendar quarters. Fiscal
quarters for SPS end on the last day of each November, February,
May and August.
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.<F12> 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.
____________________
<F12> Twelve specific conditions must be met to qualify as a
pooling. The Transaction should meet those criteria as
follows: (1) Both PSCo and SPS were autonomous and
were not a subsidiary or division of another
corporation within two years before the plan of
combination was initiated; (2) At the date of the
merger initiation and at the date of consummation SPS
and PSCo are independent of each other; (3) SPS and
PSCo will undertake a course of action which will
attempt to complete the transaction within one year in
accordance with a specific plan, or completed in a
single transaction. Litigation or proceedings of a
governmental authority that delay the completion of a
plan are excepted from the one-year rule, provided they
are beyond the control of the combining companies;
(4) At the consummation date of the plan, NCE will
offer and issue its majority class of stock (voting
rights) for no less than 90% of the voting common stock
interests of SPS and PSCo. The 90%, or more of the
voting common stock interests being acquired is
determined at the date the plan is consummated; (5) No
changes in the equity interests of the voting common
stock of SPS or PSCo were to be made in contemplation
of a pooling of interests. This restriction is for a
period beginning two years prior to the initiation date
of the plan of combination and for the period between
the initiation date and the consummation date; (6) SPS
and PSCo will not reacquire any of its voting common
stock in substance or form to effect a business
combination. Any reacquisition must be a normal amount
as evidenced by both companies' patterns of
reacquisition prior to the merger; (7) Each SPS and
PSCo common stockholder will receive a voting common
stock interest exactly in proportion to his or her
voting common stock interest prior to the combination;
(8) The SPS and PSCo common shareholders will receive
the rights they are entitled to and will not be
deprived or restricted in any way from exercising those
rights; (9) The entire merger agreement will be
effected on the date of consummation; (10) Subsequent
to consummation the combined corporation, NCE will not
agree to reacquire or retire any of the stock which was
issued to effect the transaction; (11) NCE will not
enter into any agreements to the benefit of the former
shareholders of SPS or PSCo, such as loan guarantees;
(12) NCE will not plan to dispose of substantial
amounts of the assets of SPS or PSCo within two years
of the date of the combination other than routine
transactions in the ordinary course of business or to
eliminate excess capacity.
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<F13>, 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).
___________________
<F13> This number is a preliminary estimate only, and will be
updated as necessary.
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 and SPS as of December 31, 1995 and the pro
forma consolidated capital structure of NCE as of December 31,
1995:
PSCo and SPS Historical Capital Structures*
(dollars in millions)
PSCo SPS
Common Stock Equity $1,344 $728
Preferred stock not
subject to Mandatory
redemption 140 --
Preferred stock subject
to mandatory redemption 44 --
Long-term Debt 1,278 581
Short-term Debt 288 116
Total $3,094 $1,425
NCE Pro Forma Consolidated Capital Structure*
(dollars in millions)
(unaudited)
Common Stock Equity $2,060
Preferred stock not
subject to mandatory
redemption 140
Preferred stock subject
to mandatory 44
redemption
Long-Term Debt 1,859
Short-Term Debt 404
Total $4,507
* 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 46% 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<F14>; 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 . . . .
____________________
<F14> 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.<F15>
____________________
<F15> IN THE MATTER OF AMERICAN WATER WORKS AND ELECTRIC
COMPANY, INCORPORATED, 2 SEC at 983, n.3.
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.<F16> 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.<F17> 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.
____________________
<F16> 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).
<F17> 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).
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,<F18>
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.
____________________
<F18> 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.
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.<F19> 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.
____________________
<F19> 1995 Report at 15-6.
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.<F20> 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.
____________________
<F20> 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).
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 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."<F21> 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).
____________________
<F21> 1995 Report at 74.
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.<F22> 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.
____________________
<F22> 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 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,<F23> 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.<F24> 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."<F25> 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.
____________________
<F23> 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).
<F24> CSW CREDIT, INC., HCAR No. 25995 (1994); JERSEY CENTRAL
POWER & LIGHT CO., HCAR No. 24348 (March 18, 1987).
<F25> UNITED LIGHT AND RAILWAYS CO., 35 SEC at 519.
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 a variety of engineering,
development, design and rehabilitation services and management,
construction, maintenance, operation and other 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.
UE's affiliate, SAGE, is also engaged in functionally
related businesses (municipal and wastewater projects, civil
works, surveying and environmental services) as is UE's other
affiliate, Environmental Services, L.L.C., which performs
environmental consulting services previously described. The
Commission has authorized registered holding companies to acquire
interests in environmental services subsidiaries in the past
(see, e.g., Central and South West Corporation, HCAR No. 26367
(Sept. 1, 1995)) and environmental services are listed as energy-
related activity in proposed Rule 58.
UE's special purpose subsidiary, UE Carolina, which was
formed solely to enable UE to provide services in North Carolina,
performs the same types of activities as UE with respect to
certain projects in such state. Likewise, UE's wholly-owned
subsidiary, Utility Services, will perform services of a nature
and for parties substantially as described with respect to UE
above, except that its activities will relate to cooling towers
for power plants and plant construction and related matters as
described under Item 1.B.3.b. above. UE Carolina and Utility
Services, as is UE, are functionally related and may be retained
for the same reasons set forth above.
UE's wholly-owned subsidiary, PRC, is in the business
of providing human resource database services from a database of
names of persons who are available to provide temporary services
to various projects. Only a minimal additional investment is
required to create such a database, and UE's investment in this
company will be immaterial. Furthermore, the development of this
database will be incident to and in connection with the services
and expertise UE already provides. The Commission has permitted
affiliates of other registered holding companies to operate and
market similar computer programs and database services. See,
e.g., EUA Energy Investment Corporation, HCAR No. 25976 (January
24, 1994); Central and South West Services, Inc., HCAR No. 25132
(August 10, 1990). Thus, the retention of this subsidiary should
be permitted.
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 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 QFs as an energy related activity.
Thus, Quixx's principal operations are retainable under the Act.
The following of Quixx's subsidiaries and affiliates are IPPs,
QFs, EWGs or FUCOs or holding companies for such entities and are
thus retainable under Section 11 as demonstrated by the
Commission's precedent: BCH, Vedco Louisville, L.L.C., Quixx
Jamaica, Inc., Quixx Carolina, Inc., Quixx WPP94, Inc., Carolina
Energy Limited Partnership, Windpower Partners 1994, L.P. and
Lindsay Cogeneration Limited Partnership.
In addition to its primary business, Quixx through
Quixx Resources and 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. 24881 (May 5, 1989); National Fuel Gas Supply
Corporation, et al., HCAR No. 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: As of February 1, 1996 as the result of a
contribution of Young Gas' shares from PSCo, e prime holds 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.<F26> 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.
____________________
<F26> 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 incremental 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."<F27>
____________________
<F27> 1995 Report at 71.
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 asynchronously connect the two companies, is
currently expected to be rated at 400 MW and allow for capacity
and energy transfers between the two systems.<F28>
____________________
<F28> This is exactly the type of asynchronous
interconnection approved by the Commission in
connection with a settlement that provided for the
construction by the Central and South West Corporation
of two HVDC ties to interconnect its ERCOT subsidiaries
with its Southwest Power Pool subsidiaries, thereby
satisfying the Act's integration requirements. See
Central and South West Corporation, HCAR No. 22439
(April 1, 1982).
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. As recently as 1992, SPS and PSCo discussed
connecting their systems through an HVDC tie and transmission
line to facilitate transactions between their systems. The
production-related benefits of the proposed 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."<F29> The benefits to be derived
by the new transmission line are also a factor in determining
whether the system is capable of physical
interconnection.<F30> The fact that the Commission has
indicated that, absent special circumstances, the "reasonably
near future" mentioned above, should not exceed 10
years,<F31> 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.
____________________
<F29> 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").
<F30> 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).
<F31> 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).
In addition, Cheyenne forms a single integrated system
with the NCE system. With regard to electric properties and as
set forth above,<F32> 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.<F33> 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."<F34> 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.<F35> 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.
____________________
<F32> The issue of Cheyenne's gas properties is discussed
under Item 3.A.2.a.i. (Retention of Gas Operations).
<F33> 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").
<F34> ID.
<F35> ID.
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.<F36> 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.
____________________
<F36> 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."<F37> The 1995 Report
also recommends primacy be given to "demonstrated economies and
efficiencies to satisfy the integration requirements."<F38>
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.
____________________
<F37> 1995 Report at 72-74.
<F38> 1995 Report at 73.
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,"<F39> especially since this Transaction will
result in a system similar to the traditional registered holding
company system.
____________________
<F39> 1995 Report at 74.
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,<F40> 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.<F41> The Commission also has considered purchases
of gas from a common pipeline<F42> as well as from different
pipeline's when the gas originates from the same gas field in
determining a common source of supply.<F43> 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.
____________________
<F40> 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").
<F41> 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).
<F42> In the Matter of the North American Company, HCAR
No. 10320 (1950) (finding Panhandle Eastern pipeline to
be a common source of supply).
<F43> 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 acquisitions of Quixx and UE are proposed to be consummated
as sales for debt in order to preserve the capital structure of
SPS. The equity of the two subsidiaries at December 31, 1995 was
valued at $95.0 million, or approximately 13% of SPS's equity of
$727.9 million. Transferring the subsidiaries by payment of a
dividend of their stock would cause a reduction of SPS's equity
by this same amount. This would be viewed negatively from a
regulatory and rating agency point of view. Selling the
subsidiaries eliminates this adverse impact on SPS.
The debt issued by NC Hold 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. The form of note to be used to evidence the
debt of NC Hold is attached as Exhibit J-5. 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. Intra-System Provision of Services
In addition to its request that the Commission find NC
Services and UE to be so organized and conducting their
businesses as to meet the requirements of Section 13(b) for
subsidiary service companies, NCE also is requesting exemptions
from the provisions of Rules 90 and 91, and the at-cost
requirements contained therein, in connection with services
provided by NC Services, UE, Quixx, QPS, UE Carolina, Utility
Services, PRC and e prime to certain affiliated QFs, IPPs, EWGs
and FUCOs, and for e prime to continue to provide services at
market-based rates to the partnership owning the facility in
which Young Gas holds a general partnership interest. As
described in more detail below, NCE believes these exemptions
will help the above-named companies compete more effectively for
the provision of services to such entities, which are either
majority-owned by unaffiliated third parties eliminating the
potential for abusive affiliate transactions, are otherwise
adequately regulated with respect to affiliate transactions or do
not otherwise present the concerns for which the at-cost
standards were developed. The Commission has indeed granted
similar exemptions to existing registered holding
companies.<F44> At this point in time, the companies who
would be purchasing services pursuant to this exemption are as
follows: Young Gas Storage Co., Ltd., and the two facilities in
which Quixx has invested that are located in North Carolina, BCH
and Carolina Energy. In addition, NCE may also need an exemption
from the at-cost requirements of Rules 90 and 91 in connection
with certain services provided by PSCo to e prime. These
exemptions would involve situations where e prime is marketing a
product or service some component of which will involve products
or services received from PSCo. As discussed in more detail
below, such exemptions may be required in order to make the
products or services viable for marketing to non-affiliates, are
consistent with Commission precedent and would be beneficial to
both the service provider and service purchaser.<F45> All
other services provided by NCE system companies to other NCE
system companies will be in accordance with the requirements of
Section 13 of the Act, unless otherwise exempted by the
Commission or the rules promulgated under the Act.
____________________
<F44> See infra notes 45 and 46 and accompanying text.
<F45> See note 53 and accompanying text.
1. NC Services
As described in Item 1.B.1.c.v, NC Services will
provide PSCo, SPS and Cheyenne, pursuant to the Service
Agreement, and the non-utility subsidiaries of the NCE system,
pursuant to the Non-Utility Service 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<F46> 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.<F47> 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."<F48> 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.
____________________
<F46> 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).
<F47> 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).
<F48> 1995 Report at 102.
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.
2. 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 an engineering, development, design and
rehabilitation services and management, construction, maintenance
and operation and other related services subsidiary of NC Hold
directly, and indirectly of NCE. It is anticipated that
virtually all services provided for PSCo, SPS and Cheyenne by UE
will be 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 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, permitting, environmental,
engineering, design, resource management, 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, design, build 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.<F49>
____________________
<F49> 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).
If, as a result of a minority investment by Quixx or
other NCE associated company, the entities for which UE will
provide services do not meet the requirements set forth in Item
3.B., UE should be allowed an exemption for the "at-cost"
standard because these situations involve special or unusual
circumstances. The Commission has granted such exemption in
similar 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.<F50> In joint
venture situations 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 interest such
associated companies may have in the ventures, the terms of UE's
provisions of services 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 will have
economic and competitive incentive to negotiate their own best
possible price. Consequently, situations in which abusive cross-
subsidization could occur will not exist. Thus, the concern of
the Act with abusive affiliate transactions will not be an issue.
____________________
<F50> See, e.g., New England Electric System, HCAR No. 22309
(December 9, 1981) (joint venture).
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.<F51>
____________________
<F51> 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).
3. QPS and UE Carolina
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.
Also as previously discussed, UE Carolina is a special
purpose subsidiary that provides engineering, design and
construction related services to the North Carolina projects in
which Quixx has invested.
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. UE Carolina will
provide engineering, design and construction related services for
the North Carolina projects in which Quixx has invested. In
similar circumstances, the Commission has authorized exemptions
from the at-cost standard of Section 13.<F52>
____________________
<F52> 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).
Even if the entities for which QPS or UE Carolina will
provide services do not meet these requirements, QPS and UE
Carolina 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.<F53> 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's
or UE Carolina's 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.
____________________
<F53> See, e.g., New England Electric System, HCAR No. 22309
(December 9, 1981).
4. Other Services
As previously mentioned, e prime, Utility Services and
PRC may provide intra-system services to associated QFs, IPPs,
EWG, and FUCOS and e prime may provide 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,
Utility Services and PRC 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
provisions 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.
NCE also may need an exemption from the provisions of
Rules 90 and 91 with regard to certain services provided by PSCo
to e prime. Although e prime's business is still in early
development stages, NCE believes that in situations where e prime
is marketing products and services to non-affiliates which
products and services contain, in part, products or services from
PSCo, in order to competitively market such products or services,
some deviation from a strict interpretation of the at-cost
requirements may be needed. For example, e prime and PSCo may
enter into an arrangement whereby e prime could market certain
billing or accounting services to non-affiliates in connection
with which it would use PSCo's computer system (the "CIS
System"). A proposed compensation arrangement under
consideration is that e prime would pay PSCo for the use of the
system based on market rates or would pay PSCo's marginal cost
for e prime's usage with some profit participation or some
similar formula. To the extent any such arrangement is in place,
no related deviation from strict at-cost charges will be
undertaken unless the entity providing services first gives
written notice to the Commission of the basis for calculating
such charge. As with changes in NC Services' allocation formula,
such charge will not be effective if within 60 days, the
Commission notifies the party providing notice of any questions
until an application for such charge is declared effective. The
parties believe that any such deviation from strict at-cost
allocations is consistent with Commission precedent.<F54>
____________________
<F54> See, Entergy Corporation, Hear No. 26322 (June 30,
1995) (allowing non-utility subsidiary to pay
incremental costs plus profit sharing in connection
with marketing and use of products and services from
system operating utilities).
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 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, PSCo's 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 or external
contractors and all charges for service company employees' 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 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 March 15, 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
April 8, 1996 by which comments may be entered and a date not
later than April 12, 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(i) to the SPS Form 8-K dated February
26, 1996 (File No. 1-3789) 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
(previously filed).
D-1.2.1 Testimony of Dr. Robert Spann to the FERC.
D-1.2.2 Testimony of Matt P. Harris to the FERC
(previously filed).
D-1.3 Order of the FERC dated __________ (to be filed by
amendment).
D-2.1 Application of PSCo before the CPUC (previously
filed).
D-2.2 CPUC Order dated __________ (to be filed by
amendment).
D-3.1 Application of PSCo to the WPSC (previously
filed).
D-3.2 WPSC Order dated __________ (to be filed by
amendment).
D-4.1 Application of SPS to the NMPUC (previously
filed).
D-4.2 NMPUC Order dated __________ (to be filed by
amendment).
D-5.1 Notification of SPS to the PUCT (previously
filed).
D-5.2 PUCT Finding dated __________ (to be filed by
amendment).
D-6.1 Application of SPS to the KCC (previously filed).
D-6.2 KCC Order dated November 28, 1995 (previously
filed).
E-1 Map of service areas of SPS, PSCo and Cheyenne
(previously filed).
E-2 Map of PSCo and Cheyenne transmission system
(previously filed).
E-3 Map of SPS transmission system (previously filed).
E-4 PSCo corporate chart (previously filed).
E-5 SPS corporate chart (previously filed).
E-6 NCE corporate chart (previously filed).
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, 1995 (filed on February 27,
1996 (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, 1995 (filed on February 26,
1996 and incorporated herein by reference).
H-4 Withdrawn.
H-5 Withdrawn.
H-6 Withdrawn.
H-7 Withdrawn.
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).
H-9 SPS Quarterly Report on Form 10-Q for the quarter
ended February 29, 1996 (filed on April 15, 1996)
(File No. 1-3789) and incorporated herein by
reference).
I-1 Proposed Form of Notice (previously filed).
J-1 Analysis of the Economic Impact of a Divestiture
of The Gas Operations of Public Service Company of
Colorado and its Subsidiaries (previously filed).
J-2 Revised Legal Memorandum of LeBoeuf, Lamb, Greene
& MacRae, L.L.P.
J-3 Table of Estimated Losses of Economies in Prior
Decisions on Divestiture and Retention of Gas
Operations.
J-4 Memorandum on NC Hold debt service (to be filed by
amendment).
J-5 Form of NC Hold Note (previously filed).
B. Financial Statements
FS-1 NCE Unaudited Pro Forma Condensed Consolidated
Balance Sheets as of December 31, 1995.
FS-2 NCE Unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended December
31, 1995.
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,
1995 (see Annual Report of PSCo on Form 10-K for
the year ended December 31, 1995 (Exhibit H-1
hereto), at p. 34).
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, 1995
(Exhibit H-1 hereto), at p. 36).
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: May 13, 1996
New Century Energies, Inc.
By:
Doyle R. Bunch II
Chairman and Secretary
Richard C. Kelly
President and Treasurer
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
ROBERT M. SPANN
On Behalf Of:
Applicants
November 9, 1995
_________________________________________________________________
GLOSSARY OF ACRONYMS AND DEFINED TERMS
_________________________________________________________________
ACRONYM DEFINED TERMS
_________________________________________________________________
APS Arizona Public Service Company
ARPA Arkansas River Power Authority
BEPC Basin Electric Power Cooperative
BPA Bonneville Power Administration
CPL Central Power and Light
CSU Colorado Springs Utilities
CSW Central and South West Corporation
ENTR Entergy Corporation
EPE El Paso Electric Company
ERCOT Electric Reliability Council of Texas
Guidelines US Department of Justice and Federal Trade
Commission Horizontal Merger Guidelines
HHI Herfindahl-Hirschman Index
IPP Independent Power Producer
MAPP Mid-Continent Area Power Pool
MEAN Municipal Energy Agency of Nebraska
NERC North American Electric Reliability Council
NWPP Northwest Power Pool
PAC PacifiCorp
PEGT Plains Electric Generation and Transmission
Cooperative
PG&E Pacific Gas and Electric Company
PNM Public Service Company of New Mexico
PRPA Platte River Power Authority
PSCo Public Service Company of Colorado
PSO Public Service of Oklahoma
QF Qualifying Facility
SEC Securities and Exchange Commission
SCE Southern California Edison
SDGE San Diego Gas and Electric Company
SPP Southwest Power Pool
SPS Southwestern Public Service Company
SRP Salt River Project
SWEPCO Southwestern Electric Power Company
TEP Tucson Electric Power Company
TNMP Texas-New Mexico Power Company
TSGT Tri-State Generation and Transmission
Association
WAPA Western Area Power Administration
WPE WestPlains Energy
WSCC Western Systems Coordinating Council
WSPP Western Systems Power Pool
WTU West Texas Utilities
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Public Service Company of )
Colorado and Southwestern ) Docket No. EC96-___
Public Service Company )
PREPARED DIRECT TESTIMONY
OF
ROBERT M. SPANN
I. INTRODUCTION AND QUALIFICATIONS
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Robert M. Spann. My business address is
Charles River Associates, 1001 Pennsylvania Avenue, NW,
Washington, DC.
Q. BY WHOM ARE YOU EMPLOYED?
A. I am a Vice President of Charles River Associates, an
economics consulting firm with offices in Washington,
Boston, and Palo Alto.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND PRIOR WORK
EXPERIENCE.
A. I received both my Bachelor's and Master's degrees in
Economics from North Carolina State University in 1970. I
received my Ph.D. in Economics, with a co-major in
Statistics, from the same University in 1973. While doing
graduate work at North Carolina State, I taught courses in
the principles of economics. I was also the recipient of
a National Science Foundation Fellowship and a Resources
for the Future Dissertation Fellowship. I have served on
the faculties of Virginia Polytechnic Institute and State
University, Montana State University, the University of
Chicago, and George Washington University. I have taught
courses in econometrics, economic theory, applied
microeconomics, and regulatory economics.
During the period 1975-1989, I was a Principal of ICF
Incorporated, a Washington, DC, consulting firm. I have
been actively involved as a consultant in the areas of
energy, utility, and antitrust economics since 1972.
During the last 22 years I have performed consulting
assignments for state regulatory bodies, federal
government agencies, regulated utilities, energy
companies, and utility consumers. I have testified before
state and federal regulatory bodies and courts on numerous
occasions. I have also assisted in the competitive
analysis of mergers in a wide range of industries
including banking, glass containers, natural gas,
utilities, and frozen foods for presentation to the
Department of Justice and Federal Trade Commission.
I am a member of both the American Economic Association
and the American Statistical Association, and an associate
member of the American Bar Association Section on
Antitrust.
I have published numerous articles on regulatory economics
in professional journals. Schedule RMS-1 is my resume.
II. SUMMARY OF TESTIMONY
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
A. I have been asked by Southwestern Public Service Company
(SPS) and Public Service Company of Colorado (PSCo) to
conduct an economic analysis of the competitive effects of
their proposed merger.
Q. PLEASE SUMMARIZE YOUR CONCLUSIONS.
A. I have analyzed the impact of this merger on both
transmission and bulk power markets. This merger does not
create or enhance market power in any relevant market.
The merging companies' individual and combined shares of
the relevant geographic market are small. The merging
companies are small participants in a broad geographic
market in which buyers and sellers have numerous options.
The two companies do not compete in any relevant
transmission market, and the merger does not affect any
transmission market.
Q. HAVE YOU COMPUTED MARKET SHARES FOR INDIVIDUAL TIER 1
UTILITIES AS THE FEDERAL ENERGY REGULATORY COMMISSION
(FERC) HAS DONE IN PRIOR MERGER AND MARKET POWER CASES?
A. Yes, I have. The two merging companies are not now
directly interconnected. Their service areas are
separated by 300 miles.
There is only one entity -- Public Service Company of New
Mexico (PNM) -- that is directly interconnected to both
SPS and PSCo. PNM is the only entity that is in a
position to substitute purchases of power from SPS for
purchases of power from PSCo without incurring any
wheeling charges.
PNM owns substantial generating resources, is directly
interconnected with numerous other utilities, and has some
excess capacity in the near term. PNM buys non-firm
wholesale power from SPS, but is a net seller of wholesale
power in the aggregate and is a net seller of power to
PSCo.
West Plains Energy also is interconnected with both of the
merging companies. It operates two electrically separated
service areas. West Plains Energy is interconnected with
PSCo in Colorado for its service area that is part of the
Western Interconnection. West Plains Energy is
interconnected with SPS at Liberal, Kansas, for its
service area that is part of the Eastern Interconnection.
The Kansas and Colorado service areas of West Plains
Energy are not themselves directly interconnected.
Therefore, deliveries of power to West Plains Energy's
Kansas service area are not substitutes for deliveries of
power to West Plains Energy's Colorado service area.
In prior merger and market power cases, FERC has
determined that, if a utility has less than a 20 percent
market share for bulk power markets defined as individual
Tier 1 utilities, that utility does not have market power.
Schedules RMS-28 and RMS-29 show the merged company's
market share (post-merger) for each Tier l utility for
PSCo and SPS. As those summary tables indicate, the
merged company's market share based on uncommitted
capacity is less than 20 percent for all Tier 1 utilities.
Based on total resources, the merged company does not have
greater than a 20 percent market share for any entity that
is interconnected with both merging companies. The merged
company's market share based on total resources is just 21
percent for transmission-dependent entities located within
SPS's service area. This result is the same with or
without the merger, and there is no change in market
shares for these entities as a result of the merger.
Moreover, as I describe more fully below, the Commission
recently found that SPS lacks market power in generation.
Q. HAVE BOTH MERGING PARTIES FILED OPEN ACCESS TRANSMISSION
TARIFFS?
A. Yes, they have. Both entities have filed open access
tariffs prior to this merger application. These tariffs
have been accepted for filing by FERC and are presently in
effect. These open access tariffs increase the number of
alternatives available to entities interconnected with one
or both of the merging entities.
Q. DO THE MERGING PARTIES COMPETE WITH ONE ANOTHER IN ANY
RELEVANT TRANSMISSION MARKET?
A. No. SPS is located in the Eastern Interconnection. PSCo
is located in the Western Interconnection. The service
areas of the two utilities are not contiguous. There are
few, if any, transactions for which transmission services
from SPS are realistic substitutes for transmission
services from PSCo, or vice versa.
Q. DO EITHER OF THE MERGING ENTITIES FACE DIRECT COMPETITION
FROM OTHER ENTITIES FOR TRANSMISSION SERVICE WITHIN ITS
SERVICE AREA?
A. Yes. Unlike conditions in the eastern part of the United
States, utilities in the west do not always own or control
all of the transmission lines in the geographic area that
includes their service area. PSCo competes with Tri-State
Generation and Transmission Co-operative (Tri-State),
Platte River Power Authority (PRPA), and the Western Area
Power Administration (WAPA), in addition to other
entities. Tri-State, PRPA, and WAPA all own high-voltage
transmission capability within the state of Colorado.
With limited exceptions, any potential purchaser of
transmission services from PSCo could purchase similar
services from Tri-State, PRPA, or WAPA.
Q. HAS FERC MADE PRIOR DETERMINATIONS REGARDING MARKET POWER
WITH RESPECT TO EITHER OF THE MERGING PARTIES?
A. Yes, it has.
The FERC addressed the issue of generation dominance with
regard to SPS in its September l, 1995, Order regarding
SPS's request for market-based rates (Docket ER95-1129-
000). In that Order the FERC stated:
"We agree with Southwestern
that its market analysis adequately
demonstrates that it lacks
generation market power."
In 1992, PSCo acquired some of the assets of Colorado Ute.
In its Order in that proceeding [Docket EC92-8), FERC
stated:
Even if the acquisition will
have the effect of increasing
concentration of installed and
excess capacity, Colorado's offer
of transmission access will enable
more suppliers to engage in short
run trades. Thus, we find that the
proposed acquisition will not have
a detrimental effect on
concentration in the short run
market....
Colorado's transmission tariff
will allow potential customers to
reach present and new capacity
resources in the relevant
geographic markets. Accordingly,
the proposed transmission tariff
will serve to preclude Colorado
from using the facilities it
acquires from Ute to block access
to alternative buyers and sellers.
Therefore, the Commission concludes
that the acquisition will not
result in any increased ability of
Colorado to exercise market power
in the long run market.
My analysis supports and is consistent with these prior findings
of the Commission.
Q. IT HAS BEEN SUGGESTED GENERALLY THAT TRANSMISSION
CONSTRAINTS COULD HYPOTHETICALLY LEAD TO INCREASED MARKET
POWER AND ANTICOMPETITIVE EFFECTS IN A MERGER CONTEXT EVEN
IF MERGING COMPANIES HAVE COMPARABLE SERVICE TARIFFS. HOW
WOULD THAT ASSERTION AFFECT YOUR ANALYSIS HERE?
A. It would not. To analyze this issue, I have considered
the case in which no open access transmission is
available. Under this hypothetical, utilities could only
purchase power from entities with which they are directly
interconnected.
Entities that are interconnected with one, but not both,
of the merging parties are not affected by the merger.
Their options are the same both before and after the
merger. The merger changes nothing and hence has no
adverse effects on these utilities.
Under the hypothetical, entities that are interconnected
with both of the merging parties are potentially affected
by the merger because the number of options they face is
reduced. One then needs to examine the market share of
the merged entity with respect to entities interconnected
with both of the merging parties. The only such entity in
this case is PNM. Even if one assumes no open access
transmission is available, the merged companies' combined
market share with respect to PNM is less than 20 percent
for both total resources and uncommitted resources.
Moreover, as I have discussed previously, PNM owns
substantial generating resources, is directly
interconnected with numerous other utilities, and has some
excess capacity in the near term. PNM buys non-firm
wholesale power from SPS, but is a net seller of wholesale
power in the aggregate and is a net seller of power to
PSCo. Therefore, transmission constraints, hypothetical
or otherwise, have no anticompetitive impact as a result
of this merger.
Q. HOW IS THE REMAINDER OF YOUR TESTIMONY ORGANIZED?
A. The next section of my testimony briefly addresses the
framework for analyzing the competitive implications of
proposed mergers. Then I present my analysis of this
particular merger.
III. ANALYTICAL FRAMEWORK FOR EVALUATING THE COMPETITIVE
EFFECTS OF MERGERS
Q. WHAT WAS THE OBJECTIVE OF YOUR ECONOMIC ANALYSIS OF THE
PROPOSED MERGER'S COMPETITIVE EFFECTS?
A. Economic analysis of a merger's competitive effects
properly focuses on whether a merger will create or
significantly enhance market power. In this context, the
term "market power" means the ability of a firm, acting
alone or in concert with other firms, to raise prices in a
relevant market or otherwise harm competition.
Market power questions are addressed by analyzing the
effects of the merger upon the structure of and
competitive conditions in the affected or "relevant"
markets. In each market, the focus is on how the proposed
merger will change the alternatives available to buyers or
sellers, and what, if any, adverse competitive
consequences are likely to result from those changes.
Q. PLEASE BRIEFLY DESCRIBE THE PROCEDURE YOU EMPLOYED IN
ANALYZING THE EFFECTS OF THIS MERGER ON COMPETITION.
A. I followed generally accepted economic principles and the
procedures established by FERC in prior merger and
marketbased rate orders. The first step is to identify
the relevant geographic markets where the merging entities
sell wholesale power. "Relevant geographic markets" are
defined by the locations of all producers that place
significant constraints on the prices that the merged
entity can charge for wholesale power. FERC has also
defined markets consisting of individual utilities
interconnected with the merged company.
The second step is to determine whether the merger would
permit the merged companies to obtain or increase market
power in wholesale sales of power in the relevant
geographic market. This second step is separated into
analyses of the near-term impacts of the merger and the
long-run impacts of the transaction.
The near-term impacts of the merger are analyzed by
reviewing market shares, indices of concentration and
changes in concentration in the relevant geographic
market, transmission access conditions with and without
the merger, and other factors bearing on the competitive
impact of the merger.
The analysis of the long-run impacts of the merger
involves determining if the merged company has long-run
transmission market power and assessing whether or not
barriers to entry exist. FERC has stated, in its May 13,
1994, Order in the Kansas City Power and Light case
(Docket ER94-1045-00), that there is no need for FERC to
focus on longer-term impacts that relate to sales from new
capacity, provided that the seller does not have
transmission market power and does not own or control
other barriers to entry. Stated another way, if the
analysis shows that the merged entity does not have
transmission market power or the ability to erect barriers
to entry to new generation, it is not necessary to analyze
long-run market power. As such, I have analyzed
transmission market power and barriers to entry.
Next I examined buyer market power issues. If two large
buyers of wholesale electricity are merging, the potential
exists for the merged entity to exert monopsony power and
reduce the prices it pays for wholesale power to less than
competitive market levels.
Finally, I analyzed whether the merger would have any
effect on retail competition.
Q. ARE YOU FAMILIAR WITH THE DEPARTMENT OF JUSTICE AND
FEDERAL TRADE COMMISSION HORIZONTAL MERGER GUIDELINES,
ISSUED APRIL 2, 1992?
A. Yes, I am. The analysis I have conducted is consistent
with the Guidelines. The Guidelines' merger analysis
begins by defining relevant products and relevant
geographic markets.
A "relevant product" should be defined so as to include
all products that are sufficiently good substitutes for
one another, such that competition between suppliers of
these products places a significant constraint on the
prices that can be charged by each supplier of the
product. The Guidelines' concept of a relevant geographic
market is the same as that discussed in my previous
answer.
The Guidelines use the Herfindahl-Hirschman Index (HHI) to
measure market concentration and the change in market
concentration resulting from a merger. The HHI is simply
the sum of the squares of the market shares of the sellers
in a defined market. The mathematical construction of the
index is such that the most concentrated market, i.e., a
monopoly (a firm with a market share of 100 percent), has
an HHI of 10,000 (100x100=10,000)). As the number of
firms increases and their market shares decline, the HHI
decreases. For example, 100 firms, each with a 1 percent
share, would result in an HHI of 100 (1 x 1=1; the sum of
100 unit values is 100).
Q. DO THE GUIDELINES INDICATE HOW THESE MARKET CONCENTRATION
MEASURES SHOULD BE UTILIZED?
A. Yes. The Guidelines present certain market-share and HHI
ranges to indicate when the DOJ and FTC are likely not to
challenge mergers. The unifying theme of the Guidelines
is that mergers should not be permitted to create or
enhance market power. When the Guidelines state that the
regulatory agencies are unlikely to challenge a merger,
this implies a belief that the transaction will not create
or enhance market power. The analysis of market shares
addresses the near-term effects of the merger. Assessment
of the longer-term effects of the merger depends on ease
of entry in the long run and the ability (if any) of the
merged firm to raise barriers to entry.
The Guidelines address three cases:
(1) If the post-merger HHI is less than 1,000 points,
the market is considered unconcentrated. No consideration
is given to the change in the HHI. In this case, the DOJ
and the FTC are not likely to challenge the merger.
(2) Where the post-merger HHI ranges from 1,000 to
1,800 points, the market is considered "moderately
concentrated." The Guidelines state that if a merger in
this range changes the HHI by less than 100 points, the
agencies are not likely to challenge the transaction.
(3) Where the post-merger HHI exceeds 1,800, the
market is considered "highly concentrated." The
Guidelines state that if a merger in this range changes
the HHI by less than 50 points, it is not likely to be
challenged.
Q. IF THE CHANGE IN THE HHI EXCEEDS THE LEVELS DISCUSSED IN
YOUR PREVIOUS ANSWER, DOES THIS MEAN THAT DOJ/FTC ARE
LIKELY TO CHALLENGE THE MERGER UNDER THE GUIDELINES?
A. No. The numerical criteria regarding concentration listed
above are used to determine the conditions under which the
DOJ/FTC will decide not to challenge a merger. The
decision to challenge a merger as one that creates or
enhances market power is based on both the numerical
criteria listed above and additional analyses of other
significant market factors. For example, if a proposed
merger results in a post-merger HHI exceeding 1,800 and
the change in the HHI exceeds 50 points, the antitrust
agencies may still decide not to challenge the merger
based on an analysis of other factors. These other
factors include entry conditions, efficiencies that result
from the merger, the potential for lessening competition
through coordinated interactions, and the financial
strength of the merging firms.
Similarly, FERC has stated in prior merger decisions that
it "may weigh and balance HHI calculations with a number
of factors to determine whether a proposed merger is
consistent with the public interest" [Entergy, 64 FERC
61,001 (1993) at p. 61,011]
Q. HAS FERC USED MARKET SHARE CRITERIA IN ADDITION TO, OR
OTHER THAN, THE HHI IN PRIOR PROCEEDINGS?
A. In market-based rate proceedings, FERC has stated that a
company with less than a 20 percent market share for a
market defined as an individual Tier 1 utility cannot
exercise market power [Louisville Gas and Electric
Company, 62 FERC, 61,016 at p. 61,146 (1993)]. The
Commission also has said that this is not a "bright line"
test, and it has approved mergers and market-based rates
where shares in individual Tier 1 markets exceed 20
percent if accompanied by the filing of an open access
tariff.
Q. ARE THERE ANY FACTORS UNIQUE TO THE ELECTRIC UTILITY
INDUSTRY THAT ARE IMPORTANT IN EVALUATING THE COMPETITIVE
EFFECTS OF MERGERS IN THE NEAR TERM?
A. Yes, there are at least three such factors. First, most
of the buyers of wholesale power own generation capacity.
Second, many buyers of wholesale power are also sellers of
wholesale power. Third, there is a wide variety of power
supply arrangements.
Q. WHY IS THE FACT THAT MOST BUYERS OF WHOLESALE POWER OWN
GENERATING CAPACITY IMPORTANT?
A. The capacity the buyers own can be a substitute for
purchases of power from the merging firms. If two
utilities merged and attempted to raise prices, any buyer
that was not already operating all of its generating units
at maximum output could increase the output of its
generating plants and reduce its purchases from the merged
entity at times in which its hourly load was less than its
total generating capacity. This would tend to temper the
concern over a merger with changes in the HHI exceeding
the levels described above.
Q. WHY ARE MANY UTILITIES BOTH BUYERS AND SELLERS OF
WHOLESALE POWER?
A. Because each utility owns a number of generating units
with different marginal operating costs, and because
electricity -- with limited exceptions -- is not storable,
each utility's marginal costs at a particular point in
time depend on the instantaneous demands of its customers
and the availability of its generating units. It is quite
possible that at one point in time Utility A has lower
marginal operating costs than Utility B, but at a later
point in time, Utility B has lower marginal operating
costs than Utility A. In this case Utility A will be a
buyer of power from Utility B during some time periods and
a seller of power to Utility B during other time periods.
For example, in 1994 PSCo was a net buyer of firm power,
but a net seller of non-firm power. Some of the same
entities that purchased power from PSCo also sold
significant amounts of power to PSCo in 1994.
Q. WHY IS THE FACT THAT MANY UTILITIES ARE BOTH BUYERS AND
SELLERS OF WHOLESALE POWER IMPORTANT?
A. The fact that many of the firms in the relevant market are
both buyers and sellers of the relevant product can reduce
the degree to which mergers that increase concentration
raise competitive concerns, all other factors held
constant. One reason that the Guidelines are concerned
with mergers that significantly increase concentration is
the possibility that, at higher levels of concentration,
firms might be able to exercise market power by
coordinating their pricing actions or engaging in tacit
collusion. If many of the producers in the industry are
alternatively buyers and sellers of the relevant products,
coordinated actions become much less likely and may be
impossible to sustain. As a result, regulators may be
less concerned with mergers that raise market
concentration under such circumstances.
Q. WHAT DO YOU MEAN WHEN YOU SAY THAT THERE IS A WIDE VARIETY
OF POWER SUPPLY ARRANGEMENTS?
A. A utility that requires capacity and/or energy can meet
those requirements in a wide variety of ways. For
example, a utility that needs capacity and energy could
purchase both under one long-term contract.
Alternatively, it could enter into a sequence of short-
term contracts. It could construct low-capital-cost
peaking facilities and purchase non-firm energy on the
spot market. It could increase its demand side management
(DSM) programs aimed at curtailing peak demand and
purchase energy. It could increase DSM programs that
reduce both energy and capacity requirements. Finally, it
could purchase reserve capacity only in combination with
one or more of the options I have already listed.
Q. WHY IS THE FACT THAT THERE IS A WIDE VARIETY OF POWER
SUPPLY ARRANGEMENTS IMPORTANT?
A. The fact that there is a wide variety of power supply
arrangements makes coordinated actions on the part of
sellers more difficult and less likely to occur. This
means that there is less concern with mergers that
increase concentration leading to the creation or
enhancement of market power.
Q. WHAT SOURCES OF INFORMATION DID YOU CONSIDER IN PERFORMING
YOUR ANALYSIS AND REACHING YOUR CONCLUSIONS?
A. I relied upon information supplied to me by SPS and PSCo
as well as publicly available information. Much of that
information describing the SPS and PSCo utility systems is
contained in the testimony of Mr. Harris of PSCo and
Mr. Hudson of SPS.
I also relied upon numerous publicly available documents,
including FERC Form l filings for utilities in the Western
Systems Coordinating Council (WSCC) and the Southwest
Power Pool (SPP); the 0E-411 filings of the WSCC and SPP;
the WSCC's "Existing Generation and Significant Additions
and Changes to System Facilities (1993-2000);" The
National Electric Reliability Council's "Supply and Demand
of Power;" the SEC Forms 10K filed by SPS and PSCo and
other investor-owned utilities; the integrated resource
plans prepared by PSCo and SPS and other entities; EIA
Forms 861 and 412 filed by entities other than investor-
owned utilities; the Electrical World Directory of
Electric Power Producers; annual reports of public power
entities such as the Western Area Power Administration,
Salt River Project, and others; and articles in the trade
press.
IV. SPS'S AND PSCO'S ACTIVITIES AS BUYERS AND SELLERS OF POWER
Q. PLEASE SUMMARIZE YOUR UNDERSTANDING OF PSCO'S ACTIVITIES
AS BOTH A BUYER AND A SELLER OF WHOLESALE POWER.
A. PSCo is in the Western Interconnection. It operates a
utility system in Colorado and in parts of Wyoming and is
primarily a buyer, not a seller, of wholesale power.
PSCo's peak demands exceed its generating capacity, and
this condition is expected to continue for the foreseeable
future.
PSCo's 1994 peak demand was 4,011 MW. The company owns
about 3,176 MW of generating capacity. It purchases
593 MW of firm power from qualifying
facilities/independent power producers and about 1000 MW
of long-term firm power from other utilities, including
Basin Electric Power Cooperative, PacifiCorp, Platte River
Power Authority, and Tri-States Generation and
Transmission.
Schedule RMS-2 shows PSCo's total sales to and purchases
from other utilities of firm and non-firm power in 1994.
PSCo purchased three times as much firm power as it sold,
and it sold about twice as much non-firm power as it
purchased. However, as subsequent schedules show, PSCo's
sales of non-firm power are small relative to the non-firm
power sales of other entities that operate in this region
of the country.
Schedule RMS-3 consists of two pages and shows PSCo's
sales of firm and non-firm power in 1994. Schedule RMS-4
shows PSCo's purchases of firm and non-firm power in 1994.
PSCo sells firm requirements power to eight entities in
Colorado. The utility purchases firm power from QF/IPPs
in Colorado and from other utilities with which it is
interconnected in Colorado. PSCo has sold non-firm power
to other entities in the Rocky Mountain, Arizona-New
Mexico, and California-Southern Nevada regions of the
WSCC. Schedules RMS-2, RMS-3, and RMS-4 use 1994 data as
reported in PSCo's FERC Form 1.
PSCo also owns Cheyenne Light, Fuel and Power Company
(Cheyenne). This utility operates a small electric
service area in Wyoming. Cheyenne purchases all of its
power from PacifiCorp. My schedules for PSCo exclude
Cheyenne's purchases and sales. Cheyenne has a peak load
of 129 MW. It has no wholesale customers. Its
transmission system consists of two 115 kV transmission
line segments totaling 25.5 miles in length. As such,
excluding Cheyenne has no effect on my analysis.
Q. PLEASE SUMMARIZE YOUR UNDERSTANDING OF SPS'S ACTIVITIES AS
A BUYER AND SELLER OF WHOLESALE POWER.
A. SPS operates a utility system in the south plains and
panhandle of Texas, eastern and southeastern New Mexico,
the Oklahoma panhandle, and southwestern Kansas. SPS's
1994 peak demand was 3,692 MW (as reported in its FERC
Form 1, using FERC Form 1 definitions), and it currently
owns generating plants with a total capacity of 4,062 MW.
SPS is part of the Eastern Interconnection, which is not
electrically connected via synchronous interconnection
with the Western Systems Coordinating Council. SPS is,
however, interconnected with the WSCC via two direct
current (DC) interconnections in New Mexico. Each of
these interconnections (which are owned by utilities that
operate in the WSCC) has a transfer capability of 200 MW.
SPS sells power throughout the WSCC. With the exception
of sales to the WSCC utilities with which it is directly
interconnected, SPS accomplishes these transactions by
purchasing transmission services from utilities in the
WSCC. Schedule RMS-5 shows SPS's total sales to and
purchases from other utilities of firm and non-firm power
in 1994. SPS is a substantial net seller of wholesale
bulk power. Schedule RMS-6 shows SPS's firm and non-firm
wholesale bulk power sales in 1994. The firm sales are
requirements sales to utilities located within SPS's
service area, plus firm requirements sales to Texas-New
Mexico Power and El Paso Electric. The non-firm sales
consist of economy-type and other interruptible sales to
entities in the WSCC and to entities to the north and east
of SPS that are also located within the Eastern
Interconnection grid.
Schedules RMS-7 shows SPS's purchases of firm and non-firm
wholesale bulk power in 1994. SPS is not a major
purchaser of wholesale bulk power. Schedules RMS-5,
RMS-6, and RMS-7 use 1994 data as reported in SPS's FERC
Form 1.
Q. HAVE YOU REVIEWED THE MERGING PARTIES' INTERCONNECTIONS
WITH OTHER UTILITIES?
A. Yes. It is important to note that the two merging parties
are not now directly interconnected. Their service areas
are more than 300 miles apart. PSCo is part of the
Western Interconnection. SPS is part of the Eastern
Interconnection. The Eastern and Western Interconnections
are not synchronized. All of the interconnections between
the eastern and western portions of the country are direct
current interconnections. None of these direct current
interconnections are owned by SPS or PSCo.
Q. WHICH UTILITIES ARE DIRECTLY INTERCONNECTED WITH PSCO?
A. PSCo is directly interconnected with Tri-State Generation
and Transmission, Western Area Power Administration
(WAPA), and Platte River Power Authority at numerous
points on its transmission system. PSCo is also
interconnected at one or more points with West Plains
Energy (a subsidiary of Utilicorp), Colorado Springs
Utility, PacifiCorp, and the Municipal Energy Agency of
Nebraska. In addition, PSCo jointly owns a transmission
line to Four Corners. As a result of that joint
ownership, it is directly interconnected with PNM, Arizona
Public Service, Salt River Project, Southern California
Edison, PacifiCorp, and Tucson Electric Power.
Q. WHICH UTILITIES ARE DIRECTLY INTERCONNECTED WITH SPS?
A. SPS is interconnected at various locations with Public
Service of Oklahoma and West Texas Utilities in the
Southwest Power Pool (SPP). Both of these entities are
subsidiaries of Central and South West Services, Inc. SPS
has an interconnection with the Kansas service area of
West Plains Energy in the SPP. However, this
interconnection is at 115 kV and is normally open for
reliability reasons. During 1993 and 1994, this
interconnection was open for reliability reasons about
68 percent of the time. SPS is planning to install phase
shifters at Liberal, Kansas, so that the line can be
operated normally closed after next year.
SPS also has direct current interconnections with three
utilities in the Western Interconnection - PNM, Texas-New
Mexico Power, and El Paso Electric. SPS interconnects
with PNM via a 200 MW DC tie at Blackwater, New Mexico.
This DC tie is owned by PNM. SPS also interconnects with
El Paso Electric and Texas-New Mexico Power via a DC tie
at Artesia, New Mexico. This is a 200 MW interconnection
that is jointly owned by El Paso Electric (133 MW) and
Texas-New Mexico Power (67 MW).
Q. WHAT IS THE RELEVANT GEOGRAPHIC MARKET FOR WHOLESALE POWER
FOR THE PURPOSE OF ANALYZING THIS MERGER?
A. The relevant geographic market for the purpose of
analyzing the competitive effects of this merger is the
U.S. portion of the WSCC. Schedule RMS-8 is a map of the
WSCC and a list of the members of the WSCC by area. FERC
used the WSCC as the relevant market in the UP&L-
PacifiCorp merger. However, because FERC has also utilized
narrower markets than the entire WSCC in analyzing a prior
transaction involving PSCo, I have also performed an
analysis of a narrower market defined as utilities within
the WSCC that are directly interconnected with one or both
of the merging parties.
Q. WHAT DATA DID YOU EXAMINE IN ORDER TO DETERMINE THE
RELEVANT GEOGRAPHIC MARKET?
A. I examined the actual transactions of the merging parties,
the identities of utilities interconnected with the
merging parties, existing power-pooling arrangements in
the region where the two entities operate, and the
distribution of transmission ownership in the western
United States.
Q. WHY DID YOU EXAMINE THE PATTERN OF EXISTING SALES BY THE
MERGING PARTIES?
A. The geographic market consists of the location of all
producers that place significant constraints on the
ability of the merging firms to raise profitably the price
of the relevant product after the merger. As such, I
analyzed data to determine where the merging parties
currently sell power and who else sells power in that same
general area or to the same customers. Examination of the
pattern of existing sales of the merging parties and
alternative sellers to customers of the merging parties
establishes the trading area of those firms. Relevant
geographic markets for antitrust analysis are usually
larger than trading areas. However, if one observes firms
selling over a broad area, this is an indication of broad
geographic markets.
Q. PLEASE DESCRIBE YOUR ANALYSIS OF THE EXISTING SALES OF
POWER BY THE MERGING PARTIES.
A. Schedule RMS-9 consists of two maps showing the states in
which SPS sold power in 1994 (page 1 of 2) and a map
showing the states in which PSCo sold power in 1994
(page 2 of 2). As these maps indicate, SPS sells power as
far north as Washington, as far west as California, and as
far east as Mississippi and Missouri. PSCo sold power to
entities located as far north as Wyoming, as far west as
California, and to entities in the Arizona-New Mexico
area.
SPS sells power throughout the Western Interconnection and
also in the Eastern Interconnection. As I noted earlier,
SPS is part of the Eastern, not the Western,
Interconnection. The fact that SPS is able to sell
significant amounts of power in the Western
Interconnection is indicative of the fact that markets are
broad. PSCo also sells power throughout a broad area of
the Western Interconnection.
The existing pattern of sales often underestimates the
scope of the geographic market. The correct measure of
the geographic market includes not only firms currently
selling in the same general area as the merging firms, but
also all firms that would begin selling in competition
with the merging parties in response to a small, non-
transitory price increase. Both categories of firms
(firms that currently sell and firms that would begin
selling in response to a price increase) act as
constraints on the pricing practices of the merging firm
and its current competitors.
Q. PLEASE DESCRIBE YOUR ANALYSIS OF THE TWO COMPANIES'
INTERCONNECTIONS.
A. Schedule RMS-10 is a map showing the states in which
utilities interconnected with one or both of the two
merging parties operate. Entities interconnected with SPS
and/or PSCo in the Western Interconnection operate in
states as far east as Colorado and New Mexico, as far west
as California, and as far north as Oregon and Montana.
Some of the entities interconnected with PSCo, such as
WAPA and Basin, operate in both the Western and Eastern
Interconnections.
Q. ARE THERE ANY OTHER FACTORS THAT LEAD YOU TO CONCLUDE THAT
THE RELEVANT GEOGRAPHIC MARKET FOR THE PURPOSE OF
ANALYZING THIS MERGER IS THE U.S. PORTION OF THE WSCC?
A. Yes, there are five such additional factors that lead me
to this conclusion that the relevant market for the
purpose of analyzing this merger is the U.S. portion of
the WSCC. They are:
The fact that, even without the FERC Open-Access
Transmission NOPR or this merger, both SPS and PSCo
already have open access transmission tariffs;
The pending FERC Open-Access Transmission NOPR;
The pattern of transmission ownership in the Western
Interconnection;
The existence of the Western Systems Power Pool; and
The significant number of utilities interconnected at
Four Corners.
Q. WHY IS THE FACT THAT BOTH MERGING PARTIES HAVE FILED OPEN-
ACCESS TARIFFS PRIOR TO THIS MERGER IMPORTANT IN
DETERMINING THE RELEVANT GEOGRAPHIC MARKET?
A. Both parties have filed open-access, comparable-service
transmission tariffs. Those tariffs are related to SPS's
market-based rate filing and PSCo's filing for permission
to operate e-prime, an unregulated subsidiary. FERC has
already approved SPS's application for market-based rates
and the company's open-access tariffs. Although FERC had
not issued a final order regarding PSCo's e-prime
application as of the date this testimony is filed, it is
quite likely that it will have acted on that application
prior to the consummation of the merger. Nevertheless,
PSCo already has a comparable service, open-access tariff
on file and in effect.
These transmission tariffs are important for two reasons.
First, the fact that both parties already have open-access
tariffs in place increases trading opportunities for
entities interconnected with SPS and/or PSCo. Second,
transmission access disputes should not really be an issue
in this merger. As FERC has stated in prior cases
involving SPS and PSCo individually (cited earlier in my
testimony), these open-access tariffs prevent the exercise
of market power.
Q. IN YOUR OPINION, WHY IS THE FERC OPEN-ACCESS TRANSMISSION
NOPR IMPORTANT IN DETERMINING THE RELEVANT GEOGRAPHIC
MARKET?
A. FERC issued its Open-Access Transmission NOPR in March of
1995 (Docket RM95-8-000). Although no final ruling has
been issued as of the date this testimony is being filed,
virtually all observers of the utility industry expect
that the NOPR process will result in some form of
increased open-access on an industry-wide basis. The only
real issue in dispute is the mechanics of the actual
tariffs and procedures governing open-access transmission.
Open-access tariffs increase the opportunities available
to all potential buyers. This point can be illustrated by
a simple diagram such as that shown in Schedule RMS-11.
Utilities A and B are the merging parties. Utility A is
interconnected with utilities B, C, and G. Utility B is
interconnected with utilities C, A, and H. Utility C is
interconnected with utilities A, B, and D. Utility D is
interconnected with utilities C, E and F.
Prior to the requirement that all utilities file open-
access tariffs, FERC's standard methodology for analyzing
a merger of utilities A and B would be to examine Utility
C's options both pre- and post-merger. Pre-merger,
Utility C's options would be purchases from utilities A,
B, and D plus its own generation. Post-merger, Utility
C's option would be purchases from the merged entity,
Utility D, Utility C's own generation, and utilities G and
H, by virtue of the open-access tariff that FERC requires
of merging utilities.
With the requirement that all utilities file open-access
tariffs, regardless of the existence of the contemplated
merger, Utility C's options are substantially increased.
Pre-merger, with open-access tariffs, Utility C's options
are utilities A, G, B, H, D, E, and F, in addition to its
own generation. Post-merger, Utility C's options are the
merged entity plus utilities G, H, D, E, and F in addition
to its own generation. As a result, even though the
merger of A and B eliminated one trading partner,
Utility C's markets are still substantially broader under
the open-access regime contemplated by the FERC's NOPR
than they were prior to open access.
Q. WHAT TRANSMISSION CONDITIONS IN THE WESTERN
INTERCONNECTION ARE IMPORTANT IN DETERMINING THE RELEVANT
GEOGRAPHIC MARKET FOR PURPOSES OF ANALYZING THIS MERGER?
A. Unlike other regions of the country, many investor-owned
utilities in the west do not own or control all of the
transmission lines within their service areas. Individual
utilities may own transmission facilities outside of their
service areas and interconnect with other entities far
from the borders of their service areas. The pattern of
transmission line ownership in Colorado is one
illustration of this point. Schedule RMS-12, prepared by
PSCo, is a map showing the key transmission corridors in
Colorado. The capacity of individual and jointly-owned
transmission lines within specific corridors is
aggregated, and these paths are referred to as TOT's in
Colorado. The key TOT's are shown in Schedule RMS-12.
Schedule RMS-13 was also prepared by PSCo. It shows the
capacity allocation shares in each of these TOT's in
Colorado. All of the important east-west and north-south
corridors have transmission lines owned by at least two
entities in Colorado (PSCo, Tri-State, Platte River Power
Authority, and WAPA). PSCo does not control more than
36 percent of the capacity in any transmission corridor
except for TOT 7, in which it has a capacity allocation of
58 percent.
Another example is the transmission system owned and
operated by WAPA. Schedule RMS-14 is reproduced from
WAPA's 1994 annual report. It shows that WAPA owns a
transmission system that traverses the service areas of
numerous utilities in the southern and eastern parts of
the Western Interconnection.
Finally, Southern California Edison (SCE) owns part of the
transmission capacity from southern California to Four
Corners. This allows SCE to engage in transactions at
Four Corners even though its retail service area is
approximately 500 miles west of that location.
The fact that transmission entities that are
interconnected with PSCo or SPS essentially traverse the
entire WSCC means that these entities can purchase and
sell power over a wide geographic area. The U.S. portion
of the WSCC is the relevant market.
Q. WHY IS THE WESTERN SYSTEMS POWER POOL IMPORTANT IN
DETERMINING THE GEOGRAPHIC MARKET FOR THE PURPOSE OF
ANALYZING THIS MERGER?
A. The Western Systems Power Pool (WSPP) is an agreement that
allows all members of the WSPP to enter into transactions
with each other at negotiated rates subject to price caps,
and to obtain transmission service for the purpose of
effecting transactions. Membership in the WSPP is not
limited to traditional utilities that are part of the
Western Interconnection. The WSPP also includes utilities
that are part of the Eastern Interconnection, power
marketers, and independent power producers (IPPs). The
effect of the WSPP is to broaden the area over which
transactions take place. There are over 90 entities in
the WSPP.
Q. WHY IS FOUR CORNERS IMPORTANT IN YOUR ANALYSIS?
A. The Four Corners area consists of three distinct
interconnection points: Shiprock, Four Corners, and San
Juan. Effectively, these three interconnection points
operate as a common bus, and any entity that is
interconnected with one of these three points can engage
in transactions with any other entity that is
interconnected at any other point in the Four Corners area
at zero or minimal costs. The entities that have
transmission rights to the Four Corners area are:
Public Service of Colorado,
Southern California Edison,
Arizona Public Service,
WAPA,
Tri-States,
PacifiCorp,
Salt River Project,
Tucson Electric Power, and
PNM.
In addition, El Paso Electric owns generation at Four
Corners and can sell that output at that location.
The fact that such a large number of utilities are
effectively interconnected at a single point broadens the
options each faces when buying or selling wholesale bulk
power. The utilities interconnected at Four Corners are
interconnected with other utilities across the entire
WSCC. This is additional evidence in support of defining
the U.S. portion of the WSCC as the relevant market.
Q. DID YOU ALSO ANALYZE NARROWER GEOGRAPHIC MARKETS
CONSISTING OF UTILITIES DIRECTLY INTERCONNECTED WITH ONE
OR BOTH OF THE MERGING PARTIES?
A. Yes. Consistent with prior FERC rulings, I analyzed
narrow destination markets defined as each individual
utility that is interconnected with one or both of the
merging parties.
Q. FOR THE PURPOSE OF ANALYZING THE IMPACTS OF THIS MERGER
WITHIN A DOJ/FTC GUIDELINES APPROACH, IS IT NECESSARY TO
ANALYZE ANY MARKETS IN THE EASTERN INTERCONNECTION?
A. No, it is not. Within the DOJ/FTC Guidelines approach to
merger analysis, one analyzes markets where the two
merging parties are competitors. Generally, there is no
potential for anticompetitive effects from a merger in
markets where one, but not both, of the parties is a
participant prior to the merger.
In the DOJ/FTC Guidelines methodology, one computes the
change in the HHI resulting from a merger as two times the
product of the pre-merger market shares of the merging
entities. If one of these market shares is zero,
pre-merger, the change in the HHI as a result of the
merger is zero.
Here, SPS sells wholesale bulk power in the Eastern
Interconnection, but PSCo does not. In order for PSCo to
sell power in the Eastern Interconnection, it would need
to move the power to Four Corners and then purchase
wheeling services from PNM to move power from Four Corners
to the eastern border of New Mexico. Alternatively, PSCo
could sell power into the Eastern Interconnection in the
western Kansas-Nebraska area by purchasing wheeling
services from WAPA, which owns and operates a DC tie to
the Eastern Interconnection at Sidney, Nebraska. The fact
that PSCo does not now engage in such transactions
indicates that they are not economical.
Moreover, even if PSCo were a seller in western Kansas,
SPS is not a significant seller in that market area. SPS
is interconnected with West Plains Energy in western
Kansas. However, this line is normally open and
unavailable for reliability reasons. Schedule RMS-15 is a
four-page chart and table prepared by SPS at my request.
It shows the percent of the hours each month in 1993 and
1994 that its interconnection with West Plains Energy's
Kansas service area was unavailable. SPS is planning to
install phase shifters at Liberal, Kansas, so that this
line can be operated normally closed after next year.
However, there is not much energy demand in either western
Kansas or western Nebraska, and that region has a
substantial amount of excess generating capacity.
Since the two merging parties are not now both selling in
the Eastern Interconnection, there is no potential for
anticompetitive effects in the Eastern Interconnection to
result from this merger.
Nevertheless, one could analyze the eastern Tier 1
entities for the situation that will exist after the
merging companies build the DC tie necessary to directly
interconnect their systems. This evaluation would not
alter the conclusion that the merger could have no adverse
affects on competition in the Eastern Interconnection.
Completing the interconnection may make PSCo's generation
capacity available to the eastern market. Such an
addition of capacity cannot create market power,
however--in fact, if anything, it should tend to lower,
not increase, market prices. In any event, since the SPS
and PSCo do not plan to build their interconnection until
2001, it necessarily can affect only long-run markets. As
I explain below, however, since the merged company will
not control or have the ability to erect barriers to entry
by competing generators, the merger will not create or
enhance market power in long-term markets.
V. RELEVANT PRODUCT MARKET
Q. WHAT IS THE RELEVANT PRODUCT MARKET FOR THE PURPOSE OF
ANALYZING THIS MERGER?
A. The relevant product market is wholesale bulk power.
Below, I present market share data based on firm
transactions, non-firm transactions, total generating
capacity, and uncommitted generating capacity. These are
the market share calculations usually presented in merger
cases before FERC.
Q. IS TRANSMISSION A RELEVANT PRODUCT MARKET FOR THE PURPOSE
OF ANALYZING THE IMPACT OF THIS MERGER?
A. No, it is not. The two merging parties are not
competitors with each other in any relevant transmission
market. There are few, if any, realistic transactions for
which use of the PSCo transmission system would be
considered a substitute or viable alternative to use of
the SPS transmission system, or vice versa. Only one
utility (PNM) operates a control area that is
interconnected with both of the merging companies, and
that utility is interconnected with numerous alternative
sellers and transmission paths for purchases of power in
addition to the merging companies.
Further, the merger will have no effect on SPS's or PSCo's
role in any relevant transmission market and will not
create or enhance market power in any such market.
VI. SHORT-RUN MERGER ANALYSIS
Q. WHAT INDICES OF CONCENTRATION AND/OR MARKET SHARES DID YOU
CALCULATE?
A. I have calculated market shares and/or changes in HHI
indices based on:
1. Total resources in the WSCC and for utilities in
the Western Interconnection that are interconnected with
one or both of the merging parties;
2. Uncommitted resources in the WSCC and for
utilities in the Western Interconnection that are
interconnected with one or both of the merging parties;
3. Total and uncommitted resources for individual
Tier 1 utilities; and
4. Sales of firm and non-firm power by all utilities
interconnected with SPS and PSCo.
VII. MARKET SHARES: TOTAL AND UNCOMMITTED RESOURCES
Q. PLEASE DISCUSS YOUR ANALYSIS OF MARKET SHARES OF TOTAL
RESOURCES.
A. In prior cases, FERC has used installed capacity or total
resources as a measure of capacity that might be available
for non-firm and some shorter-term firm purchases.
Schedule RMS-16 shows the merged company's ("M-P New Co.")
and the merging companies' market shares of total
resources for the WSCC as a whole, and for utilities in
the Western Interconnection that are interconnected with
one or both of the merging parties. Even though SPS is
not part of the WSCC (because it is part of the Eastern
Interconnection), I have included it in these numbers
because it is interconnected with the WSCC via DC ties to
New Mexico.
Each of the merging parties has about 3 percent of the
total resources in the WSCC. The change in the HHI as a
result of this merger is 18. This change in the HHI is
calculated as two times the product of the merging
entities' market shares. This level of change in the HHI
is well within the range for which a merger is unlikely to
be challenged under the Guidelines.
For a market defined as all entities in the Western
Interconnection that are directly interconnected with one
or both of the merging parties, PSCo has a market share of
8 percent and SPS has a market share of 6 percent. The
change in the HHI is 96. The pre-merger HHI is 1,470,
resulting in a post-merger HHI of 1,566. This level of
post-merger HHI and change in the HHI are within the range
for which a merger is unlikely to be challenged under the
Guidelines.
Q. DID YOU ALSO COMPUTE MARKET SHARES BASED ON UNCOMMITTED
CAPACITY?
A. Yes. In prior cases, FERC has used uncommitted resources
as a measure of the amount of capacity that is for sale.
Uncommitted resources are defined as total resources less
peak demand and reserves. Firm sales contracts to other
utilities are included in peak demand. The presumption in
FERC's use of this measure is that committed capacity is
required to serve native load at some times during the
year.
Q. PLEASE DISCUSS YOUR ANALYSIS OF MARKET SHARES OF
UNCOMMITTED RESOURCES.
A. Schedule RMS-17 shows the merging companies' market shares
of uncommitted resources for the WSCC as a whole, and for
utilities in the Western Interconnection that are
interconnected with one or both of the merging parties.
Even though SPS is not part of the WSCC, I have included
SPS in these numbers because it is interconnected to the
west via the DC ties in New Mexico. The change in the HHI
due to the proposed merger is zero for both market
definitions. This stems from the fact that SPS has zero
uncommitted capacity.
Q. WHAT DO YOU CONCLUDE FROM YOUR MARKET SHARE CALCULATIONS
WITH RESPECT TO TOTAL RESOURCES AND UNCOMMITTED RESOURCES?
A. The market shares of the merged entity are small. The
changes in the HHI as a result of this merger are small or
zero. This merger will not create or enhance market power
in bulk power sales.
(B) MARKET SHARES: NON-FIRM AND FIRM ENERGY
Q. WHAT DATA SOURCES DID YOU USE TO COMPUTE MARKET SHARES FOR
NON-FIRM AND FIRM ENERGY SALES?
A. I used the FERC Form 1's filed by investor-owned
utilities. I have used FERC Form 1 definitions to
classify transactions as firm or non-firm. Use of Form 1
data does, however, require some care and interpretation.
In some cases, the two parties to a transaction may report
it differently. For example, there are instances in which
the same transaction is reported as "short-term firm" by
one party and as non-firm by the other party. In
addition, governmental and other public entities such as
WAPA, PRPA, and Tri-State do not file Form 1's, and the
data they do file and/or report may not be given in
sufficient detail to separately analyze firm versus non-
firm sales.
Q. PLEASE DISCUSS YOUR ANALYSIS OF MARKET SHARES FOR NON-FIRM
ENERGY SALES.
A. Schedule RMS-18 shows non-firm sales of energy by the
merging companies, the investor-owned utilities
interconnected with the merging companies in the Western
Interconnection, and the Western Area Power Administration
(WAPA). I have excluded other non-investor-owned
utilities due to the lack of consistent data available
from other governmental and public entities. As such, my
calculations overstate market shares of SPS and PSCo and
present a highly conservative estimate of the effect of
the merger on market concentration.
The market shares shown in Schedule RMS-18 are 3.3 percent
for PSCo and 6.6 percent for SPS. The change in the HHI
is 44 (44=2x3.3x6.6). This change in the HHI is well
within the range of HHI changes for which a merger would
not be challenged under the Guidelines. Even though my
calculations are very conservative due to the exclusion of
public power entities, the change in the HHI is low enough
that it would not raise any competitive issues in a
Guidelines analysis.
Q. PLEASE DISCUSS YOUR MARKET SHARE CALCULATIONS FOR FIRM
POWER.
A. Schedule RMS-19 shows firm sales of power by SPS and PSCo
as well as all utilities interconnected with SPS and PSCo
in the Western Interconnection. This schedule is limited
to sales by investor-owned utilities and WAPA due to the
lack of consistent data available from other governmental
and public entities. As such, my calculations overstate
market shares of SPS and PSCo and present a highly
conservative estimate of market shares.
The market shares shown in Schedule RMS-19 are 5.1 percent
for PSCo and 3.1 percent for SPS. The change in the HHI
is 32. This change in the HHI is well within the range of
changes for which a merger would not be challenged under
the Guidelines. Even though these calculations are
conservative (due to the exclusion of some public
entities), they indicate such a small change in the HHI
that the merger would raise no competitive issues in a
Guidelines analysis.
Q. WHAT DO YOU CONCLUDE FROM YOUR MARKET SHARE CALCULATIONS
WITH RESPECT TO FIRM AND NON-FIRM SALES?
A. The merged entity's share of the relevant market is small.
The changes in the HHI resulting from this merger are
small or zero. This merger will not create or enhance
market power.
VIII. TIER 1 UTILITIES
Q. HOW IS YOUR ANALYSIS OF TIER 1 UTILITIES ORGANIZED?
A. For the purpose of analyzing this merger, Tier l utilities
fall into the following categories:
1. Utilities interconnected with both parties;
2. Utilities other than transmission-dependent
utilities in the Western Interconnection that are
interconnected with one, but not both, of the merging
parties;
3. Utilities other than transmission-dependent
entities in the Eastern Interconnection that are
interconnected with one, but not both, of the merging
parties; and
4. Transmission-dependent entities that are
interconnected with either SPS or PSCo.
Each category is separately analyzed below.
Q. WHY DO YOU DISTINGUISH BETWEEN UTILITIES THAT ARE
INTERCONNECTED WITH ONE, BUT NOT BOTH, OF SPS AND PSCO,
AND UTILITIES THAT ARE INTERCONNECTED WITH BOTH OF THE
MERGING PARTIES?
A. If there were any anticompetitive effect from the merger,
utilities that are interconnected with both of the merging
parties would be the most likely to be affected. The
options facing utilities interconnected with one, but not
both, of the merging parties are the same both before and
after the merger. The merger changes nothing and hence
has no adverse effects on these utilities.
Entities that are interconnected with both of the merging
parties are potentially affected by the merger because the
number of options they face is reduced. One therefore
needs to examine the market share of the merged entity
with respect to entities that are interconnected with both
of the merging parties.
Q. PLEASE DESCRIBE YOUR ANALYSIS OF TIER 1 UTILITIES DIRECTLY
INTERCONNECTED WITH BOTH SPS AND PSCO.
A. PNM is directly interconnected with both SPS and PSCo. It
is interconnected with PSCo at Four Corners and with SPS
at Blackwater, New Mexico, via a 200 MW DC interconnection
that is owned by PNM. PNM is the only entity that is
directly interconnected with both SPS and PSCo in the
sense that it can substitute purchases of power from SPS
for purchases of power from PSCo, or vice versa, without
incurring any wheeling charges.
WestPlains Energy also is interconnected with both PSCo
and SPS, but cannot substitute supplies from one company
for those of the other. WestPlains Energy is
interconnected with PSCo in Colorado for its service area
that is part of the Western Interconnection and is
interconnected with SPS at Liberal, Kansas, for its
service area that is part of the Eastern Interconnection.
The Kansas and Colorado service areas of WestPlains Energy
are not directly interconnected and are operated
separately.
Deliveries of power to WestPlains Energy's Kansas service
area are not substitutes for deliveries of power to
WestPlains Energy's Colorado service area. SPS
theoretically can sell power to WestPlains Energy for the
latter's Colorado service area. Such a transaction,
however, would involve wheeling over PNM from Blackwater
to Four Corners, and subsequent wheeling by either Tri-
State, WAPA, or PSCo to WestPlains Energy's Colorado
service area. As such, competition for WestPlains Energy's
Colorado business is of the same nature as competition for
the business of any other utility that is interconnected
with PSCo, but not with SPS. Thus, for the purpose of
FERC's standard analysis of Tier 1 utilities, WestPlains
Energy should be considered two entities, one in Colorado
that is directly interconnected with PSCo, and one in
Kansas that is directly interconnected with SPS.
Schedule RMS-20 shows SPS and PSCo's individual market
shares and the merged company's market share for total
resources and uncommitted resources for the Tier 1 market
defined as PNM. The schedule consists of two pages, one
for total resources and one for uncommitted resources.
The market share for the merged entity ("M-P New Co.") is
11 percent for total resources and 4 percent for
uncommitted capacity. In previous merger and market-based
rate cases, FERC has found that shares of less than 20
percent in a Tier 1 market are indicative of lack of
market power.
I should note that, in computing these market shares, I
have assumed open-access tariffs for SPS and PSCo both
pre-and post-merger. This is appropriate since, even
without the merger, PSCo and SPS would be obligated to
provide open-access transmission as a result of other
filings that they have made individually.
My analysis is highly conservative and probably
significantly overstates SPS and PSCo's market shares
because I have not assumed open-access tariffs on the part
of any other entities that are interconnected with PNM. A
more realistic premise would be to assume open-access
tariffs on the part of all entities that are
interconnected with PNM, since it is likely that the FERC
NOPR regarding open-access transmission will result in
some form of increased open-access transmission. Assuming
that all utilities have open-access tariffs would mean
that one would include in this analysis all of PNM's
Tier 2 interconnections as well as its Tier 1
interconnections, i.e., all utilities that are
interconnected with PNM's Tier 1 utilities. In this case,
the capacity available to compete for PNM's business would
include all of the entities in the Rocky Mountain,
Arizona/New Mexico, and California/Southern Nevada regions
of the WSCC, as well as most major utilities in the
Pacific Northwest. Addition of all of these entities via
open-access tariffs would reduce SPS's and PSCo's combined
share of the PNM market to less than 10 percent based on
total resources, and to less than 4 percent based on
uncommitted resources.
Q. IF THERE WERE NO OPEN-ACCESS TARIFFS, OR IF ACCESS WERE
ONLY AVAILABLE AT HIGH COSTS, WOULD PNM BE ADVERSELY
AFFECTED BY THIS MERGER?
A. No, it would not. Even assuming away all open-access
tariffs, including the existing SPS and PSCo tariffs, the
merged entity's market share with respect to PNM would be
14.5 percent for total resources and 7.5 percent for
uncommitted resources. In previous merger and market-
based rate cases, FERC has found that market shares of
less than 20 percent in a Tier 1 market are indicative of
lack of market power. Hence, even if there were no open-
access tariffs available, the merged entity would not have
market power with respect to PNM under the standards
according to which FERC has ruled in prior cases.
Q. PLEASE DESCRIBE YOUR ANALYSIS OF UTILITIES OTHER THAN
TRANSMISSION-DEPENDENT UTILITIES IN THE WESTERN
INTERCONNECTION THAT ARE INTERCONNECTED WITH ONE, BUT NOT
BOTH, OF THE MERGING PARTIES.
A. The Western Interconnection utilities that are
interconnected with one, but not both, of the merging
parties are analyzed in Schedule RMS-21. For each such
entity there are two pages, one for total resources and
one for uncommitted resources. Again, I have assumed open
access tariffs for SPS and PSCo, but not for other
entities. As such, my market share calculations are very
conservative.
Even with my conservative assumptions, the merged entity
would not have a market share in excess of 20 percent in
any of these Tier 1 markets.
Two additional points are worth noting. First, many of
the Tier l entities analyzed in Schedule RMS-21 are net
sellers to PSCo, not net buyers that are dependent on
PSCo. Platte River, Tri-State, Basin, and PacifiCorp are
all net sellers of power to PSCo. Second, Westplains
Energy has obtained a Certificate of Public Convenience
and Necessity to construct a 141 MW combined-cycle plant
to serve its Colorado loads. The effect of constructing
this plant will be to reduce WestPlains's purchases from
PSCo.
Q. PLEASE DESCRIBE YOUR ANALYSIS OF UTILITIES OTHER THAN
TRANSMISSION-DEPENDENT UTILITIES IN THE EASTERN
INTERCONNECTION THAT ARE INTERCONNECTED WITH ONE, BUT NOT
BOTH, OF THE MERGING ENTITIES.
A. PSCo is not directly interconnected with any entities in
the Eastern Interconnection. SPS is interconnected in the
SPP with the Kansas service area of WestPlains Energy,
with Public Service of Oklahoma (PSO), and with West Texas
Utilities (WTU). PSO and WTU are two of the four utility
subsidiaries of Central and South West Services, Inc.
(CSW). All of the utility subsidiaries of CSW are
interconnected with one another. Therefore, for the
purposes of a merger analysis, it is appropriate to
consider CSW as one entity.
Schedule RMS-22 shows market shares based on total
resources for Tier 1 markets defined as the CSW and the
WestPlains-Kansas systems. For simplicity, I calculate
market shares for utilities that are Tier 1 entities to
SPS in the Eastern Interconnection, assuming that the only
options available to them are other suppliers in the
Eastern Interconnection.
No market shares are shown in that schedule for
uncommitted capacity. Since SPS has zero excess capacity
and PSCo does not operate in the Eastern Interconnection,
the merged company's share of each of these markets is
zero, when based on uncommitted capacity.
Q. PLEASE DISCUSS YOUR ANALYSIS OF TRANSMISSION-DEPENDENT
UTILITIES LOCATED WHOLLY WITHIN THE SERVICE TERRITORIES OF
EITHER SPS OR PSCO.
A. SPS sells requirements power to 21 municipalities and
cooperatives located within its service area. The City of
Lubbock operates its own utility and its own generation in
addition to purchasing power from SPS. There is "house-to
house" retail competition in Lubbock between SPS and the
City of Lubbock. There is also house-to-house competition
in the City of Floyada.
Schedule RMS-23 lists the municipalities and cooperatives
located within SPS's service area. Schedule RMS-24 shows
the market share calculations for total resources
applicable to all of these entities except the City of
Lubbock, because it has its own generation. Schedule
RMS25 shows the market share calculations for the City of
Lubbock. Again, for simplicity, I calculate market shares
for utilities that are Tier 1 entities to SPS in the
Eastern Interconnection, assuming that the only options
available to them are other suppliers in the Eastern
Interconnection. Again, the market shares for uncommitted
capacity are zero because SPS has zero uncommitted
capacity.
Schedule RMS-26 lists entities that purchased requirements
power from PSCo in 1994 and which did not own generation.
Schedule RMS-27 shows market share calculations for these
entities based on both total resources and uncommitted
capacity.
Q. HAVE YOU PREPARED A SCHEDULE THAT SUMMARIZES YOUR MARKET
SHARE CALCULATIONS FOR EACH TIER 1 MARKET?
A. Yes, I have. Schedule RMS-28 shows the merged entity's
share of total resources and uncommitted capacity for each
Tier 1 market in the Western Interconnection. Schedule
RMS-29 shows the merged entity's share of total resources
and uncommitted capacity for each Tier 1 market in the
Eastern Interconnection.
Q. WHAT CONCLUSIONS DO YOU DRAW FROM THE MARKET SHARES IN
SCHEDULES RMS-28 AND RMS-29?
A. The combined market shares of PSCo and SPS are less than
20 percent with respect to total resources and uncommitted
capacity for all Tier 1 markets except the transmission-
dependent entities within SPS's service area. The merged
company's market share is 21 percent for total resources,
but zero for uncommitted capacity, in that Tier 1 market.
That market share will not be changed by the merger and is
attributable solely to SPS. The Commission already has
found that SPS does not possess market power in generation
in the applicable Tier 1 markets. I also conclude that
this merger will not create or enhance market power in
those markets.
Q. DID YOU PERFORM OTHER ANALYSES OF INDIVIDUAL UTILITIES
THAT MIGHT BE AFFECTED BY THE MERGER?
A. Yes. I analyzed the sales of the two merging parties to
determine if there were any entities that purchased power
from both SPS and PSCo in 1994. Schedule RMS-30 lists the
entities that purchased power from both companies in 1994
and indicates whether the entity is interconnected with
PSCo, SPS, or both.
Only one entity -- PNM -- is interconnected with both
utilities in the sense that purchases from the two merging
parties substitute for each other without requiring
wheeling services.
With the exception of PNM, sales by one or both of the
merging parties to the entities listed in that schedule
involve wheeling by another utility.
PNM is a substantial net,seller of power. This is
illustrated by Schedule RMS-31, which consists of two
pages. The first page shows PNM's total sales and
purchases of wholesale power. PNM is a net seller of
nonfirm power and a net buyer of firm power. The second
page summarizes the merging parties' transactions with
PNM. Neither of the merging parties sells firm power to
PNM. Although both of the merging parties sell non-firm
power to PNM, PSCo is a substantial net buyer of power
from PNM, whereas SPS is a substantial net seller to PNM.
It is unlikely that this merger will create market power
for the merged entity with respect to any of the entities
that purchased power from both PSCo and SPS in 1994. In
most cases, one or both of the merging parties had to
purchase wheeling services from another utility to effect
a transaction. Such sales are indicative of the broad
geographic market in the west. In the case of PNM, its
position as a net seller, its large number of
interconnections with other entities, and its own
uncommitted capacity make it unlikely that this merger
would subject it to an exercise of market power.
IX. BARRIERS TO ENTRY
Q. WHY IS IT IMPORTANT TO ANALYZE BARRIERS TO ENTRY AND ENTRY
CONDITIONS?
A. As FERC stated in its Louisville Gas & Electric decision
of January 14, 1993, one cannot accurately calculate long-
run market shares. FERC also stated in its May 13, 1994,
order in the Kansas City Power and Light case that there
is no need for it to focus on longer-term impacts that
relate to sales from new capacity, provided that the
seller does not exercise transmission market power and
does not own or control other barriers to entry.
Entry is a critical factor in disciplining the long-run
market. Economic theory generally holds that market power
is difficult to sustain over the long run unless entry
barriers exist. The possibility of entry by new firms in
response to price increases places a constraint on the
ability of existing firms to exercise market power and
can, indeed, prevent the exercise of market power. Entry
allows buyers to negotiate with existing suppliers or new
entrants for their capacity and energy needs. New
entrants can include both traditional utilities and non-
utility generators. As such, the long-run analysis of
merger impacts involves addressing entry and the degree to
which the merger may raise or increase entry barriers.
Q. HAVE YOU ANALYZED ENTRY CONDITIONS?
A. Yes. Neither SPS nor PSCo has the power to raise entry
barriers. As discussed in the testimony of Applicants'
witnesses Mr. David Hudson and Mr. Matt Harris, neither
company controls resources, generating sites, or other
facilities that could be used to prevent entry by other
firms.
Moreover, the best evidence that there are no barriers to
entry is the fact that entry is occurring now in the
relevant markets and is likely to be increasingly
important in the future.
For example, in January 1994, the City of Las Cruces
issued a RFP for power supply. Seven entities made
proposals to Las Cruces. Those entities were SPS, Plains
Electric Cooperative, OES1-Geo-thermal, Four Corners Power
Association, L. P., ENRON Power Marketing, Inc., Destec,
and Conoco.
In its 1993 Integrated Resource Plan, WestPlains Energy
discussed alternatives to the construction of a new power
plant. The entities offering short-term power to
Westplains Energy included PSCo, Tri-State, City of
Colorado Springs, SPS, Combined Energy Company, and
PowerNet. WestPlains Energy also received offers for
long-term supply of power from Sunflower Electric,
Combined Energy Company, Fountaine Power Partners,
PowerNet, SPS, and Southern California Edison.
Finally, Golden Spread Electric Cooperative, which is
located in the SPS area, has announced plans to construct
its own generating capacity. It recently issued a RFP
soliciting alternatives to constructing its own generation
facilities.
These activities are indicative of substantial new entry
both currently and in the near future in the general area
of the country where the merging utilities are located.
The fact that such entry is occurring is compelling
evidence that there are no long-run barriers to entry.
PSCo is engaged in the sale and transmission of natural
gas in Colorado and Wyoming. Because many new power
generation plants are fueled by gas, an existing utility's
control of gas supplies or gas transmission facilities
potentially could present an opportunity to foreclose
entry by new gas-fired power generators. That potential
does not exist in this case, however. PSCo currently
provides both firm and interruptible gas transportation
services to its customers, which include other power
generators. In addition, its transportation services and
transactions are regulated by the State of Colorado and
the State of Wyoming and, to the extent it engages in
interstate businesses, it is subject to the non-
discriminatory access provisions of FERC's regulations.
PSCo's control of natural gas transmission facilities does
not constitute a barrier to entry by competing power
generators.
X. BUYER POWER
Q. WHAT IS MEANT BY BUYER POWER?
A. If a merger is proposed by two large buyers of wholesale
electricity, a theoretical potential exists for the merged
entity to exert monopsony power and reduce the prices it
pays for wholesale power to less than competitive market
levels. This is not an issue in the instant merger
because SPS is primarily a seller, not a buyer of power,
and PSCo's purchases relative to the size of the market
are so small that any attempt to exercise monopsony power
would be fruitless.
XI. RETAIL COMPETITION
Q. WHAT TYPES OF RETAIL COMPETITION CAN BE AFFECTED BY A
MERGER?
A. There are three types of retail electric competition that
could conceivably be affected by a utility merger. They
are fringe-area, yardstick, and industrial location
competition. In addition, interfuel retail competition
issues can arise when one of the merging parties provides
gas service in areas where the other party provides
electrical services.
Q. WHAT IS FRINGE-AREA COMPETITION?
A. Fringe-area competition occurs where two utilities have
adjacent service areas and may compete at the borders of
their service areas for new loads.
Q. IS FRINGE-AREA COMPETITION AN ISSUE IN THIS MERGER?
A. No, it is not. The electric service areas of SPS and PSCo
are not adjacent.
Q. WHAT IS YARDSTICK COMPETITION?
A. Yardstick competition refers to a situation in which
regulatory commissions compare costs and rates among
utilities in the course of regulating individual firms.
Theoretically, reducing the number of utilities through a
merger could reduce the ability of regulatory commissions
to make such comparisons. The concept of yardstick
competition is, at best, nebulous.
Q. IS YARDSTICK COMPETITION AN ISSUE IN THIS MERGER?
A. No, it is not. Although regulatory commissions make
comparisons with utilities in other jurisdictions, there
are so many other utilities in the WSCC and the SPP that
the merger of these two utilities will have no impact on
the ability of regulatory commissions to make comparisons
of costs and rates across utilities as a regulatory tool.
Q. WHAT DO YOU MEAN BY INDUSTRIAL LOCATION COMPETITION?
A. Energy-intensive industries may consider utility costs as
one factor in deciding where to locate new production
facilities and how intensely to operate existing
facilities. As such, utilities may compete with one
another for new industrial customers.
Q. IS INDUSTRIAL LOCATION COMPETITION AN ISSUE IN THIS
MERGER?
A. No, it is not. Industrial location competition is limited
to industries that are very energy-intensive. For most
industries, labor costs, raw material costs, access to
markets, and natural resources are much more important
factors in location decisions. If SPS and PSCo may be
considered competitors for retail business, in this sense,
one would also have to view all of the utilities in the
relevant geographic market as competitors for that same
business. SPS's and PSCo's shares of this "market" are so
small that, even assuming that they compete with one
another for retail business, this merger could not
possibly create or enhance market power.
Q. IS INTERFUEL COMPETITION AN ISSUE IN THIS MERGER?
A. No, it is not. SPS does not own a gas distribution
business in PSCo's service area and PSCo does not own a
gas distribution business in SPS's service area.
Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?
A. Yes, it does.
REVISED 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.
____________________
<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.
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.
____________________
<F2> Id., at 983 n.3.
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.
____________________
<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).
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>
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>
____________________
<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).
<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).
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>
____________________
<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]."
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.
____________________
<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).
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.
____________________
<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.
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>
____________________
<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).
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 the Gas Operations of PSCo and its Cheyenne
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
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.
____________________
<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.
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 $43,605,187 that an
independent PSCo gas division would suffer represent 6.44 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 $1,682,723 or 10.77 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 62.54 percent
and gas income of 85.06 percent. Similarly, Cheyenne would
suffer a loss of 86.36 percent in gross gas income and 109.94
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
2.47 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 June 30, 1995. Cheyenne's gas
operation, on a stand-alone basis, would have a projected rate of
return of 3.13 percent -- down from 9.62 percent for the same
period.
____________________
<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.
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>
____________________
<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.
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.
____________________
<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").
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 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-3
SUMMARY OF LOST ECONOMY RATIOS
PSCO
NewGasco-Colorado NewGasco-Wyoming
Percent of Percent of
estimated estimated
loss of loss of
economies economies
Amount to: Amount to:
Operating Revenues $677,326,418 6.44% $15,630,080 10.77%
Operating Revenue
Deductions<F1> 607,599,384 7.18% 13,681,672 12.30%
Gross Income<F2> 69,727,034 62.54% 1,948,408 88.36%
Net Income<F2> 51,266,520 85.06% 1,530,526 109.94%
Estimated Loss of
Economies 43,605,187 1,682,723
FITCHBURG GAS &
GULF STATES UTILITIES ELECTRIC
Fitchburg Gas
GSU Gas Division 1991 Division-1990
Percent of Percent of
estimated estimated
loss of loss of
economies economies
Amount to: Amount to:
Operating Revenues $31,858,000 16.13% $17,324,993 13.94%
Operating Revenue
Deductions<F1> 30,770,000 16.70% 15,755,267 15.33%
Gross Income<F2> 1,088,000 472.24% 1,569,726 153.87%
Net Income<F2> n/a n/a n/a n/a
Estimated Loss of
Economies 5,138,000 2,415,391
ENGINEER PUBLIC SERVICE COMPANY
Gas Properties of Gas Properties of
Gulf States Utilities Virginia Electric and
Co.-1940 Power Co.-1940
Percent of Percent of
estimated estimated
loss of loss of
economies economies
Amount to: Amount to:
Operating Revenues $638,711 6.58%* $1,057,000 3.38%
Operating Revenue
Deductions<F1> 444,006 9.46%* 735,294 4.86%
Gross Income<F2> 201,594 20.85%* 317,890 11.25%
Net Income<F2> 166,402 25.25%* 168,412 21.23%
Estimated Loss of
Economies 42,024 35,750
THE NORTH AMERICAN
COMPANY PHILADELPHIA COMPANY
Gas Properties of the
St. Louis County Gas
Co.-1942 Gas Group-1946
Percent of Percent of
estimated estimated
loss of loss of
economies economies
Amount to: Amount to:
Operating Revenues $2,748,770 5.85% $16,656,560 3.00%
Operating Revenue
Deductions<F1> 2,009,757 8.01% 13,197,846 3.79%
Gross Income<F2> 742,027 21.68% 3,565,357 14.03%
Net Income<F2> 661,110 24.34% n/a n/a
Estimated Loss of
Economies 160,900 500,328
GENERAL PUBLIC MIDDLE SOUTH
UTILITIES CORP. UTILITIES, INC.
Gas Properties of Gas Properties of
Jersey Central Power & Louisiana Power &
Light Co.-1949 Light Co.-1954
Percent of Percent of
estimated estimated
loss of loss of
economies economies
Amount to: Amount to:
Operating Revenues $4,714,958 4.87% $5,264,186 5.18%
Operating Revenue
Deductions<F1> 4,235,661 5.42% 4,112,285 6.63%
Gross Income<F2> 479,477 47.84% 1,151,901 23.68%
Net Income<F2> 202,582 113.24% n/a n/a
Estimated Loss of
Economies 229,398 272,816
NEES
Gas Properties of 8
Subsidiaries
Combined-1958
Percent of
estimated
loss of
Amount economies to:
Operating Revenues $22,752,270 4.83%
Operating Revenue Deductions 18,207,191 6.03%
Gross Income 4,718,864 23.28%
Net Income<F2> 3,669,931 29.93%
Estimated Loss of Economies 1,098,500
____________________
<F1> Excludes federal income taxes.
<F2> Before deducting federal income taxes.
* Based on estimated cost increases rejected by the SEC as
"overstated" and "doubtful."
NEW CENTURY ENERGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(Thousands of Dollars)
AT DECEMBER 31, 1995
ASSETS
PSCo SPS PRO FORMA
Property, plant & equipment, at cost:
Electric $3,751,321 $2,418,558 $6,169,879
Gas 989,215 - 989,215
Steam 17,698 - 17,698
Other 70,748 39,502 110,250
Common to all departments 380,809 - 380,809
Construction work in progress 192,580 54,920 247,500
5,402,371 2,512,980 7,915,351
Less: accumulated depreciation 1,921,659 886,896 2,808,555
Total property, plant & equipment 3,480,712 1,626,084 5,106,796
Investments, at cost 24,282 43,687 67,969
Current assets:
Cash & temporary cash investments 14,693 13,613 28,306
Accounts receivable - net 124,731 63,860 188,591
Accrued unbilled revenues 96,989 19,839 116,828
Materials & supplies, at average cost 56,525 20,719 77,244
Fuel inventory, at average cost 35,654 2,314 37,968
Gas in underground storage,
at cost (LIFO) 44,900 - 44,900
Current portion of accumulated
deferred income taxes 19,229 3,877 23,106
Regulatory assets recoverable
within one year 40,247 - 40,247
Prepaid expenses and other 35,619 5,106 40,725
Total current assets 468,587 129,328 597,915
Deferred charges:
Regulatory assets 321,797 109,957 431,754
Unamortized debt expense 10,460 5,426 15,886
Other 48,457 20,228 68,685
Total deferred charges 380,714 135,611 516,325
$4,354,295 $1,934,710 $6,289,005
The accompanying notes to pro forma consolidated
balance sheet and statements of income are
an integral part of this statement.
NEW CENTURY ENERGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(Thousands of Dollars)
AT DECEMBER 31, 1995
CAPITAL AND LIABILITIES
PSCo SPS PRO FORMA
Common stock (2) $ 316,791 $ 40,918 $ 102,230
Paid-in capital (2) 680,315 307,483 1,243,277
Retained earnings (6) 346,539 379,527 714,014
Total common equity 1,343,645 727,928 2,059,521
Preferred stock:
Not subject to mandatory redemption 140,008 260 140,268
Subject to mandatory redemption 41,289 - 41,289
Long-term debt 1,195,553 580,655 1,776,208
2,720,495 1,308,843 4,017,286
Noncurrent liabilities:
Defueling and decommissioning
liability 23,115 - 23,115
Employees' postretirement benefits
other than pensions 51,704 2,864 54,568
Employees' postemployment benefits 23,500 2,325 25,825
Total noncurrent liabilities 98,319 5,189 103,508
Current liabilities:
Notes payable & commercial paper 288,050 116,250 404,300
Long-term debt due within one year 82,836 180 83,016
Preferred stock subject to mandatory
redemption within one year 2,576 - 2,576
Accounts payable 156,109 9,706 165,815
Dividends payable 35,284 - 35,284
Recovered purchased gas & electric
energy costs - net 9,508 7,159 16,667
Customers' deposits 17,462 6,282 23,744
Accrued taxes 55,393 28,736 83,703
Accrued interest 32,071 12,471 44,542
Current portion of defueling
& decommissioning liability 24,055 - 24,055
Merger costs - - 12,478
Other 78,451 61,646 140,097
Total current liabilities 781,795 242,430 1,036,277
Deferred credits:
Customers' advances for construction 99,519 335 99,854
Unamortized investment tax credits 113,184 5,970 119,154
Accumulated deferred income taxes 508,143 359,973 868,116
Other 32,840 11,970 44,810
Total deferred credits 753,686 378,248 1,131,934
$4,354,295 $1,934,710 $6,289,005
The accompanying notes to pro forma consolidated balance sheet and
statements of income are an integral part of this statement.
NEW CENTURY ENERGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AND STATEMENTS OF INCOME
(1) The unaudited pro forma combined statements of income
have been prepared from the historical consolidated financial statements
of PSCo and SPS and are presented as if the companies were combined
during all periods presented herein. The PSCo amounts have been
prepared from its consolidated financial statements which have been
incorporated by reference herein. SPS has an August 31 fiscal year-end
and, accordingly, its consolidated financial statements have been
updated to include interim period results consistent with the periods
presented for PSCo.
(2) The unaudited pro forma combined balance sheet and
statements of income reflect the conversion of each outstanding share of
PSCo Common Stock into one share of Company Common Stock, and each
outstanding share of SPS Common Stock into 0.95 of one share of Company
Common Stock in accordance with the terms of the Merger Agreement.
(3) There were no intercompany transactions and, accordingly,
no pro forma elimination adjustments were made.
(4) For discussion regarding material commitments and
contingencies relating to either PSCo or SPS, reference is made to the
documents incorporated by reference herein.
(5) The unaudited pro forma combined financial statements
include $6.7 million of nonrecurring charges incurred during the year
ended December 31, 1995. The unaudited pro forma combined statements of
income do not reflect future nonrecurring charges directly related to
the Mergers estimated to total approximately $12.5 million. This
includes merger transaction costs of approximately $11.3 million and
benefits expense of approximately $1.2 million resulting from an
accelerated vesting of benefits as a result of the Mergers. The pro
forma combined balance sheet at December 31, 1995 has been adjusted to
include these items with the recognition of additional current
liabilities and the reduction of retained earnings.
NEW CENTURY ENERGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
(Thousands of Dollars, except per share data)
FOR THE YEAR ENDED DECEMBER 31, 1995
PSCo SPS PRO FORMA
Operating revenues:
Electric $1,449,096 $852,510 $2,301,606
Gas 624,585 - 624,585
Other 36,920 - 36,920
2,110,601 852,510 2,963,111
Operating expenses:
Fuel used in generation 181,995 376,544 558,539
Purchased power 481,958 6,485 488,443
Gas purchased for resale 392,680 - 392,680
Other operating expenses 350,093 111,212 461,305
Maintenance 64,069 27,594 91,663
Depreciation and amortization 141,380 62,552 203,932
Taxes (other than income taxes) 81,319 43,316 124,635
Income taxes 95,357 69,840 165,197
1,788,851 697,543 2,486,394
Operating income 321,750 154,967 476,717
Other income and deductions:
Allowance for equity funds
used during construction 3,782 245 4,027
Miscellaneous income and
deductions - net (2,770) 10,942 8,172
1,012 11,187 12,199
Interest charges and preferred dividends:
Interest on long-term debt 85,832 42,421 128,253
Amortization of debt discount and
expense less premium 3,278 2,048 5,326
Other interest 58,109 1,695 59,804
Allowance for borrowed funds
used during construction (3,313) (2,744) (6,057)
Dividend requirements on preferred
stock of PSCo and SPS - - 17,588
143,906 43,420 204,914
Net income 178,856 122,734 284,002
Dividend requirements on preferred
stock of PSCo and SPS 11,963 5,625 -
Earnings available for common stock 166,893 117,109 284,002
Weighted average common shares
outstanding (2) 62,932 40,918 101,804
Earnings per weighted average
share of common stock outstanding $2.65 $2.86 $2.79
The accompanying notes to pro forma consolidated balance sheet and
statements of income are an integral part of this statement.
NEW CENTURY ENERGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AND STATEMENTS OF INCOME
(1) The unaudited pro forma combined statements of
income have been prepared from the historical consolidated
financial statements of PSCo and SPS and are presented as if the
companies were combined during all periods presented herein. The
PSCo amounts have been prepared from its consolidated financial
statements which have been incorporated by reference herein. SPS
has an August 31 fiscal year-end and, accordingly, its consolidated
financial statements have been updated to include interim period
results consistent with the periods presented for PSCo.
(2) The unaudited pro forma combined balance sheet and
statements of income reflect the conversion of each outstanding
share of PSCo Common Stock into one share of Company Common Stock,
and each outstanding share of SPS Common Stock into 0.95 of one
share of Company Common Stock in accordance with the terms of the
Merger Agreement.
(3) There were no intercompany transactions and,
accordingly, no pro forma elimination adjustments were made.
(4) For discussion regarding material commitments and
contingencies relating to either PSCo or SPS, reference is made to
the documents incorporated by reference herein.
(5) The unaudited pro forma combined financial
statements include $6.7 million of nonrecurring charges incurred
during the year ended December 31, 1995. The unaudited pro forma
combined statements of income do not reflect future nonrecurring
charges directly related to the Mergers estimated to total
approximately $12.5 million. This includes merger transaction
costs of approximately $11.3 million and benefits expense of
approximately $1.2 million resulting from an accelerated vesting of
benefits as a result of the Mergers. The pro forma combined
balance sheet at December 31, 1995 has been adjusted to include
these items with the recognition of additional current liabilities
and the reduction of retained earnings.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 0
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 200
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 200
<COMMON> 200
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 200
0
0
<LONG-TERM-DEBT-NET> 0
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 200
<GROSS-OPERATING-REVENUE> 0
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 0
<OPERATING-INCOME-LOSS> 0
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 0
<NET-INCOME> 0
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
