As filed with the Securities and Exchange Commission on August 25, 1999
File No. __________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
New Century Energies, Inc. Northern States Power Company
1225 Seventeenth Street 414 Nicollet Mall
Denver, Colorado 80202 Minneapolis, Minnesota 55401
(Name of companies filing this statement and
address of principal executive offices)
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New Century Energies, Inc.
1225 Seventeenth Street
Denver, Colorado 80202
(Name of registered holding company parent of each applicant or declarant)
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Wayne H. Brunetti James J. Howard
President and Chief Operating Officer Chairman of the Board, President and
New Century Energies, Inc. Chief Executive Officer
1225 Seventeenth Street Northern States Power Company
Denver, Colorado 80202 414 Nicollet Mall
Minneapolis, Minnesota 55401
(Name and addresses of agents for service)
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The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Paul J. Bonavia Gary R. Johnson
Senior Vice President and Vice President and General Counsel
General Counsel Scott M. Wilensky
William M. Dudley Senior Attorney
Associate General Counsel Northern States Power Company
New Century Energies, Inc. 414 Nicollet Mall
1225 Seventeenth Street Minneapolis, Minnesota 55401
Denver, Colorado 80202
Joanne C. Rutkowski Peter D. Clarke
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Gardner, Carton & Douglas
1875 Connecticut Avenue, N.W. 321 North Clark Street, Suite 3400
Washington, D.C. 20009 Chicago, Illinois 60610
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TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transaction..................................1
A. Introduction...................................................1
B. Overview of the Transaction....................................3
C. Description of the Parties to the Merger.......................4
1. NCE and its Subsidiaries..................................4
2. NSP and its Subsidiaries..................................7
D. Description of the Merger.....................................11
E. Operations of the Combined Company............................13
Item 2. Fees, Commissions and Expenses......................................13
Item 3. Applicable Statutory Provisions.....................................14
A. Merger Analysis -- Overview...................................15
1. Introduction.............................................15
2. Section 9(a)(2)..........................................16
B. Section 10(b).................................................17
1. Section 10(b)(1).........................................17
2. Section 10(b)(2).........................................21
3. Section 10(b)(3).........................................23
C. Section 10(c).................................................25
1. Section 10(c)(1).........................................25
(a) The Merger will be lawful under Section 8.......25
(b) The Merger will not be detrimental to carrying
out the provisions of Section 11...............26
(i) Integration of Electric Operations.......28
(a) Interconnection.....................48
(b) Coordination........................51
(c) Single Area or Region...............56
(d) Size................................60
(ii) Retention of Combined Gas System.........63
(iii) Coordinated Operations of Combined
Gas Properties..........................68
(a) Loss of economies...................69
(b) Same state or adjoining states......72
(c) Size................................73
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TABLE OF CONTENTS
(continued)
Page
(iv) Retention of Other Businesses............74
2. Section 10 (c)(2)........................................77
D. Section 10(f).................................................80
E. Intra-system Transactions.....................................81
1. New Century Services, Inc. (to be renamed Xcel
Energy Services Inc.)....................................81
2. Services, Goods, and Assets Involving the Utility
Operating Companies......................................84
3. Non-Utility Sale of Goods and Services to EWGs,
FUCOs, and QFs...........................................86
4. UE.......................................................87
5. Other Existing Transactions..............................87
F. Capitalization of New NSP.....................................87
Item 4. Regulatory Approvals................................................87
A. Antitrust.....................................................88
B. Federal Power Act.............................................88
C. Atomic Energy Act.............................................89
D. State Public Utility Regulation...............................89
E. Other.........................................................89
Item 5. Procedure...........................................................90
Item 6. Exhibits and Financial Statements...................................90
A. Exhibits......................................................90
B. Financial Statements..........................................93
Item 7. Information as to Environmental Effects.............................94
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Item 1. Description of Proposed Transaction
A. Introduction
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This Application-Declaration seeks approvals relating to the proposed
combination (the "Merger") of New Century Energies, Inc., a Delaware corporation
("NCE"), and Northern States Power Company, a Minnesota corporation ("NSP").
Upon receipt of all necessary approvals, NCE will be merged with and into NSP,
which will be renamed Xcel Energy Inc. ("Xcel"). Also as part of the Merger, NSP
intends to transfer all of its existing electric and natural gas utility
facilities and operations currently conducted directly by NSP at the parent
company level to a newly formed, wholly-owned subsidiary (referred to herein as
"New NSP"). Following the consummation of the Merger, Xcel will register with
the Securities and Exchange Commission (the "Commission") as a holding company
under the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"
or the "Act").1
The combination of NSP and NCE, two well-run, mid-sized, mid-continent
energy companies, will result in a financially strong and competitive regional
energy company. A key motivating factor for the proposed transaction is the
shared vision by the senior managements of both NSP and NCE (the "Applicants")
concerning the changes that are occurring in the utility industry and the
actions needed to respond effectively to those changes. The Merger will produce
substantial benefits to the public, consumers and investors and will meet all
applicable standards of the Act. Among other things, the Applicants believe that
the Merger offers significant strategic and financial benefits to each company
and to their respective shareholders, as well as to their employees, customers
and the communities in which they do business. These benefits include, among
others:
(i) increased scope, providing an infrastructure capable
of supporting more efficient utility operations,
non-utility business activities and corporate
services;
(ii) increased stability and competitiveness of rates
resulting from fuel diversification and operating
efficiencies, thus improving Applicants' ability to
meet the challenges of the increasingly competitive
environment in the utility industry;
(iii) integration of corporate and administrative functions
and programs, including centralized management and
coordination and operation of utility systems;
(iv) savings from the coordinated dispatch and operation
of the combined generating assets of the Applicants;
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1 Prior to completion of the Merger, NSP and NCE expect to file one or
more additional applications-declarations under the Act with respect
to ongoing activities (including financing activities) and other
matters pertaining to Xcel after the Merger.
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(v) enhanced financial stability and strength through
increased market capitalization and a stronger
balance sheet, improving access to capital markets,
and capability to support the growth objectives
established for non-utility businesses, including
NRG Energy;
(vi) increased geographic diversity of service
territories, reducing exposure to local changes in
economic, competitive and climatic conditions,
enabling Xcel to withstand risk and volatility better
than either NSP or NCE on a stand-alone basis;
(vii) greater purchasing power for items such as fuel and
transportation services, and streamlining of
inventories;
(viii) expanded management resources and ability to select
leadership from a larger and more diverse management
pool;
(ix) continued ability to play a strong role in the
economic development efforts of the communities that
the Applicants now serve; and
(x) a strong global presence, with operations in the
United Kingdom, Central Europe, Australia and South
America.
In summary, Applicants believe the Merger will significantly improve their
competitive positions and create an enhanced platform for growth for all
segments of their businesses. Applicants estimate that efficiencies created by
the Merger will generate cost savings of approximately $1.1 billion (net of
costs to achieve) in the first ten years following the Merger. The expected
Merger benefits are discussed in further detail in Item 3.C.2. below.
The shareholders of NCE and NSP approved the Merger on June 28, 1999,
with more than 83% of the votes cast by the shareholders of each corporation
voting in favor of the Merger. Various aspects of the Merger and the
transactions relating thereto will be submitted for review and/or approval by:
(i) the Arizona Corporation Commission (the "Arizona Commission"), (ii) the
Kansas Corporation Commission (the "Kansas Commission"), (iii) the Minnesota
Public Utilities Commission (the "Minnesota Commission"), (iv) the New Mexico
Public Regulation Commission (the "New Mexico Commission"), (v) the North Dakota
Public Service Commission (the "North Dakota Commission"), (vi) the Public
Utilities Commission of the State of Colorado (the "Colorado Commission"), (vii)
the Public Utility Commission of Texas (the "Texas Commission"), (viii) the
Wyoming Public Service Commission (the "Wyoming Commission"), (ix) the Federal
Energy Regulatory Commission (the "FERC") and (x) the Nuclear Regulatory
Commission (the "NRC"). Further, the Merger cannot proceed until the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), has expired or been terminated by the regulators.
Approval will also be necessary from the Federal Communications Commission (the
"FCC") in connection with various licenses. In addition, NSP
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possesses various franchises, permits and licenses granted by local and state
authorities that NSP may need to assign, renew or replace as a result of the
Merger. British regulatory approval may also be required in light of NCE's
ownership interest in Yorkshire Electricity and NSP's indirect investments in
the United Kingdom. Apart from the approval of the Commission under the Act, the
foregoing approvals are the only governmental approvals required for the Merger.
In order to permit timely consummation of the Merger and the realization of the
substantial benefits it is expected to produce, the Applicants request that the
Commission's review of this Application-Declaration commence and proceed as
expeditiously as practicable.
B. Overview of the Transaction
---------------------------
NCE and NSP have entered into an Agreement and Plan of Merger, dated as
of March 24, 1999 (the "Merger Agreement"), which provides for a strategic
business combination involving NCE and NSP in a "merger-of-equals" transaction.
Pursuant to the Merger Agreement, NCE will merge with and into NSP. NSP, as the
surviving corporation, will change its name to Xcel. Also, as part of the
Merger, NSP is expected to transfer its existing utility operations that are
being conducted directly by NSP at the parent company level to New NSP, which
will be a wholly-owned subsidiary of Xcel.2 Upon completion of the Merger, Xcel
will have the following public-utility subsidiary companies: Southwestern Public
Service Company, a New Mexico corporation ("SPS"); Public Service Company of
Colorado, a Colorado corporation ("PSCo"); Cheyenne Light, Fuel and Power
Company, a Wyoming corporation ("Cheyenne"); New NSP, a Minnesota corporation;
and Northern States Power Company, a Wisconsin corporation ("NSP-W"). Black
Mountain Gas Company ("BMG"), which currently operates in Arizona as a division
of NSP, is also to become a public-utility subsidiary of Xcel.3 New Century
Services, Inc., the existing service company for the NCE system, will be the
service company for the Xcel system under Section 13 of the Act, although it is
expected to be renamed Xcel Energy Services Inc. In addition, Xcel will continue
to own all of NSP's existing non-utility subsidiaries and will acquire all of
the outstanding capital stock of the non-utility subsidiaries of NCE. See
EXHIBIT E-12 for the resulting corporate structure of Xcel.
A copy of the Merger Agreement is incorporated by reference as EXHIBIT
B-1.
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2 The Merger Agreement provides that NSP shall not be obligated to
undertake the above restructuring if it would cause a NSP Material
Adverse Effect as defined in that document, and, if a NSP Material
Adverse Effect would result, the parties must negotiate in good faith
an alternative to the restructuring.
3 Presently pending before the Commission is NSP's application for
approval to transfer the assets and operations of BMG to a subsidiary
of NSP (File No. 70-09337). NSP's intent is to accomplish the
transfer of such assets promptly upon receipt of the necessary
regulatory approvals. If these approvals are obtained prior to
consummation of the Merger, BMG will be Xcel's sixth public-utility
subsidiary company.
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C. Description of the Parties to the Merger
----------------------------------------
1. NCE and its Subsidiaries
NCE is a registered public utility holding company formed in 1997
pursuant to Commission order. New Century Energies, Inc., Holding Co. Act
-----------------------------
Release No. 26748 (Aug. 1, 1997) (herein, the "1997 NCE Order"). NCE has three
public-utility subsidiaries, PSCo, SPS and Cheyenne, which are referred to
herein collectively as the "NCE Operating Companies." PSCo serves approximately
1.2 million electric customers and approximately 1.0 million gas customers in
the state of Colorado. SPS serves approximately 385,000 electric customers in
portions of the states of Texas, New Mexico, Oklahoma and Kansas. Cheyenne
serves approximately 35,000 electric customers and 28,000 gas customers in and
around Cheyenne, Wyoming. Maps of the electric and gas service areas of the NCE
Operating Companies are filed as EXHIBITS E-4.1 and E-4.2.
PSCo's transmission facilities are located in Colorado. PSCo is a
member of the Western Systems Coordinating Council ("WSCC"), an interstate
network of transmission facilities that are owned by public entities and
investor-owned utilities. WSCC is the regional reliability coordinating
organization for member electric power systems in the entire western electric
grid (the "Western Interconnect") of the United States. PSCo is also a member of
the Western Systems Power Pool ("WSPP"), 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 arrangement
provides for short-term energy and capacity exchanges at market-based prices for
most members and electronic bulletin board posting of available power and
energy.
PSCo's transmission system is directly interconnected with Western Area
Power Administration ("WAPA") in the WSCC. PSCo is also directly interconnected
with Basin Electric Power Cooperative, PacifiCorp, Platte River Power Authority
and Tri-State Generation and Transmission Cooperative. Nearby PSCo are the two
high voltage direct current ("HVDC") interconnections between the WSCC and the
eastern electrical grid (the "Eastern Interconnect"): 100 MW at Stegal (owned by
Tri-State), and 200 MW at Sidney (owned by WAPA). PSCo's 1999 projected peak
load is 4,894 MW, and its net capability is 5,171 MW. Its net capability
includes 1,768 MW of long-term purchased contracts.
Cheyenne's transmission facilities are located in Wyoming. These
facilities are very limited, consisting of two 115 kV transmission line segments
that total 25.5 miles in length. The primary purpose of these transmission lines
is to deliver power that Cheyenne purchases from its full requirements supplier,
PacifiCorp. Power is wheeled from WAPA's transmission system, with which
Cheyenne intersects, to Cheyenne's distribution substation for ultimate
distribution to Cheyenne's retail customers. Unlike PSCo and SPC, Cheyenne does
not have any wholesale load. Like PSCo, Cheyenne is a member of the WSCC.
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SPS's transmission system is located in parts of Texas, New Mexico,
Oklahoma and Kansas. SPS is a member of the Southwest Power Pool ("SPP"), the
regional reliability council for member electric power systems in a portion of
southwestern United States. SPS is also a member of WSPP.
SPS's transmission system is interconnected with two SPP-member
utilities, Public Service Company of Oklahoma (an operating company within the
Central and South West system) and West Plains Energy-Kansas (a division of
UtiliCorp United Inc.), which enables it to purchase or sell energy from power
producers in the Eastern Interconnect. It is also interconnected with the WSCC
via a 200 MW HVDC tie near Clovis, New Mexico (Public Service Company of New
Mexico) and a 200 MW HVDC tie at Artesia, New Mexico (El Paso Electric Company
and Texas-New Mexico Power Company), which allows SPS to purchase and sell
energy from power producers in the Western Interconnect. SPS's 1999 projected
peak load is 4,043 MW, and its net capability is 4,850 MW. Its net capability
includes 508 MW of long-term purchased contracts.
In connection with their 1997 merger, PSCo and SPS stated their intent
to construct a new tie line to interconnect their combined electric systems
within five years after the consummation of that merger. Following a joint
planning process that involved input from over fifty participants, the final
project was selected in August 1998. In early January 1999, after further
evaluation, PSCo and SPS announced plans for the phased approach for the
implementation of this project and the construction of additional transmission
facilities to alleviate transmission constraints, increase reliability and
provide energy supply alternatives in anticipation of competition. This
expansion is expected to be completed in a phased approach and will require
various regulatory approvals. The first phase will involve construction of a
230-mile, 345 kV line from Amarillo, Texas to Holcomb, Kansas (the
"Amarillo-Holcomb line"), and is expected to be completed in the third quarter
of 2001.4 The second phase will consist of construction of a 100-mile, 345 kV
line from Holcomb, Kansas to Lamar, Colorado and a HVDC facility that would
interconnect the PSCo and SPS systems, as well as the WSCC and SPP regional
transmission grids. This second phase is now scheduled for completion in 2004
and will establish the fifth HVDC interconnection between the Western and
Eastern Interconnects.5
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4 In the 1997 NCE Order, the Commission noted that: "In the event that
New Century Energies at any time determines not to construct the tie,
or the tie is not substantially completed within five years of the date
of consummation of the [PSCo/SPS] merger, New Century Energies will
file a post-effective amendment concerning the measures it will take to
ensure that the requirements of section 2(a)(29)(A) are satisfied." The
Applicants believe that completion of first phase (the Amarillo Holcomb
line) will result in substantial completion of the tie line.
5 In April 1999, SPS submitted an application to the Kansas Commission
requesting a siting permit in Kansas for construction of both the
Amarillo-Holcomb line and the Holcomb-Lamar line. Kansas is the state
where the longest portion of the two lines will be constructed. SPS
has completed the detailed routing and environmental assessment of the
proposed location of the lines. Public conferences have been held in
Colorado, Kansas, Oklahoma and Texas to present information to
affected landowners and receive their input. Hearings on the Kansas
application were held in June 1999 and, on July 16, 1999, the Hearing
Examiner in the proceeding recommended to the Kansas Commission that
the location of the lines was reasonable. The Hearing Examiner
recommended approval of the requested Siting Permit, KCC Docket No.
99-SWPE-764-MIS. The Kansas Commission recently affirmed the Hearing
Examiner's order. In the Matter of the Application of Southwestern
--------------------------------------------------
Public Service Company for a Siting Permit, Docket No. 99-SWPE-764-MIS
------------------------------------------
(KCC July 19, 1999).
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While not directly related to the interconnection of the PSCo and SPS systems,
the third phase of this project will involve construction of an approximately
275-mile, 345 kV line from Amarillo, Texas to Oklahoma City, Oklahoma. The
completion of this line is not expected before 2006. Further information on the
utility assets and operations of the NCE Operating Companies is included in
Annex A.
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 Colorado Commission. As a public utility under the laws of the states of
Texas, New Mexico, Kansas and Oklahoma, SPS is regulated as to retail electric
and certain other matters by the Texas Commission, New Mexico Commission, Kansas
Commission and Oklahoma Commission, respectively. Cheyenne is subject to
regulation in connection with its electric and gas retail sales and other
matters by the Wyoming Commission. The NCE Operating Companies are also subject
to regulation by FERC pursuant to the Federal Power Act, as amended, with
respect to the classification of accounts, rates for any wholesale sales of
electricity,6 the interstate transmission of electric power and energy,
interconnection agreements, the licensing of certain hydro-electric facilities,
and acquisitions and sales of certain utility properties. In addition, PSCo and
Cheyenne are subject to regulation by FERC under the Natural Gas Act of 1935, as
amended ("NGA") with regards to certain transportation or sale of natural gas
for resale.
NCE, directly or indirectly, owns all the outstanding common stock of
the following non-utility subsidiary companies: New Century Services, the NCE
system service company under Section 13 of the Act; WestGas InterState, Inc.
("WGI"), a natural gas company subject to FERC jurisdiction under the NGA; and
NC Enterprises, Inc. ("NC Enterprises"), a holding company for NCE's foreign
operations and most of its non-utility businesses. PSCo also holds various non-
utility subsidiaries. These subsidiaries primarily operate in support to PSCo's
operations. The non-utility operations of NCE have all been previously
authorized under the 1935 Act or have been established by rule or pursuant to
statutory exemption. A further description of the non-utility subsidiaries of
NCE is set forth in Annex C.
New Century Services has entered into a separate service agreement with
NCE and each of the NCE Operating Companies (the "Utility Service Agreement").
(A copy of the form of the Utility Service Agreement as well as an appendix
entitled "Description of Services and Determination of Charges for Services" is
filed as EXHIBIT B-2.) PSCo's service agreement has a section and attachment to
reflect state merger commitments made at the time it sought
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6 Cheyenne currently makes no wholesale sales of electricity.
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Colorado Commission approval to merge with SPS. New NSP and NSP-W will also
enter into the Service Agreement with New Century Services. New Century Services
has also entered into separate service agreements (the "Non-Utility Service
Agreements") with the non-utility subsidiary companies of NCE. It is
contemplated that New Century Services will similarly enter into one or more
separate service agreements with the direct and indirect non-utility
subsidiaries of NSP. 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 NCE Common Stock is listed on the New York Stock Exchange, Inc.
("NYSE"). The authorized capital stock of NCE consists of 260,000,000 shares of
NCE Common Stock and 20,000,000 shares of NCE preferred stock. As of the close
of business on June 30, 1999, 115,242,268 shares of NCE Common Stock and no
shares of NCE preferred stock were issued and outstanding. The consolidated
assets of NCE, as of December 31, 1998, were approximately $7.7 billion,
representing $4.6 billion in net electric utility property, plant and equipment
($1.7 billion for SPS, $2.8 billion for PSCo and $46 million for Cheyenne); $817
million in net gas utility property, plant and equipment ($792 million for PSCo
and $24 million for Cheyenne); $500 million in non-utility subsidiary property,
plant and equipment; and $1.8 billion in other corporate assets.
Pertinent financial information regarding NCE's utility operations for
the year ended December 31, 1998 may be summarized as follows ($ in millions):
Electric Utility Revenues Gas Utility Revenues
------------------------- --------------------
SPS $951 --
PSCo 1,636 $640
Cheyenne 37 18
NCE and the NCE Operating Companies are all financially strong
companies. The Moody long-term debt ratings of SPS and PSCo are A3 and Aa2,
respectively. More detailed information concerning NCE and its subsidiaries is
contained in (i) NCE's Annual Report on Form 10-K for the year ended December
31, 1998, and its Quarterly Reports on Form 10-Q for the quarters ended March
31, 1999, and June 30, 1999, which are incorporated by reference as EXHIBITS
H-2, H-11 and H-12, respectively; (ii) PSCo's Annual Report on Form 10-K for the
year ended December 31, 1998, and its Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1999, and June 30, 1999, which are incorporated by
reference as EXHIBITS H-5, H-17 and H-18, respectively; and (iii) SPS's Annual
Report on Form 10-K for the year ended December 31, 1998 and its Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1999, and June 30, 1999,
which are incorporated by reference as EXHIBITS H-6, H-7 and H-8, respectively.
2. NSP and its Subsidiaries
NSP, which was incorporated in 1909, is a public-utility company and a
holding company
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exempt from registration pursuant to Commission order under Section 3(a)(2) of
the Act. Northern States Power Company, Holding Co. Act Release No. 22334 (Dec.
-----------------------------
23, 1981). NSP owns all of the outstanding common stock of NSP-W, a Wisconsin
corporation, which is a public-utility company under the Act. Maps of the
electric and gas service areas of NSP and NSP-W are filed as EXHIBITS E-3.1 and
E-3.2.
NSP is engaged primarily in the generation, transmission and
distribution of electricity throughout a 30,000 square mile service area in
Minnesota, North Dakota and South Dakota. NSP also purchases, distributes and
sells natural gas to retail customers and transports customer-owned gas in
approximately 118 communities within this area and in Arizona. Of the more than
2.5 million people served by NSP, the majority are in the Minneapolis-St. Paul
metropolitan area. In 1998, more than 73% of the electric retail revenue of NSP
was derived from sales in the Minneapolis-St. Paul metropolitan area, and more
than 64% of its retail gas revenue was derived from sales in the St. Paul
metropolitan area. NSP provides both electric and gas utility service in
Minnesota, North Dakota and South Dakota but only gas utility service in
Arizona. As of December 31, 1998, NSP provided retail electric utility service
to approximately 1,240,000 customers and gas utility service to approximately
385,000 customers.
NSP-W is engaged in the generation, transmission, and distribution of
electricity to approximately 210,400 retail customers in an area of
approximately 18,900 square miles in northwestern Wisconsin, to approximately
9,100 electric retail customers in an area of approximately 300 square miles in
the western portion of the Upper Peninsula of Michigan and to 10 wholesale
customers in the same general area. NSP-W purchases, distributes and sells
natural gas to retail customers or transports customer-owned natural gas in the
same service territory to approximately 78,000 customers in Wisconsin and 5,000
customers in Michigan. In 1998, NSP-W provided approximately 13% of NSP's
consolidated revenues.
The electric transmission system of NSP and NSP-W (the "NSP System") is
located throughout the service territories that NSP and NSP-W serve in
Minnesota, North Dakota, South Dakota, Michigan and Wisconsin. NSP and NSP-W are
directly connected with each other through numerous transmission lines that they
own, including one 345 kV transmission line, two 115 kV transmission lines and
two 69 kV transmission lines.
NSP and NSP-W are members of the MidContinent Area Power Pool ("MAPP"),
the regional reliability council for numerous electric providers in portions of
the Midwest. The NSP System is interconnected with 19 other utility systems,
including utilities in MAPP (Great River Energy, Otter Tail Power, WAPA,
Southern Minnesota Municipal Power Agency, Interstate Power, IES Utilities,
MidAmerican Energy, Minnesota Power, Dairyland Power Coop and Manitoba
Hydro-Electric Board at the United States/Canada border); and utilities in Mid-
America Interconnected Network ("MAIN") (Ameren, Wisconsin Public Service
Corporation, Wisconsin Electric Power Company and Wisconsin Power and Light).
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The combined net generating capability (considering purchases and
sales) of NSP and NSP-W is projected to be 8,411 MW in 2000, against a net
demand of 7,171 MW.7 Given MAPP's minimum reliability reserve margin requirement
of 15 percent, NSP has 164 MW of uncommitted capacity in 2000. In 1998, NSP was
a net purchaser of power, and it anticipates being a significant purchaser in
future years. In the past, NSP relied increasingly on the short-term energy
market to meet increased customer demand for energy. On June 28, 1999, NSP filed
a request for proposals ("RFP") with the Minnesota Commission. In this request,
NSP identified a need for a long-term capacity and energy to meet the increased
requirements of customers beginning in 2003. The RFP identifies the need to have
from 200 to 1200 additional MW of generation resources in service for 2003. The
range is intended to provide an opportunity to look at a wide variety of
potential future conditions. The RFP permits both acceleration or delay of the
in-service date. Further information on the utility assets and operations of NSP
and NSP-W is included in Annex B.
Retail sales rates, services and other aspects of NSP's retail
operations are subject to the jurisdiction of the Minnesota Commission, the
North Dakota Commission, the South Dakota Commission and the Arizona Commission
within their respective states. The Minnesota Commission also possesses
regulatory authority over aspects of NSP's financial activities, including
security issuances, property transfers when the asset value is in excess of
$100,000, mergers with other utilities, and transactions between NSP and
affiliates. In addition, the Minnesota Commission reviews and approves NSP's
electric resource and gas supply capacity plans for meeting customers' future
energy needs. NSP-W is subject to regulation of similar scope by the Wisconsin
Commission and the Michigan Commission, except that the Michigan Commission does
not regulate NSP-W's issuances of securities. In addition, a state commission
generally must certify the need for new generating plants and transmission lines
of designated capacities to be located within such state before they may be
sited and built. Wholesale rates for electric energy sold in interstate
commerce, the classification of accounts, the interstate transmission of
electric power and energy, interconnection agreements, issuances of securities
not regulated by state commissions, acquisitions and sales of certain utility
properties and certain other activities of NSP and NSP-W (including the
licensing of certain hydro-electric facilities) are subject to the jurisdiction
of FERC. The operation and construction of NSP's Prairie Island and Monticello
nuclear facilities are subject to regulation by the NRC. In addition, NSP and
NSP-W are subject to FERC jurisdiction under the NGA with regards to sale of
natural gas for resale.
NSP is also engaged, directly and through subsidiary companies, in
non-utility businesses. NSP directly provides: (i) an appliance services program
for its residential
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7 The electric production and transmission costs of NSP and NSP-W are shared
by them. The cost-sharing arrangement between the companies is referred to
as the Interchange Agreement. It is a FERC-regulated agreement and has been
accepted by the Wisconsin Commission and the Minnesota Commission for
determination of costs recoverable by NSP-W and NSP in rate cases.
-9-
<PAGE>
customers, (ii) construction of natural gas distribution systems for third
parties (primarily end-users and municipal gas systems), (iii) sale and
installation of power quality instruments primarily to protect equipment of
customers from electric surges, (iv) sale of steam to industrial customers in
NSP's service territory and (v) installation and maintenance of street lighting
for municipalities and other customers. In addition, NSP owns directly the
interests of the following non-utility subsidiary companies: NSP Financing I, a
special purpose business trust; Viking Gas Transmission Company ("Viking"), an
interstate natural gas pipeline subject to FERC jurisdiction under the NGA;
Eloigne Company ("Eloigne"), an investor in projects that qualify for low-income
housing tax credits; Energy Masters International, Inc. ("EMI"), an energy
services company; Seren Innovations, Inc. ("Seren"), a company that provides
cable, telephone and high-speed internet access system; Ultra Power
Technologies, Inc. ("Ultra Power"), a company that markets power cable testing
technology; First Midwest Auto Park, Inc. ("FMAP"), an owner of a parking
garage; United Power and Land Company ("UP&L"), a real estate investment
company; NRG Energy, Inc. ("NRG"), a holding company for many of NSP's non-
utility businesses, including significant investments in independent power
projects and foreign operations; Reddy Kilowatt Corporation ("Reddy Kilowatt"),
the owner of certain intellectual property rights; and Nuclear Management
Company ("NMC"), a limited liability company that will provide services to the
nuclear operations of its members. NSP owns 100% of all of the foregoing
businesses, except that NSP owns 25% of the membership interests in NMC. A
further description of the non-utility subsidiaries of NSP is set forth on Annex
D hereto.
NSP-W owns directly all of the outstanding common stock of Clearwater
Investments, Inc. ("Clearwater"), an investor in housing projects that qualify
for low-income housing tax credits, and NSP Lands, Inc. ("NSP Lands"), a real
estate investor. NSP-W also owns 75.86% of Chippewa and Flambeau Improvement
Company ("C&F"), a company that builds and operates dams and reservoirs for
hydro-electric plants. A further description of the non-utility subsidiaries of
NSP-W is also set forth on Annex D hereto.
NSP Common Stock is listed on the NYSE and the Chicago and Pacific
Stock Exchanges. As of the close of business on June 30, 1999, there were
153,796,567 shares of NSP Common Stock and 1,050,000 shares of NSP cumulative
preferred stock issued and outstanding. NSP's principal executive office is
located at 414 Nicollet Mall, Minneapolis, Minnesota 55401. NSP-W does not have
any preferred stock outstanding, and all of its common stock is owned by NSP.
Copies of the Articles of Incorporation of NSP and NSP-W are incorporated by
reference as EXHIBIT A-1 and EXHIBIT A-2. Consolidated assets of NSP and its
subsidiaries as of December 31, 1998 were approximately $7.4 billion, consisting
of $3.7 billion in net electric utility property, plant and equipment ($3.1
billion for NSP and $594 million for NSP-W); $439 million in net gas utility
property, plant and equipment ($376 million for NSP and $63 million for NSP-W);
and $1.6 billion in non-utility subsidiary assets, and $1.7 billion in other
corporate assets.
Pertinent financial information regarding NSP's utility revenues for
the year ended
-10-
<PAGE>
December 31, 1998, may be summarized as follows (before intercompany
eliminations)8:
($ in millions)
Electric Gas
-------- ---
NSP $2,244 $366
NSP-W $ 325 $ 79
Like NCE, NSP is a financially strong company. The Moody long-term
credit ratings of NSP and NSP-W are both Aa3. More detailed information
concerning NSP and its subsidiaries is contained in (i) NSP's Annual Report on
Form 10-K for the year ended December 31, 1998 and its Quarterly Reports on Form
10-Q for the quarters ended March 31, 1999, and June 30, 1999, which are
incorporated by reference as EXHIBITS H-1, H-9, and H-10, respectively; (ii)
NSP-W's Annual Report on Form 10-K for the year ended December 31, 1998, and its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999, and June
30, 1999, which are incorporated by reference as EXHIBITS H-3, H-13 and H-14,
respectively; and (iii) NRG's Annual Report on Form 10-K for the year ended
December 31, 1998 and its Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999, and June 30, 1999, which are incorporated by reference as
EXHIBITS H-4 , H-15 and H-16, respectively.
D. Description of the Merger
-------------------------
The Merger Agreement provides for the merger of NCE with and into NSP
pursuant to which: (a) each share of NCE Common Stock issued and outstanding
immediately prior to the effective time of the Merger, together with any NCE
Rights,9 shall be converted into the right to receive 1.55 shares (the
"Conversion Ratio") of duly authorized, validly issued, fully paid and
nonassessable NSP Common Stock; (b) each issued and outstanding share of NSP
Common Stock and each share of preferred stock of NSP issued and outstanding
immediately prior to the effective time of the Merger shall remain outstanding
and (c) each share of NCE Common Stock, together with any NCE Rights, that is
owned by NSP or any of its subsidiaries or held in the treasury of NCE
- ------------
8 In the following table, Electric Utility revenues are the revenues
derived by NSP and NSP-W from each company's operations as an "electric
utility company" as defined in Section 2(a)(3) under the Act, and Gas
Utility revenues are the revenues derived by NSP and NSP-W from each
company's operations as a "gas utility company" under Section 2(a)(4)
of the Act. These amounts do not conform to NSP's consolidated
financial statements, as the consolidated financial statements reflect
eliminations of intercompany revenues among NSP and its consolidated
subsidiaries, and NSP reports, in its consolidated financial
statements: (i) the revenues of its wholly-owned regulated natural gas
interstate pipeline (Viking) as part of Gas Utility revenues, (ii) the
revenues of its other consolidated subsidiaries as part of "Other
Income (Deductions)" and (iii) the results of the operations of its
non-consolidated subsidiaries under "Equity in Earnings of
Unconsolidated Affiliates."
9 Each NCE Right entitles the registered holder to purchase from NCE one
one-hundredth of a share of Series A Junior Participating Preferred
Stock. The NCE Rights were distributed as a dividend on each
outstanding share of NCE Common Stock as part of NCE's shareholder
rights plan which was approved by the Commission in New Century
------------
Energies, Holding Co. Act Release No. 26751 (Aug. 1, 1997).
--------
-11-
<PAGE>
will be canceled and shall cease to exist, and no consideration shall be
delivered in exchange therefor. As noted previously, NSP will change its name to
Xcel at or prior to the Merger. Based upon the capitalization of NCE and NSP on
March 24, 1999 (the date the Merger Agreement was signed) and the Conversion
Ratio, NCE shareholders would own 54 percent and NSP shareholders would own 46
percent of the common equity of Xcel if the Merger had been consummated as of
such date.
Except as set forth below, if any holder of NCE Common Stock would be
entitled to receive a number of shares of NSP Common Stock that includes a
fraction, then in lieu of a fractional share, such holder will be entitled to
receive a cash payment determined by multiplying the fractional share interest
by the average of the last reported sales price, regular way, per share of NSP
Common Stock on the NYSE Composite Tape for the ten business days prior to and
including the last business day on which NSP Common Stock was traded on the
NYSE, without any interest thereon. Fractional shares of NCE Common Stock held
in accounts under the dividend reinvestment plans and employee benefit plans of
NCE will be converted into the applicable number of shares (or fractional
shares) of NSP Common Stock under corresponding plans of NSP, in accordance with
the Conversion Ratio.
The Merger is subject to customary closing conditions, including the
receipt of the requisite shareholder approvals of NCE and NSP and all necessary
governmental approvals, including the approval of the Commission.
The Merger is designed to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended. NSP and NCE
believe the Merger will be treated as a "pooling of interests" for accounting
purposes.
The Merger Agreement contains certain covenants relating to the conduct
of business by the parties pending the consummation of the Merger. Generally,
the parties must carry on their businesses in the ordinary course consistent
with past practice, may not increase common stock dividends beyond specified
levels and may not issue capital stock except as specified. The Merger Agreement
also contains restrictions on, among other things, charter and bylaw amendments,
capital expenditures, acquisitions, dispositions, incurrence of indebtedness,
certain increases in employee compensation and benefits, and affiliate Mergers.
The Merger Agreement provides that, after the effectiveness of the
Merger, Xcel's principal corporate office will be located in Minneapolis,
Minnesota. Xcel will also maintain significant operating offices in Denver,
Colorado, and Amarillo, Texas. Xcel's board of directors (classified into three
classes) will consist of an even number of up to 14 persons, half of whom will
be designated by NSP and half of whom will be designated by NCE. As of the date
hereof, NSP and NCE have not determined which individuals, in addition to
Messrs. Howard and Brunetti, will serve as officers of Xcel following
consummation of the Merger. Mr. James J. Howard, the current Chairman, Chief
Executive Officer and President of NSP, will be entitled to serve as Chairman of
the Board of Xcel until the first anniversary of the effectiveness of the Merger
of NCE and NSP.
-12-
<PAGE>
Mr. Wayne H. Brunetti, the President and Chief Operating Officer of NCE, will be
entitled to serve as President and Chief Executive Officer of Xcel upon the
effectiveness of the Merger, and thereafter will assume the position of Chairman
when Mr. Howard ceases to be Chairman.
E. Operations of the Combined Company
----------------------------------
As explained more fully in Item 3.C.1(b), the gas operations of Xcel
will constitute a single, integrated gas-utility system, and the electric
operations (with the exception of Cheyenne, which the Commission has already
found to be a permissible additional system) will similarly form a single,
integrated electric-utility system.
The integration of the electric operations will be achieved primarily
through membership by NSP, NSP-W and SPS in the Midwest Independent Transmission
System Operator, Inc. ("MISO"). In addition, the electric operations will be
integrated through the use of a three-year 100 MW contract path, and the other
methods described more fully in Item 3.C.1.(b)(i).
There will be significant savings and synergies as a result of these
integrated operations. As noted previously and as described in Item 3.C.2 below,
the benefits are estimated to exceed $1.1 billion over the next ten years.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Merger, including the solicitation of
proxies, registration of securities of Xcel under the Securities Act of 1933,
and other related matters, are estimated as follows:
Commission filing fee for the Joint Registration
Statement on Form S-4....................................$1,145,707.50
Accountants' fees.............................................................10
Legal fees and expenses relating to the Act...................................10
Other legal fees and expenses.................................................10
Shareholder communication and proxy solicitation..............................10
NYSE listing fee..............................................................10
Exchanging, printing, and engraving of stock certificates.....................10
Investment bankers' fees and expenses
SG Barr Devlin................................................................10
The Blackstone Group..........................................................10
Consulting fees related to the Merger.........................................10
Expenses related to integrating the operations of the merged
company and miscellaneous.............................................10
TOTAL...................................................... 10
===================
- ------------
10 To be filed by amendment.
-13-
<PAGE>
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 Merger:
Transactions to which section or rule may be
Section of the Act applicable:
- ------------------ --------------------------------------------
4, 5 Registration of Xcel as a holding company following
consummation of the Merger.
6(a), 7 Issuance of Xcel Common Stock in the
Transaction in exchange for shares of NCE
Common Stock; formation and capitalization of
New NSP.
9(a)(1), 10 Acquisition by Xcel of stock of New Century
Services and of non-utility
subsidiaries of NCE.
9(a)(2), 10(a), Acquisition by Xcel of common stock of NCE
(b), (c) and (f) and NCE Operating Companies; acquisition by
Xcel of common stock of New NSP.
8, 9(c)(3), 11(b), 21 Retention by Xcel of the retail gas utility
operations of NSP, NSP-W, PSCo and
Cheyenne; retention of other businesses of NSP
and NCE and their direct and indirect
subsidiaries.
12(d) Sale by NCE of securities of NCE Operating
Companies.
13 Approval of the services to be provided by New
Century Services to New NSP, NSP-W, BMG
and Xcel in accordance with the Utility Service
Agreement; approval of services to be provided
thereunder by New Century Services to the direct
and indirect non-utility subsidiaries of NSP in
accordance with the Non-Utility Service
Agreement; approval of the performance of
certain services between Xcel system companies;
and exemption from at-cost standards with
respect to certain services between Xcel system
companies.
44 Sale by NCE of securities of NCE Operating
Companies.
Rules
- -----
80-92 Affiliate transactions, generally.
-14-
<PAGE>
88 Expansion of the activities of New Century
Services to the Xcel System.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed to be applicable to the Merger, such sections and rules
should be considered to be set forth in this Item 3.
A. Merger Analysis -- Overview
---------------------------
1. Introduction
The Commission must find that Section 10 of the Act is satisfied to
approve the Merger. The Section 10 analysis is presented in detail below. The
highlight of the analysis is whether the Merger will tend toward the economical
and the efficient development of an integrated public utility system.
Applicants believe that it will.
The future of the electric utility industry will be much different from
its past. The utility market model, with generation functionally unbundled from
transmission, is supplanting the vertically integrated monopoly model.
Applicants recognize these changes and believe that the Merger forms an
integrated public utility system positioned for competition in the utility
industry of the future. Regional transmission organizations ("RTOs") will
further the development of the market model because RTOs facilitate transmission
access on a regional basis at non-pancaked rates, thereby promoting the growth
of larger and more competitive regional wholesale power markets. More buyers and
sellers participate in broader bulk power markets, and this increased
competition will tend to produce lower and more stable prices for the benefit of
consumers. The NSP companies and SPS, respectively, are presently located to the
north and south, respectively, of MISO. As part of the Merger, they will join
MISO, increasing its size and multiplying the consumer benefits that follow from
regional integration of transmission systems and the corresponding increase in
competition within bulk power markets.
The 1935 Act was intended, among other things, to prevent the evils
that arise "when the growth and extension of holding companies bears no relation
to the economy of management and operation or the integration and coordination
of related operating properties . . ."11 In contrast, the Xcel system is an
example of growth that promotes economies and coordination of related operating
properties within a single region in a manner consistent not only under the
policies of the Act, but also with the policies of both FERC and with state
regulatory initiatives. As discussed in detail below, the RTO integration model
represents a reasoned evolution of the integration requirements under the 1935
Act, particularly when viewed as an extension of the past precedent of
integration through a power pool. For these reasons, it is a model that should
be encouraged by this Commission.
- ------------
11 Section 1(b)(4).
-15-
<PAGE>
Section by Section Analysis
2. Section 9(a)(2)
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), 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." As a result of the proposed Merger, Xcel will acquire all of
the outstanding voting securities of the NCE Operating Companies. Also in
connection with the Merger, Xcel will acquire all of the outstanding securities
of New NSP. The Merger therefore requires prior Commission approval under the
standards of Section 10.12 In this regard, the relevant standards are set forth
in Sections 10(b), 10(c) and 10(f) of the Act.
As set forth more fully below, the Merger 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 Merger is fair and reasonable;
the Merger will not create detrimental interlocking relations or
concentration of control;
the Merger will not result in an unduly complicated capital structure
for the Xcel system;
the Merger is in the public interest and the interests of investors and
consumers;
the Merger is consistent with Section 8 and not detrimental to carrying
out the provisions of Section 11 of the Act;
the Merger tends toward the economical and efficient development of
both integrated electric and gas systems; and
the Merger will comply with all applicable state laws.
Furthermore, the Merger also provides an opportunity for the Commission to
follow certain of the interpretive recommendations made by the Division of
Investment Management (the "Staff") in its report issued in June 1995 entitled
"The Regulation of Public Utility Holding Companies" (the "1995 Report"), in
particular the Staff's overall recommendation that the Commission act
administratively to modernize and simplify holding company regulation and
minimize regulatory overlap, while
- ------------
12 Similarly, to the extent that NCE could be deemed to sell utility
securities or assets, it would require approval under Section 12.
-16-
<PAGE>
protecting the interests of consumers and investors.
B. 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
the Commission finds that:
(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.
1. Section 10(b)(1)
The standards of Section 10(b)(1) are satisfied because the proposed
Merger will not "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." By its nature,
any merger results in new links between previously unrelated companies. The
Commission has recognized that such interlocking relationships are permissible
in the interest of efficiencies and economies. Northeast Utilities, Holding Co.
-------------------
Act Release No. 25221 (Dec. 21, 1990), as modified, Holding Co. Act Release No.
-----------
25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358
------------- ----------------------
(D.C. Cir. 1992) ("interlocking relationships are necessary to integrate
[the two merging entities]"). The links that will be established as a result
of the Merger 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 Xcel to consist of up to 14 members, one-half designated by NSP
and one-half designated by NCE.13 In addition, a variety of contractual
arrangements among the companies in the
- ------------
13 The Applicants acknowledge the requirements of Section 17(c) of the
Act and Rule 70 thereunder with respect to limitations upon directors
and officers of registered holding companies and subsidiary companies
thereof having affiliations with commercial banking institutions and
investment bankers and undertake that, upon completion of the Merger,
they will be in compliance with the applicable provisions thereof.
-17-
<PAGE>
Xcel system will be established, including the following:
New NSP and NSP-W will each enter into the Utility Service
Agreement with New Century Services. Likewise, NSP's direct
and indirect non-utility subsidiaries will enter into the
Non-Utility Service Agreement with NSP. Through the
consolidation of functions into New Century Services, the Xcel
system will achieve substantial economies and efficiencies. By
entering into these service agreements, NSP and its direct and
indirect subsidiaries will receive services from New Century
Services and effectively avail themselves of these economies
and efficiencies, just as the NCE system companies presently
do.
New NSP and NSP-W may enter into service agreements with Utility
Engineering, Inc. ("UE") to obtain engineering and
construction services. UE was authorized to provide the NCE
Operating Companies such services in the 1997 NCE Order. These
arrangements should enable New NSP and NSP-W to achieve
further efficiencies, just as the NCE Operating Companies
have.
New NSP, NSP-W, PSCo, and SPS will enter into a Joint Operating
Agreement, which provides for coordinated production-related
activities including inter-system sales of capacity and
energy, and joint planning. This agreement is discussed
further below.
New NSP, NSP-W, PSCo, SPS and Cheyenne will enter into a joint
open-access transmission tariff pursuant to which they will
offer transmission services over their individual systems
and over the combined Xcel system.
These arrangements are necessary to integrate NSP and NCE fully into the Xcel
system and will therefore be in the public interest and the interest of
investors and consumers. Forging such relationships is beneficial to the
protected interests under the Act and, thus, is not prohibited by Section
10(b)(1). Moreover, because substantial benefits will accrue to the public,
investors and consumers from the combination of NCE and NSP, whatever
interlocking relationships may arise from the combination are not detrimental.
In applying Section 10(b)(1) to utility acquisitions, the Commission
must further determine whether the acquisition will create "the type of
structures and combinations at which the Act was specifically directed." Vermont
-------
Yankee Nuclear Power Corp., Holding Co. Act Release No. 15958 (Feb. 6, 1968).
- --------------------------
The NSP-NCE strategic alliance will not create a "huge, complex and irrational
system" but, rather, will afford the opportunity to achieve economies of scale
and efficiencies for the benefit of investors and consumers. See American
--- --------
Electric Power Company, Inc., Holding Co. Act Release No. 20633 (July 21, 1978)
- -----------------------------
("AEP"). As explained in the Joint Proxy Statement and
---
-18-
<PAGE>
Prospectus of NSP and NCE (the "Joint Proxy Statement") (a copy of which is
included as EXHIBIT C-2), the primary objective of the Merger is to position the
companies to participate in the growing and increasingly competitive energy
markets. Specifically, the Merger will combine the strengths of the two
companies, thus enabling them to offer customers a broader array of energy
products and services more efficiently and cost-effectively than could either
company acting alone, and at the same time create a larger and more diverse
asset and customer base, with enhanced opportunities for operating efficiencies
and risk diversification. Xcel will be a mid-size registered holding company,
and its operations will not exceed the economies of scale of current electric
generation and transmission technology or provide undue market power or control
to Xcel in the region in which it will provide service.
While the combination of NCE and NSP will result in a larger utility
system, it certainly will not be one that exceeds the economies of scale of
current electric generation and transmission technology, on the one hand, and
gas transportation technology on the other. If approved, the Xcel system will
serve approximately 3.0 million electric customers and 1.5 million gas customers
in twelve states. As of December 31, 1998, the combined consolidated assets of
the Applicants totaled approximately $15.1 billion and, for the year ended
December 31, 1998, combined operating revenues totaled approximately $6.4
billion. As of December 31, 1998, the combined owned summer generating capacity
of the regulated utility operations of NSP, NSP-W, PSCo, SPS and Cheyenne
totaled approximately 15,000 MW.
The following table shows the Xcel system's relative size as compared
to other registered systems in terms of assets, operating revenues and
customers14:
<TABLE>
<CAPTION>
Total Assets Operating Revenues Electric Customers
System ($ Millions) ($ Millions) (Thousands)
------ ------------ ------------ -----------
<S> <C> <C> <C>
Southern $36,192 $11,403 3,794
AEP 19,483 6,346 3,022
Entergy 22,848 11,495 2,495
CSW 13,744 5,482 1,752
GPU 16,288 4,249 2,041
Xcel 15,608 6,430 3,000
</TABLE>
Moreover, the Commission has approved a number of acquisitions
involving larger and similarly-sized operating utilities. See, e.g., Entergy
--- ---- -------
Corporation, Holding Co. Act Release No. 25952 (Dec. 17, 1993) (acquisition of
- -----------
Gulf States Utilities; combined assets at time of acquisition in excess of $22
billion); TUC Holding Company, Holding Co. Act Release No. 26749 (Aug. 1, 1997)
-------------------
(combination of Texas Utilities Company and ENSERCH Corporation; combined
- ------------
14 Source: U.S. Securities and Exchange Commission, Financial and
Corporate Report, Holding Companies Registered under the Public Utility
Holding Company Act of 1935 as of July 1, 1999 (data provided is as of
December 31, 1998); Northern States Power Company 1998 Annual Report.
-19-
<PAGE>
assets at time of acquisition of $24.0 billion); Houston Industries
--------------------
Incorporated, Holding Co. Act Release No. 26744 (July 24, 1997) (combination of
- ------------
Houston Industries Incorporated and NorAm Energy Corp., combined assets at time
of acquisition of $16.0 billion); Northeast Utilities, supra (acquisition of
-------------------- -----
Public Service Company of New Hampshire; combined assets at time of acquisition
of approximately $9 billion); Centerior Energy Corp., Holding Co. Act Release
----------------------
No. 24073 (April 29, 1986) (combination of Cleveland Electric Illuminating and
Toledo Edison; combined assets at time of acquisition of approximately $9.1
billion); AEP, supra (acquisition of Columbus and Southern Ohio Electric;
--- -----
combined assets at time of acquisition of close to $9 billion). Furthermore, at
a time of consolidation in the industry, the combined assets of Xcel will be
less than the combined assets of certain existing registered holding companies:
AEP ($19.4 billion at December 31, 1998), Southern Company ($36.2 billion at
December 31, 1998) and Entergy Corporation ($22.8 billion at December 31, 1998)
and GPU, Inc. ($16.3 billion at December 31, 1998).
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 economic efficiencies that can be achieved through the integration and
coordination of utility operations. See, e.g., AEP, supra. The Commission in AEP
--- ---- --- ----- ---
noted that, although the framers of the Act were concerned about "the evils of
bigness, they were also aware that the combination of isolated local utilities
into an integrated system afforded opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations...[and] [t]hey
wished to preserve these opportunities." Id. By virtue of the Merger, Xcel will
---
be in a position to realize precisely these types of benefits. Among other
things, the Merger is expected to yield labor cost savings, corporate and
administrative and purchasing savings, cost of fuel and purchased gas savings.
These expected economies and efficiencies from the combined utility operations
are described in greater detail in Item 3.C.2., below.
Finally, Section 10(b)(1) also requires the Commission to consider
possible anticompetitive effects of a proposed combination. As the Commission
noted in Northeast Utilities, 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 to customers." In this case, NCE and NSP will file Notification and
Report Forms with the Department of Justice and the Federal Trade Commission
pursuant to the HSR Act describing the effects of the Merger on competition in
the relevant market and it is a condition to the consummation of the Merger that
the applicable waiting period under the HSR Act shall have expired or been
terminated.
The competitive impact of the Merger will also be considered by FERC.
As summarized in the testimony of Dr. Heironymous and Dr. Gilbert submitted in
support of FERC application (filed as Exhibits D-1.1 and D-1.2 hereto), there is
no adverse impact on competition resulting from the consolidation of the
pre-merger market shares of Applicants. While post-merger integration plans of
Applicants will affect the post-merger market shares, these occur as a result of
joining an RTO
-20-
<PAGE>
and through exercise of rights under FERC Order No. 888 and do not result in any
anti-competitive effects.15 Indeed, most markets are deconcentrated as a result
of the type of integrative actions that Applicants intend to take to integrate
their operations, and thus the Merger has a positive impact on competition. The
Commission has found, and the courts have agreed, that it may appropriately rely
upon FERC with respect to such matters. See City of Holyoke v. SEC, supra at
--- ---------------------- -----
363-64, quoting Wisconsin's Environmental Decade v. SEC, 882 F.2d 523, 527 (D.C.
------- ---------------------------------------
Cir. 1989). For these reasons, the Merger 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).
2. Section 10(b)(2)
Section 10(b)(2) precludes approval of an acquisition if the considera-
tion to be paid in connection with the combination, including all fees,
commissions and other remuneration, is "not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of...the utility assets
underlying the securities to be acquired." The Commission has found "persuasive
evidence" that the standards of Section 10(b)(2) are satisfied where, as here,
the agreed consideration for an acquisition is the result of arm's-length
negotiations between the managements of the companies involved, supported by
opinions of financial advisors. See Southern Company, Holding Co. Act Release
--- ----------------
No. 24579 (Feb. 12, 1988).
First, the Merger is a pure stock-for-stock exchange that is to qualify
for treatment as a pooling of interests. The Merger will therefore involve no
"acquisition adjustment" or other write-up of the assets of NCE or NSP.
Second, as explained on pages 41 and 47 of the Joint Proxy Statement
(EXHIBIT C-2 hereto), the historical price data, high and low, for NSP and NCE
Common Stock provide support for the consideration of 1.55 shares of NSP Common
Stock for each share of NCE Common Stock.
Third, the Conversion Ratio is the product of extensive and vigorous
arm's-length negotiations between NCE and NSP. These negotiations were preceded
by extensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of each of the respective companies. This process is
described in "Background of the Merger" at pages 30 to 35 of the Joint Proxy
Statement. As recognized by the Commission in Ohio Power Co., Holding Co. Act
--------------
Release No. 16753 (June 8, 1970), prices arrived at through arm's-length
negotiations are particularly persuasive evidence that Section 10(b)(2) is
satisfied.
Fourth, nationally-recognized investment bankers for NCE and NSP have
reviewed extensive information concerning the companies, analyzed the Conversion
Ratio employing a variety of valuation methodologies and opined that the
Conversion Ratio is fair to the respective holders of
- ------------
15 While Applicants have committed to certain market mitigation in the NSP
destination market, this was done to allay any potential concerns about
the impact of the merger on competition.
-21-
<PAGE>
NCE Common Stock and NSP Common Stock as of the date of the Merger Agreement and
as of the date the Joint Proxy Statement was mailed to stockholders of NSP and
NCE. The investment bankers' analyses and opinions are described in detail on
pages 40 to 53 of the Joint Proxy Statement. The assistance of independent
consultants in setting considerations has been recognized by the Commission as
evidence that the requirements of Section 10(b)(2) have been met. Southern
--------
Company, supra; and SV Ventures, Inc., Holding Co. Act Release No. 24579 (Feb.
- ------- ----- ------------------
12, 1988).
Finally, the Merger was submitted to, and approved by, the affected
public shareholders, i.e., the common shareholders of NCE and the common and
preferred shareholders of NSP. Holders of approximately 93% of NCE's common
stock represented at the meeting approved the Merger, and holders of
approximately 83% of NSP's common and preferred stock represented at the meeting
approved the Merger.
A further consideration under Section 10(b)(2) is the overall fees,
commissions and expenses to be incurred in connection with the Merger. NCE and
NSP believe that these items are reasonable and fair in light of the size and
complexity of the Merger relative to other utility mergers and acquisitions, and
the anticipated benefits of the Merger to the public, investors and consumers
are consistent with recent precedent and meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application-Declaration, NSP and NCE
together expect to incur a combined total of approximately $43.7 million in
fees, commissions and expenses in connection with the Merger, including the
financial advisory fees to SG Barr Devlin and The Blackstone Group. By contrast,
AEP and Central and South West Corporation have represented that they expect to
incur total transaction fees and regulatory processing fees of approximately $53
million in connection with their proposed Merger. The Cincinnati Gas and
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 acquisition of Gulf States Utilities -- which
amounts all were approved as reasonable by the Commission. CINergy, Holding Co.
-------
Act Release No. 26146 (Oct. 21, 1994); Northeast Utilities, Holding Co. Act
--------------------
Release No. 25548 (June 3, 1992); and Entergy Corp., Holding Co. Act Release No.
-------------
25952 (Dec. 17, 1993).
The Applicants believe that the estimated fees and expenses in this
matter bear a fair relation to the value of their respective companies and the
benefits to be achieved by the Merger, and further that the fees and expenses
are fair and reasonable in light of the complexity of the Merger. See Northeast
--- ---------
Utilities, supra (noting that fees and expenses must constitute normal costs and
- --------- -----
represent a minor part of the overall acquisition). Based on a $22 1/2 price per
share of NSP Common Stock, which was the closing price per share as reported on
the NYSE-Composite Transaction of NSP Common Stock July 30, 1999, the Merger
would be valued at approximately $4.0 billion. The total estimated fees and
expenses of $43.7 million represent approximately 1.1% of the value of the
consideration to be paid, and are consistent with (and are in fact generally
lower than) percentages
-22-
<PAGE>
previously approved by the Commission. See, e.g., Entergy Corp., supra (fees and
--- ---- ------------- -----
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Northeast Utilities, supra (fees
------------------- -----
and expenses represented approximately 2% of the value of the assets to be
acquired).
3. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Merger will "unduly complicate the capital structure" or be "detrimental to the
public interest or the interest of investors or consumers or the proper
functioning" of the Xcel system.
The capital structure of Xcel will be substantially similar to capital
structures approved by the Commission in other orders. See, e.g., Ameren
--- ---- ------
Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997); CINergy Corp.;
- ----------- -------------
Holding Co. Act Release No. 26934 (Nov. 2, 1998); and Centerior Energy Corp.,
-----------------------
Holding Co. Act Release No. 24073 (April 29, 1986). Xcel's capital structure
will also be similar to the capital structures of existing registered holding
company systems. See, e.g., Ameren, supra; the 1997 NCE Order, supra; and
--- ---- ------ ----- -----
American Electric Power, Holding Co. Act Release No. 21433 (Feb. 13, 1980). The
- -----------------------
shareholders of NCE will receive Xcel (i.e., NSP) Common Stock. Xcel will own
----
100% of the common stock of NSP-W, New NSP, BMG, SPS, PSCo and Cheyenne, and
there will be no minority common stock interest in any of those companies. Each
outstanding share of NSP preferred stock will remain outstanding without change
as preferred stock of Xcel. The Commission has found previously that the
existence of preferred stock under facts similar to those of the present case
does not violate the standards of the Act. Illinois Power Company, Holding Co.
----------------------
Act Release No. 16574 (Jan. 2, 1970) (finding that "adequate safeguards were
afforded by the dividend and liquidation preferences and other protective
provisions that are applicable to such stock. See also, New Century Energies,
--- ---- ----------------------
Inc., Holding Co. Act Release No. 26751(Aug. 1, 1997) and The Columbia Gas
- ---- ------------------
System, Inc., Holding Co. Act Release No. 26361 (Aug. 25, 1995) (each
- -------------
authorizing preferred stock in a registered holding company).
The existing debt securities of NSP, NSP-W, SPS, PSCo and Cheyenne will
likewise remain outstanding without change, except that, with the merger of NCE
into NSP, the debt of NCE will become the debt of Xcel, and the existing debt of
NSP will be transferred to New NSP. The only voting securities of Xcel that will
be publicly held after the Merger will be NSP's existing Preferred Stock (which,
as noted above, will become Preferred Stock of Xcel) and Xcel Common Stock. The
outstanding NSP (i.e., Xcel) preferred stock will consist of 1.05 million
shares, consisting of 6 series. Each share of such preferred stock is entitled
to one vote per share on all matters presented to stockholders with the
exception of $3.60 series consisting of 275,000 shares, which is entitled to
three votes per shares.16
- ------------
16 This Application only requests authorization to retain such preferred
stock. Any proposed issuance of additional preferred stock will be
addressed in a separate application.
-23-
<PAGE>
Xcel will have the ability to issue, subject to the approval of the
Commission, preferred stock, the terms of which may be set by Xcel's Board of
Directors. See, e.g., Columbia Gas System, Inc., Holding Co. Act Release No.
--- ---- --------------------------
26361 (Aug. 25, 1995) (approving restated charter, including preferred the terms
of which, including voting rights, can be established by the board of
directors). The only outstanding class of voting securities of Xcel's direct
non-utility subsidiaries will be common stock and, in each case, all issued and
outstanding shares of such common stock will be held by Xcel (other than as
noted above for C&F, which is 75.86% owned, and NMC, which is 25% owned.)
Set forth below are summaries of the capital structures of NSP and NCE
as of December 31, 1998, and the pro forma consolidated capital structure of
Xcel (assuming the Merger occurred on December 31, 1998):
NSP and NCE Historical Capital Structures
(dollars in millions)
NSP NCE
Common stock equity $2,481 47.3% $2,615 45.3%
Preferred stock 305 5.8 294 5.1
Long-term debt 1,851 35.3 2,344 40.6
Short-term debt17 609 11.6 524 9.0
-------- ------- ------ ------
Total $5,246 100.0% $5,777 100.0%
Xcel Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common stock equity $ 5,096 46.2%
Preferred stock 599 5.4
Long-term debt 4,057 41.4
Short-term debt17 1,272 7.0
------- ------
Total $11,024 100.0%
Xcel's pro forma consolidated common equity to total capitalization ratio of
46.9% comfortably exceeds the "traditionally acceptable 30% level."18 Northeast
---------
Utilities, Holding Co. Act Release No.
- ---------
- ------------
17 Includes current portion of long-term debt.
18 Under section 7(d)(1) of the Act, the Commission generally has required
a registered holding company system and its public-utility subsidiaries
to maintain a 65/30 debt/common equity ratio, the balance generally
being preferred equity. Such debt/equity capitalization requirement was
included in rule 52, as originally adopted, as applied to securities
issued by public-utility subsidiaries, but was eliminated in 1992.
-24-
<PAGE>
25221 (Dec. 21, 1990). Accordingly, the proposed Merger will not unduly
complicate the capital structure of the resulting holding company.
Section 10(b)(3) also requires the Commission to determine whether the
proposed combination will be detrimental to the public interest, the interests
of investors or consumers or the proper functioning of the combined Xcel system.
The combination of NSP and NCE is entirely consistent with the proper
functioning of a registered holding company system. NSP's and NCE's utility
operations will be fully integrated. Further, the combination will result in
substantial, otherwise unavailable, savings and benefits to the public and to
consumers and investors of both companies, and the integration of NSP and NCE
will improve the efficiency of their respective systems. The integration of NSP
and NCE is described below in Item 3.C.1.(b) and the benefits and savings are
described in Item 3.C.2.
Finally, as indicated previously, consummation of the Merger is
conditional upon receipt of numerous state and federal regulatory approvals.
These regulatory approvals will assure that the interests of retail customers
and wholesale customers are adequately protected. FERC's approval will further
assure that there is no significant effect to competition. Moreover, as noted by
the Commission in approving Entergy's acquisition of Gulf States Utilities,
"concerns with respect to investors' interests have been largely addressed by
developments in the federal securities laws and the securities market
themselves." Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993).
-------------
Xcel, New NSP, NSP-W, PSCo, SPS and NRG will be reporting companies subject to
the continuous disclosure requirements of the 1934 Act following the completion
of the Merger. The various reports previously filed by NSP and NCE under the
1934 Act contain readily available information concerning the Merger. For these
reasons, the Applicants believe that the Merger will be in the public interest
and the interest of investors and consumers and will not be detrimental to the
proper functioning of the resulting holding company system.
C. 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; 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.
1. Section 10(c)(1)
----------------
(a) The Merger will be lawful under Section 8
-25-
<PAGE>
Section 10(c)(1) first requires that the Merger be lawful under Section
8. That section was intended to prevent holding companies, by the use of
separate subsidiaries, from circumventing state restrictions on common ownership
of gas and electric operations. The Merger will not result in any new situations
of common ownership of so-called "combination" systems within a given state.
Post-Merger, New NSP, as successor to NSP, will continue to provide electric
and gas utility services in Minnesota, North Dakota and South Dakota. NSP-W will
provide electric and gas utility services in Wisconsin and Michigan; PSCo will
provide gas and electric utility service in Colorado; and Cheyenne will provide
gas and electric utility service in Wyoming. Since Minnesota, Michigan,
Wisconsin, Wyoming, Colorado, South Dakota and North Dakota law all permit
combination gas and electric utilities serving the same area, the Merger does
not raise any issue under Section 8 or, accordingly, the first clause of Section
10(c)(1).
(b) The Merger will not be detrimental to carrying out
the provisions of Section 11
Section 10(c)(1) also requires that the Merger not be "detrimental to
the carrying out of the provisions of Section 11." Section 11(b)(1) directs the
Commission generally to limit a registered holding company "to a single
integrated public-utility system." In the 1997 NCE Order, the Commission found
that the combined Colorado, New Mexico, Texas, Oklahoma and Kansas electric
operations constituted a single, integrated electric utility system (the
"Primary System"),19 and that the Wyoming electric operations (the "Cheyenne
Electric System") and the combined Wyoming and Colorado gas operations (the "Gas
System") were each a permissible additional system under the A-B-C clauses of
Section 11(b)(1). At issue is whether the further addition of NSP and NSP-W,
each of which is a combination electric and gas utility, will result in a system
that is "detrimental to the carrying out of the provisions of Section 11."
In the early years of its administration of the Act, the Commission
construed Section 11(b)(1) to preclude significant geographic expansion by
holding company systems. However, as the Commission has acknowledged, the Act
"creates a system of pervasive and continuing economic regulation that must in
some measure at least be fashioned from time to time to keep pace with changing
economic and regulatory climates."20 In recent decisions, the Commission has
cited U.S. Supreme Court and Circuit Court of Appeals cases that recognize that
an agency is not required to
- ------------
19 The Commission's decision was predicated on the completion of a tie
line between the SPS and PSCo systems or on the parties' otherwise
satisfying the requirements of section 10(c)(1). The status of the tie
line is discussed elsewhere in this Application.
20 Union Electric Co., Holding Co. Act Release No. 18368, n. 52 (1974),
------------------
quoted in Consolidated Natural Gas Co., Holding Co. Act Release No.
----------------------------
26512 (April 30, 1996) (authorizing international joint venture to
engage in energy marketing activities); Eastern Utilities Associates,
----------------------------
Holding Co. Act Release No. 26232 (Feb. 15, 1995)(removing restrictions
on energy management activities); and Southern Co., Holding Co. Act
------------
Release No. 25639 (Sept. 23, 1992) (approving acquisition of foreign
public-utility subsidiary company).
-26-
<PAGE>
"establish rules of conduct to last forever,"21 but must "adapt [its] rules and
policies to the demands of changing circumstances"22 and to "treat experience
not as a jailer but as a teacher."23 Consequently, the Commission has attempted
to "respond flexibly to the legislative, regulatory and technological changes
that are transforming the structure and shape of the utility industry" as
recommended in the Staff's 1995 Report. Indeed, with specific reference to the
integration requirements of the Act, the 1995 Report explains:
The statute recognizes . . . that the application of the integration
standards must be able to adjust in response to changes in "the state
of the art." As discussed previously, the Division believes the SEC
must respond realistically to the changes in the utility industry and
interpret more flexibly each piece of the integration equation.24
Moreover, the ultimate determination has always been whether, on the facts of a
given matter, the proposed transaction "will lead to a recurrence of the evils
the Act was intended to address."25 See also Sempra Energy, Holding Company Act
Release No. 26971 (Feb. 1, 1999) where the Commission acknowledged that "we have
taken notice of developments that have occurred in the gas industry, and have
interpreted the Act and analyzed proposed transactions in light of these changed
and changing circumstances".
As explained more fully below, the combination of the Primary System of
NCE and the electric operations of NSP and NSP-W (the "NSP Electric System")
will result in a single, integrated electric utility system (the "Xcel Electric
System"). Integration will result primarily from the decision by NSP, NSP-W and
SPS to join MISO, a common FERC-approved independent system operator ("ISO").
Among other things, MISO will assume operational control over the transmission
systems of the NSP companies and SPS. Through the MISO transmission tariff, MISO
will enable those companies to transact with each other and numerous systems at
single-system transmission rates.26 In addition, Applicants project that they
can achieve additional integration through a 100 MW firm transmission path from
2002 through 2004 between SPS and the NSP companies. The combination of the NCE
Gas System and the NSP gas operations also will result in a single, integrated
gas utility system (the "Xcel Gas System"). Consequently, the Commission should
find that the Xcel Electric System will be the primary integrated public-utility
system for purposes of
- ------------
21 Rust v. Sullivan, 500 U.S. 173 (1991); American Trucking Assns., Inc.
----------------- ------------------------------
v. Atchison, T.&S.F.R. Co., 387 U.S. 397 (1967); Shawmut Assn. v. SEC,
--------------------------- --------------------
146 F.2d, 791 (1st Cir. 1945).
22 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10,
-----------------------
1999) [hereinafter "NIPSCO"], citing Rust v. Sullivan at 186-187.
------ -----------------
Accord, Sempra Energy, Holding Co. Act Release No. 26971 n.23
-------------
(Feb. 1, 1999) (interpreting the integration standards of the 1935 Act
in light of developments in the gas industry).
23 NIPSCO, supra, citing Shawmut Assn. v. SEC at 796-97.
------ ----- ----------------------
24 1995 Report at 71.
25 Union Electric, supra.
-------------- -----
26 PSCo will be interconnected with the combined SPS and NSP company
systems upon the completion of its announced tie-line with SPS.
-27-
<PAGE>
Section 11(b)(1), and the Xcel Gas System and the Cheyenne Electric System are
permissible systems under the A-B-C clauses of that section.27
(i) Integration of Electric Operations
The threshold question is whether the Primary System of NCE can be
combined with the electric operations of NSP to form a single integrated public
utility system. The term, as applied to electric utility companies, means:
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 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.
Section 2(a)(29)(A). As the definition suggests, and the Commission has
observed, Section 11 is not intended to impose "rigid concepts" but rather
creates a "flexible" standard designed "to accommodate changes in the electric
utility industry." UNITIL Corp., Holding Co. Act Release No. 25524 (April 24,
------------
1992); see also Yankee Atomic Electric. Co., Holding Co. Act Release No. 13048
--- ---- -----------------------------
(Nov. 25, 1955) ("We think it is clear from the language of Section 2(a)(29)(A),
which defines an integrated public utility system, that Congress did not intend
to imposed [sic] rigid concepts with respect thereto.")(citations omitted); and
see also Madison Gas and Electric Company v. SEC, 168 F.3d. 1337 (D.C. Cir.
- --- ---- -----------------------------------------
1999) ("section 10(c)(1) does not require that new acquisitions comply to the
letter with section 11").28 Section 2(a)(29)(A) expressly directs the Commission
to consider the "state of the art" in analyzing the integration requirement. As
indicated above, the Commission is not constrained by its past decisions
interpreting the integration standards based on a different "state of the art."
See AEP, supra (noting that the state of the art -- technological advances in
- --- --- -----
generation
- ------------
27 The Applicants further believe that the Commission could find (i) that
the Xcel Gas System is the primary integrated system and that the NCE
Primary System, the Cheyenne Electric System and the NSP Electric
Operations are retainable additional systems, or (ii) that the Xcel Gas
and Electric Systems together constitute a single integrated public
utility system within the meaning of Section 11(b)(1) of the Act, and
the Cheyenne Electric System is a retainable additional system. The
Applicants reserve the right to supplement this Application-Declaration
to develop these arguments fully in the event that the Commission
or the Staff reject the argument that the Xcel Electric System will be
the primary integrated public-utility system for purposes of Section
11(b)(1), and the Xcel Gas System and the Cheyenne Electric System are
permissible systems under the A-B-C clauses of that section.
28 The Commission interprets the 1935 Act and its integration standards
"in light of . . . changed and changing circumstances." Sempra Energy,
-------------
Holding Co. Act Release No. 26971 (Feb. 1, 1999) (interpreting the
integration standards of the 1935 Act in light of developments in the
gas industry). Accord, NIPSCO.
------
-28-
<PAGE>
and transmission, unavailable thirty years prior -- served to distinguish a
prior case and justified "large systems spanning several states.")
The concept of an integrated public utility system has evolved in light
of the dramatic changes in the law, technology and structure of the industry
since the passage of the 1935 Act over 60 years ago. Since the enactment of the
Act, the "state of the art" has changed enormously, so as to include within the
scope of integrated operations a broader range of utility contractual
relationships and activities. A review of these changes seems appropriate in
view of the Commission's stated goal of interpreting the Act to accommodate
changes in the industry.
Historically, electric utilities have been single corporate entities
engaged in three vertically-integrated businesses: (i) generation of electricity
(i.e., the ownership and operation of power plants that produce electricity);
----
(ii) transmission of electricity (i.e., the ownership and operation of the high
----
voltage facilities that transport electric energy in bulk from one point to
another, generally from a utility's generating units to its distribution
facilities); and (iii) distribution of electricity (the ownership and operation
of the lower voltage facilities that deliver electric energy from the
transmission system to most end users). Until recently, electric utilities
operated as regulated monopolies "predicated on the concept that a central
source of power supplied by efficient, low-cost utility generation,
transmission, and distribution was a natural monopoly."29 These utilities
generally built generating facilities in the proximity of their customers, and
transmission was treated essentially "as an incidental service."30
- ------------
29 Energy Information Administration, Department of Energy, The Changing
------------
Structure of the Electric Power Industry: An Update at 5.
---------------------------------------------------
30 See Comments by Commissioner Curtis L. Hebert, New Orleans, LA ISO
---
Conf., F.E.R.C. Docket No. PL 98-5-000, Tr. at 2 (June 1, 1998); 1995
SEC Staff Report on the Regulation of Public Utility Holding Companies
at 59. See also Promoting Wholesale Competition Through Open Access
--- ---- ------------------------------------------------------
Non-Discriminatory Transmission Services by Public Utilities; Recovery
----------------------------------------------------------------------
of Stranded Costs by Public Utilities and Transmitting Utilities,
---------------------------------------------------------------------
Notice of Proposed Rulemaking, FERC Stats. & Regs., Proposed
Regulations,P. 32,514 (1995) ("Mega-NOPR"), wherein FERC described the
electric industry in 1935, the year of enactment of both the Act and
the Federal Power Act, which was a companion piece of legislation to
the Act, as follows:
The Federal Power Act was enacted in an age of mostly
self-sufficient, vertically integrated electric utilities, in
which generation, transmission, and distribution facilities
were owned by a single entity and sold as part of a bundled
service (delivered electric energy) to wholesale and retail
customers. Most electric utilities built their own power
plants and transmission systems, entered into interconnection
and coordination arrangements with neighboring utilities, and
entered into long-term contracts to make wholesale
requirements sales (bundled sales of generation and
transmission) to municipal, cooperative, and other
investor-owned utilities (IOUs) connected to each utility's
transmission system. Each system covered limited service
areas. This structure of separate systems arose naturally due
primarily to the cost and technological limitations on the
distance over which electricity could be transmitted.
Mega-NOPR at 33,059.
-29-
<PAGE>
In the decades following the enactment of the Act, the transmission
sector of the electric utility industry significantly expanded. The total miles
of high voltage (230 kV and above) transmission lines tripled in the 1950s, and
tripled again in the 1960s.31 Utilities had originally constructed transmission
facilities to transmit power from their own plants to their customers.
Subsequent to the enactment of the 1935 Act, utilities increasingly developed
interconnections with their neighboring utilities to obtain and provide
assistance in emergency situations, to improve reliability, and to reduce the
costs of power supply through long-term capacity transactions and economy
transactions with their neighbors.32 Technological advances in transmission have
also occurred, making it possible to transmit electric power economically over
long distances at higher voltages. In today's world, "improved transmission and
monitoring technologies have increased the feasible geographic bounds for supply
choice; a geographic radius of 1,000 miles or more is currently considered
reasonable for choosing among supply options."33
- ------------
31 There were 2,974 miles of high voltage transmission in 1940, 8,174
miles in 1950, 22,379 miles in 1960, and 65,370 miles in 1970. Peter
Fox-Penner, Electric Utility Restructuring, A Guide to the Competitive
----------------------------------------------------------
Era (1997) at 130.
---
32 See William J. Baumol & J. Gregory Sidak, Transmission Pricing and
--- -------------------------
Stranded Costs in the Electric Power Industry (1995) at 13.
---------------------------------------------
33 Technological advances have occurred with respect to the "size" of
transmission lines (345 kV to 765 kV lines) which have allowed for the
transfer of large amounts of power over great distances. Technological
advances have also occurred with respect to the "type" of transmission
lines. High-voltage direct current ("HVDC") technology provides the
ability to transmit bulk power over longer distances with less energy
loss and normally with a smaller investment than with alternating
current ("AC") transmission lines. This technology provides an
economical way to interconnect separated AC power grids and enables
power transfers to occur between these systems, thus improving
economies and reliability. The application of phase shifting
transformers, series compensation, and flexible alternating current
transmission system ("FACTS") technology has also provided the ability
to improve and control the transfer of power and energy across
expansive transmission networks. New flexible alternating FACTS
technology can increase the capacity of existing transmission lines by
approximately 20 to 40 percent. Electricity: Innovation and
-------------------------------
Competition, Hearing Before the Subcomm. of Energy and Power of the
----------------------------------------------------------------------
House Comm. on Commerce, 105th Cong. 38 (1997) (statement of Robert B.
-----------------------
Schainker, Manager, Substations, Transmissions and Substation Business
Area Power Delivery Group, Electric Power Research Institute). Such
technology "help[s] electric utilities operate their bulk power
networks closer to their inherent thermal limits, while maintaining
and/or improving network security and reliability." Id. Advances in
telecommunications and computer technology have improved the ability
to economically dispatch power systems and control power flow across
such systems. Improvements in telecommunication technology and the
growth in coverage area of telecommunications systems have allowed for
the quick and reliable transfer of data necessary to control and
dispatch from a single location generation that can be scattered over
large geographic areas. The improvements provided by fast and reliable
telecommunication networks allow for the control and economic dispatch
of power systems that extend over large geographic areas, providing
system operators an almost real time ability to monitor and control
the power system. Significant improvements in transmission and
resource planning have also occurred since 1935. There are several
software packages available today that enable the system planner to
model the operation of most of the equipment used on a power system.
Studies can be performed that not only evaluate power transfer
capabilities, but also allow the system planner to add different types
of equipment to determine their impact on increasing power transfer
capabilities. Development of such software has enabled the system
planner to determine what equipment functions best as well as where
and when it should be installed. Further technological advances can be
expected in the future as "power engineers" explore the potential for
computers to optimize the efficiency and reliability of the North
American power network. Leslie Lamarre, The Digital Revolution, EPRI
----------------------
Journal (Jan./Feb. 1998).
-30-
<PAGE>
Interconnections have proven so beneficial that every utility in the
continental United States is interconnected with one of three Interconnects: the
Eastern Interconnect, which encompasses utilities in the eastern United States
and Canada from the Atlantic Ocean to the High Plains; the Western Interconnect,
which encompasses utilities from the High Plains/Rocky Mountain region to the
Pacific Ocean; and ERCOT, which encompasses most of the State of Texas. FERC has
described the present state of the transmission sector of the electric utility
industry:
The transmission facilities of any one utility in a region are part of
a larger, integrated transmission system. From an electric engineering
perspective, each of the three interconnections in the United States
(the Eastern, the Western and ERCOT) operates as a single "machine."
Regional Transmission Organization, Notice of Proposed Rulemaking, IV FERC
Stats. & Regs. P. 32,541 (1999) ("RTO NOPR") at 33,697.34
The generation sector of the electric utility industry is also very
different than it was in 1935. Concern over the nation's energy future, in
conjunction with other factors, led to the first significant legislative
development at the federal level affecting the electric utility industry since
the enactment of the Act and the FPA: the enactment of the Public Utility
Regulatory Policies Act of 1978 ("PURPA"). PURPA requires utilities to purchase
the output of qualifying facilities ("QFs") at avoided cost rates established by
state commissions.35 An effect of PURPA was to begin to separate generation from
the transmission and distribution functions of utility operations, or to put it
another way, to broaden the scope of integrated electric operations to include
purchases from third parties as well as a utility's own production of
electricity. Consistent with the intent of PURPA, in some states significant QF
resources were added in lieu of utility generation.36
Following the enactment of PURPA and the development of the QF
industry, independent power producers ("IPPs") emerged as another type of
generation supplier. IPPs operate without a franchised service territory or an
established customer base and seek to sell the output of their generating
facilities in the wholesale market, typically to a single utility. With many
traditional utilities wary of investing in new generation for a variety of
reasons, IPPs in some instances found a ready market. IPPs were further spurred
by the great latitude that FERC afforded them in rate setting. In fact, FERC
initially developed its market-based rate standards in the context of IPPs.37
However, the development of IPPs was inhibited by their lack of access to
essential transmission facilities to reach a broader customer base, as well as
ownership restrictions effectively created by the integration requirements of
the Act. Recognizing these obstacles and desiring to promote greater
- ------------
34 FERC has noted that "the entire Eastern interconnection is, as the name
indicates, interconnected." North American Electric Reliability
---------------------------------------
Council, 87 FERC Para. 61,161 (1999).
-------
35 PURPA Section 210. 16 U.S.C. Sections 824a-3.
36 PSCo, which has installed capacity of more than 3,000 MW, purchases
over 600 MW of capacity and associated energy from QFs pursuant to
long-term agreements.
37 See, e.g., Commonwealth Atlantic Limited Partnership, 51 F.E.R.C. Para.
--- --- -----------------------------------------
61,368 (1990).
-31-
<PAGE>
development of wholesale power markets generally, Congress passed the Energy
Policy Act of 1992 ("EPACT").38 EPACT amended the FPA to permit any entity
selling power at wholesale to request FERC to order a transmission-owning
utility to provide transmission services.39 EPACT also created a new exemption
under Section 32 of the 1935 Act for exempt wholesale generators ("EWGs"). The
EWG exemption ensures that the 1935 Act's integration requirements will not
thwart the development of IPPs participating in the wholesale market, an
implicit acknowledgment that the economic operation of a utility system depends
on contractual relationships as well as facilities ownership.
Since EPACT, the competitive electric supply wholesale market has
developed rapidly. This progress has been facilitated by FERC's willingness to
permit the sale of electric capacity and energy at market-based rates. This
change in regulatory policy applies not only to IPPs, but to power marketers
(many of which are affiliated with utilities) - a relatively new class of
wholesale market participant that purchases and sells power produced by third
parties, not from their own resources. This new policy also applies to utilities
directly, who have increasingly focused on their own wholesale marketing
efforts. It is now the rare utility that does not have either market-based rate
authority or an active wholesale power marketing function.40
Notwithstanding these initiatives, FERC concluded that due to the lack
of third-party transmission access, and preferential access that utilities
accorded to their own marketing efforts, unequal transmission access continued
to impede the development of fully competitive bulk power markets that FERC
sought to promote.41 On that basis, within three years of the enactment of
- ------------
38 Pub. L. No. 102-486, 106 Stat. 2776 (1992).
39 PURPA also included a provision that allowed the Commission to order
wheeling for power generated by a third party under certain narrowly-
defined circumstances. However, FERC quickly interpreted this already
limited authority very conservatively. See Southeastern Power
--- --------------------
Administration v. Kentucky Utilities Co., 20 F.E.R.C. Para. 61,204
------------------------------------------
(1983) (holding that the Commission could not order wheeling if the
wheeling order would result in a disturbance of existing market
patterns, and holding that Section 211 of the FPA, as added by PURPA,
was not designed to remedy a utility's anticompetitive conduct). EPACT
amended sections 211 and 212 of the FPA to expand the Commission's
authority to order wheeling upon application. 16 U.S.C. Sections 824j,
824k.
40 The NSP companies, PSCo and SPS all have been granted market rate
authority and participate actively in wholesale markets. The NCE
system also has an active wholesale power marketer, e prime.
41 One commentator has described this unequal transmission access as
follows:
For more than 100 years, electric companies operated as
separate, regulated monopolies producing, transmitting and
distribution electricity to their own customers or native
load. The utilities were virtual islands unto themselves with
no competition and minimal risk. To help ensure a reliable
supply of electricity when generators were down for
maintenance or during period of peak demand for electricity
and other shortages, neighboring utilities installed
connections between their individual transmission systems or
control areas....Power could now flow from one neighboring
utility to another. As these connections expanded, they
eventually formed a complex "grid" of transmission systems or
control areas capable of transmitting electricity across must
longer distances...Utilities also faced another
challenge...wholesale competition. Suddenly your neighboring
utilities could buy electricity at potentially lower prices
from another, more distant supplier. That meant lost business
and lost income from your company. One way to reduce this
threat was to set the price for access to your company's
transmission system so high that it discouraged other
utilities from wheeling power across your territory. The
result was that distant power suppliers often found it
difficult if not physically impossible to wheel their
electricity to your neighbors. You could also thwart
competition by withholding information about transmission
pricing and availability, or the hours when your system had
sufficient capacity to handle the additional flow of
electricity.
Nelson, Kenneth C., "The New World of Power Marketing," Management
----------
Quarterly, v. 40, pages 13-42 (Spring 1999).
---------
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<PAGE>
EPACT, FERC commenced the so-called "Mega-NOPR" proceeding, Promoting Wholesale
-------------------
Competition Through Open Access Non-discriminatory Transmission Services by
- --------------------------------------------------------------------------------
Public Utilities; Recovery of Stranded Costs by Public Utilities and
- --------------------------------------------------------------------------------
Transmitting Utilities.42 This notice of proposed rulemaking culminated
- ------------------------
approximately a year later with FERC's issuance of Order No. 888.43
Order No. 888 requires all transmission owners to (1) offer comparable
open-access transmission service for wholesale transactions under a tariff of
general applicability on file at FERC44 and (2) take transmission service for
their own wholesale sales under their open-access tariff. Order No. 888 was
intended to facilitate third-party utilization of the transmission grid as the
vehicle for developing a competitive wholesale bulk power market. Under Order
No. 888, a utility must wheel power for third parties upon their request, on
either a firm or a non-firm basis. If the transmitting utility does not have
sufficient transmission capacity to transmit on a firm basis, it must either
offer to expand its transmission system to accommodate the request, or, if
appropriate, to redispatch generation to relieve constraints and thereby make
capacity available. In the interim, a utility must offer transmission on a
non-firm basis to the requesting entity.
Prior to Order No. 888, electric utilities typically needed to
construct direct interconnections to facilitate capacity and energy transfers.
Now, as a matter of right under Order No. 888, two utilities can contractually
arrange for interconnection. By contract, they can acquire either a firm or a
non-firm path that would allow power transfers between the two systems.
- ------------
42 70 FERCP. 61,357 (1995).
43 Promoting Wholesale Competition Through Open Access Non-Discriminatory
-----------------------------------------------------------------------
Transmission Service by Public Utilities; Recovery of Stranded Costs by
-----------------------------------------------------------------------
Public Utilities and Transmitting Utilities, FERC Stats. and Regs.,
----------------------------------------------
Regulations Preambles, Para. 31,036 (1996) ("Order No. 888"), order on
--------
rehearing, FERC Stats. & Regs., Regulations Preambles, Para. 31,048
---------
(1997) (Order 888-A"), order on rehearing, 81 FERC Para. 61,248 (1997)
------------------
("Order 888-B"), order on rehearing, 82 FERC Para. 61,046 (1998)
-------------------
("Order 888-C").
44 FERC has explained what it means by comparability:
an open access tariff that is not unduly discriminatory or
anticompetitive should offer third parties access on the same
or comparable basis, and under the same or comparable terms
and conditions, as the transmission provider's uses of its
system.
67 FERC at 61,490.
-33-
<PAGE>
Moreover, Order No. 888's companion order, Order No. 889,45 requires
public utilities to functionally separate their transmission and reliability
functions from their wholesale power marketing functions. In this connection,
Order No. 889 required public utilities to develop and maintain an Open Access
Same-Time Information Service ("OASIS") to give transmission users the same
access to transmission information that the wholesale merchant function of a
utility enjoys. Order No. 889 also required utilities to comply with prescribed
standards of conduct that are designed to prevent the employees of a public
utility engaged in the sale of electricity at wholesale from receiving
preferential access to any pertinent transmission-related information. Thus,
while FERC in Order Nos. 888 and 889 did not require actual corporate
divestiture of generation and transmission functions within utilities, on an
operational basis there has been a de facto separation of these functions in
--------
response to these orders.
The comparable transmission service and functional unbundling that FERC
has required in Order Nos. 888 and 889 initially may appear to contradict the
integrated operation of electric systems required under Section 11. Taken
together, the two orders require utilities to deprive themselves of any benefit
associated with the consolidation of ownership of transmission and generation
facilities. Instead, under the concepts supporting Order Nos. 888 and 889, such
benefits are created by the competitive marketplace that results from open
access. As FERC stated in Order No. 888, "[i]ncreasingly, customers are
demanding the benefits of competition in the growing electric commodity market."
FERC estimated quantitative benefits of its rule of $3.8-$5.4 billion a year, in
addition to expected non-quantifiable benefits such as better use of existing
assets and institutions, new market mechanisms, technical innovation and less
rate distortion. According to FERC, the continuing competitive changes in the
industry and the prospect of these benefits to customers made it imperative that
FERC ensure nondiscriminatory transmission access through Order Nos. 888 and
889.46 Thus, FERC has recognized that the economic operation of utility systems
can be achieved, and indeed is perhaps best achieved, through contractual
relations in a competitive marketplace, and not simply through ownership of
facilities.
EPACT, Order Nos. 888 and 889, and other FERC policies and initiatives
have had a tremendous impact on the development of competitive bulk power
markets. Utilities have increased their own in-house wholesale marketing efforts
and the number of entities with whom they trade. To illustrate by example,
PSCo's non-requirements wholesales sales (including short-term firm and economy
sales) economy sales have increased from 306,920 MWh in 1993 to 7,873,800 MWh in
1998. Moreover, whereas PSCo's past wholesale marketing efforts were largely
limited to economy energy sales made by its dispatchers in the former Inland
Power Pool, New Century Services now has a marketing group that makes sales on
behalf of PSCo throughout the entire western region. Similarly, NSP's revenues
from sales for resale have increased by 55% from 1996 to 1998. While
- ------------
45 Open Access Same-Time Information System (formerly Real-Time
------------------------------------------------------------
Information Network) and Standards of Conduct, Order No. 889,
--------------------------------------------------
[1991-1996 Transfer Binder] F.E.R.C. Stats. & Regs., Regs. Preambles
Para. 31,035, at 31,585 (1996), order on reh'g, Order No. 889-A, III
--------------
F.E.R.C. Stats. & Regs., Regs. Preambles Para. 61,253 (1997).
46 Order No. 888.
-34-
<PAGE>
trades were typically made with MAPP and MAIN in the past, NSP has found it
economical to trade in markets such as Ohio, Louisiana and Florida.
Moreover, power marketers are an increasingly important presence in the
industry. The top ten power marketers sold in excess of 1 billion MWh in 1998.
These entities typically arbitrage remaining price differentials by buying in
one market and selling in another. The effect is to minimize margins to be
gained in these interregional sales and therefore to drive electric supply
market prices closer to a regional-wide marginal (or incremental) cost. As
prices move to marginal cost, rate differentials arising from historical
embedded cost begin to disappear.47 IPPs also are
- --------
47 One commentator has recently described the ramifications of the more
competitive wholesale markets resulting from the enactment of EPACT and
the issuance of Order Nos. 888 and 889 as follows:
What resulted is a highly competitive and sophisticated
24-hour power market. . . .
Next we examine what happens in "real-time" . . . . Economic
power schedulers, working in the front office, monitor the
utility's entire real-time system, making sure that the
planners have accurately matched the power supply assets with
the hourly demand or native load. Economic power schedulers
also make sure that the planners have utilized the least
expensive power supply assets. Schedulers may also make
adjustments to the power plan in order to maximize the goals
of reducing costs, providing customers with the lowest
possible wholesale prices. To make these adjustments, economic
power schedulers rely on available power supply assets and the
hourly or "spot" market. Unexpected changes in the weather,
mechanical problems at the generating station and congestion
on the transmission grid are only a few of the factors that
can result in deviations from the planner's schedule. Let's
assume the scheduler needs an additional 10 MW of power for
two hours, one hour from now. He or she, depending on the
level of sophistication of the company, may consult a data
screen that displays the real-time spot-market price and the
incremental cost of generation or the cost of producing the
additional or next 10 MW of electricity.
If the incremental cost of generation is less than the market
price, the power scheduler may ask the generating plant to
increase production or start a peaking unit. If the price of
power from pre-existing contracts is less than the spot market
price or generation, the scheduler may draw upon the amount of
electricity stipulated in the contract. But if the spot market
price is less than the incremental cost of generation or
contract power, the scheduler may notify the traders in the
"front office." They immediately go to the spot market and
begin the buying process.
The economic power scheduler may also find that the utility is
"long" on power or has excess capacity for several hours. The
traders may now begin the selling process. Trading in the spot
market has the same requirements as day-ahead, weekly and
monthly trading except that it happens at a much faster pace.
Spot market trading averages less than 20 minutes for securing
a buyer or seller scheduling transmission or obtaining an NERC
tag, applying competitive intelligence and price and credit
risk management, confirming the trade and notifying billing,
finance and accounting in the "back office."
Nelson, Kenneth C., "The New World of Power Marketing," Management
----------
Quarterly, v. 40, pp. 13-32 (Spring 1999).
---------
-35-
<PAGE>
becoming a more significant sector of the electric utility industry. Nationwide,
plans to build new plants have exploded. In NEPOOL alone, an additional 30,000
MWs has been announced, almost all of it from IPPs.48 Similar plant additions
have been announced by IPPs and EWGs in the mid-continent area as well. These
significant plant additions lessen the impact of historical embedded
utility-specific price differentials by changing the cost structure of the
industry as a whole.
Notwithstanding these developments in the wholesale power market, FERC
has recognized that impediments remain to the achievement of fully competitive
markets. Specifically, FERC has identified two important transmission-related
problems with the current structure of the industry: (1) engineering and
economic inefficiencies inherent in the current operation and expansion of the
transmission grid and (2) continuing opportunities for transmission owners to
discriminate in the operation of their transmission facilities in favor of their
own or affiliated power marketing activities. Thus, whereas FERC in the past
only encouraged utilities to join and place their transmission systems under the
operational control of ISOs,49 it has recently issued the RTO NOPR, wherein it
- --------
48 RTO NOPR at 33,689.
49 Although FERC Order No. 888 did not require the formation of ISOs, it
did encourage their formation and set out the minimal characteristics
that an ISO should have. As set out in Order No. 888, these
characteristics are as follows: (i) an ISO's governance should be
structured in a fair and non-discriminatory manner; (ii) an ISO and its
employees should have no financial interest in the economic performance
of any power market participant, an ISO should adopt and enforce strict
conflict of interest standards; (iii) an ISO should provide open access
to the transmission system and all services under its control at non-
pancaked rates pursuant to a single, unbundled, grid-wide tariff that
applies to all eligible users in a non-discriminatory manner; (iv) an
ISO should have the primary responsibility in ensuring short-term
reliability of grid operations, its role in this responsibility should
be well-defined and comply with applicable standards set by the North
American Electric Reliability Council and the regional reliability
council; (v) an ISO should have control over the operation of
interconnected transmission facilities within its region; (vi) an ISO
should identify constraints on the system and be able to take
operational actions to relieve those constraints within the trading
rules established by the governing body, these rules should promote
efficient trading; (vii) the ISO should have appropriate incentives for
efficient management and administration and should procure the services
needed for such management and administration in an open competitive
market; (viii) an ISO's transmission and ancillary services pricing
policies should promote the efficient use of and investment in
generation, transmission, and consumption, an ISO or a regional
transmission group of which the ISO is a member should conduct such
studies as may be necessary to identify operational problems or
appropriate expansions; (ix) an ISO should make transmission system
information publicly available on a timely basis via an electronic
information network consistent with FERC's requirements; (x) an ISO
should develop mechanisms to coordinate with neighboring control areas
and (xi) an ISO should establish an alternative dispute resolution
process to resolve disputes in the first instance. FERC's principles
were intended to ensure that ISOs will have operational control over
participating members' transmission systems and operate such systems in
a non-discriminatory manner for the benefit of all market participants.
-36-
<PAGE>
is proposing that each public utility that owns, operates, or controls
transmission facilities make certain filings with respect to forming and
participating in an RTO - i.e., a properly constituted ISO or transmission
----
company ("TRANSCO").
FERC has thus given utilities new impetus to join RTOs, including ISOs.
The RTO NOPR makes clear that the form of an RTO is not critical so long as the
RTO has certain minimum characteristics and functions. Minimum characteristics
include (i) independence from market participants; i.e., generators; (ii)
----
sufficient scope and regional configuration, i.e., the RTO must encompass the
----
entire region in which it operates and should operate all transmission
facilities within its region; (iii) operational authority; and (iv) short-term
reliability. Minimum functions include (i) tariff administration and design;
(ii) congestion management; (iii) parallel path flow management; (iv) supplier
of last resort for ancillary services; (v) OASIS and total transmission
capability and available transmission capacity; (vi) market monitoring; and
(vii) planning and expansion. These minimum characteristics and functions are
intended to have the effect of turning the nation's transmission facilities into
independently owned and operated "common carriers" that offer comparable service
to all would-be users.
Several factors led to FERC's issuance of the RTO NOPR at this time.
First, FERC has identified what can be broadly characterized as operational
inefficiencies in the current provision of transmission services. Due to the
changes in the structure of the electric utility industry, the transmission
grids in the three interconnects - the Eastern Interconnect, the Western
Interconnect and ERCOT - are being used more extensively and in different ways
that they ever had been in the past.50 This increased usage, which has put a
strain on all systems, has further called into question the reliance on the
"contract path" model of arranging transmission services whereby an entity
requiring transmission service between two utilities - e.g., Utilities A and B -
----
could arrange it by putting together a "path" among intervening systems - e.g.,
----
Utilities C and D - even where power flows primarily over another system - e.g.,
----
Utility E. In the past, there was generally enough slack in the grid to allow
for these arrangements. Now, however, with transmission systems operating closer
to capacity during many periods, FERC has recognized the need to have
transmission arrangements evaluated and made in a larger, regional context. FERC
expects that properly configured RTOs, through control over a larger, regional
grid, will:
improve transmission congestion management on the grid;51
- ---------------
50 According to the North American Electric Reliability Council ("NERC"),
"the adequacy of the bulk transmission system has been challenged to
support the movement of power in unprecedented amounts and in
unexpected directions." RTO NOPR at 33,690.
51 As FERC explains:
The scheduling of power by multiple utilities over a regional grid can
lead to unexpected overloads on constrained facilities. This can be a
serious barrier to competitive power trading because some power sale
transactions may be have to be curtailed. With a regional scope, an
RTO would be better able to mange congestion. An RTO would be in a
better position to prevent congestion or control it through
application of appropriate region wide congestion pricing to ration
use of the grid if necessary. An RTO would also more readily identify
schedules that could lead to congestion, and relieve congestion
through regional redispatch authority.
RTO NOPR at 33,716.
-37-
<PAGE>
improve efficiency by providing more accurate estimates of available
transfer capability ("ATC") than those currently provided by individual
systems;52
allow for more effective management of parallel path flows by
internalizing such flows within the RTO-controlled system - e.g., in
the example, recognizing that power flows primarily over Utility E
rather than Utilities C and D in the example above;53 and
allow for more efficient planning for transmission or generation
investments needed to increase transmission capacity.54
FERC expects that RTOs will promote economic efficiency as well as
operational efficiency. A significant barrier to equalizing the trading price of
a more distant utility with a nearby utility is the cost of transmission, which
is hampered by the "pancaking" of rates under the current transmission pricing
scheme. Simply stated, if a transaction requires movement of power across the
transmission system of multiple, non-affiliated public utilities:
[the] transmission customer pays separate, additive access charges
every time its contract path crosses the boundary of a transmission
owner. By raising the cost of transmission, pancaking reduces the size
of geographic power markets. This, in turn, can result in concentrated
electricity markets. Balkanization of electricity markets hurts
electricity consumers, in general, by forcing them to pay higher
prices than they would in a larger, more competitive, bulk power
market.55
- --------------
52 The FERC explains this benefit as follows:
Conditions on all parts of the regional grid affect ATC on
individual utility systems. Factors such as load estimates,
generation and transmission outages, generation dispatch orders
and transactions on individual systems can affect the
determination of ATC. An individual utility may not have complete
or timely information regarding such factors and may apply
assumptions and criteria in its ATC estimates that are different
from those of neighboring transmission operators, leading to wide
variations in ATC values for the same transmission path. . . .
An RTO would produce better ATC estimates because it would have
access to complete regional usage information, would have current
information because the RTO will be the security coordinator as
well as the OASIS site administrator, and would calculate ATC
values on a consistent region-wide basis using a regional flow
model.
RTO NOPR at 33,716.
53 RTO NOPR at 33,717.
54 "One advantage of an RTO that is helpful in planning is that it will
be able to see the 'big picture.' Planning and expansion of grid
facilities will no longer be done on a piecemeal basis." RTO NOPR at
33,717.
55 RTO NOPR at 33,703.
-38-
<PAGE>
As such, wholesale generators or customers seeking to buy competitively priced
generation in more distant markets must pay transmission costs that may exceed
the benefits of the transaction.
Among other benefits, an RTO price structure eliminates rate pancaking,
allowing power on the most distant edges of an ISO to be transmitted at market
price with no additional cost for transmission than would exist for a nearby
transaction or even the generation-to-end-user within a utility's own service
area. FERC has explained this benefit:
The Commission has long recognized that transmission pricing
reform is most effectively accomplished on a regional basis. An
RTO would have the geographic scope needed to eliminate pancaked
transmission rates within its region. This would broaden the
generation market and could result in more potential suppliers
and less concentrated generation markets, thereby fostering more
competitive markets and lower prices to consumers.56
Because RTOs will offer service to customers on a system-wide basis under a
single FERC-approved tariff, customers will have available " 'one stop shopping'
for regional transmission service . . . resulting in simpler and more efficient
procedures for transmission users to transmit power over greater distances."57
Due to these and other developments at the federal level, the landscape
of the electric industry is changing rapidly. Wholesale power markets have
developed from a balkanized, utility-specific, cost-based structure to a more
competitive market-based structure.58 The effect of these developments on SEC
merger policy is both direct and profound. The emergence of RTOs, with the
encouragement of FERC, will further facilitate wholesale competition, moving the
industry further from the vertically-integrated utility model under which
utilities relied substantially on their own resources to serve their loads.
Because NSP and NCE can, by joining the same RTO, obtain energy from distant
markets at prices equivalent to or better than nearby markets in which they do
business, direct physical interconnection is no longer necessary for the
utilities to transact with, or act in unison with, one another to achieve
operational efficiency. For example, in situations where two non-contiguous
utilities in the same RTO wish to transact with each other, they can arrange
necessary transmission services using an RTO's non-pancaked tariff. Moreover,
using this tariff, two non-contiguous utilities in the same RTO may reach common
suppliers or hubs to both sell and purchase electricity collectively. The net
effect of these regulatory and market changes is to require a re-evaluation of
the meaning of integration in light of the present structure of the electric
utility industry and regulatory environment, which have changed dramatically
since the passage of the Act. The Commission already has recognized many of
these changes in its decisions in UNITIL Corp., Holding Co. Act Release No.
-------------
25524 (April 24, 1992) and Conectiv, Inc., Holding Co. Act Release
---------------
- ----------------
56 RTO NOPR at 33,716 (footnote omitted).
57 RTO NOPR at 33,717.
58 Indeed, FERC in Order No. 888 invoked the widely-differing cost of
utility-generated electricity across the major regions of the country
as evidence of the need for reform. Order No. 888 at 31,651-52.
-39-
<PAGE>
No. 26832 (February 25, 1998). As will be demonstrated, Applicants joint
membership in the same ISO/RTO is entirely consistent with past precedent and
meets the integration requirements of the Act.
Regulatory changes at the state level have paralleled those at the
federal level and have been equally dramatic. Concurrent with or subsequent to
their implementation of PURPA, states began developing integrated resource
planning requirements that mandate that utilities focus on both supply-side and
demand-side resources and that require local utilities competitively bid their
resource requirements to obtain the lowest cost resources possible. Under these
resource procurement requirements, utilities must purchase power from third
parties (rather than provide for their own generation) if to do so would result
in lower costs to consumers. Typically, special evaluation procedures apply to
assure the fairness of the bidding process where a utility desires to pursue a
self-build option or where an affiliate desires to submit a proposal. The
bidding process has also become the manner in which QF suppliers are chosen for
avoided cost sales. For example, the Colorado Commission has adopted integrated
resource planning rules that require that utilities in Colorado conduct a
competitive resource procurement process for all additions of capacity to their
systems, except in very narrow circumstances, e.g., capacity and/or energy from
the generation facilities of other utilities or from non-utility generators
pursuant to agreements for less than one year term or for less than ten
megawatts of capacity. In the event that a Colorado utility wishes to pursue a
self-build option of greater than 10 MW, it must submit a proposal in the
competitive process. SPS and NSP are likewise subject to competitive procurement
procedures.59 Thus, the state regulators have recognized that the economic
operation of a utility system must include the benefits of integration through
the marketplace and not just the effects of vertically-integrated ownership
structure.
Moreover, virtually every state, either at the legislative level or the
state regulatory commission level, has implemented or is actively considering
retail competition. One consequence of such actions has been the divestiture by
utilities of large amounts of generating assets to relieve stranded costs or in
response to a state mandate. Since August 1997, approximately 50,000 MW of
generating capacity have been sold (or are under contract to be sold) by
utilities, and an additional 30,000 MW is currently for sale. In total, this
represents more than 10 percent of U.S. generating capacity.60 The combination
of state restructuring efforts and federal unbundling of transmission from
generation makes it clear that utilities will not be encouraged to achieve
saving from mergers through the combination of generating facilities. The lowest
cost supply of power will be achieved in the market, and consumers will directly
access that market.
The two states in which SPS primarily operates vividly illustrate the
trend towards retail competition. In New Mexico, the Electric Utility
Restructuring Act of 1999 was enacted. This legislation provides for retail
competition in the state of New Mexico. In that connection, it will
- --------------
59 As stated previously under Item 1.C.2., NSP recently submitted a
request for bids for up to 1,200 MW of capacity.
60 RTO NOPR at 33,690.
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<PAGE>
require the corporate separation of the generation function of SPS's New Mexico
operations on the one hand and the transmission and distribution functions of
such operations on the other. The distribution function is to have the
obligation to serve as the supplier of last resort for retail customers. In
Texas, a restructuring bill, SB7, was also enacted. It requires that SPS file a
transition to competition plan with the Texas Commission by December 1, 2000. It
also requires that SPS and each other investor-owned electric utility owning
more than 400 MW of generation shall sell, at auction, entitlements to at least
15% of the utility's installed generation capacity.61
To summarize, the ongoing corporate restructuring of the U.S. utility
industry reflects the effects of emerging FERC policy on transmission, including
Order Nos. 888 and 889 requiring open-access transmission on comparable terms
and the functional unbundling of the transmission and wholesale merchant
functions, the formation of ISOs and the recent RTO NOPR. It is also the product
of many recent state laws mandating competitive resource procurement and retail
electric competition, and the functional separation (and in some states,
divestiture) of generation from transmission and distribution operations.
Layered on these changes are both rapid developments in technology and the
emergence and growth of the power marketing and energy trading businesses, both
of which facilitate efficient and competitive low-cost electric markets. Perhaps
most notable among all of these changes is the recent evolution of RTOs. RTOs
facilitate trading regions with no economic constraints on transmission access
and with the ability to manage and plan for new transmission on a regional basis
to help alleviate transmission constraints, thereby providing entities with both
the requisite physical and economic means to integrate their systems. The
cumulative effect of these regulatory, technological and economic changes has
dramatically altered the "state of the art" that Congress directed the
Commission to consider more than sixty years ago. The Commission must "respond
realistically to the changes in the utility industry and interpret more flexibly
each piece of the integration equation." 1995 Report at 67. Indeed, as stated
previously, the ultimate determination has always been whether, on the facts of
a given matter, the proposed transaction "will lead to a recurrence of the evils
the Act was intended to address."62 In sum, these changes require the Commission
to reevaluate its standards regarding the meaning of integration in today's
energy market.63
* * * * *
It is against this backdrop of rapid change in the electric utility
industry and the regulatory
- ---------------
61 Applicants do not request herein any requisite SEC authorizations that
they may need to comply with the New Mexico or Texas legislation. They
will seek such authorizations at a later date after SPS has developed
its compliance plan.
62 Union Electric Co., quoted in Southern Co., Holding Company Act
-------------------- -------------
Release No. 25639 (Sept. 23, 1992).
63 The need for this reevaluation was not unforeseen. The SEC Staff in
its 1995 Report advised the SEC that "open access under FERC Order No.
636, wholesale wheeling under the Energy Policy Act [and FERC Order No.
888] and the development of an increasingly competitive and
interconnected market for wholesale power have expanded the means for
achieving the interconnection and the economic operation and
coordination of utilities with non-contiguous service territories."
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<PAGE>
framework that Applicants have developed a plan to integrate the NCE and NSP
systems. Specifically, the NSP companies and SPS will join the same ISO, namely
MISO. Through the MISO Tariff, SPS and NSP will be able to access each other's
systems and also to access collectively, as both a buyer and a seller, wholesale
markets. Applicants also plan to achieve additional operational efficiencies
through reservation of a 100 MW firm transmission path from SPS to New NSP for
the period 2002 through 2004. In addition, the Xcel Operating Companies will
achieve operational efficiencies through other means, including potential
arrangements with MAPP and joint marketing efforts. MISO and the contract path
are explained below, followed by a showing how the Xcel Electric System will be
an integrated electric utility system within the meaning of Section 2(a)(29)(A).
MISO
MISO is a voluntary non-profit corporation formed by 11
transmission-owning electric utilities ("Transmission Owners") located in the
Midwest. The Transmission Owners are Ameren Corporation (which includes Central
Illinois Public Service Company and Union Electric Company), Central Illinois
Light Company, Cinergy Corporation (which includes PSI Energy, Inc., Cincinnati
Gas & Electric Company and Union Light, Heat and Power Company), Commonwealth
Edison Company, Hoosier Energy Rural Electric Cooperative, Illinova Corp., LG&E
Energy Corp. (which includes Louisville Gas and Electric Company and Kentucky
Utilities Company), Southern Illinois Power Cooperative, Southern Indiana Gas &
Electric Company, Wabash Valley Power Association and Wisconsin Electric Power
Company. MISO is expected to commence operations in mid-2001. As FERC has
recognized, MISO is unique in that it "began through a consensual process and
was not driven by a pre-existing institution."64 The other ISOs were either the
result of state restructuring initiatives (ERCOT and the California ISOs) or
grew out of existing tight power pools (PJM, New England, and New York ISOs).
As presently constituted (excluding the NSP companies and SPS), MISO
will have a service territory that includes portions of Illinois, Indiana,
Kentucky, Michigan, Missouri, Ohio and Wisconsin and two regional reliability
councils (East Central Area Reliability Coordination Agreement ("ECAR") and
Mid-American Interconnected Network ("MAIN")). MISO will control 45,000 miles of
transmission facilities which represent approximately $6.5 billion in capital
investments, and approximately 70,000 MW of generation assets will be located
within the MISO region. With the addition of the NSP companies and SPS, MISO's
transmission facilities will expand significantly to include portions of
Minnesota, North Dakota, South Dakota, Texas, New Mexico, Oklahoma and Kansas,
and generation assets in the MISO region will exceed 80,000 MW. It is expected
that additional power suppliers will be added to MISO prior to its operational
date and that generation assets in the MISO region could reach 100,000 MW.
On September 16, 1998, FERC conditionally approved the formation of
MISO by
- ----------------
64 RTO NOPR at 33,693.
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<PAGE>
authorizing the transfer of jurisdictional facilities from the
Transmission Owners to MISO, and accepting the MISO Tariff and MISO Agreement
for filing.65 In its Order evaluating MISO under its eleven principles for ISOs
and approving the formation of MISO, FERC stated:
The participating transmission owners (Transmission Owners) will
transfer to the Midwest ISO functional control over all network
transmission facilities above 100 kV and all network transformers whose
two highest voltages exceed 100 kV (Transmission System). The Midwest
ISO will be authorized to provide non-discriminatory open access
transmission service over the Transmission System, to receive and
distribute transmission revenues, and to be responsible for regional
system security. The Transmission Owners will retain ownership of their
transmission facilities, and will physically operate and maintain these
facilities, subject to the Midwest ISOs direction. Under the Midwest
ISO Agreement, the Transmission Owners who are currently control area
operators will continue to operate their control areas for local
generation control and economic dispatch purposes. However, the
Transmission Owners will follow the directives of the ISO for
redispatching generation, curtailing load, and providing reactive
supply, voltage control or other ancillary services.66
The MISO Tariff will, as its name suggests, be administered by MISO.
The MISO Tariff provides for transmission service using non-pancaked zonal rates
for a six-year transition period ("Transition Period") after the commencement of
operations. During the Transition Period, each control area will operate as a
separate "zone" for determining transmission rates. Transmission customers will
pay a single rate based on the zone in which the load is located. Transmission
customers sending power through or exporting power from MISO will pay a single
rate based on the average cost of transmission facilities of all Transmission
Owners. Moreover, pricing for point-to-point transmission service from another
control area into MISO ("drive-in" service) or service within MISO
("drive-within" service) will be based on the zonal rates described above. After
the Transition Period, MISO will attempt to formulate a single, grid-wide rate
for transmission service.67
The MISO Bylaws also include criteria for regional transmission
planning decisions. The planning function is the responsibility of the MISO
Planning Staff, which will engage in a collaborative process with owners, users
and other interested parties such as state regulators. The Planning Staff is
charged with developing cost-effective plans to resolve transmission constraints
that would otherwise preclude requested transmission service and to create the
MISO Plan by integrating, evaluating and modifying the transmission plans
developed by each Transmission Owner. The ability to look at transmission
upgrades over a larger region and to recommend "non-
- ----------------
65 Midwest Independent Transmission System Operator, Inc., 84 FERC Para.
------------------------------------------------------
61,231 ("MISO Order"), reconsidered and clarified, 85 FERC Para. 61,250
("MISO Clarification"), order on rehg, 85 FERC Para. 61,372 (1998)
("MISO Rehearing Order").
66 See the MISO Orders.
---
67 Bundled retail load is excluded from service under the MISO Tariff
during the Transition Period.
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<PAGE>
owner" solutions should provide a more efficient transmission planning process.
While MISO will have functional control over the Transmission System of
the Transmission Owners, some generation control functions (such as scheduling,
economic dispatch and load balancing) will continue to be performed by the
existing control area operations within MISO. Nevertheless, MISO will have
significant control over the generation of the Transmission Owners. As stated by
the Transmission Owners of MISO in their application to FERC, MISO will possess
authority over generation to the extent "generation affects transmission."68 In
particular, MISO will solve transmission congestion through curtailments,
generation redispatch and (as a last resort) load shedding. MISO will use
redispatch to prevent the curtailment of scheduled firm and network transmission
service and the costs of redispatch will be shared among all load including
bundled native load on a pro rata basis rather than directly assigned to
specific transmission customers.69 MISO members that own generation will be
required to offer redispatch service pursuant to cost-based rates on file with
FERC, and MISO will select the least-cost option for redispatch. When requests
for new firm service cannot be accommodated under current operating conditions,
MISO will facilitate transmission capacity reassignment (by posting bids
electronically on a real-time basis) and transmission capacity expansion by
generation redispatch (by identifying generators that could relieve the
constraint by increasing or decreasing their output).70 When a system emergency
arises, however, MISO will take whatever actions are necessary to maintain the
reliability of the Transmission System, including curtailments.71
MISO also will develop all necessary operating procedures and have
authority over the security coordinator functions of the Transmission Owners,
such as approving transmission requests, implementing curtailment of
transmission or requiring redispatch of generation with transmission. MISO will
monitor real-time data to determine whether any control areas are experiencing
generation capacity deficiencies. MISO also will control transmission
maintenance. Integration of generation will occur at the MISO level through the
methods outlined above and through coordinating the maintenance (outage
schedules) of generating units to assure that they minimize the impact on
transmission capability. Thus, entities participating in the MISO will
interconnect and integrate their systems in a joint effort to promote regional
deployment of certain operating functions, security and redispatch functions and
scheduling functions so as to enhance efficiencies across this broad regional
market.
In joining MISO, New NSP, NSP-W and SPS will transfer control of their
respective transmission systems to MISO and become subject to the MISO Tariff
and Bylaws. Thus, like the tight power pool arrangements that formed the basis
for findings of integration by the Commission in UNITIL and Conectiv, the
------ --------
transmission facilities of these entities will be under common management and
control along with those of other MISO members. In an environment where
- ----------------
68 See ER98-1438-000, Applicants Response at 3.
69 MISO Order at 62,162.
70 Id.
---
71 Id.
---
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<PAGE>
transmission and generation are unbundled, it is the Applicants' view that there
is no greater integrating action than to turn over the operation and
coordination functions of the merged company's key transmission assets to a
single management entity. Transmission will be centrally coordinated so as to
maximize transmission capacity. Further, transmission constraints will be
alleviated through regional redispatch of generation so that the system can
operate at maximum efficiency. Transmission upgrades will be planned on a
regional basis to assure the most economic means of relieving constraints over
the long-run are achieved. The greater the transmission capacity, the greater
the ability the NSP companies and the NCE Operating Companies will have to
obtain low cost sources of generation throughout the MISO region and to arrange
for power transfers from one another. Finally, removal of rate pancaking
throughout the MISO region will remove economic barriers in reaching more
distant sources of generation supply. Thus, the efficiency of centralized
transmission management and pricing will directly create greater purchasing
efficiencies in obtaining power for Xcel's customers.
The impact of joining MISO on Applicants' operations is best demonstrated
by way of an example. Currently, NSP buys power from the market to meet its
customers' energy needs. A key limiting factor in all purchases is the cost of
transmission. It is common for NSP to arrange a purchase from the Cinergy hub,
which is a liquid market that permits critical hedging against volatile price
swings. However, because of transmission cost differentials, NSP typically finds
nearby power more economical by the time delivery is expected. NSP then sells
its position in Cinergy and buys from neighboring markets at a higher energy
price but a lower overall price (energy plus pancaked transmission). Under MISO,
NSP will be able to keep and to take delivery from Cinergy as there will be no
incremental transmission cost that makes it uneconomical. With SPS in the same
RTO, the purchase could be made jointly and dispatched to the entity whose load
requirements indicate a need for the energy. Again, there would be no
transmission price differential and the power could flow freely to either NSP or
SPS. In this way, both operating companies achieve economies associated with
access to low-cost power as well as efficiencies in the economic use of this
power supply. Without common MISO membership, pancaked transmission rates would
create differences in the ultimate purchase decision that would make such
coordinated arrangements more difficult and less efficient.
Accordingly, when the NSP companies and SPS become members of MISO,
they will be able to transmit power between their two systems at nonpancaked
rates - specifically, at an incremental cost which is the same per unit cost
involved in shipping power within their respective systems.72 Since all market
participants in MISO can similarly move power at no additional cost of
transport, the MISO Tariff makes choice of power supply across a broad region
economically feasible. As this occurs, integration of generation will be
efficiently accomplished in the
- -------------
72 There are gaps in the contiguous borders of MISO; however, any charges
incurred for flows across those borders would produce a relative small
cost differential when compared with a traditional rate pancake across
multiple service territories; as a consequence, the transactions will
still be economically feasible. In fact, there is currently an
intervening utility between SPS and MISO. As explained below, SPS
intends to obtain a contract path across the intervening utility
service area so that it is interconnected directly with MISO.
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<PAGE>
marketplace, through the ability to access
potentially 100,000 MW of generating capacity rather than merely seeking
opportunities to exchange power with one another. When the NSP companies and SPS
believe such opportunities exist, they will successfully lower their total
energy costs to customers through their joint participation in energy markets.
The establishment of a Midwest power exchange ("Midwest PX"), that would
complement the operation of the MISO, is currently being evaluated. If the
Midwest PX is established, generation would be sold into the power exchange and
purchased from the exchange, with the ISO providing the regional scope for this
trading activity. The movement from cost-based power pools (like those that
existed in UNITIL and Conectiv) to power exchanges, which will have a large
number of participants, are expected to facilitate lower costs to consumers.
The NSP companies and SPS commit to join MISO, contingent only on
consummation of the Merger. Upon joining MISO, Xcel's northern zone, consisting
of New NSP and NSP-W, will be physically interconnected with its southern zone,
consisting of SPS, through the MISO transmission system, and, if necessary, a
firm transmission contract path between SPS and Ameren (a MISO member). Thus,
the operation of transmission assets, the transmission planning process and the
generation assets of all three of these Xcel operating companies will be subject
to the regional management of a single transmission organization.
Applicants anticipate that by the time that MISO becomes fully
operational, it will have attracted additional members, which will permit SPS to
be directly interconnected with MISO through intervening utilities. For example,
if PSO were to join MISO, there would be a contiguous MISO transmission region
between SPS and NSP. To the extent that SPS is not directly interconnected with
another MISO member, SPS intends to obtain a firm, 200 MW bi-directional
transmission path from the point at which its system interconnects with PSO to
the point at which PSO interconnects with Ameren and MISO. This path is referred
to herein as the "MISO Interconnection."73
Absent changes that result in a direct interconnection between SPS and
another MISO member, Applicants will seek entitlement from FERC for the MISO
Interconnection. In the event that Applicants need to establish the MISO
Interconnection, they will attempt to enter into arrangements with PSO to
facilitate third-party use. Specifically, they will attempt to make arrangements
so that the interconnection path will be treated as part of SPS's system, and
therefore subject MISO's control. Transmission customers would then be able to
arrange service over the path
- -------------
73 Applicants engaged Dr. Ricardo Austria of Power Technologies, Inc.
("PTI") to aid in analyzing potential impediments to their
interconnection plans. Based on his analysis, Applicants anticipate
that PSO does not presently have sufficient capacity to grant the full
request of 200 MW for the MISO Interconnection. Specifically, the 200
MW reservation would have an adverse impact on a "flowgate" located in
eastern Oklahoma. However, Dr. Austria's analysis shows that ATC at the
affected flowgate can be upgraded to accommodate the full request if a
transmission reinforcement consisting of a 25-mile 345 kV line is
constructed from Pecan Creek to Riverside ("Pecan Line"). Dr. Austria
also determined that obtaining 200 MW of ATC on the west-bound portion
of the path during winter months would require redispatch of the
Western Resources and Sunflower systems.
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<PAGE>
through MISO.
The Contract Path
-----------------
For at least three years following consummation of the Merger, NCE and
NSP will interconnect their systems through a firm contract for a 100 MW
unidirectional path from SPS to NSP (through PSO and Ameren), to flow 100 MW
from a point of receipt located at SPS's Tolk generating station to a point of
delivery at NSP-M's Sherbourne County generation station (the "Northbound
Path").
The same upgrades required with respect to the MISO Interconnection
would be required with respect to the Northbound Path. Moreover, to mitigate
potential market power effects, Applicants identified four transmission upgrades
(in addition to the Pecan Line) that, if implemented, would mitigate such market
impacts. These may include upgrades to three 161 kV lines and one transformer.
The Applicants are willing and able to invest in upgrades of the type and cost
identified.
Although the Applicants propose, and fully support, the Northbound
Path, the Northbound Path (like virtually every firm contract path) has some
market concentrating effects as a result of the loop-flows, as well as market
de-concentrating effects. For this reason, Applicants have supported the
Northbound Path as a separate option from MISO in their filing for FERC approval
of the Merger. In the event that FERC cannot approve the Northbound Path without
a hearing, the Applicants will request FERC and the SEC to approve the Merger
without the Northbound Path.
The Applicants initially proposed that the Northbound Path be a 200 MW
firm path, as compared to 100 MW firm path, as 200 MW could be physically moved
between the two systems on a firm basis and would result in additional savings.
However, preliminary analysis of this scenario indicated that the loss in
available capacity in the NSP destination market was likely significant enough
to cause a potential screen failure under FERC's guidelines related to market
power, which could have resulted in NSP being required to divest a portion of
its generation assets. Because NSP is currently acquiring additional generation
resources, divestiture would be inconsistent with its growing need for energy
and capacity to serve its customers. Thus, the Applicants chose to have the
Northbound Path be a 100 MW firm path from SPS to NSP, which does not result in
the same concern.
* * * * *
As previously discussed, joint membership and participation in MISO is
the primary means by which NCE and NSP will integrate their system operations.
As MISO moves to eliminate utility-specific cost disparities through a large
regional trading market, an economically efficient electric supply will be
available to any market participant. This elimination of traditional cost-based
prices will allow the benefits of integration to occur through the market and
contractual arrangements, rather than through the ownership of facilities and
joint dispatch of operations. NSP and NCE intend to integrate operations in the
most economic manner possible, consistent with state and FERC
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<PAGE>
regulatory requirements, to take full advantage of the opportunities available
to produce power at a lower cost for the benefit of its customers and
shareholders.
The foregoing discussion was intended to provide background and
overview of how NSP and NCE will be integrated through MISO and through a
contract path. Each of the four integration standards of Section 2(a)(29)(A) is
discussed specifically below.
(a) Interconnection
The first requirement for an integrated electric utility system is that
the electric generation and/or transmission and/or distribution facilities
comprising the system be "physically interconnected or capable of physical
interconnection." Historically, the Commission has focused on physical
interconnection through facilities that the parties owned or, by contract,
controlled.74 As early as 1978, however, the Commission indicated that joint
participation in a power pool could be the basis for a finding of integration.75
To date, the Commission has found interconnection through memberships in "tight"
power pools and ISOs.76 These findings are consistent with the recommendation of
the 1995 Study that the Commission "adopt a more flexible interpretation of the
geographic and physical integration standards, with more emphasis on whether an
acquisition will be economical and subject to effective regulation."
The 1995 Report further recommended that the Commission should
increasingly rely on an acquisition's demonstrated economies and efficiencies,
rather than upon physical interconnection, to meet the integration standard. The
Report noted that the 1935 Act provides the necessary
- ----------------
74 See, e.g., Northeast Utilities, Holding Co. Act Release No. 25221 (Dec.
--- ---- -------------------
21, 1990) ("Northeast Utilities") at n.85, supplemented, Holding Co.
Act Release No. 25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke
-------------- ---------------
v. SEC., 972 F.2d 358 (1992) (Northeast had the right to use a Vermont
-------
Electric line for ten years, with automatic two-year extensions,
subject to termination upon two years notice, in order to provide power
to a Northeast affiliate.); Centerior Energy Corp., Holding Co. Act
-----------------------
Release No. 24073 (1986) (Cleveland Electric Illuminating Company and
Toledo Edison Company were connected by a line owned by Ohio Edison.
All three were members of the Central Area Power Coordination Group
("CAPCO"). The line connecting Cleveland Electric, Ohio Edison and
Toledo was a CAPCO line with segments owned by each of the three named
utilities.); Cities Service Power & Light Co., 14 S.E.C. 28, 53 n.44
----------------------------
(1943) (two companies in the same holding company system were found to
be interconnected where energy was transmitted between two separated
parts of the system over a transmission line owned by the United States
Bureau of Reclamation, under an arrangement which afforded the system
the privilege of using the line).
75 See AEP, supra ("The pooling issue is one aspect of the major debate,
--- --- -----
. . . as to what should be the future structure of the electric utility
industry. We will not undertake to resolve these issues since they are
beyond our mandate in this case and because they are within the
province of the Congress and the Department of Energy.").
76 See, e.g., UNITIL Corp., supra (interconnection through NEPOOL), and
--- ---- ------------ -----
Conectiv, Inc., Holding Co. Act Release No. 26382 (Feb. 25, 1998)
---------------
(interconnection through PJM, Inc.). See also Yankee Atomic Elec. Co.,
--- ---- -----------------------
36 S.E.C. 552, 565 (1955); Connecticut Yankee Atomic Power Co., 41
-------------------------------------
S.E.C. 705, 710 (1963) (authorizing various New England companies to
acquire interests in a commonly-owned nuclear power company and finding
the interconnection requirement met because the New England
transmission grid already interconnected the companies).
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<PAGE>
flexibility and that the application of the integration standards must be able
to adjust in response to changes in the state of the art. The Report concluded
that it would be a logical extension of prior orders for the Commission to find
that wheeling and other forms of sharing power (such as reliability councils and
proposed regional transmission groups) also qualify as interconnection. This
recommendation is particularly significant in view of the recent RTO NOPR which
is intended to encourage the development of regional transmission grids that
will bring even more distant utilities closer together.
As explained above, the NSP Electric System and the Primary System of
NCE will be "physically interconnected or capable of physical interconnection"
through membership in MISO and by means of the Northbound Path.
The Northbound Path, in and of itself, satisfies the physical
interconnection requirement of Section 2(a)(29)(A). The Commission in the past
has found the interconnection requirement met where the parties had a firm
contract path. "The physical interconnection requirements of [Section
2(a)(29)(A)] are met if the two service areas are connected by power
transmission lines that the companies have the right to use whenever needed."
Centerior, supra. Dicta in a series of Commission decisions states that contract
- --------- -----
rights cannot be relied on to integrate two "distant" systems. See, e.g., WPL
--- ---- ---
Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998), citing
- ---------------
UNITIL Corp., supra; Northeast Utilities, Holding Co. Act Release No. 25273
- ------------- ----- --------------------
(March 15, 1991); Centerior Energy Corp., supra. In the Applicants' view, it
----------------------- -----
would be incorrect to interpret these statements to mean that a firm contract
path might not meet the "physical interconnection" requirement because of its
length. In both UNITIL and Northeast Utilities, the Commission explained that
------ --------------------
the reason a contract path might not "integrate" two distant utilities was due
to the "single area or region" requirement of Section 2(a) (29)(A). UNITIL,
------
supra at n.30; Northeast Utilities, supra at n.75. The Commission did not hold
- ----- -------------------- -----
in any of these cases that the length of a firm contract path was relevant in
determining whether the "physically interconnected or capable of physical
interconnection" requirement of Section 2(a)(29)(A) was met. Such a holding
would be contrary to the literal language of Section 2(a)(29)(A).
NSP and NCE also will be "physically interconnected or capable of
physical interconnection" through their common membership in MISO. Commission
precedent supports a finding of interconnection through an ISO such as MISO. In
1992, the Commission approved the merger of UNITIL Corporation with Fitchburg
Gas and Electric Light Company, based on their common membership in the New
England Power Pool ("NEPOOL"),77 a regional power pool that was the basis for a
FERC approved ISO and associated power exchange.78 UNITIL and Fitchburg were not
connected through transmission lines that they owned. Rather, as the Commission
noted in its order:
- -------------
77 New England Power Pool, 79 FERCP. 61,374 (1997); New England Power
---------------------- -----------------
Pool, 83 FERCP. 61,045 (1998).
----
78 MISO differs from how NEPOOL was initially structured as a tight power
pool in that NEPOOL provided for centralized dispatch, within a single
routed area, of the generating assets of the NEPOOL members. However,
as explained below, this difference is not relevant to whether two
entities are "physically interconnected or capable of physical
interconnection."
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<PAGE>
Access to and use of the regional transmission network, which
is owned by the larger New England utilities, is provided by
the NEPOOL Agreement and by transmission rate schedules and
contracts filed with the Federal Energy Regulatory Commission.
In this matter, the Companies are indirectly interconnected
through NEPOOL-designated transmission facilities ("PTF") and
other nonaffiliate transmission facilities pursuant to the
NEPOOL Agreement and other separate agreements with
nonaffiliate companies. The Commission has previously found a
system to be "capable of physical interconnection" on the
basis of contractual rights to use a third-party's
transmission lines.
This matter differs from prior orders in that there will be no
particular line through which transfers of power will be made
among the Companies. Instead, power will be delivered through
a nonaffiliate system and a transmission charge will be paid
to the owner of the facilities. On the facts of this matter,
the Commission is satisfied that the Companies' contractual
arrangements for transmission service establish that the
UNITIL electric system will satisfy the physical
interconnection requirement of the Act.
With respect to the "other separate agreements with nonaffiliate companies"
described above, the Commission by footnote explained that Fitchburg obtained
primary transmission service from New England Power Company ("NEPCO") under the
NEPOOL Agreement and through NEPCO's FERC Tariff Number 3, which provided for
non-firm service. The Commission went on to note that Fitchburg was eligible to
use NEPCO's FERC Tariff No. 4 79 should Fitchburg and UNITIL Power conduct more
power sales or swaps. In 1998, based on UNITIL, the Commission found that
------
Delmarva Power & Light Company and Atlantic Energy, Inc. met the physical
interconnection requirements of Section 2(a)(29)(A) through their common
membership in PJM Interconnection, LLC ("PJM"), which was a regional power pool
and the first, FERC-approved, operational ISO.80 Conectiv, Inc., Holding Co. Act
--------------
Release No. 26832 (February 25, 1998).
The facts of this case similarly establish physical interconnection
under the UNITIL precedent and its progeny. Access by NSP and SPS to the
------
regional transmission network of MISO will be provided by the MISO Agreement and
MISO Tariff, which have been filed with FERC. Also, like UNITIL Power and
Fitchburg, NSP and SPS will have "other separate agreements with nonaffiliate
companies" - namely; the firm Northbound Path for 100 MW, and the nonfirm
- -----------
79 Under FERC Tariff No. 4, Fitchburg would receive firm transmission
service. Amendment No. 11 to Form U-1 of UNITIL Corporation, File No.
70-7628, at 55.
80 Pennsylvania - New Jersey - Maryland Interconnection, 81 FERC Para.
61,257 (1998).
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<PAGE>
arrangements that Applicants may arrange as described below under
"Coordination." In particular, MAPP has an open-access transmission tariff,
Schedule F, that may provide an alternative path for transactions between SPS
and the NSP companies. Moreover, like UNITIL, power will be delivered through
------
the MISO system and a transmission charge will be paid to the owner of the
facilities. As noted above, MISO will have functional control over the
transmission systems of NSP, NSP-W, SPS and other members of the MISO. As was
the case in UNITIL, the NSP companies and SPS will be able to readily obtain
------
transmission services at non-pancaked rates to exchange energy with each other
or to access the market collectively as either a buyer or a seller. For these
reasons, Applicants believe that the Xcel Electric System will be "physically
interconnected or capable of physical interconnection."
Applicants note that MISO differs from NEPOOL in UNITIL and from PJM in
------
Conectiv in that NEPOOL and PJM were both "tight" power pools at the time of the
- --------
Commission's decisions, in that the generation assets of all members of NEPOOL
and PJM were centrally dispatched and controlled. Applicants acknowledge the
relevance of generation control for purposes of evaluating whether the system is
operated as "a single interconnected and coordinated system" under Section
2(a)(29)(A), but do not believe it is relevant as to whether the system is
"physically interconnected or capable of physical interconnection."81
(b) Coordination
Historically, the Commission has interpreted the requirement that an
integrated electric system be economically operated under normal conditions as a
single interconnected and coordinated system, "to refer to the physical
operation of utility assets as a system in which, among other things, the
generation and/or flow of current within the system may be centrally controlled
and allocated as need or economy directs." See, e.g., Conectiv, supra, citing
--- ---- -------- -----
The North American Company, Holding Co. Act Release No. 3466 (April 14, 1942),
- ---------------------------
aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd on constitutional issues, 327 U.S. 686
- ----- ------------------------------
(1946). The Commission has noted that, through this standard, Congress "intended
that the utility properties be so connected and operated that there is
coordination among all parts, and that those parts bear an integral operating
relationship to one another." Id., (citations omitted). Applicants submit that
---
the need for "joint economic dispatch" that the Commission has historically
focused on reflects a past structure of the industry and regulatory
requirements. So-called "single" dispatch and committed bilateral power
exchanges are not required
- -------------
81 The relationship between physical interconnection and coordinated
system is examined in The North American Co., 11 S.E.C. 194, at 241-42
----------------------
(1942). The only physical interconnection between four small service
areas and a North American subsidiary, Illinois Iowa Power Co., was
through facilities operated by Central Illinois Public Service Co., a
nonaffiliated company. The small properties were held to be physically
interconnected with the subsidiary but not part of a coordinated system
because most or all of the power for sale in these service areas was
purchased from Central Illinois and there was no central control:
"Thus, even though we find physical interconnection exists or may be
effected, evidence is necessary that in fact the isolated territories
are or can be so operated in conjunction with the remainder of the
system that central control is available for the renting of power."
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<PAGE>
by the explicit terms of the statute and, indeed, may be inconsistent with
regulatory requirements and the economical and efficient operation of large
systems. Accordingly, Applicants further submit that in today's environment, the
coordination requirement should be deemed satisfied if utilities are able to
achieve efficiencies through such measures as coordinated generation operations,
even where such operations do not arise to the level of joint dispatch;
coordinated transmission through common participation and membership in an ISO;
coordinated marketing efforts, both as a buyer and seller of electricity; the
integration of administrative and general services and programs; and
gas/electric convergence type measures, which will lead to lower costs for gas
as a fuel for the generation of electricity.
This is not a matter of first impression. Nearly a decade ago, the
Commission found, and the courts agreed, that the coordination requirement could
be satisfied even if power never flowed between two parts of the system.
Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990). Environmental
- --------------------------------- -------------
Action involved the acquisition by a holding company of an interest in an
- ------
electric generating plant ("GenCo"). The intervenors argued that the acquisition
did not satisfy the standards of the 1935 Act because, among other things, the
system's existing electric utility company ("UtilCo") had represented that it
might purchase up to twenty percent of GenCo's capacity if, and only if, the
price of such power was competitive in the market. The Court of Appeals noted
that the GenCo might not purchase any of GenCo's output but, nonetheless,
concluded that the Commission had correctly found that UtilCo and GenCo could be
operated as part of a coordinated system, within the meaning of the Act. Id. at
---
1264-65, citing Electric Energy, Inc., Holding Co. Act Release No., 13871 (Nov.
---------------------
28, 1958) (the companies sponsoring the construction of a generating plant only
pledged to buy any surplus energy remaining after the plant had supplied the
needs of the major purchaser, a nonaffiliated government agency). More recently,
the Commission found similar types of coordinated operational and administrative
functions to constitute "de facto" integration. Sierra Pacific Resources,
--------------------------
Holding Co. Act Release No. 27054 (1999). Moreover, the coordination of
administrative functions and joint marketing activities were crucial factors in
the Commission's determination that the coordination requirement was satisfied
in Sempra and NIPSCO.
------ ------
Moreover, in applying the integration standard, the Commission looks
beyond simply the coordination of the generation and transmission within a
system to the coordination of other activities. See, e.g., General Public
--- ---- ---------------
Utilities Corp., Holding Co. Act Release No. 13116 (Mar. 2, 1956) (integration
- ---------------
is accomplished through power dispatching by a central load dispatcher as well
as through coordination of maintenance and construction requirements); Middle
------
South Utilities, Inc., Holding Co. Act Release No. 11782 (Mar. 20, 1953),
- -----------------------
petition to reopen denied, Holding Co. Act Release No. 12978 (Sept. 13, 1955),
- -------------------------
rev'd sub nom. Louisiana Public Service Comm'n v. SEC, 235 F.2d 167 (5th Cir.
- -------------- ----------------------------------------
1956), rev'd, 353 U.S. 368 (1957), reh'g denied, 354 U.S. 928 (1957)
----- -------------
(integration is accomplished through an operating committee which coordinates
not only the scheduling of generation and system dispatch, but also makes and
keeps records and necessary reports, coordinates construction programs and
provides for all other interrelated operations involved in the coordination of
generation and transmission); North American Company, Holding Co. Act Release
----------------------
No. 10320 (Dec. 28, 1950) (economic integration is demonstrated by the exchange
of power, the coordination of future power demand, the sharing of extensive
experience with regard to engineering and other
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<PAGE>
operating problems, and the furnishing of financial aid to the company being
acquired). See also NIPSCO, supra (functional merger of Bay States and NIPSCO
--- ---- ------ -----
gas supply department through NIPSCO Services, "a service company subsidiary of
NIPSCO that provides financial, accounting, tax, purchasing, natural gas
portfolio management, and other administrative services to associate
companies.")
Applicants do not intend to engage in joint economic dispatch of the
Xcel Operating Companies' systems similar to other registered systems that
effectively operate as tight power pools. Given that the Operating Companies are
in separate control areas, such joint dispatch would not be feasible. Moreover,
Applicants believe any proposal to operate in such a manner would not be well
received by the Xcel Operating Companies' state commissions, which generally
require that those companies obtain the best deal in the market, rather than
simply assume that affiliates will be the lowest cost source of supply. As more
states move down the path toward retail competition, with some states requiring
significant divestiture of generating assets, and as the growth in liquidity in
wholesale markets continues, coordination in the market (and not joint dispatch)
will be the key means of achieving the efficiency objectives previously attained
through joint dispatch. Applicants will satisfy the coordination requirement in
several ways.
First, as has already been discussed in great detail, the transmission
-----
systems of the NSP companies and SPS will be operated as a single interconnected
and coordinated system through joint membership and participation in MISO. Among
other things, MISO will develop all operating procedures and schedules, approve
all transmission requests and direct the operation of the transmission grid for
all MISO participants. MISO also will control maintenance and planning of all of
the transmission facilities within the MISO system. This degree of coordination
and integration of transmission assets is comparable to that presented to, and
accepted by, the Commission in UNITIL and Conectiv, supra.82 Moreover, the
------ --------
availability of transmission under MISO will provide the means to coordinate
operations and engage in the joint marketing efforts that are described below.
Second, in light of the developments that have occurred in the electric
------
utility industry and the regulatory framework that applies to it, which have
been detailed above, the integration of utilities can occur through the market
and contractual arrangements rather than through historical joint dispatch. In
fact, although the Commission relied upon the tight power pool structure of
NEPOOL and PJM, which included joint dispatch, in finding integration in UNITIL
------
and Conectiv, those power pools have or are restructuring into ISOs and
--------
associated power exchanges, where the market will determine the dispatch of
generating plants.
The Joint Operating Agreement reflects this new environment. Under the
agreement, the generating systems of the Xcel Electric System will be operated
as a single interconnected and coordinated system. Specifically, Xcel will
coordinate the planning, operation and maintenance of
- ------------
82 See also MISO Order, supra at n.162 and n.169.
-----
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<PAGE>
generating capacity resources and the dispatch of electricity throughout the
combined system of NSP and NCE. Although not providing for joint dispatch, the
Joint Operating Agreement will provide for coordinated dispatch. Under this
arrangement, system dispatchers will arrange for economy energy sales (provided
for in Schedule B of the Joint Operating Agreement) where such sales will lower
the operating costs of the purchasing Operating Company. To allay any concerns
that state commissions and FERC may have, the sales will not be made if the
purchaser has a better purchase opportunity, or the seller has a better sales
opportunity. The Joint Operating Agreement (Schedule A) also provides for
short-term capacity and associated energy sales, subject to the same
limitations. The Joint Operating Agreement also provides for joint generation
planning and the common procurement of resources, although again the agreement
addresses potential state concerns by making explicit that any resource
additions will comply with applicable state procurement requirements.
Additionally, the Joint Operating Agreement also vests the agent, New Century
Services, with the responsibility of arranging joint sales and purchases of
electricity, as described below, and makes provision for the allocation of
associated costs and revenues.
Third, the Xcel Operating Companies will coordinate through joint
-----
marketing efforts, both as a buyer and seller. System dispatchers will
continually monitor the generation needs and capacity of the NSP and NCE
systems. This will include the NSP Companies, SPS and PSCo. The Xcel Operating
Companies already have the ability to reach common suppliers, purchasers, and
trading hubs in various combinations. The rapidly evolving wholesale power
markets surrounding the energy industry will allow NSP and NCE to operate their
generation assets as a single system by buying and selling power to decrease the
overall production costs of the two systems. The diversity of weather, time,
fuel supply and localized economic conditions will create opportunities to
allocate resources more efficiently. This can be accomplished without the need
to actually move power from the NSP system or NCE system to the other company's
system. Power can be delivered to and from the systems by third parties using
their transmission systems. These marketing efforts will be greatly facilitated
by the common participation of the NSP companies and SPS in MISO. For example,
NSP and NCE will be able to use their diversity to buy and sell in common MISO
markets such as Ameren to optimize their use of this market, acting, in effect,
like their own trading hub. The 100 MW Northbound Path83 will further facilitate
the ability of the entities to coordinate their systems by assuring the ability
to move power even when there are transmission constraints.
MISO, however, is not the only means for NSP and NCE to engage in these
efforts: the NSP companies, SPS, and PSCo presently trade in other common
markets, which can be accessed post-merger. For example, the NSP companies and
NCE Operating Companies both hold capacity contracts with Basin Electric
Cooperative. In 1998 NCE purchased 200MW of capacity from the
- ------------
83 Applicants have committed to limit their reservation of firm
transmission service to avoid potential anticompetitive effects as a
result of the Merger, which is an additional consideration under the
1935 Act. In applying the 1935 Act, the Commission must weigh policies
[of the 1935 Act] against each other and against the needs of
particular situations. Union Electric, supra. The limitations to which
-------------- -----
the applicants have agreed represent a reconciliation of the various
objectives of the 1935 Act in furtherance of the interests which the
1935 Act was meant to protect, those of investors, consumers and the
public.
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<PAGE>
Laramie River Station. PSCo recently added an additional 136 MW. NSP contracted
for 65 MW of seasonal capacity from Basin as well as entering into an ongoing
energy only agreement which allows NSP to purchase system energy from Basin.
Because Laramie River Station is located at the intersection of the Eastern and
Western Interconnections, it is equipped to sell power in both directions. In
the future, joint purchases could be made and dispatched to the operating
companies that would provide the greater benefit. Weather diversity would make
these purchases more economically efficient as changes in daily and hourly load
forecasts can be accommodated by joint purchasing and coordinated dispatch. In
addition to Basis, both PSCo and NSP have made significant purchases from WAPA
in the past. In 1997, NSP purchased 252,332 MWh from WAPA. During this same time
period, the NCE Operating Companies purchased 559,121 MWh from WAPA. Given
WAPA's location on the border of the Eastern and Western Interconnects, it will
serve as a market for coordinated trading activities. This ability to diversify
supply over a broader region with diverse weather and time zones is how
companies can best achieve the benefits of economic integration in a
market-based commodity like electricity. The NSP companies and NCE Operating
Companies also anticipate making use of the burgeoning power markets and their
associated volatility to maximize efficiency and coordination on their systems.
Fourth, the generation assets of NSP and SPS also will be coordinated
------
through MISO. As stated in the application to FERC, MISO will possess authority
over generation to the extent "generation affects transmission."84 In
particular, MISO will solve transmission congestion through load shedding,
curtailments and generation redispatch. MISO will use redispatch to prevent the
curtailment of scheduled firm and network transmission.85 MISO members which own
generation will be required to offer redispatch service pursuant to cost-based
rates on file with FERC, and MISO will select the least-cost option for
redispatch. When requests for new firm service cannot be accommodated absent
mitigation, MISO will facilitate transmission capacity reassignment (by posting
bids electronically on a real-time basis) and generation redispatch (by
identifying generators that could relieve the constraint by increasing or
decreasing their output).86 When a system emergency arises, however, MISO will
take whatever actions are necessary to maintain the reliability of the
transmission system including load shedding or curtailments.87 Integration of
generation also will occur at the MISO level through coordinating maintenance
(outage schedules) of generating units of the transmission owners to assure that
they minimize the impact on transmission capability. Thus, the generating assets
of NSP and SPS will be coordinated and integrated by MISO as needed to
facilitate transmission access by the members of MISO.
Fifth, as explained further below, the Xcel Operating Companies will be
-----
able to achieve efficiencies in the management of their natural gas portfolios.
Because PSCo, SPS, and NSP use natural gas to generate electricity, these
efficiencies are expected to translate to lower cost for gas as a fuel for
electric production, which will benefit electric customers.
- ------------
84 See ER98-1438-000, Applicants Response at 3.
85 MISO Order at 62,162.
86 Id.
---
87 Id.
---
-55-
<PAGE>
Sixth, the combined system in this matter will be coordinated in a
-----
variety of ways beyond simply the coordination of the generation and
transmission within the system. Among other things, virtually all administrative
and general services will be performed for the Xcel System by New Century
Services. In addition, the accounting functions of the combined system will be
prepared and consolidated through the use of a single system. Xcel will have a
single accounting organization which will be managed by a single team in one or
more locations. The coordination and integration of the combined system is
expected to be further achieved through the coordination and integration of
information system networks; customer service; procurement organizations;
organizational structures for power generation, energy delivery and customer
relations; and support services.
As indicated by the language under Section 2(a)(29)(A) that the
coordinated system be "economically operated," the Commission further analyzes
whether the coordinated operation of the system results in economies and
efficiencies. The question whether a combined system will be economically
operated under Section 10(c)(2) and Section 2(a)(29)(A) was recently addressed
by the Court of Appeals in Madison Gas and Electric Company v. SEC, 168 F.3d
------------------------------------------
1337 (D.C. Cir. 1999). In that case, the court determined that in analyzing
whether a system will be economically coordinated, the focus must be on whether
the acquisition "as a whole" will "tend toward efficiency and economy." Id. at
1341. The Merger will clearly meet this standard. As explained in Item 3.C.2.
below, NSP and NCE estimate that the net savings from the Merger will exceed
$1.1 billion over 10 years.
In short, all aspects of the combined system will be centrally and
efficiently planned and operated. As with other merger applications approved by
the Commission, the combined system will be capable of being economically
operated as a single interconnected and coordinated system as demonstrated by
the variety of means through which its operations will be coordinated and the
efficiencies and economies expected to be realized by the proposed transaction.
(c) Single Area or Region
As required by Section 2(a)(29)(A), the operations of the Xcel Electric
System will be confined to a "single area or region in one or more States."
While the terms "area" and "region" are not defined in the 1935 Act, the "single
area or region" requirement does not mandate that a system's operations be
confined to a small geographic area or a single state.88 The Commission has
specifically found that the combining systems need not be contiguous in order
for the requirement
- -----------
88 In considering size, the Commission has consistently found that utility
systems spanning multiple states satisfy the single area or region
requirement of the 1935 Act. For example, the Entergy system covers
portions of four states (Entergy, supra), the Southern system provides
------- -----
electric service to customers in portions of four states (Southern Co.,
------------
Holding Co. Act Release No. 24579 (Feb. 12, 1988)), and the principal
integrated system of NCE covers portions of five states (with all of
its electric operations serving customers in six states) (1997 NCE
Order, supra). As early as 1945, the Commission found that the
-----
operations of American Electric Power in seven states were confined to
a single region or area. American Gas and Electric Co., Holding Co. Act
-----------------------------
Release No. 6333 (Dec. 26, 1945).
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<PAGE>
to be met.89 Rather, the Commission has found that the single area or region
test should be applied flexibly when doing so does not undercut the policies of
the 1935 Act against "`scatteration' -- [that is,] the ownership of widely
dispersed utility properties which do not lend themselves to efficient operation
and effective state regulation." NIPSCO, supra (applying single area or region
------ -----
requirement with respect to gas utility system); accord, Sempra, supra.90
------ ------ -----
Moreover, the Staff has recommended that the Commission "interpret the
'single area or region' requirement flexibly, recognizing technological
advances, consistent with the purposes and provisions of the Act" and that the
Commission place "more emphasis on whether an acquisition will be economical."
1995 Report at 66, 69. The Staff has recognized that "recent institutional,
legal and technological changes . . . have reduced the relative importance of .
. . geographical limitations by permitting greater control, coordination and
efficiencies" and "have expanded the means for achieving the interconnection and
economic operation and coordination of utilities with non-contiguous service
territories." 1995 Report at 69. It has also recognized that the concept of
"geographic integration" has been affected by "technological advances on the
ability to transmit electric energy economically over longer distances, and
other developments in the industry, such as brokers and marketers." Id. Such
---
advances and developments are breaking down traditional boundaries and concepts
of regions. The Commission has confirmed its support for the Staff's Report,
citing, in particular, the Staff's recommendation that the Commission "continue
to interpret the 'single area or region' requirement of [the 1935 Act] to take
into account technological advances." NIPSCO, supra; accord, Sempra, supra.
------ ----- ------ ------ -----
The Applicants believe that the Xcel Electric system will satisfy
"single area or region" requirement. The Xcel Operating Companies all have their
electric operations in the Mid-Continent area of the United States in states
that adjoin - Michigan, Wisconsin, Minnesota, North Dakota, South Dakota,
Wyoming, Colorado, New Mexico, Texas, Oklahoma and Kansas - even if their
systems are not directly interconnected. Three of the primary Xcel Operating
Companies (SPS, NSP and New NSP) will be part of MISO, which will be tasked with
operating the regional grid, and the other primary system, PSCo, will be
directly interconnected upon completion of NCE's commitments in the 1997 NCE
Order. An RTO, such as MISO, effectively defines a region from both an
operational and economic standpoint. To reiterate, FERC is promoting RTOs due to
operational and economic inefficiencies that presently exist. Generally, from an
operational perspective, RTOs will place transmission services in a larger
regional market, which is necessary to achieve short-term and long-term
reliability, including the authority to direct transmission maintenance
schedules and to redispatch generation to ensure the integrity and operation
efficiency of the electric grid. The RTO will also ensure proper evaluation of
ATC, proper transmission congestion management and proper management of loop
flows. By virtue of common membership in MISO, the electric operations of the
NSP companies and SPS will be part of the same region.
- ------------
89 See, e.g., Conectiv, supra; cf. 1997 NCE Order, supra (integration test
--- ---- -------- ----- -- -----
was met where entities planned to build a 300 mile transmission line to
interconnect the systems which operated in noncontiguous territories).
90 In Gaz Metropolitain, Inc., the Commission agreed that a single area or
-----------------------
region could include areas across international borders. Holding Co.
Act Release No. 26170 (Nov. 23, 1994).
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<PAGE>
Likewise, RTOs create an economic region due to the pancaking of
transmission rates and the burden to transmission customers of having to arrange
service from unaffiliated providers that would otherwise exist. The result is
that RTOs become the primary trading region for RTO members. FERC has recognized
the key of RTOs in establishing a trading region among utilities:
The Commission has long recognized that transmission pricing reform is
most effectively accomplished on a regional basis. An RTO would have
--------
the geographic scope needed to eliminate pancaked transmission rates
within its region. This would broaden the generation market...thereby
fostering more competitive markets and lower prices.91
MISO is extremely effective in achieving this objective. Quite simply, joint
membership in MISO makes all of its members, at the most, one-wheel away.92 That
is, the elimination of pancaked transmission rates throughout the MISO region
will create a broad wholesale market readily accessible to all members.
Thus, through a common RTO, the NSP companies and SPS will be in the
same operational and economic region. These regions created by RTOs are larger
than those in the electrical regions of the past for a variety of reasons.
First, as previously discussed the technological advances and additions to the
transmission network that have occurred since 1935 now permit trading to occur
over 1000 mile distances. Second, as explained in detail previously, a large
region is necessary to address the inefficiencies and inequities that FERC is
seeking to remedy through RTOs.
Moreover, although PSCo will not be in the same RTO as SPS and the NSP
Companies, it nonetheless should be considered to be in the same economic
region, in light of the historic pattern of trading with Basin Cooperative and
WAPA as described above. Upon the completion of Phase II of the tie line, trades
into MAPP by PSCo will be further facilitated, and, more importantly, because
the interconnection will place PSCo on the border of MISO, PSCo will be able to
directly access the MISO region, including NSP, at non-pancaked rates.
The conclusion that the Xcel Electric System will constitute a single
area or region is further supported by the logic of the Commission's definition
of "region" used for purposes of its size analysis under Section 10(b)(1). In
Entergy, supra, the Commission adopted the applicants' definition of the
- ------- -----
relevant region for purposes of Section 10(b)(1) to include themselves and those
electric utilities directly interconnected with either or both, which, at the
time, were their most accessible markets. This region consisting of utilities
within "one-wheel" of the merging utilities made sense in light of the barrier
that rate pancaking presented in trying to access more distant markets. In
today's increasingly competitive world, NSP and NCE do not operate as isolated
- ------------
91 RTO NOPR, FERC Stats & Regs at 33,716.
92 In fact, under the MISO bylaws it may be possible for NSP and SPS to
be part of a single zone in which case there would be no incremental
cost of transmission (or no wheel) for exchanges of power between them.
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<PAGE>
companies, and their geographic region should be analyzed in terms of their most
accessible markets, which will be MISO. With the elimination of rate pancaking
and with central control of their transmission assets in MISO, the Xcel Electric
system will primarily compete within and access the MISO market and will be
within "one wheel" of each other under the MISO Tariff. At the time PSCo
interconnects its system with SPS, it will be one-wheel away from both SPS and
NSP thereby satisfying the test set forth in Entergy.
-------
The Commission's recent decision in Sempra Energy is also relevant for
-------------
a commodity business such as the evolving electricity industry. In that
decision, the SEC approved Sempra's acquisition of a 90 percent interest in
Frontier Energy LLC of North Carolina and considered the combined system to be
an integrated system under the Act.93 In that decision the SEC affirmed the
existence of a national natural gas commodity market. The SEC pointed out that,
when the Act was drafted in the 1930s, the common source requirement meant the
city gate. Now, however, with the changing gas market, it means obtaining gas
from the same supply basins. Thus, even though the two systems in Sempra were
------
3,000 miles apart, the SEC said that its decision did not undercut the Act
because the acquisition did not raise the concerns that prompted its enactment.
The logic of this decision is directly applicable to electric mergers
because the electric industry is in rapid transition to becoming both a
commodity market and an extended retail consumer services industry. As
demonstrated above, there are numerous instances where NCE and NSP are purchase
and sell commodity energy in the same market. These instances will increase with
continued growth in wholesale electric power market competition. In Sempra, the
------
SEC concluded that because Sempra and the North Carolina distribution company it
was acquiring purchased some natural gas from the same supply basin, they were
integrated utilities for Section 11 purposes under the Act. Extending the logic
of Sempra to the evolving electricity markets, the systems of NSP and NCE are in
------
a "single area or region" because they purchase and sell energy into the same
regional and national commodity markets.
Moreover, although the physical distance between the NSP companies and
the NCE Operating Companies are greater than the Commission has approved in the
past, Applicants do not believe that they contravene the policy of the Act
against "scatteration" the ownership of widely dispersed utility properties that
do not lend themselves to efficient operation. As stated in Sempra, supra, "The
------ -----
Act is directed against the growth and extension of holding companies [that]
bear no relation to economy of management and operation or the integration and
coordination of related operating properties". As demonstrated above, the
Primary System of NCE and the electric operations of NSP and NSP-W will be
economically operated as a single interconnected and coordinated system. As
demonstrated below, the combined system will not have a adverse effect upon
localized management, efficient operation or effective regulation.
Finally, Applicants retained the Pacific Economics Group to determine
whether the service
- ------------
93 Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998).
-------------
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<PAGE>
territories of NSP and NCE constitute a single region under traditional economic
theories. The report of the Pacific Economies Group, filed as EXHIBIT K-1, will
demonstrate that the companies operate in a single, unified economic region.
Pacific Economics Group used a gravity model to demonstrate a high degree of
economic interaction in the region including NSP and NCE's service territories.
Pacific Economics further found that the geographic Elzinga-Hogarty market
analysis underscores this result, clearly identifying that the companies operate
within a distinct economic region. For all of these reasons, the Applicants
believe that the Xcel Electric System will be confined to a single area or
region, within the meaning of the Act.94
(d) Size
The final clause of Section 2(a)(29)(A) requires the Commission to look
to the size of the combined system (considering the state of the art and the
area or region affected) and its effect upon localized management, efficient
operation, and the effectiveness of regulation. In the instant matter, these
standards are easily met. The size of the Xcel Electric System will not impair
the advantages of localized management, efficient operation or the effectiveness
of regulation. Instead, the Merger will actually increase the efficiency of
operations.
Localized Management -- The Commission has found that an acquisition
---------------------
does not impair the advantages of localized management where the new holding
company's "management [would be] drawn from the present management" (Centerior,
---------
supra), or where the acquired company's management would remain substantially
- -----
intact (AEP, supra). The Commission has noted that the 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." AEP, supra. The Commission also evaluates localized management
--- -----
in terms of whether a merged system will be "responsive to local needs." AEP,
---
supra.
- -----
The management of Xcel will be drawn primarily from the existing
management of NSP and NCE and their subsidiaries. NSP will continue to maintain
its corporate headquarters in Minneapolis and will maintain the management
structure of its combined subsidiary companies (including the electric operating
and other subsidiary companies of NCE) essentially intact. The electric utility
subsidiaries will continue to operate through the regional offices with local
service personnel and line crews available to respond to customers needs. Xcel
will preserve the well-established delegations of authority -- currently in
place at NSP and NCE -- which permit the local, district and regional management
teams to budget for, operate and maintain the electric distribution system, to
procure materials and supplies and to schedule work forces in order to continue
to provide the high quality of service which the customers of NSP and NCE have
enjoyed in the past. In short, the management structures of NSP and NCE, which
are responsive to local needs, will be left essentially intact after the Merger.
Accordingly, the advantages of localized management will not be impaired.
- ------------
94 As explained below, the Xcel Gas System, which spans the same
geographic expanse, is itself an integrated public utility system which
by definition is confined "to a single area or region."
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<PAGE>
Efficient Operation -- As discussed above in the analysis of Section
--------------------
10(b)(1), the size of Xcel will not impede efficient operation; rather, the
Merger will result in significant economies and efficiencies as described in
Item 3.C.2 below. Operations (as described in Item 1.E.) are more efficiently
performed on a centralized basis because of economies of scale, standardized
operating and maintenance practices and closer coordination of system-wide
matters.
Effective Regulation -- The Merger will not impair the effectiveness of
--------------------
regulation at either the state or federal level. The utility subsidiaries of NCE
will continue to be regulated by the state commissions of Colorado, Texas,
Wyoming, Oklahoma, New Mexico and Kansas with respect to retail rates, service
and related matters. The electric utility subsidiaries of NSP will continue to
be regulated by the state commissions of Minnesota, North Dakota, South Dakota,
Michigan, and Wisconsin with respect to retail rates, service and related
matters.95 On the federal level, Xcel will be fully regulated as a registered
holding company. The electric utility subsidiaries of Xcel will continue to be
regulated by FERC with respect to interstate electric sales for resale and
transmission services, by the NRC with respect to the operation of nuclear
facilities, and by the FCC with respect to certain communications licenses. The
jurisdiction of other federal regulators is similarly not affected.
Moreover, the Merger Agreement requires approvals from most of the
regulatory authorities having jurisdiction over the Xcel Operating Companies as
a condition to the consummation of the Merger. Applicants are working closely
with such regulators (both state and federal) to obtain the required approvals
(as described below in Item 4). Presumably, if the Merger results in an
impairment of regulatory authority, the state commissions will not approve it.96
Summary
-------
The cumulative effect of the regulatory, technological and economic
changes discussed above have significantly changed what is now the "state of the
art" in the electric industry. The Commission must respond to these changes
realistically in a manner that furthers the National and local energy policies
that have developed.
A rigid reading of the integration requirement was undoubtedly
appropriate at a time when ownership or control of the intervening lines was the
only way that a utility could move power from its generation assets to its
distribution systems. The need for this type of firm physical interconnection
has been reduced, if not eliminated, as the distribution systems now routinely
- ------------
95 The NSP and NCE management structures are designed to facilitate
communications with state regulators. Each company has established
State offices which have responsibility for regulatory, environmental,
and corporate communications and have other external relations
purposes. These state offices provide a single point of contact with
each of the state regulatory and environmental offices and have the
responsibility for handling all regulatory contacts, including making
regulatory filings and answering customer inquiries to the regulatory
commissions. It is expected that these offices will be left essentially
intact after the Merger.
96 In fact, a key aspect of the merger applications is to explain why no
such impairment of regulatory authority occurs.
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<PAGE>
contract for power with nonaffiliates and move the purchased commodity power
over independently operated or owned transmission lines -- or eliminate the
requirement for physical movement of power from the generator to the utility
system through use of market swaps, power displacement or other similar
techniques. Indeed, a narrow reading of the integration standard could force
merging parties to a "Hobson's choice," by requiring unnecessary
interconnections that could cause a merger to fail to satisfy FERC's standards
for approval.
Xcel's participation in MISO integrates the Xcel Electric System while
significantly increasing the geographic scope of MISO in furtherance of FERC
policy. A primary factor in NSP's and SPS's decision to join MISO was to enable
the electric operations of the two companies to be integrated in today's
electric market. The development of ISOs and other RTOs is critical to ensuring
the reliability and adequacy of the interstate transmission grid. As FERC
explained in the RTO NOPR:
the industry has undergone sweeping restructuring activity,
including a movement by many states to develop retail
competition, the growing divestiture of generation plants by
traditional electric utilities, a significant increase in the
number of mergers among traditional electric utilities and
among electric utilities and gas pipeline companies, large
increases in the number of power marketers and independent
generation facility developers entering the marketplace, and
the establishment of independent system operators (ISOs) as
managers of large parts of the transmission system. Trade in
bulk power markets has continued to increase significantly and
the Nation's transmission grid is being used more heavily and
in new ways. As a result, the traditional means of grid
management is showing signs of strain and may be inadequate to
support the efficient and reliable operation that is needed
for the continued development of competitive electricity
markets.97
The Commission has found, and the courts have agreed, that in
circumstances in which the expertise in operating issues is lodged with another
regulator, it is appropriate to "watchfully defer" to the work of that
regulator.98 Applicants urge the SEC to apply the doctrine of watchful deference
to FERC's stated objective to improve the competitiveness of the electric
industry through large RTOs.
The need for the SEC to accommodate the views of FERC in this matter
cannot be overstated. Congress enacted the 1935 Act and the FPA as two parts of
the same legislation. The
- ------------
97 RTO NOPR, FERC Stats & Regs at 33,685.
98 Northeast Utilities, Holding Co. Act Release No. 25273 (March 15,
-------------------
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (1992).
-------------- -----------------------
See also Wisconsin's Environmental Decade v. SEC, 882 F.2d 523 (D.C.
--- ---- ----------------------------------------
Cir. 1989) ("we are not prepared to say that the Commission abdicates
its duty in an exemption determination by deciding to rely, watchfully,
on the course of state regulation").
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<PAGE>
legislative history makes clear that the purpose of Section 11 of the 1935 act
"is simply to provide a mechanism to create conditions under which effective
Federal and State regulation will be possible."99 The FERC's administration of
the FPA has evolved as that agency has sought to develop fully competitive
wholesale markets consistent with the changing technology. These facts compel
the conclusion that administration of the 1935 Act must also evolve if the 1935
Act is to continue to create conditions under which "effective Federal and State
regulation" is possible.
In the 1995 Report, the Division recommended that the Commission focus
on whether the resulting system will be subject to effective regulation. The
Study emphasized that "open access under FERC Order No. 636, wholesale wheeling
under the Energy Policy Act [and FERC Order No. 888] and the development of an
increasingly competitive and interconnected market for wholesale power have
expanded the means for achieving the interconnection and the economic operation
and coordination of utilities with non-contiguous service territories." The
Study further expressed concern that the Act "not serve as an artificial barrier
where other energy regulators have determined that an acquisition will benefit
utility consumers." Accordingly, the Study concluded that "[w]hen considering
any proposed acquisition, the SEC should consider whether the resulting system
will impair the effectiveness of regulation. Where the affected state and local
----------------------------------
regulators concur, the SEC should interpret the integration standard flexibly to
- --------------------------------------------------------------------------------
permit non-traditional systems if the standards of the Act are otherwise met."
- -------------------------------------------------------------------------------
(Emphasis added.) Under this approach, if the affected States approve a proposed
transaction (a condition precedent to the instant Merger), the "effectiveness of
regulation" standard would be met.
A condition of the Merger is the receipt of all requisite state
approvals. The Merger also benefits investors, consumers and the public interest
and does not give rise to the evils against which the Act is addressed.
Accordingly, for the reasons set forth above, the Commission should find that
the Xcel Electric System comprises a single, integrated electric-utility system
within the meaning of the Act.
(ii) Retention of Combined Gas System
Because the Commission has interpreted the term "integrated
public-utility system" to mean a system that is either gas or electric, but not
both, it is necessary to qualify the combined gas operations of NSP and NCE (the
"Xcel Gas System") under the "A-B-C" clauses of Section 11(b)(1). Under those
provisions, a registered holding company can own "one or more" additional
integrated systems if certain conditions are met. Specifically, the Commission
must find that (A) the additional system "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) the additional
system is located in one state or adjoining states, and (C) the combination of
systems under the control of a single holding company is not so large . . . as
to impair the advantages of localized management, efficient operation, or the
effectiveness of regulation."
- ------------
99 Sen. Rep. No. 621, 74th Cong., 1st Sess. (1935).
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<PAGE>
As shown below, the Xcel Gas System will constitute a single,
integrated public utility system. Section 2(a)(29)(B) defines an "integrated
public utility system" as applied to gas utility companies as:
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 combined gas operations of NSP and NCE satisfy this definition.
First, both the Commission's precedent and current technological
realities indicate that the Xcel Gas System will operate as a coordinated system
confined in its operation to a single area or region because it will derive
natural gas from common sources of supply, and utilize transportation and
storage facilities. The gas utility operations of NSP and NCE will operate in a
single area or region, as those operations are in the adjoining states of
Michigan, Wisconsin, Minnesota, North Dakota, South Dakota, Wyoming, Colorado
and Arizona. The Commission has not traditionally required that the pipeline
facilities of an integrated gas system be physically interconnected. See,
---
Penzoil Company, Holding Co. Act Release No. 15963 (Feb. 7, 1968) (finding an
- ----------------
integrated gas utility system where some gas utility properties were not
connected with the rest of the system, but with the facilities of an
unaffiliated transmission company from which the system purchased all natural
gas supplied to those properties, but not each other). See also, American
--- ---- --------
Natural Gas Company, Holding Co. Act Release No. 15620 n.5 (Dec. 12, 1966) ("It
- -------------------
is clear the integrated or coordinated operations of a gas system under the Act
may exist in the absence of such interconnection"). Instead, the Commission has
looked to such issues as from whom the distribution companies within the system
receive much, although not all, of their gas supply. See, e.g., Philadelphia
--- ---- ------------
Company and Standard Power and Light Company, Holding Co. Act Release No. 8242
- ---------------------------------------------
(June 1, 1948) ("most of the gas used by these companies in their operations is
obtained from common sources of supply"); Consolidated Natural Gas Company,
---------------------------------
Holding Co. Act Release No. 25040 (Feb. 14, 1990) (finding integrated system
where each company derived natural gas from two transmission companies, although
one such company also received gas from other sources); Sempra Energy, Holding
-------------
Co. Act Release No. 26971 (Feb. 1, 1999) (finding an integrated system where
each utility would derive "a significant amount" of gas from two basins and
noting that gas can now be obtained by more flexible and efficient means, due to
the development of market centers, hubs and pooling points). The Commission also
has considered obtaining gas from a common pipeline, North American Company,
-----------------------
Public Holding Co. Act Release No. 11530 (finding Panhandle Eastern pipeline to
be a common source of supply): NIPSCO Industries, Holding Co. Act Release No.
------------------
26975 (Feb. 10, 1999) (finding an integrated system where the applicants had
contracted capacity on only one common long-haul pipeline and ten of sixteen
individual interstate pipelines on which the applicants' systems had contract
capacity intersected at and formed industry-recognized trading hubs), as well
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<PAGE>
as from different pipelines when the gas originates from the same gas field in
determining a common source of supply. See, Central Power Company and
--- ----------------------------
Northwestern Public Service Company, Holding Co. Act Release No. 2471 (Jan. 6,
- ------------------------------------
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." See also, MCN Corporation, Holding Co. Act Release No. 26576 (Sept.
--- ---- ----------------
17, 1996) (finding an integrated system where one gas utility would receive
70-90% of its gas supply from the same basin from which two affiliates received
46% and 55% of their supply). 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.
The NSP and NCE gas operations today purchase gas from multiple basins
and transport gas on multiple pipelines in order to enhance supply competition
and provide increased reliability. However, NSP and NCE purchase significant
quantities of natural gas from common supply basins as shown below.
Approximately 75% of the 324.7 Bcf of natural gas purchased during 1998 were
from common supply sources. The majority of these supplies were delivered off of
the Northern Natural Gas Company ("NNG") and Colorado Interstate Gas Company
("CIG") pipeline systems to NSP and NCE, respectively. The pipeline systems of
NNG and CIG are directly connected in two locations in the Mid Continent supply
basin (i.e., the Hugoton and Anadarko supply basins). Together NCE and NSP hold
over 1.5 Bcf of daily capacity and receive peak day deliveries in excess of 1.7
Bcf from the NNG and CIG pipeline systems. NSP and NCE purchase gas from the
following major supply basins:
NATURAL GAS NCE NSP NCE & NSP
FIELD/BASIN (Bcf) (Bcf) (Bcf) % OF TOTAL
- ----------- --- --- --- ----------
Mid Continent 33.7 27.7 61.4 18.9
Permian 58.5 5.3 63.9 19.7
Rocky Mountain 118.7 1.7 120.5 37.1
San Juan 2.9 - 2.9 0.9
Denver-Julesburg 13.8 - 13.7 4.2
Alberta - 41.9 41.9 12.9
Other - 20.4 20.4 6.3
----- ---- ----- -----
Total 227.6 97.0 324.7 100
In addition to the above, NCE and NSP own or have contracted for
significant underground gas storage and own local gas peak shaving capacity at
numerous locations throughout Colorado, Minnesota, Texas and other Midwestern
states. The vast majority of this storage and peak shaving capacity is directly
linked or accessible to the NNG and CIG pipeline systems. As a result, these
operationally flexible assets have the ability to further integrate the common
sources of supply for NCE and NSP. Access to the various storage facilities and
pipelines forms a grid upon which the companies can source supply to take
advantage of relative shifts in market conditions among the various producing
basins.
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<PAGE>
The concept of a "common source of supply" is susceptible to a
different understanding today than in 1935, when the "single area or region" was
generally defined in terms of the pipeline delivery points (i.e., the
----
city-gate), where system LDCs purchased their gas. Sempra Energy, Holding Co.
-------------
Act Release No. 26971 (February 1, 1999). In Sempra, the Commission recognized
------
"that the relevant inquiry today is whether the system LDCs purchase substantial
quantities of gas produced in the same supply basins, and whether that gas is
`deliverable' - in other words, whether there is sufficient transportation
capacity available in the marketplace to assure delivery on an economical and
reliable basis." See also NIPSCO Industries, Inc., Holding Co. Act Release No.
--- ---- ------------------
26975 (February 10, 1999) (NIPSCO Industries' acquisition of Bay State Gas
Company, in which case the Commission held that "[a]lthough the intervening
territory between the NIPSCO Operating Companies is significant, we do not
believe that the distance contravenes the policy of the Act against scatteration
- -- the ownership of widely dispersed utility properties which do not lend
themselves to efficient operation and effective state regulation").
In NIPSCO Industries' acquisition of Bay State Gas Company, the
Commission recognized that the "state of the art" in the gas industry continues
to evolve and change, primarily as a result of decontrol of wellhead prices, the
continuing development of an integrated national gas transportation network, the
emergence of marketers and brokers, and the "unbundling" of the commodity and
transportation functions of the interstate pipelines in response to various FERC
initiatives, in particular Order 636,100 which has dramatically altered the way
in which local gas distribution companies purchase and ship their required gas
supplies. NIPSCO, supra.
------ -----
The Commission has also considered and recognized that another
important development affecting the "state of the art" in the natural gas
industry has been the creation of a national network of trading hubs and market
centers. The development of trading hubs and market centers was a natural
outgrowth of FERC Order 436 and 636, which, as indicated, required interstate
pipelines to separate, or "unbundle," the commodity and transportation and
storage functions of the interstate pipelines.
In this regard, it is significant to note that, 6 of the 12 individual
interstate pipelines (long-haul and regional) on which the NCE and NSP companies
have contracted capacity intersect at and form industry recognized trading hubs.
These include:
Name of Hub Location Intersecting Pipelines
----------- -------- ----------------------
MidContinent Market Greensburg, Kansas ANR Pipeline Co.
Center KN Energy, Inc.
Natural Gas Pipeline Co.
Northern Natural Gas Co.
Panhandle Eastern PipeLine Co.
Williams Gas Pipelines
- ------------
100 See 1995 Report, pp. 29-31.
---
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<PAGE>
Name of Hub Location Intersecting Pipelines
----------- -------- ----------------------
Chalk Bluffs near Cheyenne, Wyoming Colorado Interstate Gas Co.
KN Energy, Inc.
Westgas Interstate, Inc.
Williams Gas Pipelines
Wyoming Interstate Co.
Trailblazer Pipeline Co.
Buffalo Wallow near Amarillo, Texas ANR Pipeline Co.
Reliant (NorAm) Gas
Transmission Co.
KN Energy, Inc.
Natural Gas Pipeline Co.
Panhandle Eastern PipeLine Co.
Transwestern Pipeline Co.
Trading hubs (including all of those listed above) essentially function
as physical transfer points between intersecting pipelines, where shippers
(i.e., buyers and sellers) and traders can sell, exchange or trade gas or
----
pipeline capacity or redirect deliveries to a different pipeline. Further,
various types of unbundled services are typically available at trading hubs,
such as parking, loaning, and wheeling of gas and, in some instances, title
transfer.101 Because of the role played today by market hubs and market centers,
coordination of the operations of two non-contiguous gas companies is no longer
dependent solely upon having contractual capacity on the same interstate
pipelines, so long as the two companies both have access to one or more common
trading hubs.
Importantly, trading hubs now allow gas distribution companies
operating in a much larger area or region of the country to realize operating
economies and efficiencies from coordinated operations that were once thought to
be achievable only by contiguous or nearly contiguous gas companies supplied by
the same interstate pipelines. In fact, as discussed below, the opportunities to
achieve operating economies may be even greater where the two companies seeking
to combine have significantly different load profiles (e.g., non-coincident
----
seasonal peaks, a substantially different customer mix, etc.) or where, as in
this case, the two companies are located in two different major gas market
centers, but served (to a degree) from common supply basins.
Because NSP and NCE share access through their respective pipeline
transporters to several industry-recognized market and supply-area hubs, they
will have the ability to physically coordinate and manage their portfolios of
gas supply, transportation and storage. Each of the hubs or market
- ------------
101 "Parking" is essentially a short-term interruptible storage service.
"Loaning" is a service by which a party with gas will provide the gas
to another party with a specific date for the return of such gas at
either that location or another location under mutually agreeable terms
and conditions (in effect, the inverse of parking). "Wheeling" is the
provision of transportation by a hub operator from one system to
another system. Finally, "title transfer" services allow parties to
exchange title to gas that is already within a pipeline system for gas
at different points on the same pipeline system or for gas that is on
another pipeline system, without the requirement of physical movement.
Title transfer in itself allows the shippers to minimize transportation
costs.
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<PAGE>
centers are served by a significant number of competing pipeline transporters,
further expanding the potential supply options available to the merged company.
In addition, as customers of hub services, NSP and NCE are among an even larger
number of other customers of such services such as natural gas marketers, local
distribution companies, and other wholesale customers.
For example, the ANR and NNG pipelines, which transport gas to NSP, and
the KN and Williams pipelines, which transport gas to NCE, all intersect at the
MidContinent Market Center hub located at Greensburg, Kansas. At the
MidContinent Market Center hub, NSP can arrange and consummate direct physical
purchases and trades of gas and/or transportation capacity with NCE or with any
other shipper having access to the MidContinent Market Center hub. NSP and NCE
also have access to the Waha Permian Basin hub near Odessa, Texas via contracted
capacity on the NNG and El Paso pipelines. The Waha Permian Basin hub is a
recognized center for western natural gas index price futures trading in the
U.S. Through four interstate and six intrastate pipeline interconnections,
market participants such as NSP and NCE can physically support, if necessary and
if permitted by state regulatory bodies, the utilization of financial
derivatives as a means of managing price volatility.
Moreover, through its contracted capacity on the CIG and KN pipelines,
NCE would have access to the storage capacity held by NSP on NNG and ANR. Such
access will enhance Xcel's ability to manage price volatility. These facilities
would also provide NSP and NCE with an important gas balancing capability, which
will allow them to manage fluctuating weather-related load profiles of each
other's system.
Finally, NSP and NCE would have direct access to the Chicago market
center hub, which is expected to become an increasingly important source of gas
for all eastern U.S. markets.
In the current natural gas industry, limitations on the deliverability
of gas in most areas of the country have disappeared. Under Section 2(a)(29)(B),
these "state of the art" changes in the industry are directly relevant to the
issue of the appropriate size of the "area or region" in which an "integrated"
gas system may operate.
(iii) Coordinated Operations of Combined Gas Properties
NSP and NCE currently manage similar physical properties and
contractual assets (gas supply, pipeline transportation, and storage contracts
of varying types and duration). Each company maintains a professional staff that
performs essential portfolio management functions. In NSP's case, these
functions are performed by a group that currently consists of 9 individuals and
provides gas portfolio management services. The NCE gas supply department
currently consists of 8 individuals.
After the Merger, there will be a formal relationship between the two
gas supply departments which will enable them to integrate the overall planning
and management of the two companies' respective portfolios of physical and
contractual assets. This formal relationship will be through New Century
Services, which will provide various administrative and operational services to
the existing gas operations of NSP and NCE.
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<PAGE>
Finally, the system will not be so large as to impair the advantages of
localized management or the effectiveness of regulation. Localized management
will be preserved. It is expected that the centralized functions of the NSP-NCE
gas system will be managed from one location, and the local functions will
continue to be handled from several regional offices. Management will,
accordingly, remain close to the gas operations, thereby preserving the
advantages of local management. And, from a regulatory standpoint, there will be
no impairment of regulatory effectiveness. The same state regulators currently
overseeing these gas operations will continue to have jurisdiction after the
proposed transaction is completed. Those same state regulators are already
regulating multi-jurisdictional gas utilities.
For all of these reasons, we believe that the NSP-NCE gas operations
will satisfy the integration requirements of Section 2(A)(29)(B).
(a) Loss of economies
Prior to the 1997 NCE Order, the Commission interpreted Clause A to
require, in effect, a showing that the additional system could not survive on a
stand-alone basis. Id., citing New England Electric System, Holding Co. Act
--- -----------------------------
Release No. 15035 (Mar. 19, 1964), rev'd, 346 F.2d 399 (1st Cir. 1966), rev'd
----- -----
and remanded, 384 U.S. 176 (1965), on remand, 376 F.2d 107 (1st Cir. 1967),
- ------------- ---------
rev'd, 390 U.S. 207 (1968). In its 1995 Report, the SEC Staff noted that, in a
- -----
competitive utility environment, any loss of economies threatens a utility's
competitive position and even a "small" loss of economies could render a utility
vulnerable to significant erosion of its competitive position. Adopting this
line of reasoning, the Commission, in its order approving the merger of PSCo and
SPS, found that "[t]he gas and electric industries are converging, and, in these
circumstances, separation of gas and electric businesses may cause the separated
entities to be weaker competitors than they would be together. This factor adds
to the quantifiable loss of economies caused by increased costs." 1997 NCE
Order, supra. See also WPL Holdings, supra.
----- --- ---- ------------ -----
Applicants believe that in light of this precedent and the changing
structure of the industry, where utilities are no longer either gas companies or
electric companies, but are commonly energy companies, lost opportunities could
constitute lost economies for the purpose of the application of the (A)-(B)-(C)
clauses. This proceeding, however, does not require that the Commission agree
with this interpretation, since Applicants can demonstrate loss of economies
under a more traditional analysis. Historically, the Commission has given
consideration to four ratios, which measure the projected loss of economies as a
percentage of: (1) total utility operating revenues; (2) total utility expense
or "operating revenue deductions"; (3) gross utility income; and (4) net utility
operating income. Although the Commission has declined to draw a bright-line
numerical test under Section 11(b)(1)(A), it has 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 gas 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., Holding Co. Act Release No. 1632
-------------------------------
(Sept. 16, 1942).
Direct Loss of Economies. NSP and NCE have each prepared separate
--------------------------
studies of their respective gas utility operations that analyze the lost
economies that their gas utility operations
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<PAGE>
would suffer upon divestiture when compared to their retention pursuant to the
Merger. These studies are attached to this Application as EXHIBIT J-1 and
EXHIBIT J-2 (the "Gas Studies").102 As set forth in the Gas Studies, if the gas
operations of NSP and NCE were operated on a stand-alone basis, lost economies
from the need to replicate services, the loss of economies of scale, the costs
of reorganization, and other factors would be immediate and substantial. In the
absence of rate relief, those lost economies would substantially injure the
shareholders of NSP and NCE upon the divestiture of those gas operations. As the
studies further show, if rate relief were granted with respect to the lost
economies, then consumers would bear those substantial costs over what they
would have to pay if the properties were retained as contemplated by the Merger.
As set forth in the Gas Studies, divestiture of the gas operations of
PSCo, Cheyenne, NSP and NSP-W into stand-alone companies would result in lost
economies of $31,626,000 for NSP, $8,824,000 for NSP-W, $43,605,187 for PSCo,
and $1,682,723 for Cheyenne. The table below shows the 1998 gas operating
revenues, gas operating revenue deductions, gas gross income and gas net income
of NSP, NSP-W, PSCo and Cheyenne.
================================================================================
000s
Gas Gas Operating Gas Gas
Company Operating Revenue Gross Net
Revenues Deductions Income Income
NSP $360,567 $330,578 $29,989 $23,432
NSP-W $78,800 $73,510 $5,290 $3,691
PSCo $640,104 $569,059 $71,044 $57,047
Cheyenne $18,438 $16,807 $1,631 $1,401
================================================================================
On a percentage basis, the lost economies amount to 76.44% of 1998 gas
net income in the case of PSCo, 120.11% in the case of Cheyenne, 134.97% of gas
net income in the case of NSP and 239.07% of gas net income in the case of
NSP-W--far in excess of the loss of net income in UNITIL, where the Commission
------
allowed the retention of gas utility operations, and the 30% loss in New England
-----------
Electric System that the Commission has described as the highest loss of net
- ----------------
income in any past divestiture order.103 As a percentage of 1998 gas operating
revenues, these lost economies described in the Gas Studies amount to 6.81% in
the case of PSCo, 9.13% in the case of Cheyenne, 8.77% in the case of NSP and
11.20% in the case of NSP-W--losses substantially higher than the
- ------------
102 The Gas Study for PSCo and Cheyenne was prepared in connection with the
1997 NCE Order. NCE is in the process of updating that study and will
file it by amendment to this Application. Based on a preliminary
review, NCE anticipates that the cost economies will exceed those
included in the prior study.
103 See UNITIL Corp., supra ("The Commission has required divestment where
--- ------------ -----
the anticipated loss of income of the stand-alone company was
approximately 30%..." or "29.9% of net income before taxes"), citing
SEC v. New England Electric System, 390 U.S. 207, 214 n. 11 (1968).
----------------------------------
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<PAGE>
losses in any past divestiture order.104 As a percentage of 1998 expenses or
operating revenue deductions, the lost economies described in the Gas Studies
would amount to 7.66% in the case of PSCo, 10.01% in the case of Cheyenne, 9.57%
in the case of NSP, and 12.00% in the case of NSP-W, higher than the losses in
any past divestiture order and, in Entergy Corporation, Holding Co. Act Release
-------------------
No. 25952 (Dec. 17, 1993), another case in which the Commission authorized the
retention of gas operations. As a percentage of 1998 gross income, the lost
economies described in the Gas Studies amount to 61.38% in the case of PSCo,
103.17% in the case of Cheyenne, 105.46% in the case of NSP and 166.81% in the
case of NSP-W, far in excess of the highest loss of gross income in any
divestiture order.
In order to recover these estimated lost economies, PSCo would need to
increase rate revenue by $44,607,409 or 6.97%, Cheyenne would need to increase
revenue by $1,775,439 or 9.63%, NSP would need to increase revenues by
$32,542,000 or 9.03% and NSP-W would need to increase rate revenue by $9,007,000
or 11.43%. These increases in rate revenues would have a direct and immediate
negative impact on the rates charged to customers for gas services. In addition,
the customers of NCE and NSP gas businesses who are also customers of their
respective electric utility businesses will experience a doubling of their
postage costs to pay separate bills. The total estimated increase in such
postage costs is $3.35 per customer per year or $5,103,032 in the aggregate
($1,523,000 for NSP gas customers, $326,000 for NSP-W gas customers, $3,478,637
for PSCo gas customers, and $101,395 for Cheyenne gas customers.)
It is the intention of the Applicants that their separate gas
properties be integrated and operated as a single economic system in conjunction
with Applicants' electric system in order to better provide competitive
comprehensive energy services to Applicant's customers. Because today the
properties of NSP and NCE are operated as separate entities and Section
11(b)(1)(A), (B) and (C) appear to require an analysis of "[e]ach such
additional system," the Gas Studies described above looked at divestiture of
four separate gas systems, preserving their present status of being separate
from one another, which produced annual lost economies that are estimated to be
$85.7 million per annum.105
These lost economies are substantial in an industry in which there are
already many companies competing with Applicants for the provision of
comprehensive energy services in Applicants' service territories and, where
there is not yet competition, lost economies may well result in increased retail
rates. Competition between energy suppliers can only benefit consumers.
Increasingly, the competitors are themselves suppliers of comprehensive energy
services just like NCE, NSP, TUC Holding Company and Houston Industries
Incorporated.
Divestiture of the NSP and NCE gas properties either into one company
or into separate
- ------------
104 The highest loss of operating revenues in any case ordering divestiture
is commonly said to be 6.58%. See, e.g., UNITIL Corp., supra ("[o]f
--- ---- ------------ -----
cases in which the Commission has required divestment, the highest
estimated loss of operating revenues of a stand-alone company was
6.58%...").
105 NSP and NCE are in the process of preparing an additional study which
will show the impact of the divestiture of their gas operations if
divestiture were to occur following their integration into one
multi-state gas operation.
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<PAGE>
companies would also result in the loss to consumers of the cost-saving benefits
of the economies offered by the "energy services" approach of NSP and NCE to the
utility business. While the losses cannot now be fully quantified, they are
substantial. At the center of the energy services company concept is the idea
that providing gas and electric services and products is only the start of the
utility's job. In addition, the utility must provide enhanced service to the
consumer by providing an entire package of both energy products and services. In
this area, NSP's and NCE's efforts are part of a trend by utilities to organize
themselves as energy service companies; that is, as providers of a total package
of energy services rather than merely suppliers of gas and electric products.
The goal of an energy service company is to retain its current customers and
obtain new customers in an increasingly competitive environment by meeting
customers' needs better than the competition. An energy service company can
provide the customer with a low cost energy (i.e., gas, electricity or
----
conservation) option without inefficient subsidies. This trend towards, and the
need for, convergence of the former separate electric utility function and gas
utility function into one energy service company was recently recognized by the
Commission in Consolidated Natural Gas Company, Holding Co. Act Release No.
----------------------------------
26512 (April 30, 1996) (hereinafter, the "CNG Order"), where the Commission
stated: "It appears that the restructuring of the electric industry now underway
will dramatically affect all United States energy markets as a result of the
growing interdependence of natural gas transmission and electric generation, and
the interchangeability of different forms of energy, particularly gas and
electricity." See also UNITIL Corp., Holding Co. Act Release No. 26527 (May 31,
--- ---- ------------
1996) and SEI Holdings, Inc., Holding Co. Act Release No. 26581 (Sept. 26,
--------------------
1996).
As the Commission recognized in WPL Holdings, TUC Holdings and the 1997
------------ ------------
NCE Order, there are significant economies and competitive advantages inherent
in a combined gas and electric utility as contrasted to a utility offering only
electricity or gas. Besides the loss of these inherent economies, other
substantial economies would be lost by the separation of the electric systems
from the gas systems. These lost economies would include decreased efficiencies
from separate meter reading, meter testing and billing operations, as well as
decreased efficiencies in customer service operations, savings in facilities
maintenance and emergency work coordination, and other administrative
operations. A final consideration, also raised by the Commission in the 1997 NCE
Order, is that the gas and electric properties of NCE and NSP have long been
under common control, and approval of the Merger will not alter the status quo
with respect to these operations.
Accordingly, it is Applicants' view that the standards of Clause A are
satisfied in light of the increased expenses and the potential loss of
competitive advantages that could result from separation from the gas system.
Against this background, Applicants believe that the Commission should find the
standards of Clause A satisfied with respect to the gas systems of NCE, NSP and
NSP-W.
(b) Same state or adjoining states
The proposed Merger does not raise any issue under Section 11(b)(1)(B)
of the Act. The Commission has paraphrased Clause B as follows: "All of such
additional systems are located in a state in which the single integrated public
utility system operates, or in states adjoining such a state, or in a foreign
country contiguous thereto." Engineers Public Service Company, Holding Co.
--------------------------------
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<PAGE>
Act Release No. 2897 (July 23, 1941), rev'd on other grounds, 138 F.2d 936 (D.C.
----------------------
Cir. 1943), vacated as moot, 332 U.S. 788 (1947). The Xcel Gas System is located
---------------
in the same states as the Xcel Electric System, plus Arizona, and Arizona
adjoins Colorado, a state in which the Xcel Electric System operates. Thus, the
requirement that each additional system is located in one state or adjoining
states is satisfied.
(c) Size
Further, retention of the combined gas operations of NCE and NSP as an
additional integrated system raises no issue under Section 11(b)(1)(c) of the
Act. The combination of the systems under the control of a single holding
company will not be "not so large . . . as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation." 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 Xcel is not too large.
Even after the combination, the gas utility operations of New NSP,
NSP-W, PSCo and Cheyenne, with some 1.5 million gas customers combined in seven
states, will be smaller than Houston Industries (the parent of Minnegasco)
which, through subsidiaries, has 2,700,000 gas customers, 630,000 of which are
in Minnesota. This company is among NSP's and NCE's primary competitors in the
region. Based on data through December 31, 1998, and giving effect to the
Merger, the combined gas assets will represent only 8.6% of the total assets of
Xcel, whereas the electric assets will represent 51.6%; operating revenues for
the gas operations will be 16.5% of total Xcel's revenues as compared with 74.1%
for the electric operations; and customers of the gas operations will constitute
33.3% of all Xcel's customers, while electric operations will represent 67.6%.
With respect to localized management, this issue is discussed for the Merger as
a whole under Item 3.C.1.(b)(i)(a) below. Applied solely to the gas operations,
the current NSP, NSP-W, PSCo and Cheyenne gas systems enhance localized
management within the larger corporate structure and will continue to do so
after the Merger is completed.
After the Merger, certain centralized gas functions of Xcel will be
managed by New Century Services from a centralized location, and the local
functions will continue to be handled from regional offices. No reduction in
customer service or support crews is expected. Management will therefore remain
geographically close to the gas operations, thereby preserving the advantages of
localized management. From the standpoint of regulatory effectiveness, NSP
already operates a combined gas and electric utility in Minnesota, North Dakota
and South Dakota, as does NSP-W in Wisconsin and Michigan, PSCo in Colorado and
Cheyenne in Wyoming. In addition, several other gas utilities in the region
serve customers in several states. Thus, the regulatory agencies in the six
states are currently regulating multi-jurisdictional gas utilities and will be
able to effectively regulate the gas utility operations of Xcel after the
Merger. In addition, the historical joint gas and electric utility operations of
NSP has never raised regulatory concerns in Minnesota and North Dakota, and NSP
has requested the Minnesota and North Dakota regulatory authorities to make
findings that the retention of the existing gas system of NSP, would not impair
their ability to regulate these systems
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<PAGE>
effectively.106 With respect to efficient operation, as described below, as part
of the Xcel system, the gas operations of New NSP, NSP-W, PSCo and Cheyenne are
expected to reduce purchased gas costs by $77.4 million from 2001 to 2010, which
will be flowed through to customers in accordance with state commission approved
gas adjustment clauses. Far from impairing the advantages of efficient
operation, the combination of the gas operations under Xcel will facilitate and
enhance the efficiency of gas operations.
As in the 1997 NCE Order and WPL Holdings, the proposed combination of
------------
NCE and NSP offers Applicants a means to compete more effectively in the
emerging energy services business. Further, as discussed above, the Merger will
give rise to none of the abuses, such as ownership of scattered utilities
properties, inefficient operations, lack of local management or evasion of state
regulation, that section 11(b)(1) and the Act generally were intended to
prohibit.
(iv) Retention of Other Businesses
In the 1997 NCE Order, the Commission approved the retention by NCE of
certain non-utility businesses of PSCo and SPS as well as their direct and
indirect subsidiary companies. Annex C sets forth those non-utility businesses.
In addition Annex C lists and describes those non-utility businesses commenced
by NCE following that merger. All such businesses have been established pursuant
to a Commission order or an applicable exception. As noted previously, the
non-utility businesses of NSP were listed and described on Annex D. At issue in
this transaction, is whether Xcel may retain the non-utility businesses of NSP
and the new non-utility businesses of NCE.
The non-utility interests of NSP are fully retainable. As a result of
the Merger, the non-utility businesses and interests of NSP and NCE described in
Item 1.C. above will become businesses and interests of Xcel. Corporate charts
showing the subsidiaries, including non-utility subsidiaries of NSP and NCE, are
filed as EXHIBITS E-10 and E-11. A corporate chart showing the projected
arrangement of these subsidiaries under Xcel is filed as EXHIBIT E-12.
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." The Commission has historically interpreted this
provision to require an operating or "functional" relationship between the
non-utility activity and the system's core non-utility business. See, e.g.
--- ----
Michigan Consolidated Gas Co., Holding Co. Act Release No. 16763 (June 22,
- -------------------------------
1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971); United Light and Railways Co.,
----- -----------------------------
Holding Co. Act Release No. 12317 (Jan. 22, 1954); CSW Credit, Inc., Holding Co.
----------------
Act Release No. 25995 (March 2, 1994); and Jersey Central Power and Light Co.,
-----------------------------------
Holding Co. Act Release No. 24348 (March 18, 1987). The Commission retreated
from this historical position and
- ------------
106 In approving the merger of PSCo and SPS into NCE, the Colorado
Commission similarly supported the retention by PSCo of its gas
operations, and the Wyoming Commission similarly supported the
retention by Cheyenne of its gas operations.
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<PAGE>
"has sought to respond to developments in the industry by expanding its concept
of a functional relationship."107 This shift culminated in the adoption of Rule
58. The Commission added "that various considerations, including developments in
the industry, the Commission's familiarity with the particular non-utility
activities at issue, the absence of significant risks inherent in the particular
venture, the specific protections provided for consumers and the absence of
objections by the relevant state regulators, made it unnecessary to adhere
rigidly to the types of administrative measures" used in the past. Id.
Furthermore, in the 1995 Report, the SEC Staff recommended that the Commission
replace the use of bright-line limitations with a more flexible standard that
would take into account the risks inherent in the particular venture and the
specific protections provided for consumers.108 As set forth more fully in
Annexes C, D and E, the non-utility business interests that Xcel will hold
directly or indirectly all meet the Commission's standards for retention.
In the past, the Commission has approved the acquisition or retention
of non-utility businesses in a merger between two companies one of which was an
independent public utility company not subject to the 1935 Act and the other was
an exempt holding company. See 1997 NCE Order, supra. As noted above, Annex C
--- -----
sets forth the non-utility business of PSCo and SPS approved for retention.
Applicants submit that the statutory requirements for ownership of NCE's new
non-utility businesses and NSP's non-utility businesses are satisfied, as
detailed in Annexes C and D hereto.
In approving NCE's retention of other businesses, the Commission also
excluded such businesses from the limitation upon investment in energy-related
companies under Rule 58, noting that the restrictions of Section 11(b)(1) are
applicable to registered holding companies and not to exempt holding companies.
Rule 58 provides in section (a)(1)(ii) that investments in non-utility
activities that are exempt under Rule 58 cannot exceed 15% of the consolidated
capitalization of the registered holding company. In its statement supporting
the adoption of the Rule, the Commission stated:
The Commission believes that all amounts that have actually
been invested in energy-related companies pursuant to
commission order prior to the date of effectiveness of the
Rule should be excluded from the calculation of aggregate
investment under Rule 58. The Commission also believes it is
appropriate to exclude from the calculation all investments
made prior to that date pursuant to available exemptions.
Holding Co. Act Release No. 26667 at 50-51. Because NSP was not yet a registered
holding
- ------------
107 Exemption of Acquisition by Registered Public-utility Holding Companies
of Securities of Non-utility Companies Engaged in Certain Energy-
related and Gas-related Activities, Holding Co. Act Release No. 26667
(Feb. 14, 1997) ("Rule 58 Release").
108 1995 Report at 81-87, 91-92.
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<PAGE>
company, none of the investments in non-utility activities that are described in
Annex D hereto were pursuant to Commission order. However, since the non-utility
investments of NSP, as an exempt holding company, were exempt under the Act,
investments made by it prior to the effective date of Rule 58 which will
continue as part of Xcel after consummation of the merger, should not count in
the calculation of the 15% maximum. See 1997 NCE Order, supra (Commission order
--- -----
granting exclusion of non-utility energy-related investments of SPS, an
independent utility, and PSCo an exempt holding company, from calculations of
the 15% maximum investment allowed under Rule 58).
Besides the non-utility businesses of NSP subsidiaries that are
described in Annex B, NSP is directly engaged at the parent company level in the
following non-utility businesses: (i) an appliance services program for its
residential customers, (ii) construction of natural gas distribution systems for
third parties (primarily end-users and municipal gas systems), (iii) sale and
installation of power quality instruments primarily to protect equipment of
customers from electric surges, (iv) sale of steam to industrial customers in
NSP's service territory and (v) installation and maintenance of street lighting
for municipalities and other customers. New NSP intends to continue to engage in
these businesses.
The following chart shows the reasons based on Commission orders or
rules that retention of such businesses should be permitted:
Business Description Authority
-------------------- ---------
Appliance services program Mississippi Power and Light
---------------------------
Company, Holding Co. Act
-------
Release No. 25140 (August 30,
1990); Rule 58(b)(1)(iv)
Sale and installation of power New Century Energies, Inc.,
quality instruments --------------------------
Holding Co. Act Release No. 26748
(Aug. 1, 1997); Central and South West
----------------------
Corp., Holding Co. Act Release No. 26250
-----
(Mar. 14, 1995); Jersey Central Power &
----------------------
Light Co., Holding Co. Act Release No.
---------
26600 (Nov. 5, 1996); Appalachian Power
-----------------
Co., Holding Co. Act Release No. 26639
---
(Jan. 2, 1997); Rule 58(b)(1)(iv)
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<PAGE>
Business Description Authority
-------------------- ---------
Construction of natural gas National Fuel Gas Company,
distribution systems for third -------------------------
parties; installation and Holding Co. Act Release No.
maintenance of street lighting 24381 (May 1, 1987); Rule 58(b)(1)(vii)
Sale of steam New Century Energies, Inc.,
--------------------------
Holding Co. Act Release No. 26748
(Aug. 1, 1997); Cinergy Corp., Holding Co.
-------------
Act Release No. 26474 (Feb. 20, 1996);
Rule 58(b)(1)(vi)
Similarly, PSCo, prior to the merger with SPS into NCE, also was
directly engaged in various non-utility businesses, namely: thermal energy, the
commercialization of electro-technologies; electric and gas vehicle products and
services; and the sale and servicing of electric and gas appliances. The
Commission in the 1997 NCE Order authorized the retention of these businesses.
From its experience in marketing these services, NCE is aware that there are
certain advantages of having a utility be able to offer these types of services
directly to customers, as opposed to through an affiliate. Based on this
experience, Applicants request the following authorization: where either PSCo or
the NSP Companies are directly engaged in a line of business, the retention of
which the Commission either in the 1997 NCE Order or in its order in this
proceeding has authorized, the other Xcel Operating Companies should likewise be
authorized to engage in that business, subject to any limitations or
requirements imposed by state law or state commission order or rule.
In addition, the Commission in the 1997 NCE Order authorized SPS, PSCo,
and other associate companies of NCE to lease office or other space to other
associate companies (with such leases to be in accordance with Rules 87, 90, and
91) or to third parties. Applicants request that the Commission extend this
authority to apply to the Xcel system and NSP and its direct and indirect
subsidiaries.
2. Section 10 (c)(2)
-----------------
Because the Merger is expected to result in substantial cost savings
and synergies, it 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.
The Merger will produce economies and efficiencies more than sufficient
to satisfy the standards of Section 10(c)(2) of the Act. 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 AEP, supra. 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
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for economies will suffice even when these are not precisely quantifiable."
Centerior, supra.
- --------- -----
NSP and NCE have estimated the nominal dollar value of synergies from
the Merger to be approximately $1.1 billion (net costs to achieve) over the
10-year period from 2001-2010. The Merger is expected to yield several types of
presently quantifiable benefits and savings, which are identified by area below:
(1) corporate and operations support; (2) corporate and administration programs;
(3) nonfuel purchasing economies; and (4) production savings, including savings
for fuel procurement, production dispatch and gas supply. The total amount of
savings currently estimated in each of these categories, on a nominal dollar
basis is summarized in the table below:
Merger Synergies in Nominal Dollars
- --------------------------------------------------------------------------------
Category Nominal
Amount
Corporate and Operations Support $691.3 million
Corporate and Administrative Programs $344.4 million
Non-Fuel Purchasing Economies $203.7 million
Production Savings $95.9 million
- --------------------------------------------------------------------------------
Total Savings $1,334.7 million
Less: Costs to Achieve ($105.8 million of ($149.5 million)
transition costs and $43.7 million of
transaction costs)
Pre-merger Initiatives ($92.9 million)
- --------------------------------------------------------------------------------
Net Savings $1,092.3 million
- --------------------------------------------------------------------------------
These expected savings will meet or exceed the anticipated savings
in a number of recent acquisitions approved by the Commission.109 See, e.g.,
--- ----
NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999)
- -------------------------
(estimated expected savings of $57.45 million over ten years); Sempra Energy,
-------------
Holding Co. Act Release No. 26890 (June 26, 1998) (estimated expected savings of
$1.2 billion over ten years); BL Holding Corp., Holding Co. Act Release No.
-----------------
26875 (May 15, 1998) (estimated expected savings of $1.1 billion over ten
years); LG&E Energy Corp., Holding Co. Act Release No. 26866 (April 20, 1998)
------------------
(estimated expected savings of $687.3 million over ten years); WPL Holdings,
------------
Holding Co. Act Release No. 26856 (April 14, 1998) (estimated expected savings
of $680 million over ten years); Conectiv, Holding Co. Act Release No. 26856
--------
(Feb. 25,
- ------------
109 Further, the Applicants anticipate an additional $24 million in
operating efficiencies due to the integration plans. Because of
contingencies in the Applicants' FERC filing, these additional savings
are not reflected in this estimate. Should FERC approve the integration
plan, the additional savings will be passed on to customers via a fuel
clause adjustment.
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<PAGE>
1998) (estimated expected savings of $500 million over ten years); Ameren
------
Corporation, supra (estimated savings of $686 million over ten years); 1997 NCE
- ----------- -----
Order, supra (estimated savings of $770 million over ten years); TUC Holding
----- -----------
Company, supra (estimated savings of $505 million over ten years); Northeast
- ------- ----- ---------
Utilities, supra (estimated savings of $837 million over eleven years); Entergy
- --------- ----- -------
Corporation, Holding Co. Act Release No. 25952 (Dec. 17, 1993) (expected savings
- -----------
of $1.67 billion over ten years); Northeast Utilities, Holding Co. Act Release
-------------------
No. 25221 (Dec. 21, 1990) (estimated savings of $837 million over eleven years);
Kansas Power and Light Co., Holding Co. Act Release No. 25465 (Feb. 5, 1992)
- ---------------------------
(expected savings of $140 million over five years); IE Industries, Holding Co.
-------------
Act Release No. 25325 (June 3, 1991) (expected savings of $91 million over ten
years); Midwest Resources, Holding Co. Act Release No. 25159 (Sept. 26, 1990)
------------------
(estimated savings of $25 million over five years); CINergy Corp., Holding Co.
-------------
Act Release No. 26146 (Oct. 21, 1994) (estimated savings of approximately $1.5
billion over ten years). These savings categories are described in greater
detail below.
Corporate and Operations Support: NCE and NSP estimate that a net
reduction in labor costs of approximately $691 million over ten years can be
achieved as a result of the Merger through elimination of approximately 784 full
time equivalent duplicative positions (including 105 contract workers) in
certain corporate, administrative and technical support functions.
Corporate and Administrative Programs: NSP and NCE estimate a reduction
in nonlabor corporate and administrative programs and expenses through the
consolidation of overlapping or duplicative programs and expenses of $344
million over ten years. Specific areas in which savings are expected to occur
include information systems, professional services, demand-side management
administration, benefits administration, insurance, regulatory expenses,
advertising and shareholder services.
Nonfuel Purchasing Economies: NSP and NCE estimate savings of $203.7
million through the combined procurement of material and supplies, inventory
reduction from standardization, and limited sharing of parts and components and
from economies of scale from the aggregation of related work activities and
increased purchasing power over service providers.
Production Savings: NSP and NCE estimate production savings of
approximately $96 million over a ten-year period. Two main components make up
total production savings: efficiencies in procurement of fossil fuel and
efficiencies in procurement and management of natural gas supply. The Applicants
estimate fossil fuel savings of $18.5 million, stemming from an increase in coal
procurement and coal transportation volumes and greater leverage during contract
negotiations. NSP and NCE estimate gas supply savings of approximately $77.4
million, based on gas transport and storage capacity reductions, gas reserve
margin reductions, field transportation reductions and capacity release savings.
The foregoing amounts do not include an additional $24 million in operating
efficiencies that the Applicants expect to achieve over ten years as a result of
the integration of the NSP and NCE electric generation systems through the 100
MW firm path from SPS to NSP. Through the use of this contract path, the
Applicants estimate approximately $31
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million in production cost savings and an additional $10 million in benefits
resulting from increased opportunity sales. The firm path would also provide a
secure source of additional low-cost supply to NSP during NSP's peak periods,
insulating NSP from predicted price volatility. These expected benefits are
offset by anticipated transmission costs, resulting in an expected net benefit
of $24 million over the ten-year period. In their application to FERC,
Applicants reserved the right to forego this firm path in the event that FERC
believes that competitive concerns related to the path raise material issues of
fact that would require a hearing. For this reason, these additional $24 million
of savings have not been included in the $1.1 billion of savings presented in
the chart above.
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 maintenance of
competitive rates, expanded management resources, more diverse service territory
and continued community involvement.
Maintenance of Competitive Rates: A combined NSP/NCE will be able to
meet the challenges of the increasingly competitive environment in the utility
industry more effectively than either NCE or NSP standing alone. The Merger will
create the opportunity for strategic, financial and operational benefits for
customers in the form of lower rates over the long term and for shareholders in
the form of greater financial strength and financial flexibility. NCE and NSP
have proposed in filings with the various state regulatory commissions that
regulate their retail sales of electricity various mechanisms to share in
contemplated benefits, including a three- to five-year rate freeze. The rate
freezes are subject to certain exceptions regarding matters beyond the NSP's or
NCE's control. Further, ratepayers will receive 100% of the benefit of
reductions in Xcel's fuel costs, except that customers of PSCo will receive 50%
of such benefit.
Expanded Management Resources: A combined NCE and NSP entity will be
able to draw on a larger and more diverse mid and senior-level management pool
to lead the new company forward in an increasingly competitive environment for
the delivery of energy, and should be better able to attract and retain the most
qualified employees. The employees of Xcel should also benefit from new
opportunities in the expanded organization.
More Diverse Service Territory: The combined service territories of NSP
and NCE will be larger and more diverse than either of the service territories
of NSP or NCE as independent entities. This increased geographical diversity
will mitigate the risk of changes in economic, competitive or climatic
conditions in any given sector of the combined service territory.
Community Involvement: Xcel will continue to play a strong role in the
economic development efforts of the communities NSP and NCE now serve. The
philanthropic and volunteer programs currently maintained by the two companies
will be continued.
D. Section 10(f)
-------------
Section 10(f) provides that:
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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 of 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 below under Item 4. "Regulatory Approvals," and as
evidenced by the filings before the Minnesota Commission, the North Dakota
Commission, the Colorado Commission, the New Mexico Commission, the Texas
Commission, and the Wyoming Commission, NSP and NCE intend to comply with all
applicable state laws related to the proposed Merger.
E. Intra-system Transactions
-------------------------
The Xcel system companies will engage in a variety of affiliate
transactions for the provision of goods, services, and construction. Certain of
these transactions are elaborated upon below. In some instances, the Applicants
simply request extension of the authorizations granted in the 1997 NCE Order,
with respect to the NCE system, to the Xcel system. The provision of goods,
services, and construction by Xcel system companies to other Xcel system
companies will be carried out in accordance with the requirements and provisions
of Rules 87, 90, and 91 unless otherwise authorized by the Commission by order
or by rule.110
1. New Century Services, Inc. (to be renamed Xcel Energy
-----------------------------------------------------
Services Inc.)
--------------
Rule 88(b) provides that "[a] finding by the Commission that a
subsidiary company of a registered holding company. . .is so organized and
conducted, or to be so 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 in the 1997 NCE Order 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. In this
Application-Declaration, Applicants are submitting substantially the application
information as would have been submitted in a Form U-13-1. Moreover, in this
application, Applicants are not requesting authorization to establish a new
service company, but rather are requesting that the Commission authorize an
existing, Commission-approved service company, New Century Services, to extend
its activities to NSP and its direct and indirect subsidiaries following the
consummation of the Merger and the formation of the Xcel
- ------------
110 As stated previously, the electric production and transmission costs of
NSP and NSP-W are shared by them in accordance with the Interchange
Agreement, which is a FERC-regulated agreement that has also been
accepted by the Wisconsin Commission and the Minnesota Commission for
determination of costs recoverable in rates by NSP-W and NSP in rate
cases.
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system.
Accordingly, it is submitted that it is appropriate to find that New
Century Services will be so organized and shall 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.
New Century Services will be the service company subsidiary for the
Xcel system. Applicants accordingly request that the prior authorizations and
exemptions from the 1997 Order and the subsequent order in 1999 111 (the "1999
Order") remain in effect and be expanded to include NSP and its subsidiaries.
Specifically, New Century Services will provide Xcel, New NSP, NSP-W, PSCo, SPS,
and Cheyenne, pursuant to the Utility Service Agreement, and the non-utility
subsidiaries of the NSP/NCE system pursuant to the Non-Utility Service
Agreement, with one or more of the following: administrative, management and
support services, including services relating to support of electric and gas
plant operations (i.e., energy supply management of the bulk power and natural
gas supply, procurement of fuels, dispatch of generating units, coordination of
electric and natural gas distribution systems, maintenance, construction and
engineering work); customer bills, and related matters; materials management;
facilities; real estate; rights of way; human resources; finance; accounting;
internal auditing; information systems; corporate planning and research; public
affairs; corporate communications; legal; environmental matters; and executive
services. The existing Service Agreement and Non-Utility Service Agreement of
New Century Services is not intended to be changed in any material respect. In
accordance with the Service Agreement, services provided by New Century Services
will be directly assigned, distributed or allocated by activity, project,
program, work order or other appropriate basis. To accomplish this, employees of
New Century Services will record their labor and expenses to bill the
appropriate subsidiary company. Costs of New Century Services will be
accumulated in accounts of the service company and be directly assigned,
distributed, or allocated to the appropriate client company in accordance with
the guidelines set forth in the Utility Service Agreement and the Non-Utility
Service Agreement and the procedures in the "Procedures Manual" included but not
incorporated with EXHIBITS B-2 and B-3. There will be an internal audit group
which, among other things, will audit the assignment of service company charges
to client companies. It is anticipated that New Century Services will be staffed
primarily by existing personnel and by transferring personnel from the current
employee rosters of NSP and its subsidiaries. New Century Services's accounting
and cost allocation methods and procedures are structured so as to comply with
the Commission's standards for service companies in registered holding company
systems and were approved by the Commission in the 1997 NCE Order.
It is expected that New Century Services will conduct substantial
operations in Minneapolis, and St. Paul, Minnesota, Eau Claire, Wisconsin,
Denver, Colorado, and Amarillo, Texas, where the headquarters of NSP, NSP-W,
PSCo, and SPS are located. Merger transition teams are presently considering
where specific
- ------------
111 New Century Energies, Inc., Holding Co. Act Release No. 27000 (April 7,
--------------------------
1999).
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operations of the combined company will be headquartered.
As compensation for services, both the Utility and Non-Utility Service
Agreements provide that "each Client Company shall pay to Service Company [i.e.,
----
New Century Services] the cost to Service Company of rendering such 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 will provide that the
"methods of assigning, distributing, or allocating Service Company costs to each
Client Company, as well as to other associate companies, are set forth in
Appendix A. . . . Such methods of assignment, distribution or allocation of
costs may be modified or changed by Service Company without the necessity of an
amendment to this Service Agreement provided that in such instance, all services
rendered hereunder shall be at actual cost thereof, fairly and equitably
assigned, distributed or allocated, all in accordance with the requirements of
the [Public Utility Holding Company] Act and any orders thereunder." Thus,
charges for all services provided by New Century Services to affiliated utility
companies will be as determined under Rules 90 and 91 of the Act. In the event
that any changes to the Service Agreement or allocations are needed to more
accurately allocate costs to New NSP, NSP-W or other NSP affiliates, Applicants
would propose those to the Commission as they become known.
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.E.3. The Non-Utility Service Agreement also will permit charges for certain
services to be at fair market value to the extent authorized by the 1997 NCE
Order, or hereafter by the Commission. Thus, except for the prior exemptions in
the 1997 NCE Order and the requested exceptions discussed below, services
provided by New Century Services to non-utility affiliates pursuant to the
Non-Utility Service Agreement will also be charged as determined under Rules 90
and 91 of the Act. For further information regarding the accounting and cost
assignment procedures of New Century Services, reference is made to EXHIBITS B-2
and B-3 hereto.112
Moreover, the Utility and Non-Utility Service Agreements provide that
no change in the organization of New Century 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 New Century 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 New Century 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 New Century Services shall have filed with the Commission an appropriate
declaration regarding such proposed change and the Commission shall
- ------------
112 NSP's agreement with a subsidiary, NMC, states that services provided
to NMC or received from NMC be at the higher of cost or market, or
lower the cost or market, respectively. However, that agreement also
deems market to equal cost and thus is consistent with SEC
requirements.
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have permitted such declaration to become effective.
Applicants believe that the Utility 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.
2. Services, Goods, and Assets Involving the Utility Operating
-----------------------------------------------------------
Companies
---------
PSCo, SPS, Cheyenne, New NSP, and NSP-W may provide to one another and
other associate companies services incidental to their utility businesses,
including but not limited to, 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 in accordance with Rules 87, 90, and 91. Moreover, in
accordance with Rules 87, 90, and 91, certain goods may be provided through a
leasing arrangement or otherwise by one utility operating company to one or more
associate companies, and certain assets may be used by one utility operating
company for the benefit of one or more other associate companies.
In addition to the foregoing, NSP and NSP-W are currently providing
services to affiliates in accordance with agreements approved by the Minnesota
Commission and/or the Wisconsin Commission. Each of these contracts (including
the parties) is described in Annex E. To the extent necessary, Applicants
request waiver from the Commission's "at cost" standards with respect to these
transactions.
To elaborate on these contracts, under Minnesota law:
no contract or arrangement, including any general or
continuing arrangement, providing for the furnishing of
management, supervisory, construction, engineering,
accounting, legal, financial or similar services and no
contract or arrangement for the purchase, sale, lease or
exchange of any property, right or thing, or for the
furnishing of any service, property, right or thing, other
than those above enumerated, made or entered into after
January 1, 1975, between a public utility and any affiliated
interest...is valid or effective unless and until the contract
or arrangement has received the written approval of the
[Minnesota Public Utilities] commission.113
An "affiliated interest" includes every subsidiary of a public utility.
Furthermore the statute provides that "the [Minnesota Public Utilities]
Commission shall approve the contract or arrangement...only if it shall clearly
appear and be established upon investigation that it is reasonable and
consistent with the public interest...," with the utility bearing the burden of
proving that it is in the public
- ------------
113 Section 216B.48, subdivision 3 (Supp. 1993).
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interest.114
Also, under a policy statement issued in Docket No. EG-999/CI-90-1008
(1994), the Minnesota Commission had adopted extensive guidelines on the
allocation of costs for transactions with nonregulated affiliates. The Policy
Statement docket initially arose from an investigation of nonregulated utility
appliance sales and service programs. However, the Minnesota Commission later
expanded the scope of the docket, and the Policy Statement also applies to all
utility arrangements with regulated and nonregulated affiliates.115 The Policy
Statement provides that costs should be assigned between the utility and
non-regulated function using the following four step hierarchy:
1. Tariffed rates shall be used to value tariffed services provided
to the non-regulated activity.
2. Costs shall be directly assigned to either regulated or
non-regulated activities whenever possible.
3. Costs which cannot be directly assigned are common costs which
shall be grouped into cost categories. Each cost category shall
be allocated based on direct analysis of the origin of costs
wherever possible. If direct analysis is not possible, common
costs shall be allocated based upon an indirect cost-causative
linkage to another cost category or group of cost categories for
which direct assignment or allocation is available.
4. When neither direct nor indirect measures of cost causation can
be found, the cost category shall be allocated based upon a
general allocator computed by the ratio of all expenses directly
assigned or attributed to regulated and non-regulated activities,
excluding the cost of fuel, gas, purchased power, and the cost of
goods sold.
Under this hierarchy, costs are allocated to non-regulated or regulated
affiliates on a "fully allocated cost" basis, in order to prevent any subsidy of
non-utility operations by the regulated utility operations and its customers.
Wisconsin, in contrast, uses a higher-of-cost-or-market test where utilities
provide services to affiliates.
The contracts listed in Annex E between associate companies are
considered contracts between a public utility and an affiliated interest under
Minnesota and Wisconsin law. However, for each contract, the Minnesota
Commission (and in some cases the Wisconsin Commission) has determined that the
contract is reasonable and is in the public's interest. The Commission's
principal
- ------------
114 Id.
---
115 In MPUC Docket No. G002/M-94-831, the MPUC again expanded the scope of
the Policy Statement, indicating it would be applied to assign costs
between NSP utility operations and regulated affiliates (such as
Viking).
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concern under Section 13 of the Act is to protect utility companies in a holding
company system from abusive cross-subsidization transactions between associate
companies. Since the Minnesota Commission or the Wisconsin Commission has found
that all the aforementioned contracts are reasonable and are in the public
interest, cross-subsidization issues do not arise under these agreements, and
each should be permitted to continue. Also, the contracts listed in Annex E
under Natural Gas and Gas Related Services are exempt from the at cost standards
of the Act under Rule 81.
3. Non-Utility Sale of Goods and Services to EWGs, FUCOs, and QFs
--------------------------------------------------------------
In its 1997 Order and subsequently in the 1999 Order, the Commission
granted an exemption under Section 13(b) of the Act from the at-cost
requirements of Section 13 and Rules 90 and 91 thereunder in connection with the
provision of goods and services, including operation and maintenance services,
at fair market prices, by New Century Services and certain non-utility
subsidiaries of NCE to associate qualifying facilities ("QFs"), exempt wholesale
generators ("EWGs") and foreign utility companies ("FUCOs") provided certain
conditions were met. In the 1999 Order, the Commission has reserved jurisdiction
over the issue whether it should similarly grant an exemption with respect to
transactions involving exempt telecommunication companies under Section 34 of
the Act, Rule 58 companies, or other non-utility subsidiaries that do not derive
any part of their income from sales of goods, services, or other property to the
NCE Operating Companies. Applicants request that this authorization be extended
to the Xcel system. This authorization would extend to at least one existing
contract among NSP subsidiaries.116
In addition, Applicants further request that the Commission, if
necessary, grant a waiver of the "at cost" rules with respect to certain
arrangements that the NSP Companies have with affiliated QFs, which would not be
subject to the blanket authorization requested above due to the failure to
satisfy certain criteria. Specifically, Applicants request an exception with
respect to Landfill Power and Minnesota Methane which, as explained in Annex E,
are affiliates of NSP that own portions of QF facilities that sell power to NSP
pursuant to PURPA contracts approved by the MPUC. The price of power under these
contracts is based on NSP's avoided costs; they are not set with reference to
Landfill Power and Minnesota Methane's cost of service. The exception being
requested by Applicant is that the Commission permit the Exempt Companies to
provide services or goods to Landfill Power and Minnesota Methane without
compliance with the at cost standards. The power purchase contracts of Landfill
Power and Minnesota Methane with NSP set out fixed rates and do not contain any
provisions that would affect the price NSP pays for power as a result of the
price charged by the Exempt Companies in providing services or goods to Landfill
Power or Minnesota Methane. Applicants further request a waiver from the at-cost
rules with respect to the services to
- ------------
116 NRG provides management and administrative services to Cogeneration
Corporation of America, which services are described in Annex D under
the caption "Subsidiaries of NRG." These services are to be provided at
cost and such contract was approved by the Bankruptcy Court as part of
the reorganization. None of the entities to be acquired by NRG in this
transaction, or to which NRG will be providing such services, will be a
"public-utility company" under the Act.
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be rendered by NMC. Currently pending before the Commission is Alliant's request
for approval of the agreement, including the cost allocation provisions, between
its operating company and NMC.117 The agreement between Xcel and NMC will be
identical to the agreement between Alliant and NMC.
4. UE
--
In the 1997 NCE Order, the Commission authorized UE to perform
engineering, development, design, construction, and other related services to
companies within the NCE system, including the NCE Operating Companies.
Applicants request that this authority be extended to enable UE to provide such
services to all associate companies within the Xcel system.
5. Other Existing Transactions
---------------------------
PSCo and SPS in File No. 70-8787 requested waivers of the "at cost"
standard with respect to various specific transactions. The Commission granted
such waivers in the 1997 NCE Order. To the extent necessary, Applicants request
that these waivers be extended following the Merger to such transactions that
are still ongoing.
F. Capitalization of New NSP
-------------------------
The Applicants request authority to organize a new utility subsidiary,
New NSP, under the laws of Minnesota and to take the following actions in
connection with the organization and capitalization of New NSP: New NSP proposes
to assume the debt of NSP existing at the time of the Merger (approximately $1.8
billion) and issue shares of its capital stock to Xcel. The equity component
will be derived by subtracting the total debt being assumed by New NSP from the
total assets being transferred to New NSP. The result of the foregoing is that
the overall equity/debt ratio New NSP will be approximately 50%, which is
relatively similar to that of NSP prior to consummation of the Merger.
Applicants also request authority for Xcel to acquire the capital stock of New
NSP and for NSP to transfer its debt to New NSP.
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that
Applicants expect to obtain in connection with the Merger. It is a condition to
the consummation of the Merger that final orders approving the Merger be
obtained from the Commission under the Act and from the various federal and
state commissions described below on terms and conditions which would not have,
or would not be reasonably likely to have, a material adverse effect on the
business, assets, financial condition or results of operations of NCE and its
subsidiaries taken as a whole, or on NSP and its subsidiaries taken as a whole.
- ------------
117 File No. 70-09513.
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A. Antitrust
---------
The HSR Act and the rules and regulations thereunder prohibit certain
transactions (including the Merger) until certain information has been submitted
to the Antitrust Division of the Department of Justice ("DOJ") and Federal Trade
Commission ("FTC") and the specified HSR Act waiting period requirements have
been satisfied. It is expected that NSP and NCE will submit the Notification and
Report Forms and all required information to the DOJ and FTC in the second half
of 1999.
The expiration or earlier termination of the HSR Act waiting period
does not preclude the DOJ or the FTC from challenging the Merger on antitrust
grounds. Applicants believe that the Merger will not violate Federal antitrust
laws. If the Merger is not consummated within twelve months after the expiration
or earlier termination of the initial HSR Act waiting period, NSP and NCE will
be required to submit new information to the DOJ and the FTC, and a new HSR Act
waiting period would begin and have to expire or be terminated before the Merger
could be consummated.
B. Federal Power Act
-----------------
Section 203 of 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 FERC. Under Section 203 of the Federal Power Act,
FERC will approve a merger if it finds that merger "consistent with the public
interest." In reviewing a merger, FERC generally evaluates: (i) whether the
merger will adversely affect competition, (ii) whether the merger will adversely
affect operating costs and rates, (iii) whether the merger will impair the
effectiveness of regulation, (iv) whether the purchase price is reasonable, (v)
whether the merger is the result of coercion, and (vi) whether the accounting
treatment is reasonable. ON July 30, 1999, NSP and NCE filed a combined
application with FERC requesting FERC to approve the Merger under Section 203 of
the Federal Power Act. In connection with this Application, NSP and NCE also
filed a joint Open Access Transmission Tariff to be effective upon completion of
the Merger and Joint Operating Agreement and proposed Statement of Policy and
Code of Conduct applicable to certain wholesale merchant function operations and
various subsidiaries under Section 205 of the Federal Power Act, to become
effective upon consummation of the Merger. In addition, Applicants separately
filed under 18 C.F.R. Part 37 proposed revised Standards of Conduct for NSP,
PSCo., Cheyenne and SPS to be effective during the pendency of and after the
proposed Merger. NSP will also need to obtain FERC's authorization under Part I
of the Federal Power Act to transfer hydro-electric licenses held by it to New
NSP, and may need to obtain FERC's authorization under Section 205 of the
Federal Power Act to amend existing wholesale contracts to have New NSP assume
NSP's responsibilities.
In addition, NSP holds certain hydroelectric project licenses under the
FPA. The transfer of the utility assets and liabilities of NSP to New NSP will
constitute transfers of the hydroelectric
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project licenses, requiring approval of FERC.
C. Atomic Energy Act
-----------------
NSP holds NRC operating licenses in connection with its ownership and
operation of the Prairie Island and Monticello nuclear generating facilities.
The operating licenses authorize NSP to own and operate the facilities. PSCo
holds NRC licenses in connection with its ownership of the Fort St. Vrain
Nuclear Electric Generating Station. The Fort St. Vrain facility ceased
operations on August 29, 1989, and is in the process of being decommissioned in
accordance with the term of orders issued by the NRC. The Atomic Energy Act
provides that a license or any rights thereunder may not be transferred or in
any manner disposed of, directly or indirectly, to any person through transfer
of control unless the NRC finds that such transfer is in accordance with the
Atomic Energy Act and consents to the transfer. Pursuant to the Atomic Energy
Act, NSP has applied for approval from the NRC to reflect the fact that after
the merger, New NSP will own and operate the Prairie Island and Monticello
facilities and will become the operating company subsidiary of such facilities.
D. State Public Utility Regulation
-------------------------------
NSP is currently subject to the jurisdiction of the Minnesota
Commission, the North Dakota Commission, the South Dakota Commission and the
Arizona Commission. NSP-W is subject to the jurisdiction of the Wisconsin
Commission and the Michigan Commission. PSCo is subject to the jurisdiction of
the Colorado Commission. Cheyenne is subject to the jurisdiction of the Wyoming
Commission. SPS is subject to the jurisdiction of the New Mexico Commission, the
Texas Commission, the Kansas Commission and the Oklahoma Commission. NSP and NCE
have filed applications for approval of the Merger, including (where necessary)
the issuance of securities, with the Minnesota Commission, the North Dakota
Commission, the Colorado Commission, the New Mexico Commission and the Wyoming
Commission.118 Approval of the Merger is not required in Texas. However, unless
the Texas Commission determines that the Merger is in the public interest, the
Texas Commission may take its findings into account in future rate making
proceedings. Thus, NSP and NCE will file with the Texas Commission for a
determination that the Merger is in the public interest. Approval of the Merger
is not required in South Dakota, Wisconsin, Michigan or Oklahoma. In Kansas, SPS
must submit to the jurisdiction of the Kansas Commission for ratemaking
purposes.
E. Other
-----
The NSP and NCE Systems possess municipal franchises and environmental
permits and licenses that they may need to assign or replace as a result of the
Merger. NSP and NCE do not anticipate any difficulties obtaining such
assignments, renewals and replacements. In addition,
- ------------
118 NSP expects to submit necessary filings to the Arizona Commission
September 1999. The Arizona filing was deferred because of a pending
change in status of the BMG gas utility operation from a division of
NSP to a subsidiary of NSP. Arizona Commission action on the pending
filing is expected August 24, 1999.
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British regulatory approval may also be required in light of NCE's ownership
interest in Yorkshire Electricity and NSP's indirect investments in the United
Kingdom.
Except as set forth above, no other state or local regulatory body or
agency and no other Federal commission or agency has jurisdiction over the
transactions proposed herein.
Finally, pursuant to Rule 24 under the Act, the Applicants represent
that the transactions proposed in this filing shall be carried out in accordance
with the terms and conditions of, and for the purposes stated in, the
declaration-application no later than December 31, 2004.
Item 5. Procedure
The Commission is respectfully requested to publish, not later than
September 17, 1999, the requisite notice under Rule 23 with respect to the
filing of this Application-Declaration, such notice to specify a date not later
than October 13, 1999, by which comments must have been entered and a date on or
after October 14, 1999, as the date when 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
Merger. The SEC Staff 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
--------
EXHIBIT Description
Number -----------
- ------
A-1 Restated Articles of Incorporation of NSP (filed as
EXHIBIT 3.01 to Form 10-Q of NSP for the quarter
ended June 30, 1998, File No. 1-3034, and
incorporated herein by reference)
A-2 Restated Articles of Incorporation of NSP-W (filed as
EXHIBIT 3.01 to Form 10-K of NSP-W for the year ended
December 31, 1987, File No. 10-3140, and incorporated
herein by reference)
A-3 Restated Articles of Incorporation of NCE dated December 8,
1995 (filed as EXHIBIT 3(a) to Registration Statement No.
333-64951 on Form S-4, File No. 1-12927, and incorporated
herein by reference)
A-4 Amended and Restated Articles of Incorporation of PSCo dated
July 10, 1998 (filed as EXHIBIT 3(a)1 to Form 10-K of PSCo for
the year ended December 31, 1998, File No. 1-3280).
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A-5 Amended and Restated Articles of Incorporation of SPS
(filed as EXHIBIT 3(a)2 to Form 10-K of SPS for the
year ended December 31, 1997, File No. 1-3789).
A-6 Certificate of Incorporation of NRG (filed as EXHIBIT 3.1 to
Registration Statement on Form S-1 (as amended), File No.
333-33397).
B-1 Agreement and Plan of Merger (Merger Agreement) (filed as
Appendix A to Exhibit C-1, and incorporated herein by
reference)
B-2* Form of Service Agreement between New Century Services and
utility affiliates (an appendix entitled "Description of Services
and Determination of Charges for Services" is attached but not
forming a part thereof.)
B-3* Form of Service Agreement between New Century
Services and non-utility affiliates (an appendix
entitled "Description of Services and Determination
of Charges for Services" is attached but not forming
a part thereof)
C-1 Registration Statement of NSP on Form S-4 (as amended) (filed as
Registration Statement No. 333-73989 and incorporated
herein by reference)
C-2 Joint Proxy Statement and Prospectus of NSP and NCE (included in
EXHIBIT C-1)
D-1.1* Original testimony of Heironymous to FERC
D-1.2* Application of NSP and NCE before FERC
D-1.3* Order of FERC approving the Merger
D-1.4* Original testimony of Gilbert to FERC
D-2.1* Application of NSP before the Minnesota Commission
D-2.2* Order of the Minnesota Commission approving the Merger
D-3.1* Application of NSP before the North Dakota Commission
D-3.2* Order of the North Dakota Commission approving the Merger
D-4.1* Application of NSP before the Arizona Commission
D-4.2* Order of the Arizona Commission approving the Merger
D-5.1* Application of NCE before the Colorado Commission
D-5.2* Order of the Colorado Commission approving the Merger
D-6.1* Application of NCE before the New Mexico Commission
D-6.2* Order of the New Mexico Commission approving the Merger
D-7.1* Application of NCE before the Wyoming Commission
D-7.2* Order of the Wyoming Commission approving the Merger
D-8.1* Application of NCE before the Texas Commission
D-8.2* Order of the Texas Commission finding that the Merger is in the
public interest
D-9* Order of the NRC finding that the transfer of certain operating
licenses in connection with the Merger is in compliance with
The Atomic Energy Act and consenting to such transfers
E-1* Map of service areas of NSP, NSP-W, PSCo, SPS and Cheyenne
E-2* Map showing interconnections of NSP, NSP-W PSCo, SPS and Cheyenne
E-3.1* Map of NSP electric and gas service areas
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E-3.2* Map of NSP-W electric and gas service areas
E-3.3* Map of NSP and NSP-W transmission systems
E-4.1* Map of PSCo electric and gas service areas (including Cheyenne
electric and gas service areas)
E-4.2* Map of SPS electric service areas
E-4.3* Map of PSCo and SPS transmission systems (including Cheyenne
transmission system)
E-10* NSP corporate chart
E-11* NCE corporate chart
E-12* Combined Company corporate chart
F-1.1* Preliminary opinion of counsel to NSP
F-1.2* Past-tense opinion of counsel to NSP
F-2.1* Preliminary opinion of counsel to NCE
F-2.1* Past-tense opinion of counsel to NCE
G-1 Opinion of SG Barr Devlin (filed as Annex B to Registration
Statement No. 333-76989 on Form S-4 and incorporated herein by
reference)
G-2 Opinion of The Blackstone Group L.P. (filed as Annex C to
Registration Statement No. 333-76989 on Form S-4 and incorporated
herein by reference)
H-1 Annual Report of NSP on Form 10-K for the year ended December 31,
1998 (File No. 1-3034 and incorporated herein by reference)
H-2 Annual Report of NCE on Form 10-K for the year ended December 31,
1998 (File No. 1-23927 and incorporated herein by reference)
H-3 Annual Report of NSP-W on Form 10-K for the year ended
December 31,1998 (File No. 10-3140 and incorporated herein by
reference)
H-4 Annual Report of NRG on Form 10-K for the year ended December 31,
1998 (File No. 333-33397 and incorporated herein by reference)
H-5 Annual Report of PSCo on Form 10-K for the year ended December 31,
1998 (File No. 1-3780 and incorporated herein by reference)
H-6 Annual Report of SPS on Form 10-K for the year ended December 31,
1998 (File No. 1-3789 and incorporated herein by reference)
H-7 Quarterly Report of SPS on Form 10-Q for the quarter ended
March 31, 1999 (File No. 1-3789 and incorporated herein by
reference)
H-8 Quarterly Report of SPS on Form 10-Q for the quarter ended
June 30, 1999 (File No. 1-3789 and incorporated herein by
reference)
H-9 Quarterly Report of NSP on Form 10-Q for the quarter ended
March 31, 1999 (File No. 1-3034 and incorporated herein by
reference)
H-10 Quarterly Report of NSP on Form 10-Q for the quarter ended
June 30, 1999 (File No. 1-3034 and incorporated herein by
reference)
H-11 Quarterly Report of NCE on Form 10-Q for the quarter ended
March 31, 1999 (File No. 1-12927 and incorporated herein by
reference)
H-12 Quarterly Report of NCE on Form 10-Q for the quarter ended
June 30, 1999 (File No. 1-12927 and incorporated herein by
reference)
-92-
<PAGE>
H-13 Quarterly Report of NSP-W on Form 10-Q for the quarter ended
March 31, 1999 (File No. 10-3140 and incorporated herein by
reference)
H-14 Quarterly Report of NSP-W on Form 10-Q for the quarter ended
June 30, 1999 (File No. 10-3140 and incorporated herein by
reference)
H-15 Quarterly Report of NRG on Form 10-Q for the quarter ended
March 31, 1999 (File No. 333-33397 and incorporated herein by
reference)
H-16 Quarterly Report of NRG on Form 10-Q for the quarter ended
June 30, 1999 (File No. 333-33397 and incorporated herein by
reference)
H-17 Quarterly Report of PSCo on Form 10-Q for the quarter ended
March 31, 1999 (File No. 1-3280 and incorporated herein by
reference)
H-18 Quarterly Report of PSCo on Form 10-Q for the quarter ended
June 30, 1999 (File No. 1-3280 and incorporated herein by
reference)
I-1 Notice of the Transaction
J-1 NSP and NSP-W Analysis of the Economic Impact of a Divestiture
of the Gas Operations of NSP and NSP-W J-2 NCE Analysis of the
Economic Impact of a Divestiture of NCE's Gas Operations (filed
as Exhibit J-1 to Application-Declaration on Form U-1 of New
Century Energies, File No. 70-8787, and incorporated herein by
reference)
K-1* Report of Pacific Economies Group
- ----------
* To be filed by Amendment
B. Financial Statements
--------------------
FS-1 Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet
at March 31, 1999 (included in Form 10-Q for the quarter ended
March 31, 1999 of NSP (EXHIBIT H-9 hereto) at p. 55)
FS-2 Unaudited Pro Forma Condensed Consolidated Statements of Income
for the three month periods ended March 31, 1999 and March 31,
1998 and for each of the three years in the period ended December
31, 1998 (included in Form 10-Q for the quarter ended March 31,
1999 of NSP (EXHIBIT H-9 hereto) at p. 53)
FS-3 NSP Consolidated Balance Sheet as of December 31, 1998 see Annual
Report of NSP on Form 10-K for the year ended December 31, 1998
(EXHIBIT H-1 hereto), at p. 41)
FS-4 NSP Consolidated Statements of Income for its last three fiscal
years (see Annual Report of NSP on Form 10-K for the year ended
December 31, 1998 (EXHIBIT H-1 hereto), at p. 39)
FS-5 NCE Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report of NCE on Form 10-K for the year ended December 31,
1998 (EXHIBIT H-2 hereto), at p. 45)
-93-
<PAGE>
FS-6 NCE Consolidated Statements of Income for its last three fiscal
years (see Annual Report of NCE on Form 10-K for the year ended
December 31, 1998 (EXHIBIT H-2 hereto), at p. 47)
FS-7 NSP-W Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report of NSP-W on Form 10-K for the year ended December
31, 1998 (EXHIBIT H-3 hereto), at p. 22)
FS-8 NSP-W Consolidated Statements of Income for its last three fiscal
years (see Annual Report of NSP-W on Form 10-K for the year ended
December 31, 1998 (EXHIBIT H-3) hereto), at p. 20)
FS-9 NRG Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report of NRG on Form 10-K for the year ended December 31,
1998 (EXHIBIT H-4 hereto), at p. 25)
FS-10 NRG Consolidated Statements of Income for it last three fiscal
years (see Annual Report of NRG on Form 10-K for the year ended
December 31, 1998 (EXHIBIT H-4 hereto), at p. 23)
FS-11 PSCo Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report of PSCo on Form 10-K for the year ended December
31, 1998 (EXHIBIT H-5 hereto), at p. 57)
FS-12 PSCo Consolidated Statements of Income for its last three fiscal
years (an Annual Report of PSCo on Form 10-K for the year ended
December 31, 1998 (EXHIBIT H-5), at p. 60)
FS-13 SPS Consolidated Balance Sheet as of December 31, 1998 (see
Annual Report of SPS on Form 10-K for the year ended December 31,
1998 (EXHIBIT H-6 hereto), at p. 69)
FS-14 SPS Consolidated Statements of Income for its last three fiscal
years (see Annual Report of SPS on Form 10-K for the year ended
December 31, 1998 (EXHIBIT H-6 hereto), at p. 72)
Item 7. Information as to Environmental Effects
The Merger neither involves "major federal actions" nor "significantly
[affects] the quality of the human environment" as those terms are used in
Section (2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4332.
The only federal actions related to the Merger pertain to the Commission's
declaration of the effectiveness of the Joint Registration Statement, the
approvals and actions described under Item 4 and Commission approval of this
Application-Declaration. Consummation of the Merger will not result in changes
in the operations of NSP, NSP-W, or NCE that would have any impact on the
environment. No federal agency is preparing an environmental impact statement
with respect to this matter.
-94-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this
Application-Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
NEW CENTURY ENERGIES, INC. NORTHERN STATES POWER COMPANY
BY: /s/ Richard C. Kelly BY: /s/ E. J. McIntyre
---------------------------------- ---------------------------------
Richard C. Kelly E. J. McIntyre
Executive Vice President and Vice President and
Chief Financial Officer Chief Financial Officer
Date: August 25, 1999
-95-
<PAGE>
Annex A
FURTHER DESCRIPTION OF UTILITY ASSETS
AND OPERATIONS OF NCE
1. PSCo ELECTRIC GENERATION PROPERTY
The PSCo electric generating stations expected to be available at the time
of the anticipated 1999 net firm system peak demand during the summer season are
as follows:
- --------------------------------------------------------------------------------
Name of Station Installed Gross Net Dependable
and Location Capacity (MW) Capacity (MW) at Major Fuel Source
at Time of Anticipated
1999 Net Firm
System Peak Demand*
- --------------------------------------------------------------------------------
Steam:
- --------------------------------------------------------------------------------
Arapahoe - 262.00 246.00 Coal
Denver, Co.
- ---------------------------------------------------------- ---------------------
- ---------------------------------------------------------- ---------------------
Cameo - near 77.00 72.70 Coal
Grand Junction,
Co.
- --------------------------------------------------------------------------------
Cherokee - 779.00 717 Coal
Denver, Co.
- --------------------------------------------------------------------------------
Comanche - Near 725.00 660 Coal
Pueblo, Co.
- --------------------------------------------------------------------------------
Craig - near Craig, 87.00(a) 83.20 Coal
Co.
- --------------------------------------------------------------------------------
Hayden - near 259.00(b) 237.00 Coal
Hayden, Co.
- --------------------------------------------------------------------------------
Pawnee - near 547.00 495.00 Coal
Brush, Co.
- --------------------------------------------------------------------------------
Valmont - near 188.00 178.00 Coal
Boulder, Co.(Unit
5)
- --------------------------------------------------------------------------------
Zuni - Denver, Co. 115.00 107.00 Gas/Oil
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total (Steam) 3,022.00 2,812.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other:
- --------------------------------------------------------------------------------
A-1
<PAGE>
- --------------------------------------------------------------------------------
Fort St. Vrain 243.00 217.00 Gas
Combustion
Turbines - near
Platteville, Co.
- --------------------------------------------------------------------------------
Combustion 209.00 171.00 Gas
turbines (6 units-
various locations)
- --------------------------------------------------------------------------------
Hydro (14 units- 53.00 37.00(d) Hydro
various locations
(c).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cabin Creek 324.00(e) 162.00 Hydro
Pumped Storage-
near Georgetown,
Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total (Steam and 3,852.00 3,408.00
Other)
- --------------------------------------------------------------------------------
Notes to Table:
* A measure of the unit capability planned to be available at the time of
the system peak load net of seasonal reductions in unit capability due to
weather, stream flow, fuel availability and station horsepower, including
requirements for air and water quality control equipment.
(a) The gross maximum capability of Craig Units No. 1 and No. 2 is 894
Megawatts ("MW"), of which PSCo has a 9.72% undivided ownership
interest.
(b) The gross maximum capability of Hayden Units No. 1 and No. 2 is 202.01
MW and 285.96 MW, respectively, of which PSCo has a 75.5% and 37.4%
undivided ownership interest, respectively.
(c) Includes one station (two units) not owned by PSCo but operated under
contract.
(d) 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.
(e) Capability at maximum load.
Fort St. Vrain, PSCo's only nuclear plant, ceased operations on
August 29, 1989, and on March 22, 1996, the physical decommissioning of the
station was completed. The initial phase of the repowered gas-fired,
combined-cycle steam electric generating station began commercial operations on
May 1, 1996. Phase 2 began operations in May 1999.
A-2
<PAGE>
2. SPS ELECTRIC GENERATION PROPERTY119
THE SPS ELECTRIC GENERATING STATIONS EXPECTED TO BE AVAILABLE AT
THE TIME OF THE ANTICIPATED 1999 NET FIRM SYSTEM PEAK DEMAND DURING THE SUMMER
SEASON ARE AS FOLLOWS:
- --------------------------------------------------------------------------------
Name of Station Installed Gross Net Dependable
and Location Capacity (MW) Capacity (MW) at Major Fuel Source
Time of Anticipated
1999 Net Firm
System Peak Demand*
- --------------------------------------------------------------------------------
STEAM:
HARRINGTON - NEAR 1,137.00 1,066.00 COAL
AMARILLO, TX
- --------------------------------------------------------------------------------
TOLK - NEAR 1,130.00 1,080.00 COAL
MULESHOE, TX
- --------------------------------------------------------------------------------
JONES - NEAR 512.00 486.00 GAS
LUBBOCK, TX
- --------------------------------------------------------------------------------
PLANT X - NEAR 463.00 442.00 GAS
EARTH, TX
- --------------------------------------------------------------------------------
NICHOLS - NEAR 479.00 457.00 GAS
AMARILLO, TX
- --------------------------------------------------------------------------------
CUNNINGHAM - NEAR 281.00 267.00 GAS
HOBBS, NM
- --------------------------------------------------------------------------------
MADDOX - NEAR 123.00 118.00 GAS
HOBBS, NM
- --------------------------------------------------------------------------------
CZ-2 - NEAR 26.00 26.00 PURCH. STEAM
PAMPA, TX
- --------------------------------------------------------------------------------
MOORE COUNTY - 51.00 48.00 GAS
NEAR SUNRAY, TX
- --------------------------------------------------------------------------------
TOTAL (STEAM) 4,202.00 3,990.00
- --------------------------------------------------------------------------------
GAS TURBINE:
CARLSBAD - NEAR 16.00 16.00 GAS
CARLSBAD, NM
- --------------------------------------------------------------------------------
CZ-1 - NEAR 13.00 13.00 HOT NITROGEN
PAMPA, TX
- --------------------------------------------------------------------------------
- ------------
119 No informtion is presented for Cheyenne as it does not own any
generating faciliites.
A-3
<PAGE>
- --------------------------------------------------------------------------------
Name of Station Installed Gross Net Dependable
and Location Capacity (MW) Capacity (MW) at Major Fuel Source
Time of Anticipated
1999 Net Firm
System Peak Demand*
- --------------------------------------------------------------------------------
MADDOX - NEAR 76.00 66.00 GAS
HOBBS, NM
- --------------------------------------------------------------------------------
RIVERVIEW - NEAR 25.00 25.00 GAS
BORGER, TX
- --------------------------------------------------------------------------------
CUNNINGHAM - 245.00 244.00 GAS
NEAR HOBBS, NM
- --------------------------------------------------------------------------------
DIESEL ENGINE 15.00 0.00 DIESEL
(1 UNIT) TUCUMCARI, NM
- --------------------------------------------------------------------------------
TOTAL (STEAM 4,592.00 4,354.00
AND GAS TURBINE)
- --------------------------------------------------------------------------------
NOTES TO TABLE:
* PURCHASED POWER CONTRACTS: THE NCE OPERATING COMPANIES HAVE CONTRACTUAL
--------- ----- ---------
ARRANGEMENTS WITH REGIONAL UTILITIES AS WELL AS QFS AND EWGS TO MEET THE ENERGY
NEEDS OF THEIR CUSTOMERS. THE NCE OPERATING COMPANIES HAVE CAPACITY CONTRACTS IN
THE FOLLOWING AMOUNTS AT THE TIME OF THE ANTICIPATED 1999 NET FIRM SYSTEM PEAK
DEMAND:
A-4
<PAGE>
NCE OPERATING COMPANY MW
PSCO 1,768
SPS 508
CHEYENNE 152
-----
TOTAL 2,428
3. NCE ELECTRIC TRANSMISSION AND DISTRIBUTION PROPERTIES
PSCo: On December 31, 1998, PSCo's transmission system consisted of
----
approximately 112 circuit miles of 345 kilovolt ("kV") overhead lines; 1,936
circuit miles of 230 kV overhead lines; 15 circuit miles of 230 kV underground
lines; 65 circuit miles of 138 kV overhead lines; 1,002 circuit miles of 115 kV
overhead lines; 22 circuit miles of 115 kV underground lines; 330 circuit miles
of 69 kV overhead lines; 137 circuit miles of 44 kV overhead lines; and 1
circuit mile of 44 kV underground lines. PSCo jointly owns with another utility
approximately 342 circuit miles of 345 kV overhead lines and 359 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 listed above.
SPS: On December 31, 1998, SPS's transmission system consisted of
---
approximately 319 circuit miles of 345 kV overhead lines; 1,598 circuit miles of
230 kV overhead lines; 2,579 circuit miles of 115 kV overhead lines; 1,768
circuit miles of 69 kV overhead lines; 1 circuit mile of 115 kV underground
line; and 5 circuit miles of 69 kV underground lines.
Cheyenne: Cheyenne's transmission facilities are located in Wyoming.
--------
These facilities are very limited, consisting of two 115kV transmission line
segments that total 25.5 miles in length. The primary purpose of these
transmission lines is to deliver power that Cheyenne purchases from its full
requirements supplier, PacifiCorp. Power is wheeled from WAPA's transmission
system, with which Cheyenne intersects, to Cheyenne's distribution substation
for ultimate distribution to Cheyenne's retail customers. Like PSCo, Cheyenne is
a member of the WSCC.
The distribution system of NCE's electric utility subsidiary companies
consists of both overhead lines and underground distribution systems. PSCo owns
approximately 210 substations (30 of which are jointly-owned) having an
aggregate transformer capacity of 19,390,000 kVa, of which, 4,141,000 kVa is
step-up transformer capacity at generating stations. SPS owns approximately 316
substations having an aggregate transformer capacity of 20,531,310 kVa, of which
5,951,000 kVa is step-up transformer capacity.
A-5
<PAGE>
4. NCE ENERGY SALES
For the year ended December 31, 1998, PSCo, SPS and Cheyenne sold the
following amounts of electric energy (at retail or wholesale) and distributed
the following amounts of natural or manufactured gas at retail:
Year ended
December 31, 1998
PSCo
Kwh of electric energy sold
(including amounts delivered in 30,456,471
interchange)
Million ("MDth") of gas distributed
at retail (including
natural and manufactured gas) 213,186
SPS
MWh of electric energy sold
(including amounts delivered in
interchange) 23,291,976
Cheyenne
MWh of electric energy sold
(including amounts delivered in
interchange) 848,024
MMBTU of gas distributed at retail
(including natural and
manufactured gas) 4,632,401
The gas property of PSCo at December 31, 1998, consisted of
approximately 16,048 miles of distribution mains ranging in size from 0.50 to 30
inches and related equipment. The Denver distribution system consisted of 9,093
miles of mains. Pressures in the system are varied to meet load requirements and
individual house regulators are installed on each customer's premises to provide
uniform flow of gas to appliances. PSCo also owns and operates four gas storage
facilities.
A-6
<PAGE>
Annex B
FURTHER DESCRIPTION OF UTILITY ASSETS
AND OPERATIONS OF NSP
1. NSP ELECTRIC GENERATING FACILITIES
As of December 31, 1998, NSP and NSP-W had a total net generating
capability of 7,186 MW and NSP had a total summer net generating capacity of
6,338 MW available primarily from the following units:
Sherburne County ("Sherco"): NSP owns two coal-fired generating units at its
Sherco station in Minnesota with a combined net capability of 1,433 MW. NSP owns
a 59% undivided interest in the third unit at the station ("Sherco 3"), of which
NSP's share of the net capability of this unit is 514 MW.
Prairie Island: NSP owns two nuclear generating units at its Prairie Island
station in Minnesota with a combined net capability of 1,039 MW.
Monticello: NSP owns one nuclear generating unit at its Monticello station in
Minnesota with a net capability of 578 MW.
King: NSP owns one coal-fired generating unit at its King station in Minnesota
with a net capability of 571 MW.
Black Dog: NSP owns four coal-fired generating units at its Black Dog station in
Minnesota with a combined net capability of 462 MW.
High Bridge: NSP owns two coal-fired generating units at its High Bridge station
in Minnesota with a combined net capability of 267 MW.
Riverside: NSP owns two coal-fired generating units at its Riverside station in
Minnesota with a combined net capability of 380 MW.
Anson: NSP owns two oil/gas-fired combustion turbine electric generating units
at its Angus Anson station in Sioux Falls, South Dakota, with an aggregate net
generating capability of 232 MW.
Inver Hills: NSP owns five oil/gas-fired combustion turbine electric generating
units at its Inver Hills station located in Inver Grove Heights, Minnesota, with
an aggregate net generating capability of 343 MW.
B-1
<PAGE>
NSP also owns numerous smaller generating units fueled with coal,
natural gas, oil or waste, wind and one hydro-electric generating facility, with
an aggregate net capability of 519 MW.
As of December 31, 1998, NSP-W had a total net summer generating
capability of 848 MW from the following units:
Bay Front: NSP-W owns three steam electric generating units at its Bay Front
station in Ashland, Wisconsin that are fueled with coal, wood and gas, with a
combined net capability of 73 MW.
French Island: NSP-W owns two steam electric generating units, fueled with wood
and refuse derived fuel, and two oil-fired combustion turbine generating units
at its French Island generating station in LaCrosse, Wisconsin with a combined
net capability of 171 MW.
Flambeau: NSP-W owns a gas/oil-fired combustion turbine electric generating unit
at its Flambeau station in Park Falls, Wisconsin with a summer net generating
capability of 12 MW.
Wheaton: NSP-W owns six oil-fired combustion turbine electric generating units
at its Wheaton station in Eau Claire, Wisconsin with a combined net capability
of 342 MW.
Hydro Plants: NSP-W also owns and operates 19 hydro-electric generating stations
throughout northwestern Wisconsin with an aggregate net capability of 250 MW.
NSP-W presently relies primarily on NSP for base load generation and
purchases of power to meet the needs of NSP-W's customers. The electric
operations of NSP and NSP-W are fully integrated and all generating units are
centrally dispatched by NSP. The electric production and transmission costs of
NSP and NSP-W are shared by the companies under an agreement which is called the
"Agreement to Coordinate Planning and Operation and Interchange Power and Energy
Between Northern States Power Company (Minnesota) and Northern States Power
Company (Wisconsin)" (the "Interchange Agreement"). The Interchange Agreement
was approved by FERC in Docket No. ER84-690-000, dated August 21, 1985. For the
year ended December 31, 1998, the combined energy (Kwh) sales of NSP and NSP-W
were produced 46% by coal-fired generation, 25% by nuclear generation, 27% by
purchase and interchange and 2% from NSP's hydroelectric and other generation.
The 1998 electric system peak load for NSP and NSP-W was 7,639 MW and occurred
on July 14, 1998, exclusive of off-system sales. For the year ended December 31,
1998, the fuel resources for NSP's and NSP-W's generation-based Kwh was 60%
obtained from coal-fired generation, approximately 35% from nuclear generation,
and approximately 5% from other fuels.
2. NSP ELECTRIC TRANSMISSION AND OTHER FACILITIES
As of December 31, 1998, NSP's electric transmission system included
265 circuit miles of 500
B-2
<PAGE>
kV line, 751 circuit miles of 345 kV line, 287 circuit miles of 230 kV line, 59
circuit miles of 161 kV line, 1,276 circuit miles of 115 kV line and 1,775
circuit miles of transmission line under 115 kV. The bulk of NSP's high voltage
transmission system is located in the State of Minnesota. As of December 31,
1998, NSP's transmission substations had a combined capacity of approximately
27,665 thousand KVA and the distribution substations totaled approximately
13,260 thousand KVA. Manitoba Hydro-Electric Board, Minnesota Power Company and
NSP completed the construction of a 500 kV transmission interconnection between
Winnipeg, Manitoba, Canada, and the Minneapolis-St. Paul, Minnesota, area in May
1980. NSP has a contract with Manitoba Hydro-Electric Board for 500 MW of firm
power utilizing this transmission line. In addition, the Company is
interconnected with Manitoba Hydro at the U.S./Canada border through a 230 kV
transmission line completed in 1970.
As of December 31, 1998, NSP-W's electric transmission system included
165 circuit miles of 345 kV line, 280 circuit miles of 161 kV line, 448 circuit
miles of 115 kV line and 1,496 circuit miles of transmission line under 115 kV.
As of December 31, 1998 NSP-W's transmission substations had a combined capacity
of approximately 4,404 thousand KVA and the distribution substations totaled
approximately 2,036 thousand KVA.
Other assets owned by NSP and NSP-W include electric distribution
systems located throughout its service area, and property, plant and equipment
owned or leased supporting their electric and gas utility functions. NSP and
NSP-W also own or lease other physical properties, including real property, and
other facilities necessary to conduct their operations.
3. NSP ENERGY SALES
For the year ended December 31, 1998, NSP and NSP-W sold the following
amounts of electric energy (at retail or wholesale) and distributed the
following amounts of natural or manufactured gas at retail:
Year ended
December 31, 1998
-----------------
NSP
kWh of electric energy sold
(including amounts delivered in
interchange) 31,151,096
Mcf of gas distributed at retail
(including natural and manufactured
gas) 73,361,063
NSP-W
kWh of electric energy sold
(including amounts delivered in
interchange) 5,380,325
Mcf of gas distributed at retail
(including natural and manufactured
gas) 16,680,874
B-3
<PAGE>
4. GAS FACILITIES
NSP provides natural gas service at retail in the St. Paul metropolitan
area and portions of southeast, northwest and central Minnesota, as well as
eastern North Dakota, and in Arizona through BMG division.120 NSP-W provides
natural gas service in western and central Wisconsin as well as Ironwood in
Michigan's Upper Peninsula. Both NSP and NSP-W are directly connected to various
interstate pipelines and have separate contractual supply portfolios for
transportation through pipelines and with suppliers of natural gas. The gas
delivery operations of NSP and NSP-W are managed out of St. Paul, Minnesota,
pursuant to a Supervisory Control and Data Acquisition Agreement among NSP,
NSP-W and Viking (NSP's wholly-owned interstate pipeline subsidiary). Under this
agreement, NSP manages the pressures of the various pipelines owned by these
companies and the inflow and outflow of natural gas from these pipelines. These
agreements were approved by the Minnesota Commission in Docket No.
G002/AI-94-831 and by the Wisconsin Commission in Docket No. 4220-AU-117.
The gas properties of NSP include 7,989 miles of natural gas
distribution and transmission mains, 50 miles of propane vapor distribution
mains, the Westcott LNG plant with a storage capacity of 2.1 Bcf equivalent and
five propane-air plants with a storage capacity of 1.4 Bcf equivalent to help
meet the peak requirements of its firm residential, commercial and industrial
customers. NSP-W's gas properties include approximately 1,724 miles of natural
gas distribution mains, the Eau Claire and LaCrosse LNG plants, having a storage
capacity of .4 Bcf equivalent, and one propane-air plant, with storage capacity
of 0.02 Bcf equivalent. The gas properties of BMG include 250 miles of natural
gas distribution mains and approximately 50 miles of propane vapor distribution
mains.
NSP and NSP-W are authorized to make certain sales of natural gas for
resale under blanket authority granted by FERC under 18 CFR 284.402.
For the year ended December 31, 1998, NSP, NSP-W and BMG distributed
the following amounts of natural or manufactured gas at retail:
- ------------
120 As noted above, a "spin down" of NSP's gas utility assets to
a subsidiary (also called BMG) is pending Arizona Commission and
Commission approval. The Arizona Commission has scheduled a hearing
for August 24, 1999.
B-4
<PAGE>
Year-ended
December 31, 1998
-----------------
NSP Mcf of gas distributed at retail (including 73,361,063
natural and manufactured gas)
NSP-W Mcf of gas distributed at retail (including 16,680,874
natural and manufactured gas)
B-5
<PAGE>
ANNEX C
NON-UTILITY SUBSIDIARIES OF NCE
<TABLE>
<CAPTION>
Type of
Name of Company Organization State Business Authority121
DIRECT NON-UTILITY SUBSIDIARIES OF NCE
<S> <C> <C> <C> <C>
WestGas InterState, Inc. Corporation CO Gas pipeline company 1997 Order
NC Enterprises, Inc. Corporation DE Non-utility holding company 1997 Order
NON-UTILITY SUBSIDIARIES OF PUBLIC SERVICE COMPANY OF COLORADO
1480 Welton, Inc. Corporation CO Utility real estate 1997 Order
P.S.R. Investments, Inc. Corporation CO Employee life insurance 1997 Order
PS Colorado Credit Corporation Corporation CO Financing/factoring company 1997 Order
Green and Clear Lakes Company Corporation NY Hydroelectric water storage 1997 Order
Fuel Resources Development Co. Corporation122 CO Natural gas exploration 1997 Order
Baugh Lateral Ditch Company Corporation CO Ditch company 1997 Order
The Beeman Irrigating Ditch and Milling Corporation CO Ditch company 1997 Order
Company
Consolidated Extension Canal Company Corporation CO Ditch company 1997 Order
East Boulder Ditch Company Corporation CO Ditch company 1997 Order
Enterprise Irrigating Ditch Company Corporation CO Ditch company 1997 Order
Fisher Ditch Company Corporation CO Ditch company 1997 Order
Hillcrest Ditch and Reservoir Company Corporation CO Ditch company 1997 Order
Jones and Donnelly Ditch Company Corporation CO Ditch company 1997 Order
Las Animas Consolidated Canal Company Corporation CO Ditch company 1997 Order
United Water Company Corporation CO Ditch company 1997 Order
NON-UTILITY SUBSIDIARIES OF NC ENTERPRISES
NC Enterprises, Inc. Corporation DE Non-utility holding company 1997 Order
ep3, L.L.C. Limited liability DE Foreign EWG and FUCO development 1997 Order
company
New Century International, Inc. Corporation DE FUCO/EWG holding company 1997 Order
Independent Power International Jersey Isles EWG Section 32
Corporation Independiente de Energia S.A.Corporation Argentina EWG Section 32
Central Piedra Buena S.A. Corporation Argentina EWG Section 32
<FN>
- ------------
121 "1997 Order" refers to New Century Energies, Inc., Holding Co. Act
Release No. 26748 (1997), wherein the Commission approved the creation
of the NCE system through the merger of Public Service Company of
Colorado and Southwestern Public Service Company, including the
retention of their non-utility businesses.
122 In dissolution under Colorado law.
</FN>
C-1
<PAGE>
Yorkshire Power Group Limited Corporation UK FUCO holding company 1997 Order
Yorkshire Holdings plc Corporation UK FUCO holding company 1997 Order
Yorkshire Electricity Group plc Corporation UK Section 3(b) subsidiary; expected FUCO 1997 Order
The Independent Power Corporation plc Corporation UK Expected FUCO 1997 Order
NCE Communications, Inc.123 Corporation DE ETC 1997 Order
Natural Fuels Corporation Corporation CO Commercialization of compressed 1997 Order
natural gas
Natural/Total Limited Liability Company Limited liability WY Commercialization of compressed 1997 Order
company natural gas
Natural/Total/KN Limited Partnership Limited partnership CO Commercialization of compressed 1997 Order
natural gas
Natural/Peoples Limited Liability Limited liability WY Commercialization of compressed 1997 Order
Company company natural gas
Utility Engineering Corporation Corporation TX Engineering services and construction 1997 Order
management
Universal Utility Services Company Corporation TX Cooling tower maintenance and resource 1997 Order
recovery
Precision Resource Company Corporation TX Human resource services 1997 Order
Vista Environmental Services Company, Limited liability TX Environmental consulting services 1997 Order
L.L.C. company
The Planergy Group, Inc. Corporation TX Energy-related company Rule 58
Planergy (Delaware), Inc. Corporation DE Energy-related company Rule 58
Planergy Services, Inc. Corporation DE Energy-related company Rule 58
Planergy Services of California, Corporation CA Energy-related company Rule 58
Inc.
Cogeneration Capital Associates, Corporation CA Energy-related company Rule 58
Incorporated
Planergy Energy Services Corporation Corporation DE Energy-related company Rule 58
Planergy Services of Houston, Inc. Corporation DE Energy-related company Rule 58
Planergy Services USA, Inc. Corporation DE Energy-related company Rule 58
Planergy Services of Texas, Inc. Corporation DE Energy-related company Rule 58
Planergy New York, Inc. Corporation NY Energy-related company Rule 58
Planergy, Inc. Corporation TX Energy-related company Rule 58
Planergy Limited Corporation Canada Energy-related company Rule 58
USA-Planergy LLC Corporation TX Energy-related company Rule 58
First American Energy Alliance, LLC Corporation NC Energy-related company Rule 58
Planergy Power II, Inc. Corporation DE Energy-related company Rule 58
New Century O&M Services, Inc. Corporation CO Ownership, operation & maintenance of HCAR No. 27048
military base assets
<FN>
- ------------
123 Formerly e prime Telecom, Inc., a subsidiary of e prime, inc.
</FN>
C-2
<PAGE>
New Century Centrus, Inc. Corporation CO ETC Section 34
Centrus, L.L.P. Limited partnership IN ETC Section 34
New Century-Cadence, Inc. Corporation CO Energy-related company Rule 58
Cadence Network LLC Limited liability DE Energy-related company Rule 58
company
e prime, inc. Corporation CO Energy services; IPP, cogeneration, 1997 Order
and ETC ownership
e prime Florida, Inc. Corporation FL Energy-related company Rule 58
e prime Georgia, Inc. Corporation GA Energy-related company Rule 58
e prime Networks, Inc. Corporation CO Meter reading network (possible ETC) 1997 Order
(inactive)
e prime Energy Marketing, Inc. Corporation CO Energy marketing 1997 Order
ep3, L.P. Limited partnership DE (Inactive) 1997 Order
Texas-Ohio Pipeline, Inc. Corporation TX Natural gas pipeline 1997 Order
Texas-Ohio Gas, Inc. Corporation TX Energy marketing 1997 Order
Johnstown Cogeneration Company, L.L.C. Limited liability CO QF ownership 1997 Order
company
Young Gas Storage Company Corporation DE Natural gas storage 1997 Order
Young Gas Storage Company, Ltd. Limited partnership CO Natural gas storage 1997 Order
e prime projects international, inc. Corporation DE (Inactive) 1997 Order
(Section 32)
e prime operating, inc. Corporation DE (Inactive) 1997 Order
(Section 32)
Kazak Power Partners Limited Corporation UK (Inactive) 1997 Order
(Section 32)
Quixx Corporation Corporation TX IPP & cogeneration development; 1997 Order
railcar services; water rights; other
non-utility investments
Quixx Mountain Holdings, LLC Limited liability DE Expected EWG Section 32
company
Front Range Energy Associates, LLC Limited liability DE Expected EWG Section 32
company
Quixx Power Services, Inc. Corporation TX IPP & cogeneration operation and 1997 Order
maintenance services
Quixx Resources, Inc. Corporation NV Ownership of water rights, QF, and EWG 1997 Order
Borger Energy Associates, L.P. Limited partnership DE QF ownership 1997 Order
(Limited Partner)
Borger Funding Corporation Corporation DE Financing Subsidiary 1997 Order
Denver City Energy Associates, L.P. Limited partnership DE EWG ownership 1997 Order
(Limited Partner)
Quixx WRR, L.P. (Limited Partner) Limited partnership TX QF ownership and ownership of water 1997 Order
rights
C-3
<PAGE>
Windpower Partners 1994, L.P. Limited partnership DE QF ownership 1997 Order
(Limited Partner)
Quixx Jamaica, Inc. Corporation DE EWG holding company 1997 Order
KES Jamaica, L.P. Limited partnership DE EWG 1997 Order
(Limited Partner)
Quixx Mustang Station, Inc. Corporation DE EWG holding company 1997 Order
Denver City Energy Associates, L.P. Limited partnership DE EWG ownership 1997 Order
(General Partner)
Quixxlin Corp. Corporation DE QF holding company 1997 Order
Quixx Linden, L.P. (General Partner) Limited partnership DE QF ownership 1997 Order
Quixx Borger Cogen, Inc. Corporation DE QF holding company 1997 Order
Borger Energy Associates, L.P. Limited partnership DE QF ownership 1997 Order
(General Partner)
Quixx Carolina, Inc. Corporation TX QF holding company 1997 Order
Carolina Energy, Limited Partnership Limited partnership DE QF ownership 1997 Order
(General Partner)
Quixx WPP94, Inc. Corporation TX QF holding company 1997 Order
Windpower Partners 1994, L.P. Limited partnership DE QF ownership 1997 Order
(General Partner)
BCH Energy, Limited Partnership Limited Partnership DE QF ownership - Inactive 1997 Order
(Limited Partner)
Carolina Energy, Limited Partnership Limited partnership DE QF ownership - Inactive 1997 Order
(Limited Partner)
Quixx Linden, L.P. (Limited Partner) Limited partnership DE QF ownership 1997 Order
Quixx Louisville, L.L.C. Limited liability DE Steam generation 1997 Order
company
Quixx WRR, L.P. (General Partner) Limited partnership TX QF ownership and ownership of water 1997 Order
rights
KES Montego, Inc. Corporation DE EWG holding company 1997 Order
KES Jamaica, L.P. (General Partner) Limited partnership DE EWG 1997 Order
Quixx Jamaica Power, Inc. Corporation DE EWG holding company 1997 Order
Mosbacher Power Group, L.L.C. Limited liability DE EWG and FUCO development and ownership 1997 Order
company
Mosbacher Power International, L.L.C. Limited liability DE EWG and FUCO development and ownership 1997 Order
company
</TABLE>
C-4
<PAGE>
Annex D
NSP NON-UTILITY BUSINESSES
The vast majority of NSP's non-utility business are EWGs, FUCOs or QFs and
therefore would be exempt from the Act. A registered holding company may acquire
and hold an interest in an EWG and a FUCO without the need to apply for or
receive approval from the Commission. Sections 32 and 33 of the Act. (The
Commission retains jurisdiction over certain related transactions with prior
entities.) The Commission has also 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 QFs, FUCOs, and EWGs. See, e.g., The Southern
--- ---- ------------
Company, Holding Co. Act Release No. 26212 (Dec. 30, 1994); Entergy Corp.,
- ------- --------------
Holding Co. Act Release No. 26322 (June 30, 1995); Northeast Utilities, Holding
-------------------
Co. Act Release No. 25977 (Jan. 24, 1994) (authorizing Charter Oak Energy and
COE Development Corporation); Central and South West Corp., Holding Co. Act
-----------------------------
Release No. 26156 (Nov. 3, 1994) (authorizing CSW to form, acquire, finance and
own securities of FUCOs); Central and South West Corporation, Holding Co. Act
-----------------------------------
Release No. 26155 (Nov. 2, 1994) (authorizing investment in joint venture which
will construct, own and operate QFs and EWGs). Moreover, Rule 58 lists the
ownership of QFs as an energy-related activity under Rule 58(b)(1)(viii). A
registered holding company may acquire "energy-related companies meeting the
Rule 58 safe harbor conditions without the need for Commission approval. 17
C.F.R. Section 250.58 (1999); Exemption of Acquisition by Registered
------------------------------------------
Public-Utility Holding Companies of Non-Utility Companies Engaged in Certain
- --------------------------------------------------------------------------------
Energy-Related Activities, Holding Co. Act Release No. 26667 (Feb. 14, 1997).
- -------------------------
In addition, under Rule 58, an energy-related company is a company that
derives or will derive substantially all of its revenues (exclusive of revenues
from temporary investments) from one of the twelve businesses described in the
Rule and from such other activities and investments as the Commission may
approve under Section 10. Of the remainder, almost all of NSP's and certain of
NCE's non-utility businesses that are not EWGs or FUCOs would be energy-related
companies under the Commission's Rule 58 or prior Commission precedent.
The non-utility subsidiary companies are further described below.
I. Subsidiaries of NSP
<TABLE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NSP Financing I Delaware Special purpose business trust Prior Commission Precedent124
Viking Gas Transmission Delaware Natural Gas Company (interstate Rule 58 (b)(2)
Company transportation)
Energy Masters International Minnesota Energy services company Rule 58(b)(1)(i)
<FN>
- ------------
124 New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1,
----------------------------
1997) (approving retention of Southwestern Public Service Capital I, as
special purpose trust of SPS).
</FN>
D-1
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Eloigne Company Minnesota Investments in affordable housing Prior commission precedent125
projects which qualify for low income
housing tax credits
First Midwest Auto Park, Inc. Minnesota Owns and operates parking garage next Prior commission precedent126
to NSP HQs
United Power & Land Minnesota Holds land adjacent to certain NSP Prior commission precedent127
Company operations, rents office space to NSP
Nuclear Management Wisconsin Provides services to the nuclear Rule 58(b)(1)(i)
Company operations of its members
Reddy Kilowatt Corporation Montana Owns certain intellectual property Prior Commission Precedent128
rights
Seren Innovations, Inc. Minnesota Provides cable, telephone and The Telecommunica-tions Act
high-speed internet access system
Ultra Power Technologies, Minnesota Markets power cable testing technology Rule 58(b)(1)(vii)
Inc.
NRG Energy, Inc. Delaware Develops, organizes, owns and operates Sections 32 and 33 and
non-regulated energy-related businesses Rule 58(b)(1)(viii)
II. Subsidiaries of NSP-W
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Clearwater Investments, Inc. Wisconsin Investment in affordable housing projects Prior Commission
which qualify for low income housing tax precedent129
credits under federal tax law
<FN>
- ------------
125 WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998).
-------------------
126 American Electric Power Service Co., Holding Co. Act Release No.
---------------------------------------
19981 (April 12, 1977).
127 UNITIL Corporation, Holding Co. Act Release No. 25524 (April 24, 1992).
------------------
128 New Century Energies, Inc., supra (approving the activity of selling
---------------------------- -----
or entering into "royalty arrangements with regard to intellectual
property owned or developed" by PSC).
129 WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998).
------------------
</FN>
D-2
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NSP Lands Wisconsin Sells excess lands adjacent to certain Prior Commission
NSP operations precedent130
Chippewa & Flambeau Wisconsin Builds and operates dams and reservoirs Prior Commission
Improvement Company precedent131
III. Subsidiaries of NRG
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Arthur Kill Power LLC Delaware Entity holding title to Arthur Kill EWG (Holding Company)
generating station in New York
Astoria Power LLC Delaware Entity holding title to Astoria turbines EWG (Holding Company)
in New York
Bioconversion Partners, L.P. California Supplies biomass fuel in California QF
Brimsdown Power Limited England Project company for peaking unit EWG
and Wales associated with Enfield Energy Centre
Limited in England
Cabrillo Power I LLC Delaware Owns and operates Encina electric EWG
generation station in San Diego,
California
Cabrillo Power II LLC Delaware Entity holding title to 17 SDG&E EWG (Holding Company)
combustion turbines in San Diego,
California
Cadillac Renewable Energy Delaware Owns Cadillac wood-fired power plant in QF
LLC Michigan
CamasPower Boiler Limited Oregon Owns waste-wood-fired steam boiler in QF
Partnership Camas paper mill in Washington, L.P.
<FN>
- ------------
130 UNITIL Corporation, supra.
------------------
131 New Century Energies, Inc., supra; UNITIL Corp., Holding Co. Act
-------------------------- ----- ------------
Release No. 25524 (April 24, 1992); and Commonwealth & Southern Corp.,
-----------------------------
Holding Co. Act Release No. 7615 (Aug. 2, 1947).
</FN>
D-3
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Camas Power Boiler, Inc. Oregon General partner in Camas Boiler Limited QF
Partners
Carolina Energy, Limited Delaware Holds remaining non-generating assets of QF
Partnership the Carolina Energy transfer station and
waste-to-energy facility in North
Carolina
Carquinez Strait Preservation California Non-profit corporation which provides Prior Commission precedent
Trust, Inc. monetary support to the communities precedent132
surrounding the Crockett cogeneration
facility in California
Cobee Development LLC Delaware Provides international business EWG (Development Office)
development services in Latin America
for Compania Boliviana de Energia
Electrica S.A.
Cobee Holdings Inc. Delaware Domestic holding company for Tosli EWG
Investments B.V.
Cogeneration Corporation of Delaware Develops, owns and operates cogeneration Rule 58(b)(1)(viii)
America facilities in U.S.
Collinsville Operations Pty Australia Operates Collinsville coal-fired power EWG
plant in Australia
Ltd.
Collinsville Power Joint (Unincorporated) Owns Collinsville coal-fired power plant EWG
Venture in Australia
Compania Boliviana de Canada (Nova Owns 15 operating power plants primarily EWG
Energia Electrica S.A. Scotia) hydroelectric, in Bolivia
Connecticut Jet Power LLC Delaware Potential CL&P assets EWG
Coniti Holding B.V. Netherlands International holding company Inactive
Crockett Cogeneration, a California Owns Crockett cogeneration facility in QF
California Limited California
Partnership
<FN>
- ------------
132 WPL Holdings, Inc., supra.
------------------ -----
</FN>
D-4
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Curtis/Palmer Hydroelectric New York Owns Curtis/Palmer hydroelectric power QF
Company plant in New York
Cypress Energy Partners, Delaware Holds land purchase option for proposed EWG
Limited Partnership coal-fired power plant in Florida
Devon Power LLC Delaware Potential CL&P assets EWG
Dunkirk Power LLC Delaware Entity holding title to Dunkirk Power EWG
Station in New York
ECK Generating, s.r.o. Czech Republic Expansion project for approximately 300 FUCO
MW coal-fired power plant under
construction in Kladno facility
El Segundo Power, LLC Delaware Owns El Segundo gas fired power plant in EWG
California
Elk River Resource Recovery, Minnesota Proposed owner of Elk River waste Inactive
Inc. processing facility in Minnesota
Energeticke Centrum Kladno, Czech Republic Owns and operates a coal-fired power FUCO
s.r.o. plant in Kladno, Czech Republic
Energy Developments Australia Develops, owns and operates power FUCO (Development Company)
Limited (Queensland) generation and waste-to-energy projects
in Australia, New Zealand, Asia and
England
Energy Investors Funds, L.P. Delaware Domestic investment company which holds QF (Holding Company)
limited partner interests in Crockett,
Curtis/Palmer, Windpower 87 and
Windpower 88 projects; also a funding
vehicle for numerous other unrelated
projects in the U.S.
D-5
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Energy National, Inc. Utah Domestic holding company which holds QF (Holding Company)
limited partner interests in Crockett,
Curtis/Palmer, Maine Energy Recovery
Company, Penobscot Energy Recovery
Company, PowerSmith, Windpower 87,
Windpower 88 projects; general partner
in Penobscot Energy Recovery Co.
Enfield Energy Centre England Owns Enfield gas fired power plant in EWG
Limited And Wales England
Enfield Holdings B.V. Netherlands International holding company for EWG
Enfield Energy Centre Limited projects
in England
Enfield Operations, L.L.C. England Operates Enfield Energy gas-fired power EWG
plant in England
Enfield Operations (UK) England Holds employees for Enfield Operations, EWG
Limited And Wales L.L.C.
ENI Chester, Limited Oregon Was limited partner in wood burning Inactive
Partnership project in Maine
ENI Crockett Limited Oregon Limited partner in Crockett QF
Partnership Cogeneration, A California Limited
Partnership
ENI Curtis Falls, Limited Oregon Limited partner in Curtis/Palmer QF
Partnership Hydroelectric Company
Enifund, Inc. Utah Holds property (house at Crockett Rule 58(b)(1)(viii)
cogeneration facility) and provides
consulting services to Maine Energy
Recovery Company
Enigen, Inc. Utah General Partner in The PowerSmith QF
Cogeneration Project, Limited Partnership
D-6
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
ESOCO Crockett, Inc. Oregon Operates Crockett cogeneration facility QF
in California
ESOCO Fayetteville, Inc. Oregon Proposed operator of Fayetteville Inactive
waste-to-energy facility in North
Carolina
ESOCO Molokai, Inc. Utah Proposed operator of Molokai biomass Inactive
fueled power plant in Hawaii
ESOCO Orrington, Inc. Utah Operates Penobscot Energy Recovery Rule 58(b)(1) (viii)
Company in Maine
ESOCO Soledad, Inc. Utah Proposed operator of Soledad wood Inactive
burning power plant in California
ESOCO Wilson, Inc. Oregon Proposed operator of Carolina Energy Inactive
waste-to-energy facility and transfer
station in North Carolina
ESOCO, Inc. Utah Domestic holding company for individual QF
Esoco O&M companies
Four Hills, LLC Delaware Landfill gas collection system for Rule 58(b)(1)(vi)
Nashua project in New Hampshire
Gladstone Power Station (Unincorporated) Owns a 1,680MW coal-fired power EWG
Joint Venture generation facility in Australia
Graystone Corporation Minnesota General Partner in Louisiana Energy EWG
Services, L.P.
Gunwale B.V. Netherlands International holding company Inactive
D-7
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Kingston Cogeneration Canada Owns Kingston cogeneration facility in EWG
Limited Partnership (Ontario) Ontario, Canada
Kissimee Power Partners, Delaware Limited Partner in Cypress Energy EWG
Limited Partnership Partners, Limited Partnership
Kladno Power (No. 1) B.V. Netherlands International holding company for FUCO
Energeticke Centrum Kladno, s.r.o.
Kladno Power (No. 2) B.V. Netherlands International holding company for Matra FUCO
Powerplant Holding B.V., in Czech
Republic
Kraftwerk Schkopau GbR Germany Owns 960MW coal-fired power plan in EWG
Schkopau, Germany
Kraftwerk Schkopau Germany Operates in Germany Schkopau facility EWG
Betriebsgesellschaft mbH
Lakefield Junction LLC Delaware Owns peaking plant to be constructed in EWG
Minnesota
Lakefield Junction LLP Delaware Formed to develop the proposed EWG
independent power project currently
planned for Martin County (Lakefield
Junction)
Lambique Beheer B.V. Netherlands International holding company for MIBRAG EWG
B.V. and Mitteldeutsche
Braunkohlengesellschaft mbH in Germany
Landfill Power LLC Wyoming Owns and operates Flying Cloud landfill QF
gas fueled power generation facility in
Eden Prairie, Minnesota
Le Paz Incorporated Minnesota Limited partner in Louisiana Energy EWG
Services, L.P.
D-8
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
LFG Partners, LLC Delaware Landfill gas collection system for Inactive
Yaworski project in Connecticut
Long Beach Generation LLC Delaware Owns Long Beach gas-fired power plant in EWG
California
Long Island Cogeneration, New York Holds contracts for Long Island Inactive
L.P. cogeneration facility in New York which
was never constructed
Louisiana Energy Services, Delaware Owns uranium enrichment facility under EWG
L.P. development in Louisiana
Louisiana Generating LLC Delaware Formed for the purpose of owning Cajun EWG
non-nuclear generating assets in
Louisiana (including gas and coal-fired
generation)
Loy Yang Power Australia Operates Loy Yang coal-fired power plant EWG
Management Pty Ltd. (Victoria) in Australia
Loy Yang Power Partners Australia Owns Loy Yang coal-fired plant in EWG
Australia
Loy Yang Power Projects Pty Australia Provides technical services to Loy Yang EWG
Ltd (Victoria) coal fired power plant in Australia
Maine Energy Recovery Maine Owns Waste-to-Energy facility in QF and
Company Biddeford, Maine Rule 58(b)(1)(ii)
Matra Powerplant Holding Netherlands International holding company for ECK FUCO
B.V. Generating, s.r.o. in Czech Republic
MIBRAG B.V. Netherlands Owns 99% of MIBRAG GmbH coal mines and EWG
coal-fired power plants in Germany
D-9
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Mid-Continent Power Delaware Owns Mid-Contingent Power Company QF
Company, L.L.C. cogeneration facility in Oklahoma
Middletown Power LLC Delaware Potential CL&P assets EWG
Minnesota Methane Holdings Delaware Domestic holding company Inactive
LLC
Minnesota Methane II LLC Delaware Owns and operates original 3 NEO/Ziegler QF and
landfill gas projects (Edward Kraemer in Rule 58(b)(1)(vi)
Burnsville, MN; Flying Cloud in Eden
Prairie, MN and Nashua in New Hampshire)
Minnesota Methane LLC Wyoming Owns and operates 18 landfill gas QF and
projects in the U.S. financed by Lyon Rule 58(b)(1)(vi)
Credit
Minnesota Waste Processing Delaware Owns municipal solid waste processing Rule 58(b)(1)(ii)
Company, L.L.C. facility and transfer station in
Minnesota
Mitteldeutsche Germany Operates coal mining, power generation EWG
Braunkohlengesellschaft and associated operations near Leipzig,
mbH Germany
MM Albany Energy LLC Delaware Landfill gas fueled power generation for QF and
project in New York Rule 58(b)(1)(vi)
MM Biogas Power LLC Delaware Domestic holding company - owns 100% QF and
interest in landfill gas fueled power Rule 58(b)(1)(vi)
generation projects not being financed
MM Burnsville Energy LLC Delaware Landfill gas fueled power generation for QF and
Edward Kraemer landfill in Minnesota Rule 58(b)(1)(vi)
D-10
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
MM Corona Energy LLC Delaware Landfill gas fueled power generation for QF and
O'Brien projects in California Rule 58(b)(1)(vi)
MM Cuyahoga Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Cleveland, Ohio Rule 58(b)(1)(vi)
MM Ft. Smith Energy LLC Delaware Will sell landfill gas to other QF and
companies in Arkansas - not a GENCO Rule 58(b)(1)(vi)
MM Hackensack Energy LLC Delaware Landfill gas fueled power generation for QF and
HMDC/Balefill/Kingsland O'Brien project Rule 58(b)(1)(vi)
in Lyndhurst, New Jersey
MM Hartford Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Connecticut Rule 58(b)(1)(vi)
MM Lopez Energy LLC Delaware Landfill gas fueled power generation for QF and
Lopez Canyon project in Los Angeles, Rule 58(b)(1)(vi)
California
MM Lowell Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Massachusetts Rule 58(b)(1)(vi)
MM Nashville Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Tennessee Rule 58(b)(1)(vi)
MM Northern Tier Energy Delaware Landfill gas fueled power generation for QF and
LLC project in Pennsylvania Rule 58(b)(1)(vi)
MM Phoenix Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Arizona Rule 58(b)(1)(vi)
D-11
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
MM Prima Deshecha Energy Delaware Landfill gas fueled power generation for QF and
LLC project in Orange County, California Rule 58(b)(1)(vi)
MM Prince William Energy Delaware Landfill gas fueled power generation for QF and
LLC project in Virginia Rule 58(b)(1)(vi)
MM Riverside LLC Delaware Landfill gas fueled power generation for QF and
project in California Rule 58(b)(1)(vi)
MM San Diego LLC Delaware Landfill gas fueled power generation for QF and
Miramar project in California Rule 58(b)(1)(vi)
MM SKB Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Pennsylvania Rule 58(b)(1)(vi)
MM Spokane Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Washington Rule 58(b)(1)(vi)
MM Tacoma LLC Delaware Landfill gas fueled power generation for QF and
project in Washington Rule 58(b)(1)(vi)
MM Tajiguas Energy Delaware Landfill gas fueled power generation for QF and
project in Santa Barbara, California Rule 58(b)(1)(vi)
MM Taunton Energy LLC Delaware Landfill gas fueled power generation for QF and
project in Massachusetts Rule 58(b)(1)(vi)
MM Tomoka Farms Energy Delaware Landfill gas fueled power generation for QF and
LLC Volusia project in Florida Rule 58(b)(1)(vi)
MM Tulare Energy LLC Delaware Landfill gas fueled power generation for QF and
Visalia project in California Rule 58(b)(1)(vi)
D-12
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
MM West Covina LLC Delaware Landfill gas fueled power generation for QF and
BKK project in California Rule 58(b)(1)(vi)
MM Woodville Energy LLC Delaware Landfill gas fueled power generation for QF and
project in California Rule 58(b)(1)(vi)
MM Yolo Power LLC Delaware Landfill gas fueled power generation for QF and
project in California Rule 58(b)(1)(vi)
MMSB Transco Holdings Delaware Transport landfill gas for resale QF and
LLC Rule 58(b)(1)(vi)
Montville Power LLC Delaware Potential CL&P assets EWG
Mt. Poso Cogeneration California Owns Mt. Poso cogeneration facility in QF
Company, a California California
Limited Partnership
NEO Albany, L.L.C. Delaware Landfill gas collection system for QF and
project in New York Rule 58(b)(1)(vi)
NEO Burnsville, LLC Delaware Landfill gas collection system for QF and
Edward Kraemer landfill in Minnesota Rule 58(b)(1)(vi)
NEO Corona LLC Delaware Landfill gas collection system for QF and
O'Brien project in California Rule 58(b)(1)(vi)
NEO Corporation Minnesota Develops, owns and operates landfill QF and
gas, hydroelectric and small Rule 58(b)(1)(vi)
cogeneration projects in the U.S.
NEO Cuyahoga, LLC Delaware Landfill gas collection system for QF and
project in Cleveland, Ohio Rule 58(b)(1)(vi)
NEO Edgeboro, LLC Delaware Landfill gas collection system for QF and
O'Brien project in New Jersey Rule 58(b)(1)(vi)
D-13
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NEO Findlay, LLC Delaware Landfill gas collection system for Inactive
project in Pennsylvania
NEO Fitchburg LLC Delaware Landfill gas collection system for QF and
project in Massachusetts Rule 58(b)(1)(vi)
NEO Ft. Smith LLC Delaware Landfill gas collection system for QF and
project in Arkansas Rule 58(b)(1)(vi)
NEO Hackensack, LLC Delaware Landfill gas collection system for QF and
HMDC/Balefill/Kingsland O'Brien projects Rule 58(b)(1)(vi)
in Lyndhurst, New Jersey
NEO Hartford, LLC Delaware Landfill gas collection system for QF and
project in Connecticut Rule 58(b)(1)(vi)
NEO Landfill Gas Holdings Delaware Domestic holding company - provides O&M QF and
Inc. services for landfill gas projects Rule 58(b)(1)(vi)
NEO Landfill Gas Inc. Delaware Domestic holding company - holds 99% QF and
interest in landfill gas collection Rule 58(b)(1)(vi)
system projects financed by Lyon Credit
NEO Lopez Canyon LLC Delaware Landfill gas collection system for QF and
project in Los Angeles, California Rule 58(b)(1)(vi)
NEO Lowell LLC Delaware Landfill gas collection system for QF and
project in Massachusetts Rule 58(b)(1)(vi)
NEO Nashville LLC Delaware Landfill gas collection system for QF and
project in Tennessee Rule 58(b)(vi)
NEO Northern Tier LLC Delaware Landfill gas collection system for QF and
project in Pennsylvania Rule 58(b)(vi)
NEO Phoenix LLC Delaware Landfill gas collection system for QF and
project in Arizona Rule 58(b)(vi)
D-14
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NEO Prima Deshecha LLC Delaware Landfill gas collection system for QF and
project in Orange County, California Rule 58(b)(vi)
NEO Prince William, LLC Delaware Landfill gas collection system for QF and
project in Virginia Rule 58(b)(vi)
NEO Riverside LLC Delaware Landfill gas collection system for QF and
project in California Rule 58(b)(vi)
NEO San Bernardino LLC Delaware Landfill gas collection system for QF and
project in California Rule 58(b)(vi)
NEO San Diego LLC Delaware Landfill gas collection system for QF and
Miramar project in California Rule 58(b)(1)(vi)
NEO SKB LLC Delaware Landfill gas collection system for QF and
project in Pennsylvania Rule 58(b)(1)(vi)
NEO Spokane LLC Delaware Landfill gas collection system for QF and
project in Washington Rule 58(b)(1)(vi)
NEO Tacoma, L.L.C. Delaware Landfill gas collection system for QF and
project in Washington Rule 58(b)(1)(vi)
NEO Tajiguas LLC Delaware Landfill gas collection system for QF and
project in Santa Barbara, California Rule 58(b)(1)(vi)
NEO Taunton LLC Delaware Landfill gas collection system for QF and
project in Massachusetts Rule 58(b)(1)(vi)
NEO Tomoka Farms LLC Delaware Landfill gas collection system for QF and
Volusia project in Florida Rule 58(b)(1)(vi)
NEO Tulare LLC Delaware Landfill gas collection system for QF and
Visalia project in California Rule 58(b)(1)(vi)
NEO West Covina LLC Delaware Landfill gas collection system for BKK QF and
project in California Rule 58(b)(1)(vi)
NEO Woodville LLC Delaware Landfill gas collection for project in QF and
California Rule 58(b)(1)(vi)
D-15
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NEO Yolo LLC Delaware Landfill gas collection system for QF and
project in California Rule 58(b)(1)(vi)
New Roads Generating, LLC Delaware Alternative domestic holding company for Inactive
Cajun non-nuclear generating assets in
Louisiana (including gas and coal-fired
generation)
North American Thermal Ohio Develops district heating and cooling QF and
Systems Limited Liability projects in the U.S.; general partner in Rule 58(b)(1)(vi)
Company Pittsburgh Thermal, Limited Partnership
and San Francisco Thermal, Limited
Partnership
Northbrook Acquisition Corp. Delaware Domestic holding company in STS QF
Hydropower Ltd.
Northbrook Carolina Hydro, Delaware Owns and operates hydroelectric power QF
L.L.C. plants in North Carolina and South
Carolina
Northbrook Energy, L.L.C. Delaware Develops hydroelectric power projects in QF
the U.S.
Northeast Generation Holding Delaware To hold 50% interest in NRG Northeast
LLC Generating LLC
Norwalk Power LLC Delaware Potential CL&P assets EWG
NR (Gibraltar) Gilbratar Company utilized during the Enfield Inactive
transactions in England
NRG Artesia Operations Inc. Delaware Proposed operator for Artesia QF
cogeneration facility in California
NRG Arthur Kill Operations Delaware Special purpose operating company to EWG
Inc. provide O&M services contract to Arthur
Kill Power LLC
D-16
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRG Asia-Pacific, Ltd. Delaware Provides international business EWG
development services in Australia and
the Pacific Rim region
NRG Astoria Gas Turbine Delaware Special purpose operating company to EWG
Operations Inc. provide O&M services contract to Astoria
Gas Turbine Power LLC
NRG Cabrillo I, Inc. Delaware Special purpose company to add layer of EWG
liability protection between operating
asset and NRG
NRG Cabrillo I LLC Delaware Special purpose company to add layer of EWG
liability protection between operating
asset and NRG
NRG Cabrillo II, Inc. Delaware Special purpose company to add layer of EWG
liability protection between operating
asset and NRG
NRG Cabrillo II LLC Delaware Special purpose company to add layer of EWG
liability of protection between
operating asset and NRG
NRG Cabrillo Power Delaware Special purpose operating company to EWG
Operations Inc. provide O&M services contract to
Cabrillo Power I LLC and Cabrillo Power
II LLC
NRG Cadillac Inc. Delaware Domestic holding company in Cadillac QF and
Renewable Energy LLC Rule 58(b)(1)(vii)
NRG Cadillac Operations Inc. Delaware Proposed operator for Cadillac wood QF and
fired power plant in Michigan Rule 58(b)(1)(vii)
NRG Collinsville Operating Australia International holding company in EWG
Services Pty Ltd. Collinsville Operations Pty Ltd.
NRG del Coronado Inc. Delaware General partner in RSD Power Partners, QF
L.P.
D-17
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRG Dunkirk Operations Inc. Delaware Special purpose operating company to EWG
provide O&M services contract to Dunkirk
Power LLC
NRG Eastern LLC Delaware To hold 50% interest in NRG Northeast EWG
Generating LLC
NRG El Segundo Inc. Delaware Domestic holding company in El Segundo EWG
Power, LLC
NRG El Segundo Operations Delaware Proposed operator for El Segundo EWG
Inc. gas-fired power plant in California
NRG Energeticky Provoz, Czech Republic Operates coal-fired power plants in FUCO
s.r.o. Kladno, Czech Republic
NRG Energy Center, Inc. Minnesota Owns and operates Minneapolis Energy QF and
Center district heating and cooling Rule 58(b)(1)(vii)
system in Minnesota
NRG Energy CZ, s.r.o. Czech Republic Provides international business FUCO
development services in the Czech
Republic and Europe
NRG Energy Development Germany Provides international business EWG
GmbH development services in Germany and
Europe
NRG Energy Jackson Valley California General partner in Jackson Valley Energy QF
I, Inc. Partners, L.P.
NRG Energy Jackson California Limited partner in (i) Jackson Valley QF
Valley II, Inc. Energy Partners, L.P., (ii) San Joaquin
Valley Energy Partners I, L.P.,
(iii) San Joaquin Valley Energy Partners
IV, L.P. and (iv) Bioconversion
Partners, L.P.
D-18
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRG Energy Ltd. England and Wales Provides international business Prior Commission
development services in the U.K. and precedent133
Europe
NRG Gladstone Operating Australia Operates coal-fired Gladstone power EWG
Services Pty Ltd. plant in Australia
NRG Gladstone Australia Holds pension assets for employees of EWG
Superannuation Pty Ltd. Gladstone coal-fired power plant in
Australia
NRG Huntley Operations Inc. Delaware Special purpose operating company to EWG
provide O&M services contract to Huntley
Power LLC
NRG International II Inc. Delaware Domestic holding company EWG/FUCO Holding Company
NRG International, Inc. Delaware Domestic holding company EWG/FUCO Holding Company
NRG International Services Delaware Holds service agreements with EWG/FUCO Holding Company
Company expatriates and international consultants
NRG Lakefield Inc. Delaware Special purpose entity to hold NRG's 50% EWG
member interest in Lakefield Junction LLC
NRG Latin America Inc. Delaware Provides international business EWG
development services in Latin America
NRG Long Beach Inc. Delaware Domestic holding company in Long Beach EWG
Generation LLC
NRG Long Beach Operations Delaware Proposed operator for Long Beach EWG
Inc. gas-fired power plant in California
<FN>
- ------------
133 CINergy Corporation, Holding Co. Act Release No. 26376 (September 21,
-------------------
1995).
</FN>
D-19
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRG Morris Operations Inc. Delaware Proposed operator for Millennium QF
cogeneration facility in Illinois
NRG Northeast Affiliate Delaware Manage payroll and benefits for Huntley EWG
Services Inc. and Dunkirk (approximately 330 employees)
NRG Northeast Generating Delaware Special purpose holding company entity EWG
LLC to facilitate east coast pool financing
NRG Northeast Power Delaware Power marketing and fuel procurement EWG
Marketing LLC
NRG Oklahoma Operations Delaware Proposed operator for Mid-Continent QF
Inc. Power Company cogeneration facility in
Oklahoma
NRG Operating Services, Inc. Delaware Currently provides O&M services for Prior Commission
Artesia, Cadillac, Collinsville, precedent134
Gladstone and Minneapolis Energy Center
projects
NRG Oswego Harbor Power Delaware Special purpose operating company to EWG
Operations Inc. provide O&M services contract to Oswego
Power LLC
NRG PacGen Inc. Delaware Domestic holding company which acquired EWG (Holding Company)
100% of the stock of Pacific Generation
Company
NRG Parlin Inc. Delaware Provides cogeneration services to NRG QF
Generating (U.S.) Inc.'s Parlin facility
in New Jersey
NRG Pittsburgh Thermal Inc. Delaware Limited Partner in Pittsburgh Thermal, QF
Limited Partnership
NRG Power Marketing Inc. Delaware Holds power marketing license Rule 58(b)(1)(v)
<FN>
- ------------
134 Entergy Corporation, Holding Co. Act Release No. 26322 (September 21,
-------------------
1995).
</FN>
D-20
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRG San Diego Inc. Delaware Limited Partner in RSD Power Partners, QF
L.P.
NRG San Francisco Thermal Delaware Special purpose entity to hold NRG's QF
Inc. limited partnership ownership in SFTLP
NRG Services Corporation Delaware Provides payroll and benefits services Prior Commission
through service agreements with precedent135
individual O&M companies
NRG Sunnyside Operations Delaware General Partner in Sunnyside Operations QF
GP Inc. Associated L.P.
NRG Sunnyside Operations Delaware Limited Partner in Sunnyside Operations Rule 58(b)(1)(viii)
LP, Inc. Associates L.P.
NRG Victoria I Pty Ltd. Australia International holding company in NRG FUCO
Victoria II Pty Ltd. and NRG Victoria
III Pty Ltd. In Australia
NRG Victoria II Pty Ltd. Australia International holding company in NRG FUCO
Victoria III Pty Ltd. In Australia
NRG Victoria III Pty Ltd. Australia International holding company for Energy FUCO
Developments Limited
NRG West Coast Inc. Delaware To act as holding company for West coast EWG (Holding Company)
limited liability companies
NRGenerating Holdings Netherlands International holding company in EWG
(No. 1) B.V. Collinsville Power Joint Venture
NRGenerating Holdings Netherlands International holding company registered Inactive
(No. 3) B.V. to do business in Australia
<FN>
- ------------
135 Entergy Corporation, supra.
------------------- -----
</FN>
D-21
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRGenerating Holdings Netherlands International holding company in Loy EWG
(No. 4) B.V. Yang Power Partners, Loy Yang Power
Management Pty Ltd. and Loy Yang Power
Projects Pty Ltd.
NRGenerating Holdings Netherlands International holding company in NRG FUCO
(No. 5) B.V. Energeticky Provoz, s.r.o.
NRGenerating Holdings Netherlands International holding company registered Inactive
(No. 6) B.V. to do business in Australia
NRGenerating Holdings Netherlands International holding company for West Inactive
(No. 7) B.V. Java O&M company in formation in
Indonesia
NRGenerating Holdings Netherlands International holding company for West Inactive
(No. 8) B.V. Java O&M company in formation in
Indonesia
NRGenerating Holdings Netherlands International holding company in Kanel EWG
(No. 9) B.V. Kangal Elektrik Limited Sirketi
NRGenerating Holdings Netherlands International holding company for EWG
(No. 11) B.V. Langage Park Project in England
NRGenerating Holdings Netherlands International holding company Inactive
(No. 12) B.V.
NRGenerating Holdings Netherlands International holding company Inactive
(No. 13) B.V.
NRGenerating Holdings Netherlands International holding company Inactive
(No. 14) B.V.
NRGenerating Holdings Netherlands International holding company Inactive
(No. 15) B.V.
NRGenerating Holdings Netherlands International holding company Inactive
(No. 16) B.V.
D-22
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
NRGenerating Holdings Netherlands International holding company Inactive
(No. 17) B.V.
NRGenerating International Netherlands International holding company Inactive
B.V.
NRGenerating Rupali B.V. Netherlands International holding company for Rupali Inactive
oil fired power plant bid in Pakistan
O Brien Biogas (Mazzaro), Delaware Landfill gas collection system for QF and
Inc. project in Pennsylvania Rule 58(b)(1)(vii)
O Brien Biogas IV LLC Delaware Landfill gas fueled power generation for QF and
Edgeboro project in New Jersey Rule 58(b)(1)(vii)
O Brien California Cogen California Owns Artesia cogeneration facility in QF
Limited California
O Brien Cogeneration, Inc. II Delaware General Partner in O'Brien California QF
Cogen Limited
O Brien Standby Power Delaware Landfill gas fueled power generation for QF
Energy, Inc. SKB project in Pennsylvania
Okeechobee Power I, Inc. Delaware General partner in Cypress QF
Energy Partners, Limited
Partnership
Okeechobee Power II, Inc. Delaware General partner in Kissimee Power QF
Partners, Limited Partnership
Okeechobee Power III, Inc. Delaware Limited Partner in Kissimee Power QF
Partners, Limited Partnership
D-23
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
ONSITE Energy, Inc. Oregon Domestic holding company for ONSITE QF
Soledad, Inc. and ONSITE Marianas
Corporation; also indirectly holds
general partner interest in Mt. Poso
project and limited partner interest in
Turners Falls project
ONSITE Funding Corporation Oregon Provides funding to various ONSITE Inactive
projects
ONSITE Limited Partnership Oregon Owned cogeneration facilities for bakery Inactive
No. 1 in Los Angeles and dairy in Michigan
ONSITE Marianas Commonwealth of Owned and operated Marianas solar energy Inactive
Corporation the Northern plant in the Commonwealth of Northern
Marianas Islands Mariana Islands in Pacific Ocean
ONSITE Soledad, Inc. Oregon Owned and operated Soledad wood burning Inactive
power plant in California
ONSITE/Haines Limited Oregon Owned wood burning power plant in Alaska Inactive
Partnership
ONSITE/Molokai, Limited Oregon Owned and operated biomass fueled Inactive
Partnership Molokai power plant in Hawaii
ONSITE/US Power Limited Oregon Owned Crossroads cogeneration facility Inactive
Partnership No. 1 in New Jersey
Orrington Waste, Ltd. Limited Oregon Provides waste disposal services to QF and
Partnership municipalities to be delivered to waste Rule 58(b)(1)(ii)
disposal operators in Maine, including
Penobscot Energy Recovery Company
D-24
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Oswego Harbor Power LLC Delaware Formed for the purpose of acquiring, EWG
operating and owning the electric
generating plant in Oswego, New York
P.T. Dayalistrik Pratama Indonesia Will own and construct West Java Inactive
coal-fired power plant in Indonesia
Pacific Crockett Energy, Inc. Utah General Partner in Crockett QF
Cogeneration, A California Limited
Partnership
Pacific Crockett Holdings, Oregon Domestic holding company for Pacific QF
Inc. Crockett Energy, Inc.
Pacific Generation Company Oregon Domestic holding company acquired by NRG QF
(formerly a wholly owned subsidiary of
PacifiCorp Holdings, Inc. which
developed, built, owned, operated and
managed energy production facilities);
also a limited partner in Camas Power
Boiler Limited Partnership
Pacific Generation Oregon Provided domestic business development Inactive
Development Company services
Pacific Generation Funding, Oregon Holds debt in Windpower 87 and Windpower QF
Inc. 88
Pacific Generation Holdings Oregon Domestic holdings company for Pacific QF and
Company Generation Funding and Pacific Recycling Rule 58(b)(1)(ii)
Energy; holds limited partner interests
in Carolina Energy, Limited Partnership
and Project Finance Fund III; and
indirectly holds general partner interest
in Kingston Cogeneration Limited
Partnership
D-25
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Pacific Generation Resources Oregon Domestic holding company which holds Rule 58(b)(1)(vi); Rule
Company limited partner interest in Long Island 58(b)(1)(viii)
Cogeneration, L.P.; holds limited and
general partner interests in
Curtis/Palmer, Windpower 87 and
Windpower 88 projects; general partner in
ENI Chester, Limited Partnership
Pacific Kingston Energy, Inc. Canada General Partner in Kingston Cogeneration EWG
(Ontario) Limited Partnership
Pacific Orrington Energy, Inc. Oregon Holds general and limited partner QF
interests in Orrington Waste, Ltd.,
Limited Partnership
Pacific Recycling Energy, Inc. Oregon Provided business development services Inactive
for waste-to-energy projects
Pacific-Mt. Poso Corporation Oregon General Partner in Mt. Poso Cogeneration QF
Company, A California Limited Partnership
Penobscot Energy Recovery Maine Owns waste-to-energy facility in QF and
Company Orrington, Maine Rule 58(b)(1)(ii)
Pittsburgh Thermal, Limited Delaware Provides district heating and cooling QF and
Partnership services in Pittsburgh Rule 58(b)(1)(vi)
Power Operations, Inc. Delaware Provides O&M services for Artesia, QF
Cadillac, Newark and Parlin projects
Project Finance Fund III, L.P. Delaware Funding vehicle for various (primarily) QF
international operating projects
Pyro-Pacific Operating California Operates Mt. Poso cogeneration facility QF
Company in California
D-26
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
RSD Power Partners, L.P. Delaware Owns and operates a power and cooling QF
plant in California
Saale Energie GmbH Germany International holding company for EWG
Kraftwerk Schkopau Betriebsgesellschaft
mbH, Kraftwerk Schkopau GbR and Saale
Energie Services GmbH (Germany)
Saale Energie Services GmbH Germany Provides consulting services to MIBRAG EWG
Sachsen Holding B.V. Netherlands International holding company for P.T. Inactive
Dayalistrik Pratama
San Bernardino Landfill Gas Delaware Partnership holding interest in QF QF
Limited Partnership, a landfill project
California limited
partnership
San Francisco Thermal, Delaware Provides district heating and cooling QF
Limited Partnership services in California
San Joaquin Valley Energy I, California General Partner in San Joaquin Valley QF
Inc. Energy Partners I, L.P.
San Joaquin Valley California General partner in San Joaquin Valley QF
Energy IV, Inc. Energy Partners IV, L.P. and
Bioconversion Partners, L.P.
San Joaquin Valley Energy California Owns and operates three biomass QF
Partners I, L.P. waste-fuel power plants (Chowchilla II,
El Nido and Madera) in California
San Joaquin Valley Energy California Holds remaining non-operating assets of QF
Partners IV, L.P. biomass waste-fuel power plant
(Chowchilla I) in California
D-27
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Scoria Incorporated Minnesota Holds license for synthetic coal QF and
technology Rules 58(b)(1)(ii)
and (vi)
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power I - C L.D.C. British West Indies passive) investments in Latin American
power projects
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power I - P L.D.C. British West Indies passive) investments in Latin American
power projects
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power II - C L.D.C. British West Indies passive) investments in Latin American
power projects - phase II
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power II - C.L.D.C. British West Indies passive) investments in Latin American
power projects - phase II
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power II - Corporation A British West Indies passive) investments in Latin American
power projects - phase II
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power II - Corporation B British West Indies passive) investments in Latin American
power projects - phase II
Scudder Latin American Cayman Islands, Investment company which owns (primarily EWG
Power II - P L.D.C. British West Indies passive) investments in Latin American
power projects - phase II
Somerset Generation I Inc. Delaware Domestic holding company in Somerset EWG
Power LLC in Massachusetts
D-28
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Somerset Generation II Inc. Delaware Domestic holding company in Somerset EWG
Power LLC in Massachusetts
Somerset Operations Inc. Delaware Proposed operator for Somerset coal EWG
fired power plant in Massachusetts
Somerset Power LLC Delaware Acquire, operate and own the electric EWG
generating plant in Somerset,
Massachusetts
STS Heislers, Inc. Delaware Hydroelectric projects Inactive
STS Hydropower Ltd. Michigan Owns and operates hydroelectric projects QF
in California, Colorado, Michigan,
Virginia and Washington
STS Turbine & Development, Delaware Provides turbine design and project QF and
L.L.C. development services Rule 58(b)(1)(iv)
Suncook Energy LLC Delaware Landfill gas fueled power generation for QF and
Nashua project in New Hampshire Rule 58(b)(1)(vi)
Sunnyside Cogeneration Utah Owns waste coal power plant in Utah QF and
Associates Rule 58(b)(1)(x)
Sunnyside Operations Delaware Operates waste coal power plant in Utah QF and
Associates L.P. Rule 58(b)(1)(x)
Sunshine State Power (No. 2) Netherlands International holding company which EWG
B.V. holds a 17.5% undivided interest in
Gladstone Power Station Joint Venture
Sunshine State Power B.V. Netherlands International holding company which EWG
holds a 20% undivided interest in
Gladstone Power Station Joint Venture
D-29
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Tosli Investments N.V. Netherlands International holding company for EWG
Compania Boliviana de Energia Electrica
S.A. in Latin America
Turners Falls Limited Massachusetts Owns Turners Falls cogeneration facility QF
Partnership in Massachusetts
Wainstones Power Limited England and Wales Will build, own and operate 800MW EWG
combined cycle gas turbine power plant
on greenfield site at Langage England
(f/k/a Plymouth Energy Centre)
West Coast Power LLC Delaware West coast holding company entity EWG
designed to facilitate west coast asset
pool financing
IV. Subsidiaries of Eloigne Company
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Safe Haven Homes LLC Delaware Affordable housing primarily within the Prior Commission
Company's service area precedent136
Lauring Green Ltd. Ptsp. Minnesota Affordable housing Same
Bemidji Townhouse Ltd. Ptsp. Minnesota Affordable housing Same
Central Towers Limited Minnesota Affordable housing Same
Partnership
Driftwood Partners Ltd. Ptsp. Minnesota Affordable housing Same
Colfax Prairie Homes Limited Wisconsin Affordable housing Same
Partnership
Cottage Court Ltd. Ptsp. Minnesota Affordable housing Same
Ctg. Homesteads Hillcrest Minnesota Affordable housing Same
Ltd. Ptsp.
<FN>
- ------------
136 WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998)
------------------
(approving retention of a non-utility subsidiary engaged in the
"development, ownership, and sales of, and asset management services
in connection with, affordable multi-family housing properties").
</FN>
D-30
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Cottages of Spring Lake Park Minnesota Affordable housing Same
Ltd. Ptsp.
Cottages of Vadnais Heights Minnesota Affordable housing Same
Ltd. Ptsp.
Ctg. Homesteads of Willow Minnesota Affordable housing Same
Ponds Ltd. Ptsp.
Albany Countryside Minnesota Affordable housing Same
Townhomes Ltd. Ptsp.
RWIC Credit Fund Ltd. Ptsp. Minnesota Affordable housing Same
Marvin Gardens Ltd. Ptsp. Minnesota Affordable housing Same
Crown Ridge Apartments Ltd. Minnesota Affordable housing Same
Ptsp.
Sioux Falls Housing Equity South Dakota Affordable housing Same
Fund I Ltd. Ptsp.
East Creek Limited Minnesota Affordable housing Same
Partnership
Edenvale Family Housing Minnesota Affordable housing Same
Limited Partnership
Granite Hill Ltd. Ptsp. Minnesota Affordable housing Same
Groveland Terrace Minnesota Affordable housing Same
Townhomes Ltd. Ptsp.
Plover Limited Liability Co. Wisconsin Affordable housing Same
Jefferson Heights Townhomes Minnesota Affordable housing Same
Ltd. Ptsp.
Lakeville Court Ltd. Ptsp. Minnesota Affordable housing Same
Majestic View Apartments, South Dakota Affordable housing Same
Ltd. Ptsp.
Marsh Run Ltd. Ptsp. Minnesota Affordable housing Same
Oakdale Leased Housing Ltd. Minnesota Affordable housing Same
Ptsp.
Wyoming Limited Partnership Minnesota Affordable housing Same
J&D 14-93 Ltd. Ptsp. Minnesota Affordable housing Same
Park Rapids Housing Limited Minnesota Affordable housing Same
Partnership
D-31
<PAGE>
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
MDI Ltd. Ptsp. #44 Minnesota Affordable housing Same
Sioux Falls Partners Ltd. Ptsp. South Dakota Affordable housing Same
806 N. Hazel Ltd. Ptsp. Minnesota Affordable housing Same
Links Lane, A Ltd. Ptsp. Minnesota Affordable housing Same
Polynesian Village 1994 Ltd. Minnesota Affordable housing Same
Ptsp.
Sioux River Ltd. Ptsp. South Dakota Affordable housing Same
Stradford Flats Ltd. Ptsp. Minnesota Affordable housing Same
Brooklyn Ctr. Leased Housing Minnesota Affordable housing Same
Assc. LLC
Fairview Ridge Ltd. Ptsp. Minnesota Affordable housing Same
Tower Terrace Ltd. Ptsp. Minnesota Affordable housing Same
R & W Partners Ltd. Ptsp. Minnesota Affordable housing Same
Mahtomedi Woodland Minnesota Affordable housing Same
Limited Partnership
Woodland Village Minnesota Affordable housing Same
Townhomes Ltd. Ptsp.
V. Subsidiaries of Energy Masters International, Inc.
<CAPTION>
Location of
-----------
Subsidiary Name Incorporation Description of Business Authority
- --------------- ------------- ----------------------- ---------
<S> <C> <C> <C>
Energy Solutions International Minnesota Energy services Rule 58(b)(1)(i)
Inc.
</TABLE>
D-32
<PAGE>
Annex E
AFFILIATE CONTRACTS
SALE OF FUEL
Washco sells wood by-product purchased from Andersen Corporation to NSP
for use as fuel in generating facilities. The price for the wood by-product
equals the average cost per Mcf of solid fuel delivered to a NSP generating
plant during the calendar year. This contract was approved by the MPUC in Docket
No. E002/M-86-775.
NSP purchases RDF from the Newport facility. This contract was approved
by the MPUC in Docket No. E002/AI-93-821.
OPERATIONAL SERVICES
NSP manages the Renaissance Square Office Building for UP&L. NSP
provides this service in exchange for two percent (2%) of the building's gross
annual rents. This contract was approved by the MPUC in Docket No.
E002/AI-94-1188.
NRG operates a municipal solid waste transfer station and Minnesota
Waste Processing's RDF storage facility on land leased from NSP. The facility
collects and distributes municipal solid waste and stores RDF for distribution
to generating facilities. This contract was approved by the MPUC in Docket No.
E002/AI-94-950. NRG also operates the Newport RDF facility, the Elk River RDF
facility and the Becker ash landfill on behalf of NSP. This contract was
approved by the MPUC in Docket No. E002/AI-93-770.
E-1
<PAGE>
CONTROL AND DATA ACQUISITION AND GAS DISPATCHING SERVICES
NSP supplies NSP-W and Viking with gas dispatching services and other
services associated with supervisory control and data acquisition (SCADA) for
their gas businesses pursuant to contracts with Viking and NSP-W. Both of the
contracts were approved by the MPUC in Docket No. G002/AI-94-831 and the
contract between NSP and NSP-W was approved by the PSCW in Docket No.
4220-AU-117. SCADA and gas dispatching are among the functions a local
distribution company (LDC) such as NSP or an interstate pipeline company like
Viking must perform in order to ensure reliable delivery of natural gas to
customers. A SCADA system electronically communicates gas flow, gas pressure,
and gas equipment set point data for the delivery system and records the data in
a computerized data storage system for monitoring and control purposes. Gas
dispatching includes monitoring and controlling the flow, pressures and
operating conditions of a natural gas delivery system through the use of a SCADA
system. Absent this agreement, NSP, NSP-W and Viking could each need to own and
operate a SCADA system. The agreement enables the companies to share the costs.
The three companies are each allocated and billed a share of the actual costs
incurred by NSP on a monthly basis. The costs are shared based on the number of
metering points monitored for each company.
NATURAL GAS AND GAS RELATED SERVICES
Under an umbrella gas agreement, NSP may purchase interruptible spot
gas supplies from EMI, make sales to EMI and release to EMI its firm unutilized
transportation rights on both unaffiliated pipelines, and on Viking. This
contract was approved by the MPUC in Docket No. G002/AI-98-071. The MPUC order
allows NSP to purchase gas supplies from EMI only when NSP receives at least
three bids (two from non-affiliates) and EMI offers the lowest bid. Thus, in
order for EMI to supply NSP with gas, EMI must be lowest cost supplier of the
gas supply alternatives available to NSP. Recovery of the gas supply cost from
retail ratepayers is also subject to MPUC audit and potential disallowance if
contracting principles are not followed. NSP-W has a similar agreement with EMI
to release pipeline capacity or to purchase pipeline capacity from one another
pursuant to rules and filed tariff provisions approved by FERC.
(Docket No. 4220-AU-118).
As described herein, Viking is an interstate pipeline that provides
natural gas transportation service subject to the rate and tariff jurisdiction
of FERC. Under FERC rules, Viking must provide transportation service on a
non-discriminatory basis to all shippers of natural gas. Viking's current rates
effective January 1, 1999 were established on a cost of service basis and were
approved by FERC by order dated May 12, 1999, 87 FERC Para. 61,167 (1999). In
addition, FERC adopted rules (18 CFR 161, 275) govern the relationship between
Viking and its affiliated local distribution companies (LDCs) and gas marketing
affiliates. The rules restrict the operations of affiliated LDCs on Viking and
prohibit any service preference to affiliated marketers.
Viking currently provides firm (FT), interruptible (IT) and authorized
overrun (AOT) gas transportation services for NSP and NSP-W pursuant to several
transportation contracts. NSP and NSP-W are "affiliated LDCs" of Viking subject
to the operational restrictions imposed by 18 CFR
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<PAGE>
161. These contracts all use Viking's standard form agreement which was approved
by FERC.137
Viking has historically provided certain transportation services for
EMI.138 EMI is presently an affiliated marketer of Viking and is subject to the
limitations of 18 CFR Section 161.
SALE OF STEAM
NSP sells steam to NRG for its Wascho operations for resale to Andersen
Corporation and to a Minnesota correctional facility. This contract was approved
by the MPUC in Docket No. E002/M-86-775.
NRG purchases steam for its Waldorf process steam operation from NSP's
High Bridge power generation facility. This contract was approved by the MPUC in
Docket No. E002/CI-82-523.
LEASING OF LAND
NSP leases land adjacent to its Wilmarth steam generating facility to
Minnesota Waste Processing. Such land is used to house a solid waste storage and
transfer facility. The storage facility collects and distributes MSW and stores
and distributes RDF to generating stations, including the Wilmarth facility.
This contract was approved by the MPUC in Docket No. E002/AI-94-950.
UP&L leases office space on floors two through eleven of the
Renaissance Square office building to NSP. This contract was approved by the
MPUC in Docket No. E002/AI-90-845. UP&L also leases office space on the first
floor and in the basement of the Renaissance Square office building to NSP. This
contract was approved by the MPUC in Docket No. E002/AI-94-1056.
FMAP leases 14,000 square feet of unimproved storage area in the first
and second floors of the parking garage adjacent to NSP's headquarters. This
contract was approved by the MPUC in Docket No. E002/AI-94-1043. FMAP also
leases 92 parking spaces in the parking facility to NSP. This contract was
approved by the MPUC in Docket No. E002/AI-94-1042.
- ------------
137 The contracts between NSP and Viking were reviewed in the following
dockets: FERC Dockets ST92-1412, ST94-5658 and ST94-5659 and MPUC
Dockets AI-93-1235, AI-94-738 and AI-93-1235. The contracts between
Viking and NSP-W were reviewed in the following dockets: FERC Dockets
ST92-2273, ST94-5660, ST95-2361 and ST94-5661. Since FERC has primary
jurisdiction over these agreements, NSP-W is not required to seek PSCW
approval.
138 These services were approved by FERC in Docket numbers ST94-4797 and
ST95-0784.
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<PAGE>
SALE OF ELECTRICITY
Minnesota Methane sells power from its QF facility in Burnsville,
Minnesota to NSP pursuant to a power purchase agreement approved by the MPUC in
Docket No. E002/AI-94-378. Similarly, Landfill Power sells power to NSP from its
QF facilities in Eden Prairie, Minnesota and Inver Grove Heights, Minnesota
pursuant to power purchase agreements approved by the MPUC in Docket Nos.
E002/AI-95-371 and E002/AI-95-570, respectively. NSP entered into these
contracts in accordance with PURPA.
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<PAGE>
EXHIBIT I-1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
Filing under the Public Utility Holding Company Act of 1935
August 25, 1999
New Century Energies and Northern States Power (70-_____)
Notice is hereby given that the following filing has been made with the
Commission pursuant to provisions of the Act and rules promulgated under the
Act. All interested persons are referred to the application-declaration for
complete statements of the proposed transactions summarized below. The
application-declaration and any amendments are available for public inspection
through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing on the
application-declaration should submit their views in writing by ___________,
1999 to the Secretary, Securities and Exchange Commission, Washington, D.C.
20549, and serve a copy of the relevant application-declaration at the addresses
specified below. Proof of service (by affidavit or, in case of an attorney at
law, by certificate) should be filed with the request. Any request for hearing
should identify specifically the issues of fact or law that are disputed. A
person who so requests will be notified of any hearing, if ordered, and will
receive a copy of any notice or order issued in the matter. After __________,
1999, the application-declaration, as filed or as amended, may be granted and/or
permitted to become effective.
New Century Energies, Inc. ("NCE"), 1225 Seventeenth Street, Denver,
Colorado 80202, a registered holding company, and Northern States Power Company
("NSP"), 414 Nicollet Mall, Minneapolis, Minnesota 55401, a holding company
exempt from registration (collectively, "Applicants"), have filed a joint
application-declaration under Sections 4; 5; 6(a); 7; 9(a)(1); 10; 9(a)(2);
10(a), (b), (c) and (f); 8; 9;(c)(3); 11(b); 21; 12(d); 13; and 13(b)(1) and
rules 44, 80-92 and 88 under the Act.
Summary of Proposal
As described in more detail below, Applicants propose: (1) to merge NCE
with and into NSP, which will be renamed Xcel Energy Inc. ("Xcel"), through the
issuance of Xcel Common Stock in exchange for NCE Common Stock; (2) to transfer
all of NSP's existing electric and gas utility operations to a newly formed,
wholly owned subsidiary ("New NSP") and to form and capitalize New NSP; (3) to
register Xcel as a holding company following consummation of the merger; (4) to
have Xcel retain the retail gas utility operations of NSP; NSP's subsidiary
Northern States Power, a Wisconsin corporation ("NSP-W"); NCE's subsidiaries
Public Service Company of
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<PAGE>
Colorado, a Colorado corporation ("PSCo."), and Cheyenne Light, Fuel and Power
Company, a Wyoming corporation ("Cheyenne"); (5) to retain the other businesses
of NSP and NCE and their direct and indirect subsidiaries; and (6) to have NCE's
service company subsidiary, New Century Services, Inc., render services to
Xcel's utility and non utility subsidiaries.
NCE and Subsidiaries
NCE, a Delaware corporation, was incorporated under the laws of the
State of Delaware in 1997. NCE is a registered public utility holding company
formed pursuant to Commission order. NCE owns all the outstanding shares of
stock of three U.S. public-utility operating subsidiaries, PSCo, Cheyenne, and
Southwestern Public Service Company, a New Mexico corporation ("SPS"). PSCo
serves approximately 1.2 million electric customers and approximately 1.0
million gas customers in the state of Colorado. SPS serves approximately 385,000
electric customers in portions of the states of Texas, New Mexico, Oklahoma and
Kansas. Cheyenne serves approximately 35,000 electric customers and 28,000 gas
customers in Cheyenne, Wyoming.
NCE, directly or indirectly, owns all the outstanding common stock of
the following non-utility subsidiary companies: New Century Services, the NCE
system service company under Section 13 of the Act; WestGas InterState, Inc.
("WGI"), a natural gas company subject to FERC jurisdiction under the NGA; and
NC Enterprises, Inc. ("NC Enterprises"), a holding company for NCE's non-utility
businesses and foreign operations. PSCo also holds various non-utility
subsidiaries. These subsidiaries primarily operate in support to PSCo's
operations. The non-utility operations of NCE have all been previously
authorized under the 1935 Act or have been established by rule or pursuant to
statutory exemption.
NCE and its subsidiaries are subject to regulation by the Commission
under the Act. 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 Colorado Commission. As a public utility under the laws of the
states of Texas, New Mexico, Kansas and Oklahoma, SPS is regulated as to retail
electric and certain other matters by the Texas Commission, New Mexico
Commission, Kansas Commission and Oklahoma Commission, respectively. Cheyenne is
subject to regulation in connection with its electric and gas retail sales and
other matters by the Wyoming Commission. SPS, PSCo and Cheyenne are also subject
to regulation by FERC pursuant to the Federal Power Act, as amended, with
respect to the classification of accounts, rates for any wholesale sales of
electricity, the interstate transmission of electric power and energy,
interconnection agreements, the licensing of hydro-electric facilities, and
acquisitions and sales of certain utility properties. In addition, PSCo and
Cheyenne are subject to regulation by FERC under the Natural Gas Act of 1935, as
amended ("NGA") with regards to certain transportation or sale of natural gas
for resale.
New Century Services has entered into service agreements with NCE, SPS,
PSCo and Cheyenne (the "Utility Service Agreements"). New NSP and NSP-W will
also enter into the Utility Service Agreement with New Century Services. New
Century Services has also entered into separate service agreements with the
non-utility subsidiary companies of NCE. It is contemplated
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<PAGE>
that New Century Services will similarly enter into one or more separate service
agreements with the direct and indirect non-utility subsidiaries of NSP.
NSP and its Subsidiaries
NSP, which was incorporated in Minnesota in 1909, is a public-utility
company and a holding company exempt from registration pursuant to Commission
order under Section 3(a)(2) of the Act. NSP owns all of the outstanding common
stock of NSP-W, which is a public-utility company under the Act.
NSP is engaged primarily in the generation, transmission and
distribution of electricity throughout a 30,000 square mile service area in
Minnesota, North Dakota and South Dakota. NSP also purchases, distributes and
sells natural gas to retail customers and transports customer-owned gas in
approximately 118 communities within this area and in Arizona. Of the more than
2.5 million people served by NSP, the majority are in the Minneapolis-St. Paul
metropolitan area. NSP provides both electric and gas utility service in
Minnesota, North Dakota and South Dakota but only gas utility service in
Arizona. As of December 31, 1998, NSP provided retail electric utility service
to approximately 1,240,000 customers and gas utility service to approximately
385,000 customers.
NSP-W is engaged in the generation, transmission, and distribution of
electricity to approximately 210,400 retail customers in an area of
approximately 18,900 square miles in northwestern Wisconsin, to approximately
9,100 electric retail customers in an area of approximately 300 square miles in
the western portion of the Upper Peninsula of Michigan and to 10 wholesale
customers in the same general area. NSP-W purchases, distributes and sells
natural gas to retail customers or transports customer-owned natural gas in the
same service territory to approximately 78,000 customers in Wisconsin and 5,000
customers in Michigan. In 1998, NSP-W provided approximately 13% of NSP's
consolidated revenues.
The electric transmission system of NSP and NSP-W is located throughout
the service territories that NSP and NSP-W serve in Minnesota, North Dakota,
South Dakota, Michigan and Wisconsin. NSP and NSP-W are directly connected with
each other through numerous transmission lines that they own, including one 345
kV transmission line, two 115 k at 93 kV transmission lines and two 69 kV
transmission lines.
Retail sales rates, services and other aspects of NSP's retail
operations are subject to the jurisdiction of the Minnesota Commission, the
North Dakota Commission, the South Dakota Commission and the Arizona Commission
within their respective states. The Minnesota Commission also possesses
regulatory authority over aspects of NSP's financial activities, including
security issuances, property transfers when the asset value is in excess of
$100,000, mergers with other utilities, and transactions between NSP and
affiliates. In addition, the Minnesota Commission reviews and approves NSP's
electric resource and gas supply capacity plans for meeting customers' future
energy needs. NSP-W is subject to regulation of similar scope by the Wisconsin
Commission and the Michigan Commission, except that the Michigan Commission does
not regulate NSP-W's
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<PAGE>
issuances of securities. In addition, a state commission generally must certify
the need for new generating plants and transmission lines of designated
capacities to be located within such state before they may be sited and built.
Wholesale rates for electric energy sold in interstate commerce, the
classification of accounts, the interstate transmission of electric power and
energy, interconnection agreements, issuances of securities not regulated by
state commissions, acquisitions and sales of certain utility properties and
certain other activities of NSP and NSP-W (including the licensing of its
hydro-electric facilities) are subject to the jurisdiction of FERC. The
operation and construction of NSP's Prairie Island and Monticello nuclear
facilities are subject to regulation by the NRC. In addition, NSP and NSP-W are
subject to FERC jurisdiction under the NGA and 18 C.F.R. Section 284.402 with
regards to the sale of natural gas for resale.
NSP is also engaged, directly and through subsidiary companies, in
non-utility businesses. NSP directly provides: (i) an appliance services program
for its residential customers, (ii) construction of natural gas distribution
systems for third parties (primarily end-users and municipal gas systems), (iii)
sale and installation of power quality instruments primarily to protect
equipment of customers from electric surges, (iv) sale of steam to industrial
customers in NSP's service territory, (v) installation and maintenance of street
lighting for municipalities and other customers. In addition, NSP owns directly
the interests of the following non-utility subsidiary companies: NSP Financing
I, a special purpose business trust; Viking Gas Transmission Company ("Viking"),
an interstate natural gas pipeline subject to FERC jurisdiction under the NGA;
Eloigne Company ("Eloigne"), an investor in projects that qualify for low-income
housing tax credits; Energy Masters International, Inc. ("EMI"), an energy
services company; Seren Innovations, Inc. ("Seren"), a company that provides
cable, telephone and high-speed internet access system; Ultra Power
Technologies, Inc. ("Ultra Power"), a company that markets power cable testing
technology; First Midwest Auto Park, Inc. ("FMAP"), an owner of a parking
garage; United Power and Land Company ("UP&L"), a real estate investment
company; NRG Energy, Inc. ("NRG"), a holding company for many of NSP's
non-utility businesses and foreign operations; Reddy Kilowatt Corporation
("Reddy Kilowatt"), the owner of certain intellectual property rights; and
Nuclear Management Company ("NMC"), a limited liability company that provides
services to the nuclear operations of its members. NSP owns 100% of all of the
foregoing businesses, except that NSP owns 25% of the membership interests in
NMC.
NSP-W owns directly all of the outstanding common stock of Clearwater
Investments, Inc. ("Clearwater"), an investor in housing projects that qualify
for low-income housing tax credits, and NSP Lands, Inc. ("NSP Lands"), a real
estate investor. NSP-W also owns 75.86% of Chippewa and Flambeau Improvement
Company ("C&F"), a company that builds and operates dams and reservoirs. A
further description of the non-utility subsidiaries of NSP-W is also set forth
on Annex D hereto.
NSP Common Stock is listed on the NYSE and the Chicago and Pacific
Stock Exchanges. As of the close of business on June 30, 1999, there were
153,796,567 shares of NSP Common Stock and 1,050,000 shares of NSP cumulative
preferred stock issued and outstanding. NSP's principal executive office is
located at 414 Nicollet Mall, Minneapolis, Minnesota 55401. NSP-W does not
I-4
<PAGE>
have any preferred stock outstanding, and all of its common stock is owned by
NSP. Consolidated assets of NSP and its subsidiaries as of December 31, 1998
were approximately $7.4 billion, consisting of $3.7 billion in net electric
utility property, plant and equipment ($3.1 billion for NSP and $594 million for
NSP-W); $439 million in net gas utility property, plant and equipment ($376
million for NSP and $63 million for NSP-W); and $1.6 billion in non-utility
subsidiary assets, and $1.7 billion in other corporate assets.
The Proposed Merger
An Agreement and Plan of Merger, dated as of March 24, 1999 (the
"Merger Agreement") among NSP and NCE provides for the merger of NCE with and
into NSP pursuant to which: (a) each share of NCE Common Stock issued and
outstanding immediately prior to the effective time of the Merger, together with
any NCE Rights,139 shall be converted into the right to receive 1.55 shares (the
"Conversion Ratio") of duly authorized, validly issued, fully paid and
nonassessable NSP Common Stock; (b) each issued and outstanding share of NSP
Common Stock and each share of preferred stock of NSP issued and outstanding
immediately prior to the effective time of the Merger shall remain outstanding
and (c) each share of NCE Common Stock, together with any NCE Rights, that is
owned by NSP or any of its subsidiaries or held in the treasury of NCE will be
canceled and shall cease to exist, and no consideration shall be delivered in
exchange therefor. As noted previously, NSP will change its name to Xcel at or
prior to the Merger. Based upon the capitalization of NCE and NSP on March 24,
1999 (the date the Merger Agreement was signed) and the Conversion Ratio, NCE
shareholders would own 54 percent and NSP shareholders would own 46 percent of
the common equity of Xcel if the Merger had been consummated as of such date.
Except as set forth below, if any holder of NCE Common Stock would be
entitled to receive a number of shares of NSP Common Stock that includes a
fraction, then in lieu of a fractional share, such holder will be entitled to
receive a cash payment determined by multiplying the fractional share interest
by the average of the last reported sales price, regular way, per share of NSP
Common Stock on the NYSE Composite Tape for the ten business days prior to and
including the last business day on which NSP Common Stock was traded on the
NYSE, without any interest thereon. Fractional shares of NCE Common Stock held
in accounts under the dividend reinvestment plans and employee benefit plans of
NCE will be converted into the applicable number of shares (or fractional
shares) of NSP Common Stock under corresponding plans of NSP, in accordance with
the Conversion Ratio.
Applicants request authority for Xcel to acquire and NCE to sell the
stock of NCE, SPS, PSCo, Cheyenne, New Century Services and the non-utility
subsidiaries of NCE. Applicants also request authority for Xcel to issue its
common stock in exchange for shares of NCE common stock, as well as to form and
capitalize New NSP. Applicants also seek an exemption from at-cost
- ------------
139 Each NCE Right entitles the registered holder to purchase from NCE one
one-hundredth of a share of Series A Junior Participating Preferred
Stock. The NCE Rights were distributed as a dividend on each
outstanding share of NCE Common Stock as part of NCE's shareholder
rights plan.
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<PAGE>
standards with respect to certain services between Xcel system companies.
The Merger Agreement provides that, after the effectiveness of the
Merger, Xcel's principal corporate office will be located in Minneapolis,
Minnesota. Xcel will also maintain significant operating offices in Denver,
Colorado, and Amarillo, Texas. Xcel's board of directors (classified into three
classes) will consist of an even number of up to 14 persons, half of whom will
be designated by NSP and half of whom will be designated by NCE. As of the date
hereof, NSP and NCE have not determined which individuals, in addition to
Messrs. Howard and Brunetti, will serve as officers of Xcel following
consummation of the Merger. Mr. James Howard, the current Chairman, Chief
Executive Officer and President of NSP, will be entitled to serve as Chairman of
the Board of Xcel until the first anniversary of the effectiveness of the Merger
of NCE and NSP. Mr. Wayne H. Brunetti, the President and Chief Operating Officer
of NCE, will be entitled to serve as President and Chief Executive Officer of
Xcel upon the effectiveness of the Merger, and thereafter will assume the
position of Chairman when Mr. Howard ceases to be Chairman.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
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<PAGE>
Exhibit J-1
EXHIBIT J-1
NSP AND NSP-W ANALYSIS OF THE ECONOMIC
IMPACT OF A DIVESTITURE OF THE
GAS OPERATIONS OF NSP AND NSP-W
<PAGE>
Exhibit J-1
NORTHERN STATES POWER COMPANY (MINNESOTA)
NORTHERN STATES POWER COMPANY (WISCONSIN)
ANALYSIS OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS OPERATIONS OF
NSP AND ITS NSP-W SUBSIDIARY
This study was undertaken by the management and staff of Northern
States Power Company, a Minnesota corporation ("NSP"), and its wholly-owned
subsidiary Northern States Power Company, a Wisconsin corporation ("NSP-W"). The
objective of the study is to quantify the economic impact on shareholders and
customers of divesting NSP of its natural gas utility assets and business in the
States of Minnesota, North Dakota, South Dakota and Arizona, and divesting NSP-W
of its natural gas utility assets and business in the States of Wisconsin and
Michigan. The study uses the same basic methodology as the divestiture study
submitted with the Application - Declaration on Form U-1 (File No. 70-08833)
filed in connection with the proposed Merger of NSP and Wisconsin Electric Power
Company in late 1996.
In addition, NSP and New Century Energies, Inc. ("NCE") are preparing a
separate analysis where the retail natural gas operations are instead divested
into a stand-alone gas holding company subject to the Act, with the retail gas
operations of NSP, NSP-W, and the NCE subsidiaries, Public Service Company of
Colorado ("PSCo") and Cheyenne Fuel, Light & Power ("Cheyenne"), each as a gas
utility subsidiary of the new gas holding company.
June 1999
<PAGE>
Exhibit J-1
TABLE OF CONTENTS
EXECUTIVE SUMMARY1
I. CONCLUSIONS..............................................................3
II. SPIN-OFF ASSUMPTIONS......................................................6
III. GENERAL STUDY ASSUMPTIONS...............................................8
IV. GAS COMPANY OF MINNESOTA ANALYSIS.......................................9
V. GAS COMPANY OF WISCONSIN ANALYSIS........................................17
VI. OTHER CUSTOMER IMPACTS...................................................24
VII. BILL COMPARISON OF GAS COMPANY OF MINNESOTA AND GAS
COMPANY OF WISCONSIN TO OTHER UTILITIES.................................25
VIII. EFFECT ON REMAINING ELECTRIC COMPANIES.................................25
APPENDIX A. COMPARISON OF NSP AND NSP-W GAS TO REGIONAL GAS UTILITIES
APPENDIX B. ORGANIZATION CHART NEW GAS COMPANY OF MINNESOTA
APPENDIX C. ORGANIZATION CHART NEW GAS COMPANY OF WISCONSIN
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<PAGE>
Exhibit J-1
EXECUTIVE SUMMARY
Northern States Power Company, a Minnesota corporation ("NSP")
management and staff have undertaken this Analysis of the Economic Impact of a
Divestiture of the Gas Operations of NSP and its Wholly-Owned Subsidiary
Northern States Power Company, a Wisconsin corporation ("NSP-W") ("Study"). The
purpose of the Study is to quantify the economic impact on NSP shareholders and
its customers of spinning off NSP's and NSP-W's natural gas assets and
businesses. NSP is currently an exempt holding company under the Public Utility
Holding Company Act of 1935 ("PUHCA") providing electric and natural gas service
in a major portion of the States of Minnesota, North Dakota, and South Dakota,
with a small natural gas operation in Arizona called Black Mountain Gas ("BMG").
NSP-W is a wholly-owned subsidiary of NSP providing electric and natural gas
service in and around Eau Claire, Wisconsin, portions of northwestern Wisconsin
and portions of the Upper Peninsula of Michigan.
The Study quantifies the economic impacts of operating the following
two entities as independent, stand-alone companies if they were disaggregated
from NSP's combined utility businesses:
The Minnesota, North Dakota, South Dakota and Arizona portion of
NSP's gas business spin-off into a new organization called, for
the purpose of this Study, Gas Company of Minnesota; and
NSP-W's gas business spin-off into a new organization called, for
the purpose of this Study, Gas Company of Wisconsin.
The Study evaluates the increased costs of "lost economies" associated
with divestiture of these businesses from two perspectives - shareholders and
customers. The effect on shareholders is the direct result of the increased
costs or lost economies resulting from a spin-off or divestiture, absent
regulatory rate relief to recoup these lost economies. The effect on customers
assumes recovery of these lost economies through rate increases, and is divided
into two parts. The potential effects on customers have first been evaluated in
terms of increased revenue requirements and rates, and second in terms of the
impact of other quantifiable and nonquantifiable costs.
The projected impacts on the shareholders of the lost economies
resulting form the spin-off of NSP's gas business (including BMG) into Gas
Company of Minnesota and the spin-off of NSP-W's gas business into Gas Company
of Wisconsin, assuming no rate adjustments to recover the lost economies and
associated income taxes, are shown in Table J-1.
J-1
<PAGE>
Exhibit J-1
- --------------------------------------------------------------------------------
TABLE J-1
ANNUAL SHAREHOLDER IMPACT OF LOST ECONOMIES
- --------------------------------------------------------------------------------
LOST ECONOMIES AS A GAS COMPANY OF GAS COMPANY OF
PERCENT OF: MINNESOTA WISCONSIN
- --------------------------------------------------------------------------------
Total Gas Operating Revenue 8.77% 11.20%
- --------------------------------------------------------------------------------
Total Gas Operating Rev. Deductions 9.57% 12.00%
- --------------------------------------------------------------------------------
Gross Gas Income 105.46% 166.81%
- --------------------------------------------------------------------------------
Net Gas Income 134.97% 239.07%
- --------------------------------------------------------------------------------
In Table J-1, Total Gas Operating Revenue is the sum of rate and other
revenue for the 12 months ending December 31, 1998 (Base Case).140 Total Gas
Operating Revenue Deductions includes all operation and maintenance expenses,
administrative and general expenses, depreciation and all taxes, except income
taxes. Gross Gas Income is the difference between Total Gas Operating Revenue
and Total Gas Operating Revenue Deductions. Net Gas Income is Gross Gas Income
minus Income Taxes.
Alternatively, and assuming that each organization is allowed to
increase its rate revenue to recover these lost economies and attendant income
taxes through rate increases, the projected impact on NSP's and NSP-W's gas
customers is shown in Table J-2.
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TABLE J-2
ANNUAL GAS CUSTOMER IMPACT OF LOST ECONOMIES
- --------------------------------------------------------------------------------
RATE REVENUE: GAS COMPANY OF GAS COMPANY OF
MINNESOTA WISCONSIN
- --------------------------------------------------------------------------------
Pre Spin-off $360,567,000 $78,800,000
- --------------------------------------------------------------------------------
Post Spin-off $393,109,000 $87,807,000
- --------------------------------------------------------------------------------
Increase $32,542,000 $9,007,000
- --------------------------------------------------------------------------------
Percent Increase 9.03% 11.43%
- --------------------------------------------------------------------------------
- -------------------
140 All dollar amounts contained in the study are expressed in 1998 dollars.
J-2
<PAGE>
Exhibit J-1
In addition to the foregoing impacts, the following table sets forth
the impact on the remaining electric utility operations comprised of NSP's and
NSP-W's current electric businesses. This impact is primarily due to the expense
of additional employees required to perform the multitude of functions
accomplished by employees who currently work for both the electric and gas
businesses and assumes that rate recovery of the lost economies and attendant
income taxes is allowed by the appropriate regulatory agencies.
- --------------------------------------------------------------------------------
TABLE J-3
ANNUAL ELECTRIC CUSTOMER IMPACT OF LOST ECONOMIES
- --------------------------------------------------------------------------------
RATE REVENUE: NSP REMAINING NSP-W REMAINING
ELECTRIC ELECTRIC
- --------------------------------------------------------------------------------
Pre Spin-off $2,200,000,000 $325,000,000
- --------------------------------------------------------------------------------
Post Spin-off $2,219,900,000 $329,690,000
- --------------------------------------------------------------------------------
Increase $19,900,000 $4,690,000
- --------------------------------------------------------------------------------
Percent Increase 0.9% 1.4%
- --------------------------------------------------------------------------------
Finally, both NSP's and NSP-W's gas customers would incur increased
personal costs such as postage on a separate envelope and additional check costs
to mail payments to two utilities rather than one. This does not include
additional customer confusion resulting from doing business with two utilities
rather than one. The increased postage expense alone of $3.96 per customer per
year for all customers is shown in Table J-4.
- --------------------------------------------------------------------------------
TABLE J-4
OTHER ANNUAL CUSTOMER IMPACTS
NSP POSTAGE NSP-W POSTAGE
- --------------------------------------------------------------------------------
$1,523,000 $326,000
- --------------------------------------------------------------------------------
I. CONCLUSIONS
The spin-off of NSP's and NSP-W's current gas businesses into two
stand-alone companies is estimated to result in a substantial increase in costs
and therefore a substantial decrease in earnings to NSP shareholders absent rate
relief to recoup these decreased earnings. Without an increase in rates, the
immediate negative effect on shareholders' earnings would be substantial. For
example, the earnings contribution relating to NSP's and NSP-W's gas businesses
would be decreased by approximately 135 percent and 239 percent, respectively,
as shown in Table J-1. Such a decline would make ownership of shares in these
stand-alone companies unattractive.
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<PAGE>
Exhibit J-1
A. Impact on Gas Operations
Rate recovery of these cost increases to retail gas customers in
Minnesota, North Dakota, South Dakota, Arizona, Wisconsin and Michigan would
result in a significant increase in the level of costs borne by these customers
with no attendant increase in the level or quality of service. The rate
increases required to provide the level of revenue needed to cover costs to
operate Gas Company of Minnesota and Gas Company of Wisconsin would be
significant, amounting to approximately $42 million, as shown in Table J-2. Such
rate increases would make the new gas companies less competitive at a time when
competition in the energy industry is rapidly increasing due to Federal Energy
Regulatory Commission ("FERC") Order No. 636 and other FERC and state regulatory
restructuring initiatives. By comparison, retention of the gas businesses would
allow rate reductions to consumers.
The potential physical bypass of Local Distribution Companies ("LDCs")
is becoming a reality that LDCs must face daily, along with the commensurate
possibility of a decreasing customer base, resultant rate increases, and
potential stranded costs. Certain NSP and NSP-W customers have already bypassed
their LDC distribution system, and other customers have used the threat of
physical bypass to negotiate service agreements at substantial discounts. The
FERC has sanctioned the bypass of LDC systems by interstate pipelines in recent
years in the interest of increasing competition. In addition, natural gas
service continues to compete with alternative fuels. Cost increases to the gas
utility operations from divestiture might increase the bypass risk.
The focus on competition is also beginning to require the unbundling of
LDC services. This trend is occurring as state commissions, LDCs and their
customers call for a change in the way LDCs provide services. While the
objectives of these groups are not always consistent, the result will likely be
the same - increased competition. LDCs already face fierce price competition,
and must remain competitive to avoid shareholder losses and a reduced customer
base. As a result of the increased costs discussed herein, bundled or unbundled
services may become uncompetitive as the rate increases needed to recover these
cost increases could potentially result in rates that few customers would pay
when compared to other competitive options they may have.
A graphic comparison of typical residential and commercial gas bills in
Minnesota, North Dakota, Wisconsin and Michigan, illustrating the loss of each
new Gas Company's relative position resulting form a spin-off, as compared to
other utilities, is contained in Table VII-1 of Exhibit J-2 - New Century
Energies, Inc. "Analysis of Economic Impact of a Divestiture of NCE's
Operations."141
B. Impact on Electric Operations
In addition, FERC Order No. 888 and state retail restructuring
initiatives are expected to increase competition in the electric industry. The
lost economies estimated for NSP's and NSP-W's remaining electric companies, if
divestiture of gas operations were required, would also have an adverse impact
on their ability to successfully compete in the restructured electric
- ------------
141 This comparison will be filed by supplement with the updated NCE study.
J-4
<PAGE>
Exhibit J-1
industry. A forced divestiture as a result of the proposed merged company would
result in the remaining electric utility operating companies of New NSP being
less competitive than they would be as part of a merged company.
The diseconomies would be reduced for the retail gas operations if all
the gas operations of NSP and NCE were instead divested into a new gas holding
company. This would allow some of the economies of the proposed larger NSP/NCE
merger to be realized. However, these economies are less than the cost
increases. In addition, the increased costs to the remaining electric operations
caused by separation from the gas operations are not mitigated in any way, thus
reducing (or even counteracting) the predicted merger savings to the electric
operations.
C. Other Impacts
As opposed to the negative results of the economic impact, two positive
conclusions were noted.
First, it is expected that after divestiture, the two segments of NSP
and NSP-W's business analyzed in this Study would continue to be managed
locally, as they currently are. NSP's gas business would continue to be managed
from and based in St. Paul, Minnesota, and from other local/regional parts of
Minnesota, North Dakota and Arizona where management is currently based. NSP-W's
gas business would continue to be locally based in the City of Eau Claire,
Wisconsin. Therefore, the benefits and costs of localized management will
continue to be realized.
Second, it is expected that after divestiture the Minnesota Public
Utilities Commission ("MPUC"), North Dakota Public Service Commission ("NDPSC"),
South Dakota Public Utilities Commission ("SDPUC"), Arizona Corporation
Commission ("ACC"), Public Service Commission of Wisconsin ("PSCW") and Michigan
Public Service Commission ("MPSC") would continue to have and exercise the same
jurisdictional authority over the regulated gas businesses as they do today.
NSP's gas business would continue to be regulated primarily by the MPUC, NDPSC,
SDPUC and ACC, and NSP-W's gas business would continue to be regulated primarily
by the PSCW and MPSC. Therefore, the state commissions will continue as the
primary agencies responsible for the regulation of the LDCs.
However, it should be noted that these same conditions (continued local
management and state regulatory jurisdiction) would exist if the gas businesses
remain with the new merged entity.
D. Divestiture Would Not Serve the Public Interest
As previously discussed in the Executive Summary, there is a
combination of approximately $42 million in revenue increases needed for the New
Gas Companies, shown in Table J-2, and an additional $25 million in revenue
increases as a result of lost utility operating economies, including income
taxes, that will impact the remaining NSP and NSP-W electric companies, and
potentially their customers shown in Table J-3. Therefore, the total revenue
J-5
<PAGE>
Exhibit J-1
increases that would be required is approximately $67 million annually, or
approximately $670 million over ten years.
Based on the foregoing conclusions, NSP believes that spinning off the
gas businesses would adversely impact NSP's shareholders and both electric and
gas customers. Therefore, NSP recommends that it is in the best interest of its
shareholders and customers that NSP and NSP-W retain their existing gas utility
assets and businesses.
II. SPIN-OFF ASSUMPTIONS
The Study assumes that two segments of NSP's current business can, in
fact, be spun-off into stand-alone companies. These two potential stand-alone
businesses are currently part of the combined companies as described below:
Within Minnesota, North Dakota and South Dakota, NSP is primarily a
combination electric and gas utility, engaged in the generation, purchase,
transmission, distribution and sale of electricity, and in the purchase,
transmission, distribution, sale and transportation of natural gas. NSP
presently provides gas-only service in Arizona through its Black Mountain Gas
division.142
NSP's gas business includes an extensive distribution system serving
numerous communities throughout Minnesota, North Dakota and Arizona. NSP's gas
system serves over 385,000 residential, commercial, industrial, and
transportation customers. Total annual gas revenues are approximately $361
million. Annual gas deliveries are nearly 87 billion cubic feet (Bcf). The Study
assumes the retail gas operations of NSP are spun-off into a stand-alone gas
company: New Gas Company of Minnesota.143
NSP's electric business, which includes generation, transmission, and
distribution facilities located statewide, provides service to nearly 1.2
million customers throughout a large portion of Minnesota, North Dakota and
South Dakota. Total annual electric revenues are approximately $2.2 billion and
annual sales are nearly 3.7 million megawatt hours (MWh).
NSP's wholly-owned subsidiary, NSP-W, operates a combination electric
and gas business in Wisconsin and the Upper Peninsula of Michigan. NSP-W is
engaged in the generation, transmission, distribution and sale of electricity,
and in the purchase, distribution, sale and transportation of natural gas.
The NSP-W gas distribution system serves over 82,000 customers. Total
annual gas revenues are approximately $79 million. Annual gas deliveries are
nearly 18 billion cubic feet
- -------------------
142 NSP is presently seeking authorization to "spin down" the BMG operations
into a new wholly-owned subsidiary of NSP, also called BMG for
purposes of the Study. The MPUC approved the transaction by order
dated April 9, 1999 (Docket No. G002/AI-99-46), and the NDPSC by order
dated April 14, 1999 (Case No. PU-400-99-35). ACC and SEC approval are
pending. The ACC has scheduled a hearing for August 24, 1999. This
Study assumes BMG is a subsidiary of NSP.
143 The Study assumes the interstate gas pipeline subsidiary of NSP --
Viking Gas Transmission Company -- remains a subsidiary of Xcel.
J-6
<PAGE>
Exhibit J-1
(Bcf). The Study assumes that the gas portion of NSP-W is spun-off into a
stand-alone gas company: New Gas Company of Wisconsin.
The NSP-W electric system consists of generation, transmission and
distribution facilities and serves approximately 220,000 customers. Total annual
electric revenues are approximately $325 million and annual sales are
approximately 6 million megawatt hours (MWh).
The Study assumes that it would be possible to spin-off NSP's gas
business and its NSP-W's gas business from their respective combined gas and
electric businesses for the following reasons:
The electric and gas systems are physically separate;
A large number of personnel who are directly involved in the
day-to-day operations of the electric and gas physical plant
("systems") are dedicated electric-only or gas-only;
The regulatory treatment of the respective electric and gas
revenue requirements, rate design, and tariff filings is, for the
most part, handled separately; and,
In other parts of the country, stand-alone electric and gas
companies routinely share overlapping service territories.144
In addition, the Study analyzes the Gas Company of Minnesota and Gas
Company of Wisconsin organizations as two stand-alone companies rather than one
combined-gas-company for the following reasons:
NSP-W is presently a wholly-owned subsidiary of NSP with existing
separate management and its own Board of Directors. Two separate
corporations would need to be merged to effectuate a single
combined gas company. However, the Wisconsin Public Utility Act
requires all public utilities operating in Wisconsin to be
incorporated in Wisconsin. (This is one reason why NSP and NSP-W
are separate legal entities today.)
NSP's gas business and NSP-W's gas business are currently
regulated by different state regulatory commissions. NSP is
regulated by the MPUC, NDPSC, SDPUC and ACC, while NSP-W is
regulated by the PSCW and MPSC. The regulatory treatment of the
respective electric and gas revenue requirements, rate design,
and tariff filings is, for the most part, handled separately.
The NSP and NSP-W gas systems can be operated independently;145
and,
- -------------------
144 Indeed, a significant portion of the NSP electric service area in
Minnesota is served by Reliant Energy Minnegasco, a gas-only LDC
subsidiary of Reliant Energy (formerly Houston Industries). Also, a
significant portion of NSP's South Dakota electric service area near
Sioux Falls is served by the gas utility division of Mid-American
Energy, Inc.
145 As discussed in the Application/Declaration on Form U-1 of NSP and
NCE, to which this study is an exhibit, the NSP and NSP-W gas systems
together constitute an "integrated public utility system" within the
meaning of Section 2(a) (29) of the Public Utility Holding Company Act
of 1935.
J-7
<PAGE>
Exhibit J-1
A significant number of personnel who oversee and maintain the
operation of the two systems are employees of NSP only or NSP-W
only.
III. GENERAL STUDY ASSUMPTIONS
The assumptions, information and data utilized in the analyses
undertaken in this Study are based on the energy industry expertise and
experience possessed by the management and staff of NSP and NSP-W. Employees
with experience in all major facets of the operations of NSP and NSP-W were
consulted and provided input. The Study's aggregate conclusions are the result
of many independent inputs and analyses from highly qualified individuals
throughout the companies.
The Base Cases for the Study were developed using actual sales,
revenues, costs, and rates of return from the 1998 gas utility operations of NSP
and NSP-W.
NSP made an extensive analysis of the major cost components that may be
associated with a divestiture. As a result of discussions with numerous
personnel at NSP and NSP-W, the major cost components associated with a
divestiture were identified, quantified, and included in the Study results. A
more exhaustive analysis would probably produce additional costs and
diseconomies from divestiture of NSP and NSP-W gas operations.
The remainder of this section discusses the major assumptions that were
employed in developing the Study.
A. For the purposes of developing the impacts of a spin-off on the
various organizations, it is assumed that each of the
organizations to be spun-off would operate as an independent,
stand-alone company. Therefore, they will have all of the
necessary management and personnel, along with the computer
systems, facilities, equipment, materials and supplies required
to operate as stand-alone companies.
B. For the purpose of determining the staffing requirements of each
stand-alone company, the guiding principle was that a sufficient
number of employees be included in order to assure that all
present functions applicable to the stand-alone organization are
performed, and that the present level and quality of service
remain unchanged.
C. Labor costs are based on an assessment of straight-time,
overtime, and pension and benefit costs for each employee of the
stand-alone organizations. Benefit levels would remain unchanged
in the New Gas Companies.
J-8
<PAGE>
Exhibit J-1
D. Unless otherwise discussed, the non-labor costs would remain
essentially unchanged from those costs allocated to the
organization to be spun-off. All gas related costs, such as the
cost of gas, have been included in each gas organization's costs.
E. Annual facility costs relating to the additional employees
required to maintain the current levels of service have been
incorporated into the analyses.
F. For the purpose of showing the final impact on each company's
customers, it is assumed that full recovery of all of the lost
economies, including income taxes, would be allowed in a formal
rate increase proceeding after divestiture, and that the current
rate levels remain unchanged until that time.
G. For the purposes of developing the impact of the spin-off on each
organization, a comparison is made to a Base Case. The Base Case
for each company is the actual results of gas operations for NSP
and NSP-W for the twelve months ended December 31, 1998, as
discussed earlier, including all currently approved regulatory
cost of service allowances.
H. It is assumed that each organization will be subject to the
regulation of the same state and federal agencies that presently
regulate each organization.
I. If there currently exists a contract for services from
independent third-parties, the contract will continue for the
spun-off organizations.
J. Only the categories of costs that are expected to change
significantly were analyzed. Clearly many other costs beyond
those presented in this Study will be impacted by a divestiture.
K. Incentive compensation for management and executive employees has
not been included when determining the new gas companies' labor
costs. However, it is assumed that a plan similar to the present
NSP plan would be developed.
L. At the time of divestiture of NSP and NSP-W gas businesses, a
release of all gas properties from the existing bond indentures
from Harris Trust & Savings Bank and Firstar Trust Company would
be required. New bond indentures would be written for the two new
gas companies.
IV. GAS COMPANY OF MINNESOTA ANALYSIS
A detailed study was undertaken to analyze the potential impact on both
the shareholders and customers of NSP if it were ordered to divest its
Minnesota, North Dakota, South Dakota and Arizona gas utility operations. In
order to accomplish that study, the management of NSP provided estimates of the
staffing levels of a Gas Company of Minnesota, as well as any other operational
and administrative changes that would have to be made in order to maintain the
same level and quality of service to its gas customers after a spin-off of the
gas business.
J-9
<PAGE>
Exhibit J-1
A. Specific Assumptions
In addition to the General Study Assumptions cited earlier, the
following specific assumptions have been incorporated into the analysis of the
spin-off of the gas operations of NSP into Gas Company of Minnesota.
1. Labor Assumptions
a. The NSP organization as of December 31, 1998 was used as the
template for developing the Gas Company of Minnesota
organization structure.
b. Where practical, some management positions were combined,
eliminated or replaced with non-management positions. Some
further consolidation of management positions may be
possible, particularly within the staff organizations.
However, the overall span of control (the ratio of
non-management employees to management employees) for Gas
Company of Minnesota is greater than the span of control in
the NSP organization. As of December 31, 1998, NSP had 548
management and 4,673 non-management employees, yielding a
span of control of 8.5 employees per manager. Gas Company of
Minnesota would have 71 management and 848 non-management
employees, resulting in a span of control of 12.0 (i.e.,
fewer managers per non-management employees than the NSP
organization). This higher span of control is due to the
following:
1) Management employees required in the operations areas,
but with a higher non-management employee count due to
the elimination of electric and corporate resources
that are currently providing both electric and gas
services; and,
2) The number of management personnel required in the
staff organization, but with some increases in
non-management staff size due to the elimination of
support for electric and corporate functions that were
currently providing both electric and gas services.
c. To provide an equivalent quality of customer service an
analysis was made of the Customer Service Area to determine
the number of employees required for Gas Company of
Minnesota. The staffing levels required in the Gas Company
of Minnesota compared to the current combined company for
the following functional areas of Customer Service are as
follows:
Meter Reading 79 Additional (29% over current levels)
Customer Service 82 Additional (37% over current levels)
Billing/Statements 24 Additional (31% over current levels)
Payment Processing 24 Additional (37% over current levels)
J-10
<PAGE>
Exhibit J-1
These functions are accomplished by a relatively small
number of personnel and a spin-off of gas responsibilities
would not significantly affect the number of employees
required to accomplish electric only functions.
d. The Customer Service cost for Gas Company of Minnesota was
based on the current cost of providing customer service
(meter reading, customer service, billing and payment
processing) for both electric and gas customers. This amount
was multiplied by the number of current gas customers as of
December 31, 1998. The staffing levels were based on an
employee per customer ratio. This ratio was applied to the
gas customers to determine the required staff size per
Customer Service function.
e. Executive salaries were based on composite industry service
data from Mercer, American Gas Association (AGA), Towers
Perrin, Edison Electric Institute (EEI), and Wyatt.
f. All non-executive salaries were based on the current
compensation levels for the functional areas.
g. Pensions and benefits were estimated as a percent of the
labor cost. Currently, pension and benefits are
approximately 30 percent above the base cost of labor.
Therefore, after the base cost of labor was determined, an
additional 30 percent was added to include pension and
benefit costs.
2. Operations & Maintenance and Administrative & General
Assumptions:
a. Annual facility costs relating to the additional employees
and building needs for the trucks, trailers and backhoes
required to operate the stand-alone companies have been
incorporated into the Study.
b. Separate arrangements would be made for external auditing of
the books and accounts of Gas Company of Minnesota.
c. Executive and administrative support from NSP would cease
upon any divestiture, and these functions have been provided
for in the Gas Company of Minnesota organizational
structure.
d. Separate gas bills would be provided to customers of Gas
Company of Minnesota. Specific shared activities such as
locating and customer support were examined and included in
the analysis.
e. The Customer Service center needed for a Gas Company of
Minnesota will be leased at an annual cost of $625,000.
J-11
<PAGE>
Exhibit J-1
3. Capital Expenditure and Cost Assumptions:
a. With the exception of Information Technology computer
hardware to handle the various accounting and operating
systems, estimated at $3.0 million, and facilities costs
related to work stations, estimated at $1.6 million. The
study assumes no additional capital expenditures would be
made by Gas Company of Minnesota as a direct consequence of
spinning off the gas facilities from NSP. This, of course,
does not include planned capital expenditures to be made in
the normal course of business in order to maintain existing
levels of service and provide service to new customers.
b. In the event NSP is required to divest its gas operations,
and assuming the assets are spun-off into a new stand-alone
corporation, the requirements of the existing indentures
would result in the need to recapitalize at market rates in
effect at the time of the spin-off. Additionally, costs
associated with the issuance of securities would be incurred
and ultimately included in the Gas Company of Minnesota cost
of service.
The current capital structure of NSP was used for the
purpose of analyzing capital costs for Gas Company of
Minnesota. This structure is equal to the capital structure
approved by the MPUC in NSP's most recent gas rate
proceeding, Docket No. G002/GR-97-1606. As of December 31,
1998, NSP's gas rate base was capitalized as follows:
Compsite
Ratio Cost Cost
----- ---- ----------
Long/Short Term Debt 48.99% 6.90% 3.37%
Preferred Stock 5.15% 4.79% 0.25%
Common Equity 45.86% 11.40% 5.23%
------ -----
Total 100.00% 8.85%
This Study assumes that Gas Company of Minnesota would have
access to capital at a cost similar to that of NSP. The
difference expected from the rates listed above would result
from an increased equity ratio. The Study assumes that gas
utilities have an equity ratio about 3% higher than electric
utilities. NSP's electric utility business encompasses about
90% of the combined rate base. The study assumes the capital
structure is really a function of the electric business and
therefore a capital structure for an electric only NSP would
be the same as the current combined capital structure. The
cost of debt was not changed because the marginal cost of
debt for a double-A utility was assumed to be about the same
as the embedded rate.
The cost of common equity is 11.4 percent which was accepted
by the MPUC in Docket No G002/GR-97-1606. Common equity
would require
J-12
<PAGE>
Exhibit J-1
the sale of new securities, as new stock certificates would
be issued to future shareholders of Gas Company of
Minnesota. Gas Company of Minnesota would capitalize through
an initial public offering (IPO) of 20% of the equity value
and spinning off 80% to existing NSP shareholders, and debt
issuance in the above reference capital structure ratios at
an aggregated cost of $5.2 million. Annual cost over 30
years would be $173,000. This cost would be charged as a
transition cost to be recovered over 30 years.
4. Transition Cost Assumptions. In addition to the increased amount
of equity discussed above, the new Gas Company of Minnesota and
Gas Company of Wisconsin would incur transition costs associated
with the new separate gas utilities being formed. Gas franchises
would be assigned to the new gas companies by providing notice to
the cities at minimal or zero cost.
5. Foregone Merger Savings. The Xcel Energy merger filing includes
anticipated merger savings for the gas utilities. The Study
assumed these savings would be lost as a result of divestiture.
The levelized annual impact is $5.8 million.
B. Organization of Gas Company of Minnesota
The functional organization chart of Gas Company of Minnesota is
contained in Appendix B.
Design of Gas Company of Minnesota Organization - The NSP organization
-----------------------------------------------
at December 31, 1998, was used as the pattern for developing the Gas
Company of Minnesota organization structure. In order to develop the
new structure for the standalone company, management was contacted for
input regarding staffing levels.
Board of Directors - The Board of Directors is assumed to consist of
-------------------
twelve directors based on the size and scope of Gas Company of
Minnesota.
Chief Executive Officer (CEO) - The CEO reports to the Board of
--------------------------------
Directors and is responsible for overseeing the entire Company. The
CEO oversees 8 direct-report executives (Chief Operating Officer;
Chief Financial Officer, Customer Service Vice President; Human
Resources Vice President, Chief Information Officer, Government
Affairs Vice President, and General Counsel) and is responsible for
Audit Services. The Executive Organization totals 19 employees, and is
composed of 8 executives, 1 manager, 2 non-management personnel, and 8
executive assistants.
Chief Operating Officer (COO) - The COO reports directly to the CEO
-------------------------------
and is responsible for the overall operating activities of the
Company. The COO oversees the work of three directors (Operations);
Gas Supply; and Gas Control and Engineering. The organization managed
by the COO totals 468 employees, and is composed of 28 managers, and
440 non-management personnel.
J-13
<PAGE>
Exhibit J-1
Director, Gas Control and Engineering - The Director of Gas Control
---------------------------------------
and Engineering is responsible for measurement system design
(pipelines, storage reservoirs, and compressors), LNG and propane
plants, and gas system control coordination. Control and Engineering
totals 55 employees, composed of 3 management and 52 non-management
personnel.
Director, Gas Supply - The Director of Gas Supply and Federal
----------------------
Regulatory Affairs is responsible for acquiring interstate gas
transportation and storage capacity, forecasting gas requirements,
making gas purchases and contract administration (supply accounting,
bill payment, etc.) Gas Supply totals 12 employees, composed of 3
management and 9 non-management personnel.
Director, Operations - The Director of Operations is responsible for
---------------------
all major distribution functions such as safety, environmental
training, regional management, pipeline construction, and distribution
system support services. Operations totals 401 employees, composed of
22 management and 379 non-management personnel.
Chief Financial Officer (CFO) - The CFO reports directly to the CEO
-------------------------------
and is responsible for rates and regulatory relations, investor
relations, risk management, finance, treasury, and accounting
functions. The CFO oversees the work of 6 managers (Rates & Regulatory
Relations, Investor Relations, Treasury, Risk Management, Corporate
Strategy, and the Controller.) The organization managed by the CFO
totals 63 employees, and is composed of 10 management and 53
non-management personnel.
Vice President, Customer Support - The Vice President, Customer
-----------------------------------
Support reports directly to the CEO and is responsible for the
day-to-day interface with customers, customer accounts, meter reading,
credit, billing and customer information service. The Vice President
is also responsible for marketing, sales, market research,
conservation programs, program development and evaluation. Two
non-regulated positions also report to the Customer Support Vice
President. Natural Gas Services provides engineering, operational and
technical support to communities that want natural gas but are outside
NSP's service territory. Advantage Service is a non-regulated
appliance service business. Customer Support totals 269 employees and
is composed of 10 management and 259 non-management personnel.
General Counsel - The General Counsel reports directly to the CEO and
---------------
oversees the Legal Affairs and the Corporate Secretary functions. The
General Counsel is responsible for environmental compliance, SEC
compliance, litigation, regulatory affairs, labor and benefit legal
matters, contracts and corporate governance. The organization managed
by the General Counsel totals 6 employees, and is composed of 2
management and 4 non-management personnel.
Human Resources Vice President - The Human Resources Vice President
--------------------------------
reports directly to the CEO and oversees company staffing,
compensation, training, benefits, health services, employee services
and security. The organization managed by the Human
J-14
<PAGE>
Exhibit J-1
Resources Vice President totals 17 employees, and is composed of 3
management and 14 non-management personnel.
Chief Information Officer (CIO) - The CIO reports directly to the CEO
--------------------------------
and is responsible for all the information technology requirements.
The CIO oversees the work of 5 managers (Application Support,
Infrastructure, Data Network, Disaster Recovery and User Support).
The organization managed by the CIO totals 55 employees, and is
comprised of 5 management and 50 non-management personnel.
Government Affairs Vice President - The Government Affairs Vice
------------------------------------
President reports directly to the CEO and is responsible for all
corporate communications, state, federal and public affairs and
environmental monitoring. The organization managed by the Government
Affairs Vice President totals 22 employees, and is composed of 4
management and 18 non-management personnel.
C. Annual Cost Increases
Based upon the foregoing general and specific assumptions, and the
staffing requirements of the organizational structure, the following increased
annual costs have been developed for Gas Company of Minnesota:
1. Customer Support $12,382,000
2. Chief Operating Officer $ 3,465,000
3. Chief Financial Officer $ 3,244,000
4. Chief Information Officer $ 1,833,000
5. Public Affairs Vice President $ 1,326,000
6. Chief Executive Officer, Audit Services $ 818,000
7. Human Resources $ 735,000
8. Board of Directors Fees $ 341,000
9. General Counsel $ 230,000
-----------
Total $24,374,000
D. Capitalization Cost Increases
Using the allowed cost of equity as discussed earlier, and recasting
the cost of capitalizing the gas assets using NSP's existing capital structure
as a proxy for Gas Company of Minnesota results in the following:
Ratio Cost Composite Cost
----- ---- --------------
Long/Short Term Debt 45.99% 6.88% 3.17%
Preferred Stock 5.15% 4.79% 0.24%
Common Equity 48.86% 11.40% 5.57%
------- -----
Total 100.00% 8.98%
The actual interest rates and preferred stock yields in effect at the
time of divestiture could be substantially higher or lower than the forecasts
employed here.
J-15
<PAGE>
Exhibit J-1
Applying the foregoing capital cost to Gas Company of Minnesota results
in the following increased annual capital costs:
Capitalization Cost $1,260,000
E. Transition Cost Increases
The following is a summary of the principal transition costs that will
be incurred as a result of a spin-off of the gas business of NSP and their
annual costs:
IPO and Debt Issuance Cost $173,000
F. Foregone Merger Savings
The following is a summary of the foregone merger savings lost if the
spin-off occurs:
Foregone Merger Savings $5,819,000
G. Total Lost Economies
Summarizing the foregoing increased annual costs, capital costs,
foregone merger savings, and amortized transition costs which were developed in
the Base Case Study yields the following total lost economies before the effect
of income taxes:
Total Lost Economies: $31,626,000
H. Income Taxes
Recovery of the foregoing lost economies in a general rate proceeding
would also require an increase to recover income taxes associated with the lost
economies. The following is a summary of the revenue effect of income taxes:
Total Income Taxes: $916,000
I. Base Case - 12 Months Ended December 31, 1998
The following is a summary of the key components of the Base Case (the
definition of each item is the same as in the Executive Summary):
1. Total Gas Operating Revenue $360,567,000
2. Total Gas Operating Revenue Deductions $330,578,000
3. Gross Gas Income $ 29,989,000
4. Net Gas Income $ 23,432,000
J-16
<PAGE>
Exhibit J-1
J. Comparison of the Total Lost Economies of Gas Company of
Minnesota to the Base Case
The Total Lost Economies, before the effect of income taxes as a
percent of the key components of the Base Case are:
1. Percent of Total Gas Operating Revenue 8.77%
2. Percent of Total Gas Operating Revenue Deductions 9.57%
3 Percent of Gross Gas Income 105.46%
4. Percent of Net Gas Income 134.97%
K. Comparison of Rates of Return on Rate Base
The following is a comparison of the rates of return on rate base for
the gas operations before and after an assumed spin-off:
1. Rate of Return - Base Case 6.42%
2. Pro Forma Rate of Return after Spin-off 1.13%
3. Required Rate of Return based on Gas Company 8.98%
of Minnesota Cost of Capital
V. GAS COMPANY OF WISCONSIN ANALYSIS
As was the case with NSP, a detailed study was undertaken to analyze
the potential impact on both the shareholders and customers of NSP-W if it were
ordered to divest its gas business.
In order to accomplish that study, the management of NSP-W provided
estimates of the staffing levels of a Gas Company of Wisconsin, as well as any
other operational and administrative changes that would have to be made in order
to maintain the same level and quality of service to its gas customers after a
spin-off of the gas properties.
A. Specific Assumptions
In addition to the General Study Assumptions cited earlier, the
following specific assumptions have been incorporated into the analysis of the
spin-off of the gas operations of NSP-W into a Gas Company of Wisconsin.
1. Labor Assumptions:
a. As was the case with Gas Company of Minnesota, the NSP-W
organization at December 31, 1998, was used as the template
for developing the Gas Company of Wisconsin organization
structure.
b. Where practical, some management positions were combined,
eliminated or replaced with non-management positions. Some
further consolidation of management positions may be
possible, particularly within the staff organizations.
However, the overall
J-17
<PAGE>
Exhibit J-1
span of control (the ratio of non-management employees to
management employees) for Gas Company of Wisconsin is
greater than the span of control in the NSP-W organization.
As of December 31, 1998, NSP-W had 120 management and 743
non-management employees, yielding a span of control of 6.2
employees per manager. Gas Company of Wisconsin has 19
management and 128 non-management employees, resulting in a
span of control of 6.7 (i.e., more managers per non
management employee than the organization). This higher span
of control is due to the following:
1) A duplicate executive organization due to the need of
having a separate set of executives for the new
organization;
2) Additional management employees required in the
operations areas due to the elimination of electric
resources that are currently providing both electric
and gas supervision; and
3) Additional management personnel required in the staff
organization due to the elimination of support for
electric functions that were currently providing both
electric and gas supervision.
c. To provide an equivalent quality of customer service an
analysis was made of the Customer Service Area to determine
the number of employees required for Gas Company of
Wisconsin. The staffing levels in the Gas Company of
Wisconsin requires 44 employees, approximately 24% of the
combined company customer service level.
These functions are accomplished by a relatively small
number of personnel and a spin-off of gas responsibilities
would not affect the number of employees required to
accomplish electric only functions.
d. The Customer Service cost for Gas Company of Wisconsin was
based on the current cost of providing customer service from
the Gas Company of Minnesota Study (meter reading, customer
service, billing and payment processing) for both electric
and gas customers. This amount was multiplied by the number
of current gas customers as of December 31, 1998. The
staffing levels were based on an employee per customer
ratio. This ratio was applied to the gas customers to
determine the required staff size per Customer Service
function.
e. Executive salaries are based on national survey data. Since
the size of the organization is smaller than Gas Company of
Minnesota, the executive salaries are assumed to be less for
Gas Company of Wisconsin.
f. All non-executive salaries are based on current average
compensation for the appropriate job level.
J-18
<PAGE>
Exhibit J-1
g. After the base cost of labor was determined, an additional
30 percent was added to determine pension and benefit costs.
This percent is based on NSP-W's approximate current
percentage in order to keep benefits similar for Gas Company
of Wisconsin.
2. Operation & Maintenance and Administrative & General Assumptions:
a. In addition to the General Study Assumptions cited earlier,
it is assumed that certain minor administrative functions
now performed by employees of NSP and billed to NSP-W would
be performed by Gas Company of Wisconsin. For example, audit
services and investor relations functions are currently
being performed by NSP, and if divestiture of NSP-W's gas
operations were ordered, Gas Company of Wisconsin would
perform those functions.
b. Annual facility costs relating to the additional employees
and building needs for trucks, trailers and backhoes
required to operate the Gas Company of Wisconsin have been
incorporated into the Study.
c. Separate arrangements would be made for external auditing of
the books and accounts of Gas Company of Wisconsin.
d. In like manner, legal assistance, billing and record-keeping
assistance would be required, and it is assumed that Gas
Company of Wisconsin would be able to acquire these services
for substantially the same fees as it is now incurring.
e. Executive and administrative support from NSP-W would cease
upon any divestiture, and these functions have been provided
for in the Gas Company of Wisconsin organizational
structure.
f. Separate gas bills would be provided the customers of Gas
Company of Wisconsin.
3. Capital Expenditure and Cost Assumptions:
a. The study assumes no additional capital expenditures would
be made by Gas Company of Wisconsin as a direct consequence
of spinning off the gas facilities from NSP-W. This, of
course, does not include planned capital expenditures to be
made in the normal course of business in order to maintain
existing levels of service and provide service to new
customers.
b. In the event NSP-W is required to divest its gas operations,
and assuming the assets are spun-off into a new stand-alone
corporation, the
J-19
<PAGE>
Exhibit J-1
requirements of the existing indentures would result in the
need to recapitalize at market rates in effect at the time
of the spin-off. Additionally, costs associated with the
issuance of securities would be incurred and ultimately
included in the Gas Company of Wisconsin cost of service.
The current capital structure of NSP-W was used for the
purpose of analyzing capital costs for Gas Company of
Wisconsin. This structure is equal to the capital structure
approved by the PSCW in NSP-W's Docket No. 4220-UR-110. As
of September 15, 1998, NSP-W's gas rate base was capitalized
as follows:
Ratio Cost Composite
----- ---- ---------
Long/Short Term Debt 45.00% 7.08% 3.28%
Common Equity 55.00% 11.90% 6.55%
------- -----
Total: 100.00% 9.73%
This Study assumes that Gas Company of Wisconsin would have
access to capital at a cost similar to that of NSP-W. The
difference expected from the rates listed above would result
from an increased equity ratio. The study assumes that gas
utilities have an equity ratio about 3% higher than electric
utilities. NSP-W's electric business encompasses about 90%
of the combined rate base, the study assumes that the
capital structure is really a function of the electric
business and therefore a capital structure for an electric
only NSP-W would be the same as the current combined capital
structure. The cost of debt was not changed because the
marginal cost of debt for a double-A utility should be about
the same as the embedded rate.
The cost of common equity is 11.90 percent which was
established by the PSCW on September 15, 1998, in NSP-W's
Docket No. 4220-UR-110. Common equity would require the sale
of new securities, as new stock certificates would be issued
to future shareholders of Gas Company of Wisconsin. Gas
Company of Wisconsin would capitalize through an initial
public offering (IPO) of 20% of the equity value and
spinning off 80% to existing NSP shareholders, and debt
issuance in the above reference capital structure ratios at
an aggregated cost of $1.0 million. Annual cost over 30
years would be $34,000. This cost would be charged as a
transition cost to be recovered over 30 years.
4. Transition Cost Assumptions. Transition costs for Gas Company of
Wisconsin have been previously discussed, and would be amortized
over the appropriate life of the asset.
J-20
<PAGE>
Exhibit J-1
5. Foregone Merger Savings. The NSP/NCE merger filing includes
anticipated merger savings for the gas utilities. The Study
assumed these savings would be lost as a result of divestiture.
The levelized annual impact is $1.2 million.
B. Organization of Gas Company of Wisconsin
The functional organization chart of Gas Company of Wisconsin is
contained in Appendix C.
Design of Gas Company of Wisconsin Organization - The NSP-W
------------------------------------------------------
organization at December 31, 1998, was used as the pattern for
developing the Gas Company of Wisconsin organization structure. In
order to develop the new structure for the stand-alone company,
management was contacted for input regarding staffing levels.
Board of Directors - The Board of Directors is assumed to consist of 6
------------------
directors based on the size and scope of Gas Company of
Wisconsin.
Chief Executive Officer (CEO) - The CEO reports to the Board of
--------------------------------
Directors and is responsible for overseeing the entire Company. The
CEO oversees 7 direct-report executives (Chief Operating Officer,
Chief Financial Officer, Customer Service Vice President; Human
Resources Vice President, Chief Information Officer, Government
Affairs Vice President, and General Counsel) and is responsible for
Audit Services. The Executive Organization totals 11 employees, and is
composed of 8 executives, 1 manager, and 2 executive assistants.
Chief Operating Officer (COO) - The COO reports directly to the CEO
-------------------------------
and is responsible for the overall operating activities of the
Company. The COO oversees the work of two directors (Operations; and
Gas Supply, Control and Engineering). The organization managed by the
COO totals 57 employees, and is composed of 4 managers, and 53
non-management personnel.
Director, Gas Supply Control and Engineering - The Director of Gas
-----------------------------------------------
Supply, Control, and Engineering, is responsible for measurement,
acquiring interstate gas transportation capacity, forecasting gas
requirements, making gas purchases, system design (pipelines, storage
reservoirs, and compressors), gas system control coordination. The
organization totals 11 employees, composed of 2 management and 9
non-management personnel.
Director, Operations - The Director of Operations is responsible for
---------------------
all major distribution functions such as safety, environmental
training, regional management, pipeline construction, distribution
system support services, facilities, warehousing, and purchasing.
Support totals 46 employees, composed of 2 management and 44
non-management personnel.
Chief Financial Officer (CFO) - The CFO reports directly to the CEO
------------------------------- and is responsible for regulatory
relations, finance, investor relations, risk management, treasury, and
accounting functions. The CFO oversees the work of three managers
(Treasury, Investor
J-21
<PAGE>
Exhibit J-1
Relations, and the Controller.) The organization managed by the CFO
totals 16 employees, and is composed of 3 managers and 13
non-management personnel.
Customer Support Vice President - The Customer Support Vice President
--------------------------------
reports directly to the CEO and is responsible for the day-to-day
interface with customers, customer accounts, meter reading, credit,
billing and customer information service. The Vice President is also
responsible for marketing, sales, market research, conservation
programs, program development and evaluation. Customer Support totals
47 employees and is composed of 2 management and 45 non-management
personnel.
General Counsel - The General Counsel reports directly to the CEO and
---------------
oversees legal affairs and corporate secretary functions. The General
Counsel is responsible for SEC compliance, litigation, regulatory
affairs, labor and benefit legal matters, contracts and corporate
governance. The organization managed by the General Counsel totals 2
employees, and is composed of 2 non-management personnel. I
Human Resources Vice President - The Human Resources Vice President
--------------------------------
reports directly to the CEO and oversees company staffing,
compensation, training, benefits, health services, employee services
and security. The organization managed by the Human Resources Vice
President totals 3 employees, and is composed of 3 non-management
personnel.
Chief Information Officer (CIO) - The CIO reports directly to the CEO
--------------------------------
and is responsible for all the information technology requirements.
The CIO oversees the work of Application Support; Infrastructure; Data
Network; Director, Recovery and User Support. The organization managed
by the CIO totals 9 employees, and is comprised of 1 management and 8
non-management personnel.
Government Affairs Vice President - The Government Affairs Vice
------------------------------------
President reports directly to the CEO and is responsible for all
corporate communications, state, federal and public affairs and
environmental monitoring. The organization managed by the Government
Affairs Vice President totals 2 employees, and is comprised of 2
non-management personnel.
C. Annual Cost Increases
Based upon the foregoing general and specific assumptions, and the
staffing requirements of the organizational structure, the following increased
annual costs have been developed for Gas Company of Wisconsin:
1. Chief Information Officer $2,443,000
2. Customer Support $2,018,000
3. Chief Financial Officer $1,319,000
4. Chief Executive Officer, Audit Services $ 575,000
5. Public Affairs Vice President $ 393,000
6. General Counsel $ 190,000
J-22
<PAGE>
7. Board of Directors $ 202,000
8. Human Resources $ 163,000
9. Chief Operating Officer $ 40,000
-----------
Total $7,343,000
D. Capitalization Cost Increases
Using the capital structure, allowed cost of equity and debt costs for
Gas Company of Wisconsin discussed earlier, the resulting weighted composite
cost of capital for the stand alone gas company would be:
Ratio Cost Composite Cost
----- ---- --------------
Long/Short Term Debt 42.00% 7.06% 2.97%
Common Equity 58.00% 11.90% 6.90%
------- -----
Total 100.00% 9.87%
The actual interest rates in effect at the time of divestiture could
be substantially higher or lower than the forecasts employed here.
Applying the foregoing capital cost to Gas Company of Wisconsin
results in the following increased capital costs:
Capitalization Costs $252,000
E. Transition Cost Increases
The following is a summary of the principal transition costs that will
be incurred as a result of a spin-off of the gas business of NSP-W and their
annual Costs:
IPO and Debt Issuance Costs $34,000
F. Foregone Merger Savings
The following is a summary of the foregone merger savings lost if the
spin-off occurs:
Foregone Merger Savings $1,195,000
G. Total Lost Economies
Summarizing the foregoing increased annual costs, capital costs, and
amortized transition costs as developed in the Base Case Study, yields the
following total lost economies before the effect of income taxes:
Total Lost Economies: $8,824,000
J-23
<PAGE>
Exhibit J-1
H. Income Taxes
Recovery of the foregoing lost economies in a general rate proceeding
would also require an increase to recover income taxes associated with the lost
economies. The following is a summary of the revenue effect of income taxes:
Total Income Taxes: $183,000
I. Base Case - 12 Months Ended December 31, 1998
The following is a summary of the key components of the Base Case (the
definition of each item is the same as in the Executive Summary):
1. Total Gas Operating Revenue $78,800,000
2. Total Gas Operating Revenue Deductions $73,510,000
3. Gross Gas Income $ 5,290,000
4. Net Gas Income $ 3,691,000
J. Comparison of the Lost Economies of Gas Company of Wisconsin to
the Base Case
The Total Lost Economies, before the effect of income taxes as a
percent of the key components of the Base Case are:
1. Percent of Total Gas Operating Revenue 11.20%
2. Percent of Total Gas Operating Revenue Deductions 12.00%
3. Percent of Gross Gas Income 166.81%
4. Percent of Net Gas Income 239.07%
K. Comparison of Rates of Return on Rate Base
The following is a comparison of the rates of return on rate base for
the gas operations before and after an assumed spin-off.
1. Rate of Return - Base Case 5.22%
2. Pro Forma Rate of Return after Spin-off (2.39%)
3. Required Rate of Return based on Gas Company 9.87%
of Wisconsin Cost of Capital
VI. OTHER CUSTOMER IMPACTS
A. Quantifiable Postage Costs
Combination customers who currently pay their monthly NSP or NSP-W
electric and gas bill with one check and one stamp will be required to use two
separate checks and two separate stamps in paying the remaining electric company
and the two new gas companies. For the gas and electric customers of the
existing NSP and NSP-W companies, the doubling of postage cost
J-24
<PAGE>
Exhibit J-1
alone, not counting check and envelope costs, will result in a total annual
out-of-pocket cost increase to customers of over $1.9 million. These annual
postage costs are broken downs as follows:
Postage Costs
-------------
Gas Company of Minnesota Customers $1,523,000
Gas Company of Wisconsin Customers $ 326,000
----------
Total $1,849,000
B. Non-Quantifiable
In addition to the quantifiable increased costs or lost economies which
have been evaluated and included in the Study, there are other non-quantifiable
costs which have not been included. The reason for not attempting to quantify
these costs is that a meaningful estimate of these costs is beyond the scope of
NSP's present analysis. However these costs do exist, and the following are a
few examples of these non-quantifiable costs.
The cost of additional regulation for both the MPUC, NDPSC,
SDPUC, ACC, PSCW and MPSC. The staffs of these agencies would
undoubtedly experience additional duties and responsibilities as
a result of dealing with an additional utility.
The cost to customers as a result of doing business with two
utilities instead of one, including additional telephone calls
for service questions or bill inquiries.
The cost to customers of providing access to meters and other
facilities for two utilities.
The cost to customers, especially contractors and builders, of
dealing with two utilities rather than one.
VII. BILL COMPARISON OF GAS COMPANY OF MINNESOTA AND GAS COMPANY OF
WISCONSIN TO OTHER UTILITIES
For a comparison of average annual bills for various utilities with
which NSP competes see Table VII-1 of Exhibit J-2 - New Century Energies, Inc.
"Analysis of the Economic Impact of a Divestiture of NCE's Gas Operations" (to
be submitted by supplement).
VIII. EFFECT ON REMAINING ELECTRIC COMPANIES
A. NSP
As a result of any divestiture, the remaining New NSP electric utility
operations would experience increased costs in addition to those experienced by
Gas Company of Minnesota. These increased costs, as outlined earlier, are
largely the result of increased labor costs associated with the additional
personnel required to replace those who are currently working in both gas and
electric operations and additional postage costs incurred since electric
billings
J-25
<PAGE>
Exhibit J-1
would no longer share postage with the gas billings is $19.9 million. The total
of these additional costs equates to approximately 0.9 percent of electric rate
revenues.
A summary of the increased annual costs applicable to New NSP is as
follows:
1. Customer Service $ 7,294,000
2. Chief Information Officer $ 6,520,000
3. Chief Financial Officer $ 1,692,000
4. Human Resources $ 1,420,000
5. Chief Executive Officer, Audit Service $ 1,098,000
6. Government Affairs Vice President $ 780,000
7. Chief Operating Officer $ 553,000
8. General Counsel $ 414,000
9. Board of Directors Fees $ 101,000
------------
Total $19,872,000
B. NSP-W
Similarly, the remaining NSP-W electric utility operations would
experience additional costs due to labor and postage. The additional labor is
due to replacing those personnel who currently work in both gas and electric
operations and additional postage costs incurred since electric billings would
no longer share postage with the gas billings. The total of these additional
costs is $4.7 million, which is approximately 1.4 percent of electric rate
revenues.
A summary of the increased annual costs applicable to NSP-W is as
follows:
1. Customer Service $2,108,000
2. Chief Operating Officer $ 810,000
3. Chief Information Officer $ 717,000
4. Chief Financial Officer $ 488,000
5. Human Resources $ 252,000
6. Chief Executive Officer (Includes BOD Fees) $ 173,000
7. General Counsel $ 131,000
8. Government Affairs Vice President $ 11,000
-----------
Total $4,690,000
J-26
<PAGE>
Exhibit J-1
APPENDIX A
COMPARISON OF NSP AND NSP-W GAS TO REGIONAL GAS UTILITIES
See Appendix A of Exhibit J-2 - New Century Energies, Inc. "Analysis
of the Economic Impact of a Divestiture of NCE's Gas Operations" (to be
submitted by supplement).
J-27
<PAGE>
Exhibit J-1
APPENDIX B
ORGANIZATION CHART
NEW GAS COMPANY OF MINNESOTA
Board of Directors
CEO
Audit Services
COO
Operations MN
Operations Dakotas
Procurement
Gas Supply
Plant/Engineering
Faciliites
VP Cust Support
Sales/Mktg
Comm/Econ Development
CBO
CFO
Controller
Treasurer
Risk Mgmt
Investor Relations
Corp Strategy
Regulatory Services
CIO
VP Human Resources
General Counsel
Law
Corp Secretary
VP Govt Affairs
Communications
Govt Affairs
Environmental
J-28
<PAGE>
Exhibit J-1
APPENDIX C
ORGANIZATION CHART
NEW GAS COMPANY OF WISCONSIN
Board of Directors
CEO
Audit Services
COO
Operations
Gas Supply
Plant/Engineering
Faciliites
Procurement
VP Cust Support
Sales/Mktg
Comm/Econ Development
CBO
CFO
Controller
Treasurer
Risk Mgmt
Investor Relations
Corp Strategy
Regulatory Services
CIO
VP Human Resources
General Counsel
Law
Corp Secretary
VP Govt Affairs
Communications
Govt Affairs
Environmental
J-29
<PAGE>
