File No. 70-9069
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Conectiv, Inc.
800 King Street
Wilmington, Delaware 19899
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(Name of company filing this statement
and address of principal executive offices)
None
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(Name of top registered holding company parent)
Barbara S. Graham Michael J. Barron
President Vice President
Conectiv, Inc. Conectiv, Inc.
800 King Street 6801 Black Horse Pike
Wilmington, Delaware 19899 Egg Harbor Township, New Jersey 08234
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application- Declaration to:
Joanne C. Rutkowski, Esq. James M. Cotter, Esq.
William S. Lamb, Esq. Vincent Pagano, Jr., Esq.
H. Liza Moses, Esq. Simpson Thacher & Bartlett
LeBoeuf, Lamb, Greene 425 Lexington Avenue
& MacRae, L.L.P. New York, New York 10017
125 West 55th Street
New York, New York 10019
Dale Stoodley, Esq. James E. Franklin II, Esq.
Delmarva Power & Light Company Atlantic Energy, Inc.
800 King Street 6801 Black Horse Pike
Wilmington, Delaware 19899 Egg Harbor Township, New Jersey 08234
The Form U-1 Application/Declaration in this proceeding, originally filed with
the Commission on July 2, 1997 and amended on August 13, 1997, is hereby amended
to the extent indicated below.
1. The following exhibit is added to Item 6.A.:
J-4 Memorandum of Law in Response to The Motion of South
Jersey Gas Company.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this Amendment No.
2 to the Application/Declaration of Conectiv, Inc. to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 26, 1997
Conectiv, Inc.
By: /s/ B.S. Graham
Barbara S. Graham
President
MEMORANDUM OF LAW
IN RESPONSE TO
THE MOTION OF SOUTH JERSEY GAS COMPANY
For the reasons set forth below, Conectiv, Inc. asks the Commission to deny
the Motion for a Formal Hearing and for Leave to File Supplemental Comments at a
Later Time submitted by South Jersey Gas Company ("South Jersey") on October 27,
1997, and supplemented by Letter Brief on November 3, 1997 (collectively, the
"Motion" or the "South Jersey Motion").
The sole issue presented by the Motion, whether Conectiv can acquire the
gas properties of Delmarva Power & Light Company, is well-settled in favor of
the continued operation of those properties by Delmarva as a subsidiary of a
registered holding company. As explained more fully in the Conectiv application,
the retail gas operations at issue in this matter amply satisfy the standards of
Section 10(c)(1) and, by reference, the "A-B-C" clauses of Section 11(b)(1), as
interpreted by this Commission and the courts. See, e.g., New Century Energies,
Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997) (the "New Century
Energies order").
Briefly stated, Section 11(b)(1) permits a registered holding company
system to own more than one integrated public-utility system if certain
conditions are met, namely:
(A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can
be secured by the retention of control by such holding company of such
system;
(B) all of such additional systems are located in one state,
adjoining states, or a contiguous foreign country; and
(C) the continued combination of such systems under the
control of such holding company is not so large (considering the state
of the art and the area or region affected) as to impair the advantages
of localized management, efficient operation, or the effectiveness of
regulation.
The intervenor concedes that the requirements of clauses B and C are met but
argues that the standards of clause A have not been satisfied. In
particular, South Jersey alleges that Conectiv has failed to demonstrate by
clear and convincing evidence: first, that divestiture would result in "serious
impairment" of the gas properties and second, that competition in the Delmarva
service territory is so robust as to overcome the assumption that a combination
of gas and electric operations is disadvantageous to the gas operations.
With respect to the intervenor's first point, the record clearly
establishes that there would be a substantial loss of economies if the gas
operations were divested. Historically, as a "guide" to determining whether lost
economies are "substantial" under Section 11(b)(1)(A), under its previous narrow
interpretation of this section, the Commission has given consideration to four
ratios which measure the projected loss of economies as a percentage of: (1)
total gas operating revenues; (2) total gas expense or "operating revenue
deductions"; (3) gross gas income; and (4) net gas income or net gas utility
operating income. Although the Commission has declined to draw a bright-line
numerical test under Section 11(b)(1)(A), it has recently noted that cost
increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in
operating revenue deductions, a 25.44% loss of gross income and a 42.46% loss of
net income would afford an "impressive basis for finding a loss of substantial
economies." See New Century Energies, citing Engineers Public Service Co., 12
S.E.C. 41, 59 (1942).
As explained more fully in the application at pages 55-56, the losses in
the instant matter, both in absolute and relative terms, exceed those accepted
by the Commission in New Century Energies and the Engineers decision.
Divestiture of the Delmarva gas operations would result in lost economies of
$14,728,000 for the stand-alone company. These lost economies compare with
Delmarva's gas operating revenues of $104,687,000, gas operating revenue
deductions of $84,628,000, gas gross income of $20,059,000 and gas net income of
$13,910,000. On a percentage basis, the lost economies would represent 14.07% of
gas operating revenue, 17.40% of gas operating revenue deductions, 73.42% of
gross gas income and 105.88% of net gas income. Indeed, the percent loss in net
gas income alone would exceed the 30% loss that the Commission has described as
the highest loss of net income in any past divestiture order.1
To recover these lost economies, the gas operations would have to increase
revenue from rates by $15,493,000 or 14.80%. Such an increase would have a
direct and immediate negative impact on the rates charged to consumers for gas
services. As the Commission recognized in the New Century Energies order, in
today's energy markets, "the 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." Emphasis added.
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1 New England Electric System, 41 S.E.C. 888 (1964), aff'd, 384 U.S. 176
(1966) and 390 U.S. 207 (1968).
With respect to the intervenor's second point, in New Century Energies, the
Commission reexamined the factual underpinning of the decision of the United
States Supreme Court in SEC v. New England Electric System, 390 U.S. 207 (1968)
(the "NEES decision"):
In the 1960s, when the NEES case was decided, utilities were
primarily franchised monopolies with captive ratepayers, and
competition between suppliers of gas and electricity, however
limited, was virtually the only source of customer choice and
was thus deemed beneficial to energy consumers. The fact that
other gas utilities of comparable size could operate
successfully on an independent basis was evidence that a gas
system could also operate on its own, a desirable result,
without a substantial loss of economies. The empirical basis
for these assumptions, however, is rapidly eroding. Although
franchised monopolies are still the rule, competition is
increasing. Increased expenses of separate operation may no
longer be offset, as they were in New England Electric System,
by a gain of qualitative benefits, but rather may be
compounded by a loss of such benefits, as the Commission finds
in this matter.
Emphasis added.
The decision in New Century Energies was not predicated on the introduction of
retail wheeling in the affected jurisdictions. Indeed, the record is silent
on that point. Rather, the Commission was speaking to the larger issue of
competition in the energy markets generally. Such competition can include
wholesale competition, intra-fuels competition and the move by many large
industrial customers to self-generation, in addition to retail competition. The
significance of such competition is that it addresses the concern of the NEES
court that a registered holding company with both gas and electric utility
operations might be tempted to favor one technology over another to the
detriment of utility consumers. In New Century Energies, the Commission noted
that it is appropriate to revisit its interpretation of the Act "in light of
these changed and changing circumstances." See also Union Electric Co., 45
S.E.C. 489, 509-10 (1974), aff'd sub nom. City of Cape Girardeau v. SEC, 521
F.2d 324 (D.C. Cir. 1975) (noting that the issue of retention of combination
systems must be resolved "in a way that makes economic and social sense in the
light of contemporary realities"), and Municipal Electric Association of
Massachusetts v. SEC, 413 F.2d 1052, 1059 (D.C. Cir. 1969) ("That a . . .
development of . . . importance and probable impact . . . was not foreseen when
the Act was written should not justify a static historical reading of its
provisions").
In the instant case, as in New Century Energies, the gas properties have
long been under common control with Delmarva's electric operations. Ownership of
these properties by Conectiv will not alter the status quo with respect to the
utility operations. Further, the relevant state commission has already approved
the proposed Mergers. Thus, in this matter, as in New Century Energies, the
Commission should find, in light of the increased expenses, and the potential
loss of competitive advantages that could result from separation from the
electric system, that the requirements of clause A are satisfied.
Accordingly, for the reasons set forth herein and in the
Application-Declaration, as amended, Conectiv requests that the Commission deny
the South Jersey Motion, and issue an order approving proposed transaction no
later than December 31, 1997.
