<PAGE> 1
FILE NO. 070-08989
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3 TO
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
------------------
FIRSTENERGY CORP.
76 SOUTH MAIN STREET
AKRON, OHIO 44308
------------------
(NAME OF COMPANIES FILING THIS STATEMENT AND ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
NONE
------------------
(NAME OF TOP REGISTERED HOLDING COMPANY, PARENT OF EACH APPLICANT OR DECLARANT)
H. PETER BURG, TREASURER
FIRSTENERGY CORP.
76 SOUTH MAIN STREET
AKRON, OHIO 44308
------------------
(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:
<TABLE>
<S> <C> <C> <C>
MICHAEL F. CUSICK TERRENCE G. LINNERT ANDREW G. BERG GORDON S. KAISER
Winthrop, Stimson, Putnam & Centerior Energy Akin, Gump, Strauss, Hauer & Squire, Sanders & Dempsey
Roberts Corporation Feld, L.L.P. L.L.P.
One Battery Park Plaza 6200 Oak Tree Blvd. 1333 New Hampshire Ave., NW 4900 Key Tower
New York, New York 10004 Independence, Ohio Suite 400 Cleveland, Ohio 44114
(212) 858-1000 44131 Washington, D.C. 20036 (216) 479-8500
(216) 447-3121 (202) 887-4000
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Item 1. Description of Proposed Merger................................................. 1
Introduction.................................................................. 1
A. Description of Parties to the Merger...................................... 2
1. General Description............................................. 2
a. FirstEnergy................................................ 2
b. Ohio Edison................................................ 2
c. Centerior.................................................. 2
d. OVEC and IKEC.............................................. 3
2. Description of Utility Operations............................... 3
a. Ohio Edison and Penn Power................................. 3
b. Centerior.................................................. 5
c. OVEC....................................................... 8
d. Current Electric Coordination.............................. 8
e. Utility Regulation......................................... 9
3. Non-Utility Interests........................................... 9
B. Description of the Proposed Merger........................................ 10
C. Negotiations Leading to the Proposed Merger............................... 11
D. Reasons for and Anticipated Effect of Merger.............................. 12
1. Savings......................................................... 12
2. Larger Stake in Major Generating Plants......................... 13
3. Rate Reduction.................................................. 13
E. Additional Information.................................................... 13
Item 2. Fees, Commissions and Expenses................................................. 14
Item 3. Applicable Statutory Provisions................................................ 14
A. Section 10(b)............................................................. 15
1. Section 10(b)(1)................................................ 15
a. Interlocking Relations..................................... 15
b. Concentration of Control................................... 15
2. Section 10(b)(2) Fairness of Consideration and Fees............. 18
a. Fairness of Consideration.................................. 18
b. Reasonableness of Fees..................................... 19
3. Section 10(b)(3) Capital Structure.............................. 20
a. Complication............................................... 20
b. Protected Interests........................................ 22
B. Section 10(c)............................................................. 22
1. Section 10(c)(1)................................................ 23
2. Section 10(c)(2)................................................ 23
a. Efficiencies and Economies................................. 23
b. Integrated Public Utility System........................... 25
C. Section 10(f)............................................................. 28
Item 4. Regulatory Approvals........................................................... 28
A. Antitrust................................................................. 28
B. Federal Power Act......................................................... 29
C. Atomic Energy Act......................................................... 29
D. State Public Utility Regulation........................................... 29
E. Other..................................................................... 29
Item 5. Procedure...................................................................... 29
Item 6. Exhibits and Financial Statements.............................................. 30
A. Exhibits.................................................................. 30
B. Financial Statements...................................................... 31
Item 7. Information as to Environmental Effects........................................ 32
</TABLE>
(i)
<PAGE> 3
ITEM 1. DESCRIPTION OF PROPOSED MERGER
This Amendment No. 3 constitutes a complete restatement of this Application
as previously filed.
INTRODUCTION
Pursuant to Sections (9)(a)(2) and 10 of the Public Utility Holding Company
Act of 1935 (the "1935 Act" or the "Act"), FirstEnergy Corp., an Ohio
corporation ("FirstEnergy" or the "Applicant"), hereby requests that the
Securities and Exchange Commission (the "Commission") (i) authorize the direct
and indirect acquisition, as set forth herein, by FirstEnergy of all of the
issued and outstanding voting securities ("Common Stock") of Ohio Edison
Company, an Ohio corporation ("Ohio Edison"), The Cleveland Electric
Illuminating Company, an Ohio corporation ("Cleveland Electric"), The Toledo
Edison Company, an Ohio corporation ("Toledo Edison") and Pennsylvania Power
Company, a Pennsylvania corporation ("Penn Power") as well as 20.5% of the
Common Stock of Ohio Valley Electric Corporation, an Ohio corporation
("OVEC")(which, in turn, owns all of the Common Stock of Indiana-Kentucky
Electric Corporation ("IKEC")) and (ii) grant such other authorizations as may
be necessary in connection therewith.
Centerior Energy Corporation, an Ohio corporation ("Centerior"), currently
owns all of the Cleveland Electric and Toledo Edison Common Stock. Ohio Edison
currently owns all of the Penn Power Common Stock. Ohio Edison, Penn Power,
Cleveland Electric, Toledo Edison, OVEC and IKEC are all "public-utility
companies" as defined in the 1935 Act. Ohio Edison is also a "holding company"
as defined in the 1935 Act. Ohio Edison is currently exempt from the
registration and other requirements of the 1935 Act, other than from Section
9(a)(2) thereof, pursuant to Section 3(a)(2). Centerior is a "holding company"
as defined in the 1935 Act and is exempt under Section 3(a)(1) of the 1935 Act
from all of the provisions of the 1935 Act (except for Section 9(a)(2) thereof).
FirstEnergy will directly acquire all of the Cleveland Electric Common
Stock, the Toledo Edison Common Stock and the Ohio Edison Common Stock and will
indirectly acquire the Penn Power Common Stock through the transactions
contemplated by (i) the Agreement and Plan of Merger, dated as of September 13,
1996 (the "Merger Agreement") between Ohio Edison and Centerior, (ii) the Merger
Agreement by and among Ohio Edison Company, FirstEnergy Corp. and Ohio Edison
Acquisition Corp., attached to the Merger Agreement as Exhibit A (the "Ohio
Edison Merger Agreement"), and (iii) the Merger Agreement by and among Centerior
Acquisition Corp., FirstEnergy Corp. and Centerior Energy Corporation, attached
to the Merger Agreement as Exhibit B (the "Centerior Merger Agreement" and,
together with the Merger Agreement and the Ohio Edison Merger Agreement, the
"Merger Agreements"). The Merger Agreements provide, among other things, for (i)
the merger of Centerior with and into FirstEnergy Corp., (immediately after the
merger of a wholly-owned subsidiary of FirstEnergy ("Centerior Acquisition
Corp.") with and into Centerior pursuant to the Centerior Merger Agreement) and
(ii) the merger of another wholly-owned subsidiary of FirstEnergy ("Ohio Edison
Acquisition Corp.") with and into Ohio Edison pursuant to the Ohio Edison Merger
Agreement (collectively, the "Merger"). Following the Merger, FirstEnergy will
be a holding company which will directly hold all of the Ohio Edison Common
Stock, Cleveland Electric Common Stock and Toledo Edison Common Stock. Penn
Power will remain a wholly-owned subsidiary of Ohio Edison. Upon consummation of
the Merger, FirstEnergy will own indirectly 20.5% of the OVEC Common Stock.
FirstEnergy is not currently a "holding company" under the 1935 Act because
it does not own, control or hold with power to vote ten percent or more of the
voting securities of a public-utility company. Following the consummation of the
Merger, FirstEnergy will be a public-utility holding company under the 1935 Act.
FirstEnergy will claim an exemption from all provisions of the 1935 Act (except
for Section 9(a)(2) thereof) pursuant to Rule 2 under the 1935 Act immediately
following the consummation of the Merger.
<PAGE> 4
A. DESCRIPTION OF PARTIES TO THE MERGER
1. General Description
a. FirstEnergy
FirstEnergy was organized under the laws of the State of Ohio in 1996 by
Ohio Edison and Centerior for the purpose of facilitating the Merger of Ohio
Edison and Centerior and is not currently engaging in any business. FirstEnergy
has organized two wholly owned subsidiaries, Centerior Acquisition Corp. and
Ohio Edison Acquisition Corp., both Ohio corporations, for the purpose of
consummating the Merger. Upon consummation of the Merger, FirstEnergy will
directly own all of the Common Stock of Ohio Edison, Cleveland Electric and
Toledo Edison, as well as indirectly owning all of the Common Stock of Penn
Power and 20.5% of the Common Stock of OVEC. FirstEnergy's Common Stock
currently is owned equally by Ohio Edison and Centerior.
b. Ohio Edison
Ohio Edison is an investor-owned public utility company headquartered in
Akron, Ohio. It was organized under the laws of the State of Ohio in 1930 and is
a "public utility company" and a public utility "holding company" which is
exempt from regulation by the Commission under the 1935 Act (except for Section
9(a)(2) thereof) because it is predominantly a public-utility company whose
operations as such do not extend beyond the State of Ohio and contiguous states.
See Ohio Edison Company, Holding Co. Act Release No. 21019 (April 26, 1979).
Ohio Edison owns all of the Common Stock of Penn Power, which is based in New
Castle, Pennsylvania. Penn Power is a "public utility company" under the 1935
Act. Including Penn Power, Ohio Edison has eight wholly-owned subsidiaries. Ohio
Edison owns directly 16.5% of the Common Stock of OVEC. OVEC and IKEC were
formed in 1952 by 15 independent investor-owned public utilities (including Ohio
Edison, Penn Power and Toledo Edison) for the purpose of providing the large
electric power requirements projected for the major uranium enrichment complex
near Portsmouth, Ohio, then being built by the Atomic Energy Commission, the
predecessor to the U.S. Department of Energy (the "DOE"). The merger will not
affect OVEC.
Ohio Edison and Penn Power operate and dispatch electrical service as a
single utility system known as the Ohio Edison System ("OES"). OES provides
retail electric service to 1.1 million customers in a 9,000 square mile area of
central and northeastern Ohio and western Pennsylvania. OES provides wholesale
electric capacity, energy and transmission services to 21 municipal electric
systems in its Ohio service area, and to five boroughs in Pennsylvania. In
addition, OES provides transmission service to nine rural electric cooperatives.
OES also engages in the sale, purchase and interchange of electric energy with
other electric companies and power producers. OES has 36 transmission
interconnections with eight public utilities, including Cleveland Electric and
Toledo Edison, which operate at or above 138 kilovolts ("kV").
Ohio Edison and Penn Power belong to the Central Area Power Coordination
Group ("CAPCO"). The other members of CAPCO are Cleveland Electric, Toledo
Edison and Duquesne Light Company ("Duquesne")(collectively, the "CAPCO
Companies"). The CAPCO Companies jointly own various generating units and
individually own various transmission facilities dedicated by the CAPCO
agreements to fulfill specified purposes. CAPCO is not a utility company or a
transmitting utility, and no CAPCO member owns a share of all CAPCO units. The
Merger will not affect the CAPCO agreements.
c. Centerior
Centerior is an investor-owned public utility holding company headquartered
in Independence, Ohio. It was organized under the laws of the State of Ohio in
1985 in connection with the merger of Cleveland Electric and Toledo Edison.
Centerior is a "holding company" which is exempt from regulation by the
Commission under the 1935 Act (except for Section 9(a)(2) thereof) because its
operations and those of its public utility subsidiaries (Cleveland Electric and
Toledo Edison) from which it derives, directly or indirectly, any material part
of its income, are predominantly intrastate in character and are carried on
substantially in the State of Ohio. See Centerior Form U-3A-2, "Statement by
Holding Company Claiming Exemption Under Rule U-2 from the Provisions of the
Public Utility Holding Company Act of 1935," dated February 28, 1997, attached
2
<PAGE> 5
hereto as Exhibit G-1. Centerior owns all of the Common Stock of Cleveland
Electric and Toledo Edison, which are based in Cleveland, Ohio, and Toledo,
Ohio, respectively. Cleveland Electric and Toledo Edison are "public-utility
companies" under the 1935 Act. In addition to Cleveland Electric and Toledo
Edison, Centerior has four other wholly-owned direct subsidiaries. Toledo Edison
owns directly 4% of the Common Stock of OVEC.
The service areas of Centerior's Toledo Edison and Cleveland Electric
subsidiaries are not contiguous. Cleveland Electric provides retail electric
service to 749,075 customers in a 1,700 square mile area of northeastern Ohio,
and Toledo Edison provides retail electric service to 290,480 customers in a
2,500 square mile area of northwestern Ohio. Cleveland Electric and Toledo
Edison also provide transmission services and electric energy for resale to
other electric utility companies and to 14 municipalities and 5 rural
cooperatives in Toledo Edison's service area. Cleveland Electric and Toledo
Edison also engage in the sale, purchase and interchange of electric energy with
other electric companies and power producers. Cleveland Electric and Toledo
Edison together have 21 transmission interconnections with 4 public utilities,
including OES, which operate at or above 138 kV.
d. OVEC and IKEC
OVEC is a public utility company organized under the laws of Ohio in 1952.
On the same date, IKEC, its wholly-owned subsidiary, was organized under the
laws of Indiana. The two companies were formed by 15 independent investor-owned
public utilities (including Ohio Edison, Penn Power, and Toledo Edison) (the
"Sponsor Companies"), furnishing electric service in the Ohio River Valley for
the purpose of providing the large electric power requirements projected for the
major uranium enrichment complex near Portsmouth, Ohio, then being built by the
Atomic Energy Commission, the predecessor to the Department of Energy ("DOE").
The Commission approved the acquisition of the OVEC Common Stock by the Sponsor
Companies under Section 10 of the 1935 Act on November 7, 1952. See Ohio Valley
Electric Corporation, 34 SEC 323 (1952).
Under participation agreements with DOE, the Sponsor Companies are
obligated to supply to OVEC certain capital funds, if needed, and are entitled
to receive any available power in excess of the DOE contract demand. OVEC's
primary obligation is to supply DOE's requirements. It sells its surplus
electric energy to the Sponsor Companies and has no other material business.
2. Description of Utility Operations
a. Ohio Edison and Penn Power
Ohio Edison furnishes electric service to communities in a 7,500 square
mile area of central and northeastern Ohio. A map of Ohio Edison's service
territory is attached as Exhibit E-1. Ohio Edison also provides transmission
services and electric energy for resale to certain municipalities in its service
area and transmission services to certain rural cooperatives. Ohio Edison also
engages in the sale, purchase and interchange of electric energy with other
electric companies. The area it serves has a population of approximately
2,537,000.
Penn Power furnishes electric service to communities in a 1,500 square mile
area of western Pennsylvania. Penn Power also provides transmission services and
electric energy for resale to certain municipalities in Pennsylvania. The area
served by Penn Power has a population of approximately 343,000. A map of Penn
Power's service territory is attached as Exhibit E-1.
GENERATING UNITS: OES owns or leases all or a portion of 39 electric
generating units, consisting of 18 coal fired units, three nuclear units, seven
oil fired units, one gas/oil fired unit and 10 diesel generators (located at
three sites), which have total net generating capacity of 5,757 megawatts
("MW"). All of the electric properties owned by OES are located within the State
of Ohio and the Commonwealth of Pennsylvania.
3
<PAGE> 6
OES's generation requirements are supplied by a number of plants which use
a variety of fuels, as set forth below:
<TABLE>
<CAPTION>
OES-OWNED
TOTAL UNIT PORTION OF
NET NET
DEMONSTRATED DEMONSTRATED
GENERATING UNIT LOCATION UNIT TYPE CAPABILITY CAPABILITY
- ------------------------- ------------ ------------------ ------------ ---------------
(MW) (MW)
<S> <C> <C> <C> <C>
NUCLEAR
Beaver Valley 1 Pennsylvania Steam Turbine 810 425(1)
Beaver Valley 2 Pennsylvania Steam Turbine 820 343(2)
Perry 1 Ohio Steam Turbine 1194 421(3)
COAL
Burger 3 Ohio Steam Turbine 94 94(4)
Burger 4 Ohio Steam Turbine 156 156(4)
Burger 5 Ohio Steam Turbine 156 156(4)
Mansfield 1 Pennsylvania Steam Turbine 780 501(5)
Mansfield 2 Pennsylvania Steam Turbine 780 360(6)
Mansfield 3 Pennsylvania Steam Turbine 800 335(7)
New Castle 3 Pennsylvania Steam Turbine 98 98(8)
New Castle 4 Pennsylvania Steam Turbine 98 98(8)
New Castle 5 Pennsylvania Steam Turbine 137 137(8)
Niles 1 Ohio Steam Turbine 108 108(4)
Niles 2 Ohio Steam Turbine 108 108(4)
Sammis 1 Ohio Steam Turbine 180 180(4)
Sammis 2 Ohio Steam Turbine 180 180(4)
Sammis 3 Ohio Steam Turbine 180 180(4)
Sammis 4 Ohio Steam Turbine 180 180(4)
Sammis 5 Ohio Steam Turbine 300 300(4)
Sammis 6 Ohio Steam Turbine 600 600(4)
Sammis 7 Ohio Steam Turbine 600 413(9)
NATURAL GAS
Edgewater 4 Ohio Steam Turbine 100 100(4)
OIL
Edgewater CT A&B Ohio Combustion Turbine 48 48(10)
Mad River CT A&B Ohio Combustion Turbine 60 60(10)
Niles CT A Ohio Combustion Turbine 30 30(10)
West Lorain CT A&B Ohio Combustion Turbine 120 120(4)
DIESEL
Burger D Ohio Internal 7 7(10)
Combustion
New Castle D Pennsylvania Internal 6 6(10)
Combustion
Sammis D Ohio Internal 13 13(10)
Combustion
---- ----
Total 8743 5757
==== ====
</TABLE>
- ---------------
1. Represents combined OES ownership of 52.50%.
2. Represents combined OES ownership and leasehold interest of 41.88%.
3. Represents combined OES ownership and leasehold interest of 35.24%.
4. 100% owned by Ohio Edison.
5. Represents combined OES ownership of 64.20%.
6. Represents combined OES ownership of 46.10%.
7. Represents combined OES ownership of 41.88%.
8. 100% owned by Penn Power.
9. Represents combined OES Ownership of 68.8%
10. Represents combined OES ownership of 100%.
4
<PAGE> 7
System Requirements
OES has a transmission system of 5,616 circuit line miles covering an area
of approximately 9,000 square miles. OES also has 26,463 distribution line miles
within its service areas. The transmission system has 629 circuit miles of 345
kV lines, 2,350 circuit miles of 138 kV lines, 1,894 circuit miles of 69 kV
lines, 180 circuit miles of 34.5 kV lines and 594 circuit miles of 23 kV lines.
Additionally, OES's electric distribution systems include 26,463 miles of
overhead pole line and underground conduit carrying primary, secondary and
street lighting circuits. OES owns, individually or together with one or more of
the other CAPCO Companies as tenants in common, 448 substations with a total
installed transformer capacity of 24,849,513 kV-amperes, of which 70 are
transmission substations, including nine located at generating plants.
The 1996 net maximum hourly demand on OES of 6,067,000 kilowatts ("kW")
(including 450,000 kW of firm power sales that extend through 2005) occurred on
August 6, 1996. The seasonal capability of OES (including 932,000 kW of net firm
and capacity purchases) on that day was 6,557,000 kW. Of that system capability,
5.9% was available to serve additional load and term power sales to other
utilities.
Fuel Sources
Sources of generation for Ohio Edison and Penn Power during the twelve
months ended December 31, 1996 were 76.7% coal and 23.3% nuclear. Approximately
two-thirds of OES's annual coal purchase requirements are supplied under
long-term contracts. These contracts have minimum annual tonnage levels of
approximately 5,300,000 tons. This contract coal is produced primarily from
mines located in Ohio, Pennsylvania, Kentucky and West Virginia; the contracts
expire at various times through February 28, 2003.
OES Fuel, a subsidiary of Ohio Edison, is the sole lessor for OES's nuclear
fuel requirements. OES and OES Fuel have contracts for the supply of uranium
sufficient to meet projected needs through 2000 and conversion services
sufficient to meet projected needs through 2001. Fabrication services for fuel
assemblies have been contracted by CAPCO for the next three reloads for Beaver
Valley Unit 1, one reload for Beaver Valley Unit 2 (through approximately 2000
and 1998, respectively), and the next five reloads for Perry (through
approximately 2004). OES has a contract with U.S. Enrichment Corporation for the
majority of its enrichment requirements for nuclear fuel through 2014.
Ohio Edison does not own or have any financial interest in any natural gas
pipeline company. However, at Ohio Edison's Edgewater plant, OES Fuel owns a
four mile gas pipeline that connects the Edgewater plant to the Columbia Gas
Transmission system.
OES's fuel costs (excluding disposal costs) for each of the five years
ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of fuel consumed per million BTUs:
Coal................................................... $1.32 $1.36 $1.36 $1.37 $1.40
Nuclear................................................ $ .52 $ .65 $ .75 $ .76 $ .83
Oil, Natural Gas & Diesel.............................. $4.10 $2.47 $4.33 $4.66 $1.67
----- ----- ----- ----- -----
Average fuel cost per kilowatt-hour
generated (cents)...................................... 1.16 1.22 1.26 1.31 1.31
</TABLE>
b. Centerior
GENERATING UNITS Cleveland Electric and Toledo Edison own or lease all or a
portion of 30 electric generating units, consisting of 16 coal-fired units, 3
nuclear units, 7 oil-fired and natural gas-fired steam units, 1 diesel generator
and three pumped storage units. Centerior's generating capacity is approximately
5,768 MW.
5
<PAGE> 8
The generation requirements of Cleveland Electric and Toledo Edison are
supplied by a number of plants which use a variety of fuels, as set forth below:
<TABLE>
<CAPTION>
CENTERIOR-OWNED
NET PORTION OF NET
DEMONSTRATED DEMONSTRATED
GENERATING UNIT LOCATION UNIT TYPE CAPABILITY CAPABILITY
- -------------------------- ---------------- --------------------- ------------ ---------------
(MW) (MW)
<S> <C> <C> <C> <C>
COAL
Ashtabula Unit 5 Ohio Steam Turbine 244 244(1)
Ashtabula Unit 9 Ohio Steam Turbine 44 44(1)
Avon Lake Unit 7 Ohio Steam Turbine 96 96(1)
Avon Lake Unit 9 Ohio Steam Turbine 596 596(1)
Bay Shore Unit 1 Ohio Steam Turbine 136 136(2)
Bay Shore Unit 2 Ohio Steam Turbine 138 138(2)
Bay Shore Unit 3 Ohio Steam Turbine 142 142(2)
Bay Shore Unit 4 Ohio Steam Turbine 215 215(2)
Mansfield Unit 1 Pennsylvania Steam Turbine 780 51(3)
Mansfield Unit 2 Pennsylvania Steam Turbine 780 358(4)
Mansfield Unit 3 Pennsylvania Steam Turbine 800 355(5)
Eastlake Unit 1 Ohio Steam Turbine 132 132(1)
Eastlake Unit 2 Ohio Steam Turbine 132 132(1)
Eastlake Unit 3 Ohio Steam Turbine 132 132(1)
Eastlake Unit 4 Ohio Steam Turbine 240 240(1)
Eastlake Unit 5 Ohio Steam Turbine 600 411(6)
OIL - NATURAL GAS
Avon Lake Unit 10 Ohio Combustion Turbine 29 29(1)
Bay Shore CT Ohio Combustion Turbine 17 17(2)
Eastlake Unit 6 Ohio Combustion Turbine 29 29(1)
Richland Unit 1 Ohio Combustion Turbine 14 14(2)
Richland Unit 2 Ohio Combustion Turbine 14 14(2)
Richland Unit 3 Ohio Combustion Turbine 14 14(2)
Stryker Ohio Combustion Turbine 18 18(2)
NUCLEAR
Beaver Valley Unit 2 Pennsylvania Steam Turbine 820 364(7)
Davis-Besse Unit 1 Ohio Steam Turbine 883 883(8)
Perry Unit 1 Ohio Steam Turbine 1194 609(9)
DIESEL
Lakeshore D Ohio Internal Combustion 4 4(1)
HYDRO-PUMPED
Seneca Units 1-3 Pennsylvania Hydro-Pumped 435 351(10)
Storage
----- -----
Total 8,678 5,768
===== =====
</TABLE>
- ---------------
1. 100% owned by Cleveland Electric.
2. 100% owned by Toledo Edison.
3. Represents 6.50% leasehold interest of Cleveland Electric.
4. Represents 28.60% leasehold interest of Cleveland Electric and 17.30%
leasehold interest of Toledo Edison.
5. Represents 24.47% leasehold interest of Cleveland Electric and 19.91%
leasehold interest of Toledo Edison.
6. Represents Cleveland Electric ownership of 68.80%.
6
<PAGE> 9
7. Represents Cleveland Electric ownership of 24.47% and Toledo Edison
ownership of 1.65% and 18.26% leasehold.
8. Represents Cleveland Electric ownership of 51.38% and Toledo Edison
ownership of 48.62%.
9. Represents 31.11% leasehold interest of Cleveland Electric and Toledo Edison
ownership of 19.91%.
10. Represents Cleveland Electric ownership of 80.00%.
System Requirements
Cleveland Electric has 3,936 MWs of generating facilities in service, 358
circuit miles of 345 kV transmission lines and 903 circuit miles of 138 kV
transmission lines. Toledo Edison has 1,832 MWs of generating capacity in
service and has 154 circuit miles of 345 kV transmission lines and 508 miles of
138 kV lines. Cleveland Electric and Toledo Edison own, individually or together
with one or more of the other CAPCO companies as tenants in common, 278
substations with a total installed transformer capacity of 25,020,000
kV-amperes, of which 55 are transmission substations, including 11 located at
generating plants.
Cleveland Electric and Toledo Edison together had a net 60-minute peak load
of their service areas for 1996 of 5,679,000 kW, which occurred on August 7,
1996. The net seasonal capability at the time of the 1996 peak load was
5,873,000 kW. The 60-minute peak load of Cleveland Electric's service area for
1996 was 3,938,000 kW and occurred on August 7, 1996. The capacity resources
available at the time of the 1996 peak were 3,922,000 kW. The net 60-minute peak
load of Toledo Edison's service area for 1996 was 1,758,000 kW and occurred on
August 7, 1996. The capacity resources available at the time of the 1996 peak
were 1,951,000 kW.
Fuel Sources
During the 12 months ended December 31, 1996, Centerior's sources of
generation consisted of 62% fossil, 32% nuclear and 6% pumped-storage.
Generation by type of fuel for 1996 was 68% coal-fired and 32% nuclear for
Cleveland Electric; 48% coal-fired and 52% nuclear for Toledo Edison; and 61%
coal-fired and 39% nuclear for Centerior.
In 1996, Cleveland Electric burned 5,922,000 tons of coal and Toledo Edison
burned 2,061,000 tons of coal for electric generation. In 1996, about 45% of
Cleveland Electric's coal requirements were purchased under long-term contracts,
with the longest remaining term being almost seven years. In most cases, these
contracts provide for adjusting the price of the coal on the basis of changes in
coal quality and mining costs. Additionally, about 34% of Cleveland Electric's
coal requirements were purchased under short-term contracts (nine to twelve
month terms) with price adjustments on the basis of coal quality. The balance of
Cleveland Electric's coal was purchased on the spot market. In 1996, about 54%
of Toledo Edison's coal requirements were purchased under long-term contracts,
with the longest remaining term being almost four years. In most cases, these
contracts provide for adjusting the price of the coal on the basis of changes in
coal quality and mining costs. The balance of Toledo Edison's coal was purchased
on the spot market.
The CAPCO Companies have a contract with the United States Enrichment
Corporation ("USEC") which, through 1996, supplied all of the needed enrichment
services for their nuclear units' fuel supply. After 1996, the amount of
enrichment services under the USEC contract varies by CAPCO Company, with
Cleveland Electric's and Toledo Edison's enrichment services reduced to 70% in
1997-1999 and reduced to 0% in 2000 and beyond. The additional required
enrichment services are available. Substantial additional fuel will have to be
obtained in the future over the remaining useful lives of the units. There is a
plentiful supply of uranium oxide raw material to meet the industry's nuclear
fuel needs.
Cleveland Electric and Toledo Edison each have adequate supplies of fuel
oil for their oil-fired electric generating units which are used primarily as
reserve and peaking capacity.
7
<PAGE> 10
The combined fuel costs (excluding disposal costs) of Cleveland Electric
and Toledo Edison for each of the five years ended December 31, 1996, were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of fuel consumed per million BTUs:
Coal..................................................... $1.58 $1.53 $1.46 $1.42 $2.00
Nuclear.................................................. $0.80 $0.95 $0.95 $0.99 $1.03
Other.................................................... $3.45 $3.85 $4.24 $4.28 $3.94
Average fuel cost per kilowatt-hour generated (cents)...... 1.27 1.38 1.43 1.43 1.53
</TABLE>
c. OVEC
OVEC owns the Kyger Creek Plant at Cheshire, Ohio, which is a coal-fired
facility with a capacity of 1075 MW. IKEC owns the Clifty Creek Plant at
Madison, Indiana, which is a coal-fired facility with a capacity of 1,290 MW.
These plants are connected by a 780-mile 345 kV transmission network and are
interconnected with the major transmission systems of the Sponsor Companies,
although OVEC's transmission facilities do not interconnect directly with the
OES or Toledo Edison systems.
From time to time, DOE has less need for power than it has contracted for
during a specific period due to decreased product demand. In that event, DOE
will release a portion of its contract demand to the Sponsor Companies. In
October 1996, OES had 150 MW of firm capacity entitlement available to it and
Toledo Edison had 20 MW. During the preceding twelve months, these amounts have
been as high as 196 MW and 54 MW, respectively, when the surplus (non-firm)
power reservation is included.
The Merger will not affect OVEC, IKEC or the OVEC agreements.
d. Current Electric Coordination
Ohio Edison and Penn Power are extensively interconnected, with 12 points
of interconnection at voltage levels ranging from 23 kV to 345 kV. Cleveland
Electric and Toledo Edison are not currently interconnected, because they are
separated by Ohio Edison's facilities. However, Ohio Edison and Cleveland
Electric have five 345 kV and four 138 kV interconnections, and Ohio Edison and
Toledo Edison have one 345 kV and one 138 kV interconnection. Ohio Edison and
Toledo Edison also have one 69 kV interconnection, which is normally operated
open. Thus, FirstEnergy's combined and integrated system will operate as a
single control area, with existing interconnections providing adequate capacity
for OES, Cleveland Electric and Toledo Edison to be thoroughly integrated.
OES, Cleveland Electric and Toledo Edison are also each directly connected
to several other neighboring utilities. Ohio Edison has one 345 kV
interconnection with Allegheny Power System, Inc. ("Allegheny Power"), seven 345
kV interconnections with American Electric Power Company, Inc. ("AEP") and five
345 kV interconnections with Duquesne. Ohio Edison has the following 138 kV
interconnections: one with Allegheny Power, eight with AEP and three with Dayton
Power and Light Company ("Dayton"). OES also has the following 69 kV
interconnections: one with Dayton, one with AEP, one with Allegheny Power and
one with Duquesne. Ohio Edison also has one 23 kV interconnection with AEP. The
69 kV interconnections with Dayton and AEP, and the 23 kV interconnection with
AEP, normally are operated open. One of the 138 kV interconnections with AEP is
also normally operated open.
Cleveland Electric has one 345 kV interconnection with GPU, Inc. ("GPU")
and one 345 kV interconnection with AEP. Cleveland Electric also has
interconnections with Cleveland Public Power and Painesville Electric Division.
Toledo Edison has three 345 kV interconnections with the Michigan Electric
Coordinating System (Detroit Edison Company and Consumers Power Company).
Thirteen municipal distribution entities are also connected to Toledo Edison's
system. These entities are members of and are served by AMP-Ohio and are
sometimes referred to as the Northwest AMP-Ohio Service Group (NWASG).
8
<PAGE> 11
The OVEC plants are connected by a 345 kV transmission network and are
interconnected with the major transmission systems of the Sponsor Companies,
although OVEC's transmission facilities do not interconnect directly with the
OES or Toledo Edison systems.
Ohio Edison and Centerior already own many of their generating assets in
common, because Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison
are currently members, along with Duquesne, of CAPCO. Pursuant to the CAPCO
agreements, OES, Cleveland Electric and Toledo Electric share ownership
interests in Perry Unit 1, Beaver Valley Unit 2, and Mansfield Units 2 and 3.
OES and Cleveland Electric also share ownership interests in Mansfield Unit 1.
e. Utility Regulation
Ohio Edison, Cleveland Electric and Toledo Edison are subject to broad
regulation as to rates and other matters by the Public Utilities Commission of
Ohio (the "PUCO"). Under Ohio law, municipalities may regulate rates, subject to
appeal to the PUCO if not acceptable to the utility. Penn Power is subject to
broad regulation as to rates and other matters by the Pennsylvania Public
Utility Commission (the "PPUC").
Ohio Edison, Cleveland Electric, Toledo Edison and Penn Power are also
subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC")
under the Federal Power Act with respect to wholesale electric rates and other
matters. Construction and operation of nuclear generating units are subject to
the regulatory jurisdiction of the Nuclear Regulatory Commission ("NRC"),
including the issuance by it of construction permits and operating licenses. OES
and Centerior are subject to regulation by the NRC in connection with their
nuclear generating units.
3. Non-Utility Interests
Upon consummation of the Merger, the consolidated assets of FirstEnergy
will include various interests in non-utility businesses. Each such interest is
currently owned or held, directly or indirectly, by Ohio Edison or Centerior.
Ohio Edison has eight wholly-owned subsidiaries: Penn Power, OES Capital,
Incorporated; OES Fuel, Incorporated; OES Finance, Incorporated; Ohio Edison
Financing Trust; Ohio Edison Financing Trust II; OES Nuclear, Incorporated; and
OES Ventures, Incorporated ("Ventures"). These subsidiaries manage and finance
nuclear fuel, finance certain electric accounts receivable and provide
structures for investment in energy related projects. Ventures finances and
manages businesses opportunities not directly related to the provision of
electric service. Ventures is part owner of three limited liability companies:
Eastroc LLC; Eastroc Technologies LLC; and Warrenton River Terminal, Ltd. Other
than Penn Power, these subsidiaries do not, individually or in the aggregate,
have a material impact on the consolidated financial statements of Ohio Edison.
Centerior has six wholly-owned direct subsidiaries: Cleveland Electric
(which has one subsidiary, Centerior Funding Corporation); Toledo Edison;
Centerior Service Company, which provides management, financial, administrative,
engineering and legal services to Cleveland Electric and Toledo Edison at cost;
Centerior Properties Company, Centerior Enterprises Corporation and Market
Responsive Energy, Inc. Centerior Properties primarily manages non-residential
real estate (and has one subsidiary BSG Properties, Inc.); Centerior Enterprises
finances business ventures not directly related to the provision of electric
service (and has five wholly-owned subsidiaries); and Market Responsive Energy
buys and sells wholesale power. Centerior Enterprises, Centerior Properties, and
Market Response Energy, individually or in the aggregate, do not have a material
impact on the consolidated financial statements of Centerior.
9
<PAGE> 12
The pro forma consolidated utility and non-utility assets (before
accumulated reserves for depreciation) of FirstEnergy at June 30, 1997
(unaudited) would be as shown on the following table.
GROSS ASSETS AT JUNE 30, 1997
<TABLE>
<CAPTION>
UTILITY NON-UTILITY TOTAL
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Ohio Edison (Consolidated)........................... $12,276,373 $ 78,243 $12,354,616
----------- ---------- -----------
Centerior (Consolidated)............................. 15,287,692 22,048 15,309,740
----------- ---------- -----------
FirstEnergy (Pro Forma).............................. $26,417,065* $ 100,291 $26,517,356*
=========== ========== ===========
</TABLE>
- ---------------
* Reflects purchase accounting adjustments.
B. DESCRIPTION OF THE PROPOSED MERGER
Ohio Edison, Centerior, FirstEnergy, Ohio Edison Acquisition Corp. and
Centerior Acquisition Corp. have entered into the Merger Agreements. Pursuant to
the Merger Agreements, the holders of Ohio Edison Common Stock and Centerior
Common Stock will become the holders of FirstEnergy Common Stock, which will,
upon consummation of the Merger, be the only outstanding equity securities of
FirstEnergy.
As more fully described in the Merger Agreements, Centerior Acquisition
Corp. will merge with and into Centerior, with Centerior as the surviving
corporation, and Ohio Edison Acquisition Corp. will merge with and into Ohio
Edison, with Ohio Edison as the surviving corporation. Centerior will then be
merged into FirstEnergy, with FirstEnergy as the surviving corporation. Each
share of Ohio Edison Common Stock will be converted into 1 share of FirstEnergy
Common Stock; and each share of Centerior Common Stock will be converted into
0.525 shares of FirstEnergy Common Stock. No fractional shares will be issued.
Instead, each Centerior stockholder who would otherwise receive a fractional
share of FirstEnergy Common Stock will receive cash in payment for that
fractional share based on the market value of FirstEnergy Common Stock on its
first day of trading on the New York Stock Exchange ("NYSE").
The Merger Agreement also provides, among other things, that after the
Merger the holders of shares of Centerior Common Stock and Ohio Edison Common
Stock will cease to have any rights as stockholders of Centerior and Ohio
Edison, respectively, except that holders of shares who have perfected their
dissenters' rights in accordance with Ohio law will have the right to be paid
the fair cash value of such shares held on the applicable record date under Ohio
law. After the Articles of Merger are filed with the Secretary of State of Ohio,
certificates representing shares of Centerior Common Stock and Ohio Edison
Common Stock will be exchangeable for certificates representing shares of
FirstEnergy Common Stock.
Approval of the Merger by the affirmative vote of the holders of at least a
majority of the Common Stock of Centerior and by the affirmative vote of the
holders of at least two-thirds of the Common Stock of Ohio Edison is a condition
to consummation of the Merger and was received, in each case, at meetings held
on March 27, 1997.
FirstEnergy will apply for the listing of FirstEnergy Common Stock on the
NYSE. Approval of the listing on the NYSE of the shares of FirstEnergy Common
Stock, issuable in the Merger, upon official notice of issuance, is a condition
precedent to the consummation of the Merger. Upon consummation of the Merger,
Ohio Edison Common Stock and Centerior Common Stock will be delisted from each
exchange on which they are listed. Following the Merger, FirstEnergy will be
required, and Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison will
continue, to file reports with the Commission pursuant to Section 13(a) of the
Securities Exchange Act of 1934.
FirstEnergy proposes to account for the Merger on the "purchase accounting"
method under generally accepted accounting principles. Arthur Andersen LLP, the
independent public accountants for both Ohio Edison and Centerior, have been
selected as the independent public accountants for FirstEnergy and have
concurred in such accounting treatment for the Merger. Under the purchase method
of accounting, the common equity of the merged enterprise will be equal to the
book common equity of the purchaser (Ohio
10
<PAGE> 13
Edison) at the time of combination plus the purchase price of the acquired
company (Centerior). The purchase price will be the fair market value of
FirstEnergy Common Stock allocated to Centerior Common Stockholders on the date
of consummation.
C. NEGOTIATIONS LEADING TO THE PROPOSED MERGER
Ohio Edison and Centerior (and its predecessors) have had a lengthy
relationship characterized by joint activity and cooperation. Ohio Edison, Penn
Power, Cleveland Electric and Toledo Edison, together with Duquesne, have been
members of CAPCO since 1967. Since the formation of CAPCO, there have been
various proposals and discussions for closer forms of association and
combination among and between the CAPCO Companies. Those discussions led, for
example, in 1986, to the affiliation of Cleveland Electric and Toledo Edison as
wholly owned subsidiaries of Centerior.
The discussions that led to the execution of the Merger Agreement commenced
in the late spring of 1996, when Willard R. Holland, Chairman of the Board and
Chief Executive Officer of Ohio Edison, and Robert J. Farling, Chairman,
President and Chief Executive Officer of Centerior, began to discuss the
potential strategic benefits of a combination of the companies. On April 11,
1996, the PUCO had issued its order with respect to a rate application by
Cleveland Electric and Toledo Edison, in which it had recommended that the two
companies undertake various financial and accounting actions related to their
nuclear properties. Centerior had begun to consider its responses to that order,
and to identify its various strategic alternatives and options. On May 6,
Messrs. Holland and Farling agreed to establish small working teams to evaluate
the potential for a combination and to consider possible synergies. It was
agreed that discussions about possible exchange ratios would be deferred until
the parties had exchanged sufficient information to enable each to evaluate the
financial and operational effects of a possible combination. In addition, the
companies jointly retained McKinsey on May 20 to assist management in a
preliminary evaluation of the possible synergies resulting from a combination.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has regularly provided
financial advisory services to both Ohio Edison and Centerior over the past
several years, and thus has substantial knowledge of both companies and the
electric utility industry generally. Because of this experience and knowledge,
the managements and Boards of each of the two companies determined that it would
be beneficial to retain Morgan Stanley to assist in the structuring of a
possible business combination. Each Board engaged Morgan Stanley on June 18 to
assist management's financial and related analyses in connection with the
structuring of a possible combination on the understanding Morgan Stanley would
establish and maintain separate working teams for each company.
At its May 28 meeting, the Centerior Board of Directors appointed an ad hoc
committee consisting of Messrs. Farling, Mosier, Savage, Miller and Williams of
the Centerior Board and Paul B. Campbell of Squire, Sanders & Dempsey L.L.P. to
evaluate Centerior's strategic alternatives in light of the April 11 PUCO order
and the preliminary discussion with Ohio Edison and report its recommendations
to the Centerior Board. On June 1, Ohio Edison and Centerior entered into a
confidentiality agreement, including stand still provisions, to facilitate the
exchange of confidential information so that each could appropriately evaluate
the potential advantages and disadvantages of a combination. Also in June,
Centerior retained Barr Devlin & Co. Incorporated ("Barr Devlin") as a financial
advisor and to provide a fairness opinion to the Centerior Board should one be
needed. Over the course of June and July, the companies exchanged financial and
operational information, evaluated that information, met with financial
advisors, accountants and lawyers on the benefits and consequences of a
combination and met to discuss a proposed form of agreement for a possible
combination. The status of the discussion was reviewed with the Board of each
company, and in Centerior's case, by the ad hoc committee, at the meetings of
those Boards in June and July. On June 25, the Centerior Board adopted a
Shareholder Rights Plan after considering prevailing conditions in the electric
industry, the trading level of its common stock as compared to historical
levels, and the possibility that Centerior might become a more visible potential
target of acquisition as a result of the discussions with Ohio Edison, were
those discussions to become public.
11
<PAGE> 14
In early August, Centerior retained Deloitte & Touche to assist its
management in identifying and quantifying the potential synergies. On August 23,
the Ohio Edison Board held a special meeting to discuss the combination.
Following that meeting, Mr. Holland indicated to Mr. Farling that Ohio Edison
would be prepared to proceed with the combination based on an exchange ratio in
the range of .5 to 1. In response, Mr. Farling suggested that each company's
advisors meet to explore exchange ratio parameters. On August 30, 1996, Ohio
Edison retained McDonald & Company Securities Inc. ("McDonald") to act as Ohio
Edison's financial advisor and to provide a fairness opinion, if required.
Throughout early September, lawyers for and representatives of the
companies began meeting to draft a merger agreement. In the first two weeks of
September, Barr Devlin and both companies' Morgan Stanley Teams met to discuss
ranges of possible exchange ratios, without reaching agreement. Over the course
of September 12 and 13, Messrs. Holland, Farling, Anthony J. Alexander,
Executive Vice President and General Counsel of Ohio Edison, Terrence G.
Linnert, Senior Vice President, Chief Financial Officer and General Counsel of
Centerior and H. Peter Burg, President and Chief Operating Officer of Ohio
Edison, discussed and agreed to present to their Boards of Directors a
transaction involving an exchange ratio of .525 to 1. They also agreed to
present to their respective Boards proposals on the method of Board selection
and termination fees in connection with the Merger Agreement.
On September 13, the Ohio Edison and Centerior Boards each met, determined
that the proposed transaction was in the best interests of their respective
stockholders and approved the proposed transaction and the Merger Agreement. At
these meetings, McDonald and Barr Devlin delivered their fairness opinions to
the Ohio Edison Board and the Centerior Board, respectively. After these
meetings, the Merger Agreement was executed by both companies. Public
announcement of the transaction was made on September 16, 1996.
D. REASONS FOR AND ANTICIPATED EFFECT OF MERGER
The Board of Directors and management of FirstEnergy believes that the
Merger will create a company that is better positioned to compete in the
electric utility industry than either Ohio Edison or Centerior on a stand-alone
basis, enhancing long-term stockholder value and providing customers with
reliable service at more stable and competitive prices. FirstEnergy expects to
achieve such results through:
(a) improved coordination, control and operation of major generating plants
and transmission facilities;
(b) accelerated debt reduction;
(c) elimination of duplicative activities;
(d) reduced operating expenses and cost of capital;
(e) elimination or deferral of certain capital expenditures;
(f) development of opportunities for sales of energy-related products and
services;
(g) enhanced cash flow; and
(h) enhanced purchasing capabilities for goods and services.
The combination of Ohio Edison and Centerior is a natural alliance of two
companies with adjoining service areas that already share ownership in many of
their major generating assets and which will realize opportunities to eliminate
duplicative costs, maximize efficiencies and increase management flexibility in
order to enhance revenues, cash flow and earnings and be a more effective
competitor in the increasingly competitive electric utility industry.
FirstEnergy believes the Merger will provide the following benefits:
1. Savings
The combination of the businesses of Ohio Edison and Centerior will result
in substantial savings, estimated at approximately $1 billion, net of costs to
achieve (estimated to be approximately $130 million), over ten years. The
regulatory plan approved by the PUCO provides for a portion of these savings to
be allocated to ratepayers in the form of lower rates for retail customers of
Cleveland Electric and Toledo Edison
12
<PAGE> 15
and by the reduction of the carrying cost of existing assets. The savings, which
Ohio Edison and Centerior do not believe could be achieved without the Merger,
are in addition to the estimated effects of cost reduction programs currently
underway at Ohio Edison and Centerior and result primarily from the reduction of
duplicative function and positions, reductions in duplicative corporate and
administrative expenses, joint dispatch of generating facilities and procurement
efficiencies. Reductions in labor are expected to comprise slightly over half
the estimated savings, based on a reduction of approximately 900 positions in
the FirstEnergy organization. These reductions are expected to be phased in over
a five-year period. Such reductions are expected to be attained through
attrition, controlled hiring and voluntary and involuntary severance programs.
Reductions in duplicative corporate and administrative expenses, such as
insurance, facilities, professional services and advertising, should comprise
about a quarter of estimated savings. Cost savings from the joint dispatch of
generating facilities and procurement efficiencies comprise the balance of the
estimated savings.
In addition, both companies' ongoing cost reduction and efficiency
improvement programs will be available for implementation throughout the new
organization. Through such programs, as well as reductions in new capital
requirements and lower overheads resulting from combining operations,
FirstEnergy expects to reduce system-wide debt by at least $2.5 billion through
the year 2000, yielding additional long-term financial savings in the form of
lower interest expense. See "Item 3. Applicable Statutory Provisions--Section
10(c)(2)" on page 23.
2. Larger Stake in Major Generating Plants
FirstEnergy will have complete or majority ownership and operational
control over the 2,360 MW Bruce Mansfield Plant (coal); the 600 MW Sammis Unit 7
(coal); the 600 MW Eastlake Unit 5 (coal); the 883 MW Davis-Besse Unit 1
(nuclear); and the 1,194 MW Perry Unit 1 (nuclear). FirstEnergy will also have
majority ownership of the 1,630 MW Beaver Valley Plant (nuclear). With the
combined ownership shares of Ohio Edison and Centerior, FirstEnergy will be
better able to maximize the operating efficiency of the units, helping to reduce
the financial risks related to operations in a more competitive electric
industry.
3. Rate Reduction
Ohio Edison and Centerior have filed a plan that would extend to Cleveland
Electric and Toledo Edison customers a rate reduction program to become
effective upon consummation of the Merger. It calls for: (i) a base rate freeze
through 2005 followed by an immediate $310 million base rate reduction; (ii)
interim residential rate reductions of $3 per month beginning six months after
the Merger, increasing to $4 per month on July 1, 2000, and to $5 per month from
July 1, 2001 through the year 2005; (iii) interim rate reductions for certain
commercial customers; (iv) a $75 million economic development loan/lease
program; (v) a $30 million energy efficiency program for residential customers;
(vi) a $2 billion aggregate reduction in assets through 2005, resulting from
amounts that will have been revalued, amortized and/or depreciated on an
accelerated basis; and (vii) earnings caps that would enable customers to share
in any additional benefits from the Merger, limiting returns on common equity,
for regulatory purposes, of Cleveland Electric and Toledo Edison to 11.5% for
calendar years from inception of the Regulatory Plan through 1999, 12.0% in 2000
and 2001 and 12.59% from 2002 through 2005. The Ohio Consumers' Counsel and the
City of Toledo filed a stipulated agreement supporting the regulatory plan. The
plan received the approval of the PUCO on January 30, 1997 which approval is a
condition to the consummation of the Merger.
These benefits are described in more detail in the discussion of the
economies and efficiencies resulting from the Merger in Item 3.B.2.a.
E. ADDITIONAL INFORMATION
The directors and executive officers of Ohio Edison and Centerior hold less
than 1% of the outstanding shares of Ohio Edison Common Stock and Centerior
Common Stock, respectively. Information pertaining to the interests in the
Merger of the Boards of Directors and certain executives of Ohio Edison and
Centerior is set forth in the Registration Statement on Form S-4 filed with the
Commission by FirstEnergy on February 3, 1997 and declared effective on February
5, 1997. No associate company or affiliate of Centerior or Ohio
13
<PAGE> 16
Edison or any affiliate of any such associate company has any direct or indirect
material interest in the proposed transaction except as stated herein or
therein.
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 under the Securities Act of 1933, and other
related matters, are estimated as follows:
<TABLE>
<S> <C>
Commission filing fee for the Registration Statement on Form S-4............... $ 1,615,726
Accountants' fees
Arthur Andersen, LLP......................................................... 421,000
Legal fees and expenses relating to the Act.................................... 300,000
Other legal fees and expenses.................................................. 4,068,000
Stockholder communication and proxy solicitation............................... 3,738,000
NYSE listing fee............................................................... 210,000
Exchanging, printing and engraving of stock certificates....................... 1,500,000
Investment bankers' fees and expenses
McDonald..................................................................... 750,000
Barr Devlin.................................................................. 7,035,000
Morgan Stanley............................................................... 11,831,000
Consulting fees related to human resource issues, public relations, regulatory
support, and other matters relating to the Merger............................ 700,000
-----------
TOTAL.......................................................................... 32,168,726
===========
</TABLE>
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Ohio Edison, Penn Power, Cleveland Electric, Toledo Edison, OVEC and IKEC
are "electric utility companies" as defined in Section 2(a)(3) of the Act. Thus,
these companies are "public-utility companies" as defined in Section 2(a)(5) of
the Act. Because FirstEnergy will, as a result of the Merger, be directly or
indirectly acquiring five per centum or more of the outstanding voting
securities of each of six public-utility companies, the transaction is subject
to Section 9(a)(2) of the Act and thus cannot proceed without Commission
approval pursuant to Section 10 of the Act. The statutory standards that the
Commission must consider in deciding whether to approve the proposed transaction
are set forth in Sections 10(b), 10(c), and 10(f) of the Act.
To the extent that other sections of the 1935 Act or the Commission's rules
thereunder are deemed applicable to the Merger, such sections and rules should
be considered to be set forth in this Item 3.
FirstEnergy believes that the operations of OVEC and IKEC devoted to
satisfying the DOE requirements represent a special and virtually riskless power
supply service to a single instrumentality of the United States government
filling a vital defense need, and is materially different from the utility
operations of Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison.
FirstEnergy believes it is within the intent of the 1935 Act to take this
qualitative difference into account, and that activities attributable to meeting
DOE's requirements under existing arrangements should not affect the
Commission's approval of the Merger. Cf. Union Electric Company, 40 S.E.C. 1072,
1076 (1962).
14
<PAGE> 17
A. SECTION 10(b)
Section 10(b) of the 1935 Act 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 interest 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 of consumers or the proper functioning of such holding
company system.
The Merger and the requests contained in this Application/Declaration are
well within the precedent of transactions approved by the Commission as
consistent with the 1935 Act. In addition, a number of the recommendations made
by the Division of Investment Management (the "Division") in the report issued
by the Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report") support the applicants' analysis. The
Commission's approval of the Merger would be consistent with previous Commission
rulings (See, e.g., CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21,
1994), and would also be consistent with the Division's overall recommendation
in the 1995 Report that the Commission "act administratively to modernize and
simplify holding company regulation. . . and minimize regulatory overlap, while
protecting the interests of consumers and investors," since, as demonstrated
below, the Merger will benefit both consumers and stockholders of FirstEnergy,
and the other federal and state regulatory authorities with jurisdiction over
the Merger will have approved it as in the public interest.
1. Section 10(b)(1)
a. Interlocking Relations
The 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 interest of investors or consumers."
Although the Merger will result, as in any transaction subject to Section
9(a)(2), in certain interlocking relations and concentration of control, they
are not of a kind or to an extent detrimental to the public interest or the
interest of investors or consumers. Following the Merger, there will exist among
FirstEnergy and its public utility subsidiaries interlocking directors and
officers only of such nature and to such extent as normally exist in public
utility holding company systems among affiliated and associated companies. See
CIPSCO, Inc., Holding Co. Act. Release No. 25152, 47 S.E.C. Docket 174, 178
(1990). The Merger Agreement provides that from the time of consummation of the
Merger, Mr. Holland shall serve as Chairman of the Board, President and Chief
Executive Officer and Mr. Farling shall serve as Vice Chairman. The initial
members of the FirstEnergy Board of Directors will be designated by Ohio
Edison's Board of Directors. All other officers of FirstEnergy and directors and
officers of FirstEnergy's subsidiaries will be designated by the FirstEnergy
Board of Directors.
b. Concentration of Control
It is well settled that the public interest is to be judged primarily in
the context of the problems with which the 1935 Act was designed to deal, as set
forth in Section 1(b) thereof. Vermont Yankee Nuclear Power Corporation, 43
S.E.C. 693, 700 (1968), rev'd on other grounds, 413 F.2d 1052 (D.C. Cir. 1969).
Viewed from this perspective, the Merger in no way contradicts the requirements
of Section 10(b)(1).
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of
15
<PAGE> 18
production capacity and reserves and generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., 46 S.E.C. 1299, 1309 (1978). In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations at which the
Act was specifically directed." Vermont Yankee, 43 S.E.C. at 700. As discussed
below, the Merger will not create a "huge, complex, and irrational system" of a
type at which the 1935 Act is directed, but rather will afford the opportunity
to achieve economies of scale and efficiencies which are expected to benefit
investors and consumers. American Electric Power Co., 46 S.E.C. 1299, 1307
(1978).
SIZE: The FirstEnergy system will serve approximately 2,000,000 retail
electric customers in northern and central Ohio and approximately 140,000 retail
electric customers in western Pennsylvania. The service areas of the companies
are contiguous, with over 100 linear miles of common borders. Ohio Edison
provides service in eight of the nine Ohio counties in Cleveland Electric's
service area. Ohio Edison provides service in three of the ten Ohio counties in
Toledo Edison's service area. Because Ohio Edison's service area lies, in part,
between the service areas of Cleveland Electric and Toledo Edison, the
combination of Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison
will allow full integration of Toledo Edison and Cleveland Electric and
operation of a service area of approximately 13,200 square miles as a
fully-integrated single system.
As of and for the twelve months ended June 30, 1997: (1) combined assets of
Ohio Edison and Centerior would have totaled approximately $18.652 billion; (2)
combined annual operating revenues would have totaled approximately $5.013
billion; and (3) combined annual electric sales would have totaled approximately
65 billion kWhs. Based upon kWh sales, the First Energy system will be the 12th
largest investor-owned electric system. Because ten investor-owned electric
systems are now larger than FirstEnergy will be after the Merger, based upon kWh
sales, it is apparent that FirstEnergy will not be larger than is necessary to
realize the available economies of scale of current electrical generation and
transmission technology. See Centerior Energy Corp., Holding Co. Act Release No.
24073, 35 SEC Docket (CCH) 769, 771-772 (April 29, 1986). Also, by comparison,
the Commission has approved acquisitions involving larger operating utilities.
See, e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)
(acquisition of Gulf States Utilities; combined assets at time of acquisition in
excess of $21 billion).
Further, Section 10(b)(1) must be construed in light of the policy stated
in Section 1(b)(4) of the 1935 Act, where Congress, in its statement of abuses
and conditions which adversely affect the public interest, condemned "the growth
and extension of holding companies [that] bears no relation to economy of
management and operation or the integration and coordination of related
operating properties." Ohio Edison, Penn Power, Cleveland Electric and Toledo
Edison are already joint owners of several major generating facilities,
including Mansfield Units 1, 2 and 3, Beaver Valley Unit 2 and Perry Unit 1, and
have extensive transmission interconnections. The generating units in which the
companies share ownership represent approximately $6 billion of the total
combined assets of FirstEnergy. Operating these facilities as part of a single
integrated system will allow FirstEnergy to realize available economies of scale
that cannot be fully realized without the combination.
In Ohio, Pennsylvania and surrounding states, several public utilities are
similar in size to or larger than FirstEnergy's utility operations will be
following the Merger. For example, AEP, Commonwealth Edison Co. ("Commonwealth
Edison"), Duke Power Co. ("Duke"), and Dominion Resources, Inc. ("VEPCO") have
significantly more generating capability than FirstEnergy will have following
the Merger, and APS, CINergy Corporation, Michigan Electric, GPU, PP&L
Resources, Inc. ("PP&L"), Public Service Electric & Gas Co. ("PSE&G"), Niagara
Mohawk Power Corporation ("NIMO") and Carolina Power & Light Company ("CP&L")
have similar generating capabilities. Also, many of the holding companies,
electric utilities and combination companies listed below are similar in size to
or larger than FirstEnergy will be following the Merger in terms of total
assets, operating revenues, customers and/or sales of electricity. Statistical
data, as of December 31, 1995, for Ohio Edison, Penn Power, Cleveland Electric
and Toledo Edison and for other investor-owned utilities in Ohio, Pennsylvania
and surrounding states are set forth below. Please note that while FirstEnergy
believes the figures in the table below are accurate and comparable one to
another, an
16
<PAGE> 19
individual figure may differ somewhat from figures filed elsewhere in other
contexts that may have been calculated in a different manner.
<TABLE>
<CAPTION>
TOTAL OPERATING ELECTRIC SALES IN
SYSTEM TOTAL ASSETS REVENUES CUSTOMERS KWH GENERATION
- ------------------------------------------- ------------ ------------ ---------- ---------- ----------
($ MILLIONS) ($ MILLIONS) (MILLIONS) (MW)
<S> <C> <C> <C> <C> <C>
Ohio Edison................................ 7,899 2,179 953,000 29,540 5,465.0
Penn Power................................. 1,146 315 143,000 4,777 919.7
Cleveland Electric......................... 7,152 1,769 749,000 21,247 4,633.8
Toledo Edison.............................. 3,474 874 291,000 11,149 1,942.6
Consolidating Adjustment................... (220) (172) -- (3,574) --
------ ----- --------- ------ --------
FirstEnergy................................ 19,451 4,965 2,136,000 63,139 12,961.1
====== ===== ========= ====== ========
COMPANIES OPERATING IN OHIO AND ADJACENT
STATES
AEP...................................... 15,902 5,670 2,912,183 120,653 24,725.8
CINergy Corporation...................... 8,220 3,031 1,355,643 51,842 11,937.1
Dayton................................... 3,323 1,255 475,563 16,814 3,377.9
COMPANIES OPERATING IN PENNSYLVANIA AND
ADJACENT STATES
Allegheny Power*......................... 6,447 2,648 1,376,300 54,244 8,324.9
DQE, Inc.*............................... 4,459 988 580,600 15,403 3,205.8
PP&L..................................... 9,492 2,752 1,226,089 42,705 8,845.1
GPU...................................... 9,870 3,805 1,976,000 45,753 7,142.0
PECO Energy Co........................... 14,961 4,186 1,467,385 48,531 8,409.6
OTHER COMPANIES
Consumer Power Company................... 8,143 3,890 1,570,000 35,506 6,544.7
Detroit Edison Company................... 11,131 3,636 2,001,510 48,942 11,831.1
PSE&G.................................... 17,200 6,164 1,897,019 40,283 10,328.3
Commonwealth Edison...................... 23,247 6,910 3,381,833 91,353 24,395.7
NIMO..................................... 9,478 3,917 1,561,657 37,684 4,659.5
Consolidated Edison Co. of New York
Inc.................................... 13,950 6,537 2,994,447 51,306 9,576.0
Long Island Lighting Co.................. 12,484 3,075 1,025,107 16,572 4,416.7
CP&L..................................... 8,227 3,007 1,086,757 49,890 9,795.3
Duke..................................... 13,359 4,677 1,789,779 76,737 16,579.7
VEPCO.................................... 13,903 4,652 1,993,000 68,953 13,768.9
NIPSCO Industries Inc.................... 4,000 1,722 403,943 16,924 4,097.7
</TABLE>
- ---------------
* Merger announced.
Also, pursuant to retail rate plans that are in effect for Ohio Edison and
Penn Power, and to be effective for Cleveland Electric and Toledo Edison
following the Merger, the combined FirstEnergy companies have committed to (i)
revalue and/or accelerate in depreciation and/or amortization of approximately
$4.3 billion in high cost nuclear and regulatory assets by December 31, 2005,
which will have the effect of significantly reducing the total assets of the
combined companies, and (ii) reduce annual base electric rates by $610 million
below current levels effective January 1, 2006. Also, over the respective time
periods of the rate plans, the companies will reduce electric charges to
customers by approximately $1 billion. Accordingly, as these plans are fully
implemented following the Merger, the relative size of FirstEnergy as compared
to these other companies will diminish.
Comparison of these data demonstrates that the integrated public utility
operations of FirstEnergy will not tend toward the concentration of control of
public utility companies of a kind or to an extent detrimental to the public
interest or the interest of investors or consumers.
EFFICIENCIES AND ECONOMIES: The Commission has rejected a mechanical size
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. American
Electric Power Co., 46 S.E.C. at 1309. More recent pronouncements of the
Commission confirm that size alone is not determinative. Thus, in Centerior
Energy Corp., Holding Co. Act Release No. 24073 (April 29,
17
<PAGE> 20
1986), the Commission stated flatly that a "determination of whether to prohibit
enlargement of a system by acquisition is to be made on the basis of all the
circumstances, not on the basis of size alone." See also Entergy Corp., Holding
Co. Act Release No. 25952 (December 17, 1993). In addition, the Division
recommended in the 1995 Report that the Commission approach its analysis of
merger and acquisition transactions in a flexible manner with emphasis on
whether the Merger creates an entity subject to effective regulation and is
beneficial for stockholders and customers as opposed to focusing on rigid,
mechanical tests. 1995 Report at 73-4.
By virtue of the Merger, FirstEnergy will be in a position to realize the
"opportunities for economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and reserves and generally
more efficient operations" described by the Commission in American Electric
Power Co., 46 S.E.C. at 1309. Among other things, the Merger is expected to
yield significant production cost savings from integrated economic dispatch;
savings through greater purchasing power; labor cost savings; and savings
through consolidation of corporate and administrative programs. These expected
economies and efficiencies from the combined utility operations are described in
greater detail in Item 3.B.2 below and are projected to result in net savings of
approximately $1 billion over the first ten years alone.
COMPETITIVE EFFECTS: As the Commission noted in Northeast Utilities,
Holding Co. Act Release No. 25221, 47 SEC Docket 1270 (December 21, 1990),
supplemented, Holding Co. Act Release No. 25273 (March 15, 1991), aff'd, City of
Holyoke Gas & Elec. Dept. v. S.E.C., 792 F.2d 358 (D.C. Cir. 1992), the
"antitrust ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal and state
administrative agencies regulate the rates charged consumers." Under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), the Merger may not be consummated until the applicable waiting periods
have expired or been terminated. Filings have been made with the Department of
Justice (the "DOJ") and the Federal Trade Commission (the "FTC") under the HSR
Act, describing the effects of the Merger on competition in the relevant market
and the applicable waiting periods have expired.
In addition, the competitive impact of the Merger was fully considered by
the FERC before it approved the Merger. A detailed explanation of the reasons
why the transaction will not threaten competition in relevant geographic and
product markets is set forth in the market study and supporting testimony
included in the Joint Application of Ohio Edison, Penn Power, Cleveland Electric
and Toledo Edison filed with the FERC. The Commission may appropriately rely
upon the FERC with respect to such matters. Entergy Corporation, SUPRA, citing
City of Holyoke Gas & Electric Dept. v. S.E.C., 972 F.2d at 363-64, quoting
Wisconsin Environmental Decade, Inc. v. S.E.C., 882 F.2d 523, 527 (D.C. Cir.
1989).
The Merger will result in a holding-company system whose management will
remain based in Ohio. Among the purposes of the Merger are (1) to foster the
economic management and operations of that system by obtaining Merger-dependent
cost savings and (2) to further the integration and coordination of those
operations.
Following the Merger, FirstEnergy, Ohio Edison, Cleveland Electric and
Toledo Edison will be subject to the oversight of the PUCO and Penn Power will
be subject to the oversight of the PPUC. The Merger will have no effect on the
regulation of OVEC and IKEC. The public utility operations of Ohio Edison,
Cleveland Electric and Toledo Edison will continue to be substantially confined
to the State of Ohio, and the public utility operations of Penn Power will
continue to be substantially confined to the Commonwealth of Pennsylvania. In
considering the Merger pursuant to Section 10(b)(1) of the Act in light of
Section 1(b)(4) thereof, there is no basis for concluding that the Merger will
involve the growth or extension of a holding company that bears no relation to
economies of management and operation or the integration and coordination of
related operating properties.
2. Section 10(b)(2) -- Fairness of Consideration and Fees
a. Fairness of Consideration
Section 10(b)(2) of the 1935 Act requires the Commission to determine
whether the consideration in connection with a proposed acquisition of
securities is reasonable and whether it bears a fair relation to
18
<PAGE> 21
investment in and earning capacity of the utility assets underlying the
securities being acquired. As noted earlier, when the Merger is consummated,
each share of Ohio Edison Common Stock will be converted into 1 share of
FirstEnergy Common Stock and each share of Centerior Common Stock will be
converted into 0.525 shares of FirstEnergy Common Stock.
These ratios were reached through a process of vigorous arm's-length
negotiations, accommodation, and compromise. Such negotiations were preceded by
extensive due diligence, analysis and evaluation of the assets, liabilities and
business prospects of each of the respective companies. See Item 1.C. As
recognized by the Commission in Ohio Power Co., 44 S.E.C. 340, 346 (1970),
prices arrived at through arms-length negotiations are particularly persuasive
evidence that Section 10(b)(2) is satisfied.
Finally, nationally-recognized investment bankers for each of Ohio Edison
and Centerior have reviewed extensive information concerning the companies and
analyzed the exchange ratios employing a variety of valuation methodologies, and
have opined that the exchange ratios are fair, from a financial point of view,
to the respective holders of Ohio Edison Common Stock and Centerior Common
Stock. The investment bankers' opinions are attached hereto as Exhibits H-1 and
H-2. The assistance of independent consultants in setting consideration has been
recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. The Southern Company; SV Ventures, Inc., Holding Co. Act
Release 24579 (February 12, 1988).
b. Reasonableness of Fees
FirstEnergy believes that the fees and commissions incurred in connection
with the Merger are reasonable and fair in light of the size and nature of the
Merger and comparable transactions and thus meet the standards of Section
10(b)(2).
As set forth in Item 2 of this Application, Ohio Edison and Centerior
together expect to incur a combined total of approximately $32 million in fees,
commissions and expenses in connection with the Merger. By contrast, The
Cincinnati Gas & Electric Company and PSI Resources Inc. incurred $47.1 million
in fees, commissions and expenses in connection with their reorganization as
subsidiaries of CINergy Corporation; Northeast Utilities alone incurred $46.5
million in fees, commissions and expenses in connection with its acquisition of
Public Service Company of New Hampshire; and Entergy Corporation alone incurred
approximately $38 million in fees, commissions and expenses in connection with
its acquisition of Gulf States Utilities -- all of which amounts were approved
as reasonable by the Commission. See CINergy, Holding Co. Act Release No. 26146
(Oct. 21, 1994); Northeast Utilities, Holding Co. Act Release No. 25548 (June 3,
1992); Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993).
With respect to financial advisory fees, Ohio Edison and Centerior believe
that the fees payable to their investment bankers are fair and reasonable for
similar reasons. Pursuant to the terms of an engagement letter dated September
10, 1996, Ohio Edison has agreed to pay McDonald for its services in connection
with the Merger (i) $375,000 payable upon delivery of the McDonald Opinion, and
(ii) $375,000 payable upon approval of the Merger by the stockholders of Ohio
Edison. Ohio Edison has also agreed to reimburse McDonald for all reasonable
out-of-pocket expenses incurred in connection with the performance of its
duties, including but not limited to reasonable fees and reasonable expenses of
legal counsel retained by McDonald, and to indemnify McDonald and certain
related persons against certain costs and liabilities in connection with its
engagement, including certain liabilities under the federal securities laws.
Pursuant to these arrangements, McDonald will receive fees in the aggregate of
$750,000.
Pursuant to the terms of Barr Devlin's engagement, Centerior has agreed to
pay Barr Devlin for its services in connection with the Merger (i) a financial
advisory retainer fee of $62,500 per quarter commencing July 1, 1996; (ii) an
initial financial advisory progress fee of $1,340,000 payable upon execution of
the Merger Agreement; (iii) a second financial advisory progress fee estimated
at $1,510,000 payable upon Centerior stockholder approval of the Merger
Agreement and (iv) a transaction fee based on the aggregate consideration to be
received by Centerior and holders of Centerior Common Stock in connection with
the Merger at its consummation, ranging from 0.45% of such aggregate
consideration (for a transaction with an aggregate consideration of $1 billion)
to 0.41% of such aggregate consideration (for a transaction with an aggregate
19
<PAGE> 22
consideration of $2 billion). All financial advisory retainer fees payable
during the term of the engagement, all financial advisory progress fees and an
additional $187,500 would be credited against any transaction fee payable to
Barr Devlin. Centerior has agreed to reimburse Barr Devlin for its out-of-pocket
expenses, including fees and expenses of legal counsel and other advisors
engaged with the consent of Centerior, and to indemnify Barr Devlin against
certain liabilities, including liabilities under the federal securities laws,
relating to or arising out of its engagement. Pursuant to these arrangements,
Barr Devlin will be compensated for fees and expenses in the aggregate of
$7,035,000.
Pursuant to the terms of an engagement letter dated June 14, 1996, Ohio
Edison has agreed to pay Morgan Stanley for its services in connection with the
Merger (i) a financial advisory fee estimated to be between $150,000 and
$250,000, based on time expended on the Merger, (ii) a transaction fee based on
the aggregate consideration to be received by Centerior and holders of Centerior
Common Stock in connection with the Merger at its consummation, ranging from
0.513% of such aggregate consideration (for a transaction with an aggregate
consideration of $800 million) to 0.432% of such aggregate consideration (for a
transaction with an aggregate consideration of $1.3 billion). The transaction
fee is payable one-third upon execution of the Merger Agreement, one-third upon
Ohio Edison shareholder approval of the Merger Agreement and one-third upon
consummation of the Merger. All financial advisory fees and $375,000 (paid to
McDonald upon delivery of the McDonald Opinion) would be credited against any
transaction fee payable to Morgan Stanley. Ohio Edison has also agreed to
reimburse Morgan Stanley for all reasonable out-of-pocket expenses incurred in
connection with the performance of its duties, including but not limited to
reasonable fees and reasonable expenses of legal counsel retained by Morgan
Stanley.
Pursuant to the terms of an engagement letter dated July 16, 1996,
Centerior has agreed to pay Morgan Stanley for its services in connection with
the Merger (i) a financial advisory fee estimated to be between $150,000 and
$250,000, based on time expended on the Merger, (ii) a transaction fee based on
the aggregate consideration to be received by Centerior and holders of Centerior
Common Stock in connection with the Merger at its consummation, ranging from
0.513% of such aggregate consideration (for a transaction with an aggregate
consideration of $800 million) to 0.395% of such aggregate consideration (for a
transaction with an aggregate consideration of $2 billion). The transaction fee
is payable one-third upon execution of the Merger Agreement, one-third upon
Centerior shareholder approval of the Merger Agreement and one-third upon
consummation of the Merger. All financial advisory fees and a mutually agreed
upon amount (to offset the amount paid to Barr Devlin upon delivery of the Barr
Devlin Opinion) would be credited against any transaction fee payable to Morgan
Stanley. Centerior has also agreed to reimburse Morgan Stanley for all
reasonable out-of-pocket expenses incurred in connection with the performance of
its duties, including but not limited to reasonable fees and reasonable expenses
of legal counsel retained by Morgan Stanley, and to indemnify Morgan Stanley and
certain related persons against any costs, losses, claims and damages in
connection with its engagement.
Pursuant to the arrangements established under the June 14, 1996 and July
16, 1996 engagement letters, Morgan Stanley will receive compensation for fees
and expenses in the aggregate of $11,831,000.
FirstEnergy believes the fees payable to Morgan Stanley, McDonald and Barr
Devlin are comparable to the fees paid to investment banks in other merger and
acquisition transactions comparable in terms of size and nature of services
rendered. Finally, the fees paid to Morgan Stanley, McDonald and Barr Devlin
reflect the competition of the marketplace. Investment banking firms actively
compete with each other to act as financial advisors to merger partners and the
fees charged by the investment banks in this transaction (and in others) reflect
this competition for services.
3. Section 10(b)(3) -- Capital Structure
a. Complication
Section 10(b)(3) requires the Commission to determine whether the Merger
will unduly complicate FirstEnergy's capital structure or will be detrimental to
the public interest, the interests of investors or consumers or the proper
functioning of FirstEnergy's system.
20
<PAGE> 23
The corporate capital structure of FirstEnergy after the Merger will not be
unduly complicated. In the Merger, FirstEnergy will directly or indirectly
acquire, by operation of law, all of the Common Stock of Ohio Edison, Cleveland
Electric, Toledo Edison and Penn Power, and thus there will be no minority
Common Stock interest in any of such companies. The existing senior debt and
equity securities of Ohio Edison, Cleveland Electric, Toledo Edison and Penn
Power will not be affected by the Merger. No change will be effected in the
capital structure of Penn Power, which will continue to be a wholly-owned
subsidiary of Ohio Edison. The Commission has previously determined that
transactions similar to the Merger would not unduly complicate the applicant's
corporate capital structure. Cf. Entergy Corporation, Holding Co. Act Release
No. 25952 (December 17, 1993); Centerior Energy Corp., Holding Co. Act Release
No. 24073 (April 29, 1986).
Set forth below are summaries of the capital structure of Ohio Edison and
Centerior as of June 30, 1997 and the pro forma consolidated capital structure
of FirstEnergy (assuming the Merger had occurred at June 30, 1997):
FIRSTENERGY CONSOLIDATED CAPITAL STRUCTURE
JUNE 30, 1997
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
OHIO EDISON CENTERIOR ADJUSTMENTS FIRSTENERGY
--------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ % $ % $ $ %
----- ----- ----- ----- ---- ------ -----
Common Stock....... 2,547 41.6 1,928 27.6 (364) 4,111 32.2
Preferred Stock.... 367 6.0 622 8.9 (14) 975 7.7
Long-term Debt..... 2,369 38.7 4,238 60.6 16 6,623 51.9
Short-term Debt.... 840 13.7 204 2.9 -- 1,044 8.2
----- ----- ----- ----- ---- ------ -----
Total.............. 6,123 100.0 6,992 100.0 (362) 12,753 100.0
===== ===== ===== ===== ==== ====== =====
</TABLE>
FirstEnergy's pro forma consolidated common equity to total capitalization ratio
of 32.2% is higher than the common equity position approved by the Commission
for Northeast Utilities (27.6%) and exceeds the "traditionally acceptable 30%
level." Northeast Utilities, Holding Co. Act Release No. 25221 (December 21,
1990).
The pro forma ratio reflects the adjustments described on page 51 of the
Joint Proxy Statement/Prospectus filed as Exhibit C-2 hereto:
(a) As required by Accounting Principles Board Opinion 16 (APB 16), a
pro forma adjustment has been recognized by FirstEnergy to adjust the
Cleveland Electric and Toledo Edison nuclear generating units to fair
value. This purchase price allocation is preliminary. For purposes of the
pro forma financial statements, such adjustment has been based upon the
estimated discounted future cash flows expected to be generated by such
nuclear generating units. The actual adjustment will be based on a
combination of estimates of fair value arrived at by reference to
replacement costs, third party appraisals and discounted cash flow
modeling. As a result of discontinuing SFAS 71 for Cleveland Electric and
Toledo Edison nuclear assets and operations, a pro forma adjustment has
been made to reflect the write-off of certain regulatory assets prior to
consummation of the Merger. All other regulatory assets are expected to
continue to be recovered through rates associated with the remainder of
their business.
(b) As required by paragraph 87 of APB 16 (Paragraph 87), a pro forma
adjustment has been made to recognize goodwill in connection with the
Merger. The goodwill represents the excess of the purchase price over
Centerior's net assets after taking into account the adjustments described
in (a) above. If it is ultimately determined that the fair market value of
Centerior's net assets is more or less than their carrying value at the
time of consummation, goodwill would be adjusted accordingly. The purchase
price was based on the imputed value to holders of Centerior Common Stock
using a market value of Ohio Edison Common Stock of $20.125 per share.
(c) Pro forma equity adjustments recognize the elimination of
Centerior's accumulated deficit in retained earnings as of the consummation
of the Merger and the purchase price computed as described in (b) above.
21
<PAGE> 24
(d) A pro forma adjustment has been made to recognize Centerior's
preferred stock of consolidated subsidiaries subject to mandatory
redemption and long-term debt at estimated fair market value.
The unaudited pro forma consolidated financial statements have been
adjusted for the expected rate reductions provided in the rate plan described
above under Item 1.D.3. Since FirstEnergy believes that the rate plan would not
provide for the full recovery of costs associated with Cleveland Electric's and
Toledo Edison's nuclear operations, Cleveland Electric and Toledo Edison will
discontinue the application of SFAS 71 for their nuclear operations. As a
result, Cleveland Electric and Toledo Edison would be required to write off
certain of their regulatory assets, the amounts of which will be determined at
the time of discontinuance; the resulting charge to income would be reflected
prior to consummation of the Merger. FirstEnergy estimates that at March 31,
1997, the write-off would have been approximately $750 million, which is
reflected in the pro forma financial statements. Although the nuclear generating
units are not impaired at Cleveland Electric and Toledo Edison, a purchase price
adjustment, as required by APB 16, to the fair value of the nuclear generating
units, estimated at $1.25 billion, is also reflected in the pro forma financial
statements. If, prior to the Merger, events cause Cleveland Electric and/or
Toledo Edison to conclude they no longer meet the criteria for applying SFAS 71
for the remainder of their business, they would be required to write off their
remaining regulatory assets and measure all other assets for impairment.
Pursuant to Paragraph 87, such effect would not result in any further adjustment
to the pro forma capital structure presented above.
It is anticipated that the FirstEnergy pro forma consolidated common equity
to total capitalization ratio is likely to improve over the next few years as it
is anticipated that, after giving effect to revenue adjustments contemplated by
the regulatory plan approved by the PUCO in January 1997, FirstEnergy's earnings
will exceed dividends in each of the fiscal years ending 1998, 1999 and 2000 and
that debt on a consolidated basis for FirstEnergy would be reduced during that
period by approximately $2.5 billion. Accordingly, assuming that earnings during
the period from 1998 through 2000 are at least equal to dividends paid during
such period and debt is reduced by $2.5 billion, the pro forma consolidated
common equity to total capitalization ratio for FirstEnergy would be at least
40% at December 31, 2000.
b. Protected Interests
As set forth more fully in Item 3.B.2.a. (Efficiencies and Economies), Item
3.B.2.b. (Integrated Public Utility System) and elsewhere in this
Application/Declaration, the Merger is expected to result in substantial
otherwise unavailable cost savings and benefits to the public and to consumers
and investors of FirstEnergy, Ohio Edison and Centerior, and will integrate and
improve the efficiency of the OES, Cleveland Electric and Toledo Edison systems.
Moreover, as noted by the Commission in Entergy Corporation, Holding Co. Act
Release No. 25952 (December 17, 1993), "concerns with respect to investors'
interests have been largely addressed by developments in federal securities laws
and the securities markets themselves." FirstEnergy will be a reporting company
subject to the continuous disclosure requirements of the Securities Exchange Act
of 1934 (the "1934 Act") following consummation of the Merger. The various
reports filed or to be filed by Ohio Edison, Penn Power, Centerior, Cleveland
Electric and Toledo Edison under the 1934 Act contain readily available
information concerning the Merger. The Merger will, therefore, be in the public
interest and the interests of investors and consumers, and will not be
detrimental to the proper functioning of the resulting holding company system.
B. SECTION 10(c)
Section 10(c) of the 1935 Act provides that:
Notwithstanding the provisions of subsection (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 . . . .
22
<PAGE> 25
1. Section 10(c)(1)
Consistent with the standards set forth in Section 10(c)(1) of the Act, the
proposed acquisition of securities will not be unlawful under the provisions of
Section 8 of the Act (inasmuch as Section 8 applies only to REGISTERED holding
companies), or detrimental to the carrying out of the provisions of Section 11
of the 1935 Act, which also applies, by its terms, only to REGISTERED holding
companies, because FirstEnergy believes that following the consummation of the
Merger it will be a public-utility holding company entitled to an exemption
under Section 3(a)(1) of the 1935 Act from all of the provisions of the 1935 Act
(except for Section 9(a)(2) thereof), including provisions relating to
registration.
Section 8 prohibits REGISTERED holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if prohibited by state law. Because none of Ohio
Edison, Penn Power, Cleveland Electric or Toledo Edison is involved in the gas
industry, following the Merger, FirstEnergy will not have acquired, and will not
own or operate a gas utility.
Section 11(a) of the Act requires the Commission to examine the corporate
structure of REGISTERED holding companies to ensure, INTER ALIA, that
unnecessary complexities are eliminated and voting powers are fairly and
equitably distributed. The proposed acquisition of securities meets the
standards of Section 11(a) of the Act. As discussed with respect to the
requirements of Section 10(b)(3) of the Act, SUPRA, FirstEnergy will issue only
common stock, and will directly or indirectly acquire, by operation of law, all
of the Common Stock of Ohio Edison, Penn Power, Cleveland Electric and Toledo
Edison, thus leaving no minority interests outstanding. Penn Power will continue
to be a wholly-owned subsidiary of Ohio Edison. FirstEnergy will indirectly own
20.5% of the OVEC Common Stock. After the Merger, no person will be a holding
company with respect to FirstEnergy.
2. Section 10(c)(2)
As the following discussion will demonstrate, the Merger will serve the
public interest by tending towards the ECONOMICAL and EFFICIENT development of
an integrated public-utility system, as required by Section 10(c)(2) of the Act.
a. Efficiencies and Economies
The direct or indirect acquisition by FirstEnergy of the Common Stock of
Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison will produce
economies and efficiencies more than sufficient to satisfy the standards of
Section 10(c)(2) of the Act. The Merger is expected to generate over $1 billion
in net savings during the first ten years, without considering cost reduction
programs already in place at Centerior and Ohio Edison. Of those savings,
approximately 87% will be expense related, while 13% will be achieved through
reductions in the capital expenditure programs of Ohio Edison and Centerior.
A summary of the savings is as follows:
<TABLE>
<CAPTION>
TOTAL SAVINGS
1998-2007
-------------
SAVINGS CATEGORY ($ MILLIONS)
------------------------------------------------------------------ -------------
<S> <C>
Corporate and Operation Labor Cost................................ $ 643.3
Corporate and Administrative Programs............................. 299.4
Non-fuel Purchasing Economies..................................... 77.8
Electric Production Cost.......................................... 115.9
Fuel Procurement Cost............................................. 44.6
---------
Total Savings................................................... $ 1,181.0
Less: Costs to Achieve............................................ (107.0)
Transaction Costs............................................... (32.0)
---------
Net Savings....................................................... $ 1,042.0
</TABLE>
23
<PAGE> 26
Generally, these net cost savings result from the reduction of duplicative
functions and positions, joint dispatch of generating facilities and related
fuel purchasing, lower capital expenditures and consolidation of various
corporate programs.
In addition, other economies and efficiencies will be realized over time as
coordinated practices become standardized. Furthermore, the improved financial
condition of FirstEnergy should result in more favorable financing costs when
the need to attract capital occurs. These long-term efficiencies and economies
are properly considered in determining if the standards of Section 10(c)(2) of
the Act have been met. See American Electric Power Co., 46 S.E.C. 1299, 1321
(1978) ("[t]he affiliation . . . is intended to be permanent . . . and we should
look to long-term considerations"); See also Centerior, SUPRA, 35 SEC Docket
(CCH) 769 at 775 ("a demonstrated potential for economies will suffice even when
these are not precisely quantifiable").
Savings expected as a result of the Merger dwarf the savings claimed in a
number of recent acquisitions approved by the Commission. See, e.g., Kansas
Power and Light Co., Holding Co. Act Release No. 25465 (Feb. 5, 1992)(expected
savings of $140 million over five years); IES 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).
These economies and efficiencies are described more fully below:
CORPORATE AND OPERATIONS LABOR COST SAVINGS: FirstEnergy estimates that a
net reduction in labor costs of approximately $643.3 million on a nominal dollar
basis can be achieved as a result of the Merger through elimination of
approximately 900 full time equivalent duplicative positions in certain
corporate administrative and technical support functions. FirstEnergy expects
that these labor reductions will be phased in 20% in each of the first five
years following consummation of the Merger. These savings, deriving from
eliminating overlap and duplication in functional performance, can only be
realized by consummating the Merger.
CORPORATE AND ADMINISTRATIVE PROGRAMS SAVINGS: FirstEnergy estimates that a
reduction in non-labor corporate and administrative expenses totalling
approximately $299.4 million on a nominal dollar basis can be achieved through
consolidation of duplicative programs and spreading expenses over greater asset
or customer bases. These include savings related to information systems,
insurance costs, outside services, stockholder services, benefits administration
and other general and administrative overheads. The aggregate cost of these
items for the companies on a stand-alone basis is greater than the cost will be
to the combined new company. An example would be the hiring of one outside
professional service (external auditors, attorneys, consultants, etc.) instead
of two.
NON-FUEL PURCHASING ECONOMIES SAVINGS: These are the savings which will
result from the new, larger company having greater purchasing power and
centralizing purchasing and inventory functions related to the construction,
operation and maintenance of generating plants, service centers, warehouses and
headquarters, as well as standardizing system components. FirstEnergy will be
able to coordinate its purchasing needs, buy in greater quantity, negotiate with
vendors and receive larger discounts. FirstEnergy estimates cost savings of
approximately $77.8 million on a nominal dollar basis from such economies.
ELECTRIC PRODUCTION COST SAVINGS: FirstEnergy estimates that production
cost savings (including fuel savings) of approximately $115.9 million on a
nominal dollar basis will result from the combined operation of the two
companies' generation and transmission systems, including the integrated
economic dispatch of such systems and electric fuel procurement savings. OES,
Cleveland Electric and Toledo Edison currently commit and dispatch their
respective systems on an "economic dispatch" basis; that is, each company
commits and dispatches its generating system to meet the load in such manner as
to minimize production costs. There are differences in incremental cost among
the systems, as well as generation available on each system during most hours.
FirstEnergy will be able to take advantage of these factors by committing and
dispatching the lowest cost generation from OES, Cleveland Electric and Toledo
Edison to serve the total load of FirstEnergy at a cost that is lower than the
combined cost of the stand-alone companies.
24
<PAGE> 27
FUEL PROCUREMENT COST SAVINGS: FirstEnergy estimates savings of
approximately $44.6 million on a nominal dollar basis can be achieved by
reducing combined coal commodity procurement costs, due to larger purchasing
volumes and greater purchasing power.
COSTS TO ACHIEVE AND TRANSACTION COSTS: These consist of merger costs such
as investment bankers' fees, attorney and accountant fees, and severance and
other employee reduction-related costs. Item 2 provides details of some of these
components and their amounts.
ADDITIONAL EXPECTED BENEFITS: In addition to the benefits described above,
there are other benefits which, while presently difficult to quantify, are
nonetheless substantial. These other benefits include maintenance of competitive
rates and services, increased size and stability, diversification of service
territory, coordination of diversification programs, complementary operational
functions and complementary management.
MAINTENANCE OF COMPETITIVE RATES: Cleveland Electric and Toledo Edison's
ratepayers will benefit because the Merger is conditioned upon the approval of
an acceptable retail regulatory plan similar to the retail regulatory plan that
the PUCO adopted for Ohio Edison in 1995. Under the plan filed by FirstEnergy on
behalf of Cleveland Electric and Toledo Edison and approved by the PUCO, their
base rate will be frozen until 2005, followed by an immediate $310 million base
rate reduction. The plan calls for interim residential rate reductions of $3 per
month beginning six months after the Merger, increasing to $4 per month on July
1, 2000, and to $5 per month from July 1, 2001 through the year 2005. Other
parts of the plan include an economic development loan/lease program, an
energy-efficiency program and an earnings cap through 2005 that would enable
customers to share in any additional benefits from the Merger. Furthermore,
FirstEnergy will be more effective in meeting the challenges of the increasingly
competitive environment in the utility industry than either Ohio Edison or
Centerior standing alone due to the economies of scale available to FirstEnergy.
The impact of these economies of scale, which are described in greater detail
below, will help to position FirstEnergy to deal effectively with increased
competition with respect to rates. The Merger, by creating the potential for
increased economies of scale, will create the opportunity for strategic,
financial and operational benefits for customers in the form of more competitive
rates over the long term and for stockholders in the form of greater financial
strength and financial flexibility.
MORE DIVERSE SERVICE TERRITORY: While lying within a single region, the
combined service territory of FirstEnergy will be larger and more diverse than
any of the discrete service territories of OES, on the one hand, and Cleveland
Electric and Toledo Edison on the other. This increased customer and
geographical diversity is expected to reduce the exposure to changes in
economic, competitive or climatic conditions in any given sector of the combined
service territory.
EXPANDED MANAGEMENT RESOURCES: FirstEnergy will be able to draw on a larger
and more diverse mid-and senior-level management pool to lead FirstEnergy
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 FirstEnergy should also benefit from new opportunities in the
expanded organization.
In light of these cost savings and various efficiencies, the requirements
of the economical and efficient development of an integrated utility system of
Section 10(c)(2) of the 1935 Act will clearly be met by the Merger.
b. Integrated Public Utility System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operation to a
single area or region, in one or more states, not so large as to impair
(considering
25
<PAGE> 28
the state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
On the basis of this statutory definition, the Commission has established
four standards that must be met before the Commission will find that an
integrated public-utility system will result from a proposed acquisition of
securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state
of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
ENVIRONMENTAL ACTION, INC. V. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990),
quoting In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958). The Merger
satisfies all four of these requirements. It should be noted that in the 1995
Report, the Division recommended that the Commission "respond realistically to
the changes in the utility industry and interpret more flexibly each piece of
the integration equation." 1995 Report at 71.
CAPABLE OF PHYSICAL INTERCONNECTION. Ohio Edison, Penn Power, Cleveland
Electric and Toledo Edison are "physically interconnected or capable of physical
interconnection" within the meaning of Section 2(a)(29)(A). The electric service
areas of the four utilities are adjacent, with Ohio Edison separating Cleveland
Electric and Toledo Edison. See map of combined OES and Centerior service areas,
attached hereto as Exhibit E-1. The Merger will unite a continuous,
geographically compact system across northern Ohio and western Pennsylvania.
Moreover, the service areas served by OES and Centerior are already highly
interconnected. Ohio Edison and Cleveland Electric have five 345 kV and four 138
kV interconnections, and Ohio Edison and Toledo Edison have one 345 kV and one
138 kV interconnection. Ohio Edison and Toledo Edison also have one 69 kV
interconnection, which is normally operated open. Except for this last
interconnection, all of the interconnections permit two-way transfer capability.
The six 345 kV lines and five 138 kV lines provide adequate capacity for the
three systems to be thoroughly integrated, with sufficient transfer capability
to carry anticipated flows associated with joint dispatch.
In view of the proximity of OES, Cleveland Electric and Toledo Edison and
their points of interconnection, the facts presented clearly support a finding
that Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison are
"physically interconnected or capable of physical interconnection" within the
meaning of Section 2(a)(29)(A) of the Act.
SINGLE INTERCONNECTED AND COORDINATED SYSTEM. OES, Cleveland Electric and
Toledo Edison could under normal conditions be operated as a single
interconnected, integrated, and coordinated system, whose operations would be
confined to a single area and region. At present, the systems of Cleveland
Electric and Toledo Edison are not physically integrated because Ohio Edison's
service area physically separates them. The combined FirstEnergy system will be
centrally and economically dispatched and generating units committed as a single
integrated system. Upon consummation of the Merger, Ohio Edison, Penn Power,
Cleveland Electric and Toledo Edison will enter into a coordination agreement
which will be filed with and approved by FERC. The Coordination Agreement will
provide for joint dispatch of the combined generating resources of Ohio Edison,
Penn Power, Cleveland Electric and Toledo Edison, and will contain the terms,
conditions and payment provisions associated with energy exchanges, resource
sharing and other transactions among the companies. Pursuant to the Coordination
Agreement, a central control center will be established to economically dispatch
the combined system and arrange off-system purchases and sales.
26
<PAGE> 29
For integration purposes under the 1935 Act, what is relevant is that
FirstEnergy will have sufficient internal transmission capacity fully to
accommodate the anticipated transfers between Ohio Edison, Penn Power, Cleveland
Electric and Toledo Edison, and will obtain transmission service from
neighboring utilities to accommodate any transfers that might exceed the
capabilities of its system.
Also, Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison are all
members of the East Central Area Reliability Coordination Agreement. Thus,
FirstEnergy will not be subject to conflicting operational requirements across
discrete reliability regions.
SINGLE AREA OR REGION. As Exhibit E-1 clearly shows, the "single integrated
system" of OES, Cleveland Electric and Toledo Edison would be confined in its
operations to a single area or region. Ohio Edison is adjacent to (and currently
separates) Cleveland Electric and Toledo Edison, all of which carry on their
businesses substantially in the State of Ohio. Penn Power's service area abuts
at the Ohio-Pennsylvania border with the Ohio Edison service area. In the 1995
Report, the Division has stated that the evaluation of the "single area or
region" portion of the integration requirement "should be made. . . . in light
of the effect of technological advances on the ability to transmit electric
energy economically over long distance, and other developments in the industry,
such as brokers and marketers, that affect the concept of geographic
integration." 1995 Report at 72-74. The 1995 Report also recommends primacy be
given to "demonstrated economies and efficiencies to satisfy the integration
requirements." 1995 Report at 73. As set forth in Item 3.B.2.a, the Merger will
result in economies and efficiencies for Ohio Edison, Penn Power, Cleveland
Electric and Toledo Edison and, in turn, their customers.
LOCALIZED MANAGEMENT, EFFICIENT OPERATION AND EFFECTIVE
REGULATION. Finally, the FirstEnergy system will not be so large as to impair
the advantages of localized management, efficient operations and the
effectiveness of regulation. The Commission's past decisions on "localized
management" show that the Merger fully preserves the advantages of localized
management. In such cases, the Commission has evaluated localized management in
terms of: (i) responsiveness to local needs, see American Electric Power Co.,
Holding Co. Act Release No. 20633 (July 21, 1978)(advantages of localized
management evaluated in terms of whether an enlarged system could be "responsive
to local needs"); General Public Utilities Corp., 37 S.E.C. 28, 36
(1956)(localized management evaluated in terms of "local problems and matters
involving relations with consumers"); (ii) whether management and directors were
drawn from local utilities, see Centerior Energy Corp., Holding Co. Act Release
No. 24073 (April 29, 1986)(advantages of localized management would not be
compromised by the affiliation of two electric utilities under a new holding
company because the new holding company's "management [would be] drawn from the
present management" of the two utilities); (iii) the preservation of corporate
identities, See Northeast Utilities, Holding Co. Act Release No. 25221
(December 21, 1990)(utilities "will be maintained as separate New Hampshire
corporations . . . [t]herefore the advantages of localized management will be
preserved"); Columbia Gas System, Inc., Holding Co. Act Release No. 24599
(March 15, 1988)(benefits of local management maintained where the utility to
be added would be a separate subsidiary); and (iv) the ease of communications,
see American Electric Power Co., Holding Co. Act Release No. 20633 (July 21,
1978)(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 communications and transportation").
The Merger satisfies all of these factors. FirstEnergy will be
headquartered in Akron, Ohio, the present headquarters for Ohio Edison, which is
less than 25 miles from Centerior's present headquarters. As to Ohio Edison,
there will be no change in the locale of management. FirstEnergy's management
will be drawn from the present management of Ohio Edison and Centerior, so the
advantages of localized management will not be compromised. The Merger will
preserve (and enhance) all the benefits of localized management OES, Cleveland
Electric and Toledo Edison currently enjoy while simultaneously allowing for the
efficiencies and economies that will derive from their strategic alliance.
Furthermore, as described earlier, the system will facilitate efficient
operation.
The effectiveness of regulation will not be diminished; Ohio Edison,
Cleveland Electric and Toledo Edison will remain subject to regulation by the
PUCO, and Penn Power will remain subject to regulation by
27
<PAGE> 30
the PPUC. Moreover, the respective interstate activities of Ohio Edison, Penn
Power, Cleveland Electric and Toledo Edison will continue to be regulated by the
FERC.
C. SECTION 10(f)
Section 10(f) provides that
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect 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.
Ohio Edison, Cleveland Electric and Toledo Edison are currently subject to
the jurisdiction of the PUCO. FirstEnergy has been advised by counsel that the
approval of the Merger by the PUCO is not required. The Merger Agreement is
conditioned upon, among other matters, the PUCO's approval of a regulatory plan
for Cleveland Electric and Toledo Edison that is mutually acceptable to Ohio
Edison and Centerior. The regulatory plan approved by the PUCO on January 30,
1997 satisfies that condition. The PUCO has adopted a resolution stating that it
intends to intervene in proceedings before the FERC and to coordinate its
consideration of any filings made by Ohio Edison, Cleveland Electric and Toledo
Edison with the schedule of such FERC proceedings. SEE Item 4.B.
Penn Power is currently subject to the jurisdiction of the PPUC. Penn Power
believes that, under Pennsylvania law, the approval of the PPUC is not required
for consummation of the Merger. The PPUC has adopted a policy essentially
stating that whenever a change in control of a Pennsylvania utility occurs,
irrespective of Pennsylvania law, it will assume jurisdiction over the
transaction. Penn Power believes no change of control will occur as a result of
the Merger since (i) Penn Power will continue to be a wholly-owned subsidiary of
Ohio Edison, (ii) the Ohio Edison Board designates the FirstEnergy Board and
(iii) approximately two-thirds of FirstEnergy's common stock immediately after
consummation of the Merger will be owned by former Ohio Edison stockholders. On
November 27, 1996 Penn Power filed an application for a declaratory order of the
PPUC that it does not have jurisdiction over the Merger. On the same date Penn
Power filed an application with the PPUC seeking approval of the Merger if the
PPUC elects to assert jurisdiction. On February 13, 1997 the PPUC issued an
order asserting jurisdiction over the Merger and granting its approval.
ITEM 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that the
applicants have obtained or expect to obtain in connection with the Merger.
A. ANTITRUST
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Merger) may not be consummated until certain
information has been submitted to the DOJ and FTC and specified HSR Act waiting
period requirements have been satisfied. The expiration or termination of the
HSR Act waiting period would not preclude the DOJ or the FTC from challenging
the Merger on antitrust grounds. If the Merger is not consummated within 12
months after the expiration or termination of the HSR Act waiting period, Ohio
Edison and Centerior would be required to submit new premerger notifications to
the DOJ and the FTC and a new HSR Act waiting period would have to expire or be
terminated before the Merger could be consummated. Ohio Edison, Penn Power,
Toledo Edison and Cleveland Electric have filed a Notification and Report Form
for Certain Mergers and Acquisitions Notification with the FTC and the Antitrust
Division of the United States DOJ under the HSR Act and the applicable waiting
period expired on June 4, 1997.
28
<PAGE> 31
B. FEDERAL POWER ACT
Section 203 of the Federal Power Act of 1935, as amended (the "Federal
Power Act") provides that no public utility shall sell or otherwise dispose of
its jurisdictional facilities or, directly or indirectly, merge or consolidate
such facilities with those of any other person or acquire any security of any
other public utility without first having obtained authorization from the FERC.
The approval of the FERC is required in order to consummate the Merger. Under
Section 203 of the Federal Power Act, the FERC will approve a merger if it finds
the merger to be "consistent with the public interest." In undertaking its
review of a utility merger transaction, the FERC generally has evaluated (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. However, the FERC has indicated in its
new merger policy statement issued on December 18, 1996 that rather than
utilizing the six-factor test described above, it will instead focus only on the
following three factors: (i) the effect on competition; (ii) the effect on
rates; and (iii) the effect on federal regulation. The new policy statement,
which is effective immediately, states the FERC's intention to address the
specific application of the policy to pending cases on a case-by-case basis.
Ohio Edison and Centerior have filed, on November 8, 1996, an application with
the FERC requesting that the FERC approve the Merger and a joint dispatch
agreement under Sections 203 and 205 of the Federal Power Act, and a separate
application pursuant to Section 205 for approval of an open access transmission
tariff offering transmission services over the combined companies' system at a
single transmission rate contingent upon the FERC's approval of the Merger. An
Order conditionally approving the merger was issued by the FERC on October 29,
1997; such conditions were formally accepted by the applicants in a notice of
acceptance on October 30, 1997.
C. ATOMIC ENERGY ACT
Ohio Edison and Penn Power each holds an NRC operating license authorizing
it to hold ownership and leasehold interests in the Beaver Valley Unit 1 nuclear
unit and (along with OES Nuclear Inc., a wholly-owned subsidiary of Ohio Edison)
the Perry Unit 1 nuclear unit. Ohio Edison also holds an NRC operating license
authorizing it to hold ownership and leasehold interests in Beaver Valley Unit
2. Each of Cleveland Electric and Toledo Edison holds an NRC operating license
authorizing it to hold ownership or leasehold interests in Perry Unit 1, Beaver
Valley Unit 2 and the Davis-Besse nuclear unit (and, in the case of Cleveland
Electric, to operate Perry Unit 1 and, in the case of Toledo Edison, to operate
Davis-Besse). The Davis-Besse facility also includes a generally licensed
independent spent fuel storage installation. The Atomic Energy Act provides that
no NRC license may be transferred, assigned, or in any manner disposed of,
directly or indirectly, through transfer of control of any license to any person
unless the NRC finds that the transfer is in accordance with the Atomic Energy
Act and consents to the transfer. Ohio Edison and Centerior have received NRC
approval of the transfer of control of their nuclear facility operating licenses
to FirstEnergy pursuant to the Atomic Energy Act.
D. STATE PUBLIC UTILITY REGULATION
While FirstEnergy has been advised by counsel that approval of the Merger
by the PUCO is not required, the Merger is conditional upon the PUCO's approval
of an acceptable retail regulatory plan for Cleveland Electric and Toledo
Edison. An application for such a plan was filed with the PUCO on November 15,
1996 and approved by order of the PUCO on January 30, 1997. Penn Power sought a
declaratory order of the PPUC that it does not have jurisdiction over the
Merger. Penn Power filed, in the alternative, an application with the PPUC
seeking approval of the Merger. PPUC approved the Merger by Order on February
13, 1997.
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.
29
<PAGE> 32
E. OTHER
FirstEnergy may file other applications for, or request, certain other
consents or authorizations by federal, state or municipal agencies in connection
with the issuance of securities, system operations and franchises or any other
activities subject to regulatory approval.
ITEM 5. PROCEDURE
The Applicant requests that there be no 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective. The Applicant submits that a recommended decision by a hearing or
other responsible officer of the Commission is not needed with respect to the
proposed transaction and that the Division may assist with the preparation of
the Commission's decision and/or order in this matter unless such Division
opposes the matters covered hereby.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
- --------
<C> <S>
A-1: Form of Amended Articles of Incorporation of FirstEnergy.
A-2: Amended Articles of Incorporation, effective June 21, 1994, constituting the
Articles of Incorporation of Ohio Edison (Incorporated by reference to the Form 10-K
Annual Report of Ohio Edison for the year ended December 31, 1994, File No. 1-2578).
A-3: Amended Articles of Incorporation, effective April 29, 1986, constituting the
Articles of Incorporation of Centerior (Incorporated by reference to a Registration
Statement filed with the Commission pursuant to the 1933 Act, File No. 33-4790).
A-4: Form of Articles of Incorporation of Ohio Edison Acquisition Corp.
A-5: Form of Articles of Incorporation of Centerior Acquisition Corp.
B-1: Merger Agreement between Ohio Edison and Centerior dated as of September 13, 1996
(with exhibits A and B thereto being incorporated as Exhibits B-2 and B-3 to this
Application/Declaration).
B-2: Merger Agreement by and among Ohio Edison, FirstEnergy and Ohio Edison Acquisition
Corp.
B-3: Merger Agreement by and among Centerior Acquisition Corp., FirstEnergy and
Centerior.
C-1: Registration Statement on Form S-4 (including all exhibits thereto) (Incorporated by
reference to the Registration Statement filed with the Commission on February 3,
1997 pursuant to the 1933 Act, File No. 333-21011).
C-2: Prospectus/Proxy Statement (Included in Registration Statement on Form S-4 filed as
C-1 herein).
D-1: Relevant Sections of Ohio Code.
D-2: Joint Application of Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison
to FERC.*
D-3: Order of FERC issued October 29, 1997.
D-4: Application for approval of retail regulatory plan by the PUCO.
D-5: Order of the PUCO.
D-6: Application for declaratory order of the PPUC regarding jurisdiction.
D-7: Application for approval of the Merger by the PPUC.
D-8: Order of the PPUC.
D-9: Notice of applicant's acceptance of conditions in order of FERC.
E-1: Map showing combined Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison
service areas.*
F-1: Preliminary Opinion of Counsel.
F-2: Past Tense Opinion of Counsel (to be filed with certificate of notification).
F-3: Opinion of counsel re: Ohio jurisdiction.
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
- --------
<C> <S>
G-1: Centerior Form U-3A-2, "Statement by Holding Company Claiming Exemption under Rule
U-2 from the Provisions of the Public Utility Holding Company Act of 1935," dated
February 28, 1997 (Incorporated by reference to such filing, File No. 69-315).
G-2: Form 10-K Annual Report of Ohio Edison for the year ended December 31, 1996
(Incorporated by reference to such filing, File No. 1-2578).
G-3: Form 10-K Annual Report of Centerior for the year ended December 31, 1996
(Incorporated by reference to such filing, File No. 1-9130).
G-4: Form 10-K Annual Report of Penn Power for the year ended December 31, 1996
(Incorporated by reference to such filing, File No. 1-3491).
G-5: Form 10-K Annual Report of Cleveland Electric for the year ended December 31, 1996
(Incorporated by reference to such filing, File No. 1-2323).
G-6: Form 10-K Annual Report of Toledo Edison for the year ended December 31, 1996
(Incorporated by reference to such filing, File No. 1-3583).
G-7: Form 10-Q Quarterly Report of Ohio Edison for the Quarter ended September 30, 1996
(Incorporated by reference to such filing, File No. 1-2578).
G-8: Form 10-Q Quarterly Report of Centerior for the Quarter ended September 30, 1996
(Incorporated by reference to such filing, File No. 1-9130).
G-9: Form 10-Q Quarterly Report of Penn Power for the Quarter ended September 30, 1996
(Incorporated by reference to such filing, File No. 1-3491).
G-10: Form 10-Q Quarterly Report of Cleveland Electric for the Quarter ended September 30,
1996 (Incorporated by reference to such filing, File No. 1-2323).
G-11: Form 10-Q Quarterly Report of Toledo Edison for the Quarter ended September 30, 1996
(Incorporated by reference to such filing, File No. 1-3583).
G-12: Form 10-Q Quarterly Report of Ohio Edison for the Quarter ended March 31, 1997
(Incorporated by reference to such filing, File No. 1-2578).
G-13: Form 10-Q Quarterly Report of Centerior for the Quarter ended March 31, 1997
(Incorporated by reference to such filing, File No. 1-9130).
G-14: Form 10-Q Quarterly Report of Penn Power for the Quarter ended March 31, 1997
(Incorporated by reference to such filing, File No. 1-3491).
G-15: Form 10-Q Quarterly Report of Cleveland Electric for the Quarter ended March 31,
1997 (Incorporated by reference to such filing, File No. 1-2323).
G-16: Form 10-Q Quarterly Report of Toledo Edison for the Quarter ended March 31, 1997
(Incorporated by reference to such filing, File No. 1-3583).
G-17: Form 10-Q Quarterly Report of Ohio Edison for the Quarter ended June 30, 1997
(Incorporated by reference to such filing, File No. 1-2578).
G-18: Form 10-Q Quarterly Report of Centerior for the Quarter ended June 30, 1997
(Incorporated by reference to such filing, File No. 1-9130).
G-19: Form 10-Q Quarterly Report of Penn Power for the Quarter ended June 30, 1997
(Incorporated by reference to such filing, File No. 1-3491).
G-20: Form 10-Q Quarterly Report of Cleveland Electric for the Quarter ended June 30, 1997
(Incorporated by reference to such filing, File No. 1-2323).
G-21: Form 10-Q Quarterly Report of Toledo Edison for the Quarter ended June 30, 1997
(Incorporated by reference to such filing, File No. 1-3583).
H-1: McDonald & Company Securities Inc. Fairness Opinion.
H-2: Barr Devlin & Co. Incorporated Fairness Opinion.
I-1: Form of Notice.
J-1: Financial Data Schedule of FirstEnergy.
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
- --------
<C> <S>
J-2: Financial Data Schedule of Ohio Edison.
J-3: Financial Data Schedule of Centerior.
</TABLE>
- ---------------
* Filed in paper format under Form SE.
** To be filed by amendment.
B. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
FS-1: FirstEnergy Unaudited Pro Forma Combined Condensed Balance Sheet as of September 30,
1996 and Unaudited Pro Forma Combined Condensed Statement of Income for the year
ended December 31, 1995 and the nine moths ended September 30, 1996.
FS-2 Ohio Edison Consolidated Balance Sheet as of December 31, 1996 (see Annual Report of
Ohio Edison on Form 10-K for the year ended December 31, 1996 (Exhibit G-2 hereto)).
FS-3: Ohio Edison Consolidated Statements of Income for its last three fiscal years (see
Annual Report of Ohio Edison on Form 10-K for the year ended December 31, 1996
(Exhibit G-2 hereto)).
FS-4: Centerior Consolidated Balance Sheet as of December 31, 1996 (see Annual Report of
Ohio Edison on form 10-K for the year ended December 31, 1996 (Exhibit G-3 hereto)).
FS-5: Centerior Consolidated Statements of Income for its last three fiscal years (see
Annual Report of Ohio Edison on Form 10-K for the year ended December 31, 1995
(Exhibit G-3 hereto)).
FS-6: Penn Power Balance Sheet as of December 31, 1996 (see Annual Report of Penn Power on
Form 10-K for the year ended December 31, 1996 (Exhibit G-4 hereto)).
FS-7: Penn Power Statements of Income for its last three fiscal years (see Annual Report of
Penn Power on Form 10-K for the year ended December 31, 1996 (Exhibit G-4 hereto)).
FS-8: Cleveland Electric Consolidated Balance Sheet as of December 31, 1996 (see Annual
Report of Cleveland Electric on Form 10-K for the year ended December 31, 1996
(Exhibit G-5 hereto)).
FS-9: Cleveland Electric Consolidated Statements of Income for its last three fiscal years
(see Annual Report of Cleveland Electric on Form 10-K for the year ended December 31,
1996 (Exhibit G-5 hereto)).
FS-10: Toledo Edison Balance Sheet as of December 31, 1996 (see Annual Report of Toledo
Edison on Form 10-K for the year ended December 31, 1996 (Exhibit G-6 hereto)).
FS-11: Toledo Edison Statements of Income for its last three fiscal years (see Annual Report
of Toledo Edison on Form 10-K for the year ended December 31, 1996 (Exhibit G-6
hereto)).
</TABLE>
There have been no material changes, not in the ordinary course of
business, to the aforementioned balance sheets from September 30, 1996 to the
date of this Application/Declaration.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Merger neither involves a "major federal action" nor "significantly
affects the quality of the human environment" as those terms are used in Section
102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq.
The only federal actions related to the Merger pertain to the expiration of the
applicable waiting period under the HSR Act the Commission's declaration of the
effectiveness of the Registration Statement on Form S-4, the approvals and
actions described under Item 4 and Commission approval of this Application.
Consummation of the Merger will not result in changes in the operations of
FirstEnergy, Ohio Edison or Centerior that would have any impact on the
environment. No federal agency is preparing an environmental impact statement
with respect to this matter.
32
<PAGE> 35
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Amendment No. 3 to the
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 4, 1997
FIRSTENERGY CORP.
By: /s/ WILLARD R. HOLLAND
------------------------------------
Willard R. Holland
President
33
<PAGE> 1
Exhibit D-3
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, and William L. Massey.
Ohio Edison Company, Pennsylvania )
Power Company, Cleveland ) Docket No. EC97-5-000
Electric Illuminating Company )
and Toledo Edison Company )
ORDER CONDITIONALLY AUTHORIZING PROPOSED MERGER
(Issued October 29, 1997)
I. Summary
-------
This order conditionally approves the merger of Ohio Edison Company (Ohio
Edison), Pennsylvania Power Company (Penn Power), Cleveland Electric
Illuminating Company (CEI) and Toledo Edison Company (Toledo Edison)
(collectively, Applicants). 1/ The Commission finds that Applicants have largely
complied with the Commission's earlier order in addressing the Commission's
concerns regarding the analysis of potential adverse competitive effects of the
merger. Applicants have also committed to several mitigation measures to address
the potential adverse competitive effects of the proposed merger.
Applicants' mitigation measures comprise a set of commitments to the
municipal system customers potentially affected by the proposed merger. The
commitments generally involve access to, availability of and pricing of
transmission capacity internal to the FirstEnergy system. However, the
Commission finds that additional commitments must be made by the Applicants to
adequately ameliorate the competitive concerns posed by the proposed merger,
particularly those generation market power concerns stemming from the strategic
planning and operation of the FirstEnergy transmission system.
In reaching this conclusion, the Commission notes that this merger has
raised substantial questions regarding access to and availability of
transmission capacity that, post-merger, will be internal to the FirstEnergy
system. Applicants proposed mitigation addresses these issues, in part. The
mitigation will
- -----------------
1/ The Commission's July 16, 1997 order contains a detailed description of
Applicants. SEE OHIO EDISON COMPANY, ET AL., 80 FERC Paragraph 61,039 at
61,094-95 (1997)(OHIO EDISON).
<PAGE> 2
Docket No. EC97-5-000 -2-
allocate internal transmission capacity to Applicants' native load customers and
to the municipal system customers potentially affected by the proposed merger.
This reallocation of Applicants' transmission system, in conjunction with the
altered usage of internal transmission that may result from the joint dispatch
of the system, creates uncertainty about how Applicants will, in the future,
ensure an open and competitive market within and into FirstEnergy's service
area.
Because the facts of this case are not completely clear, we are left with
some concerns that Applicants could plan and operate their transmission system
in such a way as to potentially exercise the substantial generation market
power indicated by the relatively high levels of merger-induced market
concentration. Our concerns in this regard can be addressed by greater
operational separation of transmission and generation. As we have noted in
WISCONSIN ELECTRIC POWER COMPANY, ET AL., Opinion No. 413, 79 FERC Paragraph
61,158 at 61,702, 61,709 (1997), and the Merger Policy Statement, INFRA note 2
at 30,120, ISOs hold some promise in mitigating certain sources of market
power. In particular, a properly formed regional ISO could attract new entrants
into the market and could facilitate the implementation of efficient
transmission pricing, thereby expanding the effective scope of the geographic
market. 2/ Negotiations relating to the formation of a Midwest ISO are
currently taking place and Centerior is participating in that process. In light
of the competitive uncertainties and the current reorganization of regional
transmission operations in the Midwest, we expect Applicants to participate in
these discussions and to participate in this ISO, assuming we ultimately
approve the ISO, as a way to address our concerns. Alternatively, Applicants
could propose participating in another appropriate regional ISO.
Finally, if Applicants fail to participate in an acceptable ISO process or if
it is demonstrated to the Commission through its complaint process that
FirstEnergy is operating its transmission system in a manner that unduly
discriminates against third parties, the Commission will not hesitate to impose
additional conditions under its section 203(b) authority. 3/
- ----------------
2/ See Inquiry Concerning the Commission's Merger Policy under the Federal
Power Act: Policy Statement, Order No. 592, FERC Stats. & Regs. Paragraph
31,044 at 30,121, 30,137 (1996), RECONSIDERATION DENIED, Order No. 592-A,
79 FERC Paragraph 61,321 (1997)(Merger Policy Statement).
3/ 16 U.S.C. Section 824b(b) (1994).
<PAGE> 3
Docket No. EC97-5-000 -3-
The Commission finds that Applicants' commitments regarding ratepayer
protection and intracorporate transactions provide reasonable assurance that the
proposed merger will not adversely affect rates or regulation. Accordingly, the
Commission finds that the proposed merger, as conditioned by the mitigation
measures described in this order, is consistent with the public interest and
authorizes the proposed merger conditioned upon Applicants' accepting these
mitigation measures.
II. Introduction
------------
In our July 16 order, we addressed Applicants' joint merger application. 4/
Following review of Applicants' competitive analysis, we gave Applicants two
options on how to address competitive issues identified in the July 16th order.
Under the first option, Applicants would proceed directly to a trial-type
hearing. Under the second option, Applicants would propose measures to remedy
potential market power problems. (OHIO EDISON, 80 FERC at 61,107).
To address the effect of the proposed merger on rates, we directed
Applicants to attempt to negotiate an adequate ratepayer protection mechanism
with the remaining wholesale customers (the Pennsylvania Municipals) 5/ that had
not already reached satisfactory arrangements with Applicants (Id. at 61,098,
61,113). To address the effect of the proposed merger on federal regulation, we
directed Applicants to inform us whether they elect to abide by our policy on
intra-corporate transactions within a newly-formed registered holding company.
(ID. at 61,098-99, 61,113).
We stated that, as a condition of approval of the proposed merger,
Applicants must comply with any commitments they have offered in this
proceeding. (OHIO EDISON, 80 FERC at 61,094 and n.2, 61,107-08, 61,112-13).
On July 30, 1997, Applicants informed us that they elected to accept the
second of the two options that we offered with
- ---------------
4/ We also accepted for filing and suspended, subject to refund, and set for
hearing, Applicants' proposed open access tariff filed in Docket No.
ER97-412-000 and Applicants' joint dispatch agreement filed in Docket No.
ER97-423-000. These agreements are at issue in a proceeding now pending
before an administrative law judge. Our conditional authorization of the
merger is without prejudice to the outcome of that proceeding.
5/ The Pennsylvania Municipals are the Boroughs of Ellwood City, Grove City
and Zelienople, Pennsylvania.
<PAGE> 4
Docket No. EC97-5-000 -4-
respect to competition issues, and would tender mitigation measures to resolve
the issues surrounding the effect of their proposed merger on competition. They
also stated that they would abide by our policy on intracorporate transactions
within a newly-formed registered holding company.
On August 8, 1997, Applicants filed a revised Appendix A screen analysis
(revised Appendix A analysis) and proposed certain mitigation measures
(collectively, compliance filing).
On August 15, 1997, Applicants notified us that they were continuing to
negotiate an adequate ratepayer mechanism with the Pennsylvania Municipals.
III. Notice and responses
--------------------
On August 28, 1997, notice of Applicants' compliance filing was published
in the Federal Register (62 Fed. Reg. 45,639 (1997)), with comments due on or
before September 22, 1997. On September 22, 1997 Enron Power Marketing, Inc.
(Enron) filed a motion to intervene and protest. 6/
On September 22, 1997: (a) the Pennsylvania Municipals; (b) Industrial
Energy Users-Ohio (IEU-Ohio); (c) the Empowerment Center of Greater Cleveland,
and (d) Industrial Consumers 7/ filed comments on Applicants' compliance filing.
On September 23, 1993, AMP-Ohio filed comments in support of Applicants'
compliance filing, together with a request for leave to file one day late.
On October 6, 1997, Applicants filed an answer (October 6 Answer) to
certain comments on Applicants' compliance filing, a modification and
clarification of their proposed mitigation measures and an opposition to Enron's
motion to intervene.
On October 7, 1997, Ohio Consumers' Counsel filed comments on Applicants'
compliance filing.
- -----------------
6/ On September 9, 1997, the Potomac Electric Power Company (PEPCO) filed, but
later withdrew, a motion to intervene in this proceeding.
7/ Industrial Consumers are the Electricity Consumers Resource Council, the
American Iron and Steel Institute, the Chemical Manufacturers Association
and the American Forest and Paper Association.
<PAGE> 5
Docket No. EC97-5-000 -5-
On October 7, 1997, Edison Electric Institute filed a motion to intervene
in this proceeding for the limited purpose of responding to Industrial
Consumers' comments on retail competition.
On October 14, 1997, IEU-Ohio filed an answer to Applicants' answer.
IV. Comments on Applicants' compliance filing
----------------------------------------
Ohio Consumers Counsel, AMP-Ohio and the Empowerment Center of Greater
Cleveland support Applicants' compliance filing and request that the Commission
approve the merger. Other commentors criticize Applicants' compliance filing on
the following grounds:
Commentors claim that the proposed mitigation measures represent little
more than what is required under Order Nos. 888 and 888-A, 8/ and offer rights
and services only to those opposing the merger (in exchange for withdrawal of
their opposition).
Among other things, commentors also argue that Applicants' compliance
filing is unresponsive because it does not include divestiture or establishment
of an ISO as long-term mitigation measures. Commentors state that unless
Applicants include one or both of these measures as part of their long-term
mitigation measures, Applicants will continue to maintain generation and
transmission dominance in the region. (IEU-Ohio at 27, Industrial Consumers at
2, 9-10, Enron at 5-6.)
Commentors complain that Applicants' proposal to grant municipal systems
and their third-party suppliers equivalent rights to already scarce internal
interface capacity further exacerbates competitive concerns, because it
virtually ensures that no interface capacity will be available to third-party
competitors. 9/ (IEU-Ohio, Appendix A at 5-6, Enron at 5-6,
- -------------------
8/ SEE Promoting Wholesale Competition Through Open Access Non- discriminatory
Transmission Services by Public Utilities; Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed. Reg.
21,540 (1996), FERC Stats. & Regs. Paragraph 31,036 (1996), ORDER ON
REH'G, Order No. 888-A, 62 Fed. Reg. 12,274 (1997), FERC Stats. & Regs.
Paragraph 31,048 (1997), REH'G PENDING (Open Access Rule).
9/ The internal interface includes all points of interconnection between the
Ohio Edison System and the Centerior companies' system.
<PAGE> 6
Docket No. EC97-5-000 -6-
Pennsylvania Municipals Appendix A at 5-6.) Commentors also challenge
Applicants' claim that reconductoring the East Akron-Goodyear transmission line
will significantly increase the simultaneous import capability into the
Centerior control area. (IEU-Ohio, Appendix B at 4-5.)
Pennsylvania Municipals oppose Applicants' contingency, priority and price
cap commitment because: (a) it applies to only short-term capacity and energy
supplies (less than one year), while Pennsylvania Municipals are seeking
long-term supplies (one-year or more); and (b) when FirstEnergy provides
electric energy to a municipal system during a constraint on FirstEnergy's
system, the municipal system may be liable for two demand charges, i.e., the
demand charge of the alternate supplier (whose electric energy it sought to
purchase), and FirstEnergy's demand charge. Pennsylvania Municipals also ask
that the Commission direct Applicants to provide additional transmission
capacity and dynamic scheduling for all municipal systems upon request.
(Pennsylvania Municipals at 7-10).
V. Applicants' answer
------------------
In their answer, Applicants expand on and clarify their earlier commitments
in response to the criticisms raised by the commentors. (Because the answer
provides a comprehensive list of all the proposed mitigation and commitments
offered, our evaluation is based on Applicants' answer.)
VI. Applicants' revised Appendix A analysis
---------------------------------------
In our July 16 order, we criticized Applicants' original Appendix A
analysis screen in four respects. Applicants' revised Appendix A analysis screen
is generally responsive to those criticisms. Our concerns, and Applicants'
response to those concerns, are as follows:
A. Internal transmission constraints
---------------------------------
In their original Appendix A analysis, Applicants allocated internal
transfer capacity between Ohio Edison Company and Centerior (the Ohio
Edison-Centerior interface) to various suppliers that have economic capacity
instead of solely to Applicants' native load. We stated that this assumption was
inappropriate, unless Applicants could show that: (1) the merged company did not
have adequate economic capacity to fully use the
<PAGE> 7
Docket No. EC97-5-000 -6-
interface; or (2) Applicants committed that the portion of capability allocated
to third parties will be available to them; or (3) alternative suppliers have
purchased transmission capability on a long-term basis (OHIO EDISON, 80 FERC at
61,103).
In lieu of making any adjustments to their Appendix A analysis, Applicants,
as noted below, address this concern by proposing that all
transmission-dependent Municipal Systems interconnected with the FirstEnergy
system will be entitled to use the Ohio Edison-Centerior interface as if the
municipal systems were a part of FirstEnergy's native load, as defined in
FirstEnergy's open access tariff. This entitlement grants the municipal systems
the same reservation and curtailment priority that FirstEnergy will accord its
own native load on the Ohio Edison-Centerior companies interface. 10/
B. Treatment of small markets
--------------------------
In their original Appendix A analysis, Applicants limited the capacity of
each supplier to the Municipal System markets to the internal demand of those
markets, instead of using the supplies sellers can physically and economically
deliver to those markets. Applicants' revised Appendix A analysis removes the
limits on supplies into the Municipal System markets.
C. Non-simultaneous transmission limits
------------------------------------
In their original Appendix A analysis, Applicants added together the
non-simultaneous transfer capabilities for imports from various sellers into
individual control areas. In our July 16 order, we expressed our concern that
adding together non-simultaneous transfer capabilities overstates the import
capability into individual control areas and the amount of capacity that can be
supplied by alternative sellers. (OHIO EDISON, 80 FERC at 61,104-05). In their
revised Appendix A analysis, Applicants estimate simultaneous limits for imports
into individual control areas included in Applicants' relevant market analysis.
- ---------------
10/ Proposed Mitigation Measures, filed August 8, 1997 (Mitigation Measures)
Attachment A at 3. The five relevant Municipal System markets (covering 41
municipal systems, either as individual systems or in groups) are:
Cleveland Public Power (CPP), North-East AMP-Ohio Service Group (AMP-Ohio
Northeast), North-West AMP-Ohio Service Group (AMP-Ohio Northwest),
Painesville Electrical Division, Ohio (Painesville) and the Pennsylvania
Municipals. ID. at 2 n.1.
<PAGE> 8
Docket No. EC97-5-000 -8-
D. Estimated prices for the delivered price test
---------------------------------------------
In their original Appendix A analysis, Applicants used a generation
stacking technique to determine market prices. In our July 16 order, we noted
that this approach resulted in significant, unexplained differences in delivered
prices between control areas and recommended that Applicants instead use system
lambda data to determine market prices. (OHIO EDISON, 80 FERC at 61,105).
Applicants' revised analysis relies on system lambda data as proxies for market
prices.
VII. Discussion
----------
A. Preliminary matters
-------------------
1. Late-filed interventions and comments
-------------------------------------
Notwithstanding Applicants' opposition, we will grant Enron's motion to
intervene. However, Enron must take the record and the procedural schedule as it
finds them. We thus will only consider Enron's comments to the extent that they
respond to Applicants' revised Appendix A analysis and proposed mitigation
measures, I.E., matters pending on compliance with our earlier order. 11/ We
find good cause to grant AMP-Ohio's request to file its comments one day late.
This delay neither impedes the progress of this proceeding nor casts an undue
burden on any party.
2. Answers
-------
Although our July 16 order did not contemplate answers to comments, we will
accept the answer of Ohio Consumer Counsel and certain portions of Applicants'
answer. We find that this material helps us in our analysis of the competitive
problems that the proposed merger presents. As indicated below, however, we will
reject a portion of Applicants' answer as beyond the scope of our earlier order.
We will also reject IEU-Ohio's answer to Applicants' answer. Our rules do not
permit answers to answers (as distinguished from answers to comments) (18 C.F.R.
ss. 385.213(a)(2) (1997)) and we find nothing of substance in IEU-Ohio's answer
that at all helps us in our deliberations.
- --------------------
11/ Enron waited until the compliance stage of this proceeding to intervene.
Only by limiting its participation to the matters pending on compliance can
we avoid unduly prejudicing the other parties to this proceeding.
<PAGE> 9
Docket No. EC97-5-000 -9-
3. Summary disposition
-------------------
In our July 16, 1997 order, we stated that, if Applicants' filed a revised
Appendix A analysis, parties would have an opportunity to "respond to
Applicants' revised Appendix A analysis and proposed remedial measures." (OHIO
EDISON, 80 FERC at 61,113). Industrial Consumers devotes most of its filing to
arguing that we must consider the effects of the merger on retail competition, a
matter that properly rests with the Ohio and Pennsylvania Commissions. IEU-Ohio
also devotes a portion of its comments (pp. 13-19) to this topic. Industrial
Consumers' and IEU-Ohio's filings, to that extent, do not "respond to
Applicants' revised Appendix A analysis and proposed remedial measures," which
is the subject matter to which we restricted comments.
Rather, Industrial Consumers' pleading is an untimely request for
rehearing, and IEU-Ohio's pleading is an untimely supplement to its pending
rehearing, of that portion of our July 16 order that left the effect of the
proposed merger on retail sales to the jurisdiction of the state commissions. We
thus will reject those portions of Industrial Consumers' and IEU-Ohio's comments
as unresponsive to our July 16 order. We will also deny Edison Electric's
limited motion to intervene, because that intervention addresses only material
that we have rejected. For the same reason, we will reject that portion of
Applicants' answer that replies to Industrial Consumers' and IEU-Ohio's comments
regarding the effect of the merger on retail competition.
B. The results of Applicants' revised Appendix A analysis
-------------------------------------------------------
Applicants' revised Appendix A analysis still shows that, in several of the
relevant markets, the proposed merger would exceed the thresholds for
merger-induced changes in market concentration. 12/ Using economic capacity
measure and available transmission capacity and economic capacity and total
transmission capacity, the merger-induced changes in concentration far exceed
even the highest thresholds in the Merger Policy Statement for the five
Municipal Systems and Duquesne. Using the available economic capacity measure
and available transmission capacity, merger-induced changes in concentration
exceed the thresholds for the CPP, Painesville, and AMP-Ohio Northwest markets
and the General Public Utilities
- ---------------
12/ See Merger Policy Statement, FERC Stats. & Regs. at 30,133- 34. We
described these guidelines in our July 16th order. SEE OHIO EDISON, 80 FERC
at 61,099 & n.41.
<PAGE> 10
Docket No. EC97-5-000 -10-
market using available economic capacity and total transmission capacity.
Applicants offer several reasons why these potential market concentration
problems should not prevent us from approving the proposed merger. First,
Applicants argue that the revised Appendix A analysis does not recognize the
beneficial effects of the proposed FirstEnergy single-system transmission rate.
This is incorrect. The purpose of using the delivered price test to define the
relevant geographic market is to include suppliers from which customers can
economically purchase. Because the delivered price test reflects the cost of
delivered energy in the post-merger market -- including the cost of both
generation and transmission -- it reflects the effect of the single-system
FirstEnergy transmission rate.
Second, Applicants argue that we should discount the results of the revised
Appendix A analysis, because some of the Municipal Systems purchase very little
electric energy from Applicants. However, trading patterns vary over time and
past trading patterns are no guarantee of future trading patterns. This is
particularly true in the current transitional period underway in electricity
markets, when trading patterns may change with the restructuring of wholesale
and retail markets. The merger review process balances market outcomes indicated
by historical trading patterns against the hypothetical, forward-looking
analysis that the delivered price test provides. While trading patterns can
serve as a "check" on the results of the delivered price test, they provide no
basis for entirely discounting the results of that test. 13/
Finally, Applicants argue that competitive problems indicated in the
revised Appendix A analysis occur in off-peak hours, when lower demand and low
prices suggest that there should be less concern about the exercise of market
power. Applicants base their argument on the results of their revised analysis
of the available economic capacity measure. However, this is only a portion of
the results in Applicants' revised Appendix A analysis. Also, we have not
concluded that available economic capacity is a superior measure upon which to
base our merger review decisions. Using the economic capacity measure in that
analysis, instead, the merger-induced changes in concentration exceed the
thresholds of the guidelines in our Policy Statement in all periods for all five
Municipal System markets and Duquesne.
- ---------------
13/ SEE Merger Policy Statement, FERC Stats. & Regs. at 30,133.
<PAGE> 11
Docket No. EC97-5-000 -11-
Although we recognize that merger-induced changes in concentration exceed
the thresholds, we find that Applicants' proposed mitigation measures, revised
in accordance with our requirements as described below, adequately address our
concerns regarding the merger's effect on competition.
C. Applicants' proposed mitigation measures 14/
--------------------------------------------
1. The Ohio Edison-Centerior interface allocation commitment
---------------------------------------------------------
Applicants commit that "each municipal electric system identified as a
destination market in the Compliance Screen Test, including all of the wholesale
customers of any FirstEnergy company whether or not such wholesale customer is
currently taking requirements service," 15/ will be entitled: (a) to use the
Ohio Edison-Centerior interface as if it were a part of FirstEnergy's native
load; and (b) to receive the same reservation and curtailment priority that
FirstEnergy accords its own native load on the interface. (October 6 Answer,
Attachment A at 3.) Applicants further state that they will not operate the
internal interface in a manner that would impede access to any third-party
supplier serving the future growth of the municipal electric systems. (October 6
Answer, Attachment A at 3, testimony of Arthur R. Garfield (Garfield) at 21,
Answer at 1-2).
We note that the commitment mentions only reservation and curtailment
priority. In the context of Applicants' proposed mitigation, equally important
to ensuring that native load use not preempt Municipal Systems' access to
suppliers is a scheduling priority equal to that for native load use. We will
therefore direct Applicants to amend this commitment to include granting a
priority equal to native load for a Municipal System's scheduling of
transmission service.
We are also concerned that the commitment applies only to suppliers serving
future growth but is silent with respect to internal interface access by
third-party suppliers serving the current or near-term operational needs of the
Municipal Systems. Accordingly, we will clarify that Applicants will not operate
the internal interface to preclude third-party suppliers from serving
- ---------------------
14/ Applicants have summarized their proposed mitigation measures in Appendix A
to their answer.
15/ Applicants' Answer, Attachment A at 1. We will refer to these customers as
Municipal Systems, which we further describe in footnote 10, SUPRA.
<PAGE> 12
Docket No. EC97-5-000 -12-
both current and future operational needs of the Municipal Systems. As so
amended, we find this commitment an acceptable response to the problem that we
identified in the July 16 order, I.E., that Applicants' use of the interface for
native load could preempt its use by other suppliers. (SEE OHIO EDISON, 80 FERC
at 61,103-04).
In regard to this mitigation measure, Pennsylvania Municipals and Enron
express concern, respectively, that only transmission capacity in excess of
FirstEnergy's native load requirements will be available to third parties and
that Applicants need to allow any party access to Applicants' internal interface
comparable to that of native load. We believe that the proposed mitigation
measure adequately addresses Pennsylvania Municipals' concern since the proposed
mitigation measure, as modified, will provide that Municipal Systems will have
access rights to the internal interface (for reservation, scheduling and
curtailment purposes) equivalent to native load.
In response to Enron, we note that the proposed mitigation measures address
the potential competitive problems identified by the revised Appendix A analysis
in the municipal system markets. We believe the Applicants' participation in an
appropriate ISO will ensure transmission access on a nondiscriminatory basis to
any party desiring access to the FirstEnergy system.
2. The transmission capacity commitment
------------------------------------
Applicants commit to treat the aggregate coincident load of all Municipal
Systems as part of FirstEnergy's native load for purposes of transmission system
planning. This commitment includes Applicants' agreement to coordinate and
cooperate with each Municipal System to upgrade existing interconnections with
each Municipal system, reconductor transmission lines to Municipal Systems, or
take any other reasonable actions that are consistent with good utility practice
(including changes in operating procedures) necessary to eliminate internal
transmission constraints affecting the Municipal Systems' ability to obtain
access to alternate energy suppliers. Applicants state that they will allocate
the costs of any such improvements in accordance with the Commission's
ratemaking practices. (Mitigation Measures, Attachment A at 3-4, Answer at
11-12, Attachment A at 2-3). In addition, FirstEnergy agrees to redispatch its
generating resources to alleviate any internal constraints (at no cost to the
Municipal Systems) which impact Municipal Systems' ability to access alternative
energy supplies.
In light of our concerns regarding generation market power stemming from the
potential for strategic planning of transmission on the FirstEnergy system, the
Commission believes
<PAGE> 13
Docket No. EC97-5-000 -13-
that this proposal is inadequate. We will thus condition our authorization of
the merger on Applicants' further commitment to allow the Municipal Systems and
any other interested parties to join with Applicants in planning the expansion
of transmission facilities. (SEE PUBLIC SERVICE COMPANY OF COLORADO AND
SOUTHWESTERN PUBLIC SERVICE COMPANY, 78 FERC Paragraph 61,267 at 62,140(1997)
(establishing a joint planning and open participation process, including
appropriate dispute resolution procedures, for construction of new transmission
line)).
We interpret Applicants' commitment to redispatch FirstEnergy's generating
resources in order to alleviate an internal transmission constraint which
affects a Municipal System's ability to access third-party suppliers as
Applicants' response to contingencies not addressed by the pricing commitments
set forth in the third mitigation measure. Since Applicants commit that
redispatch costs will not be borne by Municipal Systems, we will further
condition our authorization of the merger on Applicants' further commitment that
Applicants will not seek to recover from other jurisdictional customers the
redispatch costs that would otherwise have been borne by Municipal Systems.
Applicants have made commitments in an individual settlement with the City
of Cleveland to increase the capacity of FirstEnergy's internal transmission
interface. In their October 6 Answer, Applicants respond to parties' concerns
that their proffered transmission upgrades will not increase capacity as much as
Applicants claim. Applicants have now provided more detailed information on
these upgrades. 16/ We note that if sufficient capacity to accommodate service
requests is still not available on the internal interface post-merger,
FirstEnergy must, pursuant to its open access tariff, expand the capacity of
that interface upon customer request.
3. The contingency, priority and price cap commitment
--------------------------------------------------
Applicants commit that, if there is an interruption or curtailment of third
party short-term and long-term capacity or energy to Municipal Systems due to an
internal condition on the FirstEnergy system, FirstEnergy will make capacity and
energy from its own resources available to the affected Municipal Systems at a
price: (a) equal to FirstEnergy's average out-of-
16/ Among other things, Applicants clarify that they will install capacitor
banks sufficient to ensure that FirstEnergy achieves the transfer
capability specified in Applicants' commitment with the City of Cleveland
to upgrade the East Akron-Goodyear transmission line.
<PAGE> 14
Docket No. EC97-5-000 -14-
pocket costs (I.E., variable costs only) of supplying energy at such time; or
(b) no higher than the cost of the third-party supply, if such supply is
delivered to the FirstEnergy system. Applicants also promise that, if internal
conditions on Applicants' system require curtailment of third-party supplies,
they will interrupt or curtail the Municipal Systems' third-party purchases on a
proportional, non-discriminatory basis equivalent to native load.
Applicants also commit that, in the event that an internal condition 17/
disrupts a third-party supplier's ability to deliver electric energy to a
Municipal System, FirstEnergy will curtail its own third-party deliveries of
equal firmness on a non-discriminatory basis. Applicants further commit that, if
an internal condition requires curtailment of load that a Municipal System
serves, Applicants will curtail their native load on a proportional and
non-discriminatory basis. (October 6 Answer, Attachment A at 4-5). 18/
We are concerned that the language in Applicants' commitment does not make
it clear that Applicants will not require Municipal Systems to pay twice when
FirstEnergy provides replacement capacity and/or energy (instead of transmitting
third-party power) as a result of an internal condition on FirstEnergy's system
that prevents Municipal Systems from taking delivery of electric energy from
third-party suppliers. That is, the possibility exists that Municipal Systems
would have to pay a third-party supplier for power that the third-party supplier
could not deliver to the Municipal Systems due to an internal condition on
FirstEnergy's system, and would also have to pay FirstEnergy for replacement
power. Accordingly, we will require Applicants to revise their commitment to
state that, when an internal condition on FirstEnergy's system prevents a
Municipal System from taking delivery of electric energy from a third-party
supplier, the Municipal System will pay FirstEnergy and the third-party supplier
no more, in total, than it would have paid the third-party supplier if its
supplies were delivered to the Municipal System.
With these changes, we find Applicants' commitment to be reasonable.We will
address the rates, terms and conditions for services that FirstEnergy will
render under this commitment when
- -----------------
17/ An internal condition includes an internal constraint and other limiting
factors.
18/ Applicants note that this commitment does not apply if the third party
fails to deliver the energy to FirstEnergy's system (October 6 Answer,
Attachment A at 5).
<PAGE> 15
Docket No. EC97-5-000 -15-
FirstEnergy files a rate schedule for these services under FPA section 205 (16
U.S.C. Section 824d (1994)).
Applicants' commitment, as modified by this order, addresses Pennsylvania
Municipals' concern that Applicants' proposal would subject Municipal Systems to
a double demand charge.
D. Additional Concerns
-------------------
1. Terms of settlement agreements
------------------------------
Applicants also offered as mitigation measures the terms of settlement
agreements that they concluded with the City of Cleveland and with AMP-Ohio.
While these settlement agreements do not necessarily address the Commission's
generic concerns, we will require, as a condition of our merger approval, that
Applicants fulfill the commitments reflected in their agreements with the City
of Cleveland and AMP-Ohio. (October 6 Answer, Attachment A at 5-6; August 8
Filing, Exhs. 1 and 2).
2. Additional Conditions
---------------------
Several intervenors have raised concerns about the effect of the merger on
transmission access and availability on the FirstEnergy system. Intervenors are
also concerned that the proposed mitigation measures do not address the
generation market power concerns that could result from Applicants' control of
transmission as well as an ISO would. Applicants' response is that the merged
company could not control prices inside the East Central Area Reliability
Council (ECAR) because there is a surplus of supply and ample transmission
capacity and because FirstEnergy will rely heavily on purchased power for its
energy requirements.
The Commission shares intervenors' concerns. That the merged company
chooses to purchase power, rather than to self-supply power, says nothing about
its ability to strategically plan and operate its transmission system to
withhold generation from the market. Moreover, the results of Applicants'
revised Appendix A analysis -- which incorporates, among other factors, supplies
from competing sellers and transmission capacity -- shows clearly that the
merger produces significant changes in concentration in some markets.
The Commission believes that Applicants' proposed mitigation, as modified
in this order, ameliorates in part our competitive concerns, particularly those
generation market power concerns stemming from the strategic planning and
operation of the FirstEnergy transmission system. In reaching this conclusion,
we note that this merger has raised substantial
<PAGE> 16
Docket No. EC97-5-000 -16-
concerns regarding post-merger access to and availability of transmission
capacity internal to the FirstEnergy system. Applicants' proposed mitigation
will reallocate internal transmission capacity to Applicants' native load
customers and to the municipal system customers potentially affected by the
proposed merger. In conjunction with the altered usage of internal transmission
that may result from the joint dispatch of the system, this reallocation of
Applicants' internal transmission capacity creates uncertainty about how
Applicants will, in the future, ensure an open and competitive market in their
service area Moreover, as noted earlier, the facts of this case leave us with
some concerns that Applicants could plan and operate their system in such a way
as to potentially exercise the sustantial generation market power that is
indicated by the relatively high levels of merger-induced market concentration.
The Commission believes Applicants' participation in an ISO will help
address the uncertainty surrounding how FirstEnergy will ensure an open and
competitive market in its service area. An ISO will independently manage the
FirstEnergy transmission system, separating the operational control of
transmission and generation that gives rise to our concern that Applicants could
potentially plan and operate their system in such a way as to exercise
generation market power. Therefore, FirstEnergy's participation in an
appropriate ISO would bolster the Commission's confidence that competitive harm
would not result from the merger. In light of the geographic market in which
Applicants are located, we believe the Midwest ISO may be the appropriate choice
and note that Centerior is participating in the negotiations relating to its
formation. The Commission believes that FirstEnergy's full participation in a
properly formed regional ISO is a practical approach to addressing the
uncertainty surrounding the competitive effects of the proposed merger.
Therefore, we expect FirstEnergy to participate in the Midwest ISO or another
appropriate ISO. If Applicants fail to participate in an ISO process, the
Commission will use its authority under section 203(b) of the FPA to address our
concerns. As discussed above, we will condition our approval of the proposed
merger on the modifications to Applicants' proposed mitigation measures
discussed in the body of this order. The conditions described above provide the
Commission with reasonable assurance that the proposed merger will not result in
competitive harm.
We note that interested parties will of course be able to monitor
transmission access and availability on FirstEnergy's system via the OASIS.
Problems with transmission access and availability on the FirstEnergy system can
be brought to our immediate attention via our complaint process. If it appears
<PAGE> 17
Docket No. EC97-5-000 -17-
that the operation or planning of the FirstEnergy transmission system may
adversely affect competition, we will consider appropriate remedial conditions
under FPA section 203(b). Such conditions could include, INTER ALIA, imposing an
obligation on Applicants to build additional capacity on their transmission
system. SEE, E.G., PUBLIC SERVICE COMPANY OF COLORADO, 75 FERC at 62,045.
E. Other Matters
-------------
As discussed above, Pennsylvania Municipals request that Applicants provide
dynamic scheduling service upon request. 19/ Applicants have consented to this
request. 20/
F. Effect on Rates
---------------
In our July 16 order, we noted that Pennsylvania Municipals were the only
remaining wholesale customers that had not negotiated a ratepayer protection
plan with Applicants and, as a result, had not withdrawn their protest. We,
therefore, directed Applicants to continue to negotiate a ratepayer protection
mechanism with Pennsylvania Municipals. Applicants now commit to an open season
for two Pennsylvania Municipals (Ellwood and Grove City) and two other
Pennsylvania boroughs taking service from Penn Power (that are not intervenors
in this proceeding), so as to provide an opportunity for these wholesale
customers to cancel their requirements contracts with Penn Power. (October 6
Answer at 4). 21/ The open season will run for 90 days after the merger is
closed. Applicants also commit that Zelienople will have the option of taking
transmission service under the FirstEnergy tariff upon its effectiveness or
continue to take service under
- ---------------------
19/ We note that Pennsylvania Municipals also request that the Commission
require Applicants to undertake transmission upgrades and expansions for
the Municipal Systems as needed in the future. We have addressed this issue
in our discussion concerning Applicants' transmission capacity commitment.
20/ Applicants' October 6th Answer, Attachment B at 2.
21/ Applicants state that Zelienople purchases all of its requirements from an
affiliate of Enron, using firm transmission service provided by the Ohio
Edison System.
<PAGE> 18
Docket No. EC97-5-000 -18-
its existing service contract. (October 6 Answer, Attachment B at 3). 22/
Consistent with the Merger Policy Statement, we find that Applicants' open
season proposal provides adequate ratepayer protection to the Pennsylvania
Municipals (all of Applicants' other wholesale customers that intervened in this
proceeding having withdrawn their protests). 23/ We, therefore, conclude that
the proposed merger will not adversely affect rates.
G. Effect on Regulation
--------------------
Applicants' agreement to abide by our policies with respect to intra-system
transactions within the newly-formed registered holding company structure
removes any concern that we would have as to the effect of the proposed merger
on federal regulation. In our July 16 order we elected not to set the issue of
the effect of the proposed merger on state regulation for hearing. We are, by
separate order issued concurrently with this order, denying IEU-Ohio's request
for rehearing of our decision not to set the issue of the proposed merger's
effect on state regulation for hearing. We have examined IEU-Ohio's arguments
and find them meritless. We therefore conclude that the proposed merger will not
adversely affect regulation.
H. Conclusion
----------
We find that the proposed mitigation measures, as modified and clarified
above, alleviates our concerns regarding the merger's effect on competition. We
also find, as discussed above, that Applicants have adequately responded to our
concerns regarding the effect of the merger on rates and on regulation. We
therefore find that the proposed merger is consistent with the public interest.
To the extent that any of the settlements in this proceeding affect wholesale
customer and/or transmission rates, Applicants must file the agreements with the
Commission as rate schedules under FPA section 205 (16 U.S.C. Section 824d
(1994)), along with appropriate cost support as required by Section 35.13 of the
Commission's regulations (18 C.F.R. Section 35.13 (1997)).
- ---------------------
22/ Additionally, Applicants further agree to offer existing wholesale
transmission service customers the option of switching to transmission
service under FirstEnergy's open access tariff.
23/ We note that Applicants' open season offer is silent with regard to whether
Pennsylvania Municipals may be liable for FirstEnergy's stranded costs. If
FirstEnergy seeks recovery of stranded costs from the Pennsylvania
Municipals, it must make a filing with the Commission.
<PAGE> 19
Docket No. EC97-5-000 -19-
The Commission orders:
- ----------------------
(A) Enron's untimely motion to intervene is hereby granted, as discussed in
the body of this order.
(B) AMP-Ohio's request to file its comments one day late is hereby granted.
(C) The portions of Industrial Consumers' and IEU-Ohio's comments that
relate to the effects of the proposed merger on retail competition are hereby
rejected as beyond the scope of comments allowed in our July 16th order.
(D) That portion of Applicants' answer that replies to Industrial
Consumers' and IEU-Ohio's comments on the effects of the proposed merger on
retail competition are hereby rejected as beyond the scope of our July 16th
order.
(E) Edison Electric Institute's limited motion to intervene is hereby
denied.
(F) The Ohio Consumer Counsel's answer is hereby accepted.
(G) IEU-Ohio's answer to Applicants' answer is hereby rejected.
(H) The proposed merger between Ohio Edison, Penn Power, CEI and Toledo is
hereby conditionally authorized, subject to Applicants' acceptance of the
conditions set forth in this order.
(I) Applicants are hereby directed to notify the Commission within 30 days
of the date of this order whether they accept the conditions set forth in this
order.
By the Commission.
(S E A L)
/s/ Lois D. Cashell
Lois D. Cashell,
Secretary.
<PAGE> 1
Exhibit D-9
[JONES, DAY, REAVIS & POGUE LETTERHEAD]
October 30, 1997
Lois D. Cashell, Secretary
Federal Energy Regulatory Commission
Washington, D.C. 20426
Re: Applicants' Acceptance of Conditions; Docket No. EC97-5-000
Dear Ms. Cashell:
On October 29, 1997, the Commission issued an "Order Conditionally
Authorizing [The Applicants'] Proposed Merger." Ordering Paragraph (I) directs
the Applicants "to notify the Commission within 30 days of the date of this
order whether they accept the conditions set forth in this order." The
Applicants, in accordance with Ordering Paragraph (I), hereby notify the
Commission they and FirstEnergy Corp. accept the conditions set forth in the
Merger Authorization Order.
By /s/ Robert S. Waters for By /s/ Robert S. Waters for
------------------------- --------------------------
Terrance G. Linnert Anthony J. Alexander
Senior Vice President Executive Vice President
and General Counsel and General Counsel
Centerior Energy Corporation Ohio Edison Company
6200 Oak Tree Boulevard 76 South Main Street
Independence, Ohio 44131 Akron, Ohio 44308
Robert S. Waters
Jones, Day, Reavis, & Pogue
1450 G Street, N.W.
Washington, D.C. 20005
Their Attorneys
cc: All Parties
