AS
FILED WITH
THE SECURITIES AND EXCHANGE
COMMISSION
ON <RR>May 4, 2000 </RR> July
25, 2000
FILE NO. 070-
09501
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
<RR>AMENDMENT NO. 1</RR>
AMENDMENT No. 2
TO
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
File No. 070-09501
FIRSTENERGY CORP.
76 SOUTH MAIN STREET
AKRON, OHIO 44308
(NAME OF COMPANY FILING THIS STATEMENT AND ADDRESS OF
PRINCIPAL
EXECUTIVE OFFICE)
NANCY C. ASHCOM, CORPORATE SECRETARY
FIRSTENERGY CORP.
76 SOUTH MAIN STREET
AKRON, OHIO 44308
(NAMES AND ADDRESS OF AGENT FOR SERVICE)
The Commission is requested to send copies of all notices,
orders and
communications in connection with this Application/Declaration
to:
MICHAEL F. CUSICK
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
(212) 858-1000
<PAGE>
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
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") issue
an order
<RR>(i)</RR> approving the direct acquisition by FirstEnergy of
all of the issued and outstanding voting securities of American
Transmission Systems,
Incorporated, a newly formed Ohio corporation ("ATSI")<RR>,and
(ii) granting such other authorizations as may be necessary in
connection therewith</RR>.
<RR>FirstEnergy proposes that </RR> ATSI will
acquire certain transmission assets as described in Item 1.B.1
hereof (the "Transmission Assets") owned by each 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 (individually, "Penn Power," and
collectively, the "Operating Companies").<RR> FirstEnergy's
</RR> The proposed creation of ATSI and transfer of
the Transmission Assets to ATSI is part of <RR> its </RR>
FirstEnergy's plan to participate in an independent
regional transmission organization("RTO"). The
<RR>proposed</RR> formation of the new transmission company is
intended to provide the following benefits to FirstEnergy and
its Operating Companies' customers: (i) greater corporate and
organizational separation of transmission from generation
; and (ii) by tying together control, planning,
maintenance and financial responsibilities of the Operating
Companies' transmission facilities into a single company having
an independent, streamlined and cost-efficient
operation , <RR>:</RR> (a) creating synergies that result
in better service in the region and (b) assuring non-
discriminatory access for all transmission users.
FirstEnergy's plan to participate in a transco-based RTO, with
the creation of ATSI as a significant step toward this end,
will maximize the value of the Transmission Assets to
shareholders.
FirstEnergy is a public-utility holding company under
the 1935 Act.
It directly owns all of the issued and outstanding voting
securities of
Cleveland Electric, Toledo Edison and Ohio Edison and
indirectly owns all
of the issued and outstanding voting securities of Penn Power.
FirstEnergy has claimed an exemption from all provisions of the
1935 Act
(except for Section 9(a)(2) thereof) pursuant to Rule 2
thereunder. See
FirstEnergy 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 29, 2000, attached hereto as
Exhibit G-1.
Ohio Edison currently owns all of the issued and
outstanding voting
securities of Penn Power. Ohio Edison, Penn Power, Cleveland
Electric and
Toledo Edison 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) thereof.
ATSI is incorporated as an Ohio corporation. It
currently does not
conduct any business or own any utility assets. Upon
completion of the
transfer of the Transmission Assets from the Operating
Companies to it,
ATSI will become a "public-utility company" as defined in the
1935 Act.
The <RR> transactions contemplated hereby </RR>
establishment
of ATSI as the transmission company in FirstEnergy's system
will be accomplished through (i) FirstEnergy's acquisition
of all of the issued and outstanding voting securities of ATSI
in exchange for approximately $300 million, (ii) the sale and
transfer by the Operating Companies of their Transmission
Assets to ATSI in consideration for the purchase price (the
"Purchase Price") which will be the net book value of the
Transmission Assets as of December 31, 1999 (approximately $647
million) and (iii) ATSI's financing of the purchase of the
Transmission Assets by <RR>(a) </RR> (A) the use of
FirstEnergy's purchase price for all of the issued and
outstanding voting securities of ATSI for an amount equal to
45% of the Purchase Price and <RR>(b)</RR> (B) ATSI's
issuance of promissory notes (which may be secured by a lien on
the assets transferred) to the Operating Companies in an
aggregate amount equal to 55% of the Purchase Price. The
interest rate on the promissory notes will be based on the
embedded cost of debt of the Operating Companies on a
consolidated basis (which is approximately 7.75%).
A. DESCRIPTION OF PARTIES TO THE TRANSACTION
1. General Description. (a) FirstEnergy.
FirstEnergy was
------------------- -----------
organized under the laws of the State of Ohio in 1996. The
principal
executive offices of FirstEnergy are located in Akron, Ohio.
FirstEnergy
is a holding company within the meaning of Section 2(a)(7) of
the 1935
Act.
FirstEnergy's principal business is the holding of all
of the
issued and outstanding voting securities of the following 12
direct active
subsidiaries: Ohio Edison; Cleveland Electric; Toledo Edison;
FirstEnergy
Properties, Inc.; FirstEnergy Ventures Corp.; FirstEnergy
Trading
Services, Inc.; FirstEnergy Securities Transfer Company;
FirstEnergy
Facilities Services Group, LLC.; MARBEL Energy Corporation;
FirstEnergy Services Corp.; FE Acquisition Corp.; and
FirstEnergy Nuclear Operating Company; and all of the issued
and outstanding voting securities of the following three direct
inactive subsidiaries: Centerior Service Company; FE Holdings,
LLC; and ATSI. Unless otherwise noted, all these subsidiaries
are incorporated in the State of Ohio and have their principal
offices in Akron, Ohio.
(b) ATSI.ATSI was incorporated as an Ohio
----
corporation on October 8, 1998. It currently does not conduct
any
business or own any utility assets. Upon consummation of the
transactions
contemplated hereby, ATSI will become a "public-utility
company" as
defined in the 1935 Act.
(c) Ohio Edison. Ohio Edison was organized under
the laws of
-----------
the State of Ohio in 1930 and is both a public utility 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 issued and outstanding voting securities of
Penn Power.
Ohio Edison also owns directly 16.5% of the issued and
outstanding voting
securities of Ohio Valley Electric Corporation, an Ohio
corporation
("OVEC") (which, in turn, owns all of the issued and
outstanding voting
securities of Indiana-Kentucky Electric Corporation ("IKEC")).
OVEC is a
public utility company organized under the laws of Ohio in
1952. On the
same date, IKEC 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),
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 Nuclear Regulatory
Commission ("NRC").
In addition to Penn Power, Ohio Edison has nine other
wholly-owned subsidiaries organized, unless otherwise noted,
under the laws of the State of Ohio: (i) OES Capital,
Incorporated, re-organized in December 1999 under the laws of
the State of Delaware; (ii) OES Fuel, Incorporated; (iii) OES
Finance, Incorporated; (iv) Ohio Edison Financing Trust,
organized under the laws of the State of Delaware; (v) Ohio
Edison Financing Trust II, organized under the laws of the
State of Delaware; (vi) OES Nuclear, Incorporated; and (vii)
OES Ventures, Incorporated. These subsidiaries manage and
finance nuclear fuel for Ohio Edison and Penn Power, finance
certain electric accounts receivable, provide structures for
investment in energy-related projects and the raising of
capital by Ohio Edison, finance and manage business
opportunities not directly related to the provision of electric
service, or provide other energy-related products and services.
Ohio Edison's ninth subsidiary, OES Ventures, Incorporated has
a 49% beneficial interest in the PNBV Capital Trust, a business
trust organized under the laws of the State of Delaware to
facilitate the acquisition of lease obligation bonds relating
to Ohio Edison's sale and leaseback of
individual interests in Beaver Valley Nuclear Power Station
Unit No. 2 and
Perry Nuclear Power Plant Unit No. 1 and the resultant
reduction in
effective cost to Ohio Edison under those leases. Finally,
Ohio Edison
has a 49% interest in FirstEnergy Engineering, Incorporated, a
corporation that provides engineering services at cost as a
subcontractor on construction projects undertaken by Ohio
Edison for third parties. Other than Penn Power, these
subsidiaries do not, individually or in the aggregate, have a
material effect on the consolidated financial statements of
Ohio Edison.
(d) Penn Power. Penn Power was organized under the
laws of
----------
the Commonwealth of Pennsylvania in 1930 and owns property and
does
business as an electric public utility in that state. Penn
Power is also
authorized to do business and owns property in the State of
Ohio.
(e) Cleveland Electric. Cleveland Electric was
organized
------------------
under the laws of the State of Ohio in 1892 and is a public
utility
company engaged primarily in the generation, transmission,
distribution
and sale of electric energy to an area of approximately 1,700
square miles
in northeastern Ohio, including the City of Cleveland. It has
one
subsidiary, Centerior Funding Corporation, which is a Delaware
corporation organized in 1996 that finances accounts
receivable. It also owns 10% of The Toledo Edison Capital
Corporation ("TECC"), which is a Delaware corporation organized
in 1997 that makes equity investments in Delaware
business trusts that hold lessor debt instruments issued in
connection
with Cleveland Electric's and Toledo Edison's sale and
leaseback of
interests in the Bruce Mansfield Plant.
(f) Toledo Edison. Toledo Edison was organized
under the laws
-------------
of the State of Ohio in 1901 and is a public utility company
engaged
primarily in the generation, transmission, distribution and
sale of
electric energy to an area of approximately 2,500 square miles
in
northwestern Ohio, including the City of Toledo. It owns 90%
of TECC.
Toledo Edison owns directly 4% of the issued and outstanding
voting
securities of OVEC.
(g) FirstEnergy Properties, Inc. FirstEnergy
Properties, Inc.
----------------------------
was organized in 1929 and primarily manages non-residential
real estate.
It has one subsidiary, BSG Properties, Inc., organized in 1996
that
pursues real estate development.
(h) FirstEnergy Ventures Corp. FirstEnergy
Ventures Corp. was
--------------------------
organized in 1971. Its principal business involves the
ownership of stock
investments in certain non-utility ventures. It has six
subsidiaries organized under the laws of the State of Ohio:
(i) Centerior Power Enterprises, Inc. which, together with
CPICOR Management LLC (a non-affiliate), is responsible for
implementing a Department of Energy ("DOE") clean coal project;
(ii) Centerior Energy Services, Inc., which provides various
energy consulting services under the registered trade name "The
E Group"; (iii) FirstEnergy Telecom Corp., which provides
telecommunications services; (iv) Centerior Communications
Holdings, Inc.,which holds equity investments for certain
telecommunications ventures; (v) Bay Shore Power Company, which
proposes to provide steam to a Toledo Edison generating unit
and a nonaffiliated refinery; and (vi) FirstEnergy Fuel
Marketing Company which provides products and services to
electricity generators and industrial fuel users. FirstEnergy
Ventures is also part owner of seven Ohio limited liability
companies: Eastroc, LLC, Eastroc Technologies, LLC and
Engineered Processes, LTD, which own or apply technologies for
the production of gypsum products; Carbon Plus, LLC, which
converts nonhazardous waste by-products into new products;
Warrenton River Terminal, LTD, which owns facilities for the
transloading of bulk materials on the Ohio River; Soils
Technology, LLC, which recycles discarded materials to
manufacture nutrient-rich soils; and Ohio National Energy, LTD,
which is involved in the East Burger Merchant Repowering
Project.
(i) FirstEnergy Trading Services, Inc. FirstEnergy
Trading
----------------------------------
Services, Inc.<RR> (formerly known as FirstEnergy Trading &
Power
Marketing, Inc.) </RR> is an Ohio corporation organized in 1995
that
<RR>acquires and arranges for the delivery of electricity and
natural gas
to the retail customers of FirstEnergy's unregulated marketing
and sales
affiliates.</RR> is a natural gas and power marketer in
wholesale markets.
(j) FirstEnergy Securities Transfer Company.
FirstEnergy
---------------------------------------
Securities Transfer Company is an Ohio corporation organized in
1997 to
act as transfer agent and registrar for the securities of
FirstEnergy and
its direct and indirect subsidiaries.
(k) FirstEnergy Facilities Services Group, LLP.
FirstEnergy Facilities Services Group is the parent company
of the eleven direct subsidiaries engaged in heating,
ventilating, air conditioning and energy management. These
subsidiaries consist of the following: (i) Ancoma, Inc. of
Rochester New York (New York corporation); (ii) Colonial
Mechanical Corporation of Richmond, Virginia (a Virginia
corporation); (iii) Webb Technologies, Inc. of Norfolk,
Virginia (a Virginia corporation); (iv) Dunbar Mechanical Inc.
of Toledo, Ohio (Ohio corporation); (v) Edwards Electrical &
Mechanical, Inc. of Indianapolis, Indiana (Indiana
corporation); (vi) Elliott-Lewis Corporation of Philadelphia,
Pennsylvania (Pennsylvania corporation); (vii) L.H. Cranston &
Sons, Inc. of Timonium, Maryland (Maryland corporation); (viii)
Roth Bros., Inc. of Youngstown, Ohio (Ohio corporation); (ix)
The Hattenbach Company of Cleveland, Ohio (Ohio corporation);
(x) R.P.C. Mechanical, Inc. of Cincinnati, Ohio (Ohio
corporation); and (xi) Spectrum Controls Systems of Cincinnati,
Ohio (Ohio corporation).
(l) MARBEL Energy Corporation. MARBEL Energy
Corporation
-------------------------
is a company owning interests in crude oil and natural gas
production, as well as natural gas distribution and
transmission facilities. MARBEL's subsidiaries include Marbel
HoldCo. Inc. a holding company which has a 50% ownership in
Great Lakes Energy Partners, LLC, an oil and natural gas
exploration and production venture and Northeast Ohio Operating
Companies, Inc. which has as subsidiaries Gas Transport, Inc.
(Delaware Corporation) and NEO Construction Company (Ohio
Corporation).
(m) FirstEnergy Services Corp. A
--------------------------
national sales group was established within FirstEnergy Corp.
to pursue sales offer energy-related products and services in
the unregulated gas and electric markets. FirstEnergy Services
Corp. has one wholly-owned subsidiary, Penn Power Energy, Inc.
(a Pennsylvania Corporation)
(n) FE Acquisition Corp. FE Acquisition Corp.
holds all
-------------------
of the outstanding shares of Mid-Atlantic Energy Development
Co., which is
constructing a peaking generation unit in Richland, Ohio.
(o) FirstEnergy Nuclear Operating Company.
-------------------------------------
FirstEnergy Nuclear Operating Company operates the Davis-Besse
Nuclear
Power Station, the Perry Nuclear Power Plant and the Beaver
Valley Nuclear Power Station under the supervision and
direction of the owners of those facilities.
2. Description of Utility Operations.
---------------------------------
(a) The Operating Companies' Utility Operations.
--------------------------------------------
Currently, neither of FirstEnergy and ATSI directly owns any
utility properties or performs any utility operations. The
following discussion focuses on the Operating Companies utility
operations with a detailed description of their transmission
systems in (b) below.
Ohio Edison and Penn Power. Ohio Edison
furnishes
--------------------------
electric service to communities in a 7,500 square mile area of
central and
northeastern Ohio. Ohio Edison has ownership interests in
certain generating facilities located in the Commonwealth of
Pennsylvania. Ohio Edison also engages in the sale, purchase
and interchange of electric energy with other electric
companies. During the twelve months ended December 31, 1999,
the principal source of Ohio Edison's operating revenues was
derived from the sale of electricity.
Penn Power furnishes electric service to communities in
a 1,500
square mile area of western Pennsylvania. During the twelve
months ended
December 31, 1999, the principal source of Penn Power's
operating revenues was derived from the sale of electricity.
Ohio Edison and Penn Power own or lease all or a portion
of 31 electric generating units, consisting of 13 coal fired
units, three nuclear units, six oil fired units, one gas/oil
fired unit and eight diesel generators (located at two sites),
which have total net generating capacity of 6,057 megawatts
(MW). All of the electric properties owned by Ohio Edison and
Penn Power are located within the State of Ohio and the
Commonwealth of Pennsylvania.
Nine of the 13 coal fired units are 100% owned by
Ohio Edison,
and all such units are located in Ohio. Four of the 13 coal
fired units
are held in a combined Ohio Edison-Penn Power ownership along
with Toledo
Edison and Cleveland Electric.
The three nuclear units consist of (i) Beaver Valley
1 (810
MW), located in Pennsylvania, (ii) Beaver Valley Unit 2, also
located in
Pennsylvania and representing a 456 MW share from a combined
Ohio Edison-
Penn Power ownership and leasehold interest of 55.61%, and
(iii) Perry
Unit 1, located in Ohio and representing a 421 MW share from a
combined
Ohio Edison-Penn Power ownership and leasehold interest of
35.24%.
The six oil-fired units are also located in Ohio and
are held
in a combined Ohio Edison-Penn Power ownership. The oil/natural
gas unit
is located in Ohio and is 100% owned by Ohio Edison. The two
diesel
generator sites are located in Ohio and are held in a combined
Ohio
Edison-Penn Power ownership.
OVEC and IKEC. OVEC owns the Kyger Creek
-------------
Plant at Cheshire, Ohio, which is a coal-fired facility with a
capacity of
1,075 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 OVEC's sponsor
companies, although
OVEC's transmission facilities do not interconnect directly
with the Ohio
Edison-Penn Power or Toledo Edison systems.
Cleveland Electric. Cleveland Electric is
------------------
engaged primarily in the generation, transmission, distribution
and sale
of electric energy to an area of approximately 1,700 square
miles in
northeastern Ohio, including the City of Cleveland. Cleveland
Electric
also has ownership interests in certain generating facilities
located in
the Commonwealth of Pennsylvania. Cleveland Electric also
engages in the
sale, purchase and interchange of electric energy with other
electric
companies. During the twelve months ended December 31, 1999,
the principal source of Cleveland Electric's operating revenues
was derived from the sale of electricity.
Cleveland Electric's generating properties consist of
all or a portion of: (i)10 units at four fossil fuel plants
including the Sammis Plant, located in Stratton, Ohio, the Lake
Shore Plant, located in Cleveland, Ohio, the Eastlake Plant,
located in Eastlake, Ohio, and the Ashtabula Plant, located in
Ashtabula, Ohio; (ii) a 454 MW share of Davis-Besse Nuclear
Power Station located in Oak Harbor, Ohio; and a (iii) pumped
storage hydroelectric plant (Seneca Plant) located in Warren,
Pennsylvania. These Cleveland Electric-owned plants have a net
demonstrated capability of 2,923 MW.
Cleveland Electric and Toledo Edison as co-lessees,
have an
ownership share of 6.5% (51 MW), 47.56% (371 MW) and 44.38%
(355 MW) of
Units 1, 2 and 3, respectively, of the coal-fired Bruce
Mansfield Plant
located in Pennsylvania. Cleveland Electric also has a 44.81%
ownership
share (535 MW) of Perry Unit 1 located in Ohio, and a 24.47%
share (201
MW) of Beaver Valley 2 located in Pennsylvania, and leases, as
co- lessee
with Toledo Edison, another 19.88% (163 MW) of Beaver Valley 2.
Cleveland
Electric owns the distribution facilities located in the area
it serves in
northeastern Ohio for distributing electric energy to all of
its
customers. These distribution facilities consist primarily of
distribution
lines and distribution substations and related service
facilities and are
used to serve electric energy to customers.
Toledo Edison. Toledo Edison is engaged
-------------
primarily in the generation, transmission, distribution and
sale of
electric energy to an area of approximately 2,500 square miles
in
northwestern Ohio, including the City of Toledo. Toledo Edison
also has
ownership interests in certain generating facilities located in
the
Commonwealth of Pennsylvania. Toledo Edison also engages in
the sale,
purchase and interchange of electric energy with other electric
companies.
During the twelve months ended December 31, 1999, the principal
source of Toledo Edison's operating revenues was derived from
the sale of electricity.
Toledo Edison's generating properties consist of: (i)
one wholly-owned fossil fuel electric generating station, Bay
Shore, located in Lucas County, Ohio; (ii) a 429 MW share of
Davis-Besse Nuclear Power Station located in Oak Harbor, Ohio;
and (iii) five internal combustion turbine generator units with
an
aggregate capability of 77 MW located in northwestern Ohio.
These Toledo
Edison-owned plants have a net demonstrated capability of 1,137
MW.
Toledo Edison and Cleveland Electric as co-lessees, have
an
ownership share of 6.5% (51 MW), 47.56% (371 MW) and 44.38%
(355 MW) of Units 1, 2 and 3, respectively, of the coal-fired
Bruce Mansfield Plant located in Shippingport, Pennsylvania.
Toledo Edison also has a 19.91% ownership share (238 MW)
of Perry
Unit 1. Toledo Edison has a tenant-in-common interest and
leasehold
interest (with Cleveland Electric as co-lessee with respect to
150 MW) in
19.91% (163 MW) in Beaver Valley Unit 2. Toledo Edison is
currently selling 150 MW of its Beaver Valley Unit 2 leased
capacity entitlement to Cleveland Electric.
Toledo Edison owns the distribution facilities
located in the
area it serves in northwestern Ohio for distributing electric
energy to
all of its customers. These distribution facilities consist
primarily of
distribution lines and distribution substations and related
service
facilities and are used to serve electric energy to its
customers.
(b) Transmission System. The Operating
Companies own
-------------------
and operate approximately 12,000 MW of generation resources
that are
connected directly to the transmission facilities to be
transferred. ATSI
will acquire from the Operating Companies and will operate
transmission
facilities currently operating at voltages of generally 345 kV
and 138 kV
(the "Bulk Transmission System"), and 69 kV facilities (the
"Area
Transmission System," and together with the Bulk Transmission
System, the
"Transmission System"). The Transmission System is planned and
operated
to integrate the generation resources of the Operating
Companies with the
their native retail and wholesale loads. To perform this
network
function, the higher voltage 345 kV and 138 kV facilities, (the
"Bulk
Transmission System"), and the 69 kV facilities, (the "Area
Transmission
System" and together with the Bulk Transmission System, the
"Transmission
System"), are integrated and operate in a parallel manner to
each other.
The Operating Companies also operate low voltage 23, 33, 34.5,
and 36 kV
facilities. These facilities were originally developed as
transmission
systems when load levels were such that the power transferred
by these
facilities was considered significant. Today, however, these
facilities
are isolated and do not play a significant role in the transfer
of power
on the system. Thus, these 23, 33, 34.5, and 36 kV facilities
no longer
provide a transmission function.
The Transmission System consists of over 7,100 circuit
miles of
transmission lines with nominal voltages of 345 kV, 138 kV and
69 kV. The
Transmission System services over 2.2 million customers in a
13,200 square
mile area in northern and central Ohio and western
Pennsylvania. The
Transmission System has 37 interconnections at voltages of 69
kV or higher
with six neighboring control areas. The Transmission System is
connected
to other systems to the East via ties with the Pennsylvania-New
Jersey-
Maryland Interconnection ("PJM"), Duquesne Light Company
("Duquesne"), and
Allegheny Energy System ("Allegheny"). The Transmission System
is
connected to other systems to the North through ties with the
Michigan
Electric Coordination Systems, and is connected to other
systems to the
South through ties with American Electric Power ("AEP") and
Dayton Power
and Light Company ("Dayton").
(c) 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 (the "FERC") under the Federal Power Act with
respect to
wholesale electric rates, transmission service, and other
matters. Construction and operation of nuclear generating
units are subject to the regulatory jurisdiction of the NRC,
including the issuance by it of construction permits and
operating licenses.
ATSI will be subject to the jurisdiction of the FERC
with respect
to its rates and other matters.
B. DESCRIPTION OF THE PROPOSED TRANSACTION
1. Description of the Transmission Assets. The
Transmission Assets
--------------------------------------
to be transferred from the Operating Companies to ATSI are
identified in
detail in Appendix D to the Operating Agreement between ATSI
and the
Operating Companies, and Schedule A to the Bill of Sale.
Appendix D to the Operating Agreement also describes the
generation and distribution facilities retained by the
Operating Companies. The Operating Agreement appears in full
in Exhibit B-2 to this Application/Declaration. Essentially,
ATSI will acquire from the Operating Companies and will operate
the Bulk Transmission System and the Area Transmission System.
The Transmission Assets to be transferred shall include:
(1) transmission lines (including towers, poles, and
conductors) and transmission stations;
(2) transformers providing transformation within the
Bulk
Transmission System and between the Bulk Transmission System
and Area
Transmission System;
(3) the System Control Center facility and equipment
in
Wadsworth, Ohio not including the associated land and land
rights;
(4) lines providing connections to generation
facilities;
(5) radial taps from the Transmission System that
are 69kV and
above (up to, but not including, the facilities that establish
the final
circuit connection to distribution facilities or retail
customers);
(6) substations that provide primarily a
transmission function;
(7) voltage control devices and power flow control
devices
directly connected to the Transmission System;
(8) mobile capacitor banks 69kV or higher; and
(9) equipment spares for transmission facilities.
The Transmission Assets include all the facilities
currently
recorded on the books of the Operating Companies as
"transmission", with the exception of certain 36 kV, 34.5kV,
33kV and 23 kV facilities ("Subtransmission Facilities") and do
not include "distribution facilities" used to provide retail
service. Distribution facilities include all facilities with
voltages below 69 kV, including both Subtransmission Facilities
and the final circuit connection
to substations providing transformation or connection to any
retail
customer regardless of voltage level. The Operating Companies
currently
provide transmission service to certain wholesale customers at
delivery
points less than 69 kV. In order to ensure continuity of
service to such
customers who decide to take service under the new FERC-
approved
transmission tariff under which ATSI will offer its
transmission service
(the "ATSI Tariff"), ATSI and the Operating Companies have
entered into an
Agency Agreement. A copy of the Agency Agreement is attached
as Appendix
C to the Operating Agreement, which in turn is included in
Exhibit B-1 to
this Application/Declaration. Under the Agency Agreement, the
Operating
Companies and ATSI have expressly provided for use of certain
distribution
facilities necessary to continue transmission service to
wholesale
customers served at delivery points whose voltages are less
than 69 kV.
Transmission service to wholesale customers over these
distribution
facilities will be offered under the ATSI Tariff, and
associated
distribution costs will be recovered in the rates on a direct
assignment
basis as a distribution adder. This procedure is necessary to
ensure that
existing wholesale customers served at voltages below 69 kV
will have
access to comparable transmission service under the ATSI
Tariff.
2. Operation of the Transmission System. ATSI will
operate the
------------------------------------
Transmission System pursuant to the ATSI Tariff and the
Operating
Agreement. ATSI will have operational control of the
Transmission Assets,
serve as the control area operator over the Transmission
System, offer and
arrange for ancillary services, operate the Open Access Same-
Time
Information System ("OASIS") in conformance with FERC Order No.
889*, and
administer the ATSI Tariff,
------------
*Open Access Same-Time Information System (Formerly Real-Time
Information
Network) and Standards of Conduct, Order No. 889, Docket No.
RM95-9-000,
61 Fed. Reg. 21737 (May 10, 1996), FERC Stats. & Regs. [Reg.
Preambles
1991-96] 31,035 (1996)(subsequent history omitted).
including all requests for service under the ATSI Tariff. ATSI
will also be responsible for maintenance of the Transmission
Assets, and will initially contract with the Operating
Companies to perform the maintenance.
As control area operator, ATSI will establish operation
standards, procedures and criteria by which the Transmission
System is administered, adhering to all NERC policies. It will
oversee the dispatch of the Transmission System and ensure that
system reliability, integrity and safety are maintained. ATSI
will evaluate and respond to transmission requests and
coordinate with ECAR Security Coordination Centers. ATSI will
schedule energy flows into, out of and across the control area
and monitor control area performance. ATSI will accommodate
maintenance outages, respond to forced outages, and coordinate
transmission switching functions with adjacent interconnected
companies along with the distribution facilities of the
FirstEnergy Operating Companies.
ATSI will offer all ancillary services required by the
FERC in its
Order No. 888 , including scheduling, system control and
dispatch service; reactive supply and voltage control from
generation sources service; regulation and frequency response
service; energy imbalance service; operating reserve -
spinning; and operating reserve - supplemental . Since
ATSI owns no generating facilities, it will purchase the
necessary ancillary services from third parties. Under the
Operating Agreement, the Operating Companies are required to
sell ancillary services to ATSI upon request at FERC approved
rates. ATSI is free, however, to purchase ancillary services
from unaffiliated generators, and will do so consistent with a
least cost procurement strategy. ATSI expects to enter into
agreements to purchase ancillary services from unaffiliated
generators in its control area. ATSI will not, however, engage
in the purchase and sale of energy other than to obtain the
necessary ancillary
services.
In short, upon receipt of the necessary regulatory
approvals, ATSI
will commence providing open access transmission service to
those existing
open access customers served by the Operating Companies under
the existing
transmission tariff ("FirstEnergy Open Access Tariff"), and any
other
eligible customer requesting transmission service from ATSI.
In addition,
post-transfer, the Operating Companies will become customers of
ATSI under
the ATSI Tariff. Where the Operating Companies are responsible
for
providing transmission service under agreements or tariffs
predating Order
No. 888 ("Grandfathered Transmission Agreements"), ATSI will
work to
ensure obligations are satisfied, and will make its
Transmission System
available to provide transmission service under the
Grandfathered
Transmission Agreements unless otherwise directed by the FERC.
3. Financial Aspects of the Transaction. A Bill of
Sale will be
------------------------------------
entered into between FirstEnergy Corp., on behalf of the
Operating
Companies, and ATSI covering the conveyance of the Transmission
Assets.
The Transmission Assets transferred to ATSI under the Bill of
Sale include
the Operating Companies' rights and interests in any contracts
under the FirstEnergy Open Access Tariff. A copy of the form
of Bill of Sale is included as part of Exhibit B-1 to this
Application/Declaration.
The transactions contemplated hereby will be
accomplished through
(i) FirstEnergy's acquisition of all of the issued and
outstanding voting
securities of ATSI in exchange for approximately $300 million,
(ii) the
sale and transfer by the Operating Companies of their
Transmission Assets
to ATSI in consideration for the Purchase Price which will be
the net book
value of the Transmission Assets as of December 31, 1999
(approximately $647 million) and (iii) ATSI's financing of the
purchase of the Transmission Assets by (a) the use of
FirstEnergy's purchase price for all of the issued and
outstanding voting securities of ATSI for an amount equal to
45% of the Purchase Price and (b) ATSI's issuance of promissory
notes (which may be secured by a lien on the assets
transferred) to the Operating Companies in an aggregate amount
equal to 55% of the Purchase Price. The interest rate on the
promissory notes will be based on the embedded cost of debt of
the Operating Companies on a consolidated basis which is
approximately 7.75%. The 45/55 equity-debt ratio is the same
as the Operating Companies' consolidated ratio as of November
30, 1998.
The Transmission Assets have been released from the
liens of the indentures securing mortgage bonds of Ohio Edison,
Cleveland Electric and
Toledo Edison, and the release from the liens of the indentures
securing
mortgage bonds of Penn Power will take place at transfer of the
Transmission Assets to ATSI. Fee land, easements and rights-of-
way have
been excluded from the asset transfer and will remain the
property of the
Operating Companies. ATSI will acquire the right to use land
through 50-
year ground leases with the Operating Companies.
C. REASONS FOR AND ANTICIPATED EFFECTS OF THE PROPOSED
TRANSACTION
1. Context of the Transaction-Creation of a Larger RTO.
---------------------------------------------------
The transfer of the Transmission Assets to ATSI will
facilitate
implementation of the subsequent transfer of these facilities
to a transco-based RTO. FirstEnergy's formation of ATSI and
the transfer of the Transmission Assets to ATSI is not the
ultimate goal. Rather, this is a step towards the subsequent
transfer of these facilities to a transco-based RTO.
FirstEnergy's ultimate goal is to divest ownership, operation
and control of its transmission facilities from its other
assets. Accordingly, if ATSI does not file a Section 203
application under the Federal Power Act to transfer ownership
or control of its transmission facilities to a transco-based
RTO within two years of the date of approval of the joint
application with the FERC (a copy of which is attached hereto
as Exhibit D-1), ATSI will file a Section 203 application to
divest its transmission facilities to an unaffiliated entity.
FirstEnergy intends to continue its efforts with other
transmission owners in the development of a transmission
alliance that would own, operate and aggregate regional
transmission assets and could, in turn, operate transmission
facilities of other companies (the "Transmission Alliance").
At present, the four utility systems currently committed to
participating with FirstEnergy in the Transmission Alliance
(AEP, Consumers Energy, Detroit Edison and Virginia Power)
would stretch from Michigan to Virginia and would provide open
access transmission service over approximately 43,500 miles of
transmission lines serving a population of 23 million. It will
strive to better align the interests of transmission customers
with the interests of transmission owners and operators.
Whatever the regional entity, ATSI's existence as a
separate corporate entity and single provider of transmission
services
will facilitate the process. Moreover, ATSI will have the
opportunity to
gain some experience in the operation of the transmission
system as a
stand alone entity - experience that will be valuable to the
effectuation
of the next step.
2. Anticipated Effects. The
<RR>proposed</RR> formation of the new
-------------------
transmission company is intended to provide the following
benefits to
FirstEnergy and its Operating Companies' customers: (i)
greater corporate
and organizational separation of transmission from generation;
and (ii) by
tying together control, planning, maintenance and financial
responsibilities of the Operating Companies' transmission
facilities into
a single company having an independent, streamlined and cost-
efficient
operation, (a) creating synergies that result in better service
in the
region, (b) assuring non-discriminatory access for all
transmission users
and (c) maximizing the value of the Transmission Assets for
shareholders.
ATSI will not be engaged in the electric power
generation business,
and will contract with the Operating Companies and others on
the open
market to provide ancillary services on a
least cost basis. ATSI will not own distribution facilities,
and will use distribution facilities only to the extent
required to provide transmission services to wholesale
customers served at voltages below 69 kV under the ATSI Tariff.
Instead,
ATSI will focus solely on efficiently and effectively operating
and
maintaining, and where necessary expanding, its transmission
system, and
will be well-situated to respond quickly to customer needs.
D. ADDITIONAL INFORMATION
No associate company or affiliate of FirstEnergy or any
affiliate
of any such associate company has any direct or indirect
material interest
in the proposed transaction except as stated herein.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
------------------------------
The fees, commissions and expenses to be paid or
incurred, directly
or indirectly, in connection with the transactions contemplated
herein,
including other related matters, are estimated as follows:
Legal fees
Winthrop, Stimson, Putnam & Roberts
$250,000
Fees relating to appraisal of the Transmission
Assets
89,000 <RR>*</RR>
<RR>Miscellaneous
*</RR>
TOTAL $339,000
<RR>*</RR>
<RR> * To be filed by amendment. </RR>
ITEM 3. APPLICABLE STATUTORY PROVISIONS
-------------------------------
It is believed that Sections 9(a)(2) and 10 of the Act
are
applicable to the acquisition by FirstEnergy of the voting
securities of ATSI in the context of the proposed
transactions. To the extent that the proposed transactions are
considered by the Commission to require authorization, approval
or exemption under any section of the Act or provision of the
rules or regulations thereunder other than those specifically
referred to herein, request for such authorization, approval or
exemption is hereby made.
Upon consummation of the transfer of the Transmission
Assets from
the Operating Companies to ATSI, ATSI will become an "electric
utility
company" as defined in Section 2(a)(3) of the Act as well as a
"public-
utility company" as defined in Section 2(a)(5) of the Act.
Because
FirstEnergy will <RR>, as a result of the transactions
contemplated herein, </RR> be directly acquiring five per
centum or more of the outstanding voting securities of ATSI in
addition to those of each of the Operating Companies (which are
public-utility companies), such acquisition will be subject to
Section 9(a)(2) of the Act. Thus FirstEnergy believes that the
acquisition of the voting securities of ATSI in the context
of the proposed transactions cannot proceed without the
Commission's approval pursuant to Section 10 of the Act. The
relevant statutory standards to be satisfied are set forth in
Sections 10(b), 10(c), and 10(f) of the Act.
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.
1. Section 10(b)(1). The proposed transactions 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.
Notwithstanding the above, as in the case of virtually
every
transaction subject to Section 9(a)(2), there may exist among
FirstEnergy
and its public utility subsidiaries (including ATSI)
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).
Similarly, the <RR> proposed transactions </RR>
acquisition by FirstEnergy of the voting securities of ATSI
will not tend toward any
"concentration of control of public-utility companies" that is
detrimental
to the public interest, consumers or investors. The <RR>
proposed transactions </RR> acquisition by FirstEnergy of
the voting securities of ATSI will not involve the
acquisition of any utility assets that are not already owned,
either directly or indirectly, by FirstEnergy and "will
therefore have no effect on the concentration of control of
public-utility companies." Wisconsin Energy Corp., Holding Co.
Act Release No. 24267, 37 SEC Docket 296, 300 (1986).
In this Application/Declaration, FirstEnergy seeks only
to more
definitively separate its generation from its transmission
facilities in
order to pave the way for complete divestiture of the
transmission
facilities to an RTO. As proposed herein, the Transmission
Assets that
are now owned by the Operating Companies will be divested to,
and acquired
by, ATSI, a corporate subsidiary of FirstEnergy. None of
FirstEnergy, the
Operating Companies and ATSI proposes to merge with any other
entity in
the instant Application/Declaration. ATSI does not currently
own any
generation, distribution or transmission facilities, and will
not own or
control any generation. Upon completion of the proposed
transfer s , the Operating Companies will no longer own
transmission facilities.
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 the investment in and the earning capacity of
the utility
assets underlying the securities being acquired. The
consideration in
connection with security acquisitions under the transactions
contemplated
herein will be as follows: (i) approximately $300 million will
be paid by
FirstEnergy for all of the outstanding voting securities of
ATSI and
(ii) the Transmission Assets will be transferred to ATSI for
the
promissory notes and a cash payment equal to the difference
between the
aggregate principal amount of the promissory notes and the net
book value
of the Transmission Assets. FirstEnergy believes that the
consideration
to be paid by it for the voting securities of ATSI is
reasonable because
the amount of such consideration plus the total amount of debt
that ATSI
will incur in acquiring the Transmission Assets is equal to the
approximate actual value of those assets. FirstEnergy further
believes
that such consideration bears a fair relation to the investment
in and the
earning capacity of the Transmission Assets because it is based
on the net
book value those assets had in the hands of the Operating
Companies. The
rates set by FERC in connection with those facilities when they
were owned
by the Operating Companies permitted them to achieve a fair
return on
those assets. Since ATSI's rates will also be subject to FERC
approval,
it can be expected that those rates (which should be based on
the same
book value) will permit ATSI to achieve a fair return on them
as well.
This being the case, FirstEnergy, being the sole equity owner
of ATSI, can
expect to earn a fair return on its investment. FirstEnergy
believes that
the consideration paid by the Operating Companies for the
promissory notes
is reasonable because the principal amount of the notes, when
added to the
cash that the Operating Companies will receive for the
Transmission
Assets, will be equal to the net book value of those assets on
the books
of the Operating Companies. The consideration paid by the
Operating
Companies bears a fair relation to the investment in and the
earning
capacity of the Transmission Assets because the interest rate
borne by the
promissory notes will be equal to the embedded cost of debt of
the
Operating Companies on a consolidated basis and this amount is
not any
greater than the cost of debt (on a consolidated basis) that
FERC
considered when it approved the transmission rates currently
applicable to
the Transmission Assets. In any event, the proposed
transaction is not in
a real sense an acquisition of securities; it is merely a
corporate
reorganization.
(b) Reasonableness of Fees. An estimate of the fees
and
----------------------
expenses to be paid in connection with the proposed
transactions is set
forth in Item 2 hereof. The estimated amounts to be paid are
fees
for necessary professional services, and other expenses
incurred or to be incurred in connection with carrying out the
proposed transactions. FirstEnergy believes that such fees and
expenses are reasonable and customary for a transaction of this
kind, and the standards of Section 10(b)(2) are thus satisfied.
3. Section 10(b)(3)-Capital Structure. Section
10(b)(3) requires
----------------------------------
the Commission to determine whether the proposed transactions
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. The corporate capital
structure of
FirstEnergy after the consummation of the proposed
<RR>transactions</RR> acquisition will not be unduly
complicated. FirstEnergy will directly acquire all of the
issued and outstanding voting securities of ATSI, in addition
to continuing to own directly or indirectly all of the issued
and outstanding voting securities of each of the Operating
Companies, and thus there will be no minority equity interest
in any of such companies. The Operating Companies will own all
of ATSI's debt securities. No change will be effected in the
capital structure of Penn Power, which will continue to be a
wholly-owned subsidiary of Ohio Edison.
In any event, as set forth more fully in Item 3.B.2 and
elsewhere
in this Application/Declaration, the proposed formation of the
new
transmission company is expected to result in certain benefits
to the
public and to consumers and investors of the FirstEnergy
holding-company
system. FirstEnergy's plan to participate in an RTO, with the
creation of ATSI as a significant step toward that end, will
maximize the value of the Transmission Assets to shareholders.
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 . . . .
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
proposed
transactions it will continue to 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. See FirstEnergy
Form U-3A-
2, "Statement by Holding Company Claiming Exemption Under Rule
U-2 from
the Provisions of the Public Holding Company Act of 1935,"
dated
February 30, 2000, attached hereto as Exhibit G-1.
Section 8 prohibits a registered holding company or any
of its
subsidiaries from acquiring, owning interests in or operating
both a gas
utility company and an electric utility company serving
substantially the
same area if prohibited by state law. Because none of
FirstEnergy and any
of its subsidiary companies owns or has any financial interest
in any gas
utility company and because ATSI will not own or have any
financial
interest in any gas utility company, following the proposed
transactions,
FirstEnergy will not have acquired, and will not own or operate
a gas
utility company.
Section 11(a) of the Act requires the Commission to
examine the
corporate structure of registered holding companies to ensure,
among
others, that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. The proposed
<RR>transactions</RR> acquisition meet s the
standards of Section 11(a) of the Act. As discussed above with
respect to the requirements of Section 10(b)(3) of the Act,
FirstEnergy will directly acquire all of the issued and
outstanding voting securities of ATSI, in addition to
continuing to own directly or indirectly all of the issued and
outstanding voting securities of each of the Operating
Companies, thus leaving no minority interests outstanding. The
Operating Companies will own all of ATSI's debt securities.
Penn Power will continue to be a wholly-owned subsidiary of
Ohio Edison. After the consummation of the proposed
transactions, no person will be a holding company with respect
to FirstEnergy.
2. Section 10(c)(2). As the following discussion will
----------------
demonstrate, the proposed transactions 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. As described more
fully in
--------------------------
Item 1.B.2 above, the proposed transactions tend towards the
following efficiencies and economies: (i) greater corporate
and organizational separation of transmission from generation;
and (ii) by tying together control, planning, maintenance and
financial responsibilities of the Operating Companies'
transmission facilities into a single company having an
independent, streamlined and cost-efficient operation,
synergies will be created that result in better service in the
region and non-discriminatory access for all transmission users
will be assured. FirstEnergy's plan to participate in an RTO,
with the creation of ATSI as a significant step toward that
end, will maximize the value of the Transmission Assets to
shareholders.
(b) Integrated Public Utility System. As applied
to electric
--------------------------------
utility companies, the term "integrated public utility system"
is defined
in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating
plants
and/or transmission lines and/or distributing
facilities, whose
utility assets, whether owned by one or more electric
utility
companies, are physically interconnected or capable of
physical
interconnection and which under normal conditions may be
economically operated as a single interconnected and
coordinated
system confined in its operation to a single area or
region,
in one or more states, not so large as to impair
(considering
the state of the art and the area or region affected)
the
advantages of localized management, efficient operation,
and the
effectiveness of regulation.
The Commission has previously taken notice of
developments that
have occurred in the gas and electric industries in recent
years, and has
interpreted the Act and analyzed proposed transactions in light
of these
changed and changing circumstances. See, e.g., New Century
Energies,
Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997)
(approving
transactions relating to combination of a Colorado gas and
electric
public-utility company and intrastate exempt holding company
and a New
Mexico electric public-utility company), citing Hearing on
Regulation of
Public Utility Holding Companies Before Subcomm, on
Telecommunications and
Finance and Subcomm. on Energy and Power of the House of
Representatives
Comm, on Commerce, 104th Cong., 1st Sess. (Aug. 4, 1995)
(testimony of
Arthur Levitt, Chairman, SEC); "The Regulation of Public-
Utility Holding
Companies," report of the Division of Investment
Management (June 1995) ("1995 Report") at 29-31; and
Consolidated
Natural Gas Co., Holding Co. Act Release No. 26512
(Apr. 30, 1996). See also Rust v. Sullivan, 500 U.S. 173, 186-
87 (1991) ("an agency is not required to" establish rules of
conduct to last forever, "but rather must be given ample
latitude to "adapt [its] rules and policies to the demands of
changing circumstances.") (citations omitted); Shawmut Assn. v.
SEC, 146 F.2d 791, 796-97 (1st Cir. 1945) (an agency "is
expected to treat experience not as a jailer but as a
teacher").
On the basis of the statutory definition above, 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 proposed transactions satisfy 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. Upon consummation
of the
proposed transactions, Ohio Edison, Penn Power, Cleveland
Electric and
Toledo Edison, along with the new transmission company, ATSI,
will
continue to be "physically interconnected or capable of
physical
interconnection" within the meaning of Section 2(a)(29)(A).
The electric
service areas of the Operating Companies are adjacent, with
Ohio Edison
separating Cleveland Electric and Toledo Edison. The proposed
transactions will maintain a continuous, geographically compact
transmission system across northern Ohio and western
Pennsylvania.
Moreover, the service areas served by the Operating
Companies are
already highly interconnected.
Ohio Edison and Penn Power have three 345kV and four
138kV
interconnections. 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. After the transfer of
the
Transmission Assets to ATSI contemplated by the proposed
transactions, the
same physical interconnections will be maintained in the
FirstEnergy
holding company system.
In view of the above, the facts presented clearly
support a finding
that the utility assets of the FirstEnergy system 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. Section
2(a)(29)(A)
of the Act requires that the utility assets, under normal
circumstances,
may be "economically operated as a single interconnected and
coordinated
system." The Commission has interpreted this language to refer
to the
physical operation of utility assets as a system in which,
among other
things, the generation and/or flow of current within the system
may be
centrally controlled and allocated as need or economy directs.
See UNITIL
Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992). The
electric
generation, transmission and distribution system of FirstEnergy
are
operated in a manner that satisfies the standard of economic
and
coordinated operations in Section 2(a)(29)(A) of the Act.
Moreover, as
more fully described in Item 1.C.2 above, the proposed
transactions are
expected to result in greater coordination and more efficient
allocation
of provision of transmission services within the region served
by the
FirstEnergy holding company system.
SINGLE AREA OR REGION. The "single integrated system"
of
FirstEnergy and its subsidiaries are currently confined in its
operations
to a single area or region, namely, northern and central Ohio
and western
Pennsylvania. This will not change as a result of the
consummation of the
proposed transactions, including the introduction of ATSI into
the
existing system.
LOCALIZED MANAGEMENT, EFFICIENT OPERATION AND EFFECTIVE
REGULATION.
The FirstEnergy utility system will not be enlarged at all as a
result of the proposed transactions; thus, they will not impair
the
advantages of localized management, efficient operations and
the
effectiveness of regulation. Moreover, the Commission's past
decisions on
"localized management" show that the proposed transactions
fully preserve
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 effectiveness of regulation will not be diminished
as a result
of the proposed transactions; Ohio Edison, Cleveland Electric
and Toledo
Edison will remain subject to regulation by the PUCO, and Penn
Power will
remain subject to regulation by 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. ATSI
will also
be subject to regulation of the FERC with respect to rates and
other
matters.
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. An application <RR>(a
copy of which is attached hereto as Exhibit D-3)</RR> was filed
for approval of the PUCO with respect to the proposed transfer
of the relevant Transmission Assets from each of the three
Operating Companies to ATSI. Approval from the PUCO was
received on February 17, 2000 and a copy of the Order is
attached as Exhibit D-4. Penn Power is currently subject to the
jurisdiction of the PPUC. An
application with the PPUC <RR>(a copy of which is attached
hereto as Exhibit D-5)</RR> has been filed for approval of the
PPUC with respect to the proposed transfer of the relevant
Transmission Assets from Penn Power to ATSI and the operation
of Penn Power's transmission lines by ATSI. Approval from
the PPUC was received on July 13, 2000 and a copy of the Order
is attached as Exhibit D-6.
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
proposed transactions. Except as set forth below, no other
state or local
regulatory body or agency and no other federal commission or
agency has
jurisdiction over the transactions proposed herein.
A. FEDERAL POWER ACT
Under Section 203 of the Federal Power Act, the FERC has
jurisdiction over the proposed transactions. The Operating
Companies have
filed a joint application with the FERC <RR>(a copy of which is
attached
hereto as Exhibit D-1)</RR> for authority to consummate the
proposed
transactions. This application was approved by the FERC on
October 27,
1999. On March 16, 2000, FERC also approved an initial Open
Access
Transmission for ATSI, and the Ground Lease between ATSI and
the Operating
Companies. <RR>(A copy of the FERC order is attached hereto as
Exhibit D-
2).</RR>
B. STATE PUBLIC UTILITY REGULATION
An application with the PUCO <RR>(a copy of which is
attached hereto as Exhibit D-3)</RR> has been filed for
approval of the PUCO with respect to the proposed transfer of
the relevant Transmission Assets from each of the three
Operating Companies to ATSI. Approval from the PUCO was
received
on February 17, 2000 <RR>and a copy of the Order is attached as
Exhibit D-4.</RR> An application with the PPUC <RR>(a copy of
which is attached hereto as Exhibit D-5) has been</RR>
was filed for approval of the PPUC with respect to the
proposed transfer of the relevant Transmission Assets from Penn
Power to ATSI and the operation of Penn Power's transmission
lines by ATSI. Approval of the PPUC was received on July 13,
2000 and a copy of the Order is attached as Exhibit D-6.
C. 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
EXHIBIT
A-1 Articles of Incorporation of ATSI. (previously filed)
A-2 Amended Articles of Incorporation of FirstEnergy
(Incorporated
by reference to the Form S-4 Registration Statement
filed on
February 3, 1997, File No. 333-21011, as Exhibit (3)-
1).
A-3 Amended Articles of Incorporation of Ohio Edison,
effective
June 21, 1994 (Incorporated by reference to the Form
10-K Annual
Report of Ohio Edison for the year ended December 31,
1994, File
No. 1-2578, as Exhibit 3-1).
A-4 Amended Articles of Incorporation of Cleveland
Electric,
effective May 28, 1993 (Incorporated by reference to
the Form
10-K Annual Report of Cleveland Electric for the year
ended
December 31, 1993, File No. 1-2323, as Exhibit 3a).
A-5 Amended Articles of Incorporation of Toledo Edison,
effective
October 2, 1992 (Incorporated by reference to the
Form 10-K
Annual Report of Toledo Edison for the year ended
December 31,
1992, File No. 1-3583, as Exhibit 3a).
A-6 Agreement of Merger and Consolidation dated April 1,
1929, among
Pennsylvania Power Company (Penn), Harmony Electric
Company and
Peoples Power Company (consummated May 31, 1930),
copies of
Letters Patent issued thereon, together with the
Election Return
and Treasurer's Return, relative to decrease of
capital stock;
Election Return authorizing change of capital stock
and increase
of indebtedness; Election Return authorizing change
of capital
stock; Election Return authorizing increase of
capital stock;
Election Return establishing 4.24% Preferred Stock;
Certificate
with respect to the establishment of the 4.64%
Preferred Stock;
Election Returns and Certificates of Actual Sale in
connection
with the purchase by Penn Power of all the property
of Pine-
Mercer Electric Company, Industry Borough Electric
Company, Ohio
Township Electric Company, and Shippingport Borough
Electric
Company; Certificate of Change of Location of Penn
Power's
principal office; Certificate of Consent authorizing
increase
in authorized Common Stock; Certificate of Consent
with respect
to the removal of limitations on the authorized
amount of
indebtedness of Penn Power; Election Returns and
Certificates
of Actual Sale in connection with the purchase by
Penn Power of
all the property of Borolak Public Service Company,
Eastfax
Public Service Company, Norango Public Service
Company, Sadwick
Public Service Company, Sosango Public Service
Company, Surrick
Public Service Company, Wesango Public Service
Company, and
Westfax Public Service Company; Certificate of Change
of
Location of Penn Power's principal office; Amendment
to the
Charter extending the territory in which Penn Power
may operate
in the Borough of Shippingport, Beaver County,
Pennsylvania;
Certificate of Consent authorizing increase in
authorized Common
Stock; Certificate with respect to the establishment
of the 8%
Preferred Stock; Certificate accepting Business
Corporation Law
of Pennsylvania for government and regulation of
affairs of Penn
Power; Articles of Amendment incorporating certain
protective
provisions relating to Preferred Stock, increasing
amount of
authorized Preferred Stock and authorizing future
increases in
amounts of authorized Preferred Stock without a vote
of the
holders of Preferred Stock; Articles of Amendment
increasing the
authorized number of shares of Common Stock;
Statement Affecting
Class or Series of Shares with respect to the
establishment of
the 7.64% Preferred Stock; Articles of Amendment
increasing the
authorized number of shares of Common Stock; Articles
of
Amendment increasing the number of authorized shares
of
Preferred Stock; Statement Affecting Class or Series
of Shares
with respect to the establishment of the 8.48%
Preferred Stock;
Articles of Amendment authorizing sinking fund
requirements for
Preferred Stock; Statement Affecting Class or Series
of Shares
with respect to the establishment of the 11%
Preferred Stock;
Articles of Amendment increasing the authorized
number of shares
of Common Stock; Statement Affecting Class or Series
of Shares
with respect to the establishment of the 9.16%
Preferred Stock;
Articles of Amendment increasing authorized number of
shares of
Common Stock; Articles of Amendment increasing
authorized number
of shares of Preferred Stock; Statement Affecting
Class or
Series of Shares with respect to the establishment of
the 8.24%
Preferred Stock; Statement Affecting Class or Series
of Shares
with respect to the establishment of the 10.50%
Preferred Stock;
Articles of Amendment increasing authorized number of
shares of
Common Stock; Articles of Amendment increasing
authorized number
of shares of Preferred Stock; Statement
<PAGE>
EXHIBIT
Affecting Class or Series of Shares with respect to
the
establishment of the 15.00% Preferred Stock;
Statement
Affecting Class or Series of Shares with respect to
the establishment of the 11.50% Preferred Stock;
Articles of Amendment increasing authorized number of
shares of
Preferred Stock; Statement Affecting Class or Series
of Shares
with respect to the establishment of the 13.00%
Preferred Stock;
Statement Affecting Class or Series of Shares with
respect to
the establishment of the 11.50% Preferred Stock,
Series B;
Articles of Amendment effective April 2, 1987, adding
a standard
of care for, and limiting the personal liability of,
officers
and directors; Articles of Amendment effective April
1, 1992,
setting forth corporate purposes of the Company;
Statement with
Respect to Shares with respect to the establishment
of the
7.625% Preferred Stock and Statement with Respect to
Shares with
respect to the establishment of the 7.75% Preferred
Stock.
(Physically filed and designated respectively, as
follows: in
Form A-2, Registration No. 2-3889, as Exhibit A-1; in
Form 1-MD
for 1938, File No.2-3889, as Exhibit (a)-1; in Form 1-
MD for
1945, File No. 2-3889, as Exhibit A; in Form U-1,
File No. 70-
2310, as Exhibit A-3 (d); in Form 8-K for March 1951,
File No.
1-3491, as Exhibit B; in Form 8-K for June 1958, File
No. 1-
3491B, as Exhibit 1; in Form 10-K for 1959 as
Exhibits 1, 2, 3
and 4; in Form 8-K for March 1960, File No. 1-3491B
as Exhibit
A; in Form U-1, File No. 70-3971, as Exhibit A-2; in
Form U-1,
File No. 70-4055, as Exhibit A-2; as Exhibits 1
through 8 in
Form 8-K for January 1962, File No. 1-3491; as
Exhibit A in Form
8-K for August 1963, File No. 1-3491; as Exhibits A
and B in
Form 8-K for September 1969, File No. 1-3491; as
Exhibit B in
Form 8-K for April 1971, File No. 1-3491; as Exhibit
B in Form
8-K for September 1971, File No. 1-3491; in Form 8-K
for
September 1972, File No. 1-3491; as Exhibit A in Form
8-K for
December 1972, File No. 1-3491; as Exhibit A in Form
8-K for
March 1973, File No. 1-3491; as Exhibit A in Form 8-K
for
December 1973, File No. 1-3491; as Exhibits A and C
in Form 8-K
for February 1974, File No. 1-3491; as Exhibits A and
B in Form
8-K for January 1975, File No. 1-3491; as Exhibit F
in Form 8-K
for May 1975, File No. 1-3491; as Exhibit A in Form 8-
K for
April 1976, File No. 1-3491; as Exhibit G in Form 10-
Q for
quarter ended June 30, 1977, File No. 1-3491; as
Exhibit C in
Form 10-K for 1977, File No. 1-3491; as Exhibit A in
Form 10-K
for 1977, File No. 1-3491; as Exhibit D in Form 10-Q
for quarter
ended June 30, 1980, File No. 1-3491; as Exhibit (4)
in Form 10-
Q for quarter ended June 30, 1981, File No. 1-3491;
as Exhibit 4
in Form 10-Q for quarter ended June 30, 1982, File
No. 1-3491;
as Exhibit 4 in Form 10-Q for quarter ended September
30, 1982,
File No. 1-3491; as Exhibit 4 in Form 10-Q for
quarter ended
September 30, 1983, File No. 1-3491; as Exhibit 4 in
Form 10-Q
for quarter ended March 31, 1984, File No. 1-3491; as
Exhibit 4
in Form 10-Q for quarter ended June 30, 1984, File
No. 1-3491;
as Exhibit 4 in Form 10-Q for quarter ended September
30, 1985,
File No. 1-3491; as Exhibit 3-2 in Form 10-K for 1987
File No.
1-3491; as Exhibit 3-2 in Form 10-K for 1992 File No.
1-3491; as
Exhibit 19-2 in Form 10-K for 1992 File No. 1-3491;
and as
Exhibit 3-2 in Form 10-K for 1993 File No. 1-3491.)
B-1 Form of Operating Agreement between the Operating
Companies and
ATSI.
D-1 Joint Application of Ohio Edison, Penn Power,
Cleveland Electric
and Toledo Edison to FERC.
D-2 Order of FERC.
D-3 Application to the PUCO.
D-4 Order of the PUCO.
D-5 Application to the PPUC.
D-6 Order of the PPUC. <RR>(To be filed by
amendment.)</RR>
F-1 Preliminary Opinion of Counsel. <RR>(To be filed by
amendment.)</RR>
F-2 Past Tense Opinion of Counsel. (To be filed with
certificate of
notification.)
G-1 FirstEnergy 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 29, 2000
(Incorporated by reference to such filing, File No.
69-423).
G-2 Form 10-K Annual Report of FirstEnergy for the year
ended
December 31, 1999 Incorporated by
reference to such filing, File No. 333-21011).
G-3 Form 10-K Annual Report of Ohio Edison for the year
ended
December 31, 1999 (Incorporated by
reference to such filing, File No. 1-2578).
G-4 Form 10-K Annual Report of Penn Power for the year
ended
December 31, 1999 (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, 1999 <RR> 1998
</RR>(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, 1999 (Incorporated by
reference to such filing, File No. 1-3583).
H-1 Form of Notice of Application.
B. FINANCIAL STATEMENTS
EXHIBIT
FS-1 FirstEnergy Consolidated Balance Sheet as of
December 31,
1999 (see Annual Report of FirstEnergy on
Form 10-K for the year ended December 31, 1999
(Exhibit G-2 hereto)).
FS-2 FirstEnergy 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, 1999 (Exhibit G-
2 hereto)).
FS-3 Ohio Edison Consolidated Balance Sheet as of
December 31,
1999 (see Annual Report of Ohio Edison on
Form 10-K for the year ended December 31, 1999
(Exhibit G-3 hereto)).
FS-4 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, 1999
(Exhibit G-3 hereto)).
FS-5 Penn Power Balance Sheet as of December 31, 1999
(see Annual Report of Penn Power on Form 10-K for
the year ended December 31, 1998 (Exhibit G-4
hereto)).
FS-6 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, 1999 (Exhibit G-4 hereto)).
FS-7 Cleveland Electric Consolidated Balance Sheet as of
December 31, 1999 (see Annual Report of
Cleveland Electric on Form 10-K for the year ended
December 31,
1999 (Exhibit G-5 hereto)).
FS-8 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, 1999
(Exhibit G-5 hereto)).
FS-9 Toledo Edison Balance Sheet as of December 31, 1999
(see Annual Report of Toledo Edison on Form 10-
K for the year ended December 31, 1999 (Exhibit G-6
hereto)).
FS-10 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, 1999 (Exhibit G-6 hereto)).
Financial Statements of ATSI are not included herein
because it has
no assets and has not engaged in any business operations.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
---------------------------------------
The proposed transactions neither involve a "major
federal action"
nor "significantly affect 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. Consummation of the proposed
transactions will not result in changes in the operations of
FirstEnergy,
Ohio Edison, Toledo Edison or Penn Power that would have any
impact on the
environment. No federal agency is preparing an environmental
impact
statement with respect to this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company
Act of 1935, the undersigned company has duly caused this
Amendment No.
<RR>1</RR> 2 to Application/Declaration to be signed on
its behalf by the
undersigned thereunto duly authorized.
Date: <RR>April __, 2000 </RR> July 25, 2000
FIRSTENERGY CORP.
<PAGE>
By: /s/H. PETER BURG
--------------------
H. Peter Burg
Chairman and Chief Executive
Officer
