EXHIBIT D-2
Electric/Telecommunication/Natural Gas Order
STATE OF NORTH CAROLINA UTILITIES
COMMISSION RALEIGH
DOCKET NO. E-2, SUB 753
DOCKET NO. P-708, SUB 5
DOCKET NO. G-21, SUB 387
BEFORE THE NORTH CAROLINA UTILITIES COMMISSION
In the Matter of Application by Carolina )
Power & Light Company, Interpath )
Communications, Inc., and North Carolina )
Natural Gas Corporation to Transfer ) ORDER APPROVING APPLICATION
Ownership of Carolina Power & Light Company, )
Interpath Communications, Inc., and )
North Carolina Natural Gas Corporation to a )
Holding Company )
HEARD: Tuesday, February 8, 2000, at 9:30 a.m. and Tuesday, February
15, 2000, at 1:30 p.m. through Wednesday, February 16, 2000, in Commission
Hearing Room 2115, Dobbs Building, 430 North Salisbury Street, Raleigh, North
Carolina
BEFORE: Commissioner William R. Pittman, Presiding, Chairman Jo Anne
Sanford, and Commissioners Ralph A. Hunt, Judy Hunt, J. Richard Conder, Robert
V. Owens, Jr., and Sam J. Ervin, IV
APPEARANCES:
For Carolina Power & Light Company:
Len S. Anthony, Deputy General Counsel, Post Office Box 1551, Raleigh,
North Carolina 27602-1551
For Carolina Utility Customers Association, Inc.:
James P. West, West Law Offices, P.C., Suite 1735, 434 Fayetteville Street
Mall, Raleigh, North Carolina 27601
For the Carolina Industrial Group for Fair Utility Rates:
Ralph McDonald, Bailey & Dixon, L.L.P.,Post Office Box 1351, Raleigh, North
Carolina 27602-1351
For Public Works Commission, City of Fayetteville:
Gearold L. Knowles, Schiff Hardin & Waite, 1101 Connecticut Avenue, N.W.,
Washington, DC 20036
For the Using and Consuming Public:
Gisele L. Rankin, Staff Attorney, Public Staff _ North Carolina Utilities
Commission, 4326 Mail Service Center, Raleigh, North Carolina 27699-4326
Margaret A. Force and Leonard G. Green, N.C. Department of Justice, Post
Office Box 629, Raleigh, North Carolina 27602-0629
BY THE COMMISSION: On October 15, 1999, pursuant to G.S. 62-111,
Carolina Power & Light Company (CP&L), Interpath Communications, Inc.
(Interpath) and North Carolina Natural Gas Corporation (NCNG) (collectively,
Applicants) filed their Application to Transfer Ownership of CP&L, Interpath and
NCNG to a Holding Company. As amended on January 31, 2000, the transfer of
ownership will be accomplished by the holders of the common stock of CP&L
exchanging their shares for a like number of shares of new holding company
common stock and the new holding company becoming the owner of the CP&L common
stock formerly represented by the CP&L common stock certificates. CP&L, as owner
of NCNG and Interpath, will convey ownership of these two utilities' stock to
the holding company as a stock dividend.
On October 25, 1999, Carolina Industrial Group for Fair Utility Rates
(CIGFUR) filed a Petition to Intervene. On November 10, 1999, Carolina Utility
Customers Association, Inc. (CUCA), the Greenville Utilities Commission (GUC),
and the Cities of Rocky Mount, Wilson and Monroe, North Carolina (Cities) filed
Petitions to Intervene. On November 24, 1999, the Attorney General filed a
Notice of Intervention. On December 13, 1999, the Public Works Commission of the
City of Fayetteville (PWC) and the North Carolina Electric Membership
Corporation (NCEMC) filed Petitions to Intervene. Each of these petitions were
allowed by Commission Order.
On November 3, 1999, the Commission issued an order Scheduling
Hearings and Requiring Prefiled Testimony and Public Notice.
On November 12, 1999, CP&L filed the Testimony of John J. Gillen and
Larry M. Smith. On January 31, 2000, CUCA filed the direct testimony of Kevin
O'Donnell. On February 2, 2000, the Public Staff filed the direct testimony of
Scott Hempling. Also on February 2, 2000, Regulatory Conditions and the Code of
Conduct agreed to by the Public Staff, CP&L, Interpath, NCNG and CP&L Holdings,
Inc. (Holdings) were filed by the Public Staff.
On February 7, 2000, CP&L filed the Rebuttal Testimony of Larry M.
Smith. On February 14, 2000, CUCA filed the additional direct testimony of Kevin
O'Donnell. Also on February 14, 2000, CP&L filed a Motion to reject the
additional direct testimony of Mr. O'Donnell.
On February 15, 2000, CP&L, Interpath, NCNG and the Public Staff
jointly filed a Stipulation stating that they each had agreed to support the
application subject to the Regulatory Conditions contained in the Stipulation
and recommending adoption thereof by the Commission.
This matter came on for hearing as scheduled. At the beginning of the
hearing, following oral argument, the Presiding Commissioner granted CP&L's
motion to reject the additional direct testimony of Mr. O'Donnell
Based on the foregoing, the testimony and exhibits received into
evidence at the hearing, and the entire record of this proceeding, the
Commission makes the following:
FINDINGS OF FACT
1. CP&L is an electric public utility company under the laws of the
State of North Carolina and is subject to the jurisdiction of the Commission.
CP&L is engaged in the business of generating, transmitting, distributing and
selling electric power in its assigned territory in North and South Carolina.
2. NCNG is a local distribution natural gas public utility
incorporated in Delaware, authorized to do business in North Carolina, and
subject to the jurisdiction of the Commission. NCNG provides natural gas,
propane and natural gas transportation services in south-central and eastern
North Carolina. NCNG is a wholly-owned subsidiary of CP&L.
3. Interpath is a telecommunications public utility company under the
laws of the State of North Carolina and is subject to the jurisdiction of the
Commission. Interpath is authorized to provide local and interexchange, long
distance, switched and dedicated services throughout the State of North
Carolina. Interpath is a wholly-owned subsidiary of CP&L.
4. Pursuant to G.S. 62-111, CP&L, NCNG and Interpath seek authority
from the Commission to transfer their ownership to a new holding company. The
transfer of ownership will be accomplished by the holders of the common stock of
CP&L exchanging their shares for a like number of shares of new holding company
common stock and the new holding company becoming the owner of the CP&L common
stock formerly represented by the CP&L common stock certificates. CP&L, as owner
of NCNG and Interpath, will convey ownership of these two utilities' stock to
the holding company as a stock dividend.
5. In order for CP&L, Interpath and NCNG to obtain Commission approval
of the proposed transfer of their ownership to a holding company they must
demonstrate that the transfer is justified by the public convenience and
necessity.
6. CP&L is currently an exempt public utility holding company under
the Public Utility Holding Company Act of 1935.
7. CP&L has diversified its business operations through the ownership
of several subsidiaries, including NCNG, Interpath and SRS, Inc.
8. As a result of these diversification activities, CP&L itself,
functions as both a holding company and an electric public utility company.
9. The Regulatory Conditions and Code of Conduct adopted herein, which
have been agreed to by the Public Staff, CP&L, Interpath and NCNG and committed
to by CP&L, Interpath, and NCNG during their testimony, are adequate to ensure
that there will be no adverse impact on the rates and service of CP&L's and
NCNG's retail ratepayers, that CP&L's and NCNG's ratepayers are protected as
much as possible from potential harm, and that there are sufficient benefits
from the transfer of ownership to offset the potential harms and risks.
10. The transfer of ownership of CP&L, Interpath and NCNG to CP&L
Holding, Inc., as proposed herein, is justified by the public convenience and
necessity.
EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 1-5
These findings of fact are essentially informational, procedural and
jurisdictional in nature and are not in dispute. The description of the proposed
transfer of ownership of CP&L, NCNG and Interpath to a holding company structure
is based upon the amended application filed by CP&L herein.
EVIDENCE AND CONCLUSIONS FOR FINDING OF FACT NO. 6
This finding is based on the Application and the testimony of CP&L
witnesses John J. Gillen and Larry M. Smith.
Through its application and the testimony of Witnesses John J. Gillen
and Larry M. Smith, CP&L explained that both the natural gas and electric
utility industries are subject to the requirements of the Public Utility Holding
Company Act of 1935 (PUHCA). PUHCA provides that a public utility (whether it is
electric or gas) that wishes to merge with another public utility must either:
(1) become a holding company subject to the requirements of PUHCA and the
Securities and Exchange Commission (SEC) rules and regulations promulgated
pursuant to PUHCA; or (2) avoid becoming a holding company by combining all
utility activities into a single corporate entity. As a result of CP&L's (an
electric utility) merger with NCNG (a gas public utility), CP&L became a holding
company under PUHCA. CP&L did not become a registered holding company subject to
the full jurisdiction of the SEC because it qualified for an exemption. This
exemption described in Section 3(a)(2) of PUHCA provides that if a holding
company itself is predominately a public utility whose operations do not extend
beyond the state in which it is organized and contiguous states it qualifies as
an exempt holding company. Since following CP&L's acquisition of NCNG, CP&L was
the holding company and was and is predominately a public utility whose
operations do not extend beyond the state in which it is organized and
contiguous states, it qualified for this exemption. No other party to the
proceeding challenged or questioned CP&L's representations with regard to the
application of PUHCA to its current situation.
EVIDENCE AND CONCLUSIONS FOR FINDING OF FACT NO. 7
This finding is based on the testimony of CP&L witnesses Gillen and
Smith and the testimony of CUCA witness O'Donnell, and the records of the
Commission.
The Commission's records, which are public documents, and the
testimony of CP&L witnesses Gillen and Smith, and CUCA witness O'Donnell
demonstrate that CP&L has diversified its business operations beyond electric
utility service. CP&L currently owns NCNG, a local distribution natural gas
company, Interpath, a telecommunications company, and SRS, an energy services
company. This fact is not in controversy and is admitted by all the parties to
this proceeding.
EVIDENCE AND CONCLUSIONS FOR FINDING OF FACT NO. 8
This finding is based on the testimony of CP&L witness Larry M. Smith.
CP&L witness Smith testified that under CP&L's current corporate structure,
CP&L, the corporation, functions as both an electric utility as well as a
holding company. Both the electric utility and holding company functions are
maintained within CP&L.
None of the other parties to this proceeding challenged CP&L with
regard to this issue.
EVIDENCE AND CONCLUSIONS FOR FINDING OF FACT NO. 9
This finding is based on the testimony of Applicants' witnesses Gillen
and Smith, Public Staff witness Hempling, the Stipulation entered into between
CP&L, NCNG, Interpath, and the Public Staff, and the record contained in Docket
Nos. E-2, Sub 740 and G-21, Sub 377.
Through its application and the testimony of witnesses John J. Gillen
and Larry M. Smith, CP&L explained that both the natural gas and electric
utility industries are subject to the requirements of PUHCA. PUHCA provides that
a public utility (whether it is electric or gas) that wishes to merge with
another public utility must either: (1) become a holding company subject to the
requirements of PUHCA and the SEC rules and regulations promulgated pursuant to
PUHCA; or (2) avoid becoming a holding company by combining all utility
activities into a single corporate entity. As a result of CP&L's (an electric
utility) merger with NCNG (a gas public utility), CP&L became a holding company
under PUHCA. CP&L did not become a registered holding company subject to the
full jurisdiction of the SEC because it qualified for an exemption. This
exemption described in Section 3(a)(2) of PUHCA provides that if a holding
company itself is predominately a public utility whose operations do not extend
beyond the state in which it is organized and contiguous states it qualifies as
an exempt holding company. Since following CP&L's acquisition of NCNG, CP&L was
the holding company and was and is predominately a public utility whose
operations do not extend beyond the state in which it is organized and
contiguous states, it qualified for this exemption. In their application in this
docket, the Applicants acknowledged that the new holding company may no longer
be exempt and may be required to register under PUHCA. The Applicants have
sought to qualify under a different exemption, that described in Section 3(a)(1)
of PUHCA, which requires that the utilities' operations be primarily intrastate
in nature. It is unclear whether the holding company will qualify for this
exemption.
In Docket Nos. E-2, Sub 740 and G-21, Sub 377, the docket established
by the Commission to address CP&L's and NCNG's application to engage in a
business combination transaction, the Commission approved a Code of Conduct and
set of Regulatory Conditions which are intended to protect NCNG's and CP&L's
customers from: (1) all direct and indirect costs of the merger; (2) any
potential adverse affects on CP&L's and NCNG's cost of capital; (3) potential
deterioration in CP&L's and NCNG's quality of service and increases in rates;
(4) the potential for CP&L and NCNG to unreasonably favor their affiliates; (5)
any potential harm to competition between gas and electric service; (6) the
potential for NCNG to discriminate against other gas customers in favor of CP&L;
(7) the potential for discrimination by NCNG against non-affiliated electric
generators; and (8) potential bias in electric generation siting.
In this docket, the Applicants and the Public Staff revised the Code
of Conduct and established numerous additional Regulatory Conditions in order to
ensure that the protections created by the original Code of Conduct and
Regulatory Conditions are preserved once CP&L converts to a holding company
structure as well as to protect this Commission's jurisdiction to the greatest
extent possible if CP&L converts to a registered holding company structure.
Regulatory Conditions 1-14 of the Conditions attached to the Stipulation entered
into between the Applicants and the Public Staff are the holding company
conditions. These Regulatory Conditions are practically identical to those
approved by the Commission with regard to the mergers of SCANA Corporation with
Public Service Company of North Carolina, Inc. and Dominion Resources, Inc. with
Consolidated Natural Gas Company, both of which involved registered holding
companies.
Public Staff witness Hempling testified that if CP&L converts to a
registered holding company under PUHCA, this Commission's traditional authority
to regulate CP&L will become uncertain because of the potentially preemptive
relationship between PUHCA and State law. Because of this concern, the Public
Staff proposed, and the Applicants agreed to, numerous Regulatory Conditions
designed to protect the Commission's jurisdiction from PUHCA preemption growing
out of CP&L's formation of a registered holding company. The 14 Regulatory
Conditions in question can be broken down into 4 categories: (1) inter-
affiliate transactions involving goods and services; (2) inter-affiliate
financing transactions; (3) inter-affiliate transfers of assets; and (4) general
conditions. Regulatory Condition No. 1 describes procedures related to the
Commission's review of inter-affiliate contracts subject to Section 13 of PUHCA.
Pursuant to this condition, CP&L and NCNG must obtain Commission permission
before engaging in such inter-affiliate transactions. In addition, the contracts
themselves must provide that CP&L and/or NCNG may not: (1) make or incur a
charge under the contract except in accordance with North Carolina law; or (2)
seek to reflect in rates any costs incurred or revenue earned under the contract
except as permitted by the Commission. Finally, the SEC must have found that the
contracts, including these terms, are not inconsistent with PUHCA, except that
no such finding by the SEC is required if no SEC authorization of the contract
is required under PUHCA. As a result, a utility's obligation to pay charges
under the SEC jurisdictional contract will be limited to those charges
determined by the Commission to be consistent with the utility's state law
obligations to charge just and reasonable rates. If the utility is not obligated
to pay a charge unless it has been filed with and approved by the state
commission, it incurs no cost which the state would have to disallow.
Regulatory Condition 2 obligates CP&L and NCNG and their affiliates to
refrain from challenging a Commission disallowance on preemption grounds. This
condition will assist the Commission by reducing the probability of having to
defend its retail ratemaking actions in court.
Regulatory Condition 3 requires CP&L and NCNG to ask the SEC to make
explicit the fact that its approval of the creation of a holding company, if
such approval is necessary, does not preempt the Commission. Such language in an
SEC order will bolster the Commission's position should any preemption challenge
later be brought to a Commission order. Regulatory Condition 4 contains the
standard language preventing CP&L and NCNG from paying more than market price
for any good and/or service purchased under an inter-affiliate transaction.
Regulatory Condition 5 requires any inter-affiliate financing
agreements between and among CP&L and NCNG and their affiliates to state that
CP&L and NCNG may not commit themselves to terms except in accordance with North
Carolina law and the Commission's rules and may not reflect in retail rates
financing costs not allowed by the Commission. Regulatory Condition 6 requires
CP&L and/or NCNG, if they seek approval from the SEC for the creation of a
holding company, to seek language in the SEC approval order stating that the
order does not prevent the Commission from exercising its customary powers over
CP&L's and NCNG's revenue requirements. Regulatory Condition 7 prohibits CP&L
and NCNG from challenging on preemption grounds a Commission review of inter-
affiliate financing transactions.
Regulatory Conditions 8-12 attempt to protect the Commission from the
risk of preemption regarding the transfer of assets within the corporate family
should CP&L become a registered holding company. Under Regulatory Condition 8
where there is a voluntary transfer of assets by a utility to an affiliate, the
transferor may not commit to the transaction, and may not reflect the
transaction in North Carolina retail rates, except upon terms that are in
accordance with North Carolina law and the Commission's decisions.
Regulatory Condition 9 requires CP&L and NCNG to include the
commitment made in Regulatory Condition 8 in any application to the SEC for
approval of the transaction. Regulatory Condition 10 requires CP&L and NCNG and
their holding company to include in their application for approval of the
acquisition filed with the SEC a request that the SEC find that approval does
not prevent the Commission from altering that structure pursuant to state law by
exercising authority over transfers of assets. Regulatory Condition 11 protects
the Commission's ability to reflect the proper price associated with transfers
and setting North Carolina rates. Regulatory Condition 12 prohibits CP&L and
NCNG from asserting preemption by the SEC, thus reducing the probability of
future legal challenges to Commission orders.
Regulatory Conditions 13 and 14 are general conditions. Regulatory
Condition 13 requires that CP&L and NCNG and their holding company and their
affiliates bear the full risk of preemption. It also specifically commits these
companies to take such actions as the Commission deems necessary to preserve its
jurisdiction and to bear the cost consequences if such jurisdiction is
diminished. Finally, Regulatory Condition 14 anticipates the possibility that
Congress might repeal PUHCA and requires CP&L and/or NCNG to work with the
Public Staff to negotiate any changes to these conditions necessitated by this
change in federal law.
None of the other parties to this proceeding, including CUCA, objected
to or commented upon the revised Code of Conduct and the Regulatory Conditions
agreed to by the Applicants and the Public Staff. CUCA, however, notes that on
cross-examination, Public Staff witness Hempling, who proposed the Regulatory
Conditions to preserve the Commission's jurisdiction and keep ratepayers in the
same place they would be without the Applicants' proposed transfer of ownership,
acknowledged that he had neither identified any quantified or quantifiable
benefits nor opined that the application was justified by the public convenience
and necessity. The Commission concludes that the revised Code of Conduct and the
Regulatory Conditions agreed to by the Applicants and the Public Staff
adequately protect the Commission and the utilities' customers from any adverse
impact of CP&L's conversion to a holding company structure. To the extent
unforeseen or unintended issues arise, any interested party may bring them to
the attention of the Commission and the Commission has the authority to take
action. The Commission will make the revised Code of Conduct and the Regulatory
Conditions express conditions of approval of CP&L's conversion to a holding
company structure.
EVIDENCE AND CONCLUSIONS FOR FINDING OF FACT NO. 10
This finding is based on the testimony of Applicants' witnesses Gillen
and Smith and the testimony of CUCA witness O'Donnell.
The Applicants' witness Smith explained that at this point in time,
CP&L's diversification activities have been relatively minimal. Under CP&L's
current corporate structure, CP&L, as the parent company, performs holding
company functions as well as operates as an electric utility. Mr. Smith
explained that this business organization, while adequate at the moment, will
become inadequate and create greater and greater confusion as CP&L's
diversification activities grow and become a larger portion of CP&L's overall
business activities. Mr. Smith explained that CP&L has safeguards in place today
to ensure that there is adequate separation between CP&L's businesses, however,
as these businesses grow it will become necessary to create a greater separation
between CP&L's electric utility activities, its telecommunications activities,
its gas activities and its holding company activities.
The Applicants' witness Gillen testified that consolidation in the
electric industry has become not only a trend, but a necessity. He identified
numerous mergers and acquisitions that have occurred just since 1997 and
explained that these business combinations have been driven by the need for
electric companies to grow to a size large enough to achieve certain economies
of scale and to diversify their energy offerings to include both electric and
gas. He further explained that if CP&L is to survive and continue to provide
adequate, reliable service to its customers in North and South Carolina, it must
be able to grow to a size sufficient to enjoy the economies of scale and scope
and financial strength enjoyed by these other utilities. According to Mr.
Gillen, the dynamics and forces currently impacting the electric industry
dictate that CP&L must grow and be in a position to grow or else it exposes
itself to the very real possibility of being unable to survive as a stand-alone
entity.
The Applicants' witness Smith explained that any business, including a
utility, has to plan well in advance to establish the corporate structure
necessary to allow it to respond to the changing needs of its industry. He
testified that CP&L is in the process now of putting itself in the position to
effectively deal with changes in its industry, including the potential for
deregulation as well as the trend towards consolidation, and also to establish a
corporate structure that allows a more clear separation of its businesses as
CP&L continues to diversify in order to survive and prosper.
Witnesses Gillen and Smith also explained that in addition to CP&L's
diversification activities and the consolidation of electric and gas companies
in the industry, the events occurring in the electric industry with regard to
deregulation require CP&L to examine its corporate structure. According to CP&L,
the existing problems involved with a holding company also functioning as a
utility, the fact that these problems are exacerbated by further
diversification, the need for CP&L to further grow and diversify to survive and
prepare for possible deregulation all dictate that CP&L find a way to more
clearly separate its utility operations from its holding company operations and
CP&L's affiliates.
According to the Applicants' witness Gillen there are numerous
benefits that he believes the Applicants and the Commission will enjoy if CP&L
is allowed to convert to the proposed holding company structure. These benefits
and advantages include:
(1) The corporate separation and financing flexibility afforded by a
holding company structure will increase the holding company's ability to respond
to changes in the electric and/or gas industry, markets and regulation. When new
business opportunities arise, they can be operated as holding company
subsidiaries, enhancing the separation between CP&L's utility operations and
those businesses. The separation will insulate CP&L and its customers from the
risk associated with operating other businesses.
(2) The holding company structure will permit the use of financing
techniques that are more directly suited to the particular requirements,
characteristics and risks of the holding company's other businesses, without
impact on the capital structure or cost of capital of CP&L.
(3) The other businesses can obtain funds from the holding company,
from affiliates other than CP&L or from their own outside financing.
(4) Legally separate entities make management of each business more
accountable and regulation less complex, and allows for better evaluation of the
success of each business.
The Applicants' witness Smith explained that the proposed holding
company structure will allow CP&L and NCNG to more clearly segregate their
utility businesses from their non-utility operations. This segregation will
provide improved regulatory oversight of CP&L's and NCNG's utility operations
because of the clear separation between utility and non-utility activities. Mr.
Smith further testified that a parent holding company structure allows a
regulated utility to be maintained as a separate legal entity, separate from its
holding company. It allows new, regulated and non-regulated entities to be added
without affecting the legal entities already under the holding company. In
addition, it provides for a clear separation of the capital structure that is
supporting each legal entity. It also makes the tracking of costs and revenues
between each of the businesses more simple. Finally, he testified that there are
now over 66 public utility holding companies in the United States operating
electric and gas public utilities in 42 states which indicates that a holding
company structure is a common and accepted corporate structure for diversified
business activities.
Mr. O'Donnell testified on behalf of CUCA in opposition to the
requested ownership transfer to a holding company. According to Mr. O'Donnell,
the possibility that CP&L will be required to reorganize in a holding company
structure in order to accomplish future mergers is not a sufficient basis upon
which to conclude that the Applicants' proposed restructuring is justified by
the public convenience and necessity. Mr. O'Donnell testified that a holding
company structure is more problematic than beneficial and therefore should not
be adopted until necessitated by a merger that provides sufficient ratepayer
benefits to offset potential costs and problems associated with the holding
company structure.
He also did not believe that the creation of a holding company would
allow for clearer segregation of utility versus non-utility income. Mr.
O'Donnell testified that cost allocation problems are enhanced as a utility
diversifies into new businesses. He also disagreed with the Applicants'
witnesses that the creation of a holding company will allow for a clearer
separation of capital structure for each subsidiary. In addition, he expressed
his opinion that a holding company structure will not insulate CP&L's customers
from the risks associated with operating other businesses.
Mr. O'Donnell warned that the creation of a holding company may result
in limitations on the Commission's regulatory oversight on CP&L. He also opined
that the survival of a utility in a competitive market is dependent upon the
ability to operate as a low cost provider rather than the ability to grow. Mr.
O'Donnell stated that growth does not necessarily equate to financial strength
and may in fact erode financial strength due to the accumulation of debt.
On cross-examination, Mr. O'Donnell acknowledged that CP&L had already
diversified into gas, telephone and consulting services, and he explained that
such diversification would be detrimental to ratepayers if the regulated entity
is subsidizing non- regulated ventures and detrimental to shareholders if the
non-regulated ventures lose money. He also agreed that cost allocation, capital
structure and rate of return issues exist today.
In rebuttal of Mr. O'Donnell's testimony, Mr. Smith described Mr.
O'Donnell's position as opposed to diversification because diversification
creates cost allocation, capital structure, and return on equity issues. Mr.
Smith acknowledged that diversification creates cost allocation problems, but
argued that diversification and growth are necessary. According to Mr. Smith,
"it is in the public interest for CP&L to grow, diversify, increase its
economies of scope and scale and to survive."
The standard to be applied by the Commission, as in merger proceedings
under G.S. 62-111, is whether the proposed transfer of ownership is justified by
the public convenience and necessity. The question, therefore, before the
Commission is whether there are sufficient identified benefits to offset
identified potential harms to the holding company structure to warrant its
approval. The Commission specifically notes Regulatory Conditions 43 and 44,
which have been agreed to by the Applicants:
(43) The Utilities agree that the benefits, costs, and associated risks of
the Formation and the operation of the Utilities under a holding company
structure will continue to be subject to NCUC review as part of this docket
or other proceedings. The NCUC retains the right to order modifications to
the structure or operations of Holdings, any Service Company, another
Utility, another Affiliate, and/or a Nonpublic Utility Operation providing
goods or services to the Utilities, and/or to take whatever action the NCUC
deems necessary to protect the Utilities' North Carolina regulated
customers.
(44) Any approval by the NCUC of the transfer of the Utilities to Holdings
shall not be considered, cited, or argued to constitute any finding or
predisposition by the NCUC that it is in the public interest for any future
diversification, expansion, acquisition, combination, merger, or transfer
of control by or involving Holdings, any Affiliate, any Nonpublic Utility
Operations, or other entity within the Holding Company System to occur.
The Commission concludes that the benefits testified to by the
Applicants' witnesses, particularly that the holding company structure may
simplify Commission oversight of the Applicants' regulated operations, in
conjunction with Regulatory Conditions 43 and 44 agreed to by the Applicants,
provide ample support for the adoption of the proposed holding company structure
while offsetting the potential harms and risks. The Commission notes, as
contemplated by these Regulatory Conditions, that it reserves the right to order
further changes in corporate structure, if necessary.
CONCLUSIONS OF LAW
1. Under the relevant statute, G.S. 62-111, the Commission has broad
authority to review all aspects of the proposed transfer of ownership and to
balance all potential benefits and costs to determine if they should be
authorized.
2. Approval should be given to CP&L, Interpath, and NCNG's proposed
transfer of ownership only if sufficient conditions are imposed to ensure that
the transfer will have no known adverse impact on the rates and service of
CP&L's and NCNG's ratepayers; CP&L's and NCNG's ratepayers are protected as much
as possible from potential harm; and these ratepayers will receive sufficient
benefit from the transfer to offset any potential costs, risks, and harms.
3. The Regulatory Conditions and Code of Conduct approved herein are
intended to prevent the transfer of ownership from having any known adverse
impact on the rates and service of CP&L's and NCNG's ratepayers; to protect
those ratepayers as much as possible from potential harm; and to provide
sufficient benefits from the transfer to offset any potential costs, risks, and
harms.
4. Based on its application of the foregoing standards to the facts of
this case, with particular attention paid to the Regulatory Conditions and Code
of Conduct approved herein, the Commission concludes that the proposed transfer
of ownership is justified by the public convenience and necessity, and that it
should be approved.
IT IS, THEREFORE, ORDERED as follows:
1. That CP&L, Interpath and NCNG's application to transfer ownership
to a holding company, as described herein and in the amended application, is
approved upon the following Regulatory Conditions with which CP&L, Interpath and
NCNG are hereby ordered to comply:
For purposes of the following Regulatory Conditions, the following definitions
shall be applicable:
Affiliate: Any company or subsidiary, ten percent (10%) or more of the
outstanding voting securities (and/or other measures of ownership interest)
of which are owned, controlled, or held with power to vote, directly or
indirectly, by Holdings, and is thus affiliated with both Holdings and each
of the Utilities.
CP&L: The public utility operations of Carolina Power & Light Company as
defined in G.S. 62-3(23).
Formation: The formation of Holdings and the transfer of stock of the
Utilities and/or other Affiliates to Holdings.
Holding Company System: Holdings and all if its Affiliates.
Holdings: The holding company established to hold 100% of the stock of each
of the Utilities (including each Utility's Nonpublic Utility Operations)
and stock/ownership interests in other Affiliates.
Interpath: The public utility operations of Interpath Communications, Inc.,
as defined in G.S. 62-3(23).
NCNG: The public utility operations of North Carolina Natural Gas
Corporation as defined in G.S. 62-3(23).
NCUC: The North Carolina Utilities Commission.
Nonpublic Utility Operations: All activities engaged in by one or more of
the Utilities, involving the sales of goods or services that are not
regulated by the North Carolina Utilities Commission.
Service Company: An Affiliate that provides shared goods and/or services to
Holdings, one or more of the Utilities, one or more of the other
Affiliates, and/or one or more of the Nonpublic Utility Operations.
Utilities (collectively) or Utility (singly): The public utility operations
of CP&L, NCNG, and/or Interpath.
REGULATORY CONDITIONS
(1) With respect to any transaction that is subject to Section 13 of the Public
Utility Holding Company Act of 1935 (PUHCA), the following requirements and
procedures shall apply:
(a) CP&L and/or NCNG shall not engage in any such transaction without first
obtaining from the NCUC such decision as is required under North Carolina
law accepting the contract that memorializes such a transaction and
authorizing the payment of compensation or fees pursuant thereto. CP&L
and/or NCNG shall submit each proposed contract to the Public Staff for
informal review at least ten days before filing it with the NCUC.
(b) Any such contract shall provide that CP&L and/or NCNG:
(i) may not make or incur a charge under any such contract except in
accordance with North Carolina law and the rules, regulations and
orders of the NCUC promulgated thereunder; and
(ii) may not seek to reflect in rates any (A) cost incurred under such
contract exceeding the amount allowed by the NCUC or (B) revenue level
earned under such contract less than the amount imputed by the NCUC.
(c) CP&L and NCNG shall certify that neither CP&L, NCNG, Holdings, nor any
Affiliate thereof has made any filing with the SEC inconsistent with such
contract. Such certification shall be repeated annually on the anniversary
of the first certification.
(d) The SEC shall have found that such contract is not inconsistent with
PUHCA, except that no such finding by the SEC shall be required if no SEC
authorization of such contract is required under PUHCA.
(2) Neither CP&L, NCNG, Holdings, nor any Affiliate thereof shall assert in any
forum, with respect to any transaction to which CP&L and/or NCNG is involved and
which is subject to Section 13 of PUHCA, that PUHCA in any way preempts the NCUC
from reviewing the reasonableness of any commitment entered into by CP&L and/or
NCNG and from disallowing costs or imputing revenues, related to such
commitment, to CP&L and/or NCNG. Should any other entity so assert, CP&L, NCNG,
their affiliated holding company and any Affiliate thereof shall not support any
such assertion and shall, upon learning of such assertion, so advise and consult
with the NCUC and the Public Staff regarding such assertion.
(3) CP&L, NCNG, Holdings or all three shall request the SEC to include the
following language in any order issued approving the creation of the holding
company and its acquisition of CP&L and NCNG (the acquisition):
Approval of this application in no way precludes the North Carolina
Utilities Commission from scrutinizing and disallowing charges incurred or
made or allowing or imputing a different level of such charges when setting
rates for services rendered to customers of affiliated public utilities in
North Carolina.
(4) Neither CP&L nor NCNG shall take any service from an Affiliate under
circumstances where the costs incurred for that service (whether directly or
through allocation) exceed fair market value.
(5) With respect to any financing transaction entered into between and/or among
CP&L, NCNG, and Holdings and/or any one or more of its other Affiliates, any
contract memorializing such transaction shall provide that CP&L and/or NCNG:
(a) may not enter into any such financing transaction except in accordance
with North Carolina law and the rules, regulations and orders of the NCUC
promulgated thereunder; and
(b) may not reflect in rates the effect of any capital structure or debt
and/or equity costs except as allowed by the NCUC.
(6) CP&L, NCNG, Holdings or all three shall include in any application for
approval of the acquisition filed with the SEC pursuant to PUHCA a request that
the SEC include the following statement in its approval order(s):
The SEC further finds that its approval of this acquisition or future
financing arrangements does not preclude the NCUC or other regulatory
authority from setting rates based on the assumption of a capital
structure, a corporate structure, debt costs or equity costs that varies
from the structure(s) or cost(s) approved in this Order.
(7) Neither CP&L, NCNG, Holdings, nor any other Affiliate thereof shall assert
in any forum, with respect to any financing transaction with which CP&L and/or
NCNG is involved and which is subject to PUHCA, that PUHCA in any way preempts
the NCUC from exercising any lawful authority it may have over such financings
or that the NCUC is precluded from setting rates based on the capital structure,
corporate structure, debt costs, or equity costs that it finds to be appropriate
for ratemaking purposes. Should any other entity so assert, CP&L, NCNG, their
affiliated holding company and other Affiliates shall not support any such
assertion and shall, upon learning of such assertion, so advise and consult with
the NCUC and the Public Staff regarding such assertion.
(8) With respect to the voluntary transfer by CP&L, NCNG, or any Affiliate
thereof to nonjurisdictional operations, an Affiliate, and/or a nonaffiliate of
the control or ownership of any asset or portion thereof used for the
generation, transmission, distribution or other provision of electric and/or
natural gas service to customers in North Carolina:
(a) CP&L, NCNG, Holdings, and any Affiliate shall not commit to or carry
out such a transfer except in accordance with North Carolina law and the
rules, regulations and orders of the NCUC promulgated thereunder; and
(b) CP&L and NCNG may not reflect in rates the value of any such transfer
subject to PUHCA except as allowed by the NCUC.
(9) CP&L, NCNG, Holdings and Affiliates shall include in their application for
approval of the acquisition filed with the SEC pursuant to PUHCA the commitment
set forth in Regulatory Condition 8 above.
(10) CP&L, NCNG, Holdings and Affiliates shall include in their application for
approval of the acquisition filed with the SEC pursuant to PUHCA a request that
the SEC include the following statement in its approval order(s):
CP&L, NCNG, their holding company and affiliates recognize that the NCUC
wishes to preserve its state law authority, under present or future state
law, to require approval of transfers of control or ownership of any asset
or portion thereof from CP&L, NCNG, or one or more of their affiliates to
nonjurisdictional operations, affiliates, or nonaffiliates. Without
conceding their right to assert that the NCUC does not and should not have
such authority, CP&L, NCNG, their holding company and affiliates request
the SEC to state, in its order approving the instant acquisition, that the
SEC does not intend its approval of the acquisition to preclude a future
state commission order mandating or otherwise exercising state authority
over such a transfer of assets.
(11) Any filing with the SEC in connection with asset transfers involving CP&L
and/or NCNG shall request that the SEC include the following language in its
approval order(s):
Approval of this application in no way precludes the North Carolina
Utilities Commission from scrutinizing and establishing the value of the
asset transfer for purposes of determining the rates for services rendered
to CP&L's and/or NCNG's customers. It is the SEC's intention that the North
Carolina Utilities Commission retain the right to review and determine the
value of such asset transfer for purposes of determining rates.
(12) Neither CP&L, NCNG, Holdings, nor any Affiliate thereof shall assert in any
forum, with respect to any asset transfer transaction to which CP&L and/or NCNG
is involved and which is subject to PUHCA, that PUHCA in any way preempts the
NCUC from (a) exercising such authority as it may have under North Carolina law
to mandate, approve or otherwise regulate a transfer of assets by or to CP&L
and/or NCNG, or (b) scrutinizing and establishing the value of the asset
transfers for purposes of determining the rates for services rendered to CP&L's
and/or NCNG's customers. Should any other entity so assert, CP&L, NCNG, Holdings
or other Affiliates shall not support any such assertion and shall, upon
learning of such assertion, so advise and consult with the NCUC and the Public
Staff regarding such assertion.
(13) With respect to the Affiliate transactions, asset transfers, and financings
described in the preceding conditions, CP&L, NCNG, Holdings and any Affiliates
thereof shall bear the full risk of any preemptive effects of PUHCA. The
previous sentence includes, but is not limited to, agreement by CP&L, NCNG,
Holdings, and all Affiliates to take all such actions as may be reasonably
necessary and appropriate to hold North Carolina ratepayers harmless from rate
increases, foregone opportunities for rate decreases or other effects of such
preemption. Such actions include, but are not limited to, filing with and
obtaining approval from the SEC of such commitments as the NCUC deems reasonably
necessary to prevent such preemptive effects.
(14) If PUHCA is amended or replaced by future legislation, representatives of
CP&L, NCNG and Holdings shall meet with the Public Staff promptly after the
passage of such legislation and negotiate in good faith whether and how these
conditions have been affected by such legislation and whether they should be
revised or removed. In the event the parties are unable to reach agreement
within a reasonable time after passage of such legislation, the unresolved
issues shall be submitted to the NCUC for resolution.
(15) CP&L and NCNG shall file with the NCUC, and provide a copy to the Public
Staff, a copy of all applications, reports, or other documents filed with the
SEC under PUHCA by Holdings, any Service Company, the Utilities, other
Affiliates, and/or a Nonpublic Utility Operation. CP&L and NCNG also shall file
with the NCUC all orders issued by the SEC that directly or indirectly affect
any of the Utilities' accounting practices, financings, or operations, and/or
transfer prices or allocations affecting the Utilities.
(16) Unless explicitly superseded by the conditions contained herein, the
conditions agreed to by CP&L and NCNG, and ordered by the NCUC, in Docket Nos.
E-2, Sub 740, and G-21, Sub 377, remain in full force and effect.
(17) All costs of the Formation and all direct and indirect corporate cost
increases, if any, attributable to the Formation shall be excluded from each of
the Utilities' utility accounts, and also shall be excluded from its utility
costs, for all purposes that affect its regulated retail utility rates and
charges. For purposes of this condition, the term "corporate cost increases" is
defined as costs in excess of the level that each of the Utilities (a) would
have incurred using prudent business judgment, or (b) would have had allocated
to it, had the Formation not occurred. "Corporate cost increases" shall also
include any payments made under change-of-control agreements, salary
continuation agreements, and/or other severance- or personnel-type arrangements
that are reasonably attributable to the Formation.
(18) Subject to future orders of the NCUC, and to the extent they affect the
Utilities' costs of providing public utility service, all administrative and
general expenses of Holdings, the Utilities, other Affiliates, and the Nonpublic
Utility Operations shall be distributed for North Carolina retail ratemaking
purposes by either direct assignment, allocation, or such other means as the
NCUC may determine are necessary to assure that the relationships between and
among Holdings, the Utilities, other Affiliates, and the Nonpublic Utility
Operations are consistent with the Code of Conduct approved by the NCUC (or any
subsequent replacement thereof).
(19) Each of the Utilities shall file a cost allocation manual with the NCUC
within nine months after the Formation. Each cost allocation manual shall
describe how all direct, indirect, and other costs will be charged to capital
projects, Holdings, any of the other Utilities, other Affiliates, and/or the
Nonpublic Utility Operations. In that connection, each of the Utilities will
perform a detailed review of the common costs to be allocated and allocation
factors to be used. Within nine months after the Formation, the Utilities shall
each provide a list of items considered to be the shared services of the
Utilities and the basis for each determination. If the organization of any of
the Utilities' public utility operations changes, the affected Utilities will
file with the NCUC any resulting changes to their cost allocation manuals.
(20) Within nine months after the Formation, the Utilities shall file with the
NCUC a cost allocation manual for each Service Company, any Affiliate, or
Nonpublic Utility Operation providing goods and services to any of the
Utilities, and for Holdings, should Holdings provide any such goods or services.
Each cost allocation manual shall describe how all direct, indirect, and other
costs of such provider of goods and services will be charged between and among
Holdings, each of the Utilities, other Affiliates, and the Nonpublic Utility
Operations, and shall include a detailed review of the common costs to be
allocated and the allocation factors to be used. On or prior to the date each
such cost allocation manual is filed, each of the Utilities shall file a list of
the services and goods that are provided or are anticipated to be provided
shortly thereafter by a Service Company, other Affiliate, Holdings, or a
Nonpublic Utility Operation. None of the Utilities shall commit to any cost
allocation that would result from any changes to such cost allocation manual or
list of services and goods until ten days after they have filed such changes
with the NCUC. If the organization of any of the Utilities changes, the affected
Utilities will promptly file with the NCUC any resulting changes to any affected
cost allocation manual.
(21) The Utilities are required to seek out and buy all goods and services from
the lowest cost provider of comparable goods and services. To this end, each of
the Utilities must conduct periodic market price studies for goods and services
it receives from Holdings, any Service Company, another Affiliate, or a
Nonpublic Utility Operation, which allows assessment of whether it could have
acquired the services at a lower market cost from nonaffiliated providers, or
whether it could have provided the service itself at lower cost.
(22) Whenever requested by the Public Staff, one or more of the Utilities shall
meet and consult with the Public Staff regarding plans for significant changes
in their organization and structure, the impact of such plans on their rates,
operations, and service, and proposals for assuring that such plans do not
adversely affect their North Carolina regulated electric customers. If one or
more of the Utilities is planning or considering such changes, the affected
Utilities shall notify the Public Staff in writing.
(23) Any affected Utilities shall file notice with the NCUC 90 days prior to the
initial transfer or any subsequent significant transfer of any services,
functions, departments, employees, rights, obligations, assets, or liabilities
from any of the Utilities to a Service Company, Holdings, another Affiliate, or
a Nonpublic Utility Operation.
(24) The Utilities shall each file annual reports of affiliated transactions
with the NCUC in a format prescribed by the NCUC. The first reports on
affiliated transactions shall be filed on March 31, 2001, for activity through
December 31, 2000, and annually thereafter on March 31.
(25) Transactions between and among each of the Utilities, Holdings, other
Affiliates, and the Nonpublic Utility Operations shall be reviewed regularly by
the Utilities' internal auditors. The Utilities shall make available for review
by the Public Staff and the NCUC all workpapers relating to these internal
audits and all other internal audit workpapers, if any, related to affiliate
transactions, and shall not oppose Public Staff and NCUC requests to review
relevant external audit workpapers.
(26) CP&L will file with the NCUC revisions to its electric cost of service
manual to reflect any changes to the cost of service determination process made
necessary by the Formation, any subsequent alterations in the organizational
structure of Holdings, the Utilities, other Affiliates, or the Nonpublic Utility
Operations, or other circumstances that necessitate such changes.
(27) In accordance with North Carolina law, the NCUC and the Public Staff will
continue to have access to the books and records of each of the Utilities,
Holdings, other Affiliates, and the Nonpublic Utility Operations.
(28) The revenues from certain CP&L electric utility wholesale transactions are
(a) allocated in part to CP&L's North Carolina retail operations in CP&L's North
Carolina retail cost of service study and/or (b) treated in part as a credit to
jurisdictional fuel expenses in CP&L's annual North Carolina retail fuel
proceedings. To the extent commitments to CP&L's wholesale customers relating to
the Formation are made by or imposed upon CP&L, the effects of which serve to
increase the North Carolina retail cost of service and/or North Carolina retail
fuel costs under reasonable cost allocation practices traditionally followed by
CP&L and approved by the NCUC, those effects shall not be recognized for North
Carolina retail cost of service or ratemaking purposes.
(29) For North Carolina electric retail cost of service/ratemaking purposes,
wherever such costs would affect the determination of Harris Purchased Capacity
and Energy Costs calculated pursuant to CP&L's Power Coordination Agreement
(PCA) with the North Carolina Eastern Municipal Power Agency (NCEMPA):
(a) all costs of the Formation and all direct and indirect corporate cost
increases, if any, attributable to the Formation shall be excluded from
CP&L's utility accounts and/or costs. For purposes of this condition, the
term "corporate cost increases" is defined as costs in excess of the level
that CP&L (i) would have incurred using prudent business judgment or (ii)
would have had allocated to it, had the Formation not occurred. "Corporate
cost increases" shall also include any payments made under
change-of-control agreements, salary continuation agreements, and/or other
severance- or personnel-type arrangements that are reasonably attributable
to the Formation; and
(b) subject to future orders of the NCUC, all administrative and general
expenses of Holdings, the Utilities, other Affiliates, and the Nonpublic
Utility Operations shall be distributed for North Carolina retail
ratemaking purposes by either direct assignment, allocation, or such other
means as the NCUC may determine are necessary to assure that the
relationships between and among CP&L, Holdings, other Affiliates, and the
Nonpublic Utility Operations are consistent with the Code of Conduct
approved by the NCUC (or any subsequent replacement thereof).
(30) The Utilities, other Affiliates, the Nonpublic Utility Operations, and
Holdings shall be bound by the Code of Conduct approved by the NCUC. The Code
shall be considered the minimum conditions to which the Holding Company System
is agreeing and shall not preclude the NCUC from amending the Code later to
incorporate additional conditions. If necessary, the Code will be modified if
there is a change in the organizational structure of Holdings, the Utilities,
other Affiliates, and/or the Nonpublic Utility Operations, changes in the
structure of the electric or natural gas industry, or if other changes occur
that warrant such amendments.
(31) Each of the Utilities will continue to take steps to implement and further
its commitment to providing superior public utility service to North Carolina
retail customers following the Formation. CP&L and NCNG will work with the
Public Staff to continue to monitor and improve service quality in the manner
required by the merger conditions set forth in Docket Nos. E-2, Sub 740, and
G-21, Sub 377.
(32) With respect to the voluntary transfer by any of the Utilities, Holdings,
another Affiliate, and/or a Nonpublic Utility Operation to Holdings, one of the
Utilities, another Affiliate, and/or a Nonpublic Utility Operation of the
control or ownership of any asset or portion thereof used (i) for the
generation, transmission, distribution, or other provision of NCUC-regulated
electric power and/or service to customers in North Carolina, (ii) for the
transmission, distribution or other provision of NCUC-regulated natural gas
service to customers in North Carolina, or (iii) for the provision of
NCUC-regulated telecommunications services to customers in North Carolina:
(a) the entity whose asset or assets are the subject of a proposed transfer
shall file an application for approval with the NCUC at least 90 days in
advance of the proposed transfer; and
(b) the Utilities, Holdings, other Affiliates, and/or the Nonpublic Utility
Operations shall not commit to or carry out such a transfer except in
accordance with North Carolina law and the rules, regulations and orders of
the NCUC promulgated thereunder.
(33) CP&L's Nuclear Decommissioning funds shall not be used in full or in part
for the purpose of the Formation or any other purpose other than providing
financial assurance for decommissioning the Harris, Brunswick, and Robinson
nuclear power stations owned by CP&L.
(34) Holdings, the Utilities, other Affiliates, and the Nonpublic Utility
Operations shall keep their respective accounting books and records on an
on-going basis in a manner that will allow all components of the cost of capital
to be identified easily and clearly for each of the Utilities on separate bases.
(35) To the extent the cost rates of any of the Utilities' long-term debt (more
than one year), short-term debt (one year or less) or preferred stock are or
have been adversely affected by the transfer of ownership, through a downgrade
or otherwise, a replacement cost rate to remove the effect will be used for all
purposes affecting any of the Utilities' rates and charges. This replacement
cost rate will be applicable to all financings, refundings, and refinancings.
This procedure will be effective through each Utility's next general rate case.
As part of each Utility's next general rate case, any future procedure relating
to a replacement cost calculation will be determined. This condition does not
indicate a preference by any party for any specific debt rating or preferred
stock rating for any of the Utilities on current or prospective bases.
(36) Each Utility will identify as clearly as possible long-term debt (of more
than one year duration) issued by the respective utility, with either (a) the
assets that are or will be utilized to provide service to the respective
Utility's regulated utility customers or (b) the respective Utility's existing
debt to be replaced with the new debt issuance.
(37) The cost of capital conditions included elsewhere herein shall also apply,
for North Carolina retail cost of service/ratemaking purposes, in all instances
in which the cost of capital affects the determination of Harris Purchased
Capacity and Energy Costs calculated pursuant to CP&L's PCA with NCEMPA.
(38) The cost of capital conditions also will apply to each respective Utility's
determination of its maximum allowable AFUDC rate, the rate of return applied to
any of the Utility's deferral accounts and regulatory assets and liabilities
that accrue a return, and any other component of the Utility's cost of service
impacted by the cost of debt and/or preferred stock. NCNG will continue to apply
an interest rate of 10% to its Deferred Gas Cost and Price Sensitive Volume
Adjustment Accounts.
(39) With respect to all financings, the following shall apply:
(a) For all types of financings (i) for which the Utilities and/or their
subsidiaries are the issuers of the respective securities and (ii) from
which any proceeds will be made available to the Utilities and/or their
subsidiaries, the Utilities and/or their subsidiaries shall request
approval from the NCUC in accordance with G.S. 62-160 through G.S. 62-169
and NCUC Rule R1-16. Generally, the format of these filings should be
consistent with past practices. A "shelf registration" approach (similar to
Docket No. E-2, Sub 738) may be requested.
(b) For all financings for common stock plans that involve the monthly,
quarterly, or other periodic issuances of common stock for dividend
reinvestment, direct purchase, employee incentives, and/or other similar
programs, Holdings, the Utilities and/or their Affiliates shall request
approval from the NCUC in accordance with G.S. 62-160 through G.S. 62-169
and NCUC Rule R1-16. Generally, the format of these filings should be
consistent with past practices.
(c) For all major common stock and any preferred stock, debt, and other
financings (i) for which Holdings and/or its other Affiliates (not the
Utilities and/or their subsidiaries) are the issuers, (ii) from which the
Utilities and/or their subsidiaries receive funds, and (iii) that involve
an effect on the respective Utility's rates and services, Holdings and/or
its other Affiliates (not the Utilities and/or their subsidiaries) shall
request approval from the NCUC in accordance with G.S. 62-160 through G.S.
62-169 and NCUC Rule R1-16.
(d) For all major common stock and any preferred stock, debt, and other
financings (i) for which Holdings and/or its other Affiliates (not the
Utilities and/or their subsidiaries) are the issuers, (ii) from which the
Utilities and/or their subsidiaries receive funds, and (iii) that will not
involve an effect on the respective Utility's rates and services, Holdings
and/or its other Affiliates shall file with the NCUC the following: advance
notification and a demonstration that such a financing will not affect the
respective Utility's rates and services. Such demonstration shall be filed
by a date that allows at least 30 days for review by the NCUC and the
Public Staff.
(e) For all major common stock and any preferred stock, debt, and other
financings (i) for which Holdings and/or its other Affiliates (not the
Utilities and/or their subsidiaries) are the issuers and (ii) from which no
proceeds will be made available to the Utilities or their subsidiaries,
Holdings and/or its other Affiliates (not the Utilities and/or their
subsidiaries) shall file with the NCUC the following: advance notification
and a demonstration that such a financing will not affect any Utility's
rates and services. Such demonstration shall be filed by a date that allows
at least 30 days for review by the NCUC and the Public Staff.
(f) All securities issuances or financings that are associated with a
merger, acquisition, or combination must be filed in conjunction with the
information requirements (application or demonstration of no effect) and
deadlines stated in Regulatory Condition 41.
(40) These conditions do not supersede any orders or directives that have been
or will be issued by the NCUC regarding the issuance of specific securities by
the Utilities. Any issuance of securities in conjunction with the establishment
of Holdings does not restrict the NCUC's right to review, and if deemed
appropriate, adjust the respective Utility's cost of capital for ratemaking
purposes for the effect of these securities.
(41) For all proposed mergers, acquisitions, or combinations involving Holdings,
the Utilities, and/or other Affiliates, advance notification shall be filed with
the NCUC within ten days of the signing of a contract, letter of intent, or
other form of agreement and at least 180 days prior to the proposed closing date
for the proposed merger, acquisition, or combination. For a merger, acquisition,
or combination that is believed to have an effect on any of the Utilities, an
application for approval pursuant to G.S. 62-111 shall be filed at least 180
days prior to the closing date for a merger, acquisition, or combination. For a
merger, acquisition, or combination that is believed to have no effect on any of
the Utilities, a demonstration of no effect shall be filed at least 180 days
prior to the closing date for a merger, acquisition, or combination.
(42) Consistent with North Carolina law, for any acquisition, combination or
merger by or involving Holdings, a Utility, one of more of the other Affiliates,
one or more of the Nonpublic Utility Operations, or another entity within the
Holding Company System over which the NCUC has jurisdiction, the NCUC will have
full authority to consider and reflect appropriately any cost savings,
synergies, and/or other benefits, as well as take appropriate action with
respect to any potential harm, to North Carolina customers resulting from such
acquisition, combination, or merger.
(43) The Utilities agree that the benefits, costs, and associated risks of the
Formation and the operation of the Utilities under a holding company structure
will continue to be subject to NCUC review as part of this docket or other
proceedings. The NCUC retains the right to order modifications to the structure
or operations of Holdings, any Service Company, another Utility, another
Affiliate, and/or a Nonpublic Utility Operation providing goods or services to
the Utilities, and/or to take whatever action the NCUC deems necessary to
protect the Utilities' North Carolina regulated customers.
(44) Any approval by the NCUC of the transfer of the Utilities to Holdings shall
not be considered, cited, or argued to constitute any finding or predisposition
by the NCUC that it is in the public interest for any future diversification,
expansion, acquisition, combination, merger, or transfer of control by or
involving Holdings, any Affiliate, any Nonpublic Utility Operations, or other
entity within the Holding Company System to occur.
(45) Neither Holdings, the Utilities, nor any other Affiliate shall assert, with
respect to Holdings' acquisition of Florida Progress Corporation, that any party
has waived its right in the merger proceeding to pursue cost savings, if any,
that may be realized by the creation of Holdings and the transfer to it of the
Utilities. Further, if no application is filed with the NCUC for approval of the
Florida Progress merger within six months of any NCUC order approving the
transfer of the Utilities to Holdings, then neither Holdings, the Utilities, nor
any other Affiliate shall object to the NCUC initiating a proceeding to
investigate the amount, if any, of cost savings realized by the Utilities as a
result of the creation of Holdings and the transfer of the Utilities thereto.
2. That the Code of Conduct attached hereto as Appendix A, is hereby
approved, and CP&L, Interpath and NCNG are hereby ordered to comply therewith.
ISSUED BY ORDER OF THE COMMISSION.
This the 17th day of May, 2000.
NORTH CAROLINA UTILITIES COMMISSION
Gail L. Mount, Deputy Clerk
mz051700.04
Commissioner Sam J. Ervin, IV concurs.
DOCKET NO. E-2, SUB 753
DOCKET NO. P-708, SUB 5
DOCKET NO. G-21, SUB 387
COMMISSIONER SAM J. ERVIN, IV, CONCURRING:
Although I agree with the ultimate result reached by the majority and
much of its reasoning, I write separately to indicate my limited disagreement
with the majority's reasoning and the basis for my conclusion that the result
reached by the majority is consistent with the relevant provisions of the Public
Utilities Act.
The standard which the Commission must apply in determining whether to
approve establishment of the proposed holding company is set out in G. S.
62-111(a), which provides that "[n]o franchise now existing . . . shall be sold,
assigned, pledged or transferred, nor shall control thereof be changed through
stock transfer or otherwise, or any rights thereunder leased, nor shall any
merger or combination affecting any public utility be made through acquisition
or control by stock purchase or otherwise, except after application to and
written approval by the Commission, which approval shall be given if justified
by the public convenience and necessity." At times when the Commission "is
adjudging public convenience and necessity in the context of proposed transfers
. . . under G. S. 62-111(a), it must inquire into all aspects of anticipated
service and rates occasioned and engendered by the proposed transfer, and then
determine whether the proposed transfer will serve the public convenience and
necessity." State ex rel. Utilities Commission v. Village of Pinehurst, 99 N.C.
App. 224, 229, 393 S.E. 2d 111 (1990), aff'd 331 N.C. 278, 415 S.E. 2d 199
(1992). Although the public convenience and necessity "is a relative or elastic
theory rather than an abstract or absolute rule" and must be determined by
analyzing "[t]he facts in each case," State ex rel. Utilities Commission v.
Casey, 245 N.C. 297, 302, 96 S.E. 2d 8 (1957), the fact that "a proposed
transfer will not adversely affect service to the public" "cannot be a
sufficient condition for satisfying the . . . public convenience and necessity
test under" G. S. 62-111(a). Village of Pinehurst, 99 N.C. App. at 228. As a
result, the Commission cannot approve establishment of the proposed holding
company without determining that the benefits to the public resulting from that
action, either as originally proposed or as conditioned, outweigh any potential
harm to the public relating to the proposed transaction.
The majority has decided in approving the creation of the proposed
holding company that "the benefits testified to by the Applicants' Witnesses,
particularly that the holding company structure may simplify Commission
oversight of the Applicants' regulated operations, in conjunction with
Regulatory Conditions 43 and 44 agreed to by the Applicants, provide ample
support for the adoption of the proposed holding company structure while
offsetting the potential harms and risks." Although I agree that the record
provides adequate support for approval of the proposed holding company, I am
concerned about the appropriateness of the majority's reliance upon all of "the
benefits testified to by the Applicants' Witnesses," which include such
considerations as the perceived necessity for further diversification, the
perceived need for CP&L to participate in future mergers, and similar factors.
As I understand the relevant statutory language, our decision to approve or
disapprove a particular transfer should depend upon definite information which
is currently in the Commission's possession. The present application has not
been coupled with any specific merger approval application or similar proposal.
Without more definite information than is contained in the present record, I
cannot conclude that facilitating future merger activity or additional
diversification would serve the public convenience and necessity. Thus, I am
unable to concur in the majority's decision to approve the creation of the
proposed holding company on the basis, at least in part, of the alleged benefits
of some future merger or diversification program, the merits of which I am
simply not in a position to evaluate at this time.
The only issue which is ripe for decision by the Commission is whether
the creation of the proposed holding company, considered in the light of current
conditions, would serve the public convenience and necessity. As a result, the
Commission's decision in this case must hinge upon a balancing of the potential
ill effects of the proposed transaction, if any, against the benefits which will
result from approval of the proposed transaction under current conditions, if
any. The only potential harms which any party has identified as likely to flow
from the creation of the proposed holding company are the risk of federal
preemption arising from the impact of the Public Utility Holding Company Act and
certain alleged accounting and cost of capital determination problems. The
principal benefit which would allegedly stem from the creation of the proposed
holding company at the present time is the enhanced corporate accounting and
financing flexibility described by the Applicants' witnesses. As a result, the
proper resolution of this proceeding must depend upon the relative weight one
believes should be assigned to these considerations.
The potential harms claimed for the proposed transaction, considered
in conjunction with the conditions proposed by the Applicants and the Public
Staff, do not strike me as entitled to overwhelming weight. Although the danger
of federal preemption of the Commission's regulatory powers under the Public
Utility Holding Company Act is a legitimate concern, the regulatory conditions
proposed by the Public Staff and accepted by the Applicants are comprehensive
and appear to do everything possible to preserve the Commission's regulatory
authority. As a result, unless one believes that the mere risk of federal
preemption, standing alone, justifies rejection of the proposed transfer, which
is a position that I do not accept, one should not give the risk of federal
preemption undue weight in the decision of this matter. The claimed difficulty
of making proper accounting allocation and cost of capital determinations does
not strike me as entitled to significant weight in the ultimate balance either.
The same essential accounting and cost of capital determination issues exist
under CP&L's current corporate structure; for that reason, I do not believe that
the creation of the proposed holding company is likely to increase the severity
of these perceived problems and could well have the opposite effect. Thus, I do
not believe that either of the potential harms identified in the record are
entitled to a great deal of weight in the ultimate balancing process. I do,
however, believe that the accounting and financing flexibility described by the
Applicant's witnesses is entitled to material weight in the ultimate balancing
process. Although CP&L and its subsidiaries are required to allocate costs at
the present time, I am satisfied that the adoption of the proposed holding
company structure will facilitate more accurate and understandable review of the
relevant corporate accounting decisions. Similarly, I believe that the adoption
of the proposed holding company structure will, at least in this instance,
improve the parent corporation's overall ability to provide financing for both
regulated and unregulated subsidiaries in an appropriate and cost-effective
manner. Finally, I agree that a greater reliance upon legally separate entities
will facilitate improved intra-corporate accountability and permit a better
evaluation of the success (or lack thereof) of each of the businesses in which
the Applicants are currently engaged. Although I agree that many of the steps
which may be taken to achieve these ends following the creation of the proposed
holding company are possible under the Applicants' current corporate structure
and although I am certainly not persuaded that the establishment of a holding
company would invariably be in the public interest, I am, on balance, persuaded
that the holding company structure proposed here would facilitate implementation
of the accounting and financing improvements described by the Applicants'
witnesses to a greater extent than would be the case under the existing
corporate structure.
The ultimate balancing of these various considerations is a difficult
process. In other words, this is a very close case. At bottom, however, I am
satisfied that the organizational benefits outlined above outweigh the potential
harms described in the record, particularly given the comprehensive conditions
proposed by the Public Staff and agreed to by the Applicants. As a result, I
concur in the Commission's decision to approve the creation of the proposed
holding company without completely concurring in the reasoning adopted by the
majority.
\s\ Sam J. Ervin, IV
COMMISSIONER SAM J. ERVIN, IV
