EXHIBIT D-2
STATE OF NORTH CAROLINA
UTILITIES COMMISSION
RALEIGH
DOCKET NO. E-2, SUB 760
BEFORE THE NORTH CAROLINA UTILITIES COMMISSION
In the Matter of
Application of CP&L Energy, Inc. to Engage ) ORDER APPROVING
in a Business Combination Transaction ) MERGER AND ISSUANCE
with Florida Progress Corporation ) OF SECURITIES
HEARD: Monday, July 17, 2000, at 7:00 p.m., and on Tuesday, July 18, 2000, at
9:30 a.m., Commission Hearing Room 2115, Dobbs Building, 430
North Salisbury Street, Raleigh, North Carolina
BEFORE: Commissioner William R. Pittman, Presiding; Chair 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
Robert W. Kaylor
Attorney at Law
Law Office of Robert W. Kaylor
225 Hillsborough Street, Suite 480
Raleigh, North Carolina 27603
Len S. Anthony
Kendal C. Bowman
Post Office Box 1551
Raleigh, North Carolina 27602-1551
For the Public Staff - North Carolina Utilities Commission
Antoinette R. Wike, General Counsel
Gisele L. Rankin, Staff Attorney
Public Staff - North Carolina Utilities Commission
Post Office Box 29520
Raleigh, North Carolina 27626-0520
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For the North Carolina Attorney General
Leonard G. Green, Assistant Attorney General
North Carolina Department of Justice
Post Office Box 629
Raleigh, North Carolina 27602
For the North Carolina Justice and Community Development Center (JCDC)
Robert Schofield, Staff Attorney
Post Office Box 28068
Raleigh, North Carolina 27611-8068
For Glenda Michales et al.
Tim W. Phillips
Marcus Trathen
Brooks, Pierce, McLenden et al.
Post Office Box 1800
Raleigh, North Carolina 27602
For the North Carolina Electric Membership Corporation
Thomas Austin
Associate General Counsel
Post Office Box 27306
Raleigh, North Carolina 27611
BY THE COMMISSION: On February 3, 2000, pursuant to G.S. 62-111 and 62-161
and Commission Rule R1-16, CP&L Holdings, Inc. (CP&L Holdings) filed an
Application for authorization to engage in a business combination transaction
between CP&L Holdings and Florida Progress Corporation (FPC), and in connection
with that transaction, authorization to issue common stock without par value.
On February 23, 2000, Carolina Utility Customers Association, Inc. (CUCA),
filed a petition to intervene, which was allowed by Order dated March 6, 2000.
On March 17, 2000, CP&L filed the Direct Testimony and Exhibits of Bonnie
V. Hancock and of Dr. John L. Harris.
On March 21, 2000, the Commission issued its Order scheduling public
hearings, requiring the pre-filing of testimony, allowing the filing of
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petitions to intervene, and requiring CP&L Holdings to give public notice of the
Application and of the scheduled hearings. Notice was properly given by CP&L.
By letter dated March 24, 2000 CP&L Holdings notified the Commission that
it was changing its name to CP&L Energy, Inc. (CP&L Energy).
On April 7, 2000, Carolina Industrial Group for Fair Utility Rates (CIGFUR
II) filed a petition to intervene, which was allowed by Order dated April 13,
2000.
On April 12, 2000, the Attorney General filed its Notice of Intervention.
On May 10, 2000, the North Carolina Electric Membership Corporation (NCEMC)
filed a petition to intervene, which was allowed by Order dated May 23, 2000.
On May 15, 2000, the Greenville Utilities Commission and the cities of
Rocky Mount, Wilson and Monroe filed a petition to intervene, which was allowed
by Order dated May 23, 2000.
On May 25, 2000, the North Carolina Justice and Community Development
Center (JCDC) and Glenda Michales et al. filed Petitions to Intervene. On May
31, 2000, CP&L filed Motions to Deny the Petitions to Intervene of JCDC and of
Glenda Michales et al. On June 5, 2000, JCDC and counsel for Glenda Michales et
al. filed separate Responses to CP&L's Motions to Deny Petitions to Intervene.
On June 6, 2000, the Attorney General also filed a response in opposition to the
Motion to Deny JCDC's Petition. By Order dated June 12, 2000, the Commission
granted both petitions to intervene by JCDC and Glenda Michales et al.
On July 7, 2000, Glenda Michales et al. filed the Direct Testimony and
Exhibits of J. Bertram Solomon and of John R. Jolly, Jr.
On July 10, 2000, the Public Staff filed the Testimony and Exhibits of Dr.
Ben Johnson.
On July 12, 2000, CP&L Energy filed Motions to Strike the Testimony of J.
Bertram Solomon and John R. Jolly, Jr. On July 13, 2000 Glenda Michales et al.
filed a Response to the two Motions to Strike Testimony.
On July 13, 2000, CP&L Energy filed the Rebuttal Testimony of Bonnie V.
Hancock.
On July 17, 2000, a public hearing was held in Raleigh. No public witnesses
appeared at the hearing.
On July 18, 2000, the evidentiary hearing in this proceeding was held as
scheduled. At the beginning of the hearing, CP&L Energy and Glenda Michales, et
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al. informed the Commission that they had reached agreement on all disputed
matters and offered into the record a stipulation which was accepted by the
Commission. All parties agreed to waive cross-examination of all witnesses and
further agreed to allow all pre-filed testimony and exhibits into the record
without the sponsoring witness taking the witness stand. The Commission accepted
into the record all pre-filed testimony and exhibits and the hearing was
adjourned.
Based on the foregoing and all of the parties' testimonies and the exhibits
received into evidence during the proceeding and the entire record, the
Commission now makes the following:
FINDINGS OF FACT
1. CP&L Energy is a corporation organized and existing under the laws
of the State of North Carolina. It is an exempt holding company under the Public
Utility Holding Company Act of 1935 (PUHCA). It owns three North Carolina
jurisdictional public utilities: Carolina Power & Light Company (CP&L), North
Carolina Natural Gas Corporation (NCNG) and Interpath Communications, Inc. CP&L
is an electric utility that provides electric generation, transmission, and
distribution services to customers located within its assigned territories in
North Carolina. NCNG is a natural gas local distribution company providing
natural gas and natural gas transportation services to customers located in its
assigned territory. Interpath is a telecommunications company authorized to
provide local and interexchange long distance switched and dedicated services
throughout North Carolina.
2. FPC is an exempt public utility holding company whose principal
public utility subsidiary is Florida Power Corporation, which is engaged in
providing wholesale and retail electric service primarily in central and
northern Florida.
3. Through its Application to the Commission, CP&L Energy seeks
authorization under G.S. 62-111 and G.S. 62-161 to engage in a business
combination transaction and for authorization to issue common stock without par
value in connection with that transaction. The proposed transaction would make
FPC a wholly owned subsidiary of CP&L Energy.
4. If the merger is approved, shareholders of FPC may elect to receive
$54.00 in cash for each outstanding share of FPC common stock or a number of
shares of CP&L Energy common stock equal to the exchange ratio, subject to
proration in the event that FPC shareholders elect to receive more than 65% of
the total consideration for the exchange in cash, or more than 35% in CP&L
Energy common stock. FPC shareholders will also receive one contingent value
obligation for each share of FPC common stock they own. Each contingent value
obligation will represent the right to receive contingent payment based upon the
net after tax cash flow to CP&L Energy generated by four synthetic fuel plants
purchased by FPC in October 1999.
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5. Upon the closing of the merger transaction, CP&L Energy will become
a registered holding company subject to the jurisdiction of the Securities and
Exchange Commission (SEC) pursuant to PUHCA. The Regulatory Conditions approved
and adopted by the Commission in Docket Nos. E-2, Sub 753, P-708, Sub 5, and
G-21, Sub 387, along with the commitments made by CP&L in that proceeding, when
renewed by CP&L Energy's current Application filing with the SEC containing the
language required by the conditions approved in the holding company proceeding,
are adequate to protect this Commission's jurisdiction from preemption by the
SEC subsequent to CP&L Energy becoming a registered holding company.
6. The Regulatory Conditions adopted by the Commission in Docket Nos.
E-2, Sub 740 and G-21, Sub 377; Docket Nos. E-2, Sub 753, P-708, Sub 5, and
G-21, Sub 387; and this docket, as well as the Code of Conduct previously
adopted by the Commission, subject to appropriate revisions to apply to CP&L
Energy's merger with FPC, are adequate to assure that there will be no adverse
impact on the rates and service of CP&L's and NCNG's customers, that these
customers are protected as much as possible from potential harm, and that these
ratepayers will receive sufficient benefits from the merger to offset any
potential costs, risks, and harms.
7. The Regulatory Conditions agreed to by CP&L Energy and the Public
Staff and adopted by the Commission herein are adequate to protect the
Commission's jurisdiction from the adverse impacts of any potential preemption
by the Federal Energy Regulatory Commission (FERC).
8. The commitments made by CP&L Energy, CP&L and NCNG, including their
absorption of all direct and indirect merger costs and the acquisition
adjustment that will be created upon closing, and the rate reduction and
continued rate cap, constitute an equitable allocation of benefits and costs
between ratepayers and shareholders.
9. The rate concessions agreed to by CP&L Energy and the Public Staff
and the benefits to CP&L, NCNG and their customers resulting from the proposed
merger adequately offset any potential cost, risk, and/or harms to CP&L's and/or
NCNG's customers associated with the merger.
10. The business combination transaction proposed by CP&L Energy is
justified by the public convenience and necessity, and the proposed securities
issuance in connection therewith are for a lawful object, are compatible with
the public interest, are consistent with the proper performance by CP&L Energy,
CP&L and NCNG of their service to the public, and will not impair their ability
to provide service at just and reasonable rates.
11. The acquisition by CP&L Energy of FPC will not materially impact
CP&L Energy's and/or CP&L's market power in North Carolina, or otherwise.
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12. CP&L Energy must ensure that CP&L's North Carolina retail
customers and NCNG's customers are held harmless from any and all current and
prospective liabilities of FPC and its subsidiaries.
EVIDENCE AND CONCLUSIONS FOR
FINDING OF FACT NOS. 1-4
The evidence supporting these findings of fact can be found in CP&L
Energy's Application and in the pre-filed testimony of CP&L Energy witness
Hancock and Public Staff witness Johnson. These findings of fact are essentially
informational, procedural and jurisdictional in nature and are not controverted.
EVIDENCE AND CONCLUSIONS FOR
FINDING OF FACT NO. 5
The evidence supporting this finding of fact is found in the record and
orders issued by the Commission in Docket Nos. E-2, Sub 753, P-708, Sub 5, and
G-21, Sub 387. The Commission takes judicial notice of its Order issued on May
17, 2000 in Docket No. E-2, Sub 753, P-708, Sub 5, and G-21, Sub 387 approving
CP&L's Application to convert to a holding company structure and to transfer its
ownership to CP&L Energy. The Code of Conduct and Regulatory Conditions adopted
in that proceeding along with the commitments made by CP&L in that proceeding,
when renewed by CP&L Energy's current Application filing with the SEC containing
the language required by the conditions approved in the holding company
proceeding, are adequate to protect this Commission's jurisdiction from
preemption by the SEC subsequent to CP&L Energy becoming a registered holding
company. That Order is now final and the time for an appeal of such Order has
passed.
EVIDENCE AND CONCLUSIONS FOR
FINDING OF FACT NOS. 6-10
The evidence supporting these findings of fact is found in the pre-filed
testimony of CP&L witness Hancock and Public Staff witness Johnson. CP&L witness
Hancock explained that the merger will benefit CP&L and its customers by
creating greater resources and greater diversity of resources and customers,
increasing its efficiency, increasing its financial strength, increasing its
size in order to withstand possible hostile takeovers, and reducing its
operating costs by integrating two strong, but medium-sized, companies. Witness
Hancock explained that the combined company will be capable of offering energy
and a broad variety of low cost, quality energy-related services to a broader
customer base during a time of rapid change in the utility industry.
Witness Hancock elaborated on these benefits by explaining that the
combination will strengthen CP&L's ability to maintain investor confidence and
to attract and retain capital needed to finance new growth. The financial
strength and stability of the combined company should enhance its financing
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capability and support its growth objectives. In addition, CP&L's and FPC's
combined generation portfolio and customer mix are more balanced than either
stand-alone company, thus reducing their risk profiles. As a result, CP&L will
be better able to expand its service offerings to respond to customer needs and
demands, and to manage and absorb the risk and volatility inherent in
competitive power supply markets.
Witness Hancock further explained that the merger will allow CP&L to
diversify its fuel and generation mix. CP&L's customers will benefit because
this will reduce CP&L's dependence upon one type of fuel source and reduce
customer exposure to fluctuations in fuel prices. In addition, the merger should
improve the efficiency of the merged company's generation resources and
operations because CP&L is a summer peaking utility with a significant amount of
industrial customer load, while Florida Power is a winter peaking utility with
mostly residential load. Thus, the two companies complement each other in both
peak loads and customer mix.
Witness Hancock further elaborated that the merger will enhance CP&L's
ability to serve its customers in North Carolina by making CP&L a stronger, more
viable company, better able to provide stable and reliable services in any
market or economic environment. Witness Hancock committed that CP&L will
continue to be a good, strong, corporate citizen, headquartered in Raleigh and
that all other things being equal, jobs and investments will occur in North
Carolina.
Regarding the savings CP&L Energy expects to realize from the merger,
Witness Hancock testified that CP&L Energy and FPC estimate the nominal value of
synergies from the merger to be at least one hundred million dollars ($100
million) annually. CP&L Energy expects to realize these synergies through (1)
the integration of corporate functions; (2) the integration of corporate
programs; (3) purchasing economies; (4) fuel procurement; and (5) business
optimization. Savings from integration of corporate functions are estimated to
be $24-32 million. These are labor related savings, primarily from consolidating
corporate and administrative functions into one service company. Savings from
integration of corporate programs are also estimated to be $24-32 million. These
savings are associated with non-labor cost reductions. Purchasing economies are
estimated to be $18-21 million. Fuel procurement savings will be $1-2 million.
Finally, business optimization and sharing of "best practices" will yield $24-30
million in annual savings.
Witness Hancock testified that the extent to which these savings will be
reflected on the books of each company within the CP&L Energy family will vary
by specific initiative and will be dependent on the outcome of the integration
and implementation processes. She explained that both utilities will see a
benefit from the combination of these corporate functions and programs as the
savings are achieved and each utility will continue to allocate its costs
consistent with current jurisdictional cost of service methodologies.
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Public Staff witness Dr. Johnson disagreed with witness Hancock on certain
issues and testified that the merger is driven by issues which are primarily of
concern to CP&L Energy's management and shareholders. He explained that most
large corporate acquisitions and mergers are undertaken to enhance shareholder
value and that this proposed merger is no exception.
Dr. Johnson explained that from a public interest perspective, the
additional jobs and economic development the merger brings to North Carolina and
the Raleigh area are its primary appeal. He testified that this particular
transaction is attractive in large part because it involves a North Carolina
utility taking control of a Florida utility. However, he cautioned that there is
no guarantee that future mergers or acquisitions will be structured in the same
manner or that the combined company will be permanently headquartered in Raleigh
and that it is possible that another firm headquartered outside North Carolina
may seek to acquire CP&L Energy.
Dr. Johnson also explained that the merger would cause the combined
companies to be more highly leveraged. He testified that, while this increase in
leverage would bring with it some risks, CP&L Energy's overall cost of capital
would decline because it will be relying less on high cost equity. This is a
result of the fact that 65% of the purchase price will be paid in cash, which
will cause CP&L Energy to issue new debt, thereby extinguishing the majority of
FPC's equity capital.
Dr. Johnson then explained that, in general, cost savings realized by a
regulated utility will eventually reduce its cost of service and revenue
requirement for ratemaking purposes. Savings that are achieved through mergers
will ultimately tend to benefit customers, because a utility's rates are set on
a cost of service basis. Under traditional rate of return, cost-based
ratemaking, customers are ultimately responsible for reimbursing all reasonable
and prudent costs incurred by the utility. To the extent these costs decline,
the savings will typically be reflected when rates are set.
Dr. Johnson stated that, in order to ensure that the overall benefits of
the merger outweigh the costs and risks, so as to justify approval of the
transaction by the Commission, CP&L Energy and the Public Staff also agreed to a
number of rate reductions. CP&L shall amend its North Carolina retail rate
schedules as follows:
X For calendar year 2002, CP&L will implement a rider on a bills rendered
basis applicable to its non-RTP customers that will provide a uniform
decrement per kWh of usage totaling, in the aggregate for the class, $3
million.
X For calendar year 2003, CP&L will implement a rider on a bills rendered
basis applicable to its non-RTP customers that will provide a uniform
decrement per kWh of usage totaling, in the aggregate for the class, $4.5
million.
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X For calendar year 2004, CP&L will implement a rider on a bills rendered
basis applicable to its non-RTP customers that will provide a uniform
decrement per kWh of usage totaling, in the aggregate for the class, $6
million dollars.
X For calendar year 2005, CP&L will implement a rider on a bills rendered
basis applicable to its non-RTP customers that will provide a uniform
decrement per kWh of usage totaling, in the aggregate for the class, $6
million.
CP&L Energy also agreed to an additional benefit, to be provided in its
2000 fuel case, whereby CP&L will amend its 2000 fuel case Application to
write-off and forego recovery of $10 million of its under-recovered fuel cost
for the test period April 1, 1999 through March 31, 2000, and will recover the
remaining under-recovered fuel costs determined reasonable by the Commission for
that test period over the three year collection period established for its 2001,
2002 and 2003 fuel cases, in three equal installments. No interest will be
recoverable by CP&L in connection with this deferral of fuel cost recovery, nor
will any deferral amounts be offset against any future fuel cost over-recoveries
for purposes of calculating interest on such over-recoveries.
Dr. Johnson testified that the rate reductions and the treatment of
under-recovered fuel costs offer real and measurable benefits to North Carolina
customers as a result of the merger.
CP&L Energy also agreed that it would extend natural gas service through
NCNG to Tabor City in Columbus County by June 30, 2001, provided it can obtain
proper right-of-way on a timely basis, and it will increase its annual
contributions to economic development projects in Eastern North Carolina by
$75,000 for the time period June 1, 2000, through May 31, 2005. Dr. Johnson
viewed these commitments as evidence of CP&L's continued commitment to serving
North Carolina.
Regarding the costs to be incurred by CP&L Energy in order to accomplish
the merger, Dr. Johnson explained that many of these costs will probably be
included as "above-the-line" costs of providing utility service, and thus would
tend to increase the utility's revenue requirement. However, some of the costs
might be classified as non-recurring costs, or they might be categorized as
"below-the-line" costs attributable to shareholders, and thus would not be
considered for ratemaking purposes. Dr. Johnson explained that as a general
principle, ratepayers are expected to reimburse a utility for costs which are
incurred for their benefit, but they are not expected to reimburse costs which
are primarily or exclusively incurred for the benefit of shareholders.
Dr. Johnson discussed in great length the proper accounting treatment of
the goodwill associated with the merger, and, in particular, the extent to which
the purchase price for FPC stock exceeded its book value. He explained that CP&L
Energy had proposed to offset any savings resulting from the merger with the
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amortization of the goodwill associated with the merger to the extent that CP&L
Energy can clearly demonstrate that such savings were realized as a result of
the business combination. Dr. Johnson disagreed with CP&L Energy on this issue,
testifying that goodwill should not be recovered from ratepayers, and gave
several reasons for his position.
To address this issue, CP&L Energy and the Public Staff agreed to the
following conditions:
All costs of the merger shall be excluded from each of the utilities'
accounts, and all direct or indirect corporate cost increases, if any,
attributable to the merger shall be excluded from utilities' costs for all
purposes that affect each of the utilities' regulated retail 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 merger 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
merger.
Any acquisition adjustment that results from the business combination of
CP&L Energy and FPC shall be excluded from CP&L's and NCNG's utility
accounts and treated for regulatory reporting and ratemaking purposes so
that it does not affect CP&L's North Carolina retail electric rates and
charges and NCNG's natural gas rates and charges. This does not prohibit
CP&L from filing additional information showing the acquisition adjustment.
Dr. Johnson further explained that the Regulatory Conditions agreed to by
CP&L Energy and the Public Staff are intended to protect the Commission's
jurisdiction from preemption by the FERC as a result of CP&L and Florida Power
Corporation entering into an integration agreement and to hold CP&L's customers
harmless from any unforeseen impacts of implementing the integration agreement
and to ensure that existing CP&L generation resources remain committed to the
benefit of CP&L's retail customers. The Regulatory Conditions also seek to
ensure that the Commission has the opportunity to review and approve on a timely
basis CP&L's proposed entry into a regional transmission organization (RTO) and
that any risks associated with the time constraints on CP&L to join an RTO are
mitigated. The Regulatory Conditions also address any potential adverse
consequences of CP&L becoming a registered holding company subject to the full
jurisdiction of the SEC and also generally safeguard the Commission's ability to
regulate CP&L and protect its customers from any harmful impacts of the merger.
The Regulatory Conditions agreed to by CP&L Energy and the Public Staff are set
forth in the Ordering Paragraphs of this Order.
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No other party to this proceeding objected to any of these proposed
conditions. Based upon the testimony of Public Staff witness Johnson and CP&L
witness Hancock, the Commission finds that these conditions as well as the
conditions and Code of Conduct adopted by the Commission in Docket Nos. E-2, Sub
740, and G-21, Sub 377, and Docket Nos. E-2, Sub 753, P-708, Sub 5, and G-21,
Sub 387, adequately protect CP&L's customers from any potential harm from the
merger and provide them with significant benefits that adequately offset any
potential cost, risk, or harm resulting from the merger, and, therefore, the
merger is justified by the public convenience and necessity.
EVIDENCE AND CONCLUSIONS FOR
FINDING OF FACT NO. 11
The evidence supporting this finding of fact is found in the prefiled
direct testimony of CP&L Energy witness Harris and Public Staff witness Johnson.
Dr. Harris testified that he had analyzed the impact of the proposed merger on
CP&L's market power and the extent to which such change in market power impacts
North Carolina customers. He found that the merger in this case will not
adversely affect market power in the North Carolina retail market. He explained
that rates for service in that market are fully regulated and therefore will not
be affected by the merger. In addition, the merger will not affect competition
in North Carolina's retail electric markets because FPC does not have the legal
authority to participate in those markets.
Regarding the wholesale market, Dr. Harris explained that the merger will
not produce any meaningful change in the wholesale power markets in North
Carolina. He testified that FPC is not, nor has it ever been, a significant
supplier of wholesale power in North Carolina. Consequently, combining CP&L
Energy and FPC will have no material impact on the North Carolina wholesale
power markets.
Dr. Johnson testified that Dr. Harris' analysis was a competent and
consistent application of the approach described by the FERC in its guidelines.
However, Dr. Johnson did not believe these guidelines are sufficient to
encompass all of the relevant concerns in this proceeding. Dr. Johnson also
explained that he was concerned that CP&L examined retail market power in the
context of the current regulatory environment and that while CP&L's analysis of
this existing market was correct, he felt that CP&L should have considered the
emerging trend towards increased competition in the industry in its analysis.
However, after explaining the basis for his concerns, Dr. Johnson testified that
he agreed with the conclusion reached by Dr. Harris, that is, that the proposed
merger will not adversely affect competitive conditions in the relevant markets
now. He explained that this is a proposed merger of two utilities that are
serving widely separated and economically distinct markets and that they are not
likely to become strong rivals, even if retail competition were to be authorized
in the future. He also explained that the proposed merger could have positive
impacts as well. Dr. Johnson explained that it will allow CP&L to diversify
outside North Carolina, which should reduce its exposure to the risk associated
with increased competition. By reorganizing and expanding, CP&L is placing
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itself in a better position to survive and prosper in the increasingly
competitive climate it sees over the horizon.
Dr. Johnson further testified that provided reasonable conditions are
imposed by the Commission and future developments are monitored carefully, the
proposed merger could ultimately serve to benefit consumers by placing one of
the major utilities in the State in a stronger position to compete with Duke
Power, The Southern Company, and other major utilities. The two conditions
recommended by Dr. Johnson and agreed to by CP&L in this regard are as follows:
CP&L recognizes that the NCUC retains the right to order reasonable
modifications to the structure and/or operations of CP&L and/or its
affiliates, in accordance with the provisions of Regulatory Condition No.
43 to the NCUC's approval of the holding company formation in Docket Nos.
E-2, Sub 753, G-21, Sub 387, and P-708, Sub 5 (Order dated June 17, 2000),
as necessary to address changes in the electric industry consistent with
North Carolina law.
CP&L agrees to hold North Carolina retail customers harmless from any and
all losses associated with or attributable to the six year divestiture by
CP&L of 85 megawatts of capacity and energy, as committed to in the merger
Application filed with the FERC by CP&L Energy and Florida Progress, and
for any and all losses associated with or attributable to the 50 megawatt
transmission path made necessary by that same Application.
No other party presented any evidence on this issue nor challenged these
two witnesses. The Commission finds the testimony of Drs. Harris and Johnson
persuasive and concludes that the proposed conditions are appropriate.
EVIDENCE AND CONCLUSIONS FOR
FINDING OF FACT NO. 12
The evidence supporting this finding of fact is found in the testimony of
Public Staff witness Dr. Ben Johnson, CP&L Energy witness Bonnie Hancock, and
the testimony of John Jolly and Bertram Solomon presented on behalf of
intervenors Glenda Michales et al.
Witnesses Jolly and Solomon explained their concern regarding certain
litigation involving FPC and an FPC subsidiary, Mid-Continent Life Insurance
Company, pending in Oklahoma State Court. Their concern was two-fold: (1) that
the merger might in some manner dissipate FPC assets that might otherwise be
available to satisfy a judgment against Mid-Continent Life Insurance Company
and/or FPC, and (2) that the cost and/or potential judgment associated with this
litigation could increase CP&L's electric rates to its North Carolina customers.
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To address the second of these concerns, CP&L Energy and the Public Staff agreed
to the following condition:
CP&L's North Carolina retail customers and NCNG's customers shall be held
harmless from all current and prospective liabilities of FPC and its
subsidiaries, including, but not limited to, the litigation involving
Mid-Continent Life Insurance Company, pensions and other employee benefits,
decommissioning costs, and taxes.
To resolve the concerns of intervenors Michales' et al., CP&L Energy and
these intervenors entered into a stipulation which was offered into and accepted
into the record without objection. This stipulation is set forth in Attachment 1
to this Order. Basically this stipulation provides that the condition CP&L
entered into with the Public Staff regarding this matter shall be interpreted so
as to prohibit CP&L from seeking to include in its North Carolina retail rates
any direct or indirect costs associated with the Mid-Continent Life Insurance
litigation, including but not limited to attorney's fees, judgments, and
increased cost of debt and/or equity. The stipulation also provides that as a
result of such commitment, and CP&L Energy's representations to the Commission
that FPC will continue to be a going concern and that the merger will not
dissipate any FPC assets or earnings available to satisfy any potential judgment
arising from the Mid-Continent Life Insurance litigation, the concerns of
intervenors Michales' et al. are adequately addressed and they do not oppose the
proposed merger.
No other parties presented any evidence regarding these matters or opposed
the stipulation. Therefore, the Commission finds it to be in the public interest
to approve the stipulation.
CONCLUSIONS OF LAW
1. Under the relevant statutes, G.S. 62-111 and 62-161, the Commission
has authority to review all aspects of a proposed merger and securities
transactions affecting a public utility and to balance all potential benefits
and costs to determine if they should be authorized.
2. Approval should be given to CP&L Energy and FPC's proposed merger
and securities transaction only if sufficient conditions are imposed to ensure
that (a) the merger will have no known adverse impact on the rates and service
of CP&L's and NCNG's ratepayers; (b) CP&L's and NCNG's ratepayers are protected
as much as possible from potential harm; and (c) these ratepayers will receive
enough benefit from the merger to offset any potential costs, risks, and harms.
3. The approved Regulatory Conditions and Code of Conduct are intended
to prevent the merger 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
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possible from potential harm; and to provide enough benefits from the merger 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, the Commission concludes that the requirements of G.S. 62-111 and
G.S. 62-161 have been met, and that the proposed merger and securities
transactions should be approved.
Specifically, the Commission concludes that the business combination
transaction proposed by CP&L Energy and FPC is justified by the public
convenience and necessity, and that the proposed securities transaction in
connection therewith is for a lawful object, is compatible with the public
interest, is consistent with the proper performance by CP&L and NCNG of their
service to the public, and will not impair their ability to provide that service
at just and reasonable rates.
IT IS, THEREFORE, ORDERED that CP&L Energy's Application to engage in a
business combination transaction and to issue securities in connection
therewith, as described herein and in the Application, is approved upon the
commitments made by CP&L Energy and upon the following Regulatory Conditions
with which CP&L Energy is hereby ordered to comply:
1. CP&L recognizes that the NCUC retains the right to order reasonable
modifications to the structure and/or operations of CP&L and/or its Affiliates,
in accordance with the provisions of Regulatory Condition 43 to the NCUC's
approval of the holding company formation in Docket Nos. E-2, Sub 753, G-21, Sub
387, and P-708, Sub 5 (Order dated May 17, 2000), as necessary to address
changes in the electric industry consistent with North Carolina law.
2. CP&L agrees to hold North Carolina retail customers harmless for
any and all losses associated with or attributable to the six-year divestiture
by CP&L of 85 MW of capacity and energy, as committed to in the merger
Application filed with the FERC by CP&L Energy and Florida Progress, and for any
and all losses associated with or attributable to the 50 MW transmission path
made necessary by that same Application.
3. All costs of the merger shall be excluded from each of the
Utilities' utility accounts, and all direct or indirect corporate cost
increases, if any, attributable to the merger shall be excluded from utility
costs for all purposes that affect each of the Utilities regulated retail 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 merger 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 merger.
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4. Any acquisition adjustment that results from the business
combination of CP&L Energy and FPC shall be excluded from CP&L's and NCNG's
utility accounts and treated for regulatory reporting and ratemaking purposes so
that it does not affect CP&L's North Carolina retail electric rates and charges
and NCNG's natural gas rates and charges. This does not prohibit CP&L from
filing additional information showing the acquisition adjustment.
5. CP&L shall amend its North Carolina retail rate schedules as
follows:
For calendar year 2002, CP&L will implement a rider on a bills rendered
basis applicable to its non-RTP customers that will provide a uniform
decrement per kwh of usage totaling, in the aggregate, $3 million. For
calendar year 2003, CP&L will implement a rider on a bills rendered basis
applicable to its non-RTP customers that will provide a uniform decrement
per kwh of usage totaling, in the aggregate for the class, $4.5 million.
For calendar year 2004, CP&L will implement a rider on a bills rendered
basis applicable to its non-RTP customers that will provide a uniform
decrement per kwh of usage totaling, in the aggregate for the class, $6
million. For calendar year 2005. CP&L will implement a rider on a bills
rendered basis applicable to its non-RTP customers that will provide a
uniform decrement per kwh of usage totaling, in the aggregate for the
class, $6 million.
6. CP&L will amend its 2000 fuel case Application to write-off and
forego recovery of $10 million of its unrecovered fuel costs for the test period
April 1, 1999, through March 31, 2000, and will recover the remaining
unrecovered fuel cost determined reasonable by the NCUC for that test period
over the three-year collection period established for its 2001, 2002, and 2003
fuel cases in three equal installments. No interest shall be recoverable by CP&L
in connection with this deferral of fuel cost recovery, nor shall any deferral
amounts be offset against any future fuel cost over-recoveries for purposes of
calculating interest on such over-recoveries.
7. CP&L will extend natural gas service to Tabor City in Columbus
County by June 30, 2001, and increase its annual contributions to economic
development projects in eastern North Carolina by $75,000 for the time period
June 1, 2000, through May 31, 2005.
8. With respect to the transfer by CP&L to any entity, affiliated or
not, of the control of, operational responsibilities for, or ownership of any
asset or portion thereof used for the generation, transmission, distribution, or
other provision of NCUC-regulated electric power and/or service to customers in
North Carolina:
(a) CP&L shall file an Application for approval with the NCUC at least
90 days in advance of the proposed transfer; and
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(b) CP&L, CP&L Energy, and/or any other Affiliates shall not commit to
or carry out such a transfer except in accordance with all applicable laws and
the rules, regulations and orders of the NCUC promulgated thereunder.
9. Any contract regarding CP&L's membership in an RTO must contain a
regulatory out clause making CP&L's involvement conditional upon state
regulatory approval, as well as federal approval. In addition, to the extent a
southeastern RTO does not prove to be viable in time for CP&L to meet its RTO
filing commitment to the FERC, any filing at the FERC and any contract related
to CP&L joining an RTO other than one with a southeastern focus must contain a
provision allowing the NCUC to require CP&L to withdraw and join a subsequently
developed southeastern FERC-approved RTO.
10. CP&L and NCNG agree to meet with and consult with the Public
Staff, upon request, regarding plans for significant changes in CP&L's, NCNG's,
and/or CP&L Energy's organization, structure (including RTO developments), and
activities; the expected and/or potential impact of such changes on CP&L's and
NCNG's regulated rates, operations and service; and proposals for assuring that
such plans do not adversely affect CP&L's North Carolina retail electric
customers or NCNG's regulated natural gas customers. To the extent that proposed
significant changes are planned for Florida Power Corporation's organization,
structure (including RTO developments), and activities and the consequences of
those plans could impact the rates, service and/or costs allocated to CP&L's or
NCNG's North Carolina regulated customers, then CP&L's and NCNG's plans and
proposals for assuring that those plans do not adversely affect their customers
must be included in these meetings. CP&L agrees to inform the Public Staff
promptly of any anticipated significant events and/or changes as described above
and initiate meetings when necessary.
11. The proposed merger of CP&L Energy and FPC and the resulting
participation of CP&L in the proposed System Integration Agreement filed with
the FERC as part of the FERC merger Application may adversely affect the NCUC's
traditional regulatory authority over CP&L because of the potentially preemptive
relationship between the Federal Power Act (FPA) and state law. The following
requirements and procedures are intended to protect the NCUC's jurisdiction in
that event:
(a) CP&L and/or CP&L Energy shall amend the proposed System
Integration Agreement Between Carolina Power & Light Company and Florida Power
Corporation (Integration Agreement) filed with the FERC merger Application of
CP&L Holdings, Inc. (now CP&L Energy), and Florida Progress Corporation on
behalf of their public utility subsidiaries, to provide the following:
i) CP&L's participation in this agreement is voluntary, and CP&L is
not obligated to make any purchases or sales pursuant to this
agreement; and
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(ii) CP&L may not make or incur a charge under this agreement except
in accordance with North Carolina law and the rules, regulations
and orders of the NCUC promulgated thereunder.
If the Integration Agreement has been approved (or accepted for filing) by the
FERC prior to CP&L having an opportunity to amend it as provided above, then
CP&L and/or CP&L Energy shall promptly make a filing with the FERC seeking an
order approving or accepting the Integration Agreement amended as set forth
above.
(b) All future FERC jurisdictional agreements, service schedules and
similar arrangements entered into pursuant to the Integration Agreement (or
comparable agreements) and filed with the FERC, (a) to which CP&L is a party or
(b) which can affect CP&L's costs and revenues, either directly or indirectly
through allocation, shall contain the language set forth in subsection (a)(i)
and (ii) above.
(c) CP&L and CP&L Energy shall request that the following language be
included in any order issued by the FERC approving or accepting a FERC
jurisdictional agreement and/or service schedule entered into pursuant to the
Integration Agreement (or comparable agreement) to which CP&L or any Affiliate
thereof is a party:
Approval or acceptance of this agreement and/or service schedule 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 retail rates for services rendered to
customers of affiliated public utilities in North Carolina.
(d) CP&L shall certify to the NCUC that neither CP&L, CP&L Energy, nor
any Affiliate thereof has made any filing with the FERC inconsistent with the
foregoing. The first such certification shall be made within 30 days of the
issuance of the NCUC's order approving the merger and shall be repeated annually
thereafter on the anniversary of the first certification.
12. With respect to any transfer by a Utility of the control of,
operational responsibilities for, or ownership of any asset or portion thereof
used for the generation, transmission, distribution or other provision of
regulated electric, natural gas, and/or telecommunications service to retail
customers in North Carolina:
(a) No Utility shall commit to or carry out such a transfer except in
accordance with these conditions, all applicable law, and the rules, regulations
and orders of the NCUC promulgated thereunder; and
(b) No Utility may reflect in rates the value of any such transfer
except as allowed by the NCUC.
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13. CP&L, NCNG, CP&L Energy, and their Affiliates shall include in any
Application to the FERC for approval of any transfer described in the
immediately preceding condition the commitment set forth in that condition. CP&L
will not transfer the control of, operational responsibilities for, or ownership
of any transmission asset to an Affiliate or non-Affiliate without first
obtaining NCUC approval.
14. Any filing with the FERC in connection with any asset transfers
involving CP&L shall request that the FERC 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 retail rates for services
rendered to CP&L's customers. It is the FERC'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 retail rates.
15. Neither CP&L, CP&L Energy, nor any Affiliate thereof shall assert
or support the assertion in any forum, with respect to any asset transfer
transaction described above to which CP&L is involved and which is subject to
the FPA, that the FPA in any way preempts the NCUC from exercising such
authority as it may have under all applicable law to (a) review the
reasonableness of any commitment entered into by CP&L and mandate, approve or
otherwise regulate a transfer of assets by or to CP&L, and/or (b) disallow costs
or impute revenues, related to such commitment, to CP&L and scrutinize and
establish the value of the asset transfers for purposes of determining the rates
for services rendered to CP&L's retail customers. Should any other entity so
assert, CP&L, CP&L Energy and/or other Affiliates shall advise and consult with
the NCUC and the Public Staff regarding such assertion.
16. CP&L, NCNG, CP&L Energy, and all Affiliates shall take all such
actions as may be reasonably necessary and appropriate to hold North Carolina
retail ratepayers harmless from rate increases, foregone opportunities for rate
decreases, and/or other effects of merger.
17. A copy of all Applications, reports, contracts, rate schedules, or
other documents (including attachments, exhibits, and similar items) filed with
the FERC by CP&L Energy, any Service Company, the Utilities, other Affiliates,
and/or a Nonpublic Utility Operation shall be filed contemporaneously by CP&L
with the NCUC and a copy shall be provided to the Public Staff at the time of
the filing. CP&L and NCNG also shall file with the NCUC all orders issued by the
FERC that directly or indirectly affect CP&L's and/or NCNG's accounting
practices, North Carolina-regulated rates, operations, and/or transfer prices or
allocations.
18. CP&L may not purchase electricity (and/or related goods and
services) from an Affiliate under circumstances where the costs incurred for
comparable service (whether directly or through allocation) exceed fair market
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value, nor may it sell electricity (and/or related goods and services) to an
Affiliate for less than fair market value except for emergency interchange
transactions.
19. CP&L and its retail customers will continue to bear the cost
responsibility for CP&L's premerger system power supply resources and receive
the revenues from those resources. CP&L shall ensure that its retail native load
customers receive the benefits associated with CP&L's existing system generation
assets, including those for which a certificate has been granted as of the
closing date of the merger. CP&L and/or any of its Affiliates shall give the
NCUC and the Public Staff written notice 30 days prior to filing with the FERC
proposed amendments, modifications, or supplements to the Integration Agreement
(or comparable agreement) that change or affect that cost responsibility and/or
receipt of revenues and/or could potentially have a negative effect on CP&L's
North Carolina retail native load customers.
20. The joint planning and coordinated dispatch of CP&L system
generation contemplated by the Integration Agreement (and/or future comparable
agreements) shall ensure that CP&L's retail native load receives priority with
respect to that generation and shall ensure that CP&L's retail native load
customers receive the benefits of CP&L owned or controlled system generation
resources. CP&L shall continue to serve its retail native load customers in
North Carolina with the lowest-cost power it can reasonably generate or purchase
from other sources before making power available for off-system sales. To the
extent CP&L owned or controlled system generation is made available for
off-system sales, the revenues realized by CP&L from such sales shall continue
to be used to reduce CP&L's retail cost of service.
21. CP&L shall not enter into contracts for the sale of energy and/or
capacity at native load priority and/or under such terms and conditions as to
cause the purchasing entity to fall within the definition of "native load" in
the Integration Agreement without first giving the NCUC and the Public Staff
written notice 20 days in advance of such a contract being executed.
22. The costs of any resource additions that are allocated or assigned
directly or indirectly to CP&L must be treated for ratemaking purposes in
accordance with all applicable laws and all NCUC orders, rules and regulations.
23. Changes will be made, if and when necessary, to the required
affiliated transactions reports and cost allocation manuals.
24. A copy of all Applications, reports, or other documents filed with
the SEC under PUHCA by CP&L Energy, any Service Company, the Utilities, other
Affiliates, and/or any Nonpublic Utility Operation shall be contemporaneously
filed with the NCUC and provided to the Public Staff. CP&L and NCNG also shall
file with the NCUC promptly upon receipt all orders issued by the SEC that
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directly or indirectly affect any of the Utilities' accounting practices,
financings, operations, and/or transfer prices or allocations.
25. CP&L and NCNG shall not take services from nor provide services to
Affiliates other than CP&L Services if comparable services can be provided more
economically and efficiently by CP&L Services.
26. CP&L and NCNG shall file with the NCUC in this docket annually one
week before the effective date of the annual contract the list of services each
intends to provide to CP&L Services and/or other Affiliates. Any modifications
by CP&L and/or NCNG to this list of services shall be filed with the NCUC at the
time CP&L and/or NCNG receive written notice of the modifications.
27. CP&L and NCNG shall file with the NCUC in this docket annually one
week before the effective date of the annual contract the list of services each
elects to take from CP&L Services. Any modifications by CP&L and/or NCNG to the
selection of services shall be filed with the NCUC at the time CP&L and/or NCNG
gives written notice to CP&L Services.
28. Any and all proposed changes to CP&L Services' contracts and
service contracts between CP&L and/or NCNG and any of their Affiliates must be
filed for approval by the NCUC contemporaneously with their being filed with the
SEC.
29. CP&L and NCNG shall cooperate fully in any future investigation of
power and natural gas marketing activities, including, but not limited to, how
those activities are structured, how prices and costs are determined and whether
these activities are being conducted in compliance with the relevant codes of
conduct.
30. CP&L's North Carolina retail customers and NCNG's customers shall
be held harmless from all current and prospective liabilities of Florida
Progress Corporation and its subsidiaries, including, but not limited to, the
litigation involving Mid-Continent Life Insurance Company, pensions and other
employee benefits, decommissioning costs, and taxes.
31. CP&L shall provide to the Public Staff immediately upon execution
and/or finalization the Tax Allocation Agreement, plans to consolidate employee
benefits plans, and other similar agreements and plans.
32. CP&L and NCNG will continue to take steps to implement and further
their commitment to providing superior public utility service following CP&L
Energy's acquisition of Florida Progress. To the extent Florida Power
Corporation's quality of service practices are found to be superior to CP&L's,
CP&L shall incorporate those practices into its own practices to the extent
practicable. CP&L and NCNG will work with the Public Staff to ensure the service
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quality indices are appropriate and to revise them if and when such revisions
are necessary.
33. CP&L Energy shall maintain all Utility financial books and records
in Raleigh, North Carolina.
34. Subject to subsequent revisions relating to this docket, CP&L, all
of its Affiliates, and its Nonpublic Utility Operations shall remain bound by
the Code of Conduct approved in Docket Nos. E-2, Sub 753, G-21, Sub 387, and
P-708, Sub 5. CP&L shall cooperate in revising the Code as necessary to
incorporate the Florida Progress merger.
35. Unless expressly 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, and the conditions agreed to by CP&L,
NCNG, Interpath, and CP&L Holdings, Inc., (subsequently CP&L Energy), and
ordered by the NCUC in Docket Nos. E-2, Sub 753, G-21, Sub 387, and P-708, Sub
5, remain in full force and effect. In addition, they will be revised and
updated as needed to apply explicitly to the FPC merger.
ISSUED BY ORDER OF THE COMMISSION
This the 22nd day of August, 2000.
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NORTH CAROLINA UTILITIES COMMISSION
Geneva S. Thigpen, Chief Clerk
/s/ Geneva S. Thigpen
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ATTACHMENT 1
STIPULATION
CP&L Energy and intervenors Michales and Farrimond have agreed to the
following stipulation:
1. CP&L agrees that Regulatory Condition No. [30] which states:
"CP&L's North Carolina retail customers and NCNG's customers shall be held
harmless from all current and prospective liabilities of Florida Progress
Corporation and its subsidiaries, including, but not limited to, the litigation
involving Mid-Continent Life Insurance Company, pensions and other employee
benefits, decommissioning costs, and taxes", shall be interpreted as prohibiting
CP&L from seeking to include in its North Carolina retail rates any direct or
indirect costs associated with the Mid-Continent Life Insurance Company
litigation, including but not limited to attorneys' fees; judgments; and
increased costs of debt and/or equity.
2. The pre-filed testimony of John R. Jolly, Jr. and Bertram Solomon
will be entered into the record without objection, however, such witnesses shall
not appear or otherwise testify in this proceeding. CP&L waives its right of
cross-examination of these two witnesses. Intervenors Michales and Farrimond
shall waive cross-examination of all witnesses.
3. Intervenors Michales and Farrimond agree that: (1) the
interpretation of Regulatory Condition No. [30] set forth above with the other
stipulations entered into by CP&L in this proceeding and (2) CP&L's
representations in filings with the North Carolina Utilities Commission that
Florida Progress will continue as a going concern and that the merger will not
dissipate any Florida Progress assets or earnings available to satisfy any
potential judgment arising from the Mid-Continent Life Insurance Company
litigation, adequately address their primary concerns regarding the merger of
CP&L Energy and Florida Progress Corporation; and that so long as the conditions
proposed by the Public Staff and agreed to by CP&L are approved by the North
Carolina Utilities Commission in connection with the merger, then they do not
object to the merger of these two companies; and they will not appeal any order
of the North Carolina Utilities Commission approving the merger of CP&L Energy
and Florida Progress Corporation.
