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As filed with the Securities and Exchange Commission on August 21, 2000
File No. 1. 070-09645
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Exelon Corporation
10 South Dearborn Street
37/th/ Floor
Chicago, IL 60603
(Name of company filing this statement and address of principal executive
offices)
________________________________________________________________________________
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John W. Rowe Corbin A. McNeill, Jr.
Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer
Unicom Corporation PECO Energy Company
10 South Dearborn Street 2301 Market Street
37/th/ Floor P.O. Box 8699
Chicago, IL 60603 Philadelphia, PA 19101
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The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
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Rebecca J. Lauer James W. Durham
Vice President and General Counsel Senior Vice President and General Counsel
Unicom Corporation PECO Energy Company
10 South Dearborn Street 2301 Market Street
37/th/ Floor P.O. Box 8699
Chicago, IL 60603 Philadelphia, PA 19101
William J. Harmon Kevin P. Gallen
Jones, Day, Reavis & Pogue Morgan, Lewis & Bockius LLP
77 West Wacker 1800 M Street, N.W.
Suite 3500 Washington, DC 20036-5869
Chicago, IL 60601
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TABLE OF CONTENTS
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Item 1. Description of Proposed Transaction.................................................................................. 2
A. Introduction -- Benefits of the Merger....................................................................... 2
B. Overview of the Transaction.................................................................................. 3
C. Description of the Parties to the Merger..................................................................... 4
1. Exelon Corporation.................................................................................. 4
2. Unicom and its Subsidiaries......................................................................... 5
3. PECO and its Subsidiaries........................................................................... 8
D. Exelon Services.............................................................................................. 13
E. Exelon Ventures, Exelon Enterprises, Exelon Energy Delivery and Genco........................................ 14
F. Description of the Merger.................................................................................... 15
Item 2. Fees, Commissions and Expenses....................................................................................... 16
Item 3. Applicable Statutory Provisions...................................................................................... 16
A. Application of the Act in Light of the Evolving "State of the Art" of the Electric
Utility Industry............................................................................................. 18
B. Section by Section Analysis.................................................................................. 25
1. Section 9(a)(2) -- Acquisition of Utility Stock..................................................... 25
2. Section 10(b) -- Commission to Approve if Three Requirements Met.................................... 26
(a) Section 10(b)(1) -- Interlocking Relations/Concentration of
Control.................................................................................... 26
(b) Section 10(b)(2) -- Merger Consideration and Fees.......................................... 32
(c) Section 10(b)(3) -- Complicated Capital Structure; No Detriment
to Protected Interests..................................................................... 34
3. Section 10(c) -- Sections 8 and 11; Integration..................................................... 38
(a) Section 10(c)(1) -- Sections 8 and 11...................................................... 38
(i) The Merger will be lawful under Section 8.......................................... 38
(ii) The Merger Is Not Detrimental to Carrying Out Provisions
of Section 11...................................................................... 39
(A) The Utility Systems Created by the Merger................................. 39
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(B) Statutory Standard -- Integration of Electric
Operations In Today's Environment......................................... 40
(iii) Exelon Will Meet All Four Parts of the Integration
Requirement of the Act............................................................. 41
(A) Interconnection -- The Contract Path...................................... 42
(B) Interconnection through OATTs and OASIS................................... 44
(C) Coordination.............................................................. 45
(D) Single Area or Region..................................................... 50
(E) Size...................................................................... 54
(F) Conclusion -- Exelon Electric System will be
Integrated................................................................ 56
(iv) Retention of Exelon Gas System..................................................... 58
(A) Loss of economies if operated as an independent
system.................................................................... 60
(B) Same State or Adjoining States............................................ 63
(C) Size --Localized Management; Efficient
Operation; Effective Regulation........................................... 64
(v) Retention of Other Businesses...................................................... 65
(vi) The Merger will Satisfy the Requirements of Section
11(b)(2) as incorporated by Section 10(c)(1)....................................... 66
(b) Section 10(c)(2) -- Economies and Efficiencies............................................. 68
(c) Section 10(f) -- Compliance with State Law................................................. 71
C. Intra-system Transactions.................................................................................... 72
1. Exelon Business Services Company.................................................................... 72
2. Services, Goods, and Assets Involving the Utility Operating Companies............................... 74
3. Non-Utility Subsidiary Transactions................................................................. 75
4. Existing Affiliate Arrangements and Requests for Exemption.......................................... 76
(a) ComEd AIA Transactions..................................................................... 76
(b) ComEd "Competitive Services"............................................................... 77
(c) PECO Government Contracts.................................................................. 77
(d) PECO Sales and Purchases To and From Retail Marketing Affiliates........................... 77
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(e) Exelon Infrastructure Services; Unicom Mechanical Services................................. 78
(i) Description of Exelon Infrastructure Services...................................... 78
(ii) Description of Mechanical Services................................................. 79
(iii) Requested Exemption from Cost Standard............................................. 80
(f) Public Interest............................................................................ 81
(g) Goods and Services to and from Genco at Cost............................................... 82
5. Phase-In of Compliance with Service Company Requirements............................................ 83
D. Approval for Restructurings -- Interim Operations............................................................ 84
Item 4. Regulatory Approvals................................................................................................. 85
A. Antitrust.................................................................................................... 85
B. Federal Power Act............................................................................................ 85
C. Atomic Energy Act............................................................................................ 86
D. State Public Utility Regulation.............................................................................. 86
E. Other........................................................................................................ 87
Item 5. Procedure............................................................................................................ 87
Item 6. Exhibits and Financial Statements.................................................................................... 87
A. Exhibits..................................................................................................... 87
B. Financial Statements......................................................................................... 91
Item 7. Information as to Environmental Effects.............................................................................. 91
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Executive Summary
This Amendment No. 2 to Application-Declaration amends and restates in
its entirety the Application-Declaration filed March 16, 2000, as amended June
16, 2000, and seeks approvals under the Public Utility Holding Company Act of
1935 (the "Act") relating to the proposed acquisition by Exelon Corporation
("Exelon") directly or indirectly of all the common stock of the following
electric utility companies:
. Commonwealth Edison Company ("ComEd"), an electric utility
company, and currently a subsidiary of Unicom Corporation
("Unicom");
. PECO Energy Company ("PECO"), an electric and gas utility company;
. Exelon Generation Company, LLC ("Genco"), to which the generating
assets of ComEd and PECO will be transferred; and
. the electric utility subsidiaries of ComEd and PECO.
Following the transaction (referred to as the "Merger"), Exelon will
register as a holding company under the Act. Accordingly, Exelon must establish,
among other things, that combining ComEd and PECO will result in a "single
integrated public-utility system." To satisfy this "integration" test, Exelon
must show that it is "interconnected" in a way that will allow it to conduct
coordinated utility operations economically in a "single area or region." The
combined electric utility systems of ComEd and PECO, including particularly the
Genco subsidiary, will clearly meet the integration and all other requirements
of the Act.
All of Exelon's generating capacity, nuclear and other, will be owned
or controlled by a single entity -- Genco. Genco will coordinate, through the
interconnected system, the efficient use of the generation formerly held by
ComEd and PECO for the benefit of the Exelon system. Genco will supply power to
its affiliates and to non-affiliated customers. Exelon will be interconnected
through the transmission facilities of ComEd and PECO and the extensive,
available interstate open access transmission. Exelon will have the legal right
under Federal Energy Regulatory Commission ("FERC") mandated Open Access
Transmission Tariffs ("OATTs") to move power economically to customers as needed
and in amounts sufficient to meet -- under normal conditions -- its operating
needs throughout the Exelon system. In addition, Exelon will acquire a 100 MW
firm contract path (the "Contract Path") and commit to keep such path for 3
years following the Merger or until the Commission determines that an
alternative path or arrangement constitutes interconnection under the Act.
Finally, Exelon Business Services Company ("Exelon Services") will be formed to
oversee centralized corporate and administrative services.
Given the operating and regulatory structure of today's industry,
Exelon will operate within a single area or region within the meaning of the
Act. ComEd and PECO have an extensive five-year history of successful power
exchanges with each other. In addition, they both buy and sell power in the same
markets. The ability to transfer power economically, taking into account
transmission cost, demonstrates that ComEd and PECO are in the same area or
region. Combining ComEd and PECO's businesses will not lead to any
anticompetitive
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concerns. Further, Exelon's distribution areas -- surrounding Chicago, Illinois
and Philadelphia, Pennsylvania -- are homogeneous and have similar operating
characteristics. Illinois and Pennsylvania have enacted customer choice utility
restructuring legislation. Finally, Exelon will in fact operate all of its
utility facilities as a single, coordinated system.
Although the United States is now largely interconnected electrically,
------------
only those utilities, such as Exelon, which can and will operate their separate
utilities economically and in a coordinated manner within the meaning of the
------------------------------------------------------------------
Act, can be considered to be in the same area or region. Exelon, with corporate
---
headquarters in Chicago, will coordinate utility operations functions with
facilities in Chicago and Philadelphia. ComEd and PECO will maintain the
benefits of localized management through local offices throughout their service
areas. Exelon's utility subsidiaries will remain fully subject to applicable
State and Federal public utility regulation, which will not be adversely
affected by the Merger. Thus, this is not a case involving "scattered"
properties or the impairment of local management, efficient operation or
effective regulation.
This Application-Declaration will show that the Merger fits within
existing Commission precedent and is made possible, applying the standards of
the Act, by reason of significant legislative, regulatory and technological
changes that have occurred in the electric utility industry in recent years.
Approving the Merger as requested will not result in any of the harms Congress
sought to prevent by adopting the Act and will be consistent with the
requirements of the Act.
The foregoing executive summary focused on the integration
requirement -- the keystone of the Act. This Application-Declaration will also
demonstrate that the other requirements of the Act are met in this case as
well./1/ In order to permit timely consummation of the Merger and the
realization of the substantial benefits it is expected to produce, the Applicant
requests that the Commission's review of this Application-Declaration commence
and proceed as expeditiously as practicable.
Item 1. Description of Proposed Transaction
A. Introduction -- Benefits of the Merger
The Merger is in response to changes in the utility industry described
in this Application-Declaration. Unicom and PECO believe that the Merger will
join two well-managed companies of similar market capitalization, operating in
States that have adopted comprehensive customer choice utility restructuring
laws, and that share a commitment to developing an energy company responsive to
increased competition and other changes in the industry. The Merger will provide
substantial strategic and financial benefits to PECO Energy's and Unicom's
shareholders, employees and customers. The Merger will significantly improve the
companies' competitive
______________________________
/1/ Exelon has filed two additional applications-declarations under the Act
with respect to financing and related activities, File No. 70 9693 (the
"Financing U-1") and with respect to investments in non-utility subsidiaries,
File No. 70-9691 (the "Investment U-I").
2
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positions and create an enhanced platform for growth for all segments of their
businesses. These benefits of the Merger expected to include:
. Expanded and Coordinated Generation Capacity
. Integrated Power Marketing and Trading Business
. Broadened, More Efficient Distribution System
. Foundation for Future Growth
. Cost Savings
B. Overview of the Transaction
The Agreement and Plan of Exchange and Merger, dated September 22, 1999
(the "Original Merger Agreement"), as amended and restated January 7, 2000 (the
"Merger Agreement"), provides for a "merger-of-equals" business combination of
Unicom and PECO. The transaction will be accomplished through a mandatory share
exchange whereby Exelon, a Pennsylvania corporation, will exchange its common
stock for the outstanding common stock of PECO (the "First Step Exchange"),
followed by the merger of Unicom Corporation ("Unicom"), the current parent of
ComEd, with and into Exelon, with Exelon as the surviving corporation (the
"Second Step Merger"). The First Step Exchange and the Second Step Merger are
referred to collectively as the "Merger."
After the Merger, Unicom and PECO's non-utility subsidiaries will be
realigned. At or about the time of the Merger, ComEd and PECO will transfer
their generating facilities (including PECO's existing subsidiaries that own and
operate the Conowingo hydroelectric project) to Genco (the "Restructurings"). As
part of the Merger and Restructurings, one or more service companies and/or
operating companies will be formed and the other corporate organizational
changes described herein will be made.
Pursuant to the Merger Agreement, each outstanding share of Unicom
common stock will be exchanged for 0.875 shares of Exelon common stock and $3.00
in cash and each outstanding share of PECO common stock will be exchanged for
one share of Exelon common stock. Upon completion of the Merger and the
Restructurings, Exelon will have the following direct or indirect public-utility
subsidiary companies: ComEd, Commonwealth Edison Company of Indiana (the
"Indiana Company"), PECO and Genco. Exelon will also hold, as subsidiaries of
Genco, PECO's existing electric utility subsidiaries that own or operate the
Conowingo hydroelectric project. In addition, one or more subsidiaries of Exelon
will act as service companies for the Exelon system under Section 13 of the
Act./2/ Finally, Exelon will continue to
____________________________
/2/ In the U-1 Application/Declaration filed March 16, 2000 (the "Original
U-1") Exelon indicated that companies might use one or more operating companies
to perform some utility functions. Exelon has now determined that it will not
use any "Opco" to own or operate facilities that are electrior gas facilities
within the meaning of Section 2(a)(3) or 2(a)(4) of the Act. References to Opcos
are therefore deleted. Exelon now expects that all service functions for the
holding company system will be performed by a single service company --Exelon
Business Services Company ("Exelon Services") except with respect to certain
services between and among ComEd, PECO
3
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own all of Unicom's existing non-utility subsidiaries and will acquire, directly
or indirectly, all of the outstanding capital stock of the non-utility
subsidiaries of PECO and certain of the operating divisions of PECO engaged in
nonregulated businesses. The current subsidiaries of ComEd will remain ComEd
subsidiaries. A copy of the Merger Agreement is incorporated by reference as
Exhibit B-1. The Merger transaction was overwhelmingly approved by the
shareholders of PECO and Unicom at meetings held June 27 and 28, 2000.
Various aspects of the Merger and the transactions relating thereto
have been submitted for review and/or approval by: (i) the Pennsylvania Public
Utility Commission (the "Pennsylvania Commission"), (ii) the Illinois Commerce
Commission (the "Illinois Commission"), (iii) the FERC and (iv) the Nuclear
Regulatory Commission (the "NRC"). Further, the Merger cannot proceed until the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), has expired or been terminated by the regulators.
Approval will also be necessary from the Federal Communications Commission (the
"FCC") in connection with various licenses. Apart from the approval of the
Commission under the Act, the foregoing approvals are the only major
governmental approvals required for the Merger.
The Restructurings also require regulatory approval by the Pennsylvania
Commission, the Illinois Commission, FERC and the NRC as well as private letter
rulings from the Internal Revenue Service. The completion of the Merger is not
conditioned on the completion of the Restructurings. The approvals sought herein
assume that the Restructurings will be consummated concurrently with, or shortly
after, the Merger and accordingly, the corporate structure described herein to
be in effect for Exelon following the Merger assumes that the Restructurings and
the realignment of non-utility subsidiaries have also been completed./3/
C. Description of the Parties to the Merger
1. Exelon Corporation
Exelon Corporation, a Pennsylvania corporation, currently a subsidiary
of PECO, has no assets and has conducted no business operations to date.
Pursuant to the Merger, Exelon will
___________________________________
(continued...)
and Genco as described below and certain services provided to ComEd, PECO and
GENCO from non-utility subsidiaries. Further, for federal and state income tax
reasons, it may be desirable to have a separate service company as a subsidiary
of Genco which would provide services to Genco and others. See Item 3.C. below
/3/ Exelon believes that substantially all conditions to the Restructurings and
the realignment of non-utility subsidiaries will be satisfied at or about the
time of the Merger. However, it is possible that private letter rulings from the
Internal Revenue Service as to the tax-free nature of the Restructurings or
certain regulatory approvals or requirements may not be received at the time the
Merger is otherwise ready to close. Exelon expects that such tax rulings and
other requirements would be received within a period not more than several
months following the Merger. Accordingly, Exelon requests authority to
effectuate the Merger, with or without the Restructurings. Exelon will file with
the Commission a Certification under Rule 24 upon completion of the Merger and,
if it occurs later, upon completion of the Restructurings. If the Restructurings
are not completed within one year of the completion of the Merger, Exelon will
file a post-effective amendment hereto to describe what steps it will take in
this regard and seek any necessary further approvals of the Commission.
4
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become the parent holding company of ComEd, PECO, Genco and the other
subsidiaries described herein. Exelon will have its principal executive office
in Chicago, Illinois.
2. Unicom and its Subsidiaries
Unicom, incorporated in January 1994, is the parent of its principal
subsidiary, ComEd, a regulated electric utility, and Unicom Enterprises, an
unregulated subsidiary engaged, through its subsidiaries, in energy service
activities. Unicom is a public utility holding company exempt from registration
pursuant to Commission order under Section 3(a)(1) of the Act./4/ Unicom's
principal executive offices are located at 10 South Dearborn Street, 37/th/
Floor, Chicago, Illinois 60603.
ComEd's Utility Business
ComEd is an Illinois corporation with its principal office in Chicago,
Illinois. ComEd is a majority-owned subsidiary (greater than 99%) of Unicom./5/
ComEd is engaged in generating, transmitting and distributing electric energy to
the public in northern Illinois. In 1998 and 1999 ComEd sold all of its fossil-
fired generating capacity. ComEd retains 10 nuclear generating units totaling
9,550 MW of generating capacity located at five stations in Illinois. ComEd
serves approximately 3.4 million retail electric customers in an 11,300 square
mile service area including the City of Chicago in Illinois.
ComEd has 5,300 miles of transmission facilities and has an open access
transmission tariff ("OATT") on file with FERC. ComEd is a participant in the
Mid-America Interconnected Network ("MAIN") as well as the Midwest Independent
System Operator, Inc. ("MISO"). MISO has been approved by FERC to act as an
regional transmission operator for its member utilities in the Midwest and
adjacent areas./6/ On December 13, 1999, ComEd and other unaffiliated
transmission providers in the Midwest submitted to FERC a joint petition for a
declaratory order regarding a proposed plan or template for an independent
transmission company ("ITC") that would operate under the oversight of the
MISO./7/ ComEd plans to transfer control of its transmission assets to an
ITC./8/
_______________________________
/4/ Unicom Corporation, Holding Co. Act Release No. 35-26090 (July 22, 1994).
------------------
/5/ At December 31, 1999, 4,859 of the 231,973,810 shares of common stock of
ComEd were not owned by Unicom but were in the hands of the public as a result
of exercises of warrants or convertible preferred stock into ComEd common stock
not followed by an exchange of such stock for Unicom common stock. The rights
under the ComEd warrants and convertible preferred stock to acquire or convert
into ComEd common stock will not be changed by the Merger. Following the Merger,
Exelon will offer to exchange any such ComEd common stock issued on exercise of
such warrants or convertible preferred stock for Exelon common stock. However,
ComEd intends to redeem the convertible preferred stock in full on August 1,
2000.
/6/ 84 FERC(P) 61,231, order on reconsideration, 85 FERC(P) 61,250, order on
reh'g, 85 FERC(P) 61,372 (1998).
/7/ See Docket No. EL00-25-000. FERC has provided guidance on this petition.
---
Commonwealth Edison Company, 90 FERC(P) 61,192 (Feb. 24, 2000, order denying
---------------------------
reh'g, 91 FERC(P) 61,178 (May 22, 2000).
8 ComEd recognizes that a transfer of utility assets may require approval of the
Commission. Any required approval will be sought at a future date.
5
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Maps of the electric service area and transmission system of ComEd are
filed as Exhibit E-1.
ComEd is an electric utility and a holding company exempt from
registration pursuant to a Commission order under Section 3(a)(1) of the Act
pursuant to order and pursuant to Rule 2./9/ ComEd is subject to regulation as a
public utility under the Illinois Public Utilities Act ("Illinois PUA") as to
retail electric rates and charges, issuance of most of its securities, service
and facilities, classification of accounts, transactions with affiliated
interests, as defined in the Illinois PUA, and other matters. In addition, the
Illinois Commission in certain of its rate orders has exercised jurisdiction
over ComEd's environmental control program. ComEd is also subject to regulation
by FERC pursuant to the Federal Power Act with respect to the classification of
accounts, rates for wholesale sales of electricity, the interstate transmission
of electric power and energy, interconnection agreements and acquisitions and
sales of certain utility properties. ComEd is also subject to the jurisdiction
of the NRC with respect to the operation of its nuclear generating stations.
ComEd's only utility subsidiary is the Indiana Company. The Indiana
Company was formed many years ago to hold a generating station built on the
Indiana side of the Illinois-Indiana border near Chicago. The generating station
was sold in 1997. The Indiana Company now has no retail customers and its only
business is holding a small amount of electric transmission property in Indiana.
The Indiana Company has no securities outstanding held by anyone other than
ComEd. /10/
The Illinois legislature has enacted a retail access program in
Illinois. Since October 1, 1999, (a) customers with peak loads of four MW or
greater, (b) a percentage of commercial customers with ten or more locations
with peak loads of 9.5 MW or greater, and (c) a percentage of other non-
residential customers have been eligible via direct access to choose their
electricity supply. The balance of ComEd's non-residential customers will become
eligible for direct access by December 31, 2000, and all of its residential
customers by May 1, 2002. ComEd will continue to provide delivery service to all
customers. As a part of the Illinois retail access program, ComEd's retail rates
are capped through 2005.
Unicom's Other Businesses
Unicom, directly or indirectly, owns all the outstanding common stock
of the non-utility subsidiary companies identified and described in Exhibit I-1
hereto. These companies are
________________________________
/9/ Commonwealth Edison Co., Holding Co. Act Release No. 35-26090 (July 22,
-----------------------
1994)
/10/ ComEd does not wish to make any change to the Indiana Company or its
assets at this time because it is unclear what the ultimate disposition of the
transmission facilities will be. ComEd is exploring establishing an independent
transmission company and/or transferring control of its transmission facilities
to an ISO. Further, it would not be desirable to transfer the Indiana Company's
facilities to ComEd because that would likely subject ComEd to the jurisdiction
of the Indiana Utility Regulatory Commission which could increase administrative
burdens on ComEd and that commission without any benefit to consumers because
ComEd would have no retail customers in Indiana.
6
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organized under Unicom Enterprises Inc. or Unicom. In addition, ComEd has the
subsidiaries identified on that Exhibit which relate to its utility operations.
Unicom's non-utility businesses are all utility related, and include mechanical
services businesses, special purposes financing and tax advantaged transaction
subsidiaries, energy management and marketing, district cooling and energy
companies, captive insurance and small investments in various other utility
related or community or economic development businesses and small passive
investments.
As described in detail herein, the non-utility operations of Unicom and
ComEd will qualify as additional businesses of Exelon under the Act pursuant to
Rule 58 or otherwise. Exelon requests that the investment in the Unicom
Enterprises activities which it will acquire at consummation of the merger be
disregarded for purposes of calculating the dollar limitation upon investment in
energy-related companies under Rule 58./11/
Unicom's Financial Position
The authorized capital stock of Unicom consists of 400,000,000 shares
of common stock. As of the close of business on December 31, 1999, 217,835,570
shares of Unicom common stock were issued and outstanding./12/ The Unicom common
stock is listed on the New York Stock Exchange, Inc. ("NYSE"), the Chicago Stock
Exchange and the Pacific Stock Exchange.
The consolidated assets of Unicom, as of December 31, 1999, were
approximately $23.4 billion, representing $12.1 billion in net electric utility
property, plant and equipment; $521.3 million in non-utility subsidiary
property, plant and equipment; and $10.8 billion in other corporate assets. For
the year ended December 31, 1999, Unicom had electric utility revenues of $6.8
billion.
Unicom and ComEd are financially strong companies. Following the
announcement of the revised Merger Agreement on January 7, 2000, Duff & Phelps
Credit Rating Co. reaffirmed its ratings of Unicom and ComEd. At that date,
Unicom's implied senior unsecured debt was rated "BBB;" ComEd's first mortgage
bonds were rated "A-" and its unsecured debt was rated "BBB+."
Further Information
More detailed information concerning Unicom and its subsidiaries,
including the utility assets and operations of ComEd, is contained in the Unicom
and ComEd combined Annual Report on Form 10-K and the Quarterly Reports on Form
10-Q, which are filed as exhibits hereto and incorporated by reference.
___________________________
/11/ See SCANA Corporation, Holding Company Act Release No. 35-27133 (Feb. 9,
--- -----------------
2000); New Century Energies, Inc., Holding Company Act Release No. 35-26748
---------------------------
(August 1, 1997). Conectiv, Inc., Holding Company Release Act No. 35-26832
---------------
(February 25, 1998); Ameren Corp., Holding Company Release Act No. 35-26809
-------------
(December 30, 1997).
/12/ Under the Merger Agreement, Unicom has agreed to repurchase $1.0 billion
of its common stock prior to the merger. At June 30, 2000 Unicom had acquired
about 14 million shares. This amount is in addition to the 26.3 million shares
of common stock purchased in January, 2000 upon settlement of certain forward
purchase contracts. Unicom outstanding common shares at June 30, 2000 was
176,642,670 shares.
7
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3. PECO and its Subsidiaries.
PECO is an investor-owned public utility company that was incorporated
in Pennsylvania in 1929 as the successor to various companies dating back as
early as 1881. PECO is made up of several unincorporated divisions, including
PECO Energy Distribution, PECO Nuclear, the Power Team and the Power Generation
Group. PECO provides electric and gas utility service in southeastern
Pennsylvania. PECO owns and operates a variety of nuclear and non-nuclear power
generation plants, and also participates in the national wholesale electricity
market and in retail access programs. PECO's principal executive offices are
located at 2301 Market Street, P.O. Box 8699, Philadelphia, Pennsylvania 19101.
PECO's Utility Business
PECO provides retail electric service to customers in the City of
Philadelphia and five nearby counties. PECO serves approximately 1.5 million
electric retail customers in its 1,972 square-mile service territory. PECO also
owns interests in three nuclear generating facilities (six units), seven fossil
fuel facilities (including coal-fired, oil-fired, and combination gas-oil
units), a pumped-storage hydro facility, a landfill gas facility, and thirty-
three distributed generation units that are primarily gas-fired. Through
subsidiaries, PECO owns and operates the 514 MW Conowingo Hydroelectric Project
("Conowingo Project"), located on the Susquehanna River in Pennsylvania and
Maryland. These generation facilities have an estimated aggregate net installed
electric generating capacity (summer rating) of 9,262 MW./13/
PECO owns transmission facilities located in the Pennsylvania-New
Jersey-Maryland ("PJM") control area. The PJM independent system operator offers
transmission service over those PECO transmission facilities and the
transmission facilities of other PJM members under the PJM open access
transmission tariff on file with FERC./14/ PECO also has an open access
transmission tariff on file with FERC./15/
PECO also provides natural gas distribution service to over 400,000
retail customers in a 1,475 square-mile area of southeastern Pennsylvania
adjacent to Philadelphia. The electric and gas service territories substantially
overlap, with the major exception of the City of Philadelphia. In 1999, 8.8% of
PECO's operating revenues and 6.6% of its operating income were from its gas
operations. Maps of the electric and gas service areas of PECO are filed as
Exhibit E-2.
Regulation as a Utility
PECO is currently a public utility holding company exempt from the
provisions of the Act, except Section 9(a)(2), by reason of the annual exemption
statements filed by it pursuant to Rule 2 of the Commission's rules and
regulations.
____________________________
/13/ PECO is in the process of acquiring additional ownership interests in the
Peach Bottom Atomic Power Station which would increase its ownership share to
50%, an additional 80 MW.
14 Pennsylvania-New Jersey-Maryland Interconnection, et al., 81 FERC(P)
-------------------------------------------------------
61,257 (1997), reh'g pending.
15 PECO Energy Co., 74 FERC(P) 61,336 (1996).
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8
<PAGE>
PECO currently has three wholly owned subsidiaries that are public
utility companies within the meaning of the Act. These companies are exclusively
engaged in owning and operating the Conowingo Project. The Conowingo Project is
a pondage hydroelectric generating facility located on the Susquehanna River
near Elkton, Maryland with a maximum capacity of about 514 MW. The Conowingo
Project is owned and operated as follows:
. PECO Energy Power Company ("PEPCO") owns the Pennsylvania portion
(direct, 100% sub of PECO); /16/
. Susquehanna Power Company owns the Maryland portion ("SPCO")
(direct, 100% sub of PEPCO and indirect sub of PECO); and
. Susquehanna Electric Company ("SECO" and together with PEPCO and
SPCO, the "Conowingo Companies") (direct, 100% sub of PECO) leases
and operates the Conowingo Project.
The book value of the Conowingo Project is $142 million. Net income
from the Conowingo Project in 1999 was about $9.9 million. Susquehanna Electric
Company operates the Conowingo Project and sells all of the output to PECO at
wholesale at a price based on actual operating expenses. PECO's wholesale power
marketing division is responsible for marketing the energy generated at the
Conowingo Project.
Typically, electricity is generated at the Conowingo Project when the
PJM system operator determines that it is economic to do so. PJM makes its
economic decision in part based on the dispatch of several hydroelectric
facilities located upstream of the Conowingo Project, which dispatch determines
the level of water available in the pond located at the Conowingo Dam. The
reason PJM controls the dispatch of the Conowingo Project is that the Conowingo
Project's dispatch is a function of the dispatch of these upstream hydroelectric
facilities.
None of the Conowingo Project companies have retail customers, nor are
they engaged in any business other than power generation at the dam. None of the
companies have any securities outstanding in the hands of persons other than
PECO or its subsidiaries.
Exelon proposes to change the affiliation of these companies so that
they are subsidiaries of Genco instead of PECO. The Conowingo Project's output
will be sold to Genco at wholesale
________________________________
/16/ PEPCO is currently a registered holding company, with one wholly owned
subsidiary, SPCO, a public utility company within the meaning of the Act and an
indirect subsidiary of PECO. In addition to the companies identified above, SPCO
also owns The Proprietors of the Susquehanna Canal, an inactive entity
incorporated in 1783 and acquired in connection with the development of the
Conowingo Project. See Holding Company Act Release No. 35-6718, June 18, 1946;
---
Holding Company Act Release No. 35-16636, March 12, 1970; Holding Company Act
Release No. 35-14782, January 2, 1963; Susquehanna Power Co., 19 FERC (P) 61,
----------------------
348, order on reh'g, 13 FERC (P) 61,132 (1980) (the initial order was
inadvertently omitted from the proper volume of FERC's reports).
9
<PAGE>
and it will have no other customers./17/ There will be no other substantive
changes to the operating relationships of the Conowingo Project companies.
PECO is subject to regulation by the Pennsylvania Commission with
respect to retail rates, accounting, service standards, service territory,
issuance of securities, certification of generation and transmission projects,
and various other matters. PECO is also subject to the jurisdiction of FERC
under the Federal Power Act for some phases of its business, including
regulation of its rates relating to wholesale sales of energy and interstate
transmission, licensing its hydroelectric stations, accounting, and certain
other matters. PECO is also subject to the jurisdiction of the NRC with respect
to the ownership and operation of its nuclear generating stations.
The Pennsylvania Electricity Generation Customer Choice and Competition
Act (the "Competition Act"), enacted in 1996, mandated the restructuring of the
electric utility industry in Pennsylvania, including retail competition for
generation beginning in 1999. The Competition Act unbundled electric service
into separate generation, transmission and distribution services with open
retail competition for generation. Electric distribution service remains
regulated by the Pennsylvania Commission. The Competition Act required utilities
to submit restructuring plans to the Pennsylvania Commission, including
quantification of their stranded costs (the loss in value of a utility's
electric generation-related assets which resulted from competition). The
Competition Act authorizes the recovery of stranded costs through charges to
distribution customers during a transition period. During the stranded cost
recovery period, the utility is subject to a rate cap which provides that total
charges to customers cannot exceed rates in place as of December 31, 1996,
subject to certain exceptions. In PECO's case, the stranded cost recovery period
will last until the end of 2010, during which time PECO's generation rates are
capped in accordance with a schedule approved by the Pennsylvania Commission. In
addition, PECO's transmission and distribution rates are capped through June 30,
2005, subject to certain exceptions.
Pursuant to the Competition Act, PECO filed with the Pennsylvania
Commission a comprehensive restructuring plan detailing its proposal to
implement full customer choice of electric generation supplier. On May 14, 1998
the Pennsylvania Commission issued its Final Order accepting a "Joint Petition
for Settlement of PECO's Restructuring Plan and Related Appeals and Application
for a Qualified Rate Order and Application of Transfer of Generation Assets"
(hereinafter referred to as "Restructuring Settlement"). Pursuant to the terms
of the Restructuring Settlement, PECO's retail electric customers received an 8%
rate reduction in 1999 and are receiving a 6% rate reduction in 2000. Pursuant
to the Restructuring Settlement, PECO is authorized to, among other things,
recover from its retail electric customers
___________________________________
/17/ The Federal hyodroelectric license for the Conowingo Project has been
issued to the owners. If the license were amended or transferred in connection
with the Merger, additional FERC proceedings and state regulatory determinations
or approvals could be necessary which could delay the consummation of the
Merger. PECO also examined other options for simplifying the current corporate
structure of the Conowingo Project and eliminating the need for an intermediate
registered holding company. In this regard, PECO examined merging some or all of
the companies, seeking exemptions under section 3(a)(1) or 3(a)(2) of the Act,
or formally converting the project to an exempt wholesale generator. These other
options were either unavailable or would involve additional costs, delays,
regulatory approvals, or potentially adverse tax complications.
10
<PAGE>
approximately $5.3 billion of stranded assets and costs and transfer its
generation assets and liabilities and wholesale power contracts to a separate
corporate affiliate. Under the Restructuring Settlement, transactions between
and among certain PECO affiliates are subject to safeguards to ensure fair
dealing. PECO's was the first restructuring plan approved in Pennsylvania and,
on a percentage and absolute numbers basis, PECO has the highest number of
customers exercising their retail choice by buying electricity from alternative
suppliers.
PECO's Other Businesses
In addition to its regulated distribution businesses, PECO actively
competes in deregulated retail markets for electricity and natural gas. Although
its utility property and operations are generally confined to Pennsylvania,/18/
PECO markets or brokers electricity to retail customers in Massachusetts and New
Jersey as well./19/ PECO markets or brokers natural gas to a small number of
retail commercial and industrial customers in New Jersey and to customers in
areas of Pennsylvania outside its gas franchise territory. In these retail
choice programs, PECO acts as a marketer or broker. It does not own any utility
distribution property or operate any utility distribution facilities in states
other than Pennsylvania. PECO also engages in wholesale marketing of electricity
through its Power Team division. PECO PowerLabs is a division which calibrates
and verifies the accuracy of laboratory measuring and testing equipment.
PECO has multiple subsidiaries that support its utility operations. A
complete list of PECO's subsidiaries and affiliated business interests is
contained in Exhibit I-2 hereto. These businesses are all utility related, and
include special purposes financing subsidiaries, EWGs, telecommunications
companies, real estate companies, investments in various utility related
businesses or funds, infrastructure services businesses, and other businesses
and small passive investments.
In addition to PECO's utility and retail competition operations, PECO is
also engaged in certain non-utility businesses either directly, through
subsidiaries or through affiliated business ventures. In addition to the
information given on Exhibit I-2, the following describes certain of these non-
utility businesses.
_________________________
/18/ The only utility property located outside Pennsylvania is the Conowingo
Project, which is located in both Pennsylvania and Maryland, and a 42.6%
interest (which will increase to 50%) in Salem Nuclear Generating Station Unit
Nos. 1 and 2, located in New Jersey. The Salem station is directly
interconnected with PECO's system through the PJM operated transmission system.
The Commission has previously recognized that joint participation in the
construction of large generating facilities (particularly nuclear facilities) is
appropriate and does not controvert the integration requirement of Section
2(a)(29)(A) of the Act. See Electric Energy, Inc., Holding Co. Act Release No.
-------------------------
13871 (November 28, 1958); Yankee Atomic Electric Co., Holding Co. Act Release
--------------------------
No. 13048 (November 25, 1955); Mississippi Valley Generating Co., Holding Co.
---------------------------------
Act Release No. 12794 (February 9, 1955).
/19/ Exelon's electricity and natural gas brokering and marketing activities are
permissible under the Act. The Commission and the SEC Staff have both
recognized, on numerous prior occasions, that marketing activities are not
utility activities under the Act. See UNITIL, Holding Company Act Release No.
----------
26650 (January 21, 1997); SEI Holdings, Inc., Holding Co. Act Release No. 26581
------------------
(September 26, 1996); PP&L Resources, Inc., Holding Co. Act Release No. 26905
--------------------
(August 12, 1998); Enron Capital & Trade Resources Corp., SEC No-Action Letter,
1997 SEC No-Act. LEXIS 287 (February 13, 1997); LG&E Power Marketing, Inc., SEC
--------------------------
No-Action Letter, 1996 SEC No-Act. LEXIS 510 (April 26, 1996). In SEI Holdings
------------
the Commission stated "[i]ndustry trends and competitive pressures make it
important for registered system companies to be poised to compete in new markets
as they are created. Such participation would appear to promote the goals of
United States energy policy, including increased competition and lower rates."
11
<PAGE>
PECO, British Energy, plc of Edinburgh, Scotland, and BE, Inc., a U.S.
subsidiary of British Energy, have formed AmerGen Energy Company, L.L.C.
("AmerGen") to pursue opportunities to acquire and operate nuclear generating
stations in the United States. PECO and BE, Inc. each own a 50% equity interest
in AmerGen. As of the date of this Application-Declaration, AmerGen has acquired
Three Mile Island Unit 1 ("TMI-1") in Pennsylvania, Clinton Power Station in
Illinois and the Oyster Creek nuclear plant in New Jersey./20/ AmerGen has also
entered into an Asset Purchase Agreement with Vermont Yankee Nuclear Power
Corporation to acquire the Vermont Yankee nuclear plant./21/ AmerGen has been
granted exempt wholesale generator ("EWG") determinations from the FERC in
connection with TMI-1 and Clinton and will apply for EWG determination with
respect to the others./22/ PECO's 50% interest in AmerGen is authorized by
section 32(e) of the Act./23/
In accordance with the provisions of the Telecommunications Act of 1996,
PECO entered the telecommunications business through undertakings with
experienced operators. PECO Hyperion Telecommunications is a general partnership
with Adelphia Business Solutions, Inc. that provides "competitive local exchange
carrier" services such as local dial tone, long distance, Internet service and
point-to-point (voice and data) communications for businesses and institutions
in eastern Pennsylvania. Through its subsidiary PECO Wireless, LLC, PECO holds a
49% interest in a company which offers personal communications services in the
Philadelphia "Major Trading Area." PECO's interests in these businesses are
authorized by section 34 of the Act. Other telecommunications related entities
in which PECO holds an interest are described in Exhibit I-2./24/
As discussed below under Item 3.B.3(a)(v), "Retention of Other Businesses,"
the non-utility operations of PECO will qualify as additional businesses of
Exelon under the Act pursuant to Rule 58 and other applicable provisions. Exelon
requests that the investment in the PECO activities which it will acquire at
consummation of the merger be disregarded for purposes of calculating the dollar
limitation upon investment in energy-related companies under Rule 58./25/
______________________
/20/ An agreement with Niagara Mohawk Power Company and New York State Electric
and Gas Company regarding Nine Mile Point Unit 1 has been terminated by the
parties.
/21/ AmerGen is assigning its rights and obligations under the Asset Purchase
Agreement for Vermont Yankee to AmerGen Vermont, LLC, its wholly owned
subsidiary formed for the purpose of owning and operating Vermont Yankee.
/22/ Letter Orders, reported at 90 FERC(P) 62,061 (2000) and 91 FERC(P) 62,049
-------------
(2000).
/23/ Exelon's compliance with Rule 53 is discussed in the Financing U-1.
/24/ To the extent that the companies identified above have not registered with
the Federal Communications Commission ("FCC") as Exempt Telecommunications
Companies on the date of the filing of this Application-Declaration, Exelon
submits that it will act to ensure their registration with the FCC under Section
34 of the Act. To the extent such registration is not completed prior to the
entry by the Commission of an order approving the Merger, Exelon requests that
the Commission reserve its jurisdiction over these entities until Exelon makes a
filing identifying the companies that have registered or explaining why they may
otherwise be retained in accordance with the Act and the Commission's Rules.
/25/ See SCANA Corporation, Holding Company Act Release No. 35-27133 (Feb. 9,
---------------------
2000); New Century Energies, Inc., Holding Company Act Release No. 35-26748
--------------------------
(August 1, 1997). Conectiv, Inc., Holding Company
--------------
12
<PAGE>
A list of Rule 58 non-utility businesses and the basis for their retention is
contained in Exhibit I-2 hereto.
PECO Financial Position
PECO's authorized capitalization consists of 500 million shares of common
stock, 15 million shares of cumulative preferred stock and 100 million shares of
series preference stock. As of the close of business on December 31, 1999, there
were 181,271,692 shares of PECO common stock and 1,930,920 shares of PECO
cumulative preferred stock of various series issued and outstanding./26/ PECO
common stock is listed on the NYSE and the Philadelphia Stock Exchange.
Consolidated assets of PECO and its subsidiaries as of December 31, 1999 were
approximately $13 billion, consisting of $4 billion in net electric utility
property, plant and equipment; $931 million in net gas utility property, plant
and equipment; and $138 million in non-utility subsidiary assets, and $8 billion
in other corporate assets. For the year ended December 31, 1999, PECO had
electric utility revenues of $4.85 billion and gas utility revenues of $481
million./27/
Like Unicom and ComEd, PECO is a financially strong company. Following the
announcement of the revised Merger Agreement on January 7, 2000, Duff & Phelps
Credit Rating Co reaffirmed its ratings of PECO. At that date, PECO's first
mortgage bonds were rated "A-" and its implied senior unsecured debt was rated
"BBB+."
Further Information
More detailed information regarding the utility assets and operations of
PECO is included in its Annual Report on Form 10-K and Quarterly Reports on Form
10-Q which are filed as exhibits hereto and incorporated by reference.
D. Exelon Services
Exelon Services will enter into a service agreement with ComEd, PECO, Genco
and other affiliates (the "General Services Agreement"). (A copy of the form of
the General Services
_______________________
(continued...)
Release Act No. 35-26832 (February 25, 1998); Ameren Corp., Holding Company
-----------
Release Act No. 35-26809 (December 30, 1997).
/26/ Under the Merger Agreement, PECO has agreed to repurchase $500 million of
its common stock prior to the Merger. At May 5, 2000, PECO had completed such
repurchases and had 169,570,844 shares outstanding.
/27/ PECO and ComEd currently have pending before the IRS requests for private
letter rulings that their respective Restructurings will be tax-free
reorganizations. If required by the IRS to satisfy the Internal Revenue Code (S)
368(c) control test, PECO will take steps prior to the Merger to either amend
the terms of its outstanding series of preferred stock so that the stockholders
have voting rights or issue to Exelon a new series of non-voting preferred stock
so that Exelon owns 80% of the resulting total class of preferred stock. Neither
arrangement will have a material effect on PECO's balance sheet. The arrangement
that is ultimately adopted will either be covered by the existing
restructuring/merger orders issued by the Pennsylvania Commission, or PECO will
seek further approvals from the Pennsylvania Commission.
13
<PAGE>
Agreement is filed as Exhibit B-2.) The General Services Agreement will include
non-utility subsidiaries of Exelon as client companies. In this Application-
Declaration, Applicant seeks certain exemptions from or waiver of the
Commission's rules regarding the provision of service at cost to certain
affiliates of Exelon as described herein. Exelon may create a service company as
a subsidiary of Genco to achieve tax savings and efficiencies. If created, this
service company would perform some but not all of the services contemplated in
the General Services Agreement and would conduct business pursuant to a service
agreement substantially the same as the General Services Agreement and pursuant
to the allocation methods approved for Exelon Services./28/
E. Exelon Ventures, Exelon Enterprises, Exelon Energy Delivery and Genco
For a variety of tax, regulatory and business reasons, Exelon has
determined that the best way to organize its non-utility subsidiaries is through
the creation of Exelon Ventures Company ("Ventures"). Ventures will be a first
tier subsidiary of Exelon. It will own all of Exelon Enterprises Company, LLC
("Enterprises"). Enterprises, in turn, will hold the existing non-utility
investments of Unicom and PECO. In addition to Enterprises, Ventures will also
own all of the voting interest in Genco./29/ This structure allows Exelon to
align its non-utility enterprises and its non-State regulated electric
generating business in an efficient and simple manner.
Likewise, for a variety of regulatory and business reasons, Exelon has
determined that it wishes to include another intermediate holding company --
Exelon Energy Delivery Company ("Exelon Delivery") in its corporate
organization. This company would serve as parent for ComEd and PECO./30/
Following the transactions, Exelon Delivery and Ventures will register as
holding companies under the Act. Genco will be a holding company for PEPCO and
SECO and will also register as a holding company. Finally, PEPCO will remain a
holding company for SPCO and will remain a registered holding company as it is
currently.
A chart showing the post-merger organization of the Exelon system, assuming
the Restructurings are complete, and including Exelon Delivery and Ventures, is
included as Exhibit E-5 hereto.
_____________________
/28/ Exelon will file a pre-effective or post-effective amendment to this
Application-Declaration seeking approval of the service company subsidiary of
Genco if it is determined to create that company. Such filing would include all
the information necessary for the Commission to make the determination required
under Rule 88. Exelon requests that if a post-effective amendment is filed, any
further order be entered without the necessity for further publication of notice
of the filing.
/29/ It is currently contemplated that Genco will be organized as a limited
liability company as will Enterprises, although Enterprises may be a business
corporation.
/30/ Exelon believes that substantially all conditions to the completion of
steps necessary to achieve the corporate structure shown in Exhibit E-5 will be
satisfied at or about the time of the Merger. However, including Exelon Delivery
as a holding company for ComEd and PECO will require approval of the
Pennsylvania Commission, a notice filing with the Illinois Commission and notice
to and authorization and/or jurisdictional disclaimer of FERC. In the event such
regulatory approvals are not obtained or other impediments develop, Exelon
Delivery would not be put it place. Accordingly, Exelon requests authority to
effectuate the Merger, with or without Exelon Energy Distribution Company. An
analysis of how Exelon Delivery and Ventures comply with the Act is included in
Item 3.B.3.a.(vi). Exelon will file with the Commission a Certification under
Rule 24 upon completion of the Merger and, if it occurs later, upon completion
of the transfer of common stock of ComEd and PECO from Exelon to Exelon
Delivery. As indicated in Note 3 above, Exelon also requests authority to
effectuate the Merger, with or without the Restructurings. Exelon will file with
the Commission a Certification under Rule 24 upon completion of the Merger and,
if it occurs later, upon completion of the Restructurings.
14
<PAGE>
F. Description of the Merger
The Merger is structured as a merger of equals. Following the Merger,
Unicom shareholders will own about 46% and PECO shareholders will own
approximately 54% of Exelon. The Merger is subject to customary closing
conditions, including the receipt of the requisite shareholder approvals of
Unicom and PECO and all necessary governmental approvals, including the approval
of the Commission.
The Merger Agreement provides that through a transition period beginning
with the closing of the merger and ending December 31, 2003, the Board of
Directors of Exelon will consist of 16 members initially, 50% of the directors
will be recommended by Unicom from among the members of its board at the time of
closing and 50% of the directors will be recommended by PECO from among the
members of its board at the time of closing. The Board of Directors will be
divided into three classes, as nearly equal in number as possible, with equal
numbers (as nearly as possible) of Unicom and PECO directors in each class. In
addition to the executive committee, which shall include the two Co-CEO's, two
PECO independent directors and two Unicom independent directors, initially there
will be other committees of the board, with the chairmen to be equally divided
between PECO designated directors and Unicom designated directors. For the first
half of the transition period, Mr. Corbin A. McNeill, Jr., current Chairman and
CEO of PECO, will be Chairman and Co-CEO of Exelon, and Mr. John W. Rowe,
current Chairman and CEO of Unicom, will be Chairman of the Executive Committee
of the Board, President and Co-CEO of Exelon. For the second half of the
transition period, Mr. McNeill will be Chairman of the Executive Committee of
the Board and Co-CEO of Exelon and Mr. Rowe will be Chairman and Co-CEO of
Exelon. At the expiration of the transition period, Mr. McNeill will retire as
an officer and employee of Exelon but will remain a director. The bylaws of
Exelon will provide that during the transition period the terms of employment of
Messrs. McNeill and Rowe and the succession process described above can be
changed only by a vote of at least two-thirds of the directors.
The Merger is structured to be tax-free to holders of PECO common stock and
Unicom common stock for United States Federal income tax purposes, except for
that portion of Merger consideration ($3.00 per share) received by Unicom
shareholders in cash, including any cash received instead of any fractional
shares in Exelon common stock.
The Merger will be accounted for using purchase accounting with PECO being
deemed to have acquired Unicom. Exelon will acquire Unicom by exchanging .875
shares of Exelon Common stock for each share of Unicom common stock. In
addition, Exelon will pay each Unicom shareholder $3.00 per Unicom share, in
cash. No new long-term debt is expected to be issued to finance the
approximately $500 million cash payment to Unicom shareholders.
An adjustment to recognize goodwill will be made in connection with the
Merger. Goodwill represents the excess of the purchase price consideration of
$5.766 billion, including PECO's estimated transaction costs, over the net book
value of assets acquired (which at June 30, 2000 were $3.459 billion). The
adjustment reflects the merger consideration including approximately 145.8
million shares of Exelon common stock at a price of $35.89 based on the average
closing price of PECO common stock between January 3 and 12, 2000. The estimated
goodwill based on these factors and pro forma adjustments at June 30, 2000 is
$2.217 billion.
15
<PAGE>
Actual goodwill recorded upon consummation of the Merger will consider the fair
value of Unicom's assets and liabilities at that future date, including the fair
value determination of nuclear generating stations, and may differ significantly
from the amounts recorded in the pro forma financial statements included in the
Joint Proxy Statement/Prospectus dated May 15, 2000 (the "Joint Proxy
Statement"). Substantially all of the goodwill will be reflected on the balance
sheet of ComEd. Goodwill will be amortized over a 40-year period. See pages 85-
96 of the Joint Proxy Statement of Unicom and PECO (a copy of which is included
as Exhibit C-2) for details regarding the pro forma financial statements of
Exelon.
The Merger Agreement contains certain covenants relating to the conduct of
business by the parties pending the consummation of the Merger. Generally, the
parties must carry on their businesses in the ordinary course consistent with
past practice, may not increase common stock dividends beyond specified levels
and may not issue capital stock except as specified. The Merger Agreement also
contains restrictions on, among other things, charter and bylaw amendments,
capital expenditures, acquisitions, dispositions, incurrence of indebtedness,
and certain increases in employee compensation and benefits. Under the Merger
Agreement, Unicom is to use commercially-reasonable efforts to purchase in the
open market, or otherwise, its common stock in an amount of $1.0 billion prior
to the closing of the Merger. Under the Merger Agreement, PECO is to use
commercially-reasonable efforts to purchase in the open market, or otherwise,
its common stock in an amount of $500 million prior to the closing of the
Merger.
The Merger Agreement provides that, after the effectiveness of the Merger,
Exelon's principal corporate office will be located in Chicago, Illinois. Exelon
will maintain corporate offices in Philadelphia as the headquarters of PECO
Energy and the combined entity's generation business will be headquartered in
southeastern Pennsylvania.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Merger, including the solicitation of
proxies, registration of securities of Exelon under the Securities Act of 1933,
and other related matters, are estimated as follows:
<TABLE>
<S> <C>
Commission filing fee for the Joint Registration Statement on Form S-4.................. $ 4,024,224
Accountants' fees....................................................................... 500,000
Legal fees and expenses relating to the Act............................................. 690,000
Other legal fees and expenses........................................................... 4,686,000
Shareholder communication and proxy solicitation........................................ 343,000
NYSE listing fee........................................................................ 536,000
Exchanging, printing, and engraving of stock certificates............................... 1,745,000
Investment bankers' fees and expenses................................................... 68,000,000
Consulting fees related to the Merger................................................... 6,600,000
Miscellaneous........................................................................... 275,776
------------
TOTAL................................................................................... $ 87,400,000
============
</TABLE>
Item 3. Applicable Statutory Provisions
16
<PAGE>
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the Merger:
Transactions to which section or
Section of the Act rule may be applicable:
------------------ ----------------------------------
2(a)(7), 2(a)(8) Declaration that Ventures, Exelon
Delivery and Genco are not holding
companies or subsidiary companies
solely for purposes of Section
11(b)(2 )
4, 5 Registration of Exelon as a
holding company following
consummation of the Merger.
6(a), 7 Issuance of Exelon common stock
in exchange for shares of Unicom
and PECO common stock.
9(a)(1), 10 Acquisition by Exelon of stock of
Exelon Services and of non-
utility subsidiaries of Unicom
and PECO.
9(a)(2), 10(a), (b), (c) and (f), 11(b) Acquisition by Exelon of common
stock of ComEd, the Indiana
Company, PECO, Genco and the
Conowingo Companies; creation of
Ventures and Exelon Delivery and
transfer of ComEd and PECO stock
to Exelon Delivery
8, 9(c)(3), 11(b) Retention by Exelon of the retail
gas utility operations of PECO;
investment in and retention of
other businesses of Unicom and
PECO and their direct and
indirect subsidiaries.
11(b)(2) Declaration that Ventures, Exelon
Delivery and Genco are not
subsidiary companies or holding
companies solely with respect to
the "great-grandfather" provisions
of Section 11(b)(2).
12 Transfer of generating assets of
ComEd and PECO to Genco in the
Restructuring; transfer of assets
to Exelon Services in connection
with establishment of service
company; transfer of common stock
of ComEd and PECO from Exelon to
Exelon Delivery.
13 Approval of the services to be
provided by Exelon Services to
utility subsidiaries in
accordance with the General
Services Agreement; approval of
services to be provided
thereunder by Exelon Services to
the direct and indirect non-
utility subsidiaries of Unicom
and PECO; approval of the
performance of certain services
between Exelon system companies;
and exemption from at-cost
standards with respect to certain
services between Exelon system
companies.
17
<PAGE>
Transactions to which section or rule may be
Section of the Act applicable:
------------------ ---------------------------------------------
Rules
-----
43-44 Transfers of utility assets and securities of
public utility subsidiaries
80-92 Affiliate transactions, generally.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed to be applicable to the Merger, such sections and rules
should be considered to be set forth in this Item 3.
A. Application of the Act in Light of the Evolving "State of the Art" of
of the Electric Utility Industry
To approve the Merger, the Commission must find that Section 10 of the Act
is satisfied. The Section 10 analysis is presented in detail below in section B
"Section by Section Analysis" in this Item 3. The highlight of the analysis is
whether the Merger will tend toward the economical and the efficient development
of an integrated public-utility system under Sections 11 and 2(a)(29) of the
--------------------------------
Act. Applicant believes that it will. Before setting forth in detail how the
Merger satisfies each requirement of the Act, this Application-Declaration will
first describe some of the recent changes in the utility industry that have
resulted in the current "state of the art."
The Act directs the Commission to consider the "state of the art" in
determining whether the requirements of the Act are satisfied./31/ The
Commission has long recognized that as the industry changes -- by means of
technological development and by reason of new laws and regulations -- the
Commission faces the task of applying the requirements of the Act in light of
these changing conditions. Such changes since 1935 have made it possible for
ever larger and geographically more diverse companies to satisfy the standards
of the Act. Systems that would have been unlikely to receive approval in an
earlier era have proven to be not only permitted, but in fact made necessary, by
the evolving state of the art./32/
In recent years the Commission has emphasized that the Act "creates a
system of pervasive and continuing economic regulation that must in some measure
at least be fashioned from time to time to keep pace with changing economic and
regulatory climates."/33/ In recent decisions, the Commission has cited U.S.
Supreme Court and Circuit Court of Appeals cases that
____________________
/31/ See the definition of "integrated public-utility system" in Section
---
2(a)(29).
/32/ See, e.g., American Electric Power Company, Inc., Holding Co. Act Release
--- ---- ------------------------------------
No. 20633 (July 21, 1978).
/33/ Union Electric Co., Holding Co. Act Release No. 18368, n. 52( April 10,
-------------------
1974), quoted in Consolidated Natural Gas Co., Holding Co. Act Release No. 26512
----------------------------
(April 30, 1996) (authorizing international joint venture to engage in energy
marketing activities); Eastern Utilities Associates, Holding Co. Act Release No.
----------------------------
26232 (Feb. 15, 1995) (removing restrictions on energy management activities);
and Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992) (approving
------------
acquisition of foreign public-utility subsidiary company).
18
<PAGE>
recognize that an agency is not required to "establish rules of conduct to last
forever,"/34/ but must "adapt [its] rules and policies to the demands of
changing circumstances"/35/ and to "treat experience not as a jailer but as a
teacher."/36/ Consequently, the Commission has attempted to "respond flexibly to
the legislative, regulatory and technological changes that are transforming the
structure and shape of the utility industry," as recommended by Division of
Investment Management (the "Staff") in its report issued in June 1995 entitled
"The Regulation of Public Utility Holding Companies" (the "1995 Report").
Indeed, with specific reference to the integration requirements of the Act, the
1995 Report explains:
The statute recognizes... that the application of the
integration standards must be able to adjust in response to
changes in "the state of the art." As discussed previously,
the Division believes the SEC must respond realistically to
the changes in the utility industry and interpret more
flexibly each piece of the integration equation./37/
The current state of the art is characterized by the development of
competitive wholesale electric supply markets resulting from changes in Federal
law and regulations and the adoption by States of utility restructuring laws
leading to retail customer choice and other changes. Increasingly, electric
utilities no longer rely solely on acquiring their own, more efficient
generation to achieve efficiencies and economies.
Because of these changes, the electric utility industry today is much
different from what it was -- even in the recent past. The utility market model,
--------------------
with generation functionally unbundled from transmission and distribution, is
supplanting the vertically integrated monopoly model throughout the country.
------------------------------------
Developments in Federal law and regulations have led to a wholesale competitive
electric generating market. The access for all eligible parties to interstate
transmission is a critical component of this market. The market model has
evolved further in some States, like Illinois and Pennsylvania. Unlike many
recent or pending merger cases at the Commission, in this case the legislatures
of the States where the companies operate have enacted State utility
restructuring legislation. In Illinois and Pennsylvania, pursuant to this recent
legislation, retail customers have a choice in determining who will supply their
electric power. Customer choice -- the elimination of the traditional monopoly
over the generation aspects of electric service -- fundamentally changes the
nature of regulation. In this case, each State has adopted laws and policies
seeking to provide consumers the benefits of competition. Further, technological
developments are changing the nature of the industry. So called "distributed
generation" and other developments have fundamentally changed how electricity is
produced and distributed and have accelerated the movement to the market model.
________________________
/34/ Rust v. Sullivan, 500 U.S. 173 (1991); American Trucking Assns., Inc. v.
---------------- ---------------------------------
Atchison, T.&S.F.R. Co., 387 U.S. 397 (1967); Shawmut Assn. v. SEC, 146 F.2d,
-------- --------------------
791 (1st Cir. 1945).
/35/ NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10,
-----------------------
1999) [hereinafter "NIPSCO"], citing Rust v. Sullivan at 186-187. Accord, Sempra
------ ----------------------- ------ ------
Energy, Holding Co. Act Release No. 26971 n.23 (Feb. 1, 1999) (interpreting the
------
integration standards of the 1935 Act in light of developments in the gas
industry).
/36/ NIPSCO, supra, citing Shawmut Assn. v. SEC at 796-97.
------ ----- ------ --------------------
/37/ 1995 Report at 71.
19
<PAGE>
The Merger is one of the first to take full advantage of the developing
market model of achieving integrated and coordinated operations -- yet it fully
complies with all the requirements of the Act in substantially the same manner
as was the case in similar mergers recently approved by the Commission./38/
Unlike many registered holding companies, Exelon will consolidate all of its
generating assets in a single entity: Genco. Genco will control and coordinate
the efficient use of all these generating assets by supplying the generation
needs of ComEd and PECO as well as supplying Exelon's other wholesale customers.
Exelon will obtain its power supply not just from its owned facilities -- the
facilities formerly owned by ComEd and PECO and transferred to Genco -- but from
a variety of market sources. Further, Exelon will coordinate the dispatch of
these generation sources not only through the use of the ComEd and PECO
transmission systems, but by using the Contract Path and a portion of the open
access transmission grid. The entire working model of the industry has shifted
from "build and own all generation necessary to serve your load" to "consider
all supply options available in the market -- both local and distant." Likewise,
the transmission grid has developed physically, but more importantly in the
legal and operational manner discussed below, to accommodate this new working
model.
Development of the competitive model for electric generation began with
the Public Utility Regulatory Policies Act of 1978 ("PURPA"), which encouraged
the development of new sources of generation. The development of the market for
non-traditional generation for the wholesale market accelerated significantly
after adoption of the Energy Policy Act of 1992 ("EPACT"). This progress has
been facilitated by FERC's willingness to permit the sale of electric capacity
and energy at market-based rates. The regulatory policy fostering market based
rates for the commodity of electricity applies not only to non-utility
generators and independent power producers ("IPPs"), which developed in the wake
of PURPA, but also to traditional integrated utilities, like ComEd and PECO, who
have increasingly focused on their own wholesale marketing efforts./39/ The
increasing number of wholesale sellers has also led to the development of power
marketers (many of which are affiliated with utilities) -- a relatively new
class of wholesale market participant that purchases and sells power produced by
third parties, not from their own resources.
The increase in the number of, and capacity controlled by, non-
traditional generators, and the volume of trading by power marketers has been
dramatic. Nationwide, plans to build new plants by non-utility entities have
expanded dramatically. For example, PJM makes public requests received by it for
interconnection to the PJM transmission grid by new generating sources. As of
January, 2000, the "queue" of applications for connection with the PJM grid
included about 100 active projects with a total of about 40,000 MW./40/ Similar
plant additions
_____________________________
/38/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
-------------------------------------
(June 14, 2000).
/39/ ComEd and PECO have each been granted market rate authority and
participate in wholesale markets. PECO's wholesale power marketing operation
division (the Power Team) is one of the most active power marketers in the
country. It ranked 14/th/ out of the top 45 wholesale power sellers in 1998.
Power Markets Week, at 16 (June 28, 1999).
------------------
/40/ Current information can be found at http://www.pjm.com/. For reference,
the PJM ISO has a peak load of about 51,000 MW.
20
<PAGE>
have been announced by IPPs in the Midwest as well. By the first quarter of
1999, power traded by marketers exceeded 400 million MWh, with over 100 entities
engaged in the business./41/
The increased capacity of non-traditional generators, and the number of
suppliers, as well as the liquidity created by power marketers has had an impact
on energy pricing. Energy marketers commonly arbitrage energy price
differentials by buying in one market and selling in another. The effect of
these trading strategies is to minimize margins to be gained in interregional
sales and therefore to drive electric supply market prices closer to a regional-
wide marginal (or incremental) cost. As prices move to marginal cost, rate
differentials arising from historical embedded cost begin to disappear. Non-
traditional generators operating in the national energy markets also are
becoming a more significant factor in the electric utility industry. Their
significant plant additions lessen the impact of historical embedded utility-
specific price differentials by changing the cost structure of the industry as a
whole.
At the same time as these developments were occurring, many States
began implementing integrated resource planning requirements that mandate that
utilities focus on both supply-side and demand-side resources and that require
local utilities to competitively bid their resource requirements to obtain the
lowest cost resources possible. Under these resource procurement requirements,
utilities typically must purchase power from third parties (rather than provide
for their own generation) if to do so would result in lower costs to consumers.
Thus, State regulators have widely recognized that the economic operation of a
utility system must include the benefits of integration through the marketplace
and not just the effects of vertically-integrated ownership structure. Illinois
and Pennsylvania have moved beyond these steps, however, and have acted to fully
open the generation supply function to competition.
For various reasons, including State utility restructuring laws,
utilities have been selling large amounts of generating assets. From August
1997, through early 1999 approximately 80,000 MW of generating capacity was sold
(or was under contract to be sold) by utilities. In total, this represents more
than 10 percent of U.S. generating capacity./42/ ComEd itself has sold 11,272 MW
of capacity (about 55% of its total capacity before the sales) to unaffiliated
purchasers. These sales contribute to the development of the market for
generation by increasing the capacity in the hands of non-traditional generators
and bringing new competitors into most local markets.
These developments make it clear -- the old model of "generating all
you use" no longer prevails. The traditional means of achieving economies and
efficiencies -- acquiring additional generation -- no longer apply. Utilities --
to the extent they provide retail bundled service -- will have to shop from a
number of sources to obtain the most economical generation. The development of
the open access transmission grid enables the utility to expand the region in
which they can find supplies. Further, in states such as Illinois and
Pennsylvania, which have opened the generating function to competition, the
traditional utility will no longer be the only
______________________________
/41/ Order No. 2000 at 15.
/42/ RTO NOPR at 33,690.
21
<PAGE>
source of generation. All customers will rely a wide-spread, increasingly
national market to provide generation at a market driven price.
The Merger is in direct response to these developments. ComEd and PECO
will use Genco to coordinate their "shopping" efforts. Further, Genco will use
its marketing abilities to sell the generation output of facilities controlled
by Exelon in the most efficient manner possible -- to ComEd and PECO and to
other customers. Importantly, and as described in the following paragraphs,
Genco will be able to arrange for the delivery of this power to where it is
needed by relying on the Contract Path and open access transmission.
Following the enactment of EPACT, FERC recognized that the full
development of a vigorous and competitive wholesale generation market would not
be possible without a means for these new classes of generators and power
marketers to move power from the generating facility to distant customers.
Seeking to foster the wholesale generation markets, FERC has mandated changes in
the legal framework of the interstate transmission grid to enable these
generators to market electricity to an expanding number of customers. As a
result, traditional utilities may also use the transmission grid to coordinate
------------
the activities of their own generation and distribution functions.
EPACT changed the legal framework for the interstate transmission of
electricity. Under this law, utilities could request transmission service over
the systems of others. This expanded the circumstances in which a non-
traditional generator, or two remote generation owning utilities, could
economically move power from one place to another. FERC initially implemented
EPACT on a case-by-case basis, ordering individual utilities to enter into
specific transactions to transmit another entity's power over the transmission
owner's system. Later it used its authority under EPACT, and its authority to
remedy discriminatory conduct under the Federal Power Act (FPA), to require all
---
utilities under its jurisdiction to open their transmission systems and allow
--------------------------------
any qualified entity to use their system on a regular basis to deliver
electricity at a fair and non-discriminatory rate. The new requirements, known
simply and descriptively as "open access" came about in 1996 in FERC's Order No.
888 and its progeny./43/ Order No. 888's key provision was the requirement that
utilities file standard transmission tariffs (called "OATTs" -- open access
transmission tariffs) under which a transmission provider must offer service to
any qualified user. OATTs provided utilities, other generation owners and power
marketers for the first time with a generally available right to use the
transmission systems of others to move power at tariffed rates.
In Order No. 889,/44/ a companion 1996 ruling, FERC also mandated that
transmission owners establish a comprehensive information system regarding the
availability and price of
___________________________________
/43/ Promoting Wholesale Competition Through Open Access Non-Discriminatory
Transmission Service by Public Utilities; Recovery of Stranded Costs by Public
Utilities, FERC Stats. and Regs., Regulations Preambles, (P) 31,036 (1996)
("Order No. 888"), order on rehearing, FERC Stats. & Regs., Regulations
Preambles, (P) 31,048 (1997) ("Order No. 888-A"), order on rehearing, 81 FERC
(P) 61,248 (1997) ("Order No. 888-B"), order on rehearing, 82 FERC (P) 61,046
(1998) ("Order No. 888-C").
/44/ Open Access Same-Time Information System (formerly Real-Time Information
------------------------------------------------------------------------
Network) and Standards of Conduct, Order No. 889, [1991-1996 Transfer Binder]
---------------------------------
FERC Stats. & Regs., Regs. Preambles (P). 31,035, at 31,585 (1996), order on
reh'g, Order No. 889-A, III FERC Stats. & Regs., Regs. Preambles (P). 61,253
(1997).
22
<PAGE>
their transmission service on an Internet site called Open Access Same-Time
Information System ("OASIS"). The OASIS provides a practical and efficient means
for distant utilities to use the interstate transmission grid to coordinate
their operations. Because of these changes it is now possible for utilities that
are not adjacent to gain the advantages of coordinated operation, to jointly use
their various generating assets on an economic basis and otherwise act as an
integrated public utility company through the use of the OATTs and OASIS.
Importantly, "open access" as dictated by Order Nos. 888 and 889, provides an
easy to use, day-to-day means of coordinating electric operations. Unlike in the
past, when inter-company transmission required complex, separately negotiated
agreements, open access is available to all on minimal notice and at standard
terms.
These legal and practical circumstances have only become available in
recent years -- in fact only since about 1997./45/ Although Exelon believes that
its electric facilities are "interconnected" and, therefore, that it is an
integrated system, through the use of OATTs and OASIS, Exelon is not relying
solely on this method to establish interconnection. Rather, Exelon is proposing
its Contract Path, which is fully consistent with the most recent Commission
precedent, in addition to other interconnections through OATTs./46/
Unicom and PECO recognize and embrace the changes in the industry and
believe that the Merger will result in an integrated public-utility system
positioned for competition in the utility industry of the future. Open access to
transmission, retail electric competition and technological changes are
promoting the growth of larger and more competitive regional wholesale power
markets. As more buyers and sellers participate in broader bulk power markets,
increased competition will tend to produce lower and more stable electricity
prices for the benefit of consumers. Although open access transmission is fully
developed to enable Exelon to coordinate its utility operations (including the
Contract Path), the transmission markets will become even more liquid and
seamless, as a result of FERC's policy of promoting regional transmission
organizations ("RTOs"), as most recently evidenced by its issuance of Order No.
_________________________________
/45/ The requirement to file an OATT was effective in 1996. OASIS went into
operation in 1997.
/46/ See, American Electric Power Company, Inc., Holding Co. Act Release No.
-----------------------------------------
27186 (June 14, 2000). Exelon has prepared an Analysis of How the
-------------------
Interconnection Requirement of PUHCA is Satisfied by OATTs and OASIS
--------------------------------------------------------------------
("Interconnection Analysis"). This Interconnection Analysis, filed as Exhibit K-
------------------------ ------------------------
1 to this Application-Declaration and incorporated by reference herein,
describes in detail the historical development of the interstate transmission
grid in the United States referred to in the preceding paragraphs of this
Application-Declaration. The Interconnection Analysis also traces the
development of the competitive generating sector of the electric utility
industry and demonstrates how that development, spurred by EPACT and FERC Order
Nos. 888 and 889, has led to a system which, when coupled with the Contract
Path, will enable Exelon to operate efficiently, under normal conditions, as a
coordinated and integrated public-utility system. Finally, the Interconnection
---------------
Analysis includes a practical guide to moving power describing in detail exactly
--------
how the OATT and OASIS system will work, in conjunction with the Contract Path,
to effectively and economically interconnect the parts of the Exelon system. The
Interconnection Analysis does not attempt a legal analysis of how Exelon meets
------------------------
the integrated public-utility system requirement of the Act -- that analysis
follows in Part B, "Section by Section Analysis" to this Item 3. Rather, the
Interconnection Analysis gives a description, too detailed to include here, of
------------------------
the factual basis for the conclusion that open access transmission constitutes
"interconnection" within the meaning of the Act. However, as noted elsewhere, it
is not necessary for the Commission to find that open access is sufficient to
establish "interconnection" within the meaning of the Act because Exelon will
also obtain the Contract Path which is sufficient alone to meet the standards of
the Act.
23
<PAGE>
2000 on December 15, 1999./47/ The development of RTOs will further streamline
the currently robust market for the interstate movement of electricity and
provide the tools for meeting the ever increasing demand for capacity on the
interstate grid. State and Federal policy makers have recognized that the
economic operation of utility systems can be achieved, and indeed is perhaps
best achieved, through contractual relations in a competitive marketplace, and
not simply through ownership of generation, transmission and distribution
facilities.
To summarize the current state of the art described in this section,
the ongoing corporate restructuring of the U.S. utility industry reflects the
effects of emerging FERC policy on market-based power pricing and on
transmission, including Order Nos. 888, 889 and 2000 requiring open access
transmission on comparable terms and the functional unbundling of the
transmission and wholesale merchant functions, the formation of ISOs and the
development of RTOs. It is also the product of many recent State laws mandating
competitive resource procurement, retail electric competition and the functional
separation (and in some States, divestiture) of generation from transmission and
distribution operations. Layered on these changes are both rapid developments in
technology and the emergence and growth of the power marketing and energy
trading industry, both of which facilitate efficient and competitive low-cost
electric markets. The cumulative effect of these regulatory, technological and
economic changes has dramatically altered the "state of the art" that Congress
directed the Commission to consider more than sixty years ago. The Commission
must "respond realistically to the changes in the utility industry and interpret
more flexibly each piece of the integration equation."/48/ The SEC Staff in its
1995 Report advised the SEC that "open access under FERC Order No. 636,
wholesale wheeling under the Energy Policy Act and the development of an
increasingly competitive and interconnected market for wholesale power have
expanded the means for achieving the
____________________________________
/47/ Order No. 2000, Docket No. RM99-2-000, Final Rule Regional Transmission
Organizations (December 15, 1999), 89 FERC (P). 61,285 (1999); order on reh'g,
Order No. 2000-A, FERC Stats and Regs (P). 31,092 (Feb. 25, 2000). FERC defines
an RTO as an entity that satisfies the minimum characteristics (independence,
scope and regional configuration, operational authority and short-term
reliability) and minimum functions (tariff administration and design, congestion
management, parallel path flow, ancillary services, OASIS information, market
monitoring, planning and expansion and interregional coordination). 18 CFR (S).
35.34. The regional organizations to which ComEd and PECO belong, MISO and PJM,
are "independent system operators," which is a type of organization structure
for the control or operation of transmission facilities of multiple owners.
Order No. 2000 at 24. MISO and PJM may become RTOs in the future. Order No. 2000
requires all public utilities that own, operate or control interstate
transmission facilities subject to FERC jurisdiction to file, by October 15,
2000, a proposal for an RTO with the minimum characteristics and functions
identified in Order No. 2000, or, alternatively, a description of any efforts
made by the utility to participate in an RTO, any obstacles to participation,
and any plans and timetable for further work toward RTO participation. Public
utilities that are members of an existing, FERC-approved regional entity must
file by January 15, 2001 an explanation of the extent to which the regional
entities in which they participate meet the minimum characteristics and
functions of an RTO. In Order No. 2000, FERC has adopted a flexible approach
that permits a number of different types of RTOs to come into being, including
non-profit independent system operators and for-profit transmission companies
(transcos), combinations of these two types of entities, or other approaches as
yet to be determined. FERC also adopted the principle of "open architecture" so
that an RTO and its members can evolve over time and improve structure,
geographic scope, market support and operations to meet market needs. FERC will
allow RTOs to propose changes to their enabling agreements to meet changing
market, organization and policy needs. The inefficiencies that continue to exist
in today's open access transmission system will be reduced as RTOs develop and
mature. More information on how RTOs will further facilitate the open access
transmission system is set forth in the Interconnection Analysis.
------------------------
/48/ 1995 Report at 67.
24
<PAGE>
interconnection and the economic operation and coordination of utilities with
non-contiguous service territories." The "means for achieving interconnection"
referred to in the 1995 Report are even more developed because of the open
access requirements of Order No. 888 and Order No. 2000 which were promulgated
after the 1995 Report was prepared.
The 1935 Act was intended, among other things, to prevent the evils
that arise "when the growth and extension of holding companies bears no relation
to the economy of management and operation or the integration and coordination
of related operating properties . . . ."/49/ The Exelon system will be an
example of growth that promotes economies and coordination of related operating
properties within a single region in a manner consistent not only under the
policies of the Act, but also with the policies of FERC and State regulatory
initiatives. Under the Act, the ultimate determination has always been whether,
on the facts of a given matter, the proposed transaction "will lead to a
recurrence of the evils the Act was intended to address."/50/ The following
section B, "Section by Section Analysis" will examine each of the requirements
of the Act and show that the Merger will satisfy all those provisions, will not
result in a recurrence of the evils to which the Act is directed and, therefore,
should be approved by the Commission.
B. Section by Section Analysis
The following is a section-by-section analysis that will demonstrate
that the Merger is consistent with each of the referenced sections of the Act
and should, therefore, be approved by the Commission. This discussion will show
that the Merger clearly comports with Commission precedent. The following
analysis will show that the Merger meets in every respect the requirements under
the Act in light of the Commission's most recent precedent./51/
1. Section 9(a)(2) -- Acquisition of Utility Stock
Section 9(a)(2) makes it unlawful, without approval of the Commission
under Section 10, "for any person...to acquire, directly or indirectly, any
security of any public-utility company, if such person is an affiliate...of such
company and of any other public-utility or holding company, or will by virtue of
such acquisition become such an affiliate."/52/ As a result of the Merger,
Exelon will directly or indirectly acquire all of the outstanding voting
securities of, and therefore be an affiliate of, each of the following public-
utility companies: ComEd, the Indiana Company, PECO, Genco and the Conowingo
Companies./53/ The Merger therefore requires prior
_______________________________
/49/ Section 1(b)(4).
/50/ Union Electric Co., quoted in Southern Co., Holding Company Act Release No.
----------------- -----------
25639 (Sept. 23, 1992).
/51/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
------------------------------------
(June 14, 2000).
/52/ Under the definition set forth in Section 2(a)(11), an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company," and "any company 5 per centum or more of
whose outstanding voting securities are owned, controlled, or held with power to
vote, directly or indirectly, by such specified company."
/53/ Upon completion of the Restructurings, the Conowingo Companies will be
subsidiaries of Genco. Further, ComEd and PECO will become subsidiaries of
Exelon Energy Delivery. See Exhibit E-5.
25
<PAGE>
Commission approval under the standards of Section 10. The relevant standards
are set forth in Sections 10(b), 10(c) and 10(f) of the Act.
The Merger complies with all of the applicable provisions of Section 10
of the Act and should be approved by the Commission:
. The consideration to be paid in the Merger is fair and
reasonable.
. The Merger will not create detrimental interlocking relations or
concentration of control.
. The Merger will not result in an unduly-complicated capital
structure for the Exelon system.
. The Merger is in the public interest and the interests of
investors and consumers.
. The Merger is consistent with Section 8 and not detrimental to
carrying out the provisions of Section 11 of the Act.
. The Merger tends toward the economical and efficient development
of an integrated electric system and a permitted additional
integrated gas system.
. The Merger will comply with all applicable State laws.
2. Section 10(b) -- Commission to Approve if Three
Requirements Met
Section 10(b) provides that if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a) unless
the Commission finds that:
. such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind
or to an extent detrimental to the public interest or the
interests of investors or consumers;
. in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
. such acquisition will unduly complicate the capital structure of
the holding-company system of the applicant or will be
detrimental to the public interest or the interests of investors
or consumers or the proper functioning of such holding-company
system.
(a) Section 10(b)(1) -- Interlocking
Relations/Concentration of Control
Applicable Standard. The standards of Section 10(b)(1) are satisfied
-------------------
because the Merger will not "tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an extent
detrimental to the public interest or the interests of investors
26
<PAGE>
or consumers." By its nature, any merger results in new links between previously
unrelated companies. The Commission has recognized that such interlocking
relationships are permissible in the interest of efficiencies and economies./54/
The links that will be established as a result of the Merger are not the types
of interlocking relationships targeted by Section 10(b)(1), which is primarily
aimed at preventing business combinations for reasons unrelated to attaining
operating synergies. In the present circumstances, the so-called interlocking
relationships will consist of new Boards of Directors of Exelon and its
subsidiaries and various contractual arrangements designed to integrate the
Exelon system and to produce efficiencies and economies. The Merger Agreement
provides for the Board of Directors of Exelon to consist of up to 16 members,
one-half designated by Unicom and one-half designated by PECO./55/ This is a
typical arrangement in a merger of equals transaction such as the Merger.
A variety of contractual arrangements among the companies in the Exelon
system will be established, including the following:
. General Service Agreements. ComEd, the Indiana Company, PECO,
--------------------------
Genco and the Conowingo Companies will each enter into a General
Services Agreement with Exelon Services. Under the General
Services Agreement, Exelon Services will also provide services to
Exelon's direct and indirect non-utility subsidiaries. Through the
consolidation of functions into Exelon Services, the Exelon system
will achieve substantial economies and efficiencies. Services
incidental to their business function may be provided directly by
ComEd or PECO in compliance with Rule 87(a)(3). The provision of
services between ComEd and PECO and certain affiliates will be
subject to State regulation as well.
. Genco, ComEd, PECO Power Sales Agreements. All generating
-----------------------------------------
facilities of ComEd and PECO will be transferred to Genco. Genco
will enter into arrangements with ComEd and PECO to provide them
with power necessary for them to meet their "bundled service" or
"provider of last resort" obligations under State law and, at the
request of ComEd and PECO, will be available to meet future supply
needs or coordinate purchases from non-affiliated suppliers. Genco
will coordinate Exelon's purchases of power from non-affiliated
entities for its competitive marketing activities. Because of this
consolidation of generation in a single entity, the Exelon system
will not need the typical "joint operating agreement" or "joint
dispatch agreement" that many other systems use to achieve
coordinated operations.
. Marketing. The function of marketing the available generating
---------
capacity of the Exelon system will be coordinated by Genco. Genco
will include the existing energy
_________________________________
/54/ Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), as
------------------- --
modified, Holding Co. Act Release No. 25273 (Mar. 15, 1991), aff'd sub nom. City
-------- ------------- ----
of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) ("interlocking relationships
-----------------
are necessary to integrate [the two merging entities]").
/55/ The Applicant acknowledges the requirements of Section 17(c) of the Act and
Rule 70 thereunder with respect to limitations upon directors and officers of
registered holding companies and subsidiary companies thereof having
affiliations with commercial banking institutions and investment bankers and
undertake that, upon completion of the Merger, it will be in compliance with the
applicable provisions thereof.
27
<PAGE>
marketing functions of PECO's Power Team as well as the wholesale
sales and marketing operations of ComEd.
These arrangements are necessary to integrate ComEd, the Indiana
Company, PECO, Genco and the Conowingo Companies fully into the Exelon system
and will therefore be in the public interest and the interest of investors and
consumers. Forging such relationships is beneficial to the protected interests
under the Act and, thus, is not prohibited by Section 10(b)(1). Because
substantial benefits will accrue to the public, investors and consumers from the
combination of Unicom and PECO, whatever interlocking relationships may occur as
a result of the combination are not detrimental.
Unlike many existing registered holding company systems, the integrated
electric system of ComEd, PECO and Genco (the "Exelon Electric System") will
have no need for a transmission integration agreement. The Exelon Electric
System will be physically interconnected through the Contract Path and through
open access transmission service which the operating companies have the right to
obtain and use on non-discriminatory terms by virtue of FERC Order Nos. 888 and
889 and the applicable open access tariffs of the utilities whose facilities
form the electrical paths between the two parts of the Exelon Electric System.
In keeping with this approach Genco, which will own and operate all of the
Exelon Electric System's integrated generating facilities, will use the Contract
Path and arrange for other interconnecting paths to ensure that both ComEd and
PECO receive power from one another when it is economically desirable. Thus,
under normal conditions, Exelon will be able to engage in coordinated operations
in a manner necessary to establish that it is an integrated public utility
company. Further, the transmission facilities owned by ComEd and PECO themselves
will each be made available to the other company and these transmission systems
will be operated by the respective independent regional transmission system
operators (the MISO in the case of ComEd, PJM in the case of PECO) under the
non-discriminatory terms contained in the applicable regional open-access
tariffs. Finally, under the prevailing retail access programs of Illinois and
Pennsylvania, the rates of ComEd's and PECO's retail customers (those that
choose to retain the companies as their suppliers) are frozen or capped and will
be unaffected by the level and allocation of transmission costs incurred by the
Exelon Electric System companies while the frozen or capped rates are in effect.
Due to these factors, the goals typically sought to be accomplished by
a "system transmission agreement" -- i.e., enabling each system company to
access the transmission facilities of the others and providing a mechanism for
rationalizing the different transmission rates imposed by each company -- are
accomplished through the open access transmission regime fostered by FERC. Thus,
where an agreement was necessary in the past to accomplish these factors leading
to integration, the same results can be obtained today without an agreement
through reliance on FERC approved rights readily available to ComEd and PECO.
The end result is the same -- integrated operations; but the legal means to
accomplish that result have been simplified since ComEd and PECO can now use
generally available rights rather than having to create unique private rights.
To further explain, Exelon emphasizes that due to the factors and
conditions of open access transmission described above, interconnection and
integration of Exelon Electric System will be accomplished, in each case without
the need for:
28
<PAGE>
(a) any transmission cost shifts between ComEd and PECO,
(b) transmission cost equalization,
(c) the incurrence of any central control and dispatch costs associated
with integration, or
(d) either ComEd or PECO constructing additional transmission
facilities.
Additionally, neither company will operate the transmission facilities
it now owns (that being the function of the MISO and PJM), nor will it be
independently responsible for transmission planning within its regional
organization.
Accordingly, for all the reasons explained above, a transmission
integration agreement between ComEd and PECO is unnecessary. Finally, because
all generating assets will be concentrated in Genco there likewise will be no
need for a "generation integration agreement."
In applying Section 10(b)(1) to utility acquisitions, the Commission
must further determine whether the acquisition will create "the type of
structures and combinations at which the Act was specifically directed."56 The
Merger will not create a "huge, complex and irrational system" but, rather, will
afford the opportunity to achieve economies of scale and efficiencies for the
benefit of investors and consumers. The Merger is a direct response to the
desire of the legislature and regulators in Illinois and Pennsylvania to enhance
competition in the electric utility business. See American Electric Power
---------------------------
Company, Inc., Holding Co. Act Release No. 20633 (July 21, 1978) ("AEP"). As
------------- ---
explained in the Joint Proxy Statement, a primary reason for the Merger is to
position the companies to participate in the growing and increasingly
competitive energy markets. Specifically, the Merger will combine the strengths
of the two companies, enabling them to offer customers a broader array of energy
products and services more efficiently and cost-effectively than could either
company acting alone. At the same time Exelon will benefit from larger and more
diverse asset and customer bases, with enhanced opportunities for operating
efficiencies and risk diversification. Although Exelon will be one of the larger
registered holding companies, its operations will not exceed the economies of
scale of current electric generation and transmission technology, nor provide
undue market power or control to Exelon in the region in which it will provide
service.
Size. While the combination of Unicom and PECO will result in a larger
----
utility system, it will not exceed the economies of scale that may be achieved
from modern electric generation and transmission technology, on the one hand,
and gas transportation technology on the other. If approved, the Exelon Electric
System will serve approximately 4.8 million electric customers and 400,000 gas
customers located primarily in two states. As of December 31, 1999, the combined
consolidated assets of Unicom and PECO totaled approximately $35.7 billion and,
for the year ended December 31, 1999, combined consolidated operating revenues
totaled approximately $12.2 billion. As of December 31, 1999, the combined owned
summer generating capacity of the regulated utility operations of ComEd and PECO
totaled approximately 18,000 to 19,000 MW. This figure does not include
generating assets owned by AmerGen.
__________________________
/56/ Vermont Yankee Nuclear Power Corp., Holding Co. Act Release No. 15958
----------------------------------
(Feb. 6, 1968).
29
<PAGE>
The following table shows the Exelon Electric System's relative size as
compared to other registered systems in terms of assets, operating revenues and
customers/57/:
Total Assets Operating Revenues Electric Customers
System ($ Millions) ($ Millions) (Thousands)
------ ------------ ------------ -----------
Southern 36,192 11,403 3,794
Entergy 22,848 11,495 2,495
AEP 58 19,483 6,346 3,022
GPU 16,288 4,249 2,041
Exelon 36,726 12,225 4,737
Moreover, the Commission has approved a number of acquisitions
involving similarly-sized operating utilities./59/
The Commission has rejected a mechanical size analysis under Section
10(b)(1) in favor of assessing the size of the resulting system with reference
to the economic efficiencies that can be achieved through the integration and
coordination of utility operations. See, e.g., AEP, supra. The Commission in AEP
--- --- --- ----- ---
noted that, although the framers of the Act were concerned about "the evils of
bigness, they were also aware that the combination of isolated local utilities
into an integrated system afforded opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations . . . [and] [t]hey
wished to preserve these opportunities." Id. By virtue of the Merger, Exelon
--
will be in a position to realize precisely these types of benefits. Among other
things, the Merger is estimated to yield labor cost savings, corporate and
administrative and purchasing savings, and savings in the cost of fuel,
information technology, facilities, vehicles, and corporate programs including
insurance, advertising, organization dues and benefits.60
Competitive Effects. Section 10(b)(1) also requires the Commission to
-------------------
consider the possible anticompetitive effects of a proposed combination. In this
case, Unicom and PECO have filed Notification and Report Forms with the
Department of Justice and the Federal Trade
______________________________
/57/ U.S. Securities and Exchange Commission, Financial and Corporate Report,
Holding Companies Registered under the Public Utility Holding Company Act of
----------------------------------------------------------------------------
1935 as of July 1, 1999 (data provided is as of December 31, 1998); Unicom and
-----------------------
PECO from Unaudited Pro Forma Combined Condensed Financial Statements included
in S-4 Registration Statement filed as an Exhibit hereto.
/58/ American Electric Power recently merged with Central and South West
Corporation. In Amendment No. 4 to the U-1 filed in connection with the merger
American Electric Power indicates that the combined company would have assets of
$33,227 million, revenues of $9,834 million and electric customers of 4.7
million.
/59/ See, e.g., American Electric Power Company, Inc., Holding Co. Act Release
--- ---- -------------------------------------
No. 27186 (June 14, 2000); Entergy Corporation, Holding Co. Act Release No.
-------------------
25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities; combined assets at
time of acquisition in excess of $22 billion); TUC Holding Company, Holding Co.
-------------------
Act Release No. 26749 (Aug. 1, 1997) (combination of Texas Utilities Company and
ENSERCH Corporation; combined assets at time of acquisition of $24.0 billion).
/60/ These expected economies and efficiencies from the combined utility
operations are described in greater detail in Item 3.B.3(b).
30
<PAGE>
Commission pursuant to the HSR Act the effects of the Merger on competition in
the relevant market. It is a condition to the consummation of the Merger that
the applicable waiting period under the HSR Act shall have expired or been
terminated./61/
The competitive impact of the Merger was also considered by FERC. In
its order approving the Merger, FERC found that the horizontal aspects of the
Merger relating to consolidating generation would not adversely affect
competition. Further, FERC found that the Merger would not adversely affect
competition through the strategic dispatch of generation or through the vertical
aspects associated with combining the generation and transmission systems.
Finally, the FERC found no serious concern with combining generation assets with
PECO's limited role as a gas distribution company. Based on this review and
review of other relevant factors, FERC approved the Merger without imposing any
conditions on the Merger./62/ No party to the FERC proceeding on the Merger
sought rehearing of the Commission's approval and it is now final and is not
subject to any court appeal.
The Commission has found, and the courts have agreed, that it may
watchfully defer to FERC with respect to such matters./63/
As summarized in the testimony of Dr. Heironymous submitted in support
of the FERC application (filed as Exhibit D-1.2 hereto), there is no adverse
impact on competition resulting from the consolidation of the pre-merger market
shares of ComEd and PECO./64/
ComEd has given up ownership of nearly half of its generation in
northern Illinois, a measure which addresses ComEd's position in its own highly
concentrated market. Although PECO owns substantial generation in its own right,
the newly merged system will own a portfolio of generation that is approximately
the same size as, but which is dispersed over a larger area than, ComEd's pre-
divestiture portfolio. In the competitive generation market in which they
operate, ComEd and PECO will continue to have little ability or incentive to
raise market prices. Further, within a relatively short time-frame, ComEd's
transmission operation and control area functions will be turned over to the
MISO, an independent regional organization that meets FERC's standards./65/
-----------
PECO's transmission already is controlled by PJM.
The Merger will not have any adverse impact on competition within the
nuclear power industry. The nuclear power industry consists of a large number of
nuclear utilities and suppliers engaged in the purchase and sale of nuclear
reactors, equipment, fuel and services in a highly competitive worldwide market
involving light water reactors, heavy water reactors, gas cooled
___________________________
/61/ The waiting period expired in April 2000.
/62/ Commonwealth Edison Co., 91 FERC(P) 61,036 (Apr. 12, 2000)(filed as
----------------------
Exhibit D-1.3 hereto).
/63/ See City of Holyoke v. SEC, supra at 363-64, quoting Wisconsin's
--- ---------------------- ----- ------- -----------
Environmental Decade v. SEC, 882 F.2d 523, 527 (D.C. Cir. 1989).
---------------------------
/64/ While ComEd and PECO offered to sell their 300 MW ComEd to PECO power
purchase contract as a mitigation measure, FERC found that such a sale was
unnecessary.
/65/ ComEd may turn over its transmission assets to the control of an ITC
which will operate with MISO oversight.
31
<PAGE>
reactors and other types of power reactors. The combined nuclear operating fleet
of ComEd and PECO, consisting entirely of light water reactors, will have a
generating capacity of approximately 14,000 MW, representing only 4.6% of the
installed worldwide generating capacity of approximately 301,700 MW for light
water reactors. Even if PECO's share of the additional light water reactors
owned and operated by AmerGen, consisting of an additional 2,810 MW, is included
in these totals, the Genco fleet will represent only 5.2% of the installed
generating capacity. Because owners of nuclear plants worldwide are potential
customers for the products of nuclear suppliers and because of the relatively
small share of nuclear generating capacity that Genco will possess, Genco will
not be in a position to exert any anticompetitive influence on nuclear
suppliers. Accordingly, the "concentration of control" of the combined nuclear
operations of ComEd and PECO in Genco resulting from the Merger will not be "of
a kind or to an extent detrimental to the public interest or the interests of
investors or consumers."
(b) Section 10(b)(2) -- Merger Consideration and Fees
Applicable Standard. Section 10(b)(2) precludes approval of an
-------------------
acquisition if the consideration to be paid in connection with the combination,
including all fees, commissions and other remuneration, is "not reasonable or
does not bear a fair relation to the sums invested in or the earning capacity of
. . . the utility assets underlying the securities to be acquired." The
Commission has found "persuasive evidence" that the standards of Section
10(b)(2) are satisfied where, as here, the agreed consideration for an
acquisition is the result of arm's-length negotiations between the managements
of the companies involved, supported by opinions of financial advisors./66/
First, the Merger is a merger of equals, with the former Unicom
shareholders holding about 46% and the former PECO shareholders holding
approximately 54% of the shares of Exelon.
Second, as explained in the Joint Proxy Statement (Exhibit C-2 hereto),
the historical price data for Unicom and PECO common stock provide support for
the consideration of 0.875 shares of Exelon common stock and $3.00 in cash for
each share of Unicom common stock and one share of Exelon common stock for each
share of PECO common stock.
Third, the merger consideration is the product of extensive and
vigorous arm's-length negotiations between Unicom and PECO. These negotiations
were preceded by extensive due diligence, analysis and evaluation of the assets,
liabilities and business prospects of each of the respective companies. This
process is described in "Background of the Merger" in the Joint Proxy
Statement./67/ As recognized by the Commission in Ohio Power Co., Holding Co.
--------------
Act Release No. 16753 (June 8, 1970), prices arrived at through arm's-length
negotiations are particularly persuasive evidence that Section 10(b)(2) is
satisfied.
_________________________
/66/ See Southern Company, Holding Co. Act Release No. 24579 (Feb. 12, 1988);
--- -----------------
Consolidated Natural Gas Co.,et al., Holding Co. Act Release No. 25040 (February
------------------------------------
14, 1990).
/67/ See pages 22 through 27 in the Joint Proxy Statement filed as Exhibit C-2
hereto.
32
<PAGE>
Fourth, nationally recognized independent investment bankers have
reviewed extensive information concerning PECO and Unicom, analyzed the merger
consideration employing a variety of valuation methodologies, and ultimately
opined that the merger consideration is fair to the respective holders of Unicom
common stock and PECO common stock as of January 7, 2000, the date of the
amendment to the Original Merger Agreement which resulted in the Merger
Agreement and the final merger consideration. The investment bankers' analyses
are described in detail and their opinions are included in full in the Joint
Proxy Statement. The assistance of independent consultants in setting
consideration has been recognized by the Commission as evidence that the
requirements of Section 10(b)(2) have been met./68/
Finally, submitting the Merger for approval by the shareholders of both
Unicom and PECO will provide additional assurance that the prices paid are
reasonable.
Fees and Expenses. A further consideration under Section 10(b)(2) is
-----------------
the overall fees, commissions and expenses to be incurred in connection with the
Merger. Unicom and PECO believe that these items are reasonable and fair in
light of the size and nature of the Merger relative to other utility mergers and
acquisitions. The anticipated benefits of the Merger to the public, investors
and consumers are consistent with recent precedent and meet the standards of
Section 10(b)(2).
As set forth in Item 2 of this Application-Declaration, Unicom and PECO
together expect to incur a combined total of approximately $87.4 million in
fees, commissions and expenses in connection with the Merger, including the fees
of financial and other advisors. AEP and Central and South West Corporation have
represented that they expect to incur total transaction fees and regulatory
processing fees of approximately $72.7 million in connection with their merger
representing 1.1% of the value of the consideration paid./69/ New Century
Energies and Northern States Power incurred an estimated $43.7 million in fees
in connection with their proposed merger. The Cincinnati Gas and Electric
Company and PSI Resources incurred $47.12 million in fees in connection with
their reorganization as subsidiaries of CINergy; Northeast Utilities alone
incurred $46.5 million in fees and expenses in connection with its acquisition
of Public Service of New Hampshire; and Entergy alone incurred $38 million in
fees in connection with its acquisition of Gulf States Utilities--which amounts
all were approved as reasonable by the Commission./70/
The Applicant believes that the estimated fees and expenses in this
matter bear a fair relation to the value of their respective companies and the
benefits to be achieved by the Merger, and further that the fees and expenses
are fair and reasonable in light of the size and nature of the Merger. See
---
Northeast Utilities, supra (noting that fees and expenses must constitute normal
------------------- -----
costs and represent a minor part of the overall acquisition). Based on the
closing prices of Unicom and PECO common stock on September 21, 1999, which was
the day prior to the original announcement of the transaction, the Merger would
be valued at approximately $18 billion. The total estimated fees and expenses of
$87.4 million represent approximately 0.49%
________________________
/68/ Southern Company, supra; and SV Ventures, Inc., Holding Co. Act Release No.
---------------- ------ -----------------
24579 (Feb. 12, 1998).
/69/ American Electric Power Company, Inc., Holding Co. Act Release No.
--------------------------------------
35-27186 (June 14, 2000).
/70/ CINergy, Holding Co. Act Release No. 26146 (Oct. 21, 1994); Northeast
------- ---------
Utilities, Holding Co. Act Release No. 25548 (June 3, 1992); and Entergy Corp.,
--------- -------------
Holding Co. Act Release No. 25952 (Dec. 17, 1993).
33
<PAGE>
of that value. The value of the consideration to be paid under the purchase
method of accounting is $5.759 billion and such total estimated fees and
expenses represent about 1.5% of that amount. These figures are consistent with
percentages previously approved by the Commission. See, e.g., Entergy Corp.,
--- --- ------- ----
supra (fees and expenses represented approximately 1.7% of the value of the
-----
consideration paid to the shareholders of Gulf States Utilities); Northeast
---------
Utilities, supra (fees and expenses represented approximately 2% of the value of
--------- -----
the assets to be acquired).
(c) Section 10(b)(3) -- Complicated Capital Structure; No
Detriment to Protected Interests
Applicable Standard. Section 10(b)(3) requires the Commission to
-------------------
determine whether the Merger will "unduly complicate the capital structure" or
be "detrimental to the public interest or the interest of investors or consumers
or the proper functioning" of the Exelon system.
Exelon's Capital Structure. The capital structure of Exelon will be
--------------------------
substantially similar to capital structures approved by the Commission in other
orders./71/ Exelon's capital structure will also be similar to the capital
structures of existing registered holding company systems. The shareholders of
Unicom and PECO will each receive Exelon common stock. Exelon will own directly
or indirectly 100% of the common stock of PECO, Genco, the Indiana Company and
the Conowingo Companies, and there will be no minority common stock interest in
any of those companies. Exelon will own virtually all (over 99%) of the common
stock of ComEd./72/ The very small outstanding amount of ComEd common stock not
owned by Exelon relates to outstanding warrants and convertible preferred stock
of ComEd which converts into ComEd common stock. Although Unicom has had a
standing exchange offer whereby it will exchange for Unicom common stock any
ComEd common stock issued on the exercise of these warrants or convertible
preferred stock, some shareholders have failed to take advantage of the offer.
Exelon expects to continue to make available a similar exchange offer post
merger./73/ Consequently, there will be no disadvantage to those few holders of
ComEd common stock as a result of the transactions. They will be able to
exchange their ComEd common stock for Exelon common stock at any time.
Although Exelon will have an authorized class of preferred stock, there
are no current plans to issue any Exelon preferred stock. Exelon will have the
ability to issue, subject to the approval of the Commission, preferred stock,
the terms of which may be set by Exelon's Board of Directors./74/ The only
outstanding class of voting securities of Exelon's direct non-utility
_________________________
/71/ See, e.g., Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30,
--- ---- ------------------
1997); (voting preferred at utility) CINergy Corp; Holding Co. Act Release
------------
No. 26934 (Nov. 2, 1998); and Centerior Energy Corp., Holding Co. Act
-----------------------
Release No. 24073 (April 29, 1986). ComEd has, and PECO may have, voting
preferred stock. See note 27.
/72/ If Exelon decides to create Exelon Delivery, it would own the ComEd common
stock and Exelon would own 100% of the voting securities of Exelon Delivery.
/73/ Exelon will seek the necessary approval for such exchange in the Financing
U-1.
/74/ See, e.g., Columbia Gas System, Inc., Holding Co. Act Release No. 26361
--- ---- -------------------------
(Aug. 25, 1995) (approving restated charter, including authorization to issue
preferred stock the terms of which, including voting rights, can be established
by the board of directors).
34
<PAGE>
subsidiaries will be common stock and, in each case, all issued and outstanding
shares of such common stock will be held by Exelon (except as noted in Exhibits
I-1 and I-2).
The existing debt securities and preferred stock of ComEd and PECO will
remain outstanding without change./74/
Set forth below are summaries of the capital structures of Unicom and
PECO as of June 30, 2000, and the pro forma combined consolidated capital
structure of Exelon (assuming the Merger occurred on June 30, 2000):
UNAUDITED PROFORMA COMBINED CONDENSED CAPITAL STRUCTURE
(in Millions)
As of June 30, 2000
<TABLE>
<CAPTION>
Unicom PECO Merger Exelon Capital
Historical Historical (1) ProForma ProForma Structure
Adjustments Percentage
<S> <C> <C> <C> <C> <C>
Common Equity
Common Stock, net of Treasury Shares $ 3,395 (2) $ 1,383 (3) $ (500)(1)
2,217 (4)
(415)(5)
569 (6) $ 6,649
Retained Earnings 562 89 (562)(6) 89
Accumulated Other
Comprehensive Income 7 - (7)(6)
--------- --------- ----------- -----------
Total Common Equity $ 3,964 $ 1,472 $ 1,302 $ 6,738 29.7%
Preferred and Preference Stock $ 2 $ 174 $ 176
Current Maturities of Pref. Stock 19 19
--------- --------- ----------- -----------
Total Pref. and Preference Stock $ 2 $ 193 $ - $ 195 0.9%
Company Obligated Mandatorily
Redeemable Preferred Securities $ 350 $ 128 $ 478 2.1%
Long-Term Debt
Securitization Bonds $ 2,550 $ 4,746 $ 7,296
Other 4,232 1,685 5,917
Current Maturities of LTD 568 220 788
--------- --------- ----------- -----------
Total Long-Term Debt $ 7,350 $ 6,651 $ 14,001 61.7%
Short-Term Debt $ 680 $ 601 (1) $ 1,281 5.6%
--------- --------- ----------- ------------ ------
Total Capital Structure $ 12,346 $ 9,045 $ 1,302 $ 22,693 100.0%
========= ========= =========== =========== ======
</TABLE>
________________________________
/74/ It is contemplated that Genco will assume the pollution control bonds of
PECO issued to finance facilities at the generating stations being transferred
to Genco.
35
<PAGE>
Notes to Capital Structure Table:
(1) Reflects the payment of the cash portion of the merger
consideration to Unicom shareholders. PECO's cash balance as of June 30, 2000
was insufficient to fully fund this cash payment. Accordingly, for pro forma
purposes, it was assumed that PECO would borrow $250 million. The amount of
actual borrowing, if any, at the time of consummation of the merger will depend
on PECO's actual cash available at that time.
(2) Includes Unicom treasury stock of $1,589 million.
(3) Includes PECO treasury stock of $ 2,196 million.
(4) A pro forma adjustment has been made to recognize estimated
goodwill in connection with the merger. The goodwill represents the excess of
the purchase consideration of $5.8 billion over the book value of Unicom's
assets and liabilities at June 30, 2000.
(5) Reflects the repurchase of approximately $ 415 million of Unicom's
outstanding common shares subsequent to June 30, 2000 to meet Unicom's share
repurchase requirement under the Merger Agreement.
(6) Reflects the elimination of Unicom's retained earnings and
accumulated other comprehensive income with purchase accounting as prescribed by
GAAP.
_____________________
The anticipated consolidated common equity of Exelon when it is formed
in the Merger, is 29.7% of total capitalization./75/ This is within the range of
the common equity component of capitalization found acceptable by the
Commission./76/
Exelon seeks approval to form two intermediate holding companies --
Ventures to hold the interests in Genco and Enterprises and Exelon Delivery to
hold ComEd and PECO. Ventures is necessary to achieve a simple corporate
structure while minimizing the Federal and State income tax impact of combining
the unregulated businesses of Unicom and PECO. Alternative structures were
considered but each had serious disadvantages including potential tax
liabilities ranging from about $5 million to about $80 million./77/ Alternative
structures which would
_____________________
/75/ The anticipated consolidated capitalization takes into account the
adjustments resulting from purchase accounting for the Merger and the affects of
the Restructuring transactions. The anticipated post-Merger consolidated common
equity ratio for Exelon, excluding securitization debt as indebtedness, is
---------
45.4%. The anticipated common equity ratio for ComEd, excluding securitization
---------
debt is 41.9% and including securitization debt is 32.1%, while the anticipated
common equity ratio for PECO, excluding securitization debt is 36% and including
---------
securitization debt is 16.3%. For a complete discussion of the capitalization of
Exelon, see the Financing U-1.
/76/ Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990);
-------------------
Exemption of Issuance and Sale of Certain Securities by Public-Utility
----------------------------------------------------------------------
Subsidiary Companies of Registered Public-Utility Holding Companies, Holding
-------------------------------------------------------------------
Company Act Release No. 25573 (July 7, 1992). Under section 7(d)(1) of the Act,
the Commission generally has required a registered holding company system and
its public-utility subsidiaries to maintain no more than a 65/30 debt/common
equity ratio, with the balance generally being preferred equity. Such
debt/equity capitalization requirement was included in rule 52, as originally
adopted, as applied to securities issued by public-utility subsidiaries, but was
eliminated in 1992. Several extraordinary events in recent years involving
write-offs related to utility restructuring have resulted in lower than
historical levels of retained earnings at Unicom and PECO. The companies expect
that Exelon's common stock ratio will improve after the Merger. See Unaudited
---
Pro Forma Combined Condensed Financial Statements in the Form S-4 Registration
Statement filed as an exhibit hereto.
/77/ Combining the PECO non-utility businesses with the Unicom non-utility
businesses under the control of Exelon is a spin-off for tax purposes. A spin-
off will result in income tax unless it complies with narrow rules. A spin-off
of the PECO non-utility businesses followed by combining those businesses with
Unicom's businesses under a first tier subsidiary of Exelon would not comply
----- ----
with these narrow rules and would be a taxable transaction. In particular, some
of the PECO non-utility interests do not have a business history of 5 years or
more; others do not constitute an "active trade or business." Thus, that
transaction would result in Pennsylvania income taxes of as much as $80 million.
Federal income tax would be deferred.
36
<PAGE>
minimize tax liability were much less desirable from a business organization
viewpoint and involved much more complicated corporate structures. With respect
to Exelon Delivery, Exelon wishes to emphasize the separation of its "wires"
business -- the transmission and distribution functions of ComEd and PECO --
from its non-State regulated utility -- Genco --and non-utility -- Enterprises
--businesses. Providing a corporate organization that clearly and fully
separates the distribution business from other businesses will better insulate
the distribution business, which will continue to be regulated, from unregulated
business. Further, providing a separate management structure for the
distribution business will provide for management focus on that business
enabling better integration and efficient development of that business.
The Commission has recognized in recent cases that there are
organizational, regulatory and tax benefits to the creation of intermediate
holding companies that should be considered./78/ The harms that the Act
envisioned would be prevented by the reduction or elimination of intermediate
holding companies are unlikely to occur given modern financial reporting and
affiliate transaction requirements. Exelon's proposal will not result in harmful
pyramiding of holding company groups. There is no risk of unfair or inequitable
distribution of voting power from the proposal. Neither Ventures nor Exelon
Delivery will issue any voting securities to anyone other than Exelon.
Accordingly, the Commission should approve the formation of Ventures and Exelon
Delivery, "look through" the intermediate holding companies (including Genco to
the extent it is a holding company for the Conowingo Companies) or treat them as
a single company for purposes of analysis under Section 11(b)(2) of the Act.
For the reasons outlined, the Merger, including the corporate
restructuring expected after the Merger, will not result in an unduly
complicated capital structure of the resulting holding company.
No Detriment to Protected Interests. Section 10(b)(3) also requires
-----------------------------------
the Commission to determine whether the proposed combination will be detrimental
to the public interest, the interests of investors or consumers or the proper
functioning of the combined Exelon system. The combination of Unicom and PECO is
entirely consistent with the proper functioning of a registered holding company
system. The utility operations of ComEd, the Indiana Company, PECO, Genco and
the Conowingo Companies will be (a) effectively interconnected by means of the
Contract Path and available open access transmission capacity, (b) economically
operated under normal conditions as a single, coordinated system, through
Genco's centralized generation and marketing function and (c) confined to a
single area or region in northern Illinois and eastern Pennsylvania which is not
so large as to impair (considering the state of the art) localized management,
efficient operation and effective regulation. Further, the combination will
result in substantial, otherwise unavailable, savings and benefits to the public
and to consumers and investors of both companies, and the integration of ComEd,
the Indiana Company, PECO, Genco and the Conowingo Companies will improve the
efficiency of their respective systems.
_________________________
/78/ National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15,
-----------------------
2000)(intermediate holding companies necessary for cross-border tax
considerations); Dominion Resources, Holding Company Act Release No. 27113 (Dec.
------------------
15, 1999)(intermediate holding company "CNG Acquisitions" to hold CNG's utility
subsidiaries under alternative form of merger)
37
<PAGE>
Finally, consummation of the Merger is conditioned upon receipt of all
necessary State and Federal regulatory approvals. These regulatory approvals
will assure that the interests of retail customers and wholesale customers are
adequately protected. FERC's approval will provide assurances that there is no
significant adverse effect on competition, no adverse effect on wholesale rates,
and no adverse effect on Federal and State regulation. Moreover, as noted by the
Commission in approving Entergy's acquisition of Gulf States Utilities,
"concerns with respect to investors' interests have been largely addressed by
developments in the Federal securities laws and the securities market
themselves."/79/ Exelon, ComEd and PECO will be reporting companies subject to
the continuous disclosure requirements of the Securities Exchange Act of 1934,
as amended ("1934 Act") following the completion of the Merger. The various
reports previously filed by Unicom, ComEd and PECO under the 1934 Act contain
readily available information concerning the Merger. For these reasons, the
Applicant believes that the Merger will be in the public interest and the
interest of investors and consumers and will not be detrimental to the proper
functioning of the resulting holding company system.
3. Section 10(c) -- Sections 8 and 11; Integration
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
-- an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or
is detrimental to the carrying out of the provisions of Section
11; or
-- the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public-
utility system.
(a) Section 10(c)(1) -- Sections 8 and 11
(i) The Merger will be lawful under Section 8
Section 10(c)(1) first requires that the Merger be lawful under
Section 8. That section was intended to prevent holding companies, by the use of
separate subsidiaries, from circumventing State restrictions on common ownership
of gas and electric operations. The Merger will not result in any new situations
of common ownership - so-called "combination" systems - within a given State.
ComEd has provided, and will continue to provide, only electric service and only
in Illinois. PECO will continue to provide electric service only in and around
Philadelphia, Pennsylvania and, as it has for many years, also provide gas
distribution services in southeastern Pennsylvania. Because Pennsylvania law
does not prohibit combination gas and electric utilities serving the same area,
the Merger does not raise any issue under Section 8 or the first clause of
Section 10(c)(1).
________________________
/79/ Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993).
-------------
38
<PAGE>
Additional assurances are expected to be provided in connection with
PECO's application for merger approval filed before the Pennsylvania Commission.
In its Pennsylvania application PECO has requested that the Pennsylvania
Commission find that the proposed combination "is [not] likely to result in
anticompetitive or discriminatory conduct, including the unlawful exercise of
market power, which will prevent retail [gas] customers in this Commonwealth
from obtaining the benefits of a properly functioning and workable competitive
retail [natural gas] market," as required by the Pennsylvania Natural Gas
Competition Act.80 A favorable finding by the Pennsylvania Commission will
provide the Commission additional assurance that the requirements of Section 8
of the Act have been satisfied.
(ii) The Merger Is Not Detrimental to Carrying Out
Provisions of Section 11
Section 10(c)(1) also requires that the Merger not be "detrimental to
the carrying out of the provisions of Section 11." Section 11(b)(1) directs the
Commission generally to limit a registered holding company "to a single
integrated public-utility system" and permitted "additional" systems. Because
the combination of ComEd, PECO and Genco will result in a single, integrated
electric utility system -- the Exelon Electric System -- and Exelon will hold a
permitted additional gas-utility system, the Merger will in no way be
detrimental to carrying out the provisions of Section 11.
(A) The Utility Systems Created by the Merger
The Merger will result in the combination of the electric systems of
ComEd and PECO, which as noted operate primarily in only two States. ComEd and
PECO will transfer their generating assets to Genco. Genco will provide power to
ComEd and PECO pursuant to FERC approved power purchase agreements. Genco will
be able to provide power to ComEd's traditional retail bundled load, to PECO's
traditional bundled or provider of last resort load, and to other wholesale and
retail customers of Exelon on an economical and efficient basis. As the single,
central controlling entity for all the electric generation of the Exelon
Electric System, Genco will be able to balance the supply it controls with the
needs of the Exelon Electric System and off-system opportunities. Through the
ComEd and PECO transmission facilities, the Contract Path and the open access
transmission capacity available to Exelon, Genco will be able to move power as
needed from Exelon's generating resources to those customers.
The gas distribution facilities of PECO are and have been for many
years a single, integrated gas utility system (the "Exelon Gas System").
Consequently, the Commission should find that the Exelon Electric System will be
the primary integrated public-utility system for purposes of Section 11(b)(1),
and that the Exelon Gas System is a permissible additional system under the A-B-
C clauses of that section.
_______________________
/80/ 66 Pa. C.S.(S).2210 (1999).
39
<PAGE>
(B) Statutory Standard -- Integration of Electric
Operations In Today's Environment
The electric system of ComEd can be combined with the electric
operations of PECO and Genco to form a single integrated electric public-utility
system. The term, as applied to electric utility companies, means:
a system consisting of one or more units of generating
plant and/or transmission lines and/or distributing
facilities, whose utility assets, whether owned by one
or more electric utility companies, are physically
interconnected or capable of physical interconnection
and which under normal conditions may be economically
operated as a single interconnected and coordinated
system confined in its operations to a single area or
region, in one or more States, not so large as to
impair (considering the state of the art and the area
or region affected) the advantages of localized
management, efficient operation, and the effectiveness
of regulation.
Section 2(a)(29)(A). As the definition suggests, and the Commission has
observed, Section 11 is not intended to impose "rigid concepts" but rather
creates a "flexible" standard designed "to accommodate changes in the electric
utility industry."/81/ Section 2(a)(29)(A) expressly directs the Commission to
consider the "state of the art" in analyzing the integration requirement. As
indicated above, the Commission is not constrained by its past decisions
interpreting the integration standards based on a different "state of the art."
See AEP, supra (noting that the state of the art -- technological advances in
------- -----
generation and transmission, unavailable thirty years prior -- served to
distinguish a prior case and justified "large systems spanning several states.")
The ultimate determination under Section 11 of the Act has always been
whether, on the facts of a given matter, the proposed transaction "will lead to
a recurrence of the evils the Act was intended to address."/82/ As shown by this
Application-Declaration, the combination of Unicom and PECO will in no way lead
to a recurrence of the problems the Act was designed to eliminate. In the
following section, this Application-Declaration describes how the Exelon
electric system will meet all of the four requirements of integration set out in
the Act.
_______________________
/81/ UNITIL Corp., Holding Co. Act Release No. 25524 (April 24, 1992); see also
------------ --- ----
Yankee Atomic Electric. Co., Holding Co. Act Release No. 13048 (Nov. 25, 1955)
---------------------------
("We think it is clear from the language of Section 2(a)(29)(A), which defines
an integrated public-utility system, that Congress did not intend to imposed
[sic] rigid concepts with respect thereto.") (citations omitted); and see also
--- ----
Madison Gas and Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir. 1999)
---------------------------------------
("section 10(c)(1) does not require that new acquisitions comply to the letter
with section 11"). The Commission interprets the 1935 Act and its integration
standards "in light of . . . changed and changing circumstances." Sempra Energy,
--------------
Holding Co. Act Release No. 26971 (Feb. 1, 1999) (interpreting the integration
standards of the 1935 Act in light of developments in the gas industry). Accord,
------
NIPSCO.
------
/82/ Union Electric, supra.
-------------- -----
40
<PAGE>
(iii) Exelon Will Meet All Four Parts of the Integration
Requirement of the Act.
ComEd and PECO intend to integrate their operations in the most
economic manner possible, consistent with State and FERC regulatory
requirements, to take full advantage of the opportunities available to produce
and distribute power at lower cost for the benefit of its customers and
shareholders. The following summarizes the factors establishing integration:
. Centralized Generation Function. Genco will coordinate the
-------------------------------
efficient use of the generation formerly held by ComEd and PECO
for the benefit of the Exelon Electric System. The creation of
Genco is made possible, in part, by the passage of utility
regulation restructuring legislation in Illinois and
Pennsylvania.
. Centralized Operations Function. Genco will coordinate the
-------------------------------
economic dispatch of all generation and, together with one or
more specialized operating subsidiaries, will coordinate the
efficient functioning of Exelon's entire electric utility
operations --including transmission and distribution systems. As
the industry moves to a competitive model, to the extent the
regulated distribution functions continue to be energy suppliers,
they will increasingly look to all potential sources of
generation in the market. Genco will be able to supply power to
its affiliates and to non-affiliated customers.
. Centralized Nuclear Operations Function. The safe and efficient
---------------------------------------
operation of all of Exelon's nuclear generating stations will be
coordinated through a centralized function which will adopt best
practices and gain efficiencies through concentrated efforts.
. Centralized Administrative Function. Exelon Services Company will
-----------------------------------
be formed to oversee all centralized corporate and administrative
services. Exelon, with corporate headquarters in Chicago,
Illinois, will coordinate utility operations functions with
facilities in Chicago and Philadelphia, Pennsylvania. ComEd and
PECO will maintain the benefits of localized management through
local offices throughout their service areas. Exelon's utility
subsidiaries will remain fully subject to applicable State and
Federal public utility regulation, which will not be adversely
affected by the Merger.
. Centralized Interconnection Management. Exelon will effectuate
-------------------------------
the coordinated operations of its generation, transmission and
distribution functions through Genco's administration of
transmission interconnections sufficient to ensure that the
benefits of the centralized control and dispatch of generating
assets are realized./83/ Exelon will be interconnected through
the Contract Path and the other transmission facilities of ComEd
and PECO and extensive interstate open access transmission
capacity. Exelon will have the legal right under the Contract
Path and OATTs to move power
___________________
/83/ Operation of the transmission system of PECO is already conducted by PJM
and the ComEd transmission system will soon be operated by MISO or the ITC.
41
<PAGE>
economically to customers as needed in amounts sufficient to meet
its operating needs throughout the Exelon system.
. Size; Single Area or Region. Exelon will not be too large. Given
---------------------------
the "state of the art," Exelon will be sufficiently large to
compete effectively in today's electric utility industry. Given
the operating and regulatory structure of today's industry, and
the fact that Genco will coordinate all generating facilities and
one or more service companies will coordinate all operations,
Exelon will be confined to a single area or region within the
meaning of the Act. ComEd and PECO have a five year history of
economic power exchange transactions. The ability to economically
interchange power, taking into account transmission cost,
demonstrates that ComEd and PECO are in the same area or region.
Further, Exelon's distribution areas -- surrounding Chicago and
Philadelphia -- are homogeneous and have similar operating
characteristics. Although the United States is electrically
------------
interconnected, only those utilities, such as Exelon, which can
operate their separate utilities economically and in a
---------------------
coordinated manner within the meaning of the Act can be
------------------------------------------------
considered to be in the same area or region. This is not a case
involving "scattered" properties prohibited by the Act.
Changes brought about in the industry through State and Federal energy
restructuring and deregulation have produced a "state of the art" making a
combination like Exelon possible today under the standards of the Act. This
Application-Declaration will show that the Merger fits squarely within existing
Commission precedent. Each of the four integration standards of Section
2(a)(29)(A) is discussed specifically below.
(A) Interconnection -- The Contract Path
The first requirement for an integrated electric utility system is
that the electric generation and/or transmission and/or distribution facilities
comprising the system be "physically interconnected or capable of physical
interconnection." Historically, the Commission has focused on physical
interconnection through facilities that the parties owned or, by specific
contract, controlled./84/ As early as 1978, however, -- well before the
developments creating a flexible, open access transmission grid -- the
Commission considered the effect of joint
__________________
/84/ See, e.g., Northeast Utilities, Holding Co. Act Release No. 25221 (Dec.
--- ---- --------- ---------
21, 1990) ("Northeast Utilities") at n.74, supplemented, Holding Co. Act Release
No. 25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke v. SEC., 972 F.2d 358
----- --- ---- -----------------------
(1992) (Northeast had the right to use a Vermont Electric line for ten years,
with automatic two-year extensions, subject to termination upon two years
notice, in order to provide power to a Northeast affiliate.); Centerior Energy
----------------
Corp., Holding Co. Act Release No. 24073 (April 29, 1986) (Cleveland Electric
------
Illuminating Company and Toledo Edison Company were connected by a line owned by
Ohio Edison. All three were members of the Central Ohio Power Coordination Group
("CAPCO"). The line connecting Cleveland Electric, Ohio Edison and Toledo was a
CAPCO line with segments owned by each of the three named utilities.); Electric
--------
Energy, Inc., 38 SEC 658, 668-671 (1958) (the right to use a transmission line
------------
owned by a different company found sufficient to satisfy integration.); Cities
------
Service Power & Light, Co., 14 SEC 28, 53 n.44 (1943) (two companies in the same
--------------------------
holding company system were found to be interconnected where energy was
transmitted between two separated parts of the system over a transmission line
owned by the United States Bureau of Reclamation, under an arrangement which
afforded the system the privilege of using the line).
42
<PAGE>
participation in a power pool as a basis for a finding of integration./85/ To
date, the Commission has found interconnection through memberships in "tight"
power pools and ISOs./86/ These findings are consistent with the recommendation
of the 1995 Report that the Commission "adopt a more flexible interpretation of
the geographic and physical integration standards, with more emphasis on whether
an acquisition will be economical and subject to effective regulation."/87/
More specifically, the Commission in the past has found, and recently
reiterated, that the interconnection requirement is met where the parties have a
firm contract path. "The physical interconnection requirements of [Section
2(a)(29)(A)] are met if the two service areas are connected by power
transmission lines that the companies have the right to use whenever
needed."/88/ In the American Electric Power decision of June, 2000, the
-----------------------
Commission again confirmed that a holding company system could be interconnected
by virtue of a single, uni-directional contract path between the two parts of
the combining system./89/ In that case, American Electric Power and Central and
South West proposed a 250 MW contract path, east to west, for a period from June
1, 1999 to May 31, 2003 (constituting a three year period following approval of
the merger by the Commission). The parties committed to either extend their
rights to use the contract path prior to its expiration or file with the
Commission to explain how the system would remain interconnected if its rights
to the path were not extended.
Exelon will obtain either through PECO or, when formed, Genco the following
Contract Path: a 100 MW firm, west to east, contract path commencing November 1,
2000./90/ Exelon commits, consistent with American Electric Power, to keep the
-----------------------
100 MW firm path in place for 3 years after the date of the order in this case
or until such earlier time as the Commission
__________________________
/85/ See AEP, supra ("The pooling issue is one aspect of the major debate, ...
--- --- -----
as to what should be the future structure of the electric utility industry. We
will not undertake to resolve these issues since they are beyond our mandate in
this case and because they are within the province of the Congress and the
Department of Energy.")
/86/ UNITIL Corp., supra (interconnection through NEPOOL), and Conectiv, Inc.,
------------ ----- -------------
Holding Co. Act Release No. 26382 (Feb. 25, 1998) (interconnection through PJM,
Inc.). See also Yankee Atomic Elec. Co., 36 SEC 552, 565 (1955); Connecticut
-------------------------------- -----------
Yankee Atomic Power Co., 41 SEC 705, 710 (1963) (authorizing various New England
----------------------
companies to acquire interests in a commonly-owned nuclear power company and
finding the interconnection requirement met because the New England transmission
grid already interconnected the companies).
/87/ 1995 Report, at 70.
/88/ Centerior, supra (emphasis added). In American Electric Power Company,
--------- ----- --------------------------------
Inc., Holding Co. Act Release No. 27186 (June 14, 2000) at note 62, the
----
Commission put to rest contentions (based on dicta in a series of Commission
decisions) that contract rights cannot be relied on to integrate two "distant"
systems. The Commission confirmed that the length of a firm contract path is not
relevant in determining whether the "physically interconnected or capable of
physical interconnection" requirement of Section 2(a)(29)(A) is met.
/89/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
--------------------------------------
(June 14, 2000).
/90/ A 100 MW path for the Exelon Electric System is comparable to a 250 MW
path for the American Electric Power system in terms of capacity based on a
comparison of the amount of generation in AEP's eastern zone which could be
available for export to its western zone versus the amount of generation
controlled long-term by Exelon in Exelon's ComEd area available for export to
its PECO area. Likewise, the Exelon Contract Path can move into PECO
approximately the same percentage of PECO's anticipated total retail customer
demand (considering the reduction in that demand likely to occur as a result of
customer choice) as the AEP path could move into its western zone to meet
Central and South West's retail demand.
43
<PAGE>
determines that an alternate path or some other arrangement is sufficient to
keep Exelon in compliance with the integration requirement of the Act./91/
(B) Interconnection through OATTs and OASIS
The American Electric Power decision demonstrates that Exelon's
-----------------------
proposed Contract Path is sufficient to establish interconnection. Exelon
believes that the additional interconnection it can achieve through other
transmission paths obtained through OATTs further demonstrates how it will
comply with the Act's interconnection and integration requirements.
The Commission's 1995 Report recommended that the Commission should
increasingly rely on an acquisition's demonstrated economies and efficiencies,
rather than upon the physical interconnection of facilities, to meet the
integration standard./92/ The 1995 Report noted that the 1935 Act provides the
necessary flexibility to adjust the integration standards in light of changes in
the "state of the art."/93/ The 1995 Report concluded that it would be a logical
extension of prior orders for the Commission to find that wheeling and other
forms of sharing power (such as reliability councils and proposed regional
transmission groups) meet the statutory interconnection standard./94/
It is important to note that the 1995 Report was issued before FERC's
issuance of Order No. 888. As summarized above in Item 3.A, and as described in
detail in the Interconnection Analysis included as Exhibit K-1 hereto, it was
------------------------
Order No. 888 which created the legal framework of practical access to the
transmission grid for all generators. Order No. 888 moved
____________________
/91/ The Contract Path will be ComEd to American Electric Power (AEP) to
Virginia Electric and Power Company (VP) to PJM. PECO has made OASIS requests on
each of the ComEd transmission system and the AEP transmission system for a
total of 100 MW each for the period November 1, 2000 through December 31, 2001
(in the form of two, one-month reservations for the months of November and
December, 2000, and a one-year, long-term reservation for the period January 1,
2001 through December 31, 2001 on each system). The ComEd reservations have a
Point-of-Delivery (POD) of AEP. The AEP reservations have a Point-of-Receipt
(POR) of ComEd and a POD of VP. To comply with the commitment made herein to
keep the Contract Path in place, Genco will "roll over" the long-term
reservations on the ComEd and AEP systems at least 60 days before the expiration
of the initial reservations, as permitted under FERC rules. With respect to the
VP leg of the Contract path, PECO has a long-term firm reservation rights to 820
MW of VP transmission with a POR of AEP and a POD of PJM for the year 2000. PECO
will exercise its right of "roll over" on the VP transmission reservation for at
least 100 MW under Section 2.2 of the Virginia Power Open Access Transmission
Tariff and the FERC clarified roll-over rights. With respect to the PJM leg of
the Contract Path, Exelon will rely on PECO's rights as a Load-Serving Entity to
use "Secondary Service" as defined by Section 28.4 of the PJM Open Access
Transmission Tariff rather than obtain from PJM 100 MW of firm point-to-point
transmission service. Secondary Service has rights equivalent to firm point-to-
point service.
In Entergy Power Marketing Corp. v. Southwest Power Pool, Inc., 91 FERCP.
---------------------------- -------------------------
61,276, FERC clarified "roll-over" rights for long-term transmission
reservations. The decision clarifies that a transmission user must give notice
at least 60 days prior to the expiration of a current long-term reservation of
its election to roll-over for an additional term of equal or longer length.
/92/ Id.
---
/93/ Id. at 71.
---
/94/ Id.
---
44
<PAGE>
"open access" from a "case-by-case" arrangement of individually negotiated
contracts to a standardized system where transmission is available on short
notice to all comers at a set price. If the 1995 Report were being written today
it seems reasonable to conclude that it would find that the current state of the
open access transmission system results in the "interconnection" of
participating utilities within the meaning of the Act./95/ The Commission need
not decide this question in this case, however, because the Contract Path is
clearly within the most recent precedent establishing the interconnection
requirement.
ComEd and PECO will be "physically interconnected or capable of
physical interconnection" through the Contract Path and through other open
access transmission service which they "have the right to use" by virtue of
EPACT, FERC Order No. 888 and the applicable open access tariffs of the
utilities forming the paths between the two parts of the Exelon Electric System.
Genco will coordinate Exelon's access to transmission services from several,
redundant sources -- those unaffiliated transmission providers which operate in
the region where the Exelon Electric System will be located, including the
Contract Path. These transmission providers are required to offer a wide variety
of highly flexible, time and quality differentiated services. These services are
available under the providers' FERC mandated OATTs. Service can be reserved and
scheduled by Genco by using readily available, easy to use, and redundant
communications systems. Genco will be able to obtain the transmission services
to connect the Exelon Electric System at just, reasonable and nondiscriminatory
rates, which by regulation, can be no higher than the rates these unaffiliated
transmission providers must charge themselves for their own comparable
transactions. In effect, Genco will be able to control the movement of power
within the Exelon Electric System using the Contract Path and other available
transmission just as reliably and efficiently as if all generation, transmission
and distribution facilities of Genco, ComEd and PECO were directly
interconnected over Exelon owned facilities.
The feasibility of transmitting power from the ComEd electric system to
the PECO electric system is clearly demonstrated by the actual recent operations
of the companies. ComEd and PECO have engaged in power sales arrangements since
1996. PECO has been able to move this power to Pennsylvania for its use through
various firm and non-firm open access transmission arrangements. Details
regarding the power transferred under these arrangements are included in the
Interconnection Analysis in Exhibit K-1.
------------------------
(C) Coordination
Coordination of Generation. Historically, the Commission has
--------------------------
interpreted the requirement that an integrated electric system be economically
operated under normal conditions as a single interconnected and coordinated
system, "to refer to the physical operation of utility assets as a system in
which, among other things, the generation and/or flow of current within the
------------------
system may be centrally controlled and allocated as need or economy
directs."/96/ The Commission has noted that, through this standard, Congress
"intended that the utility properties
______________________
/95/ See the 1995 Report at 71.
---
/96/ See, e.g., Conectiv, supra, citing The North American Company, Holding Co.
--- ---- -------- ----- ------ --------------------------
Act Release No. 3466 (April 14, 1942), aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd
----- -----
on constitutional issues, 327 U.S. 686 (1946) (emphasis supplied).
------------------------
45
<PAGE>
be so connected and operated that there is coordination among all parts, and
that those parts bear an integral operating relationship to one another."/97/
Traditionally, the most obvious indicia of "coordinated operations" was
the ability to engage in "automatic central dispatch" or "joint economic
dispatch." A single controller would determine which generating units should run
at what time to achieve the lowest overall cost of generation. For this to work,
all generating resources had to be interconnected with the distribution system.
It is clear from the language of the Act and Commission precedent that
central or joint dispatch is not per se a requirement for a finding of
coordinated operations./98/ Central dispatch was a means to accomplish the
-----
efficient "coordinated" operations required by the Act not an end in itself.
---
Applicant submits that the need for joint economic dispatch that the Commission
has historically focused on reflects a past structure of the industry and
regulatory requirements. So-called "single system" dispatch and committed
bilateral power exchanges are not required by the explicit terms of the statute
and, indeed, may be inconsistent with regulatory requirements and the economical
and efficient operation of large systems. In any event, the goals formerly
satisfied by centralized, coordinated dispatch are now met by employing market
mechanisms. Applicant submits that in today's environment, the coordination
requirement should be deemed satisfied if:
. utilities are able to achieve efficiencies through such measures
as coordinated generation operations, even where such operations
do not rise to the level of traditional "joint economic dispatch"
within a single control area;
. utilities are able to coordinate cost-effective transmission of
power to loads by using open access to transmission; and
. utilities engage in coordinated marketing efforts, both as a buyer
and seller of electricity and integrate other functions including
administrative and general services and programs.
____________________
/97/ Id., (citations omitted).
---
/98/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
-------------------------------------
(June 14, 2000). See also, Electric Energy, Inc., 38 SEC 658 (1958); Cities
------------------------------- ------
Service Power & Light Co., 14 SEC 28 (1943). In fact, the Commission has even
-------------------------
held that a system could be deemed integrated even if power never flowed between
two parts of the system. Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th
---------------------------------
Cir. 1990). Environmental Action involved the acquisition by a holding company
--------------------
of an interest in an electric generating plant ("Plant"). The intervenors argued
that the acquisition did not satisfy the standards of the 1935 Act because,
among other things, the system's existing electric utility company ("UtilCo")
had represented that it might purchase up to twenty percent of Plant's capacity
-----
if and only if the price of such power was competitive in the market. The Court
of Appeals noted that the UtilCo might not purchase any of Plant's output but,
nonetheless, concluded that the Commission had correctly found that UtilCo and
Plant could be operated as part of a coordinated system, within the meaning of
the Act. Id. at 1264-65, citing Electric Energy, Inc., Holding Co. Act Release
-- ----------------------------
No. 13871 (Nov. 28, 1958) (the companies sponsoring the construction of a
generating plant only pledged to buy any surplus energy remaining after the
plant had supplied the needs of the major purchaser, a nonaffiliated government
agency).
46
<PAGE>
These factors are consistent with the requirements of the Act.
Applicant will not use traditional joint automatic economic dispatch of the
systems of ComEd and PECO as do other registered systems that effectively
operate as tight power pools. Given that ComEd and PECO are in separate "control
areas," such true automatic joint dispatch would not be feasible./99/ However,
Exelon will centralize all its generating assets and activities in Genco. Genco
will provide power to ComEd and PECO as one of several competing options to meet
those companies' bundled load or provider of last resort load obligations.
Because of this organizational structure, Exelon will have no need for the type
of "joint operating agreement" that many registered public-utility systems have.
While those agreements may be necessary to achieve integrated operations among
several separate subsidiary utility companies, in Exelon's case all generation
--------
resources are controlled in a single entity and no such agreements are
required./100/
In general terms, PECO currently has, and after the Merger Genco will
continue to have, ultimate control over the dispatch of generation located
within PJM for economic purposes and PJM has ultimate control of dispatch for
reliability purposes. Further, PJM's control relates only to that generation
which is included in the PJM Installed Capacity pool. PECO, as a generator in
PJM, has and Genco will also have, a specified capacity obligation to PJM.
Currently, PECO owns capacity in excess of its PJM capacity obligations. This
additional capacity is not included in PJM Installed Capacity and therefore is
not subject to call by PJM even in capacity emergency situations./102/
Under normal operating conditions, even capacity which is included in
the PJM Installed Capacity pool may be "self-scheduled" by the owner. All
generating units included in the PJM Installed Capacity are required to be "bid-
in" to the pool on a daily basis (i.e., the capacity offered at a price
determined by the generator). However, the owner has the option to "self-
schedule" this generation (i.e., plan to sell it outside PJM). In the case of
self-scheduled
_____________________
/99/ A control area is a portion of the transmission and distribution grid
where electric control over the area's electric system is performed by one
entity, usually the vertically integrated utility having the certificated
service area corresponding with that portion of the grid. The operators of a
control area ensure the constant balanced operation of the grid and directly
control the output of all generation within the control area and also control
the movement of power into and out of or across the control area. See the
---
Interconnection Analysis in Exhibit K-1. Traditionally, the several electric
------------------------
utilities making up a registered holding company system acted as a single
control area. Thus, it was possible for direct system-wide coordination of
generation to achieve maximum efficiency of dispatch of generation. The
Commission recognized early that much of the benefit of coordinated operations
could be achieved even without centralized automatic dispatch through a single
controller. Several cases refer to coordination of generation through voice
communication. See, e.g., Electric Energy, Inc., 38 SEC 658 (1958); Cities
--- --- -------------------- ------
Service Power & Light Co., 14 SEC 28 (1943). With the increase in interchange
------------------------
sales between control areas, and the developing market for wholesale generation,
it is now possible to achieve economic benefits equivalent to those achieved by
-----------------
centralized automatic dispatch across areas that are not in the same control
area. The elimination of the need to be in the same control area to achieve
generation efficiencies is demonstrated by the development of RTOs. RTOs will
assume much of the function of the control areas including control of the
transmission grid and dispatching of generation within the RTO's area. See
---
Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998) at n. 9.
-------------
("The PJM staff centrally forecasts, schedules and coordinates the operation of
generating units, bilateral transactions and the spot energy market to meet load
requirements.")
/101/ See the discussion in Item 3.b.2.a above regarding the fact that Exelon
will not need "transmission integration agreements" or similar arrangements.
/102/ The MISO, to which ComEd belongs, will act as a transmission operator and
will have no dispatch authority over generation.
47
<PAGE>
generation, PJM skips over that unit in making its economic dispatch decisions,
unless there is a generation emergency. Thus, Genco will be able to use all its
available capacity located in PJM to serve needs of ComEd in non-emergency
conditions./103/ Even in PJM "max-emergency," that capacity owned by Genco which
is not part of PJM Installed Capacity will remain available for ComEd. Finally,
all generation decisions are subject to normal reliability criteria and
transmission constraints.
Further, under the Exelon system, each utility will be free -- indeed
may be required by the Illinois Commission or Pennsylvania Commission -- to seek
other sources of supply. Genco may coordinate this effort for ComEd and PECO. It
can no longer be assumed that power from affiliates will be the lowest cost
source of supply. Because both Illinois and Pennsylvania have adopted retail
customer choice regimes, the energy portion of retail service is deregulated.
ComEd and PECO are no longer the monopoly provider of generation. Accordingly,
coordination through market mechanisms (and not simply joint dispatch of owned
generation) will be the key means of achieving the efficiency objectives
previously attained through joint dispatch.
The operation and coordination of the ComEd transmission system will
increasingly be performed by an ITC operating under the purview of the MISO,
just as PJM now operates PECO's transmission facilities. These RTOs will develop
all operating procedures and schedules, approve all transmission requests and
direct the operation of the transmission grid for all transmission users. The
RTOs will also control maintenance and planning of all of the transmission
facilities within their respective areas. This degree of coordination and
integration of transmission assets is comparable to that presented to, and
accepted by, the Commission in recent decisions./104/
Genco will conduct marketing efforts, both as a buyer and seller, for
the Exelon system. The Commission has recently recognized joint marketing
efforts as a means to coordinate system operations within the meaning of the
Act./105/ System dispatchers at Genco will continually monitor the generation
needs and capacity of the ComEd and PECO systems. ComEd and PECO already have
the ability to reach common suppliers, purchasers, and trading hubs in various
combinations. The rapidly evolving wholesale power markets surrounding the
energy industry will allow Genco to operate its generation assets wherever
located as a single system by buying and selling power as the situation dictates
to decrease the overall production costs of the system. This method of operation
will result in lower available energy costs for the ComEd and PECO distribution
functions and provide Genco with an attractively priced product for other market
sales. The diversity of weather, time, fuel supply and localized economic
conditions applicable to the various generating assets will create opportunities
to allocate resources more efficiently.
________________
/103/ Transmitting the power to ComEd via a short-term firm or nonfirm
transmission path.
/104/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
------------------------------------
(June 14, 2000) (interconnection through 250 MW uni-directional contract path);
UNITIL Corp., Holding Co. Act Release No. 25524 (April 24, 1992)
-----------
(interconnection through NEPOOL); Conectiv, Inc., Holding Co. Act Release No.
-------------
26382 (Feb. 25, 1998) (interconnection through PJM, Inc.). See also MISO Order,
--- ----
supra at n. 162 and n. 169.
-----
/105/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
------------------------------------
(June 14, 2000).
48
<PAGE>
Coordination of Non-Operating Activities. In applying the integration
----------------------------------------
standard, the Commission looks beyond simply the coordination of the generation
and transmission within a system to the coordination of other activities./104/
Recently, the Commission has found coordinated operational and administrative
functions to constitute "de facto" integration for exempt holding
companies./105/ Moreover, the coordination of administrative functions and joint
marketing activities were crucial factors in the Commission's determination that
the coordination requirement was satisfied in Sempra and NIPSCO.
------ ------
The combined system of Exelon will be coordinated in a variety of ways
beyond simply the coordination of the generation and transmission within the
system. Among other things, administrative and general services will be
performed for the Exelon System by Exelon Services. Exelon may develop
additional service companies to perform specialized functions. Exelon will have
a single accounting organization which will be managed by a single team in one
or more locations. The coordination and integration of the combined system is
expected to be further achieved through the coordination and integration of
information system networks; customer service; procurement organizations;
organizational structures for power generation, energy delivery and customer
relations; and support services.
Efficiency. As indicated by the language of Section 2(a)(29)(A) that
----------
the coordinated system be "economically operated," the Commission further
analyzes whether the coordinated operation of the system results in economies
and efficiencies. The question whether a combined system will be economically
operated under Section 10(c)(2) and Section 2(a)(29)(A) was recently addressed
by the Court of Appeals in Madison Gas and Electric Company v. SEC, 168 F.3d
---------------------------------------
1337 (D.C. Cir. 1999). In that case, the court determined that in analyzing
whether a system will be economically coordinated, the focus must be on whether
the acquisition "as a whole" will "tend toward efficiency and economy." Id. at
---
1341. The Merger will meet this standard given the significant savings and
synergies and other benefits expected to result from the Merger.
___________________
/104/ See, e.g., American Electric Power Company, Inc., Holding Co. Act Release
--- ---- -------------------------------------
No. 27186 (June 14, 2000) (centralized asset-management policy, integrated
financial decisions, centralized resource allocation, implementation of best
practices, coordinated communications and information system networks); General
-------
Public Utilities Co., Holding Co. Act Release No. 13116 (Mar. 2, 1956)
--------------------
(integration is accomplished through power dispatching by a central load
dispatcher as well as through coordination of maintenance and construction
requirements); Middle South Utilities, Inc., Holding Co. Act Release No. 11782
----------------------------
(Mar. 20, 1953), petition to reopen denied, Holding Co. Act Release No. 12978
(Sept. 13, 1955), rev'd sub nom. Louisiana Public Service Comm'n v. SEC, 235
----- --- ---- --------------------------------------
F.2d 167 (5th Cir. 1956), rev'd, 353 U.S. 368 (1957), reh'g denied, 354 U.S. 928
----- ----- ------
(1957) (integration is accomplished through an operating committee which
coordinates not only the scheduling of generation and system dispatch, but also
makes and keeps records and necessary reports, coordinates construction programs
and provides for all other interrelated operations involved in the coordination
of generation and transmission); North American Company, Holding Co. Act Release
----------------------
No. 10320 (Dec. 28, 1950) (economic integration is demonstrated by the exchange
of power, the coordination of future power demand, the sharing of extensive
experience with regard to engineering and other operating problems, and the
furnishing of financial aid to the company being acquired). See also NIPSCO,
--- ---- ------
supra (functional merger of Bay States and NIPSCO gas supply department through
-----
NIPSCO Services, "a service company subsidiary of NIPSCO that provides
financial, accounting, tax, purchasing, natural gas portfolio management, and
other administrative services to associate companies.")
/105/ Sierra Pacific Resources, Holding Co. Act Release No. 27054 (July 26,
------------------------
1999).
49
<PAGE>
In short, all aspects of the combined system will be centrally and
efficiently planned and operated. As with other merger applications approved by
the Commission, the combined system will be capable of being economically
operated as a single interconnected and coordinated system as demonstrated by
the variety of means through which its operations will be coordinated and the
efficiencies and economies expected to be realized by the proposed
transaction./106/
(D) Single Area or Region
As required by Section 2(a)(29)(A), the operations of the Exelon
Electric System will be confined to a "single area or region in one or more
States." While the terms "area" and "region" are not defined in the 1935 Act,
the "single area or region" requirement does not mandate that a system's
operations be confined to a small geographic area or a single State./107/ The
Commission has specifically found that the combining systems need not be
contiguous in order for the requirement to be met./108/ Rather, the Commission
has found that the single area or region test should be applied flexibly when
doing so does not undercut the policies of the 1935 Act against "`scatteration'
-- [that is,] the ownership of widely dispersed utility properties which do not
lend themselves to efficient operation and effective state regulation."/109/
Conversely, utilities which may be "efficiently and economically operated" in an
integrated fashion, and where effective State regulation is not hampered by such
combination, should be considered in the same area or region.
_____________________
/106/ The savings, synergies and other benefits are discussed under Item
3.B.3.(b).
/107/ In considering size, the Commission has consistently found that utility
systems spanning multiple States satisfy the single area or region requirement
of the 1935 Act. For example, the Entergy system covers portions of four States
(Entergy, supra), the Southern system provides electric service to customers in
-----
portions of four States (Southern Co., Holding Co. Act Release No. 24579 (Feb.
------------
12, 1988)), and the principal integrated system of New Century Energies covers
portions of five States (with all of its electric operations serving customers
in six States). If New Century Energies merger with Northern States Power is
approved, the new holding company will serve in 12 States ranging from Michigan
and Minnesota to Colorado and Texas. As early as 1945, the Commission found that
the operations of American Electric Power in seven States were confined to a
single region or area. The AEP system spans about 425 miles from western
Virginia to southern Michigan. American Gas and Electric Co., Holding Co. Act
-----------------------------
Release No. 6333 (Dec. 28, 1945). The combined system of AEP and Central and
South West encompasses 11 states and about 1,200 miles from the Rio Grande River
at the Texas-Mexico border to the Blue Ridge area of Virginia. By contrast,
Exelon's regulated utility operations will be primarily in only two States. Its
main service areas, Chicago and Philadelphia, are about 750 miles apart.
/108/ See, e.g., Conectiv, supra; cf. New Century Energies, supra (integration
--- --- -------- ----- --- -------------------- -----
test was met where entities planned to build a 300-mile transmission line to
interconnect the systems which operated in noncontiguous territories). See also,
--- ----
American Electric Power Company, Inc., Holding Co. Act Release No. 27186 (June
-------------------------------------
14, 2000) (eastern zone and western zone separated by 150 miles).
/109/ NIPSCO, supra (applying single area or region requirement with respect to
------ -----
gas utility system); accord, Sempra, supra. In Gaz Metropolitan, Inc., the
------ ------ ----- ----------------------
Commission agreed that a single area or region could include areas across
international borders. Holding Co. Act Release No. 26170 (Nov. 23, 1994).
50
<PAGE>
The Commission recently set out the basis for finding that a system will be
considered as operating in a single area or region./110/ A system which meets
the following, will be considered in a single area or region:
. the system is interconnected;
. it is susceptible of economic and coordinated operations;
. no adverse finding is required on anticompetitive grounds;
. its size will not impair efficient operation, localized management or
effective regulation; and
. the combination will result in economies and efficiencies.
As demonstrated in this Application, the Exelon system will satisfy all
these requirements.
In the 1995 Report, the Staff recommended that the Commission "interpret
the `single area or region' requirement flexibly, recognizing technological
advances, consistent with the purposes and provisions of the Act" and that the
Commission place "more emphasis on whether an acquisition will be
economical."/111/ The Staff recognized that "recent institutional, legal and
technological changes . . . have reduced the relative importance of . . .
geographical limitations by permitting greater control, coordination and
efficiencies" and "have expanded the means for achieving the interconnection and
economic operation and coordination of utilities with noncontiguous service
territories."/112/ The 1995 Report also recognized that the concept of
"geographical integration" has been affected by "technological advances in the
ability to transmit electric energy economically over longer distances, and
other developments in the industry, such as brokers and marketers."/113/
Importantly, there have been significant further developments since the
1995 Report which further reinforce the conclusions reached by the Staff at that
time. FERC Order No. 888 established and Order 2000 will further refine the open
access transmission system. In the words of the 1995 Report, these developments
dramatically changed the "relative importance of . . . geographical
limitations." In 1995, the Staff concluded that the "state of the art" had
"expanded the means for achieving the interconnection and economic operation and
coordination of utilities with noncontiguous service territories." With the
development of open access transmission, the nascent "means" of interconnection
seen by the Staff in 1995 have fully developed into more effective and
economical "means" by which Exelon may, under normal conditions, achieve the
economic operation and coordination of its utilities with noncontiguous
________________________
/110/ American Electric Power Company, Inc., Holding Co. Act Release No. 27186
--------------------------------------
(June 14, 2000).
/111/ 1995 Report at 66, 69.
/112/ 1995 Report at 69.
/113/ Id.
---
51
<PAGE>
service territories as required by the Act. As described in the Interconnection
---------------
Analysis, there is a significant volume of interchange of electric power through
--------
the corridor of major transmission lines running from the Chicago area generally
through Indiana, Ohio and the Virginias to southeastern Pennsylvania. The
following table gives information regarding transactions from ComEd to PECO
under their existing contract over the three-year period ending in 1999:
Year Total MWh Delivered to PECO
---- ---------------------------
1997 1,552,456
1998 456,623*
1999 1,111,613
* The decline in 1998 was the result of increased need for
power in the ComEd service area.
ComEd and PECO have demonstrated through their existing utility operations
that it is physically possible and, as importantly, economically possible, for
Exelon to conduct its business in a coordinated manner through the use of this
available transmission. Although open access transmission is available to all
utilities, only those utilities, such as Exelon, which can operate their
separate utilities economically and in a coordinated manner within the meaning
-----------------------------------------------------------
of the Act should be considered in the same area or region. While FERC has noted
----------
that "the entire Eastern interconnection is, as the name indicates,
interconnected," this refers to electrical, physical interconnection and does
not indicate that any two utilities in the Eastern interconnection can be deemed
--- -----------------
"integrated" within the meaning of the Act./114/
The regions created by changes in the operation of the transmission grid
brought about by open access transmission through RTOs are larger than those in
the electrical regions of the past for a variety of reasons. First, as
previously discussed the technological advances and additions to the
transmission network that have occurred since 1935 now permit trading to occur
over 1,000-mile distances./115/ Second, a large region is necessary to address
the inefficiencies and inequities that FERC is seeking to remedy through RTOs.
The developments noted by the Staff in 1995, and enhancements and
improvements since that date, are breaking down traditional boundaries and
concepts of regions. The Commission has confirmed its support for the Staff's
Report, citing, in particular, the Staff's recommendation that the Commission
"continue to interpret the `single area or region' requirement of [the 1935 Act]
to take into account technological advances."/116/ The Commission noted as long
ago as 1978 that the permissible area or region of a registered holding company
was a function of
_______________________
/114/ North American Electric Reliability Council, 87 FERC (P) 61,161 (1999).
-------------------------------------------
The country is divided into three synchronous "interconnections:" Eastern,
Western and ERCOT. The Eastern Interconnection, in which ComEd and PECO are
located, covers all the area east of the Rocky Mountains, except for most of
Texas.
/115/ Chicago, headquarters of ComEd is about 750 miles from Philadelphia,
headquarters of PECO.
/116/ NIPSCO, supra; accord, Sempra, supra. While these cases were determining
------ ----- ------ ------ -----
integration of gas utilities, where the statutory standard is different from
electric integration, the principal of taking into account technological
advances is fully applicable in this case.
52
<PAGE>
technological realities./117/ Exelon will be able to use open access
transmission to achieve the coordinated operations of its system thus
demonstrating that it will, in fact, be confined to a "single area or region."
Other factors demonstrate that the Exelon Electric System will satisfy the
single area or region requirement. Exelon will operate distribution facilities
in only two States -- significantly fewer than many existing or proposed
registered holding company systems. The principal generating facilities of Genco
are located in those two States./118/ The traditional service areas of the
Exelon Electric System, that of ComEd and PECO, are similar and
homogeneous./119/ Each serves a major city and surrounding metropolitan and
adjacent areas in a relatively compact service area. Illinois and Pennsylvania
are very similar -- both States have large populations, with a significant
industrial and commercial base. The service characteristics and ratios of
residential, industrial and commercial companies of the companies are
similar./120/ These many similarities and the trade between the areas shows that
Exelon will operate in a single area or region.
The conclusion that the Exelon Electric System will constitute a single
area or region is further supported by the logic of the Commission's definition
of "region" used for purposes of its size analysis under Section 10(b)(1). In
Entergy, supra, the Commission adopted the applicants' definition of the
-----
relevant region for purposes of Section 10(b)(1) to include themselves and those
electric utilities directly interconnected with either or both, which, at the
time, were their most accessible markets. This region consisting of utilities
within "one wheel" of the merging utilities made sense in light of the barrier
that rate pancaking presented in trying to access more distant markets. In
today's increasingly competitive world, ComEd and PECO do not operate as
isolated companies, and their geographic region should be analyzed in terms of
their most accessible markets, which include the areas of MISO, Alliance RTO and
PJM -- that is the open access transmission path existing between Chicago and
Philadelphia.
The Commission's recent decision related to the gas industry in Sempra is
------
also relevant for a commodity business such as the evolving electricity
industry. In that decision, the SEC
_____________________
/117/ American Electric Power Company, Inc., Holding Co. Act Release No.
------------------------------------
20633 (July 21, 1978)
/118/ PECO has an interest in the Salem nuclear generating station in New
Jersey. See note 16 above. Other generating facilities coordinated by Genco will
---
be EWGs whose geographical location is not restricted by the Act.
/119/ The nature or characteristics of the service area of utilities has been
relevant in the Commission's review of the circumstances leading to a conclusion
that a system was integrated within the meaning of the Act. The similarities
among the various parts of an integrated system tends to show that the system is
not so large as to impair the benefits of localized management and regulation
and is therefore integrated. In a homogeneous system, management is better able
to attend to local concerns which are similar throughout the system. See Middle
--- ------
West Corp., 18 SEC 296 (1945); In re West Texas Utilities Co., 21 SEC 566
---------- ------------------------------
(1945).
_____________________
/120/ In 1999, ComEd's electric revenues were derived 33% from residential
customers while PECO's electric revenues were derived 27% from residential
customers. In each case the balance was derived from industrial, commercial and
wholesale customers. The percentage of total sales made to residential customers
is a useful guide to the nature of an electric utility's business. The division
between residential and other types of customers has a strong impact on the
nature of a utility's load and how it meets that load. Of course, in
Pennsylvania and Illinois all customers have (or soon will have) a choice of
electricity supplier.
53
<PAGE>
approved Sempra's acquisition of a 90 percent interest in Frontier Energy LLC of
North Carolina and considered the combined system to be an integrated gas system
under the Act./121/ In that decision the SEC affirmed the existence of a
national natural gas commodity market. The SEC pointed out that, when the Act
was drafted in the 1930s, the common source requirement meant the city gate.
Now, however, with the changing gas market, it means obtaining gas from the same
supply basins. Thus, even though the two systems in Sempra were 3,000 miles
------
apart, the SEC said that its decision did not undercut the Act because the
acquisition did not raise the concerns that prompted its enactment./122/ This
conclusion supports the notion that mere distance does not equate to
"scatteration" so long as the separate parts of the system can be operated,
under normal conditions, in a coordinated manner. Exelon has demonstrated that
it meets that test.
Exelon does not believe that the combination of ComEd and PECO will
contravene the policy of the Act against "scatteration" -- the ownership of
widely dispersed utility properties that do not lend themselves to efficient
operation. As stated in Sempra, supra, "The Act is directed against the growth
------ -----
and extension of holding companies [that] bears no relation to economy of
management and operation or the integration and coordination of related
operating properties." The Commission dealt with this concept in American
--------
Electric Power in 1978./123/ This case involved one of the few situations of a
--------------
significant expansion of a registered holding company system in "modern" times,
i.e., after the period when the break-up of the huge holding company systems of
the 1930's was complete. The Commission noted that "the standards in these
sections [2(a)(29) and 10(b)] were relatively easy to apply to the huge,
complex, and irrational holding company systems at which the Act was primarily
aimed." The Commission went on to note that it was more difficult to apply the
standards to AEP which, although large and widespread, was efficient and clearly
a rational and proper company. Exelon, like AEP in 1978, does not present any of
the evils the Act was designed to eliminate. The facts of this case demonstrate
that the Exelon Electric System will be economically operated as a single
interconnected and coordinated system. It has a sound economic and financial
rationale. It will have compact distribution service areas in only two States.
Furthermore, as demonstrated in the following sections, the combined system will
not have an adverse effect upon localized management, efficient operation or
effective regulation.
(E) Size
The final clause of Section 2(a)(29)(A) requires the Commission to look to
the size of the combined system (considering the state of the art and the area
or region affected) and its effect
____________________________
/121/ Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998).
-------------
/122/ Applicant recognizes that the Sempra case is not directly on point because
------
the language of Section 2(a)(29)(B) of the Act regarding an integrated gas
utility differs from that of Section 2(a)(29)(A) describing an electric system.
The recognition in that case of the changing nature of energy markets in the
United States is directly relevant, however.
/123/ American Electric Power Company, Inc., Holding Co. Act Release No. 20633
------------------------------------
(July 21, 1978) ("AEP").
54
<PAGE>
upon localized management, efficient operation, and the effectiveness of
regulation. In the instant matter, these standards are easily met./124/
Localized Management The Commission has found that an acquisition does not
--------------------
impair the advantages of localized management where the new holding company's
"management [would be] drawn from the present management" (Centerior, supra), or
--------- -----
where the acquired company's management would remain substantially intact (AEP,
---
supra). The Commission has noted that the distance of corporate headquarters
-----
from local management was a "less important factor in determining what is in the
public interest" given the "present-day ease of communication and
transportation." AEP, supra. The Commission also evaluates localized management
--- -----
in terms of whether a merged system will be "responsive to local needs." AEP,
---
supra.
-----
The management of Exelon will be drawn primarily from the existing
management of Unicom, ComEd, PECO and their subsidiaries. The corporate
headquarters of Exelon will be in Chicago -- the current headquarters of Unicom
and ComEd. PECO's distribution and transmission functions will have headquarters
in Philadelphia. The management of the combined generating operations of Genco
and the marketing activities will be conducted in southeastern Pennsylvania. The
electric utility subsidiaries will continue to operate through the regional
offices with local service personnel and line crews available to respond to
customer's needs. In short, the management structures of ComEd and PECO, which
are responsive to local needs, will continue to perform to meet customer needs
after the Merger. Accordingly, the advantages of localized management will not
be impaired.
Efficient Operation -- As discussed above in the analysis of Section
-------------------
10(b)(1), the size of Exelon will not impede efficient operation; rather, the
Merger will result in significant economies and efficiencies. Operations will be
more efficiently performed on a centralized basis because of economies of scale,
standardized operating and maintenance practices and closer coordination of
system-wide matters.
Effective Regulation -- The Merger will not impair the effectiveness of
--------------------
regulation at either the State or Federal level. ComEd will continue to be
regulated by the Illinois Commission and PECO by the Pennsylvania Commission
with respect to retail rates, service and related matters subject to the
changing regulation brought about by utility regulatory restructuring laws in
both States./125/ On the Federal level, Exelon will be regulated as a single
registered holding company as opposed to two exempt holding company systems. The
electric utility subsidiaries of Exelon will continue to be regulated by FERC
with respect to interstate electric sales for resale and transmission services,
by the NRC with respect to the operation of nuclear facilities, and by the FCC
with respect to certain communications licenses.
____________________
/124/ See Item 3.B.2(a) for a discussion of the relative size of the Exelon
---
system
/125/ Although Genco will be a "public-utility company" for purpose of the Act
and will be subject to FERC rate regulation, it will not be subject to utility
regulation by Illinois or Pennsylvania consistent with the restructuring
legislation in those States.
55
<PAGE>
At the State level, the Merger Agreement requires approval of the
Pennsylvania Commission. Under the Illinois Customer Choice and Rate Relief Law
of 1997, the legislature determined that corporate reorganizations and mergers
would foster the move to a more competitive environment and accordingly provided
that such transactions, such as the Merger, could be undertaken without an
approval process at the Illinois Commission. See 220 ILCS 5/16-111(g). Although
---
the process is streamlined, the new law -- together with other provisions of the
Illinois Public Utility Act, clearly protects the public interest. Under the
Customer Choice and Rate Relief Law, ComEd is required to file a notice with the
Illinois Commission describing its transaction. That notice was filed on
November 22, 1999/126/ and included the following information, as required by
statute:
. A complete statement of the accounting entries to be made to reflect
the transaction, a certification that the entries are in accordance
with GAAP, and a certification that cost allocations between the
utility and its affiliates will be in accord with Illinois Commission
approved cost allocation guidelines.
. A description of the use of proceeds of any sale of facilities
(inapplicable to this transaction).
. A list of regulatory approvals for the transaction.
. An irrevocable commitment by the utility that, as a result of the
transaction, it will not impose any stranded cost charges that it
might otherwise be allowed to charge retail customers under Federal
law or increase the transition charges that it is otherwise entitled
to collect under the Illinois utility restructuring law.
The forgoing notice constitutes all action that must be taken for the
Merger to proceed under Illinois law.
The public interest is protected by these requirements and by other
provisions of the Illinois Public Utility Act that will continue to be
applicable to ComEd, most notably the provisions regulating affiliate
transactions. Applicant is working closely with regulators (both State and
Federal) to obtain the required approvals. The Illinois Commission and the
Pennsylvania Commission have adequate jurisdiction to prevent the Merger from an
impairment of their regulatory authority.
(F) Conclusion -- Exelon Electric System will be
Integrated
A rigid reading of the integration requirement may have been appropriate at
a time when ownership or control of the intervening transmission lines was the
only way that a utility could move power from its generation assets to its
distribution systems. The need for this type of firm physical interconnection
has been greatly reduced, if not eliminated, as the distribution systems now
routinely contract for power with nonaffiliates and move the purchased commodity
power
____________________
/126/ An amended notice informs the Illinois Commission of the change to the
Merger Agreement.
56
<PAGE>
over independently operated or owned transmission lines -- or eliminate the
requirement for physical movement of power from the generator to the utility
system through use of market swaps, power displacement or similar techniques.
As FERC explained in the RTO NOPR:
the industry has undergone sweeping restructuring
activity, including a movement by many states to
develop retail competition, the growing divestiture of
generation plants by traditional electric utilities, a
significant increase in the number of mergers among
traditional electric utilities and among electric
utilities and gas pipeline companies, large increases
in the number of power marketers and independent
generation facility developers entering the
marketplace, and the establishment of independent
system operators (ISOs) as managers of large parts of
the transmission system. Trade in bulk power markets
has continued to increase significantly and the
Nation's transmission grid is being used more heavily
and in new ways. As a result, the traditional means of
grid management is showing signs of strain and may be
inadequate to support the efficient and reliable
operation that is needed for the continued development
of competitive electricity markets./127/
The Commission has found, and the courts have agreed, that in circumstances
in which the expertise in operating issues is lodged with another regulator, it
is appropriate to "watchfully defer" to the work of that regulator./128/
Applicant urges the SEC to apply the doctrine of watchful deference to FERC's
stated objective to improve the competitiveness of the electric industry through
large RTOs, Orders such as 888 and 889, and through State development of
restructuring laws.
The need for the SEC to accommodate the views of FERC in this matter cannot
be overstated. Congress enacted the 1935 Act and the FPA as two parts of the
same legislation. The legislative history makes clear that the purpose of
Section 11 of the 1935 act "is simply to provide a mechanism to create
conditions under which effective Federal and State regulation will be
possible."/129/ The FERC's administration of the FPA has evolved as that agency
has sought to develop fully competitive wholesale markets consistent with
changing technology. Administration of the 1935 Act must also evolve if the 1935
Act is to continue to create conditions under which "effective Federal and State
regulation" is possible.
______________________
/127/ RTO NOPR, FERC Stats & Regs at 33,685.
/128/ Northeast Utilities, Holding Co. Act Release No. 25273 (March 15, 1991),
-------------------
aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (1992). See also
----- --- ---- ---------------------- --- ----
Wisconsin's Environmental Decade v. SEC, 882 F.2d 523 (D.C. Cir. 1989) ("we are
----------------------------------------
not prepared to say that the Commission abdicates its duty in an exemption
determination by deciding to rely, watchfully, on the course of state
regulation").
/129/ Sen. Rep. No. 621, 74th Cong., 1st Sess. (1935).
57
<PAGE>
In the 1995 Report, the Division recommended that the Commission focus on
whether the resulting system will be subject to effective regulation. The 1995
Report emphasized that "open access under FERC Order No. 636, wholesale wheeling
under the Energy Policy Act [and FERC Order No. 888] and the development of an
increasingly competitive and interconnected market for wholesale power have
expanded the means for achieving the interconnection and the economic operation
and coordination of utilities with non-contiguous service territories."/130/ The
1995 Report further expressed concern that the Act "not serve as an artificial
barrier where other energy regulators have determined that an acquisition will
benefit utility consumers." Accordingly, the 1995 Report concluded that "[w]hen
considering any proposed acquisition, the SEC should consider whether the
resulting system will impair the effectiveness of regulation. Where the affected
State and local regulators concur, the SEC should interpret the integration
standard flexibly to permit non-traditional systems if the standards of the Act
are otherwise met." Under this approach, if the affected States approve a
proposed transaction (a condition precedent to the instant Merger), the
"effectiveness of regulation" standard would be met. A condition of the Merger
is the receipt of all requisite State approvals.
The Commission should find that the Exelon Electric System comprises a
single, integrated electric utility system within the meaning of the Act.
(iv) Retention of Exelon Gas System
Because the Commission has interpreted the term "integrated public-utility
system" to mean a system that is either gas or electric, but not both, it is
necessary to qualify the gas operations of PECO (the "Exelon Gas System") under
the "A-B-C" clauses of Section 11(b)(1). Under those provisions, a registered
holding company can own "one or more" additional integrated systems if certain
conditions are met. Specifically, the Commission must find that (A) the
additional system "cannot be operated as an independent system without the loss
of substantial economies which can be secured by the retention of control by
such holding company of such system," (B) the additional system is located in
one State or adjoining states, and (C) the combination of systems under the
control of a single holding company is not so large . . . as to impair the
advantages of localized management, efficient operation, or the effectiveness of
regulation."
As shown below the Exelon Gas System currently is, and will continue to be,
a single, integrated public-utility system. This case presents a less
complicated determination of the A-B-C Clause test than other cases presented to
the Commission in recent years because only PECO has gas distribution
facilities. There is no need, as has been the situation with other cases to
analyze whether two previously separate gas systems can constitute a single
integrated system. Further, the PECO gas system has been operating as a single,
integrated system for many years.
Section 2(a)(29)(B) defines an "integrated public-utility system" as
applied to gas utility companies as:
_______________
/130/ 1995 Report at 73-74.
58
<PAGE>
a system consisting of one or more gas utility
companies which are so located and related that
substantial economies may be effectuated by being
operated as a single coordinated system confined
in its operation to a single area or region, in
one or more States, not so large as to impair
(considering the state of the art and the area or
region affected) the advantages of localized
management, efficient operation, and the
effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a
common source of supply may be deemed to be
included in a single area or region.
PECO's current gas operations satisfy this definition. There will be no change
to the PECO gas operations caused by the Merger that would affect this
conclusion.
PECO's gas operations serve all or a portion of five counties surrounding
the City of Philadelphia. This "single area or region" is located wholly within
the Commonwealth of Pennsylvania. PECO's facilities comprise a physically
interconnected network of gas transmission and distribution facilities that
derive all of their natural gas from common sources of supply. The management of
PECO's gas operations will continue to reside with PECO Energy, which will be
headquartered in the City of Philadelphia (indeed, the electric and gas
distribution companies will continue to share employees and common facilities so
long as the Commission does not order divestiture). Management will,
accordingly, remain close to the gas operations, thereby preserving the
advantages of local management. This will remain true even after the Merger and
various plans of reorganization and restructuring have been implemented. PECO's
gas distribution operations are, and will continue to be, regulated by the
Pennsylvania Commission. The effectiveness of regulation will not be altered or
impaired by PECO's merger with Unicom.
PECO's gas operations overlap the territory served by PECO's electric
distribution company ("EDC"). This overlap of service territories permits PECO
to achieve significant synergies in serving both its electric and gas customers
which are passed along to those customers in the form of lower rates and better
service. The synergies achieved due to PECO's combined gas and electric
operations are identified in Exhibit J-1 hereto, which identifies the additional
costs PECO's gas utility would incur if PECO were not permitted to retain the
system and were instead forced to operate as a stand-alone gas utility.
The Pennsylvania Legislature recently passed the Natural Gas Competition
Act ("Gas Competition Act"). 66 Pa.C.S.A. (S)(S) 2201 et. seq. (1999). The
Pennsylvania Gas Competition Act will require PECO to provide competitors access
into PECO's gas distribution network. While PECO is presently one of the lowest
cost gas utility suppliers in the Commonwealth of Pennsylvania, if PECO were
required to divest its gas utility, the conservative projections included in
Exhibit J-1 indicate that the price PECO's gas utility would have to charge
retail customers located in its present service territory would make it one of
the most expensive retail
59
<PAGE>
gas suppliers in the State (with an estimated post-divestiture rate increase of
$292 per customer per year, an increase of 30.28%)./131/
Because most of the increased costs would be charged to operations that
will remain regulated under the Gas Competition Act, such as gas distribution,
maintenance of gas mains, meter reading, billing and customer service, it will
not be possible for PECO's distribution customers to escape the high cost of a
new stand-alone operation by choosing an alternate gas supplier. See Exhibit J-1
---
at 5. Thus, if the Commission were to require PECO to divest its gas operations
to "New Gas Co", New Gas Co's gas distribution customers would suffer the most.
PECO's gas system not only satisfies the integration requirements of
Section 2(A)(29)(B), the retention of this system is also appropriate under the
A-B-C clauses of (S) 11(b)(1) of the Act, as shown below.
(A) Loss of economies if operated as an
independent system
In its 1995 Report, the SEC Staff noted that, in a competitive utility
environment, any loss of economies threatens a utility's competitive position
and even a "small" loss of economies could render a utility vulnerable to
significant erosion of its competitive position. Adopting this line of
reasoning, the Commission, in its order approving the merger of Public Service
Colorado and Southwestern Public Service, moved away from earlier cases that
required, in effect, a showing that the additional system could not survive on a
stand-alone basis. In this case the Commission found that "[t]he gas and
electric industries are converging, and, in these circumstances, separation of
gas and electric businesses may cause the separated entities to be weaker
competitors than they would be together. This factor adds to the quantifiable
loss of economies caused by increased costs." /132/ The potential of divestiture
injuring PECO's ability to compete is heightened in this case because PECO is
already subject to retail electric competition in the Commonwealth of
Pennsylvania and will soon be subject to retail gas competition as well.
Historically, the Commission has given consideration to four ratios, which
measure the projected loss of economies as a percentage of: (1) total utility
operating revenues; (2) total utility expense or "operating revenue deductions";
(3) gross utility income; and (4) net utility operating income. Although the
Commission has declined to draw a bright-line numerical test under Section
11(b)(1)(A), it has indicated that cost increases resulting in a 6.78% loss of
operating revenues, a 9.72% increase in operating revenue deductions, a 25.44%
loss of gross gas income and a 42.46% loss of net income would afford an
"impressive basis for finding a loss of substantial economies." Engineers Public
----------------
Service Co., Holding Co. Act Release No. 3796 (Sept. 17, 1942).
-----------
Direct Loss of Economies. PECO has prepared a study of its gas utility
------------------------
operations that analyzes the lost economies that its gas utility operations
would suffer upon divestiture when
____________________
/131/ Under the Gas Competition Act the non-gas cost portion of PECO's rates
are capped until January 1, 2001.
/132/ New Century Energies, supra. See also Dominion Resources, Inc.,
-------------------- ----- --- ---- -------------------------
Holding Company Act Release No. 27113 (December 15, 1999); WPL Holdings, supra.
------------ -----
60
<PAGE>
compared to their retention pursuant to the Merger. The study is attached to
this Application as Exhibit J-1 (the "Gas Study").
The Gas Study shows that if New Gas Co were operated on a stand-alone
basis, lost economies from the need to replicate services, the loss of economies
of scale, the costs of reorganization, and other factors would be immediate and
substantial. In the absence of rate relief, those lost economies would
substantially injure the shareholders of PECO and Unicom upon the divestiture of
those gas operations. As the Gas Study further shows, if rate relief were
granted with respect to the lost economies, then consumers would bear the
majority of those substantial costs over what they would have to pay if the
properties were retained as contemplated by the Merger. This is because a
substantial portion of the synergies achieved by combined operations occur in
operational areas that will remain subject to rate regulation even after full
retail competition for retail gas and electric customers is implemented in
Pennsylvania.
As set forth in the Gas Study, divestiture of the gas operations of PECO
into New Gas Co would result in lost economies of over $72.8 million (exclusive
of income tax effects). The table below shows PECO's 1998 gas operating
revenues, gas operating revenue deductions, gas gross income and net income from
gas operations on both a pre- and post-divestiture basis. The post-divestiture
gas operating revenues number is the revenue requirement in order for NewGasCo
to make up for the lost economies.
<TABLE>
<CAPTION>
=================================================================================
Gas Operating
Gas Operating Revenue Gas Gross Gas Net
Timing Revenues Deductions Income Income
---------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Pre-Divestiture (actual) $399,642 $323,265 $76,377 $58,506
Post-Divestiture $520,640 $396,143 $3,499 $19,214
(est., see Exh. J-I)
---
Difference $120,998 $72,878 $72,878 $39,292
(Increased revenue
requirement; Economies
Lost as Result of
Divestiture)
=================================================================================
</TABLE>
On a percentage basis, the lost economies amount to 124.5% of 1998 gas net
income--far in excess of the 30% loss of net income in New England Electric
System that the Commission has described as the highest loss of net income in
any past order requiring divestiture./133/ As a percentage of 1998 gas operating
revenues, these lost economies described in the Gas Study amount to 18.24% --
greater than the losses identified in several past orders that permitted
_______________________
/133/ See UNITIL Corp., Holding Co. Act Release No. 25524 (April 24, 1992) ("The
----------------
Commission has required divestment where the anticipated loss of income of the
stand-alone company was approximately 30% . . ." or "29.9% of net income before
taxes"), citing SEC v. New England Electric System, 390 U.S. 207, 214 n.11
-----------------------------------------
(1968).
61
<PAGE>
merger applicants to retain the additional systems in question./134/ As a
percentage of 1998 expenses or operating revenue deductions, the lost economies
described in the Gas Study would amount to 22.54%. Again, the losses identified
in the Gas Study exceed the losses as a percentage of operating revenue
deductions identified in past orders permitting retention of the additional
systems, including Ameren (17.6%) and Conectiv (17.4%). As a percentage of 1998
gross income, the lost economies described in the Gas Study amount to 95.42%,
far in excess of the 25.44% figure the Commission relied upon in identifying a
loss of substantial economies in its Engineers Public Service Co. decision. See
---
supra.
-----
In order to recover these estimated lost economies, New Gas Co stand-alone
gas operations would need to increase rate revenue by $123 million or about 30%.
This increase in rate revenues would have an immediate negative impact on the
rates charged to customers for gas services (to the extent that they apply to
regulated operations) and would adversely impact New Gas Co's ability to compete
in the emerging retail gas market in Pennsylvania (to the extent they apply to
operations which will soon be competitive). In addition, the customers of PECO's
gas businesses who are also electric customers will experience a doubling of
their postage costs to pay two separate bills. The total estimated increase in
incremental costs associated with forced divestiture would be $292 per customer
per year, or 30.3% over the average customer's current annual payments.
Other Lost Economies. Divestiture of the PECO gas property would also
--------------------
result in the loss to consumers of the cost-saving benefits of the economies
offered by the "energy services" approach of PECO and Unicom to the utility
business. While the losses cannot now be fully quantified, they are substantial.
At the center of the energy services company concept is the idea that providing
gas and electric services and products is only the start of the utility's job.
In addition, the company must provide enhanced service to the consumer by
providing an entire package of both energy products and services. In this area,
PECO and Unicom's efforts are part of a trend by companies to organize
themselves as energy service providers; that is, as providers of a total package
of energy services rather than merely utility suppliers of gas and electric
products. The goal of an energy service company is to retain its current
customers and obtain new customers in an increasingly competitive environment by
meeting customers' needs better than the competition. An energy service company
can provide the customer with a low cost energy (i.e., gas, electricity or
conservation) option without inefficient subsidies. This trend towards, and the
need for, convergence of the former separate electric utility function and gas
utility function into one energy service company was recognized by the
Commission in Consolidated Natural Gas Company, Holding Co. Act Release No.
--------------------------------
26512 (April 30, 1996) (hereinafter, the "CNG Order"), where the Commission
---------
stated: "It appears that the restructuring of the electric industry now underway
will dramatically affect all United States energy markets as a result of the
growing interdependence of natural gas transmission and electric generation, and
the interchangeability of different forms of energy, particularly gas and
electricity." See also
--------
_______________________
/134/ See, e.g., Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25,
--- --- -------------
1998) (loss of 14.07% of gas operating revenues in case permitting retention of
additional gas system); UNITIL Corp., supra (loss of slightly less than 14% of
------------ -----
operating revenues). The highest loss of operating revenues in any case ordering
divestiture is commonly said to be 6.58%. ("[o]f cases in which the Commission
has required divestment, the highest estimated loss of operating revenues of a
stand-alone company was 6.58% . . .") Id.
--
62
<PAGE>
New Century Energies, Holding Co. Act Release No. 26748 (August 1, 1997); UNITIL
-------------------- ------
Corp., Holding Co. Act Release No. 26527 (May 31, 1996) and SEI Holdings, Inc.,
----- ------------------
Holding Co. Act Release No. 26581 (Sept. 26, 1996).
It is the intent of Applicant that PECO's gas property continue to be
integrated and operated as a single economic system in conjunction with
Applicant's combined electric system in order to better provide competitive
comprehensive energy services to Applicant's customers. PECO's potential
competitors, including Conectiv, Baltimore Gas & Electric, Public Service
Electric and Gas, UGI Utilities, Inc., PPL Corporation and others are themselves
potential suppliers of comprehensive energy services. The lost economies
Applicant shows in Exhibit J-1 are substantial in an industry in which there are
already many companies competing with Applicant for the provision of
comprehensive energy services in Applicant's service territories. In areas of
PECO's business that will remain regulated, lost economies will result in
increased retail rates for PECO's gas and electric customers. For the
deregulated portions of PECO's business, competition between energy suppliers
can only benefit consumers.
As the Commission recognized in WPL Holdings, TUC Holdings and New Century
------------ ------------ -----------
Energies, there are significant economies and competitive advantages inherent in
--------
a combined gas and electric utility as contrasted to a utility offering only
electricity or gas. Besides the loss of these inherent economies, other
substantial economies would be lost by the separation of the electric systems
from the gas system. These lost economies would include decreased efficiencies
from separate meter reading, meter testing and billing operations, the need for
duplicative customer service operations, plus a loss of savings due to failure
to exploit synergies in areas such as facilities maintenance, emergency work
coordination, and other administrative operations.
A final consideration, raised by the Commission in the 1997 New Century
Energies Order, is that PECO's gas and electric properties have long been under
PECO's control, and approval of the Merger will not alter the status quo with
respect to these operations.
It is Applicant's view that the standards of Clause A of Section 11(b)(1)
of the Act are satisfied in light of the increased expenses and the potential
loss of competitive advantages that could result from the divestiture of PECO's
gas system. Applicant requests that the Commission find the standards of Clause
A are satisfied for the reasons set forth above.
(B) Same State or Adjoining States
The Merger does not raise any issue under Section 11(b)(1)(B) of the Act.
The Commission has paraphrased Clause B as follows: "All of such additional
systems are located in a State in which the single integrated public-utility
system operates, or in states adjoining such a State, or in a foreign country
contiguous thereto." Engineers Public Service Company, Holding Co. Act Release
--------------------------------
No. 2897 (July 24, 1941), rev'd on other grounds, 138 F.2d 936 (D.C. Cir. 1943),
----------------------
vacated as moot, 332 U.S. 788 (1947). The PECO Gas System is located in the same
---------------
State and region as the PECO Electric System. Indeed, the two service
territories overlap. Thus, the requirement that each additional system be
located in one State or adjoining States is satisfied.
63
<PAGE>
It is Applicant's view that the standards of Clause B of Section 11(b)(1)
of the Act are satisfied due to the proximate location of PECO's gas and
electric properties. Applicant requests that the Commission find the standards
of Clause B are satisfied for the reasons set forth above.
(C) Size --Localized Management; Efficient
Operation; Effective Regulation
Retention of PECO's gas operations as an additional integrated system
raises no issue under Section 11(b)(1)(C) of the Act. PECO's mid-sized gas
system is "not so large . . . as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation." In any
event, as the Commission has recognized elsewhere, the determinative
consideration is not size alone or size in an absolute sense, either big or
small, but size in relation to its effect, if any, on localized management,
efficient operation and effective regulation. From these perspectives, it is
clear that PECO's gas operations are not too large.
PECO's gas utility operations with 419,738 gas customers combined in five
adjoining Pennsylvania counties, are relatively minor when compared to Houston
Industries (the parent of Minnegasco) which, through subsidiaries, has 2.7
million gas customers located in multiple States, 630,000 in Minnesota alone.
Based on data through December 31, 1999, and giving effect to the Merger,
the net gas utility property, plant and equipment will represent only 2.8% of
the total assets of Exelon, whereas the net electric utility property, plant and
equipment will represent 45.3%; operating revenues for the gas operations will
be 3.9% of total company revenues as compared with 94.5% for the electric
operations; and customers of the gas operations will constitute 8% of all Exelon
customers (all of which are also located in PECO's electric distribution service
territory), while electric operations will represent 92%.
With respect to localized management, this issue is discussed for the
Merger as a whole under Item 3.B.3(a)(iii)(D) below. Applied solely to the gas
operations, the PECO gas system will continue to be run from PECO Energy's
Philadelphia headquarters. Management will therefore remain geographically close
to the gas operations, thereby preserving the advantages of localized
management. No reduction in customer service or support crews is expected.
From the standpoint of regulatory effectiveness, PECO has operated its
combined gas and electric utility in Pennsylvania for many years. The historical
joint gas and electric utility operations of PECO have not raised regulatory
concerns in Pennsylvania and Applicant does not believe the Merger will
introduce any new concerns in this area.
With respect to efficient operation, as described above, as part of the
Applicant's combined system, PECO's gas operations are expected to provide cost
synergies in combined operations worth approximately $84.4 million over the ten-
year period from 2001-2010, which may enable PECO to reduce costs for its
regulated gas distribution customers and compete more efficiently for retail gas
customers in Pennsylvania's newly deregulated retail gas market. Effective
competition in the Pennsylvania retail gas market is absolutely necessary if the
fledgling market is to provide benefits to retail customers. Far from impairing
the advantages of
64
<PAGE>
efficient operation, the continued combination of the gas operations will
facilitate and enhance the efficiency of both Exelon's gas and electric
operations.
It is Applicant's view that the standards of Clause C of Section 11(b)(1)
of the Act are satisfied because the Merger will not give rise to any of the
abuses, such as ownership of scattered utilities properties, inefficient
operations, lack of local management or evasion of State regulation, that Clause
C and the Act generally were intended to prohibit. Applicant requests that the
Commission find the standards of Clause C are satisfied for the reasons set
forth above.
(v) Retention of Other Businesses
Exhibits I-1 and I-2 list and describe those non-utility businesses
conducted by Unicom and PECO. As a result of the Merger, the non-utility
businesses and interests of Unicom and PECO described in Item 1.C. above and in
those Exhibits will become businesses and interests of Exelon. These non-utility
interests are fully retainable by Exelon under the Act. Corporate charts showing
the subsidiaries, including non-utility subsidiaries of Unicom and PECO, are
filed as Exhibits E-3 and E-4. A corporate chart showing the projected
arrangement of these subsidiaries under Exelon is filed as Exhibit E-5.
Section 11(b)(1) permits a registered holding company to retain "such other
businesses as are reasonably incidental, or economically necessary or
appropriate, to the operations of [an] integrated public-utility system." The
Commission has historically interpreted this provision to require an operating
or "functional" relationship between the non-utility activity and the system's
core non-utility business./135/ The Commission modified this historical position
and "has sought to respond to developments in the industry by expanding its
concept of a functional relationship."/136/ This shift culminated in the
adoption of Rule 58. The Commission added "that various considerations,
including developments in the industry, the Commission's familiarity with the
particular non-utility activities at issue, the absence of significant risks
inherent in the particular venture, the specific protections provided for
consumers and the absence of objections by the relevant State regulators, made
it unnecessary to adhere rigidly to the types of administrative measures" used
in the past. /137/ Furthermore, in the 1995 Report, the SEC Staff recommended
that the Commission replace the use of bright-line limitations with a more
flexible standard that would take into account the risks inherent in the
particular venture and the specific protections provided for consumers./138/ As
set forth more fully in Exhibits I-1 and I-2, the non-
_______________________
/135/ See, e.g., Michigan Consolidated Gas Co., Holding Co. Act Release No.
--- ---- -----------------------------
16763 (June 22, 1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971); United Light and
----- ----------------
Railways Co., Holding Co. Act Release No. 12317 (Jan. 22, 1954); CSW Credit,
------------ ----------
Inc., Holding Co. Act Release No. 25995 (March 2, 1994); and Jersey Central
---- --------------
Power and Light Co., Holding Co. Act Release No. 24348 (March 18, 1987).
-------------------
/136/ Exemption of Acquisition by Registered Public-utility Holding Companies of
Securities of Non-utility Companies Engaged in Certain Energy-related and Gas-
related Activities, Holding Co. Act Release No. 26667 (Feb. 14, 1997) ("Rule 58
Release").
/137/ Id.
---
/138/ 1995 Report at 81-87, 91-92.
65
<PAGE>
utility business interests that Exelon will hold directly or indirectly all meet
the Commission's standards for retention.
In the past, the Commission has approved the acquisition or retention of
non-utility businesses in a merger where one or both companies were either not
subject to the Act or were exempt from registration. See WPL Holdings, Inc.,
--- ------------------
supra. See also New Century Energies, supra Applicant submits that the statutory
----- --- ---- -------------------- -----
requirements for ownership of all non-utility businesses identified in Exhibits
I-1 and I-2 are satisfied.
In New Century Energies and WPL Holdings, the Commission also excluded the
-------------------- ------------
non-utility businesses applicants sought to retain from the limitation upon
investment in energy-related companies under Rule 58, noting that the
restrictions of Section 11(b)(1) are applicable to registered holding companies
and not to exempt holding companies. Unicom and PECO are both exempt holding
companies. Rule 58 provides in section (a)(1)(ii) that investments in non-
utility activities that are exempt under Rule 58 cannot exceed 15% of the
consolidated capitalization of the registered holding company. In its statement
supporting the adoption of the Rule, the Commission stated:
The Commission believes that all amounts that have
actually been invested in energy-related companies
pursuant to commission order prior to the date of
effectiveness of the Rule should be excluded from the
calculation of aggregate investment under Rule 58. The
Commission also believes it is appropriate to exclude
from the calculation all investments made prior to that
date pursuant to available exemptions./139/
Because the non-utility investments of Unicom and PECO, as exempt holding
companies, were exempt under the Act, investments made by them prior to the
effective date of Rule 58 which will continue as part of Exelon after
consummation of the merger, should not count in the calculation of the 15%
maximum. See New Century Energies, supra (Commission order granting exclusion of
--- -------------------- -----
non-utility energy-related investments of Southwestern Electric Service, an
independent utility, and Public Service Colorado, an exempt holding company,
from calculations of the 15% maximum investment allowed under Rule 58).
(vi) The Merger will Satisfy the Requirements of
Section 11(b)(2) as incorporated by Section
10(c)(1)
Section 11(b)(2) further directs the Commission:
To require that each registered holding company, and
each subsidiary company thereof, shall take such steps
as the Commission shall find necessary to ensure that
the corporate structure or continued existence of any
company in the holding- company system does not unduly
or unnecessarily complicate the
_______________________
/139/ Holding Co. Act Release No. 26667 at 75.
66
<PAGE>
structure, or unfairly or inequitably distribute voting
power among security holders, of such holding-company
system. In carrying out the provisions of this
paragraph the Commission shall require each registered
holding company (and any such company in the same
holding company system with such holding company) to
take such action as the Commission shall find necessary
in order that such holding company shall cease to be a
holding company with respect to each of its subsidiary
companies which itself has a subsidiary company which
is a holding company. Except for the purpose of fairly
and equitably distributing voting power among the
security holders of such company, nothing in this
paragraph shall authorize the Commission to require any
change in the corporate structure or existence or any
company which is not a holding company, or of any
company whose principal business is that of a public-
utility company.
Section 11(b)(2) raises two issues: first, will the proposed corporate
structure or continued existence of any company unduly or unnecessarily
complicate the structure of the Exelon holding company system post-Merger and,
second, will the Merger result in an unfair or inequitable distribution of
voting power among the security holders of Exelon. As explained more fully below
and as found by the Commission in recent cases, any apparent complexity in the
resulting holding company system does not create any inequitable distribution of
voting power and is necessary in order to achieve important benefits./140/
Ventures and Exelon Delivery raise an issue under Section 11(b)(2)./141/
The important benefits Exelon will derive from these companies should outweigh
any increase in complexity there presence causes. There presence will not in any
way create inequitable distribution of voting power. Both companies serve the
purpose of creating the simplest possible business organization that still
achieves important business goals of Exelon. As noted above, Ventures is
required to achieve significant tax savings. Exelon Delivery will enable Exelon
to fully and efficiently integrate its regulated utility businesses and provide
full separation from its unregulated businesses.
Accordingly, the Applicants seek a declaratory order requesting that the
proposed transaction structure is in compliance with Section 11 of the Act,
solely for purposes of complying with the "great grandfather" provisions of
Section 11(b)(2)./142/
_______________________
/140/ National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15,
-----------------------
2000)(intermediate holding companies necessary for cross-border tax
considerations); Dominion Resources, Holding Company Act Release No. 27113 (Dec.
------------------
15, 1999)(intermediate holding company "CNG Acquisitions" to hold CNG's utility
subsidiaries under alternative form of merger).
/141/ PECO is currently a holding company with respect to the Conowingo
Companies. Further, PEPCO is a registered holding company. Thus, Genco will also
be a holding company with respect to the Conowingo Companies and a determination
is sought that it not be considered a holding company soley for purposes of
Section 11(b)(2). See note 16 above.
/142/ See Item 1.C and 1.E. for a discussion of the utility subsidiaries of
ComEd and PECO.
67
<PAGE>
Ventures and Exelon Delivery will be wholly-owned, directly by Exelon.
Other than to enhance the full integration of the regulated utilities, Exelon
Delivery will not affect the operation of ComEd or PECO. Likewise, Ventures will
not affect the operation of Genco. Thus, there is no possibility that
implementation and continuance of the proposed transaction structure could
result in an undue or unnecessarily complex capital structure or inequitable
distribution of voting power to the detriment of the public interest or the
interest of consumers. Accordingly, this is not the type of situation that
concerned the drafters of the Act, and, Exelon urges the Commission to exercise
its discretion to find that any apparent complexity of the proposed transaction
structure is neither undue nor unnecessary.
(b) Section 10(c)(2) -- Economies and Efficiencies
Because the Merger is estimated to result in substantial cost savings and
synergies, it will tend toward the economical and efficient development of an
integrated public-utility system, thereby serving the public interest, as
required by Section 10(c)(2) of the Act.
The Merger will produce economies and efficiencies more than sufficient to
satisfy the standards of Section 10(c)(2) of the Act. Although some of the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are properly considered in determining whether the standards
of Section 10(c)(2) have been met. See AEP, supra. Some potential benefits
--- --- -----
cannot be precisely estimated, nevertheless they too are entitled to be
considered. "[S]pecific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable." Centerior, supra.
--------- -----
Cost Synergies. Unicom and PECO estimate that the combined company will
--------------
achieve regulated and unregulated net annual cost savings of approximately $100
million in the first year following completion of the merger, increasing to
approximately $180 million by the third year. Approximately 60% of these savings
will be attributable to regulated activities and the remainder to unregulated
activities. Estimated savings include only those cost savings and cost avoidance
items management expects to achieve as a result of the merger. These expected
savings are comparable to the anticipated savings in a number of recent
acquisitions approved by the Commission./143/
_______________________
/143/ See, e.g., NIPSCO Industries, Inc., Holding Co. Act Release No. 26975
--- ---- -----------------------
(Feb. 10, 1999) (estimated expected savings of $57.45 million over ten years);
Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998) (estimated
-------------
expected savings of $1.2 billion over ten years); BL Holding Corp., Holding Co.
----------------
Act Release No. 26875 (May 15, 1998) (estimated expected savings of $1.1 billion
over ten years); LG&E Energy Corp., Holding Co. Act Release No. 26866 (April 30,
-----------------
1998) (estimated expected savings of $687.3 million over ten years); WPL
---
Holdings, Holding Co. Act Release No. 26856 (April 14, 1998) (estimated expected
--------
savings of $680 million over ten years); Conectiv, Holding Co. Act Release No.
-------
26832 (Feb. 25, 1998) (estimated expected savings of $500 million over ten
years); Ameren Corporation, supra (estimated savings of $686 million over ten
------------------ -----
years); 1997 NCE Order, supra (estimated savings of $770 million over ten
-----
years); TUC Holding Company, supra (estimated savings of $505 million over ten
------------------- -----
years); Northeast Utilities, supra (estimated savings of $837 million over
------------------- -----
eleven years); Entergy Corporation, Holding Co. Act Release No. 25952 (Dec. 17,
-------------------
1993) (expected savings of $1.67 billion over ten years); Northeast Utilities,
-------------------
Holding Co. Act Release No. 25221 (Dec. 21, 1990) (estimated savings of $837
million over eleven years); Kansas Power and Light Co., Holding Co. Act Release
--------------------------
No. 25465 (Feb. 5, 1992) (expected savings of
68
<PAGE>
Other Benefits. Unicom and PECO believe that the Merger will provide
--------------
substantial strategic and financial benefits to PECO Energy's and Unicom's
shareholders, employees and customers. These benefits are expected to include:
Expanded Generation Capacity. Exelon is expected to have a portfolio of
generation assets with a capacity that will be nearly double that of either
PECO Energy or Unicom alone and that can be deployed to expand its power
marketing business. Unicom and PECO believe the competitive and strategic
value of size and scope will increase future earnings growth rates, creating
value for shareholders. With a focus on nuclear operations excellence, Exelon
will have the nation's largest nuclear generation fleet. Unicom and PECO
expect to achieve synergies in operations and supply management by combining
best practices and operating capabilities. The expansion strategy of Exelon
will be consistent with PECO Energy's disciplined acquisition programs and
will provide a framework for adding value to Unicom's nuclear fleet.
Expanded Marketing and Trading Business. Based on the expanded generation
capacity of Exelon, Unicom and PECO will extend the scale and the scope of the
power marketing and trading business by:
capitalizing on the flexibility and geographic diversity of the
combined portfolio,
broadening the portfolio of customized products offered to customers,
enhancing their position as a preferred counterparty, and
pursuing additional generation development and contract opportunities.
Broadened Distribution Platform. Exelon will have approximately 5 million
electric customers -- among the largest electric utility customer bases in
the nation -- and will use its existing distribution facilities as a
platform for regional consolidation based on:
an unwavering commitment to top-tier reliability and customer
satisfaction,
sharing of best practices and systems while also respecting each
company's commitment to its local community and service territory,
capturing synergies and economies of scale,
growth through market extension and strategic acquisitions, and
the benefits of more diversified economic, weather and market
conditions.
_______________________
(continued...)
$140 million over five years); IE Industries, Holding Co. Act Release No. 25325
-------------
(June 3, 1991) (expected savings of $91 million over ten years); Midwest
-------
Resources, Holding Co. Act Release No. 25159 (Sept. 26, 1990) (estimated savings
---------
of $25 million over five years); CINergy Corp., Holding Co. Act Release No.
-------------
26146 (Oct. 21, 1994) (estimated savings of approximately $1.5 billion over ten
years).
69
<PAGE>
Strategic Fit and Compatibility. PECO Energy, with its generation focus
and substantial number of distribution customers, and Unicom, with its
distribution focus and substantial generation capacity, have
complementary strategies and compatible corporate cultures and visions of
the future of the energy business. The companies have a shared commitment
to supporting and participating in competitive electric markets, are
already competing in deregulated markets in their respective service
territories and are prepared for industry restructuring.
Foundation for Future Growth. The Merger is expected to provide the
critical mass, and the development and operating infrastructure, to
expand the broad and complementary unregulated businesses of PECO Energy
and Unicom, with a focus on EWG development, energy-related
infrastructure services, energy solutions and telecommunications. The
merger is expected to enhance the flexibility of the companies to take
advantage of new opportunities for unregulated businesses, including by:
leveraging of infrastructure services over a broader customer base,
capitalizing on opportunities in the telecommunications business, and,
exploiting cross-selling opportunities in the unregulated energy
solutions business.
Cost Savings. Unicom and PECO believe that the merger will produce cost
savings through the elimination of duplication in corporate and
administrative programs, generation consolidation, greater efficiencies
in the power marketing and trading business, unregulated ventures
integration, improved purchasing power (non-fuel), and the combination of
portions of the two workforces. Unicom and PECO estimate that the
combined company will achieve regulated and unregulated net annual cost
savings of approximately $100 million in the first year following
completion of the merger, increasing to approximately $180 million by the
third year. Approximately 60% of these savings will be attributable to
regulated activities and the remainder to unregulated activities.
Estimated savings include only those cost savings and cost avoidance
items management expects to achieve as a result of the merger.
Nuclear Coordination. The potential benefits associated with the
--------------------
integration of the nuclear operations of ComEd and PECO will be particularly
significant. As the licensed owner and operator of the nuclear power plants
currently owned and operated by ComEd and PECO, Genco will be subject to
pervasive regulatory oversight by the NRC under the Atomic Energy Act of 1954,
as amended, ("AEA") with respect to virtually every aspect of the operation,
maintenance, and eventual decommissioning of these plants. As described in the
license transfer applications submitted to the NRC in connection with the
Merger, the qualifications of Genco to carry out its licensed responsibilities
will meet or exceed the existing qualifications of ComEd and PECO and enhance
the safety of nuclear operations throughout the Exelon system./144/ The
_______________________
/144/ The NRC recently adopted new procedures to streamline its license transfer
proceedings and facilitate the transfer of NRC licenses to technically and
financially qualified licensees as the restructuring of the electric utility
70
<PAGE>
Merger will combine two of the nation's most experienced nuclear management
teams and nuclear operating organizations, currently consisting of over 9,600
personnel responsible for the operation of 14 nuclear plants with a total
generating capacity in excess of about 14,000 MW, with demonstrated experience
in achieving and sustaining safe and reliable nuclear plant operations, into a
single nuclear operating group in Genco.
In accordance with the requirements imposed under the AEA and NRC
regulations, this integrated nuclear group will be led by an experienced and
dedicated nuclear management team that establishes and enforces high standards
and clear accountability, focuses on effective nuclear support, assures the
sharing and implementation of best practices, and effectively exercises
oversight of licensed activities. The Genco nuclear group will function as a
single cohesive entity, with a common vision, a shared mandate for regulatory
compliance and performance excellence, and consistent standards, programs,
practices, and management controls designated to sustain and enhance the safety
of nuclear operations. Additional personnel, resources, and nuclear operating
experience will become available to all of ComEd's and PECO's existing nuclear
plants through the nuclear group.
Finally, the Genco nuclear group will be available to assist in the safe
and efficient operation of the nuclear generating stations owned by AmerGen.
Thus, the establishment of the Genco nuclear group in connection with the
merger will not only improve the efficiency of economy of nuclear power plant
operations throughout the Exelon system, it will also further the public
interest by enhancing the safety of nuclear operations throughout the system.
(c) Section 10(f) -- Compliance with State Law
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
_______________________
(Continued...)
industry unfolds. See Streamlined Hearing Process for NRC Approval of License
------------------------------------------------------------
Transfers, 63 Fed. Reg. 66723 (Dec. 3, 1998). As Commissioner Merrifield of the
---------
NRC observed in a speech several weeks after the merger between Unicom and PECO
was announced: "As I have said on several occasions, I view the consolidation in
the nuclear industry as a tremendous opportunity to further improve the
operational performance and safety of these plants. In most of the transactions,
I expect that the buyers will be large nuclear generating companies that own and
operate a substantial number of nuclear units. These buyers have economies of
scale and resources that are simply not available to companies that own and
operate only one nuclear unit. I am also truly encouraged by the fact that most
of the license transfers will likely involve buyers with excellent performance
records." See Statement of NRC Commissioner Jeffrey S. Merrifield, 27/th/ Water
---
Reactor Safety Information Meeting (Oct. 25, 1999).
71
<PAGE>
As described below under Item 4. "Regulatory Approvals," and as evidenced
by the filings before the Illinois Commission and the Pennsylvania Commission,
ComEd and PECO intend to comply with all applicable State laws related to the
Merger.
C. Intra-system Transactions
The Exelon system companies will engage in a variety of affiliate
transactions for the provision of goods, services, and construction. Certain of
these transactions are elaborated upon below. The provision of goods, services,
and construction by Exelon system companies to other Exelon system companies
will be carried out in accordance with the requirements and provisions of Rules
87, 90, and 91 unless otherwise authorized by the Commission by order or by
rule. With respect to exceptions to the cost rules requested below for an
interim period following the Merger, Exelon commits that not later than 15
months following the date of the Commission's order in this case all
transactions subject to the interim exemption or waiver will be conducted in
accordance with the Commission's pricing standards for affiliate transactions.
1. Exelon Business Services Company.
Rule 88(b) provides that "[a] finding by the Commission that a subsidiary
company of a registered holding company . . . is so organized and conducted, or
to be so conducted, as to meet the requirements of Section 13(b) of the Act with
respect to reasonable assurance of efficient and economical performance of
services or construction or sale of goods for the benefit of associate
companies, at cost fairly and equitably allocated among them (or as permitted by
[Rule] 90), will be made only pursuant to a declaration filed with the
Commission on Form U-13-1, as specified in the instructions for that form, by
such company or the persons proposing to organize it." Notwithstanding the
foregoing language, the Commission in recent cases has made findings under
Section 13(b) based on information set forth in an Application-Declaration on
Form U- 1, without requiring the formal filing of a Form U-13-1./145/ In this
Application-Declaration, Applicant is submitting substantially the application
information as would have been submitted in a Form U-13-1. Accordingly, it is
submitted that it is appropriate to find that Exelon Services will be so
organized and shall be so conducted as to meet the requirements of Section
13(b), and that the filing of a Form U-13-l is unnecessary, or, alternatively,
that this Application-Declaration should be deemed to constitute a filing on
Form U-13-1 for purposes of Rule 88.
Exelon Services/146/ will be the service company subsidiary for the Exelon
system and will provide Exelon, ComEd, PECO, Genco and non-utility subsidiaries
with one or more of the following: administrative, management and support
services, including services relating to
_______________________
/145/ New Century Energies; Ameren; CINergy Corp.; UNITIL Corp., supra.
-------------------- ------ ------------- ------------ -----
/146/ As noted above, Exelon may establish a specialized service company for
Genco operations ("GenServCo"). The GenServCo will pay the salaries of its
employees and be responsible for the administration of all employee benefit
plans. GenCo will reimburse GenServCo for its expenses on a full cost basis in
accordance with the requirements imposed by Section 13 of the Act and the
Commission Rules promulgated thereunder. Exelon will provide information
regarding such a service company by pre-or post-effective amendment hereto which
will include a services agreement in a form that is substantively similar to the
General Services Agreement included as Exhibit B-2 to this Application.
72
<PAGE>
support of electric and gas plant operations (i.e., energy supply management of
the bulk power and natural gas supply, procurement of fuels, coordination of
electric and natural gas distribution systems, maintenance, construction and
engineering work); customer bills, and related matters; materials management;
facilities; real estate; rights of way; human resources; finance; accounting;
internal auditing; information systems; corporate planning and research; public
affairs; corporate communications; legal; environmental matters; executive
services and the other services listed on Schedule 2 to the General Service
Agreement. Exelon Services will have a minimal capitalization -- not more than
1,000 shares with total equity capital of not more than $10,000.
In accordance with the General Service Agreement, services provided by
Exelon Services will be directly assigned, distributed or allocated by activity,
project, program, work order or other appropriate basis. To accomplish this,
employees of Exelon Services will record their labor and expenses to bill the
appropriate subsidiary company. Costs of Exelon Services will be accumulated in
accounts of the service company and be directly assigned, distributed, or
allocated to the appropriate client company in accordance with the guidelines
set forth in the General Services Agreement and the procedures in the
"Procedures Manual" which will be provided to the Staff. There will be an
internal audit group which, among other things, will audit the assignment of
service company charges to client companies. Exelon Services' accounting and
cost allocation methods and procedures are structured so as to comply with the
Commission's standards for service companies in registered holding company
systems.
Exelon Services will be staffed primarily by transferring existing
personnel from the current employee rosters of Unicom, PECO and their
subsidiaries. Exelon Services will have its headquarters in Chicago and will
conduct substantial operations in both Chicago and Philadelphia. Merger
transition teams are presently considering where specific operations of the
combined company will be headquartered.
As compensation for services, the General Service Agreement provides that
"Client Companies listed in Attachment A hereto, as amended from time to time,
shall pay to Service Company [i.e., Exelon Services] all costs which reasonably
can be identified and related to particular services provided by Service Company
for or on Client Company's behalf (except as may otherwise be permitted by the
SEC)."
Companies listed on Attachment A will be ComEd, PECO, Genco and any other
company which is a "public utility company" within the meaning of the Act and
which operates within the United States (the "Operating Companies") as well as
any subsidiary that is involved in directly providing goods, construction or
services to the Operating Companies (together with the Operating Companies, the
"Utility Subsidiaries").
The General Services Agreement also provides that "Client Companies listed
on Attachment B hereto, as amended from time to time, shall pay to Service
Company charges for services that are to be no less than cost (except as may
otherwise be permitted by the SEC), insofar as costs can reasonably be
identified and related by Service Company to its performance of particular
services for or on behalf of Client Company."
The companies listed on Attachment B will be subsidiaries that Exelon is
authorized to hold, other than the Utility Subsidiaries, such as EWGs, FUCOs,
Exempt Telecommunications Companies ("ETCs"), and Energy Related Companies
("ERCs") permitted under Rule 58 or by
73
<PAGE>
Commission order, certain intermediate companies/147/ and other entities which
are not involved in directly providing goods, construction or services to
Utility Subsidiaries (collectively, the "Non-Utility Subsidiaries").
Where more than one company is involved in or has received benefits from a
service performed, the General Service Agreement will provide that the such
costs "shall be fairly and equitably allocated using the ratios set forth" in
the General Service Agreement. Thus, charges for all services provided by Exelon
Services to affiliated utility companies will be as determined under Rules 90
and 91 of the Act. Except for the requested exceptions discussed below, services
provided by Exelon Services to Non-Utility Subsidiaries pursuant to the General
Services Agreement will also be charged as determined under Rules 90 and 91 of
the Act. In the event that any changes to the General Service Agreement or
allocations are needed to more accurately allocate costs to ComEd, PECO, Genco
or other affiliates, Applicant will propose such changes to the Commission as
they become known.
The General Services Agreement provides that no change in the organization
of Exelon Services, the type and character of the companies to be serviced, the
factors for allocating costs to associate companies, or in the broad categories
of services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder, shall be made unless and until Exelon Services
shall first have given the Commission written notice of the proposed change not
less than 60 days prior to the proposed effectiveness of any such change. If,
upon the receipt of any such notice, the Commission shall notify Exelon Services
within the 60-day period that a question exists as to whether the proposed
change is consistent with the provisions of Section 13 of the Act, or of any
rule, regulation or order thereunder, then the proposed change shall not become
effective unless and until Exelon Services shall have filed with the Commission
an appropriate declaration regarding such proposed change and the Commission
shall have permitted such declaration to become effective.
Applicant believes that the General Services Agreement is structured so as
to comply with Section 13 of the Act and the Commission's rules and regulations
thereunder.
2. Services, Goods, and Assets Involving the Utility Operating
Companies
ComEd, PECO and Genco may provide to one another and other associate
companies services incidental to their utility businesses, including but not
limited to, infrastructure services maintenance, storm outage emergency repairs,
and services of personnel with specialized expertise related to the operation of
the utility. These services will be provided in accordance with Rules 87, 90,
and 91. Moreover, in accordance with Rules 87, 90, and 91, certain goods may be
provided through a leasing arrangement or otherwise by one Utility Subsidiary to
one or
_______________________
/147/ In the Investment U-1, Exelon is seeking authority to establish certain
Non-utility subsidiaries that will be authorized to engage in permitted
activities under Rule 58 and otherwise which will include a request that
"intermediate companies" also be allowed for organizational, tax, limitation of
liability, international considerations and other proper business purposes. See,
---
e.g., Interstate Energy Corporation, Holding Company Act Release No. 35-27069
---- -----------------------------
(Aug. 26, 1999); Ameren Corporation, Holding Company Act Release No. 35-27053
------------------
(July 23, 1999); Entergy Corporation, Holding Company Act Release No. 27039
-------------------
(June 22, 1999); New Century Energies, Inc., Holding Company Act Release No. 35-
--------------------------
27000 (Apr. 7, 1999).
74
<PAGE>
more associate companies, and certain assets may be used by one Utility
Subsidiary for the benefit of one or more other associate companies. Because
these services will be provided in accordance with applicable rules, no relief
is sought from the Commission regarding these services.
Although Genco is a "public-utility company," it is not subject to State
rate regulation and will have no "captive" customers. Accordingly, Exelon will
seek exemption or waiver of certain affiliate rules relating to Genco./148/
3. Non-Utility Subsidiary Transactions
The Applicant requests authorization for Exelon Services and the Non-
Utility Subsidiaries to enter into agreements to provide construction, goods or
services to certain associate companies enumerated below at fair market prices
determined without regard to cost and therefore requests an exemption (to the
extent that Rule 90(d) of the Act does not apply/149/) under Section 13(b) from
the cost standards of Rules 90 and 91.
In recent decisions,/150/ the Commission has approved such relief allowing
"at market" pricing for substantially the following transactions, and Exelon
requests similar relief, if the client company is:
1) a FUCO or an EWG that derives no part of its income, directly or
indirectly, from the generation, transmission, or distribution of
electric energy for sale within the United States;
2) an EWG that sells electricity at market-based rates which have been
approved by the FERC or other appropriate State public utility
commission, provided that the purchaser of the EWG's electricity is
not an affiliated public utility or an affiliate that re-sells such
power to an affiliated public utility;
3) a qualifying facility ("QF") under the Public Utility Regulatory
Policies Act of 1978 ("PURPA") that sells electricity exclusively at
rates negotiated at arm's length to one or more industrial or
commercial customers purchasing such
_______________________
/148/ See Item 3.C.4.(g). Sales of electric energy by Genco to ComEd and PECO
are not subject to the Commission's jurisdiction. See Middle South Utilities,
Holding Company Act Release No. 35-23579 (Jan. 23, 1985); Section 2(a)(20) of
the Act.
/149/ Under Rule 90(d)(1), the price of services, construction or goods is not
---
limited to cost if neither the buyer nor the seller of such services,
construction or goods is (i) a public-utility holding company, (ii) an
investment or similar company as defined in the Rule, (iii) a company in the
business of selling goods to associate companies or performing services or
construction (i.e., a "service company") or (iv) any company controlling an
entity described in (i), (ii) or (iii). In general, therefore, goods, services
or construction provided from one Non-utility Subsidiary to other Non-utility
Subsidiaries (other than any service company) are not subject to the cost
restrictions and may be priced at market, which may be above or below cost. A
Non-utility Subsidiary would generally be permitted to make such sales of goods,
services or construction to another Non-utility Subsidiary under Rule 87(b).
/150/ Interstate Energy Corporation, Holding Company Act Release No. 35-27069
-----------------------------
(Aug. 26, 1999); Ameren Corporation, Holding Company Act Release No. 35-27053
------------------
(July 23, 1999); Entergy Corporation, Holding Company Act Release No. 27039
-------------------
(June 22, 1999); Entergy Corporation, Holding Company Act Release No. 27040
-------------------
(June 22, 1999); New Century Energies, Inc., Holding Company Act Release No. 35-
--------------------------
27000 (Apr. 7, 1999).
75
<PAGE>
electricity for their own use and not for resale, or to an electric
utility company other than an affiliated electric utility at the
purchaser's "avoided cost" determined under PURPA;
4) an EWG or a QF that sells electricity at rates based upon its costs of
service, as approved by FERC or any State public utility commission
having jurisdiction, provided that the purchaser of the electricity is
not an affiliated public utility; or
5) an exempt telecommunications company under Section 34 of the Act
("ETC"), an energy related company ("ERC") under Rule 58 or any other
Non-Utility Subsidiary that (a) is partially owned, provided that the
ultimate purchaser of goods or services is not a Utility Subsidiary,
(b) is engaged solely in the business of developing, owning, operating
and/or providing services or goods to Non-Utility Companies described
in (1) through (4) above, or (c) does not derive, directly or
indirectly, any part of its income from sources within the United
States and is not a public-utility company operating within the United
States.
4. Existing Affiliate Arrangements and Requests for Exemption.
(a) ComEd AIA Transactions
ComEd currently provides to or receives services from affiliates in
accordance with an Affiliated Interests Agreement ("AIA") approved by the
Illinois Commission. PECO's form of Mutual Services Agreement under which PECO
will provide and receive services from affiliates has been approved by the
Pennsylvania Commission. These contracts are filed as Exhibits B-3.1 and B-3.2,
respectively.
Under the Illinois AIA, ComEd may provide services to affiliates, and
affiliates may provide services to ComEd, at the "prevailing price," which, as
defined in the AIA, is substantially a market price,/151/ or if there is no
prevailing price, then at fully distributed cost, which is substantially the
same as "cost" as defined under the Act.
Under the AIA ComEd has a contract with Unicom Energy Services ("UES")
under which it acquires services at the prevailing price. Under this contract,
UES provides service to ComEd in connection with a contract that ComEd has with
certain U.S. governmental agencies to provide energy management, demand side
management and energy conservation and efficiency services. These services
include energy audits, feasibility analyses, engineering and design and
implementation. All services required to be provided by ComEd to the
governmental entities are provided to ComEd by UES at a prevailing price. Exelon
will take the position that because ComEd acts solely as a conduit or pass
through and the services provided by UES are for the benefit of the U.S.
government, not ComEd, that these transactions do not constitute the
_______________________
/151/ Under the AIA, "prevailing price" means, for the utility, the tariffed
rate or other pricing mechanism approved by the Illinois Commission, and for
ComEd's Unicom affiliates, the price charged to nonaffiliates if such
transactions with nonaffiliate constitute a substantial portion of the
affiliate's total revenues from such transactions.
76
<PAGE>
type of affiliate transaction that is subject to the provisions of Section 13 of
the Act. The Commission has agreed with this analysis in the past./152/
(b) ComEd "Competitive Services"
Under Illinois law, regulated distribution utilities such as ComEd are
authorized to provide certain competitive services to affiliates and
unaffiliated parties. These services include any service "declared to be
competitive" by the Illinois Commission, "contract service" for the provision of
electric power and energy or other services provided by mutual agreement between
an electric utility and a retail customer, and "services, other than tariffed
services, that are related to but not necessary for, the provision of electric
power and energy or delivery services." ("Competitive Services")./153/ The price
at which Competitive Services may be sold by the utility is not limited to cost.
Competitive Services are accounted for on a so-called "below the line"
basis, that is, the costs associated with such services may not be included in
the utility's calculation of cost for rate making purposes. Any profit or loss
on these activities would be disregarded for utility rate making purposes. In
effect, these activities are conducted as if they were conducted by a separate
nonregulated "subsidiary" except that the corporate entity of the utility
company is the actual party to the transactions. Accordingly, under Illinois law
customers are fully protected from the possibility that an abuse of the
affiliate relationships between or among ComEd and any of the other Exelon
companies could result in excessive charges to ComEd, or be passed on to its
customers.
Applicant requests authorization for ComEd continue to perform under
existing arrangements with affiliates to provide Competitive Services and to
acquire goods or services from affiliates related to Competitive Services at
fair market prices determined without regard to cost and therefore requests an
exemption under Section 13(b) from the cost standards of Rules 90 and 91 as
applicable for a period of not longer than 15 months following the date of the
Commission's order in this case. The existing arrangements subject to this
exemption are described in Exhibit B-3.3.
(c) PECO Government Contracts
PECO and/or its subsidiaries will provide energy services to U.S.
governmental agencies at rates approved by the Pennsylvania Commission in the
same manner as ComEd as described in Item 3.C.4.(a) above.
(d) PECO Sales and Purchases To and From Retail Marketing
Affiliates
Under the proposed Pennsylvania Mutual Service Agreement, most transactions
between affiliates will be made at cost. Through January 1, 2001, PECO's Interim
Code of Conduct
_______________________
/152/ Entergy Arkansas, Inc., File No. 132-3, 1998 SEC No-Act. LEXIS 435 (Mar.
----------------------
26, 1998).
/153/ 220 ILCS 16-102
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<PAGE>
provides additional protection to the regulated utility in transactions
involving non-power goods and services between the regulated electric
distribution company (PECO) and its retail marketing affiliate(s) by requiring
PECO to sell non-power goods and services to its affiliated retail marketing
entities at the greater of cost or market and requiring PECO to purchase non-
power goods and services from those entities at prices no higher than market in
order to prevent anti-competitive cross subsidies. Interim Code of Conduct,
Appendix H of PECO's Pennsylvania Commission approved restructuring settlement
in Docket Nos. R-00973953 and P-00971265. The recently promulgated final state-
wide Code of Conduct applicable to all utilities, 52 Pa. Code 54.121 (effective
July 7, 2000), however, which will apply to PECO effective January 1, 2001, does
not contain any such asymmetrical transfer pricing provision. Rather, any such
transfer will merely be subject to the Pennsylvania Commission's affiliate
transaction requirements, which require the charging of full incremental cost.
Applicant does not believe that there will ordinarily be any conflict
between the Commission's cost rules and the Pennsylvania Commission approved
inter-affiliate cost allocation rules. To address the rare circumstances in
which the Commission's cost rule and the Mutual Services Agreement (reflecting
the terms of PECO's Pennsylvania restructuring settlement) may conflict, PECO
proposes to implement a practice that will mitigate any such conflict. Under the
proposed procedure PECO will only sell non-power goods or services to its retail
marketing affiliate when its cost is substantially equal to the market price for
the services or goods in question./154/ PECO will only purchase non-power goods
and services from its retail marketing affiliate when the at-cost price offered
by that affiliate is at or below the market price for the same goods or
services. The proposed procedure will protect customers who receive service from
PECO's regulated entity from any potential for abuse of the affiliate
relationship and ensure that regulated services are not used to subsidize
competitive activities. PECO requests an exemption under Section 13(b) from the
cost standards of Rules 90 and 91 as applicable for transactions pursuant to the
Code of Conduct for a period of not longer than 15 months following the date of
the Commission's order in this case. The existing arrangements subject to this
exemption are described in Exhibit B-3.3.
(e) Exelon Infrastructure Services; Unicom Mechanical Services
(i) Description of Exelon Infrastructure Services.
PECO is engaged in the Electric Infrastructure Business through its current
subsidiary, Exelon Infrastructure Services, Inc ("EIS") and its subsidiaries.
Exelon plans to expand this utility related business through additional
acquisitions. This business consists of two major groups: Construction
Maintenance Operations Group and Program Management and Sales Group. The
Construction Maintenance Operations Group will include most of EIS's field
operations and will be functionally aligned around the skills and resources
required to perform particular kinds of work. EIS is putting in place
centralized systems for the management of construction and maintenance work on a
nationwide basis so that EIS can quickly set up a new project site, hire workers
and manage assets efficiently.
_______________________
/154/ If the utility's cost is below market, it would not be permitted to sell
at cost under Pennsylvania rules, but would be prohibited from selling at market
by the Commission's rules.
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<PAGE>
The Construction and Maintenance Operations Group consists of four field
operations groups and a shared services organization. (1) Underground
Construction and Maintenance. This group's capabilities are focused on
installing and maintaining underground communications and energy networks. The
group enables EIS to build and maintain underground distributed infrastructures
throughout the United States for gas, communications and electric utilities. (2)
High Voltage Transmission and Distribution Construction and Maintenance. This
group's expertise is focused on installing and maintaining high voltage
transmission and distribution lines, substations and towers for electric and
telecommunications companies. (3) On-site Construction, Maintenance and Service.
This group will provide construction and ongoing maintenance services to
industrial and municipal owners of complex electric and communications
infrastructures on a nationwide basis. The group will provide inside plant
electric and communications construction and maintenance services to a variety
of local, regional and national customers. (4) High Volume Network Interfaces.
This group will manage large volumes of technical service and repair work for
communications and energy utilities. The group will have a staff of technicians,
repairmen and installers who service telephones, meters, power supplies, cable
boxes and other low voltage interface devices.
Shared Operational Services. In addition to the four operations
groups, EIS has also created the Operational Shared Services Group to take
advantages of opportunities of scale and to share best practices. This group
will handle fleet management, safety management, tools procurement and craft
training.
Program Management and Sales. The Program Management and Sales Group
will include most of EIS's project management, engineering and sales resources.
This group will be responsible for developing the processes and skills required
to sell and manage turnkey projects and outsourcing services for energy
utilities, communications companies and large commercial and industrial owners
of infrastructure. The group will consist of three principal divisions,
engineering, program management and sales. EIS's infrastructure outsourcing
business will also be included in this group. (1) Engineering. EIS will provide
a variety of engineering and design services for energy and communications
infrastructure owners. The primary focus of the engineering group will be to
support the Construction and Operations Group and the Program Management Group
in designing and building turnkey projects. Individual engineering services will
be offered on an as-needed basis. (2) Program Management. This group is
implementing project and program management processes and procedures that will
be used to manage large-scale turnkey projects and other services provided by
EIS (3) Sales. EIS will focus its sales activities to serve the needs of
communications companies, electric utilities and large commercial and industrial
infrastructure owners. (4) Infrastructure Outsourcing. This group provides new
residential design and construction services on an outsourced basis, permitting
a single point of contact for the design and construction of all utility
infrastructures (including gas, electric, cable and telephone). The group also
provides infrastructure services in connection with outdoor lighting.
(ii) Description of Mechanical Services
Unicom Mechanical Services ("Mechanical Services") business includes the
installation, operation and maintenance of space conditioning equipment,
building automation and temperature controls, installation and maintenance of
refrigeration systems, building
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<PAGE>
infrastructure wiring supporting data and controls networks, environmental
monitoring and control, ventilation system calibration and maintenance, piping
and fire protection systems, and installation and maintenance of emergency power
generation systems. A breakdown of each category includes the following primary
equipment and/or services: (1) Space Conditioning. Boilers, electric drive and
absorption chillers, roof top packaged units, furnaces, steam, and hot and
chilled water distribution servicing, installation, and maintenance of the above
equipment. (2) Building Automation and Temperature Controls. Installation and
maintenance of temperature monitoring and control systems, security systems,
automatic scheduling of environmental systems, equipment status. (3)
Refrigeration systems. Installation and maintenance of process cooling systems
for food preparation and storage, refrigeration applications requiring heat
rejection within specifications. (4) Infrastructure Wiring for Data Networks.
Infrastructure of cable and data ports and servers to provide LAN connectivity
for building automation and controls systems or other devices. (5) Environmental
Monitoring and Controls/Ventilation Systems. Air handling system balancing and
controls, monitoring of air change rates and control of outside air intake,
indoor air quality monitoring and filtration systems, special cooling and
environmental controls for data centers. (6) Piping and Fire Protection Systems.
Installation of water piping and associated pumps for water distribution (either
for space conditioning or fire protection systems), installation of storage
tanks, sprinkler systems and controls for fire protection. (7) Emergency Power
Generation Systems. Installation and maintenance of emergency back-up generation
for critical power applications such as fire protection, elevators, security
systems, exit and hall way lighting, and pumps and other forms of distributed
generation such as microturbines.
(iii) Requested Exemption from Cost Standard
The services provided by EIS and the mechanical services businesses are the
type commonly "outsourced" by regulated utilities. In fact, the EIS business has
grown through acquisition of existing contractors who provide service to a
number of utilities. Existing subsidiaries of EIS provided services to PECO
prior to becoming affiliated with PECO. Exelon expects that future subsidiaries
of EIS and/or Mechanical Services will be providing services to PECO and/or
ComEd at the time they become affiliated with the Exelon group. The Utility
Subsidiaries will continue to outsource some or all of their needs for work of
the type done by EIS and Mechanical Services. The Utility Subsidiaries use (or
in the case of Genco, will use) a process which ensures that contracts are let
at a competitive price. In some cases formal competitive bids are sought; in
other cases a more informal check of the market is conducted.
The Utility Subsidiaries would like to allow EIS and Mechanical Services to
compete for this business on an equal footing with non-affiliated contractors.
Exelon estimates that in the first full year following the Merger EIS and
Mechanical Services could provide up to approximately 6 % and 2 % of their total
sales, respectively, to the Utility Subsidiaries./155/ The amount of such
services purchased from EIS and Mechanical Services would likely be about
constitute a minor portion of the Utility Subsidiaries' construction budgets for
that period.
_______________________
/155/ The percentage of EIS's total business represented by sales to the Utility
Subsidiaries is expected to decline as the EIS business grows through
acquisitions.
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<PAGE>
Pricing of services to ComEd at "market" prices will be permitted by the
Illinois Commission. ComEd's existing AIA allows affiliates to sell goods and
services to ComEd at "prevailing prices" -- i.e., the price at which such
affiliate makes a substantial number of sales to the general public. Under the
Pennsylvania Public Utilities Code/156/, any services provided to or from an
affiliate of a Pennsylvania public utility must be provided at a reasonable
price. In PECO's recent merger and restructuring filing with the Pennsylvania
Commission, in which it sought approval for affiliate contracts, PECO requested
a determination that pricing for affiliate services will be considered
reasonable if those services are provided at no more than cost, or on such other
pricing treatment as may be directed or permitted by an appropriate regulatory
authority. The costs of services provided to any associate company by EIS or
Mechanical Services (and their subsidiaries) will in all cases be comparable to
the costs charged to unaffiliated third parties.
Exelon requests a determination that EIS and Mechanical Services may engage
in the business described above with ComEd, PECO and Genco pursuant to Rule
87(a)(3) or otherwise. In addition, Exelon requests an exemption under Section
13(b) of the Act from the cost standards of Rules 90 and 91 for EIS and
Mechanical Services to provide services to the Utility Subsidiaries at market
prices for a period of not longer than 15 months following the date of the
Commission's order in this case. The existing arrangements subject to this
exemption are described in Exhibit B-3.3. Exelon and EIS will take all steps
necessary to develop accounting methods and other safeguards sufficient to
ensure that at the end of such 15 month period, to the extent EIS continues to
do business with Exelon's utility affiliates that only those costs properly
chargeable to those services are included in billings to the utility affiliates.
In particular, Exelon will provide that any cost of capital included in "cost"
as permitted under Rules 90 and 91 will comply with Commission guidelines.
(f) Public Interest
The Illinois Commission has found, and the Pennsylvania Commission is
expected to find in connection with its review of the Merger, that the AIA and
the Mutual Services Agreement are reasonable and are in the public interest. The
Commission's principal concern under Section 13 of the Act is to protect utility
companies in a holding company system from abusive cross-subsidization
transactions between associate companies. Since Applicant and its affiliates
will not be able to engage in transactions under State law until the Illinois
Commission or the Pennsylvania Commission will have found that all the
aforementioned contracts are reasonable and are in the public interest, cross-
subsidization issues will not arise under these agreements, and each should be
permitted to continue./157/ Applicant emphasizes that the bundled
________________________
/156/ Pa. C.S. Title 66.
/157/ The Commission is authorized to grant exemptions or waiver of the at cost
rules that involve special or unusual circumstances or are not in the ordinary
course of business." Section 13(b)(2) of the Act. See Dominion Resources, Inc.,
----------------------------
Holding Company Act Release No. 35-27113 (Dec. 15, 1999) See also, In Entergy
-------- ----------
Corporation, Holding Co. Release No. 27040 (June 22, 1999) the Commission
-----------
addressed its flexibility in administering Section 13 in the context of
Entergy's Settlement Agreement with several regulators. The Commission allowed
Entergy's regulated utilities to provide services to non-utility businesses at
cost of service plus five percent. In reaching its decision, the Commission
recognized that the Act's statutory provisions afforded the Commission the
"necessary flexibility to deal with changing circumstances." The Commission has
used this flexibility several times. See, e.g., New England
--- ---- -----------
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<PAGE>
rate distribution customers of ComEd and PECO are protected from increases in
rates for proscribed periods because of the rate cap or rate freeze in effect in
those States as described elsewhere in this Application-Declaration./158/
(g) Goods and Services to and from Genco at Cost
Genco will be the owner and operator of all the generating stations of
Exelon. As owner of Exelon's generating assets, Genco will coordinate the
dispatch and sale of Exelon's generation with its purchase of off-system
resources. In addition, Genco or its Subsidiaries will hold Exelon's interest in
other entities that own and operate generation assets and support the operation
of these assets, including the EWG assets of AmerGen and future acquisitions. A
significant portion of this portfolio of generating assets are nuclear fueled.
While Genco will be a "public-utility company" within the meaning of the Act, it
is not subject to State rate regulation and will not have any captive customers
-- its sales will be in competitive markets and at wholesale.
For the nuclear plants owned by Genco or its subsidiaries, the coordinated
operation of multiple plants within a larger nuclear organization, rather than
as stand-alone plants, offers the potential for greater operational efficiencies
and economies of scale. The sharing of best management, safety, maintenance, and
operating practices within such an organization, coupled with a diversity of
reactor designs and plant locations, also reduces the risk and potential impact
of prolonged outages due to technical problems or local regulatory concerns.
One area of particular concern to the Nuclear Regulatory Commission in its
regulation of nuclear generating plants is the identity and capabilities of the
individuals who will be responsible for nuclear operations and safety. The NRC
has found that a key factor in its determination that AmerGen has the technical
qualifications to own nuclear plants is the managerial and technical support
that PECO currently provides to AmerGen and the sharing of talent and expertise
between AmerGen and PECO./159/ These nuclear support functions will be
transferred to Genco and, in approving the license transfers associated with the
Merger, the NRC will rely upon the continuation of these support services from
Genco to, and the sharing of talent and expertise between, AmerGen and Genco.
________________________
(continued...)
Electric System, Holding Co. Release No. 22309 (Dec. 9, 1981) (authorizing the
---------------
price or charter rental of a good or service to be 90% of a market rate);
Blackhawk Coal Co., Holding Co. Release. 23834 (Sept. 20, 1985) (authorizing
------------------
market-based cap on prices paid for coal purchased from coal mining affiliate);
Columbus Southern Power Co., Holding Co. Release No. 25326 (June 5, 1991)
---------------------------
(authorizing sale of spare at replacement cost); EUA Cogenex Corp., Holding Co.
-----------------
Release No. 26373 (Sept. 14,(authorizing sale goods or services at prices not to
exceed market prices ); and EUA Cogenex Corp., Holding Co. Release No. 26469
-----------------
(Feb. 6, 1996) provision of goods or services at prices not to exceed market
prices).
/158/ See Item 3.C.3.
/159/ See In re GPU Nuclear, Inc. (Three Mile Island Unit No. 1), Order
-----------------------
Approving Transfer of License and Conforming Amendment, Docket No. 50-289 (April
12, 1999); 64 Fed. Reg. 19,202.
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Consequently, Genco has important reasons to seek to share services with
AmerGen and future EWGs of Exelon. These services may include such services as
engineering and technical support and functions, nuclear fuel procurement and
engineering, information systems, licensing, emergency planning, maintenance,
quality assurance, management services and support, offsite safety review, and
other services beneficial to the efficient operation of Genco and AmerGen
generation facilities. These services would involve a substantial number of
employees and other resources but will result in the most efficient operation of
the Exelon generation function.
Exelon seeks approval pursuant to Rule 87(a)(3) or otherwise for Genco and
AmerGen and any future Subsidiary of Genco to provide such services, at cost as
defined in Rules 90 and 91, to each other as required for the efficient
operation of the generating facilities in the Exelon system.
Genco expects to render to and receive from ComEd and PECO services
pertaining to the interface between the generation function conducted by Genco
and the transmission and distribution functions provided by ComEd and PECO.
These services would be limited to those necessary for the efficient operation
of the facilities located at the generating station sites where generating
facilities are connected to transmission and distribution facilities --primarily
switchyard facilities. In some cases it may be more efficient for Genco
employees to conduct maintenance and perform other services on facilities
located at the switchyard but which are owned by ComEd or PECO. In other cases,
it will be more efficient for ComEd or PECO employees to provide these services.
Examples of these services would be preventative, corrective and predictive
maintenance services for high voltage electrical equipment from generator output
to the point of distribution system interconnection; calibration and repair of
station auxiliary power and generation meters; operation of Richmond Frequency
Converters; maintain switch house buildings and equipment; environmental
cleanup; supply functions; and similar services.
Exelon seeks approval pursuant to Rules 85(a), 87(a)(3) or otherwise for
Genco and ComEd and PECO to provide such services to each other, at cost as
defined in Rules 90 and 91, as required for the efficient operation of the
facilities in the Exelon system.
Finally, ComEd and PECO expect to obtain supply planning services and also
to use Genco to assist ComEd and PECO in obtaining energy supply resources from
unaffiliated sellers in each case related to the utility's unbundled retail
sales and/or wholesale sales to the extent energy supply is not provided by
Genco.
Exelon seeks authority for ComEd and PECO and Genco to provide these
services to each other, at cost as defined in Rules 90 and 91, as necessary or
desirable in the normal operation of their businesses.
5. Phase-In of Compliance with Service Company Requirements.
Exelon expects Exelon Services to be operational on the date the Merger is
effective or within 30 days thereafter. However, Exelon seeks authority to
delay, for a period not longer than 12 months following the effective date of
the Merger, the full implementation of all expected services to be provided by
Exelon Services and/or full implementation of required accounting
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systems and cost allocation methodologies. Such delay would be to accommodate
the need to develop systems to fully implement the desired accounting
requirements or for other reasons making full implementation more costly or
complex than if a short delay were allowed./162/
D. Approval for Restructurings -- Interim Operations
Exelon expects all approvals as well as Internal Revenue Service rulings as
to the tax free nature of the spin-off of the generation businesses of Unicom
and PECO to be in place shortly after completion of the Merger (i.e., by year-
end 2000). In the event there is a lag of a few months between closing of the
Merger and completion of the Genco Restructuring, Exelon would operate during
the interim period as follows:
1. Power marketing activities. During the interim period, ComEd and PECO
plan to begin integrating the management of their generation portfolio and power
marketing operations. They will thus act in concert to market the output of
their generation, to supply their loads, and to buy and sell generation of third
parties. This will at a minimum involve sharing market information between ComEd
and PECO and joint management and consultation with respect to what will be
temporarily a "virtual" combined portfolio. It may also involve what could be
characterized as brokering services. For example, Power Team -- the marketing
arm of PECO which will become part of Genco -- may buy and sell power on behalf
of ComEd, and ComEd's counterpart to Power Team - the Wholesale Energy Group -
may do so on behalf of Power Team. Power Team may also administer certain power
purchase agreements ComEd has to acquire power from the generating units it has
recently sold to third parties.
2. Management. Senior management of both ComEd and PECO plan to integrate
management of nuclear generation. This will include the Chief Nuclear Officer
and his senior management team managing the operations of both ComEd and PECO
nuclear generation, as well as AmerGen generation.
3. Services of employees. Employees of both ComEd and PECO will provide
services to affiliates. This includes the following:
. ComEd generation employees working on PECO generation matters, and PECO
generation employees working on ComEd generation matters.
. Employees of ComEd and PECO providing services to affiliates as
employees of ComEd and PECO for all or a portion of the interim period.
4. Common procurement. Exelon plans to integrate generation procurement
such that a single contract with a vendor can be utilized by ComEd and PECO
prior to the restructuring and by Genco after the restructuring.
_____________________
/162/ The Commission has allowed limited phase-in of the affiliate requirements
for companies who are becoming subject to the Act for the first time as a result
of a merger. See Dominion Resources, Inc., Holding Company Act Release No. 27113
------------------------
(December 15, 1999).
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5. Transfer of Goods. There may be transfers of goods and equipment between
ComEd and PECO relating to generation activities during the interim period. All
equipment related to generation will be transferred to Genco when the
Restructuring is consummated.
6. Unicom Energy. Power Team may sell power to Unicom Energy -- a retail
energy provider -- during the interim period.
7. Other activities. Exelon will take other reasonable steps to achieve
full functional integration of generation operations of ComEd and PECO during
the interim period. Legal structure alignment of the integration of those
operations will occur when the assets are transferred to Genco and when the
Restructurings are completed.
Exelon seeks approval to transfer the utility assets of ComEd and PECO
through the creation of subsidiaries, statutory divisions, mergers or other
procedures, making of dividends, direct transfer or otherwise so as to achieve
the corporate structure described herein. Finally, Exelon seeks approval to
engage in necessary intra-system transactions designed to achieve the benefits
of the final corporate structure as describe herein pending the completion of
the Restructurings such as agreements between ComEd and PECO to facilitate
common control of generation and marketing of electricity.
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that Applicant
expects to obtain in connection with the Merger. It is a condition to the
consummation of the Merger that final orders relating to the Merger be obtained
from the Commission under the Act and from the various Federal and State
commissions described below and that those orders not impose terms or conditions
which, individually or in the aggregate, could reasonably be expected to have a
material adverse affect on Exelon and its prospective subsidiaries taken as a
whole or which would be materially inconsistent with the agreements of the
parties to the Merger Agreement.
A. Antitrust
The HSR Act and the rules and regulations thereunder prohibit certain
transactions (including the Merger) until certain information has been submitted
to the Antitrust Division of the Department of Justice ("DOJ") and Federal Trade
Commission ("FTC") and the specified HSR Act waiting period requirements have
been satisfied. Unicom and PECO submitted the Notification and Report Forms and
all required information to the DOJ and FTC in January 2000. The waiting period
expired in April 2000.
The expiration or earlier termination of the HSR Act waiting period does
not preclude the DOJ or the FTC from challenging the Merger on antitrust
grounds. Applicant believes that the Merger will not violate Federal antitrust
laws.
B. Federal Power Act
Section 203 of the Federal Power Act provides that no public utility shall
sell or otherwise dispose of its jurisdictional facilities or directly or
indirectly merge or consolidate such facilities with those of any other person
or acquire any security of any other public utility,
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<PAGE>
without first having obtained authorization from FERC. Under Section 203 of the
Federal Power Act, FERC will approve a merger if it finds that merger
"consistent with the public interest." In reviewing a merger, FERC evaluates
three factors: (i) whether the merger will adversely affect competition, (ii)
whether the merger will adversely affect cost based power or transmission rates,
and (iii) whether the merger will impair the effectiveness of regulation. On
November 22, 1999, ComEd and PECO filed a combined application with FERC
requesting FERC to approve the Merger under Section 203 of the Federal Power
Act.
On April 12, 2000, FERC entered its order approving the proposed
transactions without imposing any conditions on the Merger. The FERC order is
filed as Exhibit D-1.3.
On December 16 and December 22, 1999, PECO and ComEd, respectively, filed
separate applications with FERC requesting FERC to authorize the transfer of
jurisdictional assets associated with the companies' Restructurings. The
Restructurings include plans to establish Genco and to separate generation and
marketing from transmission and distribution businesses. FERC was informed that
the transfers are expected to occur about the time the Merger becomes effective.
On March 17, 2000 and April 12, 2000 FERC entered orders approving the requested
transfers. On May 31, 2000, ComEd filed a second application with FERC
requesting FERC to authorize the transfer of additional jurisdictional assets
associated with the Restructurings. On July 24, 2000 PECO, ComEd, and their
public utility affiliates filed an application with FERC requesting
authorization for Genco to engage in wholesale power sales at market-based
rates, confirmation of market-based rate authority for the existing Exelon
public utility subsidiaries, waiver of FERC inter-affiliate power sales
transaction pricing rules and code of conduct rules, and acceptance of certain
tariffs and rate schedules. On July 24, 2000, PECO and ComEd filed an
application with FERC requesting authorization to implement the revised holding
company structure described herein.
C. Atomic Energy Act
ComEd, PECO and AmerGen hold NRC operating licenses in connection with
their ownership and/or operation of various nuclear generating facilities. The
operating licenses authorize the holder to own and operate the facilities. The
AEA provides that a license or any rights thereunder may not be transferred or
in any manner disposed of, directly or indirectly, to any person through
transfer of control unless the NRC finds that such transfer is in accordance
with the AEA and consents to the transfer. Pursuant to the AEA, ComEd and PECO
filed applications with the NRC seeking approval of the license transfer
associated with the Merger and the Restructuring. AmerGen has also applied for
NRC approval in connection with the transfer of PECO's interest in AmerGen to
Genco.
On August 3, 2000, the NRC issued orders approving the proposed transfer of
ComEd and PECO licenses to GenCo. These NRC orders are filed as Exhibit D-4.2.
The NRC approval of the indirect transfer of the licenses held by AmerGen and
for the period of interim operation of the plants prior to completion of the
Restructurings are expected in the near future.
D. State Public Utility Regulation
ComEd is currently subject to the jurisdiction of the Illinois Commission.
PECO is subject to the jurisdiction of the Pennsylvania Commission. Genco,
although a "public-utility
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<PAGE>
company" under the Act will not be a public utility subject to jurisdiction by
either the Illinois Commission or the Pennsylvania Commission. PECO has filed an
application for approval of the Merger and related matters with the Pennsylvania
Commission. ComEd made its required notice filing with the Illinois Commission
outlining the terms of the Merger on November 22, 1999.
Further filings have been or will be made with the Illinois Commission and
the Pennsylvania Commission regarding the Restructurings.
E. Other
ComEd and PECO possess municipal franchises and environmental permits and
licenses (including licenses from the FCC) that they may need to assign or
replace as a result of the Merger. ComEd and PECO do not anticipate any
difficulties obtaining such assignments, renewals and replacements. Except as
set forth above, no other State or local regulatory body or agency and no other
Federal commission or agency has jurisdiction over the transactions proposed
herein.
Finally, pursuant to Rule 24 under the Act, the Applicant represents that
the transactions proposed in this filing shall be carried out in accordance with
the terms and conditions of, and for the purposes stated in, the declaration-
application no later than August 1, 2000.
Item 5. Procedure
The Commission is respectfully requested to publish, not later than August
18, 2000, the requisite notice under Rule 23 with respect to the filing of this
Application-Declaration, such notice to specify a date not later than September
12, 2000, by which comments must have been entered and a date on or after
September 12, 2000, as the date when an order of the Commission granting and
permitting this Application-Declaration to become effective may be entered by
the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the Merger.
The SEC Staff may assist in the preparation of the Commission's decision. There
should be no waiting period between the issuance of the Commission's order and
the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
A. Exhibits
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
----------------------------------------------------------------------------
<S> <C> <C>
A-1 Restated Articles of Incorporation Incorporated by reference
of Exelon to S-4 Registration
Statement, Exhibit C-1
----------------------------------------------------------------------------
</TABLE>
87
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<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
-----------------------------------------------------------------------------------------
<S> <C> <C>
A-2 Restated Articles of Incorporation of Incorporated by reference;
ComEd effective February 20, 1985, File No. 1-1839, Unicom
including Statements of resolution Form 10-K for the year
Establishing Series, relating to the ended December 31, 1994,
establishment of three new series of Exhibit (3)-2.
ComEd preference stock known as the
"$9.00 Cumulative Preference Stock,"
the "$6.875 Cumulative Preference
Stock" and the "$2.425 Cumulative
Preference Stock."
------------------------------------------------------------------------------------------
A-3 Restated Articles of Incorporation of Incorporated by reference; File
PECO No. 1-1401, PECO 1993 Form 10-K,
Exhibit 3-1
------------------------------------------------------------------------------------------
B-1 Amended and Restated Agreement and Incorporated by reference; Annex
Plan of Exchange and Merger (Merger 1 to Exhibit C-1
Agreement)
------------------------------------------------------------------------------------------
B-2 Form of General Services Agreement Filed March 16, 2000
------------------------------------------------------------------------------------------
B-3.1 Affiliated Interest Agreement approved Filed herewith
by Illinois Commission.
------------------------------------------------------------------------------------------
B-3.2 Mutual Services Agreement approved by Filed herewith
Pennsylvania Commission
------------------------------------------------------------------------------------------
B-3.3 Description of existing agreements Filed by amendment
under State approved affiliated
interest requirements
------------------------------------------------------------------------------------------
C-1 Registration Statement of Exelon on Incorporated by reference;
Form S-4 Registration Statement No.
333-37082.
------------------------------------------------------------------------------------------
C-2 Joint Proxy Statement and Prospectus Incorporated by reference;
of Unicom and PECO included in Exhibit C-1
------------------------------------------------------------------------------------------
D-1.1 Joint Application of ComEd and PECO to Filed March 16, 2000
FERC re Merger (excluding exhibits
and testimony which Applicant will
supply upon request of the Commission)
------------------------------------------------------------------------------------------
D-1.2 Direct Testimony of Dr. William H. Filed March 16, 2000
Heironymous (Exhibit No. APP-300
to FERC Joint Application).
------------------------------------------------------------------------------------------
D-1.3 Order of FERC approving the Merger Filed June 16, 2000
------------------------------------------------------------------------------------------
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
-------------------------------------------------------------------------------------------
<S> <C> <C>
D-1.4 Application of ComEd to FERC for Filed March 16, 2000
Authority to Transfer Jurisdictional
Assets ("Restructuring Filing")
(excluding exhibits and testimony
which Applicant will supply upon
request of the Commission)
-------------------------------------------------------------------------------------------
D-1.5 Application of PECO to FERC for Filed March 16, 2000
Authority to Transfer
Jurisdictional Assets ("Restructuring
Filing") (excluding exhibits and
testimony which Applicant will supply
upon request of the Commission)
-------------------------------------------------------------------------------------------
D-2.1 Application of PECO before the Filed March 16, 2000
Pennsylvania Commission regarding
the Merger (excluding exhibits and
testimony which Applicant will supply
upon request of the Commission)
-------------------------------------------------------------------------------------------
D-2.2 Order of the Pennsylvania Commission Filed herewith
approving the Merger
-------------------------------------------------------------------------------------------
D-2.3 Application of PECO before Pennsylvania Filed March 16, 2000
Commission regarding Restructuring
(excluding exhibits and testimony
which Applicant will supply
upon request of the Commission)
-------------------------------------------------------------------------------------------
D-2.4 Joint Petition for Settlement Filed herewith
before Pennsylvania Commission
-------------------------------------------------------------------------------------------
D-3.1 Notice of ComEd to the Illinois Filed March 16, 2000
Commission regarding the Merger
(excluding exhibits and attachments
which Applicant will supply upon
request of the Commission)
-------------------------------------------------------------------------------------------
D-3.2 Application of ComEd to the Illinois Filed March 16, 2000
Commission regarding Restructuring
(excluding exhibits and testimony
which Applicant will supply upon
request of the Commission)
-------------------------------------------------------------------------------------------
D-4.1 Applications of PECO, ComEd and Filed March 16, 2000 and
AmerGen to the NRC regarding supplemental filings filed
transfer of nuclear generating herewith.
operating licenses
-------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
--------------------------------------------------------------------------------------------
<S> <C> <C>
D-4.2 Orders of the NRC finding that the Filed herewith
transfer of the ComEd and PECO
operating licenses in connection
with the Merger and Restructurings
is in compliance with The Atomic
Energy Act and consenting to such
transfers
--------------------------------------------------------------------------------------------
E-1 Maps of service area and transmission Filed in paper under Form SE
system of ComEd
--------------------------------------------------------------------------------------------
E-2 Maps electric and gas service areas Filed in paper under Form SE
and transmission system of PECO
--------------------------------------------------------------------------------------------
E-3 Unicom corporate chart Filed in paper under Form SE
--------------------------------------------------------------------------------------------
E-4 PECO corporate chart Filed in paper under Form SE
--------------------------------------------------------------------------------------------
E-5 Exelon corporate chart Filed in paper under Form SE
--------------------------------------------------------------------------------------------
F-1 Preliminary opinion of counsel to Filed by amendment
Exelon
--------------------------------------------------------------------------------------------
F-2 Past-tense opinion of counsel to Filed by amendment
Exelon
--------------------------------------------------------------------------------------------
G-1 Opinion of Wasserstein Perella & Co. Incorporated by reference; Annex
4 to S-4 Registration Statement,
Exhibit C-1
--------------------------------------------------------------------------------------------
G-2 Opinion of Salomon Smith Barney Inc. Incorporated by reference; Annex
3 to S-4 Registration Statement,
Exhibit C-1
--------------------------------------------------------------------------------------------
G-3 Opinion of Morgan Stanley & Co. Incorporated by reference; Annex
2 to S-4 Registration Statement,
Exhibit C-1
--------------------------------------------------------------------------------------------
H-1 Annual Report of Unicom on Form Incorporated by reference, File
10-K for the year ended December 31, No. 1-11375
1999
--------------------------------------------------------------------------------------------
H-2 Annual Report of PECO on Form 10-K Incorporated by reference,
for the year ended December 31, 1999 No. 1-1401
--------------------------------------------------------------------------------------------
H-3 Quarterly Reports of Unicom on Form Incorporated by reference,
10-Q for the quarters ended March 31, File No. 1-11375
2000 and June 30, 2000
--------------------------------------------------------------------------------------------
H-4 Quarterly Reports of PECO on Form Incorporated by reference,
10-Q for the quarters ended March 31, File No. 1-1401
2000 and June 30, 2000
--------------------------------------------------------------------------------------------
I-1 List and Description of Subsidiaries Filed herewith
and Investments Of Unicom Corporation
(Other than "Public-Utility" Companies)
(updated as of August, 2000)
--------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
-------------------------------------------------------------------------------------------
<S> <C> <C>
I-2 List and Description of Subsidiaries Filed herewith
and Investments Of PECO Energy (Other
than "Public-Utility" Companies)
(updated as of August, 2000)
-------------------------------------------------------------------------------------------
J-l Analysis of the Economic Impact of Filed March 16, 2000
a Divestiture of the Gas Operations
of PECO Energy Company
-------------------------------------------------------------------------------------------
K-1 Analysis of How the Interconnection Filed March 16, 2000
Requirement of PUHCA is Satisfied by
OATTs and OASIS ("Interconnection
Analysis")
-------------------------------------------------------------------------------------------
L-1 Form of Notice of filing Filed by amendment
-------------------------------------------------------------------------------------------
</TABLE>
B. Financial Statements
<TABLE>
-------------------------------------------------------------------------------------------
Statement Description Method of Filing
No.
-------------------------------------------------------------------------------------------
<S> <C> <C>
FS-1 Historical consolidated financial Incorporated by reference to
statements of Unicom Annual Reports on Form 10-K for
the years ended 1999, 1998 and
1997 and Quarterly Reports on
Form 10-Q for the quarters
ended March 31, 2000 and
June 30, 2000
-------------------------------------------------------------------------------------------
FS-2 Historical consolidated financial Incorporated by reference to
statements of PECO Annual Reports on Form 10-K for
the years ended 1999, 1998 and
1997 and Quarterly Reports on
Form 10-Q for the quarters
ended March 31, 2000 and
June 30, 2000
-------------------------------------------------------------------------------------------
FS-3 Unaudited Pro Forma Financial Incorporated by reference; S-4
Statements of Exelon, giving Registration Statement, Exhibit
effect to the Merger C-1
-------------------------------------------------------------------------------------------
</TABLE>
Item 7. Information as to Environmental Effects
The Merger neither involves "major federal actions" nor "significantly
[affects] the quality of the human environment" as those terms are used in
Section (2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4332.
The only Federal actions related to the Merger pertain to the Commission's
declaration of the effectiveness of the Joint Registration Statement, the
approvals and actions described under Item 4 and Commission approval of this
Application-Declaration. Consummation of the Merger will not result in changes
in the operations of Unicom, ComEd or PECO that would have any impact on the
environment. No Federal agency is preparing an environmental impact statement
with respect to this matter.
91
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of 1935,
the undersigned company has duly caused this amendment to Application-
Declaration to be signed on its behalf by the undersigned thereunto duly
authorized.
EXELON CORPORATION
Date: August 21, 2000 BY: /S/ Corbin A. McNeill, Jr.
--------------------------
Name: Corbin A. McNeill, Jr.
Title: Chairman, Chief Executive Officer
and President
92
