<PAGE>
As filed with the Securities and Exchange Commission on June 16, 2000
File No. 1. 070-09645
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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
37th 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
37th 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........................................................................ 7
D. Exelon Services....................................................................................... 12
E. Exelon Ventures, Exelon Enterprises and Exelon Energy Delivery........................................ 12
F. Description of the Merger............................................................................. 13
Item 2. Fees, Commissions and Expenses............................................................................. 14
Item 3. Applicable Statutory Provisions............................................................................ 15
A. Application of the Act in Light of the Evolving "State of the Art" of the
Electric Utility Industry............................................................................. 16
B. Section by Section Analysis........................................................................... 23
1. Section 9(a)(2) -- Acquisition of Utility Stock.................................................. 24
2. Section 10(b) -- Commission to Approve if Three Requirements Met................................. 25
(a) Section 10(b)(1) -- Interlocking Relations/Concentration of Control........................ 25
(b) Section 10(b)(2) -- Merger Consideration and Fees.......................................... 30
(c) Section 10(b)(3) -- Complicated Capital Structure; No Detriment to Protected Interests..... 32
3. Section 10(c) -- Sections 8 and 11; Integration.................................................. 36
(a) Section 10(c)(1) -- Sections 8 and 11...................................................... 36
(i) The Merger will be lawful under Section 8............................................ 36
(ii) The Merger Is Not Detrimental to Carrying Out Provisions of Section 11............... 37
(A) The Utility Systems Created by the Merger...................................... 37
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(B) Statutory Standard -- Integration of
Electric Operations In Today's Environment........................................ 38
(iii) Exelon Will Meet All Four Parts of the
Integration Requirement of the Act...................................................... 39
(A) Interconnection................................................................... 40
(B) The Contract Path................................................................. 45
(C) Coordination...................................................................... 46
(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............ 63
(v) Retention of Other Businesses........................................................... 64
(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................................................................................ 71
1. Exelon Business Services Company.................................................................... 71
2. Services, Goods, and Assets Involving the Utility Operating Companies............................... 74
3. Non-Utility Subsidiary Transactions................................................................. 74
4. Existing and Anticipated Affiliate Arrangements and Requests for Exemption......................... 78
(a) ComEd AIA Transactions........................................................................ 78
(b) ComEd "Competitive Services".................................................................. 79
(c) PECO Government Contracts..................................................................... 80
(d) PECO Sales and Purchases To and From Retail Marketing Affiliates.............................. 80
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(e) Exelon Infrastructure Services; Unicom Mechanical Services................................... 80
(i) Description of Exelon Infrastructure Services.......................................... 80
(ii) Description of Mechanical Services..................................................... 82
(iii) Requested Exemption from Cost Standard................................................. 82
(iv) Alternative Relief for EIS............................................................. 83
(f) Public Interest.............................................................................. 84
(g) Goods and Services to and from Genco......................................................... 85
5. Phase-In of Compliance with Affiliate Requirements................................................. 87
D. Approval for Restructurings -- Interim Operations....................................................... 87
Item 4. Regulatory Approvals......................................................................................... 87
A. Antitrust............................................................................................... 87
B. Federal Power Act....................................................................................... 88
C. Atomic Energy Act....................................................................................... 88
D. State Public Utility Regulation......................................................................... 88
E. Other................................................................................................... 89
Item 5. Procedure.................................................................................................... 89
Item 6. Exhibits and Financial Statements............................................................................ 89
A. Exhibits................................................................................................ 89
B. Financial Statements.................................................................................... 93
Item 7. Information as to Environmental Effects...................................................................... 93
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Executive Summary
This Amendment No. 1 to Application-Declaration amends and restates in
its entirety the Application-Declaration filed March 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. Exelon believes the use of a flexible array
of firm and non-firm transmission reservations available through the OATTs is
sufficient under the Act, and is the best and most economical way, to satisfy
the interconnection requirement necessary to establish integration. 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. Further,
Exelon's distribution areas -- surrounding Chicago, Illinois and Philadelphia,
<PAGE>
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,
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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
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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 positions and create an enhanced platform for growth for
all segments of their businesses. These benefits of the Merger expected to
include:
_______________
/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-1").
<PAGE>
. 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 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, directly or
indirectly, 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 electric or gas facilities
within the meaning of Section 2(a)(3) or 2(a)(4) of the Act. References to Opcos
are therefore deleted in this Amendment No. 1. 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 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.
<PAGE>
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 will be submitted to the shareholders of
PECO and Unicom at meetings to be 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 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.
__________________
/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.
<PAGE>
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/
Maps of the electric service area and transmission system of ComEd are
filed as Exhibit E-1.
_________________
/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.
<PAGE>
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.
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 organized under Unicom Enterprises Inc. or Unicom.
In addition, ComEd has the subsidiaries identified on that Exhibit which relate
to its utility operations.
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./10/
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
_________________
/9/ Commonwealth Edison Co., Holding Co. Act Release No. 35-26090 (July 22,
-----------------------
1994)
/10/ 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).
<PAGE>
were issued and outstanding./11/ 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.
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
_____________________________
/11/ Under the Merger Agreement, Unicom has agreed to repurchase $1.0 billion of
its common stock prior to the merger. At March 31, 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 March 31, 2000 was
177,646,782 shares.
<PAGE>
Pennsylvania and Maryland. These generation facilities have an estimated
aggregate net installed electric generating capacity (summer rating) of 9,262
MW./12/
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./13/ PECO also has an open access
transmission tariff on file with FERC./14/
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. PECO currently has three wholly owned subsidiaries that are public
utility companies within the meaning of the Act: PECO Energy Power Company
("PEPCO"), Susquehanna Power Company ("SPCO") and Susquehanna Electric Company
("SECO"). The Conowingo Project is owned and operated through PEPCO, SPCO and
SECO./15/
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
________________
/12/ 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.
/13/ Pennsylvania-New Jersey-Maryland Interconnection, et al., 81 FERC (P)61,257
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(1997), reh"g pending.
/14/ PECO Energy Co., 74 FERC (P)61,336 (1996).
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/15/ PEPCO, a registered holding company, has one wholly owned subsidiary, SPCO,
a public utility company within the meaning of the Act and an indirect
subsidiary of PECO. PEPCO owns the portion of the Conowingo Project located in
Pennsylvania and SPCO owns the portion located in Maryland. The Conowingo
Project is leased to and operated by SECO, which sells the Project"s output to
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).
<PAGE>
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 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,/16/
PECO markets or brokers electricity to
_______________________
/16/ 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
<PAGE>
retail customers in Massachusetts and New Jersey as well./17/ 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.
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.
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
the Three Mile Island Unit 1 ("TMI-1") in Pennsylvania and Clinton Power Station
in Illinois. AmerGen has also entered into separate Asset Purchase Agreements
with Vermont Yankee Nuclear Power Corporation and GPU Nuclear, Inc. and Jersey
Central Power & Light Company to acquire, respectively, Vermont Yankee/18/ and
Oyster Creek nuclear plants./19/ AmerGen has been granted exempt wholesale
generator ("EWG")
___________________
(continued)
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).
/17/ 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."
/18/ 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.
/19/ 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.
<PAGE>
determinations from the FERC in connection with TMI-1 and Clinton and will apply
for EWG determination with respect to the others./20/ PECO's 50% interest in
AmerGen is authorized by section 32(e) of the Act./21/
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./22/
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./23/ 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./24/
PECO common stock is listed on the NYSE and the Philadelphia Stock
________________________
/20/ Letter Orders, reported at 90 FERC (P)62,061 (2000) and 91 FERC (P)62,049
-------------
(2000).
/21/ Exelon's compliance with Rule 53 is discussed in the Financing U-1.
/22/ 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 expects to
request 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.
/23/ 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).
/24/ 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.
<PAGE>
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.
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 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 an exemption 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. /25/
E. Exelon Ventures, Exelon Enterprises and Exelon Energy Delivery
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
________________________________
/25/ Excelon will a pre-effective amendment to the is 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.
<PAGE>
of the voting interest in Genco./26/ 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./27/
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.
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
____________________________
/26/ It is currently contemplated that Genco will be organized as a limited
liability company as will Enterprises, although Enterprises may be a business
corporation.
/27/ 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
<PAGE>
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. For accounting purposes, the Merger will be
treated as a "purchase" of Unicom by PECO.
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
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 rule may be
Section of the Act applicable:
------------------ -------------------------------------------------
2(a)(7), 2(a)(8) Declaration that Ventures and Exelon Delivery are
not holding companies or subsidiary companies 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.
8, 9(c)(3), 11(b), 21 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 and Exelon Delivery are
not subsidiary companies or holding companies 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.
<PAGE>
Transaction to which section or rule may be
Section of the Act applicable:
------------------ ------------------------------------------------
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.
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 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./28/ 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./29/ Neither the Act nor what it means have
_________________________
/28/ See the definition of "integrated public-utility system" in Section
---
2(a)(29).
/29/ See, e.g., American Electric Power Company, Inc., Holding Co. Act
--- ---- -------------------------------------
Release No. 20633 (July 21, 1978).
<PAGE>
changed, but the means by which utilities can comply with the Act have changed.
The Exelon system presents yet another case of a new way of complying with the
long-standing requirements of the Act. In particular, the manner in which Exelon
proposes to establish that it is "interconnected" and therefore to show that it
meets one of the conditions to the requirement of an "integrated" system,
presents a new idea. As will be shown, the means of interconnection -- through
the use of available open access transmission -- is fully consistent with the
requirements of the Act as demonstrated by recent cases./30/
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."/31/ In recent decisions, the Commission has cited U.S.
Supreme Court and Circuit Court of Appeals cases that recognize that an agency
is not required to "establish rules of conduct to last forever,"/32/ but must
"adapt [its] rules and policies to the demands of changing circumstances"/33/
and to "treat experience not as a jailer but as a teacher."/34/ 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./35/
________________________
/30/ The discussion of the method of establishing "interconnection" sufficient
to meet the integration requirements of the Act is found under Item 3, section
3.(ii) "The Merger is Not Detrimental to Carrying Out the Provisions of Section
11" and Item 3, section 3.(iii)(A) "Exelon Will Meet All Four Parts of the
Integration Requirement -- Interconnection."
/31/ 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).
/32/ 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).
/33/ 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).
/34/ NIPSCO, supra, citing Shawmut Assn. v. SEC at 796-97.
------ ----- ------ --------------------
/35/ l995 Report at 71.
<PAGE>
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.
The Merger is unique in that it is one of the first to take full advantage
of the developing market model of achieving integrated and coordinated
operations. 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 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
<PAGE>
wholesale marketing efforts./36/ 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./37/ Similar
plant additions 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./38/
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
________________________
/36/ 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 14th out of the top 45 wholesale power sellers in 1998.
Power Markets Week, at 16 (June 28, 1999).
------------------
/37/ Current information can be found at http://www.pjm.com/. For reference,
the PJM ISO has a peak load of about 51,000 MW.
/38/ Order No. 2000 at 15.
<PAGE>
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./39/ 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 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 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
__________________________
/39/ RTO NOPR at 33,690.
<PAGE>
"open access" came about in 1996 in FERC's Order No. 888 and its progeny./40/
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,/41/ a companion 1996 ruling, FERC also mandated that
transmission owners establish a comprehensive information system regarding the
availability and price of 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.
As a means of establishing interconnection sufficient to achieve
integration under the Act, these legal and practical circumstances have only
become available in recent years -- in fact only since about 1997./42/ The
Merger of Unicom and PECO is one of the first to take advantage of this
opportunity.
Because of the importance of OATTs and OASIS to Exelon's assertion that
its electric facilities are "interconnected" and, therefore, that it is an
integrated system, 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 will enable Exelon to operate
efficiently, under normal conditions, as a coordinated and integrated
public-utility system. Finally, the Interconnection Analysis includes
------------------------
_______________________
/40/ Promoting Wholesale Competition Through Open Access Non-Discriminatory
Transmission Service by Public Utilities; Recovery of Stranded Costs by Public
Utilities and Transmitting 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").
/41/ 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).
/42/ The requirement to file an OATT was effective in 1996. OASIS went into
operation in 1997.
<PAGE>
a practical guide to moving power describing in detail exactly how the OATT and
OASIS system will work 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.
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, 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. 2000 on December 15, 1999./43/
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.
____________________
/43/ 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.
------------------------
<PAGE>
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."/44/ 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 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 . . . "/45/ 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."/46/ 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. As noted, the one
area where the Merger might be said to present novel facts, is in the method of
establishing "interconnection" sufficient to meet the integration requirements
of the
_____________________
/44/ 1995 Report at 67.
/45/ Section 1(b)(4).
/46/ Union Electric Co., quoted in Southern Co., Holding Company Act Release
------------------ ------------
No. 25639 (Sept. 23, 1992).
<PAGE>
Act. The discussion of this topic is found under section 3.(ii) "The Merger is
Not Detrimental to Carrying Out the Provisions of Section 11" and section
3.(iii)(A) "Exelon Will Meet All Four Parts of the Integration Requirement --
Interconnection," below.
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."/47/ 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./48/ The Merger therefore requires prior 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.
___________________
/47/ 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."
/48/ Upon completion of the Restructurings, the Conowingo Companies will be
subsidiaries of Genco. See Exhibit E-5.
<PAGE>
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 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./49/ 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./50/ 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:
____________________
/49/ 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]").
/50/ 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.
<PAGE>
. 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 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 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 arrange for 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
<PAGE>
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:
(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."/51/ 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
_______________
/51/ Vermont Yankee Nuclear Power Corp., Holding Co. Act Release No. 15958
----------------------------------
(Feb. 6, 1968).
<PAGE>
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 and Prospectus of Unicom and PECO (the
"Joint Proxy Statement") (a copy of which is included as Exhibit C-2), 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 $12.2 billion. As of December 31, 1999, the combined owned
summer generating capacity of the regulated utility operations of ComEd and PECO
totaled approximately 18,000 to 19,000 MW. This figure does not include
generating assets owned by AmerGen.
The following table shows the Exelon Electric System's relative size as
compared to other registered systems in terms of assets, operating revenues and
customers/52/:
<TABLE>
<CAPTION>
Total Assets Operating Revenues Electric Customers
System ($ Millions) ($ Millions) (Thousands)
------ ---------- ------------ -----------
<S> <C> <C> <C>
Southern 36,192 11,403 3,794
Entergy 22,848 11,495 2,495
AEP/53/ 19,483 6,346 3,022
CSW 13,744 5,482 1,752
GPU 16,288 4,249 2,041
Exelon 36,726 12,225 4,737
</TABLE>
________________
/52/ (Feb. 6, 1968). 52 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.
/53/ The proposed merger of American Electric Power and Central and South West
Corporation is pending before the Commission. In Amendment No. 4 to the U-1
filed in connection with the merger American Electric Power indicates that the
combined company would have revenues of $9,834 million, assets of $33,227
million and electric customers of 4.7 million.
<PAGE>
Moreover, the Commission has approved a number of acquisitions involving
similarly-sized operating utilities./54/
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./55/
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 Commission pursuant to the HSR Act
describing 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./56/
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./57/ 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.
________________
/54/ See, e.g., 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).
/55/ These expected economies and efficiencies from the combined utility
operations are described in greater detail in Item 3.B.3(b).
/56/ The waiting period expired in April 2000.
/57/ Commonwealth Edison Co., 91 FERC (P) 61,036 (Apr. 12, 2000)(filed as
----------------------
Exhibit D-1.3 hereto).
<PAGE>
The Commission has found, and the courts have agreed, that it may
watchfully defer to FERC with respect to such matters./58/
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./59/
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./60/
-----------
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 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
______________
/58/ 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).
----------------------------
/59/ 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.
/60/ ComEd may turn over its transmission assets to the control of an ITC which
will operate with MISO oversight.
<PAGE>
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./61/
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./62/ 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.
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./63/
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
/61/ 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).
/62/ See pages 22 through 27 in the Joint Proxy Statement filed as Exhibit C-2
heret o.
/63/ Southern Company, supra; and SV Ventures, Inc., Holding Co. Act Release
---------------- ------ -----------------
No. 24579 (Feb. 12, 1988).
<PAGE>
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 $53 million in connection with their proposed
merger. 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./64/
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% 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(c)
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./65/ Exelon's capital structure
____________________
/64/ 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).
/65/ See, e.g., Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30,
--- ----- ------------------
1997); CINergy Corp; Holding Co. Act Release No. 26934 (Nov. 2, 1998); and
Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986).
-----------------------
<PAGE>
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.66 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.67 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./68/ The only
outstanding class of voting securities of Exelon's direct non-utility
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./69/
Set forth below are summaries of the capital structures of Unicom and
PECO as of March 31, 2000, and the pro forma combined consolidated capital
structure of Exelon (assuming the Merger occurred on March 31, 2000):
___________________________
/66/ 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.
/67/ Exelon will seek the necessary approval for such exchange in the Financing
U-1.
/68/ 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).
/69/ 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.
<PAGE>
Unicom and PECO Historical
Capital Structures
(dollars in millions)
Unicom PECO
------- -------
Common stock equity $ 3,932 $ 1,895
Preferred stock 352 321
Long-term debt 6,965 6,895
Short-term debt/70/ 445 135
------- -------
Total $11,694 $ 9,246
======= =======
Exelon Pro Forma Consolidated
Capital Structure
(dollars in millions)(unaudited)
Common stock equity $ 6,654
Preferred stock 673
Long-term debt 13,860
Short-term debt/70/ 580
-------
Total $21,767
=======
The anticipated consolidated common equity of Exelon when it is formed
in the Merger, is 31% of total capitalization./71/ This is within the range of
the common equity component of capitalization found acceptable by the
Commission./72/
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
______________
/70/ Includes current portion of long-term debt.
/71/ 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 46%.
---------
The anticipated common equity ratio for ComEd, excluding securitization debt is
---------
39% and including securitization debt is 30%, while the anticipated common
equity ratio for PECO, excluding securitization debt is 40% and including
---------
securitization debt is 15%. For a complete discussion of the capitalization of
Exelon, see the Financing U-1.
/72/ 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.
<PAGE>
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.
Alternative structures which would 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 business 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./73/ 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 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
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.
___________________
/73/ 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)
<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."/74/ 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).
_________________
/74/ Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993).
<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./75/ 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, as well as 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.
____________________
/75/ 66 Pa. C.S. (S) 2210 (1999).
<PAGE>
(B) Statutory Standard -- Integration of
Electric Operations In Today's
Environment(B)
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
plants and/or transmission lines and/or distributing
facilities, whose utility assets, whether owned by one
or more electric utility companies, are physically
interconnected or capable of physical interconnection
and which under normal conditions may be economically
operated as a single interconnected and coordinated
system confined in its 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."76 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."77 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.
______________
/76/ 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.
------
/77/ Union Electric, supra.
-------------- -----
<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./78/ Exelon will be
interconnected through the transmission facilities of ComEd and PECO and
extensive interstate open access transmission capacity. Exelon will have
the legal right under the OATTs to move power economically to customers
as needed in
_________________
/78/ 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.
<PAGE>
amounts sufficient to meet its operating needs throughout the Exelon
system. Because of legal and operating changes in transmission made
within the last five years, Exelon will be one of the first public
utility holding company systems to be able to operate in an
interconnected and coordinated manner -- under normal conditions-- by
use of OATTs and OASIS technology and protocols. Exelon believes the
use of a flexible array of firm and non-firm transmission reservations
available through the OATTs is sufficient under the Act, and is the
best and most economical way, to achieve the interconnection necessary
to establish integration. The reservation of a single end-to-end, all
hours firm contract path will not add any significant increased
capacity, availability, flexibility or reliability to Exelon's
interconnections; but will add cost. However, to the extent the
Commission deems it necessary under the Act, Exelon will procure a 100
MW firm transmission path as described herein to be part of its
interconnection resources.
. 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(A)
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./79/ As early as 1978, however, -- well before the
developments creating a
_________________
/79/ 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.,
----- --- ---- ------------------------
<PAGE>
flexible, open access transmission grid -- the Commission considered the effect
of joint participation in a power pool as a basis for a finding of
integration./80/ To date, the Commission has found interconnection through
memberships in "tight" power pools and ISOs./81/ 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."/82/
The 1995 Report further 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./83/ 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."/84/ 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./85/
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
________________
(continued...)
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).
/80/ 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.").
/81/ 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).
/82/ 1995 Report, at 70.
/83/ Id.
--
/84/ Id. at 71.
--
/85/ Id.
--
<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./86/
The Commission in the past has found the interconnection requirement met
where the parties had 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."/87/
ComEd and PECO will be "physically interconnected or capable of physical
interconnection" through the 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. 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
that are required 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 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.
Further, as detailed in the Interconnection Analysis, the legal rights
------------------------
encompassed in Order No. 888 and the open access tariffs of transmission owners
will provide a more comprehensive and reliable method of interconnection than
the single contract path relied upon in prior cases. The transmission capacity
available through open access transmission tariffs is directly analogous to the
rights attendant to participation in a power pool. In fact, the "right to use"
_____________________
/86/ See the 1995 Report at 71.
---
/87/ Centerior, supra (emphasis added). Dicta in a series of Commission
--------- -----
decisions states that contract rights cannot be relied on to integrate two
"distant" systems. See, e.g., WPL Holdings, Inc., Holding Co. Act Release No.
--- ----- -------------------
26856 (April 14, 1998), citing UNITIL Corp., supra; Northeast Utilities, Holding
------ ------------- ----- -------------------
Co. Act Release No. 25273 (March 15, 1991); Centerior Energy Corp., supra. In
----------------------- -----
the Applicant's view, it would be incorrect to interpret these statements to
mean that a firm contract path might not meet the "physical interconnection"
requirement because of its length. In both UNITIL and Northeast Utilities, the
------ -------------------
Commission explained that the reason a contract path might not "integrate" two
distant utilities was due to the "single area or region" requirement of Section
2(a)(29)(A). UNITIL, supra at n.30; Northeast Utilities, supra at n.75. The
------ ----- ------------------- -----
Commission did not hold in any of these cases that the length of a firm contract
path was relevant in determining whether the "physically interconnected or
capable of physical interconnection" requirement of Section 2(a)(29)(A) was met.
Such a holding would be contrary to the literal language of Section 2(a)(29)(A).
<PAGE>
use" transmission afforded by OATTs is equivalent, in all respects essential to
the analysis under the Act, to the rights associated with power pools which the
Commission has often, and recently, relied on for a finding of interconnection
and the ability to operate in a coordinated manner./88/
In 1992, the Commission approved the merger of UNITIL Corporation with
Fitchburg Gas and Electric Light Company based on their common membership in the
New England Power Pool ("NEPOOL"), a regional power pool./89/ UNITIL and
Fitchburg were not connected through transmission lines that they owned. Rather,
as the Commission noted in its order:
Access to and use of the regional transmission network, which
------------------------------------------------------
is owned by the larger New England utilities, is provided by
the NEPOOL Agreement and by transmission rate schedules and
contracts filed with the Federal Energy Regulatory Commission.
In this matter, the Companies are indirectly interconnected
through NEPOOL-designated transmission facilities ("PTF") and
other nonaffiliated transmission facilities pursuant to the
NEPOOL Agreement and other separate agreements with
nonaffiliated companies. The Commission has previously found a
system to be "capable of physical interconnection" on the
basis of contractual rights to use a third-party's
transmission lines.
This matter differs from prior orders in that there will be no
--
particular line through which transfers of power will be made
---------------
among the Companies. Instead, power will be delivered through
----------------------------------------
a nonaffiliated system and a transmission charge will be paid
-------------------------------------------------------------
to the owner of the facilities. On the facts of this matter,
------------------------------
the Commission is satisfied that the Companies" contractual
arrangements for transmission service establish that the
UNITIL electric system will satisfy the physical
interconnection requirement of the Act. (emphasis added)/90/
In 1998, based on UNITIL, the Commission found in Conectiv, Inc.,/91/
------ --------------
that Delmarva Power & Light Company and Atlantic Energy, Inc. met the physical
interconnection
__________________
/88/ E.g., Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25,
---- --------------
1998).
/89/ New England Power Pool, 79 FERC (P) 61,374 (1997); New England Power Pool,
---------------------- ----------------------
83 FERC (P) 61,045 (1998).
/90/ With respect to the "other separate agreements with nonaffiliate
companies" described above, the Commission by footnote explained that Fitchburg
obtained primary transmission service from New England Power Company ("NEPCO")
under the NEPOOL Agreement and through NEPCO"s FERC Tariff Number 3, which
provided for non-firm service. The Commission went on to note that Fitchburg was
eligible to use NEPCO"s FERC Tariff No. 4 should Fitchburg and UNITIL Power
conduct more power sales or swaps. The interconnection found in these cases was
therefore effected pursuant to FERC filed tariffs. Similarly, the FERC filed
OATTs constitute tariffs pursuant to which Exelon will "have the right" to use
intervening transmission facilities to conduct its coordinated operations.
/91/ Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998).
--------------
<PAGE>
requirements of Section 2(a)(29)(A) through their common membership in PJM./92/
The Commission noted that Delmarva and Atlantic were not physically
interconnected, but:
are interconnected through their undivided ownership interest
in, and/or rights to use, the same regional generation
-------------
facilities and extra-high voltage transmission facilities, as
well as through their contractual rights to use the
-------------
transmission facilities of other members of the PJM regional
power pool. (emphasis added)/93/
The language from UNITIL and Conectiv quoted above also describes the
------ --------
arrangement which Exelon proposes. All of the essential elements necessary for
the Commission's findings in those cases are present in this case:
. Exelon will use the tariffed transmission service available from
others.
. Exelon will use "no particular line" but will be able to transmit
power, for a tariffed charge, over the facilities of an
unaffiliated person (or persons).
. Through the tariff, which each transmission owner must file with
FERC, Exelon will have a legal right to obtain this service./94/
-----------
Thus, under the clear precedent of UNITIL and Conectiv, the systems of
------ --------
ComEd and PECO will be "interconnected" within the meaning of the Act.
Applicant believes that relying on numerous transmission service
reservations is a better, more flexible and more economical way of realizing
significant interchange capability -- better than a more traditional contract
path. The open access approach increases the number of potential interconnection
options and allows the flexible use of less expensive non-firm products where
appropriate while providing a high level of assurance that transmission capacity
will be available when needed. This flexible use of the transmission grid also
enhances competition by more efficiently utilizing transmission resources. When
combined, ComEd and PECO will continue to develop and refine this open access
approach, and make other changes necessary to meet anticipated needs in the
short-, medium- and long-term markets. The open access approach, therefore, will
promote the public interest and benefit consumers and shareholders.
The model of single contract path or single line interconnection as a
means of establishing integration that has characterized past Commission
decisions was developed in an industry characterized by the almost universal
feature of vertically integrated electric utilities. This industry structure,
particularly the absence of open access transmission, made it impossible for two
merging companies to force a utility which controlled transmission in the area
between
_____________________
/92/ Pennsylvania " New Jersey " Maryland Interconnection, 81 FERC (P) 61,257
----------------------------------------------------
(1998). PJM is a regional power pool and the first, FERC-approved, operational
ISO.
/93/ Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998).
--------------
/94/ See the Interconnection Analysis included as Exhibit K-1 for a detailed
---
description of how OATTs will allow Exelon to transmit power.
<PAGE>
them to provide transmission on an economic or reasonable basis. Thus, it was
practically impossible to arrange for more than minimal interties. The best
compromise was limited capacity, individually-negotiated contract paths. The
capacity and duration were often limited because it was not economic to arrange
for greater capacity or duration. Similarly, when utilities were able to
construct new interties between their areas, these were also often limited in
size because of economic constraints.
As described above and in the Interconnection Analysis in Exhibit K-1,
------------------------
with the advent of EPACT and FERC Order No. 888, an intervening utility is now
obligated to provide available transmission capacity and, if there is
insufficient capacity, are obligated to offer to construct additional
transmission. These changes in the law, and more importantly the resulting
development of a robust market for transmission services -- which will only be
enhanced in the future as a result of the development of existing and future
RTO's -- have enabled a far superior method of providing for economic
coordination of electric utilities. These developments allow utilities to obtain
a balanced portfolio of transmission capacity over multiple paths, with various
degrees of firmness, providing for various amounts of capacity which can be
designed by the holding company system to enhance its optimal integrated
operations. Today, superior interchange ability can be achieved via a portfolio
of short-term firm and non-firm transmission at a lower all-in cost than the
more limited, rigid, single firm contract path.
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.
------------------------
(B) The Contract Path
Exelon believes that the required electrical interconnection will exist
without a firm path, and that its ability to operate economically under normal
conditions as a single interconnected and coordinated (integrated) system will
be enhanced through the use of an array of firm and non-firm open access
transmission reservations as presented in this Application-Declaration./95/
Nevertheless, if the Commission finds it necessary under the Act, for
three years following consummation of the Merger, ComEd and PECO will procure a
firm contract for a 100 MW unidirectional path from ComEd to PECO. If required,
Exelon will procure this transmission capacity through one or a combination of
three alternative paths that are available. The path may be:
. ComEd to American Electric Power to First Energy to PJM;
____________________
/95/ If the Commission requires Exelon to establish the 100 MW firm contract
path, this path will be used as a part of the overall portfolio of transmission
arrangements that Exelon will use to conduct its coordinated operations
following the Merger.
<PAGE>
. ComEd to American Electric Power to Virginia Electric Power to PJM; or
. ComEd to American Electric Power to Allegheny Power System to PJM.
As noted in the Interconnection Analysis, Exelon believes that there is
------------------------
sufficient available transmission capacity to allow Exelon to economically
reserve this 100 MW path on a firm basis for a period of 3 years following the
Merger. Further, because the transmission owners listed above are obligated
under their OATTs to provide this service, if available, at their tariffed
rates, Exelon can be assured that it will have the ability to procure the needed
service at a reasonable price./96/
Applicant notes that the Commission has in the past declined to require a
holding company system to build an additional line or otherwise increase
physical interconnections when no economic benefit would be derived from such
action./97/ Applicant submits that an inflexible requirement for a specific
contract path falls within this precedent -- requiring a fixed, firm contract
path would be uneconomical -- and the Commission should rely on the dynamic
operation of the transmission grid and OATTs to make the finding of
interconnection of the Exelon system./98/
(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."/99/ The
Commission has noted that, through this standard, Congress "intended that the
utility properties
______________________
/96/ PECO has made an OASIS request on the AEP transmission system for 100 MW
for the period 2001, 2002, and 2003 with a Point-of-Receipt (POR) of ComEd and a
Point-of-Delivery (POD) of Virginia Power (VP). As of June 1, 2000, the request
had not yet been accepted by AEP. No other requests have been made. However,
PECO currently has firm rights to 820 MW of VP transmission with a POR of AEP
and a POD of PJM for the year 2000. It is expected that PECO will exercise its
right of "rollover" on this transmission reservation, subject to Section 2.2 of
the Virginia Power Open Access Transmission Tariff. With respect to the PJM leg
of any firm path it would obtain, it is expected that Exelon will rely on the
right PECO Energy will have 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. If
required by the Commission to obtain 100 MW of firm point-to-point service, then
a request for such service will be made on the PJM OASIS at an appropriate time.
With respect to the ComEd leg of any firm path Exelon would obtain, Exelon would
make a reservation for such transmission service at an appropriate time.
/97/ UNITIL, supra, at note 29; Electric Energy, Inc., 38 SEC 658, 669 (1953)
------ ---------------------
(direct interconnection not required in circumstances which would have resulted
in an uneconomic duplication of transmission facilities.)
/98/ See the Interconnection Analysis for information regarding the cost of a
---
firm contract path.
/99/ 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).
------------------------------
<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."/100/
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./101/ 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.
__________________
/100/ Id., (citations omitted).
---
/101/ 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 exisiting 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 major purchaser, a nonaffiliated government
agency).
<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./102/ 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./103/
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
_________________
/102/ 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.")
/103/ See the discussion in Item 3.b.2.a above regarding the fact that Exelon
will not need "transmission integration agreements" or similar arrangements.
<PAGE>
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 UNITIL and Conectiv./104/
------ --------
Genco will conduct marketing efforts, both as a buyer and seller, for the
Exelon system. 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.
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./105/
Recently, the Commission has found coordinated operational and administrative
functions to constitute "de facto" integration for exempt holding
companies./106/ 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.
____________________
/104/ See also MISO Order, supra at n. 162 and n. 169.
--- ---- -----
/105/ See, e.g., 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.")
/106/ Sierra Pacific Resources, Holding Co. Act Release No. 27054 (July 26,
------------------------
1999).
<PAGE>
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.
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./107/
(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./108/ The Commission has
specifically found that the combining systems need not be contiguous in order
for the
________________
/107/ The savings, synergies and other benefits are discussed under Item
3.B.3.(b).
/108/ 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). If approved, the combined system of AEP and
Central and South West would encompass 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.
<PAGE>
requirement to be met./109/ 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."/110/ 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.
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 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 over the three-year
period ending in 1999:
______________
/109/ 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).
/110/ 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).
/111/ 1995 Report at 66, 69.
/112/ 1995 Report at 69.
/113/ Id.
---
<PAGE>
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 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."
______________________
/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.
/117/ American Electric Power Company, Inc., Holding Co. Act Release No. 20633
------------------------------------
(July 21, 1978)
<PAGE>
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 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
___________________
/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.
121 Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998).
-------------
<PAGE>
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 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
-----
_________________
/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").
/124/ See Item 3.B.2(a) for a discussion of the relative size of the Exelon
---
system
<PAGE>
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.
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
_____________________
/125/ Although Genco will be a "public-utility company" for purposes 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.
<PAGE>
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 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
____________________
/126/ An amended notice informs the Illinois Commission of the change to the
Merger Agreement.
<PAGE>
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.
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
___________________
/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).
/130/ 1995 Report at 73-74.
<PAGE>
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:
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.
<PAGE>
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 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.
______________
/131/ Under the Gas Competition Act the non-gas cost portion of PECO's rates are
capped until January 1, 2001.
<PAGE>
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 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
____________________
/132/ New Century Energies, supra. See also Dominion Resources, Inc., Holding
-------------------- ----- --- ---- -------- --------- ---
Company Act Release No. 27113 (December 15, 1999; WPL Holdings, supra.
--- -------- -----
<PAGE>
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
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pre-Divestiture $399,642 $323,265 $76,377 $58,506
(actual)
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 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
_________________
/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).
/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.
--
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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-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:
___________________________
/135/ See, e.g. Michigan Consolidated Gas Co., Holding Co. Act Release No. 16763
--- ---- -----------------------------
(June 22, 170), 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
<PAGE>
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./140/ 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)(vi)
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 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
____________________________
/139/ Holding Co. Act Release No. 26667 at 75
/140/ In the Financing U-1, Exelon undertakes to maintain the equity component
of its capitalization at not less than 30% excluding from the debt portion the
transition bonds issued in connection with the securization transactions arising
out of utility restructuring legislation in Illinois and Pennsylvania. Exelon
proposes that it will also exclude securitization debt from capitalization for
purposes of determining its Rule 58 investment limitation.
<PAGE>
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./141/
Ventures and Exelon Delivery raise an issue under Section 11(b)(2)./142/
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).
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.
____________________________
/141/ 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).
/142/ 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. See note 15 above.
<PAGE>
(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/
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
____________________________
/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 $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).
<PAGE>
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.
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
<PAGE>
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 PEC, 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 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.
____________________________
/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
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, 27th Water
---
Reactor Safety Information Meeting (Oct. 25, 1999).
<PAGE>
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.
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.
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
<PAGE>
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 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.
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. It is expected that Exelon
____________________________
/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.
<PAGE>
Services will conduct substantial operations in 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 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.
____________________________
/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).
<PAGE>
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 more associate companies, and certain assets may be used by one Utility
Subsidiary for the benefit of one or more other associate companies.
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.
___________________________
/148/ See Item 3.C.4.(g).
/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
<PAGE>
In recent decisions/150/, the Commission has approved such relief allowing
"at market" pricing for substantially the following transactions, 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 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.
Exelon requests similar relief. However, because of the unique
circumstances applicable to Exelon -- the formation of an independent Genco, the
retail rate caps and freezes applicable to ComEd and PECO and the full
restructuring of the electricity supply market in Illinois and Pennsylvania --
certain of the limitations included in the above list are unnecessary for the
protection of investors or consumers.
______________________________
(continued...)
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).
<PAGE>
The unnecessary limitations in the above list can be summarized as the
restriction that the entity receiving the "at market" service cannot be a seller
of electricity to an affiliated utility. Thus, goods or services can be provided
at market prices to an EWG if that EWG makes no sales of electricity, directly
or indirectly, to an affiliated utility./151/ These restrictions are fully
appropriate where the customers of the Utility Subsidiary could be subjected to
goods or services at a price above the affiliate's cost and where such inflated
price could be passed on to captive ratepayers./152/ However, in the Exelon
system, because of the factors indicated above, such restriction is not
necessary.
As described in this Application/Declaration, Genco will supply electricity
to ComEd and PECO. Genco will also coordinate the use of other generation
resources for the Exelon Electric System -- including from the EWGs now owned by
AmerGen as well as future EWGs. Thus, it is likely that an EWG owned by the
Exelon system would make sales directly or indirectly to Genco, ComEd or PECO.
Such an EWG does not fit within the restrictions of the circumstances where
market pricing of goods or services provided to that EWG from Exelon Services or
another Non-Utility Subsidiary has been allowed (see, e.g., items 2, 3 or 4 in
the list above). There is no reason that such a restriction is necessary,
however, to protect regulated utility customers. FERC has already held that
certain power sales contracts between PECO and its affiliated EWGs need not be
subject to affiliate rules. /153/ Further, ComEd and PECO will seek a similar
determination from FERC regarding transactions between them and Genco.
In Illinois, many non-residential customers have been eligible since
October 1, 1999 to choose their electricity supply via direct access. 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. Furthermore, as a part of the Illinois retail access program, ComEd's
retail rates are capped through the end of 2004. Consequently, the price for
electricity -- the commodity -- is now de-regulated and subject to market
prices. Customers are protected by a rate cap during the transition period.
In Pennsylvania, under the settlement entered into in connection with the
State restructuring process, PECO phased-in full retail choice for generation
supply for all of its retail customers through January 2, 2000. Since that date,
every PECO retail customer has been entitled to purchase its electric generation
______________________________
/151/ Exelon does not seek general relief from the limitation that goods or
services cannot be provided at market to a Non-Utility Subsidiary if the
ultimate purchaser of the goods or services is a Utility Subsidiary. However,
Exelon is requesting relief for Non-Utility Subsidiaries to directly provide
goods or services to the Utility Subsidiaries at market prices in certain
limited circumstances. See Item 1.C.4.e.
/152/ For example, FERC has explained that affiliate abuse takes place when a
public utility and an affiliated power marketer transact in ways that result in
a transfer of benefits from the public utility (and its captive ratepayers) to
the power marketer (and the shareholders). Heartland, 68 FERC " 61,223 at
---------
62,062; Wholesale Power Services, Inc., 72 FERC " 61,284 (1995).
-------------------------------
/153/ FERC agreed that there is no possibility that PECO Energy could engage in
affiliate abuse with AmerGen Energy or AmerGen Vermont in connection with the
proposed power sales because PECO Energy does not have any captive customers.
AmerGen Energy, 90 FERC " 61,080 at 61,282 (2000); AmerGen Vermont, 91 FERC "
-------------- ---------------
61,082 at 61,291 (2000). In both cases, FERC noted that the fact that PECO
Energy"s rates will be capped during most of the period of the agreements
provides further protection against affiliate abuse.
<PAGE>
supply requirements from alternative electric generation suppliers. PECO serves
as a "provider of last resort" to retail customers who elect not to purchase
their electric generation supply requirements from alternative electric
generation suppliers or who elect to do so but then wish to switch back to PECO.
In addition, the settlement requires PECO to reduce its retail electric rates
during 1999 and 2000 by 8% and 6%, respectively, from the rates in existence on
December 31, 1996. PECO has entered into additional settlements in Pennsylvania
that (1) cap its transmission and distribution rates until December 31, 2006,
and (2) cap its retail generation rates pursuant to a fixed schedule until
December 31, 2010./154/
Thus, if Exelon Services or any other Exelon associate company were to
provide goods or services to Genco or AmerGen, for example, at a market price,
there is no risk that an abusively "inflated" price could be passed on to the
bundled service or provider of last resort customers of ComEd or PECO. All of
these customers are protected today by the rate caps or freezes in place.
Further, these customers now have (or soon will have) a choice of electricity
supplier. With the cost of electricity set by market forces, AmerGen, Genco or
other affiliated generators of Exelon have no incentive or ability to charge
abusively excessive prices based on "passing through" the cost of services
received from an Exelon affiliate at an excessive market price. Because no
customers can be harmed by actions taken by the Genco or the Non-Utility
Subsidiaries, there is no basis for retaining the rules that restrain
inter-affiliate transactions and interactions for the sake of preventing
affiliate abuse.
The Commission has granted requests for exemption from the Commission's "at
cost" requirements for proposed transactions where the circumstances showed that
there was little if any risk that Utility Subsidiaries and their customers could
be harmed from excessive charges resulting from an abuse of the affiliate
relationships./155/ Accordingly, Exelon proposes that the following transactions
be exempt under Section 13(b) from the at cost requirements of Rules 90 and 91
and Exelon Services or a Non-Utility Subsidiary be allowed to provide goods or
services at market prices 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;
______________________________
/154/ PECO continues to have captive retail distribution service customers,
which it serves under rates and tariffs regulated by the Pennsylvania
Commission. PECO recently agreed to provide further protections to those
customers. In a settlement reached with intervenors in the Pennsylvania
Commission proceeding considering the Merger, PECO agreed to reduce its retail
electric distribution service rates by a total of $200 million during the period
from January 1, 2002, through December 31, 2005, and agreed to extend for an
additional eighteen months, or until December 31, 2006, rate caps on its retail
electric transmission and distribution service charges. Following hearings on
this settlement, a Pennsylvania Commission administrative law judge recently
issued a decision recommending that the PaPUC approve the settlement.
Recommended Decision in PaPUC Docket No. A-00110550F0147 (issued June 1, 2000).
PECO's retail generation rates are capped pursuant to a fixed schedule set forth
in its initial settlement under the Pennsylvania Competition Act, which was
approved by the Pennsylvania Commission.
/155/ 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).
<PAGE>
2) an EWG that sells electricity at rates which have been approved by the
FERC or other appropriate State public utility commission, provided
that the purchaser of the EWG's electricity, if it is an affiliated
public utility or an affiliate that re-sells such power to an
affiliated public utility, shall either (a) be subject to State
restructuring whereby all customers have a choice in electricity
provider, (b) have in place a rate cap or rate freeze which prevents
the public utility from passing on any higher costs of electricity
purchased directly or indirectly from any associate company or (c) be
subject to a combination of customer choice and such rate caps or
freezes that together cover all customers;
3) a qualifying facility ("QF") under the Public Utility Regulatory
Policies Act of 1978 ("PURPA") that sells electricity (i) at rates
based on costs of service as approved by FERC or (ii) exclusively at
rates negotiated at arm's length to one or more industrial or
commercial customers purchasing such electricity for their own use and
not for resale, or to an electric utility company at the purchaser's
"avoided cost" determined under PURPA, provided that the purchaser of
the QF's electricity, if it is an affiliated public utility or an
affiliate that re-sells such power to an affiliated public utility,
shall either (a) be subject to State restructuring whereby all
customers have a choice in electricity provider, (b) have in place a
rate cap or rate freeze which prevents the public utility from passing
on any higher costs of electricity purchased directly or indirectly
from any associate company or (c) be subject to a combination of
customer choice and such rate caps or freezes that together cover all
customers; or
4) an ETC, an 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 (3) 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 and Anticipated Affiliate Arrangements and Requests for
Exemption.. Existing and Anticipated 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 has filed a form of Mutual Services Agreement with the
Pennsylvania Commission seeking approval for it to provide and receive services
from affiliates. Each of these contracts (including the parties) is described in
Exhibit B-3.
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
<PAGE>
substantially a market price,/156/ 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. To the
extent required, Exelon seeks an exemption or waiver from applicable provisions
of the Act for ComEd to continue this arrangement.
(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")./157/ 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 to enter into agreements 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.
______________________________
/156/ 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.
/157/ 220 ILCS 16-102
<PAGE>
(c) PECO Government Contracts
PECO seeks a waiver similar to ComEd's prevailing price standard in
order to permit PECO or its subsidiaries to provide energy services to U.S.
governmental agencies at rates approved by the Pennsylvania Commission.
(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, in accordance with the Pennsylvania
Commission's regulations. However, transactions involving non-power goods and
services between the regulated electric distribution company (PECO) and its
retail marketing affiliate(s) protect the regulated utility 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. This standard is required by Appendix H
(Interim Code of Conduct) of PECO's Pennsylvania Commission approved
restructuring settlement in Docket Nos. R-00973953 and P-00971265.
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./158/ 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 that, in its Order, the Commission find
the proposed measures comply with its "at cost" rules (Rules 90 and 91), or
grant a limited waiver therefrom, as appropriate.
(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
_____________________________
/158/ 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.
<PAGE>
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.
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.
<PAGE>
(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 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
<PAGE>
approximately 6 % and 2 % of their total sales, respectively, to the Utility
Subsidiaries./159/ 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.
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/160/, 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.
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. 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.
(iv) Alternative Relief for EIS
In the event EIS may provide services to the Utility Subsidiaries, but is
limited to cost as provided in Rules 90 and 91, Exelon seeks approval for (1)
certain existing contracts to be preformed on the basis on which they were
entered into until such contracts are complete and (2) the inclusion of a 12.75
% cost of capital in such calculation of "cost."/161/
(1) EIS has acquired and anticipates that it will acquire in the future
existing infrastructure service businesses which have traditionally included
ComEd and/or PECO as their customers. To the extent there is any contract with
ComEd and/or PECO in place on the date of the Merger, or any contract with ComEd
and/or PECO in place on the date Exelon, through EIS or a Subsidiary, acquires a
new business, Exelon seeks any necessary approval for the continued performance
of that contract pursuant to its terms, including any pricing terms, until
completion notwithstanding that such contract would be performed by an affiliate
of ComEd and PECO. This will allow an orderly transition of these contracts.
______________________________
/159/ 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.
/160/ Pa. C.S. Title 66.
/161/ The relief requested in this subsection (iv) will be unnecessary if the
Commission grants the relief requested in subsection (iii).
<PAGE>
(2) EIS's primary business is providing infrastructure services to
companies outside the Exelon system. Because Exelon expects that less than 10%
of EIS's revenues will be derived from Exelon affiliates that are public
utilities or utility service companies, EIS will not be shielded from exposure
to ordinary business risk via its association with Exelon./162/ EIS seeks
authority to include in the "cost" of services rendered to its utility and
utility service company affiliates a rate of return that reflects: (1) the
substantial equity component of EIS's capital structure, and (2) the risks the
EIS subsidiaries face as participants in the unregulated, competitive
infrastructure services market./163/
The EIS companies debt-to-equity ratio differs from the remainder of the
Exelon system because EIS has issued and will continue to issue common stock to
finance the acquisition of infrastructure service companies it acquires and to
provide incentives for the former owners (many of whom are the present managers)
of the acquired companies by giving them a continuing stake in the success of
the EIS businesses. While the overall debt-to-equity ratio for Exelon will be
approximately 70/30, EIS's current capitalization is approximately 96% equity,
and is expected to remain heavily weighted toward equity. Therefore, it is
appropriate to apply an equity-based rate of return as compensation for capital
used by EIS in its business.
As noted, the EIS companies participate in a competitive infrastructure
services market. Prior to their acquisition, several of the EIS companies were
awarded infrastructure services contracts with PECO based on an arms-length
competitive bidding process that provided market-based rates of return in the
13-16% range. PECO is presently authorized to receive a 12.75% return on equity
from the Pennsylvania Public Utility Commission. However, for the year ending
December 31, 1999, PECO achieved an adjusted return on equity of 11%. Based on
these figures, Exelon requests authorization for EIS to receive a 12.75% return
on its necessary capital procured to provide services to the Exelon utilities
and utility service companies.
(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
______________________________
/162/ EIS businesses provided approximately $29 million in services to PECO in
1999, which represented about 5.8% of EIS"s $503 million in total revenues for
the year. Due to its acquisition of additional infrastructure services
companies, EIS expects to provide approximately $50 million in services to PECO
in 2000 which is 6.8% of EIS"s total expected revenues of $734 million for the
year. EIS does not anticipate providing more than 10% of its services to PECO,
ComEd or Genco or to service companies that provide services to public utility
associates on an annual basis. If Exelon determines, on a prospective basis that
more than 10% of EIS"s fiscal year revenues are likely to be derived from
associated public utility companies and/or utility service companies on a
combined basis), Exelon will seek additional authorization from the Commission.
/163/ Under Rule 91, "cost" includes " reasonable compensation for necessary
capital procured through the issuance of capital stock."
<PAGE>
reasonable and are in the public interest, cross-subsidization issues will not
arise under these agreements, and each should be permitted to continue./164/
Applicant emphasizes that the bundled 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./165/
(g) Goods and Services to and from Genco
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
______________________________
/164/ 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 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 No. 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 parts at replacement cost); EUA Cogenex Corp., Holding Co. Release No.
------------------
26373 (Sept. 14, 1995) (authorizing sale of goods or services at prices not to
exceed market prices); and EUA Cogenex Corp., Holding Co. Release No. 26469
(Feb. 6, 1996) (authorizing provision of goods or services at prices not to
exceed market prices). The Commission should again exercise its flexibility to
approve Applicants" waiver request in order to comply with applicable Illinois
and Pennsylvania commission orders.
/165/ See Item 3.C.3.
<PAGE>
managerial and technical support that PECO currently provides to AmerGen and the
sharing of talent and expertise between AmerGen and PECO./166/ 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.
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.
Exelon seeks approval for Genco and AmerGen and any future Subsidiary of
Genco to provide such services to each other as required for the efficient
operation of the generating facilities in the Exelon system. 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.
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.
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 necessary or desirable in the normal
operation of their businesses.
______________________________
/166/ 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.
<PAGE>
5. Phase-In of Compliance with Affiliate Requirement
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 one year 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 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./167/
D. Approval for Restructurings -- Interim Operations
As noted, the Restructurings may be delayed for regulatory or tax reasons
for a period of time following the completion of the Merger. 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.
______________________________
/167/ 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).
<PAGE>
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, 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. In the near future, ComEd and PECO and their
regulated affiliates will make additional filings requesting certain further
FERC authorizations in order to fully effectuate the Restructurings. In
addition, the Conowingo Companies hold certain hydroelectric project licenses
under the FPA. The transfer of the utility assets and liabilities of the
Conowingo Companies will constitute transfers of the hydroelectric project
licenses, requiring approval of FERC.
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
have applied for approval from the NRC to reflect the fact that after the
Merger, Genco will be the owner and operator of the facilities and Exelon will
be the parent company of Genco. AmerGen has also applied for NRC approval in
connection with the Transfer of PECO's interest in AmerGen to Genco.
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
<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 July
15, 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 August 15,
2000, by which comments must have been entered and a date on or after August 15,
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
<TABLE>
<CAPTION>
A. Exhibits
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Exhibit No. Description of Document Method of Filing
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<S> <C> <C>
A-1 Restated Articles of Incorporation of Incorporated by reference to S-4
Exelon Registration Statement, Exhibit
C-1
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
A-2 Restated Articles of Incorporation of ComEd Incorporated by reference; File
effective February 20, 1985, including Statements No. 1-1839, Unicom Form 10-K for
of Resolution Establishing Series, relating to the year ended December 31, 1994,
the establishment of three new series of ComEd Exhibit (3)-2.
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 PECO Incorporated by reference; File
No. 1-1401, PECO 1993 Form 10-K,
Exhibit 3-1
------------------------------------------------------------------------------------------------------------------
B-1 Amended and Restated Agreement and Plan of Incorporated by reference; Annex
Exchange and Merger (Merger Agreement) 1 to Exhibit C-1
------------------------------------------------------------------------------------------------------------------
B-2 Form of General Services Agreement Filed March 16, 2000
------------------------------------------------------------------------------------------------------------------
B-3 Description of existing agreements under State Filed by amendment
approved affiliated interest requirements
------------------------------------------------------------------------------------------------------------------
C-1 Registration Statement of Exelon on Form S-4 Incorporated by reference;
Registration Statement No.
333-37082.
------------------------------------------------------------------------------------------------------------------
C-2 Joint Proxy Statement and Prospectus of Unicom Incorporated by reference;
and PECO included in Exhibit C-1
------------------------------------------------------------------------------------------------------------------
D-1.1 Joint Application of ComEd and PECO to FERC re Filed March 16, 2000
Merger (excluding exhibits and testimony which
Applicant will supply upon request of the
Commission)
------------------------------------------------------------------------------------------------------------------
D-1.2 Direct Testimony of Dr. William H. Heironymous Filed March 16, 2000
(Exhibit No. APP-300 to FERC Joint Application).
------------------------------------------------------------------------------------------------------------------
D-1.3 Order of FERC approving the Merger Filed herewith
------------------------------------------------------------------------------------------------------------------
D-1.4 Application of ComEd to FERC for Authority to Filed March 16, 2000
Transfer Jurisdictional Assets ("Restructuring
Filing") (excluding exhibits and testimony which
Applicant will supply upon request of the
Commission)
------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
D-1.5 Application of PECO to FERC for Authority to Filed March 16, 2000
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 Pennsylvania Filed March 16, 2000
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 approving Filed by amendment
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-3.1 Notice of ComEd to the Illinois Commission Filed March 16, 2000
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 Commission Filed herewith
regarding Restructuring (excluding exhibits and
testimony which Applicant will supply upon
request of the Commission)
------------------------------------------------------------------------------------------------------------------
D-4.1 Application of PECO, ComEd and AmerGen to the NRC Filed March 16, 2000
regarding transfer of nuclear generating
operating licenses
------------------------------------------------------------------------------------------------------------------
D-4.2 Order of the NRC finding that the transfer of Filed by amendment
Filed by amendment certain operating licenses in
connection with the Merger is in compliance with
The Atomic Energy Act and consenting to such
transfers
------------------------------------------------------------------------------------------------------------------
E-1 Maps of service area and transmission system of Filed in paper under Form SE
ComEd
------------------------------------------------------------------------------------------------------------------
E-2 Maps electric and gas service areas and Filed in paper under Form SE
transmission system of PECO
------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Exelon Filed by amendment
------------------------------------------------------------------------------------------------------------------
F-2 Past-tense opinion of counsel to Exelon Filed by amendment
------------------------------------------------------------------------------------------------------------------
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 10-K for the year Incorporated by reference, File
ended December 31, 1999 No. 1-11375
------------------------------------------------------------------------------------------------------------------
H-2 Annual Report of PECO on Form 10-K for the year Incorporated by reference, File
Incorporated by reference, File ended December 31, No. 1-1401
1999 No. 1-1401
------------------------------------------------------------------------------------------------------------------
H-3 Quarterly Reports of Unicom on Form 10-Q for the Incorporated by reference, File
Incorporated by reference, File quarter ended No. 1-11375
March 31, 2000 No. 1-11375
------------------------------------------------------------------------------------------------------------------
H-4 Quarterly Reports of PECO on Form 10-Q for the Incorporated by reference, File
Incorporated by reference, File quarter ended No. 1-1401
March 31, 2000 No. 1-1401
------------------------------------------------------------------------------------------------------------------
I-1 List and Description of Subsidiaries and Filed herewith
Investments Of Unicom Corporation (Other than
"Public-Utility" Companies) (updated as of June,
2000)
------------------------------------------------------------------------------------------------------------------
I-2 List and Description of Subsidiaries and Filed herewith
Investments Of PECO Energy (Other than
"Public-Utility" Companies) (updated as of June,
2000
------------------------------------------------------------------------------------------------------------------
J-l Analysis of the Economic Impact of a Divestiture Filed March 16, 2000
of the Gas Operations of PECO Energy Company
------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Exhibit No. Description of Document Method of Filing
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
K-1 Analysis of How the Interconnection Requirement Filed March 16, 2000
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>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Statement No. Description Method of Filing
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FS-1 Historical consolidated financial statements of Incorporated by reference to
Unicom Annual Reports on Form 10-K for
the years ended 1999,1998 and 1997
------------------------------------------------------------------------------------------------------------------
FS-2 Historical consolidated financial statements of Incorporated by reference to
PECO Annual Reports on Form 10-K for
the years ended 1999,1998 and 1997
------------------------------------------------------------------------------------------------------------------
FS-3 Unaudited Pro Forma Financial Statements of Incorporated by reference; S-4
Exelon, giving effect to the Merger Registration Statement, Exhibit
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.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of 1935,
the undersigned company has duly caused this Application-Declaration to be
signed on its behalf by the undersigned thereunto duly authorized.
EXELON CORPORATION
Date: June 16, 2000 BY: /s/ Corbin A McNeill, Jr.
--------------------------
Name: Corbin A McNeill, Jr.
Title: Chairman, Chief Executive
Officer and President
