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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1/A
-------------------------
AMENDMENT NO. 3
TO
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Houston Industries Incorporated and
Houston Lighting & Power Company
Houston Industries Plaza
1111 Louisiana, 47th Floor
Houston, TX 77002-5231
(Name of company filing this statement
and address of principal executive offices)
-------------------------
None
(Name of top registered holding company
parent of each applicant or declarant)
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Hugh Rice Kelly
Executive Vice President and General Counsel
Houston Industries Incorporated
Houston Industries Plaza
1111 Louisiana, 47th Floor
Houston, TX 77002-5231
(Names and addresses of agent for service)
-------------------------
The Commission is also requested to send copies
of any communications in connection with this matter to:
James R. Doty Stephen A. Massad
Baker & Botts, L.L.P. Baker & Botts, L.L.P.
The Warner One Shell Plaza
1299 Pennsylvania Avenue, N.W. 910 Louisiana Street
Washington, D.C. 20004-2400 Houston, TX 77002-4995
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Houston Industries Incorporated ("HI") and Houston Lighting &
Power Company ("HL&P") hereby amend and restate their September 5, 1996
application for an order from the United States Securities and Exchange
Commission (the "Commission") to the effect that upon the consummation of the
merger transactions described at Item 1.B below, the resulting public utility
holding company, and every subsidiary company thereof as such, shall be exempt
from all provisions of the Public Utility Holding Company Act of 1935, as
amended (the "Act"), other than Section 9(a)(2), pursuant to Section 3(a)(2) of
the Act.
Please call James R. Doty at (202) 639-7792 or Stephen A.
Massad at (713) 229-1475 if you will require additional information with
regard to this matter.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
A. THE PARTICIPANTS
1. HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING
& POWER COMPANY
HI is a public utility holding company within the meaning of
the Act. It is incorporated and maintains its principal place of business in
Texas; its common stock is listed on the New York Stock Exchange. HI owns two
primary operating subsidiaries. HL&P, an electric utility company, is HI's
principal operating subsidiary, and is wholly owned by HI. HL&P is also
incorporated in Texas and conducts its utility operations exclusively within
that state. HL&P is engaged in the generation, transmission, distribution and
sale of electric energy and serves over 1.5 million customers in a 5,000
square-mile area of the Texas Gulf Coast, including the City of Houston. HI's
other primary operating subsidiary is Houston Industries Energy, Inc. ("HI
Energy"), a Delaware corporation that participates primarily in the development
and acquisition of foreign independent power projects and the privatization of
foreign generation, transmission and distribution facilities. HI Energy also
holds an interest in a domestic "qualifying facility" that is exempt from the
Act pursuant to Section 210(e) of the Public Utility Regulatory Policies Act of
1978. Each foreign electric utility in which HI Energy has made an investment
or otherwise holds an interest is an exempt "foreign utility company" pursuant
to Section 33(a) of the Act and therefore is not a "public utility company" as
such term is defined in Section 2(a)(5) of the Act. Each foreign independent
power project in which HI Energy has made an investment or otherwise holds an
interest is an "exempt wholesale generator" pursuant to Section 32(a)(1) of the
Act and therefore is not an "electric utility company" as such term is defined
in Section 2(a)(3) of the Act. For a summary of the investments by HI Energy in
foreign utility companies and exempt wholesale generators see Response 8 in
Exhibit G and Appendix 4 thereto. In addition, HI has a subsidiary, Houston
Industries Power Generation, Inc. ("HI Power"), which has recently begun
participating in domestic generation projects. HI Energy's existing interests
in domestic power generation projects under development will be transferred to
HI Power. HI is also the holding company parent of several other non-utility
subsidiaries; however, HL&P currently accounts for substantially all of HI's
consolidated income and common stock equity. Following consummation of the Basic
Mergers (as herein defined) it is anticipated that HL&P's electric utility
operations and business will continue to account for the predominant portion of
the consolidated income and common stock equity of the combined companies. HI
is exempt from the provisions of the Act, other than Section 9(a)(2), pursuant
to Section 3(a)(1) because both HI and HL&P "are predominantly intrastate in
character and carry on their business substantially in" Texas.
Additional information regarding HI and its subsidiaries,
including HL&P, is set forth in the following documents, each of which is
incorporated herein by reference:
(i) Form U-3A-2 for HI for Calendar Year 1996, filed on
February 28, 1997, Commission File Number 069-00231,
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(ii) Annual Report on Form 10-K of HI (Commission File
Number 1-7629) and HL&P (Commission File Number 1-3187) for
fiscal year ended December 31, 1996, filed on March 20, 1997,
and
(iii) Amendment No. 2 to the Registration Statement on
Form S-4 of HI and HL&P (Registration No. 333-11329),
filed on October 28, 1996.
2. NORAM ENERGY CORP.
NorAm Energy Corp. ("NorAm") is a public utility company within
the meaning of the Act. It is incorporated in Delaware and maintains its
principal executive offices in Texas; its common stock is listed on the New York
Stock Exchange. NorAm provides retail natural gas service to over 2.7 million
customers in over 1,300 municipalities and has several non-utility subsidiaries.
NorAm's natural gas distribution business operates as three divisions of the
parent company: (i) Entex, the local gas distribution company in Houston,
Texas, and in other areas in Texas, Louisiana and Mississippi, (ii) Arkla, which
distributes natural gas at retail in Arkansas, Louisiana, Oklahoma and Texas,
and (iii) Minnegasco, which distributes natural gas in Minnesota. NorAm also
operates interstate gas pipeline facilities through subsidiaries NorAm Gas
Transmission Company and Mississippi River Transmission Corporation and operates
natural gas gathering assets in Oklahoma, Louisiana, Arkansas and Texas through
NorAm Field Services Corp. NorAm's wholesale energy marketing business is
engaged in marketing natural gas and electric power and providing risk
management services to natural gas resellers and certain large volume customers.
This business is principally conducted by NorAm Energy Services, Inc. ("NES"),
together with certain affiliates. In addition, NorAm provides unregulated
retail energy services to industrial and large commercial customers through
NorAm Energy Management, Inc. HI understands that NorAm is planning to form one
or more subsidiary companies which may invest in certain gas distribution
systems in Latin America. It is NorAm's intention that any foreign utility in
which NorAm will hold an interest shall be an exempt "foreign utility company"
and therefore not a "public utility company" as such term is defined under
Section 2(a)(5) of the Act. During 1996, NorAm's gas utility business accounted
for 44% of its consolidated operating revenues.
Additional information on NorAm is set forth in the following
documents, each of which is incorporated herein by reference:
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(i) NorAm Form U-1 (regarding proposed investments
in Gas Natural, S.A., a Columbian corporation) filed on
May 5, 1995, Commission File Number 070-08629,
(ii) Annual Report on Form 10-K of NorAm (Commission
File Number 1-3751) for the fiscal year ended December 31,
1996, filed on March 28, 1997, and
(iii) Amendment No. 2 to the Registration Statement on
Form S-4 of HI and HL&P (Registration No. 333-11329),
filed on October 28, 1996.
B. THE TRANSACTION
On August 11, 1996, HI, HL&P and a new Delaware subsidiary of
HI, named "HI Merger, Inc." ("Merger Sub"), entered into an Agreement and Plan
of Merger (as amended by Amendment to Agreement and Plan of Merger dated October
23, 1996, the "Merger Agreement") with NorAm. Under the Merger Agreement, HI
will merge with HL&P and the currently outstanding common stock of HI will
become the common stock of HL&P, which will be renamed "Houston Industries
Incorporated" ("Houston"). Thereafter, NorAm will merge with Merger Sub, which
will be renamed "NorAm Energy Corp." and will be a wholly owned subsidiary of
Houston following the merger (collectively, the mergers are referred to herein
as the "Basic Mergers"). Following the Basic Mergers, the electric utility
business of HL&P will be conducted by Houston under HL&P's name.
Under the Merger Agreement, holders of NorAm common stock will
receive at their election: (i) cash in the amount of $16.00 per share or (ii)
Houston voting common stock. The market value of the stock component will be
generally equal to $16.00 per share, assuming the average NYSE closing sales
price of a share of HI common stock is within a specified price range during a
20-day period prior to the closing date of the Basic Mergers. If the closing
does not occur by May 11, 1997, the cash (but not stock) consideration
increases thereafter by two percent (simple interest) per quarter until
closing. The shareholders' elections will be subject to the right of HI to
prorate cash and stock elections so that the aggregate amounts of cash and
stock elections are approximately equal. The total value of the cash and stock
consideration to be issued in exchange for all of NorAm's common stock and
common stock equivalents is expected to be approximately $2.5 billion.
The Boards of Directors of each party have approved the Merger
Agreement. On December 17, 1996, the shareholders of both HI and NorAm approved
the Merger Agreement at their respective special shareholders meetings, each
company's shareholders approving the agreement by approximately 99% of the
votes cast. Consummation of the Basic Mergers is subject to customary closing
conditions
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and receipt of regulatory approvals, including approvals from certain state
regulatory agencies and municipal franchise authorities and the filing of the
requisite notifications under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the expiration of applicable waiting periods
thereunder. See Item 4 for a discussion of these approvals and of proceedings
initiated by the Federal Energy Regulatory Commission ("FERC"). The parties
have agreed to certain undertakings and limitations regarding the conduct of
their businesses prior to the closing.
The Merger Agreement provides for termination by either party
upon the occurrence of certain events, including failure of the parties to
consummate the Basic Mergers by August 11, 1997, which date may be extended
until December 31, 1997, in the event that the only unsatisfied condition to
closing is receipt of regulatory approvals. The Merger Agreement provides for
a termination fee to be paid by one party to the other in certain
circumstances, which fee ranges from $10 million to $75 million depending on
the circumstances of termination.
Under the merger structure Houston would be both a public
utility company and a public utility holding company under the Act. The Merger
Agreement contemplates that the companies surviving the Basic Mergers will
continue to be exempt from registration under the Act pursuant to Section
3(a)(2) of the Act and regulations promulgated thereunder because Houston, as
the surviving holding company, would be "predominantly a public-utility company
whose operations as such do not extend beyond the State in which it is
organized and States contiguous thereto." Alternative structures are provided
for in the Merger Agreement should the order requested in this Application be
denied or should there be legislative changes that permit structures not
presently authorized by the Act. One of the alternative structures
contemplates a non-holding company structure in which all domestic utility
operations would be conducted within one publicly-held company. (The
considerations attendant on this alternative structure for the companies, their
public shareholders and consumers are addressed in Part C, below.)
The descriptions of the Merger Agreement set forth herein do
not purport to be complete and are qualified in their entirety by the provisions
of the Merger Agreement, which is Exhibit A hereto. In addition, a more
complete description of the Merger Agreement is set forth in Amendment No. 2 to
the Registration Statement on Form S-4 of HI and HL&P, filed on October 28,
1996, which is Exhibit B hereto.
The cash portion of the merger consideration (estimated to be
approximately $1.25 billion) is expected to be funded through bank borrowings
under new bank credit facilities (the "Bank Facilities") to be arranged by a
newly formed
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finance subsidiary (the "Borrower") with a group of commercial banks. As of
the date hereof, the structure, terms and provisions of the Bank Facilities
have not yet been made definitive.(1)
The Bank Facilities are expected to bear interest at a rate
based upon either the London Interbank Offered Rate plus a margin or a base
rate plus a margin or at a rate determined through a bidding process.
The borrowings under the Bank Facilities are expected to be
secured by liens on or first priority security interests in assets, which may
include (i) the shares of common stock of NorAm held by Houston or its
affiliates after the Basic Mergers, (ii) the shares of common and preferred
stock of Time Warner Inc. owned by the Company, (iii) the capital stock of
certain subsidiaries of the Borrower and (iv) intercompany notes evidencing any
loans made by the Borrower to Houston or its direct or indirect subsidiaries.
The obligations under the Bank Facilities will not be secured by the utility
properties of HL&P or NorAm.
In order to provide liquidity to the Borrower to meet its
financial obligations, Houston is expected to issue to the Borrower a new
series of preference stock of Houston and enter into a support agreement under
which it would agree to make cash contributions or advances to the Borrower
from excess cash flow (with calculations, definitions and payment mechanics to
be agreed upon). Houston may also agree to certain covenants, including
certain limitations on the payment of dividends on or the repurchase of
Houston common stock. The net proceeds of any disposition or monetization of
the Time Warner stock are expected to be used to prepay borrowings under the
Bank Facilities, subject to a corresponding release by the banks of their
security interest in the Time Warner stock to the extent of any such prepayment.
The Bank Facilities are also expected to contain customary
covenants and default provisions applicable to the Borrower and its
subsidiaries, including limitations on the ability of the Borrower and its
subsidiaries to, among other things, incur additional indebtedness (other than
certain permitted indebtedness), create liens and make investments or loans.
C. REASONS FOR THE TRANSACTION STRUCTURE
Although the merger of NorAm directly into HL&P, rather than
with a special purpose HL&P subsidiary, may appear to have some advantages,
such as the simplicity of a single combined enterprise and the elimination
altogether of a utility holding company, there are in fact significant
advantages for investors and consumers and for the efficient operation of the
utilities if HL&P and NorAm can continue to exist and operate as separate
corporations.
First, the HL&P mortgage (which secures approximately $3.15
billion of HL&P first mortgage bonds) contains an "after-acquired property
clause" that, in the case of a merger of NorAm into HL&P, would result in the
creation of a lien on all property (other than excluded property) of NorAm.
Upon the creation of such a lien on NorAm properties, the terms of NorAm's
indentures would require that the benefits of this lien be extended to secure
approximately $1.4 billion of NorAm debentures (which currently are unsecured
obligations of NorAm). The resulting 44% increase in the amount of debt
secured by mortgage liens would not only impose substantial restrictions on
Houston's future financing flexibility but would also constitute an impediment
to Houston's ability to modify, amend or eliminate its mortgage if that should
become necessary or desirable.
Second, HL&P and NorAm believe that state regulatory
commissions will prefer the proposed structure over the alternative of merging
NorAm directly into HL&P
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(1) In connection with the financing, HI and NorAm have sought the
opinion of Nationally Recognized Statistical Rating Organizations regarding the
effect of the Basic Mergers on the outstanding debt of the gas and electric
utilities. See Response 3 in Exhibit G and Appendix 1 thereto for a summary and
discussion of the credit ratings obtained. Prior to FERC initiating proceedings
in February 1997, the Borrower and the banks had negotiated and were ready to
enter into the new bank credit facilities. The Borrower and the banks did not
and still have not executed such facilities because of the effect on the timing
of the Basic Mergers caused by the FERC proceedings. It is anticipated that
when the timing of the resolution of the FERC proceedings is more certain, the
Borrower will renegotiate the structure, terms and provisions of the Bank
Facilities, which may differ significantly from the structure, terms and
provisions previously negotiated.
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both because the proposed structure will avoid the encumbrance of NorAm's
utility assets and because it will retain legal separation between the electric
and gas utility operations. The legal separation of the gas and electricity
operations serves several ends, each of which is consistent with the goals and
duties of state regulatory agencies. First, the segregation of the gas and
utility operations is well understood and familiar to both state regulators and
to financial markets. In Texas, for example, the separation of regulation by
the establishment of two, separate regulatory bodies having quite distinct
responsibilities--one for gas and one for electric utilities--further reflects
this operational division. Financing sources and financial analysts have
familiarity with evaluating the financial positions of the gas company and the
electric company as separate entities. Accordingly, a corporate structure
which keeps those entities separate does no violence to the pattern of state
regulation. Rather, this separation facilitates the combined company's access
to capital markets, serving the preferences of lower cost financing
specifically designed for the separate and different businesses.
Similarly, state regulators are comfortable with analyzing gas
and electric utilities separately. The Minnesota Public Utilities Commission
("Minnesota"), for example, voiced concern about the increased difficulty in
regulation that would transpire if Minnesota became obligated to consider
issues related to nuclear generating facilities owned by the same entity that
Minnesota regulated for gas rates. Minnesota noted that the risk pattern for a
company with nuclear generating facilities is different from that of a gas
distribution utility.
That difference obviously extends beyond the presence of
nuclear plants. For example, an electric utility can have different capital
needs and cost issues by virtue of its need to build and maintain generating
facilities. While there are many similarities among gas distribution
utilities, even in different geographical areas, the state regulators of
NorAm's gas operations are not necessarily fully conversant with the types of
business and regulatory issues that HL&P would face in providing electric
service in Houston, Texas. Naturally, more regulatory effort would be required
if the staffs of NorAm's current state regulators were obligated to consider
how to allocate capital costs across a fully merged "Utilicorp-type" entity and
to understand the interrelationship among regulatory concerns facing HL&P
electric customers and NorAm gas customers.
While the regulatory tasks associated with a "Utilicorp-type"
structure would not be insurmountable, regulatory issues are more easily
addressed by maintaining the separately regulated businesses in individual
corporate entities. Each business would be better situated to address its
particular capital needs and regulators would be able to focus on only those
issues and requirements related to the utility services being provided in their
jurisdictions.
For these and other proper business reasons (see also Item
3.A.3 below), the parties believe that the transaction structure described in
Item 1.B would be in their best interests and in the best interests of their
respective investors and consumers.
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ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses to be paid or incurred,
directly or indirectly by all parties, in connection with the Basic Mergers are
estimated to total approximately $32 million, including investment bankers'
fees of approximately $24 million.
The fees, commissions and expenses to be paid or incurred in
connection with this filing are estimated to total approximately $225,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
Section 3(a)(2) of the Act is applicable to the proposed
transaction. Sections 4 and 5 of the Act and the rules promulgated thereunder
prohibiting certain transactions by nonexempt, unregistered holding companies
and requiring registration of public utility holding companies, respectively,
would be applicable to the transaction if (i) the Commission were to deny this
Application for an exemption pursuant to Section 3(a)(2) and (ii) the parties
were to implement the transaction without using the alternative, non-holding
company structure described above.
Although HI is currently subject to Section 9(a)(2) of the
Act, that section will not be applicable to the proposed transaction inasmuch
as HI, the existing utility holding company, will be eliminated when, in the
first step of the transaction, it merges into its only utility subsidiary.(2)
The second step of the transaction involves an acquisition of securities of a
gas utility company by an electric utility company, not by a utility holding
company. Accordingly, at the time the second step is to be implemented, there
will be no utility holding company to which Section 9(a)(2) can apply. The
Commission has consistently taken the position that the acquiror must be a
utility holding company (or an "affiliate"(3) of a utility company) before it
can become subject to the Act.(4) Moreover, in determining whether an
acquisition of a public utility affiliate triggers Section 9(a)(2), the
Commission's practice is
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(2) The foreign utilities in which HI has an ownership interest do
not constitute public utility companies under Section 2(a)(5) of the Act,
pursuant to Section 33(a) of the Act. The foreign independent power projects in
which HI has an ownership interest do not constitute electric utility companies
under Section 2(a)(3) of the Act, pursuant to Section 32(a)(1) of the Act. The
domestic qualifying facility in which HI has an ownership interest is exempt
from the Act pursuant to Section 210(e) of the Public Utility Regulatory
Policies Act of 1978.
(3) As the owner of 5% or more of NorAm's voting securities, Houston
will be an "affiliate" of NorAm, as that term is defined in Section 2(a)(11) of
the Act, upon consummation.
(4) See, e.g., Scana Corp., SEC No-Action Letter (June 14, 1990)
(concluding that Section 9(a)(2) of the Act allows a person to acquire 5% or
more of one, but no more than one, public utility without Commission approval).
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to examine the final intended result of a set of transactions immediately
preceding and following the acquisition.(5)
A. ELIGIBILITY FOR A 3(a)(2) EXEMPTION
Houston, with NorAm as its only utility subsidiary, should be
eligible for an exemption under Section 3(a)(2) of the Act based on the plain
wording of that Section, which states simply that to qualify for the exemption
a utility holding company must be "predominantly a public-utility company whose
operations as such do not extend beyond the State in which it is organized and
States contiguous thereto."
1. PREDOMINANTLY A PUBLIC-UTILITY COMPANY
Upon consummation of the proposed transaction, Houston will
continue to be predominantly an electric utility company operating entirely
within its state of incorporation. As shown on Exhibit C.1, HL&P's 1996 gross
operating utility revenues were almost twice those of NorAm. Stated
differently, NorAm's gross operating utility revenues in 1996 were 34% of the
combined gross utility operating revenues of HL&P and NorAm in 1996.(6) Thus,
NorAm's gross utility operating revenues will constitute a clear minority of the
combined gross utility operating revenues. NorAm's utility operations account
for an even smaller percentage of combined utility operations based on other
financial comparisons. NorAm accounted for approximately 15% of total
utility assets (i.e., net property, plant and equipment) at December 31, 1996
and approximately 20% of utility net operating income for 1996.
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(5) Id. Under the facts in Scana, although a holding company owned
two utility affiliates for a time, the holding company continued to own only
one utility affiliate after the series of merger transactions was complete;
therefore, the final intended result of the merger transactions was not subject
to Section 9(a)(2). The Commission has referred to this approach of viewing a
series of transactions as integral parts of a single plan and purpose as the
transitional merger doctrine. In applying that doctrine, the Commission has
stated that "[t]he requirements of Section 9(a)(2) are determined by the final
result, not by the modalities of separate and succeeding transactions." In re
Nat'l Propane Corp., 46 S.E.C. 1322, 1337-38 (1978) (citing Ass'n of
Massachusetts Consumers, Inc. v. United States, 516 F.2d 711 (D.C. Cir. 1975),
cert. denied, 423 U.S. 1052 (1976)); see also In re Crescent Pub. Serv. Co.,
1946, 22 S.E.C. 426, 432 (1946). Based on informal, pre-filing conferences with
the Staff, the parties believe the Staff concurs that Section 9(a)(2) is not an
issue for this application.
(6) NorAm's gross operating utility revenues as a percentage of the
combined gross operating utility revenues of NorAm and HL&P is essentially the
same for 1993 (33%), 1994 (32%) and 1995 (32%) as for 1996.
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Inasmuch as Houston will conduct far more utility business
directly as an operating company (operating the HL&P system as it existed
immediately prior to the Basic Mergers) than it will conduct indirectly as a
holding company (through ownership of NorAm as a subsidiary), the fair
interpretation(7) of the word "predominantly" dictates that Houston should be
viewed as "predominantly a public-utility company". The plain meaning of the
word "predominantly" applies to Houston's role as a public-utility company in
light of a comparison of Houston and NorAm's operations and revenues. As the
Commission noted in In re Northern States Power Co.:(8)
The Act prescribes no specific standard or test for interpreting the
word "predominantly." This Commission in construing the word has
referred to the dictionary definition of "predominant": "Superior in
power, influence, effectiveness, number or degree; having ascendency
or control; prevalent over others." In conformity with the concept of
relationship thus embodied in the Act, absolute size of the
subsidiaries' operations has never been specified as a factor in
determining the predominant character of the holding company seeking a
Section 3(a)(2) exemption, but the utility operations of the holding
company have been compared with those of its utility subsidiaries,
with most significance generally given to gross revenues.
There is no question that following the Basic Mergers Houston
will control NorAm and will enjoy the incidents of predominance cited in the
Northern States order. The Commission, noting that "predominantly" is a function
of relative size, has principally relied upon the comparison of the utility
subsidiaries' gross operating revenues as a percentage of the gross operating
revenues of the parent (the "gross-to-gross test"). Stated on a gross-to-gross
basis, NorAm's gross operating utility revenues in 1996 were approximately 53%
of those of HL&P. Whether considered prior to or following the Basic Mergers,
the HL&P/Houston operations are "predominant".
As acknowledged by the Division of Investment Management of
the Commission (the "Staff") in its June 1995 report entitled The Regulation of
Public-Utility Holding Companies (the "1995 Staff Report"), "the [Commission's]
decisions under [Sections 3(a)(1) and 3(a)(2)] have generally focused on size
as a proxy for effective state
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(7) The Commission has repeatedly stated: "In determining the intent
of Congress in the use of the word 'predominantly,' we are required to construe
the statute according to a FAIR INTERPRETATION of its terms. In the absence of
some considerations apparent upon the face of the statute or embodied in
legislative history, unusual meanings of words must be avoided and ordinary
definitions followed . . . ." In re Northern States Power Co., Holding Co. Act
Release No. 12,655 (September 16, 1954) (quoting Union Electric Co., 5 S.E.C.
252, 261 (1939)) (emphasis added).
(8) Holding Co. Act Release No. 12,655 (September 16, 1954).
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regulation. The result has been a somewhat confusing array of decisions."(9)
While the 1995 Staff Report amply demonstrates the inconsistencies in the
Commission's application of a gross-to-gross test in its prior decisions, 35%
has emerged as an informal benchmark of the relative contribution by a
subsidiary (on a gross-to-gross basis) that has been used by the Commission for
purposes of granting an exemption under Section 3(a)(2).(10)
It is respectfully submitted that it is in the public interest
that the Commission revisit the appropriateness of that 35% revenue benchmark.
First, the Act does not require any such strict, numerical
test; indeed, the Commission has also stated "we do not recognize any
particular ratios of revenues or assets as being finally determinative of the
question"(11) of whether a company is predominantly a utility. Moreover, if a
numerical test is to be applied, the 35% ratio has no inherent validating
logic. It would be completely consistent with the statutory word "predominant"
to simply require that the parent's utility operations be larger than those of
the subsidiary(12); here, based on revenues, they are almost twice as large.
Indeed, based on other equally valid financial indicators, the size of NorAm's
operations is an even smaller percentage of the size of HL&P's operations.
The book value of NorAm's utility assets (i.e., net property, plant and
equipment) was approximately 18% of that of HL&P at December 31, 1996; NorAm's
operating income from utility operations was approximately 24% of that of HL&P
for 1996.
Second, the prior cases denying the Section 3(a)(2) exemption
are distinguishable in that none of those cases involves the combination of a
holding company that is a pure electric utility company with a subsidiary that
is a pure gas utility company, as would be the case in the proposed
combination. In terms of stability, continuity and scale of operations, HL&P
is an established utility of the type that the Act was designed to foster, and
will continue to operate as such subsequent to the Basic Mergers. Under the
facts of the Basic Mergers: (i) the parent company will continue to directly
operate no utility operations other than the traditional electric utility
operations of HL&P, (ii) its only utility subsidiary will continue to directly
operate no utility operations other than the traditional gas utility operations
of NorAm, and (iii) the parent will account for comfortably more than half
(indeed, almost two-thirds) of the combined utility operating revenues. The
Commission should
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(9) 1995 Staff Report at 111.
(10) Id. at 111-12. The Commission has stated that "in all prior
cases where exemptions under Section 3(a)(2) have been denied, the gross
utility revenues of the subsidiaries have exceeded 35 percent of those of the
parent." Id. In re Maine Public Service Co., Holding Co. Act Release No. 7541
(July 7, 1947).
(11) In re Kentucky Utilities Co., Holding Co. Act Release No. 9017
(April 20, 1949).
(12) See text at note 8 above.
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therefore consider whether the "gross-to-gross" test should have any
applicability to a comparison of the relative magnitude of gas utility
operations to that of electric utility operations.
Third, the prior cases using the 35% test may also be
distinguished in that the test was formulated during periods of concern
regarding the effectiveness of state regulation; that is, the 35% ratio became
a benchmark prior to the emergence of effective state regulation. Given the
plenary authority of the states that will regulate Houston and NorAm to
scrutinize affiliate transactions, and the manifest differences in the nature
of the utility services to be provided by Houston on the one hand and NorAm on
the other, there exists no basis for concern about the effectiveness of state
regulation. Moreover, the proposed transaction has received approval of each of
the utility commissions in the states other than Texas presently served by
NorAm. Indeed, the plenary authority of all of those commissions and the Texas
regulatory bodies to continue to regulate HL&P and NorAm will not be affected
by the mergers. See Item 4 below. In fact, regulatory review by state
commissions may actually be enhanced by keeping electric and gas utility
operations in separate corporate entities.
Finally, in order to "respond flexibly to the legislative,
regulatory and technological changes that are transforming the structure and
shape of the utility industry,"(13) the Commission has indicated a willingness
to reconsider precedent in interpreting Section 3(a) of the Act.(14) In this
vein, the Commission has announced its intention to reject bright-line tests
and rather to consider the specific facts and circumstances surrounding each
specific request for exemption, giving significant attention to the
availability of state regulation for the proposed transaction.(15) The
Commission's intention in this regard is consistent with its broad power to
interpret and define the terms, phrases and provisions used in the Act. See
Exhibit H (Memorandum from James R. Doty to the Office of Public Utility
Regulation, Division of Investment Management, Securities and Exchange
Commission, The General Interpretive Powers Held by the SEC With Regards to
the Public Utility Holding Company Act of 1935 (February 21, 1997)).
Thus, there is no compelling public interest reason for the
Commission to deny an exemption under Section 3(a)(2). Certainly, an exemption
should not be denied based on formalistic adherence to a size test that is
neither required by the Act nor relevant to the realities of today's
competitive environment in the marketing and delivery of energy services. See
in this connection the discussion in Item 3.A.3 of the "unless and except
clause" in Section 3(a) of the Act. For these reasons, the Commission should
decline to be
- --------------------
(13) 1995 Staff Report at 70.
(14) Id. at 119.
(15) 1995 Staff Report at 119.
12
<PAGE> 13
confined by the strictures of the 35% revenue benchmark (which is not required
by the Act) and should find that the holding company that will be formed
pursuant to the Basic Mergers will be "predominantly a public-utility".
2. CONTIGUITY
Eligibility for a Section 3(a)(2) exemption also includes the
requirement that the holding company be "a public-utility company whose
operations as such do not extend beyond the State in which it is organized and
States contiguous thereto." Applying the plain words of the Act, particularly
the term "as such", Houston will satisfy the contiguity requirement because its
operations will be conducted exclusively in Texas, its state of incorporation.
Its NorAm subsidiary's operations, on the other hand, will be conducted in
Texas, three states that are contiguous to Texas and two non-contiguous states,
Minnesota and Mississippi. Nothing in the brief provisions of Section 3(a)(2)
requires geographic contiguity as to subsidiary operations. This point is
underscored by comparing the language in Section 3(a)(2) with that in Section
3(a)(1), which requires intrastate operations as to both the parent and its
utility subsidiaries.
In Union Electric Co. of Missouri,(16) the Commission noted
that in Section 3(a)(2) "there is not a single word referring to subsidiaries,"
but that various other sections of the Act (including Section 3(a)(1))
specifically refer to the "operations, activities or place of incorporation of
the subsidiaries of the holding company seeking exemption." The Commission
therefore concluded that "it is plain that under that subsection [3(a)(2)]
Congress intended us to ignore as irrelevant the place of operation of the
operating subsidiaries of the holding company, and that we should in the
instant case consider solely whether the operations of Union Electric Company
of Missouri itself, as an operating company, are confined to the state of
Missouri and contiguous states."(17) In a later proceeding, the Commission
again affirmed that "[c]ontiguity of the utility subsidiaries is not required
by paragraph (2) of section 3(a)."(18)
- --------------------
(16) 5 S.E.C. 252 (1939).
(17) This approach coincides with the Commission's intention to
flexibly interpret the geographic requirements for an integrated public-utility
system under Section 2(a)(29) of the Act. See 1995 Staff Report at 72-74
("noting that the relevance of physical and geographic integration to a sound
public-utility industry has diminished").
(18) In re Northern States Power Co., Holding Co. Act Release No.
22334 (December 23, 1981) (approving the acquisition by a holding company of a
subsidiary and allowing the holding company to maintain exempt status pursuant
to Section 3(a)(2), notwithstanding that the new subsidiary had operations in
states non-contiguous to the state of organization of the holding company). See
also, however, In re Eastern Pub. Serv. Co., Securities Act Release No. 1973
(1940).
13
<PAGE> 14
3. THE UNLESS AND EXCEPT CLAUSE
Under the "unless and except" clause of Section 3(a), the
Commission would have the authority to revoke or deny Houston's Section 3(a)(2)
exemption if the Commission were to determine that the exemption is
"detrimental to the public interest or the interest of investors or consumers."
The Commission has rarely invoked this authority, and recent Commission orders
granting Section 3 exemptions for combination gas and electric companies
indicate that the Commission should not find the proposed transaction to be
detrimental so as to justify invocation of the "unless and except" clause.
In the past, the Commission disfavored combination gas and
electric systems, even among exempt holding companies.(19) Moreover, Section
11 of the Act restricts combining gas and electric systems in registered
holding companies. The Commission has explicitly stated, however, that "this
[Section 11] standard is not in terms applicable to an application for
exemption under 3(a)(2), since that provision does not require that the system
be a single integrated system, but rather that it be predominantly a
public-utility company."(20) The Commission has further noted that "in a
number of prior cases, the Commission has held that combination companies may
receive an exemption even though they did not meet the single integrated system
standard of Section 11(b)(1).(21) Indeed, the Commission has recognized that
while its past effort to further public and consumer interest by keeping
electric and gas systems separate may have been "[v]alid and constructive . . .
in its day, that approach may now be outmoded."(22)
The Commission has stated that the "broad and flexible
language" of the "unless and except" clause should be read "in a way that
makes economic and social sense in the light of contemporary realities."(23) In
recent proceedings the Commission has determined that one of the "contemporary
realities" to consider in deciding whether an exemption would be contrary to
the public interest is "the protection afforded to investors, consumers, and
the public by the existence of vigorous state regulation."(24) The Commission
- --------------------
(19) In re Illinois Power Co., 44 S.E.C. 140 (1970).
(20) In re Delmarva Power & Light Co., Holding Co. Act Release No.
19717 (October 19, 1976).
(21) Id.
(22) Union Elec. Co., 45 S.E.C. 489 (1974), aff'd without opinion sub
nom. City of Cape Girardeau v. S.E.C., 521 F.2d 324 (D.C. Cir. 1975).
(23) Id.
(24) WPL Holdings, Inc., Holding Co. Act Release No. 24590 (February
26, 1988).
14
<PAGE> 15
has granted exemptions to combination electric and gas companies where it has
found that the existence of local and state regulation of the utility industry
was sufficient to ensure that the interests of consumers, investors and the
public would be protected.(25) These decisions were based on an earlier
statement by the Commission that competition in the energy industry is a
"question of state policy" and that the conclusions of local officials "should
be given great weight in determining whether the public interest would in fact
be adversely affected."(26)
The proposed transaction, and thus the resulting holding
company structure, are subject to approval requirements of state regulatory
bodies in each of the states other than Texas where NorAm operates, and,
indeed, have received all such approvals. The Texas regulatory bodies (indeed,
all of the state regulatory bodies) will retain jurisdiction over the utilities
(as specifically set forth in Item 4 below). Thus, in this instance, as in
prior proceedings where the Commission declined to apply the "unless and
except" clause, "the grant of an exemption from the Act would not result in a
regulatory gap"(27) and, therefore, would not be detrimental to the public
interest. Rather, the resulting holding company will serve such interest and
the interest of investors and consumers by producing a number of economies and
efficiencies, similar to economies and efficiencies upon which the Commission
has in the past looked favorably.(28)
Most significantly, the resulting holding company will permit
both Houston and NorAm to respond more rapidly and effectively to the changing
nature of the electric and gas industries in the face of the convergence of the
electricity and natural gas markets. Moreover, a holding company structure
would give both Houston and NorAm greater flexibility to take advantage of the
lowest-cost financing opportunities that are specifically
- --------------------
(25) This deference to local officials and increased acceptance of
combined gas and electric systems were reflected in the 1995 Staff Report. See,
e.g., 1995 Staff Report at 74-76. In light of the recommendations and the
approach of the 1995 Staff Report, and considering the numerous instances where
the Commission has exempted combination companies in the past, the proposed
transaction should not raise any concerns that it is detrimental to interests
of consumers, investors or the public. See also Dominion Resources Inc.,
Holding Co. Act Release No. 24618 (April 5, 1988).
(26) In re Northern States Power Co., 36 S.E.C. 1 (1954).
(27) Id.
(28) See, e.g., In re Illinova Corp., Holding Co. Act Release No.
26054 (May 18, 1994) (granting exemption requested in connection with a
proposed merger based on an application that claimed that the new structure
would create efficiencies and economies such as allowing the resulting
companies to respond to competitive opportunities in the electric power
industry and increasing the financial flexibility of the resulting companies).
15
<PAGE> 16
designed for their manifestly different utility businesses. In addition, the
combination of HI's electric market knowledge with NorAm's wholesale gas and
electricity trading operations and skills will help propel the combined company
forward in the converging wholesale energy markets, benefitting investors.
The statement of Milton Honea, the Chairman, President and
Chief Executive Officer of NorAm, elaborates on the highly beneficial nature of
the transaction to all concerned:
This transaction is a natural fit that will benefit our shareholders,
customers, and employees. Our companies have a shared vision, common
geographical areas, and complementary skills and assets. Our
shareholders benefit from the value created by the combination -- the
increased access to Houston Industries' experience and skills in the
electric power industry, Houston Industries' financial strength, and
our complementary international development interests. Our customers
benefit from the combined company's enhanced ability to offer a broad
array of products and services, particularly in electricity. Finally,
the combination will provide greater opportunities for our employees
as the combined company continues to expand its wholesale, retail, and
international presence.
Don Jordan, Chairman and Chief Executive Officer of HI, adds:
The combination of HL&P and Entex under one owner offers excellent
potential for enhancing local customer service and for providing a
wide range of new value-added services. At the same time, we intend
to continue the efforts already underway to increase the opportunity
to move gas from west to east across the Mid-Continent region where
NorAm Gas Transmission and Mississippi River Transmission are
strategically located.
Houston Industries plans to expand many of the retail services offered
by NorAm Energy throughout its gas and electric distribution
operations. NorAm has been a leader in developing new value-added
services for residential and small business customers such as
appliance repair and preventative maintenance contracts and home
security system sales and monitoring, as well as services for other
utilities and retail marketers.
ITEM 4. REGULATORY APPROVAL.
HI and NorAm made the necessary filings with the Department of
Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. The waiting period thereunder expired on October 31,
1996. In addition, the Department of Justice has informed HI's counsel that
its inquiry regarding the filings has been concluded.
The Basic Mergers are subject to review by regulatory
commissions in each state other than Texas in which NorAm conducts utility
operations. HI and NorAm have
16
<PAGE> 17
requested and received prior final approval of the Basic Mergers from the
Minnesota Public Utilities Commission, the Arkansas Public Service Commission,
the Oklahoma Corporation Commission, the Louisiana Public Service Commission and
the Mississippi Public Service Commission. See Exhibit E. Each of those
agencies regulates rates and services provided by a NorAm division and has
reviewed the transaction to assure that it is not inconsistent with the public
interest. Texas statutes do not require HI and NorAm to obtain approval of the
Basic Mergers from the Texas Railroad Commission ("Railroad Commission") or the
Texas Public Utility Commission ("TPUC"). NorAm and HI personnel, have,
however, discussed the Basic Mergers with the Commissioners and Staff members of
both the Railroad Commission and the TPUC, have furnished those agencies with
copies of orders issued by the other state regulatory commissions and have
committed to provide Texas ratepayers with the same commitments as have been
made in the approval process for the benefit of ratepayers in other
jurisdictions. The Basic Mergers will not adversely affect the authority of the
Railroad Commission over NorAm's operations or of the TPUC over HL&P's
operations.
NorAm's power marketing operations are conducted through NES
pursuant to power marketing authorizations granted by FERC. On September 30,
1996, NorAm and HI filed notice of a change in the status of NES to reflect its
post-merger affiliation with HL&P and for confirmation that NES may continue
power marketing activities at market based rates following the Basic Mergers.
Prior to issuance of the FERC order described below, HI, HL&P
and NorAm concluded that approval of the Basic Mergers would not be required
from FERC. Although Section 203 of the Federal Power Act of 1935 (the "FPA"),
16 U.S.C. 824b, requires FERC approval of certain mergers, combinations and
property dispositions by "public utilities" (as defined in the FPA), the Basic
Mergers were not considered to be within that requirement. HL&P is not a
"public utility" under the FPA, because it operates wholly in intrastate
commerce, except for certain transactions that do not make it a "public
utility" under the FPA. NorAm is not a "public utility" under the FPA.
NorAm's subsidiary, NES, operates as a "power marketer" under provisions of the
FPA by virtue of its entering into transactions for the purchase and sale of
electricity at wholesale in interstate commerce, but NES is not merging with
any party or disposing of any of its properties in the Basic Mergers.
On February 5, 1997, FERC issued an order to determine whether
it may have jurisdiction under the FPA over the Basic Mergers. In its order,
FERC required NES either to file a response within 30 days stating why NES
believes FERC does not have jurisdiction, or to file an application for
approval of the Basic Mergers under Section 203 of the FPA.
In its response filed March 7, 1997, NES stated that, for the
reasons set forth above, the Basic Mergers are not subject to FERC jurisdiction
under the FPA. On March 27, 1997, without conceding that FERC approval is
required to close the Basic Mergers, NES filed an application for
authorization pursuant to Section 203 of the FPA. See Exhibit I.
The Nuclear Regulatory Commission ("NRC") has authority to
determine whether any transfer of control over an NRC operating license is in
accordance with
17
<PAGE> 18
provisions of the Atomic Energy Act of 1954. On December 9, 1996, the NRC
informed HL&P that the NRC staff believes that no NRC action is required for
the Basic Mergers to occur. See Exhibit G, Appendix 3, Letter from NRC to HL&P
(December 9, 1996).
Four municipal approvals were required under the terms of
various NorAm franchise contracts:
o On December 18, 1996, the Houston City Council adopted an ordinance
approving the transfer of Entex's franchise through the Basic Mergers.
The ordinance was adopted without dissent. See Exhibit G, Appendix 2:
Exhibit 1.
o On October 2, 1996, Stafford's City Council adopted an ordinance
approving the Basic Mergers. See Exhibit G, Appendix 2: Exhibit 2.
o On November 7, 1996, Longview's City Council adopted an ordinance
approving a transfer of Arkla's franchise and recognizing the Basic
Mergers. See Exhibit G, Appendix 2: Exhibit 3.
o On December 15, 1996, approval for the transfer of franchise
application before the City of Tyler became effective by operation of
law. There exists no formal order or approval.
ITEM 5. PROCEDURE.
HI and HL&P respectfully request that the Commission issue its
order granting and permitting the exemption requested by this Application as
soon as practicable, but in any event not later than June 1, 1997.
HI and HL&P hereby (i) waive a recommended decision by a
hearing officer or any other responsible officer of the Commission, (ii) agree
that the Division of Investment Management may assist in the preparation of the
decision of the Commission, and (iii) request that the Commission order that
the exemption requested by this Application be effective immediately upon
consummation of the Basic Mergers.
18
<PAGE> 19
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
Exhibit A: Agreement and Plan of Merger, as amended (attached as Appendix A to Amendment No. 2 to the
Registration Statement appearing and incorporated as Exhibit B hereto)
Exhibit B: Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P, filed on October 28,
1996 (Registration No. 333-11329), incorporated by reference herein
Exhibit C: 1995 State-by-State Gross Operating Utility Revenues*
Exhibit C.1: 1996 State-by-State Gross Operating Utility Revenues
Exhibit D: Notice pursuant to 17 C.F.R. Section 250.23(f)*
Exhibit E: Certain Orders of State Regulators:
E.1. Order, dated November 6, 1996, of the Arkansas Public Service Commission conditionally
approving the Merger*
E.2. Final Order, dated October 15, 1996, of the Corporation Commission of the State of Oklahoma
approving the Merger*
E.3. Final Order Approving Merger Transaction, dated December 11, 1996, of the Public Service
Commission of the State of Mississippi*
E.4. Letter of Non-Opposition to the Merger, dated December 23, 1996, of the Louisiana Public
Service Commission*
E.5. Amendment, dated January 23, 1997, to Letter of Non-Opposition to the Merger, dated December
23, 1996, of the Louisiana Public Service Commission*
E.6. Final Order Approving Merger Subject to Conditions, dated February 24, 1997, of the Minnesota
Public Utilities Commission*
E.7. Final Order, dated March 12, 1997, of the Arkansas Public Service Commission approving the
Merger*
Exhibit F: Omitted intentionally; not applicable
Exhibit G: Response to February 13, 1997 data request of the Office of Public Utility Regulation, Division of
Investment Management, Securities and Exchange Commission*
Exhibit G.1: Revised Responses to Items 1 and 2 to February 13, 1997 data request of the Office of Public Utility
Regulation, Division of Investment Management, Securities and Exchange Commission
Exhibit H: Memorandum from James R. Doty to the Office of Public Utility Regulation, Division of Investment
Management, Securities and Exchange Commission, The General Interpretive Powers Held by the SEC With
Regards to the Public Utility Holding Company Act of 1935 (February 21, 1997)
Exhibit I: Press Release of NorAm Energy Corp., dated March 27, 1997, Regarding Filing of Application
under Section 203 of the FPA
</TABLE>
* Previously filed.
19
<PAGE> 20
Financial Statements
1. Statements of Applicants.
Reference is made to the following documents, each of which is
incorporated by reference herein: (i) Form U-3A-2 for HI for Calendar Year
1996, filed on February 28, 1997, Commission File Number 069-00231, and (ii)
Annual Report on Form 10-K of HI (Commission File Number 1-7629) and HL&P
(Commission File Number 1-3187) for the fiscal year ended December 31, 1996,
filed on March 20, 1997.
2. Statements of Top Registered Holding Company.
None.
3. Statements of Company Whose Securities Are Being Acquired or Sold.
Reference is made to the Annual Report on Form 10-K of NorAm
(Commission File Number 1-3751) for the fiscal year ended December 31, 1996,
filed on March 28, 1997, which is incorporated by reference herein.
4. Statements of Changes.
None.
5. Pro Forma Financial Statements Showing the Effects of the Basic Mergers.
Reference is made to Amendment No. 2 to the Registration
Statement on Form S-4 of HI and HL&P (Registration No. 333-11329), filed on
October 28, 1996, which is incorporated by reference herein.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
The proposed transaction, a corporate restructuring, neither
involves a "major federal action" nor "significantly affects the quality of the
human environment" as those terms are used in Section 102(2)(c) of the National
Environmental Policy Act. Consummation of the proposed transactions will not
result in changes in the operations of the parties that would have any impact
on the environment. No Federal agency is preparing an Environmental Impact
Statement with respect to this matter.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused this statement
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: April 11, 1997 Houston Industries Incorporated
By: /s/ HUGH RICE KELLY
-------------------------------
Hugh Rice Kelly
Executive Vice President, General Counsel
and Corporate Secretary
Houston Lighting & Power Company
By: /s/ HUGH RICE KELLY
-------------------------------
Hugh Rice Kelly
Executive Vice President, General Counsel
and Corporate Secretary
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
Exhibit A: Agreement and Plan of Merger, as amended (attached as Appendix A to
Amendment No. 2 to the Registration Statement appearing and incorporated as Exhibit B hereto)
Exhibit B: Amendment No. 2 to the Registration Statement on Form S-4 of
HI and HL&P, filed on October 28, 1996 (Registration No.
333-11329), incorporated by reference herein
Exhibit C: 1995 State-by-State Gross Operating Utility Revenues*
Exhibit C.1: 1996 State-by-State Gross Operating Utility Revenues
Exhibit D: Notice pursuant to 17 C.F.R. Section 250.23(f)*
Exhibit E: Certain Orders of State Regulators:
E.1. Order, dated November 6, 1996, of the Arkansas Public Service Commission conditionally
approving the Merger*
E.2. Final Order, dated October 15, 1996, of the Corporation Commission of the State of Oklahoma
approving the Merger*
E.3. Final Order Approving Merger Transaction, dated December 11, 1996, of the Public Service
Commission of the State of Mississippi*
E.4. Letter of Non-Opposition to the Merger, dated December 23, 1996, of the Louisiana Public
Service Commission*
E.5. Amendment, dated January 23, 1997, to Letter of Non-Opposition to the Merger, dated December
23, 1996, of the Louisiana Public Service Commission*
E.6. Final Order Approving Merger Subject to Conditions, dated February 24, 1997, of the Minnesota
Public Utilities Commission*
E.7. Final Order, dated March 12, 1997, of the Arkansas Public Service Commission approving the
Merger*
Exhibit F: Omitted intentionally; not applicable
Exhibit G: Response to February 13, 1997 data request of the Office of Public Utility Regulation, Division of
Investment Management, Securities and Exchange Commission*
Exhibit G.1: Revised Responses to Items 1 and 2 to February 13, 1997 data request of the Office of Public Utility
Regulation, Division of Investment Management, Securities and Exchange Commission
Exhibit H: Memorandum from James R. Doty to the Office of Public Utility Regulation, Division of Investment
Management, Securities and Exchange Commission, The General Interpretive Powers Held by the SEC With
Regards to the Public Utility Holding Company Act of 1935 (February 21, 1997)
Exhibit I: Press Release of NorAm Energy Corp., dated March 27, 1997, Regarding Filing of Application
under Section 203 of the FPA
</TABLE>
* Previously filed.
<PAGE> 1
EXHIBIT C.1
1996 STATE-BY-STATE GROSS OPERATING UTILITY REVENUES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
% of Pro
Amount Forma Combined
------ --------------
<S> <C> <C>
HL&P
Texas $4,025 66%
------ ------
NorAm
Texas 711 12%
Arkansas 339 6%
Louisiana 165 3%
Oklahoma 83 1%
Mississippi 103 2%
Minnesota 713 10%
------ ------
Total NorAm $2,114 34%
------ ------
Pro Forma Combined $6,139 100%
====== ======
</TABLE>
C.1-1
<PAGE> 1
EXHIBIT G.1
REVISED RESPONSES TO ITEMS 1 AND 2 TO FEBRUARY 13, 1997 DATA REQUEST
OF THE OFFICE OF PUBLIC UTILITY REGULATION, DIVISION OF INVESTMENT MANAGEMENT,
SECURITIES AND EXCHANGE COMMISSION
1. PLEASE INCLUDE IN THE RECORD OPERATING REVENUES, OPERATING INCOME
AND NET INCOME FOR THE MOST RECENT AVAILABLE 12-MONTH PERIOD, AND
ASSETS AND NUMBER OF CUSTOMERS AS OF THE MOST RECENT AVAILABLE
DATE, ATTRIBUTABLE TO THE UTILITY OPERATIONS OF HOUSTON INDUSTRIES
INCORPORATED AND NORAM ENERGY CORP., AND RELATED RATIOS WITH
RESPECT TO EACH ITEM.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FOR 12-MONTH PERIOD HOUSTON NORAM ENERGY HI/HL&P NORAM/ NORAM LOCAL NORAM UTILITY
AT 12/31/96 INDUSTRIES, CORP. PERCENTAGE GAS PERCENTAGE OPERATIONS
INCORPORATED OF TOTAL OF TOTAL PERCENTAGE OF HL&P
UTILITY OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross Operating HL&P NorAm Local Gas 66% 34% 53%
Utility Revenues $4,025,027,000 Distribution
$2,114,000,000
Consolidated $990,466,000 $314,466,000 76% 24% N/A
Operating Income
Net Operating Utility HL&P NorAm 80% 20% 24%
Income $732,328,000 $178,000,000
Consolidated Net $404,944,000 $90,858,000 82% 18% N/A
Income
Total Consolidated $12,287,857,000 $4,017,477,000 75% 25% N/A
Assets
Total Utility Assets $10,596,232,000 $1,921,000,000 85% 15% 18%
Customers HL&P Local Gas 36% 64% N/A
1,540,578 Distribution
2,787,890
(Texas customers:
Arkla 45,717
Entex 1,166,119)
</TABLE>
G.1-1
<PAGE> 2
2. PLEASE INCLUDE A BRIEF NARRATIVE EXPLANATION OF WHY NORAM HAS
SIGNIFICANTLY MORE CUSTOMERS THAN HL&P.
The number of customers served by a retail public utility depends on
three factors: the nature of the utility service, the size of the geographic
area in which the utility is authorized to provide service and the population
density within that geographic area. Under traditional public utility
regulation, the regulatory authority grants each retail public utility a
"certificate of convenience and necessity" to provide utility service within a
defined geographic boundary. While minor overlaps in such territories are
frequent, the bulk of the retail customers in a given area will usually be
served by a single public utility, and within that defined area the public
utility generally has an obligation to provide utility service at
nondiscriminatory rates to all who request such service. If the certificated
area encompasses a large municipality, the potential customer base, of course,
is larger than it would be in an area that is primarily rural in nature. Also,
the nature of the utility service can influence the willingness of individual
customers to obtain service from the utility. For example, the cost of natural
gas line extensions and the availability of alternatives to natural gas tend to
reduce the number of rural natural gas customers in some areas, though rural
electric service can be more prevalent as a result of the efforts of the Rural
Utilities Service and retail electric co-ops.
The HL&P utility territory is concentrated in the city of Houston,
Texas and 22 surrounding counties, a geographical area of about 5,000 square
miles. As of December 31, 1996,(1) HL&P had approximately 1,528,000 customers:
1.35 million residential and 187,000 commercial and industrial customers.
Within this area, the number of HL&P customers predominates over the number of
NorAm customers. HL&P's residential customers purchased approximately 19
million mwhs of electricity or about 29% of total HL&P mwh sales for 1996. The
commercial and industrial customer base purchased approximately 44 million
mwhs in 1996 or about 68% of total HL&P mwh sales.
This two-to-one ratio of all commercial and industrial sales over
residential sales reflects the significant concentration of chemical,
petrochemical, refinery, and other industrial demand for electricity in the
concentrated Houston geographical area. Residential customer growth since 1988
has averaged 1.8% per year. Commercial and industrial customer growth since
1988 has averaged 1.3% per year.
____________________
(1) Unless otherwise indicated, all of the figures cited herein are as
of December 31, 1996.
G.1-2
<PAGE> 3
NorAm's local distribution companies provide gas service to a
geographic area, which encompasses not only the metropolitan area of Houston,
but rural areas and smaller towns in other parts of Texas, Louisiana, Arkansas
and Oklahoma; and NorAm provides gas service in the City of Minneapolis and
other communities in Minnesota. Within this geographic area, NorAm serves a
total of 2,788,000 customers. The NorAm utility divisional-system is
significantly concentrated along the Texas Gulf Coast, beginning around Corpus
Christi, Texas and extending into northern Louisiana, including Shreveport.
This system also serves a territory which includes almost all of southern
Arkansas through mid-state, and extending as far northeast as Jonesboro,
Arkansas, to the southeastern corner of Missouri. The system serves
Mississippi, from the Gulf Coast north through the center of the state; and it
includes six gas distribution communities along the Oklahoma border with Texas.
These are the areas served by the Entex and Arkla divisions. Finally, NorAm
serves the metropolitan area of Minneapolis, Minnesota and other scattered
communities in Minnesota (Minnegasco).
Although this gas distribution region encompasses 1,368 communities in
six states, the greatest number of customers (1.2 million) is situated in
Texas. The breakdown of customers in other states is as follows: Minnesota
640,000, Arkansas 439,000, Louisiana 263,000, Mississippi 119,000 and Oklahoma
115,000.
2.5 million of NorAm's customers are residential. 1.3 million of those
residential customers are within the Entex division (Texas and Louisiana),
661,000 are within the Arkla division (Arkansas, Mississippi and Oklahoma) and
584,000 are within the Minnegasco division (Minnesota). The total numbers of
NorAm commercial and industrial customers in all six states are 228,000 and
2,326, respectively. NorAm residential customers purchased 198.8 million mcf
(46% of total sales) of gas in 1996 with commercial gas purchases at 131.8
million mcf (30% of total sales) and industrial gas purchases at 59.8 million
mcf (14%).
As with other retail utilities, for both HL&P and NorAm, the customer
base is primarily residential; but for NorAm approximately 90% of its customers
are residential. While NorAm has more customers than HL&P, in NorAm's case each
of those residential customers provided on average only $481 in revenue during
1996. Each of HL&P's residential customers, however, was responsible for on
average approximately $1,200 in revenues during 1996.
The relative percentages of residential customer gas purchases to small
commercial/industrial and large commercial/industrial purchases vary
significantly from division to division, as these divisions move beyond the
Texas Gulf Coast, as set forth below:
G.1-3
<PAGE> 4
<TABLE>
<CAPTION>
(in millions)
ENTEX ARKLA MINNEGASCO TOTAL
----- ----- ---------- -----
<S> <C> <C> <C> <C>
Residential 73.4 mcf 50.4 mcf 75.0 mcf 198.8 mcf
(48%) (57%) (50%) (51%)
Small Commercial 48.7 mcf 26.1 mcf 23.2 mcf 98.0 mcf
and Industrial (32%) (29%) (16%) (25%)
Large Commercial 29.6 mcf 12.7 mcf 51.3 mcf 93.6 mcf
and Industrial (20%) (14%) (34%) (24%)
--- ---- ---- ------
Total 151.7 mcf 89.2 mcf 149.5 mcf 390.4 mcf
(100%) (100%) (100%) (100%)
</TABLE>
Note, however, that if only firm (as opposed to interruptible) contract amounts
are considered for Entex and Minnegasco(2), there is a significant decrease in
commercial and industrial volume:
<TABLE>
<CAPTION>
(in millions)
ENTEX MINNEGASCO
----- ----------
<S> <C> <C>
Residential 73.4 mcf (56%) 75.0 mcf (66%)
Small Commercial and Industrial 36.9 mcf (28%) 7.1 mcf (6%)
Large Commercial and Industrial 20.1 mcf (16%) 31.2 mcf (28%)
-------------- --------------
Total 130.4 mcf (100%) 113.3 mcf (100%)
</TABLE>
Thus, when firm gas sales are considered for Entex and Minnegasco, an even lower
percentage of commercial and industrial revenues are represented by these
purchases.
A comparison of 1996 HL&P electricity unit sales by customer class to
NorAm 1996 gas unit sales by customer class reflects the following(3):
<TABLE>
<CAPTION>
HL&P (mwhs) NORAM (mcfs)
----------- ------------
<S> <C> <C>
Residential 29% 46%
Commercial and Industrial 68% 44%
Other 3% 10%
--- ---
100% 100%
</TABLE>
- ---------------------
(2) Arkla did not have any interruptible contract amounts.
(3) A similar comparison using firm (as opposed to interruptible) contract
amounts reflects the following: HL&P - 31% residential, 66% commercial and
industrial and 3% other; NorAm - 53% residential, 36% commercial and
industrial and 11% other.
G.1-4
<PAGE> 5
As illustrated above, on the basis of units of energy sold, HL&P's sales
weigh far more heavily in the category of commercial and industrial customers
than of residential customers. NorAm, on the other hand, sells a slightly
greater amount on an mcf basis to its residential customers than to its
commercial and industrial customers. A comparison of the revenues generated for
HL&P versus NorAm by commercial and industrial customers again indicates HL&P's
predominance. Each of HL&P's commercial and industrial customers provided on
average approximately $11,600 in revenues per customer in 1996 as compared to
NorAm's commercial and industrial customers, each of which provided on average
approximately $3,600 in revenues in 1996. The concentration of high
electricity usage among industry along the Texas Gulf Coast region
substantially accounts for the greater electric energy sales to
commercial/industrial customers, and thus for the predominance of HL&P's
utility operations.
To provide electric service, HL&P, as with other electric utilities, has
constructed large generating facilities at high capital cost, and creates the
electricity which HL&P sells through the transformation into electric energy of
the fuels which HL&P purchases from others (natural gas, coal, lignite and
uranium). Today, relatively minor amounts of the electric energy sold are
purchased from other producers. HL&P distributes electric energy to its
customers through a network of power lines which HL&P has constructed and
maintains. While the costs associated with that function are not insubstantial,
they are relatively small when compared with the costs associated with
generation of electric energy.
In 1996, HL&P had $9 billion of net utility plant, which produced $1.6
billion of residential utility electric revenues in 1996 and $2.2 billion of
commercial and industrial utility electric revenues, in addition to
approximately $253 million of other utility revenues. In 1996, NorAm had $2.2
billion of natural gas distribution utility plant that produced $1.2 billion of
residential utility gas revenues and approximately $826 million of commercial
and industrial utility gas revenues.
Natural gas utilities such as the NorAm distribution companies operate
principally as distributors of natural gas purchased from others. The
facilities used for that distribution constitute the gas utility's primary
assets, which are relatively small in comparison with the total assets of an
electric generating company such as HL&P. The fuel component of the
distribution company's business is a pass-through of purchased gas costs.
G.1-5
<PAGE> 6
Therefore, the actual portion of NorAm's revenues that relate to the gas
distribution company's "value-added" activities are relatively small. Indeed,
approximately $1.3 billion --approximately 62%-- of NorAm's total 1996 revenues
of $2.1 billion are attributable to gas pass-through costs. By contrast,
HL&P's revenues attributable to pass through of fuel costs, also $1.3 billion,
are only approximately 33% of total revenues.
It is respectfully submitted that the number and characteristics of
customers has been considered by the Commission as only one of several
contextual factors, not as dispositive, in resolving questions of predominance.
In this case, to the extent such customer profile and characteristics are
considered, they reinforce the predominance of the electric utility operations
of Houston Industries, following the merger, in the core service area shared by
both utilities.
G.1-6
<PAGE> 1
EXHIBIT H
February 21, 1997
MEMORANDUM
TO: Office of Public Utility Regulation, Division of Investment
Management, Securities and Exchange Commission
FROM: James R. Doty
Baker & Botts, L.L.P.
RE: The General Interpretive Powers Held by the SEC With Regards to
the Public Utility Holding Company Act of 1935.
The June, 1995, report entitled The Regulation of
Public-Utility Holding Companies (the "1995 Staff Report"), stated that
"decisions under [Sections 3(a)(1) and 3(a)(2)] have generally focused on size
as a proxy for effective state regulation. The result has been a somewhat
confusing array of decisions."(1) While the 1995 Staff Report amply
demonstrates the inconsistencies in the application of a gross-to-gross test in
its prior decisions, 35% has emerged as an informal benchmark of the relative
contribution by a subsidiary (on a gross-to-gross basis) that has been used by
the Commission for purposes of granting an exemption under Section 3(a)(2).(2)
In their Form U-1 Application, regarding a proposed merger
transaction with NorAm Energy Corp. ("NorAm"), Houston Industries Incorporated
("HI") and Houston Lighting & Power Company ("HL&P") submitted that it would be
in the public interest to revisit the appropriateness of the 35 percent
benchmark. This Memorandum discusses the Commission's broad power to interpret
and define the terms, phrases and provisions used in the Public Utility Holding
Company Act of 1935 (the "Act"), and to supplement and expand upon the
Commission's own usage and application of those terms, in appropriate cases
without informal rulemaking. As such, we intend this Memorandum to support
- -------------------------
(1) 1995 Staff Report at 111.
(2) Id. at 111-12. The Commission has stated that "in all prior
cases where exemptions under Section 3(a)(2) have been denied, the gross
utility revenues of the subsidiaries have exceeded 35 percent of those of the
parent." Id. In re Maine Public Service Co., Holding Co. Act Release No. 7541
(July 7, 1947).
H-1
<PAGE> 2
our position that the Commission should expand upon its prior discussions of
what constitutes "predominantly a public-utility company."
I. The Commission Has Broad Authority To Define Terms When
Interpreting and Applying The Provisions Of Section 3 Of The Act.
It is a well settled tenet of administrative law that an agency
has the power to interpret statutes for which they have been delegated the
authority to administer. In fact, one court has stated that, "[i]t needs no
citation of authorities, in fact it would be an unnecessary exhibition of
learning to cite authorities for the elementary proposition that an agency
charged with carrying out a statute, . . . has also the authority to construe
the statute."(3) Courts have further stated that not only do agencies have the
power, but it is often necessary, and therefore, the duty of agencies to
interpret provisions of the statutes.(4) This is true especially when an
agency is defining a particular term in a statute it administers.(5)
When an agency is acting pursuant to these powers, courts
cannot substitute their judgment for that of the administrative agency.(6)
Rather, courts "must respect the judgment of an agency empowered to apply the
law to varying fact patterns,"(7) and cannot overturn an agency's
interpretation if it is sufficiently rational or reasonable.(8)
- -------------------------
(3) L'Enfant Plaza North, Inc. v. District of Columbia Redevelopment
Land Agency, 300 F. Supp. 426, 428 (D.D.C. 1969).
(4) California Co. v. Udall, 296 F.2d 384, 388 (D.C. Cir. 1961); see
Hoctor v. USDA, 82 F.3d 165, 168 (7th Cir. 1996).
(5) See Zuber v. Allen, 90 S.Ct. 314, 330 (1969); see also Marshall
v. Burlington Northern, Inc., 595 F.2d 511, 513 (9th Cir. 1979).
(6) When interpreting statutory provisions, administrators of the
statutes often must choose between two conflicting reasonable interpretations.
Holly Farms Corp. v. National Labor Relations Board, 116 S.Ct. 1396, 1401
(1996). But, because of their expertise and specialization in the particular
regulatory area, administrative agencies are better suited to fill in the gaps
and interpret ambiguous statutory terms. In light of this, courts give
deference to the agency's interpretation. Chevron, U.S.A., Inc. v. NRDC, 467
U.S. 837 (1984).
(7) Holly Farms, 116 S.Ct. at 1401.
(8) Niagara Frontier Tariff Bureau v. United States, 826 F.2d 1186,
1190-91 (2d Cir. 1987); Arkansas AFL-CIO v. FCC, 11 F.3d 1430, 1441 (8th Cir.
1993).
H-2
<PAGE> 3
It is also well understood that, in discharging its
interpretive duty, an agency will find it necessary to redefine or expand upon
the definitions of the operative terms of the statute.(9) An agency is accorded
the same deference when it changes its interpretation through redefining or
refining the terms of the statutes it administers. Courts have recognized that,
"an agency may change its interpretation of a statute entrusted to its
administration, and that when the intent of Congress is unclear courts must
uphold the agency's interpretation if it is based on a 'reasonable accommodation
of conflicting policies.'"(10) In this circumstance, courts understand that an
agency must have the latitude to adopt standards that may evolve over time in
response to the changing realities of the industries they regulate.(11) These
"course corrections" are allowed as long as they are consistent with
Congressional intent,(12) and the agency provides a reasoned explanation for the
change.(13)
Aware of the necessity to interpret the terms and provisions of
Section 3 of the Act, the Commission has issued regulations and rules
delineating its interpretation of the Act. The Commission's interpretation of
the meaning of the term "predominantly," however, has historically been
confined to a number of orders granting or denying the Section 3(a)(2)
exemption. This category of Commission pronouncements is not issued pursuant
to the procedures associated with informal rulemaking. This, however, does
not affect the power or ability of the Commission to proceed in this manner
when interpreting terms or provisions of the statute.(14) Nor is it expected
that definitional changes will necessarily be effected by the formal procedures
of notice and comment rulemaking.(15) Rather, the Commission has flexibility to
- -------------------------
(9) This is the situation presented here. Congress has stated that,
"[t]he Commission, by rules and regulations upon its own motion, or by order
upon application, shall exempt any holding company . . . from any provision or
provisions of this chapter . . . ." 15 U.S.C. Section 79c(a) (1988). As the
cases cited below indicate, the general exemptive authority could not be
responsibly implemented without an expansive view of the authority to define
terms.
(10) Production Worker Union of Chicago v. NLRB, 793 F.2d 323, 328
(D.C. Cir. 1986).
(11) Arkansas AFL-CIO v. FCC, 11 F.3d 1430, 1441 (8th Cir. 1993).
(12) Toyota Motor Sales, U.S.A., Inc. v. United States, 585 F. Supp.
649 (CIT 1984).
(13) Rainbow Broadcasting Co. v. FCC, 949 F.2d 405, 408 (D.C. Cir.
1991).
(14) ARCO Oil and Gas v. EPA, 14 F.3d 1431, 1433 (10th Cir. 1993)
(stating that the deferential standard of review "is the same whether the
agency interpretation is performed through rulemaking or informal
adjudication.").
(15) See Employers Inc. of Wausau v. Browner, 52 F.3d 656, 666 (7th
Cir. 1995) (stating "the degree of deference is tied not to the formality or
elaborateness of the procedures used by the agency but to the character of the
issue in relation to whatever procedures were employed to resolve it.").
H-3
<PAGE> 4
redefine, expand upon, and modify the terms of the statute without resorting to
the cumbersome process of notice and comment rulemaking so it can respond
quickly and effectively to changing industry realities. It is, therefore, well
within Commission power to revisit the issue of what is meant by "predominantly
a public-utility company" by issuing an order in response to the Form U-1
Application.
II. In Light Of The Pressures Exerted By A Rapidly Evolving Industry It Would
Be Reasonable For The Commission To Expand Its Interpretation Of The Term
"Predominantly."
Historically, the Commission has interpreted the Act flexibly in
accordance with the contemporary state of the utility industry, the market, and
technology. The Commission has recognized that technology, the utility
industry and the economy have changed extensively since the enactment of the
Act, and continue to change.(16) Indeed, according to the 1995 Staff Report,
"[s]ince enactment of the Holding Company Act, change has been the most
consistent feature of the technology and regulation of electric and gas
utilities."(17) And repeatedly, the Commission has chosen to evolve its
interpretation of the Act in response to those changes.(18) As the Commission
has explained, the Act "creates a system of pervasive and continuing economic
regulation that must in some measure at least be refashioned from time to time
to keep pace with changing economic and regulatory climates."(19)
- -------------------------
(16) E.g., Consolidated Natural Gas Co., HCAR No. 26512, 1996 WL
218645, at *4 (1996); The Southern Co., HCAR No. 25639, 1992 WL 252209, at *5-7
(1992); In re Am. Elec. Power Co., HCAR No. 20633, 1978 WL 19453, at *9-10
(1978). See generally 1995 Staff Report.
(17) 1995 Staff Report at 11.
(18) E.g., Consolidated Natural Gas Co., 1996 WL 218645, at *4; Unitil
Corp., HCAR No. 25524, 1992 WL 93961, at *4 (1992); The Southern Co., 1992 WL
252209, at *6-7; In re Am. Elec. Power Co., 1978 WL 19453, at *7-10.
(19) Union Elec. Co., 45 S.E.C. 489, 503 n.52 (1974), aff'd sub nom
City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975), cited with
approval in Eastern Utils. Assocs., HCAR No. 26232, 1995 WL 71422, at *3
(1995), and cited with approval in The Southern Co., 1992 WL 252209, at *6 &
n.39. In considering the definition of an integrated electric-utility system,
the Commission has reiterated that it "has recognized that 'Congress did not
intend to impose rigid concepts but instead expressly included flexible
considerations' to accommodate changes in the electric utility industry. Thus,
the Commission has considered advances in technology and the particular
operating circumstances in applying the integration standards." Unitil Corp.,
1992 WL 93961, at *3 (citations omitted).
H-4
<PAGE> 5
An example of the Commission's acknowledgment of these pressures is
evident in a 1996 Release amending a previous order regarding the proposed
expansion of the activities of SEI Holdings, Inc. ("SEI"), a wholly owned
nonutility subsidiary of The Southern Company ("Southern").(20) Initially, the
Commission issued an order authorizing SEI to acquire, directly and indirectly
through subsidiaries, the securities of companies that derive a substantial
portion of their revenues from energy related businesses.(21) SEI filed an
amended application asking the Commission to expand the category of activities
in which SEI was allowed to engage, including the right to engage in all forms
of brokering and marketing transactions involving all energy commodities.
Prior to this Release, it had been Commission policy, with regard to
proposed marketing of energy commodities at retail, to authorize the proposal
subject to a reservation of jurisdiction pending review of specific state plans
or programs concerning retail wheeling.(22) However, the Commission reversed
that policy in this case, stating that "in view of the pace of developments in
the industry, . . . retail marketing proposals that satisfy that statutory
requirements should not be subject to the delays inherent in a reservation of
jurisdiction."(23) The Commission further stated that:
Industry 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 is consistent with the
statutory goals to ensure a sound utility industry and the protection
of the interests of consumers . . . .(24)
Another example of the Commission's flexible approach to interpreting
the Act can be found in the Commission's 1992 approval of a registered holding
company's proposed acquisition of Australian public utility operations.(25) In
deciding that the proposed transaction
- -------------------------
(20) SEI Holdings, Inc., Holding Co. Act Release No. 26,581
(September 26, 1996).
(21) SEI Holdings, Inc., Holding Co. Act Release No. 26,468 (Feb. 2
1996).
(22) SEI Holdings, Inc., Holding Co. Act Release No. 26,581
(September 26, 1996).
(23) Id.
(24) Id.
(25) The Southern Co., 1992 WL 252209.
H-5
<PAGE> 6
satisfied the standards of sections 10 and 11 of the Act, the Commission chose
not to rely on its earlier decisions, but rather made an independent evaluation
of whether the transaction was consistent with the statutory scheme, in light
of the current state of domestic public utility companies, the modern world
economy and the regulatory environment.(26) Recognizing that the economy and the
regulatory environment had undergone significant changes, the Commission
embraced "a departure from the dicta of earlier Commissions concerning the
combination of domestic and foreign properties,"(27) and approved the
acquisition.
The Commission's commitment to evolving its interpretation of the Act
is also evidenced by its series of decisions concerning proposed acquisitions
by American Electric Power Company, Inc. ("AEP"). In 1946, the Commission
rejected AEP's application for permission to acquire the stock of the Columbus
and Southern Ohio Electric Company ("CSOE"), asserting that "the substantially
enlarged group of properties that would result from the acquisition . . .
cannot be found to be 'not so large as to impair . . . the advantages of
localized management and the effectiveness of regulation.'"(28) Yet, in 1978,
the Commission approved in principle AEP's application to acquire CSOE's stock.
The Commission rationalized its change in direction in part by observing that
since 1946, technological justifications for large systems spanning many states
had become clear.(29) The Commission also maintained that the energy crisis had
changed the desired level of competition for electric utilities.(30)
The Commission has also applied this same principle of flexibility
when interpreting section 3(a)(2). As the Commission has explained in the
3(a)(2) context, the determination of whether the 3(a)(2) standards are
satisfied must be made "in the light of contemporary circumstances" and the
Commission's "present view of the Act's requirements."(31) Further, in order to
"respond flexibly to the legislative, regulatory and technological changes that
are
- -------------------------
(26) Id. at *4-7.
(27) Id. at *5.
(28) In re Am. Elec. Power Co., WL 252209, at *8 (quoting American
Gas & Elec. Co., 21 S.E.C. 575, 816-17 (1946)).
(29) Id. at *8-10 & n.26. In support of its rationale, the Commission
cited, among other sources, a Brookings Institution study dated 1971 which
asserted that the Act's "atomization" of the electric power industry was as
undesirable under current levels of technology as had been the
over-concentration of the industry under the technology of earlier years.
(30) Id. at *12.
(31) Union Elec. Co., 45 S.E.C. at 503.
H-6
<PAGE> 7
transforming the structure and shape of the utility industry,"(32) the
Commission has indicated a willingness to reconsider precedent in interpreting
Section 3(a) of the Act.(33) In this vein, the Commission has announced its
intention to reject bright-line tests and rather to consider the specific facts
and circumstances surrounding each specific request for exemption, giving
significant attention to the availability of state regulation for the proposed
transaction.(34)
As recognized by the Commission and Staff in the releases and reports
noted above, the public utility industry is already engaged in rapid change.
Competitive forces beyond the control or influence of any single public utility
or combination of utilities are transforming the marketplace for electric power
and natural gas. Electric utilities, such as HI, must be allowed to respond
quickly and innovatively in order to keep pace with the changing environment.
It is appropriate, therefore, that the Commission respond with commensurate
promptness and flexibility when determining the rights and obligations of
entities operating in the industry it regulates.
HI and NorAm, as private parties to a business combination, have
proceeded in the reasonable expectation that the Commission should not and will
not balk at the reconsideration of an outdated "benchmark" -- such as the
gross-to-gross computation -- or in defining the terms of the Act. Therefore,
as the Commission considers HI and HL&P's Form U-1 application, it should
consider Section 3(a)(2) in light of present market and industry realities, and
expand upon its interpretation of the term "predominantly" as necessary to
grant the exemption.
- -------------------------
(32) 1995 Staff Report at 70.
(33) Id. at 119.
(34) Id.
H-7
<PAGE> 1
EXHIBIT I
NEWS RELEASE
CONTACTS: FOR RELEASE: March 27, 1997
NorAm Energy:
Randy Burkhalter (investors), (713) 654-7502
Ellen Orsburn (media), (713) 654-5930
Houston Industries:
Dan Bulla (investors), (713) 207-3120
Sandy Fruhman (media), (713) 207-3123
NORAM ENERGY SERVICES FILES APPLICATION FOR FERC APPROVAL OF MERGER
HOUSTON, March 27 -- NorAm Energy Services, Inc. (NES), a subsidiary of NorAm
Energy Corp. (NorAm), today filed an application under Section 203 of the
Federal Power Act (FPA) for approval by the Federal Energy Regulatory
Commission (FERC) of the merger of its parent company with Houston Industries
Incorporated (HI).
Although NES filed a response with the FERC on March 7 that disclaims
any FERC jurisdiction over the merger, HI and NorAm made the decision to cause
NES to file the application for approval of the merger in anticipation of an
expedited review. FERC's new merger guidelines provide for expedited review of
merger applications, particularly for transactions presenting limited issues.
NES's application requests that the Commission grant approval of the merger
within 60 days of the closing of the comment period but, in any event, no
later than August 1, 1997.
"The prospect of a prompt review in this case, where there are only
limited issues related to the role of NES in the HI-NorAm merger, led to our
decision to have NES file an application with FERC for approval of the merger
in addition to the response stating our view that the FERC does not have
jurisdiction," said Milt Honea, Chairman, President and CEO of NorAm.
"We already have received approval of the merger from the five states
and the Texas municipalities required, and we have been notified that the
Justice Department has closed our case without further action," Honea
explained. The only other regulatory action required is the Securities and
Exchange Commission's ruling on HI's application for an exemption under the
Public Utility Holding Company Act of 1935.
-more-
I-1
<PAGE> 2
NES Files for FERC Approval of Merger Page 2
"Even though we still believe that the FERC does not have jurisdiction
over the merger, our primary goal is to complete the merger as quickly as
possible, to enable the new company to compete in the converging energy
business," reiterated Don Jordan, Chairman and CEO of Houston Industries.
NorAm Energy Corp. (NYSE:NAE) is the nation's third-largest natural
gas distribution company, serving nearly 3 million customers through its Arkla,
Entex and Minnegasco distribution divisions. It is also a major natural gas
supply, gathering, storage and transportation company, as well as a wholesale
and retail energy marketer and energy services provider.
Houston Industries (NYSE:HOU) is involved in the electric utility and
unregulated energy businesses in the United States and foreign markets.
Houston Lighting & Power, its subsidiary, is the nation's tenth-largest
electric utility in terms of kilowatt-hour sales. Houston Industries Energy
pursues foreign utility privatizations and the development of unregulated power
generation projects in foreign markets.
# # #
I-2
