File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________________________________
FORM U-1
__________________________________
APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of company or companies filing this statement
and addresses of principal executive offices)
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of top registered holding company
parent of each applicant or declarant)
* * *
G. P. Maloney, Executive Vice President
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
John F. Di Lorenzo, Jr., Associate General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza Columbus, Ohio 43215
Jeffrey D. Cross, General Counsel
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
American Electric Power Company, Inc. ("American"), a holding
company registered under the Public Utility Holding Company Act of
1935, as amended ("1935 Act"), and AEP Resources, Inc.
("Resources"), a wholly-owned non-utility subsidiary of
American,FN1
FN1 Resources invests in exempt wholesale generators and foreign
utility companies and other independent energy projects.
request authority (i) for Resources, or a wholly-owned subsidiary,
to enter into a joint venture ("Management Company") with Conoco
Inc. ("Conoco") that will provide energy services to industrial,
commercial and institutional customers; (ii) for Resources, or a
wholly-owned subsidiary, to enter into a joint venture ("Capital
Company") with Conoco and its parent, E. I. du Pont de Nemours and
Company ("DuPont") that will provide financing for energy-related
assets to customers of Management Company; (iii) for American or
Resources to provide Management Company and its subsidiaries with
up to $100 million in guarantees through December 31, 2002; (iv)
for Resources, Capital Company or Management Company to form, and
guarantee the obligations of, one or more subsidiaries; (v) for
Capital Company, Management Company and their subsidiaries to issue
membership or partnership interests; and (vi) for Capital Company
and Management Company and their subsidiaries to pay dividends out
of capital or unearned surplus to the extent permitted by
applicable law. American and Resources on the one hand and Conoco
and DuPont on the other hand are sometimes hereinafter referred to
as the "Parties".
A. Introduction.
American owns and holds all of the outstanding securities of
its subsidiary companies, including seven electric utility
companies, FN2
FN2 The seven electric utility subsidiaries in the AEP System are
Appalachian Power Company, Columbus Southern Power Company,
Indiana Michigan Power Company, Kentucky Power Company,
Kingsport Power Company, Ohio Power Company and Wheeling Power
Company (collectively, the "Utility Subsidiaries"). American
also owns all of the common stock of AEP Generating Company,
which sells power at wholesale to various AEP System companies
and others, and minority interests in Ohio Valley Electric
Corporation and its subsidiary, Indiana Kentucky Electric
Corporation, which supply power to certain government
facilities.
a service company (American Electric Power Service Corporation
("AEPSC")), AEP Resources Service Company ("RESCo")FN3
FN3 RESCo, formerly known as AEP Energy Services, Inc., provides
a variety of services primarily to non-affiliated entities,
but also to its affiliates, in the United States and abroad.
Among the services provided by RESCo are engineering,
designing, construction and construction management,
operating, fuel management, maintenance and power plant
overhaul, and other similar kinds of managerial and technical
services.
and AEP Energy Services, Inc. ("AEPES")FN4.
FN4 AEPES, formerly known as AEP Energy Solutions, Inc., initially
was formed to market power and natural gas. It is now an
energy-related company under Rule 58.
The subsidiary companies are principally engaged in the generation,
transmission, and distribution of electric power. American and all
of its subsidiaries are referred to herein as the "AEP System".
DuPont is a worldwide producer of diversified products,
including chemicals, fibers, agricultural and pharmaceutical
products, polymers, films, photopolymer and electronic materials.
Conoco, a wholly-owned DuPont subsidiary, develops and produces
crude oil and natural gas, processes natural gas, and transports
and refines crude oil and other feedstocks to produce high-quality
fuels, lubricants and other products.
B. Proposed Transactions.
(1) General
Many industrial, commercial and institutional entities
have energy functions which produce (or procure) and distribute
thermal energy, electricity, fuels and other similar products to
the entity's facilities. These products then are used, among other
things, to heat or cool products, machinery and buildings, to power
machinery and lighting and for other functions in the entity's
business. The facilities used for these functions often have a
distinct physical location on the site and their staffs often are
organized separately from the rest of the site staffs.
DuPont and Conoco for example have identififed 33 large
industrial and refining plants located in 16 states among their
numerous facilities. Each of these plants has a distinct energy
function which may include boilers to produce steam and related
fuel handling and waste disposal facilities, "dowtherm" vaporizers
(a high heat transfer medium), air compressors, electric
generators, chillers, electric substations, tanks to store
industrial gases and facilities to distribute these products
throughout the industrial or refining facility. Appendix A
contains a more complete description of the facilities at some of
the sites.
Commercial and institutional entities sometimes have
similar energy functions. For example, a hospital or university
complex may have a steam plant to heat buildings, an electric
generator or a central air conditioning or chilled water facility.
Sometimes these energy facilities may serve two or more neighboring
entities.
Generally, these "Energy Facilities" include facilities
and equipment that are used by industrial, commercial and
institutional entities to produce, convert, store and distribute
(i) thermal energy products, such as process steam, heat, hot
water, chilled water, and air conditioning, (ii) electricity, (iii)
compressed air, (iv) process and potable water, (v) industrial
gases, such as nitrogen, and (vi) other similar products. Energy
Facilities also include related facilities that transport, handle
and store fuel, such as coal handling and oil storage tanks, and
facilities that treat waste for these entities, such as scrubbers,
precipitators, cooling towers and water treatment facilities.
Some Energy Facilities were placed in service in the
1950's or even earlier and are in need of significant investment to
maintain their reliability. For example, the average age of
DuPont's boilers is 35 years. Improvements to maintain reliability
may include replacement of key components, such as air compressors,
cooling towers, boiler sidewall or piping, pumps and turbines.
Other improvements, such as computer and control systems, can
improve operating efficiencies and provide better operating
information.
As the energy industry is changing, industrial,
commercial and institutional entities are considering how to manage
their energy functions more efficiently. Since energy management
is not their core business, many seek innovative assistance with
their energy facilities from companies whose core business is
energy. Likewise, energy companies seek to assist these
industrial, commercial and institutional companies. Duke Energy
for example has formed an industrial asset development subsidiary
which is considering acquiring, developing and operating industrial
energy assets in the United States and Canada.FN5
FN5 Electric Power Daily, August 27, 1997, p. 2.
Cinergy Corp., New Century Energies and Florida Progress Corp. have
formed a partnership to supply energy to commercial customers with
national operations.FN6
FN6 Energy Daily, Sept. 9, 1997.
In transactions that have come before this Commission,
Scott Paper Company sold its energy complex at Scott's Mobile,
Alabama pulp, paper and tissue mill to Mobile Energy Services,
Inc., a subsidiary of Southern Company.FN7
FN7 Southern Company, HCAR No. 26185 (December 13, 1994).
The Mobile energy complex includes turbine generators, power
boilers, recovery boilers, evaporator sets, waste treatment
facilities, fuel and "liquor" storage and station control
facilities. H. J. Heinz Company also recently outsourced its
inside the fence energy facility that provides steam, electricity
and compressed air to its manufacturing facility in Pittsburgh,
Pennsylvania to an affiliate of Duquesne Light Company.FN8
FN8 DQE, Inc., HCAR No. 26728 (June 10, 1997).
(2) The Ventures
Resources and Conoco/DuPont intend, through Capital
Company and Management Company (collectively, "Ventures"), to
develop a new business that will provide energy management and
capital for Energy Facilities. Their goal is to allow a customer
to focus its management and capital on its core businesses and
allow the Ventures to manage and finance the energy requirements of
the customer. As permitted by applicable law, Management Company
intends to provide Energy Facilities Management Services, Energy
Conservation Services, Procurement Services, Other Energy Services
and Incidental Services as described below. Capital Company
intends to provide lease and other financing for the Energy
Facilities of Management Company's customers.
The Ventures initially will finance and manage Energy
Facilities used at 16 manufacturing sites for DuPont's industrial
production. Similar assets at 17 additional DuPont and Conoco
manufacturing sites also have been identified as potential projects
for the Ventures. The Ventures will seek additional customers not
affiliated with DuPont.
American will not seek recovery through higher rates to
the Utility Subsidiaries' customers in order to compensate American
for any possible losses that it may sustain on investment in
Ventures or for any inadequate returns on such investments.
Neither Management Company nor Capital Company will be a public
utility company as defined in the 1935 Act, and without further
Commission approval, neither company will undertake any activity
if, as a result, it would become a public utility company as
defined in the 1935 Act. Without further authorization of this
Commission, the Ventures will not provide their services outside
the United States.
(3) Management Company
Management Company will provide the following services:
(a) "Energy Facility Management Services" include the
day-to-day operations, maintenance, and management, and other
technical and administrative services required to operate, maintain
and manage the Energy Facilities, as well as long-term planning and
budgeting for and evaluation of improvements to Energy Facilities.
(b) "Energy Conservation Services" include (1)
identification (through energy audits or otherwise) of energy and
other resource (water, labor, maintenance, materials, etc.) cost
reduction or efficiency opportunities; (2) design of facility or
process modifications or enhancements to realize such
opportunities; (3) management, or direct construction or
installation, of energy conservation or efficiency equipment; (4)
training of customer personnel in the operation of equipment; (5)
maintenance of energy systems, (6) design, management or direct
construction and installation of new and retrofit heating,
ventilating, and air conditioning ("HVAC"), electrical and power
systems, motors, pumps, lighting, water and plumbing systems, and
related structures, to realize energy and other resource efficiency
goals or to otherwise meet a customer's energy-related needs; (7)
system commissioning (i.e., monitoring the operation of an
installed system to ensure that it meets design specifications);
(8) reporting of system results; (9) design of energy conservation
programs; (10) implementation of energy conservation programs; (11)
provision of conditioned power services (i.e., services designed to
prevent, control or mitigate adverse effects of power disturbances
on a customer's electrical system to ensure the level of power
quality required by the customer, particularly with respect to
sensitive electronic equipment); and (12) other similar or related
activities.
(c) "Procurement Services" include arranging as agent or
broker for a customer to purchase electricity, natural gas, oil,
propane, industrial gases and other commodities and supplies used
by or distributed through Energy Facilities ("Energy Commodities").
Procurement Services also include the purchase and sale, as
principal, of electricity and natural gas, to the extent permitted
by state law and state commission orders, and other Energy
Commodities, but Management Company will not take positions in, or
trade, Energy Commodities for a profit.
(d) "Other Energy Services" including development,
design, construction, ownership, operation, and sale, and providing
other managerial and technical services for, Energy Facilities and
equipment used in and improvements to Energy Facilities.
(e) "Incidental Services" include products and services
that are incidental to Energy Facilities Management Services,
Energy Conservation Services, Procurement Services and Other Energy
Services. These incidental products and services will be closely
related to the consumption of energy and/or the maintenance of
Energy Facilities.
These services will be provided to DuPont, Conoco, any
other affiliate of Management Company (other than American, any
other registered holding company and any subsidiaries of either)
and any nonaffiliate at market-based prices. Payment for services
will vary by project and may include fee-for-service, fixed price,
time and materials, progress payments, turnkey payment, Capital
Company or third-party financing arrangements, performance
contracts with a savings guarantee or payment based on the energy
or other resource savings achieved, the output of equipment (for
example, steam, water, chilled water, air or heat), commissions,
and other payment structures.
American and Conoco will contribute equal amounts of
equity capital to Management Company for the purpose of providing
working capital for Management Company. Management Company may
also obtain debt financing from American or Resources, Conoco or
unaffiliated third parties such as commercial banks. Loans from
American or Resources to Management Company would be made at the
cost of funds incurred by American or Resources in accordance with
Rule 52.
Management Company will be staffed primarily by current
employees of DuPont and Conoco at the facilities. It is expected
that initially not more than 25 employees of AEPSC and the Utility
Subsidiaries will be transferred to Management Company. In
addition, AEPSC, the Utility Subsidiaries, RESCo, AEPES and Conoco
and its affiliates may provide services or sell goods to Management
Company.FN9
FN9 In accordance with Rules 87(a) and 90, services and goods
provided by AEPSC or the Utility Subsidiaries to Management
Company will be at cost. Services and goods may be provided
by RESCo and AEPES at other than cost in accordance with Rules
87(b)(1) and 90(d)(1).
In no event will more than 2% of the total employees of AEPSC and
the Utility Subsidiaries render services to Management Company at
any one time.
(4) Capital Company
Capital Company will offer financing for existing energy
assets and improvements and provide new capital for customers of
Management Company through sale and leaseback, project financing or
other creative financing facilities. Assets financed by Capital
Company generally will be managed by Management Company. In
addition, Capital Company will make its financing services
available to customers of Management Company to assist Management
Company in connection with its program to provide energy management
and related services to its customers.
Capital Company anticipates purchasing from DuPont and
Conoco the Energy Facilities located at 33 of their industrial and
refining facilities at their fair market value, estimated to be
approximately $1 billion. Capital Company will lease the
facilities back to DuPont and Conoco.
Capital Company expects to maintain (i) a debt to total
capitalization ratio of approximately 75% and (ii) an investment
grade rating. All debt financing obtained by Capital Company will
be non-recourse to American, Resources, DuPont and Conoco.
American will contribute cash to fund its portion of the equity
contributions required by Capital Company. DuPont and Conoco will
contribute cash or assets to fund their portion of the equity
contributions.
Capital Company may have a small staff, initially less
than ten employees; Management Company will most likely provide it
with many services. In addition, AEPSC, the Utility Subsidiaries,
RESCo, AEPES and Conoco and its affiliates may provide services to
Capital Company.
(5) Guarantees of Management Company
American or Resources may guarantee the debt and other
obligations of Management Company. Debt financing of Management
Company which is guaranteed by American will not (i) exceed a term
of 15 years or (ii) (a) bear a floating interest rate in excess of
2% over the prime rate, London Interbank Offered Rate or other
appropriate index in effect from time to time or (b) bear a fixed
interest rate in excess of 2.5% above the yield at the time of
issuance of United States Treasury obligations of a comparable
maturity. Nondebt obligations of Management Company which may be
guaranteed by American may take the form of bid bonds or
performance or other direct or indirect guarantees of contractual
or other obligations. The maximum amount of these obligations that
American or Resources proposes to guarantee is $100 million. These
guarantees are in addition to those authorized in the Orders dated
May 2, 1997 (HCAR No. 26713) and May 10, 1996 (HCAR No. 26516).
(6) Additional Subsidiaries
Resources may form special purpose subsidiaries to hold
its interests in Management Company and Capital Company.
Resources may guarantee the debt and other obligations of
these subsidiaries. From time to time it may be advantageous for
Capital Company or Management Company to form subsidiaries to
undertake one or more of the activities described herein. These
subsidiaries may be organized (i) in order to facilitate the making
of proposals to a prospective customer; or (ii) after the award of
a bid proposal, in order to facilitate closing on the purchase or
financing of the underlying assets; or (iii) at any time after the
consummation of a transaction in order, among other things, to
comply with applicable federal or state laws; or (iv) as part of
tax planning, to limit exposure to U.S. and state taxes; or (v) for
other lawful business purposes. Capital Company and Management
Company may guarantee the debt and other obligations of these
subsidiaries.
(7) Issuance of Membership Interests
It is anticipated that Capital Company and Management
Company will be limited liability companies which will issue
membership interests to Resources, DuPont and Conoco. In addition,
subsidiaries of Capital Company or Management Company may be
limited liability companies or partnerships which will issue
membership or partnership interests. Capital Company, Management
Company and their subsidiaries request authority to issue
membership or partnership interests, as the case may be.
The Management Company Operating Agreement will provide
for initial contributions by the members to the Management Company
of $1,000 and such additional amounts as may determined by the
Management Committee. The Capital Company Operating Agreement will
provide for initial contributions by the members to the Capital
Company of $1,000 and such additional amounts as may determined by
the Management Committee. Membership interests may be issued to
third parties by Management or Capital Company on terms to be
agreed by the members. Membership or partnership interests may be
issued by subsidiaries of Management or Capital Company on terms to
be decided.
(8) Dividends Out of Capital
Rule 46 under the 1935 Act prohibits subsidiaries of
registered holding companies, including Management Company, Capital
Company and their subsidiaries, from declaring or paying dividends
out of capital or unearned surplus. It is requested that
Management Company, Capital Company and their subsidiaries be
authorized to declare and pay dividends to their parent companies
from time to time out of capital or unearned surplus to the extent
permitted by applicable law.
It is expected that situations will arise where
Management Company, Capital Company or one or more of their
subsidiaries will have unrestricted cash available for distribution
in excess of current and retained earnings. Consequently, in these
situations the declaration and payment of a dividend would have to
be charged, in whole or in part, to capital or unearned surplus.
One such situation could result if Management Company or
Capital Company were to sell a portion of its equity in a
subsidiary to a third party for cash. It then would have
substantial unrestricted cash available for upstream distribution,
but (assuming no profit on the sale) would not have available
current earnings and therefore could not, without prior Commission
approval, declare and pay a dividend to the Parties out of such
cash proceeds.
Any dividend actually declared and paid by Management
Company, Capital Company or a subsidiary out of capital or unearned
surplus pursuant to the authority requested herein will conform to
applicable law of the respective company's jurisdiction of
organization and applicable covenant restrictions in loan or other
financing agreements.
The ability of these companies to use distributable cash
to pay dividends ultimately to Resources will benefit the American
System by enabling Resources to dividend the cash to AmericanFN10
FN10 Resources has authority to declare and pay dividends out of
capital or unearned surplus. HCAR No. 26760 (September 18,
1997).
or to apply such amounts to the reduction or refinancing of
outstanding bank borrowings and to fund operations of other
American subsidiaries. In addition, since Management Company,
Capital Company and their subsidiaries will be engaged in
activities described in this Application, the payment of dividends
out of capital or unearned surplus by these American direct and
indirect subsidiaries will not adversely affect the financial
integrity of the American System or jeopardize the working capital
of American's Utility Subsidiaries within the contemplation of
Section 12(c) of the 1935 Act.
C. Compliance with Rule 54.
Rule 54 provides that in determining whether to approve
certain transactions other than those involving an exempt wholesale
generator ("EWG") or a foreign utility company ("FUCO"), as defined
in the 1935 Act, the Commission will not consider the effect of the
capitalization or earnings of any subsidiary which is an EWG or
FUCO if Rule 53(a), (b) and (c) are satisfied. The requirements of
Rule 53(a), (b) and (c) are satisfied.
Rule 53(a)(1). As of June 30, 1997, American, through
its subsidiary, Resources, had aggregate investment in FUCOs of
$380,493,000. This investment represents approximately 23.6% of
$1,574,652,000, the average of the consolidated retained earnings
of American reported on Form 10-Q for the four consecutive quarters
ended June 30, 1997.
Rule 53(a)(2). Each FUCO in which American invests will
maintain books and records and make available the books and records
required by Rule 53(a)(2).
Rule 53(a)(3). No more than 2% of the employees of the
operating company subsidiaries of American will, at any one time,
directly or indirectly, render services to any FUCO.
Rule 53(a)(4). American has submitted and will submit a
copy of Item 9 and Exhibits G and H of American's Form U5S to each
of the public service commissions having jurisdiction over the
retail rates of American's operating company subsidiaries.
Rule 53(b). (i) Neither American nor any subsidiary of
American is the subject of any pending bankruptcy or similar
proceeding; (ii) American's average consolidated retained earnings
for the four most recent quarterly periods ($1,574,652,000)
represented an increase of approximately $135,727,000 (or 9.4%) in
the average consolidated retained earnings from the previous four
quarterly periods ($1,438,925,000); and (iii) for the fiscal year
ended December 31, 1996, American did not report operating losses
attributable to American's direct or indirect investments in EWGs
and FUCOs.
Rule 53(c). Rule 53(c) is inapplicable because the
requirements of Rule 53(a) and (b) have been satisfied.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
To be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
(a) Sections 9(a) and 10 may apply to the acquisition by
Resources of Capital Company's and Management Company's securities
and to the proposed businesses of Capital Company and Management
Company as discussed below.
(b) Sections 6, 7 and 12(b) and Rule 45 thereunder may apply
to the proposed guarantee by American or Resources of the debt and
other obligations of Management Company.
(c) Sections 9(a) and 10 may apply to the formation by
Resources, Capital Company and Management Company of subsidiaries.
Sections 6, 7 and 12(b) and Rule 45 thereunder may apply to the
proposed guarantee by Resources, Capital Company and Management
Company of the debt and other obligations of their subsidiaries.
(d) Sections 6(a) and 7 and Rule 52 may apply to the sale of
securities by Resources, Capital Company, Management Company and
their subsidiaries. Under Rule 52(b), the issuance of common
stock, preferred stock and indebtedness by Resources, Capital
Company and Management Company and their subsidiaries as well as
their acquisition by Resources, Capital Company or Management
Company is exempt from prior Commission approval under the 1935
Act. Rule 45(b)(4) exempts the making of cash capital
contributions from prior Commission approval. Resources does not
expect to invest more than $250 million in Capital Company or more
than $50 million in Management Company, either by acquisition of
securities or making capital contributions, both of which are
exempt from Commission approval under Rules 45(b)(4) and 52.
(e) Section 12(c) and Rule 46 may apply to dividends out of
capital or unearned surplus. The Commission has recently issued
orders authorizing the payment of dividends out of capital or
unearned surplus under circumstances substantially similar to those
proposed herein. See GPU International, Inc., et al., HCAR No.
26678, February 28, 1997; The Southern Company, et al., HCAR No.
26543, July 17, 1996; Cinergy Corp., et al., HCAR No. 26719, May
22, 1997.
To the extent that the proposed transactions are considered by
the Commission to require authorization, approval or exemption
under any section of the 1935 Act or provision of the rules or
regulations other than those specifically referred to herein,
request for such authorization, approval or exemption is hereby
made.
LEGAL ANALYSIS UNDER SECTIONS 9 AND 10
Unless approved by the Commission under Section 10 of the 1935
Act, it is unlawful under Section 9(a)(1) "for any registered
holding company or any subsidiary company thereof...to acquire,
directly or indirectly, any securities or utility assets or any
other interest in any business." Resource's proposed initial
investment in Management Company and in Capital Company constitutes
an acquisition by American of "any securities" or "any other
interest in any business" within the meaning of Section 9(a)(1) of
the 1935 Act, and therefore Commission approval is required.
Under Section 10(a) of the 1935 Act, a company may apply to
the Commission for approval of such an acquisition. Section 10(b)
provides, in part, that the Commission shall approve the
acquisition unless it finds that the acquisition will be
detrimental to the public interest or the interest of investors or
consumers or the proper functioning of the holding company system.
Notwithstanding Section 10(b), Section 10(c)(1) directs the
Commission not to approve "an acquisition of securities or utility
assets, or of any other interest, which is...detrimental to the
carrying out of the provisions of Section 11." Section 11(b)(1) in
turn, directs the Commission:
To require...that each registered holding company, and
each subsidiary company thereof, shall take such action
as the Commission shall find necessary to limit the
operations of the holding-company system of which such
company is a part to a single integrated public-utility
system, and to such other businesses as are reasonably
incidental, or economically necessary or appropriate to
the operations of such integrated public-utility system.
Section 11(b)(1) further provides:
The Commission may permit as reasonably incidental, or
economically necessary or appropriate to the operations
of one or more integrated public utility systems the
retention of an interest in any [non-utility] business
which the Commission shall find necessary or appropriate
in the public interest or for the protection of investors
or consumers and not detrimental to the proper
functioning of such system....
These two sentences are known as the "other business" clauses of
Section 11(b)(1). The Commission has long interpreted Section
11(b)(1) to permit the retention of non-utility interests upon an
affirmative showing of an "operating or functional relationship"
between the non-utility business and the operations of the
integrated utility business of the holding company system.FN11
FN11 See generally Michigan Consolidated Gas Co., 44 SEC 361
(1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971).
The Commission consistently has held the promotion and sale of
various energy management and financing services like those
proposed by Management Company and Capital Company are functionally
related to the operations of utility holding company systems under
the standards of Section 11 of the 1935 Act.FN12
FN12 AEP Energy Services, Inc., HCAR No. 26267 (April 5, 1995);
Cinergy Solutions, HCAR No. 26662 (February 7, 1997);
Northeast Utilities, HCAR No. 25114-A (July 27, 1990), HCAR
No. 25900 (Sept. 30, 1993) and HCAR No. 26564 (August 28,
1996); General Public Utilities Corporation, HCAR No. 26556
(August 16, 1996); and American Electric Power Company, HCAR
Nos. 26572 (September 13, 1996) and 26583 (September 27,
1996).
These activities benefit the holding company system by tending to
increase sales of its energy and energy-related services. Such
activities are closely related to the core utility businessFN13
FN13 See Eastern Utilities Associates, HCAR No. 26232 (February 15,
1995).
and support national policies to promote efficient and competitive
energy markets.FN14
FN14 Consolidated Natural Gas Company, HCAR No. 26512 (April 30,
1996). See also Eastern Utilities Associates, HCAR No. 26232
(February 15, 1995) (strong national interest in promoting
energy conservation and efficiency).
A. Management Company.
As described under Item 1 of this Application, Management
Company expects to provide Energy Facility Management Services,
Energy Conservation Services, Procurement Services, and Other
Energy Services.
(1) Energy Facilities Management
It has been clearly established that operation,
maintenance, management, procurement and other services required to
operate and maintain electric generation, transmission or
distribution facilities are functionally related to a registered
electric holding company's core business. See e.g. AEP Energy
Services, Inc. (now known as RESCo), HCAR No. 26267 (April 5,
1995), in which RESCo was authorized to provide project
development, engineering, design, construction and construction
management, operating, fuel management, maintenance and power plant
overhaul, and other similar kinds of managerial and technical
services to Power Projects which included projects relating to the
generation, transmission and distribution of electric power. See
also Entergy Corporation, HCAR No. 26322 (June 30, 1995) and
Southern Company, HCAR No. 26212 (December 30, 1994).
In Cinergy Solutions, HCAR No. 26662 (February 7, 1997),
the Commission authorized asset management of non-electric energy
facilities, such as steam, chillers, i.e., refrigeration and
coolant equipment, HVAC and lighting systems.FN15
FN15 In a separate proceeding, subsidiaries of Cinergy also were
permitted to engage in the district heating and cooling
business in the Cincinnati metropolitan area, noting among
other things that heating and cooling systems use skills and
expertise developed by Cinergy in its core business. Cinergy
Corp., HCAR No. 26474 (February 20, 1996). In Northeast
Utilities, HCAR No. 25900 (September 30, 1993), energy
management services were expanded to include the
identification of energy and other resource cost reduction
opportunities and the design and installation of facilities or
systems for such purposes, including heating, cooling, water
and plumbing systems.
The Commission has recognized these decisions by including in
activities permitted by an energy-related company under Rule 58
"the production, conversion, sale and distribution of thermal
energy products, such as process steam, heat, hot water, chilled
water, air conditioning, compressed air and similar products".
The Commission also has recognized that some companies
wish to utilize the expertise of energy companies, including
registered holding company systems, in managing their existing
energy complexes. In Southern Company, HCAR No. 26185 (December
13, 1994), the Commission authorized a subsidiary of Southern
Company to purchase the interest of Scott Paper Company in an
energy and recovery complex at Scott's Mobile Alabama pulp, paper
and tissue mill. The principal components of the complex were
turbine generators, power boilers, recovery boilers, evaporator
sets, waste treatment facilities, fuel and "liquor" storage and
station control facilities. The Southern Company subsidiary then
supplied steam and electric power to the mills.
The proposed Energy Facility Management Services are the
same types of services as authorized in the Orders described above,
i.e., those required to operate, maintain and manage Energy
Facilities. Similar to these Orders, Energy Facilities include
those that not only produce, convert, store and distribute thermal
energy products, electricity and water, but also include compressed
air, industrial gases and other similar products which are not
explicitly mentioned in the above Orders. The predominant focus of
Energy Facility Management Services is management of thermal energy
and electricity, but also includes compressed air, water,
industrial gases and other similar products. Customers often
manage these products together with their thermal energy and
electricity. Unless Management Company is permitted to manage all
of a customer's commonly managed products and services, it will be
disadvantaged in competition. Customers will look to other energy
services providers which are willing and able to manage all of
these functions. As a result, Management Company should be
authorized to provide Energy Facilities Management Services.
(2) Energy Conservation Services
The scope of Energy Conservation Services, as described
in detail above, is based on the well-established formulation under
which the Commission authorized HEC Inc., a nonutility subsidiary
of Northeast Utilities, to engage in energy management services.
See Northeast Utilities, HCAR No. 25114-A (July 27, 1990), HCAR No.
25900 (September 30, 1993) and HCAR No. 26564 (August 28,
1996).FN16
FN16 The Commission initially limited the revenues from energy
management services from outside New England and New York to
less than the revenues from inside the area. In 1995, the
Commission removed this limitation. Northeast Utilities, HCAR
No. 26335 (July 19, 1995). See also Eastern Utilities
Associates, HCAR No. 26232 (February 15, 1995).
The Commission recently authorized nonutility subsidiaries of
Cinergy Corp. and General Public Utilities Corporation to engage in
these precise activities. Cinergy Corp., HCAR No. 26662 (February
7, 1997) and General Public Utilities Corporation, HCAR No. 26556
(August 16, 1996). The Commission has also authorized nonutility
subsidiaries of Eastern Utilities Associates and Entergy
Corporation to engage broadly in energy management services.
Eastern Utilities Associates, HCAR Nos. 24273 (December 19, 1986)
and 26546 (July 25, 1996) and Entergy Corp., HCAR No. 25718
(December 28, 1992).
(3) Procurement Services
In Consolidated Natural Gas Company, HCAR No. 26512
(April 30, 1996), the Commission determined a nonutility subsidiary
of a registered gas holding company could be authorized to broker
and market electric power and other fuels. Subsequently, the
Commission authorized the nonutility subsidiaries of registered
electric holding companies to broker and market electric power,
natural gas and other fuels. See e.g. American Electric Power
Company, HCAR Nos. 26572 (September 13, 1996) and 26583 (September
27, 1996). See also Rule 58 (b)(v). Procurement of these
commodities on behalf of customers forms the focus of the
Procurement Services. As in the case of Energy Facilities
Management Services, however, the scope of procurement activities
must include all those that a customer views as reasonable to
procure through its energy function. Consequently, the procured
commodities include industrial gases, water and other commodities
and supplies used by or distributed through Energy Facilities.
(4) Other Energy Services
Other Energy Services include various services for Energy
Facilities that are not included in Energy Facilities Management
Services. The Commission has repeatedly authorized nonutility
subsidiaries of registered electric companies to engage in these
types of services. See e.g. AEP Energy Services, Inc. (now known
as RESCo), HCAR No. 26267 (April 5, 1995), Entergy Corporation,
HCAR No. 26322 (June 30, 1995) and Southern Company, HCAR No. 26212
(December 30, 1994).
(5) Incidental Services
Incidental Services are identical to those recently
authorized by the Commission. See Consolidated Natural Gas
Company, HCAR No. 26757 (August 27, 1997).
B. Capital Company.
Capital Company will provide financing, including the purchase
and leasing, of Energy Facilities to customers of Management
Company. The Commission has authorized several financing or
leasing subsidiaries of registered holding companies.
In 1985, the Commission authorized Central and South West
Corporation to acquire CSW Leasing in order to invest up to $250
million in the equity of leveraged leases of equipment other than
utility assets. The Commission found that CSW's attempt to reduce
its tax liability was in the ordinary course of business for a
registered holding company and so permitted the investment under
Section 9(A)(3). Central and South West Corp., HCAR No. 23578
(January 22, 1985).FN17
FN17 In 1985, the Commission also authorized CSW to acquire CSW
Credit which would engage in factoring accounts receivable for
associate and nonassociate companies. Central and South West
Corp., HCAR No. 23767 (July 19, 1985). The Commission limited
CSW Credit's acquisition of nonassociate utility receivables
so that the outstanding amount of nonassociate receivables was
less than the outstanding amount of associate utility
receivables. Central and South West Corp., HCAR No. 25995
(March 2, 1994). In 1995, the Commission determined that this
type of limitation was not relevant to the provision of energy
management services, because the latter were closely related
to the core business of the utility. Eastern Utility
Associates, HCAR No. 26232 (February 15, 1995). Similarly,
this limitation is not needed for Capital Company because its
financing will support the provision of Energy Facilities
Management Services which are closely related to American's
core utility business.
More recently, registered companies have sought Commission
approval to finance the sales of goods or services to customers and
to more broadly finance customers' businesses. Cinergy Solutions
was authorized to finance, subject to an investment limit of $100
million, (1) goods and services provided by Cinergy Solutions to
customers and (2) energy-related equipment for Cinergy's electric
and gas customers. Its customer financing may take the form of
loans, installment purchases, operating or finance lease
arrangements and loan guarantees. Cinergy Corp., HCAR No. 26662
(February 7, 1997).FN18
FN18 Cinergy Solutions was also authorized to own qualifying
facilities and facilities used for the production, conversion
and distribution of thermal energy products. Although they
are not owners, Management Company and Capital Company will
provide two key functions of ownership - managing and
financing the facilities. See also The Southern Company, HCAR
No. 26185 (December 13, 1994) (approval to acquire energy
island inside integrated paper mill).
See also Consolidated Natural Gas Company, HCAR No. 26234 (February
23, 1995), authorizing CNG Financial Services to finance the sales
of standard appliances, equipment to promote new technologies, and
equipment that enables the use of gas or electricity as an
alternate fuel to customers of its gas utility affiliates in an
aggregate amount up to $25 million.FN19
FN19 The Commission said that the total dollar value of loans in
the states not served by CNG local distribution companies
could not exceed the total dollar value of loans in the four
states served by the local distribution companies. This
geographic restriction is not relevant to Capital Company
because CNG Financial Services was authorized to provide loans
even to those customers which purchased gas indirectly from
its gas pipeline subsidiary. Capital Company seeks to finance
only direct customers of Management Company.
* * *
In addition to satisfying Commission precedent, the Ventures
provide an important opportunity for American in the rapidly
changing energy markets in the United States. It allows American
to assist a significant customer, DuPont, in meeting an important
objective with respect to its energy assets and to begin a business
relationship with a large energy company, Conoco, and its parent.
Offering energy management services, including the financing, will
also attract new customers and increase loyalty from existing
customers. Finally, the proposed activities will offer an
opportunity for additional earnings in what will be a highly
competitive deregulated power market.
The proposed investment in the Ventures will not have an
adverse impact on any of American's Utility Subsidiaries or their
respective customers. No Utility Subsidiary will owe indebtedness
or extend credit or sell or pledge its assets directly or
indirectly to the Ventures and any losses that may be incurred by
the Ventures will have no effect on domestic rates of any Utility
Subsidiary (because of American's and Resources' undertaking not to
seek recovery in rates).
The Ventures clearly fall within Commission precedent, will
further important business objectives of American and will not harm
the Utility Subsidiaries. Therefore, the Commission should approve
this Application.
ITEM 4. REGULATORY APPROVAL.
No commission other than the Securities and Exchange
Commission has jurisdiction over the proposed transaction.
ITEM 5. PROCEDURE.
It is requested, pursuant to Rule 23(c) of the Rules and
Regulations of the Commission, that the Commission's order
granting, and permitting to become effective this Application or
Declaration be issued on or before January 31, 1998. American
waives any recommended decision by a hearing officer of or by any
other responsible officer of the Commission and waives the 30-day
waiting period between the issuance of the Commission's order and
the date it is to become effective, since it is desired that the
Commission's order, when issued, becomes effective forthwith.
American consents to the Office of Public Utility Regulation
assisting in the preparation of the Commission's decision and/or
order in this matter, unless the Office opposes the matter covered
by this Application or Declaration.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
The following exhibits and financial statements are filed
as part of this statement:
Exhibits:
Exhibit A-1 Operating Agreement of Capital Company (to be
filed by amendment)
Exhibit A-2 Operating Agreement of Management Company (to
be filed by amendment)
Exhibit F Opinion of Counsel (to be filed by amendment)
Exhibit G Proposed form of Notice
It is believed that financial statements are not necessary or
relevant to the disposition of this proceeding.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
It is believed that the proposed transactions will not have
any environmental effects which would require an environmental
impact statement under Section 102(c)(2) of the National
Environmental Policy Act. No other federal agency has prepared or
is preparing an environmental impact statement with respect to the
proposed transactions.
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.
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
By__/s/ G. P. Maloney_________________
Vice President
Dated: November 21, 1997
