614-223-1648
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
November 1, 2000
American Electric Power Company, Inc., American Electric Power Service
Corporation, Appalachian Power Company, Central Power and Light Company,
Columbus Southern Power Company, Ohio Power Company, Southwestern Electric Power
Company and West Texas Utilities Company hereby transmit an Application or
Declaration on Form U-1.
Please contact either William E. Johnson, Esq. (614-223-1624) or me with any
questions regarding this filing.
Very truly yours,
/s/ Thomas G. Berkemeyer
Thomas G. Berkemeyer
Assistant Secretary
File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
APPLICATION-DECLARATION
ON
FORM U-1
----------------------------------
APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
---------------------------------------
APPALACHIAN POWER COMPANY
40 Franklin Road, Roanoke, Virginia 24011
CENTRAL POWER AND LIGHT COMPANY
539 North Carancahua Street, Corpus Christi, Texas 78401-2802
COLUMBUS SOUTHERN POWER COMPANY
1 Riverside Plaza, Columbus, Ohio 43215
OHIO POWER COMPANY
301 Cleveland Avenue, S.W., Canton, Ohio 44702
SOUTHWESTERN ELECTRIC POWER COMPANY
428 Travis Street, Shreveport, Louisiana 71156-0001
WEST TEXAS UTILITIES COMPANY
301 Cypress Street, Abilene, Texas 78601-5820
---------------------------------------------
(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)
* * *
Susan Tomasky, General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
---------------------------------------
(Name and address of agent for service)
ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTIONS
A. Introduction and Summary of the Proposed Transactions
American Electric Power Company, Inc. ("AEP"), a holding company
registered under the Public Utility Holding Company Act of 1935, as amended
("1935 Act"), American Electric Power Service Corporation ("AEPSC"), a service
subsidiary of AEP, Appalachian Power Company ("APCo"), Central Power and Light
Company ("CPL"), Columbus Southern Power Company ("CSPCo"), Ohio Power Company
("OPCo"), Southwestern Electric Power Company ("SWEPCo"), West Texas Utilities
Company ("WTU"), (collectively, the "Operating Companies"), each a direct or
indirect wholly owned public utility electric subsidiary of AEP, AEP Deregulated
Holding Company, Inc. or LLC ("Holdco"), and AEP Regulated Holding Company, Inc.
or LLC ("Regco") and one or more intermediate wholly owned utility holding
company subsidiaries to be formed by AEP (collectively, "Applicants"), hereby
file this application-declaration with the Securities and Exchange Commission
("Commission") under Sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of the 1935
Act, and Rules 43(a), 44, 45, 46, 54, 90 and 91 thereunder.
As part of the ongoing restructuring in the electric utility industry,
CPL, SWEPCo and WTU have filed business separation plans with the Public
Utilities Commission of Texas ("PUCT") and OPCo and CSPCo have filed
restructuring compliance plans with The Public Utilities Commission of Ohio
("PUCO"), each of which, among other things, separates all or most of the
constituent company's jurisdictional generation assets from its transmission and
distribution assets. SWEPCo has also filed a business separation plan with the
Arkansas Public Service Commission ("APSC"). These restructuring plans have been
either negotiated and/or contested and/or the subject of hearings. A copy of the
PUCT restructuring order is attached hereto as Exhibit D-2; a copy of the PUCO
restructuring order is attached hereto as Exhibit D-4. APCo must file a
restructuring compliance plan with the Virginia State Corporation Commission
("VSCC") before December 31, 2000. APCo must also file a restructuring
compliance plan with the West Virginia Public Service Commission ("WVPSC"),
following the WVPSC's resolution of certain issues relating to restructuring
generally under its jurisdiction. This file will be supplemented to the extent
other jurisdictions in which the electric utility subsidiaries of AEP operate
enact electric utility restructuring. It is expected that the restructuring
compliance plans of any such utilities would conform to the broad outlines of
the pattern of compliance presented in this filing.
B. Background
Each of the Operating Companies is a vertically integrated electric
utility that provides service to customers in parts of various respective
states. As a public utility, each of the Operating Companies is subject to
regulation in the state or states in which its customers are located.
Additionally, the Federal Energy Regulatory Commission ("FERC"), under section
203 of the Federal Power Act,1 has jurisdiction over the sale, lease, or other
disposition of each of the Operating Companies' utility assets. Additionally,
FERC regulates the wholesale power transactions of each of the Operating
Companies.
C. Regulatory Environment
1. Texas and Arkansas
In June 1999 restructuring legislation was signed into law in Texas
that will restructure the electric utility industry ("Texas Legislation"). The
Texas Legislation, among other things:
o Gives customers of investor-owned utilities the opportunity to choose their
electric provider beginning January 1, 2002;
o Provides for the recovery of regulatory assets and of other stranded costs
through securitization and non-bypassable wires charges;
o Requires reductions in nitrogen oxide and sulfur dioxide emissions;
o Provides a rate freeze until January 1, 2002 followed by a 6% rate
reduction for residential and small commercial customers, an additional
rate reduction for low-income customers and a number of customer
protections;
o Sets an earnings test for the three years of rate freeze (1999 through
2001);
o Sets certain limits for ownership and control of generation capacity by
companies; and
o Requires a filing after January 10, 2004 to finalize stranded costs (2004
true-up proceeding) including final fuel recovery balances, regulatory
assets, certain environmental costs, accumulated excess earnings and other
issues.
Delivery of electricity will continue to be the responsibility of the
local electric transmission and distribution utility company at regulated
prices. Each electric utility must submit a plan to unbundle its business
activities into a retail electric provider, a power generation company and a
transmission and distribution utility.
Legislation was enacted in 1999 in Arkansas that will ultimately
restructure the electric utility industry ("Arkansas Legislation"). Major points
of the Arkansas Legislation are:
o Retail competition begins January 1, 2002 but can be delayed until as late
as June 30, 2003 by the APSC;
o Transmission facilities must be operated by an independent system operator
if owned by a company which also owns generation assets;
o Rates will be frozen for one to three years; and
o Market power issues will be addressed by APSC.
SWEPCo filed a business unbundling plan in Arkansas on June 30, 2000,
a copy of which is attached hereto as Exhibit D-9.
CPL, SWEPCo and WTU filed their business separation (unbundling) plan
with the PUCT on January 10, 2000, a copy of which is attached hereto as Exhibit
D-1. The filing provided a code of conduct and described (i) a financial and
accounting functional separation but not a legal or structural separation; (ii)
how operations will be physically separated and the functions they will perform;
and (iii) competitive energy services. In March 2000, the PUCT ruled that the
plan was not in compliance with the Texas Legislation and ordered revised plans
be submitted to separate the generation business from the wires business into
separate legal entities by January 1, 2002. In May 2000 a revised separation
plan was filed, which the PUCT approved on July 7, 2000 in an interim order
(Exhibit D-2).
Under the Texas Legislation, electric utilities are allowed, with the
approval of the PUCT, to recover stranded costs including generation-related
regulatory assets that may not be recoverable in a future competitive market.
The approved costs can be refinanced through securitization, which is a
financing structure designed to provide lower financing costs than are available
through conventional public utility financings. The securitized amounts plus
interest are then recovered through a non-bypassable wires charge. In 1999, CPL
filed an application with the PUCT to securitize approximately $1.27 billion of
its retail generation-related regulatory assets and approximately $47 million in
other qualified restructuring costs.
On February 10, 2000, the PUCT tentatively approved a settlement,
which will permit CPL to securitize approximately $764 million of net regulatory
assets. The PUCT's order authorized issuance of up to $797 million of
securitization bonds including the $764 million for recovery of net regulatory
assets and $33 million for other qualified refinancing costs. The $764 million
for recovery of net regulatory assets reflects the recovery of $949 million of
regulatory assets offset by $185 million of customer benefits associated with
accumulated deferred income taxes. CPL had previously proposed in its filing to
flow these benefits back to customers over the 14-year term of the
securitization bonds. The remaining regulatory assets originally requested by
CPL in its 1999 securitization request has been included in a March 2000 filing
with the PUCT, requesting recovery of an additional $1.1 billion of stranded
costs. The March 2000 filing for $1.1 billion includes recovery of approximately
$800 million of South Texas Project ("STP") nuclear plant costs included in
utility plant on the Balance Sheet and previously identified as Excess Cost Over
Market ("ECOM") by the PUCT for regulatory purposes. Hearings on this phase of
the filing were completed in late October, 2000. A final determination on
recovery will occur as part of the 2004 true-up proceeding and the total amount
recoverable can be securitized.
On April 11, 2000, four parties appealed the PUCT's securitization
order to the Travis County District Court. One of these appeals challenges the
ability to recover securitization charges under the Texas Constitution. CPL will
not be able to issue securitization bonds until these appeals are resolved. The
Supreme Court of Texas will hear oral arguments on this appeal on November 29,
2000. As a result, the securitization bonds are not likely to be issued until
2001.2
CPL's recovery of generation-related regulatory assets and stranded
costs are subject to a final determination by the PUCT in 2004. The Texas
legislation provides that all such finally determined stranded costs will be
recovered.
Beginning January 1, 2002, fuel costs will not be subject to PUCT
fuel reconciliation proceedings. Consequently, CPL, SWEPCo and WTU will file a
final fuel reconciliation with the PUCT which reconciles their fuel costs
through the period ending December 31, 2001. Any final fuel balances will be
included for recovery in the 2004 true-up proceeding.
2. Ohio
Comprehensive electric restructuring legislation was passed in Ohio
in July 1999. Under the new law, all retail customers in Ohio can choose their
electric supplier commencing January 1, 2001.
The legislation deregulates electric generation and supply, with
electric transmission and distribution continuing as regulated utility
functions. Thus, as an incumbent Ohio electric utility, each of OPCo and CSPCo
is required to separate its existing functions pertaining to competitive retail
sale of generation service from those pertaining to transmission and
distribution service. OPCo and CSPCo intend to comply with restructuring
legislation by separating their respective generating assets from their
respective transmission and distribution assets. Moreover, the legislation
requires that utilities devise incentives to induce 20% of their electric loads
by customer class to switch providers by halfway through the "market development
period" (i.e., the transition period to full competition), but in no event later
than December 31, 2003.
Other provisions of the law include:
o A 5% cut in the generation component of rates for every residential
customer beginning January 1, 2001.
o The establishment of a market development period beginning January 1, 2001
and ending no later than December 31, 2005.
o Utility rates otherwise are frozen for non-switching customers through the
market development period.
o An opportunity to recover PUCO-approved transition costs over the market
development period.
o An opportunity to recover PUCO-approved regulatory assets through December
31, 2010.
o The transfer of either ownership or control of transmission assets to an
independent transmission entity before December 31, 2003.
o A requirement that incumbent utilities provide retail electric service to
native load customers who decline to switch to different suppliers or who
desire to return to service from the incumbent utility.
o The filing of a proposed transition plan by year-end 1999. The transition
plan must include a rate unbundling plan, a corporate separation plan, an
operational support plan, an employee assistance plan and a consumer
education plan. The transition plan may also include a quantification of
utility transition costs and an application to receive transition revenues.
The PUCO is required to issue its order on the transition plan no later
than October 31, 2000.
As required by the legislation, OPCo and CSPCo filed its proposed transition
plan with the PUCO on December 30, 1999, a copy of which is filed herewith as
Exhibit D-3. On March 28, 2000, the PUCO staff issued its report on the
Applicants' transition plan filing. On May 8, 2000, a stipulation agreement
between OPCo, CSPCo, the PUCO staff, the Ohio Consumers' Counsel and other
concerned parties ("Stipulation Agreement") was filed with the PUCO for
approval. The key provisions of the Stipulation Agreement are:
o Recovery of generation-related regulatory assets over seven years for OPCo
and eight years for CSPCo through transition rates (frozen for the first
five years of the recovery period) and a wires charge.
o A shopping incentive (a price credit) of 2.5 mills per kwh for the first
25% of CSPCo residential customers that switch suppliers. There is no
comparable shopping incentive for OPCo customers.
o The absorption of $40 million by CSPCo and OPCo ($20 million per company)
of consumer education, implementation and transition plan filing costs with
deferral of the remaining costs, plus a carrying charge, as a regulatory
asset for recovery in future distribution rates.
o The companies will make available a fund of up to $10 million to reimburse
customers who chose to purchase their power from another company for
certain transmission charges imposed by Pennsylvania-New Jersey-Maryland
transmission organization (PJM) and/or a midwest independent system
operator (Midwest ISO) on generation originating in the Midwest ISO or PJM
areas.
o The statutory 5% reduction in the generation component of residential
tariffs will remain in effect for the entire five year transition period.
o OPCo's and CSPCo's request for a $90 million gross receipts tax rider to
recover duplicate excise tax will be litigated separately.
Hearings on the Stipulation Agreement and the excise tax issue were
held in June 2000. On September 28, 2000, the PUCO issued its Opinion and Order
which approved the Stipulation Agreement (Exhibit D-4.) Also, the PUCO held that
the companies' excise tax credit rider should become effective one year earlier
than the companies had proposed, thus ending the rate recovery for the public
utility excise tax a year earlier. CSPCo and OPCo intend to appeal the excise
tax credit rider holding.
3. Virginia and West Virginia
(a) Virginia Restructuring
Under a 1999 Virginia restructuring law a transition to choice
of supplier for retail customers will commence on January 1, 2002 and be
completed, subject to a finding by the VSCC that an effective competitive market
exists by January 1, 2004 but not later than January 1, 2005.
The Virginia restructuring law provides an opportunity for
recovery of just and reasonable net stranded generation-related costs. The
mechanisms in the Virginia law for stranded cost recovery are: a capping of
incumbent utility transition rates until as late as July 1, 2007, and the
application of a wires charge upon customers who may depart the incumbent
utility in favor of an alternative supplier prior to the termination of the rate
cap. The law provides for the establishment of capped rates prior to January 1,
2001 and establishment of a wires charge by the fourth quarter of 2001. Since
APCo does not intend to request new rates, its current rates will become the
capped rates. By December 31, 2000 APCo intends to file a corporate separation
plan with the VSCC setting forth how APCo will meet the requirements of the
Virginia restructuring law.
(b) West Virginia Restructuring Plan
The WVPSC issued an order on January 28, 2000 approving an
electricity restructuring plan. On March 11, 2000, the West Virginia legislature
approved the restructuring plan by joint resolution. The joint resolution
provides that the WVPSC cannot implement the plan until the legislature makes
necessary tax law changes to preserve the revenues of the state and local
governments.
The provisions of the restructuring plan provide for customer
choice to begin on January 1, 2001, or at a later date set by the WVPSC after
all necessary rules are in place (the "starting date"); deregulation of
generation assets occurring on the starting date; functional separation of the
generation, transmission and distribution businesses on the starting date and
their legal corporate or structural separation no later than January 1, 2005; a
transition period of up to 13 years, during which the incumbent utility must
provide default service for customers who do not change suppliers unless an
alternative default supplier is selected through a WVPSC-sponsored bidding
process; capped and fixed rates for the 13-year transition period as discussed
below; deregulation of metering and billing; a 0.5 mills per kwh wires charge
applicable to all retail customers for the period January 1, 2001 through
December 31, 2010 intended to provide for recovery of any stranded costs
including net regulatory assets; and establishment by APCo of a rate
stabilization deferral balance of $76 million by the end of year ten of the
transition period to be used as determined by the WVPSC to offset market prices
paid for electricity in the eleventh, twelfth, and thirteenth year of the
transition period by residential and small commercial customers that do not
choose an alternative supplier.
Default rates for residential and small commercial customers are
capped for four years after the starting date and then increase as specified in
the plan for the next six years. In years eleven, twelve and thirteen of the
transition period, the power supply rate shall equal the market price of
comparable power. Default rates for industrial and large commercial customers
are discounted by 1% for four and a half years, beginning July 1, 2000, and then
increased at pre-defined levels for the next three years. After seven years the
power supply rate for industrial and large commercial customers will be market
based. APCo's Joint Stipulation Agreement, which was approved by the WVPSC on
June 2, 2000 in connection with a base rate filing, also provides additional
mechanisms to recover APCo's regulatory assets. Following the WVPSC's resolution
of certain issues relating to restructuring generally under its jurisdiction
APCo must file a restructuring compliance plan with the WVPSC.
4. Federal Energy Regulatory Commission
Pursuant to Section 203 of the Federal Power Act, U.S.C. 824b (1994),
and Part 33 of the FERC's regulations thereunder, 18 C.F.R. Part 33 (1999), the
Operating Companies will file an application with the FERC. The application will
request FERC's approval to transfer the assets of the Operating Companies and
all action necessary to complete the contemplated restructuring.
D. Overview of Requested Authorizations
1. The Transaction
AEP's corporate separation is designed to align the company's legal
structure and business activities with the realities of a restructuring electric
industry. Corporate separation responds to the changing laws, regulations and
business requirements of the electric industry. AEP's realigned corporate legal
structure complies with restructuring statutory and regulatory requirements and
provides greater flexibility to conduct business. Earlier this year the affected
Operating Companies filed respective Arkansas, Ohio and Texas business
separation plans to comply with restructuring requirements in those states. The
principles reflected in those filings are generally being applied to the entire
system. This realignment consists of actual legal corporate separation of
certain subsidiaries and companies of AEP, including the former CSW and its
subsidiaries, and is not a functional reorganization of those entities. For a
complete diagram of the final corporate structure sought by Applicants, please
see Exhibit B-1 (the new corporate structure chart as of January 1, 2002).
(a) Formation and Capitalization of Regco
AEP seeks authorization to form Regco, a first tier wholly owned
corporation or limited liability company. Regco will be formed to hold utility
subsidiaries of AEP that are subject to regulation by at least one state utility
commission and foreign utility company subsidiaries also subject to regulation
as to rates or tariffs. AEP proposes to make an initial capital contribution to
Regco in an amount to be determined, in exchange for all of the common stock of,
or limited liability interests in, Regco. AEP seeks authorization for Regco to
issue, and for AEP to acquire, all of the common stock of, or limited liability
interests in, Regco.
(b) Formation of Holdco
AEP seeks authorization to form Holdco, a first tier wholly
owned corporation or limited liability company. Holdco will be formed to hold
utility and non-utility subsidiaries of AEP whose revenues derive from
competitive, usually market-based, activity. AEP proposes to make an initial
capital contribution to Holdco in an amount to be determined, in exchange for
all of the common stock of, or limited liability interests in, Holdco. AEP seeks
authorization for Holdco to issue, and for AEP to acquire, all of the common
stock of, or limited liability interests in, Holdco.
2. Capitalization Ratios
The Transaction, when completed, will not materially impact the
consolidated debt/equity ratios of AEP. Moreover, the Operating Companies and
AEP will not undertake to issue any debt or engage in any transaction if such
action would result in the Operating Companies or the AEP consolidated system's
debt/equity ratios falling below the Commission's debt/equity requirement of 30%
common stock equity. If, in the unlikely event the required debt/equity ratio
could not be maintained for one or more entities in the AEP consolidated system,
Applicants seek a waiver of such debt/equity ratio requirement for up to two
fiscal years.
E. Financing Plan
1. Preliminary considerations
As noted, in connection with electric deregulation in their
respective states, it is the current intention of the Operating Companies to
separate all or most of their respective generation assets from their respective
transmission and distribution assets. Applicants intend for Holdco to hold the
subsidiaries owning generation assets and for Regco to hold (i) the subsidiaries
owning transmission and distribution assets and (ii) the vertically integrated
utility subsidiaries operating in states that are not restructuring. (See
Exhibit B-1.) The assets would be separated in one or more transactions, as soon
as reasonably practicable after receipt of necessary regulatory approvals and
satisfaction of other conditions. AEP may engage a financial advisor to provide
financial advice in connection with these transactions.
The financing plan and actual transaction structures by which the
assets would be separated have not been finalized, and therefore the discussion
below posits a number of alternatives and is subject to corresponding
contingencies and qualifications.
In addition to these preliminary considerations, the following
general observations apply. Regardless of which particular structure is used,
there should be no material increase in AEP's consolidated debt. This reflects
the basic fact that AEP already owns these assets, and is simply segregating
direct title between the regulated and the nonregulated sides of its business.
AEP believes that the asset transfers and associated financings would not
themselves have any material adverse impact on the credit ratings of the
Operating Companies and/or the entities owning, directly or indirectly, the
assets which the Operating Companies currently own exclusively; rather, any such
potential impact is a consequence of state deregulation and loss of monopoly
supplier status.
2. Transaction structures
There are two basic transaction structures by which the Operating
Companies would separate their respective generation assets from their
respective transmission and distribution assets (the "Transaction"):
(a) Under the 'Sale Scenario', newly formed subsidiaries
purchase either (i) generation or (ii) transmission and distribution assets, for
cash and/or promissory notes or other consideration, from the Operating
Companies.
(b) Under the 'Spin-Off Scenario', the Operating Companies
contribute (i) their respective generation or (ii) their transmission and
distribution assets to newly formed subsidiaries for shares of stock or other
equity securities of such subsidiaries.
The Operating Companies would then distribute their investment
in such subsidiaries to AEP by dividend or otherwise, which thereupon
contributes such stock or other equity to Regco or Holdco. AEP expects that the
distribution of entities owning utility assets of this magnitude in each
instance could be a dividend out of "capital or unearned surplus" within the
meaning of Rule 46 under the 1935 Act.
Under both scenarios, Applicants intend to transfer the assets
at net book value. The decision to use a particular transaction structure will
depend, among other factors, on whether the transaction can be structured on a
tax-deferred basis and other transaction costs.
The Operating Companies are considering both potential
structures discussed above, as well as variations of each.
(c) Bridge financing
Regardless of the ultimate structure adopted, AEP believes it
may need to effect interim or 'bridge' financing, which could be in an aggregate
amount equal to the value of the transferred assets.
AEP expects that bridge financing may be useful to complete the
transactions contemplated by this Application. For example, it is possible that
the liens associated with the assets being transferred will need to be released
before any such transfer can take place. However, proceeds from any financings
by the Operating Companies to discharge the liens may not be available until the
transfer of assets has taken place. Accordingly, it is possible that bridge
financing would be required in order to facilitate the transfer of assets. A
second possibility is that prevailing financing market conditions at the time of
the transfer may be unattractive or even unavailable. A bridge financing
commitment would allow the transfer of assets to proceed without being subject
to the vagaries of the financial markets. Finally, other considerations,
including regulatory, legal, tax, mortgage or accounting constraints, might
dictate use of bridge financing, as an interim expedient.
Regardless of the circumstances that might cause AEP to effect
bridge financing, AEP would expect to replace such financing with more permanent
financing as soon as reasonably practicable, reducing the debt at the AEP level
and correspondingly increasing nonrecourse debt at the subsidiary level. Any
impact of bridge financing on the overall consolidated capitalization is thus
expected to be only temporary.
(d) Financing of Holdco and Regco
Applicants anticipate that it will be necessary for Holdco
and/or Regco to obtain financing in furtherance of the goals set forth in this
Application and for other corporate objectives. Applicants will amend this
filing to complete the record to the extent necessary for any such financings.
(e) Service Corporation Agreements
Applicants anticipate that AEPSC will enter into a service
agreement with one or more of the new entities contemplated by this Application.
Applicants will amend this filing to complete the record to the extent necessary
for any such agreements.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
Estimated fees and expenses expected to be incurred by Applicants in
connection with the Transaction will be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The relevant standards for Commission review of this application under
Sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of the 1935 Act, and Rules 43(a),
44, 45, 46, 54, 90 and 91 thereunder.
A. Sections 9 & 10
Section 9(a)(1) provides that unless the Commission under Section 10 has
approved the acquisition, it shall be unlawful 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." Section
10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be detrimental
to the carrying out of the provisions of Section 11.
If the requirements of subsection (f) of this section are satisfied, the
Commission shall approve the acquisition unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to an
extent detrimental to the public interest or the interest of investors or
consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with
such acquisition is not reasonable or does not bear fair relation to the
sums invested in or the earning capacity of the utility assets to be
acquired or the utility assets underlying the securities to be acquired;
or
(3) such acquisition will unduly complicate the capital structure of
the holding-company system of the applicant or will be detrimental to the
public interest or the interest of investors or consumers or the proper
functioning of such holding-company system.
The Transaction, for the reasons set forth below, satisfy the standards of
Section 10 of the 1935 Act.
1. The Transaction Complies With State Law
The Transaction complies with, or upon completion of the record shall
comply with, applicable state laws on the matter of restructuring and the
transfer of utility assets. Specifically, each Operating Company has structured
the Transaction in response to state law and legislative mandate. The
Transaction puts into effect the state regulatory and legislative determination
that restructuring is in the public interest.
The Transaction is reasonably incidental, economically necessary and
appropriate to the operations of each Operating Company and the AEP system.
Specifically, the Transaction will (a) allow Regco to continue to serve the
needs of its regulated customers while positioning the AEP system for
competition in the deregulated retail generation market; (b) segregate the
transmission and distribution assets into rate-regulated subsidiaries; (c) allow
each deregulated Operating Company to manage and operate its respective
generating assets with due regard to market considerations; and, (d) increase
the flexibility for financing activities on cost-effective terms that reflect
the costs of capital for each area of business activity.
2. The Capital Structure Is Not Unduly Complicated
The Transaction does not unduly complicate the capital structure of
the AEP system. The capital structure of the AEP system on a consolidated basis
will be essentially unchanged. The Transaction will tend toward the proper
functioning of the AEP system in a partly deregulated, partly regulated
operating environment. The Transaction results in a more economical and
efficient system. The resulting increased efficiency of operations significantly
offsets any perceived added complexity caused by the Transaction.3 For all of
the foregoing reasons, the Transaction satisfies the requirements of, and is
entirely consistent with the Act.
3. The Consideration is Fair and Reasonable
The consideration to be paid in connection with the Transaction is
fair and reasonable. Indeed, each state public utility commission has approved
or will approve the corporate separation plan as it relates to its particular
jurisdiction.
B. Section 12 & Rule 46
Section 12(c) governs the proposed dividends for which authorization has
been sought. Section 12(c) provides that:
It shall be unlawful for any registered holding company or any subsidiary
company thereof, by use of the mails or any means or instrumentality of
interstate commerce, or otherwise, to declare or pay any dividend on any
security of such company or to acquire, retire, or redeem any security of
such company, in contravention of such rules and regulations or orders as
the Commission deems necessary or appropriate to protect the financial
integrity of companies in holding-company systems, to safeguard the
working capital of public-utility companies, to prevent the payment of
dividends out of capital or unearned surplus, or to prevent the
circumvention of the provisions of this chapter or the rules, regulations,
or orders thereunder.
AEP expects that the distribution of entities owning utility assets of
this magnitude, in each instance could be a dividend out of "capital or unearned
surplus" within the meaning of Rule 46 under the 1935 Act. Applicants believe
that, in the overall context of the Transaction, neither shareholders,
ratepayers nor the public will be adversely affected.4 The distributions will be
structured as such in order to minimize the tax burden on the Applicants. The
distributions are fundamentally necessary to effect the transfer of their
respective generation or transmission and distribution assets to an affiliate in
the AEP system in accordance with the relevant order of each respective state
utility commission. The distributions will be the final step in the
reorganization of the AEP system, in accordance with, and fulfillment of, the
regulations and legislative policies and objectives that culminated in
deregulation of and competition in electrical generation in each state, as
described herein. The distributions are not intended to harm the interests of
any Operating Company, successor or, ultimately, AEP. The AEP system will
continue to own the assets transferred by such distributions. The regulated
parts of the AEP system that are not subject to deregulation and competition
will be owned directly by Regco. For these reasons, the proposed distributions
are entirely consistent with the policies and principles behind Section 12 of
the 1935 Act.
C. Section 13(b) Compliance
Section 13(b) of the 1935 Act provides that:
It shall be unlawful for any subsidiary company of any registered holding
company or for any mutual service company, by use of the mails or any
means or instrumentality of interstate commerce, or otherwise, to enter
into or take any step in the performance of any service, sales, or
construction contract by which such company undertakes to perform services
or construction work for, or sell goods to, any associate company thereof
except in accordance with such terms and conditions and subject to such
limitations and prohibitions as the Commission by rules and regulations or
order shall prescribe as necessary or appropriate in the public interest
or for the protection of investors or consumers and to insure that such
contracts are performed economically and efficiently for the benefit of
such associate companies at cost, fairly and equitably allocated between
such companies.
Any transaction between AEPSC and any newly formed affiliates and any
related service agreements shall be in compliance with section 13(b) of the 1935
Act and Rules 90 and 91 under the 1935 Act.
D. Rule 54 Compliance
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. All applicable
conditions of Rule 53(a) are currently satisfied except for clause (1). As of
June 30, 2000, AEP, through its subsidiaries, had an aggregate investment in
EWGs and FUCOs of $1,920,829,000. This investment represents approximately 54.2%
of $3,544,649,000, the average of the consolidated retained earnings of AEP
reported on Forms 10-Q and 10-K for the four consecutive quarters ended June 30,
2000. However, AEP was authorized to invest up to 100% of its consolidated
retained earnings in EWGs and FUCOs (HCAR No. 26864, April 27, 1998) (the "100%
Order") in File No. 70-9021. Although AEP's aggregate investment exceeds the 50%
'safe harbor' limitation contained in Rule 53, AEP's aggregate investment is
below the 100% limitation authorized under the 100% Order.
As of September 30, 1997, the most recent period for which financial
statement information was evaluated in the 100% Order, AEP's consolidated
capitalization consisted of 47.4% common and preferred equity and 52.6% debt. As
of June 30, 2000, AEP's consolidated capitalization consisted of 36.2% common
and preferred equity and 63.8% debt. The requested authorization will have no
impact on AEP's consolidated capitalization ratios on a pro forma basis. AEP
believes this ratio remains within acceptable ranges and limits. Further, AEP's
interests in EWGs and FUCOs have contributed positively to its consolidated
earnings.
AEP will continue to maintain in conformity with United States generally
accepted accounting principles and make available the books and records required
by Rule 53(a)(2). AEP does, and will continue to, comply with the requirement
that no more than 2% of the employees of AEP's electric utility operating
subsidiaries shall, at any one time, directly or indirectly, render services to
an EWG or FUCO in which AEP directly or indirectly owns an interest, satisfying
Rule 53(a)(3). And lastly, AEP will continue to submit a copy of Item 9 and
Exhibits G and H of AEP's Form U5S to each of the public service commissions
having jurisdiction over the retail rates of AEP's electric utility operating
subsidiaries, satisfying Rule 53(a)(4). Rule 53(c) is inapplicable by its terms
because the proposals contained herein do not involve the issue and sale of
securities (including any guarantees) to finance an acquisition of an EWG or
FUCO.
Rule 53(b). (i) Neither AEP nor any subsidiary of AEP is the subject of
any pending bankruptcy or similar proceeding; (ii) AEP's average consolidated
retained earnings for the four most recent quarterly periods ($3,544,649,000)
represented an increase of approximately $40,644,000 (or 1.2%) in the average
consolidated retained earnings from the previous four quarterly periods
($1,693,698,000); and (iii) for the fiscal year ended December 31, 1999, AEP did
not report operating losses attributable to AEP's direct or indirect investments
in EWGs and FUCOs.
As noted, AEP was authorized to invest up to 100% of its consolidated
retained earnings in EWGs and FUCOs. In connection with its consideration of
AEP's application for the 100% Order, the Commission reviewed AEP's procedures
for evaluating EWG or FUCO investments. Based on projected financial ratios and
on procedures and conditions established to limit the risks to AEP involved with
investments in EWGs and FUCOs, the Commission determined that permitting AEP to
invest up to 100% of its consolidated retained earnings in EWGs and FUCOs would
not have a substantial adverse impact upon the financial integrity of the AEP,
nor would it have an adverse impact on any of its electric utility operating
subsidiaries or their customers, or on the ability of state commissions to
protect the electric utility operating subsidiaries or their customers.
ITEM 4. REGULATORY APPROVAL
The FERC must approve the sale of utility assets and other action
contemplated in this Application. The VSCC and WVPSC must approve the corporate
separation plans of APCo. The APSC must approve the business unbundling plan of
SWEPCo.
On July 7, 2000, the PUCT issued an order approving the corporate
separation plan of CPL, SWEPCo and WTU (Exhibit D-2.) On September 28, 2000, the
PUCO issued an order on each of OPCo and CSPCo's request to separate its
generation assets from its transmission and generation assets. In that order,
the PUCO approved the Stipulation Agreement requiring the separation of each of
OPCo and CSPCo's generation assets from its transmission and distribution assets
as determined in accordance with accepted PUCO procedures (Exhibit D-4). Orders
of the other state commissions approving the corporate separation plans will be
filed in subsequent amendments.
ITEM 5. PROCEDURE
It is requested that the Commission's order granting this Application or
Declaration be issued on or before ____________. There should be no recommended
decision by a hearing or other responsible officer of the Commission and no
30-day waiting period between the issuance of the Commission's order and its
effective date. Applicants consent to the Division of Corporate Regulation
assisting in the preparation of the Commission's decision and order in this
matter, unless the Division opposes the Transaction covered by this Application
or Declaration.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
B-1 Form of Proposed AEP Structure (filed herewith on
Form SE)
D-1 PUCT Application (to be filed by amendment)
D-2 PUCT Order (to be filed by amendment)
D-3 PUCO Application (to be filed by amendment)
D-4 PUCO Order (to be filed by amendment)
D-5 VSCC Application (to be filed by amendment)
D-6 VSCC Order (to be filed by amendment)
D-7 WVPSC Application (to be filed by amendment)
D-8 WVPSC Order (to be filed by amendment)
D-9 APSC Application (to be filed by amendment)
D-10 APSC Order (to be filed by amendment)
D-11 FERC Application(to be filed by amendment)
D-12 FERC Order(to be filed by amendment)
F Opinion of Counsel(to be filed by amendment)
H Form of Notice
(b) Financial statements:
Consolidated balance sheets as of June 30, 2000 and consolidated
statements of income for the period ended June 30, 2000 of AEP, APCo, CPL,
CSPCo, OPCo, SWEPCo and WTU. (Incorporated by reference from AEP's Form 10-Q for
the period ended June 30, 2000, File No. 1-3525.)
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
As described in Item 1, the proposed transactions are of a routine and
strictly financial nature in the ordinary course of AEP's business. Accordingly,
the Commission's action in this matter will not constitute any major federal
action significantly affecting the quality of the human environment.
No other federal agency has prepared or is preparing an environmental
impact statement with regard 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.
AMERICAN ELECTRIC POWER SERVICE CORPORATION
APPALACHIAN POWER COMPANY
CENTRAL POWER AND LIGHT COMPANY
COLUMBUS SOUTHERN POWER COMPANY
OHIO POWER COMPANY
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
/s/ A. A. Pena
Treasurer
Dated: October 27, 2000
Exhibit G
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. /November , 2000
-----------------------------------------------:
:
In the Matter of :
:
AMERICAN ELECTRIC POWER COMPANY, INC. :
AMERICAN ELECTRIC POWER SERVICE CORPORATION :
APPALACHIAN POWER COMPANY :
CENTRAL POWER AND LIGHT COMPANY :
COLUMBUS SOUTHERN POWER COMPANY :
OHIO POWER COMPANY :
SOUTHWESTERN ELECTRIC POWER COMPANY :
WEST TEXAS UTILITIES COMPANY :
:
File No. 70- :
-----------------------------------------------:
American Electric Power Company, Inc. ("AEP"), a holding company
registered under the Public Utility Holding Company Act of 1935, as amended
("1935 Act"), American Electric Power Service Corporation ("AEPSC"), a service
subsidiary of AEP, Appalachian Power Company ("APCo"), Central Power and Light
Company ("CPL"), Columbus Southern Power Company ("CSPCo"), Ohio Power Company
("OPCo"), Southwestern Electric Power Company ("SWEPCo"), West Texas Utilities
Company ("WTU"), (collectively, the "Operating Companies"), each a direct or
indirect wholly owned public utility electric subsidiary of AEP, AEP Deregulated
Holding Company, Inc. or LLC ("Holdco"), and AEP Regulated Holding Company, Inc.
or LLC ("Regco") and one or more intermediate wholly owned utility holding
company subsidiaries to be formed by AEP (collectively, "Applicants"), hereby
file this application-declaration with the Securities and Exchange Commission
("Commission") under Sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of the 1935
Act, and Rules 43(a), 44, 45, 46, 54, 90 and 91 thereunder.
AEP's corporate separation is designed to align the company's legal
structure and business activities with the realities of a restructuring electric
industry. Corporate separation responds to the changing laws, regulations and
business requirements of the electric industry. AEP's realigned corporate legal
structure complies with restructuring statutory and regulatory requirements and
provides greater flexibility to conduct business. Earlier this year the affected
Operating Companies filed respective Arkansas, Ohio and Texas business
separation plans to comply with restructuring requirements in those states. The
principles reflected in those filings are generally being applied to the entire
system. This realignment consists of actual legal corporate separation of
certain subsidiaries and companies of AEP, including the former CSW and its
subsidiaries, and is not a functional reorganization of those entities. For a
complete diagram of the final corporate structure sought by Applicants, please
see Exhibit B-1 (the new corporate structure chart as of January 1, 2002).
The Application or Declaration and any amendments thereto are available
for public inspection through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by November __, 2000 to the Secretary, Securities and Exchange
Commission, Washington, D.C. 20549, and serve a copy on the applicants at the
addresses specified above. Proof of service (by affidavit or, in case of any
attorney at law, by certificate) should be filed with the request. Any request
for a hearing shall identify specifically the issues of fact or law that are
disputed. A person who so requests will be notified of any hearing, if ordered,
and will receive a copy of any notice or order issued in this matter. After said
date, the Application or Declaration, as filed or as it may be amended, may be
permitted to become effective.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
--------
1 16 U.S.C. 824b(a) (1994).
2 See Central and South West Corporation, HCAR No. 27168, Order Authorizing
Issuance of Securitization Bonds (April 20, 2000).
3 See Wisconsin's Environmental Decade, Inc. v SEC, 882 F.2d 523, 527 (D.C.
Cir. 1989); Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990); Entergy
Corp., HCAR No. 25136 (Aug. 27, 1990).
4 Ibid. The Commission, among other things, authorized the dividending of
interests to Genco.
