(As filed with the Securities and Exchange Commission
December 27, 2000)
File No. 70-9791
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM U-1
APPLICATION OR DECLARATION UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
----------------------------------
Madison Gas and Electric Company
133 South Blair Street
P.O. Box 1231
Madison, Wisconsin 53701-1231
(Names of companies filing this statement and
addresses of principal executive offices)
---------------------------------
None
(Name of top registered holding company parent)
---------------------------------
Mark C. Williamson
Executive Vice President and Chief Strategic Officer
Madison Gas and Electric Company
133 South Blair Street
P.O. Box 1231
Madison, Wisconsin 53701-1231
(Name and address of agent for service)
The Commission is requested to send copies of all notices,
orders and communications in connection with this matter to:
Lee Cullen Gary Mathis
Cullen Weston Pines & Bach LLP Madison Gas and Electric Co.
122 West Washington Avenue 133 South Blair Street
Suite 900 P.O. Box 1231
Madison, WI 53703 Madison, WI 53701-1231
Ph: (608) 251-0101 Ph: (608) 252-7000
Fax: (608) 251-2883 Fax: (608) 252-7098
E-mail: [email protected] E-mail: [email protected]
TABLE OF CONTENTS
Page
ITEM 1: DESCRIPTION OF PROPOSED TRANSACTION . . . . . . . . 3
A. Introduction and Request for Commission Action. . . 3
1. Description of MGE. . . . . . . . . . . . . . . . . 4
2. Description of MGE's Non-Utility Subsidiaries . . . 6
B. Transco Legislation . . . . . . . . . . . . . . . . 6
C. Transco Operations and Organization . . . . . . . . 9
D. Transferred Properties . . . . . . . . . . . . . . 20
E. Related Orders and Applications
Pertaining to the Establishment of
the Transco and Corporate Manager. . . . . . . . . 22
ITEM 2: FEES, COMMISSIONS AND EXPENSES . . . . . . . . . . 23
ITEM 3: APPLICABLE STATUTORY PROVISIONS. . . . . . . . . . 23
A. Section 10 Standards . . . . . . . . . . . . . . . 23
1. Section 10(b). . . . . . . . . . . . . . . . . . . 24
a. Section 10(b)(1). . . . . . . . . . . . . . . 24
b. Section 10(b)(2). . . . . . . . . . . . . . . 25
i. Fairness of Consideration. . . . . . . . 25
ii. Reasonableness of Fees . . . . . . . . . 25
c. Section 10(b)(3). . . . . . . . . . . . . . . 26
2. Section 10(c). . . . . . . . . . . . . . . . . . . 27
a. Section 10(c)(1). . . . . . . . . . . . . . . 28
b. Section 10(c)(2). . . . . . . . . . . . . . . 28
(i) Efficiencies and Economies . . . . . . . 28
(ii) Integrated Public Utility System . . . . 29
(a) Physical Interconnection . . . . . . . . 30
(b) Single Interconnected and
Coordinated System. . . . . . . . . . . .31
(c) Single Area or Region. . . . . . . . . . 31
(d) Localized Management, Efficient
Operation and Effective Regulation . . . 31
3. Section 10(f). . . . . . . . . . . . . . . . . . . 33
ITEM 4: REGULATORY APPROVALS . . . . . . . . . . . . . . . 33
ITEM 5: PROCEDURE. . . . . . . . . . . . . . . . . . . . . 33
ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS. . . . . . . . . 34
A. Exhibits . . . . . . . . . . . . . . . . . . . . . 34
B. Financial Statements . . . . . . . . . . . . . . . 36
ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS. . . . . . 37
Madison Gas and Electric Company hereby amends and restates
its Application/Declaration on Form U-1 in Commission file No
70-9791 as follows:
ITEM 1: DESCRIPTION OF PROPOSED TRANSACTION
A. Introduction and Request for Commission Action
Pursuant to Sections 9(a)(2) and 10 of the Public Utility
Holding Company Act of 1935, as amended (the "Act"), Madison Gas
and Electric Company ("MGE"), a Wisconsin corporation, hereby
requests authorization for a transaction, as described in
further detail below, in which: (i) MGE will transfer ownership
and control over its transmission assets to American
Transmission Company LLC ("ATC" or the "Transco"), a Wisconsin
limited liability company formed on June 12, 2000, which will be
a single-purpose transmission company; (ii) MGE will receive, in
exchange for such transfer, member units of the Transco in
proportion to the value of the transmission assets contributed;
(iii) MGE will purchase Class A shares of ATC Management Inc.
(the "Corporate Manager"), a Wisconsin corporation formed on
June 12, 2000, in proportion to the value of the transmission
assets contributed; and (iv) MGE will purchase one Class B share
of the Corporate Manager. Specifically, MGE requests authority
to acquire voting securities of ATC and the Corporate Manager,
to the extent that the Corporate Manager is a public utility
company within the meaning of the Act. As explained in Section
E below, this request for Commission action is made in
conjunction with several other such requests by other parties
related to the formation of the Transco.
Applicants do not at this time request Commission approval
for any further transaction by Transco or Corporate Manager. In
the event Applicant proposes to engage in any transaction
resulting in a material change in the corporate structure,
management, or control of Corporate Manager or Transco for which
approval of the Commission may be required under the Act,
Applicants will undertake to file a Post-Effective Amendment
requesting such approval.
In 1999, the State of Wisconsin enacted legislation that
facilitates the formation of a single-purpose transmission
company such as the Transco. As explained in more detail below,
that legislation, among its other provisions, encourages public
utility affiliates of Wisconsin utility holding companies to
transfer ownership of their transmission assets to a
transmission company. The legislation does so by adjusting the
calculation of an existing limit on the amount of unregulated
(or non-utility) investments these holding companies and their
affiliates can make, after the transfer of assets to the
Transco. The Transco will be managed by the Corporate Manager,
which will also hold a portion of the Transco's membership
interests. All participants in the Transco will ultimately own
a direct or indirect interest in the Transco and the Corporate
Manager in proportion to the value of the transmission assets or
cash each participant contributes to the Transco (except Edison
Sault and South Beloit Water, Gas & Electric Company, which are
not expected to invest in the Corporate Manager).
In addition to MGE the initial participants in the Transco
will be Wisconsin Public Power Inc. ("WPPI"), Wisconsin Public
Service Corporation ("WPS"), Wisconsin Electric Power Company
("WEPCO"), Edison Sault Electric Company ("Edison Sault"),
Wisconsin Power and Light Company ("WPL"), South Beloit Water,
Gas and Electric Company ("South Beloit"), and the Corporate
Manager. [N1 - The Commission, in HCAR No. 27206 (Aug. 2, 2000)
authorized, among other things, WPL to become a member of the
Transco and to acquire shares of the Corporate Manager.] All
utilities participating in the Transco are referred to herein as
"Member Utilities". Other transmission-owning utilities may, in
the future, decide to become members of the Transco, as may
certain non-transmission-owning utilities, based on their load-
ratio shares.
MGE intends to contribute its transmission assets to the
Transco on or about January 1, 2001. [N2 - Wisconsin law
contemplates that the transfer of the transmission assets to the
Transco will occur by January 1, 2001.]
1. Description of MGE
MGE is a Wisconsin corporation organized in 1896, that
generates, transmits and distributes electricity in Dane County,
Wisconsin in an area covering approximately 250 square miles.
MGE also purchases, transports and distributes natural gas
throughout a 1,325 square mile area located in seven Wisconsin
counties: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and
Vernon. MGE is a "public utility" pursuant to PUHCA Sec.
2(a)(5) and is both an "electric utility" and a "gas utility"
pursuant to Sections 2(a)(3) and (4). However, MGE is currently
not a utility holding company. Moreover, although MGE will be
an initial member of the Transco, it is not expected to own a
10% or greater interest in either the Transco or the Corporate
Manager, and thus will not become a utility holding company.
The Public Service Commission of Wisconsin ("Wisconsin
Commission") regulates MGE's rates charged for gas and electric
service, accounts, issuance of securities, plant and
transmission line siting, and other aspects of its business
related to the terms and conditions of such retail service. The
Federal Energy Regulatory Commission ("FERC") has jurisdiction,
under the Federal Power Act, over MGE's transmission facilities,
wholesale transactions, certain accounting practices and certain
other aspects of MGE's business. The Nuclear Regulatory
Commission ("NRC") has jurisdiction over operation of the
Kewaunee Nuclear Power Plant(Kewaunee). MGE has a 17.8%
ownership interest in Kewaunee. The other owners are Wisconsin
Public Service Corporation ("WPSC"), which operates Kewaunee,
and Wisconsin Power and Light Company.
As of December 31, 1999, MGE supplied electric service to
approximately 125,000 customers, of whom 112,000 were located in
the cities of Fitchburg, Madison, Middleton and Monona, and
13,000 in adjacent areas. Of the total number of customers,
approximately 108,000 were residential and 17,000 were
commercial and industrial. Electric revenues for 1999 were
derived from sales to the following classes of customers:
residential (35%), commercial (47%), industrial (7%), public
authorities including the University of Wisconsin (7%), and
sales to other utilities (4%). Electric operations accounted for
68% of MGE's total 1999 revenues.
MGE is a member of Mid-America Interconnected Network, Inc.
("MAIN"), a regional reliability group. MAIN members work
together to better utilize reserve generating capacity and
coordinate long-range system planning and day-to-day operations.
MAIN seeks to maintain adequate planning generation reserve
margins in the region, ranging from 15% to 22%. MGE is also a
member of the Mid-Continent Area Power Pool ("MAPP") Regional
Transmission Committee ("RTC"). RTC members pool their
transmission systems allowing each member to easily access
economical energy across the Upper Midwest. Each member is then
compensated for the energy flows on their individual
transmission system.
MGE also owns and controls approximately 636 MW of net
generating capability, and 306 miles of transmission lines and
radials.
In addition to its electric operations, as of Dec. 31,
1999, MGE supplied natural gas service to approximately 111,000
customers in the cities of Elroy, Madison, Middleton, Monona,
Fitchburg, Lodi, Verona and Viroqua; 22 villages; and all or
parts of 41 townships. Gas revenues for 1999 comprised of
residential (57%), commercial (32%), industrial (4%) and other
(7%). Transportation service accounted for slightly more than
3% of the total 1999 gas revenues. Gas operations accounted for
32% of MGE's total revenues.
MGE's gas facilities include 1,955 miles of distribution
mains. MGE has physical interconnections with both ANR Pipeline
Company (ANR) and Northern Natural Gas Company (NNG). MGE's
primary service territory, which includes Madison and the
surrounding area, receives deliveries at four ANR and one NNG
gate station. MGE also receives deliveries at NNG gate stations
located in Viroqua and Elroy and in Crawford County.
Interconnections with two major pipelines provide competition in
interstate pipeline service and a more reliable and economical
supply mix, which includes gas from Canada and the U.S. Mid-
Continent and Gulf/Offshore regions.
2. Description of MGE's Non-Utility Subsidiaries
MGE wholly owns the following subsidiaries.
MAGAEL INC., which holds title to property acquired by the
Company for future utility plant expansion and nonutility
property.
Central Wisconsin Development Corporation, which assists
new and expanding businesses throughout Central Wisconsin by
participating in planning, financing, property acquisition,
joint ventures, and associated activities.
Great Lakes Energy Corp. - Inactive. As of Dec. 31, 1999,
Great Lakes Energy Corp. owned 100% of the voting securities of
American Energy Management, Inc., an inactive Wisconsin
Corporation.
Wisconsin Resources Corporation - Inactive.
North Central Technologies, Inc. - Inactive.
Mid America Technologies, Inc. - Inactive.
B. Transco Legislation
In 1999, the State of Wisconsin enacted legislation that
facilitates the formation of the Transco as a for-profit single-
purpose transmission company. [N3 - 1999 Wisconsin Act 9, Secs.
2335 tr to 2335 uh (Assembly Amendment to Assembly Subcommittee
Amendment 1 to 1999 Assembly Bill 133) (the "Transco
Legislation").] In its proposed tariff, the Transco will charge
a single system-wide average network rate to be phased in over 5
years in accordance with the Transco Legislation, and a single
system-wide average point-to-point rate for "through and out"
service. [N4 - The ATC filed its proposed tariff with the FERC
on July 31, 2000 in Docket No. ER00-3316-000.] Key benefits of
the Transco include the elimination of rate "pancaking" among
the Transco members' multiple transmission systems; one-stop
shopping for transmission and wholesale distribution services
over multiple transmission systems; the reduction of operational
barriers within the Transco service area; and the transfer of
ownership of the transmission assets from vertically integrated
utilities that will further functional unbundling. These
benefits are in keeping with the goals of the Transco
Legislation and FERC policies. The Transco Legislation, among
other things, encourages public utility affiliates of Wisconsin
utility holding companies to transfer ownership of their
transmission assets to the Transco by beneficially adjusting the
calculation of an existing limit on the amount of unregulated
(or non-utility) investments the holding company system can
make, after the transfer of their assets to the Transco. [N5 -
Wis. Stat. Sec. 196.485(5). This investment cap applies to any
holding company system that owns a Wisconsin public utility.
Generally, Wisconsin law limits the amount of assets that all
non-utility affiliates in a holding company system may own to an
amount equal to 25% of the assets owned by all of the electric
public utility affiliates within that system. Wis. Stat. Sec.
196.795(6m)(b). The Transco Legislation permits an electric
utility within a holding company system to exclude certain
energy related "eligible investments" (as defined in the
Wisconsin Public Utility Holding Company Act) from the
calculation of non-utility assets that count towards the 25%
asset cap if, among other things, each electric utility within a
holding company system that owns transmission assets in
Wisconsin transfers all of those transmission assets to the
Transco before January 1, 2001 and each electric utility within
that holding company system petitions, by June 30, 2000, the
Wisconsin Commission and the FERC for authority to transfer
operational control of all of its transmission facilities in
Wisconsin and the surrounding states to the Midwest Independent
Transmission System Operator, Inc.] The Transco will be managed
by the Corporate Manager. All Transco participants will
ultimately own direct or indirect interests in the Transco and
the Corporate Manager in proportion to the value of the
transmission assets or cash each participant contributes to the
Transco. Transmission-dependent utilities, as defined by the
Transco legislation, that participate in the Transco will
purchase their interests for cash and will obtain ownership
shares in proportion to their 1999 Wisconsin load-ratio shares.
Tax exempt transmission-dependent entities that participate in
the Transco, such as WPPI, [N6 - WPPI is a municipal electric
company owned by 30 Wisconsin municipalities that operate
electric utilities. These utilities supply electric power to
more than 100,000 customers in Wisconsin and purchase all of
their electric requirements from WPPI. WPPI was created
pursuant to Wisconsin legislation and is a non-profit, political
subdivision of the state. Wis. Stat. Sec. 66.073.] will
purchase their interests for cash at a price that will keep the
other participants whole, as explained below.
The Transco Legislation obligates the Transco to construct,
operate, maintain and expand its transmission facilities to
provide adequate, reliable transmission services for a single,
system-wide rate for the use of its system under an open-access
transmission tariff (the "Transco OATT") that has been filed
with the FERC. The Transco Legislation directs that the Transco
support robust competition in energy markets, extend no
favoritism to any participant and meet the transmission needs of
all participants. Under the provisions of the Transco
Legislation, the Transco will transfer the operational control
of its transmission facilities to the Midwest Independent
Transmission System Operator, Inc. (the "Midwest ISO") when the
Midwest ISO becomes operational. If, however, the Midwest ISO
fails to commence, or ceases operations, the Transco, in
accordance with the Transco Legislation, will join another
independent system operator or other regional transmission
organization authorized under federal law to operate in
Wisconsin.
As previously stated, the initial participants in the
Transco will include, in addition to MGE, WPL, South Beloit,
WPPI, WPS, Wisconsin Electric and Edison Sault. [N7 - The
Corporate Manager will also initially own a less than 1%
interest in the Transco.] All utilities participating in the
Transco are referred to herein as "Member Utilities". Other
entities, both within and outside of Wisconsin, may, in the
future, decide to become members of the Utilities intend to
contribute their transmission assets to the Transco on or about
January 1, 2001, (the "Operations Date"). [N8 - The Transco
Legislation currently contemplates that the transfer of the
transmission assets will occur by the Operations Date.
Accordingly, the Member Utilities are proceeding under the
assumption that the Transco will begin operations on the
Operations Date and are therefore making all of the requisite
FERC filings to have the Transco OATT effective as of such
date.] The transmission systems of the Member Utilities (and
the Alliant Energy transmission assets that are not being
transferred to the Transco) are interconnected at various points
and essentially all operate as part of the same reliability and
planning council -- the Mid-America Interconnected Network, Inc.
("MAIN"). [N9 - Edison Sault is part of the East Central Area
Reliability (ECAR) group but is expected to become part of MAIN
by January 1, 2001.] MAIN promotes coordinated planning,
construction, operation, maintenance and use of operation and
transmission facilities by its members. The Member Utilities'
transmission systems were also planned and built on a
coordinated basis pursuant to the Wisconsin "advance planning"
law in effect from 1975 until 1997. For a map detailing the
interconnection of the transmission systems of the Member
Utilities, see Exhibit E hereto.
C. Transco Operations and Organization
The Transco will have the exclusive duty to provide
transmission service in geographic areas previously served by
the Transco members. The Transco will not, however, have that
duty in areas where control of transmission facilities has been
transferred directly to the Midwest ISO. Wisconsin law
prohibits the Transco from bypassing distribution systems and
directly serving retail customers.
As contemplated by the Transco Legislation, the Transco is
organized as a limited liability company under Wisconsin law. A
Wisconsin limited liability company may elect to be "member
managed" or "manager managed." [N10 - Wis. Stat. Section
183.0401(2).] The Transco has elected to be manager managed,
and Wisconsin law specifically allows the manager of any limited
liability company to be a corporation. [N11 - Wis. Stat.
Sections 183.0401(2)(6), 183.0102(13), and 183.0102(18).] The
Transco has designated the Corporate Manager, a Wisconsin
corporation formed for this purpose, to be its manager. The
two legal entities, the Transco and the Corporate Manager, are a
single functional unit, as the Corporate Manager exists for the
sole purpose of conducting the affairs of the Transco.
Member Utilities will also purchase shares of the
Corporate Manager for cash, in proportion to their percentage
interests in the Transco. It is expected that MGE will pay
approximately $5,000 for an approximate 5.31% interest in the
Corporate Manager. The Corporate Manager will have two classes
of stock: Class A and Class B. MGE will receive approximately
5% of the non-voting Class A shares, in proportion to its
ownership interest in the Transco. Additionally, each Member
Utility, including MGE, will receive one Class B voting share.
This structure accomplishes two explicit goals articulated
by the Wisconsin Legislature in the Transco Legislation. First,
the Transco Legislation requires that the transfer of
transmission assets be designed to avoid or minimize material
adverse tax consequences and, to the extent practicable, satisfy
the requirements for a tax-free transfer. [N12 - Wis. Stat.
Section 196.485(5)(b)2.a and 196.485(5)(b)2.b.] The
"pass-through" tax treatment afforded by the limited liability
company structure accomplishes this purpose and avoids any
tax-induced retail rate impact from the creation of the Transco.
The transfer of assets to a limited liability company is a
tax-free transaction and income earned by the Transco will not
be taxed twice, as it would in a corporation.
Second, the Transco Legislation clearly contemplates a
transmission company that can access public financial markets.
[N13 - The Transco Legislation refers to an anticipated "initial
issuance of securities by the transmission company to any 3d
party." Wis. Stat. Section 196.485 (3m)(a)4.] The Transco
Legislation also allows any holder of 10% or more equity in a
transmission company to, after 3 years, require the transmission
company to comply with all state and federal laws necessary for
the holder to sell or transfer its ownership interests. [N14 -
Wis. Stat. Section 196.485(3m)(a)5.] Because corporate stock is
more readily marketable to the public than member units in a
limited liability company, the creation of the Corporate Manager
as a stock corporation will facilitate access to public
financial markets.
FERC, in Order 888 and Order 2000, and the Wisconsin
Legislature in 1997 Act 204, have recognized that in order to
foster competitive markets in electricity, transmission
facilities should operate independently from the generation or
distribution business. The Transco will further the goals of
FERC and ACT 204 in two ways. First, the Transco has applied to
join the Midwest ISO ("MISO") and MISO has accepted the
application effective on MISO's operation date, at which time
the Transco will transfer operational control of its
transmission facilities to MISO. [N15 - The Transco Legislation
provides that if MISO fails to commence operations or ceases
operations, requirements that apply to MISO will apply to any
other independent system operator or regional transmission
organization that is authorized under federal law to operate in
Wisconsin. Wis. Stat. Section 196.485(2)(bx).]
Second, over time, public ownership of the Transco is
expected to increase and ownership by the utilities to decrease,
furthering the goal of complete independence of transmission
from the generation and distribution businesses. During the
first three years of the Transco's existence, no member may
transfer its interest in the Transco except to an affiliate or
to another member of the Transco. After the three-year period,
however, if a Transco member wishes to sell all or part of its
interest in the Transco, it can do so by redeeming its Member
Units in the LLC for Class A Shares of the Corporate Manager.
(The member who receives such Class A stock would be free to
sell it to a third-party.) Alternatively, the Transco member
could sell its member units to the Corporate Manager for cash.
The Corporate Manager would raise the cash for such a purchase
by means of a public offering of Class A shares. As the initial
members of the Transco sell some or all of their interest to the
Corporate Manager, a greater share of the Transco will be owned
by the Corporate Manager. The Corporate Manager, in turn, will
be owned in greater share by the investing public through the
sale of stock. Broader public ownership would move the Transco
over time toward the goal of complete independence from the
founding utilities and thus from the generation and distribution
businesses those utilities engage in.
Various requirements regarding the ownership and governance
of a transmission company in Wisconsin are set forth in the
Transco Legislation. [N16 - Wis. Stat. Sections 196.485(3m)(c),
196.485(5), and 196.485.(6).]
Each utility that transfers its transmission assets to the
Transco will receive as consideration membership (LLC) units in
the Transco in proportion to the value of the assets
transferred. In accordance with the Transco Legislation, the
assets transferred will be valued at net book value determined
on the basis of the regulated books of account at the time of
transfer. [N17 - Wis. Stat. Section 196.485(5)(b)7.] WPPI,
which owns no transmission assets, is investing cash in the
Transco and will receive membership units in proportion to its
investment. Membership units will initially be valued at $10.
The Corporate Manager will also have a membership interest in
the Transco by virtue of an investment of $1,000 for 100
membership units.
The Transco is governed by the Corporate Manager's
shareholders and Board of Directors ("Board"). The Board will
appoint the chief executive officer (and other officers) of the
Corporate Manager. Because the management of the Transco is
vested in the Corporate Manger, the governance requirements set
forth in the Transco Legislation [N18 - Wis. Stat. Section
196.485(3m)(c).] are satisfied through the provisions of the
Corporate Manager's organizational documents as described below.
The Corporate Manager's Amended and Restated Articles of
Incorporation provide for 100,000,000 shares of common stock,
with 99,999,990 shares being Class A stock and ten shares being
Class B. Initially, each participant's ownership of Corporate
Manager Class A stock will be in the same proportion as the
participant's ownership interest in the Transco. With 5 initial
participants, only 5 of the 10 shares of Class B stock will
initially be issued. (Ten thousand shares of Class A Stock will
initially be issued.) If at any time a participant's ownership
interest in the Transco falls below 2%, then it must sell its
share of Class B stock back to the Corporate Manager. [N19 -
Unlike the other participants, WPPI, regardless of its
percentage ownership interest in the Transco, may retain its
share of Class B Stock.]
Prior to a public offering, only Class B shares will have
voting rights, including the right to elect directors. Each
Class B stockholder will have the right to appoint one director
to the Board. An appointee to the Board may be removed only by
the participant nominating him or her. The four independent
directors required by the Transco Legislation [N20 - Wis. Stat.
Section 196.485.(3m)(c)2, provides: "That at least 4 managers
or directors of the transmission company have staggered 4-year
terms, are elected by a majority vote of the voting security
holders and are not directors, employees or independent
contractors of a person engaged in the production, sale,
marketing, transmission or distribution of electricity or
natural gas or of an affiliate of such person."] will be elected
to the Board by a majority vote of the Class B stockholders.
Class B stockholders will also have the following powers:
(i) by majority vote, to amend the Articles of
Incorporation; and
(ii) by majority vote, to approve any merger, consolidation
or sale of all or substantially all of the assets of
Corporate Manager.
After a public offering of stock in the Corporate Manager,
Class A stockholders will be entitled to vote and will elect a
majority of the Board. Although after a public offering Class B
stockholders will only elect a minority of the Board, each Class
B stockholder would continue to have the right to appoint one
director to the Board. After a public offering, the rights to
amend the Articles of Incorporation and to approve a merger,
consolidation or sale of the Corporate Manager will transfer to
the Class A stockholders.
All Class B shares will convert into Class A shares on the
earlier of the following events:
(i) the Corporate Manager owns more than 50% of the
Transco membership units; or
(ii) the tenth anniversary of the Operations Date; [N21 -
The Operations Date is January 1, 2001.]
provided that the Board may, by majority vote, elect to override
the conversion and keep the Class B shares outstanding after
such an event. Such a conversion of Class B shares into Class A
shares would mean that, at that time, the Class A shareholders
will elect all directors.
Most decisions of the Board require a majority of a quorum
[N22 - A quorum is fixed at two-thirds of the directors until an
initial public offering is made, at which time a simple majority
will constitute a quorum.] of the Board, including:
(i) approving an operating and a capital budget for the
Transco and the Corporate Manager;
(ii) effecting a change in the distribution payment rate of
the Transco, which will initially be set at 80%;
(iii)hiring and firing officers and establishing their
compensation, including benefit plans;
(iv) admitting new participants to the Transco, and
determining the price therefor;
(v) after three years, making an initial public offering
of the stock of the Corporate Manager;
(vi) approving for submission to the shareholders either
(a) the amendment of the Articles of Incorporation of
the Corporate Manager or (b) the merger, consolidation
or sale of all or substantially all of the Corporate
Manager's assets; and
(vii)approving changes to the Bylaws (with certain
exceptions).
Unanimous Board approval will be required for the
following:
(i) to effect a change in the allocation of profits and
losses;
(ii) to effect a public offering prior the third
anniversary of the Operations Date;
(iii)to change the number of directors on the Board prior
to the tenth anniversary of the Operations Date; and
(iv) to make any amendment of the Articles of Incorporation
or Bylaws that relates to matters requiring unanimity
or to amend any provision in the Bylaws that
incorporates or embodies a provision of 1999 Wisconsin
Act 9.
The Transco members will enter into an agreement (the
"Operating Agreement") which will govern the activities of the
Transco. Because the Transco is a manager-managed limited
liability company, the Operating Agreement will grant to the
Corporate Manager full, complete and exclusive discretion to
exercise management control over the business of the Transco.
As the manager, the Corporate Manager is obligated to provide
all management services to the Transco, which itself has no
management. The Corporate Manager may not resign or be removed
as manager without the unanimous consent of the Member Utilities
and the Corporate Manager. (The members of the Transco also
control the Corporate Manager so if they believe that it is
performing inadequately, their remedy is to replace the
management of the Corporate Manager, and not the Corporate
Manager as manager of the Transco.) The Corporate Manager also
is to have no other role than to serve as manager of the
Transco. Thus, it will negotiate all contracts on behalf of the
Transco, and make all required filings on the Transco's behalf.
The Corporate Manager's employees will either directly or by
contract with third parties perform all the functions necessary
to run an electric transmission company. Accordingly, all of
the Corporate Manager's expenses will be for the account of the
Transco. Such expenses will be charged back to the Transco at
cost in accordance with Section 13(b) of the Act and Rules 90
and 91 thereunder. The Corporate Manager will have all powers
as a manager to do all things necessary and convenient to carry
out the Transco's business. The Transco will rely completely on
the Corporate Manager to take all actions required in the
conduct of the Transco's business.
It is expected that the transmission-owning Member
Utilities and the Transco will enter into one or more agreements
("O&M Agreements") pursuant to which the Member Utilities will
provide the Transco with "reasonable and cost effective
operations and maintenance services" for at least the first
three years after the Operations Date in accordance with the
Transco Legislation. [N23 - Wis. Stat. Section 196.485
(3m)(a)1.b.] Services provided under the O&M Agreements will
include operations services such as inspection, field switching
and communications repair; line equipment maintenance services
such as line inspection, line repair, grounding, corrosion
control and right of way access maintenance; station equipment
services including inspection, structure and foundation repair
and system testing and maintenance; emergency response services
such as field response, emergency clean up response and
post-emergency repair; station related services such as grass
maintenance, vegetation control and security checks; and other
miscellaneous services including grounding repair and major
equipment repair. Each utility will commit to maintain the
organizational and physical resources needed to perform all
services under an O&M Agreement.
The Member Utilities and the Transco will also enter into
one or more services agreements ("Services Agreements") pursuant
to which the Member Utilities will provide the Transco with
certain services not covered by the O&M Agreements. Services
provided under the Services Agreements include control center
services including the provision and supervision of control
center operator labor and dispatch of field operations
personnel; real estate services which include real estate
records management, encroachment monitoring, lease management,
billing and collection, joint facility management and route
planning, siting and selection; project services necessary for
the design, functioning and construction of capital projects
including engineering, protection and control design,
procurement and construction; environmental services; supply
chain services including sourcing, logistic, inventory and
warehousing functions; engineering services; planning services
and other miscellaneous services.
The decision to employ the O&M Agreements and the Services
Agreements just referred to has been made pursuant to the
requirements of the Transco Legislation, which provides that the
Transco shall,
[S]ubject to any approval required under
state or federal law, contract with each
transmission utility that has transferred
transmission facilities to the transmission
company for the transmission utility to
provide reasonable and cost-effective
operation and maintenance services to the
transmission company during the 3-year
period after the transmission company first
begins operations. The transmission company
and a transmission utility may, subject to
any approval required under federal or state
law, agree to an extension of such 3-year
period.
The rationale for this statutory mandate is that, at least
during the initial 3-year period, economy, reliability and
safety will best be served if the required services are provided
to the Transco by the utilities whose transmission assets are
being transferred. Those utilities have the resources, and
their personnel have the expertise and the experience with the
transmission assets, to provide the required services safely,
reliably and economically. The agreements provide that the
covered services will be rendered at cost, except that unless
otherwise prohibited by law, the Transco will commit to use an
annual minimum of 85% of the number of hours of a member
utility's own labor used in a representative year for
transmission facilities maintenance. The rationale for this
provision is that the utilities will be committing labor and
other resources to performance of the services required by the
Transco and will incur the costs of that resource commitment.
MGE is not subject to the Commission's jurisdiction
regarding transactions limited to cost. Nevertheless, the
Applicant believes that the terms of the Services Agreements and
the O&M Agreements provide fair, reasonable, and equitable
compensation for the costs incurred to render services to the
Transco and are consistent with the requirements of Section 13e
of the Act.
The Transco will enter into an Asset Contribution Agreement
("ACA") with each Member Utility that is contributing
transmission assets. The ACA provides for each Member Utility to
identify the real estate rights of way and personal property
that are to be contributed, and establishes the form of those
conveyances. In brief, the assets conveyed are required to be
all those necessary to enable the Transco to conduct
transmission operations. Each Member Utility will make certain
representations with respect to those assets conveyed, and will
agree to indemnify the Transco in the event of a breach of those
representations.
Additionally, the Member Utilities and the Transco will
enter into a Forming Party Agreement Regarding System Operating
Procedures ("Forming Party Agreement") which memorializes
certain principles of the Transco transmission system operation
that the Member Utilities agreed are necessary to ensure that
transmission system reliability and efficiency are continued
during the transition of system control from the Member
Utilities to the Transco. No services will be provided under
the Forming Party Agreement, though some of the principles
articulated in the Forming Party Agreement have been
incorporated into other agreements, such as service agreements,
between the Member Utilities and the Transco.
The distribution systems owned and operated by the Member
Utilities are currently interconnected with the current Member
Utilities' transmission systems. On January 1, 2001, when the
Transco will take over ownership and operation of the Member
Utilities' transmission systems, the Member Utilities'
distribution systems will then be interconnected with the
Transco's transmission system. Each Member Utility will enter
into a Distribution-Transmission Interconnection Agreement
(each, a "D-T Agreement") which will contain the terms and
conditions that will govern the interconnection of the Member
Utilities' distribution systems with the Transco transmission
system, addressing such matters as maintenance, operating and
meter standards, access to facilities and liability issues. The
D-T Agreements contain no provisions for the payment of rates or
charges to the Transco for the Transco's provision of
interconnection services to the Member Utilities.
The Member Utilities' generators are currently
interconnected with the Member Utilities' transmission systems.
On January 1, 2001, the Member Utilities' generators will then
be interconnected with the Transco's transmission system. Each
Member Utility will enter into a Generation - Transmission
Interconnection Agreement (each a "G-T Agreement") which will
govern the terms and conditions that will govern the
interconnection of the Member Utilities' generators with the
Transco transmission system, addressing such matters as
maintenance, operating and metering standards, access to
facilities, redispatch, provision of ancillary services and
liability issues. The G-T Agreements contain no provisions for
the payment of rates or charges to the Transco for the Transco's
provision of interconnection service to the Member Utilities'
generators.
The Member Utilities will each enter into a Network
Operating Agreement ("NOA") and Network Integration Transmission
Service Agreement ("NITSA") with the Transco. These agreements
are transmission service agreements pursuant to the Transco's
OATT on file at FERC for the provision of network integration
transmission service. The NITSA is a form agreement on file at
FERC. The NITSA specifies the network resources and network
load that will be served under the agreement. The NOA contains
the specific operating provisions that allow a network customer
to integrate its load and resources as provided in the OATT.
WPPI, and any other transmission-dependent tax-exempt
entity that participates in the Transco, will also be members of
the Transco, but will not be contributing transmission assets.
Because the participation of tax exempt entities like WPPI will
reduce the transmission revenue otherwise received by the
Transco, [N24 - Based on FERC precedent with respect to natural
gas pipelines, the revenue requirement reflected in the
Transco's FERC petition includes provision for income taxes
payable by its members with respect to Transco income. The
participation of any tax-exempt entity in the Transco will
reduce that revenue requirement and therefore each tax-exempt
Transco member must make contributions to the Transco to make up
for the diminished return of the other members. Alternatively,
the Transco participants may agree on special allocations of
certain tax elements, rather than adjust the purchase price to
be paid by such tax-exempt entities.] such entities will
purchase their interests for a price that is designed to keep
the other participants whole. It is anticipated that funds
received from WPPI and any other tax-exempt Transco member will
be used to fund outlays necessary to pay start-up costs and
construction work-in-progress or be used as cash working
capital. The tax-exempt purchase price will be recalculated
annually, such that all tax-exempt participants will be required
to make additional cash contributions (or receive a refund of
any "over contributed" funds) to ensure that the return
otherwise payable to the other transmission-contributing
participants is not diminished because of the tax exempt
entities' participation.
No Member Utility will be obligated to make any additional
capital contributions to the Transco or the Corporate Manager;
however, there may be additional contributions if a majority of
the Corporate Manager's directors determine that such additional
capital is appropriate. The Operating Agreement will establish
a target dividend rate of 80% of the Transco's earnings, subject
to adjustment.
More detailed information regarding the financing and
governance of the Transco and the Corporate Manager is contained
in the August 15, 2000 Application of Alliant Energy, SEC File
No. 70-9735 (the "Alliant Application").
D. Transferred Properties
MGE proposes to transfer ownership and control of its
transmission assets to the Transco. [N25 - For a complete list
of these facilities, please see MGE's sec. 203 application to
FERC (D-1).] The Transco will acquire from MGE transmission
facilities that operate at voltages of 345 kV, 138 kV and 69 kV,
excluding radial facilities. The MGE transmission assets
proposed to be transferred include:
- Transmission lines (including towers, poles, and
conductors);
- Transformers providing transformation within the
bulk transmission system and between the bulk and
area transmission systems; and
- Substations that solely provide a transmission
function.
The determination as to what MGE assets constitute
"transmission" assets to be transferred to the Transco has been
made pursuant to an order of the Wisconsin Commission, dated
July 13, 2000, in Docket No. 05-EI-119. The PSCW conducted a
proceeding specifically to provide direction on this issue to
the Wisconsin utilities. [N26 - See Investigation into the
Classification of Transmission Facilities Pursuant to Wis. Stat.
Sec. 196.485(1)(h), Docket No. 05-EI-119.] Under the Wisconsin
Commission Order, MGE has made its compliance filing to list its
transmission assets and to request exceptions. By Letter Order
dated December 20, 2000, the Wisconsin Commission approved MGE's
compliance filing. MGE will file as an exhibit the Wisconsin
Commission order accepting MGE's compliance filing as a post
effective amendment.
A breakdown of MGE's transmission assets to be contributed
to the Transco is provided in Exhibit I. It is expected that,
as of December 31, 2000, the original cost of the MGE
transmission assets will be approximately $86 million. The net
book value (original cost less accumulated depreciation) of the
MGE transmission assets at December 31, 2000 is expected to be
approximately $47 million, and the contribution value is
expected to be approximately $33 million.
The facilities MGE will transfer to the Transco do not
include distribution or generation facilities or radial lines
used to provide retail service. Distribution facilities include
all facilities with voltages below 50 kV, including the final
circuit connection to substations providing transformation or
connection to any retail customer regardless of voltage level.
The Transco will be under a statutory mandate to transfer
operational control of its jurisdictional facilities to the
Midwest ISO. Prior to the transfer, the Transco will have
operational control of the transmission system contributed by
Wisconsin utilities; provide ancillary services; operate an Open
Access Same-Time Information System ("OASIS") in conformance
with FERC Order No. 889; and administer the Transco OATT. The
Transco will also be responsible for the maintenance of the
transmission facilities under its ownership and control and will
assume responsibility for transmission system planning. After
the transfer to the Midwest ISO, the Transco will make changes
to its OATT to accommodate operational differences between the
Transco and the Midwest ISO open access transmission tariff.
MGE will enter into a bill of sale, deeds, easement
assignments and other documentation with the Transco governing
the conveyance of its respective transmission assets. The
transmission assets transferred to the Transco will include
MGE's rights and interests in any contracts under its existing
Open Access Transmission Tariff (the "MGE OATT").
In addition to the assets from MGE, it is expected that the
Transco will also acquire transmission assets from WPL, South
Beloit, Wisconsin Electric, Edison Sault and WPS. The Transco
is also expected to acquire the incidental transmission
facilities of transmission-dependent utilities, such as WPPI's
member municipal utilities. The Transco will assign a nominal
value of $10 to each member unit initially issued in exchange
for transmission assets.
The Transco will offer ancillary services under the
Transco's OATT. Because the Transco will own no generating
facilities, it will purchase ancillary services from third
parties and resell them under its OATT. The Transco expects to
enter into agreements to purchase must-run and ancillary
services from generators in the control areas of MGE, WPL, WPS
and Wisconsin Electric. The Transco will contract for must-run
operations and ancillary services with the generators located in
its control area and connected to its transmission system. In
accordance with Wisconsin law, the Transco will not, however,
engage in the purchase and sale of energy other than to obtain
necessary ancillary services required by its customers.
Upon receipt of necessary regulatory approvals, the Transco
will begin providing open access transmission services under its
OATT to those existing open access customers currently served by
MGE under the existing MGE OATT and to any other eligible
customer requesting transmission service from the Transco. MGE
will become a transmission customer of the Transco under its
transmission tariff. Where MGE is responsible for providing
transmission service under agreements or tariffs pre-dating FERC
Order No. 888 ("grandfathered agreements"), the Transco will
make its transmission system available under the Transco OATT in
order to provide transmission service to customers under the
grandfathered agreements.
E. Related Orders and Applications Pertaining to the
Establishment of the Transco and Corporate Manager
On August 3, 2000, Alliant and WPL obtained a Commission
order authorizing them to: (i) acquire small membership
interests in the Transco; (ii) acquire a small percentage of the
capital stock of the Corporate Manager; and (iii) authorizing
Alliant, through September 30, 2001, to guarantee the Transco's
payment obligations under a credit agreement and to enter into a
reimbursement agreement with the Transco. [N27 - Alliant Energy
Corporation, HCAR No. 27206 (August 3, 2000).]
On August 15, 2000, WPL, South Beloit, the Transco and the
Corporate Manager filed the Alliant Application seeking
Commission authorization for: (i) WPL to transfer ownership and
control over its transmission assets to the Transco; (ii) South
Beloit to transfer ownership and control over its transmission
assets to the Transco; (iii) WPL and South Beloit to receive, in
exchange for their transmission assets, member units, i.e.,
shares, of the Transco; (iv) WPL to purchase Class A shares of
the Corporate Manager; (v) WPL to purchase one Class B share of
the Corporate Manager; (vi) the Transco's issuance of member
units in exchange for transmission assets, in the case of
transmission-owning Transco members, or cash, in the case of
transmission-dependent Transco members; and (vii) the Corporate
Manager's issuance of its Class A and Class B shares in exchange
for cash payments.
WPL and South Beloit have also sought Commission
authorization through June 30, 2004 for external financing by
the Transco and the Corporate Manager through various forms of
(i) short-term debt financing; (iii) long-term debt financing;
and (iii) equity financing in the form of common or preferred
stock of the Corporate Manager, other equity securities or
additional interests in the Transco.
This Application, the Alliant Application and any
applications filed by other Member Utilities should be viewed as
companion filings. All must be approved expeditiously if the
Transco is to commence operations prior to the Operations Date.
If the Commission does not act within this timeframe certain
Applicants will be in violation of the Transco Legislation and
may face adverse regulatory consequences. [N28 - For example,
pursuant to Wis. Stats. Sec. 196.485(8), any public utility
affiliate that does not complete the contribution of its
transmission facilities to the Transco by January 1, 2000, will
be subject to a penalty of $25,000 for each day that the
contribution is delayed if the Transco is legally able to accept
the contribution.]
ITEM 2: FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses incurred, or to be
incurred, in connection with the transactions proposed herein
consist largely of attorney fees which will be approximately
$475,000.
ITEM 3: APPLICABLE STATUTORY PROVISIONS
MGE believes that the proposed transaction is regulated by
Sections 9(a)(2) and 10 of the Act. To the extent the
Commission finds that the transaction requires authorization,
approval or exemption under any section of the Act or provision
of the rules or regulations thereunder other than those
specifically referred to herein, MGE hereby requests such
authorization, approval or exemption.
When the transmission assets of the Member Utilities are
transferred to the Transco, the Transco will become an "electric
utility company" under Section 2(a)(3) of the Act and a "public
utility company" under Section 2(a)(5). In addition, the
Corporate Manager, by virtue of its ownership interest in, and
management of, the Transco, will also become an "electric
utility company" and a "public utility company." As a result of
the proposed transaction, MGE will be acquiring 5% or more of
the outstanding voting securities of the Transco and Corporate
Manager. As a consequence, MGE's acquisition of an interest in
the Transco and Corporate Manager will be subject to the
Commission's approval pursuant to Section 9(a)(2) of the Act.
Therefore, MGE believes that the proposed transaction cannot
proceed without the Commission's approval under Section 10 of
the Act. The relevant statutory standards to be satisfied are
set forth in Sections 10(b), 10(c) and 10(f) of the Act.
A. Section 10 Standards
The statutory standards to be considered by the Commission
in evaluating the transaction are set forth in Sections 10(b),
10(c) and 10(f) of the Act. For the reasons set forth in detail
below, the transaction fully complies with such sections.
1. Section 10(b)
Section 10(b) of the Act provides that, if the
requirements of Section 10(f) are satisfied, the Commission
shall approve an acquisition under Section 9(a) unless the
Commission finds that:
(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 a fair
relation to the sums invested in or the earning
capacity of the utility assets to be acquired or
the utility assets underlying the securities to
be acquired; or
(3) such acquisitions will unduly complicate the
capital structure of the holding-company 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.
a. Section 10(b)(1)
The proposed transaction will not tend towards interlocking
relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the public
interest or the interest of investors or consumer.
The Corporate Manager will initially have a ten member
Board of Directors. While five directors will be appointed by
the Member Utilities, four directors will be independent, as
mandated by the Transco Legislation. The remaining director
will be the chief executive officer of the Corporate Manager.
The employees of the Transco and the Corporate Manager will not
be employees of any of the member utilities. Therefore, any
interlocking relations will be minimal, at most.
Similarly, the proposed transaction will not tend toward
any "concentration of control of public utility companies" that
is detrimental to the public interest or the interest of
consumers or investors. The end result of the formation of the
Transco will not be the concentration of control over the
Wisconsin transmission system, but rather the dilution of
control. There will be at least five member utilities with
input, through the Corporate Manager, over decisions as to the
management and operation of the Transco's transmission assets.
One of these Member Utilities -- WPPI -- currently has no such
input. Indeed the creation of the Transco will encourage
competition, rather than concentrate control.
b. Section 10(b)(2)
Under Section 10(b)(2) of the Act, the Commission must
determine whether the consideration to be paid in connection
with the transaction "including all fees, commission and other
remuneration ... is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of ...
the utility assets underlying the securities to be acquired
...."
i. Fairness of Consideration
Section 10(b)(2) of the Act requires the Commission to
determine whether the consideration in connection with a
proposed acquisition of securities is reasonable and whether it
bears a fair relation to the investment in, and the earning
capacity of, the utility assets underlying the securities being
acquired. All transmission assets that will be transferred to
the Transco will be valued based on the same methodology. This
methodology is generally mandated by the Transco Legislation and
the specifics have been arrived at as the result of arms-length
negotiations among all of the Member Utilities, subject to the
review and approval of the Wisconsin Commission. Applicants
further believe that such consideration bears a fair relation to
the investment in and the earning capacity of the transmission
assets to be transferred because it is based on the Contribution
Value of those assets. Because the Transco's rates will also be
subject to FERC approval, it can be expected that those rates
(which will largely also be based on the same Contribution
Value) will permit the Transco to earn a fair return on them as
well. This being the case, all Member Utilities, including MGE,
can expect to earn a fair return on their investment.
ii. Reasonableness of Fees
An estimate of the fees and expenses to be paid in
connection with the proposed transactions is set forth in Item 2
hereof. The estimated amounts to be paid are fees required to
be paid to governmental bodies, fees for necessary professional
services, and other expenses incurred or to be incurred in
connection with carrying out the proposed transaction.
Applicants believe that such fees and expenses are reasonable
and customary for a transaction of this kind and that the
standards of Section 10(b)(2) are thus satisfied.
c. Section 10(b)(3)
Section 10(b)(3) requires that the Commission determine
whether the proposed transaction will unduly complicate MGE's
capital structure or will be detrimental to the public interest,
the interests of investors or consumers or the proper
functioning of MGE's system. The corporate capital structure of
MGE after the consummation of the proposed transaction will not
be unduly complicated.
The ownership structure of the Corporate Manager and the
Transco has been designed to simplify management of the Transco
and to facilitate public investment in the Transco enterprise
through a public offering of stock in the Corporate Manager,
such stock being more attractive to investors than would be the
equivalent member units (LLC interests) of the Transco.
Although such structure introduces an additional corporate layer
into the MGE system, the Transco and the Corporate Manager will,
as a practical matter, function as one entity. The Corporate
Manager has been introduced simply to make public investment in
the Transco enterprise more "investor-friendly".
In any event, as set forth more fully elsewhere in this
Application/Declaration the proposed formation of the new
transmission company is expected to result in benefits to the
public and to consumers and investors of the MGE holding company
system.
The transfer of the MGE Transmission Assets to the Transco
in exchange for a membership interest in the Transco will not be
detrimental to the investors in MGE. There are currently
outstanding approximately $115 million principal amount of MGE
first mortgage bonds which are secured by permanent additions
having a depreciated book value of approximately $402 million as
of September 30, 2000. Of this amount, approximately $192
million of permanent additions (166 2/3% of the principal amount
of the bonds) were applied to the issuance of the bonds with the
balance available for additional bonding or other applications
permitted by the mortgage indenture securing the bonds. The
aggregate depreciated book value of the MGE Transmission Assets
is approximately $47 million. After the release of the
Transmission Assets from the lien of the indenture, MGE will
substitute other property additions not presently under a lien
of indenture for the purpose of securing its bonds. Following
the release of the MGE Transmission Assets from the lien of the
mortgage indenture, MGE's outstanding first mortgage bonds will
be secured by permanent additions with a depreciated book value
of more than 3.0 times the aggregate principal amount of those
bonds.
MGE has no intention to issue additional first mortgage
bonds; however, it does intend to transfer additional utility
assets free of the lien of the indenture in connection with the
proposed further restructuring of its operations. Any such
further transfers will be made in accordance with the terms of
the indenture.
With respect to the equity investors in MGE (common
stockholders) and holders of MGE's unsecured debt securities,
MGE's total assets will not be materially affected by the
proposed transaction. MGE will receive directly or indirectly
an equity interest in the Transco that approximates the value of
the MGE Transmission Assets transferred to the Transco.
MGE is required by order of the Public Service Commission
of Wisconsin to maintain a capital structure in which equity
constitutes 50% to 55% of total capital. The proposed
transaction will not adversely affect MGE's ability to maintain
a balanced capital structure in accordance with the requirements
of the Public Service Commission of Wisconsin.
2. Section 10(c)
Section 10(c) of the Act provides that:
Notwithstanding the provisions of subsection (b), the
Commission shall not approve:
(1) An acquisition of securities or utility assets,
or of any other asset, which is unlawful under
the provisions of Section 8 or is detrimental to
the carrying out of the provisions of Section 11;
or
(2) The acquisition of securities or utility assets
of a public utility or holding company unless the
Commission finds that such acquisition will serve
the public interest by tending towards the
economical and efficient development of any
integrated public utility system ....
a. Section 10(c)(1)
Consistent with the standards set forth in Section 10(c)(1)
of the Act, the proposed acquisition of securities will not be
unlawful under the provisions of Section 8 of the Act, or
detrimental to the carrying out of the provisions of Section 11
of the Act.
Section 8 prohibits a registered holding company or any of
its subsidiaries from acquiring, owning interests in, or
operating both a gas utility company and an electric utility
company serving substantially the same area if prohibited by
state law, and is thus not applicable to the transactions
contemplated herein.
Section 11(a) of the Act requires the Commission to examine
the corporate structure of registered holding companies to
ensure, among other things, that unnecessary complexities are
eliminated and voting powers are fairly and equitably
distributed, and is thus not applicable to the transactions
contemplated herein.
b. Section 10(c)(2)
As the following discussion will demonstrate, the proposed
transaction will serve the public interest by tending towards
the economical and efficient development of an integrated public
utility system as required by Section 10(c)(2) of the Act.
(i) Efficiencies and Economies.
The proposed transaction tends toward a variety of
efficiencies and economies. It implements the legislative
intent of the Transco Legislation to meet the reliability and
competitive needs of the State of Wisconsin by: 1) creating a
single transmission system without pancaked rates; 2)
encouraging creation of a regional grid; 3) simplifying
administration of the highly constrained MAPP-MAIN interface by
eliminating the multiple ownership of the MAIN side of the
interface; [N29 - Wisconsin is split between two reliability
councils, with the Western part of the state belonging to MAPP
and the eastern part of the state belonging to MAIN. Currently
transfer capacity at the MAPP/MAIN interface is limited.] 4)
increasing access from the south and west by creating incentives
to improve overall import capability; and 5) preserving the
value of the current owners' investments in the transmission
system without write-up of the value of the assets. The Transco
also takes the functional unbundling requirement of FERC Order
Nos. 888 and 2000 a step further by separating transmission from
generation and distribution into a separate corporation. In
addition, by combining the transmission systems of several
utilities, the Transco will provide operational benefits, such
as internalizing loop flow, eliminating constraints, and
permitting calculation of available transmission capability on a
system wide basis.
(ii) Integrated Public Utility System
As applied to electric utility companies, the term
"integrated public utility system" is defined in Section
2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating
plants and/or transmission lines and/or distributing
facilities, whose utility assets, whether owned by one
or more electric utility companies, are physically
interconnected or capable of physical interconnection
and which under normal conditions may be economically
operated as a single interconnected and coordinated
system confined in its operation to a single area
or region, in one or more states, not so large as to
impair (considering the state of the art and the area
or region affected) the advantages of localized
management, efficient operation, and the effectiveness
of regulation.
The Commission has previously taken notice of developments
that have occurred in the gas and electric industries in recent
years, and has interpreted the Act and analyzed proposed
transactions in light of those developments. [N30 - See, e.g.,
American Electric Power Co., HCAR No. 27186 (June 14, 2000)
(AAEP Order); New Century Energies, Inc., HCAR No. 26748 (Aug.
1, 1997) (approving transactions relating to combination of a
Colorado gas and electric utility company and intrastate exempt
holding company and a New Mexico electric utility company),
citing Hearing on Regulation of Public Utility Holding Companies
Before Subcomm. on Telecommunications and Finance and Subcomm.
on Energy and Power of the House of Representatives Comm. on
Commerce, 104th Cong., 1st Sess. (Aug. 4, 1995) (testimony of
Arthur Levitt, Chairman, SEC). See also Rust v. Sullivan, 500
U.S. 173, 186-87 (1991) (stating that "an agency is not required
to" establish rules of conduct to last forever, "but rather must
be given ample latitude to 'adopt [its] rules and policies to
the demands of changing circumstances.'") (citations omitted);
Shawmut Assn. v. SEC, 146 F.2d 791, 796-97 (1st Cir. 1945)
(stating that an agency "is expected to treat experience not as
a jailer but as a teacher").]
Based on the statutory definition, the Commission has
established four standards that must be met before it will find
that an integrated public-utility system will result from a
proposed acquisition of securities:
(1) the utility assets of the system are physically
interconnected or capable of physical
interconnection;
(2) the utility assets, under normal conditions, may
be economically operated as a single
interconnected and coordinated system;
(3) the system must be confined in its operations to
a single area or region; and
(4) the system must not be so large as to impair
(considering the state of the art and the area or
region affected) the advantages of localized
management, efficient operation, and the
effectiveness of regulation. [N31 - Environmental
Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th
Cir. 1990), quoting In re Electric Energy, Inc.,
38 S.E.C. 658, 668 (1958).]
The proposed transaction satisfies all four of these
requirements. In examining proposed transactions to determine
whether the integration requirements have been satisfied, the
Commission has "interpreted the Act and analyzed transactions in
the light of ... changed and changing circumstances." [N32 - AEP
Order.] Applicants believe that the Transco Legislation, as
well as the recent FERC Order No. 2000, both of which strongly
encourage transmission company formation, constitute such
changing circumstances which the Commission should consider when
evaluating the proposed transaction.
(a) Physical Interconnection
In view of the above, the facts presented clearly support a
finding that the utility assets of the Transco will be
"physically interconnected or capable of physical
interconnection" within the meaning of Section 2(a)(29)(A) of
the Act once the transactions contemplated herein are completed.
Indeed, as discussed in Item 1, the utility assets to be owned
by the Transco are already physically interconnected.
(b) Single Interconnected and Coordinated System.
Section 2(a)(29)(A) of the Act requires that the utility
assets, under normal circumstances, may be "economically
operated as a single interconnected and coordinated system."
The Commission has interpreted this language to refer to the
physical operation of utility assets as a system in which, among
other things, the generation and/or flow of current within the
system may be centrally controlled and allocated as need or
economy dictate. [N33 - See UNITIL Corp., HCAR No. 25524 (Apr.
24, 1992).] As discussed above, the transmission assets that
will be transferred to the Transco will be operated in a manner
that satisfies the standard of economic and coordinated
operations in Section 2(a)(29)(A) of the Act. Moreover, the
proposed transaction is expected to result in greater
coordination and more efficient allocation of the provision of
transmission services within the area served by the Transco.
(c) Single Area or Region
The "single integrated system" of the Transco will
initially be the central and eastern portions of the State of
Wisconsin and small adjacent areas of the Michigan Upper
Peninsula and Illinois. Through the membership of additional
transmission-owning-utilities, the Transco's system may grow to
include other parts of Wisconsin and portions of other
Midwestern states.
(d) Localized Management, Efficient Operation and
Effective Regulation
The creation of the Transco will not impair localized
management, efficient operation or effective regulation by
reason of its size. Moreover, the Commission's past decisions
on "localized management" show that the proposed transaction
fully preserves the advantages of localized management. In such
cases, the Commission has evaluated localized management in
terms of:
(1) responsiveness to local needs [N34 - See American
Electric Power Co., HCAR No. 20633 (July 31,
1978) (advantages of localized management
evaluated in terms of whether an enlarged system
could be "responsive to local needs"); General
Public Utilities Corp., 37 S.E.C. 28, 36 (1956)
(localized management evaluated in terms of
"local problems and matters involving relations
with consumers").];
(2) whether management and directors were drawn from
local utilities [N35 - See Centerior Energy
Corp., HCAR No. 24073 (April 29, 1986)
(advantages of localized management would not be
compromised by the affiliation of two electric
utilities under a new holding company because the
new holding company's "management [would be]
drawn from the present management" of the two
utilities)];
(3) the preservation of corporate identities [N36 -
See Northeast Utilities, HCAR No. 25221 (December
21, 1990) (utilities "will be maintained as
separate New Hampshire corporations ...
[t]herefore the advantages of localized
management will be preserved"); Columbia Gas
System, Inc., HCAR No. 24599 (March 15, 1988)
(benefits of local management maintained where
the utility to be added would be a separate
subsidiary).]; and
(4) the ease of communications [N37 - See American
Electric Power Co., HCAR No. 20633 (July 21,
1978) (distance of corporate headquarters from
local management was a "less important factor in
determining what is in the public interest" given
the "present-day ease of communication and
transportation")].
These elements will all be satisfied here. The Transco is
being created in response to local needs. The Wisconsin
Legislature has determined that the Transco will improve
electric service in Wisconsin. Each local utility (except
Edison Sault and South Beloit) will elect one director to the
Corporate Manager's Board of Directors. Each Member Utility
will continue to exist after the transmission assets are
transferred to the Transco. Finally, communication
Communication between the Transco and its members will flow
easily. [N38 - In addition, under the Transco Legislation, the
Transco and/or the Midwest ISO are obligated, to the maximum
extent practicable, to "eliminate[] advantages in electric
generation, wholesale and retail markets that are otherwise
related to ownership, control or operation of transmission
facilities" and "[s]atisf[y] the reasonable needs of
transmission users in this state for reliable, low-cost and
competitively priced electric service." Wis. Stat. Sec.
196.485(3)(c).]
3. Section 10(f)
Section 10(f) provides that:
the Commission shall not approve any acquisition as to
which an application is made under this section unless
it appears to the satisfaction of the Commission that
such State laws as may apply in respect of such
acquisition have been complied with, except where the
Commission finds that compliance with such State laws
would be detrimental to the carrying out of the
provisions of Section 11.
As discussed above, the Transco is being created pursuant to,
and in accordance with, Wisconsin law. As already discussed,
Wisconsin law provides an incentive for Wisconsin public utility
holding companies to transfer their transmission assets to a
single-purpose transmission company such as the Transco will be.
The Wisconsin Transco Legislation also facilitates and regulates
the proposed transaction. As described below, the transaction
requires the approval of the Wisconsin Commission. Thus, the
requirements of Section 10(f) are satisfied.
ITEM 4: REGULATORY APPROVALS
On July 31, 2000, the Transco filed an application with the
FERC seeking approval of the Transco OATT, and on September 8,
2000, MGE filed an application with FERC under sec. 203 of the
Federal Power Act for approval to contribute its transmission
facilities to the ATC. (Docket No. EC00-136-000.) FERC
approved MGE's application on November 21, 2000 [N39 - Madison
Gas and Electric Company, Wisconsin Public Service Commission,
American Transmission Company L.L.C., Docket No. EC00-136-000,
93 F.E.R.C. Par. 61,215 (Nov. 24, 2000)]. In addition, the
Wisconsin Commission must approve certain aspects of the
transactions contemplated herein. To receive those approvals,
the ATC and the member utilities filed an application to the
Wisconsin Commission on August 18, 2000, and on December 20,
2000, the Wisconsin Commission approved the application.
(Docket No. 137-NC-100.) No other state or other federal agency
has jurisdiction in this matter concerning MGE's contributions
to the Transco.
ITEM 5: PROCEDURE
The Commission is requested to publish a notice under Rule
23 with respect to the filing of this Application/Declaration as
soon as practicable. MGE requests that the Commission's Order
be issued as soon as practicable after the notice period and in
any event not later than December 1, 2000 in order to
accommodate a closing before December 15, 2000. This will
facilitate the Member Utilities' meeting the January 1, 2001
deadline contemplated by the Transco Legislation for the
commencement of Transco operations and the timely completion of
the transmission asset transfers that are required in order for
the Wisconsin public utility holding companies to qualify for
relief from the Wisconsin non-utility asset cap limit.
MGE further requests that there should not be a 30-day
waiting period between issuance of the Commission's order and
the date on which the Order is to become effective, hereby
waives a recommended decision by a hearing officer or any other
responsible officer of the Commission, and consents that the
Division of Investment Management may assist in the preparation
of the Commission's decision and/or order, unless the Division
opposes the matters proposed herein.
ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Form of Articles of Organization of the Transco. - -
Incorporated by reference to Alliant Energy SEC File
No. 70-9695.
A-2 Form of Operating Agreement of the Transco. - -
Incorporated by reference to Alliant Energy SEC File
No. 70-9695.
A-3 Form of Articles of Incorporation of the ATC
Management Inc. - - Incorporated by reference to
Alliant Energy SEC File No. 70-9695.
A-4 Articles of Amendment to the Articles of Incorporation
of ATC Management Inc. - - Incorporated by reference
to Alliant Energy SEC File No. 70-9695.
A-5 Amended By-laws of ATC Management Inc. - -
Incorporated by reference to Alliant Energy SEC File
No. 70-9695.
B-1 Form of O&M Agreement. - - Incorporated
by reference to Alliant Energy SEC file No. 70-9695.
B-2 Form of Services Agreement. - - Incorporated by
reference to Alliant Energy SEC file No. 70-9695.
B-3 Form of Asset Contribution Agreement. - - Incorporated
by reference to Alliant Energy SEC file No. 70-9695.
B-4 Form of Transco Forming Party Agreement. - -
Incorporated by reference to Alliant Energy SEC file
No. 70-9695.
B-5 Form of Transco Generation - Transmission
Interconnection Agreement. - - Incorporated by
reference to Alliant Energy SEC file No. 70-9695.
B-6 Form of Network Operating Agreement. - - Incorporated
by reference to Alliant Energy SEC file No. 70-9695.
B-7 Form of Transco Distribution - Transmission
Interconnection Agreement. - - Incorporated by
reference to Alliant Energy SEC file No. 70-9695.
C Not Applicable.
D-1 Application of MGE to FERC under sec. 203 of the
Federal Power Act.
D-2 Omnibus Application of the Transco and Member
Utilities to the Public Service Commission of
Wisconsin. - - Incorporated by reference to Alliant
Energy SEC File No. 70-9695.
D-3 Supplement to Omnibus Application. - - Incorporated by
reference to Alliant Energy SEC file No. 70-9695.
D-4 Compliance Filing of MGE to Public Service Commission
of Wisconsin pursuant to its Order of July 13, 2000 in
Docket No. 05-EI-119.
D-5 Application of the Transco to FERC under sec. 205 of
the Federal Power Act - - Incorporated by reference to
Alliant Energy SEC file No. 70-9695.
D-6 Order of FERC regarding Transco Application - -
Incorporated by reference to Alliant Energy SEC file
No. 70-9695.
E Interconnection Map -- to be incorporated by reference
or filed pursuant to Form SE - - Incorporated by
reference to Alliant Energy SEC file No. 70-9695.
F-1 Preliminary Opinion of Counsel.*
F-2 Past-tense Opinion of Counsel.*
G Not applicable.
H Form of Notice.
I Description and valuation of transferred assets.
* To be filed by amendment.
B. Financial Statements.
1.1 Balance Sheet of MGE and consolidated
subsidiaries, as of June 30, 2000 (incorporated
by reference to the Quarterly Report on Form 10-Q
of MGE for the quarter ended June 30, 2000) (File
No. 0-1125).
1.2 Statement of Income of MGE and consolidated
subsidiaries for the six months ended June 30,
2000 (incorporated by reference to the Quarterly
Report on Form 10-Q of MGE for the quarter ended
June 30, 2000) (File No. 0-1125).
1.3 Balance Sheet of MGE as of June 30, 2000
(incorporated by reference to the Quarterly
Report on Form 10-Q of MGE for the quarter ended
June 30, 2000) (File No. 0-1125).
1.4 Statement of Income of MGE for the period ended
June 30, 2000 (incorporated by reference to the
Quarterly Report on Form 10-Q of MGE for the six
months ended June 30, 2000) (File No. 0-1125).
ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this
Application/Declaration involve a "major federal action" nor do
they "significantly affect the quality of the human environment"
as those terms are used in Section 102(2)(C) of the National
Environmental Policy Act. The transaction that is the subject
of this Application/Declaration will not result in changes in
the operation of MGE that will have an impact on the
environment.
MGE is not aware of any federal agency that has prepared or
is preparing an environmental impact statement with respect to
the transactions that are the subject of this
Application/Declaration.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, MGE has duly caused this statement to be
signed on its behalf by the undersigned thereunto duly
authorized.
MADISON GAS AND ELECTRIC COMPANY
By: /S/ Mark C. Williamson
Mark C. Williamson
Executive Vice President and
Chief Strategic Officer
Dated: December 27, 2000
