<PAGE>
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
(Name of company filing this statement
and address of principal executive offices)
Monongahela Power Company
(d/b/a Allegheny Power)
1310 Fairmont Avenue
Fairmont, West Virginia 26554
__________________________________
(Name of top registered holding company)
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices,
orders and communications in connection with this Application /
Declaration to:
Thomas K. Henderson, Esq.
Vice President and General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
<PAGE>
TABLE OF CONTENTS Page
Item 1. Description of Proposed Transaction . . . . . . 3
A. Introduction .. . . . . . . . . . . . . . . . . 3
1. Authorization Requested. . . . . . . . . . . 3
2. Overview of the Transaction . . . . . . . . 3
B. Description of the Parties to the Transaction . . . . 3
1. UtiliCorp and West Virginia Power. . . . . . 3
2. Monongahela Power, d/b/a Allegheny Power . . . 4
C. Post Transaction Management and Operation . . . . . 4
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . 6
Item 3. Applicable Statutory Provisions . . . . . . . . . . 6
A. Legal Analysis . . . . . . . . . . . . . . . . . . 6
1. Section 10(c) . . . . . . . . . . . . . . . . 6
2. Section 11(b)(1) . . . . . . . . . . . . . . . 6
3. Section 8 - Retention of Gas Properties . . . . 7
4. Section 11(b)(1) - A, B, and C Clauses . . . 10
5. Section 13(b) . . . . . . . . . . . . . . . 16
6. Rule 54 Compliance . . . . . . . . . . . . . 17
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . 17
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Financial Statements . . . . . . . . 18
A. Exhibits . . . . . . . . . . . . . . . . . . . . . 18
B. Financial Statements . . . . . . . . . . . . . . . 19
Item 7. Information as to Environmental Effects . . . . . . 19
<PAGE>
Item No. 1. Description of the Proposed Transaction
A. Introduction
1. Authorizations Requested
Monongahela Power Company d/b/a Allegheny Power
("Monongahela Power"), a wholly owned electric utility
subsidiary of Allegheny Energy, Inc. ("Allegheny"), a
registered holding company under the Public Utility Holding
Company Act of 1935, as amended ("Act"), proposes to
acquire, via purchase, and retain all of the West Virginia
based electric and gas utility assets and properties owned by
UtiliCorp United Inc. ("UtiliCorp"),<FN 1> an electric and gas utility
based in Kansas City, Missouri ("Transaction"). Monongahela
seeks an order from the Securities and Exchange Commission
granting it authorization to retain the gas system.<FN 2>
2. Overview of the Transaction
Allegheny and UtiliCorp have entered into an Asset
Purchase Agreement whereby Monongahela, as Allegheny's
designated affiliate, will purchase all the regulated assets of
UtiliCorp United Inc.'s West Virginia Power Division. The
proposed purchase price of the West Virginia Power division
is approximately $75 million. The purchase price is subject to
adjustment shortly after closing, based upon the closing date
balance sheet. The acquisition price approximates the book
value of the assets. Closing on the transaction is planned
for December 1999, assuming all necessary regulatory approvals
have been received.<FN 3>
B. Description of the Parties to the Transaction
1. UtiliCorp and West Virginia Power
UtiliCorp, a combination utility based in Kansas City,
Missouri, provides electric and gas utility services to more than
three million electric and gas customers, primarily in the
Midwest. UtiliCorp has an isolated service territory in West
Virginia which it operates under a division called West Virginia
Power.
<FN 1>
1 UtilCorp does business in West Virginia as West Virginia Power.
<FN/>
<FN 2>
2 The purchase of utilit assets is subject to approval by the West Virginia
Public Service Commission and as such, the acquisition falls within Section
9(b) of the Act and no approval by this Commission is required.
<FN/>
<FN 3>
3 Allegheny is also acquiring an option for one of its subsidiaries to
purchase the West Virginia assets of Service Today, Inc., commonly known as
Appalachian Electric Heating, an unregulated business which installs and
services heating, ventilation and air conditioning systems. Allegheny
Ventures,Inc. (formerly AYP Capital, Inc.) will be the subsidiary to purchase
those assets. Since the business of Appalachian Electric Heating falls
within the activities permitted by Rule 58, no Commission approval is being
sought for the acquisition of those assets by Allegheny Ventures, Inc.
<FN/>
<PAGE>
West Virginia Power is a combination gas and electric
utility with service territory only in West Virginia. It
provides electric energy service to approximately 26,000
customers and natural gas service to approximately 24,000
customers in West Virginia. West Virginia Power's electric
distribution lines cover approximately 1,989 miles in a
1,360 square mile service area. West Virginia Power's gas
service territory includes approximately 670 miles of gas
pipeline in a 500 square mile service area. West Virginia
Power provides natural gas service to several pockets in
central and south-central West Virginia. West Virginia
Power's electric and gas service territories are shown on the
map attached hereto as Exhibit E.
The principal place of business of the West Virginia
Power division is in Fairlea, West Virginia. For the twelve
months ended December 31, 1999, UtiliCorp's revenues were
approximately $12.5 billion. West Virginia Power
contributed $51.9 million of those revenues, $28.2 million from
electric sales and $23.7 million from sales of natural gas, or
.04% of total revenues of UtiliCorp for the period.
2. Monongahela, d/b/a Allegheny Power
Monongahela is a wholly owned electric utility
subsidiary of Allegheny and currently provides electric
service to approximately 325,000 West Virginia customers.<FN 4> Its
service territory is contiguous to West Virginia Power's
territory. The assets to be acquired from West Virginia
Power include both electric and gas facilities. The service to
be provided by Monongahela Power using these assets will be
within the State of West Virginia. The electric assets and
West Virginia Power's electric service territory that will be
acquired are located in five (5) counties in southeastern
West Virginia which are contiguous to the West Virginia service
territory of Monongahela Power. The natural gas assets
and West Virginia Power's gas service territory that will be
acquired serve approximately 24,000 customers in relatively
small pockets in central and southcentral West Virginia in areas
within or relatively close to Applicant's existing service
territory.
Monongahela Power is a member of the Allegheny
Power family of companies d/b/a Allegheny Power. Allegheny
Power, through its regulated public utilities Monongahela
Power, West Penn Power Company and the Potomac Edison
Company, delivers electric energy to three million people in
parts of Maryland, Ohio, Pennsylvania, Virginia and West
Virginia. For the twelve months ended December 31, 1998,
Allegheny's revenues were approximately $2.58 billion.
Mononogahela's revenues were approximately $645 million or 25%
of total revenues of Allegheny for the period.
C. Post Transaction Management and Operations
Monongahela Power intends to create two new divisions for
this acquisition: one division will encompass the UtiliCorp
West Virginia electric assets and another separate division will
encompass the UtiliCorp West Virginia gas assets. Monongahela
Power will operate the gas and electric service territories by
<FN 4>
4 Its sister operating company, The Potomac Edison Company, also provides
electric service to approximately 100,000 West Virginia customers.
<FN/>
<PAGE>
using common resources, such as computer systems, billing
systems, buildings, trucks, equipment, labor, accounting and
other central services, to the greatest extent practicable.
After the Transaction, the former West Virginia Power gas
system will continue to be operated by the employees who
currently perform those services. It is anticipated that gas
will be supplied from the existing gas supply agreements in place
or as acquired by Monongahela Power pursuant to new contracts.
In connection with this Transaction, Allegheny Energy
Service Company and Monongahela Power have entered into a
twenty-year Gas Supply Option Agreement ("Agreement") with
UtiliCorp's and its unregulated subsidiary, Aquila
Energy. It is not a requirements contract and Allegheny
Energy Service Company and Monongahela Power are not
obligated to take any gas under the Agreement. Under the
Agreement, Allegheny Energy Service Company or Monongahela
Power may take gas for generation use or to supply West
Virginia Power customers.
It is also anticipated that Allegheny Energy Service
Corporation, a service company, will offer employment to all
employees of West Virginia Power's electric and gas
divisions at closing at the same geographic location.
Employees will be given credit for all service with the
UtiliCorp under all employee benefit plans and arrangements
maintained by Allegheny Energy Service Corporation, or, for
union employees, to the extent permissible under the
Collective Bargaining Agreement and applicable law.
Monongahela Power will assume the Collective Bargaining
Agreement at closing.
It is anticipated that an existing power supply
agreement with American Electric Power will be assigned by
UtiliCorp West Virginia to Monongahela Power and will
continue in effect until its termination date of December 31,
2001. Thereafter, electric generation will be supplied from
Monongahela Power's own generation or the market; provided,
however, that if a plan for retail choice is implemented in
West Virginia, customers will have the opportunity to
choose their generation supplier in accordance with that
plan.
Following completion of the Transaction, the gas
utility operations of Applicant, with approximately 24,000
customers in a West Virginia service territory of 500 square
miles and annual revenues of $22-25 million, will be
substantially smaller than the gas utility operations of
Applicant's competitors in the region. Giving effect to the
Transaction, gas net utility plant will only represent 2.7% of
the total net utility plant of the Applicant or .6% of
Allegheny Energy, Inc., whereas electric net utility plant will
represent 97.3% of the total net utility plant of the Applicant
or 99.4% of Allegheny Energy, Inc. Operating revenues for the
gas operations will be 3.5% of Applicant's operating revenues
or .9% of Allegheny Energy, Inc.'s operating revenues as
compared with the electric operations comprising 96.5% of the
Applicant's operating revenues or 99.1% of Allegheny
Energy, Inc.'s operating revenues. Customers of the gas
operations will constitute 6.3% of all of Applicant's customers
or 1.7% of Allegheny Energy, Inc.'s customers, while electric
customers will represent 93.7% of the Applicant's customers or
98.3% of Allegheny Energy, Inc.'s customers. The Transaction
is small in relation to the transactions in other proceedings
<PAGE>
in which the Commission has approved the acquisition and retention of gas
properties.<FN 5>
Item No. 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with this Transaction are
______________ (to be filed by amendment).
Item No. 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's
rules thereunder are or may be directly or indirectly
applicable to the proposed transaction: sections 9(b)(1), 10
(acquisition of utility assets); sections 8 and 11(b)
(retention of gas assets / operations); and rule 54 (EWGs and
FUCOs).
To the extent that other sections of the Act or the
Commission's rules thereunder are deemed applicable to the
Transaction, such sections and rules should be considered to be
set forth in this Item 3.
A. Legal Analysis
1. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding
the provisions of Section 10(b), the Commission shall not
approve:
(1) an acquisition of securities or utility assets, or
of any other interest, which is unlawful under the
provisions of Section 8 or is detrimental to the
carrying out of the provisions of Section 11; or
(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
the efficient development of an integrated public
utility system . . . .
By their terms, Sections 8 and 11 only apply to registered
holding companies and are therefore applicable to Allegheny,
since it is a registered holding company.
Section 10(c)(1) requires that an acquisition be lawful
under Section 8 prohibits registered holding companies from
acquiring, owning interests in or operating both a gas and an
electric utility serving substantially the
same area if state law prohibits it. As discussed below, the
Transaction does not raise any issue under Section 8 or,
accordingly, the first clause of Section 10(c)(1). Section 8
indicates that a registered holding company may own both gas
and electric utilities where, as here, the relevant state
utility commissions support such an arrangement.
<FN 5>
5 See, e.g., New Century Energies, Inc., HCAR No. 26748, File No. 70-8787
(Aug. 1, 1997).
<FN/>
<PAGE>
Section 10(c)(1) also requires that the transactions
not be detrimental to carrying out the provisions of Section 11.
Section 11(a) of the Act requires the Commission to examine
the corporate structure of registered holding companies to
ensure that unnecessary complexities are eliminated and
voting powers are fairly and equitably distributed. As
described above, the Transaction will not result in unnecessary
complexities or unfair voting powers.
2. Section 11(b)(1)
Although Section 11(b)(1) generally requires a
registered holding company system to limit its operations "to
a single integrated public utility system, and to such other
businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated
public utility system," a combination integrated gas and
electric system within a registered holding company is
permissible under Section 8. Additionally, Section
11(b)(1) provides that "one or more additional integrated
public utility systems" may be retained if, as here,
certain criteria are met. Section 11(b)(2)
directs the Commission "to ensure that the corporate
structure or continued existence of any company in the
holding company system does not unduly or unnecessarily
complicate the structure, or unfairly or inequitably
distribute voting power among security holders, of such
holding company system."
As detailed below, the Transaction will not be detrimental
to the carrying out of the provisions of Section 11.
3. Section 8 - Retention of Gas Operations
Monongahela Power's acquisition and retention of the gas
operations of West Virginia Power, as contemplated by this
Transaction,<FN 6> would be lawful under Section 8 of the Act and
would not be detrimental to the carrying out of Section 11 of
the Act. The purchase of utility assets is subject to
approval by the West Virginia Public Service Commission and as
such, the acquisition falls within Section 9(b) of the Act <FN 7>
and no approval by this Commission is required. However,
approval by this Commission may be required under Section 11
for retention of the gas assets. For reasons hereinafter stated,
retention of the gas assets, which is an integral part of this
Transaction, satisfies the integration test of Section 11 of the
Act.
<FN 6>
6 The West Virginia Power assets will do business as Monongahela Power
Company, d/b/a Allegheny Power.
<FN/>
<FN 7>
7 Section 9(b) states: (b) Acquisition of utility assets authorized by
State Commission; holding company systems organized in same state.
Subsection (a) shall apply to--- (1)the acquisition by a public-utility
company of utility assets the acquisition of which has been expressly
authorized by a State Commission.
<FN/>
<PAGE>
Section 8 of the Act provides:
Whenever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a
single company of the utility assets of an electric
utility company and a gas utility company serving
substantially the same territory, it shall be unlawful for
a registered holding company, or any subsidiary company
thereof . . . (1) to take any step, without the
express approval of the State commission of such State,
which results in its having a direct or indirect
interest in an electric utility company and a gas
utility company serving substantially the same
territory; or (2) if it already has any such interest,
to acquire, without the express approval of the State
commission, any direct or indirect interest in an
electric utility company or gas utility company serving
substantially the same territory as that served by such
companies in which it already has an interest.
On its face, Section 8 suggests that, with the approval of
the relevant state utility commission(s), registered holding
company systems can include both electric and gas utility
systems. The purpose of Section 8 is to preclude the use of
the registered holding company structure to circumvent
applicable state law restrictions on the ownership of
gas and electric assets by the same company. Accordingly,
absent state objection, two types of combination registered
holding companies are implicitly acceptable under the statute:
a registered holding company system that includes combination
companies and a system that includes separate gas and electric
companies.
Monongahela Power believes it is consistent with the
Act and the Act's policy objectives for the Commission to allow
companies to retain both an electric and gas public utility
system provided they obtain state approval. Since the passage
of the Act, the Commission has emphasized different aspects
of Section 8 and its interplay with Section 11 - initially
allowing registered holding companies to own both gas and
electric systems under Section 8, then focusing on Section
11 as controlling determinations regarding combination
companies, and requiring the second system to meet the
requirements set forth in the A-B-C clauses of Section
11(b)(1). The main policy behind separating gas and
electric systems was that gas utilities would benefit from
having separate management focused entirely on the gas
utility business. However, both the legislative history of
the Act and recent changes in the utility industry indicate
that it is an appropriate time for the Commission to reemphasize
the provisions of Section 8 of the Act and allow combination
registered holding companies where, as in this case, they are
permitted under relevant state law.
A review of the legislative history of Section 8
supports allowing combination companies to remain within
registered systems so long as those companies have state
approval. In its report, the Senate Committee on Interstate
Commerce noted that the provision in Section 8 concerning
combination companies "is concerned with competition in the
field of distribution of gas and electric energy - a field
which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extraState
device of a holding company is used to circumvent state
policy." <FN 8> In addition, attached to the above-referenced
committee report is the Report of the National Power Policy
<FN 8>
8 The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at
29-30 (1935).
<FN/>
<PAGE>
Committee on Public-Utility Holding Companies,<FN 9> which sets forth
a recommended policy that: "Unless approval of a State
commission can be obtained the commission should not permit the
use of the holding-company form to combine a gas and electric
utility serving the same territory where local law prohibits
their combination in a single company." Thus, the legislative
history indicates a desire to allow combination companies where
state approvals can be obtained.
More recently, in a 1995 report, the Division of
Investment Management of the Securities and Exchange
Commission ("SEC") noted "it does not appear that the SEC's
precedent concerning additional systems precludes the SEC from
relaxing its interpretation of Section 11(b)(1)(A)" and "the
utility industry is evolving toward the creation of onesource
energy companies that will provide their customers with
whatever type of energy supply they want, whether
electricity or gas." <FN 10> The Division recommended that the
Commission interpret Section 11(b)(1) of the Act to allow
registered holding companies to hold both gas and electric
operations as long as each affected state utility regulatory
commission approved of the existence of such a company.<FN 11> This
follows a trend in the utility industry whereby, among other
things, customers are increasingly seeking the most economic
means of meeting their energy needs, and not simply their gas
needs or their electric needs, is evidenced by the transformation
of traditional utilities into energy service companies, the
growth of new energy providers such as marketers, and the
treatment of energy (both gas and electric) as a
commodity for arbitrage transactions. Finally, reemphasis on
Section 8 fits within the overall regulatory scheme of the
Act.
First, Section 11 is flexible and its interpretation was
designed to evolve as the policy concerns over the
regulation of utility holding companies changed.<FN 12> As
discussed below, the utility industry and the regulation of that
industry have evolved dramatically in recent years.
Competitive forces (exactly what the Act was designed to
promote) are pushing holding companies to offer more than one
form of energy within the same holding company system. Second, a
registered holding company would still be required to
demonstrate that any acquisition or transaction by which it
would become a combination company would not be
detrimental to the carrying out of the provisions of Section 11
of the Act. Both systems must be capable of operating
efficiently. Thus, Applicant would still have to meet the
standards of Section 11, but the construction of those
standards should take into account the fundamental policy of the
Act to allow local regulators to make the major
determination with regard to combination companies.
<FN 9>
9 The National Power Policy Committee was a committee appointed by President
Franklin D. Roosevelt consisting of representatives from various government
departments concerned with power problems and instructed to report to
Congress on the coordination of government policy relating to such problems.
<FN/>
<FN 10>
10 The Regulation of Public-Utility Holding Companies, Division of Investment
Management, Securities and Exchange Commission (June 1995) ("1995 Report"),
at 75-76.
<FN/>
<FN 11>
11 Id.
<FN/>
<FN 12>
12 See Mississippi Valley Generating Co., 36 SEC 159, 186 (1955) (noting that
Congress intended the concept of integration to be flexible); UNITIL Corp.,
50 SEC 961, 967 (1992) (noting that Section 11 contains a flexible standard
designed to accommodate changes in the industry).
<FN/>
<PAGE>
The combination of the gas and electric operations of West
Virginia Power is permissible pursuant to the terms of Section 8
of the Act and is in the public interest. First, the
combination of gas and electric operations in West Virginia
Power is lawful under the applicable state laws and has not been
a source of complaints from the Public Service Commission of West
Virginia ("West Virginia PSC") which has, and will continue to
have, direct jurisdiction over the soonto-be Monongahela Power
gas operations. Neither the Applicant, nor its parent
company, Allegheny, will be circumventing any state laws.
In its application for approval of the Transaction by the
West Virginia PSC, the Applicant has asked the commission to
indicate its support for West Virginia Power to continue as a
combination gas and electric company. Further, retaining West
Virginia Power's gas operations will afford customers greater
diversity in meeting their energy needs, especially given that
the gas and electric operations of West Virginia Power and
the Applicant operate in substantially the same territory.
Moreover, the historical concern that a holding company such as
Applicant's parent, Allegheny, or the Applicant itself would
be able to emphasize greatly one form of energy over the other
has dissipated both because of the competitive nature of the
energy market, which requires utilities to meet customer
demand for energy above all else, and because state regulators
will have sufficient control over, and would be unlikely to
approve, a combination company that attempts to undertake such
practices.
Further, Section 11(b) states:
The Commission may permit as reasonably
incidental, or economically necessary or
appropriate to the operations of one or more
integrated public-utility systems the
retention of an interest in any business (other
than the business of a public-utility company as such)
which the Commission shall find necessary or
appropriate in the public interest or for the
protection of investors or consumers and not
detrimental to the proper functioning of such system
or systems.
For the foregoing reasons, the Commission should
approve the retention by the Applicant of West Virginia
Power's gas system as contemplated by the Transaction. No
policy would be furthered by divestiture.
4. Section 11(b)(1) - A, B, C Clause
Even if the Act were not interpreted as generally
permitting combination gas and electric systems upon receipt of
state approval, Section 11 contains additional provisions that
permit the retention by the Applicant of West Virginia Power's
gas system. Section 11(b)(1) of the Act allows a registered
holding company to retain "one or more" additional
integrated systems if certain conditions are satisfied.
Specifically, the Commission must find that:
(A) Each of such additional systems cannot be operated
as an independent system without the loss of
substantial economies which can be secured by the
retention of control by such holding company of such
system;
<PAGE>
(B) All of such additional systems are located in one
State, adjoining States, or a contiguous foreign
country; and
(C) The combination of systems under the control of a
single holding company is not so large
(considering the state of the art and the area or
region affected) as to impair the advantages of
localized management, efficient operation, or the
effectiveness of regulation.
Each of these requirements is satisfied in this
Transaction. Retention by the Applicant of West Virginia
Power's gas system is therefore appropriate under Section
11(b)(1).
(a) Loss of Economies
In its 1995 Report, the Division recommended that the
Commission "liberalize its interpretation of the `A-B-C'
clauses."<FN 13> In recent years the Commission has been
presented with several opportunities to implement the
Division's recommendations as to the appropriateness of
combination electric and gas companies under the Act.
Following the Division's recommendation to liberalize
interpretation of Section 11, the Commission has approved a
number of convergence mergers, clarifying that the Act "does not
prohibit ownership of combination gas and electric
systems."<FN 14>
In approving the formation of New Century Energies, Inc.
as a combination gas and electric registered holding company,
the Commission stated:
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
has analyzed proposed transactions in light of these
changed circumstances. . . . The gas and electric industries
are converging, and, in these circumstances, separation of
gas and electric businesses may cause the separated
entities to be weaker competitors than they would be
together. This factor adds to the quantifiable
loss of economies caused by increased costs.<FN 15>
Most importantly, the Commission distanced itself from
earlier, more restrictive precedent stating:
<FN 13>
13 1995 Report at 74.
<FN/>
<FN 14>
14 See New Century Energies, Inc., HCAR No. 26748, File No. 70-8788
(Aug. 1, 1997). See, e.g. WPL Holdings, Inc., HCAR No. 26856 (Apr. 14,
1998), aff'd sub nom., Madison Gas and Electric Company v. SEC, 168 F.3d
1337 (D.C. Cir. 1999); CINergy Corp., HCAR No. 26934, File No. 70-8427
(Nov. 2, 1998); Conectiv Inc., HCAR No. 26832, File No. 70-9069 (Feb. 25,
1998).
<FN/>
<FN 15>
15 See New Century Energies, Inc., HCAR No. 26748, File No. 70-8787, text &
nn. 59-60 (Aug. 1, 1997). See also CINergy Corp., HCAR No. 26934, File
No. 70-8427 (Nov. 2, 1998); WPL Holdings, Inc., HCAR No. 26856 (Apr. 14,
1998).
<FN/>
<PAGE>
In the 1960s, when the [New England Electric System
("NEES")] . . . case was decided, utilities were
primarily franchised monopolies with captive ratepayers,
and competition between suppliers of gas and electricity,
however limited, was virtually the only source of
customer choice and was thus deemed beneficial to energy
consumers. The fact that other gas utilities of comparable
size could operate successfully on an independent basis was
evidence that a gas system could also operate on its own,
a desirable result, without a substantial loss of
economies. The empirical basis for these assumptions,
however, is rapidly eroding. Although franchised
monopolies are still the rule, competition is increasing.
Increased expenses of separate operation may no longer be
offset, as they were in New England Electric System, by
a gain of qualitative competitive benefits, but rather
may be compounded by a loss of such benefits . . . .<FN 16>
Recently, in WPL Holdings, the Commission applied the
formula it had used to calculate lost economies in New
Century Energies. In addition to examining the increased
costs of the gas operations as calculated in the applicants'
study, the Commission recognized that "other factors operate to
compound the loss of economies represented by increased costs."
In particular, the Commission referred to the retention of
gas assets as offering applicants the ability to compete more
effectively in the emerging energy services market. The U.S.
Court of Appeals for the D.C. Circuit has upheld the
Commission's reinterpretation of the A-B-C clauses and
Section 11.<FN 17>
Applicant supports the Commission's recent interpretations
of Section 11. From a policy perspective, the Commission's
historic concern underpinning its decision in NEES and other
earlier decisions where the retainability of gas properties by
registered electric systems was at issue - namely, of
fostering competition between electric and gas - is simply no
longer valid given the current "state of the art" in the
electric and gas utility industries.Since the Commission
decided the NEES case, profound economic and regulatory
factors have caused
fundamental changes in the gas supply and electric
generation industry. These changes have made the
Commission's earlier positions regardingcombination
utilities obsolete. Since combination ownership creates
efficiencies and no longer has the effect of eliminating
competition, there is no reason for the Commission to
prohibit combination ownership under the circumstances
presented here.
The logic of the New Century Energies and WPL Holdings
orders is equally compelling in the instant situation. As
discussed below, Applicant satisfies the traditional analysis,
as the losses estimated from divestiture of West Virginia
Power's gas system are generally consistent with the losses
found adequate in earlier cases. As in New Century Energies
and WPL Holdings, Applicant notes that there are significant
economies and competitive advantages inherent in a combined
gas and electric utility as contrasted to a utility
offering only electric or gas. Increased costs as a result of
divestiture of West Virginia Power's gas operations would be
<FN 16>
16 See New Century Energies, Inc., HCAR No. 26748, File No. 70-8787
(Aug. 1, 1997).
<FN/>
<FN 17>
17 See Madison Gas and Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir.
1999) (affirming WPL Holdings, Inc. and the Commission's expansive
interpretation of Section 11).
<FN/>
<PAGE>
compounded by loss of qualitative competitive benefits.
Applicant believes that divestiture or spin-off of the gas
system, and its operation on a stand-alone basis, would result in
the loss of substantial economies. Lost economies would arise
from the need to replicate services, the loss of economies of
scale, the costs of reorganization, and other factors would be
immediate and substantial. In the absence of rate relief,
those lost economies would substantially injure shareholders
and customers upon divestiture of the gas properties. A
substantial increase in costs would cause a substantial decrease
in earnings to West Virginia Power's shareholders absent rate
relief to recoup those increased costs. Absent rate relief to
the gas system, it would earn a return that is much smaller in
comparison to that earned by other utilities in the region,
making it more expensive for the gas system to go into the
market for financing. Further, if rate relief were granted
with respect to the lost economies, then consumers would bear
those substantial costs over what they would have to pay if
the properties were retained as contemplated by the proposed
transaction.
Rate recovery of these cost increases would result in a
significant increase in the level of costs borne by retail gas
customers in West Virginia with no corresponding increase
in the level or quality of service. The rate increases
required to provide the level of revenue needed to cover costs
to operate West Virginia Power's gas system would be
significant. Such rate increases would make the new stand-
alone gas company less competitive at a time when competition in
the energy industry is rapidly increasing due to Federal Energy
Regulatory Commission ("FERC") Order No. 636 and other FERC
and state regulatory restructuring initiatives. As a result
of divestiture, the stand-alone gas company would experience
increased annual costs, capitalization costs and transition
costs, as well as lost merger savings. Annual costs would
include additional labor and overhead expenses due to the
loss of shared services with Monongahela Power's and West
Virginia Power's electric operations. The stand-alone gas
system would experience additional labor and overhead expenses
in the following departments: Information Resources;
Human Resources; Accounting; General Engineering and
Facilities Management; Materials Management; Transportation
Service; Purchasing; Public Affairs; Shareholder Relations;
Marketing and Customer Relations; Meter Reading (for two
utilities); Executive Office; Treasury, Legal and Audit
functions.
Annual costs would also include increases in non-labor
operations and maintenance expenses in the following areas:
Hardware Leases and Software Maintenance; Disaster Recovery
(i.e., services to ensure that the system would be able to
continue to operate in the event of a disaster); Automated
Mapping/Facilities Management System ("AM/FM System");
Office Supply Purchases (i.e., as a stand-alone company, the gas
system would also experience a loss in advantage when
bargaining for supplies, which would result in increased
costs); and Audit Fees. Increased capitalized expenditures
would arise from the capitalized portion of labor increases, as
well as from the capital costs associated with materials
purchases. Gas supply expenses could increase significantly as
a result of divestiture because of loss of utilizing existing
fuel management personnel and cross-over strategy to use gas
during summer peaking time for electric
generation. Similarly, regulatory costs would involve
additional duties for the West Virginia Public Service
Commission as a result of regulating an additional utility. The
<PAGE>
additional duties would largely be the result of
duplicating existing approvals, such as separate requests for
approval of financing, rules, regulations and consents.
The process of divesting West Virginia Power's gas
system would result in significant transition and
divestiture costs for the stand-alone gas system.
Currently, the gas and electric operations of West Virginia
Power share operations services and most administrative and
financial services, as well as the information systems
support for these areas. Following divestiture, the standalone
gas system would be responsible for all operations and support
functions. It would need to develop capabilities in these
areas. It would also need to hire and train new staff,
purchase and install equipment, and implement
information systems, to return it to its current level.
Further, creation of the stand-alone gas system is a complex
legal and financial transaction that would require
significant involvement of both investment bankers and
outside legal counsel. Transitional expenses would be high.
UtiliCorp has a desire to exit all regulated utility
business operations in West Virginia. It has no desire to retain
the gas assets or sell their assets piecemeal. It desires to
sell the gas assets with the electric assets since they have
integrated their operation.
Monongahela Power has estimated that the combination of West
Virginia Power's assets with its own will result in savings of
$6 million per year. As a result of divestiture, these savings
would be lost to both the stand-alone gas system and the
remaining Monongahela Power electric system. By comparison,
retention of the gas system would allow cost savings due to the
operating efficiencies that would be achieved, and would
minimize rate increases in the future.
The potential physical bypass of Local Distribution
Companies ("LDCs") is becoming a reality that LDCs must face
daily, along with the commensurate possibility of a
decreasing customer base, resultant rate increases, and
potential stranded costs. Recently, FERC has allowed the
bypass of LDCs by interstate pipelines in order to promote
competition.
In addition, natural gas service continues to compete with
alternative fuels. Cost increases to the gas utility operations
from divestiture would increase the bypass risk. In addition,
the growing focus on competition has begun to require the
unbundling of LDC services. LDCs already face fierce price
competition, and must remain competitive to avoid shareholder
losses and a reduced customer base. As a result of the
increased costs from divestiture, bundled or unbundled services
may become uncompetitive as the rate increases needed to
recover these cost increases could potentially result in
rates that few customers would pay when compared to other
available competitive options.
Further, divestiture of West Virginia Power's gas
properties would also result in a loss of the cost-saving
benefits of the economies offered by the "energy services"
approach of the Applicant to the utility business. While the
losses cannot now be fully quantified, they are
substantial. At the center of the energy services company
concept is the idea that providing gas and electric services and
products is only the start of the utility's job. In addition,
the utility must provide enhanced service to the consumer by
providing an entire package of both energy
products and services. In this area, the Applicant's
purchase of West Virginia Power, a combination company, is a part
<PAGE>
of a trend by utilities to organize themselves as energy
service providers, that is, providers of a total package of
energy services rather than merely suppliers of gas and
electric products. The goal of an energy service
company is to retain its current customers and obtain new
customers in an increasingly competitive environment by
meeting customers' needs better than the competition. An
energy service company can provide the customer with a low cost
energy (i.e., gas, electricity, or conservation) option.
This trend towards, and the need for, convergence
of the former separate electric utility function and gas
utility function into one energy service company was
recently recognized by the Commission in the Consolidated
Natural Gas Company order, where the Commission stated: "It
appears that the restructuring of the electric industry now
underway will dramatically affect all United States energy
markets as a result of the growing interdependence of
natural gas transmission and electric generation, and the
interchangeability of different forms of energy,
particularly gas and electricity."<FN 18>
Monongahela Power believes that the standards of Clause A
are satisfied in light of the increased expenses and the
potential loss of competitive advantages that would result from
separation of West Virginia Power's gas system.
Accordingly, Monongahela Power believes that the Commission
should find the standards of Clause A satisfied with respect to
West Virginia Power's gas system.
(b) Same State or Adjoining States
The proposed acquisition and retention of West Virginia
Power's gas utility system satisfies Clause B of Section
11(b)(1) of the Act. The West Virginia Power gas utility
system is located within West Virginia counties in areas
within or relatively close to Applicant's service territory.
(c) Size
Finally, retention of West Virginia Power's gas utility
system satisfies the remaining clause of Section 11(b)(1).
Under Clause C, the combination of systems under the single
control of the Applicant, including West Virginia Power's gas
utility system, will not be so large (given the state of the art
and the region or area affected) as to impair the advantages of
localized management, efficient operation, or the effectiveness
of regulation. The Commission has determined previously that
the relevant consideration is not size alone, or size in any
absolute sense, either big or small, but size in relation
to its effect, if any, on localized management, efficient
operation, and effective regulation. Based on this
perspective, it is clear that the continued operation of the gas
system of West Virginia Power as a division within Monongahela
Power is not too large.
With respect to localized management, the Transaction as
a whole will enhance localized management from an
existing, contiguous large utility in West Virginia rather than
the existing isolation of a service territory separated from its
headquarters and major management in Kansas City and far
removed from UtiliCorp's other service territories After the
Transaction is completed, management will remain geographically
close. No reduction in support crews is presently expected
<FN 18>
18 See Consolidated Natural Gas Co., HCAR No. 26512 (Apr. 30, 1996).
<FN/>
<PAGE>
of the West Virginia Power employees, and the resources of the
Applicant will be used to supplement and aid service efforts;
the gas system is expected to be operated by the employees
who currently perform those services. West Virginia Power
will be implementing customer service improvements to both gas
and electric operations. All customers will have access to the
Applicant's toll-free 24-hour customer service center located in
West Virginia, providing customers with a single point of
contact for all of their energy needs. Thus, the
advantages of local management will not only be preserved but
will be promoted by this transaction. In terms of regulatory
effectiveness, the West Virginia PSC has been regulating West
Virginia Power as a combination electric and gas company since
the late 1980's, and thus, the Transaction will not alter the
effective regulatory treatment of the company. Likewise, the
historical joint gas and electric utility operations of West
Virginia Power have never raised regulatory concerns in West
Virginia, and the Applicant and West Virginia Power have
requested that the West Virginia PSC approve the retention
of the existing gas system of West Virginia Power. Retaining the
West Virginia Power gas operations under the Applicant will
facilitate and enhance the efficiency of the gas operations.
As in the New Century Energies and WPL Holdings orders, the
proposed Transaction offers the Applicant a means to compete
more effectively in the emerging energy services business.
Further, as discussed above, the Transaction will give rise to
none of the abuses, such as ownership of
scattered utility properties, inefficient operations, lack of
local management or evasion of state regulation, that Section
11(b)(1) and the Act generally were intended to prohibit.
Moreover, as previously noted, the parties have requested, and
expect to receive an order from the West
Virginia PSC, approving the acquisition and stating that it does
not object to retention of the gas system by the Applicant.
As discussed in the SEC's 1995 Report, approval of the state
commission is the prerequisite for potential liberalization of
the retention standard. Thus, the Commission
should authorize retention of West Virginia
Power's gas operations.
5. Section 13(b) Compliance
Section 13(b) 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
among such companies.
<PAGE>
Any transaction between Allegheny Energy Service Company and
Monongahela Power related to the disposition of gas acquired by
one or the other under the Gas Supply Option Agreement shall
be in compliance with section 13(b) of the Act and rules 90
and 91 under the Act.
6. Rule 54 Compliance
Rule 54 provides that in determining whether to approve
certain transactions other than those involving exempt
wholesale generators ("EWG") or foreign utility companies
("FUCO"), as defined in the 1935 Act, the Commission will not
consider the effect of the capitalization or earnings of any
subsidiary which is an EWG or FUCO if Rule 53(a), (b) and (c)
are satisfied. The requirements of Rule 53(a), (b)
and (c) are satisfied.
Item No. 4. Regulatory Approvals
Monongahela Power's purchase of utility assets is
subject to approval by the West Virginia Public Service
Commission. UtiliCorp must also seek approval from the Iowa
Public Service Commission where it provides utility service. A
Petition for Approval of the proposed acquisition of utility
assets has been filed with the West Virginia Public Service
Commission, and filings will be made with the Federal
Energy Regulatory Commission under the Federal Power Act and with
the Department of Justice under the Hart-ScottRodino Act. A
filing will be made with the Federal Communications
Commission for transfer of communication licenses incidental
to operation of the utility assets being acquired.
No regulatory agency, other than this Commission and
those mentioned above, has jurisdiction over the
Transaction.
Item No. 5. Procedure
It is requested that the Commission's order granting this
Application / Declaration be issued on or before November
24, 1999, inasmuch as closing is anticipated for December 1999.
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. Applicant consents to the Division of
Corporate Regulation's assisting in the preparation of the
Commission's decision and order in this matter, unless the
Division opposes the transactions covered by this Application or
Declaration.
Item No. 6. Exhibits and Financial Statements
(a) Exhibits
B-1 Asset Purchase Agreement (to be filed by
amendment)
B-2 Affidavit of Peter J. Dailey
(to be filed by amendment)
D-1 Application to the West Virginia Public
Service Commission (to be filed by amendment
<PAGE>
D-2 Order of the West Virginia Public
Service Commission (to be filed by amendment)
D-3 Application to the Federal Energy
Regulatory Commission (to be filed by
amendment)
D-4 Order of the Federal Energy Regulatory
Commission(to be filed by amendment)
D-5 Hart-Scott Rodino Notification Filing
(to be filed by amendment)
D-6 Application to the Federal
Communications Commission (to be filed by
amendment)
D-7 Order of the Federal Communications
Commission(to be filed by amendment)
D-8 UtiliCorp's Application to the Iowa
Public Service Commission
(to be filed by amendment)
D-9 Order of the Iowa Public Service
Commission(to be filed by amendment)
E Map showing combined service
territory of Monongahela Power and West Virginia
Power (gas and electric)
(to be filed by paper on Form SE)
F Opinion of Counsel (to be filed by
amendment)
G Financial Data Schedules (to be filed by
amendment)
H Form of Notice
(b) Financial Statements as of September 30, 1999
FS-1 Monongahela Power balance sheet, per
books and pro forma (to be filed by
amendment).
FS-2 Monongahela Power statement of
income and retained earnings, per books
and pro forma (to be filed by amendment).
Item No. 7. Information as to Environmental Effects
<PAGE>
(a) For the reasons set forth in Item 1 above, the
authorization applied for herein does not require
major federal action significantly affecting the
quality of the human environment for purposes of
Section 102(2)(C) of the a National Environmental
Policy Act (42 U.S.C. 4232(2)(C)).
(b) Not applicable.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned company has duly
caused this statement to be signed on its behalf by the
undersigned thereunto duly authorized.
MONONGAHELA POWER COMPANY
By_____________________________
Terence A. Burke
Deputy General Counsel
Dated: October 26, 1999
<PAGE>
H Form of Notice
Monongahela Power Company (70-9***)
Monongahela Power Company ("Monongahela Power"), 1310
Fairmont Avenue, Fairmont, West Virginia 26554, a wholly
owned utility subsidiary of Allegheny Energy, Inc.,
("Allegheny"), a registered holding company, 10435
Downsville Pike, Hagerstown, MD 21740-1766, has filed an
application-declaration with this Commission under sections 8,
9(a), 10, 11, and 13(b) of the Act and rules 54, 90 and 91 under
the Act.
Monongahela Power proposes to acquire and retain all of the
West Virginia based electric and gas utility assets and
properties owned by UtiliCorp United Inc. ("UtiliCorp"), an
electric and gas utility based in Kansas City, Missouri
("Transaction"). Monongahela Power seeks an order from the
Securities and Exchange Commission granting it authorization to
retain the gas assets.<FN 1>
Allegheny and UtiliCorp have entered into an Asset Purchase
Agreement ("Agreement") whereby Monongahela Power, as Allegheny's
designated affiliate, will purchase all the regulated assets of
UtiliCorp United Inc.'s West Virginia Power Division. The
proposed purchase price of the West Virginia Power division is
approximately $75 million. The purchase price is subject to
adjustment shortly after closing, based upon the closing date
balance sheet. The acquisition price approximates the book value
of the assets. Closing on the transaction is planned for December
1999, assuming all necessary regulatory approvals have been
received.<FN 2>
UtiliCorp, a combination utility based in Kansas City,
Missouri, provides electric and gas utility services to more than
three million electric and gas customers, primarily in the
Midwest. UtiliCorp has an isolated service territory in West
Virginia, which it operates under a division called West Virginia
Power. West Virginia Power is a combination gas and electric
utility with service territory only in West Virginia. It
provides electric energy service to approximately 26,000
customers and natural gas service to approximately 24,000
customers in West Virginia. West Virginia Power's electric
distribution lines cover approximately 1,989 miles in a 1,360
square mile service area. West Virginia Power's gas service
territory includes approximately 670 miles of gas pipeline in a
500 square mile service area. West Virginia Power provides
natural gas service to several pockets in central and south
central West Virginia. The principal place of business of the
West Virginia Power division is in Fairlea, West Virginia. For
the twelve months ended December 31, 1998, UtiliCorp's revenues
were approximately $12.5 billion. West Virginia Power
contributed $51.9 million of those revenues, $28.2 million from
electric sales and $23.7 million from gas sales or .04% of
UtiliCorp's total revenues.
Monongahela Power is a wholly owned electric utility
subsidiary of Allegheny and currently provides electric
service to approximately 325,000 West Virginia customers.<FN 3> Its
service territory is contiguous to West Virginia Power's
territory. The assets to be acquired from West Virginia
Power include both electric and gas facilities. The service to
be provided by Monongahela Power using these assets will be
within the State of West Virginia. The electric assets and
West Virginia Power's electric service territory that will be
<FN 1>
1 The purchase of utility assets is subject to approval by the West Virginia
Public Service Commission and as such, the acquisition falls within Section
9(b) of the Act and no approval by this Commission is required or requested.
<FN/>
<FN 2>
2 Allegheny is also acquiring an option for one of its subsidiaries to purchase
the West Virginia assets of Service Today, Inc., commonly known as
Applachian Electric Heating, an unregulated business which installs and
services heating, ventilation and air conditioning systems. Allegheny
Ventures, Inc. (formerly AYP Capital, Inc.) will be the subsidiary to
purchase those assets. Since the business of Appalachian Electric Heating
falls within the activities permitted by Rule 58, no Commission approval is
being sought for the acquisition of those assets by Allegheny Ventures, Inc.
<FN/>
<FN 3>
3 Its sister operating company, The Potomac Edison Company, also provides
electric service to approximately 100,000 West Virginia customers.
<FN/>
<PAGE>
acquired are located in five (5) counties in southeastern
West Virginia which are contiguous to the West Virginia service
territory of Monongahela Power. The natural gas assets
and West Virginia Power's gas service territory that will be
acquired serve approximately 24,000 customers in relatively
small pockets in central and southcentral West Virginia in areas
within or relatively close to Applicant's existing service
territory.
Monongahela Power is a member of the Allegheny Power family
of
companies d/b/a Allegheny Power. Allegheny Power, through its
regulated public utilities Monongahela Power, West Penn Power
Company and the Potomac Edison Company, delivers electric energy
to three million people in parts of Maryland, Ohio, Pennsylvania,
Virginia and West Virginia. For the twelve months ended September
30, 1999, Allegheny's revenues were approximately $2.6 billion.
Mononogahela Power's revenues were approximately $645 million or
25% of total revenues of Allegheny for the period.
Monongahela Power intends to create two new divisions for
this acquisition: one division will encompass the UtiliCorp
West Virginia electric assets and another separate division will
encompass the UtiliCorp West Virginia gas assets. Monongahela
Power will operate the gas and electric service territories by
using common resources, such as computer systems, billing
systems, buildings, trucks, equipment, labor, accounting and
other central services, to the greatest extent practicable.
After the Transaction, the former West Virginia Power gas
system will continue to be operated by the employees who
currently perform those services. It is anticipated that gas
will be supplied from the existing gas supply agreements in place
or as acquired by Monongahela Power pursuant to new contracts.
In connection with this Transaction, Monongahela Power has also
entered into a twenty-year gas supply option agreement (Gas
Supply Option Agreement") with UtiliCorp's unregulated
subsidiary, Aquila Energy, for Aquila Energy to supply natural
gas to Monongahela Power. It is not a requirements contract and
Monongahela Power is not obligated to take any gas under the Gas
Supply Option Agreement. However, Monongahela Power may take gas
for its own generation use, it may use the gas to supply West
Virginia Power customers.
It is also anticipated that Allegheny Energy Service
Corporation, a nonutility service company, will offer
employment to all employees of West Virginia Power's
electric and gas divisions at closing at the same geographic
location. Employees will be given credit for all service with
the UtiliCorp under all employee benefit plans and
arrangements maintained by Allegheny Energy Service
Corporation, or, for union employees, to the extent
permissible under the Collective Bargaining Agreement and
applicable law. Monongahela Power will assume the
Collective Bargaining Agreement at closing. Additionally, an
existing power supply agreement with American Electric Power
will be assigned by UtiliCorp West Virginia to Monongahela
Power and will continue in effect until its termination date
of December 31, 2001. Thereafter, electric generation will be
supplied from Monongahela Power's own generation or the market;
provided, however, that if a plan for retail choice is
implemented in West Virginia, customers will have the
opportunity to choose their generation supplier in accordance
with that plan.
Following completion of the Transaction, the gas
utility operations of Applicant, with approximately 24,000
customers in a West Virginia service territory of 500 square
miles and annual revenues of $22-25 million, will be
substantially smaller than the gas utility operations of
Applicant's competitors in the region. Giving effect to the
Transaction, gas net utility plant will only represent 2.7% of
the total net utility plant of the Applicant or .6% of
Allegheny Energy, Inc., whereas electric net utility plant will
represent 97.3% of the total net utility plant of the Applicant
or 99.4% of Allegheny Energy, Inc. Operating revenues for
the gas operations will be 3.5% of Applicant's operating
revenues or .9% of Allegheny Energy, Inc.'s operating
revenues as compared with the electric operations comprising
96.5% of the Applicant's operating revenues or 99.1% of
Allegheny Energy, Inc.'s operating revenues. Customers of the
gas operations will constitute 6.3% of all of Applicant's
customers or 1.7% of Allegheny Energy, Inc.'s customers, while
electric customers will represent 93.7% of the Applicant's
customers or 98.3% of Allegheny Energy, Inc.'s customers.
The Transaction is small in relation to thetransactions in
other proceedings in which the
Commission has approved the acquisition and retention of gas
properties.<fn 4>
<FN 4>
4 See, e.g., New Century Energies, Inc., HCAR No. 26748, File No.
70-8787 (Aug. 1, 1997).
<FN/>
