File No. 70-9625
(Mountaineer Gas Acquisition)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5 to FORM U-1
APPLICATION/DECLARATION UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
Monongahela Power Company
(d/b/a Allegheny Power)
1310 Fairmont Avenue
Fairmont, West Virginia 26554
__________________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
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
Robert R. Winter, Esq.
Deputy General Counsel
Allegheny Power
1310 Fairmont Avenue
Fairmont, West Virginia 26554
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Company
10435 Downsville Pike
Hagerstown, MD 21740
<PAGE>
1. Applicants hereby amends the application replacing
Items 1 through 7 with the following:
TABLE OF CONTENTS Page
Item 1. Description of the 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. Mountaineer Gas . . . . . . . . . . . . . . . . .3
2. Monongahela Power . . . . . . . . . . . . . . . 4
C. Post Transaction Management and Operation . . . . . . .4
D. Financing . . . . . . . . . . . . . . . . . . . . . . 6
E. Capitalization Ratios . . . . . . . . . . . . . . . . .7
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . 8
Item 3. Applicable Statutory Provisions . . . . . . . . . . . 8
A. Section 3(a)(2). . . . . . . . . . . . . . . . . . . . 8
B. Section 6, 7 & 12(b) . . . . . . . . . . . . . . . . 13
C. Sections 9 & 10 . . . . . . . . . . . . . . . . . . .14
D. Section 10(c)(2). . . . . . . . . . . . . . . . . . .14
E. Section 11(b) . . . . . . . . . . . . . . . . . . . .17
F. Section 13(b) . . . . . . . . . . . . . . . . . . . .23
G. Rule 54 Compliance . . . . . . . . . . . . . . . . .23
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . 23
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Financial Statements . . . . . . . . . ..24
A. Exhibits . . . . . . . . . . . . . . . . . . . . . .24
B. Financial Statements . . . . . . . . . . . . . . . . 25
Item 7. Information as to Environmental Effects . . . . . . . 25
<PAGE>
Item No. 1. Description of the Proposed Transaction
A. Introduction
1. Authorization Requested
Monongahela Power Company ("Monongahela Power"), a
wholly owned combination gas and electric utility
subsidiary<F1> of Allegheny Energy, Inc. ("Allegheny"), a
registered holding company under the Public Utility Holding
Company Act of 1935, as amended ("Act"), seeks authorization
to indirectly acquire 100% of the outstanding securities of
Mountaineer Gas Company ("Mountaineer Gas") headquartered in
Charleston, West Virginia ("Transaction"). Upon completion
of the Transaction, Monongahela Power will own 100% of the
outstanding securities of Mountaineer Gas, a public utility
company. As a holder of more than a 10% interest in a
public utility company, Monongahela Power will be defined as
a holding company as defined under the Act. Specifically, a
"holding company" is defined in section 2(a)(7) of the Act
to include any company that directly or indirectly owns 10%
or more of the outstanding voting securities of a public
utility company.
2. Overview of the Transaction
Mountaineer Gas is owned by Eastern Systems Corporation
("ESC"), a West Virginia corporation that is owned by Energy
Corporation of America ("ECA"). ECA is exempt from
registration under section 3(a)(1) of the Act and by Rule 2
under the Act. Allegheny, ESC and ECA have entered into a
Stock Purchase Agreement under which Monongahela Power, as
Allegheny's assignee, proposes to acquire 100% of the
outstanding securities of Mountaineer Gas for approximately
$223 million in cash and the assumption of $100 million in
long term debt securities. The purchase price is subject to
adjustment after closing based upon the closing date balance
sheet. The Transaction will be accounted for as a purchase.
The purchase price is comparable to that paid in other
similar transactions. Closing on the Transaction is planned
for July 2000, assuming all necessary regulatory approvals
have been obtained.
B. Description of the Parties
1. Mountaineer Gas
Mountaineer Gas provides utility service to
approximately 200,000 customers throughout West Virginia,
including the cities of Wheeling, Martinsburg, Beckley,
Huntington and Charleston. Mountaineer Gas' service
territories are shown on the map attached hereto as Exhibit
E. Mountaineer Gas' principal place of business is located
in Charleston, West Virginia. Mountaineer Gas owns
Mountaineer Gas Services, an unregulated gas production
<F1> In Holding Company Act Release ("Holding Co. Act Release")
No. 27121, the Commission approved Monongahela Power's
purchase of the electric assets and retention of gas assets
of West Virginia Power. See Allegheny Energy, Inc., Holding
Co. Act Release No.35-27121, Order Authorizing Retention of
Assets (December 23, 1999).
<PAGE>
company, which owns an interest in approximately 375 wells
and has gas storage facilities under contract. Mountaineer
Gas Services is primarily engaged in providing energy
procurement and marketing services to Mountaineer Gas. For
the twelve months ended December 31, 1999, Mountaineer Gas
had revenues of approximately $174 million. Mountaineer Gas'
regulated activities contributed $162 million, or 94% of
those revenues.
2. Monongahela Power
Allegheny is a diversified energy company,
headquartered in Hagerstown, Maryland. Allegheny has three
regulated public utilities: Monongahela Power, a combination
utility which provides electric and gas service to in part
of West Virginia and Ohio; West Penn Power Company which
provide electric service in Pennsylvania; and The Potomac
Edison Company which provides electric service in Maryland,
West Virginia, and Virginia. Collectively the Allegheny
system utilities do business as Allegheny Power. Allegheny
Power, operating as an integrated system, delivers electric
and gas to 1.4 million customers in parts of Maryland, Ohio,
Pennsylvania, Virginia and West Virginia. Allegheny has
several non-utility subsidiaries.<F2>
Monongahela Power provides electric service to
approximately 351,000 West Virginia customers and
approximately 28,000 Ohio customers.<F3> Additionally, through
its West Virginia Power division gas operations, Monongahela
Power provides natural gas service to approximately 24,000
customers in West Virginia. Monongahela Power is
headquartered in Fairmont, West Virginia. For the twelve
months ended December 31, 1999, Allegheny's revenues were
approximately $2.8 billion. Monongahela Power contributed
$673 million or 24% of Allegheny's revenues.
C. Post Transaction Management and Operations
Mountaineer Gas will become a wholly owned subsidiary
of Monongahela Power. Consistent with the treatment
afforded the unregulated assets of West Penn Power in and
the ongoing restructuring of Allegheny's generation, supply
and unregulated activities, Monongahela Power may transfer
Mountaineer Gas' unregulated production company, Mountaineer
Gas Services, to Allegheny Supply.
<F2> Allegheny, through its wholly owned non-utility subsidiary
Allegheny Energy Supply Company LLC. ("Allegheny Supply"),
is a producer and marketer of electricity and other energy
products. Allegheny Supply operates and markets competitive
retail and wholesale electric generation and operates
regulated electric generation for the portions of Allegheny
Power not yet deregulated. Allegheny Supply operates over
4,100 MW of capacity from 19 units in 11 generating plants,
located in southwestern Pennsylvania and West Virginia.
Monongahela Power, Potomac Edison and Allegheny Supply
jointly own Allegheny Generating Company ("AGC"), which owns
a 40% undivided interest in a pumped-storage hydroelectric
generating facility and related transmission facilities
located in Bath County, Virginia ("Bath Project"). AYP
Ventures, Inc. actively invests in and develops energy
related and telecommunications projects.
<F3> Monongahela Power's sister operating company, Potomac
Edison, provides electric service to approximately 100,000
West Virginia customers.
<PAGE>
Monongahela Power will operate the gas and electric
utilities using shared resources, such as computer systems,
billing systems, buildings, trucks, equipment, labor,
accounting and other central services, to the greatest
extent practicable. It is anticipated that Allegheny Energy
Service Corporation ("AESC"), Allegheny's service company,
will continue to operate Mountaineer Gas with Mountaineer
Gas employees. Employees will be given credit for prior
service under all employee benefit plans or, for union
employees, to the extent permissible under the existing
Collective Bargaining Agreement and applicable law.
It is anticipated that gas will be supplied from the
existing gas supply agreements or as acquired under new
contracts. Allegheny has entered into a Gas Sales and
Purchase Agreement with ECA ("Gas Agreement"). The Gas
Agreement provides for an annual contract volume of up to
3.99 million Dth at indexed prices. Under the Gas
Agreement, which will be assigned to Allegheny Supply,
Allegheny may take gas for generation, to supply Mountaineer
Gas and West Virginia Power gas customers or for resale.
The acquisition of Mountaineer Gas strategically fits
Allegheny and Monongahela Power as: i) the acquisition is
accretive to earnings in year one (excluding transition
expenses); ii) it provides Allegheny with 200,000 additional
gas customers and the opportunity to cross sell electricity
(when permitted by West Virginia) to 160,000 of those
customers; iii) return exceeds Allegheny's cost of capital;
iv) it is located in the state of West Virginia where
Allegheny is familiar with both the territory and the
regulatory environment; v) significantly expands Allegheny's
gas distribution business from 24,000 customers to
approximately 224,000 customers; and, vi) provides Allegheny
with 11.7 bcf of contracted gas storage. Upon completion of
the Transaction, the gas utility operations of Monongahela
Power will consist of approximately 224,000 customers
throughout West Virginia, 11.7 billion cubic feet of
contracted gas storage, 3,926 miles of gas pipelines, 375
wells in the Appalachian area, 790 square miles of service
territory,<F4> with service centers in Beckley, Charleston,
Elkins, Huntington, Oak Hill, Palestine, Hugheston, Hinton,
and Wheeling.
The acquisition is part of a trend by energy holding
companies to organize themselves as energy service
providers, that is, providers of a total package of energy
services rather than just merely suppliers of gas or
electricity. The goal of an energy service provider 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. In that order the Commission held that: "[i]t
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,
<F4> The total area of counties within which service is
provided totals 19,500 square miles.
<PAGE>
particularly gas and electricity."<F5> As with Sempra, New
Century Energies and WPL Holdings, the Transaction gives
Monongahela Power and Allegheny a way to compete more
effectively in the emerging energy services markets.
For the period ended December 31, 1999, Mountaineer Gas
had annual revenues of $174 million. Gas net utility plant
will represent 16% of the total net utility plant of
Monongahela Power and 3% of Allegheny Power's combined net
utility plant, whereas electric net utility plant will
represent 84% of the net utility plant of Monongahela Power
and 97% of Allegheny Power's net utility plant. Operating
revenues for the gas operations will make up approximately
22.5% of Monongahela Power's operating revenues and 7% of
Allegheny Power's operating revenues. Electric operations
will contribute 77.5% of Monongahela Power's operating
revenues and, when combined with other companies in the
Allegheny Power family, will contribute 93% of Allegheny
Power's operating revenues. Gas customers will constitute
38% of Monongahela Power's customers and 13% of Allegheny
Power's total customers. Electric customers will represent
62% of Monongahela Power's customers and 87% of all
Allegheny Power customers.
D. Financing
Allegheny seeks authorization to issue up to $162
million in long term debt securities. Additionally,
Allegheny seeks authorization to make a capital contribution
of up to $165 million to Monongahela Power. The
contribution will funded by the requested debt securities
issuance and $3 million in general funds. The contribution
will be made in a combination of cash, guarantees, or loans.
Monongahela Power seeks authority to issue up to $165
million in long term debt securities for the purpose of
acquiring Mountaineer Gas. Additionally, Monongahela Power
seeks authorization to issue loans and guarantees to
Mountaineer Gas in an aggregate amount up to $100 million.
The amount of loans and guarantees issued is contingent upon
the amount of Mountaineer Gas' debt assumed in the
Transaction. Monongahela Power has filed a concurrent-
financing request with the Ohio Public Utility Commission.
The West Virginia PSC does not require financing
authorization requests. As proposed, the Transaction
financing structure (wherein Allegheny and Monongahela Power
jointly finance the acquisition) results in a more favorable
debt to common equity ratio for Monongahela Power than would
result from financing the entire Transaction purchase price
with new Monongahela Power debt. This is true whether only
the current Transaction is considered or if the upcoming
required restructuring of the electric generation assets
that both the Ohio PUC and the West Virginia PSC have
approved is also considered. Specifically, in a separate
to-be-filed application which will impact the debt / common
equity ratio, Monongahela Power will be requesting
Commission authority to transfer its generation assets and
related liabilities to Allegheny Supply in a manner
consistent with the methodology used by Potomac Edison and
West Penn Power. See Order Approving Transfer of West Penn
Assets, Holding Co. Act Release No. 27101 (November 12,
<F5> See Consolidated Natural Gas Co., Holding Co. Act Release
No. 26512 (Apr. 30, 1996).
<PAGE>
1999), and see Notice, In re Potomac Edison's Request to
Transfer Assets, Holding Co. Act Release No. 27180 (June 5,
2000).
Current projections show that under the proposed
financing structure Monongahela Power's debt/common equity
ratio would change from the pre-Transaction level of
approximately 54% debt / 46% common equity to post
Transaction level of approximately 55% debt / 45% common
equity - well within the Commission required levels of
approximately 70% debt / 30% common equity. Thereafter, it
is estimated that after the required restructuring
Monongahela Power's debt to common equity ratio will be
reduced to approximately 62% debt / 38% common equity -
still within the Commission's required levels. If the
entire Transaction purchase price were financed with new
Monongahela Power debt, similar debt/common equity ratio
projections would be 65% debt / 35% common equity after the
Transaction and 75% debt / 25% common equity after
restructuring.
Monongahela Power has received approval from the Ohio
PUC to issue securities in connection with this
Transaction. No authorization of the financing is required
in West Virginia. In obtaining Ohio's approval Allegheny
and Monongahela Power have made representations based upon
the financing of the Transaction as set forth in this
application. Additionally, the West Virginia PSC has issued
an order approving the acquisition of Mountaineer Gas.
Allegheny and Monongahela Power representations in that
proceeding were also based upon the financing of the
Transaction as set forth in this application.
Finally, upon completion of the Transaction,
Mountaineer Gas seeks authority to issue, and Monongahela
Power seeks authority to guarantee, up to $100 million in
short-term debt securities. The short-term debt securities
will be in the form of commercial paper and bank borrowings.
The short-term debt securities will be used primarily for
financing ongoing operations. The interest rates, fees, and
expenses for all financing for which authorization is
requested shall be comparable to those obtainable by
comparable utilities issuing comparable securities with the
same or similar terms and maturities. The terms and
conditions of the Guarantees will be established through
arm's-length negotiations based upon current market
conditions. Any Guarantee issued will be without recourse to
any of the Allegheny system operating companies to the
extent not authorized under Rule 52 under the Act.
E. Capitalization Ratios
The Transaction, when completed, will not impact the
debt / equity ratios of Allegheny. Moreover, Monongahela
Power , Allegheny, and all the subsidiaries thereof, will
not undertake to issue any debt or engage in any transaction
if such action would result in either Monongahela Power's or
the consolidated system's debt / equity ratios falling below
the Commission's debt / equity requirement of 30% common
stock equity. Additionally, within sixty (60) days after
the end of each financial quarter, Monongahela Power and
Allegheny will provide the Commission with reports
containing actual and pro forma capitalization ratio
calculations in the same format that was provided in the
confidential exhibit to this application for Allegheny on a
consolidated basis and for Monongahela Power.
<PAGE>
Item No. 2. Fees, Commissions and Expenses
Fees and expenses in the estimated amount of $100,000
plus ordinary expenses of approximately $500 are expected to
be incurred in connection with the preparation of this
application. None of the fees, commissions, or expenses is
to be paid to any associate or affiliate company of
Allegheny or any affiliate of any such associate company
except for legal, financial, and other services to be
performed at cost.
Item No. 3. Applicable Statutory Provisions
The relevant standards for Commission review of this
application are Sections 3(a), 6(a), 7, 9(a), 10, 11(b),
12(b), and 13(b) of the Act and Rules 45, 54, 90 and 91
under the Act. 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 herein.
A. Section 3(a)(2)
Section 3(a)(2) of the Act is applicable to the
proposed transaction. Under section 3(a)(2), the Commission
can exempt a holding company and its subsidiaries from any
provision or provisions of the Act that would apply to such
companies if it finds that "such holding company is
predominantly a public-utility company whose operations as
such do not extend beyond the state in which it is organized
and states contiguous thereto . . ." unless it finds the
exemption "detrimental to the public interest or the
interest of investors or consumers." For the reasons set
forth below, the standards of section 3(a)(2) are satisfied
with respect to this Transaction and the requested exemption
should be granted.
1. "Predominantly"
In the Commission's Houston Industries order,<F6> which
built on the Commission's reasoning and findings in the
Northern States Power Company order,<F7> the Commission noted
that:
Section 3(a)(2) has no specific numerical test
to determine when a company is "predominantly" a
utility rather than a holding company. In making
this determination, the Commission has often
used numerical indicators to compare the utility
operations of the holding company, as a separate
entity, and the utility operations of its
subsidiaries, with the greatest emphasis placed
on the relative gross revenues of the companies
in question.<F8> Other indicia, such as operating
income and utility assets, have also been
<F6> Holding Co. Act Release No. 26744 (July 24, 1997).
<F7> Holding Co. Act Release No. 22334 (Dec. 23, 1981).
<F8> Citing Union Electric Co., 40 SEC 1072 (1964). When
applying these criteria, the Commission has generally
granted exemptions where the ratio of the subsidiaries'
gross utility revenues to those of its parent was not more
than approximately 25%. See, e.g., Ohio Edison Co., Holding
Co. Act Release No. 21019 (Apr. 26, 1979) (16.9%); Delmarva
Power & Light Co., Holding Co. Act Release No. 19717 (Oct.
19, 1976) (25.8%); and Washington Gas Light Co., Holding Co.
Act Release No. 1964 (Mar. 5, 1940) (23.7%). Exemptions have
generally been denied in cases where this ratio was 35% or
more. See, e.g., Union Electric Co., 5 SEC 252 (1939)
(35.7%); and Wisconsin Electric Power Co., Holding Co. Act
Release No. 8741 (Dec. 20, 1948) (54.7%).
<PAGE>
considered in determining whether to grant an
exemption.<F9> . in considering whether the
exemption under section 3(a)(2) is available,
[the Commission] must "construe the statute
according to a fair interpretation of its
terms."<F10>
When applying these criteria, the Commission has generally
granted exemptions where the ratio of the subsidiaries'
utility operating income to that of the parent was not more
than approximately 35%.<F11> Exemptions have generally been
denied in cases where this ratio was 35% or more.<F12> As set
forth below, this Transaction satisfies the Commission's
criteria.
In the Houston Industries case, Houston Industries
Incorporated, an exempt public utility holding company, and
Houston Power & Light, its electric public utility
subsidiary company, sought Commission approval to first
merge (forming Houston Industries Incorporated) and then to
have the surviving entity acquire NorAm Energy Corporation
("NorAm"), a gas utility company, as a new subsidiary. The
Commission, after an examination of all of the factors it
identified as indicative of the relative size of the utility
operations of Houston Industries and NorAm, held that on the
basis of all of the facts and circumstances Houston
Industries was predominantly a utility rather than a holding
company within the meaning of section 3(a)(2). As of
December 31, 1996 and for the year then ended, NorAm's
utility operating revenues equaled approximately 53% of
Houston Industries' operating revenues, NorAm's utility
operating income was 24.3% of Houston Industries' utility
operating income, and NorAm's utility assets were 18.1% of
Houston Industries' utility assets. The Commission held that
the ratios of operating income and utility assets were
consistent with ratios in prior orders granting an
exemption.
In this Transaction, as of December 31, 1999,
Mountaineer Gas' utility operating revenues were
approximately 26% of Monongahela Power's operating revenues,
its utility operating income was 15% of Monongahela Power's
utility operating income, and its utility assets were 13% of
Monongahela Power's utility assets.<F13> In this case the
<F9> Citing Union Electric Co., 40 SEC 1072, 1077 (1962); and
Northern States Power Co., Holding Co. Act Release No. 22334
(Dec. 23, 1981).
<F10> Citing Union Electric Co., 5 SEC 252, 261 (1939).
<F11> See, e.g., Houston Industries Inc., Holding Co. Act
Release No. 26744 (July 24, 1997) (24.3%); Union Electric
Co., 40 SEC 1072 (1964).; Ohio Edison Co., Holding Co. Act
Release No. 21019 (Apr. 26, 1979) (16.9%); Delmarva Power &
Light Co., Holding Co. Act Release No. 19717 (Oct. 19,
1976) (25.8%); and Washington Gas Light Co., Holding Co. Act
Release No. 1964 (Mar. 5, 1940) (23.7%).
<F12> See, e.g., Union Electric Co., 5 SEC 252 (1939) (35.7%);
and Wisconsin Electric Power Co., Holding Co. Act Release
No. 8741 (Dec. 20, 1948) (54.7%).
<F13> It should be noted that by orders of the West Virginia PSC
and the Public Utility Commission of Ohio, Monongahela Power
will be seeking Commission authority to transfer its
electric generating assets to its generating affiliate
Allegheny Energy Supply Company, LLC on or before February
1, 2001. The transfer is part of the continuing
restructuring of the electric industry.
<PAGE>
ratios are lower than the ratios in past cases where
exemptions were granted. Additionally, Monongahela Power,
with approximately 393,000 customers is approximately twice
as large as Mountaineer Gas, which has approximately 200,000
customers.<F14>
The Commission, in Houston Industries, held that
following the transaction: "Houston Industries would control
NorAm and enjoy the incidents of predominance" as
established in prior cases.<F15> In those prior cases the
Commission relied upon the comparison of the utility
subsidiaries' gross operating revenues as a percentage of
the gross operating revenues of the parent (the "gross-to-
gross test"). In Houston Industries, on a gross-to-gross
test basis, NorAm's gross operating utility revenues in 1996
were approximately 53% of those of Houston Lighting & Power.
Stated differently, NorAm's gross operating utility revenues
in 1996 were 34% of the combined gross utility operating
revenues of Houston Lighting & Power and NorAm in 1996. In
the present matter, as stated, on a gross-to-gross test
basis, Mountaineer Gas' gross operating utility revenues in
1999 were approximately 24% of Monongahela Power's gross
operating utility revenues and represents 19% of the
combined gross utility operating revenues of Mountaineer Gas
and Monongahela Power.
The Commission has also made other comparisons of
utility / combined utility operations. In Houston Industries
the Commission found that NorAm accounted for approximately
15% of total combined utility assets (i.e., net property,
plant and equipment) and approximately 20% of utility net
operating income for 1996. In this case, as previously
noted in Item No. 1, subsection C, for the period ended
December 31, 1999, Mountaineer Gas' net utility plant
represents 13% of the combined net utility plant of
Mountaineer Gas and Monongahela Power after the proposed
Transaction.
Finally, as Monongahela Power will conduct far more
utility business directly as an operating company as it
existed immediately prior to the Transaction than it will
conduct indirectly as a holding company (through ownership
of Mountaineer Gas as a subsidiary), as held in Houston
Industries, the fair interpretation of "predominantly"
dictates that Monongahela Power be viewed as predominantly a
public-utility company and not a holding company. As
demonstrated, the Commission's prior holding that Houston
Industries would "enjoy the incidents of predominance" as
NorAm's gross utility operating revenues would constitute a
clear minority of the combined gross utility operating
revenues is equally applicable to Monongahela Power in this
proposed Transaction. Applicants conclude that this
Transaction and application satisfies the Commission's
<F14> In Houston Industries the Commission noted that Houston
Industries' utility operations were entirely electric and
NorAm's were entirely gas, a comparison of units of energy
sold is not relevant and because Houston Industries'
customer mix is significantly different from that of NorAm,
the relative number of customers is not indicative of the
size of the two utility businesses. Similarly, Monongahela
Power's utility operations are almost entirely electric but
for 24,000 newly acquired gas customer resulting from the
acquisition of West Virginia Power, and Mountaineer Gas' are
entirely gas, a comparison of units of energy sold is not
relevant and because the customer mix is significantly
different from that of Mountaineer Gas, the relative number
of customers is also not indicative of the size of the two
utility businesses.
<F15> Houston Industries Inc., Holding Co. Act Release No. 26744
at pg. 14.
<PAGE>
requirements for a Section 3(a)(2) exemption, as Monongahela
Power's operations are, as demonstrated, predominant whether
considered prior to or following the Transaction.
Accordingly, the Section 3(a)(2) exemption should be
granted.
2. Contiguity
Eligibility for a Section 3(a)(2) exemption also
includes the requirement that the holding company be "a
public-utility company whose operations as such do not
extend beyond the State in which it is organized and States
contiguous thereto." Mountaineer Gas' will continue to
operate in West Virginia. Ohio is contiguous to West
Virginia. However, it is not required that Mountaineer Gas
operate in Ohio. In Union Electric Co.,<F16> the Commission
noted that in Section 3(a)(2) "there is not a single word
referring to subsidiaries but that various other sections of
the Act (including Section 3(a)(1)) specifically refer to
the operations, activities or place of incorporation of the
subsidiaries of the holding company seeking exemption."
In prior orders, the Commission concluded that "it is
plain that under that subsection [3(a)(2)] Congress intended
us to ignore as irrelevant the place of operation of the
operating subsidiaries of the holding company, and that we
should in the instant case consider solely whether the
operations of Union Electric itself, as an operating
company, are confined to the state of Missouri and
contiguous states."<F17> In a later proceeding, the Commission
again affirmed that "[c]ontiguity of the utility
subsidiaries is not required by paragraph (2) of section
3(a)."<F18> Applying the plain words of the Act, particularly
the term "as such," Monongahela Power will satisfy the
contiguity requirement because its operations will be
conducted exclusively in West Virginia and Ohio.
3. The Unless And Except Clause
Under the "unless and except" clause of Section 3(a),
the Commission would have the authority to revoke or deny
Monongahela Power's Section 3(a)(2) exemption if the
Commission were to determine that the exemption is
"detrimental to the public interest or the interest of
investors or consumers." The Commission has rarely invoked
this authority, and recent Commission orders granting
Section 3 exemptions for combination gas and electric
companies indicate that the Commission should not find the
proposed transaction to be detrimental so as to justify
invocation of the "unless and except" clause.
<F16> 5 S.E.C. 252 (1939).
<F17> This approach coincides with the Commission's intention to
flexibly interpret the geographic requirements for an
integrated public-utility system under Section 2(a)(29) of
the Act. See 1995 Staff Report at 72-74 ("noting that the
relevance of physical and geographic integration to a sound
public-utility industry has diminished").
<F18> In re Northern States Power Co., Holding Co. Act Release
No. 22334 (December 23, 1981) (approving the acquisition by
a holding company of a subsidiary and allowing the holding
company to maintain exempt status pursuant to Section
3(a)(2), notwithstanding that the new subsidiary had
operations in states non-contiguous to the state of
organization of the holding company). See also, however, In
re Eastern Pub. Serv. Co., Securities Act Release No. 1973
(1940).
<PAGE>
In the past, the Commission disfavored combination gas
and electric systems, even among exempt holding companies.<F19>
Moreover, Section 11 of the Act restricts combining gas and
electric systems in registered holding companies. The
Commission has explicitly stated, however, that "this
Section 11] standard is not in terms applicable to an
application for exemption under 3(a)(2), since that
provision does not require that the system be a single
integrated system, but rather that it be predominantly a
public-utility company."<F20> The Commission has further noted
that "in a number of prior cases, the Commission has held
that combination companies may receive an exemption even
though they did not meet the single integrated system
standard of Section 11(b)(1).<F21> Indeed, the Commission has
recognized that while its past effort to further public and
consumer interest by keeping electric and gas systems
separate may have been "[v]alid and constructive . . .in its
day, that approach may now be outmoded."<F22>
The Commission has noted that the "broad and flexible
language" of the "unless and except" clause should be read
"in a way that makes economic and social sense in the light
of contemporary realities."<F23> In recent proceedings the
Commission has determined that one of the "contemporary
realities" to consider in deciding whether an exemption
would be contrary to the public interest is "the protection
afforded to investors, consumers, and the public by the
existence of vigorous state regulation."<F24> The Commission
has granted exemptions to combination electric and gas
companies where it has found that the existence of local and
state regulation of the utility industry was sufficient to
ensure that the interests of consumers, investors and the
public would be protected.<F25> These decisions were based on
an earlier statement by the Commission that competition in
the energy industry is a "question of state policy" and that
the conclusions of local officials "should be given great
weight in determining whether the public interest would in
fact be adversely affected."<F26>
<F19> In re Illinois Power Co., 44 S.E.C. 140 (1970).
<F20> In re Delmarva Power & Light Co., Holding Co. Act Release
No.19717 (October 19, 1976).
<F21> Id.
<F22> Union Elec. Co., 45 S.E.C. 489 (1974), aff'd without
opinion sub nom. City of Cape Girardeau v. S.E.C., 521 F.2d
324 (D.C. Cir. 1975).
<F23> Id.
<F24> WPL Holdings, Inc., Holding Co. Act Release No. 24590
(February 26, 1988).
<F25> This deference to local officials and increased acceptance
of combined gas and electric systems were reflected in the
1995 Staff Report. See, e.g., 1995 Staff Report at 74-76. In
light of the recommendations and the approach of the 1995
Staff Report, and considering the numerous instances where
the Commission has exempted combination companies in the
past, the proposed transaction should not raise any concerns
that it is detrimental to interests of consumers, investors
or the public. See also Dominion Resources Inc., Holding Co.
Act Release No. 24618 (April 5, 1988).
<F26> In re Northern States Power Co., 36 S.E.C. 1 (1954).
<PAGE>
The proposed transaction, and thus the resulting
holding company structure, are subject to approval of the
West Virginia PSC under whose regulatory both Monongahela
Power and Mountaineer Gas operate, and, indeed, have
received approval for this Transaction. The West Virginia
PSC will retain jurisdiction over Monongahela Power and
Mountaineer Gas. In this matter the grant of an exemption
from the Act would not result in a regulatory gap and
therefore, would not be detrimental to the public interest.
Rather, the resulting holding company will serve the public
interest and the interest of investors and consumers by
producing a number of economies and efficiencies, similar to
economies and efficiencies upon which the Commission has in
the past looked favorably.<F27>
Finally, and most significantly, the resulting holding
company will permit both Monongahela Power and Mountaineer
Gas to respond more rapidly and effectively to the changing
nature of the electric and gas industries in the face of the
convergence of the electricity and natural gas markets.
Moreover, a holding company structure would give both
Monongahela Power and Mountaineer Gas greater flexibility to
take advantage of the lowest-cost financing opportunities
that are specifically designed for their manifestly
different utility businesses. In addition, the combination
of Monongahela Power's electric market knowledge with
Mountaineer Gas's wholesale gas operations and skills will
help propel the combined company forward in the converging
wholesale energy markets, benefiting investors.
B. Sections 6, 7 & 12(b)
Allegheny's and Monongahela Power's request to issue
debt securities are governed by sections 6(a) and 7 of the
Act. Allegheny's request for authority to make capital
contributions to Monongahela Power is governed by Rule
45(b)(4) under the Act. Allegheny's proposed loans to
Monongahela Power, and Monongahela Power's proposed loan to
Mountaineer Gas, together with the requested guarantee
authority are governed by section 12(b) of the Act.
Currently, the request by Mountaineer Gas to issue short-
term debt securities is not exempt under Rule 52 as West
Virginia does not exercise jurisdiction over such financing
requests. However, should the West Virginia PSC authorize
the financing as part of its order approving the acquisition
the transaction would then be exempt under Rule 52. Section
6(b) applies to the short-term debt securities issuance, the
loans and guarantees are subject to section 12(b).
For the reasons set forth below, the requirements of
Section 10(f) have been satisfied. Accordingly, the
acquisition of Mountaineer Gas satisfies the integration
standards and there is no basis for the Commission to make
any of the negative findings enumerated in Section 10(b).
<F27> See, e.g., In re Illinova Corp., Holding Co. Act Release
No. 26054 (May 18, 1994) (granting exemption requested in
connection with a proposed merger based on an application
that claimed that the new structure would create
efficiencies and economies such as allowing the resulting
companies to respond to competitive opportunities in the
electric power industry and increasing the financial
flexibility of the resulting companies).
<PAGE>
C. Sections 9 & 10
Under Section 10 the relevant provisions are set forth
in subsections (b), (c), and (f). Section 10(b) 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 acquisition will unduly complicate the capital
structure of the holding company system of the applicant or
will be detrimental to the public interest or the interest
of investors or consumers or the proper functioning of such
holding company system.
Section 10(f) provides that the Commission ". shall not
approve any acquisition ... 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." Finally, Section 10(c) of the
Act provides that, notwithstanding the provisions of Section
10(b), the Commission shall not approve: 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;<F28> or 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.
D. Section 10(c)(2)
The acquisition of Mountaineer Gas will expand,
broaden, and diversify Monongahela Power's customer base;
enable the combined companies to offer their customers
access to more comprehensive products and services than
either company alone could offer; enhance through increased
financial strength and stability Allegheny's ability to
compete in the utility market as a diversified growth-
oriented energy company; and provide operating efficiencies.
The combination of Mountaineer Gas Company with Allegheny
Power will provide efficiencies for the benefit of
Mountaineer Gas customers and the stakeholders of Allegheny
Power. Efficiencies will be realized through the sharing of
resources and sharing of central services. Annual synergy
savings of $9.7 million are expected as a result of these
<F28> No Section 8 issues are raised by this application
<PAGE>
efficiencies and as a result of a one-time integration cost
of $10 million.
Allegheny and Monongahela Power recognize that the
proposed acquisition initially confers the bulk of the
quantifiable financial benefits (as more fully set forth in
the following paragraphs) to the ratepayers of Mountaineer
Gas. However, Applicants contend that the Transaction
ultimately confers substantial long term benefits on the
entire Allegheny system through increased energy (gas and
electric) market share, fuel options (gas or coal), fuel
source location, generation flexibility, and strategic
growth opportunities. In addition, the acquisition of
Mountaineer Gas will allow Monongahela and Allegheny to
offer customers access to more comprehensive products and
services than either company alone could offer. The retail
natural gas experience and expertise of Mountaineer Gas will
complement the electricity and telecommunications experience
and expertise of the Allegheny system, offering improved
capabilities in the delivery of a more complete range of
products and services for all customers.
These benefits in the long term will benefit the
Allegheny system as a whole (including Mountaineer Gas),
shareholders, customers, and employees. The synergy savings
discussed herein reflect those savings attributable to this
Transaction. No synergy savings have been calculated for,
or attributed to, the co-ordination of Mountaineer Gas and
West Virginia Gas as the recentness of the West Virginia Gas
acquisition, the differing entity sizes, customer base, and
revenue streams combine to make any such calculation too
speculative to be relied upon.
The Transaction will tend toward the economical and
efficient development of an integrated public utility
system, thereby serving the public interest, as required by
Section 10(c)(2) of the Act. Benefits and related costs of
this Transaction occur as a result of the integration of the
two utilities, Mountaineer Gas and Monongahela Power.
The Transaction will produce economies and efficiencies
more than sufficient to satisfy the standards of Section
10(c)(2), described above. Although some of the anticipated
economies and efficiencies will be fully realizable only in
the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met.<F28>
Some potential benefits cannot be precisely estimated;
nevertheless they too are entitled to be considered:
"[S]pecific dollar forecasts of future savings are not
necessarily required; a demonstrated potential for economies
will suffice even when these are not precisely
quantifiable."<F29>
As in Energy East,<F30> New Century Energies,<F31> and WPL
Holdings,<F32> here are significant economies and competitive
advantages inherent in a combined gas and electric utility
<F28> See American Electric Power Co., 46 SEC 1299, 1320-1321
(1978).
<F29> Centerior Energy Corp., Holding Co. Act Release No. 24073
(April 29, 1986).
<F30> See Holding Co. Act Release No. 27128 (February 2, 2000).
<F31> Holding Co. Act Release No. 26748, (Aug. 1, 1997).
<F32> See, e.g., WPL Holdings, Inc., Holding Co. Act Release No.
26856 (Apr. 14, 1998), aff'd sub nom., Madison Gas and
Electric Company v. SEC, 168 F.3d 1337 (D.C. Cir. 1999).
<PAGE>
as contrasted to a utility offering only electric or gas.
Monongahela Power presently serves 24,000 gas and 351,000
electric customers in West Virginia. Mountaineer Gas serves
approximately 200,000 customers. The integration of
operations and services will result in substantial savings
and efficiencies.<F33> Operation of Mountaineer Gas on a stand-
alone basis would result in the loss of these economies and
the resulting savings and other benefits. Lost economies
would arise from the need to replicate services such as
management, procurement, materials management, finance,
accounting, legal, customer service, engineering, and
construction. Additionally, there would be losses related
to economies of scale, the costs of reorganization, and
other factors - all of which would be immediate and
substantial.
Applicants estimate that the Transaction will result in
annual direct and indirect savings of approximately $10
million per year.<F34> Specifically, annual direct savings will
result from savings in: General Operations - $1.5 million;
Call Center Operations - $1.2 million; Accounting and
Finance - $1.2 million; Executive Compensation - $1 million;
Marketing - $750,000; Information Systems - $600,000; and,
Human Resources - $400,000. Annual indirect savings will
result from savings in: the Online Service System - $1.5
million; Management Fees - $720,000; TCO refund - $500,000;
Materials and Supplies - $300,000; and, Property Taxes -
$100,000.<F35> These savings are offset in the first year by the
costs to achieve the acquisition. This consists of costs
such as investment bankers' fees, attorney and accountant
fees, and severance and other employee reduction-related
costs. In addition to the benefits described above, there
are other general benefits which, while presently difficult
to quantify, are nonetheless substantial. These other
benefits include competitive rates and services, increased
size and stability, diversification of service territory,
fuel and non-fuel purchasing economies, coordination of
diversification programs, complementary operational
functions and complementary management.
The expected savings, when projected over a five to ten
years period amount to approximately $40 million ($10
million for five periods ($50 million) offset by an initial
acquisition cost of $10 million). The savings levels are
comparable to the savings claimed in a number of recent
acquisitions approved by this Commission. Specifically, the
Commission approved the savings claimed by: Energy East;<F36>
New Centuries Energies (projected savings of $769 million
over 10 years);<F37> Kansas Power and Light Co.,<F38> (expected
<F33> See Exhibit D-6, Allegheny Power Acquisition of
Mountaineer Gas Company Cost Study ("Cost Study"). Note,
due to the recentness of the acquisition, the cost study
does not take into account savings, if any, achieved
relating to the acquisition of West Virginia Power's Gas
Division.
<F34> Id.
<F35> Id., at pages 5 - 9.
<F36> Holding Co. Act Release No. 27128 (February 2, 2000).
<F37> Holding Co. Act Release No. 26748, (Aug. 1, 1997).
<F38> Holding Co. Act Release No. 25465 (Feb. 5, 1992).
<PAGE>
savings of $140 million over five years); IE Industries,<F39>
(expected savings of $91 million over ten years); Midwest
Resources<F40> (estimated savings of $25 million over five
years).
Additionally, both electric and gas customers will
benefit from real savings expected to be achieved by
consolidated Meter Readings, Treasury, Legal and Auditing
functions, 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. Substantial
benefits are expected to result from reduced costs
associated with financing day to day operations.
Mountaineer Gas currently has a high cost of debt.
Allegheny and Monongahela Power have a lower cost of debt. A
refinancing of Mountaineer Gas' debt would result in
additional annual savings.
E. Section 11(b)
1. Integrated Public Utility System Requirement
The Act generally confines the utility properties of a
registered holding company to a "single integrated public-
utility system," either gas or electric.<F41> Section
(2)(29)(A) defines an integrated public-utility system, as
applied to electric utility properties, to mean:
a system consisting of one or more units of generating
plants and/or transmission lines 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 operations to a single area or
<F39> Holding Co. Act Release No. 25325 (June 3, 1991).
<F40> Holding Co. Act Release No. 25159 (Sept. 26, 1990).
<F41> The limitation is intended to eliminate evils that
Congress found to exist "when the growth and extension of
holding companies bears no relation to . . . the integration
and coordination of related operating properties." Section
1(b)(4). Congress believed that, "in the absence of clearly
overriding considerations a utility system should have a
management single-mindedly devoted to advancing the
interests of its investors and consumers and not engaged,
through the means of the holding company device, in
operating other utility or non-utility businesses." See SEC
v. New England Electric System, 41 S.E.C. 888 (1964), rev'd,
SEC v. New England Electric System, 346 F.2d 399 (1st Cir.
1966), rev'd and remanded, 384 U.S. 176 (1965), on remand,
376 F.2d 107 (1st Cir. 1967), rev'd, 390 U.S. 207 (1968).
The "other business" clauses of section 11(b)(1) further
limit the nonutility businesses of a registered holding
company to those that are "reasonably incidental, or
economically necessary or appropriate to the operations of
such integrated public-utility system," on a finding by the
Commission that the interests are "necessary or appropriate
in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning" of
the integrated system.
<PAGE>
region, in one or more States, not so large as to
impair . . . the advantages of localized management,
efficient operations, and the effectiveness of
regulation.
Section 2(29)(B) defines an integrated public-utility
system, as applied to gas utility properties, to mean:
a system consisting of one or more gas utility
companies which are so located and related that
substantial economies may be effectuated by being
operated as a single coordinated system confined in its
operations to a single area or region, in one or more
States, not so large as to impair ... the advantages of
localized management, efficient operations, and the
effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common
source of supply may be deemed to be included in a
single area or region.
The combined system will meet the standard set forth in
Section 2(a)(29)(B) and, therefore, will satisfy the
requirements of Sections 10(c)(1) and (2) and should be
approved by the Commission. Commission precedent and
current technological realities indicate that the Allegheny
gas utility system will operate as a coordinated system
confined in its operation to a single area or region because
it will derive natural gas from a common source of supply.
None of the Act, the Commission's orders and rulings or no-
action letters of the Commission's staff provide a
definition as to what constitutes a "common source of
supply." The Commission has not traditionally required that
the pipeline facilities of an integrated system be
interconnected, and instead has looked to such issues as
from whom the distribution companies within the system
receive much, although not all, of their gas supply. The
Commission also has considered purchases of gas from a
common pipeline as well as from different pipeline's when
the gas originates from the same gas field in determining a
common source of supply. Since the time of most of these
decisions, the state of the art in the industry has
developed to allow efficient operation of systems whose gas
supplies derive from many sources.
Upon completion of the Transaction, Monongahela
Power's West Virginia Gas Division and Mountaineer Gas'
operations will form an integrated utility system in
accordance with the requirements of Section 2(a)(29)(B).
The two operations are physically connected through the
Columbia Gas Transmission, Columbia Gulf Transmission, and
Tennessee Gas pipelines. Through these systems, Monongahela
Power's West Virginia Gas Division and Mountaineer Gas
derive gas from common sources of supply in the Gulf Coast
Basin and the Appalachia Basin. Monongahela Power's West
Virginia Gas Division and Mountaineer Gas may also derive
gas from common sources through two exclusively West
Virginia pipelines - the Cranberry Pipeline and the Gas
Transport Pipeline. The gas utility operations of
Monongahela Power's West Virginia Gas Division and
Mountaineer Gas are limited to West Virginia.
In view of the separate definitions and their differing
criteria, the Commission has traditionally held that gas and
electric properties do not together constitute an integrated
system.<F42> An exception to this requirement is provided in
Section 11(b)(1), collectively the "A,B,C Clauses." The
<F42> SEC v. New England System, 384 U.S. at 178, n. 7.
<PAGE>
Commission has stated that the Act does not prohibit
ownership of combination gas and electric systems, but
rather specifies the showings that must be made by an
applicant to justify ownership of such properties.<F43>
Section 11(b)(1) of the Act allows a registered holding
company to retain "one or more" additional integrated
systems if the Commission finds 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;
(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.
In its 1995 Report, the Division recommended that the
Commission "liberalize its interpretation of the `A-B-C'
clauses."<F44> 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."<F45>
In approving the formation and acquisition 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
<F43> Id.
<F44> The Regulation of Public-Utility Holding Companies,
Division of Investment Management, Securities and Exchange
Commission (June 1995) ("1995 Report") at 74.
<F45> See New Century Energies, Inc., Holding Co. Act Release
No. 26748, File No. 70-8787 (Aug. 1, 1997). See, e.g., WPL
Holdings, Inc., Holding Co. Act Release 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., Holding
Co. Act Release No. 26934, File No. 70-8427 (Nov. 2, 1998);
Conectiv Inc., Holding Co. Act Release No. 26832, File No.
70-9069 (Feb. 25, 1998).
<PAGE>
would be together. This factor adds to the quantifiable
loss of economies caused by increased costs.<F46>
Most importantly, the Commission distanced itself from
earlier, more restrictive precedent stating:
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 . . . .<F47>
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 United States Court of Appeals for the District
of Columbia has upheld the Commission's re-interpretation of
the A-B-C clauses and Section 11.<F48>
In HCAR No.35-27121, the Commission held that
Monongahela Power satisfied the Commission's integration
requirements.<F49> That finding is equally applicable here. In
this application, a determination is necessary that
Allegheny's acquisition of Mountaineer Gas satisfies the
Commission's integration requirements for a gas utility and
the A-B-C Clauses. As set forth in the following
discussion, the acquisition of Mountaineer Gas satisfies
the integration standards for the following reasons:
<F46> See New Century Energies, Inc., Holding Co. Act Release
No. 26748, File No. 70-8787, text and nn. 59-60 (Aug. 1,
1997). See also CINergy Corp., Holding Co. Act Release No.
26934, File No. 70-8427 (Nov. 2, 1998); WPL Holdings, Inc.,
Holding Co. Act Release No. 26856 (Apr. 14, 1998).
<F47> See New Century Energies, Inc., Holding Co. Act Release
No. 26748.
<F48> 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).
<F49> Holding Co. Act Release No. 35-27121 (December 23, 1999).
<PAGE>
(1) Mountaineer Gas and Monongahela Power operate in a
"single area or region" as both are located in West
Virginia and are within the five state region in which
Allegheny Power operations;
(2) substantial economies achievable through combining
functions in such areas as management, procurement,
materials management; customer service, finance,
accounting, legal, engineering, and construction would be
lost if Mountaineer Gas were operated in a stand alone
capacity; and
(3) the area or region is not "so large as to impair . . .
the advantages of localized management, efficient
operation, and the effectiveness of regulation." To the
contrary, the day-to-day operations of Mountaineer Gas
will be under the direction of an on-site management team
acting in coordination with Allegheny Power 's utility
operations in order to promote efficiency.
Mountaineer Gas will continue to be subject to effective
local regulation by the West Virginia PSC and the Ohio
Public Utility Commission.
For the foregoing reasons, the Commission should find
that the standards of Clause A are satisfied. Mountaineer
Gas operates in West Virginia's southern, northern and
eastern counties. Monongahela Power operates substantially
in the eastern and northern counties of West Virginia. As
both utilities operate within the same state, West Virginia,
clause B is satisfied.
Finally, acquisition of Mountaineer Gas satisfies the
remaining clause of Section 11(b)(1). Under Clause C, the
combination of systems under the single control of the
Applicant, including Mountaineer Gas' 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.
The operation of the gas system of Mountaineer Gas as a
subsidiary of Monongahela Power would not adversely impact
its operations.
After the Transaction is completed, Mountaineer Gas
will be managed out of Charleston, West Virginia.
Management will remain geographically close to the service
area as Mountaineer Gas provides service virtually across
the state. Currently, the management and executives of
Mountaineer Gas are located in Denver, Colorado. After the
Transaction, management will all be located in West
Virginia. The resources of Allegheny 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. It is contemplated that in the
future all customers will have access to Allegheny's 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 enhanced by this
Transaction of Monongahela Power. Additionally, the
<PAGE>
management of Mountaineer Gas will be aligned and
coordinated with that of the existing West Virginia Power
gas division.
With respect to regulatory effectiveness, as noted the
West Virginia PSC has and will continue to regulate
Mountaineer Gas and Mongongahela Power. Thus, the
Transaction will not alter the West Virginia PSC's
regulatory effectiveness. The Transaction has not raised
undue regulatory concerns in West Virginia where Monongahela
Power and Mountaineer Gas have filed a joint request for
approval with the West Virginia PSC.
As Monongahela Power is West Virginia Gas Division and
Mountaineer Gas will, to the extent practicable, be operated
as a combined gas operation other synergies will be
realized. This would result in decreased costs for each of
the gas utilities as they would be able to share costs not
only with each other, but also with the electric system and
accordingly spread those costs across a larger base.
As earlier noted, Applicants have estimated that the
Transaction would result in annual direct savings as
follows: General Operations - $1.5 million; Call Center
Operations - $1.2 million; Accounting and Finance - $1.2
million; Executive Compensation - $1 million; Marketing -
$750,000; Information Systems - $600,000; and Human
Resources - $400,000; Annual indirect $1.5 million; and
Management Fees - $720,000. The savings from the
coordinated operations of Mountaineer Gas and the West
Virginia Power Gas Division are in addition to these
estimates.
The separation of the gas operations would also
significantly reduce Monongahela Power's and Allegheny's
ability to compete in the marketplace. As noted, the gas
and electric industries are converging, companies in the
retail energy delivery business must be able to offer
customers a range of options to meet their energy needs as
well as have diversified generation options. Separation
reduces the opportunity to package and / or bundle services
to customer thereby reducing opportunities for cross selling
and marketing in the emerging markets. Finally, the
separation of Mountaineer Gas and West Virginia Gas would
result in increased intra company competition resulting in a
loss of benefits.
In summary, the Transaction does not give rise to any
of the abuses, ownership of scattered utility properties,
inefficient operations, lack of local management or evasion
of state regulation that Section 11(b)(1) of the Act
prohibits. Accordingly, the Commission should approve the
Transaction.
F. Section 13(b) Compliance
Section 13(b) of the Act provides that:
it shall be unlawful for any subsidiary company
of any registered holding company or for any
mutual service company, by use of the mails or any
means or instrumentality of interstate commerce,
or otherwise, to enter into or take any step in
the performance of any service, sales, or
construction contract by which such company
undertakes to perform services or construction
<PAGE>
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.
Any transactions between Allegheny Energy Supply Company,
LLC. and Mountaineer Gas related to gas acquired by one or
the other under the Gas Agreement, or the provision of other
services, shall be in compliance with section 13(b) of the
Act and Rules 90 and 91 under the Act.
G. Rule 54 Compliance
Rule 54 provides that the Commission, in determining
whether to approve certain transactions by such registered
holding company or its subsidiaries other than with respect
to exempt wholesale generators ("EWGs") and foreign utility
companies ("FUCOs"), will not consider the effect of the
capitalization or earnings of any subsidiary which is an EWG
or FUCO upon the registered holding company system if the
provisions of Rule 53(a), (b) and (c) are satisfied. At
December 31, 1999, Allegheny's average consolidated retained
earnings was approximately $897million, and Allegheny's
aggregate investment in EWGs and FUCOs was approximately
$4.2 million. Accordingly, Allegheny may invest up to
approximately $448.5 million or an additional $444.3 million
(50% of Retained Earnings less existing investment) in EWGs
and FUCOs as of December 31, 1999. When the Transaction is
consummated, for purposes of compliance with Rule 54,
Allegheny's aggregate investment in EWGs and FUCOs will not
exceed 50% of its consolidated retained earnings and the
provisions of Rule 53(a) will be satisfied. Allegheny
further states that none of the conditions set forth in rule
53(b) exist or will exist as a result of the proposed
Transaction. Therefore, Rule 53(c) is inapplicable.
Item No. 4. Regulatory Approvals
Allegheny's acquisition of the securities of
Mountaineer Gas is subject to approval by the West Virginia
PSC. A petition for approval of the proposed acquisition
of utility assets has been filed with the West Virginia PSC.
A joint stipulation agreement relating to post transaction
operation of Mountaineer Gas has been executed by Allegheny
Power, Eastern Systems Corporation, Independent Oil & Gas
Association, Weirton Steel Corporation, the West Virginia
PSC Consumer Advocate Division, and the West Virginia Public
Service Commission Staff. The joint stipulation agreement
will have minimal impact on the efficiencies that will be
realized as a result of the integration of Mountaineer Gas
and Allegheny Power. On May 11, 2000, the West Virginia PSC
approved the stipulation and proposed acquisition.<F50>
<F50> See Exhibit D-2 Order of the West Virginia Public Service
Commission.
<PAGE>
On the federal regulatory level, a filing has been made
with the Department of Justice under Hart-Scott-Rodino. The
Justice Department requested, and Allegheny and Mountaineer
Gas furnished, additional information on the transaction.
The thirty-day period for action has now expired. A filing
has been made with the Federal Communications Commission for
transfer of related communication licenses incidental to
operation of the utility assets being acquired. The Federal
Communications Commission has re-issued those licenses to
reflect this Transaction. Other than the above agencies, no
other state or federal commission, other than this
Commission, has jurisdiction over the Transaction.
Item No. 5. Procedure
It is requested that the Commission's order granting
this Application / Declaration be issued as soon as
practicable but not later July 1, 2000, inasmuch as closing
is anticipated for July 2000. 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 Transaction covered by this application-
declaration.
Item No. 6. Exhibits and Financial Statements
(a) Exhibits
B-1 Stock Purchase Agreement (filed July 13,
2000)
B-2 Affidavit of Peter J. Dailey (filed July
13, 2000)
D-1 Application to the West Virginia Public
Service Commission (filed July 13, 2000)
D-2 Order of the West Virginia Public
Service Commission
(filed July 13, 2000)
D-3 Hart-Scott Rodino Notification Filing
(filed July 17, 2000)
D-4 Application to the Federal
Communications Commission (filed July 13, 2000)
D-5 Order of the Federal Communications
Commission (re-filed via Form SE August 2, 2000)
D-6 Allegheny Power Acquisition of
Mountaineer Gas Company Cost Study (re-
filed August 2, 2000)
<PAGE>
E Map showing combined service territory
of Monongahela Power and Mountaineer Gas
(gas and electric) (to be filed by paper on
Form SE)
(filed July 17, 2000)
F Opinion of Counsel
(filed July 13, 2000)
G Financial Data Schedules (filed July
17, 2000)
H Form of Notice (filed Feb. 4, 2000)
(b) Financial Statements
FS-1 Monongahela Power balance sheet, per books and
pro forma (filed July 17, 2000)
FS-2 Monongahela Power statement of income and retained
earnings, per books and pro forma (filed July 17,
2000)
Item No. 7. Information as to Environmental Effects
(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.
<PAGE>
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.
ALLEGHENY ENERGY, INC
/s/ THOMAS K. HENDERSON
By _____________________________
Thomas K. Henderson
MONONGAHELA POWER COMPANY
/s/ THOMAS K. HENDERSON
By _____________________________
Thomas K. Henderson
Dated: August 3, 2000
