File No. 70-8651
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM U-1/A
AMENDMENT NO. 2
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Names of Companies filing this statement and addresses of principal executive
offices:
National Fuel Resources, Inc.
478 Main Street
Buffalo, New York 14202
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Name of Top Registered Holding Company:
NATIONAL FUEL GAS COMPANY
Names and Addresses of Agent for Service:
Robert J. Kreppel, President
National Fuel Resources, Inc.
478 Main Street
Buffalo, New York 14202
David F. Smith
10 Lafayette Square
Buffalo, New York 14203
It is respectfully requested that the Commission send copies of all notices,
orders and communications to:
Kyle G. Storie, Esq.
10 Lafayette Square
Buffalo, New York 14203
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The subject U-1 is hereby amended and restated in its
entirety as follows:
Description of Applicants
National Fuel Resources, Inc. ("NFR") is a non-rate
regulated natural gas marketer/broker which also invests in certain gas
equipment research and development projects. NFR is a wholly-owned subsidiary of
National Fuel Gas Company ("National"). National is a public utility holding
company registered under the Public Utility Holding Company Act of 1935, as
amended ("Act").
Item 1. Description of Proposed Transactions
NFR hereby seeks authority, at both the retail and wholesale
level, to purchase, sell, market, broker and otherwise trade electric power and
certain commodities1; provide electricity, steam and/or commodity management
services; and engage in activities and perform services related to the
foregoing, including energy storage and procurement services. Other activities
and services might include arranging supply and sales options for electric
generators, helping utilities explore alternative methods to meet Clean Air Act
requirements through a combination of new technologies, emission credits,
cross-fuel management and electricity purchases and sales, helping customers
manage price changes in electricity and fuel relative to time and location, and
assisting utilities and non-utility generators by managing fuel supply and
transportation contracts, and providing price and delivery flexibility.
Brokering Activities. Brokering generally involves bringing
two parties (typically a buyer and a seller) together for a fee or commission
which one of the parties has agreed to pay. For example, NFR intends to enter
into a buyer's broker arrangement whereby NFR will represent the energy buyer in
efforts to obtain the best energy mix and price for that customer with payment
by the buyer to NFR for such services based on energy savings achieved on behalf
of the buyer.
Marketing Activities. Marketing transactions may take a
variety of different forms. In general, however, these transactions involve
contracts under which the performance of the parties is expressed in terms of
the obligation to make or take physical delivery of electricity, gas or other
energy commodities, as well as the purchase and sale of commodity-based
derivative contracts, such as options, swaps and exchange-traded futures
contracts, under which physical delivery may or may not in fact occur.2
Generally, what distinguishes a marketer from a broker is
that a marketer, unlike a broker, usually takes title to the commodity (in this
case, electricity, gas, oil, etc.) and bears the risks associated with market
price fluctuations of the commodity (market risk) and the ability to enforce
performance by the other party to the contract (counter-party credit risk).
While not intended as an exhaustive list, NFR proposes to
engage in the following marketing activities:
(a) Electricity and/or Fuel Arbitrage Transactions.
Marketing may involve a simple fuel-for-electricity exchange in which NFR may
commit to purchase fuel from an electricity producer and, in turn, supply
electricity at an agreed price. NFR in this case would seek to participate in
the evolving integrated energy market by identifying and capturing the electric
and/or fuel arbitrage profits that are inherent in the wholesale electric and
natural gas business.
One example would be where a municipal electric system
("MuniPower") has entered into a long-term, fixed-price, gas contract to
purchase gas which it uses to generate electricity. Because MuniPower has a
source of fixed-price gas, it essentially produces fixed-price power. If events
(e.g., an unusual cold spell) were to drive up gas demand and hence spot gas
prices, MuniPower would have an opportunity to sell its gas supply on the spot
market at a profit, but would be prevented from doing so since its gas supply is
essentially dedicated to producing its electricity requirements. In such a case,
NFR could enable MuniPower to realize a profit on the sale of its gas, but
without any interruption in the supply of electricity to MuniPower's customers.
Specifically, NFR could contract with third party power producers for an
alternative supply of lower-cost electricity to meet MuniPower's needs in
exchange for the right to MuniPower's gas supply, which NFR would then resell on
the spot market at a profit. In this example, MuniPower would benefit from the
lower cost source of electricity and/or through a sharing of the profit realized
by NFR in remarketing gas supply.
(b) Dispatch Control of Energy Assets. Another example is a
transaction in which an owner of generation and related energy assets wants to
"outsource" dispatch control (but not physical operation) of its generating
facilities in return for fixed price electricity. To illustrate, suppose a
generation cooperative ("Coop") has a mix of generation assets which it uses to
supply its members power needs. The Coop fuel generation mix includes gas, oil
and coal, which Coop purchases on the spot market. As long as Coop purchases its
fuel on the spot market, its electricity cost will fluctuate with the spot
market for fuel. Coop could reduce or eliminate such price volatility by
entering into a contract with a third party who agrees to take over the fuel
procurement and dispatch responsibilities of all of Coop's generation assets in
exchange for Coop's agreement to purchase power under a long-term fixed price
contract.
In this situation, NFR could offer Coop what is essentially
a "fixed-for-floating swap." NFR would expect to realize a profit on the
transaction through its ability to achieve overall savings on fuel cost and by
controlling the dispatch of Coop's generating units in order to assure that the
units with the lowest fuel cost at any time are dispatched first.3 NFR could
supply Coop with power from either Coop's own generation assets, or from more
economic facilities, depending on the current market for power. Further, NFR may
have the opportunity to maximize the value of any excess Coop generating
capacity by marketing such capacity to a much greater number of potential
purchasers than Coop on its own would be able to do. The net result for Coop is
a lower cost of power which it can pass on to its members.
(c) Sale of Options on Capacity or Energy. Many utilities,
as well as power marketers, instead of asking for bids for firm power to meet
future energy needs, have begun asking for options on capacity or energy. This
allows utilities to avoid additional capital spending in an uncertain market
environment, and allows them to quickly assess the cost of meeting future energy
needs.
To illustrate, suppose that a utility has completed its
resource planning which indicates the need for a certain amount of additional
capacity several years in the future. Instead of requesting bids for fixed-price
energy or capacity, the utility may prefer to request bids for options on that
energy or capacity. NFR, in this situation, could sell such an option for a
premium paid up front. However, if the purchasing utility operates in a market
where spot electricity prices are driven by the cost of gas-fired generation,
and NFR's position under the option contract sold to the utility is covered by
rights to gas-fired generation which NFR has acquired or owns, NFR would be
exposed under the option contract to the risk of any increase in the price for
natural gas. NFR could hedge this risk by purchasing an option in the natural
gas futures market.
(d) National Energy Supplier. The fourth example involves
making retail sales to a large energy consumer with facilities in many different
locations who wishes to "outsource" all of its energy needs at all locations in
order to achieve overall savings, by, among other means, obtaining volume
discounts that a single source supplier could offer, and by eliminating the high
cost of administering separate procurement programs at each location. To
illustrate, suppose that a national department store chain has stores in all
fifty States and wishes to engage an "energy partner" to advise it on its
current energy purchases. NFR could address this customer's needs in several
ways. Initially, it could begin advising the customer on fuel procurement
practices in order to identify lower cost supplies, and undertake to represent
the customer in negotiations with its various electric utility, gas utility and
fuel suppliers. Ultimately, and subject to necessary changes in State laws, NFR
may itself wish to become the customer's electricity supplier and wheel
electricity to each of the customer's stores.
Payment for all of the services and activities delineated
herein will vary by project and may include fee-for-service, fixed price,
performance contracts with a savings guarantee or payment based on the energy or
other resource savings achieved, the output of equipment (for example, steam,
water, chilled water, air, or heat), commissions, and other payment structures.
The services provided to any associate company of NFR will be provided at cost,
as defined in Section 13 of the Act.
NFR proposes to engage in energy marketing/brokering and the
related activities described herein without regard to the location or identity
of customers or source of revenues, provided, however, that NFR will not make
any sales of electricity to retail customers in any State unless authorized or
permitted to make such sales under the laws of that State. In addition, NFR
requests that the Commission reserve jurisdiction over any sales by NFR of
electricity to customers outside the United States pending completion of the
record in this proceeding.4
As a result of any of above activities, NFR will not own or
operate any electric utility assets as defined by Section 2(a)(18) of the Act,
so that it will not become an electric utility company as defined in Section
2(a)(3) of the Act.
Use of Risk Mitigation Measures
A critical aspect of successful energy marketing involves
the use of various risk mitigation measures to balance an overall portfolio
position in order to limit the financial impact of any loss that may be
sustained on any particular commodity transaction due to adverse market price
movements or counterparty defaults. Such measures may include entering into
off-setting physical delivery contracts (i.e., off-setting purchases and sales
of electricity, gas, etc.), the purchase and sale of derivative instruments,
such as options and futures contracts, for purposes of hedging a physical
position, and an appropriate mix of long and short-term contracts.
It may become necessary or desirable for NFR to trade in any
electricity futures market that may develop to cover its obligations in the
market. NFR intends to continue to engage in futures transactions involving
natural gas, and to expand its activities to other fuels and power capacity
rights, and to utilize rate swaps and other commodity-based derivative products
that may be developed for use in the markets in which it participates in the
ordinary course of its business. NFR would not deal in such derivative products
for purposes of speculation, but rather would use them only to reduce price-risk
exposure through hedging.
NFR represents that it will take measures to mitigate the
market and counterparty credit risks associated with the portfolio of
electricity and fuel purchase or sales contracts. Such measures may include
matching long-term firm or variable price electricity sales contracts with
long-term firm or variable price fuel purchase contracts. NFR may also hedge
fuel price risk through the purchase of fuel or fuel reserve or options on fuel
reserves.
In addition, NFR may purchase or sell commodity-based
derivative instruments, such as electricity or gas futures contracts and options
on electricity or gas futures, such as are traded on the New York Mercantile
Exchange, and gas and oil price swap agreements in order to hedge positions
under existing contracts for physical delivery.5
NFR may also hedge price risk exposure under a purchase or
sale contract by taking an opposite position to that purchase or sale.
Similarly, in a portfolio of purchase and sales contracts, risk could also be
limited through an appropriate mix of long-term and short-term contracts, and
diversification of the mix of customers and suppliers regionally and across
industry lines. Finally, NFR will endeavor to limit risk exposure through
contract provisions (i.e., liquidated damages) that would place a ceiling on the
amount of damages payable when performance failure occurs and/or exclude
consequential damages.
Ultimately, a successful energy commodity marketer must be
able to manage a "book" of contracts involving purchases, sales and trades of
electricity and other energy commodities. The marketer will seek to hedge the
risk associated with these contracts through a combination of physical assets,
balanced physical purchases and sales, purchases and sales on futures markets,
or other derivative risk management tools. A successful marketer will need a
strong physical presence (assets), as well as the capability to participate in
the growing financial market for energy-related products. In this connection,
the value added by the marketer, from the perspective of its customer, is the
superior ability of the marketer to aggregate risks so as to manage them as
efficiently as possible. In order to do this, the marketer needs to have the
ability to participate in all energy markets, both physically and financially.
Funding
NFR is capitalized at $3,500,000 which currently is believed
to be sufficient to fund the proposed activities. Additionally, NFR may in the
future finance the proposed transactions through capital contributions, and/or
long-term loans from National and through borrowings from the Money Pool (File
No. 70-8729, HCAR No. 35-26443, December 28, 1995) (the "Money Pool Order")
under which NFR is currently authorized to borrow up to $25 million.
Joint Ventures and Other Relationships
NFR also proposes to form, and finance partnerships,
strategic alliances, joint ventures, etc. with third parties which would provide
all of the services and undertake all the activities delineated herein. NFR also
proposes to take an ownership interest in entities currently established, or to
be established, which are or will be engaged solely in the services and
activities delineated herein.
NFR wishes to acquire equity interests, notes or other forms
of indebtedness of the joint ventures and other entities described in this
subsection. NFR would make capital contributions, loans or advances of money,
property or other contributions (including direct payment of expenses) to the
joint ventures and other entities described in this subsection. The rate of
interest on loans or advances from NFR will equal National's cost of money. The
aggregate amount of all funding of and/or investment in such entities shall not
exceed the amount which, at the time of the investment, NFR is authorized to
borrow from the Money Pool.
NFR represents that it will not sell electric power or other
energy at retail or otherwise engage in the Proposed Transactions unless
approved or allowed under applicable state law.
All the authorizations described above would be for a period
ending December 31, 2001 with the exception of short-term borrowings from and
other participation in the Money Pool which would be for the same period as in
the Money Pool Order i.e. through December 31, 2000 (and any extension or
renewal of such authorization).
Rule 24 Certificates
NFR currently files a Rule 24 Certificate within 45 days of
the end of each quarter under File No. 70-7833, HCAR No. 35-25437, December 20,
1991 (the "NFR Originating Order"), in which an Income Statement and Balance
Sheet is provided. NFR proposes to report to the Commission with respect to the
transactions contemplated hereunder as part of the NFR Originating Order
quarterly Rule 24 Certificate which, along with the above referenced Balance
Sheet and Income Statement will include:
1. A description of all retail electric marketing/brokering
activities in which NFR began participation during the applicable quarter with
reference to the state regulatory approval of said program and/or the applicable
electric retail wheeling tariff.
NFR's participation in the Money Pool will be reported in
the Rule 24 Certificates filed under the Money Pool Order.
Item 2. Fees, Commissions and Expenses
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Attorney's Fees Less than $5,000
Item 3. Applicable Statutory Provisions.
Sections 6, 7, 9, 10, 11, 12 and 13 and Rules 42, 43, 45, 49
and 52 are applicable to the transactions contemplated hereunder.
Applicable Provisions Proposed Transaction
Sections 9(a), 10 NFR's participation in
and 11(b), 13 the Proposed Transactions.
Sections 9(a) and 10 NFR's formation,
participation, financing,
and/or investment in
entities established
to participate in the
Proposed Transactions.
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Rule 52 Intra-company financing
between National and NFR.
Sections 6, 7, 9, 10, Participation by NFR in
11 and 12. Rules 42, the Money Pool with
43, 45, 49, 52, File regard to the Proposed
No. 70-8729, HCAR No. Transactions.
35-26443
To the extent that the proposals herein are considered by
the Commission to require authorization, approval or exemption under any section
of the Act or provision of the rule or regulations other than those specifically
referred to herein, request for such authorization approval or exemption is
hereby made.
Pursuant to authority granted in HCAR Release No. 35-26364;
70-8649 (the "Horizon U-1"), Horizon Energy Development, Inc. ("Horizon"), an
affiliate of National, has committed less than $15 million to date in a
combination of development cost expenditures, loans and guarantees to facilitate
the development of EWGs and FUCOs. None of the proceeds from the transactions
contemplated hereunder shall be invested in an EWG or FUCO.
Item 4. Regulatory Approval
NFR has obtained authority from FERC to act as a wholesale
power marketer (See ER95-1374-000). No other federal regulatory authority, other
than the Commission, has jurisdiction over the proposals. No state regulatory
authority has jurisdiction over the financing proposals or the proposed
wholesale activities. The state commissions where NFR plans to do business have
jurisdiction over retail sales of electricity.
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Item 5. Procedure
The Commission is requested to issue an order permitting the
Application-Declaration to become effective as soon as possible with respect to
consummation of the transactions described herein.
National respectfully requests that the Commission's orders
herein be entered pursuant to the provisions of Rule 23. If a hearing is
ordered, Applicant-Declarants waive a recommended decision by a hearing officer,
or any other responsible officer of the Commission, and agree that the Division
of Investment Management, Office of Public Utility Regulation may assist in the
preparation of the Commission's decision and/or order; and request that the
Commission's order become effective upon issuance.
Item 6. Exhibits and Financial Statements
a) Exhibits
F-1 Opinion of Counsel
b) Financial Statements
Not applicable.
Item 7. Information as to Environmental Effects
The Proposed Transactions involve no action which will
significantly affect the quality of the environment.
No federal agency has prepared or is preparing an
environmental impact statement with respect to the Proposed Transactions.
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SIGNATURES
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused this Amendment
to the Application-Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Dated: January 28, 1997
NATIONAL FUEL RESOURCES, INC.
By: /s/Robert J. Kreppel
Robert J. Kreppel
President
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1 Such commodities might include propane, fuel oil and other fossil fuels, wood
chips, wastes, steam and other substances.
2 The purchase and sale of commodity-based derivatives in a commodity
business (generally, options, futures contracts and swaps) may be for the
purpose of hedging (or off-setting) an existing position under a contract
calling for physical delivery of a commodity, or as a substitute for a position
to be taken at a later time in a physical market. For example, to lock in the
price of a block of electricity or gas that will be needed in the future in
order to supply new customers. For an electricity/gas marketer, the purchase and
sale of energy-based derivatives may be a less risky means to take a position in
a commodity than other alternatives, such as building expensive power plants or
purchasing and holding large inventories of a commodity.
3 This type of "fixed-for-floating swap" transaction was recently offered by
Oglethorpe Power Corp., the largest electric cooperative in the United States.
See Power Markets Week (McGraw-Hill, February 12, 1996), pp. 1-3.
4 It is not intended that such proposed reservation of jurisdiction
would in any way limit or restrict NFR's ability to make retail sales of
electricity outside the United States through "exempt wholesale generators" or
"foreign utility companies," as defined in Sections 32 and 33 of the Act,
respectively, subject to satisfying the specific requirements of those sections.
5 In this regard, it should be noted that one of the attractive features of
using exchange-traded commodities futures contracts (such as exist for
electricity, gas, and oil), in addition to their liquidity, is that they tend to
virtually eliminate counterparty credit risk due to the fact that the exchange
itself acts as the counterparty.
