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As filed with the Securities and Exchange Commission on July 26, 1999
File No. 70-09451
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
FORM U-1 APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Sierra Pacific Resources Nevada Power Company
6100 Neil Road 6226 West Sahara Avenue
Reno, Nevada, 89511 Las Vegas, Nevada 89146
(Name of company or companies filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent of each applicant or declarant)
Malyn K. Malquist Michael R. Niggli
Chairman of the Board, President President and Chief Operating Officer
and Chief Executive Officer Nevada Power Company
Sierra Pacific Resources 6226 West Sahara Avenue
6100 Neil Road Las Vegas, Nevada 89146
Reno, Nevada, 89511 (702) 367-5000
(702) 834-3600
(Name and addresses of agents for service)
--------------------------------------------
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application to:
Clifford (Mike) M. Naeve, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.
Washington, D.C. 20005
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Introduction and Request for Commission Action
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding
Company Act of 1935 (the "Act"), this Application requests that the Securities
and Exchange Commission (the "SEC" or "Commission") approve a merger between
Sierra Pacific Resources ("Sierra Pacific"), which is an exempt intrastate
holding company under the Act, and Nevada Power Company ("Nevada Power"), with
Nevada Power to become a wholly-owned subsidiary of Sierra Pacific (the
"Transaction"). Herein, Sierra Pacific and Nevada Power collectively are
referred to as the "Applicants." The Applicants also request an order under
Section 3(a)(1) of the Act declaring Sierra Pacific exempt from all provisions
of the Act except Section 9(a)(2) following consummation of the Transaction.
Nevada Power is an electric utility company under the Act. Sierra
Pacific owns all of the common stock of Sierra Pacific Power Company ("SPPC"),
which also is an electric and gas utility company under the Act. The Transaction
will not impact SPPC's structure; SPPC will continue to be a wholly-owned
subsidiary of Sierra Pacific, and will become a sister company to Nevada Power.
The Transaction is designed to create a merged company that will be able to
participate more effectively in the increasingly competitive energy marketplace.
The Transaction will be governed by the terms of an Agreement and Plan
of Merger dated as of April 29, 1998 (the "Merger Agreement"), by and among
Nevada Power, Sierra Pacific, Desert Merger Sub, Inc. ("Desert Merger Sub"), and
Lake Merger Sub, Inc. ("Lake Merger Sub"). Sierra Pacific will create two
wholly-owned, special purpose subsidiary corporations named Desert Merger Sub
and Lake Merger Sub, both to be Nevada corporations. Under the terms of the
Merger Agreement, first, Lake Merger Sub will be merged into Sierra Pacific,
with Sierra Pacific as the surviving corporation. Immediately thereafter, Nevada
Power will be merged into Desert Merger Sub. Desert Merger Sub, which will be
the surviving corporation, will then immediately change its name to Nevada Power
Company. It is through this second step that Nevada Power will become a
subsidiary of Sierra Pacific.
The Nevada Power Board of Directors ("Nevada Power Board") and the
Sierra Pacific Board of Directors ("Sierra Pacific Board") approved the
Transaction on April 29, 1998. A majority of both the Nevada Power and Sierra
Pacific common shareholders voted in favor of the Transaction in separate
meetings held on October 9, 1998. A registration statement on Form S-4, which
includes a Prospectus (the "Registration Statement") was filed with the
Commission on September 4, 1998.
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The Transaction is conditioned, among other things, upon approval by
the SEC, the Public Utilities Commission of Nevada ("Nevada PUC") and the
Federal Energy Regulatory Commission ("FERC"), and on the expiration or
termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (as amended) (the "HSR Act"). The Applicants
filed the required notices pursuant to the HSR Act on February 16, 1999, and
refiled on March 19, 1999. The applicable waiting period under the HSR Act
expired on April 18, 1999.
For the Commission to approve the Transaction, Section 10 of the Act
requires the Commission to find that the Transaction will tend towards the
economical and efficient development of an integrated public-utility system and
that state laws have been complied with. The Transaction clearly satisfies these
requirements. While Section 10 also permits the Commission to disapprove an
acquisition if certain adverse circumstances would result - such as undue
concentration of control or other harm to the public interest or to the
interests of investors or consumers - these adverse circumstances are not
present here. Accordingly, the Applicants submit that the Transaction meets all
requirements of Section 10.
With respect to the exemption requested under Section 3(a)(1), the
holding company system must meet the statutory requirements of the exemption
and, in addition, the Commission must not find that the exemption would be
detrimental to the public interest or the interests of investors or consumers.
The Applicants submit that these criteria are satisfied as well.
The Applicants request expedited treatment of this application, so
that upon receipt of other regulatory approvals, Sierra Pacific and Nevada Power
will be in a position to consummate the Transaction promptly. Unless otherwise
indicated, all financial information set forth herein is for the fiscal year
ended December 31, 1998.
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Item 1. Description of Proposed Transaction.
A. Description of the Parties to the Transaction.
1. Sierra Pacific.
Sierra Pacific is a public utility holding company incorporated in the
State of Nevada, which is exempt from regulation by the Commission under the Act
(except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and
by order of the Commission.1 Sierra Pacific is headquartered in Reno, Nevada,
with operating subsidiaries primarily engaged in the energy and utility
businesses.
SPPC, the principal subsidiary of Sierra Pacific, is a public utility
incorporated in the State of Nevada. SPPC provides electric service to
approximately 294,000 retail customers in northern Nevada and northeastern
California. SPPC also sells electric power at wholesale. In the Reno/Sparks area
of northwestern Nevada, SPPC distributes natural gas at retail to approximately
105,000 customers and provides water service to about 67,000 customers. During
1998, 87% of SPPC's revenues were from retail sales of electricity, natural gas
and water in Nevada, 5% from retail sales of electricity in California and 8%
from wholesale sales of electricity and gas. SPPC's 1998 electric and gas
operating revenues, which totaled $685.2 million, were comprised of its electric
business ($585.7 million, or 85%) and its natural gas business ($99.5 million,
or 15%). Of these 1998 electric and gas operating revenues, $644.5 million, or
94% were from sales in Nevada and $40.7 million, or 6% were from sales in
California. In addition SPPC's water business operating revenues were $49.1
million. As of December 31, 1998, SPPC's net utility plant in service was $ 1.6
billion. A map of SPPC's electric/gas service area is attached as Exhibit E-1.
During 1998, the peak electric demand experienced by SPPC was 1423
megawatts ("MW"). SPPC served this demand, plus a reserve margin, with a
combination of the following: (i) 1049 MW of power generated by plants owned by
SPPC, (ii) 323 MW of power purchased pursuant to long term contracts, and (iii)
additional firm and short-term power purchases. SPPC's fuel requirements for
electric generation were provided by natural gas (60.7%), coal (39.0%) and oil
(0.3%).
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1 Sierra Pacific Resources, Holding Co. Act Release No. 24566 (Jan. 28,
1988), aff'd, Environmental Action, Inc. v. SEC, 895 F.2d 1255 (D.C. Cir.
1990).
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As of December 31, 1998, SPPC's electric transmission facilities
consisted of approximately 4,000 overhead pole line miles and 81 substations.
Its electric distribution facilities consisted of approximately 9,000 overhead
pole line miles, 4,500 underground cable miles and 178 substations.
SPPC's natural gas business consists of providing local distribution
service in the Reno/Sparks area that accounted for $99.5 million in 1998
operating revenues; 13.6% of total SPPC operating revenues. SPPC has contracted
for firm winter-only and annual natural gas supplies with Canadian and domestic
suppliers to meet the firm gas requirements of its local distribution and
electric operations. The contracts total 157,000 decatherms per day through
March 1999; 93,000 decatherms per day through April 1999; 78,000 decatherms per
day for May through October 1999; and 65,000 decatherms per day for the
remainder of 1999. SPPC's firm natural gas supply is supplemented with natural
gas storage services and supplies from a Northwest Pipeline Company facility
located at Jackson Prairie in southern Washington and a liquid natural gas
storage facility. For 1998, SPPC's total local gas distribution supply
requirements were 14.9 million decatherms and its electric generating fuel
requirements were 35 million decatherms. As of December 31, 1998, SPPC owned and
operated 1,296 miles of three-inch equivalent natural gas distribution lines.
SPPC is subject to regulation by the Nevada PUC and the California
Public Utilities Commission ("California PUC") with respect to its rates for
retail sales of electricity as well as terms of service, issuance of certain
securities, siting of and necessity for generation and certain transmission
facilities, accounting and other matters. The Nevada PUC also has jurisdiction
with respect to SPPC's gas and water business. In addition, SPPC is subject to
regulation by FERC under the Federal Power Act with respect to rates for the
sale of electricity for resale, the terms and conditions for providing
interstate electric transmission service, and other matters. SPPC also is
subject to applicable federal and state environmental regulations.
Sierra Pacific is engaged in non-utility businesses, as well as
certain other utility businesses that are not jurisdictional under the Act,
through the following subsidiaries:
1. Tuscarora Gas Pipeline Company was formed as a wholly-owned
subsidiary in 1993 for the purpose of entering into a partnership (the Tuscarora
Gas Transmission Company or, "TGTC") with a subsidiary of TransCanada, a
non-affiliated Canadian natural gas transportation company, to develop,
construct and operate a natural gas pipeline to serve an expanding gas market in
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Reno, northern Nevada and northeastern California. Sierra Pacific has an
investment of approximately $15.5 million in this subsidiary. In 1995, TGTC
completed construction and began service of its 229-mile pipeline extending from
Malin, Oregon to Reno, Nevada. At Malin, Oregon, TGTC interconnects with Pacific
Gas Transmission Company ("PGT"), a major interstate natural gas pipeline
extending from Oregon to the U.S./Canadian border. The PGT system provides TGTC
customers access to natural gas reserves in the Western Canadian Sedimentary
basin, one of the largest natural gas reserve basins in North America. As an
interstate pipeline, TGTC provides only transportation service. During 1998,
SPPC and Sierra Pacific were the two largest customers of TGTC, contributing
89.3% and 7.6% of TGTC's revenues, respectively. Malin, Oregon began taking
service from TGTC during the later part of 1996. The Sierra Army Depot at
Herlong, California began taking service from TGTC during the later part of
1997. In 1998, TGTC began serving two new customers, the United States Gypsum
Company, located north of Empire, Nevada and HL Power Company located northwest
of Wendel, California.
2. Sierra Energy Company d/b/a e-three ("e-three") is an unregulated,
wholly-owned subsidiary that provides energy-related products and services both
inside and outside SPPC's service territory. e-three recently has entered into a
50% Nevada limited liability company, e-three Custom Energy Solutions LLC, with
a subsidiary of Nevada Power to do performance contracts and similar
energy-related services in southern Nevada.
3. Lands of Sierra, Inc. ("LOS") was organized in 1964 to develop and
manage SPPC non-utility property in Nevada and California. In recent years,
Sierra Pacific has focused on selling the LOS properties and the properties
remaining include only vacant land in Nevada and land leases in the Lake Tahoe
region.
4. Sierra Pacific Energy Company ("SPEC"), which is developing a
customer information system for the energy industry. SPEC also is engaged in
providing certain products and services in Nevada through a partnership with
Enable, which is a partnership consisting of KN Energy and PacifiCorp
subsidiaries.
Sierra Pacific also has four immaterial subsidiaries. Three of these
subsidiaries are no longer actively engaged in business activities, namely
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Sierra Water Development Company (a subsidiary formerly engaged in water
exploration activities in northern Nevada), Sierra Gas Holdings Company (a
subsidiary formerly engaged in gas and oil exploration) and Great Basin Energy
Company (a subsidiary formerly engaged in generation activities in northern
Nevada). The fourth subsidiary, SPR Media Group, was established to explore
fiber optics opportunities in Nevada but never engaged in business activities.
The common stock of Sierra Pacific, par value $1 per share ("Sierra
Pacific Common Stock"), is listed on the New York Stock Exchange (the "NYSE"),
under the symbol SRP. As of the close of business on March 16, 1999, there were
31,013,571 shares of Sierra Pacific Common Stock issued and outstanding.
For the year ended December 31, 1998, Sierra Pacific's operating
revenues on a consolidated basis were approximately $741.8 million, of which
$7.5 million are attributable to non-utility activities. Consolidated assets of
Sierra Pacific and its subsidiaries at December 31, 1998, were approximately
$2.0 billion, of which approximately $1.6 billion consisted of net utility plant
and equipment.
Sierra Pacific's principal executive office is located at 6100 Neil
Road, Reno, Nevada, 89511. At December 31, 1998, Sierra Pacific and its
subsidiaries employed 1,476 employees, of which 1,446 were employed by SPPC.
More detailed information concerning Sierra Pacific and its
subsidiaries is contained in Sierra Pacific's and SPPC's Annual Reports on Form
10-K for the year ended December 31, 1998, which are incorporated herein by
reference as Exhibits G-1 and G-3, respectively.
2. Nevada Power.
Nevada Power is a public utility, incorporated in the State of Nevada,
that provides retail electric service predominantly to the more than 1.3 million
residents of Clark County, Nevada, with limited service provided to the Federal
Department of Energy (U.S. Government Test Site) in Nye County, Nevada. Both
Clark County and Nye County are located in southern Nevada. Nevada Power also
sells electric power at wholesale.
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Nevada Power owns plants with generating capacity totaling 1,939 MW.
Nevada Power purchases an additional 750 MW of generating capacity, including
(i) 235 MW of Hoover Dam power purchased pursuant to a contract with the State
of Nevada, (ii) 210 MW of power purchased pursuant to a contract with Nevada
Sun-Peak Limited Partnership, an independent power producer, and (iii) 305 MW of
power purchased pursuant to contracts with four qualifying facilities. In
addition, Nevada Power has agreements with other suppliers to purchase 965 MW of
firm capacity and associated energy. During 1998, the peak demand experienced by
Nevada Power was 3,855 MW. Nevada Power served this demand, plus a reserve
margin, with a combination of its 1,939 MW of owned generating capacity, 750 MW
of purchased generating capacity and additional firm and short-term power
purchases. To obtain additional firm capacity and associated energy to meet peak
needs, Nevada Power utilizes a competitive bidding process and spot market
purchases. During 1998, 67% of the energy generated by Nevada Power's plants
came from coal-fired stations and 33% from natural gas-fired stations.
As of December 31, 1998, Nevada Power owned approximately 1,650 miles
of electric transmission facilities (a portion of that under shared ownership),
114 transmission and distribution substations, and a distribution system
consisting of approximately 3,162 overhead pole line miles and 9,338 underground
cable miles.
Nevada Power is subject to regulation by the Nevada PUC with respect
to its rates for retail sales of electricity as well as terms of service,
issuance of certain securities, siting of and necessity for generation and
certain transmission facilities, and accounting and other matters. In addition,
Nevada Power is subject to regulation by FERC under the Federal Power Act with
respect to rates for the sale of electricity for resale, the terms and
conditions for providing interstate electric transmission service, and other
matters. Nevada Power is also subject to applicable federal and state
environmental regulations.
The common stock of Nevada Power, par value $1 per share ("Nevada
Power Common Stock"), is listed on the NYSE and the Pacific Exchange, Inc.,
under the symbol NVP. As of the close of business on March 2, 1999, there were
51,265,117 shares of Nevada Power Common Stock issued and outstanding.
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For the year ended December 31, 1998, Nevada Power's utility operating
revenues on a consolidated basis were approximately $874 million. Consolidated
assets of Nevada Power and its subsidiaries at December 31, 1998, were
approximately $2.6 billion, of which approximately $1.9 billion consisted of net
electric plant and equipment. Nevada Power does not have any material revenue
generating subsidiaries. Nevada Power has the following subsidiaries, listed by
category, that it considers immaterial:
1. Non-profit making subsidiaries created to assist other business
activities.
Commonsite Inc. - A Nevada corporation owned entirely by Nevada Power.
It owns the real estate occupied by Reid Gardner 4, a coal fired plant owned
jointly by Nevada Power and the California Department of Water Resources.
NVP Capital I - A Delaware corporation needed for Nevada Power to
issue QUIPS, Quarterly Income Preferred Securities.
NVP Capital II - A Delaware corporation needed for Nevada Power to
issue QUIPS, Quarterly Income Preferred Securities.
2. Subsidiaries generating no profits.
Nevada Electric Investment Company ("NEICO") - A Nevada corporation
owned entirely by Nevada Power. In the past, NEICO has conducted energy-related
business activities. It also owns two corporations that once were involved in
mining activities (Genwal Coal Co. and Castle Valley Resources, Inc.), and
another corporation that has never conducted business (Alkan Mining Company).
All three of these corporations are listed below. NEICO was inactive for a
period of years, and in recent months, has obtained ownership interests in three
new limited liability companies involved in various energy-related activities.
None of these three companies, listed below, have yet made a profit.
Northwind Las Vegas, L.L.C. - NEICO owns 50% of this Nevada limited
liability company. UTT Nevada. Inc., an affiliate of Unicom, owns the other
50%. Northwind Las Vegas, L.L.C. develops opportunities for district heating and
cooling within Nevada.
Northwind Aladdin, LLC - NEICO owns 25% of this Nevada limited
liability company. UTT Nevada. Inc., an affiliate of Unicom, owns the other 75%.
Northwind Aladdin, LLC will construct, own and operate district heating and
cooling facilities at the Aladdin casino complex, currently under construction.
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e-three Custom Energy Solutions, LLC - NEICO owns 50% of this Nevada
limited liability company, and e-three, a wholly owned subsidiary of Sierra
Pacific, owns the other half. This limited liability subsidiary recently was
formed to enter into performance contracts and similar energy-related services
in southern Nevada.
3. Subsidiaries no longer actively engaged in business activities.
Genwal Coal Co. - A Nevada corporation owned entirely by NEICO.
Inactive but kept in good standing. Assets were sold on January 1, 1995.
Castle Valley Resources Inc. - A Nevada corporation owned entirely by
NEICO. Inactive but kept in good standing. Previously, it was the sales arm of
Genwal Coal Co.
4. Subsidiaries never engaged in business activities.
Alkan Mining Company - A Nevada corporation owned entirely by NEICO
that has never conducted business but has been kept in good standing.
Nevada Power recently created several Nevada limited liability
companies that have conducted no business activities but are in good standing.
They are: Nevada Power Services, LLC; Nevada Power Choices, LLC; Nevada Power
Solutions, LLC; Las Vegas Energy, LLC; Nevada Solutions, LLC; Power Choice, LLC;
Nevada Power Energy Services, LLC; and Nevada Choices, LLC.
Nevada Power's principal executive office is located at 6226 West
Sahara Avenue, Las Vegas, Nevada, 89146. At December 31, 1998, Nevada Power
employed approximately 1,888 employees.
More detailed information concerning Nevada Power is contained in
Nevada Power's Annual Report on Form 10-K for the year ended December 31, 1998,
which is incorporated herein by reference as Exhibit G-5.
3. Desert Merger Sub and Lake Merger Sub.
Sierra Pacific created Desert Merger Sub and Lake Merger Sub, both
Nevada corporations, solely for the purpose of merging with Nevada Power and
Sierra Pacific, respectively. Neither Desert Merger Sub nor Lake Merger Sub is
engaged in any business operations. The mailing address for Desert Merger Sub
and Lake Merger Sub is the same as that for Sierra Pacific.
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B. Description of the Transaction.
1. Reasons for the Transaction.
Nevada Power and Sierra Pacific view the Transaction as a natural
outgrowth of utility deregulation and restructuring that is reshaping the
electric industry in Nevada, California and throughout the nation. Pursuant to a
Nevada law (Assembly Bill 366, codified at Nev. Rev. Stat. ss.ss. 704.961-990
(1997)), electric competition for retail sales service must commence in the
state no later than December 31, 1999. However, the Nevada PUC has discretion to
extend the commencement date. Currently, retail electric competition is
scheduled to commence March 1, 2000. The Transaction joins two companies of
similar market capitalization, with a common vision of the future of the utility
and energy industries and with complementary operations that almost exclusively
are in one state. The Transaction is expected to provide substantial strategic
and financial benefits to the stockholders of the two companies, as well as to
their employees and customers and the communities which they serve. The Nevada
Power Board and the Sierra Pacific Board believe that such benefits include:
o Support for Utility Deregulation. The Transaction coincides with Nevada
electric utility deregulation and ongoing California electric utility
deregulation and is intended to establish a combined company that, by
providing customers multiple energy products and services and lower costs
than the companies could achieve individually, will have the ability to
compete more effectively in unregulated markets and serve customers more
cost-effectively in regulated markets. Nevada Power and SPPC also propose
selling all of their generating plants. Under the divestiture proposal and
subject to ongoing state resource planning requirements, amounts raised by
the sale will be reinvested primarily in new transmission and distribution
facilities. Nevada Power and SPPC believe that divestiture of their
generating capacity will facilitate the move to a competitive market for
electricity in Nevada and elsewhere. The divestiture proposal is contingent
upon consummation of the Transaction and receipt of necessary
authorizations. Through Nevada Power and SPPC, the combined company will
offer regulated retail electric distribution service throughout most of
Nevada and a small portion of northern California and offer regulated gas
distribution and water service in the Reno and Sparks areas of northern
Nevada. Unregulated subsidiaries of Sierra Pacific will engage in natural
gas and electricity marketing and offer energy related products and
services.
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o Competitive and Strategic Position. The combination of the companies'
complementary expertise and vision, including Nevada Power's substantially
larger and more diverse electric customer base and its customer expertise
and Sierra Pacific's customer and marketing expertise in both electricity
and natural gas markets, provides the combined company with the size and
scope to be an effective competitor in the emerging and increasingly
competitive markets for transporting and distributing energy and energy
services. The Transaction will create a company with the ability to develop
and market competitive new products and services and provide integrated
energy solutions for wholesale and retail customers.
o Ability to Better Manage Growth. Both Nevada Power and SPPC have
experienced high rates of service territory growth. Five-year average
increases in retail electric kWh sales and customers for the companies,
separately and as combined, compared to industry averages are as follows:
5-Year Average 5-Year Average
Retail Electric kWh Increase in
Company Sales Increases Customers
------- ------------------- --------------
Nevada Power................... 8% 7%
SPPC........................... 5% 3%
Combined Company............... 7% 5%
Industry Average............... 2% 1%
The Nevada Power Board and the Sierra Pacific Board believe that the
combined company will be in a better position to finance and manage the
construction and operational changes required to meet the increasing needs
of customers in Southern and Northern Nevada while also maintaining
stronger earnings than either company could standing alone. The Transaction
is expected to have a positive effect on cash flow of the combined
companies.
o Expanded Management Resources and Employment Opportunities. The combined
company will be able to draw upon a larger and more diverse pool of
management for leadership in an increasingly competitive environment. As a
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company more able to effectively respond to competitive pressures, the
combined company will offer better prospects for employees and be better
able to retain and attract the most qualified employees. Employees will
benefit from a larger and stronger company with job opportunities in
additional locations.
o Community Development. The combined company will continue to play a leading
role in the economic development of the communities served by Nevada Power
and SPPC and will continue the commitment to philanthropic and volunteer
programs currently maintained by the two companies and their subsidiaries.
These communities also will benefit from increased competition and lower
prices for regulated and deregulated natural gas and electricity and energy
related products and services.
o Potential Cost Savings and Cost Avoidances Resulting from the Transaction.
Estimated potential savings and cost avoidances expected to be achieved by
the two companies after the Transaction has been limited to quantifiable
amounts, as determined by the managements of Nevada Power and Sierra
Pacific. Recognition has been given to those costs to be incurred in
achieving these potential savings and cost avoidances and to the time
required to implement plans designed to integrate operations. These
estimated savings and cost avoidances are attributable to the Transaction
and do not include other types of savings and cost avoidances that might be
achieved without a combination of the companies. In addition, Sierra
Pacific will continue efforts already underway by Nevada Power and SPPC to
increase productivity and reduce costs by redesigning and reengineering key
business processes. Operating synergies from the Transaction are estimated
to generate total cost savings and cost avoidances, net of $125 million
estimated costs to achieve such savings and avoidances, of $322 million
over a ten-year period. In addition, the goodwill recorded as a result of
the Transaction will be amortized over a forty-year period and also will
represent a cost to achieve such savings and avoidances. The final
accounting treatment of the cost savings and cost avoidances and costs of
attaining them will depend upon the regulatory treatment accorded by the
Nevada PUC.
The major components of the anticipated cost savings and cost avoidances
identified by the managements of Nevada Power and Sierra Pacific are set
forth below.
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o Integration of corporate functions. The combined company will have the
ability to eliminate redundant functions in a variety of areas,
including accounting and finance, human resources, information
services, external relations, legal and executive administration. The
staffing levels for these functions are relatively fixed and do not
vary directly with changes in the number of employees or customers.
o Integration of corporate programs. The combined company will be able
to integrate various corporate and administrative functions, thereby
reducing certain non-labor costs in the areas of insurance,
advertising, professional services, benefits plan administration,
credit facilities, association dues, postage, research and development
and shareholder services. In addition, future expenditures in the area
of information systems that would be made by each company on a
stand-alone basis will be reduced for the combined company. Additional
expenditures will be reduced through the more efficient management of
investment in other technology areas, including personal computers,
other hardware and related software, and data center requirements.
o Integration of competitive retail services. Following the commencement
of retail electric competition in Nevada, retail electric service and
metering service will be offered on a competitive basis. Currently,
Nevada Power and SPPC provide retail electric service and metering
service on a separate, regulated basis. However, as a result of the
electric restructuring, Nevada Power and SPPC will provide these
services on a competitive basis through a jointly-owned retail service
company and a metering company. The Applicants intend to consolidate
as many other business practices as make economic sense.
o Integration of customer support functions. The combined company will
be able to integrate related customer support functions in the areas
of customer service, marketing and sales, and other support services,
such as purchasing and materials management. The staffing levels in
these functions also do not increase or decrease linearly with the
number of customers.
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o Streamlining of inventories and purchasing economics. The combined
company will be able to centralize some purchasing and inventory
functions. Inventory may be shared across locations. Purchasing
leverage of the combined company is expected to lead to materials and
services volume discounts.
Most of the estimated cost savings and cost avoidances as described above
are expected to be achieved through personnel reductions involving the
elimination of approximately 250 duplicative positions. Nevada Power and
Sierra Pacific jointly will develop an integration management plan, which
will examine the manner in which to best organize and manage the businesses
of Nevada Power and Sierra Pacific following consummation of the
Transaction and to identify duplicative positions in corporate and
administrative functions. Both companies are committed to achieving cost
savings and avoidances resulting from personnel reductions through
attrition, strictly controlled hiring, reassignment, retraining and
voluntary separation programs.
2. Merger Agreement.
The Merger Agreement calls for a merger of equals between the two
companies - Nevada Power and Sierra Pacific. The Merger Agreement provides for a
holding company structure in which Sierra Pacific will be the surviving parent
company, and Nevada Power and SPPC will be the operating utility subsidiaries.
Sierra Pacific also will continue to own the non-utility subsidiaries that it
owns today.
The Merger Agreement provides for a two-step merger in which Nevada
Power will become a subsidiary of Sierra Pacific. The purpose of this two-step
process is to allow Nevada Power to become a first-tier subsidiary of Sierra
Pacific without generating any adverse tax consequences for any of the parties.
At the conclusion of the process, current Sierra Pacific and Nevada Power
shareholders will become Sierra Pacific shareholders.
In the first step, Lake Merger Sub will merge with and into Sierra
Pacific, with Sierra Pacific continuing as the surviving corporation. This step
is necessary because, as discussed below, each share of pre-merger Sierra
Pacific Common Stock may be exchanged for $37.55 in cash or 1.44 shares of
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Sierra Pacific Common Stock. The exchange of pre-merger stock for cash or stock
occurs as a result and at the time of this first merger.
The second step of the process commences immediately after this first
step. Nevada Power will merge with and into Desert Merger Sub. Desert Merger
Sub, which will be the surviving corporation, will then immediately change its
name to Nevada Power Company. It is through this second step that Nevada Power
will become a subsidiary of Sierra Pacific.
Under the Merger Agreement, each share of Sierra Pacific and Nevada
Power Common Stock will be converted into the right to receive cash and/or
Sierra Pacific Common Stock. Each owner of Sierra Pacific Common Stock prior to
the first merger will be entitled to receive either 1.44 shares of Sierra
Pacific Common Stock or $37.55 in cash in exchange for each share of Sierra
Pacific Common Stock that it owns. Each owner of Nevada Power Common Stock prior
to the second merger will be entitled to receive either 1 share of Sierra
Pacific Common Stock or $26.00 in cash in exchange for each share of Nevada
Power stock that it owns. The cash consideration for Sierra Pacific and Nevada
Power stock represents a 5% premium per share of Sierra Pacific Common Stock or
Nevada Power Common Stock, respectively based on the 10-day average share price
of each company's stock prior to the Boards' approval of the Merger Agreement on
April 29, 1998.
The total amount of cash to be paid to shareholders of pre-merger
Sierra Pacific Common Stock in the first merger is $151.6 million, and the total
amount to be paid to shareholders of Nevada Power Common Stock in the second
merger is $304.6 million. The Merger Agreement provides for contingencies should
shareholders elect to convert more or less than this amount of their shares to
cash. The Merger Agreement also provides for special treatment of shareholders
of less than 100 shares. Sierra Pacific will finance the approximately $460
million necessary to fund the cash consideration provided for under the Merger
Agreement. The exact sources and precise methods of financing this amount have
not yet been determined.
The Merger Agreement provides that all outstanding shares of Nevada
Power preferred stock will be redeemed or otherwise retired prior to the
consummation of the Transaction. At any time upon 30 days notice to the holders
of the Nevada Power preferred stock, such stock is redeemable at a price of
$21.00 per share for the 5.20% and 5.40% series and at $20.25 per share for the
16
<PAGE>
4.70% series. Nevada Power has not determined precisely when or how it will
retire the Nevada Power preferred stock.
The Transaction is subject to certain closing conditions, including
governmental authorizations, consents, orders or approvals. The requisite
shareholder approvals have been obtained.
The Merger Agreement may be terminated under certain circumstances,
including: by mutual written consent of Sierra Pacific and Nevada Power; by
either party if the Transaction is not consummated by October 29, 1999 (which
date will be extended to April 29, 2000 in certain circumstances); by either
party if any state or federal law or court order prohibits consummation of the
Transaction; by a non-breaching party if there occurs a material breach by the
other party of the Merger Agreement which is not cured within 20 days after
notice; or by either party, in certain circumstances, as a result of a more
favorable third-party tender offer or business combination proposal with respect
to such party. The Merger Agreement requires that termination fees be paid in
certain circumstances, including if there is a willful breach of the Merger
Agreement or if, in certain circumstances, a business combination with a third
party is consummated within two and one-half years of the termination of the
Merger Agreement. The aggregate termination fees under these provisions is $52.5
million.
In connection with the Merger Agreement, Sierra Pacific and Nevada
Power entered into several related agreements, including employment agreements,
severance arrangements and confidentiality agreements. These related agreements
are described further in the Registration Statement (Ex. C-1).
3. Background and Negotiations Leading to the Transaction.
In recent years Nevada Power and Sierra Pacific have carefully
followed developments in energy regulatory policies at the federal level and in
Nevada and California that have substantially increased competition in the
markets for wholesale and retail electricity. Both companies recognized that
significant changes in the utility industry would result from these policy
developments. The companies believe that industry restructuring and economic
forces are likely to exert tremendous pressure on small and medium-sized
electric utilities, making it difficult for them to compete effectively with
larger utilities. As such, the two companies had exploratory discussions from
17
<PAGE>
time to time in recent years regarding a potential business combination between
Sierra Pacific and Nevada Power but no further steps were taken.
During February 1998, Mr. Michael Niggli, President and Chief
Operating Officer of Nevada Power, and Mr. Malyn Malquist, President, Chairman
of the Board and Chief Executive Officer of Sierra Pacific, talked about their
shared visions for Nevada Power and Sierra Pacific, and senior management of
each company began to discuss the potential benefits of a possible business
combination. The Nevada Power Board and the Sierra Pacific Board were advised of
these discussions in February and March 1998.
On March 5 and 6, 1998, a joint meeting was held in San Francisco
between Nevada Power and Sierra Pacific along with Nevada Power's financial
advisor PaineWebber Incorporated ("PaineWebber") and Sierra Pacific's financial
advisor SG Barr Devlin to discuss a possible business combination. As a result,
on March 10, 1998, Sierra Pacific and Nevada Power entered into a
confidentiality agreement pursuant to which they agreed to exchange non-public
information. Following these meetings, the companies commenced extensive due
diligence and exchanged information.
On March 12, 1998, at a meeting of the Nevada Power Board, Nevada
Power's senior management and representatives of PaineWebber, Nevada Power's
financial advisor, made a detailed presentation to the Nevada Power Board with
regard to a potential "merger of equals" business combination with Sierra
Pacific. At the conclusion of the meeting, the Nevada Power Board gave
management authorization to continue to explore a possible combination with
Sierra Pacific.
On March 13, 1998, at a meeting of the Sierra Pacific Board, Sierra
Pacific's senior management and representatives of SG Barr Devlin, Sierra
Pacific's financial advisor, briefed the Sierra Board with regard to a potential
"merger of equals" business combination with Nevada Power. The Sierra Pacific
Board authorized Mr. Malquist and Mr. Oldham, Vice President, Transmission
Services Group and Strategic Development of Sierra Pacific, to continue
discussions with Nevada Power regarding such a business combination.
Throughout the remainder of March and April 1998, representatives of
Sierra Pacific and Nevada Power held numerous discussions which focused
primarily on the issues of valuation, dividend policy, management and
18
<PAGE>
headquarters locations. On March 30, 1998, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") was retained to provide additional financial
advice and guidance to management and the Sierra Pacific Board. During April
1998, the Nevada Power Board and the Sierra Pacific Board were briefed
separately on the progress of negotiations, including reviews of the steps that
had been taken regarding due diligence and transaction structure, as well as
proposals regarding corporate names and headquarters locations, board
representation and senior management composition. The presentations described
potential strategic benefits of the transaction, the status of negotiations on,
and key terms and conditions of, the proposed Merger Agreement and the
regulatory plan for the transaction.
By the last week of April 1998, Nevada Power and Sierra Pacific had
agreed on a merger of equals transaction consisting of a cash election merger
where holders of Nevada Power Common Stock could elect to receive for each of
their shares either $26.00 in cash or one share of Sierra Pacific Common Stock
and holders of Sierra Pacific Common Stock could elect to receive for each of
their shares either $37.55 in cash or 1.44 shares of Sierra Pacific Common
Stock. The companies further agreed that following the Transaction, former
holders of Nevada Power Common Stock would own approximately 50.2% of the
outstanding Sierra Pacific Common Stock, and former holders of Sierra Pacific
Common Stock would own approximately 49.8% of the outstanding Sierra Pacific
Common Stock.
On April 29, 1998, the Sierra Pacific Board and the Nevada Power Board
each approved the Merger Agreement. Following the meetings of their respective
Boards, Sierra Pacific and Nevada Power executed the Merger Agreement on April
29, 1998 and publicly announced the proposed Transaction on April 30, 1998.
For a more detailed description of the background of the Transaction,
see pages 38-43 of the Registration Statement (Ex. C-1).
C. Management and Operations of the Applicants Following the
Transaction.
The Merger Agreement provides that the post-merger Sierra Pacific
Board of Directors will consist of 14 members, 7 to be selected by Sierra
Pacific and 7 to be selected by Nevada Power. Mr. Niggli (currently, President
and Chief Operating Officer of Nevada Power Company), and Mr. Malquist
(currently, Chairman, President and Chief Executive Officer of Sierra Pacific
19
<PAGE>
and SPPC) will be members of the Sierra Pacific Board of Directors after the
Transaction is consummated. Subject to affiliate rules promulgated by regulatory
agencies having jurisdiction over the matter, Mr. Niggli will become Chairman
and Chief Executive Officer of Sierra Pacific and Chairman of each of its
subsidiaries and Mr. Malquist will become President and Chief Operating Officer
of Sierra Pacific and President and Chief Executive Officer of the surviving
Nevada Power and SPPC.
The Merger Agreement provides that post-merger, the corporate
headquarters of Sierra Pacific and the principal offices of the natural gas and
water business units will be located in Reno, Nevada. The headquarters of SPPC
and the surviving Nevada Power will be located in Las Vegas, Nevada. Nevada
Power and SPPC will continue to operate as the utility subsidiaries of Sierra
Pacific.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by Sierra Pacific and Nevada Power, in connection with the
Transaction, including registration of securities of Sierra Pacific under the
Securities Act of 1933, and other related matters, are estimated as follows:
Commission filing fee for the
Registration Statement on Form S-4......................................$712,040
HSR filing fee...........................................................$45,000
Legal fees and expenses ..............................................$6,000,000
Accountants' fees.......................................................$160,000
Investment bankers' fees and expenses................................$15,400,000
Consultants and other (public relations, regulatory support,
travel, integration, printing, exchange listing fees, etc.)...........$3,682,960
----------
TOTAL (estimated) ..............................................$26,000,000
Item 3. Applicable Statutory Provisions.
A. Statement of Applicable Provisions.
Sections 9(a)(2), 10, and 3(a)(1) of the Act are directly or
indirectly applicable to the proposed Transaction.
20
<PAGE>
Under Section 9(a)(2), it is unlawful, without approval of the
Commission, under the standards of Section 10, for any person to acquire,
directly or indirectly, the securities of a public utility company, if that
person will, by virtue of the acquisition, become an affiliate of that public
utility and any other public utility or holding company. The term "affiliate"
for this purpose means any person that directly or indirectly owns, controls, or
holds with power to vote, five percent or more of the outstanding voting
securities of the specified company.
Pursuant to the Transaction, Sierra Pacific will acquire securities of
Nevada Power, a public utility. After the Transaction, Sierra Pacific will be
affiliated with two public utilities - SPPC and Nevada Power. Accordingly, the
Transaction requires Commission approval under the standards of Section 10.
Following the Transaction, Sierra Pacific believes, for reasons
explained below, that it will qualify for the intrastate exemption under Section
3(a)(1) of the Act, and requests an order granting such exemption. Under this
section, the Commission must exempt, by rule or order, any holding company if
that holding company, and each material public utility subsidiary company from
which the holding company derives any material part of its income, are
predominantly intrastate in character, and carry on their business in the state
in which they are organized, unless and except insofar as the Commission finds
the exemption detrimental to the public interest or the interest of investors or
consumers.
B. The Standards of Section 10.
The statutory standards to be considered by the Commission in
evaluating the Transaction are set forth in Sections 10(b), 10(c) and 10(f) of
the Act.
21
<PAGE>
1. Section 10(b).
Under Section 10(b) of the Act, the Commission must approve the
Transaction 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
the 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.
a. Detrimental "Interlocking Relations" or "Concentration of
Control."
The Transaction will not result in detrimental interlocking relations
or concentration of control. There currently are no common directors of Sierra
Pacific and Nevada Power, but following consummation of the Transaction there
may be common directors and officers of Sierra Pacific, SPPC and Nevada Power.
Such interlocking relationships, however, would serve to integrate the merging
companies, and are characteristic of virtually every merger transaction subject
to Section 9(a)(2). Thus, any interlocking relations which do occur will be of
the kind generally approved of by the Commission and will not be detrimental to
interests of consumers, investors or the public.
The Transaction also will not result in a detrimental concentration of
control. The expected increase in size resulting from the Transaction will not
make the merged company a large company. Instead, the Transaction will take two
22
<PAGE>
relatively small utility companies and combine them into one mid-sized company.
The merged company still will be much smaller than almost all of its neighboring
utilities and holding company systems such as Southern California Edison,
Pacific Gas & Electric, PacifiCorp and Bonneville Power Administration ("BPA"),
which are among the largest utilities in the country.2 As a consequence, the
merged company will not be able to dominate the region. Following the
Transaction, Sierra Pacific will have total utility assets of $3.1 billion,
total utility revenues of $1.4 billion, and will serve approximately 805,000
electric customers and 101,000 natural gas customers. However, as discussed
above, the Applicants intend to divest their electric generation assets. The
utility activities of Sierra Pacific following the Transaction will be confined
almost exclusively to Nevada. The Commission has approved a number of
transactions which resulted in holding companies of a much larger size.3
Section 10(b)(1) also requires the Commission to consider possible
anticompetitive effects of a proposed merger. In this case, the Commission has
concurrent jurisdiction with the Department of Justice (the "DOJ"), Federal
Trade Commission (the "FTC"), FERC and the Nevada PUC to consider the
competitive effects of the Transaction. On February 16, 1999, and March 19,
1999, the Applicants filed Notification and Report Forms with the DOJ and the
FTC, as required by the HSR Act, which contained a description of the
Transaction's effects on competition. Consummation of the Transaction is
conditioned on the expiration or termination of the applicable waiting period
under the HSR Act, which expired on April 18, 1999. In addition, the Applicants
have made filings with the Nevada PUC and FERC, the agencies having immediate
jurisdiction over Nevada Power's and SPPC's utility operations. These filings,
which are attached as Exhibits D-1 and D-3, contain detailed explanations of why
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2 As of December 31, 1997, Pacific Gas & Electric Company had $25.1 billion
in utility assets and generated $9.5 billion in operating revenues for
1997. PacifiCorp had $9.1 billion in utility assets as of December 31, 1997
and $3.7 billion in operating revenues for 1997.
3 See, e.g., TUC Holding Co., File No. 70-8953, Rel. No. 35-26749 (issued
August 1, 1997). TUC Holding has utility assets of approximately $19.6
billion, operating utility revenues of approximately $6.9 billion and
approximately 2.7 million utility customers. See also Entergy Corp., 51
S.E.C. 869 (combined utility assets after Gulf States acquisition of $21
billion).
23
<PAGE>
the Transaction will not have any adverse competitive effect. FERC evaluated the
Transaction's competitive effects and issued an order dated April 15, 1999,
approving the Transaction upon finding that it is in the public interest and
will not adversely affect competition. The FERC conditioned its approval of the
Transaction on the Applicants' commitment to divest their generation assets. A
copy of the FERC order is attached as Exhibit D-4. Following its evaluation of
the competitive effects of the Transaction, the Nevada PUC issued an order dated
January 4, 1999, approving the Transaction, subject to certain conditions. A
copy of the Nevada PUC order is attached as Exhibit D-2. Also, a June 11, 1999
settlement accepted by the Nevada PUC, attached as Exhibit D-5, provides that
the Nevada PUC has fully and finally authorized the Applicants to consummate the
Transaction and the Nevada PUC will withdraw its intervention at the SEC. See
Exhibit D-5, at p. 10, section 3.4.
The testimony of Peter Fox-Penner, which is Exhibit SPNP-17 to the
FERC application attached as Exhibit D-3 hereto, explains why the Transaction
will not have anticompetitive effects. The Applicants are located in the Western
System Coordinating Council ("WSCC"). Due to the structure of the WSCC market,
the Transaction cannot cause a reduction in competition. First, the Applicants
are relatively small utilities in the WSCC. Together, the Applicants own a total
of approximately 3,800 MW of generation capacity, representing slightly more
than one-tenth of the WSCC surplus capacity. The amount of the Applicants'
generation capacity pales even further when compared to the approximately
155,000 MW of generation resources located in the WSCC. All of the Applicants'
generating capacity is needed to serve their native load customers. Because the
Applicants do not own enough generating capacity to meet their native load
obligations, they are net power purchasers by a wide margin in both short term
and long term power markets. Not only are the Applicants small when compared to
the WSCC as a region, but they are also small compared to the control areas with
which they are interconnected, such as BPA, Pacific Gas & Electric, Southern
California Edison and PacifiCorp. Second, Sierra Pacific does not make sales
into Nevada Power's control area, and visa versa. Because the Applicants do not
compete with each other in their respective control areas, the proposed merger
does not cause the loss of a competitor or any increase in market power in those
control areas. Third, with one insignificant exception, Nevada Power and SPPC
are interconnected only through different utility systems. SPPC's primary
interconnections are with systems to the north and northwest of Nevada, whereas
Nevada Power's primary interconnections are to the south and southwest of
24
<PAGE>
Nevada. The only system that has significant interconnections with both Nevada
Power and SPPC is the PacifiCorp-East system to the east. As a consequence, the
merger would cause no concentration of market power in the bulk power markets of
the systems directly connected to the Applicants. Fourth, because the Applicants
are such small players in the regional bulk power market as a whole, their
combination cannot cause any meaningful or measurable increase in market share
in regional markets outside of their own service territories. Hence, the
Commission can conclude that the Transaction will have no adverse competitive
effects. Indeed, for the reasons stated below, the Commission may conclude that
the Transaction will facilitate even greater competition in electric wholesale
and retail markets.
Under a new Nevada law (Assembly Bill 366, codified at Nev. Rev. Stat.
sections 704.961-990 (1997)), Nevada Power's and SPPC's retail electric service
territories in Nevada will be opened to retail competition commencing March 1,
2000. FERC already has introduced competition into wholesale electric markets
through its many orders authorizing market-based rates for wholesale power sales
and a series of orders mandating non-discriminatory access to electric
transmission facilities. The Transaction will facilitate both state and federal
efforts to increase competition in electric markets because, as part of the
merger, the Applicants have committed to the Nevada PUC to divest their
generation assets and, subject to state resource planning approvals, invest the
proceeds in the expansion of their transmission and distribution capacity. This
expansion is important because there is limited import capability into the
Nevada Power and SPPC service territories. Increasing the import capability will
expand the number of suppliers that can compete to serve customers in the Nevada
electricity market. The goal of generation divestiture is to balance market
power mitigation while retaining the value of the underlying assets. The
divestiture proposal is contingent upon consummation of the Transaction and
receipt of necessary authorizations. The exact timing of the closing of the
divestiture depends on the date that the Applicants obtain all of the necessary
regulatory approvals, including FERC approval of rate schedules for the sale of
power by the new owners of the divested generation units. The Applicants
anticipate that the divestiture will be completed 12 to 18 months after
consummation of the Transaction. However, the divestiture of jointly-owned
plants may take additional time due to conditions in existing participation
agreements, such as rights of first refusal. Another pro-competitive benefit
accompanying the merger is the Applicants' commitment to either join a regional
transmission organization ("RTO") or form an independent "Transco" that would
operate the Applicants' transmission facilities, within no more than three
years.
25
<PAGE>
The additional benefits accompanying the Transaction are outlined
below in Items 1(B)(1) and 3(B)(2) of this Application, and are benefits which
the Commission has weighed against any concerns about concentration of control
it has had in other transactions. See American Electric Power Co., 46 S.E.C.
1299 (1978).
For all of these reasons, the Applicants believe that the Transaction
will not result in a concentration of control which will be detrimental to the
public interest, but will offer the potential to facilitate an actual increase
in competition in regional electricity markets.
b. Fairness of Consideration.
Section 10(b)(2), as applied to the Transaction, provides that the
Commission shall approve the Transaction unless it finds that the consideration
paid by Sierra Pacific to the shareholders of Nevada Power is not reasonable or
does not bear a fair relation to the earning capacity of the utility assets
underlying the Nevada Power shares. In its determination as to whether or not
consideration for an acquisition meets the fair and reasonable test of Section
10(b)(2), the Commission has considered whether the price was decided as the
result of arm's-length negotiations4 and whether each party's Board of Directors
has approved the purchase price.5 The Commission also considers the opinions of
investment bankers6 and the earnings, dividends, and book and market value of
the shares of the company to be acquired.7
Pursuant to the Merger Agreement, each owner of pre-merger Sierra
Pacific Common Stock will be entitled to receive either 1.44 shares of
post-merger Sierra Pacific Common Stock or $37.55 in cash in exchange for each
share of pre-merger Sierra Pacific Common Stock that it owns ("Sierra Pacific
Merger Consideration"). Each owner of Nevada Power Common Stock will be entitled
to receive either 1 share of post-merger Sierra Pacific Common Stock or $26.00
- ---------------
4 American National Gas Co., 43 S.E.C. 203 (1966).
5 Consolidated National Gas Co., 45 S.E.C. 672 (1990).
6 Id.
7 Northeast Utilities, 42 S.E.C. 963 (1966).
26
<PAGE>
in cash in exchange for each share of Nevada Power stock that it owns ("Nevada
Power Merger Consideration"). The cash consideration for Sierra Pacific and
Nevada Power stock represents a 5% premium per share of Sierra Pacific Common
Stock or Nevada Power Common Stock, respectively based on the 10-day average
share price of each company's stock prior to the Boards' approval of the Merger
Agreement on April 29, 1998. Pursuant to the Merger Agreement, approximately
$151.6 million in cash and approximately 38,740,334 shares of the Sierra Pacific
Common Stock will constitute the Sierra Pacific Merger Consideration, and
approximately $304.6 million in cash and approximately 39,051,502 shares of
Sierra Pacific Common Stock will constitute the Nevada Power Merger
Consideration.
The consideration to be paid to shareholders of the pre-merger
companies was the result of arm's-length negotiations between the management and
financial and legal advisors of Sierra Pacific and Nevada Power over a period of
several months, as detailed in Item 1(B)(3) above. The Boards of Directors of
Sierra Pacific and Nevada Power approved the Transaction in separate meetings
held on April 29, 1998.
In addition, nationally-recognized investment banking firms retained
separately by Sierra Pacific and Nevada Power have reviewed extensive
information concerning the Applicants and analyzed the respective conversion
ratios employing several valuation methodologies. In connection with the
approval of the Merger Agreement, (i) Sierra Pacific's Board of Directors
considered the opinions of its financial advisors, SG Barr Devlin and Merrill
Lynch, to the effect that the aggregate consideration to be received upon
consummation of the Transaction is fair, from a financial point of view, to the
holders of Sierra Pacific Common Stock, and (ii) Nevada Power's Board of
Directors considered the opinion of its financial advisor, PaineWebber, to the
effect that the aggregate consideration to be received by Nevada Power common
shareholders in connection with the Transaction is fair to such holders from a
financial point of view. Each of the fairness opinions of SG Barr Devlin,
Merrill Lynch and PaineWebber are attached hereto as Exhibits H-1, H-2, and H-3,
respectively, and incorporated herein by reference.
In rendering their fairness opinions, SG Barr Devlin, Merrill Lynch
and PaineWebber each performed a number of analyses relevant to the fairness of
the Transaction consideration, including: a comparison of select historical and
projected operating performance data of the Applicants and comparable companies;
27
<PAGE>
a comparison of Sierra Pacific's and Nevada Power's relative contributions to
the total consideration; discounted cash flow analyses; and analyses of the
potential pro forma results of the Transaction. In preparing their opinions, the
financial advisors reviewed, among other things, both public and non-public
historical and projected financial information and forecasts related to the
earnings, assets, business, dividends, cash flow, and prospects of Sierra
Pacific, Nevada Power, and comparable companies. A detailed summary of the
financial opinions is contained at pages 50-64 of the Registration Statement
(Ex. C-1).
Moreover, following the receipt of the Registration Statement
containing these fairness opinions, a majority of both the Nevada Power and
Sierra Pacific common shareholders voted in favor of the Transaction in separate
meetings held on October 9, 1998.
In light of these fairness opinions and considering all relevant
factors, the Applicants believe that the aggregate consideration to be paid is
reasonable and bears a fair relation to the earnings capacity of the utility
assets underlying the Applicants' shares. Accordingly, the consideration to be
paid by Sierra Pacific and Nevada Power meets the standards of Section 10(b)(2).
c. Reasonableness of Fees.
The Applicants believe that the overall fees, commissions, and
expenses incurred and to be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the Transaction
relative to other transactions and the anticipated benefits of the Transaction
to the public, investors, and consumers; that they are consistent with recent
precedent; and that they meet the standards of Section 10(b)(2).
As stated in Item 2 above, Sierra Pacific and Nevada Power together
expect to incur a combined total of approximately $26 million in fees,
commissions and expenses in connection with the Transaction. This amount is
28
<PAGE>
substantially less than the fees associated with recent transactions approved by
the Commission,8 and is consistent with the standards of Section 10(b)(2).
d. Capital Structure and the Public Interest.
Section 10 (b)(3) requires the Commission to determine whether the
Transaction will unduly complicate Sierra Pacific's capital structure or would
be detrimental to the public interest, the interests of investors or consumers,
or the proper functioning of Sierra Pacific's system.
Following the Transaction, Sierra Pacific will have a capital
structure which is substantially similar to capital structures which the
Commission has approved in other orders.9 In the Transaction, the shareholders
of Nevada Power and pre-merger Sierra Pacific will receive post-merger Sierra
Pacific Common Stock. The Merger Agreement provides that all outstanding shares
of Nevada Power preferred stock will be redeemed or otherwise retired prior to
the consummation of the Transaction. After consummation of the Transaction,
Sierra Pacific will own 100 percent of the shares of Nevada Power Common Stock,
and will continue to own 100 percent of the shares of SPPC Common Stock. The
Transaction will not affect the outstanding securities of SPPC, including its
first mortgage bonds, junior subordinated debentures, SPPC preferred stock or
SPPC Class A preferred stock. The only issued and outstanding voting securities
of Sierra Pacific will be the Sierra Pacific Common Stock. For these reasons,
the Applicants believe that the Transaction will not unduly complicate Sierra
Pacific's capital structure.
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8 See TUC Holding Co., supra. (estimated fees and expenses of $37 million);
Kansas Power & Light Co., Rel. No. 35-25465 (issued February 5, 1992)
(estimated fees and expenses of approximately $30 million); New Century
Energies, Inc., Rel. No. 35-26748 (issued August 1, 1997) (estimated fees
and expenses of $23.5 million).
9 See, e.g., TUC Holding Co., supra; CINergy Corp., File No. 70-8427, Rel.
No. 35-26146 (issued October 21, 1994); Entergy Corp., File No. 70- 8059,
Rel. No. 35-25952 (issued December 17, 1993). In each of these orders, the
Commission approved mergers which resulted in a holding company acquiring
100 percent of a utility operating company's common stock.
29
<PAGE>
Set forth below are summaries of the historical capital structures
(excluding short-term debt) of Sierra Pacific and Nevada Power as of June 30,
1998, and the pro forma consolidated capital structure of Sierra Pacific and
Nevada Power as of the same date:
30
<PAGE>
<TABLE>
<CAPTION>
Sierra Pacific and Nevada Power Historical Capital Structures
(dollars in thousands)
Sierra Pacific Nevada Power
<S> <C> <C> <C> <C>
Common Stock Equity...... $651,665 47.0% $826,505 44.9%
Preferred Stock.......... $73,115 5.3% $3,385 0.2%
Preferred Securities..... $48,500 3.5% $118,872 6.4%
Long-term Debt........... $611,936 44.2% $892,858 48.5%
Total Capitalization .... $1,385,216 100.0% $1,841,620 100.0%
</TABLE>
<TABLE>
<CAPTION>
Sierra Pacific's Post-Transaction Consolidated Capital Structure
(dollars in thousands)
(unaudited)
Sierra Pacific
<S> <C> <C>
Common Stock Equity...... $1,459,145 39.8%
Preferred Stock.......... $73,115 2.0%
Preferred Securities..... $167,372 4.6%
Long-term Debt........... $1,965,594 53.6%
Total Capitalization .... $3,665,226 100.0%
</TABLE>
The ratio of consolidated common equity to total capitalization of the
combined companies will be, on an unaudited pro forma basis, 39.8 percent. This
figure exceeds the traditionally acceptable ratio of approximately 30 percent.
As discussed earlier in Item 1(B)(1), the Applicants believe that the
Transaction, by achieving efficiencies and economies, will benefit the interests
of the public, consumers and investors and will not impair the proper
functioning of the holding company system.
31
<PAGE>
2. Section 10(c).
a. Section 10(c)(1).
Under Section 10(c)(1), the Commission must not approve an acquisition
which is "unlawful under the provisions of Section 8" or "detrimental to the
carrying out of the provisions of Section 11." Section 8 prohibits an
acquisition by a registered holding company of an interest in an electric
utility and a gas utility serving substantially the same territory without the
express approval of the state commission when state law prohibits or requires
approval of the acquisition. Section 8 applies only to registered holding
companies and is thus inapplicable to the Transaction. The Nevada PUC issued an
order dated January 4, 1999, approving the Transaction, subject to certain
conditions. A copy of that order is attached as Exhibit D-2. Also, a June 11,
1999 settlement accepted by the Nevada PUC, attached as Exhibit D-5, provides
that the Nevada PUC has fully and finally authorized the Applicants to
consummate the Transaction and the Nevada PUC will withdraw its intervention at
the SEC. See Exhibit D-5, at p. 10, section 3.4.
Section 11(b)(1) requires a registered holding company, with limited
exceptions, to limit its operations to a "single integrated public-utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public-utility system."
Section 2(a)(29) provides separate definitions for "integrated
public-utility system" for gas and electric companies. For electric utility
companies, the term means:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system . . . .
For gas utilities, the term means:
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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.
With respect to either type of company, the system must be:
confined in its operations to a single area or region, in one or more
States, not so large as to impair (considering the state of the art
and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of
regulation[.]10
Section 11(b)(1) permits the acquisition and retention of more than
one integrated utility system only if the requirements of Section 11(b)(1)(A),
(B) and (C) are satisfied.
The Commission consistently has recognized that compliance with the
standards of Section 11 is not required where the resulting holding company is
exempt under Section 3. See, e.g., Gaz Metropolitain, Inc., Holding Co. Act
Release No. 26170 (Nov. 23, 1994). Nonetheless, in applying Section 10(c)(1) to
an exempt holding company, the Commission focuses on whether the acquisition
would be detrimental to the core concerns of Section 11, namely the protection
of the public interest and the interests of investors and consumers. WPL
Holdings, 49 S.E.C. 761 (1988), aff'd in part and rev'd in part sub nom.
Wisconsin Environmental Decade, Inc. v. S.E.C., 882 F.2d 523 (D.C. Cir. 1989).
In addition:
The Commission has previously determined that a holding company may acquire
utility assets that will not, when combined with its existing utility
assets, make up an integrated system or comply fully with the ABC clauses,
provided that there is a de facto integration of contiguous utility
properties and the holding company will be exempt from registration under
section 3 of the Act following the acquisition.
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10 For gas companies, utilities deriving natural gas from a common source of
supply may be deemed to be included in a single area or region.
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WPS Resources Corp., Holding Co. Act Release No. 26922 (Sept. 28, 1998)
(citing BL Holding Corp., Holding Co. Act Release No. 26875 (May 15, 1998);
TUC Holding Co.; Gaz Metropolitain).
The Transaction is fully consistent with the standards of Section
10(c)(1) as applied to exempt holding companies. The merger will combine SPPC's
electric and gas system with Nevada Power's electric system, producing a
combined enterprise that will better serve the needs of its customers and the
interests of its investors by offering more efficient energy supply and delivery
service in competitive markets. The Transaction will not impede the ability of
the Nevada PUC or the California PUC to carry out their statutory
responsibilities with respect to the utility activities of Nevada Power or SPPC.
As noted above, by order dated January 4, 1999, the Nevada PUC approved the
Transaction, subject to certain conditions. The utility operations of the
combined enterprise will continue to be regulated by the Nevada PUC and the
California PUC after the merger.
SPPC's existing gas and electric integrated systems meet the de facto
integration standard. The service territories of SPPC's existing gas and
electric systems overlap. Moreover, the gas and electric systems have been
combined for many years (Sierra Pacific Resources, Holding Co. Act Release No.
24556 (Jan. 28, 1988)) and share corporate services.
The Nevada Power and SPPC electric system will be coordinated to a
significant degree, although for several reasons, the Nevada Power and SPPC
electric systems will not be jointly dispatched. Foremost, as discussed herein,
because Nevada Power and SPPC have agreed to sell all of their generating
plants, they will have no generating plants to dispatch. As discussed below, the
dispatching of generating units located in the Nevada Power and SPPC control
areas will be coordinated upon consummation of the merger. Shortly thereafter,
this coordination will be enhanced by an independent scheduling administrator
("ISA") and later by an RTO or Transco. In addition, as a result of electric
restructuring in Nevada, retail electric markets will be fully competitive.
Meanwhile, as discussed below, Nevada Power and SPPC are in the process of
implementing integrated operations. Although Nevada Power and SPPC electric
system may not be a single integrated system under the Commission's current
interpretation as it is applied to registered holding companies, it is
nonetheless integrated to a significant degree. Moreover, an exempt company need
not satisfy the standards of Section 11, nor the requirements of the ABC
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clauses. WPS Resources (approving merger of two electric systems which are not
jointly dispatched and which do not constitute a single integrated system). For
the reasons discussed below, the Transaction satisfies the standard the
Commission has applied to exempt companies, namely the de facto integration
standard set forth in TUC Holding Co., and recently applied in WPS Resources.
First, as discussed in Item 1(B) and in the following section,
although the utility systems of Nevada Power and SPPC will "lack[] economic
joint dispatch, the two systems will be coordinated . . .." WPS Resources, at
11. Nevada Power and SPPC will be able to integrate many services, including
accounting and finance, human resources, information services, external
relations, legal and executive administration, customer service, marketing and
sales, and purchasing and materials management. Over the past several months,
employee teams from both Nevada Power and SPPC have been developing integration
plans for various operational functions. The Nevada Power and SPPC transmission
functions will be integrated under one executive director, including the Open
Access Same Time Information System ("OASIS"), transmission access, system
operation, planning, and system expansion functions. Transmission and substation
maintenance functions also will be integrated under one department head and
Nevada Power and SPPC will share resources during emergencies. Nevada Power and
SPPC will integrate engineering standards, designs, and development of new
designs, will share inventory and equipment and will jointly train employees.
Additional operational functions will be integrated upon the completion of a new
Energy Management System ("EMS"), discussed below. In addition, Nevada Power's
and SPPC's transmission systems will be operated pursuant to a joint open access
transmission tariff filed with FERC, which establishes a single rate for
transmission services that utilize the facilities of both Nevada Power and SPPC.
Nevada Power and SPPC each use an EMS to remotely operate their
electric power grids. The EMS is a computer system that is used to communicate
with and control all major substations, generation plants, and transmission
lines for the purpose of delivering energy to all customers. Nevada Power and
SPPC currently are implementing an integrated EMS, which is expected to be
functional in approximately one year. Nevada Power placed a new EMS in service
in September 1997. Sierra Pacific is now procuring a new EMS from the same
vendor that supplied Nevada Power's EMS. Minor upgrades will be performed on the
Nevada Power EMS system, making the two systems identical in size, scope, and
functionality. The merged company's EMS will have one global set of databases,
operator displays, and source code. This will allow the EMS operations to be
35
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combined under one department head with a common group of computer technicians
providing integrated programming, software development, and hardware and
software maintenance. The EMS will link Nevada Power and SPPC through advanced
communication and signaling capabilities. The integrated EMS will be able to
remotely control and operate the electric grids of Nevada Power and SPPC from
either location. This will provide redundancies in system dispatch for
maintenance, new construction, and system restoration following disturbances, as
well as comprehensive back-up capability for failure of either EMS. In addition,
the integrated EMS will have a common energy scheduling and accounting software
package for the purposes of accepting and accounting for energy schedules and
implementing real-time energy schedules over any of the merged company's
interties. Completion of the EMS project also will allow integration of the
energy trading function of the merged company as well as the economic generation
dispatch function until generation divestiture is complete. This EMS system
eventually will interface with the ISA for energy accounting, scheduling, and
generation dispatch purposes.
As discussed above, Nevada Power and SPPC expect to complete the
divestiture of their generating plants within 12-18 months after the
consummation of the Transaction.11 Nevada Power and SPPC have developed an
integrated divestiture plan designed to maximize the value of the generation
assets, mitigate market power issues, support the transition to competitive
markets and meet provider of last resort requirements during the transition.
Upon consummation of the merger, all generation operations and maintenance will
be integrated under one department head. Prior to the divestiture closing,
Nevada Power and SPPC will integrate generation functions through dispatch and
fuel and materials procurement. Also, Nevada Power and SPPC jointly will
contract for services, and will share support services, such as engineering.
Following the proposed divestiture of generation assets, Nevada Power and SPPC
will purchase their power requirements on a coordinated basis from a common
market - the Western System Power Pool. Following the commencement of retail
electric competition in Nevada, retail electric service and metering and billing
services will be offered on a competitive basis. Currently, Nevada Power and
SPPC each provide retail electric service and metering and billing services on a
regulated basis. As a result of the electric restructuring, Nevada Power and
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11 The divestiture of jointly-owned plants may take additional time due to
conditions in existing participation agreements, such as rights of first
refusal.
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SPPC will continue to provide these services as the provider of last resort and
also will provide these services on a competitive basis through a jointly-owned
retail service company and a metering company.
The transmission systems of Nevada Power and SPPC will be coordinated
on a joint basis. As stated above, the Applicants have agreed to join an RTO or
Transco within three years. In addition, however, the Nevada PUC's order
approving the Transaction requires the Applicants to submit a proposal for an
interim ISA to the FERC before the merger can take effect. Exhibit D-2 hereto,
p. 82. The Applicants made the ISA filings with the FERC on July 23, 1999.
Initially, the transmission systems of Nevada Power and SPPC will be the only
transmission systems operated by the ISA. The ISA will be responsible for
accepting and processing all requests for reservation, scheduling and use of the
transmission system, including use of interconnections to control areas outside
Nevada. The ISA will coordinate the dispatching of generating units located in
the Nevada Power and SPPC control areas, and also coordinate all scheduled
outages associated with such generation. Both the interim ISA and, later, the
RTO or Transco will be responsible for directing the dispatch of generating
facilities in the Nevada Power and SPPC service territories for purposes of
addressing system emergencies, managing transmission constraints, meeting
reliability criteria and providing ancillary services.
The Nevada Power and SPPC systems are not directly interconnected. Due
to the utilities' generation divestiture, such means of direct interconnection
is unnecessary for the joint dispatch of the systems' generating units. However,
as discussed previously, the systems will be coordinated operationally
immediately following the merger in a number of ways. This coordination will be
supplemented by an ISA and eventually an RTO or Transco, providing functional
interconnection of the systems. Also, SPPC has received Nevada PUC approval to
design, permit, and construct a 177 mile 345kV transmission line from the Falcon
substation to the Gonder substation, both located in the SPPC control area. This
project, expected to be completed by 2001, will increase substantially the
import and export capability of SPPC's entire system. Most specifically, it is
projected to increase the ability of SPPC's system to accept and deliver energy
by over 150 MW at the Gonder substation, where SPPC and Nevada Power are
interconnected through PacifiCorp's Utah transmission system.
Here, like in WPS Resources, "[t]here are significant synergies and
financial efficiencies between the two systems, and operations are coordinated
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to a significant degree." Id. at 12 n.25. The Commission should find that these
joint electric system operations satisfy the de facto integration standard.
The Applicants believe that their electric systems will function as a
coordinated and interconnected transmission system that fully satisfies the
integration requirements of sections 10 and 11 of the Act, especially as applied
to exempt holding companies.
Second, while the electric service territories of the Nevada Power and
SPPC public utility systems do not overlap, they "are adjacent and in close
proximity." Id. at 12. In WPS Resources, the service territories of both
utilities were located in Wisconsin's Upper Peninsula region. Likewise, Nevada
Power and SPPC utilities operating in the same region - both are Nevada
utilities with service territories located predominantly in Nevada. Moreover,
both Nevada Power and SPPC serve customers in Nye County, Nevada. The service
territories of Nevada Power and SPPC are separated geographically by 38 miles.
Located between their service territories is federal land, including a Nevada
test site and the Nellis Air Force Base bombing range. These federal facilities
constitute an impediment to direct physical interconnection. A map showing the
transmission systems of Nevada Power, SPPC and the surrounding region is
attached at Exhibit E-4.
Finally, as noted above, the Transaction will produce a combined
entity that will be able to compete more efficiently and effectively in
providing energy services to customers. Thus, the Commission should find that
the Transaction would not be detrimental to the interest of Section 11, and
thereby satisfies the requirements of Section 10(c)(1).
b. Section 10(c)(2).
Section 10(c)(2) requires that the Commission not approve an
acquisition unless "the Commission finds that such acquisition will serve the
public interest by tending towards the economical and efficient development of
an integrated public-utility system."
The Commission has interpreted Section 10(c)(2) to permit the approval
of acquisitions resulting in more than one integrated system. "[W]e have
indicated in the past that acquisitions may be approved even if the combined
system will not be a single integrated system. Section 10(c)(2) requires only
that the acquisition tend 'towards the economical and the efficient development
of an integrated public-utility system.'"12 The Commission has held that "where
a holding company will be exempt from registration under Section 3 of the Act
following an acquisition of non-integrating utility assets, it suffices for
purposes of Section 10(c)(2) to find benefits to one integrated system."13
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12 Gaz Metropolitain, Inc., 58 S.E.C. Docket 189, 192, Rel. No. 35-26170 (Nov.
23, 1994) (quoting Union Electric Company, 45 S.E.C. 489, 504-06 (1974),
aff'd without op. sub nom. City of Cape Girardeau v. SEC, 521 F.2d 324
(D.C. Cir. 1975)).
13 TUC Holding Co., supra.
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In this case, both the Nevada Power and SPPC utility systems will
realize a number of benefits from the Transaction. The Transaction will combine
two companies with complementary operations and expertise, and provide important
strategic, financial and other benefits to the merging companies, shareholders
and customers.
The Transaction will have a number of operational benefits that will
result in economic efficiencies for Sierra Pacific as a whole and for both
utility systems. As discussed above in Item 1(B)(1), Sierra Pacific will
experience economies by combining and coordinating operations with Nevada Power
with respect to corporate functions, including accounting and finance, human
resources, information services, external relations, legal and executive
administration. In addition, the Applicants expect that the Transaction will
result in various cost savings through the integration of corporate programs
(e.g., insurance, advertising), customer support functions (e.g., customer
service, marketing and sales) and competitive utility operations (e.g., retail
electric service and metering service). The operational benefits and
efficiencies associated with the Transaction are estimated at $322 million over
a ten year period, and are discussed in the Registration Statement at pages
45-46. The Transaction also will allow the Applicants to offer a greater range
of services to customers, making the Applicants more competitive, and will
provide significantly increased financial resources to Nevada Power and SPPC,
making them better able to meet customer needs. The Commission previously has
found that similar benefits satisfied the affirmative finding required under
Section 10(c)(2). See, e.g., WPL Holdings, Inc., 50 S.E.C. 233, 237 (1990)
(benefits supporting Section 10(c)(2) finding include "[a] structure that could
more effectively address the growing national competition in the energy
industry, refocus various utility activities, facilitate selective
diversification into non-utility business . . . and provide additional
flexibility for financing . . ."). Accordingly, the Commission should find that
the requirements of Section 10(c)(2) are satisfied with regard to the
Transaction.
3. Section 10(f) -- Compliance with State Requirements.
To approve an acquisition, the Commission is required, under Section
10(f), to find that the acquisition has complied with all applicable state laws.
The Transaction is conditioned expressly on receipt of all required regulatory
approvals, including that of the Nevada PUC. The Applicants have filed an
Application with the Nevada PUC, a copy of which is filed as Exhibit D-1 hereto.
A copy of the Nevada PUC order dated January 4, 1999, approving the Transaction,
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subject to certain conditions, is filed as Exhibit D-2 hereto. Also, a June 11,
1999 settlement accepted by the Nevada PUC, attached as Exhibit D-5, provides
that the Nevada PUC has fully and finally authorized the Applicants to
consummate the Transaction and the Nevada PUC will withdraw its intervention at
the SEC. See Exhibit D-5, at p. 10, section 3.4.
C. Section 3(a)(1).
The Applicants believe that, following consummation of the
Transaction, Sierra Pacific and each of its subsidiary companies will be
entitled to exemption under Section 3(a)(1) from all provisions of the Act
(except for Section 9(a)(2) thereof). Section 3(a)(1) authorizes the Commission
to exempt any holding company:
if such holding company, and every subsidiary company thereof which is a
public-utility company from which such holding company derives, directly or
indirectly, any material part of its income are predominantly intrastate in
character and will carry on their businesses substantially within a single
State in which such holding company and every such subsidiary company
thereof are organized.
Following the Transaction, Sierra Pacific and each of its public
utility subsidiaries - Nevada Power and SPPC - will be organized in Nevada.
Further, Nevada Power will earn all of its utility revenues in Nevada and, based
on financial information for the year ended December 31, 1998, SPPC earns more
than 94% of its utility revenues in Nevada. Following the Transaction, Sierra
Pacific will earn approximately 97% of its utility revenues in Nevada. These
amounts are within the existing range of orders issued by the Commission under
3(a)(1) (see Sierra Pacific Resources, Holding Co. Act Release No. 24566 (Jan.
28, 1988)) and well below the percentages of out-of-state utility revenues
presented by holding companies claiming exemption under Rule 2, which claims for
exemption have not been challenged.14
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14 See e.g., 1983 Form U-3A-2 filed by Diversified Energies (File No. 69- 271)
(disclosing 22.4% of utility revenues from out-of-state operations); 1998
Form U-3A-2 filed by TNP Enterprises (File No. 69-291) (disclosing 16% of
operating revenues from and 22.7% of retail electricity sales (in MWH) to
out-of-state customers, who comprise 19.5% of all electric customers); and
1998 Form U-3A-2 filed by MidAmerican Energy Holdings Co. (File No. 69-300)
(disclosing 21% of retail gas operating revenues and 12.4% of electric
operating revenues from out-of-state operations and 20.2% of net gas plant
and 11.7% of net electric plant located out-of-state).
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Under such circumstances, Sierra Pacific will qualify as an exempt
holding company, "unless and except insofar as [the Commission] finds the
exemption detrimental to the public interest or the interest of investors or
consumers . . . ." As discussed in Item 1(B)(1), the Applicants believe that the
Transaction will result in efficiencies and economies which will benefit the
interest of the public, investors and consumers. As noted above, the utility
business resulting from the Transaction raises no public interest concerns.
Therefore, the Applicants believe that Sierra Pacific will continue to qualify
for the Section 3(a)(1) exemption upon consummation of the Transaction, and
requests an order from the Commission granting such exemption.
Item 4. Regulatory Approval.
As stated above, the Transaction is conditioned on approval by the
Nevada PUC. Nevada Power and SPPC made a joint application to the Nevada PUC on
July 7, 1998, seeking the necessary approvals of the Merger Agreement and
certain related matters, including the proposed generation divestiture. By order
dated January 4, 1999, the Nevada PUC approved the Transaction, subject to
certain conditions. Also, a June 11, 1999 settlement accepted by the Nevada PUC,
attached as Exhibit D-5, provides that the Nevada PUC has fully and finally
authorized the Applicants to consummate the Transaction and the Nevada PUC will
withdraw its intervention at the SEC. See Exhibit D-5, at p. 10, section 3.4. In
an opinion letter, attached as Exhibit F-3, the Sierra Pacific and SPPC general
counsel explains that SPPC was not required to file an application with the
California PUC for approval of the Transaction, but SPPC has agreed to file an
application with the California PUC for approval of the proposed sale of SPPC's
generating assets.
On October 2, 1998, SPPC and Nevada Power filed an application with
FERC requesting authorization for the Transaction under Section 203 of the
Federal Power Act. Under Section 203, the FERC will approve a merger if it finds
the mergers "consistent with the public interest." FERC has stated in a Policy
Statement that, in analyzing a merger under Section 203, it will evaluate the
following criteria: (i) the effect of the merger on competition in electric
power markets, utilizing an initial screening approach derived from the DOJ/FTC
Horizontal Mergers Guidelines to determine if a merger will result in an
increase in an applicant's market power; (ii) the effect of the merger on the
applicants' wholesale sales and transmission customers; and (iii) the effect of
the merger on state and federal regulation of the applicants. FERC issued an
order dated April 15, 1999, approving the Transaction upon finding that it is in
the public interest and will not adversely affect competition. The FERC
conditioned its approval of the Transaction on the Applicants' commitment to
divest their generation assets.
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The HSR Act, and the rules and regulations thereunder, provide that
certain merger transactions (including the Transaction) may not be consummated
until required information and materials have been furnished to the DOJ and the
FTC and certain waiting periods have expired or been terminated. The Applicants
filed the required notices pursuant to the HSR Act on February 16, 1999, and
refiled on March 19, 1999. The applicable waiting period under the HSR Act
expired on April 18, 1999.
Aside from the SEC, no other state or federal agency has jurisdiction
over the Transaction.
Item 5. Procedure.
The Applicants respectfully request that the Commission issue and
publish not later than February 19, 1999 the requisite notice under Rule 23 with
respect to the filing of this Application, such notice to specify a date not
later than March 19, 1999, by which comments may be entered and a date not later
than March 22, 1999, as a date after which an order of the Commission granting
and permitting this Application to become effective may be entered by the
Commission.
The Applicants submit that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval of the
proposed Transaction. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
Item 6. Exhibits and Financial Statements.
a. Exhibits.
A-1 Articles of Incorporation of Sierra Pacific (Exhibit B to Exhibit D-1
hereto)
A-2 By-Laws of Sierra Pacific (Exhibit C to Exhibit D-1 hereto)
A-3 Articles of Incorporation of Nevada Power (Exhibit B to Exhibit D-1
hereto)
A-4 By-Laws of Nevada Power (Exhibit C to Exhibit D-1 hereto)
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B-1 Agreement and Plan of Merger (Exhibit A to Exhibit D-1 hereto; Exhibit
H to Exhibit D-3 hereto; and filed as Annex A to the Registration
Statement on Form S-4 on September 4, 1998 (Registration No.
333-62895) and incorporated herein by reference)
C-1 Registration Statement of Sierra Pacific and Nevada Power on Form S-4
(filed September 4, 1998 (Registration No. 333-62895) and incorporated
herein by reference)
D-1 Application to the Nevada PUC, filed August 7, 1998, together with
testimony and exhibits (filed herewith on Form SE)
D-2 Order of Nevada PUC approving merger, dated January 4, 1999, and
Clarification Order, dated January 29, 1999.
D-3 Application to FERC, filed October 2, 1998, together with testimony
and exhibits (filed herewith on Form SE)
D-4 Order of FERC approving merger, dated April 15, 1999, and Order
denying rehearing, dated July 14, 1999.
D-5 Settlement accepted by the Nevada PUC, dated June 11, 1999.
E-1 Map of SPPC's service territory (Exhibit I to Exhibit D-1 hereto and
Exhibit SPNP-11 to Exhibit D-3 hereto)
E-2 Map of Nevada Power's service territory (Exhibit I to Exhibit D-1
hereto and Exhibit SPNP-3 to Exhibit D-3 hereto)
E-3 Map showing the service territories of SPPC and Nevada Power (Exhibit
I to Exhibit D-3 hereto)
E-4 Map showing the transmission systems of SPPC and Nevada Power (filed
herewith on Form SE)
E-5 Sierra Pacific organization chart (Appendix 1 to Exhibit D-3 hereto)
E-6 Nevada Power organization chart (Appendix 1 to Exhibit D-3 hereto)
E-7 Combined company organization chart after the Transaction (Appendix 1
to Exhibit D-3 hereto)
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F-1 Opinion of Counsel
F-2 Past Tense Opinion of Counsel (to be filed by amendment)
F-3 Opinion of Counsel of William E. Peterson, Senior Vice President,
General Counsel and Corporate Secretary, Sierra Pacific Resources
G-1 Sierra Pacific's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 1-8788, filed March 23, 1999, and
incorporated herein by reference)
G-2 Sierra Pacific's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (File No. 1-8788, filed May 14, 1999, and incorporated
herein by reference)
G-3 SPPC's Annual Report on Form 10-K for the fiscal year ended December
31, 1998 (File No. 0-508, filed March 23, 1999, and incorporated
herein by reference)
G-4 SPPC's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 (File No. 0-508, filed May 14, 1999, and incorporated herein by
reference)
G-5 Nevada Power's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (File No. 1-4698, filed March 19, 1999, and
incorporated herein by reference)
G-6 Nevada Power's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (File No. 1-4698, filed April 30, 1999, and
incorporated herein by reference)
H-1 Opinion of SG Barr Devlin (filed as Annex C to the Registration
Statement on Form S-4 on September 4, 1998 (Registration No.
333-62895) and incorporated herein by reference)
H-2 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (filed
as Annex D to the Registration Statement on Form S-4 on September 4,
1998 (Registration No. 333-62895) and incorporated herein by
reference)
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<PAGE>
H-3 Opinion of PaineWebber Incorporated (filed as Annex B to the
Registration Statement on Form S-4 on September 4, 1998 (Registration
No. 333-62895) and incorporated herein by reference)
I-1 Proposed Form of Notice
b. Financial statements.
FS-1 Sierra Pacific Consolidated Balance Sheet as of December 31, 1998
(previously filed with the Commission in Sierra Pacific Annual Report
on Form 10-K for the year ended December 31, 1998 (Exhibit G-1
hereto), filed March 23, 1999, File No. 1-8788, and incorporated
herein by reference)
FS-2 Sierra Pacific Consolidated Balance Sheet as of March 31, 1999
(previously filed with the Commission in Sierra Pacific Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (Exhibit G-2
hereto), filed May 14, 1999, File No. 1-8788, and incorporated herein
by reference)
FS-3 Sierra Pacific Consolidated Statement of Income for the 12 months
ended December 31, 1998 (previously filed with the Commission in
Sierra Pacific Annual Report on Form 10-K for the year ended December
31, 1998 (Exhibit G-1 hereto), filed March 23, 1999, File No. 1-8788,
and incorporated herein by reference)
FS-4 Sierra Pacific Consolidated Statement of Income for the 3 months ended
March 31, 1999 (previously filed with the Commission in Sierra Pacific
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(Exhibit G-2 hereto), filed May 14, 1999, File No. 1-8788, and
incorporated herein by reference)
FS-5 Nevada Power Consolidated Balance Sheet as of December 31, 1998
(previously filed with the Commission in Nevada Power Annual Report on
Form 10-K for the year ended December 31, 1998 (Exhibit G-5 hereto),
filed March 19, 1999, File No. 1-4698, and incorporated herein by
reference)
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FS-6 Nevada Power Consolidated Balance Sheet as of March 31, 1999
(previously filed with the Commission in Nevada Power Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999 (Exhibit G-6
hereto), filed April 30, 1999, File No. 1-4698, and incorporated
herein by reference)
FS-7 Nevada Power Consolidated Statement of Income for the 12 months ended
December 31, 1998 (previously filed with the Commission in Nevada
Power Annual Report on Form 10-K for the year ended December 31, 1998
(Exhibit G-5 hereto), filed March 19, 1999, File No. 1-4698, and
incorporated herein by reference)
FS-8 Nevada Power Consolidated Statement of Income for the 3 months ended
March 31, 1999 (previously filed with the Commission in Nevada Power
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(Exhibit G-6 hereto), filed May 14, 1999, File No. 1-4698, and
incorporated herein by reference)
FS-9 Pro Forma Combined Financial data for Sierra Pacific and Nevada Power
(previously filed with the Commission in the Registration Statement of
Sierra Pacific on Form S-4, filed on September 4, 1998 (Registration
No. 333-62895) and incorporated herein by reference)
Item 7. Information as to Environmental Effects.
The Transaction will not involve major federal action significantly
affecting the quality of the human environment as those terms are used in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Section
4321 et seq. ("NEPA"). First, no major federal action within the meaning of NEPA
is involved. Second, consummation of the Transaction will not result in changes
in the operations of Nevada Power or the subsidiaries of Sierra Pacific that
would have any significant impact on the environment. To the Applicants'
knowledge, no federal agency is preparing an environmental impact statement with
respect to this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned Applicants have duly caused this Application to be
signed on their behalf by the undersigned thereunto duly authorized.
SIERRA PACIFIC RESOURCES / SIERRA PACIFIC POWER COMPANY:
By: /s/ William E. Peterson Date: 7/26/99
----------------------- -------
Name: William E. Peterson
-------------------
Title: Senior Vice President, General Counsel and Corporate Secretary
--------------------------------------------------------------
NEVADA POWER COMPANY:
By: /s/ Richard L. Hinckley Date: 7/26/99
----------------------- -------
Name: Richard L. Hinckley
-------------------
Title: Vice President, Secretary and General Counsel
---------------------------------------------
47
<PAGE>
Exhibit D-4
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
Linda Breathitt, and Curt Hebert, Jr.
Sierra Pacific Power Company and ) Docket Nos. EC99-1-000
Nevada Power Company ) ER99-34-000
ORDER APPROVING MERGER AND CONDITIONALLY
ACCEPTING FOR FILING PROPOSED JOINT
OPEN ACCESS TRANSMISSION TARIFF
(Issued April 15, 1999)
On October 2, 1998, as supplemented on October 9, 1998, Sierra Pacific
Power Company (Sierra) and Nevada Power Company (Nevada Power)
(collectively, the Applicants) filed a joint application pursuant to
Section 203 of the Federal Power Act (FPA) [FN1] for approval of the merger
of Nevada Power and Sierra Pacific Resources, Inc. (SPR), the holding
company parent of Sierra. The proposed merger would create an exempt
holding company structure in which SPR would be the surviving parent
company and Sierra and Nevada Power would be the operating utility
subsidiaries, as described more fully below.
On October 2, 1998, the Applicants filed a proposed joint Open Access
Transmission Tariff (OATT) in connection with the proposed merger to apply
to transmission service provided by the Applicants following the merger.
As discussed below, the Commission has reviewed the proposed merger
under the Commission's Merger Policy Statement. [FN2] In this order, we
will approve the merger, as proposed. Further, the Commission will
conditionally accept for filing, without setting for hearing, the proposed
OATT under which transmission will be provided by the Applicants following
the merger.
I. Background
----------
A. Description of the Parties to the Merger
----------------------------------------
1. Sierra/SPR
----------
SPR is a holding company whose principal subsidiary is Sierra, [FN3]
an electric generation, transmission, and distribution utility serving
approximately 287,000 customers in northern Nevada and northeastern
California. Sierra's service territory covers an area of approximately
50,000 square miles, including the cities of Reno, Sparks, Carson City, and
Echo, as well as the Lake Tahoe area. Sierra also provides natural gas and
water service in the cities of Reno and Sparks.
Sierra is both a summer and a winter peaking utility. Its 1998 summer
peak was 1429 MW and its 1997-98 winter peak was 1302 MW. Sierra's
generation has a total summer capacity of 1052 MW. Because its generation
resources are inadequate by themselves to serve its load, Sierra also must
make significant purchases of power both from within and outside of its
control area. Sierra's simultaneous import capability is currently 660 MW.
2. Nevada Power
------------
Nevada Power is an electric generation, transmission, and distribution
company serving approximately 533,800 customers in southern Nevada. [FN4]
Its service territory covers approximately 4,500 square miles and includes
the cities of Las Vegas, North Las Vegas, Henderson, and surrounding
unincorporated areas and load centers within Clark and Nye counties.
Nevada Power is a summer peaking utility, with a 1998 summer peak of
3855 MW. Nevada Power owns approximately 2190 MW of installed capacity.
Like Sierra, Nevada Power relies on significant purchases of power to meet
its peak load. Nevada Power's import capacity is 2456 MW, which will
increase by approximately 850 MW when its Crystal Project is completed in
the spring of 1999.
B. Description of Proposed Merger and Proposed OATT
------------------------------------------------
1. The Proposed Merger
-------------------
The Applicants state that the merger between Nevada Power and SPR
would be a merger of equals between the two companies and would create a
holding company structure in which SPR would be the surviving parent
company and Sierra and Nevada Power would be the operating utility
subsidiaries. [FN5]
Each share of SPR and Nevada Power common stock would be converted
into the right to receive either cash or post-merger SPR common stock. Each
owner of pre-merger SPR common stock would be entitled to receive either
1.44 shares of post-merger SPR common stock or $37.55 in cash for each
share of pre-merger SPR common stock that it owns. Each owner of Nevada
Power common stock would be entitled to receive either 1.00 share of
post-merger SPR common stock or $26.00 in cash for each share or Nevada
Power stock that it owns.
The Applicants indicate that they are not interconnected and have
never engaged in transactions between themselves. They also state that they
do not compete for sales in each other's service territories and that their
competitive screen analysis shows that there are no vertical or horizontal
competitive issues raised by the proposed merger.
In order to eliminate any adverse rate impacts, the Applicants make
several commitments. They propose a three-year rate freeze for requirements
rates. Thereafter, a "hold harmless" provision would apply under which
merger-related costs would not be included in rates unless such costs are
outweighed by merger-related cost savings. [FN6] In addition, the
Applicants have designated a series of "open season" opportunities for
wholesale customers to switch to other suppliers. For transmission rates,
the Applicants commit to a similar five- year "hold harmless" provision.
The Applicants also commit to either joining a regional ISO or forming
an independent transco within three years of the consummation of the
proposed merger. They state that they will divest their generation to
unaffiliated entities after completion of the proposed merger, as part of
the Nevada electric retail restructuring process. In order to address
issues of limited import capability on each Applicant's system, the
Applicants also commit to investing the proceeds of their divestiture in
transmission expansion, to the extent permitted by the Nevada Commission.
2. The Proposed OATT
-----------------
In support of their merger application, the Applicants have filed a
proposed OATT that would govern the terms of transmission service provided
by the merged entity after the merger is consummated. [FN7] The Applicants
state that the proposed OATT is consistent with the terms of Order No. 888
[FN8] except for two changes: (1) the proposed OATT provides for a zonal
rate structure; and (2) certain changes have been made to accommodate
retail open access in California. [FN9]
II. Notices of Filing, Interventions, and Answers
---------------------------------------------
A. The Merger
----------
Notice of the Applicants' merger filing was published in the Federal
Register, 63 Fed. Reg. 56,020 (1998), with comments, interventions, and
protests due on or before December 2, 1998. Notice of the supplemental
filing was published at 63 Fed. Reg. 57,115 (1998), with comments,
interventions, and protests due on or before December 2, 1998. [FN10]
The Nevada Independent Energy Coalition (NIEC), a trade association of
cogenerators, filed a timely motion to intervene. While NIEC does not
oppose the proposed merger, it states that the Commission's order approving
the merger should set forth clear principles for the treatment of the
Qualifying Facility (QF) Power Purchase Agreements, including stranded cost
recovery, by the merged entity.
The Public Utilities Commission of Nevada (Nevada Commission) filed a
timely notice of intervention, motion to consolidate, request to submit
further comments, and request for additional information. It later filed a
motion to submit supplementary comments together with its supplementary
comments, including its order conditionally accepting the merger. [FN11] In
the Compliance Order, the Nevada Commission attaches numerous conditions to
the approval of the proposed merger, including requiring the divestiture of
generation assets and the submittal of an application to recover stranded
costs. In the Clarifying Order, the Nevada Commission clarified the terms
of the conditions it attached to the approval of the merger. Specifically,
it stated that the Applicants must file a plan of divestiture and agree to
submit an application to recover stranded costs. The Nevada Commission
takes no position on the merits of the merger and moves that this
Commission consolidate the merger application in Docket No. EC99-1-000 with
the Joint OATT filed in Docket No. ER99-34-000. It requests that we
consider the Nevada Commission's findings and rulings on the merger. [FN12]
Valley Electric Association (Valley), a small electric membership
cooperative in southwestern Nevada that is a customer of Nevada Power,
filed a timely motion to intervene and a timely protest. Concerning market
power, Valley states that the Applicants maintain significant existing
market power over the utilities in their areas and that the Commission
should impose appropriate mitigation measures as a condition of its
approval of the merger. Valley argues that the Commission should require
the Applicants to report on a regular basis the status of their efforts at
developing and joining an ISO or Transco, and impose such conditions as may
be appropriate should the Applicants fail to join a suitable transmission
entity within three years. Concerning the Applicants' promise to use the
proceeds from their divestiture of generation facilities to invest in new
transmission facilities, Valley argues that the Commission should condition
its approval of the merger on the Applicants' commitment to a specified
minimum investment in transmission facilities. Concerning merger costs,
Valley states that the Applicants should be permitted to recover merger-
related costs only to the extent that such costs are offset by savings
resulting from the merger. Concerning ratepayer protection issues, Valley
finds fault with the Applicants' proposed three-year rate freeze and open
season provisions. Finally, Valley objects to the Applicants' inclusion of
goodwill costs to be recovered from ratepayers.
Truckee-Donner Public Utility District and the Plumas-Sierra Electric
Cooperative, Inc. (Plumas) (collectively, TD-PS) filed a timely motion to
intervene and a timely protest. TD- PS claims that the Applicants have not
shown that the proposed merger is beneficial to retail ratepayers or to
wholesale customers. It finds fault with the Applicants' merger analysis,
the Applicants' portrayal of the proposed merger as being pro-competitive,
and the Applicants' suggested mitigation measures as conditions to the
merger. TD-PS requests that the Commission reject the proposed merger and
require the Applicants to refile using a revised screen analysis; or, in
the alternative, set the proposed merger for hearing; or, if the Commission
approves the merger without a hearing, attach certain conditions to protect
ratepayers and transmission customers from anticompetitive consequences.
The Salt River Project Agricultural Improvement and Power District
(Salt River), which operates the Salt River Project [FN13] and owns and
operates electric power generation, transmission, and distribution
facilities that provide power to various customers in the State of Arizona,
filed a timely motion to intervene and a timely protest. Salt River does
not oppose the merger, but argues that the Applicants have not provided
sufficient information regarding the transfer of certain generation
facilities that could be pertinent to the Commission's evaluation of the
effect of the proposed merger on competition.
The Transmission Agency of Northern California (TANC), which provides
electric transmission facilities and services for its members, [FN14] filed
a timely motion to intervene and a timely protest. TANC argues that Sierra
has failed to comply with the terms of a Commission order [FN15] addressing
the Alturas Intertie Project. [FN16]
The Utah Associated Municipal Power Systems (UAMPS) filed a late
motion to intervene and comments on February 19, 1999. UAMPS stated that
the Commission should advance the development of regional transmission
organizations (RTOs) by requiring the Applicants to join an RTO.
On December 17, 1998, the Applicants filed an answer raising
substantive arguments in response to the motions to intervene, protests,
and related motions filed in this proceeding. In addition, the Applicants
claim that TANC and Plumas have no interests that will be affected by the
outcome of this proceeding and thus object to those parties' motions for
intervention.
On February 5, 1999, the Applicants filed an answer to the
Supplementary Comments of the Nevada Commission. The Applicants state that
the Compliance Order does not require any supplement or modification to
their Section 203 filing with the Commission. The Applicants state that
there is no need for the Commission to either attach conditions to its
approval of the merger or to address any of the issues raised by the Nevada
Commission.
On March 12, 1999, the Applicants filed an answer to UAMPS' motion to
intervene, stating that they agree with the theory of UAMPS' request, but
that its request that the Applicants be required to join a RTO is
premature.
On November 2, 1998, the Applicants filed a motion requesting the
issuance of a protective order. On February 12, 1999, the Nevada Commission
filed a motion to lodge its clarifying order in the record in this
proceeding. On March 29, 1999, the Commission issued an order adopting the
protective order.[FN17]
B. The OATT
--------
Notice of the Applicants' OATT filing was published in the Federal
Register, 63 Fed. Reg. 56,014 (1998), with comments, interventions, and
protests due on or before October 22, 1998. [FN18]
Valley filed a timely motion to intervene and a timely protest. Valley
protests six different elements of the Applicants' filing: (1) the
Applicants' failure to specify the rates under which they would operate
once they are merged; (2) language that would allow the Applicants to
curtail service and allocate redispatch costs on an inter-zonal basis
(rather than solely on an intra-zonal basis); (3) the lack of a cap on
penalties for over-runs of capacity reservations; (4) the failure to adopt
regional practices for scheduling matters; (5) the ambiguity resulting from
the modification of a section of the filing regarding the operation of
network resources; and (6) the failure to provide detailed methodologies
for calculating available transmission capacity and completing system
impact studies.
TD-PS filed a timely motion to intervene and for an extension of time
for filing comments, or, in the alternative, protest and motion for
hearing. TD-PS expresses no opinion on the rates to be charged in Nevada,
but claims that the rates to be charged in California are not just and
reasonable.
The Nevada Commission filed a timely notice of intervention. It states
that the question of possible future interconnection between the Applicants
"may" warrant an evidentiary hearing. While the Applicants' filings with
this Commission state that they do not plan to interconnect, the Nevada
Commission is concerned that they may be contemplating such an
interconnection. It states that any such interconnection would raise a
variety of issues.
On November 6, 1998, the Applicants filed a joint answer to the
motions to intervene and related motions filed in this proceeding. This
filing contains "factual clarifications" of assertions made concerning
alleged deviations from Order Nos. 888 and 888-A, [FN19] proposed rates,
scheduling matters, and future intent to interconnect.
C. Request For Abeyance and Response
---------------------------------
On April 12, 1999, the Nevada Commission filed a motion requesting
that this Commission hold this proceeding in abeyance. It noted its
intention to meet on April 12 to consider whether to issue an order
requiring the Applicants to show cause why they are not in violation of the
Nevada Commission's Compliance Order on the merger. According to the Nevada
Commission, recent filings by Sierra and Nevada Power appeared to be
"inconsistent with the condition that the Companies file with the [Nevada
Commission] a divestiture plan that includes an appropriate [Generation
Aggregation Tariff], along with a representation that the Companies intend
to implement the divestiture plan, in good faith." [FN20] The Generation
Aggregation Tariffs (GATs) referred to by the Nevada Commission are tariffs
related to future sales of power at wholesale from the generation
facilities to be divested. [FN21] The Nevada Commission argues that these
GAT filings could cause Nevada to be deprived of the benefits of a truly
competitive generation market. It argues that unless this Commission delays
action on the merger until the Nevada Commission completes its show cause
proceeding, the federal proceeding might thwart the State's efforts, due to
preemption.
The Nevada Commission also argues that we should hold this proceeding
in abeyance because of Sierra's March 30, 1999 filing with this Commission
of what the Nevada Commission characterizes as "a revised version" of the
Applicants' joint OATT. The Nevada Commission says that this filing would
revise the terms and conditions of the OATT, as well as the rates. [FN22]
On April 12, 1999, the Nevada Commission issued an order to show cause
in which it says that its Compliance Order
requires that any tariff for sales of generation
services to retail aggregators from load pocket
generators which is submitted to FERC [the GAT tariffs]
must further the legislative objectives of encouraging
and enhancing the development of a competitive
generation market in the State of Nevada. [Nevada Power
and Sierra] should be ordered to appear and provide
evidence to demonstrate how they have attempted to
comply with [the Nevada Commission's merger order].
[FN23]
On April 13, the Applicants made a filing with this Commission in
response to the Nevada Commission's request that we delay action on the
merger. They argue that the pendency of neither the GAT proceeding nor
proceeding on the revised rates for the OATT should delay our action on the
merger. They state that the Nevada Commission has ample authority to
enforce its orders.
III. Discussion
----------
A. Procedural Matters
------------------
1. The Merger
----------
Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure, [FN24] the timely, unopposed motions to intervene and notices of
intervention serve to make those who filed them parties to this proceeding.
Due to the absence of any undue prejudice or delay, the Commission will
grant the late, unopposed motions to intervene in this proceeding of SNWA,
Oxbow, Fallon, and UAMPS.
Pursuant to Rule 213 of the Commission's Rules of Practice and
Procedure, [FN25] we will reject those portions of the Applicants' answers
of December 17, 1998, February 5, 1999, and March 12, 1999 that respond to
protests submitted by intervenors in this proceeding. These pleadings are
largely repetitive and, as we stated in the Merger Policy Statement, [FN26]
considering such pleadings would merely bog down the process of considering
mergers. The Applicants have not shown good cause to waive our regulations
to allow them to answer the substantive arguments raised in the
interventions. We will grant the opposed motions to intervene of TANC and
Plumas, which have demonstrated a sufficient interest in this proceeding to
justify intervention.
Several parties have raised issues that are being addressed in other
proceedings. TANC has raised issues concerning the Alturas Intertie project
that will be addressed in Docket Nos. ER99-28-000, et al.; Salt River
raises issues concerning the future transfer of generation facilities,
which will be the subject of a subsequent filing; NIEC raises issues
related to the treatment of QFs, a subject which, as framed by NIEC, is
beyond our jurisdiction; and UAMPS raises an issue concerning RTO formation
in the Applicants' region, which will be addressed in future RTO
proceedings.
2. The OATT
--------
Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure, the timely, unopposed motions to intervene and notice of
intervention serve to make those who filed them parties to this proceeding.
Due to the absence of any undue prejudice or delay, the Commission will
grant the late, unopposed motion to intervene in this proceeding of Kal
Kan.
Pursuant to Rule 213 of the Commission's Rules of Practice and
Procedure, [FN27] we reject those portions of the Applicants' answer of
November 6, 1998 that respond to protests submitted in this proceeding.
3. Whether We Should Defer Action on These Proceedings
---------------------------------------------------
We conclude that it is not necessary to delay this proceeding, as the
Nevada Commission requested, to avoid preemption or interference with the
State's goals. As discussed below, we do not believe that our action
approving the Applicants' proposed merger preempts or interferes with the
Nevada Commission's independent merger approval authority. We believe it is
important to clarify several matters.
As an initial matter, our approval of the merger is premised in part
on the Applicants' representation that divestiture of their generating
units will take place. Thus, if the Applicants do not divest the units, the
approval in this order is a nullity. Second, our merger authority is
independent of the Nevada Commission's merger authority and we do not
perceive anything in this order as preempting the separate merger
conditions of the Nevada Commission or the need for the Applicants to file
a divestiture plan that satisfies the Nevada Commission's requirements.
Third, the Nevada Commission's primary concerns appear to be the rate and
market power issues associated with the GAT filings. Nothing in this merger
order prejudges those issues and we will take into account the Nevada
Commission's concerns in those dockets.
With regard to the March 30, 1999 filing by Sierra of rates for the
joint OATT, we do not agree with the Nevada Commission's characterization
of this filing as a revision to the terms and conditions of that tariff. It
is a proposed revision to the rates only, and in fact, as discussed below,
such a rate filing is necessary for both companies.
For these reasons, we will not delay action on the merger or on the
joint OATT in Docket No. ER99-34-000. We do not believe, however, that our
action today will in any way preempt the Nevada Commission from taking
whatever actions it believes are necessary to obtain for its ratepayers the
benefits of a competitive generation market.
B. The Merger
----------
1. Standard of Review
------------------
Section 203(a) of the FPA [FN28] provides, in relevant part, as
follows:
No public utility shall sell, lease, or otherwise
dispose of the whole of its facilities subject to the
jurisdiction of the Commission, or any part thereof of a
value in excess of $50,000, or by any means whatsoever,
directly or indirectly, merge or consolidate such
facilities or any part thereof with those of any other
person, or purchase, acquire, or take any security of
any other public utility, without first having secured
an order of the Commission authorizing it to do so.
Under Section 203(a), the Commission must approve a proposed merger if
it finds that the merger "will be consistent with the public interest."
[FN29]
In 1996, the Commission issued its Merger Policy Statement updating
and clarifying its procedures, criteria and policies applicable to public
utility mergers. [FN30] The Merger Policy Statement provides that the
Commission will generally take account of three factors in analyzing
proposed mergers: (a) the effect on competition; (b) the effect on rates;
and (c) the effect on regulation.
For the reasons discussed below, we find that the Applicants' proposed
merger and mitigation commitments are consistent with the public interest.
Accordingly, we will approve the merger without further investigation.
2. Effect on Competition
---------------------
a. The Applicants' Analysis
------------------------
The Applicants perform an Appendix A analysis to evaluate the
competitive effects on wholesale electricity markets of the proposed
merger. They identify firm and non-firm energy as the relevant product and
use economic and available economic capacity as measures of suppliers'
ability to provide it. [FN31] The Applicants identify and define ten
destination markets. [FN32] The Applicants state that their analysis shows
that pre- to post-merger changes in concentration for various time periods
in ten destination markets do not exceed the Guidelines' thresholds. They
conclude that the merger poses no competitive concerns.
b. Intervenors' Concerns
---------------------
Valley argues that while the Applicants' analysis shows that there is
no pre- to post- merger increase in concentration that would signal
competitive concern, the Nevada Power destination market is highly
concentrated. It claims that Nevada Power has in the past used its monopoly
power, for example, to demand unreasonable conditions for building an
interconnection. As a result, Valley believes that the merger should be
conditioned, among other things, on the Applicants acting in a timely and
good faith manner to join a fully independent ISO. They also ask this
Commission to impose a specific requirement that the Applicants invest in
transmission facilities.
TD-PS raises a number of concerns about the data and assumptions used
by the Applicants in their delivered price test analysis. It argues that
the Applicants' analysis inappropriately excludes Nevada Power as a
supplier in the Sierra Pacific market because: (1) the Applicants assume
too low a price in the Sierra Pacific destination market; (2) available
transmission capacity into the Sierra Pacific market is too low; and (3)
the Applicants used ceiling transmission rates instead of discounted rates.
[FN33] As a result, the Applicants' analysis does not accurately portray
the degree to which the merger would adversely affect competition.
Truckee-Donner also claims that the Applicants' analysis does not properly
account for limited entry and that the Appendix A screen analysis fails to
examine the competitive consequences of the merged company's increased
transmission market power. [FN34]
c. Commission Determination
------------------------
We note that the Applicants have committed to the Nevada Commission to
divest all their electric generation facilities to non-affiliates in
response to restructuring requirements in Nevada. Generation divestiture
will moot any concerns regarding the Applicants' analysis. [FN35] We also
note that this Commission must approve the prices, terms, and conditions of
wholesale sales from the Applicants' divested generation facilities (the
GAT tariffs). [FN36] As a result, we believe that the proposed merger would
not adversely affect competition, and we approve it, based on our
understanding that the Applicants will divest their generation as required
by the Nevada Commission.
Since we have concluded that the Applicants' divestiture of their
generation is sufficient to ensure that the merger would not adversely
affect competition, it has not been necessary to consider the propriety of
several assumptions that the Applicants used in their analysis. We address
only one issue here. [FN37] While we see no need to expend additional
resources in considering issues that are, in this case, moot, we do not
want our silence to necessarily be construed as our endorsement of all of
the Applicants' assumptions.
3. Effect of the Merger on Rates
-----------------------------
Nevada Power and Sierra both have several wholesale requirements and
transmission customers. [FN38] The Applicants assert that they are
attempting to reach agreement with all of their wholesale requirements
customers and intend to file those agreements with the Commission as they
are executed.
If they are unable to reach agreements with these customers, the
Applicants offer "default" commitments, including a three-year rate freeze,
a designated series of "open season" opportunities for wholesale customers
to switch to other suppliers, and a "hold harmless" provision. The
Applicants offer a series of four 30-day open seasons within the first two
years after the merger is consummated. [FN39] Under the hold harmless
commitment, the Applicants offer to exclude any merger-related costs in
wholesale rates for five years after the merger, unless they show that such
costs are outweighed by merger-related cost savings. Because the Applicants
have transmission projects in various stages of construction and intend to
initiate new transmission projects post-merger, the rate freeze would not
apply to transmission service. Given their intention to file for inclusion
of the cost of these projects in their transmission rates, the Applicants
commit only to exclude any merger-related costs from transmission rates for
five years unless they show that such costs are outweighed by merger
savings. The Applicants are not interconnected and therefore propose to
provide transmission under a joint tariff with zonal rates. They state that
zonal rates will allow the customers of each Applicant to continue to pay
the same rate they would have paid absent the merger, and will eliminate
rate pancaking for transactions that use both systems.
Valley argues that these proposed ratepayer protections are inadequate
because the open season provisions are unnecessarily rigid and the rate
freeze does not allow customers to participate in any reductions in rates.
According to Valley, Nevada Power initiated negotiations prior to the
filing of the merger application, but no agreement was reached. At that
time Nevada Power allegedly offered Valley the right to terminate its
contract at any time on thirty days' notice. Valley requests that the
Commission condition the merger on the Applicants' commitment to retain
this more flexible open season provision. TD-PS asserts that the merger
benefits have not been quantified, thus making the hold harmless provisions
untenable.
We find that the "default" commitment offers of a rate freeze,
scheduled open seasons, and a hold harmless provision is adequate
protection for customers. [FN40] In addition, we noted in the Merger Policy
Statement that the most promising and expeditious means of addressing
ratepayer protection is for the parties to negotiate an agreement on
ratepayer protection mechanisms. [FN41] We note the Applicants' continued
efforts in this respect.
We find that the lack of an estimate of merger savings does not
diminish the hold harmless provision, noting that a detailed estimate of
savings is no longer required in a merger application. [FN42] In addition,
the Applicants' open season proposal provides adequate lead time for
planning purposes for alternative power suppliers and for responses to a
Request For Proposals. We do not agree with Valley that Nevada Power must
give it the right to terminate its contract at any time on thirty days'
notice. While Nevada Power may have made this offer as part of earlier
negotiations that failed, this does not mean that such an offer is critical
to adequate customer protection.
Accordingly, we conclude that the proposed merger will not adversely
affect rates.
4. Effect of the Merger on Regulation
----------------------------------
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves
possible changes in the Commission's jurisdiction when a registered holding
company is formed, thus invoking the jurisdiction of the Securities and
Exchange Commission. We are also concerned with the effect on state
regulation where a state does not have the authority to act on a merger.
[FN43]
The Applicants state that the merger will not adversely affect
regulation. With regard to this Commission's jurisdiction, the Applicants
state that since SPR is and will remain a public utility holding company
that is exempt from regulation under PUHCA, there will be no change in the
Commission's authority to regulate the Applicants. With regard to state
regulation, they state that the Nevada and California Commissions have
authority to act on the merger.
With respect to state regulation, the Applicants state that they
requested approval of the merger from the Nevada Commission. The Nevada and
California Commissions intervened in this docket, with the California
Commission raising no substantive issues. The Nevada Commission submitted
to the Commission its ruling conditionally accepting the merger
application. We have considered these rulings and our order approving the
merger in no way interferes with retail restructuring in Nevada.
Accordingly, in light of the facts stated above, we are satisfied that
the proposed merger will not have an adverse effect on regulation.
5. Accounting Issues
-----------------
The Applicants state that the merger would be recorded using the
"purchase" method of accounting in accordance with Accounting Principles
Board Opinion No. 16 (APB 16). In using the purchase method, the Applicants
indicate that the fair value of the net assets is assumed to be book value.
The Applicants state that the difference between the purchase price and the
net assets (at book value) would be reflected as goodwill on the books of
Nevada Power. We have no basis to dispute the Applicants' claim that this
business combination qualifies for the purchase method of accounting and
will therefore approve its use. [FN44]
The Applicants do not identify specific accounts for recording
goodwill or the related amortization. Furthermore, they do not fully
explain why it is appropriate to record the goodwill on the books of Nevada
Power instead of SPR or Sierra. We will direct the Applicants to begin the
amortization of goodwill upon consummation of the merger. Amounts that are
not authorized to be recovered in rates should be amortized to Account 425,
Miscellaneous Amortization. Amounts that are authorized to be recovered in
rates should be amortized to Account 406, Amortization of Electric Plant
Acquisition Adjustments.
The Applicants state that the costs associated with the proposed
merger include transaction and transition costs. However, they do not
identify specific accounts for recording the merger related costs. If the
Applicants determine that rate recovery of any portion of the merger
related costs is probable, they may account for that portion as a
regulatory asset and amortize it to income commensurate with its rate
recovery. If rate recovery is not probable, then transaction costs should
be charged to Account 426, Other Deductions [FN45] and transition costs
should be charged to operating expense as incurred.
We will direct the Applicants to submit their accounting for the
merger, including a detailed explanation of the proposed accounting for
goodwill and merger related costs, within six months after the date the
merger is consummated. [FN46]
C. The OATT
--------
In connection with the proposed merger, the Applicants submitted for
filing a joint OATT (the Tariff) that would apply to the transmission
service provided by the Applicants after the merger. The Applicants assert
that the Tariff is based on the Order No. 888 pro forma tariff, with
certain modifications: (1) the Tariff provides for a zonal rate structure,
and (2) certain changes have been made to accommodate retail open access in
California. The Applicants request that the Commission waive its 120-day
notice requirement and allow the Tariff to be accepted and be made
effective on the date that the merger is consummated.
1. Non-rate Terms and Conditions
-----------------------------
We will accept the non-rate terms and conditions of the proposed
tariff, as discussed below.
a. Penalties
---------
Valley complains that the Applicants have failed to articulate the
specific penalty to be imposed for exceeding a capacity reservation. It
says that the Commission should order the Applicants to revise the sections
of the Tariff so that the penalty is specified. Valley also complains that
the imposition of a penalty of either 150 percent of the applicable rate or
the incremental costs incurred for providing the capacity is unjust and
argues that the Commission should cap the incremental costs at 150 percent
of the applicable rate. TD-PS requests a clarification of how incremental
costs would be determined following the Applicants' generation divestiture.
The Applicants' penalty provision is identical to the one approved by
the Commission in Sierra's individual open access tariff [FN47] and is
therefore accepted. TD-PS's request for clarification is premature and is
thus denied.
b. Scheduling
----------
Valley claims that the Applicants did not justify the following
changes made to nonfirm scheduling and reservation deadlines and the
deadline for changes to schedules: (1) scheduling changes must be made
thirty minutes before the start of the next hour rather than the twenty
minutes permitted in Nevada Power's tariff and the pro forma tariff; (2)
the scheduling deadline for nonfirm service has changed from 2:00 P.M. to
1:00 P.M. of the day before service is provided; and (3) the reservation
deadline for hourly nonfirm service has changed from 12:00 P.M. to 11:00
A.M. of the day before service.
The Applicants respond that the nonfirm scheduling and reservation
deadlines were revised to reflect North American Electric Reliability
Council (NERC) tagging rules that require that all transactions be reported
no later than 2:00 P.M. in the easternmost time zone where transactions
could occur (which in this case is the Sierra Pacific system). In addition,
the Applicants contend that the scheduling change deadline was increased
from twenty to thirty minutes to give the Applicants an additional ten
minutes to make any necessary corresponding changes with neighboring
control areas.
We conclude that the Applicants have provided adequate justification
for the revisions and that the revisions are consistent with or superior to
the pro forma tariff. We will therefore approve them as submitted.
c. Curtailments and Redispatch
---------------------------
Valley requests that language be added to clarify that the Applicants
would not curtail service on one system unless the constraint is on that
system, and for service using both systems, that only the portion of
service in the affected system would be curtailed. Valley also requests
that language be added to limit redispatch to the system where the
curtailment occurs.
These changes are unnecessary. The Applicants would not be operating a
single system and no changes to the Tariff are needed to emphasize that
fact.
d. Attachments
-----------
Valley expresses concern about the Applicants' methodology for
calculating available transmission capacity (ATC) and for completing system
impact studies. TD-PS takes issue with some of the Applicants'
characterizations of the Applicants' system.
We find that the Applicants' description of procedures satisfy the
Commission's requirements.
e. Miscellaneous
-------------
TD-PS and Valley complain that certain language in the sections
addressing Reciprocity, Curtailment of Firm Transmission Service, and
Operation of Network Resources are inconsistent with the pro forma tariff.
The disputed language is specifically required by Order No. 888-A and
is thus accepted.
2. Rates
-----
The Applicants state that they intend to neither physically
interconnect their two systems nor acquire firm transmission rights to
permit integrated system operations. Thus, the Applicants propose separate
rates that are based on the existing system costs and revenue requirements
for Sierra and Nevada Power as reflected in their individual open access
transmission rates on file with the Commission. [FN48] The Applicants
stated in their original filing that they intend to file new rates prior to
the merger effective date in order to reflect the costs of Sierra's Alturas
Intertie Project and Nevada Power's Crystal Project. [FN49]
Service on one system would be priced based on the applicable rates
for that system. Service across both systems would be priced at a single
rate based on the location of the delivery point. Transmission customers
would need to acquire and pay separately for third party service to effect
service between the systems. The Applicants have committed to joining an
ISO within three years of the merger consummation, and state that at that
time it is likely they will adopt single-system rates.
TD-PS protests these proposed rates and requests that the Commission
order the Applicants to adopt a single system rolled-in rate instead of
separate system rates. TD-PS states that, even if the Commission adopts the
Applicants' rate structure, a hearing is required on the reasonableness of
Sierra's rates, given that Sierra has proposed, in a retail rate
proceeding, to reclassify about fifty percent of its transmission
facilities as distribution. Valley protests the Applicants' failure to
submit new rates concurrently with their merger filings. It requests that
the Commission place conditions on its approval of the merger and the
Tariff in order to prevent the Applicants from recovering merger costs in
future rate filings and implementing inter-company subsidization.
We find that the Applicants' proposal to use separate rates is
acceptable, given that: (1) the Applicants do not intend to interconnect
their systems; (2) there is a large rate disparity between the transmission
rates charged by Sierra and Nevada Power, [FN50] and the use of a single
system rate at this time would shift costs for the ratepayers of one
company to the other; and (3) the Applicants have voluntarily agreed to
join an ISO within three years of the merger consummation.
We believe that the concerns raised by the Nevada Commission with
regard to possible future interconnection are premature. Nevada Power has
committed to file new rates to reflect the cost of new transmission
facilities prior to the effective date of the merger and Sierra has already
filed new rates. We will address in such future proceedings any concerns
raised by the Nevada Commission about the effect of possible transmission
expansion projects.
In addition, Nevada Power addresses concerns that the new
refunctionalization of transmission and distribution would lower rates by
indicating that it intends to file updated rates prior to the merger
effective date.
The Commission orders:
- ---------------------
(A) The untimely and the opposed motions to intervene are hereby granted.
(B) Intervenors' requests for hearing are hereby denied.
(C) The answers are hereby rejected to the extent discussed in the body
of this order.
(D) The Applicants' proposed merger is hereby approved as discussed in
the body of this order.
(E) The Applicants shall advise the Commission within 10 days of the date
the merger is consummated.
(F) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates,
services, account, valuation, estimates, or determinations of cost,
or any other matter whatsoever now pending or that may come before
the Commission.
(G) The Applicants' proposed use of the purchase method of accounting for
the merger is approved. The Applicants must submit their accounting
for the merger within six months of the merger's completion. The
Applicants must promptly inform the Commission of any change in
circumstances that would reflect a departure from the facts the
Commission has relied upon in approving the merger accounting.
(H) The Commission retains authority under Section 203(b) of the FPA to
issue supplemental orders as appropriate.
(I) The Applicants' proposed joint open access transmission tariff is
hereby accepted for filing, conditioned upon Nevada Power submitting
its updated rates, as required in Ordering Paragraph (L).
(J) The Applicants' request for waiver of the 120-day notice requirement
in Docket No. ER99-34-000 is hereby granted.
(K) The Applicants are hereby informed of the following rate schedule
designation: Sierra Pacific Resources Operating Companies, FERC
Electric Tariff, Original Volume No. 1 (Open Access Transmission
Tariff) (supersedes Sierra Pacific Power Company's FERC Electric
Tariff, Original Volume No. 3 and Nevada Power Company's FERC
Electric Tariff, Original Volume No. 1).
(L) Nevada Power is hereby directed to file updated transmission rates
prior to the consummation of the merger.
By the Commission. Commissioner Massey concurred with a separate statement
attached.
( S E A L )
/s/ Linwood A. Watson, Jr.
Linwood A. Watson, Jr.,
Acting Secretary
- ----------------------
FN1 16 U.S.C. s 824b (1994).
FN2 Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595
(1996), FERC Statutes and Regulations P 31,044 (1996), reconsideration
denied, Order No. 592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC P 61,321
(1997) (Merger Policy Statement).
FN3 SPR also owns four other subsidiaries: (1) Tuscarora Gas Pipeline
Company, which owns an interest in and operates the Tuscarora Pipeline, an
interstate natural gas pipeline; (2) e-three, a unregulated national energy
services company; (3) Sierra Pacific Energy, a customer information system
developer; and (4) Lands of Sierra, a real estate management company.
FN4 While Nevada Power is not owned by a holding company, it does own
six non-utility subsidiaries.
FN5 The merger would occur after SPR creates two wholly owned special
purpose subsidiaries: Desert Merger Sub, Inc. (Desert Merger Sub) and Lake
Merger Sub, Inc. (Lake Merger Sub). In the next stage, Lake Merger Sub (a
Nevada corporation ) would merger with and into SPR. SPR would be the
surviving corporation and would continue its corporate existence under the
laws of the State of Nevada. In the final stage, Nevada Power would merge
with and into Desert Merger Sub, becoming a subsidiary of SPR. Desert
Merger Sub would be the surviving corporation and would immediately change
its name to Nevada Power Company, Inc. SPR also would continue to own
directly the non-utility subsidiaries that it owns today, as well as Nevada
Power's non-utility subsidiaries, which would be transferred to SPR.
FN6 Merger-related costs consist of transaction costs, transition
costs, and amortization of goodwill (approximately $445 million amortized
evenly over forty years).
FN7 The Applicants request a waiver of the 120-day notice requirement
and that the OATT be accepted for filing and put into effect on the date
the merger is consummated.
FN8 Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities; Recovery of
Stranded Costs by Public Utilities and Transmitting Utilities, Order No.
888, 61 Fed. Reg. 21,540 (1996), FERC Statutes and Regulations, P 31,036
(1996), order on reh'g, Order No. 888-A, 62 Fed. Reg. 12,274 (1997), FERC
Statutes and Regulations P 31,048 (1997), order on reh'g, Order No. 888-B,
81 FERC P 61,248 (1997), order on reh'g, Order No. 888-C, 82 FERC P 61,046
(1998).
FN9 The joint proposed OATT contains all of the provisions implemented
by the settlement approved by the Commission in Docket No. ER98-12-000.
See, Sierra Pacific Power Company, 85 FERC P 61,169 (1998).
FN10 Timely motions to intervene were filed by Overton Power District
No. 5 (Overton); Kal Kan Foods, Inc. (Kal Kan); the Western Area Power
Administration (WAPA); Paiute Pipeline Company (Paiute); Wells Rural
Electric Company (Wells); the United States Department of Energy's Nevada
Operations Office (DOE/NV); Barrick Goldstrike Mines, Inc. (Barrick);
Newmont Mining Corporation (Newmont); and the Truckee-Carson Irrigation
District (Truckee- Carson). The Public Utilities Commission of the State of
California (California Commission)filed a notice of intervention. Late
motions to intervene were filed on December 23, 1998, by the Southern
Nevada Water Authority (SNWA); on January 15, 1999, by the Oxbow Power
Corporation (Oxbow); and on January 26, 1999, by the City of Fallon, Nevada
(Fallon). The above-listed motions and notice raised no substantive issues.
FN11 Compliance Order, In Re Application of Nevada Power Co., Sierra
Pacific Power Co., and Sierra Pacific Resources for approval of agreement
and plan of merger. Docket No. 98-7023 (issued Dec. 31, 1998) (the
Compliance Order). The Nevada Commission subsequently submitted to us the
Order Clarifying Compliance Order, In Re Application of Nevada Power Co.,
Sierra Pacific Power Co., and Sierra Pacific Resources for approval of
agreement and plan of merger (issued January 29, 1999) (the Clarifying
Order).
FN12 See, e.g., the Nevada Commission's rulings on generation
divestiture and the filing of jurisdictionalrate schedules (including an
Independent System Administrator and a Generation Aggregation Tariff) that
would govern the wholesale sales of electricity from divested generation
facilities to retail aggregators.
FN13 A federal reclamation project authorized under the Federal
Reclamation Act of 1902.
FN14 TANC's members are the California cities of Alameda, Biggs,
Gridley, Healdsburg, Lodi, Lompoc, Palo Alto, Redding, Roseville, Santa
Clara (now Silicon Valley Power), and Ukiah; the Sacramento Municipal
Utility District; the Modesto Irrigation District; and the Turlock
Irrigation District. Plumas is an associate member of TANC.
FN15 Sierra Pacific Power Company, 85 FERC P 61,314 (1998) (the
November 30 order), rehearing granted, 86 FERC P 61,198 (1999).
FN16 The Alturas Intertie Project is Sierra's construction of a
200-mile, 345 kV transmission line between Sierra's North Valley Road
substation, near Reno, Nevada, and its new Hilltop Substation near Alturas,
California.
FN17 Sierra Pacific Power Company & Nevada Power Co., 86 FERC P 61,304
(1999).
FN18 Timely motions to intervene were filed by Overton, TANC, Newmont,
and Electric Clearinghouse, Inc. (ECI). A late motion to intervene was
filed on November 6, 1998, by Kal Kan. The above-listed motions raised no
substantive issues.
FN19 See supra note 8.
FN20 Nevada Commission filing of April 12, 1999, at 2 (footnote
omitted).
FN21 Docket Nos. ER99-2332 and ER99-2338 (filed March 31, 1999).
FN22 Nevada Commission filing of April 12, 1999 at 3. See note 49,
below, and accompanying text.
FN23 In Re Application of Nevada Power Co., Sierra Pacific Power Co.,
and Sierra Pacific Resources, Docket No. 98-7023, Order to Appear and Show
Cause issued April 12, 1999 at 1-2.
FN24 18 C.F.R. s 385.214 (1998).
FN25 18 C.F.R. s 385.213(2) (1998).
FN26 Merger Policy Statement at p. 30,127.
FN27 18 C.F.R. s 385.213(2) (1998).
FN28 See supra note 1.
FN29 Id.
FN30 See supra note 2.
FN31 For firm and non-firm energy, the Applicants account for
different market conditions by evaluating off-peak, shoulder, and peak
periods (defined by hours) for the Winter, Spring/Fall, and Summer seasons.
The Applicants also define intermediate capacity as a relevant product.
However, they find that because the Applicants have no uncommitted
capacity, the merger has no effect.
FN32 These markets include: Sierra Pacific, Nevada Power, Arizona
Public Service, PacifiCorp, Southern California Edison, Pacific Gas &
Electric, Idaho Power, Bonneville Power Administration, Los Angeles
Department of Water and Power, and Western Area Power Administration (Lower
Colorado).
FN33 Truckee-Donner argues that Nevada Power must incur wheeling
charges to deliver supplies to the Sierra Pacific system. Consequently, the
use of ceilingrates (relative to discounted rates) will increase the
delivered cost of Nevada Power supplies.
FN34 Truckee-Donner Intervention at 16, n.15.
FN35 See, Consolidated Edison Company of New York, Inc. and Rockland
Utilities, Inc., 86 FERC P 61,054 (1999).
FN36 Our conclusion in no way pre-judges market power issues that may
be associated with wholesale sales from the generation facilities to be
divested.
FN37 We note, in particular, that the Applicants have estimated market
prices that appear to be inconsistent with trading patterns in the markets
affected by the merger.
FN38 According to the application, Sierra's affected customers are:
Fallon, the Hawthorne Army Depot, PG&E's system at Echo Bay, and Plumas.
Nevada Power's affected customers are: City of Boulder City, Lincoln Power
District No. 1, Overton, Valley, and the City of Needles, California.
FN39 We note that three of the four open seasons are set at intervals
tied to the date the merger is consummated. The certainty of these dates
will provide more lead time than the stated 30-day notice period.
FN40 Merger Policy Statement at p. 30,124.
FN41 Merger Policy Statement at p. 30,123.
FN42 Merger Policy Statement at p. 30,123.
FN43 Merger Policy Statement at pp. 30,124-25.
FN44 Entergy Services, Inc. and Gulf States Utilities Company, 65 FERC
P 61,332 (1993).
FN45 MidAmerican Energy Company and MidAmerican Energy Holdings, 85
FERC P 61,354 (1998).
FN46 See Electric Plant Instruction No. 5, and Paragraph B of Account
No. 102, 18 C.F.R. Part 101 (1998).
FN47 Sierra Pacific Power Company, 85 FERC P 61,169 (1998).
FN48 See, Sierra Pacific Power Company, 85 FERC P 61,169 (1998) and
Nevada Power Company, 74 FERC P 61,034 (1996).
FN49 Sierra filed its updated rate schedule with the Commission on
March 30, 1999, in Docket Nos. ER99-2339-000 and ER99-34-000.
FN50 $2.80/kW versus $1.26/kW.
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Sierra Pacific Power Company and ) Docket Nos. EC99-1-000
Nevada Power Company ) ER99-34-000
(Issued April 15, 1999)
William L. MASSEY, Commissioner, concurring:
Today's order approves the merger of Sierra Pacific Power Company and
Nevada Power Company.
While the Applicants' analysis indicates that the pre- to post-merger
changes in generation concentration do not exceed the merger guidelines'
thresholds, an intervenor raises concerns about the Applicants' analysis.
Since the Applicants have committed to divest all of their generation
facilities, the order finds these concerns moot and approves the merger
based on that commitment. Our order emphasizes, however, that the approval
is not an endorsement of the Applicants' assumptions, and we point out one
problem in particular--the use of estimated market prices that appear
inconsistent with trading patterns.
For the benefit of future applicants, I would have preferred an order
that gave more detailed guidance on what particular problems the
Applicants' analysis contained. The Applicants' use of estimated market
prices may indeed be the most important problem, but it is not the only
one. A review of the Appendix A analysis reveals that the Applicants'
treatment of transmission availability is questionable since they use a
mixture of simultaneous and non-simultaneous import capability. This may
not accurately portray what suppliers are in the relevant geographic
market. [FN1] Also, the Applicants define time periods by hour, as opposed
to load level, which may mask important merger-related effects that occur
within long time periods. [FN2] In addition, the Applicants include
suppliers in the destination market that do not pass the delivered price
test because their capacity is too costly to compete in that market. [FN3]
The order should have listed these flaws in more detail. Recently,
commissioners have expressed concern that perhaps the guidance we give
applicants on how to file merger applications has been insufficient. The
industry is better served by giving potential merger applicants a clear
understanding of how to perform the Appendix A analysis. The Merger Policy
Statement was the first step in that direction, and since then the
Commission has on many occasions used individual merger orders to refine
the analysis and to make clear what data and assumptions applicants should
use. [FN4] Last April, we issued a Notice of Proposed Rulemaking that set
out in great detail our merger filing requirements. [FN5] We have not
issued a Final Rule in that proceeding, but I hope we will in the not too
distant future. Meanwhile, we should continue to issue orders in merger
cases that clearly and specifically set out the flaws in applicants'
analysis, even when, as here, we approve the merger. Moving through the
regulatory process in a timely manner requires the filing of complete and
accurate applications in the first instance. We can help future merger
applicants by giving as much guidance as we can in individual merger
orders.
/s/ William L. Massey
--------------------- mp
William L. Massey
- -------------------
FN1 See Ohio Edison Company, et al., 80 FERC P 61,039, at p. 61,104
for fuller discussion of the use of non-simultaneous transmission limits.
FN2 See American Electric Power Company and Central and Southwest
Corporation, 85 FERC P 61,201, fn. 78, (1998).
FN3 Merger Policy Statement, Order 592, FERC Statutes and Regulations
P 31,044, at pp. 30,130-31 (1996).
FN4 See, e.g., Atlantic City Electric Company and Delmarva Power &
Light Company, 80 FERC P 61,126 (1997).
FN5 Revised Filing Requirements Under Part 33 of the Commission's
Regulations, Notice of Proposed Rulemaking, 63 Fed. Reg. 20340 (April 24,
1998), FERC Statutes and Regulations P 35,528 (1998).
END OF DOCUMENT
<PAGE>
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
Linda Breathitt, and Curt Hebert, Jr.
Sierra Pacific Power Company ) Docket Nos. EC99-1-001
and Nevda Power Company ) and ER99-34-001
ORDER DENYING REHEARING
(Issued July 14, 1999)
I. Background
On May 17, 1999, Truckee Donner Public Utility District
(Truckee-Donner) and Plumas-Sierra Electric Cooperative, Inc. (collectively,
TD-PS) filed a request for rehearing of our order approving the proposed merger
of Sierra Pacific Power Company (Sierra Pacific) and Nevada Power Company
(Nevada Power) (collectively, the Applicants). 1/
In approving the merger, we relied on the fact that the "Applicants
have committed to the Nevada Commission [Public Utilities Commission of Nevada]
to divest all their electric generation facilities to non-affiliates in response
to restructuring requirements in Nevada." 2/ We stated that we were not relying
on the Applicants' Appendix A analysis of market power and that issues
concerning the validity of that analysis were moot in light of the planned
divesture: "Since. . . the Applicants' divestiture of their generation is
sufficient to ensure that the merger would not adversely affect competition, it
has not been necessary to consider the propriety of several assumptions that the
Applicants used in their analysis." 3/
On June 30, 1999, TD-PS filed a motion to lodge an order of the Nevada
Commission. 4/ That order approved a joint proposal by the Applicants, the
- ---------------
1/ Sierra Pacific Power Company and Nevada Power Company, 87 FERC paragraph
61,077 (1999) (Sierra, or Merger Order). The Merger Order contains a
detailed description of the Applicants and the transaction.
2/ Id. at 61,333.
3/ Id.
4/ In Re Joint Application of Nevada Power Company, Sierra Pacific Power
Company, and Sierra Pacific Resources for approval of agreement and plan of
merger, Docket No. 98-7023 (June 23, 1999).
<PAGE>
Nevada Commission staff, and the Nevada Utility Consumers Advocate to hold a
settlement conference to resolve issues related to the merger, including the
divestiture plan. The settlement states that the Applicants have satisfied the
Nevada Commission's order requiring them to make various filings, including the
filing of a divestiture plan, and allows the merger to be consummated. The
settlement provides for the Applicants to file a revised divestiture plan.
According to TD-PS, the Nevada Commission's approval of this settlement will
delay the Nevada Commission's review of the divestiture plan, thus extending the
period during which the merger will be in effect without divestiture. This
exacerbates the problem of this Commission's failure to require interim
mitigation measures (as discussed below), according to TD-PS.
II. Discussion
A. Arguments Raised on Rehearing
TD-PS argues on rehearing that the Commission erred by relying on the
future divestiture of the Applicants' generating facilities as the sole basis
for our conclusion that the merger will not adversely affect competition.
Specifically, TD-PS claims that the Commission violated that section of the
Merger Policy Statement 5/ that states that either: (1) any mitigation measures
necessary to remedy anticompetitive effects of a merger must be in place when
the merger is consummated, or (2) interim measures must bridge the gap between
approval of the merger and the implementation of the mitigation measures. 6/
TD-PS also argues that the divestiture plan is too vague and ill-defined for the
Commission to rely upon. It further argues that in approving the proposed merger
based on the Applicants "wholly amorphous and distant prospect of divestiture,"
the Commission jettisoned its requirement of a valid Appendix A analysis. 7/ As
a result, TD-PS asserts that the Commission must consider the concerns
previously raised by intervenors regarding the serious flaws in the Applicants'
Appendix A analysis and either reject the application in light of those flaws or
order a hearing to resolve the issues.
- ---------------
5/ Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC
Stats. & Regs. paragraph 31,044 (1996), reconsideration denied, Order No.
592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC paragraph 61,321 (1997) (Merger
Policy Statement).
6/ Merger Policy Statement, FERC Stats. and Regs. at 30,136.
7/ Petition for Rehearing at 9.
2
<PAGE>
TD-PS also argues that the Commission ignored external factors that
were not adequately captured by the Appendix A screen analysis. One factor, they
contend, is the degree to which the merger would increase the Applicants'
monopsony power in the generation market. According to TD-PS, even after retail
competition is under way in Nevada, the merging companies could be expected to
serve the majority of the load in their service territories as aggregators or
providers of last resort. After divestiture, they would have to purchase most of
the power to meet this load.
A second factor external to the screen analysis, TD-PS argues, is that
the merger would increase the Applicants transmission market power by: (1)
eliminating competition between the Applicants for provision of transmission
service through Nevada and (2) enhancing their ability to favor their own
"affiliated aggregation function" in allocating scarce import capability. In
regard to the second of these possibilities, TD-PS maintains that the
Applicants' promised participation in an Independent System Operator or
Independent System Administrator (ISA) would not diminish their ability to plan
and operate their systems to favor their own power schedules and that the merger
would allow this behavior to occur in a more concerted fashion in both service
areas. Reviewing one example of such potential abuse, TD-PS cites a dispute
between Truckee-Donner and Sierra Pacific over allocation of import capacity on
the Sierra Pacific system that was addressed in a settlement agreement in Docket
No. ER97-3593-000. 8/
B. The Applicants' Answer
The Applicants filed an answer disputing TD-PS' interpretation of the
Merger Order as finding "serious flaws" with the Appendix A analysis. The
Applicants note that, in light of the commitment to divest, the Merger Order
stated that "it has not been necessary to consider the propriety of several
assumptions that the Applicants used in their analysis." Moreover, the
Applicants claim, the Merger Order at no time indicated any competitive problems
raised by the merger.
- ---------------
8/ In Docket No. ER97-3593-000, Sierra Pacific and Truckee-Donner reached a
settlement regarding the allocation of import capability that was approved
by the Commission concurrently with the order approving the merger. See
Sierra Pacific Power Co., 87 FERC paragraph 61,066 (1999) (Letter Order).
3
<PAGE>
With regard to TD-PS' allegations that the divestiture plan is vague,
the Applicants note that both this Commission and the Nevada Commission have
required that divestiture take place as a condition to the merger approvals.
They also state that they have taken concrete steps to implement divestiture.
For example, they have filed Generation Aggregation Tariffs (GAT) with the
Commission that establish market power mitigation measures for the divested
units. 9/ The Applicants further clarify that they will divest their generation
facilities to unaffiliated entities as soon as is reasonably practicable
following completion of the merger.
In particular, the Applicants commit to the following divestiture time
line: (1) initial bids will be required within 15 days of the Commission's
acceptance of the GAT filings; 10/ (2) a list of final bidders will be
established within two weeks of receipt of the initial bids; (3) final bids will
be due 85 days after the final bidders are selected; (4) winning bidders will be
selected within the next three weeks; (5) applications for necessary regulatory
approval of the transfers will be filed within 30 days after winning bidders are
selected; and (6) transfer of the generation assets to the purchaser will be
within ten days after receipt of all necessary regulatory approvals. However, if
this is not possible, the Applicants commit to complete the transfer as soon as
practicable thereafter. 11/ In order to mitigate the market power of the new
owners, the Applicants will allow purchasers to buy only one "bundle" of
generation in each of their control areas.
In response to TD-PS' concerns about generation market power during
the interim period, the Applicants state that their commitment to a three-year
rate freeze for wholesale customers protects these customers from any
competitive advantage the Applicants might possess in the short term. They note
that the concern expressed in the Merger Policy Statement is that a merger will
cause the loss of a competitor and a corresponding reduction in competition. In
this regard, the Applicants note that there never has been a transaction between
the Applicants and they argue that there thus can be no reduction in competition
as a result of the merger.
- ---------------
9/ The Sierra Pacific GAT was filed in Docket No. ER99-2332-000 and the Nevada
Power GAT was filed in Docket No. ER99-2338- 000.
10/ The Applicants explain that the generation facilities cannot be auctioned
until the Commission accepts the GATs for filing, because these tariffs
will provide prospective purchasers with a reasonable forecast of future
revenues from power sales from the generation facilities.
11/ Answer at 6.
4
<PAGE>
As for the transmission market power issues raised by TD-PS, the
Applicants note that they previously filed Open Access Transmission Tariffs
(OATT) that conform with Order No. 888, 12/ which addresses TD-PS' concern
regarding transmission access across Nevada. As to TD-PS' concern regarding
abuse of allocation of import capability, the Applicants reiterate that their
systems are not interconnected and state that it would be impossible for either
Applicant to dispatch its system in a way that materially affects the
transmission capabilities of the other. With regard to TD-PS' example of such
potential abuse, the Applicants note that complaints regarding the ISA and
Sierra Pacific's compliance with the settlement agreement in Docket No.
ER97-3593-000 are premature and irrelevant to the merger proceeding.
C. Commission Determination
We will accept the Applicants' May 28, 1998 pleading, since it has
aided us in understanding and resolving the issues. 13/
We will accept TD-PS's motion to lodge the Nevada Commission's
decision approving the settlement in its proceeding. However, we do not agree
that the State's decision demonstrates a need for this Commission to require
mitigation measures for the interim period. As discussed below, we do not agree
that such measures are needed.
With regard to assertions that the divestiture commitment is too vague
to rely upon, we note that the Applicants have made progress towards
divestiture, including the GATs filed with this Commission prior to approval of
the merger. Also, we note that the Applicants have again committed to divest
their generation to unaffiliated entities. 14/ Finally, the Applicants state
- ---------------
12/ See Promoting Wholesale Competition Through Open Access Non- discriminatory
Transmission Services by Public Utilities; Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed. Reg.
21,540 (1996), FERC Stats. & Regs. paragraph 31,036 (1996), order on reh'g,
Order No. 888-A, 62 Fed. Reg. 12,274 (1997), FERC Stats. & Regs. paragraph
31,048 (1997), order on reh'g, Order No. 888-B, 81 FERC paragraph 61,248
(1997), order on reh'g, Order No. 888-C, 82 FERC paragraph 61,046 (1998).
13/ Rule 213(a)(2) of our Rules of Practice and Procedure, 18 C.F.R. paragraph
385.213(a)(2) (1999), does not permit answers to requests for rehearing
unless otherwise ordered.
14/ Filing of May 28, 1999 at 2, 6. We note that TD-PS incorrectly states that
we rejected the Applicants' commitments made in their various prior
answers. We stated in the Merger Order that we rejected "those portions of
the Applicants' answers. . .that respond to protests. . . ." We thus
rejected the Applicants' responses to the intervenors' arguments, not the
Applicants' commitments made in those pleadings.
5
<PAGE>
that they have filed a detailed divestiture plan at the Nevada Commission. Based
on these facts, we believe that the Applicants' divestiture proposal is
sufficiently detailed to support our earlier finding that the merger would not
adversely affect competition. Moreover, as noted above, the Applicants have
committed to a specific time line for divestiture.
TD-PS argues that we also erred in the Merger Order by not imposing an
interim mitigation measure for the time period between the consummation of the
merger and the completion of the Applicants' divestiture. We note that the
thrust of TD-PS' original concern regarding the Applicants' Appendix A analysis
was that the Applicants employed assumptions that inappropriately excluded
Nevada Power as a supplier in the Sierra Pacific destination market. Thus, TD-PS
appears to be concerned that the merger eliminates a competitor in the Sierra
Pacific destination market. Based on the particular facts and circumstances of
this case, we do not believe that an interim mitigation measure is necessary.
The Applicants explain that there never has been a transaction between
the control areas of Sierra Pacific and Nevada Power. 15/ Therefore, Nevada
Power has not transacted with either Sierra Pacific or wholesale customers in
the Sierra Pacific market. 16/ We do not believe that any changes in conditions
in the Sierra Pacific market during the interim period would be significant
enough to change this circumstance by, for example, increasing Nevada Power's
presence in that market. Absent the merger, therefore, Nevada Power would remain
an improbable source of alternative supply in the Sierra Pacific market, and the
merger would be unlikely to eliminate a competitor. We recognize that, under our
Merger Policy Statement, historical transactions are only a part of the analysis
necessary to evaluate the competitive effects of a merger. However, for the
reasons discussed above, which are specific to this case, and in the limited
context of assessing the need for interim mitigation, we are satisfied that no
interim mitigation measures are necessary.
- ---------------
15/ Answer and Clarification of Nevada Power Company and Sierra Pacific Power
Company, May 28, 1999, at 12.
16/ Sales from Nevada Power to Sierra Pacific would require wheeling service
through an adjacent control area(s). Sales made directly from the Nevada
Power to Sierra Pacific control area would be precluded by the lack of a
direct interconnection. The Merger Order explained that the Applicants are
not interconnected, do not intend to physically interconnect, do not intend
to acquire firm transmission rights to permit integrated system operations,
and have never engaged in transactions between themselves. See Sierra, 87
FERC at 61,328, 61,336. We note that pursuant to our policy, once the
Applicants merge and become affiliates, transactions between the Applicants
could not be made absent a separate section 205 filing. See, e.g., Puget
Sound Energy, Inc., 86 FERC paragraph 61,088 (1999).
6
<PAGE>
TD-PS also claims that we ignored certain factors "external" to the
screen analysis in our assessment of the competitive effects of the proposed
merger. One factor is an alleged increase in the merged company's monopsony
power resulting from the combination of two dominant retail load aggregators
after retail competition is introduced in Nevada. Such monopsony power, TD-PS
argues, would be exacerbated by the Applicants continued ability to "game"
import capability. The second factor is an increase in transmission market power
resulting from the elimination of a transmission competitor.
We do not believe that such factors are relevant in this merger
proceeding. First, TD-PS has not demonstrated that the retail restructuring
would produce a market that would have a high concentration of retail
aggregators, potentially giving rise to monopsony concerns. Second, TD-PS'
contention that the merger will eliminate a transmission competitor (and
therefore increase concentration in the transmission market) is not supported.
Transmission service across the Applicants systems will be provided pursuant to
their OATT. This tariff is consistent with Order No. 888, which was designed to
prevent the exercise of market power in transmission markets recognized by the
Commission to not be necessarily competitive.
The remaining issues of future settlement filings and the Applicants'
joining an ISO or ISA are not related to the merger, but will be the subject of
separate, future section 205 filings. We note that we are not relying on the
Applicants joining an ISO or ISA as a basis for our approval of this merger.
Accordingly, we deny the request for rehearing.
The Commission orders:
(A) The motion to lodge the decision of the Nevada Commission is
hereby granted.
(B) The request for rehearing is hereby denied.
By the Commission.
( S E A L )
/s/ David P. Boergers
---------------------
David P. Boergers,
Secretary.
7
<PAGE>
Exhibit D-5
BEFORE THE PUBLIC SERVICE COMMISSION OF NEVADA
In the Matter of the Application of )
NEVADA POWER COMPANY, )
SIERRA PACIFIC POWER ) Docket No. 98-7023
COMPANY, and SIERRA PACIFIC )
RESOURCES for Approval of )
agreement and plan of Merger. )
JOINT PROPOSAL FOR SETTLEMENT CONFERENCE
This Joint Proposal for Settlement Conference ("Joint Proposal") is
made as to all issues set forth herein by and between Sierra Pacific Power
Company ("SPPC"), Sierra Pacific Resources ("Sierra Pacific"), Nevada Power
Company ("NIT"), together referred to as "Joint Applicants", and the
Regulatory Operations Staff of the Public Utilities Commission ("Staff').
The Attorney General's Office of Advocate for Customers of Public Utilities
("UCA"), agrees to this Joint Proposal except for the provisions and
exhibits set forth in Article II.
WHEREAS, on July 7, 1998, Joint Applicants filed with the Public
Utilities Commission of Nevada ("PUCN" or "Commission") an application
seeking acceptance of the plan to merge which included a commitment to
generation divestiture and the formation of an Independent System
Administrator ("ISA"); and
WHEREAS, the PUCN conducted evidentiary hearings regarding the
application, and on January 4, 1999, the PUCN issued its Compliance Order
conditionally approving the plan to merge; and
WHEREAS, Joint Applicants sought clarification of certain portions of
the Compliance Order, and on February 1, 1999, the PUCN issued an Order
Clarifying Compliance Order; and
WHEREAS, Joint Applicants filed with the PUCN their Restructuring
Compliance Plan and Unbundling docket on April 1, 1999.
WHEREAS, Joint Applicants filed with the PUCN their Divestiture Plan
on April 15,1999; and
WHEREAS, Joint Applicants filed with the Federal Energy Regulatory
Commission ("FERC") on March 31, 1999 their Generation Aggregation Tariff
("GAT") proposals; and
WHEREAS, on April 12, 1999 the PUCN issued an Order to Appear and
Show Cause and hearing commenced on May 10, 1999; and
WHEREAS, on June 2, 1999 the PUCN issued a Notice of Hearing with
regard to the Divestiture Plan filing made by Joint Applicants on April
15, 1999; and
WHEREAS, pursuant to the PUCN's directive at hearing on June 4, 1999,
Joint Applicants, the Staff and UCA have conducted further discussions and
analysis to resolve various substantive and procedural matters; and
WHEREAS, as a result of these discussions and analysis, the Parties
offer this Joint Proposal;
NOW THEREFORE, for and in consideration of the mutual covenants and
obligations herein contained the Parties agree as follows:
Article I.
MERGER TO BE CONSUMMATED
1.1 For the limited purpose of consummating the merger and
conditioned on Joint Applicants' filing of their final ISA proposal with
FERC and the PUCN simultaneously, Joint Applicants have satisfied the
requirements of the Compliance Order to file their Restructuring Compliance
Plan and Unbundling Application, and the Divestiture Plan including the GAT
and the ISA. Notwithstanding the above, the Parties acknowledge that the
PUCN has not formally and fully reviewed, accepted or rejected the filings
referenced above. The Parties therefore agree, subject to the rights,
remedies, conditions and limitations set forth hereinafter, to jointly
recommend that the PUCN conduct proceedings to formally review and promptly
thereafter issue an order regarding the Joint Applicants' revised
Divestiture Plan as described in Paragraph 1.2 below. The Parties
respectfully request that the Show Cause Order be lifted and the Notice of
Hearing vacated. Joint Applicants will take all steps reasonable and
necessary to consummate the merger pursuant to the Compliance Order and the
Merger Agreement.
1.2 With all due speed, Joint Applicants will withdraw and refile
their Divestiture Plan for approval by the PUCN. The refiled Divestiture
Plan will include auction protocols, the Offering Memorandum and proforma
purchase and sale agreements, a delineation of the bundles as revised
herein, and any proposals for the utilization of buy-back contracts to
serve load.
1.3 The Parties respectfully request that the PUCN review the revised
Divestiture Plan including the final ISA.
1.3.a. The revised Divestiture Plan including the ISA shall be filed
in Docket No. 98-7023. The issues raised in the revised Divestiture Plan
including the ISA shall be severed from the Compliance Order and heard by
the PUCN pursuant to a proceeding and process of the PUCN's choosing to
take evidence and render an order.
1.3.b. Joint Applicants will not use or raise severance of the
revised Divestiture Plan including the ISA from the Compliance Order or the
fact of severance, against the PUCN in any manner whatsoever, or claim any
right, remedy, defense, or make any argument relating thereto, and Joint
Applicants expressly waive as to the PUCN any and all such rights,
remedies, defenses, claims or arguments relating thereto.
1.4 The Parties do not, by agreeing to or participating in PUCN
review of the revised Divestiture Plan including the ISA as set forth in
Paragraph 1.3 above, waive any defenses, claims or arguments of whatsoever
kind or nature on appeal or review.
1.5 Following review of the revised Divestiture Plan including the
ISA as set forth in Paragraph 1.3 above, by accepting this Joint Proposal,
the PUCN agrees to issue an order in connection with the revised
Divestiture Plan including the ISA. Joint Applicants agree to comply with
such order, subject to any relief or remedy obtained through appeal or
review pursuant to applicable law by any affected Party.
1.6 Joint Applicants will not transfer or delegate in any manner
title, control, authority, operation or administration of any generation or
transmission to any non-affiliated person or entity until the PUCN has
rendered an order on the revised Divestiture Plan, including the ISA,
pursuant to Paragraph 1.5 above.
Article II.
GENERATION AGGREGATION TARIFF
2.1 The UCA specifically does not agree to provisions and exhibits
set forth in this Article.
2.2 Northern GAT: Sierra will seek early acceptance of its cost-based
recourse tariff as filed in FERC Docket ER99-2332. Joint Applicants and
Staff respectfully request that the PUCN join or support the request of
early acceptance.
2.2-a. After acceptance by FERC of the cost-based recourse tariff,
Joint Applicants will file with FERC the modification of the accepted
tariff as set forth in Exhibit "A".
2.2.b. The Parties respectfully request that the PUCN close Docket
No. 99-40 15 without further action or order.
2.2.c. Joint Applicants will take all reasonable and necessary
actions to support the modification to the accepted tariff at FERC, but in
the event that settlement discussions ensue, Joint Applicants may pursue
settlement under terms that differ from the modified filing.
2.2.d. By agreement to this procedure for the modification of the
GAT, the Parties do not intend to interfere in any way with the rights of
any other Party to participate at FERC in the proceeding modifying the
accepted tariff or to limit the scope of such participation.
2.3 Southern GAT: Joint Applicants and Staff agree that NPC will
modify NPC's divestiture bundles, and NPC will revise its filing at FERC in
Docket No. ER99-2338, to reflect four load pocket generation bundles
delineated according to plant sites: Reid Gardner, Clark, Harry Allen, and
Sunrise/Sunpeak. In addition, NPC will modify its filing at FERC to
incorporate the tariff revisions set forth in Exhibit "B" hereto.
2.3.a. NPC will seek early acceptance of the revised tariff filed in
FERC Docket No. ER99-2338. Joint Applicants and Staff respectfully request
that the PUCN join or support this request.
2.3.b. NPC will file a separate ancillary services tariff consistent
with Sections 4 and 6 of Exhibit "C", attached hereto.
2.3.c. In the event FERC determines that market power may be
exercised in the southern load pocket and reject the southern GAT filed as
Docket ER99-2338, Joint Applicants will, to the extent allowed by any Order
issued by FERC rejecting the southern GAT, refile the southern GAT as set
forth in Exhibit "C" hereto.
2.3.d. Joint Applicants will take all reasonable and necessary
actions to support the revisions and modifications or refilings as set
forth above at FERC, but in the event that settlement discussions ensue,
Joint Applicants may pursue settlement under terms that differ from the
modified filing.
2.3.e. By agreement to these procedures for the southern GAT, the
Parties do not intend to interfere in any way with the rights of any other
Party to participate at FERC in the proceeding modifying the accepted
tariff or to limit the scope of such participation.
ARTICLE III.
MISCELLANEOUS PROVISIONS
3.1 Joint Applicants will not challenge in any manner Staffs
assistance and/or support of the PUCN in any proceeding related to these
matters before FERC or in any other forum.
3.2 The public record in this docket, and in the proceeding to review
the revised Divestiture Plan and ISA may be used and submitted by the PUCN
in whole or in part in any presentation related to these matters before
FERC or any other forum and Joint Applicants will not challenge in any
manner such use or submission.
3.3 After merger consummation and pursuant to the revised Divestiture
Plan including the ISA as approved by the PUCN as set forth in Paragraphs
1.5 and 1.6, Joint Applicants will divest their generation assets,
3.3.a. Without waiving any of the provisions of Paragraph 1.4 above,
all of which provisions are expressly incorporated herein, Joint Applicants
agree to file with the PUCN a report of the results of the generation
divestiture and if the final terms of sale deviate from the order approving
the revised Divestiture Plan, Joint Applicants will not transfer title or
control to the buyer until the PUCN has reviewed and approved the
deviation.
3.3.b. Joint Applicants will not use or raise Paragraph 3.3.a.
against the PUCN in any manner whatsoever, or claim any right, remedy,
defense, or make any argument relating thereto, and Joint Applicants
expressly waive as to the PUCN any and all such rights, remedies, defenses,
claims or arguments relating thereto.
3.4 Upon acceptance by the PUCN of this Joint Proposal, the PUCN will
promptly withdraw its intervention at the Securities and Exchange
Commission ("SEC"), and inform the SEC that with acceptance of this Joint
Proposal and the filing of the ISA as set forth in Paragraph 1.1, the PUCN
has fully and finally authorized Joint Applicants to consummate the merger.
ARTICLE IV.
GENERAL PROVISIONS
4.1 Nothing in this Joint Proposal is intended to nor shall it be
interpreted as abrogating, limiting or otherwise constraining the general
authority of the Commission to interpret and enforce the provisions of this
agreement or of the applicability of any provisions of the Nevada Revised
Statutes and Nevada Administrative Code.
4.2 The Parties acknowledge the Commission's authority to enforce the
provisions of this agreement subject to existing law and the rules
promulgated thereunder.
4.3 This Joint Proposal is made upon the express understanding that
it constitutes a negotiated settlement. Each and every provision of this
Joint Proposal is critical to this settlement, and the provisions of this
Joint Proposal are not severable. In the event this Joint Proposal is not
approved by the PUCN in its entirety, without modification and in the form
presented, it shall be withdrawn without prejudice to any claim or position
taken in this proceeding by any Party, and it shall not be admissible in
evidence or in any way described or discussed in any proceeding hereafter.
SIERRA PACIFIC POWER COMPANY
SIERRA PACIFIC RESOURCES
6/11/99 /s/ William E. Peterson
------------------------ ---------------------------------
NEVADA POWER COMPANY
6/11/99 /s/ Richard L. Hinckley
------------------------ ---------------------------------
REGULATORY OPERATIONS STAFF
6/11/99 /s/ Harry Schlegelmilch
------------------------ ---------------------------------
ATTORNEY GENERAL'S OFFICE OF
ADVOCATE FOR CUSTOMERS OF
PUBLIC UTILITES
6/11/99 /s/ Fred Schmidt
------------------------ ---------------------------------
<PAGE>
Exhibit F-1
<TABLE>
<CAPTION>
<S> <C>
[LOGO]
William E. Peterson Sierra Pacific
Senior Vice President -----------------
General Counsel and Corporate Secretary R E S O U R C E S
- -----------------------------------------------------------------------------------------------------------------------
6100 Neil Road, P.O. Box 30150, Reno, Nevada 89520-3150 o 775.834.5900 o Fax: 775.834.5959 o E-Mail: [email protected]
</TABLE>
June 18, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Application of Sierra Pacific Resources and Nevada Power
Company on Form U-1 under the Public Utility Holding
Company Act of 1935 (File No. 70-09451)
Ladies and Gentlemen:
This opinion is furnished to the Securities and Exchange Commission
(the "Commission") in connection with the filing with the commission of the
Application on Form U-1 (File No. 70-09451) (the "Application") of Sierra
Pacific Resources ("Sierra Pacific") and Nevada Power Company ("Nevada Power")
(collectively, the "Applicants") under the Public Utility Holding Company Act of
1935, as amended (the "Act"). The Application requests that the Commission issue
an order authorizing a merger between Sierra Pacific and Nevada Power, with
Nevada Power to become a wholly-owned subsidiary of Sierra Pacific (the
"Transaction").
In connection with this opinion, I have examined such corporate
records, certificates, and other documents as I have considered relevant and
necessary as a basis for the opinions expressed in this letter.
The opinions expressed below with respect to the Transaction are
subject to and rely on upon the following assumptions:
1. The Transaction shall have been duly authorized and approved, to
the extent required by the governing corporate documents and applicable
state laws, by the Board of Directors and shareholders of Sierra Pacific
and Nevada Power.
2. All required approvals, authorizations, consents, certificates,
rulings and order of, and all filings and registrations with, all
applicable federal and state commissions and regulatory authorities with
respect to the Transaction shall have been obtained or made, as the case
may be, and shall have become final and unconditional in all respects and
shall remain in effect (including the approval and authorization of the
Commission under the Act) and the Transaction shall have been accomplished
in accordance with all such approvals, authorizations consents,
certificates, orders, filings and registrations.
3. The Registration Statement of the Applicants on Form S-4
(Registration No. 333-62895), filed with the Commission in connection with
the Transaction and declared effective by the Commission on September 4,
1998, shall remain effective pursuant to the Securities Act of 1933, as
amended; no stop order shall have been entered with respect thereto.
4. All corporate formalities required by state laws for the
consummation of the Transaction shall have been taken.
5. The parties shall have obtained all consents, waivers and releases,
if any, required for the Transaction under all applicable governing
corporate documents, contracts, agreements, debt instruments, indentures,
franchises, licenses and permits.
Based on the foregoing, and subject to the assumptions and conditions
set forth herein, I am of the opinion that when the Commission has taken the
action requested in the Application:
1. All state laws applicable to the Transaction will have been
complied with.
2. Sierra Pacific and Nevada Power are each a corporation validly
organized and duly existing under the laws of the State of Nevada.
3. The shares of Sierra Pacific Common Stock issued in connection with
the Transaction will be validly issued, fully paid and nonassessable, and
the holders thereof will be entitled to the rights and privileges
appertaining thereto as set forth in the Articles of Incorporation of
Sierra Pacific. The shares of pre-merger Sierra Pacific Common Stock
acquired by Sierra Pacific in the Transaction will be validly issued, fully
paid and nonassessable, and the holders thereof will be entitled to the
rights and privileges appertaining thereto as set forth in the Articles of
Incorporation of Sierra Pacific. The shares of Nevada Power Common Stock
acquired by Sierra Pacific in the Transaction will be validly issued, fully
paid and nonassessable, and the holders thereof will be entitled to the
rights and privileges appertaining thereto as set forth in the Articles of
Incorporation of Nevada Power.
4. Sierra Pacific may legally acquire the shares of pre-merger Sierra
Pacific Common Stock and Nevada Power Common Stock.
5. The consummation of the Transaction will not violate the legal
rights of the holders of any securities issued by Sierra Pacific, Nevada
Power, or any associate company thereof.
This opinion is being delivered solely for the benefit of the person
to whom it is addressed; accordingly, it may not be utilized by any other person
for any other purpose without my prior consent. I hereby consent to the use of
this opinion as an exhibit to the Application.
Very truly yours,
/s/ William E. Peterson
-----------------------
