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(As filed with the Securities and Exchange Commission December 28, 2000)
File No. 70-9741
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM U-1/A
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Wisconsin Energy Corporation
231 West Michigan Street
P.O. Box 2949
Milwaukee, Wisconsin 53201
Wisconsin Electric Power Company
231 West Michigan Street
P.O. Box 2046
Milwaukee, Wisconsin 53201
(Names of companies filing this statement and
addresses of principal executive offices)
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None
(Name of top registered holding company parent)
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Larry Salustro
Senior Vice President and General Counsel
Wisconsin Energy Corporation
231 West Michigan Street
P.O. Box 2949
Milwaukee, Wisconsin 53201
(Name and address of agent for service)
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The Commission is requested to send copies of all notices, orders and
communications in connection with this matter to:
A. William Finke, Counsel Bruce C. Davidson, Esq.
Wisconsin Electric Power Company Brian D. Winters, Esq.
231 West Michigan Street Quarles & Brady LLP
P.O. Box 2046 411 East Wisconsin Ave
Milwaukee, Wisconsin 53201 Milwaukee, Wisconsin 53202
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TABLE OF CONTENTS
Page
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ITEM 1: DESCRIPTION OF PROPOSED TRANSACTION............................... 1
A. Introduction and Request for Commission Action.................... 1
B. Transco Legislation............................................... 11
C. Transco Operations and Organization............................... 14
D. Transferred Properties............................................ 28
E. Related Orders and Applications Pertaining to the Establishment of
the Transco and Corporate Manager................................. 32
ITEM 2: FEES, COMMISSIONS AND EXPENSES.................................... 33
ITEM 3: APPLICABLE STATUTORY PROVISIONS................................... 34
A. Section 10 Standards.............................................. 35
1. Section 10(b)................................................ 35
a. Section 10(b)(1)................................. 36
b. Section 10(b)(2)................................. 37
i. Fairness of Consideration........................ 37
ii. Reasonableness of Fees........................... 38
c. Section 10(b)(3)................................. 38
2. Section 10(c)................................................ 41
a. Section 10(c)(1)................................ 41
b. Section 10(c)(2)................................ 42
(i) Efficiencies and Economies...................... 42
(ii) Integrated Public Utility System................ 43
(a) Physical Interconnection........................ 45
(b) Single Interconnected and Coordinated System.... 45
(c) Single Area or Region........................... 46
(d) Localized Management, Efficient Operation and
Effective Regulation............................ 46
3. Section 10(f)................................................ 48
B. Section 3(a)(1)................................................... 49
ITEM 4: REGULATORY APPROVALS.............................................. 52
A. Federal Power Act................................................. 52
B. State Public Utility Regulation................................... 54
ToC-i
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ITEM 5: PROCEDURE......................................................... 55
ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS................................. 55
A. Exhibits.......................................................... 55
B. Financial Statements.............................................. 58
ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS........................... 58
ToC-ii
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Wisconsin Energy Corporation and Wisconsin Electric Power Company hereby
amend and restate their Application/Declaration on Form U-1 in Commission file
No. 70-9741 as follows:
ITEM 1: DESCRIPTION OF PROPOSED TRANSACTION
A. Introduction and Request for Commission Action
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding Company
Act of 1935, as amended (the "Act"), Wisconsin Energy Corporation ("WEC" or
"Wisconsin Energy"), a Wisconsin corporation and an exempt holding company
pursuant to Section 3(a)(1) of the Act, and Wisconsin Electric Power Company
("Wisconsin Electric") (collectively "Applicants"), a wholly-owned subsidiary of
WEC and an electric utility company as defined by the Act, hereby request
authorization for a transaction, as described in further detail below, in which:
(i) Wisconsin Electric will transfer ownership and control over its transmission
assets to American Transmission Company LLC ("ATC" or the "Transco"), a
Wisconsin limited liability company formed on June 12, 2000, which will be a
single-purpose transmission company; (ii) Edison Sault Electric Company ("Edison
Sault"), a wholly-owned subsidiary of WEC and an electric utility company as
defined by the Act, will transfer ownership and control over its transmission
assets to the Transco; (iii) Wisconsin Electric and Edison Sault will receive,
in exchange for such transfer, member units of the Transco in proportion to the
value of the transmission assets contributed; (iv) Wisconsin Electric will
purchase Class A shares of ATC Management Inc. (the "Corporate Manager"), a
Wisconsin corporation formed on June 12, 2000, in proportion to the value of the
transmission assets contributed to the Transco by itself and Edison Sault; and
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(v) Wisconsin Electric will purchase one Class B share of the Corporate Manager.
WEC also requests an order from the Commission affirming its continued Section
3(a)(1) exemption from registration under the Act. As explained in Section E
below, this request for Commission action is made in conjunction with several
other such requests by other parties related to the formation of the Transco.
Applicants do not at this time request Commission approval for any further
transaction by Transco or Corporate Manager. In the event Applicants propose to
engage in any transaction resulting in a material change in the corporate
structure, management, or control of Corporate Manager or Transco for which
approval of the Commission may be required under the Act, Applicants will
undertake to file a Post-Effective Amendment requesting such approval.
In 1999, the State of Wisconsin enacted legislation that facilitates the
formation of a single-purpose transmission company such as the Transco. As
explained in more detail below, that legislation, among its other provisions,
encourages public utility affiliates of Wisconsin holding companies to transfer
ownership of their transmission assets to a transmission company. The
legislation does so by beneficially adjusting the calculation of an existing
limit on the amount of unregulated (or non-utility) investments these holding
companies and their affiliates can make, after the transfer of assets to the
Transco. The Transco will be managed by the Corporate Manager, which will also
hold a portion of the Transco's membership interests. All participants in the
Transco will ultimately own a direct or indirect interest in the Transco and the
Corporate Manager in proportion to the value of the transmission assets or cash
each participant
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contributes to the Transco (except Edison Sault and South Beloit Water, Gas &
Electric Company, which are not expected to invest in the Corporate Manager).
In addition to Wisconsin Electric and Edison Sault the initial participants
in the Transco will be Wisconsin Public Power Inc. ("WPPI"), Wisconsin Public
Service Corporation "AWPS"), Madison Gas & Electric Company "AMGE"), Wisconsin
Power and Light Company ("WPL"), South Beloit Water, Gas and Electric Company
("South Beloit"), and the Corporate Manager./1/ All utilities participating in
the Transco are referred to herein as "Member Utilities". Other transmission-
owning utilities may, in the future, decide to become members of the Transco, as
may non-transmission-owning utilities, based on their load ratio shares.
Wisconsin Electric and Edison Sault intend to contribute their transmission
assets to the Transco on or about January 1, 2001./2/
WEC is a public utility holding company incorporated under the laws of the
State of Wisconsin and is exempt pursuant to Section 3(a)(1) of the Act by order
of the Commission from regulation by the Commission under the Act (except for
Section 9(a)(2) thereof). Wisconsin Energy Corporation, Holding Company Act
Release No. 27163 (April 10, 2000) ("WEC"). WEC's principal executive office is
located at 231 West Michigan Street, Milwaukee, Wisconsin 53203.
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/1/The Commission, in HCAR No. 27206 (Aug. 2, 2000) authorized, among other
things, WPL to become a member of the Transco and to acquire shares of the
Corporate Manager.
/2/The Wisconsin legislation currently contemplates that the transfer of
the transmission assets to the Transco will occur by January 1, 2001.
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WEC owns directly all of the common stock of two public utility companies:
Wisconsin Electric, a combination electric and gas utility company, and Edison
Sault, an electric utility company. In addition, WEC owns all of the common
stock of WICOR, Inc. ("WICOR"), a public utility holding company incorporated
under the laws of the State of Wisconsin, which is exempt from regulation under
the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the
Act. See WEC, supra. WICOR has one wholly-owned public utility subsidiary,
Wisconsin Gas Company ("Wisconsin Gas"), which is a gas utility company
organized under the laws of the State of Wisconsin. On a consolidated basis at
December 31, 1999, WEC had total assets of $6.2 billion. During 1999, WEC had,
on a consolidated basis, total operating revenues of $2.27 billion and net
income of $209 million. WEC acquired WICOR on April 26, 2000, in a transaction
accounted for as a purchase. Accordingly, WICOR is reflected in WEC's
consolidated financial statements from and after the date of acquisition. WEC's
June 30, 2000 consolidated financial statements are incorporated by reference in
Item 6.B. After the acquisition of WICOR, WEC had consolidated total assets of
$8.4 billion at June 30, 2000.
Wisconsin Electric and Edison Sault are subject to regulation by the
Federal Energy Regulatory Commission (the "FERC") under the Federal Power Act
(the "FPA") with respect to wholesale sales and transmission of electric power
and gas, construction and operation of hydroelectric projects, gas marketing,
and accounting and certain other matters. Wisconsin Electric is subject to
regulation by the Public Service Commission of Wisconsin (the "Wisconsin
Commission") and the Michigan Public Service Commission (the "Michigan
Commission") and Edison Sault is subject to regulation by the Michigan
Commission with respect to rates charged
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for retail gas and electric service and the terms and conditions of such retail
service provided in the respective jurisdictions. Wisconsin Electric is subject
to regulation by the Nuclear Regulatory Commission with respect to the
activities of the nuclear facility which it owns. Wisconsin Gas is subject to
regulation by the Wisconsin Commission with respect to rates charged for retail
gas service and the terms and conditions of such retail service.
Wisconsin Electric is authorized to provide retail electric service in
designated territories in Wisconsin and in certain territories in Michigan.
Wisconsin Electric also sells wholesale electric power. At December 31, 1999,
Wisconsin Electric had total assets of $5.0 billion. During 1999, Wisconsin
Electric had total operating revenues of $2.02 billion, and net income of $212
million after dividends on preferred stock.
Wisconsin Electric generates, transmits, distributes, and sells electric
energy in a territory of approximately 12,000 square miles, with a population
estimated at 2,300,000 in southeastern (including the metropolitan Milwaukee
area), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. As of December 31, 1999, Wisconsin Electric had approximately 1.0
million electric customers. During 1999, Wisconsin Electric had electric
operating revenues of $1.69 billion.
Wisconsin Electric purchases, distributes and sells natural gas to retail
customers and transports customer-owned gas in four distinct service areas of
about 3,800 square miles in Wisconsin: west and south of the City of Milwaukee,
the Appleton area, the Prairie du Chien area, and areas within Iron and Vilas
Counties. The gas service territory has an estimated
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population of approximately 1,200,000. During 1999, Wisconsin Electric had gas
operating revenues of $307 million.
Effective May 31, 1998, WEC acquired ESELCO, Inc. ("ESELCO"), a holding
company whose principal subsidiary was Edison Sault. ESELCO was merged with and
into WEC with WEC the surviving company. Wisconsin Energy Corporation, Holding
Company Act Release No. 26877 (May 21, 1998). Thus, Edison Sault is a wholly-
owned direct subsidiary of WEC. Edison Sault is authorized to provide retail
electric service in certain territories in Michigan. Edison Sault generates,
transmits, distributes and sells electric energy in a territory of approximately
2,000 square miles with a population of approximately 55,000 in the eastern
Upper Peninsula of Michigan. Edison Sault also provides wholesale electric
service under contract with one rural cooperative. At December 31, 1999, Edison
Sault had approximately 22,000 electric customers, and total assets of $75
million. During 1999, Edison Sault had electric operating revenue of $38
million and net income of $4 million.
During 1999, Wisconsin Electric sold approximately 30.6 million megawatt-
hours (MWH) of electric energy (at retail and wholesale). Wisconsin Electric's
net generation totaled 28 million MWH during 1999, with the remaining sales
provided for by power purchases. For the year ended December 31, 1999,
approximately 63.6% of Wisconsin Electric's MWH sales was obtained from coal-
fired generation, approximately 22.0% from nuclear generation, approximately
2.7% from other generation, and approximately 11.7% was purchased. During 1999,
Edison Sault sold approximately 0.8 million MWH of electric energy (at retail
and
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wholesale). In 1999, Edison Sault generated 23.9% of its total electric energy
requirements and purchased 76.1% of its requirements.
At December 31, 1999, Wisconsin Electric's electric transmission system
consisted of 2,870 miles of transmission circuits, of which 771 miles were
operating at 345 kilovolts, 123 miles at 230 kilovolts, 1,652 miles at 138
kilovolts, and 384 miles at voltage levels less than 138 kilovolts. The
transmission assets also include associated real property interests. At
December 31, 1999, Wisconsin Electric was operating 21,987 pole miles of
overhead distribution lines and 16,295 miles of underground distribution cable,
as well as 350 distribution substations and 233,726 line transformers.
Edison Sault owns two 138 kilovolt submarine transmission cable circuits,
which interconnect with Consumers Energy Company in the Lower Peninsula of
Michigan, as well as two 138 kilovolt substations, which interconnect with a 46
mile, 138 kilovolt transmission line owned and operated by Cloverland Electric
Cooperative. In total, Edison Sault had 282 miles of transmission line in
service at December 31, 1999, and maintained 792 miles of primary distribution
lines. Edison Sault renders service to its customers through approximately
8,600 line transformers.
At December 31, 1999, Wisconsin Electric's gas distribution system included
approximately 7,895 miles of mains connected at 22 gate stations to the pipeline
transmission systems of ANR Pipeline Company ("ANR"), Natural Gas Pipeline
Company of American, Northern Natural Gas Company ("Northern Natural") and Great
Lakes Transmission Company. Wisconsin Electric has a liquefied natural gas
storage plant, which converts and stores in
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liquefied form natural gas received during periods of low consumption. The
liquefied natural gas storage plant has a send-out capability of 70,000
dekatherms per day. Wisconsin Electric also has propane tanks for peaking
purposes. These tanks can provide approximately 7,000 dekatherms of supply to
the system.
Wisconsin Electric also operates two district steam systems for space
heating and processing. These systems are located in Milwaukee and in
Wauwatosa, Wisconsin, and are subject to regulation by the Wisconsin Commission.
The combined systems consist of approximately 43 miles of high and low pressure
mains and related regulating equipment. Steam for the Milwaukee system is
supplied by Wisconsin Electric's Valley power plant. Steam for the Wauwatosa
system is supplied by Wisconsin Electric's Milwaukee County power plant.
In addition, each of the following companies are direct non-utility
subsidiaries of WEC:
(a) Wispark Corporation ("Wispark"), which develops and invests in real
estate, primarily business parks and industrial buildings.
(b) Wisvest Corporation ("Wisvest"), which is a non-regulated energy
services subsidiary that builds, owns, operates and maintains energy production
facilities and invests in other energy-related projects.
(c) Wisconsin Energy Capital Corporation ("WECC"), which engages in
investing and financing activities.
(d) Minergy Corp. ("Minergy"), which is engaged in the business of
developing and marketing proprietary technologies designed to convert high
volume industrial and mineral wastes into value-added products.
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(e) WEC International Inc. ("WECII"), which serves as WEC's international
investment vehicle.
(f) Witech Corporation ("Witech"), which is a venture capital company
operating in the State of Wisconsin.
(g) WEC Nuclear Corporation, formerly WEC Sub Corp., which has an ownership
interest in Nuclear Management Company, L.L.C., a company which provides
services to Wisconsin Electric in connection with the Point Beach nuclear plant
and to other companies that own nuclear generating facilities.
(h) Northern Tree Service, Inc., which is engaged in tree trimming in the
State of Michigan's eastern Upper Peninsula.
(i) Badger Service Company ("Badger"), which holds coal rights in Indiana.
Effective April 26, 2000 WEC acquired WICOR, a holding company. See WEC,
Supra. On a consolidated basis at December 31, 1999, WICOR had total assets of
$1.1 billion. During 1999, WICOR had total operating revenues of $1.01 billion
and net income of $53.8 million.
WICOR has one wholly-owned public utility subsidiary, Wisconsin Gas, a gas
utility company which is organized under the laws of the State of Wisconsin. At
December 31, 1999, Wisconsin Gas distributed gas to approximately 538,000
customers in 529 communities throughout Wisconsin. Wisconsin Gas' service area
has a population of approximately 2,000,000. At December 31, 1999, Wisconsin
Gas had total assets of $674 million. During 1999, Wisconsin Gas had total
operating revenues of $439.5 million, and net income of $26.4 million.
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Wisconsin Gas owns a gas distribution system, which, on December 31, 1999,
included approximately 9,300 miles of distribution and transmission mains,
455,000 service laterals and 535,000 active meters. Wisconsin Gas receives gas
at gate stations throughout Wisconsin connected to the pipeline transmission
systems of ANR, Northern Natural and Viking Gas Transmission Company.
The following companies are direct non-utility subsidiaries of WEC's
wholly-owned subsidiary WICOR:
(a) WICOR Energy Services Company ("WICOR Energy"), which engages in
natural gas purchasing and selling, and energy and price risk management.
(b) FieldTech, Inc. ("FieldTech"), which provides meter reading and
technology services for gas, electric and water utilities.
(c) WICOR Industries, Inc. ("WICOR Industries"), an intermediate holding
company, which holds the stock of WICOR's manufacturing subsidiaries and owns
100 percent of the voting securities of five direct subsidiaries: Sta-Rite
Industries, Inc. ("Sta-Rite"), SHURflo Pump Manufacturing Company ("SHURflo"),
Hypro Corporation, WEXCO of Delaware, Inc. and WICOR Foreign Sales Corp. WICOR
Industries and its subsidiaries manufacture pumps and fluid processing equipment
including filtration equipment for residential, agricultural, and industrial
markets worldwide.
WICOR is a co-owner of Guardian Pipeline, L.L.C. ("Guardian"). Guardian is
a limited liability company formed to construct, own and operate an interstate
natural gas pipeline extending approximately 150 miles from the Chicago Market
Hub near Joliet, Illinois, to near the
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Town of Ixonia, Jefferson County, in southeastern Wisconsin. Subsidiaries of CMS
Energy Corporation and Northern States Power Company are equal one-third members
with WICOR in Guardian. The pipeline will have a capacity of 750,000 dekatherms
per day, will cost approximately $234 million, and is planned to be in service
by November 1, 2002. Wisconsin Gas has committed to purchase 650,000 dekatherms
per day of capacity in the pipeline.
B. Transco Legislation
In 1999, the State of Wisconsin enacted legislation which facilitates the
formation of the Transco as a for-profit single-purpose transmission company./3/
The Transco will charge a single system-wide average network rate to be phased
in over 5 years in accordance with the Transco Legislation, and a single system-
wide average point-to-point rate for "through and out" service, under an open
access transmission tariff filed with the FERC on July 31, 2000. Key benefits
of the Transco include the elimination of rate "pancaking" among the Transco
members" multiple transmission systems; one-stop shopping for transmission and
wholesale distribution services over multiple transmission systems; the
reduction of operational barriers within the Transco service area; and the
transfer of ownership of the transmission assets from vertically integrated
utilities that will further functional unbundling. These benefits are in
keeping with the goals of the Transco Legislation and FERC policies. The
Transco Legislation, among other things, encourages public utility affiliates of
Wisconsin holding companies, including WEC, to transfer ownership of their
transmission assets to the Transco by beneficially adjusting the calculation of
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/3/1999 Wisconsin Act 9, (S)(S) 2335 tr to 2335 uh (Assembly Amendment to
Assembly Subcommittee Amendment 1 to 1999 Assembly Bill 133) (the "Transco
Legislation").
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an existing limit on the amount of unregulated (or non-utility) investments the
holding company system can make, after the transfer of their assets to the
Transco./4/ The Transco will be managed by the Corporate Manager. All Transco
participants will ultimately own direct or indirect interests in the Transco in
proportion to the value of the transmission assets or cash each participant
contributes to the Transco. Transmission-dependent utilities, as defined by the
Transco Legislation, that participate in the Transco will purchase their
interests for cash and will obtain ownership shares in proportion to their 1999
Wisconsin load ratio shares. Tax exempt transmission-dependent entities that
participate in the Transco, such as WPPI,/5/ will purchase their interests for
cash at a price that will keep the other participants whole, as explained below.
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/4/Section 196.485(5) of the Wisconsin Statutes. This investment cap
applies to any holding company system that owns a Wisconsin public utility.
Generally, Wisconsin law limits the amount of assets that all non-utility
affiliates in a holding company system may own to an amount equal to 25% of
the assets owned by all of the electric public utility affiliates within
that system. Section 196.795(6m)(b) of the Wisconsin Statutes. The Transco
Legislation permits an electric utility within a holding company system to
exclude certain energy related "eligible investments" (as defined in the
Wisconsin Public Utility Holding Company Act) from the calculation of non-
utility assets that count towards the 25% asset cap if, among other things,
each electric utility within a holding company system that owns
transmission assets in Wisconsin transfers all of those transmission assets
to the Transco before January 1, 2001 and each electric utility within that
holding company system petitions, by June 30, 2000, the Public Service
Commission of Wisconsin and the FERC for authority to transfer operational
control of all of its transmission facilities in Wisconsin and the
surrounding states to the Midwest Independent Transmission System Operator,
Inc. For purposes of the Transco Legislation, the term "eligible assets"
includes assets of a non-utility affiliate used to, among other things,
generate or transmit gas, oil, electricity or steam energy; provide energy
management services; provide energy-related customer services; recover,
produce energy from, or process waste materials; provide telecommunications
services; provide environmental engineering services; and manufacture or
sell products that filter, pump, or process water or other fluids. All such
assets in the WEC system will thus not count toward the investment cap if,
among other things, Wisconsin Electric contributes its transmission assets
to the Transco in accordance with the Transco Legislation.
/5/WPPI is a municipal electric company owned by 30 Wisconsin
municipalities that operate electric utilities. These utilities supply
electric power to more than 100,000 customers in Wisconsin and purchase all
of their electric requirements from WPPI. WPPI was created pursuant to
Wisconsin legislation and is a non-profit, political subdivision of the
state. Section 66.073 of the Wisconsin Statutes.
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The Transco Legislation obligates the Transco to construct, operate,
maintain and expand its transmission facilities to provide adequate, reliable
transmission services for a single, system-wide rate for the use of its system
under an open-access transmission tariff (the "Transco OATT") that has been
filed with the FERC. The Transco Legislation directs that the Transco support
robust competition in energy markets, extend no favoritism to any participant
and meet the transmission needs of all participants. Under the provisions of
the Transco Legislation, the Transco will transfer the operational control of
its transmission facilities to the Midwest Independent Transmission System
Operator, Inc. (the "Midwest ISO") when the Midwest ISO becomes operational. If,
however, the Midwest ISO fails to commence operations, or ceases operations, the
Transco, in accordance with the Transco Legislation, will join another
independent system operator or other regional transmission organization
authorized under federal law to operate in Wisconsin.
As previously stated, the initial participants in the Transco will include,
in addition to Wisconsin Electric and Edison Sault, WPL, South Beloit, WPPI,
WPS, and MGE/6/. All utilities participating in the Transco are referred to
herein as "Member Utilities". Other entities, both within and outside of
Wisconsin, may, in the future, decide to become members of the Transco and will
then also become Member Utilities. The Member Utilities intend to contribute
their transmission assets to the Transco on or about January 1, 2001,
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/6/The Corporate Manager will also initially own a less than 1% interest in
the Transco.
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(the "Operations Date")./7/ The transmission systems of the Member Utilities
(and the Alliant Energy transmission assets that are not being transferred to
the Transco) are interconnected at various points and essentially all operate as
part of the same reliability and planning council -- the Mid-America
Interconnected Network, Inc. ("MAIN")./8/ MAIN promotes coordinated planning,
construction, operation, maintenance and use of operation and transmission
facilities by its members. The Member Utilities' transmission systems were also
planned and built on a coordinated basis pursuant to the Wisconsin "advance
planning" law in effect from 1975 until 1997. For a map detailing the
interconnection of the transmission systems of the Member Utilities, see Exhibit
E hereto.
C. Transco Operations and Organization
The Transco will have the exclusive duty to provide transmission service in
geographic areas previously served by the Transco members. The Transco will
not, however, have that duty in areas where control of transmission facilities
has been transferred directly to the Midwest
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/7/The Transco Legislation currently contemplates that the transfer of the
transmission assets will occur by the Operations Date. Indeed, for a
Wisconsin public utility holding company to obtain relief from the asset
cap described in note 4 above, the holding company's affiliated
transmission-owning utilities must commit to transfer their transmission
assets to the Transco by January 1, 2001. Wisconsin Electric has made such
a commitment to the Wisconsin Commission. It is not clear how a failure to
actually effect a transfer by the Operations Date would affect relief under
the asset cap calculation. Accordingly, the Member Utilities are proceeding
under the assumption that the Transco will begin operations on the
Operations Date and are therefore making all of the requisite FERC filings
to have the Transco OATT effective as of such date.
/8/Edison Sault is technically a member of the East Central Area
Reliability (ECAR) group. However, pursuant to a FERC-approved joint
operating agreement, on January 1, 2001, Edison Sault will become a part of
the Wisconsin Electric control area.
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ISO./9/ Wisconsin law prohibits the Transco from bypassing distribution systems
and directly serving retail customers.
As contemplated by the Transco Legislation, the Transco is organized as a
limited liability company under Wisconsin law. A Wisconsin limited liability
company may elect to be "member managed" or "manager managed."/10/ The Transco
has elected to be manager managed, and Wisconsin law specifically allows the
manager of any limited liability company to be a corporation./11/ The Transco
has designated the Corporate Manager, a Wisconsin corporation formed for this
purpose, to be its manager. The two legal entities, the Transco and the
Corporate Manager, are a single functional unit, as the Corporate Manager exists
for the sole purpose of conducting the affairs of the Transco.
The transmission-owning Member Utilities will receive member units in the
Transco in proportion to the value of the transmission assets they contribute.
For purposes of establishing these proportions, the transmission assets will be
valued at their Contribution Value, defined as original cost less accumulated
depreciation, as adjusted on a dollar-for-dollar basis for deferred taxes,
excess deferred taxes and deferred investment tax credits. The resulting
proportions will then be adjusted based on various factors including the level
of participation by transmission dependent utilities, such as WPPI, which may
acquire member units in the Transco for cash
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/9/As noted above, if the Midwest ISO fails to commence, or ceases
operations, the Transco will join another independent system operator or
other regional transmission organization authorized under federal law to
operate in Wisconsin.
/10/Section 183.0401(2), Wis. Stat.
/11/Sections 183.0401(2)(6), 183.0102(13), and 183.0102(18).
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based upon their 1999 Wisconsin load share ratio. It is expected that Wisconsin
Electric's and Edison Sault's initial interests in the Transco will approximate
42% and 6%, respectively, or 48% in the aggregate. These ownership percentages
may fluctuate based on various factors, including the number of municipal
utilities and electric cooperatives that participate in the Transco. The Member
Utilities, with the exception of Edison Sault and South Beloit, will also
purchase shares of the Corporate Manager for cash, in proportion to their
percentage interests in the Transco. It is expected that Wisconsin Electric will
pay approximately $48,000 for an approximate 48% interest in the Corporate
Manager based on the initial interests in the Transco of itself and Edison
Sault. The Corporate Manager will have two classes of common stock: Class A and
Class B. Wisconsin Electric will receive approximately 48% of the non-voting
Class A shares, in proportion to its and Edison Sault's ownership interests in
the Transco. Additionally, Wisconsin Electric, WPL, MGE, WPS, and WPPI will each
receive one Class B voting share.
This structure accomplishes two explicit goals articulated by the Wisconsin
Legislature in the Transco Legislation. First, the Transco Legislation requires
that the transfer of transmission assets be designed to avoid or minimize
material adverse tax consequences and, to the extent practicable, satisfy the
requirements for a tax-free transfer./12/ The "pass-through" tax treatment
afforded by the limited liability company structure accomplishes this purpose
and avoids any tax-induced retail rate impact from the creation of the Transco.
The transfer of assets to a limited liability company is a tax-free transaction
and income earned by the Transco will not be taxed twice, as it would in a
corporation.
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/12/Section 196.485(5)(b)2.a and 196.485(5)(b)2.b, Wis. Stat.
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Second, the Transco Legislation clearly contemplates a transmission company
that can access public financial markets./13/ The Transco Legislation also
allows any holder of 10% or more equity in a transmission company to, after 3
years, require the transmission company to comply with all state and federal
laws necessary for the holder to sell or transfer its ownership interests./14/
Because corporate stock is more readily marketable to the public than member
units in a limited liability company, the creation of the Corporate Manager as a
stock corporation will facilitate access to public financial markets.
FERC, in Order 888 and Order 2000, and the Wisconsin Legislature in Act
204, have recognized that in order to foster competitive markets in electricity,
transmission facilities should operate independently from the generation or
distribution business. The Transco will further the goals of FERC and Act 204 in
two ways. First, the Transco has applied to join the Midwest ISO and the Midwest
ISO has accepted the application effective on the ISO's operation date, at which
time the Transco will transfer operational control of its transmission
facilities to the Midwest ISO./15/
Second, over time, public ownership of the Transco is expected to increase
and ownership by the utilities to decrease, furthering the goal of complete
independence of transmission from the generation and distribution businesses.
During the first three years of the
--------------------
/13/The Transco Legislation refers to an anticipated "initial issuance of
securities by the transmission company to any 3d party." Section 196.485
(3m)(a)4, Wis. Stat.
/14/Section 196.485(3m)(a)5, Wis. Stat.
/15/The Transco Legislation provides that if the Midwest ISO fails to
commence operations or ceases operations, requirements that apply to the
Midwest ISO will apply to any other independent system operator or regional
transmission organization that is authorized under federal law to operate
in Wisconsin. Section 196.485(2)(bx), Wis. Stat.
17
<PAGE>
Transco's existence, no member may transfer its interest in the Transco except
to an affiliate or to another member of the Transco. After the three-year
period, however, if a Transco member wishes to sell all or part of its interest
in the Transco, it can do so by redeeming its Member Units in the LLC for Class
A Shares of the Corporate Manager. (The member who receives such Class A stock
would be free to sell it to a third party.) Alternatively, the Transco member
could sell its member units to the Corporate Manager for cash. The Corporate
Manager would raise the cash for such a purchase by means of a public offering
of Class A shares. As the initial members of the Transco sell some or all of
their interest to the Corporate Manager, a greater share of the Transco will be
owned by the Corporate Manager. The Corporate Manager, in turn, will be owned in
greater share by the investing public through the sale of stock. Broader public
ownership would move the Transco over time toward the goal of complete
independence from the founding utilities and thus from the generation and
distribution businesses those utilities engage in.
Various requirements regarding the ownership and governance of a
transmission company in Wisconsin are set forth in the Transco Legislation./16/
Each utility that transfers its transmission assets to the Transco will
receive as consideration membership (LLC) units in the Transco in proportion to
the value of the assets transferred. In accordance with the Transco
Legislation, the assets transferred will be valued at
--------------------
/16/Sections 196.485(3m)(c), 196.485(5), and 196.485.(6), Wis. Stat.
18
<PAGE>
net book value determined on the basis of the regulated books of account at the
time of transfer./17/ WPPI, which owns no transmission assets, is investing
cash in the Transco and will receive membership units in proportion to its
investment. Membership units will initially be valued at $10. The Corporate
Manager will also have a membership interest in the Transco by virtue of an
investment of $1,000 for 100 membership units.
The Transco is governed by the Corporate Manager's shareholders and Board
of Directors ("Board"). The Board will appoint the chief executive officer (and
other officers) of the Corporate Manager. Because the management of the Transco
is vested in the Corporate Manager, the governance requirements set forth in the
Transco Legislation/18/ are satisfied through the provisions of the Corporate
Manager's organizational documents as described below.
The Corporate Manager's Amended and Restated Articles of Incorporation
provide for 100,000,000 shares of common stock, with 99,999,990 shares being
Class A stock and ten shares being Class B. Initially, each participant's
ownership of Corporate Manager Class A stock will be in the same proportion as
the participant's ownership interest in the Transco (its own and Edison Sault's
interests in the case of Wisconsin Electric). With 5 initial participants, only
5 of the 10 shares of Class B stock will initially be issued. (Ten thousand
shares of Class A Stock will initially be issued.) If at any time a
participant's ownership interest in the Transco falls below 2%, then it must
sell its share of Class B stock back to the Corporate Manager./19/
--------------------
/17/Section 196.485(5)(b)7, Wis. Stat.
/18/Section 196.485(3m)(c), Wis. Stat.
/19/However, unlike the other participants, WPPI may retain its share of
Class B stock regardless of its percentage ownerhip interest in the
Transco.
19
<PAGE>
Prior to a public offering, only Class B shares will have voting rights,
including the right to elect directors. Each Class B stockholder will have the
right to appoint one director to the Board. An appointee to the Board may be
removed only by the participant nominating him or her. The four independent
directors required by the Transco Legislation/20/ will be elected to the Board
by a majority vote of the Class B stockholders. Class B stockholders will also
have the following powers:
(i) by majority vote, to amend the Articles of Incorporation; and
(ii) by majority vote, to approve any merger, consolidation or sale of all
or substantially all of the assets of Corporate Manager.
After a public offering of stock in the Corporate Manager, Class A
stockholders will be entitled to vote and will elect a majority of the Board.
Although after a public offering Class B stockholders will only elect a minority
of the Board, each Class B stockholder would continue to have the right to
appoint one director to the Board. After a public offering, holders of Class A
stock will possess all voting rights incident to shares of common stock under
Wisconsin law, including the right to vote on amendments to the Articles of
Incorporation and on any proposal to merge, consolidate or sell the Corporate
Manager.
All Class B shares will convert into Class A shares on the earlier of the
following events:
(i) the Corporate Manager owns more than 50% of the Transco membership
units; or
--------------------
/20/Section 196.485.(3m)(c)2, Wis. Stat., provides: "That at least 4
managers or directors of the transmission company have staggered 4-year
terms, are elected by a majority vote of the voting security holders and
are not directors, employees or independent contractors of a person engaged
in the production, sale, marketing, transmission or distribution of
electricity or natural gas or of an affiliate of such person."
20
<PAGE>
(ii) the tenth anniversary of the Operations Date;/21/
provided that the Board may, by majority vote, elect to override the conversion
and keep the Class B shares outstanding after such an event. Such a conversion
of Class B shares into Class A shares would mean that, at that time, the Class A
shareholders will elect all directors.
Most decisions of the Board require a majority of a quorum/22/ of the
Board, including:
(i) approving an operating and a capital budget for the Transco and the
Corporate Manager;
(ii) effecting a change in the distribution payment rate of the Transco,
which will initially be set at 80%;
(iii) hiring and firing officers and establishing their compensation,
including benefit plans;
(iv) admitting new participants to the Transco, and determining the price
therefor;
(v) after three years, making an initial public offering of the stock of
the Corporate Manager;
(vi) approving for submission to the shareholders either (a) the amendment
of the Articles of Incorporation of the Corporate Manager or (b) the
merger, consolidation or sale of all or substantially all of the
Corporate Manager's assets; and
(vii) approving changes to the Bylaws (with certain exceptions).
Unanimous Board approval will be required for the following:
(i) to effect a change in the allocation of profits and losses;
(ii) to effect a public offering prior the third anniversary of the
Operations Date;
--------------------
/21/The Operations Date is January 1, 2001.
/22/A quorum is fixed at two-thirds of the directors until an initial
public offering is made, at which time a simple majority will constitute a
quorum.
21
<PAGE>
(iii) to change the number of directors on the Board prior to the tenth
anniversary of the Operations Date; and
(iv) to make any amendment of the Articles of Incorporation or Bylaws that
relates to matters requiring unanimity or to amend any provision in
the Bylaws that incorporates or embodies a provision of 1999
Wisconsin Act 9.
The Transco members will enter into an agreement (the "Operating
Agreement") which will govern the activities of the Transco. Because the
Transco is a manager-managed limited liability company, the Operating Agreement
will grant to the Corporate Manager full, complete and exclusive discretion to
exercise management control over the business of the Transco. As the manager,
the Corporate Manager is obligated to provide all management services to the
Transco, which itself has no management. The Corporate Manager may not resign
or be removed as manager without the unanimous consent of the Member Utilities
and the Corporate Manager. (The members of the Transco also control the
Corporate Manager so if they believe that it is performing inadequately, their
remedy is to replace the management of the Corporate Manager, and not the
Corporate Manager as manager of the Transco.) The Corporate Manager also is to
have no other role than to serve as manager of the Transco. Thus, it will
negotiate all contracts on behalf of the Transco, and make all required filings
on the Transco's behalf. The Corporate Manager's employees will either directly
or by contract with third parties perform all the functions necessary to run an
electric transmission company. Accordingly, all of the Corporate Manager's
expenses will be for the account of the Transco. Such expenses will be charged
back to the Transco at cost in accordance with Section 13(b) of the Act and
Rules 90 and 91 thereunder. The Corporate Manager will have all powers as a
manager to do all things
22
<PAGE>
necessary and convenient to carry out the Transco's business. The Transco will
rely completely on the Corporate Manager to take all actions required in the
conduct of the Transco's business.
It is expected that the transmission-owning Member Utilities and the
Transco will enter into one or more agreements ("O&M Agreements") pursuant to
which the Member Utilities will provide the Transco with "reasonable and cost
effective operations and maintenance services" for at least the first three
years after the Operations Date in accordance with the Transco Legislation./23/
Services provided under the O&M Agreements will include operations services such
as inspection, field switching and communications repair; line equipment
maintenance services such as line inspection, line repair, grounding, corrosion
control and right of way access maintenance; station equipment services
including inspection, structure and foundation repair and system testing and
maintenance; emergency response services such as field response, emergency clean
up response and post-emergency repair; station related services such as grass
maintenance, vegetation control and security checks; and other miscellaneous
services including grounding repair and major equipment repair. Each utility
will commit to maintain the organizational and physical resources needed to
perform all services under an O&M Agreement.
The Member Utilities and the Transco will also enter into one or more
services agreements ("Services Agreements") pursuant to which the Member
Utilities will provide the Transco with certain services not covered by the O&M
Agreements. Services provided under the Services Agreements include control
center services including the provision and supervision of control center
operator labor and dispatch of field operations personnel; real estate services
which include real estate records management, encroachment monitoring, lease
management,
--------------------
/23/Section 196.485 (3m)(a)1.b. of the Wisconsin Statutes.
23
<PAGE>
billing and collection, joint facility management and route planning, siting and
selection; project services necessary for the design, functioning and
construction of capital projects including engineering, protection and control
design, procurement and construction; environmental services; supply chain
services including sourcing, logistic, inventory and warehousing functions;
engineering services; planning services and other miscellaneous services.
The decision to employ the O&M Agreements and the Services Agreements just
referred to has been made pursuant to the requirements of the Transco
Legislation, which provides that the Transco shall,
[S]ubject to any approval required under state or federal law,
contract with each transmission utility that has transferred
transmission facilities to the transmission company for the
transmission utility to provide reasonable and cost-effective
operation and maintenance services to the transmission company during
the 3-year period after the transmission company first begins
operations. The transmission company and a transmission utility may,
subject to any approval required under federal or state law, agree to
an extension of such 3-year period.
The rationale for this statutory mandate is that, at least during the initial 3-
year period, economy, reliability and safety will best be served if the required
services are provided to the Transco by the utilities whose transmission assets
are being transferred. Those utilities have the resources, and their personnel
have the expertise and the experience with the transmission assets, to provide
the required services safely, reliably and economically. The agreements provide
that the covered services will be rendered at cost, except that unless otherwise
prohibited by law, the Transco will commit to use an annual minimum of 85% of
the number of hours of a member utility's own labor used in a representative
year for transmission facilities maintenance. The rationale for this
24
<PAGE>
provision is that the utilities will be committing labor and other resources to
performance of the services required by the Transco and will incur the costs of
that resource commitment.
Wisconsin Energy, as an unregistered holding company, and Wisconsin
Electric and Edison Sault as its affiliates, are not subject to the Commission's
jurisdiction regarding transactions limited to cost. Nevertheless, the
Applicants believe that the terms of the Services Agreements and the O&M
Agreements provide fair, reasonable, and equitable compensation for the costs
incurred to render services to the Transco, and are consistent with the
requirements of Section 13(e) of the Act.
The Transco will enter into an Asset Contribution Agreement ("ACA") with
each Member Utility that is contributing transmission assets. The ACA provides
for each Member Utility to identify the real estate rights of way and personal
property that are to be contributed, and establishes the form of those
conveyances. In brief, the assets conveyed are required to be all those
necessary to enable the Transco to conduct transmission operations. Each Member
Utility will make certain representations with respect to those assets conveyed,
and will agree to indemnify the Transco in the event of a breach of those
representations.
Additionally, the Member Utilities and the Transco will enter into a
Forming Party Agreement Regarding System Operating Procedures ("Forming Party
Agreement") which memorializes certain principles of the Transco transmission
system operation that the Member Utilities agreed are necessary to ensure that
transmission system reliability and efficiency are continued during the
transition of system control from the Member Utilities to the Transco. No
services will be provided under the Forming Party Agreement, though some of the
principles
25
<PAGE>
articulated in the Forming Party Agreement have been incorporated into other
agreements, such as service agreements, between the Member Utilities and the
Transco.
The distribution systems owned and operated by the Member Utilities are
currently interconnected with the current Member Utilities' transmission
systems. On January 1, 2001, when the Transco will take over ownership and
operation of the Member Utilities' transmission systems, the Member Utilities'
distribution systems will then be interconnected with the Transco's transmission
system. Each Member Utility will enter into a Distribution-Transmission
Interconnection Agreement (each, a "D-T Agreement") which will contain the terms
and conditions that will govern the interconnection of the Member Utilities'
distribution systems with the Transco transmission system, addressing such
matters as maintenance, operating and meter standards, access to facilities and
liability issues. The D-T Agreements contain no provisions for the payment of
rates or charges to the Transco for the Transco's provision of interconnection
services to the Member Utilities.
The Member Utilities' generators are currently interconnected with the
Member Utilities' transmission systems. On January 1, 2001, the Member
Utilities' generators will be interconnected with the Transco's transmission
system. Each Member Utility will enter into a Generation B Transmission
Interconnection Agreement (each a "G-T Agreement") which will contain the terms
and conditions that will govern the interconnection of the Member Utilities'
generators with the Transco transmission system, addressing such matters as
maintenance, operating and metering standards, access to facilities, redispatch,
provision of ancillary services and liability issues. The G-T Agreements
contains no provisions for the payment of rates or
26
<PAGE>
charges to the Transco for the Transco's provision of interconnection service to
the Member Utilities' generators.
The Member Utilities will each enter into a Network Operating Agreement
("NOA") and Network Integration Transmission Service Agreement ("NITSA") with
the Transco. These agreements are transmission service agreements pursuant to
the Transco's OATT on file at FERC for the provision of network integration
transmission service. The NITSA is a form agreement on file at FERC. The NITSA
specifies the network resources and network load that will be served under the
agreement. The NOA contains the specific operating provisions that allow a
network customer to integrate its load and resources as provided in the OATT.
WPPI, and any other transmission-dependent tax-exempt entity that
participates in the Transco, will also be members of the Transco, but will not
be contributing transmission assets. Because the participation of tax exempt
entities like WPPI will reduce the transmission revenue otherwise received by
the Transco,/24/ such entities will purchase their interests for a price that is
designed to keep the other participants whole. It is anticipated that funds
received from WPPI and any other tax-exempt Transco member will be used to fund
outlays necessary to pay start-up costs and construction work-in-progress or be
used as cash working capital. The tax-exempt purchase price will be
recalculated annually, such that all tax-exempt participants will be
--------------------
/24/Based on FERC precedent with respect to natural gas pipelines, the
revenue requirement reflected in the Transco's FERC petition includes
provision for income taxes payable by its members with respect to Transco
income. The participation of any tax-exempt entity in the Transco will
reduce that revenue requirement and therefore each tax-exempt Transco
member must make contributions to the Transco to make up for the diminished
return of the other members. Alternatively, the Transco participants may
agree on special allocations of certain tax elements, rather than adjust
the purchase price to be paid by such tax-exempt entities.
27
<PAGE>
required to make additional cash contributions (or receive a refund of any "over
contributed" funds) to ensure that the return otherwise payable to the other
transmission-contributing participants is not diminished because of the tax
exempt entities' participation.
No Member Utility will be obligated to make any additional capital
contributions to the Transco or the Corporate Manager; however, there may be
additional contributions if a majority of the Corporate Manager's directors
determine that such additional capital is appropriate. The Operating Agreement
will establish a target dividend rate of 80% of the Transco's earnings, subject
to adjustment.
More detailed information regarding the financing and governance of the
Transco and the Corporate Manager is contained in the August 15, 2000
Application of Alliant Energy, SEC File No. 70-9735 (the "Alliant Application").
D. Transferred Properties
Wisconsin Electric and Edison Sault propose to transfer ownership and
control of their transmission assets to the Transco. The Transco will acquire
from Wisconsin Electric and Edison Sault transmission facilities that operate at
voltages of 345 kV, 138 kV and 69 kV. The Wisconsin Electric and Edison Sault
transmission assets proposed to be transferred include:
. Transmission lines (including towers, poles, and conductors) and
transmission substations;
. Transformers providing transformation within the bulk
transmission system and between the bulk and area transmission
systems;
. Lines providing connections to generation sources and step-up
(plant) substations;
28
<PAGE>
. Radial taps from the transmission system up to, but not
including, the facilities that establish the final connection to
distribution facilities or retail customers;
. Substations that provide primarily a transmission function;
. Voltage control devices and power flow control devices directly
connected to the transmission system; and
. Associated real estate and interests in real estate located in
the States of Michigan and Wisconsin, as further described in the
relevant property descriptions, or easements granted or assigned
to the Transco.
The determination as to what Wisconsin Electric assets constitute "transmission"
assets to be transferred to the Transco has been made consistent with an order
of the Public Service Commission of Wisconsin, dated July 13, 2000, in Docket
No. 05-EI-119. The PSCW conducted a proceeding specifically to provide
direction on this issue to the Wisconsin utilities./25/
A breakdown of the transmission assets to be contributed to the Transco by
Wisconsin Electric and Edison Sault is provided in Exhibit I. The original cost
of the Wisconsin Electric and the Edison Sault transmission assets is
approximately $372.9 million and $41.0 million, respectively. The net book value
(original cost less accumulated depreciation) of the Wisconsin Electric
transmission assets and the Edison Sault transmission assets at December 31,
2000 is expected to be approximately $230.0 million and $31.4 million,
respectively, and the contribution value is expected to be approximately $214.0
million and 30.0 million, respectively.
The facilities Wisconsin Electric and Edison Sault will transfer to the
Transco do not include distribution facilities used to provide retail service or
generation facilities. Distribution facilities include all facilities with
voltages below 50 kV, including the final circuit connection to
--------------------
/25/See Investigation into the Classification of Transmission Facilities
Pursuant to Wis. Stats. (S) 196.485(1)(h), Docket No. 05-EI-119.
29
<PAGE>
substations providing transformation or connection to any retail customer
regardless of voltage level.
Wisconsin Electric currently provides FERC jurisdictional transmission
service to certain customers over distribution facilities operated at voltages
of less than 50 kV. The Transco will continue to provide such service as
Wisconsin Electric's agent. Consequently, transmission customers that use
Wisconsin Electric's distribution system will, in the future, be able to secure
from the Transco all necessary transmission services over Wisconsin Electric's
current transmission and distribution system.
The Transco will be under a statutory mandate to transfer operational
control of its jurisdictional facilities to the Midwest ISO./26/ Prior to the
transfer, the Transco will have operational control of the transmission system
contributed by Wisconsin utilities; provide ancillary services; operate an Open
Access Same-Time Information System ("OASIS") in conformance with FERC Order No.
889; and administer the Transco OATT. The Transco will also be responsible for
the maintenance of the transmission facilities under its ownership and control
and will assume responsibility for transmission system planning. After the
transfer to the Midwest ISO, the Transco will make changes to its OATT to
accommodate operational differences between the Transco and the Midwest ISO open
access transmission tariff.
Wisconsin Electric and Edison Sault will each enter into a bill of sale,
deeds, easement assignments and other documentation with the Transco governing
the conveyance of their
--------------------
/26/If the Midwest ISO fails to commence operations or ceases operations,
statutory requirements that apply to the Midwest ISO will apply to any
other independent system operator or regional transmission organization
that is authorized under federal law to operate in Wisconsin. Section
196.485(2)(bx), Wis. Stat.
30
<PAGE>
respective transmission assets. The transmission assets transferred to the
Transco will include Wisconsin Electric's rights and interests in any contracts
under its existing Open Access Transmission Tariff (the "Wisconsin Electric
OATT").
In addition to the assets from Wisconsin Electric and Edison Sault, it is
expected that the Transco will also acquire transmission assets from WPL, South
Beloit, MGE and WPS. The Transco is also expected to acquire the incidental
transmission facilities of transmission-dependent utilities, such as WPPI's
member municipal utilities. The Transco will assign a nominal value of $10 to
each member unit initially issued in exchange for transmission assets.
The Transco will offer ancillary services under the Transco's OATT.
Because the Transco will own no generating facilities, it will purchase
ancillary services from third parties and resell them under its OATT. The
Transco expects to enter into agreements to purchase must- run and ancillary
services from generators in the control areas of Wisconsin Electric, WPL, WPS
and MGE. The Transco will contract for must-run operations and ancillary
services with the generators located in its control area and connected to its
transmission system. In accordance with Wisconsin law, the Transco will not,
however, engage in the purchase and sale of energy other than to obtain
necessary ancillary services required by its customers.
Upon receipt of necessary regulatory approvals, the Transco will begin
providing open access transmission services under its OATT to those existing
open access customers currently served by Wisconsin Electric under the existing
Wisconsin Electric OATT and to any other eligible customer requesting
transmission service from the Transco. Wisconsin Electric will become a
transmission customer of the Transco under its transmission tariff. Where
Wisconsin
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<PAGE>
Electric is responsible for providing transmission service under agreements or
tariffs pre-dating FERC Order No. 888 ("grandfathered agreements"), the Transco
will make its transmission system available under the Transco OATT in order to
provide transmission service to customers under the grandfathered agreements.
E. Related Orders and Applications Pertaining to the Establishment of the
Transco and Corporate Manager
On August 3, 2000, Alliant and WPL obtained a Commission order authorizing
them to: (i) acquire small membership interests in the Transco; (ii) acquire a
small percentage of the capital stock of the Corporate Manager; and (iii)
authorizing Alliant, through September 30, 2001, to guarantee the Transco's
payment obligations under a credit agreement and to enter into a reimbursement
agreement with the Transco./27/
On August 15, 2000, WPL, South Beloit, the Transco and the Corporate
Manager filed the Alliant Application seeking Commission authorization for: (i)
WPL to transfer ownership and control over its transmission assets to the
Transco; (ii) South Beloit to transfer ownership and control over its
transmission assets to the Transco; (iii) WPL and South Beloit to receive, in
exchange for their transmission assets, member units, i.e., shares, of the
Transco; (iv) WPL to purchase Class A shares of the Corporate Manager; (v) WPL
to purchase one Class B share of the Corporate Manager; (vi) the Transco's
issuance of member units in exchange for transmission assets, in the case of
transmission-owning Transco members, or cash, in the case of
--------------------
/27/Alliant Energy Corporation, HCAR No. 27206 (August 3, 2000).
--------------------------
32
<PAGE>
transmission-dependent Transco members; and (vii) the Corporate Manager's
issuance of its Class A and Class B shares in exchange for cash payments.
WPL and South Beloit have also sought Commission authorization through June
30, 2004 for external financing by the Transco and the Corporate Manager through
various forms of (i) short-term debt financing; (ii) long-term debt financing;
and (iii) equity financing in the form of common or preferred stock of the
Corporate Manager, other equity securities or additional interests in the
Transco.
This Application, the Alliant Application and any applications filed by
other Member Utilities should be viewed as companion filings. All must be
approved expeditiously if the Transco is to commence operations prior to the
Operations Date. If the Commission does not act within this timeframe certain
Applicants will be in violation of the Transco Legislation and may face adverse
regulatory consequences./28/
ITEM 2: FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses incurred, or to be incurred, by the
Applicants in connection with the transactions proposed herein are estimated as
follows:
<TABLE>
<S> <C>
Real Estate Appraisal and Transfer Costs $ 821,000
Environmental Assessment and Remediation 311,000
Legal Fees 1,082,000
Independent Engineer's Fee and Miscellaneous 80,000
Internal Non-Labor 806,000
Internal Labor 812,000
----------
Total $3,912,000
</TABLE>
--------------------
/28/For example, pursuant to Wis. Stats. (S) 196.485(8), any public utility
affiliate that does not complete the contribution of its transmission
facilities to the Transco by January 1, 2001, will be subject to a penalty
of $25,000 for each day that the contribution is delayed if the Transco is
legally able to accept the contribution.
33
<PAGE>
ITEM 3: APPLICABLE STATUTORY PROVISIONS
The Applicants believe that the proposed transaction is regulated by
Sections 9(a)(2), 10 and 3(a)(1) of the Act. To the extent the Commission finds
that the transaction requires authorization, approval or exemption under any
section of the Act or provision of the rules or regulations thereunder other
than those specifically referred to herein, the Applicants hereby request such
authorization, approval or exemption.
When the transmission assets of the Member Utilities are transferred to the
Transco, the Transco will become an "electric utility company" under Section
2(a)(3) of the Act and a "public utility company" under Section 2(a)(5). In
addition, it is possible that the Corporate Manager, by virtue of its ownership
interest in, and management of, the Transco, will also become an "electric
utility company" and a "public utility company." For purposes of this
Application, the Applicants have assumed that the Commission will consider the
Corporate Manager to be a "public utility company." However, the Applicants
reserve the right to make a future filing demonstrating that the Corporate
Manager should not be considered to be a public utility company.
As a result of the proposed transaction, Wisconsin Energy will be
indirectly acquiring 5% or more of the outstanding voting securities of the
Transco. Wisconsin Energy already maintains such an interest, directly or
indirectly, in Wisconsin Electric, Edison Sault and Wisconsin Gas, all of which
are public utility companies under Section 2(a)(5) of the Act. As a
consequence, Wisconsin Energy's indirect acquisition of an interest in the
Transco will be subject to the
34
<PAGE>
Commission's approval pursuant to Section 9(a)(2) of the Act. Similarly, if the
Corporate Manager is considered to be a public utility company, Wisconsin
Electric will be directly acquiring more than 5% of two public utility companies
(the Transco and the Corporate Manager)/29/. Therefore, the Applicants believe
that the proposed transaction cannot proceed without the Commission's approval
under Section 10 of the Act. The relevant statutory standards to be satisfied
are set forth in Sections 10(b), 10(c) and 10(f) of the Act.
A. Section 10 Standards
The statutory standards to be considered by the Commission in evaluating
the transaction are set forth in Sections 10(b), 10(c) and 10(f) of the Act.
For the reasons set forth in detail below, the transaction fully complies with
such sections.
1. Section 10(b)
Section 10(b) of the Act provides that, if the requirements of Section
10(f) are satisfied, the Commission shall approve an acquisition under Section
9(a) unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind
or to an extent detrimental to the public interest or the
interest of investors or consumers;
--------------------
/29/Although Edison Sault may acquire more than 5% of the voting securities
of the Transco, it will not acquire any shares in the Corporate Manager.
Since Edison Sault does not have any other utility affiliates, as the term
"affiliate" is defined for purposes of Section 9(a)(2) of the Act, the
Applicants believe that its direct acquisition of member units in the
Transco, as opposed to WEC's indirect acquisition of those units, is not
subject to the Commission's approval under Section 9(a)(2) of the Act. In
the event that Edison Sault's interest in the Transco exceeds 10%, in which
case Edison Sault may be deemed to be a "holding company" under the Act,
Edison Sault will file an exemption statement on Form U-3A-2 pursuant to
Rule 2 under the Act.
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(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
(3) such acquisitions will unduly complicate the capital structure of
the holding-company of the applicant or will be detrimental to
the public interest or the interest of investors or consumers or
the proper functioning of such holding-company system.
a. Section 10(b)(1)
The proposed transaction will not tend towards interlocking relations or
the concentration of control of public utility companies, of a kind or to an
extent detrimental to the public interest or the interest of investors or
consumer.
The Corporate Manager will initially have a ten member Board of Directors.
While five directors will be appointed by the Member Utilities, four directors
will be independent, as mandated by the Transco Legislation. The remaining
director will be the chief executive officer of the Corporate Manager. The
employees of the Transco and the Corporate Manager will not be employees of any
of the member utilities. Therefore, any interlocking relations will be minimal,
at most.
Similarly, the proposed transaction will not tend toward any "concentration
of control of public utility companies" that is detrimental to the public
interest or the interest of consumers or investors. The end result of the
formation of the Transco will not be the concentration of control over the
Wisconsin transmission system, but rather the dilution of control. There will
be at least five member utilities with input, through the Corporate Manager,
over decisions as to the
36
<PAGE>
management and operation of the Transco's transmission assets. One of these
Member Utilities -- WPPI -- currently has no such input. Indeed the creation of
the Transco will encourage competition, rather than concentrate control.
b. Section 10(b)(2)
Under Section 10(b)(2) of the Act, the Commission must determine whether
the consideration to be paid in connection with the transaction "including all
fees, commissions and other remuneration ... is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of ... the
utility assets underlying the securities to be acquired ...."
i. Fairness of Consideration
Section 10(b)(2) of the Act requires the Commission to determine whether
the consideration in connection with a proposed acquisition of securities is
reasonable and whether it bears a fair relation to the investment in, and the
earning capacity of, the utility assets underlying the securities being
acquired. All transmission assets that will be transferred to the Transco will
be valued based on the same methodology. This methodology is generally mandated
by the Transco Legislation and the specifics have been arrived at as the result
of arms-length negotiations among all of the Member Utilities, subject to the
review and approval of the Wisconsin Commission. Applicants further believe
that such consideration bears a fair relation to the investment in and the
earning capacity of the transmission assets to be transferred because it is
based on the Contribution Value of those assets. Because the Transco's rates
will also be subject to FERC approval, it can be expected that those rates
(which will largely also be based on the same Contribution Value) will permit
the Transco to earn a fair return on the assets as well.
37
<PAGE>
This being the case, all Member Utilities, including Wisconsin Electric and
Edison Sault, can expect to earn a fair return on their investment.
ii. Reasonableness of Fees
An estimate of the fees and expenses to be paid in connection with the
proposed transactions is set forth in Item 2 hereof. The estimated amounts to
be paid are fees required to be paid to governmental bodies, fees for necessary
professional services, and other expenses incurred or to be incurred in
connection with carrying out the proposed transaction. Applicants believe that
such fees and expenses are reasonable and customary for a transaction of this
kind and that the standards of Section 10(b)(2) are thus satisfied.
c. Section 10(b)(3)
Section 10(b)(3) requires that the Commission determine whether the
proposed transaction will unduly complicate WEC's or Wisconsin Electric's
capital structure or will be detrimental to the public interest, the interests
of investors or consumers or the proper functioning of WEC's system.
The corporate capital structures of WEC and Wisconsin Electric after the
consummation of the proposed transaction will not be unduly complicated. The
ownership structure of the Corporate Manager and the Transco has been designed
to simplify management of the Transco and to facilitate public investment in the
Transco enterprise through a public offering of stock in the Corporate Manager,
such stock being more attractive to investors than would be the equivalent
member units (LLC interests) of the Transco. Although such structure introduces
an additional corporate layer into the WEC system, the Transco and the Corporate
Manager will, as
38
<PAGE>
a practical matter, function as one entity. The Corporate Manager has been
introduced simply to make public investment in the Transco enterprise more
"investor-friendly"./30/
In any event, as set forth more fully elsewhere in this
Application/Declaration the proposed formation of the new transmission company
is expected to result in benefits to the public and to consumers and investors
of the WEC holding company system.
The transfer of the Wisconsin Electric transmission assets to the Transco
in exchange for a membership interest in the Transco will not be detrimental to
the investors in Wisconsin Electric. There are currently outstanding
approximately $712 million principal amount of Wisconsin Electric first mortgage
bonds which are secured by permanent additions having a depreciated book value
of approximately $2.8 billion as of September 30, 2000. Of this amount,
approximately $1,187 million of permanent additions (166 2/3% of the principal
amount of the bonds) were applied to the issuance of the bonds (or refundable
bonds made the basis for the issuance of $130 million of the outstanding bonds)
with the balance available for additional bonding or other applications
permitted by the mortgage indenture securing the bonds. The aggregate
depreciated book value of the Wisconsin Electric transmission assets is
approximately $230 million. Following the release of the Wisconsin Electric
transmission assets from the lien of the mortgage indenture, Wisconsin
Electric's outstanding first mortgage
--------------------
/30/Upon the transfer of transmission assets to the Transco, Wisconsin
Electric may be deemed to be a "holding company" under the Act because of
its more than 10% ownership interests in the Transco and the Corporate
Manager. Consequently, Wisconsin Electric will file an exemption statement
on Form U-3A-2 pursuant to Rule 2 under the Act.
39
<PAGE>
bonds will be secured by permanent additions with a depreciated book value of
more than 3.5 times the aggregate principal amount of those bonds.
After the release of the transmission assets from the lien of the
indenture, which will be effected by substituting refundable (previously issued
and retired) bonds in the aggregate principal amount of 6/10ths of the amount of
cash that would otherwise be required to be deposited with the Trustee, as
permitted by the indenture, there will be net bondable property additions of
approximately $1.8 billion and refundable bonds in the aggregate principal
amount of approximately $1.3 billion available for the issuance of additional
bonds, the withdrawal or reduction of cash deposited or required to be deposited
with the Trustee, or other applications permitted by the indenture. Wisconsin
Electric has no intention to issue additional first mortgage bonds; however, it
does intend to transfer additional utility assets free of the lien of the
indenture in connection with the proposed further restructuring of its
operations. Any such further transfers will be made in accordance with the
terms of the indenture.
With respect to the equity investors in Wisconsin Electric (preferred
stockholders all of Wisconsin Electric's common stock is owned by Wisconsin
Energy) and holders of Wisconsin Electric's unsecured debt
securities, Wisconsin Electric's total assets will not be materially affected by
the proposed transaction. Wisconsin Electric will receive directly or
indirectly an equity interest in the Transco which approximates the value of the
Wisconsin Electric transmission assets transferred to the Transco.
Wisconsin Electric is required by order of the Public Service Commission of
Wisconsin to maintain a capital structure in which equity constitutes 48.5% to
53.5% of total capital. The
40
<PAGE>
proposed transaction will not adversely affect Wisconsin Electric's ability to
maintain a balanced capital structure in accordance with the requirements of the
Public Service Commission of Wisconsin.
Edison Sault has no equity holders other than Wisconsin Energy and has
called for optional redemption of all of its outstanding first mortgage bonds.
The proposed transaction will not adversely affect Edison Sault's ability to
maintain a balanced capital structure.
2. Section 10(c)
Section 10(c) of the Act provides that:
Notwithstanding the provisions of subsection (b), the Commission shall
not approve:
(1) An acquisition of securities or utility assets, or of any other
asset, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11;
or
(2) The acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and efficient development of any integrated public
utility system ....
a. Section 10(c)(1)
Consistent with the standards set forth in Section 10(c)(1) of the Act, the
proposed acquisition of securities will not be unlawful under the provisions of
Section 8 of the Act, or detrimental to the carrying out of the provisions of
Section 11 of the Act.
Section 8 prohibits a registered holding company or any of its subsidiaries
from acquiring, owning interests in, or operating both a gas utility company and
an electric utility
41
<PAGE>
company serving substantially the same area if prohibited by state law, and is
thus not applicable to the transactions contemplated herein.
Section 11(a) of the Act requires the Commission to examine the corporate
structure of registered holding companies to ensure, among other things, that
unnecessary complexities are eliminated and voting powers are fairly and
equitably distributed. As discussed above, the Transco/Corporate Manager
ownership structure has been designed to facilitate public investment in the
Transco enterprise and is therefore not unnecessarily complex. Moreover,
subject to the right of each Member Utility to appoint a director of the
Corporate Manager, voting powers are generally allocated based on contributions
to the Transco. Accordingly, the proposed transactions meet the standards of
Section 11(a) of the Act.
b. Section 10(c)(2)
As the following discussion will demonstrate, the proposed transaction will
serve the public interest by tending towards the economical and efficient
development of an integrated public utility system as required by Section
10(c)(2) of the Act.
(i) Efficiencies and Economies.
The proposed transaction tends toward a variety of efficiencies and
economies. It implements the legislative intent of the Transco Legislation to
meet the reliability and competitive needs of the State of Wisconsin by: 1)
creating a single transmission system without pancaked rates; 2) encouraging
creation of a regional grid; 3) simplifying administration of the highly
constrained MAPP-MAIN interface by eliminating the multiple ownership of the
42
<PAGE>
MAIN side of the interface;/31/ 4) increasing access from the south and west by
creating incentives to improve overall import capability; and 5) preserving the
value of the current owners' investments in the transmission system without
write-up of the value of the assets. The Transco also takes the functional
unbundling requirement of FERC Order Nos. 888 and 2000 a step further by
separating transmission from generation and distribution into a separate entity.
In addition, by combining the transmission systems of several utilities, the
Transco will provide operational benefits, such as internalizing loop flow,
eliminating constraints, and permitting calculation of available transmission
capability on a system wide basis.
(ii) Integrated Public Utility System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operation to a
single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
--------------------
/31/Wisconsin is split between two reliability councils, with the Western
part of the state belonging to MAPP and the eastern part of the state
belonging to MAIN. Currently transfer capacity at the MAPP/MAIN interface
is limited.
43
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The Commission has previously taken notice of developments that have
occurred in the gas and electric industries in recent years, and has interpreted
the Act and analyzed proposed transactions in light of those developments./32/
Based on the statutory definition, the Commission has established four
standards that must be met before it will find that an integrated public-utility
system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation./33/
The proposed transaction satisfies all four of these requirements. In examining
proposed transactions to determine whether the integration requirements have
been satisfied, the
--------------------
/32/See, e.g., American Electric Power Co., HCAR No. 27186 (June 14, 2000)
--------------------------
("AEP Order"); New Century Energies, Inc., HCAR No. 26748 (Aug. 1 1997)
-------------------------
(approving transactions relating to combination of a Colorado gas and
electric utility company and intrastate exempt holding company and a New
Mexico electric utility company), citing Hearing on Regulation of Public
Utility Holding Companies Before Subcomm. on Telecommunications and Finance
and Subcomm. on Energy and Power of the House of Representatives Comm. on
Commerce, 104th Cong., 1st Sess. (Aug. 4, 1995) (testimony of Arthur
Levitt, Chairman, SEC). See also Rust v. Sullivan, 500 U.S. 173, 186-87
----------------
(1991) (stating that "an agency is not required to" establish rules of
conduct to last forever, "but rather must be given ample latitude to Aadopt
[its] rules and policies to the demands of changing circumstances.")
(citations omitted); Shawmut Assn. v. SEC, 146 F.2d 791, 796-97 (1st Cir.
--------------------
1945) (stating that an agency "is expected to treat experience not as a
jailer but as a teacher").
/33/Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir.
----------------------------------
1990), quoting In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958).
--------------------------
44
<PAGE>
Commission has "interpreted the Act and analyzed transactions in the light of
... changed and changing circumstances."/34/ Applicants believe that the
Transco Legislation, as well as the recent FERC Order No. 2000, both of which
strongly encourage transmission company formation, constitute such changing
circumstances which the Commission should consider when evaluating the proposed
transaction.
(a) Physical Interconnection
In view of the above, the facts presented clearly support a finding that
the utility assets of the Transco will be "physically interconnected or capable
of physical interconnection" within the meaning of Section 2(a)(29)(A) of the
Act once the transactions contemplated herein are completed. Indeed, as
discussed in Item 1, the utility assets to be owned by the Transco are already
physically interconnected.
(b) Single Interconnected and Coordinated System.
Section 2(a)(29)(A) of the Act requires that the utility assets, under
normal circumstances, may be "economically operated as a single interconnected
and coordinated system." The Commission has interpreted this language to refer
to the physical operation of utility assets as a system in which, among other
things, the generation and/or flow of current within the system may be centrally
controlled and allocated as need or economy dictate./35/ As discussed above, the
transmission assets that will be transferred to the Transco will be operated in
a manner that satisfies the standard of economic and coordinated operations in
Section
--------------------
/34/AEP Order.
---------
/35/See UNITIL Corp., HCAR No. 25524 (Apr. 24, 1992).
-----------
45
<PAGE>
2(a)(29)(A) of the Act. Moreover, the proposed transaction is expected to result
in greater coordination and more efficient allocation of the provision of
transmission services within the area served by the Transco.
(c) Single Area or Region
The "single integrated system" of the Transco will initially be the central
and eastern portions of the State of Wisconsin and small adjacent areas of the
Michigan Upper Peninsula and Illinois. Through the membership of additional
transmission-owning-utilities, the Transco's system may grow to include other
parts of Wisconsin and portions of other Midwestern states.
(d) Localized Management, Efficient Operation and Effective
Regulation
The creation of the Transco will not impair localized management, efficient
operation or effective regulation by reason of its size. Moreover, the
Commission's past decisions on "localized management" show that the proposed
transaction fully preserves the advantages of localized management. In such
cases, the Commission has evaluated localized management in terms of :
(1) responsiveness to local needs/36/;
(2) whether management and directors were drawn from local
utilities/37/;
--------------------
/36/See American Electric Power Co., HCAR No. 20633 (July 31, 1978)
--------------------------
(advantages of localized management evaluated in terms of whether an
enlarged system could be "responsive to local needs"); General Public
--------------
Utilities Corp., 37 S.E.C. 28, 36 (1956) (localized management evaluated in
--------------
terms of "local problems and matters involving relations with consumers").
/37/See Centerior Energy Corp., HCAR No. 24073 (April 29, 1986) (advantages
---------------------
of localized management would not be compromised by the affiliation of two
electric utilities under a new holding company because the new holding
company's "management [would be] drawn from the present management" of the
two utilities).
46
<PAGE>
(3) the preservation of corporate identities/38/; and
(4) the ease of communications/39/.
These elements will all be satisfied here. The Transco is being created in
response to local needs. The Wisconsin Legislature has determined that the
Transco will improve electric service in Wisconsin. Each local utility (except
Edison Sault and South Beloit) will elect one director to the Corporate
Manager's Board of Directors. Each Member Utility will continue to exist after
the transmission assets are transferred to the Transco. Communication between
the Transco and its members will flow easily./40/
Finally, the formation of the Transco will have no impact on the existing
integration of the Wisconsin Energy holding company system. In its Order dated
April 10, 2000, regarding the acquisition by Wisconsin Energy of WICOR, Inc.,
the Commission made the following findings:
The existing WEC electric utility system is, and following the Merger
will continue to be, an integrated electric utility system ....
[T]here is substantial evidence that the gas operations of [Wisconsin
Electric] and Wisconsin Gas will constitute an integrated gas utility
system within the meaning of section 2(a)(29)(B).
--------------------
/38/See Northeast Utilities, HCAR No. 25221 (December 21, 1990) (utilities
-------------------
"will be maintained as separate New Hampshire corporations ... [t]herefore
the advantages of localized management will be preserved"); Columbia Gas
------------
System, Inc., HCAR No. 24599 (March 15, 1988) (benefits of local management
-----------
maintained where the utility to be added would be a separate subsidiary).
/39/See American Electric Power Co., HCAR No. 20633 (July 21, 1978)
--------------------------
(distance of corporate headquarters from local management was a "less
important factor in determining what is in the public interest" given the
"present-day ease of communication and transportation").
/40/In addition, under the Transco Legislation, the Transco and/or the
Midwest ISO are obligated, to the maximum extent practicable, to
"eliminate[ ] advantages in electric generation, wholesale and retail
markets that are otherwise related to ownership, control or operation of
transmission facilities" and "[s]atisf[y] the reasonable needs of
transmission users in this state for reliable, low-cost and competitively
priced electric service." Section 196.485(3)(c) of the Wisconsin Statutes.
47
<PAGE>
In this matter there will be de facto integration of the separate gas
and electric systems./41/
The formation of the Transco and the participation in the Transco by Wisconsin
Electric and Edison Sault will not alter in any way the facts on which the
Commission based its April 10, 2000, findings that the Wisconsin Energy holding
company system is integrated under the meaning of the Act.
3. Section 10(f)
Section 10(f) provides that:
the Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of Section 11.
As discussed above, the Transco is being created pursuant to, and in accordance
with, Wisconsin law. As already discussed, Wisconsin law provides an incentive
for Wisconsin public utility holding companies to transfer their transmission
assets to a single-purpose transmission company such as the Transco will be.
The Wisconsin Transco Legislation also facilitates and regulates the proposed
transaction. As described below, the transaction requires the approval of the
Wisconsin Commission and that approval has been granted. Thus, the requirements
of Section 10(f) are satisfied.
--------------------
/41/HCAR No. 27163 (April 10, 2000).
48
<PAGE>
B. Section 3(a)(1)
Section 3(a)(1) provides that unless the Commission would find an exemption
"detrimental to the public interest or the interest of investors or consumers,"
the Commission shall exempt any holding company from registration 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 carry on their business
substantially in a single State in which such holding company and
every such subsidiary company thereof are organized.
As previously noted, WEC is currently a Section 3(a)(1) exempt holding company
pursuant to Commission order. After completion of the proposed transaction,
WEC will continue to satisfy the requirements of Section 3(a)(1).
Section 2(a)(8) of the Act provides that a utility, such as the Transco
will be and the Corporate Manager may be, is a "subsidiary company" of any
entity that owns at least 10% of its voting securities. Because WEC will own
(indirectly through Wisconsin Electric and Edison Sault) more than 10% of the
Transco and the Corporate Manager, each will be a "subsidiary company" of WEC.
In its recent order granting WEC exemption from registration under Section
3(a)(1) in connection with its acquisition of WICOR, the Commission stated:
Wisconsin Gas will remain the sole public-utility subsidiary of WICOR
and will become an indirect, wholly owned subsidiary of WEC.
Wisconsin Gas is incorporated under the laws of the state of Wisconsin
and conducts all of its gas business within Wisconsin. WICOR will
obtain 100 percent of its utility gross revenues from
49
<PAGE>
within Wisconsin, and WEC will obtain approximately 94 percent of its
utility gross revenues from Wisconsin. The remaining six percent of
utility gross revenues primarily come from [Wisconsin Electric's] and
Edison Sault's operations in the Upper Peninsula of Michigan. Using
the net operating revenues test, the number would be lower than six
percent./42/
Based on that analysis the Commission concluded that WEC (and WICOR) would
satisfy the standards of Section 3(a)(1), and issued an order granting exemption
from registration.
WEC's (indirect) acquisition of an interest in the Transco will have only a
de minimis effect on the calculations the Commission relied on its April 2000
----------
order. All of the Transco's assets will be located in Wisconsin, with the
exception of the Edison Sault and Wisconsin Electric transmission assets located
in the Upper Peninsula of Michigan and some South Beloit transmission assets
located in Illinois. The rates ultimately charged for the Transco's services,
and thus its revenues and earnings, will be based largely on the value of its
assets. WEC's share of the Transco's revenues and earnings attributable to
activity in Michigan will actually be less than the imputed transmission revenue
and earnings WEC currently receives from Michigan./43/ The reason is that WEC
currently has a 100% (indirect) interest in its Michigan transmission assets
but, upon transfer of those assets to the Transco, will have only a 48%
(indirect) interest in them. The estimated value of South Beloit's Illinois
transmission assets that will be transferred to the Transco is approximately
$590,000 or 1/10 of 1% of the Transco's total assets. Thus,
--------------------
/42/HCAR No. 27163 (April 10, 2000).
/43/Currently, most of the transmission service that WEC's utility
subsidiaries provide to their customers is bundled with the power those
customers purchase. As a result, revenue and earnings attributable only to
the sale of transmission service are not broken out but can be thought of
as "imputed." Because the Transco will sell unbundled transmission service,
once the Transco begins operation WEC will be able to identify its pro rata
share of earnings and revenue attributable to transmission.
50
<PAGE>
WEC's pro rata share of earnings and revenue attributable to the Illinois assets
will be insignificant.
Accordingly, the Applicants believe that WEC will retain its current
Section 3(a)(1) exemption after Wisconsin Electric's acquisition of interests in
the Transco and Corporate Manager and Edison Sault's acquisition of interests in
the Transco. On the Operations Date, the Transco and the Corporate Manager will
clearly be "predominantly intrastate in character" and will carry out nearly all
of their business in Wisconsin, the state where they are organized. Applicants
estimate that until and unless additional non-Wisconsin utilities join the
Transco, the Transco will derive approximately 95% of its revenues and income
from Wisconsin activities. Similarly, approximately 95% of the total value of
the Transco's transmission assets will be associated with transmission
facilities located in Wisconsin. These figures are well within the ranges the
Commission has previously found to be acceptable./44/
For these reasons, WEC requests that the Commission affirm WEC's exemption
from registration under Section 3(a)(1) of the Act.
Wisconsin Electric may become a utility holding company in its own right as
a result of its acquisition of a greater than 10% interest in the Transco and,
assuming it is considered to be a public utility company, the Corporate Manager.
Given that the Transco and the Corporate Manager will be "predominantly"
Wisconsin utilities that carry out nearly all of their business in Wisconsin on
the Operations Date, the Applicants believe that Wisconsin Electric will qualify
for exemption from registration pursuant to Rule 2. Consequently, upon the
completion of the
--------------------
/44/See, e.g., NIPSCO Industries, Inc., HCAR No. 26975 (February 10, 1999).
----------------------
51
<PAGE>
transaction described in this Application, Wisconsin Electric will file an
exemption statement on Form U-3A-2 pursuant to Rule 2.
Edison Sault will own less than 10% of the Transco and will not have any
ownership interest in the Corporate Manager. Consequently, the Transco and
Corporate Manager will not be subsidiaries of Edison Sault for purposes of the
Act and Edison Sault will not become a utility holding company. Edison Sault
will therefore not be required to seek an exemption under the Act.
ITEM 4: REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that the
Applicants have obtained or expect to obtain in connection with the proposed
transaction. Except as set forth below, no other state or local regulatory body
or agency and no other federal commission or agency (except the Commission under
the Act) is known to have jurisdiction over the proposed transaction, and no
other regulatory approvals are required.
A. Federal Power Act.
Under Section 203 of the Federal Power Act, the FERC has jurisdiction
over the proposed transaction. Wisconsin Electric filed an application with the
FERC on January 6, 2000, for authorization to transfer ownership and control of
certain transmission facilities to the Transco (referred to in the proceeding at
the FERC as "Wisconsin Transco"). On March 31, 2000, the FERC issued an order
authorizing the transfer as consistent with the public interest./45/
--------------------
/45/Wisconsin Electric Power Company, Docket No. EC00-45-000, Order
Authorizing Disposition of Jurisdictional Facilities (March 31, 2000), 90
FERC (PAR) 61,346.
52
<PAGE>
Edison Sault filed an application with the FERC on August 28, 2000 for
authorization to transfer ownership and control of certain transmission
facilities to the Transco. On November 9, 2000, the FERC issued an order
authorizing the transfer as consistent with the public interest./46/
In addition to its Section 203 jurisdiction over the transfer to the
Transco of transmission assets by individual Member Utilities, FERC has
jurisdiction under Section 205 over the Transco's rates and terms and condition
of service. The Transco applied to FERC on July 31, 2000, for approval of its
proposed Open Access Transmission Tariff ("OATT"). On December 14, 2000, FERC
issued an order in Docket No. EROO-3316-000, Accepting in Part and Rejecting in
Part Filing of Open Access Transmission Tariff. In that order, FERC accepted
the Transco's proposed OATT, with certain clarifications and modifications, as
consistent with or superior to FERC's pro forma tariff./47/ FERC accepted the
---------
OATT to be effective on the date the associated rates become effective. With
respect to the Transco's proposed rates, however, FERC stated that certain
aspects of the rate proposal deemed to be rate "incentives," such as the capital
expansion adder and shortened depreciation for new transmission facilities, were
only available in the context of RTOs. On December 15, 2000, the Transco
submitted a new Section 205 rate filing without the capital expansion adder and
shortened depreciation life proposals. The rates proposed in the December 15,
2000, filing reflect a reduction of approximately 5% from the rates proposed in
the July 21, 2000, filing but are otherwise identical to the rates proposed in
the July filing. The Transco has asked FERC for expedited review of its December
15, 2000, filing.
--------------------
/46/Edison Sault Electric Company, Docket No. ECOO-131-000, Order
Authorizing Disposition of Jurisdictional Facilities (November 9, 2000), 93
FERC (PAR)61, 146.
/47/American Transmission Company LLC, 93 FERC (PAR) 61, 627 (2000).
---------------------------------
53
<PAGE>
Applicants do not believe that final FERC approval of the OATT price terms is
required in order for the Commission to grant the authorizations requested in
this Application. Based on the FERC's December 14, 2000, order approving the
Transco's OATT, the Transco's December 15, 2000, Section 205 rate filing, and
FERC precedent, the Transco can begin operations on January 1, 2001, without
violating the Federal Power Act.
B. State Public Utility Regulation
On December 22, 2000, the Wisconsin Commission issued its Order in
Docket No. 137-NC-100. In that Order, the Wisconsin Commission ordered, inter
alia, that Wisconsin Electric is authorized to become a member of the Transco by
contributing its transmission facilities and land rights to the Transco.
Edison Sault filed an application with the Michigan Commission on October
27, 2000, requesting the Commission to approve the classification of Edison
Sault's facilities of 50kV or higher as transmission facilities and to grant any
other approvals that may be needed to facilitate transfer of such facilities to
the Transco, including approval of journal entries to record the transfer of the
affected property. On December 20, 2000 the Michigan Commission issued an order
approving the application.
Wisconsin Electric filed an application with the Michigan Commission on
October 27, 2000, requesting the Commission to approve the classification of its
transmission and distribution facilities as determined by the Wisconsin
Commission and the associated journal entries to record the transfer of
transmission assets to the Transco. On December 20, 2000, the Michigan
Commission issued an order approving the application.
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<PAGE>
ITEM 5: PROCEDURE
The Commission has published a notice under Rule 23 with respect to the
filing of this Application/Declaration and no hearing has been requested. The
Applicants request that the Commission's Order be issued as soon as practicable
in order to accommodate a closing before December 29, 2000. This will facilitate
the Member Utilities' meeting the January 1, 2001 deadline contemplated by the
Transco Legislation for the commencement of Transco operations and the timely
completion of the transmission asset transfers that are required in order for
the Wisconsin public utility holding companies to qualify for relief from the
Wisconsin non-utility asset cap limit.
The Applicants further request that there should not be a 30-day waiting
period between issuance of the Commission's order and the date on which the
Order is to become effective, hereby waive a recommended decision by a hearing
officer or any other responsible officer of the Commission, and consent that the
Division of Investment Management may assist in the preparation of the
Commission's decision and/or order, unless the Division opposes the matters
proposed herein.
ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Form of Articles of Organization of the Transco. - - Incorporated
by reference to Alliant Energy SEC File No. 70-9695.
A-2 Form of Operating Agreement of the Transco. - - Incorporated by
reference to Alliant Energy SEC File No. 70-9695.
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A-3 Form of Articles of Incorporation of ATC Management Inc. - -
Incorporated by reference to Alliant Energy SEC File No. 70-9695.
A-4 Form of Amended and Restated Articles of Incorporation of ATC
Management Inc. -- Incorporated by reference to Alliant Energy
SEC File No. 70-9695.
A-5 Amended By-laws of ATC Management Inc. - - Incorporated by
reference to Alliant Energy SEC File No. 70-9695.
B-1 Form of O&M Agreement. -- Incorporated by reference to Alliant
Energy SEC File No. 70-9695.
B-2 Form of Services Agreement. -- Incorporated by reference to
Alliant Energy SEC File No. 70-9695
B-3 Form of Asset Contribution Agreement. -- Incorporated by
reference to Alliant Energy SEC File No. 70-9695.
B-4 Form of Transco Forming Party Agreement. -- Incorporated by
reference to Alliant Energy SEC File No. 70-9695.
B-5 Form of Transco Generation - Transmission Interconnection
Agreement. -- Incorporated by reference to Alliant Energy SEC
File No. 70-9695.
B-6 Form of Network Operating Agreement. -- Incorporated by reference
to Alliant Energy SEC File No. 70-9695.
B-7 Form of Transco Distribution-Transmission Interconnection
Agreement. -- Incorporated by reference to Alliant Energy SEC
File No. 70-9695.
B-8 Form of Network Integration Transmission Service Agreement. --
Incorporated by reference to Alliant Energy SEC File No. 70-9695.
C Not Applicable.
D-1 Application of Edison Sault to FERC.
D-2 Application of Wisconsin Electric to FERC.
D-3 Order of FERC regarding Wisconsin Electric Application.
D-4 Order of FERC regarding Edison Sault Application.
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D-5 Application of Edison Sault to Michigan Public Service
Commission.
D-6 Application of Wisconsin Electric to Michigan Public Service
Commission.
D-7 Order of Michigan Public Service Commission regarding Wisconsin
Electric.
D-8 Order of Michigan Public Service Commission regarding Edison
Sault.
D-9 Application of the Transco to FERC. -- Incorporated by reference
to Alliant Energy SEC File No. 70-9695.
D-10 Order of FERC regarding Transco Application. -- Incorporated by
reference to Alliant Energy SEC File No. 70-9695.
D-11 Omnibus Application of the Transco and Member Utilities to the
Public Service Commission of Wisconsin (Docket No. 137-NC-100).
-- Incorporated by reference to Alliant Energy SEC File No. 70-
9695.
D-12 Supplement to Omnibus Application. -- Incorporated by reference
to Alliant Energy SEC File No. 70-9695.
D-13 Order of Wisconsin Commission regarding Omnibus Application. --
Incorporated by reference to Alliant Energy SEC File No.
70-9695.
E Interconnection Map. -- Incorporated by reference to Alliant
Energy SEC File No. 70-9695.
F-1 Preliminary Opinion of Quarles & Brady LLP.
F-2 Past Tense Opinion of Quarles & Brady LLP.*
F-3 Past Tense Opinion of Loomis, Ewert, Parsley, Davis & Gotting,
P.C.*
G. Not applicable.
H. Form of Notice -- previously filed.
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I. Description and valuation of transferred assets.
* To be filed by amendment.
B. Financial Statements.
1.1 Balance Sheet of Wisconsin Energy and consolidated subsidiaries,
as of June 30, 2000 (incorporated by reference to the Quarterly
Report on Form 10-Q of Wisconsin Energy for the quarter ended
June 30, 2000) (File No. 001-09057).
1.2 Statement of Income of Wisconsin Energy and consolidated
subsidiaries for the six months ended June 30, 2000 (incorporated
by reference to the Quarterly Report on Form 10-Q of Wisconsin
Energy for the quarter ended June 30, 2000) (File No. 001-
09057).
1.3 Balance Sheet of Wisconsin Electric, as of June 30, 2000
(incorporated by reference to the Quarterly Report on Form 10-Q
of Wisconsin Electric for the quarter ended June 30, 2000) (File
No.001-01245).
1.4 Statement of Income of Wisconsin Electric for the period ended
June 30, 2000 (incorporated by reference to the Quarterly Report
on Form 10-Q of Wisconsin Electric for the six months ended June
30, 2000) (File No. 001-01245).
ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this Application/Declaration
involve a "major federal action" nor do they "significantly affect the quality
of the human environment" as those terms are used in Section 102(2)(C) of the
National Environmental Policy Act. The transaction that is the subject of this
Application/Declaration will not result in changes in the operation of the
Applicants that will have an impact on the environment. The Applicants are not
aware of any federal agency that has prepared or is preparing an environmental
impact statement with respect to the transactions that are the subject of this
Application/Declaration.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this amendment to be signed on
their behalf by the undersigneds thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
By: /s/ Larry Salustro
-------------------
Larry Salustro
Senior Vice President and General Counsel
WISCONSIN ELECTRIC POWER COMPANY
By: /s/ David K. Porter
--------------------
David K. Porter
Senior Vice President
Dated: December 28, 2000
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