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FILE NO. 70-8891
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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<TABLE>
<S> <C> <C>
IES Industries Inc. Interstate Power Company WPL Holdings, Inc.
200 First Street S.E. 1000 Main Street 222 West Washington Avenue
Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004 Madison, Wisconsin 53703
</TABLE>
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(Name of companies filing this
statement and address of principal
executive office)
None
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(Name of top registered holding company, parent of each applicant or declarant)
<TABLE>
<S> <C> <C>
Lee Liu Michael R. Chase Erroll B. Davis, Jr.
Chairman of the Board, President President President and
& Chief Executive Officer Interstate Power Company Chief Executive Officer
IES Industries Inc. 1000 Main Street WPL Holdings, Inc.
200 First Street S.E. Dubuque, Iowa 52004-0769 222 West Washington Avenue
Cedar Rapids, Iowa 52401 Madison, Wisconsin 53703-0192
</TABLE>
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
<TABLE>
<S> <C> <C>
Barbara J. Swan, Esq. Stephen W. Southwick, Esq. Kent Ragsdale, Esq.
Vice President and General Counsel Vice President, General Counsel Staff Counsel
Wisconsin Power and Light Company and Secretary Interstate Power Company
222 West Washington Avenue IES Industries Inc. 1000 Main Street
Madison, Wisconsin 53703-0192 200 First Street S.E. P.O. Box 769
Cedar Rapids, Iowa 52401 Dubuque, Iowa 52004-0769
</TABLE>
M. Douglas Dunn, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
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The Applicants hereby amend and supplement their
Application/Declaration on Form U-1 in File No. 70-8891 (the "Application") as
follows:
1. Electric Integration-- Interconnection. Item 1.B.3 and Item
3.A.2.b.ii.I of the Application are supplemented by adding thereto the
following:
IEC will be an integrated electric system within the meaning
of Section 2(a)(29)(A) of the Act. IEC will be operated as a single system,
economically dispatched pursuant to the Coordination Agreement. Utilities and
IPC ("IEC West") are presently directly interconnected(1) and WP&L and South
Beloit ("IEC East") are presently directly interconnected.(2) IEC West and IEC
East are presently interconnected through firm contractual wheeling arrangements
with third parties(3) and through MAPP.(4) Additionally, IEC intends to build
two tie-lines (aggregating 250 MW of transfer capability) between IEC West and
IEC East.(5) In the Federal Energy Regulatory Commission Initial Decision on
Rate and Merger Issues (Issued July 3, 1997) (the "Initial FERC Decision"), the
Administrative Law Judge, however, ordered the Applicants to delay construction
of the tie-lines between IEC West and IEC East until the Applicants have
constructed 400 MW of additional simultaneous import capability into the
Wisconsin Upper Michigan System ("WUMS"). IES Utilities et al, 80 F.E.R.C.
Paragraph 63,001, 21 (1997).
On November 12, 1997, the Federal Energy Regulatory Commission
(the "FERC") issued its decision on the merger. IES Utilities, Inc. et al.,
Opinion No. 419, 81 FERC Paragraph 61, ___ (1997) ("Opinion No. 419"). In
Opinion No. 419, the FERC accepted a competition stipulation that had been
negotiated by the Applicants and the FERC trial staff,
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(1) Utilities and IPC are already directly physically interconnected through
numerous transmission lines that they own, including three 161 KV lines and
the East 345 KV Line which runs from Minneapolis/St. Paul to St. Louis in
which Utilities and IPC participate along with other neighboring utilities.
(2) WP&L and South Beloit are already directly physically interconnected by two
69 KV transmission lines.
(3) The Applicants have entered into a firm contract for the transmission of up
to 200 MW of power with ComEd and DPC for a three year period that commenced
on October 1, 1997.
(4) WP&L, Utilities and IPC are members of the MAPP Regional Transmission
Committee ("RTC") and the MAPP Power and Energy Marketing Committee ("PEM").
Membership in the RTC joins the transmission resources of all three
Applicants to the MAPP transmission pool and permits participation in the
MAPP transmission pool by the Applicants through the use of MAPP Schedule F.
Membership in PEM allows the Applicants to engage in capacity and energy
transactions using MAPP Schedule K.
(5) The transmission lines proposed to be constructed include a 69 KV tie-line
between Prairie du Chien, Wisconsin and MacGregor, Iowa and a 161 KV line
connecting WP&L's Nelson Dewey generating plant on the east side of the
Mississippi River to IPC's Turkey River substation on the west side of the
Mississippi River.
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as modified to include an extra condition imposed by the presiding
Administrative Law Judge. The competitive stipulation, as modified, generally
addresses the Applicants' use of firm transmission service purchased from ComEd
and DPC in order to achieve joint dispatch; Applicants' proposal to construct
two additional transmission lines between IEC West and IEC East at a future
time; Applicants' proposal to make eight specified transmission improvements to
increase transfer capability into WUMS; Applicants' obligation to purchase
additional point-to-point transmission service if joint dispatch transfers
between IEC West and IEC East exceed the contract path quantity; and alternative
dispute resolution and additional efforts to increase transfer capability into
WUMS if the specified measures are not fully successful.
The record developed in the FERC proceeding demonstrates that,
at present, although IEC West and IEC East are interconnected through
neighboring utilities, there are no high voltage connections directly between
Iowa and WUMS. Initial FERC Decision at 30. Additionally, the transmission
capability between Iowa and WUMS is limited. In short, power cannot go straight
from Iowa to WUMS but must flow across the grid which is already constrained. As
a result of physics, due to the nature of the way power flows across the grid
and the engineering peculiarities of the Iowa-WUMS interface, the joint dispatch
of the Applicants' generating facilities through use of their 200 MW of
transmission rights(6) will result in the Applicants' using up much of the
import capability into WUMS thereby during times of system constraint preventing
competitors of the Applicants from selling power into WUMS.
The immediate construction of the tie-lines(7) will, for
reasons of physics and engineering peculiar to the Iowa-WUMS interface, not
alleviate the congestion at the constrained interface. Accordingly, the Initial
Decision and Opinion No. 419 direct the Applicants to delay construction of
their new tie-lines until the Applicants construct additional facilities to
increase the overall transfer capability into WUMS. The construction of these
additional facilities will reinforce the electrical interconnection between Iowa
and WUMS. The requirements of the competitive stipulation adopted by Opinion No.
419 are only necessary because, as a factual, physics and engineering matter,
the Applicants are currently interconnected and capable of integrated operation
to the point where they must first provide transmission capacity for others
before construction of the tie-lines.
The type and degree of physical interconnection described in
the Initial FERC Decision is sufficient to establish interconnection under the
Act for the purposes of Sections 2(a)(29)(A), 10(c)(2) and 11(b)(1). The
Commission has found that proposals to contract for or to construct physical
connections between utilities in a single system satisfy the interconnection
requirement. See New England Electric System, 38 S.E.C. 193, 198-99 (1958)
(engineering studies and testimony showing feasibility of direct
interconnections among four small systems satisfied the requirements of the Act
that utilities be "capable of physical interconnection"); Mississippi Valley
Generating Co., 36 S.E.C. 159 (1955) (while complete direct physical
interconnection between the companies involved did not currently
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(6) See footnote 3. Pursuant to the competitive stipulation, Applicants agreed
to offer 50 MW of their transmission rights to WUMS loads on a first come,
first served basis.
(7) See footnote 5.
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exist, the Commission recognized that physical interconnection was possible
through the construction of transmission lines).
Additionally, the Commission has found that two utilities that
are capable of sharing power through wheeling or power pool arrangements (as the
Applicants will be forced to do upon consummation of the Transaction pending
further construction of new transmission facilities) are physically
interconnected or capable of physical interconnection. The fact that two
facilities may be separated by other facilities that are not owned by the
holding company does not change the fact that they are interconnected or capable
of physical connection and of supplying power to one another as needed. City of
New Orleans v. SEC, 969 F.2d 1163, 1165 (D.C. Cir. 1992).
The Commission has also acknowledged that utilities can be
interconnected through power pools or by means of contractual rights to use the
lines of a third party. See Northeast Utilities, Holding Co. Act Release No.
25273 (Mar. 15, 1991); Centerior Energy Corp., Holding Co. Act Release No. 24073
(April 29, 1986); UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24,
1992). The Commission has recognized that a finding that wheeling and other
forms of sharing power through reliability councils and proposed regional
transmission groups also qualify as "interconnection" under section 2(a)(29)(A)
of the Act appears to be a logical extension of prior Commission holdings. 1995
Report at 71.
Moreover, even in the absence of the current interconnections,
the wheeling contract and the common power pool membership, the Applicants'
proposal to construct additional transmission facilities at the minimal
estimated cost of $4,400,000 would satisfy the integration requirements of the
Act. The Commission has indicated that a single integrated system exists based
solely on a planned, future interconnection, provided that such physical
interconnection is "contemplated or . . . possible within the reasonably near
future" and not just something that "might occur in the remote future, and whose
occurrence has not been foreshadowed by any facts shown in the record." In re
North American Co. and Its Subsidiaries, Holding Co. Act Release No. 4505 (Apr.
15, 1942); In re Cities Service Power & Light Corp., Holding Co. Act Release No.
5256 (Aug. 30, 1944) (integration standard met where "Derby contemplates the
construction of such interconnection facilities").
2. Gas Integration-- Coordination. Item 1.B.4 and Item
3.A.2.b.ii.II of the Application are supplemented by adding thereto the
following:
IEC intends to operate the presently separate gas operations of
the Applicants as a single centrally managed and coordinated integrated gas
system within the meaning of Section 2(a)(29)(B) of the Act. Central to the
coordinated operation of the gas system is the procurement of gas supplies. The
gas companies share common sources of supply and receive gas transportation
services from NNG, NGPL, ANR, Viking Natural Gas Pipeline and Northern Border
Pipeline Company. Upon consummation of the Transaction, the gas procurement
component of the gas operations of the Applicants will be centrally managed
through Interstate Services.
Generally, the general manager of Energy Portfolio Management for
Interstate Energy will make decisions on the optimum configuration of the
capacity and supply portfolios for the three utility companies which make up
Interstate Energy. Response of Doug Mitchell to PSCW Staff Audit Request (April
10, 1997). Specifically, individuals
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within the Energy Portfolio Management department of Interstate Energy who
perform gas capacity and supply procurement functions will be employees of
Interstate Services. These individuals will be charged with procuring gas
capacity and supply for each of the three utilities. There will not be any
differentiation between individuals who buy gas for one utility versus
individuals who buy gas for another utility. However, it is anticipated that
there would continue to be the need to forecast requirements, procure gas and
capacity in accordance with those requirements, and dispatch to meet those
requirements by jurisdiction. Response of Doug Mitchell to PSCW Staff Audit
Request (April 16, 1997). It is anticipated that the central management of the
gas procurement function will, over time, improve efficiency and reduce overall
costs as duplicative functions and excess reserved capacity are eliminated.
Additionally, as existing gas supply contracts between the
individual utilities and their suppliers terminate in the ordinary course, it is
expected that Interstate Services, rather than the separate utilities, will
contract for future gas supplies. The greater economies of scale as a result of
coordinated gas procurement are expected to generate further cost savings. It is
also expected that, over time, the utilities will enter into a gas coordination
agreement to detail how pipeline and gas supply costs attributable to the
centralized procurement function are to be allocated between the utilities. PSCW
R. at 799. Any such gas coordination agreement would be subject to state
commission approval. Id.
In sum, the coordinated gas operations of the gas properties
of the Applicants will commence immediately through the centralization of
management and day-to-day operating functions at Interstate Services. Full
integration will be achieved over time as existing individual gas contracts are
replaced with contracts covering the entire system.
3. Gas Retention-- New Precedent. Item 3.A.2.a.i of the
Application is supplemented by adding thereto the following:
In recent months the Commission has been presented with
several real, rather than hypothetical, opportunities to assess the
recommendations of the Division made in the 1995 Report as to the
appropriateness of combination electric and gas companies under the Act as
several companies seeking to implement convergence mergers have filed
applications with the Commission. At the same time, merger opponents have sought
to persuade the Commission that the Commission should not implement the
Division's recommendations.
In July and August of 1997, the Commission approved three
convergence mergers clarifying that the Act does not prohibit combination
electric and gas companies of the type sought to be created in the instant
situation.(8) In the words of the Commission, the
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(8) See New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1,
1997) (New Century Energies Inc., a registered holding company, is the
result of the combination of Public Service Company of Colorado and
Southwestern Public Service Company.); TUC Holding Company, Holding Co. Act
Release No. 26749 (Aug. 1, 1997) (TUC Holding Company, an exempt holding
company, is the result of the combination of Texas Utilities Company and
ENSERCH Corporation.); and Houston Industries Incorporated, Holding Co. Act
Release No. 26744 (July 24, 1997) (Houston Industries Incorporated, an
exempt holding
(continued...)
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Act "does not prohibit ownership of combination gas and electric systems." New
Century Energies, Inc., Holding Co. Act Release No. 26748 at 27.
The Commission's actions in approving three new convergence
transactions upon a showing of loss of economies are consistent with the
recommendations set forth in the 1995 Report. In approving the formation of New
Century Energies as a combination gas and electric registered holding company,
the Commission stated:
The Commission has previously taken notice of developments
that have occurred in the gas and electric industries in
recent years, and has interpreted the Act and has analyzed
proposed transactions in light of these changed
circumstances... The gas and electric industries are
converging, and, in these circumstances, separation of gas and
electric businesses may cause the separated entities to be
weaker competitors than they would be together. This factor
adds to the quantifiable loss of economies caused by increased
costs.
New Century Energies, Inc., Holding Co. Act Release No. 26748 at 30-31.
Most importantly, the Commission distanced itself from the
earlier more restrictive precedent of the decision in New England Electric
System, 41 S.E.C. 888 (1964) ("NEES") stating:
In the 1960s, when the NEES case was decided, utilities were
primarily franchised monopolies with captive ratepayers, and
competition between suppliers of gas and electricity, however
limited, was virtually the only source of customer choice and
was thus deemed beneficial to energy consumers. The fact that
other gas utilities of comparable size could operate
successfully on an independent basis was evidence that a gas
system could also operate on its own, a desirable result,
without a substantial loss of economies. The empirical basis
for these assumptions, however, is rapidly eroding. Although
franchised monopolies are still the rule, competition is
increasing. Increased expenses of separate operation may no
longer be offset, as they were in New England Electric System
by a gain of qualitative competitive benefits, but rather may
be compounded by a loss of such benefits...
New Century Energies, Inc., Holding Co. Act Release No. 26748 at 32.
The logic of the New Century Energies decision is equally
compelling in the instant situation. It is the intention of the Applicants that
the separate gas properties of the Applicants be integrated and operated as a
single economic system in conjunction with Applicants' electric system in order
to better provide competitive comprehensive energy services to Applicants'
customers. Because today the properties are operated as separate entities and
Section 11(b)(1)(A), (B) and (C) appear to require an analysis of "[e]ach such
additional system," the original loss-of-economies analysis looked at
divestiture as three
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(8) (...continued)
company, is the result of the combination of Houston Industries
Incorporated and NorAm Energy Corp.)
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separate gas systems, preserving their present status of being independent from
one another, which produced annual lost economies that are estimated to be $34.3
million per annum. If the gas integration and coordination plan discussed above
was in effect and these properties were to be divested as a single multistate
gas utility company, annual lost economies are still estimated to be $27.4
million per annum.
In either case, the lost economies are substantial in an
industry in which there are already many companies competing with Applicants for
the provision of comprehensive energy services in Applicants' service territory
and, where there is not yet competition, lost economies may well result in
increased retail rates. Competition between energy suppliers can only benefit
consumers. Increasingly, the competitors are themselves suppliers of
comprehensive energy services just like New Century Energies, Inc., TUC Holding
Company and Houston Industries Incorporated.
4. Retention of Non-Utility Businesses. Item 1.B.5 and Item
3.A.2.a.ii of the Application are supplemented by adding thereto the information
contained in Exhibit M-3 hereto which is hereby herein incorporated by
reference. For the reasons stated therein, Applicants request that each of the
businesses be retained based on the prior Commission precedent discussed in
Exhibit M-3.
5. Other Regulatory Approvals. Item 1.A and Item 4 of the
Application are supplemented by adding thereto the following:
A. Antitrust. The Applicants fully satisfied the requirements
under the HSR Act on July 7, 1996. However, because the Applicants did not
consummate the Transaction within one year of that date, the Applicants were
obliged to re-notify the DOJ and FTC of the proposed Transaction. The Applicants
resubmitted the necessary filings under the HSR Act on September 3, 1997. The
HSR Act imposes a 30-day waiting period for the consummation of each merger
comprising the Transaction subject to the HSR Act's prenotification requirement.
The Applicants, however, requested and were granted early termination of that
waiting period by the FTC on September 12, 1997.
B. Federal Power Act. The Administrative Law Judge presiding
over the FERC proceeding issued his Initial Decision on Rate and Merger Issues
in Docket Nos. EC96-13-000, ER96-1236-000 and ER96-2560-000 approving the
Transaction, subject to conditions, on July 3, 1997. The Initial FERC Decision
was subject to FERC review; the subsequent FERC order, Opinion No. 419,
approving the transaction, was issued on November 12, 1997.
C. Atomic Energy Act. The NRC approved the Transaction
relative to the Duane Arnold Energy Center on August 28, 1997. Pursuant to the
Order, parties had until October 6, 1997 to request a hearing on the Order; no
such hearing was requested.
D. State Public Utility Regulation. The MPUC approved the
Transaction in Minnesota Public Utilities Commission Opinion and Order at Docket
No. E, 6-100/PA-96- 184 (March 24, 1997). The ICC approved the Transaction in
Illinois Commerce Commission Opinion and Order in Matter No. 96-0122 (May 7,
1997) (filed as Exhibits O-3- (a) and O-4-(a)). The IUB approved the Transaction
at Docket No. SPU-96-6 on September 26, 1997 (filed as Exhibit 0-5-(a)). The
PSCW, in an Order relating to Docket No. 6680-
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UM-100, effective November 6, 1997, approved the merger subject to conditions
(filed as Exhibit 0-6-(a)).
Pursuant to the Applicants' agreement with the PSCW and in
response to the PSCW Order effective November 6, 1997, the Applicants hereby
request that the Commission include in any order approving IEC as a registered
holding company:
Approval of the Application in no way precludes the Public
Service Commission of Wisconsin, the Iowa Utilities Board, the
Minnesota Utility Commission, the Illinois Commerce Commission
or any other state regulatory authority from scrutinizing and
disallowing the pass through of costs and rates for services
rendered to customers of the client companies. It is the SEC's
intention that each state commission having jurisdiction over
a client company will retain the right to review and disallow
cost of services provided to a client company by Interstate
Services, Inc., that may be subject to recovery in rates.
6. Interstate Services, Inc. Item 1.B.1.a.iii. is amended to
read that Interstate Services will be incorporated in the State of Iowa as a
subsidiary of WPLH to serve as the service company for the Interstate Energy
system after consummation of the Transaction. Item 3.C. is amended to read, by
inserting the following paragraph immediately after the first paragraph of the
section:
The Service Agreements give the system companies the explicit
right, at their sole discretion, to discontinue taking services from Interstate
Services under any circumstances where a company other than Interstate Services
can provide fully comparable quality services at a price that is lower than the
price charged by Interstate Services. Also, prior to filing any amendments to a
Service Agreement with the Commission, the parties to the Service Agreement
must file with the applicable state regulatory commissions, pursuant to law or
stipulation, a copy of such amendments. Under the Service Agreements, in the
event that a state commission does not object to an amendment within thirty days
of its filing with the state commission, the parties to the Service Agreement
will consider the state commission to have acquiesced to the amendment.
7. Procedure and Timing. Item 5 of the Application is amended
and restated to read as follows:
Item 5. Procedure
The Commission is respectfully requested to enter an order not
later than November 28, 1997 granting and permitting this
Application/Declaration to become effective.
It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval of the
proposed Transaction. The Division of Investment Management may assist in the
preparation of the Commission's
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decision. There should be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
Item 6. Exhibits
Item 6 of the Application is supplemented by adding thereto
the following:
Exhibit K-3 Order of the Administrative Law Judge at the
Federal Energy Regulatory Commission
Exhibit M-3 Discussion of Retention of Non-Utility Business
Exhibit N-3 Order of the Federal Energy Regulatory
Commission
Exhibit O-3-(a) Order of the Minnesota Public Utilities
Commission
Exhibit O-4-(a) Order of the Illinois Commerce Commission
Exhibit 0-5-(a) Order of the Iowa Utilities Board
Exhibit 0-6-(a) Order of the Public Service Commission of
Wisconsin
In accordance with Rule 202 of Regulation S-T, these Exhibits were
filed with the Commission in paper pursuant to a Continuing
hardship exemption.
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SIGNATURES
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, each of the undersigned companies has duly caused this
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 13, 1997
WPL HOLDINGS, INC.
By: /s/ Erroll B. Davis, Jr.
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Erroll B. Davis, Jr.
President and Chief Executive
Officer
IES INDUSTRIES INC.
By: /s/ Lee Liu
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Lee Liu
Chairman of the Board, President
and Chief Executive Officer
INTERSTATE POWER COMPANY
By: /s/ Michael R. Chase
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Michael R. Chase
President
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