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Exhibit D-1.2
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
William L. Massey, Linda Breathitt
and Curt Hebert, Jr.
Louisville Gas and Electric Company
Kentucky Utilities Company Docket No. EC00-67-000
PowerGen plc
ORDER AUTHORIZING MERGER
(Issued June 29, 2000)
On March 24, 2000, as supplemented on April 28, 2000, Louisville Gas and
Electric Company (LG&E) and Kentucky Utilities Company (KU), on behalf of
themselves and their affiliates holding jurisdictional assets (collectively the
LG&E Companies) and PowerGen plc (PowerGen) (collectively Applicants), submitted
for filing an application pursuant to section 203 of the Federal Power Act
(FPA).(1) Applicants seek Commission authorization to effectuate a merger that
will be structured as an indirect acquisition of LG&E Energy Corporation (LG&E
Energy) by PowerGen.
The Commission authorizes the transaction as consistent with the public
interest. As discussed below, the Commission concludes that the transaction will
not adversely affect competition, rates, or regulation.
Background
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LG&E, a wholly-owned subsidiary of LG&E Energy and an exempt public utility
holding company pursuant to section 3(a)(2) of the Public Utility Holding
Company Act of 1935 (PUHCA),(2) is primarily engaged in the generation,
transmission and distribution
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(1) 16 U.S.C. (S) 824b (1994).
(2) 15 U.S.C. (S) 79a, et seq. (1994).
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Docket No. EC00-67-000 -2-
of electricity in Kentucky.(3) In addition, LG&E purchases, distributes, stores,
and sells natural gas.
KU, a wholly-owned subsidiary of LG&E Energy, is an exempt public
utility holding company pursuant to section 3(a)(2) of PUHCA. KU is engaged in
generating, transmitting, and selling electric energy to customers in Kentucky,
Virginia, and Tennessee.
PowerGen is an integrated gas and electric company in the United
Kingdom (UK) that does not own or operate any generation, transmission, or
distribution facilities in the United States.
Pursuant to the Agreement and Plan of the Merger, an indirect
wholly-owned subsidiary of PowerGen (Merger Sub) will merge with and into LG&E
Energy. LG&E Energy will be the surviving entity. The relationship of LG&E
Energy to its operating subsidiaries, LG&E and KU, will remain unchanged. LG&E
Energy and its operating subsidiaries will retain their separate corporate
status and names following the merger.
Notices and Interventions
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Notices of Applicants' original and supplemental filings were published
in the Federal Register, 65 Fed. Reg. 19,374 and 65 Fed. Reg. 30,980 (2000) with
comments, interventions, and protests due on or before May 23, 2000. Big Rivers
Electric Corporation (Big Rivers), Rayburn Country Electric Cooperative, Inc.
(Rayburn), East Kentucky Power Cooperative, Inc. (East Kentucky) and Tenaska,
Inc. (Tenaska) filed timely motions to intervene raising no substantive issues.
The Public Service Commission of the Commonwealth of Kentucky (Kentucky
Commission) filed a timely notice of intervention raising no substantive issues.
The Illinois Municipal Electric Agency (Illinois Municipal) filed a
timely motion to intervene and protest. Illinois Municipal states that it owns a
joint interest in the Trimble County Unit 1 generation plant (Trimble Plant)
along with LG&E. Illinois Municipal requests the opportunity to discuss with
LG&E the elimination of pancaked transmission rates and the potential changes in
the management of the Trimble Plant as a result of the merger. In addition,
Illinois Municipal is concerned about LG&E's plans
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(3) LG&E owns 4.9 percent of the public utility, Ohio Valley Electric
Corporation, which has one wholly-owned public utility subsidiary, Indiana
Kentucky Electric Corporation. Application at 8.
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Docket No. EC00-67-000 -3-
regarding compliance with the United States Environmental Protection Agency's
NO(x) regulations.
Kentucky Municipals(4) filed a timely motion to intervene and protest.
Kentucky Municipals argue that KU has not explained whether it intends to seek
to recover from wholesale customers any part of the costs of complying with the
conditions imposed by the Kentucky Commission or any part of the increased costs
that will be associated with operating utilities on different continents.
Kentucky Municipals contend that KU and LG&E have established a mechanism for
passing on to retail customers benefits that are achieved by the merger through
the Retail Earnings Sharing Mechanism, but no such mechanism exists for
wholesale customers. As a result, Kentucky Municipals argue that wholesale
ratepayers are facing a prospective gap between higher rates they pay, and the
lower rates offered to retail customers. Kentucky Municipals also assert that
the Commission should consider whether the proposed merger may degrade the
reliability and the quality of service available to wholesale customers.
On June 8, 2000, Applicants filed a motion for leave to file an answer
and an answer to the protests.
Discussion
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Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure, 18 C.F.R. (S) 385.214 (1999), the timely, unopposed notice and
motions to intervene serve to make them parties to this proceeding. We will
reject Applicants' answer since it represents an impermissible answer to a
protest under 18 C.F.R. (S) 385.231(a)(2) (1999).
The Commission's Merger Policy Statement(5) provides that the
Commission will generally take account of three factors in analyzing proposed
mergers: (a) the effect on competition; (b) the effect on rates; and (c) the
effect on regulation.
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(4) The Kentucky Municipals include: the Electric & Water Plant Board
of Frankfort, Kentucky, Berea College, the Cities of Barbourville, Bardstown,
Bardwell, Benham, Corbin, Falmouth, Madisonville, Nicholasville, Paris and
Providence, Kentucky.
(5) See Inquiry Concerning the Commission's Merger Policy Under the
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Federal Power Act: Policy Statement, Order No. 592, FERC Stats. & Regs.
P. 68,595 (1996), order on reconsideration, Order No. 592-A, 79 FERC P. 61,321
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(1997) (Merger Policy Statement).
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Docket No. EC00-67-000 -4-
A. Effect on Competition
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Applicants claim that the proposed merger raises no horizontal or
vertical competitive concerns. They state that PowerGen neither owns, operates,
engages in, nor supplies inputs used for, generation, transmission, or
distribution of electricity in North America. Applicants therefore conclude that
a competitive screen analysis is unnecessary because none of the Applicants own
facilities or sell upstream input or downstream electricity products in any
common geographic markets. The Commission agrees and therefore, we find that the
proposed merger does not raise competitive concerns.(6)
B. Effect on Rates
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In the Merger Policy Statement, we explain that our concern is that the
proposed transactions will not have an adverse effect on rates.(7) Applicants
state that while transaction costs and an acquisition premium will be incurred
as a result of the proposed merger, they commit to holding their wholesale and
transmission customers harmless from these merger-related costs. Applicants
further state they will not attempt to recover any of these costs through rates
without first receiving specific regulatory approval to do so. Applicants also
commit to the ratepayer protections established in the previous merger between
LG&E and KU.(8) In light of these commitments, Applicants claim the proposed
transaction will not have an adverse effect on rates. We find that these
commitments constitute adequate ratepayer protection for the LG&E Companies'
transmission and wholesale customers.
Kentucky Muncipals argue that Applicants' ratepayer protection and the
hold harmless commitments are inadequate. Kentucky Municipals further state that
Applicants
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(6) We note that no intervenor argues to the contrary.
(7) Merger Policy Statement at 30,121-124.
(8) Louisville Gas and Electric Company, et al., 82 FERC P. 61,308
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(1998). The following commitments detailed in the LG&E/KU merger remain in force
and will not be affected by this transaction: (1) a cap on base rates for all
LG&E and KU firm wholesale requirements and firm transmission customers for five
years; (2) certain base rate reductions for KU's wholesale requirements
customers; (3) certain reductions in fuel costs for all wholesale requirements
customers; (4) waiver by KU of its right to file for changes in base rates for
five years under section 205 of the FPA; and (5) sharing of certain merger-
related costs savings with wholesale customers if the actual cost to achieve the
merger was lower than the estimated cost.
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Docket No. EC00-67-000 -5-
have not proposed any mechanism for passing on to wholesale customers any of the
benefits that are actually achieved as a result of the instant merger. Kentucky
Municipals ignore the fact that the Commission's public interest test under
section 203 of the FPA does not require applicants to show positive benefits of
a merger. Rather, the Commission's focus has been on adequate ratepayer
protection to ensure that ratepayers are protected from possible adverse effects
of a merger.(9) In regard to Kentucky Municipals' concern regarding disparity
between retail and wholesale rates, we note that this is not a merger-related
issue.
Illinois Municipal requests an opportunity to discuss pancaked
transmission rates with LG&E. However, we do not believe Illinois Municipal's
concerns are relevant in this proceeding because Applicants' transmission rates
will not change as a result of the proposed merger. Furthermore, in the Midwest
Independent System Operator proceedings in which LG&E and KU are members, the
Commission addressed this concern by directing parties to engage in negotiations
to ensure no customer pays pancaked rates.(10)
Accordingly, we find that the proposed transaction will not have an
adverse impact on rates.
C. Effect on Regulation
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As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange Commission
(SEC). We are also concerned with the effect on state regulation where a state
does not have authority to act on a merger and raises concerns about the effect
on regulation.(11)
Applicants state that PowerGen will register as a public utility
holding company under PUHCA and will be subject to regulations imposed by the
SEC. As a result, Applicants commit to comply with the Commission's policy
regarding intra-system
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(9) Merger Policy Statement at 30,121-124.
(10) Midwest Independent Transmission System Operator, Inc., 84 FERC P.
61,231 at 62,169-70, order on reh'g, 85 FERC P. 61,372 at 62,420 (1996).
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(11) Merger Policy Statement at 30,124-25.
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Docket No. ECOO-67-000 -6-
transactions for those transactions involving the sale of non-power goods and
services between PowerGen, any of its subsidiaries or affiliates, and the LG&E
Companies.(12)
Applicants also state that the proposed transaction will not impair
state regulation because the proposed transaction will not alter the structure
of the LG&E Companies which will remain subject to the appropriate state
regulatory commissions for retail activities.
When a public utility is acquired by another company, whether a
domestic company or a foreign company, the Commission's ability to adequately
protect public utility ratepayers against inappropriate cross-subsidization may
be impaired absent access to the parent company's books and records. Section
301(c) of the FPA gives the Commission authority to examine the books and
records of any person who controls, directly or indirectly, a jurisdictional
public utility insofar as the books and records relate to transactions with or
the business of such public utility.(13) In this case, PowerGen has committed to
make available upon request by the Commission all publicly available financial
information and related books and records. Moreover, PowerGen will make
available upon request information necessary to support the pricing for the sale
of goods and services between the PowerGen system of companies and the LG&E
Companies. We construe this commitment as agreeing to provide the Commission
access to all books and records within the lawful scope of section 301(c) of the
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FPA and our approval of the proposed acquisition is based on this
understanding.(14)
Accordingly, in light of the facts stated above, we are satisfied that
the proposed transaction will not have an adverse effect on regulation.
D. Accounting Issues
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The application indicates that the merger will be recorded using the
purchase method of accounting. Since the proposed merger is occurring at the
non-jurisdictional holding company level and Applicants do not propose any
changes to the books and records of the LG&E Companies, we have no objection to
Applicants' proposed merger accounting.
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(12) See Application at 23.
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(13) Section 301(c) of the FPA, 16 U.S.C. (S) 825(c) (1994).
(14) PaciflCorp, 87 FERCP. 61,288 at 62,152-53 (1999).
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Docket No. ECOO-67-000 -7-
Since the proposed merger will not have any impact on the books and
records of the jurisdictional subsidiaries, we will not require Applicants to
submit their proposed merger accounting. However, in the event that the proposed
merger should affect the books and records of the LG&E Companies, Applicants
should promptly notify the Commission and provide a full explanation of any
proposed adjustments.
E. Other Issues
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In response to the concerns raised by Illinois Municipal, Illinois
Municipal has not demonstrated how the proposed merger, and the possible
management changes would adversely affect the current agreements between
Illinois Municipal and LG&E related to the Trimble Plant. Furthermore, we note
that this is not the appropriate forum to address concerns about the Trimble
Plant management and compliance with the NO(x) regulations.
Kentucky Municipals raise concerns about the effect of the merger on
reliability and quality of service. Specifically, they are concerned that the
proposed merger may degrade the reliability and the quality of service to
wholesale customers after the merger. Kentucky Municipals offers no compelling
arguments to suggest that electric reliability or quality of service would be
degraded by the proposed merger.
The Commission orders:
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(A) The proposed transaction is hereby authorized as discussed in the
body of this order.
(B) The foregoing authorization is without prejudice to the authority
of the Commission or any other regulatory body with respect to rates, service,
accounts, valuation, estimates, or determinations of cost or any other matter
whatsoever now pending or which may come before the Commission.
(C) Nothing in this order shall be construed to imply acquiescence in
any estimate or determination of cost of any valuation of property claimed or
asserted.
(D) The Commission retains authority under sections 203(b) and 309 of
the FPA to issue supplemental orders as appropriate.
(E) Applicants must promptly inform the Commission of any change in the
circumstances that would reflect a departure from the facts the Commission has
relied upon in approving the merger accounting.
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Docket No. ECOO-67-000 -8-
(F) Applicants shall advise the Commission within 10 days of the date
on which the transaction is consummated.
By the Commission.
(SEAL)
/s/ Linwood A. Watson, Jr.
Linwood A. Watson, Jr.,
Acting Secretary.
