Rulemaking for EDGAR System
Overview
SECURITIES AND EXCHANGE COMMISSION
Release No. 35-27186; 70-9381
American Electric Power Company, Inc. and Central and South West Corporation
Order Authorizing Acquisition of Registered Holding Company and Related Transactions; Approving Amended Service Agreements; and Denying Requests for Hearing
June 14, 2000
American Electric Power Company, Inc. ("AEP"), Columbus, Ohio, and Central and South West Corporation ("CSW") (together, the "Applicants"), Dallas, Texas, each a registered public-utility holding company, have filed a joint application-declaration, as amended (the "Application"), under sections 6(a), 7, 9(a), 10, 11, 12(b), 12(c), 12(d), 12(f), 13(b), 32 and 33 of the Public Utility Holding Company Act of 1935 ("Act") and rules 43, 45, 46, 53, 54, 83, 87, 88, 90 and 91.1
The Commission issued a notice of the Application on March 12, 1999 (Holding Co. Act Release No. 26989). We received eight sets of comments or requests for hearing, of which six have been withdrawn.
TABLE OF CONTENTS
I. Background
A. Summary of Proposals
B. Parties
1. AEP
2. CSW
C. Intervenors
D. Proposed Merger and Post-Merger Corporate Structure
E. Other Approvals
1. Federal Approvals
2. State Approvals
F. Expected Benefits of the Merger
II. Discussion of the Merger and Intervenors' Objections
A. Applicable Standards for Approving the Merger: Section 10(b)
1. Section 10(b)(1): Concentration of Control
2. Section 10(b)(2): Fairness of Consideration
3. Section 10(b)(3): Capital Structure and Public Interest
a. Effect Upon Capital Structure
b. Effect Upon the Protected Interests and System
Functioning
B. Applicable Standards for Approving the Merger: Section 10(c)
1. Sections 10(c)(1), 11(b)(1) and 2(a)(29)(A): Integrated
Electric System
a. Interconnection
b. Economic and Coordinated Operation
(1) Introduction
(2) Proposed Operation of the New AEP System
(A) Existing Agreements
(i) AEP Operating Companies
(ii) CSW Operating Companies
(B) Proposed Umbrella Agreements
(i) System Integration Agreement
(ii) System Transmission Integration Agreement
(C) Central Dispatch
(D) The Contract Path
(E) Other Forms of Coordination
(i) Joint Marketing and Trading
(ii) Administrative Coordination
(3) Contentions of the Intervenors
(4) Conclusion
c. "Single Area or Region"
d. No Impairment to Efficient Operation, Localized
Management or Effective Regulation by Reason of
System Size
e. Conclusion
2. Section 10(c)(2): Economies and Efficiencies
Appendix 1 -- Current AEP and CSW Short-Term Borrowing
Authority and Applicants' Related Request
for Authority
Appendix 2 -- Current CSW Financing and Guaranty Authority and
Applicants' Related Request for Authority
Appendix 3 -- Effect of Merger on Certain Stock-Based Benefit
Plans
A. Summary of Proposals
As discussed in more detail below, Applicants propose that AEP: (1) acquire, by means of a merger described below (the "Merger"), all of the issued and outstanding common stock of CSW ("CSW Common Stock"); (2) form a special purpose subsidiary (the "Merger Sub"); (3) issue shares of common stock ("AEP Common Stock") to effect the proposed transactions; (4) provide financing for CSW's subsidiaries; (5) merge CSW's service company subsidiary, Central and South West Services, Inc. ("CSW Service"), into AEP's service company subsidiary, American Electric Power Service Corporation ("AEP Service"), with AEP Service to render services to AEP and its subsidiaries (including CSW and its subsidiaries) under amended service agreements following consummation of the Merger; (6) retain CSW as a registered public-utility holding company subsidiary for a period of no more than eight years following the proposed Merger; and (7) retain ownership of CSW's nonutility businesses.
B. Parties
1. AEP
AEP is primarily engaged, through subsidiaries, in the generation, transmission and distribution of electricity. The AEP electric system (the "AEP System") covers more than 45,500 square miles in portions of Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia and West Virginia and serves approximately three million customers.2 As of October 31, 1999, 194,103,349 shares of AEP Common Stock were outstanding. AEP's consolidated operating revenues for the twelve months ended December 31, 1999, after eliminating intercompany transactions, were $6.9 billion, and its consolidated operating income for that same period was $1.3 billion. Consolidated assets of AEP and its subsidiaries as of December 31, 1999 were approximately $21.5 billion, consisting of $13.1 billion in net electric utility property, plant and equipment and $8.4 billion in other corporate assets. AEP currently ranges from the fifth to the eighth largest public utility system in the United States, depending upon the criterion of measurement.
AEP has seven wholly owned electric operating company subsidiaries (together, the "AEP Operating Companies"): Wheeling Power Company ("Wheeling Power"), serving northern West Virginia; Appalachian Power Company ("Appalachian Power"), serving the southwestern portion of Virginia and southern West Virginia; Kentucky Power Company ("Kentucky Power"), serving eastern Kentucky; Kingsport Power Company ("Kingsport Power"), serving Kingsport, Virginia, and eight neighboring communities in northeastern Tennessee; Columbus Southern Power Company ("Columbus Southern Power"), serving central and southern Ohio; Ohio Power Company ("Ohio Power"), serving the northwestern, central, eastern and southern sections of Ohio; and Indiana Michigan Power Company ("Indiana Michigan Power"), serving northern and eastern Indiana and southwestern Michigan.3 AEP also wholly owns an electric generating company subsidiary, AEP Generating Company, that sells power at wholesale to Indiana Michigan Power and Kentucky Power and to a nonaffiliate utility.
Appalachian Power, Kentucky Power, Columbus Southern Power, Ohio Power, Indiana Michigan Power and AEP Generating Company are subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act (the "FPA") with respect to rates for interstate transmission and wholesale sales of electric power, accounting and other matters. Appalachian Power and Wheeling Power are subject to regulation by the West Virginia Public Service Commission ("West Virginia Commission"). Appalachian Power is also subject to regulation by the State Corporation Commission of Virginia. Columbus Southern Power and Ohio Power are subject to regulation by the Public Utilities Commission of Ohio ("Ohio Commission"). Kentucky Power is subject to regulation by the Kentucky Public Service Commission ("Kentucky Commission"). Kingsport Power is subject to regulation by the Tennessee Regulatory Authority. Indiana Michigan Power is subject to regulation by the Indiana Utility Regulatory Commission ("Indiana Commission") and the Michigan Public Service Commission ("Michigan Commission"). In addition, Indiana Michigan Power is subject to regulation by the Nuclear Regulatory Commission ("NRC") under the Atomic Energy Act of 1954 with respect to the operation of its nuclear generation plant.
The AEP Operating Companies own 23,759 megawatts ("MW") of generating capacity. The AEP System includes approximately 129,000 miles of transmission and distribution lines.4 At December 31, 1999, the AEP System was interconnected through 121 high-voltage transmission interconnections with 25 neighboring electric utility systems. AEP is a member of, and is directly interconnected with utilities in, the East Central Area Reliability Council ("ECAR"), a regional power pool.5 ECAR members interchange power and energy with one another on a firm, economy and emergency basis. AEP is also directly interconnected with utilities in the Southern Electric Reliability Council and the Mid-America Interconnected Network.
2. CSW
CSW is primarily engaged, through subsidiaries, in the generation, transmission and distribution of electricity. The CSW electric system (the "CSW System") covers more than 152,000 square miles in portions of Texas, Oklahoma, Arkansas and Louisiana and serves approximately 1.7 million customers. As of December 31, 1999, 212,648,293 shares of CSW Common Stock were outstanding. CSW's consolidated operating revenues for the twelve months ended December 31, 1999, after eliminating intercompany transactions, were approximately $5.5 billion, and its consolidated operating income for that same period was $866 million. Consolidated assets of CSW and its subsidiaries as of December 31, 1999 were approximately $14.2 billion, consisting of $8.7 billion in net electric utility property, plant equipment and $5.5 billion in other corporate assets. In terms of total assets, CSW is the sixteenth largest investor-owned electric utility in the United States.
CSW has four wholly owned operating subsidiaries (together, the "CSW Operating Companies"): Central Power and Light Company ("CP&L"), serving portions of southern Texas; Public Service Company of Oklahoma ("PSO"), serving portions of eastern and southwestern Oklahoma; Southwestern Electric Power Company ("SWEPCO"), serving portions of North Texas, western Arkansas and northwestern Louisiana, and West Texas Utilities Company ("WTU"), serving portions of west-central Texas.6
Each of the CSW Operating Companies is subject to regulation by the FERC under the FPA with respect to rates for interstate sale at wholesale and transmission of electric power, accounting and other matters. CP&L is also subject to regulation by the NRC.7
The Public Utility Commission of Texas ("Texas Commission") has original jurisdiction over retail rates in the unincorporated areas of Texas and appellate jurisdiction over retail rates in the incorporated areas served by CP&L, SWEPCO and WTU. In addition, SWEPCO is subject to the jurisdiction of the Arkansas Public Service Commission ("Arkansas Commission") and the Louisiana Public Service Commission ("Louisiana Commission"). PSO is subject to the jurisdiction of the Corporation Commission of the State of Oklahoma ("Oklahoma Commission").
CSW owns 14,205 MW of generating capacity. The CSW System has more than 16,000 circuit miles of transmission and over 66,000 circuit miles of distribution lines.
The CSW System is a unique registered system in both shape and operation. Geographically, the CSW Operating Companies lie in roughly three-quarters of a circle, with the center of the circle in north-central Texas. The utilities are interconnected end-to-end around this arc, extending from CP&L in southern Texas through WTU's service territory, a relatively narrow corridor in western Texas, to interconnect with PSO. In turn, PSO interconnects in eastern Oklahoma with SWEPCO.
The CSW Operating Companies do not all belong to the same power pool or operate in the same interconnect.8 PSO and SWEPCO are members of the Southwest Power Pool (the "SPP"), a regional reliability council in the Eastern Interconnect. CP&L and WTU are members of the Electric Reliability Council of Texas ("ERCOT"). The CSW System thus conducts utility operations in two different control areas, or zones: ERCOT and non-ERCOT (the SPP).
ERCOT utilities engage primarily in intrastate operations. The Texas Commission has jurisdiction over wholesale sales and transmission service in ERCOT -- matters which FERC would normally regulate.
We considered the CSW System's unique characteristics in Central and South West Corp. ("Central and South West Corp."), an order reaffirming that the CSW System is an integrated electric system.9 In that order, we noted that:
All the members of ERCOT are electrically isolated from PSO, SWEPCO and other utilities operating in whole or in part in states other than Texas. The ERCOT interchange agreements in effect preclude direct or indirect exchange of electric energy with utilities receiving or transmitting electric energy in interstate commerce. When CP&L and WTU joined ERCOT, they ceased to exchange electric energy with PSO and SWEPCO, except for a special arrangement under which the northern division of WTU, adjacent to the Oklahoma border, could operate alternately either with PSO or with ERCOT as long as simultaneous interconnection was avoided. [footnote omitted]
The order approved a FERC-approved settlement agreement under which two asynchronous high-voltage direct current ("HDVC") ties were installed between SPP and ERCOT, specifically, a 220-MW tie owned by CSW and a 600-MW tie on which CSW owns half of the capacity. Through the ties, CSW coordinates the operation of its ERCOT and non-ERCOT Operating Companies.
C. Intervenors
As noted above, we received submissions from eight parties or groups of related parties (the "Intervenors").10
Four Intervenors subsequently withdrew their submissions.11
The following four Intervenors remain. The American Public Power Association (the "APPA") and the National Rural Electric Cooperative Association (the "NRECA") (together, "APPA/NRECA") filed a joint motion to intervene and comments objecting to the Merger and requested a hearing.12 Consumers for Fair Competition ("Consumers"), a coalition of utility stakeholders, filed comments in opposition to the Merger and requested a hearing.13 Mr. Paul S. Davis, a shareholder of AEP, filed a comment letter and request for hearing on March 21, 2000. A group of consumer counselors and others includes: the Indiana Office of Utility Consumer Advocate; the Missouri Office of the Public Counsel;14 the Electricity Consumers Resource Council;15 Industrial Energy Users - Ohio;16 Public Citizen;17 Ohio Partners for Affordable Energy;18 Citizens Action Coalition of Indiana;19 and the Environmental Law and Policy Center20 (collectively, the "Advocates Group"), filed a joint submission opposing the Merger.21 They did not request a hearing.
On July 23, 1999, Applicants filed a response to the various submissions ("Response"). APPA/NRECA replied to the Response on July 30, 1999.22
D. Proposed Merger and Post-Merger Corporate Structure
AEP will acquire CSW in accordance with an Agreement and Plan of Merger, dated as of December 21, 1997 (as subsequently amended, "Merger Agreement"), among AEP, CSW and Merger Sub. Merger Sub will be merged with and into CSW. CSW will be the surviving corporation and a wholly owned subsidiary of AEP.
Each share of CSW Common Stock (with certain exceptions) issued and outstanding immediately prior to the Merger will be converted into the right to receive, and will become exchangeable for, 0.60 shares of AEP Common Stock.23 The former holders of CSW Common Stock will own approximately 40% of the outstanding shares of AEP Common Stock after the Merger. Applicants state that the Merger is expected to have no effect on the outstanding public debt and other equity securities of CSW, AEP or their respective subsidiaries.
All of CSW's utility and nonutility subsidiaries will become indirect subsidiaries of AEP except CSW Service, which will be merged into AEP Service, and CSW Credit, Inc., a wholly owned nonutility subsidiary of CSW that engages in the factoring of utility accounts receivable, which AEP will hold directly. Applicants propose that CSW remain a registered holding company subsidiary of AEP for up to eight years following the Merger. AEP's utility and nonutility subsidiaries will remain its subsidiaries. AEP, CSW and their subsidiaries after the Merger are referred to collectively below as "New AEP." New AEP's Operating Companies are referred to below as the "New AEP System."
The table below contains financial and related data for the AEP System and the CSW System for the twelve months ended December 31, 1999, as well as pro forma data for the New AEP System at that date.
For the
Twelve Months Ended
December 31, 1999
(In Millions)
At
December 31, 1999
(In Millions)
Operating
Revenues
Net
Income
Number of
Customers
Total Assets
AEP System
$6,916
$520
3.0
$21,500
CSW System
5,500
455
1.8
14,200
New AEP
System
$12,416
$975
4.8
$35,700
E. Other Approvals
The holders of AEP Common Stock and CSW Common Stock approved the Merger at their respective annual meetings held in May 1998. In addition, the Merger was reviewed by several federal and state regulatory agencies.
1. Federal Approvals
Both AEP and CSW filed notification and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") with the Federal Trade Commission (the "FTC") and the Department of Justice (the "DOJ"). On February 2, 2000, the DOJ notified Applicants that it had completed its review of the Merger and that no further action was warranted.
On March 15, 2000, the FERC issued an order (the "FERC Order") conditionally approving the Merger.24 The order primarily addresses market power and competitive concerns raised by the Merger. The FERC Order, among other things, holds that, subject to the conditions of the order, including certain commitments of Applicants, the Merger is consistent with the public interest as required by the FPA.25 The FERC also conditioned its approval on the transfer of operational control of the New AEP System transmission facilities to a fully-functioning, FERC-approved regional transmission operator(s) ("RTO(s)") by December 15, 2001.26 Applicants sought a rehearing of two aspects of the FERC Order: first, the finding that their analysis did not adequately evaluate the potential vertical effect of the Merger; and second, the FERC's modification to the pricing methodology proposed for system energy exchanges between the East and West Zones (discussed in section II.B.1.b.(2).(B), infra). The FERC dismissed the first request as moot, in view of Applicants' commitment to comply with the conditions of the FERC Order regardless of the disposition of their rehearing request. The FERC granted the second request because Applicants explained that their proposed pricing formula would always operate so as not to result in an above-market price for a New AEP System Operating Company purchaser.
The NRC approved the transfer of control of CP&L's NRC licenses with a condition that the Merger be completed by December 31, 1999.27 The NRC subsequently extended the deadline to June 30, 2000. The Federal Communications Commission approved the transfer of certain microwave licenses held by CSW.
2. State Approvals
The interested state regulatory authorities have approved the proposed Merger and/or related matters. The state commissions of Arkansas, Indiana, Kentucky, Louisiana, Oklahoma and Texas conditionally approved the Merger, pending the FERC order and final action by other relevant authorities.28 Other state commissions, such as Ohio, Virginia and West Virginia, were apprised of the Merger but concluded that they did not have to take formal action. The Ohio commission, in particular, opened a formal docket on the Merger and appeared in the FERC proceeding.
Certain of the state commissions addressed concerns relating to the potential effects of the Merger on competition as a result of the amount of generating capacity that New AEP would control. The Texas Commission approved a settlement agreement with its staff under which Applicants agreed to divest 1,604 MW of generation capacity in ERCOT and an additional 300 MW in SPP.29 In addition, the Oklahoma Commission directed AEP and CSW to request that the SPP evaluate, and AEP and CSW help remedy, any adverse competitive effect that may result from power transfers from AEP to CSW over a Contract Path, discussed further below, that will afford a 250 MW firm east-to-west point-to-point transmission service over the service territory of Ameren Corporation ("Ameren") to certain transmission assets in the SPP.
F. Expected Benefits of the Merger
Applicants state that the Merger will benefit the public, investors and consumers. Specifically, Applicants anticipate that:
- New AEP will operate more efficiently and be better able to keep rates low in an increasingly competitive electric utility industry;
- New AEP will achieve savings through the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, improved purchasing power, and the combination of two work forces;
- New AEP will have a stronger financial base, improved position in the credit markets, and greater market diversity than either AEP or CSW standing alone would have;
- The Merger will diversify the service territory of the New AEP System, reducing exposure to local changes in economic and competitive conditions; and
- The Merger will enhance the profitability of New AEP.
Applicants estimate that net non-fuel savings from the Merger will be approximately $2 billion and net fuel-related savings will be approximately $98 million over the first ten years after the Merger. The expected benefits of the Merger are discussed in greater detail in section II.B.2 below.
Fees and expenses in the estimated amount of $72.7 million are anticipated in connection with the proposed transactions.
II. Discussion of the Merger and Intervenors' Objections
The proposed Merger requires our prior approval under sections 9(a) and 10 of the Act. We have reviewed the proposed transaction and find that the requirements of the Act are satisfied. Our application of the integration standards of the Act and our consideration of the potential anticompetitive effects of the Merger are central to our approval of the Merger. Accordingly, these matters are discussed below.
A. Applicable Standards for Approving the Merger: Section 10(b)
Section 10(b) requires us to approve the Merger unless we make adverse findings under three specific standards.
1. Section 10(b)(1): Concentration of Control
Section 10(b)(1) requires that we not approve the proposed acquisition if we find that it 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." Although we are primarily concerned under the Act with the structure of public-utility holding company systems, our analysis under section 10(b)(1) includes consideration of federal antitrust policies.30 Anticompetitive ramifications of an acquisition are considered in light of the fact that utilities are regulated monopolies subject to the ratemaking authority of federal and state administrative bodies.31
In considering whether an acquisition satisfies the standards of section 10(b)(1) in previous applications, we have exercised "watchful deference" to the analysis of other federal and state regulators that considered antitrust policies in connection with the merger.32 We have done so here. As noted above, Applicants made HSR filings with the FTC and the DOJ and the applicable waiting period has expired. In addition, the FERC fully considered the competitive impact of the Merger under section 203 of the FPA. The FERC Order approved the Merger after a hearing on its potential effect on wholesale competition. The FERC Order incorporates a number of conditions designed to address competition issues. The Texas, Oklahoma and Missouri Commissions also considered competition issues.
APPA/NRECA asserts that the Merger would have "profound anti-competitive effects," detrimental to the public interest and the interest of consumers.33 APPA/NRECA acknowledges that it is the Commission's practice to exercise "watchful deference," but urges us to "ensure that the FERC's ultimate resolution addresses the market-power concerns relevant under the Act."34
APPA/NRECA filed with their Motion to Intervene a copy of their protest of the Merger filed at the FERC. Their concerns, as outlined in their FERC protest, involve the elimination of a competitor from both the AEP and CSW service territories and from the wholesale market in general, and perceived inadequacies in the Applicants' competition analysis.35 These concerns were fully considered at the FERC. The FERC recognized that the proposed Merger raised competitive concerns, but determined that, with the conditions and remedies imposed in the FERC Order, the Merger is consistent with the public interest under section 203 of the FPA.
Three state agencies and the FERC considered the potential competitive effects of the Merger. The FERC, in particular, recognized that the transaction raised competitive concerns involving operational matters and sought to address and remedy potential anticompetitive effects by required divestiture of capacity and other remedial measures. These matters are entrusted to the expertise of the FERC.36
We have reviewed the entire record in this proceeding and have considered in particular the remedial measures that the FERC and the Texas Commission require to address potential anticompetitive effects of the proposed Merger. We believe that we may appropriately rely upon the findings and requirements of these agencies in concluding that no adverse finding under section 10(b)(1) of the Act is required in this matter.37
2. Section 10(b)(2): Fairness of Consideration
Section 10(b)(2) requires us not to approve an acquisition if we find that the consideration 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. . . ." As noted above, CSW shareholders will receive 0.60 shares of AEP Common Stock for each share of CSW Common Stock that they currently own.
Based upon our review, we are satisfied that the purchase price is not unfair or unreasonable within the meaning of section 10(b)(2). The price is the result of arm's-length negotiations between AEP and CSW. The Applicants state that these negotiations were preceded by months of due diligence, analysis and evaluation of the assets, liabilities and business prospects of the respective companies, which were described in detail in the Applicants' joint proxy statement seeking shareholder approval of the Merger.
The record does not offer any basis to conclude that the consideration to be paid in the Merger is unfair or unreasonable. There also is no basis to conclude that the consideration does not bear a fair relation to the earning capacity of the utility assets to be acquired within the meaning of section 10(b)(2).
Mr. Davis urges us to consider that the market price of AEP and CSW Common Stock has declined.38 In addition, Mr. Davis asks us to consolidate the Application with a request by AEP and its subsidiaries for financing authorizations in File No. 70-8779, a proceeding in which he has also filed comments. He suggests that consolidation is appropriate because the requested financing authorizations contemplate "very large security issues" and the Application proposes to combine two large holding company systems. He adds that, "[t]he uncertainties in integrating the companies and achieving cost savings were recognized by the two managements in the Statement to Stockholders dated April 17, 1998." We do not perceive any relationship between the Application and the requested authorizations. Specifically, the findings upon which we base our approval of the Merger in no way depend upon whether we approve AEP's financing request in File No. 70-8779. Accordingly, we deny the requested consolidation. We will address Mr. Davis' comments on File No. 70-8779 when we consider that matter. To the extent that Mr. Davis suggests that the Merger may not satisfy section 10(b)(2) of the Act because of this decline, we reject the suggestion.
The consideration offered by AEP will be AEP Common Stock. On December 19, 1997, the last trading day before the Merger was announced, the closing prices of AEP Common Stock and CSW Common Stock were $52 and $26, respectively. The Exchange Ratio in the Merger Agreement provided, in effect, that CSW shareholders would receive approximately $31.20 per share of CSW Common Stock (in AEP Common Stock). This represents a premium of approximately 20% over the closing price of CSW Common Stock on December 19, 1997.
To support their assertion that section 10(b)(2) is satisfied in this matter, Applicants describe:
- arm's length negotiations between AEP and CSW, conducted in a competitive context, resulting in the proposed Exchange Ratio;
- fairness opinions from the Applicants' financial advisers, Salomon Smith Barney Inc., which provided an opinion to AEP, and Morgan Stanley & Co. Incorporated, which provided an opinion to CSW;
- a valuation analysis demonstrating the fairness of consideration, as evidenced by the comparative market prices of, and dividends paid on, AEP Common Stock and CSW Common Stock;
- necessary shareholder approvals; and
- the inclusion of required closing conditions in the Merger Agreement intended to assure that the Merger will be consummated on terms that are fair to Applicants and their shareholders.
Mr. Davis does not explain how the price of AEP's Common Stock raises a material question of fact or law that requires examination at a hearing.39 He does not explain whether the Merger consideration is unfair to either AEP or CSW shareholders. We are satisfied that no adverse finding under section 10(b)(2) is required in this matter.40
3. Section 10(b)(3): Capital Structure and Public Interest
a. Effect upon Capital Structure
Section 10(b)(3) of the Act requires us to approve a proposed acquisition unless we find that it would "unduly complicate the capital structure of the holding-company system of the applicant" or would "be detrimental to the public interest or the interest of investors or consumers [the "protected interests" under the Act] or the proper functioning of such holding-company system." We have considered the anticipated capital structure of the New AEP System following the Merger and have concluded that a negative finding under section 10(b)(3) is not warranted.
Set forth below is a table showing the consolidated capital structure of each of AEP and CSW and the pro forma consolidated capital structure of New AEP after the Merger.
At December 31, 1999
AEP
CSW
Pro Forma New AEP
Amount
(In $
millions)
Percent
of Total
Amount
(In $
millions)
Percent
of Total
Amount
(In $
millions)
Percent
of Total
Common
stock equity
$ 5,006
37.1%
$ 3,683
36.0%
$ 8,689
36.6%
Preferred
stock
164
1.2
18
0.2
182
0.8%
Long-term
debt
7,447
55.1
4,077
39.8
11,524
48.5
Short-term
debt
888
6.6
2,124
20.7
3,012
12.7
Trust
preferred
securities
--
--
335
3.3
335
1.4
Total
capitalization
$ 13,505
100.0%
$ 10,237
100.0%
$ 23,742
100.0%
The proposed Merger will not significantly change AEP's existing capital structure. Equity would be reduced from 38.3% to 37.4% of total capitalization, and debt increased from 61.7% to 62.6%.41 These figures are well within the 60%/30% debt/common equity ratio that we have generally viewed as adequate for registered holding companies.42 We therefore do not find that the Merger would unduly complicate the capital structure of the New AEP System.
b. Effect Upon the Protected Interests and System Functioning
As discussed below, Applicants anticipate that the proposed Merger will benefit consumers. The FERC, the NRC, and various state commissions have granted necessary approvals after extensive reviews, as discussed below. Finally, the Merger is expected to have no adverse effect on the rights of holders of the outstanding preferred stock and debt securities of New AEP. In view of these considerations, we do not find that the Merger would be detrimental to the protected interests or the proper functioning of the New AEP System.
B. Applicable Standards for Approving the Merger: Section 10(c)
Section 10(c)(1) of the Act requires us not to approve an acquisition that would be "detrimental to the carrying out of the provisions of section 11."43 Section 10(c)(2) further requires us to find that the acquisition "will serve the public interest by tending towards the economical and efficient development of an integrated public-utility system." As discussed below, the Merger will satisfy these standards.
1. Sections 10(c)(1), 11(b)(1) and 2(a)(29)(A): Integrated Electric System Section 10(c)(1) of the Act makes reference to section 11(b)(1), which generally confines the utility properties of a registered holding company to a "single integrated public-utility system." Section 2(a)(29)(A) defines an "integrated public-utility system," as applied to electric utility properties, to mean:
. . . 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 operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation [...].
Following the statutory definition, we have recognized four standards that must be met before we will find that a proposed combination of utility properties will result in an integrated system:
- the combined utility assets must be physically interconnected or capable of physical interconnection (the "interconnection requirement");
- the combined utility assets, under normal conditions, must be economically operated as a single interconnected and coordinated system (the "economic and coordinated operation requirement");
- the system must be confined in its operations to a single area or region (the "single area or region requirement"); and
- 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 (the "no impairment requirement").44
We have read each standard of section 2(a)(29)(A) in connection with the other provisions of the section, and in light of the facts under consideration and the other objectives of the Act.45
The U.S. Supreme Court has recognized that the Act is an "intricate statutory scheme" which must be given "practical sense and application."46 We have noted in the context of the statutory integration requirements that the Act "creates a system of pervasive and continuing economic regulation that must in some measure at least be refashioned from time to time to keep pace with changing economic and regulatory climates."47 We have previously taken notice of developments that have occurred in the gas and electric industries in recent years, and have interpreted the Act and analyzed proposed transactions in light of these changed and changing circumstances.48 This approach is consistent with the language of section 2(a)(29)(A) itself, which directs us to consider the "state of the art" -- that is, the contemporary realities of the industry.49 Our precedents under sections 2(a)(29)(A), 10(b)(1) and 10(c)(2) of the Act reflect this approach.50 The ultimate determination has always been whether, on the facts of a given matter, the proposed transaction "will lead to a recurrence of the evils the Act was intended to address," i.e., the abuses identified in section 1 of the Act.51 On the facts of this matter, we find that the New AEP System will constitute an electric integrated system.
a. Interconnection
Applicants have obtained a 250 MW firm Contract Path providing east-to-west firm point-to-point transmission service from AEP's Breed-Casey interconnection with Ameren, along the Indiana/Illinois border, to Ameren's interconnection in Missouri with the MOKANOK line, which runs to an interconnection with CSW in Oklahoma. The term of the Contract Path is from June 1, 1999 to May 31, 2003.52 Applicants have the ability through the Ameren open access tariff to renew the Contract Path. We have previously found the interconnection requirement to be satisfied on the basis of the merging companies' contractual rights to use a third party's transmission lines.53
Applicants note that the Contract Path provides a means to meet the statutory interconnection standard and, at the same time, preserves flexibility to enter into other more favorable arrangements should they become available during the four-year term of the Contract Path. Applicants commit to either extend their right to use the Contract Path prior to May 31, 2003, or to file a post-effective amendment explaining how the New AEP System will continue to satisfy the interconnection requirement if its rights with respect to the Contract Path are not extended.
The Advocates Group challenges the adequacy of the term of the Contract Path and states that we "must find that arrangements will be in place throughout the life of the post-acquisition entity."54 The Advocates Group refers to prior orders where "the utilities had the right to use the third party's lines for ten years and indefinitely."55
The Advocates Group asserts that, where third party transmission rights are not in place for an indefinite period after a merger, we have consistently "found that alternative or subsequent interconnection arrangements were certain" and have not relied on a temporary contract only.56 The Advocates Group notes that Applicants have no plan comparable to that of the applicants in the recent Madison Gas decision.57 In Madison Gas, the Court of Appeals relied upon the applicant's "showing of a current transmission line contract and of a plan to build two tie-lines of its own across the Mississippi before the end of the contract term." APPA/NRECA also emphasizes that the merging companies have no plans to build an interconnection.58
We disagree with the Advocates Group's assertion that the Applicants have not made sufficient commitments upon which we may conclude that the New AEP System will satisfy the interconnection requirement. Applicants have committed to renew the Contract Path or to inform us of the means by which the interconnection requirement will be satisfied if it is not renewed. The Act imposes a continuing requirement upon registered systems to satisfy the statutory integration requirements. We do not believe that Madison Gas stands for the proposition that plans must be in place to build transmission lines; an existing contract path, coupled with a commitment to find alternatives should the contract path not be renewed, should be sufficient to satisfy the statutory requirement.59 We have yet to address whether physical interconnection can be demonstrated through membership in an RTO. The Applicants have not sought to rely upon AEP's participation in a RTO for a showing of interconnection. The question of AEP's ability to do so, if the Contract Path is terminated, thus remains open. The ongoing industry restructuring will require our continuing consideration of the interconnection requirement. Moreover, the Advocates Group and APPA/NRECA err to the extent that they suggest that Applicants must have concrete plans now to construct an interconnection.60
APPA/NRECA asserts that "the Commission has never held that the interconnection requirement may be satisfied by the use of third-party transmission service in lieu of actual physical interties, when utilities are as widely separated as AEP and CSW and lie in different power pools."61 There is dicta in a series of our decisions stating that contract rights cannot be relied on to "integrate" "distant" utility properties.62 We do not believe that these statements mean that a contract path might not meet the interconnection requirement because of its length. These earlier cases suggest that the reason a contract path might not "integrate" two distant utilities was due to the "single area or region" requirement of section 2(a)(29)(A).63 We did not hold in any of these prior cases that the length of a contract path was relevant in determining whether the interconnection requirement of section 2(a)(29)(A) was met. Such an approach would be inappropriate in view of the express language of section 2(a)(29)(A) as well as technological and commercial developments that have made feasible the transmission of power over longer distances.
The Advocates Group suggests, without discussion, that a one-way transmission contract is inadequate.64 We do not agree. As explained in section II.B.2. below, Applicants anticipate net-fuel related savings of approximately $98 million over the ten-year period following the Merger. Applicants contemplate that fuel-related savings will result from the economic transfer of energy from one zone of the New AEP System, the "East Zone," to another, the "West Zone." (These zones correspond to the pre-merger AEP System and CSW System, respectively.) The Contract Path will also afford the New AEP System additional opportunities for cost-effective energy transfers. Applicants do not anticipate sufficient levels of west-to-east energy transfers to warrant a firm two-way contract path. In view of these consideration, the Contract Path is adequate to support these transactions and satisfy the interconnection requirement.
The Advocates Group further claims that, by ceding use of the HVDC ties, the CSW Operating Companies will no longer constitute an integrated system and that CSW's Texas assets will be "fatally separated from the remainder of the post-merger system."65 The Advocates Group notes that the HVDC ties, which link the CSW SPP assets with the CSW ERCOT assets, were constructed specifically to connect the CSW Operating Companies.66
Applicants state, however, that they have committed only to waive priority with respect to use of the HVDC ties for unplanned (i.e., non-firm) transactions in ERCOT and the SPP. The waiver would not apply to planned (i.e., firm) transactions submitted to ERCOT or other transfers of firm capacity between the SPP and ERCOT control areas. Applicants state that New AEP will continue to use the HVDC ties to connect the New AEP ERCOT and non-ERCOT (SPP) Operating Companies in the manner described in Central and South West Corporation.67
The Advocates Group also asserts that Applicants' intention to join an independent system operator ("ISO") in the future is not a substitute for real integration.68 The APPA/NRECA agrees.69 Applicants, however, do not rely on participation in an ISO or RTO to satisfy the interconnection requirement specifically or the statutory integration requirements generally. Applicants note merely that this participation will likely result in increased reliability for the New AEP System.
We are satisfied that the utility properties of the New AEP System will be interconnected.
b. Economic and Coordinated Operation
(1) Introduction
In applying section 2(a)(29)(A), we have noted that, "[c]learly, Congress intended that more than interconnection is needed . . . ."70 The Court of Appeals for the District of Columbia Circuit has affirmed our view that the words "economically operated" in section 2(a)(29)(A) impose a requirement "that facilities, in addition to their physical interconnection, be consolidated so as to take advantage of efficiencies."71
(2) Proposed Operation of the New AEP System
The proposed operation of the New AEP System will differ in some respects from the traditional vertically-integrated monopoly utility model.72 Power supply will not be pooled and dispatched in the manner characteristic of that model, but will instead be coordinated through FERC-approved agreements that will be set over existing operating and transmission agreements, which will remain in place. Applicants state that the continuation of the existing agreements is necessary to assure the affected state regulators that the Merger will not result in cost or benefit transfers within or among the New AEP System Operating Companies as a result of the proposed Merger to the detriment of ratepayers.73 In addition, the New AEP System will coordinate its operations by various measures, including joint marketing and trading of electricity in the wholesale bulk power market, a comparatively new way in which utilities coordinate their operations today.
(A) Existing Agreements
(i) AEP Operating Companies
Appalachian Power, Columbus Southern Power, Indiana Michigan Power, Kentucky Power and Ohio Power are parties to an Interconnection Agreement, dated July 6, 1951, as amended, defining how these AEP Operating Companies share the costs and benefits associated with their generating plants (the "AEP Interconnection Agreement").74 The same AEP Operating Companies are also parties to a Transmission Equalization Agreement, dated April 1, 1984, which defines the method under which they share the costs associated with their relative ownership of transmission facilities (the "AEP Transmission Agreement" and, together with the AEP Interconnection Agreement, the "Existing AEP Agreements").75
(ii) CSW Operating Companies
The CSW Operating Companies and CSW Service are parties to the Restated and Amended Operating Agreement, dated as of January 1, 1997 ("CSW Operating Agreement"). The agreement requires the CSW Operating Companies to maintain specified annual planning reserve margins and requires those utilities that have capacity in excess of the required margins to make that capacity available for sale to associate utilities as capacity commitments. The CSW Operating Agreement also provides for the coordination of construction and operation of jointly-owned facilities; unit sales to assist associate utilities to meet capacity reserve levels; emergency energy; economy energy; off-system sales and purchases; and central load dispatching. Under the agreement, CSW Service has authority to coordinate the acquisition, disposition, planning, design and construction of system generating units and to supervise the operation and maintenance of a central control center. CSW Service schedules the energy output of the system capability to obtain the lowest cost of energy for serving aggregate system demand and coordinates off-system purchases and sales. The CSW Operating Agreement has been accepted for filing and allowed to become effective by the FERC.
The CSW Operating Companies and CSW Service are also parties to a transmission coordination agreement ("CSW Transmission Coordination Agreement" and, together with the CSW Operating Agreement, the "Existing CSW Agreements"). This agreement establishes a coordinating committee that has responsibility to oversee the coordinated planning of system transmission facilities.76 Under the CSW Transmission Coordination Agreement, CSW Service has the responsibility to monitoring the reliability of transmission systems and to administer the CSW open access transmission tariff filed with the FERC.77 The CSW Transmission Coordination Agreement has been accepted for filing by the FERC effective as of January 1, 1997, and is the subject of proceedings commenced to consider the reasonableness of its terms and conditions.
Together, the Existing AEP Agreements and the Existing CSW Agreements are sometimes referred to below as the "Existing Agreements."
(B) Proposed Umbrella Agreements
Upon consummation of the Merger, the power supply and transmission of the New AEP System will be coordinated under two FERC-approved agreements, a System Integration Agreement and a System Transmission Integration Agreement (together, the "Umbrella Agreements"). As noted above, the Existing Agreements will continue in effect and will thus continue to control the distribution of power supply costs and benefits, and the allocation of costs and benefits associated with ownership of transmission assets, among the East Zone Operating Companies and the West Zone Operating Companies, respectively, of the New AEP System.
(i) System Integration Agreement
The System Integration Agreement applies to the coordination of the power supply resources of the New AEP System and the distribution of costs and benefits between the New AEP Operating Companies in the East and West Zones.78
Under the agreement, each Zone is required to have enough generating capacity to meet its firm load obligations. When one Zone has surplus capacity available for sale and the other has insufficient capacity, the surplus Zone will make its surplus capacity available.79 If neither Zone has surplus capacity after meeting its firm load obligations, or if third party capacity is cheaper than that available from the surplus Zone, capacity will be purchased from third parties for the Zone(s) with insufficient capacity.
Economic energy will also be transferred from one Zone to the other to minimize the total production cost of the New AEP System. The East Zone and the West Zone will be centrally dispatched on a least-cost basis for the New AEP System, as discussed further below. AEP Service will perform these functions.
The System Integration Agreement contains four FERC-approved service schedules governing: (1) the allocation of capacity costs and purchased power costs; (2) pricing for capacity exchanges between the Zones; (3) pricing for energy exchanges between the Zones; and (4) the allocation of "Trading and Marketing Realizations," which are the net gains or losses from the New AEP System's off-system transactions.
(ii) System Transmission Integration Agreement
The System Transmission Integration Agreement applies to the transmission facilities owned or operated by the New AEP System. The agreement contains two FERC-approved service schedules governing: (1) the allocation of transmission costs and revenues between the East Zone and the West Zone; and (2) the allocation of control and dispatch costs associated with the integration of the Zones, the cost of the transmission capacity reserved on other systems to link the Zones, and any revenues from the resale of those capacity rights. AEP Service will coordinate the planning, operation and maintenance of transmission facilities and capacity of the New AEP System.
(C) Central Dispatch
Power supply and transmission of the New AEP System will not be pooled and dispatched in the manner characteristic of the traditional vertically integrated monopoly utility model. Rather, Applicants intend, when and as practicable, to combine the control area functions of the East Zone and the West Zone. Except as provided in the System Integration Agreement, while operating as separate control areas (AEP, CSW-SPP and CSW-ERCOT), the pre-Merger generation dispatch priorities and methodologies applicable within each control area will continue to apply to that control area. Dispatch of the combined properties will be conducted on a least-cost basis, subject to availability of transmission entitlements linking the control areas. In determining the New AEP System's generation dispatch priorities, each Zone's most economic generation will be used to serve its native load customers and previously committed firm load contracts.
The control areas will be centrally dispatched in real time to minimize total generation costs for the New AEP System, subject to any transmission constraints. A single control center will schedule the generating resources of the New AEP System on a day-ahead and an hour-ahead basis. The center will control the joint dispatch of all of the power supply resources of the New AEP System.
Dispatch of the New AEP System will be performed in two steps. The first step will be unit commitment. In this step, the system operator projects the system peak load requirements for a period, and, to meet that requirement, schedules available generating units to be on-line in economic order, subject to any operational or other constraints, including transfer limitations within the New AEP System. The operator will not load the less economic units unless the load requires them. The system operator will also examine the energy market to determine if lower cost reliable energy can be purchased in order to avoid loading higher cost generating sources.
The second step will be the incremental loading of the on-line generation sources and purchases. This step will be performed continuously and each unit's available generation dispatched above its minimum load level in order to match the generation to the load. Generation of the New AEP System's various units will be dispatched from lowest cost to highest cost. Dispatch will be subject to available transmission, including the HVDC ties connecting the ERCOT and non-ERCOT areas of the West Zone and the 250 MW Contract Path between the East Zone and the West Zone.
(D) The Contract Path
The New AEP System will transmit power from the East Zone to the West Zone over the Contract Path. As noted previously, Applicants have agreed to limit their reservation of firm transmission service from east to west over the Contract Path to 250 MW, unless the FERC authorizes them to exceed this limit. This commitment is intended to mitigate anticompetitive effects that may be attributable to the Merger.80
In addition to the use of the Contract Path, quantities in excess of 250 MW may be moved within the New AEP System in any given hour by using non-firm transmission rights. These additional transfers will be made when they would be economical for New AEP System operations, after taking opportunity costs into consideration.
Applicants also expect that, from time to time, there will be opportunity to transfer energy economically from the West Zone to the East Zone. In these circumstances, Applicants will make use of their rights to nominate secondary points of receipt and delivery under their transmission service agreements with Western Resources and Ameren.81
(E) Other Forms of Coordination
Applicants note that industry restructuring has expanded the means by which a company can coordinate merged utility operations. Applicants intend, subject to applicable regulatory restraints, to implement measures in addition to the Umbrella Agreements and transactions described above that will permit the operation of the New AEP System in an economic and coordinated manner. These measures are described briefly below.
(i) Joint Marketing and Trading
Following the Merger, AEP intends to coordinate the activities of the New AEP System through various business units of AEP Service. AEP Service's wholesale business unit will be responsible for evaluating marketing and trading efforts, design and purchase of new generating facilities, operation and maintenance of generating capacity resources, centralization of trading and marketing activities, acquisition and maintenance of transmission services needed for intrasystem power transfers, provision of billing and administration, and other administrative services.
The wholesale business unit will coordinate the New AEP System's joint marketing and trading efforts, both as a buyer and as a seller. The Applicants emphasize the importance of coordinated trading operations in the contemporary electric industry.82
Currently, trading operations are coordinated with the operation of generating assets as part of AEP's regulated operations. Applicants state that this measure has enabled AEP to coordinate the operation of its generation assets with the broader power market. Upon consummation of the Merger, New AEP will combine AEP's and CSW's trading operations with the operation of their generating assets to achieve similar benefits.
Applicants note that the ability to diversify supply over a broader region with diverse weather and time zones is another way in which the New AEP System can achieve the benefits of economic integration with a market-based commodity like electricity. The wholesale business unit will take advantage of the New AEP's System's generation capacity, wholesale customer base, diversity of weather, time and fuel supply to allocate resources more efficiently and thereby decrease the overall production costs of the New AEP System.
(ii) Administrative Coordination
The New AEP System will achieve administrative coordination by various measures. The North American energy delivery unit of AEP Service will centralize asset-management policy decisions, provide an integrated approach to financial decisions, develop an appropriate allocation of resources between new capital investment and routine operation and maintenance expenses, and implement the use of best practices throughout the New AEP System. The North American energy delivery unit will consist of a transmission organization, a distribution organization, a customer interface and services organization, a regulatory, planning and budgeting services organization, and a customer and community services organization.
The corporate development unit will provide direction to the New AEP System in areas such as integration, best practices and business re-engineering. The corporate development unit will provide communications and energy information services that complement New AEP's affiliated businesses and invest in new ventures that will support New AEP's strategic plan.
Finally, the coordination of the New AEP System will be furthered by the coordination of information system networks and other support services. AEP Service will perform many administrative and support services for the New AEP System.
(3) Contentions of the Intervenors
The Advocates Group argues that the Application does not support a finding that the New AEP System will be operated in an economic and coordinated manner.83 The Advocates Group states that the level of coordination is limited to the capacity of the Contract Path, which is inadequate.84
The Advocates Group asserts that:
The merged company cannot be a "coordinated system." There are two systems. The components within each system are tied together through coordination agreements and some central dispatch. But there is no plan to coordinate the two previously separate systems through coordination and dispatch, except for insignificant amounts limited by the 250 MW connection. . . . The Applicants make no pretense to being a single coordinated system after the merger. All that is "coordinated" is the transfer of a token amount of power between two huge systems.85
Contrary to the suggestion of the Advocates Group, the Contract Path is only one of several measures proposed to coordinate the New AEP System.86 Moreover, the Advocates Group's argument seems to rest on the assumption that power supply must be pooled and dispatched in the manner characteristic of the traditional vertically-integrated monopoly utility model if we are to make a finding of economic and coordinated operation. This is not the case, however. Pooling and central dispatch are merely one way in which coordination is achieved in the traditional model. They are not required by the Act or our precedent.
Moreover, as indicated above, the recent development of a competitive wholesale bulk power market is changing the way in which utilities coordinate the operation of their generating facilities and their marketing and trading operations. For example, a utility's trading strategy necessarily affects its use of its generation facilities. If the price of electricity is such that the utility can sell electricity profitably, the trading group will direct the utility's generating units to generate electricity to capacity.87 In contrast, if the price of electricity is so low that it is cheaper to purchase electricity instead of incurring production costs, the trading group will direct its generating units to curtail operations. The coordination of generating assets and marketing/trading activities represents a form of operational coordination that characterizes the emerging utility market model in the electric industry today.
The Advocates Group also asserts that, "The Applicants [c]annot [s]atisfy the "[e]conomical and [e]fficient [test] of Section 10(c)(2) by [s]elling [o]ff [g]eneration [p]resently [u]sed to [i]ntegrate the [s]ystem." The Advocates Group refers to the CSW System's commitment to divest generation capacity in ERCOT and the SPP to mitigate potential anticompetitive effects of the Merger.88
We address the Advocates Group's contentions concerning section 10(c)(2) in section II.B.2. of this Order. To the extent that the Advocates Group suggests that the proposed divestiture will impair economic and coordinated operation, Applicants respond that it will not. The New AEP System will coordinate the dispatch of generating units under its control, make economic purchases of power, and supply power to its customers. The divestiture of portions of certain existing generating units that are currently part of Applicants' supply options will not affect the Applicants' ability to coordinate the operations of the New AEP System.89
(4) Conclusion
We find that the proposed forms of central control and coordination of the New AEP System satisfy the "economic and coordinated operation" requirement of section 2(a)(29)(A). The fact that power supply and transmission of the New AEP System will not be pooled and dispatched in the manner characteristic of the traditional utility model does not preclude this finding. As noted above, the Act does not, by its terms, specify the measures that are required for a finding of economic and coordinated operations. The Applicants' approach to coordination reflects the extent to which actions of Congress, the FERC and the states are shaping the contemporary electric industry. The unbundling of generation and transmission and the new forms of central control and coordination that are developing are the direct result of federal and state efforts to promote a competitive energy market -- a goal consistent with the purpose of the Act to promote "economy of management and operation" of public-utility companies.90
c. "Single Area or Region"
The "single area or region" standard, like the "no impairment" standard discussed below and the provisions of sections 10(b)(1) and 10(c)(2) of the Act, implicitly requires us to consider the size of the system that would result from the proposed Merger. The Act was not intended to preclude a holding company from expanding its utility system by acquisition or otherwise. Indeed, the Act expressly permits a holding company that meets the standards of the Act to function and develop as a regional system.91
The leading case interpreting the size standards of sections 2(a)(29)(A), 10(b)(1), and 10(c)(2) of the Act is our 1978 decision in American Electric Power Co., 46 S.E.C. 1299 ("1978 AEP Order") approving AEP's proposed acquisition of Columbus and Southern Ohio Electric Company. In 1946, we had declined to approve the acquisition because we could not find that the combined system was "not so large as to impair . . . the advantages of localized management and the effectiveness of regulation."92 Our 1946 decision did not identify any abuses that might ensue from the affiliation. Rather, it emphasized that an essential part of the spirit of the Act was the desire to avert the process of concentration of power which had characterized the growth of holding companies.93
In 1978, we revisited and approved the acquisition. In discussing the "no impairment standard," we noted the relevance of section 10(b)(1).94 We observed:
The standards in these sections were relatively easy to apply to the huge, complex, and irrational holding company systems at which the Act was primarily aimed; such systems clearly contravened these standards as well as the physical ones. But those standards were, and are now, difficult to apply to a system like AEP, which is large but efficient, with, or without, [the acquisition].95
We further noted that section 10(c)(2) requires us to consider the size of the resulting system before approving an acquisition, but, like section 10(b)(1), imposes no precise limits on holding company growth.96 Rather, these sections "are couched in discretionary terms and require the Commission to exercise its best judgment as to the maximum size of a holding company in a particular area, considering the state of the art and the area or region affected." "[T]he determination of whether to permit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of preconceived notions of size."97 We concluded:
In sum, the framers of the Act were clearly concerned about the evils of bigness, and they pointed to certain problems which large holding company systems may create. On the other hand, they were also aware that the combination of isolated local utilities into an integrated system afforded opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations. They wished to preserve these opportunities while avoiding an excess of concentration and bigness.98
Although the 1978 AEP Order focuses upon section 2(a)(29)(A) in the context of the "no impairment requirement" rather than the "single area or region requirement," the decision considers the issue of size in a broad statutory context and articulates general principles which we reaffirm.99
The Act does not define the terms "area" and "region." The terms, by their nature, are susceptible of flexible interpretation, which permits us to respond to the current state of the industry and to give the terms practical meaning and effect.
We have found that the single area or region test should be applied flexibly when doing so does not undercut the policies of the Act "against scatteration -- the ownership of widely dispersed utility properties which do not lend themselves to efficient operation and effective state regulation."100 We have not required that combining systems be contiguous for the requirement to be met.101
Distance raised many more barriers to integration when the Act was passed in 1935 than is the case today. The 1995 Report recognized that "recent institutional, legal and technological changes . . . have reduced the relative importance of . . . geographical limitations by permitting greater control, coordination and efficiencies" and "have expanded the means for achieving the interconnection and economic operation and coordination of utilities with non-contiguous service territories."102 These advances and developments are breaking down traditional boundaries and concepts of regions.
We have followed the recommendations of the 1995 Report, citing, in particular, its recommendation that we "continue to interpret the `single area or region' requirement to take into account technological advances."103 The 1995 Report also recommended, in recognition of the changing environment in the utility industry, that we adopt "a more flexible interpretation of the geographic and physical integration standards, with more emphasis on whether an acquisition will be economical and subject to effective regulation."104 We believe that this approach is consistent with the Act's goal of preventing "the growth and extension of holding companies [that] bears no relation to economy of management and operation."105 We also believe that this approach is consistent with our precedent, which evaluates the "single area or region" requirement not only in terms of size and distance, but also in light of "the existing state of the arts of generating and transmission and the demonstrated economic advantages of the proposed arrangement[],"106 the importance of effective regulation and the absence of anticompetitive concerns under section 10(b)(1).
As described above, the New AEP System will be interconnected and susceptible of economic and coordinated operation and no adverse finding is required on anticompetitive grounds under section 10(b)(1). We find below that the size of the New AEP System will not impair efficient operation, localized management or effective regulation and that the Merger will result in economies and efficiencies under section 10(c)(2).107 In view of these considerations, we find that the New AEP System will operate in a "single area or region."
The Advocates Group and APPA/NRECA challenge the Merger on the ground that the New AEP System does not satisfy the single area or region requirement. The Advocates Group asserts that, "[t]he size alone of the territory that is proposed to constitute an integrated system may be determinative of whether the `single area or region' standard is met."108 According to the Advocates Group, the Applicants "do not provide any specific information relating to how the proposed territory would constitute one region in terms of generation, fuel sources, marketing, transportation, community size, or any other factor the Commission has considered in the past."109
We considered these factors in our early precedent, in keeping with our application of section 2(a)(29)(A) in terms of practical considerations.110Cities Service, supra note 70, at 36. In the Cities Service decision, we declined to find that electric operations in Wyoming, Colorado, New Mexico and Arizona constituted an electric integrated system. With respect to the single area or region requirement, we noted that: "The statute and its legislative history make it clear that, consistently with geographic conditions (in the broad sense of the term) as much compactness should be achieved in outlining the spheres of holding company influence as physical facts permit." Id. at 59. Further, we stated that: "The standard of localized management cannot be met by any combination of properties (as one or more systems) spread over a territory as vast as that covered by the States of Wyoming, Colorado, New Mexico and Arizona." Id. We rejected this per se size approach in the 1978 AEP Order. In view of the changes in the electric industry, many of these factors have far less relevance than they did sixty-five years ago. Moreover, our application of section 2(a)(29)(A) has evolved with the changes in the industry. As discussed previously, we rejected a per se size standard in the 1978 AEP Order, in favor of an approach that considers each standard of section 2(a)(29)(A) in light of the other standards and the other objectives of the Act.
The Advocates Group also suggests that the single area or region requirement is not met because the proposed Merger reflects merely the Applicants' desire for growth.111 In this regard, the Advocates Group contrasts the Application with the 1978 AEP Order, in which the purpose and result of the acquisition was to include the acquired utility within a systemwide practice of joint planning and dispatch.112
Again, this contention seems to rest on the assumption that pooling and dispatch of power supply in the manner characteristic of a vertically integrated monopoly utility are required to satisfy section 2(a)(29)(A) of the Act. We have explained that this is not the case. Accordingly, we reject the Advocates Group's argument that the single area or region requirement is not satisfied.
The Advocates Group also suggests that the New AEP System does not meet the single area or region requirement because of ERCOT's separation from the rest of the nation's electric grid.113 We have previously concluded, however, that the location of CSW Operating Companies inside and outside of ERCOT, connected by HVDC ties, does not preclude a finding that the CSW System is an integrated electric system.114 Similarly, the features of the CSW System do not compel a finding that the New AEP System does not satisfy the single area or region requirement. Rather, the features of the CSW System, with its two control areas or zones, suggest that the integration characteristics of the New AEP System are less than novel.
APPA/NRECA contends that the New AEP System's operations will not be confined to a single area or region because they will span 11 states and cover an area of 197,400 square miles.115 APPA/NRECA notes that AEP already has electric utility assets in more states, covering a larger area, than any other registered holding company. APPA/NRECA describes other multistate registered systems as "decidedly more compact" (e.g., Entergy Corporation, The Southern Company and New Century Energies, Inc.) and adds that except for New Century Energies, Inc. (for which physical interconnection is planned), these systems are characterized by multiple interconnections and close system proximity.116
APPA/NRECA asserts that the relevant facts in this matter are that the AEP and CSW headquarters are approximately 1,000 miles apart and the boundaries of the service territories are even more distant. Further, APPA/NRECA notes that the New AEP System's power pools and reliability councils are not contiguous.117
APPA/NRECA does not identify any factor other than distance that precludes a finding that the New AEP System is in a single area or region. APPA/NRECA does not identify any abuses identified by the Act that would recur if the New AEP System were found to be in a single area or region, except to the extent that the APPA challenges the anticompetitive effects of the Merger, a contention that we have addressed in section II.A.1. above.
Taken overall, APPA/NRECA's argument appears to be that the New AEP System, by any measure, is simply too large to be within a single area or region. We reject this argument. To do otherwise would effectively return us to the per se size requirement that we rejected in the 1978 AEP Order. In that regard, we note that the APPA/NRECA's emphasis on geographical distances ignores the technological and regulatory changes in the industry that have made economic and coordinated operation possible over great distances.118 We also reaffirm our view that the various requirements of section 2(a)(29)(A) cannot be considered independently of one another and the other objectives of the Act.119 Accordingly, we reject the contention that the New AEP System is too large to satisfy the single area or region requirement.
d. No Impairment to Efficient Operation, Localized Management or Effective Regulation by Reason of System Size
The record in this matter supports a finding that the Merger will not impair localized management, efficient operation or effective regulation due to the size of the New AEP System. Both we and the FERC will continue to regulate the New AEP System as before. The FERC did not set the issue of effective regulation for hearing.120
Various state regulators have also demonstrated that they can effectively regulate the New AEP System. The orders of the Arkansas, Indiana, Kentucky, Louisiana, Michigan, Oklahoma and Texas Commissions impose an extensive list of service quality standards on the New AEP System Operating Companies that operate within their states.121 The order of the Texas Commission approves several provisions designed to ensure the effectiveness of its regulatory authority over the New AEP System's operations in Texas, as well as provisions to ensure the continuity of CSW's local management and organizational structure following the Merger.122 The Indiana and Kentucky orders contain detailed guidelines relating to affiliate transactions.123 The Oklahoma order grants the Oklahoma Commission and the State Attorney General access to the books and records of AEP and its affiliates and subsidiaries, including their participation in joint ventures, with respect to matters and activities that relate to Oklahoma retail rates.124 Under the proposed Louisiana settlement, the Louisiana Commission will have an opportunity to conduct several reviews of Merger savings over an eight-year period following the Merger.125 We have found that effectiveness of state regulation is not impaired where state regulators have the same jurisdiction before and after a merger.126
APPA/NRECA acknowledges that the regulators will have the same jurisdiction before and after the Merger. But APPA/NRECA states that "that argument, however, misses the point," because "having operations in eleven states would give the merged company many additional ways to `hide the pea' from its various state regulators, who would have difficulty coordinating their regulatory efforts due to the sheer numbers of commissions and staffs involved."127
These assertions lack support. None of the state commissions that regulates the New AEP System Operating Companies has raised as an objection to the Merger the impairment of its ability to regulate, or any other objection, in submissions to us. There is also no empirical basis for the suggestion that New AEP would seek to obstruct regulation by its state regulators.128
APPA/NRECA also suggests that "all indications in the application are that localized management will be substantially curtailed."129 In particular, APPA/NRECA cites the proposed centralization of management of power generation, transmission, distribution and customer services; the elimination of duplicative positions at the corporate management level; and the relocation of CSW's headquarters in Ohio. APPA/NRECA further asserts that the Applicants have provided "meager and contradictory information" on the impact of the Merger on localized management, and contends that we do not have an adequate record on which to determine whether New AEP will impair localized management. APPA/NRECA does not explain how the alleged impairment is related to the size of the New AEP System.
APPA/NRECA's unsupported assertions concerning the curtailment of localized management are unpersuasive.130 Applicants anticipate that the impact of the Merger will be predominantly confined to the combination of AEP's and CSW's service companies and the establishment of a business unit and management structure which will resemble the existing structures of CSW and AEP. Applicants state that the New AEP Operating Companies will continue to operate through the regional offices with local service personnel and line crews available to respond to customers' needs. AEP will preserve well-established delegations of authority, currently in place at AEP and CSW, which permit the local, district and regional management teams to budget for, operate and maintain the electric distribution system, to procure materials and supplies and to schedule work forces in order to continue to provide the same quality of service as before the Merger.131
We note our previous determination that the Merger will meet the section 2(a)(29)(A) standard of "economic and coordinated operation" and our finding below under section 10(c)(2) that the Merger will result in economies and efficiencies. To the extent that APPA argues that the size of the New AEP System will impair efficient operation, APPA does not explain how this impairment will occur, although it does object that the Application does not satisfy section 10(c)(2) of the Act.132 As we discuss below, we find that section 10(c)(2) is satisfied in this matter.
e. Conclusion
For the reasons discussed above, we find that the New AEP System will be an integrated system within the meaning of section 2(a)(29)(A) of the Act. Accordingly, the proposed Merger will not be detrimental to the carrying out of section 11 of the Act, which, as noted previously, generally limits a registered holding company to a single integrated system. Section 10(c)(1) of the Act is therefore satisfied. For the reasons discussed immediately below, we also find that the Merger will "tend[] towards the economical and efficient development of an integrated public-utility system," as required by section 10(c)(2).
2. Section 10(c)(2): Economies and Efficiencies
Section 10(c)(2) of the Act requires us to find that a proposed acquisition will "serve the public interest by tending towards the economical and efficient development of an integrated public-utility system."
As noted previously, Applicants project almost $2 billion of net non-fuel cost savings over the ten-year period immediately following consummation of the Merger. Applicants also anticipate net fuel-related savings of approximately $98 million over this same period. Applicants contemplate that fuel-related savings will result from the economic transfer of energy between the East Zone and the West Zone in order to displace relatively higher cost generation in the latter with relatively lower cost generation from the former. As explained previously, the Merger will afford the New AEP System additional opportunities for cost-effective energy transfers.133 These efficiencies will benefit consumers as well as investors. Based upon the resolution of issues related to the allocation of Merger-related savings between customers and shareholders of New AEP in the states which have approved the Merger, Applicants have guaranteed that approximately 55% of the projected savings from the Merger will be passed through to the respective customers of each New AEP System Operating Company.
We have reviewed the assumptions and methodologies that underlie Applicants' projections, and we find that they are reasonable and consistent with our precedent. The projected savings were the subject of testimony and related workpapers filed by Applicants' expert witness in the Texas and Louisiana proceedings. Applicants filed these documents as Exhibit D-2.1 (vol. 2) (testimony) and Exhibits D-3.1 (vol. 4 of 5) and D-4.1 (vol. 4 of 6) (workpapers) to the Application.
In addition to these benefits, Applicants anticipate non-quantifiable and organizational economies and efficiencies from the Merger. We have recognized that it is appropriate to consider "not only benefits resulting from the combination of utility assets, but also financial and organizational economies and efficiencies" under section 10(c)(2).134
Applicants state that generation mix and system reliability are two of the principal additional benefits contemplated from the Merger. Applicants explain that the New AEP System will have a more balanced generation mix that is less susceptible to fuel price volatility and supply interruptions than either the AEP System or the CSW System.
In addition, Applicants state that the New AEP System will be better situated to provide more reliable electric service than is possible for either the AEP System or the CSW System by itself. For example, the New AEP System will have a larger generating base after the Merger, and thus more generating resources to draw upon when units are down for maintenance or there is an unscheduled outage. As another example, Applicants state that the New AEP System should have a lower risk of unserved load than either the AEP System or the CSW System has, since each System has access to fewer interconnections to neighboring systems for emergency support than the New AEP System will have.
The record indicates that the proposed Merger will result in the economies and efficiencies required under section 10(c)(2) of the Act. Accordingly, we find that the requirements of section 10(c)(2) are satisfied.
APPA/NRECA disputes Applicants' showing under section 10(c)(2). APPA/NRECA states that "[c]laims of merger savings are inherently suspect;" "[e]stimates of merger benefits are subject to great uncertainties, particularly non-production savings that form the bulk of the savings claimed here."135 We note, however, that in addition to our review, various other regulators have considered the anticipated savings. Applicants note that they provided their estimates of Merger savings to the staffs of all eleven state commissions that will have retail rate jurisdiction over the New AEP System Operating Companies. The savings, as well as Applicants' plans for allocation of the savings, were approved by the Arkansas, Indiana, Kentucky and Oklahoma Commissions. In each of those states, the Applicants responded to discovery requests from participants, including many of the Intervenors, and defended the savings as being achievable. In each state, the Applicants either received a state commission order and/or entered into stipulations with state commission staff (and other parties) which establish the level of savings that will be shared with customers and which guarantee the savings to customers, regardless of whether savings are achieved.
APPA/NRECA observes generally that "savings often can be achieved without a merger."136 Even if this were the case, the Act requires us to apply the standards of section 10, including section 10(c)(2), to the proposed Merger. We are not required to, nor do we, substitute our business judgment for that of the Applicants.137
APPA/NRECA contends that "some of the claimed savings, such as `purchasing economies' are not true economies and efficiencies as intended by the Act's requirements, but rather are pecuniary savings enjoyed by a larger enterprise that is able to obtain lower prices from its suppliers."138 We do not perceive, and APPA/NRECA does not elucidate, the distinction between "true economies" and "pecuniary savings," for purposes of section 10(c)(2).139 Section 10(c)(2) of the Act does not identify the types of economies and efficiencies that must be demonstrated. Accordingly, we reject APPA/NRECA's argument concerning purchasing economies.
APPA/NRECA argues, finally, that the anticipated Merger savings are "well below the average level" as compared to other utility mergers.140 Applicants respond that the expected savings are more than sufficient to support a finding, without a hearing, that the Merger will satisfy section 10(c)(2) of the Act.141 As stated previously, we are satisfied on the basis of the record that Applicants have made the affirmative showing required by section 10(c)(2). That section does not require a comparative analysis of the savings of the Merger and those of other utility mergers.
With respect to the proposed divestiture of 250 MW of generating capacity in ERCOT and the SPP, the Advocates Group asserts that, "Even if the divestiture of the generation plants could somehow avoid violating the integration requirement on a physical basis, it will leave customers worse off on an economic basis."142 This concern is misplaced. As part of the respective settlements which they approved, the Oklahoma Commission and the Texas Commission considered the potential impact of the divestiture upon consumers. In the Oklahoma stipulation, Applicants committed to hold Oklahoma retail consumers harmless from any such adverse effects.143 The Texas settlement includes (1) a requirement that proceeds from the divestiture be used to reduce stranded costs of the New AEP System; (2) a provision that limits any adverse impact on consumers related to the divestiture; and, most significant, (3) a provision for rate reductions totalling $221 million for the New AEP System's customers in Texas over the six years following the Merger. In view of these measures, it appears unlikely that the divestiture will adversely affect consumers.
It is well settled that evidentiary hearings are required only when there exists a genuine issue of material fact.144 The proponent of the hearing must make a minimal showing that material facts are in dispute; the intervenor cannot rely on bald or conclusory allegations that a dispute exists.145 On the basis of our review, we are satisfied that no hearing is needed in this matter.
In order to effect the Merger, Applicants request authorization, variously, for issuances and sales of securities and/or acquisitions in transactions by which (1) AEP will acquire Merger Sub, Merger Sub will merge with and into CSW and, through the merger, AEP will indirectly acquire the CSW Common Stock; (2) AEP will issue AEP Common Stock in exchange for CSW Common Stock; (3) AEP will acquire, directly or indirectly, CSW Credit, Inc. (CSW will factor accounts receivable of all the New AEP System Operating Companies, consistent with previous authorizations); (4) AEP will reorganize, consolidate and, where necessary, restate certain of the existing intrasystem short-term financing and other authorizations of AEP, CSW and their respective subsidiaries, as described in Appendix 1; (5) CSW and its nonutility subsidiaries will borrow or obtain guarantees from AEP under the same terms and conditions as currently authorized for CSW and its nonutility subsidiaries, as described in Appendix 2; (6) as management may deem appropriate, AEP will acquire, directly or indirectly, CSW's nonutility businesses through the merger of one or more CSW nonutility businesses with one or more wholly owned nonutility subsidiaries (either presently existing and performing substantially equivalent activities or to be formed, if appropriate) of AEP; and, similarly, CSW will acquire and consolidate one or more of AEP's nonutility businesses; upon consolidation each nonutility business would succeed to the authority of the consolidated nonutility business;146 (7) CSW Service will merge with and into AEP Service, with AEP Service as the surviving company; and (8) CSW will distribute or pay as a dividend to AEP the common stock of one or more CSW nonutility businesses.
Applicants also request that AEP Service succeed to certain of the authority of CSW Service set forth in certain orders and that these authorized activities extend, where applicable, to the New AEP System Operating Companies.147 Applicants further propose that New AEP Service enter into an amended service agreement with all of AEP's subsidiaries, under which New AEP Service will provide the services previously provided by CSW Service, consistent with the requirements of section 13(b) of the Act and previously approved allocation methods, as well as several new allocation methods proposed in the Application.
Previous orders have authorized both AEP and CSW to use the proceeds of certain financings to invest up to 100% of consolidated retained earnings in EWGs and FUCOs.148 As of December 31, 1999, AEP and CSW had consolidated retained earnings of approximately $1,725 million and $1,906 million respectively. Applicants propose that these orders terminate upon consummation of the Merger and that AEP be authorized to issue and sell securities in an amount of up to 100% of its consolidated retained earnings for investment in EWGs and FUCOs, with consolidated retained earnings to be calculated on the basis of the combined consolidated retained earnings of the New AEP. As of December 31, 1999, the pro forma aggregate investment in EWGs and FUCOs would have been approximately $1,853 million or about 51% of consolidated retained earnings of New AEP.
Finally, Applicants propose that certain stock-based benefit plans currently maintained by AEP and CSW be continued, modified or cancelled in connection with the Merger, as described in Appendix 3.
The proposals summarized above and in the appendices to this Order are variously subject to sections 6(a), 7, 9(a), 10, 11, 12(b), 12(c), 13(b), 32 and 33 of the Act and rules 43, 45, 46, 53, 54, 83, 87, 88, 90 and 91 of the Act. We have reviewed the proposed transactions and find that the requirements of the Act are satisfied.
We have carefully examined the Application under the applicable standards of the Act, and have concluded that the proposed transactions are consistent with those standards. We have reached these conclusions on the basis of the complete record before us.
No federal or state commission other than this Commission has jurisdiction over the proposed transactions, other than as discussed above. As noted above, Applicants state that fees and expenses in connection with the Merger will be approximately $72.7 million.
Due notice of the filing of the Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been ordered by the Commission. Upon the basis of the facts in the record, it is hereby found that the applicable standards of the Act and rules thereunder are satisfied, and that no adverse findings are necessary:
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Application, as amended, be, and it hereby is, granted, subject to the
terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that the requests for hearing be, and are, denied.
IT IS FURTHER ORDERED, that the request for a consolidation of this Application with the application in File No. 70-8779 be, and is, denied.
By the Commission. Jonathan G. Katz Secretary
Current AEP and CSW Short-Term Borrowing Authority and Applicants' Related Request for Authority
Current CSW Short-Term Borrowing Authority
Currently, the CSW system uses short-term debt, primarily commercial paper, to meet working capital requirements and other interim capital needs. In addition, to improve efficiency, CSW has established a system money pool ("CSW Money Pool") to coordinate short-term borrowings for CSW, its electric utility subsidiary companies and CSW Service, as set forth in Central and South West Corp., Holding Co. Act Release No. 26697 (Mar. 28, 1997) and Central and South West Corp., Holding Co. Act Release No. 26854 (Apr. 3, 1998) (together, the "CSW Money Pool Orders"). AEP has no equivalent to the CSW Money Pool.
The CSW Money Pool Orders authorize for CSW, CP&L, PSO, SWEPCO, WTU and CSW Service ("CSW Money Pool Participants") a short-term borrowing program through March 31, 2002, which includes the sale of commercial paper by CSW to commercial paper dealers and financial institutions, and the sale of short-term notes to banks and their trust departments, by the Money Pool Participants. The CSW Money Pool Orders authorize short-term borrowing limits for CSW and the CSW Money Pool Participants as follows:
CSW Money Pool
Participant
Short-Term
Borrowing Limit
CSW
$2,500,000,000
CP&L
600,000,000
PSO
300,000,000
SWEPCO
250,000,000
WTU
165,000,000
CSW Service
210,000,000
Current AEP Short-Term Borrowing Authority
Under American Electric Power Co., Inc., Holding Co. Act Release No. 27049 (Jul. 14, 1999) ("AEP Short-Term Financing Order"), the Commission authorized the following short-term borrowing limits for AEP and certain of its subsidiaries identified below:
Company
Short-Term
Borrowing Limit
AEP
$ 500,000,000
AEP Generating
125,000,000
Appalachian Power
325,000,000
Columbus Southern Power
350,000,000
Indiana Michigan Power
500,000,000
Kentucky Power
150,000,000
Kingsport Power
30,000,000
Ohio Power
450,000,000
Wheeling Power
30,000,000
Total
$2,460,000,000
Request of Applicants
Applicants request authority, effective upon consummation of the Merger, for AEP to continue the CSW Money Pool and to manage and to fund it consistent with all the terms and conditions of the CSW Money Pool Orders and all previous orders relating to the CSW Money Pool, subject to the following:
(1) CSW's $2,500,000,000 short-term borrowing authorization will transfer to AEP and AEP's short-term borrowing limit will be increased from $500,000,000 to $5,000,000,000. The new limit will consist of (a) $2,500,000,000 authorized for CSW; (b) $2,460,000,000 authorized for AEP, AEP Generating and the AEP Operating Companies, and (c) $40,000,000 for New AEP Service;
(2) AEP, AEP Generating and the AEP Operating Companies will be added as participants to the CSW Money Pool and permitted to issue short-term debt up to the amounts specified in the AEP Short-Term Financing Order; and
(3) New AEP Service and certain other subsidiaries of AEP will be added as participants to the CSW Money Pool, although their borrowings would be exempt under rule 52(b).149
Accordingly, Applicants propose that the CSW Money Pool Orders be revised to authorize the following short-term borrowing limits for the companies indicated (other than New AEP Service and certain subsidiaries of AEP noted above):
Money Pool
Participant
Short-Term
Borrowing Limit
AEP150
$5,000,000,000
AEP Generating
125,000,000
Appalachian Power
325,000,000
Columbus Southern Power
350,000,000
Indiana Michigan Power
500,000,000
Kentucky Power
150,000,000
Kingsport Power
30,000,000
Ohio Power
450,000,000
Wheeling Power
30,000,000
New AEP Service151
40,000,000
CP&L
600,000,000
PSO
300,000,000
SWEPCO
250,000,000
WTU
165,000,000
CSW Service151
210,000,000
Total
$8,525,000,000
Footnotes
1 Applicants filed five amendments to the Application, the last on May 24, 2000.
2 The electric operations of AEP are an electric integrated public-utility system within the meaning of section 2(a)(29)(A) of the Act. See American Electric Power Co., Inc., 46 S.E.C. 1299 (1978) ("1978 AEP Order").
3 In addition, AEP owns interests in various nonutility businesses, including 50% of Yorkshire Electricity Group plc, a United Kingdom foreign utility company ("FUCO") as defined in section 33 of the Act. AEP's nonutility subsidiaries are used to conduct businesses that are permitted by the Act under sections 32, 33 or 34, by Commission order under section 11(b)(1), or by rule 58.
4 The lines include 2,022 circuit miles of 765 kilovolt ("KV") lines wholly owned by AEP's subsidiaries and 766 miles of 345 KV lines owned jointly with nonaffiliates.
5 ECAR's membership includes 29 major electricity suppliers located in nine states serving more than 36 million people. The current full members are those utilities whose generation and transmission have an impact on the reliability of the interconnected electric systems in the region.
6 CSW owns interests in various nonutility subsidiaries, including SEEBOARD plc, a United Kingdom FUCO. CSW's nonutility subsidiaries are used to conduct businesses that are permitted by the Act under sections 32, 33 or 34, or by order under sections 9(a)(1) and 10, or rule 58.
7 CP&L owns a 25.2% interest in the South Texas Project, a nuclear electricity generating station.
8 There are three U.S. interconnects: the Eastern Interconnect, which encompasses utilities in the eastern U.S. and Canada from the Atlantic Ocean to the High Plains; the Western Interconnect, which encompasses utilities from the High Plains/Rocky Mountain region to the Pacific Ocean; and the Electric Reliability Council of Texas ("ERCOT"), which has only Texas utilities as members.
9 47 S.E.C. 754 (Apr. 1, 1982) (order terminating a proceeding examining CSW's compliance with the integration standards of section 11(b)(1) of the Act and upholding a 1945 determination that CSW owns a single integrated public-utility system).
10 In addition, the Arkansas Commission, the Louisiana Commission and the Indiana Commission filed motions to intervene but did not raise any issues or concerns. The Ohio Commission filed a request for an extension to review the Application in order to determine whether to comment; it subsequently withdrew its request and advised us that it would not submit comments. These commissions have jurisdiction over AEP and CSW Operating Companies that serve retail customers in their respective states. Each has approved the proposed Merger and/or related matters. See section I.E.2., infra.
11 These Intervenors consisted of three groups of cooperatives and one utility. Arkansas Electric Cooperative Corporation, Mid-Tex Generation and Transmission Electric Cooperative, Inc., and its members, Rayburn Country Electric Cooperative, Inc., the Oklahoma Association of Electric Cooperatives and its members, and Magic Valley Electric Cooperative, Inc. filed, and subsequently withdrew, a joint motion to intervene, comments and request for hearing. East Texas Electric Cooperative, Inc., Northeast Texas Electric Cooperative, Inc. and Tex-La Electric Cooperative of Texas, Inc. filed, and subsequently withdrew, a joint petition for leave to intervene, protest, comments and request for hearing. South Texas Electric Cooperative, Inc., Medina Electric Cooperative, Inc. and the City of Robstown, Texas filed, and subsequently withdrew, a joint intervention and protest. Dayton Power & Light Company, an electric utility operating in west-central Ohio, filed, and subsequently withdrew, a protest and comments in opposition to the Merger and a request for hearing.
12 APPA is an organization of approximately 2,000 municipal and other state and local government-owned utilities. NRECA is an association of approximately 1,000 rural electric cooperatives. APPA and NRECA members are located in areas served by the Applicants.
13 Consumers' members include public power suppliers, power marketers, investor-owned utilities, industrial and small business energy customers, consumer advocates and state regulators.
14 These four Intervenors are the statutory representatives of their respective states' residential utility consumers before state and federal regulators, legislatures and courts.
15 The Electricity Consumers Resource Council is an association of large industrial consumers of electricity.
16 Industry Energy Users - Ohio has 36 members with manufacturing facilities located throughout Ohio, including the areas served by Ohio Power and Columbus Southern Power.
17 Public Citizen is a non-profit research, lobbying, and litigation organization that advocates consumer protection and government and corporate accountability. Its members are located throughout the United States, including states served by the AEP and CSW Operating Companies.
18 Ohio Partners for Affordable Energy is an organization formed to advocate affordable energy policies on behalf of low- and moderate-income consumers.
19 The Citizens Action Coalition of Indiana is a non-profit corporation with approximately 300,000 members and contributors, comprised primarily of residential utility consumers of Indiana utilities, including customers of Indiana Michigan Power.
20 The Environmental Law and Policy Center, a Chicago-based regional environmental organization, provides technical and legal services to citizen groups throughout the Midwest, including areas served by AEP Operating Companies.
21 The Attorney General of Oklahoma, the Ohio Consumers' Counsel, and the West Virginia Consumer Advocate Division were originally a members of the Advocates Group, but subsequently withdrew.
22 Response to Applicants' Opposition to Motions to Intervene.
23 Shares of CSW Common Stock owned by AEP, CSW or any of their direct or indirect subsidiaries, including Merger Sub, if not held on behalf of third parties, will not be converted into AEP Common Stock.
24 See American Electric Power Company and Central and South West Corporation, Dkt. Nos. EC98-40-000, ER98-2770-000 and ER98-2786-000, 90 FERC ¶ 61,242 (Mar. 15, 2000), reh'g request dismissed in part, denied in part and granted in part, Opinion No. 442-A (May 15, 2000). The disposition of the request is discussed in note 26, infra.
25 Applicants committed: (1) to divest 550 MW of generation capacity (250 MW of CSW's generation capacity in ERCOT immediately upon consummation of the Merger and 300 MW of CSW's generation capacity in the SPP by July 1, 2002); (2) to limit their ability to contract for firm transmission capacity from the AEP system to the CSW system to 250 MW, unless authorized by the FERC to contract for more capacity; (3) to schedule available capacity between ERCOT and the SPP on the HVDC ties on a first-in-time basis; (4) to waive their native load priority into the CSW-SPP control area for nonfirm imports; (5) to waive their native load priority for transfers of energy from the CSW System to the AEP System for a four-year period following the Merger; and (6) to adopt certain ratepayer protection measures. The effect of commitment (4) upon the New AEP System is discussed in section II.B.1.a., infra. As discussed in section II.B.1.b.(2), infra, the FERC Order also approved proposed New AEP System agreements and tariffs.
26 To "determine whether operations or wholesale transactions involving Applicants are unduly discriminatory or preferential or show evidence of the exercise of market power," the FERC also requires that Applicants provide for interim mitigation measures. Applicants committed to provide generation dispatch information necessary for the Midwest Independent System Operator (the "MISO") to monitor the effects of the dispatch on the loading of the MISO's constrained transmission facilities. The FERC Order requires AEP to provide similar generation dispatch information and other additional data to an independent party in order to monitor the effects of this dispatch on the loading of AEP's constrained transmission facilities. The FERC Order requires that the independent party analyze the data and submit the analysis and data to the FERC for review.
Because the proposed divestitures could not be completed by the consummation of the Merger, Applicants proposed to make interim sales equivalent to the capacity to be divested until the completion of each divestiture. The FERC Order requires the Applicants to file, prior to the consummation of the Merger, the proposed terms and conditions of the interim sales contracts. Applicants made the required compliance filings with the FERC on March 31, 2000.
27 CP&L will continue to hold the interests in the South Texas Project and STP Nuclear Operating Company following the Merger.
28 In an order, a copy of which is attached to the Application as Exhibit D-2.2, the Arkansas Commission approved a settlement among its staff, AEP, CSW and SWEPCO. Among other things, the Arkansas Commission imposed certain conditions concerning quality and reliability of service and cost of capital protection, and adopted a regulatory plan governing the treatment of the costs and benefits of the Merger and the manner in which they would be reflected in SWEPCO's Arkansas retail rates. The Arkansas Commission also required Applicants to hold Arkansas ratepayers harmless for any adverse impact on rates resulting from any Merger mitigation plan entered into with other state or federal regulators.
In an order, a copy of which is attached to the Application as Exhibit D-8.1 ("Indiana Order"), the Indiana Commission conditionally approved a settlement agreement among its staff, AEP and Indiana Michigan Power. Among other things, the settlement agreement addresses: (1) net non-fuel Merger savings; (2) fuel and purchase power Merger savings; (3) limitation on requests for stranded cost recovery; (4) allocation of the proceeds from the sale of facilities; (5) system integration agreements; (6) standards for affiliate transactions; and (7) adequacy and reliability of electric service.
In an order, a copy of which is attached to the Application as Exhibit D-7.1 ("Kentucky Order"), the Kentucky Commission approved a settlement agreement among AEP, CSW, the Kentucky Attorney General, and intervenors in the state proceeding. The agreement, among other things, provides for: (1) the pass-through of Merger savings to customers; (2) a rate moratorium; (3) quality of service and reliability standards; (4) reporting requirements; and (5) standards for affiliate transactions.
In an order, a copy of which is attached to the Application as Exhibit D-3.2 ("Louisiana Order"), the Louisiana Commission approved conditions in a settlement agreement designed to (1) capture for Louisiana ratepayers the actual (rather than projected) savings resulting from the Merger; (2) protect ratepayers from any adverse effect on rates or quality and reliability of service; and (3) ensure that transactions among New AEP System affiliate companies do not result in cost increases to Louisiana customers.
The Missouri Public Service Commission also entered into a settlement agreement with Applicants in the FERC proceeding. The FERC set for hearing the effect of the Merger on wholesale rates and on retail competition in Missouri. In the proceeding, the Missouri Commission raised concerns regarding competitive impacts that may occur as a result of Applicants' use of the Contract Path, discussed in section II.B.1.a., infra. Under the settlement, the Missouri Commission may, within four years after the Merger, initiate a review by the FERC of the Merger's effects on retail competition, assuming retail competition has been implemented in Missouri. The FERC approved the settlement. See 90 FERC ¶ 61,094 (2000).
In an order, a copy of which is attached to the Application as Exhibit D-10.1 ("Michigan Order"), the Michigan Commission approved a settlement agreement similar to those described above, between its staff and AEP.
A settlement agreement was approved in an order by the Texas Commission, a copy of which is attached to the Application as Exhibit D-5.4. This agreement, which addressed issues related to competition and reliability, is discussed infra.
29 The 1,604 MW of generation capacity includes 250 MW of generating capacity to be divested under a settlement agreement with the FERC.
30 See, e.g., Sempra Energy, Holding Co. Act Release No. 26890 (June 26, 1998) at text accompanying n.24 ("Sempra Energy I").
31 Id. at text accompanying n.25 (citations omitted).
32 See, e.g., id. The United States Court of Appeals for the District of Columbia Circuit has upheld this approach. See Madison Gas and Electric Co. v. SEC, 168 F.3d 1337, 1341-42 (D.C. Cir. 1999) (citations omitted) ("Madison Gas"), aff'g WPL Holdings, Inc., Holding Co. Act Release No. 26856 (Apr. 14, 1998) ("WPL Holdings I").
33 APPA/NRECA at 6.
34 Id. at 22.
35 In particular, APPA/NRECA asserts that (1), the proposed Contract Path "appears to be a wholly arbitrary choice and subject to change," (2) the proposal to divest generation capacity (300 MW in the SPP and 250 MW in ERCOT), as a mitigation measure, depends on the inability of CSW to exercise the market power sought to be remedied; and (3) Applicants' reliance on market entry by new competitors to cure the Merger's competitive problems is misplaced. Id. at 23-24.
36 See Sempra Energy I, supra note 30.
37 See id. (relying upon combined findings and requirements of the DOJ, the FERC and the California Public Utilities Commission).
38 Mr. Davis acknowledges that his comments were filed almost a year after the notice period closed, but he states that "substantial changes in circumstances," specifically problems in a nuclear plant of AEP, litigation brought against AEP by the Environmental Protection Agency ("EPA"), and a decline in the market price of AEP and CSW Common Stock, make it appropriate for us to consider his submission. We note that any problems in the operation of the nuclear plant are the immediate concern of another federal agency, the NRC, and have no relevance to the findings that we are required to make under the Act. Similarly, litigation brought by the EPA has no bearing upon our consideration of the Merger.
39 We note that on May 16, 2000, the closing prices of AEP's and CSW's Common Stock were $36 1/4 and $21 3/16, respectively. These prices closely approximate the Exchange Ratio agreed to in the Merger Agreement.
40 The Application states that the estimated fees, commissions and expenses will total approximately $72.7 million, representing approximately 1.1% of the value of the consideration to be paid by AEP. We have found that fees within this range are permissible under section 10(b)(2). See, e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and expenses of approximately $38 million, representing approximately 2% of the value of the consideration to be paid to shareholders of Gulf States Utilities) ("Entergy Corp."); Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992) (fees and expenses of approximately $46.5 million, representing approximately 2% of the value of the assets to be acquired). On our review of the record in this matter, we are satisfied that the fees and commissions are not unreasonable.
41 Equity includes a common stock equity component of 36.6%. The pro forma consolidated capitalization of AEP includes substantial levels of short-term debt (more than $3 billion), most of which is attributable to the acquired CSW System. The rating agencies have taken these levels of short-term debt into consideration. Ratings of the senior securities of the Operating Companies of both Systems have not changed since the announcement of the Merger in December, 1997. As of March 31, 2000, the overall levels of short-term debt of both AEP and CSW have declined.
42 See, e.g., Entergy Corp., supra note 40, citing Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), n.47 ("Northeast Utilities"), supplemented, Holding Co. Act Release No. 25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992).
43 Section 10(c)(1) further prohibits approval of an acquisition that is unlawful under the provisions of section 8. Section 8, which is not applicable to the Merger, addresses an acquisition by a registered holding company of an interest in an electric utility and gas utility that serve substantially the same territory.
44 See, e.g., Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990), citing Electric Energy Inc., 38 SEC 658, 668 (1958) ("Electric Energy").
45 See generally 1978 AEP Order, supra note 2. See also Sempra Energy, Holding Co. Act Release No. 26971 (Feb. 1, 1999) ("Sempra Energy II"), citing North American Co., 18 S.E.C. 459, 463 (1945) (in applying the integration standards for gas utility systems, the Commission has "read each standard of section 2(a)(29)(B) in connection with the other provisions of the section").
46 SEC v. New England Electric System, 384 U.S. 176 (1966), rev'g and remanding 346 F.2d 399 (1st Cir. 1966), rev'g, New England Electric System, 41 SEC 888 (1964), on remand, 376 F.2d 107 (1st Cir. 1967), rev'd, 390 U.S. 207 (1968).
47 Union Electric Co., 45 S.E.C. 489, 503 n.52 ("Union Electric"), aff'd sub nom. City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975) (the issue of retainability of both gas and electric properties must be resolved "in a way that makes economic and social sense in the light of contemporary realities").
48 New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997) ("New Century Energies") (reassessing the requirements of section 11(b)(1)(A) with respect to an additional integrated system). We have taken industry conditions into consideration when appropriate. Id., citing Union Electric, supra note 47, at 509-10 and Municipal Electric Assn. of Massachusetts v. SEC, 413 F.2d 1052, 1059 (D.C. Cir. 1969), reversing and quoting a dissenting opinion from Vermont Yankee Nuclear Power Corp., 43 S.E.C. 693 (1968) ("That [a] . . . development of . . . importance and probable impact . . . was not foreseen when the Act was written should not justify a static historical reading of its provisions.").
49 We have stated that "[w]e think it is clear from the language of Section 2(a)(29)(A), which defines an integrated public utility system, that Congress did not intend to imposed [sic] rigid concepts with respect thereto". Yankee Atomic Electric Co., Holding Co. Act Release No. 13048 (Nov. 25, 1955). Accord: UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992) ("UNITIL") (the integration requirement creates a "flexible" standard designed "to accommodate changes in the electric utility industry"). In UNITIL, we effectively determined that a tight power pool was the functional equivalent of a traditional integrated system.
50 See, e.g., UNITIL, supra note 49 (participation in a tight power pool was sufficient to meet the standard of economic and coordinated operation even though the "definition [of section 2(a)(29)(A)] reflects an assumption that the holding company would coordinate the operations of the integrated system"); 1978 AEP Order, supra note 2, at 1309-10 (technological advances in generation and transmission, unavailable thirty years previously, served to distinguish a prior case and justified "large systems spanning several states"). See also New Century Energies, supra note 48.
51 Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992) (quotation omitted). Section 1(c) of the Act directs us to interpret all the provisions of the Act to "meet the problems and eliminate the evils" identified in section 1 of the Act. In particular, section 1(b)(4) identifies as an abuse "the growth and extension of holding companies [that] bears no relation to economy of management and operation or the integration and coordination of related operating properties."
52 The MOKANOK line is owned by several utilities, including subsidiaries of Ameren, CSW and Western Resources, Inc. ("Western Resources"). CSW owns only the segment of the line located in Oklahoma, but it has a contractual right, as one of owners of the line, to a share of the transmission capacity over the full length of the line. To obtain 250 MW of transmission capacity over the MOKANOK line, the New AEP System will use CSW's existing share of capacity and will purchase 38 MW of additional capacity from Western Resources.
53 See, e.g., Madison Gas, supra note 32, at 1340 (physical interconnection through a three-year firm contract to use a 200 MW transmission line owned by two nonaffiliates). See also Northeast Utilities, supra note 42 (interconnection standard met where combining entities reached an agreement to obtain service by nonaffiliates having a transmission line connecting the two systems); Centerior Energy Corp., Holding Co. Act Release No. 24073 (Apr. 29, 1986) ("Centerior") (interconnection standard met where merging systems could be connected through a power transmission line, owned by a nonaffiliate, that each had the right to use).
54 Advocates Group at 7.
55 Id. at 8 citing Northeast Utilities, supra note 42, at n.74; Centerior, supra note 53.
56 Advocates Group at 7-8.
57 Id. See supra note 32.
58 APPA/NRECA at 9-10.
59 As noted above, the holding company in Madison Gas had a current transmission line contract and planned to build two tie-lines across the Mississippi before the end of the contract term. The applicants in that matter committed to take measures to ensure that the interconnection requirements of section 2(a)(29)(A) would be satisfied if the tie-lines were not constructed and a connection agreement was not in place at that time. 168 F.3d at 1340-41.
In this context, we note the efforts of the FERC to restructure the way in which transmission is provided and obtained in the U.S., first, by requiring that utilities provide open access to transmission service to all market participants on comparable terms; and second, by requiring utilities to participate in RTOs. See Order No. 888: Promoting Wholesale Competition through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, FERC Stats. & Regs., Regulations Preambles, ¶ 31,036 (1996) ("Order 888"), order on reh'g, FERC Stats. & Regs., Regulations Preambles, ¶ 31,048 (1997) ("Order 888-A"), order on reh'g, 81 FERC ¶ 61,248 (1997) ("Order 888-B"), order on reh'g, 82 FERC ¶ 61,046 (1998) ("Order 888-C"); Order No. 2000: Regional Transmission Organizations, Order No. 2000, 89 FERC ¶ 61,285 (1999), reprinted at 65 Fed. Reg. 810 (Jan. 6, 2000).
Order 888's key provision was the requirement that utilities file open access tariffs under which a transmission provider must offer service. The tariffs provided utilities and power marketers for the first time with a generally available right to use the transmission systems of others to move power at tariffed rates.
Order No. 2000 requires all public utilities that own, operate or control interstate transmission facilities subject to FERC jurisdiction to file, by October 15, 2000, a proposal for an RTO with the minimum characteristics and functions identified in Order No. 2000, or, alternatively, a description of any efforts made by the utility to participate in an RTO, any obstacles to participation, and any plans and timetable for further work toward RTO participation. FERC defines an RTO as an entity that satisfies the minimum characteristics (independence, scope and regional configuration, operational authority and short-term reliability) and minimum functions (tariff administration and design, congestion management, parallel path flow, ancillary services, OASIS information, market monitoring, planning and expansion and interregional coordination). 18 CFR §; 35.34. Public utilities that are members of an existing FERC-approved regional entity must file by January 15, 2001 an explanation of the extent to which the regional entities in which they participate meet the minimum characteristics and functions of an RTO.
60 The Court of Appeals stated in Madison Gas, "The SEC has reasonably construed this requirement [that assets be `capable of physical interconnection'] to be satisfied in cases past `on the basis of contractual rights to use a third-party's transmission lines' or `if physical interconnection is `contemplated or . . . possible within the reasonably near future.'" Id. at 1340 (emphasis added).
61 APPA/NRECA at 10.
62 See WPL Holdings I, supra note 32, at n.39 citing UNITIL, supra note 49; Northeast Utilities, supra note 42; Centerior, supra note 53.
63 UNITIL, supra note 49, at n.30; Northeast Utilities, supra note 42, at n.75.
64 Advocates Group at 6.
65 Id. at 5. See note 25 supra, discussing the conditions of the FERC Order.
66 Id. at 13-14, citing Central and South West Corp., supra note 9.
67 Applicants state that CSW's firm transmission capacity has always been adequate to coordinate its operations and there has never been a need to assert a priority for unplanned transactions over the HVDC ties. As a result, Applicants do not expect their waiver of priority for non-firm use of the HVDC ties to affect the coordination of the New AEP System in any way.
68 Advocates Group at 9.
69 "The Applicants' reliance on their generalized ISO plans must . . . be rejected as a means of satisfying the statute's requirement." APPA/NRECA at 12.
70 Cities Service Co., 14 S.E.C. 28, 59 (1943) ("Cities Service").
71 City of New Orleans v. SEC., 969 F.2d 1163, 1168 (D.C. Cir. 1992) ("City of New Orleans") (citations omitted). The Court of Appeals rejected intervenors' argument that a system would no longer be "economically operated" within the meaning of section 2(a)(29)(A) as a result of the transfer of certain system generating facilities to an unregulated affiliate. The problem identified by intervenors was that power from these facilities would no longer be offered first for in-system use. The Court of Appeals concluded that we could find economic coordination bases on a "less stringent requirement." Id.
72 The traditional model is characterized by pooling of system energy resources and the exchange of energy and operating reserves through central load dispatch. As the demand on system utilities rises, a system operator draws upon the least expensive available resource, whether system-owned generation or purchased power, without regard to which utility owns that resource. Generators are started, loaded and taken off-line at the operator's direction. This process optimizes the interchange of energy among system operating companies. Power flows over interconnecting transmission ties are determined by economic dispatch programs.
73 See, e.g., page 3-4 of Louisiana Order, conditionally approving the Merger (expressing concern "that the proposed system agreements not result in cost shifting from AEP to SWEPCO or be otherwise unjust or unreasonable"); Michigan Order, Exhibit A (Settlement Agreement), Section 5 (citing AEP's commitment to file any allocation of the cost of new, modified or upgraded generation or transmission facilities whose costs will be subject to the System Integration Agreement or System Transmission Integration Agreement with the FERC, described in section II.B.1.b.(2).(B). below, and to notify the Michigan Commission of the filing); p. 9 of Indiana Order, approving the Merger under the terms of a Stipulation and Settlement Agreement (noting that the approved agreement includes provisions designed to prevent cost shifting or cross subsidization).
74 Sharing is based upon each Operating Company's "member-load-ratio," which is calculated monthly on the basis of each utility's maximum peak demand in relation to the sum of the maximum peak demands of all five companies during the preceding 12 months.
75 The facilities at issue are the extra-high-voltage transmission system (which includes facilities rated 345 KV and above) and certain facilities operated at lower voltages (which include facilities rated 138 KV and above). Sharing of costs and benefits under this agreement is also based upon each AEP Operating Company's member-load-ratio.
76 The committee's responsibilities include the performance of transmission planning studies and the interaction of the CSW Operating Companies with ISOs and other regional bodies interested in transmission planning.
77 The CSW Transmission Coordination Agreement also provides for the allocation among the CSW Operating Companies of revenues collected for transmission and ancillary services provided under the open access tariff.
78 The existing AEP Interconnection Agreement and the CSW Operating Agreement will continue to govern the distribution of costs and benefits within the East and West Zones.
79 Applicants generally expect that the East Zone will have surplus capacity.
80 See supra note 25 and accompanying text.
81 PSO has the right to transfer approximately 113 MW of energy on a non-firm basis across the MOKANOK line.
82 The Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat. 2776 (1992), among other things, created the exemption for exempt wholesale generators ("EWGs"). The EWG exemption insures that the integration requirements of the Act are not a barrier to the participation of independent power producers in the wholesale electric market -- an implicit acknowledgement that the economic operations of a utility depend on contractual relationships as well as ownership of generating facilities. Since the Energy Policy Act, a competitive electric supply wholesale market has rapidly developed, facilitated by FERC's willingness to permit the sale of electric capacity and energy at market-based rates. Utilities have increasingly focused on their own wholesale marketing efforts.
83 APPA/NRECA also asserts that the Applicants fail to satisfy this standard of section 2(a)(29)(A). APPA/NRECA at 12. APPA/NRECA states, however, that we need not reach that issue because the Applicants also have not met their burden to satisfy "the stricter economic integration requirement" of section 10(c)(2) of the Act. APPA/NRECA at 8, n.7. The APPA/NRECA's arguments concerning section 10(c)(2) are discussed in section II.B.2., infra.
84 "Integration means joint operations, not a token wire path. In none of the integration cases decided under the Act has the actual integration been so insignificant relative to the size of the merged company." Advocates Group at 6.
85 Id.
86 As discussed above, although the New AEP System will continue to operate under the Existing Agreements concerning shared power supply and transmission, the Umbrella Agreements will permit control and coordination of the New AEP System. Our finding of economic and coordinated operation is also supported by other proposed measures: potential intrasystem transfers of capacity and energy; joint trading and marketing; and corporate and administrative coordination.
87 A traditional utility's customers were generally limited to end-users in its service territory. A utility created the most value for its shareholders by incurring the least possible costs to generate just enough electricity to serve its native load. In contrast, today a utility sells electricity not only to the customers located in its service area but also to wholesale customers. A utility creates value by selling as much electricity as it can profitably sell, after meeting the requirements of native load.
88 Advocates Group at 27-28.
89 Response at 39. Applicants also note that, under the Texas settlement, most of the generating capacity being divested will be subject to recall by the New AEP System during peak months to ensure that adequate capacity is available to serve native load. Id. at n.48.
90 Section 1(b)(4) of the Act.
91 The Regulation of Public-Utility Holding Companies, Division of Investment Management, SEC (June 1995) ("1995 Report") at 56, citing S. Rep. 621, 74th Cong., 1st Sess. (1935) (Report of Senator Wheeler from the Committee on Interstate Commerce at 30; H.R. Rep. No. 1318, 74th Cong., 1st Sess. (1935) at 15. We find no support for APPA/NRECA's general assertion that "the statutory presumption is against large mergers." APPA/NRECA at 5-6.
92 American Gas and Electric Co., 22 S.E.C. 808, 816-817 (1946) ("American Gas and Electric"). In a 1945 decision, we had identified the size and extensive area of the utility operations of the central system of AEP's predecessor (essentially identical to the current AEP system) as a potential problem under section 11(b)(1) of the Act. At the same time, we had noted that the system had a long history of having been planned, developed and operated as a highly coordinated system. American Gas and Electric Co., 21 S.E.C. 575, 595 (1945).
93 1978 AEP Order, supra note 2 at 1308, discussing American Gas and Electric, supra note 92.
94 Id. at 1307. Section 10(b)(1), discussed in section II.A.1. supra, requires us to disapprove an acquisition that, among other things, will tend towards "the concentration of control of public-utilities companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers."
95 Id.
96 Section 10(c)(2) of the Act requires us to find that a proposed acquisition will "serve the public interest by tending towards the economical and efficient development of an integrated public-utility system."
97 In Commonwealth & Southern Corp., Holding Co. Act Release No. 7615 (Aug. 1, 1947), we stated:
We do not, in applying particular size standards, lose sight of the objectives of other criteria. There must be a reconciliation of all objectives to the end of accomplishing a satisfactory administration of the Act. Thus we do not disregard operating efficiency in our determination of whether size is excessive from the viewpoint of localized management or effectiveness of regulation.
98 1978 AEP Order, supra note 2, at 1309. In an earlier decision, we had stated that, "The legislative history of Section 2(a)(29)(A) of the Act indicates that its overall purpose is the encouragement of operating advantages stemming from unified operations to the extent that such advantages are not outweighed by disadvantages resulting from an undue concentration of economic power." North American Co., Holding Co. Act Release No. 10320 (Dec. 28, 1950).
99 The utility to be acquired was a "hole in the doughnut," surrounded by AEP's service territory. 1978 AEP Order, supra note 2, at 1307. The size of the acquisition raised no issue and the "single area or region" of AEP was unchanged.
100 NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999) ("NIPSCO") (applying single area or region requirement to gas utility system).
101 See, e.g., Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998) ("Conectiv"); cf. New Century Energies, supra note 48 (finding that electric utilities located in two different power pools, in two different reliability councils, in both the Eastern and Western Interconnects, and with a physical separation of 300 miles were in the same area or region); Electric Energy, supra note 44 (utility assets were within the same area or region as the acquirer's service area despite a distance of 100 miles crossing two states); Mississippi Valley Generating Co., Holding Co. Act Release No. 12794 (Feb. 9, 1955) (single area or region test met where generating station was located 150 air miles from the territory served by the acquiring company).
102 1995 Report, supra note 91, at 69-70. The 1995 Report noted that the concept of "geographic integration" has been affected by "technological advances on the ability to transmit electric energy economically over longer distances, and other developments in the industry, such as brokers and marketers." Id. at 69.
103 NIPSCO, supra note 100, at n.30 citing the 1995 Report, supra note 91, at 69. Accord: Sempra Energy II, supra note 45, at n.27.
104 1995 Report, supra note 91, at 66.
105 Section 1(b)(4) of the Act.
106 Connecticut Yankee Atomic Power Co., 41 S.E.C. 705, 710 (1963) ("Connecticut Yankee").
107 The Merger is expected to result in nearly $2 billion in net non-production savings and $98 million in net fuel related savings over a ten-year period.
108 Advocates Group at 15. For this proposition, the OCC Group cites Middle West Corp., 15 S.E.C. 309, 336, n.81 (Jan. 25, 1944) ("Middle West Corp.") ("[W]hen extremely large sections are considered . . . distance alone may be definitive.") and Cities Service, supra note 70, at 59 ("[T]erritory as vast as that covered by the States of Wyoming, Colorado, New Mexico and Arizona," spanning 900 miles from north to south, is not a single area or region under section 2(a)(29)(A)).
109 Advocates Group at 21.
110 For example, in one decision cited by the Advocates Group, we determined that combined electric properties constituted an electric integrated system on the following grounds:
The companies operate in a relatively compact geographical area. Their assets are physically interconnected, and they can be, and are, operated as a unit with respect to economical power interchange. They are amenable to regulation within a single State.
111 The Advocates Group asserts that, "Acceptance of this Application will leave the public unprotected from holding company acquisitions that sacrifice operational efficiency for expansionism." Advocates Group at 3.
112 The Advocates Group states that, "In contrast, the new proposed `region' covered by the merged company is not the product of past efforts to plan generation and transmission for the combined load, and there certainly is no plan to do so in the future . . . . The new proposed `region' is a product only of a desire of the two systems' corporate managers to increase the size and geographical scope of the enterprise." Id. at 19.
113 Id. at 17-18, 21.
114 Central and South West Corp., supra note 9. As noted previously, Applicants state that the New AEP System will continue to use the HVDC ties in the manner described in that order. See the discussion in section II.B.1.a., supra.
115 "Deeming these operations to be in a single area or region would effectively read the requirement out of the Act." APPA/NRECA at 12.
116 Id. at 12-13. APPA/NRECA cites Entergy Corp., supra note 40 (four states over a 73,000 square-mile area) and Southern Co., Holding Co. Act Release No. 24579 (Feb. 12, 1988) (four states, geographically contiguous service territories, covering a 122,000 square-mile area, interconnected at three points, with a fourth to be built the year the merger was completed). Id. at 13, n.20. We note that the CSW integrated system is "decidedly less compact" than these systems and lacks multiple interconnections.
117 Id. at 14.
118 In light of recent technological advances in the electric industry, for example, "a geographic radius of 1,000 miles or more is currently considered reasonable for choosing among supply options." Rodney E. Stevenson & David W. Penn, "Discretionary Evolution: Restructuring the Electric Utility Industry," Land Economics, Vol. 71, No. 3 (Aug. 1, 1995).
119 See 1978 AEP Order, supra note 2.
120 The FERC concluded that Applicants had adequately addressed its concerns about its own jurisdiction and that state commissions could "impose in their own proceedings appropriate conditions to ensure that there is no impairment of effective regulation at the state level." American Electric Power Co., 85 FERC ¶ 61,201 at 61,821-22 (1998). Thus, the FERC concluded that the Merger would not impair the effectiveness of regulation and that the issue did not merit further investigation.
121 See Application at 91.
122 Among other things, these provisions include (1) a requirement that the New AEP System continue to comply with the Texas Commission's transmission pricing rules in ERCOT; (2) a commitment by the New AEP System not to withdraw from either ERCOT or the SPP without the Texas Commission's prior approval; (3) a commitment by the New AEP System to comply with a detailed code of conduct governing activities among AEP's subsidiaries, and (4) a commitment that the New AEP System will not contend in any forum that the jurisdiction of the Texas Commission over any of CSW's Operating Companies located in Texas changed as a result of the Merger.
123 Indiana Order, Stipulation at Section 8 and Kentucky Order, Stipulation at Section 8.
124 Oklahoma Commission Order (attached to the Application as Exhibit D-4.2), Stipulation at Section 5.
125 Louisiana Order, Appendix A at Section III.
126 See, e.g., Conectiv, supra note 101.
127 APPA/NRECA at 18.
128 Citing section 1 of the Act, APPA/NRECA suggests that consumers may be injured by service transactions and allocations of costs that present problems that the states cannot deal with effectively. APPA/NRECA at n.30. The proposed intrasystem transactions and cost allocation measures of the New AEP System are subject to the requirements of section 13 of the Act and related rules. These requirements are designed, precisely, to obviate the abuses identified in section 1 of the Act.
129 APPA/NRECA at 16.
130 Id. at 17. With respect to the movement of CSW's headquarters to Columbus, Ohio, we have previously concluded that the distance of corporate headquarters from local management is less important than in 1935, in view of the contemporary ease of communication and transportation. 1978 AEP Order, supra note 2, at 1312 (AEP had headquarters in New York City and operations in Michigan and Virginia).
131 Applicants observe that New AEP's responsiveness to local customers and concerns should be the criteria for evaluating the effectiveness of its management. Response at 51.
132 Id. at 18. See Connecticut Yankee, supra note 106, at 710 (finding that the "single area or region" standard must be considered in light of "the existing state of the art of generation and transmission and the demonstrated economic advantages of the proposed arrangement").
133 See the discussion in section II.B.1.b., supra.
134 WPL Holdings, Inc., Holding Co. Act Release No. 25377 (Sept. 18, 1991) ("WPL Holdings II"). See, e.g., New Century Energies, supra note 48 (approving combination that "will result in a larger, financially stronger company, that, through the pooling of resources and expertise, will be able to achieve increased financial stability and strength, greater opportunities for earnings and dividend growth, reduction of operating costs, deferral of certain capital expenditures, efficiencies of operations, better use of facilities for the benefit of customers, seasonal diversity of demand, improved ability to use new technologies, greater retail and industrial sales diversity and improved capability to make wholesale power purchases and sales.").
135 APPA/NRECA at 19.
136 Id.
137 See, e.g., WPL Holdings II, supra note 134 (rejecting intervenor's argument that, instead of creating a new holding company, applicant should have adopted other available ways to maintain a balanced capital structure).
138 APPA/NRECA at 19.
139 Id. at 20.
140 Id.
141 Response at 42.
142 Advocates Group at 28-29.
143 See Oklahoma Order, Stipulation at Section 7. Applicants agreed to make an "after the fact" calculation of margins both before and after the divestiture. If negative margins result, Oklahoma consumers will be held harmless from the additional costs associated with the divestiture. Id.
144 City of New Orleans, supra note 71, at 1167 n.6, quoting Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523, 526 (D.C. Cir. 1989).
145 City of New Orleans at 1167 n.6 (D.C. Cir. 1992), citing Connecticut Bankers Ass'n v. Board of Governors of Fed. Reserve Sys., 627 F.2d 245, 251 (D.C. Cir. 1980).
146 Applicants undertake to file with the Commission a rule 24 report on January 1 and July 1 of each year following the Merger. The report will include: (1) a written description of any changes in the nonutility organizational structure relating to the merger or reorganization of nonutility businesses of AEP; and (2) an organizational chart for New AEP that highlights any changes in its nonutility organizational structure during that reporting period.
147 Central Power and Light Co., Holding Co. Act Release Nos. 26771 (Oct. 31, 1997) and 26931 (Oct. 21, 1998); Central and South West Services, Inc., Holding Co. Act Release Nos. 26795 (December 11, 1997) and 26898 (July 21, 1998).
148 See American Electric Power Co., Inc., Holding Co. Act Release Nos. 26864 (Apr. 27, 1998); Central and South West Corp., Holding Co. Act Release No. 26653 (Jan. 24, 1997).
149 The additional subsidiaries are Cedar Coal Co., Central Appalachian Coal Co., Central Coal Co., Central Ohio Coal Co., Colomet, Inc., Simco Inc., Southern Appalachian Coal Co., Southern Ohio Coal Co., Windsor Coal Co., Blackhawk Coal Co., Conesville Coal Preparation Company, Franklin Real Estate Company, Indiana Franklin Realty Company and West Virginia Power Co.
150 Applicants request that, following the Merger, AEP and CSW (for a transitional period not to exceed eight years) together have the authority that CSW has under the Money Pool Orders.
151 Applicants have requested authority to complete the merger of CSW Service with and into AEP Service not later than December 31, 2000. Accordingly, during this transitional period, each of CSW Service and AEP Service will retain its current short-term borrowing authority. Applicants state that the borrowings of AEP Service and CSW Service will be exempt under rule 52(b).
Current CSW Financing and Guarantee Authority and Applicants' Related Request for Authority
Current CSW Financing Authority
CSW has supported the financing and other activities of its subsidiaries through Commission orders authorizing it to issue and guarantee certain indebtedness. This authority ("CSW Guarantee Authority") is described below:
Under Central and South West Corp., Holding Co. Act Release No. 26910 (Aug. 24, 1998), CSW is authorized, through December 31, 2003, to fund the management, operations and administrative costs of the electric vehicle business of CSW Energy Services, Inc. ("CSW Energy Services") by making loans to CSW Energy Services and providing guarantees and other credit support on behalf of CSW Energy Services, up to an aggregate amount outstanding at any time of $25,000,000.
Central and South West Corp., Holding Co. Act Release No. 26811 (Dec. 30, 1997) ("CSW Guarantee Order"), effective through December 31, 2002, authorized the following activities: (1) external financing by CSW; (2) the acquisition by CSW of the common stock of its subsidiaries; (3) the repurchase by CSW's subsidiaries of their common stock from CSW; (4) credit enhancement for the CSW subsidiaries' securities, including guarantees by CSW; (5) the repurchase by CSW of its securities by means of tender offers; and (6) the issuance by CSW of other types of securities not exempt under rules 45 and 52 under the Act.
Central and South West Corp., Holding Co. Act Release No. 26767 (October 21, 1997) confirmed certain previous authority and granted additional authority such that CSW was authorized, through December 31, 2002, to: (1) organize and invest in EWGs and FUCOs, either directly or indirectly; (2) provide certain operational and management services to EWGs and FUCOs; (3) provide guarantees or other forms of credit support for the securities or contractual obligations in connection with permitted activities; and (4) fund these investments and obligations under the guarantees and other forms of credit support through issuances by CSW.
Under Central and South West Corp., Holding Co. Act Release No. 26766 (Oct. 21, 1997), CSW is authorized, through December 31, 2002, to issue guarantees in an aggregate amount up to $250,000,000 to support the debt and other obligations of affiliated power marketers and "energy-related companies" (as that term is defined in rule 58 under the Act).
Under Central and South West Corp., Holding Co. Act Release No. 26762 (Sept. 30, 1997), CSW is authorized to participate in the organization and operation of STP Nuclear Operating Company.
Under Central and South West Corp., Holding Co. Act Release No. 26522 (May 29,1996), CSW is authorized to provide up to $250,000,000 in equity support to the Sweeny Project in the form of an equity support agreement, guarantee or letter of credit to the project lender.
Request of Applicants
Applicants state that it may be more efficient or commercially necessary after the Merger for AEP to support certain of the financing arrangements and business activities that CSW previously supported. Applicants request approval for AEP, upon consummation of the Merger, to support the CSW Guarantee Authority. Applicants request that the CSW Guarantee Authority be vested in both CSW and AEP; provided that, the guarantee authority of CSW, set forth in the CSW Guarantee Order, will be vested in both CSW and AEP and all other authority of CSW set forth in the CSW Guarantee Order will be vested in AEP. Accordingly, the Applicants do not seek to increase the CSW Financing Authority or the authority in the CSW Guarantee Order.
Effect of Merger on Certain Stock-Based Benefit Plans
By order dated November 27, 1996 (Holding Co. Act Release No. 26616), the Commission confirmed previous authority and authorized CSW to offer, through December 31, 2001, 10,000,000 shares of CSW Common Stock under its Dividend Reinvestment and Stock Purchase Plan ("CSW Dividend Plan"). By order dated August 13, 1996 (Holding Co. Act Release No. 26553) ("AEP Dividend Plan Order") the Commission confirmed previous authority and authorized AEP to offer, through December 31, 2000, 54,000,000 shares of AEP Common Stock under its Dividend Reinvestment and Direct Stock Purchase Plan ("AEP Dividend Plan"). Applicants request that, as soon as practicable upon consummation of the Merger, (1) the authority of the CSW Dividend Plan be terminated, and (2) AEP be authorized to issue 55,200,000 shares of AEP Common Stock through December 31, 2000 under the AEP Dividend Plan consistent otherwise with all the terms and conditions set forth in the AEP Dividend Plan Order.
By order dated November 21, 1995 (Holding Co. Act Release No. 26413) ("CSW Thrift Plan Order"), the Commission confirmed previous authority and authorized CSW to issue and sell a total of 5,000,000 shares of CSW Common Stock to the trustee of the Central and South West Thrift Plan ("CSW Thrift Plan"). By order dated December 1, 1997 (Holding Co. Act Release No. 26786) ("AEP Savings Plan Order"), the Commission confirmed previous authority and authorized AEP to sell, through December 31, 2001, 8,800,000 shares of AEP Common Stock to the trustee of the American Electric Power System Employees Savings Plan ("AEP Savings Plan"). Applicants request that, upon consummation of the Merger, (1) the authority of CSW to issue shares of CSW Common Stock to the CSW Thrift Plan be terminated, and (2) AEP be authorized to issue 11,440,000 shares of AEP Common Stock through December 31, 2001 in connection with the AEP Savings Plan and the CSW Thrift Plan, for a transitional period, consistent otherwise with all the terms and conditions of the AEP Savings Plan Order and the CSW Thrift Plan Order, respectively.
By order dated April 7, 1992 (Holding Co. Act Release No. 25511) ("CSW Incentive Plan Order"), the Commission authorized CSW to adopt the Central and South West Corporation 1992 Long Term Incentive Plan ("CSW Incentive Plan") under which certain key employees would be eligible, through December 31, 2001, to receive certain performance and equity-based awards including (a) stock options, (b) stock appreciation rights, (c) performance units, (d) phantom stock, and (e) restricted shares of common stock. Applicants request that, upon consummation of the Merger, AEP succeed to the authority of CSW to permit AEP (1) to honor the awards granted by CSW prior to the consummation of the Merger, (2) to administer the plan (subject to any necessary shareholder or regulatory approval) on a combined company basis and to grant any remaining awards, and (3) to reserve and issue sufficient shares of AEP Common Stock under (1) and (2) above in connection with the CSW Incentive Plan consistent otherwise with all the terms and conditions set forth in the CSW Incentive Plan Order.
Details
69 FR 13689