ML20203Q299
| ML20203Q299 | |
| Person / Time | |
|---|---|
| Site: | Davis Besse, Perry, 05000000 |
| Issue date: | 05/05/1986 |
| From: | Silberg J CLEVELAND ELECTRIC ILLUMINATING CO., DUQUESNE LIGHT CO., SHAW, PITTMAN, POTTS & TROWBRIDGE, TOLEDO EDISON CO. |
| To: | Harold Denton Office of Nuclear Reactor Regulation |
| References | |
| TAC-60875, NUDOCS 8605090220 | |
| Download: ML20203Q299 (32) | |
Text
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SHAW, PITTMAN, POTTs & TROWBRIDGE A PARYNt aswir or poortssioNAL CompOmAtsONS 8800 M STREET, N. W.
WASHINGTON. D. C. 20036 tstrcopia n esoas ear-toes a ama woe TELER 892693 etMAwkAW wSH:
ca. . ymAw-TELEpMON.
J AY E. SIL BERO, P C. 43o36 e33-toa3 May 5, 1986 Mr. Harold R. Denton, Director Office of Nuclear Reactor Regulation U. S. Nuclear Regulatory Commission Washington, D. C. 20555 Re: Cleveland Electric Illuminating Company (Perry Nuclear Power Plant, Units 1 and 2)
Docket Nos. 50-440 and 50-441 Duquesne Light Company (Beaver Valley Power Station, Unit 2)
Docket No. 50-412 Toledo Edison Company (Davis-Besse Nuclear Power Plant)
Docket No. 50-346
Dear Mr. Denton:
My letters of August 14, 1985, November 13, 1985, January 8, 1986, January 31, 1986 and February 13, 1986 transmitted documents that had been filed with the Securities and Exchange Commission in connection with the proposed affiliation between The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE). By order dated April 29, 1986, the Securities and Exchange Commission approved the proposed g5IBBnBMik P
s SHAw, PITTM AN, PoTTs & TROWBRIDGE a PamTNgRSWP #NCLuOeNG PmOFESSchat ComposeaTcest
.Mr. Harold R. Denton May 5, 1986 Page 2 transaction. A copy of the order is enclosed for your in-formation. On April 29, 1986 the affiliation became effective.
As of that date, CEI and TE became wholly owned subsidiaries of Centerior Energy Corporation. CEI and TE continue as electric utility companies and as NRC operating licensees and construc-tion permittees.
y truly yo :s,
^
L -
f ay'E. Silberg o se L for The Cleveland Electric Illbminating Company, Duquesne Light Company, and The Toledo Edison Company JES:L
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SECURITIES AND EXCHA!CE COMMISSION (Release No. 35- 24073 ; 70-7149)
Centerior Ehergy Corporation (formerly Wrth Holding Capany)
Order Denyirg Request for Hearing ard Approvirq Proposed Acquisition of the Cleveland Electric Illuminating Cangny and the 'Ibledo Edison Compny.
April 29, 1986 On Atsust 23, 1985, a notice was issued (HCAR No. 23806) of the filing of an application pursuant to Sections 9(a)(2) and 10 of the Public Utilitiy Holding Cacpany Act of 1935 ("Act") seekirg Ccmnission approval of the acquisition by North Ibiding Catpny (since renamed Centerior Ehergy Corporation) of all of the outstanding ccmnon stock of the Clevelard Electric Illuminatirg Canpany and the
'Ibledo Edison Ca:pny by means of the transaction proposed in the application (and the six amerdnents thereto, the last of which was filed on February 26, 1986), tich is sumnarized below.
I. BACKGROUND
'Ibe Cleveland Electric Illtrninating Cmpny ("CEI") is a publicly-held Ohio electric utility servirg 644,904 residential and 69,455 conmercial ard industrial customers prbnarily in a five-county,1700 square mile service area extending 100 miles alorg the south shore of Iake Erie in northeast Ohio with a total population of approxirately 1,850,000. CEI reported total assets of $5.7 billion and gross reverms of $1.25 billion as of ard for the fiscal year ended Deceber 31, 1985. In addition to its conventional generating capacity, CEI owns 51.4% of the Davis-Besse nuclear plant. 'Ihe Toledo Edison Canpany ("TE"),
also a publicly-held Ohio electric utility, serves 243,912 residential and 27,811 camercial and irdustrial custoners in a ten-county, 2500 square mile service area extendirg 75 miles alorg the south shore of Iake Erie in northwest
e Chio with a total population of approximately 750,000. E reported total as-sets of $3.4 billion and gross revenus of $595 million as of and for the fis-cal year ended Decenber 31, 1985. In addition to its conventional generatirg capacity, E oms 48.6% of the Davis-Besse nuclear plant. CEI also owns 31%
and E 20% of each of the two Perry nuclear plants. Perry Unit 1 is expected to be in cannercial operation smetime during 1986; Perry thit 2 is inder review, and the c apanies do not project a start-up date. In addition, CEI oms 24.5% and E 20% of the Beaver Valley 2 nuclear plant, scheduled to be empleted by the end of 1987. 'Ihe service areas of CEI and TE are not adjacent to each other; they are separated by the service area of the mio Mison Ocngny
(" Ohio Eison").
CEI and E are both nebers of the Central Area Power Ooordination Group
("CAPCO"), which was formed in 1967 by CEI, E and three other regional electric utility capanies: Duquesne Light 02ngny, mio Eison, and the latter's tolly-owned subsidiary, Pennsylvania Power C m pany. CAPOD was established to afford greater reliability of interconnections, and lower cost of service through coor-dinated generatig unit maintenance and generating reserve back-up among the five ca pnies. In 1980 CAPCO discontinued joint planning for construction of future generatirg units.
Iast June, CEI and E entered into a definitive agreement ("Agreenent")
l to cabine the two capanies as separate, wholly-owned subsidiaries of a newly-I formed holding capny.1/ Shortly thereafter, CEI organized North Bolding
,l,/, 'the question of the new holding ompany's status under the Act is not before us at present; however, based on the facts in the application, it l appears likely that the new holding empny would be entitled to the ex-enption prw ided in Section 3(a)(1). According to the application, the new holding empny will file a claim of exemption pursuant to Rule 2 un-der the Act inmediately following consunmation of the proposed transaction.
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- l Campany (" North"), an Ohio corporation since renarned Centerior Energy Corpora-tion ("Centerior"), for the purpose of acquiring all the outstanding ocmnon stock of both CEI ard TE.
On August 8,1985 North filed an application requesting the comnission's approval of the proposed transaction. m August 23, 1965, the Comission is-19, 1985 to request a cued a notice giving interested persons until Septeober hearing on the application. Requests for a hearing were received fra the Western Reserve Alliance (*WA") and the Office of the Q>nsumers' Coun the State of mio ("CCC"). 2/ Ce = 1 for centerior entered into discus-sions with WRA ard OCC in an attmpt to meet the concerns they raised in their hearing requests. As a result of those discussions, and in responsa to comments on the application given by the staff of the Ccamission, Centerior filed six 26, 1986, Ants to its application between ibvember 1,1985, and February and the OCC withdrew its request for a hearing. By a letter dated January 13, 1986, the chairman of the Chio Public Utilities Ccumission ("POOO"), Thomas V. Quma, expressed PUCO's support for Centerior's application and urged the Ccamission to approve the proposed transaction.
2/ Both WRA and OCC styled their filings " Motion to Intervene and Request Fbr a Bearing". A motion to intervene filed before a hearing has been Nonetheless, ber-anaa the sub-ordered by the ominission is premature.
l missions filed by WRA ard 00C met the procedural and substantive require-t ments for hearing requests, the omrenission has treated them as such.
The Ccamission has received a number of other letters ccamenting on the proposed transaction, diich are included in the record of this matter and discussed at Ep.19-20 and 25-26, below.
_4 II. CENTERIOR'S APPLICATION Both CEI and E are " electric utility capnies" as defined in Section 2(a)(3) of the Act 3/ and thus "public utility empnies" as defined in Section 2(a)(5) of the Act. 4f Because Chnterior would, in the proposed nerger trans-action, S/ be acquiring more than five percent of the outstanding voting secu-rities of each of two public utility c apanies, the transaction is subject to Section 9(a)(2) of the Act 6/ and thus cannot proceed without Comission appro-3/ Section 2(a)(3), in pertinent part, defines an " electric utility empny" as "any espany dich owns or operates facilities used for the generation,
- transmission, or distribution of electric energy for sale, other than 5 sale to tenants or sployees of the capany operating su& facilities for their own use and not for resale."
4/ Section 2(a)(5) defines "public utility empny" as "an electric utility e spany or a gas utility e s pany."
5/ 'Ibe proposed merger of GI and E is to be accmplished as follows.
North organized two wholly-owned Ohio subsidiaries, East Merger Capany
(" East") and West Merger Ompny (" West"), for the purpose of nerging with CEI ard 2, respectively. 'Ihe Agrement provides that den all
- docanents required under Chio law have been duly filed with the Secretary I
of State of Ohio (the " Effective Time") (a) East will be serged into CEI; (b) West will be merged into E; (c) each share of cmmon stock of CEI
! outstandirg will be converted into the right to receive 1.11 shares of Centerior; (d) an d share of comon stock of 2 outstanding will be l
converted into the right to receive one share of Centerior; and (e) all shares of Centerior owned by CEI and E will be cancelled. As a result of the foregoirg, inmediately upon consumation of the transaction, the only holders of shares of camon stock of Centerior would be the owners of the existing cmmon stock of CEI and TE whose shares were converted into shares of Centerior. All other outstanding securities of CEI and l TE will be unaffected. After the Effective Time holders of CEI and TE canon stock will have no rights as shareholders of these capnies except for dissenters' rights, and certificates representing canon stock of CEI and E as to dich dissenters' rights have not been exercised will be exchangeable for certificates representing shares of Centerior.
I 6/ Section 9(a)(2) preides that it is tmlawful for any person to acquire any security of any public utility c apany if that person l
owns, or by virtue of that transaction will cae to own, five percent l or more of the voting securities of that public utility capany and of any other public utility empny, unless the acquisition has been approved by the Cmmission under Section 10 of the Act.
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'The criteria that Section 10 requires val pursuant to Section 10 of the Act.
the Ocamission to consider in deciding dwther to approve the proposed trans-action are set forth in Sections 10(b), 10(c), and 10(f).
A. Sections 10(b)(1) and 10(b)(3) - Concentration of control, capital stnacture emplexities and other system effects section 10(b)(1) of the Act requires the Ozanission to approve a proposed acquisition unless the conmission finds that it "will tend tomrds ... the con-centration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interest of investSr's or consmers."
'!his 5rovision is intended to prevent utility acquisitions that result in an undue concentration of econm ic power. It allows the Ccamission to exercise its best judgment as to the maximum size of a holding omgany in a particular In area, considering the state of the art and the tres or region affected. 7/
Section 1(b)(4) of the Act, in its statement of abuses and conditions dich adversely affect the public interest, Congress cordenned the growth and extension of holding c apanies [that]
bears no relation to economy of management and operation or the integration and coordination of related operatirg properties; Bence, the Camission's determination of eether to prohibit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of size alone. C apared with the 12 registered holding c apany j
i i systems, sich must meet the same integration and size standards, Centerior would be roughly fourth in total assets - a sizeable capany, but certainly not one that would exceed the econmies of scale of current electrical generation 1299, 1309 (1978); BCAR No.
7/ American Electric Power, Inc. 46 S.E.C. 20633, July 21, 1978.
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and transmission technology. There appear to be no circunstances in this proposed transaction that would all into question the concerna expressed in Section 1(b)(4).
Section 10(b)(1) also requires the Caumission to consider possible anti-competitive effects of the acx3uisition. As discussed below (p. 22), the Ccm-mission does not find that the creation of Centerior will result in any sig-nificant diminution of concetition in the market for bulk power sales.
Section 10(b)(3) of the Act requires a proposed acquisition to be approved unless the Ccamission finds that it would unduly emplicate the capital structure of the holding-ccupany system of the applicant or will be detrimental to the public interest or the interest of investors or consumers or the proper functioning of su& holding-company system.
The only securities Centerior will be issuing will be camon stod. Accord-ingly, the Commission makes no adverse findings under Section 10(b)(1) or Section 10(b)(3).
B. Section 10(b)(2) - Fairness of the Exchange Section 10(b)(2) of the Act requires that the c-nission approve Centerior's acquisition of the securities of GI and TE unless it finds that the consideration is not reasonable in light of "the ses invested in or the earning capacity of
... the utility assets underlying the securities to be acquired". As noted earlier, 8/ when the proposed transaction is consunnated, norHlissenting share-holders of TE will receive one share of Centerior common stod for each share of TE cannon stod they presently hold; non-dissenting shareholders of GI will re-ceive 1.11 shares of Centerior comon stock for ead share of CEI cannon stod they presently hold. The Commission therefore assessed the reasonableness of 8f See footnote 5, above, p. 4.
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the consideration received by the shareholders of CEI and TE by examining the reasonableness of the different exchange ratios applicable to the securities of the two ompanies. kong the factors considered were the respective earn-ings, dividends, market values, and book values of CEI and TE. 'Ihe accenpany-ing tables ccznpare the two capanies' historical per share market value, earn-ings, dividends, and book value. Traditionally, the Cm mission's analysis has enphasized unrket values as a measure of "the sums invested in" and earnings as a measure of the " earning capacity" of the utility assets in question. 9f
'Ihe application states that the exchange ratio of 1.11:1 was arrived at by arm's-lergth negotiation between the two companies. In those negotiations CEI was advised and representa3 by its investnent banker, Morgan Stanley & Co.
Incorporated (" Morgan Stanley"); TE engaged Merrill Lynd Capital Markets
("Merrill Lyn 6") as its investment banker. 'Ihe parties agreed on the form of the proposed affiliation between CEI and TE, a holding capany above the two utilities, at an early stage of their discussions. Once that framework was established, negotiations focused on determining appropriate exchange ratios, i.e., the number of shares of Centerior cmmon stock to be issued in exchange for each share of CEI and the nunber to be issued in exchange for each share of TE. 'Ihe application states that the two investment banking firms prformed extensive studies for their respective clients in addition to in-house studies cenducted by the managemants of both capanies.
TE initially proposed relative unadjusted book value as the foundation for the exchange ratio; CEI proposed the relative market value of the cmpanies' 9f See Northeast Utilities 42 S.E.C. 963, 968-974 (1966); National Fuel Gas cm pany 36. S.E.C. 489, 495 (1955).
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FINMCIAL COMPARISCN OF CEI APO TE As of CEI E Ratio 12/31/81 $15.83 $16.13 .98 WARET VAUE 12/31/82 $19.75 $21.00 .94 12/31/83 $18.63 $18.00 1.035 per share 12/31/84 $19.38 $18.50 1.t48 12/31/85 $25.50 $22.00 1.159 2/28/86 $25.50 $22.63 1.127 As of CEI E Ratio 12/31/81 $2.52 $2.77 .91 EARNIN3S 12/31/82 $3.01 $3.18 .95 12/31/83 $3.28 $3.50 .94 per share 12/31/84 $3.64 $3.70 .98 12/31/85 $3.53 $3.54 1.00 As of CEI E Ratio 12/31/81 $2.08 $2.30 .90 DIVItEtOS 12/31/82 $2.19 $2.38 .92 12/31/83 $2.31 $2.46 .94 per share 12/31/84 $2.43 $2.52 .96 12/31/85 $2.55 $2.01 1.27 As of CEI g Ratio 12/31/81 $19.63 $23.46 .84 BOOK VAM E 12/31/82 $19.86 $23.53 .84 12/31/83 $20.79 $24.12 .86 per share 12/31/84 $21.51 $23.76 .91 12/31/85 $22.46 $24.44 .92
9-cm mon shares. According to the application, neither suggestion was mutually acceptable, and the exchange ratio of 1.11:1 finally adopted was reached through a process of extensive and vigorous arm's-length negotiation and ccm-prcmise. Both investment banking firms then analyzed that exchange ratio and furnished to the Boards of Directors of CEI and TE opinions (whi d are set forth in the merger proxy statements filed with the Cmmission on Form S-4 (Registration No. 2-99531) and as exhibits to the present application) that the proposed transaction, at the agreed-upon exchange ratio, was fair to the shareholders of the two ccupanies.
We are persuaded that the relevant financial and operating factors were analyzed by the investment banks, and that both conpanies pursued negotiations at arm's length and in the best interests of their respective shareholders. In addition, the Commission has independently analyzed the financial and operating performances of CEI and TE for the past five years. Clearly, there is a range of possible reasonable exchange ratios frca .92:1 to 1.27:1 based on the analysis of relative market values, book values' earnings per share, and dividends per ,
share. 'the Ccamission is satisfied that the proposed 1 11:1 exchange ratio is .
not unfair or unreasonable in light of the statutory criteria of Section 10(b)(2).
I CEI and TE have acknowledged the possibility that they may be obliged to write off same portion of their investment in their unfinished nuclear generating plants. 'therefore, it remains for us to consider whether such an eventuality might affect the fairness of the excflange ratio. As mentioned earlier, CEI and TE are partners in the Davis-Besse, Perry, and Beaver Valley nuclear power generating plants. 'these are the only nuclear plants in which either has any interest. It is reasonable to asstune that any write-off of investment in those plants mandated by the PUCD will be proportional to their respective shares in
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the nuclear plant in question. Since their shares of each of those plants are not highly disproportionate to their relative sizes, g any write-off would affect each ccanpany roughly proportionately to its size. 'Ihe fairness of the exchange ratio would thus not be materially affected regardless of the size of the write-off.
Section 10(b)(2) also requires the Ccenission to consider the reasonable-ness of the fees involved in a transaction. 'Ibe Ccanission finds that the record tefore us does not enable it to evaluate the reasonableness of the fees payable to the investment bankers upon constanation of the proposed transaction:
a total of $3,794,000 to Morgan Stanley and $3,100,000 to Merrill Lynch. 'Ihe application states that these fees are based on the current market prices of the ccarnn stock of CEI and TE and includes a listing of mergers and acquisition frca 1983 to the present, with publicly-disclosed fees paid in those cases. (If the proposed transaction is not constumated, Morgan Stanley ami Merrill Lynch are to be ca@ensated on a time and effort basis.) Rather than delay the merger, and thus realization of the atteniant benefits for the ocupanies' constaners and investors, the Ccmnission reserves jurisdiction over the fees of the invesdnent bankers and authorizes its Division of Investment Management to approve those fees by delegated authority if satisfactory justification is subnitted.
C. Section 2(a)(29)(A) - Integrated Public Utility System Section 10(c)(2) of the Act requires that an acxguisition, in order to be approved by the Cormnissiori, must " serve the public interest by tending toward the econcunical and efficient develognent of an integrated public utility sys-ten. " Before considering the econanies and efficiencies CEI and TE assert will result from their affiliation, the ccanission aust determine Wwther the 1_0/
0 See pp. 1-2, above.
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new system, Centerior, to be formed fra the cabination of CEI ard TE will be an " integrated public utility system," as defined in Section 2(a)(29)(A) of the Act:
As applied to electric utility espanies, a system consisting of one or more units of generating plants and/or transmission lines ard/or distributing facilities, whose utility assets, whether owned by one or more electric utilitf capanies, are physically interconnected or capable of physical interconnection and which under nonnal conditions may be econmically 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 (mnsidering the state of the art and the area or region affected) the advantages of localized manage-ment, efficient operation, and the effectiveness of regulation.
Under Section 2(a)(29)(A) the Camission must consider thether CEI ard TE are " physically interconnected or capable of physical interconnection" within the meaning of that section. The service areas of CEI and TE are not contiguous.
'Ihey are separated at their closest points by a distance of 50 miles across the service area of Ohio Edison. The physical interconnection requirements of the section are met if the two service areas are connected by power transmission lines that the capanies have the right to use dunever needed. 3/
CEI and TE rely on a 345 kilovolt CAPCO transnission line to establish that they are " physically interconnected" within the meaning of Section 2(a)(29)(A) of the Act. CEI and TE each own the portion of that transmission line that is located in its service area. 'Jhe portion of the line between their service areas is owned by Ohio Edison, another member of CAPCO. Under '
CAPCO's Transmission Agreement, however, investment responsibility for GPCO transmission lines is shared by the CAPCO companies and paid for over the life
- 11/ In Electric Energy, Inc. 38 S.E.C. 658 668-671 (1958), the right to use a transmission line owned by a different campany (with power dispatch coor-dination by voice communication, rather than centralized dispatch,) was fourd sufficient to satisfy the stardards of Section 2(a)(29)(A). See also Cities Service Powr & Light Co.,14 S.E.C. 28, 53 note 44 (19UT.
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of the lines as if the conpanies owned the lines as tenants in commn. 'Ihe capacity of each CAP 00 transmission line is available for the use of individual menber empanies so long as their use does not noterially interfere with the purposes of the Transmission Agreement, i.e., to facilitate intra-CAP 00 power sales and coordination. 'Ihe CAPCO agreements have no termination date and remain in effect as long as CAP 00 facilities are in existence.
According to the application, technical studies indicate that even a worst-case power transfer scenario (all power needs of TE being supplied fra the CEI system, an extrene energency condition) would not result in naterial interference with Chio Edison's use of the transmission line; no loading prob-blems would exist, and there would rannin a significant margin between the line's loading level and its rating. In view of these studies and the provi-sions of the CAPCO agreements, the Cannission finds that the GI and TE sys-tems are " physically interconnected" within the meaning of Section 2(a)(29)(A) of the Act.
'those studies ard the present voice comunication coordination of power dispatch between the two utilities' control areas demonstrate that the Cen-terior system could under normal conditions be operated as a single intercon-nected and coordinated system, whose operations would be confined to the state of Ohio. Since Centerior will be headquartered in Ohio and its manage-sent drawn fra the present management of CEI and TE, the advantages of localized management will not be capranised. As described below, increased efficiency can be expected to result from the affiliation. Finally, the effectiveness of regulation will not be diminished; CEI and TE will remain subject to regulation by the P000, which supports the affiliation, and the Ohio legislature will decide whether and to what extent the PD00 should have
-1 F jurisdiction over Centerior.12/2 'Jhe Camission thus finds that the Centerior system would be an integrated public utility system within the meaning of Section 2(a)(29)(A) of the Act.
D. Section 10(c)(2) - Econmties and Efficiencies Baving concluded that the Centerior system would be an integrated one, we sust determine whether the affiliation will tend toward Centerior's economical and efficient development. Traditionally, that determination has been approached by attenpting to identify the opportunities for savings likely to result, and, to the extent possible, to estimate the dollar amounts of those savings p/ Bow-ever, specific dollar forecasts of future savings are not necessarily required; a demonstrated potential for econmies will suffice even when these are not precisely quantifiable. 3/
As part of the gplication, CEI and TE presented reports prepara3 by their staffs examining the anticipated benefits of the affiliation. Eadi study group analyzed the current operations of the two ocanpanies, determined how the affili-l ation could result in econsties of operation, and attesqpted, where possible, to quantify the expected savings. 'Ihe anticipated savings range from $700,000 (annually) in cmputer-aided drafting to $53.4 million (1986-2000) from the deferral of construction of new generating plants, joint econcaic coordination of power dispatdt, and improved coordination of off-peak power generation.
l Other anticipated annual savings are inventory and material purchasing (S4.2 12/ See p. 25, below.
M/ See, generally, Eastern Gas and Puel Associates, 43 S.E.C. 524, 527-35 (1967).
3/ In the Matter of American Electric Power, BCAR No. 20633, July 21,1978,
- p. 27.
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million), management infonnation systans ($2.1 million), personnel consolidation ard consolidation of similar functions in a service ccupany ($7.2 million), nar-keting and industrial sales stabilization (no estimate given), inproved financial stability and net savings achievable as a result of changes in credit ratings
($1.1 million), and generating mpacity rationalization (no estimate possible until agreenent is reached on ownership and cost of generating capacity).
Se experience of the Ccenission in prior cases involving electric utility mergers confirms the significant savings adilevable as a result of personnel, service cmpany, and nanagement information systens consolidations. Given the structual similarities between these two espanies and other electric utility empanies, our experience with previous acquisitions suggests that savings fra eliminating such overlapping functions are highly probable. Se record before us, including the cmpany's projected savings, also confinns that savings are probable. Accepting the c mpanies' estimates, the affiliation would result in savings of $9.3 million annually in these two areas alone.
Asstaning the savings from the other factors materialize, the merger would result in additional benefits of nearly $10 million annually; savings could thus aggregate approxinately $300 million for the 15-year period ending in the year 2000. mis cagares very favorably with an initial cost of $10 million.
Even though the Ccanission is satisfied that Centerior satisfies the re-quirements of Section 2(a)(29)(A), in order to sustain novement toward achieve-ment of anticipated econcmies (through, e.g., centralized dispatch of power as l
opposed to the present joint econcunic dispatch via voice ccanunication) cen-terior, CEI, and TE have agreed to enter into and file with the crmmission, within one year after the effective date of this order, an Operating Agreement
describing the manner in which they will effect the further econmic and effi-cient development of the integrated public utility system as described in the application.
E. Section 10(f) - Applicable State Law Section 10(f) of the Act prohibits Ccanission approval of any acquisition under Section 10 unless it appears to the Comission's satisfaction that ap-plicable state laws have been complied with (unless the 0:mnission finds that such state laws would be detrimental to the carrying out of the provisions of Section 11). 'Ihe corporations involved in this transaction are organized and operate exclusively in Ohio. The application states that no state regulatory authority has jurisdiction over the proposed transaction, but that the RJCO has been advised of the proposed transaction, ard would be provided with a copy of the Ebrm S-4 filed with the Cmmission. As noted above, the chairman of the PUCO has expressed the PUCO's support for Centerior's application ard urged the Camission to approve the proposed transaction. 'Ibe Agreenent provides that as a condition to the obligation of both CEI ard TE to consum-mate the proposed transaction each shall have received from counsel for the other empany and from counsel for Centerior opinions dated the date of the closirg to the effect that all regulatory approvals required for the consum-mation have been obtained ard remain in full force and effect. Based on the foregoirg, it appears to the Camission's satisfaction that applicable state laws have been cmplied with.
F. Conditions in the application Besides filing with the Omnission the Operating Agreement referred to earlier, Centerior has agreed to:
- 1. File with the Omnission, prior to Marcil 1 of each year, (a) con-solidating financial statments including a balance sheet, statment of ineme and retained earnings, and statment of changes in financial position for the prior year; and (b) financial statments of Centerior's l
service espany using the same form required to be used by service capanies of holding capanies registered under the Act; and (c) totil March 1,1991, an annual update of the activities undertaken during the prior year to increase the integration, coordination, interconnection, and omntmication of the GI and 'IE electrical facilities.
- 2. Following consanation of the proposed transaction, to utilize the chart of accotmts authorized by the Federal Energy Regulatory Cannis-sion as set forth in 18 CFR $101.
- 3. Following constannation of the proposed transaction, to use the " work
I As noted abwe,3/ the CCC agreed, after negotiations with counsel for
., Centerior, to withdraw its request for a hearing. As part of that agrement, centerior amended its application to include the following terms and conditions and requested that they be reflected in any order the Comission issued apprcwing 15/ P. 3.
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.- -17 the proposed transaction. OCC informed the Ccmnission that it had no objec--
tion to the approval of Centerior's application if the following paragraphs were included as corditions of any Ccumission order approving the proposed transaction:
- 1. Centerior will provide to the Public Utilities Comnission of Chio
("PUC0") and to the CCC its initial, and thereafter its annual exmp-tion statement subnitted on Ebrm U-3A-2 and filed pursuant to Rule 2 urder tM Act (17 CFR 250.2), ard all other documents filed with the Comnission pursuant to the Act ard rules promulgated thereunder. In the event that Centerior should ever request exenpt status by order under Section 3(a)(1) of the Act and as a result is no lorger required to make a Form U-3A-2 filirg, it will prepare ard subnit annually to the WC0 and the OCC an annual statement containing the same in-fonnation which is required to be contained in the Form U-3A-2.
- 2. Neither Centerior, CEI, TE nor any other company directly or indi-rectly controlled by Centerior will object in the context of a pro-ceeding before the WC0 to a request for discovery of books, records, or other documents in the possession of Centerior or any of its sub-sidiaries on the grounds that the prticular person or entity having possession of the same is not subject to the PUCO's jurisdiction.
- 3. Centerior, CEI ard TE agree that following consumnation of the affil-iation, Centerior will not permit a minority ccamon stock owiership interest to be held in either CEI or 'IE.
- 4. CEI ard TE agree that neither shall invest in, lend funds to, guaran-tee the obligations of or otherwise finance any entity in the centerior
9 system before January 1, 1987 unless they have received authorization fra the PUCO to do so. After January 1,1987 such authorization shall not be required if the PUCO disclaims jurisdiction over the transaction presented for approval. It 'is understood that this lim-itation does not apply to transactions in the ordinary course of the cmpanies' business operations in sich CEI or TE acts on behalf of, or with respect to, the other.
- 5. Centerior will provide to the PUCO and to the OCC, on an annual basis, financial statements of its service empany usirg the same form that the Otzmission currently requires or in the future may require to be filed by registered holding cmpany systems pursuant to the Act.
- 6. Centerior, TE and CEI shall, for a period of five years ccanencing with the issuance of this order, individually or jointly sponsor tes-timony in all TE and CEI base rate and annual electric fuel ca ponent proceedirgs before the RXX) settirg forth information regarding the implementation of the reorganization and the benefits and oosts derived as a result of their affiliation; however, neither centerior, CEI nor TE shall be requirai to do ao more than once in any calendar year.
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- 7. Centerior agrees to notify the OCC of any change to the service ccm-pany agreement at least sixty days prior to its implementation, to 1
enter into good faith discussions with the OCC regarding any objec-tions it may have to any such charge, and to recognize the right of l
the PUCO to examine any such change in the course of base rate case or annual electric fuel cmponent proceedings to the extent it affects charges being made by the service cmpany to CEI or TE.
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- 8. CEI and 'IE shall not transfer any assets to any affiliate within the Centerior system, other than another public utility within the Cen-terior system, prior to January 1,1987, unless they have received authorization fra the PUC0 to do so. After January 1,1987 such authorization shall not be required if the RJC0 disclaims jurisdic-tion over the transaction presented for approval. In presenting such proposed transfers to the PUCO for approval, CEI and 'IE agree to request that the PUCO delay final action for at least forty-five days after filing of the application in order to afford interested persons the opportunity to subnit objections ard request a public
. hearing.
III. THE HEARIIG RD]UESTS On September 18, 1985, WA filed a request for a hearing on Centerior's application. @A identified itself an a tax-exempt "non profit consumer util-ility corporation ... engaged in the education of people and organizations regarding energy issues" that "has been an intervenor in numerous cases against utility cm;anies since its inception, including CEI." As noted earlier, the OCC also filed a hearing request, which has since been withdrawn.
A number of other organizations and individuals also wrote to the Otar.is-sion regarding Centerior's application. Between January 22 aid April 1,1986, the Comnission received twenty-three letters frm individuals and organizations in the Cleveland area urging that a hearing be held on Centerior's application.
Ibne of those l~etters emplied with the procedural requirements for requesting a hearing set forth in the notice of the filing of the application published in the Federal Register, and none was filed within the time period set forth in that notice. Moreover, most of those letters raised no issues of fact or l
law, and none raised any issue not raised by MtA.
A. MtA's flearing Request utA's hearing request and three subsequent "anplifications" raised various contentions, which are stanarized below.
In analyzing a request for a hearing, the ccanission applies the criteria of Rule 23(d) 16/ by determining whether the request raises a significant issue of fact or law that is relevant to the issues the Act requires the Comission to consider in deciding whether to grant the application. A sinple assertion that a particular standard of the Act has not been met does not alone suffice to raise a significant issue of fact or law.
Se Ccmnission has reviewed all of the issues presented in MRA's hearing request, and finds that a hearing on the gplication is not warranted. Se Ccunission notes the following in response to NRA's hearing request: 7 1_7/
Be utilities' nuclear plants - MtA asserts that CEI and TE have mis-nanaged the cmnstruction of their nuclear power plants, that the Perry plants are " riddled with the influence of organized crine" (flearing request, pp.1, 3-4; Anplification No.1, p.14), and that the utilities' primary motive in l
l setting up a holding ecmpany is to " cover up the problems at their nuclear plants" (Bearing request, p.3).
,16/ 17 C.F.R. 5250.23(d):
If the ccanission deems that a hearing is appropriate in the public
- interest or the interest of investors or consumers, it will issue an l
order thereon, and in that event a declaration or application shall I
not boccane effective except pursuant to further Ccanission action.
,1.,7/ As indicated, the ccanission has considered all of the issues pre-sented, and others. % the extent it does not discuss then here, it has considered then and concluded that they do not warrant a l.
hearing.
_g1_
Se Cennission has considered these allegations and has determined that they do not inplicate any policies underlying the Act, and thus do not require the Ccanission to reach a different result in this case.
Diversification by exernpt holding companies into non-utility business -
MtA conterds that one of the main motives for the proposed transaction is to create an exenpt holding cmpany that would enable the utilities to diversify into non-utility businesses so that they "can gain greater political and social power by controlling and influencing local businesses" (Amplification leo. 2, p. 6). According to NRA, the Act was meant to restrict diversification by exenpt holding companies into non-utility operations in the same nanner as diversification by registered holding cmpanies (Anplification No. 2, pp. 5-7),
that the Camission's decision to the contrary in Pacific Lighting Corp. 45 S.E.C 152 (1973) was in error (Amplification No. 2, p.6).
MtA's unsupported allegation regarding the ccxnpanies' motives has no bearing on the subject matter of the application. In addition, the Ca mission, in its decision in Pacific Lighting Corp., held that exenpt holding coupanies are not subject to the diversification restrictions that Section 11 of the 7st imposes on registered holding empanies.
Ca mission approval of securities issuances - NRA raises a question regard-l ing the application of Section 7(f) of the Act, which deals with declarations
! by registered holding and subsidiary ca panies regarding securities transactions, to the proposed transaction (Anplification No. 2, p. 7).
Camission approval of the issuance of shares of Centerior's stock is not required under Sections 6 and 7 of the Act, Wiich deal with issuance of securi-ties by registered holding cmpanies, bemuse Centerior is not, and will not by i
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virtue of the proposed transaction become, a registered holding ccmpany.
Anti-coupetitive effects - MLA asserts that the fonnation of Centerior 4
will result in anti-ccupetitive behavior by CEI and TE to the detriment of Ohio's municipal electric utilities (Asplification No. 2, p. 7).
The Canission does not find that centerior's creation will disadvantage the municipal electric utilities. 1he proximity of several other sizeable electric utilities able to supply power, Chio Power and Chio Mison, with canbined assets of $10.9 billion serving approximately 1.6 million custmers, should prevent any significant diminution of competition in the market for bulk power sales to municipal electric utilities. We are unable to conclude on the basis of the information presented by MLA that a hearing on this issue is warranted. MtA sets forth na facts regarding anti-cmpetitive concerns as a result of the merger, including possible econanic barriers to entry by po-tential cepetitors to Centerior, percentage of the wholesale market share to be controlled by Centerior versus existing competitors, and lack of access to power at reasonable terms by tolesale custaners of Centerior. Moreover, American Municipal Power-Glio, Inc. (" AMP 4hio"), a non-profit corporation created by Chio's municipal electric utilities, dich initially expressed some concerns in this regard, has notified the Camission that discussions with CEI and TE have alleviated those concerns, and that it does not oppose approval of the application.
Basis for the issuance of Centerior's securities - WLA conterds that the proposed transaction would involve "the issuance of securities on fictitious or unsound asset values" within the meanings of Section f(b)(1) of the Act because the utilities' nuclear plants are valueless (Asplification No.1, pp.
12-13, 15; Asplification No. 2, pp. 2, 8, 9).
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l In oors5emning "the issuance of securities on fictitious or unsound as-set values," Congress was concerned with the practice of " write-ups": arti-ficially inflating asset values by means of intercorporate transfers among related entities to provide a basis for raising additional capital from pub-lic investors. ,18/ h t abuse was facilitated by the lack at that time of audited financial statements. '! hat situation is not presented here. CEI and TE are not proposing to sell securities to the public based on inflated asset values. 'Ihe asset values of those two empanies are carefully examined in the context of state rate proceedings. h PUCO has not brought to our atten-tion any fictitious or unsound assets held by CEI or TE. Further, the chairm n of the PDOD has expressed strong support for the proposed transaction.
Section 2(a)(29)(A): Physically interconnected or <-apable of physical interconnection - WRA questions whether the Centerior syntan would meet the criteria set forth in Section 2(a)(29)(A) of the Act (Amplification No. 1, pp.16-17) on the ground that the systen does not own the CAP 00 345 kV line.
As set forth above (pp.10-13), the Cmmission has concluded that the Centerior systan will meet the standards of Section 2(a)(29)(A).
Pees to be paid to the investment bankers - MIA asserts that the fees of the investment bankers in the proposed transaction are excessive (Ampli-fication No. 3, pp. 2-3).
'the record before us does not permit us to evaluate the proposed fees fully and the Camission therefore reserves jurisdiction over them. 'there is, however, no reason at this time to order a hearing on the matter.
18/ See Section 1(b) of the Act.
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24 -
Ohio law - MLA asserts that the proposed transaction would result in Ohio constaners being &arged for trineeded and non-functioning nuclear power plants, which, it alleges, would violate Ohio law (Anplification No. 2, pp. 18-19).
Nowhere in its subnissions does MtA cite any Glio law that it alleges l would be violated by the proposed transaction. As noted above (p. 15), the appliation, part of the record before us, states that no state regulatory authority has jurisdiction over the proposed transaction, opinions of counsel to that effect are preconditions to constmention, and.the PUCD has urged the Cenunission to approve the proposed transaction. Nor did the OCC's hearing request allege, or even suggest, that the transaction was questionable under ,
any state law. On the foregoing basis, it appears to the satisfaction of the Cannission that sudt state laws as may apply in respect of the acquisition have been emplied with.
- l Substitution of FERC regulation for PUC0 regulation of Centerior's nuclear I plants - MtA asserts that the Federal Energy Regulatory Canaission ("FERC") has proved nore receptive to requests for rate increases than state regulatory bodies J and that the formation of a holding coupany would allow CEI and TE to evade PUCO regulation of their troubled nuclear plants by transferring them to a subsidiary of Centerior yet to be formed, Wiich would then sell the generated power at wholesale to CEI and TE in transactions subject to regulation not by the PUC0 but by the PERC. (Anglification ico. 1, p. 23).
Mere Centerior to transfer its nuclear plants into a new subsidiary, diich j sold power not at retail, but only to other utilities, rate setting for those wholesale power sales would be the responsibility of the FERC, rather than of >
the PUCO. Although the PUOO would of course retain jurisdiction over the re-tail rates CEI and TE charged constuners, in effect it might lose jurisdiction i
, , - , - , ~ , , . e. , . - _ - _--r..,,,-, _ , , , - ..
m- , , ,._----, - , , . , w-.---, -m,------- - - ,---6--
over the nuclear plants since it might be obliged to accept the wholesale rates set by the FERC as part of the utilities' cost of service. Although we are sympathetic to consumers' concerns about the inpact this might have on their utility rates, even if GI and TE were planning such a course of action it would raise no questions having a direct bearing on the subject setter of the application. 'the Act does not confer rate-1naking authority on the Conurls-sion. In any event, a bill presently is pending before the mio legislature i
providing for state regulation of utility holding canpanies that would subject any su& transfer of utility assets by CEI or TE into a subsidiary of Centerior to PUC0 approval. OCC's agreenent with Centerior includes a condition that pre-vents any su& transfer until the mio legislature has had the opportunity to emplete action on this legislation. In addition, the dairman of the PUCD has written to the Cmunission to express PUCO's support for the application. 'the Canmission believes that in a matter sud as this it is appropriate to give con-
, siderable weight to the opinion of the regulatory body most familiar with the i
interests of Centerior's consumers and to the decision of the Ohio legislature.
B. Other Subnissions On July 31, 1985, AMP-Chio wrote to the Ccenission's Office of Public Utility Regulation to express its muunhars' concern over potential anti-ccur-petitive effects of the proposed cabination of CEI and TE. 22bsequently, AMP-Chio participated in a series of meetings and discussions with CEI and TE and reached an understanding with than that alleviated its concern. On October 18, 1985, AMP-mio filed a Motion to Intervene stating that it did not in any way oppose or wish to delay Conunission approval of the application, but wished to intervene " simply to assure that it has an opportunity to participate if the applicants, arry other party, or the Canunission itself requests or requires
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a modification which would materially or adversely affect AMP-Ohio's interests."
On September 19, 1985, the City of Toledo filed a Motion to Intervene 'in order to preserve its rights to participate in any hearings that may 'be held . . ."
but did not raise any issue or umke any emnents. .
Neither of these submissions requesta3 a hearing or raised any issues of '
fact or law. 'they merely asked, prematurely, for the right to participate l in a hearing that h:d not yet been, and might never be, ordered. Because of !
the action we take today on the question of ordering a hearing, the Motions to Intervene filed by the City of Toledo and by AMPH3hio are moot.
On December 2,1985 the Cmmission received a letter fra the Consumers Imague of Ohio ("Imague") expressing a nunber of concerns regarding the pro-posed holding ;-=ny, all of which are dealt with in our discussion of NRA's hearing requesti, above, but making no request for a hearing. .On January 13, 1986, the Ccanission remived a letter fra Mr. Joseph P. Meissner, an attorney in the Urban Development Office of the Imgal Aid Society of cleveland seeking to intervene on behalf of the Imague. 'me Office of Ebblic Utility Regulation replied with a letter explaining, among other things, that Mr. Meissner's letter did not constitute a valid request for a hearing; it raised no issues of fact or law and did not ceply with the procedural requirenents.
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IV. FI}OINGS On the basis of the foregoing, the Cennission ocoeludes that neither NRA l
nor any other person has raised any issue of fact or law that would arrant the ordering of a hearing on Centerior's application. 'merefore, it finds that a hearing on the application is not appropriate in the public interest or in the interest of investors or consmers. Accordingly, i
IT IS CRDERED that the request for a hearing is denied. 'Ihe matters pre-sented in the application have been considered, and it is hereby found that the applicable standards of the Act and the rules thereunder are satisfied except with respect to the fees of the investment bankers, and that no adverse findings are called for. Accordingly, IT IS (RDERED that the proposed transaction, as set forth in the appli-cation, as amended, is hereby approved, effective forthwith, subject to the Camission's reservation of jurisdiction with respect to fees, subject to the tems and conditions of Rule 24 under the Act, and subject to the following undertakings, to which Centerior has agreed:
- 1. Within one year of the effective date of this order, Centerior, CEI and TE will enter into and file with this Ccanission an operating agree-ment describing the manner in which they will effect the developnent of an integrated public utility systen as described in the application.
- 2. Prior to March 1 of each year, Centerior will file with the Comnis-sion (a) consolidating financial stataments including a balance sheet, statement of ineczne and retained earnings, and statement of changes in financial position for the prior year; (b) financial statements of Cen-terior's service capany using the same form required to be used by ser-vice campanies of holding cmpanies registered under the Act; and (c) un-til March 1, 1991, an annual update of the activities undertaken during the prior year to increase the integration, coordination, interconnection arti comunication of the CEI and TE electrical facilities.
- 3. Following consummation of the proposed trarmaction, Centerior will utilize the chart of accounts authorized by the Federal Energy Regulatory Cautission as set forth in 18 CPR 5101.
- 4. Following constenation of the proposed transaction, Centerior's ser-vice coupany will use the " work order systan" of accounting for all services it provides to GI and TE.
- 5. Centerior will provide to the PU3) and to the OCC its initial, and thereafter its annual, exemption statement subnitted on Form U-3A-2 and filed pursuant to 17 CFR 5250.2, and all other documents filed with the Cannission pursuant to the Act and the rules promulgated thereunder. In the event that Centerior should ever apply for exempt status by order pursuant to Section 3(a)(1) cf the Act and as a result ceases to file Form U-3A-2 anrually, it will prepare ard submit annually to the PUCO and the CCC an annual statement containing the same information that is required to be subnitted in Form U-3A-2.
- 6. Neither Centerior, GI, TE, nor any other capany directly or indi-rectly controlled by Centerior will object in the context of a promeding before the PUCO to a request for the discovery of books, records, or other documents in the possession of Centerior or any of its subsidiaries on the l grounds that the particular person or entity having possession of the same is not subject to the PUCO's jurisdiction.
j 7. Centerior, GI and TE agree that following consummation of the affili-l l
ation Centerior will not permit a minority canon stod ownership interest in either GI or TE.
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, 8. CBI and TE agree that neither shall invest in, lend funds to, guaran-tee the obligations of, or otherwise finance any entity in the Centerior system before January 1, 1987 unless they have received authorization fran the PUCO to do so. After January 1, 1987, such authorization shall not be required if the PUCO disclaims jurisdiction over the transaction presented for approval. It is understood that this limitation does not apply to transactions in the ordinary course of the comganies' business operations in which CEI or TE acts on behalf of, or with respect to, the other.
- 9. Centerior will provide to the PUCO and to the OCC, on an annual basis, financial statements of its service company using the same fonn that the Orrmission currently requires or in the future may require to be filed by registered holding canpany systems pursuant to the Act.
- 10. Centerior, CEI, and TE shall, for a period of five years consnencing with the issuance of this order, individually or jointly sponsor testimony in all GI and TE base rate and annual electric fuel omeponent proceedings before the PUCO setting forth information regarding the implementation of l
the reorganization and the benefits and costs derived as a result of their affiliation; however, neither Centerior, CEI, nor TE shall be required i to do so more than once in any calendar year.
- 11. Centerior agrees to notify the OCC of any change to the service ccm-pany agreement at least sixty days prior to its implementation, to enter into good faith discussions with the OCC regarding any objections it may have to any such change, and to recognize the right of the PUCO to examine any such change in the course of base rate case or annual electric
fuel component proceedings to the extent it affects charges being made by the service ccrnpany to CEI or TE.
- 12. CEI and 'IE shall not transfer any assets to any affiliate within the Centerior system other than another public utility within the Centerior systs, prior to January 1, 1987, unless they have received authorization frcm the PUC0 to do so. After January 1, 1987, such authorization shall not be required if the PUCO disclaims jurisdiction over the transaction presented for approval. In presenting such proposed transfers to the PUCO, CEI and 'IE agree to request that the Kr:0 delay final action for at least forty-five days after the filing of the application in order to
' afford interested persons the opportmity tp subnit objections and request a public hearing.
By the Camission.
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John meeler, W W \
et C T Secretary