[Federal Register Volume 59, Number 89 (Tuesday, May 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11184]
[[Page Unknown]]
[Federal Register: May 10, 1994]
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DEPARTMENT OF EDUCATION
[Docket No. EC94-3-000]
Illinois Power Co., Order Granting Authorization for Proposed
Corporate Restructuring and Clarifying Jurisdiction Over Indirect
Mergers of Public Utilities Owned By Public Utility Holding Companies
Issued May 3, 1994.
Introduction
This order authorizes Illinois Power Company (Illinois Power) to
create a holding company, IP Holding Company (IP Holding), of which
Illinois Power will become a wholly-owned subsidiary. We also take this
opportunity to clarify our jurisdiction under section 203 of the
Federal Power Act (FPA). While this Commission does not have
jurisdiction over public utility holding company mergers or
consolidations,\1\ we conclude that, ordinarily, when public utility
holding companies merge, an indirect merger involving their public
utility subsidiaries also takes place, and that our approval under
section 203 is required for the indirect merger of the public
utilities.
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\1\Although mergers and consolidations differ in the mechanics
of the combination (mergers involve one company acquiring the other,
while consolidations entail forming a new entity), Black's Law
Dictionary, at 309 (Revised Sixth Ed. 1990), for ease of
presentation, we will refer to both types of combinations as
mergers.
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Accordingly, in this order we establish and announce a rebuttable
presumption that an indirect merger of the public utility subsidiaries
occurs simultaneously with the merger of the holding company parents.
Therefore, prior to public utility holding companies merging, their
public utility subsidiaries must either rebut the presumption or obtain
our approval under section 203 of the FPA. If applicants can show us
that there will not be an indirect merger or consolidation of the
facilities of the public utility subsidiaries, our jurisdiction will
not apply until such time as the public utility subsidiaries themselves
seek to merge or consolidate.
Background
On November 15, 1993, Illinois Power submitted an application
pursuant to section 203 of the Federal Power Act for authority to
effect a ``disposition of facilities'' that would be deemed to occur as
a result of a proposed corporate restructuring.\2\ Illinois Power
states that the proposed restructuring would be accomplished through
the creation of a holding company, IP Holding, of which Illinois Power
would become a subsidiary.
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\2\In support of its application Illinois Power presents
information as required by section 33.2 of the Commission's
regulations.
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Illinois Power states that the proposed restructuring is intended
to permit the establishment of non-utility businesses that can take
advantage of new business opportunities on a timely basis without the
need for prior regulatory approvals, to increase financial flexibility,
to enhance managerial accountability for separate business activities,
and to insulate utility ratepayers and security holders from the risks
of non-utility projects. Illinois Power states that the proposed
restructuring will not affect its jurisdictional facilities, rates or
services.
The proposed restructuring would be accomplished as follows:
1. Illinois Power has formed a subsidiary, IP Holding, under
Illinois law.
2. IP Holding, in turn, has formed a subsidiary, IP Merging
Corporation (IP Merging), also an Illinois corporation.
3. Following all necessary approvals, IP Merging will merge with
and into Illinois Power. In the merger, all outstanding shares of
Illinois Power common stock will be converted on a share-for-share
basis into IP Holding common stock by operation of law, and IP Holding
will become the owner of all outstanding shares of Illinois Power
common stock.\3\ Illinois Power common stock will thereafter cease to
be listed and traded on the stock market, and the common shares of IP
Holding will be listed and traded instead.
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\3\IP Holding has filed an application with the Securities and
Exchange Commission (SEC) for authority to acquire Illinois Power's
common stock, pursuant to sections 9(a)(2) and 10 of the Public
Utility Holding Company Act of 1935 (PUHCA).
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Notice of the application was published in the Federal Register,\4\
with comments due on or before December 8, 1993. None was filed.
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\4\58 FR 62,649 (1993).
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Discussion
A. The Application
The Commission has held that the transfer of a public utility's
common stock from its existing shareholders to a holding company
constitutes a transfer of the ``ownership and control'' of the
utility's jurisdictional facilities and is thus a ``disposition of
facilities'' subject to Commission review and approval under section
203 of the Federal Power Act. See Central Vermont Public Service Corp.,
39 FERC 61,295 (1987) (Central Vermont). Because Illinois Power's
proposed restructuring would entail the transfer of the ownership of
its common stock from existing shareholders to IP Holding, the
restructuring is subject to the requirements of section 203.
The Commission is obligated to approve a proposed ``disposition of
facilities'' under section 203 if it would be ``consistent with the
public interest.''\5\ In making such a determination, the Commission
considers, inter alia: (1) The effect on utility operating costs and
rate levels: (2) the contemplated accounting treatment; (3) the
reasonableness of the purchase price; (4) the possibility of coercion;
(5) the effect on competition; and (6) the impact on the effectiveness
of regulation. Commonwealth Edison Co., 36 FPC 927, 936-42 (1966),
aff'd sub nom. Utility Users League v. FPC, 394 F.2d 16 (7th Cir.),
cert. denied, 393 U.S. 953 (1968).
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\5\An applicant need not show that a positive benefit to the
public will result. See Pacific Power & Light Company v. FPC, 111
F.2d 1014, 1016-17 (9th Cir. 1940).
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The Commission finds that Illinois Power's proposed restructuring
will be compatible with each of the relevant factors. First, the
proposed restructuring will have no effect on either Illinois Power's
operating costs or its rate levels. The Applicant does not request a
rate increase as part of its filing. Any future changes in Illinois
Power's wholesale rates would be subject to Commission review and
approval under section 205 of the FPA.
Second, the contemplated accounting treatment will be appropriate.
The merger of Illinois Power and IP Merging will be accounted for on a
``pooling of interests'' basis under generally accepted accounting
principles. Illinois Power's books and records will continue to be
maintained in accordance with the Commission's Uniform System of
Accounts.
Third, the proposed restructuring entails no ``purchase price.''
The proposed restructuring involves the conversion of each share of
Illinois Power common stock into a share of IP Holding common stock.
Therefore, the proportion of each shareholder's ownership will be
unchanged.
Fourth, because the proposed reorganization only involves Illinois
Power and its affiliates, there is no possibility of coercion.
Fifth, because no facilities will be combined with those of any
other public utility, the proposed restructuring will not have an
adverse effect on competition.
Sixth, the proposed restructuring will not impair effective
regulation of Illinois Power. Illinois Power's services, rates and
facilities will be unaffected by the restructuring and will continue to
be regulated by the Illinois Commerce Commission and by this
Commission.
B. Clarification of Jurisdiction Over Indirect Mergers of Public
Utilities Owned By Public Utility Holding Companies
While there is no current proposal to merge IP Holding with another
public utility holding company, it is possible that in the future such
a merger may take place.\6\ In our view, most mergers of public utility
holding companies will simultaneously involve an indirect merger of the
public utility subsidiaries of such holding companies. Accordingly, we
take this opportunity to announce a clarification of our jurisdiction
when there is a merger of public utility holding companies. To assure
that the public interest is protected when public utility holding
companies merge, we will establish a rebuttable presumption that an
indirect merger of jurisdictional facilities of the public utility
subsidiaries occurs at the time the holding company parents merge.
Prior to the public utility holding companies merging, their public
utility subsidiaries must file under section 203 of the FPA either
sufficient information to rebut the presumption, or for Commission
approval of the indirect merger of the public utilities.
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\6\With the recent and projected increase of competition in the
electric utility industry, mergers may become an increasingly
popular tool for utilities seeking to achieve greater efficiency and
become more competitive. Our decision today is necessary to ensure
the continued adequacy of our merger policies in protecting the
public interest.
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The public utilities may rebut the presumption by showing that
after the merger of the holding companies, the public utility
subsidiaries will still effectively compete with each other. If they
make such a showing, jurisdiction under 203 will not attach until such
time as the public utilities themselves seek to combine.
1. The Three Step Process
Section 203(a) of the FPA provides that:
No public utility shall sell, lease or otherwise dispose of the
whole of its facilities subject to the jurisdiction of the Commission,
or any part thereof of a value in excess of $50,000, or by any means
whatsoever, directly or indirectly, merge or consolidate such
facilities or any part thereof with those of any other person * * *
without first having secured an order of the Commission authorizing it
to do so.
The provision applies to any public utility, which section 201(e)
of the FPA defines as ``any person [with certain exceptions specified
in section 201(e) which are not relevant here] who owns or operates
facilities'' for the sale of electric energy at wholesale or the
transmission of electric energy in interstate commerce. Public utility
holding companies, in contrast to public utilities, do not normally own
such facilities.7 Therefore, we have no jurisdiction over public
utility holding companies that are not also public utilities and thus
have no jurisdiction over most mergers of holding companies.
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\7\Certain public utility holding companies, however, are also
public utilities. E.g., Cincinnati Gas and Electric Company.
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In recent years, however, some public utilities have followed a
three-step process to reorganize. In ``step one,'' a public utility
forms a company and transfers ownership of all of the utility's stock
to a newly created company, which becomes the parent holding company of
the public utility.8 In ``step two,'' the public utility holding
company merges with another public utility holding company. In ``step
three,'' the public utilities under the control of the single public
utility holding company formally merge their facilities.
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\8\Illinois Power seeks Commission authorization of a ``step
one'' transaction in this docket.
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Central Vermont and Missouri Basin Municipal Power Agency v.
Midwest Energy Company and Iowa Resources, Inc., 53 FERC 61,368
(1990), reh'g denied, 55 FERC 61,464 (1991) (Missouri Basin) describe
our jurisdiction (or lack thereof) at each of the three steps. In
Central Vermont, the Commission found jurisdiction under section 203
when a public utility establishes a holding company, because the
shareholders of the public utility transfer ownership and control over
jurisdictional facilities in the course of the transaction. In Missouri
Basin, the Commission found that the merger of two public utility
holding companies was subject to the SEC's jurisdiction, but not to our
jurisdiction. The Commission determined that neither of the holding
companies in Missouri Basin owned or operated FERC-jurisdictional
facilities, and therefore neither holding company was a public utility
under the FPA when the merger was consummated. Thus, the Commission
found, the merger did not fall within the Commission's jurisdiction
under section 203. The Commission stated that if, in the future, the
public utility subsidiaries should merge--a ``step three''
transaction--Commission approval would be required.9 The
Commission later approved the merger of the affiliated public
utilities.10
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\9\53 FERC at 62,298-99.
\1\0Iowa Public Service Company, Iowa Power, Inc., and Midwest
Power Systems, 60 FERC 61,048 (1992). The Commission has generally
approved mergers between affiliated public utilities. See, e.g.,
Wisconsin Electric Power Company, 59 FPC 1196 (1977) (``while
technically a merger, this action is more in the nature of an
intrasystem consolidation and does not present the potential evils
which are inherent in the merger of two non-affiliated systems'');
Delmarva Power & Light Company, 5 FERC 61,201 (1978) (``the
transaction would only simplify the corporate structure by merging
these subsidiaries into the parent''); Union Electric Company, 25
FERC 61,394 (1983), reh'g denied, 26 FERC 61,184 (1984) (``the
nature of the proposed transaction is essentially a consolidation of
operating utilities presently under one ownership rather than the
acquisition of any additional electric or gas utility''); and
Kentucky Utilities Company and Old Dominion Power Company, 56 FERC
61,184 (1991) (``because Kentucky Utilities already wholly owned
Old Dominion and, in effect, controls the use of Old Dominion's
system, the merger will not alter Kentucky Utilities' control'').
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2. Reasons for Clarification
a. The Presumption. Our decision to adopt a presumption of indirect
merger and to require the public utility subsidiaries to rebut the
presumption by showing that after merger of their parents they will
continue to compete with each other, is informed by the Supreme Court's
decision in Copperweld Corp. v. Independence Tube Corp. (Copperweld),
467 U.S. 752 (1984). The Court held that section 1 of the Sherman
Antitrust Act, which outlaws conspiracies or combinations in restraint
of trade, regards as one company a parent and subsidiary that maintain
separate operations. The two cannot conspire because they do not
compete in the economic sense. Copperweld holds that even if companies
maintain separate corporate form, if they pursue a common economic
interest, they no longer compete.
The Court explained:
A parent and its wholly owned subsidiary have a complete unity
of interest. Their objectives are common, not disparate; their
general corporate actions are guided or determined not by two
separate corporate consciousness, but one. They are not unlike a
multiple team of horses drawing a vehicle under the control of a
single driver. With or without a formal ``agreement,'' the
subsidiary acts for the benefit of the parent, its sole shareholder.
If a parent and a subsidiary do ``agree'' to a course of action,
there is no sudden joining of economic resources that had previously
served different interests, and there is no justification for Sec. 1
scrutiny.
* * * * *
[i]n reality a parent and a wholly owned subsidiary always have a
``unity of purpose or a common design'' * * * whether or not the
parent keeps a tight rein over the subsidiary; the parent may assert
full control at any moment if the subsidiary fails to act in the
parent's best interest.
467 U.S. at 771-72 (emphasis in original; footnote deleted).
The courts have applied Copperweld to electric utilities and their
affiliates. In City of Mount Pleasant, Iowa v. Associated Electric Co-
op, 838 F.2d 268, 274-77 (8th Cir. 1988), for example, which involved
municipal and cooperative utilities, the Eight Circuit held:
Even though [affiliates] may quarrel among themselves on how to
divide the spoils of their economic power, it cannot be reasonably
said that they are independent sources of that power. Their power
depends, and has always depended, on the cooperation among
themselves. They are interdependent, not dependent.
838 F.2d at 277 (emphasis deleted).
While Copperweld applies to the Sherman Act, the rationale of the
decision suggests that the common interest between members of an
enterprise affects their standing as competitors for FPA purposes as
well. While this Commission has no responsibility to enforce the
antitrust laws,11 it must weigh competitive considerations in its
merger analyses.12
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\1\1Northern Natural Gas Co. v. FPC, 399 F.2d 953, 960 (D.C.
Cir. 1968), citing California v. FPC, 369 U.S. 482, 490 (1962).
\1\2See, e.g., Northeast Utilities Service Co. 56 FERC 61,369
at 61,998-62,011 (1991), order on reh'g, 58 FERC 61,070, further
order on reh'g, 59 FERC 61,042 (1992), remanded on other grounds,
939 F.2d 937 (1st Cir. 1993) (NU).
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Moreover, while City of Mount Pleasant involved municipal utilities
suing an electric co-op (none of which were subject to our section 203
jurisdiction), at least one court has applied Copperweld to a
jurisdictional public utility. Rosemont Cogeneration Joint Venture v.
Northern States Power, 91-1 Trade Cases (CCH) 69,351 at 65,408 (D MN
1991).
The above case law supports our conclusion that when public utility
holding companies merge, their public utility subsidiaries likely
retain no real corporate independence. Rather, decision-making for the
public utility subsidiaries appears to rest with the new holding
company. The voting stock of the public utilities belongs to the
shareholders of the new holding company; the new holding company board
of directors presumably sets or can set corporate policy for all
subsidiaries; and management of the public utility subsidiaries
presumably gains access to proprietary financial and corporate
information of the entire system of the new holding company. For us to
assume that a merger of the public utilities occurs only when the new
parent proposes to combine its subsidiaries may, in most instances,
elevate corporate form over economic substance.
We therefore will presume, subject to rebuttal, that mergers
between public utility holding companies also accomplish an indirect
merger of their public utility subsidiaries. If the public utilities
can rebut the presumption, we will find that jurisdiction will not
attach until such time as the public utility subsidiaries formally
merge or consolidate their facilities. If the public utilities cannot
rebut the presumption, section 203 approval of the indirect merger of
the public utilities will be required.13
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\1\3Section 203 requires approval prior to a merger. Therefore,
the public utilities must file under section 203 evidence to rebut
the presumption that an indirect merger of public utilities will
occur when the holding companies merge, and/or alternatively an
application for approval under section 203.
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b. Rebutting the Presumption. The Eighth Circuit in City of Mount
Pleasant left open the possibility for courts to consider affiliates as
separate enterprises for antitrust purposes. In granting summary
judgment to the co-op, the panel held:
The record bears out the defendants' claim that the cooperative
organization is a single enterprise pursuing a common goal--the
provision of low-cost electricity.* * * The burden [falls] therefore
on the City to show specific facts which present a triable issue as
to whether any of the defendants has pursued interests diverse from
those of the cooperative itself. By ``diverse'' we mean interests
that show that any two of the defendants are, or have been, actual
or potential competitors, * * * or at the very least, interests
which are sufficiently divergent so that a reasonable juror could
conclude that the entities have not always worked together for a
common cause. In the language of Copperweld, the City must show
facts that could lead a reasonable juror to find the coordination
between any two defendants to be a ``joining of two independent
sources of economic power previously pursuing separate interests.''
838 F.2d at 276 (citations omitted).
Informed by the analysis in Copperweld and City of Mount Pleasant,
we will require section 203 applicants, in order to rebut the
presumption, to show that the new holding company will not interfere
with the independence of the public utility subsidiaries, and will
allow them to operate and compete with each other in the same manner as
before the merger of the holding companies. In order to rebut the
presumption of an indirect merger, the public utilities must show: (1)
That they will continue to exercise independent decision-making
authority; (2) that their proprietary, financial and corporate
information will not be available to each other, either directly or
indirectly; and (3) that they will compete on price and service in the
same markets to the same extent they have competed in the past.14
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\1\4We do not believe there can be competition between public
utilities if they do not exercise independent decision-making or if
they share information. Accordingly, elements (1) and (2) must be
met. However, the fact that (1) and (2) are met in and of themselves
is not sufficient to show that the affiliates will compete.
Applicants therefore must submit additional evidence that they will
compete with each other. For example, one indicia of competition
would be that they will separately participate in competitive
solicitations.
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The Commission Orders
(A) The disposition of the jurisdictional facilities of Illinois
Power in the above-described corporate restructuring is hereby
authorized subject to the following conditions:
(1) The proposed transaction is authorized upon the terms and
conditions and for the purposes set forth in the application;
(2) The Commission retains authority under section 203(b) of the
Federal Power Act to issue supplemental orders as appropriate;
(3) The foregoing authorization is without prejudice to the
authority of this Commission or any other regulatory body with respect
to rates, service, accounts, valuation, estimates, determinations of
cost, or any other matter whatsoever now pending or which may come
before this Commission;
(4) Nothing in this order shall be construed to imply acquiescence
in any estimate or determination of cost or any valuation of property
claimed or asserted; and
(B) In the event IP Holding should seek to merge with another
public utility holding company, the public utilities will be required
to file under section 203 of the FPA evidence to rebut a presumption
that such a merger would not also result in an indirect merger of the
public utility subsidiaries, or alternatively for approval of an
indirect merger of the public utilities.
By the Commission.
Lois D. Cashell,
Secretary.
[FR Doc. 94-11184 Filed 5-9-94; 8:45 am]
BILLING CODE 6717-01-P
