E4-2047. American Electric Power Company Inc. (70-9381); Notice and Order for a Hearing Pursuant to Section 19 of the Public Utility Holding Company Act of 1935

August 30, 2004.

This matter is before the Securities and Exchange Commission (“Commission”) on remand from the United States Court of Appeals for the District of Columbia (“Court'). The Court, in National Rural Electric Cooperative Association, et al. v. Securities and Exchange Commission, 276 F.3d 609 (D.C. Cir. 2002), considered a Commission order ^[1] that authorized the American Electric Power Company Inc. (“AEP”), a holding company registered under the Public Utility Holding Company Act of 1935, as amended (“Act”), to acquire Central and South West Corporation (“CSW”).^[2] However, the Court found that the Commission's order did not adequately explain its determination that a unidirectional contract met the Act's interconnection requirement and that it had not made sufficient evidentiary findings and had not engaged in the proper legal analysis to support its conclusion that the resulting system would operate in a single area or region. The Court therefore remanded the matter for the Commission to provide a fuller explanation of its rationale.

Section 10(c)(1) and, by reference, section 11(b)(1), of the Act require the Commission to find that the utility operations to be acquired by a holding company, when combined with its existing operations, will constitute a “single integrated public-utility system.” ^[3] Section 2(a)(29)(A) of the Act defines an electric “integrated public-utility system” to mean,

[A] system * * * 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.

Section 10(c)(2) of the Act further requires the Commission to find that a proposed acquisition will “serve the public interest by tending towards the economical and the efficient development of an integrated public-utility system.”

The Court of Appeals upheld the Commission's finding under section 10(c)(2) that the merger would produce economies and efficiencies. However, the Court found that the Commission's order did not adequately justify two of its findings: (1) it did not “provide a satisfactory explanation” for the determination that a unidirectional contract path would “interconnect” AEP and CSW (together, “Applicants”),^[4] and (2) it “failed to make any evidentiary findings” or to engage in the proper legal analysis to support its conclusion that the resulting system would operate in a “single area or region.” ^[5] Based on these conclusions, the Court vacated the order and “remanded for further proceedings consistent with this opinion.”

We believe further supplementation of the record is required for us to address the issues identified in the Court's opinion and to determine on remand whether the combined AEP and CSW systems meet the relevant standards of sections 10(c)(1) and 11(b)(1) of the Act and in particular, what specific facts about AEP's and CSW's electric systems and the geographic area covered by their systems are relevant to the required determinations. We recognize that parties to this proceeding may wish to introduce facts regarding the current state of the utility industry, in particular facts regarding the growth of regional transmission organizations and the unbundling of generation, transmission and distribution assets that has occurred in recent years that they believe are relevant to this determination. We also recognize that the parties may wish to introduce further facts—demographic, economic, and otherwise—regarding the geographic area in which the combined AEP-CSW system operates that they believe are relevant to this determination.

Therefore, in light of the issues raised by the Court of Appeals' opinion, it appears to the Commission that it is appropriate in the public interest that a hearing be held with respect to the proposed transaction. The hearing shall be limited to determining whether AEP and CSW are interconnected, through a unidirectional contract path or otherwise, and whether the resulting combined system operates in a single area or region. Accordingly,

It is ordered that a hearing shall be commenced, pursuant to section 19 of the Act and in accordance with the Commission's Rules of Practice,^[6] at a time and place to be fixed by further order, for the purpose of determining whether the AEP and CSW systems are interconnected and operate in the same area or region, and hence satisfy the requirements of sections 10(c)(1) and 11(b)(1) of the Act and that an Administrative Law Judge, to be designated by further order, preside at the hearing.

It is further ordered that the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of this Order.

It is further ordered the Division of Investment Management shall be a party to the proceeding.

It is further ordered that any person, other than the American Electric Power Company and the Division of Investment Management, who wishes to be heard or who otherwise desires to participate in the proceeding, whether as a party or as a limited participant, shall file a written motion seeking to do so with the Secretary of the Commission in accordance with the requirements of Rule 210(b) of the Commission's Rules of Practice.^[7] A movant shall serve a copy of any such motion upon American Electric Power Company Inc. at the address noted below in accordance with Rule 150(c) of the Commission's Rules of Practice, and proof of service shall be filed with the Secretary of the Commission contemporaneously with the motion.

It is further ordered that the Secretary of the Commission shall give notice of the hearing by mailing copies of this Notice and Order by certified mail to:

The American Electric Power Company, 1 Riverside Plaza, Columbus, Ohio 43215

The American Public Power Association, 2301 M Street, NW., Washington, DC 20037

The National Rural Electric Cooperative Association, 4301 Wilson Blvd., Arlington, Virginia 22203

It is further ordered that the Secretary of the Commission shall give notice to all other persons by publication of this Notice and Order in the Federal Register; that a copy of this Notice and Order shall be published in the “SEC Docket”; and that an announcement of the hearing shall be included in the “SEC News Digest.”

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  American Electric Power Co., Inc., and Central and South West Corp., Holding Co. Act Release No. 27186 (June 14, 2000). In addition to approving the proposed transaction, the Commission denied the hearing requests of the American Public Power Association (“APPA”), the National Rural Electric Cooperative Association (“NRECA”), Consumers for Fair Competition and Mr. Paul S. Davis. The APPA and NRECA jointly filed the petition for review that led to the Court of Appeals decision remanding this matter to the Commission.

The merger was completed on June 15, 2000. The appeal did not stay the operation of the order. See section 24(b) of the Act.

2.  In the original proceeding, AEP and CSW, at that time each public utility holding companies separately registered under the Act, were joint applicants. AEP and CSW merged following issuance of the Commission's order, with AEP as the surviving registrant.

3.  Section 10(c)(1) of the Act in pertinent part requires the Commission not to approve an acquisition of securities or utility assets that is “detrimental to the carrying out of the provisions of section 11.” Section 11(b)(1) in pertinent part limits the operations of a holding company system to a single integrated public-utility system.

4.  National Rural Electric Cooperative Association v. SEC, 276 F.3d at 616 (D.C. Cir. 2002).

5.  Id at 617.

6.  17 CFR part 201.

7.  17 CFR 201.210(b).