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As filed with the Securities and Exchange Commission on May 12,
1997
File No. 70-09033
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM U-1 APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Mineral Energy Company
101 Ash Street
San Diego, California 92101
(Name of company or companies filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent of each
applicant or declarant)
Richard D. Farman Stephen L. Baum
President and Chief President and Chief
Operating Officer Executive Officer
Pacific Enterprises Enova Corporation
555 West Fifth Street, Suite 2900 101 Ash Street
Los Angeles, California 90013-1001 San Diego, CA 92101
(213) 895-5000 (619) 696 2000
(Name and addresses of agents for service)
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The Commission is requested to send copies of all notices,
orders and communications in connection with this Application
to:
Ruth S. Epstein, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566
Introduction and Explanation
This Amendment No. 1 to the Application on Form U-1 of
Mineral Energy Company filed with the SEC on March 26, 1997, is
submitted solely for the purpose of filing the following
Exhibits:
Exhibit D-1 Joint Application of Pacific,
Enova, the Company, Pacific Sub and Enova Sub to
the CPUC, filed October 30, 1996.
Exhibit D-2 Testimony of T. J. Flaherty, F. H. Ault & D.L.
Reed before the CPUC, "Identification of Merger
Synergies."
Exhibit D-3 Joint Petition for a Declaratory Order of Pacific
and Enova before FERC filed December 6, 1996.
Exhibit D-4 Joint Application of Enova
and SDG&E before FERC, filed January 27, 1997.
Exhibit D-5 Testimony of William Hieronymous before FERC,
filed October 30, 1996.
Exhibit D-7 Letter on behalf of SDG&E to the NRC, submitted
December 2, 1996.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned company has duly
caused this Amendment No. 1 to be signed on its behalf by the
undersigned thereunto duly authorized.
Mineral Energy Company
/s/ Stephen L. Baum
By______________________________
Stephen L. Baum, Vice President
Date: May 12, 1997
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE
STATE OF CALIFORNIA
Joint Application of Pacific Enterprises, Enova ) APPLICATION
Corporation, Mineral Energy Company, B Mineral ) NO. ____
Energy Sub and G Mineral Energy Sub for Approval )
of a Plan of Merger Of Pacific Enterprises and Enova) Filed
Corporation With and Into B Mineral Energy Sub ) October 30,
("Newco Pacific Sub") and G Mineral Energy Sub ) 1996
("Newco Enova Sub"), the Wholly-Owned Subsidiaries )
of A Newly Created Holding Company, Mineral )
Energy Company. )
APPLICATION
Pursuant to Section 854 of the California Public
Utilities Code, Pacific Enterprises, Enova Corporation, Mineral
Energy Company ("Mineral Energy"), B Mineral Energy Sub ("Newco
Pacific Sub") and G Mineral Energy Sub ("Newco Enova Sub")
(collectively referred to herein as "Applicants"), hereby request
expedited approval from the California Public Utilities
Commission ("CPUC" or "Commission") for a plan of merger of
their respective companies.
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Applicants do not believe that approval under Public
Utilities Code Section 851 is necessary for the plan of merger at
issue herein due to the fact that no lines, facilities,
franchises, or permits of either SoCalGas or SDG&E will be merged
with or transferred to the other utility or any other entity.
Both utilities will remain as they are today - - regulated in
their tariffed utility services by the Commission, having no
change in the status of their outstanding securities or debt,
having the same assets and liabilities, and both still under the
ownership of their respective parent holding companies. However,
in making the showing provided for under Public Utilities Code
Section 854 in this Application, Applicants submit that, even if
Section 851 is found to apply to this proceeding, its public
interest criterion is satisfied under the showing to be made
herein.
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I.
EXECUTIVE SUMMARY
As is explained in greater detail below, this merger
will serve the public interest by providing the following
benefits to California energy consumers:
1. Enhanced competition in both the restructured
electric and natural gas industries;
2. The creation of an entity of sufficient scope,
scale, financial flexibility and expertise to
competitively and expeditiously provide the energy
services and related products that are desired by
energy consumers, without adversely affecting
competition;
3. A combination of California companies that
unquestionably preserves CPUC jurisdiction over
the utility operations of the resulting
organization;
4. The creation of a company that will expedite the
introduction of new energy services and related
products into the California economy through
aggressive pro-consumer strategies, including full
compliance with the Commission's unbundling
initiatives, to spur the move to an increasingly
competitive energy industry; and,
5. Synergies, consisting of cost reductions and cost
avoidances, that will result in savings and
avoidances, net of costs to achieve the merger, of
approximately $65 million in the first year after
merger consummation, growing to approximately
$105 million in the third year, and accumulating
to approximately $1.2 billion over the first ten
years,
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These numbers assume a ten-year amortization of costs to
achieve the merger.
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the majority of which will be realized in utility
operations, the cost savings of which will be
shared directly or indirectly by ratepayers and
shareholders, as this Commission may provide.
The plan of merger for which approval is sought herein
does not raise market power concerns, but will facilitate the
expedited implementation of energy services industry competition
in California. As such, it is the next logical step in the
restructuring that is taking place in the energy industry and may
even be a necessary ingredient to true competition in California.
The narrowing margins that have resulted from increased
competition in currently competitive energy markets, together
with increased consumer demand for energy products and services
in the restructured energy industry, render this transaction
necessary to provide Enova Corporation and Pacific Enterprises
with a reasonable opportunity to survive and prosper. The
creation of an organization that is better able to meet these
consumer demands will benefit all California energy consumers in
an increasingly competitive energy industry. Entities that seek
to delay or impede competition will undoubtedly try to prevent
this merger or at least substantially delay the competition it
will create. These anti-competitive activities are certainly
predictable, but they do not detract from the pro-competitive,
pro-consumer nature of this plan of merger. In fact, they
confirm the consumer benefits that can be expected to result.
Consistent with the pressures of an increasingly
competitive energy industry, time is very much of the essence in
processing this Application.
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"Regulatory delays to mergers, acquisitions or sales of
companies will delay the benefits of these transactions from
reaching consumers, and artificially lower the value of
California based firms. It is incumbent upon regulators and
legislators to move swiftly, or our actions will hinder the
efficient operation of the marketplace..." Concurring Opinion of
Commissioner Knight in Re GTE Corporation (1996) __CPUC 2d __
(D. 96-04-053). Timely action by the Commission on this
Application will permit Applicants to form an entity
that is the best vehicle by which to compete in the restructured
electric service marketplace at the onset of competition
beginning January 1, 1998.
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As a result, Applicants respectfully request expedited review and
approval of this Application, under a schedule that will allow
the Commission to issue a decision no later than, and preferably
before, December 1997, approximately 14 months from today. The
sooner this Application is approved by the Commission, the sooner
consumers will begin enjoying the benefits it will provide. In
order to facilitate the expedited processing of this proceeding,
Applicants are prepared to file testimony and exhibits in support
of this Application, supplementing and supporting the information
set forth herein, by December 12, 1996.
A. The Merger Is A Natural Outgrowth of Industry
Restructuring That Will Further the State's Policy
Objective of Increased Competition.
The proposed transaction will occur in the context of
fundamental and far-reaching changes in the energy industry,
regionally and nation-wide. This Commission has, in many
significant respects, led this change through its adoption and
implementation of sweeping restructuring of the California energy
market.
In the last decade, the Commission introduced vast
structural changes into the natural gas industry and market. The
competition engendered through that restructuring has brought
benefits not only to utility customers, but to the entire
California economy. The Commission and the California
Legislature are now compelling corresponding changes in the
electric industry in order to bring the benefits of competition
to California electric consumers. In so doing, the Commission
has firmly stated its policy to establish:
. . . a market structure that embraces competition
in the provision of electric services, offers
retail customers choice and flexibility in energy
services, and reforms the manner in which we
regulate utility monopoly services.
(D. 95-12-063, as modified by D. 96-01-009, mimeo, at
p. 25.)
Similarly, through its enactment of AB 1890, the California
Legislature has found and declared that:
It is the intent of the Legislature to ensure that
California's transition to a more competitive
electricity market structure allows its citizens and
businesses to achieve the economic benefits of industry
restructuring at the earliest possible date, creates a
new market structure that provides competitive, low
cost and reliable electric service . . . .
(AB 1890, Section 1 (a).)
Applicants share these objectives. The proposed transaction is
founded upon Applicants' commitment to the development of a fully
competitive energy market.
As a result of the evolving energy industry structural
changes, electric distribution companies will effectively lose
their exclusive local sales franchises for bundled utility
services. Retail competition will emerge through
instrumentalities such as the power exchange and independent
system operator, direct access, and the unbundling of various
energy-related products and services. The removal of barriers to
entry into retail energy markets will also continue to enable
increasingly aggressive and diverse energy providers to compete
for retail load.
Enova Corporation and Pacific Enterprises are
undertaking the proposed transaction to enable their active and
effective participation in the rapidly evolving energy
marketplace. Each has concluded that it can best adapt to the
new regime through a combination of its businesses with those of
the other party.
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The Commission has repeatedly recognized that the form of
organization and ownership of any for-profit venture lies in the
sound discretion of management, subject to the rights provided
otherwise of the shareholders to consent and to the Commission's
oversight to the extent necessary to protect the public interest.
Re Roseville Telephone Company (1996) __CPUC 2d __ (D.
96-07-059); Re San Diego Gas & Electric Company (1995) __CPUC 2d
__ (D. 95-12-018).
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Each is also determined to pursue the proposed merger to
facilitate and expedite the move to a fully competitive energy
industry in California by forming a company with the resources
and capabilities necessary to compete vigorously. By combining
their individual strengths, Enova Corporation and Pacific
Enterprises will improve the breadth and quality of energy
services and related products available to California customers
without jeopardizing safety and reliability of service.
By granting the requested approval on an expedited
basis, the Commission will accelerate the development of the
market forces that the Commission's pro-competitive regulatory
framework has been designed to produce.
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Currently, no barriers exist preventing an unregulated
utility affiliate from conducting business in the utility's
service territories. The Commission should prevent any such
barrier from being constructed in this proceeding. While the
Commission has no jurisdiction to impose such a prohibition upon
an unregulated utility affiliate, it should not only forcefully
reject any arguments which might have, through indirect or subtle
means, such a result, but also confirm in this proceeding the
right of the new organization to conduct unregulated business
activities in the utilities' service territories.
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B. How the Merger Will Be Accomplished.
Pursuant to the Agreement and Plan of Merger and
Reorganization dated as of October 12, 1996 ("Merger Agreement",
a copy of which is attached hereto as Exhibit "A" and is
incorporated herein by this reference), Mineral Energy (whose
name will be changed prior to completion of the merger), a
California corporation, has been formed for the purpose of
facilitating this merger of equals. The outstanding capital
stock of Mineral Energy is owned currently 50% by Enova
Corporation and 50% by Pacific Enterprises. Under the
plan of merger, two subsidiary companies of Mineral Energy have
been created solely for the purpose of facilitating the plan of
merger. G Mineral Energy Sub and B Mineral Energy Sub will merge
with and into Enova Corporation and Pacific Enterprises
respectively, and as a result Enova Corporation and Pacific
Enterprises will become subsidiaries of Mineral Energy, owning
all of Enova Corporation's and Pacific Enterprises' outstanding
common stock. Each share of each other class of capital stock of
Enova Corporation and Pacific Enterprises shall be unaffected and
shall remain outstanding. Following this transaction, Newco
Pacific Sub and Newco Enova Sub will cease to exist. Mineral
Energy will become the parent of Pacific Enterprises and Enova
Corporation. Therefore, the corporate structures of Pacific
Enterprises, Southern California Gas Company ("SoCalGas"), Enova
Corporation and San Diego Gas and Electric Company ("SDG&E") will
remain unchanged.
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Except, of course, for the conversion of the outstanding
common shares of both Enova Corporation and Pacific Enterprises
into common shares of Mineral Energy that will occur through this
business combination.
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Pacific Enterprises and Enova Corporation will be controlled
directly by Mineral Energy, and SoCalGas and SDG&E will become
second tier subsidiaries of Mineral Energy. The existing common
shareholders of Pacific Enterprises and Enova Corporation will be
the common shareholders of Mineral Energy.
No lines, facilities, franchises, or permits of either
SoCalGas or SDG&E will be merged with or transferred to the other
utility or any other entity. Both utilities will remain as they
are today - - regulated in their tariffed utility services by the
Commission, having no change in the status of their outstanding
securities or debt, having the same assets and liabilities, and
both still under the ownership of their respective parent holding
companies.
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Further, in compliance with Public Utilities Code Section
362, all facilities of SDG&E needed to maintain the reliability
of the electric supply in the San Diego Basin will remain
available and operational.
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It is incumbent upon the Commission to recognize that
this merger should not be analyzed as if it were taking place as
recently as even two years ago. The Commission's and
Legislature's restructuring process is designed to increase
competition among energy providers for all types of consumers
throughout the state; this merger will further these objectives
and should be viewed in the light of the additional choices it
will make available to energy consumers.
II.
REASONS FOR THE TRANSACTION AND
FACTS REQUIRING ITS APPROVAL (RULE 35(c))
Rule 35(c) of the Commission's Rules of Practice and
Procedure requires Applicants to describe the reasons for the
merger and the facts requiring its approval. These reasons and
facts are discussed in general terms below, while the information
specifically required under Section 854 is set forth in Section
III of this Application. Remaining informational requirements
are satisfied in Section IV.
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In addition, other regulatory agencies from which
approvals may be required, or at which filings related to the
merger may be made, include the Federal Trade Commission, the
Antitrust Division of the Department of Justice, the Securities
and Exchange Commission, the Nuclear Regulatory Commission, and
the Federal Energy Regulatory Commission.
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A. Applicants' Reasons for Entering Into this Transaction.
The proposed merger is in direct response to the
Commission's and the California Legislature's adopted market
structure, through which electric distribution companies will
effectively lose their exclusive local retail sales franchises to
provide bundled energy services. In this new environment,
companies like SDG&E, that have historically depended on their
local franchises and monopoly rights for their revenues
stand potentially to lose customers of their previously-tariffed
services to the competitive marketplace and therefore must adapt
to survive.
The combination of Pacific Enterprises and Enova
Corporation will produce an entity with the financial strength
and breadth of capabilities to participate effectively in an
energy service and product market in which numerous powerful and
aggressive companies are poised to compete. These competitors
include the two major investor-owned electric utilities in the
State, whose individual retail electric operations exceed those
of Enova Corporation by several times and who are affiliated with
substantial independent power production and marketing companies.
Potential competitors also include other power producers,
marketers and brokers, both within and outside the State,
including those amassing strength on California's borders in
anticipation of the Commission's restructured electric services
market.
Many of the potential competitors are highly
experienced and are capable of committing vast capital and other
resources to compete in California's energy market. The combined
resources, skills, and energies of Enova Corporation and Pacific
Enterprises will allow the new organization to compete viably
with these powerful market participants in the new regional,
national and international markets evolving currently,
thus strengthening competitive forces to the benefit of all
energy consumers.
The reasons, from the perspectives of both Pacific
Enterprises and Enova Corporation, for entering into this merger
are set forth below.
1. Pacific Enterprises' Reasons for Entering Into the
Transaction.
For Pacific Enterprises, the merger is largely an
outgrowth of anticipated increased customer demand for new energy
services and related products. The restructuring that has taken
place, and continues to evolve, has also narrowed operating
margins, rendering increases in size and scope necessary to
compete in the increasingly competitive energy industry that is
developing. This merger presents Pacific Enterprises with
a unique opportunity to realize increases in scope and scale
while providing it with the ability to compete for electric
sales. At the same time, it preserves SoCalGas' status as a
southern California company, headquartered among the customers it
serves.
Pacific Enterprises and SoCalGas have a long history of
rendering safe and reliable service to their customers and have
extensive knowledge of the natural gas industry. Without
expertise in the electric industry, however, they face the very
real risk of being left behind, and of not being able to meet the
needs of their customers, in an increasingly competitive energy
market.
A business combination with Enova Corporation presents
Pacific Enterprises with access to the electric procurement,
generation, transmission, distribution, and marketing expertise
held by Enova Corporation together with the ability to package an
array of natural gas and electric services and related products.
This combination of natural gas and electric expertise will
strengthen the combined organization's ability to meet the energy
demands of customers served by the companies. Moreover, it will
position the combined company to market a diversified portfolio
of energy services and products inside and outside of its
regulated utility subsidiaries' service territories, thereby
further enhancing competition throughout California. In
addition, the new organization will maintain a strong commitment
to workforce and supplier diversity and continued support of
public institutions and charities.
As the Commission has acknowledged, its envisioned
market structure is, at least in part, the natural outgrowth of
the expanding demands of customers for a broader and more
cost-effective array of energy services. A principal objective
of the merger is to unite the diverse skills and capabilities of
Pacific Enterprises and Enova Corporation in order to more
effectively address these customer requirements. SoCalGas, the
largest natural gas local distribution company in the United
States, has a national reputation for service quality in the
natural gas distribution industry together with extensive
expertise in natural gas procurement, storage, distribution,
transmission and marketing. SDG&E is widely known for its
expertise in delivering customer savings through demand-side
management services, innovative management delivering low cost
energy services, and vast experience in electricity procurement,
generation, distribution, and transmission. Both SoCalGas and
SDG&E have long-standing concern for, and commitment to, serving
California energy consumers and their communities.
By combining this expertise and commitment with
substantial operating synergies, Pacific Enterprises and Enova
Corporation intend to provide customers of their regulated
utility subsidiaries with safe and reliable service at
competitive rates. This merger will also create a combined
company that can compete aggressively in the expanding
unregulated energy services and products marketplace by providing
greater service and product choices and flexibility in a manner
consistent with the Commission's gas and electric restructuring
objectives and policies.
2. Enova Corporation's Reasons for Entering Into the
Transaction.
For Enova Corporation, the business combination affords
increased financial strength and operational scale from which to
engage in the competitive retail energy market. As discussed
above, the Commission's and Legislature's restructuring of the
electric market will effectively result in SDG&E, along
with other electric service monopolies, losing its exclusive
local franchise for providing bundled utility services.
Accompanying this loss, however, is the corresponding opportunity
to offer a variety of energy services to retail customers
throughout the state. Enova Corporation strongly believes that,
in order to compete effectively in the envisioned market, it must
substantially increase its capability to meet customer needs, to
develop a market presence, to operate more efficiently, and to
increase access to adequate quantities of capital on favorable
terms. Enova Corporation has concluded that each of these
objectives can best be achieved by joining with Pacific
Enterprises, and that present and future customers of the
combined entity will be the ultimate beneficiaries.
Numerous strong and enterprising power producers,
marketers and brokers are already jostling for position to enter
the new energy market. These competitors include Edison
International and Pacific Gas & Electric Company, whose utility
operations alone provide financial resources and operations far
in excess of the resources available to Enova Corporation.
Additional competitors include non-California entities such
as Enron, Pacificorp, and others. Many of the non-regulated
energy-related businesses of these competitors are substantially
larger than those of Enova Corporation. The increased financial
strength and operational capabilities produced by this strategic
combination will enable Enova Corporation to encounter and manage
significantly more risk in the diversity and scale of competitive
services and products it brings to the energy market. As a
result, it will be able to offer a wider array of services and
products to a larger population of consumers and thereby compete
from a position of strength.
A major benefit of the combination of Enova Corporation
and Pacific Enterprises derives from their shared commitment to
the development of a robust energy market. Their complementary
expertise will enable the combined entity to bring into the
market products and services that neither could deliver as
effectively or as expeditiously alone.
Finally, the business combination will allow Enova
Corporation to combine its cost management and service quality
expertise with those of Pacific Enterprises. This combination
will enhance the cost-efficiency and effectiveness of SDG&E's
local distribution operations. Moreover, the resulting operating
synergies and corresponding cost savings will provide significant
benefits to utility customers. In this way, the business
combination will advance Enova Corporation's objective to further
enhance the efficiency and quality of the utility services
provided by SDG&E.
It is important to Enova Corporation that all of the
foregoing objectives will be achieved while remaining a San
Diego, California-headquartered company, committed to enhancing
the economy of this state, thereby benefiting employees,
consumers and investors. The new organization will maintain a
strong commitment to workforce and supplier diversity and
continued support of public institutions and charities, while
employing California residents and paying California taxes.
These are benefits that a merger with an out-of-state entity
might not generate.
B. The Merger Will Benefit All California Energy Consumers.
The business combination at issue under this
Application satisfies all applicable requirements for CPUC
approval. Increased synergies will result in cost reductions and
cost avoidances, net of costs to achieve the merger, of
approximately $65 million in the first year after merger
consummation, growing to approximately $105 million in the third
year, and accumulating to approximately $1.2 billion over the
first ten years. The majority of these synergies will be
realized in utility operations, to be shared by ratepayers and
shareholders pursuant to this Commission's directive. These
savings represent a clear, quantifiable benefit to ratepayers and
shareholders. While substantial, however, these savings would be
greater if not for the extensive savings already achieved by the
cost management efforts of Pacific Enterprises, Enova
Corporation, and their utility subsidiaries in preparation for,
and in response to, growing competition in the energy industry.
In this regard, SoCalGas has already achieved
approximately $73.8 million in productivity savings in the
1994-96 time period, some $11.8 million more than required by the
combined 1994 General Rate Case and 1995 and 1996 Global
Settlement target of $62 million. Similarly, SDG&E reduced its
workforce from 5084 in 1982 to 3725 in 1996 (27%), while
experiencing an increase during that same time period in electric
customers served from 804,546 to 1,160,889 (44%). Without
regrading customer service, this merger will achieve even greater
efficiencies that can only be achieved through this transaction.
The resultant savings will benefit the customers of both
utilities and the California economy in general. But this is not
the only, or even the greatest, benefit of the merger.
Of vastly greater importance is the enhanced ability
of the combined companies to provide new options to all customers
through an array of competitively priced energy-related services
and products in California markets. The availability of these
new products and services to a broad spectrum of consumers will
help solidify the Commission's and Legislature's desired market
structure and promote the price reductions, customer choice and
flexibility that the Commission and Legislature have found will
benefit the entire California economy.
C. The Merger Will Enhance Competition While
Avoiding Problems Associated With Market Power.
Due to the unique complementary characteristics of
Pacific Enterprises and Enova Corporation, the merger will help
deliver the benefits of competition to California energy
consumers while avoiding the creation of any problems associated
with market power.
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Section 854(b)(3) in fact requires the Commission to
request an advisory opinion from the Attorney General regarding
whether competition will be adversely affected. Applicants
request the Commission to make this request as soon as possible.
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1. The Merger Will Help Deliver the Benefits Of
Competition to California Energy Consumers.
Through numerous restructuring proceedings, the
Commission has repeatedly found that enhanced competition in the
energy industry is in the public interest. In fact,
restructuring in the natural gas industry over the recent decade
has resulted in greater competition, lower prices and lower
margins, to the benefit of all California consumers. This merger
will aid the restructuring of the electric industry in achieving
the same objectives.
As electric rates are reduced in the face of
competitive pressures, consumer demand for energy services and
related products will increase. The industry's preparation to
compete in this new world is becoming increasingly apparent
through the numerous mergers of electric and gas companies that
are occurring throughout the United States. Through such
mergers, companies are empowering themselves, through increased
scope, financial strength, and product diversity, to compete in
the new energy industry.
To the extent that viable competitors exist to compete
with the enormous scope and scale presented by companies such as
Edison International, Pacific Gas and Electric Company, Enron
(together with its proposed merger partner Portland General
Electric), and Pacificorp, the competitive pressures exerted on
them, and on the entire energy industry, will be increased. This
competition promises to result in lower prices and increased
energy service offerings to all California consumers. The
proposed merger will add a viable competitor to the marketplace,
thereby contributing to the realization of these economic gains.
2. The Merger Will Not Result in the Creation of
Market Power.
As the Commission is well aware, Pacific Enterprises
does not own any electric transmission or distribution
facilities. Consequently, the merger cannot and will not result
in the creation of any market power for electric transmission or
distribution.
Nor will the merger give rise to an increase of market
power in electric generation. In accordance with the
Commission's electricity restructuring orders (D.95-12-063, as
modified by D.96-01-009), SDG&E, along with Pacific Gas and
Electric Company and Southern California Edison, has sought
authorization in FERC Docket No. ER96-1663-000 to make sales into
the proposed power exchange at market-based rates. SDG&E has
supported that request with a showing that it has no market power
in generation outside of the San Diego Basin, and has generation
market power within the Basin only during a limited number of
hours of the year. SDG&E has proposed specific mitigation and
monitoring measures to assure that it cannot exercise market
power in generation.
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In particular, SDG&E has proposed that, for a three-year
period, it will bid its fossil-based units into the power
exchange at their respective hourly running costs, and will
credit back to its customers any amounts it receives from the
power exchange in excess of those running costs. After two
years' experience with the power exchange, it will propose such
mitigation measures, if any, as are needed after the three year
period.
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Unless and until the FERC approves those measures, SDG&E's
generation will remain subject to the existing regulatory regime.
Pacific Enterprises, the core business of which is
natural gas transmission, storage and distribution, does have a
subsidiary that owns some alternative energy electric generation
facilities. However, those facilities are of very limited size
and scope and are all under long-term contracts to existing
buyers.
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Pacific Energy, a subsidiary of Pacific Enterprises, owns
four wastewood projects producing 67 total megawatts, three
geothermal projects producing 48 megawatts, three hydroelectric
projects producing 30 megawatts, and eight landfill gas projects
producing 37 megawatts. These power generation projects are all
qualifying facilities ("QFs") that sell their energy and capacity
(with the exception of limited self-use) to seven public
utilities pursuant to long-term power purchase agreements.
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As the Applicants will demonstrate through the testimony to be
filed herein, the production from these QF facilities is both so
limited and so committed under long-term contracts as to present
absolutely no market power issues in electric generation as a
result of the merger of Pacific Enterprises and Enova
Corporation.
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Pursuant to the requirements of the Public Utilities
Regulatory Policy Act of 1978 that limit ownership rights in Qfs,
Pacific Enterprises will make an appropriate disposition of the
QFs in accordance with the terms of the Merger Agreement prior to
approval of the merger.
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While both SoCalGas and SDG&E do own natural gas
distribution facilities, as the Commission is aware, these
facilities are operated pursuant to CPUC approved open access
tariffs and are closely regulated as to rates by this Commission.
This regulatory regime assures that there will not be any
exercise of market power in the operation of the gas distribution
facilities after the proposed merger.
In light of the foregoing, it is apparent that, while
this merger will serve to benefit California energy consumers
through revenue requirement reductions resulting from cost
reduction operational synergies, increased competition in the
energy product and services market generated by a company of
sufficient scope and scale to compete viably, the unbundling of
numerous energy products and services, and the introduction
of additional energy products and services to California
consumers, it will not raise any market power issues.
III.
THE PROPOSED MERGER FULFILLS ALL OF THE
REQUIREMENTS OF PUBLIC UTILITIES CODE SECTION 854
Based upon the facts set forth above, and discussed
below, Applicants respectfully submit that this merger fulfills
all of the requirements of California Public Utilities Code
Section 854.
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A discussion of the fact that this combination will not
adversely affect competition, as required by Public Utilities
Code Section 854(b)(3), is set forth in Section II, subsection C.
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A. Short-Term and Long-Term Benefits to California Energy
Consumers (Section 854(b)(1) and (2).
1. The Proposed Transaction Will Provide Short- and
Long-Term Benefits to California Energy Customers.
Public Utilities Code Section 854(b) requires
Applicants to demonstrate that the proposed transaction will
provide short- and long-term economic benefits to utility
customers. For purposes of this Application, Applicants believe
that one year is reflective of the short-term and no longer than
ten years is reflective of the long-term. In a past Commission
decision related to a merger among energy utilities, the
Commission determined the short-term to be three years
(coincident with the general rate case cycle) and the long-term
15 years. (Re SCEcorp (1991) 40 CPUC 2d 159); however, in that
case the Commission specifically stated that the definition of
"long-term" will vary with the circumstances of each individual
case. At the time of that decision, the restructuring of the
electric services industry had not commenced. Shortly after a
decision is rendered on this Application, the independent system
operator and power exchange will begin operation and the ability
of consumers to choose their energy supplier will be, or will
soon become, a reality. Many bundled utility services will be
unbundled. The momentum of competition will be strong.
Consequently, long-term forecasted benefits must be calculated
over a shorter period than previously used due to the rapid
changes competition will bring to the electric energy and
services businesses. Both one year, for the short-term, and no
greater than ten years for the long-term, reflect the quickening
pace of competition driven by developments in the energy services
business compared to past energy company merger applications.
As discussed in earlier sections of this Application,
utility consumers will experience economic benefits in the short-
and long-term through the increased competition in energy
services and products that the combined entity will generate and
facilitate. Increased competition leads directly to lower
prices, new technology, and better, more diverse, services. As
traditional utility services are unbundled on a state-wide basis
(which the combined entity will pursue in its utility operations,
particularly in its electric operations), more choices will be
afforded to consumers, whether commercial, industrial, or
residential.
As noted above, the merger will produce significant
synergies which will result in lower utility operating costs and
other savings. Applicants' testimony in support of this
Application will include a quantification of these savings. That
testimony will demonstrate synergy cost reductions and cost
avoidances, net of costs to achieve the merger, of approximately
$65 million in the first year, increasing to approximately $105
million in the third year, and accumulating to approximately $1.2
billion over the first ten years, the majority of which will be
realized in the public utility operations of SoCalGas and SDG&E.
While customers of SDG&E and SoCalGas will benefit
directly from savings produced by the proposed transaction as
discussed above, they will benefit, with all energy customers in
California, to a far greater degree from the acceleration in
retail competition which the proposed merger will produce.
Together, Enova Corporation and Pacific Enterprises will bring to
the marketplace a larger and more attractive portfolio
of energy-related products and services because they will possess
the financial base necessary to manage the risks inherent in
doing so. The availability of this new source of products and
services to a broad spectrum of consumers will strengthen the
market and promote lower prices and greater choice.
2. The Benefits of the Proposed Merger Will Be
Allocated Equitably.
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Legal issues exist as to whether Section 854 (b)(2) is
applicable to the merger of two unregulated holding companies, or
as to whether it unlawfully provides for an unconstitutional
taking of property. Applicants reserve the right to present at
the appropriate time all legal arguments on these issues. The
proposals set forth herein and in testimony on the allocation of
forecasted economic benefits should not be construed as a waiver
of this right.
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Assuming that Public Utilities Code Section 854 (b)(2)
applies to this transaction, it is fair that the forecasted
economic benefits resulting from the synergies between SoCalGas
and SDG&E be shared 50% to the utility customers and 50% to
Mineral Energy shareholders. Public Utilities Code Section
854(b)(2) requires that utility customers receive not less than
50% of the long-term and short-term forecasted economic
benefits. Applicants believe the 50/50 sharing is fair to both
the customers and shareholders for the following reasons:
1. A fundamental motivating factor behind this
transaction is the declared intent of the
merged entities to aggressively market
energy products and services, including the
expansion of the competitive energy service
marketplace, to provide on a state-wide
basis in an unbundled fashion historically
bundled utility services. Substantial
investment by Applicants' shareholders will
be required to fulfill this goal. It may
take several or more years for shareholders
of the merged companies to realize fully
the financial benefits of these marketing
efforts; by comparison, energy customers,
not only in SoCalGas and SDG&E service
territories but throughout California,
should reap benefits through expanded
choices of energy products and services,
and lower prices, very quickly.
Consequently, providing shareholders with a
fair portion of the economic benefits
encourages and supports the shareholders'
investments and is balanced against the
immediate benefits to be realized by
utility customers.
2. As a general concept, equitable allocation
of merger savings encourages utilities and
their parents to seek cost-saving mergers.
Shareholders must be rewarded not only for
the risks they assume in pursuing this
merger transaction but also for creating
the structure that will provide a more
efficient operation for SoCalGas and SDG&E.
This sharing of immediate economic benefits
provides shareholders with an incentive to
pursue mergers that will result in
cost-savings, to the mutual benefit of
ratepayers and shareholders.
3. For some shareholders (those of Enova
Corporation) there may be some initial
post-merger dilution of earnings.
Eventually, any such dilution will be
overcome, but it poses additional risk to
those affected shareholders.
In both the short-term and the long-term, customers can
be assured of receiving their 50% allocation of the net
forecasted financial economic benefits of this transaction
through appropriate revenue reductions in each of SoCalGas' and
SDG&E's base rate revenue requirements. These revenue
requirement impacts should be reflected in rates pursuant to
currently authorized cost allocation rules.
B. The Merger Is In the Public Interest (Section
854(c)).
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Section 854 specifies numerous factors for the
Commission to weigh in determining whether or not a proposed
change of control is in the public interest. While Applicants
are not required to satisfy each of these factors in connection
with the authorization sought here, this Application is organized
to correspond to each factor. As asserted above, Applicants will
demonstrate that each such factor is satisfied, whether or
not required.
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1. The Merger Will Maintain or Improve the
Financial Condition of the Public Utilities
Involved.
By providing both companies with the complementary
abilities and expertise possessed by the other, they will become
increasingly able to compete in the restructured energy industry.
This combined expertise, in electric and gas marketing, electric
generation and procurement, natural gas storage and procurement,
and natural gas and electric transmission and distribution, will
enhance the ability of the combined company to bring new
value-added products and services to the market faster, obtain
lower cost energy for customers, and maximize the combined
company's ability to leverage its resources to compete
effectively in a highly competitive energy industry. This
combined expertise, coupled with the increased financial strength
of a merged company with $5 billion of equity capitalization and
$8 billion of assets, means Enova Corporation and Pacific
Enterprises will be better able to compete for market share and
revenues, all to the financial benefit of the combined company.
The merger will also provide the combined company with
increases in scale and scope that will improve access to capital
and lead to greater resource availability. This, in turn, will
provide the combined company with an increased ability to develop
new products and services and compete in new markets.
The merger will have no effect on the financial
condition of either SDG&E or SoCalGas because their fundamental
financial profiles will not change. Existing regulatory
conditions imposed upon Pacific Enterprises and Enova Corporation
to ensure that the financial health of their utility subsidiaries
are not compromised by activities of the parents or unregulated
affiliates will remain fully intact unless or until modified by
the Commission, unimpaired by this merger.
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For example, the conditions imposed upon Enova
Corporation and SDG&E in D.95-12-018 related to SDG&E's dividend
policies, capital requirements, capital structure, and equity
ratio will be unaffected by the merger.
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2. The Merger Will Maintain or Improve the Quality
of Service to Public Utility Ratepayers in the
State.
SDG&E and SoCalGas both possess solid records of
providing reliable and efficient service to their respective
customers. They also share a common belief that sustained high
levels of service will be critical in a competitive energy
market. Enova Corporation and Pacific Enterprises do not
contemplate any material downsizing in the levels of the field
operations personnel that maintain utility facilities.
Both SDG&E and SoCalGas have developed methods of
measuring customer satisfaction. In the case of SDG&E, these
customer satisfaction and electric service reliability measures
present risk/reward opportunities under SDG&E's existing
Performance Based Regulation ("PBR") mechanism. In the case of
SoCalGas, these customer satisfaction measures have been proposed
to form the basis for risk under its pending PBR proposal when
ratings are not satisfactory. This emphasis on customer service
and satisfaction will be maintained following the merger.
SoCalGas and SDG&E are committed to maintaining their strong
records of accomplishment in this area.
3. The Merger Will Maintain or Improve the Quality of
the Utilities' Managements.
The merger will allow Applicants to streamline
corporate and administrative functions and eliminate duplications
in gas operations and some field services support from
overlapping service territories. It will also result in
improvements through the combination of the complementary
management skills of the merging companies.
Pacific Enterprises and SoCalGas will provide Enova
Corporation with the gas procurement, distribution, transmission
and marketing skills of the largest natural gas local
distribution company in the United States, as well as vast
experience in the restructured natural gas industry. At the same
time, Enova Corporation and SDG&E will provide Pacific
Enterprises with skills and expertise in marketing of electric
products and services, as well as in electric procurement,
generation, transmission and distribution. Both companies share
a vision of, and desire for, increased competition in the energy
industry. The complementary skills of the respective companies'
managements will improve their ability to realize this vision and
succeed in a restructured energy industry.
By providing for continuity in the senior management of
the combined companies, utility management will retain the
expertise and vision that have guided Pacific Enterprises, Enova
Corporation, and the utilities they own and control. The
management of the new organization will be led by Richard D.
Farman, as Chairman and Chief Executive Officer of Mineral
Energy, Stephen L. Baum, as Vice Chairman, President,
and Chief Operating Officer of Mineral Energy, Warren I. Mitchell
as President and the principal executive officer of the new
company's regulated businesses, and Donald E. Felsinger as
President and the principal executive officer of the new
company's unregulated businesses.
Mr. Farman is currently President and Chief Operating
Officer of Pacific Enterprises. He has held various executive
positions at SoCalGas, Pacific Enterprises and their affiliates
for over 18 years, including serving as Chairman and CEO of
SoCalGas for five years. Mr. Baum is currently President and
Chief Executive Officer of Enova Corporation and Vice-Chairman of
SDG&E. He has held various executive level positions at SDG&E
and its affiliates for over ten years. Mr. Mitchell is currently
President of SoCalGas. He has held various executive level
positions at SoCalGas and its affiliates for over 38 years. Mr.
Felsinger is currently President and Chief Executive Officer of
SDG&E and Executive Vice President of Enova Corporation. He has
held various executive level positions at SDG&E and its
affiliates for over 13 years. Pursuant to the Merger Agreement,
continuity of experienced management is assured because in 2000,
when Mr. Farman retires, he will be succeeded by Mr. Baum as
Chairman and Chief Executive Officer of Mineral Energy.
4. The Merger Will Be Fair and Reasonable to Affected
Public Utility Employees, Including Both Union and
Non-Union Employees.
Where duplication in administrative, managerial, and
miscellaneous support services positions would result from this
merger, the combined workforce of the two companies will be
reduced. However, the plan of merger does not provide for any
material corporate structural change at SDG&E and SoCalGas. In
addition, no material reduction in either utility's field
operations personnel is contemplated as a consequence of this
transaction. In particular, as previously noted, the Applicants
expect impacts on union employees in field operations will be
relatively small in the proposed merger. Of course, the
companies will fulfill their duties to bargain in good faith over
the effects of the merger on union employees. Synergies will
primarily focus on, and result from, the streamlining and
elimination of duplication in management, administrative, and
various support functions.
To the extent that benefit plans and salary structures
require adjustment, in order to be administered on a unified
basis, they will be adjusted so as to maintain overall parity
with the appropriate labor markets. Downsizing will be
accomplished principally through a combination of attrition,
targeted voluntary retirement and/or severance plans, and
reductions in contract and agency employees. The goal is to
accomplish all downsizing through voluntary means; however, to
the extent that lay-offs are necessary to accomplish workforce
reductions, employees will be provided with a fair and equitable
severance package.
5. The Merger Will Be Fair and Reasonable to the
Majority of All Affected Public Utility
Shareholders.
SoCalGas and SDG&E are wholly-owned subsidiaries of
public utility holding companies, Pacific Enterprises and Enova
Corporation, respectively. The merger at issue herein is not
only fair and reasonable, but clearly in the best interests of
both Enova Corporation and Pacific Enterprises, and their
respective shareholders.
The merger of these holding companies will be
accomplished through a merger of Newco Enova Sub and Newco
Pacific Sub with and into Enova Corporation and Pacific
Enterprises, as a result of which, the common shareholders of
Enova Corporation and Pacific Enterprises will together own all
outstanding common stock of Mineral Energy. Each share of each
other class of capital stock of Enova Corporation and
Pacific Enterprises shall be unaffected and shall remain
outstanding. Through this transaction, SDG&E and SoCalGas will
become second tier subsidiaries of Mineral Energy. The corporate
structures, however, of Pacific Enterprises, SoCalGas, Enova
Corporation, and SDG&E, will be otherwise unaffected.
The Boards of Directors of both Pacific Enterprises and
Enova Corporation have unanimously concluded that the proposed
transaction is fair and promotes the interests of their
respective shareholders. Morgan Stanley & Company delivered its
written opinion to the Board of Directors of Enova Corporation,
dated as of October 12, 1996, subject to the assumptions made,
matters considered, and the limits of the review undertaken, as
stated in the opinion, that the exchange ratio is fair to the
Enova Corporation common shareholders from a financial point of
view. Merrill Lynch, Pierce, Fenner & Smith and Barr Devlin &
Company each delivered written opinions to the Board of Directors
of Pacific Enterprises, dated as of October 11, 1996, that,
subject to the assumptions made, matters considered, and the
limits of the review undertaken, as stated in the opinion, the
exchange ratio is fair to the holders of Pacific Enterprises
common stock from a financial point of view. The proposed
transaction will also be put to a vote by shareholders, and they
will, through their vote, judge the fairness of the terms of the
merger.
6. The Merger Will Be Beneficial to State and Local
Economies and to the Communities in the Areas
Served by the Public Utilities.
Because the proposed merger will permit the new
organization to participate viably in the expanding California
marketplace for energy products and services, it can be expected
to produce lower retail energy prices sooner than if the merger
didn't occur. These lower prices will benefit energy consumers
at all retail levels, lowering operating costs for businesses and
creating additional discretionary income for individual
customers. Likewise, the expansion of customer choice and
flexibility, also an important objective of the Commission's
electric restructuring decision and recent state legislation,
will be available sooner. Additionally, the entities producing
this competition will be California corporations employing
California workers and paying California taxes.
The Applicants' Merger Agreement includes additional
commitments that ensure the merger will benefit state and local
economies and community interests. For example, the combined
companies plan to maintain their strong historical commitment to
the support of public institutions and charitable endeavors. In
addition, it is the intent of Applicants not only to invest in
new business enterprises in California, but also to maintain
their strong historical commitment to workforce and supplier
diversity. In short, the proposed merger will strongly benefit
California in general and the individual communities served by
SDG&E and SoCalGas in particular.
7. The Merger Will Preserve the Jurisdiction of the
Commission and the Capacity of the Commission to
Effectively Regulate and Audit Public Utility
Operations In The State.
The utility subsidiaries of Pacific Enterprises and
Enova Corporation are regulated and subject to audit by this
Commission. The combination of Pacific Enterprises and Enova
Corporation will in no way diminish the Commission's regulatory
jurisdiction or audit authority.
In addition, the combined company will follow affiliate
transaction rules conforming to Commission standards. The
combined company will also abide by a standard of conduct
applicable to affiliated gas and power marketing efforts. A
description of these rules will be submitted to the Commission by
Applicants as part of the testimony to be filed in support of
this Application.
Both SoCalGas and SDG&E have various proceedings
pending at the Commission. It is the intent of the Applicants
that such proceedings remain unaffected by this transaction.
However, in conjunction with future proceedings following
completion of the merger, there will be a desire to reconcile and
consolidate some of the diverse regulatory mechanisms and
regulatory proceedings applicable to SoCalGas and SDG&E.
As these various proceedings and associated mechanisms come
before the Commission, SoCalGas and SDG&E will seek modifications
as appropriate.
8. The Transaction Will Not Result in Adverse
Consequences in Need of Mitigation.
In contrast to the substantial benefits outlined above,
there are no features of the proposed merger that will produce
adverse consequences for SoCalGas, SDG&E, their customers, or the
public. Each utility will remain a separate corporate entity,
operating as a stand-alone utility, subject to appropriate
regulatory oversight. No aspect of the merger will alter these
utilities' commitments and responsibilities as public utilities.
Moreover, aside from the revenue requirement reductions that will
result from cost reductions flowing from operational synergies,
the merger will not alter the rates, terms, or conditions for the
provision of gas and electric services by either SDG&E or
SoCalGas.
The synergies savings will not adversely impact
service. There will not be any material downsizing in field
operations as a consequence of this transaction. The substantial
majority of the synergies will be achieved through streamlining
corporate, administrative, and field support functions, as well
as the elimination of some duplicative functions in overlapping
gas operations.
The long-standing commitment of SoCalGas and SDG&E to
providing high quality service will not be altered by this
merger. That commitment is based on the firm belief that service
quality is a critical element of utility service. Moreover, as
discussed in Section II.C., no diminution of competition will
result from the proposed merger. On the contrary, competition
will be enabled and advanced.
C. Reasonable Options Proposed By Other Parties (Section
854(d)).
As indicated above, Applicants anticipate opposition
and delay tactics from parties that wish to prevent or delay
competition as well as other parties supported or encouraged by
such parties. While it is difficult to foresee what options may
be proposed by parties that might oppose this transaction and the
increased competition it will present, Applicants will certainly
respond to any such proposals. However, it is clear that, in
order to accomplish the shared vision of Pacific Enterprises and
Enova Corporation to compete successfully in a restructured
energy industry, unity of management and direction between these
companies is key. No other alternatives provide the respective
companies with the combination of cost savings, stability in
direction, and soundness in financial footing that will be made
available as a result of the proposed merger.
In the next several months, Applicants intend to form a
joint venture to pursue the marketing of gas and power as well as
a broad range of value-added energy management products and
services. However, while this joint venture will be a reasonable
means of achieving some of the benefits that can be derived from
a combination of the Applicants' complementary abilities and
expertise, it is not a reasonable alternative to the merger for
which approval is sought herein. A joint venture or other less
integrated business form would not produce the unity of direction
and commitment necessary to pursue effectively the long range
strategic goals Applicants share, including developing and
offering a wide variety of energy products and services
throughout the marketplace. Nor would such a business enterprise
produce the synergy savings this merger will produce.
D. Environmental Review.
In this Application, the Applicants are requesting the
Commission to approve a plan for a merger. The merger involves
several steps. A new prospective parent corporation, Mineral
Energy, has been incorporated. Two wholly-owned subsidiaries of
Mineral Energy, Newco Enova Sub and Newco Pacific Sub, have also
been incorporated. This Application pertains to the mergers of
Enova Corporation with Newco Enova Sub and Pacific Enterprises
with Newco Pacific Sub. The surviving corporations will be Enova
Corporation and Pacific Enterprises as wholly-owned subsidiaries
of Mineral Energy. The next steps will consist of filing
documents with the Securities and Exchange Commission and the
California Department of Corporations, and of setting up Mineral
Energy's corporate offices. These are the activities which
comprise the plan for a merger and are the only activities which
the Applicants are requesting the Commission to approve.
These activities will not cause any direct or indirect
physical change in the environment and therefore do not
constitute a "project" requiring environmental review under the
California Environmental Quality Act ("CEQA"). This conclusion
comports with the intent of CEQA to require agencies to review
activities which may cause direct or indirect physical changes in
the environment. CEQA does not apply to activities which do not
cause direct or indirect physical changes in the environment.
CEQA's provisions and mechanisms do not work when an agency
attempts to apply them to activities that do not physically
change the environment. When an agency tries to apply CEQA to
activities that do not physically change the environment,
it invites speculation about remote and unforseeable
environmental effects, it studies non-environmental effects
(like rates and prices), and it encounters frustration and delay.
The Applicants request the Commission to find that CEQA does not
apply to the plan of merger and to avoid this type of review in
conjunction with the processing of this Application.
Rule 17.1 of the Commission's Rules of Practice and
Procedure follows CEQA in this regard and provides for a
Commission determination that CEQA does not apply. CEQA, sound
legislative policy, and the Commission's rules and practices,
provide for the Commission to prevent the delays and
uncertainties that would be created by reviewing the plan of
merger under CEQA. CEQA does not apply and would not
contribute to informed Commission decisionmaking in this
proceeding. Accordingly, Applicants have attached to this
Application as Exhibit "B" a Proponent's Environmental
Assessment, supporting the conclusion that CEQA does not apply to
this plan for merger.
IV.
INFORMATION REGARDING THE APPLICANTS
A. Incorporation and Place of Business (Rules 15(a) and 16).
1. Pacific Enterprises.
The exact legal name of Applicant is "Pacific
Enterprises." Applicant is a corporation duly organized and
validly existing under the laws of the State of California. A
certified copy of its Restated Articles of Incorporation as
currently in effect are attached hereto as Appendix "1" and is
incorporated herein by reference and made a part of this
Application. The principal place of business of Pacific
Enterprises is 555 West Fifth Street, Los Angeles, California
90013-1011.
2. Enova Corporation.
The exact legal name of Applicant is "Enova
Corporation." Applicant is a corporation duly organized and
validly existing under the laws of the State of California. A
certified copy of its restated Articles of Incorporation as
amended to date is attached hereto as Appendix "2". The
principal place of business of Enova Corporation is 101 Ash
Street, San Diego, California 92112-9400. Its mailing address is
Post Office Box 129400, San Diego, California 92112-9400.
3. Mineral Energy, G Mineral Energy Sub, and B
Mineral Energy Sub.
The exact legal names of Applicants are Mineral Energy
Company, G Mineral Energy Sub, and B Mineral Energy Sub. These
Applicants are corporations duly organized and validly existing
under the laws of the State of California. Certified copies of
their Articles of Incorporation are collectively attached hereto
as Appendix "3". These Applicants are newly formed corporations
which, at present, have no place of business and no telephone
number. The provisions of Mineral Energy's Articles of
Incorporation will be revised at the appropriate time to
effectuate the merger.
B. Character of the Business Performed and the Territory
Served (Rule 35(a)).
1. Pacific Enterprises.
Applicant Pacific Enterprises is a public utility
holding company. Its principal subsidiary is SoCalGas. SoCalGas
is a public utility engaged primarily in the purchase, storage,
distribution, transportation and sale of natural gas throughout
most of southern California and portions of central California.
Its service area contains approximately 17 million persons
including those within the City of Los Angeles. Retail service
is provided through approximately 4.7 million independent active
meters serving residential, commercial, industrial and utility
electric generating customers. Through other subsidiaries,
Pacific Enterprises is also engaged in interstate and offshore
natural gas transmission, alternate energy development, and
centralized heating and cooling for large building complexes.
2. Enova Corporation.
Enova Corporation is an energy management company
providing electricity, natural gas and value-added products and
services to customers throughout California and certain other
states. Enova Corporation is the parent company of SDG&E and six
other subsidiaries - - Enova Energy, Enova Financial,
Enova International, Enova Technologies, Califia Company and
Pacific Diversified Capital Company. SDG&E is Enova
Corporation's principal subsidiary and is a public utility that
provides regulated electric service to 1.2 million customers in
San Diego and southern Orange counties, and regulated natural gas
service to 700,000 customers in San Diego county. SDG&E's
service area encompasses 4,100 square miles, covering two
counties and 25 cities.
3. Mineral Energy, G Mineral Energy Sub, and B
Mineral Energy Sub.
Mineral Energy, which will be renamed prior to
consummation of the merger, is a California corporation, 50% of
whose outstanding capital stock is owned by Enova Corporation and
50% of whose outstanding capital stock is owned by Pacific
Enterprises. Mineral Energy was formed to effect the merger and
will be the holding company for Pacific Enterprises and Enova
Corporation upon completion of this merger.
G Mineral Energy Sub and B Mineral Energy Sub are
California corporations that have been formed as subsidiaries of
Mineral Energy for the sole purpose of effectuating the merger.
Upon completion of the merger, these corporate entities will
cease to exist. They have no present business operations.
C. Description of the Utility Property Involved in the
Transaction (Rule 35(b)) and Statement of Book
Cost/Original Cost.
SDG&E and SoCalGas are not parties to the merger
transaction. Each will continue to exist in its present
corporate form and under the direct ownership of Enova
Corporation and Pacific Enterprises, respectively. The plan of
merger does not require that any utility property be sold,
assigned or otherwise transferred. Consequently, the transaction
does not provide for a purchase or transfer of utility assets.
Under the plan of merger, all utility property currently owned by
SDG&E remains with SDG&E following the merger, and all utility
property currently owned by SoCalGas remains with SoCalGas
following the merger. A detailed description of the merger
transaction is set forth in Exhibit "A", attached hereto and
incorporated herein by reference.
D. Proxy Statement.
1. Pacific Enterprises.
Applicant Pacific Enterprises' Proxy Statement provided
to shareholders pursuant to the Securities Exchange Act of 1934
in connection with its Annual Meeting of Shareholders held 1996,
is attached hereto as Appendix "4" and made a part of this
Application.
2. Enova Corporation.
Applicant Enova Corporation's Proxy Statement provided
to shareholders pursuant to the Securities Exchange Act of 1934
in connection with its Annual Meeting of Shareholders of April
23, 1996, is attached hereto as Appendix "5" and made a part of
this Application.
3. Mineral Energy, G Mineral Energy Sub, and B
Mineral Energy Sub.
Information Statements for Applicant Mineral Energy
will not exist until after completion of the merger. Information
Statements for G Mineral Energy Sub and B Mineral Energy Sub do
not, and will not, exist because these companies will not be
publicly held.
E. Balance Sheets and Financial Information (Rules 17(a)-(h)
and 36(a)(c)).
1. Pacific Enterprises.
Applicant Pacific Enterprises' most recent financial
statement as of September 30, 1996 as filed with the United
States Securities and Exchange Commission, containing the
information required by Rule 17, is attached to this Application
as Appendix "6" and made a part of this Application.
2. Enova Corporation.
Applicant Enova Corporation's most recent financial
statement as of September 30, 1996 as filed with the United
States Securities and Exchange Commission, containing the
information required by Rule 17, is attached to this Application
as Appendix "7".
3. Mineral Energy Pro Forma Balance Sheet.
Mineral Energy's unaudited pro forma financial
information, attached hereto as Appendix "8", combines the
historical consolidated balance sheets and statements of income
of Pacific Enterprises and Enova Corporation, including their
respective subsidiaries, after giving effect to the mergers. The
unaudited pro forma combined condensed balance sheet at September
30, 1996, gives effect to the mergers as if they had occurred
at September 30, 1996. The unaudited pro forma combined
condensed statements of income for each of the three years in the
period ended December 31, 1995, the nine-month periods ended
September 30, 1996 and 1995, give effect to the mergers as if
they had occurred at January 1, 1993. This information is not
necessarily indicative of the financial position or the operating
results that would have occurred had the mergers been consummated
on the date, or at the beginning of the periods, for which the
mergers are being given effect nor is it necessarily indicative
of future operating results or financial position.
4. Mineral Energy, G Mineral Energy Sub, and B
Mineral Energy Sub Financial Statements.
Neither Mineral Energy, G Mineral Energy Sub, nor B
Mineral Energy Sub has prepared any financial statements as of
the date of filing this Application. Each corporation has
authorized 1,000 shares of common stock. None of the
corporations have ever paid dividends, nor do any of them have
any preference or preferred stock issued, bonds authorized or
issued, or any other notes or indebtedness. None of these
corporations are subject to any security agreement, mortgage, or
deed of trust.
F. Description and Terms of the Transaction (Rules 35(b)(d)
and 36(b)).
The merger transaction will confer upon Mineral Energy
direct control of Pacific Enterprises and Enova Corporation and
indirect control of SoCalGas and SDG&E. These changes in control
will result from a series of transactions that will occur
pursuant to the Merger Agreement by and among Pacific
Enterprises, Enova Corporation, Mineral Energy, G Mineral Energy
Sub and B Mineral Energy Sub.
- ----------------------------------------------------------------
In the merger agreement, G Mineral Energy Sub is referred
as NewCo Enova Sub and B Mineral Energy Sub is referred to as
NewCo Pacific Sub.
- ----------------------------------------------------------------
The Merger Agreement provides for
a tax-free stock-for-stock merger, and pooling of interests
accounting for the merged entities. Pacific Enterprises
shareholders will receive 1.5038 shares of the new parent
company's common stock for each share of Pacific Enterprises
common stock they own and Enova Corporation shareholders will
receive one share of the new parent company's stock for each
share of Enova common stock.
Under the merger, G Mineral Energy Sub and B Mineral
Energy Sub will merge with and into Enova Corporation and Pacific
Enterprises, as a result of which, the common shareholders of
Enova Corporation and Pacific Enterprises will together own all
outstanding shares of common stock of Mineral Energy. Each share
of each other class of capital stock of Enova Corporation and
Pacific Enterprises shall be unaffected and shall remain
outstanding. Following this transaction, B Mineral Energy Sub
and G Mineral Energy Sub will cease to exist, Mineral Energy will
become the parent of Pacific Enterprises and Enova Corporation,
and the corporate structures of Pacific Enterprises, SoCalGas,
Enova Corporation and SDG&E will otherwise remain unchanged.
Through this transaction, Pacific Enterprises and Enova
Corporation will become controlled directly, and SoCalGas and
SDG&E will become controlled indirectly, by Mineral Energy.
Other pertinent terms and conditions of the merger can be
determined by reference to the Merger Agreement, Exhibit
"A" hereto, which is incorporated herein by this reference.
V.
OTHER ALLEGATIONS REQUIRED BY
COMMISSION'S RULES OF PRACTICE AND PROCEDURE
A. Statutory Authority (Rule 15). This
Application is filed pursuant to Section 854 of the Public
Utilities Code of the State of California.
B. Correspondence and Communications (Rule
15(b)). All correspondence and communications in regard to this
Application should be addressed as follows:
Brian Cherry Lee Schavrien
Pacific Enterprises Enova Corporation
555 West 5th Street, M. L. 25A1 Post Office Box 129400
Los Angeles, California 90013-1011 San Diego, California
92112-9400
Telephone (213) 244-3895 Telephone (619) 696-4050
With a copy to:
Thomas R. Brill Jeffrey M. Parrott
Director, Regulatory Law Law Department
Pacific Enterprises Enova Corporation
633 West Fifth Street, Suite 5200 Post Office Box 129400
Los Angeles, California 90071-2071 San Diego, California
92112-9400
Telephone (213) 895-5171 Telephone (619) 699-5015
Facsimile (213) 629-9621 Facsimile (619) 696-4838
C. Service of this Application.
Copies of this Application, together with the Notice of
Availability set forth in Exhibit "A" hereto, are being served on
all known parties of record in SoCalGas' and SDG&E's consolidated
1996 Biennial Cost Allocation Proceeding,
A.96-03-031/A.96-04-030; SoCalGas' Performance-Based Regulation
Proceeding, A.95-06-002; SoCalGas' and SDG&E's General Order 96-A
service lists; and SDG&E's Performance-Based Regulation
Proceeding, A.92-10-017, as well as all of the cities and
counties in the respective service territories of
SoCalGas and SDG&E.
VI.
CONCLUSION
WHEREFORE, Applicants respectfully request that the Commission
issue an Order approving the proposed merger as in the public
interest pursuant to Public Utilities Code Section 854 on an
expeditious basis.
Executed at Los Angeles, California this 30th day of
October, 1996.
PACIFIC ENTERPRISES
By____________________________
Richard D. Farman
President and Chief Operating
Officer
Leslie E. LoBaugh
Thomas R. Brill
David J. Gilmore
By____________________________
Thomas R. Brill
Attorneys for Applicant Pacific Enterprises
Executed at San Diego, California this 30th day of
October, 1996.
ENOVA CORPORATION
By_____________________
Stephen L Baum
President and
Chief Executive Officer
David R. Clark
Jeffrey M. Parrott
Michael Thorpe
By_________________________
Jeffrey M. Parrott
Attorneys for Applicants Enova Corporation
Executed at San Diego, California this 29th day of
October, 1996.
MINERAL ENERGY COMPANY G MINERAL ENERGY SUB
By_____________________________ By__________________________
Kevin C. Sagara Kevin C. Sagara
President President
David R. Clark
Jeffrey M. Parrott
Michael Thorpe
By_________________________
Jeffrey M. Parrott
Attorneys for Applicants
Mineral Energy Company
and G Mineral Energy Sub
Executed at Los Angeles, California this 29th day of
October, 1996.
B MINERAL ENERGY SUB
By____________________________
Gary W. Kyle
President
Leslie E. LoBaugh
Thomas R. Brill
David J. Gilmore
By____________________________
Thomas R. Brill
Attorneys for Applicants
Mineral Energy Company and
B Mineral Energy Sub
VERIFICATION
I am the President and Chief Operating Officer of
Pacific Enterprises, one of the Applicants herein, and am
authorized to make this verification on its behalf, and am
informed and believe and thereupon allege that the statements
contained in the foregoing Application are true.
I declare under penalty of perjury that the foregoing
is true and correct.
Executed on October 29, 1996, at Los Angeles,
California.
By____________________________
Richard D. Farman
President and Chief Operating
Officer
Pacific Enterprises
VERIFICATION
I am the President and Chief Executive Officer of Enova
Corporation, one of the Applicants herein, and am authorized to make
this verification on its behalf, and am informed and believe and
thereupon allege that the statements contained in the foregoing
Application are true.
I declare under penalty of perjury that the foregoing
is true and correct.
Executed on October 30, 1996, at San Diego, California.
By____________________________
Stephen L. Baum
President and
Chief Executive Officer
Enova Corporation
VERIFICATION
I am the President of B Mineral Energy Sub, one of the
Applicants herein, and am authorized to make this verification
on its behalf, and am informed and believe and thereupon allege
that the statements contained in the foregoing Application are
true.
I declare under penalty of perjury that the foregoing
is true and correct.
Executed on October 29, 1996, at San Diego, California.
By____________________________
Gary W. Kyle
President
B Mineral Energy Sub
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE
STATE OF CALIFORNIA
Joint Application of Pacific Enterprises, Enova ) APPLICATION
Corporation, Mineral Energy Company, B Mineral ) NO. _____
Energy Sub and G Mineral Energy Sub for Approval )
of a Plan of Merger Of Pacific Enterprises and Enova) Filed
Corporation With and Into B Mineral Energy Sub ) October 30,
("Newco Pacific Sub") and G Mineral Energy Sub ) 1996
("Newco Enova Sub"), the Wholly-Owned Subsidiaries )
of A Newly Created Holding Company, Mineral )
Energy Company. )
JOINT APPLICATION OF PACIFIC ENTERPRISES, ENOVA
CORPORATION, MINERAL ENERGY COMPANY, B MINERAL ENERGY SUB
AND G MINERAL ENERGY SUB FOR APPROVAL OF A PLAN OF MERGER
OF PACIFIC ENTERPRISES AND ENOVA CORPORATION WITH AND INTO
B MINERAL ENERGY SUB ("NEWCO PACIFIC SUB") AND G MINERAL
ENERGY SUB ("NEWCO ENOVA SUB"), THE WHOLLY-OWNED
SUBSIDIARIES OF A NEWLY CREATED HOLDING COMPANY,
MINERAL ENERGY COMPANY
LESLIE E. LOBAUGH DAVID R. CLARK
THOMAS R. BRILL JEFFREY M. PARROTT
DAVID J. GILMORE MICHAEL R. THORP
633 West Fifth Street 101 Ash Street
Suite 5200 Post Office Box 1831
Los Angeles, California 90071 San Diego, California 92112
Telephone (213) 895-5171 Telephone (619) 699-5015
Facsimile (213) 629-9621 Facsimile (619) 696-4838
Attorneys for Attorneys for
PACIFIC ENTERPRISES ENOVA CORPORATION
B MINERAL ENERGY SUB G MINERAL ENERGY SUB
MINERAL ENERGY COMPANY MINERAL ENERGY COMPANY
October 30, 1996
TABLE OF CONTENTS
CHAPTER 1
DIRECT TESTIMONY OF T. J. FLAHERTY
IDENTIFICATION OF MERGER SYNERGIES
Page
I. INTRODUCTION 1
II. THE COST SAVINGS AND COST AVOIDANCES THAT HAVE BEEN
IDENTIFIED AS "SYNERGIES" ARE DIRECTLY ATTRIBUTABLE
TO THE MERGER 1
III. THE MERGER WILL CREATE DIFFERENT TYPES OF SYNERGIES 3
IV. PE AND ENOVA CONDUCTED A DETAILED AND COMPREHENSIVE
REVIEW PROCESS TO IDENTIFY SYNERGIES 6
V. THE SYNERGIES RESULTING FROM THE MERGER OF PE AND
ENOVA COMPARE FAVORABLY WITH THE RESULTS OF OTHER
RECENT MERGERS 9
VI. PE AND ENOVA HAVE INITIATED AN ONGOING PROCESS TO
HELP REALIZE THEIR ESTIMATED SYNERGIES 12
VII. SUMMARY 13
DIRECT TESTIMONY OF T. J. FLAHERTY
IDENTIFICATION OF MERGER SYNERGIES
I.
INTRODUCTION
My name is Thomas J. Flaherty and I am employed by Deloitte
& Touche Consulting Group ("D&T") as the National
Partner-Utilities Consulting. I have over 23 years of experience
working on all aspects of regulated utilities, and in particular,
mergers and acquisitions of operating utilities and their holding
companies. A detailed statement of my qualifications is
included in Exhibit M-7. I am personally familiar with the
proposed combination of Pacific Enterprises ("PE") and Enova
Corporation ("Enova").
My testimony relates to the cost savings and cost avoidances
estimated by the management of PE and Enova that are anticipated
to result from this proposed combination. In my testimony:
I set forth a definition of "synergies" that distinguishes cost
savings and cost avoidances resulting from the merger from cost
savings and cost avoidances resulting from other sources; I
discuss the process PE and Enova used to calculate these
merger-related synergies and how this process not only conforms
to, but is more rigorous than, the process typically followed in
similar utility mergers; I explain how the synergies attributable
to the merger of PE and Enova compare to the synergies resulting
from other recent utility and utility holding company mergers;
and I discuss the ongoing process that PE and Enova have
established to help them actually realize their estimated
merger-related synergies.
II.
THE COST SAVINGS AND COST AVOIDANCES THAT HAVE BEEN IDENTIFIED
AS "SYNERGIES" ARE DIRECTLY ATTRIBUTABLE TO THE MERGER
The merger of companies in any industry typically creates a
variety of benefits -- strategic, operational, or economic.
These benefits of working together, often referred to as
"synergies," are the principal reason for most mergers and
acquisitions. Some merger benefits are more difficult to
quantify, such as the possibility that two complementary
companies will be able to achieve greater revenue growth working
together as one company than each would on its own. Other merger
benefits, such as merger-related cost savings and cost
avoidances, are more readily calculated.
My testimony is concerned with cost savings and cost
avoidances. However, PE and Enova have not ignored other
potential benefits of their merger. In fact, the "Policy"
testimonies of Stephen Baum and Richard Farman (Exhibit M-1)
directly address the numerous strategic benefits of bringing the
two companies together. My testimony focuses upon merger-related
synergies and for the purposes of my testimony, synergies are a
cost savings or cost avoidance that is directly attributable to
the merger.
Normally, cost savings are considered to be reductions in
the total cost of service resulting from the elimination of
duplicative activities or redundancies. Cost avoidances are the
ability to forego certain types of expenditures (normally capital
expenditures) due to the reduced need for parallel capabilities.
A cost savings or cost avoidance is directly attributable to
the merger if it is not reasonably attainable in the absence of
the merger. For example, both companies conduct certain
activities which are similar in nature, such as investor
relations. The merger will allow the companies to save costs by
eliminating redundancies in these related activities. Without
the merger, this activity elimination could not take place --
each company would need to perform its own separate investor
relations activities. Other examples of merger-related synergies
would include the reduced costs which would result from
coordinated technology planning or work volume distribution that
can only take place once PE and Enova combine.
Additionally, cost savings or cost avoidances which result
from the new size and economic scope of the combined entity are
merger-related. For example, routine activities which could not
be economically outsourced by PE, Enova or their utility
affiliates individually may now be candidates for outsourcing
given the new combined entity's greater volume. Similarly,
activities that PE, Enova and their utility affiliates now
outsource might be performed more cost-effectively internally by
the combined entity where volumes justify specialized resources.
The greater size of the combined entity may enable it to be a
more cost-effective purchaser of various products and services.
Further, to the extent that the combination of PE and Enova
enables these companies and their utility affiliates to reduce
costs by transferring technology or competencies to each other,
these benefits are also merger-related if such actions could not
have been effectively implemented by PE, Enova, or their utility
affiliates independently, or if such transfers enable operating
costs to be reduced more rapidly or more cheaply than otherwise
would have been the case.
Each of the categories described above, as well as other
additional cost savings or cost avoidances which are directly
attributable to the merger, are synergies. Conversely, cost
savings or avoidances which would have occurred in the absence of
the merger are not synergies and are not included in PE's and
Enova's calculation of synergies attributable to the merger.
Accordingly, those initiatives already planned by PE, Enova, or
their utility affiliates that would affect future cost levels
have been reduced from the starting point the companies used to
calculate merger synergies.
In addition, certain costs will be incurred to effectuate
the merger or to enable merger synergies to be achieved. These
"costs to achieve" are out-of-pocket, cash costs and a necessary
element of consideration in quantifying merger synergies. Lack
of recognition of these costs to achieve would overstate the
amount of merger savings available to customers and shareholders.
III.
THE MERGER WILL CREATE DIFFERENT TYPES
OF SYNERGIES
The synergies which typically result from the merger of two
utilities can be broken into two generic categories: (1) a
reduction in operations and maintenance ("O&M") expenses; and
(2) a reduction or elimination in the need for future capital
expenditures. This distinction is usually important for
determining the amount of synergies that will be shared between
utility customers and shareholders. O&M expenses are usually
included in rates, and therefore merger-related reductions of
such expenses (cost savings) would typically be available for
sharing with utility customers. On the other hand, future
capital expenditures are usually not included in rates, and
therefore merger-related reductions or eliminations of future
capital expenditures (cost avoidances) are typically not
available for distribution to utility customers, except to the
extent that such capital expenditures are already being recovered
in utility rates. In this circumstance, however, SDG&E currently
is operating under performance-based regulation for its gas
operations and a rate cap for its electric operations and
SoCalGas is pursuing performance-based regulation. Under the
mechanics of these regulatory approaches, future capital
expenditures can generally be considered to be reflected in the
ongoing cost to serve the customer. To the extent that these
future expenditures are considered in the existing (or filed)
regulatory model, synergies related to cost avoidance are subject
to distribution similar to cost savings. To facilitate
understanding and categorization of identified synergies, PE and
Enova clearly distinguish between merger-related cost savings
which result from a reduction in utility O&M expenses and
merger-related cost avoidances which result from a reduction or
elimination in the need for future utility capital expenditures.
Although PE and Enova are proposing to share net synergies (after
costs to achieve) between customers and shareholders, the
companies are doing so under the assumption that no adjustments
are made to their existing or proposed regulatory models that
have the effect of reducing revenue requirements for
synergies-related costs over the estimation period (1998-
2007). Should the Commission adjust the baselines assumed in the
PE and Enova regulatory models, the synergies available for
distribution between customer and shareholders -- both cost
savings and cost avoidances -- could be affected.
Several different types of merger synergies are typically
available in utility mergers. These types of synergies captured
by PE, Enova, and their affiliates are identified and defined
below:
o Avoidance of Duplication and Overlap - Where similar
activities are performed within the stand-alone
companies, a merger can result in reduced costs from the
elimination of replication in positions or expenditures.
o Economies of Scale - The affiliation of two companies and
their respective purchase volumes creates economies in
procurement through the potential lower unit costs
associated with volume discounts.
o Avoidance of Parallel Capital Expenditures - Merging
companies pursuing similar project-related expenditures,
such as for new information systems, can avoid duplicate
capital outlays through adoption of one party's system
upon completion.
PE and Enova have identified several principal areas where
they anticipate cost savings and cost avoidances, including
corporate labor, field support labor, corporate programs,
facilities, nonfuel purchasing, and gas supply. Each of these
categories is described below to provide an overview of the
nature of the synergies typically captured in a utility merger.
o Corporate Labor - This category reflects the position
reductions related to performance of administrative and
management activities on a combined basis rather than as
stand-alone entities. These positions can be reduced
because these required functions can be centralized and
performed once on behalf of the combined entity rather
than by the two entities separately.
o Field Support Labor - Similar to corporate labor above,
position reductions in the field support area are created
by the ability to centralize certain functions, such
as engineering, purchasing, marketing administration and
gas supply planning. These positions can be reduced
because the required functions can be integrated
to provide a common base of activity, thus requiring
fewer resources to perform related functions.
o Corporate Programs - This area relates to the nonlabor
expenditures associated with corporate headquarters
functions, such as benefits, insurance, advertising and
information systems. This also includes expenditures for
third-party payments for professional services for legal,
consulting, etc., that can be reduced. These reductions
are possible by eliminating duplication in performance
and achieving economies of scale for the procurement of
certain services.
o Facilities - This category reflects the ability to
consolidate personnel in reduced total square footage
than presently exists since the number of personnel will
be reduced, freeing up floor space. Thus, remaining
personnel will be housed in smaller or fewer corporate
locations than currently exist. In addition, certain
operating facilities may be consolidated, such as meter
shops, to reflect the ability to centralize these
activities in one location.
o Nonfuel Purchasing - This category reflects certain
economies of scale related to the procurement of
materials and supplies or contract services. These
economies will result from higher combined purchasing
volumes than either company presently procures, thus
reducing the unit cost through greater discount
potential.
o Gas Supply - Two gas utilities separately purchasing and
arranging transportation for gas may be able to realize
certain benefits from combining their supply purchases or
otherwise utilizing available assets more effectively.
These cost savings and cost avoidance categories are further
discussed in the accompanying testimony of Debra Reed and Frank
Ault entitled "Identification of Merger Synergies." I have
reviewed this testimony and believe that the synergies described
by Ms. Reed and Mr. Ault appear reasonably attainable if the
merger is allowed to take place. Moreover, I also believe that
these synergies are directly related to the merger, and would not
take place in the absence of the merger.
IV.
PE AND ENOVA CONDUCTED A DETAILED AND COMPREHENSIVE REVIEW
PROCESS TO IDENTIFY SYNERGIES
Time constraints and confidentiality restrictions often
limit the amount of resources that merging companies can devote
to synergies quantification prior to the initial public
announcement of a merger. Although PE and Enova were also
initially subject to significant time and confidentiality
constraints, the companies made concerted efforts to develop
realistic merger-related cost savings and cost avoidance
estimates prior to announcement. And, after the initial
public announcement, these efforts were even more extensive and
rigorous than many other merger-related synergy quantification
efforts that I have been involved with. I believe that PE's
and Enova's detailed and comprehensive review process provides a
sound basis for the synergies estimate developed by PE and Enova,
and should demonstrate to the Commission that the identified cost
savings and cost avoidances have been thoroughly evaluated and
are reasonably attainable.
Prior to public announcement of their merger, PE and Enova
assembled a senior management working group to estimate the
potential cost savings and cost avoidances that would arise from
the merger. D&T assisted the working group in this effort, and
D&T has continued to assist the companies in their
post-announcement synergies review process. The working group
assembled, reviewed, and evaluated relevant information, and then
presented the results of its analysis to the executive
managements of both companies. Because of confidentiality
concerns, middle management was not directly involved in this
pre-announcement analysis. However, after the merger was
publicly announced, the working group, which had taken on broader
responsibilities as the Transition Management Team (the "TMT"),
assembled middle managers from both companies into the following
ten "synergies teams" to further calculate the synergies
that could be anticipated from the merger:
o Accounting and Finance o Support Services
o Human Resources o Customer Services
o Legal and External Relations o Marketing
o Information Technology Services o Transmission and
Distribution
o Corporate Services o Gas Operations
Each synergies team was made up of six to eight middle
managers, many of whom dedicated themselves for approximately
five weeks to the calculation of potential cost savings, cost
avoidances and costs to achieve. In addition, these managers
were assisted by other PE and Enova personnel as the need arose
during the evaluation process, especially in areas that required
significant technical expertise. The TMT provided the synergies
teams with guidance throughout the process, and assisted the
teams with certain overall assumptions (such as the anticipated
rate of inflation). The synergies teams met in working sessions
over the entire five-week period, and conducted a detailed
analysis of information relevant to their deliberations. Each
team was directed by a team leader who was responsible for the
team's work. The synergies teams quantified the potential
synergies in their respective areas, and then presented the
results of their work to the TMT.
Those areas where potential merger-related impacts were
expected to occur were identified by review of the current
organizational alignment and operational focus of PE and Enova.
This review provided an initial perspective on the individual
functions and field office locations and established where
similar functions resided or were performed, as well as future
plans and emphasis of each of the companies.
The identified areas were reviewed in greater detail based
on the available information obtained from each of the companies.
This review focused on further understanding the function,
scope, staffing levels, expenditure patterns, account content,
expected changes, and other relevant factors. For example, a
detailed staffing alignment was prepared to compare functions
within PE and Enova.
This detailed staffing alignment was developed based on
comprehensive human resources files made available to the
synergies teams. This information was used to align the various
functions and subfunctions of the companies and determine the
number of resources devoted to related activities. The synergies
teams spent considerable time assuring that all appropriate
resources were accounted for in the functions affected by the
merger and that all functions or subfunction resources -- whether
permanent employees, part-time employees or contractors --
were identified. Specific questions about operating assumptions
(e.g., bargaining unit differences or implementation timing),
were addressed to members of other synergies teams both during,
and in follow-up to, these discussion meetings to assure
appropriate coordination.
As a result of this review, several operational areas were
identified where the opportunity existed for cost savings and
cost avoidances directly attributable to the merger. These areas
were discussed within the synergies teams and additional
refinements were made. These discussions focused on assumption
development, data analysis, and operational implementation. For
example, implementation constraints due to systems conversion
were identified to assist the teams with respect to the timing of
potential position reductions from integration of the specific
functions. These areas were challenged as to whether the
opportunity for potential synergies existed due specifically to
the merger, whether these cost savings or cost avoidances were
attainable in the near term, and the value of these potential
benefits. Upon internal review of the quantification of
potential cost savings or cost avoidances, the synergies teams
agreed to a level of quantification that was attainable based on
the analysis of synergies potential given the level of currently
available information.
The TMT thoroughly challenged the synergies quantification
presented by the various synergies teams, as well as the various
assumptions that formed the basis for the teams' estimates.
In addition, the TMT also directed an independent review team,
assisted by D&T, to review the completeness and accuracy of the
information presented by the synergies teams. Throughout the
process, the TMT focused on identifying merger-related synergies
and on excluding any cost savings or avoidances which could or
would have been achieved in the absence of the merger.
The results of the extensive synergies identification and
quantification work developed by the synergies teams and the TMT
are set forth in the accompanying "Identification of Merger
Synergies" testimony of Debra Reed and Frank Ault and the
"Allocation of Merger Synergies" testimony of Ralph Todaro
(Exhibit M-4). Thousands of hours of work by more than one
hundred PE and Enova personnel provide a sound basis for Ms.
Reed's and Mr. Ault's estimates. As set forth above, I believe
that PE's and Enova's detailed and comprehensive review process
should demonstrate to the Commission that the synergy cost
savings and cost avoidances identified by PE and Enova have been
thoroughly evaluated and are reasonably attainable.
V.
THE SYNERGIES RESULTING FROM THE MERGER OF PE AND ENOVA
COMPARE FAVORABLY WITH THE RESULTS OF OTHER RECENT MERGERS
As set forth in the testimony of Debra Reed and Frank Ault,
the merger of PE and Enova should create synergies of
approximately $1.2 billion net of costs to achieve. These
anticipated cost savings and cost avoidances are summarized below
for a ten-year period (1998-2007). This period is consistent
with that utilized in quantification of synergies in other
similar utility merger transactions before various regulatory
agencies. This ten-year period provides both a short and
long-term perspective on potential synergies.
SYNERGIES SUMMARY
1998-2007 Amount Percent of
Area ($ Millions) Total
Corporate Labor $538 38%
Field Support Labor 332 24
Corporate Programs 462 33
Facilities 40 3
Nonfuel Purchasing 23 2
Gas Supply 8 -
Total Gross Synergies 1,403 100%
Less: Costs to Achieve ( 205)
Net Synergies $1,198
As the above table indicates, corporate labor, field support
labor, and corporate programs account for approximately 95% of
the anticipated synergies. This heavy emphasis on corporate
or administrative cost savings and cost avoidances is to be
expected in a merger such as this. PE's primary emphasis is the
gas utility operations of its subsidiary, SoCalGas. Although
Enova's main subsidiary, SDG&E, is, in part, also a gas utility,
it serves an entirely different geographic gas service
territory. Moreover, SDG&E's extensive electric operations will
be largely unaffected by the merger from a cost savings or cost
avoidance perspective. Accordingly, the vast majority of the
cost savings and cost avoidances will need to take place in the
common administrative functions where PE and Enova engage in
duplicative activities.
The anticipated synergies from the merger of PE and Enova
compare favorably with those synergies identified in other recent
utility mergers. In particular, I looked at position reductions
and nonfuel O&M expense reductions -- two categories that provide
a useful basis for comparative assessment of relative
merger-related synergies. As indicated in the table immediately
below, the position reductions that will result from the merger
of PE and Enova are slightly below the average from 12 of the
most recent utility transactions proposed prior to the public
announcement of the PE and Enova combination (and for which
relevant data was available).
POSITION REDUCTIONS
Low = 3.3%
Average = 8.5%
High = 11.0
PE/ENOVA = 7.4%
The 7.4% position reduction amount for the merger of PE and
Enova reflects the estimated total number of position reductions
at both PE and Enova (862) compared to the total number of
positions at both PE and Enova (11,700) prior to the initiation
of evaluation of the merger. Given the lack of significant
overlap between the utility operations of PE's and Enova's
main subsidiaries discussed above, the fact that the 7.4%
reduction amount is slightly below the average reduction figure
of 8.4% is understandable and expected.
Similarly, the nonfuel O&M reductions that will result from
the merger of PE and Enova are also below the average reductions
from the same 12 transactions:
NONFUEL O&M (YEAR 5)
Low = 5.4%
Average = 9.9%
High = 16.0
PE/ENOVA = 6.2%
Again, given the lack of substantial overlap between the
utility operations of PE's and Enova's main subsidiaries, the
disparity between the PE and Enova merger O&M synergies and
the average synergies from other recent proposed utility or
utility holding company mergers is explainable. In fact, in
light of all of the various operational factors affecting the
merger of PE and Enova, I believe that the cost savings and cost
avoidances from the merger compare favorably with the cost
savings and cost avoidances anticipated from the other recent
transactions, and are well in line with industry experience.
VI.
PE AND ENOVA HAVE INITIATED AN ONGOING PROCESS TO HELP
REALIZE THEIR ESTIMATED SYNERGIES
Merger partners invariably identify potential merger-related
synergies at the outset of any merger. However, there is no
guarantee that estimated merger-related synergies will actually
be realized. Certain categories of synergies are within the sole
control of corporate management; other categories are not. In
any event, it is my experience that it takes a strong commitment
from the management of merging companies to achieve all of the
synergies estimated at the outset of a merger. I believe that PE
and Enova have made such a commitment.
The determination of how to position PE and Enova to realize
the identified merger synergies and how best to structure and
operate the new organization is of critical importance to
the successful implementation of the merger. To identify the
most effective structure and basis of operation for the new
entity, as well as to support the attainment of identified
synergies, PE and Enova have initiated planning for combined
operations in an even more thorough, detailed, and comprehensive
manner. Both companies have created a transition planning
process to define integration activities and guide the analysis
of individual operating processes and functions. The
overall transition planning process will also include
cross-functional teams that will be responsible for
corporate-wide activities such as information technology.
To guide this effort, the TMT has been chartered to oversee
and lead transition planning. The TMT is comprised of senior
management of both PE and Enova and is charged with
developing the transition process and managing the effort through
its conclusion. The TMT was responsible for direction of the
synergies teams' effort and has a scope of responsibility that
also encompasses various transaction related issues. This type
of transition process is a recommended element of a successful
integration program. By conducting this effort, PE and Enova
will better position the combined entity to realize anticipated
cost savings and cost avoidances.
VII.
SUMMARY
PE and Enova have presented the Commission with an estimate
of merger-related synergies benefits that is well researched and
documented, and consistent with synergy estimates from other
recent utility and utility holding company mergers. The process
that PE and Enova used to determine these cost savings and cost
avoidances, i.e., multiple management teams directed by a senior
management group, was detailed, comprehensive, and exceeded the
typical process utilized by other companies in similar analyses.
Moreover, both companies have rigorously sought to exclude from
their estimates cost savings and cost avoidances which are not
merger-related. In addition, the ongoing process that PE and
Enova have initiated to help them actually realize their
estimated merger-related synergies is further evidence of a
strong management commitment at both companies to achieving these
benefits. In light of all of these factors, I believe that the
synergies estimated by PE and Enova have been thoroughly
evaluated and are reasonably attainable.
This concludes my prepared direct testimony.
UNITED STATES OF AMERICA 79 ferc Sec. 61, 107
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Elizabeth Anne Moler, Chair;
Vicky A. Bailey, James J. Hoecker,
William L. Massey, and Donald F. Santa, Jr.
Enova Corporation and ) Docket No. EL97-15-000
Pacific Enterprises )
ORDER ASSERTING JURISDICTION,
DENYING MOTION TO REOPEN DOCKET, AND
DENYING MOTIONS FOR CONSOLIDATION
(Dated April 30, 1997)
On December 6, 1996, Enova Corporation (Enova) and Pacific
Enterprises (Pacific) (collectively, Petitioners) filed a
petition requesting an order disclaiming jurisdiction over the
reorganization of their businesses under a newly-formed holding
company. Petitioners maintain that Commission approval under
section 203 of the Federal Power Act (FPA)
- ----------------------------------------------------------------
16 U.S.C. Section 824b (1994).
- ----------------------------------------------------------------
is not required for the proposed reorganization. However, as
discussed more fully below, the Commission has determined that
approval under section 203 is required for the disposition of the
jurisdictional facilities of Enova s public utility subsidiaries,
San Diego Gas & Electric Company (SDG&E), a traditional electric
utility, and Enova Energy, a power marketer, encompassed in
Petitioners reorganization.
- ---------------------------------------------------------------
The Commission will issue subsequent orders to address
related filings in Docket No. EL97-21-000 [wherein Southern
California Edison Company (SoCal Edison) filed a complaint
against SDG&E and Ensource, a Pacific subsidiary, regarding the
proposed merger of Enova and Pacific] and in Docket No.
EC97-12-000 [wherein SDG&E and Enova Energy filed an application
for authorization pursuant to section 203].
- ----------------------------------------------------------------
Docket No. EL97-15-000 -2-
I. Background
A. Description of Petitioners
Enova and Pacific are each exempt public utility
holding companies under section 3(a)(1) of the Public Utility
Holding Company Act (PUHCA) of 1935.
- ---------------------------------------------------------------
15 U.S.C. Sec. 79c(a)(1) (1994).
- ---------------------------------------------------------------
1. Enova
As indicated above, Enova is the parent of SDG&E,
a traditional electric utility, and Enova Energy, a power
marketer authorized to sell power at market-based rates.
- ---------------------------------------------------------------
Enova Energy, Inc., 76 FERC Section 61,242 (1996).
- ---------------------------------------------------------------
SDG&E owns and operates electric generation, transmission, and
distribution facilities, and serves electric customers at retail
in San Diego and Orange Counties, California, and natural gas
customers at retail in San Diego County, California. The
creation of Enova was approved by the Commission two years ago,
whereupon Enova became the holder of all of SDG&E's common stock
and SDG&E's common stockholders became the stockholders of
Enova.
- ----------------------------------------------------------------
San Diego Gas & Electric Company, Docket No. EC95-6-000,
70 FERC Section 62,118 (1995).
- -----------------------------------------------------------------
In the order approving the stock transfer, the Commission
indicated that if Enova sought to merge with another holding
company, the public utilities of those companies would be
required to file evidence to rebut the presumption that such a
merger would result in an indirect merger of the public
utilities, or alternatively for approval. The Commission also
specifically noted its authority to issue subsequent orders under
section 203(b) of the FPA as needed in the event Enova sought to
merge with another holding company.
2. Pacific
Pacific is the parent of, among others, Southern
California Gas Company (SoCalGas), a natural gas distribution
company. SoCalGas provides gas service to customers in central
and southern California, and owns certain qualifying facilities
with a total of 1.6 megawatts (MW) of capacity. Pacific's
subsidiaries also include various natural gas pipelines,
specifically: Pacific Interstate Transmission Company, Pacific
Interstate Offshore Pipeline Company, and Pacific Offshore
Pipeline Company. Pacific s subsidiary, Pacific Energy, has
direct and indirect ownership interests in certain qualifying
facilities. Pacific has another subsidiary, Ensource, that was a
power marketer authorized to sell power at market-based rates.
Docket No. EL97-15-000 - 3 -
However, on December 6, 1996, Ensource filed a notice of
cancellation of its market-based rate schedule, which was
accepted for filing by order issued January 29, 1997.
- ---------------------------------------------------------
Ensource, 78 FERC Section 61,064 (1997).
- ---------------------------------------------------------
B. Planned Merger
The petition states that the two holding
companies, Enova and Pacific, would be combined under a newly
created holding company, NewCo, that would own all of the stock
of the Petitioners and would be owned by the Petitioners
stockholders.
NewCo Enova Sub, a subsidiary of NewCo, would merge
into Enova, with Enova as the surviving corporation. NewCo
Pacific Sub, also a subsidiary of NewCo, would merge into
Pacific, with Pacific surviving. All Enova and Pacific common
stock would be converted into the right to receive NewCo common
stock. Upon consummation of this transaction, the Petitioners
would be wholly-owned subsidiaries of NewCo.
- ----------------------------------------------------------------
The Agreement and Plan of Merger and Reorganization
submitted with the petition does not refer to NewCo, but
instead refers to the new holding company as Mineral Energy
Company. NewCo Enova Sub and NewCo Pacific Sub are referred
to as G Mineral Energy Sub and B Mineral Energy Sub,
respectively.
- ----------------------------------------------------------------
The Board of Directors and the highest level officer
positions of NewCo initially would be evenly divided between
designees of Pacific and Enova, respectively. The petition
states that, based on the most recent share holding information
available at that time, 52% percent of NewCo's shares would be
converted Pacific shares, and 48% would be converted Enova
shares. Including those shareholders who own both Pacific and
Enova stock, however, 53% of NewCo Stock would be owned by former
Enova shareholders. The Petitioners, SDG&E, and SoCalGas would
continue to operate under their existing names.
The petition further explains that the Petitioners have
formed a joint venture that would engage in marketing natural gas
and electricity. The petition states that the joint venture
would not make jurisdictional power sales until after
consummation of the merger and after filing a separate
application for, and receiving, sales authorization from the
Commission.
C. Petitioners Position on Commission Jurisdiction
The Petitioners maintain that Commission approval is not
required for mergers occurring at the holding company level.
First, the Petitioners state that Commission approval under
Docket No. EL97-15-000 - 4 -
section 203 of the FPA is needed only for certain actions taken
by public utilities, not holding companies. Second, noting the
Commission s previous determination that there is a rebuttable
presumption that the public utility subsidiaries of merging
holding companies also merge (albeit indirectly), the Petitioners
assert that the rebuttable presumption has no application here
because the planned business reorganization does not involve an
indirect merger of public utility subsidiaries. Petitioners
state that, with the cancellation of Ensource s rate schedule,
Pacific has no public utility subsidiary that could indirectly
merge with Enova s public utility subsidiaries, SDG&E and Enova
Energy.
The Petitioners also assert that the planned merger does not
constitute a disposition of facilities requiring Commission
approval under section 203. According to the Petitioner, there
will be no transfer of the stock of SDG&E or Enova Energy, nor
will the transaction involve any other transfer or reorganization
of the jurisdictional facilities of the public utility
subsidiaries. Lastly, the Petitioners note that the planned
merger will be subject to the review of the California
Commission, as well as other federal agencies, and that the
Commission s jurisdiction over SDG&E and Enova Energy would be
unaffected by the merger. The Petitioners also state that the
joint marketing venture developed by the Petitioners would engage
in wholesale sales of electricity only to the extent authorized
by the Commission after consummation of the merger.
II. Notice of the Petition and Responding Filings
A. Notice, Interventions, Protests, Answer, and Responses
Notice of the petition for declaratory order was published
in the Federal Register, with comments, protests, and
interventions due on or before January 10, 1997.
- ---------------------------------------------------------------
61 Fed. Reg. 67,041 (1996).
- ---------------------------------------------------------------
Timely, unopposed motions to intervene in this docket were
filed by the City of Burbank (Burbank), the City of San Diego
(San Diego),
- ---------------------------------------------------------------
San Diego filed a late motion to intervene in Docket No.
EC95-6-000 as part of its timely motion to intervene in Docket
No. EL97-15-000.
- ---------------------------------------------------------------
the City of Vernon (Vernon), Imperial Irrigation District
(Imperial Irrigation), Kern River, K N Marketing Inc.
(KN Marketing), the National Rural Electric Cooperative
Association and the American Public Power Association, jointly
(the Associations), Pacific Gas and Electric Company (PG&E),
SoCal Edison, the Southern California Public Power Authority
Docket No. EL97-15-000 - 5 -
(Public Power Authority),
- ----------------------------------------------------------------
The Public Power Authority explains that it is a joint
powers agency whose members are each engaged in the generation,
transmission, and distribution of electric energy, and are
customers and competitors of SoCalGas. The members of the Public
Power Authority are: the Cities of Anaheim, Azusa, Banning,
Burbank, Colton, Glendale, Pasadena, Riverside, and Vernon; the
Department of Water and Power of the City of Los Angeles; and the
Imperial Irrigation.
- -----------------------------------------------------------------
and the Southern California Utility Power Pool (SoCal Power
Pool).
- -----------------------------------------------------------------
The Power Pool states that its members operate
municipally-owned electric generation, transmission, and
distribution systems that provide electric service in southern
California. The members of the Power Pool are the Los Angeles
Department of Water and Power, and the cities of Burbank,
Glendale, and Pasadena, California.
- -----------------------------------------------------------------
A notice of intervention was filed by the Public Utilities
Commission of the State of California (California Commission).
On February 26, 1997, the NutraSweet Kelco Company (Kelco) filed
a late motion to intervene.
The motions filed by Burbank, K N Marketing, PG&E, SoCal
Power Pool, and Kelco, as well as the notice filed by the
California Commission, raised no substantive issues. The motions
to intervene filed by the following included protests: Vernon,
SoCal Edison, Public Power Authority, Imperial Irrigation, Kern
River, and the Associations.
On January 27, 1997, Petitioners filed an answer to the
procedural motion filed by San Diego, as well as a procedural
motion filed by Imperial Irrigation which is unrelated to the
jurisdictional determination addressed in this order and that
will be addressed in a subsequent order. On February 28, 1997,
SoCal Edison filed a response to an answer the Petitioners filed
on February 7, 1997, in the related proceeding in Docket No.
EL97-21-000. On April 18, 1997, SoCal Edison filed a motion to
admit into this docket a supplemental response to a filing made
by Petitioners in Docket No. EL97-21-000. SoCal Edison states
that it filed the same responses in Docket No. EL97-21-000.
B. Motions to Consolidate
San Diego moved to reopen Docket No. EC95-6-000 and
consolidate Docket No. EC95-6-000 with the instant proceeding.
As noted, supra n.5, the Commission there approved the
disposition of SDG&E s jurisdictional facilities as part of a
corporate reorganization involving the creation of Enova.
Kern River moved to consolidate the instant proceeding with
Ensource s rate schedule cancellation proceeding in Docket No.
Docket No. EL97-15-000 - 6 -
ER97-703-000, based on its assertion that the proceedings involve
similar facts and issues.
C. Positions of the Intervenors
The following descriptions of the positions of the parties
do not include arguments raised as to the propriety of approving
the proposed transaction or requests for an evidentiary hearing
in the event the Commission finds that it has jurisdiction over
the transaction. Those positions will be discussed in a later
order addressing whether the proposed disposition of
jurisdictional facilities is consistent with the public interest.
San Diego asks that the Commission assert jurisdiction over
the transaction or "at the least, provisional jurisdiction." San
Diego also asks the Commission to exercise its authority to issue
supplemental orders in Docket No. EC95-6-000 in order to assure
jurisdiction over the planned merger. San Diego argues that the
Commission should deny the instant petition and apply section 203
in the same manner as it would if NewCo were acquiring SDG&E
directly, without Enova as an intervening, middle-tier holding
company. San Diego further asks that the Commission require the
Petitioners to file, as part of their section 203 application,
the competitive screen analysis set forth in the Merger Policy
Statement.
- ---------------------------------------------------------------
See Inquiry Concerning the Commission's Merger Policy
Under the Federal Power Act: Policy Statement, Order No. 592, 61
Fed. Reg. 68,595 (1996), III FERC Stats. & Regs. Para. 31,044 (1996)
(Merger Policy Statement).
- ----------------------------------------------------------------
Vernon argues that the Commission has jurisdiction over the
transaction. Vernon maintains that the Petitioners argument
that the merging holding companies do not have public utility
subsidiaries that would indirectly merge as part of the corporate
restructuring as a result of Ensource's cancellation of its
market-based rate schedule, amounts to jurisdictional
gamesmanship. Vernon argues that this is particularly true here
where the Petitioners admittedly are developing a new subsidiary
that may well engage in wholesale power sales, requiring the same
type of authorization as Ensource filed to cancel. Vernon
asserts that Commission review of any future market-based rate
authorization request would not be an adequate substitute for
review of the public interest implications of this merger.
Vernon also asserts that the Commission made clear its
intent to review any future merger of Enova with another holding
company in the order approving the creation of Enova. In that
order, the Commission advised SDG&E that it must "file under
section 203 evidence to rebut the presumption that such a merger
would not also result in an indirect merger of the public utility
Docket No. EL97-15-000 - 7 -
subsidiaries, or alternatively, for approval of an indirect
merger of the public utilities."
- ------------------------------------------------------------
70 FERC at 64,294.
- ------------------------------------------------------------
Vernon argues that, as subsidiaries to the same holding company,
the merging entities will not exercise independent
decision-making authority. Further, Vernon asserts that the
Petitioners have not rebutted the presumption that the merger
would not preserve competition between the to-be-merged entities.
Vernon also states that the ongoing restructuring of the electric
industry and the related competitive market power issues cannot
be assessed in isolation from the natural gas industry in the
same market region.
Imperial Irrigation asserts that the Commission has
jurisdiction over the proposed merger. Imperial Irrigation
states that the proposed merger involves the disposition of the
jurisdictional facilities of SDG&E and Enova Energy, as well as
the disposition of Ensource s jurisdictional facilities through
the cancellation of its rate schedule. Imperial Irrigation
argues that the Commission should exercise its section 203(b)
authority to impose supplemental orders. Imperial Irrigation
also states that the cancellation of Ensource s rate schedule
along with the Petitioners plan to market electric energy
through its new joint venture after consummation of the merger
demonstrate that Ensource s rate schedule cancellation was merely
an attempt to manipulate Petitioners jurisdictional status.
SoCal Edison argues that the proposed merger would result in
the indirect merger of SDG&E and Enova Energy with Ensource, as
well as the disposition of the jurisdictional facilities of SDG&E
and Enova Energy. SoCal Edison states that the cancellation of
Ensource s rate schedule was merely an attempt to avoid
Commission jurisdiction over the proposed merger. SoCal further
states that, nevertheless, the merger entails a de facto indirect
merger requiring petitioners to rebut the presumption established
in Illinois Power, infra. SoCal Edison further argues that
Petitioners reliance on Missouri Basin, infra, is misplaced in
that Missouri Basin stands for the sole proposition that the
merger of public utility holdings companies that are not
themselves public utilities does not fall within the Commission s
jurisdiction.
SoCal Edison argues that the proposed merger entails the
disposition of SDG&E s and Enova Energy's jurisdictional
facilities. SoCal Edison maintains that the Commission s
decision in Central Vermont, infra, holds that the substance, not
the form, of a transaction governs the Commission's jurisdiction.
SoCal Edison also cites Illinois Power, infra, as standing for
the proposition that the Commission must review mergers before
the real corporate independence of public utility subsidiaries
and the economic control over jurisdictional facilities is lost.
Docket No. EL97-15-000 - 8 -
SoCal Edison asserts that the control of SDG&E and Enova Energy
would shift to a new decision maker whose financial and
competitive interests would be distinctly different.
The Public Power Authority adopts and incorporates by
reference SoCal Edison s protest in this proceeding.
Kern River also argues that the proposed merger requires
Commission approval. Kern River asserts that the Petitioners
have not rebutted the presumption of indirect merger set forth in
Illinois Power, infra. Kern River objects to the cancellation of
Ensource s rate schedule and asserts that the cancellation
appears to be an actual consolidation of power marketing within
the ultimate merged entity. Kern River argues that the
Petitioners statement that Pacific s qualifying facilities (QFs)
may lose their exempt status as a result of the merger indicates
that Pacific s QFs may indirectly merge with Enova s public
utilities upon consummation of the merger.
The Associations argue that the Commission has jurisdiction
in this case because the proposed merger includes the disposition
of jurisdictional facilities, and because section 203 is written
broadly enough to encompass any disposition of jurisdictional
facilities and any merger or consolidation of such facilities.
The Associations also assert that the Commission cannot rely on
other agencies or entities to address the effect of the proposed
merger on public interest concerns, particularly in light of the
Commission s expertise in energy markets. The Associations state
that, while other agencies may review the proposed transaction,
they will do so under different statutory authority and,
therefore, with different purposes.
III. Procedural Matters
A. Interventions, Answer, and Response
Pursuant to Rule 214 of the Commission s Rules of Practice
and Procedure,
- ---------------------------------------------------------------
18 C.F.R. Section 385.214 (1996).
- ---------------------------------------------------------------
the timely, unopposed motions to intervene and notice of
intervention serve to make the following parties in
this docket: Burbank, San Diego, Vernon, Imperial Irrigation,
Kern River, K N Marketing, the Associations, PG&E, SoCal Edison,
the Public Power Authority, the SoCal Power Pool, and the
California Commission. Due to the absence of any undue prejudice
or delay, the Commission will grant the late, unopposed motion to
intervene filed in this docket by Kelco. Pursuant to Rule
213(a)(2),
- ----------------------------------------------------------------
18 C.F.R. Section 385.213(a)(2) (1996).
- ----------------------------------------------------------------
the Commission will not consider the answer and
Docket No. EL97-15-000 - 9 -
the response filed by the Petitioners and SoCal Edison,
respectively.
B. Motions to Consolidate
San Diego requests that the Commission reopen Docket No.
EC95-6-000, in order to exercise its authority to issue
supplemental orders under section 203(b), and to consolidate that
docket with the instant proceeding. The order in Docket No.
EC95-6-000 approved the proposed disposition of SDG&E's
jurisdictional facilities to Enova as consistent with the public
interest. The order also specifically referenced our authority
under section 203(b) to issue supplemental orders, as
appropriate. Granting San Diego s request is unnecessary in
light of the action taken in this order. Therefore, we will deny
the request to reopen Docket No. EC95-6-000 and to consolidate
that docket with the instant proceeding. Accordingly, we also
will deny San Diego s late motion to intervene in Docket No.
EC95-6-000.
Kern River requests that the Commission consolidate the
instant proceeding with Ensource s rate schedule cancellation
proceeding in Docket No. ER97-703-000. Kern River states that
these dockets should be consolidated because they are integrally
related and involve the same set of facts and issues. However,
the rate schedule termination has been accepted, and we note that
no requests for rehearing of that acceptance were filed. In any
event, the Commission s decision in this proceeding does not
hinge on Ensource s status as a power marketer. Therefore, we
will deny Kern River's request for consolidation.
IV. Discussion
Based on our analysis of the purposes of section 203 of the
FPA, relevant legislative history and case law, and Commission
precedent, we conclude that the merger of the Enova and Pacific
holding companies will result in a disposition (a transfer of
control) of the jurisdictional facilities of SDG&E and Enova
Energy, and that, for purposes of section 203, the public
utilities SDG&E and Enova Energy will have effectively disposed
of jurisdictional facilities. Accordingly, Commission approval
of the proposed disposition is required under section 203. In
reaching this conclusion, we do not assert jurisdiction over the
proposed merger of the holding companies themselves. Rather, we
assert jurisdiction over the proposed transfer of control of
public utility jurisdictional facilities to ensure that this
transfer of control is consistent with the public interest.
A. Statutory Framework and Related Definitions
Section 203 of the FPA, which establishes the Commission's
jurisdiction over corporate transactions involving public utility
Docket No. EL97-15-000 - 10 -
jurisdictional facilities and public utility securities, is
broadly worded and, on its face, covers a wide range of corporate
activities involving jurisdictional facilities. It also reflects
Congress' intent that the Commission be able to ensure that
corporate realignments do not adversely affect the maintenance of
adequate service or coordination in the public interest of
jurisdictional facilities. It reads in pertinent part:
(a) No public utility shall sell, lease, or otherwise
dispose of . . . its facilities subject to the
jurisdiction of the Commission . . . or by any means
whatsoever, directly or indirectly, merge or
consolidate such facilities or any part thereof with
those of any other person, or purchase, acquire, or
take any security of any other public utility, without
first having secured an order of the Commission
authorizing it to do so. . . . After notice and
opportunity for hearing, if the Commission finds that
the proposed disposition, consolidation, acquisition,
or control will be consistent with the public interest,
it shall approve the same.
(b) The Commission may grant any application for an
order under this section in whole or in part and upon
such terms and conditions as it finds necessary or
appropriate to secure the maintenance of adequate
service and the coordination in the public interest of
facilities subject to the jurisdiction of the
Commission. The Commission may from time to time for
good cause shown make such orders supplemental to any
order made under this section as it may find necessary
or appropriate. (Emphasis added.)
Thus, section 203 requires Commission authorization before a
public utility may
(1) sell, lease, or otherwise dispose of its jurisdictional
facilities,
(2) directly or indirectly, merge or consolidate any part of its
jurisdictional facilities with the jurisdictional facilities
of any other person, or
(3) purchase, acquire, or take any security of any other public
utility.
The purpose of section 203 of the FPA was to provide a
mechanism for maintaining oversight of the facilities of public
utilities, and preventing transfers of control over those
facilities that would be detrimental to consumers and/or
investors or that would inhibit the Commission s ability to
Docket No. EL97-15-000 - 11 -
secure the maintenance of adequate service and the coordination
in the public interest of [jurisdictional] facilities.
- ---------------------------------------------------------------
Section 203(b), quoted supra.
- ---------------------------------------------------------------
Neither section 203 nor any other provision of the FPA
defines the terms dispose, facilities subject to the
jurisdiction of the Commission, merge, consolidate, and
control. However, we do not believe these terms should be read
narrowly. To do so would result in a jurisdictional void in
which certain types of power sales facilities and corporate
transactions could escape Commission oversight.
The text of section 203 focuses on jurisdictional
"facilities." Over the course of the development of the electric
industry, the traditional focus of facilities has been on
physical facilities, such as transmission lines and related
equipment, for example. However, facilities also has been
defined to include contracts, accounts, memoranda, papers, and
other records (often referred to as paper facilities ).
- ----------------------------------------------------------------
Hartford Electric Light Co. (Hartford), 131 F.2d 953, 961
(2d Cir. 1942), cert. denied, 319 U.S. 741 (1943). See also
Connecticut Light & Power Co. v. FPC, 324 U.S. 515, 528 n.6
(1945) (discussing Hartford).
- -----------------------------------------------------------------
Without such an interpretation, a large class of entities (power
marketers) could engage in sales for resale in interstate
commerce with no regulation, even if they were affiliated with,
or wholly owned by, traditional public utilities owning physical
facilities, since such interstate wholesale sales may not be
regulated by the states. As the Commission stated in Citizens
Energy Corporation,
- -----------------------------------------------------------------
35 FERC Section 61,198 (1986).
- ---------------------------------------------------------------
in which it determined that a power marketer is a "public
utility" under section 201(e) of the FPA by virtue of its
wholesale sales transactions and the underlying paper facilities:
Section 201(b) confers jurisdiction over not only
facilities (1) for interstate transmission but
also - and disjunctively - over facilities (2) for
interstate wholesale sales. . . . We find [jurisdiction
over facilities for interstate wholesale sales] in
petitioner's corporate organization, contracts,
accounts, memoranda, papers, and other records, in so
far as they are utilized in connection with such
sales.
- ---------------------------------------------------------------
Id. at 61,452 (quoting Hartford).
Docket No. EL97-15-000 - 12 -
Thus, we conclude that "facilities" under section 203 -- as under
other sections of the FPA -- includes the facilities of power
marketers (such as Enova Energy) such as wholesale power sales
contracts and related accounts and records.
- ---------------------------------------------------------------
The Commission also has found that rate schedules are
jurisdictional facilities. Ocean State Power, 38 FERC Section
61,140 at 61,378 (1987).
- ---------------------------------------------------------------
Section 203 also references merge and consolidate.
These terms also are not defined in the FPA but are often
considered corporate terms of art. When describing corporate
amalgamations, "merger" is used to denote the vesting of the
control of different corporations in a single one by the issue of
stock of the others; in other words, one corporation absorbs the
other and remains in existence while the other is dissolved. On
the other hand, a "consolidation" occurs when the consolidating
companies dissolve their property and business being transferred
to a single company; in other words, a new corporation is
created and the consolidating corporations are extinguished.
- ----------------------------------------------------------------
See Webster s New International Dictionary of the English
Language, 1539 (2d Ed. 1948).
- ----------------------------------------------------------------
However, we do not believe Congress intended a narrow
interpretation of "merge" or "consolidate." Section 203(a)
"clearly was not written to describe the strict legal concepts of
corporate mergers and consolidations. This language speaks of
merger or consolidation of facilities, not of corporate
entities.
- ----------------------------------------------------------------
Pennsylvania Electric Co. (Pennsylvania Electric), 9 FPC
91, 95 (1950)(emphasis in original; footnote omitted). See also
Duke Power Company v. FPC, 401 F.2d 930 at 933 (D.C. Cir. 1968)
(Duke).
- ---------------------------------------------------------------
Additionally, section 203 applies to mergers or
consolidations that occur directly or indirectly. Thus, even
where the public utility corporations or partnerships that own
jurisdictional facilities are not themselves dissolved or
extinguished, there may be a dissolution of one or more of the
entities that own or control those public utilities, resulting in
an indirect merger of the public utilities jurisdictional
facilities.
- -----------------------------------------------------------------
Also,
[t]ransactions of an acquisitional nature
fall easily within the language of the "merge
or consolidate" clause which, if limited to
dispositive exploits, would largely be a
nullity since the first clause of Section 203(a)
(continued...)
Docket No. EL97-15-000 - 13 -
- ---------------------------------------------------------------
decrees Commission approval wherever a public
utility proposed to "sell, lease, or
otherwise dispose of" . . . jurisdictional
facilities.
Duke at 933.
- ----------------------------------------------------------------
Similarly, we do not believe Congress intended a narrow
interpretation of the term "dispose." In common usage, the
phrase dispose of means [t]o transfer to the control of
someone else, as by selling; to alienate; part with; relinquish;
bargain away.
- ---------------------------------------------------------------
See Webster s New International Dictionary of the English
Language, 752 (2d Ed. 1948).
- ----------------------------------------------------------------
However, section 203 on its face refers not only to traditional
means of disposing of facilities (sale, lease) but uses the broad
phrase "or otherwise dispose of" (emphasis added). Section 203
also specifically references "control":
After notice and opportunity for hearing, if the
Commission finds that the proposed disposition,
consolidation, acquisition, or control will be
consistent with the public interest, it shall approve
the same. (emphasis added.)
Thus, the text of the statute itself supports an
interpretation that section 203 was intended to encompass a
variety of actions involving jurisdictional facilities, as
opposed to an attempt to enumerate every mechanism conceivable in
1935 for transferring control ("disposing") of jurisdictional
facilities. Additionally, the Commission will interpret
undefined terms in the statute to preserve its ability to protect
consumers from corporate realignments that adversely affect
jurisdictional facilities.
B. Legislative History of Section 203
The legislative history of section 203 also supports a broad
interpretation of the Commission's jurisdiction over corporate
realignments that involve jurisdictional facilities. It
indicates that the focus of section 203 is on the disposition of
control of jurisdictional facilities, however such disposition
might be effected (i.e., through sale, lease, merger,
consolidation, or acquisition of securities, or otherwise).
Both of the original Senate and House bills (S. 1725 and
H.R. 5423) included the forerunner of section 203, which was
similarly worded to the provision ultimately enacted:
Docket No. EL97-15-000 - 14 -
(a) No public utility shall sell, lease, assign,
mortgage, or otherwise dispose of or encumber the whole
or any part of its facilities subject to the
jurisdiction of the Commission, 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.
(b) No public utility shall hereafter purchase,
acquire, take, or hold any security of any other public
utility without first having been authorized to do so
by the Commission. This subsection shall not prevent
the holding of any security lawfully acquired before
the enactment of this title.
No changes relevant to the issue here were made to this section
during the legislative process.
- ----------------------------------------------------------------
The original versions of the bill included a section 216
which addressed holding company acquisitions. However, FPC
Commissioner Seavey in his analysis of this version of the bill
stated, in pertinent part: "[Section 216] govern[s] . . . the
acquisition of utility securities by holding companies. [This
subject is] fully covered by title I of the bill, and [this]
section[] can be eliminated." Hearings before the House
Committee on Interstate and Foreign Commerce, 74th Cong., 1st
Sess. 386 (1935) (House Hearings). See also S. Rep. No. 621,
74th Cong., 1st Sess. 20 (1935). Section 216 subsequently was
removed from the bills.
- ----------------------------------------------------------------
The Senate and House Reports confirm Congress' intent that
section 203 give the Commission sufficient authority over
corporate transactions affecting jurisdictional facilities to
carry out its jurisdictional responsibilities. In its analysis
of section 203(a), the Senate Report states in pertinent part:
This section furnishes an essential check upon the
development of the industry along uneconomic lines. It
complements [PUHCA] by directing the Commission to
prevent transfers or consolidations of property which
would impair the ability of public utilities to render
adequate service or impede, or tend to impede, the
coordination in the public interest of facilities
subject to the jurisdiction of the Commission.
- ----------------------------------------------------------------
S. Rep. No. 621, 74th Cong., 1st Sess. 50 (1935).
- -----------------------------------------------------------------
The House Report on S. 2796 states in pertinent part:
Docket No. EL97-15-000 - 15 -
[A]pproval must be secured for the sale, lease, or
other disposition [of jurisdictional facilities] . . .
and for mergers or consolidations of such facilities .
. . . Commission approval of an acquisition,
consolidation, or control would remove such transaction
from the prohibitory provisions of any other law.
- -----------------------------------------------------------------
H.R. Rep. No. 1318, 74th Cong., 1st Sess. 28 (1935).
- -----------------------------------------------------------------
Thus, Congress clearly was concerned about corporate changes
that "impede or tend to impede" the coordination of
jurisdictional facilities in the public interest. This concern
could not reasonably be limited merely to nominal ownership of
jurisdictional facilities or corporate form; rather, Congress
was concerned with the substantive decision making authority and
control over jurisdictional facilities.
C. Case Law
There is no case law that squarely addresses the specific
jurisdictional issues before us. However, the Court of Appeals
for the District of Columbia Circuit addressed the extent of the
Commission s jurisdiction under section 203 in Duke, supra, and
provides useful guidance on the broad focus of section 203. Most
pertinent to the case before us, the Duke decision supports the
conclusion that one of the fundamental prerequisites of section
203 jurisdiction is the presence of jurisdictional facilities.
In other words, the Commission s corporate jurisdiction follows
facilities subject to the jurisdiction of the Commission.
The Duke case involved the acquisition by a public utility
facilities used solely in local distribution of electric
energy for retail sale. Specifically, Duke Power Company (Duke),
a public utility, purchased facilities from Clemson University,
[exempt from the FPA under section 201(f)] that had been used for
intrastate distribution of electric energy. The Commission
determined that the acquisition by Duke was a merger or
consolidation of facilities with those of another person
requiring Commission approval under section 203. The court
reversed the Commission s decision.
The issue before the court was whether the [FPA] requires
an interstate electric utility to obtain approval by the [FERC]
of its acquisition of facilities utilized in the local
distribution of electric energy.
- --------------------------------------------------------------
Duke at 931.
- --------------------------------------------------------------
In analyzing this issue in light of Congress delineation between
federal and state jurisdiction, the court first concluded that
the prohibitions forged by this section are imposed only upon a
'public
Docket No. EL97-15-000 - 16 -
utility.
- -------------------------------------------------------------
Id.
- -------------------------------------------------------------
Second, the court accept[ed] the Commission's conclusion that
the 'merge or consolidate clause encompasses acquisitions of
facilities.
- -------------------------------------------------------------
Id.
- ------------------------------------------------------------
Third, the court determined that even where the other person is
not a public utility by virtue of section 201(f), but
nevertheless owns or controls what normally would be a
jurisdictional facility, section 203 will attach. The court
concluded that the phrase those of any other person in section
203(a) must be facilities subject to the jurisdiction of the
Commission and that local distribution facilities expressly are
not jurisdictional. Because the facilities to be acquired
consisted of only non-jurisdictional, local distribution
facilities, the court found that the Commission had no section
203 jurisdiction over the acquisition.
- ---------------------------------------------------------------
Id.
- --------------------------------------------------------------
While, as noted, the court's analysis does not address the
specific jurisdictional issues presented in this proceeding, we
believe our analysis is entirely consistent with the Duke court's
fundamental holding that section 203 jurisdiction is triggered
only where jurisdictional facilities are involved.
D. Commission Precedent
1. Disposition of Facilities
The Commission has interpreted its section 203 jurisdiction
in a number of cases as the industry has evolved over the last
decade, and our analysis of the issues presented by the
Enova/Pacific merger is consistent with, and builds upon, the
precedent established.
The seminal Commission decision interpreting the
disposition clause of section 203(a) is Central Vermont.
- --------------------------------------------------------------
Central Vermont Public Service Corporation (Central
Vermont), 39 FERC Section 61,295 (1987).
- ---------------------------------------------------------------
In Central Vermont, the Commission determined that the
transfer of all of a public utility's stock is a transfer of
ownership and control of the utility's jurisdictional facilities
and that such transfer constitutes a disposition of
jurisdictional facilities requiring Commission approval under
section 203. The Commission stated:
[T]he transfer of ownership and control of Central
Vermont s jurisdictional facilities, from Central
Docket No. EL97-15-000 - 17 -
Vermont's existing shareholders to the newly created
holding company, constitutes a disposition of
jurisdictional facilities requiring prior Commission
approval under section 203. After the reorganization
the jurisdictional facilities of the public utility
will be controlled through the parent s ownership of
the utility s common stock by virtue of the parent's
ability to name Central Vermont's board of directors.
Although the current stockholders of the public utility
will own stock in the holding company after the reorganization is
completed, they will no longer have a proprietary interest in, or
direct control over, the jurisdictional facilities. The
substance of the transaction, therefore, is a "disposition" of
facilities via the transfer of all direct control. . . .
To the extent that utility revenues are used to finance
non-utility operations, the cost of utility service may
be increased. If the parent makes unwise investment
decisions the reliability of service of jurisdictional
facilities could be impaired. This aspect of the
holding company/operation utility relationship was a
concern to those who enacted Title II of the Public
Utility Act.
- ---------------------------------------------------------
Central Vermont at 61,960.
- ---------------------------------------------------------
In Central Illinois,
- ---------------------------------------------------------
Central Illinois Public Service Company (Central
Illinois), 42 FERC Section 61,073 (1988).
- --------------------------------------------------------------
the Commission explained that its assertion of jurisdiction in
Central Vermont was not based solely on the transfer of stock,
but rather that the Commission's concern lies in the transfer of
control of public utilities and, thereby, control over the
jurisdictional facilities of those public utilities. After
considering the legislative history of section 203, the
Commission found that "Congress' intent was to ensure that the
Commission maintain oversight over any transfer of jurisdictional
utility property . . . ."
- -----------------------------------------------------------
Central Illinois at 61,328 (emphasis in original). See
also, Savannah Electric & Power Co., 42 FERC Section 61,240
(1988), which involved the transfer of all of a public utility's
stock to a registered public utility holding company. The
Commission asserted jurisdiction, relying on the rationales set
forth in Central Vermont and Central Illinois. The Commission
also analyzed the application of section 318 of the FPA to the
transaction and concluded that section 318 did not apply.
Section 318 provides that the SEC s jurisdiction preempts the
Commission's jurisdiction under certain circumstances. The
(continued...)
Docket No. EL97-15-000 - 18 -
- ---------------------------------------------------------------
(...continued) Commission found that under section 203,
the Commission had jurisdiction over the disposition of
facilities (via a transfer of stock) of the public utility, while
the SEC had jurisdiction to approve or disapprove the holding
company s acquisition of the public utility s stock. The
Commission further explained:
In finding that section 318 does not preclude
our assertion of jurisdiction, we wish to
again emphasize that it is not our intent to
undertake regulation of every stock transfer
made by public utility shareholders. Our
concern is solely with transfers of control
of public utilities and, thereby, the
jurisdictional facilities of those public
utilities. Further, our assertion of
jurisdiction is solely to fulfill our
obligations under section 203 of the FPA in a
manner that is complementary to the SEC s
jurisdiction over reorganization transactions.
Savannah at 61,779 (emphasis in original.) See also,
Central Illinois, 42 FERC at 61,328-329.
- --------------------------------------------------------------
The Commission also has discussed certain elements of
control in cases outside the context of section 203. The
Commission has linked "decision-making" and dominion and
control to its determination of "control" over facilities in
determining whether an entity is a "public utility." The
Commission also has said that the reference to "operates
[jurisdictional] facilities" in the definition of public utility
in section 201(e) of the FPA refers "to the person who has
control and decision-making authority concerning the operation of
facilities."
- ----------------------------------------------------------------
See, e.g., Bechtel Power Corp., 60 FERC Section 61,156
(1992).
- ----------------------------------------------------------------
In sale/lease-back cases, the Commission has disclaimed
jurisdiction over entities with a mere fiduciary interest in
facilities where the entity holding the fiduciary interest could
not exert control over the entity responsible for operating the
facilities.
- ----------------------------------------------------------------
See, e.g., Allegheny Electric Cooperative, Inc., 47 FERC
Section 61,015 (1989); Baltimore Refuse Energy Systems Co., 40
FERC Section 61,366 (1987); Pacific Power & Light Co., 3 FERC
Section 61,119 (1978).
- -----------------------------------------------------------------
Also, we note that the definition of control that has been in the
Commission's accounting regulations since 1937 is:
Control (including the terms controlling, controlled by
and under common control with) means the possession,
Docket No. EL97-15-000 - 19 -
directly or indirectly, of the power to direct or cause
the direction of the management and policies of a
company, whether such power is exercised through one or
more intermediary companies, or alone, or in
conjunction with, or pursuant to an agreement, and
whether such power is established through a majority or
minority ownership or voting of securities, common
directors, officers, or stockholders, voting trusts,
holding trusts, associated companies, contract or any
other direct or indirect means.
- ---------------------------------------------------------------
This definition was adopted in Order No. 42, 1 Fed. Reg.
691 (1936), codified and reissued in Order No. 141, 12 Fed. Reg.
8461 (1948), and may be found at 18 C.F.R. Part 101, Definitions
5.B. (1996).
- -----------------------------------------------------------------
2. Mergers and Consolidations
In Illinois Power,
- ---------------------------------------------------------------
Illinois Power Company (Illinois Power), 67 FERC Section
61,136 (1994).
- ----------------------------------------------------------------
the Commission reviewed and clarified its jurisdiction under
section 203 in instances where holding companies merge, and
determined that "most mergers of public utility holding companies
will simultaneously involve an indirect merger of the public
utility subsidiaries of such holding companies."
- ---------------------------------------------------------------
ID. at 61,352-53.
- ---------------------------------------------------------------
The Commission described the three-step process some utilities
were following to reorganize, and explained how section 203
jurisdiction applied at each step.
In step one, a public utility transfers ownership of all of
its stock to a newly-formed holding company.
Following Central Vermont, the Commission reiterated that such a
transfer constitutes a transfer of the ownership and control of
the utility's jurisdictional facilities and, therefore, is a
disposition of facilities subject to section 203 approval.
In step two, the public utility holding company merges with
another public utility holding company.
The Commission stated that it does not have jurisdiction over the
merger of holding companies unless the holding companies own or
operate jurisdictional facilities. However, the Commission
adopted a rebuttable presumption that when public utility holding
companies merge, their public utility subsidiaries likely retain
no real corporate independence, that decision-making for the
public utilities would typically rest with the new holding
Docket No. EL97-15-000 - 20 -
company, and that, therefore, an indirect merger of the public
utilities occurs requiring section 203 authorization.
- ---------------------------------------------------------------
Illinois Power at 61,354. In reaching this conclusion,
the Commission departed from its decision in a prior case,
Missouri Basin Municipal Power Agency, 53 FERC Section 61,368
(1990), reh'g denied, 55 FERC Section 61,464 (1991), in which it
had not asserted jurisdiction based on similar facts. It
affirmed only that part of Missouri Basin that held that the
Commission does not have jurisdiction over the merger of holding
companies.
- -----------------------------------------------------------------
In step three, the public utility subsidiaries of the merged
holding companies formally merge and section 203 approval is
required.
In discussing the adoption of a rebuttable presumption of
indirect mergers, the Commission stated that its decision was
informed by Copperweld,
- ---------------------------------------------------------------
Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752
(1984). See also Century Oil Tool, Inc. v. Production
Specialties, Inc., 737 F.2d 1316, 1317 (5th Cir. 1984), where the
Court stated:
Given Copperweld, we see no relevant
difference between a corporation wholly owned
by another corporation, two corporations
wholly owned by a third corporation or two
corporations wholly owned by three persons
who together manage all affairs of the two
corporations. A contract between them does
not join formally distinct economic units.
In reality, they have always had a unity of
purpose or a common design.
- ----------------------------------------------------------------
where the Court held that section 1 of the Sherman Act, which
outlaws conspiracies or combinations in restraint of trade,
regards as one company a parent and subsidiary that maintain
separate operations. The Commission offered the court s
explanation, which strongly supports a conclusion that this
Commission must be able to look beyond corporate form in
determining whether a public utility is effectively disposing of,
merging, or consolidating its jurisdictional facilities:
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. . . . [in 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
Docket No. EL97-15-000 - 21 -
subsidiary fails to act in the parent's best interest.
467 U.S. at 771-72 (emphasis in original; footnote
deleted).
- ---------------------------------------------------------------
Illinois Power at 61,354.
- --------------------------------------------------------------
Similarly, while section 203 is applicable only to actions taken
by public utilities, we will look beyond the corporate form of a
transaction, and regard a parent and subsidiary as one
company,
- ----------------------------------------------------------------
See San Diego Gas & Electric Co., 38 FERC Section 61,241
at 61,778 (1987) (agency may disregard corporate form;
corporations may be regarded as one entity for one purpose even
though they are legitimately distinct for others; inquiry is
whether statutory purposes would be frustrated by corporate
form).
- -----------------------------------------------------------------
in instances where the control over a public utility and its
jurisdictional facilities is transferred from one corporate
entity to another. Further, the fact that the Commission does
not have jurisdiction over every aspect of a proposed corporate
transaction does not mean that the Commission has to ignore those
aspects of the transaction that effect a change in control over a
public utility's jurisdictional facilities.
E. Conclusion
In this proceeding, two public utility holding companies
(Enova and Pacific) propose to merge; one of the holding
companies is the parent of two public utilities (SDG&E and Enova
Energy).
- ----------------------------------------------------------------
The jurisdictional determinations made in this order
preclude the need to address arguments raised regarding
Ensource's rate schedule cancellation as an element of the
proposed corporate realignment, or related issues, in connection
with this proceeding.
- ----------------------------------------------------------------
There is no dispute that Commission jurisdictional facilities are
involved in the proposed transaction. SDG&E owns both physical
and "paper" facilities used for the transmission and sale for
resale of electric energy in interstate commerce, and Enova
Energy owns "paper" facilities that permit it to market power at
wholesale in interstate commerce. Therefore, the remaining
question is whether SDG&E and/or Enova Energy will have
effectively disposed of and/or merged or consolidated
jurisdictional facilities for purposes of section 203. If so,
Commission authorization under section 203 is required.
While the FPA does not specifically delineate the meaning of
the disposition or "merger or consolidation" of jurisdictional
facilities under section 203, it is clear under the language of
section 203 itself as well as the Duke case that the Commission's
jurisdiction under section 203 attaches to jurisdictional
facilities and that Congress intended that the Commission be able
Docket No. EL97-15-000 - 22 -
to secure the maintenance of adequate service and the
coordination in the public interest of those facilities.
Additionally, the references on the face of the statute [section
203(a)] to or otherwise dispose and the proposed disposition,
consolidation, acquisition, or control (emphases added) reflect
an intent to cast a broad net over various types of transactions
so that public utilities and their affiliates cannot use form
over substance to avoid regulatory oversight of corporate
realignments affecting jurisdictional facilities, paper or
otherwise. Similarly, the merge or consolidate clause of
section 203 applies to public utilities that "by any means
whatsoever, directly or indirectly" merge or consolidate their
facilities (emphasis added), and reflects an intent to capture a
broad scope of activities and means of accomplishing those
activities.
Further, while section 203 applies to a public utility that
disposes of or merges or consolidates its jurisdictional
facilities, as explained above, the Commission may disregard
corporate form and regard a parent and its subsidiary as a unit
in order to determine whether statutory mandates would be
frustrated by the proposed transaction. While the Commission
does not have jurisdiction over the merger of holding companies
that are not themselves public utilities, section 203 was
intended to preserve the Commission's oversight of corporate
realignments that may impact the coordination in the public
interest of jurisdictional facilities, no matter how
accomplished.
On the facts of this case, as discussed further below, we
conclude that the proposed merger of Enova and Pacific will
result in a transfer of control of the jurisdictional facilities
of Enova's two public utility subsidiaries, SDG&E and Enova
Energy. Therefore, we do not need to reach the question of
whether the proposed merger also results in a direct or indirect
merger or consolidation of the SDG&E or Enova Energy
jurisdictional facilities with those of any other person. We
further conclude that, for purposes of section 203, Enova and its
public utility subsidiaries act as one company and are
effectively disposing of jurisdictional facilities via a transfer
of control over those facilities to NewCo. To hold otherwise
would elevate form over substance.
In their petition for a declaratory order, the Petitioners
rely on Missouri Basin as support for their argument that the
Commission may not review mergers between holding companies. The
petitioners also argue that the Commission may not review mergers
involving public utilities unless there exists the type of
indirect merger described in Illinois Power. Lastly, the
petitioners argue that a disposition of facilities does not occur
in their proposed transaction because, the petitioners say, the
stock of the public utilities will not be transferred.
Docket No. EL97-15-000 - 23 -
There are several fundamental flaws in these arguments.
First, as stated above, the Commission agrees that it does not
have jurisdiction over mergers of holding companies that are not
also public utilities. Our assertion of jurisdiction is not over
the merger of the holding companies; rather, our concern is over
the control of the jurisdictional facilities of the public
utilities in the holding company system. Second, the Missouri
Basin and Illinois Power cases did not address the situation here
and cannot, in any event, be interpreted as holding that the
Illinois Power scenario is the only type of indirect merger over
which the Commission has section 203 jurisdiction. Third, since
all the stock of SDG&E and Enova Energy is owned by Enova, and
since all of Enova s stock will be transferred to the new holding
company, the substance of the transaction will be a disposition
of control of the public utilities jurisdictional facilities to
the new holding company. Even though Enova will continue to own
the public utilities stock after the transfer, control over the
public utilities (and their jurisdictional facilities) will be
exercised by NewCo and its shareholders under a divergently
different corporate form with economic goals which reflect the
corporate purposes of the newly-created holding company.
- ---------------------------------------------------------------
Petitioners make two related arguments in support of their
position that their merger will not result in any change in
control over SDG&E's and Enova Energy's jurisdictional
facilities. First, they note that the stock of Enova is widely
dispersed among members of the public and the same will be true
of NewCo's stock. Second, they argue that there will be no
change in control since a majority of NewCo's shares, including
those shareholders that currently own both Pacific and Enova
stock, will be owned by former Enova shareholders. This is a
variation of an argument rejected in Central Vermont.
In Central Vermont, the Commission found that even though
the current shareholders of the public utility would own the
holding company's stock after the reorganization was
completed, they would no longer have direct control over the
public utility's jurisdictional facilities. Here, Enova's
current shareholders will not be able to exercise the
control over SDG&E and Enova Energy, and their
jurisdictional facilities, as they are able to exercise
today. This does not change because NewCo's stock will be
widely dispersed, or because a majority of its stock will be
owned by persons that currently own Enova shares.
- ---------------------------------------------------------------
As such, there is indeed a disposition of jurisdictional
facilities of SDG&E and Enova Energy.
The petitioners cite Missouri Basin and Duke to support
their argument that section 203 only gives the Commission
jurisdiction over actions taken by public utilities. They
suggest that after the initial transfer of the public utility's
Docket No. EL97-15-000 - 24 -
stock to a holding company, the public utility loses any ability
to exert control over its jurisdictional facilities and therefore
cannot dispose of its jurisdictional facilities in subsequent
corporate transactions because control over its jurisdictional
facilities lies solely with the holding company. Carried to its
logical conclusion, this argument would lead to the result that
if a stand-alone public utility created a holding company above
it the Commission would have jurisdiction due to a change in
control of the public utility s jurisdictional facilities, but if
the holding company then immediately sold 100% of its stock to
another party (who would then be able to control the first tier
holding company and thus the public utility) the Commission would
not have jurisdiction even though the control over the public
utility s facilities is being transferred in both transactions.
In short, form would be elevated over substance.
As discussed above, the Commission may regard corporations
as one entity in order to ensure that statutory purposes are not
frustrated by corporate form. Therefore, for purposes of
ensuring that the transfer of control of SDG&E and Enova Energy
is consistent with the public interest, Enova and its public
utility subsidiaries may properly be regarded as one entity.
In Central Vermont, the Commission discussed at some length
the concern that the transfer of ownership and control of
jurisdictional facilities could "present potential for abuses
adverse to the public interest."
- ---------------------------------------------------------------
Central Vermont at 61,960.
- --------------------------------------------------------------
The Commission has expressed concern over the potential effect
such a corporate structure might have on reliability of service
or use of operating utility funds for corporate activities
unrelated to utility service,
- -------------------------------------------------------------
Id.
- -------------------------------------------------------------
as well as abuses adverse to the public interest which could
result from the "ever-increasing reorganizations involving
jurisdictional public utilities."
- -------------------------------------------------------------
Central Illinois at 61,328.
- -------------------------------------------------------------
The Commission has a broad public interest mandate in
section 201(a) of the FPA to oversee the operational aspects of
the electric power industry, including issues involving bulk
power supply and transmission access. The industry currently is
undergoing a fundamental restructuring which entails wholesale
competitive power markets and, increasingly, competitive retail
power markets. As the competitive energy markets evolve, the
Commission has a public interest responsibility to be vigilant
with respect to the corporate realignment of the jurisdictional
facilities of both traditional public utilities and the public
utility power marketers that are playing an increasingly larger
Docket No. EL97-15-000 - 25 -
role in bulk power supply. Our interpretation of section 203 is
clearly consistent with the Congress' intent in enacting the
provision, and the jurisdictional responsibilities given to the
Commission.
The Commission does not intend to affect the actions of
public utility holding companies unnecessarily; nevertheless,
the Commission would be remiss in upholding its statutory mandate
if it allowed control over jurisdictional facilities to be
removed from its oversight merely by how the transaction is
structured. Accordingly, the petitioners' request for a
declaratory order disclaiming jurisdiction over the merger of
Enova and Pacific will be denied because the merger encompasses
the disposition of the jurisdictional facilities of SDG&E and
Enova Energy via a transfer of control.
F. Guidance for Future Cases
We understand that industry participants, in this time of
restructuring, need as much certainty as possible concerning the
circumstances in which we have jurisdiction under section 203, as
well as a better understanding of how quickly the Commission will
be able to process section 203 filings. We believe that the
discussion above, applicable to the instant proceeding as well as
to our companion orders in the NorAm
- -------------------------------------------------------------
Order Asserting Jurisdiction, NorAm Energy Services, Inc.,
Docket No. EL97-25-000.
- ---------------------------------------------------------------
and Morgan Stanley
- ---------------------------------------------------------------
Order Authorizing Dispositions of Jurisdictional
Facilities and Denying Request for Disclaimer of Jurisdiction,
Morgan Stanley Capital Group, Docket Nos. EC97-23-000 and
EL97-30-000; Chi Power Marketing, Docket No. EC97-26-000.
- ---------------------------------------------------------------
proceedings issued today, answers in large part the first
question by providing the framework which we will use to analyze
whether a proposed corporate realignment involves a disposition
and/or direct or indirect merger of jurisdictional facilities.
We acknowledge that we cannot definitively identify every
combination of entities or disposition of assets that may trigger
section 203 jurisdiction, since we cannot anticipate every type
of restructuring that might occur in response to rapidly evolving
competitive pressures. However, it should be clear that our
concern is with changes in control, including direct or indirect
mergers, that affect jurisdictional facilities (whether physical
or "paper" facilities). We must maintain flexibility in
responding to industry restructuring if we are to discharge our
statutory responsibility "to secure the maintenance of adequate
service and the coordination in the public interest of facilities
subject to the jurisdiction of the Commission."
Docket No. EL97-15-000 - 26 -
In asserting jurisdiction over new types of corporate
realignments that involve jurisdictional facilities, we will
commit, within the constraints of our resources, to make every
effort to efficiently process those section 203 filings that come
before us. It is clear that many of these transactions may
involve few public utility assets and may have little or no
impact in the pertinent geographic and product markets. In these
cases we intend to be flexible as to what information must be
filed, to provide shortened comment periods on the filings, and
to issue orders expeditiously.
We take this opportunity to comment briefly on the
information we expect to see from applicants and the procedures
we intend to follow, in those section 203 filings that, for
example, do not involve a merger or consolidation of
jurisdictional facilities or do not otherwise raise market power
concerns. As reflected in the Merger Policy Statement, the
mergers of greatest potential concern to the Commission are
mergers between vertically integrated electric utilities that own
generation and/or transmission facilities. Thus, for example,
review of a disposition of a marketer's jurisdictional facilities
alone may not necessarily raise complex issues and, therefore,
may be amenable to expeditious action by the Commission. Even if
a power marketer owns generation facilities, it may be that its
facilities are geographically dispersed such that their transfer
to another power marketer would not raise complicated issues.
Similarly, cases may arise, such as Morgan Stanley, in which
the disposition of a marketer's jurisdictional facilities occurs
within the context of a merger of entities engaged in businesses
unrelated to our jurisdictional concerns under the FPA. There
again, expeditious review and action by the Commission may be
anticipated. On the other hand, additional review in various
degrees may be required where, for example, a marketer is merging
with another power marketer or with an entity with control over
fuel resources or transportation facilities necessary for
electric generation, thus raising concerns about the potential to
create barriers to entry.
We believe that the Morgan Stanley proceeding, which we
approved today, provides useful guidance on these types of
disposition applications. Morgan Stanley involves a proposed
merger of two Wall Street financial firms, one of which owns a
public utility power marketer. We found that a disposition of
the jurisdictional facilities of that public utility via a change
in control will take place as part of the merger and we
authorized the disposition. With respect to the information
necessary to support the proposed disposition application, the
applicants in Morgan Stanley addressed the effect the transaction
would have on competition, on rates, and on regulation. They
explained why an Appendix A competitive analysis was not needed
in the circumstances presented but nevertheless proceeded to
Docket No. EL97-15-000 - 27 -
explain why the transaction would not have an adverse effect on
competition. This is an acceptable approach in circumstances
that do not involve a merger or consolidation or other actions
that would result in the aggregation of generation and/or
transmission market power.
- ---------------------------------------------------------------
Merger Policy Statement at 30,113 and 30,136.
- ---------------------------------------------------------------
However, the fact that an Appendix A analysis was not needed
in Morgan Stanley does not mean it may not be necessary in other
applications involving dispositions of facilities that present
different facts. Our focus will be on whether the transaction
enhances the ability of the affected public utility or utilities
to exercise market power in relevant geographic and product
markets. The information applicants submit to support a
disposition of facilities must be adequate for us to analyze the
effect on competition, if any.
Similarly, applicants must be prepared to address the effect
on rates and regulation. As in Morgan Stanley where the only
affected public utility was a power marketer authorized to sell
at market-based rates and engaged only in wholesale power sales
in interstate commerce, the information supplied can be concise.
However, the type of information necessary to address these
factors may vary depending on the circumstances.
Finally, we will make every effort to expedite the
processing of disposition applications. While we normally
provide a 60-day comment period on section 203 applications, a
shorter notice period might be appropriate in cases of the type
in Morgan Stanley or in unusual circumstances. In the Merger
Policy Statement, the Commission stated its intent to make a
reasonable effort to issue an initial order on a completed
application 60-90 days after the comment period closes.
- ---------------------------------------------------------------
Merger Policy Statement at 30,127.
- ---------------------------------------------------------------
If the application does not raise significant concerns, the
Commission may be able to take action on an even more expedited
basis. Any request for expedited action must be fully supported
and should discuss how long it took from the time the contract
was signed until the date of filing with the Commission.
The Commission orders:
(A) The late, unopposed motion to intervene in this docket
filed by NutraSweet Kelco Company is hereby granted, as discussed
in the body of this order.
(B) Vernon s motion to consolidate Docket No. ER97-703-000
with this docket is hereby denied, as discussed in the body of
this order.
Docket No. EL97-15-000 - 28 -
(C) San Diego s motion to reopen Docket No. EC95-6-000 and
to consolidate that docket with this docket is hereby denied, as
discussed in the body of this order.
(D) San Diego s motion for late intervention in Docket No.
EC95-6-000 is hereby denied, as discussed in the body of this
order.
(E) The answer filed by the Petitioners and the responses
filed by SoCal Edison are rejected, as discussed in the body of
this order.
(F) The Petitioners' petition for declaratory order
disclaiming jurisdiction is denied, as discussed in the body of
this order.
By the Commission.
( S E A L )
Lois D. Cashell,
Secretary.
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
San Diego Gas & Electric Company ) Docket No. EC97- -000
Enova Energy, Inc. )
APPLICATION
FOR AUTHORIZATION AND APPROVAL OF MERGER
San Diego Gas and Electric Company ("SDG&E"), and
Enova Energy, Inc. ("Enova Energy") (collectively, the
"Applicants") hereby submit this application pursuant to
Section 203 of the Federal Power Act ("FPA"), 16 U.S.C.
Section 824b (1988), and Part 33 of the Regulations of the
Federal Energy Regulatory Commission ("Commission"), 18 C.F.R.
Part 33 (1995), requesting authorization and approval for the
merger of Pacific Enterprises ("Pacific") and Enova
Corporation ("Enova")
- ------------------------------------------------------------
Ensource, a subsidiary of Pacific, filed on December 6,
1996, a notice of cancellation of its electricity rate
schedule in Docket No. ER97-703-000. Ensource joins in this
application only if, and so long as, it is a "pubic utility"
within the meaning of the FPA. If the Commission grants
Ensource's notice of cancellation, Ensource will not be a
"public utility" within the meaning of the FPA, and will not
be a necessary party to the application.
- -------------------------------------------------------------
As described in Section III of this application, following
the merger Pacific and Enova will be owned and controlled by a
new holding company, "NewCo," and SDG&E and Enova Energy will
become indirect subsidiaries of NewCo.
- ------------------------------------------------------------
NewCo is a California corporation, the outstanding stock
of which is owned 50 percent by Enova and 50 percent by
Pacific. NewCo was formed expressly for the purpose of
facilitating the merger described herein. Immediately
following the transaction the stock of NewCo will be held by
the former shareholders of Enova and Pacific.
- --------------------------------------------------------------
On December 6, 1996, Enova and Pacific filed a
Petition for Declaratory Order Disclaiming Jurisdiction
- ------------------------------------------------------------
Docket No. EL97-15-000.
- ------------------------------------------------------------
asking the Commission to declare that the proposed merger is
not subject to the Commission's jurisdiction under Section 203
of the FPA. Issuance of the requested declaratory order would
moot the instant application. If the Commission does not
grant the requested declaratory order, the Applicants request
that the Commission approve the proposed transaction within
the 150-day processing time described in Order No. 592, the
Commission's Merger Policy Statement
- -----------------------------------------------------------
Inquiry Concerning the Commission's Merger Policy Under
the Federal Power Act, Policy Statement, 61 Fed. Reg. 68,595,
68,605 (December 18, 1996).
- ---------------------------------------------------------
and, in any event, by December 1997.
I.
INTRODUCTION AND SUMMARY
As described in its Merger Policy Statement, the
Commission will, in assessing mergers subject to its
jurisdiction under Section 203, consider three factors: (1)
effect on competition, (2) effect on rates, and (3) effect on
regulation. The Pacific/Enova merger handily satisfies the
Merger Policy Statement's criteria on each score.
Effect on Competition In essence, the merger would
combine the holding companies of two utilities. One is a gas
utility affiliated with a few QFs that are in the process of
being partially divested. The other is an adjacent gas and
electric utility. Thus, the merging firms do not, to any
significant degree, have, in the words of the Merger Policy
Statement, "facilities to sell relevant products in common
geographic markets."
- ------------------------------------------------------------
Id. at 68,597. Pacific does own Ensource, which is
authorized to make sales of electricity for resale in
interstate commerce and a public utility under the FPA.
However, Ensource has made no sales and has no contracts to do
so. As noted above, Ensource has filed a notice of
cancellation of its tariffs and rate schedules.
- -------------------------------------------------------------
Accordingly, the screen analysis set forth in the Merger
Policy Statement, which is designed to measure the horizontal
effects of an electric utility merger, is unnecessary in this
case. Under the most conservative assumptions, it can be
shown that the increased concentration caused by the merger in
even the smallest conceivable geographic markets falls well
below the level of concern specified in the Department of
Justice Merger Guidelines.
Pacific's role in sales and transportation of
natural gas gives rise to no significant concerns about
vertical effects on competition in the sale of electricity.
Under requirements of the Public Utilities Commission of the
State of California ("CPUC"), SoCalGas is subject to a strict
regime of nondiscrimination and cannot favor SDG&E over other
market participants in terms of service. SoCalGas has,
moreover, undertaken to post contemporaneously, and to offer
to other similarly-situated non-affiliated shippers, any
discounts it offers to SDG&E. Similarly, Pacific and Enova
have adopted a code of conduct that would forbid SoCalGas from
providing sensitive market information to any marketing
affiliate.
Pacific owns no electric transmission. For that
reason alone the merger will have no adverse effects upon
competition in transmission.
The Merger Policy Statement addresses competitive
effects in wholesale electricity markets, leaving to state
commissions the evaluation of any effects on retail
competition. Such retail effects in the instant case will be
scrutinized by the CPUC in determining whether to approve the
combination under Section 854 of the California Public
Utilities Code.
The Applicants have nonetheless analyzed the
competitive effects of the proposed merger in the small
portion of Orange County where SDG&E's electric service
territory overlaps with the service territory of SoCalGas.
There is scant fuel substitutability and little competition
between the two fuels at present. Moreover, the merger will
coincide in time with, and is largely prompted by, the
fundamental restructuring of the electrical services industry
in California and the advent of retail customer choice; strong
intrafuel competition will discipline the market more
effectively than interfuel competition could.
Effect on Rates The proposed combination likewise
readily satisfies the standards of the Merger Policy Statement
as to any adverse effect on rates. SDG&E has no existing firm
wholesale customers. However, to assure that the transaction
will not have any adverse effect on those electric rates that
are subject to this Commission's jurisdiction, SDG&E
undertakes, if this application is granted, to hold its future
wholesale and transmission customers harmless for at least
five years after the proposed merger from any increase in
costs arising out of the merger. SDG&E will make the
necessary showing in any filings for changed rates it makes
after consummation of the merger.
Effect on Regulation The proposed merger is subject
to approval by the CPUC, and it will not create a registered
holding company. Accordingly, there are, as the Policy
Statement recognizes, no concerns as to the effect on
regulation.
II.
BACKGROUND
A. Enova
Enova is a California corporation with its principal
place of business at 101 Ash Street, San Diego, California
92101. Enova does not itself own, operate, or directly
control any electric generation, transmission, or distribution
facilities. Enova is an exempt public utility holding company
under Section 3(a)(1) of the Public Utility Holding Company
Act, 15 U.S.C. Section 79c(a) (1) ("PUHCA").
Enova's principal subsidiary is SDG&E, a public
utility owning and operating electric generation,
transmission, and distribution facilities, and serving some
1.2 million electric customers at retail in San Diego and
Orange Counties, California, as well as some 700,000 natural
gas customers at retail in San Diego County. The only other
subsidiary of Enova engaged in purchases or sales of
electricity is Enova Energy, a power marketer authorized by
the Commission to sell power at market-based rates.
- ------------------------------------------------------------
See Enova Energy, Inc., 76 FERC Para. 61,242 (Sept. 9,
1996).
- --------------------------------------------------------------
None of Enova's remaining affiliates is engaged in activities
subject to the jurisdiction of this Commission under either
the FPA or the Natural Gas Act ("NGA").
- -----------------------------------------------------------
One of Enova's subsidiaries, Enova Mexico, S.A. de C.V.,
is engaged in the planning, construction, and operation of one
or more local gas distribution systems in Mexico. In
addition, Enova and Pacific have formed a joint venture that
will engage in marketing natural gas, among other things.
Enova and Pacific will each own half of the joint venture.
The joint venture will not engage in electricity sales subject
to this Commission's jurisdiction prior to the consummation of
the merger. Any wholesale electricity sales to be conducted
by the joint venture following the merger would, of course,
require prior Commission approval.
- -----------------------------------------------------------
SDG&E's adoption of a holding company structure,
whereby Enova became the holder of all of SDG&E's common stock
and SDG&E's former common stockholders became the stockholders
of Enova, was approved by the Commission in February 1995.
- -----------------------------------------------------------
San Diego Gas & Electric Co., 70 FERC Para. 62,118
(1995).
- ---------------------------------------------------------
B. Pacific
Pacific is a California corporation with its
principal place of business at 633 West Fifth Street, Suite
5400, Los Angeles, California 90071-2006. Pacific itself does
not own, operate, or directly control any electric generation,
transmission, or distribution facilities. Pacific, like
Enova, is an exempt public utility holding company under
Section 3(a)(1) of PUHCA.
Pacific's principal subsidiary is SoCalGas, a
natural gas distribution utility providing gas service to
approximately 4.8 million customers in central and southern
California.
- -----------------------------------------------------------
SoCalGas is not a "public utility" under the FPA, since
it engages in neither sales nor transmission of electricity
subject to the Commission's jurisdiction. SoCalGas owns
certain alternative energy projects -- totalling 1.6 MW in
capacity -- that are qualifying facilities under Section 210
of the Public Utility Regulatory Policies Act of 1978
("PURPA"). Sales from these facilities are exempt, under
PURPA Section 210, from the Commission's jurisdiction.
- -------------------------------------------------------------
Pacific has numerous other subsidiaries engaged in
energy and non-energy business, including Pacific Interstate
Transmission Company and Pacific Interstate Offshore Company,
both of which are interstate pipelines subject to the
Commission's jurisdiction under the NGA, and Pacific Offshore
Pipeline Company, which the Commission has found to be exempt
from its jurisdiction under the NGA.
- ------------------------------------------------------------
Pacific Offshore Pipeline Co., 64 FERC Para. 61,167
(1993).
- -------------------------------------------------------------
Pacific also owns Pacific Energy, which, in turn
owns, either directly or, (in some cases) indirectly, an
interest in alternative energy projects, totaling some 182 MW
in capacity, that are qualifying facilities under PURPA. At
the time of the proposed transaction, Pacific Energy will have
reduced its interest in each of these QFs, as necessary, to
satisfy the Commission's QF ownership criteria, set forth at
18 C.F.R. Section 292.206.
- -----------------------------------------------------------
Likewise, any QF interests held by SoCalGas will satisfy
the Commission's ownership criteria.
- ------------------------------------------------------------
To do so will require a divestiture of 88.5 MW of Pacific
Energy's total QF capacity.
Additionally, Ensource, a wholly-owned subsidiary of
Pacific, is authorized to make sales of electricity for resale
in interstate commerce
- ------------------------------------------------------------
See Letter from Donald J. Gelinas, Director, Division of
Applications, dated July 10, 1996, in Docket No.
ER96-1919-000.
- -----------------------------------------------------------
and to the extent it makes such sales is a "public utility"
under the FPA. However, Ensource has made no sales at
wholesale and has no contracts to do so. Moreover, on
December 6, 1996, Ensource filed in Docket No. ER97-703-000 a
notice of cancellation of its tariffs and rate schedules to
make such sales.
C. Electric Industry Restructuring in California
The proposed transaction is, in very real terms, an
outgrowth of electric industry restructuring in California.
As the Commission is aware, on December 20, 1995, the CPUC
issued its Policy Decision on electric industry
restructuring.
- -----------------------------------------------------------
CPUC Decision No. 95-12-063 (December 20, 1995), as
modified by Decision No. 96-01-009 (January 10, 1996).
- -----------------------------------------------------------
Under that decision, SDG&E, Southern California Edison
Company ("Edison") and Pacific Gas & Electric Company ("PG&E")
are to offer competing suppliers direct access to their retail
customers beginning on January 1, 1998. Moreover, subject to
the approval of this Commission, the three utilities are to
convey operational control of their respective transmission
systems to an "Independent System Operator ("ISO") and to bid
all of their fossil generation resources into (as well as
purchase all of their native-load requirements from) a
newly-established hourly spot market or "Power Exchange"
("PX"). In August 1996, the California Legislature enacted
legislation ("AB 1890") affirming and codifying the main
elements of the CPUC's restructuring orders, and in September
the Governor signed that legislation into law.
SDG&E, Edison, and PG&E have applied to this
Commission in Docket Nos. EC96-19-000, et. al., for the
requisite authorizations to implement the CPUC's restructuring
proposal on or before January 1, 1998. By orders dated
October 30 and November 26, 1996, the Commission has
conditionally approved certain fundamental elements of the
proposal, and has directed SDG&E, Edison, PG&E and the ISO to
submit detailed tariffs, contracts, by-laws and protocols on
or before March 31, 1997, looking toward a commencement date
of January 1, 1998 for the restructured market.
- -----------------------------------------------------------
Pacific Gas & Electric Co., 77 FERC Para. 61,077 (Oct.
30, 1996); Pacific Gas & Electric Co., 77 FERC Para. 61,204
(Nov. 26, 1996). In a further order issued on December 18,
1996, the Commission provided certain guidance concerning the
applicants' market power showings and convened a technical
conference on market power. Pacific Gas & Electric Co., 77
FERC Para. 61,265 (Dec. 18, 1996).
- ------------------------------------------------------------
III.
DESCRIPTION OF PROPOSED
BUSINESS COMBINATION
The proposed transaction is a combination of equals
between two utility holding companies, Enova and Pacific. The
combination will be effected by the creation of a new holding
company -- NewCo
- ------------------------------------------------------------
The actual name of NewCo has not yet been determined.
- ---------------------------------------------------------
that will own all of the stock of Enova and Pacific and
will in turn be owned by their former shareholders. This
combination will be carried out in the following manner:
NewCo is a recently created corporation, 50 percent
of whose outstanding stock is owned by Pacific and 50 percent
of whose outstanding stock is owned by Enova. Under the
Agreement and Plan of Merger and Reorganization among Enova,
Pacific, NewCo, NewCo Enova Sub and NewCo Pacific Sub dated
October 12, 1996, (the "Combination Agreement"),
- ----------------------------------------------------------
A copy of the Combination Agreement is contained in the
application to the CPUC for approval of the merger. That
application is contained in Exhibit G to this application.
Certain additional parts of the Agreement that were redacted
in the CPUC application appear in Exhibit H.
- --------------------------------------------------------
NewCo Enova Sub, a subsidiary of NewCo, will be merged into
Enova, with Enova as the surviving corporation. Similarly,
NewCo Pacific Sub, another subsidiary of NewCo, will be merged
into Pacific, with Pacific as the surviving corporation. Each
issued share of Enova common stock will be converted into the
right to receive a share of NewCo common stock, and each
issued share of Pacific common stock will be converted into
the right to receive 1.5038 shares of NewCo common stock.
Thus, upon consummation of the proposed transaction, each of
Enova and Pacific will be a wholly owned subsidiary of NewCo.
Enova, Pacific, SDG&E, and SoCalGas will continue
their separate corporate existences under their existing
names. Pacific and SoCalGas will maintain their corporate
headquarters at Los Angeles, while Enova and SDG&E will
maintain their corporate headquarters at San Diego. The
headquarters of NewCo will be in San Diego.
The parties' obligation to consummate the
Combination Agreement is subject, among other things, to the
grant of all necessary regulatory approvals. Pacific and
Enova have applied for approval of the business combination by
the CPUC under Section 854 of the California Public Utilities
Code.
- ------------------------------------------------------------
Section 854 is included in Exhibit G hereto.
- ---------------------------------------------------------
They also will file for approval by the Securities and
Exchange Commission ("SEC") under Section 9(a)(2) of PUHCA and
for exemption under Section 3(c)(e) of themselves and NewCo
from the registration requirements of PUHCA.
- -----------------------------------------------------------
15 U.S.C. Section 79i(a)(2).
- ----------------------------------------------------------
In addition, the parties have filed for the requisite consent
of the Nuclear Regulatory Commission under the Atomic Energy
Act, and will make the appropriate pre-merger filings with the
Department of Justice and the Federal Trade Commission under
the Hart-Scott-Rodino Act. Pacific and Enova seek to
consummate the merger in time to coincide with commencement of
the restructured California electricity market described
above.
IV.
THE PACIFIC/ENOVA MERGER MORE THAN
SATISFIES THE REQUIREMENTS OF SECTION 203 AND THE
COMMISSION'S POLICY STATEMENT
Under Section 203(a), the Commission will approve
mergers that are "consistent with the public interest." In
its Merger Policy Statement, the Commission has revised its
criteria for evaluating proposed mergers under Section 203 to
ensure that the Commission's policies do not impede the
development of vibrant, fully competitive generation
markets.
- -----------------------------------------------------------
61 Fed. Reg. 68,598.
- ----------------------------------------------------------
The Commission has reduced the criteria to be considered to
three: (1) the effect of the merger on competition; (2) the
effect of the merger on rates; and (3) the effect of the
merger on regulation. The discussion below addresses those
criteria.
A. The Effect of the Merger on Existing Competition
The prepared direct testimony of William H.
Hieronymus attached hereto analyzes the effects that the
combination of Pacific and Enova will have on competition.
- ----------------------------------------------------------
Dr. Hieronymus is an economist with extensive experience
in analyzing competition in the electric industry.
- ---------------------------------------------------------
Dr. Hieronymus considers, successively, the horizontal effects
of the merger on competition in wholesale electric markets,
the vertical effects on such markets arising out of the role
of SoCalGas as a gas transporter, the effects of the merger
due to the merging entities' interests in electric
transmission, and the effects of the merger on retail
interfuel competition in the small overlap area between the
electric service territory of SDG&E and the gas service
territory of SoCalGas. The prepared direct testimony of
Jeffrey K. Hartman
- -----------------------------------------------------------
61 Fed. Reg. 68,597.
- ---------------------------------------------------------
addresses SoCalGas's ability, in its role as a gas
transporter, to favor SDG&E over other electric generators.
(1) Horizontal Effects on Electric Generation
Markets
In its Merger Policy Statement, the Commission has
adopted a methodology -- the competitive analysis screen
described in Appendix A to the Policy Statement -- that will
allow it to assess the horizontal effects of a given merger on
competition in the electric generation markets in which the
merging entities compete. Because, however, the screen
analysis is designed to analyze competitive effects in
instances where the merging entities do compete, the
Commission has provided that such analysis need not be
submitted where they do not compete:
However, it will not be necessary for the
merger applicants to perform the screen
analysis or file the data needed for the
screen analysis in cases where the merging
firms do not have facilities or sell
relevant products in common geographic
markets. In these cases, the proposed
merger will not have an adverse competi-
tive impact (i.e., there can be no
increase in the applicants' market power
unless they are selling relevant products
in the same geographic markets) so there
is no need for a detailed data analysis.
- ---------------------------------------------------------
61 Fed. Reg. 68,597.
- ----------------------------------------------------------
Pacific and Enova do not compete to any meaningful
extent in the sale of electricity. The only interests Pacific
has in electric generation are the 182 megawatts of QFs in
which it currently holds an ownership share, of which 71
megawatts are in northern California and 78 megawatts are in
southern California.
- -----------------------------------------------------------
Pacific's subsidiary Ensource has authorization to make
sales at market based rates, but, as noted above, has not made
any and has no contracts to do so. Ensource owns no
generation and has filed notice of cancellation of its FERC
tariffs. For those reasons, among others, Ensource does not
affect the analysis of effects on competition.
- ----------------------------------------------------------
In order to assure that those QFs maintain their qualifying
status under PURPA, however, Pacific will divest itself of
some or all of its interests (depending on who owns the
remaining interest) prior to the consummation of the merger.
Thus, at the time of the merger, Pacific's QF interests will
not exceed 23 megawatts in northern California, 15 megawatts
in southern California and 2.5 megawatts elsewhere in the
WSCC.
Total generation in California alone exceeds 50,000
megawatts. Viewed in that context, Pacific's generation
capacity -- all of which is committed under long-term
contracts until at least 2007 -- is so minimal as to bring the
combination of Pacific and Enova within the class of mergers
for which the Merger Policy Statement does not require
performance of the screen analysis; in no practical sense do
Pacific and SDG&E "compete" in generation.
In any event, making extremely conservative "worst-
case" assumptions about transmission constraints and
transmission rates, Dr. Hieronymus was able to demonstrate
that, if the Commission's screen analysis had been performed
in full, the results would show precisely what one would
expect: no increase of more than 16 points in the Herfindal-
Hirschman Index ("HHI") for any destination market. Under the
Department of Justice's Merger Guidelines, which form the
foundation of the Merger Policy Statement, such a small
increase provides no basis for concern.
- ------------------------------------------------------------
Dr. Hieronymus refers at page 18 of his testimony to a
proposed merchant plant in Nevada in which Enova Energy may be
a participant. It should be noted that Enova Energy's
participation in that project does not depend in any way upon
consummation of the Pacific-Enova merger.
- ----------------------------------------------------------
It is true that SDG&E is currently able to exercise
horizontal market power within the San Diego Basin by virtue
of the fact that, at certain hours and under certain
conditions, its own units within the Basin are needed to meet
load (because of limitations on transmission capacity into the
Basin), to assure reliability, or both. SDG&E has, in the
California restructuring proceeding, undertaken to bid its
generating units within the Basin into the Power Exchange at
their incremental cost and to credit back to customers any
revenues received from the PX in excess of its bid. It has
also proposed, in broad terms, a rigorous monitoring program
to enforce these undertakings and assure against the exercise
of market power.
- ------------------------------------------------------------
See the Supplement of Southern California Edison Company
and San Diego Gas & Electric Company to Application for
Authorization to Sell Electric Energy at Market-Based Rates
Using a Power Exchange, filed in Docket No. ER96-1663 on May
29, 1996, at III-23 to III-27.
- -------------------------------------------------------------
Whether or not these measures are sufficient need
not be determined here, however, for two reasons. First,
SDG&E has no wholesale customers within the San Diego Basin,
i.e., within the area subject to the above-described
transmission constraints. Second, and more importantly, it is
the effect of the merger on competition that is at issue here,
and the merger will have no appreciable effect on SDG&E's
generation market power.
- -----------------------------------------------------------
If and to the extent that the Commission concludes that
despite the above-quoted language in the Merger Policy
Statement and despite the analysis presented by Dr.
Hieronymus, further divestiture of Pacific's remaining
interests in QFs within the WSCC is necessary to obviate the
need to perform the full screen analysis or to avoid an
evidentiary hearing, or for grant of this application, then
Applicants would accept such a condition. They request,
however, that Pacific be afforded a period of up to a year
after the merger to complete such divestiture. During that
time, Pacific would credit any net revenue it receives from
the QFs back to the purchasing utility.
Conversely, if the Commission should determine that,
regardless of further divestiture, submission of the full
Appendix A analysis is necessary, then the Applicants
respectfully request that it so notify them at the earliest
possible time.
- ------------------------------------------------------------
(2) Vertical Effects on Electric Generation Markets
SoCalGas transports natural gas on behalf of SDG&E
and various other owners of gas-fired generation in Southern
California. Concerns about the exercise of vertical market
power would in theory arise if and to the extent that SoCalGas
could favor SDG&E over competing generators in the terms of
service or in pricing of transportation, or to the extent that
SoCalGas could provide valuable market information to its
affiliates but not to competing sellers of electricity.
As the attached testimony of Jeffrey K. Hartman,
makes clear, the current CPUC regulatory regime, combined with
the undertakings by SoCalGas before the CPUC and in this
proceeding, preclude such favortisim on SoCalGas's part, even
if it were in the interest of the merged entity.
- -----------------------------------------------------------
Under the CPUC's regulatory regime, discounting comes at
the expense of shareholders rather than other customers.
Moreover, as described by Mr. Hartman, the California electric
restructuring legislation, A.B. 1890, imposes a rate cap on
SDG&E and other electric utilities, which means that increases
in the Power Exchange price will likely decrease recovery of
stranded costs. This creates an incentive for the combined
Pacific/Enova entity to keep gas transportation prices low.
- ----------------------------------------------------------
As required by the CPUC, SoCalGas provides transportation
service at tariffed rates and on nondiscriminatory terms.
SoCalGas is willing to commit in this proceeding, as it has
before the CPUC, to follow the policy this Commission adopted
in Order No. 497 with respect to discounting. Thus, SoCalGas
will not offer any discount to SDG&E unless it
contemporaneously posts that discount on its electronic
bulletin board and makes it available to similarly-situated
non-affiliated shippers.
With respect to information sharing, SoCalGas has
already submitted a code of conduct to the CPUC under which it
must not provide any valuable market information (such as
customers lists, billing records, or usage patterns) to any
affiliated electric marketer unless it simultaneously makes
such information available to unaffiliated electric marketers.
As Mr. Hartman further describes, that obligation will be
triggered not only if SoCalGas provides sensitive information
to a marketing affiliate, but also if it provides such
information to personnel of SDG&E, or of any other affiliate,
engaged in the electric merchant function.
- ------------------------------------------------------------
To the extent that it is relevant, the Commission may
note that the CPUC has every incentive to enforce the
foregoing restrictions stringently. This is not a case in
which a state commission might favor parochial interests at
the expense of out of state customers or suppliers. If
SoCalGas were to favor SDG&E in its transportation practices,
or in the transfer of sensitive market information, the
victims would be California customers. Thus, even if the CPUC
were otherwise inclined to favor in-state interests, that
inclination would have no application here.
- -----------------------------------------------------------
(3) Competitive Effects Due to Merger of
Transmission Facilities
Similarly, the merger will have no adverse effects
on competition in transmission. Quite simply, Pacific has no
transmission facilities. In any event, SDG&E has on file and
in effect the open access tariffs prescribed by Order No. 888
and as described above will turn over operational control of
its transmission system to an Independent System Operator with
the onset of the restructured market.
(4) Effects on Interfuel Competition in the Retail
Overlap Area
The Merger Policy Statement makes clear that the
Commission will focus on competition in electricity at the
wholesale level.
- ----------------------------------------------------------
The Commission notes in the Statement that "[i]n cases
where a state commission asks us to address the merger's
effects on retail markets because it lacks adequate authority
under state law, we will do so." 61 Fed. Reg. 68,605. As
noted above, the CPUC will review the Pacific/Enova merger
under Section 854 of the Public Utilities Code.
- ----------------------------------------------------------
Nonetheless, Dr. Hieronymus also considered whether the
Pacific-Enova merger would adversely affect retail competition
within the small area in which the electric service territory
of SDG&E overlaps with the gas service territory of SoCalGas.
He concluded that it would not. For example the California
Energy Commission, ("CEC") in modeling electricity demand in
the commercial sector has found such demand unaffected by gas
prices. The CEC also characterizes substitution in the
residential sector as "minor."
- -----------------------------------------------------------
Hieronymus testimony at 21.
- -----------------------------------------------------------
Moreover, with the advent of direct access under
California's electric industry restructuring program, a
plethora of marketers and other suppliers will compete to
provide electric service to customers within the overlap area.
Similarly, gas marketers and aggregators are already competing
for retail customers within that area. This interfuel
competition will continue after the merger.
B. The Effect of the Merger on Rate Levels
In its Merger Policy Statement, the Commission
recognized that an investigation of merger costs and benefits
can be both contentious and time-consuming.
- ------------------------------------------------------------
61 Fed. Reg. 68,602.
- ------------------------------------------------------------
The Commission required merger applicants to propose
mechanisms to assure that customers are protected if the
expected merger benefits do not materialize. Among the
mechanisms discussed were open seasons, hold-harmless
provisions, rate freezes, and rate reductions.
- -----------------------------------------------------------
Id. 68,603.
- -----------------------------------------------------------
In the instant case, SDG&E has no wholesale
requirements customers.
- ----------------------------------------------------------
Nor does Enova Energy or Ensource.
- ---------------------------------------------------------
Indeed, SDG&E currently makes no sales at wholesale other
than economy energy sales and very short-term (less than 12
months) sales of capacity. Moreover, as noted above, under
the CPUC's restructuring orders, SDG&E will be obligated,
after the commencement of the proposed Power Exchange, to bid
all of the output of its fossil generation into the PX for a
five-year period, and has committed in Docket No. ER96-1663 to
bid that generation into the PX at variable costs and to
rebate to customers any PX revenues for such generation
exceeding variable costs. These variable costs will not be
affected by the proposed Pacific-Enova merger. Thus, the
merger will have no adverse effect on wholesale rates.
Similarly, SDG&E has no firm transmission contracts
in place for service through its system (other than for
short-term as-available service and mutual assistance
short-term back-up transmission assignments). Its other
transmission commitments arise from various interchange
contracts and the Western System Power Pool (as-available
commitments) and the open access transmission tariff it filed
in compliance with Order No. 888.
The Merger Policy Statement encourages applicants to
negotiate the particular form of rate protection they propose
with their customers and favors an open season as a form of
protection.
- ------------------------------------------------------------
61 Fed. Reg. 68,603.
- ------------------------------------------------------------
SDG&E does not oppose the concept of an open season.
However, because SDG&E lacks firm wholesale or transmission
customers, an open-season commitment would not, it appears,
serve the Commission's purposes. For the same reason, prior
negotiation with pre-existing customers is not practicable.
Nonetheless, to comply fully with the letter and
spirit of the Merger Policy Statement, SDG&E undertakes, if
this application is granted, to hold customers harmless from
any increase in FERC-jurisdictional rates arising out of the
merger. In that circumstance, SDG&E will undertake the burden
in any FERC rate case it files within five years after the
consummation of the merger to show that its rates are not
higher than they otherwise would have been absent the
merger.
- ------------------------------------------------------------
The initial transmission access fees proposed by SDG&E,
Edison, and PG&E in Docket No. ER96-19-000 are to reflect the
cost of each utility's transmission facilities as of the
start-up of the ISO. Under AB 1890 the rate design proposed
by the three utilities is to remain in effect for two years
after commencement of the ISO's operations, if the Commission
approves. After two years, however, the ISO is to propose a
rate methodology determined by its governing board and, if the
Board cannot agree, and alternative dispute resolution fails,
the default methodology proposed to the Commission is to be
different from the initial rate design. Thus, it appears
likely that SDG&E will make a further rate filing at that
time.
- ------------------------------------------------------------
C. The Effect of the Merger on The Effectiveness
of Regulation
In the Merger Policy Statement, the Commission made
clear that an application will not be deemed`to raise any
issue as to the effect on regulation if (a) the merger will
not create, or maintain the existence of, a registered holding
company, and (b) the merger will be subject, under state
statute, to review by a state commission.
- -----------------------------------------------------------
Id. at 68,604.
- ------------------------------------------------------------
Both conditions are satisfied here. First, as
stated above, Enova and Pacific are both exempt from
registration under Section (3)(a)(1) of PUHCA as intrastate
holding companies; they will file requests with the SEC to
maintain such status for themselves and for Newco.
- ---------------------------------------------------------
The Applicants will promptly advise the Commission of the
SEC's action on those requests.
- --------------------------------------------------------
Second, Section 854 of the California Public Utilities Code
requires the companies to obtain CPUC approval prior to the
proposed merger, and they have applied to the CPUC for such
approval. The CPUC may approve the merger, disapprove the
merger, or approve the merger with conditions. Under Section
854 the CPUC must address, among other things: the short-term
and long-term benefits of the merger, the allocation of such
benefits between ratepayers and shareholders, the merger's
effect on competition, the effect of the merger on service
levels, the effect of the merger on the quality of management,
the effect of the merger on competition, the effect of the
merger on employees and the effect of the merger on state and
local economies. In short, the CPUC will generally address
all factors relevant to whether the proposed merger is in the
public interest. Thus, the CPUC has all of the authority it
needs to protect its jurisdiction and to determine whether the
proposed merger is in the public interest.
VII.
REQUEST FOR EXPEDITED REVIEW
One of the stated purposes of the Merger Policy
Statement is to provide "greater regulatory certainty and
expedition of regulatory action in order to respond quickly to
rapidly changing market conditions."
- -----------------------------------------------------------
61 Fed. Reg. 68,596.
- ----------------------------------------------------------
Market conditions are, indeed, changing rapidly in
California; retail competition will begin in less than a year.
The merger of Enova and Pacific -- if it falls within Section
203 at all -- presents no serious wholesale competitive
issues, and no issues at all as to rates or regulation. The
CPUC is examining any effects on retail competition and rates.
The Applicants accordingly request that, if the Commission
does not disclaim jurisdiction, it grant the instant
application within the 150-day processing time set forth in
the Merger Policy Statement and, in any event, by December
1997.
VIII.
REQUIRED INFORMATION
The following information is submitted in response
to 18 C.F.R. Section 33.2.
(a) The exact name and address of the principal
business office.
The names and principal business offices of
Ensource, SDG&E, and Enova Energy are:
Ensource
555 West Fifth Street
Los Angeles, California 90013-1011
San Diego Gas & Electric Company
101 Ash Street
San Diego, California 92112-9400
Enova Energy, Inc.
12555 High Bluff Drive
Suite 155
San Diego, California 92130
(b) Name and address of the person authorized to
receive notices and communications in respect
to the application.
The following individuals are authorized to receive notices
and communications in respect to the Joint Application:
For Ensource:
Frederick E. John
555 West Fifth Street
Los Angeles, California 90013-1011
For SDG&E and Enova Energy:
Don Garber
P.O. Box 1831
San Diego, California 92112-4150
The Applicants request that notices and
communications also be sent to counsel for the Applicants,
designated below, and that such counsel be placed on the
official service list for this proceeding:
For SDG&E and Enova Energy:
Michael C. Tierney
P.O. Box 1831
San Diego, California 92112-4150
Phone: (619) 699-5033
Fax: (619) 699-5027
Nicholas W. Fels
Matthew S. Yeo
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566
Phone: (202) 662-6000
Fax: (202) 662-6291
For Ensource:
Leslie E. LoBaugh, Jr.
Thomas R. Brill
David J. Gilmore
633 West Fifth Street
Suite 5400
Los Angeles, California 90071
Phone: (213) 895-5138
Fax: (213) 629-9621
c. Designation of territories served, by counties
and states.
SDG&E provides gas service to San Diego County and
electric service to San Diego County and a portion of Orange
County.
d. A general statement briefly describing the
facilities owned or operated for transmission
of electric energy in interstate commerce or
the sale of electric energy at wholesale in
interstate commerce.
Neither Pacific nor any subsidiary of Enova other
than SDG&E has any such facilities, other than certain books,
contracts and accounts.
SDG&E's fossil generating capacity consists of two
steam stations, Encina with a capacity of 951 MW, and South
Bay with a capacity of 690 MW, plus various relatively small
combustion turbines with a total capacity of 332 MW.
Additionally, SDG&E owns a 430-MW share of Units 2 and 3 of
the San Onofre Generation Station ("SONGS").
SDG&E's transmission system includes 279 circuit
miles of 500 kV lines, 358 circuit miles of 230 kV lines, 318
circuit miles of 138 kV lines; and 938 circuit miles of 69 kV
lines.
SDG&E's ownership interest in the 500 kV Southwest
Powerlink ("SWPL") includes 159 circuit miles in California
and 120 circuit miles in Arizona, for a total of 279 circuit
miles.
- -----------------------------------------------------------
The SWPL is comprised of three 500 kV line segments,
partially or wholly owned by SDG&E. SDG&E's ownership share
of the various SWPL line segments is as follows: Palo Verde -
North Gila 76.22 percent, North Gila - Imperial Valley 85.64
percent and Imperial Valley - Miguel 100.00 percent.
- ---------------------------------------------------------
SDG&E owns five 230 kV transmission lines interconnecting
SDG&E to Edison at the SONGS 230 kV substation. It also owns
two 230 kV lines interconnecting SDG&E to the Comision Federal
de Electricidad ("CFE") at Miguel and Imperial Valley
Substations. These facilities, combined with SDG&E's
entitlements described in the following paragraph, primarily
serve to integrate the SONGS generating resources, the Pacific
Northwest (via the 500 kv AC and 1000 kV DC Pacific Intertie),
Baja Norte California (Republic of Mexico), and the
southwestern United States (Arizona and other interconnected
States) with SDG&E's load.
In addition, SDG&E has entitlements to 161 MW on the
California Pacific AC Intertie ("PACI") and to 105 MW on the
California Pacific DC Intertie ("PDCI"), for a total Pacific
Intertie share of 266 MW in the North-to-South direction. In
the South-to-North direction, SDG&E's total entitlement is 108
MW. SDG&E's entitlement points of delivery or receipt are at
the California-Oregon Border for the PACI and the
Nevada-Oregon Border for the PDCI, and ultimately at the SONGS
substation.
(e) Whether the application is for disposition of
facilities by sale, lease or otherwise, a
merger or consolidation of facilities, or for
purchase or acquisition of securities of a
public utility, also a description of the
consideration, if any, and the method of
arriving at the amount thereof.
As described more fully above, pursuant to the
Combination Agreement, which Pacific and Enova negotiated at
arms length, Pacific and Enova will be merged with and into
NewCo, which will be the surviving corporation. Upon
completion of the merger process, Pacific shareholders will
have the right to receive 1.5038 shares of NewCo common stock,
no par value per share, for each share of Pacific common stock
outstanding; Enova shareholders will have the right to receive
1.0 share of NewCo common stock for each share of Enova stock
outstanding. The merger involves a combination of two
companies through exchanges of stock; no "consideration" is
being paid.
(f) A statement of facilities to be disposed of,
consolidated, or merged, giving a description
of their present use and of their proposed use
after disposition, consolidation, or merger.
State whether the proposed disposition of
facilities or plan for consolidation or merger
includes all the operating facilities of the
parties to the transaction.
The proposed merger includes all of the operating
facilities of the Applicants. They are described above.
Appropriate disposition of Pacific's interest in the
above-described QFs will be made prior to completion of the
merger to assure that they do not lose their qualifying status
under PURPA as a result of the merger. As noted above,
Applicants would accept a condition requiring full divestiture
of Pacific's QFs in relevant geographic markets if the
Commission concludes that such divestiture is necessary for
merger approval, to avoid the need for filing the full market
screen analysis set forth in the Merger Policy Statement, or
to avoid evidentiary hearings. If the Commission imposes a
condition of full divestiture of Pacific's QFs, Applicants
request that Pacific be provided one year following
consummation of the merger to dispose of these facilities to
avoid a "fire sale" and potential loss of shareholder value.
Applicants would propose that Pacific credit any net revenues
back to the purchasing utility during this interim period to
address any market power concerns.
(g) A statement of the cost of the facilities
involved in the sale, lease, or consolidation.
All of the jurisdictional facilities of the
Applicants are, and after the merger is consummated will
continue to be, accounted for pursuant to the Commission's
Uniform System of Accounts. Original cost is the basis for
the valuation of Pacific's and Enova's utility plant service.
Statements of the utility plant in service and the cost
thereof are included as part of Exhibit C to this application.
(h) A statement as to the effect of the proposed
transaction upon any contract for the purchase,
sale, or interchange of electric energy.
The merger will have no effect on any contract for
the purchase, sale or interchange of electric energy. In
particular, as described above, SDG&E and Enova Energy will
maintain their corporate existence and will remain bound by
existing contracts.
(i) A statement as to whether or not any
application with respect to the transaction or
any part thereof is required to be filed with
any other Federal or State regulatory body.
Pacific and Enova have filed for, or will file for,
several other regulatory approvals, in addition to those
required from this Commission. The following approvals are
required:
1. Securities and Exchange Commission - As described
above, Pacific and Enova will file with the SEC for approval
of the transaction under Section 9(a)(2) of PUHCA. They will,
simultaneously, ask the SEC to rule that both they and NewCo
will, after the consummation of the transaction, be exempt
under Section 3(a)(1) from PUHCA's registration requirement.
2. Nuclear Regulatory Commission - SDG&E owns a 20
percent undivided interest in San Onofre Nuclear Generating
Station ("SONGS") Units 2 and 3 under a license issued by the
Nuclear Regulatory Commission ("NRC"). On December 2, 1996,
SDG&E submitted a letter to the NRC seeking consent, pursuant
to the Atomic Energy Act, if such consent is required, for the
proposed merger. There will be no change in the operation of
either SONGS 2 or 3 as a result of the proposed merger. A
copy of this filing is part of Exhibit G.
3. Other Regulatory Approvals - On October 30, 1996,
the Pacific and Enova filed an application with the CPUC
seeking approval of the merger pursuant to Section 854 of the
California Public Utilities Code. A copy of this application
is included herewith as part of Exhibit G, along with
supporting testimony Pacific and Enova have submitted to the
CPUC.
In addition to the applications identified above,
Pacific and Enova are required to file a notification or
report form to the Federal Trade Commission ("FTC") and the
Antitrust Division of the United States Department of Justice
("DOJ") under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 ("HSR"). HSR requires that certain information be
filed with the FTC and DOJ, and that certain waiting periods
expire before completing the merger transaction.
(j) The facts relied upon by Applicants to show
that the proposed disposition, merger, or
consolidation of facilities or acquisition of
securities will be consistent with the public
interest.
The instant application, with accompanying exhibits
and prepared direct testimony, provides the facts relied upon
by the Applicants to show that the combination will be
consistent with the public interest.
(k) A brief statement of franchises held, showing
date of expiration if not perpetual.
SDG&E has separate electric and gas franchises with
the two counties and the 25 cities in its service territory.
These franchises allow SDG&E to locate facilities for the
transmission and distribution of electricity and gas in the
streets and other public places. The franchises do not have
fixed terms, except for the electric and gas franchises with
the Cities of Chula Vista (expiring in 1997), Encinitas
(2012), San Diego (2021), and Coronado (2028); and the gas
franchises with the City of Escondido (2036) and the County of
San Diego (2030).
(l) A form of notice suitable for publication in
the Federal Register, which will briefly
summarize the facts contained in the
application in such way as to acquaint the
public with its scope and purpose.
A form of notice, suitable for publication in the
Federal Register is set forth in Appendix A to the transmittal
letter submitted herewith.
IX.
REQUIRED EXHIBITS
Pursuant to Section 33.3 of the Commission's
Regulations, the following exhibits are attached.
- ------------------------------------------------------------
Applicants believe that these exhibits comply
substantially with the requirements of Section 33.3. To the
extent that they do not meet any of those requirements,
Applicants respectfully request that the requirements be
waived.
- -------------------------------------------------------------
Exhibit A
Copies of Corporate Resolutions Authorizing the
Transaction
Attached as Exhibit A.
Exhibit B
Statement as to Measure of Control or Ownership
Attached as Exhibit B.
Exhibit C
Balance Sheets
Attached as Exhibit C.
Exhibit D
Contingent Liabilities
Attached as Exhibit D.
Exhibit E
Income Statements
Attached as Exhibit E.
Exhibit F
Retained Earnings
Attached as Exhibit F, Pacific and Enova for the period
covered by the income statements referred to in Exhibit E is
provided as Exhibit F.
Exhibit G
State and Federal Applications
As of the date of this application, the only applications
filed with any other Federal or State regulatory body in
connection with the proposed merger are the application filed
with the CPUC on October 30, 1996 (copy attached) and the
application for the requisite NRC approval filed on December
2, 1996. Also included in Exhibit G is testimony filed in
support of the application, and a copy of Section 854 of the
California Public Utilities Code.
- --------------------------------------------------------
The CPUC Application and testimony are not being served on
parties to the CPUC proceeding. Applicants will provide
copies to those parties that do not have them.
- --------------------------------------------------------
Exhibit H
Copy of All Contracts with Respect to the Proposed
Transaction
The application to the CPUC for approval of the proposed
merger, Exhibit G hereto, includes a copy of the Agreement and
Plan of Merger and Reorganization By and Among Enova
Corporation, Pacific Enterprises, Mineral Energy Company, G
Mineral Sub and B Mineral Sub dated October 12, 1996 (the
"Combination Agreement").
At the time they submitted the Combination Agreement to
the CPUC, Enova and Pacific withheld certain exhibits to the
Combination Agreement on the grounds that the exhibits
contained confidential and commercially sensitive information.
Since the original submission to the CPUC, Enova and Pacific
have disclosed to the parties in the CPUC proceeding certain
portions of those exhibits. Those portions are provided in
Exhibit H hereto. Also included in Exhibit H is a subsequent
amendment to the Combination Agreement ("Amendment No. 1 to
Agreement and Plan of Merger and Reorganization").
Other exhibits to the Combination Agreement, or portions
thereof, remain privileged and confidential. Certain other
contracts with respect to the proposed transaction are also
privileged and confidential. Enova and SDG&E have submitted
these materials to the Commission under separate seal, and
request that they be treated as privileged and confidential
pursuant to 18 C.F.R. Section 388.112.
Exhibit I
Map
Exhibit I is a map showing the service area and
transmission facilities of SDG&E, the only party to the
transaction having physical facilities subject to the
Commission's jurisdiction under the FPA.
X.
CONCLUSION
Because the merger of Pacific and Enova is clearly
consistent with the public interest, and because of the
imminent onset of retail competition in California, the
Applicants respectfully request that the Commission grant its
approval as promptly as possible, and in any event, by
December 1997.
Respectfully submitted,
SAN DIEGO GAS & ELECTRIC COMPANY ENSOURCE
ENOVA ENERGY, INC.
By: By:
Nicholas W. Fels David J. Gilmore
Nicholas W. Fels Leslie E.LoBaugh, Jr.
Matthew S. Yeo Thomas R. Brill
Covington & Burling David J. Gilmore
1201 Pennsylvania Avenue, N.W. 633 West Fifth Street
P. O. Box 7566 Suite 5400
Washington, D.C. 20044-7566 Los Angeles, CA 90071
Phone: (202) 662-6000 Phone: (213) 895-5138
Fax: (202) 662-6291 Fax: (213) 629-9621
Michael C. Tierney
P. O. Box 1831
San Diego, CA 92112-4150
Phone: (619) 699-5027
Fax: (619) 699-5027
January 27, 1997
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
San Diego Gas & Electric Company )
) Docket No. EC97-___-000
Enova Energy, Inc. )
PREPARED DIRECT TESTIMONY
OF
WILLIAM H. HIERONYMUS
I. QUALIFICATIONS AND SUMMARY OF CONCLUSIONS
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. I am William H. Hieronymus. My business address is Putnam,
Hayes & Bartlett, 1 MemoriaI Drive, Cambridge, MA, 02138.
Q. WHAT IS YOUR OCCUPATION?
A. I am a Managing Director of Putnam, Hayes & Bartlett, Inc.
("PHB"), an economic and management consulting firm with offices
in Cambridge, Washington, DC, Palo Alto, CA, Los Angeles, CA,
London, England, Auckland, New Zealand, and Wellington, New
Zealand.
I received my Bachelor's degree from the University of Iowa
in 1965, my Master's degree in economics in 1967 and a Doctoral
degree in economics in 1969 from the University of Michigan,
where I was a Woodrow Wilson Fellow and National Science
Foundation Fellow. After serving in the U.S. Army, I began my
consulting career. In 1973, I joined Charles River Associates
Inc. as a specialist in antitrust economics. By the mid-1970s my
focus was principally on the economics of energy and network
industries. In 1978, I joined PHB, where my consulting practice
has focused almost exclusively on network industries,
particularly electric utilities.
During the past 23 years, I have completed numerous
assignments for electric utilities; state and federal government
agencies and regulatory bodies; energy and equipment companies;
research organizations and trade associations; independent power
producers and investors; international aid and lending agencies;
and foreign governments. While I have worked on most
economics-related aspects of the utility sector, a major theme
has been public policies and their relation to the operation of
utility companies.
Since about 1988, the main focus of my consulting has been
on electric utility industry restructuring, regulatory innovation
and privatization. In that year I began work on the
restructuring and privatization of the electric utility industry
of the United Kingdom, an assignment on which I worked nearly
full time through the completion of that restructuring in 1990.
I also led a major study of the reorganization of the New
Zealand electricity sector, focusing mainly on competition issues
in the generating sector. Following privatization of the U.K.
industry, I continued to work in the United Kingdom for
electricity clients based there, and I was also involved in
restructuring studies concerning the former Soviet Union, Eastern
Europe, the European Union and specific European countries.
In 1993, I returned to the United States, where I have
worked on restructuring, regulatory reform and, more generally,
on the increasingly competitive future of the U.S. electricity
industry. In this context, I have sponsored testimony before the
Federal Energy Regulatory Commission (FERC or "the Commission")
and state utilities commissions in several merger and market rate
cases. In particular, I have sponsored testimony before the FERC
and the California Public Utilities Commission (CPUC) on the
restructuring process in California and the market power issues
that it raises.
More generally, I have testified before state and federal
regulatory bodies, legislative bodies and federal courts on
numerous occasions, principally on electric utility matters
but also on antitrust and civil litigation. My resume is
attached as Exhibit No. ___ (WHH-1).
Q. WHAT IS YOUR ASSIGNMENT IN THIS PROCEEDING?
A. I have been asked by San Diego Gas & Electric Company
(SDG&E) and Enova Energy, Inc. ("Enova Energy"; collectively,
"Applicants") to evaluate the impact of the proposed merger of
Pacific Enterprises (PE) and Enova Corporation ("Enova") on the
competitiveness of electricity markets. This testimony contains
the findings of that analysis.
Q. WHAT MARKETS DID YOU CONSIDER?
A. I examined the merger's potential impact on horizontal
market power in markets for wholesale electricity generation.
- -----------------------------------------------------------------
In its Order No. 592, the Commission has stated that its
merger assessments will address retail competition when it is
requested to do so by a state commission that lacks authority
under state law to conduct such a review. Docket No.
RM-96-6-000, Order No. 592 ("Merger Policy Statement"), slip. op.
at 51. The CPUC has jurisdiction over any retail markets
affected by the proposed merger, and I have filed testimony
before the CPUC that addresses those issues. Therefore, I have
not examined retail electricity markets in this proceeding, other
than with respect to interfuel competition.
- ----------------------------------------------------------------
I have examined the potential for horizontal or vertical
market power associated with electricity transmission. I have
also considered whether the combination of PE's gas distribution
and Enova's generation businesses could give rise to vertical
market power. Finally, I have also considered whether retail
interfuel competition exists in the limited area that is common
to the franchised electric service territory of SDG&E and the
franchised gas service territory of Southern California Gas
Company ("SoCalGas," the gas utility subsidiary of PE).
Q. PLEASE SUMMARIZE YOUR CONCLUSIONS.
A. This merger will not reduce competition or create market
power in any of the markets I have examined. Fundamentally, the
merger will combine the holding companies of two utilities. One
is a gas utility whose electricity market participation is
limited to ownership of a small number of affiliated qualifying
facilities (QFs) that are in the process of being at least
partially divested. The other is an adjacent gas and electric
utility.
The two companies do not compete to any significant extent,
and the merger will have no adverse horizontal effects. Any
potential vertical effects will be prevented by existing CPUC
rate regulation and standard regulatory restrictions on affiliate
dealings.
More specifically, the merger will not create horizontal
market power in electric generation. It involves a small and
severely capacity-short electric utility, which currently has
very little ability to compete in wholesale electricity markets
and will be a small player in the planned WEPEX market, and an
alternative energy company (PE's subsidiary, Pacific Energy) that
has very little capacity. All of the PE capacity resources are
sold under long-term contracts and PE will have to divest
substantially more than half of those resources before the merger
is consummated to comply with PURPA restrictions on qualifying
facility ownership.
Because the merging companies will have so little capacity
available to participate in the wholesale electricity market, it
necessarily follows that the merger will have, at most, a very
small effect on the merged entities' market share and in the
concentration level (as reflected by the Herfindahl-Hirschman
Index, or HHI) of any geographic or product market. Even using
the narrowest possible geographic market definition, and greatly
underestimating the amount of capacity available to compete with
the companies' resources, the change in the HHI associated with
this merger is less than 10 points. According to the Department
of Justice/Federal Trade Commission Merger Guidelines ("Merger
Guidelines"), mergers that change the HHI by less than 50
points are presumed not to reduce market competitiveness, even in
highly concentrated markets. This merger clearly meets that
criterion.
Because these facts are so clear, I have taken a very
conservative approach to implementing the market power analysis
described in Commission Order No. 592 ("Merger Policy
Statement"). As is discussed below, I have limited my analysis
to a highly conservative analysis of the structure of potential
geographic markets using the guidance set forth in Appendix A to
that Statement. From this analysis, I believe that it clearly
and logically follows that the merger would fall well within the
allowable limits of the screening criteria for any other markets
that the Appendix A methodology would suggest to be appropriate,
as such markets would almost certainly be more liberally defined
than those I have examined here. As the Applicants have stated
in the application in this proceeding, if the Commission
disagrees with the conclusion that the full Appendix A analysis
is unnecessary, and determines that its review of the proposed
merger requires the complete screening analysis, then PE is
willing to divest the remaining QF capacity in the Western
Systems Coordinating Council (WSCC) that it could otherwise
retain under PURPA. If this complete divestiture occurs, PE will
no longer own any electric generation facilities in any relevant
geographic area and will have no electricity to sell. As the
Commission states on Page 8 of the Merger Policy Statement, when
merging firms lack facilities and do not sell relevant products
in common geographic areas, there is no need for a screening
analysis since the merger cannot have an adverse competitive
impact.
Given the de minimis participation of PE in electricity
markets, the only potential competitive issue affecting
electricity arises from the merger of SDG&E's electricity
operations into a company also owning PE's gas operations. This
merger will not have meaningful effects on horizontal market
power stemming from the potential for competition between gas and
electricity. Gas clearly is not directly substitutable for
electricity in wholesale electricity markets. Any possible
substitutability is derived from substitution at the retail
level.
While gas and electricity are substitutes in some uses, the
weakness of substitution means that they cannot be considered to
be in the same market under the Guidelines criteria for product
market definition. Such substitution as is possible requires
replacement of expensive durable appliances and other equipment.
Further, the fact that there will be direct and vigorous
competition among electricity suppliers in California means that
the weak barrier to the exercise of market power that gas
competition represents is redundant and irrelevant.
I also find that this merger will neither create nor enhance
horizontal or vertical market power related to electricity
transmission. PE neither owns nor controls transmission
facilities, and, under the California restructuring plan,
operational control over SDG&E's transmission system will be
transferred to an Independent System Operator (ISO). The merger
therefore will not affect the breadth of transmission
alternatives available to transmission service purchasers.
Further, SDG&E has filed an open-access tariff in compliance with
the Commission's Order No. 888. The existence of the ISO and
SDG&E's open-access tariff ensure that no vertical market power
exists, or could be augmented, by the merger. In this context it
is also notable that PE will own only two MW of generation in the
areas served by SDG&E transmission facilities.
Hence, the merger cannot meaningfully increase any incentive
that SDG&E might have, were it possible to do so, to manipulate
its transmission to favor newly-affiliated generation.
Similarly, this merger raises no significant concerns about
the potential exercise of vertical market power in electricity
generation through the combination of PE's gas operations with
SDG&E's electricity operations.
There is no competition between SDG&E and SoCalGas to
provide gas transportation services to generators, and indeed
they cannot do so under California franchise regulation. SDG&E
is a transportation customer of SoCalGas. However, SoCalGas's
transportation operations are subject to open-access regulation
by the CPUC, and the price and other terms of its tariffs are
CPUC-regulated, which provides protection against SoCalGas
favoring affiliated generation. SoCalGas has undertaken to
follow Commission Order No. 497 (as modified by subsequent
Commission orders), so that if SDG&E receives any transportation
discounts from SoCalGas, SoCalGas will contemporaneously post
notice of those discounts on the SoCalGas electronic bulletin
board and make a comparable discount available to all similarly
situated non-affiliated shippers.
Further, SoCalGas will not provide non-public market
information to any affiliated marketer or to SDG&E's electricity
marketing personnel.
Finally, while the Commission's recent Merger Policy
Statement focuses solely on wholesale competition, I have also
considered the merger's possible impact on retail competition in
the small area where the franchised gas and electric utility
service territories of SDG&E and SoCalGas overlap. The overlap
area (south Orange County) affects only seven percent of SDG&E's
customers and less than two percent of SoCalGas's. The other 93
percent of SDG&E electric customers are already served by SDG&E's
gas operations. Virtually all gas customers, and all electric
customers in this area are served under CPUC regulated tariffs
and electricity will be subject to electricity-on-electricity
competition. Hence, the merger will not meaningfully affect
competitive restraints on electricity pricing to the small
proportion of customers that will now be served by an affiliated
gas company.
Q. HOW IS THE REMAINDER OF YOUR TESTIMONY ORGANIZED?
A. Section II briefly describes the merging parties' business
operations. In Section III, I review the critical issues of
merger analysis raised by the Merger Policy Statement. In
Section IV, I describe the very minor competitive presence of the
merging parties and show that, even in the most narrowly-defined
market, the merger will not create or enhance market power.
Section V summarizes my conclusions.
II. DESCRIPTION OF THE MERGING PARTIES
Q. PLEASE DESCRIBE PACIFIC ENTERPRISES.
A. PE is an exempt public utility holding company whose
principal operating company is SoCalGas. SoCalGas, which is not
engaged in the generation, sales or transmission of electricity,
provides gas service to 4.7 million customers in central and
southern California.
- ----------------------------------------------------------------
SoCalGas owns seven fuel cell demonstration projects in
southern California, with a total capacity of 1.6 megawatts. The
electricity generated by each of these cells is used only by the
facility at which the cell is located.
- -----------------------------------------------------------------
Exhibit No. ___ (WHH-2) depicts the SoCalGas service area.
PE has a number of other subsidiaries, including two companies
(Pacific Interstate Transmission Company and Pacific Interstate
Offshore Company) that operate pipelines jurisdictional to FERC
under the Natural Gas Act and Pacific Offshore Pipeline Company,
a non-jurisdictional gathering facility.
- ----------------------------------------------------------------
See Pacific Offshore Pipeline Co., 64 FERC Para. 61,167
(1993).
- -----------------------------------------------------------------
Two PE subsidiaries have some involvement in electricity
markets. Pacific Energy has direct or (in some cases) indirect
ownership interests in QFs that have a total of 182 megawatts
(MW) of capacity. Of that total capacity, 166 MW is located in
the western United States, including 71 MW in northern California
(of which PE owns 58.25 MW) and 78 MW in southern California (of
which PE owns 54 MW). Exhibit No. ___ (WHH-3) lists these
facilities, their total capacities, PE's share and their current
contractual commitments. By the time the merger is consummated,
in accordance with PURPA requirements Pacific Energy will have
reduced its share in each of these plants to no more than 50
percent. Because some of these facilities already are partly
owned by other electric utilities, PE will, in some cases, have
to sell its entire ownership share. Specifically, it will be
able to retain only 37.75 MW of the entitlements that it has in
California, 15 MW of which are in southern California and 22.75
MW in northern California. It will retain only 2.5 MW of
capacity elsewhere in the WSCC.
Another PE subsidiary, Ensource, has been authorized by the
FERC to sell electricity at market-based rates.
- -----------------------------------------------------------------
See letter of Mr. Donald J. Gelinas, Director, Division of
Applications, dated 10 July 1996 in FERC Docket No.
ER96-1919-000.
- -----------------------------------------------------------------
Ensource currently has no wholesale purchase or sales
contracts and does not expect to undertake any such contracts in
the future. Additionally, Ensource has filed a notice of
cancellation of its FERC rate schedule in Docket No.
ER97-703-000.
Q. PLEASE DESCRIBE ENOVA CORPORATION.
A. Enova is an exempt public utility holding company with
several subsidiaries. Its main subsidiary is SDG&E, a franchised
utility serving 1.2 million electric customers in San Diego
County and a small part of southern Orange County and 700,000 gas
customers in San Diego County. Exhibit No. ___ (WHH-2) outlines
SDG&E's gas and electric service territories.
As an electric utility, SDG&E is significantly
capacity-short. It has 2,403 MW of owned capacity and 1996 firm
purchases (including purchases from QFs) of 1,434 MW; SDG&E makes
no firm capacity sales.
- -----------------------------------------------------------------
SDG&E occasionally makes spot sales of very short-term
capacity.
- -----------------------------------------------------------------
Its total firm resources in 1996 thus totaled 3,837 MW,
against a forecast 1996 peak load and reserves of 3,919 MW.
- -----------------------------------------------------------------
SDG&E's actual 1996 peak, excluding reserves, was 3,305 MW.
- -----------------------------------------------------------------
SDG&E has for more than a decade followed a strategy of
meeting its load through capacity purchases rather than
generation expansions. It has therefore been capacity-short for
several years and expects to remain so at least through the end
of the decade. Exhibit No. ___ (WHH-4) shows SDG&E's loads and
resources for 1996 through 2000. Not surprisingly, given its
capacity/load balance, SDG&E has significant net purchases of
energy; in 1995, for example, its net purchases were 10.1 million
megawatt-hours (MWh), or 65 percent of its retail sales of 15.5
million MWh.
- -----------------------------------------------------------------
SDG&E FERC Form 1, 1995, page 401. Its purchases were 10.5
million MWh and its non-requirements sales for resale were 0.4
million.
- -----------------------------------------------------------------
Under the California electric restructuring process
("WEPEX"), SDG&E, along with the other investor-owned utilities
in California and other parties, will participate in the
California power exchange (PX) and the California Independent
System Operator (ISO), and has submitted extensive filings to
both FERC and the CPUC concerning the creation and functioning of
those institutions. As a generator, SDG&E will be a relatively
small participant in the power exchange; it is about one-fifth
the size of both Southern California Edison (SCE) and Pacific
Gas and Electric (PG&E) and one-third the size of the Los Angeles
Department of Water and Power (LADWP). Even after the
divestiture that SCE and PG&E have proposed in response to the
CPUC's orders, each of those utilities will own more generating
capacity than SDG&E.
Other utilities that are wholly or primarily located outside
California but are directly interconnected with California
utilities, such as the Bonneville Power Administration and
PacifiCorp, also are much larger than SDG&E. Under the
Commission's restructuring orders, SDG&E is committed to bid in
all of its generation to the exchange for the first five years,
and to serve its retail load through purchases from the exchange.
In testimony before the Commission and the CPUC, SDG&E has
reported that it will have the ability, in about 750 hours a
year, to exert market power within the San Diego Basin, due to
transmission constraints on imports into the Basin. As I will
describe a greater length below, SDG&E has submitted proposals
that fully mitigate that market power.
- -----------------------------------------------------------------
See FERC Docket No. ER96-1663-000, Supplement of Southern
California Edison Company and San Diego Gas & Electric Company to
Application for Authority to Sell Electric Energy at Market-Based
Rates Using a Power Exchange, 29 May 1996, at III-23 to III-27.
- -----------------------------------------------------------------
Enova has another subsidiary engaged in sales of electricity.
Enova Energy is a power marketer with recent FERC authorization
to sell at market-based rates.
- -----------------------------------------------------------------
Enova Energy, Inc., 76 FERC Para. 61,242, (9 September
1996).
- -----------------------------------------------------------------
Enova Energy has made no sales of electricity at wholesale
to date, and has no long-term purchase contracts.
III. MERGER ANALYSIS UNDER THE MERGER POLICY STATEMENT AND ITS
APPLICATION TO THIS PROCEEDING
Q. WHAT ARE THE GENERAL MARKET POWER ISSUES RAISED BY MERGER
PROPOSALS?
A. Market power analysis of a merger proposal examines whether
the merger would cause a material increase in the merging firms'
market power or a significant reduction in the competitiveness of
relevant markets. Market power is defined as the ability of a
firm or group of firms to profitably sustain a significant
increase in the price of their products above a competitive
level.
In merger market power analyses, the critical issue is the
change in market competitiveness due to the merger, rather than
whether relevant markets are fully competitive (i.e., were fully
competitive prior to the merger). While the pre-merger
competitiveness of markets may, as under the DOJ/FTC Merger
Guidelines adopted by the Commission in the Merger Policy
Statement,
- -----------------------------------------------------------------
Merger Policy Statement, slip op. at 22.
- -----------------------------------------------------------------
affect the amount of such change that is acceptable, the
focus still is on the change in market competitiveness caused by
the merger.
This focus on the effect of the merger means that the merger
analysis examines those business areas where the merging firms
are competitors. As the Commission has noted, markets in which
the merging firms do not compete will, in most instances, be
unaffected by the merger. That is, no horizontal market power
will be created by the merger of two companies that do not
compete.
It is possible, however, that mergers of non-competing
companies could create vertical market power. This may occur in
the case of a combination of a provider of an input with a user
of that input. Vertical market power relates to the effect of
the merger on the merging firms' ability and incentives to use
their market position in a related business to affect
competition. In the case of a merger of electric utilities, for
example, vertical market power could result if the merger created
an opportunity and incentive to operate transmission in a manner
that created market power for the merged companies that did not
exist previously.
Q. WHAT ARE THE MAIN ELEMENTS IN DEVELOPING AN ANALYSIS OF
MARKET POWER?
A. Broadly, understanding the competitive impact of a merger
requires defining the relevant market (or markets) in which the
merging firms participate. Participants in a relevant market
include all suppliers (and in some instances, potential
suppliers) that can compete in the supply of the products
produced by the merging parties and whose ability to do so
restrains the ability of the merging parties to increase prices.
Thus, determining the scope of a market is fundamentally an
analysis of the potential for competitors to respond to an
attempted price increase. Typically, markets are defined in two
dimensions: geography and product attributes. The relevant
market is thus composed of companies that can supply a given
product (or its close substitute) to customers in a given
geographic area.
Q. WHAT METHOD DOES THE COMMISSION, IN ITS MERGER POLICY
STATEMENT, SUGGEST USING FOR THE ANALYSIS OF PROPOSED
MERGERS INVOLVING ELECTRIC UTILITIES?
A. The Commission has adopted the Guidelines approach to
evaluating mergers. In adapting the Guidelines to the particular
features of electricity, it has outlined a "screening analysis"
that it expects will provide a conservative measure of
competition in relevant product and geographic markets. The
screening analysis method seeks to identify supply resources that
are economically viable alternatives for the products sold by
merger applicants and are physically capable of being delivered
to the purchasers. The screening analysis will consider the
supply alternatives available to electric utilities that are
directly interconnected to either of the merging parties, as well
as those electric utilities that historically have been trading
partners with either or both merger applicants.
- -----------------------------------------------------------------
Merger Policy Statement, slip op. at Appendix A, p. 5.
- -----------------------------------------------------------------
In identifying these alternative capacity resources, the
Commission has described a number of factors that should be
considered, including the prevalence of transmission constraints,
the level of posted transmission tariffs, and the costs
associated with generation from that capacity.
After the scope of these markets has been identified, i.e.,
the amount of capacity that can be expected to compete in making
sales to each purchasing utility, and the ownership of that
capacity, the merger's effect on their competitiveness is
assessed. Mergers that meet the threshold criteria of the
Guidelines, in terms of the change in HHI, will likely not be
subject to further review of market power issues. Mergers that
do not meet the Guidelines criteria will likely be set for
hearing or otherwise be subject to additional examination. The
Commission has suggested that the product markets it has
previously found relevant long-term capacity, short-term
capacity, and non-firm energy will continue to be its focus,
although there may be cases in which those products should be
considered under varying load or supply conditions.
- -----------------------------------------------------------------
Merger Policy Statement, slip op. at Appendix A, p. 4.
- -----------------------------------------------------------------
I should note that the screening analysis addresses issues
of horizontal market power, but does not prescribe any particular
methodology for analyzing vertical market power.
IV. COMPETITION BETWEEN ENOVA AND PE
Q. IN ITS MERGER POLICY STATEMENT, HAS THE COMMISSION REQUIRED
THAT THE SCREENING ANALYSIS BE PERFORMED IN SUPPORT OF EVERY
MERGER INVOLVING AN ELECTRIC UTILITY?
A. No, it has not. In both the body of the Merger Policy
Statement, as well as in its Appendix A, which details the
competitive analysis screen, the Commission has stated that
proposed mergers of companies that do not compete in common
markets need not be evaluated through the screening
analysis.
- -----------------------------------------------------------------
Merger Policy Statement, slip op. at 8 and at Appendix A,
p. 22.
- -----------------------------------------------------------------
Q. ARE THE PARTIES PROPOSING A MERGER FOR WHICH THE SCREENING
ANALYSIS IS NECESSARY?
A. No. PE's capacity resources are extremely small, providing
it with virtually no ability to compete in electricity markets.
Combining the PE resources with the SDG&E capacity which is
relatively minor itself will produce a tiny change in the HHI
(less than 10 points), even using the narrowest possible
definition of geographic markets and severely limiting the
capacity that is considered to compete with the companies'
capacity.
- -----------------------------------------------------------------
In my analysis, I focus on non-firm energy markets. The
Commission has previously found that long-term capacity markets
are presumptively competitive; in Docket No. ER96-1663-000, SDG&E
has noted that it does not control generation sites. See FERC
Docket No. ER96-1663-000, Supplement of Southern California
Edison Company and San Diego Gas & Electric Company to
Application for Authority to Sell Electric Energy at Market-Based
Rates Using a Power Exchange, 29 May 1996, at III-28. Analysis
of short-term capacity markets is unnecessary because SDG&E is,
as discussed above, severely capacity-short and all of PE's
capacity is committed via long-term contract.
Consequently, the companies have no uncommitted resources
with which to compete in capacity markets.
- -----------------------------------------------------------------
Q. PLEASE DESCRIBE HOW YOU REACHED THE CONCLUSION THAT THE
MERGER WILL NOT CREATE A MATERIAL CHANGE IN HHI LEVELS.
A. As I have said, PE's only generation resources are the
Pacific Energy QFs located in California, Washington, Maine and
Maryland. Clearly, only the California and Washington facilities
(with a total capacity of 166 MW) could conceivably be relevant
to the analysis of this merger. In order to comply with PURPA
standards that require utilities and their affiliates to own no
more than a 50 percent share of any QF, PE will, by the time of
the merger, divest all but 40.25 MW of its interest in the WSCC
facilities. This is all of the capacity that PE brings to the
merger under the broadest possible definition of a relevant
geographic market.
Similarly, SDG&E is a very small participant in wholesale
electricity markets. As shown in Exhibit No. ___ (WHH-4), for
1997 (at the time of the summer peak) the company projects 3,939
MW of total resources: 2,403 of owned capacity, 236 MW of
purchases from cogeneration facilities and other non-utility
generators, and firm purchases of 1,300 MW.
- -----------------------------------------------------------------
These figures are based on SDG&E's April 1996 submission
to the California Energy Commission ("CEC"). I am advised that
as part of its standard procurement process, SDG&E is completing
short-term contracts that will allow it to meet its 1997 peak.
- -----------------------------------------------------------------
Thus, this merger will add at most 40.25 MW, about 1
percent, to the capacity currently available to SDG&E. This
capacity is still more trivial relative to the capacity in the
region as a whole; California alone contains over 50,000 MW of
generating capacity. Even after the implementation of their
announced divestitures, SCE and PG&E will both be larger than the
combined company, as will LADWP; moreover, if SCE accepts, as it
has announced it might, just two purchasers for its divested
generation, each of those two purchasers would also be larger
than the combined Pacific/Enova entity. In short, the new
company will be a small participant in a region characterized by
larger participants.
Q. HAVE YOU PERFORMED ANY ANALYSIS THAT MEASURES HOW THE MERGER
WILL AFFECT CONCENTRATION?
A. Yes, I have. In Appendix A to the Merger Policy Statement,
the Commission has described an approach to analyzing electricity
related markets that focuses on the factors determining the scope
of geographic and product markets. I have considered these
factors, and made extremely conservative assumptions for each.
The results of this analysis show that the proposed merger will
not create or enhance market power in any geographic market under
any load conditions.
Specifically, I have analyzed competition in a geographic
market consisting only of southern California, under the
assumption that only generation located in southern California
can compete in that market. Southern California is the narrowest
destination market that could be addressed under FERC policy
guidance. The assumption that no outside generation can compete
in that market is very conservative. As a logical matter, it
also is the case that if the merger does not increase
concentration in southern California, it cannot increase it in
any other destination market.
As the Commission requests in Appendix A, I have examined
the southern California market under different load conditions.
SDG&E's generation consists only of must-take capacity (nuclear
and cogeneration resources), fossil steam units, and peaking
capacity.
PE's only resources are QFs. Therefore, I have considered
three potential load conditions: minimum load conditions, when
only must-take and hydro resources are in the market; moderate
load conditions, when fossil steam units are the marginal units,
and peak conditions, when peaking capacity sets the market price.
My analysis makes extremely conservative assumptions on the
amount of competing capacity that would be in the market in each
setting.
Q. WHY IS SOUTHERN CALIFORNIA THE MOST CONSERVATIVE POSSIBLE
DESTINATION MARKET?
A. Southern California is the smallest possible relevant market
because of the nature of transmission pricing under the
California restructuring and the absence of transmission
constraints within southern California.
Under the restructuring proposals embodied in California
Assembly Bill 1890, signed into law last year, there is no tariff
pancaking within southern California indeed, there is none using
the transmission owned by California utilities. Hence,
transmission pricing cannot define a smaller market (i.e., no
individual utility in California can properly be considered a
destination market separate from other California utilities).
In addition, I am advised by SDG&E that the company has
identified no constraints that limit the flow of power within
southern California.
- -----------------------------------------------------------------
SDG&E has previously reported to the Commission that the
simultaneous import limit (SIL) may, at times, constrain
transfers into the San Diego Basin, and has proposed mitigation
measures to address that possibility. It is important to
recognize that this "constraint" is a construct of the market
power analysis. That is, the analysis for the WEPEX filing noted
that the SIL could bind if SDG&E were to withdraw capacity in
order to drive up prices. This does not mean that, in practice,
there is a transmission constraint within southern California.
Indeed, given the SDG&E undertaking to keep its units available
and bid them into the PX at marginal cost, it is unlikely that
the SIL will bind. In any event, there are no wholesale
electricity customers within the San Diego Basin that could be
affected by this posited constraint.
- -----------------------------------------------------------------
Hence, all generation in southern California competes on an
essentially equal basis to serve all southern California
utilities.
Q. WHY IS IT CONSERVATIVE TO ASSUME THAT ONLY SOUTHERN
CALIFORNIA GENERATION COMPETES IN SOUTHERN CALIFORNIA
DESTINATION MARKETS?
A. Southern California is heavily interconnected to northern
California, to the Pacific Northwest, and to the Desert
Southwest. Historically, it imports large amounts of energy,
even under transmission pricing provisions that are less
favorable to imports than those that will apply in the future.
The links to the Desert Southwest are historically
unconstrained. While flows from the north are sometimes
constrained, even during those periods there are significant
imports.
Further, much of the capacity that I have conservatively
excluded from the market such as Southwest nuclear and minemouth
coal units and northern nuclear and hydro units would be included
under the Commission's delivered price test.
Q. DO THE MERGING COMPANIES SERVE DESTINATION MARKETS OUTSIDE OF
SOUTHERN CALIFORNIA?
A. Yes. SDG&E is directly connected to utilities in the Desert
Southwest, Northern California and the Pacific Northwest. Its
direct connections are shown on Exhibit No. ___ (WHH-5).
PE serves no destination markets as FERC has defined them.
All of its output is committed under long term contracts with
existing customers, so it cannot compete in any market.
Q. HOW DO YOU KNOW THAT THE EFFECT OF THE MERGER ON
CONCENTRATION IN SOUTHERN CALIFORNIA WILL BE GREATER THAN THE
EFFECT IN ANY OTHER DESTINATION MARKET?
A. Almost all of the merged company's capacity will be in
southern California. Because the effect of a merger on HHIs
depends solely on the shares of the merging parties (the change
in HHI is equal to two times the product of the companies'
pre-merger shares), the change in HHI will be greatest in the
markets where the shares are largest.
As an example to show why southern California is, from the
merging company's perspective, the least favorable market
definition, consider an alternative destination utility, for
example, Arizona Public Service (APS). All of the southern
California capacity that SDG&E competes with in the southern
California market I am analyzing would also compete to the same
degree in Arizona. This is true even if there are transmission
limitations, since a limitation that requires that other southern
California capacity be "squeezed down" would have the same pro
rata effect on the merged company's capacity. However, there
would be other capacity included in the APS market. Hence,
the merged companies' market shares must be smaller than in
southern California and it follows that the HHI change caused by
the merger also would be smaller. This same logic applies also
to all other destination markets outside southern California.
Q. HAVE YOU ALSO ADOPTED A CONSERVATIVE DEFINITION OF COMPETING
CAPACITY UNDER THE COMMISSION'S DELIVERED PRICE TEST?
A. Yes. In addition to assuming that no capacity from outside
southern California can be counted, I also have very
conservatively restricted the definition of competing capacity
within southern California under different load conditions.
It is at least theoretically possible that during very low
load hours, the only generation required to serve load will be
must-take resources and very low-cost generation, such as hydro
generation. Because SDG&E's and PE's generation capacity of this
sort is limited and their ability to profit from increased market
prices for that capacity is trivial at most, it is highly
unlikely that the merger could create market power under these
load conditions.
SDG&E has no hydro capacity. Its must-take capacity
consists of its share of the San Onofre Nuclear Generating
Station (SONGS), which it does not operate (and the revenues of
which are based on a performance incentive mechanism approved by
the CPUC and thus independent of market prices), and the QFs in
its territory, in which it has no ownership interest. PE will
have a total of 15 MW of QF capacity in southern California (2 MW
of which lie in the SDG&E territory), a tiny amount relative to
the amount of must-take capacity in the region as a whole.
Consistent with PURPA, PE will not hold a majority interest in
any of its QFs at the time of the merger. During low-load
periods, PE's 15 MW will be the combined company's only capacity
that could be used to affect market prices or that could benefit
from artificial increases in market prices (under the
California restructuring legislation, QFs will receive
market-based prices). It would surely be impossible for this
amount of capacity to affect market outcomes in the southern
California market. Because this conclusion is so clear, I have
not separately examined the merger-induced HHI change for periods
of low load; as I discuss below, however, my examination of
moderate load periods provides ample confirmation.
To examine market conditions during periods of somewhat
higher load, when fossil steam units will set the market price, I
have made the most restrictive assumption possible: that the
only fossil steam units in the market will be those owned by
SDG&E (i.e., SDG&E's Encina and South Bay gas units, but not its
peaking combustion turbines). Must-take capacity, including
nuclear and QF
- -----------------------------------------------------------------
I have reduced the cogeneration figures for each of the
utilities by the amount of PE capacity in their service
territories.
- -----------------------------------------------------------------
capacity in southern California owned by others, along with
hydro capacity, is also assumed to be "in the market" during
these hours. Thus, I have included all of the capacity that
would be included under a delivered price test when the price is
such that all of SDG&E's capacity, but no competing steam
capacity, is in the market according to the delivered price test.
This set of conditions may never exist in the real world, since
they assume that SDG&E's steam capacity is lower in cost (by at
least 5 percent) than any other utility-owned fossil capacity
in southern California. However, this stylized market
conservatively represents any possible similar real world market,
in that inclusion of any additional steam or combined cycle
capacity would simply reduce the merging companies' shares and
hence the change in HHIs. I excluded peaking units from this
analysis because in load conditions in which no non-SDG&E
steam units were running, the peaking units of SDG&E and others
certainly would not be running.
Even using this extremely conservative definition of
competing capacity, the HHI change for the southern California is
a mere eight points (Exhibit No. ___ (WHH-6)). This demonstrates
that the merger essentially has no effect on market
concentration, even when the market is severely restricted.
- -----------------------------------------------------------------
This analysis reflects PE's ownership share of its QFs
after the PURPA-mandated divestiture. This is consistent with
Commission treatment of capacity in jointly owned plants. Even
if PE were able to control the entire capacity of those plants,
however, my conclusions would not change. After the
divestiture, PE will own shares in plants in southern California
with a total capacity of 30 MW. If one assumed that PE
controlled the availability of the entire 30 MW, PE's share when
SDG&E's steam units were on the margin would be 0.3 percent and
the HHI change would be 16 points.
- -----------------------------------------------------------------
This analysis also demonstrates that the merger can have no
effect on competition during low-load periods. It includes
almost all of SDG&E's capacity, but only the must-take and hydro
resources of other companies. If the market in low-load hours
were restricted to must-take and hydro resources, the must-take
and hydro capacity of other companies would remain in the market,
but the many hundred megawatts of SDG&E gas capacity would be
eliminated. The merging companies would have a correspondingly
smaller presence.
This analysis includes all of the merged company's capacity
except for its peakers. That is, there is no capacity owned by
the merging parties except for the peakers that is not included
in it. In order to assure that there is no other set of
circumstances in which the change in HHIs would be higher than
those calculated above, I have also considered a second market
condition in which the load level, and thus the price at the
destination market, is higher high enough that all of the
merging parties' capacity, including SDG&E's peakers, are
included in the computation of HHIs.
Under this high price regime, essentially all capacity in
southern California will meet the delivered price test. Using
this product market definition, the HHI change is just two points
in the southern California market (Exhibit No. ___ (WHH-7)).
- -----------------------------------------------------------------
The analysis includes the effect of the announced SCE
divestiture. While this affects the measured concentration level
of the market, it does not affect the HHI change induced by the
proposed merger.
The SCE divestiture does not involve its must-take or hydro
capacity, and therefore does not affect the analysis reported in
Exhibit No. ___ (WHH-6).
If PE controlled all capacity in the QFs in which it will have
a share (30 MW), the PE share would be 0.1 percent and the HHI
change would be three points.
- -----------------------------------------------------------------
To determine whether PE's QF capacity in northern California
(which will total 22.75 MW at the time of the merger) could
affect the market concentration analysis, I have examined a
geographic market that includes capacity in northern as well as
southern California.
- -----------------------------------------------------------------
I have incorporated PG&E's announced divestiture in the
analysis. PG&E, like SCE, has not announced any plans to divest
must-take or hydro capacity. Including the divestiture affects
only the overall market concentration level and does not affect
the HHI change resulting from the merger.
- -----------------------------------------------------------------
The HHI changes in this market are five points (when SDG&E
gas steam units are on the margin; Exhibit No. ___ (WHH-8)) and
one point (when prices are high enough that peaking units are
running; Exhibit No. ___ (WHH-9)).
- -----------------------------------------------------------------
The northern California QFs in which PE will have some
share have a total capacity of 45.5 MW. If the HHI calculations
were to consider all of that capacity to be under PE's control,
the PE capacity would be 75.5 MW (45.5 MW in northern California
and 30 MW in southern California). If SDG&E gas steam units were
on the margin, the PE share would be 0.4 percent and the HHI
change would be 10 points. If peakers were included in the
market, the PE share would be 0.2 percent and the HHI change
would be two points.
- ---------------------------------------------------------------
Q. WOULD YOUR CONCLUSIONS CHANGE IF THE ANALYSIS INCLUDED ENOVA
ENERGY'S SHARE OF THE MERCHANT PLANT THAT IS CURRENTLY BEING
PLANNED FOR SOUTHERN NEVADA?
A. No, they would not. I am informed that Enova Energy is in
the process of negotiating the terms of its involvement in this
project, and that while it currently plans to hold a 37.5
percent equity interest in the plant (157.5 MW of the plant's
total capacity of 420 MW), no final commitments have been made.
Including this project's capacity would not affect the
conclusions I have put forward because, during those periods when
its energy would be able to compete in the California spot
market, energy from the abundant generation resources in the
Southern Nevada area (and likely the Desert Southwest) would also
be able to compete in California. The merger would have no
effect on the competitiveness of such a large market.
Q. BASED ON YOUR ANALYSIS, DO YOU FIND ANY REASON TO BELIEVE
THAT THE DETAILED SCREENING ANALYSIS WOULD REVEAL THAT THE
MERGING PARTIES HAVE MARKET POWER JOINTLY, OR THAT THE
PROPOSED MERGER WILL CREATE OR ENHANCE MARKET POWER?
A. No. I have emphasized that my analysis excludes a great deal
of capacity that would be included in any delivered price
analysis. It also uses the most conservative geographic market
definitions. The results show unambiguously that the proposed
merger meets the criteria set forth in the Merger Guidelines.
The time-consuming and costly examination contemplated in the
screening analysis would necessarily produce results that show
the merger to have even smaller effects than those I have
calculated above.
I am advised that, should the Commission nonetheless find
that the combination of PE's minuscule capacity resources with
the SDG&E resources requires the screening analysis, PE has
committed to selling its entire share of the QF facilities in
order to facilitate the timely review of the merger.
Q. IN PREVIOUS SUBMISSIONS TO THIS COMMISSION, SDG&E HAS
ACKNOWLEDGED THAT IT MAY, AT TIMES, HAVE MARKET POWER WITHIN
THE SAN DIEGO BASIN. PLEASE DESCRIBE THAT MARKET POWER AND
ITS RELEVANCE TO THIS PROCEEDING.
A. As referenced earlier in my testimony, SDG&E has previously
reported to this Commission and the CPUC, it is possible that the
simultaneous import limit (SIL) on transfers into the San Diego
Basin, which will bind in about 750 hours a year, could confer
retail market power on SDG&E under the CPUC plans for open
access.
- -----------------------------------------------------------------
This constraint does not affect wholesale competition
because, as I have noted, no utilities other than SDG&E lie
within the Basin, and SDG&E has no transmission-dependent
utilities (TDUs) either within or outside the Basin.
- -----------------------------------------------------------------
The proposed merger, however, will have no effect on the
market power conferred by the SIL. There will be no change in
the pattern of ownership of the physical transmission and
generation system, and the merger will not change SDG&E's plans
to upgrade its transmission into the Basin. Consequently, the
merger will not change the impact of the SIL constraint. In any
event, SDG&E has proposed mitigation measures that both eliminate
its ability to manipulate market prices through its bidding
practices for its units and remove any financial benefits it
would receive from an artificial increase in market prices.
Specifically, SDG&E has proposed to bid its non-nuclear
generation into the PX at marginal cost. It also proposes to
offset any market revenues it collects in excess of marginal cost
against regulated recovery of fixed operations and maintenance
costs.
Q. DO THE ACTIVITIES OF THE MERGING PARTIES' MARKETING
AFFILIATES, ENOVA ENERGY AND ENSOURCE, CREATE POTENTIAL
MARKET POWER ISSUES?
A. No. Ensource's and Enova Energy's activities have no effect
on competition in electricity products. As a factual matter,
Ensource has made no power marketing transactions and has filed
to cancel its tariffs. It has therefore never been a competitor
in electricity products, nor will it be. Similarly, Enova Energy
has made no wholesale sales of electricity to date, and has no
long-term purchase contracts. I have already discussed why Enova
Energy's possible participation in a Nevada merchant plant will
not affect the analysis of this merger.
Q. WILL THE COMPETITIVENESS OF TRANSMISSION SERVICES BE AFFECTED
BY THE CONSUMMATION OF THE PROPOSED MERGER?
A. No. In this case, competition in transmission services will
not be affected by the proposed merger. First, while Enova
(through SDG&E) owns electric transmission facilities, PE owns
none (directly or indirectly through subsidiaries). Therefore,
the merger does not combine ownership of transmission, and
therefore can have no effect on the availability of transmission
alternatives for transmission purchasers. Second, Commission
Orders No. 888 and 889 ensure that transmission owners such as
SDG&E will not be able to foreclose access to any transmission
facilities. Third, as part of the California restructuring,
SDG&E will turn over operational control of its transmission
facilities and Pacific Intertie entitlements to the California
ISO.
Q. YOUR DISCUSSION ABOVE HAS FOCUSED ON ELECTRICITY MARKETS.
THE PROPOSED MERGER INVOLVES A GAS UTILITY AND AN ADJACENT
GAS ELECTRIC UTILITY. WILL COMPETITION BETWEEN GAS AND
ELECTRICITY BE ADVERSELY AFFECTED BY THE MERGER?
A No, it will not. Horizontal competition can occur between
two different products only if the products are effective
economic substitutes for each other. This is not currently the
case for gas and electricity, nor is it likely to be the case in
the future. First, it is important to recognize that at the
wholesale level, there is no substitutability whatsoever between
natural gas and electricity. An electric utility seeking to
purchase electricity to re-sell to retail customers cannot decide
to buy natural gas instead. Thus, any possible substitutability
between natural gas and electricity will occur only at the retail
level.
Even at the end-use level, relatively little
substitutability can occur between gas and electricity. Any
substitution possibilities that exist tend to take considerable
time to occur due to the need to change durable capital equipment
to substitute between them.
Moreover, at current prices, and at future prices as
currently foreseen, most end uses clearly are better served by
one form of energy or the other. These factors all contribute to
the conclusion that gas and electricity should not be considered
as substitutes for each other.
For example, the California Energy Commission ("CEC"), in
its modeling of commercial electricity demand, has found that
demand for electricity is unaffected by gas prices, suggesting
that gas and electricity are not substitutes for each other for
the entire commercial sector.
- -----------------------------------------------------------------
California Energy Commission, "Staff Report: California
Energy Demand: 1995-2015, Volume II, Electricity Demand
Forecasting Methods ("CEC 1995 Forecasting Methodology"), at
3-65.
- -----------------------------------------------------------------
The CEC further assumes that, even for those residential end
uses where substitution is possible, it is "minor,"
- -----------------------------------------------------------------
CEC 1995 Forecasting Methodology, at 2-10.
- -----------------------------------------------------------------
and finds that "electrical energy use [in the process and
extraction industries] does not have significant inter-fuel
competition."
- -----------------------------------------------------------------
CEC 1995 Forecasting Methodology, at 6-3.
- -----------------------------------------------------------------
In addition, open access competition for serving retail
electricity customers in California will mean that there will be
such strong intra-fuel competition that any incentives consumers
might have to substitute between fuels will be far outweighed by
the intensity of competition among the providers of each fuel.
Clearly, electricity provided by any of the many retailers
expected to enter retail markets is closely substitutable for
electricity provided by any single electricity retailer, far more
closely than is gas.
Finally, while I am aware that the topic of electric/gas
convergence is frequently discussed in today's energy industry, I
do not believe that the concept of convergence suggests that
gas and electricity are meaningful substitutes. None of the
frequently cited examples of convergence suggests that customers
will actually substitute, to any meaningful extent, between
electricity and gas in a given application. Instead, gas tolling
and arbitraging the "sparks spread" are simply means by which
enterprising companies can provide value to customers in certain
circumstances. The predicted desire of consumers to consolidate
their activities with a single supplier of energy services is
simply a reaction to information acquisition costs and to the
transaction costs of paying multiple providers for similar
services.
This "economy of scope" in energy retailing is not, however,
"convergence," in the sense that electricity and gas have become
substitutes. Indeed, none of the examples of convergence of
which I am aware suggests that gas and electricity are effective
substitutes.
Q. YOU HAVE DESCRIBED THE VERY LIMITED COMPETITION THAT EXISTS
BETWEEN ELECTRICITY AND NATURAL GAS. WILL THE CONSUMMATION
OF THE PROPOSED MERGER REDUCE THAT MINIMAL COMPETITION?
A. No, it will not. Because of the absence of wholesale
substitutability, competition between gas and electricity can
exist only at the retail level. SDG&E is a combination utility
and already owns the gas system serving the geographic area
containing well over 90 percent of its electric customers.
Hence, the merger does not change the competitive picture for
such customers. The great bulk of SoCalGas's customers are in
the franchise areas of other electric utilities that are not
parties to this merger. Hence, competition there is also
unaffected. The only area in which it hypothetically could be
affected is a small overlap area in southern Orange County that
contains approximately 80,000, or about seven percent, of SDG&E's
electric customers and less than two percent of SoCalGas's
customers. Only in this area will the merger mean that the
franchised local gas utility and the franchised local electric
utility become commonly owned.
I am informed that in this overlap area, residential and
light commercial customers constitute the overwhelming majority
of load. The area contains only seven customers eligible for
non-core service. Because the overlap is part of SoCalGas's
franchised gas service area, rather than part of open territory
that could be serviced by more than one company, its hookups and
core service are all subject to the system-wide tariffs on file
with the CPUC.
Q. HOW MIGHT COMPETITION IN THIS LIMITED OVERLAP AREA BE
AFFECTED BY THE PROPOSED MERGER?
A. I do not believe that competition in this relatively small
overlap area will be adversely affected by the merger. Customers
in the overlap area face the same economic and technical limits
on gas/electric competition that I discussed earlier. The
opportunities for switching fuels are limited to long-run
decisions on equipment purchases in a few end uses. Further, the
vigorous competition among electricity retailers and among gas
retailers will be far more important than competition between the
fuels. Finally, those customers without access to competing
retail suppliers will be served under regulated tariffs.
All customers in the overlap area are electricity customers,
and their rates are currently set by CPUC-approved tariff. Those
that also have gas hookups will be able to engage in whatever
limited fuel switching that is technically and economically
feasible, with or without the merger: Because the vast bulk of
SoCalGas's customers in the overlap area are core customers, they
purchase their gas subject to CPUC-approved tariffs. Clearly,
neither SDG&E nor SoCalGas will be able to increase prices for
its franchise customers without regulatory approval. Five of the
seven customers eligible for non-core service have elected to pay
non-core transportation rates for their gas supplies, and all
five have chosen to use companies other than SoCalGas to procure
their gas supplies. Of the two remaining customers eligible for
non-core service, one has chosen to pay core transportation rate
to SoCalGas and to procure its gas through a company other than
SoCalGas. The other has elected to pay core transportation
rates and to purchase gas from SoCalGas. With retail access in
gas available either directly or through core aggregation, and
electric retail access coming in the relatively near future, even
the existing customers purchasing under core tariffs will be able
to choose from among many suppliers of both fuels. As I have
noted, the CPUC and this Commission will assure by their open
access requirements that neither SDG&E (in electricity) nor
SoCalGas (in gas) can limit vigorous competition from numerous
other suppliers of the same fuel. The merger of two of those
many competitors will not affect the options available to those
customers. Thus, to the extent that there is interfuel
competition in the overlap area, it will continue or increase
after the merger: many sellers of electricity will vie with many
sellers of gas.
Q. DOES THE PROPOSED MERGER OF A GAS TRANSPORTATION COMPANY AND
A COMPANY THAT OWNS GAS-FIRED GENERATION CREATE THE POTENTIAL
FOR VERTICAL MARKET POWER OR AFFILIATE ABUSE?
A. I do not believe that the affiliation of SDG&E with SoCalGas,
which delivers gas to SDG&E and throughout the rest of southern
California, presents any meaningful concern about the potential
for vertical market power or affiliate abuse. Vertical market
power would arise if SoCalGas could impose unfavorable gas
delivery costs on other owners of gas-fired generation, which
artificially pushed up the costs of generators competing with
SDG&E and permitted SDG&E to gain market share and higher
profits on its gas-fired generation. As the testimony of Mr.
Hartman makes clear, however, SoCalGas is prevented (by CPUC
regulations and by its own commitments to comply with Order No.
497's provisions on transportation rate discounts and not to
provide SDG&E with sensitive market information) from favoring
SDG&E.
Q. COULD THIS MERGER ADVERSELY AFFECT COMPETITION IN
ELECTRICITY-RELATED BUSINESSES, SUCH AS POWER MARKETING OR
ENERGY SERVICES?
A. No. Ensource and Enova Energy are relatively new
participants in power marketing and have made no wholesale
purchases or sales. The elimination of Ensource as a power
marketer therefore would not affect competition in power
marketing. More importantly, power marketing itself is
characterized by very easy entry and is a highly competitive
business in which power marketers act only as intermediaries. A
market characterized by easy entry and many players is highly
unlikely to be vulnerable to the attempted manipulation of prices
by any participant, and it is equally unlikely that a combination
of two power marketers even power marketers much larger than the
two tiny competitors at issue here would result in the creation
of market power. Similarly, there are many actual competitors
beginning to provide energy services, and many more potential
competitors waiting in the wings.
An important reason for the conclusion that the merging
parties' power marketing operations are of no concern is that
power marketing, in and of itself, conveys no control over
resources that could be withdrawn from the market. Most power
contracts between generators and power marketers are short term;
even if a marketer assembled enough such contracts to affect
prices, the result would be quite temporary. Further, the terms
of most such contracts usually convey to the power marketer no
ability to withhold capacity.
As noted earlier, the marketing affiliates of Enova and PE
do not have power purchase contracts of any type in the WSCC.
V. CONCLUSIONS
Q. PLEASE SUMMARIZE YOUR CONCLUSIONS.
A. This merger poses no anticompetitive concerns. It will not
reduce competition in electric generation. The merging parties
are at most minor competitors in a market that includes much
larger suppliers. Because of the extremely limited
substitutability between gas and electricity, they do not compete
in the provision of substitutes for electricity. Nor will
competition in generation be affected by SoCalGas' operation of
gas distribution facilities; CPUC regulation, and SoCalGas'
undertaking that discounts provided to SDG&E will be available to
similarly-situated shippers, will ensure that vertical market
power will not be exercised.
Transmission-related competition similarly will be
unaffected by the merger. The merging parties are not
competitors in transmission services; PE owns no transmission
facilities.
Nor is there any potential for the exercise of vertical
market power through control of transmission lines; SDG&E has
filed an open-access tariff and will cede operational control of
its system to the California ISO.
The merger will not reduce competition in the limited area
in which their gas and electric franchises overlap. The nature
of retail competition in gas and electricity will ensure that
energy prices are set competitively. CPUC oversight of the gas
and electric distribution functions within the overlap area will
ensure that the prices for regulated services will be set
appropriately.
Competition in other electricity-related markets, such as
energy services or power marketing, will not be affected by the
merger.
In short, the proposed merger will not reduce the
competitiveness of any market.
Q. DOES THIS CONCLUDE YOUR PREPARED DIRECT TESTIMONY?
A. Yes, it does.
December 2, 1996
By Hand
U.S. Nuclear Regulatory Commission
Attention: Document Control Desk
11555 Rockville Pike
Rockville, Maryland 20852 10 C.F.R. Section 50.80
Subject: Docket Nos. 50-206, 50-361, and 50-362
San Onofre Nuclear Generating Station Units
1, 2, 3 SDG&E Corporate Restructuring
Commissioners:
San Diego Gas & Electric Company ("SDG&E") is the
holder of operating Licenses Nos. DPR-13, NPF-10, and NPF-15 for
the San Onofre Nuclear Generation Station ("SONGS") Units 1, 2
and 3. SDG&E is a 20% co-owner of the SONGS units, with the
remainder of the ownership held by Southern California Edison
Company and two municipal utilities. SDG&E's parent, Enova
Corporation ("Enova"), is embarking on a corporate restructuring
that, as more fully described below, will result in Enova
combining with Pacific Enterprises ("Pacific"), with each
becoming a subsidiary of newly created holding company, Mineral
Energy Company ("New Holding Company"). I am writing to assure
that any necessary NRC approvals for the restructuring are
received in a timely manner.
SDG&E will not be affected by the restructuring; it
will remain a subsidiary of Enova. After the restructuring is
complete, SDG&E will continue to be a public utility providing
the same utility services as it did prior to the restructuring.
SDG&E will also continue to be a licensee of the SONGS units, and
no transfer of the operating licenses or interests in the units
will result from the restructuring. Control of the operating
licenses for the SONGS units, now held by SDG&E and its
co-owners, will remain with SDG&E and the same owners and will
not be affected by the restructuring.
Under these circumstances, SDG&E believes that neither
the Atomic Energy Act nor the regulations of the Nuclear
Regulatory Commission ("NRC") require the NRC's approval of the
planned restructuring. The restructuring will not involve the
transfer of the NRC licenses for the SONGS units, nor should it
be considered a transfer of control, particularly in view of
SDG&E's minority ownership interest in the SONGS units. SDG&E is
aware, however, that the NRC has taken official action to approve
a variety of similar restructurings by its licensees in recent
years. Accordingly, by this letter, SDG&E requests that the
Commission concur in the proposed restructuring pursuant to 10
C.F.R. Section 50.80, if the Commission is of the view that NRC
approval is necessary. As shown below, the proposed
restructuring will not affect SDG&E's qualifications as a holder
of the operating licenses for the SONGS units and is consistent
with applicable provisions of law, NRC regulations, and
Commission orders.
In order to assist the Commission in its review of this
request, I shall describe the proposed restructuring and then
shall show that the restructuring fully satisfies the criteria
that are applied by the NRC in considering such matters.
I. The Restructuring
Enova and Pacific have determined that it is in the
interests of their respective shareholders and employees, as well
as the customers and communities served by their utility
subsidiaries, for the two companies to engage in a business
combination as peer firms in a strategic merger of equals. Each
believes that such a combination will improve its ability to
compete in the rapidly evolving energy marketplace. The
restructuring will result in Enova and Pacific becoming
subsidiaries of New Holding Company.
Enova is a holding company whose principal subsidiary
is SDG&E. (On April 20, 1995, the NRC approved a corporate
restructuring that resulted in SDG&E becoming a subsidiary of
Enova.) SDG&E is engaged in electric and gas businesses; it
generates and purchases electric energy and distributes it to
approximately 1.2 million customers in San Diego County and an
adjacent portion of Orange County, California. It also purchases
and distributes natural gas to approximately 700,000 customers in
San Diego County and transports gas for others. Enova also has
certain non-utility subsidiaries, including Enova Financial,
Inc., Califia Company, Enova Energy, Inc., Pacific Diversified
Capital Company, Enova Technologies, Inc., and Enova
International.
SDG&E is a "public utility" as defined in Section
201(e) of the Federal Power Act, 16 U.S.C. Section 824(e). It
sells electric energy at wholesale to, and transmits electric
energy in interstate commerce for, other electric utilities under
rate schedules approved by the Federal Energy Regulatory
Commission ("FERC"). In addition, SDG&E's utility operations are
subject to pervasive regulation by the California Public
Utilities Commission ("CPUC") under the California Public
Utilities Code. The CPUC regulates, inter alia, SDG&E's retail
rates and charges, issuances of securities (other than short-term
debt securities), services, facilities, classification of
accounts, transactions with affiliated interests, and other
matters. The restructuring will not affect the extensive
regulatory oversight of SDG&E's utility activities.
Pacific is a holding company. Its principal
subsidiary, Southern California Gas Company ("SoCalGas"), is
engaged in supplying natural gas throughout most of the
southern and part of central California. SoCalGas provides gas
service to approximately 4.7 million customers in a 23,000-square
mile service area. Through other subsidiaries, Pacific is also
engaged in interstate and offshore natural gas transmission to
serve its utility operations, in alternate energy development, in
centralized heating and cooling for large building complexes, and
in investment in foreign utility operations.
Pacific and Enova view the combination of the two
companies as a natural outgrowth of the utility deregulation and
restructuring that is reshaping energy markets in California and
throughout the nation. The combination joins two companies with
highly complementary operations that are geographically
contiguous. The combination is expected to provide substantial
strategic, financial and other benefits. These benefits
include a greater capacity to compete effectively in a changing
regulatory environment, a larger and more diverse natural gas
customer base which, together with Enova's electricity
capability, will enable New Holding Company to be a prominent
competitor in markets for energy and energy services, an ability
to consolidate corporate and administrative functions, the
capacity to draw on a large and more diverse pool of management,
and an improved ability to assist in the economic development of
communities served by Pacific and Enova.
New Holding Company is a California corporation with 50
percent of the outstanding capital stock owned by Pacific and 50
percent by Enova. In order to effect the restructuring, Enova
will merge with a subsidiary of New Holding Company, with Enova
being the surviving corporation. Pacific will similarly merge
with another subsidiary of New Holding Company and will remain as
the surviving corporation. The outstanding common stock of
Enova, other than shares held by shareholders who perfect
dissenter's rights under California law, will be converted into a
right to receive shares of New Holding Company. Similarly, the
outstanding common stock of Pacific will be converted into shares
of New Holding Company. Thus, as a result of the transaction,
Enova and Pacific will each become a subsidiary of New Holding
Company, and their respective shareholders will become
shareholders of New Holding Company.
There will be no change in the capital structure of
SDG&E as a result of the restructuring. SDG&E's preferred stock
and debt will not be affected by the restructuring and will
remain securities and obligations of SDG&E.
The corporate restructuring must be approved by the
shareholders of both Enova and Pacific and, in addition to review
by the NRC, is subject to review by the CPUC, the Securities and
Exchange Commission ("SEC"), and possibly FERC. (A copy of the
CPUC application is enclosed.) I anticipate that the
restructuring will be accomplished, assuming all the necessary
approvals are received, by the end of 1997.
II. The Restructuring is Consistent with Applicable
Provisions of Law, NRC Regulations and Commission Orders.
In its review of similar restructurings, the NRC has
customarily examined three specific areas:
o Whether the proposed restructuring will reduce the
funds available to the licensee to carry out activities under its
operating licenses;
o Whether the proposed restructuring will adversely
affect the management of the licensee's utility operations; and
o Whether the proposed restructuring will result in the
licensee becoming owned, controlled, or dominated by an alien, a
foreign corporation, or a foreign government.
This section addresses these issues.
1. Funding. The proposed restructuring will have no
adverse impact on the funds available to SDG&E to carry out
activities under the operating licenses. The proposed
restructuring is not expected to result in a sale or lease of
facilities or assets of SDG&E and is also not expected to have an
effect on SDG&E's capital structure. However, Enova and Pacific
anticipate that certain cost savings will arise out of the
restructuring. A portion of those savings is expected to reduce
SDG&E's wholesale and retail rate levels in relation to what they
would be but for the combination. SDG&E will seek CPUC approval
to retain a portion of the savings, thereby improving SDG&E's
financial condition.
Following the restructuring, SDG&E will remain subject
to the jurisdiction of the CPUC with respect to, among other
things, retail rates. Any changes in SDG&E's wholesale or
transmission rates will be subject to FERC review and approval.
The restructuring will not adversely affect the source
of funds for SDG&E to operate its utility facilities, including
operating costs and the eventual decommissioning costs of the
SONGS units. That source is and will remain the utility
revenues derived from the rates charged to its ratepayers and, in
the case of decommissioning costs, money earned from invested
ratepayer funds. If the proposed restructuring causes any
changes to those revenues, it will be to reflect anticipated
decreases in costs, and in particular costs unrelated to the
operation and decommissioning of the SONGS units. Capital costs,
including capital improvements or additions to SONGS, will be
financed after the restructuring in the same manner as they
were prior to the restructuring.
In sum, the regulatory process as it relates to SDG&E
and the continued funding of its operations will not be adversely
affected by the restructuring. Accordingly, SDG&E believes that
the restructuring does not and cannot reasonably be seen to
threaten any adverse change in the funds available for the
conduct of licensed activities.
2. Management. The proposed restructuring will
promote efficiency in the management of SDG&E's operations,
allowing the elimination of certain positions that will become
redundant and by providing access to talent and expertise (e.g.,
with regard to natural gas procurement) in areas in which Pacific
is also engaged. However, SDG&E management will continue to make
its own decisions with respect to utility planning, operation,
financial requirements, purchasing, and sales. The SDG&E nuclear
management structure will not be changed by the restructuring.
The proposed restructuring will not adversely affect the
management of SDG&E's utility operations.
3. Ownership. After the restructuring, Enova will
remain the sole owner of SDG&E's outstanding common stock,
although the current holders of the stock of Enova and Pacific
will become the owners of New Holding Company. Based upon
the information available as at June 1996, foreign accounts
represent less than one percent of the total outstanding shares
of Enova and less than one percent of the total outstanding
shares of Pacific. As a result, foreign accounts should
represent less than one percent of the ownership of New Holding
Company.
The restructuring will not result in SDG&E becoming
owned, controlled, or dominated by foreign interests.
CONCLUSION
As shown above, the proposed restructuring will not in
any way adversely affect SDG&E's qualifications as holder of the
operating licenses for the SONGS units. The proposed
restructuring is consistent with applicable provisions of law and
the Commission's regulations. Accordingly, if the Commission
concludes that its approval is necessary, we respectfully request
that the Commission consent to the proposed restructuring.
I understand from conversations with the NRC staff that
it should prove feasible for the NRC to rule on this matter by
June 1, 1997. If additional information is needed or if you have
any questions, please feel free to contact me.
Respectfully submitted,
Richard A. Meserve
Counsel for San Diego Gas & Electric
Company
cc: Mr. Frank J. Miraglia, Jr.
Mr. David B. Matthews
Mr. Mel B. Fields
Mr. Leonard J. Callan
Mr. James Sloan