ML20070U494
| ML20070U494 | |
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| Site: | Seabrook  |
| Issue date: | 03/15/1991 |
| From: | Katz J SECURITIES & EXCHANGE COMMISSION |
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| NUDOCS 9104090100 | |
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SECURITIES AND EXCHANGE COMMISSION (Release No. 35-2L273
- 70-7695)
Wortheast Utilities supplemental Motorandum Opinion and order Authorising Acquisition of Public Servio4 Company of New Hampshire and Related Financings; Cranting Requests for Reconsideration; Denying Requests for En Rvidentiary Hearing March 15, 1991 on December 21, 1990, the Commission issued a Hemorandum Opinion and Order (Holding Co. Act Release No. 25221)
(" December order") authorizing the acquicition
(" Acquisition") by Northeast Utilities (" Northeast"), West Springfield, Massachusetts, a public-utility holding company registered under the Public Utility Holding Company Act of 1935 ("Act"), of the Public servien company of New Hampshire ("PSNH"), a New Hampshire publicly owned electric utility, and related transactions, subject to certain reservations of jurisdiction, and denying requests for a hearing.1/
The City of Holyoke ons & Electrio Department ("Helyoke") has filed a petition for rehearing and reco' sideration of the December Order, and the Massachusetts Municipal Wholesale Electric Company ("KKWEC") has filed a petition for rehearing.
Northeast has filed a response.
The petitioners argue that the commission erred in approving the Acquisition.
They allege various errors.
Their chief argument, however, is that the commission failed to provide a sufficient analysis of the anticompetitive effects of the 1/
The procedural history of this matter is set forth in the December Order.
Egg Northeast Utilm., Holding Co. Act Release No. 25221 (Dec. 21, 1990).
9104090100 910401 PDR ADOCK 05000443 M
pop
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l Acquisition.
They base their challenge, in large part, on the initial decisien of the Federal Energy Regulatory commission
("TERC") Administrative Law Judge ("ALJ") Assued December 20, 1990, approving the merger of Northeast and pSifH. 1/ The ALJ found that the targer, if unconditioned, would have anticompetitive consequences.
He concluded, however, that the proposed norger would be consistent with the public interest once certain terns and conditions were imposed. 2/
Those conditions l
l included. Initt glia, changes in Northeast's transmission commitments to nitigate the anticorpetitive effects of the Acquisition.
To address the issues raised by Holyoke and MMWEC, the Commission grants their requests for reconsideretion.
I. DISCU8830N c
l A. ggg1Lgn ie f bi ti)
Section 10(b)(1) of the Act prohibits, inter 1111, approval of an acquisition that would result in "the concentration of control of public-utility conpanies, of a kind or to an extent 2/
Northeast Utils. Serv. Co. (Re Public Serv. Co. of Nav H art s h i r_a_), Docket Nos. EC90-10-000, ER90-143-000, ER90-144-l 000, ER90-145-000, and EL90-9-000 (Dec. 20, 1990).
The matter is before the FERC on exceptions from the initial decision of the ALJ.
JU Under section 203 cf the Federal Power Act ("FPA"), the TERC "shall approve" a werger if it is " consistent with the public interest."
In its determitiation, the TIRC must consider the anticompetitive conceiquuices of sne proposed transaction.
Egg culf states Utils. Co. v. FPC, 411 U.S.
747 (1973).
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3 detrimental to the public interest or the interest of investors or consumers."
In determining whether the Acquisition would result in an undue concentration of control, the Commission in its-December order expressly considered a variety of factors, including peak load capacity, operating revenues, number of electrical custcmars, KWH sales and total assets of the merged conpany.
We cor.cluded that the sire of the resulting system would not exceed the econonies of scale of current technology or provide undue p.
.r or control to Northeast within the New England region et within the electric utility industry.
The Commission's analysis under section 10(b)()
also includes consideration of federal antitrust policies. A/
In our December order, we recognized that the Acquisition would decrease competition, but concluded that the Acquisition's benefits would outweigh its anticompetitive effects.
The petitioners challenge J
this determination, arguing that the Commission ignored the anticompetitive effects of the merged company's control of transmission facilities and surplus-power. 1/
A/
Municinal riee. Assn. of Nass. v. src, 413 F.2d 1052, 1056-57 (D.C. Cir. 1969) ("Section 10(b)(1) nust take significant content from (federal antitrust) policies ")
Environmental-Action. Inc. v. Erc, 895 F.2d 1255, 1260 (9th Cir. 3090)
(" Federal antitrust policies are to inform the SEC's interpretation of section 10(b) (1).").
The-petitioners also challenge the Commisalon's failure to 1/.
make use of the Department of Justics's Merger Guidelines
(" Guidelines") in its analysis of potential anticompetitive effects.
The Commission has considered the testimony in the record concerning the application of the cuidelines to the Acquisition.
We note that the Guidelines are an analytical (continued...)
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4 4-Ar the petitioners note, our anticompetitive analysis under sect. ton 10(b) (1) is cast largely in terms of site and corporate at ucture, rather than in terms of transnission access or excess capacity.
This fceus reflects this agency's primary concern with the structure of public-utility holding company systems i/
However, our evaluation of whether an acquisition vill result in an undue concentration of control is based on all of the circunstances, not on size alone. 2/
in cases such as the instant ene, where anticompetitive issues arise involving the allocation of excess generating capacity, transmission access or the flow of electricity over transmission lines or a holding company system, the Commission also considers those issues in determining whether a propened acquisition will result in e
- 5/ (... continued) tool.
To the extent the Guidelines are intended to identify anticompetitive concerns, the Commission is satisfied that it has adequately identified those concerns.
1/
- &gg American riac. Power co..
Inc <, 46 S.E.C. 1299, 1323 (1978); accord Louisiana Power & Light Co., Holding Co. Act Release No. 227(5 (Dec. 21. - 1992); New Encland Elec. sys.,
Holding Co.-Act Release No. 22309 (Dec.
1, 1981); Arkans as Power & Licht C om, 45 S.E.C. 567, 574 (1974); yerment Yankee 43 S.E.C. 693, 699 (1968); New Encland Nuclear Power cerco, Egggr serv. co., 10 S.E.C. 562, 571 (1941).
2/
sierra Pae. Resources, Holding Co. Act Release No. 24566 (Jan. 28, 1988), a_f f ' d__ sub nomm Enviro _neantal Action. Inc<
22_ SIS, 895-F.2d 1255 (9th Cir.1990) ; Municipal Elec. Assn.
of Maas, v._ Erc, 413 F.2d at 1056-57: 333 Ararican ri m Power Co.,
Inc, 46-S.E.C. at 1309.
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-s-concentration of control detrimental to the public interest or the. interest of investors or consumers. A/
To that end, the Commission has considered evidenca in this proceeding that the merged company would control key transmission lines that carry bulk power to an entire region of New England and would also be the largest supplier of surplus bulk power in the area. 2/ The merged-company's control of both transmission lines and surplus bulk power raises the potential for anticompetitive behavior. 12/
In the Decer.ber order, tha 1/
EA3 Municioni Elec. Assn. ef_ Mass. v. sEC, 413 T.2d at 1058-59 ("This type of control, albeit indirect in the sense of not-constituting control by internal company voting or managerial authority, does not seem... to be beyond the
..):
reach of tho' language of Section 10(b)(1)
Amerlean riae. Power ce.. Inc <, 4 6 S.E.C. 1299.
Contrary to Holyoke's suggestion, in reviewing the Acquisition the commission'has considered the interests of consumers in the New England. area generally and not just consumers serviced by Northeast and PSNH.
1/
" Bulk powar" generally refers to the wholesale purchase or sale of energy betveen electric utilities.
" Surplus bulk power," " surplus capacity" or " excess capacity" refer to'the amount of energy availaole-to a utility in_ excess of the demand on that utility for electric power.
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As explained by the AtJ, control over key transmission corridorst-would give-the merged company the power to demand excessive charges for. transmission, or to deny it altogether, while favoring its own excess-generation at high prices.
That the merged company _could-use its-power to force its own extra goods on buyers elsewhere is an especially significant concern because (Northeast)-PSNH will have the largest block of surplus capacity in New England.
. Commission relied upon the transmission comri+eants made by
?lertheast, and the New Hampshire corridor 71r.n '" Plan") entered i.nto by Northeast and New England Electric System ("NEES"), as a means of curbing such anticompetitive behavior. 11/
The ALJ, in the initial FERC decision, found these commitments to be insufficient and concluded that the anticompetitive effects of the Acquisition re. quired the imposition of additional uerms and conditions regulating the sale and transmission of bulk power.
Both the commission aid the FERC have statutory responsibilities with respect to the anticompetitive consequences of mergers in the public-utility industry.
However, tFS Commission in administering the Act and the FERC in administering the Federal Power Act ("TPA") pursue different goals in their 11/
Under Northeast's general transmission commitments, it will provide transmission service to third parties Vhenever capacity in available for this purpose.
It will expand its system to provide transmission service for others whenever it1Ao compensated therefor and such expansion can reasonably be achieved.
Under the Plan, Northeast and NEES will open up a corridor through New Hampshire to f;cflitate transfers of electricity from Maine, across the PSNH system, to eastern Massachusetts, Rhode Island, Oonnecticut and vermont.
The transmission commitments and Plan will provide southerr How England utilities with access to bulk power from utilities in northern New England and Canada.
l Northeast has represented to this Commission that it will provide transmission "in all instances," so-long as it can continue to serve its own customers " reliably and economically."
We assume that Northeast's offer is made in good faith and will be honored, g33 American riectric Pcwer Co.,
Inc., 46 S.E.C. at 1312 n.32.
We draw support for this assumption from.the fact that Northeast is alread/ a substantial provider of transmission services for others in New England.
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7-regulation of the utility subsidiaries of holding companies. 12/
Congress designed the Act primarily to eliminate financial abuses l
by publie-utility holding companies. 12/ Thus, the commission, as the agency with expertise in financial transactions and norporate finance, is charged with regulation of the corporate structure and financing of public-utility holding companies and their affiliates.
Congress enacted the TrA to regulate the wholesale interstate sale and distribution of electricity, closing the regulatory gap created by Public Ut11. comm'n v.
11/
The Public Utility Act of 1935, ch. 687, 49 stat. 603, included two separate but overlapping pieces of legislation, Title I, Which is the Public Utility !!olding Company Act of 1935 ("Act"), 15 U.S.C. 79 11 1222, and Title II, which is designated parts I and II of the Federal power Act ("TPA"),
16 U.S.C. 624 at A m.
12/
By 1932, approximately 49% of the investor-owned utilities were controlled by three holding companies.
Virtually all the holding company systern were characterized by extremely complex capital structures that made it difficult, if-not impossible, for investors to analyse the p ality of earnings and the financial condition of the companies in which they were investing.
In the early 1930s, many of the holding-companies collapsed, leaving investors with billions of dollars of-losses.
Congress-found the operation of these systems detrimental to the interests of United States consumers and investors and concluded that the systems' interstate character had rendered state regulation largely ineffective.
The specific abuses identified by congress included the pyramiding of voting cont.ol, overcapitalization, securities issued upon the basis'rt fictitious and unsound asset values, intrasystem profiteering on transfers of securities, financial mismanagement, excessive intrasystem management fees and service charges, the concentration of economic power not susceptible to stato regulation, and the expansion of holding company systems without regard to the integration l
and coordination of related utility properties, gas section 1(b) of the Act.
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Attleboro staar L Elee.
Co.,
273 U.S. 83 (1927), in which the n
supreme Court had held that such transactions were beyond the l
L reach of state regulation.
Congress has entrusted administration-L of the TPA to the TERC es the agency with the technical expertise necessary to regulate the transmission of energy. 11/
Because.the TPA is directed at operational issues, including transmission-access and bulk power supply, the expertise and
-technical-ability for resolving the types of anticompetitive issues-raised by the petitioners lie principally with the TERC.
When the commission,- in determining whether there is an undue concentration cf-control, idertifies such issues, we can look to the TERC's-expertise for an appropriate resolution of these issues..Accordingly, we condition our approval of the l
l 11/. Justice Stevens, concurring in a recent Supreme Court-decieion,: explained:
Congress enacted:[the Act) to prevent financial-abuses among public utility holding companies and their affiliates.
It entrusted.the-(Commission),
-the agency with the: expertise in financial transactions and-corporate finance, with the task of administering the act.
The (Commission) carries out its duties essentially by monitoring L
inter-affiliate financial transactions and eliminating, potential conflicts of interest.
Congress enacted the TPA to' regulate the wholesale interstate sale and distribution of electricity.
It entrusted the administration of the FPA.
to the TERC as the agency with-the technickl expertise reguired to regulate energy transmission.
Arcadia v. Chio Power t h, _ U.S.
111 S.Ct. 415, l-423 (1990) (citatice-
_f.tted).
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, Acquisition upon the issuance by the TERC of a final order approving the merger under section 203 of the TPA. 11/
3.
Other Matters Petitioners assert several other arguments that the
- Commission has considered and rejected.
First, Holyoke charges
- that the Acquisition vill violate the requirement of sections 10 (c) (1) and 10(c) (2) of the Act that the resulting syster be "not so large as to impair the effectiveness of regulation." 11/
Specifically, Holyoke alleges that an existing subsidiary of Ncrtheast, Holyoke Water Power Company ("HWP"),
currently violates this " effectiveness of regulation" requirement. 12/
Holyoke's argument goes not to the size of the system-but, rather, to EWP's status under the state regulatory scheme governing public utilities. 11/
11/
TheLCommission of course has on-going authority to rescind or further condition ite approval under the Act.
113 section 20(a).
Both section 10(c)(1), by reference to section 11, and 11/
section 10 (c) (2) require -that the marged Northeast-PSRH system be an " integrated publio-utility system."
By definition, such a system must be "not so large as to impair
. the effectiveness of regulation."
Section 2 (a) (29) of the Act.
12/
HWP, which provides retail electric service to 44 industrial all located within the city of Holyoke, is a customern, direct competitor of Holyoke.
Because NWP's sole electric business-is " supplying Ag/
electricity in bulk," the Massachusetts Department of Public Utilities does not regulate the rates that NWP charges its industrial customers.
Egg Hass. Gen. Law ch. 164, 5 94.
. As noted, the Act requires that an acquisition not result in a system that is so large as to impair tha effectiveness of D
regulation.
In so doing, the Act seeka to protect thc ability of the states to regulate their public utilities.12/
The Act does not, however, require that the Commission, in approving an acquisition under section 10, find that a utility company is subject to any particular degree of state regulation or even to state regulation at all.
The extant to which Massachusetts chooses to regulate KWP has no bearing upon our determination of whether the Acquisition will result in a systen that is so large as to impair the effectiveness of regulaticn.
Thus, this challenge fails.
Holyoke further alleges thet Northeast has acquired a real estate business without commission approval, in violation of sections 9(a)(1) and 11(b) (1) of the Act. 22/
At issue is KWP's ownership of savaral properties, not used in the company's utility operations, that could be sold or developed for 1
L industrial use.
Because the Acquisition will not alter this situation, we decline to determina in this proceeding whether 12/ SJt.t suora note 13.
2A/
Section 9 (a) (1) of the Act requires Commission approval of the acquisition of "any securities" by a registered holding company.
An acquisition under section 9(a)(1) must satisfy the standards of section 11(b)(1), which limits a registered holding cocpany system "to a single integrated publica utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated publie-utility system.
e
( H"'/'s property holdings are reasonably incidental or necessary or appropriate to the operations of the holding company system. 11/
Finally, Holyoke asserts that Northeast's control of three separace subsidiaries that provide electric service in Massachusetts unduly complicates the structure of the Northeast system. 11/
Holyoke therefore urges the Commission to deny the application for approval of the Acquisition under section 10(b)(3) of the Act or to condition approval upon Northeast's elimination of cne or more of those subsidiaries pursuant to section 11(b)(2) of the Act. 22/
The Acquisition itself will neither create undue complication in the Northeast system, nor from the time of its incorporation until it was 11/
HWP, ired by Northeast in 1967, was actively involved in acqu industrial development in the City of Holyoke.
The Commission, in approving Northennt's acquisition of HWP, expressly reserved the questicr whether HWp's nonutility businesses could remain within the Northeast system.
The Commission notes that, since 1967, HWp has gradually disposed of its real-estate holdings.
It has not acquired any property within the past ten years.
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The three subsidiaries are RWP, its subsidiary Holyoke Power
& Electric Co., and Western Hassachusetts Electric Co.
Holyoke intervened in 1967 when the Commission approved Northeast's acquisition of HWP, resulting in Northeast's control of three separate subsidiaries that operate in Massachusetts.
133 Nertheast Ut11a., 43 S.E.C. 462, 470 n.11 (1967).
At that time, Holyoke did not allege that the acquisition o'. NWP would violate section 11 of the Act by _
unnecessarily complicating Northeast's corporate structure.
-11/.Section 10(b)(3) requires that the Commission approve an acquisition unless it finds that the acquisition "will unduly complicate the capital structure of the holding company system of the applicant.
section 11(b)(2),
inter alig, prohibits the retention of a company that would
" unduly or unnecessarily complicate the structure.
. of such holding company system."
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will it af fect the situation with respect to the Massachusetts subsidiaries of which Holyoke cemplains.
Accordingly, we reject Holyoke's arguments in this regard, 21/
KKWIC argues that section 10(c)(2) of the Act bars the Acquisition because it will not tend toward the economical and efficient development of the Northeast-PSRH integrated public-utility system.
MMWIC challenges the Commissien's findings concerning potential economies and ef ficiencies that would result from the Acquisition and asserts that, in any event, the benefits cov1d be achieved by contract rather than by acquisition. 11/
In 23/ We note that the Commission has approved the existance of multiple utility subsidiaries within a single state where the statutory standards, in particular sections 10(c)(2) and 11 (b) (2 ), were met.
For example, the Central and Southwest Corporation, a registered holding company, has three electric utility subsidiaries operating in Texas, while American Electric Power company, another registered holding company, has three electric utility subsidiaries in Ohio.
11/
We reject KMWEC's assertion that these savings could be achieved without the Acquisition, certain synergies predicted by Nertheast come about because, under the Act, Northeast must provide services to affiliates at cost.
lat-section 13(b) of the Act and rule 90 thereunder.
In the absence of an affiliate relationship with PSNH, Northeast would not have an obligation to provide services at cost, and the projected savings would not necessarily accrue.
Purther, this argument assumes that PSNH could ba viable indefinitely as a astand-alone" entity.
Petitioners cite l
the July 20, 1990 order issued by the New Hampshire Public
(
Utilities commission ("NHPUC") as having found that a stand-alone PSNH would be viable.
Petitioners are incorrect in their characterization of this order.
Although the RHPUC found that " Stand-alone PSNH is at least marginally able to support its capitalization and will survive as a viable entity" (14 at 164), it also made clear-that it did not believe there was "a substantial possibility of being left with a Stand-alone PSNH" (idA at 126).
The NHPUC also found l-(continued...)
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. the December order, the Commission exanined at length the acer.aies and ef ficiencies associated with the Acquisition.
We are satisfied that ths benefits of these economies and eff' cies satisfy the public interest provision of section 10(c)t.
21/
The parties have renewed their requests for an evidentiary hearing.
They have had a further opportunity to present their arguments.
We have considered these arguments, and we have reviewed the record in light of them.
We conclude that Holyoke and KMWEC have failed to raise a genuina issue of material fact that could be resolved by, and thus would warrant, an evidentiary 21/ (... continued )
risk to the public associated with a that there would be a a Gtand-alona PSNH."
11 at 126; see also TERC decision at 6
(" Continuing to maintain a weakened PSNH-as a company which would be. marginal at best, and indeed could well &nd up in bankruptcy again,.is not ' consistent with the public interest.'").
These conclusions of NHPUC and the TERC are consistent with the Commission's own finding that "[t]he public interest is sorved by bringing a prompt and to the PSHH bankruptcy and by providing PSNH with the management, capacity and financial resources to make it viable again."
-The Commission, of course, cannot guarantee the success rf
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PSNH.
Based upon the evidence in the record, however, va are satisfied that the merged PSNH will be in a stronger financial position than a stand-alone pSNH would be.
11/ Moreover, the Commission has recognised that a public utility's emergence from bankruptcy reorganization is a benefit that, in itself, may satisfy the standards of section 10(c)(2).
Raa, sic, Middle want corn, 1 S.E.C. 514 (1936) (reorganized utility better able to serve the public).
gf4 Utilities Power &_ Licht core., 4 S.E.C. 131 (1936) (facilitates reorganization of the parent of a public utility); Peories Licht and Power co, 2 S.E.C. 829 (1937)
(substitution of a solvent company for an insolvent company).
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hearing. 12/
Accordingly, we again den / the requests for such a hearing.
II. CONCLUSION As explained above, the commission conditions its approval of the Acquisition upon the TEReis issuance of a final order approving the merger under section 2c3 of the TpA.
subject to that condition, the Acquisit. ion, on the terms and conditione set forth in the December order, sat uties the statutory standards.
Upon the basis of the facts in the record, it is hereby found that,_ except as to these natters over which jur16 diction has been reserved in the December Order, the applicable standards of the Act and rules thereunder are satisfied, and that no adverse findings are necessary:
IT IS CRDERED, that the requests for reconsideration are granted; IT IS TURTHER ORDERED, that the requests for an evidentiary hwaring are again deniedi IT Is TURTHER ORDERED, that approval hereunder is conditioned upon the issuance of a final order of the rederal Energy Regulatory Commission that the merger of Northeast and L
12/ Wisconsin _'s r
fronnental Da.cade, ine. v. src, 382 T.2d 523, 526 (D.C. cir.1989) ("It is well settled that evidentiary hearings are required only when a genuine issue of material f act exists. ") ; accord Env_ironmantal ietien. _ Inc. v. arc, 895 T.2d 1255, 1265-66 (9th cir. 1990), citing garro wire &
cable com_v. FERS, 677 T.2d 124, 129 (D.C. Cir. 1982).
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13 PSNH satisfies the requireronts of section 203 of the rederal Power A ei and IT IS NRTHER ORDERED, that the Decan.bsr order, as modified, is affirmes.
By the Cetetission.
[
C)
/4 Jonathan G.
Katt Secretary Datedt March 15, 1991 l
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