-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JEnYNeGDFsmHGJ8QcW/4iKTeZcSkP/9fWkoDY8xIm+2dW5SFwXkZHyk+HN/wvpOc InivJ+dQVtagXKdcXNY7VQ== 0000898080-96-000053.txt : 19960515 0000898080-96-000053.hdr.sgml : 19960515 ACCESSION NUMBER: 0000898080-96-000053 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960513 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW CENTURY ENERGIES INC CENTRAL INDEX KEY: 0001004858 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-08787 FILM NUMBER: 96562186 BUSINESS ADDRESS: STREET 1: 1225 17TH ST CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032948989 MAIL ADDRESS: STREET 1: 1225 17TH ST CITY: DENVER STATE: CO ZIP: 80202 U-1/A 1 FORM U-1/A File No. 70-8787 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 2 TO THE FORM U-1 APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 New Century Energies, Inc. 1225 Seventeenth Street Denver, Colorado 80202 (Name of company filing this statement and address of principal executive offices) None (Name of top registered holding company) Richard C. Kelly Doyle R. Bunch II President and Treasurer Chairman and Secretary 1225 Seventeenth Street Tyler at Sixth Denver, Colorado 80202 Amarillo, Texas 79101 (Names and addresses of agents for service) The Commission is requested to send copies of all notices, orders and communications in connection with this Application- Declaration to: William S. Lamb, Esq. Gary W. Wolf, Esq. LeBoeuf, Lamb, Greene & MacRae, L.L.P. Cahill Gordon & Reindel 125 West 55th Street 80 Pine Street New York, New York 10019 New York, New York 10005 Patricia T. Smith, Esq. William M. Dudley, Esq. Public Service Company of Colorado 1225 Seventeenth Street Denver, Colorado 80202 TABLE OF CONTENTS Page Item 1. Description of Proposed Transaction . . . . . . . . 1 A. Introduction . . . . . . . . . . . . . . . . . . . 1 1. General Request . . . . . . . . . . . . . . . 2 2. Overview of the Transaction . . . . . . . . . 2 B. Description of the Parties to the Transaction . . . 3 1. General Description . . . . . . . . . . . . . 3 a. PSCo . . . . . . . . . . . . . . . . . . 3 b. SPS . . . . . . . . . . . . . . . . . . . 5 c. NCE and its Subsidiaries . . . . . . . . 6 i. NCE . . . . . . . . . . . . . . . . 6 ii. PSCo . . . . . . . . . . . . . . . . 6 iii. SPS . . . . . . . . . . . . . . . . 7 iv. Cheyenne . . . . . . . . . . . . . . 7 v. PSCo Merger Corp . . . . . . . . . . 7 vi. SPS Merger Corp. . . . . . . . . . . 7 vii. NC Services . . . . . . . . . . . . 8 viii. NC Hold . . . . . . . . . . . . . 8 ix. WestGas Interstate, Inc. . . . . . . 9 2. Description of Facilities . . . . . . . . . . 9 a. PSCo . . . . . . . . . . . . . . . . . . 9 i. General . . . . . . . . . . . . . . 9 ii. Electric Generating Facilities and Resources . . . . . . . . . . . . . 9 iii. Electric Transmission Facilities . . 11 iv. Gas Facilities . . . . . . . . . . . 13 v. Other . . . . . . . . . . . . . . . 13 b. SPS . . . . . . . . . . . . . . . . . . . 13 i. General . . . . . . . . . . . . . . 13 ii. Electric Generating Facilities . . . 13 iii. Electric Transmission Facilities . . 15 iv. Other . . . . . . . . . . . . . . . 16 3. Non-Utility . . . . . . . . . . . . . . . . . 16 a. PSCo . . . . . . . . . . . . . . . . . . 16 b. SPS . . . . . . . . . . . . . . . . . . . 17 C. Description of Transaction . . . . . . . . . . . . 20 1. Background and Negotiations Leading to the Proposed Transaction . . . . . . . . . . . . . 20 2. Merger Agreement . . . . . . . . . . . . . . . 22 D. PSCo and SPS Benefit Plans . . . . . . . . . . . . 24 E. Management and Operations of NCE Following the Merger . . . . . . . . . . . . . . . . . . . . . . 24 Item 2. Fees, Commissions and Expenses . . . . . . . . . . . 25 Item 3. Applicable Statutory Provisions . . . . . . . . . . 26 A. Legal Analysis . . . . . . . . . . . . . . . . . . 27 1. Section 10(b) . . . . . . . . . . . . . . . . 29 a. Section 10(b)(1) . . . . . . . . . . . . 30 i. Interlocking Relationships . . . . . 30 ii. Concentration of Control . . . . . . 30 b. Section 10(b)(2) -- Fairness of Consideration . . . . . . . . . . . . . . 33 c. Section 10(b)(2) -- Reasonableness of Fees . . . . . . . . . . . . . . . . . . 36 d. Section 10(b)(3) . . . . . . . . . . . . 37 2. Section 10(c) . . . . . . . . . . . . . . . . 39 a. Section 10(c)(1) . . . . . . . . . . . . 40 i. Retention of Gas Operations . . . . 41 ii. Other Businesses . . . . . . . . . . 49 I. Direct Subsidiary of NCE . . . 50 II. Subsidiaries of NC Hold . . . . 50 III. Subsidiaries and Operations of PSCo . . . . . . . . . . . 58 b. Section 10(c)(2) . . . . . . . . . . . . 61 i. Efficiencies and Economies . . . . . 61 ii. Integrated Public Utility System . . 65 I. Electric System . . . . . . . . 65 II. Gas Utility System . . . . . . 70 3. Section 10(f) . . . . . . . . . . . . . . . . 72 4. Other Applicable Provisions - Section 9(a)(1) . . . . . . . . . . . . . . . . . . . 72 B. Intra-System Provision of Services . . . . . . . . 74 1. NC Services . . . . . . . . . . . . . . . . . 74 2. UE . . . . . . . . . . . . . . . . . . . . . . 78 3. QPS and UE Carolina . . . . . . . . . . . . . 80 4. Other Services . . . . . . . . . . . . . . . . 81 Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . 83 A. Antitrust . . . . . . . . . . . . . . . . . . . . . 83 B. Federal Power Act . . . . . . . . . . . . . . . . . 83 C. State Public Utility Regulation . . . . . . . . . . 84 Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . 85 Item 6. Exhibits and Financial Statements . . . . . . . . . 86 A. Exhibits . . . . . . . . . . . . . . . . . . . . . 86 B. Financial Statements . . . . . . . . . . . . . . . 88 Item 7. Information as to Environmental Effects . . . . . . 88 Item 1. Description of Proposed Transaction A. Introduction This Application/Declaration seeks approvals relating to the proposed combination of Public Service Company of Colorado ("PSCo") and Southwestern Public Service Company ("SPS"), pursuant to which PSCo and SPS will become wholly owned subsidiaries of New Century Energies, Inc. ("NCE"), a new Delaware holding company (the "Transaction"). Following the consummation of the Transaction, NCE will register with the Securities and Exchange Commission (the "Commission") as a holding company under the Public Utility Holding Company Act of 1935 (the "Act"). The Transaction is expected to produce substantial benefits to the public, investors and consumers, and meets all applicable standards of the Act. Among other things, PSCo and SPS believe that the Transaction will allow the shareholders of each of the companies to participate in a larger, financially stronger company, that, through a pooling of the equity, management, human resources and technical expertise of each company, will be able to achieve increased financial stability and strength, greater opportunities for earnings and dividend growth, reduction of operating costs, deferral of certain capital expenditures, efficiencies of operation, better use of facilities for the benefit of customers, seasonal diversity of demand, improved ability to use new technologies, greater retail and industrial sales diversity and improved capability to make wholesale power purchases and sales. In this regard, PSCo and SPS believe that synergies created by the Transaction will generate substantial cost savings to NCE which would not be available absent the Transaction. PSCo and SPS have estimated the dollar value of certain synergies resulting from the Transaction to be approximately $770 million, net of costs to achieve the savings, over the first 10-year period from 1997 to 2006. The expected Transaction benefits are discussed in further detail in Item 3.A.2.b.i. below. The shareholders of PSCo and SPS both approved the Transaction at their respective meetings held on January 31, 1996. PSCo and SPS have submitted applications requesting approval of the Transaction and/or related matters to (i) the Public Utility Commission of the State of Colorado (the "CPUC"), (ii) the Public Utility Commission of the State of New Mexico (the "NMPUC"), (iii) the Public Service Commission of the State of Wyoming (the "WPSC"), (v) the Public Utility Commission of the State of Texas ("PUCT"), (vi) the Kansas Corporation Commission (the "KCC"), (vii) the Federal Energy Regulatory Commission (the "FERC") and (viii) the Nuclear Regulatory Commission (the "NRC"). The NRC approved the Transaction on February 22, 1996. PSCo will also request the approval of the Municipality of Brighton, Colorado as required under the franchise granted by the municipality to PSCo. Finally, both companies will make the required filings with the Antitrust Division of the U.S. Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). See Item 4 below for additional detail regarding these regulatory approvals. Apart from the approval of the Commission under the Act, the foregoing approvals are the only regulatory approvals required for the Transaction. In order to permit timely consummation of the Transaction and the realization of the substantial benefits it is expected to produce, NCE requests that the Commission's review of this Application/Declaration commence and proceed as expeditiously as practicable. 1. General Request Pursuant to Sections 9(a)(2) and 10 of the Act, NCE hereby requests authorization and approval of the Commission to acquire, by means of the mergers described below, all of the issued and outstanding common stock of PSCo, SPS and Cheyenne Light, Fuel and Power Company, a Wyoming public utility company and currently a wholly owned subsidiary of PSCo ("Cheyenne"). NCE also hereby requests that the Commission approve (i) the acquisition by NCE of all of the outstanding voting securities of New Century Services, Inc. ("NC Services"), New Century Hold Co. ("NC Hold") and West Gas Interstate, Inc., currently a non- utility subsidiary of PSCO that is engaged in the gas transportation business ("WGI"), under Section 9(a)(1) of the Act; (ii) the acquisition by NC Hold of the outstanding voting securities of all of SPS's, and certain of PSCo's, non-utility subsidiaries under Section 9(a)(1) of the Act; (iii) NC Services as a subsidiary service company in accordance with the provisions of Rule 88 of the Act and the Service Agreement and the Non-Utility Service Agreement as a basis for NC Services to comply with Section 13 of the Act and the Commission's rules thereunder; (iv) Utility Engineering Corporation ("UE"), which following the consummation of the Transaction will be an indirect subsidiary of NCE, as a subsidiary service company in accordance with the provisions of Rule 88 of the Act and the UE Service Agreement and the UE Non-Utility Service Agreement as a basis for UE to comply with Section 13 of the Act and the Commission's rules thereunder; (v) certain additional affiliate transactions as being in accordance with the provisions of Section 13 of the Act and (vi) the issuance of NCE Common Stock in connection with the Transaction. 2. Overview of the Transaction Pursuant to an Agreement and Plan of Reorganization, dated as of August 22, 1995, as amended on December 8, 1995 (the "Merger Agreement"), PSCo Merger Corp., a Colorado corporation and a wholly-owned subsidiary of NCE ("PSCo Merger Corp."), will be merged with and into PSCo, with PSCo continuing as the surviving corporation (the "PSCo Merger"), and SPS Merger Corp., a New Mexico corporation and a wholly-owned subsidiary of NCE, will be merged with and into SPS, with SPS as the surviving corporation (the "SPS Merger"). As a result of the PSCo Merger and the SPS Merger, and the declaration of a dividend by PSCo to NCE of all of the stock of Cheyenne, PSCo, SPS and Cheyenne will become operating subsidiaries of NCE, and NCE will be a holding company within the meaning of the Act. In addition, WGI will become a direct subsidiary of NCE (by the declaration of a dividend by PSCo to NCE of WGI's stock), as will NC Services and NC Hold (which will be newly formed corporations). Upon consummation of the Transaction, the non-utility subsidiaries of SPS will become subsidiaries of NC Hold, and certain of the non-utility subsidiaries of PSCo will become subsidiaries of NC Hold while others will remain subsidiaries of PSCo (as described below). NCE is also requesting approval of the terms of (1) the Service Agreement among NC Services and the operating utility subsidiaries of NCE, (2) the Non-Utility Service Agreement between NC Services and the non-utility subsidiaries of NCE, (3) the UE Service Agreement among UE and the utility subsidiaries of NCE and (4) the UE Non- Utility Service Agreement among UE and the non-utility subsidiaries of NCE. NCE is also requesting approval of the acquisition by NC Hold of the outstanding capital stock of certain of the non-utility subsidiaries of PSCo and of SPS. The two SPS subsidiaries, Quixx Corporation ("Quixx") and UE will be transferred through the sale by SPS of all of the outstanding common stock of such subsidiaries to NC Hold in exchange for debt of NC Hold. The subsidiaries of PSCo to be transferred to NC Hold will be transferred by a declaration of a dividend of their stock to NCE and subsequent capital contribution of their stock to NC Hold. A chart of the proposed corporate structure of NCE following consummation of the Transaction is attached hereto as Exhibit E-6. The common shareholders of PSCo and SPS will receive one and 0.95 of one share of common stock, par value of $1.00 per share, of NCE ("NCE Common Stock"), respectively, and will become common shareholders of NCE (see Item 1.C.2 below). The Transaction will have no effect on the shares of preferred stock of PSCo and SPS issued and outstanding at the time of the consummation of the Transaction, each series of which and each share of which will remain unchanged. A copy of the Merger Agreement is incorporated by reference as Exhibit B-1 hereto. B. Description of the Parties to the Transaction 1. General Description a. PSCo PSCo was incorporated under the laws of the State of Colorado in 1924 and is a public utility holding company exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act and Rule 2 thereunder. Pursuant to Rule 2, PSCo has filed a statement with the Commission on Form U-3A-2 for the year ended December 31, 1995, which is incorporated by reference as Exhibit H-3 hereto. PSCo and Cheyenne are primarily engaged in providing electric and gas service in Colorado and Cheyenne, Wyoming. As of December 31, 1995, PSCo provided electric utility service to 1.1 million customers, and Cheyenne provided electric utility service to 34,000 customers in the Cheyenne area. In addition, PSCo and Cheyenne provided gas utility service to approximately 935,000 and 27,000 customers, respectively. Maps of PSCo's and Cheyenne's service territory are attached as Exhibits E-3 and E-4 respectively. PSCo is subject to regulation as a public utility under the Colorado Public Utilities Law as to retail electric and gas rates and other matters by the CPUC. PSCo and Cheyenne are also subject to regulation by the FERC with respect to the classification of accounts, rates for any wholesale sales of electricity, the interstate transmission of electric power and energy, interconnection agreements, issuances of securities not regulated by state commissions and acquisitions and sales of certain utility properties under the Federal Power Act. Cheyenne is subject to regulation in connection with its electric and gas retail sales and other matters by the WPSC. In addition, PSCo and Cheyenne are subject to regulation by the FERC under the Natural Gas Act of 1935, as amended. PSCo is also currently subject to regulation by the NRC in connection with its ownership of the Fort St. Vrain nuclear generating facility. This facility ceased operations on August 29, 1989 and is in the process of being decommissioned in accordance with the terms of orders issued by the NRC. PSCo directly owns a majority of the issued and outstanding common stock of nine non-utility companies. In addition, PSCo has a controlling interest in six small water and ditch companies, a general partner interest in a partnership engaged in gas storage and minority interests in a number of limited partnerships. The common stock, par value of $5.00 per share, of PSCo ("PSCo Common Stock") is listed on the New York Stock Exchange ("NYSE"), the Chicago Stock Exchange and the Pacific Stock Exchange. As of December 31, 1995, there were 63,358,128 shares of PSCo Common Stock and 2,888,652 shares of PSCo preferred stock outstanding. PSCo's principal executive office is located at 1225 Seventeenth Street, Denver, Colorado 80202. A copy of the Restated Articles of Incorporation of PSCo is incorporated by reference as Exhibit A-3. For the year ended December 31, 1995, PSCo's operating revenues on a consolidated basis were approximately $2.11 billion, of which approximately $1.45 billion were derived from electric operations, $625 million from gas operations and $37 million from other operations. Consolidated assets of PSCo and its subsidiaries at December 31, 1995 were approximately $4.4 billion, consisting of approximately $2.5 billion in identifiable electric utility property, plant and equipment; approximately $675 million in identifiable gas utility property, plant and equipment; and approximately $10 billion in other corporate assets. A more detailed summary of information concerning PSCo and its subsidiaries is contained in PSCo's Annual Report on Form 10-K for the year ended December 31, 1995 and Statement on Form U-3A-2 for the year ended December 31, 1995, copies of which are incorporated by reference as Exhibits H-1 and H-3, respectively. b. SPS SPS, incorporated under the laws of the State of New Mexico in 1921, is a public utility company as defined in the Act. SPS is engaged in the generation, transmission, distribution and sale of electric energy. It serves a population of approximately one million in a 52,000 square-mile area of the Panhandle and south plains of Texas, eastern and southeastern New Mexico, the Oklahoma Panhandle and southwestern Kansas. SPS provides electric energy to 46 communities with a population of 2,000 or more: 35 in Texas, 9 in New Mexico and 1 each in Oklahoma and Kansas. Approximately 56 percent of SPS's operating revenues during fiscal 1995, excluding sales to other utilities, were derived from operations in Texas. A map of SPS's service area is attached as Exhibit E-3. As a public utility under the laws of the states of Texas, New Mexico, Kansas and Oklahoma, SPS is regulated by the PUCT, NMPUC, KCC and the Oklahoma Corporation Commission (the "OCC"), respectively, as to its retail rates, services, accounts, depreciation, and acquisitions and sales of utility properties, and in other respects. In addition, issuances of securities by SPS are regulated by the NMPUC and the KCC, and the issuances of securities secured by a lien on Oklahoma property is regulated by the OCC. SPS is also subject to regulation by the FERC with respect to borrowings and the issuance of securities not regulated by the state commissions listed above, the classification of accounts, rates to any wholesale customers, the interstate transmission of electric power and energy, interconnection agreements, and acquisitions and sales of certain utility properties under the Federal Power Act. SPS also owns all of the issued and outstanding common stock of two corporations engaged in non-utility businesses, which are described in more detail below. The common stock of SPS, par value $1.00 per share (the "SPS Common Stock"), is listed on the NYSE, the Chicago Stock Exchange and the Pacific Stock Exchange. As of December 12, 1995, there were 40,917,908 shares of SPS Common Stock outstanding and no shares of Preferred Stock. SPS may issue one or more series of preferred stock prior to the consummation of the Transaction, subject to obtaining the necessary regulatory approvals. SPS's principal executive office is located at SPS Tower, Tyler at Sixth, Amarillo, Texas 79101. A copy of the SPS Restated Articles of Incorporation is incorporated by reference as Exhibit A-4. On a consolidated basis, SPS's operating revenues for the calendar year ended December 31, 1995 were approximately $853 million, and its total assets at December 31, 1995 were approximately $1.9 billion. More detailed information concerning SPS is contained in the Annual Report of SPS on Form 10-K for the year ended August 31, 1995 and the Quarterly Report on Form 10-Q for the quarter ended November 30, 1995, which are incorporated by reference as Exhibits H-2 and H-8, respectively. c. NCE and its Subsidiaries i. NCE NCE was incorporated under the laws of the State of Delaware on August 21, 1995 to become a holding company for PSCo and SPS following the Transaction and for the purpose of facilitating the Transaction. NCE filed a Restated Certificate of Incorporation on December 11, 1995. NCE has, and prior to the consummation of the Transaction will have, no operations other than those contemplated by the Merger Agreement to accomplish the Transaction. Upon consummation of the Transaction, NCE will be a public utility holding company and will own all of the issued and outstanding common stock of PSCo, SPS, Cheyenne, NC Services, NC Hold and WGI. NC Hold will, in turn, own all of the issued and outstanding common stock of the SPS non-utility subsidiaries and certain of the PSCo non-utility subsidiaries described in Item 1.B.3. below. At present, the common stock of NCE, which consists of 200 issued and outstanding shares, is owned by PSCo and SPS, each of which owns 100 shares. A copy of the Restated Certificate of Incorporation of NCE is attached as Exhibit A-1. ii. PSCo Following the consummation of the Transaction, PSCo will become a direct subsidiary of NCE. PSCo's utility operations and facilities are described in Item 1.B.2.a. below and its non-utility subsidiaries and operations are described in Item 1.B.3.a. below. Under current plans, all of PSCo's existing non-utility subsidiaries will become either direct or indirect subsidiaries of NCE as explained in greater detail under Item 3.A.2.a.ii. below. The following existing PSCo subsidiaries will remain subsidiaries of PSCo: 1480 Welton, Inc. ("1480 Welton"), PS Colorado Credit Corporation ("PSCCC"), P.S.R. Investments, Inc. ("PSRI"), Fuel Resources Development Company ("Fuelco"), Green and Clear Lakes Company ("Green and Clear Lakes"), and several small water and ditch companies described in more detail in Item 3.A.2.a.ii. The remaining existing non-utility subsidiaries of PSCo will become subsidiaries of NC Hold, except WGI which will become a direct subsidiary of NCE. iii. SPS Following the consummation of the Transaction, SPS will become a direct subsidiary of NCE. SPS's utility operations and facilities are described in Item 1.B.2.b. below and SPS's non- utility subsidiaries are described in Item 1.B.3.b. below. Under current plans, all of SPS's existing non-utility subsidiaries will become indirect subsidiaries of NCE through NC Hold, as explained in greater detail under Item 3.A.2.a.ii. below. iv. Cheyenne Following the consummation of the Transaction, Cheyenne will become a direct subsidiary of NCE. Cheyenne's utility operations and facilities are described in Item 1.B.2.a. below. Cheyenne does not currently own any interest in any non-utility subsidiaries. v. PSCo Merger Corp. Solely for the purpose of facilitating the Transaction proposed herein, PSCo Merger Corp. will be incorporated under the laws of the State of Colorado prior to the consummation of the Transaction. The authorized capital stock of PSCo Merger Corp. will consist of 100 shares of common stock, no par value ("PSCo Merger Corp. Common Stock"), all of which will be held by NCE. PSCo Merger Corp. has not had, and prior to the closing of the Transaction will not have, any operations other than the activities contemplated by the Merger Agreement necessary to accomplish the combination of PSCo Merger Corp. and PSCo as herein described. vi. SPS Merger Corp. Solely for the purpose of facilitating the Transaction proposed herein, SPS Merger Corp. will be incorporated under the laws of the State of New Mexico prior to the consummation of the Transaction. The authorized capital stock of SPS Merger Corp. will consist of 100 shares of common stock, no par value ("SPS Merger Corp. Common Stock"), all of which will be held by NCE. SPS Merger Corp. has not had, and prior to the closing of the Transaction will not have, any operations other than the activities contemplated by the Merger Agreement necessary to accomplish the combination of SPS Merger Corp. and SPS as herein described. vii. NC Services Prior to the consummation of the Transaction, NC Services will be incorporated in Delaware to serve as the service company for the NCE system. NC Services will provide PSCo, SPS, Cheyenne and the other companies of the NCE system with a variety of administrative, management and support services. NC Services will enter into a service agreement with PSCo, SPS and Cheyenne (the "Service Agreement"). (A copy of the form of Service Agreement as well as an appendix entitled "Description of Services and Determination of Charges for Services" is filed as Exhibit B-2). For the direct and indirect non-utility subsidiaries of NCE, NC Services will enter into one or more separate service agreements (the "Non-Utility Service Agreement"). (A copy of the form of Non-Utility Service Agreement as well as an appendix entitled "Description of Services and Determination of Charges for Services" is filed as Exhibit B-3). The authorized capital stock NC Services will consist of 1,000 shares of common stock, par value $.01 per share. Upon consummation of the Transaction, all issued and outstanding shares of NC Services common stock will be held by NCE. viii. NC Hold Prior to the consummation of the Transaction, NC Hold will be incorporated in Delaware to serve as a holding company for (and directly or indirectly acquire the outstanding capital stock of) the following non-utility subsidiary companies of PSCo and SPS: e prime, inc. ("e prime"), Natural Fuels Corporation Company ("Natural Fuels"), Quixx and UE. Quixx has the following subsidiaries and affiliates: BCH Energy Limited Partnership, Vedco Louisville, L.L.C., Quixx Jamaica, Inc., Quixx Carolina, Inc., Carolina Energy Limited Partnership, Quixx WPP94, Inc., Windpower Partners 1994, L.P., Quixx Power Services, Inc., Amarillo Railcar Services, Lindsay Cogeneration Limited Partnership, Quixx Resources, Inc. and Quixx WRR, L.P. UE has two affiliates as follows: S.A. Garza Engineers, Inc. and Environmental Services, L.L.C. and one subsidiary, Utility Engineering Carolina, PLLC. UE intends to create two new wholly owned subsidiaries, Universal Utility Services Corporation ("Utility Services") and Precision Resource Company ("PRC"). e prime has one subsidiary, Young Gas Storage Company, Inc. ("Young Gas"). These companies are described below in Item 1.B.3. The authorized capital stock of NC Hold will consist of 1,000 shares of common stock, par value $.01 per share. Upon consummation of the Transaction, all issued and outstanding shares of NC Hold common stock will be held by NCE. NC Hold will also have issued debt to SPS in connection with its acquisition of UE and Quixx as more fully described in Item 3.A.4 below. ix. WestGas Interstate, Inc. WGI is a natural gas transmission company operating in Colorado and Wyoming that will be a wholly-owned subsidiary of NCE following consummation of the Transaction. WGI's interstate pipeline system consists of approximately 0.23 miles of 8-inch pipe, 11.45 miles of 4-inch pipe, a 300 foot 8-inch discharge main, and a meter station. The facilities extend from PSCo's Chalk Bluffs meter station in Weld County, Colorado, approximately two miles south of the Wyoming border, north to the WestGas Paraffin Meadows meter station in Laramie County, Wyoming. This meter station is interconnected with the Cheyenne distribution system, approximately four miles south of the City of Cheyenne, Wyoming. The system's peak day capacity is 13 MMcf, and annual throughput is 2,900 MMcf. Annual 1995 revenues were approximately $104,000. WGI currently serves the following four customers only: Cheyenne, Associated Interstate Pipeline Company, Enron Power Marketing, Inc., and Frontier Oil and Refining Company. 2. Description of Facilities a. PSCo i. General For the year ended December 31, 1995, PSCo and its utility subsidiaries sold the following amount of electric energy (at retail or wholesale) and distributed the following amount of natural or manufactured gas at retail: PSCo Kwh of electric energy sold . . . . . . . . 23,649,058,597 Mcf of gas distributed at retail . . . . . . . . 148,646,374 Cheyenne Kwh of electric energy sold . . . . . . . . . . 805,091,065 Mcf of gas distributed at retail . . . . . . . . . 5,251,043 ii. Electric Generating Facilities and Resources As of December 31, 1995, PSCo had a total net generating capability of approximately 3313 MW available from the following units: Arapahoe: Arapahoe is located in Denver, Colorado and has an installed gross capacity of 262 MW and a net dependable capacity of 246 MW. Its major fuel source is coal. Cabin Creek: A pumped storage hydro station located near Georgetown, Colorado and has a total capacity of 324 MW at maximum load and a net dependable capacity of 162 MW. Cameo: Cameo is located near Grand Junction, Colorado and has an installed gross capacity of 77 MW and a net dependable capacity of 72.7 MW. Its major fuel source is coal. Cherokee: Cherokee is located in Denver, Colorado and has an installed gross capacity of 784 MW and a net dependable capacity of 723 MW. Its major fuel source is coal. Comanche: Comanche is located near Pueblo, Colorado and has an installed gross capacity of 725 MW and a net dependable capacity of 660 MW. Its major fuel source is coal. Craig: Craig is located near Craig, Colorado and is comprised of three units, two of which are owned by PSCo. The total installed gross capacity of the units is 894 MW, of which PSCo has a 9.72% undivided ownership interest. PSCo's share in the installed gross capacity is 86.90 MW. Its share in the net dependable capacity is 83.20 MW. Its major fuel source is coal. Fort St. Vrain: Fort St. Vrain is located near Platteville, Colorado and will have installed capacity of 130 MW and a net dependable capacity of 126 MW when it comes on line, which occured in May 1996. Hayden: Hayden, located near Hayden, Colorado is comprised of two units, Units 1 and 2, which have gross maximum capabilities of 202.01 MW and 285.96 MW, respectively. PSCo has a 75.5% undivided ownership interest in Unit 1 and a 37.4% undivided ownership interest in Unit 2. Its total share in the installed gross capacity of these units is 259.47 MW. Its total share in the net dependable capacity is 236.90 MW. Its major fuel source is coal. Pawnee: Pawnee is located near Brush, Colorado and has an installed gross capacity of 530 MW and a net dependable capacity of 495 MW. Its major fuel source is coal. Valmont Unit 5: Valmont is located near Boulder, Colorado and has an installed gross capacity of 188 MW and a net dependable capacity of 178 MW. Its major fuel source is coal. Zuni: Zuni is located in Denver, Colorado and has an installed gross capacity of 115 MW and a net dependable capacity of 107 MW. Its major fuel source is coal. PSCo has six combustion turbine units at various locations. The total installed gross capacity of these units is 209 MW. The units' net dependable capacity is 171 MW. In addition to Cabin Creek, PSCo has 14 hydro units at various locations, including one station (two units) not owned by PSCo but operated by it under contract. These units have a total installed gross capacity of 53.35 MW. The units' net dependable capacity is 36.55 MW. Seasonal hydro plant net dependable capabilities are based upon average water conditions and limitations for each particular season. The individual plant seasonal capabilities are sometimes limited by less than design water flow. PSCo has seven diesel generators at various locations with a total of 15.5 MW installed gross capacity and net dependable capacity. PSCo purchases capacity and energy from various regional utilities as well as Qualifying Facilities ("QFs"), as that term is defined in the Public Utility Regulatory Policies Act of 1978 ("PURPA") in order to meet energy needs of its customers. Together, PSCo and Cheyenne purchased approximately 37% of the total electric system energy input for 1995. PSCo's 1995 summer peak load, which occurred on August 11, 1995, was 4262.2 MW and its 1995 winter peak load, which occurred on January 4, 1995, was 3927.8 MW. Cheyenne does not generate any electricity, but purchases all of its electric energy requirements from an unaffiliated electric utility. Cheyenne does own five small diesel generating units (nameplate rating of 2 MW each) which are held on cold standby and which have been contractually placed under the control of the unaffiliated electric utility company that supplies all of Cheyenne's electric energy requirements. iii. Electric Transmission Facilities PSCo's transmission system is located primarily within Colorado although small portions of two jointly owned lines are located in New Mexico and Nebraska, both along the Colorado border. As of December 31, 1995, PSCo's transmission system consisted of approximately 112 circuit miles of 345 KV overhead lines; 1,864 circuit miles of 230 KV lines; 15 circuit miles of 230 KV underground lines; 65 circuit miles of 138 KV overhead lines; 996 circuit miles of 115 KV underground lines; 20 circuit miles of 115 KV underground lines; 355 circuit miles of 69 KV overhead lines; 143 circuit miles of 44 KV overhead lines; and 1 circuit mile of 44 KV underground lines. PSCo jointly owns with other utilities approximately 342 circuit miles of 345 KV overhead lines and 360 miles of 230 KV overhead lines, of which PSCo's share is 112 miles and 147 miles, respectively, which shares are included in the amounts referred to above. The system is interconnected with the systems of the following utilities with which PSCo has major firm purchase power contracts; capacity and energy are provided primarily by generating sources in the locations indicated: Utility Location Basin Electric Power Cooperative Southeast Wyoming PacifiCorp West & Northwest U.S. Northwest Colorado Platte River Power Authority Northcentral Colorado Tri-State Southeast Wyoming and Northwest Colorado PSCo has wheeling agreements with the above, and with other utilities and public power agencies, which are utilized to provide capacity and energy to PSCo's system from time to time. PSCo's transmission system also interconnects with the system of the Western Area Power Administration ("WAPA"). PSCo is a member of the Western Systems Coordinating Council (the "WSCC"), an interstate network of transmission facilities which are owned by public entities and investor-owned utilities. WSCC is the regional reliability council providing planning and coordination for member electric power systems in the Western United States. PSCo is also a member of the Western Systems Power Pool (the "WSPP") which is an economic power pool that operates an electronic bulletin board and acts as a clearinghouse for bulk power transactions among over 90 member utilities and marketers. The WSPP Agreement, to which PSCo is a signatory, provides for the sale and purchase of capacity, energy and transmission services at market-based rates with a cost-based floor and ceiling. ____________________ SPS is also a member of the WSPP, as described in Item b.iii below. Cheyenne owns two 115 KV transmission line segments that total 25.5 miles in length that fall within and are operated by WAPA's Loveland control area. iv. Gas Facilities The gas property of PSCo at December 31, 1995 consisted chiefly of approximately 14,977 miles of distribution mains ranging in size from 0.50 to 30 inches and related equipment. The Denver distribution system consisted of 8,522 miles of mains. The gas property of Cheyenne at December 31, 1995 consisted chiefly of approximately 534 miles of distribution/transmission mains ranging in size from 1 to 16 inches and related equipment. v. Other PSCo owns and operates four underground gas storage facilities Rountup, Asbury, Fruita (all conventional depleted gas reservoirs) and Leyden (a converted mined cavern). These combined facilities have a maximum working volume of 18,974,000 Mcf, and a maximum daily sendout capacity of 252,000 Mcf/day. PSCo's steam heating property at December 31, 1995 consisted of 10.5 miles of transmission, distribution and service lines in the business district of Denver, including a steam transmission line connecting the steam heating system with PSCo's Zuni electric power plant. Steam is supplied from boilers installed at PSCo's Denver Steam Plant, which has a capability of 295,000 pounds of steam per hour under sustained load. An additional 300,000 pounds of steam per hour is available from PSCo's Zuni electric generating plant on a peak demand basis. PSCo also owns service and office facilities in Denver and other communities located throughout its service territory. In addition PSCo and its subsidiaries own other property, plant and equipment supporting their electric and gas utility functions. PSCo's former nuclear generating station, Fort St. Vrain, located near Platteville, Colorado ceased operations on August 29, 1989. b. SPS i. General For the year ended August 31, 1995, SPS sold 20.3 billion kwh of electric energy (at retail and wholesale). ii. Electric Generating Facilities At December 31, 1995 SPS had a total of 4135 MW net generation capability. SPS's steam generation stations have a combined net capability of 3990 MW. These stations are: Harrington: Harrington, located near Amarillo, TX, has a net capability of 1066 MW. Its principal fuel source is coal. Tolk: Tolk, located near Muleshoe, TX, has a net capability of 1080 MW. Its principal fuel source is coal. Jones: Jones, located near Lubbock, TX, has a net capability of 486 MW. Its principal fuel source is natural gas. Plant X: Plant X, located near Earth, TX, has a net capability of 442 MW. Its principal fuel source is natural gas. Nichols: Nichols, located near Amarillo, TX, has a net capability of 457 MW. Its principal fuel source is natural gas. Cunningham: Cunningham, located near Hobbs, NM, has a net capability of 267 MW. Its principal fuel source is natural gas. Maddox: Maddox, located near Hobbs, NM, has a net capability of 118 MW. Its principal fuel source is natural gas. Moore County: Moore County, located near Sunray, TX, has a net capability of 48 MW. Its principal fuel source is natural gas. CZ-2: CZ-2, located near Pampa, TX, has a net capability of 26 MW. Its principal fuel source is purchased steam. SPS's other electric generation facilities -- gas turbines and diesel engines -- have a total net capability of 145 MW. These stations are: Carlsbad (gas turbine): Carlsbad, located in Carlsbad, NM, has a net capability of 16 MW. CZ-1 (gas turbine): CZ-1, located near Pampa, TX, has a net capability of 13 MW. Maddox (gas turbine): Maddox, located near Hobbs, NM, has a net capability of 76 MW. Riverview (gas turbine): Riverview, located near Borger, TX, has a net capability of 25 MW. Tucumcari (diesel engine): Tucumcari, located in Tucumcari, NM, has a net capability of 15 MW. SPS's summer peak load for the calendar year 1995, which occurred on July 28, 1995, was 3952 MW and its 1995 winter peak load, which occurred on February 28, 1995, was 2486 MW. iii. Electric Transmission Facilities As of December 31, 1995, SPS's transmission system consisted of 319 circuit miles of 345 KV lines, 1,524 circuit miles of 230 KV lines, 2,364 circuit miles of 138 KV lines and 1,843 circuit miles of 69 KV lines. SPS is in the southwest corner of the Eastern Interconnection of the United States and is a member of the Southwest Power Pool ("SPP"), one of the seven reliability councils on the Eastern Interconnection. SPS is bordered to the south and southeast by the Electric Reliability Council of Texas ("ERCOT") and to the west by the WSCC. SPS is not interconnected with ERCOT. SPS is connected with utilities west of its service territory through two high voltage direct current (HVDC) interconnections in New Mexico and has four interconnecting transmission lines with utilities of the SPP. These interconnections are described in the following table: Voltage (kilovolts) The Other Location Interconnecting Utility Company Utility Near Artesia, NM El Paso Electric Co. 230* 345 and Texas-New Mexico Power Co. Near Clovis, NM Public Service Company 230* 345 of New Mexico Near Oklaunion, TX Public Service Company 345 345 of Oklahoma Near Elk City, OK Public Service Company 230 230 of Oklahoma Near Shamrock, TX West Texas Utilities 115 115 Near Guymon, OK West Plains Energy 115 115 *These are HVDC interconnections owned by the interconnecting utilities. SPS has scheduling capabilities over these facilities through the WSPP agreement and pursuant to agreements with the interconnecting utilities. Transactions with the SPP are handled through interties near Elk City and Guymon, Oklahoma, and Shamrock and Oklaunion, Texas. These interties allow SPS to sell energy to or to purchase energy from the eastern electrical grid. Sales through eastern interties accounted for 2.0% of fiscal 1995 total sales. HVDC interconnections link SPS with the western electrical grid of the United States. SPS purchases and sells energy through HVDC interties near Artesia and Clovis, New Mexico. Sales through these interties accounted for 4.1% of fiscal 1995 total sales. iv. Other In addition, SPS and its subsidiaries own property, plant and equipment supporting their electric utility functions. 3. Non-Utility a. PSCo PSCo has eight direct non-utility subsidiaries, seven of which are wholly-owned: WGI, e prime, 1480 Welton, PSCCC, PSRI, Fuelco and Green and Clear Lakes. In addition, PSCo owns 80% of the capital stock of Natural Fuels. e prime, in turn, has one subsidiary: Young Gas. WGI is a natural gas transmission company operating in Colorado and Wyoming (see Item I.B.1.c.vi.); e prime will offer energy related products and services to energy-using customers and to selected segments of the utility industry; Fuelco has been engaged in the exploration for, and the development and production of, natural gas and oil, principally in Colorado; 1480 Welton is a real estate company which owns certain of PSCo's real estate interests for use in its utility business; PSRI owns and manages company owned life insurance (COLI) policies on certain past and present employees, the benefits from which are to provide future funding for general corporate purposes; PSCCC is a company that finances (factors) certain of PSCo's current assets; Young Gas holds a 47.5% interest in a partnership which owns an underground gas storage facility; Green and Clear Lakes owns water rights and storage facilities for water used at PSCo's Georgetown Hydroelectric Station; and Natural Fuels sells compressed natural gas as a transportation fuel to retail markets, converts vehicles for natural gas usage, constructs fueling facilities and sells miscellaneous fueling facility equipment. PSCo also holds a greater than 50% interest in several other relatively small ditch and water companies: namely East Boulder Ditch Company, Hillcrest Ditch and Reservoir Company, United Water Company, Consolidated Extension Canal Company, Enterprise Ditch Company and Las Animas Consolidated Canal Company as well as a less than 50% interest in the following small ditch and water companies: Fisher Ditch Water Company, Baugh Lateral Ditch Company, Beenan Irrigating Ditch and Milling Company and Jones and Donelley Ditch Company (collectively, the "Ditch Companies"). These Ditch Companies' capital requirements are not significant and are not consolidated in PSCo's financial statements or statistical data. ____________________ The aggregate revenues of the five Ditch Companies in which PSCo holds a 50% or greater interest at December 31, 1994 were $103,031. Their aggregate assets at that time were $84,049. Together, at December 31, 1995, PSCo's non-utility subsidiaries and investments constituted less than three percent of the consolidated book value of the assets of both PSCo and its subsidiaries. A corporate chart of PSCo and its subsidiaries, showing their non-utility interests, is filed as Exhibit E-4. b. SPS SPS wholly owns two direct non-utility subsidiaries, UE and Quixx. No assets of Quixx or UE are presently, or will following the consummation of the Transaction be, included in the rate base of any public utility company within the NCE system. UE is a wholly owned subsidiary formed in 1986. It is engaged in a variety of engineering, design, construction, management and other miscellaneous services, employing approximately 120 employees. UE's assets at December 31, 1995, were approximately $43.4 million and total revenues for calendar year 1995 were $29.8 million. SPS is one of UE's major clients. UE is also involved in other projects for nonaffiliate customers, providing general engineering, development, design and rehabilitation services and management, construction, maintenance, operation and other related services. UE also works jointly with Quixx on cogeneration and other independent power and related projects. Quixx is a wholly owned subsidiary formed in 1986. Its primary business is investing in and developing cogeneration and energy-related projects. Quixx also holds water rights and certain other non-utility assets. Quixx employs approximately 70 employees. Quixx's assets at December 31, 1995 were approximately $86.0 million and total revenues for calendar year 1995 were $19.7 million. UE has two affiliates as follows: S.A. Garza Engineers, Inc. ("SAGE"), in which UE holds a 39% convertible preferred stock interest and a 12% common stock interest, is involved in municipal water and wastewater projects, civil works and surveying services and may in the future provide services to NCE's utility subsidiaries and non-utility subsidiaries and affiliates; and Vista Environmental Services, L.L.C., 49% of which is owned by UE, performs environmental consulting services, client-regulatory interfacing, site assessments, due diligence, waste management planning, remedial action design and implementation, groundwater valuation, mineral surveys, and on- site field supervision in both the private and governmental sectors and is providing site remediation services, and will continue to provide site remediation and other services, to SPS and may in the future provide such services to NCE's utility subsidiaries and non-utility subsidiaries and affiliates. UE currently has three wholly owned subsidiaries, Utility Engineering Carolina PLLC ("UE Carolina"), Utility Services and PRC. UE Carolina provides engineering, design and construction related services to the North Carolina energy projects (described below). UE Carolina was formed as a special purpose subsidiary to comply with North Carolina requirements with respect to its qualification to do business in such state. Utility Services will provide services related to the engineering, design, and construction of cooling towers for power plants, as well as plant construction, distribution, operation and maintenance activity, resource recovery, plant and facility ownership and leasing, and wood product fabrication. Such services may be provided to utility and non-utility subsidiaries and affiliates. PRC will provide a resource database service. The database will be comprised of names of people who can be dispatched to provide temporary services to various projects. Such services may be provided to utility and non-utility subsidiaries and affiliates. Quixx has five wholly owned subsidiaries, four of which hold partnership interests in various energy-related limited partnerships. In addition, Quixx directly holds interests in five other entities. The following is a description of Quixx's subsidiaries and affiliates: Quixx holds a 25% limited partnership interest in BCH Energy Limited Partnership ("BCH"), which is constructing a waste-to-energy cogeneration facility located near Fayetteville, North Carolina to provide steam to a Du Pont De Nemours & Company ("Du Pont") plant near Fayetteville and electric power to Carolina Power & Light. Quixx holds a 95% interest in Vedco Louisville L.L.C., which owns a facility consisting of two gas-fired boilers providing steam to a Du Pont plant in Louisville, Kentucky. Quixx Jamaica, Inc., a wholly owned subsidiary of Quixx, holds a 99% limited partnership interest in KES Jamaica, L.P. which owns a 42.3 megawatt oil-fired combustion turbine power plant located in Montego Bay, Jamaica, W.I. and sells electricity to Jamaica Power Services. Quixx holds a 32-1/3% limited partnership interest and, through Quixx Carolina, Inc., a wholly owned subsidiary of Quixx, a 1% general partnership interest in Carolina Energy, Limited Partnership ("Carolina Energy"), which is developing, and will own and operate solid waste fueled cogeneration facilities in Wilson and Lenoir Counties, North Carolina, which will provide steam to a Du Pont plant and will sell electric power to Carolina Power & Light. Quixx holds a 24.67% limited liability partnership interest and, through Quixx WPP94, Inc., a wholly owned subsidiary of Quixx, a 0.33% general partnership interest in Windpower Partners, 1994, L.P., which owns a 35 megawatt windplant in Texas and sells the electricity to the City of Austin and the Lower Colorado River Authority. Quixx Power Services, Inc. ("QPS"), a wholly owned subsidiary of Quixx, will operate and maintain generation facilities in various locations, including the BCH and Carolina Energy cogeneration facilities. Amarillo Railcar Services, a railcar maintenance facility owned and operated by Quixx, provides inspection, light and heavy maintenance and storage for unit trains. A majority of these services are provided for railcars that transport coal for use by SPS. Quixx holds a 50% general partnership interest in Lindsay Cogeneration Limited Partnership, which intends to construct and operate an on site cogeneration facility to be utilized to remediate brine contamination of groundwater as mandated by California. Quixx holds a 1% general partnership interest and, through Quixx Resources, Inc., a wholly owned subsidiary of Quixx, a 99% limited partnership interest in Quixx WRR, L.P., which will hold all of Quixx's water rights located in Roberts, Gray, Hutchinson and Carson Counties, Texas. In addition, Quixx has royalty interests in coal and other minerals produced and to be produced from certain New Mexico properties owned by the Pittsburgh and Midway Coal Mining Company. Quixx also finances sales of heat pumps and markets other non-utility goods and services. Together, SPS's non-utility subsidiaries constituted approximately 13 percent of the consolidated book value of the assets of SPS and it subsidiaries at August 31, 1995. A corporate chart of SPS and its subsidiaries, showing their non-utility interests, is filed as Exhibit E-5. C. Description of Transaction 1. Background and Negotiations Leading to the Proposed Transaction PSCo and SPS have had numerous discussions over the past several years related to various means of better utilizing their facilities, including pursuing possibilities to enter into joint ventures for the construction of various generation and transmission facilities. In addition, PSCo and SPS share the view that fundamental changes in the electric energy industry are inevitable and that such changes are leading to greater competition in a once monopolistic industry. The Energy Policy Act of 1992 (the "1992 Act") granted the FERC the authority to order electric utilities to provide transmission service to other utilities and to other buyers and sellers of electricity in the wholesale market. The 1992 Act also created a new class of power producers, exempt wholesale generators ("EWGs"), which are exempt from regulation under the Act. The exemption from regulation under the Act of EWGs has increased the number of entrants into the wholesale electric generation market, thus increasing competition in the wholesale segment of the electric utility industry. Commencing in December 1993, pursuant to its authority under the 1992 Act, the FERC issued a number of orders in spe- cific cases directing utilities to provide transmission services. Under the FERC's evolving transmission policies, utilities are being required to offer transmission services to third parties on a basis comparable to service that the utilities provide themselves. On April 7, 1995, the FERC issued a notice of proposed rule making under which it proposed to implement on a comprehensive basis the comparable transmission service policies it has developed in specific cases. The FERC's actions to date and its transmission rulemaking proceeding have increased the availability of transmission services, thus creating greater competition in the wholesale power market. In addition, state regulatory bodies in certain states have initiated proceedings to review the basic structure of the industry. These bodies are considering proposals to require some measure of competition in the retail portion of the industry. With the passage of the 1992 Act and the rapidly changing utility environment in general, both PSCo and SPS began investigating their individual strategic options related to the new competitive landscape. Both companies reached the same conclusions: 1. A key to future success would be to become a quality low cost provider; 2. Size would be a key factor related to the various options that could be provided to meet customer demands and further reduce costs; and 3. Financial strength would be essential in the changing environment. On March 29, 1995, following an electric utility industry meeting in Washington, D.C., senior management from both PSCo and SPS met to discuss a variety of business opportunities the two companies could jointly pursue as part of the changing environment, including a possible merger. Soon after this meeting, PSCo engaged the law firm of LeBoeuf, Lamb, Greene & MacRae, L.L.P. to advise it with respect to the potential business combination and SPS engaged the law firm of Cahill Gordon & Reindel ("Cahill Gordon") to advise it with respect to the potential business combination. On May 12, 1995, certain PSCo employees met with certain SPS employees to discuss, among other items, (i) the hiring of Deloitte & Touche LLP ("Deloitte & Touche") to assist the managements of PSCo and SPS in preparing a detailed synergy analysis; (ii) establishing a timetable to investigate a possible merger; (iii) the financial and operational modeling and analysis that would be required; and (iv) the exchange of preliminary information requests. On May 12, 1995, a Confidentiality and Standstill Agreement was signed between PSCo and SPS. Pursuant to that agreement, the two companies and their representatives agreed to provide non-public information to each other with a view toward exploring a possible business combination. Following those preliminary discussions, PSCo engaged Barr Devlin & Co. Incorporated ("Barr Devlin") to act as its financial advisor in connection with a possible business combination with SPS and SPS engaged Dillon, Read & Co. Inc. ("Dillon Read") to act as its financial advisor in connection with the possible business combination with PSCo. During the months of June, July and August of 1995, PSCo and SPS management personnel and representatives of Deloitte & Touche had numerous meetings in Dallas and Denver to analyze all aspects of the synergy study (i.e., operations and maintenance, capacity deferrals, fuel savings, other corporate programs, etc.). In these meetings, PSCo and SPS management personnel, with the assistance of Deloitte & Touche, analyzed potential savings which would be created by the Transaction and which could not be obtained absent the Transaction and savings which would be accelerated as result of the merging of the operations of the two companies. Costs of achieving the merger- related savings as well as savings which were already planned to be achieved through other means were also identified and quantified so that the synergy savings would be a "net" amount. In addition, preliminary due diligence activities and financial and operating modeling assumptions were discussed, and conferences were held between the respective financial advisors and counsel with respect to merger-related matters. In July, representatives of LeBoeuf Lamb and Cahill Gordon began drafting the Merger Agreement. Throughout this period, the Boards of Directors of PSCo and SPS discussed various aspects of the Transaction and the status of the negotiations. On August 22, 1995, the PSCo Board met to review and approve the Mergers. Barr Devlin rendered its written fairness opinion, provided the PSCo Board with information supporting that opinion and discussed in detail the analysis underlying its opinion. The PSCo management and its legal advisors also made presentations reviewing the transaction, including valuation issues, legal issues, and issues concerning the Merger Agreement and related documents. After the presentations, the PSCo Board approved the Merger Agreement and related documents. On August 22, 1995, the SPS Board met to approve the Mergers. SPS management and its legal and financial advisors made presentations reviewing the transaction (valuation, legal, Merger Agreement and related documents). Dillon Read delivered its fairness opinion to the SPS Board. After the presentations, final negotiations were held with representatives of PSCo regarding the conversion ratio. At the conclusion of those discussions and negotiations, the SPS Board unanimously approved the Merger Agreement and related documents. On January 31, 1996, the shareholders of PSCo and SPS, respectively, met and voted to approve the Transaction. Additional information regarding the background of the Transaction is set forth in the NCE Registration Statement on Form S-4 (Exhibit C-1 hereto). 2. Merger Agreement The Merger Agreement provides for SPS Merger Corp. to be merged with and into SPS, and PSCo Merger Corp. to be merged with and into PSCo. The Merger Agreement is incorporated by reference as Exhibit B-1. Under the terms of the Merger Agreement, upon consummation of the Transaction: - each issued and outstanding share of PSCo Common Stock, together with appurtenant rights, shall be converted into the right to receive one share of NCE Common Stock (the "PSCo Conversion Ratio"); - each issued and outstanding share of SPS Common Stock, together with appurtenant rights, shall be converted into the right to receive 0.95 of one share of NCE Common Stock (the "SPS Conversion Ratio" and, together with the PSCo Conversion Ratio, the "Conversion Ratios"); - each share of PSCo Merger Corp. Common Stock issued and outstanding prior to the Transaction will be converted into one share of Common Stock of PSCo as the surviving corporation; - each share of SPS Merger Corp. Common Stock issued and outstanding prior to the Transaction will be converted into one share of Common Stock of SPS as the surviving corporation; and - all shares of capital stock of NCE issued and outstanding immediately prior to the Transaction will be cancelled. ____________________ Other than treasury and certain other shares which will be cancelled, fractional shares and shares held by holders who dissent in compliance with Colorado law. Other than those shares which will be cancelled, fractional shares and shares held by holders who dissent in compliance with New Mexico law. The shares of preferred stock of PSCo and SPS outstanding at the time of the consummation of the Transaction will remain preferred stock of PSCo and SPS, respectively. The Transaction is conditioned on being tax-free to PSCo and SPS shareholders (except as to dissenters' rights and fractional shares.) Based on the capitalization and the Conversion Ratios of PSCo and SPS on December 1, 1995 the shareholders of PSCo and SPS would own securities representing approximately 62.0% and 38.0%, respectively, of the outstanding shares of common stock. The Transaction is subject to customary closing conditions, including the receipt of the requisite shareholder approvals of PSCo and SPS and all necessary governmental approvals, including the approval of the Commission. The Transaction is designed to qualify as a tax-free reorganization under Section 351 of the Internal Revenue Code of 1986, as amended. PSCo and SPS believe that the Transaction will be treated as a "pooling of interests" for accounting purposes. D. PSCo and SPS Benefit Plans PSCo and SPS currently have ten plans which involve the issuance of shares of the companies' common stock to participating employees, or, in the case of Dividend Investment Plans, shareholders, as follows: the PSCo Employee Savings and Stock Ownership Plan, the PSCo Omnibus Incentive Plan, the PSCo Annual Incentive Plan, the PSCo Long Term Incentive Plan, the PSCo Automatic Dividend Reinvestment and Common Stock Purchase Plan, the SPS 1989 Stock Incentive Plan, the SPS Employee Investment Plan, the SPS Dividend Reinvestment and Cash Payment Plan for Employees and the SPS Dividend Reinvestment and Cash Payment Plan for Shareholders. It is anticipated that for an undetermined period of time after the consummation of the Transaction all, such PSCo and SPS plans, except the dividend reinvestment plans, will be maintained on substantially the same terms, except that shares of NCE Common Stock will be used instead of PSCo Common Stock and SPS Common Stock. It is also anticipated that the PSCo Dividend Reinvestment Plan and the two SPS Dividend Reinvestment Plans will be terminated in connection with the consummation of the Transaction to be replaced by an NCE dividend reinvestment plan (the "NCE DRIP"). NCE will seek authorization from the Commission as required in connection with NCE shares to be issued under the PSCo or the SPS plans or the NCE DRIP. At some point subsequent to the consummation of the Transaction, it is intended that certain of the stock-based plans of NCE (the "NCE Stock-Based Benefit Plans") will replace the PSCo or SPS benefit plans with a similar name. It is intended that each of the NCE Stock-Based Benefit Plans will contain substantially the same provisions as the existing PSCo or SPS plans with similar name. All of the NCE Stock-Based Benefit Plans will be adopted and approved by PSCo and SPS, as the shareholders of NCE, prior to the consummation of the Transaction. Again, NCE will seek authorization from the Commission as required in connection with NCE shares to be issued under the NCE Stock Based Benefit Plans. E. Management and Operations of NCE Following the Merger The NCE Board of Directors and officers currently are Doyle R. Bunch II, Executive Vice-President of SPS and Richard C. Kelly, Senior Vice-President, Finance, Treasurer and Chief Financial Officer of PSCo. Messrs. Bunch and Kelly will resign from their current positions as directors and officers of NCE upon consummation of the Transaction. Pursuant to the Merger Agreement, upon consummation of the Transaction the NCE Board will consist of 14 members, eight designated by PSCo and six by SPS. As of the date hereof, PSCo and SPS had not determined which individuals, in addition to Bill D. Helton, Chairman of the Board of Directors and Chief Executive Officer of SPS, and Wayne H. Brunetti, President, Chief Executive Officer and Chief Operating Officer of PSCo, will be designated to serve as directors of NCE upon consummation of the Transaction. Upon consummation of the Transaction, the NCE Board of Directors shall have four committees as follows: an audit committee, a compensation committee, a finance committee and a nominating and civic responsibility committee. PSCo and SPS each shall designate the chairmen of two of these committees. In addition to the chairmen, each committee shall consist of two members designated by PSCo and two members designated by SPS. The Merger Agreement provides that for four and one-half years following consummation of the Transaction, these arrangements concerning the NCE Board of Directors and its committees may not be modified unless the terms of such modification are approved by a vote of two-thirds of the NCE Board of Directors. Initially, Mr. Helton will be Chairman of the Board of Directors and Chief Executive Officer of NCE and Mr. Brunetti will be NCE's Vice-Chairman of the Board, President and Chief Operating Officer. Mr. Helton and Mr. Brunetti will each have an employment agreement with NCE following the consummation of the Transaction. The forms of these employment agreements are attached as Annexes VI and VII to NCE's Registration Statement on Form S-4 incorporated by reference herein as Exhibit C-1. The Merger Agreement provides that NCE shall maintain (i) its corporate offices in Denver, Colorado and (ii) significant operating offices in Amarillo, Texas. Such provision cannot be modified for four and one-half years following the consummation of the Transaction unless the terms of such modification are approved by a vote of two-thirds of the NCE Board of Directors. Following consummation of the Transaction, the activities of NCE will be governed by its Restated Certificate of Incorporation and Restated Bylaws, attached hereto as Exhibits A- 1 and A-2 respectively. Item 2. Fees, Commissions and Expenses The fees, commissions and expenses to be paid or incurred, directly or indirectly, in connection with the Transactions, including the solicitation of proxies, registration of securities of NCE under the Securities Act of 1933, and other related matters, are estimated as follows: Commission filing fee relating to Application/Declaration on Form U-1 . . . . $ 2,000 Commission filing fee for the Registration Statement on Form S-4 . . . . * Accountants' fees . . . . . . . . . . . . . * Legal fees and expenses relating to the Act * Other legal fees and expenses . . . . . . . * Shareholder communication and proxy solicitation . . . . . . . . . . . . . . * NYSE listing fee . . . . . . . . . . . . . * Exchanging, printing, and engraving of stock certificates . . . . . . . . . . . . * Investment bankers' fees and expenses Barr Devlin & Co. Incorporated . . . . . * Dillon, Read & Co. Inc. . . . . . . . . . * Consulting fees related to human resource issues, public relations, regulatory support, and other matters relating to the Transaction . . . . . . . . . . . . . . . * Expenses related to integrating the operations of the merged company and miscellaneous . . . . . . . . . . . . * TOTAL * To be filed by amendment. Item 3. Applicable Statutory Provisions The following sections of the Act and the Commission's rules thereunder are or may be directly or indirectly applicable to the proposed transaction: Section of the Act Transactions to which section or rule is or may be applicable 4, 5 Registration of NCE as a holding company following the consummation of the Transaction 6(a), 7 Issuance of NCE Common Stock in the Transaction in exchange for shares of PSCo and SPS Common Stock; issuance to NC Hold of stock of certain non-utility subsidiaries of PSCo and SPS; issuance by NC Hold of debt to SPS; issuance by NC Hold of stock to NCE; issuance by NC Services of stock to NCE 9(a)(2), 10(a), Acquisition by NCE of common stock (b), (c) and (f) of PSCo, SPS and Cheyenne 9(a)(1), 10 Acquisition by NCE of stock of WGI, NC Services and NC Hold; acquisition by NC Hold of stock of certain non-utility subsidiaries of PSCo and SPS; acquisition by SPS of debt of NC Hold 8, 11(b), 21 Retention by NCE of gas operations and other businesses of PSCo and Cheyenne 13 Approval of the Service Agreement and services provided to utility affiliates thereunder by NC Services; approval of the Non-Utility Service Agreement and services provided to non-utility affiliates thereunder by NC Services; approval of the UE Service Agreement and services provided to utility affiliates thereunder by UE; approval of the UE Non-Utility Service Agreement and services provided to non-utility affiliates thereunder by UE; approval of the performance of certain services between the NCE system companies Rules 80-91 NC Services charges to NCE system companies; UE charges to NCE system companies; certain NCE system companies' charges to other NCE system companies 87(a)(3) Services among NCE system companies 88 Approval of NC Services and UE as subsidiary service companies 93, 94 Accounts, records and annual reports by NC Services and UE To the extent that other sections of the Act or the Commission's rules thereunder are deemed applicable to the Transaction, such sections and rules should be considered to be set forth in this Item 3. A. Legal Analysis Section 9(a)(2) makes it unlawful, without approval of the Commission under Section 10, "for any person . . . to acquire, directly or indirectly, any security of any public utility company, if such person is an affiliate . . . of such company and of any other public utility or holding company, or will by virtue of such acquisition become such an affiliate." Under the definition set forth in Section 2(a)(11)(A), an "affiliate" of a specified company means "any person that directly or indirectly owns, controls, or holds with power to vote, 5 per centum or more of the outstanding voting securities of such specified company," and "any company 5 per centum or more of whose outstanding voting securities are owned, controlled, or held with power to vote, directly or indirectly, by such specified company." PSCo, SPS and Cheyenne are public utility companies as defined in Section 2(a)(5) of the Act. Because NCE will acquire more than five percent of the voting securities of each of PSCo, SPS and Cheyenne as a result of the Transaction, and because PSCo, SPS and Cheyenne will become "affiliates" of NCE as a result of the Transaction, NCE must obtain the approval of the Commission for the Transaction under Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by the Commission in evaluating the proposed transaction are set forth in Sections 10(b), 10(c) and 10(f) of the Act. As set forth more fully below, the Transaction complies with all of the applicable provisions of Section 10 of the Act and should be approved by the Commission. Thus: - the consideration to be paid in the Transaction is fair and reasonable; - the Transaction will not create detrimental interlocking relations or concentration of control; - the Transaction will not result in an unduly complicated capital structure for the NCE system; - the Transaction is in the public interest and the interests of investors and consumers; - the Transaction is consistent with Sections 8 and 11 of the Act; and - the Transaction will comply with all applicable state laws. Furthermore, this Transaction also provides an opportunity for the Commission to follow certain of the interpretive recommendations made by the Division of Investment Management (the "Division") in the report issued by the Division in June 1995 entitled "The Regulation of Public Utility Holding Companies" (the "1995 Report"). While the Transaction and the requests contained in this Application/Declaration are well within the precedent of transactions approved by the Commission as consistent with the Act prior to the 1995 Report and thus could be approved without any reference to the 1995 Report, a number of the recommendations contained therein serve to strengthen the Applicants' analysis and would facilitate the creation of a new holding company better able to compete in the rapidly evolving utility industry. The Division's overall recommendation that the Commission "act administratively to modernize and simplify holding company regulation. . . and minimize regulatory overlap, while protecting the interests of consumers and investors," should be used in reviewing this Application/Declaration since, as demonstrated below, the Transaction will benefit both consumers and shareholders of NCE and the other federal and state regulatory authorities with jurisdiction over this Transaction will have approved it as in the public interest. In addition, although discussed in more detail in each applicable item below, the specific recommendations of the Division with regard to financing transactions, utility ownership and diversification are applicable to this Transaction. ____________________ Letter of the Division of Investment Management to the Securities and Exchange Commission, 1995 Report. E.g., the reduced regulatory burdens associated with routine financings. 1995 Report at 50. E.g., the Commission should apply a more flexible interpretation of the integration requirements under the Act; interconnection through power pools, reliability councils and wheeling arrangements can satisfy the physical interconnection requirement of section 2(a)(29); the geographic requirements of section 2(a)(29) should be interpreted flexibly, recognizing technical advances consistent with the purposes and provisions of the Act; the Commission's analysis should focus on whether the resulting system will be subject to effective regulation; the Commission should liberalize its interpretation of the "A-B- C" clauses and permit combination systems where the affected states agree, and the Commission should "watchfully defer" to the work of other regulators. 1995 Report at 71-7. E.g., the Commission should promulgate rules to reduce the regulatory burdens associated with energy-related diversification and the Commission should adopt a more flexible approach in considering all other requests to enter into diversified activities. 1995 Report at 88-90. 1. Section 10(b) Section 10(b) provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless: (1) such acquisition will tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interests of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or (3) such acquisition will unduly complicate the capital structure of the holding company system of the applicant or will be detrimental to the public interest or the interests of investors or consumers or the proper functioning of such holding company system. a. Section 10(b)(1) i. Interlocking Relationships By its nature, any merger results in new links between theretofore unrelated companies. However, these links are not the types of interlocking relationships targeted by Section 10(b)(1), which was primarily aimed at preventing business combinations unrelated to operating synergies. The Merger Agreement provides for the Board of Directors of NCE to be composed of members drawn from the Boards of Directors of both PSCo and SPS. This is necessary to integrate PSCo and SPS fully into the NCE system and will therefore be in the public interest and the interests of investors and consumers. Forging such relations is beneficial to the protected interests under the Act and thus are not prohibited by Section 10(b)(1). ii. Concentration of Control Section 10(b)(1) is intended to avoid "an excess of concentration and bigness" while preserving the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" afforded by the coordination of local utilities into an integrated system. American Electric Power Co., 46 SEC 1299, 1309 (1978). In applying Section 10(b)(1) to utility acquisitions, the Commission must determine whether the acquisition will create "the type of structures and combinations at which the Act was specifically directed." Vermont Yankee Nuclear Corp., 43 SEC 693, 700 (1968). As discussed below, the PSCo-SPS strategic alliance will not create a "huge, complex, and irrational system," but rather will afford the opportunity to achieve economies of scale and efficiencies which are expected to benefit investors and consumers. American Electric Power Co., 46 SEC 1299, 1307 (1978). Size: If approved, the NCE system will serve approximately 1.5 million electric customers in six states and 946,000 gas customers in Colorado and Wyoming. As of and for the year ended December 31, 1995: (1) the combined assets of PSCo and SPS would have totaled approximately $6 billion; (2) combined operating revenues of PSCo and SPS would have totaled approximately $2.9 billion; and (3) combined owned generating capacity totaled would have totaled approximately 7,248 MW. By comparison, the Commission has approved a number of acquisitions involving significantly larger operating utilities. See, e.g., CINergy Corp., HCAR No. 26146 (Oct. 21, 1994) (combination of Cincinnati Gas Electric Co. and PSI Resources; combined assets at time of acquisition of approximately $7.9 billion); Entergy Corp., 55 HCAR No. 25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities; combined assets at time of acquisition in excess of $21 billion); Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990) (acquisition of Public Service of New Hampshire; combined assets at time of acquisition of approximately $9 billion); Centerior Energy Corp., HCAR No. 24073 (April 29, 1986) (combination of Cleveland Electric Illuminating and Toledo Edison; combined assets at time of acquisition of approximately $9.1 billion); American Electric Power Co., 46 SEC 1299 (1978) (acquisition of Columbus and Southern Ohio Electric combined assets at time of acquisition of close to $9 billion). As the following table demonstrates, seven of the fifteen registered electric utility holding company systems are larger than NCE will be following the Transaction in terms of assets, operating revenues, customers and/or sales of electricity: Total Operating Electric Sales in System Assets Revenues Customers KWH Total ($ Millions) ($ Millions) (Thousands) (Millions) Southern 27,042 8,297 3,507 139,991 AEP 15,713 5,505 2,773 114,080 Entergy 22,613 5,798 2,360 97,452 CSW 10,909 3,623 1,661 57,334 GPU 9,210 3,650 1,949 42,658 Northeast 10,585 3,643 1,680 40,159 CINergy 7,720 2,796 1,221 50,579 NCE 6,018 2,881 1,476 44,229 ____________________ Amounts are as of December 31, 1994 or for the year ended December 31, 1994. In addition, NCE will be smaller than two of the registered holding companies to be formed as a result of recently announced mergers, specifically the merger of Wisconsin Energy Corp. and Northern States Power Company (combined 1994 year-end assets of approximately $10,362 million and operating revenues of $4,180 million) and Union Electric Company and CIPSCO, Inc. (combined 1994 year-end assets of approximately $8,402 million and operating revenues of $2,850 million). NCE will be a mid to small-size registered holding company, and its operations would not exceed the economies of scale of current electric generation and transmission technology or provide undue power or control to NCE in the region in which it will provide service. Efficiencies and economies: As noted above, the Commission has rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing the size of the resulting system with reference to the efficiencies and economies that can be achieved through the integration and coordination of utility operations. More recent pronouncements of the Commission confirm that size is not determinative. Thus, in Centerior Energy Corp., HCAR No. 24073 (April 29, 1986), the Commission stated flatly that a "determination of whether to prohibit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of size alone." In addition, in the 1995 Report, the Division recommended that the Commission approach its analysis on merger and acquisition transactions in a flexible manner with emphasis on whether the Transaction creates an entity subject to effective regulation and is beneficial for shareholders and customers as opposed to focusing on rigid, mechanical tests. ____________________ 1995 Report at 73-4. By virtue of the Transaction, NCE will be in a position to realize the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" described by the Commission in American Electric Power Co. 46 SEC 1299, 1309. Among other things, the Transaction is expected to yield significant capital expenditure savings through the deferral or elimination of certain capacity requirements and a reduction in reserve margin; savings through greater purchasing power; labor cost savings; administrative and general savings; and cost-of-capital savings. These expected economies and efficiencies from the combined utility operations are described in greater detail below and are projected to result in net savings of approximately $770 million over the first ten years alone. Competitive Effects: As the Commission noted in Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), the "antitrust ramifications of an acquisition must be considered in light of the fact that public utilities are regulated monopolies and that federal and state administrative agencies regulate the rates charged consumers." PSCo and SPS will file Notification and Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the Transaction on competition in the relevant market and it is a condition to the consummation of the Transaction that the applicable waiting periods under the HSR Act shall have expired or been terminated. In addition, the competitive impact of the Transaction is being fully considered by the FERC before it approves the Transaction. A detailed explanation of the reasons why the Transaction will not threaten competition in even the most narrowly drawn geographic and product markets is set forth in the prepared testimony of Dr. Robert Spann, filed with the FERC on behalf of PSCo and SPS, a copy of which is filed as Exhibit D- 1.2.1. The application filed by PSCo and SPS with the FERC is filed as Exhibit D-1.1. For these reasons, the Transaction will not "tend toward interlocking relations or the concentration of control" of public utility companies, of a kind or to the extent detrimental to the public interest or the interests of investors or customers within the meaning of Section 10(b)(1). b. Section 10(b)(2) -- Fairness of Consideration Section 10(b)(2) requires the Commission to determine whether the consideration to be given by NCE to the holders of PSCo Common Stock and SPS Common Stock in connection with the Transaction is reasonable and whether it bears a fair relation to investment in and earning capacity of the utility assets underlying the securities being acquired. Market prices at which securities are traded have always been strong indicators as to values. As shown in the table below, most quarterly price data, high and low, in the years 1994 and 1995, for PSCo and SPS Common Stock provide support for this conversion ratio. ____________________ The shares of PSCo preferred stock and SPS preferred stock outstanding at the time of the consummation of the Transaction will remain outstanding preferred stock of PSCo and SPS, respectively. PSCo SPS* PSCo SPS* High Low Dividends High Low Dividends 1994 First $32 1/8 $28 1/2 $0.50 $30 7/8 $27 5/8 $0.55 Quarter Second 29 3/4 25 3/8 0.50 29 1/8 23 3/4 0.55 Quarter Third 27 7/8 24 3/4 0.50 27 1/4 24 7/8 0.55 Quarter Fourth 30 1/8 25 7/8 0.50 28 25 3/8 0.55 Quarter 1995 First 31 1/2 29 0.51 29 3/8 26 1/2 0.55 Quarter Second 32 7/8 29 1/4 0.51 29 7/8 27 3/4 0.55 Quarter Third 34 1/2 30 5/8 0.51 32 7/8 28 5/8 0.55 Quarter Fourth 35 7/8 33 3/8 0.51 33 7/8 32 0.55 Quarter * The information is provided for calendar quarters. Fiscal quarters for SPS end on the last day of each November, February, May and August. On August 22, 1995, the last full trading day before the public announcement of the execution and delivery of the Merger Agreement, the closing price per share on the NYSE Consolidated Tape of (i) PSCo Common Stock was $31 1/2 and (ii) SPS Common Stock was $29 3/8, a ratio of 1 to 0.93. The fairness of the Transaction's consideration is also evidenced by the fact that the Transaction is a pure stock-for-stock exchange and qualifies for treatment as a pooling of interests for accounting purposes. As set forth more fully above, each share of PSCo Common Stock will be converted into the right to receive one share of NCE Common Stock, and each share of SPS Common Stock will be converted into the right to receive 0.95 of one share of NCE Common Stock. The Transaction will therefore involve no "acquisition adjustment" or other write-up of the assets of SPS or PSCo. ____________________ Twelve specific conditions must be met to qualify as a pooling. The Transaction should meet those criteria as follows: (1) Both PSCo and SPS were autonomous and were not a subsidiary or division of another corporation within two years before the plan of combination was initiated; (2) At the date of the merger initiation and at the date of consummation SPS and PSCo are independent of each other; (3) SPS and PSCo will undertake a course of action which will attempt to complete the transaction within one year in accordance with a specific plan, or completed in a single transaction. Litigation or proceedings of a governmental authority that delay the completion of a plan are excepted from the one-year rule, provided they are beyond the control of the combining companies; (4) At the consummation date of the plan, NCE will offer and issue its majority class of stock (voting rights) for no less than 90% of the voting common stock interests of SPS and PSCo. The 90%, or more of the voting common stock interests being acquired is determined at the date the plan is consummated; (5) No changes in the equity interests of the voting common stock of SPS or PSCo were to be made in contemplation of a pooling of interests. This restriction is for a period beginning two years prior to the initiation date of the plan of combination and for the period between the initiation date and the consummation date; (6) SPS and PSCo will not reacquire any of its voting common stock in substance or form to effect a business combination. Any reacquisition must be a normal amount as evidenced by both companies' patterns of reacquisition prior to the merger; (7) Each SPS and PSCo common stockholder will receive a voting common stock interest exactly in proportion to his or her voting common stock interest prior to the combination; (8) The SPS and PSCo common shareholders will receive the rights they are entitled to and will not be deprived or restricted in any way from exercising those rights; (9) The entire merger agreement will be effected on the date of consummation; (10) Subsequent to consummation the combined corporation, NCE will not agree to reacquire or retire any of the stock which was issued to effect the transaction; (11) NCE will not enter into any agreements to the benefit of the former shareholders of SPS or PSCo, such as loan guarantees; (12) NCE will not plan to dispose of substantial amounts of the assets of SPS or PSCo within two years of the date of the combination other than routine transactions in the ordinary course of business or to eliminate excess capacity. In addition, the Conversion Ratios are the product of extensive and vigorous arms-length negotiations between PSCo and SPS. These negotiations were preceded by months of due diligence, analysis and evaluation of the assets, liabilities and business prospects of each of the respective companies. See NCE Registration Statement on Form S-4 (Exhibit C-1 hereto). Finally, nationally-recognized investment bankers for each of PSCo and SPS have reviewed extensive information concerning the companies and analyzed the Conversion Ratios employing a variety of valuation methodologies, and have opined that the Conversion Ratios are fair, from a financial point of view, to the respective holders of PSCo Common Stock and SPS Common Stock. The investment bankers' analyses and opinions are attached as Annexes II and III to NCE's Registration Statement on Form S-4 and are described on pages 33-43 of the Form S-4 (Exhibit C-1 hereto). In light of these opinions and an analysis of all relevant factors, including the benefits that may be realized as a result of the Transaction, NCE believes that the Conversion Ratios fall within the range of reasonableness, and the consideration for the Transaction bears a fair relation to the sums invested in, and the earning capacity of, the utility assets of PSCo and SPS. c. Section 10(b)(2) -- Reasonableness of Fees NCE believes that the overall fees, commissions and expenses incurred and to be incurred in connection with the Transaction are reasonable and fair in light of the size and complexity of the Transaction relative to other transactions and the anticipated benefits of the Transaction to the public, investors and consumers; that they are consistent with recent precedent; and that they meet the standards of Section 10(b)(2). As set forth in Item 2 of this Application/Declaration, PSCo and SPS together expect to incur a combined total of approximately $18 million in fees, commissions and expenses in connection with the Transaction. By contrast, Cincinnati Gas & Electric Company and PSI Resources incurred $47.12 million in fees in connection with their reorganization as subsidiaries of CINergy, Northeast Utilities alone incurred $46.5 million in fees and expenses in connection with its acquisition of Public Service of New Hampshire and Entergy alone incurred $38 million in fees in connection with its recent acquisition of Gulf States Utilities -- which amounts all were approved as reasonable by the Commission. See CINergy, HCAR No. 26146 (Oct. 21, 1994); Northeast Utilities, HCAR No. 25548 (June 3, 1992); Entergy Corp., HCAR No. 25952 (Dec. 17, 1993). ___________________ This number is a preliminary estimate only, and will be updated as necessary. With respect to financial advisory fees, PSCo and SPS believe that the fees payable to their investment bankers are fair and reasonable for similar reasons. Pursuant to the terms of Barr Devlin's engagement, PSCo has agreed to pay Barr Devlin for its services in connection with the Transaction: (i) a financial advisory retainer fee of $100,000 payable upon signing the June 5, 1995 engagement letter; (ii) an initial financial advisory progress fee of $1,000,000 payable upon execution of the Merger Agreement; (iii) a second financial advisory progress fee of $1,000,000 payable upon PSCo shareholder approval of the Merger Agreement, and (iv) a transaction fee based on the aggregate consideration to be received by SPS and holders of SPS Common Stock in connection with the Transaction on the consummation of the Transaction, ranging from 0.45 percent of such aggregate consideration (for a transaction with an aggregate consideration of $1,000,000,000) to 0.41 percent of such aggregate consideration (for a transaction with an aggregate consideration of $2,000,000,000). All retainer fees payable during the term of the engagement and all financial advisory progress fees would be credited against any transaction fee payable to Barr Devlin. PSCo has agreed to reimburse Barr Devlin for its out-of-pocket expenses, including fees and expenses of legal counsel and other advisors engaged with the consent of PSCo, and to indemnify Barr Devlin against certain liabilities, including liabilities under the federal securities laws, relating to or arising out of its engagement. Pursuant to the engagement letter between SPS and Dillon Read, SPS has paid Dillon Read the following amounts: $200,000 upon the execution of the engagement letter and $450,000 upon the rendering of Dillon Read's fairness opinion to the SPS Board. In addition, SPS has agreed to pay Dillon Read $200,000 upon the affirmative vote of SPS shareholders in favor of the Transaction, $100,000 on April 30, 1996, and $100,000 every six months thereafter until the Transaction is consummated or Dillon Read's engagement has been terminated. SPS has also agreed to pay Dillon Read a fee upon consummation of the Transaction equal to 0.37 percent of the aggregate amount of consideration received by SPS's common shareholders, less the $850,000 and the $100,000 semi-annual payments mentioned above which will have previously been paid. The investment banking fees of PSCo and SPS reflect the competition of the marketplace, in which investment banking firms actively compete with each other to act as financial advisors to merger partners. PSCo has agreed to reimburse Barr Devlin for its out- of-pocket expenses, including fees and expenses of legal counsel and other advisors engaged with the consent of PSCo, and to indemnify Barr Devlin against certain liabilities, including liabilities under the federal securities laws, relating to or arising out of its engagement. SPS has agreed to reimburse Dillon Read for its out-of- pocket expenses, including fees and expenses of legal counsel and other advisors engaged with the consent of SPS, and to indemnify Dillon Read against certain liabilities, including liabilities under the federal securities laws, relating to or arising out of its engagement. d. Section 10(b)(3) Section 10(b)(3) requires the Commission to determine whether the Transaction will unduly complicate NCE's capital structure or will be detrimental to the public interest, the interests of investors or consumers or the proper functioning of NCE's system. Capital structure: The corporate capital structure of NCE after the Transaction will not be unduly complicated and will be substantially similar to capital structures approved by the Commission in other orders. See, e.g., CINergy, HCAR No. 26146 (Oct. 21, 1994); Centerior Energy Corp., HCAR No. 24073 (April 29, 1986); Midwest Resources, et al., HCAR No. 25159 (Sept. 26, 1990); Entergy Corp., HCAR No. 25952 (Dec. 17, 1993); Northeast Utilities, HCAR No. 25548 (June 3, 1992). In the Transaction, the shareholders of PSCo and SPS will receive NCE Common Stock. NCE will own 100% of the common stock of PSCo and SPS and there will be no minority common stock interest remaining in either company. Each share of PSCo and SPS preferred stock outstanding at the time of the consummation of the Transaction will remain outstanding preferred stock of PSCo and SPS, respectively. The debt securities of PSCo and SPS outstanding at the time of the consummation of the Transaction will likewise remain outstanding without change. The only voting securities of NCE which will be publicly held after the transaction will be NCE Common Stock. NCE will have the ability to issue, subject to the approval of the Commission, preferred stock, the terms of which, including any voting rights, may be set by NCE's Board of Directors as has been authorized by the Commission with regard to other registered holding companies. See, e.g., The Columbia Gas System, Inc., HCAR No. 26361 (Aug. 25, 1995) (approving restated charter, including preferred stock whose terms, including voting rights, can be established by the board of directors). The only class of voting securities of NCE's direct and indirect non-utility subsidiaries will be common stock and, in all but one case, all issued and outstanding shares of such common stock will be held by NCE or a subsidiary of NCE. NCE will hold 80% of the common stock of Natural Fuels. In addition, NC Hold will have issued debt to SPS in connection with its acquisition of the outstanding voting securities of Quixx and UE as more fully described in Item 3.A.4.ii below. Set forth below are summaries of the historical capital structure of PSCo and SPS as of December 31, 1995 and the pro forma consolidated capital structure of NCE as of December 31, 1995: PSCo and SPS Historical Capital Structures* (dollars in millions) PSCo SPS Common Stock Equity $1,344 $728 Preferred stock not subject to Mandatory redemption 140 -- Preferred stock subject to mandatory redemption 44 -- Long-term Debt 1,278 581 Short-term Debt 288 116 Total $3,094 $1,425 NCE Pro Forma Consolidated Capital Structure* (dollars in millions) (unaudited) Common Stock Equity $2,060 Preferred stock not subject to mandatory redemption 140 Preferred stock subject to mandatory 44 redemption Long-Term Debt 1,859 Short-Term Debt 404 Total $4,507 * The pro forma consolidated capital structure of NCE has been adjusted to reflect future nonrecurring charges directly related to the Transaction, which result in, among other things, the recognition of additional current liabilities and a reduction in retained earnings. NCE's pro forma consolidated common equity to total capitalization ratio of 46% comfortably exceeds the "traditionally acceptable 30% level." Northeast Utilities, 47 SEC Docket at 1279, 1284 (1990). Protected interests: As set forth more fully in Item 3.A.2.b.i (Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System) and elsewhere in this Application/Declaration, the Transaction is expected to result in substantial cost savings and synergies, and will integrate and improve the efficiency of the PSCo and SPS utility systems. The Transaction will therefore be in the public interest and the interests of investors and consumers, and will not be detrimental to the proper functioning of the resulting holding company system. 2. Section 10(c) Section 10(c) of the Act provides that, notwithstanding the provisions of Section 10(b), the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and the efficient development of an integrated public utility system . . . . ____________________ By their terms, Sections 8 and 11 only apply to registered holding companies and are therefore inapplicable at present to NCE, since it is not now a registered holding company. The following discussion of Sections 8 and 11 is included only because, under the present transaction structure, M-P will register as a holding company after consummation of the Transaction. a. Section 10(c)(1) Section 10(c)(1) requires that an acquisition be lawful under Section 8. Section 8 prohibits registered holding companies from acquiring, owning interests in or operating both a gas and an electric utility serving substantially the same area if state law prohibits it. As discussed below, the Transaction does not raise any issue under Section 8 or, accordingly, the first clause of Section 10(c)(1). Indeed, Section 8 indicates that a registered holding company may own both gas and electric utilities where, as here, the relevant state utility commissions support such an arrangement. Section 10(c)(1) also requires that the transactions not be detrimental to carrying out the provisions of Section 11. Section 11(a) of the Act requires the Commission to examine the corporate structure of registered holding companies to ensure that unnecessary complexities are eliminated and voting powers are fairly and equitably distributed. As described above, the Transaction will not result in unnecessary complexities or unfair voting powers. Although Section 11(b)(1) generally requires a registered holding company system to limit its operations "to a single integrated public utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public utility system," a combination integrated gas and electric system within a registered holding company is permissible under Section 8. Additionally, Section 11(b)(1) provides that "one or more additional integrated public utility systems" may be retained if, as here, certain criteria are met. Section 11(b)(2) directs the Commission "to ensure that the corporate structure or continued existence of any company in the holding company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding company system." As detailed below, the Transaction will not be detrimental to the carrying out of the provisions of Section 11. i. Retention of Gas Operations NCE's retention of the gas operations of PSCo is lawful under Section 8 of the Act and would not be detrimental to the carrying out of Section 11 of the Act. Section 8: Section 8 of the Act provides that [w]henever a State law prohibits, or requires approval or authorization of, the ownership or operation by a single company of the utility assets of an electric utility company and a gas utility company serving substantially the same territory, it shall be unlawful for a registered holding company, or any subsidiary company thereof . . . (1) to take any step, without the express approval of the state commission of such state, which results in its having a direct or indirect interest in an electric utility company and a gas company serving substantially the same territory; or (2) if it already has any such interest, to acquire, without the express approval of the state commission, any direct or indirect interest in an electric utility company or gas utility company serving substantially the same territory as that served by such companies in which it already has an interest. (emphasis added). On its face, the section indicates that, with the approval of the relevant state utility commissions, registered holding company systems can include both electric and gas utility systems. A careful reading of the section indicates that the thrust of the section is to preclude the use by registered holding companies of separate gas and electric utility companies with overlapping service territories in order to circumvent any state law restrictions on the ownership of gas and electric assets by the same company. Thus, two types of combination registered holding companies are implicitly acceptable under the statute absent such state objection -- a registered holding company system that includes combination companies and a system that includes separate gas and electric companies. NCE believes that a reemphasis by the Commission on Section 8, which would allow registered combination companies pending state support, is consistent both with the Act and its policy objectives. Indeed, over time the Commission has in fact emphasized different aspects of Section 8 and its interplay with Section 11 -- initially allowing registered holding companies to own both gas and electric systems under Section 8, then focusing on Section 11 as controlling determinations regarding combination companies, and requiring the second system to meet a strict interpretation of the requirements set forth in clauses A, B and C of Section 11(b)(1). In its early decisions, the Commission adhered to the concept that the decision as to whether or not to allow combination companies is one that states should make (although the Commission might have to implement it in certain cases) and, where such systems were permissible, the role of the Commission was to ensure that both such systems are integrated as defined in the Act. The Commission's most notable decision in this line is In the Matter of American Water Works and Electric Company, Incorporated, 2 SEC 972 (1937). In this case, the Commission approved the applicant's voluntary reorganization plan under Section 11(e) of the Act and permitted the newly reorganized registered holding company to retain its electric and its gas operations, specifically noting that while the Act does not contain a definition of single integrated utility in the context of a combination company: We believe, however, that it is proper to regard such a combined property as a single integrated system, provided that all of the electric properties are integrated and all of the properties, both gas and electric, are in fairly close geographic proximity and are so related that substantial economies may be effectuated by their coordination under common control. The question of public policy as to the common ownership of gas and electric facilities in the same territory is apparently left by the statute to the decision of the states. ____________________ IN THE MATTER OF AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC at 983, n.3. Thus, since the combination company did not violate state policy, there was no need for the Commission to exercise jurisdiction to implement state policy. By the early 1940's, however, the Commission switched its focus to Section 11 and adopted a narrow interpretation of the standards contained therein as the controlling factor with regard to combination registered holding companies. In connection with its analysis of combination companies under Section 11, the Commission frequently noted a policy concern existing at that time which advocated separating the management of gas and electric utilities based on the belief that the gas utility business tended to be overlooked by combination company management who focused on the electric business. Therefore, gas utilities would benefit from having separate management focused entirely on the gas utility business. However, both the legislative history of the Act and recent changes in the utility industry indicate that it is a propitious time for the Commission to reemphasize the provisions of Section 8 of the Act and allow combination registered holding companies where, as in this case, they are permitted under relevant state law. ____________________ SEE, E.G., IN THE MATTER OF COLUMBIA GAS & ELECTRIC CORPORATION, 8 SEC 443 at 463 (1941); In the Matter of United Gas Improvement Company, HCAR No. 2692 (April 15, 1941); SECURITIES AND EXCHANGE COMMISSION v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176 (1966). It should be noted that the Commission continued to give primacy to state utility commission determinations in making decisions regarding combination exempt holding companies. SEE, E.G., In the Matter of Northern States Power Company, HCAR No. 12655 (Sept. 16, 1954); DELMARVA POWER & LIGHT CO., 46 S.E.C. 710 (1976); WPL HOLDINGS, HCAR No. 24590 (Feb. 26, 1988). SEE, E.G., IN THE MATTER OF THE PHILADELPHIA COMPANY, 28 SEC 35, 48 (1948); IN THE MATTER OF THE NORTH AMERICAN COMPANY, 11 SEC 169, 179-80 (195); In the Matter of Illinois Power Company, HCAR No. 16574 (Jan. 2, 1970). A review of the legislative history of Section 8 clarifies this intent. In its report, the Senate Committee on Interstate Commerce noted that the provision in Section 8 concerning combination companies "is concerned with competition in the field of distribution of gas and electric energy - a field which is essentially a question of State policy, but which becomes a proper subject of Federal action where the extra-State device of a holding company is used to circumvent state policy." The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 31 (1935). In addition, attached to the above- referenced committee report is the Report of the National Power Policy Committee on Public-Utility Holding Companies, which sets forth a recommended policy that: "Unless approval of a State commission can be obtained the commission should not permit the use of the holding-company form to combine a gas and electric utility serving the same territory where local law prohibits their combination in a single entity." This does not prohibit combination companies where such approvals can be obtained. ____________________ The National Power Policy Committee was an committee appointed by President Franklin D. Roosevelt consisting of representatives from various government departments concerned with power problems and instructed to report to Congress on the coordination of government policy relating to such problems. Its members were Harold L. Ickes, Frank R. McNinch, Elwood Mead, T.W. Norcross, Morris L. Cooke, Robert E. Healy, David E. Lilienthal and Edward M. Markham. Much more recently, in the 1995 Report, the Division noted "it does not appear that the SEC's precedent concerning additional systems precludes the SEC from relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility industry is evolving toward the creation of one-source energy companies that will provide their customers with whatever type of energy supply they want, whether electricity or gas," and recommended that the Commission interpret Section 11(b)(1) of the Act to allow registered holding companies to hold both gas and electric operations as long as each affected state utility regulatory commission approves of the existence of such a company. This change in the industry whereby, among other things, customers are increasingly seeking the most economic means of meeting their energy needs, and not simply their gas needs or their electric needs, is evidenced by the transformation of traditional utilities into energy service companies as well as the growth of new energy providers such as marketers and even the treatment of energy as a commodity for arbitrage transactions. ____________________ 1995 Report at 15-6. Another important factor in favor of focusing on state commission determinations regarding combination companies is that one of the primary goals of Congress in enacting the Act was to simplify the corporate structures of holding company systems to enable states to regulate the production and distribution of energy. Section 8 provides that the Act may be used as a tool to further state policy when state policy prohibits combined electric and gas operations, and implicitly allows such combination companies where consistent with state policy. This is consistent with the general policy of the Act that local regulators are in the best position to assess the needs of their communities. The Act was never intended to supplant local regulation but, rather, was intended to create conditions under which local regulation was possible. Section 21 of the Act, which further codifies this legislative intent, states: "Nothing in [the Act] shall affect . . . the jurisdiction of any other commission, board, agency, or officer of . . . any State, or political subdivision of any State, over any person, security, or contract, insofar as such jurisdiction does not conflict with any provision of [the Act] . . . ." The legislative history reveals that Section 21 of the Act was further intended "to insure the autonomy of state commissions [and] nothing in the [Act] shall exempt any public utility from obedience to the requirements of state regulatory law." The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 10 (1935). Thus, the Act should not be used as a tool to override state policy, particularly when the holding company involved is subject to both state and federal regulation and when the affected state regulatory commissions have indicated their support for the combined electric and gas operations in one holding company system. Finally, this reemphasis on Section 8 fits within the overall regulatory scheme of the Act. First, Section 11 of the Act is flexible and was designed to change as the policy concerns over the regulation of utility holding companies changed. As discussed below, the utility industry and the regulation of that industry has changed dramatically in recent years and it is competitive forces (the very thing that the Act was designed to promote) that are pushing holding companies to offer alternative forms of energy. Second, a registered holding company would still be required to demonstrate that any acquisition or transaction by which it would become a combination company would not be detrimental to the carrying out of the provisions of Section 11 of the Act. In other words, its electric system would have to constitute an integrated electric system and that its gas system would have to constitute an integrated gas system and both systems must be capable of being operated efficiently. Thus, the standards of Section 11 would still have to be met, but the construction of those standards should take into account the fundamental policy of the Act and allow local regulators to make the major determination with regard to combination companies. ____________________ MISSISSIPPI VALLEY GENERATING CO., 36 SEC 159 (1955) (noting that Congress intended the concept of integration to be flexible); UNITIL Corporation, HCAR No 25524 (April 24, 1992) (noting that section 11 contains a flexible standard designed to accommodate changes in the industry). NCE as a combination company is permissible pursuant to the terms of Section 8 of the Act and is in the public interest. First, the combination of electric and gas operations in PSCo and Cheyenne is lawful under all applicable state laws. NCE will not be using its holding company structure to circumvent any state regulations. In addition, in their applications for approval of the Transaction by both the Colorado and Wyoming regulatory commissions -- who have, and will continue to have, direct jurisdiction over the NCE system's gas operations located in their respective states -- PSCo and Cheyenne have asked these commissions to indicate their support for NCE as a combination electric and gas utility company through the retention of PSCo's and Cheyenne's gas operations. Based on preliminary discussions with the staffs of these commissions, the parties expect that these Commissions will be supportive of such retention. In addition, the existence of both gas and electric systems in the NCE holding company system will allow NCE's customers greater choice to meet their energy needs, especially given the fact that the electric and gas systems operate in substantially the same territory. Moreover, the prior fear that a holding company such as NCE would be able to greatly emphasize one form of energy over the other based on its own agenda has dissipated both because of the competitive nature of the energy market, which requires utilities to meet customer demand for energy above all else, and because state regulators will have sufficient control over, and would be unlikely to approve, a combination company that attempts to undertake such practices. Even if the Act were not interpreted as generally permitting combination gas and electric systems, Section 11 contains additional provisions that permit the retention by PSCo and Cheyenne of their respective gas systems. Section 11(b)(1) of the Act permits a registered holding company to control one or more additional integrated public utility systems -- i.e., gas as well as electric -- if: (A) each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control by such holding company of such system; (B) all of such additional systems are located in one state, adjoining states, or a contiguous foreign country; and (C) the continued combination of such systems under the control of such holding company is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. In the 1995 Report, the Division recommended that the Commission "liberalize its interpretation of the `A-B-C' clauses." Historically, as a "guide" to determining whether lost economies are "substantial" under Section 11(b)(1)(A), under its previous narrow interpretation of this section, the Commission has given consideration to four ratios, which measure the projected loss of economies as a percentage of: (1) total gas operating revenues; (2) total gas expense or "operating revenue deductions"; (3) gross gas income; and (4) net gas income or net gas utility operating income. Although the Commission has declined to draw a bright-line numerical test under Section 11(b)(1)(A), under its previous narrow interpretation of this Section it indicated that cost increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in operating revenue deductions, a 25.44% loss of gross income and a 42.46% loss of net income would afford an "impressive basis for finding a loss of substantial economies." Engineers Public Service Co., 12 SEC 41, 59 (1942) (citation omitted). ____________________ 1995 Report at 74. Here, the lost economies that would be experienced if the gas properties of PSCo and Cheyenne were to be operated on a stand-alone basis meet, and in most instances, exceed these numbers, without any increase in benefits to consumers. These lost economies result from the need to replicate services, the loss of economies of scale, the costs of reorganization, and other factors, and are described more fully in the Analysis of the Economic Impact of a Divestiture of the Gas Operations of PSCo and its Cheyenne Subsidiary (the "Divestiture Study") (Exhibit J-1 hereto). As set forth in the Divestiture Study, divestiture of the gas operations of PSCo and Cheyenne into stand-alone companies would result in lost economies of $43,605,187 for PSCo and $1,682,723 for Cheyenne. These lost economies compare with gas operating revenues of $677,326,418 for PSCo and $15,630,080 for Cheyenne; gas operating revenue deductions of $607,599,384 for PSCo and $13,681,672 for Cheyenne; gas gross income of $69,727,034 for PSCo and $1,948,408 for Cheyenne, and gas net income of $51,266,520 for PSCo and $1,530,526 for Cheyenne. On a percentage basis, the lost economies amount to 6.44% of gas operating revenue, 7.18% of gas operating revenue deductions, 62.54% of gross gas income and 85.06% of net gas income for PSCo as well as 10.77% of gas operating revenues; 12.30% of gas operating revenue deductions, and 86.36% of gross gas income and 109.94% of net gas income for Cheyenne. The percent losses in net gas income alone that will be suffered by the PSCo and Cheyenne gas system if operated on a stand-alone basis exceed the 30% loss in the New England Electric System case that the Commission has described as the highest loss of net income in any past divestiture order. The percentage loss that would be suffered by PSCo in gas operating revenue and gross gas income exceeds the percentage loss in the majority of diversification orders issued by the Commission in the past. The percentage loss that would be suffered by Cheyenne in gross gas income also exceeds the percentage loss in the majority of diversification orders issued by the Commission. The applicable percentages here and in past cases are summarized in Exhibit J-3. ____________________ NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888 (1964), aff'd, 384 U.S. 176 (1966) and 390 U.S. 207 (1968). In order to recover these lost economies the PSCo gas division would need to increase its revenue from rates by $44,607,669 or 6.62% and the Cheyenne gas division would need to increase rate revenue by $1,775,439 or 11.38%. These increases on rate revenues would have a direct and immediate negative impact on the rates charged to consumers for gas services. In addition, the customers of the PSCo and Cheyenne gas business who are also customers of their respective electric utility business will experience a doubling of their postage costs to pay two separate bills. The total estimated increase in such postage costs is $3.84 per customer, per year or $3,580,032 in the aggregate ($3,478,637 for PSCo's gas customers and $101,395 for Cheyenne's gas customers). Moreover, it should be noted that the divestiture of PSCo's and Cheyenne's gas business will result in increased labor and postage costs to both companies' electric system. Specifically, it is estimated that the cost to PSCo's customers would be approximately $44.9 million, or 3.42% of its electric revenues, and the cost to Cheyenne's customers would be approximately $1.0 million, or 2.86% of its electric revenues. Finally, divestiture of PSCo's and Cheyenne's gas operations would cause a significant, although difficult to quantify, amount of damage to NCE's customers, NCE's regulators and NCE's ability to compete in the marketplace. Such non- quantifiable costs to customers involve the additional expenses of doing business with two utilities instead of one (i.e., additional telephone calls for service and billing inquiries, and costs of providing access to meters and other facilities for two utilities) and costs associated with making the entities supply information to shareholders and publish the reports required by the 1934 Act. Similarly, regulatory costs involve additional duties for the staffs of the CPUC and the WPSC as a result of dealing with an additional utility. These additional duties would largely be the result of duplicating existing functions, such as separate requests for approval of financing and rate case requests. NCE's competitive position in the market would also suffer because as the utility industry moves toward a complete energy services concept, competitive companies must be able to offer customers a range of options to meet their energy needs. Divestiture of gas operations would render NCE unable to offer its customers a significant and important option, namely gas services, and could damage NCE's long-term competitive potential. (B) and (C) clauses: The remaining requirements of Section 11(b)(1) are met because the gas operations of PSCo are located in adjoining states (Colorado and Wyoming) and because the continued combination of the gas operations under NCE is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation or the effectiveness of regulation. The gas systems are confined to a relatively small area. Moreover, as the Commission has recognized elsewhere, the determinative consideration is not size alone or size in an absolute sense, either big or small, but size in relation to its effect, if any, on localized management, efficient operation and effective regulation. From these perspectives, it is clear that the continued combination of the gas operations under NCE is not too large. With respect to localized management, management will remain geographically close to both gas operations, thereby preserving the advantages of localized management. From the standpoint of regulatory effectiveness, each gas operation is organized in a separate corporation by regulatory jurisdiction which facilitates state regulation. In addition, it is expected that the relevant state regulatory authorities will indicate their support for the retention of the gas system by NCE and thereby indicating that they can continue to regulate this system effectively. Finally, as detailed above, the gas operations of PSCo and Cheyenne enjoy substantial economies as part of the PSCo system, and will realize additional economies as a result of the Transaction as part of the NCE System. Far from impairing the advantages of efficient operation, the continued combination of the gas operations under NCE will facilitate and enhance the efficiency of gas operations. For further discussion of the requirements of Section 11(b)(1)(C), see the legal memorandum filed as Exhibit J-2 hereto. In addition, as previously noted, the parties have requested, and expect to receive a statement by the two affected state utility commissions that they do not object to retention of the gas system in the NCE system, which, as discussed in the 1995 Report, is the prerequisite for potential liberalization of the retention standard. ii. Other Businesses As a result of the Transaction, the non-utility businesses and interests of PSCo and SPS described in Item 1.B.3. above will become businesses and interests of NCE. From PSCo, NCE will hold the following non-utility subsidiaries indirectly through NC Hold: e prime, Young Gas and Natural Fuels. NCE will hold the following non-utility subsidiaries through PSCo: Green & Clear Lakes, 1480 Welton, PSRI, PSCCC, Fuelco and the Ditch Companies and will hold WGI directly. In addition, PSCo will continue to operate certain of its non-utility businesses directly. From SPS, NCE will hold the following non-utility subsidiaries indirectly through NC Hold: UE and Quixx. In addition, the subsidiaries, affiliates and associates of UE and Quixx will become indirect subsidiaries, affiliates and associates, respectively, of NCE. Corporate charts showing the non-utility subsidiaries of PSCo and SPS are filed as Exhibits E-4 and E-5. A corporate chart showing the projected arrangement of these subsidiaries under NCE is filed as Exhibit E-6. Standard for retention: Section 11(b)(1) permits a registered holding company to retain "such other businesses as are reasonably incidental, or economically necessary or appropriate, to the operations of [an] integrated public utility system." Under the cases interpreting Section 11, an interest is retainable if (1) there is an operating or functional relationship between the operations of the utility system and the non-utility business sought to be retained, and retention is in the public interest, or if (2) the business evolved out of the system's utility business, the investment is not significant in relation to the system's total financial resources, and the investment has the potential to produce benefits for investors and/or consumers. In addition, the Commission has stated that "retainable non-utility interests should occupy a clearly subordinate position to the integrated system constituting the primary business of the registered holding company." As set forth more fully below, the non-utility business interests that NCE will hold directly or through PSCo and NC Hold all meet the Commission's standards for retention. ____________________ SEE, E.G., MICHIGAN CONSOLIDATED GAS CO., 44 SEC 361, 365 (1970), AFF'D, 444 F.2d 913 (D.C. Cir. 1971) (QUOTING GENERAL PUBLIC UTILITIES CORP., 32 SEC 807, 839 (1951)); UNITED LIGHT AND RAILWAYS CO., 35 SEC 516, 519 (1954). CSW CREDIT, INC., HCAR No. 25995 (1994); JERSEY CENTRAL POWER & LIGHT CO., HCAR No. 24348 (March 18, 1987). UNITED LIGHT AND RAILWAYS CO., 35 SEC at 519. I. Direct Subsidiary of NCE WGI: WGI transports gas from the PSCo gas system to Cheyenne. As discussed previously, this gas pipeline subsidiary ensures access to natural gas supplies for the gas utility operations of Cheyenne and, thus, is functionally related to such utility operations. The Commission's decisions recognize functional relationship of gas pipelines to the gas utility business and the retainability of gas transmission interests in connection with gas utility operations. See, e.g., CNG Transmission Corp., HCAR No. 25239, (Jan. 9, 1991); Gas Related Activities Act of 1990, Sec.2(a). WGI does provide gas transportation services for three other area gas utilities. II. Subsidiaries of NC Hold UE: UE is engaged in a variety of engineering, development, design and rehabilitation services and management, construction, maintenance, operation and other related services. UE will provide such services to system companies as well as to unaffiliated third parties. Clearly, the engineering, construction and design of utility plants is functionally related to the core utility operations of NCE. A utility company must be able to construct or otherwise acquire additional capacity as needed and UE's ability to do so is one of the reasons SPS has remained a strong low-cost provider of power in the retail and wholesale markets. The retention of UE as a separate subsidiary that offers services to third parties has allowed SPS, and will allow NCE, to keep its power plant and utility construction operations active even when the affiliated utility system is not expanding its own capacity. As a non-regulated subsidiary, UE will be able to compete in the developing independent power market due to its ability to accomplish plant construction quickly and at a competitive price. Moreover, the Commission has authorized registered holding companies to engage in a number of similar businesses, including engineering, development, construction, management and related services. See, e.g., Central and South West Corp., HCAR No. 26280 (Apr. 26, 1995) (authorizing Central and South West Services engineering and construction department to provide services to third parties); Entergy Corporation, HCAR No. 26322 (June 30, 1995) (authorizing Energy Enterprises, Inc. to provide development, design, engineering, construction, maintenance and management services to domestic and foreign power projects); New England Electric System, HCAR No. 26017 (Apr. 1, 1994) (authorizing New England Electric Resources, Inc. to provide consulting services, including engineering, design and construction, to nonaffiliates for profit); General Public Utilities Corp., HCAR No. 25108 (June 26, 1990) (authorizing engineering and management services by Energy Initiatives, Incorporated). The activities of UE will be similar to those approved by the Commission and thus, UE is retainable. In addition concurrently with the 1995 Report, the Commission released for public comment a proposed new Rule 58 (60 Fed. Reg. 33,642 (June 28, 1995)), which would exempt acquisitions or transactions of energy-related businesses from the prior approval requirements of Sections 9(a)(1) and 10. As proposed, energy related activities include the sale of technical, operational, management and other similar kinds of services and expertise developed in the course of utility operations in such areas as power plant and transmission system engineering, development, design and rehabilitation; construction; maintenance and operation. Thus, the Division has indicated that it believes these operations are functionally related businesses under Section 11 of the Act. UE's affiliate, SAGE, is also engaged in functionally related businesses (municipal and wastewater projects, civil works, surveying and environmental services) as is UE's other affiliate, Environmental Services, L.L.C., which performs environmental consulting services previously described. The Commission has authorized registered holding companies to acquire interests in environmental services subsidiaries in the past (see, e.g., Central and South West Corporation, HCAR No. 26367 (Sept. 1, 1995)) and environmental services are listed as energy- related activity in proposed Rule 58. UE's special purpose subsidiary, UE Carolina, which was formed solely to enable UE to provide services in North Carolina, performs the same types of activities as UE with respect to certain projects in such state. Likewise, UE's wholly-owned subsidiary, Utility Services, will perform services of a nature and for parties substantially as described with respect to UE above, except that its activities will relate to cooling towers for power plants and plant construction and related matters as described under Item 1.B.3.b. above. UE Carolina and Utility Services, as is UE, are functionally related and may be retained for the same reasons set forth above. UE's wholly-owned subsidiary, PRC, is in the business of providing human resource database services from a database of names of persons who are available to provide temporary services to various projects. Only a minimal additional investment is required to create such a database, and UE's investment in this company will be immaterial. Furthermore, the development of this database will be incident to and in connection with the services and expertise UE already provides. The Commission has permitted affiliates of other registered holding companies to operate and market similar computer programs and database services. See, e.g., EUA Energy Investment Corporation, HCAR No. 25976 (January 24, 1994); Central and South West Services, Inc., HCAR No. 25132 (August 10, 1990). Thus, the retention of this subsidiary should be permitted. Quixx: The primary business of Quixx is investment in IPPs, QFs, EWGs, foreign utility companies ("FUCOs") and other energy-related projects. Section 32 of the Act exempts EWGs from the provisions of the Act while Section 33 of the Act exempts FUCOs from the provisions of the Act, thereby allowing registered holding companies to obtain interests in such entities. Moreover, the Commission has authorized the formation and financing of a number of non-utility subsidiaries of registered holding companies in order to invest in and hold securities of IPPs, QFs, FUCOs and EWGs. Unless otherwise authorized by the Commission, any IPP in which Quixx invests shall constitute a part of NCE's "integrated public utility system" within the meaning of Section 2(a)(29) of the Act. See, e.g., Northeast Utilities, HCAR No. 25977 (Jan. 24, 1994) (authorizing Charter Oak Energy and COE Development Corporation); Central and Southwest Corp., HCAR No. 26156 (Nov. 3, 1994) (authorizing CSW to form, acquire, finance and own securities of FUCOs); Central and Southwest Corporation, HCAR No. 26155 (Nov. 2, 1994) (authorizing investment in a joint venture which will construct, own and operate IPPs, QFs and EWGs). In addition, proposed Rule 58 lists the ownership of QFs as an energy related activity. Thus, Quixx's principal operations are retainable under the Act. The following of Quixx's subsidiaries and affiliates are IPPs, QFs, EWGs or FUCOs or holding companies for such entities and are thus retainable under Section 11 as demonstrated by the Commission's precedent: BCH, Vedco Louisville, L.L.C., Quixx Jamaica, Inc., Quixx Carolina, Inc., Quixx WPP94, Inc., Carolina Energy Limited Partnership, Windpower Partners 1994, L.P. and Lindsay Cogeneration Limited Partnership. In addition to its primary business, Quixx through Quixx Resources and Quixx WRR, L.P. holds interests in certain water rights in Texas, which may be retained based on the same argument discussed in connection with the Ditch Companies below. It should be noted that Quixx has entered into an agreement to sell approximately 40% of its water rights. Subject to the satisfaction of various conditions, the sale is scheduled to close in 1996. Quixx also provides financing for heat pump acquisitions by SPS customers. This activity is functionally related to the utility business, was developed in the course of SPS's utility business and is de minimus in amount, contributing $1.2 million in income representing interest on heat pump financing contracts for the twelve months ended December 31, 1995. Rule 48 of the Act contains exemptions from the financing approval requirements for certain system companies to finance the acquisition of utility appliance such as water pumps for the customers of the operating utility companies within the holding company system. Although not directly applicable to Quixx, this rule does indicate that such activity is permissible for a registered holding company system and it functionally related to utility operations. Similarly, proposed Rule 58's safe harbor for utility appliances businesses for registered holding company systems and for businesses developed in the course of utility operations indicates this business is functionally related within the meaning of Section 11(b)(1) of the Act. Finally, the Commission has authorized financing and leasing of utility equipment for customers. See Central and South West Corporation, HCAR No. 26367 (Sept. 1, 1995); Entergy Corporation , HCAR No. 25718 (Dec. 28, 1992). See also, Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995) (authorizing CNG's subsidiary, CNGF, to finance the purchase of certain gas equipment, including "New Technology Equipment" and "Alternate Fuel Equipment," by customers who would, in turn, purchase gas from CNG System subsidiaries). Amarillo Railcar Services, a division of Quixx should also be retainable. The Commission has authorized electric utility subsidiaries of registered holding companies to construct, finance, acquire, and operate unit train repair and maintenance facilities generally where the railcars were used to service the utility by transporting coal. In the Matter of Southwestern Electric Power Company (subsidiary of CSW), HCAR Nos. 19643; 19468 (Aug. 9, 1976; April 6, 1976, respectively); In the Matter of Ohio Power Company (subsidiary of American Electric Power Company), HCAR Nos. 22977; 21886; 21173 (June 17, 1983; Jan. 16, 1981; Aug. 3, 1979, respectively). The operations of Amarillo Railcar are incident to, and were developed as a result of, utility operations and expertise in connection with the transportation of coal. Although a majority of Amarillo Railcar Services' work involves railcars that transport coal for use by NCE system utility companies, it is also a general railcar maintenance operation that provides services to unaffiliated third parties. Amarillo Railcar's net revenues in the fiscal year ended August 31, 1995 were $1,555,000, which accounted for only two-tenths of one percent of SPS's overall revenues. It is a small operation that developed from utility operations, incurs very little cost at this point and is beneficial to shareholders and, thus, is retainable. Quixx also holds a royalty interest in coal and other minerals produced from certain properties owned by the Pittsburgh and Midway Coal Mining Company. The Commission has approved of the acquisition of coal and mineral rights by registered holding companies or their utility subsidiaries, see, e.g., In the Matter of Alabama Power Company (subsidiary of The Southern Company), HCAR No. 10258 (November 30, 1950); In the Matter of The Youghiogeny and Ohio Coal Company, HCAR No. 19587 (June 21, 1976), as well as the transfer of such rights between subsidiaries, see, e.g., The Columbia Gas System, Inc. et al., HCAR No. 24881 (May 5, 1989); National Fuel Gas Supply Corporation, et al., HCAR No. 24491 (November 4, 1987). Therefore the Commission should not object to the retention of royalty interests in the coal and mineral production of the Pittsburgh and Midway Coal Mining Co. These rights were acquired in settlement of litigation over an acquisition and are de minimus, contributing $489,000 in revenues from royalty payments on coal for the twelve months ended December 31, 1995. Quixx Power Services, Inc., a wholly owned subsidiary of Quixx ("QPS"), will operate and maintain generation facilities in various locations, including two cogeneration facilities in which Quixx holds an equity interest, the BCH and the Carolina Energy facilities. QPS will perform similar operation and maintenance services for unaffiliated projects. The expertise needed to provide such services is listed as an "energy-related" activity in proposed Rule 58. The services to be provided are consistent with the type of activities approved in various "consulting services" cases such as The Southern Company HCAR No. 26132 (July 17, 1981) and American Electric Power Company, HCAR 22468 (April 21, 1982) (each authorizing the creation of a consulting subsidiary to render management, technical and training services to non-affiliated entities). In addition, QPS' activities are de minimus, accounting for revenues of $609,000 for the twelve months ended December 31, 1995. e prime: e prime is, or intends to, engage in energy related activities and consumer services. Because e prime is a start-up company formed in 1995, many of these activities are in their preliminary phases. It is anticipated that e prime will further develop some or all of these activities, or alternatively, the activities described hereunder may be conducted by Quixx or another NCE system company. The energy- related activities e prime is, or intends to, engage in include: electric and gas brokering and marketing; energy consulting and project development services; construction, operation and ownership of electric generation and gas storage facilities; and construction, operation and ownership of equipment and facilities to gather and disseminate energy-related management information. Other consumer service activities e prime is, or intends to, engage in include information processing and other technology based services. e prime is currently engaged in purchasing gas from, and reselling it to, utility and non-utility companies at negotiated rates reflecting market conditions. e prime intends to conduct similar activities in connection with its marketing of electricity and has filed an application with the FERC requesting all requisite approvals and waivers to act as a power marketer. Unless authorized by the by FERC, the marketing or brokering of power by e prime will not involve purchases from and sales to associated companies in the NCE system. Both power and gas marketing services will be offered to third parties. The electric power and gas marketing activities of e prime are functionally related to NCE's core utility system. NCE believes that entering into the power and gas marketing businesses is a significant step in allowing NCE to compete in the utility industry and thus is in the best interest of investors and consumers. As a result of e prime's activities, various sources of competitively priced electricity and gas will become more readily available to the wholesale electric power and gas market in general. All consumers of electric power and gas will thus benefit as the alternatives for supply of electricity and gas increase and competition among electric suppliers grows. In addition, e prime's brokering and marketing activities are consistent with the requirements of Section 11(b)(1) as the Division has recommended it to be interpreted. In the 1995 Report, the Division recommended that the Commission adopt a flexible approach for requests by registered holding companies to engage in diversified activities, and especially those activities that the Division deemed to be "energy-related." Moreover, in proposed Rule 58, the definition of energy-related activities includes "the brokering and marketing of energy commodities, including but not limited to electricity and natural or manufactured gas." Additionally, as noted in the 1995 Report, the Commission has authorized various registered holding companies to engage in gas and some power marketing activities in the past. See 1995 Report at 12, citing Consolidated Natural Gas Co., HCAR No. 24329 (Feb. 27, 1987) (authorizing gas marketing subsidiary) and Entergy Co., HCAR No. 25848 (June 8, 1993) (authorizing sale of consulting services to non-affiliates, including sale of expertise relating to brokering of power); Northeast Utilities, HCAR No. 26359 (Aug. 18, 1995) (authorizing certain power marketing activities). Thus, the marketing activities of e prime may be retained consistent with the requirements of the Act. e prime also provides consulting services for project development and energy cost control to commercial and industrial customers and may engage in general demand side management activities. The expertise needed to provide such services is listed as an "energy-related" activity in proposed Rule 58. As discussed in detail with regard to the retention of UE, the Commission has authorized registered holding company subsidiaries to engage in utility-related consulting services numerous times in the past. See also, UNITIL Corporation, HCAR No. 25816 (May 24, 1993) (authorizing subsidiary to engage in consulting and other services on energy related matters), Central and South West Corporation, HCAR No. 26367 (Sept. 1, 1995) (authorizing subsidiary to engage in energy and demand side management services to commercial and industrial customers) and American Electric Power Company, HCAR No. 26267 (April 5, 1995) (authorizing subsidiary to provide demand-side management services). e prime is constructing or owns and operates electric generation and gas storage facilities, directly or indirectly, and is continuing to evaluate additional projects. The categories of electric generation facilities in which e prime may have an interest are QFs, EWGs, FUCOs and IPPs. In connection therewith, e prime may conduct preliminary development activities include project due diligence and design; design review; market studies; site inspection; preparation of bid proposals (including the posting of bid bonds, cash deposits or similar instruments); application or required permits or authorizations, acquisition of options on sites and other rights; negotiation and execution of contractual commitments with owners of existing facilities, equipment vendors and other project contractors; negotiating of financing commitments with lenders and co-investors; and other activities required in preparation for the acquisition or financing of one of the listed entities. The Commission previously has authorized such activities by companies in a registered holding company system (See The Southern Company, HCAR No. 26212 (Dec. 30, 1994)). Managerial and technical services provided to such entities by e prime may include project development, engineering, design, construction and construction management, operating fuel management, testing, maintenance and administrative and technical support, all of which, again, have been previously authorized (See American Electric Power Company, HCAR No. 26267 (April 5, 1995); Entergy Corporation HCAR No. 26322 (June 30, 1995)). As discussed with regard to the retention of Quixx, investments in the listed entities have also been permitted frequently by the Commission and are also listed as an energy-related activity in proposed Rule 58. e prime may hold these interests directly, or indirectly through entities whose sole purpose is to hold such entities. e prime will not acquire an interest in an IPP unless it forms part of NCE's "integrated public utility system" within the meaning of Section 2(a)(29) of the Act unless authorized by the Commission or the Act. It should be noted that e prime may purchase an interest in a QF that is currently owned by an independent third party and is selling power to PSCo. Although the sale of power is not subject to the Commission's jurisdiction as power sales are excluded from the definition of goods in Rule 80 of the Act, such sales and the rates charged are subject to the jurisdiction of the other regulatory entities, which in this specific case is the CPUC. A potential business expansion by e prime is marketing information processing equipment and facilities and other technology based services, including metering and billing, to utilities and non-utility companies at market based rates. e prime is also continuing to evaluate other similar consumer services. Again, these services are ones in which other registered holding company subsidiaries have been authorized to engage. Central and South West Corporation, HCAR No. 26250 (Mar. 14, 1995) (authorizing provisions of metering, billing and collecting services to unaffiliated water and gas utilities); The Southern Company, HCAR No. 26221 (Jan. 25, 1995) (authorizing subsidiary to offer automated billing services to nonaffiliate utilities). Additionally, some of the technology utilized in these services was developed in utility operations and the Commission has previously permitted registered holding company subsidiaries to market to third parties technology developed in the course of the operation of affiliated utilities. See Southern Company HCAR No. 26211 (Dec. 30, 1994) (allowing marketing to third parties of communications network capacity initially developed for utility subsidiaries); Jersey Central Power & Light Company, HCAR No. 24348 (March 18, 1987) (allowing licensing to third party utilities of computer theft prevention technology initially developed for company's own use). Young Gas: As of February 1, 1996 as the result of a contribution of Young Gas' shares from PSCo, e prime holds all of the outstanding shares of Young Gas. Young Gas owns 47.5% interest in a partnership which owns a gas storage facility which stores gas primarily for use in PSCo's gas operations. The rates charged to PSCo for such services by the partnership are determined in accordance with FERC regulations and are cost- based. The partnership provides services to third parties at FERC determined rates as well. The Commission has recognized the functional relationship of gas storage facilities to a holding company system's utility business. In National Fuel Gas Company, HCAR No. 25437 (Dec. 20, 1991), the Commission authorized the registered holding company: (1) to acquire a wholly owned subsidiary to market natural gas and to assist in transporting and storing natural gas, and (2) to acquire a 50% interest in a partnership engaged in purchasing, storing, transporting, and marketing natural gas throughout the United States. See also, Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995) (describing CNG System as comprised of, inter alia, CNG Energy Services Corporation, which gas marketing subsidiary "sells gas and related services such as storage . . . to System [companies] and nonassociates . . ."). Just as the Commission recognized, the benefits and functional relations to utility operations of gas storage subsidiaries, the Commission should also permit retention of Young Gas. Gas storage is also an enumerated energy or gas related activity in proposed Rule 58. Furthermore, it is clear under the Gas Related Activity Act, gas storage is a permitted activity. Natural Fuels: This 80% subsidiary engages in the sale of compressed natural gas for use as a transportation fuel, converts vehicles for natural gas usage, constructs fueling facilities and sells fueling facility equipment. Natural Fuels offers services to third parties. The Commission previously has authorized other registered holding companies to form subsidiaries to engage in the activities that are carried out by Natural Fuels. In Consolidated Natural Gas Co., HCAR No. 25615, (Aug. 27, 1992), Consolidated Natural Gas Company and its wholly owned subsidiary, CNG Energy Co., sought authorization for CNG Energy's Natural Gas Vehicle Division to engage in, inter alia, the following activities: (1) buying and reselling equipment necessary to transform vehicles from gasoline to natural gas and/or combined natural gas and gasoline operation ("Conversion Equipment"); (2) installing and/or maintaining Conversion Equipment on customer vehicles and providing training on the use, installation and maintenance thereof; (3) designing, constructing, owning, leasing, selling and/or maintaining refueling stations or mobile refueling operations for the refueling of natural gas vehicles; and (4) entering into various joint arrangements with unrelated companies or individuals to engage in these activities. The retention of Natural Fuels should thus be authorized. See also, Consolidated Natural Gas Co., HCAR No. 26234 (Feb. 23, 1995) (authorizing CNG's subsidiary, CNGF, to finance the purchase of certain gas equipment, including "New Technology Equipment" and "Alternate Fuel Equipment," by customers who would, in turn, purchase gas from CNG System subsidiaries). This business is also an enumerated energy related business in proposed Rule 58. III. Subsidiaries and Operations of PSCo 1480 Welton: 1480 Welton holds certain of PSCo's real estate used or intended to be used in the utility business of PSCo, is functionally related to the utility operation of PSCo and is retainable. 1480 Welton does not hold interests in any other types of properties, nor does it offer services to non- system companies. The Commission has permitted a number of registered holding company systems to establish and/or retain real estate subsidiaries. See, e.g., UNITIL Corporation, HCAR No. 35-25524 (April 24, 1992) (UNITIL Realty); The Southern Company, HCAR No. 21898 (January 27, 1981) (Alabama Property Co. subsidiary of Alabama Power Co.); America Electric Power, HCAR No. 7615 (August 2, 1947) (Franklin Real Estate Co. and Indiana Franklin Realty Co.). PSCCC: PSCCC engages in financing and factoring of certain of PSCo's assets. The Commission has authorized the acquisition of interests in similar credit companies by registered holding companies. See Central and South West Corporation, HCAR No. 23767 (July 19, 1985). Following consummation of the Transaction, PSCCC may engage in factoring and similar transactions with other companies in the NCE holding company system, including SPS, on the same terms as transactions with PSCo. PSCCC will provide services to unaffiliated third parties. However, it should be noted that, consistent with the requirements of the Commission's order in Central and South West Corporation (HCAR No. 25995 (March 2, 1994)), PSCCC currently does not derive more than 50% of its revenues from operations outside the PSCo system and, following consummation of the Transaction, will not derive more than 50% of its revenues from operations outside the NCE system without prior specific authorization from the Commission, unless Rule 58 is adopted. Fuelco: Fuelco is engaged in natural gas and oil exploration and production. The Commission has approved the oil and gas exploration and development activities of New England Energy Incorporated ("NEEI"), the subsidiary of New England Electric System. New England Energy Incorporated, HCAR No. 23988 (Jan. 13, 1986); New England Energy Incorporated, HCAR No. 21862 (Dec. 30, 1980). Fuelco is functionally related to utility operations and is thus retainable. In addition, PSCo, it should be noted that PSCo does intend to divest Fuelco as soon as practicable. Green and Clear Lakes and Ditch Companies: Green and Clear Lakes stores water for use by a PSCo hydroelectric facility, a business that clearly is functionally related to utility operations. The Ditch Companies own utility water rights that are also clearly functionally related to utility operations. Indeed, at the time of the break-up of the Cities Service holding company system, the Commission noted that the Ditch Companies could be retained by PSCo under the standards of Section 11(b)(1). In the Matter of Cities Service Power & Light Company, HCAR No. 4489 (Aug. 18, 1943). PSRI: PSRI owns certain life insurance policies acquired prior to 1986 on certain PSCo employees and retirees. PSRI does not intend to acquire any new policies or engage in any other active business. However, divestiture or the early winding-down of PSRI could have adverse tax consequences for PSCo. In addition, PSRI accounts for only 1.2% of PSCo's consolidated revenue in the year ended December 31, 1994. Steam heating business (division of PSCo): The steam heating business of PSCo, which is located exclusively in its service territory and primarily in the downtown Denver area, serves 120 customers and has annual revenues of approximately $7.2 million. The retention of this business will further NCE's ability to be an energy service company providing consumers with all options to meet their energy needs. Although much of the steam is supplied from boilers at PSCo's Denver steam plant, the steam system is connected to the Zuni plant as well and approximately one-quarter of the steam heating business requirements are met through steam produced by this electric generation plant in the course of its ordinary operation. The Commission has previously approved of the retention of steam heating operations under Section 11(b)(1). See North American Company, 11 SEC 194 (1942); In the Matter of the Philadelphia Company, HCAR No. 8242 (June 2, 1948). Of course, PSCo is aware that the Commission in 1943 in the Service case found similar operations of PSCo to be non- retainable. That fact, however, is not dispositive here as, unlike at that time, the system is now connected with a PSCo generation facility and uses the steam produced by a facility also used for electric generation and the nature of utility services has changed since that time. The retention of steam heating operations will allow NCE to offer customers this additional option to meet their energy needs, thereby, allowing NCE to compete effectively in the energy-services business. Moreover, steam heating also is an enumerated "energy-related" business in proposed Rule 58. Thus, this steam heating business of PSCo is reasonably incidental to NCE's utility operations and may be retained. PSCo also intends to utilize and market the capacity and expertise developed in its thermal operations in different situations such as by offering chilled water services to existing customers, providing services to maintain customer's heating and cooling plants and offering steam cleaning services, all of which qualify as energy related under proposed Rule 58. ____________________ The Commission did not require divestiture of the operations in 1943 as it recognized they were unprofitable and PSCo was unlikely to be able to divest them. Telecommunications operations: PSCo currently leases excess capacity on the fiber optic cable it already has in place for utility operations. PSCo's fiber optic cable contains 48 fibers but PSCo only uses 6 of the fibers for its utility operations. PSCo now leases some of the excess capacity (approximately 14 fibers) at market based rates to an unaffiliated third parties engaged in telecommunications operations. As previously mentioned in the discussion of e prime, the Commission has allowed companies in registered holding company systems to market technology or excess capacity in technology developed for utility operations which allows the utility to recover the costs of developing the technology and has the potential for making a profit. Indeed, the Commission has specifically approved of the licensing of excess capacity in fiber optic lines. See Central and South West Corporation, HCAR No. 26061 (June 3, 1994) and The Southern Company, HCAR No. 26221 (Jan. 25, 1995). In this case, little or no additional investment by PSCo is needed in order for it to recover its costs on this utility equipment. Moreover, the owning of telecommunications operations and leasing fiber optic capacity is an energy-related activity in proposed Rule 58. Similarly, PSCo may lease excess capacity on its paging system, a system developed for utility operations the cost of which, with little additional investment, can be recovered. Energy conservation and demand side management activities: PSCo is also engaged in energy conservation and demand side management services. The focus of PSCo's program is currently upon the customer rebates required by the CPUC. PSCo intends to expand its operations to include such activities as energy audits to establish efficiency solutions and provide financing for customers (including federal government agencies); the provision of services to home offices and the development and marketing of software to monitor energy usage by both industrial and residential customers. Again, demand side management activities have been authorized by the Commission, are closely related to the operation of a utility and are energy-related as defined in proposed Rule 58. Commercialization of electro-technologies and intellectual property: PSCo also markets non-utility products and services developed through electric utility operations. For example, PSCo currently provides relay testing services for customers and may lease or sell surge protection equipment to unaffiliated third parties as well as install, own and operate photovoltaic cells and commercialize other electro-technologies that become available to it. Similarly, PSCo may sell or enter into royalty arrangements with regard to intellectual property owned or developed by PSCo in its utility operations. Such commercialization activities are energy related activities as defined in Rule 58 and, as discussed with regard to e prime's proposed meter reading services, commercialization of technology developed in utility operations has been previously authorized by the Commission (See also American Electric Power Company, HCAR No. 22468 (April 21, 1982) (authorizing sale and licensing of intellectual property developed by utility system companies)). PSCo may also provide home safety monitoring services to customers which would monitor gas leakage and other safety concerns. Electric and gas vehicle products and services: PSCo is currently engaged in a pilot-program to develop fueling sites for natural gas vehicles. The fueling units will be owned by PSCo, but installed at commercial customer sites. PSCo may expand its activities to include the distribution or sale of LNG vehicles, the sale of gas compressors for fueling stations and the development of LNG fueling services and may enter into the business of electric powered-vehicle operation including investments in related technology. Such activities are energy related activities as defined in Rule 58 and most of them have been authorized by the Commission (see discussion of Natural Fuels above). In addition, PSCo may enter into the LNG production and delivery services. Sale and servicing of electric and gas appliances: PSCo's appliance service operations provide repair services and warranties to customers in connection with certain household appliances and may involve the leasing of certain large appliances (i.e. HVAC system. lighting system, chillers) to industrial customers. Such activities are energy related activities as defined in Rule 58. b. Section 10(c)(2) The Transaction will tend toward the economical and efficient development of an integrated public utility system, thereby serving the public interest, as required by Section 10(c)(2) of the Act. i. Efficiencies and Economies The Transaction will produce economies and efficiencies more than sufficient to satisfy the standards of Section 10(c)(2), described above. Although some of the anticipated economies and efficiencies will be fully realizable only in the longer term, they are properly considered in determining whether the standards of Section 10(c)(2) have been met. See American Electric Power Co., 46 SEC 1299, 1320-1321 (1978). Some potential benefits cannot be precisely estimated; nevertheless they too are entitled to be considered: "[S]pecific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable." Centerior Energy Corp., HCAR No. 24073 (April 29, 1986) (citation omitted). PSCo and SPS have estimated the nominal dollar net value of synergies from the Transaction to be approximately $770 million over the first 10-year period from 1997 to 2006. The Transaction is expected to yield several types of presently quantifiable benefits: (1) capital expenditure savings; (2) production cost savings; (3) labor cost savings; and (4) administrative and general savings. The amount of savings currently estimated in each of these categories, on a nominal dollar basis, is summarized in the table below: Category Amount Corporate Programs $ 82.7M Non-fuel Purchasing Economies 19.1M Capacity Deferrals 160.1M Fuel Savings 163.4M Labor 389.5M Less: Pre-merger Initiatives (2.1M) Less: Costs to Achieve (43.0M) _______ Net Total Estimated Savings $769.7M _______ These expected savings far exceed the savings claimed in a number of recent acquisitions approved by the Commission. See, e.g., Kansas Power and Light Co., HCAR No. 25465 (Feb. 5, 1992) (expected savings of $140 million over five years); IE Industries, HCAR No. 25325 (June 3, 1991) (expected savings of $91 million over ten years); Midwest Resources, HCAR No. 25159 (Sept. 26, 1990) (estimated savings of $25 million over five years). These savings categories are described in greater detail below. Corporate Programs: These are savings related to insurance costs, outside services, shareholder services, advertising and other general and administrative overheads. The aggregate cost of these items for the companies on a stand-alone basis is greater than the cost will be to the combined new company. An example would be the hiring of one outside professional service (external auditors, attorneys, consultants, etc.) instead of two. Non-Fuel Purchasing Economies: These are the savings which will result from the new, larger company having greater purchasing power. The new company will be able to coordinate its purchasing needs, buy in greater quantity, negotiate with vendors and receive larger discounts. Capacity Deferrals: This refers to the savings created by deferring the construction of additional generating capacity. For these deferrals to be achieved, the two systems must be integrated via a HVDC interconnection and transmission line. Because of load diversity (the two systems peak at different times) the new company's peak load is less than the sum of the peak loads of the two individual companies. This load diversity requires less total capacity; allowing the new company to defer generation expansion and the associated costs to the ratepayer. The amount of projected capacity deferral savings is net of the estimated incremental merger-related cost of the HVDC interconnection and transmission line (approximately $112 million). See Item 3.A.2.b.ii.I for details of the interconnection and line. Fuel Savings: These are savings which result from the new, larger company having greater purchasing power. The new company will be able to negotiate contracts to procure and transport fuel in larger quantities, and at much larger discounts than either PSCo or SPS would on a stand-alone basis. Additionally, once the two systems are directly interconnected, the new company's operators will be able to dispatch and generate the power in the most economic manner, as certain plants are more economical than others. Labor Cost Savings: PSCo and SPS estimate that a net reduction in labor costs of approximately $389.5 million on a nominal dollar basis can be achieved as a result of the Transaction through elimination of approximately 550-600 full time equivalent duplicative positions in certain corporate and administrative functions. This assumes a one-year period will be required to achieve the personnel reductions. (less) Pre-Merger Initiatives: The level of employees of both companies combined compared with the level of employees needed for the new company indicates that 550-600 full-time duplicate positions be eliminated through the merger process. There is, however, a level of employee reduction which will occur regardless of the merger. This figure is a part of the total labor savings amount above, and is removed from the savings estimates to avoid double counting of savings for forecasting purposes Costs to Achieve: This consists of merger costs such as investment bankers' fees, attorney and accountant fees, and severance and other employee reduction-related costs. Item 2 provides details of some of these components and their amounts. Additional Expected Benefits: In addition to the benefits described above, there are other benefits which, while presently difficult to quantify, are nonetheless substantial. These other benefits include competitive rates and services, increased size and stability, diversification of service territory, coordination of diversification programs, complementary operational functions and complementary management. - Competitive Rates and Services NCE will be able to meet the challenges of the increasingly competitive environment in the utility industry more effectively than either PSCo or SPS standing alone. The Transaction will create financial and operational benefits for customers in the form of lower rates and better service over the long-term. - Increased Size and Stability As a larger entity, shareholders will benefit over the long-term from the NCE's greater financial strength and financial flexibility. NCE will be better able to take advantage of future strategic opportunities and to reduce its exposure to changes in economic conditions in any segment of the business. - Diversification of Service Territory The combined service territories of PSCo and SPS will be larger and more geographically diverse than the independent service territories of each entity, reducing NCE's exposure to changes in economic, competitive or climatic conditions in any given sector of the combined service territory. - Coordination of Diversification Programs PSCo and SPS each have complementary nonregulated subsidiary businesses, and NCE, as a stronger financial entity, should be able to manage and pursue these subsidiary businesses more efficiently and effectively as a result of access to lower-cost capital and efficiencies achievable through greater size. - Complementary Operational Functions The combination of PSCo, with expertise in customer service applications and energy services as well as natural gas utility operations, and SPS, a low-cost power producer with recognized expertise in engineering services, wholesale power marketing and utility generation projects, will allow NCE to offer customers a more complete menu of service options and a better operational balance. - Complementary Management The managements of PSCo and SPS have complementary strengths which will provide NCE with a strong and capable management team, facilitating the merger of similar corporate cultures and achieving cooperation and coordination in an efficient manner. ii. Integrated Public Utility System I. Electric System As applied to electric utility companies, the term "integrated public utility system" is defined in Section 2(a)(29)(A) of the Act as: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operation to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. On the basis of this statutory definition, the Commission has established four standards that must be met before the Commission will find that an integrated public utility system will result from a proposed acquisition of securities: (1) the utility assets of the system are physically interconnected or capable of physical interconnection; (2) the utility assets, under normal conditions, may be economically operated as a single interconnected and coordinated system; (3) the system must be confined in its operations to a single area or region; and (4) the system must not be so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. Environmental Action, Inc. v. Securities and Exch. Comm'n, 895 F.2d 1255, 1263 (9th Cir. 1990) (citing In re Electric Energy, Inc., 38 SEC 658, 668 (1958)). The Transaction satisfies all four of these requirements. It should be noted that in the 1995 Report, the Division recommended that the Commission "respond realistically to the changes in the utility industry and interpret more flexibly each piece of the integration requirement." ____________________ 1995 Report at 71. At the moment, PSCo and SPS have the ability to exchange power over a transmission tie owned by Public Service Company of New Mexico ("PNM"). In the past, the two companies have exchanged electric energy utilizing these facilities. Facilitating the current transmission and exchange of power between the parties is participation by PSCo, SPS and PNM in the WSPP, which provides for, among other things, the exchange of bulk power. The Section 2(a)(29) standard will be met in this Transaction, however, as the NCE system is capable of interconnection through the construction of a new transmission tie line, construction of which is planned within five years of the effective time of the Transaction. PSCo and SPS currently intend to complete the interconnect between the two companies by the year 2001. The estimated length of the tie line is approximately 300 miles, running from near Amarillo, Texas to Southeastern Colorado. The transmission tie line voltage is expected to be 345 KV. Following completion of the line, the PSCo and SPS systems will be operated as a single interconnected system. It is currently estimated that the costs associated with constructing the interconnection line amount to $149 million, of which $112 million are incremental costs attributable to the Transaction. Since SPS operates in the Eastern Interconnection and is a member of the SPP and PSCo is in the Western Interconnection and is a member of the WSCC, the interconnect must include a HVDC back-to-back terminal between the two systems. This HVDC terminal, which will asynchronously connect the two companies, is currently expected to be rated at 400 MW and allow for capacity and energy transfers between the two systems. ____________________ This is exactly the type of asynchronous interconnection approved by the Commission in connection with a settlement that provided for the construction by the Central and South West Corporation of two HVDC ties to interconnect its ERCOT subsidiaries with its Southwest Power Pool subsidiaries, thereby satisfying the Act's integration requirements. See Central and South West Corporation, HCAR No. 22439 (April 1, 1982). This additional interconnect will further the economic operation of the NCE system by enabling it to achieve additional production-related synergies. Indeed, the plans for the line's construction are not related to any requirement of the Act, but rather to the substantial benefits that will accrue as a result of the line. As recently as 1992, SPS and PSCo discussed connecting their systems through an HVDC tie and transmission line to facilitate transactions between their systems. The production-related benefits of the proposed interconnect were determined in three areas: capacity deferral savings, joint dispatch savings and fuel energy savings. The process used to estimate these savings involved modeling each company's system and determining its costs on a stand-alone basis and then on a combined basis. The savings were based on a comparison of the individual system costs to those determined on a combined basis. The representation of the individual systems was based on each company's most recent resource plan, modified to account for any major changes in assumptions since the plan was developed, and the most recent fuel forecasts. The combined system expansion plan was based on the reduced capacity requirements of the combined system and accounted for the expected fuel synergy savings. The development of these costs considered production costs as well as investment-related costs. Benefits attributed to joint dispatch savings were developed within the combined system model and coincide with the in-service date of a new transmission line between the two companies. Overall, it is anticipated that the electric production-related savings from the merger of PSCo and SPS will aggregate approximately $270 million (net of the cost of the line). To achieve this level of savings, the tie-line will need to be constructed. Additional savings are likely to be realized over time. Additional information regarding electric production-savings can be found in Exhibit D-1.2.2. attached hereto. The Commission has previously indicated that a single integrated system exists even based solely on a planned, future interconnection, provided that such physical interconnection is "contemplated or . . . possible within the reasonably near future" and not just something that "might occur in the remote future, and whose occurrence has not been foreshadowed by any facts shown in the record." The benefits to be derived by the new transmission line are also a factor in determining whether the system is capable of physical interconnection. The fact that the Commission has indicated that, absent special circumstances, the "reasonably near future" mentioned above, should not exceed 10 years, is not an issue in this case as the parties do have definite plans to construct an interconnection that will be in service and generating economies within 5 years of the consummation of the Transaction. ____________________ In the Matter of the North American Company and Its Subsidiaries, HCAR No. 4505 (Apr. 15, 1942). See Also, In the Matter of Hudson River Power Corporation, HCAR No. 2415 (Dec. 9, 1940) (integration standard not met where "the record discloses no definite plan for bringing about any such interconnection"); In the Matter of Cities Service Power & Light Corporation, HCAR No. 5256 (Aug. 30, 1944) (integration standard met where "Derby contemplates the construction of such interconnection facilities"). In one instance, the Commission noted that while "we are not aware of any plans for undertaking these interconnections in the near future ... [w]e find ... no occasion to doubt the validity of the estimates of benefits to be derived therefrom," in its holding that such facilities were considered capable of interconnection. In the Matter of Cities Service Power & Light Company, HCAR No. 4489 (Aug. 18, 1943). See, In the Matter of Union Electric Company, HCAR No. 18368 (Apr. 10, 1974) (holding that in the absence of special circumstances, physical interconnection that might be built in ten years if economical does not meet integration requirement). In addition, Cheyenne forms a single integrated system with the NCE system. With regard to electric properties and as set forth above, the key to a single integrated system, is that the utility assets are "physically interconnected or capable of interconnection." Historically both Cheyenne and PSCo were part of the Cities Service Power and Light Company holding company system. When the Commission ordered the break-up of that system in the mid-1940s, it issued orders organizing the various systems within the Cities Services system as independent systems. At that time, the Commission specifically examined the relationship between the electric utility operations of PSCo and Cheyenne and held that together they constituted a single integrated system within the meaning of Section 2(a)(29) of the Act. The Commission noted that the two systems were interconnected via "a transmission line which functions as an important tie between the companies although it is owned, not in the system, but by the United States Bureau of Reclamation." Moreover, although the Commission initially postponed any finding on the issue of PSCo's retention of combination gas and electric utility properties, it did examine the PSCo and Cheyenne gas operations as one unit. PSCo and Cheyenne continue to form such an integrated system and the addition of NCE as a holding company above these entities does not alter that fact, nor does the fact that the NCE system includes SPS utility properties since, as described above, PSCo and SPS will be interconnected and PSCo and Cheyenne are interconnected. Thus, the entire system is, or is capable of being, integrated. ____________________ The issue of Cheyenne's gas properties is discussed under Item 3.A.2.a.i. (Retention of Gas Operations). Cities Service Power & Light Company And Its Subsidiary Companies, HCAR No. 4489 (August 18, 1943) ("We find that the properties of the Cheyenne company and the Arvda company, together with the main body of the Public Service properties in northern Colorado, form a single integrated electric utility system"). ID. ID. The specific physical interconnection via electric transmission ties between PSCo and Cheyenne is as follows: 115KV transmission lines owned by WAPA connect with the Cheyenne system via the Happy Jack, Cheyenne and Archer substations. WAPA transmission lines also interconnect with PSCo transmission lines. One of these WAPA owned lines connects PSCo and Cheyenne, running directly from a WAPA-PSCo interconnection to a WAPA- Cheyenne interconnection. Indeed, the Applicants believe that this line is the same line referred to in the Cities Service decision previously discussed. It should be noted that Cheyenne was receiving electricity from PSCo via this line at the time of the Cities Service decision, while today, as a result of a competitive bid process to supply the Cheyenne system, Cheyenne obtains all of its electricity requirements from an unaffiliated electric utility over different transmission lines. This fact should not alter the above analysis because (1) the two systems remain physically interconnected and have been efficiently operated as a single, integrated utility system and (2) the Act's purposes are being met, as competition has been allowed to flourish in the PSCo holding company system where the winner of a competitive bid, regardless of other corporate relationships, supplies the Cheyenne system. PSCo did bid to supply the Cheyenne system and, had it been successful, could have supplied Cheyenne with its needs using the WAPA line. ____________________ SEE SUPRA note 20. The NCE electric system will operate in a single area or region. The system will operate in six contiguous states in the greater southwest region of the United States. It should be noted that in the 1995 Report, the Division has stated that the evaluation of the "single area or region" portion of the integration requirement "should be made... in light of the effect of technological advances on the ability to transmit electric energy economically over longer distance, and other developments in the industry, such as brokers and marketers, that affect the concept of geographic integration." The 1995 Report also recommends primacy be given to "demonstrated economies and efficiencies to satisfy the integration requirements." As set forth in Item 3.A.2.b.i, the Transaction will result in economies and efficiencies for the utilities and, in turn, their customers. ____________________ 1995 Report at 72-74. 1995 Report at 73. Moreover, the NCE electric system will not be so large as to impair the advantages of localized management, efficient operations, and the effectiveness of regulation. After the Transaction, PSCo, SPS and Cheyenne will maintain their current headquarters as subsidiary headquarters and as local operating headquarters for the areas they presently serve, while NCE maintains system headquarters in both Denver (corporate offices) and Amarillo (operating offices). This structure will preserve all the benefits of localized management PSCo, SPS and Cheyenne presently enjoy while simultaneously allowing for the efficiencies and economies that will derive from their strategic alliance. Furthermore, as described earlier, the system will facilitate efficient operation. Additionally, the NCE system will not impair the effectiveness of state regulation. PSCo, SPS and Cheyenne will continue their separate existence as before and their utility operations will remain subject to the same regulatory authorities by which they are presently regulated, namely the CPUC, WPSC, PUCT, NMPUC, KCC, OCC, the FERC and, until the decommissioning of the Fort St. Vrain facility is complete, the NRC. PSCo and SPS are working closely with the CPUC, WPSC, NMPUC, PUCT, KCC and OCC as well as the FERC and the NRC to ensure they are well informed about this Transaction and this Transaction will not be consummated unless all required regulatory approvals are obtained. Pursuant to the recommendations contained in the 1995 Report, this last factor is significant as the Division stated therein "when the affected state and local regulators concur, the [Commission] should interpret the integration standard flexibly to permit non-traditional systems if the standards of the Act are otherwise met," especially since this Transaction will result in a system similar to the traditional registered holding company system. ____________________ 1995 Report at 74. II. Gas Utility System Section 2(a)(29)(B) defines an "integrated public utility system" as applied to gas utility companies: [A] system consisting of one or more gas utility companies which are so located and related that substantial economies may be effectuated by being operated as a single coordinated system confined in its operation to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation: Provided, that gas utility companies deriving natural gas from a common source of supply may be deemed to be included in a single area or region. The NCE gas utility system will meet the standard set forth in Section 2(a)(29)(B) and, therefore, will satisfy the requirements of Sections 10(c)(1) and (2) and should be approved by the Commission. First, both the Commission's limited precedent and current technological realities indicate that the NCE gas utility system will operate as a coordinated system confined in its operation to a single area or region because it will derive natural gas from a common source of supply. None of the Act, the Commission's orders and rulings or no-action letters of the Commission's staff provide a definition as to what constitutes a "common source of supply." Nevertheless, the Commission has not traditionally required that the pipeline facilities of an integrated system be interconnected, and instead has looked to such issues as from whom the distribution companies within the system receive much, although not all, of their gas supply. The Commission also has considered purchases of gas from a common pipeline as well as from different pipeline's when the gas originates from the same gas field in determining a common source of supply. Since the time of most of these decisions, the state of the art in the industry has developed to allow efficient operation of systems whose gas supplies derive from many sources. ____________________ See In the Matter of Penzoil Company, HCAR No. 15963 (1968) (finding an integrated system where facilities both connected with an unaffiliated transmission company but not each other). See also, American Natural Gas Company, HCAR 15620 (1966) ("It is clear the integrated or coordinated operations of a gas system under the Act may exist in the absence of such interconnection"). See, e.g., In the Matter of Philadelphia Company and Standard Power and Light Company, HCAR No. 8242 (1948) ("most of the gas used by these companies in their operations is obtained from common sources of supply"); Consolidated Natural Gas Company, HCAR No. 25040 (1990) (finding integrated system where each company derived natural gas from two transmission companies, although one such company also received gas from other sources). In the Matter of the North American Company, HCAR No. 10320 (1950) (finding Panhandle Eastern pipeline to be a common source of supply). See In the Matter of Central Power Company and Northwestern Public Service Company, HCAR 2471 (1941), in which the Commission declared an integrated system to exist where two entities purchase from different pipeline companies since "both pipelines run out of the Otis field, side by side, and are interconnected at various points in their transmission system; and that they are within two miles of each other at Kearney." PSCo's and Cheyenne's gas operations form an integrated utility system in accordance with the requirements of Section 2(a)(29)(B). The two operations are physically connected through the WestGas Interstate transmission pipeline (owned by WGI) which connects to the PSCo transmission system at Chalk Bluffs, Colorado near the Colorado, Wyoming border and runs to Cheyenne, Wyoming. Through this system, PSCo and Cheyenne derive gas from common sources of supply. PSCo and Cheyenne also derive gas from common sources through the Colorado Interstate Gas Co. transmission system, to which both companies are connected. The gas utility operations of PSCo and Cheyenne are limited to the Colorado/Wyoming area and have been operated efficiently and economically as a single integrated utility for decades. 3. Section 10(f) Section 10(f) provides that: The Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect to such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. As described in Item 4 of this Application/Declaration, and as evidenced by the applications before the CPUC, WPSC, PUCT, NMPUC and the KCC all relating to the Transaction, NCE intends to comply with all applicable state laws related to the proposed transaction. 4. Other Applicable Provisions - Section 9(a)(1) NCE is also requesting authorization from the Commission under Section 9(a)(1) of the Act for the acquisition by it of the voting securities of NC Services and NC Hold as part of the Transaction. Section 9(a)(1) of the Act requires a registered holding company or any subsidiary thereof to obtain authorization from the Commission before acquiring "any securities or utility assets or any other interest in any business." In order to approve an acquisition under Section 9(a)(1), the Commission must find that such acquisition meets the standards of Section 10 of the Act, which in turn requires compliance with Section 8 and 11 of the Act. Although NCE will not become a registered holding company until consummation of the Transaction and thus Section 9(a)(1) is not applicable to it until that time, because NCE will become subject to Section 9(a)(1) and the exact chronology of the formation of NC Hold and NC Services has not been determined, NCE is requesting the Commission's authorization for these transactions. The acquisition by NCE of the common stock of NC Services, making it a wholly owned subsidiary of NCE, will allow NCE to create a subsidiary service company and capture economies of scale from the centralization of administrative and general services to be provided to system companies. Since the cost of such services are considered in rate cases, the benefits realized as a result of NC Services will accrue to NCE's ratepayers. Virtually every registered holding company has a subsidiary service company performing many of the same functions as NC Services will perform. The acquisition of NC Services is in the public interest, will not unduly complicate the capital structure of NCE and will not cause the NCE system to violate any other provision of the Act. NC Services' only class of authorized stock will be its common stock, all of which will be owned by NCE. The operation of NC Services, and the allocation of cost for its operation, is discussed in detail in Item 3.B below. NCE is also requesting authorization to acquire all of the issued and outstanding common stock of NC Hold, which will serve as an intermediate holding company for certain of the system's non-utility subsidiaries. NCE believes that an intermediate holding company provides a clearer separation between the system's utility and non-utility operations of the system and allows for centralization of the operation of the non- utility operations. Although NC Hold will have issued and outstanding debt to SPS (in connection with NC Hold's acquisition of UE and Quixx) as part of the Transaction, this should not unduly complicate the NCE system's capital structure. While NC Hold will have a board of directors, appointed officers and, possibly, employees, it also will receive services from NC Services. Costs for any work performed for NC Hold by NC Services will be charged to NC Hold in accordance with the appropriate allocation method set forth in the Non-Utility Service Agreement. Finally, NC Hold requests authorization under Section 9(a)(1) of the Act to acquire all of the issued and outstanding common stock of e prime, UE, Quixx, Young Gas and Natural Fuels. As discussed in Item 3.A.2.a.ii above, each of these businesses may be retained by the NCE system under the Act. NCE believes that the reorganization of these non-utility businesses as subsidiaries of NC Hold instead of as subsidiaries of either PSCo or SPS directly, will be beneficial to ratepayers by insulating the operating utilities from the results of operations of these entities. NC Hold will directly or indirectly acquire the securities of certain current PSCo subsidiaries via an equity contribution from NCE. In order to maintain the current equity capitalization of SPS, NC Hold will issue debt to SPS in exchange for the securities of UE and Quixx. The acquisitions of Quixx and UE are proposed to be consummated as sales for debt in order to preserve the capital structure of SPS. The equity of the two subsidiaries at December 31, 1995 was valued at $95.0 million, or approximately 13% of SPS's equity of $727.9 million. Transferring the subsidiaries by payment of a dividend of their stock would cause a reduction of SPS's equity by this same amount. This would be viewed negatively from a regulatory and rating agency point of view. Selling the subsidiaries eliminates this adverse impact on SPS. The debt issued by NC Hold will have a twenty year maturity and bear interest at a fixed rate, with interest payments to be made semi-annually. The interest rate will be determined at the time of issuance based on the then prevailing rate which would be charged by an unaffiliated third party. The principal will be repaid in twenty equal annual installments. NC Hold will have the option to prepay the entire obligation, including accrued and unpaid interest, at any time without any prepayment premium. The form of note to be used to evidence the debt of NC Hold is attached as Exhibit J-5. NC Hold expects to have sufficient earnings to service the debt based on the expected earnings of UE and Quixx. See Exhibit J-4. If necessary, NC Hold will also have available the earnings of its other subsidiaries. B. Intra-System Provision of Services In addition to its request that the Commission find NC Services and UE to be so organized and conducting their businesses as to meet the requirements of Section 13(b) for subsidiary service companies, NCE also is requesting exemptions from the provisions of Rules 90 and 91, and the at-cost requirements contained therein, in connection with services provided by NC Services, UE, Quixx, QPS, UE Carolina, Utility Services, PRC and e prime to certain affiliated QFs, IPPs, EWGs and FUCOs, and for e prime to continue to provide services at market-based rates to the partnership owning the facility in which Young Gas holds a general partnership interest. As described in more detail below, NCE believes these exemptions will help the above-named companies compete more effectively for the provision of services to such entities, which are either majority-owned by unaffiliated third parties eliminating the potential for abusive affiliate transactions, are otherwise adequately regulated with respect to affiliate transactions or do not otherwise present the concerns for which the at-cost standards were developed. The Commission has indeed granted similar exemptions to existing registered holding companies. At this point in time, the companies who would be purchasing services pursuant to this exemption are as follows: Young Gas Storage Co., Ltd., and the two facilities in which Quixx has invested that are located in North Carolina, BCH and Carolina Energy. In addition, NCE may also need an exemption from the at-cost requirements of Rules 90 and 91 in connection with certain services provided by PSCo to e prime. These exemptions would involve situations where e prime is marketing a product or service some component of which will involve products or services received from PSCo. As discussed in more detail below, such exemptions may be required in order to make the products or services viable for marketing to non-affiliates, are consistent with Commission precedent and would be beneficial to both the service provider and service purchaser. All other services provided by NCE system companies to other NCE system companies will be in accordance with the requirements of Section 13 of the Act, unless otherwise exempted by the Commission or the rules promulgated under the Act. ____________________ See infra notes 45 and 46 and accompanying text. See note 53 and accompanying text. 1. NC Services As described in Item 1.B.1.c.v, NC Services will provide PSCo, SPS and Cheyenne, pursuant to the Service Agreement, and the non-utility subsidiaries of the NCE system, pursuant to the Non-Utility Service Agreement, with a variety of administrative, management and support services, including services relating to electric power planning, transportation, materials management, facilities and real estate, accounting, budgeting and financial forecasting, finance and treasury, rates and regulation, legal, internal audit, corporate communications, environmental, fuel procurement, corporate planning, investor relations, human resources, marketing and customer services, information systems and general administrative and executive management services. In accordance with the Service Agreement, services provided by NC Services will be directly assigned, distributed or allocated by activity, project, program, work order or other appropriate basis. To accomplish this, employees of NC Services will record transactions utilizing the existing data capture and accounting systems of each client company. Costs of NC Services will be accumulated in accounts of NC Services and directly assigned, distributed and allocated to the appropriate client company in accordance with the guidelines set forth in the Service Agreement. SPS and PSCo are currently developing the system and procedures necessary to implement the Service Agreement. It is anticipated that NC Services will be staffed by transfer of personnel from PSCo, SPS and their subsidiaries. NC Services' accounting and cost allocation methods and procedures are structured so as to comply with the Commission standards for service companies in registered holding-company systems. NC Services' billing system uses the "Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies" established by the Commission for service companies of registered holding-company systems. As compensation for services, the Service Agreement provides for the client companies to: "pay to [NC Services] all costs which reasonably can be identified and related to particular services performed by [NC Services] for or on its behalf." Where more than one company is involved in or has received benefits from a service performed, the Service Agreement provides that "costs will be directly assigned, distributed or allocated, between or among such companies on a basis reasonably related to the service performed to the extent reasonably practicable," in accordance with the methods set forth in Appendix A to the Service Agreement. Thus, charges for all services provided by NC Services to affiliated utility companies will be on an "at cost" basis as determined under Rules 90 and 91 of the Act. The Non-Utility Service Agreement contains provisions similar to those of the Service Agreement, except as set forth in detail below in this Item 3.B. The Non-Utility Service Agreement also permits charges for certain services to be at fair market value to the extent authorized by the Commission. Thus, except for the requested exceptions discussed below, services provided by NC Services to non-utility affiliates pursuant to the Non-Utility Service Agreement will also be charged on an "at cost" basis as determined under Rules 90 and 91 of the Act. Section 13(b) of the Act allows the Commission to exempt transactions, by rule, regulation or order, from the provisions of Section 13(b) and the rules promulgated thereunder if such transactions: (1) are with any associate company which does not derive, directly or indirectly, any material part of its income from sources within the United States and which is not a public utility company operating within the United States or (2) involve special or unusual circumstances or are not in the ordinary course of business. The Commission has utilized this exemptive power in the past under certain circumstances and recently with some frequency to generally allow non-utility subsidiaries of registered holding companies to provide services to certain FUCOs, EWGs and QFs at market-based rates. In addition, in the 1995 Report, the Division recommended that "the SEC should also issue exemptive orders under Section 13 allowing more nonutility subsidiaries to charge market rates to nonutility affiliates." The Commission's principal concern under Section 13 of the Act is to protect the utility companies in a holding company system from abusive cross-subsidization transactions with affiliates. Exemptions from Rules 90 and 91 for purely non-utility transactions will not interfere with this mandate as all services to utility subsidiaries will be at cost in accordance with Rules 90 and 91, but will benefit the holding company system by allowing it to offer competitively priced services based on market considerations. Thus, NC Services hereby requests that the Commission grant an exemption from the provisions of Rules 90 and 91, and the at-cost requirement contained therein, for the following transactions: Services provided to associate FUCOs and EWGs that derive no part of their income, directly or indirectly, from the generation, transmission or distribution of electric energy for sale or the distribution of natural gas at retail in the United States; and services provided to an associated EWG, QF or IPP, provided that the purchaser of the electricity sold by such entity is not an associate company of NCE. No services will be provided at market-based rates to a QF, IPP or EWG selling electricity to PSCo, SPS or Cheyenne unless authorized by the Act or the Commission. ____________________ See, e.g., New England Electric System, HCAR No. 22309 (Dec. 9, 1981) (utility permitted to enter into lease with affiliated joint venture with lease payments based on market price); EUA Cogenex Corporation, HCAR No. 263731 (Sept. 14, 1995) (authorizing service companies of two registered holding companies to provide services to affiliated joint venture at market based rates in certain circumstances). See, e.g., Entergy Corporation, HCAR No. 26322 (June 30, 1995); General Public Utilities Corporation, HCAR No. 26307 (June 14, 1995) and The Southern Company, HCAR No. 26212 (Dec. 30, 1994). 1995 Report at 102. No change in the organization of NC Services, the type and character of the companies to be serviced, the methods of allocating costs to associate companies, or in the scope or character of the services to be rendered subject to Section 13 of the Act, or any rule, regulation or order thereunder, shall be made unless and until NC Services shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the Commission shall notify NC Services within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of Section 13 of the Act, or of any rule, regulation or order thereunder, then the proposed change shall not become effective unless and until NC Services shall have filed with the Commission an appropriate declaration regarding such proposed change and the Commission shall have permitted such declaration to become effective. NCE believes that the Service Agreement and the Non-Utility Service Agreement are structured so as to comply with Section 13 of the Act and the Commission's rules and regulations thereunder. Rule 88: Rule 88 provides that "[a] finding by the Commission that a subsidiary company of a registered holding company . . . is so organized and conducted, or to be conducted, as to meet the requirements of Section 13(b) of the Act with respect to reasonable assurance of efficient and economical performance of services or construction or sale of goods for the benefit of associate companies, at cost fairly and equitably allocated among them (or as permitted by Rule 90), will be made only pursuant to a declaration filed with the Commission on Form U-13-1, as specified" in the instructions for that form, by such company or the persons proposing to organize it. Notwithstanding the foregoing language, the Commission has on at least two recent occasions made findings under Section 13(b) based on information set forth in an Application/Declaration on Form U-1, without requiring the formal filing of a Form U-13-1. See CINergy Corp., HCAR No. 26146 (Oct. 21, 1994); UNITIL Corp., HCAR No. 25524 (April 24, 1992). In this Application/Declaration, NCE has submitted substantially the same applicable information as would have been submitted in a Form U-13-1. Accordingly, it is submitted that it is appropriate to find that NC Services is so organized and its business will be so conducted as to meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is unnecessary, or, alternatively, that this Application/Declaration should be deemed to constitute a filing on Form U-13-1 for purposes of Rule 88. 2. UE NCE also requests that the Commission find that UE is so organized and to be conducted as to meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is unnecessary, or, alternatively, that this Application/Declaration should be deemed to constitute a filing on Form U-13-1 for purposes of Rule 88. As previously discussed, following consummation of the Transaction, UE will be an engineering, development, design and rehabilitation services and management, construction, maintenance and operation and other related services subsidiary of NC Hold directly, and indirectly of NCE. It is anticipated that virtually all services provided for PSCo, SPS and Cheyenne by UE will be on an "at cost" basis as determined under Rules 90 and 91 of the Act and as further described in the form of UE Service Agreement between UE and its utility affiliates attached hereto as Exhibit B-4. UE will also provide services to non-utility affiliates and the form of UE Non-Utility Service Agreement between UE and its non-utility affiliates, attached hereto, as Exhibit B-5, contains a cost allocation formula designed to ensure compliance with such rules. The procedural methods relating to UE's provision of services to affiliates are set forth in Exhibit B-7 hereto. UE will provide such services to unaffiliated companies on market-based rates. The UE Non-Utility Services Agreement also permits charges for certain services at fair market value to the extent authorized by the Commission. Thus, except for certain requested exceptions discussed below, services provided by UE to non- utility affiliates pursuant to the UE Non-Utility Services Agreement will be charged on an "at cost" basis as determined under Rules 90 and 91 of the Act. NCE hereby requests that the Commission grant an exemption from the provisions of Rules 90 and 91, and the at-cost requirement contained therein, for services provided by UE to associated QFs, IPPs, EWGs and FUCOs meeting the criteria set forth above in Item 3.B. UE intends to provide the following services to these entities: operations and management services, which include development, permitting, environmental, engineering, design, resource management, construction and construction management, pre-operational start-up, testing and commissioning, long-term operations and maintenance, fuel procurement, management and supervision, technical training, administrative support, and any other managerial or technical services required to operate, design, build and maintain electric power facilities, to developers, owners and operators of domestic and foreign power projects, including power projects that Quixx, its subsidiaries, or other associated companies may develop on its own or in collaboration with third parties, and to other associated companies, except as described below. ____________________ See, e.g., Entergy Corporation, HCAR No. 26322 (June 30, 1995) (authorizing operations and management services including design and long-term operations) and American Electric Power Company, HCAR No. 26267 (April 5, 1995) (authorizing provision of services including engineering and construction services to certain affiliated and non-affiliated entities involved in projects relating to the generation, transmission, and distribution of electric power). If, as a result of a minority investment by Quixx or other NCE associated company, the entities for which UE will provide services do not meet the requirements set forth in Item 3.B., UE should be allowed an exemption for the "at-cost" standard because these situations involve special or unusual circumstances. The Commission has granted such exemption in similar situations based upon a consideration of what is necessary or appropriate for the public interest and in light of the abuses the Act was intended to prevent. In joint venture situations where one of NCE's associated companies owns an interest of less than a majority and one or more of the other partners owns an interest equal to or greater than the interest owned by the NCE associated company, despite the interest such associated companies may have in the ventures, the terms of UE's provisions of services will be made freely and openly by parties dealing at arms' length and subject to the checks and balances of a competitive system. In each case, the partners will have economic and competitive incentive to negotiate their own best possible price. Consequently, situations in which abusive cross- subsidization could occur will not exist. Thus, the concern of the Act with abusive affiliate transactions will not be an issue. ____________________ See, e.g., New England Electric System, HCAR No. 22309 (December 9, 1981) (joint venture). No services will be provided at market-based rates to entities or associated companies which sell electricity to PSCo, SPS or Cheyenne unless authorized by the Act or the Commission. NCE believes that significant advantages can be gained by centralizing most design and engineering personnel in the NCE system in this special purpose subsidiary service company as the NCE system will benefit from the economies of scale that come with centralization in general, while at the same time the pre- existing reputation and good-will associated with UE will be maintained, allowing it to continue to compete in the marketplace for third party contracts on the same basis as prior to the Transaction. The Commission has recognized a number of special purpose subsidiary service companies in the past. ____________________ See, e.g., American Electric Power Company, HCAR No. 22468 (April 21, 1982) (consulting subsidiary); Entergy Corp., HCAR No. 25718 (Dec. 28, 1992) (subsidiary engaged in energy management services and development of efficient lighting technology); Northeast Utilities, HCAR No. 25565 (June 29, 1992) (subsidiary servicing nuclear power project). 3. QPS and UE Carolina QPS is a wholly owned subsidiary of Quixx, organized to operate and maintain generation facilities. QPS will operate and maintain generation facilities in various locations and is currently under contract to operate and manage two cogeneration facilities in which Quixx has an interest of less than a majority: the BCH waste-to-energy cogeneration facility and the Carolina Energy solid waste fueled cogeneration facility. In both instances, and in future similar situations, QPS will provide operations and management services to these "technical" affiliates (i.e., entities which have more than 5% of their voting securities owned by a NCE subsidiary but which have one or more other non-affiliated, independent security holders holding a percentage of the voting power equal to or greater than that held by the applicable NCE subsidiary) which will include development, engineering design, construction and construction management, pre-operational start-up, testing and commissioning, long-term operations and maintenance, fuel procurement, management and supervision, technical training, administrative support, and any other managerial or technical services required to operate and maintain electric power facilities. Also as previously discussed, UE Carolina is a special purpose subsidiary that provides engineering, design and construction related services to the North Carolina projects in which Quixx has invested. NCE hereby requests that the Commission grant an exemption from the provisions of Rules 90 and 91, and the at-cost requirement contained therein, for the provision of such services to these "technical" affiliates. The Commission's principal concern under Section 13 of the Act is to protect the utility companies in a holding company system from abusive cross- subsidization transactions with affiliates. The Commission has granted exceptions to allow for fair market pricing of such services under certain circumstances and NCE requests an exemption from the provisions of Rules 90 and 91 as described above in Item 3.B. With respect to the existing contracts and in future instances, QPS will be providing services to developers, owners and operators of various power projects, including power projects that Quixx, its subsidiaries or other associated companies may develop on their own or in collaboration with third parties, and to other associated companies. UE Carolina will provide engineering, design and construction related services for the North Carolina projects in which Quixx has invested. In similar circumstances, the Commission has authorized exemptions from the at-cost standard of Section 13. ____________________ See, e.g., Entergy Corporation, HCAR No. 26322 (June 30, 1995) (authorizing fair market prices for the provision of operations and management services, including long-term operations and maintenance, to certain power projects, including those developed by associate companies). Even if the entities for which QPS or UE Carolina will provide services do not meet these requirements, QPS and UE Carolina should be allowed an exemption for the "at-cost" standard because these situations involve special or unusual circumstances. The Commission has granted such exemptions in joint venture situations based upon a consideration of what is necessary or appropriate for the public interest and in light of the abuses the Act was intended to prevent. In the existing contracts and in future ventures where one of NCE's associated companies owns an interest of less than a majority and one or more of the other partners owns an interest equal to or greater than the interest owned by the NCE associated company, despite the interests that Quixx, its subsidiaries, or other associated companies may have in the ventures, the terms of QPS's or UE Carolina's provisions of services were and will be made freely and openly by parties dealing at arms' length and subject to the checks and balances of a competitive system. In each case, the partners had and will have economic and competitive incentive to negotiate their own best possible price. Consequently, a situation in which abusive cross-subsidization could occur does not exist. No services will be provided at market-based rates to entities or associated companies which sell electricity to PSCo, SPS or Cheyenne unless authorized by the Act or the Commission. Thus, the concern of the Act with abusive affiliate transactions is not an issue in this instance. ____________________ See, e.g., New England Electric System, HCAR No. 22309 (December 9, 1981). 4. Other Services As previously mentioned, e prime, Utility Services and PRC may provide intra-system services to associated QFs, IPPs, EWG, and FUCOS and e prime may provide administrative and consulting services to Young Gas Storage Co., Ltd., the partnership that owns the Young Gas Storage facility and in which Young Gas holds a 47.5% interest. NCE hereby requests that the Commission grant an exemption from the provisions of Rules 90 and 91, and the at-cost requirement contained therein, for services provided by e prime, Utility Services and PRC to associated QFs, IPPs, EWGs and FUCOs meeting the criteria set forth above in Item 3.B. No services will be provided at market-based rates to entities or associated companies which sell electricity to PSCo, SPS or Cheyenne unless authorized by the Act or the Commission. In addition, NCE requests an exemption from the provisions of Rules 90 and 91 for e prime to continue to provide services to Young Gas Storage Co., Ltd. at market based rates. Similar to the situation with QPS, the NCE system will only hold a 47.5% interest in Young Gas Storage Co., Ltd. and must negotiate on an arms length basis with the majority owner (the Coastal Corporation) with regard to the provision of such services. Thus, the concern of the Act with abusive affiliate transactions is not an issue in this instance. NCE also may need an exemption from the provisions of Rules 90 and 91 with regard to certain services provided by PSCo to e prime. Although e prime's business is still in early development stages, NCE believes that in situations where e prime is marketing products and services to non-affiliates which products and services contain, in part, products or services from PSCo, in order to competitively market such products or services, some deviation from a strict interpretation of the at-cost requirements may be needed. For example, e prime and PSCo may enter into an arrangement whereby e prime could market certain billing or accounting services to non-affiliates in connection with which it would use PSCo's computer system (the "CIS System"). A proposed compensation arrangement under consideration is that e prime would pay PSCo for the use of the system based on market rates or would pay PSCo's marginal cost for e prime's usage with some profit participation or some similar formula. To the extent any such arrangement is in place, no related deviation from strict at-cost charges will be undertaken unless the entity providing services first gives written notice to the Commission of the basis for calculating such charge. As with changes in NC Services' allocation formula, such charge will not be effective if within 60 days, the Commission notifies the party providing notice of any questions until an application for such charge is declared effective. The parties believe that any such deviation from strict at-cost allocations is consistent with Commission precedent. ____________________ See, Entergy Corporation, Hear No. 26322 (June 30, 1995) (allowing non-utility subsidiary to pay incremental costs plus profit sharing in connection with marketing and use of products and services from system operating utilities). PSCo, SPS and Cheyenne may also provide to one another services incidental to their utility businesses, such as power plant maintenance overhauls, power plant and storm outage emergency repairs and services of personnel with specialized expertise related to the operation of the utility (i.e., services by an industrial lighting specialist or waste disposal specialist). These services will be provided at cost in accordance with the standards of the Act and the Commission's rules and regulations thereunder. Moreover, PSCo's CIS System will remain an asset of PSCo following the transaction. While all required system personnel involved in the operation of the CIS System will be employees of the service company or external contractors and all charges for service company employees' labor will be subject to the terms of the Service Agreement and the Non-Utility Service Agreement, PSCo will charge other system companies for the use of the CIS System at cost. Item 4. Regulatory Approvals Set forth below is a summary of the regulatory approvals that NCE has obtained or expects to obtain in connection with the Transaction. A. Antitrust The HSR Act and the rules and regulations thereunder provide that certain transactions (including the Transaction) may not be consummated until certain information has been submitted to the DOJ and FTC and specified HSR Act waiting period requirements have been satisfied. PSCo and SPS will submit Notification and Report Forms and all required information to the DOJ and FTC and the Transaction will not be consummated unless the applicable waiting period has expired or has been terminated. The expiration of the HSR Act waiting period does not preclude the Antitrust Division or the FTC from challenging the Transaction on antitrust grounds; however, Applicant believes that the Transaction will not violate Federal antitrust laws. If the Transaction is not consummated within twelve months after the expiration or earlier termination of the initial HSR Act waiting period, PSCo and SPS would be required to submit new information to the Antitrust Division and the FTC, and a new HSR Act waiting period would have to expire or be earlier terminated before the Transaction could be consummated. B. Federal Power Act Section 203 of the Federal Power Act of 1935, as amended (the "Federal Power Act"), provides that no public utility shall sell or otherwise dispose of its jurisdictional facilities or directly or indirectly merge or consolidate such facilities with those of any other person or acquire any security of any other public utility, without first having obtained authorization from the FERC. PSCo and SPS submitted a joint application for approval of the Transaction to the FERC on November 9, 1995. C. State Public Utility Regulation Colorado: PSCo is subject to the CPUC. Pursuant to Rule 55 of the CPUC's Rules of Practice and Procedure, PSCo filed an application with the CPUC requesting approval of the Merger Agreement on November 9, 1995. The application is required to demonstrate, among other things, that the approval sought is not contrary to the public interest. In addition, the CPUC will consider the rate making treatment associated with the Transaction. Failure to obtain favorable treatment could have a material adverse effect. NCE and PSCo have requested that the CPUC also indicate that it does not object to the retention of PSCO's and Cheyenne's Gas System in the NCE structure. Wyoming: Cheyenne is subject to the jurisdiction of the WPSC. Pursuant to Section 37-1-104 of the Wyoming Revised Statutes, any reorganization of a public utility requires prior approval of the WPSC. The statute defines reorganization as a transaction which results in a change in the ownership of a majority of the voting capital stock of a public utility and precludes the WPSC from approving any reorganization that adversely affects the utility's ability to serve the public. Pursuant to Section 209 of the WPSC's Rules of Practice and Procedure, Cheyenne filed an application for approval of the applicable portions of the Merger Agreement on November 9, 1995. In addition, the WPSC will consider the rate making treatment associated with the Transaction. Failure to obtain favorable treatment could have a material adverse effect. NCE and PSCo have requested that the WPSC also indicate that it does not object to the retention of PSCO's and Cheyenne's Gas System in the NCE structure. New Mexico: SPS is subject to the jurisdiction of the NMPUC. Pursuant to the New Mexico Public Utility Act and the NMPUC's Rules of Practice and Procedure, SPS filed an application with the NMPUC requesting approval of the Merger Agreement on November 9, 1995. The NMPUC will approve the consummation of the Transaction if it finds that they are not unlawful or inconsistent with the public interest and will not interfere with the provision by SPS of reasonable and proper utility service at fair, just and reasonable rates. In addition, the NMPUC will consider the rate making treatment associated with the Transaction. Failure to obtain favorable treatment could have a material adverse effect. Texas: SPS must report the Transaction to the PUCT under 1.251 of the Public Utility Regulatory Act of 1995 and obtain a finding that the Transaction is in the public interest. SPS submitted such report to the PUCT on November 9, 1995. While a finding that the Transaction is not in the public interest does not prohibit the consummation of the SPS Merger, if the PUCT makes such a finding it is required to take the effect of the Transaction into consideration in future ratemaking proceedings and disallow the effect of the Transaction if it will unreasonably affect rates or services. Rate treatment resulting from a finding that the Transaction was not in the public interest could materially and adversely affect SPS. Kansas: SPS is subject to the jurisdiction of the KCC, pursuant to the Kansas Public Utility Act. On November 9, 1995, SPS filed an application with the KCC requesting authority for the issuance of common stock by SPS to NCE pursuant to the Merger Agreement. The application is required to describe the purposes for which the common stock is to be issued and state that such issuance is necessary and required and will be sold for such purposes. The KCC issued its order granting the requested authority to SPS on November 28, 1995. NCE may also be subject to the KCC pursuant to the Kansas Holding Companies Act ("KHCA"). The KHCA states that no foreign holding company shall acquire control of a Kansas public utility without first entering into an agreement to keep the KCC fully informed as to transactions between the utility and the holding company and to submit to the jurisdiction of the KCC insofar as such transactions affect the rates or charges to be made by the utility. NCE has entered into such an agreement with the KCC. Oklahoma: SPS is subject to the jurisdiction of the OCC. However, no approval or authorization of any Oklahoma public regulatory body, including the OCC, of the Merger Agreement is required. Item 5. Procedure The Commission is respectfully requested to issue and publish not later than March 15, 1996 the requisite notice under Rule 23 with respect to the filing of this Application/ Declaration, such notice to specify a date not later than April 8, 1996 by which comments may be entered and a date not later than April 12, 1996 as the date after which an order of the Commission granting and permitting this Application/Declaration to become effective may be entered by the Commission. It is submitted that a recommended decision by a hearing or other responsible officer of the Commission is not needed for approval of the proposed Transaction. The Division of Investment Management may assist in the preparation of the Commission's decision. There should be no waiting period between the issuance of the Commission's order and the date on which it is to become effective. Item 6. Exhibits and Financial Statements A. Exhibits A-1 Restated Certificate of Incorporation of NCE (filed as Annex VIII to the Registration Statement on Form S-4 on December 13, 1995 (Registration No. 33-64951), and incorporated herein by reference). A-2 Restated Bylaws of NCE (filed as Annex IX to the Registration Statement on Form S-4 on December 13, 1995 (Registration No. 33-64951), and incorporated herein by reference). A-3 Restated Articles of Incorporation of PSCo (filed as Exhibit 3(a) to the PSCo Annual Report on Form 10-K for the year ended December 31, 1990 (File No 1-3280) and incorporated herein by reference). A-4 Restated Articles of Incorporation of SPS (filed as Exhibit 3(i) to the SPS Form 8-K dated February 26, 1996 (File No. 1-3789) and incorporated herein by reference). B-1 Merger Agreement, as amended (filed as Annex I to the Registration Statement on Form S-4 on December 13, 1995 (Registration No. 33-64951), and incorporated herein by reference). B-2 Form of Service Agreement between NC Services, Inc. and utility affiliates (to be filed by amendment). B-3 Form of Service Agreement between NC Services, Inc. and non-utility affiliates (to be filed by amendment). B-4 Form of Service Agreement between UE and its utility affiliates (to be filed by amendment). B-5 Form of Service Agreement between UE and its non- utility affiliates (to be filed by amendment). B-6 Summary of Procedures for NC Services (to be filed by amendment). B-7 Summary of Procedures for UE (to be filed by amendment). C-1 Registration Statement of NCE on Form S-4 (filed on December 13, 1995 (Registration No 33-64951) and incorporated herein by reference). C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1). D-1.1 Joint Application of PSCo and SPS before the FERC (previously filed). D-1.2.1 Testimony of Dr. Robert Spann to the FERC. D-1.2.2 Testimony of Matt P. Harris to the FERC (previously filed). D-1.3 Order of the FERC dated __________ (to be filed by amendment). D-2.1 Application of PSCo before the CPUC (previously filed). D-2.2 CPUC Order dated __________ (to be filed by amendment). D-3.1 Application of PSCo to the WPSC (previously filed). D-3.2 WPSC Order dated __________ (to be filed by amendment). D-4.1 Application of SPS to the NMPUC (previously filed). D-4.2 NMPUC Order dated __________ (to be filed by amendment). D-5.1 Notification of SPS to the PUCT (previously filed). D-5.2 PUCT Finding dated __________ (to be filed by amendment). D-6.1 Application of SPS to the KCC (previously filed). D-6.2 KCC Order dated November 28, 1995 (previously filed). E-1 Map of service areas of SPS, PSCo and Cheyenne (previously filed). E-2 Map of PSCo and Cheyenne transmission system (previously filed). E-3 Map of SPS transmission system (previously filed). E-4 PSCo corporate chart (previously filed). E-5 SPS corporate chart (previously filed). E-6 NCE corporate chart (previously filed). F-1 Opinion of counsel (to be filed by amendment). F-2 Past-tense opinion of counsel (to be filed by amendment). G-1 Opinion of Barr Devlin & Co Incorporated (filed as Annex II to the Registration Statement on Form S-4 on December 13, 1995 (Registration No. 33-64951), and incorporated herein by reference). G-2 Opinion of Dillon, Read & Co. Inc. (filed as Annex II to the Registration Statement on Form S-4 on December 13, 1995 (Registration No. 33-64951), and incorporated herein by reference). H-1 Annual Report of PSCo on Form 10-K for the year ended December 31, 1995 (filed on February 27, 1996 (File No. 1-3280) and incorporated herein by reference). H-2 Annual Report of SPS on Form 10-K for the year ended August 31, 1995 (filed on November 21, 1995 (File No 1-3789) and incorporated herein by reference). H-3 Statement of PSCo on Form U-3A-2 for the year ended December 31, 1995 (filed on February 26, 1996 and incorporated herein by reference). H-4 Withdrawn. H-5 Withdrawn. H-6 Withdrawn. H-7 Withdrawn. H-8 SPS Quarterly Report on Form 10-Q for the quarter ended November 30, 1995 (filed on January 16, 1996) (File No. 1-3789) and incorporated herein by reference). H-9 SPS Quarterly Report on Form 10-Q for the quarter ended February 29, 1996 (filed on April 15, 1996) (File No. 1-3789) and incorporated herein by reference). I-1 Proposed Form of Notice (previously filed). J-1 Analysis of the Economic Impact of a Divestiture of The Gas Operations of Public Service Company of Colorado and its Subsidiaries (previously filed). J-2 Revised Legal Memorandum of LeBoeuf, Lamb, Greene & MacRae, L.L.P. J-3 Table of Estimated Losses of Economies in Prior Decisions on Divestiture and Retention of Gas Operations. J-4 Memorandum on NC Hold debt service (to be filed by amendment). J-5 Form of NC Hold Note (previously filed). B. Financial Statements FS-1 NCE Unaudited Pro Forma Condensed Consolidated Balance Sheets as of December 31, 1995. FS-2 NCE Unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended December 31, 1995. FS-3 SPS Consolidated Balance Sheet as of August 31, 1995 (see Annual Report of SPS on Form 10-K for the year ended August 31, 1995 (Exhibit H-2 hereto), at p. 23). FS-4 SPS Consolidated Statements of Income for its last three fiscal years (see Annual Report of SPS on Form 10-K for the year ended August 31, 1995 (Exhibit H-2 hereto), at p. 26). FS-7 PSCo Consolidated Balance Sheet as of December 31, 1995 (see Annual Report of PSCo on Form 10-K for the year ended December 31, 1995 (Exhibit H-1 hereto), at p. 34). FS-8 PSCo Consolidated Statement of Income for its last three fiscal years (see Annual Report of PSCo on Form 10-K for the year ended December 31, 1995 (Exhibit H-1 hereto), at p. 36). Item 7. Information as to Environmental Effects The Transaction neither involves a "major federal action" nor "significantly affects the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. The only federal actions related to the Transaction pertain to the Commission's declaration of the effectiveness of NCE's Registration Statement on Form S-4, the expiration of the applicable waiting period under the HSR Act, FERC approval of the application filed by NCE with the FERC under the Federal Power Act, and Commission approval of this Application/Declaration. Consummation of the Transaction will not result in changes in the operations of PSCo, Cheyenne or SPS that would have any impact on the environment. No federal agency is preparing an environmental impact statement with respect to this matter. SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Application/Declaration of New Century Energies, Inc. to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 13, 1996 New Century Energies, Inc. By: Doyle R. Bunch II Chairman and Secretary Richard C. Kelly President and Treasurer EX-99 2 EX99.1 - SPANN TESTIMONY UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Public Service Company of ) Colorado and Southwestern ) Docket No. EC96-___ Public Service Company ) Direct Testimony Of ROBERT M. SPANN On Behalf Of: Applicants November 9, 1995 _________________________________________________________________ GLOSSARY OF ACRONYMS AND DEFINED TERMS _________________________________________________________________ ACRONYM DEFINED TERMS _________________________________________________________________ APS Arizona Public Service Company ARPA Arkansas River Power Authority BEPC Basin Electric Power Cooperative BPA Bonneville Power Administration CPL Central Power and Light CSU Colorado Springs Utilities CSW Central and South West Corporation ENTR Entergy Corporation EPE El Paso Electric Company ERCOT Electric Reliability Council of Texas Guidelines US Department of Justice and Federal Trade Commission Horizontal Merger Guidelines HHI Herfindahl-Hirschman Index IPP Independent Power Producer MAPP Mid-Continent Area Power Pool MEAN Municipal Energy Agency of Nebraska NERC North American Electric Reliability Council NWPP Northwest Power Pool PAC PacifiCorp PEGT Plains Electric Generation and Transmission Cooperative PG&E Pacific Gas and Electric Company PNM Public Service Company of New Mexico PRPA Platte River Power Authority PSCo Public Service Company of Colorado PSO Public Service of Oklahoma QF Qualifying Facility SEC Securities and Exchange Commission SCE Southern California Edison SDGE San Diego Gas and Electric Company SPP Southwest Power Pool SPS Southwestern Public Service Company SRP Salt River Project SWEPCO Southwestern Electric Power Company TEP Tucson Electric Power Company TNMP Texas-New Mexico Power Company TSGT Tri-State Generation and Transmission Association WAPA Western Area Power Administration WPE WestPlains Energy WSCC Western Systems Coordinating Council WSPP Western Systems Power Pool WTU West Texas Utilities UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Public Service Company of ) Colorado and Southwestern ) Docket No. EC96-___ Public Service Company ) PREPARED DIRECT TESTIMONY OF ROBERT M. SPANN I. INTRODUCTION AND QUALIFICATIONS Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Robert M. Spann. My business address is Charles River Associates, 1001 Pennsylvania Avenue, NW, Washington, DC. Q. BY WHOM ARE YOU EMPLOYED? A. I am a Vice President of Charles River Associates, an economics consulting firm with offices in Washington, Boston, and Palo Alto. Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND PRIOR WORK EXPERIENCE. A. I received both my Bachelor's and Master's degrees in Economics from North Carolina State University in 1970. I received my Ph.D. in Economics, with a co-major in Statistics, from the same University in 1973. While doing graduate work at North Carolina State, I taught courses in the principles of economics. I was also the recipient of a National Science Foundation Fellowship and a Resources for the Future Dissertation Fellowship. I have served on the faculties of Virginia Polytechnic Institute and State University, Montana State University, the University of Chicago, and George Washington University. I have taught courses in econometrics, economic theory, applied microeconomics, and regulatory economics. During the period 1975-1989, I was a Principal of ICF Incorporated, a Washington, DC, consulting firm. I have been actively involved as a consultant in the areas of energy, utility, and antitrust economics since 1972. During the last 22 years I have performed consulting assignments for state regulatory bodies, federal government agencies, regulated utilities, energy companies, and utility consumers. I have testified before state and federal regulatory bodies and courts on numerous occasions. I have also assisted in the competitive analysis of mergers in a wide range of industries including banking, glass containers, natural gas, utilities, and frozen foods for presentation to the Department of Justice and Federal Trade Commission. I am a member of both the American Economic Association and the American Statistical Association, and an associate member of the American Bar Association Section on Antitrust. I have published numerous articles on regulatory economics in professional journals. Schedule RMS-1 is my resume. II. SUMMARY OF TESTIMONY Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? A. I have been asked by Southwestern Public Service Company (SPS) and Public Service Company of Colorado (PSCo) to conduct an economic analysis of the competitive effects of their proposed merger. Q. PLEASE SUMMARIZE YOUR CONCLUSIONS. A. I have analyzed the impact of this merger on both transmission and bulk power markets. This merger does not create or enhance market power in any relevant market. The merging companies' individual and combined shares of the relevant geographic market are small. The merging companies are small participants in a broad geographic market in which buyers and sellers have numerous options. The two companies do not compete in any relevant transmission market, and the merger does not affect any transmission market. Q. HAVE YOU COMPUTED MARKET SHARES FOR INDIVIDUAL TIER 1 UTILITIES AS THE FEDERAL ENERGY REGULATORY COMMISSION (FERC) HAS DONE IN PRIOR MERGER AND MARKET POWER CASES? A. Yes, I have. The two merging companies are not now directly interconnected. Their service areas are separated by 300 miles. There is only one entity -- Public Service Company of New Mexico (PNM) -- that is directly interconnected to both SPS and PSCo. PNM is the only entity that is in a position to substitute purchases of power from SPS for purchases of power from PSCo without incurring any wheeling charges. PNM owns substantial generating resources, is directly interconnected with numerous other utilities, and has some excess capacity in the near term. PNM buys non-firm wholesale power from SPS, but is a net seller of wholesale power in the aggregate and is a net seller of power to PSCo. West Plains Energy also is interconnected with both of the merging companies. It operates two electrically separated service areas. West Plains Energy is interconnected with PSCo in Colorado for its service area that is part of the Western Interconnection. West Plains Energy is interconnected with SPS at Liberal, Kansas, for its service area that is part of the Eastern Interconnection. The Kansas and Colorado service areas of West Plains Energy are not themselves directly interconnected. Therefore, deliveries of power to West Plains Energy's Kansas service area are not substitutes for deliveries of power to West Plains Energy's Colorado service area. In prior merger and market power cases, FERC has determined that, if a utility has less than a 20 percent market share for bulk power markets defined as individual Tier 1 utilities, that utility does not have market power. Schedules RMS-28 and RMS-29 show the merged company's market share (post-merger) for each Tier l utility for PSCo and SPS. As those summary tables indicate, the merged company's market share based on uncommitted capacity is less than 20 percent for all Tier 1 utilities. Based on total resources, the merged company does not have greater than a 20 percent market share for any entity that is interconnected with both merging companies. The merged company's market share based on total resources is just 21 percent for transmission-dependent entities located within SPS's service area. This result is the same with or without the merger, and there is no change in market shares for these entities as a result of the merger. Moreover, as I describe more fully below, the Commission recently found that SPS lacks market power in generation. Q. HAVE BOTH MERGING PARTIES FILED OPEN ACCESS TRANSMISSION TARIFFS? A. Yes, they have. Both entities have filed open access tariffs prior to this merger application. These tariffs have been accepted for filing by FERC and are presently in effect. These open access tariffs increase the number of alternatives available to entities interconnected with one or both of the merging entities. Q. DO THE MERGING PARTIES COMPETE WITH ONE ANOTHER IN ANY RELEVANT TRANSMISSION MARKET? A. No. SPS is located in the Eastern Interconnection. PSCo is located in the Western Interconnection. The service areas of the two utilities are not contiguous. There are few, if any, transactions for which transmission services from SPS are realistic substitutes for transmission services from PSCo, or vice versa. Q. DO EITHER OF THE MERGING ENTITIES FACE DIRECT COMPETITION FROM OTHER ENTITIES FOR TRANSMISSION SERVICE WITHIN ITS SERVICE AREA? A. Yes. Unlike conditions in the eastern part of the United States, utilities in the west do not always own or control all of the transmission lines in the geographic area that includes their service area. PSCo competes with Tri-State Generation and Transmission Co-operative (Tri-State), Platte River Power Authority (PRPA), and the Western Area Power Administration (WAPA), in addition to other entities. Tri-State, PRPA, and WAPA all own high-voltage transmission capability within the state of Colorado. With limited exceptions, any potential purchaser of transmission services from PSCo could purchase similar services from Tri-State, PRPA, or WAPA. Q. HAS FERC MADE PRIOR DETERMINATIONS REGARDING MARKET POWER WITH RESPECT TO EITHER OF THE MERGING PARTIES? A. Yes, it has. The FERC addressed the issue of generation dominance with regard to SPS in its September l, 1995, Order regarding SPS's request for market-based rates (Docket ER95-1129- 000). In that Order the FERC stated: "We agree with Southwestern that its market analysis adequately demonstrates that it lacks generation market power." In 1992, PSCo acquired some of the assets of Colorado Ute. In its Order in that proceeding [Docket EC92-8), FERC stated: Even if the acquisition will have the effect of increasing concentration of installed and excess capacity, Colorado's offer of transmission access will enable more suppliers to engage in short run trades. Thus, we find that the proposed acquisition will not have a detrimental effect on concentration in the short run market.... Colorado's transmission tariff will allow potential customers to reach present and new capacity resources in the relevant geographic markets. Accordingly, the proposed transmission tariff will serve to preclude Colorado from using the facilities it acquires from Ute to block access to alternative buyers and sellers. Therefore, the Commission concludes that the acquisition will not result in any increased ability of Colorado to exercise market power in the long run market. My analysis supports and is consistent with these prior findings of the Commission. Q. IT HAS BEEN SUGGESTED GENERALLY THAT TRANSMISSION CONSTRAINTS COULD HYPOTHETICALLY LEAD TO INCREASED MARKET POWER AND ANTICOMPETITIVE EFFECTS IN A MERGER CONTEXT EVEN IF MERGING COMPANIES HAVE COMPARABLE SERVICE TARIFFS. HOW WOULD THAT ASSERTION AFFECT YOUR ANALYSIS HERE? A. It would not. To analyze this issue, I have considered the case in which no open access transmission is available. Under this hypothetical, utilities could only purchase power from entities with which they are directly interconnected. Entities that are interconnected with one, but not both, of the merging parties are not affected by the merger. Their options are the same both before and after the merger. The merger changes nothing and hence has no adverse effects on these utilities. Under the hypothetical, entities that are interconnected with both of the merging parties are potentially affected by the merger because the number of options they face is reduced. One then needs to examine the market share of the merged entity with respect to entities interconnected with both of the merging parties. The only such entity in this case is PNM. Even if one assumes no open access transmission is available, the merged companies' combined market share with respect to PNM is less than 20 percent for both total resources and uncommitted resources. Moreover, as I have discussed previously, PNM owns substantial generating resources, is directly interconnected with numerous other utilities, and has some excess capacity in the near term. PNM buys non-firm wholesale power from SPS, but is a net seller of wholesale power in the aggregate and is a net seller of power to PSCo. Therefore, transmission constraints, hypothetical or otherwise, have no anticompetitive impact as a result of this merger. Q. HOW IS THE REMAINDER OF YOUR TESTIMONY ORGANIZED? A. The next section of my testimony briefly addresses the framework for analyzing the competitive implications of proposed mergers. Then I present my analysis of this particular merger. III. ANALYTICAL FRAMEWORK FOR EVALUATING THE COMPETITIVE EFFECTS OF MERGERS Q. WHAT WAS THE OBJECTIVE OF YOUR ECONOMIC ANALYSIS OF THE PROPOSED MERGER'S COMPETITIVE EFFECTS? A. Economic analysis of a merger's competitive effects properly focuses on whether a merger will create or significantly enhance market power. In this context, the term "market power" means the ability of a firm, acting alone or in concert with other firms, to raise prices in a relevant market or otherwise harm competition. Market power questions are addressed by analyzing the effects of the merger upon the structure of and competitive conditions in the affected or "relevant" markets. In each market, the focus is on how the proposed merger will change the alternatives available to buyers or sellers, and what, if any, adverse competitive consequences are likely to result from those changes. Q. PLEASE BRIEFLY DESCRIBE THE PROCEDURE YOU EMPLOYED IN ANALYZING THE EFFECTS OF THIS MERGER ON COMPETITION. A. I followed generally accepted economic principles and the procedures established by FERC in prior merger and marketbased rate orders. The first step is to identify the relevant geographic markets where the merging entities sell wholesale power. "Relevant geographic markets" are defined by the locations of all producers that place significant constraints on the prices that the merged entity can charge for wholesale power. FERC has also defined markets consisting of individual utilities interconnected with the merged company. The second step is to determine whether the merger would permit the merged companies to obtain or increase market power in wholesale sales of power in the relevant geographic market. This second step is separated into analyses of the near-term impacts of the merger and the long-run impacts of the transaction. The near-term impacts of the merger are analyzed by reviewing market shares, indices of concentration and changes in concentration in the relevant geographic market, transmission access conditions with and without the merger, and other factors bearing on the competitive impact of the merger. The analysis of the long-run impacts of the merger involves determining if the merged company has long-run transmission market power and assessing whether or not barriers to entry exist. FERC has stated, in its May 13, 1994, Order in the Kansas City Power and Light case (Docket ER94-1045-00), that there is no need for FERC to focus on longer-term impacts that relate to sales from new capacity, provided that the seller does not have transmission market power and does not own or control other barriers to entry. Stated another way, if the analysis shows that the merged entity does not have transmission market power or the ability to erect barriers to entry to new generation, it is not necessary to analyze long-run market power. As such, I have analyzed transmission market power and barriers to entry. Next I examined buyer market power issues. If two large buyers of wholesale electricity are merging, the potential exists for the merged entity to exert monopsony power and reduce the prices it pays for wholesale power to less than competitive market levels. Finally, I analyzed whether the merger would have any effect on retail competition. Q. ARE YOU FAMILIAR WITH THE DEPARTMENT OF JUSTICE AND FEDERAL TRADE COMMISSION HORIZONTAL MERGER GUIDELINES, ISSUED APRIL 2, 1992? A. Yes, I am. The analysis I have conducted is consistent with the Guidelines. The Guidelines' merger analysis begins by defining relevant products and relevant geographic markets. A "relevant product" should be defined so as to include all products that are sufficiently good substitutes for one another, such that competition between suppliers of these products places a significant constraint on the prices that can be charged by each supplier of the product. The Guidelines' concept of a relevant geographic market is the same as that discussed in my previous answer. The Guidelines use the Herfindahl-Hirschman Index (HHI) to measure market concentration and the change in market concentration resulting from a merger. The HHI is simply the sum of the squares of the market shares of the sellers in a defined market. The mathematical construction of the index is such that the most concentrated market, i.e., a monopoly (a firm with a market share of 100 percent), has an HHI of 10,000 (100x100=10,000)). As the number of firms increases and their market shares decline, the HHI decreases. For example, 100 firms, each with a 1 percent share, would result in an HHI of 100 (1 x 1=1; the sum of 100 unit values is 100). Q. DO THE GUIDELINES INDICATE HOW THESE MARKET CONCENTRATION MEASURES SHOULD BE UTILIZED? A. Yes. The Guidelines present certain market-share and HHI ranges to indicate when the DOJ and FTC are likely not to challenge mergers. The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power. When the Guidelines state that the regulatory agencies are unlikely to challenge a merger, this implies a belief that the transaction will not create or enhance market power. The analysis of market shares addresses the near-term effects of the merger. Assessment of the longer-term effects of the merger depends on ease of entry in the long run and the ability (if any) of the merged firm to raise barriers to entry. The Guidelines address three cases: (1) If the post-merger HHI is less than 1,000 points, the market is considered unconcentrated. No consideration is given to the change in the HHI. In this case, the DOJ and the FTC are not likely to challenge the merger. (2) Where the post-merger HHI ranges from 1,000 to 1,800 points, the market is considered "moderately concentrated." The Guidelines state that if a merger in this range changes the HHI by less than 100 points, the agencies are not likely to challenge the transaction. (3) Where the post-merger HHI exceeds 1,800, the market is considered "highly concentrated." The Guidelines state that if a merger in this range changes the HHI by less than 50 points, it is not likely to be challenged. Q. IF THE CHANGE IN THE HHI EXCEEDS THE LEVELS DISCUSSED IN YOUR PREVIOUS ANSWER, DOES THIS MEAN THAT DOJ/FTC ARE LIKELY TO CHALLENGE THE MERGER UNDER THE GUIDELINES? A. No. The numerical criteria regarding concentration listed above are used to determine the conditions under which the DOJ/FTC will decide not to challenge a merger. The decision to challenge a merger as one that creates or enhances market power is based on both the numerical criteria listed above and additional analyses of other significant market factors. For example, if a proposed merger results in a post-merger HHI exceeding 1,800 and the change in the HHI exceeds 50 points, the antitrust agencies may still decide not to challenge the merger based on an analysis of other factors. These other factors include entry conditions, efficiencies that result from the merger, the potential for lessening competition through coordinated interactions, and the financial strength of the merging firms. Similarly, FERC has stated in prior merger decisions that it "may weigh and balance HHI calculations with a number of factors to determine whether a proposed merger is consistent with the public interest" [Entergy, 64 FERC 61,001 (1993) at p. 61,011] Q. HAS FERC USED MARKET SHARE CRITERIA IN ADDITION TO, OR OTHER THAN, THE HHI IN PRIOR PROCEEDINGS? A. In market-based rate proceedings, FERC has stated that a company with less than a 20 percent market share for a market defined as an individual Tier 1 utility cannot exercise market power [Louisville Gas and Electric Company, 62 FERC, 61,016 at p. 61,146 (1993)]. The Commission also has said that this is not a "bright line" test, and it has approved mergers and market-based rates where shares in individual Tier 1 markets exceed 20 percent if accompanied by the filing of an open access tariff. Q. ARE THERE ANY FACTORS UNIQUE TO THE ELECTRIC UTILITY INDUSTRY THAT ARE IMPORTANT IN EVALUATING THE COMPETITIVE EFFECTS OF MERGERS IN THE NEAR TERM? A. Yes, there are at least three such factors. First, most of the buyers of wholesale power own generation capacity. Second, many buyers of wholesale power are also sellers of wholesale power. Third, there is a wide variety of power supply arrangements. Q. WHY IS THE FACT THAT MOST BUYERS OF WHOLESALE POWER OWN GENERATING CAPACITY IMPORTANT? A. The capacity the buyers own can be a substitute for purchases of power from the merging firms. If two utilities merged and attempted to raise prices, any buyer that was not already operating all of its generating units at maximum output could increase the output of its generating plants and reduce its purchases from the merged entity at times in which its hourly load was less than its total generating capacity. This would tend to temper the concern over a merger with changes in the HHI exceeding the levels described above. Q. WHY ARE MANY UTILITIES BOTH BUYERS AND SELLERS OF WHOLESALE POWER? A. Because each utility owns a number of generating units with different marginal operating costs, and because electricity -- with limited exceptions -- is not storable, each utility's marginal costs at a particular point in time depend on the instantaneous demands of its customers and the availability of its generating units. It is quite possible that at one point in time Utility A has lower marginal operating costs than Utility B, but at a later point in time, Utility B has lower marginal operating costs than Utility A. In this case Utility A will be a buyer of power from Utility B during some time periods and a seller of power to Utility B during other time periods. For example, in 1994 PSCo was a net buyer of firm power, but a net seller of non-firm power. Some of the same entities that purchased power from PSCo also sold significant amounts of power to PSCo in 1994. Q. WHY IS THE FACT THAT MANY UTILITIES ARE BOTH BUYERS AND SELLERS OF WHOLESALE POWER IMPORTANT? A. The fact that many of the firms in the relevant market are both buyers and sellers of the relevant product can reduce the degree to which mergers that increase concentration raise competitive concerns, all other factors held constant. One reason that the Guidelines are concerned with mergers that significantly increase concentration is the possibility that, at higher levels of concentration, firms might be able to exercise market power by coordinating their pricing actions or engaging in tacit collusion. If many of the producers in the industry are alternatively buyers and sellers of the relevant products, coordinated actions become much less likely and may be impossible to sustain. As a result, regulators may be less concerned with mergers that raise market concentration under such circumstances. Q. WHAT DO YOU MEAN WHEN YOU SAY THAT THERE IS A WIDE VARIETY OF POWER SUPPLY ARRANGEMENTS? A. A utility that requires capacity and/or energy can meet those requirements in a wide variety of ways. For example, a utility that needs capacity and energy could purchase both under one long-term contract. Alternatively, it could enter into a sequence of short- term contracts. It could construct low-capital-cost peaking facilities and purchase non-firm energy on the spot market. It could increase its demand side management (DSM) programs aimed at curtailing peak demand and purchase energy. It could increase DSM programs that reduce both energy and capacity requirements. Finally, it could purchase reserve capacity only in combination with one or more of the options I have already listed. Q. WHY IS THE FACT THAT THERE IS A WIDE VARIETY OF POWER SUPPLY ARRANGEMENTS IMPORTANT? A. The fact that there is a wide variety of power supply arrangements makes coordinated actions on the part of sellers more difficult and less likely to occur. This means that there is less concern with mergers that increase concentration leading to the creation or enhancement of market power. Q. WHAT SOURCES OF INFORMATION DID YOU CONSIDER IN PERFORMING YOUR ANALYSIS AND REACHING YOUR CONCLUSIONS? A. I relied upon information supplied to me by SPS and PSCo as well as publicly available information. Much of that information describing the SPS and PSCo utility systems is contained in the testimony of Mr. Harris of PSCo and Mr. Hudson of SPS. I also relied upon numerous publicly available documents, including FERC Form l filings for utilities in the Western Systems Coordinating Council (WSCC) and the Southwest Power Pool (SPP); the 0E-411 filings of the WSCC and SPP; the WSCC's "Existing Generation and Significant Additions and Changes to System Facilities (1993-2000);" The National Electric Reliability Council's "Supply and Demand of Power;" the SEC Forms 10K filed by SPS and PSCo and other investor-owned utilities; the integrated resource plans prepared by PSCo and SPS and other entities; EIA Forms 861 and 412 filed by entities other than investor- owned utilities; the Electrical World Directory of Electric Power Producers; annual reports of public power entities such as the Western Area Power Administration, Salt River Project, and others; and articles in the trade press. IV. SPS'S AND PSCO'S ACTIVITIES AS BUYERS AND SELLERS OF POWER Q. PLEASE SUMMARIZE YOUR UNDERSTANDING OF PSCO'S ACTIVITIES AS BOTH A BUYER AND A SELLER OF WHOLESALE POWER. A. PSCo is in the Western Interconnection. It operates a utility system in Colorado and in parts of Wyoming and is primarily a buyer, not a seller, of wholesale power. PSCo's peak demands exceed its generating capacity, and this condition is expected to continue for the foreseeable future. PSCo's 1994 peak demand was 4,011 MW. The company owns about 3,176 MW of generating capacity. It purchases 593 MW of firm power from qualifying facilities/independent power producers and about 1000 MW of long-term firm power from other utilities, including Basin Electric Power Cooperative, PacifiCorp, Platte River Power Authority, and Tri-States Generation and Transmission. Schedule RMS-2 shows PSCo's total sales to and purchases from other utilities of firm and non-firm power in 1994. PSCo purchased three times as much firm power as it sold, and it sold about twice as much non-firm power as it purchased. However, as subsequent schedules show, PSCo's sales of non-firm power are small relative to the non-firm power sales of other entities that operate in this region of the country. Schedule RMS-3 consists of two pages and shows PSCo's sales of firm and non-firm power in 1994. Schedule RMS-4 shows PSCo's purchases of firm and non-firm power in 1994. PSCo sells firm requirements power to eight entities in Colorado. The utility purchases firm power from QF/IPPs in Colorado and from other utilities with which it is interconnected in Colorado. PSCo has sold non-firm power to other entities in the Rocky Mountain, Arizona-New Mexico, and California-Southern Nevada regions of the WSCC. Schedules RMS-2, RMS-3, and RMS-4 use 1994 data as reported in PSCo's FERC Form 1. PSCo also owns Cheyenne Light, Fuel and Power Company (Cheyenne). This utility operates a small electric service area in Wyoming. Cheyenne purchases all of its power from PacifiCorp. My schedules for PSCo exclude Cheyenne's purchases and sales. Cheyenne has a peak load of 129 MW. It has no wholesale customers. Its transmission system consists of two 115 kV transmission line segments totaling 25.5 miles in length. As such, excluding Cheyenne has no effect on my analysis. Q. PLEASE SUMMARIZE YOUR UNDERSTANDING OF SPS'S ACTIVITIES AS A BUYER AND SELLER OF WHOLESALE POWER. A. SPS operates a utility system in the south plains and panhandle of Texas, eastern and southeastern New Mexico, the Oklahoma panhandle, and southwestern Kansas. SPS's 1994 peak demand was 3,692 MW (as reported in its FERC Form 1, using FERC Form 1 definitions), and it currently owns generating plants with a total capacity of 4,062 MW. SPS is part of the Eastern Interconnection, which is not electrically connected via synchronous interconnection with the Western Systems Coordinating Council. SPS is, however, interconnected with the WSCC via two direct current (DC) interconnections in New Mexico. Each of these interconnections (which are owned by utilities that operate in the WSCC) has a transfer capability of 200 MW. SPS sells power throughout the WSCC. With the exception of sales to the WSCC utilities with which it is directly interconnected, SPS accomplishes these transactions by purchasing transmission services from utilities in the WSCC. Schedule RMS-5 shows SPS's total sales to and purchases from other utilities of firm and non-firm power in 1994. SPS is a substantial net seller of wholesale bulk power. Schedule RMS-6 shows SPS's firm and non-firm wholesale bulk power sales in 1994. The firm sales are requirements sales to utilities located within SPS's service area, plus firm requirements sales to Texas-New Mexico Power and El Paso Electric. The non-firm sales consist of economy-type and other interruptible sales to entities in the WSCC and to entities to the north and east of SPS that are also located within the Eastern Interconnection grid. Schedules RMS-7 shows SPS's purchases of firm and non-firm wholesale bulk power in 1994. SPS is not a major purchaser of wholesale bulk power. Schedules RMS-5, RMS-6, and RMS-7 use 1994 data as reported in SPS's FERC Form 1. Q. HAVE YOU REVIEWED THE MERGING PARTIES' INTERCONNECTIONS WITH OTHER UTILITIES? A. Yes. It is important to note that the two merging parties are not now directly interconnected. Their service areas are more than 300 miles apart. PSCo is part of the Western Interconnection. SPS is part of the Eastern Interconnection. The Eastern and Western Interconnections are not synchronized. All of the interconnections between the eastern and western portions of the country are direct current interconnections. None of these direct current interconnections are owned by SPS or PSCo. Q. WHICH UTILITIES ARE DIRECTLY INTERCONNECTED WITH PSCO? A. PSCo is directly interconnected with Tri-State Generation and Transmission, Western Area Power Administration (WAPA), and Platte River Power Authority at numerous points on its transmission system. PSCo is also interconnected at one or more points with West Plains Energy (a subsidiary of Utilicorp), Colorado Springs Utility, PacifiCorp, and the Municipal Energy Agency of Nebraska. In addition, PSCo jointly owns a transmission line to Four Corners. As a result of that joint ownership, it is directly interconnected with PNM, Arizona Public Service, Salt River Project, Southern California Edison, PacifiCorp, and Tucson Electric Power. Q. WHICH UTILITIES ARE DIRECTLY INTERCONNECTED WITH SPS? A. SPS is interconnected at various locations with Public Service of Oklahoma and West Texas Utilities in the Southwest Power Pool (SPP). Both of these entities are subsidiaries of Central and South West Services, Inc. SPS has an interconnection with the Kansas service area of West Plains Energy in the SPP. However, this interconnection is at 115 kV and is normally open for reliability reasons. During 1993 and 1994, this interconnection was open for reliability reasons about 68 percent of the time. SPS is planning to install phase shifters at Liberal, Kansas, so that the line can be operated normally closed after next year. SPS also has direct current interconnections with three utilities in the Western Interconnection - PNM, Texas-New Mexico Power, and El Paso Electric. SPS interconnects with PNM via a 200 MW DC tie at Blackwater, New Mexico. This DC tie is owned by PNM. SPS also interconnects with El Paso Electric and Texas-New Mexico Power via a DC tie at Artesia, New Mexico. This is a 200 MW interconnection that is jointly owned by El Paso Electric (133 MW) and Texas-New Mexico Power (67 MW). Q. WHAT IS THE RELEVANT GEOGRAPHIC MARKET FOR WHOLESALE POWER FOR THE PURPOSE OF ANALYZING THIS MERGER? A. The relevant geographic market for the purpose of analyzing the competitive effects of this merger is the U.S. portion of the WSCC. Schedule RMS-8 is a map of the WSCC and a list of the members of the WSCC by area. FERC used the WSCC as the relevant market in the UP&L- PacifiCorp merger. However, because FERC has also utilized narrower markets than the entire WSCC in analyzing a prior transaction involving PSCo, I have also performed an analysis of a narrower market defined as utilities within the WSCC that are directly interconnected with one or both of the merging parties. Q. WHAT DATA DID YOU EXAMINE IN ORDER TO DETERMINE THE RELEVANT GEOGRAPHIC MARKET? A. I examined the actual transactions of the merging parties, the identities of utilities interconnected with the merging parties, existing power-pooling arrangements in the region where the two entities operate, and the distribution of transmission ownership in the western United States. Q. WHY DID YOU EXAMINE THE PATTERN OF EXISTING SALES BY THE MERGING PARTIES? A. The geographic market consists of the location of all producers that place significant constraints on the ability of the merging firms to raise profitably the price of the relevant product after the merger. As such, I analyzed data to determine where the merging parties currently sell power and who else sells power in that same general area or to the same customers. Examination of the pattern of existing sales of the merging parties and alternative sellers to customers of the merging parties establishes the trading area of those firms. Relevant geographic markets for antitrust analysis are usually larger than trading areas. However, if one observes firms selling over a broad area, this is an indication of broad geographic markets. Q. PLEASE DESCRIBE YOUR ANALYSIS OF THE EXISTING SALES OF POWER BY THE MERGING PARTIES. A. Schedule RMS-9 consists of two maps showing the states in which SPS sold power in 1994 (page 1 of 2) and a map showing the states in which PSCo sold power in 1994 (page 2 of 2). As these maps indicate, SPS sells power as far north as Washington, as far west as California, and as far east as Mississippi and Missouri. PSCo sold power to entities located as far north as Wyoming, as far west as California, and to entities in the Arizona-New Mexico area. SPS sells power throughout the Western Interconnection and also in the Eastern Interconnection. As I noted earlier, SPS is part of the Eastern, not the Western, Interconnection. The fact that SPS is able to sell significant amounts of power in the Western Interconnection is indicative of the fact that markets are broad. PSCo also sells power throughout a broad area of the Western Interconnection. The existing pattern of sales often underestimates the scope of the geographic market. The correct measure of the geographic market includes not only firms currently selling in the same general area as the merging firms, but also all firms that would begin selling in competition with the merging parties in response to a small, non- transitory price increase. Both categories of firms (firms that currently sell and firms that would begin selling in response to a price increase) act as constraints on the pricing practices of the merging firm and its current competitors. Q. PLEASE DESCRIBE YOUR ANALYSIS OF THE TWO COMPANIES' INTERCONNECTIONS. A. Schedule RMS-10 is a map showing the states in which utilities interconnected with one or both of the two merging parties operate. Entities interconnected with SPS and/or PSCo in the Western Interconnection operate in states as far east as Colorado and New Mexico, as far west as California, and as far north as Oregon and Montana. Some of the entities interconnected with PSCo, such as WAPA and Basin, operate in both the Western and Eastern Interconnections. Q. ARE THERE ANY OTHER FACTORS THAT LEAD YOU TO CONCLUDE THAT THE RELEVANT GEOGRAPHIC MARKET FOR THE PURPOSE OF ANALYZING THIS MERGER IS THE U.S. PORTION OF THE WSCC? A. Yes, there are five such additional factors that lead me to this conclusion that the relevant market for the purpose of analyzing this merger is the U.S. portion of the WSCC. They are: The fact that, even without the FERC Open-Access Transmission NOPR or this merger, both SPS and PSCo already have open access transmission tariffs; The pending FERC Open-Access Transmission NOPR; The pattern of transmission ownership in the Western Interconnection; The existence of the Western Systems Power Pool; and The significant number of utilities interconnected at Four Corners. Q. WHY IS THE FACT THAT BOTH MERGING PARTIES HAVE FILED OPEN- ACCESS TARIFFS PRIOR TO THIS MERGER IMPORTANT IN DETERMINING THE RELEVANT GEOGRAPHIC MARKET? A. Both parties have filed open-access, comparable-service transmission tariffs. Those tariffs are related to SPS's market-based rate filing and PSCo's filing for permission to operate e-prime, an unregulated subsidiary. FERC has already approved SPS's application for market-based rates and the company's open-access tariffs. Although FERC had not issued a final order regarding PSCo's e-prime application as of the date this testimony is filed, it is quite likely that it will have acted on that application prior to the consummation of the merger. Nevertheless, PSCo already has a comparable service, open-access tariff on file and in effect. These transmission tariffs are important for two reasons. First, the fact that both parties already have open-access tariffs in place increases trading opportunities for entities interconnected with SPS and/or PSCo. Second, transmission access disputes should not really be an issue in this merger. As FERC has stated in prior cases involving SPS and PSCo individually (cited earlier in my testimony), these open-access tariffs prevent the exercise of market power. Q. IN YOUR OPINION, WHY IS THE FERC OPEN-ACCESS TRANSMISSION NOPR IMPORTANT IN DETERMINING THE RELEVANT GEOGRAPHIC MARKET? A. FERC issued its Open-Access Transmission NOPR in March of 1995 (Docket RM95-8-000). Although no final ruling has been issued as of the date this testimony is being filed, virtually all observers of the utility industry expect that the NOPR process will result in some form of increased open-access on an industry-wide basis. The only real issue in dispute is the mechanics of the actual tariffs and procedures governing open-access transmission. Open-access tariffs increase the opportunities available to all potential buyers. This point can be illustrated by a simple diagram such as that shown in Schedule RMS-11. Utilities A and B are the merging parties. Utility A is interconnected with utilities B, C, and G. Utility B is interconnected with utilities C, A, and H. Utility C is interconnected with utilities A, B, and D. Utility D is interconnected with utilities C, E and F. Prior to the requirement that all utilities file open- access tariffs, FERC's standard methodology for analyzing a merger of utilities A and B would be to examine Utility C's options both pre- and post-merger. Pre-merger, Utility C's options would be purchases from utilities A, B, and D plus its own generation. Post-merger, Utility C's option would be purchases from the merged entity, Utility D, Utility C's own generation, and utilities G and H, by virtue of the open-access tariff that FERC requires of merging utilities. With the requirement that all utilities file open-access tariffs, regardless of the existence of the contemplated merger, Utility C's options are substantially increased. Pre-merger, with open-access tariffs, Utility C's options are utilities A, G, B, H, D, E, and F, in addition to its own generation. Post-merger, Utility C's options are the merged entity plus utilities G, H, D, E, and F in addition to its own generation. As a result, even though the merger of A and B eliminated one trading partner, Utility C's markets are still substantially broader under the open-access regime contemplated by the FERC's NOPR than they were prior to open access. Q. WHAT TRANSMISSION CONDITIONS IN THE WESTERN INTERCONNECTION ARE IMPORTANT IN DETERMINING THE RELEVANT GEOGRAPHIC MARKET FOR PURPOSES OF ANALYZING THIS MERGER? A. Unlike other regions of the country, many investor-owned utilities in the west do not own or control all of the transmission lines within their service areas. Individual utilities may own transmission facilities outside of their service areas and interconnect with other entities far from the borders of their service areas. The pattern of transmission line ownership in Colorado is one illustration of this point. Schedule RMS-12, prepared by PSCo, is a map showing the key transmission corridors in Colorado. The capacity of individual and jointly-owned transmission lines within specific corridors is aggregated, and these paths are referred to as TOT's in Colorado. The key TOT's are shown in Schedule RMS-12. Schedule RMS-13 was also prepared by PSCo. It shows the capacity allocation shares in each of these TOT's in Colorado. All of the important east-west and north-south corridors have transmission lines owned by at least two entities in Colorado (PSCo, Tri-State, Platte River Power Authority, and WAPA). PSCo does not control more than 36 percent of the capacity in any transmission corridor except for TOT 7, in which it has a capacity allocation of 58 percent. Another example is the transmission system owned and operated by WAPA. Schedule RMS-14 is reproduced from WAPA's 1994 annual report. It shows that WAPA owns a transmission system that traverses the service areas of numerous utilities in the southern and eastern parts of the Western Interconnection. Finally, Southern California Edison (SCE) owns part of the transmission capacity from southern California to Four Corners. This allows SCE to engage in transactions at Four Corners even though its retail service area is approximately 500 miles west of that location. The fact that transmission entities that are interconnected with PSCo or SPS essentially traverse the entire WSCC means that these entities can purchase and sell power over a wide geographic area. The U.S. portion of the WSCC is the relevant market. Q. WHY IS THE WESTERN SYSTEMS POWER POOL IMPORTANT IN DETERMINING THE GEOGRAPHIC MARKET FOR THE PURPOSE OF ANALYZING THIS MERGER? A. The Western Systems Power Pool (WSPP) is an agreement that allows all members of the WSPP to enter into transactions with each other at negotiated rates subject to price caps, and to obtain transmission service for the purpose of effecting transactions. Membership in the WSPP is not limited to traditional utilities that are part of the Western Interconnection. The WSPP also includes utilities that are part of the Eastern Interconnection, power marketers, and independent power producers (IPPs). The effect of the WSPP is to broaden the area over which transactions take place. There are over 90 entities in the WSPP. Q. WHY IS FOUR CORNERS IMPORTANT IN YOUR ANALYSIS? A. The Four Corners area consists of three distinct interconnection points: Shiprock, Four Corners, and San Juan. Effectively, these three interconnection points operate as a common bus, and any entity that is interconnected with one of these three points can engage in transactions with any other entity that is interconnected at any other point in the Four Corners area at zero or minimal costs. The entities that have transmission rights to the Four Corners area are: Public Service of Colorado, Southern California Edison, Arizona Public Service, WAPA, Tri-States, PacifiCorp, Salt River Project, Tucson Electric Power, and PNM. In addition, El Paso Electric owns generation at Four Corners and can sell that output at that location. The fact that such a large number of utilities are effectively interconnected at a single point broadens the options each faces when buying or selling wholesale bulk power. The utilities interconnected at Four Corners are interconnected with other utilities across the entire WSCC. This is additional evidence in support of defining the U.S. portion of the WSCC as the relevant market. Q. DID YOU ALSO ANALYZE NARROWER GEOGRAPHIC MARKETS CONSISTING OF UTILITIES DIRECTLY INTERCONNECTED WITH ONE OR BOTH OF THE MERGING PARTIES? A. Yes. Consistent with prior FERC rulings, I analyzed narrow destination markets defined as each individual utility that is interconnected with one or both of the merging parties. Q. FOR THE PURPOSE OF ANALYZING THE IMPACTS OF THIS MERGER WITHIN A DOJ/FTC GUIDELINES APPROACH, IS IT NECESSARY TO ANALYZE ANY MARKETS IN THE EASTERN INTERCONNECTION? A. No, it is not. Within the DOJ/FTC Guidelines approach to merger analysis, one analyzes markets where the two merging parties are competitors. Generally, there is no potential for anticompetitive effects from a merger in markets where one, but not both, of the parties is a participant prior to the merger. In the DOJ/FTC Guidelines methodology, one computes the change in the HHI resulting from a merger as two times the product of the pre-merger market shares of the merging entities. If one of these market shares is zero, pre-merger, the change in the HHI as a result of the merger is zero. Here, SPS sells wholesale bulk power in the Eastern Interconnection, but PSCo does not. In order for PSCo to sell power in the Eastern Interconnection, it would need to move the power to Four Corners and then purchase wheeling services from PNM to move power from Four Corners to the eastern border of New Mexico. Alternatively, PSCo could sell power into the Eastern Interconnection in the western Kansas-Nebraska area by purchasing wheeling services from WAPA, which owns and operates a DC tie to the Eastern Interconnection at Sidney, Nebraska. The fact that PSCo does not now engage in such transactions indicates that they are not economical. Moreover, even if PSCo were a seller in western Kansas, SPS is not a significant seller in that market area. SPS is interconnected with West Plains Energy in western Kansas. However, this line is normally open and unavailable for reliability reasons. Schedule RMS-15 is a four-page chart and table prepared by SPS at my request. It shows the percent of the hours each month in 1993 and 1994 that its interconnection with West Plains Energy's Kansas service area was unavailable. SPS is planning to install phase shifters at Liberal, Kansas, so that this line can be operated normally closed after next year. However, there is not much energy demand in either western Kansas or western Nebraska, and that region has a substantial amount of excess generating capacity. Since the two merging parties are not now both selling in the Eastern Interconnection, there is no potential for anticompetitive effects in the Eastern Interconnection to result from this merger. Nevertheless, one could analyze the eastern Tier 1 entities for the situation that will exist after the merging companies build the DC tie necessary to directly interconnect their systems. This evaluation would not alter the conclusion that the merger could have no adverse affects on competition in the Eastern Interconnection. Completing the interconnection may make PSCo's generation capacity available to the eastern market. Such an addition of capacity cannot create market power, however--in fact, if anything, it should tend to lower, not increase, market prices. In any event, since the SPS and PSCo do not plan to build their interconnection until 2001, it necessarily can affect only long-run markets. As I explain below, however, since the merged company will not control or have the ability to erect barriers to entry by competing generators, the merger will not create or enhance market power in long-term markets. V. RELEVANT PRODUCT MARKET Q. WHAT IS THE RELEVANT PRODUCT MARKET FOR THE PURPOSE OF ANALYZING THIS MERGER? A. The relevant product market is wholesale bulk power. Below, I present market share data based on firm transactions, non-firm transactions, total generating capacity, and uncommitted generating capacity. These are the market share calculations usually presented in merger cases before FERC. Q. IS TRANSMISSION A RELEVANT PRODUCT MARKET FOR THE PURPOSE OF ANALYZING THE IMPACT OF THIS MERGER? A. No, it is not. The two merging parties are not competitors with each other in any relevant transmission market. There are few, if any, realistic transactions for which use of the PSCo transmission system would be considered a substitute or viable alternative to use of the SPS transmission system, or vice versa. Only one utility (PNM) operates a control area that is interconnected with both of the merging companies, and that utility is interconnected with numerous alternative sellers and transmission paths for purchases of power in addition to the merging companies. Further, the merger will have no effect on SPS's or PSCo's role in any relevant transmission market and will not create or enhance market power in any such market. VI. SHORT-RUN MERGER ANALYSIS Q. WHAT INDICES OF CONCENTRATION AND/OR MARKET SHARES DID YOU CALCULATE? A. I have calculated market shares and/or changes in HHI indices based on: 1. Total resources in the WSCC and for utilities in the Western Interconnection that are interconnected with one or both of the merging parties; 2. Uncommitted resources in the WSCC and for utilities in the Western Interconnection that are interconnected with one or both of the merging parties; 3. Total and uncommitted resources for individual Tier 1 utilities; and 4. Sales of firm and non-firm power by all utilities interconnected with SPS and PSCo. VII. MARKET SHARES: TOTAL AND UNCOMMITTED RESOURCES Q. PLEASE DISCUSS YOUR ANALYSIS OF MARKET SHARES OF TOTAL RESOURCES. A. In prior cases, FERC has used installed capacity or total resources as a measure of capacity that might be available for non-firm and some shorter-term firm purchases. Schedule RMS-16 shows the merged company's ("M-P New Co.") and the merging companies' market shares of total resources for the WSCC as a whole, and for utilities in the Western Interconnection that are interconnected with one or both of the merging parties. Even though SPS is not part of the WSCC (because it is part of the Eastern Interconnection), I have included it in these numbers because it is interconnected with the WSCC via DC ties to New Mexico. Each of the merging parties has about 3 percent of the total resources in the WSCC. The change in the HHI as a result of this merger is 18. This change in the HHI is calculated as two times the product of the merging entities' market shares. This level of change in the HHI is well within the range for which a merger is unlikely to be challenged under the Guidelines. For a market defined as all entities in the Western Interconnection that are directly interconnected with one or both of the merging parties, PSCo has a market share of 8 percent and SPS has a market share of 6 percent. The change in the HHI is 96. The pre-merger HHI is 1,470, resulting in a post-merger HHI of 1,566. This level of post-merger HHI and change in the HHI are within the range for which a merger is unlikely to be challenged under the Guidelines. Q. DID YOU ALSO COMPUTE MARKET SHARES BASED ON UNCOMMITTED CAPACITY? A. Yes. In prior cases, FERC has used uncommitted resources as a measure of the amount of capacity that is for sale. Uncommitted resources are defined as total resources less peak demand and reserves. Firm sales contracts to other utilities are included in peak demand. The presumption in FERC's use of this measure is that committed capacity is required to serve native load at some times during the year. Q. PLEASE DISCUSS YOUR ANALYSIS OF MARKET SHARES OF UNCOMMITTED RESOURCES. A. Schedule RMS-17 shows the merging companies' market shares of uncommitted resources for the WSCC as a whole, and for utilities in the Western Interconnection that are interconnected with one or both of the merging parties. Even though SPS is not part of the WSCC, I have included SPS in these numbers because it is interconnected to the west via the DC ties in New Mexico. The change in the HHI due to the proposed merger is zero for both market definitions. This stems from the fact that SPS has zero uncommitted capacity. Q. WHAT DO YOU CONCLUDE FROM YOUR MARKET SHARE CALCULATIONS WITH RESPECT TO TOTAL RESOURCES AND UNCOMMITTED RESOURCES? A. The market shares of the merged entity are small. The changes in the HHI as a result of this merger are small or zero. This merger will not create or enhance market power in bulk power sales. (B) MARKET SHARES: NON-FIRM AND FIRM ENERGY Q. WHAT DATA SOURCES DID YOU USE TO COMPUTE MARKET SHARES FOR NON-FIRM AND FIRM ENERGY SALES? A. I used the FERC Form 1's filed by investor-owned utilities. I have used FERC Form 1 definitions to classify transactions as firm or non-firm. Use of Form 1 data does, however, require some care and interpretation. In some cases, the two parties to a transaction may report it differently. For example, there are instances in which the same transaction is reported as "short-term firm" by one party and as non-firm by the other party. In addition, governmental and other public entities such as WAPA, PRPA, and Tri-State do not file Form 1's, and the data they do file and/or report may not be given in sufficient detail to separately analyze firm versus non- firm sales. Q. PLEASE DISCUSS YOUR ANALYSIS OF MARKET SHARES FOR NON-FIRM ENERGY SALES. A. Schedule RMS-18 shows non-firm sales of energy by the merging companies, the investor-owned utilities interconnected with the merging companies in the Western Interconnection, and the Western Area Power Administration (WAPA). I have excluded other non-investor-owned utilities due to the lack of consistent data available from other governmental and public entities. As such, my calculations overstate market shares of SPS and PSCo and present a highly conservative estimate of the effect of the merger on market concentration. The market shares shown in Schedule RMS-18 are 3.3 percent for PSCo and 6.6 percent for SPS. The change in the HHI is 44 (44=2x3.3x6.6). This change in the HHI is well within the range of HHI changes for which a merger would not be challenged under the Guidelines. Even though my calculations are very conservative due to the exclusion of public power entities, the change in the HHI is low enough that it would not raise any competitive issues in a Guidelines analysis. Q. PLEASE DISCUSS YOUR MARKET SHARE CALCULATIONS FOR FIRM POWER. A. Schedule RMS-19 shows firm sales of power by SPS and PSCo as well as all utilities interconnected with SPS and PSCo in the Western Interconnection. This schedule is limited to sales by investor-owned utilities and WAPA due to the lack of consistent data available from other governmental and public entities. As such, my calculations overstate market shares of SPS and PSCo and present a highly conservative estimate of market shares. The market shares shown in Schedule RMS-19 are 5.1 percent for PSCo and 3.1 percent for SPS. The change in the HHI is 32. This change in the HHI is well within the range of changes for which a merger would not be challenged under the Guidelines. Even though these calculations are conservative (due to the exclusion of some public entities), they indicate such a small change in the HHI that the merger would raise no competitive issues in a Guidelines analysis. Q. WHAT DO YOU CONCLUDE FROM YOUR MARKET SHARE CALCULATIONS WITH RESPECT TO FIRM AND NON-FIRM SALES? A. The merged entity's share of the relevant market is small. The changes in the HHI resulting from this merger are small or zero. This merger will not create or enhance market power. VIII. TIER 1 UTILITIES Q. HOW IS YOUR ANALYSIS OF TIER 1 UTILITIES ORGANIZED? A. For the purpose of analyzing this merger, Tier l utilities fall into the following categories: 1. Utilities interconnected with both parties; 2. Utilities other than transmission-dependent utilities in the Western Interconnection that are interconnected with one, but not both, of the merging parties; 3. Utilities other than transmission-dependent entities in the Eastern Interconnection that are interconnected with one, but not both, of the merging parties; and 4. Transmission-dependent entities that are interconnected with either SPS or PSCo. Each category is separately analyzed below. Q. WHY DO YOU DISTINGUISH BETWEEN UTILITIES THAT ARE INTERCONNECTED WITH ONE, BUT NOT BOTH, OF SPS AND PSCO, AND UTILITIES THAT ARE INTERCONNECTED WITH BOTH OF THE MERGING PARTIES? A. If there were any anticompetitive effect from the merger, utilities that are interconnected with both of the merging parties would be the most likely to be affected. The options facing utilities interconnected with one, but not both, of the merging parties are the same both before and after the merger. The merger changes nothing and hence has no adverse effects on these utilities. Entities that are interconnected with both of the merging parties are potentially affected by the merger because the number of options they face is reduced. One therefore needs to examine the market share of the merged entity with respect to entities that are interconnected with both of the merging parties. Q. PLEASE DESCRIBE YOUR ANALYSIS OF TIER 1 UTILITIES DIRECTLY INTERCONNECTED WITH BOTH SPS AND PSCO. A. PNM is directly interconnected with both SPS and PSCo. It is interconnected with PSCo at Four Corners and with SPS at Blackwater, New Mexico, via a 200 MW DC interconnection that is owned by PNM. PNM is the only entity that is directly interconnected with both SPS and PSCo in the sense that it can substitute purchases of power from SPS for purchases of power from PSCo, or vice versa, without incurring any wheeling charges. WestPlains Energy also is interconnected with both PSCo and SPS, but cannot substitute supplies from one company for those of the other. WestPlains Energy is interconnected with PSCo in Colorado for its service area that is part of the Western Interconnection and is interconnected with SPS at Liberal, Kansas, for its service area that is part of the Eastern Interconnection. The Kansas and Colorado service areas of WestPlains Energy are not directly interconnected and are operated separately. Deliveries of power to WestPlains Energy's Kansas service area are not substitutes for deliveries of power to WestPlains Energy's Colorado service area. SPS theoretically can sell power to WestPlains Energy for the latter's Colorado service area. Such a transaction, however, would involve wheeling over PNM from Blackwater to Four Corners, and subsequent wheeling by either Tri- State, WAPA, or PSCo to WestPlains Energy's Colorado service area. As such, competition for WestPlains Energy's Colorado business is of the same nature as competition for the business of any other utility that is interconnected with PSCo, but not with SPS. Thus, for the purpose of FERC's standard analysis of Tier 1 utilities, WestPlains Energy should be considered two entities, one in Colorado that is directly interconnected with PSCo, and one in Kansas that is directly interconnected with SPS. Schedule RMS-20 shows SPS and PSCo's individual market shares and the merged company's market share for total resources and uncommitted resources for the Tier 1 market defined as PNM. The schedule consists of two pages, one for total resources and one for uncommitted resources. The market share for the merged entity ("M-P New Co.") is 11 percent for total resources and 4 percent for uncommitted capacity. In previous merger and market-based rate cases, FERC has found that shares of less than 20 percent in a Tier 1 market are indicative of lack of market power. I should note that, in computing these market shares, I have assumed open-access tariffs for SPS and PSCo both pre-and post-merger. This is appropriate since, even without the merger, PSCo and SPS would be obligated to provide open-access transmission as a result of other filings that they have made individually. My analysis is highly conservative and probably significantly overstates SPS and PSCo's market shares because I have not assumed open-access tariffs on the part of any other entities that are interconnected with PNM. A more realistic premise would be to assume open-access tariffs on the part of all entities that are interconnected with PNM, since it is likely that the FERC NOPR regarding open-access transmission will result in some form of increased open-access transmission. Assuming that all utilities have open-access tariffs would mean that one would include in this analysis all of PNM's Tier 2 interconnections as well as its Tier 1 interconnections, i.e., all utilities that are interconnected with PNM's Tier 1 utilities. In this case, the capacity available to compete for PNM's business would include all of the entities in the Rocky Mountain, Arizona/New Mexico, and California/Southern Nevada regions of the WSCC, as well as most major utilities in the Pacific Northwest. Addition of all of these entities via open-access tariffs would reduce SPS's and PSCo's combined share of the PNM market to less than 10 percent based on total resources, and to less than 4 percent based on uncommitted resources. Q. IF THERE WERE NO OPEN-ACCESS TARIFFS, OR IF ACCESS WERE ONLY AVAILABLE AT HIGH COSTS, WOULD PNM BE ADVERSELY AFFECTED BY THIS MERGER? A. No, it would not. Even assuming away all open-access tariffs, including the existing SPS and PSCo tariffs, the merged entity's market share with respect to PNM would be 14.5 percent for total resources and 7.5 percent for uncommitted resources. In previous merger and market- based rate cases, FERC has found that market shares of less than 20 percent in a Tier 1 market are indicative of lack of market power. Hence, even if there were no open- access tariffs available, the merged entity would not have market power with respect to PNM under the standards according to which FERC has ruled in prior cases. Q. PLEASE DESCRIBE YOUR ANALYSIS OF UTILITIES OTHER THAN TRANSMISSION-DEPENDENT UTILITIES IN THE WESTERN INTERCONNECTION THAT ARE INTERCONNECTED WITH ONE, BUT NOT BOTH, OF THE MERGING PARTIES. A. The Western Interconnection utilities that are interconnected with one, but not both, of the merging parties are analyzed in Schedule RMS-21. For each such entity there are two pages, one for total resources and one for uncommitted resources. Again, I have assumed open access tariffs for SPS and PSCo, but not for other entities. As such, my market share calculations are very conservative. Even with my conservative assumptions, the merged entity would not have a market share in excess of 20 percent in any of these Tier 1 markets. Two additional points are worth noting. First, many of the Tier l entities analyzed in Schedule RMS-21 are net sellers to PSCo, not net buyers that are dependent on PSCo. Platte River, Tri-State, Basin, and PacifiCorp are all net sellers of power to PSCo. Second, Westplains Energy has obtained a Certificate of Public Convenience and Necessity to construct a 141 MW combined-cycle plant to serve its Colorado loads. The effect of constructing this plant will be to reduce WestPlains's purchases from PSCo. Q. PLEASE DESCRIBE YOUR ANALYSIS OF UTILITIES OTHER THAN TRANSMISSION-DEPENDENT UTILITIES IN THE EASTERN INTERCONNECTION THAT ARE INTERCONNECTED WITH ONE, BUT NOT BOTH, OF THE MERGING ENTITIES. A. PSCo is not directly interconnected with any entities in the Eastern Interconnection. SPS is interconnected in the SPP with the Kansas service area of WestPlains Energy, with Public Service of Oklahoma (PSO), and with West Texas Utilities (WTU). PSO and WTU are two of the four utility subsidiaries of Central and South West Services, Inc. (CSW). All of the utility subsidiaries of CSW are interconnected with one another. Therefore, for the purposes of a merger analysis, it is appropriate to consider CSW as one entity. Schedule RMS-22 shows market shares based on total resources for Tier 1 markets defined as the CSW and the WestPlains-Kansas systems. For simplicity, I calculate market shares for utilities that are Tier 1 entities to SPS in the Eastern Interconnection, assuming that the only options available to them are other suppliers in the Eastern Interconnection. No market shares are shown in that schedule for uncommitted capacity. Since SPS has zero excess capacity and PSCo does not operate in the Eastern Interconnection, the merged company's share of each of these markets is zero, when based on uncommitted capacity. Q. PLEASE DISCUSS YOUR ANALYSIS OF TRANSMISSION-DEPENDENT UTILITIES LOCATED WHOLLY WITHIN THE SERVICE TERRITORIES OF EITHER SPS OR PSCO. A. SPS sells requirements power to 21 municipalities and cooperatives located within its service area. The City of Lubbock operates its own utility and its own generation in addition to purchasing power from SPS. There is "house-to house" retail competition in Lubbock between SPS and the City of Lubbock. There is also house-to-house competition in the City of Floyada. Schedule RMS-23 lists the municipalities and cooperatives located within SPS's service area. Schedule RMS-24 shows the market share calculations for total resources applicable to all of these entities except the City of Lubbock, because it has its own generation. Schedule RMS25 shows the market share calculations for the City of Lubbock. Again, for simplicity, I calculate market shares for utilities that are Tier 1 entities to SPS in the Eastern Interconnection, assuming that the only options available to them are other suppliers in the Eastern Interconnection. Again, the market shares for uncommitted capacity are zero because SPS has zero uncommitted capacity. Schedule RMS-26 lists entities that purchased requirements power from PSCo in 1994 and which did not own generation. Schedule RMS-27 shows market share calculations for these entities based on both total resources and uncommitted capacity. Q. HAVE YOU PREPARED A SCHEDULE THAT SUMMARIZES YOUR MARKET SHARE CALCULATIONS FOR EACH TIER 1 MARKET? A. Yes, I have. Schedule RMS-28 shows the merged entity's share of total resources and uncommitted capacity for each Tier 1 market in the Western Interconnection. Schedule RMS-29 shows the merged entity's share of total resources and uncommitted capacity for each Tier 1 market in the Eastern Interconnection. Q. WHAT CONCLUSIONS DO YOU DRAW FROM THE MARKET SHARES IN SCHEDULES RMS-28 AND RMS-29? A. The combined market shares of PSCo and SPS are less than 20 percent with respect to total resources and uncommitted capacity for all Tier 1 markets except the transmission- dependent entities within SPS's service area. The merged company's market share is 21 percent for total resources, but zero for uncommitted capacity, in that Tier 1 market. That market share will not be changed by the merger and is attributable solely to SPS. The Commission already has found that SPS does not possess market power in generation in the applicable Tier 1 markets. I also conclude that this merger will not create or enhance market power in those markets. Q. DID YOU PERFORM OTHER ANALYSES OF INDIVIDUAL UTILITIES THAT MIGHT BE AFFECTED BY THE MERGER? A. Yes. I analyzed the sales of the two merging parties to determine if there were any entities that purchased power from both SPS and PSCo in 1994. Schedule RMS-30 lists the entities that purchased power from both companies in 1994 and indicates whether the entity is interconnected with PSCo, SPS, or both. Only one entity -- PNM -- is interconnected with both utilities in the sense that purchases from the two merging parties substitute for each other without requiring wheeling services. With the exception of PNM, sales by one or both of the merging parties to the entities listed in that schedule involve wheeling by another utility. PNM is a substantial net,seller of power. This is illustrated by Schedule RMS-31, which consists of two pages. The first page shows PNM's total sales and purchases of wholesale power. PNM is a net seller of nonfirm power and a net buyer of firm power. The second page summarizes the merging parties' transactions with PNM. Neither of the merging parties sells firm power to PNM. Although both of the merging parties sell non-firm power to PNM, PSCo is a substantial net buyer of power from PNM, whereas SPS is a substantial net seller to PNM. It is unlikely that this merger will create market power for the merged entity with respect to any of the entities that purchased power from both PSCo and SPS in 1994. In most cases, one or both of the merging parties had to purchase wheeling services from another utility to effect a transaction. Such sales are indicative of the broad geographic market in the west. In the case of PNM, its position as a net seller, its large number of interconnections with other entities, and its own uncommitted capacity make it unlikely that this merger would subject it to an exercise of market power. IX. BARRIERS TO ENTRY Q. WHY IS IT IMPORTANT TO ANALYZE BARRIERS TO ENTRY AND ENTRY CONDITIONS? A. As FERC stated in its Louisville Gas & Electric decision of January 14, 1993, one cannot accurately calculate long- run market shares. FERC also stated in its May 13, 1994, order in the Kansas City Power and Light case that there is no need for it to focus on longer-term impacts that relate to sales from new capacity, provided that the seller does not exercise transmission market power and does not own or control other barriers to entry. Entry is a critical factor in disciplining the long-run market. Economic theory generally holds that market power is difficult to sustain over the long run unless entry barriers exist. The possibility of entry by new firms in response to price increases places a constraint on the ability of existing firms to exercise market power and can, indeed, prevent the exercise of market power. Entry allows buyers to negotiate with existing suppliers or new entrants for their capacity and energy needs. New entrants can include both traditional utilities and non- utility generators. As such, the long-run analysis of merger impacts involves addressing entry and the degree to which the merger may raise or increase entry barriers. Q. HAVE YOU ANALYZED ENTRY CONDITIONS? A. Yes. Neither SPS nor PSCo has the power to raise entry barriers. As discussed in the testimony of Applicants' witnesses Mr. David Hudson and Mr. Matt Harris, neither company controls resources, generating sites, or other facilities that could be used to prevent entry by other firms. Moreover, the best evidence that there are no barriers to entry is the fact that entry is occurring now in the relevant markets and is likely to be increasingly important in the future. For example, in January 1994, the City of Las Cruces issued a RFP for power supply. Seven entities made proposals to Las Cruces. Those entities were SPS, Plains Electric Cooperative, OES1-Geo-thermal, Four Corners Power Association, L. P., ENRON Power Marketing, Inc., Destec, and Conoco. In its 1993 Integrated Resource Plan, WestPlains Energy discussed alternatives to the construction of a new power plant. The entities offering short-term power to Westplains Energy included PSCo, Tri-State, City of Colorado Springs, SPS, Combined Energy Company, and PowerNet. WestPlains Energy also received offers for long-term supply of power from Sunflower Electric, Combined Energy Company, Fountaine Power Partners, PowerNet, SPS, and Southern California Edison. Finally, Golden Spread Electric Cooperative, which is located in the SPS area, has announced plans to construct its own generating capacity. It recently issued a RFP soliciting alternatives to constructing its own generation facilities. These activities are indicative of substantial new entry both currently and in the near future in the general area of the country where the merging utilities are located. The fact that such entry is occurring is compelling evidence that there are no long-run barriers to entry. PSCo is engaged in the sale and transmission of natural gas in Colorado and Wyoming. Because many new power generation plants are fueled by gas, an existing utility's control of gas supplies or gas transmission facilities potentially could present an opportunity to foreclose entry by new gas-fired power generators. That potential does not exist in this case, however. PSCo currently provides both firm and interruptible gas transportation services to its customers, which include other power generators. In addition, its transportation services and transactions are regulated by the State of Colorado and the State of Wyoming and, to the extent it engages in interstate businesses, it is subject to the non- discriminatory access provisions of FERC's regulations. PSCo's control of natural gas transmission facilities does not constitute a barrier to entry by competing power generators. X. BUYER POWER Q. WHAT IS MEANT BY BUYER POWER? A. If a merger is proposed by two large buyers of wholesale electricity, a theoretical potential exists for the merged entity to exert monopsony power and reduce the prices it pays for wholesale power to less than competitive market levels. This is not an issue in the instant merger because SPS is primarily a seller, not a buyer of power, and PSCo's purchases relative to the size of the market are so small that any attempt to exercise monopsony power would be fruitless. XI. RETAIL COMPETITION Q. WHAT TYPES OF RETAIL COMPETITION CAN BE AFFECTED BY A MERGER? A. There are three types of retail electric competition that could conceivably be affected by a utility merger. They are fringe-area, yardstick, and industrial location competition. In addition, interfuel retail competition issues can arise when one of the merging parties provides gas service in areas where the other party provides electrical services. Q. WHAT IS FRINGE-AREA COMPETITION? A. Fringe-area competition occurs where two utilities have adjacent service areas and may compete at the borders of their service areas for new loads. Q. IS FRINGE-AREA COMPETITION AN ISSUE IN THIS MERGER? A. No, it is not. The electric service areas of SPS and PSCo are not adjacent. Q. WHAT IS YARDSTICK COMPETITION? A. Yardstick competition refers to a situation in which regulatory commissions compare costs and rates among utilities in the course of regulating individual firms. Theoretically, reducing the number of utilities through a merger could reduce the ability of regulatory commissions to make such comparisons. The concept of yardstick competition is, at best, nebulous. Q. IS YARDSTICK COMPETITION AN ISSUE IN THIS MERGER? A. No, it is not. Although regulatory commissions make comparisons with utilities in other jurisdictions, there are so many other utilities in the WSCC and the SPP that the merger of these two utilities will have no impact on the ability of regulatory commissions to make comparisons of costs and rates across utilities as a regulatory tool. Q. WHAT DO YOU MEAN BY INDUSTRIAL LOCATION COMPETITION? A. Energy-intensive industries may consider utility costs as one factor in deciding where to locate new production facilities and how intensely to operate existing facilities. As such, utilities may compete with one another for new industrial customers. Q. IS INDUSTRIAL LOCATION COMPETITION AN ISSUE IN THIS MERGER? A. No, it is not. Industrial location competition is limited to industries that are very energy-intensive. For most industries, labor costs, raw material costs, access to markets, and natural resources are much more important factors in location decisions. If SPS and PSCo may be considered competitors for retail business, in this sense, one would also have to view all of the utilities in the relevant geographic market as competitors for that same business. SPS's and PSCo's shares of this "market" are so small that, even assuming that they compete with one another for retail business, this merger could not possibly create or enhance market power. Q. IS INTERFUEL COMPETITION AN ISSUE IN THIS MERGER? A. No, it is not. SPS does not own a gas distribution business in PSCo's service area and PSCo does not own a gas distribution business in SPS's service area. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. EX-99 3 EX-99.2 - REVISED LEGAL MEMO REVISED LEGAL MEMORANDUM ON THE RETENTION OF GAS DIVISION BY NEW CENTURY ENERGIES, INC. INTRODUCTION The combination of Public Service Company of Colorado ("PSCo") and Southwestern Public Service Company ("SPS") in a merger of equals transaction (the "Transaction") will result in PSCo and SPS becoming wholly owned subsidiaries of New Century Energies, Inc. ("NCE"), a holding company which will be registered under the Public Utility Holding Company Act of 1935 (the "Act"). NCE has filed an Application/Declaration on Form U- 1 (the "Application") seeking the approval of the Securities and Exchange Commission (the "Commission") under the Act for the Transaction and related matters. In addition, the Application seeks the Commission's authorization for PSCo and its subsidiary, Cheyenne Light, Fuel and Power Company ("Cheyenne"), to retain their gas utility systems following the consummation of the Transaction. This memorandum supplements the Application with respect to legal issues related to NCE's request for authority to retain these gas systems following its registration as a holding company under the Act. ____________________ PSCo is an operating electric and gas public utility company as well as a holding company as a result of its ownership of all of the outstanding common stock of Cheyenne, an electric and gas public utility company organized in and operating in the state of Wyoming. In the case of both PSCo and Cheyenne, the electric utility operations are much larger than the gas utility operations. PSCo is currently exempt from registration under the Act pursuant to Section 3(a)(2) of the Act and Rule 2 thereunder. SUMMARY Both the legislative history of the Act as well as the Commission's early interpretation of the Act indicate that the purpose of the Act was to facilitate the process by which state utility regulatory commissions determine whether or not registered combination gas and electric holding company systems are permissible, and not to impose a more restrictive federal view. In addition, as the Commission has noted in a number of prior decisions, the Act is intended to provide for a flexible regulatory scheme that is capable of adapting to changes in the utility industry. The industry is in the process of its most radical change (from regulation to competition) since that which occurred as a result of the adoption of the Act and it is clear that the industry is currently evolving in a direction that requires utility company systems to offer their customers a range of energy options in order to remain competitive. Thus, the Commission should analyze the retention of PSCo's and Cheyenne's gas systems by focusing on those sections of the Act (Sections 8 and 21) that give primacy to state utility commission decisions with regard to combination registered holding companies and should "watchfully defer" to such local decision makers who are in the optimum position to regulate the combination utility. Under such analysis, NCE must be allowed to retain the gas systems of PSCo and Cheyenne as long as the Colorado Public Utilities Commission (the "CPUC") and the Wyoming Public Service Commission (the "WPSC") who have, and will continue to have, direct jurisdiction over the NCE's gas operations in their respective states, permit the continued existence of a combination system. Even if the Commission chooses not to focus on state commission determinations, Section 11 of the Act contains additional provisions that permit the retention of PSCo's and Cheyenne's gas systems -- namely, the so-called A-B-C clauses (the "A-B-C Clauses") of Section 11(b)(1) under which the Commission in the past has permitted retention of an additional gas or electric utility system in addition to the large electric utility system within a registered holding company system. Again, the standards set forth in this section should be read in light of the current changes in the utility industry. In any event, NCE without a doubt meets these standards with regard to the retention of the gas operations discussed herein. DISCUSSION I. Section 8 1. General Section 8 of the Act states: Whenever a state law prohibits, or requires approval or authorization of, the ownership or operation by a single company of the utility assets of an electric utility company and a gas utility company serving substantially the same territory, it shall be unlawful for a registered holding company, or any subsidiary thereof ... (1) to take any step, without the express approval of the State commission of such State, which results in it having a direct or indirect interest in an electric utility company and a gas utility company serving substantially the same territory; or (2) if it already has any such interest, to acquire, without the express approval of the State commission, any direct or indirect interest in an electric utility company or gas utility company serving substantially the same territory as that served by such companies which it already has an interest. On its face, this section indicates that, with approval of the relevant state utility commissions, a registered holding company can include a combination of electric and gas utility systems. A careful reading of the section indicates that the thrust of the section is to preclude the use by a holding company of separate gas and electric utility subsidiary companies with overlapping service territories in order to circumvent any state law restrictions on the ownership of gas and electric assets by the same company. Nevertheless, over time the Commission has adopted different interpretations of this section -- initially allowing registered holding companies to own both gas and electric systems pending relevant state approvals under Section 8, then focusing on Section 11 as controlling determinations regarding such combination companies and, requiring the "additional system" to meet a strict interpretation of the A-B-C Clauses. 2. Early Cases In its early decisions, the Commission adhered to the concept that the decision as to whether or not to allow a particular combination company is one that the affected states should make (although the Commission may have to implement the states' decisions in certain cases) and, where such systems were permissible, the role of the SEC is to ensure that both such systems are integrated as defined in the Act. The Commission's most notable decision in this line is In the Matter of American Water Works and Electric Company, Incorporated, 2 SEC 972 (1937). In this case, the Commission approved the applicant's voluntary reorganization plan under Section 11(e) of the Act and permitted the newly reorganized registered holding company to retain both its electric and its gas operations. While specifically noting that the Act does not contain a definition of single integrated utility in the context of a combination company, the Commission stated in this case that: We believe, however, that it is proper to regard such a combined property as a single integrated system, provided that all of the electric properties are integrated and all of the properties, both gas and electric, are in fairly close geographic proximity and are so related that substantial economies may be effectuated by their coordination under common control. The question of public policy as to the common ownership of gas and electric facilities in the same territory is apparently left by the statute to the decision of the states. Thus, since the combination company did not violate state policy, there was no need for the Commission to exercise jurisdiction to implement state policy by requiring divestiture of gas and electric operations. In this case the Commission's concern, under the Act, was that each system was an integrated system and otherwise met the standards of Section 11 of the Act. ____________________ Id., at 983 n.3. 3. Other Cases By the 1940's, however, the Commission de-emphasized its role as the implementer of state policy on combination companies and focused on a narrow interpretation of the standards of Section 11 as the basis for a policy, adopted and implemented in simplification proceedings, that the Commission should not allow registered holding companies to own both gas and electric companies unless the smaller system qualified for retention under the A-B-C Clauses. At this point, the Commission revisited and reinterpreted the American Water Works decision by noting that it could also have been viewed as a permissible retention under the A-B-C Clauses. Thus, most Section 11 proceedings involving the question of combination companies from that time forward discussed retention of the gas system solely in the context of whether or not it was a permissible "additional system" meeting the requirements of the A-B-C Clauses. In connection with this analysis, the Commission noted a policy concern existing at that time which advocated separating the management of gas utility operations from the management of electric utility operations. This policy was based on the belief that gas utilities benefitted from having a separate management focusing their entire energy on the gas business, as opposed to being part of a combination company where management tended to focus on electric utility operations at the expense of gas utility operations. In other words, there was a perception of internal management competition between gas and electric operations that could be detrimental to the gas operations and, in turn, to consumers. ____________________ See, e.g., In the matter of Columbia Gas & Electric Corporation, 8 SEC 443 at 463 (1941); In the Matter of United Gas Improvement Company, HCAR No. 2692 (April 15, 1941). See, e.g., In the Matter of the North American Company, 11 SEC 194, 216 (1942); In the Matter of Engineers Public Service Company, 12 SEC 41, 56 (1942); UNITIL Corporation, HCAR No. 25524 (April 24, 1992). See In the Matter of the Philadelphia Company, 28 SEC 35, 48 (1948); In the Matter of the North American Company, 18 SEC 169, 179-80 (1950); In the Matter of Illinois Power Company, HCAR No. 16574 (Jan. 2, 1970). The Supreme Court addressed the interplay between Sections 8 and 11 of the Act in its decision Securities and Exchange Commission v. New England Electric System ("NEES"), 384 U.S. 176 (1966). In this decision, the Court noted: To some extent, local policy was expected to govern, with Section 8 serving to prevent circumvention of that policy ... At the same time, Section 11 was expected to assist in imposing restrictions with regard to the combination of gas and electricity in one system. Discussing the interplay between Section 8 and Section 11, the Senate Committee noted that Section 8 only applied to future acquisitions [and] "the policy upon which this section was based was essential in any Federal legislation in utility holding companies; it did not think that the section should make it unlawful to retain (up to the time that section 11 may require divestment) interests in businesses in which the companies were lawfully engaged on the date of enactment of this title." The Commission's policy with regard to exempt combination holding companies gives primacy to state determinations. In prior cases, the Commission has considered whether or not it could approve transactions and grant exemptions to combination holding companies under the Act as being in the public interest in light of the dictates of Section 11(b)(1) and its single integrated utility requirement. In a 1954 decision granting an exemption from the Act, the Commission considered whether or not the holding company was eligible for the exemption because it conducted both gas and electric utility operations and such operations could be considered detrimental to the public interest as violative of Section 11(b)(1). In this case the Commission first decided that "the mere existence of the combined electric and gas operations does not of itself require the denial of an exemption." The final decision on whether or not the combined system was in the public interest was based on the concept that: competition in the field of distribution of gas and electric energy is essentially a question of state policy. The considered conclusions of the local authorities, deriving their power from specific state legislation, should be given great weight in determining whether the public interest would be adversely affected by the retention of combined operations. In the absence of a compelling showing in the record to the contrary, we would not be warranted in rejecting the appraisal of such authorities that the local public interest ... is served by retention of the combined operations. The Commission made a number of similar determinations in subsequent decisions relating to exempt holding companies. For example, in a 1988 case involving Section 9(a)(2) approval of an acquisition and subsequent exemption, the Commission reviewed its precedent and determined: the judgement of a state's legislature and public- service commission as to what will benefit their constituents is entitled to considerable deference .... we do not believe that the pro-competitive thrust of the Act expresses an absolute Federal policy against combination gas and electric operations .... Neither the Act nor the NEES decisions require that the [SEC] adopt such an inflexible rule. ____________________ Id., at 183 n.14. The dissenting opinion in this case specifically disputed this discussion, noting that "the House and Senate Committees in identical language expressly stated that common ownership of competing forms of energy was a field which is essentially a question of state policy; the present Section 8 was enacted to support this approach by using federal power to limit common ownership only where it is contrary to state law." Id. at 190 (Harlan dissenting). In the Matter of Northern States Power Company, HCAR No. 12655, 36 SEC 1 (Sept. 16, 1954). Id. at 8 (citations omitted). See, e.g., Delmarva Power & Light Co., 46 S.E.C. 710 (1976); Wisconsin Energy Corp., HCAR No. 24267 (Dec. 18, 1986). WPL Holdings, HCAR No. 24590 (Feb. 26, 1988). 4. Legislative History and Recent Developments A review of the legislative history of the Act together with the recent evolution of the utility industry indicates that now is a propitious time for the Commission to revisit its interpretations and allow combination registered holding companies where permitted under relevant state law without violating the spirit of the remaining sections of the Act. As embodied throughout Section 1 of the Act, one of the principle "evils" that the Act was designed to remedy was that multistate holding companies with activities "extending over many States are not susceptible of effective control by any State and make difficult, if not impossible, effective State regulation of public utility companies." Thus, the Act attempts to simplify the corporate structures of holding company systems to enable states to regulate the production and distribution of energy. In general, the Act is not concerned with those types of holding companies that can indeed be effectively regulated on the state level and provides exemptions for them in Sections 3(a)(1) and Section 3(a)(2). The Act creates federal jurisdiction to regulate those holding companies that could otherwise escape state and local regulation, but no indication exists that it should be used to override effective state regulatory policy. ____________________ This exemption applies where the holding company and all material utility subsidiaries are incorporated in and operate predominantly in the same state. This exemption applies where the holding company is predominantly a utility company whose operations do not extend beyond the state in which it is incorporated and states contiguous thereto. Indeed, Section 21 of the Act specifically indicates that "nothing in [the Act] shall affect ... the jurisdiction of an other commission, board, agency, or officer of ... any State ... insofar as such jurisdiction does not conflict with any provision of [the Act]." Section 8 in particular provides for the use of the Act as a tool to further state policy with regard to combination companies within registered holding company systems by prohibiting such companies where state law prohibits them and, implicitly, allowing such companies where state law and state regulatory officials do not object. A review of the legislative history of Section 8 clarifies this intent. In its 1935 report, the Senate Committee in Interstate Commerce noted that the provision in Section 8 concerning combination gas and electric companies "is concerned with competition in the field of distribution of gas and electric energy -- a field which is essentially a question of State policy, but which becomes a proper subject of Federal action where the extra-State device of a holding company is used to circumvent state policy." Conversely, when the holding company is not attempting to circumvent state policy, there does not appear to be any need for the federal government to exercise its jurisdiction. As noted in the report of the National Power Policy Committee on public- Utility Holding Companies, which is attached to the Senate report cited above, the policy of Section 8 is: Unless approval of a State commission can be obtained, the [SEC] should not permit the use of the holding- company form to combine a gas and an electric utility servicing the same territory where local law prohibits their combination in a single entity; but not to prohibit them where such approval can be obtained. Recent changes in the competitive nature of the utility industry indicate that any conceived need for regulation by the Commission due to a concern that the managements of combination companies may emphasize one form of energy over the other has been eliminated by market forces providing customers the ability to select the form and supplier of their energy needs which in turn mandates that utility companies offer a range of options to compete effectively. As the Division of Investment Management indicated in its recent report entitled the Regulation of Public- Utility Holding Companies, "the utility industry is evolving toward the creation of one-source energy companies that will provide their customers with whatever type of energy supply they want, whether electricity or gas." Thus, now that the fundamental restructuring of holding company systems has been completed and the industry is undergoing structural changes that will shift control over certain matters from utilities to consumers able to choose services offered by competing utilities, the Commission should reemphasize the provisions of Section 8 and the initial policy impetus of the Act by allowing combination registered holding companies to compete in the market as long as they can be effectively regulated on the state level. The Commission should again use the Act as a tool to implement state policy rather than as a device to impose additional unneeded and burdensome protections. ____________________ The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 31 (1935). The Division of Investment Management, The Regulation of Public-Utility Holding Companies at 15-16 (1995) (the "1995 Report"). The 1995 Report at 63 (citing the SEC Annual Report of 1952 reporting that the simplification proceedings required under the Act were nearly completed). This would not conflict with earlier interpretations of the Act. First, Section 11 is flexible and was designed to change as the policy concerns over the regulation of utility holding companies changed. Clearly, the utility industry and the regulation of that industry has changed dramatically in recent years and it is competitive forces (the very thing that the Act was designed to promote) that are pushing holding companies to offer alternative forms of energy. Second, a registered holding company would still be required to demonstrate that any acquisition or transaction by which it would become a combination company would not be detrimental to the carrying out of the provisions of Section 11 of the Act. In other words, its electric system would have to constitute an integrated electric system and that its gas system would have to constitute an integrated gas system and both systems would have to be capable of efficient operation. As discussed in Section II below, the Section 11 standards are met by the Transaction. ____________________ Mississippi Valley Generating Co., 36 SEC 159 (1955) (noting that Congress intended the concept of integration to be flexible); UNITIL Corporation, HCAR No. 25524 (April 24, 1992) (noting that section 11 contains a flexible standard designed to accommodate changes in the industry). See the 1995 Report for a discussion of the recent changes in the industry and the regulation thereof. In addition, nothing in the Supreme Court's NEES decision discussed above requires a different conclusion. First, as the Commission noted in its Union Electric decision, the Supreme Court's NEES decision attached "great weight... to [the Commission's] expertise in the administration of the Act." 45 SEC at 509 n.77. The NEES decision therefore leaves the Commission free to apply its expertise to administer the Act in light of changes in legal, regulatory and economic circumstances which were not foreseen at the time of the NEES decisions, including market and regulatory changes which has "substantially changed" the Act. As is clear, and the 1995 Report substantiates, the reform of the industry so as to be competitively based is as "substantial" a change as has occurred since that which was imposed by the adoption of the Act. Thus, NCE as a combination company is permissible pursuant to the terms of Section 8 of the Act and is in the public interest. First, the combination of electric and gas operations of PSCo and Cheyenne is lawful under both Colorado and Wyoming law, and PSCo in its applications to the CPUC and WPSC requesting their approval of the Transaction has requested that they indicate that they do not object to the continuance of this system. Moreover, the existence of both gas and electric systems in NCE's holding company system will allow NCE's customers greater choice to meet their energy needs, especially given that the electric and gas operations occur in substantially the same service territory, and will allow NCE to remain competitive with other utility companies. Indeed, the local regulators have effectively regulated this system as a combination gas and electric utility for decades. Finally, any concern that a holding company such as NCE would emphasize one form of energy over the other based on a single management's agenda is now unwarranted because of the increasingly competitive nature of the energy market. The market requires utilities to focus on customer demands for flexible energy supplies and, as a result of open-access to gas lines, forces gas providers like PSCo and Cheyenne to pre-empt and react to competitors. Furthermore, state regulatory authorities who approve of the combination company have sufficient authority to prevent energy preferences. II. Section 11 NCE meets the standards for retention of the gas operations of PSCo and Cheyenne pursuant to Section 11 of the Act as well. Under the A-B-C Clauses, a registered holding company is entitled to retain one or more additional integrated public utility systems if: (A) each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control by such holding company of such system; (B) all of such additional systems are located in one state, adjoining states, or a contiguous foreign country; and (C) the continued combination of such systems under the control of such holding company is not so large (considering the state of the art and the area or region so affected) as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. In fact, the Commission has held that the retention of existing gas properties is governed by less stringent standards than the acquisition of new gas properties, and has allowed at least two registered electric systems to retain long- standing gas utility properties without a showing of compliance with the A-B-C Clauses, subject to re-examination by the Commission when more information became available. ____________________ See, e.g., Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523, 527-28 (D.C. Cir. 1989); Delmarva Power & Light Co., HCAR 35-19717, 46 SEC 710, 715 (Oct. 19, 1976) (distinguishing between stricter standards applicable to the acquisition of new combination properties and the mere "continued existence of a combination company which had been in operation for thirty years"); Columbia Gas & Electric Corp., HCAR 35- 2477, 8 SEC 443, 462-463 (Jan. 10, 1941); Union Electric Company, HCAR 35-18368, 45 SEC 489, 503-506 (April 10, 1974) ("acquisitions are measured by standards more stringent than those governing retainability of existing properties"), aff'd without op. sub nom., City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975); and American Gas and Electric Co., HCAR 35-6639, 22 SEC 808 (May 17, 1946). See Middle South Utilities, Inc. et al., HCAR 35-11782 (March 20, 1953), 35 SEC 1, 14-15 (1953) (gas properties retained by New Orleans Public Service Inc.); and The North American Company, HCAR 35-10320, 32 SEC 169 (Dec. 28, 1950) and Union Electric Company of Missouri, HCAR 35-12262, 35 SEC 483 (Dec. 15, 1953) (retention by Union Electric Company of Missouri of gas properties of Missouri Power & Light Company and Missouri Edison Company, respectively). In its Application and supporting exhibits, PSCo and NCE have shown that clause (A) above will be satisfied because the gas divisions of PSCo and of Cheyenne will both suffer substantial losses of economy if they are separated from the NCE system and are operated on a stand-alone basis. This evidence is presented in the "Analysis of the Economic Impact of the Divestiture of the Gas Operations of PSCo and its Cheyenne Subsidiary" conducted by management of PSCo (the "Divestiture Study"), Exhibit J-1 to the Application. In addition, following the effectiveness of the transaction, NCE will satisfy the criteria of clause (B) as its gas utility operations will be confined to the contiguous states of Colorado and Wyoming. Finally, the NCE gas system will not be so large as to impair local management, efficient operation or effective regulation. Additional detail regarding clauses (A) and (C) follow. 1. Loss of Substantial Economies The starting point for any attempt to define "loss of substantial economies" is a line of cases beginning with New England Electric System ("NEES"), HCAR 35-15035, 41 SEC 888 (March 19, 1964) and culminating in SEC v. New England Electric System ("NEES"), 390 U.S. 207 (1968), the second of two Supreme Court opinions. The Supreme Court, in attempting to flesh out the concept of substantial economies, accepted the formulation developed in The North American Company, HCAR 35-3446, 11 SEC 194 (April 14, 1942), aff'd, 133 F.2d 148, aff'd as to constitutionality, 327 U.S. 687 (1946), that the loss must be such that it would be "likely to cause a serious impairment of the system." 390 U.S. at 211. In accepting the "serious impairment test," the Supreme Court rejected a very generous "business judgment" test adopted by the First Circuit when it reviewed the Commission's order in NEES. The NEES Commission opinion made clear that the Commission believed that the issue was not the total estimated loss, but the proportion of operations that such loss represents. As the Commission stated therein: "we have previously pointed out that the test of the substantiality of the estimated loss is not in absolute terms but rather in relation to total revenues, expenses and income." 41 SEC at 897. See also Philadelphia Company, HCAR 35-8242, 28 SEC 35, 49 (June 1, 1948); General Public Utilities Corporation, HCAR 35-10982, 32 SEC 807, 837 (Dec. 28, 1951). The Commission then compared the anticipated proportionate losses that would have been suffered by New England Electric System with the anticipated losses in other divestiture cases decided by the Commission and held that the anticipated losses of New England Electric System were no more substantial than in previous cases where divestiture had been ordered. The Supreme Court expressly approved the Commission's use of loss ratios in comparable cases. 390 U.S. at 216. The use of comparisons to other holding companies' anticipated losses was also used by the Commission in General Public Utilities Corp., 32 SEC at 8837. ____________________ A table of anticipated losses in previous decisions was attached to the Commission's decision and is reproduced as Exhibit J-2 to the Application. The examination of the NEES case and the other cases which the Commission used for comparison reveals that the losses in those cases are not of the magnitude of the losses that the PSCo and Cheyenne gas divisions would suffer if divested, and that the "serious impairment" test is met. The total lost economies of $43,605,187 that an independent PSCo gas division would suffer represent 6.44 percent of the total gas operating revenues of $677,326,418, and the total lost economies to be suffered by an independent Cheyenne gas division amount to $1,682,723 or 10.77 percent of its total operating revenues of $15,630,080. In the NEES case the loss of economies represented only 4.83 percent of operating revenues. Of the cases considered by the Commission, the lost economies in this case exceed, on a percentage basis, the loss of economies to gas operating revenues in The Philadelphia Company (3.00 percent), General Public Utilities Corp. (4.87 percent) and Middle South Utilities, Inc. (5.18 percent) cases. More importantly, in NEES, the company estimated it would suffer a reduction in gross income and net income that would have been approximately 23.28 percent and 29.94 percent, respectively. As is extensively documented in the Divestiture Study, the losses that a separate PSCo gas division would incur will result in a decrease in gross gas income of 62.54 percent and gas income of 85.06 percent. Similarly, Cheyenne would suffer a loss of 86.36 percent in gross gas income and 109.94 percent in net gas income. These numbers exceed the comparable estimated losses in the Engineers Public Service Company (20.85 percent in gross gas income and 25.25 percent in net gas income); The North American Company (21.68 percent in gross gas income and 24.34 percent in net gas income), The Philadelphia Company (14.03 percent in gross gas income) and Middle South Utilities, Inc. (23.68 percent in gross gas income) cases. The Supreme Court in NEES, 390 U.S. at 215, held that the Commission did not err in deciding that the decline in rate of return on base rates from 6.4 percent to 5.2 percent was not sufficient to constitute a loss of substantial economies. The Court also approved the Commission's use of projected return comparisons with that of other gas companies in the area. NEES would have tied for the second lowest rate of return on rate base. In the present situation, the effect is again more dramatic than it was in NEES. The new PSCo company would only have a projected return on rate base of 2.47 percent -- approximately half of what NEES would have had and a rather substantial decrease from the 9.31 percent rate of return over the 12 months ended June 30, 1995. Cheyenne's gas operation, on a stand-alone basis, would have a projected rate of return of 3.13 percent -- down from 9.62 percent for the same period. ____________________ The Court of Appeals had overturned the Commission's order by relying upon an estimated return of 4.1 percent and an average in Massachusetts of 5.9 percent. 376 F.2d 107, 114. The Supreme Court did not decide whether such a reduction would be a substantial loss, but rather found that the Court of Appeals had used an improperly low figure and that when additional tax deductions were considered the proper figure was 5.2 percent. In the three areas considered most important by the Commission -- net income, operating revenues and return on rate base -- an independent PSCo gas division and an independent Cheyenne gas division would suffer losses of economies that would be more substantial than in the majority of previous cases where divestiture was ordered. 2. Size of Additional System Under clause (C), the dispositive consideration in evaluating the size of a system is not size alone or size in an absolute sense, either big or small, but size in relation to its effect, if any, on localized management, efficient operation and effective regulation. The statutory language makes clear that the size of the additional system(s) is not to be considered abstractly or mechanistically, on the basis of preconceived notions of "appropriate" size limitations. Rather, the express terms of Section 11(b)(1)(C) mandate a flexible test based on the specific facts and circumstances at hand. To this end, the Act requires that the Commission assess the size of the additional system with reference both to the impact on localized management, efficient operations, and the effectiveness of regulation and to "the state of the act and the area or region affected." The Commission's decisions recognize these principles. In the relatively few instances where it has squarely addressed Clause (C), the Commission has stated that the applicable inquiry is similar to that involved in applying the size standards of Section 2(a)(29), which defines "integrated" electric and gas systems using substantially identical language. Commission decisions construing the size criteria of Section 2(a)(29)(A) firmly establish that sheer size is not dispositive and that the Commission must take into account all relevant circumstances and must "exercise its best judgment as to the maximum size of a holding company in a particular area, considering the state of the art and the area or region affected." ____________________ See The North American Company, 11 SEC at 214 (footnote omitted): The language of Clause (C) finds an almost identical counterpart in the definition of an integrated electric utility system contained in Section 2(a)(29)(A). That definition describes a system having certain physical characteristics and which is, further -- ...confined in its operations to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. Similar language appearing in different sections of a statute is normally to be given the same meaning. The use of this similar language in Section 2(a)(29)(A) and in Clause (C) of Section 11(b)(1), in our opinion, casts considerable light on the meaning of the size standards of Clause (C) and would seem to indicate that similar considerations are involved in applying the size standards of Clause (C) to a combination of principal and additional systems, as are involved in applying the size standards of Section 2(a)(29)(A) to determine the maximum limits of a single integrated system. See also Lone Star Gas Corp. et al., HCAR 35-3865, 12 SEC 286, 295 (Oct. 22, 1942); Cities Service Power & Light Co., HCAR 35-7615, 14 SEC 28, 59 (Aug. 17, 1943); The Commonwealth & Southern Co., HCAR 35-4489, 26 SEC 464, 488- 489 (Aug. 1, 1947). See, e.g., Energy Corp., 55 SEC Docket 2035, 2040 (1993); Centerior Energy Corp., HCAR 35-24073, 35 SEC Docket 769, 771 (April 29, 1986); American Electric Power Company, Inc., HCAR 35-20633, 46 SEC 1299, 1309 (July 21, 1978). American Electric Power Company, Inc., 46 SEC at 1309. As discussed in more detail below, from these perspectives -- i.e., a flexible fact-specific perspective in which size is evaluated in relation both to its effect (if any) on localized management, efficient operation and effectiveness of regulation and to the "state of the art" and the area or region affected -- it is clear that the continued combination of gas and electric operations under NCE is not prohibitively large under Section 11(b)(1)(C). (a) The continued combination of gas and electric operations under NCE will preserve the effectiveness of regulation. From the standpoint of regulatory effectiveness, PSCo's gas division and Cheyenne's gas division are each organized in separate corporations by regulatory jurisdictions, which facilitate state regulation. Following consummation of the Transaction, all Colorado gas operations will continue to be conducted through PSCo and all Wyoming gas operations through Cheyenne, both of which will continue to be separate corporations, although Cheyenne will become a direct subsidiary of NCE instead of PSCo. Thus, the effective state regulatory scheme currently in place will continue unaltered after the consummation of the Transaction. As previously mentioned, both the CPUC and the WPSC will have indicated that they do not object to this structure, confirming that they believe they will continue to have effective regulatory control over these gas operations. (b) Localized management: The Commission's past decisions on "localized management" have evaluated localized management in terms of such factors as responsiveness to local needs, whether management and directors were drawn from local utilities, the preservation of corporate identities, the ease of communication, and other factors. ____________________ Entergy Corp., HCAR 35-25952, 55 SEC Docket 2035, 2046 n.83 (Dec. 17, 1993); American Electric Power Co., HCAR 35-20633, 15 SEC Docket 375, 383 (July 21, 1978) (advantages of localized management evaluated in terms of whether an enlarged system could be "responsive to local needs"); General Public Utilities Corp. et al., HCAR 35-13116, 37 SEC 28, 36 (March 2, 1956) (localized management evaluated in terms of "local problems and matters involving relations with consumers"). See Centerior Energy Corp., 35 SEC Docket at 775 (advantages of localized management would not be compromised by the affiliation of two electric utilities under a new holding company because the new holding company's "management [would be] drawn from the present management" of the two utilities): Northeast Utilities, HCAR 25221, 47 SEC Docket 1270, 1285 (Dec. 21, 1990) (advantages of localized management would be preserved in part because the board of New Hampshire utility, which was to be acquired by an out-of-state holding company, included "four New Hampshire residents"). See Northeast Utilities, 47 SEC Docket at 1285 (utilities "will be maintained as separate New Hampshire corporations.. . . [t]herefore the advantages of localized management will be preserved"); Columbia Gas System, Inc., HCAR 35-24599, 40 SEC Docket 654, 656 (March 15, 1988) (benefits of local management maintained where the utility to be added would be a separate subsidiary). See American Electric Power Co., 15 SEC Docket at 383- 84 (distance of corporate headquarters from local management was a "less important factor in determining what is in the public interest" given the "present-day ease of communication and transportation"). In addition, the Commission has held that so long as there is evidence as to the local nature of important policy determinations, the advantages of localized management are not necessarily impaired by central control. The North American Co., 11 SEC at 237. The localization of policy determinations can be effectively achieved where management's time and efforts are concentrated in the area served by the principal system (here, the electric system). Southern Union Gas Co. et al., HCAR 35- 3802, 12 SEC 116, 142 (Sep. 19, 1942). It can also be achieved where the systems are in close proximity to each other. Engineers Public Service Co., HCAR 35-3796, 12 SEC 41, 66 (Sep. 16, 1942). The retention of the gas properties under NCE satisfies all of these considerations. Retention of the PSCo gas properties would preserve the local nature of important policy determinations in relation to those gas services, since the principal corporate office of the holding company will be located in Denver, which is the central location within the gas service territory. This location of the principal corporate office ensures that the company will be "responsive to local needs and local public feeling" of its gas customers, Lone Star Gas Corp., 12 SEC 286 (1942), since the decision making body of the company will most likely be aware of the issues of the population in the area of its residence. In addition, the Cheyenne gas division will continue to recognize economies of scale from certain centralized functions such as rate operations and billing, while the day-to-day operation of its system will continue to be located in Cheyenne, in the midst of its customers. By contrast, if the gas operations of Cheyenne were divested, and acquired by another company not currently a part of the community, such an acquiror would likely not be as sensitive to the needs and desires of the area as Cheyenne. The danger of such an acquisition is especially real here, since the Cheyenne gas system on a stand- alone basis would be relatively small, and the loss of economies occasioned by divestiture would be substantial, thereby rendering the company especially vulnerable to acquisition. Finally, the gas properties of PSCo and Cheyenne are located almost entirely within the electric service area of PSCo and Cheyenne. While the Commission has never required that additional systems must be entirely within the area served by the principal system, a substantial overlap of service territories has assisted in determining that a combination is not too large. See, e.g., Engineers Public Service Co., 12 SEC 41 (1942) (finding a combination to be not too large when the additional system was entirely within the principal service territory); New England Electric System, 41 SEC at 892 (finding that where 75 percent of the gas franchise area was located within the electric franchise area, no substantial question under clause C was raised). As a result, the continued combination of the gas and electric systems under the control of NCE will not be so large as to impair the advantages of localized management. (c) Efficiency of operation: The foregoing geographic and management factors also ensure that the continued combination of gas and electric properties under NCE will not impair the efficiency of gas and electric operation. Indeed, as set forth in NCE's Application, the Transaction is expected to result in significant efficiencies, a portion of which will directly benefit gas operations. By contrast, as described more fully in the divestiture impact analysis submitted by NCE in support of its Application, a forced divestiture of the PSCo and Cheyenne gas systems would result in a loss of substantial economies that can be preserved by the continued operation of those gas system under the control of NCE. 3. Recent Developments As previously mentioned, the Commission and courts have recognized that the Act must be interpreted "in the light of contemporary circumstances" and "changing economic and regulatory climates." Union Electric Co., 45 SEC at 503 & n.52, aff'd sub nom. City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975). See also The Southern Company, HCAR 35-25639, 50 SEC 1328, 1337 (Sep. 23, 1992) (citing Union Electric with approval). Section 11(b)(1)(C) itself calls on the Commission to consider the "state of the art" and thereby requires that advances in communications and changes wrought by intervening legal and regulatory developments must be considered by the Commission, and the Supreme Court's SEC v. New England Electric System decision permits the Commission to exercise its discretion in interpreting the Act to account for such changes. As set forth in section I-4 above, changes in the economic and regulatory climate are rapidly rendering the old labels of "gas utility company" and "electric utility company" obsolete, have effectively eliminated many of the policy concerns underlying the old hostility to registered combination utility systems, and have established competing policy priorities. Accordingly, it is appropriate for the Commission to reflect the radical developments in the utility industry and permit the request of NCE to become a combination utility. CONCLUSION For the reasons set forth above, and in NCE's Application and supporting exhibits, it is respectfully submitted that the Commission should allow NCE to retain the gas utility operations of PSCo and Cheyenne following the consummation of the Transaction and the registration of NCE as a holding company under the Act. EX-99 4 EX-99.3 - TABLE OF LOST ECONOMIES Exhibit J-3 SUMMARY OF LOST ECONOMY RATIOS PSCO NewGasco-Colorado NewGasco-Wyoming Percent of Percent of estimated estimated loss of loss of economies economies Amount to: Amount to: Operating Revenues $677,326,418 6.44% $15,630,080 10.77% Operating Revenue Deductions 607,599,384 7.18% 13,681,672 12.30% Gross Income 69,727,034 62.54% 1,948,408 88.36% Net Income 51,266,520 85.06% 1,530,526 109.94% Estimated Loss of Economies 43,605,187 1,682,723 FITCHBURG GAS & GULF STATES UTILITIES ELECTRIC Fitchburg Gas GSU Gas Division 1991 Division-1990 Percent of Percent of estimated estimated loss of loss of economies economies Amount to: Amount to: Operating Revenues $31,858,000 16.13% $17,324,993 13.94% Operating Revenue Deductions 30,770,000 16.70% 15,755,267 15.33% Gross Income 1,088,000 472.24% 1,569,726 153.87% Net Income n/a n/a n/a n/a Estimated Loss of Economies 5,138,000 2,415,391 ENGINEER PUBLIC SERVICE COMPANY Gas Properties of Gas Properties of Gulf States Utilities Virginia Electric and Co.-1940 Power Co.-1940 Percent of Percent of estimated estimated loss of loss of economies economies Amount to: Amount to: Operating Revenues $638,711 6.58%* $1,057,000 3.38% Operating Revenue Deductions 444,006 9.46%* 735,294 4.86% Gross Income 201,594 20.85%* 317,890 11.25% Net Income 166,402 25.25%* 168,412 21.23% Estimated Loss of Economies 42,024 35,750 THE NORTH AMERICAN COMPANY PHILADELPHIA COMPANY Gas Properties of the St. Louis County Gas Co.-1942 Gas Group-1946 Percent of Percent of estimated estimated loss of loss of economies economies Amount to: Amount to: Operating Revenues $2,748,770 5.85% $16,656,560 3.00% Operating Revenue Deductions 2,009,757 8.01% 13,197,846 3.79% Gross Income 742,027 21.68% 3,565,357 14.03% Net Income 661,110 24.34% n/a n/a Estimated Loss of Economies 160,900 500,328 GENERAL PUBLIC MIDDLE SOUTH UTILITIES CORP. UTILITIES, INC. Gas Properties of Gas Properties of Jersey Central Power & Louisiana Power & Light Co.-1949 Light Co.-1954 Percent of Percent of estimated estimated loss of loss of economies economies Amount to: Amount to: Operating Revenues $4,714,958 4.87% $5,264,186 5.18% Operating Revenue Deductions 4,235,661 5.42% 4,112,285 6.63% Gross Income 479,477 47.84% 1,151,901 23.68% Net Income 202,582 113.24% n/a n/a Estimated Loss of Economies 229,398 272,816 NEES Gas Properties of 8 Subsidiaries Combined-1958 Percent of estimated loss of Amount economies to: Operating Revenues $22,752,270 4.83% Operating Revenue Deductions 18,207,191 6.03% Gross Income 4,718,864 23.28% Net Income 3,669,931 29.93% Estimated Loss of Economies 1,098,500 ____________________ Excludes federal income taxes. Before deducting federal income taxes. * Based on estimated cost increases rejected by the SEC as "overstated" and "doubtful." EX-99 5 EX-99.4 - PRO FORMA BALANCE SHEET NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Thousands of Dollars) AT DECEMBER 31, 1995 ASSETS PSCo SPS PRO FORMA Property, plant & equipment, at cost: Electric $3,751,321 $2,418,558 $6,169,879 Gas 989,215 - 989,215 Steam 17,698 - 17,698 Other 70,748 39,502 110,250 Common to all departments 380,809 - 380,809 Construction work in progress 192,580 54,920 247,500 5,402,371 2,512,980 7,915,351 Less: accumulated depreciation 1,921,659 886,896 2,808,555 Total property, plant & equipment 3,480,712 1,626,084 5,106,796 Investments, at cost 24,282 43,687 67,969 Current assets: Cash & temporary cash investments 14,693 13,613 28,306 Accounts receivable - net 124,731 63,860 188,591 Accrued unbilled revenues 96,989 19,839 116,828 Materials & supplies, at average cost 56,525 20,719 77,244 Fuel inventory, at average cost 35,654 2,314 37,968 Gas in underground storage, at cost (LIFO) 44,900 - 44,900 Current portion of accumulated deferred income taxes 19,229 3,877 23,106 Regulatory assets recoverable within one year 40,247 - 40,247 Prepaid expenses and other 35,619 5,106 40,725 Total current assets 468,587 129,328 597,915 Deferred charges: Regulatory assets 321,797 109,957 431,754 Unamortized debt expense 10,460 5,426 15,886 Other 48,457 20,228 68,685 Total deferred charges 380,714 135,611 516,325 $4,354,295 $1,934,710 $6,289,005 The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Thousands of Dollars) AT DECEMBER 31, 1995 CAPITAL AND LIABILITIES PSCo SPS PRO FORMA Common stock (2) $ 316,791 $ 40,918 $ 102,230 Paid-in capital (2) 680,315 307,483 1,243,277 Retained earnings (6) 346,539 379,527 714,014 Total common equity 1,343,645 727,928 2,059,521 Preferred stock: Not subject to mandatory redemption 140,008 260 140,268 Subject to mandatory redemption 41,289 - 41,289 Long-term debt 1,195,553 580,655 1,776,208 2,720,495 1,308,843 4,017,286 Noncurrent liabilities: Defueling and decommissioning liability 23,115 - 23,115 Employees' postretirement benefits other than pensions 51,704 2,864 54,568 Employees' postemployment benefits 23,500 2,325 25,825 Total noncurrent liabilities 98,319 5,189 103,508 Current liabilities: Notes payable & commercial paper 288,050 116,250 404,300 Long-term debt due within one year 82,836 180 83,016 Preferred stock subject to mandatory redemption within one year 2,576 - 2,576 Accounts payable 156,109 9,706 165,815 Dividends payable 35,284 - 35,284 Recovered purchased gas & electric energy costs - net 9,508 7,159 16,667 Customers' deposits 17,462 6,282 23,744 Accrued taxes 55,393 28,736 83,703 Accrued interest 32,071 12,471 44,542 Current portion of defueling & decommissioning liability 24,055 - 24,055 Merger costs - - 12,478 Other 78,451 61,646 140,097 Total current liabilities 781,795 242,430 1,036,277 Deferred credits: Customers' advances for construction 99,519 335 99,854 Unamortized investment tax credits 113,184 5,970 119,154 Accumulated deferred income taxes 508,143 359,973 868,116 Other 32,840 11,970 44,810 Total deferred credits 753,686 378,248 1,131,934 $4,354,295 $1,934,710 $6,289,005 The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. NEW CENTURY ENERGIES, INC. NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF INCOME (1) The unaudited pro forma combined statements of income have been prepared from the historical consolidated financial statements of PSCo and SPS and are presented as if the companies were combined during all periods presented herein. The PSCo amounts have been prepared from its consolidated financial statements which have been incorporated by reference herein. SPS has an August 31 fiscal year-end and, accordingly, its consolidated financial statements have been updated to include interim period results consistent with the periods presented for PSCo. (2) The unaudited pro forma combined balance sheet and statements of income reflect the conversion of each outstanding share of PSCo Common Stock into one share of Company Common Stock, and each outstanding share of SPS Common Stock into 0.95 of one share of Company Common Stock in accordance with the terms of the Merger Agreement. (3) There were no intercompany transactions and, accordingly, no pro forma elimination adjustments were made. (4) For discussion regarding material commitments and contingencies relating to either PSCo or SPS, reference is made to the documents incorporated by reference herein. (5) The unaudited pro forma combined financial statements include $6.7 million of nonrecurring charges incurred during the year ended December 31, 1995. The unaudited pro forma combined statements of income do not reflect future nonrecurring charges directly related to the Mergers estimated to total approximately $12.5 million. This includes merger transaction costs of approximately $11.3 million and benefits expense of approximately $1.2 million resulting from an accelerated vesting of benefits as a result of the Mergers. The pro forma combined balance sheet at December 31, 1995 has been adjusted to include these items with the recognition of additional current liabilities and the reduction of retained earnings. EX-99 6 EX-99.5 - PRO FORMA INCOME STATEMENT NEW CENTURY ENERGIES, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (Thousands of Dollars, except per share data) FOR THE YEAR ENDED DECEMBER 31, 1995 PSCo SPS PRO FORMA Operating revenues: Electric $1,449,096 $852,510 $2,301,606 Gas 624,585 - 624,585 Other 36,920 - 36,920 2,110,601 852,510 2,963,111 Operating expenses: Fuel used in generation 181,995 376,544 558,539 Purchased power 481,958 6,485 488,443 Gas purchased for resale 392,680 - 392,680 Other operating expenses 350,093 111,212 461,305 Maintenance 64,069 27,594 91,663 Depreciation and amortization 141,380 62,552 203,932 Taxes (other than income taxes) 81,319 43,316 124,635 Income taxes 95,357 69,840 165,197 1,788,851 697,543 2,486,394 Operating income 321,750 154,967 476,717 Other income and deductions: Allowance for equity funds used during construction 3,782 245 4,027 Miscellaneous income and deductions - net (2,770) 10,942 8,172 1,012 11,187 12,199 Interest charges and preferred dividends: Interest on long-term debt 85,832 42,421 128,253 Amortization of debt discount and expense less premium 3,278 2,048 5,326 Other interest 58,109 1,695 59,804 Allowance for borrowed funds used during construction (3,313) (2,744) (6,057) Dividend requirements on preferred stock of PSCo and SPS - - 17,588 143,906 43,420 204,914 Net income 178,856 122,734 284,002 Dividend requirements on preferred stock of PSCo and SPS 11,963 5,625 - Earnings available for common stock 166,893 117,109 284,002 Weighted average common shares outstanding (2) 62,932 40,918 101,804 Earnings per weighted average share of common stock outstanding $2.65 $2.86 $2.79 The accompanying notes to pro forma consolidated balance sheet and statements of income are an integral part of this statement. NEW CENTURY ENERGIES, INC. NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND STATEMENTS OF INCOME (1) The unaudited pro forma combined statements of income have been prepared from the historical consolidated financial statements of PSCo and SPS and are presented as if the companies were combined during all periods presented herein. The PSCo amounts have been prepared from its consolidated financial statements which have been incorporated by reference herein. SPS has an August 31 fiscal year-end and, accordingly, its consolidated financial statements have been updated to include interim period results consistent with the periods presented for PSCo. (2) The unaudited pro forma combined balance sheet and statements of income reflect the conversion of each outstanding share of PSCo Common Stock into one share of Company Common Stock, and each outstanding share of SPS Common Stock into 0.95 of one share of Company Common Stock in accordance with the terms of the Merger Agreement. (3) There were no intercompany transactions and, accordingly, no pro forma elimination adjustments were made. (4) For discussion regarding material commitments and contingencies relating to either PSCo or SPS, reference is made to the documents incorporated by reference herein. (5) The unaudited pro forma combined financial statements include $6.7 million of nonrecurring charges incurred during the year ended December 31, 1995. The unaudited pro forma combined statements of income do not reflect future nonrecurring charges directly related to the Mergers estimated to total approximately $12.5 million. This includes merger transaction costs of approximately $11.3 million and benefits expense of approximately $1.2 million resulting from an accelerated vesting of benefits as a result of the Mergers. The pro forma combined balance sheet at December 31, 1995 has been adjusted to include these items with the recognition of additional current liabilities and the reduction of retained earnings. EX-27 7 FINANCIAL DATA SCHEDULE
OPUR1 YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 0 0 200 0 0 200 200 0 0 200 0 0 0 0 0 0 0 0 0 0 0 200 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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