-----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, PHv4mxMu55vDCFBOn3g99s2u/F3Nc3YC0d6Av3cQVYXkFsjXW9p3BQY8A8TdRb3y db8NY3fFk0rcBriBORVFQQ== 0000950129-97-001522.txt : 19970414 0000950129-97-001522.hdr.sgml : 19970414 ACCESSION NUMBER: 0000950129-97-001522 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970411 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOUSTON INDUSTRIES INC CENTRAL INDEX KEY: 0000202131 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 741885573 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-08907 FILM NUMBER: 97579199 BUSINESS ADDRESS: STREET 1: 4400 POST OAK PKWY STREET 2: 5 POST OAK PK CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7136293000 MAIL ADDRESS: STREET 1: P O BOX 4567 CITY: HOUSTON STATE: TX ZIP: 77210 U-1/A 1 HOUSTON INDUSTRIES INCORPORATED - AMEND. #3 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM U-1/A ------------------------- AMENDMENT NO. 3 TO APPLICATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ------------------------- Houston Industries Incorporated and Houston Lighting & Power Company Houston Industries Plaza 1111 Louisiana, 47th Floor Houston, TX 77002-5231 (Name of company filing this statement and address of principal executive offices) ------------------------- None (Name of top registered holding company parent of each applicant or declarant) ------------------------- Hugh Rice Kelly Executive Vice President and General Counsel Houston Industries Incorporated Houston Industries Plaza 1111 Louisiana, 47th Floor Houston, TX 77002-5231 (Names and addresses of agent for service) ------------------------- The Commission is also requested to send copies of any communications in connection with this matter to: James R. Doty Stephen A. Massad Baker & Botts, L.L.P. Baker & Botts, L.L.P. The Warner One Shell Plaza 1299 Pennsylvania Avenue, N.W. 910 Louisiana Street Washington, D.C. 20004-2400 Houston, TX 77002-4995 2 Houston Industries Incorporated ("HI") and Houston Lighting & Power Company ("HL&P") hereby amend and restate their September 5, 1996 application for an order from the United States Securities and Exchange Commission (the "Commission") to the effect that upon the consummation of the merger transactions described at Item 1.B below, the resulting public utility holding company, and every subsidiary company thereof as such, shall be exempt from all provisions of the Public Utility Holding Company Act of 1935, as amended (the "Act"), other than Section 9(a)(2), pursuant to Section 3(a)(2) of the Act. Please call James R. Doty at (202) 639-7792 or Stephen A. Massad at (713) 229-1475 if you will require additional information with regard to this matter. ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION. A. THE PARTICIPANTS 1. HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY HI is a public utility holding company within the meaning of the Act. It is incorporated and maintains its principal place of business in Texas; its common stock is listed on the New York Stock Exchange. HI owns two primary operating subsidiaries. HL&P, an electric utility company, is HI's principal operating subsidiary, and is wholly owned by HI. HL&P is also incorporated in Texas and conducts its utility operations exclusively within that state. HL&P is engaged in the generation, transmission, distribution and sale of electric energy and serves over 1.5 million customers in a 5,000 square-mile area of the Texas Gulf Coast, including the City of Houston. HI's other primary operating subsidiary is Houston Industries Energy, Inc. ("HI Energy"), a Delaware corporation that participates primarily in the development and acquisition of foreign independent power projects and the privatization of foreign generation, transmission and distribution facilities. HI Energy also holds an interest in a domestic "qualifying facility" that is exempt from the Act pursuant to Section 210(e) of the Public Utility Regulatory Policies Act of 1978. Each foreign electric utility in which HI Energy has made an investment or otherwise holds an interest is an exempt "foreign utility company" pursuant to Section 33(a) of the Act and therefore is not a "public utility company" as such term is defined in Section 2(a)(5) of the Act. Each foreign independent power project in which HI Energy has made an investment or otherwise holds an interest is an "exempt wholesale generator" pursuant to Section 32(a)(1) of the Act and therefore is not an "electric utility company" as such term is defined in Section 2(a)(3) of the Act. For a summary of the investments by HI Energy in foreign utility companies and exempt wholesale generators see Response 8 in Exhibit G and Appendix 4 thereto. In addition, HI has a subsidiary, Houston Industries Power Generation, Inc. ("HI Power"), which has recently begun participating in domestic generation projects. HI Energy's existing interests in domestic power generation projects under development will be transferred to HI Power. HI is also the holding company parent of several other non-utility subsidiaries; however, HL&P currently accounts for substantially all of HI's consolidated income and common stock equity. Following consummation of the Basic Mergers (as herein defined) it is anticipated that HL&P's electric utility operations and business will continue to account for the predominant portion of the consolidated income and common stock equity of the combined companies. HI is exempt from the provisions of the Act, other than Section 9(a)(2), pursuant to Section 3(a)(1) because both HI and HL&P "are predominantly intrastate in character and carry on their business substantially in" Texas. Additional information regarding HI and its subsidiaries, including HL&P, is set forth in the following documents, each of which is incorporated herein by reference: (i) Form U-3A-2 for HI for Calendar Year 1996, filed on February 28, 1997, Commission File Number 069-00231, 2 3 (ii) Annual Report on Form 10-K of HI (Commission File Number 1-7629) and HL&P (Commission File Number 1-3187) for fiscal year ended December 31, 1996, filed on March 20, 1997, and (iii) Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P (Registration No. 333-11329), filed on October 28, 1996. 2. NORAM ENERGY CORP. NorAm Energy Corp. ("NorAm") is a public utility company within the meaning of the Act. It is incorporated in Delaware and maintains its principal executive offices in Texas; its common stock is listed on the New York Stock Exchange. NorAm provides retail natural gas service to over 2.7 million customers in over 1,300 municipalities and has several non-utility subsidiaries. NorAm's natural gas distribution business operates as three divisions of the parent company: (i) Entex, the local gas distribution company in Houston, Texas, and in other areas in Texas, Louisiana and Mississippi, (ii) Arkla, which distributes natural gas at retail in Arkansas, Louisiana, Oklahoma and Texas, and (iii) Minnegasco, which distributes natural gas in Minnesota. NorAm also operates interstate gas pipeline facilities through subsidiaries NorAm Gas Transmission Company and Mississippi River Transmission Corporation and operates natural gas gathering assets in Oklahoma, Louisiana, Arkansas and Texas through NorAm Field Services Corp. NorAm's wholesale energy marketing business is engaged in marketing natural gas and electric power and providing risk management services to natural gas resellers and certain large volume customers. This business is principally conducted by NorAm Energy Services, Inc. ("NES"), together with certain affiliates. In addition, NorAm provides unregulated retail energy services to industrial and large commercial customers through NorAm Energy Management, Inc. HI understands that NorAm is planning to form one or more subsidiary companies which may invest in certain gas distribution systems in Latin America. It is NorAm's intention that any foreign utility in which NorAm will hold an interest shall be an exempt "foreign utility company" and therefore not a "public utility company" as such term is defined under Section 2(a)(5) of the Act. During 1996, NorAm's gas utility business accounted for 44% of its consolidated operating revenues. Additional information on NorAm is set forth in the following documents, each of which is incorporated herein by reference: 3 4 (i) NorAm Form U-1 (regarding proposed investments in Gas Natural, S.A., a Columbian corporation) filed on May 5, 1995, Commission File Number 070-08629, (ii) Annual Report on Form 10-K of NorAm (Commission File Number 1-3751) for the fiscal year ended December 31, 1996, filed on March 28, 1997, and (iii) Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P (Registration No. 333-11329), filed on October 28, 1996. B. THE TRANSACTION On August 11, 1996, HI, HL&P and a new Delaware subsidiary of HI, named "HI Merger, Inc." ("Merger Sub"), entered into an Agreement and Plan of Merger (as amended by Amendment to Agreement and Plan of Merger dated October 23, 1996, the "Merger Agreement") with NorAm. Under the Merger Agreement, HI will merge with HL&P and the currently outstanding common stock of HI will become the common stock of HL&P, which will be renamed "Houston Industries Incorporated" ("Houston"). Thereafter, NorAm will merge with Merger Sub, which will be renamed "NorAm Energy Corp." and will be a wholly owned subsidiary of Houston following the merger (collectively, the mergers are referred to herein as the "Basic Mergers"). Following the Basic Mergers, the electric utility business of HL&P will be conducted by Houston under HL&P's name. Under the Merger Agreement, holders of NorAm common stock will receive at their election: (i) cash in the amount of $16.00 per share or (ii) Houston voting common stock. The market value of the stock component will be generally equal to $16.00 per share, assuming the average NYSE closing sales price of a share of HI common stock is within a specified price range during a 20-day period prior to the closing date of the Basic Mergers. If the closing does not occur by May 11, 1997, the cash (but not stock) consideration increases thereafter by two percent (simple interest) per quarter until closing. The shareholders' elections will be subject to the right of HI to prorate cash and stock elections so that the aggregate amounts of cash and stock elections are approximately equal. The total value of the cash and stock consideration to be issued in exchange for all of NorAm's common stock and common stock equivalents is expected to be approximately $2.5 billion. The Boards of Directors of each party have approved the Merger Agreement. On December 17, 1996, the shareholders of both HI and NorAm approved the Merger Agreement at their respective special shareholders meetings, each company's shareholders approving the agreement by approximately 99% of the votes cast. Consummation of the Basic Mergers is subject to customary closing conditions 4 5 and receipt of regulatory approvals, including approvals from certain state regulatory agencies and municipal franchise authorities and the filing of the requisite notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of applicable waiting periods thereunder. See Item 4 for a discussion of these approvals and of proceedings initiated by the Federal Energy Regulatory Commission ("FERC"). The parties have agreed to certain undertakings and limitations regarding the conduct of their businesses prior to the closing. The Merger Agreement provides for termination by either party upon the occurrence of certain events, including failure of the parties to consummate the Basic Mergers by August 11, 1997, which date may be extended until December 31, 1997, in the event that the only unsatisfied condition to closing is receipt of regulatory approvals. The Merger Agreement provides for a termination fee to be paid by one party to the other in certain circumstances, which fee ranges from $10 million to $75 million depending on the circumstances of termination. Under the merger structure Houston would be both a public utility company and a public utility holding company under the Act. The Merger Agreement contemplates that the companies surviving the Basic Mergers will continue to be exempt from registration under the Act pursuant to Section 3(a)(2) of the Act and regulations promulgated thereunder because Houston, as the surviving holding company, would be "predominantly a public-utility company whose operations as such do not extend beyond the State in which it is organized and States contiguous thereto." Alternative structures are provided for in the Merger Agreement should the order requested in this Application be denied or should there be legislative changes that permit structures not presently authorized by the Act. One of the alternative structures contemplates a non-holding company structure in which all domestic utility operations would be conducted within one publicly-held company. (The considerations attendant on this alternative structure for the companies, their public shareholders and consumers are addressed in Part C, below.) The descriptions of the Merger Agreement set forth herein do not purport to be complete and are qualified in their entirety by the provisions of the Merger Agreement, which is Exhibit A hereto. In addition, a more complete description of the Merger Agreement is set forth in Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P, filed on October 28, 1996, which is Exhibit B hereto. The cash portion of the merger consideration (estimated to be approximately $1.25 billion) is expected to be funded through bank borrowings under new bank credit facilities (the "Bank Facilities") to be arranged by a newly formed 5 6 finance subsidiary (the "Borrower") with a group of commercial banks. As of the date hereof, the structure, terms and provisions of the Bank Facilities have not yet been made definitive.(1) The Bank Facilities are expected to bear interest at a rate based upon either the London Interbank Offered Rate plus a margin or a base rate plus a margin or at a rate determined through a bidding process. The borrowings under the Bank Facilities are expected to be secured by liens on or first priority security interests in assets, which may include (i) the shares of common stock of NorAm held by Houston or its affiliates after the Basic Mergers, (ii) the shares of common and preferred stock of Time Warner Inc. owned by the Company, (iii) the capital stock of certain subsidiaries of the Borrower and (iv) intercompany notes evidencing any loans made by the Borrower to Houston or its direct or indirect subsidiaries. The obligations under the Bank Facilities will not be secured by the utility properties of HL&P or NorAm. In order to provide liquidity to the Borrower to meet its financial obligations, Houston is expected to issue to the Borrower a new series of preference stock of Houston and enter into a support agreement under which it would agree to make cash contributions or advances to the Borrower from excess cash flow (with calculations, definitions and payment mechanics to be agreed upon). Houston may also agree to certain covenants, including certain limitations on the payment of dividends on or the repurchase of Houston common stock. The net proceeds of any disposition or monetization of the Time Warner stock are expected to be used to prepay borrowings under the Bank Facilities, subject to a corresponding release by the banks of their security interest in the Time Warner stock to the extent of any such prepayment. The Bank Facilities are also expected to contain customary covenants and default provisions applicable to the Borrower and its subsidiaries, including limitations on the ability of the Borrower and its subsidiaries to, among other things, incur additional indebtedness (other than certain permitted indebtedness), create liens and make investments or loans. C. REASONS FOR THE TRANSACTION STRUCTURE Although the merger of NorAm directly into HL&P, rather than with a special purpose HL&P subsidiary, may appear to have some advantages, such as the simplicity of a single combined enterprise and the elimination altogether of a utility holding company, there are in fact significant advantages for investors and consumers and for the efficient operation of the utilities if HL&P and NorAm can continue to exist and operate as separate corporations. First, the HL&P mortgage (which secures approximately $3.15 billion of HL&P first mortgage bonds) contains an "after-acquired property clause" that, in the case of a merger of NorAm into HL&P, would result in the creation of a lien on all property (other than excluded property) of NorAm. Upon the creation of such a lien on NorAm properties, the terms of NorAm's indentures would require that the benefits of this lien be extended to secure approximately $1.4 billion of NorAm debentures (which currently are unsecured obligations of NorAm). The resulting 44% increase in the amount of debt secured by mortgage liens would not only impose substantial restrictions on Houston's future financing flexibility but would also constitute an impediment to Houston's ability to modify, amend or eliminate its mortgage if that should become necessary or desirable. Second, HL&P and NorAm believe that state regulatory commissions will prefer the proposed structure over the alternative of merging NorAm directly into HL&P - -------------------- (1) In connection with the financing, HI and NorAm have sought the opinion of Nationally Recognized Statistical Rating Organizations regarding the effect of the Basic Mergers on the outstanding debt of the gas and electric utilities. See Response 3 in Exhibit G and Appendix 1 thereto for a summary and discussion of the credit ratings obtained. Prior to FERC initiating proceedings in February 1997, the Borrower and the banks had negotiated and were ready to enter into the new bank credit facilities. The Borrower and the banks did not and still have not executed such facilities because of the effect on the timing of the Basic Mergers caused by the FERC proceedings. It is anticipated that when the timing of the resolution of the FERC proceedings is more certain, the Borrower will renegotiate the structure, terms and provisions of the Bank Facilities, which may differ significantly from the structure, terms and provisions previously negotiated. 6 7 both because the proposed structure will avoid the encumbrance of NorAm's utility assets and because it will retain legal separation between the electric and gas utility operations. The legal separation of the gas and electricity operations serves several ends, each of which is consistent with the goals and duties of state regulatory agencies. First, the segregation of the gas and utility operations is well understood and familiar to both state regulators and to financial markets. In Texas, for example, the separation of regulation by the establishment of two, separate regulatory bodies having quite distinct responsibilities--one for gas and one for electric utilities--further reflects this operational division. Financing sources and financial analysts have familiarity with evaluating the financial positions of the gas company and the electric company as separate entities. Accordingly, a corporate structure which keeps those entities separate does no violence to the pattern of state regulation. Rather, this separation facilitates the combined company's access to capital markets, serving the preferences of lower cost financing specifically designed for the separate and different businesses. Similarly, state regulators are comfortable with analyzing gas and electric utilities separately. The Minnesota Public Utilities Commission ("Minnesota"), for example, voiced concern about the increased difficulty in regulation that would transpire if Minnesota became obligated to consider issues related to nuclear generating facilities owned by the same entity that Minnesota regulated for gas rates. Minnesota noted that the risk pattern for a company with nuclear generating facilities is different from that of a gas distribution utility. That difference obviously extends beyond the presence of nuclear plants. For example, an electric utility can have different capital needs and cost issues by virtue of its need to build and maintain generating facilities. While there are many similarities among gas distribution utilities, even in different geographical areas, the state regulators of NorAm's gas operations are not necessarily fully conversant with the types of business and regulatory issues that HL&P would face in providing electric service in Houston, Texas. Naturally, more regulatory effort would be required if the staffs of NorAm's current state regulators were obligated to consider how to allocate capital costs across a fully merged "Utilicorp-type" entity and to understand the interrelationship among regulatory concerns facing HL&P electric customers and NorAm gas customers. While the regulatory tasks associated with a "Utilicorp-type" structure would not be insurmountable, regulatory issues are more easily addressed by maintaining the separately regulated businesses in individual corporate entities. Each business would be better situated to address its particular capital needs and regulators would be able to focus on only those issues and requirements related to the utility services being provided in their jurisdictions. For these and other proper business reasons (see also Item 3.A.3 below), the parties believe that the transaction structure described in Item 1.B would be in their best interests and in the best interests of their respective investors and consumers. 7 8 ITEM 2. FEES, COMMISSIONS AND EXPENSES. The fees, commissions and expenses to be paid or incurred, directly or indirectly by all parties, in connection with the Basic Mergers are estimated to total approximately $32 million, including investment bankers' fees of approximately $24 million. The fees, commissions and expenses to be paid or incurred in connection with this filing are estimated to total approximately $225,000. ITEM 3. APPLICABLE STATUTORY PROVISIONS. Section 3(a)(2) of the Act is applicable to the proposed transaction. Sections 4 and 5 of the Act and the rules promulgated thereunder prohibiting certain transactions by nonexempt, unregistered holding companies and requiring registration of public utility holding companies, respectively, would be applicable to the transaction if (i) the Commission were to deny this Application for an exemption pursuant to Section 3(a)(2) and (ii) the parties were to implement the transaction without using the alternative, non-holding company structure described above. Although HI is currently subject to Section 9(a)(2) of the Act, that section will not be applicable to the proposed transaction inasmuch as HI, the existing utility holding company, will be eliminated when, in the first step of the transaction, it merges into its only utility subsidiary.(2) The second step of the transaction involves an acquisition of securities of a gas utility company by an electric utility company, not by a utility holding company. Accordingly, at the time the second step is to be implemented, there will be no utility holding company to which Section 9(a)(2) can apply. The Commission has consistently taken the position that the acquiror must be a utility holding company (or an "affiliate"(3) of a utility company) before it can become subject to the Act.(4) Moreover, in determining whether an acquisition of a public utility affiliate triggers Section 9(a)(2), the Commission's practice is - -------------------- (2) The foreign utilities in which HI has an ownership interest do not constitute public utility companies under Section 2(a)(5) of the Act, pursuant to Section 33(a) of the Act. The foreign independent power projects in which HI has an ownership interest do not constitute electric utility companies under Section 2(a)(3) of the Act, pursuant to Section 32(a)(1) of the Act. The domestic qualifying facility in which HI has an ownership interest is exempt from the Act pursuant to Section 210(e) of the Public Utility Regulatory Policies Act of 1978. (3) As the owner of 5% or more of NorAm's voting securities, Houston will be an "affiliate" of NorAm, as that term is defined in Section 2(a)(11) of the Act, upon consummation. (4) See, e.g., Scana Corp., SEC No-Action Letter (June 14, 1990) (concluding that Section 9(a)(2) of the Act allows a person to acquire 5% or more of one, but no more than one, public utility without Commission approval). 8 9 to examine the final intended result of a set of transactions immediately preceding and following the acquisition.(5) A. ELIGIBILITY FOR A 3(a)(2) EXEMPTION Houston, with NorAm as its only utility subsidiary, should be eligible for an exemption under Section 3(a)(2) of the Act based on the plain wording of that Section, which states simply that to qualify for the exemption a utility holding company must be "predominantly a public-utility company whose operations as such do not extend beyond the State in which it is organized and States contiguous thereto." 1. PREDOMINANTLY A PUBLIC-UTILITY COMPANY Upon consummation of the proposed transaction, Houston will continue to be predominantly an electric utility company operating entirely within its state of incorporation. As shown on Exhibit C.1, HL&P's 1996 gross operating utility revenues were almost twice those of NorAm. Stated differently, NorAm's gross operating utility revenues in 1996 were 34% of the combined gross utility operating revenues of HL&P and NorAm in 1996.(6) Thus, NorAm's gross utility operating revenues will constitute a clear minority of the combined gross utility operating revenues. NorAm's utility operations account for an even smaller percentage of combined utility operations based on other financial comparisons. NorAm accounted for approximately 15% of total utility assets (i.e., net property, plant and equipment) at December 31, 1996 and approximately 20% of utility net operating income for 1996. - -------------------- (5) Id. Under the facts in Scana, although a holding company owned two utility affiliates for a time, the holding company continued to own only one utility affiliate after the series of merger transactions was complete; therefore, the final intended result of the merger transactions was not subject to Section 9(a)(2). The Commission has referred to this approach of viewing a series of transactions as integral parts of a single plan and purpose as the transitional merger doctrine. In applying that doctrine, the Commission has stated that "[t]he requirements of Section 9(a)(2) are determined by the final result, not by the modalities of separate and succeeding transactions." In re Nat'l Propane Corp., 46 S.E.C. 1322, 1337-38 (1978) (citing Ass'n of Massachusetts Consumers, Inc. v. United States, 516 F.2d 711 (D.C. Cir. 1975), cert. denied, 423 U.S. 1052 (1976)); see also In re Crescent Pub. Serv. Co., 1946, 22 S.E.C. 426, 432 (1946). Based on informal, pre-filing conferences with the Staff, the parties believe the Staff concurs that Section 9(a)(2) is not an issue for this application. (6) NorAm's gross operating utility revenues as a percentage of the combined gross operating utility revenues of NorAm and HL&P is essentially the same for 1993 (33%), 1994 (32%) and 1995 (32%) as for 1996. 9 10 Inasmuch as Houston will conduct far more utility business directly as an operating company (operating the HL&P system as it existed immediately prior to the Basic Mergers) than it will conduct indirectly as a holding company (through ownership of NorAm as a subsidiary), the fair interpretation(7) of the word "predominantly" dictates that Houston should be viewed as "predominantly a public-utility company". The plain meaning of the word "predominantly" applies to Houston's role as a public-utility company in light of a comparison of Houston and NorAm's operations and revenues. As the Commission noted in In re Northern States Power Co.:(8) The Act prescribes no specific standard or test for interpreting the word "predominantly." This Commission in construing the word has referred to the dictionary definition of "predominant": "Superior in power, influence, effectiveness, number or degree; having ascendency or control; prevalent over others." In conformity with the concept of relationship thus embodied in the Act, absolute size of the subsidiaries' operations has never been specified as a factor in determining the predominant character of the holding company seeking a Section 3(a)(2) exemption, but the utility operations of the holding company have been compared with those of its utility subsidiaries, with most significance generally given to gross revenues. There is no question that following the Basic Mergers Houston will control NorAm and will enjoy the incidents of predominance cited in the Northern States order. The Commission, noting that "predominantly" is a function of relative size, has principally relied upon the comparison of the utility subsidiaries' gross operating revenues as a percentage of the gross operating revenues of the parent (the "gross-to-gross test"). Stated on a gross-to-gross basis, NorAm's gross operating utility revenues in 1996 were approximately 53% of those of HL&P. Whether considered prior to or following the Basic Mergers, the HL&P/Houston operations are "predominant". As acknowledged by the Division of Investment Management of the Commission (the "Staff") in its June 1995 report entitled The Regulation of Public-Utility Holding Companies (the "1995 Staff Report"), "the [Commission's] decisions under [Sections 3(a)(1) and 3(a)(2)] have generally focused on size as a proxy for effective state - -------------------- (7) The Commission has repeatedly stated: "In determining the intent of Congress in the use of the word 'predominantly,' we are required to construe the statute according to a FAIR INTERPRETATION of its terms. In the absence of some considerations apparent upon the face of the statute or embodied in legislative history, unusual meanings of words must be avoided and ordinary definitions followed . . . ." In re Northern States Power Co., Holding Co. Act Release No. 12,655 (September 16, 1954) (quoting Union Electric Co., 5 S.E.C. 252, 261 (1939)) (emphasis added). (8) Holding Co. Act Release No. 12,655 (September 16, 1954). 10 11 regulation. The result has been a somewhat confusing array of decisions."(9) While the 1995 Staff Report amply demonstrates the inconsistencies in the Commission's application of a gross-to-gross test in its prior decisions, 35% has emerged as an informal benchmark of the relative contribution by a subsidiary (on a gross-to-gross basis) that has been used by the Commission for purposes of granting an exemption under Section 3(a)(2).(10) It is respectfully submitted that it is in the public interest that the Commission revisit the appropriateness of that 35% revenue benchmark. First, the Act does not require any such strict, numerical test; indeed, the Commission has also stated "we do not recognize any particular ratios of revenues or assets as being finally determinative of the question"(11) of whether a company is predominantly a utility. Moreover, if a numerical test is to be applied, the 35% ratio has no inherent validating logic. It would be completely consistent with the statutory word "predominant" to simply require that the parent's utility operations be larger than those of the subsidiary(12); here, based on revenues, they are almost twice as large. Indeed, based on other equally valid financial indicators, the size of NorAm's operations is an even smaller percentage of the size of HL&P's operations. The book value of NorAm's utility assets (i.e., net property, plant and equipment) was approximately 18% of that of HL&P at December 31, 1996; NorAm's operating income from utility operations was approximately 24% of that of HL&P for 1996. Second, the prior cases denying the Section 3(a)(2) exemption are distinguishable in that none of those cases involves the combination of a holding company that is a pure electric utility company with a subsidiary that is a pure gas utility company, as would be the case in the proposed combination. In terms of stability, continuity and scale of operations, HL&P is an established utility of the type that the Act was designed to foster, and will continue to operate as such subsequent to the Basic Mergers. Under the facts of the Basic Mergers: (i) the parent company will continue to directly operate no utility operations other than the traditional electric utility operations of HL&P, (ii) its only utility subsidiary will continue to directly operate no utility operations other than the traditional gas utility operations of NorAm, and (iii) the parent will account for comfortably more than half (indeed, almost two-thirds) of the combined utility operating revenues. The Commission should - -------------------- (9) 1995 Staff Report at 111. (10) Id. at 111-12. The Commission has stated that "in all prior cases where exemptions under Section 3(a)(2) have been denied, the gross utility revenues of the subsidiaries have exceeded 35 percent of those of the parent." Id. In re Maine Public Service Co., Holding Co. Act Release No. 7541 (July 7, 1947). (11) In re Kentucky Utilities Co., Holding Co. Act Release No. 9017 (April 20, 1949). (12) See text at note 8 above. 11 12 therefore consider whether the "gross-to-gross" test should have any applicability to a comparison of the relative magnitude of gas utility operations to that of electric utility operations. Third, the prior cases using the 35% test may also be distinguished in that the test was formulated during periods of concern regarding the effectiveness of state regulation; that is, the 35% ratio became a benchmark prior to the emergence of effective state regulation. Given the plenary authority of the states that will regulate Houston and NorAm to scrutinize affiliate transactions, and the manifest differences in the nature of the utility services to be provided by Houston on the one hand and NorAm on the other, there exists no basis for concern about the effectiveness of state regulation. Moreover, the proposed transaction has received approval of each of the utility commissions in the states other than Texas presently served by NorAm. Indeed, the plenary authority of all of those commissions and the Texas regulatory bodies to continue to regulate HL&P and NorAm will not be affected by the mergers. See Item 4 below. In fact, regulatory review by state commissions may actually be enhanced by keeping electric and gas utility operations in separate corporate entities. Finally, in order to "respond flexibly to the legislative, regulatory and technological changes that are transforming the structure and shape of the utility industry,"(13) the Commission has indicated a willingness to reconsider precedent in interpreting Section 3(a) of the Act.(14) In this vein, the Commission has announced its intention to reject bright-line tests and rather to consider the specific facts and circumstances surrounding each specific request for exemption, giving significant attention to the availability of state regulation for the proposed transaction.(15) The Commission's intention in this regard is consistent with its broad power to interpret and define the terms, phrases and provisions used in the Act. See Exhibit H (Memorandum from James R. Doty to the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission, The General Interpretive Powers Held by the SEC With Regards to the Public Utility Holding Company Act of 1935 (February 21, 1997)). Thus, there is no compelling public interest reason for the Commission to deny an exemption under Section 3(a)(2). Certainly, an exemption should not be denied based on formalistic adherence to a size test that is neither required by the Act nor relevant to the realities of today's competitive environment in the marketing and delivery of energy services. See in this connection the discussion in Item 3.A.3 of the "unless and except clause" in Section 3(a) of the Act. For these reasons, the Commission should decline to be - -------------------- (13) 1995 Staff Report at 70. (14) Id. at 119. (15) 1995 Staff Report at 119. 12 13 confined by the strictures of the 35% revenue benchmark (which is not required by the Act) and should find that the holding company that will be formed pursuant to the Basic Mergers will be "predominantly a public-utility". 2. CONTIGUITY Eligibility for a Section 3(a)(2) exemption also includes the requirement that the holding company be "a public-utility company whose operations as such do not extend beyond the State in which it is organized and States contiguous thereto." Applying the plain words of the Act, particularly the term "as such", Houston will satisfy the contiguity requirement because its operations will be conducted exclusively in Texas, its state of incorporation. Its NorAm subsidiary's operations, on the other hand, will be conducted in Texas, three states that are contiguous to Texas and two non-contiguous states, Minnesota and Mississippi. Nothing in the brief provisions of Section 3(a)(2) requires geographic contiguity as to subsidiary operations. This point is underscored by comparing the language in Section 3(a)(2) with that in Section 3(a)(1), which requires intrastate operations as to both the parent and its utility subsidiaries. In Union Electric Co. of Missouri,(16) the Commission noted that in Section 3(a)(2) "there is not a single word referring to subsidiaries," but that various other sections of the Act (including Section 3(a)(1)) specifically refer to the "operations, activities or place of incorporation of the subsidiaries of the holding company seeking exemption." The Commission therefore concluded that "it is plain that under that subsection [3(a)(2)] Congress intended us to ignore as irrelevant the place of operation of the operating subsidiaries of the holding company, and that we should in the instant case consider solely whether the operations of Union Electric Company of Missouri itself, as an operating company, are confined to the state of Missouri and contiguous states."(17) In a later proceeding, the Commission again affirmed that "[c]ontiguity of the utility subsidiaries is not required by paragraph (2) of section 3(a)."(18) - -------------------- (16) 5 S.E.C. 252 (1939). (17) This approach coincides with the Commission's intention to flexibly interpret the geographic requirements for an integrated public-utility system under Section 2(a)(29) of the Act. See 1995 Staff Report at 72-74 ("noting that the relevance of physical and geographic integration to a sound public-utility industry has diminished"). (18) In re Northern States Power Co., Holding Co. Act Release No. 22334 (December 23, 1981) (approving the acquisition by a holding company of a subsidiary and allowing the holding company to maintain exempt status pursuant to Section 3(a)(2), notwithstanding that the new subsidiary had operations in states non-contiguous to the state of organization of the holding company). See also, however, In re Eastern Pub. Serv. Co., Securities Act Release No. 1973 (1940). 13 14 3. THE UNLESS AND EXCEPT CLAUSE Under the "unless and except" clause of Section 3(a), the Commission would have the authority to revoke or deny Houston's Section 3(a)(2) exemption if the Commission were to determine that the exemption is "detrimental to the public interest or the interest of investors or consumers." The Commission has rarely invoked this authority, and recent Commission orders granting Section 3 exemptions for combination gas and electric companies indicate that the Commission should not find the proposed transaction to be detrimental so as to justify invocation of the "unless and except" clause. In the past, the Commission disfavored combination gas and electric systems, even among exempt holding companies.(19) Moreover, Section 11 of the Act restricts combining gas and electric systems in registered holding companies. The Commission has explicitly stated, however, that "this [Section 11] standard is not in terms applicable to an application for exemption under 3(a)(2), since that provision does not require that the system be a single integrated system, but rather that it be predominantly a public-utility company."(20) The Commission has further noted that "in a number of prior cases, the Commission has held that combination companies may receive an exemption even though they did not meet the single integrated system standard of Section 11(b)(1).(21) Indeed, the Commission has recognized that while its past effort to further public and consumer interest by keeping electric and gas systems separate may have been "[v]alid and constructive . . . in its day, that approach may now be outmoded."(22) The Commission has stated that the "broad and flexible language" of the "unless and except" clause should be read "in a way that makes economic and social sense in the light of contemporary realities."(23) In recent proceedings the Commission has determined that one of the "contemporary realities" to consider in deciding whether an exemption would be contrary to the public interest is "the protection afforded to investors, consumers, and the public by the existence of vigorous state regulation."(24) The Commission - -------------------- (19) In re Illinois Power Co., 44 S.E.C. 140 (1970). (20) In re Delmarva Power & Light Co., Holding Co. Act Release No. 19717 (October 19, 1976). (21) Id. (22) Union Elec. Co., 45 S.E.C. 489 (1974), aff'd without opinion sub nom. City of Cape Girardeau v. S.E.C., 521 F.2d 324 (D.C. Cir. 1975). (23) Id. (24) WPL Holdings, Inc., Holding Co. Act Release No. 24590 (February 26, 1988). 14 15 has granted exemptions to combination electric and gas companies where it has found that the existence of local and state regulation of the utility industry was sufficient to ensure that the interests of consumers, investors and the public would be protected.(25) These decisions were based on an earlier statement by the Commission that competition in the energy industry is a "question of state policy" and that the conclusions of local officials "should be given great weight in determining whether the public interest would in fact be adversely affected."(26) The proposed transaction, and thus the resulting holding company structure, are subject to approval requirements of state regulatory bodies in each of the states other than Texas where NorAm operates, and, indeed, have received all such approvals. The Texas regulatory bodies (indeed, all of the state regulatory bodies) will retain jurisdiction over the utilities (as specifically set forth in Item 4 below). Thus, in this instance, as in prior proceedings where the Commission declined to apply the "unless and except" clause, "the grant of an exemption from the Act would not result in a regulatory gap"(27) and, therefore, would not be detrimental to the public interest. Rather, the resulting holding company will serve such interest and the interest of investors and consumers by producing a number of economies and efficiencies, similar to economies and efficiencies upon which the Commission has in the past looked favorably.(28) Most significantly, the resulting holding company will permit both Houston and NorAm to respond more rapidly and effectively to the changing nature of the electric and gas industries in the face of the convergence of the electricity and natural gas markets. Moreover, a holding company structure would give both Houston and NorAm greater flexibility to take advantage of the lowest-cost financing opportunities that are specifically - -------------------- (25) This deference to local officials and increased acceptance of combined gas and electric systems were reflected in the 1995 Staff Report. See, e.g., 1995 Staff Report at 74-76. In light of the recommendations and the approach of the 1995 Staff Report, and considering the numerous instances where the Commission has exempted combination companies in the past, the proposed transaction should not raise any concerns that it is detrimental to interests of consumers, investors or the public. See also Dominion Resources Inc., Holding Co. Act Release No. 24618 (April 5, 1988). (26) In re Northern States Power Co., 36 S.E.C. 1 (1954). (27) Id. (28) See, e.g., In re Illinova Corp., Holding Co. Act Release No. 26054 (May 18, 1994) (granting exemption requested in connection with a proposed merger based on an application that claimed that the new structure would create efficiencies and economies such as allowing the resulting companies to respond to competitive opportunities in the electric power industry and increasing the financial flexibility of the resulting companies). 15 16 designed for their manifestly different utility businesses. In addition, the combination of HI's electric market knowledge with NorAm's wholesale gas and electricity trading operations and skills will help propel the combined company forward in the converging wholesale energy markets, benefitting investors. The statement of Milton Honea, the Chairman, President and Chief Executive Officer of NorAm, elaborates on the highly beneficial nature of the transaction to all concerned: This transaction is a natural fit that will benefit our shareholders, customers, and employees. Our companies have a shared vision, common geographical areas, and complementary skills and assets. Our shareholders benefit from the value created by the combination -- the increased access to Houston Industries' experience and skills in the electric power industry, Houston Industries' financial strength, and our complementary international development interests. Our customers benefit from the combined company's enhanced ability to offer a broad array of products and services, particularly in electricity. Finally, the combination will provide greater opportunities for our employees as the combined company continues to expand its wholesale, retail, and international presence. Don Jordan, Chairman and Chief Executive Officer of HI, adds: The combination of HL&P and Entex under one owner offers excellent potential for enhancing local customer service and for providing a wide range of new value-added services. At the same time, we intend to continue the efforts already underway to increase the opportunity to move gas from west to east across the Mid-Continent region where NorAm Gas Transmission and Mississippi River Transmission are strategically located. Houston Industries plans to expand many of the retail services offered by NorAm Energy throughout its gas and electric distribution operations. NorAm has been a leader in developing new value-added services for residential and small business customers such as appliance repair and preventative maintenance contracts and home security system sales and monitoring, as well as services for other utilities and retail marketers. ITEM 4. REGULATORY APPROVAL. HI and NorAm made the necessary filings with the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The waiting period thereunder expired on October 31, 1996. In addition, the Department of Justice has informed HI's counsel that its inquiry regarding the filings has been concluded. The Basic Mergers are subject to review by regulatory commissions in each state other than Texas in which NorAm conducts utility operations. HI and NorAm have 16 17 requested and received prior final approval of the Basic Mergers from the Minnesota Public Utilities Commission, the Arkansas Public Service Commission, the Oklahoma Corporation Commission, the Louisiana Public Service Commission and the Mississippi Public Service Commission. See Exhibit E. Each of those agencies regulates rates and services provided by a NorAm division and has reviewed the transaction to assure that it is not inconsistent with the public interest. Texas statutes do not require HI and NorAm to obtain approval of the Basic Mergers from the Texas Railroad Commission ("Railroad Commission") or the Texas Public Utility Commission ("TPUC"). NorAm and HI personnel, have, however, discussed the Basic Mergers with the Commissioners and Staff members of both the Railroad Commission and the TPUC, have furnished those agencies with copies of orders issued by the other state regulatory commissions and have committed to provide Texas ratepayers with the same commitments as have been made in the approval process for the benefit of ratepayers in other jurisdictions. The Basic Mergers will not adversely affect the authority of the Railroad Commission over NorAm's operations or of the TPUC over HL&P's operations. NorAm's power marketing operations are conducted through NES pursuant to power marketing authorizations granted by FERC. On September 30, 1996, NorAm and HI filed notice of a change in the status of NES to reflect its post-merger affiliation with HL&P and for confirmation that NES may continue power marketing activities at market based rates following the Basic Mergers. Prior to issuance of the FERC order described below, HI, HL&P and NorAm concluded that approval of the Basic Mergers would not be required from FERC. Although Section 203 of the Federal Power Act of 1935 (the "FPA"), 16 U.S.C. 824b, requires FERC approval of certain mergers, combinations and property dispositions by "public utilities" (as defined in the FPA), the Basic Mergers were not considered to be within that requirement. HL&P is not a "public utility" under the FPA, because it operates wholly in intrastate commerce, except for certain transactions that do not make it a "public utility" under the FPA. NorAm is not a "public utility" under the FPA. NorAm's subsidiary, NES, operates as a "power marketer" under provisions of the FPA by virtue of its entering into transactions for the purchase and sale of electricity at wholesale in interstate commerce, but NES is not merging with any party or disposing of any of its properties in the Basic Mergers. On February 5, 1997, FERC issued an order to determine whether it may have jurisdiction under the FPA over the Basic Mergers. In its order, FERC required NES either to file a response within 30 days stating why NES believes FERC does not have jurisdiction, or to file an application for approval of the Basic Mergers under Section 203 of the FPA. In its response filed March 7, 1997, NES stated that, for the reasons set forth above, the Basic Mergers are not subject to FERC jurisdiction under the FPA. On March 27, 1997, without conceding that FERC approval is required to close the Basic Mergers, NES filed an application for authorization pursuant to Section 203 of the FPA. See Exhibit I. The Nuclear Regulatory Commission ("NRC") has authority to determine whether any transfer of control over an NRC operating license is in accordance with 17 18 provisions of the Atomic Energy Act of 1954. On December 9, 1996, the NRC informed HL&P that the NRC staff believes that no NRC action is required for the Basic Mergers to occur. See Exhibit G, Appendix 3, Letter from NRC to HL&P (December 9, 1996). Four municipal approvals were required under the terms of various NorAm franchise contracts: o On December 18, 1996, the Houston City Council adopted an ordinance approving the transfer of Entex's franchise through the Basic Mergers. The ordinance was adopted without dissent. See Exhibit G, Appendix 2: Exhibit 1. o On October 2, 1996, Stafford's City Council adopted an ordinance approving the Basic Mergers. See Exhibit G, Appendix 2: Exhibit 2. o On November 7, 1996, Longview's City Council adopted an ordinance approving a transfer of Arkla's franchise and recognizing the Basic Mergers. See Exhibit G, Appendix 2: Exhibit 3. o On December 15, 1996, approval for the transfer of franchise application before the City of Tyler became effective by operation of law. There exists no formal order or approval. ITEM 5. PROCEDURE. HI and HL&P respectfully request that the Commission issue its order granting and permitting the exemption requested by this Application as soon as practicable, but in any event not later than June 1, 1997. HI and HL&P hereby (i) waive a recommended decision by a hearing officer or any other responsible officer of the Commission, (ii) agree that the Division of Investment Management may assist in the preparation of the decision of the Commission, and (iii) request that the Commission order that the exemption requested by this Application be effective immediately upon consummation of the Basic Mergers. 18 19 ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
Exhibits - -------- Exhibit A: Agreement and Plan of Merger, as amended (attached as Appendix A to Amendment No. 2 to the Registration Statement appearing and incorporated as Exhibit B hereto) Exhibit B: Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P, filed on October 28, 1996 (Registration No. 333-11329), incorporated by reference herein Exhibit C: 1995 State-by-State Gross Operating Utility Revenues* Exhibit C.1: 1996 State-by-State Gross Operating Utility Revenues Exhibit D: Notice pursuant to 17 C.F.R. Section 250.23(f)* Exhibit E: Certain Orders of State Regulators: E.1. Order, dated November 6, 1996, of the Arkansas Public Service Commission conditionally approving the Merger* E.2. Final Order, dated October 15, 1996, of the Corporation Commission of the State of Oklahoma approving the Merger* E.3. Final Order Approving Merger Transaction, dated December 11, 1996, of the Public Service Commission of the State of Mississippi* E.4. Letter of Non-Opposition to the Merger, dated December 23, 1996, of the Louisiana Public Service Commission* E.5. Amendment, dated January 23, 1997, to Letter of Non-Opposition to the Merger, dated December 23, 1996, of the Louisiana Public Service Commission* E.6. Final Order Approving Merger Subject to Conditions, dated February 24, 1997, of the Minnesota Public Utilities Commission* E.7. Final Order, dated March 12, 1997, of the Arkansas Public Service Commission approving the Merger* Exhibit F: Omitted intentionally; not applicable Exhibit G: Response to February 13, 1997 data request of the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission* Exhibit G.1: Revised Responses to Items 1 and 2 to February 13, 1997 data request of the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission Exhibit H: Memorandum from James R. Doty to the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission, The General Interpretive Powers Held by the SEC With Regards to the Public Utility Holding Company Act of 1935 (February 21, 1997) Exhibit I: Press Release of NorAm Energy Corp., dated March 27, 1997, Regarding Filing of Application under Section 203 of the FPA
* Previously filed. 19 20 Financial Statements 1. Statements of Applicants. Reference is made to the following documents, each of which is incorporated by reference herein: (i) Form U-3A-2 for HI for Calendar Year 1996, filed on February 28, 1997, Commission File Number 069-00231, and (ii) Annual Report on Form 10-K of HI (Commission File Number 1-7629) and HL&P (Commission File Number 1-3187) for the fiscal year ended December 31, 1996, filed on March 20, 1997. 2. Statements of Top Registered Holding Company. None. 3. Statements of Company Whose Securities Are Being Acquired or Sold. Reference is made to the Annual Report on Form 10-K of NorAm (Commission File Number 1-3751) for the fiscal year ended December 31, 1996, filed on March 28, 1997, which is incorporated by reference herein. 4. Statements of Changes. None. 5. Pro Forma Financial Statements Showing the Effects of the Basic Mergers. Reference is made to Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P (Registration No. 333-11329), filed on October 28, 1996, which is incorporated by reference herein. ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS. The proposed transaction, a corporate restructuring, 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. Consummation of the proposed transactions will not result in changes in the operations of the parties that would have any impact on the environment. No Federal agency is preparing an Environmental Impact Statement with respect to this matter. 20 21 SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned companies have duly caused this statement to be signed on their behalf by the undersigned thereunto duly authorized. Date: April 11, 1997 Houston Industries Incorporated By: /s/ HUGH RICE KELLY ------------------------------- Hugh Rice Kelly Executive Vice President, General Counsel and Corporate Secretary Houston Lighting & Power Company By: /s/ HUGH RICE KELLY ------------------------------- Hugh Rice Kelly Executive Vice President, General Counsel and Corporate Secretary 21 22 INDEX TO EXHIBITS
Exhibits - -------- Exhibit A: Agreement and Plan of Merger, as amended (attached as Appendix A to Amendment No. 2 to the Registration Statement appearing and incorporated as Exhibit B hereto) Exhibit B: Amendment No. 2 to the Registration Statement on Form S-4 of HI and HL&P, filed on October 28, 1996 (Registration No. 333-11329), incorporated by reference herein Exhibit C: 1995 State-by-State Gross Operating Utility Revenues* Exhibit C.1: 1996 State-by-State Gross Operating Utility Revenues Exhibit D: Notice pursuant to 17 C.F.R. Section 250.23(f)* Exhibit E: Certain Orders of State Regulators: E.1. Order, dated November 6, 1996, of the Arkansas Public Service Commission conditionally approving the Merger* E.2. Final Order, dated October 15, 1996, of the Corporation Commission of the State of Oklahoma approving the Merger* E.3. Final Order Approving Merger Transaction, dated December 11, 1996, of the Public Service Commission of the State of Mississippi* E.4. Letter of Non-Opposition to the Merger, dated December 23, 1996, of the Louisiana Public Service Commission* E.5. Amendment, dated January 23, 1997, to Letter of Non-Opposition to the Merger, dated December 23, 1996, of the Louisiana Public Service Commission* E.6. Final Order Approving Merger Subject to Conditions, dated February 24, 1997, of the Minnesota Public Utilities Commission* E.7. Final Order, dated March 12, 1997, of the Arkansas Public Service Commission approving the Merger* Exhibit F: Omitted intentionally; not applicable Exhibit G: Response to February 13, 1997 data request of the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission* Exhibit G.1: Revised Responses to Items 1 and 2 to February 13, 1997 data request of the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission Exhibit H: Memorandum from James R. Doty to the Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission, The General Interpretive Powers Held by the SEC With Regards to the Public Utility Holding Company Act of 1935 (February 21, 1997) Exhibit I: Press Release of NorAm Energy Corp., dated March 27, 1997, Regarding Filing of Application under Section 203 of the FPA
* Previously filed. EX-99.C1 2 1996 STATE-BY-STATE GROSS OPERATING UTILITY REV. 1 EXHIBIT C.1 1996 STATE-BY-STATE GROSS OPERATING UTILITY REVENUES (MILLIONS OF DOLLARS)
% of Pro Amount Forma Combined ------ -------------- HL&P Texas $4,025 66% ------ ------ NorAm Texas 711 12% Arkansas 339 6% Louisiana 165 3% Oklahoma 83 1% Mississippi 103 2% Minnesota 713 10% ------ ------ Total NorAm $2,114 34% ------ ------ Pro Forma Combined $6,139 100% ====== ======
C.1-1 EX-99.G1 3 REVISED RESPONSES TO ITEMS 1 AND 2 TO REQUEST 1 EXHIBIT G.1 REVISED RESPONSES TO ITEMS 1 AND 2 TO FEBRUARY 13, 1997 DATA REQUEST OF THE OFFICE OF PUBLIC UTILITY REGULATION, DIVISION OF INVESTMENT MANAGEMENT, SECURITIES AND EXCHANGE COMMISSION 1. PLEASE INCLUDE IN THE RECORD OPERATING REVENUES, OPERATING INCOME AND NET INCOME FOR THE MOST RECENT AVAILABLE 12-MONTH PERIOD, AND ASSETS AND NUMBER OF CUSTOMERS AS OF THE MOST RECENT AVAILABLE DATE, ATTRIBUTABLE TO THE UTILITY OPERATIONS OF HOUSTON INDUSTRIES INCORPORATED AND NORAM ENERGY CORP., AND RELATED RATIOS WITH RESPECT TO EACH ITEM.
- ------------------------------------------------------------------------------------------------------------------------------------ FOR 12-MONTH PERIOD HOUSTON NORAM ENERGY HI/HL&P NORAM/ NORAM LOCAL NORAM UTILITY AT 12/31/96 INDUSTRIES, CORP. PERCENTAGE GAS PERCENTAGE OPERATIONS INCORPORATED OF TOTAL OF TOTAL PERCENTAGE OF HL&P UTILITY OPERATIONS - ------------------------------------------------------------------------------------------------------------------------------------ Gross Operating HL&P NorAm Local Gas 66% 34% 53% Utility Revenues $4,025,027,000 Distribution $2,114,000,000 Consolidated $990,466,000 $314,466,000 76% 24% N/A Operating Income Net Operating Utility HL&P NorAm 80% 20% 24% Income $732,328,000 $178,000,000 Consolidated Net $404,944,000 $90,858,000 82% 18% N/A Income Total Consolidated $12,287,857,000 $4,017,477,000 75% 25% N/A Assets Total Utility Assets $10,596,232,000 $1,921,000,000 85% 15% 18% Customers HL&P Local Gas 36% 64% N/A 1,540,578 Distribution 2,787,890 (Texas customers: Arkla 45,717 Entex 1,166,119)
G.1-1 2 2. PLEASE INCLUDE A BRIEF NARRATIVE EXPLANATION OF WHY NORAM HAS SIGNIFICANTLY MORE CUSTOMERS THAN HL&P. The number of customers served by a retail public utility depends on three factors: the nature of the utility service, the size of the geographic area in which the utility is authorized to provide service and the population density within that geographic area. Under traditional public utility regulation, the regulatory authority grants each retail public utility a "certificate of convenience and necessity" to provide utility service within a defined geographic boundary. While minor overlaps in such territories are frequent, the bulk of the retail customers in a given area will usually be served by a single public utility, and within that defined area the public utility generally has an obligation to provide utility service at nondiscriminatory rates to all who request such service. If the certificated area encompasses a large municipality, the potential customer base, of course, is larger than it would be in an area that is primarily rural in nature. Also, the nature of the utility service can influence the willingness of individual customers to obtain service from the utility. For example, the cost of natural gas line extensions and the availability of alternatives to natural gas tend to reduce the number of rural natural gas customers in some areas, though rural electric service can be more prevalent as a result of the efforts of the Rural Utilities Service and retail electric co-ops. The HL&P utility territory is concentrated in the city of Houston, Texas and 22 surrounding counties, a geographical area of about 5,000 square miles. As of December 31, 1996,(1) HL&P had approximately 1,528,000 customers: 1.35 million residential and 187,000 commercial and industrial customers. Within this area, the number of HL&P customers predominates over the number of NorAm customers. HL&P's residential customers purchased approximately 19 million mwhs of electricity or about 29% of total HL&P mwh sales for 1996. The commercial and industrial customer base purchased approximately 44 million mwhs in 1996 or about 68% of total HL&P mwh sales. This two-to-one ratio of all commercial and industrial sales over residential sales reflects the significant concentration of chemical, petrochemical, refinery, and other industrial demand for electricity in the concentrated Houston geographical area. Residential customer growth since 1988 has averaged 1.8% per year. Commercial and industrial customer growth since 1988 has averaged 1.3% per year. ____________________ (1) Unless otherwise indicated, all of the figures cited herein are as of December 31, 1996. G.1-2 3 NorAm's local distribution companies provide gas service to a geographic area, which encompasses not only the metropolitan area of Houston, but rural areas and smaller towns in other parts of Texas, Louisiana, Arkansas and Oklahoma; and NorAm provides gas service in the City of Minneapolis and other communities in Minnesota. Within this geographic area, NorAm serves a total of 2,788,000 customers. The NorAm utility divisional-system is significantly concentrated along the Texas Gulf Coast, beginning around Corpus Christi, Texas and extending into northern Louisiana, including Shreveport. This system also serves a territory which includes almost all of southern Arkansas through mid-state, and extending as far northeast as Jonesboro, Arkansas, to the southeastern corner of Missouri. The system serves Mississippi, from the Gulf Coast north through the center of the state; and it includes six gas distribution communities along the Oklahoma border with Texas. These are the areas served by the Entex and Arkla divisions. Finally, NorAm serves the metropolitan area of Minneapolis, Minnesota and other scattered communities in Minnesota (Minnegasco). Although this gas distribution region encompasses 1,368 communities in six states, the greatest number of customers (1.2 million) is situated in Texas. The breakdown of customers in other states is as follows: Minnesota 640,000, Arkansas 439,000, Louisiana 263,000, Mississippi 119,000 and Oklahoma 115,000. 2.5 million of NorAm's customers are residential. 1.3 million of those residential customers are within the Entex division (Texas and Louisiana), 661,000 are within the Arkla division (Arkansas, Mississippi and Oklahoma) and 584,000 are within the Minnegasco division (Minnesota). The total numbers of NorAm commercial and industrial customers in all six states are 228,000 and 2,326, respectively. NorAm residential customers purchased 198.8 million mcf (46% of total sales) of gas in 1996 with commercial gas purchases at 131.8 million mcf (30% of total sales) and industrial gas purchases at 59.8 million mcf (14%). As with other retail utilities, for both HL&P and NorAm, the customer base is primarily residential; but for NorAm approximately 90% of its customers are residential. While NorAm has more customers than HL&P, in NorAm's case each of those residential customers provided on average only $481 in revenue during 1996. Each of HL&P's residential customers, however, was responsible for on average approximately $1,200 in revenues during 1996. The relative percentages of residential customer gas purchases to small commercial/industrial and large commercial/industrial purchases vary significantly from division to division, as these divisions move beyond the Texas Gulf Coast, as set forth below: G.1-3 4
(in millions) ENTEX ARKLA MINNEGASCO TOTAL ----- ----- ---------- ----- Residential 73.4 mcf 50.4 mcf 75.0 mcf 198.8 mcf (48%) (57%) (50%) (51%) Small Commercial 48.7 mcf 26.1 mcf 23.2 mcf 98.0 mcf and Industrial (32%) (29%) (16%) (25%) Large Commercial 29.6 mcf 12.7 mcf 51.3 mcf 93.6 mcf and Industrial (20%) (14%) (34%) (24%) --- ---- ---- ------ Total 151.7 mcf 89.2 mcf 149.5 mcf 390.4 mcf (100%) (100%) (100%) (100%)
Note, however, that if only firm (as opposed to interruptible) contract amounts are considered for Entex and Minnegasco(2), there is a significant decrease in commercial and industrial volume:
(in millions) ENTEX MINNEGASCO ----- ---------- Residential 73.4 mcf (56%) 75.0 mcf (66%) Small Commercial and Industrial 36.9 mcf (28%) 7.1 mcf (6%) Large Commercial and Industrial 20.1 mcf (16%) 31.2 mcf (28%) -------------- -------------- Total 130.4 mcf (100%) 113.3 mcf (100%)
Thus, when firm gas sales are considered for Entex and Minnegasco, an even lower percentage of commercial and industrial revenues are represented by these purchases. A comparison of 1996 HL&P electricity unit sales by customer class to NorAm 1996 gas unit sales by customer class reflects the following(3):
HL&P (mwhs) NORAM (mcfs) ----------- ------------ Residential 29% 46% Commercial and Industrial 68% 44% Other 3% 10% --- --- 100% 100%
- --------------------- (2) Arkla did not have any interruptible contract amounts. (3) A similar comparison using firm (as opposed to interruptible) contract amounts reflects the following: HL&P - 31% residential, 66% commercial and industrial and 3% other; NorAm - 53% residential, 36% commercial and industrial and 11% other. G.1-4 5 As illustrated above, on the basis of units of energy sold, HL&P's sales weigh far more heavily in the category of commercial and industrial customers than of residential customers. NorAm, on the other hand, sells a slightly greater amount on an mcf basis to its residential customers than to its commercial and industrial customers. A comparison of the revenues generated for HL&P versus NorAm by commercial and industrial customers again indicates HL&P's predominance. Each of HL&P's commercial and industrial customers provided on average approximately $11,600 in revenues per customer in 1996 as compared to NorAm's commercial and industrial customers, each of which provided on average approximately $3,600 in revenues in 1996. The concentration of high electricity usage among industry along the Texas Gulf Coast region substantially accounts for the greater electric energy sales to commercial/industrial customers, and thus for the predominance of HL&P's utility operations. To provide electric service, HL&P, as with other electric utilities, has constructed large generating facilities at high capital cost, and creates the electricity which HL&P sells through the transformation into electric energy of the fuels which HL&P purchases from others (natural gas, coal, lignite and uranium). Today, relatively minor amounts of the electric energy sold are purchased from other producers. HL&P distributes electric energy to its customers through a network of power lines which HL&P has constructed and maintains. While the costs associated with that function are not insubstantial, they are relatively small when compared with the costs associated with generation of electric energy. In 1996, HL&P had $9 billion of net utility plant, which produced $1.6 billion of residential utility electric revenues in 1996 and $2.2 billion of commercial and industrial utility electric revenues, in addition to approximately $253 million of other utility revenues. In 1996, NorAm had $2.2 billion of natural gas distribution utility plant that produced $1.2 billion of residential utility gas revenues and approximately $826 million of commercial and industrial utility gas revenues. Natural gas utilities such as the NorAm distribution companies operate principally as distributors of natural gas purchased from others. The facilities used for that distribution constitute the gas utility's primary assets, which are relatively small in comparison with the total assets of an electric generating company such as HL&P. The fuel component of the distribution company's business is a pass-through of purchased gas costs. G.1-5 6 Therefore, the actual portion of NorAm's revenues that relate to the gas distribution company's "value-added" activities are relatively small. Indeed, approximately $1.3 billion --approximately 62%-- of NorAm's total 1996 revenues of $2.1 billion are attributable to gas pass-through costs. By contrast, HL&P's revenues attributable to pass through of fuel costs, also $1.3 billion, are only approximately 33% of total revenues. It is respectfully submitted that the number and characteristics of customers has been considered by the Commission as only one of several contextual factors, not as dispositive, in resolving questions of predominance. In this case, to the extent such customer profile and characteristics are considered, they reinforce the predominance of the electric utility operations of Houston Industries, following the merger, in the core service area shared by both utilities. G.1-6 EX-99.H 4 MEMORANDUM FROM JAMES R. DOTY DATED 02/21/97 1 EXHIBIT H February 21, 1997 MEMORANDUM TO: Office of Public Utility Regulation, Division of Investment Management, Securities and Exchange Commission FROM: James R. Doty Baker & Botts, L.L.P. RE: The General Interpretive Powers Held by the SEC With Regards to the Public Utility Holding Company Act of 1935. The June, 1995, report entitled The Regulation of Public-Utility Holding Companies (the "1995 Staff Report"), stated that "decisions under [Sections 3(a)(1) and 3(a)(2)] have generally focused on size as a proxy for effective state regulation. The result has been a somewhat confusing array of decisions."(1) While the 1995 Staff Report amply demonstrates the inconsistencies in the application of a gross-to-gross test in its prior decisions, 35% has emerged as an informal benchmark of the relative contribution by a subsidiary (on a gross-to-gross basis) that has been used by the Commission for purposes of granting an exemption under Section 3(a)(2).(2) In their Form U-1 Application, regarding a proposed merger transaction with NorAm Energy Corp. ("NorAm"), Houston Industries Incorporated ("HI") and Houston Lighting & Power Company ("HL&P") submitted that it would be in the public interest to revisit the appropriateness of the 35 percent benchmark. This Memorandum discusses the Commission's broad power to interpret and define the terms, phrases and provisions used in the Public Utility Holding Company Act of 1935 (the "Act"), and to supplement and expand upon the Commission's own usage and application of those terms, in appropriate cases without informal rulemaking. As such, we intend this Memorandum to support - ------------------------- (1) 1995 Staff Report at 111. (2) Id. at 111-12. The Commission has stated that "in all prior cases where exemptions under Section 3(a)(2) have been denied, the gross utility revenues of the subsidiaries have exceeded 35 percent of those of the parent." Id. In re Maine Public Service Co., Holding Co. Act Release No. 7541 (July 7, 1947). H-1 2 our position that the Commission should expand upon its prior discussions of what constitutes "predominantly a public-utility company." I. The Commission Has Broad Authority To Define Terms When Interpreting and Applying The Provisions Of Section 3 Of The Act. It is a well settled tenet of administrative law that an agency has the power to interpret statutes for which they have been delegated the authority to administer. In fact, one court has stated that, "[i]t needs no citation of authorities, in fact it would be an unnecessary exhibition of learning to cite authorities for the elementary proposition that an agency charged with carrying out a statute, . . . has also the authority to construe the statute."(3) Courts have further stated that not only do agencies have the power, but it is often necessary, and therefore, the duty of agencies to interpret provisions of the statutes.(4) This is true especially when an agency is defining a particular term in a statute it administers.(5) When an agency is acting pursuant to these powers, courts cannot substitute their judgment for that of the administrative agency.(6) Rather, courts "must respect the judgment of an agency empowered to apply the law to varying fact patterns,"(7) and cannot overturn an agency's interpretation if it is sufficiently rational or reasonable.(8) - ------------------------- (3) L'Enfant Plaza North, Inc. v. District of Columbia Redevelopment Land Agency, 300 F. Supp. 426, 428 (D.D.C. 1969). (4) California Co. v. Udall, 296 F.2d 384, 388 (D.C. Cir. 1961); see Hoctor v. USDA, 82 F.3d 165, 168 (7th Cir. 1996). (5) See Zuber v. Allen, 90 S.Ct. 314, 330 (1969); see also Marshall v. Burlington Northern, Inc., 595 F.2d 511, 513 (9th Cir. 1979). (6) When interpreting statutory provisions, administrators of the statutes often must choose between two conflicting reasonable interpretations. Holly Farms Corp. v. National Labor Relations Board, 116 S.Ct. 1396, 1401 (1996). But, because of their expertise and specialization in the particular regulatory area, administrative agencies are better suited to fill in the gaps and interpret ambiguous statutory terms. In light of this, courts give deference to the agency's interpretation. Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). (7) Holly Farms, 116 S.Ct. at 1401. (8) Niagara Frontier Tariff Bureau v. United States, 826 F.2d 1186, 1190-91 (2d Cir. 1987); Arkansas AFL-CIO v. FCC, 11 F.3d 1430, 1441 (8th Cir. 1993). H-2 3 It is also well understood that, in discharging its interpretive duty, an agency will find it necessary to redefine or expand upon the definitions of the operative terms of the statute.(9) An agency is accorded the same deference when it changes its interpretation through redefining or refining the terms of the statutes it administers. Courts have recognized that, "an agency may change its interpretation of a statute entrusted to its administration, and that when the intent of Congress is unclear courts must uphold the agency's interpretation if it is based on a 'reasonable accommodation of conflicting policies.'"(10) In this circumstance, courts understand that an agency must have the latitude to adopt standards that may evolve over time in response to the changing realities of the industries they regulate.(11) These "course corrections" are allowed as long as they are consistent with Congressional intent,(12) and the agency provides a reasoned explanation for the change.(13) Aware of the necessity to interpret the terms and provisions of Section 3 of the Act, the Commission has issued regulations and rules delineating its interpretation of the Act. The Commission's interpretation of the meaning of the term "predominantly," however, has historically been confined to a number of orders granting or denying the Section 3(a)(2) exemption. This category of Commission pronouncements is not issued pursuant to the procedures associated with informal rulemaking. This, however, does not affect the power or ability of the Commission to proceed in this manner when interpreting terms or provisions of the statute.(14) Nor is it expected that definitional changes will necessarily be effected by the formal procedures of notice and comment rulemaking.(15) Rather, the Commission has flexibility to - ------------------------- (9) This is the situation presented here. Congress has stated that, "[t]he Commission, by rules and regulations upon its own motion, or by order upon application, shall exempt any holding company . . . from any provision or provisions of this chapter . . . ." 15 U.S.C. Section 79c(a) (1988). As the cases cited below indicate, the general exemptive authority could not be responsibly implemented without an expansive view of the authority to define terms. (10) Production Worker Union of Chicago v. NLRB, 793 F.2d 323, 328 (D.C. Cir. 1986). (11) Arkansas AFL-CIO v. FCC, 11 F.3d 1430, 1441 (8th Cir. 1993). (12) Toyota Motor Sales, U.S.A., Inc. v. United States, 585 F. Supp. 649 (CIT 1984). (13) Rainbow Broadcasting Co. v. FCC, 949 F.2d 405, 408 (D.C. Cir. 1991). (14) ARCO Oil and Gas v. EPA, 14 F.3d 1431, 1433 (10th Cir. 1993) (stating that the deferential standard of review "is the same whether the agency interpretation is performed through rulemaking or informal adjudication."). (15) See Employers Inc. of Wausau v. Browner, 52 F.3d 656, 666 (7th Cir. 1995) (stating "the degree of deference is tied not to the formality or elaborateness of the procedures used by the agency but to the character of the issue in relation to whatever procedures were employed to resolve it."). H-3 4 redefine, expand upon, and modify the terms of the statute without resorting to the cumbersome process of notice and comment rulemaking so it can respond quickly and effectively to changing industry realities. It is, therefore, well within Commission power to revisit the issue of what is meant by "predominantly a public-utility company" by issuing an order in response to the Form U-1 Application. II. In Light Of The Pressures Exerted By A Rapidly Evolving Industry It Would Be Reasonable For The Commission To Expand Its Interpretation Of The Term "Predominantly." Historically, the Commission has interpreted the Act flexibly in accordance with the contemporary state of the utility industry, the market, and technology. The Commission has recognized that technology, the utility industry and the economy have changed extensively since the enactment of the Act, and continue to change.(16) Indeed, according to the 1995 Staff Report, "[s]ince enactment of the Holding Company Act, change has been the most consistent feature of the technology and regulation of electric and gas utilities."(17) And repeatedly, the Commission has chosen to evolve its interpretation of the Act in response to those changes.(18) As the Commission has explained, the Act "creates a system of pervasive and continuing economic regulation that must in some measure at least be refashioned from time to time to keep pace with changing economic and regulatory climates."(19) - ------------------------- (16) E.g., Consolidated Natural Gas Co., HCAR No. 26512, 1996 WL 218645, at *4 (1996); The Southern Co., HCAR No. 25639, 1992 WL 252209, at *5-7 (1992); In re Am. Elec. Power Co., HCAR No. 20633, 1978 WL 19453, at *9-10 (1978). See generally 1995 Staff Report. (17) 1995 Staff Report at 11. (18) E.g., Consolidated Natural Gas Co., 1996 WL 218645, at *4; Unitil Corp., HCAR No. 25524, 1992 WL 93961, at *4 (1992); The Southern Co., 1992 WL 252209, at *6-7; In re Am. Elec. Power Co., 1978 WL 19453, at *7-10. (19) Union Elec. Co., 45 S.E.C. 489, 503 n.52 (1974), aff'd sub nom City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975), cited with approval in Eastern Utils. Assocs., HCAR No. 26232, 1995 WL 71422, at *3 (1995), and cited with approval in The Southern Co., 1992 WL 252209, at *6 & n.39. In considering the definition of an integrated electric-utility system, the Commission has reiterated that it "has recognized that 'Congress did not intend to impose rigid concepts but instead expressly included flexible considerations' to accommodate changes in the electric utility industry. Thus, the Commission has considered advances in technology and the particular operating circumstances in applying the integration standards." Unitil Corp., 1992 WL 93961, at *3 (citations omitted). H-4 5 An example of the Commission's acknowledgment of these pressures is evident in a 1996 Release amending a previous order regarding the proposed expansion of the activities of SEI Holdings, Inc. ("SEI"), a wholly owned nonutility subsidiary of The Southern Company ("Southern").(20) Initially, the Commission issued an order authorizing SEI to acquire, directly and indirectly through subsidiaries, the securities of companies that derive a substantial portion of their revenues from energy related businesses.(21) SEI filed an amended application asking the Commission to expand the category of activities in which SEI was allowed to engage, including the right to engage in all forms of brokering and marketing transactions involving all energy commodities. Prior to this Release, it had been Commission policy, with regard to proposed marketing of energy commodities at retail, to authorize the proposal subject to a reservation of jurisdiction pending review of specific state plans or programs concerning retail wheeling.(22) However, the Commission reversed that policy in this case, stating that "in view of the pace of developments in the industry, . . . retail marketing proposals that satisfy that statutory requirements should not be subject to the delays inherent in a reservation of jurisdiction."(23) The Commission further stated that: Industry trends and competitive pressures make it important for registered system companies to be poised to compete in new markets as they are created. . . . such participation is consistent with the statutory goals to ensure a sound utility industry and the protection of the interests of consumers . . . .(24) Another example of the Commission's flexible approach to interpreting the Act can be found in the Commission's 1992 approval of a registered holding company's proposed acquisition of Australian public utility operations.(25) In deciding that the proposed transaction - ------------------------- (20) SEI Holdings, Inc., Holding Co. Act Release No. 26,581 (September 26, 1996). (21) SEI Holdings, Inc., Holding Co. Act Release No. 26,468 (Feb. 2 1996). (22) SEI Holdings, Inc., Holding Co. Act Release No. 26,581 (September 26, 1996). (23) Id. (24) Id. (25) The Southern Co., 1992 WL 252209. H-5 6 satisfied the standards of sections 10 and 11 of the Act, the Commission chose not to rely on its earlier decisions, but rather made an independent evaluation of whether the transaction was consistent with the statutory scheme, in light of the current state of domestic public utility companies, the modern world economy and the regulatory environment.(26) Recognizing that the economy and the regulatory environment had undergone significant changes, the Commission embraced "a departure from the dicta of earlier Commissions concerning the combination of domestic and foreign properties,"(27) and approved the acquisition. The Commission's commitment to evolving its interpretation of the Act is also evidenced by its series of decisions concerning proposed acquisitions by American Electric Power Company, Inc. ("AEP"). In 1946, the Commission rejected AEP's application for permission to acquire the stock of the Columbus and Southern Ohio Electric Company ("CSOE"), asserting that "the substantially enlarged group of properties that would result from the acquisition . . . cannot be found to be 'not so large as to impair . . . the advantages of localized management and the effectiveness of regulation.'"(28) Yet, in 1978, the Commission approved in principle AEP's application to acquire CSOE's stock. The Commission rationalized its change in direction in part by observing that since 1946, technological justifications for large systems spanning many states had become clear.(29) The Commission also maintained that the energy crisis had changed the desired level of competition for electric utilities.(30) The Commission has also applied this same principle of flexibility when interpreting section 3(a)(2). As the Commission has explained in the 3(a)(2) context, the determination of whether the 3(a)(2) standards are satisfied must be made "in the light of contemporary circumstances" and the Commission's "present view of the Act's requirements."(31) Further, in order to "respond flexibly to the legislative, regulatory and technological changes that are - ------------------------- (26) Id. at *4-7. (27) Id. at *5. (28) In re Am. Elec. Power Co., WL 252209, at *8 (quoting American Gas & Elec. Co., 21 S.E.C. 575, 816-17 (1946)). (29) Id. at *8-10 & n.26. In support of its rationale, the Commission cited, among other sources, a Brookings Institution study dated 1971 which asserted that the Act's "atomization" of the electric power industry was as undesirable under current levels of technology as had been the over-concentration of the industry under the technology of earlier years. (30) Id. at *12. (31) Union Elec. Co., 45 S.E.C. at 503. H-6 7 transforming the structure and shape of the utility industry,"(32) the Commission has indicated a willingness to reconsider precedent in interpreting Section 3(a) of the Act.(33) In this vein, the Commission has announced its intention to reject bright-line tests and rather to consider the specific facts and circumstances surrounding each specific request for exemption, giving significant attention to the availability of state regulation for the proposed transaction.(34) As recognized by the Commission and Staff in the releases and reports noted above, the public utility industry is already engaged in rapid change. Competitive forces beyond the control or influence of any single public utility or combination of utilities are transforming the marketplace for electric power and natural gas. Electric utilities, such as HI, must be allowed to respond quickly and innovatively in order to keep pace with the changing environment. It is appropriate, therefore, that the Commission respond with commensurate promptness and flexibility when determining the rights and obligations of entities operating in the industry it regulates. HI and NorAm, as private parties to a business combination, have proceeded in the reasonable expectation that the Commission should not and will not balk at the reconsideration of an outdated "benchmark" -- such as the gross-to-gross computation -- or in defining the terms of the Act. Therefore, as the Commission considers HI and HL&P's Form U-1 application, it should consider Section 3(a)(2) in light of present market and industry realities, and expand upon its interpretation of the term "predominantly" as necessary to grant the exemption. - ------------------------- (32) 1995 Staff Report at 70. (33) Id. at 119. (34) Id. H-7 EX-99.I 5 PRESS RELEASE OF NORAM ENERGY CORP. DATED 4/27/97 1 EXHIBIT I NEWS RELEASE CONTACTS: FOR RELEASE: March 27, 1997 NorAm Energy: Randy Burkhalter (investors), (713) 654-7502 Ellen Orsburn (media), (713) 654-5930 Houston Industries: Dan Bulla (investors), (713) 207-3120 Sandy Fruhman (media), (713) 207-3123 NORAM ENERGY SERVICES FILES APPLICATION FOR FERC APPROVAL OF MERGER HOUSTON, March 27 -- NorAm Energy Services, Inc. (NES), a subsidiary of NorAm Energy Corp. (NorAm), today filed an application under Section 203 of the Federal Power Act (FPA) for approval by the Federal Energy Regulatory Commission (FERC) of the merger of its parent company with Houston Industries Incorporated (HI). Although NES filed a response with the FERC on March 7 that disclaims any FERC jurisdiction over the merger, HI and NorAm made the decision to cause NES to file the application for approval of the merger in anticipation of an expedited review. FERC's new merger guidelines provide for expedited review of merger applications, particularly for transactions presenting limited issues. NES's application requests that the Commission grant approval of the merger within 60 days of the closing of the comment period but, in any event, no later than August 1, 1997. "The prospect of a prompt review in this case, where there are only limited issues related to the role of NES in the HI-NorAm merger, led to our decision to have NES file an application with FERC for approval of the merger in addition to the response stating our view that the FERC does not have jurisdiction," said Milt Honea, Chairman, President and CEO of NorAm. "We already have received approval of the merger from the five states and the Texas municipalities required, and we have been notified that the Justice Department has closed our case without further action," Honea explained. The only other regulatory action required is the Securities and Exchange Commission's ruling on HI's application for an exemption under the Public Utility Holding Company Act of 1935. -more- I-1 2 NES Files for FERC Approval of Merger Page 2 "Even though we still believe that the FERC does not have jurisdiction over the merger, our primary goal is to complete the merger as quickly as possible, to enable the new company to compete in the converging energy business," reiterated Don Jordan, Chairman and CEO of Houston Industries. NorAm Energy Corp. (NYSE:NAE) is the nation's third-largest natural gas distribution company, serving nearly 3 million customers through its Arkla, Entex and Minnegasco distribution divisions. It is also a major natural gas supply, gathering, storage and transportation company, as well as a wholesale and retail energy marketer and energy services provider. Houston Industries (NYSE:HOU) is involved in the electric utility and unregulated energy businesses in the United States and foreign markets. Houston Lighting & Power, its subsidiary, is the nation's tenth-largest electric utility in terms of kilowatt-hour sales. Houston Industries Energy pursues foreign utility privatizations and the development of unregulated power generation projects in foreign markets. # # # I-2 -----END PRIVACY-ENHANCED MESSAGE-----