-----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, Fp3/8AUf5Mp8qKkD1oXS988RKYDFTK4IfP9bK4+zYCcEcrxgP8hErfjCb5bBK7tt CNoR0WiOXZopw0n+tpSuyQ== 0000899652-05-000082.txt : 20050304 0000899652-05-000082.hdr.sgml : 20050304 20050304164530 ACCESSION NUMBER: 0000899652-05-000082 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20050304 DATE AS OF CHANGE: 20050304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINERGY CORP CENTRAL INDEX KEY: 0000899652 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 311385023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-10254 FILM NUMBER: 05661754 BUSINESS ADDRESS: STREET 1: 139 E FOURTH ST CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5132872644 MAIL ADDRESS: STREET 1: 139 E FOURTH STREET STREET 2: P.O BOX 960 CITY: CINCINATI STATE: OH ZIP: 45202 U-1/A 1 file7010254amend2.txt As filed with the Securities and Exchange Commission on March 4, 2005. File No. 070-10254 SECURITIES AND EXCHANGE COMMISSION 450 FIFTH STREET WASHINGTON, D.C. 20549 ------------------------------------------ AMENDMENT NO. 2 TO FORM U-1 DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 -------------------------------------------- CINERGY CORP. THE CINCINNATI GAS & ELECTRIC COMPANY 139 East Fourth Street Cincinnati, Ohio 45202 (Name of companies filing this statement and addresses of principal executive offices) --------------------------------------------- CINERGY CORP. (Name of top registered holding company) --------------------------------------------- Wendy L. Aumiller Treasurer Cinergy Corp. 139 East Fourth Street Cincinnati, Ohio 45202 (Name and address of agent for service) Please direct communications to: George Dwight II William C. Weeden Associate General Counsel Skadden Arps Slate Meagher & Flom Cinergy Corp. 1400 New York Avenue, N.W. 139 East Fourth Street, 25 AT2 Washington, D.C. 20005 Cincinnati, Ohio 45202 202-371-7877 (ph) 513-287-2643 (ph) 202-371-7012 (f) 513-287-3810 (f) wweeden@skadden.com gdwight@cinergy.com NOTE: The amended Declaration on Form U-1 is hereby further amended and restated in its entirety as set forth below. Other than with respect to Exhibit H, the following amendment and restatement is being submitted solely in response to requests of the staff of the Commission for certain updating or additional information. Item 1. Description of Proposed Transactions A. Requested Authorization Cinergy Corp.("Cinergy"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended (the "Act"), and its subsidiary, The Cincinnati Gas & Electric Company ("CG&E"; and together with Cinergy, "Applicants"), request Commission authorization for CG&E to transfer (the "Transfer"), at net book value as of closing, its ownership interest in three electric generating facilities, including certain realty and other improvements, equipment, assets, properties, facilities and rights associated therewith or ancillary thereto having a total nameplate capacity of 1105 megawatts ("MW") (collectively, the "Plants") to its subsidiary, The Union Light, Heat and Power Company ("ULH&P").1 At December 31, 2004, the Plants had a net book value of approximately $351 million (including construction work in progress of approximately $19.9 million).2 The Transfer meets the goal of the Kentucky Public Service Commission ("KPSC") that ULH&P acquire physical generating assets to serve its retail electric customers. Historically, those customers have been served entirely through long-term supply contracts between CG&E and ULH&P, in part from power generated from these Plants. The KPSC approved the transaction in December 2003, finding it in the best interests of ULH&P's customers and urging this Commission to give consideration to its findings.3 B. Parties 1. Cinergy Cinergy was created in connection with the October 1994 merger between CG&E and the then-parent company of PSI Energy, Inc. ("PSI").4 Through CG&E, ULH&P and PSI,5 Cinergy provides retail electric and/or natural gas service to customers in southwestern Ohio, northern Kentucky and most of Indiana. In addition to its Midwestern-based utility business, Cinergy has numerous non-utility subsidiaries engaged in a variety of energy-related businesses. As of and for the year ended December 31, 2004, Cinergy reported consolidated total assets of approximately $15.0 billion and consolidated total operating revenues of approximately $4.7 billion. For further information regarding Cinergy, reference is made to Cinergy's Annual Report on Form 10-K for 2004. 2. CG&E CG&E is a combination electric and gas public utility holding company formed under Ohio law and engaged in the production, transmission, distribution and sale of electric energy and the sale and transportation of natural gas in the southwestern portion of Ohio and, through ULH&P, northern Kentucky. CG&E is exempt from registration under the Act pursuant to Section 3(a)(2) and Rule 2(b). The area served with electricity, gas, or both covers approximately 3,200 square miles, has an estimated population of 2.0 million people, and includes the cities of Cincinnati and Middletown in Ohio and Covington and Newport in Kentucky.6 Cinergy directly holds all the outstanding common stock of CG&E. The Public Utilities Commission of Ohio ("PUCO") regulates CG&E's retail sales of electricity and natural gas.7 CG&E's wholesale power sales and transmission services are regulated by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act ("FPA"). CG&E currently provides ULH&P full requirements electric service under a long-term power sales agreement, FERC Rate Schedule No. 56 (the "Full Requirements PPA"). As of and for the year ended December 31, 2004, CG&E reported consolidated total operating revenues of approximately $2.5 billion and consolidated total assets of approximately $6.2 billion. For further information regarding CG&E, reference is made to CG&E's Annual Report on Form 10-K for 2004. 3. ULH&P A direct wholly-owned subsidiary of CG&E formed under Kentucky law, ULH&P is engaged in the transmission, distribution, and sale of electric energy and the sale and transportation of natural gas in northern Kentucky. The area served with electricity, gas, or both covers approximately 500 square miles, has an estimated population of 330,000 people, and includes the cities of Covington and Newport in northern Kentucky. ULH&P owns no electric generating facilities, but rather historically has relied on CG&E for its full requirements of electric supply to serve its retail customers. ULH&P's retail sales of electricity and natural gas are regulated by the KPSC. ULH&P has no wholesale customers. As of and for the year ended December 31, 2004, ULH&P reported total operating revenues of approximately $355 million and total assets of approximately $468 million. For further information regarding ULH&P, reference is made to ULH&P's Annual Report on Form 10-K for 2004. C. Terms of Transfer CG&E proposes to transfer, and ULH&P intends to acquire, the Plants, which comprise CG&E's right, title and interest in and to the following three electric generating stations, together in each case with certain realty and other improvements, equipment, assets, properties, facilities (e.g., inventories of fuel, supplies, materials and spare parts) associated with or ancillary to each Plant. CG&E will retain all transmission facilities and generation step-up transformers ("GSUs") or other FERC-jurisdictional facilities physically connected to the Plants. East Bend. ULH&P will acquire CG&E's entire ownership share (447 MW nameplate rating) in the East Bend Generating Station ("East Bend"), a 648 MW (nameplate rating) coal-fired baseload station located in Rabbit Hash, Kentucky. East Bend is jointly owned by CG&E (69 percent) and The Dayton Power & Light Company ("DP&L") (31 percent). At December 31, 2004, the net book value of CG&E's ownership interest in East Bend was approximately $193 million (including construction work in progress ("CWIP") of approximately $5.4 million). Miami Fort 6. ULH&P also proposes to acquire Miami Fort Unit 6 ("Miami Fort 6"), a 168 MW (nameplate rating) coal-fired intermediate load generating unit located in North Bend, Ohio. Miami Fort 6 is wholly-owned by CG&E, but is part of the larger Miami Fort Generating Station, which is jointly owned by CG&E and DP&L. At December 31, 2004, Miami Fort 6 had a net book value of approximately $18 million (including CWIP of approximately $9,171). Woodsdale. Finally, ULH&P proposes to acquire the Woodsdale Generating Station ("Woodsdale"), a 490 MW (nameplate rating) dual-fuel combustion-turbine peaking station that operates on either natural gas or propane and is located in Trenton, Ohio. Woodsdale is wholly-owned by CG&E. At December 31, 2004, Woodsdale had a net book value of approximately $140 million (including CWIP of approximately $15 million). The Plants will be transferred at net book value at the closing of the Transfer, pursuant to the terms of separate, but substantially identical Asset Transfer Agreements.8 The Plants are in good operating condition and are directly interconnected to the Cinergy joint transmission system. Following the acquisition, ULH&P will also operate East Bend and Woodsdale,9 with assistance, provided at cost, (i) from Cinergy Services, Inc., Cinergy's service company subsidiary, in accordance with its Commission-approved utility service agreement and (ii) from CG&E, on an as-needed basis, pursuant to the exemption under Rule 87(a)(3). ULH&P will fund its acquisition of the Plants by means of assumption of debt of CG&E, issuance of debt to CG&E in the form of inter-company promissory notes and/or other consideration, in reliance on existing Commission authorization and/or the exemption for state commission-authorized financings under Rule 52(a). The debt assumed by ULH&P may include tax exempt debt owed by CG&E that was issued as part of the financing for the construction or improvement of East Bend (with an aggregate principal amount of approximately $75 million). Ultimately, any CG&E debt assumed by ULH&P will be repaid by ULH&P as it comes due or refinanced by ULH&P, fully satisfying or otherwise extinguishing all of CG&E's liability on such debt. Further, ULH&P anticipates that CG&E may make a capital contribution to ULH&P, the proceeds of which may be used as partial consideration for the Transfer. The acquisition financing will be structured consistent with maintaining an investment grade rating for ULH&P.10 In connection with the Transfer, CG&E and ULH&P will enter into (and in the case of the Full Requirements PPA terminate) certain FERC-jurisdictional agreements pursuant to Section 205 of the FPA (collectively, "FERC 205 Agreements"). More specifically, the Purchase, Sale and Operation Agreement between CG&E and ULH&P ("PSOA") provides the terms and conditions pursuant to which the Plants will continue to be jointly dispatched with the generation resources of CG&E and PSI. Importantly, by virtue of the PSOA, following the Transfer, the Plants will continue to be dispatched in exactly the same manner as they are today, i.e., jointly with CG&E's remaining generating facilities and PSI's generation. The Facilities Operation Agreement between CG&E and ULH&P provides the terms and conditions under which CG&E will provide ULH&P with the use of the various GSUs owned by CG&E and interconnected with the Plants. Finally, CG&E and ULH&P filed a notice of cancellation of the Full Requirements PPA with FERC to be effective upon closing of the transaction, as ULH&P no longer will require power under that agreement once it owns the Plants.11 By orders dated March 2, 2005 (Docket No. ER04-1249-000) and March 3, 2005 (Docket Nos. ER04-1248-000, ER04-1248-001 & ER04-1247-000), the FERC has accepted for filing the PSOA and the Facilities Operation Agreement and has accepted for cancellation the Full Requirements PPA. D. Rationale for Transfer Although separately incorporated, ULH&P and CG&E have always been operated and planned effectively as a single company. For a number of reasons, all of the generating facilities for the combined companies have been placed in CG&E. CG&E's generation portfolio thus has been planned and operated to meet the power needs of retail customers in the Greater Cincinnati/Northern Kentucky area, the combined CG&E/ULH&P service territories, not just for CG&E load. ULH&P has paid for power from the Plants and CG&E's other generation assets under a number of long-term agreements, including currently under the Full Requirements PPA. However, the KPSC has stated on a number of occasions, dating back to 2001, that it believes an alternative structure should be adopted to serve load in Kentucky, i.e., that ULH&P should own physical generation assets. The KPSC is concerned that reliance on purchased power to serve ULH&P's entire load unduly exposes ULH&P's retail customers to the volatility of market prices for power.12 In light of these concerns, CG&E and ULH&P determined to enter into the proposed transactions. Preliminary to that determination, ULH&P examined various alternatives for meeting the KPSC's goals. ULH&P concluded that a request for proposals ("RFP") would not benefit its retail customers, and thus chose not to initiate such a process. Among other things, the financial problems that had resulted in significant downgrades in the credit ratings of numerous electric industry participants increased credit risk associated with purchases from many potential third parties. In its December 2003 order authorizing the Transfer, the KPSC agreed with ULH&P's determination that an RFP would not benefit ULH&P's customers.13 ULH&P also concluded that constructing new generation was not a viable alternative for a number of reasons, including the cost of construction and difficulties in siting new plants. Finally, entering into new purchase agreements to serve ULH&P's load would do nothing to further the KPSC's goal of ending ULH&P's total reliance on purchases. ULH&P and CG&E also analyzed a number of possible transfers of plants from CG&E to ULH&P. The Transfer is the result of that analysis. ULH&P determined that the Plants, taken together, will adequately meet ULH&P's retail load requirements. As the KPSC has found, this mix of generating assets (base load, intermediate and peaking) reasonably matches ULH&P's expected load shape over the long-run.14 Further, each of the Plants is directly interconnected to the Cinergy joint transmission system, reducing ULH&P's exposure to electric supply interruptions caused by the implementation of transmission loading relief procedures on other systems. ULH&P also determined that acquiring the Plants at their net book value would be the least cost alternative for meeting its long-term retail load requirements. Finally, ULH&P determined, in consultation with ICF Consulting, a recognized expert in the field, that the market value of the Plants exceeds their net book value. Item 2. Fees, Commissions and Expenses Total fees and expenses in connection with the preparation and filing of this application, and receipt of the Commission's order with respect thereto, are estimated not to exceed $5,000, consisting chiefly of outside counsel fees and expenses. Item 3. Applicable Statutory Provisions A. Provisions Applicable to Transfer Sections 9(b)(1), 12(b), 12(d) and 12(f) of the Act and Rules 43, 44, 45 and 54 thereunder are or may be applicable to the proposed transactions. The KPSC Order exempts ULH&P's acquisition of the Plants from Commission jurisdiction under Sections 9(a) and 10 pursuant to Section 9(b)(1). With respect to the transfer by CG&E, Section 12(d) and Rule 44, taken together, provide, as relevant here, that no registered holding company shall, directly or indirectly (emphasis added), sell to any person any utility assets -- "in contravention of such rules and regulations or orders regarding the consideration to be received for such sale, maintenance of competitive conditions, fees and commissions, accounts, disclosure of interest, and similar matters as the Commission deems necessary or appropriate in the public interest or for the protection of investors or consumers or to prevent the circumvention of the provisions of this title or the rules, regulations, or orders thereunder." The Transfer clearly satisfies these criteria. The Transfer will be effected at "cost" (i.e., net book value of the Plants at closing), which is fair and reasonable consideration from the perspective of both parties. As discussed above (see Item 1.D, "Rationale for Transfer"), in reviewing the transaction, the KPSC agreed with ULH&P's determination that an RFP would not have benefited ULH&P's customers. The KPSC found the Transfer in the best interests of ULH&P and its ratepayers, and urged this Commission to give weight to its findings. B. Rule 54 Statement Rule 54 provides that in determining whether to approve the issue or sale of a security by a registered holding company for purposes other than the acquisition of an exempt wholesale generator ("EWG") or a foreign utility company ("FUCO"), or (as in the present case) other transactions by such registered holding company or its subsidiaries other than with respect to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or a FUCO upon the registered holding company if paragraphs (a), (b) and (c) of Rule 53 are satisfied. Cinergy's aggregate investment in EWGs and FUCOs currently falls within the "safe harbor" afforded by Rule 53(a). At December 31, 2004, Cinergy's "aggregate investment" (as defined in Rule 53(a)(1)) was approximately $785 million and Cinergy's "consolidated retained earnings" (also as defined in Rule 53(a)(1)) were approximately $1,570 million. Accordingly, at December 31, 2004, Cinergy's aggregate investment did not exceed 50% of its consolidated earnings and was within the "safe harbor" limitation contained in Rule 53(a). Cinergy satisfies all of the other conditions of paragraphs (a) and (b) of rule 53. With reference to rule 53(a)(2), Cinergy maintains books and records in conformity with, and otherwise adheres to, the requirements thereof. With reference to rule 53(a)(3), no more than 2% of the employees of Cinergy's domestic public utility companies render services, at any one time, directly or indirectly, to EWGs or FUCOs in which Cinergy directly or indirectly holds an interest. With reference to rule 53(a)(4), Cinergy will concurrently provide a copy of this application to each regulator referred to therein, and will otherwise comply with the requirements thereof concerning the furnishing of information. With reference to rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2) and (3) thereunder have occurred. Finally, rule 53(c) by its terms is inapplicable since the proposed transactions do not involve the issue or sale of a security to finance the acquisition of an EWG or FUCO. Item 4. Regulatory Approval With the exception of the KPSC which has issued its approval, no state or federal commission (other than this Commission), has jurisdiction over the Transfer.15 Item 5. Procedure Applicants request that the Commission issue a notice of and order authorizing the proposed transactions as soon as practicable. Applicants waive a recommended decision by a hearing officer or other responsible officer of the Commission; consent that the Division of Investment Management may assist in the preparation of the Commission's order, unless the Division opposes the matters proposed herein; and request that there be no waiting period between the issuance of the Commission's order and its effectiveness. Item 6. Exhibits and Financial Statements (a) Exhibits A Not applicable B Form of Asset Transfer Agreement (previously filed) C Not applicable D-1 Application, dated July 21, 2003, filed by ULH&P with KPSC in Case No. 2003-00252 (excluding exhibits thereto) (previously filed) D-2 Amended Application, dated October 29, 2003, in Case No. 2003-00252 (excluding exhibits thereto)(previously filed) D-3 Order of KPSC, dated December 5, 2003, in Case No. 2003-00252 (previously filed) E Not applicable F Preliminary opinion of counsel (previously filed) G-1 Revised Form of Federal Register notice (previously filed) H Response of Cinergy Corp. to Motion to Intervene and Protest, and in the Alternative, Motion for Hearing of the Ohio Consumer's Counsel (b) Financial Statements FS-1 Consolidated balance sheet of Cinergy as of June 30, 2004 (filed as a part of and hereby incorporated by reference from Cinergy's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) (previously filed) FS-2 Consolidated statement of income of Cinergy for the six months ended June 30, 2004 (filed as a part of and hereby incorporated by reference from Cinergy's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) (previously filed) FS-3 Consolidated balance sheet of CG&E as of June 30, 2004 (filed as a part of and hereby incorporated by reference from CG&E's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) (previously filed) FS-4 Consolidated statement of income of CG&E for the six months ended June 30, 2004 (filed as a part of and hereby incorporated by reference from CG&E's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004) (previously filed) Item 7. Information as to Environmental Effects (a) The Commission's action in this matter will not constitute any major federal action significantly affecting the quality of the human environment. (b) No other federal agency has prepared or is preparing an environmental impact statement with regard to the proposed transactions. SIGNATURE Pursuant to the requirements of the Act, each of the undersigned companies has duly caused this Declaration on Form U-1 to be signed on its behalf by the officer indicated below. Dated: March 4, 2005 CINERGY CORP. By: /s/Wendy L. Aumiller Wendy L. Aumiller Vice President and Treasurer THE CINCINNATI GAS & ELECTRIC COMPANY By: /s/Wendy L. Aumiller Wendy L. Aumiller Vice President and Treasurer 1 By virtue of the KPSC Order (defined below), ULH&P's acquisition of the Plants is exempt from Commission jurisdiction under Sections 9(a)(1) and 10 of the Act. See Section 9(b)(1) of the Act, 15 U.S.C. ss. 79i(b)(1). 2 "Net book value" as used herein means original cost less accumulated depreciation. At closing, ULH&P shall also (i) compensate CG&E at cost for inventories, as of the closing date, of fuels, supplies, materials and spare parts of CG&E located at or in transit to the Plants and (ii) reimburse CG&E for all transaction costs incurred by CG&E or any of its affiliates in connection with the Transfer. 3 See In the Matter of the Application of The Union Light Heat and Power Company for a Certificate of Public Convenience to Acquire Certain Generation Resources and Related Property; for Approval of Certain Purchase Power Agreements; for Approval of Certain Accounting Treatment; and for Approval of Deviation from Requirements of KRS 278.2207 and 278.2213(6), Case No. 2003-00252, at n. 1 (Dec. 5, 2003) ("KPSC Order"). 4 See Cinergy Corp., HCAR No. 26146, Oct. 21, 1994. 5 PSI is engaged in the production, transmission, distribution, and sale of electric energy in north central, central, and southern Indiana, serving an estimated population of 2.1 million people located in 69 of the state's 92 counties, including the cities of Bloomington, Columbus, Kokomo, Lafayette, New Albany, and Terre Haute. Cinergy directly holds all the outstanding common stock of PSI. PSI's retail electric services are regulated by the Indiana Utility Regulatory Commission, and its wholesale electric sales and transmission services are regulated by the Federal Energy Regulatory Commission. PSI will not acquire or divest any assets as a result of, nor will it otherwise participate in or be affected by, the Transfer. 6 In August 2004, CG&E consummated the sale to a nonaffiliate of its gas utility subsidiary, Lawrenceburg Gas Company, which provides local distribution service in and around Lawrenceburg, Indiana. See Cinergy Corp., et al., HCAR No. 27880, July 29, 2004. In addition to ULH&P, CG&E has one other utility subsidiary, Miami Power Corporation, whose business is limited to ownership of a 138 kilovolt transmission line extending from the Miami Fort Generating Station along the Ohio River in southwestern Ohio to a point near Madison, Indiana. CG&E has several immaterial nonutility subsidiaries. 7 Pursuant to Ohio's electric customer choice legislation which went into effect in January 2001, the PUCO has no approval authority over the Transfer. See Exhibit H for further information with respect to the absence of approval authority of the PUCO with respect to the Transfer, including in the context of CG&E's "corporate separation" plan (as described therein). 8 At closing, ULH&P shall also (i) compensate CG&E at cost for inventories, as of the closing date, of fuels, supplies, materials and spare parts of CG&E located at or in transit to the Plants and (ii) reimburse CG&E for all transaction costs incurred by CG&E or any of its affiliates in connection with the Transfer. 9 CG&E will continue to operate Miami Fort 6. 10 ULH&P has Commission authority to issue debt with a maturity of two years or less in an aggregate principal amount not to exceed $65 million at any time outstanding, subject to certain terms and conditions, through June 30, 2006. See Cinergy Corp., et al., HCAR No. 27429, Aug. 2, 2001. 11 Also, pursuant to a Back-up Power Sale Agreement between CG&E and ULH&P, CG&E will sell back-up power to ULH&P in the event of a scheduled or forced outage at East Bend or Miami Fort 6. (Woodsdale is not covered by the Back-up Agreement because, as a peaking facility it will not operate for most hours of the year, and thus will not be relied on to meet ULH&P's base load requirements.) ULH&P has determined to bid out its back-up requirements for East Bend and Miami Fort 6, and thus CG&E will only file for FERC approval of the Back-up Agreement in the event that it is the winning bidder. 12 See, e.g., KPSC Order, supra, at 3-4 ("Background"). 13 The KPSC noted that the cost of the units is no greater than the market price; that "[a]ttempting to acquire an entire generation fleet through a single transaction is unprecedented in the electric utility industry"; and that uncertainty in the market supported the approach adopted by ULH&P. Id. at 10-11. 14 Id. at 12 (finding "ULH&P's analysis of supply-side resource options to be reasonable."). 15 The FERC has jurisdiction over (and has issued orders authorizing) the FERC 205 Agreements but not the Transfer. EX-99 2 exhibithfile7010254amend2.txt Exhibit H UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION Cinergy Corp., et al. File No. 070-10254 Public Utility Holding Company Act of 1935 RESPONSE OF CINERGY CORP. TO MOTION TO INTERVENE AND PROTEST, AND IN THE ALTERNATIVE, MOTION FOR HEARING OF THE OHIO CONSUMERS' COUNSEL I. INTRODUCTION On February 14, 2005, the Ohio Consumers' Counsel ("OCC") submitted a Motion to Intervene and Protest, and in the Alternative, Motion for Hearing ("Motion") with respect to the pending Declaration on Form U-1 as amended ("SEC Application" or "Application") filed by Cinergy Corp. ("Cinergy"), a registered holding company under the Public Utility Holding Company Act of 1935, and its Ohio electric and gas utility holding company subsidiary, The Cincinnati Gas & Electric Company ("CG&E"). The Application requests Commission authorization for CG&E to transfer ("Proposed Transfer") certain electric generating facilities -- namely, CG&E's interest in the East Bend, Miami Fort 6, and Woodsdale generating units, as described further in the Application ("Generating Assets") -- to its Kentucky electric and gas utility subsidiary, The Union Light Heat & Power Company ("ULH&P"). The OCC requests that the Commission deny the Proposed Transfer as presently structured or in the alternative conduct a hearing. The OCC's Motion is misplaced. The OCC would have this Commission in effect overturn or reconsider statutes enacted by the Ohio legislature and decisions by the Public Utilities Commission of Ohio ("PUCO") on these very matters. The issues raised in the Motion involve assertions solely relating to matters of Ohio state law and regulation, which are jurisdictional to, and have been resolved in evidentiary proceedings held by, the PUCO. The OCC participated in those proceedings. The OCC now seeks to re-litigate issues of Ohio state law and regulation that were fully considered and squarely rejected by the PUCO. The Commission should deny OCC's Motion in its entirety and approve the Application. II. ARGUMENT The Proposed Transfer has been approved by the Kentucky Public Service Commission ("KPSC"). The issues raised by the OCC directly conflict with Ohio statutory law and have been considered and rejected in proceedings involving CG&E and the OCC held before the PUCO. The Commission should reject the OCC's request that it second guess the resolution of these state matters properly submitted to and determined by the relevant state utility commissions in Ohio and Kentucky. A. The Generating Assets are not rate base assets and can no longer affect retail generation prices in Ohio because generation is a competitive service in Ohio. The OCC argues that it is against the interest of Ohio consumers for CG&E to transfer the Generating Assets to ULH&P. Its assertion directly conflicts both with Ohio statutes and decisions of the PUCO and KPSC. In December 2003, after conducting hearings on the matter, the KPSC authorized the Proposed Transfer.1 With respect to Ohio, the Ohio legislature has expressly determined that Ohio utilities have sole discretion and control over the retention or divestiture of their generation assets: Notwithstanding section 4905.20, 4905.21, 4905.46, or 4905.48 of the Revised Code, an electric utility may divest itself of any generating asset at any time without commission approval, subject to the provisions of Title XLIX [49] of the Revised Code relating to the transfer of transmission, distribution, or ancillary service provided by such generating asset.2 Moreover, the PUCO is fully aware that CG&E is divesting the Generating Assets and, over the OCC's objections, approved retail generation market prices through 2008 based in part upon the divestiture of these assets.3 In short, the Proposed Transfer fully accords with Ohio statutory law, and the applicable state authorities either have approved the Proposed Transfer as in the public interest or are aware of, and have approved market-based rates that specifically contemplate, the Proposed Transfer.4 With respect to the interests of Ohio consumers raised by the Motion, the Ohio legislature deregulated generation service in the State of Ohio effective January 1, 2001.5 That legislation required electric utilities, including CG&E, to "unbundle" their rates into distribution, transmission, and generation components to permit competitive retail electric service providers to compare their generation price with the utilities' generation price and compete for customers.6 Ohio statutes expressly provide that generation prices are no longer subject to traditional rate-base rate of return regulation; require CG&E to apply to the PUCO to establish market-based generation prices; and limit the PUCO's authority over market prices of electricity generation.7 The OCC, contrary to legislative and PUCO determinations, alleges that the transfer of the Generating Assets will somehow harm Ohio consumers.8 To the contrary, by transferring the Generating Assets, CG&E is acting within Ohio's statutory framework and is not taking any action not contemplated by the Ohio legislature and considered and acknowledged by the PUCO. Moreover, in raising concerns about generation prices charged to Ohio consumers, the OCC ignores the Ohio statutes regarding generation prices and fails to take into account the effect of the market on generation prices. To the extent the OCC has any complaint, it should be lodged with the Ohio legislature, not with this Commission. B. The PUCO found that Ohio consumers are held harmless by the Proposed Transfer: CG&E's generation resources historically have served not only CG&E's Ohio electric customers but also indirectly ULH&P's Kentucky electric customers. The arguments raised by the OCC in this case were recently litigated by CG&E, the OCC, and other parties before the PUCO in the Rate Stabilization Plan Proceeding, which set CG&E's Ohio generation market price through December 31, 2008. In that case, the Ohio Marketers' Group, a coalition of competitive retail electric service providers, also questioned the Proposed Transfer.9 The record established, however, that there would be virtually no effect on CG&E and its consumers because historically, through a wholesale contractual arrangement between ULH&P and CG&E, the Generating Assets had been part of a portfolio of CG&E generation resources serving the same "load" of customer demand for electricity.10 This long-term supply relationship -- under which CG&E for many years has met the full electric requirements of its subsidiary ULH&P from CG&E's generation resources, including the Generating Assets, under successive wholesale supply agreements approved by the FERC -- is essential context for the Proposed Transfer. It is discussed in the SEC Application, but ignored by the OCC in its Motion.11 In its Opinion and Order in the RSP Proceeding, the PUCO specifically addressed the Proposed Transfer.12 The PUCO held that "[w]e are satisfied with CG&E's explanation that its customers have first call on the East Bend, Miami Fort No. 6, and Woodsdale Units until they are transferred to ULH&P. [Conversely,] [a]fter that transfer expenses related to those units will no longer be included in the calculation of the [market-based rate]."13 Thus, in approving the generation market price CG&E will charge to consumers through 2008, the PUCO expressly recognized the Proposed Transfer and found no harm to CG&E's consumers resulting from the Proposed Transfer.14 The OCC was an active party to the case before the PUCO, fully and unsuccessfully litigating there the same issues it seeks to raise here. C. The OCC's factual allegations are incorrect. The OCC argues that the Proposed Transfer is against the public interest of Ohio consumers for three reasons: (1) the sale price is insufficient and leaves CG&E with a generation shortfall; (2) the transfer violates Ohio statutory corporate separation requirements; and (3) the transfer harms retail competitive conditions in Ohio.15 The OCC is wrong in each instance. First, as discussed above, the Kentucky commission has expressly authorized and the Ohio commission is fully aware of the Proposed Transfer. Both commissions are aware that the transfer is at net book value, and of the effect, if any, on generation capacity available to consumers in both states. Indeed, when the issue was litigated in Ohio, the evidence of record suggested that Ohio consumers may actually benefit from lower prices as a result of the transfer.16 On cross-examination, CG&E witness Mr. Steffen, Vice President - Rates, testified that "to the extent those plants left the system and we had lesser environmental (costs), in fact, it would flow through a lesser component - a reduced dollar value component of the POLR (provider of last resort charge) and could cause the POLR to be lower."17 Mr. Steffen also testified that "the relative situation for CG&E in terms of capacity versus load is somewhat unchanged because the assets match the load."18 The PUCO agreed with CG&E's assessment that the transfer did not harm Ohio consumers when it approved CG&E's generation market price for the period extending through 2008.19 Further, because ULH&P is a subsidiary of CG&E, CG&E has always served ULH&P by wholesale contract from CG&E's generating assets. ULH&P customers have paid the contract rate approved by the FERC and the KPSC. Therefore, contrary to the OCC's assertions, Kentucky customers, just like Ohio customers, have "paid" for the Generating Assets. Under these circumstances, a transfer at net book value, where the load follows the assets (and vice versa), and where Ohio customers may experience lower prices due to lower environmental costs, is reasonable. The PUCO and KPSC agreed. Second, the OCC alleges that the transfer violates Ohio corporate separation law.20 To the contrary, the PUCO has specifically approved CG&E's corporate separation plan, including the Proposed Transfer. In making this assertion, the OCC quotes a section of the PUCO's November 2004 rehearing order addressing CG&E's argument that the PUCO cannot force CG&E to divest all of its generation assets.21 That argument between CG&E and the PUCO is not at issue in this proceeding, or for that matter before the PUCO. In fact, the PUCO has determined that CG&E need not divest the entirety of its generation assets at this time and has approved CG&E's corporate separation plan through December 31, 2008.22 The PUCO's order is consistent with Ohio's statutory framework because the legislature determined that CG&E may, but is not required to, divest its generation assets without PUCO approval.23 Thus, the PUCO specifically considered the Proposed Transfer, and approved both CG&E's generation market price and its corporate separation plan as those elements will exist after the transfer. The OCC's argument on this point has no merit.24 Third, the OCC alleges that the transfer is "anti-competitive" because ULH&P and Ohio retail load will not be served through a wholesale competitive bid process.25 The OCC alleges that Ohio law requires such a process.26 It does not. Ohio law requires CG&E to offer a competitive bid process for retail consumers to choose or reject a retail price resulting from the competitive bid.27 Nothing in the relevant statutory provision requires retail load to be bid out. The PUCO agrees with CG&E and has approved the competitive bid process contained in its market-based standard service offer application.28 III. CONCLUSION For the foregoing reasons, Cinergy and CG&E respectfully request that the Commission reject the OCC's arguments and approve the Application. As for the OCC's alternative of a further evidentiary hearing, there is no need for an SEC hearing to re-litigate state ratemaking issues; the Commission should not be asked to substitute its judgment for the judgment of the PUCO regarding these state issues. Respectfully submitted, CINERGY CORP. THE CINCINNATI GAS & ELECTRIC COMPANY By: /s/ George Dwight II_ George Dwight II Associate General Counsel 139 East Fourth Street, 25 AT2 Cincinnati, Ohio 45202 513-287-2643 (P) 513-287-3810 (F) gdwight@cinergy.com William C. Weeden Skadden Arps Slate Meagher & Flom 1400 New York Avenue, N. W. Washington, D.C. 20005 202-371-7877 (P) 202-371-7012 (F) wweeden@skadden.com CERTIFICATE OF SERVICE A copy of this Response was mailed (electronically and via next business day overnight delivery) to the OCC's counsel of record in this matter on March 4, 2005. /s/ George Dwight II George Dwight II 1 In the Matter of the Application of The Union Light Heat and Power Company for a Certificate of Public Convenience to Acquire Certain Generation Resources and Related Property; for Approval of Certain Purchase Power Agreements; for Approval of Certain Accounting Treatment; and for Approval of Deviation from Requirements of KRS 278.2207 and 278.2213(6), Case No. 2003-00252 (Dec. 5, 2003). 2 Ohio Rev. Code Ann. ss. 4928.17 (Baldwin 2005) (emphasis added). 3 In re CG&E's MBSSO, Case No. 03-93-EL-ATA ("Rate Stabilization Plan Proceeding" or "RSP Proceeding") (Opinion and Order at 33-35) (September 29, 2004) ("September 2004 CG&E RSP Order"). 4 Further, by orders dated March 2, 2005 (Docket No. ER04-1249-000) and March 3, 2005 (Docket Nos. ER04-1248-000, ER04-1248-001 & ER04-1247-000), the Federal Energy Regulatory Commission ("FERC") has accepted for filing or cancellation certain agreements between CG&E and ULH&P relating to the Proposed Transfer, including the long-term full requirements power sale agreement discussed below. 5 Ohio Rev. Code Ann. ss. 4928.03 (Baldwin 2005). 6 Ohio Rev. Code Ann. ss. 4928.17 (Baldwin 2005). 7 Ohio Rev. Code Ann. ss.ss. 4928.01, 4928.03, 4928.05, 4928.14 (Baldwin 2005). 8 OCC Motion at 2 ("shifting costs to the disadvantage of CG&E's customers in Ohio"), 3 ("a multi-state strategy that disfavors Ohioans.") 9 September 2004 CG&E RSP Order, supra, OMG's brief at 15-16. 10 September 2004 CG&E RSP Order, supra (Tr. IV at 86-87) (testimony of CG&E witness, Mr. Steffen, Vice President -- Rates). 11 See, e.g., SEC Application, Item 1.A ("Historically, those [ULH&P] customers have been served entirely through long-term supply contracts between CG&E and ULH&P, in part from power generated from these Plants.") see also Id. at Item 1.D [emphasis added]: Although separately incorporated, ULH&P and CG&E have always been operated and planned effectively as a single company. For a number of reasons, all of the generating facilities for the combined companies have been placed in CG&E. CG&E's generation portfolio thus has been planned and operated to meet the power needs of retail customers in the Greater Cincinnati/Northern Kentucky area, the combined CG&E/ULH&P service territories, not just for CG&E load. ULH&P has paid for power from the Plants and CG&E's other generation assets under a number of long-term agreements, including currently under the Full Requirements PPA. 12 Id. (Opinion and Order at 35). 13 Id. 14 The PUCO approved CG&E's market price for generation to remain effective through December 31, 2008 -- well after the completion of the Proposed Transfer. In re CG&E's MBSSO, Case No. 03-93-EL-ATA (Entry on Rehearing) (November 23, 2004) ("November 2004 CG&E RSP Rehearing Order"). 15 OCC Motion at 5-10. 16 September 2004 CG&E RSP Order, supra (Tr. IV at 88-89). 17 Id. at 89 (the POLR is a component of CG&E's generation market price). 18 Id. at 87. In that regard, as discussed in Section II.B, historically CG&E has effectively supplied the entire ULH&P electric load from CG&E's fleet of generating assets, including these Generating Assets. Although CG&E proposes to divest the Generating Assets, CG&E would also concurrently "divest" its full requirements supply obligation to ULH&P. As described in the SEC Application, this full requirements long-term supply contract between CG&E and ULH&P will be terminated at the closing of the Proposed Transfer. On March 3, 2005, the FERC accepted for filing the proposed cancellation of this contract. See note 4 supra. 19 September 2004 CG&E RSP Order, supra (Opinion and Order at 35). 20 OCC Motion at 7-9. 21 OCC Motion at 8. 22 September 2004 CG&E RSP Order, supra (Opinion and Order at 33-34). For strategic reasons, as a component of CG&E's transition plan to a deregulated environment in Ohio, CG&E had proposed in 1999, and in 2000 the PUCO had issued an order approving, a corporate separation plan, which contemplated, among other things, the transfer by CG&E to an exempt wholesale generator ("EWG") affiliate of all of CG&E's electric generating units. In addition to its knowledge of and non-opposition to the Proposed Transfer, the PUCO in the September 2004 CG&E RSP Order held that CG&E was under no obligation, through year-end 2008, to transfer its remaining generating assets (i.e., remaining after consummation of the Proposed Transfer) to an EWG affiliate. 23 Ohio Rev. Code Ann. ss. 4928.17 (Baldwin 2005). 24 In complete contradiction to its argument here, OCC has previously asserted that CG&E should be immediately required to divest all of its generating assets. September 2004 CG&E RSP Order, supra (Opinion and Order at 33); In re CG&E's MBSSO, Case No. 03-93-EL-ATA (OCC's Merit Brief at 17-21) (June 22, 2004). 25 OCC Motion at 9-10. 26 Id. at 9. 27 Ohio Rev. Code Ann. ss. 4928.14 (Baldwin 2005). 28 November 2004 CG&E RSP Rehearing Order, surpa. -----END PRIVACY-ENHANCED MESSAGE-----