[Federal Register Volume 59, Number 89 (Tuesday, May 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11184]


[[Page Unknown]]

[Federal Register: May 10, 1994]


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DEPARTMENT OF EDUCATION
[Docket No. EC94-3-000]

 

Illinois Power Co., Order Granting Authorization for Proposed 
Corporate Restructuring and Clarifying Jurisdiction Over Indirect 
Mergers of Public Utilities Owned By Public Utility Holding Companies

    Issued May 3, 1994.

Introduction

    This order authorizes Illinois Power Company (Illinois Power) to 
create a holding company, IP Holding Company (IP Holding), of which 
Illinois Power will become a wholly-owned subsidiary. We also take this 
opportunity to clarify our jurisdiction under section 203 of the 
Federal Power Act (FPA). While this Commission does not have 
jurisdiction over public utility holding company mergers or 
consolidations,\1\ we conclude that, ordinarily, when public utility 
holding companies merge, an indirect merger involving their public 
utility subsidiaries also takes place, and that our approval under 
section 203 is required for the indirect merger of the public 
utilities.
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    \1\Although mergers and consolidations differ in the mechanics 
of the combination (mergers involve one company acquiring the other, 
while consolidations entail forming a new entity), Black's Law 
Dictionary, at 309 (Revised Sixth Ed. 1990), for ease of 
presentation, we will refer to both types of combinations as 
mergers.
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    Accordingly, in this order we establish and announce a rebuttable 
presumption that an indirect merger of the public utility subsidiaries 
occurs simultaneously with the merger of the holding company parents. 
Therefore, prior to public utility holding companies merging, their 
public utility subsidiaries must either rebut the presumption or obtain 
our approval under section 203 of the FPA. If applicants can show us 
that there will not be an indirect merger or consolidation of the 
facilities of the public utility subsidiaries, our jurisdiction will 
not apply until such time as the public utility subsidiaries themselves 
seek to merge or consolidate.

Background

    On November 15, 1993, Illinois Power submitted an application 
pursuant to section 203 of the Federal Power Act for authority to 
effect a ``disposition of facilities'' that would be deemed to occur as 
a result of a proposed corporate restructuring.\2\ Illinois Power 
states that the proposed restructuring would be accomplished through 
the creation of a holding company, IP Holding, of which Illinois Power 
would become a subsidiary.
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    \2\In support of its application Illinois Power presents 
information as required by section 33.2 of the Commission's 
regulations.
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    Illinois Power states that the proposed restructuring is intended 
to permit the establishment of non-utility businesses that can take 
advantage of new business opportunities on a timely basis without the 
need for prior regulatory approvals, to increase financial flexibility, 
to enhance managerial accountability for separate business activities, 
and to insulate utility ratepayers and security holders from the risks 
of non-utility projects. Illinois Power states that the proposed 
restructuring will not affect its jurisdictional facilities, rates or 
services.
    The proposed restructuring would be accomplished as follows:
    1. Illinois Power has formed a subsidiary, IP Holding, under 
Illinois law.
    2. IP Holding, in turn, has formed a subsidiary, IP Merging 
Corporation (IP Merging), also an Illinois corporation.
    3. Following all necessary approvals, IP Merging will merge with 
and into Illinois Power. In the merger, all outstanding shares of 
Illinois Power common stock will be converted on a share-for-share 
basis into IP Holding common stock by operation of law, and IP Holding 
will become the owner of all outstanding shares of Illinois Power 
common stock.\3\ Illinois Power common stock will thereafter cease to 
be listed and traded on the stock market, and the common shares of IP 
Holding will be listed and traded instead.
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    \3\IP Holding has filed an application with the Securities and 
Exchange Commission (SEC) for authority to acquire Illinois Power's 
common stock, pursuant to sections 9(a)(2) and 10 of the Public 
Utility Holding Company Act of 1935 (PUHCA).
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    Notice of the application was published in the Federal Register,\4\ 
with comments due on or before December 8, 1993. None was filed.
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    \4\58 FR 62,649 (1993).
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Discussion

A. The Application

    The Commission has held that the transfer of a public utility's 
common stock from its existing shareholders to a holding company 
constitutes a transfer of the ``ownership and control'' of the 
utility's jurisdictional facilities and is thus a ``disposition of 
facilities'' subject to Commission review and approval under section 
203 of the Federal Power Act. See Central Vermont Public Service Corp., 
39 FERC  61,295 (1987) (Central Vermont). Because Illinois Power's 
proposed restructuring would entail the transfer of the ownership of 
its common stock from existing shareholders to IP Holding, the 
restructuring is subject to the requirements of section 203.
    The Commission is obligated to approve a proposed ``disposition of 
facilities'' under section 203 if it would be ``consistent with the 
public interest.''\5\ In making such a determination, the Commission 
considers, inter alia: (1) The effect on utility operating costs and 
rate levels: (2) the contemplated accounting treatment; (3) the 
reasonableness of the purchase price; (4) the possibility of coercion; 
(5) the effect on competition; and (6) the impact on the effectiveness 
of regulation. Commonwealth Edison Co., 36 FPC 927, 936-42 (1966), 
aff'd sub nom. Utility Users League v. FPC, 394 F.2d 16 (7th Cir.), 
cert. denied, 393 U.S. 953 (1968).
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    \5\An applicant need not show that a positive benefit to the 
public will result. See Pacific Power & Light Company v. FPC, 111 
F.2d 1014, 1016-17 (9th Cir. 1940).
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    The Commission finds that Illinois Power's proposed restructuring 
will be compatible with each of the relevant factors. First, the 
proposed restructuring will have no effect on either Illinois Power's 
operating costs or its rate levels. The Applicant does not request a 
rate increase as part of its filing. Any future changes in Illinois 
Power's wholesale rates would be subject to Commission review and 
approval under section 205 of the FPA.
    Second, the contemplated accounting treatment will be appropriate. 
The merger of Illinois Power and IP Merging will be accounted for on a 
``pooling of interests'' basis under generally accepted accounting 
principles. Illinois Power's books and records will continue to be 
maintained in accordance with the Commission's Uniform System of 
Accounts.
    Third, the proposed restructuring entails no ``purchase price.'' 
The proposed restructuring involves the conversion of each share of 
Illinois Power common stock into a share of IP Holding common stock. 
Therefore, the proportion of each shareholder's ownership will be 
unchanged.
    Fourth, because the proposed reorganization only involves Illinois 
Power and its affiliates, there is no possibility of coercion.
    Fifth, because no facilities will be combined with those of any 
other public utility, the proposed restructuring will not have an 
adverse effect on competition.
    Sixth, the proposed restructuring will not impair effective 
regulation of Illinois Power. Illinois Power's services, rates and 
facilities will be unaffected by the restructuring and will continue to 
be regulated by the Illinois Commerce Commission and by this 
Commission.

B. Clarification of Jurisdiction Over Indirect Mergers of Public 
Utilities Owned By Public Utility Holding Companies

    While there is no current proposal to merge IP Holding with another 
public utility holding company, it is possible that in the future such 
a merger may take place.\6\ In our view, most mergers of public utility 
holding companies will simultaneously involve an indirect merger of the 
public utility subsidiaries of such holding companies. Accordingly, we 
take this opportunity to announce a clarification of our jurisdiction 
when there is a merger of public utility holding companies. To assure 
that the public interest is protected when public utility holding 
companies merge, we will establish a rebuttable presumption that an 
indirect merger of jurisdictional facilities of the public utility 
subsidiaries occurs at the time the holding company parents merge. 
Prior to the public utility holding companies merging, their public 
utility subsidiaries must file under section 203 of the FPA either 
sufficient information to rebut the presumption, or for Commission 
approval of the indirect merger of the public utilities.
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    \6\With the recent and projected increase of competition in the 
electric utility industry, mergers may become an increasingly 
popular tool for utilities seeking to achieve greater efficiency and 
become more competitive. Our decision today is necessary to ensure 
the continued adequacy of our merger policies in protecting the 
public interest.
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    The public utilities may rebut the presumption by showing that 
after the merger of the holding companies, the public utility 
subsidiaries will still effectively compete with each other. If they 
make such a showing, jurisdiction under 203 will not attach until such 
time as the public utilities themselves seek to combine.
1. The Three Step Process
    Section 203(a) of the FPA provides that:
    No public utility shall sell, lease or otherwise dispose of the 
whole of its facilities subject to the jurisdiction of the Commission, 
or any part thereof of a value in excess of $50,000, or by any means 
whatsoever, directly or indirectly, merge or consolidate such 
facilities or any part thereof with those of any other person * * * 
without first having secured an order of the Commission authorizing it 
to do so.
    The provision applies to any public utility, which section 201(e) 
of the FPA defines as ``any person [with certain exceptions specified 
in section 201(e) which are not relevant here] who owns or operates 
facilities'' for the sale of electric energy at wholesale or the 
transmission of electric energy in interstate commerce. Public utility 
holding companies, in contrast to public utilities, do not normally own 
such facilities.7 Therefore, we have no jurisdiction over public 
utility holding companies that are not also public utilities and thus 
have no jurisdiction over most mergers of holding companies.
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    \7\Certain public utility holding companies, however, are also 
public utilities. E.g., Cincinnati Gas and Electric Company.
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    In recent years, however, some public utilities have followed a 
three-step process to reorganize. In ``step one,'' a public utility 
forms a company and transfers ownership of all of the utility's stock 
to a newly created company, which becomes the parent holding company of 
the public utility.8 In ``step two,'' the public utility holding 
company merges with another public utility holding company. In ``step 
three,'' the public utilities under the control of the single public 
utility holding company formally merge their facilities.
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    \8\Illinois Power seeks Commission authorization of a ``step 
one'' transaction in this docket.
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    Central Vermont and Missouri Basin Municipal Power Agency v. 
Midwest Energy Company and Iowa Resources, Inc., 53 FERC 61,368 
(1990), reh'g denied, 55 FERC 61,464 (1991) (Missouri Basin) describe 
our jurisdiction (or lack thereof) at each of the three steps. In 
Central Vermont, the Commission found jurisdiction under section 203 
when a public utility establishes a holding company, because the 
shareholders of the public utility transfer ownership and control over 
jurisdictional facilities in the course of the transaction. In Missouri 
Basin, the Commission found that the merger of two public utility 
holding companies was subject to the SEC's jurisdiction, but not to our 
jurisdiction. The Commission determined that neither of the holding 
companies in Missouri Basin owned or operated FERC-jurisdictional 
facilities, and therefore neither holding company was a public utility 
under the FPA when the merger was consummated. Thus, the Commission 
found, the merger did not fall within the Commission's jurisdiction 
under section 203. The Commission stated that if, in the future, the 
public utility subsidiaries should merge--a ``step three'' 
transaction--Commission approval would be required.9 The 
Commission later approved the merger of the affiliated public 
utilities.10
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    \9\53 FERC at 62,298-99.
    \1\0Iowa Public Service Company, Iowa Power, Inc., and Midwest 
Power Systems, 60 FERC 61,048 (1992). The Commission has generally 
approved mergers between affiliated public utilities. See, e.g., 
Wisconsin Electric Power Company, 59 FPC 1196 (1977) (``while 
technically a merger, this action is more in the nature of an 
intrasystem consolidation and does not present the potential evils 
which are inherent in the merger of two non-affiliated systems''); 
Delmarva Power & Light Company, 5 FERC 61,201 (1978) (``the 
transaction would only simplify the corporate structure by merging 
these subsidiaries into the parent''); Union Electric Company, 25 
FERC 61,394 (1983), reh'g denied, 26 FERC 61,184 (1984) (``the 
nature of the proposed transaction is essentially a consolidation of 
operating utilities presently under one ownership rather than the 
acquisition of any additional electric or gas utility''); and 
Kentucky Utilities Company and Old Dominion Power Company, 56 FERC 
61,184 (1991) (``because Kentucky Utilities already wholly owned 
Old Dominion and, in effect, controls the use of Old Dominion's 
system, the merger will not alter Kentucky Utilities' control'').
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2. Reasons for Clarification
    a. The Presumption. Our decision to adopt a presumption of indirect 
merger and to require the public utility subsidiaries to rebut the 
presumption by showing that after merger of their parents they will 
continue to compete with each other, is informed by the Supreme Court's 
decision in Copperweld Corp. v. Independence Tube Corp. (Copperweld), 
467 U.S. 752 (1984). The Court held that section 1 of the Sherman 
Antitrust Act, which outlaws conspiracies or combinations in restraint 
of trade, regards as one company a parent and subsidiary that maintain 
separate operations. The two cannot conspire because they do not 
compete in the economic sense. Copperweld holds that even if companies 
maintain separate corporate form, if they pursue a common economic 
interest, they no longer compete.
    The Court explained:

    A parent and its wholly owned subsidiary have a complete unity 
of interest. Their objectives are common, not disparate; their 
general corporate actions are guided or determined not by two 
separate corporate consciousness, but one. They are not unlike a 
multiple team of horses drawing a vehicle under the control of a 
single driver. With or without a formal ``agreement,'' the 
subsidiary acts for the benefit of the parent, its sole shareholder. 
If a parent and a subsidiary do ``agree'' to a course of action, 
there is no sudden joining of economic resources that had previously 
served different interests, and there is no justification for Sec. 1 
scrutiny.
* * * * *
[i]n reality a parent and a wholly owned subsidiary always have a 
``unity of purpose or a common design'' * * * whether or not the 
parent keeps a tight rein over the subsidiary; the parent may assert 
full control at any moment if the subsidiary fails to act in the 
parent's best interest.

467 U.S. at 771-72 (emphasis in original; footnote deleted).

    The courts have applied Copperweld to electric utilities and their 
affiliates. In City of Mount Pleasant, Iowa v. Associated Electric Co-
op, 838 F.2d 268, 274-77 (8th Cir. 1988), for example, which involved 
municipal and cooperative utilities, the Eight Circuit held:

    Even though [affiliates] may quarrel among themselves on how to 
divide the spoils of their economic power, it cannot be reasonably 
said that they are independent sources of that power. Their power 
depends, and has always depended, on the cooperation among 
themselves. They are interdependent, not dependent.

838 F.2d at 277 (emphasis deleted).

    While Copperweld applies to the Sherman Act, the rationale of the 
decision suggests that the common interest between members of an 
enterprise affects their standing as competitors for FPA purposes as 
well. While this Commission has no responsibility to enforce the 
antitrust laws,11 it must weigh competitive considerations in its 
merger analyses.12
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    \1\1Northern Natural Gas Co. v. FPC, 399 F.2d 953, 960 (D.C. 
Cir. 1968), citing California v. FPC, 369 U.S. 482, 490 (1962).
    \1\2See, e.g., Northeast Utilities Service Co. 56 FERC 61,369 
at 61,998-62,011 (1991), order on reh'g, 58 FERC 61,070, further 
order on reh'g, 59 FERC 61,042 (1992), remanded on other grounds, 
939 F.2d 937 (1st Cir. 1993) (NU).
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    Moreover, while City of Mount Pleasant involved municipal utilities 
suing an electric co-op (none of which were subject to our section 203 
jurisdiction), at least one court has applied Copperweld to a 
jurisdictional public utility. Rosemont Cogeneration Joint Venture v. 
Northern States Power, 91-1 Trade Cases (CCH) 69,351 at 65,408 (D MN 
1991).
    The above case law supports our conclusion that when public utility 
holding companies merge, their public utility subsidiaries likely 
retain no real corporate independence. Rather, decision-making for the 
public utility subsidiaries appears to rest with the new holding 
company. The voting stock of the public utilities belongs to the 
shareholders of the new holding company; the new holding company board 
of directors presumably sets or can set corporate policy for all 
subsidiaries; and management of the public utility subsidiaries 
presumably gains access to proprietary financial and corporate 
information of the entire system of the new holding company. For us to 
assume that a merger of the public utilities occurs only when the new 
parent proposes to combine its subsidiaries may, in most instances, 
elevate corporate form over economic substance.
    We therefore will presume, subject to rebuttal, that mergers 
between public utility holding companies also accomplish an indirect 
merger of their public utility subsidiaries. If the public utilities 
can rebut the presumption, we will find that jurisdiction will not 
attach until such time as the public utility subsidiaries formally 
merge or consolidate their facilities. If the public utilities cannot 
rebut the presumption, section 203 approval of the indirect merger of 
the public utilities will be required.13
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    \1\3Section 203 requires approval prior to a merger. Therefore, 
the public utilities must file under section 203 evidence to rebut 
the presumption that an indirect merger of public utilities will 
occur when the holding companies merge, and/or alternatively an 
application for approval under section 203.
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    b. Rebutting the Presumption. The Eighth Circuit in City of Mount 
Pleasant left open the possibility for courts to consider affiliates as 
separate enterprises for antitrust purposes. In granting summary 
judgment to the co-op, the panel held:

    The record bears out the defendants' claim that the cooperative 
organization is a single enterprise pursuing a common goal--the 
provision of low-cost electricity.* * * The burden [falls] therefore 
on the City to show specific facts which present a triable issue as 
to whether any of the defendants has pursued interests diverse from 
those of the cooperative itself. By ``diverse'' we mean interests 
that show that any two of the defendants are, or have been, actual 
or potential competitors, * * * or at the very least, interests 
which are sufficiently divergent so that a reasonable juror could 
conclude that the entities have not always worked together for a 
common cause. In the language of Copperweld, the City must show 
facts that could lead a reasonable juror to find the coordination 
between any two defendants to be a ``joining of two independent 
sources of economic power previously pursuing separate interests.''

838 F.2d at 276 (citations omitted).

    Informed by the analysis in Copperweld and City of Mount Pleasant, 
we will require section 203 applicants, in order to rebut the 
presumption, to show that the new holding company will not interfere 
with the independence of the public utility subsidiaries, and will 
allow them to operate and compete with each other in the same manner as 
before the merger of the holding companies. In order to rebut the 
presumption of an indirect merger, the public utilities must show: (1) 
That they will continue to exercise independent decision-making 
authority; (2) that their proprietary, financial and corporate 
information will not be available to each other, either directly or 
indirectly; and (3) that they will compete on price and service in the 
same markets to the same extent they have competed in the past.14
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    \1\4We do not believe there can be competition between public 
utilities if they do not exercise independent decision-making or if 
they share information. Accordingly, elements (1) and (2) must be 
met. However, the fact that (1) and (2) are met in and of themselves 
is not sufficient to show that the affiliates will compete. 
Applicants therefore must submit additional evidence that they will 
compete with each other. For example, one indicia of competition 
would be that they will separately participate in competitive 
solicitations.
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The Commission Orders

    (A) The disposition of the jurisdictional facilities of Illinois 
Power in the above-described corporate restructuring is hereby 
authorized subject to the following conditions:
    (1) The proposed transaction is authorized upon the terms and 
conditions and for the purposes set forth in the application;
    (2) The Commission retains authority under section 203(b) of the 
Federal Power Act to issue supplemental orders as appropriate;
    (3) The foregoing authorization is without prejudice to the 
authority of this Commission or any other regulatory body with respect 
to rates, service, accounts, valuation, estimates, determinations of 
cost, or any other matter whatsoever now pending or which may come 
before this Commission;
    (4) Nothing in this order shall be construed to imply acquiescence 
in any estimate or determination of cost or any valuation of property 
claimed or asserted; and
    (B) In the event IP Holding should seek to merge with another 
public utility holding company, the public utilities will be required 
to file under section 203 of the FPA evidence to rebut a presumption 
that such a merger would not also result in an indirect merger of the 
public utility subsidiaries, or alternatively for approval of an 
indirect merger of the public utilities.

    By the Commission.
Lois D. Cashell,
Secretary.
[FR Doc. 94-11184 Filed 5-9-94; 8:45 am]
BILLING CODE 6717-01-P