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

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]

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