Conectiv, Inc.; Order Authorizing Acquisition of Public Utility Companies and Related Transactions; Approving Organization of Service Company Subsidiary; Authorizing Certain Affiliate Transactions; Approving Service Agreements; and Reserving Jurisdiction

SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-26832; 70-9069]

Conectiv, Inc.; Order Authorizing Acquisition of Public Utility

Companies and Related Transactions; Approving Organization of Service

Company Subsidiary; Authorizing Certain Affiliate Transactions;

Approving Service Agreements; and Reserving Jurisdiction

February 25, 1998.

Conectiv, Inc. (``Conectiv''), a Delaware corporation not currently

subject to the Public Utility Holding Company Act of 1935, as amended

(``Act''), has filed an application-declaration, as amended, under

sections 6(a), 7, 9, 10, 11 and 13 of the Act, and rules 80 through 91,

93 and 94, seeking approvals related to the proposed combination of

Delmarva Power & Light Company (``Delmarva''), a Delaware and Virginia

public utility company, and Atlantic Energy, Inc. (``Atlantic''), a New

Jersey public utility holding company exempt by order under section

3(a)(1) from all provisions of the Act, except section 9(a)(2).

Conectiv requests, among other things, an order under sections 9(a)(2)

and 10 of the Act authorizing its acquisition of all of the issued and

outstanding common stock of Delmarva and Atlantic by means of the

mergers described below. Following the transactions, Conectiv will

register as a holding company under section 5 of the Act.\1\

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\1\ Conectiv will file a notification of registration on Form

U5A within 30 days of the merger and will file a registration

statement on Form U5B within 90 days.

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The Commission issued a notice of the filing on October 3, 1997

(Holding Co. Act Release No. 26763). The Commission received a request

for a hearing dated October 27, 1997, from South Jersey Gas Company

(``South Jersey''), a New Jersey public utility company engaged in the

transmission, distribution, transportation and sale of natural and

mixed gases in New Jersey.

[[Page 10658]]

South Jersey filed supplemental comments on November 7, 1997. By letter

dated December 22, 1997, South Jersey withdrew its request for a

hearing.

I. Background

Delmarva provides electric service in Delaware, Maryland and

Virginia and gas service in Delaware. As of June 30, 1997, Delmarva

provided electric utility service to approximately 445,000 customers in

an area encompassing about 6,000 square miles in Delaware (255,000

customers), Maryland (170,000 customers) and Virginia (20,000

customers), and gas utility service to approximately 102,000 customers

in an area of about 275 square miles in northern Delaware.

Delmarva's gas facilities are located exclusively in New Castle

County, Delaware. Delmarva owns gas property consisting of a liquefied

natural gas plant in Wilmington, Delaware with a storage capacity of

3.045 million gallons and a maximum daily sendout capacity of 49,898

Mcf per day.\2\ Delmarva also owns four natural gas city gate stations

at various locations in its gas service territory. The stations have a

total contract sendout capacity of 125,000 Mcf per day. Delmarva has

111 miles of transmission mains (including 11 miles of joint-use gas

pipelines that are used 10% for gas distribution and 90% for

electricity production), 1,539 miles of distribution mains and 1,091

miles of service lines.

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\2\ The facility is used primarily as a peak-shaving facility

for Delmarva's gas customers.

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Delmarva is engaged indirectly, through subsidiaries and

affiliates, in various nonutility activities. In general, these

activities include: acquisition and operation of service businesses

primarily involving heating, ventilation and air conditioning sales,

installation and servicing, and other energy-related activities;

provision of a full-range of retail and wholesale telecommunications

services; ownership and financing of an office building that its leased

to Delmarva and/or its affiliates; oil and gas exploration and

development; ownership of approximately 2.9% of the common stock of

Chesapeake Utilities Corporation, a publicly traded gas utility company

with gas utility operations in Delaware, Maryland and Florida;\3\ gas-

related activities; and a variety of unregulated investments. These

activities, and the subsidiaries through which they are engaged, are

described in detail in Appendix A to this order. On June 30, 1997,

Delmarva's nonutility subsidiaries and investments constituted

approximately 7.5% of the consolidated assets of Delmarva and its

subsidiaries.

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\3\ The application requests the Commission to reserve

jurisdiction over Conectiv's acquisition of the common stock of

Chesapeake Utilities Corporation for a period of three years from

the date of this order to permit Conectiv to effect an orderly

disposition of the stock or otherwise comply with the requirements

of the Act.

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On June 30, 1997, there were 61,269,320 shares of Delmarva Common

Stock, par value $2.25 per share, outstanding and 1,253,548 shares of

Delmarva preferred stock outstanding. For the fiscal year ended June

30, 1997, Delmarva's operating revenues on a consolidated basis were

approximately $1,256 million, of which approximately $1,018 million

were derived from electric operations, $134 million from gas operations

and $104 million from other operations. Consolidated assets of Delmarva

and its subsidiaries at June 30, 1997 were approximately $2,992

million, consisting of approximately $2,531 million in electric utility

property, plant and equipment; approximately $236 million in gas

utility property, plant and equipment; and approximately $225 million

in other corporate assets.

Atlantic's principal subsidiary is Atlantic City Electric Company

(``ACE''), a public utility company engaged in the generation,

transmission, distribution and sale of electric energy. ACE serves a

population of approximately 476,000 customers in a 2,700 square-mile

area of Southern New Jersey.\4\

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\4\ ACE is also a holding company by reason of its ownership of

Deepwater Operating Company (``Deepwater''), a public utility

company. Deepwater owns no physical assets. It operates generating

facilities in New Jersey for ACE.

ACE claims exemption from registration under section 3(a)(1) of

the Act by rule 2. Prior to the consummation of the proposed

mergers, Deepwater will be either merged into ACE or made a

subsidiary of Atlantic Energy Enterprises, Inc., a holding company

for Atlantic's nonutility subsidiaries.

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Delmarva and ACE have undivided ownership interests in two nuclear

plants: Peach Bottom Nuclear Generating Station, a Pennsylvania

facility in which each company holds a 7.51 percent interest, and Salem

Nuclear Generating Station, a New Jersey facility in which each company

holds a 7.41 percent interest. Delmarva and ACE also hold undivided

ownership interests in two Pennsylvania coal-fired thermal units, the

Keystone and Conemaugh generating stations.\5\

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\5\ The application states that the four plants in which ACE and

Delmarva hold ownership interests will account for a substantial

proportion of Conectiv's generation resources, although the plants

are located outside the utilities' traditional service areas.

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Atlantic is engaged indirectly, through subsidiaries and

associates, in a variety of nonutility activities. In general, these

activities include: brokering of used utility equipment to developing

countries; provision of utility consulting services related to the

design of substations and other utility infrastructure; investment in

leveraged leases of commercial aircraft and container ships;

development and operation of independent power production projects;

ownership and operation of thermal heating and cooling system; and

provision of other energy-related services to business and

institutional energy users. These activities, and the subsidiaries

through which they are engaged, are described in detain in Appendix B

to this order. As of June 30, 1997, Atlantic's nonutility subsidiaries

and investments constituted approximately 8.9% of the consolidated book

value of the assets of Atlantic and its subsidiaries.

As of June 30, 1997, there were 52,502,479 shares of Atlantic

Common Stock, no par value, outstanding and no shares of preferred

stock outstanding. For the year ended June 30, 1997, Atlantic had

operating revenues on a consolidated basis of approximately $987

million. Total assets as of June 30, 1997 were approximately $2,758

million.

The electric service territories of ACE and Delmarva are not

contiguous, and the companies are not directly interconnected. However,

Delmarva and ACE, together with other members of PJM Interconnection,

LLC (``PJM''), a regional power pool described below, have undivided

interests in, or joint rights to use, certain 500 kv transmission

facilities that are used to import power from the west and to deliver

power from jointly owned power plants to their owner's systems. These

facilities include a transmission line over the Delaware River and

other extra-high voltage lines that directly connect the jointly owned

power plant with lower voltage lines of PJM.

PJM is a ``tight'' power pool.\6\ The application describes PJM as

the largest

[[Page 10659]]

and most sophisticated centrally dispatched electric control area in

North America, and the third largest in the world.\7\ The PJM service

territory includes all or part of Pennsylvania, New Jersey, Maryland,

Delaware, Virginia and the District of Columbia. PJM's objectives are

to ensure reliability of the bulk power transmission system and to

facilitate an open-competitive wholesale electric market.

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\6\ The Commission noted in Untili Corp., Holding Co. Act

Release No. 25524 (April 24, 1992):

Generally, a tight power pool consists of two or more electric

systems which coordinated the planning and/or operation of their

bulk power facilities for the purpose of achieving greater economy

and reliability in accordance with a contractual agreement that

establishes each member's responsibilities.

Tight power pools have centralized dispatch of generating

facilities, whereby energy and operating reserves are interchanged

among the participant systems and transferred over facilities owned

by the individual participants. Participants have contractual

requirements relating to generating capacity and operating reserves,

together with specific financial penalties if these requirements are

not met. Sufficient transmission capacity is made available to

realize the full value of operating and planning coordination.

Id. at 10, n.22.

\7\ Comparable tight pools are the New York Power Pool and the

New England Power Pool (``NEPOOL'').

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PJM became the first operational Independent System Operator \8\ in

the United States on January 1, 1998, managing the PJM Open Access

Transmission Tariff and facilitating the Mid-Atlantic spot market. With

the implementation of the Tariff, PJM began operating the nation's

first regional, bid-based energy market.

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\8\ Independent system operators are generally established to

coordinate access to and delivery of electric power generated by a

number of sources. The U.S. Department of Energy in an August 1997

report entitled Electricity Prices in a Competitive Environment:

Marginal Cost Pricing of Generation Services and Financial Status of

Electric Utilities, defines an ``Independent System Operator'' as

``[a] neutral operator responsible for maintaining an instantaneous

balance of the grid system. The Independent System Operator performs

its function by controlling the dispatch of flexible plants to

ensure that loads match resources available to the system.'' Id. at

106.

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In order to achieve economy and reliability in the bulk power

supply within the PJM region, PJM members coordinate the planning and

operation of their systems, share installed and operating reserves to

reduce installed generator requirements, and participate in centralized

unit commitment, coordinated bilateral transactions, and instantaneous

real-time dispatch of energy resources to meet customer load

requirements throughout PJM. Within the PJM pool, there is a wholesale

energy market based on a ``split-the-savings'' energy exchange. There

is also a reciprocal sharing of capacity resources and a competitive

market is transmission entitlements to import energy.

Delmarva's generation and bulk transmission, and ACE's generation

and transmission facilities are operated on an integrated basis with

those of other PJM members. The PJM staff centrally forecasts,

schedules and coordinates the operation of generating units, bilateral

transactions and the spot energy market to meet load requirements.\9\

To maintain a reliable and secure electric system, PJM monitors,

evaluates and coordinates the operation of over 8,000 miles of high-

voltage transmission lines. Operations are closely coordinated with

neighboring control areas, and information is exchanged to enable real-

time security assessments of the transmission grid. PJM provides

accounting services for energy, ancillary services, transmission

services, and capacity reserve obligations.

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\9\ The PJM staff coordinates the planning of generation to meet

combined peak loads of the control area. They coordinate planning of

the interconnected bulk power transmission system to deliver energy

reliably and economically to customers. PJM conducts many

specialized planning studies within the pool and with surrounding

entities.

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Conectiv was formed to become a holding company for Delmarva and

Atlantic following consummation of the proposed mergers, as

contemplated by a merger agreement dated as of August 9, 1996, as

amended and restated as of December 26, 1996 (``Merger Agreement''). At

present, Conectiv's common stock, consisting of 1,000 issued and

outstanding shares, is owned by Delmarva and Atlantic, each of which

owns 500 shares. The shareholders of Delmarva and Atlantic approved the

proposed mergers at their respective meetings held on January 30, 1997.

Conectiv will serve approximately 921,000 electric customers in New

Jersey, Delaware, Maryland and Virginia, and 102,000 gas customers in

Delaware. The service territory of the Conectiv system will extend from

the Virginia portion of the Delmarva Peninsula north to Atlantic City,

New Jersey and west to Wilmington, Delaware. As of, and for the fiscal

year ended, June 30, 1997, the combined assets of Delmarva and Atlantic

would have totalled approximately $5.75 billion, the combined operating

revenues would have totaled approximately $2.24 billion and the

combined installed generating capacity would have totaled 4417 MW.

Conectiv believes that the mergers will lead to economies of scale

through the elimination of duplicate facilities and positions,

integration of corporate and administrative programs, improved

purchasing and production capacity and reserves, and generally more

efficient operations. Conectiv estimates that the mergers could result

in net cost savings of more than $500 million during the ten-year

period following the mergers. Conectiv expects approximately 59.55% of

the savings to occur through labor reductions in redundant positions,

4.48% from reduced facilities, 21.51% from economies of scale and cost

avoidance in corporate and administrative programs, 9,64% from

purchasing economies for non-fuel materials and supplies, and 4.82%

from purchasing economies for fuel and power purchases.

Under the Merger Agreement, DS Sub, Inc., a Delaware direct

subsidiary of Conectiv formed for purposes of the merger,\10\ will be

merged with and into Delmarva, with Delmarva as the surviving

corporation (``Delmarva Merger''), and Atlantic will be merged with and

into Conectiv, with Conectiv as the surviving corporation (``Atlantic

Merger'' and, together with Delmarva Merger, ``Mergers''). As a result

of the Mergers, Delmarva and its direct subsidiaries and certain direct

subsidiaries of Atlantic will become direct subsidiaries of Conectiv,

and Conectiv will be a holding company within the meaning of the Act.

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\10\ The authorized capital stock of DS Sub consists of 1000

shares of common stock, $0.01 par value, all of which is held by

Conectiv.

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Upon consummation of the Mergers, each issued and outstanding share

of Delmarva Common Stock will be converted into the right to receive

one share of Conectiv common stock (``Conectiv Common Stock'')

(``Delmarva Conversion Ratio''). Each issued and outstanding share of

Atlantic common stock (``Atlantic Common Stock'') will be converted

into the right to receive 0.75 shares of Conectiv Common Stock

(``Atlantic Conversion Ratio'') and 0.125 shares of Class A common

stock of Conectiv (``Conectiv Class A Common Stock'').\11\ Based on the

capitalization and the Delmarva Conversion Ratio and the Atlantic

Conversion Ratio, the shareholders of Delmarva and Atlantic would own

securities representing approximately 60.6% and 39.4%, respectively, of

the outstanding shares of the Conectiv Common Stock, and the

shareholders of Atlantic would own 100% of the outstanding shares of

the Conectiv Class A Common Stock.

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\11\ The outstanding shares of preferred stock of Delmarva and

Atlantic will not be affected.

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The Conectiv Class A Common Stock is a ``letter'' or ``tracking''

stock, designed to track the performance of the currently regulated

electric utility business of ACE (``Targeted Business'').\12\ The

application states that the Conectiv Class A Common Stock, which will

be issued only to the holders

[[Page 10660]]

of the Atlantic Common Stock, allocates proportionately more of the

risks associated with the Targeted Business to Atlantic's current

stockholders and, at the same time, provides them the opportunity to

participate in proportionately more of the growth prospects of the

Targeted Business. The Merger Agreement provides, subject to

declaration by the Conectiv Board of Directors, and its obligation to

react to the financial condition and regulatory environment of the

company and its results of operations, that the dividends declared and

paid on the Conectiv Class A Common Stock will be maintained at a level

of $3.30 per share per annum until the earlier of July 1, 2001, or the

end of the twelfth calendar quarter in which the Mergers become

effective (``Initial Period''). The application-declaration states,

that after the Initial Period, Conectiv intends to pay dividends to the

holders of the Conectiv Class A Common Stock at a rate equal to 90% of

net earnings attributable to the Targeted Business in excess of $40

million.\13\ Through the use of the tracking stock, the holders of

Atlantic Common Stock will retain more than half the benefits and risks

relating to the Targeted Business after the Mergers.

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\12\ In conjunction with the Mergers and the findings and

recommendations of the New Jersey Commission on April 30, 1997, on

the restructuring of the New Jersey electric industry, ACE expects

to move all of its currently nonregulated operations out of ACE. ACE

would retain only the Targeted Business.

\13\ The Merger Agreement further provides that if, and to the

extent that, the annual dividends, paid on the Conectiv Class A

Common Stock during the Initial Period exceeds 100% of Conectiv's

earnings attributable to the Targeted Business in excess of $40

million per year during the Initial Period, the Conectiv Board may

consider this fact in determining the appropriate annual dividend

rate on the Conectiv Class A Common Stock following the Initial

Period.

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Holders of the Conectiv Class A Common Stock will not have any

specific rights or claims against the businesses, assets and

liabilities of the Targeted Business, other than as common stockholders

of Conectiv. Holders will be subject to risks associated with an

investment in Conectiv and all of its businesses, assets and

liabilities. Both holders of Conectiv Common Stock and holders of

Conectiv Class A Common Stock will be entitled to one vote per share on

all matters submitted to a vote at any meetings of stockholders,

subject to the rights, if any, of holders of any outstanding class of

preferred stock. The holders of Conectiv Common Stock and the holders

of Conectiv Class A Common Stock will vote as one class for all

purposes, except as may otherwise be required by the laws of

Delaware.\14\

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\14\ There are also special provisions governing the conversion

and redemption of the Conectiv Class A Common Stock, either at the

discretion of Conectiv or in the event of a merger, tender offer or

disposition of all or substantially all of the assets of the

Targeted Business. A more complete description of the Conectiv Class

A Common Stock is provided in the ``Description of the Company's

Capital Stock'' on pages 75 to 97 of the Joint Proxy filed as

Exhibit C-2 to the application. Risk factors associated with the

dual class capital structure are also discussed extensively in the

Joint Proxy on pages 14 to 22 under the heading ``Risk Factors.''

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Both the Class A Common Stock and the Common Stock will be publicly

traded, will have full voting rights and will be able to be evaluated

through regular periodic filings under the Securities Exchange Act of

1934.\15\ The Conectiv Class A Common Stock will have no preference or

accrual rights. Further, the Conectiv Class A Common Stock will have

the same priority in liquidation as the Common Stock.

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\15\ The notes to the consolidated financial statements of

Conectiv will include condensed financial information of ACE.

Complete financial statements of ACE will continue to be filed with

the Commission under the Securities Exchange Act of 1934 and will be

available to Conectiv stockholders upon request.

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The application explains that the use of two classes of Conectiv

common stock was proposed during the merger negotiations as a means to

address the merger partners' differing evaluations of the growth

prospects of, and uncertainties associated with deregulation of, ACE's

regulated electric utility business. The Boards of Delmarva and

Atlantic determined that the use of tracking stock was necessary to

bridge the companies' differing views concerning the appropriate

conversion ratio for a business combination.

Delmarva currently has in place a long-term incentive plan and

Atlantic has in place an equity incentive plan. Upon completion of the

Mergers, a Conectiv plan will replace both plans.\16\ The Conectiv plan

provides for a maximum number of five million shares of Conectiv Common

Stock available for issuance under the plan.

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\16\ On January 30, 1997, the shareholders of Delmarva and

Atlantic approved the Conectiv Incentive Compensation Plan, a

comprehensive cash and stock compensation plan providing for the

grant of annual incentive awards as well as long-term incentive

awards such as restricted stock, stock options, stock appreciation

rights, performance units, dividend equivalents and other types of

awards as the committee of the Conectiv Board that will administer

the plan deems appropriate.

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Prior to the consummation of the Mergers, Conectiv will form a

subsidiary service company, Conectiv Resource Partners, Inc.

(``Conectiv Resource'') (formerly Support Conectiv, Inc.), to serve the

Conectiv system companies.\17\ Conectiv Resource will provide a variety

of administrative, management, engineering, construction, environmental

and support services, including services relating to electric power

planning, electric system operations, materials management, facilities

and real estate, accounting, budgeting and financial forecasting,

finance and treasury, rates and regulation, legal, internal audit,

corporate communications, environmental matters, fuel procurement,

corporate planning, investor relations, human resources, marketing and

customer services, information systems and general administrative and

executive management services.\18\

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\17\ Conectiv Resource's authorized capital stock will consist

of up to 3,000 shares of common stock, $1 par value per share.

Conectiv requests authorization to acquire the voting securities of

Conectiv Resource as part of the Mergers. Conectiv will hold all

issued and outstanding shares of Conectiv Resource common stock.

\18\ No change in the organization of Conectiv Resource, the

type and character of the companies to receive services, the methods

of allocating costs to associate companies, or the scope or

character of services shall be made unless and until Conectiv

Resource has given the Commission written notice of the proposed

change not less than 60 days prior to the proposed effectiveness of

the change. If, upon receipt of such notice, the Commission notifies

Conectiv Resource within the 60-day period that a question exists as

to whether the proposed change is consistent with the provisions of

section 13 of the Act or related rules, Conectiv Resource will be

required to file a declaration and the proposed change shall not

become effective until authorized by order of the Commission.

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Conectiv Resource will enter into a service agreement with each

associate company to which it renders services (``Service

Agreement'').\19\ In accordance with the Service Agreement, services

provided by Conectiv Resource will be directly assigned, distributed or

allocated to an associate company by activity, project, program, work

order or other appropriate basis. Employees of Conectiv Resource will

record transactions utilizing the existing data capture and accounting

systems of each client associate company. Costs of Conectiv Resource

will be accumulated in accounts of Conectiv Resource and directly

assigned, distributed and allocated to the appropriate client company

in accordance with the guidelines set forth in the Service Agreement.

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\19\ See Exhibit B-2 to the application.

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It is anticipated that Conectiv Resource will be staffed by the

transfer of current personnel of Delmarva, Atlantic and their

subsidiaries. Conectiv Resource's accounting and cost allocation

methods and procedures will be structured so as to comply with the

Commission's standards for service companies in registered holding

company systems. Conectiv states that the Service Agreement is

structured so as to comply with section 13 of the Act and the

Commission's rules and regulations under the Act. Thus, charges for all

services provided by Conectiv Resource to associate companies will be

[[Page 10661]]

on an at-cost basis, as determined under rules 90 and 91 under the Act.

The interested state regulatory authorities have approved the

proposed Mergers and/or related matters. The Virginia State Corporation

Commission approved the Mergers by order dated August 6, 1997. The

Delaware Public Service Commission approved the Mergers by order dated

September 23, 1997, the Pennsylvania Public Utility Commission, by

order dated October 2, 1997, authorized the transfer of control of ACE

and Delmarva to Conectiv through a transfer of stock. The New Jersey

Board of Public Utilities approved the Mergers by order dated December

30, 1997. The Maryland Public Service Commission approved the Mergers

by order dated July 16, 1997. The Federal Energy Regulatory Commission

(``FERC'') approved the proposed Mergers on July 30, 1997.\20\ The

Nuclear Regulatory Commission approved the transfer of the nuclear

power licenses to Conectiv by order dated December 18, 1997. Delmarva

and Atlantic filed Premerger Notification and Report Forms with the

Antitrust Division of the U.S. Department of Justice and the Federal

Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act

of 1976. The applicable waiting period expired on August 25, 1997

without any comments being provided on the filing.

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\20\ See Atlantic City Power Electric Company and Delmarva Power

& Light Company, Dkt. No. EC97-7-01 (July 30, 1997).

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Fees and expenses in the estimated amount of $19,318,060 are

anticipated in connection with the proposed transaction.

II. Discussion

The proposed acquisition by Conectiv of all of the issued and

outstanding common stock of Delmarva and of Atlantic requires prior

Commission approval under sections 9(a)(2) and 10 of the Act. The

various issuances and sales of securities,\21\ and related acquisitions

of securities, involved in the Mergers are subject to sections 6(a) and

7, and 9(a)(1) and 10 respectively, of the Act.The proposed service

agreements are subject to section 13 of the Act and rules 80-91, 93 and

94. The Commission has reviewed the proposed transactions and finds

that the requirements of the Act are satisfied, except as to the matter

over which jurisdiction is reserved.

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\21\ These transactions include the issuance of Conectiv Common

Stock in exchange for shares of Delmarva and Atlantic Common Stock

and the issuance of Conectiv Class A Common Stock for Atlantic

Common Stock.

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A. Statutory Integration Requirements

As a preliminary matter, it is necessary to determine the extent to

which the proposed principal system of Conectiv, i.e., the combined

electric properties of Delmarva and Atlantic, is an integrated public

utility system within the meaning of section 2(a)(29)(A) of the Act.

The Commission's application of the integration requirements of section

10(c)(1) of the Act, and by reference, section 11(b)(1), is central to

its authorization of the proposed acquisition by Conectiv of Delmarva

and Atlantic. Once this question is decided, it is necessary to

consider whether Conectiv may own the Delmarva gas integrated system as

an additional system.

1. Integration Standards

Section 10(c)(1) requires the Commission not to approve an

acquisition that ``would be detrimental to the carrying out of the

provisions of section 11.'' \22\ Section 11(b)(1) of the Act, in turn,

generally confines the utility properties of a registered holding

company to a ``single integrated public-utility system,'' either gas or

electric, as discussed below.\23\

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\22\ The Commission has interpreted this provision to bar a

utility acquisition by a registered (or to-be-registered) holding

company that would not be permissible under section 11(b)(1) of the

Act. See, e.g., Electric Bond and Share Co., 33 S.E.C. 21, 31,

(1952).

Section 10(c)(1) further prohibits Commission approval of an

acquisition that ``is unlawful under the provisions of section 8.''

Section 8 prohibits an acquisition by a registered holding company

of an interest in an electric utility and a gas utility serving

substantially the same territory without the express approval of the

state commission when the state's law prohibits or requires approval

of the acquisition.

New Jersey, Virginia, Delaware and Pennsylvania law do not

prohibit the proposed ownership by Conectiv of both gas and electric

properties. As previously noted, all of the interested state utility

commissions have approved the proposed merger and/or related

matters.

\23\ The limitation in intended to eliminate evils that Congress

found to exist ``when the growth and extension of holding companies

bears no relation to * * * the integration and coordination of

related operating properties.'' Section 1(b)(4) of the Act. Congress

believed that, ``in the absence of clearly overriding considerations

a utility system should have a management single-mindedly devoted to

advancing the interests of its investors and consumers and not

engaged, through the means of the holding company device, in

operating other utility or non-utility businesses.'' New England

Electric System, 41 S.E.C. 888 (1964), rev'd, SEC v. New England

Electric System, 346 F.2d 399 (1st Cir. 1966), rev'd and remanded,

384 U.S. 176 (1965), on remand, 376 F.2d 107 (1st Cir. 1967), rev'd,

390 U.S. 207 (1968).

The ``other business'' clauses of section 11(b)(1) further limit

the nonutility businesses of a registered holding company to those

that are ``reasonably incidental, or economically necessary or

appropriate to the operations of such integrated public-utility

system,'' on a finding by the Commission that the interests are

``necessary or appropriate in the public interest or for the

protection of investors of consumes and not detrimental to the

proper functioning'' of the integrated system.

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Section 2(a)(29)(A) defines an integrated public-utility system, as

applies to electric utility properties, to mean:

a system consisting of one or more units of generating plants and/or

transmission lines or distributing facilities, whose utility assets,

whether owned by one or more electric utility companies, are

physically interconnected or capable of physical interconnection and

which under normal conditions may be economically operated as a

single interconnected and coordinated system confined in its

operations to a single area or region, in one or more States, not so

large as to impair * * * the advantages of localized management,

efficient operations, and the effectiveness of regulation.

Section 2(a)(29)(B) defines an integrated public-utility system, as

applied to gas utility properties, to mean:

a system consisting of one or more gas utility companies which are

so located and related that substantial economies may be effectuated

by being operated as a single coordinated system confined in its

operations to a single area or region, in one or more States, not so

large as to impair * * * the advantages of localized management,

efficient operations, and the effectiveness of regulation: Provided,

That gas utility companies deriving natural gas from a common source

of supply may be deemed to be included in a single area or region.

In view of the separate definitions and their differing criteria, the

Commission has long held that gas and electric properties do not

together constitute an integrated system.\24\

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\24\SEC v. New England Electric System, 384 U.S. at 178, n.7 and

the cases cited in the decision.

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2. The Combined Electric Properties

On the basis of the statutory definition of an electric integrated

public utility system, the Commission has established four standards

that must be met before the Commission will find that an integrated

public system will result from a proposed acquisition of securities:

(1) The utility assets of the system are physically

interconnected or capable of physical interconnection;

(2) The utility assets, under normal conditions, may be

economically operated as a single interconnected and coordinated

system;

(3) The system must be confined in its operations to a single

area or region; and

(4) The system must not be so large as to impair (considering

the state of the art and the area or region affected) the advantages

of

[[Page 10662]]

localized management, efficient operation, and the effectiveness of

regulation.\25\

\25\ Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th

Cir. 1990), citing Electric Energy, Inc., 38 S.E.C. 658, 668 (1958).

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The combined electric properties satisfy each of these four

requirements.

The Commission has previously determined that the physical

interconnection requirement of the Act can be satisfied on the basis of

contractual rights to use third parties' transmission lines, when the

merging companies are members of a tight power pool.\26\ In addition,

Delmarva and ACE are interconnected through their undivided ownership

interests in, and/or rights to use, the same regional generation

facilities and extra-high voltage facilities, as well as through their

contractual rights to use the transmission facilities of other members

of the PJM regional power pool. Although it would be possible to

construct a transmission line directly interconnecting Delmarva and

ACE, Conectiv believes that such action is unnecessary because present

transmission arrangements provide adequate service.\27\

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\26\ Unitil Corp., Holding Co. Act Release No. 25524 (Apr. 24,

1992).

\27\ See Unitil Corp., Holding Co. Act Release No. 25524, citing

Electric Energy Inc., 38 S.E.C. at 669 (direct interconnection not

required in circumstances that would have resulted in an uneconomic

duplication of transmission facilities).

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The proposed Mergers also satisfy the requirement that the utility

assets, under normal conditions, may be ``economically operated as a

single interconnected and coordinated system.'' \28\ The Commission has

interpreted this language to refer to the physical operation of utility

assets as a system in which, among other things, the generation and/or

flow of current within the system may be centrally controlled and

allocated as need or economy directs.\29\ In approving the acquisition

of Public Service Company of New Hampshire by Northeast Utilities, the

Commission noted that ``the operation of generating and transmitting

facilities of PSNH and the Northeast operating companies is coordinated

and centrally dispatched under the NEPOOL Agreement.'' \30\ Similarly,

in Unitil Corp., the Commission concluded that the combined electric

utility assets of the companies may be operated as a single

interconnected and coordinated system through their participation in

NEPOOL.\31\ In this matter, in addition to coordinated operation

through PJM, Conectiv will have a central operating transmission and

generation control center in Newark, Delaware. For these reasons,

Conectiv will be able to operate its combined electric utility assets

as a single interconnected and coordinated system.

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\28\ See Cities Services Co., 14 S.E.C. 28, 55 (1943) (Congress

intended that the utility properties be so connected and operated

that there is coordination among all parts, and that those parts

bear an integral operating relationship to one other).

\29\ North American Co., 11 S.E.C. 194, 242 (1942), aff'd on

constitutional issues, 327 U.S. 686 (1946). The Commission explained

that ``even though we find physical interconnection exists or may be

effected, evidence is necessary that in fact the isolated

territories are or can be so operated in conjunction with the

remainder of the system that central control is available for the

routing of power within the system.'' Id.

\30\ Northeast Utilities, Holding Co. Act Release No. 25221 at

n.85, modified, Holding Co. Act Release No. 25273 (Mar. 15, 1991),

aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir.

1992).

\31\ Unitil Corp., Holding Co. Act Release No. 25524.

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The Commission's third and fourth requirements are also satisfied.

The Conectiv electric system will operate in a single area or region in

four contiguous states in the Mid-Atlantic region.\32\ The system will

not be so large as to impair ``the advantages of localized management,

efficient operations, and the effectiveness of regulation.'' After the

Mergers, Conectiv will maintain system headquarters in Wilmington,

Delaware. This structure will preserve the benefits of localized

management and the system, as described above, will facilitate

efficient operations. Delmarva and ACE will continue to exist as

subsidiaries of Conectiv, and their utility operations will remain

subject to their respective state commissions. Delmarva and Atlantic

have received the requisite orders from these regulators as a condition

precedent to consummating the proposed Mergers.

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\32\ While Conectiv will have ownership interests in

Pennsylvania, its service area will be limited to Virginia,

Maryland, Delaware and New Jersey.

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The Commission finds that the combined electric properties of

Delmarva and Atlantic will constitute an integrated public utility

system. The Commission has further determined that the proposed

acquisition by Conectiv of this electric integrated system will

``ten[d] towards the economical and efficient development of an

integrated public-utility system,'' and so satisfy the requirement of

section 10(c)(2) of the Act.

B. Proposed Ownership of Delmarva's Gas Operations

In addition to the principal electric integrated electric system,

Conectiv proposes to acquire and retain the integrated gas public

utility system of Delmarva.\33\ Although section 11(b)(1) generally

limits a registrant to ownership of a single integrated system, an

exception to this requirement is provided in section 11(b)(1)(A)-(C)

(``ABC clauses''). A registered holding company may own one or more

additional systems, if each system meets the criteria of these clauses.

Specifically, the Commission must find that (A) the additional system

``cannot be operated as an independent system without the loss of

substantial economies which can be secured by the retention of control

by such holding company of such system,'' (B) the additional system is

located in one or adjoining states, and (C) the combination of systems

under the control of a single holding company is ``not so large * * *

as to impair the advantages of localized management, efficient

operation, or the effectiveness of regulation.''\34\ The Commission has

repeatedly held that a registered holding company cannot own properties

that are not part of its principal integrated system unless they

satisfy the ABC clauses.\35\ Only clause A is at issue here.\36\

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\33\ As noted previously, Conectiv requests the Commission to

reserve jurisdiction over Conectiv's acquisition of the Chesapeake

Utilities Corporation stock for a period of three years from the

date of this order to permit Conectiv to effect an orderly

disposition of the stock or otherwise comply with the requirements

of the Act.

\34\ North American Co., 11 S.E.C. at 206; and New Century

Energies, Inc., Holding Co. At Release No. 26748 (Aug. 1, 1997).

\35\ See, e.g. United Gas International Co., 9 S.E.C. 52, 65

(1941) (section 11(b)(1) permits more than one integrated system

only if the additional system or systems meets the standards of the

ABC clauses; a utility subsidiary is not retainable as part of an

additional system unless those clauses are satisfied). See also

Philadelphia Co., 28 S.E.C. 35, 46 (1948), aff'd, 177 F.2d 720 (D.C.

Cir. 1949). Accord New Century Energies, Inc., Holding Co. Act

Release No. 26748.

\36\ As explained below, the proposed acquisition of the gas

integrated system does not raise any issues under clauses B or C.

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1. Requirements of Clause A

The Commission has construed the provisions of clause A to require

an affirmative showing by a registrant that an additional system could

not be operated under separate ownership without a loss of economies

``so important as to cause a serious impairment of that system,'' and

``substantial in the sense that they were important to the ability of

the additional system to operate soundly.''\37\ The Commission has

applied this standard

[[Page 10663]]

to the additional system in question, in light of the relevant facts

and circumstances. In his matter, based on the relevant facts and

circumstances, the Commission finds that the additional system may be

owned and operated by Conectiv after the Mergers are consummated.\38\

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\37\ New England Electric System, 41 S.E.C. at 892-93. The

Commission has variously phrased the rule under clause A. See SEC v.

New England Electric System, 384 U.S. at 181 (citing, among other

orders, Philadelphia Co., 28 S.E.C. at 46 (``For the economies to be

`substantial,' they must be `important' in the sense that they are

of such nature that their loss would cause a serious economic

impairment of the system.'').

\38\ See New England Electric System, 41 S.E.C. at 893 (``a

registrant seeking to retain an additional system has the burden of

showing by clear and convincing evidence that such additional system

cannot be operated under separate ownership without the loss of

economies so important as to cause a serious impairment of that

system'').

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Conectiv prepared and submitted a supplemental severance study

(``Severance Study'') with respect to the gas operations. The analysis

focuses upon the increases in operating costs that would result from

divestiture.

In New England Electric System and earlier cases, the Commission

took the approach of examining the substantiality of the estimated loss

in relation to total revenues, expenses and income resulting from

divestiture. The Commission suggested in an early leading decision that

cost increases resulting in a 6.78% loss of operating revenues, a 9.72%

increase in operating revenue deductions, a 25.44% loss of gross income

and a 42.46% loss of net income would afford an ``impressive basis for

finding a loss of substantial economies.''\39\ The Severance Study

indicates that the ratios in this matter are significantly higher than

guidelines established in Commission precedent and thus would result in

greater loss of economies if the gas system were severed. The record

indicates that the cost increases that would result from severance of

the gas operations here would satisfy, and in all instances exceed,

those thresholds.\40\ As set forth in the Severance Study, divestiture

of the gas operation into a stand-alone company would result in lost

economies of $14.7 million. On a percentage basis, the Severance Study

indicates that divestiture of the gas operations would amount to 14.07%

of gas operating revenues, 17.4% of gas operating revenue deductions,

73.42% of gross gas income and 105.88% of net gas income.

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\39\ Engineers Public Service Co., 12 S.E.C. 41 (1942), rev'd on

other grounds and remanded. 138 F.2d 936 (D.C. Cir. 1943), vacated

as moot, 332 U.S. 788 (1947).

\40\ See Exhibit J-I to the application.

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In order to recover these lost economies, the Severance Study

indicates that the new stand-alone company would need to increase

customer rates by about 14.8% ($15.5 million) in order to provide an

9.36% rate of return on rate base.\41\ In the absence of rate relief,

the Severance Study concludes that the lost economies would result in a

3.35% rate of return on rate base for the gas operations, a rate

greater than the 2.01% projected stand-alone rate of return in Unitil

Corp., where retention was authorized.\42\

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\41\ 9.36% is the effective cost of capital for the stand-alone

gas business, based on use of the weighted average approximate costs

for capital of Delmarva as of September 30, 1996.

\42\ See Unitil Corp., Holding Co. Act Release No. 25524.

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To the extent that competition between competing sources of energy

remains a concern, the Commission notes that section 10(b)(1) of the

Act, among other things, prohibits an acquisition that would result in

``the concentration of control of public-utility companies, of a kind

or to an extent detrimental to the public interest or the interest of

investors or consumers.'' The Commission's analysis under section

10(b)(1) includes consideration of federal antitrust policies. In

addition, the FERC and the Antitrust Division of the U.S. Department of

Justice, which typically have concomitant jurisdiction over merger

transactions, consider the anticompetive consequences of the proposed

transaction.\43\ As previously noted, the FERC gas approved the

proposed Mergers and no comments were received in conjunction with the

Hart-Scott-Rodino filing.

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\43\ Under section 203 of the Federal Power Act, the FERC

``shall approve'' a merger if it is ``consistent with the public

interest.'' See Gulf States Utilities Co. v. FPC, 422 U.S. 747, 758

(1973).

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The Commission finds that the requirements of clause A are

satisfied with respect to Conectiv's ownership of the Delmarva gas

operations as an additional integrated system.

2. Requirements of Clauses B and C

The proposed acquisition of the gas integrated system does not

raise any issues under clauses B or C. With respect to clause B, the

principal electric system to Conectiv will be located in New Jersey,

Delaware, Maryland and Virginia; the additional gas system will be

located in an adjoining state--Delaware. As required by clause C, the

combination of systems under the ownership of Connectiv will not be

``so large * * * as to impair the advantages of localized management,

efficient operation, or the effectiveness of regulation.''

C. Proposed Nonutility Interests of Conectiv

Section 11 (b)(1) limits the nonutility interests of a registered

holding company to those that are ``reasonably incidental, or

economically necessary or appropriate to the operations of such

integrated public-utility system.'' The Commission must find that the

interests are ``necessary or appropriate in the public interest or for

the protection of investors or consumers and not detrimental to the

proper functioning'' of the integrated system. The Commission has

interpreted these provisions to require the existence of an operating

or functional relationship between the utility operations of the

registered holding company and its nonutility activities.\44\ With

respect to new acquisitions, the Commission has interpreted section

10(c)(1) of the Act to mean that ``any property whose disposition would

be required under section 11(b)(1) may not be acquired.''\45\

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\44\ See generally Michigan Consolidated Gas Co., 444 F.2d 913

(D.C. Cir. 1971).

\45\ Texas Utilities Co., 21 S.E.C. 827, 829 (1946) (denying

approval to acquisition of transportation company by registered

holding company).

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The Commission has examined the various nonutility interests that

Conectiv seeks to acquire and has concluded that the statutory

requirements for ownership are satisfied. The Commission has further

concluded that Delmarva's and Atantic's existing investments in these

activities, as of the date of consummation of the Mergers, should be

disregarded for purposes of calculating the dollar limitation upon

investment in energy-related companies under new rule 58.\46\ As in

previous similar matters involving to-be-registered holding companies,

the Commission reaches this conclusion in view of the fact that the

Mergers partners were not subject to the restrictions that section

11(b)(1) and relevant Commission precedent places upon the nonutility

investments of registered system companies.\47\

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\46\ See Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62

FR 7900 (Feb. 20 1997) (adopting rule 58).

\47\ See, e.g., New Century Energies, Inc., Holding Co. Act

Release No. 26748 (proposed combination of utility and exempt

holding company and stand-along utility). The Act is silent

concerning nonutility diversification by exempt holding companies,

such as Atlantic, and the Commission has never determined the limits

upon diversification by these companies. See, e.g., Pacific Lighting

Corp., 45 S.E.C. 152 (1973) (two commissioners held that the

nonutility activities of exempt holding companies should complement

the utility operations; two other commissioners proposed guidelines

under which utility activities would be separated from nonutility

activities).

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D. Proposed Dual Class of Equity Stock of Conectiv

As discussed previously, the Merger Agreement contemplates that

Delmarva stockholders will receive one share of Conectiv Common Stock

in exchange for each share of Delmarva Common Stock. Atlantic

stockholders will receive 0.75 shares of Conectiv Common Stock and

0.125 shares of a tracking stock,

[[Page 10664]]

Conectiv Class A Common Stock, in exchange for each share of Atlantic

Common Stock.

As explained above, the proposed issuance of tracking stock in this

matter represents a means by which Delmarva and Atlantic addressed the

difference in their evaluations of the overall impact of the growth

prospects of, and uncertainties associated with deregulation of, the

regulated electric utility business of Atlantic. The use of tracking

stock in connection with the Mergers addresses the concerns of the

managements of the merger partners and allows the respective

stockholders of Delmarva and Atlantic to gain, as shareholders of

Conectiv, the level of exposure that the companies' managements have

deemed advisable to the growth prospects of the regulated utility

business of Atlantic and the uncertainties associated with deregulation

of that business.

Conectiv seeks authorization for issuance of the Conectiv Class A

Common Stock under Section 7(c)(2)(A) of the Act. Section 7(c)(2)(A)

provides for the issuance of securities ``solely * * * for the purpose

of effecting a merger.'' \48\ Section 7(d) of the Act provides in

pertinent part, that if the requirements of section 7(c) are satisfied,

the Commission shall permit a declaration regarding the issue or sale

of a security to become effective unless the Commission finds that:

\48\ The Commission notes that section 7(c)(1) provides that a

declaration regarding the issuance of securities by a registered

holding company cannot become effective unless it relates to certain

specified types of securities including ``a common stock * * * being

without preference as to dividends or distribution over * * * any

outstanding security of the [holding company].'' Because

authorization of the issuance of the Class A Common Stock is sought

under section 7(c)(2), the Commission does not have to reach the

question of whether the dividend rate of the stock constitutes a

``preference as to dividends'' for purposes of section 7(c)(1).

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(1) The security is not reasonably adapted to the security

structure of the declarant and other companies in the same holding

company system;

(2) The security is not reasonably adapted to the earning power

of the declarant;

(3) Financing by the issue and sale of the particular security

is not necessary or appropriate to the economical and efficient

operation of a business in which the applicant lawfully is engaged

or has an interest; [or]

* * * * *

(6) The terms and conditions of the issue or sale of the

security are detrimental to the public interest or the interest of

investors or consumers.\49\

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\49\ Section 7(d)(4) requires the Commission to find that the

fees, commissions, or other remuneration, to whomsoever paid,

directly or indirectly, in connection with the issue, sale, or

distribution of the security are not reasonable. Section 7(c)(5)

addresses the issuance of a guarantee or other assumption of

liability.

The Commission has also considered whether the Class A Common Stock

would give rise to any abuse that the Act is intended to prevent.\50\

Various provisions of the Act are intended to ensure that a holding

company system does not have an unnecessarily complicated capital

structure or that voting power is unfairly or inequitably distributed

among system security holders.\51\ In these respects, it does not

appear that the issuance of the Class A Common Stock would be

detrimental to the interests of investors or consumers. There will be

no effect on the legal title to Conectiv assets or the responsibilities

for the liabilities of Conectiv or its subsidiaries.\52\ The Class A

Common Stock will be directly linked to the performance of the Targeted

Business and thus adapted to the earning power of Conectiv. The Class A

Common Stock will be subject to the requirements of the other federal

securities laws and will be listed on the New York Stock Exchange.\53\

The Class A Common Stock has all of the attributes of common stock,

particular voting rights.\54\ The only voting securities of Conectiv

that will be publicly held after the Mergers will be Common Stock and

Class A Common Stock. In addition to common stock of Delmarva, all of

which will be held by Conectiv, Delmarva will continue to have

1,253,548 shares of outstanding voting preferred stock (not including

2.8 million shares of Quarterly Income Preferred Securities). The only

class of voting securities of Conectiv's direct and indirect nonutility

subsidiaries will be common stock. The shareholders of both Delmarva

and Atlantic approved the proposed Mergers.

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\50\ Section 1(c) of the Act directs the Commission to interpret

all the provisions of the Act to meet the problems and eliminate the

evils enumerated in section 1(a).

\51\ See sections 10(b) of the Act (Commission is not to approve

an acquisition that ``will unduly complicate the capital structure

of the holding-company system'' or be ``detrimental to the public

interest, the interests of investors or consumers or the proper

functioning of [the] holding-company system''); 10(c)(1) (Commission

is not to approve an acquisition that would be detrimental to the

carrying out of the provisions of section 11''); and 11(b)(2)

(Commission is to ensure that the corporate structure of a

registered holding company ``does not unduly complicate the

structure, or unfairly or inequitably distribute voting power among

security holders''). See, e.g., American Power & Light Co. v. SEC,

329 U.S. 90 (1946) (upholding constitutionality of section 11(b)(2)

and affirming orders requiring the dissolution of two subholding

company subsidiaries of a registered holding company on the grounds

of undue capital complexity).

\52\ Pennsylvania was the only state to exercise jurisdiction

over the transfer of stock involved in the Mergers. The order of the

Pennsylvania Public Utility Commission approved the issuance of the

Conectiv Class A Common Stock.

\53\ The Commission has noted that: Concerns with respect to

investors have been largely addressed by developments in the federal

securities laws and in the securities markets themselves. Registered

holding companies are subject to extensive reporting requirements

under the Act. In addition, the securities of those companies are

publicly held and are registered under the Securities Act of 1933.

The companies are subject to the continuous disclosure requirements

of the Securities Exchange Act of 1934. * * * The interest of

investors is protected not only by the requirements of this Act but

also by the disclosure requirements of these other statutes.

Southern Co., Holding Co. Act Release No 25639 (Sept. 23, 1992).

\54\ Compare Cities Service Co., 34 S.E.C. 28, 33-34 (1956)

(Commission found an unfair and inequitable distribution of voting

power in conflict with the standards of section 11(b)(2) where Class

A stock represented approximately 46% of the combined common and

Class A equity of the company, and the public holdings of Class A

stock alone amounted to 35% of the combined equity, but the Class A

had no voting power).

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Set forth below are summaries of the historical capital structure

of Delmarva and Atlantic as of June 30, 1997 and the pro forma

consolidated capital structure of Conectiv as of June 30, 1997:

Delmarva and Atlantic Historical Consolidated Capital Structures

[Dollars in thousands]

------------------------------------------------------------------------

Delmarva Atlantic

------------------------------------------------------------------------

Common Stock Equity........................... $942,322 $782,688

Preferred stock not subject to mandatory

redemption................................... 89,703 30,000

Preferred stock subject to mandatory

redemption................................... 70,000 113,950

Long-term Debt................................ 923,710 786,187

-------------------------

Total................................... 2,025,735 1,712,825.

------------------------------------------------------------------------

Conectiv Pro Forma Consolidated Capital Structure

[Dollars in thousands, unaudited]

------------------------------------------------------------------------

Conectiv

------------------------------------------------------------------------

Common Stock (incl. additional paid in capital)............ $1,461,721

Class A Common Stock....................................... 136,840

Retained Earnings.......................................... *266,630

Preferred stock not subject to mandatory redemption (of

subsidiaries)............................................. 119,703

Preferred stock subject to mandatory redemption (of

subsidiaries)............................................. 183,950

Long-term Debt............................................. 1,709,897

------------

[[Page 10665]]

Total................................................ 3,878,741

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* The pro forma consolidated capital structure of Conectiv has been

adjusted to reflect future nonrecurring charges directly related to

the Mergers, which result in, among other things, the recognition of

additional current liabilities and a reduction in retained earnings.

Conectiv's pro forma consolidated common equity to total capitalization

ratio of 48% comfortably exceeds the ``traditionally acceptable 30%

level.'' \55\

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\55\ Northeast Utilities, Holding Co. Act Release No. 25221.

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In view of all these considerations, the Commission has concluded

that sections 7(d), 10(b) and 10(c) of the Act do not require any

negative findings.

III. Conclusion

The Commission has carefully examined the application under the

applicable standards of the Act, and has concluded that the proposed

issuances, sales and acquisitions and related transactions are

consistent with those standards. The Commission has reached these

conclusions on the basis of the complete record before it.

Due notice of the filing of the application-declaration has been

given in the manner prescribed in rule 23 under the Act, and no hearing

has been requested of or ordered by the Commission. Upon the basis of

the facts in the record, it is hereby found that, except as to the

matter over which jurisdiction has been reserved, the applicable

standards of the Act and rules are satisfied, and that no adverse

findings are necessary:

It is ordered, under the applicable provisions of the Act and rules

under the Act, that, except as to the matter over which jurisdiction

has been reserved, the application-declaration, as amended, is, granted

and become effectively immediately, subject to the terms and conditions

prescribed in rule 24 under the Act;

It is further ordered, that jurisdiction is reserved over

Conectiv's ownership of Chesapeake Utilities Corporation for up to

three years from the date of this order; and

It is further ordered, that Conectiv will file a post-effective

amendment no later than the end of that three-year period requesting

the Commission to dispose of the matter over which jurisdiction is

reserved, in the event that the matter is not moot.

For the Commission, by the Division of Investment Management,

under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

Appendix A

Delmarva

Delmarva has seven direct nonutility subsidiaries: Delmarva

Services Company, Delmarva Energy Company (``DEC''), Conectiv

Services, Inc. (``CSI''), Conectiv Communications, Inc., Delmarva

Capital Investments, Inc. (``DCI''), Conectiv Solutions LLC

(``Solutions'') and East Coast Natural Gas Cooperative, L.L.C.

(``ECNG'').

1. Delmarva Services Company. Delmarva Services Company, a

Delaware corporation and a direct subsidiary of Delmarva, was formed

in 1986 to own and finance an office building that it leases to

Delmarva and/or its affiliates.\1\ Delmarva Services Company also

owns approximately 2.9% of the common stock of Chesapeake Utilities

Corporation, a publicly-traded gas utility company with gas utility

operations in Delaware, Maryland and Florida.\2\

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\1\ See UNITIL Corp., Holding Co. Act Release No. 25524 (Apr.

24, 1992) (subsidiary that had acquired real estate to support the

system's utility operations deemed to be retainable under the

standards of section 11(b)(1)).

\2\ As noted previously, Conectiv has requested that the

Commission reserve jurisdiction over the Chesapeake stock for a

period of three years from the date of this order to permit Conectiv

to effect an orderly disposition of the Chesapeake stock.

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2. DEC. DEC, a Delaware corporation and a direct subsidiary of

Delmarva, was formed in 1975. It is currently engaged, directly and

through its subsidiary, in rule 58 energy marketing activities.

Conectiv/CNE Energy Services LLC, a Delaware limited liability

company in which DEC holds a 50% interest,was formed in 1997 to

engage in rule 58 energy marketing activities in the New England

states.\3\

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\3\ See rule 58(b)(1)(v) (subject to certain conditions, no

Commission approval is required for a registered holding company to

acquire the securities of a company that derives substantially all

of its revenues from ``the brokering and marketing of energy

commodities, including but not limited to electricity or natural or

manufactured gas or other combustible fuels''). See also New Century

Energies, Inc., Holding Co. Act Release No. 26784 (Aug. 1, 1997).

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3. CSI, directly and through subsidiaries, provides a wide range

of energy-related goods and services to industrial, commercial and

residential customers. CSI is engaged in the design, construction

and installation, and maintenance of new and retrofit heating,

ventilating, and air conditioning (``HVAC''), electrical and power

systems, motors, pumps, lighting, water and plumbing systems, and

related structures as approved by the Commission.\4\

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\4\ See Cinergy Corp., Holding Co. Act Release No. 26662 (Feb.

7, 1997) (``Cinergy Solutions Order'').

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a. Power Consulting Group, Inc., a Delaware corporation, was

formed in 1997 to provide electrical engineering, testing and

maintenance services to large commercial and industrial

customers.\5\

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\5\ Subject to certain conditions, rule 58(b)(1)(ii) exempts the

acquisition of the securities of a company that derives

substantially all of its revenues from ``[t]he development and

commercialization of electrotechnologies related to energy

conservation, storage and conversion, energy efficiency, waste

treatment, greenhouse gas reduction, and similar innovations.'' See

also Allegheny Power System, Inc., Holding Co. Act Release No. 26085

(July 14, 1994) (investments in technologies related to power

conservation and storage, conservation and load management,

environmental and waste treatment, and power-related electronic

systems and components).

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b. Conectiv Plumbing, L.L.C., a Delaware limited liability

company owned 90% by CSI, provides plumbing services primarily in

connection with the CSA HVAC business. Conectiv Plumbing, L.L.C. was

formed in 1998 in connection with the acquisition of an HVAC

company. Under New Jersey law, an individual with a New Jersey

master plumbing license must hold at least a 10% equity interest in

a company providing plumbing services in New Jersey. To meet this

requirement, the bulk of the acquired company's HVAC business was

retained within CSI but the related and incidental plumbing services

were spun down to a new subsidiary, Conectiv Plumbing, L.L.C., that

is 10% owned by a master plumber.

4. Conectiv Communications, Inc., A Delaware corporation and a

direct sibsidiary of Delmarva, was formed in 1996 to provide a full-

range of retail and wholesale telecommunications services.\6\

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\6\ Section 34 of the Act provides an exemption from the

requirement of prior Commission approval for the ownership by a

registered holding company of interests in companies engaged in a

broad range of telecommunications activities and businesses. Section

34 permits ownership of interests in telecommunications companies

engaged exclusively in the business of providing telecommunications

service upon application to the Federal Communications Commission

for a determination of ``exempt telecommunications company'' status.

Conectiv Communications, Inc. is an exempt telecommunications

company under section 34 of the Act.

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5. DCI, a Delaware corporation and a direct subsidiary of

Delmarva, was formed in 1985 to be a holding company for the

following unregulated investments. In addition DCI acts as a vehicle

for the development and sale of properties that are not currently

used or useful in the utility business.\7\

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\7\ DCI is managing real estate that was acquired for an

intended utility purpose that has ceased to exist, to enable the

utility to obtain the necessary rights of way for transmission lines

and other utility operations. Unlike many other states, Delaware

does not provide a right of condemnation for a franchised electric

utility. Rather, the utility is often forced to acquire the

underlying fee simple for a larger parcel in order to obtain an

easement or right of way. The development and sale of these

properties is a means of recovering the costs associated with their

acquisition.

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a. DCI I, Inc., a Delaware corporation and a wholly owned

subsidiary of DCI formed in 1985 to invest in leveraged leases.\8\

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\8\ See Central and South West Corp., Holding Co. Act Release

No. 23578 (Jan. 22, 1985) (approving leveraged lease investments by

a registered holding company)

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b. DCI II, Inc., a Virgin Islands corporation and a wholly owned

foreign sales subsidiary of DCI formed in 1985 to be involved in

equity investments in leveraged leases.\9\

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\9\ Id.

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[[Page 10666]]

c. DCTC-Burney, Inc., a Delaware corporation and a wholly owned

subsidiary of DCI formed in 1987 to invest in ``qualifying

facilities.'' \10\

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\10\ A ``qualifying facility'' is defined under the Public

Utility Regulatory Policies Act of 1978, as amended (``PURPA'').

Subject to certain conditions, Rule 58( b)(1)(viii) exempts the

acquisition of the securities of a company that is primarily engaged

in ``the development, ownership or operation of `qualifying

facilities'* * *, and any integrated thermal, steam host, or other

necessary facility constructed, developed or acquired primarily to

enable the qualifying facility to satisfy the useful thermal output

requirements under PURPA.'' See also New Century Energies, Inc.,

Holding Co. Act Release No. 26748 (Aug. 1,1997); Entergy Corp.,

Holding Co. Act Release No. 26322 (June 30, 1995); Southern Co.,

Holding Co. Act Release No. 26212 (Dec. 30, 1994); Central and South

West Corp., Holding Co. Act Release No. 26156 (Nov. 3, 1994);

Central and South West Corp., Holding Co. Act Release No. 26155

(Nov. 2, 1994); and Northeast Utilities, Holding Co. Act Release No.

25977 (Jan. 24, 1994).

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i. Forest Products, L.P., a Delaware limited partnership, in

which DCTC-Burney, Inc. is the sole 1% general partner, and which is

a general partner in Burney Forest Products, A Joint Venture.

ii. Burney Forest Products, A Joint Venture, a California

general partnership which is owned by DCTC-Burney, Inc. and Forest

Products, L.P. The partnership owns a wood-burning qualifying

facility in Burney, CA. DCTC-Burney, Inc.'s total direct and

indirect ownership interest is 45%.

d. Luz Solar Partners, Ltd. IV, a California limited partnership

which owns a solar-powered generating station in Southern California

in which DCI owns a 4.7% limited partnership interest.\11\

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\11\ Id.

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e. UAH-Hydro Kennebec, L.P., a New York limited partnership

which owns a hydro-electric project in which DCI owns a 27.5%

limited partnership interest.\12\

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\12\ Id.

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f. Christiana Capital Management, Inc., a Delaware corporation

and a wholly owned subsidiary formed in 1987, which owns an office

building leased to associates.\13\

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\13\ See Unitil Corp., Holding Co. Act Release No. 25524 (Apr.

24, 1992).

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g. Delmarva Operating Services Company, a Delaware corporation

and a wholly owned subsidiary of DCI formed in 1987, operates and

maintains the following qualifying facilities under contracts with

the plants' owners: the Delaware City Power Plant in Delaware City,

DE; a qualifying facility in Burney, CA; and a qualifying facility

in Sacramento, California, owned by the Sacramento Power Authority

under a subcontract with Siemens Power Corporation.\14\

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\14\ See supra note 9.

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6. Solutions, a Delaware limited liability company, is jointly

owned by Delmarva and Atlantic. Solutions was formed in 1997 to

provide, directly or through subsidiaries, power systems consulting,

end use efficiency services, customized on-site systems services and

other energy services to large commercial and industrial

customers.\15\ Solutions, directly or through subsidiaries, provides

energy management services, often on a turnkey basis. Energy

management services may involve the marketing, sale, installation,

operation and maintenance of various products and services related

to the business of energy management and demand-side management, and

may include energy audits; facility design and process enhancements;

construction, maintenance and installation of, and training client

personnel to operate energy conservation equipment; design,

implementation, monitoring and evaluation of energy conservation

programs; development and review of architectural, structural and

engineering drawings for energy efficiencies; design and

specification of energy consuming equipment; and general advice on

programs.\16\ Solutions also provides conditioned power services,

that is, services designed to prevent, control, or mitigate adverse

effects of power disturbances on a customer's electrical system to

ensure the level of power quality required by the customer,

particularly with respect to sensitive electronic equipment, again

as approved by the Commission.\17\

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\15\ Upon consummation of the proposed transactions, Solutions

will become a wholly-owned subsidiary of Conectiv.

\16\ Subject to certain conditions, rule 58(b)(1)(i) exempts the

acquisition of the securities of a company that derives

substantially all of its revenues from ``[t]he rendering of energy

management services and demand-side management services'' See also

Eastern Utilities Associates, Holding Co. Act Release No. 26232

(Feb. 15, 1995); Northeast Utilities, Holding Co. Act Release No.

25114-A (July 27, 1990) and New England Electric System, Holding Co.

Act Release No. 22719 (Nov. 19, 1982).

\17\ See supra note 4.

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Solutions also markets comprehensive asset management services,

on a turnkey basis or otherwise, in respect of energy-related

systems, facilities and equipment, including distribution systems

and substations, transmission facilities, electric generation

facilities (stand-by generators and self-generation facilities),

boilers, chillers (refrigeration and coolant equipment), HVAC and

lighting systems, located on or adjacent to the premises of a

commercial or industrial customer and used by that customer in

connection with its business activities, as previously permitted by

the Commission.\18\ Solutions also provides these services to

qualifying and non-qualifying cogeneration and small power

production facilities under the Public Utility Regulatory Policies

Act of 1978 (``PURPA'').\19\

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\18\ Id.

\19\ See rule 58(b)(1)(viii) (an energy-related company can

engage in the development, ownership or operation of ``qualifying

facilities,'' as defined under PURPA, and any integrated thermal,

steam host, or other necessary facility constructed, developed or

acquired primarily to enable the qualifying facility to satisfy the

useful thermal output requirements of PURPA). Solutions will not

undertake any Asset Management Service without further Commission

approval if, as a result thereof, Solutions would become a public

utility company within the meaning of the Act.

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Solutions provides consulting services to associate and

nonassociate companies. The consulting services may include:

technical and consulting services involving technology assessments,

power factor correction and harmonics mitigation analysis, meter

reading and repair, rate schedule design and analysis, environmental

services, engineering services, billing services, risk management

services, communications systems, information systems/data

processing, system planning, strategic planning, finance,

feasibility studies, and other similar or related services.\20\

Solutions also offer marketing services to nonassociate business in

the form of bill insert and automated meter-reading services, as

well as other consulting services, such as how to set up a marketing

program.\21\

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\20\ See The Cinergy Solutions Order; see also rule

58(b)(1)(vii) (relating to the sale of technical, operational,

management, and other similar kinds of services and expertise,

developed in the course of utility operations).

\21\ See Consolidated Natural Gas Co., Holding Co. Act Release

No. 26757 (Aug. 27, 1997) (the ``1997 CNG Order'').

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Solutions provides service Line repair and extended warranties

with respect to all of the utility or energy-related services lines

that enter a customer's house, as well as utility bill insurance and

other similar or related services.\22\ Solutions may also provide

centralized bill payment centers for ``one stop'' payment of all

utility and municipal bills, and annual inspection, maintenance and

replacement of any appliance.\23\ Solutions also is engaged in the

marketing and brokering of energy commodities, including retail

marketing activities.\24\

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\22\ See the Cinergy Solutions Order.

\23\ See Consolidated Natural Gas Co., Holding Co. Act Release

No. 26363 (Aug. 28, 1995).

\24\ See supra note 3.

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Solutions also provides other goods and services, from time to

time, related to the consumption of energy and maintenance of

property by those end-users, where the need for the service arises

as a result of, or evolves out of, the above services and the

incidental services do not differ materially from the enumerated

services.\25\

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\25\ See the 1997 CNG Order.

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In connection with its activities, Solutions from time to time

may form new subsidiaries to engage in the above activities, or

acquire the securities or assets of nonassociate companies that

derive substantially all of their revenues from the above

activities.

Provision of the above goods and services, which are closely

related to the system's core energy business, is intended to further

Conectiv's goal of becoming a full-service energy provider.

7. ECNG, a Delaware limited liability company in which Delmarva

holds a 1/7th interest, is engaged in gas-related activities.

Delmarva participates in ECNG to make bulk purchases of gas in order

to improve the efficiency of its natural gas local distribution

operations.\26\

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\26\ ECNG members provide emergency backup natural gas supplies

to other members and jointly undertake the bulk purchase and storage

of natural gas for use in their local distribution business. Because

these activities are functionally related to the operations of the

gas utility business of Delmarva, ECNG is retainable by Conectiv

under section 11(b)(1). Further, upon Commission approval of the

Mergers, ECNG will be exempt from all obligations, duties or

liabilities imposed upon it by the Act as a subsidiary company or as

an affiliate of a registered holding company or of a subsidiary

company. See rule 16 under the Act.

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[[Page 10667]]

Delmarva also has a nonutility subsidiary trust, Delmarva Power

Financing I (``DPFI''), which was formed in 1996 in connection with

the issuance by Delmarva of Cumulative Quarterly Income Preferred

Securities.

Appendix B

Atlantic

Atlantic has three direct nonutility subsidiaries, Atlantic

Energy International, Inc. (``AEII''), Atlantic Energy Enterprises,

Inc. (``AEE''), and Solutions.\1\

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\1\ ACE has a very small home security business, with annual

revenues of less than $10,000, that is located exclusively in its

service territory. The business incurs few costs at this point.

Accordingly, Conectiv seeks to retain this business under section

11(b)(1). Although it is currently operated within ACE, it may be

moved to a separate subsidiary of Conectiv. If this occurs, the

subsidiary will apply for exempt telecommunications company status

under section 34.

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1. AEII, a Delaware corporation, is a direct subsidiary of

Atlantic formed in 1996 to broker used utility equipment to

developing countries and to provide utility consulting services

related to the design of sub-stations and other utility

infrastructure. This subsidiary will wind down its business by June

30, 1998.

2. AEE, a New Jersey corporation, is a direct subsidiary of

Atlantic formed in 1995 to be a holding company for Atlantic's non-

regulated subsidiaries. Through its six wholly owned subsidiaries,

and 50% equity interest in Enerval, LLC, a natural gas marketing

venture, AEE has pursued growth opportunities in energy-related

fields, that will complement Atlantic's existing businesses and

customer relationships.

a. ATE, a New Jersey corporation and a wholly owned subsidiary

of AEE formed in 1986, holds and manages capital resources for AEE.

ATE's primary investments are equity investments in leveraged leases

of three commercial aircraft and two container ships.\2\ ATE owns a

94% limited partnership interest in EnerTech Capital Partners L.P.,

a limited partnership that will invest in and support a variety of

energy technology growth companies.\3\

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\2\ See Central and South West Corp., Holding Co. Act Release

No. 23588 (Jan. 22, 1985).

\3\ Activities involving ``the development and commercialization

of electrotechnologies related to energy conservation, storage and

conversion, energy efficiency, waste treatment, greenhouse gas

reduction, and similar innovations'' are energy-related activities

within the meaning of rule 58(b)(1)(ii). See also New Century

Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997).

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b. AGI, a New Jersey corporation and a wholly owned subsidiary

of AEE formed in 1986. AGI develops, owns and operates independent

power production projects.\4\

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\4\ See supra note 9.

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i. Pedrick Ltd., Inc., a New Jersey corporation and a wholly

owned subsidiary of AGI, formed in 1989 to hold a 35% limited

partnership interest in Pedricktown Cogeneration Limited

Partnership.

ii. Pedrick Gen., Inc., a New Jersey corporation and a wholly

owned subsidiary of AGI, formed in 1989 to hold a 15% general

partnership interest in Pedricktown Cogeneration Limited

Partnership.

iii. Vineland Limited, Inc., a Delaware corporation and a wholly

owned subsidiary of AGI, formed in 1990 to hold a 45% limited

partnership interest in Vineland Cogeneration Limited Partnership.

iv. Vineland General, Inc., a Delaware corporation and a wholly

owned subsidiary of AGI, formed in 1990 to hold a 5% general

partnership interest in Vineland Cogeneration Limited Partnership.

v. Binghamton General, Inc., a Delaware corporation and a wholly

owned subsidiary of AGI, formed in 1990 to hold a 10% general

partnership interest in Binghamton Cogeneration Limited Partnership,

whose assets have been sold to a third party.

vi. Binghamton Limited, Inc., a Delaware corporation and a

wholly owned subsidiary of AGI, formed in 1990 to hold a 35% limited

partnership interest in Binghamton Cogeneration Limited Partnership,

whose assets have been sold to a third party.

c. ATS, a Delaware corporation and a wholly owned subsidiary of

AEE, formed in 1994. ATS and its subsidiaries develop, own and

operate thermal heating and cooling systems. ATS also provides other

energy-related services to business and institutional energy users.

ATS has made investments in capital expenditures related to district

heating and cooling systems to serve the business and casino

district in Atlantic City, NJ. ATS is also pursuing the development

of thermal projects in other regions of the U.S.\5\

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\5\ Subject to certain conditions, rule 58(b)(1)(vi) exempts the

acquisition of the securities of a company that derives

substantially all of its revenues from ``the production, conversion,

sale and distribution of thermal energy products, such as process

steam, heat, hot water, chilled water, air conditioning, compressed

air and similar products; alternative fuels; and renewable energy

resources; and the servicing of thermal energy facilities.'' See

also New Century Energies, Holding Co. Act Release No. 26748 (Aug.

1, 1997); Cinergy Corp., Holding Co. Act Release No. 26474 (Feb. 20,

1996).

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i. Atlantic Jersey Thermal Systems, Inc., a Delaware corporation

and wholly owned subsidiary formed in 1994, that owns a 10% general

partnership interest in TELPI (as defined below).

ii. ATS Operating Services, Inc., a Delaware corporation and a

wholly owned subsidiary formed in 1995 that provides thermal energy

operating services.

iii. Thermal Energy Limited Partnership I (``TELPI''), a

Delaware limited partnership wholly owned by Atlantic Thermal and

Atlantic Jersey Thermal Systems, that holds an investment in the

Midtown Energy Center. The Midtown Energy Center, which produces

steam and chilled water, represents the initial principal operations

of ATS. Currently, TELPI is operating the heating and cooling

equipment of several businesses in Atlantic City, NJ. Some of these

businesses will be served by the ATS district system once it is in

commercial operation and others will continue to be served

independently by ATS.

iv. Atlantic Paxton Cogeneration, Inc., a wholly owned

subsidiary that is currently inactive and expected to be dissolved

sometime in 1998.

v. Atlantic-Pacific Glendale, LLC, a Delaware limited liability

company in which ATS holds a 50% interest, was formed in 1997 to

construct, own and operate an integrated energy facility to provide

heating, cooling and other energy services to DreamWorks Animation,

LLC in Glendale, California.

vi. Atlantic-Pacific Las Vegas, LLC, a Delaware limited

liability company in which ATS holds a 50% interest, was formed in

1997 to finance, own and operate an integrated energy plant to

provide heating and cooling services to three affiliated customers

in Las Vegas, Nevada.

d. CCI, a Delaware corporation and a wholly owned subsidiary of

AEE formed in 1995 to pursue investments and business opportunities

in the telecommunications industry.\6\

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\6\ It is contemplated that CCI will be merged with and into

Conectiv Communications, Inc. See supra note 5.

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e. ASP, a New Jersey corporation and a wholly owned subsidiary

of AEE formed in 1970 that owns and manages certain investments in

real estate, including a 280,000 square-foot commercial office and

warehouse facility in southern New Jersey. Approximately fifty

percent of the space in this facility is currently leased to system

companies and fifty percent is leased to nonaffiliates.\7\

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\7\ See Central Power and Light Co., Holding Co. Act Release No.

26408 (Nov. 13, 1995).

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f. AET, a Delaware corporation and a wholly owned subsidiary of

AEE formed in 1991. AET is currently winding up its sole investment

in technology. The Earth Exchange, Inc., which is nominal. There are

no future plans for investment activity at this time by AET.

g. Enerval, a Delaware limited liability company. In 1995, AEE

and Cenerprise, Inc., a subsidiary of Northern States Power

established Enerval, formerly known as Atlantic CNRG Services, LLC.

AEE and Cenerprise each own 50 percent of Enerval. Enerval provides

energy management services, including natural gas procurement,

transporation and marketing. Disucssions are underway for the

purchase of AEE of Cenerprise's interest.\8\

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\8\ See supra note 15.

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3. Solutions, a Delaware limited liability company that is

jointly owned by Delmarva and Atlantic, was formed in 1997 to

provide, directly or through subsidiaries, power systems consulting,

end use efficiency services, customized on-site systems services and

other energy services to large commercial and industrial

customers.\9\

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\9\ Upon consummation of the proposed transactions, Solutions

will become a wholly owned subsidiary of Conectiv.

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ACE also has a nonutility subsidiary trust, Atlantic Capital I

(``ACT''), which was formed in 1996 in connection with the issuance

by ACE of Cumulative Quarterly Income Preferred Securities.

[FR Doc. 98-5488 Filed 3-3-98; 8:45 am]

BILLING CODE 8010-01-M