File No. 70-9703
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
Form U-1/A
Amendment No. 4
To
Application or Declaration
Under
The Public Utility Holding Company Act of 1935
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Vectren Corporation
Vectren Utility Holdings, Inc.
One Vectren Square
Evansville, Indiana 47708
(Names of companies filing this statement and addresses of principal
executive offices)
------------------------------------
None
(Name of top registered holding company parent)
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Ronald E. Christian
Executive Vice President, Chief Administrative Officer,
General Counsel and Corporate Secretary
Vectren Corporation
One Vectren Square
Evansville, Indiana 47708
(Name and address of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Joanne C. Rutkowski
Baker Botts L.L.P.
The Warner
1299 Pennsylvania Ave., N.W.
Washington, DC 20004-2400
Vectren Corporation ("Vectren") and Vectren Utility Holdings,
Inc. ("Utility Holdings" and, together with Vectren, the "Applicants") hereby
amend and restate their Application-Declaration as follows.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Introduction
Vectren and Utility Holdings are seeking exemption by order
pursuant to Section 3(a)(1) of the Public Utility Holding Company Act of 1935
(the "Act").
On October 4, 2000, the Securities and Exchange Commission
("Commission") issued an order (the "October Order") reserving jurisdiction over
the request by Applicants for an order of exemption under Section 3(a)(1) of the
Act. The effect of the order has been to continue the exemption of Vectren and
Utility Holdings, and each of their subsidiary companies as such, pursuant to
Sections 3(a)(1) and 3(c) of the Act, pending further Commission action./1
B. Description of the Companies
Vectren Corporation, an Indiana corporation, is an electric
and gas utility holding company headquartered in Evansville, Indiana. Vectren
was organized on June 10, 1999, to effect the merger of Indiana Energy, Inc.
("Indiana Energy") and SIGCORP, Inc. ("SIGCORP"). On March 31, 2000, Indiana
Energy merged with SIGCORP and into Vectren. See Vectren Corporation, Holding
Co. Act Release No. 27150 (March 8, 2000) (the "March Order"). Thereafter, on
October 31, 2000, Vectren purchased certain natural gas distribution assets (the
"Ohio operations" or the "DPL gas assets") from The Dayton Power & Light
Company. See October Order, above.
Vectren's wholly owned subsidiary, Utility Holdings, serves as
the intermediate holding company for three operating public utility companies:
Indiana Gas Company, Inc., an Indiana and Ohio corporation ("Indiana Gas"),
Southern Indiana Gas and Electric Company, an Indiana corporation ("SIGECO"),
and Vectren Energy Delivery of Ohio, Inc., an Ohio corporation ("VEDO"). The
Ohio operations are owned as a tenancy in common by VEDO (53% ownership) and
Indiana Gas (47% ownership).
Through its public-utility subsidiary companies, Vectren
provides electric and/or gas utility service to customers in Southern and
Central Indiana and in an adjoining area in West Central Ohio.
Using a financing model approved by both the Indiana Utility
Regulatory Commission (the "Indiana Commission") and the Public Utility
Commission of Ohio (the "Ohio Commission"), the three operating utility
companies, Indiana Gas, SIGECO, and VEDO, are guarantors of Utility Holdings'
short-term credit facilities with a total capacity of $350 million and its $550
million in unsecured senior notes. The guarantees are full and unconditional and
joint and several. Utility Holdings' borrowings under its short-term credit
facilities and proceeds from the issuance of unsecured senior notes are
re-loaned to the three operating utility companies to meet their short and
long-term debt financing needs. The utilities' borrowing rates are the same as
Utility Holdings' underlying borrowing costs, with no mark-up. Vectren believes
that this consolidated financing model provides better access to debt capital
and at lower costs than the individual utilities would be expected to obtain on
their own. The consolidated financing model has been reviewed and approved by
the Indiana and Ohio Commissions.
The utilities also have arrangements with other nonregulated
Vectren affiliates to provide substantially all natural gas and coal used in
utility operations, and a significant portion of needed utility infrastructure
services, such as meter reading, facilities locating services, and gas utility
underground construction. These arrangements are also subject to regulatory
oversight by the Indiana and Ohio Commissions.
Both Vectren and Utility Holdings are "public utility holding
companies" as defined by the Act. Indiana Gas is a "gas utility company," SIGECO
is an "electric utility company" and a "gas utility company," and VEDO is a "gas
utility company" as those terms are defined by the Act.
C. Profile of Utility Operations
Vectren derives utility revenues and earnings primarily from
Indiana operations that are regulated by the Indiana Commission. These utility
operations, performed through Indiana Gas and SIGECO (which generally do
business as Vectren Energy Delivery of Indiana), provide energy delivery
services to approximately 665,000 natural gas customers and 135,000 electric
customers located in Indiana. In addition, the Ohio operations (which generally
do business as Vectren Energy Delivery of Ohio) provide retail distribution
services to approximately 315,000 natural gas customers located near Dayton,
Ohio, a service territory that adjoins that of Vectren's Indiana operations.
Electric customers receive power principally from SIGECO-owned generation while
the commodity for gas customers is purchased from third parties through a
nonregulated affiliate.
The Vectren utility companies provide utility service in the
classic sense and generate revenues primarily from serving customers'
requirements. These companies are subject to state regulatory processes and are
judicious in their requests for price increases. Vectren's primary source of
growth at the utility level is through a well executed regulatory strategy, not
through aggressive marketing and sales of energy outside of the company's home
territory. Periodically, when SIGECO's generation capacity is in excess of that
needed to serve native load and Indiana firm wholesale customers, the company
sells, hedges, and trades this unutilized capacity in the wholesale markets to
maximize the return on its investment in generation assets:
o These transactions typically involve purchase and sale contracts that
mature within eighteen months of execution and that are integrated with SIGECO's
generation portfolio and power supply and delivery obligations. These contracts
are physically and financially settled.
o In the past, SIGECO also periodically executed forward physical
contracts to deliver and receive power outside of Indiana. Even though these
contracts contemplated physical delivery, virtually none resulted in the
physical transfer of power (i.e., these transactions were financially settled
and title did not pass outside the state). They were primarily used as hedges
against other transactions.
D. Utility Regulation
Indiana Gas is subject to regulation by the Indiana Commission
and, by reason of its partial ownership of the Ohio operations, subject to
regulation by the Ohio Commission. SIGECO is subject to regulation by the
Indiana Commission. VEDO is subject to regulation by the Ohio Commission.
By order dated July 11, 2000, the Ohio Commission authorized
the acquisition of the Ohio operations. See Vectren Energy of Ohio, Inc., Case
No.00-524-GA-ATR (the "Ohio Order") (a copy of the Ohio Order was previously
filed as Exhibit D-1.3). In approving the acquisition, the Ohio Commission
expressly noted that the transaction structure was intended to help Vectren
maintain its exempt status. Of interest here, the Ohio Order notes:
On June 8, 2000, joint petitioners filed a supplement to the
joint petition. Since the filing of the joint petition,
Vectren and [Indiana Gas] consulted with the SEC staff.
Pursuant to that consultation, Vectren and [Indiana Gas]
intend to proceed with the acquisition of the DP&L gas assets
pursuant to the following structure: 1) [VEDO] will acquire an
approximate 53 percent ownership interest in the gas assets,
and [Indiana Gas] will acquire an approximate 47 percent
ownership interest in the DP&L gas assets; 2) Vectren will be
the operator of the DP&L gas assets and IGC has now
incorporated under Ohio law; 3) the DP&L gas assets to be
jointly owned by [VEDO] and [Indiana Gas] will be
operationally combined so that effectively they will be
operated in Ohio by Vectren as a single entity; and 4) the
combined enterprise will maintain a single tariff applicable
to Ohio customers and provide gas service to customers in the
name of Vectren. To effectuate the operational combination,
joint petitioners request that the Commission provide
accounting authority sufficient in all respects for Vectren to
maintain such books, system of accounts, depreciation reserve
or fund, and any other records as [VEDO] and [Indiana Gas] may
reasonably require to lawfully own, operate, and maintain the
DP&L gas assets in accordance with Title 49, Revised Code, as
well as all other applicable laws and regulations.
In approving the acquisition, the Ohio Commission found that:
The proposed transaction is reasonable, will not adversely
affect the public utility company's customers, is in the
public interest, and should be approved. * * * We find that
our jurisdiction and authority over the rates, services, and
operations of the owner of the DP&L gas assets will not change
due to the proposed transaction. Moreover, we find that it
will not impair our ability to protect ratepayers. The
Commission is satisfied that the potential transfer of
ownership interest in DP&L's gas assets will not impair the
quality of service presently provided to customers of the
public utility, and that Vectren has the ability to
operationally manage the gas assets. * * * We also find that
[Indiana Gas] has sufficiently demonstrated the requisite
experience and capabilities to operate and manage gas assets
in Indiana, where it operates a gas utility serving some
500,000 customers and is considered by the Indiana Regulatory
Commission to have solid management, finances and operations.
The Ohio operations are subject to comprehensive rate regulation by the Ohio
Commission. In addition, the costs of purchased gas charged to customers through
adjustment clauses in VEDO's and Indiana Gas' rate schedules are subject to
periodic audits by, and proceedings before, the Ohio Commission. As public
utilities under Ohio law, VEDO and Indiana Gas are also subject to regulation by
the Ohio Commission as to: (1) record keeping and accounting, including
depreciation rates; (2) abandonment of utility facilities; (3) service quality
and safety; (4) issuances of stocks, bonds, notes and other securities; and (5)
mergers and certain acquisitions and leases with other public utilities. The
Ohio Commission requires Ohio public utilities to file various reports and other
information with the Ohio Commission on a periodic basis, including an annual
report containing information regarding their utility operations and results.
By letter dated September 7, 2000 (the "Indiana Letter"), the
Indiana Commission similarly advised this Commission that:
the [Indiana] Commission believes that it has the jurisdiction
to monitor the activities of Indiana Gas to ensure that
cross-subsidization between Indiana Gas and [VEDO] or any
other affiliate does not occur.
The foregoing opinion is given with the understanding that
Vectren's Indiana and Ohio utility businesses will be
separately operated and that Indiana Gas and [VEDO] will not
be merged into a single company. * * *
Finally, . . .Indiana Gas has operated in Indiana as a gas
utility continuously since 1945 and under our regulatory
purview.
A copy of the Indiana Letter was filed as Exhibit D-1.4.
SIGECO's electric operations are subject to the jurisdiction
of the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act
with respect to wholesale electric rates and other matters. The gas distribution
operations of Indiana Gas, SIGECO and VEDO are covered by the Hinshaw Amendment
and thus exempt from regulation by the FERC under Sections 1(b) and 1(c) of the
Natural Gas Act. Moreover, that portion of Indiana Gas' system that extends into
Kentucky solely for the purpose of interconnecting with the pipeline of Texas
Gas Transmission Corporation is subject to a certificate issued by the FERC
under Section 7f of the Natural Gas Act.
<
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Footnotes regarding Item 1:
/1 At the request of Commission Staff, Applicants have also filed annual reports
on Form U-3A-2. Such filings perfect a claim of exemption pursuant to Rule 2, in
addition to the "good-faith" exemption provided by Section 3(c) of the Act.
<
ITEM 2. FEES, COMMISSIONS, AND EXPENSES
The fees, commissions and expenses associated with this
application are estimated to be approximately $20,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Section 3(a)(1) generally provides that the Commission "shall"
exempt a holding company from registration under the Act if:
such holding company, and every subsidiary company thereof
which is a public-utility company from which such holding
company derives, directly or indirectly, any material part of
its income, are predominantly intrastate in character and
carry on their business substantially in a single state in
which such holding company and every such subsidiary company
are organized.
In other words, the objective requirements of Section 3(a)(1) are that each of
the holding company and its "material" public-utility subsidiary companies be
"predominantly" intrastate in character and carry on its business
"substantially" in a single state in which the holding company and the material
subsidiaries are organized. If an applicant satisfies the objective requirements
of the statute, Section 3(a) directs the Commission to grant an exemption,
"unless and except insofar as [the Commission] finds the exemption detrimental
to the public interest or the interest of investors or consumers."
As explained below, each of Indiana Gas and SIGECO (but not
VEDO) is a material utility subsidiary company for purposes of the Act. Each of
Vectren and Utility Holdings and the material utility subsidiaries, Indiana Gas
and SIGECO, is organized under the laws of Indiana. To qualify for exemption,
Applicants must further show that they and their material utility subsidiaries
are "predominantly intrastate in character" and operate "substantially in a
single State." In this regard, in matters involving combination gas and electric
operations, the Commission has determined that it is appropriate to consider
"operating margin" or "net operating revenues," which are defined as gross
revenues minus costs of purchased gas for retail gas distribution and the cost
of fuel for electric generation. NIPSCO Industries, Inc., 53 S.E.C. 1296 (1999).
The netting out of fuel costs is necessary to avoid overstating the relative
size of the gas operations. The Commission has explained: "This is because
pass-through costs represent a much larger part of revenues in the gas business
than in the electric business." AES Corporation, Holding Co. Act Release No.
27063 (Aug. 20, 1999).
a. Materiality of Utility Subsidiaries
In NIPSCO, the Commission found that an out-of-state utility
subsidiary that contributed the following percentages of the consolidated
holding company figures would not be material for purposes of Section 3(a)(1):
---------------------------------- -----------------------------------------
Measure NIPSCO Range of Values
---------------------------------- -----------------------------------------
Gross Operating Revenues 16.0-16.2%
---------------------------------- -----------------------------------------
Operating Margin 10.8-11.2%
---------------------------------- -----------------------------------------
Utility Operating Income 7.1-8.7%
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For purposes of applying the NIPSCO percentages above to Vectren's operations,
the following definitions are used:
o Gross Operating Revenues: Utility revenues per generally accepted
accounting principles prior to the netting of any utility wholesale
revenues.
o Operating Margin: Gross Operating Revenues, less (a) the cost of purchased
gas for retail distribution and the cost of fuel for retail electric
generation, and (b) the cost of pass-through revenue taxes./2 The cost of
purchased power for retail and wholesale activities is not deducted.
o Utility Operating Income: Operating income per generally accepted
accounting principles.
In the instant matter, each of Vectren, Utility Holdings and the utility
subsidiaries other than VEDO is organized under Indiana law./3 For purposes of
analysis under Section 3(a)(1), the only out-of-state utility is VEDO, which
contributed the following revenues, margin and income for the past three years:
---------------------------------- -----------------------------------------
Measure VEDO Average Values
---------------------------------- -----------------------------------------
Gross Operating Revenues 10.9%
---------------------------------- -----------------------------------------
Operating Margin 5.7%
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Utility Operating Income 5.4%
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These percentages are within the percentage accepted in NIPSCO. VEDO therefore
is not a material public-utility subsidiary company, and neither Vectren nor
Utility Holdings has any "material" out-of-state public-utility subsidiary
companies.
b. Predominantly and Substantially Intrastate
In its 2003 Enron decision, the Commission explained:
To determine whether a utility is predominately intrastate in
character and operates substantially in a single state, the
Commission evaluates a variety of quantifiable factors in
order to compare a company's out-of-state presence with its
in-state presence. Some of the most common indicia we have
considered include gross operating revenues, net operating
revenues, utility operating income, net utility income, and
net utility plant. Among these indicia, we have "generally
assigned the most weight to a comparison of gross utility
operating revenues as a measure of the relative size of
in-state and out-of-state utility operations." We
traditionally have looked at the most recent three-year
average when evaluating the percent of revenue generated from
interstate sales./4
Citing the NIPSCO decision, the Commission noted that: "[t]he highest three-year
average of interstate revenues that we had previously found consistent with the
granting of an exemption pursuant to Section 3(a)(1) was 13.2%."/5
In NIPSCO, the Commission had found the "predominantly and
substantially" standard satisfied where the out-of-state utility operations
represented no more than the following percentage of total utility operations:
---------------------------------- -----------------------------------------
Measure NIPSCO Range of Values
---------------------------------- -----------------------------------------
Gross Operating Revenues 19.2-19.8%
---------------------------------- -----------------------------------------
Operating Margin 13.0-13.7%
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Utility Operating Income 8.7-11.1%
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Under the language of the statute, the "predominantly and substantially" test
must be applied both, on a consolidated basis, to the holding company and, on a
corporate basis, to each material utility subsidiary.
i. Vectren and Utility Holdings
The out-of-state utility operations of Vectren and Utility
Holdings contributed the following revenues, margin and income for the past two
years /6:
------------------------------- ---------------------------------------------
Measure Vectren/Utility Holdings
Average Values
------------------------------- ----------- -------------- -------------
Ohio Gas Electric Total
Retail Wholesale Operations
Operations Operations
------------------------------- ----------- -------------- -------------
Gross Operating Revenues 21.0% 1.5% 22.5%
------------------------------- ----------- -------------- -------------
Operating Margin 11.6% 4.1% 15.7%
------------------------------- ----------- -------------- -------------
Utility Operating Income/7 7.2% N/A N/A
------------------------------- ----------- -------------- -------------
In the instant matter, the out-of-state utility operations of Vectren and
Utility Holdings have had revenues, margins and income slightly higher than that
approved in NIPSCO but well within the range established by the Commission's
interpretation of similar language in Section 3(a)(2) of the Act. See Houston
Industries Inc., Holding Co. Act Release No. 26744 (July 24, 1997) (in which the
Commission determined that a holding company receiving approximately one-third
of its utility operating revenues from a subsidiary company was "predominantly"
a public-utility company within the meaning of Section 3(a)(2) of the Act).
If wholesale transactions in which title does not pass (i.e.
financially settled transactions) were excluded from this analysis, the
Applicants' average Gross Operating Revenues resulting from out-of-state
activity would remain at 22.5% but the average Operating Margin would decrease
to 13.9%. The breakdown of revenue and margin would be as follows:
------------------------------- ---------------------------------------------
Measure Vectren/Utility Holdings
Average Values
------------------------------- ----------- -------------- ---------------
Ohio Gas Electric Total
Retail Wholesale Operations
Operations Operations
------------------------------- ----------- -------------- ---------------
Gross Operating Revenues 22.4% 0.1% 22.5%
------------------------------- ----------- -------------- ---------------
Operating Margin 13.5% 0.4% 13.9%
------------------------------- ----------- -------------- ---------------
Footnote 18 of the 2003 Enron decision states, "The state in
which the sale of electricity takes place determines the source of utility
revenues. We have determined that, if a sale occurs within the state in question
or along that state's borders, it is intrastate . . . .The parties do not
dispute the location where title passes with respect to Enron's electricity
sales." Since title does not pass when consummating a financially settled
transaction, such transactions should be not be deemed to result in utility
revenues for purposes of analysis under the Act.
ii. Indiana Gas
On a corporate basis, the out-of-state utility operations of
Indiana Gas contributed the following revenues, margin and income for the past
three years:
---------------------------------------- -----------------------------------
Measure Indiana Gas Average Range of Values
---------------------------------------- -----------------------------------
Gross Operating Revenues 19.5%
---------------------------------------- -----------------------------------
Operating Margin 15.6%
---------------------------------------- -----------------------------------
Utility Operating Income 12.2%
---------------------------------------- -----------------------------------
The contribution of revenues, margins and income by the Ohio operations of
Indiana Gas have been slightly higher than that approved in NIPSCO but well
within the range established by the Commission's interpretation of similar
language in Section 3(a)(2) of the Act.
iii. SIGECO
On a corporate basis, the out-of-state utility operations of
SIGECO contributed the following revenues, margin and income for the past two
years/8:
---------------------------------------- -----------------------------------
Measure SIGECO Average Values
---------------------------------------- -----------------------------------
Gross Operating Revenues 21.8%
---------------------------------------- -----------------------------------
Operating Margin 6.1%
---------------------------------------- -----------------------------------
Utility Operating Income/9 N/A
---------------------------------------- -----------------------------------
The contributions of revenues by the out-of state operations of SIGECO have been
slightly higher than that approved in NIPSCO but well within the range
established by the Commission's interpretation of similar language in Section
3(a)(2) of the Act.
If wholesale transactions in which title does not pass (i.e.,
transactions that were financially settled) were excluded from this analysis,
SIGECO's Gross Operating Revenues resulting from out-of-state activity would
decrease to 0.4% and Operating Margin would decrease to 0.6%. Both of these
adjusted percentages are well below that accepted in NIPSCO.
c. Considerations Affecting Utility Activity Outside of Indiana
As described above, from time to time SIGECO has generation
excess to its native load needs, and as a result, it optimizes and hedges excess
generation in the wholesale power market. Periodically, this activity results in
out-of-state sales and purchases as not all interconnect points and nearby
liquid trading hubs are located within Indiana. The percentage of out-of-state
Operating Margin generated from wholesale electric sales as a percentage of
total Operating Margin increased from 2.6% in 2003 to 4.6% in 2004 as a result
of a variety of factors. In years prior to 2003 and 2004, SIGECO relied
substantially on optimizing activity into the Cinergy Hub, which is located in
Indiana, because it was liquid and was the best proxy for hedging the value of
SIGECO's generation. However, uncertainty regarding the then-imminent
commencement of energy market operations of the Midwest Independent Transmission
System Operator, Inc. ("MISO") significantly reduced the Cinergy Hub's forward
market liquidity. That reduction of market liquidity combined with a lack of
sufficiently creditworthy neighboring utilities and energy market participants
caused SIGECO to employ its optimizing, hedging, and trading strategies with
respect to its excess generation using the PJM L.L.C. ("PJM") Hub. Virtually all
of these PJM transactions were financially settled. While these transactions
involved contracts that contemplated, or allowed for, physical delivery, the
intent of these transactions were not to market or deliver energy to the PJM
Hub. Rather, the PJM Hub represented the most liquid and efficient market and
best proxy for hedging the value of SIGECO's generation in the forward markets
at that time.
Because of the decreasing liquidity in forward physical
markets caused by limited credit quality neighboring utilities, uncertainty
regarding MISO energy market operations, and the entrance of counterparties such
as investment banking firms and hedge funds into the electric financial markets,
SIGECO, like many others in the electric industry, has begun to meet its hedging
and trading needs by executing pure financial products that do not contemplate
physical delivery and are cleared through the NYMEX (New York Mercantile
Exchange) and ICE (Intercontinental Exchange). SIGECO began executing financial
transactions in the first quarter of 2005. These purely financial transactions
are tied to major hubs in both the PJM and MISO footprints but, as noted above,
do not contemplate physical delivery of electric energy and so, should not be
considered out-of-state utility sales for purposes of Section 3(a)(1).
Another factor that will reduce SIGECO's out-of-state sales is
the opening of the MISO energy markets. Now that energy market operations by
MISO have commenced, SIGECO expects a return of liquidity to the area as more
utilities can physically exchange power within the MISO footprint. In the MISO
energy market Locational Marginal Pricing system ("LMP"), SIGECO will physically
sell or purchase power directly with MISO at its load and generating station
commercial pricing nodes, the delivery points of which are all located in
Indiana. Thus, to the extent SIGECO continues to engage in physical transactions
of electricity, these delivery points will almost always be in Indiana.
SIGECO's forward market optimization, hedging, and trading of
its expected excess generation is substantially short term in nature, with
contracts that mature within eighteen months of inception. The forward maturity
of these contracts results in a lag between the execution of the contracts and
the actual performance or financial settlement of the contracts. It is the
financial settlement date that triggers the recording of revenue. Therefore,
SIGECO has contracts at the PJM Hub that were executed during 2004 and in early
2005, which will mature in 2005. In other words, SIGECO's move toward financial
and MISO-based transactions for its forward market transactions will not be
fully reflected in its reporting until these contracts have matured. Thus,
although it is contemplated that out-of-state utility revenues will be reduced
significantly in subsequent years, it appears that out-of-state activity in 2005
will be equal to, if not greater than, the out-of-state revenues reported in
2004. In this regard, however, it should be noted that the only physical forward
activity executed in 2005 at the PJM Hub has been to offset existing positions
in that market as a part of SIGECO's transition to financial contracts.
To summarize, it is anticipated that as a result of the use of
financial transactions to replace physical transactions at the PJM Hub and the
reemergence of a MISO market allowing access to more creditworthy counterparties
using Indiana delivery points, the small amount of wholesale transactions
executed that contemplate out-of-state delivery will further decline. To the
extent these purely financial transactions replace physical transactions that
are financially settled, out-of-state Operating Margin based on 2004 historical
data would decline in future years from the current 16% to approximately 13%,
and almost the entire remaining percentage of out-of-state activity would be
associated with Ohio natural gas retail sales.
Regardless of the type of transaction, be it a physical
transaction with a utility as the counterparty or a financial transaction with a
financial institution as the counterparty, SIGECO's purpose for executing these
transactions has not changed. The primary purpose of these transactions
continues to be to optimize and hedge the system's excess generation while
limiting market risk exposure.
Finally, SIGECO has made and will be making significant
investments in pollution control equipment within the next few years. SIGECO
anticipates recovering the costs of such incremental pollution control
investment in its retail rates, as permitted by Indiana law. This should
increase SIGECO's in-state revenues, thereby decreasing the percentage of
revenues from out-of-state utility operations. During 2004, electric revenues
grew over $14 million as a result of recovery of pollution control investments,
which decreased the percentage of out-of-state net retail operating revenues by
almost half a percent compared to 2003. Additional pollution control recovery
revenues are expected in 2005 and should favorably affect the company's
position.
d. "Unless and Except" Clause Considerations
As noted above, notwithstanding an applicant's compliance
with the objective requirements of Section 3(a)(1), the Commission has the
authority to deny or condition an exemption, "insofar as [the Commission]
finds the exemption detrimental to the public interest or the interest of
investors or consumers." In assessing this standard, the Commission has
traditionally focused on the presence of state regulation. See, e.g., KU Energy
Corp., Holding Co. Act Release No. 25409 (Nov. 13, 1991); CIPSCO Inc., Holding
Co. Act Release No. 25212 (Sept. 18, 1990). Chapter 6 of the 1995 Report on
The Regulation of Public-Utility Holding Companies (the "1995 Report")discusses
the background and administration of the Act's exemptive provisions and explains
that "Congress subjected holding companies to the requirements of the Act
because meaningful state regulation of their abuses was often obstructed by
their control of subsidiaries in several states and by the constitutional
doctrines limiting state economic regulation." Id. at 109, note 4. The Study
notes that exemptions from registration are available where the holding
company is susceptible to effective state regulation or is otherwise not the
type of company at which the Act was directed. See Sen. Rep. No.621, 74th
Cong., 1st Sess. (1935).
Both of those factors are present in this matter. As noted
above, the Ohio Commission has made extensive findings about its ability to
protect consumers in the context of this holding company structure, and the
Indiana Commission has issued a letter similarly addressing these concerns,
particularly with respect to the question of cross-subsidization. In matters
involving exempt holding companies, this Commission has traditionally given
weight to the views of the affected state regulators. In NIPSCO, for example,
the Commission noted that:
Each of Bay State's and Northern's regulators made the finding
aware of the fact that, if we approved the application, Bay
State and Northern would be owned by an out-of-state holding
company exempt from registration under the Act. The Commission
has given weight to a state's judgment concerning its ability
to exercise effective regulatory control./10
Of interest here, the Ohio Commission specifically cited the experience of the
Indiana Commission and the absence of regulatory abuses as a basis for its
finding that the proposed structure "is reasonable, will not adversely affect
the public utility company's customers, is in the public interest, and should be
approved":
We also find that [Indiana Gas] has sufficiently demonstrated
the requisite experience and capabilities to operate and
manage gas assets in Indiana, where it operates a gas utility
serving some 500,000 customers and is considered by the
Indiana Utility Regulatory Commission to have solid
management, finances, and operations.
In the Indiana Letter, the Indiana Commission similarly advised this Commission
that:
the [Indiana] Commission believes that it has the jurisdiction
to monitor the activities of Indiana Gas to ensure that
cross-subsidization between Indiana Gas and [VEDO] or any
other affiliate does not occur.
The foregoing opinion is given with the understanding that
Vectren's Indiana and Ohio utility businesses will be
separately operated and that Indiana Gas and [VEDO] will not
be merged into a single company. * * *
The Indiana Commission further advised that "Indiana Gas has operated in Indiana
as a gas utility continuously since 1945 and under our regulatory purview."
Further, the continued exemption of Vectren and Utility
Holdings will not give rise to any of the evils that the Act was intended to
address. There are appropriate safeguards in this matter to ensure that the
continued exemption will not be detrimental to the public interest or the
interest of investors or consumers, the "protected interests" under the Act.
Both Vectren and Utility Holdings are subject to continuous reporting
requirements under the other federal securities laws. Indiana Gas and SIGECO are
subject to broad regulation as to rates and other matters, including affiliate
transactions, by the Indiana Commission. VEDO and Indiana Gas are subject to
broad regulation as to rates and other matters by the Ohio Commission.
In approving the acquisition, the Ohio Commission expressly
noted that the structure was intended to help Vectren maintain its exempt
status. The Indiana Commission has similarly indicated its comfort with the
arrangement. In addition, there are a number of safeguards in place to ensure
against cross-subsidization or other detriment to the protected interests.
Utility and nonutility financings are conducted through separate subsidiaries of
the parent holding company. Financings for the nonutility activities are done by
Vectren Capital Corp., a first-tier nonutility subsidiary of Vectren, while
financings for the utilities are done by Utility Holdings.
The ability to finance utility operations at the Utility
Holdings level further shields the utility operations from any risks that may be
associated with the nonutility activities. The Ohio and Indiana Commissions have
jurisdiction over all issuances of equity and debt with a maturity of one year
or more. Because Indiana Gas is dually incorporated, it requires the approval of
both Ohio and Indiana for equity and long-term debt financings.
Finally, as noted by the Indiana Commission, Indiana Code
8-1-2-49 requires that Indiana Gas must file any contract between it and Vectren
and/or VEDO. That section, in pertinent part, provides that "[i]f it be found
that any such contract is not in the public interest, the [Indiana] Commission
after investigation and hearing is authorized to disapprove such contract."
While Ohio does not have a statute that specifically governs affiliate
transactions, it can address these types of issues through codes of conduct and
traditional ratemaking proceedings. Further discussion of the regulation of the
Vectren system is contained in the discussion of Utility Regulation, supra.
The structural protections, the degree and quality of other
regulation and the absence of any holding company abuses all demonstrate that
continued exemption of Vectren and Utility Holdings will not be detrimental to
the "protected interests:"
o First, there is no evidence of past problems. Indeed, the Ohio
Commission expressly focused on the company's positive experience with the
Indiana Commission.
o Second, each of the affected state regulators has considered the
exemption and concluded that it would not impair the regulator's ability to
protect consumers.
o Third, there is no scatteration of utility properties.
o Fourth, as explained in Vectren's Annual Report on Form 10-K for the
year ended December 31, 2004 (SEC File No.001-15467):
[Utility Holdings'] and Indiana Gas' credit ratings on
outstanding senior unsecured debt at December 31, 2004, are
A-/Baa1 as rated by Standard and Poor's Ratings Services
(Standard and Poor's) and Moody's Investors Service (Moody's),
respectively. SIGECO's credit ratings on outstanding senior
unsecured debt are BBB+/Baa1. SIGECO's credit ratings on
outstanding secured debt are A-/A3. [Utility
Holdings's]commercial paper has a credit rating of A-2/P-2.
In addition, each of the holding companies and their public-utility subsidiary
companies has in excess of 30% common equity capitalization as computed in
compliance with Commission precedent./11
o Fifth, the Commission always has the authority under the "unless and
except" clause to condition or deny an exemption that it finds to be detrimental
to the protected interests.
Accordingly, the Commission should find that Vectren and Utility Holdings are
entitled to exemption under Section 3(a)(1) of the Act.
<
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Footnotes regarding Item 3:
/2 The netting of the effect of revenue taxes from Operating Margin is necessary
to avoid overstating the relative size of the Ohio territory's operating
revenues. This is because pass-through taxes collected from customers represent
a much larger component of revenues in Ohio than in Indiana, and those taxes are
collected on a dollar-for-dollar basis, like gas and fuel costs.
/3 Indiana Gas is dually-incorporated under Indiana and Ohio law. Although
Indiana Gas is an Ohio, as well as an Indiana, utility, it is treated as an
Indiana utility for purposes of the analysis under Section 3(a)(1). This
approach is consistent with that approved by the Commission in KU Energy Corp.,
Holding Co. Act Release No. 25409 (Nov. 13, 1991). In that matter, Kentucky
Utilities Company ("Kentucky Utilities"), a Kentucky public-utility company and
exempt holding company, merged with its Virginia subsidiary public-utility
company. Kentucky Utilities then incorporated in Virginia, as well as in
Kentucky, in order to satisfy the requirements of Virginia law. For purposes of
analysis under Section 3(a)(1), Kentucky Utilities was treated as a Kentucky
utility.
/4 Enron Corporation, Holding Co. Act Release No. 27782 (Dec. 29, 2003)
(footnotes omitted).
/5 Enron, supra, citing the NIPSCO decision.
/6 While the Staff has generally considered a three year average, electric
wholesale sales data for 2002 aggregated by delivery point is not available.
Therefore, 2002 data is not included in the above calculation. The Company
believes the inclusion of 2002 would not materially alter the above calculation.
/7 Operating income related to out-of-state wholesale sales is not calculable as
it is difficult to derive costs explicitly associated with those sales.
/8 While the Staff has generally considered a three year average, electric
wholesale sales data for 2002 aggregated by delivery point is not available.
Therefore, 2002 data is not included in the above calculation. The Company
believes the inclusion of 2002 would not materially alter the above calculation.
/9 Operating income related to out-of-state wholesale sales is not calculable as
it is difficult to derive costs explicitly associated with those sales.
/10 The NIPSCO order cited Wisconsin Energy Corp., Holding Co. Act Release No.
24267 (Dec. 18, 1996) ("the judgment of a state's legislature and public service
commission as to what will benefit their constituents is entitled to
considerable deference when not in conflict with the policies of the Act");
Northern States Power Co., 36 S.E.C. 1, 8 (1954) ("The considered conclusion of
the local authorities, deriving their power from specific State legislation,
should be given great weight in determining whether the public interest would in
fact be adversely affected . . . ."), cited with approval in Houston Industries,
Inc., Holding Co. Act Release No. 26744 (July 24, 1997).
/11 Consolidated Capitalization is defined to include, where applicable, all
common stock equity (comprised of common stock, additional paid in capital,
retained earnings, treasury stock and other comprehensive income), minority
interests, preferred stock, preferred securities, equity-linked securities,
long-term debt, short-term debt and current maturities.
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ITEM 4. REGULATORY APPROVALS
No other regulatory approvals are required.
ITEM 5. PROCEDURE
The Applicants respectfully request that appropriate and
timely action be taken by the Commission in this matter. No recommended decision
by a hearing officer or other responsible officer of the Commission is necessary
or required in this matter. The Division of Investment Management of the
Commission may assist in the preparation of the Commission's decision in this
matter. There should be no thirty-day waiting period between the issuance and
effective date of any order issued by the Commission in this matter, and it is
respectfully requested that any such order be made effective immediately upon
the entry thereof.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
Exhibit No. Description of Exhibit
H-1.1 Vectren Corporation's 2004 Annual Report, incorporated by
reference to SEC Form 10-K, File No.001 -15467, March 2,
2005.
H-2.1 Form U-3A-2, as amended for Vectren Corporation and
Vectren Utility Holdings, Inc. for year ended
December 31, 2004, incorporated by reference to
SEC File No. 69-00491.
Financial Statements
FS-2.1 Vectren Corporation's Consolidated Balance Sheet and
Statement of Income for the quarter ended March 31, 2005,
incorporated by reference to SEC Form 10-Q, File No.
001-15467, May 3, 2005.
FS-4.1 Vectren Corporation's Consolidated Balance Sheet and
Statement of Income for the year ended December 31, 2004,
incorporated by reference to SEC Form 10-K, File No. 001-
15467, March 2, 2005.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this
Application-Declaration involves a "major federal action" or "significantly
affect[s] the quality of the human environment" as those terms are used in
Section 102(2)(C) of the National Environmental Policy Act. None of the proposed
transactions that are the subject of this Application-Declaration will result in
changes in the operation of the Applicants that will have an impact on the
environment. The Applicants are not aware of any federal agency that has
prepared or is preparing an environmental impact statement with respect to the
transactions proposed herein.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the Applicants have duly caused this Amendment to be signed
on their behalf by the undersigned thereunto duly authorized.
Dated: June 21, 2005
VECTREN CORPORATION
By: /s/_Ronald E. Christian__
Name: Ronald E. Christian
Title: Executive Vice President,
Chief Administrative Officer,
General Counsel and Corporate Secretary
VECTREN UTILITY HOLDINGS, INC.
By: /s/_Ronald E. Christian__
Name: Ronald E. Christian
Title: Executive Vice President,
Chief Administrative Officer,
and Corporate Secretary