Pre-Effective Amendment to Application or Declaration — Form U-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: U-1/A Pre-Effective Amendment to Application or 5± 23K
Declaration -- formu1a
2: EX-3.1 Articles of Association and Bylaws of E.On Ag 11± 40K
3: EX-3.2 Memo and Articles of Asso. of Powergen Plc 66± 263K
11: EX-21 Description of E.On's Subsidiary Companies 103 350K
4: EX-99.1 Letter Agreement Dated April 8, 2001 12± 43K
14: EX-99.10 Amended LG&E Services Service Agremt. 13± 51K
15: EX-99.11 Opinion of Counsel- E.On 3 13K
16: EX-99.12 Opinion of Counsel-Powergen 2± 14K
17: EX-99.13 E.On Ag Consol Fin Statmts Year End 12/31/00 4 30K
18: EX-99.14 Pro Fm Cnsl Bal Sheet & Incm Stmt End 12/31/00 2 19K
19: EX-99.15 LG&E Energy Consol Fin Stmt End 12/31/00 44 236K
5: EX-99.2 Appl. to Kentucky Public Service Commission 13± 59K
6: EX-99.3 Order of the Kentucky Public Service Commission 29± 113K
7: EX-99.4 Appl. to the Va State Corp. Commission 112± 429K
8: EX-99.5 Order of the Virginia State Corp. Commission 14 41K
9: EX-99.6 Appl. to the Federal Energy Regulatory Comm. 142 634K
10: EX-99.7 Ferc Order 10 38K
12: EX-99.8 Description of Powergen's Subsidiary Companies 38 169K
13: EX-99.9 Appointment of Agent for Services of Process 2 12K
EX-99.7 — Ferc Order
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Exhibit C-6
UNITED STATES OF AMERICA 97 FERCP. 61,049
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Pat Wood, III, Chairman;
William L. Massey, Linda Breathitt,
and Nora Mead Brownell.
E.ON AG
and Docket No. EC01-115-000
Powergen plc
LG&E Energy Corporation
Louisville Gas and Electric Company
Kentucky Utilities Company
ORDER AUTHORIZING MERGER AND GRANTING WAIVER
(Issued October 15, 2001)
On June 12, 2001,/1 E.ON AG, Powergen plc (Powergen), LG&E Energy
Corporation (LG&E Energy), Louisville Gas and Electric Company (LG&E), and
Kentucky Utilities Company (KU) filed, on behalf of their jurisdictional
subsidiaries and affiliates (collectively, Applicants), a joint application
pursuant to section 203 of the Federal Power Act (FPA)/2 seeking authorization
of the acquisition of Powergen's shares by E.ON. LG&E Energy, LG&E, and KU (LG&E
Companies) are wholly-owned direct or indirect subsidiaries of Powergen. In
addition, E.ON requests waiver of Part 33.2(c)(2) of the Commission's
Regulations to the extent that it requires information about E.ON's interests in
energy businesses that are solely foreign.
------------------------
1/ The merger application was supplemented on August 15, 2001 with a copy
of the August 6, 2001 Order of the Kentucky Public Service Commission approving
the proposed transaction.
2/ 16 U.S.C.ss. 824(b) (1994).
Docket No. EC01-115-000 -2-
The Commission has reviewed the proposed merger under the Commission's
Merger Policy Statement\3 and its regulations implementing section 203 of the
FPA\4 (Order No. 642) and, as discussed below, we authorize it as consistent
with the public interest. We also grant the requested waiver.
I. Background
A. Description of the Parties
1. E.ON and Its Subsidiaries
E.ON is a stock corporation formed under the laws of the Federal Republic
of Germany. It is primarily engaged in the business of supplying, through its
subsidiaries, electricity and natural gas in Germany, as well as in other
countries in Europe. E.ON owns directly and indirectly interests in energy
businesses throughout the world. E.ON directly owns 37.1 percent of the shares
of RAG AG (RAG), which has an indirect interest, through its subsidiary RAG Coal
International, in certain coal mines in the Appalachian, Midwestern, and western
regions of the United States that supply certain U.S. electric generating units.
E.ON also holds an indirect ownership interest in STEAG, which formed a joint
venture with Avista Corporation and also established STEAG Power LLC in Houston,
Texas for the purpose of financing and constructing fossil-fired merchant plants
in the United States. Furthermore, E.ON has a subsidiary, VEBA Oel AG, which,
through its subsidiary, sold gasoline, fuel oil, and naphtha in the United
States.
2. Powergen and Its Subsidiaries
Powergen, a public limited company organized under the laws of England and
Wales, is a registered holding company under the Public Utility Holding Company
Act of 1935 (PUHCA). Powergen has a wholly-owned subsidiary, LG&E Energy, which
is an exempt utility holding company under section 3(a)(1) of PUHCA incorporated
in the State of Kentucky. Through LG&E Energy, Powergen indirectly owns LG&E,
which is a
------------------------
3/ See Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592 , 61 Fed. Reg. 68,595 (1996), FERC
Statutes and Regulations, Regulations Preambles July 1996-December 2000P.P.
31,044, at pp. 30,117 -18 (1996), reconsideration denied, Order No. 592-A , 62
Fed. Reg. 33,341 (1997), 79 FERCP. 61,321 (1997).
4/ Revised Filing Requirements Under Part 33 of the Commission's
Regulations, Order No. 642 , FERC Statutes and Regulations, Regulations
Preambles July 1996-December 2000P.P. 31,111 (2000), reh'g denied, Order No.
642-A , 94 FERCP. 61,289 (2001).
Docket No. EC01-115-000 -3-
combination gas and electricity public utility engaged in generation,
transmission and distribution of electricity in Kentucky. LG&E also purchases,
distributes, and sells natural gas within the same service area and in certain
additional areas. LG&E Energy also has another wholly-owned subsidiary, KU, a
public utility that is engaged in producing, transmitting, and selling electric
energy to customers in Kentucky, Virginia, Tennessee, and Pennsylvania. LG&E and
KU are founding members of the Midwest Independent System Operator (Midwest
ISO). Pursuant to the Settlement Agreement Involving Owners in the Midwest ISO,
the Alliance Companies and Other Parties,/5 LG&E and KU will become members of
Midwest ISO or another fully-functioning Commission-approved RTO. In addition,
through LG&E Energy, Powergen owns various other subsidiaries, including a power
marketing firm, LG&E Energy Marketing, Inc., and a generation facilities
operating company, Western Kentucky Energy Corporation. LG&E Energy also has
ownership interests in several exempt wholesale generators.
B. Description of the Proposed Merger
The transaction is governed by a Letter Agreement between E.ON and Powergen
dated April 8, 2001, and "E.ON AG: Recommended Pre-Conditional Cash Offer for
Powergen plc" of April 9, 2001. Under the terms and conditions of these
documents, E.ON intends to purchase all of the issued and to be issued share
capital of Powergen. The transaction will result in an indirect change in
control over all of Powergen's direct and indirect subsidiaries and affiliates,
including jurisdictional facilities of LG&E Energy and its subsidiaries and
affiliates. Upon the completion of the transaction, Powergen will become a
wholly-owned subsidiary of E.ON. LG&E Energy, LG&E, and KU will also survive the
acquisition, and each will retain its separate existence. E.ON also plans to
make LG&E Energy its direct or indirect wholly-owned fully-controlled
subsidiary.
II. Notice of Filing and Responsive Pleadings
Notice of the filing was published in the Federal Register, 66 Fed. Reg.
33,957 (2001), with comments, interventions, and protests due on or before
August 13, 2001. Big Rivers Electric Corporation and Enron Power Marketing, Inc.
filed timely, unopposed motions to intervene raising no substantive issues. Ms.
Cecil Ronald Hamblin timely filed a letter of intervention urging the Commission
to consider the possible effect the proposed transaction might have on the labor
market in the City of Norton, Virginia. Pursuant to 18 C.F.R.ss. 385.214 (2001),
the filing of a timely, unopposed motion to intervene makes the movant a party
to the proceeding.
------------------------
5/ See Illinois Power Co., 95 FERCP. 61,183 (2001).
Docket No. EC01-115-000 -4-
III. Discussion
A. Standard of Review
Section 203(a) of the FPA provides that the Commission must approve a
proposed merger if it finds that the merger "will be consistent with the public
interest." Consistent with the Merger Policy Statement, the Commission will
generally consider the following three factors in analyzing proposed mergers:
(1) the effect on competition, (2) the effect on rates, and (3) the effect on
regulation.
B. Effect on Competition
1. Horizontal Competitive Issues
a. Argument
Applicants state that pursuant to Order No. 642 and Part 33.3(a)(2), they
are not required to provide the full competitive analysis screen because the
merging parties here do not operate in the same geographic markets, or even if
they do, the extent of such overlapping operation is de minimis. According to
the application, E.ON has no direct ownership interest in any U.S. generating
facility. STEAG, in which E.ON has an indirect interest, currently does not own
any operating generation in the United States. It plans to dispose of its
interests in plants that are currently under development before such plants
become operational, and has no other plants under consideration that would be
operational before year 2004. Applicants further argue that even if STEAG's
current interests in development projects are attributed to E.ON as owned
generation, the horizontal analysis screen still is not required because the
extent of overlap of Applicants' operations in the same geographic market is de
minimis. Powergen indirectly, through LG&E Energy's subsidiaries, owns
insignificant amounts of generation in the markets where STEAG's development
projects are located, and almost all of that generation is under long-term
contract.
b. Commission Conclusion
Pursuant to Order No. 642 we will not require a merger applicant to provide
a full horizontal competitive analysis screen if: (1) the application
demonstrates that the merging entities do not currently operate in the same
geographic markets, or if they do, that the extent of such overlapping operation
is de minimis; and (2) no intervenor has alleged
Docket No. EC01-115-000 -5-
that one of the merging entities is a perceived potential competitor in the same
geographic market./6 Applicants here do not operate in the same geographic
markets. Moreover, no intervenor in this proceeding claims that one of the
merging parties is a perceived potential competitor in the same geographic
market. Therefore, we find that the proposed transaction does not raise any
horizontal competitive concerns.
2. Vertical Competitive Issues
a. Argument
Applicants state that the proposed merger raises no vertical market power
concerns. They argue that LG&E's and KU's RTO commitments and lack of control
over generation sites eliminate any concern over transmission and generation
siting-related vertical power issues.
Applicants also state that the proposed transaction does not raise any
vertical market power issues concerning ownership or control of inputs of
electric generation because E.ON does not directly own, control, or operate any
entity that provides inputs to electricity products in the U.S. As for E.ON's
direct ownership of RAG, Applicants argue that because E.ON does not exercise
control over RAG and RAG's coal interests are thus not attributable to E.ON.,
the Applicants should be exempt from filing a vertical analysis. According to
the merger application, E.ON is in no position to control RAG's activities for
the following reasons. First, although E.ON is the largest single stockholder of
RAG, the remaining shares are held by only four entities, in contrast to a
situation in which the remaining shares are widely scattered so that no other
stockholder is in position to influence the company's operations. Second, E.ON
has no representatives on RAG's three-member Management Board, the body charged
with the day-to-day management of the company. Third, E.ON has only three
representatives on RAG's 21-member Supervisory Board, which oversees the
Management Board, but has limited decision-making authority with respect to
day-to-day operations, such as pricing and supply. Finally, E.ON has no ability
to influence RAG Coal International's management and policy decisions because
E.ON does not have any representatives on its Management Board (as well as
Supervisory Board).
Alternatively, Applicants argue that even if E.ON controlled RAG's coal
operations, the proposed merger would have no adverse vertical competitive
effects. Applicants provide an analysis of the competitive effects of combining
LG&E's generation with RAG's coal interests, as prescribed in Order No. 642.
Applicants define the relevant downstream product as wholesale electric energy.
They define the relevant downstream geographic
------------------------
6/ See Order No. 642 at 31,902.
Docket No. EC01-115-000 -6-
markets as East Central Area Reliability Coordination Agreement (ECAR), the
Mid-America Interconnected Network, Inc. (MAIN), the Tennessee Valley Authority
(TVA), and Southern Indiana Gas & Electric Company (SIGE). Applicants analyze
the relevant downstream electricity markets based on the assumption that coal
suppliers can control the output of the electric generation units they serve.
They attribute the capacity of coal-fired electric generators to the coal
supplier for the purpose of calculating market shares and concentration in the
downstream electricity market. Applicants report that only one market, SIGE, is
highly concentrated in any time period, and only under the most conservative
attribution methodology.
For the purpose of the upstream market analysis, Applicants define the
relevant upstream product as steam coal used in electric power generation. The
upstream geographic market for steam coal is defined as the areas from which
coal is supplied to generators that can compete to supply electricity to serve
the relevant downstream markets. According to the application, the upstream
market (defined as including all actual coal suppliers to generating plants in
the relevant destination markets and all utilities directly interconnected with
those direct interconnections, i.e., utilities in ECAR, MAIN, and TVA) is
unconcentrated, with HHIs in the range of 729-983. The HHI for the upstream
market (defined as including the geographic source of coal supplies to
generating plants in ECAR, MAIN, and TVA) is in the range of 594-760.
b. Commission Conclusion
Applicants have shown that the combination of their generation and
transmission facilities will not harm competition. As Applicants note, LG&E and
KU have committed to transfer operational control of their transmission systems
to the MISO and will remain members of the Midwest ISO at least until the end of
2002. Furthermore, they have committed to be members of a Commission-approved
RTO thereafter. Therefore, they lack the ability to exploit their transmission
assets to harm competition in wholesale electricity markets.
Applicants have also shown that the combination of LG&E's generation assets
with RAG's coal interests will not harm competition. Using the attribution
method described in Order No. 642, they have shown that the relevant downstream
markets are not highly
Docket No. EC01-115-000 -7-
concentrated./7 In addition, no intervenor has challenged Applicants' analysis
of the competitive effects of the proposed merger.
C. Effect on Rates
The Merger Policy Statement and Order No. 642 require that applicants
provide mechanisms that will protect ratepayers from adverse effects of the
proposed transaction./8 Applicants commit to hold their
Commission-jurisdictional wholesale and transmission customers harmless for a
period of five years from costs related to the proposed transaction to the
extent that those costs are not offset by transaction-related savings.
Applicants also commit that they will not attempt to recover transaction-related
costs through wholesale rates of the LG&E Companies without receiving Commission
approval to do so. In addition, Applicants commit that the Commission-approved
ratepayer protection mechanisms established in the merger of LG&E Energy and KU
will remain in force and effect without change./9 Furthermore, Applicants also
affirm the commitments made by LG&E Energy and Powergen in connection with their
merger that their wholesale and transmission customers will be held harmless
from costs related to that merger and that there will not be any attempt to
recover any costs related to that merger without first receiving Commission
approval to do so./10 We find that these commitments constitute adequate
ratepayer protection. Accordingly, we find that the proposed transaction will
not have an adverse impact on rates.
------------------------
7/ The exception is the SIGE downstream electricity market. However,
Applicants do not own significant generation from which they could profit from
higher prices in that market. During periods when the market is highly
concentrated, Applicants own at most 115 MW of economic capacity. Exhibit No.
JA-7 at 2.
8/ See Merger Policy Statement at 30,123-124 and Order No. 642 at 31,914.
9/ See Louisville Gas and Electric Company, et al., 82 FERC P. 61,308,
62,223-24 (1998). The following commitments detailed in the LG&E and KU merger
remain in effect: (1) a cap on base rates for all LG&E and KU firm wholesale
requirements and firm transmission customers for five years; (2) certain base
rate reductions for KU's wholesale requirements customers; (3) certain
reductions in fuel costs for all wholesale requirements customers; (4) waiver by
KU of its right to file for changes in base rates for five years under section
205 of the FPA; and (5) sharing of certain merger-related costs savings with
wholesale customers if the actual cost to achieve the merger is lower than the
estimated cost.
10/ See Louisville Gas and Electric Company, et al., 91 FERCP. 61,321,
62,105 (2000).
Docket No. EC01-115-000 -8-
D. Effect on Regulation
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange
Commission./11 Applicants state that as part of the proposed transaction, E.ON
will register as a holding company under PUHCA, and LG&E Energy and its
subsidiaries will become part of E.ON's registered holding company. As required
by Order No. 642, Applicants commit to be subject to the Commission's policy on
intra-corporate transactions with respect to any transaction involving the sale
of non-power goods and services between or among any of the LG&E Companies or
any of its subsidiaries or affiliates./12
When a public utility is acquired by another company, whether a domestic
company or a foreign company, the Commission's ability to adequately protect
public utility ratepayers against inappropriate cross-subsidization may be
impaired unless we have access to the parent company's books and records.
Section 301(c) of the FPA gives the Commission authority to examine books and
records of any person who controls, directly or indirectly, a jurisdictional
public utility insofar as the books and records relate to transactions with or
the business of such public utility./13 In this case, E.ON and Powergen have
committed to make available upon request by the Commission all publicly
available financial information and related books and records. Moreover,
Applicants commit to make available upon request any information necessary to
support the pricing for the sale of goods and services between or among any of
the LG&E Companies and E.ON or any of its subsidiary or affiliated companies. We
construe this commitment as agreeing to provide the Commission access to all
books and records within the scope of section 301(c) of the FPA, and our
approval of the proposed transaction is based on this understanding.
In the Merger Policy Statement, we also expressed concern with the effect
on state regulation where a state does not have authority to act on a merger and
raises concerns about the effect on regulation./14 Applicants state that there
will be no change with respect to state regulation as a result of the proposed
transaction because it will not affect the corporate structure of LG&E Energy
and its subsidiaries, and each of the LG&E Energy
------------------------
11/ See Merger Policy Statement at 30,124-25.
12/ Order No. 642 at 31,914.
13/ Section 301(c) of the FPA, 16 U.S.C.ss. 825(c) (1994).
14/ See supra note 11.
Docket No. EC01-115-000 -9-
subsidiaries will continue to be subject to the same state regulatory
jurisdiction after the transaction. Furthermore, Applicants submitted the
Kentucky Public Service Commission's order approving the proposed transaction
and state that they have filed for approval from the Virginia State Corporation
Commission and will seek any approval that may be required by the Tennessee
Regulatory Authority.
E. Accounting Issues
The application indicates that the merger will be recorded using the
purchase method of accounting. Because the merger is occurring at the
non-jurisdictional holding company level and Applicants do not propose any
changes to the books and records of the LG&E Companies, we have no objection to
Applicants' proposed merger accounting.
Because the proposed merger will not have any effect on the books and
records of the jurisdictional subsidiaries, we will not require Applicants to
submit their proposed merger accounting. However, if the proposed merger affects
the books and records of the LG&E Companies, Applicants must promptly notify the
Commission and provide a full explanation of any proposed adjustments.
F. Other Issues
We grant E.ON's request for waiver of Part 33.2(c)(2) of the Commission's
regulations to the extent that it requires information about E.ON's interests in
energy businesses that are solely foreign. We find that it is not necessary for
E.ON to provide information at this time about its subsidiaries and affiliates
that are not doing business in the United States or are transacting with other
subsidiaries and affiliates within the United States.
The concerns raised by Ms. Hamblin regarding the effect of the proposed
merger on the labor market in the City of Norton, Virginia are more
appropriately addressed in other fora. We note that Applicants have requested
that the Virginia State Corporation Commission approve their merger. Absent
evidence of reduced reliability or inadequate service (evidence that is not even
alleged here), a decision to reduce staffing levels is within management's
discretion, subject to any obligations (enforceable in other fora) the company
may have toward employees or the union by contract or under applicable labor
laws./15
------------------------
15/ Baltimore Gas and Electric Company, et al., 76 FERCP. 61,111, 61,575
(1996).
Docket No. EC01-115-000 -10-
The Commission orders:
(A) Applicants' proposed transaction is authorized upon the terms and
conditions and for the purposes set forth in the application.
(B) The waiver requested by Applicants is hereby granted.
(C) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, service,
accounts, valuation, estimates, or determinations of cost or any other matter
whatsoever now pending or which may come before the Commission.
(D) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost of any valuation of property claimed or
asserted.
(E) The Commission retains authority under sections 203(b) and 309 of the
FPA to issue supplemental orders as appropriate.
(F) Applicants must promptly inform the Commission of any change in the
circumstances that would reflect a departure from the facts the Commission has
relied upon in approving the merger accounting.
(G) Applicants shall advise the Commission within 10 days of the date on
which the transaction is consummated.
By the Commission.
( S E A L )
David P. Boergers,
Secretary.
Dates Referenced Herein and Documents Incorporated by Reference
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