(As filed April 4, 2001)
File No. 70-9645
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POS-AMC
(Post-Effective Amendment No. 1)
to
FORM U-l
APPLICATION/DECLARATION
under
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
EXELON CORPORATION
10 South Dearborn Street
37th Floor
Chicago, Illinois 60603
EXELON INFRASTRUCTURE SERVICES, INC.
200 Yale Avenue
Morton, Pennsylvania 19070
EXELON SERVICES INC.
2315 Enterprise Drive
Westchester, Illinois 60154
(Names of companies filing this statement and addresses of
principal executive offices)
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EXELON CORPORATION
(Name of top registered holding company parent of applicants)
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John W. Rowe Corbin A. McNeill, Jr.
Co-Chief Executive Officer Co-Chief Executive Officer
Exelon Corporation Exelon Corporation
10 South Dearborn Street 2301 Market Street
37th Floor P.O. Box 8699
Chicago, Illinois 60603 Philadelphia, Pennsylvania 19101
(Names and addresses of agents for service)
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The Commission is requested to send copies of all notices, orders and
communications in connection with this Application/Declaration to:
Glenn D. Newman, Vice President and Harvey B. Dikter, Senior Vice President
General Counsel and General Counsel
Exelon Enterprises Company, LLC Exelon Infrastructure Services, Inc.
10 South Dearborn Street, 34th Floor 200 Yale Avenue
Chicago, Illinois 60603 Morton, Pennsylvania 19070
William T. Baker, Jr. Esq.
Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
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Section 1.1 Background. By order dated October 19, 2000 in this
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proceeding (Holding Co. Act Release No. 27256) (the "Merger Order"), the
Commission authorized Exelon Corporation ("Exelon") to acquire all of the issued
and outstanding common stock of PECO Energy Company ("PECO"), an electric and
gas utility company, followed by the merger of Unicom Corporation ("Unicom"), an
exempt holding company whose principal public-utility subsidiary is Commonwealth
Edison Company ("ComEd"), with and into Exelon. The Commission also authorized
ComEd and PECO to transfer all of their generation assets to Exelon Generation
Company, LLC ("Genco"), a new electric utility generating subsidiary of Exelon.
ComEd, PECO and Genco are herein referred to collectively as the "Utility
Subsidiaries."1 The Commission also made findings with respect to Exelon's
retention of the existing nonutility subsidiaries and investments of Unicom and
PECO. The combination of Unicom and PECO was completed on October 20, 2000, and
Exelon filed its notification of registration on Form U5A on the same day.
Exelon's direct subsidiaries include Exelon Ventures Company, LLC
("Ventures"), which in turn holds all of the common stock of Genco and Exelon
Enterprises Company, LLC ("Enterprises"). Enterprises is an intermediate
nonutility holding company that holds many of the existing nonutility
subsidiaries of Unicom and PECO, including, among others, Exelon Infrastructure
Services, Inc. ("EIS") and Exelon Services Inc. (formerly Unicom Mechanical
Services Inc.) ("ES"). EIS, directly and through several wholly-owned
subsidiaries, provides infrastructure services to utilities, pipelines,
telecommunications companies, governmental entities, and other businesses. ES,
directly and through its wholly-owned subsidiaries, designs, builds, tests,
maintains, repairs, and distributes heating, cooling, ventilation, electrical,
building control and security systems and industrial process systems, and
provides related financing, primarily to larger industrial and commercial
customers.
In the Merger Order, the Commission granted EIS and ES a temporary
exemption under Section 13(b) of the Act from the "at-cost" standards of Rules
90 and 91 in order to permit EIS and ES to continue to provide services to
ComEd, PECO, Genco and any other public utility subsidiary of Exelon at market
prices, determined without regard to cost, under existing arrangements entered
into under the Illinois Affiliated Interests Agreement ("AIA") approved by the
Illinois Commerce Commission ("Illinois Commission") and PECO's Mutual Services
Agreement ("MSA") approved by the Pennsylvania Public Utility Commission
("Pennsylvania Commission") and under other individual contracts.2 The Merger
Order specifies that, as of January 1, 2002, these transactions will be
performed at cost in accordance with Rules 90 and 91. EIS and ES are now
requesting a modification to the Merger Order in order to eliminate this
restriction so that EIS and ES may continue to provide services and goods to the
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1 PECO owns all of the stock of three subsidiaries, referred to as the
"Conowingo Companies," that are engaged exclusively in owning and operating a
hydroelectric facility on the Susquehanna River, and ComEd owns all of the stock
of Commonwealth Edison of Indiana, which hold transmission assets located in
Indiana.
2 These existing arrangements were summarized in Exhibit B-3.3 to the
original Application/Declaration in this proceeding.
Utility Subsidiaries at market prices, determined without regard to cost,
subject to certain proposed conditions and limitations that are discussed below.
Section 1.2 Description of EIS and ES and their Current Operations.
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Exelon Infrastructure Services: EIS, directly and through
subsidiaries, provides a wide range of infrastructure services to owners and
operators of electric, gas, cable television and telecommunication networks and
to companies in other asset intensive industries. These services include the
following:
o Development and implementation of preventive and corrective action
maintenance programs, including reliability centered maintenance for
utility transmission and distribution systems, predictive maintenance, and
diagnostic testing and analysis
o Engineering, design and construction of electric, gas and communications
transmission and distribution infrastructure
o Maintenance and construction program management for electric, gas and
communications infrastructure owners
o Turnkey project management for high voltage electric transmission design
and construction projects
o Splicing, installation, repair and other craft services for copper, fiber
and cable communications systems
o System planning, remote operations and control and emergency response
services for electric, gas and communications infrastructure owners.
o Meter installation and reading
EIS and its subsidiaries operate in 46 states, and have more than 8000
employees.
As explained in the original Application/Declaration in this
proceeding, EIS' customer base consists primarily of utilities and other
companies that own and operate large, asset intensive, distribution networks.
Increasingly, these companies are outsourcing to third party providers many of
the design, construction, maintenance and operations functions associated with
their assets. The growth of EIS and of other similar companies has tracked the
trend toward greater outsourcing of these functions. EIS estimates that during
1999 more than $24 billion of infrastructure construction and maintenance work
was outsourced to utility contractors like EIS. This represented an increase of
approximately 14% over 1998 levels. EIS' management expects that this trend will
continue.
The infrastructure services industry is highly competitive and is
served by numerous small, owner-operated private companies, public companies and
several large regional companies. Relatively few barriers prevent entry into
this industry. As a result, any organization that has adequate financial
2
resources and access to technical expertise may become one of EIS' competitors.
Competition in the industry depends on a number of factors, including price. EIS
believes that many of its competitors may have lower overhead cost structures
and may, therefore, be able to provide their services at lower rates than EIS
can. In addition, certain competitors of EIS may have greater financial,
technical and marketing resources than EIS.
Additionally, EIS may encounter intense competition from other
industry "consolidators" that have a business objective similar to that of EIS.
Certain of these entities are well established and have extensive experience in
identifying acquisition opportunities and effecting business combinations
directly or through affiliates. Competition among consolidators to buy a limited
number or an identifiable set of businesses could lead to higher prices being
paid for acquired companies.
EIS also faces competition from the in-house service organizations of
its existing or prospective customers. Electric and gas utility and
telecommunications and cable television service providers typically employ
personnel who perform some of the same types of services that EIS offers.
EIS does not have a captive customer base and is not dependent on any
single customer or contract to assure profitability. No single customer of the
company represented 10% or more of its consolidated revenues in 2000. EIS
estimates that, in 2001 and later years, it will derive about 10% of its
revenues under contracts with the Utility Subsidiaries. That percentage is not
expected to grow and may, in fact, decline, as EIS grows through acquisitions.
EIS enters into contracts principally on the basis of competitive
bids,3 although the final terms, conditions and prices under its contracts are
usually subject to further negotiation with the customer after bid selection.
Although the terms of the company's contracts vary considerably, most are either
on a lump sum basis in which EIS agrees to perform the work for a fixed amount
or on a unit price basis in which EIS agrees to receive payment for units of
work performed. EIS also performs services on a cost-plus and time and materials
basis. The non-price terms of contracts entered into by EIS typically include
quality assurance provisions, warranties and performance commitments that are
backed by performance bonds, liquidated damages, and/or specified penalties for
late performance. Where EIS uses subcontractors on specific jobs, it necessarily
assumes the risks of poor performance or late performance by its subcontractors.
Thus, while the price bid on a particular job will always include a profit
margin, EIS is exposed to the risk of loss through contractual penalties,
warranty service and other claims.
Exelon Services. ES and its subsidiaries provide a variety of energy
products and services and other related services to industrial and commercial
customers. These include:
o Mechanical contracting services (e.g., the design and construction of
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heating, ventilating and air conditioning (HVAC) systems)
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3 EIS estimates that approximately 57% of its revenues in 2001 will be
derived under contracts obtained on the basis of competitive bids.
3
o Mechanical maintenance services (e.g., the maintenance of HVAC and other
----
equipment, including preventative maintenance, full-service proactive
maintenance, and emergency troubleshooting and repair)
o Building security and access control (e.g., the design, installation and
----
servicing of systems that control access to doorways via card-swipes, video
monitoring, and other technology-based solutions to monitoring/controlling
personnel, inventory, etc.)
o Building automation/environmental control services (e.g., monitoring and
----
maintaining temperature or other environmental parameters)
o Plumbing contracting services
o Electrical contracting services
o Lighting retrofits
o Design, installation, and maintenance of on-site generation
o Energy audits
o Performance contracting (e.g., developing projects that include many of the
----
above.
ES and its subsidiaries currently operate in 9 states and employ about
2200 people. ES is currently providing mechanical contracting and maintenance
services and building security and automation/control services to ComEd under
various agreements.
ES' customer base consists primarily of building owners and managers,
property managers, institutional and governmental entities and other businesses.
Increasingly, these companies are outsourcing to third party providers many of
the mechanical, electrical, control and plumbing services required to build and
maintain their assets. The growth of ES and of other similar companies has
tracked the trend toward greater outsourcing of these functions. ES' management
expects that this trend will continue.
The mechanical and electrical services industry is highly competitive
and is served by numerous small, owner-operated private companies, public
companies and several large regional companies. Relatively few barriers prevent
entry into this industry.4 As a result, any organization that has adequate
financial resources and access to technical expertise may become one of ES'
competitors. Competition in the industry depends on a number of factors,
including price.
Additionally, ES may encounter intense competition from other industry
"consolidators" that have a business objective similar to that of ES. Certain of
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4 For example, see Contractor Magazine or Plumbing and Mechanical Magazine
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for a listing of many of the companies that compete with ES in this industry.
4
these entities are well established and have extensive experience in identifying
acquisition opportunities and effecting business combinations directly or
through affiliates. Competition among consolidators to buy a limited number or
an identifiable set of businesses could lead to higher prices being paid for
acquired companies. ES also faces competition from the in-house service
organizations of its existing or prospective customers.
ES does not have a captive customer base and is not dependent on any
single customer or contract to assure profitability. No single customer of the
company represented 10% or more of its consolidated revenues in 2000. As stated
in the original Application/Declaration, ES estimates that, in the first full
year following the Merger, ES and its subsidiaries will derive about 2% of their
revenues under contracts with the Utility Subsidiaries. While ES anticipates
that this percentage will grow, ES does not anticipate that it will ever exceed
20%.
ES enters into contracts principally on the basis of competitive
negotiations and bids,5 although the final terms, conditions and prices under
its contracts are usually subject to further negotiation with the customer after
bid selection. There are several publicly available publications that provide
periodical surveys of labor and construction costs, and methods to estimate the
costs of a particular project.6 ES typically relies upon these sources when
preparing bids. ES commits that when a competitive bidding process is not used
it will charge the Utility Subsidiaries no more than the prices listed in the
relevant publication.
Similarly, there are sources that have prepared model contracts for
many of the types of services that ES performs. The American Institute of
Architects is one such source. It is not uncommon for customers to require that
the model contract developed by this organization be used. ES further commits
that it will use this contract, or other publicly available model contracts, or
ones with substantially similar terms and conditions, for any contracts entered
into with the Utility Subsidiaries.
The non-price terms of these contracts will typically include quality
assurance provisions, warranties and performance commitments that are backed by
performance bonds, liquidated damages, and/or specified penalties for late
performance. Where ES uses subcontractors on specific jobs, it necessarily
assumes the risks of poor performance or late performance by its subcontractors.
Thus, while the price bid on a particular job will always include a profit
margin, ES is exposed to the risk of loss through contractual penalties,
warranty service and other claims.
Section 1.3 Request for Exemption under Section 13(b). EIS and ES
-----------------------------------------
request that the Commission grant an exemption under Section 13(b) from the
"at-cost" standards of Rules 90 and 91 as applied to the performance of any
current or future agreement under which EIS or ES or their respective
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5 In a competitive bid situation, the customer develops specifications
(called "specs") for a project, and then circulates a Request for Proposals to
various competitors who submit bids for what they will charge to complete the
project according to spec. In a competitive negotiation situation, a customer
identifies a project to be done, and then contacts a number of competitors who
compete to design and engineer the project as well as on the basis of price. All
of the contracts that ES currently has with the Utility Subsidiaries (see
Exhibit K-1 to the original Application/Declaration) were awarded on the basis
of a competitive bidding process.
6 RS Means Company develops one such publication. Its website
(www.rsmeans.com) describes the source of the data the company develops, as well
as provides examples for estimating costs.
5
subsidiaries undertake to provide goods or services to any Utility Subsidiary,
if the Utility Subsidiary has procured such goods or services from EIS or ES
pursuant to formal competitive procurement procedures or other competitive
procurement practices that comply with requirements of the Illinois or
Pennsylvania Commission, as applicable, that are designed to prevent cross
subsidization by utility ratepayers. In addition, EIS and ES propose the
following additional limitations (the "Business Limitations") on the amount of
business that they will perform for the Utility Subsidiaries. First, the
revenues from the sale of goods and services to the Utility Subsidiaries will
not exceed 20% of the revenues of EIS and ES from all customers in any calendar
year; and second, payments by any Utility Subsidiary to EIS and ES will not
exceed 20% of such Utility Subsidiary's construction and operations and
maintenance budgets in any calendar year.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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The incremental fees, commissions and expenses incurred or to be
incurred in connection with this Post-Effective Amendment are estimated at not
more than $10,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
--------------------------------
Section 3.1 Generally. EIS' and ES' request to provide services to the
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Utility Subsidiaries at market prices is subject to Section 13(b) of the Act and
Rules 87, 90 and 91 thereunder. Section 13(b) provides that:
"[I]t shall be unlawful for any subsidiary company of any registered
holding company or for any mutual service company, by use of the mails
or any means or instrumentality of interstate commerce, or otherwise,
to enter into or take any step in the performance of any service,
sales, or construction contract by which such company undertakes to
perform services or construction work for, or sell goods to, any
associate company thereof except in accordance with such terms and
prohibitions as the Commission by rules and regulations or order shall
prescribe as necessary or appropriate in the public interest or for
the protection of investors or consumers and to insure that such
contracts are performed economically and efficiently for the benefit
of such associate companies at cost, fairly, and equitably allocated
among such companies. This provision shall not apply to such
transactions as the Commission by rules and regulations or order may
conditionally or unconditionally exempt as being necessary or
appropriate in the public interest or for the protection of investors
or consumers, if such transactions (1) are with any associate company
which does not derive, directly or indirectly, any material part of
its income from sources within the United States and which is not a
public-utility company operating within the United States, or (2)
involve special or unusual circumstances or are not in the ordinary
course of business."
Congress enacted Section 13 to eliminate one of the principal abuses
associated with the use of the holding company structure, namely, the milking of
6
affiliated public-utility companies by subjecting them to excessive charges for
services, equipment and materials.7 As noted in the legislative history:
"[Section 13] is designed to free public-utility companies of the
tribute heretofore exacted from them in the performance of services,
sales, and construction contracts by their holding companies and by
servicing, construction, and other companies controlled by their
holding companies. Such contracts when made freely and openly by the
parties dealing at arms' length are subject to the checks incident to
our competitive system, but when dictated by the holding companies
sitting on both sides of the transaction are one of the most abused
devices of the public-utility holding company system."8
Rule 87 provides, subject to certain limitations, that a subsidiary
company (including an authorized service company subsidiary) of a registered
holding company may render services or construction and sell goods to associate
companies, without prior Commission approval, provided that such transactions
are performed in compliance with Rule 90 and other applicable rules. Rule 88(b)
requires Commission approval for the organization of any subsidiary to act as a
service company. Under Rule 88(b), in order to approve the creation of a service
company subsidiary, the Commission must affirmatively find that it "is so
organized and conducted or to be conducted, as to meet the requirements of
section 13(b) of the Act with respect to reasonable assurance of efficient and
economical performance of services or construction or sale of goods for the
benefit of associate companies, at cost fairly and equitably allocated among
them . . .."
Rule 90(a) provides that, except as permitted by the Commission by
rule or order, a subsidiary company of a registered holding company may not sell
goods or service or construction to any associate company at more than cost as
determined pursuant to Rule 91. Rule 91 states that "a transaction shall be
deemed to be performed at not more than cost if the price (taking into account
all charges) does not exceed a fair and equitable allocation of expenses
(including the price paid for goods) plus reasonable compensation for necessary
capital . . .."
Although Section 13(b) generally requires that intrasystem service,
sales and construction contracts for the provision of services, construction
work and goods be performed "at cost," as determined in accordance with Rules 90
and 91, the Commission has discretion to exempt specified transactions from the
"at cost" requirement in situations involving "special or unusual circumstances"
where the public interest or interest of consumers or investors would not be
harmed. The Commission has exercised its discretion to exempt specified
transactions or categories of transactions from the "at cost" standard through
rules of general applicability as well as by order approving exemptions on a
case by case basis.
For example, Rule 81 exempts "the sale of water, telephone service,
transportation, or other similar commodity or service, the sale of which is
normally subject to public regulation, or to the furnishing of services,
construction, or goods, to a customer, incidentally to such a sale," provided
that the selling company offers "comparable" services, construction or goods to
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7 See Section 1(b)(2) of the Act.
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8 H. Rep. No. 1318, 74th Cong., 1st Sess. (1935), p 19; S. Rep. No. 621,
74th Cong., 1st Sess., (1935), p. 36.
7
other (i.e., non-associate) customers. Rule 90(d), read together with Rule
92(b), exempts from the "at cost" pricing standard sales of "goods produced by
the seller," so long as the price charged does not exceed the price "at which
the purchaser might reasonably be expected to obtain comparable" goods
elsewhere, or to furnish them itself, giving due regard to quality, quantity,
regularity of supply, and other factors entering into the calculation of a fair
price. These two exemptions were intended to permit nonutility subsidiaries of
registered holding companies to engage in specified types of business
transactions with associate companies on market-based pricing terms under
circumstances in which comparability of price and quality of service can be
assured.9 The Commission clearly recognized that, under such circumstances,
public utility subsidiaries will not be subjected to excessive charges for
services or goods in transactions with associate companies resulting from "an
absence of arm's-length bargaining or from restraint of free and independent
competition." (See Section 1(b)(2) of the Act).
The Commission has also routinely granted exemptions by order from the
"at cost" requirement as applied to sales of administrative, operating and
technical services by one nonutility subsidiary of a registered holding company
to other nonutility subsidiaries in the same system, if the purchaser falls into
any one of five different categories and the transactions will not indirectly
affect the costs of any affiliated public utility.10
On a few occasions, the Commission has also granted exemptions from
the "at cost" requirements of Section 13(b) under factual circumstances that are
similar to those presented in this case, that is, where the associate company
purchasing the goods or services was a public-utility subsidiary. The leading
case is New England Electric System, Holding Co. Act Release No. 22309 (Dec. 9,
---------------------------
1981) ("NEES"), in which the Commission authorized a time charter rental of a
----
collier from a joint venture (between a New England Electric System ("NEES")
subsidiary and an unaffiliated third party) to New England Power Company
("NEPCO"), a generating and transmission company in the NEES system, at 90% of a
market rate as determined by comparison to other similar rates charged for like
vessels. NEES participated in the joint venture in part to make a profit and in
part to meet its business needs. NEES also intended to subcharter the collier to
non-affiliates when it was not needed by the NEES system. The market rate was
included in a 24-year contract in which the price would be adjusted periodically
and the parties believed that the pricing structure would still produce an
"attractive" profit for the affiliated joint venture. Although this rate might
have been expected to be passed through by NEPCO to NEES' utility subsidiaries
(and presumably then collected from customers), the Commission granted the
exemption in part because it believed that the Federal Energy Regulatory
Commission ("FERC") would have final authority over the rates NEPCO would charge
to the NEES system utilities.
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9 See Cinergy Corp., et al., Holding Co. Act Release No. 26474 (Feb. 20,
--- ---------------------
1996) (authorizing various transactions related to nonutility district heating
and cooling subsidiary operations, subject to obligation to file reports
containing information sufficient to demonstrate that sales of chilled or hot
water to associate utility company were on terms that are comparable to those
offered to non-associate purchasers of similar thermal products.
10 See e.g., Merger Order, p. 14.
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8
In granting the exemption, the Commission also considered the element
of business risk that the venture was undertaking in order to serve NEPCO.
Specifically, the Commission noted that the expectations of the parties were
based on current assessments of the economics for coal transportation and the
advantages of the new collier, and that unforeseen changes in demand for coal
and technological innovations in coal transportation could result in losses for
the venture.11 Under these circumstances, the Commission concluded that the
market-based pricing formula, which was designed to produce a profit to the
venture and provide a discount for NEPCO, would be appropriate.
Section 3.2 The Requested Exemption is in the Public Interest and Will
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Not Frustrate the Purposes of Section 13(b). The terms and conditions under
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which EIS and ES propose to provide infrastructure and mechanical contracting
services to the Utility Subsidiaries will ensure that the Utility Subsidiaries
obtain the benefits of competition and that EIS and ES will provide these
services to affiliates and non-affiliates alike on comparable terms.
Most of the services EIS and ES provide to their customers, including
all of the services they currently provide to the Utility Subsidiaries, are
under contracts that EIS and ES obtain pursuant to competitive bids or other
competitive procurement procedures. Moreover, as described in Item 1, the
infrastructure and mechanical services industries are very competitive. There
are many competing suppliers in these industries, including many service
providers that are larger and more established than EIS and ES. Thus, while EIS
and ES submit bids on most of the infrastructure and mechanical services jobs
that the Utility Subsidiaries choose to outsource, EIS and ES are not always the
successful bidders. Quite to the contrary, the payments by ComEd and PECO to EIS
and ES account for a relatively small percentage (estimated at less than 5% in
2000) of their total construction and operations and maintenance expenditures.
In addition, transactions between EIS and ES, on the one hand, and
ComEd and PECO, on the other, are regulated by the Illinois Commission and the
Pennsylvania Commission, respectively. Prior to the merger, both Commissions had
allowed such transactions to occur at market prices. Under the Illinois
Commission approval, affiliates may provide services to ComEd at the "prevailing
price," which, as defined in the AIA, means the price that the affiliates charge
nonaffiliates for similar work if such transactions constitute a substantial
portion of the affiliate's total revenues from such transactions. If no such
prevailing price exists, affiliates charge ComEd fully distributed cost, which
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11 See also Yankee Atomic Electric Company, et al., Holding Co. Act Release
--- ---- --------------------------------------
No. 14025 (June 12, 1959), the Commission found "special or circumstances" that
warranted an exemption from the at cost standard of Section 13(b) in connection
with performance under certain research agreements pursuant to which a jointly
owned utility subsidiary would provide accumulated information, records and
experience to its sponsoring utilities in consideration for payments determined
without regard to cost; and Blackhawk Coal Co., Holding Co. Act Release No.
------------------
23834 (Sep. 20, 1985), in which the Commission granted an exemption under
Section 13(b) in connection with sales of coal by a coal mining subsidiary to
its parent utility company. The proposed sales were pursuant to a settlement
agreement that had been approved by FERC under which the price of coal would be
capped at market prices. FERC had determined that the actual cost the subsidiary
was charging the utility to be excessive and entered into the settlement
agreement with the utility, among other things, to establish the price cap and
refund monies to ratepayers. The Commission granted the exemption from Section
13(b), thereby apparently permitting the transactions to be priced below the
coal mining subsidiary's "cost" (although the order does not clearly state that
the market pricing will, in fact, be below "cost"), because of the "immediate
and significant" reduction in rates and the substantial benefit to customers and
investors of the utility.
9
is substantially the same as "cost" as defined in the Act. Under the
Pennsylvania Commission approved Pennsylvania MSA, the pricing of transactions
between PECO and affiliates are subject to the Commission's affiliate
transaction requirements. Pursuant to those requirements, the Pennsylvania
Commission has allowed numerous transactions between EIS and PECO to be
performed at market prices.12
Pursuant to restructuring legislation in both Illinois and
Pennsylvania, both ComEd and PECO have strong incentives to reduce their costs,
and little, if any, ability to pass on unreasonably incurred costs to captive
ratepayers. The Illinois legislature enacted a retail access program for
Illinois in 1997. All of ComEd's non-residential customers are currently
eligible for direct access. All of its residential customers will be eligible by
May 1, 2002. Not only does ComEd face the prospect of a substantial reduction in
its revenues due to customers switching suppliers, ComEd was also required to
reduce its bundled rates to residential customers by 15% in August 1998, and
must reduce those same rates another 5% in October 2001. All of ComEd's other
bundled retail rates are capped through 2004.
Pennsylvania enacted restructuring legislation in 1996. All of PECO's
customers have been eligible for direct access since 1999. Pursuant to the
legislation, PECO was required by the Pennsylvania Commission to reduce its
bundled rates by 8% in 1999, and by a further 6% in 2000. PECO's bundled rates
are capped through 2010, and its transmission and distribution rates are capped
through June 30, 2005. Both caps are subject to certain exceptions.
Thus, ratepayers are fully protected by existing state regulation and
legislation.
Moreover, the proposed Business Limitations will assure that EIS' and
ES' profitability will not become dependent upon the volume of business it does
with the Utility Subsidiaries and, likewise, that the Utility Subsidiaries will
not become unduly dependent for critical services on EIS and ES. Hence, this is
not a case in which the success of a new nonutility business venture will depend
solely, or even primarily, upon revenues derived from "captive" associate
utility companies. In this respect, the proposed Business Limitations (in
conjunction with the competitive procurement, pricing and contracting practices
that the Utility Subsidiaries will use and the rate caps and state commission
oversight) will effectively prevent any opportunity for cross-subsidization of
EIS and ES at the expense of the Utility Subsidiaries.
The Commission should also recognize here, as it did in NEES, the
element of business risk that EIS and ES undertake in providing infrastructure
and mechanical contracting services to its customers, including the Utility
Subsidiaries. As indicated, like most other infrastructure and mechanical
services companies, EIS and ES typically must provide warranties and performance
guarantees, which often must be backed by performance bonds, liquidated damages
and the like. In fact, bids on infrastructure and mechanical services are often
won or lost on the basis of such "non-price" terms. It would be unrealistic to
expect EIS and ES to limit their charges for work performed for the Utility
Subsidiaries to recovery of their "costs," when, under the terms of agreements,
they are subject to potential penalties, late charges, warranty claims and the
like which could expose them to substantial losses.
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12 These contracts were filed as exhibits to the original Merger
application. See Exhibit K-1, Exhibits 14-15 and 17-20.
10
In contrast, under the typical "at cost" based service arrangements
between associate companies in a registered holding company system, the service
provider (for example, a subsidiary service company) generally does not provide
warranties or back its performance with liquidated damages, performance bonds or
the like, or agree to accept any significant business risks associated with
either the quality or timeliness of its performance of services or the products
it sells.13 In contrast, vendors of construction or maintenance services in the
competitive marketplace usually accept these risks. A vendor who provides
warranties and/or performance guaranties would not be adequately compensated for
the business risks taken if it were limited to charging "cost." The element of
risk taken by the seller of goods or services is one that the Commission
specifically considered in granting an exemption under Section 13(b) in NEES.
----
If, after December 31, 2001, EIS and ES are limited to charging "cost"
for the infrastructure and mechanical contracting services they provide to the
Utility Subsidiaries, the likely result is that they will simply decline to bid
for work that the Utility Subsidiaries may choose to outsource. That would have
the unintended consequence of reducing competition for infrastructure and
mechanical contracting services, which could, in some cases, lead to higher
prices for the Utility Subsidiaries.
Also, it must be recognized that Exelon has made a series of
acquisitions of both infrastructure and mechanical contracting services
companies in order to establish itself as a major service provider in these
businesses with a national scope of operations. EIS and ES both compete with
other similar companies that are not subject to the restraints of the Act. Under
these circumstances, a rigid insistence upon the use of "at cost" pricing by EIS
and ES would be fundamentally unfair to Exelon's investors and would not produce
any offsetting benefit to the Utility Subsidiaries or their customers.
The Commission should also recognize that there is a fundamental
distinction between companies like EIS and ES, which engage in a competitive
business on a national scale and derive only a small part of their revenues from
transactions with associate companies, and a service company subsidiary, which
is organized specifically to provide services to associate companies at cost
fairly and equitably allocated. In effect, a service company has a "captive"
customer base from which it derives all or almost all of its revenues, and it is
typically obligated to provide enumerated categories of services to its
associate companies upon request. Moreover, as indicated, it is not enough that
a service company limit its charges to its associate companies to cost fairly
and equitably allocated. The Commission must also affirmatively find that a
service company is so organized and conducted as to be able to render services
efficiently and economically. The Commission reviews service company performance
on an ongoing basis to assure that these statutory requirements are met.
In contrast, EIS and ES have no obligation to provide any services to
the Utility Subsidiaries, and the Utility Subsidiaries have no obligation to
purchase any services from EIS or ES. Moreover, the Commission does not, nor
would it have any reason to, monitor the organization and cost structure of a
- ------------------------
13 In many of the Commission-approved service agreements that we have
reviewed, the service company's only obligation for poor performance is to
reperform the work, at cost.
11
company like EIS or ES to ensure that it is an efficient and economic provider
of goods and services to its associate companies. Instead, the capabilities of
EIS and ES and their associated cost structures are largely determined by the
competitive marketplace in which they participate.
Section 3.3 Rule 54 Analysis. The proposed transaction is also subject
----------------
to Section 32 of the Act and Rule 54 thereunder. Rule 54 provides that, in
determining whether to approve any transaction that does not relate to an EWG or
"foreign utility company" ("FUCO"), as defined in Section 33, the Commission
shall not consider the effect of the capitalization or earnings of any
subsidiary that is an EWG or FUCO upon the registered holding company system if
paragraphs (a), (b) and (c) of Rule 53 are satisfied.
Exelon's "aggregate investment," as defined in Rule 53(a)(1)(i), in
all EWGs and FUCOs at December 31, 2000 was $744 million. By order dated
December 8, 2000 (Holding Co. Act Release No. 27296), the Commission has
authorize Exelon to use the proceeds of financings to make investments in EWGs
and FUCOs so long as its "aggregate investment" in such entities does not exceed
$4 billion. Exelon's investments in EWGs and FUCOs are within this limit.
In addition, Exelon has complied and will comply with the
record-keeping requirements of Rule 53(a)(2), the limitation under Rule 53(a)(3)
on the use of its domestic public-utility subsidiaries' personnel to render
services to EWGs and FUCOs, and the requirements of Rule 53(a)(4) concerning the
submission of copies of certain filings under the Act to retail regulatory
commissions. Finally, none of the circumstances described in Rule 53(b) has
occurred or is continuing.
ITEM 4. REGULATORY APPROVALS.
--------------------
No state commission and no federal commission, other than this
Commission, has jurisdiction over the proposed exemption.
ITEM 5. PROCEDURE.
---------
Exelon requests that the Commission issue a notice to the public with
respect to the exemption proposed herein as soon as practicable and that an
order be issued as soon as the Commission's rules allow. It is further requested
that: (i) there not be a recommended decision by an administrative law judge or
other responsible officer of the Commission, (ii) the Division of Investment
Management be permitted to assist in the preparation of the Commission's
decision, unless said Division opposes the matters proposed herein and (iii)
there be no waiting period between the issuance of the Commission's order and
the date on which it is to become effective.
12
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
(a) EXHIBITS:
--------
L-2 - Form of Federal Register Notice.
(b) FINANCIAL STATEMENTS:
--------------------
(Not applicable)
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
The proposed exemption is not a major Federal action significantly
affecting the quality of the human environment. No Federal agency has prepared
or is preparing an environmental impact statement with respect to the proposed
transactions, which are the subject hereof.
SIGNATURES
----------
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned companies have duly caused this statement to be signed
on their behalves by the undersigned thereunto duly authorized.
EXELON CORPORATION
By:/s/ Randall Mehrberg
----------------
Name: Randall Mehrberg
Title: Senior Vice President and General
Counsel
EXELON INFRASTRUCTURE SERVICES, INC.
By:/s/ Harvey B. Dikter
----------------
Name: Harvey B. Dikter
Title: Senior Vice President and General
Counsel
EXELON SERVICES, INC.
By:/s/ Kenneth H. Beard
----------------
Name: Kenneth H. Beard
Title: President
Date: April 4, 2001
13
Exhibit L-2
PROPOSED FORM OF FEDERAL REGISTER NOTICE
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
-----
Filings under the Public Utility Holding Company Act of 1935, as amended
("Act")
April , 2001
--
Notice is hereby given that the following filing(s) has/have been made with
the Commission pursuant to provisions of the Act and rules promulgated
thereunder. All interested persons are referred to the application(s) and/or
declaration(s) for complete statements of the proposed transaction(s) summarized
below. The application(s) and/or declaration(s) and any amendments thereto
is/are available for public inspection through the Commission's Office of Public
Reference.
Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in writing by May
, 2001 to the Secretary, Securities and Exchange Commission, 450 5th Street,
- --
N.W., Washington, D.C. 20549, and serve a copy on the relevant applicant(s)
and/or declarant(s) at the address(es) as specified below. Proof of service (by
affidavit or, in case of an attorney at law, by certificate) should be filed
with the request. Any request for hearing shall identify specifically the issues
of fact or law that are disputed. A person who so requests will be notified of
any hearing, if ordered, and will receive a copy of any notice or order issued
in the matter. After May , 2001, the application(s) and/or declaration(s), as
--
filed or as amended, may be granted and/or permitted to become effective.
* * * * * *
EXELON CORPORATION, ET AL. (70-9645)
-------------------------
Exelon Corporation ("Exelon"), a registered holding company whose principal
executive offices are at 10 South Dearborn Street, 37th Floor, Chicago, Illinois
60603, and two of its indirect non-utility subsidiaries, Exelon Infrastructure
Services, Inc. ("EIS") and Exelon Services Inc. ("ES"), have filed a
post-effective amendment to the application-declaration in this proceeding
designating Section 13(b) of the Public Utility Holding Company Act of 1935, as
amended (the "Act"), as applicable to the proposed transaction.
By order dated October 19, 2000 in this proceeding (Holding Co. Act Release
No. 27256) (the "Merger Order"), the Commission authorized Exelon to acquire all
of the issued and outstanding common stock of PECO Energy Company ("PECO"), an
electric and gas utility company, followed by the merger of Unicom Corporation
("Unicom"), an exempt holding company whose principal public-utility subsidiary
is Commonwealth Edison Company ("ComEd"), with and into Exelon. The Commission
1
also authorized ComEd and PECO to transfer all of their generation assets to
Exelon Generation Company, LLC ("Genco"), a new electric utility generating
subsidiary of Exelon. ComEd, PECO and Genco are herein referred to collectively
as the "Utility Subsidiaries."1
EIS directly and through several wholly-owned subsidiaries, provides
infrastructure services to utilities, pipelines, telecommunications companies,
governmental entities, and other businesses. ES, directly and through its
wholly-owned subsidiaries, designs, builds, tests, maintains, repairs, and
distributes heating, cooling, ventilation, electrical, building control and
security systems and industrial process systems, and provides related financing,
primarily to larger industrial and commercial customers.
In the Merger Order, the Commission granted EIS and ES a temporary
exemption under Section 13(b) of the Act from the "at-cost" standards of Rules
90 and 91 in order to permit EIS and ES to continue to provide services to the
Utility Subsidiaries at market prices, determined without regard to cost, under
existing arrangements entered into under the Illinois Affiliated Interests
Agreement ("AIA") approved by the Illinois Commerce Commission ("Illinois
Commission") and PECO's Mutual Services Agreement ("MSA") approved by the
Pennsylvania Public Utility Commission ("Pennsylvania Commission") and under
other individual contracts. The Merger Order specifies that, as of January 1,
2002, these transactions will be performed at cost in accordance with Rules 90
and 91.
EIS and ES are now requesting a modification to the Merger Order in order
to eliminate this restriction so that EIS and ES may continue to provide
services and goods to the Utility Subsidiaries at market prices, determined
without regard to cost, subject to certain proposed conditions and limitations.
Specifically, EIS and ES request that the Commission grant an exemption under
Section 13(b) from the "at-cost" standards of Rules 90 and 91 as applied to the
performance of any current or future agreement under which EIS or ES or their
respective subsidiaries undertake to provide goods or services to any Utility
Subsidiary if the Utility Subsidiary has procured such goods or services from
EIS or ES pursuant to formal competitive procurement procedures or other
competitive procurement practices that comply with requirements of the Illinois
or Pennsylvania Commission, as applicable, that are designed to prevent cross
subsidization by utility ratepayers. In addition, EIS and ES propose the
following additional limitations (the "Business Limitations") on the amount of
business that they may perform for the Utility Subsidiaries. First, the revenues
- ------------------------
1 PECO owns all of the stock of three subsidiaries, referred to as the
"Conowingo Companies," that are engaged exclusively in owning and operating a
hydroelectric facility on the Susquehanna River, and ComEd owns all of the stock
of Commonwealth Edison of Indiana, which hold transmission assets located in
Indiana.
2
from the sale of goods and services to the Utility Subsidiaries will not exceed
20% of the revenues of EIS and ES from all customers in any calendar year; and
second, payments by any Utility Subsidiary to EIS and ES will not exceed 20% of
such Utility Subsidiary's construction and operations and maintenance budgets in
any calendar year.
EIS and ES state that the terms and conditions under which they propose to
provide infrastructure and mechanical contracting services to the Utility
Subsidiaries will ensure that the Utility Subsidiaries obtain the benefits of
competition and that EIS and ES will provide these services to affiliates and
non-affiliates alike on comparable terms. Among other things, EIS and ES
represent that most of the services EIS and ES provide to their customers,
including all of the services they currently provide to the Utility
Subsidiaries, are under contracts that EIS and ES obtain pursuant to competitive
bids or other competitive procurement procedures. EIS and ES further note that
they compete for the Utility Subsidiaries' business with many other suppliers of
infrastructure and mechanical contracting services and that revenues from the
Utility Subsidiaries account for a relatively small percentage (estimated at
less than 5% in 2000) of their total construction and operations and maintenance
expenditures.
EIS and ES also state that the transactions they enter into with ComEd and
PECO are regulated by the Illinois Commission and the Pennsylvania Commission,
respectively, and that, prior to the merger, both Commissions had allowed such
transactions to occur at market prices. Further, EIS and ES assert that,
pursuant to restructuring legislation in both Illinois and Pennsylvania, both
ComEd and PECO have strong incentives to reduce their costs, and little, if any,
ability to pass on unreasonably incurred costs to captive ratepayers.
Accordingly, EIS and ES state that ratepayers are fully protected by existing
state regulation and legislation.
Further, EIS and ES assert that the proposed Business Limitations will
assure that the profitability of such companies will not become dependent upon
the volume of business either company does with the Utility Subsidiaries and,
likewise, that the Utility Subsidiaries will not become unduly dependent for
critical services on EIS and ES.
Lastly, EIS and ES state that an exemption from Section 13(b) of the Act is
appropriate in this case because the "at-cost" requirements would not adequately
compensate either company for the business risk that they undertake in providing
infrastructure and mechanical contracting services to the Utility Subsidiaries.
In this regard, EIS and ES state that they typically must provide warranties and
performance guarantees, which often must be backed by performance bonds,
liquidated damages and the like.
3