U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission


(Release No. 35-27765; 70-9899)

Conectiv, et al.

Supplemental Order Releasing Jurisdiction Over the Issuance of Transition Bonds; Reserving Jurisdiction

November 19, 2003

Conectiv, a registered holding company, PHI Service Company ("PHI Service"), both wholly owned subsidiaries of Pepco Holdings, Inc. ("PHI"), a registered holding company, Atlantic City Electric Company ("ACE"), a public utility subsidiary of Conectiv, and Atlantic City Electric Transition Funding LLC ("ACE Transition Funding" or "Special Purpose Issuer"), all located in Wilmington, Delaware (collectively, "Applicants") have filed with the Securities and Exchange Commission ("Commission"), a post-effective amendment ("Amendment") to an application-declaration ("Application") previously filed under sections 6(a), 7, 9(a), 10, 12(b), 12(d), 12(f), 12(g) and 13(b) of the of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 42, 43, 45, 90, 91 and 54 under the Act. The Commission issued a notice of the underlying Application in this matter on October 26, 2001 (HCAR No. 27458).

I. Background

A. Merger

On February 9, 2001, Conectiv and Potomac Electric Power Company ("Pepco"), an electric and gas utility company, entered into an agreement and plan of merger ("Merger").1 Conectiv and Pepco consummated the Merger on August 1, 2002, which resulted in the formation of Pepco Holdings, Inc. ("PHI"), which registered as a holding company under the Act. Subsequent to the Merger, Applicants state that Conectiv remains a registered holding company under the Act and the parent of, among others, ACE, an electric utility company. ACE is the parent of ACE Transition Funding, a financing subsidiary established for the sole purpose of issuing transition bonds ("Transition Bonds").

B. Transition Bonds

The proposals set forth in the Application relate to recovery of stranded costs resulting from the restructuring of the electric utility industry by the State of New Jersey. As of December 31, 2001, ACE served approximately 509,000 customers in its service territory, covering an area of about 2,700 square miles in the southern one-third of New Jersey. ACE reported net income after extraordinary items of $75.5 million on revenue of $1.041 billion for the year ended December 31, 2001.

The New Jersey Electric Discount and Energy Competition Act ( "Competition Act"), was signed into law in February 1999. The Competition Act provides, among other things, for the restructuring of the electric utility industry in New Jersey. The Competition Act requires the unbundling of electric services into separate generation, transmission and distribution services with open retail competition for generation services. The Competition Act provides for utilities to recover the anticipated loss in value of their generation-related assets and the costs incurred under power purchase contracts with nonutility generators of electricity that are not recoverable under market rates. The Competition Act also provides for the recovery of these stranded costs through a non-bypassable charge included in customers' bills ("Market Transition Charge").

The Competition Act authorizes a utility to securitize its right to recover stranded costs through the issuance of Transition Bonds by the electric public utility or other financing entity approved by the New Jersey Board of Public Utilities ("BPU"). To the extent a utility's right to recover stranded costs is securitized, a portion of the Market Transition Charge is replaced by a non-bypassable irrevocable charge included in customers' electric bills ("Transition Bond Charge"), which is designed to meet the costs of paying the principal of and interest on the Transition Bonds and the costs associated with the issuance, credit enhancing, and servicing of the Transition Bonds. The Competition Act also authorizes the recovery of a related Market Transition Charge tax component (the "MTC Tax"). The right to charge, collect, and receive the Transition Bond Charge, as well as the MTC Tax, constitute "Bondable Transition Property." In order to facilitate the issuance of Transition Bonds, ACE formed the Special Purpose Issuer March 28, 2001, under a limited liability company agreement with ACE as its sole member, and acquired its securities under authority granted through prior Commission orders.

The Competition Act authorizes the BPU to issue a "bondable stranded costs rate order," such as a BPU financing order, approving, among other things, the issuance of Transition Bonds to recover bondable stranded costs and related expenses of a public electric utility. A utility, a finance subsidiary of a utility, or a third-party assignee of a utility may issue Transition Bonds.

On June 25, 2001, ACE filed a petition with the BPU, which was supplemented on August 19, 2002, requesting issuance by the BPU of a bondable stranded costs rate order under the Competition Act to allow ACE to monetize its bondable stranded costs, plus associated transaction costs and the cost of retiring its debt or equity or both. The final structure, pricing and other terms of the Transition Bonds is subject to the approval of the BPU or its designee. On September 20, 2002, the BPU issued an order authorizing the issuance of $440 million of Transition Bonds.

Applicants state that by order dated October 28, 2002 HCAR No. 27588 ("Securitization Order") the Commission authorized through May 31, 2006 (" Authorization Period"):

  1. ACE to sell, pledge or assign Bondable Transition Property to the Special Purpose Issuer from time to time in exchange for the net proceeds from the sale of a series of Transition Bonds;
  2. the Special Purpose Issuer to issue and sell Transition Bonds from time to time, pursuant to an underwriting agreement, in an aggregate principal amount up to $440 million, with a reservation of Commission jurisdiction on an amount up to $1.7 billion, to be authorized and approved by the BPU;
  3. the Special Purpose Issuer to enter into interest rate swaps, interest rate hedging programs, and credit enhancement arrangements to reduce interest rate credit risks with respect to, and to facilitate the issuance of, Transition Bonds;
  4. ACE to act as the servicer of the Bondable Transition Property and enter into a servicing agreement under which ACE or an affiliate will perform services for the Special Purpose Issuer and receive compensation determined on a market basis rather than the "at cost" standard of section 13(b) of the Act;
  5. ACE, PHI Service or any successor entity, or another affiliate to act as administrator for the Special Purpose Issuer and enter into an administration agreement. The Special Purpose Issuer will pay a fee for these services which will be equal to a market rate fee rather than the "at cost" standard of section 13(b) of the Act;
  6. The Special Purpose Issuer to use the proceeds from the Transition Bonds to pay the expenses of issuance and to purchase the Bondable Transition Property from ACE and ACE to use these proceeds principally to reduce stranded costs through the retirement of debt or equity or both, and/or to finance or refinance the cost of buying down and /or buying out long-term power purchase contracts;
  7. ACE to enter into the indemnity provisions of a sale agreement, through which it may indemnify the Special Purpose Issuer and related parties under the terms of the sale agreement; for ACE, as servicer, to enter into the indemnity provisions of a servicing agreement through which it may indemnify the Special Purpose Issuer and related parties under the terms of the servicing agreement; for ACE, PHI Service, or any successor entity or another affiliate, as administrator, to enter into the indemnity provisions of an administration agreement through which it may indemnify the Special Purpose Issuer under the terms of the administration agreement; and for the Special Purpose Issuer to enter into the indemnity provisions of its limited liability company agreement through which it may indemnify ACE and other parties under the limited liability company agreement; and
  8. ACE to make capital contributions to the Special Purpose Issuer and receive interest and other investment earnings.

Applicants state that under the authority provided in the Securitization Order, on December 19, 2002, ACE sold $440 million of Bondable Transition Property to ACE Transition Funding under a Bondable Transition Property Sale Agreement in exchange for the net proceeds of the issuance of Transition Bonds. Applicants further state that ACE Transition Funding issued and sold $440 million of Transition Bonds under an Indenture between ACE Transition Funding and The Bank of New York, as Trustee. Applicants state that ACE entered into a Bondable Transition Property Agreement with ACE Transition Funding appointing ACE to act as servicer of the Transition Property. Finally, Applicants state that ACE Transition Funding entered into an Administration Agreement with PHI Service under which PHI Service would act as administrator for ACE Transition Funding.

II. Current Request

Applicants now state that by order dated September 25, 2003, the BPU granted ACE authority to issue Transition Bonds in an additional amount of up to $152 million through the Authorization Period. Applicants request that the Commission release jurisdiction over an additional $152 million in Transition Bonds, authorize ACE Transition Funding to issue $152 million in additional Transition Bonds on the terms and conditions in the Securitization Order as described above, and continue to reserve jurisdiction over the remaining $1,108 million in Bonds.

III. Rule 54 Analysis

Applicants state that Pepco Holdings, Inc ("PHI"), Applicants' parent company satisfies all of the conditions of rule 53 except rule 53(a)(1). Applicants state that as of June 30, 2003, PHI's aggregate investment as defined in rule 53(a)(1) was $1.8 million. By order dated July 31, 2002 (HCAR No. 27577), the Commission authorized PHI to invest up to 100% of PHI's retained earnings plus $3.5 billion in exempt wholesale generators ("EWGs"), as that term is defined in section 32 of the Act, and foreign utility companies ("FUCOs"), as that term is defined in section 33 of the Act. Applicants state that as of June 30, 2003, PHI's retained earnings were $771.2 million making PHI's maximum investment in EWGs and FUCOs equal to $4,271.2 million. Thus PHI is operating within the confines of its EWG and FUCO investment authority.

Applicants state that PHI currently complies with, and will comply with, the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of the PHI system's domestic public utility company 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. Further, Applicants state that none of the circumstances described in rule 53(b) has occurred or is continuing.

Applicants state that the issuance of an additional $152 million in Transition Bonds will not require any of the Applicants to seek relief from their obligations, incurred in conjunction with previous Commission orders. Applicants state that as of June 30, 2003, PHI's common equity ratio was 31.1%, Conectiv's common equity ratio was 26.7% and ACE's common equity ratio was 37.6%. Applicants state that the Transition Bond issuance will also not affect any of PHI's outstanding applications with the Commission.

Applicants estimate that through the issuance of the Transition Bonds, it will incur approximately $2,500,000 in legal, financial, and other transaction related fees. These fees represent approximately 1.6% of the total value of the $152 million in Transition Bonds. Applicants maintain that no other state or federal commission, other than this Commission and the BPU, has jurisdiction over the proposed transactions.

Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that, except as to the matter over which jurisdiction has been reserved, the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, that jurisdiction is released over the issuance by ACE of $152 million in Transition Bonds.

IT IS FURTHER ORDERED, under the applicable provisions of the Act and rules under the Act, that, except as to those matters over which jurisdiction has been reserved, the Application be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act; and

IT IS FURTHER ORDERED that jurisdiction continues to be reserved over the issuance of the remaining $1.108 billion of Transition Bonds until the record is complete.

For the Commission, by the Division of Investment Management, pursuant delegated authority.

Margaret H. McFarland
Deputy Secretary



Modified: 11/19/2003