U-1 1 u-1applicationbasic.txt (As filed with the Securities and Exchange Commission November 2, 2000) File No. 70-_______ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM U-1 APPLICATION OR DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 Madison Gas and Electric Company 133 South Blair Street P.O. Box 1231 Madison, Wisconsin 53701-1231 (Names of companies filing this statement and addresses of principal executive offices) None (Name of top registered holding company parent) Mark C. Williamson Executive Vice President and Chief Strategic Officer Madison Gas and Electric Company 133 South Blair Street P.O. Box 1231 Madison, Wisconsin 53701-1231 (Name and address of agent for service) The Commission is requested to send copies of all notices, orders and communications in connection with this matter to: Lee Cullen Gary Mathis Cullen Weston Pines & Bach LLP Madison Gas and Electric Co. 122 West Washington Avenue 133 South Blair Street Suite 900 P.O. Box 1231 Madison, WI 53703 Madison, WI 53701-1231 Ph: (608) 251-0101 Ph: (608) 252-7000 Fax: (608) 251-2883 Fax: (608) 252-7098 E-mail: cullen@cwpb.com E-mail: gmathis@mge.com TABLE OF CONTENTS Page ITEM 1: DESCRIPTION OF PROPOSED TRANSACTION . . . . . . . . 3 A. Introduction and Request for Commission Action. . . 3 1. Description of MGE. . . . . . . . . . . . . . . . . 4 2. Description of MGE's Non-Utility Subsidiaries . . . 5 B. Transco Legislation . . . . . . . . . . . . . . . . 6 C. Transco Operations and Organization . . . . . . . . 8 D. Transferred Properties . . . . . . . . . . . . . . 11 E. Related Orders and Applications Pertaining to the Establishment of the Transco and Corporate Manager. . . . . . . . . 13 ITEM 2: FEES, COMMISSIONS AND EXPENSES . . . . . . . . . . 14 ITEM 3: APPLICABLE STATUTORY PROVISIONS. . . . . . . . . . 14 A. Section 10 Standards . . . . . . . . . . . . . . . 15 1. Section 10(b). . . . . . . . . . . . . . . . . . . 15 a. Section 10(b)(1). . . . . . . . . . . . . . . 15 b. Section 10(b)(2). . . . . . . . . . . . . . . 16 i. Fairness of Consideration. . . . . . . . 16 ii. Reasonableness of Fees . . . . . . . . . 17 c. Section 10(b)(3). . . . . . . . . . . . . . . 17 2. Section 10(c). . . . . . . . . . . . . . . . . . . 17 a. Section 10(c)(1). . . . . . . . . . . . . . . 18 b. Section 10(c)(2). . . . . . . . . . . . . . . 18 (i) Efficiencies and Economies . . . . . . . 18 (ii) Integrated Public Utility System . . . . 19 (a) Physical Interconnection . . . . . . . . 20 (b) Single Interconnected and Coordinated System . . . . . . . . . . .20 (c) Single Area or Region. . . . . . . . . . 21 (d) Localized Management, Efficient Operation and Effective Regulation . . . 21 3. Section 10(f). . . . . . . . . . . . . . . . . . . 22 ITEM 4: REGULATORY APPROVALS . . . . . . . . . . . . . . . 23 ITEM 5: PROCEDURE. . . . . . . . . . . . . . . . . . . . . 23 ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS. . . . . . . . . 24 A. Exhibits . . . . . . . . . . . . . . . . . . . . . 24 B. Financial Statements . . . . . . . . . . . . . . . 25 ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS. . . . . . 26 ITEM 1: DESCRIPTION OF PROPOSED TRANSACTION A. Introduction and Request for Commission Action Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding Company Act of 1935, as amended (the "Act"), Madison Gas and Electric Company ("MGE"), a Wisconsin corporation, hereby requests authorization for a transaction, as described in further detail below, in which: (i) MGE will transfer ownership and control over its transmission assets to American Transmission Company LLC ("ATC" or the "Transco"), a Wisconsin limited liability company formed on June 12, 2000, which will be a single-purpose transmission company; (ii) MGE will receive, in exchange for such transfer, member units of the Transco in proportion to the value of the transmission assets contributed; (iii) MGE will purchase Class A shares of ATC Management Inc. (the "Corporate Manager"), a Wisconsin corporation formed on June 12, 2000, in proportion to the value of the transmission assets contributed; and (iv) MGE will purchase one Class B share of the Corporate Manager. As explained in Section E below, this request for Commission action is made in conjunction with several other such requests by other parties related to the formation of the Transco. In 1999, the State of Wisconsin enacted legislation that facilitates the formation of a single-purpose transmission company such as the Transco. As explained in more detail below, that legislation, among its other provisions, encourages public utility affiliates of Wisconsin utility holding companies to transfer ownership of their transmission assets to a transmission company. The legislation does so by adjusting the calculation of an existing limit on the amount of unregulated (or non-utility) investments these holding companies and their affiliates can make, after the transfer of assets to the Transco. The Transco will be managed by the Corporate Manager, which will also hold a portion of the Transco's membership interests. All participants in the Transco will ultimately own a direct or indirect interest in the Transco and the Corporate Manager in proportion to the value of the transmission assets or cash each participant contributes to the Transco (except Edison Sault and South Beloit Water, Gas & Electric Company, which are not expected to invest in the Corporate Manager). In addition to MGE the initial participants in the Transco will be Wisconsin Public Power Inc. ("WPPI"), Wisconsin Public Service Corporation ("WPS"), Wisconsin Electric Power Company ("WEPCO"), Edison Sault Electric Company ("Edison Sault"), Wisconsin Power and Light Company ("WPL"), South Beloit Water, Gas and Electric Company ("South Beloit"), and the Corporate Manager. [N1 - The Commission, in HCAR No. 27206 (Aug. 2, 2000) authorized, among other things, WPL to become a member of the Transco and to acquire shares of the Corporate Manager.] All utilities participating in the Transco are referred to herein as "Member Utilities". Other transmission-owning utilities may, in the future, decide to become members of the Transco, as may certain non-transmission-owning utilities, based on their load- ratio shares. MGE intends to contribute its transmission assets to the Transco on or about January 1, 2001. [N2 - Wisconsin law contemplates that the transfer of the transmission assets to the Transco will occur by January 1, 2001.] 1. Description of MGE MGE is a Wisconsin corporation organized in 1896, that generates, transmits and distributes electricity in Dane County, Wisconsin in an area covering approximately 250 square miles. MGE also purchases, transports and distributes natural gas throughout a 1,325 square mile area located in seven Wisconsin counties: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and Vernon. MGE is a "public utility" pursuant to PUHCA Sec. 2(a)(5) and is both an "electric utility" and a "gas utility" pursuant to Sections 2(a)(3) and (4). However, MGE is currently not a utility holding company. Moreover, although MGE will be an initial member of the Transco, it is not expected to own a 10% or greater interest in either the Transco or the Corporate Manager, and thus will not become a utility holding company. The Public Service Commission of Wisconsin ("Wisconsin Commission") regulates MGE's rates, accounts, issuance of securities, plant and transmission line siting, and other aspects of its business. The Federal Energy Regulatory Commission ("FERC") has jurisdiction, under the Federal Power Act, over MGE's transmission facilities, wholesale transactions, certain accounting practices and certain other aspects of MGE's business. The Nuclear Regulatory Commission ("NRC") has jurisdiction over operation of the Kewaunee Nuclear Power Plant (Kewaunee). MGE has a 17.8% ownership interest in Kewaunee. The other owners are Wisconsin Public Service Corporation ("WPSC"), which operates Kewaunee, and Wisconsin Power and Light Company. As of December 31, 1999, MGE supplied electric service to approximately 125,000 customers, of whom 112,000 were located in the cities of Fitchburg, Madison, Middleton and Monona, and 13,000 in adjacent areas. Of the total number of customers, approximately 108,000 were residential and 17,000 were commercial and industrial. Electric revenues for 1999 were derived from sales to the following classes of customers: residential (35%), commercial (47%), industrial (7%), public authorities including the University of Wisconsin (7%), and sales to other utilities (4%). Electric operations accounted for 68% of MGE's total 1999 revenues. MGE is a member of Mid-America Interconnected Network, Inc. ("MAIN"), a regional reliability group. MAIN members work together to better utilize reserve generating capacity and coordinate long-range system planning and day-to-day operations. MAIN seeks to maintain adequate planning generation reserve margins in the region, ranging from 15% to 22%. MGE is also a member of the Mid-Continent Area Power Pool ("MAPP") Regional Transmission Committee ("RTC"). RTC members pool their transmission systems allowing each member to easily access economical energy across the Upper Midwest. Each member is then compensated for the energy flows on their individual transmission system. MGE also owns and controls approximately 636 MW of net generating capability, and 306 miles of transmission lines and radials. In addition to its electric operations, as of Dec. 31, 1999, MGE supplied natural gas service to approximately 111,000 customers in the cities of Elroy, Madison, Middleton, Monona, Fitchburg, Lodi, Verona and Viroqua; 22 villages; and all or parts of 41 townships. Gas revenues for 1999 comprised of residential (57%), commercial (32%), industrial (4%) and other (7%). Transportation service accounted for slightly more than 3% of the total 1999 gas revenues. Gas operations accounted for 32% of MGE's total revenues. MGE's gas facilities include 1,955 miles of distribution mains. MGE has physical interconnections with both ANR Pipeline Company (ANR) and Northern Natural Gas Company (NNG). MGE's primary service territory, which includes Madison and the surrounding area, receives deliveries at four ANR and one NNG gate station. MGE also receives deliveries at NNG gate stations located in Viroqua and Elroy and in Crawford County. Interconnections with two major pipelines provide competition in interstate pipeline service and a more reliable and economical supply mix, which includes gas from Canada and the U.S. Mid- Continent and Gulf/Offshore regions. 2. Description of MGE's Non-Utility Subsidiaries MGE wholly owns the following subsidiaries. MAGAEL INC., which holds title to property acquired by the Company for future utility plant expansion and nonutility property. Central Wisconsin Development Corporation, which assists new and expanding businesses throughout Central Wisconsin by participating in planning, financing, property acquisition, joint ventures, and associated activities. Great Lakes Energy Corp. - Inactive. As of Dec. 31, 1999, Great Lakes Energy Corp. owned 100% of the voting securities of American Energy Management, Inc., an inactive Wisconsin Corporation. Wisconsin Resources Corporation - Inactive. North Central Technologies, Inc. - Inactive. Mid America Technologies, Inc. - Inactive. B. Transco Legislation In 1999, the State of Wisconsin enacted legislation that facilitates the formation of the Transco as a for-profit single- purpose transmission company. [N3 - 1999 Wisconsin Act 9, Secs. 2335 tr to 2335 uh (Assembly Amendment to Assembly Subcommittee Amendment 1 to 1999 Assembly Bill 133) (the "Transco Legislation").] In its proposed tariff, the Transco will charge a single system-wide average network rate to be phased in over 5 years in accordance with the Transco Legislation, and a single system-wide average point-to-point rate for "through and out" service. [N4 - The ATC filed its proposed tariff with the FERC on July 31, 2000 in Docket No. ER00-3316-000.] Key benefits of the Transco include the elimination of rate "pancaking" among the Transco members' multiple transmission systems; one-stop shopping for transmission and wholesale distribution services over multiple transmission systems; the reduction of operational barriers within the Transco service area; and the transfer of ownership of the transmission assets from vertically integrated utilities that will further functional unbundling. These benefits are in keeping with the goals of the Transco Legislation and FERC policies. The Transco Legislation, among other things, encourages public utility affiliates of Wisconsin utility holding companies to transfer ownership of their transmission assets to the Transco by beneficially adjusting the calculation of an existing limit on the amount of unregulated (or non-utility) investments the holding company system can make, after the transfer of their assets to the Transco. [N5 - Wis. Stat. Sec. 196.485(5). This investment cap applies to any holding company system that owns a Wisconsin public utility. Generally, Wisconsin law limits the amount of assets that all non-utility affiliates in a holding company system may own to an amount equal to 25% of the assets owned by all of the electric public utility affiliates within that system. Wis. Stat. Sec. 196.795(6m)(b). The Transco Legislation permits an electric utility within a holding company system to exclude certain energy related "eligible investments" (as defined in the Wisconsin Public Utility Holding Company Act) from the calculation of non-utility assets that count towards the 25% asset cap if, among other things, each electric utility within a holding company system that owns transmission assets in Wisconsin transfers all of those transmission assets to the Transco before January 1, 2001 and each electric utility within that holding company system petitions, by June 30, 2000, the Wisconsin Commission and the FERC for authority to transfer operational control of all of its transmission facilities in Wisconsin and the surrounding states to the Midwest Independent Transmission System Operator, Inc.] The Transco will be managed by the Corporate Manager. All Transco participants will ultimately own direct or indirect interests in the Transco and the Corporate Manager in proportion to the value of the transmission assets or cash each participant contributes to the Transco. Transmission-dependent utilities, as defined by the Transco legislation, that participate in the Transco will purchase their interests for cash and will obtain ownership shares in proportion to their 1999 Wisconsin load-ratio shares. Tax exempt transmission-dependent entities that participate in the Transco, such as WPPI, [N6 - WPPI is a municipal electric company owned by 30 Wisconsin municipalities that operate electric utilities. These utilities supply electric power to more than 100,000 customers in Wisconsin and purchase all of their electric requirements from WPPI. WPPI was created pursuant to Wisconsin legislation and is a non-profit, political subdivision of the state. Wis. Stat. Sec. 66.073.] will purchase their interests for cash at a price that will keep the other participants whole, as explained below. The Transco Legislation obligates the Transco to construct, operate, maintain and expand its transmission facilities to provide adequate, reliable transmission services for a single, system-wide rate for the use of its system under an open-access transmission tariff (the "Transco OATT") that has been filed with the FERC. The Transco Legislation directs that the Transco support robust competition in energy markets, extend no favoritism to any participant and meet the transmission needs of all participants. Under the provisions of the Transco Legislation, the Transco will transfer the operational control of its transmission facilities to the Midwest Independent Transmission System Operator, Inc. (the "Midwest ISO") when the Midwest ISO becomes operational. It is presently expected that this transfer will occur on or about November 1, 2001. As previously stated, the initial participants in the Transco and the Corporate Manager will include, in addition to MGE, WPL, South Beloit, WPPI, WPS, Wisconsin Electric and Edison Sault. [N7 - The Corporate Manager will also initially own a less than 1% interest in the Transco.] All utilities participating in the Transco are referred to herein as "Member Utilities". Other entities, both within and outside of Wisconsin, may, in the future, decide to become members of the Transco. The Member Utilities intend to contribute their transmission assets to the Transco on or about January 1, 2001, (the "Operations Date"). [N8 - The Transco Legislation currently contemplates that the transfer of the transmission assets will occur by the Operations Date. Accordingly, the Member Utilities are proceeding under the assumption that the Transco will begin operations on the Operations Date and are therefore making all of the requisite FERC filings to have the Transco OATT effective as of such date.] The transmission systems of the Member Utilities are interconnected at various points and essentially all operate as part of the same reliability and planning council -- the Mid-America Interconnected Network, Inc. ("MAIN"). [N9 - Edison Sault is part of the East Central Area Reliability (ECAR) group but is expected to become part of MAIN by January 1, 2001.] MAIN promotes coordinated planning, construction, operation, maintenance and use of operation and transmission facilities by its members. The Member Utilities' transmission systems were also planned and built on a coordinated basis pursuant to the Wisconsin "advance planning" law in effect from 1975 until 1997. For a map detailing the interconnection of the transmission systems of the Member Utilities, see Exhibit E hereto. C. Transco Operations and Organization The Transco will have the exclusive duty to provide transmission service in geographic areas previously served by the Transco members. The Transco will not, however, have that duty in areas where control of transmission facilities has been transferred directly to the Midwest ISO. Wisconsin law prohibits the Transco from bypassing distribution systems and directly serving retail customers. The transmission-owning Member Utilities and the Transco have entered into operating agreements ("O&M Agreements") pursuant to which the Member Utilities will provide the Transco with "reasonable and cost effective operation and maintenance services" for at least the first three years after the Operations Date in accordance with the Transco Legislation. [N10 - Wis. Stat. Sec. 196.485 (3m)(a)1.b.] The Member Utilities and the Transco have also entered into services agreements ("Services Agreements") pursuant to which the Member Utilities will provide the Transco with certain services not covered by the O&M Agreements. Additionally, the Member Utilities and the Transco have entered into an Operating Agreement pursuant to which the Transco will provide, among other things, ancillary services and control-area operations at FERC-approved rates. Finally, the Transco will operate certain of Alliant Energy Corporation's transmission facilities outside of Wisconsin that are not being transferred to the Transco under the terms of an agency agreement ("Agency Agreement"). [N11 - Alliant Energy Corporation is the holding company parent of WPL and South Beloit.] In accordance with the Transco Legislation, all transmission owning Member Utilities will transfer all transmission assets to the Transco on the Operations Date. For purposes of establishing relative shares, the transmission assets will be valued at their Contribution Value, defined as original cost less accumulated depreciation, as adjusted on a dollar-for-dollar basis for deferred taxes, excess deferred taxes and deferred investment tax credits. The resulting shares will then be adjusted based on various factors and the level of participation by transmission-dependent utilities which may acquire member units in the Transsco for cash based upon their 1999 Wisconsin load-ratio shares. It is expected that MGE's Contribution Value at December 31, 2000, exclusive of land rights, will be approximately $40.1 million, and its initial interest in the Transco will approximate 5.31%. These ownership percentages may fluctuate based on various factors, including the number of participants in the Transco. WPPI, and any other transmission-dependent tax-exempt entity that participates in the Transco, will also be members of the Transco, but will not be contributing transmission assets. Because the participation of tax exempt entities like WPPI will reduce the transmission revenue otherwise received by the Transco, [N12 - Based on FERC precedent with respect to natural gas pipelines, the revenue requirement reflected in the Transco's FERC petition includes provision for income taxes payable by its members with respect to Transco income. The participation of any tax-exempt entity in the Transco will reduce that revenue requirement and therefore each tax-exempt Transco member must make contributions to the Transco to make up for the diminished return of the other members. Alternatively, the Transco participants may agree on special allocations of certain tax elements, rather than adjust the purchase price to be paid by such tax-exempt entities.] such entities will purchase their interests for a price that is designed to keep the other participants whole. It is anticipated that funds received from WPPI and any other tax-exempt Transco member will be used to fund outlays necessary to pay start-up costs and construction work-in-progress or be used as cash working capital. The tax-exempt purchase price will be recalculated annually, such that all tax-exempt participants will be required to make additional cash contributions (or receive a refund of any "over contributed" funds) to ensure that the return otherwise payable to the other transmission-contributing participants is not diminished because of the tax exempt entities' participation. The Corporate Manager will manage the Transco, and will employ all personnel necessary to operate the Transco. All costs and expenses of the Corporate Manager will be treated as Transco expenses. The Transco members will enter into an agreement (the "Operating Agreement") which will govern the activities of the Transco. In accordance with the Transco's Operating Agreement, the Member Utilities will not be permitted to sell their interests in the Transco for a period of three years following the Operations Date, with certain exceptions. [N13 - Interests may be transferred to another Member Utility or to a person who is and remains 100% directly or indirectly owned by the Member Utility selling its interest or the related holding company.] After the three-year period expires, any Transco interest may be freely transferred subject to any applicable legal constraints. The Member Utilities may exchange all or a portion of their Transco member units for shares in the Corporate Manager on a one-for-one basis at any time after the three years, or, if earlier, one year after an initial public offering by the Corporate Manager. No Member Utility will be obligated to make any additional capital contributions to the Transco or the Corporate Manager; however, there may be additional contributions if a majority of the Corporate Manager's directors determine that such additional capital is appropriate. The Operating Agreement will establish a target dividend rate of 80% of the Transco's earnings, subject to adjustment. Member Utilities will also purchase shares of the Corporate Manager for cash, in proportion to their percentage interests in the Transco. It is expected that MGE will pay approximately $5,000 for an approximate 5.31% interest in the Corporate Manager. The Corporate Manager will have two classes of stock: Class A and Class B. MGE will receive approximately 5.31% of the non-voting Class A shares, in proportion to its ownership interest in the Transco. Additionally, each Member Utility, including MGE, will receive one Class B voting share. [N14 - Neither South Beloit nor Edison Sault will receive shares in the Corporate Manager.] Each holder of a Class B share will be entitled to appoint one of the Corporate Manager's directors. All Class B shares will convert into Class A shares on the earlier of (i) the ownership by the Corporate Manager of more than 50% of the Transco interests or (ii) the tenth anniversary of the Operations Date, unless the Corporate Manager's Board of Directors elects to override the conversion. Class A shares will become voting shares upon the conversion of Class B shares to Class A shares or after the Corporate Manager commences a public offering of its stock. Following the public offering, the Class A shareholders will have the right to elect a majority of the Board of Directors and the Class B shareholders will elect a minority of the directors, but each owner of a Class B share will continue to have the right to appoint one of the Corporate Manager's directors. More detailed information regarding the financing and governance of the Transco and the Corporate Manager is contained in the August 15, 2000 Application of Alliant Energy, SEC File No. 70-9735 (the "Alliant Application"). D. Transferred Properties MGE proposes to transfer ownership and control of its transmission assets to the Transco. [N15 - For a complete list of these facilities, please see MGE's sec. 203 application to FERC (D-1).] The Transco will acquire from MGE transmission facilities that operate at voltages of 345 kV, 138 kV and 69 kV, excluding radial facilities. The MGE transmission assets proposed to be transferred include: - Transmission lines (including towers, poles, and conductors); - Transformers providing transformation within the bulk transmission system and between the bulk and area transmission systems; and - Substations that solely provide a transmission function. The determination as to what MGE assets constitute "transmission" assets to be transferred to the Transco has been made pursuant to an order of the Wisconsin Commission, dated July 13, 2000, in Docket No. 05-EI-119. The PSCW conducted a proceeding specifically to provide direction on this issue to the Wisconsin utilities. [N16 - See Investigation into the Classification of Transmission Facilities Pursuant to Wis. Stat. Sec. 196.485(1)(h), Docket No. 05-EI-119. Under the Wisconsin Commission Order, MGE has made its compliance filing to list its transmission assets and to request exceptions. MGE will amend this Application by filing the Wisconsin Commission order accepting MGE's compliance filing, once such order has been issued.] A breakdown of MGE's transmission assets to be contributed to the Transco is provided in Exhibit I. The net book value (original cost less accumulated depreciation) of the MGE transmission assets at December 31, 2000 is expected to be approximately $40.1 million. The facilities MGE will transfer to the Transco do not include distribution or generation facilities or radial lines used to provide retail service. Distribution facilities include all facilities with voltages below 50 kV, including the final circuit connection to substations providing transformation or connection to any retail customer regardless of voltage level. The Transco will be under a statutory mandate to transfer operational control of its jurisdictional facilities to the Midwest ISO. Prior to the transfer, the Transco will have operational control of the transmission system contributed by Wisconsin utilities; provide ancillary services; operate an Open Access Same-Time Information System ("OASIS") in conformance with FERC Order No. 889; and administer the Transco OATT. The Transco will also be responsible for the maintenance of the transmission facilities under its ownership and control and will assume responsibility for transmission system planning. After the transfer to the Midwest ISO, the Transco will make changes to its OATT to accommodate operational differences between the Transco and the Midwest ISO open access transmission tariff. MGE will enter into a bill of sale, deeds, easement assignments and other documentation with the Transco governing the conveyance of its respective transmission assets. The transmission assets transferred to the Transco will include MGE's rights and interests in any contracts under its existing Open Access Transmission Tariff (the "MGE OATT"). In addition to the assets from MGE, it is expected that the Transco will also acquire transmission assets from WPL, South Beloit, Wisconsin Electric, Edison Sault and WPS. The Transco is also expected to acquire the incidental transmission facilities of transmission-dependent utilities, such as WPPI's member municipal utilities. The Transco will assign a nominal value of $10 to each member unit initially issued in exchange for transmission assets. The Transco will offer ancillary services under the Transco's OATT. Because the Transco will own no generating facilities, it will purchase ancillary services from third parties and resell them under its OATT. The Transco expects to enter into agreements to purchase must-run and ancillary services from generators in the control areas of MGE, WPL, WPS and Wisconsin Electric. The Transco will contract for must-run operations and ancillary services with the generators located in its control area and connected to its transmission system. In accordance with Wisconsin law, the Transco will not, however, engage in the purchase and sale of energy other than to obtain necessary ancillary services required by its customers. Upon receipt of necessary regulatory approvals, the Transco will begin providing open access transmission services under its OATT to those existing open access customers currently served by MGE under the existing MGE OATT and to any other eligible customer requesting transmission service from the Transco. MGE will become a transmission customer of the Transco under its transmission tariff. Where MGE is responsible for providing transmission service under agreements or tariffs pre-dating FERC Order No. 888 ("grandfathered agreements"), the Transco will make its transmission system available under the Transco OATT in order to provide transmission service to customers under the grandfathered agreements. E. Related Orders and Applications Pertaining to the Establishment of the Transco and Corporate Manager On August 3, 2000, Alliant and WPL obtained a Commission order authorizing them to: (i) acquire small membership interests in the Transco; (ii) acquire a small percentage of the capital stock of the Corporate Manager; and (iii) authorizing Alliant, through September 30, 2001, to guarantee the Transco's payment obligations under a credit agreement and to enter into a reimbursement agreement with the Transco. [N17 - Alliant Energy Corporation, HCAR No. 27206 (August 3, 2000).] On August 15, 2000, WPL, South Beloit, the Transco and the Corporate Manager filed the Alliant Application seeking Commission authorization for: (i) WPL to transfer ownership and control over its transmission assets to the Transco; (ii) South Beloit to transfer ownership and control over its transmission assets to the Transco; (iii) WPL and South Beloit to receive, in exchange for their transmission assets, member units, i.e., shares, of the Transco; (iv) WPL to purchase Class A shares of the Corporate Manager; (v) WPL to purchase one Class B share of the Corporate Manager; (vi) the Transco's issuance of member units in exchange for transmission assets, in the case of transmission-owning Transco members, or cash, in the case of transmission-dependent Transco members; and (vii) the Corporate Manager's issuance of its Class A and Class B shares in exchange for cash payments. WPL and South Beloit have also sought Commission authorization through June 30, 2004 for external financing by the Transco and the Corporate Manager through various forms of (i) short-term debt financing; (iii) long-term debt financing; and (iii) equity financing in the form of common or preferred stock of the Corporate Manager, other equity securities or additional interests in the Transco. This Application, the Alliant Application and any applications filed by other Member Utilities should be viewed as companion filings. All must be approved expeditiously if the Transco is to commence operations prior to the Operations Date. If the Commission does not act within this timeframe certain Applicants will be in violation of the Transco Legislation and may face adverse regulatory consequences. [N18 - For example, pursuant to Wis. Stats. Sec. 196.485(8), any public utility affiliate that does not complete the contribution of its transmission facilities to the Transco by January 1, 2000, will be subject to a penalty of $25,000 for each day that the contribution is delayed if the Transco is legally able to accept the contribution.] ITEM 2: FEES, COMMISSIONS AND EXPENSES. The fees, commissions and expenses incurred, or to be incurred, in connection with the transactions proposed herein will be filed by amendment. ITEM 3: APPLICABLE STATUTORY PROVISIONS MGE believes that the proposed transaction is regulated by Sections 9(a)(2) and 10 of the Act. To the extent the Commission finds that the transaction requires authorization, approval or exemption under any section of the Act or provision of the rules or regulations thereunder other than those specifically referred to herein, MGE hereby requests such authorization, approval or exemption. When the transmission assets of the Member Utilities are transferred to the Transco, the Transco will become an "electric utility company" under Section 2(a)(3) of the Act and a "public utility company" under Section 2(a)(5). In addition, the Corporate Manager, by virtue of its ownership interest in, and management of, the Transco, will also become an "electric utility company" and a "public utility company." As a result of the proposed transaction, MGE will be acquiring 5% or more of the outstanding voting securities of the Transco and Corporate Manager. As a consequence, MGE's acquisition of an interest in the Transco and Corporate Manager will be subject to the Commission's approval pursuant to Section 9(a)(2) of the Act. Therefore, MGE believes that the proposed transaction cannot proceed without the Commission's approval under Section 10 of the Act. The relevant statutory standards to be satisfied are set forth in Sections 10(b), 10(c) and 10(f) of the Act. A. Section 10 Standards The statutory standards to be considered by the Commission in evaluating the transaction are set forth in Sections 10(b), 10(c) and 10(f) of the Act. For the reasons set forth in detail below, the transaction fully complies with such sections. 1. Section 10(b) Section 10(b) of the Act provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless the Commission finds that: (1) such acquisition will tend towards interlocking relations or the concentration of control of public-utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or (3) such acquisitions will unduly complicate the capital structure of the holding-company of the applicant or will be detrimental to the public interest or the interest of investors or consumers or the proper functioning of such holding-company system. a. Section 10(b)(1) The proposed transaction will not tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumer. The Corporate Manager will initially have a ten member Board of Directors. While five directors will be appointed by the Member Utilities, four directors will be independent, as mandated by the Transco Legislation. The remaining director will be the chief executive officer of the Corporate Manager. The employees of the Transco and the Corporate Manager will not be employees of any of the member utilities. Therefore, any interlocking relations will be minimal, at most. Similarly, the proposed transaction will not tend toward any "concentration of control of public utility companies" that is detrimental to the public interest or the interest of consumers or investors. The end result of the formation of the Transco will not be the concentration of control over the Wisconsin transmission system, but rather the dilution of control. There will be at least five member utilities with input, through the Corporate Manager, over decisions as to the management and operation of the Transco's transmission assets. One of these Member Utilities -- WPPI -- currently has no such input. Indeed the creation of the Transco will encourage competition, rather than concentrate control. b. Section 10(b)(2) Under Section 10(b)(2) of the Act, the Commission must determine whether the consideration to be paid in connection with the transaction "including all fees, commission and other remuneration ... is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of ... the utility assets underlying the securities to be acquired ...." i. Fairness of Consideration Section 10(b)(2) of the Act requires the Commission to determine whether the consideration in connection with a proposed acquisition of securities is reasonable and whether it bears a fair relation to the investment in, and the earning capacity of, the utility assets underlying the securities being acquired. All transmission assets that will be transferred to the Transco will be valued based on the same methodology. This methodology is generally mandated by the Transco Legislation and the specifics have been arrived at as the result of arms-length negotiations among all of the Member Utilities, subject to the review and approval of the Wisconsin Commission. Applicants further believe that such consideration bears a fair relation to the investment in and the earning capacity of the transmission assets to be transferred because it is based on the Contribution Value of those assets. Because the Transco's rates will also be subject to FERC approval, it can be expected that those rates (which will largely also be based on the same Contribution Value) will permit the Transco to earn a fair return on them as well. This being the case, all Member Utilities, including MGE, can expect to earn a fair return on their investment. ii. Reasonableness of Fees An estimate of the fees and expenses to be paid in connection with the proposed transactions is set forth in Item 2 hereof. The estimated amounts to be paid are fees required to be paid to governmental bodies, fees for necessary professional services, and other expenses incurred or to be incurred in connection with carrying out the proposed transaction. Applicants believe that such fees and expenses are reasonable and customary for a transaction of this kind and that the standards of Section 10(b)(2) are thus satisfied. c. Section 10(b)(3) Section 10(b)(3) requires that the Commission determine whether the proposed transaction will unduly complicate MGE's capital structure or will be detrimental to the public interest, the interests of investors or consumers or the proper functioning of MGE's system. The corporate capital structure of MGE after the consummation of the proposed transaction will not be unduly complicated. The ownership structure of the Corporate Manager and the Transco has been designed to simplify management of the Transco and to facilitate public investment in the Transco enterprise through a public offering of stock in the Corporate Manager, such stock being more attractive to investors than would be the equivalent member units (LLC interests) of the Transco. Although such structure introduces an additional corporate layer into the MGE system, the Transco and the Corporate Manager will, as a practical matter, function as one entity. The Corporate Manager has been introduced simply to make public investment in the Transco enterprise more "investor-friendly". In any event, as set forth more fully elsewhere in this Application/Declaration the proposed formation of the new transmission company is expected to result in benefits to the public and to consumers and investors of the MGE holding company system. 2. Section 10(c) Section 10(c) of the Act provides that: Notwithstanding the provisions of subsection (b), the Commission shall not approve: (1) An acquisition of securities or utility assets, or of any other asset, which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11; or (2) The acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and efficient development of any integrated public utility system .... a. Section 10(c)(1) Consistent with the standards set forth in Section 10(c)(1) of the Act, the proposed acquisition of securities will not be unlawful under the provisions of Section 8 of the Act, or detrimental to the carrying out of the provisions of Section 11 of the Act. Section 8 prohibits a registered holding company or any of its subsidiaries from acquiring, owning interests in, or operating both a gas utility company and an electric utility company serving substantially the same area if prohibited by state law, and is thus not applicable to the transactions contemplated herein. Section 11(a) of the Act requires the Commission to examine the corporate structure of registered holding companies to ensure, among other things, that unnecessary complexities are eliminated and voting powers are fairly and equitably distributed, and is thus not applicable to the transactions contemplated herein. b. Section 10(c)(2) As the following discussion will demonstrate, the proposed transaction will serve the public interest by tending towards the economical and efficient development of an integrated public utility system as required by Section 10(c)(2) of the Act. (i) Efficiencies and Economies. As described more fully above, the proposed transaction tends toward the following efficiencies and economies: (i) greater corporate and organizational separation of transmission from generation; and (ii) by tying together control, planning, maintenance and financial responsibilities for the Member Utilities' transmission facilities into a single company having an independent, stream-lined and cost-efficient operation, synergies will be created that result in better service in the region and non-discriminatory access for all transmission users will be assured. (ii) Integrated Public Utility System As applied to electric utility companies, the term "integrated public utility system" is defined in Section 2(a)(29)(A) of the Act as: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operation to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. The Commission has previously taken notice of developments that have occurred in the gas and electric industries in recent years, and has interpreted the Act and analyzed proposed transactions in light of those developments. [N19 - See, e.g., American Electric Power Co., HCAR No. 27186 (June 14, 2000) (AAEP Order@); New Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997) (approving transactions relating to combination of a Colorado gas and electric utility company and intrastate exempt holding company and a New Mexico electric utility company), citing Hearing on Regulation of Public Utility Holding Companies Before Subcomm. on Telecommunications and Finance and Subcomm. on Energy and Power of the House of Representatives Comm. on Commerce, 104th Cong., 1st Sess. (Aug. 4, 1995) (testimony of Arthur Levitt, Chairman, SEC). See also Rust v. Sullivan, 500 U.S. 173, 186-87 (1991) (stating that "an agency is not required to" establish rules of conduct to last forever, "but rather must be given ample latitude to 'adopt [its] rules and policies to the demands of changing circumstances.'") (citations omitted); Shawmut Assn. v. SEC, 146 F.2d 791, 796-97 (1st Cir. 1945) (stating that an agency "is expected to treat experience not as a jailer but as a teacher").] Based on the statutory definition, the Commission has established four standards that must be met before it will find that an integrated public-utility system will result from a proposed acquisition of securities: (1) the utility assets of the system are physically interconnected or capable of physical interconnection; (2) the utility assets, under normal conditions, may be economically operated as a single interconnected and coordinated system; (3) the system must be confined in its operations to a single area or region; and (4) the system must not be so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. [N20 - Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990), quoting In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958).] The proposed transaction satisfies all four of these requirements. In examining proposed transactions to determine whether the integration requirements have been satisfied, the Commission has "interpreted the Act and analyzed transactions in the light of ... changed and changing circumstances." [N21 - AEP Order.] Applicants believe that the Transco Legislation, as well as the recent FERC Order No. 2000, both of which strongly encourage transmission company formation, constitute such changing circumstances which the Commission should consider when evaluating the proposed transaction. (a) Physical Interconnection In view of the above, the facts presented clearly support a finding that the utility assets of the Transco will be "physically interconnected or capable of physical interconnection" within the meaning of Section 2(a)(29)(A) of the Act once the transactions contemplated herein are completed. Indeed, as discussed in Item 1, the utility assets to be owned by the Transco are already physically interconnected. (b) Single Interconnected and Coordinated System. Section 2(a)(29)(A) of the Act requires that the utility assets, under normal circumstances, may be "economically operated as a single interconnected and coordinated system." The Commission has interpreted this language to refer to the physical operation of utility assets as a system in which, among other things, the generation and/or flow of current within the system may be centrally controlled and allocated as need or economy dictate. [N22 - See UNITIL Corp., HCAR No. 25524 (Apr. 24, 1992).] As discussed above, the transmission assets that will be transferred to the Transco will be operated in a manner that satisfies the standard of economic and coordinated operations in Section 2(a)(29)(A) of the Act. Moreover, the proposed transaction is expected to result in greater coordination and more efficient allocation of the provision of transmission services within the area served by the Transco. (c) Single Area or Region The "single integratedd system" of the Transco will initially be the central and eastern portions of the State of Wisconsin and small adjacent areas of the Michigan Upper Peninsula and Illinois. Through the membership of additional transmission-owning-utilities, the Transco's system may grow to include other parts of Wisconsin and portions of other Midwestern states. (d) Localized Management, Efficient Operation and Effective Regulation The creation of the Transco will not impair localized management, efficient operation or effective regulation by reason of its size. Moreover, the Commission's past decisions on "localized management" show that the proposed transaction fully preserves the advantages of localized management. In such cases, the Commission has evaluated localized management in terms of: (1) responsiveness to local needs [N23 - See American Electric Power Co., HCAR No. 20633 (July 31, 1978) (advantages of localized management evaluated in terms of whether an enlarged system could be "responsive to local needs"); General Public Utilities Corp., 37 S.E.C. 28, 36 (1956) (localized management evaluated in terms of "local problems and matters involving relations with consumers").]; (2) whether management and directors were drawn from local utilities [N24 - See Centerior Energy Corp., HCAR No. 24073 (April 29, 1986) (advantages of localized management would not be compromised by the affiliation of two electric utilities under a new holding company because the new holding company's "management [would be] drawn from the present management" of the two utilities)]; (3) the preservation of corporate identities [N25 - See Northeast Utilities, HCAR No. 25221 (December 21, 1990) (utilities "will be maintained as separate New Hampshire corporations ... [t]herefore the advantages of localized management will be preserved"); Columbia Gas System, Inc., HCAR No. 24599 (March 15, 1988) (benefits of local management maintained where the utility to be added would be a separate subsidiary).]; and (4) the ease of communications [N26 - See American Electric Power Co., HCAR No. 20633 (July 21, 1978) (distance of corporate headquarters from local management was a "less important factor in determining what is in the public interest" given the "present-day ease of communication and transportation")]. These elements will all be satisfied here. The Transco is being created in response to local needs. The Wisconsin Legislature has determined that the Transco will improve electric service in Wisconsin. Each local utility (except Edison Sault and South Beloit) will elect one director to the Corporate Manager's Board of Directors. Each Member Utility will continue to exist after the transmission assets are transferred to the Transco. Finally, communication between the Transco and its members will flow easily. [N27 - In addition, under the Transco Legislation, the Transco and/or the Midwest ISO are obligated, to the maximum extent practicable, to "eliminate[] advantages in electric generation, wholesale and retail markets that are otherwise related to ownership, control or operation of transmission facilities" and "[s]atisf[y] the reasonable needs of transmission users in this state for reliable, low-cost and competitively priced electric service." Wis. Stat. Sec. 196.485(3)(c).] 3. Section 10(f) Section 10(f) provides that: the Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect of such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of Section 11. As discussed above, the Transco is being created pursuant to, and in accordance with, Wisconsin law. As already discussed, Wisconsin law provides an incentive for Wisconsin public utility holding companies to transfer their transmission assets to a single-purpose transmission company such as the Transco will be. The Wisconsin Transco Legislation also facilitates and regulates the proposed transaction. As described below, the transaction requires the approval of the Wisconsin Commission. Thus, the requirements of Section 10(f) are satisfied. ITEM 4: REGULATORY APPROVALS On July 31, 2000, the Transco filed an application with the FERC seeking approval of the Transco OATT, and on September 8, 2000, MGE filed an application with FERC under sec. 203 of the Federal Power Act for approval to contribute its transmission facilities to the ATC. (Docket No. EC00-136-000.) In addition, the Wisconsin Commission must approve certain aspects of the transactions contemplated herein. To receive those approvals, the ATC and the member utilities filed an application to the Wisconsin Commission on August 18, 2000. (Docket No. 137-NC-100.) No other state or other federal agency has jurisdiction in this matter concerning MGE's contributions to the Transco. ITEM 5: PROCEDURE The Commission is requested to publish a notice under Rule 23 with respect to the filing of this Application/Declaration as soon as practicable. MGE requests that the Commission's Order be issued as soon as practicable after the notice period and in any event not later than December 1, 2000 in order to accommodate a closing before December 15, 2000. This will facilitate the Member Utilities' meeting the January 1, 2001 deadline contemplated by the Transco Legislation for the commencement of Transco operations and the timely completion of the transmission asset transfers that are required in order for the Wisconsin public utility holding companies to qualify for relief from the Wisconsin non-utility asset cap limit. MGE further requests that there should not be a 30-day waiting period between issuance of the Commission's order and the date on which the Order is to become effective, hereby waives a recommended decision by a hearing officer or any other responsible officer of the Commission, and consents that the Division of Investment Management may assist in the preparation of the Commission's decision and/or order, unless the Division opposes the matters proposed herein. ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS A. Exhibits A-1 Form of Articles of Organization of the Transco. - - Incorporated by reference to Alliant Energy SEC File No. 70-9695. A-2 Form of Operating Agreement of the Transco. - - Incorporated by reference to Alliant Energy SEC File No. 70-9695. A-3 Form of Articles of Incorporation of the Corporate Manager. - - Incorporated by reference to Alliant Energy SEC File No. 70-9695. A-4 Form of Bylaws of the Corporate Manager. - - Incorporated by reference to Alliant Energy SEC File No. 70-9695. B-1 Form of O&M Agreements.* B-2 Form of Services Agreements.* B-3 Form of System Operating Agreement.* B-4 Form of Agency Agreement.* C Not Applicable. D-1 Application of MGE to FERC under sec. 203 of the Federal Power Act. D-2 Order of FERC regarding MGE Application.* D-3 Comprehensive Application for Commission Approvals Required For the Formation and Operation of the Transmission Company, American Transmission Company LLC, ATC Management, Inc., Wisconsin Electric Power Company, Wisconsin Public Power, Inc., Wisconsin Power and Light Company, Wisconsin Public Service Corporation, Madison Gas and Electric Company. D-4 Order of Public Service Commission of Wisconsin regarding MGE Compliance Filing in Docket No. 05-EI- 119.* D-5 Compliance Filing of MGE to Public Service Commission of Wisconsin pursuant to its Order of July 13, 2000 in Docket No. 05-EI-119. D-6 Application of the Transco to FERC under sec. 205 of the Federal Power Act.* D-7 Order of FERC regarding Transco Application.* E Interconnection Map -- to be incorporated by reference or filed pursuant to Form SE* F-1 Preliminary Opinion of Counsel.* F-2 Past-tense Opinion of Counsel.* G Not applicable. H Form of Notice. I Description and valuation of transferred assets.* * To be filed by amendment. B. Financial Statements. 1.1 Balance Sheet of MGE and consolidated subsidiaries, as of June 30, 2000 (incorporated by reference to the Quarterly Report on Form 10-Q of MGE for the quarter ended June 30, 2000) (File No. 0-1125). 1.2 Statement of Income of MGE and consolidated subsidiaries for the six months ended June 30, 2000 (incorporated by reference to the Quarterly Report on Form 10-Q of MGE for the quarter ended June 30, 2000) (File No. 0-1125). 1.3 Balance Sheet of MGE as of June 30, 2000 (incorporated by reference to the Quarterly Report on Form 10-Q of MGE for the quarter ended June 30, 2000) (File No. 0-1125). 1.4 Statement of Income of MGE for the period ended June 30, 2000 (incorporated by reference to the Quarterly Report on Form 10-Q of MGE for the six months ended June 30, 2000) (File No. 0-1125). ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS None of the matters that are the subject of this Application/Declaration involve a "major federal action" nor do they "significantly affect the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act. The transaction that is the subject of this Application/Declaration will not result in changes in the operation of MGE that will have an impact on the environment. MGE is not aware of any federal agency that has prepared or is preparing an environmental impact statement with respect to the transactions that are the subject of this Application/Declaration. SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, MGE has duly caused this statement to be signed on its behalf by the undersigned thereunto duly authorized. MADISON GAS AND ELECTRIC COMPANY By: Mark C. Williamson Mark C. Williamson Executive Vice President and Chief Strategic Officer Dated: November 2, 2000