SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27772; 70-10155)
Dominion Resources, Inc., et al.
Order Authorizing Organization and Acquisition of a Subsidiary for Procurement, Storage and Maintenance of Equipment and Inventory Services; Reservation of Jurisdiction
December 12, 2003
Dominion Resources, Inc. ("DRI"), a registered public-utility holding company under the Public Utility Holding Company Act of 1935 ("Act"), and Dominion Energy, Inc. ("DEI"), its direct, wholly owned nonutility subsidiary (together, "Applicants"), both in Richmond, Virginia, have filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 9(a), 10, 12 (b) and (d) and 13 of the Act and rules 53 and 54. The Commission issued a notice of the filing of the Application on November 7, 2003 (Holding Co. Act Release No. 27749).
DRI and DEI request authority to organize and acquire Dominion Wholesale, Inc. ("DWI"), as a subsidiary of DEI to assist their nonutility electric generation and gas-related subsidiaries in the procurement, storage and maintenance of materials, machinery, equipment, services and supplies (the "Equipment") more cost effectively and to sell Equipment to unaffiliated third parties (together, "Inventory Services").
DRI has multiple subsidiaries, utility and nonutility, engaged in the generation of electricity. DRI's principal utility subsidiaries are: (1) Virginia Electric and Power Company ("Virginia Power"), a public-utility company engaged in the generation, transmission and distribution of electric energy in Virginia and northeastern North Carolina, (2) The Peoples Natural Gas Company ("Peoples"), a public-utility company engaged in the distribution of natural gas in Pennsylvania, (3) The East Ohio Gas Company ("East Ohio"), a public-utility company engaged in the distribution of natural gas in Ohio, and (4) Hope Gas, Inc. ("Hope"), a public-utility company engaged in the distribution of natural gas in West Virginia. Virginia Power is a direct subsidiary of DRI. Consolidated Natural Gas Company ("CNG") is a direct subsidiary of DRI and also a registered holding company, directly owning Peoples, East Ohio and Hope. DRI's nonutility activities are conducted through: (1) DEI, through its direct and indirect subsidiaries (together with DEI, the "DEI Companies"), active in competitive electric power generation and in development, exploration and operation of natural gas and oil reserves, (2) direct and indirect subsidiaries of Virginia Power, engaged in acquiring raw materials for nuclear power stations owned and operated by Virginia Power, fuel procurement for Virginia Power, energy marketing and nuclear consulting services, (3) direct and indirect subsidiaries of CNG, engaged in the natural gas business (other than retail distribution), including transmission, storage, and exploration and production, and (4) DRI's interest in Dominion Fiber Ventures LLC, which owns Dominion Telecom, Inc., owner of a fiber optic network providing telecommunications and advanced data services. DRI recently announced its intention to sell its telecommunications assets. DRI has another nonutility subsidiary, Dominion Capital, Inc., a diversified financial services company with operating subsidiaries in commercial and residential lending and merchant banking businesses, which is being sold pursuant to Commission order.1
DRI and DEI state that DWI will provide Inventory Services described as (a) procurement, storage, maintenance and sales of Equipment to associate nonutility companies and (b) incidental sales of Equipment to unaffiliated third parties. Transfers of Equipment by DWI to DRI's state regulated electric and gas utility subsidiaries may require additional state approvals and Applicants request the Commission to reserve jurisdiction regarding the inclusion of DRI's electric and gas utility companies as associate companies receiving Inventory Services from DWI.
DEI will be the sole stockholder of DWI, acquiring all of its outstanding capital stock or other ownership interests directly. DEI would make an initial capital contribution to DWI of $1,000 and working capital needs of DWI would be funded through a combination of equity investments, capital advances or loans from DRI and/or DEI.
Applicants state that, initially, DWI will store, maintain and hold for sale four combustion turbines, two steam turbine generators and related auxiliary equipment, in the process of being manufactured and formerly designated for a cancelled project. DEI has made progress payments on the turbines and auxiliary equipment and will assign its rights to the manufacturing contracts and delegate its remaining payment obligations to DWI. In consideration, DWI will give to DEI a note in the amount of required payments (past and present) for the Equipment.
In the future, DWI will provide Inventory Services for inventory and spare parts to, among other things, eliminate redundant inventory for projects and centralize purchases. In addition, DWI may maintain a centralized warehouse for certain of the inventory and spare parts at an as yet undetermined location. Applicants anticipate that the initial purchase of spare parts and inventory will be funded by a loan from DEI, to be repaid from proceeds collected by DWI at the future sale of the assets.
DWI will use its SAP tracking system to manage and track its inventory. The SAP tracking system tracks the number of units for each item received, issued and returned to inventory at each warehouse. The SAP tracking system further tracks the cost of inventory using the moving average cost methodology. Moving average cost is an amount based on the average of all of the costs of the same part determined at the time that the part was added to inventory.
For purchases and sales of Equipment between DWI and associate nonutility companies, price will be: (1) in the case of major equipment, such as turbines, the direct identification cost of the equipment plus a carrying cost for overhead; and (2) in the case of other spare parts and equipment, the moving average cost price formulated through DWI's SAP tracking system. Sales of Equipment by DWI to non-affiliates shall be at arms' length.
The Applicants state that they believe that the creation and maintenance of a company to provide Inventory Services will provide cost savings, economies of scale and other efficiencies, in that it will, among other things, enable DRI and DEI to centralize purchases of Equipment, to eliminate redundant inventory for projects, to pool substantial expertise and experience among DRI system employees and create greater operating efficiencies. In addition, the Applicants state that creation of DWI will allow DRI the flexibility to work with other parties, associate or non-affiliated, for future development of generation facilities.
DRI currently meets all of the conditions of rule 53(a), except for clause (1). With respect to rule 53(a)(1), however, the Commission has determined that DRI's financing of its investment in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") in an amount not to exceed 100% of its "average consolidated retained earnings" plus $4.5 billion would not have either of the adverse effects set forth in rule 53(c) (the "Rule 53(c) Order").2 DRI asserts that its investment in EWGs and FUCOs continues to have no adverse effect to the DRI system. At September 30, 2003, DRI's "average consolidated retained earnings" were $1,692.4 million and, therefore, DRI's investment in EWGs and FUCOs continues to be within the Commission's authorized limit. DRI further asserts that it and its subsidiaries are in compliance, and will continue to comply, with the other provisions of rule 53(a) and (b). Applicants assert that their proposal, considered in conjunction with the effect of the capitalization and earnings of DRI's EWGs and FUCOs, would not have a material adverse effect on the financial integrity of the DRI system or an adverse impact on DRI's public-utility subsidiaries, their customers, or the ability of state commissions to protect such public-utility customers. The Rule 53(c) Order was predicated, in part, upon an assessment of DRI's overall financial condition, taking into account, among other factors, DRI's consolidated capitalization ratio and its retained earnings, both of which have improved since the date of the order.3 Since the date of the Rule 53(c) Order, the capitalization and earnings attributable to DRI's investments in EWGs and FUCOs have not had an adverse impact on DRI's financial integrity.
The fees, commissions and expenses paid or incurred or to be incurred in connection with the Application are estimated at $10,000. Applicants also state that no other regulatory commission has jurisdiction over the transactions for which authority is sought.
Due notice of the filing of the Application has been given in the manner prescribed in 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 the applicable standards of the Act and rules are satisfied and no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules, that the Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act and the filing, quarterly (within 60 days of the end of each quarter), with the Commission: (1) DWI's balance sheet and income statement and (2) a report listing (i) the names of associate and third parties DWI is providing Inventory Services to and (ii) the transactions, and the nature of the transactions (including a general description of any Equipment purchased or sold), for Inventory Services which exceed $25,000 in value.
IT IS FURTHER ORDERED that jurisdiction is reserved over inclusion of DRI's electric and gas utility companies as associate companies receiving Inventory Services from DWI.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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