File No. 70-9477
As filed with the Securities and Exchange Commission on August 21, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
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POST-EFFECTIVE AMENDMENT NO. 10
TO
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Dominion Resources,Inc. Consolidated Natural Gas Company
120 Tredegar Street 120 Tredegar Street
Richmond, VA 23219 Richmond, VA 23219
(Name of company filing this statement and
address of principal executive offices)
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Dominion Resources, Inc.
(Name of top registered holding company
parent of each applicant or declarant)
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James F. Stutts
Vice President and General Counsel
Dominion Resources, Inc.
120 Tredegar Street
Richmond, VA 23219
(Name and address of agent for service)
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The Commission is also requested to send copies
of any communication in connection with this matter to:
Sharon L. Burr, Esq. John D. McLanahan, Esq.
Senior Counsel Troutman Sanders LLP
Dominion Resources Services, Inc. 600 Peachtree Street, N.E.
120 Tredegar Street Atlanta, GA 30308
Richmond, VA 23219
APPLICATION-DECLARATION
UNDER
SECTION 13
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
REVISED SERVICE AGREEMENT AND RELATED MATTERS
Amendment No. 9 to the foregoing Application/Declaration is
hereby amended and restated to read in its entirety as follows:
Item 1. Description of Proposed Transactions.
This post-effective amendment to the Application-
Declaration of the Applicants in File No. 70-9477 is submitted,
under the Public Utility Holding Company Act of 1935 (the "Act")
in connection with proposed changes in the standard service
agreement (the "Current Agreement") of Dominion Resources
Services, Inc. ("DRI Services") and Consolidated Natural Gas
Service Company, Inc.("CNG Services"). The Current Agreement was
put in place following the merger (the "Merger") of Dominion
Resources, Inc. ("DRI") and Consolidated Natural Gas Company
("CNG"), which was approved in this proceeding by the Securities
and Exchange Commission (the "Commission") on December 15, 1999,
HCAR No. 35-27113 (the "Order"), and completed on January 28,
2000. This amendment supplements and completes the record with
respect to certain matters set forth in the Order.
CNG Services was formed in 1966, and DRI Services was
formed by DRI as a new subsidiary service company in late 1999 in
anticipation of the Merger. After closing of the Merger, DRI
Services and CNG Services entered into the Current Agreement, a
new single system-wide service agreement, with DRI and all
principal subsidiaries of DRI including subsidiaries of CNG. The
Current Agreement was modeled on the service agreement in effect
for the CNG system prior to the Merger. The DRI-CNG combined
system had, until January 1, 2001, been operating with two
service companies, and each system company had the opportunity to
elect to purchase services from either service company. The
Order requires that no later than March 31, 2001, all service
functions will be centralized and a single service company will
provide all routine service functions to the DRI-CNG combined
system.
The Order further authorized that, for a limited period
of time ending no later than March 31, 2001, Virginia Electric
and Power Company ("Virginia Power"), an electric utility company
subsidiary of DRI, can provide certain services to system
companies under a subcontract with DRI Services (the "Virginia
Power Support Agreement"). DRI has committed to make whole any
company for any excess payment made to Virginia Power. The
Virginia Power Support Agreement has and continues to serve as a
practical and efficient means for Virginia Power to provide to
DRI Services the same types of services that it has historically
provided to DRI system companies. The Virginia Power Support
Agreement was established primarily to be the Virginia State
Corporation Commission ("VSCC") approved contractual framework
for which services may be performed by Virginia Power for its
affiliates.
The Order also authorized a form of ancillary service
agreement under which Virginia Power can contract with other
associate companies for specific services. The VSCC has not
approved the form of ancillary service agreement and it has not
been used by Virginia Power. However similar ancillary service
agreements have been put into place among the DRI system gas
utility companies and Dominion Transmission, Inc. pursuant to
Rule 87. 1 The categories of services performed pursuant to these
agreements include facility and well maintenance, computer
software, pipe monitoring and pigging, and metering.
DRI and CNG now state the following.
1. The merger of CNG Services into DRI Services.
CNG Services, a Delaware corporation, had issued and
outstanding 100 shares of common stock, $100 par value per share.
DRI Services, a Virginia corporation, has issued and outstanding
200 shares of common stock, no par value per share. CNG
transferred all the outstanding shares of CNG Services to DRI as
a dividend. CNG Services was, effective January 1, 2001, merged
with DRI Services, with DRI Services being the surviving
corporation. Each share of the outstanding common stock of CNG
Services was converted into a share of common stock of DRI
Services pursuant to the merger.
2. Adoption of a new standard system service agreement.
DRI has completed an analysis and review of services
currently centralized and considered efficiencies to be gained by
a combination of the two service companies, and, as a result,
propose revisions to the Current Agreement. Changes will be made
to the basis of allocation to reflect consideration of what
services and groups will be in the combined services company.
Certain wording changes will also be made to the Current
Agreement in order to update references, eliminate unnecessary
detail, clarify the mechanics of the methods of cost allocation
and better align the allocation basis with the cost driver of the
service. DRI believes that the revised allocations are in compliance
with the examination findings released by the Office of Public Utility
Regulation on July 26, 2002.
Accordingly, a revised DRI system service agreement
(the "New Agreement") would be executed, effective January 1,
2001, by DRI Services with all the subsidiaries of DRI with which
it is a party under the Current Agreement. The New Agreement
will supersede and replace all of such earlier service
agreements. A form of the New Agreement is attached as Exhibit
K-3.1. A matrix showing the changes to allocations methods
together with a copy of the Current Agreement marked to show
changes between it and the New Agreement is being provided to the
staff as supplemental information. Although the New Agreement
provides for the DRI subsidiaries to select those categories of
services they would need for the coming year, it is anticipated
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1 Where Ancillary Service Agreements have been entered into by The Peoples
Natural Gas Company and/or Hope Gas, Inc., the necessary state commission
approvals have been obtained. No state commission approvals are needed
for the remaining ancillary service agreements currently in place.
2
that each of such subsidiaries will generally select certain core
management services required for the functioning of an integrated
system. Core services include such categories as accounting,
auditing, legal and regulatory, information technology, executive
and administrative, corporate planning, tax, corporate secretary,
investor relations, treasury/finance and external affairs.
Request is made for approval of the New Agreement.
The cost of certain activities performed or obtained by
DRI Services relate to overall governance and corporate existence
of DRI, the parent company. The cost associated with these
activities will be charged directly to DRI. Investor Relations,
Corporate Secretary, Shareholder Administration and Corporate
Financial Planning generally include these activities. In
addition, the cost of certain Executive, Accounting, Treasury,
Tax and Legal activities associated with DRI corporate existence
and governance will be directly charged to the parent company.
Examples include activities associated with maintaining the books
and records of DRI, DRI debt and equity offerings, and the board
of directors' meetings.
Request is also made for authority for DRI Services to
use a "60-day letter proceeding" to obtain any required
Commission clearance with respect to changes to the New
Agreement. In this regard, no change in the organization of DRI
Services, the type and character of the companies to be serviced,
the method of allocating costs to associate companies, or in the
scope or character of services to be rendered, shall be made
unless and until DRI Services shall have given the Commission
written notice of such proposed changes not less than 60 days
prior to the effectiveness of any such change. If upon the
receipt of any such notice, the Commission within the 60-day
period shall notify DRI Services that a question exists as to
whether the aforesaid proposed change is consistent with the
provisions of Section 13 of the Act, or any rule, regulation or
order thereunder, the proposed change shall not become effective
unless and until DRI Services shall have filed with the
Commission an appropriate declaration with respect to such
proposed change, and the Commission shall have permitted such
declaration to become effective. DRI Services will initiate a
60-day letter proceeding if a modification of an allocation is
expected to result in an increase or decrease in billings to an
associate company of the lesser of 10% or $100,000 from the
billings to the associate company before the modification is
made. DRI had assets of approximately $29.3 billion and year
2000 revenues of approximately $9.3 billion; DRI thus considers
this magnitude threshold reasonable in the context of the vast
size of DRI's post-Merger assets and operations.
3. Amendment and continuation of the Virginia Power
Support Agreement.
During the post-Merger transition period to date,
considerable personnel and service functions have been moved from
Virginia Power to DRI Services to centralize functions and
services. It has been determined by DRI that movement of other
functions at this time would be disruptive and would create no
significant efficiencies. DRI has moved the following functions
from Virginia Power into DRI Services.
Auditing
Legal
Employee Benefits/Pension Investment
Executive and Administrative
Environmental Compliance
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Risk Management
Tax
Treasury/Finance
At the time of the Order, it was anticipated that the
generation function of Virginia Power would be legally separated
from the delivery function, thereby resulting in an unregulated
generation subsidiary which could exchange services with the
other unregulated associate companies within the DRI system
without first obtaining approval from the Virginia and North
Carolina Utilities Commissions. However, the Virginia Commission
has since denied Virginia Power's request for legal separation
and instead the delivery and generation functions of Virginia
Power remain within one legal entity but are operated on a
functionally separated basis. Virginia Power still retains some
service functions primarily needed in its own operations but
which are also of some importance to its associates. In order to
promote efficiencies within the DRI system and reduce duplication
of personnel and the costs associated therewith, it continues to
be necessary for Virginia Power employees to provide certain
services, as listed below and in Exhibit A to the Revised
Virginia Power Support Agreement, for the benefit of its
associates. Under the laws of the Commonwealth of Virginia the
provision of such services by a public utility to its affiliates
requires prior State Corporation Commission approval, which can
take up to ninety days to obtain. Such a delay in the approval
process often hinders the ability of the DRI system companies to
carry out their business in a timely and efficient manner. Both
the Virginia State Corporation Commission and the North Carolina
Utilities Commission have already approved both the Virginia
Power Support Agreement (See Order of VSCC dated December 29,
1999 Case No. PUA990068 and Order of NCUC dated January 27, 2000
in Docket No. E-22, Sub 385) and the Revised Virginia Power
Support Agreement (See Order of VSCC dated December 15, 2000 Case
No. PUA90068 and Order of NCUC dated January 19, 2001 Docket No.
E-22, Sub 385) and accordingly, use of these agreements as a
mechanism to provide the approved services through DRI Services
to the DRI associates will allow the DRI System to carry out its
business strategy in a more timely and efficient manner.
Additionally, many of the DRI Services' personnel are
currently located in facilities owned or leased by Virginia Power
and use equipment and materials owned by Virginia Power in
carrying out their everyday functions. To require that DRI
Services purchase or lease separate facilities, equipment and
materials in order to carry out their operations would create a
considerable and unnecessary expense which would in turn be borne
by all of the system companies.
For these reasons it is requested that the Revised
Virginia Power Support Agreement be approved and allowed to
remain in place. Further changes are likely in Virginia Power's
service arrangements not only in connection with the
disaggregation of its generating assets, but also in connection
with further anticipated changes in the DRI system to ultimately
conform its legal structure to its functional business structure.
It is therefore proposed that the Virginia Power Support
Agreement be terminated and replaced with a revised Virginia
Power Support Agreement ("Revised Virginia Power Support
Agreement"). The following services would be provided under the
Revised Virginia Power Support Agreement.
Accounting
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Regulatory
Human Resources
Operations
Business and Operations Services
Marketing
Budgeting and Planning
Purchasing
Rates
Research
Customer Service
Energy Marketing
Office Space and Equipment
External Affairs
The scope of services, in terms of types of services
and number of personnel involved, under the Revised Virginia
Support Agreement will be reduced from that under the current
support agreement. The annual billings to DRI Services by
Virginia Power under the Virginia Power Support Agreement for the
year ended December 31, 2001 were approximately $24,043,000. The
total revenues of Virginia Power for 2001 were $4.9 billion; the
provision of services to DRI Services under the Virginia Power
Support Agreement can therefore be regarded as incidental to the
main business of Virginia Power as an electric utility company.
Virginia Power proposes to continue to provide de minimis
services (not to exceed 1% of Virginia Power revenues for the
year) to associate companies through DRI Services. Most of such
services will be in connection with the provision of facilities
and equipment and customer services.
A form of the Revised Virginia Power Support Agreement
is filed as Exhibit K-3.2. Costs that are to be allocated under
the Revised Virginia Power Support Agreement will include all
costs of doing business including interest on debt and a return
for the use of equity capital. A copy of the current Virginia
Power Support Agreement marked to show changes between it and the
new agreement has been provided to the staff as supplemental
information.
The North Carolina Utilities Commission approved the
Merger upon several regulatory conditions with which DRI is
required to comply. One of the conditions was that in any filing
with the Commission under the Act made in connection with asset
transfers involving Virginia Power doing business in North
Carolina as North Carolina Power ("NC Power"), DRI is to make a
request that the Commission include certain language in its
order. DRI, therefore, requests that the following language be
included in the order to be issued in this proceeding:
Approval of this application in no way precludes the North
Carolina Utilities Commission from scrutinizing and
establishing the value of the asset transfer for purposes of
determining the rates for services rendered to NC Power's
customers. It is the Commission's intention that the North
Carolina Utilities Commission retain the right to review and
determine the value of such asset transfer for purposes of
determining rates.
5
Notwithstanding the foregoing, Virginia Power is not requesting
Commission approval of any asset transfer pursuant to this
Application.
4. Changes to the New Agreement.
DRI and DRI Services will not alter the nature of
services, pricing standards or the methods of allocations
incorporated in the New Agreement except through a 60-Day Letter
proceeding or with the prior authorization of the Commission.
5. Ancillary service agreements with DRI Services.
Ancillary service agreements have been entered by
certain subsidiaries of CNG (including gas utility companies) to
allow provision of services by such subsidiaries to DRI Services
which will, in turn, provide the services through the New
Agreement to Virginia Power and other associate companies. 2 The
types of services provided pursuant to these agreements include
customer service, marketing, vehicle maintenance, facility
management, purchasing, supply chain management, call center,
billing, market research and support, engineering, business
development, telecommunications, external and governmental
affairs. This would be in accordance with the VSCC's intent to
have all services from and to Virginia Power to be run through
DRI Services for ease of regulatory oversight.
6. Rule 54 Analysis.
DRI currently meets all of the conditions of Rule
53(a), except for clause (1). At March 31, 2002, DRI's
"aggregate investment", as defined in Rule 53(a)(1), in
"exempt wholesale generators" ("EWGs") and "foreign utility
companies" ("FUCOs"), was approximately $1,811.0 million (of
which approximately $1,804.2 was in EWGs). With respect to Rule
53 (a) (1), however, the Commission has determined that DRI's
financing of its investment in EWGs and 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). At March 31, 2002, DRI's aggregate
investment in EWGs and FUCOs was approximately 33% of "average
consolidated retained earnings" (1,048.3 million) plus $4.5
billion. See Dominion Resources, Inc. Holding Company Act Release
No. 35-27485, dated December 28, 2001 (the "Rule 53 (c)
Order"). DRI continues to assert that its investment in EWGs
and FUCOs will not adversely affect the DRI system.
In addition, DRI and its subsidiaries are in compliance
and will continue to comply with the other provisions of Rule 53
(a) and (b), as demonstrated by the following determinations:
(i) The DRI system maintains books and records, and
prepares financial statements, in accordance with Rule 53 (a)
(2). Furthermore, DRI has undertaken to provide the Commission
access to such books and records and financial statements as it
may request;
_____________
2 Where Ancillary Service Agreements have been entered into by The
Peoples Natural Gas Company and/or Hope Gas, Inc., the necessary
state commission approvals have been obtained. No state commission
approvals are needed for the remaining Ancillary Service Agreements
currently in place.
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(ii) No more than 2% of the employees of DRI's domestic
public utility companies render services at any one time, to its
EWGs or FUCOs;
(iii) DRI has submitted (a) a copy of each Form U-1
and Rule 24 certificate that has been filed with the Commission
under Rule 53 and (b) a copy of Item 9 of the Form U5S and
Exhibits G and H thereof to each state regulator having
jurisdiction over the retail rates of DRI's public utility
subsidiaries;
(iv) Neither DRI nor any subsidiary has been the
subject of a bankruptcy or similar proceeding (unless a plan of
reorganization has been confirmed in such proceeding);
(v) DRI's "average consolidated retained earnings"
for the four most recent quarterly periods have not decreased by
10% or more from the average for the previous four quarterly
periods; and
(vi) In the previous fiscal year, DRI did not report
operating losses attributable to its investment in EWGs/FUCOs
exceeding 3% of DRI's consolidated retained earnings.
The proposed transactions, 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 which took
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. In the aggregate
DRI's EWG and FUCO investments have been profitable for all
quarterly periods ending March 31, 2000 through March 31, 2002.
DRI's EWG and FUCO investments also were profitable for the
period from December 28, 2001 through March 31, 2002. As
of September 30, 2001, the most recent period for which financial
statement information was evaluated in the Rule 53 (c) Order,
DRI's consolidated capitalization consisted of 33.4% common
equity, 6.4% preferred stock and 60.2% debt (including long and
short-term debt and preferred stock). As of March 31, 2002, the
consolidated capitalization ratios of DRI, with consolidated debt
including all short-term debt and non-recourse debt of its EWGs
and FUCOs, were as follows:
As of March 31, 2002
(thousands of dollars)
%
Common shareholders' equity 34.7
Preferred stock 5.9
Long-term and short-term debt 59.4
______
100
DRI's consolidated retained earnings decreased from
$1,199 million as of March 31, 2000 to $1,077 million as of March
31, 2002 and grew from $922 million as of December 31, 2001 to
$1,077 million as of March 31, 2002. DRI's EWGs and FUCOs have
7
made a positive contribution to earnings by contributing
approximately $1,052.6 million in revenues from March 31, 2000
through March 31, 2002, and net income of $274.9 million for the
same period. DRI's EWG and FUCO contributions to revenues and
net earnings from December 31, 2001 to March 31, 2002 were $146
million and $8.8 million, respectively. Accordingly, since the
date of the Rule 53 (c) Order, the capitalization and earnings
attributable to DRI's investments in EWGs and FUCOs has not had
an adverse impact on DRI's financial integrity.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or
incurred, directly or indirectly, in connection with seeking the
authorizations herein requested are estimated as follows:
Fee, Commission or Expense Thousands
========================== =========
Legal Fees and Expenses $50
=======
Total $50
Item 3. Applicable Statutory Provisions.
Section 13 of the 1935 Act and Rules 54, 88, 90 and 91
thereunder are or may be directly or indirectly applicable to the
proposed transactions for which authorization is sought in this
Application-Declaration.
Item 4. Regulatory Approvals.
Approval of the revised New Agreement has been obtained
from the state utility commissions of Virginia, North Carolina,
Pennsylvania and West Virginia. Approval of the revised Virginia
Power Support Agreement has been obtained from the state utility
commissions in Virginia and North Carolina. DRI and CNG require
no other regulatory approvals or consents to complete the
transactions contemplated by this post-effective amendment.
Item 5. Procedure.
The Commission is respectfully requested forthwith to
issue an order of the Commission granting and permitting this
post-effective amendment to this Application-Declaration to
become effective.
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It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for
approval of the proposed transactions. The Division of
Investment Management may assist in the preparation of the
Commission's decision. There should be no waiting period between
the issuance of the Commission's order and the date on which it
is to become effective.
Item 6. Exhibits.
Exhibit D-7.2 Order of the Virginia State Corporation Commission.
(Filed by paper copy)
Exhibit D-8.2 Order of the North Carolina Utilities Commission.
(Filed by paper copy)
Exhibit D-9.2 Order of the Pennsylvania Public Utility Commission.
(Filed herewith)
Exhibit D-10.2 Order of the West Virginia Public Service Commission.
(Filed herewith)
Exhibit H-8 Allocation Matrix
Exhibit K-3.1 Form of New Service Agreement.
Exhibit K-3.2 Form of Revised Virginia Power Support Agreement.
Item 7. Information as to Environmental Effects.
The changes in service company arrangements neither
involve a "major federal action" nor "significantly affect the
quality of the human environment" as those terms are used in
Section 10(2)(C) of the National Environmental Policy Act, 42
U.S.C. Section 4321, et seq. The only federal actions related to
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the changes in service company arrangements pertain to the
Commission's approval of this post-effective amendment to this
Application-Declaration under the 1935 Act and the other
approvals and actions described in Item 4 above. The changes in
service company arrangements will not result in changes in the
operations of DRI, CNG or any of their respective subsidiaries
that would have any impact on the environment. No federal agency
is preparing an environmental impact statement with respect to
this matter.
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Pursuant to the Public Utility Holding Company Act of
1935, each of the undersigned companies has caused this
Application-Declaration to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION RESOURCES, INC. CONSOLIDATED NATURAL GAS COMPANY
By: James F. Stutts By: James F. Stutts
__________________ ___________________
Name: James F. Stutts Name: James F. Stutts
Title: Vice President and Title: Vice President and
General Counsel General Counsel
Date: August 21, 2002 Date: August 21, 2002