Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-00-01371/USCOURTS-caDC-00-01371-0/pdf.json

Parties Involved:
American Electric Power Company, Inc.
Intervenor
American Public Power Association
Petitioner
Paul S. Davis
Intervenor for Petitioner
National Rural Electric Cooperative Association
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 4, 2001 Decided January 18, 2002

No. 00-1371

National Rural Electric Cooperative Association and

American Public Power Association,

Petitioners

v.

Securities and Exchange Commission,

Respondent

American Electric Power Company, Inc. and

Paul S. Davis,

Intervenors

Petition for Review of an Order of the

Securities and Exchange Commission

Scott Hempling argued the cause for petitioners. With

him on the briefs was David S. Lapp. Richard B. Geltman

entered an appearance.

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John W. Avery, Special Counsel, Securities & Exchange

Commission, argued the cause for respondent. With him on

the brief was Eric Summergrad, Deputy Solicitor.

J. A. Bouknight Jr. argued the cause for intervenor. With

him on the brief were Samuel T. Perkins, Cynthia L. Taub

and Niki Kuckes. Douglas G. Green entered an appearance.

Before: Edwards, Henderson and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: The Securities and Exchange Commission authorized American Electric Power Company, which

provides electricity services in a number of eastern and

midwestern states, to acquire a company that provides electricity services in several distant southern and southwestern

states. Challenging the Commission's decision, two electric

utility associations argue that the post-acquisition company

will violate section 10 of the Public Utility Holding Company

Act, 15 U.S.C. s 79j, which requires that any registered

public-utility holding company comprise a "single integrated

... system" that is "physically interconnected or capable of

physical interconnection" and "confined in its operations to a

single area or region," id. ss 79j(c)(1); 79k(b)(1);

79b(a)(29)(A). Because the Commission failed to explain its

conclusions regarding the interconnection requirement, and

because it failed to justify its finding that the proposed

acquisition will satisfy the single-area-or-region requirement,

we vacate the Commission's order and remand for further

proceedings consistent with this opinion.

I.

Congress passed the Public Utility Holding Company Act

of 1935, 15 U.S.C. ss 79a et seq. ("PUHCA"), to "protect

consumers and investors from abuses associated with [interstate] public utility holding companies," Envtl. Action, Inc. v.

SEC, 895 F.2d 1255, 1258 (9th Cir. 1990). Many of these

companies had developed highly pyramidal structures with a

few not always responsible shareholders of the top holding

company exercising excessive control over the underlying

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operating companies. See Am. Power & Light Co. v. SEC,

329 U.S. 90, 100-03 (1946). To ensure that "the growth and

extension of holding companies" bear some "relation to economy of management and operation or ... integration and

coordination of related operating properties," 15 U.S.C.

s 79a(b)(4), the Act requires most interstate holding companies to register with the Securities and Exchange Commission, id. s 79e, and charges the Commission with reviewing

all transactions in which a registered holding company proposes to acquire securities or utility assets of another holding

or public-utility company, id. s 79j.

Although PUHCA states that the Commission "shall approve" most proposed acquisitions, id. s 79j(b), it details

several conditions barring approval, two of which are relevant

here. First, the Act prohibits approval of an acquisition if the

Commission finds that the resulting holding company will no

longer constitute a single "integrated public-utility system,"

id. ss 79j(c)(1); 79k(b)(1), defined elsewhere as--

[A] system ... 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 operations 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.

Id. s 79b(a)(29)(A). The Commission has broken this language down into four separate prerequisites for approval of a

proposed acquisition: (1) The post-acquisition public-utility

system's assets must be "physically interconnected or capable

of physical interconnection" (the interconnection requirement); (2) the assets must be capable of economic operation

"as a single interconnected and coordinated system" (the

coordination requirement); (3) the system itself must be

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ment); and (4) the system "must not be so large as to impair

... the advantages of localized management, efficient operation, and the effectiveness of regulation" (the localization

requirement). Electric Energy, Inc., PUHCA Release No.

13871, 38 S.E.C. 658, 668 (Nov. 28, 1958). The second

relevant PUHCA condition prohibits the Commission from

approving an acquisition unless the Agency finds that the

proposed transaction will "serve the public interest by tending towards the economical and efficient development of an

integrated public-utility system." 15 U.S.C. s 79j(c)(2). To

win Commission approval, then, a proposed acquisition must

not only meet the four single-integrated-system requirements, but do so in a way that produces net " 'efficiencies and

economies.' " Wisconsin's Envtl. Decade, Inc. v. SEC, 882

F.2d 523, 528 (D.C. Cir. 1989) (quoting Union Elec. Co.,

PUHCA Release No. 18368, 45 S.E.C. 489, 494 (Apr. 10,

1974)).

The proposed acquisition at issue here will merge Central

and South West Corporation's ("CSW") four wholly-owned

operating subsidiaries, which currently supply power to parts

of Arkansas, Louisiana, Oklahoma, and Texas, with Intervenor American Electric Power Company's ("AEP") whollyowned electric generating company and seven wholly-owned

electric operating utilities, which supply power to parts of

Indiana, Kentucky, Michigan, Ohio, Tennessee, Virginia, and

West Virginia. Under the terms of the agreement, a newlyformed AEP subsidiary will merge with and into CSW. CSW

will survive the merger, but it and most of its subsidiaries will

become subsidiaries of the post-acquisition company--socalled "New AEP." With more than thirty-seven thousand

megawatts of generating capacity, New AEP will serve close

to five million customers in eleven states.

AEP and CSW's systems are neither contiguous nor physically interconnected--indeed, at their closest point, they are

separated by hundreds of miles. See Appendix A; see also

AEP, Service Territories, at http://www.csw.com/about/

territory.htm (last visited Nov. 8, 2001). The companies

propose to interconnect their systems by means of a 250-

megawatt, unidirectional transmission service contract with

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Ameren Corporation. This "contract path" will enable New

AEP's western zone (the current CSW system) to make use

of some surplus generating capacity--that is, generating capacity over and above firm load obligations--in the eastern

zone (the current AEP system). The contract extends for

four years (from June 1, 1999 to May 31, 2003), after which

New AEP may renew, though potentially at greater cost.

See Resp't's Br. at 35. AEP and CSW apparently expect that

there will be fewer "opportunit[ies] to transfer energy economically" from west to east than from east to west, but when

and if such opportunities arise, New AEP proposes to make

use of its rights under pre-existing transmission service

agreements. Am. Elec. Power Co., Inc. & Central S. W.

Corp., PUHCA Release Nos. 35-27186, 70-9381, 2000 SEC

LEXIS 1227, at *61 n.79, *65-66 (June 14, 2000) ["Approval

Order"].

The proposed acquisition requires the approval of several

regulatory agencies in addition to the Securities and Exchange Commission. The Federal Energy Regulatory Commission granted conditional approval in March 2000 provided

that AEP and CSW reduce the merger's potential anticompetitive effects by divesting 550 megawatts of generating

capacity and "limit[ing] their ability to contract for firm

transmission capacity from [east to west] to 250" megawatts.

Am. Elec. Power Co., Cent. & S. W. Corp., Docket Nos.

EC98-40-000, ER98-2770-000, ER98-2786-000, 90 F.E.R.C.

p 61,242, 61776 (2000) (reversing in part, affirming in part,

vacating in part, and modifying FERC's initial decision); see

also Wabash Valley Power Ass'n v. FERC, 268 F.3d 1105

(D.C. Cir. 2001) (denying petition for review). The public

utility commissions of the affected states also considered the

proposed merger, and most explicitly approved side agreements among AEP, CSW, and third parties, all drafted to

ensure that ratepayers realize benefits from the transaction.

Approval Order, 2000 SEC LEXIS 1227, at *23-24 & n.28.

On June 14, 2000, the Securities and Exchange Commission

added its voice to the chorus approving the proposed acquisition. Id. at *113. Dismissing concerns expressed by four

intervenors--a coalition of utility stakeholders and a group of

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consumer counselors, as well as Petitioners in this case, the

American Public Power Association and the National Rural

Electric Cooperative Association--the Commission found that

the merger satisfies PUHCA's requirements. Id. at *44-109.

Specifically, the Commission concluded that the contract path,

though both temporary and unidirectional, "is adequate to ...

satisfy the interconnection requirement" because it will permit "the economic transfer of energy from one zone of the

New AEP System ... to another," generating "net-fuel related savings of approximately $98 million over the ten-year

period following the merger." Id. at *50-51. Moreover, the

Commission observed, AEP has "committed" either "to renew

the [c]ontract [p]ath" or to find another way to satisfy the

interconnection requirement after 2003. Id. at *48.

With respect to the statute's coordination requirement, the

Commission conceded that New AEP's structure will "differ

in some respects from the traditional ... utility model," in

which generating capacity is centrally pooled and dispatched--presumably because New AEP's east and west

zones will continue to satisfy their respective power demands

separately, transferring power from east to west only when

"one [z]one has surplus capacity available for sale and the

other has insufficient capacity." Id. at *54-55, 61. The

Commission was unconcerned by this lack of centralization,

however, because it viewed "unbundling of generation and

transmission" to be "the direct result of [government] efforts

to promote a competitive energy market--a goal consistent

with" PUHCA's purpose of ensuring that the growth of

holding companies fosters economy of management and operation. Id. at *75.

The Commission next addressed PUHCA's region requirement. Finding that recent technological advances have "reduced the relative importance of ... geographical limitations"

on utility systems, the Commission declined to read this third

requirement as imposing any independent conditions on the

proposed merger. Id. at *83. Rather, the Commission found

that the merger satisfies PUHCA's other requirements--

including interconnection and coordination (discussed above)

and localization (discussed below)--and then concluded, "[i]n

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view of these considerations, ... the New AEP System will

operate in a 'single area or region.' " Id. at *85.

Turning to the fourth single-integrated-system requirement, localization, the Commission observed that "[v]arious

state regulators have ... demonstrated that they can effectively regulate the New AEP System," in that they have

already imposed "an extensive list of service quality standards on the New AEP System Operating Companies that

operate within their states." Id. at *94. Additionally, the

Commission indicated that most affected states have imposed

conditions on the proposed merger, under which the states

retain the ability to review the activities of New AEP and its

affiliates and subsidiaries. Id. at *94-95. Noting that it has

historically "found that effectiveness of state regulation is not

impaired where state regulators have the same jurisdiction

before and after a merger," id. at *95 (citing Conectiv, Inc.,

PUHCA Release Nos. 35-26832, 70-9069, 60 S.E.C. Docket

1260 (CCH) (Feb. 25, 1998)), and also citing its conclusion

(discussed below) that the AEP-CSW merger will generate

efficiencies, id. at *99, the Commission concluded that New

AEP will not be "so large as to impair ... the advantages of

localized management, efficient operation, and the effectiveness of regulation," PUHCA, 15 U.S.C. s 79b(a)(29)(A).

Finally, the Commission considered PUHCA's requirement

that any "acquisition of securities or utility assets of a public

utility or holding company" must itself tend "towards the

economical and efficient development of an integrated publicutility system." Id. s 79j(c)(2). Referring to AEP and

CSW's projection that the merger will save "almost $2 billion

of net non-fuel cost[s]" and "approximately $98 million" of

fuel-related costs over the first ten years, the Commission

indicated that it had "reviewed the assumptions and methodologies" underlying the projection and found them "reasonable and consistent with ... precedent." Accordingly, the

Commission determined that the merger will produce sufficient "economies and efficiencies" to pass muster under

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PUHCA. Approval Order, 2000 SEC LEXIS 1227, at *100-

04.

II.

Reiterating many of the substantive arguments they raised

during the Commission's review process, Petitioners claim

that the Commission erred in finding that the proposed

acquisition satisfies PUHCA's interconnection and region requirements and in accepting AEP and CSW's projections

regarding the cost savings that will result from the merger.

Petitioners also argue that the Commission's "decision not to

hold evidentiary hearings as part of its review of the application for approval of the acquisition was arbitrary and capricious because the acquisition raised factual issues substantially in dispute." Pet'rs' Br. at 2. In considering these claims,

we follow the familiar rules of administrative review, accepting the Commission's findings of fact as long as they are

supported by "substantial evidence," Steadman v. SEC, 450

U.S. 91, 97 n.12 (1981) ("Commission findings of fact are

conclusive for a reviewing court if supported by substantial

evidence." (internal citations omitted)), and affirming its conclusions of law unless they are "arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law,"

5 U.S.C. s 706(2)(A). See, e.g., Wonsover v. SEC, 205 F.3d

408, 412 (D.C. Cir. 2000) (applying this standard).

Interconnection Requirement

Petitioners have two principal concerns regarding the Commission's application of the statute's interconnection requirement: first, that the companies' "temporary, one-way transmission contract" is "too small and too tentative" to satisfy

PUHCA, and second, that the Approval Order departed from

Commission precedent without adequate explanation. Pet'rs'

Br. at 23-24, 33-35. In support of their first point, Petitioners contend that AEP and CSW's contract with Ameren

permits the transfer of only a "[t]oken [a]mount" of power, in

that the 250-megawatt contract path "represents just 0.68

percent" of New AEP's combined 37,000 megawatts of generating capacity. Id. at 24-25. Moreover, they argue that the

unidirectional contract path cannot satisfy PUHCA because

the Act requires interconnection--a term that, to Petitioners,

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implies two-way transfers of power. Petitioners also point

out that AEP and CSW have never said how they plan to

satisfy the interconnection requirement after 2003. The companies' promise to devise an alternative method of interconnecting their systems if they opt not to renew the contract

path is, according to Petitioners, inadequate because " 'separate properties not interconnected must be capable of physical interconnection ... at the time the Commission considers

the matter and not at some indefinite future time.' " Id. at 27

(quoting Gen. Pub. Utils. Corp., PUHCA Release No. 10982,

32 S.E.C. 807, 825 (Dec. 28, 1951)). Finally, Petitioners

invoke our decision in Madison Gas & Elec. v. SEC, 183 F.3d

1337, 1340 (D.C. Cir. 1999), for the proposition that a transmission contract cannot, in and of itself, support a finding

that utility assets are "physically interconnected or capable of

physical interconnection," PUHCA, 15 U.S.C. s 79b(a)(29)(A).

We are unpersuaded by Petitioners' characterization of the

contract path as too "small" and "tentative." Although we

recognize that 250 megawatts represents a small percentage

of New AEP's total generating capacity, Petitioners point to

no statutory language, legislative history, or case law requiring that physically separated zones of a power system be

interconnected by lines capable of transmitting any specific

percentage of the power generated in each zone. Moreover,

the Commission said it could order New AEP to divest one of

the systems if the company fails to devise a satisfactory

method of integrating its utilities after the contract with

Ameren expires. Resp't's Br. at 35-36.

Nor are we swayed by Petitioners' reference to Madison

Gas. All we said there was that a power system's "showing

of a current transmission line contract and of a plan to build

two tie-lines ... before the end of the contract term" adequately supported the Commission's finding that the system's

two zones were "capable of physical interconnection." Madison Gas, 168 F.3d at 1340 (internal citations omitted). This

in no way implies that the transmission line contract would be

insufficient, in and of itself, to satisfy PUHCA. On the

contrary, just before approving the Commission's interconnection finding we observed that "[t]he SEC has reasonably

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construed [the interconnection] requirement to be satisfied in

cases past on the basis of contractual rights to use a thirdparty's transmission lines or if physical interconnection is

contemplated or ... possible within the reasonably near

future." Id. (internal citations omitted) (emphasis added).

Thus, nothing in Madison Gas precludes a finding that AEP

and CSW's contract with Ameren meets PUHCA's interconnection requirement.

We are, however, puzzled by the Commission's acceptance

of a unidirectional contract path to "interconnect" AEP and

CSW. Webster's Dictionary defines "interconnection" as

"connection between two or more: mutual connection"--a

definition that seems, on its face, to require two-way transfers

of power. Webster's Third New International Dictionary

1177 (1993) (emphasis added). In addition, PUHCA itself

requires that the interconnected system be one "which under

normal conditions may be economically operated as a single

interconnected and coordinated" whole. 15 U.S.C.

s 79b(a)(29)(A). Absent some explanation from the Commission, we cannot understand how a system restricted to unidirectional flow of power from one half to the other can be

operated in such a manner.

Moreover, we agree with Petitioners that the Commission

failed to follow its own prior reasoning regarding interconnection of distant utilities. Petitioners point to several prior

orders in which the Commission expressly indicated that

"contract rights cannot be relied upon to integrate two distant utilities." WPL Holdings, Inc., PUHCA Release No. 35-

26856, 53 S.E.C. 501, 517 n.39 (Apr. 14, 1998) (emphasis

added) (concluding that "the distances at issue in this matter"--between cities in Iowa and Wisconsin--are "within the

parameters of the previous decisions"), aff'd, Madison Gas &

Elec., 183 F.3d 1337; see also UNITIL Corp., PUHCA

Release No. 35-25524, 50 S.E.C. 961, 967 n.30 (Apr. 24, 1992)

("[C]ontract rights cannot be relied upon to integrate two

distant utilities."); Northeast Utils., PUHCA Release Nos.

35-25221, 70-7695, 50 S.E.C. 427, 449 n.75 (Dec. 21, 1990)

(indicating that "the use of a third party cannot be relied

upon to integrate two distant utilities"). Although these

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statements were dicta, Petitioners argue that they express a

clear policy from which the Commission departed in approving the AEP-CSW merger. We agree.

As Petitioners point out, the Commission has clearly indicated that a contract path cannot alone integrate distant

utilities. We think those statements sufficiently explicit to

obligate the Commission to provide some rationale for its

current contrary view. "[A]n agency changing its course

must supply a reasoned analysis indicating that prior policies

and standards are being deliberately changed, not casually

ignored." Greater Boston Tel. Corp. v. FCC, 444 F.2d 841,

852 (D.C. Cir. 1970). This is particularly true here, since the

few cases in which the Commission has accepted transmission

contracts as evidence of interconnection, unlike this case,

have involved contracts for transmission of large amounts of

power in both directions between relatively closely situated

utility assets. E.g., Conectiv, Inc., 66 S.E.C. Docket at 1266

(stating that "the physical interconnection requirement of the

Act can be satisfied on the basis of contractual rights to use

third parties' transmission lines, when the merging companies

are members of a tight power pool"--that is, a group of

utilities that coordinate their planning and operation to improve economy and reliability); UNITIL Corp., 50 S.E.C. at

966 (deciding that contract rights were adequate to interconnect utilities, both because the utilities were part of a tight

power pool, and because they were located in New England, a

small area with "unique geographical characteristics"); Centerior Energy Corp., PUHCA Release Nos. 35-24073,

70-7149, 49 S.E.C. 472, 478 (Apr. 29, 1986) (approving use of

third-party transmission lines to interconnect two formerly

separate utility systems in light of a study showing that the

transmission lines would be adequate even in an emergency

in which one of the systems had to meet 100% of the other

system's power demand).

Recognizing the apparent conflict between its past and

present views on the interconnection issue, the Commission

rationalized its approval of the contract path in this case as

follows:

There is dicta in a series of our decisions stating that

contract rights cannot be relied on to "integrate" "disUSCA Case #00-1371 Document #652142 Filed: 01/18/2002 Page 11 of 18
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tant" utility properties.... We do not believe that these

statements mean that a contract path might not meet the

interconnection requirement because of its length.

These earlier cases suggest that the reason a contract

path might not "integrate" two distant utilities was due

to the "single area or region" requirement.... We did

not hold in any of these prior cases that the length of a

contract path was relevant in determining whether the

interconnection requirement ... was met. Such an approach would be inappropriate in view of the express

language of [PUHCA] as well as technological and commercial developments that have made feasible the transmission of power over longer distances.

Approval Order, 2000 SEC LEXIS 1227, at *49-50. We

perceive only one rational interpretation of this peculiar

paragraph: Although a long transmission line may be sufficient to interconnect two distant utilities, the length of the

line--that is, the distance between the connected utilities--

may violate PUHCA's region requirement. Yet the Commission concedes that it failed explicitly to consider the length of

the contract path in deciding whether New AEP meets the

region requirement. Resp't's Br. at 37 n.24. The Commission cannot first distinguish its prior orders on the grounds

that a factor considered in those orders is relevant to one part

of its analysis but not another, and then ignore that factor

altogether. There may be a satisfactory explanation for the

Commission's change in course, but it is not evident from the

Approval Order now before us.

Region Requirement

Challenging the Commission's determination that the proposed merger satisfies PUHCA's region requirement, Petitioners make three arguments: No industry standard supports the conclusion that AEP and CSW are in the same

"region"; the Commission failed to make independent evidentiary findings to support that conclusion; and finally, the

Commission erred in deciding that a proposed acquisition that

meets the other single-integrated-system requirements is

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necessarily also confined to a single region. We agree with

the Commission that the first argument "read[s] into [PUHCA] additional constraints that are not imposed by" the

statute's language. Resp't's Br. at 30. Nothing in the Act

requires, as Petitioners imply, that a utility system's boundaries conform to those of the "reliability regions" created by

the voluntary North American Reliability Council ("NARC").

Nor does the Act mention FERC's "regional transmission

organizations." While the Commission could potentially

point to boundaries identified by NARC or FERC as evidence that a utility system is confined to a single region,

Petitioners may not point to such boundaries as evidence that

a utility system is not so confined. The Commission may

make its own decision regarding the meaning of the region

requirement; NARC and FERC actions have no precedential

value for that decision.

That said, we agree with Petitioners that the Commission's

decision that New AEP meets the region requirement cannot

withstand even the most deferential review, both because the

Commission failed to make any evidentiary findings on the

issue and because it erroneously concluded that a proposed

acquisition that satisfies PUHCA's other requirements also

meets the statute's region requirement. On the first point,

we note that prior Commission decisions addressing the

region requirement have analyzed such factors as the geography and socioeconomic characteristics of the areas covered by

the system. In Middle West Corp., for example, the Commission stated:

To find that an aggregation of the properties of Southwestern Light, Public Service and Southwestern Gas

constitutes a single system, we must find that an area

400 miles north-to-south and 350 miles east-to-west embraces but a single area or region. In well-settled and

economically developed territory such a finding might be

impossible. But the geographical characteristics of the

territory encompassed by this sector of properties are

fairly homogeneous. The area is more or less typical

throughout, relying largely on oil and other minerals,

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agriculture, and relatively light industry for its subsistence. The rendition of satisfactory service in arid and

sparsely-settled areas frequently requires the stretching

of lines over long distances to connect small population

centers with generating facilities strategically placed

near suitable water and fuel supplies. In view of these

facts we believe that the properties in question lie within

a single area or region.

PUHCA Release No. 4846, 15 S.E.C. 309, 336 (Jan. 25, 1944).

Similarly, in American Natural Gas Co., the Commission

listed several factors that could be relevant to a finding that

different service areas are located in "a common economic

and geographic region," including "industrial, marketing and

general business activity, transportation facilities, and gas

utility requirements." PUHCA Release No. 15620, 43 S.E.C.

203, 206 (Dec. 12, 1966).

The Approval Order in this case considers none of these

factors. Never mentioning whether the territories served by

AEP and CSW have common geographic or geologic traits,

the order's discussion of the region requirement rests on two

repeated assertions: that the terms "area" and "region" are

"by their nature ... susceptible of flexible interpretation,"

e.g., Approval Order, 2000 SEC LEXIS 1227, at *81, 84, and

that "recent institutional, legal and technological changes

have reduced the relative importance of geographical limitations" on utility systems, id. at *83, 87, 92. From these

statements, which we accept as true, the Commission somehow concludes that it may reach an affirmative decision

regarding the region requirement without any substantive

discussion of the noncontiguous and seemingly dissimilar

regions served by New AEP.

In fact, as Petitioners' final argument stresses, the Commission's Approval Order ultimately determines that New

AEP satisfies the region requirement not because of any

identified similarities between the areas currently served by

AEP and those served by CSW, but instead because New

AEP satisfies all other PUHCA requirements:

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As described above, the New AEP System will be interconnected and susceptible of economic and coordinated

operation.... We find below that the size of the New

AEP System will not impair efficient operation, localized

management or effective regulation and that the Merger

will result in economies and efficiencies.... In view of

these considerations, we find that the New AEP System

will operate in a single area or region.

Id. at *85 (internal quotations omitted). This analysis conflicts with PUHCA's express requirement that an electric

utility system be "confined in its operations to a single area or

region ... not so large as to impair ... the advantages of

localized management, efficient operation, and the effectiveness of regulation." 15 U.S.C. s 79b(a)(29)(A). The Commission applies the requirement as if it did not include the

word "single" but instead read: "confined to an area or areas

not so large as to impair...." Technological improvements

may well justify ever-expanding electric utilities, but PUHCA

confines such utilities to a "single" area or region.

In support of its approval of the merger in this case, the

Commission cites its decision in North American Co.,

PUHCA Release No. 35-5657, 18 S.E.C. 459 (Mar. 13, 1945),

for the principle that a "flexible approach" to interpreting the

region requirement "is not new," Resp't's Br. at 26-27. But

that case involved an integrated gas rather than electric

system--a highly relevant detail, for even in 1945, PUHCA

specifically provided that "gas utility companies deriving natural gas from a common source of supply may be deemed to

be included in a single area or region." 15 U.S.C.

s 79b(a)(29)(B) (1940). Thus, the statute itself expressly

supported the Commission's conclusion that the two natural

gas companies in question lay "in a single area within the

meaning of the Act" despite the "wide intervening territory

lying between them." North American Co., 18 S.E.C. at 462-

63. No comparable statutory language supports the Commission's parallel decision regarding the electric utilities at issue

in this case. See 15 U.S.C. s 79b(a)(29)(A).

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The Commission may well be right that PUHCA's region

requirement is outdated in light of recent technological advances. In view of the statute's plain language, however, only

Congress can make that decision. In fact, a pending bill

would repeal PUHCA, but it has not yet become law. See

Public Utility Holding Company Act of 2001, S. 206, 107th

Cong. s 4 (2001) (last action in May 2001). In the meantime,

the Commission may not interpret the phrase "single area or

region" so flexibly as to read it out of the Act. The Commission may have some legitimate basis for concluding that

AEP's service territories in Indiana, Kentucky, Michigan,

Ohio, Tennessee, Virginia, and West Virginia fall in the same

"region" as CSW's service territories in Arkansas, Louisiana,

Oklahoma, and Texas, but we cannot find it in the record

before us.

Economies and Efficiencies

This brings us finally to Petitioners' arguments regarding

PUHCA's requirement that a holding company's acquisition

of securities or utility assets of another holding or publicutility company produce net "economies and efficiencies."

According to Petitioners, the Commission erred in accepting

AEP and CSW's projections that the proposed merger will

produce approximately $2.1 billion in cost savings. We disagree. We owe considerable deference to the Commission's

assertion that it "reviewed the assumptions and methodologies that underlie" the projections and found them "reasonable and consistent with ... precedent." Approval Order,

2000 SEC LEXIS 1227, at *102. Moreover, Petitioners point

to no evidence or expert testimony supporting their assertion

that the companies' calculations were flawed. Their unsupported claims that the projections are speculative and that

the companies' FERC-mandated divestiture of generating

capacity is neither economical nor efficient are insufficient to

cast doubt on the Commission's contrary findings or even to

raise a substantial question of fact warranting a hearing. Cf.

City of Holyoke Gas & Elec. Dep't v. SEC, 972 F.2d 358, 365

(D.C. Cir. 1992) (noting that the Commission need only grant

a hearing if "the ultimate decision will ... be enhanced or

assisted by the receipt of [additional] evidence," and that we

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review for abuse of discretion a Commission decision not to

hold a hearing).

III.

The Commission's order is vacated and this matter is

remanded for further proceedings consistent with this opinion.

So ordered.

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[Photo not available electronically]

Appendix A: Map of the United States showing the CSW

service territories in parts of Arkansas, Louisiana,

Oklahoma, and Texas, and the AEP service territories in

parts of Indiana, Kentucky, Michigan, Ohio, Tennessee,

Virginia, and West Virginia.

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