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1993 PSI Energy rate increaseso PDJEner;)r !/toric! office August 5, 1993 The Honorable Ted Johnson President Carmel/Clay Parks and Recreation 12618 Limberlost Drive Carmel, IN 46033 Dear Mayor: 1441 South Guilford P. 0. Box 876 Carmel. Indiana 46032 :317.581.3013 AGG 0 9 CE OF THE & YL,,. As you know, this is a very active time for those of us at PSI Energy. We are working to complete our merger with The Cincinnati Gas & Electric Co. and we are fighting IPALCO's hostile takeover bid. At the same time we are continuing normal operations to provide safe and reliable electric service. Given the level of public interest and media coverage of our company, we thought this would be a good time to provide you with a very brief update on two important PSI activities: PSI's rate case and the ClNergy merger. PSI'S RATE CASE In November 1992, PSI announced plans to file for a rate increase of 10 to 14% - our first since 1986. This increase covers costs associated with clean air compliance requirements, investments to improve our infrastructure and compliance with new accounting rules related to employee retirement benefits. In April, we delayed our filing due to the need to concentrate our efforts on responding to IPALCO'S hostile takeover. In early August, we plan to move forward with our request for a general rate case proceeding before the Indiana Utility Regulatory Commission (IURC). At that time, we will file our case -in - chief, including detailed testimony. Hearings will be held and interested parties will have the opportunity to cross-examine witnesses and present testimony. rearrest -for a rate increase is not the result of our proposed merger with The Cincinnati. Gas & Electric Co. (CG&E). PSI's rate case was planned long before our plans to form ClNergy. CINERGY The ClNergy merger is moving forward in spite of IPALCO'S attack. IPALCO continues to fight us in every arena and has been very aggressive in its efforts to seize control of PSI. In response to an IURC ruling, our merger has been restructured so that PSI Energy will remain an Indiana corporation, as a subsidiary of ClNergy. 0 Page Two Among the reasons PSI continues to believe that ClNergy is the superior transaction are the following: * Lower Rates - Our analysis shows that by the end of 10 years, PSI's rates under CINergy will be 8% lower than under a PSI/IPALCO combination and 7% lower than if P5I were to merge with no one. Commitment to Indiana - The ClNergy merger agreement states, in writing, that PSI will continue to maintain at least the same level of support to charitable and civic causes as it does now. PSI has pledged to maintain its local offices throughout our 69 - county service territory. PSI will aggressively continue our well-regarded economic development efforts. IPALCO has made no such pledges to Indiana. In fact, it has indicated that it will consolidate and reduce some charitable contributions, close some local offices and slash PSI's economic development budget. * Strategic Advantages - We strongly believe that the electric industry is changing and becoming more competitive. We believe that consolidations will occur and that it is important to pick a partner who offers PSI access to new markets. CG&E offers important interconnections to the east and south which give us additional access to power when demand on our system is high and additional opportunities to sell power off -system when energy demand on our system is low. You may already know that one of the most controversial features of . IPALCO'S plan is its proposal to charge customers $900 million to fund its hostile takeover of PSI. Enclosed is a thoughtful letter from Indiana Congressman Phil Sharp regarding this topic. Our battle with IPALCO isnot one which we started or one which we chose. I personally believe that hostile takeovers waste valuable energy and resources and IPALCO'S actions have caused deep divisions in many areas of this state. But PSI and its board of directors strongly believe that ClNergy and the benefits it will provide are right for PSI, our customers and our shareholders, and we are resolved to fight IPALCO'S hostile takeover. Thank you for your interest in these issues. If you have any questions regarding our rate plans, ClNergy or any other PSI matters, please don't hesitate to call me at 581-3013. Sin re y J Di bjl MCCOSKEY 1 t Manager k£ 2..1.20001001 a..K.e IS Laws. oiluontha 4 prat rNst.a/ Mat 1••••4 C Lanza. �i 7..r MVM.. WNIY Yd. 1441. Ind cc $.floc ..ra.M a..om.n .101e, d•„ ..a.GI.J M.¢q 1 Wen l.d,Vll. Winn ay. t+u ..KLA. =rt tjs wean. cM.c:xx YON./3. 0 Med.. [WC b...Cf J wpy.inP C..._ tifabq 11.b. *cult of Repregentatibel Czatnitrlt m Curry Ona [amort SUBCOMMITTEE ON ENERGY AND POWER antinstnn. inC 20515-6117 July 29, 1993 Chairman James R. Monk Indiana Utility Regulatory Commission 302 west Washington Street Roca E2306, I.G.C.P. Indianapolis, Indiana 46204 Dear Chairman Monk: I as writing to register ay strong concern regarding the possible impact on Indiana censurers of the hostile takeover attempt involving IPALCO Enterprises and PSI Resources. At the outset, I want to make it clear that I am net in a position to judge the relative =Grits of either the IPALCO -PSI takeover or the CINergy merger. Both of these proposals involve complex financial arrangements. Either would require in-depth analysis by your Commission, which has the responsibility to weigh the facts and legal arguments about what is best for Indiana consumers. However, because of the intense concern of a number of my constituents, I have had some research done on the history of acquisition adjustsentc in utility rata cases. This review confirmed my sense that IPAECO's request for a $900 million acquisition adjustment, as outlined in its filing with the u.3. Securities and Exchange commission (SECJ in connection with its hostile takeover bid, is of an unprecedented size. The magnitude of this acquisition adjustment raises serious concerns in my mind about problems, not only with this transaction, but also with its potential for setting a precedent that puts consumers at risk all over this country. specifically, I am concerned about any device that will force consumers to finance a Berger or a hostile takeover.. Historically, in oases involving acquisition adjustments, state commissions have pared down, regcesta to have carsusers bear the burden, or have subjected approval of such fees to stringent conditions. -z- Finally, regulators have approved acquisition adjustments primarily, if not always, in cases .involving mergers that ars friendly or necessary to raSCtla troubled companies -- not hostile takeover attempts. In those cases, including some in Indiana, the combined company resulting from a merger was clearly in a better position to previda service to ratepayers. Under such circumstances, it may be appropriate to ask censurers to.pay for part of the cost of financing the merger. However. I am much more skeptical about this device in the cantext of a hostile takeover. We vitnessed uneconomic, inefficient combinations of companies in other parts of the economy during the 1980's. Any parallel activity in the electric industry could have tremendously damaging effects on captive electric consumers. Speaking as the elected representative of Indiana consumers whose interests are affected by I7lLc0's bid, and in light of my experience as Chairman of the subcommittee on Energy and Power of the U.S. House of Representatives, I would like to explain my concerns and urge you to scrutinize any acquisition adjustment request very closely. As I have indicated, the cora of ay concern is the $900 million "acquisition adjustment" described in IPALCO's filing with the SEC. The company plans to ask the IURC to allow it to recover this fee from Indiana consumers through their electric bills. I want to make it clear that I would be concerned about any proposal, by any party, that so clearly burdened consumers. A number of my constituents have contacted me in connection with the proposed takeover, asking we what I think about the acquisition adjustment and whether it is fair to consumers. Many of these PSI customers -- from the industrial consumer to the person on the street -- are concerned that they will be called upon; up front, to foot the bill for a corporate adventure which may never producethe future savings for consumers which IjPALCO projects. In other words, many ratepayers fear that the takeover would put them at severe risk, without much prospect of future benefit, while guaranteeing IPALCO's shareholder, an immediate profit regardless of how the company fares in the long run. Legislation passed by the Congress last year recognized that we are on the brink of a new era in the electric industry. Through reforms to the Public [Utility Holding Company Act of 1935 (puHcA) and the Federal Power Act, Congress sought to benefit consumers by increasing opportunities for competition in the electric industry. In amending these statutes, Congress vas mindful of their original purposes — to bring order to a monopolistic, unregulated industry whose consumers and investors had bean hared by unrestrained stock speculation during the roaring '20's and early Depression years. 0 - 3 - As the legislation proceeded, it became clear to me that the electric utility industry is moving out of a twenty add period of growth through construction -- same of it unwise -- to a period where growth is more likely to take place either through purchases of power or.mergers with other utility companies. We already have seen some of this activity in the successfully concluded 1992 merger of Kansas Power and Light Company and Ranzas Gas and Electric Company, and in the failed 1991 merger effort involving Southern California Edison Company and San Diego Cas and Electric Company. withcut a doubt, some of these transactions will and should be carried cut. Under the right circumstances, a utility merger can result in lower costs and improved service for consumers, while still providing an attractive return on investment. It is essential, however, that these transactions be based on the efficiency of the marketplace, and not on artificial incentives. I cannot stress too strongly that regulators must examine the merits of a merger, if any, from the consumers' standpoint. The same speculative urges that led to enactment of FURCA in 1935 are present today. I understand that analysis of the proposed $900 million acquisition adjustment will require a great deal of sophistication, and that accountants and lawyers will debate how best to evaluate it. Suffice it to say that this figure is higher than any I am aware of, including the $312 million acquisition adjustment approved by the Kansas state commission in 1992. I believe that IURC approval of a $900 zillion acquisition adjustment could only be justified by a crystal clear demonstration of future savings for consumers. This assessment will require the Commission to look far into the future, and to try to determine whether the savings to consumers which IPALCO forecasts will in fact materialize. If a high degree of certainty is impossible, then perhaps the companies involved should find a different way of financing their transactions that does not put consumers so obviously at risk. At a minimum, recovery of any acquisition fee should be conditioned an the realization of consumer savings, and carefully tracked through milestones that measure progress toward achieving.those savings. l'd like to add a word about precedent. I understand that, in recant years, the Commission has approved acquisition adjustments in several cases involving water and gas utilities. my impression is that these nay not be analogous to IPALCO's plan, since the adjustments were much smaller. In addition, I understand that a number of these mergers involved Utilities experiencing difficulties, or utilities reaching a voluntary settlement -- neither of which criteria applies in the IPALCO -PSI situation. I have already outlined my ccncerne about the dangers to consumers of regulatory encouragement of such activity, and 0 0 0 - 4 - trust that the Commission will carefully examine its precedents to determine whether they should apply in the context of this hostile takeover attempt. • A number of court cases arising out of the last wave of electric utility mergers involved state regulatory actions on accuisition adjustments. In some, courts reviewing these decisions held that approval of all or part of a utility's request to recover an acquisition fee was warranted by the efficiency and savings it secured for consumers. sae Central Me. Posner Co. v. Public Util. ccmm'n, 163 A.2d 762 (Me. 1960); City of patsburch v. Pennsylvania Pub. Ut11. Comm/n, 90 A.2d 607 (1952)). In other cases, however, the court found that state regulators had permitted recovery when it was not justified. Ho one captured the central policy issue more succinctly than did a Pennsylvania judge writing in 1954. In ruling that the state commission erred in approving an acquisition fee for assets which had not performed well, the court concluded; "Insofar as that expectation has not been realized the improvidence of the expenditures was that of the stockholders and cannot be charged to operating expense." Harrisburg Steel Corp. v. Pennsylvania Pub. Util. Comm'n, 109 A.2d 719, 724 (Pa. 1954). I respectfully commend to the Commission the concern this court displayed in ensuring that consumers of another era did not bear the financial burden of their utility's mistakes. Thank you for taking the time to review my general concerns about acquisition adjustments, as well as the specific concerns I have based on what is knovn of IPALCo's proposal' for taking over PSI Resources.