UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


MADISON GAS ELEC CO

v.

SEC


98-1216a

D.C. Cir. 1999


*	*	*


Karen LeCraft Henderson, Circuit Judge: Petitioners  Madison Gas &
Electric Corp and the Wisconsin Citizen's  Utility Board seek review
of a decision of the Securities and  Exchange Commission (Commission
or SEC), which approved  the application, filed pursuant to section 10
of the Public  Utility Holding Company Act (PUHCA or Act), 15 U.S.C. 
s 79j, of WPL Holdings, Inc. (WPL), IES Industries, Inc.  (IES) and
Interstate Power Company (IPC) to merge into a  new holding company,
Interstate Energy Corp. (Interstate).  The petitioners assert the
Commission's approval of the  merger violated sections 10(b)(1),
10(c)(1) and 10(c)(2) of  PUHCA, 15 U.S.C. ss 79j(b)(1), 79j(c)(1),
79j(c)(2). Finding  no violation of PUHCA, we deny the petition for


I.


On July 26, 1996 WPL, IES and IPC filed an application to  merge IES
and IPC into WPL which was then to be renamed  Interstate Energy Corp.
At the time of the application WPL  was the holding company of
Wisconsin Power & Light Com- pany, which was both a public utility
providing electricity in  southern and central Wisconsin and itself
the holding compa- ny of South Beloit Water, Gas & Electric Co., a
public utility  serving northern Illinois. IES was the holding company
of  IES Utilities, which provided gas and electricity to customers  in
Iowa. IPC was a public utility providing gas and electrici- ty to
customers in Minnesota, Iowa and Illinois. Under the  merger proposal
Interstate was to become the holding compa- ny of WP&L (which would in
turn continue to hold South  Beloit Water, Gas & Electric Co.), IES
Utilities and IPC,  thereby controlling four public utilities. On
October 11, 1996  the SEC filed a notice of the application pursuant
to 17  C.F.R. s 250.23, directing that comments and hearing re-


quests be filed no later than November 5, 1996. Filing  Notice, 61
Fed. Reg. 54,687 (1996).


During 1997 the merger was approved separately by the  Federal Energy
Regulatory Commission (FERC) (November  12, 1997), the Wisconsin
Public Service Commission (Novem- ber 7, 1997), the Illinois Commerce
Commission (March 9,  1997), the Minnesota Public Utilities Commission
(March 24,  1997) and the Iowa Utilities Board (September 26, 1997).
On  June 16, 1997, long after the November 1996 deadline for  comment
or hearing requests, the petitioners filed a notice of  appearance,
motion to intervene and request for hearing,  opposing the merger.


On April 14, 1998 the SEC released its opinion and order  approving the
merger and denying the petitioners' request  for hearing. WPL
Holdings, Inc., Holding Co. Act Release  No. 26,856, 66 SEC Docket
2256, 1998 WL 172800 (Apr. 14,  1998), (SEC Op.).1 The petitioners
seek review of the SEC's  decision.


II.


As noted above, the petitioners contend the SEC's approval  of
Interstate's merger violated three provisions of PUHCA:  section
10(c)(2), 15 U.S.C. s 79j(c)(2); section 10(b)(1), 15  U.S.C. s
79j(b)(1); and section 10(c)(1), 15 U.S.C. s 79j(c)(1).  In reviewing
the SEC's decision we must treat its factual  findings as "conclusive"
"if supported by substantial evi- dence," 15 U.S.C. s 79x(a), and
accept its interpretation of  PUHCA if it "neither contravenes
Congress's intent nor is  'unreasonable,' " City of New Orleans v.
SEC., 969 F.2d 1163,  1168 (D.C. Cir. 1992) (citation omitted). We
address each  statutory challenge separately.


A. Section 10(c)(2)


Section 10(c)(2) of the Act provides that the SEC "shall not  approve
... the acquisition of securities or utility assets of a 




__________

n 1 The SEC denied the hearing request because it had been "filed  over
seven months after the expiration of the notice period in this 
matter." SEC Op. at 47.


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 an inte- grated
public-utility system." 15 U.S.C. s 79j(c)(2). The  SEC made the
required finding and the petitioners challenge  it on two grounds: (1)
the merged Interstate is not an  "integrated public-utility system"
under the Act and (2) there  is no evidence that the merged system
will be "economical  and efficient." We conclude that the SEC's
finding should be  upheld in each respect.


First, the petitioners contest the finding that Interstate's  merged
electrical operation is an "integrated system." Sec- tion 2(a)(29)(A)
of PUHCA defines an "integrated public- utility system" to mean:


As applied to electric utility companies, a system consist- ing 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
capa- ble 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 effec- tiveness
of regulation;....


15 U.S.C. s 79b(a)(29)(A). The petitioners argue here, as  they did
below, that the merged electrical assets are not  "physically
interconnected or capable of physical interconnec- tion" because the
assets in Minnesota and Iowa (Interstate  West) are physically
separated from the assets in Illinois and  Wisconsin (Interstate East)
by the Mississippi River. The  SEC found that, despite the physical
separation, the statutory  integration requirement was met because (1)
Interstate had a  three-year "firm contract" to use a transmission
line owned  by two unrelated parties, which line crossed the
Mississippi,  as an interim link between Interstates East and West and


Interstate planned to construct two "tie-lines" of its own to  form a
permanent connection.


The petitioners first contend that the Act requires that a  permanent
interconnection be in place at the time of the  merger. We believe
that the Commission has reasonably  interpreted the statutory
definition otherwise. Section  2(a)(29)(A)'s definition does not
require that assets be actually  interconnected--only that they be
"capable of physical inter- connection," that is, that it is possible
to interconnect them.  The SEC has reasonably construed this
requirement to be  satisfied in cases past "on the basis of
contractual rights to  use a third-party's transmission lines"2 or "if
physical inter- connection is 'contemplated or ... possible within the
reason- ably near future.' "3 Interstate's showing of a current trans-
mission line contract and of a plan to build two tie-lines of its  own
across the Mississippi before the end of the contract  term supports
the Commission's finding that Interstate East  and Interstate West are
"capable of physical interconnection"  under each of the Commission's


The petitioners also contend that actual integration of the  assets is
too uncertain because construction of the tie-lines  must yet be
approved by state regulatory agencies and  because FERC conditioned
approval of the construction on  Interstate's addition of transfer
capability to the Wisconsin  Upper Michigan System, an interstate
transmission facilities  network. See IES Utilities, Inc., 81 F.E.R.C.
p 61,187, at  61,828-29 (Nov. 12, 1997); SEC Op. at 21 (JA 40). The 




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n 2 See UNITIL Corp., Holding Co. Act Release No. 25,524, 50  S.E.C.
961, 986 (April 24, 1992) (citing Northeast Utilities, Holding  Co.
Act Release No. 25,221, 50 S.E.C. 427, 451 n.85 (Dec. 21, 1990); 
Centerior Energy Corp., Release No. 24073, 49 S.E.C. 472 (Apr. 29, 
1986); Cities Serv. Co., Holding Co. Act Release No. 35-4489, 14 
S.E.C. 28, 53 n.44 (1943)).


3 New Century Energies, Holding Co. Act Release No. 26,748, 65  S.E.C.
Docket 277, 1997 WL 429612, at *9 (Aug. 1, 1997) (quoting  North
American Co., Holding Co. Act Release No. 3446, 11 S.E.C.  194, 242-43
(Apr. 14, 1942)).


petitioners, however, have offered no evidence suggesting  either that
the state agencies, which have already approved  the merger, will not
approve the tie-lines as well or that  Interstate will fail to comply
with FERC's condition or to  construct the tie-lines as planned. In
any event, as the SEC  noted in its decision, Interstate has committed
to take mea- sures "to ensure that the interconnection requirements of
 section 2(a)(29) of the Act are satisfied" if the tie-lines are not 
constructed and a connection agreement is not in place. See  SEC Op.
at 22 n.38.


The petitioners further contend that, even if Interstate's  electric
assets form an integrated system, there is insufficient  evidence that
the merger will, as the SEC found, result in  efficient and economic
operation of the system. The SEC  based its finding in the main on
Interstate's estimates that  the merger would result in electrical
production cost savings  of approximately $220.9 million. SEC Op. at
23. The peti- tioners do not challenge this estimate but argue that it
is not  economical or efficient to spend a large sum ($4.4 million) to
 construct tie-lines that will add little electrical capacity to the 
system. The Act, however, requires that the "acquisition" as  a whole,
not merely the construction of an interconnection,  tend toward
efficiency and economy. Interstate's unchal- lenged figures, on which
the SEC relied, support the Com- mission's finding that the
acquisition so tends.4




__________

n 4 In their reply brief, the petitioners acknowledged that the  $220.8
million savings "can be cited to satisfy Section 10(c)(2)."  Reply Br.
at 6-7. At the same time, however, they argue that the  inefficiency
of the tie-lines construction runs afoul of the section  2(a)(29)(A)
definition of an "integrated public-utility system." 15  U.S.C. s
79b(a)(29)(A). To the extent that this argument is not  waived, see
Board of Regents of University of Washington v. EPA,  86 F.3d 1214,
122 (D.C. Cir. 1996) ("[W]e have generally held that  issues not
raised until the reply brief are waived and we do so  here.")
(internal citations omitted), it must be rejected because,  similarly
to section 10(c)(2), section 2(a)(29)(A) requires that a  system's
combined "assets" (and not the interconnection in particu- lar) be


B. Section 10(b)(1)


Next, the petitioners assert that the SEC violated section  10(b)(1) of
PUHCA which prohibits approval of an acquisition  if the Commission
finds, inter alia, that "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." 15
U.S.C. s 79j(b)(1). In finding no imper- missible anti-competitive
tendency, the SEC relied largely on  the merger's approval by FERC and
by "the interested state  commissions," which had "scrutinized the
potential competi- tive effects of the Mergers." SEC Op. at 50. The
petitioners  object to the SEC's reliance on analyses of other
regulatory  bodies, contending the SEC neglected its statutory duty to
 conduct an independent assessment of the merger's anti- competitive


We have previously observed that the SEC is entitled to  "watchfully"
defer to the determinations of other regulatory  bodies: "[W]hen the
SEC and another regulatory agency  both have jurisdiction over a
particular transaction, the SEC  may 'watchfully defer[ ]' to the
proceedings held before--and  the result reached by--that other
agency." City of Holyoke  Gas & Elec. Dep't v. SEC, 972 F.2d 358,
363-64 (D.C. Cir.  1992) (quoting Wisconsin's Envtl. Decade v. SEC,
882 F.2d  523, 527 (D.C. Cir. 1989)). In City of Holyoke, the SEC had 
found that post-merger concentration of control "raise[d] the 
potential for anticompetitive behavior" but "decided to defer  to the
FERC ... in the delicate matter of crafting conditions  designed to
preclude Northeast from engaging in post-merger  anticompetitive
behavior." Id. at 363. Accordingly, the Com- mission conditioned its
approval on that of FERC and the  court upheld the SEC's decision to
give FERC the final say.  As in City of Holyoke, the SEC here deferred
to other  agencies' determinations that, subject to conditions imposed
 by FERC,5 there was no anti-competitive effect. Unlike City 




__________

n 5 FERC's approval was subject to "certain specifically tailored 
conditions for the Mergers that addressed the alleged anticompeti-
tive effects of the Mergers" and "are specifically intended to 


of Holyoke, however, the Commission did so here after rather  than
before the other agencies issued their decisions and  therefore had
the benefit of the agencies' determinations and  supporting materials
before it. The Commission's deference  here was at least as "watchful"
as in City of Holyoke and  should therefore be upheld. Cf. Wisconsin's
Environmental  Decade v. SEC, 882 F.2d 523, 526-527 (upholding SEC's 
"watchful" deference to state regulatory body in determining 
utility's diversification did not require hearing and was not 
detrimental to public interest and noting court was "not  prepared to
say that the Commission abdicates its duty in an  exemption
determination by deciding to rely, watchfully, on  the course of state


C. Section 10(c)(1)


Section 10(c)(1) expressly subjects holding company acqui- sition
approvals to the provisions of section 11 of the Act:  "[T]he
Commission shall not approve ... an acquisition of  securities or
utility assets, or of any other interest, which is  unlawful under the
provisions of section 79h of this title  [PUHCA s 8] or is detrimental
to the carrying out of the  provisions of section 79k [PUHCA s 11]."
15 U.S.C.  s 79j(c)(1) (emphasis added). Relevant here, section
11(b)(1)  imposes on the SEC


the duty ... as soon as practicable after January 1, 1938:


(1) To require by order, after notice and opportunity  for hearing,
that each registered holding company, and  each subsidiary company
thereof, shall take such ac- tion as the Commission shall find
necessary to limit the  operations of the holding-company system of




__________

n 'mitigate the anti-competitive effects of this merger, reduce Appli-
cants' market power to safe harbor levels consistent with U.S. 
Department of Justice and Federal Trade Commission Horizontal  Merger
Guidelines ... and permit the [FERC] to find that the  merger is
consistent with the public interest.' " SEC Op. at 50-51  (quoting IES
Utilities, Inc., 80 F.E.R.C. p 63,001, at 65,002 (admin- istrative law
judge decision)).


such company is a part to a single integrated public- utility


15 U.S.C. s 79k(b)(1). The statute provides a single excep- tion to the
integration requirement: "That the Commission  shall permit a
registered holding company to continue to  control one or more
additional integrated public-utility sys- tems" if the SEC makes
specific findings set out in the "ABC  clauses," 15 U.S.C. s
79k(b)(1)(A)-(C). The Commission  made the required findings and
therefore concluded that  Interstate comes within the ABC exception.
The petitioners  challenge the Commission's determination on two
grounds.  We find neither one persuasive.


First, the petitioners argue, as they did below, that section  10
acquisition approvals are subject to section 11(b)(1)'s inte- gration
requirement but not to its ABC exception. According  to the
petitioners, the exception is available only to holding  companies
existing as of January 1, 1938, PUHCA's original  effective date,
because the exception requires the SEC to  "permit a registered
holding company to continue to control  one or more additional
integrated public-utility systems," 15  U.S.C. s 79k(c)(1) (emphasis
added), and only existing hold- ing companies could continue to
control additional systems.  The petitioners' contention rests on a
misunderstanding of  the relationship between section 10 and section


In enacting section 11, titled "Simplification of holding  company
systems," the Congress imposed on the Commission  the duty to
"examine" existing public utility holding compa- nies "to determine
the extent to which unnecessary complexi- ties may be removed, voting
power fairly and equitably  distributed among security holders, and
the properties in a  holding company system confined to those
necessary or ap- propriate to the operations of a single
geographically and  economically integrated public utility system." S.
Rep. No.  621, 74th Cong., 1st Sess. 32 (1935). Complementarily, sec-
tion 10, as enforced through section 9 of the Act,6 was  "designed to
give the Commission supervision over the future 




__________

n 6 Section 9(a) provides:


development of utility holding systems so that the systems  will be
subjected to the limitation of geographic and economic  integration
laid down in section 11." Id. at 30, quoted in SEC  Op. at 33-34. To
this end section 10(c)(1), as noted above,  expressly incorporates
section 11's requirements. By its  terms, however, section 10(c)(1)
does not require that new  acquisitions comply to the letter with
section 11. In contrast  to its strict incorporation of section 8
(proscribing approval of  an acquisition "that is unlawful"
thereunder), with respect to  section 11 section 10(c)(1) prohibits
approval of an acquisition  only if it "is detrimental to the carrying
out of [its] provi- sions." The Commission has consistently read this
provision  to import into section 10's regime not only the integration
 requirement of 11(b)(1)'s main clause but also the exception to  the
requirement in the ABC clauses, 15 U.S.C.  s 79k(b)(1)(A)-(C).7 Given
the complementary nature of the  two sections and the legislative
history suggesting an intent  to subject existing holding companies
and new acquisitions to  the same limitations, it is not unreasonable


__________

n Unless the acquisition has been approved by the Commission  under
section 79j of this title, it shall be unlawful--


(1) for any registered holding company or any subsidiary  company
thereof, by use of the mails or any means or  instrumentality of
interstate commerce, or otherwise, to ac- quire, directly or
indirectly, any securities or utility assets or  any other interest in


(2) for any person, by use of the mails or any means or 
instrumentality of interstate commerce, to acquire, directly  or
indirectly, any security of any public-utility company, if  such
person is an affiliate under clause (A) of paragraph (11)  of
subsection (a) of section 79b of this title, of such company  and of
any other public utility or holding company, or will by  virtue of
such acquisition become such an affiliate.


15 U.S.C. s 79i(a).


7 See, e.g., New Century Energies, Holding Co. Act Release No.  26,748,
65 S.E.C. Docket 277, 1997 WL 429612 (Aug. 1, 1997);  UNITIL Corp.,
Holding Co. Act Release No. 25,524, 50 S.E.C. 961,  986 (April 24,
1992); see also Philadelphia Co. v. SEC, 177 F.2d 720  (D.C. Cir.
1949) (applying ABC clauses but upholding SEC finding  that applicant
did not satisfy them).


Commission has, that section 11's implementation will not be  harmed if
its ABC integration exception is available to newly  formed holding
companies as well as to existing ones. Under  this interpretation, the
phrase "continue to control" in section  11(b)(1), on which the
petitioners place so much emphasis,  may be viewed simply as
reflecting its context (examining  existing holding companies) and not
as a conscious restriction  of the ABC exception's reach.


Having concluded that the ABC exception is properly ap- plied to
section 10 holding companies that did not exist as of  PUHCA's
effective date, we sustain the SEC's determination  that Interstate
fits within the exception. The petitioners  assert the Commission
should have required Interstate to  divest itself of its gas
systems--which deprive Interstate of  "single integrated public
system" status under section  11(b)(1)--because there was insufficient
evidence to support  the finding, required under clause (A) of section
11(1), that  "each of such cannot be operated as an independent system
 without the loss of substantial economies which can be se- cured by
the retention of control by such holding company of  such system." 15
U.S.C. s 79k(b)(1)(A).8 We conclude that  the Commission's finding
that divestiture will result in sub- 


__________

n 8 The ABC clauses provide in full:


Provided, however, That the Commission shall permit a regis- tered
holding company to continue to control one or more  additional
integrated public-utility systems, if, after notice and  opportunity
for hearing, it finds that--


(A) Each of such additional systems cannot be operated as  an
independent system without the loss of substantial econo- mies which
can be secured by the retention of control by  such holding company of
such system;


(B) All of such additional systems are located in one State,  or in
adjoining States, or in a contiguous foreign country;  and


(C) The continued combination of such systems under the  control of
such holding company is not so large (considering  the state of the
art and the area or region affected) as to  impair the advantages of
localized management, efficient  operation, or the effectiveness of
regulation.


stantial "lost economies" is supported by substantial evidence  and
must therefore be sustained.


In making its finding the SEC applied the formula it had  recently used
to calculate lost economies in New Century  Energies, Holding Co. Act
Release No. 26,748, 65 S.E.C.  Docket 277, 1997 WL 429612, at *10
(Aug. 1, 1997). The  Commission compared the ratio of each gas
system's estimat- ed increased costs to its historical amounts of
income and  revenue, as calculated in the applicants' study, and
found, as  it had in New Century Energies, that clause A was satisfied
 because the ratios were "generally consistent with ratios  found
adequate to support retention in earlier cases." SEC  Op. at 27. The
Commission further noted, although it consid- ered the ratios by
themselves sufficient support,9 that "other 




__________

n 15 U.S.C. s 79k(b)(1)(A)-(C). The petitioners do not challenge the 
Commission's findings under clause (B) or clause (C) of the excep-
tion.


9 In early cases the Commission took the view "that increased 
operational expenses are not sufficient to show satisfaction of clause
 A." New Century Energies, 1997 WL 429612, at 11 (citing New  England
Electric Sys., Holding Co. Act Release No. 15,035, 41  S.E.C. 888
(Mar. 19, 1964); Standard Power & Light Corp., Holding  Co. Act
Release No. 8242 (Jun. 1, 1948); Engineers Pub. Serv. Co.,  Holding
Co. Act Release No. 3796, 12 S.E.C. 41, 62 (Sept. 16, 1942)).  The
Commission explained in New Century Energies that it no  longer
required other factors such as "the assumption that a  combination of
gas and electric operations is typically disadvanta- geous to the gas
operations, and the assumption, conversely, that  the public interest
and the interests of investors and consumers (the  protected interests
under the Act) are promoted by a separation of  gas and electric
operations." Id. at 11. Because of increasing  competition among gas
providers, the Commission reasoned, these  assumptions are no longer
so compelling, while "[i]ncreased ex- penses of separate operation may
no longer be offset, as they were  in New England Electric System, by
a gain of qualitative competi- tive benefits, but rather may be
compounded by a loss of such  benefits, as the Commission finds in
this matter." Id. Although  the petitioners attack this change, they


factors operate to compound the loss of economies represent- ed by
increased costs." Id. Specifically, the Commission  found that the
combined retention of gas assets "offers Appli- cants a means to
compete more effectively in the emerging  energy services business"
and that "[e]ach of the state com- missions found that gas customers
would benefit from the  Mergers." Id. These factors in conjunction
with the cost  comparisons from Interstate's study adequately support
the  Commission's finding of lost economies.


Apart from the substance of the clause A finding, the  petitioners
object to the Commission's exclusive reliance on  studies prepared by
Interstate. Citing City of New Orleans  v. SEC, 969 F.2d 1163, 1166
(D.C. Cir. 1992), they contend the  Commission was under a duty to
verify the studies' data  independently. In City of New Orleans,
however, the court  faulted the Commission for accepting raw data from
an  applicant because the Commission did not have before it any 
"underlying support for the estimates." 969 F.2d at 1167.  Here, by
contrast, it appears that the Commission had not  only the comparison
calculations but also the assumptions and  methodology that yielded
them. See SEC Op. at 27.


For the preceding reasons, we uphold the SEC's approval  of the
Interstate merger. Accordingly, the petition for re- view is


Denied.




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n in question the Commission's reappraisal of its earlier assumptions. 
We therefore see no objection to the change of viewpoint.