RE: Transmission Divesture and Tax Policy

thanks.

-----Original Message-----
From: =09Walton, Steve =20
Sent:=09Monday, August 20, 2001 9:11 AM
To:=09Steffes, James D.; Novosel, Sarah; Shapiro, Richard
Cc:=09Perrino, Dave
Subject:=09RE: Transmission Divesture and Tax Policy

Response to your questions:

1. I think it would be best if it there were transmission assets only. Gi=
ven the geographic scale we want to achieve, adding in the distributions sy=
stems is unnecessary and my lead to more perpetuation of the local mentalit=
y. I don't think you get much of a scale benefit from adding in the distri=
bution systems. The distribution systems are also likely to remain as supp=
liers of last resort in the event of retail access, which raises complicati=
ons. It would be equivalent to an pipeline also being an LDC. =20

2. The divesting company does not get the shares, its shareholders receive=
them as a direct distribution. As a result, the old management has no con=
trol over the shares of the Transco. Several utilities (UtilA, UtilB, Util=
C, etc) agree to simultaneously spin off their transmission into BigTrans. =
The share holders of UtilA get X shares of BigTrans in exchange for Y shar=
es of UtilA and how hold Y fewer shares in UtilA and X shares of BigTrans. =
The spin off could also be done as part of a merger. Both parties agree t=
o spin off their transmission into a common company. The shareholders woul=
d receive publicly traded hares in both UtilA-BCombine and BigTrans. The m=
anagements of both companies being separated from each other. There would =
have to be a conflict of interest standard for the board and management of =
BigTrans, which prohibits any substantial benefit from market operations, j=
ust as we have for any other RTO.

Steve

-----Original Message-----
From: =09Steffes, James D. =20
Sent:=09Monday, August 20, 2001 7:32 AM
To:=09Walton, Steve; Novosel, Sarah; Shapiro, Richard
Cc:=09Perrino, Dave
Subject:=09RE: Transmission Divesture and Tax Policy

A couple questions --

1.=09Could the company include distribution wires as well, instead of being=
just a transmission only wires?
2.=09How many shares would a divesting company get? Could this be more tha=
t 5%? If so, wouldn't this be over the "control" threshold?

In general, I fully support this type of action. =20

Jim=09

-----Original Message-----
From: =09Walton, Steve =20
Sent:=09Friday, August 17, 2001 3:56 PM
To:=09Steffes, James D.; Novosel, Sarah; Shapiro, Richard
Cc:=09Perrino, Dave
Subject:=09Transmission Divesture and Tax Policy

Jim, Sarah and Rick,

=09The following describes the suggestion that I made in our meeting this m=
orning. This is a strategy which could only be executed in legislation. =
=20

The Problem:

One of the chief difficulties of forming a Transco are the tax consequences=
of divestiture of assets. The problem was identified in 1995 when we first=
started talking about a Transco in the West. If the parties agree in adv=
ance of divesture to combine their assets with others into a new company, t=
he divestiture creates a tax event. As a result, the Transco's like Allian=
ce or TransConnect have adopted an LLC structure to avoid the tax consequen=
ces of formation. The problem with the LLC form is the reluctance of the o=
wners to surrender all control of their assets to the Managing Member who h=
as "little skin in the game." Questions have also been raised by opponents=
about the fiduciary responsibilities of Managing Member. Are they to look=
out of the financial interests of the owners (passive and active)? All th=
ese issues came up when we were working with various companies in 1999-2000=
on possible pipe/wire companies.

The Suggestion:

Create a short window during which utilities could divest their assets into=
a Transco without facing a tax penalty. Under such a provision, current o=
wners would be allowed to agree in advance to combine their assets to form =
a new company without taxes being levied on the spin off, as long as the ne=
w company was a transmission only company. The shareholders of the contrib=
uting companies would received publicly traded shares in the new company, s=
o there is no issue of the original company controlling the Transco. The F=
ederal Treasury is tax neutral, since without the provision the Transco doe=
sn't form. When the shareholders of Transco sell their shares, the are tax=
able, if the Transco becomes more valuable, then the benefit accrues to Tre=
asury in taxes on the sale of the stock. With a two year window, the compa=
nies would be faced with a one time opportunity to make the shift and avoid=
taxes. This become a trigger for breaking up the vertical integration for=
which a business case can be made the shareholders of today's owners are b=
etter off.

=09Thanks for listening (reading).

Steve