Question
November 7, 2007
VIA ELECTRONIC MAIL
ORIGINAL BY U. S. FIRST CLASS MAIL
Mr. Michael B. Verne
Federal Trade Commission
Premerger Notification Office
Bureau of Competition
600 Pennsylvania Avenue, N.W. Room 303
Washington, DC 20580
RE: (redacted). Hart-Scott-Rodino PremergerNotification
Dear Mr. Verne:
This letter confirms our telephone call of earliertoday and our understanding regarding application of the Hart-Scott-RodinoAct's exemption involving an acquisition of a half-built power plant by ourclient. As you know, the client we represent (the "Client") is aprivately formed nonprofit corporation organized by specific legislative act ofits members, all political subdivisions, under the laws of the State of Ohiofor the sole purpose of benefiting its members (the "Members"). Forthe reasons set forth below and as you confirmed in our telephone call, Client shouldbe treated as a political subdivision for HSR purposes and, therefore, isexempt from the requirements to file a premerger notification with the FederalTrade Commission and the Department of Justice and to comply with theapplicable waiting period. Similar to the client in FTC File # 9904004, Client is an "agency" and is not an"entity" and, therefore, Client is not a "person"nor an "acquiring person" under CFR 801.1.
Description of Transaction
The transaction at issue involves Client's possible acquisition,on behalf of its Members, of a half-built power plant from a major U.S. powercompany that currently owns the facility. The power plant will provide aportion of the future power supply needs of the Members. If the power plant hasoutput capacity greater than that needed by the Members, Client may enter intolong-term contracts to sell the excess output to non-Member public and privateentities. Any resulting income from any such contracts with private entitieswill inure to the benefit of the Members.
Description of Client
The Members of Client must be either (1) politicalsubdivisions of the State of Ohio or another state that own or are in theprocess of initiating electric, natural gas, or communication utility systems,or (2) political subdivisions that consume electric power to distribute it toother political subdivisions that qualify under (1) but are so geographicallyremote from Client's general area of operations that Client cannot economicallyprovide services to such Member. Client's powers specifically include the rightto borrow on behalf of its Members.
Client was organized to assist in procuring the mosteconomic and reliable wholesale electric power supplies and transmissionservices for its Members both on an individual basis and on a "pool"basis for groups of Members. Client generates and buys, or otherwise arrangesfor, electric power for its Members for use in their individual municipalelectric utility systems. It also arranges for the transmission of power to theMembers. Some of the Members obtain all of their power supply through Client,while others purchase only a portion of their needs through Client. In everysituation, however, Client's activities are vitally important to the operationsof the Members. Both its Articles of Incorporation and its Code of Regulationsprovide that it will be operated for the benefit of its Members.
1. AuthorizingStatutes
As stated above, Client was organized by specificlegislative act of its members, all political subdivisions. Any politicalsubdivision interested in becoming a Member must take legislative action to doso. That is, acceptance of membership in Client is formally approved andtypically memorialized by such Member's adoption of an ordinance or resolutionor other administrative action.
2.Applicability of Laws
Client is not subject to any Ohio orlocal income tax. Interest on bonds issued by Client is exempt from Ohio andlocal income tax. Ohio recently enacted a commercial activity tax on allreceipts of Ohio businesses. Client is exempt from such tax. Clientis subject to Ohio property taxes and is subject to sales tax onpurchases of its non-utility related property.
Client is a Municipal Power Agency under the laws ofthe State of Ohio. This designation is important for various purposes,including, for example, appropriation of property by public agency. BecauseClient is a Municipal Power Agency, a public body can appropriate property andtransfer it to Client and such use would be considered a public use.
Client is also afforded the treatment of politicalsubdivisions by the Internal Revenue Service (the "Service"). Inaddition to its tax exempt status under section 501(c)(12) of the Internal Revenue Code of 1986, as amended (the "Code"), Client hasreceived several rulings that essentially treat it as a political subdivision.
On May 9, 1996, the Service issued a private letter rulingconcluding that Client is empowered to issue, on behalf of its Members, taxexempt bonds under Code section 103(a). That ruling finds the following factscrucial to the analysis:
Here [Client] was organized under state law as anon-profit corporation by specific legislative act of its members, allpolitical subdivisions of State, as authorized by State law. Each [Member] willspecifically approve any debt issued by [Client], and each will be responsiblefor part of the debt service. [Client's] public purpose is to help its membersby providing economical electrical power, transmission of electrical powertechnical services, and mutual aid. The members control [Client] throughtheir power to elect and move representatives on the governing Board ofTrustees. [Client] is a non-profit corporation and none of [Client]sincome can be paid to any person or entity other than a member upon dissolutionany assets remaining after payment of debt must be divided among the members,including past members, according to their contributions, dues, and patronage.(emphasis added.)
The Service issued another private letter ruling on October 24, 2002under Code section 141 which addresses the taxation of private activity bonds(i.e., bonds issued by non-governmental persons for private purposes). Inconcluding that Client came within the meaning of "governmentalperson" under Treas. Reg. 1.141-1(b), the ruling considered the following facts relevantto the analysis:
[Client] was formed by the Members to obtaineconomic, reliable supplies of electric power and transmission services onbehalf of its Members (political subdivisions of certain states) and to providerelated technical services to its Members. By obtaining electric power andtransmission services and providing related technical services, [Client]performs the same or similar functions that each Member would be required toperform in individually if [Client] did not exist. Hence, [Client] is used forthe governmental purpose of its Member utility systems and performs thegovernmental function on behalf of the Members.
The Members have the powers and interests of anowner. All annual revenues in excess of expenses accrue to the benefit of theMembers in that they are either applied to reduce costs of services to Membersor are treated as increases to Members' patronage capital. In the event of[Client's] dissolution or liquidation, Members receive the assets of [Client],to the extent that any remain after payment of [Client's] debts, based oninitial capital contributions, refunds of membership fees, and their patronagecapital.
Controland supervision of [Client] are vested in public authorities and not privateinterests because the Members, each of which is a political subdivision,control all aspects of [Client's] operations through the Board. The Board iscomposed exclusively of representatives of the Members, each of whom must beelected by the Members. In the event of an unscheduled vacancy, any replacementBoard trustee would also be selected from among the Members.
Thefinancial affairs of [Client] are controlled by the Members. The Members,through the Board, establish the amount of all fees and energy charges anddevelop [Client's] annual budget. Both the Board and the Members approve[Client's] annual budget.
Finally, on May 28, 2004, the Service issued aprivate letter ruling that Client's gross income is excluded from taxationunder Code section 115 because Client performs an essential governmentalfunction and all of its income accrues to the benefit of one or more politicalsubdivisions. With regard to Client's status, the ruling states the following:
[Client]was formed to benefit its member political subdivisions by allowing them to usetheir pooled resources to purchase and sell electric power at favorable rates.Such activities are similar to those undertaken by the political subdivisionsin Rev. Rul. 90-74to obtain insurance coverage at the lowest possible rate. Thus, [Client]derives its income from an essential governmental function that accrues to thebenefit of political subdivisions of State. Private interests will benefit nomore than incidentally from the business operations of [Client]. Accordingly,based on the information presented, the income of [Client] will be excludablefrom gross income under section 115(1) of the Code.
3.Board Appointments
Client isgoverned by a board of trustees consisting of sixteen of its Members. Noindividuals, non-Member municipalities, or other entities or organizations areeligible to serve as trustees. Members elected as trustees appoint anindividual to represent them on the Board. The president and general counselserve as non-voting, ex officio trustees. One hundred percent of thecontrol of Client is held by political subdivisions. Although the definition ofcontrol in CFR 801.1(b)refers to the ability to designate 50 percent or more of the directors, theMembers are entitled to designate all of the directors.
In light of these facts andconsistent with our discussion, Client is exempt from the Act. Client is apolitical subdivision and is not an "entity" under section 801.1(a)(2)of the regulations. If your understanding of today's telephone call differsfrom what has been stated herein, please let me know.