thanks.

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

Response to your questions:

1.  I think it would be best if it there were transmission assets only.  Given the geographic scale we want to achieve, adding in the distributions systems is unnecessary and my lead to more perpetuation of the local mentality.  I don't think you get much of a scale benefit from adding in the distribution systems.  The distribution systems are also likely to remain as suppliers of last resort in the event of retail access, which raises complications.  It would be equivalent to an pipeline also being an LDC.  

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 control over the shares of the Transco.  Several utilities (UtilA, UtilB, UtilC, etc) agree to simultaneously spin off their transmission into BigTrans.  The share holders of UtilA get X shares of BigTrans in exchange for Y shares 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 to spin off their transmission into a common company.  The shareholders would receive publicly traded hares in both UtilA-BCombine and BigTrans.  The managements 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, just as we have for any other RTO.

Steve

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

A couple questions --

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

In general, I fully support this type of action.  

Jim	

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

Jim, Sarah and Rick,

	The following describes the suggestion that I made in our meeting this morning.  This is a strategy which could only be executed in legislation.  

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 advance of divesture to combine their assets with others into a new company, the divestiture creates a tax event.  As a result, the Transco's like Alliance or TransConnect have adopted an LLC structure to avoid the tax consequences of formation.  The problem with the LLC form is the reluctance of the owners to surrender all control of their assets to the Managing Member who has "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 these 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 owners 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 new company was a transmission only company.  The shareholders of the contributing companies would received publicly traded shares in the new company, so there is no issue of the original company controlling the Transco.  The Federal Treasury is tax neutral, since without the provision the Transco doesn't form.  When the shareholders of Transco sell their shares, the are taxable, if the Transco becomes more valuable, then the benefit accrues to Treasury in taxes on the sale of the stock.  With a two year window, the companies 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 better off.


	Thanks for listening (reading).

Steve