No-Action Letter under:
Public Utility Company Act of 1935 -
Section 2(a)(7)

Arizona Electric Power Cooperative, Inc

July 27, 2001

RESPONSE OF THE OFFICE OF PUBLIC UTILITY REGULATION DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 01-2-OPUR Arizona Electric Power Cooperative, et al. File No. 132-3

Without necessarily agreeing with your legal analysis, and subject to the limitations set forth in the paragraph below, based on the facts and representations in your letter of July 26, 2001, we would not recommend any enforcement action to the Commission under section 2(a)(7) of the Public Utility Holding Company Act of 1935 against any Member, as defined in your letter, of Arizona Electric Power Cooperative ("AEPCO") or any Member of its restructured progeny, GENCO, TRANSCO and CSP, if the proposed restructuring of AEPCO takes place in the manner and under the circumstances described in your letter.

You should note that facts or conditions different from those presented in your letter might require a different conclusion. Further, this response expresses only the Division's position on enforcement action. It does not purport to express any legal conclusion on the questions presented. Finally, you should note that the relief provided by this response applies only to the specific Class A, B and C Members identified by name in your letter. It does not extend to any new Members of these three Classes or to the members of any new membership classes which may be added in the future.

David G. LaRoche
Special Counsel

July 27, 2001

July 27, 2001

Robert D. Rosenberg, Esq.
Slover & Loftus
1224 Seventeenth Street, N.W.
Washington, DC 20036

Re: Arizona Electric Power Cooperative
File No. 132-3

Dear Mr. Rosenberg:

Enclosed is our response to your letter of July 26, 2001. By incorporating our answer in the enclosed copy of your letter, we avoid having to recite or summarize the facts involved.

Very truly yours,

David G. LaRoche
Special Counsel

Enclosure

Incoming Letter

October 19, 2001

rdr@sloverandloftus.com

BY HAND

Securities and Exchange Commission
Division of Investment Management
Office of Public Utility Regulation
Mail Stop 5-3
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Catherine A. Fisher, Assistant Director

Re: Request for No-Action Assurance by Arizona Electric Power Cooperative, Inc.; Southwest Transmission Cooperative, Inc.; and Sierra Southwest Cooperative Services, Inc.

Dear Ms. Fisher:

This letter supersedes all prior drafts of our no-action letter request, which are hereby withdrawn in their entirety.

We are counsel to Arizona Electric Power Cooperative, Inc. ("AEPCO" or "GENCO"), and its restructured progeny, Southwest Transmission Cooperative, Inc. ("TRANSCO"), and Sierra Southwest Cooperative Services, Inc. ("CSP"). AEPCO, TRANSCO, and CSP are all nonprofit rural electric generation and transmission cooperative corporations organized under the electric power generation and transmission cooperative laws of the State of Arizona, Ariz. Rev. Stat. §§ 10-2121 to 10-2149. They are hereinafter referred to individually as a "Cooperative" and collectively as the "Cooperatives."

We are writing on behalf of the Cooperatives to obtain your assurance that the Division of Investment Management (the "Division" or the "Staff") will not recommend that the Securities and Exchange Commission (the "Commission") take any enforcement action pursuant to the Public Utility Holding Company Act of 1935 (the "Act") against their current member in connection with the proposed restructuring of AEPCO (the "Restructuring"). As described herein, the current members of the Cooperatives ("Members") are six distribution cooperatives¹ (which are the Class A Members of all three Cooperatives), Morenci Water & Electric Company (Class B Member of AEPCO/GENCO and TRANSCO), the City of Mesa, Arizona (Class B Member of AEPCO/GENCO), Salt River Project Agricultural Improvement and Power District (Class C Member of AEPCO/GENCO), GENCO itself (Class B Member of TRANSCO and CSP), TRANSCO itself (Class B Member of CSP), and CSP (Class B Member of TRANSCO).² The Cooperatives acknowledge that the no-action assurance requested by this letter will be effective only as to the current Members and on the facts as described herein and does not extend to any new Members or new classes of membership of the Cooperatives. The Cooperatives further agree not to make any changes in their Members or classes of Membership without seeking further assurances in advance from the Staff.

As described herein, AEPCO is presently an integrated generation and transmission rural electric cooperative that will be restructured into three entities: a generation company (still named AEPCO, but generally referenced herein as GENCO to distinguish it from the pre-Restructuring AEPCO); a transmission company ("TRANSCO"); and a cooperative service provider ("CSP"), which will act as a wholesale power marketer and a retail energy services provider and provide support services, including staffing of non-core positions, to GENCO and TRANSCO. The three Cooperatives will continue to have largely the same ownership as AEPCO has had (primarily, but not entirely, the same six member-distribution cooperatives, each of which is entirely owned by its retail members-customers), although there are some minor differences in the ownership of each Cooperative, as described infra.

A "no action" was issued for a similar restructuring in Oglethorpe Power Corp., et al., SEC No-Action Letter (Nov. 7, 1996) ("Oglethorpe"),³ and other no action letters have found that interests in nonprofit rural electric cooperatives do not constitute "securities" within the meaning of the Act. We respectfully request that similar treatment be afforded here.⁴ We also ask that such a letter be issued no later than July 24, 2001, as the closing on the Restructuring transaction is presently scheduled to close shortly thereafter.

In further support of this request, we respectfully state as follows.

1. BACKGROUND

1. AEPCO

1. Basic Activities

AEPCO is a nonprofit rural electric generation and transmission cooperative corporation incorporated in Arizona and engaged primarily in the generation, wholesale sales, and transmission of electric energy.

AEPCO's primary customers for generation, wholesale sales, and transmission are its Members, and AEPCO generates most of its own power. AEPCO also sells surplus power (not needed by Members) to non-Members and supplements its generation resources with purchases from other utilities.⁵ AEPCO is engaged to a very limited extent in some other activities.⁶

2. Oversight and Regulation

AEPCO's major source of financing consists of loans from or guaranteed by the Rural Utilities Service ("RUS," successor to the Rural Electrification Administration or "REA"), part of the United States Department of Agriculture.⁷ That financing has been provided through a mortgage that empowers the RUS, consistent with its normal practices and applicable federal regulations, to exercise substantial supervision and oversight over AEPCO's activities. In particular, AEPCO is required to obtain the RUS's approval for contracts and rate schedules under which AEPCO purchases and/or sells power and for other significant activities.⁸ The RUS's consent is required for the Restructuring described herein, and the RUS has imposed a number of conditions on the Restructuring.

The Federal Energy Regulatory Commission ("FERC") generally refrains from regulating the wholesale sales and transmission activities of RUS-financed cooperatives such as AEPCO on the grounds that they are not "public utilities" so as to avoid any conflict with the RUS. See, e.g., Dairyland Power Cooperative, 37 F.P.C. 12 (1967); Salt River Project Agr. Dist. v. Fed. Power Comm., 391 F.2d 470 (D.C. Cir. 1968); City of Paris, Kentucky v. Fed. Power Comm., 399 F.2d 983 (D.C. Cir. 1968).⁹ Nonetheless, § 211 of the Federal Power Act gives FERC separate jurisdiction to order transmission ("wheeling") by a "transmitting utility" under specified conditions, and RUS-financed cooperatives are considered to be transmitting utilities subject to § 211 of the Federal Power Act. See, e.g., Sunflower Electric Power Corporation, 87 FERC ¶61,263 (1999) (noting FERC's § 211 authority over a RUS-financed cooperative). In addition, FERC has imposed a reciprocity condition on non-jurisdictional utilities to obtain service under the open access transmission tariffs of FERC-jurisdictional utilities required under Orders Nos. 888 and 889, as discussed more fully infra with respect to TRANSCO. Also, FERC has just recently made non-jurisdictional utilities in the WSCC subject to temporary wholesale market price mitigation measures.¹⁰

While AEPCO is thus not subject to most of FERC's regulation of utilities, AEPCO has been, and may, along with TRANSCO, continue to be, subject to some regulation by the Arizona Corporation Commission (the "ACC"), the state's public utility commission. The ACC has reviewed AEPCO's wholesale rates to its Class A Members, reviews financings and sales of assets, and performs other regulatory duties. Many states (such as Georgia in Oglethorpe) choose not to regulate rural electric cooperatives located within their boundaries on the grounds that they are owned and controlled by their customers. As some states, such as Arizona, do regulate such cooperatives, a brief review of the federal permissibility of this regulation is in order. However, the Cooperatives wish to stress that they are not relying on their regulation by the ACC as a grounds for requesting the no-action letter.

Notwithstanding Dairyland and its progeny, the Supreme Court held in Arkansas Electric Coop. v. Ark. Public Serv. Comm'n, 461 U.S. 375 (1983), that states may regulate RUS-financed cooperatives, even with respect to their wholesale and transmission rates. States are generally preempted from regulating wholesale sales and transmission by "public utilities" on the grounds that such state regulation would conflict with FERC regulation. See, e.g., United States v. Public Utilities Comm'n of Calif., 345 U.S. 294 (1953).¹¹ Arkansas Electric, however, reasoned that such preemption did not apply to state regulation of RUS-financed cooperatives because FERC does not treat such entities as "public utilities" and thus does not regulate their wholesale and transmission rates.

Arkansas Electric further found that, under the circumstances at issue, the presence of RUS oversight did not conflict with, and was actually intended to coexist with, state regulation. The decision suggested that the RUS might have the authority (which it had not attempted to exercise) to preempt state regulation generally and that the state regulation could not impair a cooperative's repayment of the RUS debt. 461 U.S. at 389 ("a particular rate set by the Arkansas PSC may so seriously compromise important federal interests, including the ability of the AECC to repay its loans, as to be implicitly pre-empted by the Rural Electrification Act").

Conflicts have, in fact, arisen between RUS debt obligations and state regulation. In at least two instances, state regulators have prevented cooperatives from charging rates sufficiently high to cover their RUS debt, and cooperatives have thus been forced into bankruptcy, resulting in discharge of some of their RUS debt. See, e.g., Wabash Valley Power Ass'n v. Rural Elect. Admin., 988 F.2d 1480, 1488-91 (7th Cir. 1993); In the Matter of Cajun Elec. Power Co-op., Inc., 109 F.3d 248 (5th Cir. 1997) (discussing extensively language in Arkansas Electric on possible preemption).

The RUS remains concerned that state regulatory activities could jeopardize repayment of RUS debt, and the overlap between RUS oversight and state regulation of cooperatives remains a potentially open issue.

3. Identity of Members

As a cooperative, AEPCO is owned by its customer Members. AEPCO's Members are divided into three classes: A, B, and C.

1. The Class A Members

The original and primary owners of AEPCO are the six Class A Members described in fn. 1, supra.¹² The Class A Members are all rural electric cooperatives that are engaged in the retail sale and distribution of electricity.¹³ Each of the six Class A Cooperatives is, and is expected to remain, entirely owned by and subject to the control of its retail customers.

Five of the six Class A Members (all except GCEC) have RUS financing, and the RUS exercises supervision and oversight over those Members, much as it does over AEPCO. Because GCEC has no RUS financing, it is subject to FERC regulation with respect to its very limited wholesale and transmission activities involving two municipal customers (the Town of Thatcher and the City of Safford).

The Class A Members that have operations in Arizona (all except for Anza) are regulated by the ACC. California does not subject Anza to economic regulation. DVEC's operations within New Mexico are regulated by the New Mexico Public Regulation Commission, which, as a practical matter, adopts the orders of the ACC with respect to DVEC's rates and other matters.

Each of the Class A Members presently has an "all requirements" contract with AEPCO that obligates it to obtain all of its electric power and associated capacity from AEPCO.¹⁴ AEPCO's contracts with its Class A Members (and other utility customers, including Class B and C Members) provide the revenue stream and security for payment of AEPCO's long-term debt, which currently exceeds $300 million.

2. The Class B and C Members

In addition to its Class A Members, AEPCO has two Class B Members and one Class C Member.

The Class B Members are the City of Mesa, Arizona ("Mesa"), and Morenci Water & Electric Company ("Morenci"), which are both electric utilities.¹⁵ The Class C Member is Salt River Project Agricultural Improvement and Power District ("Salt River Project"), which is also an Arizona electric utility.¹⁶ The inclusion of the Class B and C Members is permitted under Arizona law and was approved by the RUS.

Mesa and Salt River Project are both governmental agencies within the meaning of § 2(c) of the Act. Mesa is an incorporated municipality within Arizona, and Salt River Project is an agency of the State of Arizona. Both entities are democratically-controlled. The voters/resident utility customers of Mesa elect the mayor and city council members to govern the municipality, and the utility constitutes part of the municipality's operations. The officers and board members of Salt River Project are elected by individual (not corporate, trust, or municipal) landowners who reside within the district under a land-based voting system that was upheld in Ball v. James, 451 U.S. 355 (1981). Accordingly, both utilities are directly accountable to their retail customers/voters.

Morenci is a state-franchised, for-profit distribution utility owned by Phelps Dodge Corporation ("PD") with an exclusive service territory. Morenci is regulated by the ACC. Morenci's franchised service territory includes the company town of Morenci, which is owned by PD and which is where Phelps Dodge Morenci, Inc. ("Morenci Mine"), the largest copper producing operation in North America, is located. Until 1998, the Morenci Mine was a customer of DVEC and not a direct customer of AEPCO. The relationship was restructured in 1998, in large part to enable Morenci to obtain unbundled power (including power from other suppliers) that would be transmitted to it by AEPCO. At that point, Morenci became the second Class B Member of AEPCO.¹⁷

The Class B and C Members differ from the Class A Members in several significant respects. First, the Class B and C Members are not cooperatives.¹⁸ As noted, Mesa and Salt River Project are § 2(c) entities, and Morenci is a private utility regulated by the ACC. Second, the Class B and C Members do not have all requirements contracts with AEPCO. Instead, they have long-term contracts to purchase large, but specified, volumes of power from AEPCO. Those contracts are at rates that are, for the most part, specified in advance. In contrast, the rates for the Class A Members are subject to fluctuation in order to enable AEPCO to recoup those costs from its Class A Members that are not recovered from sales to other customers, including the Class B and C Members. In fact, the rates for the Class B and C Members are lower than the rates for the Class A Members. Third, as discussed infra, the voting powers of the Class B and C Members are not as extensive as those of the Class A Members.

AEPCO established the Class B (in 1982) and C (in 1988) membership categories for three principal reasons. First, AEPCO had significant excess generation capacity at the time, and entering into the large, long-term sales contracts with non-cooperatives was an efficient and appropriate use of AEPCO's resources that benefitted AEPCO's Class A Members. The contracts were for substantial volumes of power,¹⁹ and the customers had an interest in being informed of and having some ability to participate in AEPCO's affairs. Such participation reflects the self-help cooperative principle that the customers are the owners of, and should have a voice in, the enterprise.

Second, tax considerations contributed to the creation of the additional classes of membership. AEPCO is a tax-exempt rural electric cooperative under § 501(c)(12) of the Internal Revenue Code. One of the requirements for qualifying for tax-exempt status is that 85% of the cooperative's income or gross revenues must come from the sale of electric power and like-kind services to members. If these large customers were not members, then the revenues associated with those sales would cause AEPCO to forego its tax-exempt status, which would have significantly increased AEPCO's costs and resulting rates. For these reasons, the separate classes of B and C membership were developed.²⁰

Third, because of the differences in the basic interests of the Class A Members and the Class B/C Members, noted supra (including the rate responsibility of the Class A Members for all costs not recouped from other sources), and differences in their voting powers, discussed infra, it made sense to establish separate classes of membership for the Class B and C Members. Creation of the separate classes of membership for the large, non-cooperative customers, with the reduced voting powers, was also appropriate in light of the policy of the RUS, which provides that the "primary" purpose of RUS covered loans is to serve Rural Electrification Act beneficiaries and that service to others is to be "necessary and incidental to the primary purpose." 7 C.F.R. §§ 1710.104 and 1710.106. The creation of the additional Membership classes, with the associated limitations on their voting powers relative to the Class A Members, allows non-cooperatives to become members while preserving the self-help, cooperative nature of AEPCO and enabling the Class A Members to continue to be the primary owners.

4. Finance and Tax Matters

AEPCO operates as a non-profit corporation, and no interest or dividends are paid or payable on any capital furnished by its Members.

AEPCO's capital consists of margins earned on the sale of electricity and other services, which are then credited to Members in accordance with their patronage as patronage capital credits.²¹ However, AEPCO has, until very recently, been in a position of negative equity (i.e., AEPCO's debt exceeded the net book value of its assets), and is not expected to be able to pay out current patronage capital credits to its Members for some time.²²

As noted supra, AEPCO operates as a tax-exempt rural electric cooperative under § 501(c)(12) of the Internal Revenue Code. As also explained supra, AEPCO's tax-exempt status is contingent on, among other things, its obtaining 85% of its revenues from sales to its Members.

5. Membership Interests

Membership interests in AEPCO are not transferable, and any attempt to transfer such interests is null and void and results in the automatic suspension of that Member's interest in AEPCO. Membership is obtained by submitting an application, agreeing to comply with the requirements for membership, and having the application accepted by the Board of Directors or the voting delegates as described below.

Membership in AEPCO carries with it responsibilities as well as rights and powers with respect to AEPCO's activities and governance.

Under § 1.02 of AEPCO's By-laws, Members are to purchase their specified volumes of power from AEPCO. Under §2.01, the Members have a property interest in the assets of AEPCO upon dissolution, following payment of all debts and liabilities as well as the patronage capital credits addressed supra. Any such remaining property and assets are to be distributed among current and former members on the basis of patronage.

Under §4.02 of AEPCO's By-laws, each Class A Member may elect two members to the Board of Directors, the Class B Members may jointly elect directors at the rate of one director for every three members (with rounding up if the number of members is not divisible by three), and the Class C Member may elect one director. Accordingly, AEPCO has fourteen directors: twelve appointed by the Class A Members (two by each Class A Member); one director appointed by Mesa and Morenci jointly (although, as explained infra, Morenci will voluntarily refrain from participating in that process); and one director appointed by Salt River Project. In addition, § 3.06 of AEPCO's By-laws provides for each Member to designate two voting delegates (and possible alternates) to vote on those matters that the By-laws require be authorized by the Members, as opposed and/or in addition to the Board of Directors. Matters requiring authorization by the delegates are admission of new members previously rejected or not accepted by the Board (§ 1.02), the sale, mortgage, lease, or other disposition of all or a substantial portion of AEPCO's property (§ 8.01), and the amendment of the By-laws (§ 12.01).

The difference in voting powers between the Class A and Class B/C Members is appropriate in light of the differences in their relative interests in AEPCO. As noted supra, the Class A Members obtain their full requirements of power through AEPCO, whereas the Class B and C Members have other power supply sources. The Class B and C Members enjoy rates that are lower than those of the Class A Members and their rates are subject to less fluctuation. In contrast, the Class A Members are effectively at risk for whatever costs are not covered by outside sales, including the sales to the Class B and C Members at the lower rates. In essence, the Class A Members are analogous to common stockholders or general partners, and the Class B and C Members are analogous to preferred stockholders or limited partners. The arrangement does not inflict any abuse on the Class B and C Members, who possess greater participation and voting rights than they would if they were non-Member customers. Indeed, as noted, the rates of the Class B and C Members are actually lower than those paid by the Class A Members and are subject to less risk. The arrangement also preserves AEPCO's self-help cooperative nature in that the vast majority of votes are held by the six Class A Member distribution cooperatives.

Under § 7.01, AEPCO is to be operated at all times as a non-profit cooperative, with no interest or dividends to be paid or payable on any capital furnished by Members. As noted supra, § 7.02 provides for retained net margins to be designated as patronage capital and allocated to each Member based on the Member's purchases of electricity and other services from AEPCO. Under § 7.02, capital credited to a Member's account is assignable only to successors in interest in the Member's business or its physical assets, absent a change (which is not anticipated) in the Board's policies of general application.

2. TRANSCO

1. Basic Activities and Creation

TRANSCO is a newly-formed nonprofit rural electric generation and transmission cooperative corporation incorporated in Arizona for future use in connection with the Restructuring.²³

Under the proposed Restructuring, AEPCO's transmission assets, transmission business activities, operations, and associated liabilities, as well as "regulatory assets," will be assigned to TRANSCO. As noted infra, TRANSCO will have many of the same structural and governance characteristics of AEPCO, its generation counterpart.

Under the proposed Restructuring, some of AEPCO's existing RUS and other debt will be assigned to TRANSCO to serve as the purchase price for the transmission assets and business that will be conveyed from AEPCO. TRANSCO will enter into a separate mortgage with the RUS and other lenders together with certain assumption and indemnity agreements for AEPCO debt that could not otherwise be directly allocated to TRANSCO. TRANSCO's assigned portion of AEPCO's debt will be based on the relative appraised value of AEPCO's transmission assets to be purchased.

2. Oversight and Regulation

As a result of the TRANSCO mortgage, the RUS will exercise oversight and supervision over TRANSCO's affairs, including the rates charged by TRANSCO for transmission services, as the RUS does for AEPCO.

Under existing law, the fact that TRANSCO has a RUS mortgage means that TRANSCO will not be directly subject to the "public utility" jurisdiction of FERC.²⁴ Nonetheless, TRANSCO has had its open access transmission tariff accepted by FERC as a "safe harbor" filing.²⁵ Acceptance of the tariff under FERC's "safe harbor" procedures will establish GENCO's and CSP's initial entitlement to receive transmission under the reciprocity provisions of the open access transmission tariffs of FERC-jurisdictional public utilities.²⁶ In addition, the tariff will serve to mitigate any potential transmission market power of CSP; this mitigation is generally required for CSP to obtain FERC authority to become a wholesale power marketer.²⁷ Under FERC's "safe harbor" procedures, acceptance of the open access tariff also establishes a presumption of compliance in the event a complaint is filed with FERC against TRANSCO under § 211 of the Federal Power Act. See Sunflower Electric, supra.

3. Identity of Members

As a cooperative, TRANSCO is owned entirely by its customer Members. TRANSCO's Members are divided into two classes, A and B.

The Class A Members consist of cooperatives that have agreed to have their electric power and associated energy delivered using TRANSCO's facilities and have agreed to share with the other Class A Members in the benefits and costs of ownership of TRANSCO. The Class A Members are the same six cooperatives that are the Class A Members of AEPCO (GENCO). Each Class A Member cooperative is entirely owned by its retail member customers.

The Class B Members consist of cooperatives and others that have transmission agreements with TRANSCO.²⁸ The Class B Members will initially consist of Morenci, GENCO, and CSP.²⁹

As with AEPCO, there are differences in the relative voting power of the two classes of Members. Under §4.02 of TRANSCO's By-laws, each Class A Member will designate one member of the TRANSCO Board of Directors to represent it, and the Class B Members will collectively designate one director to represent them. Accordingly, TRANSCO has seven directors: six appointed by the Class A Members (one by each Class A Member), and one director appointed by GENCO, CSP, and Morenci jointly (although, as explained infra, Morenci will voluntarily refrain from participating in that process). In addition, § 3.06 of TRANSCO's By-laws provides for each Member to designate a voting delegate (and possible alternate) to vote on those matters that the By-laws require be authorized by the Members, in addition to the Board of Directors. Matters requiring authorization by the delegates are admission of new members previously rejected or not accepted by the Board (§ 1.02) and the sale, mortgage, lease, or other disposition of all or a substantial portion of TRANSCO's property (§ 8.01).

The differences in voting power are appropriate, as with AEPCO, in that the Class A Members are fully dependent on TRANSCO for the delivery of power purchased from AEPCO and their rates are subject to adjustment to the extent that costs are not recouped from the other customers. In contrast, Morenci has a more limited stake in that it can obtain transmission service from others and faces less cost exposure to TRANSCO.³⁰ Moreover, the different voting powers will, consistent with RUS policy, cause TRANSCO to be controlled primarily by member distribution cooperatives and to retain its self-help, self-owned nature.

4. Finance and Tax Matters

TRANSCO will operate as a non-profit corporation, and no interest or dividends will be paid or payable on any capital furnished by its Members. TRANSCO's capital will consist of margins earned on the sale of transmission of electricity and other services, which are then credited to members in accordance with their patronage as patronage capital credits.³¹

As a practical matter, TRANSCO is not expected to be in a position to pay out patronage capital credits to its Members for some time. As noted, AEPCO itself has only recently overcome its negative equity position, and TRANSCO will, as part of the Restructuring, acquire debt that is only slightly less than the net book value of its transmission assets it receives from AEPCO.

TRANSCO will operate as a tax-exempt rural electric cooperative under § 501(c)(12) of the Internal Revenue Code, which requires that at least 85% of its income be derived from the sale of transmission to Members. Based on AEPCO's past experience, TRANSCO expects that at least 90% of its income will be derived from sales to Members.

5. Membership Interests

Membership interests in TRANSCO will not be transferable, and any attempt to transfer such interests will be null and void and result in the automatic suspension of that interest. Membership is obtained by submitting an application, agreeing to comply with the requirements for membership, and having the application accepted by the Board of Directors or the voting delegates as described below.

Membership in TRANSCO carries with it responsibilities as well as rights and powers with respect to TRANSCO's activities and governance. Members also have the right to participate in the governance of CSP through the appointment of Directors and voting delegates as specified supra.

Under § 1.02 of TRANSCO's By-laws, Members are to obtain transmission services from or through TRANSCO. Under § 2.01, the Members will have a property interest in the assets of TRANSCO upon dissolution, following payment of all debts and liabilities and patronage capital credits. Any such remaining property and assets are to be distributed among current and former members on the basis of patronage.

Under §7.01, TRANSCO is to be operated at all times as a non-profit cooperative, with no interest or dividends to be paid or payable on any capital furnished by Members. As noted supra, § 7.02 provides for retained net margins to be designated as patronage capital and allocated to each Member based on the Member's purchases of electricity and other services from TRANSCO. Under § 7.02(d), capital credited to a Member's account is assignable only to successors in interest in the Member's business or its physical assets, absent a change (which is not anticipated) in the Board's policies of general application.

3. CSP

1. Basic Activity and Creation

CSP is a newly-formed nonprofit rural electric generation and transmission cooperative corporation³² incorporated in Arizona for future use in connection with the Restructuring.

Under the proposed Restructuring, CSP will function as a cooperative service provider. CSP will provide support functions for GENCO and TRANSCO, and CSP will also have some independent activities.

In particular, CSP will provide support staffing for GENCO and TRANSCO. In that regard, most (but not all) of AEPCO's existing employees will be assigned to, and become employees of, CSP,³³ and CSP will become responsible for the future employment-related benefits of those employees. CSP will also provide separate support functions for GENCO and TRANSCO in such areas as resource planning and long term power marketing. Such functions will be provided to GENCO's and TRANSCO's specifications.

CSP will also undertake some activities in its own right and for its (and its Members') benefit, as distinct from providing activities for the direct benefit of GENCO and TRANSCO. In particular, CSP will function as a long-term wholesale and retail power marketer, selling power and related services in its own name.³⁴ CSP will be assigned various assets, activities, and operations of AEPCO that do not involve generation or transmission. Additionally, CSP will engage in new or related lines of business, such as energy audits and energy management services, as described supra.

As noted infra, CSP will have many of the same structural and governance characteristics of AEPCO and TRANSCO.

2. Regulation

Unlike GENCO and TRANSCO, CSP will not obtain financing utilizing loans or loan guarantees from the RUS. Accordingly, RUS will have no regulatory or oversight functions over CSP. Nonetheless, the RUS's consent is required for the overall Restructuring, including the creation of CSP out of AEPCO, and RUS has imposed a number of conditions on CSP, particularly its relationship with GENCO and CSP. These conditions are intended in substantial part to ensure that CSP's existence and operation do not impair GENCO's and TRANSCO's ability to repay their RUS debt.

Since CSP will not have RUS financing, its wholesale power marketing activities will be subject to FERC's "public utility" jurisdiction. As noted supra, one of the conditions for qualifying as a FERC-authorized power marketer is to show that the marketer and any related entities lack or have mitigated any market power in generation or transmission. As part of that successful showing in Sierra Southwest, supra, TRANSCO made a "safe harbor" transmission filing and CSP demonstrated that it and GENCO lack market power in generation, as noted supra.

CSP's retail power marketing activities will be regulated by the Arizona Corporation Commission ("ACC"), the state's public utility commission. CSP has been established in part as a vehicle by which AEPCO may participate in the retail open access program established by the ACC. None of CSP's retail customers will be "captive," i.e., CSP will have to compete with others to obtain the business of these customers.

3. Identity of Members

As a cooperative, CSP will be owned by its customer Members. CSP's Members are divided into three classes: A, B, and C.

The Class A Members will consist of cooperatives that purchase wholesale power and energy from GENCO, purchase transmission from TRANSCO, and receive services from CSP pursuant to the Resource Integration Agreement (described infra). The Class A Members will be the same six cooperatives that are the Class A Members of both GENCO and TRANSCO. Their regulatory status is addressed supra.

The Class B Members will consist of generation and transmission cooperatives organized under Arizona law that purchase services from CSP. The Class B Members will be GENCO and TRANSCO. Their regulatory status is addressed supra.

The Class C Members will consist of others that purchase retail or wholesale electric power and energy or other related services or products from CSP. It is expected that the Class C Members will initially consist of CSP's retail customers of electricity (when feasible under market conditions) and may eventually include purchasers of other services.³⁵ CSP will have to compete to obtain these customers. Morenci is not expected to become a Class C or other Member of CSP.

Under § 4.02 of CSP's By-laws, each Class A Member will designate one member to the Board of the Directors, the Class B Members will elect one director, and the Class C Members will collectively elect one director. Accordingly, CSP will have eight directors: six appointed by the Class A Members (one by each Class A Member), one appointed by GENCO and TRANSCO jointly, and one appointed by the Class C Members jointly. The differences in the voting powers are appropriate in view of the differences in the level of dependency upon CSP and the fact that CSP will primarily service the Class A Members.

In addition, § 3.06 of CSP's By-laws provides for the appointment of voting delegates (and possible alternates) to vote on those matters that the By-laws require be authorized by the Members, in addition to the Board of Directors. Each Class A or B Member designates a single voting delegate, and the Class C Members designate a delegate from each of three regional districts (Southern Arizona, Northern Arizona, and Other Regions). There are thus a total of eleven such delegates (one for each of the six Class A Members, one for each Class B Member (GENCO and TRANSCO) for a total of two, and three for Class C Members). Matters requiring authorization by the delegates are admission of news members previously rejected or not accepted by the Board (§ 1.02) and the sale, mortgage, lease, or other disposition of all or a substantial portion of CSP's property (§ 8.01).

4. Finance and Tax Matters

CSP will operate as a non-profit corporation, and no interest or dividends will be paid or payable on any capital furnished by its members. CSP will receive its initial capital in the form of capital contributions from GENCO and TRANSCO, its Class B Members. CSP will also receive assets associated with and used to meet the employee-related benefit obligations (such as medical) of former AEPCO employees (including retired employees and current employees being transferred to CSP) that CSP will be assuming. CSP will provide much of the staffing for both GENCO and TRANSCO, primarily utilizing employees that were previously employed by AEPCO. CSP will also provide various services, including long term power marketing, to GENCO under the Resource Integration Agreement. CSP also expects to engage in wholesale and retail power marketing for its own account. Margins that CSP earns on the sale of services and power will be credited to Members in accordance with their patronage as patronage capital credits.³⁶

CSP does not expect to qualify initially for tax-exempt status under § 501(c)(12) of the Internal Revenue Code. While CSP will primarily serve its Members and expects to obtain more than 85% of its revenues from sales to its Members, primarily from staffing and other support services provided to TRANSCO and GENCO, most of the sales at the outset will be for staffing and support services, rather than sales of electricity,³⁷ and CSP consequently will not qualify for tax-exempt status as a rural electric cooperative under those circumstances.

5. Membership Interests

Membership interests in CSP will not be transferable, and any attempt to transfer such interests will be null and void and result in the automatic suspension of that interest. Membership is obtained by submitting an application, agreeing to comply with the requirements for membership, and having the application accepted by the Board or Directors or the voting delegates as described above.

Membership in CSP carries with it responsibilities as well as rights and powers with respect to CSP's activities and governance. Members also have the right to participate in the governance of CSP through the appointment of Directors and voting delegates as specified supra.

Under § 1.05 of CSP's By-laws, Members are to pay for specified services provided by the Cooperative. Under § 2.01 of CSP's By-laws, the Members will have a property interest in the assets of CSP upon dissolution, after payment of all debts and liabilities and patronage credits. Any such remaining property and assets will be distributed on the basis of patronage.

Under § 7.01, CSP is to be operated at all times as a non-profit cooperative, with no interest or dividends to be paid or payable on any capital furnished by Members. As noted supra, § 7.02 provides for retained net margins to be designated as patronage capital and allocated to each Member based on the Member's purchases of electricity and other services from CSP. Under § 7.02(d), capital credited to a Member's account is assignable only to successors in interest in such Member's business or its physical assets, absent a change (which is not anticipated) in the Board's policies of general application.

2. THE RESTRUCTURING

On September 10, 1997, AEPCO's Board of Directors adopted the recommendations of its Structure/Wholesale Power Contract Study Committee as to the proposed Restructuring of AEPCO. Substantial planning, revision, and negotiation, particularly with the RUS, have ensued. The proposed Restructuring is now planned to be consummated on or after July 25, 2001.

The Restructuring is intended to accomplish several objectives. In particular, it is intended to help AEPCO adapt to the emerging electric utility industry and associated industry regulation where generation, transmission, and power marketing are increasingly viewed and conducted as separate and independent activities. The Restructuring will separate AEPCO's generation and transmission activities and assets, and it will also provide a vehicle for AEPCO to participate in wholesale and retail power marketing at the federal and state levels, respectively. Separating the transmission and generation assets and activities will also facilitate AEPCO's potential participation in a possible Regional Transmission Organization as contemplated by FERC Order No. 2000. Establishment of CSP as a cooperative service provider, and associated arrangements for the appropriate coordination and integration of the Cooperatives, will also help preserve the efficiencies and economies inherent in AEPCO's current operations. The Restructuring will thus enhance AEPCO's ability to survive and thrive in the emerging utility industry by providing better service to both its Members and the public as a whole.

The Restructuring Agreement provides that: AEPCO (functioning as GENCO³⁸) will retain AEPCO's generating assets and related activities and operations (i.e., Carbon Coal Company); the transmission assets, activities, and operations will be assigned to TRANSCO; and the various other assets, activities, and operations, as well as most employees (and their benefit obligations as well as investment assets to fulfill those obligations) will be assigned to CSP. CSP will provide much of the staffing for GENCO and TRANSCO pursuant to separate Staffing Agreements entered into pursuant to the Restructuring Agreement, although GENCO and TRANSCO will each provide its own respective management and certain core staff, as described supra.

CSP will also provide long term power marketing and other assistance, including compiling load forecasts and identifying power resource and sales opportunities, to GENCO pursuant to the Resource Integration Agreement.³⁹ CSP will assist GENCO in determining whether GENCO has excess or inadequate resources to meet GENCO's loads, and will identify resource purchase or sales opportunities to resolve any such imbalances, but GENCO will retain control over its sales and purchases of resources. GENCO and CSP will both obtain needed transmission services from TRANSCO. As noted supra, GENCO, TRANSCO, and CSP will share the same Chief Financial Officer, Chief Legal Officer, Chief Auditor, and initially the same CEO (the current Chief Executive Officer of AEPCO) for the sake of efficiency and continuity. Otherwise, the Chief Operating Officers and the other senior management for the three Cooperatives will be separate.

Under the Restructuring, five of the six Class A Members (all except MEC) will retain their existing "all-requirements" wholesale power contracts with GENCO; the members with such contracts are sometimes referred to as "All Requirements Members" ("ARMs"). The all-requirements contracts involve "bundled" sales of both power and transmission from GENCO to the ARMs.⁴⁰ Since GENCO will not own any transmission facilities, GENCO will enter into a transmission agreement with TRANSCO to acquire the transmission to deliver the power under the bundled sales arrangement to the ARMs.⁴¹

MEC has chosen to become a "partial requirements" customer of GENCO. MEC's commitment under its partial requirements contract with GENCO will be for a fixed amount of capacity and associated energy (but not transmission), corresponding to what MEC was projected to take in 2000, the last year in which GENCO's existing resources were projected to be sufficient to meet the loads of its Class A Members and other existing wholesale commitments. MEC will then be free to purchase additional resources from other sources, with or without assistance from GENCO and/or CSP. Since its "partial requirements" contract does not include transmission, MEC will enter into a separate transmission service agreement with TRANSCO to cover the delivery of power to be received from GENCO under the partial requirements contract. To the extent that MEC desires for TRANSCO to deliver other power, MEC will enter into a separate arrangement with TRANSCO.⁴²

MEC's "partial requirements" status is fully consistent with, and actually furthers, the self-help nature of cooperatives. Rather than depend exclusively on GENCO to acquire additional resources that are needed to service MEC's future load growth, MEC desires the ability to contract for its future power needs on its own. MEC's "partial requirements" status will not cause GENCO to have excess resources or give GENCO any sort of unfair advantage relative to other electric utilities. MEC will remain obligated for its share of existing resources; its flexibility applies only to its growth in load. MEC's election to become a "partial requirements" member will not free up any existing AEPCO resources to be sold to non-Members. The Class A Members have experienced substantial load growth in recent years, and GENCO now needs to acquire additional resources to meet those loads, independent of MEC's decision to become a partial requirements customer. The growth in the loads of the Class A Members is likely to leave AEPCO with less excess resources to sell to non-Members at non-peak hours, regardless of MEC's decision to become a "partial requirements" Member.

3. ISSUES ARISING UNDER THE ACT

The principal issue presented is whether the Members of GENCO, TRANSCO, and CSP can be deemed to be holding companies within the meaning of Section 2(a)(7) of the Act by virtue of their membership interests in the Cooperatives. The analysis entails consideration of whether the Cooperatives are electric utility companies within the meaning of Section 2(a)(3) of the Act, and, if so, whether the membership interests constitute "voting securities" within the meaning of Section 2(a)(7) of the Act.

1. The Status of GENCO, TRANSCO, and CSP As Electric Utility Companies

Section 2(a)(3) of the Act defines an "electric utility company" as "any company which owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale ...."

After the Restructuring, GENCO will continue to own and operate facilities for the generation of electric energy for sale and will thus be an electric utility company within the meaning of the Act. Similarly, TRANSCO, after the Restructuring, will own and operate facilities for the transmission of electric energy for sale and will thus also be an electric utility company within the meaning of the Act.

While GENCO and TRANSCO both clearly appear to qualify as electric utility companies, CSP's status is not as clear. CSP will not own or operate GENCO's generation facilities or TRANSCO's transmission facilities, although CSP will (a) be engaged in wholesale and/or retail power marketing and/or brokering, i.e., power sales, and (b) provide staffing and other assistance and support to both GENCO and TRANSCO.

Our request in the next section of this letter assumes that CSP will also be deemed to be an electrical utility company. However, the Staff has issued no-action letters in response to previous requests from conventional (i.e., stock and for-profit) companies engaged in power marketing/brokering activities and analogous similar utility support functions, where the companies sought to avoid being deemed to be electric utilities companies.

Various no-action letters have indicated that power marketing and/or power brokering activities at the wholesale and/or retail level⁴³ are not sufficient to cause an entity to be deemed to be an "electric utility company" within the meaning of the Act. See, e.g., Sun Power Marketing, L.L.C., SEC No-Action Letter (July 24, 1997); Enron Capital & Trade Resources Corp., SEC No-Action Letter (Feb. 13, 1997); LG&E Power Marketing, Inc., SEC No-Action Letter (April 26, 1996); Eastex Power Marketing, Inc., SEC No-Action Letter (April 30, 1996); Coral Power, L.L.C., SEC No-Action Letter (Feb. 22, 1996).

With respect to CSP's support to GENCO and TRANSCO, previous no-action letters have specified that an entity would not be deemed to "operate" an "electric utility company" for purposes of the Act where the entity (a) has no investment interest in the company or its facilities, (b) does not assume full operating responsibility for such facilities, and (c) does not receive a fee related to the facility's revenues or income. See, e.g., Ebasco Services, Inc., SEC No-Action Letter (Aug. 12, 1982); Cobb Electric Membership Corporation/Cobb Energy Management Corporation, SEC No-Action Letter (March 23, 1999); WKE Station Two, Inc./Big Rivers Electric Corporation, SEC No-Action Letter (July 13, 1998).

CSP will comply with each of these criteria. First, while CSP will be a Class B Member of TRANSCO, CSP will not have an investment interest as such in GENCO or TRANSCO.⁴⁴ Second, CSP will not have operating responsibility for either GENCO or TRANSCO. Because GENCO and TRANSCO will each have its own core management personnel, CSP's role will actually be considerably more constricted than in Ebasco, where the outside entity essentially operated the plant to the utility's specifications.⁴⁵ While, as noted, CSP will be a Class B Member of TRANSCO and will, along with GENCO and Morenci, have the right to elect one of TRANSCO's seven directors, CSP's participation will be in its role as a customer of TRANSCO, and it certainly will not have any sort of controlling influence. Third, CSP will provide support, including staffing and other services, to GENCO and TRANSCO, but will do so subject to GENCO's and TRANSCO's respective management directives, plans, and policies.⁴⁶ CSP's fee for providing its services and staffing support will be based on its costs for providing the services rendered to GENCO and TRANSCO and not GENCO's or TRANSCO's revenues or income. In other words, GENCO and TRANSCO will be operated for the benefit of themselves and their Members, and not specifically for the benefit of CSP.

Accordingly, there is a basis for concluding that CSP should not be deemed to be an electric utility company. Nonetheless, we request that the no-action letter be issued for CSP on the same premise as the other Cooperatives, namely that while a rural electric cooperative may be an electric utility company, it does not have any voting securities because it is a cooperative, as discussed below.

2. Membership Interests in TRANSCO, GENCO, and CSP are Not Voting Securities of an Electric Utility Company

GENCO, TRANSCO, and CSP request a determination that the interests of their members in the Cooperatives do not constitute "voting securities" that would result in application of the Act to the Cooperatives or their Members.

Section 2(a)(7)(A) of the Act defines a "holding company" as "any company which directly or indirectly owns, controls or holds with power to vote, 10 per centum or more of the outstanding voting securities of a public utility company ...." Section 2(a)(5) defines a "public utility company" to include an electric utility company.

Section 2(a)(16) of the Act defines a "security" as:

any note, draft, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, receiver's or trustee's certificate, or, in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guaranty of, assumption of liability on, or warrant or right to subscribe to or purchase, any of the foregoing.

Section 2(a)(17) of the Act in turn defines "voting security" as "any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a company ...."

In several previous no-action letters under the Act concerning membership interests in public utility companies organized as cooperative corporations, the Staff stated that it would not recommend any enforcement action against the owners of such interests.⁴⁷ In each case, the cooperatives argued that a membership interest in a cooperative corporation was not a voting security within the meaning of the Act, and, as a result, the owner of such an interest in a public utility company was not a holding company subject to regulation under the Act.

Oglethorpe is the most pertinent of these precedents in that it involved an integrated generation and transmission electric cooperative that was spinning its transmission assets and system operations off to two separate member-owned cooperatives comprised of the same members. Furthermore, Oglethorpe sold power to non-members (so much so that it did not qualify for tax-exempt status) and had, at that time, even entered into a power swap arrangement by which it sold its entire system output to an outside power marketer, which in turn supplied fixed-price energy to Oglethorpe. Additionally, Oglethorpe was not subject to regulation at the state level and did not make a "safe harbor" filing at FERC. Despite the split of one integrated generation and transmission cooperative into three separate, but common member-owned cooperatives, the taxable status of the cooperative, the sale of all of its output to a non-member, and the absence of state regulation and a "safe harbor" filing, a no-action letter was issued for the restructuring.

Other no-action letters involving generation and transmission cooperatives accepted that the presence of some sales to non-members did not negate a cooperative's status or cause its members to possess voting interests. In Western Farmers, non-member sales amounted to 20.1% of the generation and transmission cooperative's sales in one year and 15% in the next year. Distribution Cooperatives involved sixteen rural electric cooperative corporations and two generation and transmission cooperative corporations, each of which operated on a nonprofit basis to supply electricity to its members at cost. In reaching its conclusion not to recommend enforcement action, the Staff noted its reliance on "the fact that all of the cooperatives are nonprofit undertakings, the sale of power is primarily to members (apart from power pool arrangements),⁴⁸ and that neither the certificates nor the incidents thereof are transferable." In Associated and Federated, the Staff noted that one generation and transmission cooperative at issue participated in three power pools through which energy was exchanged with other utility companies and, at times, sold surplus power to nonmembers, with the proceeds of such sales, in effect, credited against costs charged to members. Those outside sales, ranged from 15.4% to 38.6%. AEPCO's outside sales, which also represent surplus generation, historically have been considerably more limited than those in these other instances where no-action letters have been issued.⁴⁹

The Commission Staff has also consistently expressed the view in numerous no-action letters that membership interests in a cooperative are not securities under the Securities Act of 1933 and the Securities Exchange Act of 1934.⁵⁰

Based on the no-action letters referenced above, it is our opinion that no Member of GENCO, TRANSCO, or CSP is subject to regulation under the Act as a result of its membership interest in the Cooperatives or as a consequence of the Restructuring. After the Restructuring, GENCO, TRANSCO, and CSP will all operate on a not-for-profit basis, and each expects to obtain revenues primarily (more than 85%) from sales to Members, as AEPCO has done in the past. Furthermore, neither membership interests in the Cooperatives nor the benefits of such membership are transferable.⁵¹

As noted supra, the Restructuring is very similar to that undertaken in Oglethorpe. The only possibly distinguishing characteristics of the Restructuring are that (a) the ownership of each Cooperative is not entirely identical, (b) the third Cooperative (TRANSCO) has made a "safe harbor" filing that has been accepted at FERC, and (c) some of the Members of the Cooperatives are not themselves cooperatives, although they are either § 2(c) exempt entities or retail customers, with the exception of Morenci. None of these factors constitutes a potentially adverse characteristic, with the possible exception of Morenci, whose situation is addressed in detail infra.

Despite the minor differences in the Class B and/or Class C ownership among the three Cooperatives, the six Class A Members are the primary owners (in terms of both financial responsibility and voting representation) of each Cooperative, as was the case in Oglethorpe. The differences in ownership that do exist among the three Cooperatives in each instance reflect differences in the functions and the associated customer constituencies of each Cooperative.⁵² In particular, CSP's retail power marketing customers will not be receiving services directly from GENCO or TRANSCO and thus will not be members of either Cooperative. Similarly, CSP will not be providing services directly to Mesa, Salt River Project, or Morenci, and those utilities will not be members of CSP, although they will be members of GENCO and/or TRANSCO, the cooperatives from whom they obtain services.⁵³

The participation of the non-Class A Members in the internal governance of each Cooperative serves to make the individual Cooperatives more democratic as institutions, more commercially responsive to their customers, and more operationally independent from the other Cooperatives.⁵⁴ In Western Farmers, a local Air Force base was originally a voting member of the cooperative, but had become a non-voting member of the cooperative at the time the no-action letter was requested. In Oglethorpe, Western Farmers, and Associated and Federated, the generation and transmission cooperatives at issue made sales to non-members to a significantly greater extent than will the Cooperatives. In fact, Oglethorpe had at the time "swapped" all of its generation with a non-member power marketer. The fact that the Cooperatives have broadened their membership to include their principal non-cooperative customers classes is a desirable feature and, compared to having cooperatives makes sales to unrepresented non-Members (as in Oglethorpe and Associated and Federated), serves to militate against any need for Staff oversight pursuant to the Act. As explained above, while the voting rights of the non-cooperative Members carry less weight than those of the Class A Members,⁵⁵ the Class B and C Members also bear much less financial responsibility for the costs of the Cooperatives. Moreover, the Class B and C Members of GENCO pay lower rates than the Class A Members, and the Class B Members of TRANSCO will enjoy greater flexibility than the Class A Members.

The fact that some of the members will not themselves be cooperatives also does not raise any issues under the Act with respect to the Restructuring. As noted, Mesa and Salt River Project are both exempt from PUHCA by virtue of their being § 2(c) entities under the Act. They are not-for-profit entities, and their ultimate managements are elected by and answerable to their customers/voters.

Morenci is neither a cooperative nor an exempt § 2(c) entity. However, its derivative voting powers in GENCO and TRANSCO fall far below the 10% threshold in § 2(a)(7) of the Act. The By-laws of GENCO (and AEPCO) entitle Morenci, together with the other Class B Member (Mesa), to elect one of the fourteen directors. Morenci's proportionate voting interest thus amounts to less than 4% (1/2 x 1/14), which is less than half of the 10% threshold. TRANSCO's By-laws entitle Morenci, together with GENCO (where, as noted, Morenci has a less than 4% interest) and CSP (where, as noted below, Morenci has no interest), to elect one of the seven directors. Accordingly, Morenci's proportionate interest in TRANSCO is still below 5% (1/3 x 1/7), again less than half of the 10% threshold specified in § 2(a)(7) of the Act. Morenci is not, and is not expected or anticipated to become, a member of CSP. In the case of AEPCO, GENCO, and TRANSCO, each of the six individual Class A Members has at least three times the voting power of Morenci.

Given that Morenci's proportionate voting powers are so limited, we believe, and we represent that Morenci also believes, that it is apparent that Morenci's voting rights and/or membership interests are entirely insufficient to give Morenci any practical ability to control or direct the activities or affairs of AEPCO, GENCO, or TRANSCO. Morenci does not have, and does not seek, any such control over the management of the Cooperatives. We also believe that Morenci's presence as a customer-owner of AEPCO, GENCO, and TRANSCO does not alter the cooperative nature of those entities or cause membership interests in them to become "voting securities" within the meaning of § 2(a)(17) of the Act, but, even if it did, Morenci's voting interests would still be de minimis for the reasons stated.

However, in order to eliminate any possibility of control, direct or indirect, for purposes of PUHCA, and in order to facilitate issuance of the no-action relief requested by this letter, Morenci will not exercise or attempt to exercise any control over the management or affairs of the Cooperatives, nor will it exercise or attempt to exercise controlling influence of a type that would require regulation of Morenci as a holding company in the public interest of investors and consumers. Specifically, Morenci will voluntarily abstain from exercising its rights to serve as, or participate in the appointment of, the directors of any of the Cooperatives unless Morenci first requests and receives further assurances from the Staff that the exercise of such rights is consistent with the continued validity of the no-action relief requested by this letter. Morenci will retain the rights under the By-laws to appoint voting delegates and to attend member meetings, which are normally held on an annual basis. In addition, Morenci will retain the right to participate in the distribution of proceeds of a Cooperative in liquidation after payment of all debts and patronage capital, which distribution is to be made among current and former members on the basis of total patronage.⁵⁶ As a result of this voluntary abstention, Morenci's interests in the Cooperatives will be at least the equivalent of the "passive" interests previously addressed in such no-action letters as SW Acquisition, L.P., SEC No-Action Letter (Apr. 7, 2000), and Berkshire Hathaway Inc., SEC No-Action Letter (Mar. 10, 2000).

Regarding any possible issues pertaining to compliance with Section 9(a)(2) of the Act, Morenci is a public utility company and its parent is an exempt holding company. Section 9(a)(2) addresses acquisitions of any security of any public utility. The authorities discussed above demonstrate that membership interests in a cooperative are not considered voting securities under the Act. Moreover, Morenci is foregoing any direct or indirect involvement in the Boards of the Cooperatives, and will only participate in the context of attending annual meetings of AEPCO, GENCO, or TRANSCO. Such abstention entirely eliminates any potential direct or indirect ability of Morenci to control or exert inappropriate controlling influence with respect to any aspect of the Cooperatives' business operations, and further demonstrates that the residual interest of Morenci in the Cooperatives does not constitute a voting security under the Act.

The Restructuring will also not create any sort of "regulatory gap." GENCO and TRANSCO will be subject to RUS oversight.⁵⁷ CSP will be FERC-jurisdictional with respect to its wholesale sales and ACC-jurisdictional with respect to its retail sales. The ACC will also continue to regulate Morenci's activities. FERC's grant of market-based rate authority to CSP for wholesale sales is premised upon CSP's (and TRANSCO's) lack of market power. TRANSCO will be subject to FERC's jurisdiction under § 211 of the Federal Power Act. Additionally, TRANSCO has made an acceptable safe harbor filing, which ensures that non-Members receive comparable treatment to Members. Indeed, the Restructuring is being undertaken to facilitate the open access regimes that have been adopted at the federal (FERC) and state (ACC) levels and to promote customer choice and competition.

In short, while the fact situation in the Restructuring may be more complicated than that in Oglethorpe and Associated and Federated, the Restructuring is not any more problematic in terms of issues arising under the Act, and the transaction is, if anything, actually more benign in terms of the underlying policies promoted under the Act.

As noted above, our opinion is that CSP's relationship with GENCO and TRANSCO fully meets the criteria articulated in Ebasco Services, Inc., SEC No-Action Letter (Aug. 12, 1982), supra, for demonstrating that CSP does not "operate" the facilities of the two other Cooperatives. However, even if CSP is found to be an electric utility company because it operates GENCO and/or TRANSCO (or for some other reason), its Members with 10% or greater interests should still not be found to be "holding companies" under the ruling in Oglethorpe and the related no-action letters in light of the fact that CSP is a non-profit cooperative without any voting stock or other voting securities.

We further note that Cobb Electric Membership Corporation/Cobb Energy Management Corporation, SEC No-Action Letter (March 23, 1999), supra, involved a cooperative (Cobb Electric Membership Corporation or "Cobb Cooperative") and its management company (Cobb Energy Management Corporation or "Cobb Energy"). The Staff agreed that Cobb Energy complied with the Ebasco criteria with respect to not operating Cobb Cooperative.⁵⁸ Significantly, Cobb Energy was a conventional, for-profit corporation. Consequently, failure to satisfy the Ebasco criteria would have caused Cobb Energy to be deemed an "electric utility company" by virtue of its operation of Cobb Cooperative, and stockholders of 10% or more of Cobb Energy's voting stock would have presumably been deemed holding companies. In contrast, CSP has no voting securities. Therefore, even if CSP is found to be an electric utility company because it fails the Ebasco criteria (which it does not) or for some other reason, it still has no voting securities, and its members cannot be deemed to be holding companies.

4. REQUEST FOR NO-ACTION ASSURANCE

We request your assurance that the Division will not recommend that the Commission take action under the Act against GENCO, TRANSCO, CSP, or any of their current Members as identified in this letter in connection with the Restructuring. Specifically, we request your assurance that the Division will not recommend that the Commission consider any Member of GENCO, TRANSCO, or CSP to be a holding company as a result of its "ownership interest" as a Member in one or more of the Cooperatives. With respect to Morenci specifically, we ask that the Staff consider both its lack of derivative voting power in GENCO and TRANSCO and its voluntary decision to refrain from exercising any rights with respect to directors without first obtaining additional clarification or guidance from the Staff. The Cooperatives again acknowledge that the no-action assurance requested by this letter will be effective only as to the current Members and on the facts as described herein and does not extend to any new Members or new classes of membership of the Cooperatives. The Cooperatives further agree not to make any changes in their Members or classes of Membership without seeking further assurances in advance from the Staff.

The Division's assurances are a critical element to the consummation of the Restructuring. The transaction is scheduled to close very shortly. Accordingly, we respectfully request a favorable response to this letter on or no later than July 24, 2001.

If you have any questions or require any additional information regarding this request, please contact the undersigned at (202) 347-7170.

Very truly yours,

Robert D. Rosenberg

RDR:kaw

Endnotes

1	The six distribution cooperatives are: (1) Anza Electric Cooperative, Inc. ("Anza"); (2) Duncan Valley Electric Cooperative, Inc. ("DVEC"); (3) Graham County Electric Cooperative, Inc. ("GCEC"); (4) Mohave Electric Cooperative, Inc. ("MEC"); (5) Sulphur Springs Valley Electric Cooperative, Inc. ("SSVEC"); and (6) Trico Electric Cooperative, Inc. ("Trico").
2	CSP's By-laws contain provisions for Class C Members, but there are no such Members at this time.
3	Like most other generation and transmission cooperatives, AEPCO, formed in 1961 by four member distribution cooperatives, has not previously sought a no-action assurance under PUHCA. The need for such assurance arises because AEPCO will be replaced by three partial successors. In light of the no-action letter in Oglethorpe, AEPCO's lenders have requested that AEPCO obtain such a determination for its Restructuring.
4	The only potentially adverse distinguishing characteristic of the Cooperatives from those in Oglethorpe is that the Cooperatives have some additional classes of membership that include non-cooperative Members. Those non-cooperative members include exempt § 2(c) entities, retail customers, and a for-profit utility. Only the for-profit utility appears potentially problematic. However, as explained infra, the for-profit utility will voluntarily suspend the exercise of various rights so as to make its involvement passive, thereby eliminating any possible basis for the exercise of control.
5	Sales to non-Members of surplus power and capacity result in the more efficient utilization of AEPCO's plant, and any margins resulting from such sales reduce the residual cost burden that must be borne primarily by the Class A Members noted infra. In 1999, sales to non-Members accounted for less than 6% of AEPCO's electric revenues. In 2000, due largely to unusual California market conditions, sales to non-Members accounted for 21% of AEPCO's electric revenues. Non-Member sales are expected to return to no more than 15% of revenues in future years and may be significantly less. AEPCO's non-Member sales consist largely of short-term or spot sales of economy power to numerous other non-captive Western utilities and power marketers. AEPCO purchases power on the spot markets and under long-term arrangements from utilities such as PacifiCorp and Public Service Company of New Mexico. AEPCO also is a member of the Western Systems Coordinating Council, the Southwest Reserve Sharing Group (successor to the Inland Power Pool), and the Southwest Regional Transmission Association, which are organizations that address reliability issues and engage in transmission planning on a regional basis.
6	In 1999, the net income from these other activities amounted to 4.1% of AEPCO's total revenues. AEPCO conducts various non-electric utility activities through a subsidiary, TSE Promotional Products, Inc. ("TSE"). TSE (under the name of its predecessor, Arizona Rural Telecommunications, Inc.) was originally formed to participate in the satellite television market, but did not do so and now provides promotional products (e.g., golf balls, umbrellas, bags) for Touchstone Energy (used as a brand name by electric cooperatives) and has no direct involvement in satellites or television. Another AEPCO subsidiary, Carbon Coal Company, is responsible for ongoing reclamation for a coal mine that was closed more than ten years ago, but which once provided coal for AEPCO's coal-fired generation facilities. AEPCO's other activities result from the formation of a division starting-up activities for CSP including energy audits, energy management services, distributed generation products and services, retail gas marketing, and internet services. Under the restructuring described infra, GENCO will retain the interest in Carbon Coal Company, but the various other non-generation and non-transmission-related activities of AEPCO (including TSE) will be assigned to CSP.
7	The RUS-guaranteed financing was issued through the Federal Financing Bank. AEPCO's other sources of financing include the National Rural Utilities Cooperative Finance Corporation. AEPCO also has issued revenue bonds for solid waste disposal and pollution control. The RUS direct and RUS-guaranteed financing amounts to $212.4 million of AEPCO's total $307.6 million in debt as of 2000.
8	The RUS's activities do not consist of classic economic or rate regulation per se, although the RUS must approve rates charged by its borrowers and otherwise seeks to preserve AEPCO's ability to cover its financial obligations and provide service to its customers-owners.
9	FERC's general jurisdiction over wholesale power sales and transmission extends only to "public utilities." By statute, governmental utilities are not public utilities. In light of agency-created exception for RUS-financed cooperatives, public utilities are thus largely synonymous with investor-owned utilities. However, generation and transmission cooperatives that lack RUS financing are considered public utilities.
10	Order on Rehearing of Monitoring and Mitigation Plan for the California Wholesale Electric Markets, Establishing West-Wide Mitigation, and Establishing Settlement Conference, 95 FERC ¶ 61,418 (2001).
11	The normal "dividing line" between FERC and state regulation is that FERC regulates wholesale sales and transmission by public utilities and the states regulate bundled retail sales and distribution. A number of states are now adopting retail open access measures, much as FERC has done with open access for transmission. FERC has found that retail open access programs can include an implicit component of unbundled transmission and has asserted jurisdiction over that component as well. See, e.g., Arizona Public Service Company, 89 FERC ¶61,226 (1999), clarified, 90 FERC ¶61,054 (2000); Arizona Independent Scheduling Administrator Association, 94 FERC ¶61,302 (2001).
12	DVEC, GCEC, SSVEC, and TRICO formed AEPCO in 1961. MEC joined in 1973, and Anza joined in 1979. These entities are expected to remain the only Class A Members of AEPCO (GENCO), TRANSCO, and CSP. To the extent changes occur in other classes of Members, they will likely be to cause at least 85% of the Cooperative's income to be derived from Members, thus preserving their self-help, self-owned, and cooperative nature. The Class A Members are primarily located within the State of Arizona. However, Anza is located entirely in California, and a small portion of DVEC's service area extends into New Mexico. Arizona is in the process of adopting an electric retail open access program in conformance with changes in Arizona law. Under this program, the Class A Members (other than Anza) will provide unbundled retail distribution services in Arizona in addition to bundled retail power sales. CSP has been established in part to serve as a vehicle for AEPCO to participate in the retail open access market, and CSP's creation out of AEPCO is one of the reasons for the Restructuring.
13	GCEC has two wholesale or transmission customers (Town of Thatcher and City of Safford). Trico has two transmission customers (Avra Valley and Silverbell Irrigation and Drainage Districts). SSVEC has a mutual standby agreement with AEPCO and Arizona Public Service Company ("APS") for the APS and SSVEC McNeal Substations. Some of the Class A Members also offer other services and products of potential interest to their members-customers including surge suppression equipment, satellite televison dishes, internet services, and loans for homes, energy efficiency improvements, and computers.
14	Some of AEPCO's Class A Members have small amounts of "preference" hydroelectric power allocations from the Western Area Power Administration, which they have assigned to AEPCO, and which AEPCO in turn passes through to the Class A Members. Power refers to the energy that is delivered over any period of time (e.g., kWh), whereas capacity refers to the capability to generate or deliver power or energy at any instant (e.g., kW). Capacity makes the supply of energy "firm."
15	Under § 1.01 of AEPCO's By-laws, Class B Members consist of non-Class A Members that have written agreements to purchase at least 15,000 kilowatts from AEPCO. Mesa joined AEPCO as a member in 1982, and Morenci joined as a member in 1998.
16	Under § 1.01 of AEPCO's By-laws, Class C membership is limited to entities organized under Arizona law as an Agricultural Improvement and Power District which currently have a wholesale power agreement with AEPCO. Salt River Project is the only Agricultural Improvement and Power District organized under Arizona law, and it has a written agreement to purchase 100,000 kilowatts of power from AEPCO, making Salt River Project by far AEPCO's largest non-Class A Member customer. Salt River Project is a political subdivision of the State of Arizona. See, e.g., New West Energy Corporation, 83 FERC ¶61,004 (1998). Salt River Project became a Member of AEPCO in 1988.
17	By way of further background, in 1938, after PD transferred its transmission and distribution assets in the Morenci area to Morenci, PD received an exemption from being a public utility holding company under § 3(a)(3) of the Act. Application of Phelps Dodge Corporation, File No. 31-397 (Release No. 1104) (May 27, 1938) (1938 WL 32406 (SEC Release No.)). That order, by its terms, did not relieve Phelps Dodge or its subsidiaries (e.g., Morenci) from "any obligations imposed upon them in any other capacity such as that of an `affiliate' or a `person' as defined in the Act." Another PD subsidiary, Phelps Dodge Energy Services, LLC ("PDES"), has a leasehold interest in the generating facilities at the Morenci Mine and other PD properties and is an exempt wholesale generator ("EWG") under the Act, as amended by the Energy Policy Act of 1992. Phelps Dodge Energy Services, LLP, 88 FEC ¶61,052 (1999). PDES also has obtained authority from FERC to sell power at market-based rates at wholesale, Green Power Partners I LLC, et al., 88 FERC ¶61,005 (1999). In its EWG application, PDES represented that it would not sell power to any affiliate (which includes Morenci) without first obtaining state authorization under § 32(k) of the Act, which PDES has not sought. Morenci does not sell any power at wholesale or provide any transmission; if it did so, however, such activities would be subject to the "public utility" regulation of FERC.
18	Under Arizona law, Ariz. Rev. Stat. § 10-2128, there is no requirement that members of a generation and transmission cooperative be distribution cooperatives.
19	AEPCO faced ample competition for the sales. The competition forced AEPCO to provide rates to the Class B and C Members that are lower than the rates paid by the Class A Members.
20	In Oglethorpe, Oglethorpe had entered into a power "swap" arrangement whereby it sold all of its generation to a non-member power marketer that in turn sold power back to Oglethorpe. However, Oglethorpe had elected to become a taxable entity.
21	Non-operating (including non-Member operating) margins may be treated as patronage capital credits under § 7.02(b) of AEPCO's By-Laws, or maintained as resources to meet financial obligations under § 7.02(c), in either event reducing the cost burden on the Members. For its part, Morenci has elected to have its patronage capital credits credited to the Cooperative as a whole and thus does not have a capital account.
22	Under 7 C.F.R. § 1717.617, RUS approval is required for an electric cooperative to pay out patronage capital credits if its equity is less than 30% of its total assets.
23	As explained infra, TRANSCO has no generation. Under Ariz. Rev. Stat. § 10-2122, a generation and transmission cooperative is a cooperative that sells generation, transmission, or related services to electric utilities.
24	TRANSCO will still be a "transmitting utility" subject to FERC regulation under § 211 of the Federal Power Act. TRANSCO may also be subject to some regulation by the ACC, although the Cooperatives request their regulation by the ACC not be relied upon as a basis for granting the requested no-action letter.
25	Sierra Southwest Cooperative Services, Inc., et al., 95 FERC ¶61,310 (2001). TRANSCO's related filing concerning its standards of conduct was also accepted, subject to making a compliance filing, which will be submitted shortly. Southwest Transmission Cooperative, Inc., 95 FERC ¶ 61,454 (2001).
26	"Safe harbor" status requires that the utility will provide transmission to others on a price and service basis that is at least comparable to what the utility provides to itself and any related entities (such as GENCO, CSP, and the Class A Members). Essentially, TRANSCO is required to adopt an open access transmission tariff that generally complies with the pro forma tariff that FERC prescribed in its "functional unbundling" mandate in Order No. 888. The pro forma tariff prevents discrimination against third party transmission customers. AEPCO is going beyond the functional unbundling requirements of Order No. 888 by placing its transmission activities in a separate cooperative.
27	As explained infra, CSP will not have any RUS financing, which means that FERC will have jurisdiction over CSP's wholesale power sales. For CSP to become a power marketer (i.e., obtain market-based rate authority), FERC requires CSP to demonstrate that it and its related entities do not possess market power in generation or transmission. CSP included such a demonstration of its and GENCO's lack of market power in its FERC application to become a power marketer, which application was granted in Sierra Southwest, supra.
28	TRANSCO may sell its services to non-members as well, which sales will reduce the cost burden on Members through the more efficient utilization of the transmission plant. Under RUS regulations, TRANSCO is required to maintain adequate plant to serve the needs of its cooperative Members, and third-party use is to be incidental to use by those cooperatives.
29	Mesa and Salt River Project will not be Class B Members of TRANSCO because AEPCO (GENCO) will continue making bundled sales to those entities; accordingly, Mesa and Salt River Project will not purchase transmission directly from TRANSCO for this purpose. The membership interests of GENCO and CSP in TRANSCO are somewhat redundant with respect to direct membership interests of the Class A Members and Morenci, but having GENCO and CSP (as well as Morenci) as individual Members of TRANSCO will help TRANSCO meet the requirement for tax-exempt status that 85% of its revenues be derived from sales from Members.
30	The RUS has imposed an essentially unconditional duty on the Class A Members to pay in order to ensure GENCO's and TRANSCO's financial and operational autonomy. Other RUS conditions prevent CSP from exercising operational control or appropriating benefits from GENCO and TRANSCO, particularly with respect to power marketing and resource location support services provided under the Resource Integration Agreement. In contrast, Morenci enjoys considerable ability to obtain power, transmission, and ancillary services from others or its own resources. This flexibility means that Morenci can reduce the share of TRANSCO costs to which it is exposed. The Class A Members (except for MEC, to the extent of its surplus requirements) have no ability to obtain transmission from others and thus no ability to reduce their financial exposure as TRANSCO customers.
31	Non-operating (including non-Member operating) margins may be treated as patronage capital credits under § 7.02(b), or maintained as resources to meet financial obligations under § 7.02(c), in either event reducing the cost burden on the Members.
32	CSP will have no generation nor transmission of its own, but will primarily service GENCO, TRANSCO, and the Class A Members as well as retail customers. As noted supra, Ariz. Rev. Stat. § 10-2122 defines a generation and transmission cooperative as one that provides generation, transmission or related services to other utilities, and § 10-2128 permits non-utilities to be a member of such a cooperative if the By-laws so provide (as CSP's do). CSP may also sell services or power to non-Members, which will reduce the cost burden on Members.
33	GENCO, TRANSCO, and CSP will share a common CEO initially (an estimated five years, to provide for continuity and stability), as well as a CFO, Chief Legal Officer, and Internal Auditor. GENCO will have nineteen core management employees that will not be provided by CSP: (1) the COO, (2-6) five Managers (for (a) Operations, (b) Maintenance, (c) Power Scheduling and Trading, (d) Regulatory Affairs, and (e) Process Control), (7-12) six Power Traders, (13) a Power Biller/Scheduler (supervisory), (14) a Term Trader/Scheduler, (15) a Power/Term Trader, and (16) one After-the-Fact Accountant, and (17-19) (a-b) two secretaries and (c) an administrative assistant. TRANSCO will have thirty core management employees that will not be provided by CSP: (1) the COO, (2-4) three Managers (for (a) System Operations, (b) Transmission Operations & Maintenance, and (c) Transmission Planning), (5-12) eight Administrators (for (a) Operations Reliability, (b) System Control, (c) System Operations Network, (d) System Operations System), (e-f) two for EMS, and (g-h) two for Operations), (13-22) ten Power System Controllers, (23-24) two EMS Analyst IIs, (25) one Systems Engineer/Analyst, (26) an Administrative Assistant, (27) an Administrative Secretary, (28-29) two Transmission Planning Engineers, and (30) one Transmission Planning Technician. GENCO's and TRANSCO's core employees will come directly from AEPCO.
34	GENCO will have rights of first refusal with respect to some purchases and sales of wholesale power by CSP. CSP will make retail power sales within the service territories of its Class A Members only pursuant to joint marketing agreements with the affected Class A Member.
35	As noted supra, Arizona is in the process of implementing a retail open access electric power competition program. CSP is being created so that AEPCO (pre-Restructuring) will have a vehicle to participate in that program.
36	Non-operating (including non-Member operating) margins may be treated as patronage capital credits or as permanent, non-allocated capital, in either event reducing the cost burden on the Members.
37	Under current market conditions, CSP's retail power sales to Class C Members are likely to be very limited, as are any sales to non-Members.
38	GENCO will be the same corporate entity as AEPCO, i.e., it will have the same Members with same membership (including Classes A, B, and C) and voting rights (although, as explained infra, Morenci will voluntarily abstain from exercising its rights as to Directors), the membership interests will continue to be non-transferable, and GENCO will continue to operate as a nonprofit cooperative on the same basis as AEPCO. The Restructuring will not alter the RUS oversight(and lack of FERC regulation) over GENCO's power sales. The regulatory status of GENCO's Members will also not be altered by the Restructuring.
39	The Resource Integration Agreement provides for the integration and coordination of the electric loads and generation resources and certain activities of the Cooperatives, particularly CSP's power marketing activities and its support functions for GENCO. In effect, the agreement establishes the arrangements by which the AEPCO successors, especially GENCO and CSP, and also MEC will integrate their respective activities and functions (including their interaction with TRANSCO) so as to provide a coordinated pooling of resources and loads similar to what AEPCO provided when it was a single, unified entity. Those arrangements include GENCO's operation of a resource pool, composed of GENCO resources (including resources used to serve all Class A Members) as well as participating CSP, MEC, and potentially other resources, on a least-cost, economic dispatch basis.
40	While GENCO's sales to the ARMs will involve bundled sales, the ARMs, at RUS's request, will remit the actual payment associated with the transmission services directly to TRANSCO, rather than have the ARMs pay GENCO and then GENCO pay TRANSCO for those transmission services. Notwithstanding the payment arrangement, GENCO will be providing a bundled sale of power and transmission to the ARMs.
41	GENCO will acquire AEPCO's other existing power sale contracts with other customers (including Mesa and Salt River Project), and will obtain transmission services needed for those contracts from TRANSCO. Morenci will continue to receive service under existing arrangements or their contract successors. Morenci's existing arrangements with AEPCO involve both bundled and unbundled purchases of power. Where the arrangement calls for a bundled purchase, it will be made by GENCO, which will in turn purchase the needed transmission from TRANSCO. Morenci will enter into a transmission agreement with TRANSCO to replace its existing transmission agreement with AEPCO for delivery of unbundled purchases from GENCO and other power suppliers of its choosing.
42	While only MEC will initially become a partial requirements Class A Member of GENCO, the other Class A Members will have the potential ability to make a similar election in the future, provided various conditions are met, particularly remaining responsible for their proportional responsibility for GENCO's then-existing resources and associated transmission from TRANSCO. Consequently, a decision by a Class A Member to switch to partial requirements status will not free up any then-existing AEPCO resources to be sold to non-Members. In particular, the RUS views sales to non-Members as embodying more risk and is likely to have concerns regarding a change in Member status that has that effect.
43	CSP's retail power marketing activities will be carried out in accordance with Arizona's retail open access program.
44	CSP's membership interest in TRANSCO does not appear to constitute an "investment interest." TRANSCO is, as noted, a nonprofit cooperative. It pays no interest or dividends on capital furnished by Members. CSP's membership interest in TRANSCO is not based on investment, but on CSP's status as a TRANSCO customer. In particular, CSP's entitlement to receive patronage capital or property upon TRANSCO's dissolution is a function of CSP's patronage as a customer of, and not any investment in, TRANSCO.
45	CSP will provide staffing for GENCO and TRANSCO, but GENCO and TRANSCO will each provide its own core and management employees. CSP, in providing personnel, will be required to perform to the specifications and management directives of GENCO and TRANSCO. CSP will also provide some support functions or services for GENCO and TRANSCO in the areas of resource planning and long term power marketing, but GENCO and TRANSCO will be responsible for the decisions in those and all other areas. Specifically, GENCO will be responsible for (a) acquiring resources to satisfy its loads, (b) operating and maintaining its power plant, and (c) entering into its power sales and power purchase contracts. Similarly, TRANSCO will be responsible for the scheduling, operation, maintenance, and expansion of its transmission facilities. CSP will provide certain assistance in these areas, but ultimate management authority and responsibility for these matters lie with GENCO and TRANSCO, respectively.
46	Indeed, FERC has determined that CSP will not have operational control over GENCO or TRANSCO. Sierra Southwest Cooperative Services, Inc., et al., 95 FERC ¶61,310 (2001). If CSP (a FERC-jurisdictional public utility) did have such control, then GENCO and TRANSCO might also be found to be subject to FERC's jurisdiction, notwithstanding Dairyland and its progeny. We do note the possibility that FERC's standards for determining operational control for purposes of the Federal Power Act might not be identical to the Staff's standards under PUHCA.
47	See Oglethorpe Power Corp., SEC No-Action Letter (Nov. 7, 1996) ("Oglethorpe"); Western Farmers Electric Cooperative, SEC No-Action Letter (Feb. 23, 2001) ("Western Farmers"); Associated Electric Cooperative, Inc. and Federated Electric Cooperative, Inc., SEC No-Action Letter (February 17, 1975) ("Associated and Federated"); Distribution Cooperatives, SEC No-Action Letter (April 1, 1974).
48	No figures for the volume of outside sales were listed in either the no-action letter or the request.
49	As noted supra, AEPCO's outside sales were higher in 2000 due to the unusual California conditions, but, even then, they were still not out of line compared to Western Farmers and Associated and Federated. AEPCO's outside sales are not expected to exceed 15% in future years, and may be significantly less.
50	See Professional Veterinary Products, Ltd., SEC No-Action Letter (July 12, 1996) (1996 SEC No-Act. LEXIS 592); Cap Rock Telephone Company, Inc., SEC No-Action Letter (Nov. 4, 1994) (1994 SEC No-Act. LEXIS 763); IAMO Telephone Company, SEC No-Action Letter (July 29, 1994) (1994 SEC No-Act. LEXIS 619); American Truckload Cooperative, Inc., SEC No-Action Letter, (July 1, 1993) (1993 SEC No-Act. LEXIS 850); Service Centers Corporation, SEC No-Action Letter (May 21, 1993) (1993 SEC No-Act. LEXIS 721); Peer Marketing Associates, Inc., SEC No-Action Letter (Feb. 3, 1993) (1993 SEC No-Act. LEXIS 146); Collision Automotive Repair Services, Inc., SEC No-Action Letter (July 7, 1992) (1992 SEC No-Act. LEXIS 841); Sports Specialists Ltd., SEC No-Action Letter (Sep. 30, 1991) (1991 SEC No-Act. LEXIS 1119); Kentucky Pharmacy Services Corporation, SEC No-Action Letter (June 6, 1991) (1991 SEC No-Act. LEXIS 768); Producers Feed Co., SEC No-Action Letter (July 30, 1990) (1990 SEC No-Act. LEXIS 999); Club Paradise Cooperative, Inc., SEC No-Action Letter (Dec. 5, 1988) (1988 SEC No-Act. LEXIS 1621); Idealease, Inc., SEC No-Action Letter (Sept. 15, 1988) (1988 SEC No-Act. LEXIS 1265).
51	Under § 7.02(d) of the By-laws of each Cooperative (§ 7.02 for AEPCO), capital credits can be assigned only to successors in interest in the business or the physical assets of a Member, unless the Cooperative's Board determines otherwise under policies of general application. No such change, general or otherwise, is contemplated here. There is also unlikely to be any potential market for the credits given that payment of credits is in the Board's (and, depending on equity levels, RUS's) discretion (assuming that the Cooperative's financial condition otherwise permits such payment) and unpaid credits earn no dividends or interest.
52	As noted supra, tax considerations and cooperative principles strongly favor having the primary customers of each Cooperative be Members of the Cooperative.
53	Mesa and Salt River Project will receive only bundled sales from GENCO. Consequently, they will not be Members of TRANSCO. In contrast, Morenci will receive bundled, and can receive unbundled, sales from GENCO as well as unbundled transmission from TRANSCO. Accordingly, Morenci will be a Member of both GENCO and TRANSCO.
54	The Class A Members voted to admit the Class B and Class C Members because their presence strengthened and improved the organization; in other words, AEPCO provides better service and lower rates to the Class A Members because it has the Class B and Class C Members. The presence of the Class B and Class C Members does not alter the fact that each Cooperative is subject to the primary control of the six Class A Member-distribution cooperatives.
55	In Oglethorpe, member voting was weighted according to the volume of sales.
56	Morenci has previously assigned its interest in any patronage capital to AEPCO and thus has no individual patronage capital account.
57	They may also be subject to ACC regulation, but the Cooperatives request that the no-action determination not be made on that basis.
58	Cobb Energy was not a member of Cobb Cooperative, whereas CSP will be a member of TRANSCO. However, as noted supra, CSP's membership in TRANSCO does not constitute an investment interest.

http://www.sec.gov/divisions/investment/noaction/arizona072701.htm