UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM U-1
APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_____________________________________________
Consolidated Edison, Inc.
4 Irving Place
New York, New York 10003
(Name of company filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent
of each applicant or declarant)
Peter A. Irwin John L. Carley
Consolidated Edison, Inc. Orange and Rockland Utilities, Inc.
4 Irving Place One Blue Hill Plaza
New York, New York 10003 Pearl River, New York 10965
(212) 460-4600 (914) 352-6000
(Name and address of agents for service)
The Commission is requested to mail copies of all notices, orders and
communications in connection with this Application to:
J.A. Bouknight
Douglas G. Green
James B. Vasile
Steptoe & Johnson LLP
1330 Connecticut Avenue, NW
Washington, D.C. 20036-1795
(202) 429-3000
TABLE OF CONTENTS
INTRODUCTION........................................................... 1
I. ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTION....................... 2
A. Description of the Parties and the New York Power Pool............ 2
1. CEI.......................................................... 2
2. Orange and Rockland.......................................... 8
3. The New York Power Pool...................................... 12
B. Description of the Merger......................................... 14
1. Background of the Merger..................................... 14
2. Description of the Merger Agreement.......................... 19
II. ITEM 2: FEES, COMMISSIONS AND EXPENSES................................ 24
III. ITEM 3: APPLICABLE STATUTORY PROVISIONS............................... 26
A. The Merger Meets the Requirements of Section 10(b) of the Act..... 27
1. Section 10(b)(1) -- Interlocking Relations................... 27
2. Section 10(b)(1) -- Concentration of Control................. 28
a. Size................................................... 29
b. Efficiencies and Economies............................. 30
c. Competitive Effects.................................... 31
3. Section 10(b)(2) -- The Consideration Is Fair and Reasonable. 32
4. The Fees Associated With the Merger Are Reasonable........... 35
5. The Capital Structure Is Not Unduly Complex.................. 37
B. The Merger Meets the Requirements of Section 10(c)................ 42
1. Section 10(c)(1)............................................. 43
a. Compliance with Section 8............................... 43
b. No Detriment to the Carrying Out of Section 11.......... 43
(1) The Electric Utility Systems....................... 47
(2) The Gas Utility Systems............................ 51
(3) "De Facto" Integration of the Electric and
Gas Systems........................................ 54
(4) Exemption of CEI Following the Merger.............. 58
2. Section 10(c)(2) -- Economic and Efficient Development of an
Integrated Public Utility System............................. 65
3. Section 10(f)................................................ 68
IV. ITEM 4: REGULATORY APPROVALS.......................................... 69
A. Antitrust........................................................ 69
B. Federal Energy Regulatory Commission............................. 69
C. State Public Utility Commissions................................. 71
V. ITEM 5: PROCEDURE..................................................... 73
VI. ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS............................. 73
VII. ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS....................... 76
VIII. SIGNATURE.............................................................. 76
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INTRODUCTION
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding Company
Act of 1935 (the "Act"), Consolidated Edison, Inc. ("CEI"), a New York public
utility holding company, hereby requests that the Securities and Exchange
Commission ("SEC" or "Commission") authorize the acquisition of all of the
issued and outstanding securities of Orange and Rockland Utilities, Inc.
("Orange and Rockland"), a New York public utility company and a holding
company, pursuant to the terms of the Agreement and Plan of Merger among Orange
and Rockland, CEI and C Acquisition Corp., dated as of May 10, 1998 (the "Merger
Agreement"). CEI owns all of the common stock of Consolidated Edison Company of
New York, Inc. ("Con Edison"), a New York electric and gas utility company under
the Act. CEI is exempt from all provisions of the Act except Section 9(a)(2)
thereof pursuant to Section 3(a)(1). Orange and Rockland is an electric and gas
utility company and a holding company which is exempt from registration under
the Act pursuant to an order of the Commission issued under Section 3(a)(2).
Orange and Rockland owns two public utility subsidiaries, Rockland Electric
Company ("RECO"), a New Jersey corporation that is an electric utility company
under the Act, and Pike County Light & Power Company ("Pike"), a Pennsylvania
corporation that is an electric and gas utility company under the Act. C
Acquisition Corp. is a New York corporation and a wholly-owned subsidiary of
CEI. Pursuant to the terms of the Merger Agreement, C Acquisition Corp. will be
merged with and into Orange and Rockland, and Orange and Rockland will be the
surviving corporation in the Merger and become a wholly-owned subsidiary of CEI,
which is a New York corporation.
The Merger is expected to produce benefits to investors and consumers and
will meet all applicable standards of the Act. Among other things, CEI believes
that the Merger offers significant strategic and financial benefits to each
company and their respective shareholders, as well as to the communities in
which they provide service. Through coordinated operations and joint
infrastructure investment, Con Edison and Orange and Rockland will be able to
improve the operations of the combined public utility systems. The adjacent gas
and electric service territories will permit the generation of synergies and
operating efficiencies that would not be available absent the Merger. Moreover,
both companies are operating in an increasingly competitive utility industry and
are in the process of divesting large portions of their generating assets to
create competition. Those divestiture processes will continue after the Merger.
The expected benefits of the Merger are discussed in detail in Item 3 below.
For purposes of this Application, CEI and Orange and Rockland, and their
operating public utility subsidiaries, may be referred to collectively as "the
Companies."
I. ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTION
A. Description of the Parties and the New York Power Pool
1. CEI
CEI was organized in 1997 as a New York corporation and currently is a
public utility holding company exempt from all provisions of the Act except
Section 9(a)(2). CEI owns all of the issued and outstanding common stock of Con
Edison, a public utility company organized and existing as a corporation under
the laws of the State of New York. Con Edison supplies electric
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service in all of New York City (except part of the Borough of Queens) and most
of Westchester County, New York, an approximate 660 square mile service
territory with a population of more than 8 million. It also supplies gas in the
Boroughs of Manhattan and the Bronx and parts of the Borough of Queens and
Westchester County, New York, and steam in part of Manhattan. Con Edison is
regulated by the New York State Public Service Commission ("NYPSC") as to retail
rates, service, accounts, issuance of securities and in other respects. The
Federal Energy Regulatory Commission ("FERC") has jurisdiction over Con Edison
under the Federal Power Act ("FPA") in connection with electric transmission
facilities and operations, wholesale sales of power and related transactions.
Con Edison's principal executive office is 4 Irving Place, New York, New
York, 10003.
Con Edison has the following subsidiaries:
(a) Davids Island Development Corporation ("Davids Island") is organized
and existing as a corporation under the laws of the State of New York. It owns
real property acquired as a possible site for an electric generating plant in
Dutchess and Columbia Counties in New York State. It is in the process of
disposing of the property. Davids Island is a wholly-owned subsidiary of Con
Edison.
(b) D.C.K. Management Corporation is a corporation organized and existing
under the laws of the State of New York that owns real property in the City of
New York. It is a wholly-owned subsidiary of Con Edison.
(c) Con Edison also owns a 28.8 percent interest in Honeoye Storage
Corporation, a New York corporation that owns and operates a gas storage
facility in upstate New York.
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Other CEI subsidiaries are:
(a) Consolidated Edison Solutions, Inc. ("CES") is a wholly-owned
subsidiary of CEI, organized in the State of New York that provides wholesale
and retail energy and related services. CES has a 33 1/3 percent fully diluted,
interest in Inventory Management & Distribution Company, Inc. ("IMD"), an energy
marketing firm organized and existing under the laws of the State of Delaware.
IMD's principal place of business is 5599 San Felipe, Suite 870, Houston, Texas,
77056. CES also has a 14.4 percent interest in Remote Source Lighting
International, Inc. ("RSLI"), a lighting technology company organized in the
State of Delaware. Its principal place of business is 32961 Calle Perfecto, San
Juan Capastrano, California 92675.
(b) Consolidated Edison Development, Inc. ("CEDI") is wholly-owned by CEI
and organized and existing under the laws of the State of New York. It is in
the business of investing in foreign and domestic energy and other
infrastructure projects and marketing of Con Edison's technical services. CEDI
has five direct subsidiaries: (i) Con Edison Development, Guatemala, Ltd.
("CEGL"), organized under the laws of the Cayman Islands and in the business of
investing in energy projects in Central America; (ii) IEP Global Development,
LLC (of which CEDI owns 50 percent), a limited liability company organized in
Delaware to develop and acquire electric power generation, transmission and
distribution projects outside of the United States; (iii) Consolidated Edison
Leasing, Inc., a corporation organized in Delaware and formed to invest in lease
transactions, which owns an undivided leasehold interest in a power plant in
Holland through the Roca Facility Trust No. 2; (iv) CED Ada, Inc., a Delaware
corporation, which owns an approximate 96 percent interest in CED/DELTA Ada,
LLC, a Delaware limited liability
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company, which owns a 49.5 percent limited partnership interest and a 0.5
percent general partnership interest in Ada Cogeneration Limited Partnership
("ACLP") (ACLP owns a 30 megawatt gas-fired qualifying cogeneration facility
under the Public Utility Regulatory Policies Act of 1978 in Ada, Michigan) and
(v) Carson Acquisition, Inc., a Delaware corporation ("Carson Acquisition")
which owns an approximate 47.75 percent interest in each of CMD Carson GP, LLC
and CMD Carson, LLC, each a Delaware limited liability company, which in turn
own, in the aggregate, all of the limited partnership and general partnership
interest in Carson Cogeneration Company, a California limited partnership
("Carson Cogen"). Carson Cogen is a lessee of a leasehold interest in a 42
megawatt qualifying cogeneration facility in Carson, California.
CEDI owns all of the issued and outstanding shares of Con Edison
Development Guatemala Acquisition and Finance, Ltd. ("CEDGAF"), a corporation
organized under the laws of the Cayman Islands. At present, CEDGAF is a shell
corporation, meaning that it has no assets or operations. It was organized in
connection with a potential investment in Guatemala, which was never made.
(c) Consolidated Edison Energy, Inc. is a wholly-owned subsidiary of CEI,
organized under the laws of the State of New York to invest in, operate and
market the output of electric energy supply facilities in the United States and
to provide specialized wholesale energy services in the electric power and
natural gas markets.
(d) Consolidated Edison Communications, Inc. ("CECI") is a wholly-owned
subsidiary of CEI, organized in the State of New York in late 1997 to own,
operate or invest in
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facilities used for telecommunications or otherwise to compete in the
telecommunications industry.
CEI's common stock is listed on the New York Stock Exchange. As of
October 31, 1998, CEI had outstanding 233,186,794 common shares ($.10 par
value). The issued and outstanding shares of Con Edison number 235,489,650
($2.50 par value), all of which are held by CEI.
For the twelve months ended September 30, 1998, CEI's total operating
revenues were $7.22 billion, of which approximately $5.74 billion were derived
from electric operations, $1 billion from gas operations, $355 million from the
steam business, and $113 million were from non-utility businesses. Consolidated
assets of CEI at September 30, 1998, were approximately $14.5 billion. A more
detailed summary of information concerning CEI and its subsidiaries is contained
in the combined CEI and Con Edison Annual Report on Form 10-K for the year ended
December 31, 1997,/1/ and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998, and September 30, 1998, which are incorporated
herein by reference.
In September 1997, the NYPSC approved a settlement agreement among Con
Edison, the Staff of the NYPSC and other parties ("the Con Edison Settlement
Agreement") providing for: (i) a transition to a competitive electric market
through the development of a "retail access" plan, (ii) a rate plan providing
for substantial retail rate reductions through March 31, 2002, (iii) a
reasonable opportunity to recover "strandable costs," and (iv) the divestiture
by Con Edison to
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/1/ CEI was formed in late 1997 and became the parent holding company for Con
Edison effective January 1, 1998. Thus, there are no 1997 figures for CEI
that differ from those reported for Con Edison.
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unaffiliated third parties of at least 50 percent of its New York City fossil-
fueled electric generating capacity. See Exhibit K-1 to this Application.
Pursuant to the Con Edison Settlement Agreement, Con Edison submitted a
divestiture plan for its fossil-fueled electric generation in New York City.
The NYPSC approved Con Edison's electric generation Divestiture Plan in orders
issued July 21, and August 5, 1998. Under the Divestiture Plan, Con Edison will
auction off in-City electric generation to unaffiliated third parties in three
bundles:
. 1,434 MW consisting of the Arthur Kill generating station and Astoria
gas turbines ("Arthur Kill bundle");
. 2,168 MW consisting of the Ravenswood generating station and gas
turbines ("Ravenswood bundle"); and
. 1,858 MW consisting of the Astoria generating station plus the Gowanus
and Narrows turbines ("Astoria bundle").
No purchaser may purchase more than one of the three bundles. Closing on the
sales of these three bundles is expected in the second half of 1999.
Under its Steam System Plan, announced on April 15, 1998, Con Edison will
auction off the remainder of its electric generation in New York City in a
fourth bundle, consisting of 463 MW of units that produce electricity and steam
for Con Edison's steam delivery system ("Steam - electric bundle"). Con Edison
plans to close on the sales of the fourth bundle by the end of 1999.
The NYPSC, in a July 21, 1998 Order, gave Con Edison the option of having
its unregulated affiliate participate in the auction to purchase one of the
initial three bundles. On
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July 24, 1998, Con Edison advised the NYPSC that its affiliate would forego its
right to participate in the auction./2/ Accordingly, Con Edison plans to divest
all of its in-City generation to third parties.
In addition, Con Edison is in the process of divesting its 810 MW
interest in the Bowline Point generating station ("Bowline Station") located in
Orange and Rockland's territory as part of Orange and Rockland's auction of its
generation, as described below. Similarly, Con Edison has agreed to divest its
400 MW interest in the Roseton station located in Central Hudson Gas and
Electric Corporation's service area in conjunction with Central Hudson's
divestiture auction. As a result of the divestitures described above, Con
Edison no longer will own dispatchable generation resources./3/ Con Edison
will, however, retain an obligation to serve load in its service territory. In
order to serve that load, Con Edison will purchase capacity and energy in the
competitive market.
2. Orange and Rockland
Orange and Rockland and its public utility subsidiaries supply electricity
and gas to a service territory covering approximately 1,350 square miles. The
eastern boundary of the service area extends along the west bank of the Hudson,
directly across the river from the service
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/2/ Con Edison's relinquishment of its affiliate's right to participate in the
auction was based on certain understandings as to the treatment of any
gain on the sales. On August 5, 1998, the NYPSC approved Con Edison's
proposal in this regard, subject to one modification, which Con Edison
accepted on August 10, 1998. Con Edison, accordingly, is proceeding with
the divestiture.
/3/ Con Edison will retain its interests in a nuclear power generating
facility. It is expected that Con Edison's nuclear facility will operate
whenever it is available and be bid into the generation market at an
incremental price reflecting the "to go" costs.
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territory of Con Edison. Orange and Rockland's New York electric and gas service
territory includes all of Rockland County, most of Orange County and part of
Sullivan County. In New Jersey, RECO supplies electricity to the northern parts
of Bergen and Passaic Counties and small areas in the northeastern and
northwestern parts of Sussex County. Pike supplies electricity and gas to the
northeastern corner of Pike County, Pennsylvania. Orange and Rockland, RECO and
Pike jointly operate a single fully integrated electric production and
transmission system serving parts of New York, New Jersey and Pennsylvania.
Orange and Rockland's principal executive office is One Blue Hill Plaza, Pearl
River, New York 10965.
Orange and Rockland and its public utility subsidiaries furnish electric
service to approximately 269,000 customers in 96 communities with an estimated
population of 681,000 and gas service to approximately 114,000 customers in 57
communities with an estimated population of 482,000. Approximately 77 percent
of Orange and Rockland's consolidated energy sales are from Orange and Rockland,
with 21 percent of consolidated energy sales generated from RECO in New Jersey
and approximately 1 percent of consolidated energy sales from Pike in
Pennsylvania.
Orange and Rockland is regulated by the NYPSC. RECO is regulated by the
New Jersey Board of Public Utilities ("NJBPU") and Pike is regulated by the
Pennsylvania Public Utility Commission ("PaPUC") as to retail rates, service and
accounts, issuance of securities and in other respects as to service provided in
those individual states. FERC has jurisdiction under the FPA over certain of
the electric facilities and operations of Orange and Rockland and its
subsidiaries.
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Orange and Rockland has three wholly-owned non-utility subsidiaries, Clove
Development Corporation ("Clove"), a New York corporation, and O&R Energy
Development, Inc. and O&R Development, Inc., both Delaware corporations. Clove
holds approximately 5,200 acres of real estate, located primarily in the Mongaup
Valley region of Sullivan County, New York. O&R Development, Inc., which was
formed to promote industrial and corporate development in Orange and Rockland's
service territory by providing improved sites and buildings, owns approximately
200 acres of land, which are being marketed for sale. O&R Energy Development,
Inc. is an inactive corporation.
RECO has two wholly-owned non-utility subsidiaries, Enserve Holdings, Inc.
("Enserve") and Saddle River Holdings Corp. ("SRH"), both Delaware corporations.
Enserve has two wholly-owned non-utility subsidiaries, Palisades Energy
Services, Inc., an energy service provider and Compass Resource, Inc.
("Compass"), both Delaware corporations. SRH has two wholly-owned non-utility
subsidiaries, NORSTAR Holdings, Inc. ("NHI") and Atlantic Morris Broadcasting,
Inc. ("AMB"), both Delaware corporations. Compass and AMB are inactive
corporations. NHI has two wholly-owned non-utility subsidiaries, NORSTAR
Management, Inc. ("NMI"), and Millbrook Holdings, Inc. ("Millbrook"), both
Delaware corporations. Millbrook holds a leasehold interest in non-utility real
estate in Morris County, New Jersey. NMI is the sole general partner of a
Delaware limited partnership, NORSTAR Energy Limited Partnership ("NORSTAR
Partnership"), a gas marketing company that is discontinuing operations, of
which NHI is the sole limited partner. The NORSTAR Partnership
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is the majority owner of NORSTAR Energy Pipeline Company, LLC, a Delaware
limited liability company, which is inactive.
For the twelve months ended September 30, 1998, Orange and Rockland's
total operating revenues on a consolidated basis were approximately $643,281,000
and total utility operating revenues were $642,524,000, of which approximately
$496 million was derived from electric sales and $146 million from gas sales./4/
As noted above, 21 percent of total utility revenues is generated from New
Jersey, approximately 1 percent is from Pennsylvania, and the balance is from
operations in New York. Consolidated assets of Orange and Rockland and its
subsidiaries at September 30, 1998, were approximately $1.3 billion. A more
detailed summary of information concerning Orange and Rockland and its
subsidiaries is contained in Orange and Rockland's Annual Report on Form 10-K
for the year ended December 31, 1997, and Orange and Rockland's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998, and
September 30, 1998, which are incorporated herein by reference.
Orange and Rockland's common stock (par value $5.00 per share) (the
"Common Stock") is listed on the New York Stock Exchange. The Common Stock
outstanding as of October 31, 1998, numbered 13,519,866.
Orange and Rockland filed a plan ("Final Divestiture Plan") to divest all
of its electric generation facilities pursuant to NYPSC divestiture orders. By
orders issued April 16, 1998, and May 26, 1998, the NYPSC approved Orange and
Rockland's Final Divestiture Plan. See Exhibit K-2
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/4/ All intercompany balances and transactions have been eliminated.
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to this Application. Orange and Rockland's Final Divestiture Plan provides for
the divestiture of 100 percent of Orange and Rockland's generating assets by
auction.
On November 24, 1998, Orange and Rockland agreed to sell all of its
electric generating facilities, including its one-third interest in the Bowline
Station, to Southern Energy, Inc., a subsidiary of The Southern Company. Also
included in this sale is Con Edison's two-thirds interest in the Bowline
Station. The sale price for all the generating facilities is approximately $480
million, with Orange and Rockland's share being approximately $345 million.
Orange and Rockland anticipates that this sale will be completed by April 30,
1999. The benefits of Orange and Rockland's restructuring to its customers
will not be reduced as a result of the Merger. Orange and Rockland's customers
will benefit from the restructuring and receive additional benefits from the
Merger.
3. The New York Power Pool
Con Edison and Orange and Rockland are members of the New York Power Pool
("NYPP"), a cooperative association consisting of the major electric utilities
operating in the State of New York. NYPP is a "tight" power pool through which
its members agree to coordinate their operations by operating their systems in
parallel, by consulting on design, use and construction of capacity, by
scheduling repair outages and by providing support to each other in meeting
generating capacity and energy transmission needs. NYPP has a centralized
computer system that monitors the available capacity on the system and the
demand for energy of all of the NYPP members to determine which sources of
capacity should be used to reliably provide economic energy to meet customer
demand. Through this process, NYPP coordinates the dispatch of the least cost
to meet the demand for power. Under the current NYPP structure, each
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member utility owns and controls its separate transmission system. Access to
those systems is available through each utility's open access transmission
tariff.
NYPP has filed with the FERC a plan to reorganize and establish an
Independent System Operator ("NYISO") that will control transmission assets in
New York, as well as operate a power exchange. Under the present NYPP
structure, NYPP dispatches the least cost generating facility to meet demand.
In the future, NYISO will operate on a bid price basis. Generating units will
bid into the hourly energy markets at a particular price. Whether any given
facility is dispatched will depend on its bid price, not the cost of the unit.
NYISO members and non-members also may make purchases outside of the power
exchange and schedule those purchases with the NYISO (bilateral agreements).
The transmission owning members of NYPP will continue to own, maintain and
operate their transmission facilities but will relinquish operational control
over their transmission facilities to the NYISO, and the NYISO will provide
transmission service to members and non-members pursuant to a pool-wide, open
access transmission tariff.
Thus, the NYISO will administer both the transmission tariff and the
energy market. The NYISO will identify system constraints and dispatch
generating units, based on information supplied by generators, to meet load,
provide necessary ancillary services and accommodate bilateral transactions.
The NYISO proposal contains "locational-based marginal pricing," which is
designed to encourage market participants to use the most efficient resources
available and to alleviate transmission constraints. Locational-based marginal
pricing will be available to all market participants and will provide incentives
for the efficient use of the transmission system.
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After divestiture, Con Edison and Orange and Rockland will purchase capacity and
energy in the regional market to serve their respective load requirements.
Following the Merger, Con Edison and Orange and Rockland will continue to
be members of NYPP and will continue to coordinate operations in accordance with
applicable NYPP procedures. In addition, since Con Edison and Orange and
Rockland are divesting the bulk of their generation assets, the Companies will
jointly purchase capacity and energy to meet their obligations to serve native
load. Upon the implementation of the NYISO, the purchases - through the NYISO
coordinated energy market, neighboring power exchanges, and bilateral
agreements - will replace, for the combined companies, the arrangement for
economic dispatch of utility-owned generation that has prevailed under the NYPP.
The Companies will make purchases to meet their aggregate load service
obligations, taking advantage of savings through larger purchasing power and a
joint purchasing plan. This combined purchasing arrangement will ensure that
both Companies are served by the lowest cost reliable power available and thus
achieve economies of scale and function not available absent the Merger.
B. Description of the Merger
1. Background of the Merger
On March 25, 1997, Orange and Rockland, the NYPSC staff and other parties
entered into an agreement providing for the settlement of Orange and Rockland's
Rate and Restructuring Plan which had been previously filed with the NYPSC. The
agreement, which was subject to NYPSC approval, provided for a global settlement
involving generating assets, retail access, a base rate freeze and stranded cost
recovery.
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The NYPSC considered the agreement in September 1997. The NYPSC expressed
concerns about the terms of the agreement and directed the parties to resume
negotiations to address those concerns. The NYPSC also encouraged Orange and
Rockland to divest its generating assets as soon as possible. Subsequently,
after retaining independent expert consultants to provide additional financial,
legal and regulatory analysis and, after extensive negotiations with the NYPSC
staff and other parties to the proceeding, on November 6, 1997, Orange and
Rockland entered into an Electric Rate and Restructuring Plan ("Restructuring
Plan") that provided, among other things, for the divestiture of all of Orange
and Rockland's generating assets. The Restructuring Plan is attached to this
Application as Exhibit K-2. The Board of Directors of Orange and Rockland also
retained Donaldson, Lufkin & Jenrette ("DLJ"), Orange and Rockland's primary
financial advisor, to advise the Board regarding the Restructuring Plan and
Orange and Rockland's strategic options following the possible sale of the
generating assets.
In November 1997, the Board of Orange and Rockland, after reviewing the
information provided by DLJ (which, consistent with the conclusions of its other
financial consultant, recommended that Orange and Rockland sell its generating
assets by auction), determined to sell the generating assets and approved the
Restructuring Plan. DLJ discussed with the Board the current competitive
environment in the utility industry, noting that Orange and Rockland faced
deregulation and regulatory risks, a consolidating industry and limited growth
prospects, all of which could erode shareholder value. In light of this, DLJ
reviewed with the Board certain strategic alternatives assuming the generating
assets were sold, including a possible sale of the company. After discussion,
the Board authorized Orange and Rockland management and DLJ to
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explore the possibility of combining the company with another entity, either
through the sale of the company or some other strategic combination, so that the
Board could determine whether it would be in the best interests of Orange and
Rockland and its shareholders to continue as only a transmission and
distribution company following the sale of the generating assets.
From November 1997 through December 1997, a number of potential strategic
partners, primarily with interests in the utility industry, were contacted in
order to determine whether any of those entities would be interested in
considering either merging with or acquiring Orange and Rockland. Those
entities that expressed an interest in continuing to review the possibility of
such a transaction were asked to sign a confidentiality agreement with Orange
and Rockland. On December 24, 1997, Con Edison executed such an agreement./5/
In January 1998, after sharing certain information regarding Orange and Rockland
with the interested parties, including CEI, Orange and Rockland requested that
such parties provide non-binding indications of interest, specifying the price
ranges within which such parties believed they might be able to pursue a
transaction. These non-binding indications of interest were requested to assist
the Orange and Rockland Board in evaluating whether it would be in the best
interests of Orange and Rockland and its shareholders for Orange and Rockland
to: a) continue as only a transmission and distribution company following the
sale of the generating assets, or b) enter into a business combination with
another party.
On February 3 and 4, 1998, preliminary, non-binding letters of interest
were received from certain of the entities that had expressed interest in
acquiring or merging with Orange and
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/5/ On January 1, 1998, Con Edison became a subsidiary of CEI.
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Rockland. CEI's letter was dated February 4, 1998. The preliminary, non-binding
letters of interest were evaluated by Orange and Rockland management, an Ad Hoc
Committee of independent directors (the "Ad Hoc Committee") formed by the Orange
and Rockland Board to review such business combinations, and the Orange and
Rockland Board. At a meeting of the Orange and Rockland Board held on
February 5, 1998, the Board further reviewed, with representatives of DLJ, the
preliminary indications of interest received. The Board considered, among other
things, the terms of each of the non-binding proposals, including the proposed
value to be received by Orange and Rockland's shareholders and the structure of
a proposed transaction. After discussion, the Board determined to permit a
limited number of the parties who expressed interest (the "Interested Parties"),
including CEI, to meet with management of Orange and Rockland and conduct due
diligence.
During the period February through April 1998, the Interested Parties
performed due diligence on Orange and Rockland and met with management. During
these months, the Ad Hoc Committee and the Orange and Rockland Board had
meetings with management, DLJ and Orange and Rockland's legal counsel to discuss
the ongoing due diligence and the status of the process and to continue to
consider whether it would be in the best interests of Orange and Rockland and
its shareholders for the company to: a) continue as only a transmission and
distribution company following the sale of the generating assets, or b) enter
into a business combination with another party. In order to assist the Board in
its consideration of whether it was in the best interests of the company and its
shareholders to continue as a transmission and distribution company or enter
into a business combination, the Board decided to send draft
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merger agreements to each of the Interested Parties in April 1998. In order to
provide the Board with a clear indication of the terms that the Interested
Parties would consider in a business combination with Orange and Rockland, the
Interested Parties were instructed to submit mark-ups of the merger agreement
that would indicate the terms pursuant to which such party would enter into a
business combination with Orange and Rockland.
Between May 1 and May 4, 1998, proposals were received from each of the
Interested Parties, including CEI. Each proposal included a draft merger
agreement, which contained the terms of the proposed merger, and which was
revised to include any changes that would be necessary for the Interested Party
to enter into a binding agreement with Orange and Rockland.
On May 4, 5 and 6, 1998, the Ad Hoc Committee, Orange and Rockland's
management, DLJ and Orange and Rockland's legal counsel considered the proposals
that had been received. On May 7, 1998, both the Ad Hoc Committee and the
Orange and Rockland Board met to discuss and consider the proposals that had
been received. Following its deliberations, the Orange and Rockland Board
authorized management, together with DLJ and Orange and Rockland's legal
counsel, to proceed with negotiations with respect to the proposal submitted by
CEI so that the Board could determine whether it would be in the best interests
of Orange and Rockland and its shareholders for Orange and Rockland to: a)
continue as only a transmission and distribution company following the sale of
the generating assets, or b) enter into a business combination with CEI.
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On May 8 and 9, 1998, representatives of Orange and Rockland's management,
DLJ and Orange and Rockland's legal counsel negotiated the terms of the Merger
Agreement with CEI and the legal counsel for CEI.
On May 10, 1998, the Board of Orange and Rockland held a special meeting
to review the terms of the transaction that had been negotiated with CEI. After
presentations by the Ad Hoc Committee, DLJ and Orange and Rockland's legal
counsel and full discussion and analysis by the Board, the Board, by unanimous
vote: (i) determined that it was in the best interests of Orange and Rockland
and its shareholders for Orange and Rockland to enter into a business
combination with CEI, (ii) determined that the terms of the Merger were fair to,
and in the best interests of, the shareholders of Orange and Rockland, and
(iii) authorized, approved and adopted the proposed agreement and plan of merger
and the transactions contemplated thereby and the execution and delivery of the
Merger Agreement. Later that evening, Orange and Rockland, CEI and C Acquisition
Corp. executed and delivered the Merger Agreement and certain related
agreements.
2. Description of the Merger Agreement
Pursuant to the Merger Agreement among Orange and Rockland, CEI and
C Acquisition Corp., Orange and Rockland will be merged with and into
C Acquisition Corp., with Orange and Rockland continuing as the surviving
corporation and becoming a wholly-owned subsidiary of CEI.
The Merger will be effected through the purchase of Orange and Rockland
stock. Each share of Orange and Rockland common stock will be cancelled and
converted into the right to receive $58.50 in cash, without interest ("the
Merger Consideration") payable to the holder of
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such share upon surrender. Any Orange and Rockland common stock owned by Orange
and Rockland as treasury stock or by CEI will be cancelled and no payment will
be due to such holders. All preferred stock and preference stock of Orange and
Rockland will be redeemed, prior to the effective date of the Merger, at a
redemption price equal to the respective amount set forth in Orange and
Rockland's restated Certificate of Incorporation, together with all dividends
accrued and unpaid to the date of redemption. The transaction is expected to be
taxable to stockholders of Orange and Rockland for Federal income tax purposes.
The Merger Agreement is subject to customary closing conditions, including
receipt of approval of the holders of Orange and Rockland's Common Stock and the
approval of various state and Federal regulatory agencies, including the
Commission. Orange and Rockland held a meeting of its common stockholders on
August 24, 1998, and the requisite two-third votes of its stockholders approved
the Merger.
The Merger will become effective at the time specified in the certificate
of merger (the "Effective Time") that is delivered and filed by the Department
of State of the State of New York. Such filing will be made on or as promptly
as practicable following the closing date under the Merger Agreement, which will
take place not later than the second business day after the satisfaction or
waiver of all of the conditions set forth in the Merger Agreement or such other
time as agreed to by the parties.
CEI will designate a Paying Agent to effect the payment of consideration
for the Merger. As soon as practicable after the Effective Time, the Paying
Agent will mail to each holder of record of a certificate or certificates (which
immediately prior to the Effective Time represented
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outstanding shares of Common Stock of Orange and Rockland that were cancelled
and became instead the right to receive the consideration for the Merger)
instructions for effecting the surrender of the certificates in exchange for the
Merger Consideration. Upon surrender of the certificates, the holders will be
entitled to receive the Merger Consideration. Until surrendered, each
certificate will be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration. No
interest will be paid or will accrue on the Merger Consideration payable to
holders of certificates.
Upon completion of the Merger, Orange and Rockland will be a wholly-owned
subsidiary of CEI. Orange and Rockland's subsidiaries, including its two utility
subsidiaries, RECO and Pike, will remain Orange and Rockland Subsidiaries. The
Merger is currently expected to close in April 1999.
At the Effective Time of the Merger, CEI will establish an advisory board,
with equal numbers of CEI and Orange and Rockland members, who will provide
advice and input regarding the implementation of the Merger and the ongoing
operations of Con Edison and Orange and Rockland. CEI will elect one new member
to its Board of Directors who previously was a member of the Board of Directors
of Orange and Rockland. Following the consummation of the Merger, CEI will
maintain a subsidiary office in Rockland County as the headquarters of Orange
and Rockland for at least three years following the Merger. CEI has committed
to make charitable contributions to the communities within the service area of
Orange and Rockland and its public utility subsidiaries on a level consistent
with the contributions provided over the two years before the Effective Time.
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Pursuant to the Merger Agreement, from and after the Effective Time,
Orange and Rockland, as a subsidiary of CEI, will indemnify, to the fullest
extent permitted by applicable law, each person who was at the date of the
Merger Agreement, or who has been at any time prior to the execution date of the
Merger Agreement, or who becomes prior to the Effective Time, (i) a director or
officer, or (ii) an employee covered by Orange and Rockland as of the date of
the Merger Agreement (to the extent of coverage extended as of such date) of
Orange and Rockland or any of its subsidiaries with respect generally to their
service to Orange and Rockland. Such rights to indemnification will continue in
full force and effect for at least six years from the Effective Time. Orange and
Rockland, as a subsidiary of CEI, also will maintain in effect, for at least six
years after the Effective Time, policies of directors' and officers' insurance
equivalent in all material respects to those maintained by or on behalf of
Orange and Rockland and its subsidiaries on May 10, 1998.
CEI will cause Orange and Rockland, as a subsidiary of CEI, to honor
(i) all collective bargaining agreements of Orange and Rockland, and (ii) the
provisions regarding employee benefit plans, contracts, agreements (including
all in effect as of the date of the Merger Agreement that apply to any current
or former employee or director of Orange and Rockland). Subject to applicable
law and obligations under collective bargaining agreements, for three years
following the consummation of the Merger, any workforce reduction will be made
on a fair and equitable basis as determined by Orange and Rockland without
regard to whether prior employment was with Orange and Rockland, CEI or any of
their subsidiaries, and with due consideration to prior experience and skills.
Generally, any employee whose employment is
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terminated or whose job is eliminated during such period will be eligible to
participate on a fair and equitable basis in the job opportunity and employee
placement programs offered by CEI, Orange and Rockland or any of their
subsidiaries for which they are eligible. The Merger Agreement provides that
all service under any Orange and Rockland benefit plan will be recognized,
accrued or credited under such plan after the consummation of the Merger - and
that employees will be given credit for service with Orange and Rockland under
CEI's benefit plans for purposes of eligibility and vesting, but not for benefit
accrual purposes or eligibility for early retirement purposes under defined
benefit pension plans, and not to the extent crediting such service would result
in duplication of benefits. Although not addressed in the Merger Agreement and
subject to (i) changes that may result from periodic reviews of the pension and
benefit plans of other employers and evolving business practices and
(ii) applicable law and collective bargaining agreements, CEI and Orange and
Rockland currently intend that all employees who were employees of Orange and
Rockland immediately before the Effective Time who transfer from Orange and
Rockland and its subsidiaries to Con Edison will receive credit for benefit
accrual and eligibility for early retirement purposes for service with Orange
and Rockland that is equivalent to that of such employees who do not transfer,
with offsets as may be appropriate to avoid duplication of benefits. Employees
also will be given credit for service with Orange and Rockland under CEI's
severance plans for purposes of calculating the amount of each employee's
severance benefits. Finally, CEI will cause Orange and Rockland to maintain,
for at least one year, benefits to the Orange and Rockland employees that are no
less favorable than the
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benefits such employees enjoyed before the Merger. The Orange and Rockland
severance plan also will be maintained by CEI for one year following the closing
date of the Merger.
The Merger may be terminated by (i) mutual consent of the parties and
(ii) by either party if the Merger is not consummated by November 30, 1999
(subject to an automatic extension of six months if the requisite statutory
approvals have not been obtained by that date, but all other conditions have
been fulfilled or are capable of being fulfilled), or (iii) by a non-breaching
party if there occurs a material breach of any representation, warranty,
covenant or agreement contained in the Merger Agreement, which is not cured
within twenty business days after receipt of notice to the other party. The
Merger Agreement provides that if the Merger is terminated because of a party's
material breach of its representations and warranties or a material failure to
perform and comply with its agreements and covenants, then the defaulting party
will pay the other party up to $5 million for its out-of-pocket expenses
incurred in connection with the Merger.
II. ITEM 2: FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by Con Edison and Orange and Rockland, in connection with the
Merger, are estimated to total approximately $18 million, including investment
bankers' fees of approximately $11 million. Below are listed the approximated
fees:
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Accountant's fees 175,000
Financial advisory and information services fees 340,000
Legal fees and expenses relating to the Act 250,000
Economic consulting fees 373,000
Other legal fees and expenses 5,000,000
Other 100,000
Shareholder communications and proxy solicitations 117,000
Investment bankers' fees and expenses
Salomon Smith Barney 4,590,000
Donaldson, Lufkin & Jenrette 6,320,000
Consulting fees relating to human resources, public
relations, etc. 400,000
Miscellaneous 600,000
-----------
Total $18,265,000
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III. ITEM 3: APPLICABLE STATUTORY PROVISIONS
The following sections of the Act are directly or indirectly applicable to
the proposed Merger: Sections 9(a)(2) and 10. To the extent other sections of
the Act or the Commission's rules under the Act are deemed applicable to the
Merger, such sections and rules should be considered to be included in this
section of the Application.
Section 9(a)(2) of the Act makes it unlawful, without prior approval of
the Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public-utility company, if such person is an
affiliate . . . of such company and of any other public utility or holding
company, or will by virtue of such acquisition become such an affiliate." Since
Orange and Rockland and its public utility subsidiaries will, by virtue of the
proposed Merger, become affiliates of CEI, Section 9(a)(2) requires approval by
the Commission under Section 10.
As set forth more fully below, the Merger meets all of the applicable
requirements of Section 10 of the Act and should be approved by the Commission:
. The Merger will not create detrimental interlocking relations or
concentration of control.
. The consideration to be paid to Orange and Rockland shareholders is
fair and reasonable.
. The Merger will not result in an unduly complex capital structure.
. The Merger is consistent with Sections 8 and 11 of the Act.
. The Merger tends towards the economic and efficient development of an
integrated electric utility system and an integrated gas utility
system.
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. The Merger is in the public interest and the interest of investors and
consumers.
. The Merger complies with all applicable State laws.
A. The Merger Meets the Requirements of Section 10(b) of the Act
Section 10(b) of the Act provides that if an acquisition satisfies the
requirements of subsection (f), the Commission shall approve the acquisition
unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or
concentration of control of public utility companies of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in the case of an acquisition of securities or utility assets,
the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable or
does not bear a fair relation to the sums invested in or the earning
capacity of the utility assets to be acquired or the utility assets
underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be detrimental to
the public interest or the interest of investors or consumers or the
proper functioning of such holding company system.
1. Section 10(b)(1) -- Interlocking Relations
Section 10(b)(1) directs the Commission to approve an acquisition unless
it finds that such acquisition will tend toward interlocking relations "of a
kind or to an extent detrimental to" the public interest or the interests of
investors or consumers. Accordingly, an acquisition does not offend
Section 10(b)(1) merely because it causes interlocking relations. Any merger,
by its nature, results in interlocking relations between previously unrelated
companies. As the Commission has recognized, such relationships are necessary
to integrate the merging entities.
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Northeast Utils., HCAR 25221, 47 S.E.C. Docket 1270 (Dec. 21, 1990), modified on
other grounds, HCAR No. 25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke
Gas & Elec. Dep't v. SEC, 972 F.2d 358 (D.C. Cir. 1992).
The Merger will not result in interlocking relations that are detrimental
to any of the interests protected by Section 10(b)(1). The Merger Agreement
provides that the Board of Directors of CEI will be modified to include one
member who previously was a member of the Board of Directors of Orange and
Rockland. Following the Merger, the Orange and Rockland Board of Directors will
be elected by CEI. An advisory board, with equal numbers of CEI and Orange and
Rockland members, will be established to provide advice and input regarding
implementation of the Merger. These relationships are necessary to integrate
the combined companies and achieve the objectives of the Merger. The Merger
will create efficiencies and economies that will benefit both consumers and
investors. The combined companies will continue to be regulated by the NYPSC,
the regulations of which are specifically designed to protect the public
interest. Similarly, the NJBPU and the PaPUC will continue to regulate RECO's
operations in New Jersey and Pike's operations in Pennsylvania, respectively, in
the public interest. Accordingly, the Merger will not harm, but will instead
promote the interests protected by Section 10(b)(1).
2. Section 10(b)(1) -- Concentration of Control
Section 10(b)(1)'s concern with concentration of control is directed at
avoiding an "excess of concentration and bigness" while preserving
"opportunities for economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and reserves and generally
more efficient operations." In re American Elec. Power Co., 46 S.E.C.
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1299, 1309 (1978). When applying Section 10(b)(1) to utility acquisitions, the
Commission must determine if the acquisition will create the type of structure
or combination at which the Act is specifically directed. In re Vermont Yankee
Nuclear Corp., 43 S.E.C. 693, 700 (1968), rev'd on other grounds, 413 F.2d 1052
(D.C.Cir 1969). As discussed below, the Merger does not create a "huge
complex and irrational system," but instead takes advantage of economies of
scale and efficiencies that benefit both investors and consumers. American
Electric Power Co., 46 S.E.C. at 1309.
a. Size
While the combination of Con Edison, Orange and Rockland, RECO and Pike
will create somewhat larger electric and gas utility systems, these systems will
not exceed the economies of scale of current electric generation and
transmission or gas distribution technology. If approved, the CEI utility
subsidiaries will serve approximately 3.3 million electric customers in New
York, New Jersey and Pennsylvania and approximately 1.1 million gas customers in
New York and Pennsylvania. As of September 30, 1998, CEI's assets totaled about
$14.5 billion, the combined consolidated assets of CEI and Orange and Rockland
totaled approximately $16 billion and for the year ended September 30, 1998,
CEI's operating revenues totaled about $7.22 billion and combined operating
revenues totaled $7.8 billion. This represents approximately an eight percent
increase in revenues and assets compared with CEI's existing system.
The Commission has approved combinations resulting in similarly-sized and
larger utility systems. See TUC Holding Co., HCAR 26749, 65 S.E.C. Docket 301
(Aug. 1, 1997) (combination of Texas Utilities Company and ENSERCH Corporation,
combined assets at time of acquisition of approximately $24 billion); Houston
Indus., Inc., HCAR 26744, 65 S.E.C. Docket 83 (July 24, 1997) (combination of
Houston Industries, Inc. and NorAm Energy Corp.,
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combined assets at time of acquisition of approximately $16 billion); Entergy
Corp., HCAR 25952, 55 S.E.C. Docket 2035 (Dec. 17, 1993) (acquisition of Gulf
States Utilities Co., combined assets in excess of $22 billion). Following the
Merger, CEI will be a mid-size holding company and its operations will not
exceed the economies of scale of current electric generation and transmission
technology, or provide undue power and control to CEI in the region in which it
will provide service.
b. Efficiencies and Economies
In Centerior Energy Corp., the Commission stated that a "determination of
whether to prohibit enlargement of a system by acquisition is to be made on the
basis of all the circumstances, not on the basis of size alone." Centerior
Energy Corp., HCAR 24073, 35 S.E.C. Docket 769, 771 (April 29, 1986). In
addition, in the SEC Staff's 1995 Report, the Division of Investment Management
recommended that the Commission approach its analysis of mergers and
acquisitions in a flexible manner with emphasis on whether the merger creates an
entity subject to effective regulation and is beneficial for shareholders and
customers as opposed to focusing on rigid, mechanical tests. The Regulation of
Public-Utility Holding Companies, Division of Investment Management Report, at
73-74, dated June 1995 (hereinafter referred to as Division Report).
By virtue of the Merger, CEI's consolidated utility revenues will increase
by less than ten percent; its operations will not exceed the economies of
current electric and gas utility technology, or provide undue power and control
to CEI in the region in which Con Edison and Orange and Rockland operate. The
companies will be in the position to realize the "opportunities for economies of
scale, the elimination of duplicate facilities . . . and generally
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more efficient operations." American Elec. Power Co., 46 S.E.C. at 1309. Among
other things, the Merger is expected to create operational and administrative
economies, savings in facility maintenance and emergency coordination, and other
administrative and general savings. In addition, as a result of the Merger, Con
Edison and Orange and Rockland and its utility subsidiaries are expected to be
better positioned to remain competitive as the utility industry restructures.
These factors should prove beneficial to the interests of investors and
consumers as well as the public interest in general. The expected economies and
efficiencies from the consolidation of Con Edison and Orange and Rockland, as
well as the competitive position of CEI after the Merger, are described in more
detail later in this Application.
c. Competitive Effects
The Merger will not have an adverse affect on competition. Section
10(b)(1) also requires the Commission to consider the possible anticompetitive
effects of a proposed combination. Entergy Corp., 55 S.E.C. Docket at 2041,
citing Municipal Elec. Ass'n v. SEC, 413 F.2d 1052, 1056-57 (D.C. Cir. 1969.)
Orange and Rockland is divesting all of its generating assets. Con Edison also
is divesting the bulk of its generating facilities to at least three separate
buyers. Thus, the Merger does not result in an increase in market concentration
for generation. Both Con Edison and Orange and Rockland are participants in the
NYISO, which will insure that transmission will be provided on a non-
discriminatory basis to all customers and competitors.
A full competition analysis was provided in the application of Con Edison
and Orange and Rockland for approval of the Merger under Section 203 of the
Federal Power Act, which was filed with the FERC on September 9, 1998. This
analysis was set forth in the testimony of Dr. William H. Hieronymus, who found
that since Orange and Rockland is divesting all of its
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generating resources, there will be no increase in market concentration from the
Merger. Under the FERC's Merger Policy Statement, which is based on the
Department of Justice's Horizontal Merger Guidelines, Dr. Hieronymus found that
the Merger passes all of the screening criteria.
On January 27, 1999, the FERC issued an order approving the Merger.
Consolidated Edison Company of New York, Inc. and Orange and Rockland Utilities,
Inc., Docket No. EC98-62-000, 86 FERC (P) 61,064 (1999). The FERC evaluated the
potential competitive consequences of the Merger in light of the criteria
established in its Merger Policy Statement. The FERC review included an analysis
of horizontal and vertical market power issues. Based on the record, including
applicants' mitigation commitments and generation divestiture plans, the FERC
found that the Merger raises no competitive concerns.
This Commission previously has relied upon the expertise of other federal
regulators in determining if a proposed transaction has anti-competitive
effects, and the D.C. Circuit has upheld the Commission's ability to "watchfully
defer[]" to other regulators. City of Holyoke Gas & Elec. Dep't v. SEC, 972
F.2d at 363-64. Applicant hereby respectfully requests that the SEC watchfully
defer to the competitive analysis set forth in the FERC order approving the
Merger.
For the reasons described above, the Merger will not "tend toward
interlocking relations or the concentration of control" of public utility
companies, of a kind or to the extent detrimental to the public interest or the
interests of consumers or investors within the meaning of Section 10 of the Act.
3. Section 10(b)(2) -- The Consideration Is Fair and Reasonable
The Commission may not approve the proposed acquisition of Orange and
Rockland by CEI under Section 10(b)(2) if it finds that the consideration to be
paid in connection with the
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acquisition, including all fees, commissions and other remuneration, is "not
reasonable or does not bear a fair relation to the sums invested in or the
earning capacity of . . . the utility assets underlying the securities to be
acquired. . . ." In considering whether or not a price meets such standard, the
Commission has considered whether the price was decided as the result of arms-
length negotiations, whether the parties' boards of directors approved the
purchase price, the opinions of investment bankers and the earnings, dividends,
book and market value of the shares of the company to be acquired. Ohio Power,
HCAR 16753 (June 8, 1970); Southern Co., HCAR 24579 (Feb. 12, 1988); Entergy
Corp., HCAR 25952 (Dec. 17, 1993).
CEI believes that the standards of Section 10(b)(2) regarding
consideration for the Merger are satisfied. The purchase price for the common
stock of Orange and Rockland was negotiated at arms-length between Orange and
Rockland and CEI. These negotiations were accompanied by extensive due
diligence, analysis and evaluation of all of the assets and goodwill of Orange
and Rockland as well as the liabilities and business prospects of Orange and
Rockland. (See Section II(B)(1) of this Application for the background and
description of the negotiations leading to the Merger.) As noted by the
Commission in In re Ohio Power Co., 44 S.E.C. 340 (1970), prices arrived at
through arms-length negotiations are particularly persuasive evidence that
Section 10(b)(2) is satisfied.
The Merger has been approved by the boards of directors of both CEI and
Orange and Rockland and by the affected public shareholders of Orange and
Rockland (approval by CEI's shareholders is not required). The acquisition was
approved by the CEI Board of Directors on April 28, 1998, consistent with its
fiduciary duties to protect the interests of the CEI
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shareholders. The Merger was approved by the Orange and Rockland Board of
Directors on May 10, 1998. The Orange and Rockland shareholders voted for
approval and adoption of the Merger Agreement on August 20, 1998.
Nationally recognized investment bankers for both Orange and Rockland and
CEI have reviewed extensive information concerning the Companies and the Merger
and have opined that the consideration to be paid to the Orange and Rockland
common stockholders is fair. The opinion letter of Salomon Smith Barney ("SSB")
for CEI found that, considering all of the facts, the consideration to be paid
for the common stock of Orange and Rockland is fair from a financial point of
view to CEI. DLJ, Orange and Rockland's financial advisor, similarly found that
the consideration was fair from a financial point of view to the holders of
Orange and Rockland common stock. In rendering their fairness opinions, both
DLJ and SSB performed a number of analyses relevant to the reasonableness of the
purchase price and its relation to the investment, in and earning capacity of,
the utility assets of both CEI and Orange and Rockland. These analyses
considered, among other things, the pro forma effect of the Merger on earnings,
dividends and cash flow, and the respective contributions of CEI and Orange and
Rockland in terms of assets, earnings, dividends, cash flow and businesses.
Both SSB and DLJ considered public and non-public historical and projected
financial information and forecasts related to the earnings, assets, business,
dividends, cash flow and prospects of CEI and Orange and Rockland; historical
market prices and trading activity of the common stock of the companies and
certain publicly traded companies deemed similar; and other information, as more
fully described in their opinion letters included with this Application as
Exhibits H-1 and H-2.
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In light of these opinions and an analysis of all relevant factors, the
purchase price falls within the range of reasonableness, and the consideration
for the Merger bears a fair relation to the sums invested in, and the earning
capacity of, the utility assets of Orange and Rockland and its subsidiaries.
4. The Fees Associated With the Merger Are Reasonable
CEI believes that the overall fees, commissions and expenses incurred and
to be incurred in connection with the Merger are reasonable and fair relative to
other mergers and the anticipated benefits of the Merger to the public, the
investors and the consumers, and such fees are consistent with recent precedent
and otherwise meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application, CEI expects that the total
fees, commissions and expenses associated with the Merger to be incurred by CEI
and Orange and Rockland together will be approximately $18 million. Similar
expenses have been incurred in other mergers and acquisitions. For example,
Union Electric and Central Illinois Public Service Company incurred together
approximately $21.8 million in fees, expenses and commissions in connection with
their combination into Ameren Corporation; Public Service Company of Colorado
and Southwestern Public Service Company incurred together $23.5 million in fees
and associated expenses in connection with their combination into New Century
Energies, Inc.; Texas Utilities and ENSERCH incurred together $37.2 million in
fees, commissions and expenses in connection with their combination into TUC
Holding Company; Houston Industries and NorAm incurred together $32 million in
fees, commissions and expenses in connection with their combination into Houston
Industries, Inc.; The Cincinnati Gas and Electric Company and PSI Resources
incurred together $47.1 million in fees, commissions and expenses in connection
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with their combination into CINergy Corp.; Northeast Utilities alone incurred
$46.5 million in fees, expenses and commissions in connection with its
acquisition of Public Service Company of New Hampshire; and Entergy alone
incurred $38 million in fees in connection with its acquisition of Gulf States
Utilities - all of which amounts were approved by the Commission as reasonable.
CEI believes that the fees paid to the financial consultants SSB and DLJ,
which are included in the total estimate of fees of $18 million, are fair and
reasonable. By letter of April 28, 1994 ("the SSB Engagement Agreement"), Con
Edison engaged Salomon Brothers, Inc., now SSB, as a financial advisor to assist
the senior management of Con Edison in identifying and/or evaluating regulated
utility acquisitions, and under the agreement was specifically requested to
assist in exploring the possibility of a business combination with Orange and
Rockland. The Board of Directors selected SSB as a financial advisor because
SSB, as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions. SSB is familiar with Con Edison, having provided certain
investment banking services to Con Edison from time to time, and having acted as
its financial advisor in connection with, and having participated in certain of
the negotiations leading to, the Merger. Pursuant to the SSB Engagement Letter,
Con Edison engaged SSB as its financial advisor in connection with the potential
acquisition of Orange and Rockland. Pursuant to the terms of the SSB Engagement
Letter, CEI agreed to pay SSB $250,000 upon CEI's commencement of substantive
negotiations with Orange and Rockland, an additional fee of $375,000 upon
execution of the Merger Agreement, an additional fee of $375,000 upon receipt
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of Orange and Rockland's shareholder approval, and an additional fee of
$4,590,000, less the amounts previously paid, on closing of the transaction. In
addition CEI has agreed to reimburse SSB for out-of-pocket expenses (including
the reasonable fees and expenses of counsel) incurred by SSB in connection with
its engagement, and to indemnify SSB and certain related parties against certain
liabilities, including liabilities under the Federal securities laws relating
to, or arising out of, its rendering of services under the SSB Engagement
Letter.
Pursuant to terms of an engagement letter between Orange and Rockland and
DLJ dated December 2, 1997, (the "DLJ Engagement Letter"), Orange and Rockland
has agreed to pay DLJ: (i) a retainer fee of $250,000, (ii) an opinion fee of
$500,000, (iii) a fee of $1,250,000 upon the execution of the Merger Agreement,
(iv) a fee of $750,000 upon shareholder approval of the Merger, and (v) a Merger
fee equal to $6,320,000 (0.8 percent of the aggregate consideration payable in
the Merger) less previously paid fees. In addition, Orange and Rockland also
has agreed to reimburse DLJ for all out-of-pocket expenses (including the
reasonable fees and expenses of counsel) incurred by DLJ in connection with its
engagement, and to indemnify DLJ and certain related persons against certain
liabilities, including liabilities under the Federal securities laws relating to
or arising out of its rendering of services under the DLJ Engagement Letter.
5. The Capital Structure Is Not Unduly Complex
Section 10(b)(3) of the Act requires the Commission to determine if the
Merger will unduly complicate CEI's capital structure or will be detrimental to
the public interest, the interests of investors or consumers or the proper
functioning of CEI's system.
-37-
As a result of the Merger, Orange and Rockland shareholders will receive
cash for surrendering their Orange and Rockland common stock which will then be
cancelled. All preferred stock and preference stock of Orange and Rockland will
be redeemed. C Acquisition Corp. will merge with Orange and Rockland, with
Orange and Rockland being the surviving corporation and a wholly-owned
subsidiary of CEI. There will be no minority common stock interest remaining in
Orange and Rockland. The only voting securities of CEI that will be publicly
held after the Merger will be CEI common stock. The only class of voting
securities of CEI's direct and indirect utility and non-utility subsidiaries
will be common stock, except for 1,915,319 shares of Con Edison's $5 Preferred
Stock, each of which has one vote per share, and, in all but a few cases, issued
and outstanding shares of such common stock will be held by CEI or a subsidiary
of CEI. CEI will hold, through its current subsidiaries, the interests
described in Item 1 of this Application.
Set forth below are summaries of the historical capital structure of CEI
and Orange and Rockland as of December 31, 1997, and the pro forma consolidated
capital structure of CEI after the Merger as of March 31, 1998.
-38-
CAPITAL STRUCTURE FOR CEI/6/
(in thousands)
- -------------------------------------------------------------------------------
12/31/97 as of 3/31/98
- -------------------------------------------------------------------------------
Common Shareholder Equity $ 5,930,079 $ 5,780,924
- -------------------------------------------------------------------------------
Preferred Stock Subject to 84,550 84,550
Mandatory Redemption
- -------------------------------------------------------------------------------
Preferred Stock 318,018 318,018
- -------------------------------------------------------------------------------
Long Term Debt 4,188,906 4,198,152
- -------------------------------------------------------------------------------
Total Capitalization 10,437,003 10,297,094
- -------------------------------------------------------------------------------
Total Noncurrent Liabilities 146,016 150,613
- -------------------------------------------------------------------------------
Total Current Liabilities 1,548,257 1,166,085
- -------------------------------------------------------------------------------
Total Deferred Credits 2,591,242 2,577,183
- -------------------------------------------------------------------------------
Total $14,722,518 $14,190,975
- -------------------------------------------------------------------------------
- ----------------------
/6/ To the extent CEI has outstanding short-term debt, CEI typically pays off
its short-term debt within a short period of time, and therefore short-
term debt is not reflected in CEI's financial statements.
-39-
CAPITAL STRUCTURE FOR Orange and Rockland
(in thousands)
- -------------------------------------------------------------------------------
12/31/97 3/31/98
- -------------------------------------------------------------------------------
Common Stock Equity $ 376,319 $ 377,463
- -------------------------------------------------------------------------------
Non Redeemable Stock 43,223 43,220
- -------------------------------------------------------------------------------
Long Term Debt 356,637 356,637
- -------------------------------------------------------------------------------
Total Capitalization 766,179 777,320
- -------------------------------------------------------------------------------
Total Noncurrent Liabilities 65,189 63,838
- -------------------------------------------------------------------------------
Total Current Liabilities 228,725 197,155
- -------------------------------------------------------------------------------
Total Deferred Credits 217,916 217,559
- -------------------------------------------------------------------------------
Total $1,288,009 $1,255,872
- -------------------------------------------------------------------------------
-40-
PRO FORMA COMBINED CAPITAL STRUCTURE FOR CEI (unaudited)
(in thousands)
------------------------------------------------------------------
1997
------------------------------------------------------------------
Common Stock Equity $ 5,695,836
------------------------------------------------------------------
Preferred Stock Subject to Mandatory 84,550
Redemption
------------------------------------------------------------------
Preferred Stock 318,018
------------------------------------------------------------------
Long Term Debt 4,198,152
------------------------------------------------------------------
Total Capitalization 10,493,365
------------------------------------------------------------------
Total Noncurrent Liabilities 150,613
------------------------------------------------------------------
Total Current Liabilities 1,181,388
------------------------------------------------------------------
Total Deferred Credits 2,577,183
------------------------------------------------------------------
Total $14,402,549
------------------------------------------------------------------
The capital structure of CEI after the Merger will not be unduly
complicated and will be substantially similar to capital structures approved by
the Commission in other orders. See e.g., LG&E Energy Corp., HCAR 26866
(Apr. 30, 1998); Conectiv, Inc., HCAR 26832 (Feb. 25, 1998); Centerior Energy
Corp., 35 S.E.C. Docket 769; Midwest Resources, Inc., HCAR 25159, 47 S.E.C.
Docket 252 (Sept. 26, 1990).
CEI's pro forma consolidated common equity to total capitalization rate of
48.7 percent comfortably exceeds the traditionally acceptable 30 percent level.
Northeast Utils., HCAR 25221, 47 S.E.C. Docket at 1284.
-41-
Section 10(b)(3) also requires the Commission to determine whether the
proposed combination will be detrimental to the public interest, the interests
of investors or consumers or the proper functioning of the CEI system. The
combination of Con Edison and Orange and Rockland is entirely consistent with
the interests of the public, investors, consumers and the proper functioning of
the holding company system. Con Edison and Orange and Rockland already are
interconnected at several points and their operations will be integrated to take
advantage of efficiencies and economies that would not be possible absent the
Merger. Further, CEI, Con Edison and Orange and Rockland will remain reporting
companies subject to the continuous disclosure requirements of the 1934 Act
following consummation of the Merger. The Merger will make Con Edison and
Orange and Rockland strong competitors in the emerging energy market, which is
good for both consumers and investors. For these reasons, the Applicants
believe that the Merger will be in the public interest and the interests of
investors and consumers, and will not be detrimental to the proper functioning
of the CEI holding company system.
As set forth more fully later in this Application, the Merger is expected
to result in cost savings and synergies, and will improve the efficiencies of
the utility systems. The Merger, therefore, will be in the public interest and
will not be detrimental to the proper functioning of the resulting holding
company system.
B. The Merger Meets the Requirements of Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
-42-
1) an acquisition of securities or utility assets, or any other
interest, which is unlawful under the provisions of section 8 or is
detrimental to the carrying out of the provisions of section 11; or
2) the acquisition of securities or utility assets of a public
utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public-
utility system . . . .
1. Section 10(c)(1)
a. Compliance with Section 8
Section 8 prohibits registered holding companies from acquiring properties
which would result in combined gas and electric operations in the same area
without the authorization of the appropriate state commission, where state law
prohibits or requires authorization for such combined operations. Section 8
applies only to registered holding company systems and thus, by its terms, is
not applicable to CEI or Orange and Rockland and its subsidiaries or the Merger.
However, even if it applied to exempt holding companies, the Merger would not be
unlawful as there is no such law, regulation or policy against combination
companies in the affected states. Accordingly, the Merger will not be unlawful
under Section 8 of the Act, and the portion of Section 10(c)(1) relating to
Section 8 is satisfied.
b. No Detriment to the Carrying Out of Section 11
Section 11 of the Act contains the integration and simplification
requirements of the Act applicable to registered holding companies.
Specifically, Section 11 mandates that the Commission require each registered
holding company to limit operations of its holding company system to a single
integrated public utility system, and certain "functionally related" businesses,
-43-
unless the provisions of subsection 11(b)(1)(A) - (C) (the "ABC" Clauses) permit
ownership of additional public utility systems.
The term "Integrated public utility system" is defined in Section 2(a)(29)
to mean:
As applied to electric utility companies, a system consisting of one
or more units of generating plants and/or transmission lines and/or
distributing facilities, whose utility assets, whether owned by one
or more electric utility companies, are physically interconnected or
capable of physical interconnection and which under normal conditions
may be economically operated as a single interconnected and
coordinated system confined in its operations to a single area or
region, in one or more States, not so large as to impair (considering
the state of the art and the area or region affected) the advantage
of localized management, efficient operation, and the effectiveness
of regulation;
and
(B) As applied to gas utility companies, a system consisting of one
or more gas utility companies which are so located and related that
substantial economies may be effectuated by being operated as a
single coordinated system confined in its operations to a single area
or region, in one or more States, not so large as to impair
(considering the state of the art and the area or region affected)
the advantages of localized management, efficient operation, and the
effectiveness of regulation; Provided, That gas utility companies
deriving natural gas from a common source of supply may be deemed to
be included in a single area or region.
Based upon these provisions, the SEC has determined that a single
integrated public utility system may be either an integrated electric utility
system or an integrated gas utility system, but not both. SEC v. New England
Elec. Sys., 384 U.S. 176, 178 n.7 (1966). An integrated electric utility system
must satisfy four criteria. The electric properties, which may be owned by more
than one subsidiary, must be: (1) physically interconnected or capable of such
interconnection; (2) economically operated as a single interconnected and
coordinated system;
-44-
(3) confined in its operations to single region; and (4) not so large as to
impair the advantages of localized management, efficient operations or the
effectiveness of regulation. See, e.g., Environmental Action, Inc. v. SEC, 895
F.2d 1255, 1263 (9th Cir. 1990) (citing In re Elec. Energy Inc., 38 S.E.C. 658,
668 (1958.) An integrated gas utility system need not be physically
interconnected and thus must satisfy three criteria: (1) substantial economies
through operation as a single coordinated system; (2) confinement to a single
region (subsidiaries deriving gas from a common source of supply may be included
in a single region); and (3) not so large as to impair the advantages of
localized management, efficient operation and effectiveness of regulation. See,
e.g., Consolidated Natural Gas Co., HCAR 25040, 45 S.E.C. Docket 672 (Feb. 14,
1990); MCN Corp., HCAR 26576, 45 S.E.C. Docket 2379 (Sept. 14, 1996).
Section 10(c)(1) does not require that exempt holding companies meet the
strict integration requirements of Section 11, but acquisitions by exempt
holding companies should not be detrimental to the carrying out of Section 11.
See Gaz Metro., Inc., HCAR 26170, 58 S.E.C. Docket 189, 193 (Nov. 23, 1994)
("Section 10(c)(1)'s requirement that the acquisition not be "detrimental" to
the carrying out of the provisions of Section 11 does not mandate that the
latter section's integration requirements be met. Exempt holding companies are
not directly subject to Section 11(b)(1)'s integration standards.") (citation
omitted.) The Commission has previously determined that a holding company may
acquire utility assets that will not, when combined with the acquiring company's
existing utility assets, make up an integrated system or fully comply with the
ABC Clauses, provided that there is de facto integration of contiguous utility
properties
-45-
and the holding company will be exempt from registration under Section 3 of the
Act following the acquisition. TUC Holding Co., HCAR 26749, 65 S.E.C. Docket 301
(Aug. 1, 1997).
Because CEI will remain exempt from registration under Section 3 following
the acquisition of Orange and Rockland, CEI is not required to show that the
electric system of Con Edison will be integrated with the electric system of
Orange and Rockland, or that the gas system of Con Edison will be integrated
with the gas system of Orange and Rockland in accordance with applicable
statutory criteria. Thus, consistent with TUC Holdings Co., CEI requests the
Commission to evaluate this Application based upon compliance with the de facto
integration standard and the fact that CEI will be exempt under Section 3
following the acquisition of Orange and Rockland.
Under this "de facto" integration standard, the Commission need not
address the question of whether the degree of integration that will exist
between the two companies would satisfy the integration standard of Section 11.
Indeed, CEI specifically requests that the Commission not address that question
vis-a-vis this Application. The issue of how utilities that have divested their
generation may satisfy the integration standard is an important policy issue,
because this Commission presumably does not want to discourage pro-competitive
divestiture. Thus, the issue should be addressed only where it is material and
where all of the relevant facts and policy implications can be examined.
Accordingly, for purposes of this Application, CEI asks the Commission to assume
that CEI's electric and gas systems will not be integrated following the Merger,
without prejudice to CEI's rights to later show that they meet the integration
standard.
-46-
In the following discussion, CEI presents information about the electric
and gas systems that is more than ample to support a finding of de facto
integration of all systems. This information is organized in accordance with
the statutory integration criteria. A summary of the basis for CEI's claim of
eligibility for exemption pursuant to Section 3 is also presented.
(1) The Electric Utility Systems
(a) Physical Interconnections
Con Edison and Orange and Rockland have adjacent electric service
territories that are physically interconnected. The Companies are directly
interconnected at three locations, two in New York and one in New Jersey. In
New York, the Companies are interconnected at the Ramapo substation via two 345-
138 kV transformers and at West Haverstraw via one 345-138 kV transformer. In
New Jersey, the Companies are directly interconnected via a 345-138 kV
transformer at South Mahwah. See Exhibit E-1.
The Companies jointly own 29.2 miles of transmission consisting of a
double circuit 345 kV tower line that runs from Con Edison's wholly-owned Ramapo
substation east to the Rockland/Westchester County line at the Hudson River.
Con Edison and Orange and Rockland, as tenants in common, own 85 percent and 15
percent undivided interest, respectively in those 345 kV circuits. Con Edison
and Orange and Rockland also jointly own, as tenants in common, the property
that supports the double circuit 345 kV ties between Ramapo and the New York/New
Jersey state line. The Companies jointly own (66 1/3 percent - Con Edison,
33 1/3 percent - Orange and Rockland) the Bowline Point generating facility and
the 345kV transmission line and substation connecting Bowline Point to the
above-mentioned transmission
-47-
facilities. As described above, Orange and Rockland and Con Edison have agreed
to sell Bowline Point to a subsidiary of the Southern Company.
(b) Operation of the Electric Systems
Orange and Rockland, RECO and Pike jointly operate a single integrated
electric production and transmission system serving New York, New Jersey and
Pennsylvania. Power supply agreements between Orange and Rockland and RECO and
Orange and Rockland and Pike reflect and provide for the integrated operation of
the system as a single electric production and transmission system, and for the
allocation of system costs among the three jurisdictions according to their pro
rata use of the system. The power supply agreements are FERC-approved tariffs
and are regulated by FERC pursuant to its jurisdiction under the Federal Power
Act. Transmission of the energy produced on the Orange and Rockland system to
the various load centers is accomplished by an interconnected interstate
transmission grid. The physical plant constructed to perform the power delivery
function is operated as a single power delivery system for the pro rata benefit
of the three companies, even though portions of it are owned by whichever of the
three companies in whose territory the facilities are located.
Con Edison operates a combination electric and gas utility system that
generates, transmits and distributes electricity and delivers natural gas to
three million customers in New York City and Westchester County. The Con Edison
service territory encompasses about 660 square miles and lies within two
contiguous areas consisting of The City of New York (except for the Rockaway
Peninsula) and most of Westchester County. Within the service area Con Edison
furnishes retail electric service to all members of the general public subject
to compliance
-48-
with the company's tariff on file with the NYPSC. To fulfill its
responsibilities under its franchise, Con Edison owns or leases and operates
electric generation, transmission and distribution facilities located within the
service area. The company uses such facilities, as well as interests in certain
other properties, to serve the present and expected needs of customers within
the service area.
Con Edison and Orange and Rockland also operate as a part of an
interconnected and coordinated regional system through their membership in NYPP,
which is a "tight" power pool. Their generating assets are centrally dispatched
through NYPP procedures. Upon implementation of the NYISO, operational control
of certain transmission facilities of Con Edison and Orange and Rockland will be
transferred to the NYISO and controlled as part of the NYISO system. In
addition, the NYISO energy markets will operate on a bid price basis and the
dispatch of any facility will depend upon its bid. Bilateral contracts outside
of the bid markets also will be permitted and will be scheduled by the NYISO.
Following divestiture of their generating assets, Con Edison and Orange and
Rockland will still have to meet their respective retail load obligations. They
will accomplish this by jointly purchasing and scheduling the delivery of
capacity and energy on an economic basis.
Following the Merger, the Companies are planning to jointly purchase
capacity and energy to provide for their aggregate loads on a centralized basis,
thereby optimizing the aggregate cost of electricity. This function will be
conducted largely by Con Edison's
-49-
Megawatthour Store./7/ Projected electricity needs of the Companies will be
provided to the Megawatthour Store, which will purchase the best group of
resources to meet the aggregate load.
If the NYISO is operating its open access transmission tariff prior to the
effective date of the Merger, transmission service over both the Con Edison and
the Orange and Rockland systems will be provided through the NYISO tariff. In
the event the NYISO tariff is not in place as of the effective date of the
Merger, the Companies have submitted to the FERC a joint open access
transmission tariff. That joint tariff provides for service across the
transmission systems of Con Edison and Orange and Rockland at a single price,
and provides a single point of contact for obtaining transmission service across
the system.
Under the NYISO proposal, the NYISO will have operational control over key
transmission facilities; however, the NYISO will not own or physically operate
the facilities. Certain key transmission facilities will be maintained and
operated by the transmission owner under the direction and control of the NYISO.
Other facilities whose status may have an effect on reliability are operated and
controlled by the transmission owner. Any changes in the status of such
facilities must be communicated to the NYISO. Thus, the Companies will continue
to have control and responsibility for the maintenance and reliability of their
transmission facilities.
(c) Same Area or Region
The electric properties of Con Edison and Orange and Rockland are located
primarily in adjoining counties in southern New York. The electric properties
of RECO in New Jersey and Pike in Pennsylvania are directly contiguous with the
New York properties of Orange and
- ----------------------
/7/ The Megawatthour Store is Con Edison's internal power marketing
department.
-50-
Rockland. Thus, the electric assets of the system are adjacent and contiguous
and located in southern New York, northern New Jersey and one adjoining county
in Pennsylvania. Thus, the electric systems will be confined to the same area
or region.
(d) The Size of the Electric Systems
The Commission has approved the formation of registered and exempt holding
companies far larger than the combination produced by the Merger. The combined
electric systems will operate principally in New York, with smaller operations
in Pennsylvania and New Jersey. Management focus will not be impaired by the
Merger. A member of the Orange and Rockland Board of Directors will be added
to the CEI Board of Directors. The Companies expect that the Merger will result
in more efficient operations. Following consummation of the Merger, the
electric systems of CEI will continue to be regulated by the New York, New
Jersey and Pennsylvania public service commissions. The FERC will continue to
regulate matters within its jurisdiction as well. Regulatory oversight of the
Companies will not change. Thus, the size of the electric systems will not be
so large as to impair the advantages of localized management, efficient
operations or the effectiveness of regulation.
(2) The Gas Utility Systems
(a) Operation of the Systems
As shown on Exhibit E-1, the existing gas service areas of Con Edison and
Orange and Rockland are adjacent; however, they are separated by the Hudson
River. Due to that separation, the existing gas systems are not directly
interconnected. The gas systems will realize economies of scale and purchasing
synergies while preserving the advantages of localized management and the
effectiveness of regulation.
-51-
The Companies share access to market and supply area locations through
several pipelines. The Companies plan to coordinate and jointly manage their
portfolios of supply and storage and to combine and centralize their gas
transportation function. The Companies also intend to engage in joint and
coordinated gas purchasing and planning. However, the gas distribution
operations of the Companies will continue to be separate.
(b) Single Region or Area
The gas systems will be confined to several counties in southern New York
and a very small portion of northeastern Pennsylvania. The gas properties of
Con Edison and Orange and Rockland are adjacent and separated only by the Hudson
River. The gas assets of Pike are adjacent to Orange and Rockland's service
area. Thus, following the Merger, the gas systems of CEI will be confined to a
single region.
In addition to being located within the same area, the gas systems also
will share a number of common sources of supply. Historically, in determining
whether two distant gas companies share a "common source of supply," the
Commission has placed substantial importance on whether the gas supply of the
two companies is derived from the same gas producing area (or basins),
recognizing that significant economies and efficiencies are achieved through the
coordination and management of gas supply. The Commission also has considered
whether the two companies are served by a common pipeline.
As indicated in the following table, Con Edison and Orange and Rockland
obtain a substantial amount of gas from the same basins. In 1997, Con Edison
and Orange and Rockland purchased 84 percent and 58 percent, respectively, of
their gas supply for retail operations from the Gulf Coast basin. In 1998,
purchases from the Gulf Coast Basin are expected to be
-52-
84 percent for Con Edison and 54 percent for Orange and Rockland. The
projections for 1999 estimate Con Edison's purchases from the Gulf Coast Basin
at 77 percent and Orange and Rockland's at 48 percent. Con Edison and Orange and
Rockland also make significant purchases from the Canadian Basin; Con Edison's
purchases for 1997, 1998 and 1999 are approximately 15 percent, while Orange and
Rockland's purchases are approximately 38 percent.
ANNUAL SUPPLY PURCHASES
-----------------------
(w/o GENERATION)
----------------
(BCF)
- ------------------------------------------------------------------------------
ANNUAL PURCHASES -- CORE MARKET
------------------------------------------------------------
SUPPLY BASIN ------------------------------------------------------------
1997 1998 1999
------------------------------------------------------------
ORU CON ED ORU CON ED ORU CON ED
- ------------------------------------------------------------------------------
Gulf Coast 13.9 109.3 11.8 109.3 9.3 69.7
- ------------------------------------------------------------------------------
Midcontinent 0.0 0.0 0.0 0.0 0.0 0.0
- ------------------------------------------------------------------------------
Appalachia 0.9 0.5 0.9 0.5 0.9 0.5
- ------------------------------------------------------------------------------
Canadian 9.1 20.0 9.1 20.1 9.1 20.1
- ------------------------------------------------------------------------------
TOTAL 23.9 129.9 21.8 129.9 19.3 90.3
- ------------------------------------------------------------------------------
Con Edison, Orange and Rockland and Pike also obtain transportation
services from several of the same interstate gas pipelines. Con Edison, Orange
and Rockland and Pike take service from Algonquin Gas Transmission, Tennessee
Gas Pipeline, National Fuel and Texas Eastern Transmission. The Companies do
not use hubs to purchase gas. The supply area locations that the Companies have
access to are: Henry, LA; Lebanon, OH; Louisiana; National
-53-
Fuel; South Texas; Niagara, NY; and Leidy, PA. As noted above, the Companies
intend to coordinate and jointly manage their portfolios of supply and storage.
(c) The Size of the Gas Systems
The gas systems will be managed under the overall direction of the CEI
Board of Directors which will remain unchanged except for the addition of one
new member from the Orange and Rockland Board of Directors. As discussed in
Item 3, Section B.2 of this Application, the Merger will result in more
efficient operations. Finally, the Merger will not impair the effectiveness of
regulation since the gas systems will continue to be regulated by the state
public utility commissions. Thus, the Merger of the gas systems will not have
an adverse effect on localized management, efficient operations or effective
regulation.
(3) "De Facto" Integration of the Electric and Gas Systems
In TUC Holding Co., the Commission addressed the acquisition of a gas
utility by an exempt electric holding company. The Commission stated:
Section 11(b)(1) makes provision for the acquisition and
retention of more than one integrated system only if the requirements
of section 11(b)(1)(A)--(C) ("ABC Clauses") are satisfied. By its
terms, however, section 11(b)(1) applies only to registered holding
companies. The Commission has previously determined that a holding
company may acquire utility assets that will not, when combined with
the acquiring company's existing utility assets, make up an integrated
system or fully comply with the ABC clauses, provided that there is a
de facto integration of contiguous utility properties and the holding
company will be exempt from registration under section 3 of the Act
following the acquisition.
TUC Holding Co., 65 S.E.C. Docket at 305-06 (footnote omitted).
-54-
In applying this standard to the combination of a purely electric utility
system with a purely gas utility system, the Commission explained:
In this matter there will be a de facto integration of the
combined utility properties. The respective service territories of
the TUC and ENSERCH systems generally overlap. The two systems will
be coordinated administratively. The combination offers TUC and
ENSERCH a means to compete more effectively in the emerging energy
services business, and it does not appear that the merger will give
rise to any of the abuses, such as ownership of scattered utility
properties, inefficient operations, lack of local management or
evasion of state regulation, that section 11(b)(1) and the Act
generally were intended to address. The merger of the two companies
should have no effect upon the ability of state and local ratemaking
authorities to carry out their statutory duties. Accordingly, the
Commission does not find that the proposed acquisition would be
detrimental to the carrying out of section 11, so that section
10(c)(1) of the Act is satisfied.
Id. at 306 (footnotes omitted).
In BL Holdings Corp., HCAR 26875 (May 15, 1998), the SEC stated that the
creation of a combination utility system with unified gas operations and an
electric generation company met the standards of the Act. Relying on TUC
Holding Co. the order states:
In this matter, there will be de facto integration of the
separate gas and electric systems . . . The two systems will be
coordinated administratively. BL Holding anticipates forming one or
more service companies that will provide certain common utility and
administrative services to BL Holding, Gas East, T&D Managers and
Genco. It does not appear that the combination will give rise to any
of the abuses, like ownership of scattered utility properties,
inefficient operations, lack of local management or evasion of state
regulation, that section 11 (b)(1) and the Act were intended to
address. The Transactions should have no effect upon the ability of
state ratemaking authorities to carry out their statutory duties.
Accordingly, the Commission does not find that the proposed
acquisition would be detrimental to the carrying out of section 11,
so that section 10(c)(1) of the Act is satisfied.
Id. (footnotes omitted).
-55-
Other recent cases in this area demonstrate the Commission's recognition
of the changes in the energy industry. In New Century Energies, for example, the
Commission stated that the gas and electric industries are converging and that
separation of such businesses could cause the separated entities to be weaker
competitors. 65 SEC Docket at 288. The SEC in approving the acquisition of KU
Energy by LG&E accepted that the combination of a combination utility system
exempt under Section 3 of the Act with an electric utility system would result
in a stronger financial competitor in the emerging total energy market. LG&E
Energy Corp., HCAR 26866 (April 30, 1998). Finally, the SEC noted in its order
approving the BL Holdings acquisition that the applicants had asserted that the
combination would create the opportunity for strategic, financial and
operational benefits in the form of greater financial strength and financial
flexibility. BL Holdings, HCAR 26875, at 15.
Con Edison and Orange and Rockland each presently coordinate the
operations of their respective electric and gas properties. The gas and electric
service areas of each company overlap and the systems share a number of
coordinated functions, including joint gas and electric billing, meter reading,
emergency management and resources, customer service and credit and billing
services. Thus, the existing gas and electric systems of each company already
are "de facto" integrated.
After the Merger, the Companies will also engage in the coordination of
administrative, corporate and purchasing functions related to the electric and
gas systems. The Companies expect to combine administrative and corporate
functions in common areas such as treasury, human resources, insurance and risk
management, accounting, legal, regulatory and government
-56-
affairs, environmental health and safety, business development, corporate
communications, information technology and purchasing functions. As noted
earlier, the Companies also intend to engage in joint and coordinated purchasing
of power and gas to meet aggregate demand of the systems in the most economical
manner. During emergencies the Companies will coordinate operations and
maintenance to expedite restoration of service.
Following the Merger, the electric and gas systems of CEI will continue to
largely overlap and will be located in adjacent service areas on opposite sides
of the Hudson River. The systems will reap many benefits available from
coordination of combined resources, while preserving local control and state
regulation.
Based upon the foregoing, the combination will result in the de facto
integration of the electric and gas utility systems of Orange and Rockland with
the electric and gas utility systems of CEI. Consistent with BL Holdings Corp.,
the service territories of the Companies are adjacent to one another. The
electric systems are physically interconnected and jointly own transmission
facilities. The gas systems obtain substantial quantities of gas from the same
supply areas and are served by the same pipelines. The systems will be
coordinated administratively and through joint purchasing arrangements for power
and gas to serve aggregate loads. The consolidation of administrative and
corporate functions is expected to provide efficiencies and economies. The
Merger will not give rise to any of the abuses, like ownership of scattered
properties, inefficient operations, lack of local management or evasion of state
regulation, that Section 11(b)(1) and the Act was intended to address.
-57-
(4) Exemption of CEI Following the Merger
Following consummation of the Merger, CEI and Orange and Rockland will
continue to be entitled to exemptions under Section 3 of the Act. CEI will
remain an exempt holding company under Section 3(a)(1) of the Act and continue
to file an annual statement on Form U-3A-2, while Orange and Rockland will
continue to rely on the Commission's order exempting Orange and Rockland from
registration based on its status as a holding company which is predominantly a
public utility company under Section 3(a)(2) of the Act./8/
[i] 3(a)(1) Exemption for CEI
CEI will continue to be entitled to an exemption under Section 3(a)(1) of
the Act. Section 3(a)(1) of the Act authorizes the Commission to exempt any
holding company:
if such holding company, and every subsidiary company thereof which
is a public-utility company from which such holding company derives,
directly or indirectly, any material part of its income, are
predominantly intrastate in character and carry on their businesses
substantially in a single State in which such holding company and
every such subsidiary company thereof are organized.
Under Section 3(a)(1) of the Act, in order for a holding company to
qualify for an exemption, each of its "material" subsidiaries must be
predominantly intrastate in nature and carry out their businesses
"substantially" in a single state in which the holding company and each material
subsidiary are organized. Wisconsin Electric Power Co., 28 S.E.C. 906 (1948).
Under
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/8/ The Commission held that Orange and Rockland was entitled to an exemption
under Section 3(a)(2) of the Act in In the Matter of Rockland Light and
Power Company, 1 SEC 354 (1936). Subsequently, Rockland Light and Power
Company became Orange and Rockland Utilities, Inc.
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an informal SEC guideline, a utility subsidiary is material if it contributes
more than ten percent of the consolidated utility revenues of the holding
company. A second guideline provides that a utility subsidiary operates
substantially in a single state if no more than about 20% of the utility's
operations are out of state. Hawes, Utility Holding Companies, Clark, Boardman
Company, Ltd., 1987 at (S) 3-04.
Following the Merger, CEI will have four public utility subsidiaries: Con
Edison, Orange and Rockland, RECO and Pike. The contribution of each utility
subsidiary to CEI's consolidated utility revenues based on 1997 figures is shown
below.
($000)
CEI consolidated utility revenues (pre-Merger) 6,740,000
Orange and Rockland consolidated utility revenues (pre-Merger) 642,000
---------
CEI consolidated utility revenues (post-Merger) 7,382,000
Con Edison utility revenues 6,740,000
Orange and Rockland utility revenues 494,000
RECO utility revenues 141,000
Pike utility revenues 6,420
Percent of total: Con Edison 91.30%
Orange and Rockland 6.70%
RECO 1.91%
Pike 0.09%
Post-Merger CEI will continue to be entitled to an exemption under section
3(a)(1), because each of its material subsidiaries will remain predominantly
intrastate in character and carry on its operations substantially in a single
state in which CEI and such subsidiaries are organized.
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Con Edison will remain a material subsidiary of CEI post Merger, because
approximately 91.3 percent of CEI's consolidated utility revenues will be
derived from Con Edison's operations. Since Con Edison is a material subsidiary
of CEI, it is necessary to consider whether Con Edison is predominantly
intrastate in character and carries on its business substantially in the state
in which CEI and Con Edison are organized.
CEI and Con Edison both are New York corporations. Con Edison's retail
electric and gas service areas are exclusively in New York, and all of its
generating and transmission assets are located in New York. Con Edison makes
only a small number of wholesale sales, and the majority of those sales are in
New York or at the New York border, and thus are intrastate in character.
Clearly, Con Edison is predominantly, if not exclusively, intrastate in
character and carries out its business substantially in New York. Thus, Con
Edison meets the requirements of Section 3(a)(1).
Orange and Rockland will not be a material subsidiary of CEI, because it
will contribute approximately 6.7 percent of CEI's consolidated utility revenues
post-Merger. Since Orange and Rockland will not be a material subsidiary, it is
not necessary to show that Orange and Rockland is predominantly intrastate in
character. Nevertheless, Orange and Rockland is organized in New York and its
electric and gas service areas are confined to three counties in New York.
Thus, Orange and Rockland is predominantly intrastate in character and carries
on its operations substantially in New York.
Post-Merger, RECO will contribute less than two percent of CEI's
consolidated utility revenues. Thus, RECO is not a material subsidiary of CEI
and is not required to be incorporated
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in or operate in New York. Pike's revenues will constitute less than 0.09
percent of CEI's consolidated utility revenues. Clearly, Pike, like RECO, will
not be a material subsidiary of CEI under Section 3(a)(1) and need not be
incorporated in or operate in the same state as CEI.
In view of the foregoing, CEI will be entitled to an exemption under
section 3(a)(1) following the Merger, because CEI and each of its material
subsidiaries will be predominantly intrastate in character and carry on their
businesses substantially in a single state in which CEI and each such subsidiary
are organized.
[ii] 3(a)(2) Exemption for Orange and Rockland
Following the Merger, Orange and Rockland will continue to rely on the
Commission's order granting Orange and Rockland an exemption under Section
3(a)(2) of the Act./9/ Section 3(a)(2) of the Act provides that the Commission
may issue an order exempting a holding company from registration under the Act
if:
such holding company is predominantly a public utility company whose
operations, as such, do not extend beyond the State in which it is
organized and States contiguous thereto.
Under this subsection, the SEC has held that the utility activities of the
subsidiaries can be about 50% of the activity (revenues, assets) of the holding
company (gross-to-gross test). Houston Industries Incorporated, HCAR No. 35-
26744 (1997). In granting the exemption to Orange and Rockland in 1936, the
Commission observed that sales at retail by Orange and Rockland amounted to
81 percent of the gross revenues of the consolidated Orange and Rockland
- ----------------------
/9/ In the Matter of Rockland Light and Power Co., 1 SEC 354 (1936).
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system and that 78 percent of the electricity and 93 percent of the gas sold by
the entire system was sold by the parent company.
Today, Orange and Rockland remains a public utility company organized and
operating exclusively in New York, with public utility subsidiaries operating in
the contiguous states of New Jersey and Pennsylvania. Orange and Rockland still
produces approximately 77 percent of the revenues of the consolidated system.
The ratio of the revenues of RECO and Pike to those of Orange and Rockland is
approximately 28.2 percent. The ratio of the assets of RECO and Pike to those
of Orange and Rockland is approximately 16 percent./10/
As shown above, there has been no material change in the operations of
Orange and Rockland and its subsidiaries since the Commission granted Orange and
Rockland an exemption in 1936. Nor will the Merger materially affect the
operations of Orange and Rockland. Orange and Rockland will continue to operate
predominantly as a public utility company in the State of New York. RECO and
Pike will continue to operate in New Jersey and Pennsylvania, respectively.
There will not be a significant change in the gross-to-gross test comparing the
revenues of RECO and Pike to those of Orange and Rockland. Thus, it is
appropriate for Orange and Rockland to continue to rely on the Commission's
order granting Orange and Rockland an exemption from the Act under Section
3(a)(2).
[iii] Effect of Divestiture
As explained earlier, both Con Edison and Orange and Rockland have plans
to divest generating assets. CEI believes that the utility revenues of its
operating subsidiaries will not be
- ----------------------
/10/ Orange and Rockland has total assets of $1.2 billion. RECO has assets
of approximately $186 million and Pike has assets of approximately
$9.2 million.
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materially affected by the planned divestitures. It is expected that Con Edison
and Orange and Rockland and its subsidiaries will continue to make substantial
sales of electric power to customers within their service areas. Retail choice
is not expected to have a disproportionate effect on either the utility revenues
of Con Edison or Orange and Rockland and its operating subsidiaries. Thus,
Orange and Rockland, RECO and Pike will remain non-material subsidiaries of CEI
following divestiture; Con Edison will continue its operations substantially in
New York; and CEI will continue to qualify for exemption under Section 3(a)(1).
Similarly, the effect of divestiture is not expected to effect Orange and
Rockland's eligibility for exemption under Section 3(a)(2). Orange and Rockland
will continue to make sales at retail in New York on a level comparable to its
present sales, and neither RECO or Pike own any generating facilities. Thus,
the gross-to-gross ratio of revenues post divestiture is expected to be
comparable to the current ratio. The book value of the Orange and Rockland
assets to be divested is approximately $289 million./11/ If that amount is
removed from Orange and Rockland's books, the gross-to-gross ratio changes from
16 percent to 19 percent. That ratio clearly is well within the range considered
acceptable by the SEC.
- ----------------------
/11/ Orange and Rockland's Annual Report for 1997 at page 23. (The total net
book value of the plant assets to be sold is $269 million. In addition,
fuel and material and supplies inventories, with a carrying value of $20
million, will be included with the sale.)
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[iv] The "Unless and Except" Clause
Section 3 of the Act provides for the exemptions from registration
described above, and requires that the Commission grant the exemptions, "unless
and except insofar as it finds the exemption detrimental to the public interest
or the interest of investors or consumers."
CEI submits that the Merger will not be detrimental to the public interest
or the interests of consumers or investors. The Merger cannot go forward
without the approval of affected state regulatory commissions and the Federal
Energy Regulatory Commission. As demonstrated above, CEI and Orange and
Rockland will be well within the guidelines of Section 3(a)(1) and 3(a)(2).
Only 2% of CEI's consolidated utility revenues will be derived from out-of-state
operations, and CEI does not have significant investments in non-utility
businesses. This Application demonstrates that the Merger is expected to
produce benefits to investors and consumers. There is simply no basis for
invoking the unless and except clause on the record presented.
Based on the foregoing, the Merger satisfies the requirements of Section
10(c)(1). The combination will result in the de facto integration of the
electric and gas utility systems of Orange and Rockland with the adjacent
electric and gas utility systems of CEI. CEI and Orange and Rockland will
continue to be eligible for exemption under Section 3 following the Merger.
Moreover, the acquisition will not go forward without the approval of the New
York, New Jersey and the Pennsylvania public service commissions. The Merger
does not reduce or eliminate the regulation of the CEI consolidated systems.
Thus, there is no effect on the local regulation that is of concern under the
Act. Finally, CEI does not believe that the acquisition and operation of these
utility systems will pose any other concerns to the public interest or the
interests of
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investors or consumers than those already addressed or that are likely to be
raised in the state proceedings. For these reasons, no adverse finding is
required under Section 10(c)(1).
2. Section 10(c)(2) -- Economic and Efficient Development of
an Integrated Public Utility System
Section 10(c)(2) of the Act requires that the Merger tend toward the
economical and efficient development of an integrated public utility system,
thereby serving the public interest. The Commission previously has determined
that where a holding company will be exempt from registration under Section 3 of
the Act following an acquisition of non-integrating utility assets, it is
sufficient for purposes of Section 10(c)(2) to find benefits to one integrated
system. BL Holdings Corp., HCAR 26875, at 14.
Section 2(a)(29) has distinct definitions for a gas utility system and an
electric utility system. Therefore, the Commission historically has taken the
position that gas and electric properties together cannot constitute a single
integrated public utility system. SEC v. New England Elec. Sys., 384 U.S. 176,
178 n.7 (1965). Nevertheless, Commission authority is equally clear that
Section 10(c)(2) does not limit Commission approval to acquisitions resulting in
only one integrated system:
we have indicated in the past that acquisitions may be approved even
if the combined system will not be a single integrated system.
Section 10(c)(2) requires only that the acquisition tend "towards the
economical and the efficient development of an integrated public-
utility system."
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Gaz Metro. Inc., HCAR 26170, at 192, quoting In re Union Elec. Co., HCAR 18368
(Apr. 10, 1974), aff'd mem. sub nom., City of Cape Girardeau, Missouri v. SEC,
521 F.2d 324 (D.C. Cir. 1975). See also, New Century Energies, HCAR 26748
(Aug. 1, 1997)
The Merger will make available rate savings above and beyond the
substantial savings captured for customers by the Con Edison Settlement
Agreement and the Orange and Rockland Restructuring Plan and the transition to
competition. The combined systems will be able to offer customers in adjacent
service areas gas and/or electric service to meet their energy needs at
competitive prices. The Companies will engage in joint purchasing to serve
their retail load obligations, combining their purchasing power to achieve
economies and synergies through the elimination of duplicative functions and
improved purchasing power. Further, the Merger will create savings in the form
of combined administrative and corporate functions that will reduce the cost of
service to both Con Edison's and Orange and Rockland's customers. These savings
will accrue to both gas and electric customers.
Thus, the Merger clearly satisfies the requirement of Section 10(c)(2) as
it tends toward the economic and efficient development of several integrated
public utility systems by benefiting the electric and gas utility systems
through cost savings and synergies.
The Merger will produce economies and efficiencies more than sufficient to
satisfy the standards of Section 10(c)(2) of the Act. Although some of the
anticipated economies and efficiencies will be fully realized only in the longer
term, it is proper to consider them in determining whether the standards of
Section 10(c)(2) are met. See In re American Elec. Power Co., 46 S.E.C. at
1320-21. Although some potential benefits cannot be precisely estimated, such
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benefits also are entitled to be considered in the Commission's 10(c)(2)
determination. "[S]pecific dollar forecasts of future savings are not
necessarily required; a demonstrated potential for economies will suffice even
when these are not precisely quantifiable." Centerior Energy Corp., 35 S.E.C.
Docket at 775 (footnote omitted).
CEI estimates that the nominal dollar value, net of costs to achieve the
Merger, of non-fuel savings from the Merger to be approximately $467.6 million
over ten years. These savings come from the elimination of duplicate corporate
and administrative programs and greater efficiencies in operations and business
processes. The synergy savings are expected to be derived primarily from labor
costs savings to be realized through combined operations in common areas such as
the treasury, human resources, insurance and risk management, accounting,
regulatory and government affairs, environmental health and safety, business
development, corporate communications, information technology, legal and
purchasing functions. The expected savings are summarized below:
SUMMARY OF SAVINGS
($ in thousands)
Labor $334,690
Facilities 19,594
Corporate and Administrative 105,828
Purchasing Economies (Non-Fuel) 48,162
Gas Supply (Support Activities) 3,341
--------
511,636
(44,060)*
--------
$467,576
* Costs to achieve
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The coordination between the Companies will be effective in meeting the
challenges of the increasingly competitive environment in the utility industry
in both the gas and electric sectors, due to economies of scale and more
efficient operations. By creating the economies of scale in both utility
systems, CEI and Orange and Rockland believe that the combined utility systems
will create the opportunity for strategic, financial and operational benefits
from customers in the form of lower rates over the long term and for
shareholders in the form of greater financial strength and financial
flexibility. As described above, the Merger will make available rate savings
above and beyond the substantial savings to be realized by customers under each
company's restructuring plan.
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described below under Item 4 of this Application, Regulatory Approvals,
and as evidenced by the filings before the public service authorities of New
York, New Jersey and Pennsylvania, CEI and Orange and Rockland and its
subsidiaries intend to comply with all applicable state laws related to the
Merger.
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IV. ITEM 4: REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that CEI and
Orange and Rockland have obtained or expect to obtain in connection with the
Merger.
A. Antitrust
The Hart-Scott-Rodino Act ("HSR Act") and the rules and regulations of
that Act provide that certain mergers (including this Merger) may not be
consummated until certain information has been submitted to the Department of
Justice ("DOJ") and the Federal Trade Commission ("FTC") and a specified waiting
period has been satisfied. CEI and Orange and Rockland submitted their
respective notification and report forms and all required information to the DOJ
and FTC on January 26, 1999.
If the Merger is not consummated within 12 months after the expiration of
the HSR Act waiting period, then CEI and Orange and Rockland would be required
to submit new information to the DOJ and the FTC, and a new HSR Act waiting
period would have to expire or be terminated before the Merger could be
consummated.
B. Federal Energy Regulatory Commission
Section 203 of the Federal Power Act ("FPA") provides that no public
utility shall sell or otherwise dispose of its jurisdictional facilities or
directly or indirectly merge or consolidate such facilities with those of any
other person or acquire the securities of any other public utility, without
first obtaining the approval from the FERC. Under section 203 of the FPA, the
FERC will approve a merger if it finds that such merger is "consistent with the
public interest." In reviewing a merger, the FERC generally evaluates whether
the merger will adversely affect competition, whether it will adversely affect
rates, and whether it will impair the effectiveness of
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regulation. Con Edison and Orange and Rockland also are subject to the
jurisdiction of the FERC under section 205 of the FPA with respect to certain
wholesale electric sales and transmission services. On September 9, 1998, an
application was filed with the FERC requesting the required approvals from the
FERC. That application is filed with this Application as Exhibit D-1.
On January 27, 1999, the FERC issued an order approving the Merger.
Consolidated Edison Company of New York, Inc. and Orange and Rockland Utilities,
Inc., Docket No. EC98-62-000, 86 FERC (P) 61,064 (1999). Based on the record
before it, including applicants' mitigation commitments and generation
divestiture plans, the FERC found that the Merger raises no competitive
concerns. The FERC also concluded that the Merger will not adversely affect
rates, or the manner or extent to which FERC or the relevant state commissions
regulate the transactions and facilities of the merged entities. The FERC
approved the applicants' proposal to use the "purchase' method of accounting to
record the Merger and found that the applicants' proposal to account for the
goodwill on the books of CEI is also acceptable and consistent with FERC
precedents. A copy of the FERC order approving the Merger is included in
Exhibit D-5.
By separate order issued January 27, 1999, in Docket No. ER98-4510-000,
the FERC conditionally accepted for filing on an interim basis, a single-system
open access transmission tariff filed by Con Edison and Orange and Rockland in
conjunction with their application for approval of the Merger. Consolidated
Edison Company of New York, Inc. and Orange and Rockland Utilities, Inc., 86
FERC (P) 61,063 (1999). The applicants requested that the interim tariff be made
effective upon consummation of the Merger and that it remain in effect until the
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NYISO open access transmission tariff takes effect. The FERC accepted the
interim tariff to become effective on the date of consummation of the Merger.
However, the FERC also stated that if the NYISO tariff becomes effective prior
to the date of consummation of the Merger, the proposed interim tariff is
unnecessary and is dismissed accordingly. A copy of the FERC order accepting
the proposed tariff is included in Exhibit D-5.
C. State Public Utility Commissions
New York
Con Edison and Orange and Rockland are seeking approval of the NYPSC under
Section 70 of the Public Service Law for CEI to acquire the stock of Orange and
Rockland as contemplated in, and pursuant to, the terms of the Merger Agreement.
Con Edison and Orange and Rockland also have sought NYPSC approval under Section
108 of the Public Service Law for a certificate of merger. Such approvals only
will be given if it is demonstrated that the Merger is in the public interest.
The approvals requested by Con Edison and Orange and Rockland in their joint
petition to the NYPSC include modifications to the restructuring plans of both
Companies to reflect the corporate structure that will result upon consummation
of the Merger. The joint petition proposes adopting cost allocation and
accounting procedures for transactions between and among CEI and its
subsidiaries that are consistent with procedures approved by the NYPSC in the
Con Edison and Orange and Rockland restructuring plans. Con Edison and Orange
and Rockland filed their joint petition with the NYPSC on June 22, 1998. That
joint petition is provided to the Commission as Exhibit D-2 to this Application.
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New Jersey
RECO is subject to the jurisdiction of the NJBPU, and thus the NJBPU's
approval also is required pursuant to New Jersey Stat. Ann. 48:2-51.1 and New
Jersey Stat. Ann. 48:3-10. The NJBPU, pursuant to its statutory mandate, will
evaluate the impact of the acquisition on competition, on the rates of affected
ratepayers, on the employees of the affected utilities, and on the provision of
safe and adequate utility service at just and reasonable rates. In reviewing
mergers and acquisitions, the NJBPU has utilized a "no harm" standard rather
than a positive benefits standard. A petition requesting approval of the Merger
was filed on July 2, 1998.
Pennsylvania
The Merger also must be approved by the PaPUC pursuant to Section 1102 of
the Pennsylvania Public Utility Code, which requires a Pennsylvania utility
(Pike) to obtain the PaPUC's approval, by certificate of public convenience,
before it may transfer property used and useful in the public service. In
determining whether to grant such a certificate, the PaPUC will consider whether
a public benefit will result from the proposed merger or acquisition. A
petition requesting PaPUC approval was filed by Pike on July 2, 1998. The
PaPUC established a separate proceeding to consider the application. On December
8, 1998, the Pennsylvania Office of Consumer Advocate and Pike notified the
PaPUC that they had agreed in principle to settle completely this proceeding. A
formal settlement agreement was filed with the PaPUC on January 19, 1999.
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Except as set forth above, no other state or local regulatory body or
agency and no other Federal commission or agency has jurisdiction over the
Merger proposed herein.
V. ITEM 5: PROCEDURE
The Commission respectfully is requested to issue and publish, not later
than February 10, 1999, the requisite notice under Rule 23 with respect to the
filing of this Application, such notice to specify a date not later than
March 3, 1999, by which comments must be entered and a date not later than
March 31, 1999, as the date after which an order of the Commission granting and
permitting this Application to become effective may be entered by the
Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
Application. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
VI. ITEM 6: EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
B-1 The Merger Agreement
C-1 The Orange and Rockland Proxy Statement dated July 17, 1998 and
incorporated herein by reference, File No. 1-4315
D-1 Application submitted to the Federal Energy Regulatory Commission
D-2 Application submitted to the New York State Public Service Commission
D-3 Application submitted to the New Jersey Board of Public Utilities
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D-4 Application submitted to the Pennsylvania Public Utility Commission
D-5 Orders of the above-mentioned agencies (to be submitted by amendment)
(A)(P) Orders of the Federal Energy Regulatory Commission
E-1(P) A map showing the interconnections and the relationship of the utility
properties of CEI and Orange and Rockland
F-1 Preliminary Opinion of Counsel (to be submitted by amendment)
F-2 Past-tense Opinion of Counsel (to be submitted by amendment)
G-1 Financial Data Schedule (see Exhibit 27)
H-1 Opinion of Salomon Smith Barney
H-2 Opinion of Donaldson, Lufkin and Jenrette Securities Corporation
I-1 Annual Report of CEI on Form 10-K for the year ended December 31, 1997
(File No. 1-4514 and incorporated herein by reference)
I-2 Annual Report of Con Edison on Form 10-K for the year ended December 31,
1997 (File No. 1-1217 and incorporated herein by reference)
I-3 Annual Report of Orange and Rockland on Form 10-K for the year ended
December 31, 1997 (File No. 1-4315 and incorporated herein by reference)
I-5 Orange and Rockland Annual Report to Shareholders (File No. 1-4315 and
incorporated herein by reference)
I-6 Quarterly Report of CEI on Form 10-Q for the quarter ended March 31,
1998 (File No. 1-4514 and incorporated herein by reference)
I-7 Quarterly Report of CEI on Form 10-Q for the quarter ended June 30, 1998
(File No. 4514 and incorporated herein by reference)
I-8 Quarterly Report of CEI on Form 10-Q for the quarter ended September 30,
1998 (File No. 1514 and incorporated herein by reference)
I-9 Quarterly Report of Con Edison on Form 10-Q for the quarter ended
March 31, 1998 (File No. 1-1217 and incorporated herein by reference)
I-10 Quarterly Report of Con Edison on Form 10-Q for the quarter ended
June 30, 1998 (File No. 1-1217 and incorporated herein by reference)
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I-11 Quarterly Report of Con Edison on Form 10-Q for the quarter ended
September 30, 1998 (File No. 1-1217 and incorporated herein by
reference)
I-12 Quarterly Report of Orange and Rockland on Form 10-Q for the quarter
ended March 31, 1998 (File No. 1-4315 and incorporated herein by
reference)
I-13 Quarterly Report of Orange and Rockland on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-4315 and incorporated herein by
reference)
I-14 Quarterly Report of Orange and Rockland on Form 10-Q for the quarter
ended September 30, 1998 (File No. 1-4315 and incorporated herein by
reference)
J Notice of the Merger
K-1 Con Edison Settlement Agreement (Amended and Restated Agreement and
Settlement, between Con Edison and the Staff of the New York Public
Service Commission, designated in Con Edison's Current Report on
Form 8-K, dated September 23, 1997 (File No. 1- 1217 as Exhibit 10)
K-2 Orange and Rockland Electric Rate and Restructuring Plan dated
November 6, 1997
L-1(P) Organization Charts of CEI and Orange and Rockland Pre-Merger, and CEI
Post-Merger
EX 27 Financial Data Schedule
Financial Statements
FS-1 CEI Unaudited Pro Forma Combined Condensed Balance Sheet as of March 31,
1998
FS-2 CEI Unaudited Pro Forma Combined Condensed Statement of Income for the
12 months ended March 31, 1998
FS-3 CEI Consolidated Balance Sheet as of March 31, 1998
FS-4 CEI Consolidated Statement of Income for the 12 months as of March 31,
1998
FS-5 Con Edison Consolidated Balance Sheet as of March 31, 1998
FS-6 Con Edison Consolidated Statement of Income for the 12 months ended as
of March 31, 1998, and the last three fiscal years
FS-7 Orange and Rockland Consolidated Balance Sheet as of March 31, 1998
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FS-8 Orange and Rockland Consolidated Statement of Income for the 12 months
ended March 31, 1998, and the last three fiscal years
FS-9 RECO Consolidated Balance Sheet as of March 31, 1998
FS-10 RECO Consolidated Statement of Income for the 12 months ended as of
March 31, 1998, and the last three fiscal years
FS-11 Pike Consolidated Balance Sheet as of March 31, 1998
FS-12 Pike Consolidated Statement of Income
VII. ITEM 7: INFORMATION AS TO ENVIRONMENTAL EFFECTS
Review and approval of the Merger is not a "major federal action
significantly affecting the quality of the human environment" within the meaning
of Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. (S)
4321 et seq. (1994). The Commission's approval of this Application, the
expiration of the applicable waiting period under the HSR Act, the review by the
appropriate state regulatory bodies and the FERC will not result in changes in
the operations of Orange and Rockland or Con Edison that would have any impact
on the environment. No Federal agency is preparing an environmental impact
statement with respect to this matter.
VIII. SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Application to be signed on
its behalf by the undersigned thereunto duly authorized.
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Respectfully submitted,
Consolidated Edison, Inc.
4 Irving Place
New York, New York 10003
By:___________________________
Peter A. Irwin
Its Attorney
By:___________________________
J. A. Bouknight, Jr.
Its Attorney
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PRO-FORMA
CONSOLIDATED EDISON, INC. (CEI)
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 1998
ORANGE & ROCKLAND
UTILITIES, INC. AND
CEI SUBSIDIARIES
MARCH 31, 1998 MARCH 31, 1998
ACTUAL ACTUAL ADJUSTMENTS PRO FORMA*
---------------- ---------------- -------------- ----------------
ASSETS (Thousands of Dollars)
Utility plant, at original cost
Electric $11,805,558 $1,048,587 $12,854,145
Gas 1,759,293 232,771 1,992,064
Steam 582,332 582,332
General 1,210,805 64,570 1,275,375
---------------- --------------- -------------- ----------------
Total 15,357,988 1,345,928 16,703,916
Less: Accumulated depreciation 4,481,414 480,773 4,962,187
---------------- --------------- -------------- ----------------
Net 10,876,574 865,155 11,741,729
Construction work in progress 284,725 70,121 354,846
Nuclear fuel assemblies and components,
less accumulated amortization 103,690 103,690
Net utility plant acquisition adjustment 437,708 (c) 437,708
---------------- --------------- -------------- ----------------
Net utility plant 11,264,989 935,276 437,708 12,637,973
---------------- --------------- -------------- ----------------
Current assets
Cash and temporary cash investments 198,257 4,771 (71,730) (d) 131,298
Accounts receivable - customer, less
allowance for uncollectible accounts (a) 561,655 60,555 622,210
Other receivables (b) 44,983 9,690 (1,246) (e) 53,427
Regulatory accounts receivable 3,888 3,888
Fuel, at average cost 38,985 6,530 45,515
Gas in storage, at average cost 31,137 3,245 34,382
Materials and supplies, at average cost 192,698 15,438 208,136
Prepayments 189,146 25,831 214,977
Other current assets 16,700 39,923 56,623
---------------- --------------- -------------- ----------------
Total current assets 1,277,449 165,983 (72,976) 1,370,456
---------------- --------------- -------------- ----------------
Investments and nonutility property 331,970 10,505 342,475
---------------- --------------- -------------- ----------------
Deferred charges
Deferred pension and other postretirement
benefits 8,051 8,051
Enlightened Energy program costs 102,349 102,349
Unamortized debt expense 138,262 10,979 149,241
Recoverable fuel costs 25,613 (6,018) 19,595
Power contract termination costs 69,594 12,625 82,219
Other deferred charges 254,270 41,642 35,200 (c) 331,112
---------------- --------------- -------------- ----------------
Total deferred charges 590,088 67,279 35,200 692,567
---------------- --------------- -------------- ----------------
Net Assets of Discontinued Operations 1,476 1,476
Regulatory asset-future federal
income taxes 938,053 75,353 1,013,406
---------------- --------------- -------------- ----------------
Total $14,402,549 $1,255,872 $399,932 $16,058,353
================ =============== ============== ================
The accompanying notes to the pro forma are an integral part of this statement.
PRO-FORMA
CONSOLIDATED EDISON, INC. (CEI)
CONSOLIDATED INCOME STATEMENT
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
ORANGE & ROCKLAND
UTILITIES, INC. AND
CEI SUBSIDIARIES
ACTUAL 1998 ACTUAL 1998 ADJUSTMENTS PRO FORMA*
----------- ------------------- ----------- ----------
(Thousands of Dollars)
OPERATING REVENUES
Electric $5,657,948 $478,468 $6,136,416
Gas 1,038,031 149,370 1,187,401
Steam 365,011 365,011
Non-utility 72,654 698 73,352
---------- -------- -------- ----------
TOTAL OPERATING REVENUES 7,133,644 628,536 7,762,180
---------- -------- -------- ----------
OPERATING EXPENSES
Purchased power 1,355,129 62,631 1,417,760
Fuel 580,024 73,121 653,145
Gas purchased for resale 490,325 82,159 572,484
Other operations 1,122,458 145,314 8,800 (c) 1,276,572
Maintenance 478,600 33,618 512,218
Depreciation and amortization 507,921 35,045 11,223 (c) 554,189
Taxes, other than federal income tax 1,178,391 96,648 1,275,039
Federal income tax 377,796 22,916 (19,670)(j) 381,042
---------- -------- -------- ----------
TOTAL OPERATING EXPENSES 6,090,644 551,452 353 6,642,449
---------- -------- -------- ----------
OPERATING INCOME 1,043,000 77,084 (353) 1,119,731
OTHER INCOME (DEDUCTIONS)
Investment income 14,082 14,082
Allowance for equity funds used during construction 3,161 22 3,183
Other income less miscellaneous deductions (4,082) 2,187 (1,895)
Taxes other than income taxes (274) (274)
Federal income tax (2,674) 102 (2,572)
---------- -------- -------- ----------
TOTAL OTHER INCOME 10,487 2,037 12,524
---------- -------- -------- ----------
INCOME BEFORE INTEREST CHARGES 1,053,487 79,121 (353) 1,132,255
Interest on long-term debt 318,464 24,417 47,400 (i) 390,281
Other interest 13,916 9,248 23,164
Allowance for borrowed funds used during construction (1,561) (1,772) (3,333)
---------- -------- -------- ----------
NET INTEREST CHARGES 330,819 31,893 47,400 410,112
---------- -------- -------- ----------
LOSS FROM DISCONTINUED OPERATIONS (10,834) (10,834)
NET INCOME 722,668 36,394 (47,753) 711,309
PREFERRED STOCK DIVIDEND REQUIREMENTS (18,276) (2,800) (21,076)
---------- -------- -------- ----------
NET INCOME FOR COMMON STOCK $ 704,392 $ 33,594 ($47,753) $ 690,233
---------- -------- -------- ----------
COMMON SHARES OUTSTANDING - AVERAGE (000) 235,195 13,616 (13,616) 235,195
BASIC AND DILUTED EARNINGS PER SHARE - CONTINUING OPERATIONS $ 2.99 $ 3.27 $ 2.98
========== ======== ======== ==========
- DISCONTINUED OPERATIONS ($0.80) ($0.05)
========== ======== ======== ==========
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 2.105 $ 2.580 $ 2.105
========== ======== ======== ==========
* Assumes $790 million long-term debt issuance and sale at a 6% interest rate.
CONSOLIDATED EDISON, INC.
-------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
AS AT MARCH 31, 1998, DECEMBER 31, 1997 AND MARCH 31, 1997
----------------------------------------------------------
As At
---------------------------------------------------
March 31, 1998 Dec. 31, 1997 March 31, 1997
-------------- ------------- --------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT, AT ORIGINAL COST
Electric $ 11,805,558 $ 11,743,745 $ 11,678,164
Gas 1,759,293 1,741,562 1,665,996
Steam 582,332 576,206 538,924
General 1,210,805 1,203,427 1,160,419
------------ ------------ ------------
Total 15,357,988 15,264,940 15,043,503
Less: Accumulated depreciation 4,481,414 4,392,377 4,371,046
------------ ------------ ------------
Net 10,876,574 10,872,563 10,672,457
Construction work in progress 284,725 292,218 309,315
Nuclear fuel assemblies and components,
less accumulated amortization 103,690 102,321 100,720
------------ ------------ ------------
NET UTILITY PLANT 11,264,989 11,267,102 11,082,492
------------ ------------ ------------
CURRENT ASSETS
Cash and temporary cash investments 198,257 183,458 94,903
Funds held for refunding of debt -- 328,874 --
Accounts receivable - customer, less
allowance for uncollectible accounts
of $22,705, $21,600 and $21,535 561,655 581,163 570,595
Other receivables 44,983 60,759 36,497
Regulatory accounts receivable 3,888 (1,682) 60,954
Fuel, at average cost 38,985 53,697 45,946
Gas in storage, at average cost 31,137 37,209 22,660
Materials and supplies, at average cost 192,698 191,759 203,675
Prepayments 189,146 75,516 170,852
Other current assets 16,700 16,457 15,453
------------ ------------ ------------
TOTAL CURRENT ASSETS 1,277,449 1,527,210 1,221,535
------------ ------------ ------------
INVESTMENTS AND NONUTILITY PROPERTY 331,970 292,397 193,894
------------ ------------ ------------
DEFERRED CHARGES
Enlightened Energy program costs 102,349 117,807 128,204
Unamortized debt expense 138,262 126,085 128,234
Recoverable fuel costs 25,613 98,301 52,389
Power contract termination costs 69,594 80,978 46,848
Other deferred charges 254,270 239,559 289,795
------------ ------------ ------------
TOTAL DEFERRED CHARGES 590,088 662,730 645,470
------------ ------------ ------------
REGULATORY ASSET-FUTURE FEDERAL
INCOME TAXES 938,053 973,079 967,977
------------ ------------ ------------
TOTAL $ 14,402,549 $ 14,722,518 $ 14,111,368
============ ============ ============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED EDISON, INC.
-------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
AS AT MARCH 31, 1998, DECEMBER 31, 1997 AND MARCH 31, 1997
----------------------------------------------------------
As At
----------------------------------------------
March 31, 1998 Dec. 31, 1997 March 31, 1997
-------------- ------------- --------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock, authorized 500,000,000
shares; outstanding 235,489,650 shares,
235,489,650 shares and 235,008,078 shares $ 1,482,351 $ 1,482,351 $ 1,478,647
Retained earnings 4,531,810 4,484,703 4,322,562
Capital stock expense (36,966) (36,975) (34,831)
------------ ------------ ------------
TOTAL COMMON SHAREHOLDERS' EQUITY 5,977,195 5,930,079 5,766,378
------------ ------------ ------------
Preferred stock
Subject to mandatory redemption
7.20% Series I 47,500 47,500 47,500
6-1/8% Series J 37,050 37,050 37,050
------------ ------------ ------------
TOTAL SUBJECT TO MANDATORY REDEMPTION 84,550 84,550 84,550
------------ ------------ ------------
Other preferred stock
$ 5 Cumulative Preferred 175,000 175,000 175,000
5-3/4% Series A 7,061 7,061 7,061
5-1/4% Series B 13,844 13,844 13,844
4.65% Series C 15,330 15,330 15,330
4.65% Series D 22,233 22,233 22,233
6% Convertible Series B -- -- 4,519
------------ ------------ ------------
TOTAL OTHER PREFERRED STOCK 233,468 233,468 237,987
------------ ------------ ------------
TOTAL PREFERRED STOCK 318,018 318,018 322,537
------------ ------------ ------------
Long-term debt 4,198,152 4,188,906 4,239,066
------------ ------------ ------------
TOTAL CAPITALIZATION 10,493,365 10,437,003 10,327,981
------------ ------------ ------------
NONCURRENT LIABILITIES
Obligations under capital leases 39,180 39,879 41,958
Other noncurrent liabilities 111,433 106,137 81,800
------------ ------------ ------------
TOTAL NONCURRENT LIABILITIES 150,613 146,016 123,758
------------ ------------ ------------
CURRENT LIABILITIES
Long-term debt due within one year 200,000 529,385 103,762
Accounts payable 377,799 440,114 352,461
Customer deposits 163,983 161,731 159,176
Accrued taxes 107,989 65,736 109,052
Accrued interest 66,557 85,613 67,706
Accrued wages 80,509 82,556 78,300
Other current liabilities 184,551 183,122 145,787
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 1,181,388 1,548,257 1,016,244
------------ ------------ ------------
PROVISIONS RELATED TO FUTURE FEDERAL INCOME TAXES
AND OTHER DEFERRED CREDITS
Accumulated deferred federal income tax 2,308,092 2,307,835 2,299,747
Accumulated deferred investment tax credits 161,490 163,680 170,290
Other deferred credits 107,601 119,727 173,348
------------ ------------ ------------
TOTAL DEFERRED CREDITS 2,577,183 2,591,242 2,643,385
------------ ------------ ------------
TOTAL $ 14,402,549 $ 14,722,518 $ 14,111,368
============ ============ ============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED EDISON, INC.
-------------------------
CONSOLIDATED INCOME STATEMENT
-----------------------------
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 AND 1997
---------------------------------------------------
1998 1997
---- ---
(Thousands of Dollars)
OPERATING REVENUES
Electric $ 5,657,948 $ 5,523,800
Gas 1,038,031 1,063,225
Steam 365,011 391,494
Non-utility 72,654 159,480
------------- -------------
TOTAL OPERATING REVENUES 7,133,644 7,137,999
------------- -------------
OPERATING EXPENSES
Purchased power 1,355,129 1,321,564
Fuel 580,024 540,741
Gas purchased for resale 490,325 618,553
Other operations 1,122,458 1,165,863
Maintenance 478,600 447,944
Depreciation and amortization 507,921 487,713
Taxes, other than federal income tax 1,178,391 1,165,187
Federal income tax 377,796 383,731
------------- -------------
TOTAL OPERATING EXPENSES 6,090,644 6,131,296
------------- -------------
OPERATING INCOME 1,043,000 1,006,703
OTHER INCOME (DEDUCTIONS)
Investment income 14,082 8,527
Allowance for equity funds used during construction 3,161 4,755
Other income less miscellaneous deductions (4,082) (7,812)
Federal income tax (2,674) 811
------------- -------------
TOTAL OTHER INCOME 10,487 6,281
------------- -------------
INCOME BEFORE INTEREST CHARGES 1,053,487 1,012,984
Interest on long-term debt 318,464 312,203
Other interest 13,916 16,893
Allowance for borrowed funds used during construction (1,561) (2,270)
------------- -------------
NET INTEREST CHARGES 330,819 326,826
------------- -------------
NET INCOME 722,668 686,158
PREFERRED STOCK DIVIDEND REQUIREMENTS (18,276) (18,429)
------------- -------------
NET INCOME FOR COMMON STOCK $ 704,392 $ 667,729
============= =============
COMMON SHARES OUTSTANDING - AVERAGE (000) 235,195 234,987
BASIC AND DILUTED EARNINGS PER SHARE $ 2.99 $ 2.84
============= =============
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 2.105 $ 2.085
============= =============
CON EDISON SALES
Electric (Thousands of kilowatthours)
Con Edison customers 37,626,512 36,962,401
Delivery service to NYPA and others 8,826,642 8,718,372
Service for municipal agencies 831,459 723,899
------------- -------------
Total sales in service territory 47,284,613 46,404,672
Off-system sales (A) 2,536,590 4,068,429
Gas (dekatherms)
Firm (B) 90,659,667 93,211,622
Off-peak firm/interruptible 23,248,182 21,656,329
------------- -------------
Total sales to Con Edison customers 113,907,849 114,867,951
Transportation of customer-owned gas
NYPA 15,425,100 7,487,843
Others 9,526,866 6,268,814
Off-system sales 15,785,892 10,949,867
------------- -------------
Total sales and transportation 154,645,707 139,574,475
Steam (Thousands of pounds) 26,267,547 28,271,763
(A) Includes 865,683 and 1,617,564 thousands of kWh, respectively, subsequently
purchased by Con Edison for sale to its customers.
(B) Includes firm transportation for customer aggregation.
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
BALANCE SHEET
-------------
AS AT MARCH 31, 1998, DECEMBER 31, 1997 AND MARCH 31, 1997
----------------------------------------------------------
As At
----------------------------------------------------
March 31, 1998 Dec. 31, 1997 March 31, 1997
-------------- ------------- --------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT, AT ORIGINAL COST
Electric $ 11,805,558 $ 11,743,745 $ 11,678,164
Gas 1,759,293 1,741,562 1,665,996
Steam 582,332 576,206 538,924
General 1,210,805 1,203,427 1,160,419
------------ ------------ ------------
Total 15,357,988 15,264,940 15,043,503
Less: Accumulated depreciation 4,481,414 4,392,377 4,371,046
------------ ------------ ------------
Net 10,876,574 10,872,563 10,672,457
Construction work in progress 284,725 292,218 309,315
Nuclear fuel assemblies and components,
less accumulated amortization 103,690 102,321 100,720
------------ ------------ ------------
NET UTILITY PLANT 11,264,989 11,267,102 11,082,492
------------ ------------ ------------
CURRENT ASSETS
Cash and temporary cash investments 98,216 183,458 94,903
Funds held for refunding of debt -- 328,874 --
Accounts receivable - customer, less
allowance for uncollectible accounts
of $22,372, $21,600 and $21,535 541,322 581,163 570,595
Other receivables 43,780 60,759 36,497
Regulatory accounts receivable 3,888 (1,682) 60,954
Fuel, at average cost 38,985 53,697 45,946
Gas in storage, at average cost 29,577 37,209 22,660
Materials and supplies, at average cost 192,698 191,759 203,675
Prepayments 188,321 75,516 170,852
Other current assets 16,688 16,457 15,453
------------ ------------ ------------
TOTAL CURRENT ASSETS 1,153,475 1,527,210 1,221,535
------------ ------------ ------------
INVESTMENTS AND NONUTILITY PROPERTY 244,370 292,397 193,894
------------ ------------ ------------
DEFERRED CHARGES
Enlightened Energy program costs 102,349 117,807 128,204
Unamortized debt expense 138,262 126,085 128,234
Recoverable fuel costs 25,613 98,301 52,389
Power contract termination costs 69,594 80,978 46,848
Other deferred charges 254,270 239,559 289,795
------------ ------------ ------------
TOTAL DEFERRED CHARGES 590,088 662,730 645,470
------------ ------------ ------------
REGULATORY ASSET-FUTURE FEDERAL
INCOME TAXES 938,053 973,079 967,977
------------ ------------ ------------
TOTAL $ 14,190,975 $ 14,722,518 $ 14,111,368
============ ============ ============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED EDISON COMPANY OF NEW YORK INC.
--------------------------------------------
BALANCE SHEET
-------------
AS AT MARCH 31, 1998, DECEMBER 31,1997 AND MARCH 31, 1997
---------------------------------------------------------
As At
---------------------------------------------------
March 3l, 1998 Dec. 31, 1997 March 31, 1997
-------------- ------------- --------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock $ 1,482,351 $ 1,482,351 $ 1,478,647
Retained earnings 4,335,539 4,484,703 4,322,562
Capital stock expense (36,966) (36,975) (34,531)
-------------- ------------- --------------
TOTAL COMMON SHAREHOLDERS' EQUITY 5,780,924 5,930,079 5,766,378
-------------- ------------- --------------
Preferred stock
Subject to mandatory redemption
7.20% Series I 47,500 47,500 47,500
6-1/8% Series J 37,050 37,050 37,050
-------------- ------------- --------------
TOTAL SUBJECT TO MANDATORY REDEMPTION 84,550 84,550 84,550
-------------- ------------- --------------
Other preferred stock
$ 5 Cumulative Preferred 175,000 175,000 175,000
5-3/4% Series A 7,061 7,061 7,061
5-1/4% Series B 13,844 13,844 13,844
4.65% Series C 15,330 15,330 15,330
4.65% Series D 22,233 22,233 22,233
6% Convertible Series 8 - - 4,519
-------------- ------------- --------------
TOTAL OTHER PREFERRED STOCK 233,468 233,468 237,987
-------------- ------------- --------------
TOTAL PREFERRED STOCK 318,018 318,018 322,537
-------------- ------------- --------------
Long-term debt 4,198,152 4,188,906 4,239,066
-------------- ------------- --------------
TOTAL CAPITALIZATION 10,297,094 10,437,003 10,327,981
-------------- ------------- --------------
NONCURRENT LIABILITIES
Obligations under capital leases 39,180 39,879 41,958
Other noncurrent liabilities 111,433 106,137 81,800
-------------- ------------- --------------
TOTAL NONCURRENT LIABILITIES 150,613 146,016 123,758
-------------- ------------- --------------
CURRENT LIABILITIES
Long-term debt due within one year 200,000 529,385 103,762
Accounts payable 356,606 440,114 352,461
Customer deposits 163,983 161,731 159,176
Accrued taxes 116,795 65,736 109,052
Accrued interest 66,557 85,613 67,706
Accrued wages 80,509 82,556 78,300
Other current liabilities 181,635 183,122 145,787
-------------- ------------- --------------
TOTAL CURRENT LIABILITIES 1,166,085 1,548,257 1,016,244
-------------- ------------- --------------
PROVISIONS RELATED TO FUTURE FEDERAL INCOME
TAXES AND OTHER DEFERRED CREDITS
Accumulated deferred federal income tax 2,308,092 2,307,835 2,299,747
Accumulated deferred investment tax credits 161,490 163,680 170,290
Other deferred credits 107,601 119,727 173,348
-------------- ------------- --------------
TOTAL DEFERRED CREDITS 2,577,183 2.591,242 2,643,385
-------------- ------------- --------------
TOTAL $ 14,190,975 $ 14,722,518 $ 14,111,368
============== ============= ==============
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
INCOME STATEMENT
----------------
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 AND 1997
---------------------------------------------------
1998 1997
------------- -------------
(Thousands of Dollars)
OPERATING REVENUES
Electric $ 5,660,384 $ 5,523,800
Gas 1,038,575 1,063,225
Steam 365,415 391,494
------------ ------------
TOTAL OPERATING REVENUES 7,064,374 6,978,519
------------ ------------
OPERATING EXPENSES
Purchased power 1,344,276 1,321,564
Fuel 580,024 540,741
Gas purchased for resale 421,216 460,143
Other operations 1,114,224 1,162,695
Maintenance 478,600 447,944
Depreciation and amortization 507,079 487,599
Taxes, other than federal income tax 1,178,237 1,165,125
Federal income tax 384,910 384,260
------------ ------------
TOTAL OPERATING EXPENSES 6,008,566 5,970,071
------------ ------------
OPERATING INCOME 1,055,808 1,008,448
OTHER INCOME (DEDUCTIONS)
Investment income 11,753 7,734
Allowance for equity funds used during construction 3,160 4,755
Other income less miscellaneous deductions (17,979) (9,293)
Federal income tax 2,836 1,340
------------ ------------
TOTAL OTHER INCOME (230) 4,536
------------ ------------
INCOME BEFORE INTEREST CHARGES 1,055,578 1,012,984
Interest on long-term debt 318,464 312,203
Other interest 13,916 16,893
Allowance for borrowed funds used during construction (1,561) (2,270)
------------ ------------
NET INTEREST CHARGES 330,819 326,826
------------ ------------
NET INCOME 724,759 686,158
PREFERRED STOCK DIVIDEND REQUIREMENTS (18,276) (18,429)
------------ ------------
NET INCOME FOR COMMON STOCK $ 706,483 $ 667,729
============ ============
CON EDISON SALES
Electric (Thousands of kilowatthours)
Con Edison customers 37,626,512 36,962,401
Delivery service to NYPA and others 8,826,642 8,718,372
Service for municipal agencies 831,459 723,899
------------ ------------
Total sales in service territory 47,284,613 46,404,672
Off-system sales (A) 2,536,590 4,068,429
Gas (dekatherms)
Firm (B) 90,659,667 93,211,622
Off-peak firm/interruptible 23,248,182 21,656,329
------------ ------------
Total sales to Con Edison customers 113,907,849 114,867,951
Transportation of customer-owned gas
NYPA 15,425,100 7,487,843
Others 9,526,866 6,268,814
Off-system sales 15,785,892 10,949,867
------------ ------------
Total sales and transportation 154,645,707 139,574,475
Steam (Thousands of pounds) 26,267,547 28,271,763
(A) Includes 865,683 and 1,617,564 thousands of kWh, respectively,
subsequently purchased by Con Edison for sale to its customers.
(B) Includes firm transportation for customer aggregation.
The accompanying notes are an integral part of these financial statements.
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(THOUSANDS OF DOLLARS)
MARCH 31,
1998
-----------
UTILITY PLANT:
- --------------
Electric $883,109
Gas 231,915
Common 64,502
-----------
Utility Plant in Service 1,179,526
Less accumulated depreciation 427,990
-----------
Net Utility Plant in Service 751,536
Construction work in progress 67,317
-----------
Net Utility Plant 818,853
-----------
NONUTILITY PROPERTY AND INVESTMENTS:
- ------------------------------------
Nonutility property 264
Less accumulated depreciation, depletion
and amortization 166
Investment in subsidiary companies 115,992
-----------
Net Nonutility Property 116,090
-----------
CURRENT ASSETS:
- ---------------
Cash and cash equivalents 2,482
Temporary cash investments 0
Customer accounts receivable, less allowance for
uncollectible accounts of $2,312 48,950
Accrued utility revenue 17,550
Other accounts receivable, less allowance for
uncollectible accounts of $226 8,690
Receivable from associated companies 11,086
Materials and supplies (at average cost) 18,852
Prepaid property taxes 22,275
Prepayments and other current assets 22,562
-----------
Total Current Assets 152,447
-----------
DEFERRED DEBITS:
- ----------------
Income tax recoverable in future rates 67,359
Deferred revenue taxes 4,170
Deferred pension and other postretirement benefits 2,049
IPP settlement costs 10,387
Unamortized debt expense (amortized over term
of securities) 8,914
Other deferred debits 23,387
-----------
Total Deferred Debits 116,266
-----------
TOTAL $1,203,656
===========
ORANGE AND ROCKLAND UTILITIES, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
CAPITALIZATION AND LIABILITIES
------------------------------
(THOUSANDS OF DOLLARS)
----------------------
March 31,
1998
-------------------
CAPITALIZATION:
- ---------------
Common stock (13,518,737 shares outstanding) $ 67,594
Premium on capital stock 132,300
Capital stock expense (6,030)
Retained earnings 183,625
-------------------
Total Common Stock 377,489
-------------------
Non-redeemable preferred stock (428,443 shares outstanding) 42,844
Non-redeemable cumulative preference stock
(11,548 shares outstanding) 376
-------------------
Total Non-Redeemable Stock 43,220
-------------------
Long-term debt 314,022
-------------------
Total Capitalization 734,731
-------------------
NON-CURRENT LIABILITIES:
- -----------------------
Reserve for claims and damages 4,011
Postretirement benefits 6,414
Pension costs 44,841
Obligations under capital leases 1,600
-------------------
Total Non-current Liabilities 56,866
-------------------
CURRENT LIABILITIES:
- --------------------
Long-term debt and obligations due within one year 143,685
Accounts payable 37,795
Payable to associated companies 81
Accrued Federal income and other taxes 8,281
Refundable fuel and gas costs 7,502
Refunds to customers 808
Other current liabilities 22,801
-------------------
Total Current Liabilities 220,953
-------------------
DEFERRED TAXES AND OTHER:
- ------------------------
Deferred Federal income taxes 169,011
Deferred investment tax credits 12,149
Accrued IPP settlement agreements 0
Accrued Order 636 transition costs 1,340
Other deferred credits 8,606
-------------------
Total Deferred Taxes and Other 191,106
-------------------
Total $ 1,203,656
===================
ORANGE AND ROCKLAND UTILITIES, INC.
Consolidated Statement of Income
For the Year Ended
-------------------------------------------------------------
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
OPERATING REVENUES:
Electric 331,539 333,689 336,509 321,737
Gas 149,103 168,331 176,319 140,033
Electric sales to other utilities 78,446 78,743 74,457 70,854
-------------------------------------------------------------
Total Utility Revenues 559,088 580,763 587,285 532,624
Diversified activities 0 0 0 0
-------------------------------------------------------------
Total Operating Revenues 559,088 580,763 587,285 532,624
-------------------------------------------------------------
OPERATING EXPENSES:
Operations:
Fuel used in electric production 72,611 70,298 57,745 70,495
Electricity purchased for resale 62,414 65,276 73,539 53,557
Gas purchased for resale 82,105 99,418 101,754 71,602
Other expenses of operation 117,541 116,534 121,199 105,792
Maintenance 29,613 31,589 31,840 36,025
Depreciation and amortization 30,500 31,305 27,732 33,043
Taxes other than income taxes 77,943 78,676 78,919 74,229
Federal income taxes 19,192 20,194 22,860 22,682
-------------------------------------------------------------
Total Operating Expenses 491,919 513,290 515,588 467,425
-------------------------------------------------------------
INCOME FROM OPERATIONS 67,169 67,473 71,697 65,199
OTHER INCOME AND DEDUCTIONS:
Allowance for other funds used during construction 0 0 0 9
Investigation and litigation costs 490 (2,167) (1,385) (5,575)
Other - net (170) (75) (2,256) (589)
Equity in earnings of subsidiary companies (2,218) (7,896) 5,050 5,163
Taxes other than income taxes (209) (206) (184) (99)
Federal income taxes 814 1,745 1,279 3,038
-------------------------------------------------------------
Total Other Income and Deductions (1,293) (8,599) 2,504 1,947
-------------------------------------------------------------
INCOME FROM OPERATIONS 65,876 58,874 74,201 67,146
INTEREST CHARGES:
Interest on long-term debt 20,139 20,116 20,844 23,186
Other interest 10,003 9,392 6,283 4,905
Amortization of debt premium and expense - net 1,079 1,208 1,321 1,252
Allowance for borrowed funds used during construction (1,739) (1,348) (550) (770)
-------------------------------------------------------------
Total Interest Charges 29,482 29,368 27,898 28,573
-------------------------------------------------------------
NET INCOME 36,394 29,506 46,303 38,573
Dividends on preferred and preference stock,
at required times 2,800 2,800 3,024 3,135
-------------------------------------------------------------
Earnings applicable to common stock 33,594 26,706 43,279 35,438
=============================================================
Average number of common shares outstanding 13,615,538 13,649,079 13,653,952 13,653,613
Earnings per average common share outstanding 2.47 1.96 3.17 2.60
ROCKLAND ELECTRIC COMPANY
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(THOUSANDS OF DOLLARS)
MARCH 31,
1998
---------
UTILITY PLANT:
- --------------
Electric $158,398
Less accumulated depreciation 50,748
---------
Net Utility Plant in Service 107,650
Construction work in progress 2,652
---------
Net Utility Plant 110,302
---------
NONUTILITY PROPERTY AND INVESTMENTS:
- ------------------------------------
Nonutility property 118
Less accumulated depreciation, depletion
and amortization 20
---------
Net Nonutility Property 98
---------
CURRENT ASSETS:
- ---------------
Cash and cash equivalents 20,415
Temporary cash investments 0
Customer accounts receivable, less allowance for
uncollectible accounts of $265 11,229
Accrued utility revenue 1,850
Other accounts receivable, less allowance for
uncollectible accounts of $79 943
Receivable from associated companies 227
Materials and supplies (at average cost) 6,103
Prepaid property taxes 25
Prepayments and other current assets 590
---------
Total Current Assets 41,382
---------
DEFERRED DEBITS:
- ----------------
Income tax recoverable in future rates 7,386
Deferred revenue taxes 6,271
Deferred pension and other postretirement benefits 5,927
IPP settlement costs 2,078
Unamortized debt expense (amortized over term
of securities) 2,017
Other deferred debits 9,192
---------
Total Deferred Debits 32,871
---------
NET ASSETS OF DISCONTINUED OPERATIONS: 1,476
- -------------------------------------- ---------
TOTAL $186,129
=========
ROCKLAND ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
---------------------------
CAPITALIZATION AND LIABILITIES
------------------------------
(THOUSANDS OF DOLLARS)
----------------------
MARCH 31,
1998
----------
CAPITALIZATION:
- ---------------
Common stock (112,000 shares outstanding) $11,200
Capital stock expense (20)
Retained earnings 86,498
----------
Total Common Stock 97,678
----------
Long-term debt 39,931
----------
Total Capitalization 137,609
----------
NON-CURRENT LIABILITIES:
- ------------------------
Reserve for claims and damages 176
Postretirement benefits 6,693
Capital lease obligations 4
----------
Total Non-current Liabilities 6,873
----------
CURRENT LIABILITIES:
- --------------------
Long-term debt and obligations due within one year 0
Accounts payable 986
Payable to associated companies 10,529
Accrued Federal income and other taxes 2,309
Refunds to customers 457
Other current liabilities 2,098
----------
Total Current Liabilities 16,379
----------
DEFERRED TAXES AND OTHER:
- -------------------------
Deferred Federal income taxes 22,091
Deferred investment tax credits 2,075
Accrued IPP settlement agreements 0
Other deferred credits 1,102
----------
Total Deferred Taxes and Other 25,268
----------
Total $186,129
==========
ROCKLAND ELECTRIC COMPANY
Statement of Income
For the Year Ended
---------------------------------------------------------------------
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
(Thousands of Dollars)
OPERATING REVENUES:
Electric 135,489 136,203 134,848 133,038
Diversified activities 52 17 0 4
---------------------------------------------------------------------
Total Operating Revenues 135,541 136,220 134,848 133,042
---------------------------------------------------------------------
OPERATING EXPENSES:
Operations:
Electricity purchased for resale 67,027 69,075 68,724 67,116
Fuel used in electric production 416 (1,059) (2,754) (1,374)
Other expenses of operation 28,881 28,243 27,642 27,020
Maintenance 3,641 3,504 4,686 4,959
Depreciation and amortization 4,198 4,169 4,072 4,032
Taxes other than income taxes 18,081 19,674 19,395 19,010
Federal income taxes 3,611 3,513 3,234 2,917
---------------------------------------------------------------------
Total Operating Expenses 125,855 127,119 124,999 123,680
---------------------------------------------------------------------
INCOME FROM OPERATIONS 9,686 9,101 9,849 9,362
OTHER INCOME AND DEDUCTIONS:
Allowance for other funds used during construction 21 40 20 18
Investigation and litigation costs 133 (568) (399) (1,578)
Other - net 1,703 1,005 690 1,064
Equity in earnings of subsidiary companies 0 0 0 0
Taxes other than income taxes (64) (63) (61) (64)
Federal income taxes (479) 39 (608) 282
---------------------------------------------------------------------
Total Other Income and Deductions 1,314 453 (358) (278)
---------------------------------------------------------------------
INCOME FROM OPERATIONS 11,000 9,554 9,491 9,084
INTEREST CHARGES:
Interest on long-term debt 2,613 2,841 3,118 3,176
Other interest 197 (349) (127) (75)
Amortization of debt premium and expense - net 324 309 138 139
Allowance for borrowed funds used during construction (33) (42) (12) (25)
---------------------------------------------------------------------
Total Interest Charges 3,101 2,759 3,117 3,215
---------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 7,899 6,795 6,374 5,869
Discontinued Operations:
Operating income (loss) - net of taxes (2,140) (6,738) (1,844) (807)
Estimated loss on disposal (8,694) (8,694) 0 0
---------------------------------------------------------------------
Income (Loss) from Discontinued Operations (10,834) (15,432) (1,844) (807)
---------------------------------------------------------------------
Earnings applicable to common stock (2,935) (8,637) 4,530 5,062
=====================================================================
Average number of common shares outstanding 112,000 112,000 112,000 112,000
Earnings per average common share outstanding (26.21) (77.12) 40.45 45.20
PIKE COUNTY LIGHT & POWER COMPANY
Balance Sheets
--------------
Assets
------
March 31,
1998
-----------
UTILITY PLANT:
- -------------
Electric $7,307,305
Gas 855,422
Common 68,406
-----------
Utility Plant in Service 8,231,133
Less accumulated depreciation 2,035,181
-----------
Net Utility Plant in Service 6,195,952
Construction work in progress 152,882
-----------
Net Utility Plant 6,348,834
-----------
NONUTILITY PROPERTY AND INVESTMENTS:
- -----------------------------------
Nonutility property 39,365
Less accumulated depreciation, depletion
and amortization 15,226
-----------
Net Nonutility Property 24,139
-----------
CURRENT ASSETS:
- --------------
Cash and cash equivalents 308,125
Temporary cash investments 0
Customer accounts receivable, less allowance for
uncollectible accounts of $50,453 376,632
Accrued utility revenue 448,141
Other accounts receivable, less allowance for
uncollectible accounts of $500 29,729
Receivable from associated companies 4,179
Materials and supplies (at average cost) 257,247
Prepaid property taxes 1,623
Prepayments and other current assets 285,751
-----------
Total Current Assets 1,711,427
-----------
DEFERRED DEBITS:
- ---------------
Income tax recoverable in future rates 608,101
Deferred revenue taxes 25,015
Deferred pension and other postretirement benefits 74,164
IPP settlement costs 159,221
Unamortized debt expense (amortized over term
of securities) 47,682
Other deferred debits 245,202
-----------
Total Deferred Debits 1,159,385
-----------
TOTAL $9,243,785
===========
PIKE COUNTY LIGHT & POWER COMPANY
Balance Sheets
--------------
Capitalization and Liabilities
------------------------------
March 31,
1998
-----------
CAPITALIZATION:
- --------------
Common stock (2,740 shares outstanding) $ 137,000
Premium on capital stock 500,000
Retained earnings 2,919,779
-----------
Total Common Stock 3,556,779
-----------
Long-term debt 2,683,500
-----------
Total Capitalization 6,240,279
-----------
NON-CURRENT LIABILITIES:
- -----------------------
Postretirement benefits 99,056
-----------
Total Non-current Liabilities 99,056
-----------
CURRENT LIABILITIES:
- -------------------
Long-term debt and obligations due within one year 0
Accounts payable 25,497
Payable to associated companies 1,294,555
Accrued Federal income and other taxes 1,173
Refundable fuel and gas costs 160,340
Refunds to customers 28,000
Other current liabilities 105,691
-----------
Total Current Liabilities 1,615,256
-----------
DEFERRED TAXES AND OTHER:
- ------------------------
Deferred Federal income taxes 1,180,276
Deferred investment tax credits 65,758
Accrued IPP settlement agreements 0
Accrued Order 636 transition costs 0
Other deferred credits 43,160
-----------
Total Deferred Taxes and Other 1,289,194
-----------
Total $9,243,785
===========
PIKE COUNTY LIGHT & POWER COMPANY
Consolidated Statement of Income
For the Year Ended
---------------------------------------------------------------------
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
OPERATING REVENUES:
Electric 5,392,213 5,305,996 5,225,782 5,335,218
Gas 837,941 840,434 766,852 686,075
---------------------------------------------------------------------
Total Operating Revenues 6,230,154 6,146,430 5,992,634 6,021,293
---------------------------------------------------------------------
OPERATING EXPENSES:
Operations:
Electricity purchased for resale 2,684,560 2,783,220 2,864,554 2,731,272
Fuel used in electric production 95,549 22,238 (74,450) (79,130)
Gas purchased for resale 591,378 591,214 473,542 443,148
Other expenses of operation 1,371,030 1,328,893 1,175,132 998,025
Maintenance 352,914 180,763 106,139 202,383
Depreciation and amortization 220,897 223,759 204,317 181,720
Taxes other than income taxes 371,893 374,067 333,277 367,350
Federal income taxes 78,668 122,075 189,282 258,685
---------------------------------------------------------------------
Total Operating Expenses 5,766,889 5,626,229 5,271,793 5,103,453
---------------------------------------------------------------------
INCOME FROM OPERATIONS 463,265 520,201 720,841 917,840
OTHER INCOME AND DEDUCTIONS:
Allowance for other funds used during construction 0 0 81 0
Investigation and litigation costs 5,848 (26,069) (16,380) (64,953)
Other - net (5,147) (4,413) (3,525) 102,601
Taxes other than income taxes (1,094) (1,082) (639) (433)
Federal income taxes 771 11,971 (9,395) (11,205)
---------------------------------------------------------------------
Total Other Income and Deductions 378 (19,593) (29,858) 26,010
---------------------------------------------------------------------
INCOME FROM OPERATIONS 463,643 500,608 690,983 943,850
INTEREST CHARGES:
Interest on long-term debt 258,615 258,615 258,615 258,615
Other interest 26,545 29,638 51,415 69,794
Amortization of debt premium and expense - net 3,291 3,291 3,291 3,291
Allowance for borrowed funds used during construction (478) (44) (4,033) (4,735)
---------------------------------------------------------------------
Total Interest Charges 287,973 291,500 309,288 326,965
---------------------------------------------------------------------
Net Income 175,670 209,108 381,695 616,885
=====================================================================
Average number of common shares outstanding 2,740 2,740 2,740 2,740
Earnings per average common share outstanding 64.11 76.32 139.30 225.14
EXHIBIT B-1
AGREEMENT AND PLAN OF MERGER
among
Orange and Rockland Utilities, Inc.
Consolidated Edison, Inc.
and
C Acquisition Corp.
Dated as of May 10, 1998
TABLE OF CONTENTS
ARTICLE I THE MERGER
Section 1.1 The Merger. 1
Section 1.2 Effects of the Merger. 1
Section 1.3 Effective Time of the Merger 2
ARTICLE II TREATMENT OF SHARES
Section 2.1 Effect on Capital Stock of the Company and the Merger Subsidiary 2
Section 2.2 Surrender of Shares 3
ARTICLE III THE CLOSING
Section 3.1 Closing 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 4.1 Organization and Qualification 5
Section 4.2 Subsidiaries 6
Section 4.3 Capitalization 6
Section 4.4 Authority; Non-Contravention; Statutory Approvals; Compliance 7
Section 4.5 Reports and Financial Statements 9
Section 4.6 Absence of Certain Changes or Events 10
Section 4.7 Litigation 10
Section 4.8 Proxy Statement 10
Section 4.9 Tax Matters 11
Section 4.10 Employee Matters; ERISA 12
Section 4.11 Labor and Employee Relations 14
Section 4.12 Environmental Protection 15
Section 4.13 Regulation as a Utility 18
Section 4.14 Vote Required 18
Section 4.15 State Anti-Takeover Statutes 18
Section 4.16 Opinion of Financial Advisor 18
Section 4.17 Insurance 18
Section 4.18 Discontinued Business 18
ARTICLE V REPRESENTATIONS AND WARRANTIES OF CEI
Section 5.1 Organization and Qualification 19
Section 5.2 Authority; Non-Contravention; Statutory Approvals; Compliance 19
Section 5.3 Litigation 20
Section 5.4 Proxy Statement 21
Section 5.5 Regulation as a Utility 21
Section 5.6 No Vote Required. 21
Section 5.7 Financing. 21
Section 5.8 Ownership of Company Common Stock 21
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Covenants of the Company 22
Section 6.2 Covenants of CEI 28
ARTICLE VII ADDITIONAL AGREEMENTS
Section 7.1 Access to the Company's Information 29
Section 7.2 Proxy Statement 29
Section 7.3 Regulatory Matters 30
Section 7.4 Approval of the Company Shareholders 31
Section 7.5 Directors' and Officers' Indemnification 31
i
Section 7.6 Public Announcements 33
Section 7.7 Standstill Agreements; Confidentiality Agreements 33
Section 7.8 Employee Agreements and Workforce Matters 33
Section 7.9 Employee Benefit Plans 34
Section 7.10 No Solicitations by the Company 35
Section 7.11 Board of Directors; Advisory Board 37
Section 7.12 Post-Merger Operations. 37
Section 7.13 Expenses 38
Section 7.14 Further Assurances 38
Section 7.15 Shareholder Litigation 38
ARTICLE VIII CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger 38
Section 8.2 Conditions to Obligation of CEI to Effect the Merger. 39
Section 8.3 Conditions to Obligation of the Company to Effect the Merger 40
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination 41
Section 9.2 Effect of Termination 42
Section 9.3 Termination Fee; Expenses 42
Section 9.4 Amendment 43
Section 9.5 Waiver 43
Section 9.6 Procedure for Termination, Amendment, Extension or
Waiver 44
ARTICLE X GENERAL PROVISIONS
Section 10.1 Non-Survival; Effect of Representations and Warranties 44
Section 10.2 Brokers 44
Section 10.3 Notices 44
Section 10.4 Miscellaneous 46
Section 10.5 Interpretation 46
Section 10.6 Counterparts; Effect 46
Section 10.7 Parties' Interest; No Third Party Beneficiaries 47
Section 10.8 Waiver of Jury Trial 47
Section 10.9 Enforcement 47
ii
INDEX OF PRINCIPAL TERMS
Term Page
1935 Act 9, 30, 35
Acquisition Agreement 42
Acquisition Proposal 36, 42
Affected Employees 34
Affiliate 24
Cancelled Shares 3
CEI Disclosure Schedule 19
CEI Required Statutory Approvals 20
CEI SEC Reports 21
CEI Subsidiaries 19
Certificates 3
Closing 5
Closing Date 5
Code 12
Company Common Stock 2
Company Financial Statements 9
Company Meeting 31
Company Plans 12
Company Preference Stock 6
Company Preferred Stock 6
Company Required Consents 8
Company Required Statutory Approvals 8
Company SEC Reports 9
Company Shareholders' Approval 18
Company Subsidiary 6
Confidentiality Agreement 29
Control 24
Discontinued Business 18
DLJ 18
Effective Time 2
Environmental Claim 17
Environmental Laws 17
Environmental Permits 15
ERISA 12
ERISA Affiliate 12
Exchange Act 9
FERC 9
Final Divestiture Plan 22
Final Order 39
GAAP 9
iii
Governmental Authority 8
Hazardous Materials 17
HSR Act 30
Indemnified Liabilities 31
Indemnified Parties 31
Indemnified Party 31
Initial Termination Date 41
Injured Party 43
ISRA 30
Liens 6
Material Business 36
Merger 1
Merger Consideration 2
Merger Subsidiary 1
Merger Subsidiary Common Stock 3
NYBCL 1
NYPSC 2
Paying Agent 3
PBGC 13
PCBs 17
person 4
Power Act 9
Proxy Statement 10
Release 17
Representatives 29
SEC 9
Securities Act 9
Settlement Agreement 22
Severance Plan 35
Subsidiary 5
Superior Proposal 36
Surviving Corporation 1
Tax 11
Termination Fee 42
Title IV Harvest Plan 13
Violation 7
Voting Debt 6
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of May 10,
1998 (referred to herein as the "date hereof"), by and among Orange and Rockland
Utilities, Inc. (the "Company"), a New York corporation, Consolidated Edison,
Inc., a New York corporation ("CEI"), and C Acquisition Corp., a New York
corporation (the " Merger Subsidiary").
WHEREAS, the Company and CEI have determined that it would be in their
respective best interests and in the interests of their respective shareholders
to effect the transactions contemplated by this Agreement; and
WHEREAS, in furtherance thereof, the respective Boards of Directors of
the Company, Merger Subsidiary and CEI have approved this Agreement and the
merger of Merger Subsidiary with and into the Company (the " Merger").
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in Section 1.3),
the separate existence of Merger Subsidiary shall cease and Merger Subsidiary
shall be merged with and into the Company in accordance with the laws of the
State of New York. The Company shall be the surviving corporation in the
Merger, shall continue its corporate existence under the laws of the State of
New York, and, following the Effective Time, the Company shall become a wholly
owned subsidiary of CEI and shall succeed to and assume all the rights and
obligations of Merger Subsidiary in accordance with the New York Business
Corporation Law (the " NYBCL"). The effects and consequences of the Merger
shall be as set forth in Section 1.2. The surviving corporation after the
Merger is sometimes referred to as the " Surviving Corporation."
Section 1.2 Effects of the Merger. At the Effective Time, (a)
the Restated Certificate of Incorporation of the Company in effect immediately
prior to the Effective Time shall be the certificate of incorporation of the
Surviving Corporation until thereafter amended, (b) the by-laws of the Company
in effect immediately prior to the Effective Time shall be the by-laws of the
Surviving Corporation after the Effective Time until duly amended, and (c) the
Merger shall have all the effects provided by the NYBCL. As of the Effective
Time, each of the directors of the Company shall resign and the directors of the
Merger Subsidiary at the Effective Time shall, from and after the Effective
Time, be the directors of the Surviving Corporation until their successors have
been duly elected or ap-
pointed and qualified or until their earlier death, resignation or removal in
accordance with the certificate of incorporation and the by-laws of the
Surviving Corporation.
Section 1.3 Effective Time of the Merger. Subject to the provisions
of this Agreement, on the Closing Date (as defined in Section 3.1), a
certificate of merger shall be executed and delivered for filing, with the order
of the New York State Public Service Commission (the " NYPSC") approving the
Merger attached thereto, by the Company and Merger Subsidiary to the Department
of State of the State of New York pursuant to the NYBCL. The Merger shall become
effective at the time specified in the certificate of merger so delivered and
filed by the Department of State of the State of New York (the " Effective
Time").
ARTICLE II
TREATMENT OF SHARES
Section 2.1 Effect on Capital Stock of the Company and the Merger
Subsidiary. As of the Effective Time, by virtue of the Merger and without any
action on the part of any holder of any capital stock of the Company or Merger
Subsidiary:
(a) Conversion of Capital Stock of the Company. Each issued and
outstanding share of Common Stock, $5 par value per share, of the Company (the "
Company Common Stock"), in each case not owned directly or through a wholly
owned Subsidiary (as defined in Section 4.1) by the Company or CEI, issued and
outstanding immediately prior to the Effective Time shall be cancelled and shall
be converted into the right to receive cash in the amount of $58.50 (the "
Merger Consideration") payable, without interest, to the holder of such share of
Company Common Stock, upon surrender, in the manner provided in Section 2.2
hereof, of the certificate formerly evidencing such share.
(b) Cancellation of Treasury Stock and Certain Company Common Stock.
Any shares of Company Common Stock that are owned by the Company as treasury
stock or by CEI or by any wholly owned Subsidiary of the Company or CEI shall be
cancelled and retired and shall cease to exist and no Merger Consideration or
other consideration shall be delivered in exchange therefor, and each holder of
a certificate formerly representing any such shares shall cease to have any
rights with respect thereto.
(c) Redemption of Company Preferred Stock. Prior to the Effective
Time, the Board of Directors of the Company shall call for redemption all
outstanding shares of Company Preferred Stock (as defined in Section 4.3), at a
redemption price equal to the amount set forth in the Restated Certificate of
Incorporation of the Company, together with all dividends accrued and unpaid to
the date of such redemption. All shares of Company Preferred Stock shall be
redeemed so that no such shares shall be deemed to be outstanding at the
Effective Time.
(d) Redemption of Company Preference Stock. Prior to the Effective
Time, the Board of Directors of the Company shall call for redemption all
outstanding shares of Company Preference Stock (as defined in Section 4.3), at a
redemption price equal to the amount set forth in the Restated Certificate of
Incorporation of the Company, together with all dividends accrued and unpaid to
the date of such redemption. All shares of Company Preference Stock shall be
redeemed so that no such shares shall be deemed to be outstanding at the
Effective Time.
(e) Capital Stock of Merger Subsidiary. Each issued and outstanding
share of Common Stock, $0.01 par value per share, of Merger Subsidiary (" Merger
Subsidiary Common Stock") (of which, as of the date hereof, 1,000 shares are
issued and outstanding, each entitling the holder thereof to vote on the
approval of this Agreement and the transactions contemplated hereby), shall be
converted into one fully paid and nonassessable share of Common Stock, $5 par
value, of the Surviving Corporation.
Section 2.2 Surrender of Shares.
(a) Deposit with Paying Agent. Prior to the Effective Time, the
Company and CEI shall mutually designate a bank or trust company to act as agent
(the " Paying Agent") for the holders of shares of Company Common Stock in
connection with the Merger to receive the funds to which holders of shares of
Company Common Stock shall become entitled pursuant to Section 2.1(a). From
time to time at, immediately prior to or after the Effective Time, CEI shall
make available to the Paying Agent immediately available funds in amounts and at
the times necessary for the payment of the Merger Consideration upon surrender
of Certificates (as defined in Section 2.2(b)) in accordance with Section
2.2(b), it being understood that any and all interest or other income earned on
funds made available to the Paying Agent pursuant to this Section 2.2(a) shall
belong to and shall be paid (at the time provided for in Section 2.2(d)) to CEI.
Any such funds deposited with the Paying Agent by CEI shall be invested by the
Paying Agent as directed by CEI.
(b) Exchange Procedure. As soon as practicable after the Effective
Time, the Paying Agent shall mail to each holder of record of a certificate or
certificates (the " Certificates") which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the " Cancelled Shares")
that were cancelled and became instead the right to receive the Merger
Consideration pursuant to Section 2.1: (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon actual delivery of the Certificates to the
Paying Agent) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate to the Paying Agent for cancellation (or to such other agent or
agents as may be appointed by agreement of CEI and the Company), together with a
duly executed letter of transmittal and such other documents as the Paying Agent
shall require, the holder of such Certificate shall be entitled to receive the
Merger Consideration in exchange for each share of Company Common Stock formerly
evidenced by such Certificate which such holder has the right to receive
pursuant to the provi-
sions of this Article II. In the event of a transfer of ownership of Cancelled
Shares which is not registered in the transfer records of the Company, the
Merger Consideration may be given to a transferee if the Certificate
representing such Cancelled Shares is presented to the Paying Agent, accompanied
by all documents required to evidence and effect such transfer and by evidence
satisfactory to the Paying Agent that any applicable stock transfer taxes have
been paid. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration as
contemplated by this Section 2.2. No interest shall be paid or will accrue on
the Merger Consideration payable to holders of Certificates pursuant to the
provisions of this Article II.
(c) Closing of Transfer Books; Rights of Holders of Company Common
Stock. From and after the Effective Time, the stock transfer books of the
Company shall be closed and no registration of any transfer of any capital stock
of the Company shall thereafter be made on the records of the Company. If, after
the Effective Time, Certificates are presented to the Surviving Corporation,
they shall be cancelled and exchanged for the Merger Consideration, as provided
in this Section 2.2. From and after the Effective Time, the holders of shares of
Company Common Stock outstanding immediately prior to the Effective Time shall
cease to have any rights with respect to such shares of Company Common Stock,
except as otherwise provided herein or by applicable law.
(d) Termination of Paying Agent. At any time commencing one year
after the Effective Time, CEI shall be entitled to require the Paying Agent to
deliver to it any funds which had been made available to the Paying Agent and
not disbursed to holders of shares of Company Common Stock (including, without
limitation, all interest and other income received by the Paying Agent in
respect of all funds made available to it), and thereafter such holders shall be
entitled to look to CEI (subject to abandoned property, escheat and other
similar laws) only as general creditors thereof with respect to any Merger
Consideration that may be payable upon due surrender of the Certificates held by
them. Notwithstanding the foregoing, neither CEI, the Surviving Corporation nor
the Paying Agent shall be liable to any holder of a share of Company Common
Stock for any Merger Consideration delivered in respect of such share to a
public official pursuant to any abandoned property, escheat or other similar
law. If any Certificates shall not have been surrendered prior to the thirty-
first day of December in the fifth calender year after the Effective Time (or
immediately prior to such earlier date on which any payment pursuant to this
Article II would otherwise escheat to or become the property of any Governmental
Authority (as defined in Section 4.4(c))), the payment in respect of such
Certificate shall, to the extent permitted by applicable law, become the
property of CEI, free and clear of all claims or interest of any person (as
defined below) previously entitled thereto. As used in this Agreement, the term
" person" shall mean any natural person, corporation, general or limited
partnership, limited liability company, joint venture, trust, association or
entity of any kind.
ARTICLE III
THE CLOSING
Section 3.1 Closing. The closing of the Merger (the " Closing")
shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919
Third Avenue, New York, New York 10022 at 10:00 A.M., local time, on the second
business day immediately following the date on which the last of the conditions
set forth in Article VIII hereof is fulfilled or waived, or at such other time,
date and place as the Company and CEI shall mutually agree (the " Closing
Date").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the schedule delivered by the Company on
the date hereof (the "Company Disclosure Schedule") and making reference to the
particular subsection of this Agreement to which exception is being taken, the
Company represents and warrants to CEI as follows:
Section 4.1 Organization and Qualification. The Company and each of
the Company Subsidiaries (as defined below) is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has all requisite power and authority, and has
been duly authorized by all necessary approvals and orders to own, lease and
operate its assets and properties to the extent owned, leased and operated and
to carry on its business as it is now being conducted and is duly qualified and
in good standing to do business in each jurisdiction in which the nature of its
business or the ownership, leasing or operation of its assets and properties
makes such qualification necessary other than in such jurisdictions where the
failure so to qualify, individually or in the aggregate, would not have a
Company Material Adverse Effect. For purposes of this Agreement, "Company
Material Adverse Effect" shall mean any change, effect, event, occurrence or
state of facts (i) that is, or reasonably would be expected to be, materially
adverse to the business, assets, financial condition, results of operations or
prospects of the Company and the Company Subsidiaries taken as a whole or (ii)
that would prevent, or reasonably be expected to prevent, the Company from
performing its obligations under this Agreement or prevent the consummation of
the transactions contemplated hereby. As used in this Agreement, (a) the term "
Subsidiary" of a person shall mean any corporation or other entity (including
partnerships and other business associations) of which at least a majority of
the voting power represented by the outstanding capital stock or other voting
securities or interests having voting power under ordinary circumstances to
elect directors or similar members of the governing body of such corporation or
entity (or, if there are no such voting interests, 50% or more of the equity
interests of which) shall at the time be held, di-
rectly or indirectly, by such person, and (b) the term " Company Subsidiary"
shall mean a Subsidiary of the Company.
Section 4.2 Subsidiaries. Section 4.2 of the Company Disclosure
Schedule sets forth a list, as of the date hereof, of (a) all the Company
Subsidiaries and (b) all other entities in which the Company has an aggregate
equity investment in excess of $2 million. All of the issued and outstanding
shares of capital stock of each Company Subsidiary are validly issued, fully
paid, nonassessable and free of preemptive rights, and are owned, directly or
indirectly, by the Company free and clear of any pledges, liens, claims,
encumbrances, security interests, charges and options of any nature whatsoever
(collectively, " Liens") and free of any other restriction (including any
restriction on the right to vote, sell or otherwise dispose of any such capital
stock) and there are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, obligating any
such Company Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of its capital stock or obligating it to
grant, extend or enter into any such agreement or commitment.
Section 4.3 Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 50,000,000 shares of Company Common
Stock, 1,000,000 shares of Cumulative Preferred Stock, issuable in series, par
value $100.00 per share (" Company Preferred Stock"), and 1,500,000 shares of
Cumulative Preference Stock, issuable in series, without par value (" Company
Preference Stock"). At the close of business on April 30, 1998, (i) 13,518,779
shares of Company Common Stock were issued and outstanding, and 16,931 shares of
Company Common Stock were reserved for conversion of Company Preference Stock,
(ii) 428,443 shares of Company Preferred Stock were issued and outstanding,
(iii) 11,518 shares of Company Preference Stock were issued and outstanding,
(iv) no bonds, debentures, notes or other indebtedness having the right to vote
(or convertible into securities having the right to vote) on any matters on
which stockholders may vote (" Voting Debt") were issued or outstanding and (v)
no shares of Company Common Stock were held by the Company in its treasury.
Since April 30, 1998, the Company has not issued any shares of Company Common
Stock or of any other class or series of capital stock or any Voting Debt, other
than shares of Company Common Stock issued upon conversion of Company Preference
Stock. As of the date hereof, all outstanding shares of Company Common Stock,
Company Preferred Stock and Company Preference Stock are validly issued, fully
paid and nonassessable and are not subject to preemptive rights. As of the
Closing Date, all outstanding shares of Company Common Stock will be validly
issued, fully paid and nonassessable and will not be subject to preemptive
rights. As of the date hereof, there are no options, warrants, calls, rights,
commitments or agreements of any character to which the Company or any Company
Subsidiary is a party or by which it is bound obligating the Company or any
Company Subsidiary to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or any Voting Debt securities of the
Company or any Company Subsidiary or obligating the Company or any
Company Subsidiary to grant, extend or enter into any such option, warrant,
call, right, commitment or agreement. At the Effective Time, there will be no
option, warrant, call, right, commitment or agreement obligating the Company or
any Company Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, any shares of capital stock or any Voting Debt of the Company
or any Company Subsidiary, or obligating the Company or any Company Subsidiary
to grant, extend or enter into any such option, warrant, call, right, commitment
or agreement.
Section 4.4 Authority; Non-Contravention; Statutory Approvals;
Compliance.
(a) Authority. The Company has all requisite power and authority to
enter into this Agreement and, subject to the receipt of the Company
Shareholders' Approval (as defined in Section 4.14) and the applicable Company
Required Statutory Approvals (as defined in Section 4.4(c)), to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company, subject to obtaining the Company Shareholders' Approval. This Agreement
has been duly and validly executed and delivered by the Company and, assuming
the due authorization, execution and delivery hereof by the other signatories
hereto, constitutes the legal, valid and binding obligation of the Company
enforceable against it in accordance with its terms.
(b) Non-Contravention. The execution and delivery of this Agreement
by the Company does not, and the consummation of the transactions contemplated
hereby will not, in any respect, violate, conflict with or result in a breach of
any provision of, or constitute a default (with or without notice or lapse of
time or both) under, or result in the termination or modification of, or
accelerate the performance required by, or result in a right of termination,
cancellation or acceleration of any obligation, or the loss of a benefit under,
or result in the creation of any Lien upon any of the properties or assets of
the Company or any of the Company Subsidiaries (any such violation, conflict,
breach, default, right of termination, modification, cancellation or
acceleration, loss or creation is referred to herein as a " Violation" with
respect to the Company and such term when used in Article V has a correlative
meaning with respect to CEI) pursuant to any provisions of (i) the certificate
of incorporation, by-laws or similar governing documents of the Company or any
of the Company Subsidiaries, (ii) subject to obtaining the Company Required
Statutory Approvals and the receipt of the Company Shareholders' Approval, any
statute, law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any Governmental Authority applicable to the Company
or any of the Company Subsidiaries or any of their respective properties or
assets (other than (x) municipal consents and franchises and (y) immaterial
consents, approvals, orders, authorizations, actions, registrations,
declarations or filings, including with respect to communications systems,
zoning, name change, occupancy and similar routine regulatory approvals) or
(iii) subject to obtaining the third-party consents set forth in Section 4.4(b)
of the Company Disclosure Schedule (the " Company Required Consents"), any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, standstill agreement, contract, lease or other instrument,
obligation or agreement of any kind to which the Company or any of the Company
Subsidiaries is a party or by which they or any of their properties or assets
may be bound or affected (other than municipal consents or franchises), except
in the case of clause (iii) for any such Violation which, individually or in the
aggregate, would not have a Company Material Adverse Effect.
(c) Statutory Approvals. No declaration, filing, registration with,
notice to, authorization, permit, order, consent or approval (other than
immaterial consents, approvals, orders, authorizations, actions, registrations,
declarations or filings, including with respect to communications systems,
zoning, name change, occupancy and similar routine regulatory approvals) of, any
court, federal, state, local or foreign governmental, administrative, or
regulatory body (including a stock exchange or other self-regulatory body) or
authority (each, a " Governmental Authority") is necessary for the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the transactions contemplated hereby, except those described in Section 4.4(c)
of the Company Disclosure Schedule (the " Company Required Statutory Approvals,"
it being understood that references in this Agreement to "obtaining" such
Company Required Statutory Approvals shall mean making such declarations,
filings or registrations; giving such notices; obtaining such authorizations,
permits, orders, consents or approvals; and having such waiting periods expire
as are necessary to avoid a violation of law).
(d) Compliance. Except as disclosed in the Company SEC Reports (as
defined in Section 4.5) filed prior to the date hereof, neither the Company nor
any of the Company Subsidiaries is in violation of, is, to the knowledge of the
Company, under investigation with respect to any violation of, or has been given
notice or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation, any applicable
Environmental Law (as defined in Section 4.12(b)(ii))) of any Governmental
Authority, except for possible violations which individually or in the aggregate
would not have a Company Material Adverse Effect. Except as disclosed in the
Company SEC Reports filed prior to the date hereof, the Company and the Company
Subsidiaries have all permits, licenses, franchises and other governmental
authorizations, consents and approvals necessary to conduct their businesses as
presently conducted which are material to the operation of the businesses of the
Company and the Company Subsidiaries (other than certain municipal consents and
franchises). The Company and each of the Company Subsidiaries is not in breach
or violation of or in default in the performance or observance of any term or
provision of, and no event has occurred which, with lapse of time or action by a
third party, could result in a default by the Company or any Company Subsidiary
under (i) their respective certificates of incorporation or by-laws or (ii) any
contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which it is a party or by
which the Company or any Company Subsidiary is bound or to which any of their
respective properties or assets are subject, except in the case of this clause
(ii) for possible violations, breaches or defaults which individually or in the
aggregate would not have a Company Material Adverse Effect. All utility rates
charged
by the Company and its utility Subsidiaries have been and continue to be made
pursuant to lawfully filed tariffs and contracts.
Section 4.5 Reports and Financial Statements. (a) The filings (other
than immaterial filings) required to be made by the Company and the Company
Subsidiaries since January 1, 1993 under the Securities Act of 1933, as amended
(the " Securities Act"); the Securities Exchange Act of 1934, as amended (the "
Exchange Act"); the Public Utility Holding Company Act of 1935, as amended (the
" 1935 Act"); the Federal Power Act (the " Power Act"); and applicable state
public utility laws and regulations have been filed with the Securities and
Exchange Commission (the " SEC"), the Federal Energy Regulatory Commission (the
" FERC"), or the appropriate state public utilities commission, as the case may
be, including all forms, statements, reports, tariffs, contracts, agreements
(oral or written) and all documents, exhibits, amendments and supplements
appertaining thereto, and complied, as of their respective dates, in all
material respects with all applicable requirements of the applicable statutes
and the rules and regulations thereunder. The Company has made available to CEI
a true and complete copy of each report, schedule, registration statement and
definitive proxy statement filed with the SEC by the Company pursuant to the
requirements of the Securities Act or Exchange Act since January 1, 1993 (the "
Company SEC Reports"). As of their respective dates, the Company SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements (including the notes thereto) of the Company included in the Company
SEC Reports (collectively, the " Company Financial Statements") have been
prepared in accordance with United States generally accepted accounting
principles (" GAAP") as applied to a regulated utility, applied on a consistent
basis during the periods involved (except as may be indicated therein or in the
notes thereto and except with respect to unaudited statements as permitted by
Form 10-Q of the SEC) and fairly present the consolidated financial position of
the Company and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended, subject, in the case of the unaudited interim financial statements, to
normal, recurring audit adjustments. True, accurate and complete copies of the
Restated Certificate of Incorporation and by-laws of the Company, as in effect
on the date hereof, are included (or incorporated by reference) in the Company
SEC Reports.
(b) Franchises. The Company and the Company utility Subsidiaries own or
have sufficient rights and consents to use under existing franchises, easements,
leases, and license agreements all properties, rights and assets necessary for
the conduct of their business and operations as currently conducted, except
where the failure to own or have sufficient rights to such properties, rights
and assets would not have, individually or in the aggregate, a Company Material
Adverse Effect. To the knowledge of the Company, no other private corporation
can commence public utility operations in any part of the territories now served
by the Company or its wholly owned utility Subsidiaries, Rockland Electric
Company ("RECO") and Pike County Light & Power Company ("Pike"), respectively,
without
obtaining a certificate of public convenience and necessity from the applicable
state utility commission.
Section 4.6 Absence of Certain Changes or Events. Except as disclosed
in the Company SEC Reports filed prior to the date hereof, since December 31,
1997, the Company and each of the Company Subsidiaries have conducted their
respective businesses only in the ordinary course of business consistent with
past practice and there has not been, and no fact or condition exists which,
individually or in the aggregate, would have a Company Material Adverse Effect.
From December 31, 1997 through the date hereof there has not been (i) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any capital stock of the
Company, other than (A) regular quarterly dividends of $.645 per share on
Company Common Stock and (B) dividends payable on Company Preferred Stock and
Company Preference Stock in accordance with their terms, (ii) any split,
combination or reclassification of any capital stock of the Company or any of
the Company Subsidiaries or any issuance or the authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for any
capital stock of the Company or any of the Company Subsidiaries or (iii) except
insofar as required by a change in GAAP, any change in accounting methods,
principles or practices by the Company or any of the Company Subsidiaries
materially affecting their respective assets, liabilities or businesses.
Section 4.7 Litigation. There (a) are no claims, suits, actions or
proceedings before any court, governmental department, commission, agency,
instrumentality or authority or any arbitrator, pending or, to the knowledge of
the Company, threatened, nor are there, to the knowledge of the Company, any
investigations or reviews by any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator pending or threatened
against, relating to or affecting the Company or any of the Company Subsidiaries
which, individually or in the aggregate, would have a Company Material Adverse
Effect, (b) have not been any significant developments since December 31, 1997
with respect to any disclosed claims, suits, actions, proceedings,
investigations or reviews that, individually or in the aggregate, would have a
Company Material Adverse Effect and (c) are no judgments, decrees, injunctions,
rules or orders of any court, governmental department, commission, agency,
instrumentality or authority or any arbitrator applicable to the Company or any
of the Company Subsidiaries except for such that, individually or in the
aggregate, would not have a Company Material Adverse Effect.
Section 4.8 Proxy Statement. None of the information supplied or to be
supplied by or on behalf of the Company for inclusion or incorporation by
reference in the proxy statement, in definitive form, relating to the meeting of
holders of Company Common Stock to be held in connection with the Merger (the "
Proxy Statement") will, at the date mailed to the Company shareholders and at
the time of the meeting of the holders of Company Common Stock to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Proxy Statement will comply as to form
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder.
Section 4.9 Tax Matters.
Except as to any items that would not, individually or in the
aggregate, have a Company Material Adverse Effect:
(a) The Company and each of the Company Subsidiaries has (i)
filed all Federal, state, local and foreign income and other tax returns or
reports (including declarations of estimated tax) required to be filed by it,
(ii) paid all taxes of any nature whatsoever (together with any related
penalties and interest) (any of the foregoing being referred to herein as a "
Tax"), that are shown on such Tax returns as due and payable on or before the
date hereof, and (iii) paid all Taxes otherwise required to be paid.
(b) There are no claims or assessments pending against the
Company or any of the Company Subsidiaries for any alleged deficiency in Tax,
and the Company does not know of any threatened Tax claims or assessments
against the Company or any of the Company Subsidiaries.
(c) The Company has established adequate accruals for Taxes and
for any liability for deferred Taxes in the Company Financial Statements in
accordance with GAAP.
(d) There are no Liens for Taxes (other than for current Taxes
not yet due and payable) on the assets of the Company or any Company Subsidiary.
(e) The Federal income Tax returns of the Company, each Company
Subsidiary and any affiliated, consolidated, combined or unitary group that
includes the Company or any Company Subsidiary either have been examined and
settled with the Internal Revenue Service or closed by virtue of the expiration
of the applicable statute of limitations for all years through 1994.
(f) None of the Company or any Company Subsidiary shall be
required to include in a taxable period ending after the Effective Time an
amount of taxable income attributable to income that accrued in a prior taxable
period but was not recognized in any prior taxable period as a result of the
installment method of accounting, the completed contract method of accounting,
the long-term contract method of accounting, the cash method of accounting or
Section 481 of the Code or comparable provisions of state, local or foreign Tax
law.
(g) From December 31, 1997 through the date hereof, there have
not been any Tax elections, any settlements or compromises of any income Tax
liability or any changes in Tax attributes.
Section 4.10 Employee Matters; ERISA.
(a) Section 4.10(a) of the Company Disclosure Schedule hereto contains
a true and complete list of each deferred compensation and each bonus or other
incentive compensation, stock purchase, stock option and other equity
compensation plan, program, agreement or arrangement; each severance or
termination pay, medical, surgical, hospitalization, life insurance and other
"welfare" plan, fund or program (within the meaning of Section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended (" ERISA")); each
profit-sharing, stock bonus or other "pension" plan, fund or program (within the
meaning of Section 3(2) of ERISA); each employment, retention, consulting,
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or required to be contributed to by the Company or by any
trade or business, whether or not incorporated (an " ERISA Affiliate"), that
together with the Company would be deemed a "single employer" within the meaning
of Section 4001(b) of ERISA, or to which the Company or an ERISA Affiliate is
party, whether written or oral, for the benefit of any employee or former
employee of the Company or any Company Subsidiary (the " Company Plans").
(b) With respect to each Company Plan, the Company has heretofore
delivered or made available to CEI true and complete copies of each of the
following documents:
(i) a copy of the Company Plan and any amendments thereto;
(ii) a copy of the two most recent annual reports on Internal
Revenue Service Form 5500 and actuarial reports, if required under ERISA, and
the most recent report prepared with respect thereto in accordance with
Statement of Financial Accounting Standards No. 87;
(iii) a copy of the most recent Summary Plan Description required
under ERISA with respect thereto;
(iv) if the Company Plan is funded through a trust or any third
party funding vehicle, a copy of the trust or other funding agreement and the
latest financial statements thereof and all related agreements; and
(v) the most recent determination letter or pending determination
letter received from the Internal Revenue Service with respect to each Company
Plan intended to qualify under Section 401 of the Internal Revenue Code of 1986,
as amended (the " Code").
(c) No liability under Title IV or Section 302 of ERISA has been
incurred by the Company or any ERISA Affiliate that has not been satisfied in
full, and no condition exists that presents a material risk to the Company or
any ERISA Affiliate of incurring any such liability, other than liability for
premiums due the Pension Benefit Guaranty Corporation (" PBGC") (which premiums
have been paid when due). No Company Plan has, to the knowledge of the Company,
engaged in a "prohibited transaction" (as defined in Section 4975 of the Code or
Section 406 of ERISA), no Company Plan subject to Title IV of ERISA (a " Title
IV Company Plan") has been terminated by the PBGC or has been the subject of a
"reportable event" (as defined in Section 4043 of ERISA and the regulations
thereunder) for which the 30-day notice requirement has not been waived and the
Company has not received any notice of intent by PBGC to terminate any such
plan.
(d) With respect to each Title IV Company Plan, the present value
of accrued benefits under such plan, based upon the actuarial assumptions used
for funding purposes in the most recent actuarial report prepared by such plan's
actuary with respect to such plan did not exceed, as of its latest valuation
date, the then current value of the assets of such plan allocable to such
accrued benefits.
(e) No Title IV Company Plan or any trust established thereunder
has incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of each Title IV Company Plan ended prior to the
Closing Date nor has there been any application for waiver of the minimum
funding standards imposed by Section 412 of the Code. All contributions required
to be made with respect to any Company Plan on or prior to the Closing Date have
been timely made or are reflected on the balance sheet.
(f) No Title IV Company Plan is a "multiemployer plan", as defined
in Section 3(37) of ERISA, nor is any Title IV Company Plan a plan described in
Section 4063(a) of ERISA.
(g) Each Company Plan has been operated and administered in all
material respects in accordance with its terms and applicable law, including but
not limited to ERISA and the Code, the rules and regulations thereunder and all
applicable collective bargaining agreements and each Company Plan intended to be
"qualified" under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service to such effect. To the
knowledge of the Company, there is no fact, condition or set of circumstances
existing that could adversely affect such favorable determination. To the
Company's knowledge, there are no investigations pending in respect of any
Company Plan by any Governmental Authority.
(h) Each Company Plan intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under Section 501(a) of the Code.
(i) No Company Plan provides medical, surgical, hospitalization,
death or similar benefits (whether or not insured) for employees or former
employees (or their beneficiaries) of the Company or any Company Subsidiary for
periods extending beyond their respective dates of retirement or other
termination of service, other than (i) coverage mandated by applicable law, (ii)
death benefits under any "pension plan," or (iii) benefits the full cost of
which is borne by the current or former employee (or his beneficiary).
(j) No amounts payable under the Company Plans will fail to be
deductible for federal income tax purposes by virtue of Section 280G of the
Code.
(k) The consummation of the transactions contemplated by this
Agreement will not, either alone or in combination with another event, (i)
entitle any current or former employee or officer of the Company or any ERISA
Affiliate to severance pay, unemployment compensation or any other payment, or
(ii) accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or officer. Schedule 4.10(k) of the Company
Disclosure Schedule sets forth estimates prepared by the Company of the amounts
reasonably expected to be paid to participants in any Company Plan (or by which
any of their benefits may be increased or accelerated) as a result solely of (i)
the execution of this Agreement, (ii) the obtaining of the Company Shareholders'
Approval and (iii) termination or constructive termination of any officer or
director's employment with the Company or any Company Subsidiary. For purposes
of the preceding sentence, the determination of the amounts set forth in
Schedule 4.10(k) is based upon each employee's current compensation, outstanding
awards and benefits accrued (as applicable) and on such other factors as the
Company, taking into account applicable law and regulations, deems reasonable
and appropriate.
(l) There are no pending, threatened or anticipated claims by or on
behalf of any Company Plan, by any employee or beneficiary covered under any
such Company Plan, or otherwise involving any such Company Plan (other than
routine claims for benefits).
Section 4.11 Labor and Employee Relations.
(a) As of the date hereof, except as disclosed in the Company SEC
Reports filed prior to the date hereof, (i) except for the existing collective
bargaining agreement between the Company and Local Union No. 503 of the
International Brotherhood of Electrical Workers effective June 1, 1997 through
May 31, 2000, neither the Company nor any of the Company Subsidiaries is a party
to any collective bargaining agreement or other labor agreement with any union
or labor organization and (ii) to the knowledge of the Company, there is no
current union representation question involving employees of the Company or any
of the Company Subsidiaries, nor does the Company know of any activity or
proceeding of any labor organization (or representative thereof) or employee
group to organize any such employees, except to the extent such, individually or
in the aggregate, would not have a Company Material Adverse Effect.
(b) Except as disclosed in the Company SEC Reports filed prior to the
date hereof or except to the extent such, individually or in the aggregate,
would not have a Company Material Adverse Effect, (i) there is no unfair labor
practice, employment discrimination or other charge, claim, suit, action or
proceeding against the Company or any of the Company Subsidiaries pending, or to
the knowledge of the Company, threatened before any court, governmental
department, commission, agency, instrumentality or authority or any arbitrator,
(ii) there is no strike, lockout or material dispute, slowdown or work stoppage
pending or, to the knowledge of the Company, threatened against or involving the
Company, and (iii) there is no proceeding, claim, suit, action or governmental
investigation pending or, to the knowledge of the Company, threatened in respect
of which any director, officer, employee or agent of the Company or any of the
Company Subsidiaries is or may be entitled to claim indemnification from the
Company or such Company Subsidiary pursuant to their respective certificates of
incorporation or by-laws or as provided in the indemnification agreements listed
in Section 4.11(b) of the Company Disclosure Schedule or any other
indemnification agreements.
Section 4.12 Environmental Protection.
(a) Except as set forth in the Company SEC Reports filed prior to the
date hereof:
i.
(i) Compliance. The Company and each of the Company Subsidiaries
is in compliance with all applicable Environmental Laws except where the
failure to so comply, individually or in the aggregate, would not have a
Company Material Adverse Effect, and neither the Company nor any of the
Company Subsidiaries has received any communication (written or oral)
reasonably grounded in fact, from any person or Governmental Authority that
alleges that the Company or any of the Company Subsidiaries is not in such
compliance with applicable Environmental Laws. To the knowledge of the
Company, compliance with all applicable Environmental Laws will not require
the Company or any Company Subsidiary to incur costs, beyond those
currently budgeted for the three Company fiscal years beginning with
January 1, 1998, that, individually or in the aggregate, would have a
Company Material Adverse Effect, including, but not limited to, the costs
of pollution control equipment that are known or anticipated to be required
in the future.
(ii) Environmental Permits. (A) The Company and each of the
Company Subsidiaries has obtained or has applied for all environmental,
health and safety permits and governmental authorizations (collectively,
the " Environmental Permits") necessary for the construction of their
facilities or the conduct of their operations except where the failure to
so obtain, individually or in the aggregate, would not have a Company
Material Adverse Effect, (B) all such Environmental Permits are in good
standing or, where applicable, a renewal application has been timely filed
and is pending agency approval except where the failure of such
Environmental
Permits to be in good standing or to have filed a renewal application on a
timely basis would not, individually or in the aggregate, have a Company
Material Adverse Effect, (C) the Company and the Company Subsidiaries are
in material compliance with all terms and conditions of the Environmental
Permits, except where failure to so comply, individually or in the
aggregate, would not have a Company Material Adverse Effect and (D) neither
the Company nor any of the Company Subsidiaries has been advised by any
Governmental Authority of any potential change in the terms and conditions
of the Environmental Permits either prior to or upon their renewal, except
for such potential changes as would not, individually or in the aggregate,
have a Company Material Adverse Effect.
(iii) Environmental Claims. There are no Environmental Claims
(as defined in Section 4.12(b)(i)) which would, individually or in the
aggregate, have a Company Material Adverse Effect pending or, to the
knowledge of the Company, threatened, (A) against the Company or any of the
Company Subsidiaries, (B) to the knowledge of the Company, against any
person or entity whose liability for any Environmental Claim the Company or
any of the Company Subsidiaries has or may have retained or assumed either
contractually or by operation of law, or (C) against any currently owned,
leased or managed, in whole or in part, real or personal property or
operations of the Company or any of the Company Subsidiaries or, to the
knowledge of the Company, against any formerly owned, leased or managed, in
whole or in part, real or personal property or operations of the Company or
any of the Company Subsidiaries.
(iv) Releases. The Company has no knowledge of any Releases (as
defined in Section 4.12(b)(iv)) of any Hazardous Material (as defined in
Section 4.12(b)(iii)) that would be reasonably likely to form the basis of
any Environmental Claim against the Company or any of the Company
Subsidiaries, or against any person or entity whose liability for any
Environmental Claim the Company or any of the Company Subsidiaries has or
may have retained or assumed either contractually or by operation of law
except for any Environmental Claim which, individually or in the aggregate,
would not have a Company Material Adverse Effect.
(v) Predecessors. The Company has no knowledge, with respect
to any predecessor of the Company or any of the Company Subsidiaries, of
any Environmental Claim which, individually or in the aggregate, would have
a Company Material Adverse Effect pending or threatened, or of any Release
of Hazardous Materials that would be reasonably likely to form the basis of
any Environmental Claim which, individually or in the aggregate, would have
a Company Material Adverse Effect.
(b) Definitions. As used in this Agreement:
(i) "Environmental Claim" means any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, directives,
claims, liens, investigations, proceedings or notices of noncompliance or
violation (written or oral) by any person or entity (including any
Governmental Authority), alleging potential liability (including, without
limitation, potential responsibility for or liability for enforcement,
investigatory costs, cleanup costs, governmental response costs, removal
costs, remedial costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on or resulting from
(A) the presence, Release or threatened Release into the environment of any
Hazardous Materials at any location, whether or not owned, operated, leased
or managed by the Company or any of the Company Subsidiaries; or (B)
circumstances forming the basis of any violation or alleged violation of
any Environmental Law or (C) any and all claims by any third party seeking
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from the presence or Release of any Hazardous
Materials or the presence of or exposure to any electromagnetic fields.
(ii) "Environmental Laws" means all federal, state and local
laws, rules, regulations, orders, decrees, judgments or binding agreements
issued, promulgated or entered into by or with any Governmental Authority,
relating to pollution, the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata)
or protection of human health as it relates to the environment including,
without limitation, laws and regulations relating to noise levels, Releases
or threatened Releases of Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials.
(iii) "Hazardous Materials" means (A) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation and transformers or other
equipment that contain dielectric fluid containing polychlorinated
biphenyls (" PCBs"); (B) any chemicals, materials or substances which are
now defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic substances," "toxic pollutants," or
words of similar import under any Environmental Law and (C) any other
chemical, material, substance or waste, exposure to which is now
prohibited, limited or regulated under any Environmental Law in a
jurisdiction in which the Company or any of the Company Subsidiaries
operates.
(iv) "Release" means any release, spill, emission, leaking,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the atmosphere, soil, surface water, groundwater or property.
Section 4.13 Regulation as a Utility. As of the date hereof, the
Company, pursuant to an order, dated March 27, 1936, of the SEC, has been
exempted, from all of the provisions of the 1935 Act, except Section 9(a)(2)
thereof relating to the acquisition of securities of other public utility
companies. The Company is regulated as a public utility in the State of New
York and in no other state. RECO is regulated as a public utility in the State
of New Jersey and in no other state. Pike is regulated as a public utility in
the State of Pennsylvania and in no other state. Except as set forth in this
Section neither the Company nor any "subsidiary company" or "affiliate" (as each
such term is defined in the 1935 Act) of the Company is subject to regulation as
a public utility holding company, public utility or public service company (or
similar designation) by the Federal government of the United States, any other
state in the United States or any foreign country.
Section 4.14 Vote Required. Provided that the NYPSC approves the
Merger prior to the Effective Time, the approval of the Merger by the holders of
two-thirds of all outstanding shares of Company Common Stock (the " Company
Shareholders' Approval") is the only vote of the holders of any class or series
of the capital stock of the Company or any of the Company Subsidiaries required
to approve this Agreement, the Merger and the other transactions contemplated
hereby.
Section 4.15 State Anti-Takeover Statutes. Assuming the accuracy of
the representation of CEI set forth in Section 5.8, neither Section 912 nor
Article 16 of the NYBCL nor any provision of Article Eighth of the Company's
Restated Certificate of Incorporation is applicable to the transactions
contemplated by this Agreement. To the knowledge of the Company, no other state
anti-takeover statute is applicable to the Company's participation in the Merger
or in the other transactions contemplated hereby.
Section 4.16 Opinion of Financial Advisor. The Company has received
the opinion of Donaldson, Lufkin & Jenrette Securities Corporation (" DLJ"),
dated the date hereof, to the effect that, as of the date hereof, the Merger
Consideration is fair from a financial point of view to the holders of Company
Common Stock.
Section 4.17 Insurance. The Company and each of the Company
Subsidiaries is, and has been continuously since January 1, 1993, insured with
financially responsible insurers in such amounts and against such risks and
losses as are customary in all material respects for companies conducting the
business as conducted by the Company and the Company Subsidiaries during such
time period. Neither the Company nor any of the Company Subsidiaries has
received any notice of cancellation or termination with respect to any insurance
policy of the Company or any of the Company Subsidiaries. The insurance policies
of the Company and each of the Company Subsidiaries are valid and enforceable
policies.
Section 4.18 Discontinued Business . NORSTAR Management, Inc. and
its Subsidiaries and the business formerly conducted by them have ceased
operations (the " Discontinued Business") and, except for liabilities reflected
in the Company Financial
Statements, neither the Company nor any the Company Subsidiary, other than
NORSTAR Management, Inc. and its Subsidiaries, has any liabilities or
obligations with respect to such business and no creditor of the Discontinued
Business has any recourse against the Company or any Company Subsidiary other
than NORSTAR Management, Inc. and its Subsidiaries.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CEI
Except as set forth in the schedule delivered by CEI on the date
hereof (the " CEI Disclosure Schedule") and making reference to the particular
subsection of this Agreement to which exception is being taken, CEI represents
and warrants to the Company as follows:
Section 5.1 Organization and Qualification. Each of CEI, Consolidated
Edison Company of New York, Inc., a New York corporation ( "CECONY"), and the
Merger Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization,
has all requisite power and authority, and has been duly authorized by all
necessary approvals and orders to own, lease and operate its assets and
properties to the extent owned, leased and operated and to carry on its business
as it is now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its assets and properties makes such
qualification necessary other than in such jurisdictions where the failure so to
qualify, individually or in the aggregate, would not have a CEI Material Adverse
Effect. For purposes of this Agreement, "CEI Material Adverse Effect" shall mean
any change, effect, event, occurrence or state of facts (i) that is, or
reasonably would be expected to be, materially adverse to the business, assets,
financial condition, results of operations or prospects of CEI and its
Subsidiaries (the " CEI Subsidiaries") taken as a whole or (ii) that would
prevent, or reasonably be expected to prevent, CEI from performing its
obligations under this Agreement or prevent the consummation of the transactions
contemplated hereby.
Section 5.2 Authority; Non-Contravention; Statutory Approvals;
Compliance
(a) Authority. Each of CEI and the Merger Subsidiary has all
requisite power and authority to enter into this Agreement and, subject to the
receipt of the applicable CEI Required Statutory Approvals (as defined in
Section 5.2(c)), to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation by each of CEI and
the Merger Subsidiary of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of CEI and the Merger
Subsidiary. This Agreement has been duly and validly executed and delivered by
each of CEI and the Merger Subsidiary and, assuming the due authorization,
execution and delivery hereof by the other signatories hereto, constitutes the
legal, valid and binding obligation of each of CEI and the Merger Subsidiary
enforceable against it in accordance with its terms.
(b) Non-Contravention. The execution and delivery of this
Agreement by CEI and the Merger Subsidiary does not, and the consummation of the
transactions contemplated hereby will not, result in a Violation pursuant to any
provisions of (i) the certificate of incorporation, by-laws or similar governing
documents of CEI or the Merger Subsidiary, (ii) subject to obtaining the CEI
Required Statutory Approvals, any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any Governmental
Authority applicable to CEI or the Merger Subsidiary or any of their respective
properties or assets (other than immaterial consents, approvals, orders,
authorizations, actions, registrations, declarations or filings, including with
respect to communications systems, zoning, name change, occupancy and similar
routine regulatory approvals) or (iii) any material note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, standstill
agreement, contract, lease or other instrument, obligation or agreement of any
kind to which CEI or the Merger Subsidiary is a party or by which they or any of
their respective properties or assets may be bound or affected, except in the
case of clause (iii) for any such Violation which, individually or in the
aggregate, would not have a CEI Material Adverse Effect.
(c) Statutory Approvals. No declaration, filing or registration
with, notice to, authorization, permit, order, consent or approval (other than
immaterial consents, approvals, orders, authorizations, actions, registrations,
declarations or filings, including with respect to communications systems,
zoning, name change, occupancy and similar routine regulatory approvals) of, any
Governmental Authority is necessary for the execution and delivery of this
Agreement by each of CEI and the Merger Subsidiary or the consummation by each
of CEI and the Merger Subsidiary of the transactions contemplated hereby, except
those described in Section 5.2(c) of the CEI Disclosure Schedule (the " CEI
Required Statutory Approvals," it being understood that references in this
Agreement to "obtaining" such CEI Required Statutory Approvals shall mean making
such declarations, filings or registrations; giving such notices; obtaining such
authorizations, permits, orders, consents
or approvals; and having such waiting periods expire as are necessary to avoid a
violation of law).
(d) Compliance. Except as disclosed in CEI SEC Reports (as defined in
Section 5.3) filed prior to the date hereof, neither CEI nor the Merger
Subsidiary is in violation of, is under investigation with respect to any
violation of, or has been given notice or been charged with any violation of,
any law, statute, order, rule, regulation, ordinance or judgment (including,
without limitation, any applicable Environmental Law) of any Governmental
Authority, which would prevent CEI from consummating the transactions
contemplated by this Agreement.
Section 5.3 Litigation. Except as disclosed in each report,
schedule, registration statement and definitive proxy statement filed with the
SEC by CEI or CECONY pursuant to the requirements of the Securities Act or
Exchange Act since January 1, 1993 (as such documents have since the time of
their filing been amended, the "CEI SEC Reports") filed prior to the date
hereof, there are no claims, suits, actions or proceedings by any court,
governmental department, commission, agency, instrumentality or authority or any
arbitrator, pending or, to the knowledge of CEI, threatened, nor are there, to
the knowledge of CEI, any investigations or reviews by any court, governmental
department, commission, agency, instrumentality or authority or any arbitrator
pending or threatened against relating to or affecting CEI or the Merger
Subsidiary which, in each case, would prevent CEI from consummating the
transactions contemplated by this Agreement.
Section 5.4 Proxy Statement. None of the information supplied or to
be supplied by or on behalf of CEI for inclusion or incorporation by reference
in the Proxy Statement will, at the date mailed to the Company shareholders and
at the time of the meeting of the holders of Company Common Stock to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
Section 5.5 Regulation as a Utility. As of the date hereof, neither
CEI nor any "subsidiary company" or "affiliate" (as each such term is defined in
the 1935 Act) of CEI is subject to regulation as a public utility holding
company, public utility or public service company (or similar designation) by
the Federal government of the United States, any state in the United States or
any foreign country.
Section 5.6 No Vote Required. No vote of holders of any class or
series of the capital stock of CEI is necessary to approve this Agreement, the
Merger or the other transactions contemplated hereby.
Section 5.7 Financing. CEI has or will have available, prior to the
Effective Time, sufficient cash in immediately available funds to pay the Merger
Consideration pursu-
ant to Article II hereof and to consummate the Merger and the other transactions
contemplated hereby.
Section 5.8 Ownership of Company Common Stock. As of the date
hereof, neither CEI nor any of its Affiliates (excluding for such purposes
officers and directors of CEI and the CEI Subsidiaries) (i) beneficially owns
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, or
(ii) is party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of the Company.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Except as set forth in the Company Disclosure Schedule and making
references to the particular subsection of this Agreement to which exception is
being taken:
Section 6.1 Covenants of the Company. After the date hereof and
prior to the Effective Time or earlier termination of this Agreement, the
Company agrees as follows, each as to itself and to each of the Company
Subsidiaries, except as expressly contemplated or permitted in this Agreement or
to the extent CEI shall otherwise consent in writing, which decision regarding
consent shall be made as soon as reasonably practical:
(a) Ordinary Course of Business. The Company shall, and shall cause
the Company Subsidiaries to, carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and in compliance in all material respects with all applicable laws
and regulations and use all commercially reasonable efforts to preserve intact
their respective present business organizations and goodwill, preserve the
goodwill and relationships with customers, suppliers and others having business
dealings with them and, subject to prudent management of work force needs and
ongoing programs currently in force, keep available the services of their
respective present officers and employees, provided, however, (i) that nothing
shall prohibit the Company from divesting its generation assets in accordance
with terms that are equivalent in all material respects to the terms in the
Order Adopting Terms of Settlement with the New York State Public Service
Commission, issued and effective November 26, 1997 (the " Settlement Agreement")
and the Final Divestiture Plan dated February 3, 1998 and the Order Authorizing
the Process For Auctioning of Generation Plant and Rejecting Joint Agreement,
issued and effective April 16, 1998 (collectively, the " Final Divestiture
Plan") and (ii) neither the Company nor any Company Subsidiary shall enter into
any new line of business. Notwithstanding the above and notwithstanding any
other provision in Section 6.1 (other than Section 6.1(l)), the Company and any
of the Company Subsidiaries may make equity infusions into a Company Subsidiary
(other than NORSTAR Management, Inc. and its Subsidiaries) (i) to the extent
required by law or a state regulatory commission or (ii) to the extent
that equity infusions into the Company Subsidiaries do not exceed $10 million in
the aggregate.
(b) Dividends. The Company shall not, and shall not permit any of the
Company Subsidiaries to: (i) declare or pay any dividends on or make other
distributions in respect of any of their respective capital stock other than to
the Company or the Company Subsidiaries and other than regular quarterly
dividends on Company Common Stock with usual record and payment dates not,
during any period of any fiscal year, in excess of the dividends for the
comparable period of the prior fiscal year, (ii) split, combine or reclassify
any of their respective capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of, or in substitution
for, shares of their respective capital stock or (iii) redeem, repurchase or
otherwise acquire any shares of their respective capital stock, other than (A)
redemptions, purchases or acquisitions required by the respective terms of any
series of Company Preferred Stock or Company Preference Stock, or (B) for the
purpose of funding employee stock ownership plans and dividend reinvestment
programs in accordance with past practice. Notwithstanding the foregoing, the
Company may redeem Company Preferred Stock pursuant to the provisions of Section
2.1(c) and the Company may redeem Company Preference Stock pursuant to the
provisions of Section 2.1(d). The last record date of the Company on or prior
to the Effective Time which relates to a regular quarterly dividend on Company
Common Stock shall be prior to the Effective Time.
(c) Issuance of Securities. The Company shall not, and shall not permit
any of the Company Subsidiaries to, issue, agree to issue, deliver, sell, award,
pledge, dispose of or otherwise encumber or authorize or propose the issuance,
delivery, sale, award, pledge, disposal or other encumbrance of, any shares of
their capital stock of any class or any securities convertible into or
exchangeable for, or any rights, warrants or options to acquire, any such shares
or convertible or exchangeable securities, other than any issuances of capital
stock of any Company Subsidiary to the Company or any wholly-owned Company
Subsidiary (other than, in each case, NORSTAR Management, Inc. and its
Subsidiaries).
(d) Charter Documents. The Company shall not amend or propose to amend
its Restated Certificate of Incorporation or by-laws or other comparable
organizational documents of any Company Subsidiary.
(e) No Acquisitions. The Company shall not, nor shall the Company
permit any of the Company Subsidiaries to: (i) acquire, or publicly propose to
acquire, or agree to acquire, by merger or consolidation with, or by purchase or
otherwise, an equity interest in or a substantial portion of the assets of, any
business or any corporation, partnership, association or other business
organization or division thereof, or (ii) otherwise acquire or agree to acquire
a material amount of assets, except in the case of this clause (ii) only, in the
ordinary course of business consistent with past practice or (iii) alter
(through merger, liquidation, reorganization, restructuring or in any other
fashion) the corporate structures or ownership of the Company or any of the
Company Subsidiaries.
(f) No Dispositions. Except (i) for the Company divesting its generation
assets in accordance with the terms and conditions set forth in the Settlement
Agreement and the Final Divestiture Plan, (ii) for Clove Development
Corporation, a wholly owned subsidiary of the Company, divesting at fair market
value, its real estate, primarily located in Sullivan County, New York, (iii)
for O&R Energy Development, Inc., a wholly owned subsidiary of the Company,
divesting at fair market value its real estate, primarily located in Orange
County, New York, and (iv) for the Company or the Company Subsidiaries making
dispositions at fair market value of less than $10 million in sales price and
indebtedness assumed by the acquiring party and its Affiliates, singularly or in
the aggregate during any fiscal year, the Company shall not, nor shall the
Company permit any of the Company Subsidiaries to, sell or dispose of any of
their respective assets other than dispositions in the ordinary course of its
business consistent with past practice. As used in this Agreement, the term "
Affiliate," except where otherwise defined herein, shall mean, as to any person,
any other person which directly or indirectly controls, or is under common
control with, or is controlled by, such person. As used in this definition, "
control" (including, with its correlative meanings, "controlled by" and "under
common control with") shall mean possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership interests, by contract
or otherwise). The Company (i) shall consult with CEI with respect to
significant decisions relating to the divestiture of the generation assets and
transactions in connection therewith prior to taking any action with respect to
any such decision or entering into any such transaction and (ii) shall take into
account the views of CEI with respect to such action or transaction. The
Company shall use its best efforts to enter into a definitive agreement to
divest its generation assets in accordance with the Settlement Agreement and the
Final Divestiture Plan on or prior to May 1, 1999 and use its best efforts to
consummate the divestiture of its generation assets as soon as practicable after
entering into such agreement. The Company shall conduct such divestiture on
terms that are equivalent in all material respects to the terms set forth in the
Final Divestiture Plan, including divesting all liabilities, arising out of,
related to or otherwise associated with such generation assets, including all
environmental liabilities (other than environmental liabilities relating to off-
site storage or disposal of Hazardous Materials associated with the generating
assets) and all liabilities with respect to fuel purchase contracts relating to
such generation assets. Unless ordered pursuant to law or regulation, the
Company shall not materially modify or amend, or propose to enter into any
agreement to modify or amend the Settlement Agreement or the Final Divestiture
Plan or conduct any negotiations with the NYPSC or any other Governmental
Authority in connection with any such proposed modification or amendment. If so
ordered, the Company shall consult with CEI prior to taking or agreeing to take
any such action. The Company and the Company Subsidiaries shall not pay out,
distribute, invest (except that the Company and the Company Subsidiaries may
invest in the ordinary course of business in a manner that would not otherwise
be prohibited by any of the provisions of this Section 6.1) or otherwise make
use of the proceeds resulting from the divestiture of its generation assets
except as expressly permitted by the provisions of this Section 6.1.
(g) Cooperation, Notification. The Company shall (i) confer on a regular
and frequent basis with one or more representatives of CEI to discuss, subject
to applicable law, material operational matters and the general status of its
ongoing operations, (ii) promptly notify CEI of any significant changes in its
business, properties, assets, condition (financial or other), results of
operations or prospects, (iii) promptly notify CEI of property sales by the
Company Subsidiaries in excess of $10 million and shall discuss with CEI use of
proceeds from such sales to the extent that such proceeds exceed $10 million,
(iv) promptly advise CEI of (A) any representation or warranty made by it
contained in this Agreement that is qualified as to materiality becoming untrue
or inaccurate in any respect or any such representation or warranty that is not
so qualified becoming untrue or inaccurate in any material respect, (B) the
failure by it to comply in any material respect with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it under this Agreement and (C) any change or event which, individually or in
the aggregate, has had or would have a Company Material Adverse Effect
(provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties (or remedies with respect
thereto) or the conditions to the obligations of the parties under this
Agreement) and (v) promptly provide CEI with copies of all filings made by the
Company or any of the Company Subsidiaries with any state or federal court,
administrative agency, commission or other Governmental Authority in connection
with this Agreement and the transactions contemplated hereby.
(h) Third-Party Consents. The Company shall, and shall cause the
Company Subsidiaries to, use all reasonable best efforts to obtain all Company
Required Consents. The Company shall promptly notify CEI of any failure or
prospective failure to obtain any such consents and, if requested by CEI, shall
provide copies of all Company Required Consents obtained by the Company to CEI.
(i) No Breach, Etc. The Company shall not, and the Company shall not
permit any of the Company Subsidiaries to, voluntarily take any action that
would or is reasonably likely to result in a material breach of any provision of
this Agreement or in any of its representations and warranties set forth in this
Agreement being untrue on and as of the Closing Date.
(j) Tax-Exempt Status. The Company shall not, and the Company shall
not permit any of the Company Subsidiaries to, take any action that would likely
jeopardize the qualification of the Company's outstanding revenue bonds which
qualify on the date hereof under Section 142(a) of the Code as "exempt facility
bonds" or as tax-exempt pollution control bonds under Section 103(b) (4) of the
Internal Revenue Code of 1954, as amended, prior to the Tax Reform Act of 1986.
(k) Tax Matters. The Company shall not (i) make or rescind any
material express or deemed election relating to Taxes without the prior written
consent of CEI, which consent shall not be unreasonably withheld, (ii) settle or
compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to
Taxes without the prior written consent of CEI or (iii) change in any material
respect any of its methods of reporting income or deductions for federal income
tax purposes from those employed in the preparation of its federal income tax
return for the taxable year ending December 31, 1996, except as may be required
by applicable law.
(l) Capital Expenditures. Except (i) as required by law, or (ii) as
reasonably deemed necessary by the Company after consulting with CEI following a
catastrophic event, such as a major storm, the Company shall not, and the
Company shall not permit any of the Company Subsidiaries to, make capital
expenditures during any fiscal year in excess of 110% of the amount budgeted for
such fiscal year by the Company for capital expenditures.
(m) Indebtedness. The Company shall not, and the Company shall not
permit any of the Company Subsidiaries to, incur or guarantee any indebtedness
(including any debt borrowed or guaranteed or otherwise assumed including,
without limitation, the issuance of debt securities or warrants or rights to
acquire debt) or enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or entity or enter into any
arrangement having the economic effect of any of the foregoing other than (i)
short-term indebtedness in the ordinary course of business consistent with past
practice (such as the issuance of commercial paper, the use of credit facilities
existing as of the date hereof or hedging activities undertaken in order to
hedge a balance sheet asset or liability and not for speculative purposes), (ii)
guarantees or "keep well" or other agreements in favor of wholly-owned
Subsidiaries (other than NORSTAR Management, Inc. and its Subsidiaries) in the
ordinary course of business consistent with past practice and not aggregating
more than $5 million, (iii) other indebtedness or "keep well" or other
agreements not aggregating more than $5 million, (iv) arrangements between the
Company and the wholly-owned Company Subsidiaries (other than NORSTAR
Management, Inc. and its Subsidiaries) or among the wholly-owned Company
Subsidiaries (other than NORSTAR Management, Inc. and its Subsidiaries), (v) in
connection with the refunding of existing long-term indebtedness at maturity or
at a lower cost of funds, (vi) in connection with the redemption of Company
Preferred Stock as set forth in Section 2.1(c), (vii) in connection with the
redemption of Company Preference Stock as set forth in Section 2.1(d), (viii) as
may be necessary in connection with capital expenditures permitted by Section
6.1(l).
(n) Compensation, Benefits. Except as may be required by applicable
law, the Company shall not, and the Company shall not permit any of the Company
Subsidiaries to, (i) enter into, adopt or amend or increase the amount or
accelerate the payment or vesting of any benefit or amount payable under, any
Company Plan or any other employee benefit plan or other contract, agreement,
commitment, arrangement, plan, trust, fund or policy maintained by, contributed
to or entered into by the Company or any of the Company Subsidiaries (other than
any adoption or amendment to, or change of, any Company Plan that, individually
or in the aggregate, does not result in any material expense to the Company and
the Company Subsidiaries taken as a whole); (ii) increase, or enter into any
contract, agreement, commitment or arrangement to increase in any manner, the
com-
pensation or fringe benefits, or otherwise to extend, expand or enhance the
engagement, employment or any related rights, of any director, officer or other
employee of the Company or any of the Company Subsidiaries, except for normal
promotion and compensation (including incentive compensation) increases and
hiring and discretionary award grants in the ordinary course of business that,
in the aggregate, do not result in a material increase in benefits or
compensation expense to the Company or any of the Company Subsidiaries; (iii)
enter into or amend any employment, severance, retention, consulting or special
pay arrangement with respect to the termination of employment or other similar
contract, agreement or arrangement with any director or officer or other
employee other than, with respect only to employees who are not officers or
directors, in the ordinary course of business consistent with past practice or
(iv) enter into any collective bargaining agreement or other labor union
contract or written agreement or amend in any material manner any such agreement
or contract to which the Company or any of the Company Subsidiaries is a party,
except as required by law, in which case the Company shall consult with CEI
prior to taking any required action.
(o) 1935 Act. The Company shall not, and the Company shall not permit
any of the Company Subsidiaries to engage in any activities which would cause a
change in its status, or that of the Company Subsidiaries, under the 1935 Act.
(p) Accounting. The Company shall not, and the Company shall not permit
any of the Company Subsidiaries to, make any changes in their accounting
methods, except as required by law, rule, regulation or GAAP.
(q) Affiliate Transactions. Subject to the other restrictions set forth
in this Section 6.1, the Company shall not permit any of the Company
Subsidiaries to, enter into any material agreement or arrangement with any of
their respective Affiliates (except wholly owned Subsidiaries other than NORSTAR
Management, Inc. and its Subsidiaries), on terms materially less favorable to
such party than could be reasonably expected to have been obtained with an
unaffiliated third-party on an arm's length basis.
(r) Rate Matters. Subject to applicable law, the Company shall, and
shall cause the Company Subsidiaries to, (i) discuss with CEI any changes in its
or the Company Subsidiaries' rates or the services it provides or charges (other
than pass-through fuel and gas rates or charges), standards of service or
accounting from those in effect on the date hereof, and obtain CEI's approval
prior to proposing, agreeing to or making any material changes with respect
thereto and (ii) subject to the preceding clause (i), consult with CEI prior to
making any filing (or any amendment thereto), or effecting any agreement,
commitment, arrangement or consent with governmental regulators, whether written
or oral, formal or informal, with respect thereto. The Company will consult with
CEI before making any filing to change its rates or the services it provides on
file with the FERC that would have a material adverse effect on the benefits
associated with the business combination provided for herein.
(s) Contracts. The Company shall not, and the Company shall not permit
any of the Company Subsidiaries to, except in the ordinary course of business
consistent with past practice, modify, amend, terminate, renew or fail to use
reasonable business efforts to renew any contract or agreement to which the
Company or the Company Subsidiary is a party, which is material to the Company
and the Company Subsidiaries taken as a whole, or waive, release or assign any
material rights or claims therein.
(t) Insurance. The Company shall, and shall cause the Company
Subsidiaries to, maintain with financially responsible insurance companies
insurance in such amounts and against such risks and losses as are customary for
companies engaged in the electric and gas utility industry and employing methods
of generating electric power and fuel sources similar to those methods employed
and fuels used by the Company or the Company Subsidiaries.
(u) Permits. The Company shall, and shall cause the Company Subsidiaries
to, use reasonable efforts to maintain in effect all existing governmental
permits which are material to the operations of the Company or the Company
Subsidiaries.
(v) Discharge of Liabilities. The Company shall not, and the Company
shall not permit any of the Company Subsidiaries to, pay, discharge, settle,
compromise or satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise) material to the Company and the
Company Subsidiaries taken as a whole, other than the payment, discharge,
settlement, compromise or satisfaction, in the ordinary course of business
consistent with past practice (which includes the payment of final and
unappealable judgments) or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of the Company SEC
Reports filed prior to the date hereof, or incurred in the ordinary course of
business consistent with past practice.
Section 6.2 Covenants of CEI . After the date hereof and prior to the
Effective Time or earlier termination of this Agreement, CEI agrees as follows,
as to itself and to each of CEI Subsidiaries, except to the extent the Company
shall otherwise consent in writing, which decision regarding consent shall be
made as soon as reasonably practical:
(a) Cooperation, Notification. CEI shall (i) promptly advise the Company
of (A) any representation or warranty made by it contained in this Agreement
that is qualified as to materiality becoming untrue or inaccurate in any respect
or any such representation or warranty that is not so qualified becoming untrue
or inaccurate in any material respect and (B) the failure by it to comply in any
material respect with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement
(provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties (or remedies with respect
thereto) or the conditions to the obligations of the parties under this
Agreement) and (ii) promptly provide the Company with copies of all filings made
by CEI or any of CEI Subsidiaries with
any state or federal court, administrative agency, commission or other
Governmental Authority in connection with this Agreement and the transactions
contemplated hereby.
(b) No Breach, Etc. CEI shall not and CEI shall not permit any of
the CEI Subsidiaries to, voluntarily take any action that would or is reasonably
likely to result in a material breach of any provision of this Agreement or in
any of its representations and warranties set forth in this Agreement being
untrue on and as of the Closing Date.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access to the Company's Information. Upon reasonable
notice, the Company shall, and shall cause the Company Subsidiaries to, afford
to the officers, directors, employees, accountants, counsel, investment bankers,
financial advisors and other representatives (collectively, " Representatives")
of CEI reasonable access, during normal business hours throughout the period
prior to the Effective Time, to all of its properties, books, contracts,
commitments and records (including, but not limited to, tax returns) and, during
such period, the Company shall, and shall cause the Company Subsidiaries to,
furnish promptly to CEI and its Representatives (i) access to each report,
schedule and other document filed or received by the Company or any of the
Company Subsidiaries pursuant to the requirements of federal or state securities
laws or filed with or sent to the SEC, the FERC, the Department of Justice, the
Federal Trade Commission, the New York Department of Environmental Conservation
or any other federal or state regulatory agency or commission and (ii) access to
all information concerning the Company, the Company Subsidiaries, and their
respective directors, officers and shareholders and such other matters as may be
reasonably requested by CEI or its Representatives in connection with any
filings, applications or approvals required or contemplated by this Agreement or
for any other reason related to the transactions contemplated by this Agreement.
Subject to obtaining customary indemnities, the parties shall promptly furnish
to each other such information as may be reasonably requested, including audited
financial statements and other financial information, and take such other action
as may be reasonably necessary and otherwise fully cooperate with each other in
the preparation of any registration statement under the Securities Act and other
documents necessary in connection with the issuance of securities (subject to
Section 6.1(c) and 6.1(m) in the case of issuances by the Company or any Company
Subsidiary). Each party shall, and shall cause its Subsidiaries and
Representatives to, hold in strict confidence all documents and information
concerning the other furnished to it in connection with the transactions
contemplated by this Agreement in accordance with the Confidentiality Agreement,
dated December 17, 1997, between the Company and CEI (the " Confidentiality
Agreement"). No review pursuant to this Section 7.1 shall have an effect for
the purpose of determining the accuracy of any representation or warranty given
by any of the parties hereto to any of the other parties hereto.
Section 7.2 Proxy Statement. The parties will prepare and file with
the SEC as soon as practicable after the date hereof the Proxy Statement. Each
of the parties hereto shall furnish all information concerning itself which is
required or customary for inclusion in the Proxy Statement. The information
provided by any party hereto for use in the Proxy Statement shall be true and
correct in all material respects without omission of any material fact which is
required to make such information not false or misleading. No representation,
covenant or agreement is made by any party hereto with respect to information
supplied by any other party for inclusion in the Proxy Statement. No filing of,
or amendment or supplement to, the Proxy Statement will be made by the Company
without providing CEI with the opportunity to review and comment thereon. If at
any time prior to the Effective Time any information relating to the Company or
CEI, or any of their respective Affiliates, officers or directors, should be
discovered by the Company or CEI which should be set forth in an amendment or
supplement to the Proxy Statement, so that the Proxy Statement would not include
any misstatement of a material fact or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, the party which discovers such information shall
promptly notify the other parties hereto and an appropriate amendment or
supplement describing such information shall be promptly filed with the SEC and,
to the extent required by law, disseminated to the stockholders of the Company.
Section 7.3 Regulatory Matters.
(a) HSR Filings. Each party hereto shall, as soon as practicable
after the date hereof, file or cause to be filed with the Federal Trade
Commission and the Department of Justice any notifications required to be filed
by their respective "ultimate parent" companies under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the " HSR Act"), and the rules
and regulations promulgated thereunder with respect to the transactions
contemplated hereby. Such parties will use their reasonable best efforts to
respond on a timely basis to any requests for additional information made by
either of such agencies.
(b) Other Regulatory Approvals. Each party hereto shall cooperate
and use its reasonable best efforts to promptly prepare and file all necessary
documentation and to effect all necessary applications, notices, petitions,
filings and other documents and use its reasonable best efforts to obtain all
necessary permits, consents, approvals and authorizations of all Governmental
Authorities necessary or advisable to obtain the Company Required Statutory
Approvals and CEI Required Statutory Approvals; provided, however, that the
Company shall not be required to take any action in connection with the
obtaining of such permits, consents, approvals and authorizations that would
have, or, insofar as reasonably can be foreseen, is likely to have, a Company
Material Adverse Effect and CEI shall not be required to take any action in
connection with the obtaining of such permits, consents, approvals and
authorizations that would have, or, insofar as reasonably can be
foreseen, is likely to have a CEI Material Adverse Effect or a Company Material
Adverse Effect.
(c) For each facility that is potentially an "industrial
establishment" (as that term is defined by the New Jersey Industrial Site
Recovery Act (" ISRA")) and is owned or operated by the Company or a Company
Subsidiary that is subject to ISRA as a result of this Agreement, the Company or
the Company Subsidiary that owns or operates such facility shall, prior to the
Closing Date, obtain a written determination from the New Jersey Department of
Environmental Protection that such facility is not an industrial establishment,
or that such facility is otherwise exempted or excluded from coverage under ISRA
(collectively a " non-applicability determination") and with respect to any
facility for which a non-applicability determination cannot be obtained, either
(i) obtain an approved Negative Declaration or No Further Action Letter (as such
terms are defined by ISRA); (ii) obtain an approved Remedial Action Workplan (as
such term is defined by ISRA); or (iii), if a Negative Declaration, No Further
Action Letter, or approved Remedial Action Workplan cannot be obtained prior to
the Closing Date, obtain and execute a Remediation Agreement permitting the
consummation of the transactions contemplated by this Agreement. The Company
shall provide to CEI all relevant correspondence, data and submissions to or
from the New Jersey Department of Environmental Protection.
Section 7.4 Approval of the Company Shareholders. The Company shall,
as soon as practicable after the date hereof (i) take all steps necessary to
duly call, give notice of, convene and hold a meeting of its shareholders (the "
Company Meeting") for the purpose of securing the Company Shareholders'
Approval, (ii) distribute to its shareholders the Proxy Statement in accordance
with applicable federal and state law and with its Restated Certificate of
Incorporation and by-laws, (iii) subject to Section 7.10, recommend to its
shareholders the approval of the Merger, this Agreement and the transactions
contemplated hereby and (iv) cooperate and consult with CEI with respect to each
of the foregoing matters. Without limiting the generality of the foregoing but
subject to its rights to terminate this Agreement pursuant to Section 9.1(g),
the Company agrees that its obligations pursuant to the first sentence of this
Section 7.4 shall not be affected by the commencement, public proposal, public
disclosure or communication to the Company of any Acquisition Proposal.
Section 7.5 Directors' and Officers' Indemnification.
(a) Indemnification. To the extent, if any, not provided by an
existing right of indemnification or other agreement or policy, from and after
the Effective Time, the Surviving Corporation shall, to the fullest extent
permitted by applicable law, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date hereof, or who becomes prior
to the Effective Time, (x) an officer or director or (y) an employee covered as
of the date hereof (to the extent of the coverage extended as of the date
hereof) of any of the Company or any Company Subsidiary (each an " Indemnified
Party" and collectively, the " Indemnified Parties") against (i) all losses,
expenses (including reasonable attorney's fees and expenses), claims, damages or
liabilities or, subject to the first proviso of the next succeeding sentence,
amounts paid in settlement, arising out of actions or omissions occurring at or
prior to the Effective Time (and whether asserted or claimed prior to, at or
after the Effective Time) that are, in whole or in part, based on or arising out
of the fact that such person is or was a director, officer or employee of the
Company or any Company Subsidiary (the " Indemnified Liabilities"), and (ii) all
Indemnified Liabilities to the extent they are based on or arise out of or
pertain to the transactions contemplated by this Agreement, in each case, to the
extent permitted by Section 722(a) of the NYBCL. In the event of any such loss,
expense, claim, damage or liability (whether or not arising before the Effective
Time), (i) the Surviving Corporation shall pay the reasonable fees and expenses
of counsel selected by the Indemnified Parties, which counsel shall be
reasonably satisfactory to the Surviving Corporation, promptly after statements
therefor are received and otherwise advance to such Indemnified Party upon
request, reimbursement of documented expenses reasonably incurred, in either
case to the extent not prohibited by the NYBCL upon receipt of an undertaking by
or on behalf of such director or officer to repay such amounts as and to the
extent required by the NYBCL, (ii) the Surviving Corporation will cooperate in
the defense of any such matter and (iii) any determination required to be made
with respect to whether an Indemnified Party's conduct complies with the
standards set forth under the NYBCL and the certificate of incorporation or by-
laws of the Surviving Corporation shall be made by independent counsel mutually
acceptable to the Surviving Corporation and the Indemnified Party; provided,
however, that the Surviving Corporation shall not be liable for any settlement
effected without its written consent (which consent shall not be unreasonably
withheld) and provided further that no indemnification shall be made if such
indemnification is prohibited by the proviso to the first sentence of Section
721 of the NYBCL. The Indemnified Parties as a group may retain only one law
firm with respect to each related matter except to the extent that such law firm
would have, in the opinion of such law firm, under applicable standards of
professional conduct then prevailing under the laws of the State of New York, a
conflict of interest in representing any particular Indemnified Party.
(b) Insurance. For a period of six years after the Effective Time,
the Surviving Corporation shall cause to be maintained in effect policies of
directors and officers' liability insurance equivalent to those maintained by
the Company prior to the Effective Time
for the benefit of those persons who are currently covered by such policies on
terms no less favorable than the terms of such current insurance coverage.
(c) Successors. In the event the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person or
entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person or entity, then and in either such case,
proper provisions shall be made so that the successors and assigns of the
Surviving Corporation, as applicable, shall assume the obligations set forth in
this Section 7.5.
(d) Survival of Indemnification. To the fullest extent permitted by
law, from and after the Effective Time, all rights to indemnification as of the
date hereof in favor of the employees, agents, directors and officers of the
Company and the Company Subsidiaries with respect to their activities as such
prior to the Effective Time, as provided in their respective certificates of
incorporation and by-laws in effect on the date hereof, or otherwise in effect
on the date hereof, shall survive the Merger and shall continue in full force
and effect for a period of not less than six years from the Effective Time.
(e) Benefit. The provisions of this Section 7.5 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her representatives.
Section 7.6 Public Announcements. Subject to each party's disclosure
obligations imposed by law, the Company and CEI will cooperate with each other
in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any public announcement or
statement with respect hereto or thereto without the consent of the other party
(which consent shall not be unreasonably withheld).
Section 7.7 Standstill Agreements; Confidentiality Agreements. Except
for the Company's ability to enter into, amend, modify, waive any provision of,
enforce and terminate, if necessary, the confidentiality agreements relating to
the sale of the generation assets, (i) during the period from the date of this
Agreement through the Effective Time, the Company shall not, and shall not
permit any Company Subsidiary, to terminate, amend, modify or waive any
provision of any confidentiality or standstill agreement to which it or any
Company Subsidiary is a party and (ii) during such period, the Company shall
enforce, to the fullest extent permitted under applicable law, the provisions of
any such agreement, including by obtaining injunctions to prevent any breaches
of such agreements and to enforce specifically the terms and provisions thereof
in any court of the United States of America or of any state having
jurisdiction.
Section 7.8 Employee Agreements and Workforce Matters.
(a) Certain Employee Agreements. CEI shall cause the Surviving
Corporation and its Subsidiaries to honor all collective bargaining agreements
in effect as of the date hereof, and, subject to Section 7.9, CEI shall cause
the Surviving Corporation and its Subsidiaries to honor all contracts,
agreements and commitments (including all Company Plans) of the Company as in
effect on the date hereof that apply to any current or former employee or
current or former director of the Company; provided, however, that this
undertaking is not intended to prevent CEI or the Surviving Corporation and its
Subsidiaries from exercising their rights with respect to such contracts,
agreements, collective bargaining agreements and commitments in accordance with
their terms, including, without limitation, any right to amend, modify, suspend,
revoke or terminate any such contract, agreement, collective bargaining
agreement or commitment or portion thereof.
(b) Workforce Matters. Subject to applicable law and obligations under
applicable collective bargaining agreements, for a period of 3 years following
the Effective Time, any reductions in workforce in respect of employees of the
Surviving Corporation and its Subsidiaries shall be made on a fair and equitable
basis as determined by the Surviving Corporation, without regard to whether
employment was with the Company or the Company Subsidiaries or CEI or CEI
Subsidiaries and with due consideration to prior experience and skills, and any
employee whose employment is terminated or job is eliminated during such period
shall be entitled to participate on a fair and equitable basis as determined by
CEI or the Surviving Corporation in the job opportunity and employment placement
programs offered by CEI or the Surviving Corporation or any of their
Subsidiaries for which they are eligible. Any workforce reductions carried out
following the Effective Time by the Surviving Corporation and its Subsidiaries
shall be done in accordance with all applicable collective bargaining agreements
and all laws and regulations governing the employment relationship and
termination thereof including, without limitation, the Worker Adjustment and
Retraining Notification Act and regulations promulgated thereunder, and any
comparable state or local law.
Section 7.9 Employee Benefit Plans.
(a) Service Credit. All service under any Company Plan that was
recognized, accrued or credited under such Company Plan immediately preceding
the Effective Time shall continue to be recognized, accrued or credited for all
relevant purposes under such Company Plan as of and at all times following the
Effective Time. Subject to obligations under applicable law and applicable
collective bargaining agreements, all employees of the Company and its
Subsidiaries who were employees immediately prior to the Effective Time (the "
Affected Employees") shall be given credit for all service with the Company or
its Subsidiaries (and service credited by the Company or such Subsidiary), to
the same extent as such service was credited for such purpose by the Company or
such Subsidiary, under (a) all employee benefit plans, programs and policies,
and fringe benefits of CEI or
the Surviving Corporation (if any) in which they first become participants on or
after the Effective Time, for purposes of eligibility and vesting but not for
benefit accrual purposes or eligibility for early retirement purposes under
defined benefit pension plans and not to the extent crediting such service would
result in duplication of benefits and (b) severance plans for purposes of
calculating the amount of each Affected Employee's severance benefits. To the
extent permissible under the terms thereof and required by applicable law, CEI
and the Surviving Corporation shall (i) waive all limitations as to preexisting
conditions exclusions and waiting periods with respect to participation and
coverage requirements applicable to the Affected Employees under any welfare
benefit plans that such employees may be eligible to participate in after the
Closing Date, other than limitations or waiting periods that are already in
effect with respect to such employees and that have not been satisfied as of the
Closing Date under any welfare benefit plan maintained for the Affected
Employees immediately prior to the Closing Date, and (ii) provide each Affected
Employee with credit for any co-payments and deductibles paid prior to the
Closing Date in satisfying any applicable deductible or out-of-pocket
requirements under any welfare plans that such employees are eligible to
participate in after the Closing Date. Nothing in this Section shall be deemed
to require the employment of any Affected Employee to be continued for any
particular period of time after the Closing Date.
(b) Continuation of Benefits. Subject to applicable law and obligations
under applicable collective bargaining agreements, CEI shall cause the Surviving
Corporation to maintain for a period of at least one year after the Closing
Date, without interruption, such employee compensation, welfare and benefit
plans, programs, policies and fringe benefits as will, in the aggregate, provide
benefits to the Affected Employees that are no less favorable than those
provided pursuant to such employee compensation, welfare and benefit plans,
programs, policies and fringe benefits of the Company and its Subsidiaries, as
in effect on the Closing Date; provided, however, that CEI shall cause the
Surviving Corporation to, for one year following the Closing Date, continue the
Company Severance Pay Plan (the " Severance Plan") in full force and effect to
the same extent that such Severance Plan is in effect on the Closing Date.
(c) Effect of the Merger. The consummation of the Merger shall not be
treated as a termination of employment of any Affected Employee for purposes of
any Company Plan.
(d) Continuation of Agreements. CEI shall cause the Surviving Corporation
to, as of the Closing Date, honor and be solely responsible for the employment,
severance, consulting and retention agreements set forth in Section 7.9 of the
Company Disclosure Schedule.
Section 7.10 No Solicitations by the Company.
(a) From and after the date hereof, (i) the Company will not, and will not
authorize or permit any of its Representatives to, directly or indirectly,
solicit, initiate or en-
courage (including by way of furnishing information) or take any other action to
facilitate knowingly any inquiries or the making of any proposal which
constitutes or may reasonably be expected to lead to an Acquisition Proposal (as
defined herein) from any person, or engage in any discussion or negotiations
relating thereto and (ii) neither the Board of Directors of the Company nor any
committee thereof shall (A) withdraw or modify, or propose publicly to withdraw
or modify, in a manner adverse to CEI, the approval or recommendation by such
Board of Directors or such committee of the Merger or this Agreement, (B)
approve or recommend, or propose publicly to approve or recommend, any
Acquisition Proposal, or (C) cause the Company or any Company Subsidiary to
enter into any letter of intent, agreement in principle, acquisition agreement
or other similar agreement (each, an " Acquisition Agreement") related to any
Acquisition Proposal; provided, however, that the Company may, at any time prior
to receipt of the Company Shareholders' Approval (the " Company Applicable
Period"), (i) in response to an Acquisition Proposal which was not solicited by
it or its Representatives and which did not otherwise result from a breach of
this Section 7.10, if the Board of Directors of the Company (x) reasonably
believes in good faith, after consultation with its financial advisors, that an
Acquisition Proposal may be a Superior Proposal (as defined herein) and (y)
determines in good faith, after consultation with its financial advisors and
outside counsel, that failing to take such action could reasonably be expected
to be a breach of its fiduciary duties to the Company's shareholders under
applicable law, and subject to providing prior written notice of its decision to
take such action to CEI (the "Company Notice") and compliance with Section
7.10(c), for a period of twenty business days following delivery of the Company
Notice, (1) furnish information with respect to the Company and its Subsidiaries
to any person making a Superior Proposal pursuant to a customary confidentiality
agreement (as determined by the Company after consultation with outside counsel)
and (2) participate in discussions or negotiations regarding such Superior
Proposal (provided, in each case, that the Company shall be permitted to deliver
only one Company Notice with respect to each person making an Acquisition
Proposal), (ii) comply with Rule 14e-2 promulgated under the Exchange Act with
regard to a tender or exchange offer (provided that, except in connection with a
termination of this Agreement pursuant to clause (iii) of this proviso, neither
the Company nor its Board of Directors nor any committee thereof shall withdraw
or modify, or propose publicly to withdraw or modify, its position with respect
to this Agreement or the Merger or approve or recommend, or propose publicly to
approve or recommend, an Acquisition Proposal), and/or (iii) in the event that
during the Company Applicable Period the Board of Directors of the Company
reasonably believes in good faith, after consultation with financial advisors
and outside counsel, (x) that it has received an Acquisition Proposal that
constitutes a Superior Proposal and (y) that failure to terminate this Agreement
and accept such Superior Proposal could reasonably be expected to be a breach of
its fiduciary duties to the Company's shareholders under applicable law, by
action of the Board of Directors of the Company (subject to this sentence and
Section 9.1(g)), terminate this Agreement (and, following the exercise of such
termination right, withdraw or modify in any adverse manner its approval or
recommendation of this Agreement or the Merger, and approve or recommend any
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company or any such Company
Subsidiary, other than the transactions contemplated by this Agreement),
but only at a time that is during the Company Applicable Period and is after the
third business day following CEI's receipt of written notice advising CEI that
the Board of Directors of the Company is prepared to accept a Superior Proposal,
specifying the material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal. The Company shall
immediately cease and terminate any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any persons conducted
heretofore by the party or its Representatives with respect to the foregoing.
(b) As used herein, (i) "Acquisition Proposal" shall mean any inquiry,
proposal or offer from any person relating to any direct or indirect acquisition
or purchase of a business (a " Material Business") that constitutes 15% or more
of the net revenues, net income or the assets (including equity securities) of
the Company and the Company Subsidiaries, taken as a whole, or 15% or more of
any class of voting securities of the Company or any Company Subsidiary owning,
operating or controlling a Material Business, any tender offer or exchange offer
that if consummated would result in any person beneficially owning 15% or more
of any class of voting securities of the Company or any such Company Subsidiary,
or any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company or any
such Company Subsidiary, other than the transactions contemplated by this
Agreement; provided, however, that no transaction permitted pursuant to Section
6.1(f) shall be deemed an Acquisition Proposal for any purpose and (ii) a "
Superior Proposal" shall mean any proposal made by a third party to acquire,
directly or indirectly, including pursuant to a tender offer, exchange offer,
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of Company
Common Stock then outstanding or all or substantially all the assets of the
Company which the Board of Directors of the Company determines in its good faith
judgment (based on the written advice of a financial advisor of nationally
recognized reputation) to be more favorable to the Company's shareholders
(taking into account any changes to the financial terms of this Agreement
proposed by CEI in response to such proposal and all financial and strategic
considerations, including relevant legal, financial, regulatory and other
aspects of the proposal and the third party making such proposal and the
conditions and the prospects for completion of such proposal, the strategic
direction and benefits sought by the Company and any changes to this Agreement
proposed by CEI in response to such proposal) than the Merger and the other
transactions contemplated by this Agreement.
(c) The Company shall promptly advise CEI orally and in writing of the
receipt of any Superior Proposal and of the receipt of any inquiry with respect
to or which the Company reasonably believes could lead to any Superior Proposal.
The Company shall promptly advise CEI orally and in writing of the identity of
the person making any such Superior Proposal or inquiry and of the material
terms of any such Superior Proposal and of any material changes thereto.
Section 7.11 Board of Directors; Advisory Board. The Board of Directors
of CEI will take such action as may be necessary (including increasing the size
of the Board of Directors of CEI) to appoint to the Board of Directors of CEI
after the Effective Time, effective at the Effective Time, one person selected
by the Nominating Committee of CEI, who (i) is a member of the Board of
Directors of the Company as of the date hereof, (ii) is willing to serve on the
Board of Directors of CEI and (iii) would be eligible under CEI's by-laws and
applicable resolutions of CEI's Board of Directors to be so nominated for
election to the Board of Directors of CEI at the next annual meeting of CEI
following the Effective Time. At the Effective Time, CEI shall cause the
Surviving Corporation to establish an advisory board that will consist of
approximately equal numbers of individuals designated by the Company and
designated by CEI, which advisory board will provide advice and input regarding
the implementation of the Merger and the ongoing operations of the Surviving
Corporation.
Section 7.12 Post-Merger Operations.
(a) Corporate Offices. The Surviving Corporation shall maintain a
subsidiary office at a Rockland County, New York location, as the headquarters
of the Company subsidiary for three years following the Merger.
(b) Charities. The parties agree that provision of charitable
contributions and community support in the service areas of the Company and the
Company Subsidiaries serves a number of important goals. After the Effective
Time, CEI shall cause the Surviving Corporation to provide, directly or
indirectly, charitable contributions and community support within the service
areas of the Company and each of the Company utility Subsidiaries at levels
substantially comparable to and no less than the levels of charitable
contributions and community support provided by the Company and the Company
utility Subsidiaries within their service areas within the two-year period
immediately prior to the Effective Time.
Section 7.13 Expenses. Subject to Section 9.3, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, except that each of
CEI and the Company shall bear and pay one-half of the costs and expenses
incurred for the filings of the premerger notification and report forms under
the HSR Act (including filing fees) and for expert witnesses retained for the
purpose of advising and supporting joint regulatory filings.
Section 7.14 Further Assurances. Each party will, and will cause its
Subsidiaries to, execute such further documents and instruments and take such
further actions as may reasonably be requested by any other party in order to
consummate the Merger in accordance with the terms hereof, including the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the
transactions contemplated by this Agreement, including seeking to have any stay
or temporary restraining order entered by any court or other Governmental
Authority vacated or reversed.
Section 7.15 Shareholder Litigation. Each of the Company and CEI
shall give the other the reasonable opportunity to participate in the defense of
any shareholder litigation against the Company or CEI, as applicable, or any of
their respective directors relating to the transactions contemplated by this
Agreement.
ARTICLE VIII
CONDITIONS
Section 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing Date of the following
conditions, except, to the extent permitted by applicable law, that such
conditions may be waived in writing pursuant to Sections 9.5 and 9.6 by the
joint action of the parties hereto:
(a) Shareholder Approvals. The Company Shareholders' Approval shall
have been obtained.
(b) No Injunction. No temporary restraining order or preliminary or
permanent injunction or other order by any federal or state court preventing
consummation of the Merger shall have been issued and be continuing in effect,
and the Merger and the other transactions contemplated hereby shall not have
been prohibited under any applicable federal or state law or regulation.
(c) Statutory Approvals. The Company Required Statutory Approvals
and CEI Required Statutory Approvals shall have been obtained at or prior to the
Effective Time and such approvals shall have become Final Orders (as defined
below). A " Final Order" means action by the relevant regulatory authority which
has not been reversed, stayed, enjoined, set aside, annulled or suspended, with
respect to which any waiting period prescribed by law before the transactions
contemplated hereby may be consummated has expired, and as to which all
conditions to the consummation of such transactions prescribed by law,
regulation or order have been satisfied.
Section 8.2 Conditions to Obligation of CEI to Effect the Merger.
The obligation of CEI to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by CEI in writing pursuant to Sections 9.5 and 9.6:
(a) Performance of Obligations of the Company. The Company (and/or
its appropriate Subsidiaries) will have performed in all material respects its
agreements and covenants contained in or contemplated by this Agreement which
are required to be performed by it at or prior to the Effective Time.
(b) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and correct
(i) on and as of the date hereof and (ii) on and as of the Closing Date with the
same effect as though such representations and warranties had been made on and
as of the Closing Date (except for representations and warranties that expressly
speak only as of a specific date or time which need only be true and correct as
of such date or time) except in each of cases (i) and (ii) for such failures of
representations or warranties to be true and correct (without giving effect to
any materiality qualification or standard contained in any such representations
and warranties) which, individually or in the aggregate, would not have a
Company Material Adverse Effect.
(c) Closing Certificates. CEI shall have received a certificate
signed by the chief financial officer of the Company, dated the Closing Date, to
the effect that, to the best of such officer's knowledge, the conditions set
forth in Section 8.2(a) and Section 8.2(b) have been satisfied.
(d) Company Material Adverse Effect. No Company Material Adverse
Effect shall have occurred and there shall exist no fact or circumstance which
would have a Company Material Adverse Effect.
(e) Company Required Consents. The Company Required Consents the
failure of which to obtain would have a Company Material Adverse Effect shall
have been obtained.
(f) Statutory Approvals. The Company Required Statutory Approvals and
CEI Required Statutory Approvals shall have been obtained and shall have become
Final Orders and such Final Orders shall not impose terms or conditions, which,
individually or in the aggregate, would have (i) a Company Material Adverse
Effect or (ii) a CEI Material Adverse Effect.
(g) Redemption of Company Preference Stock. The Company shall have
redeemed all outstanding shares of Company Preference Stock in accordance with
the provisions of Section 2.1(d).
Section 8.3 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be further
subject to the satisfaction, on or prior to the Closing Date, of the following
conditions, except as may be waived by the Company in writing pursuant to
Sections 9.5 and 9.6:
(a) Performance of Obligations of CEI. CEI (and/or its appropriate
Subsidiaries) will have performed in all material respects its agreements and
covenants contained in or contemplated by this Agreement which are required to
be performed by it at or prior to the Effective Time.
(b) Representations and Warranties. The representations and
warranties of CEI set forth in this Agreement shall be true and correct (i) on
and as of the date hereof and (ii) on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date (except for representations and warranties that expressly speak
only as of a specific date or time which need only be true and correct as of
such date or time) except in each of cases (i) and (ii) for such failures of
representations or warranties to be true and correct (without giving effect to
any materiality qualification or standard contained in any such representations
and warranties) which, individually or in the aggregate, would not have a CEI
Material Adverse Effect.
(c) Closing Certificates. The Company shall have received a
certificate signed by the chief financial officer of CEI, dated the Closing
Date, to the effect that, to the best of such officer's knowledge, the
conditions set forth in Section 8.3(a) and Section 8.3(b) have been satisfied.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any
time prior to the Closing Date, whether before or after the Company
Shareholders' Approval contemplated by this Agreement:
(a) by mutual written consent of the Company and CEI;
(b) by CEI or the Company, if any state or federal law, order, rule
or regulation is adopted or issued, which has the effect, as supported by the
written opinion of outside counsel for such party, of prohibiting the Merger, or
by any party hereto if any court of competent jurisdiction in the United States
or any state shall have issued an order, judgment or decree permanently
restraining, enjoining or otherwise prohibiting the Merger, and such order,
judgment or decree shall have become final and nonappealable;
(c) by CEI or the Company, by written notice to the other party, if
the Effective Time shall not have occurred on or before November 30, 1999 (the "
Initial Termination Date"); provided, however, that the right to terminate the
Agreement under this Section 9.1(c) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before this date;
and provided, further, that if on the Initial Termination Date the conditions to
the Closing set forth in Sections 8.1(c) and/or 8.2(f) shall not have been
fulfilled but all other conditions to the Closing shall be fulfilled or shall be
capable of being fulfilled, then the Initial Termination Date shall be extended
to May 31, 2000;
(d) by CEI or the Company, by written notice to the other, if the
Company Shareholders' Approval shall not have been obtained at a duly held
Company Meeting, including any adjournments thereof;
(e) by CEI, by written notice to the Company, if there shall have
been any breach of any representation or warranty, or any breach of any covenant
or agreement of the Company hereunder, which breaches individually or in the
aggregate would have a Company Material Adverse Effect, and such breach shall
not have been remedied within 20 business days after receipt by the Company of
notice in writing from CEI, specifying the nature of such breach and requesting
that it be remedied or CEI shall not have received adequate assurance of a cure
of such breach within such 20 business-day period;
(f) by the Company, by written notice to CEI, if there shall have
been any breach of any representation or warranty, or any breach of any covenant
or agreement of CEI hereunder, which breaches individually or in the aggregate
would have a CEI Material Adverse Effect, and such breach shall not have been
remedied within 20 business days after receipt by CEI of notice in writing from
the Company, specifying the nature of such breach and requesting that it be
remedied or the Company shall not have received adequate assurance of a cure of
such breach within such 20 business-day period;
(g) by the Company, in accordance with clause (iii) of the proviso to
the first sentence of Section 7.10(a); provided that, in order for the
termination of this Agreement pursuant to this paragraph (g) to be deemed
effective, the Company shall have complied with all provisions of Section 7.10,
including the notice provisions therein, and with the applicable requirements,
including the payment of the Termination Fee (as defined in Section 9.3(a)), of
Section 9.3;
Section 9.2 Effect of Termination. In the event of termination of
this Agreement by either the Company or CEI pursuant to Section 9.1 there shall
be no liability on the part of either the Company or CEI or their respective
officers or directors hereunder, except that Section 7.13, Section 9.2 and
Section 9.3, the agreement contained in the next to last sentence of Section
7.1, Section 10.2 and Section 10.8 shall survive the termination.
Section 9.3 Termination Fee; Expenses.
(a) Termination Fee Payable by the Company. If this Agreement (i) is
terminated by the Company pursuant to Section 9.1(g) or (ii) is terminated by
the Company or CEI pursuant to Section 9.1(d) as a result of the Company
Shareholders' Approval not being obtained and at or prior to the Company Meeting
(or any subsequent meeting of the Company's shareholders at which it is proposed
that the Merger be approved) there shall have been an Acquisition Proposal
(whether or not conditional and whether or not such offer shall have been
rejected or shall have been withdrawn prior to the time of such termination or
of the meeting) and, solely in the case of any termination described in this
clause (ii) of this paragraph (a), within two and one-half years of such
termination the Company or any Com-
pany Subsidiary enters into any Acquisition Agreement or consummates any
Acquisition Proposal (provided, that for the purposes of this Section 9.3(a)(ii)
the terms " Acquisition Agreement" and " Acquisition Proposal" shall have the
meanings assigned to such terms in Section 7.10 except that the references to
"15%" in the definition of "Acquisition Proposal" in Section 7.10 shall be
deemed to be references to "35%"), then, in each case, the Company shall
immediately pay to CEI by wire transfer of same day funds a termination fee
equal to $25 million in cash (the " Termination Fee").
(b) Payment of Expenses. If this Agreement is terminated pursuant to
Section 9.1(d) or 9.1(e), then the Company shall promptly (but not later than
ten business days after receiving notice of termination) pay to CEI in cash by
wire transfer of same day funds an amount equal to all documented out-of-pocket
expenses and fees incurred by CEI (including, without limitation, fees and
expenses payable to all legal, accounting, financial, and other professionals
arising out of, in connection with or related to the transactions contemplated
by this agreement) not in excess of $5 million. If this Agreement is terminated
pursuant to Section 9.1(f), then CEI shall promptly (but not later than ten
business days after receiving notice of termination), pay to the Company in cash
by wire transfer of same day funds an amount equal to all documented out-of-
pocket expenses and fees incurred by the Company (including, without limitation,
fees and expenses payable to all legal, accounting, financial, and other
professionals arising out of, in connection with or related to the transactions
contemplated by this agreement) not in excess of $5 million. The Company and
CEI each agree that notwithstanding any provisions in this Agreement to the
contrary, including Section 9.2, each of the Company and CEI retain their
remedies at law or in equity with respect to breaches of this Agreement and that
no termination which results from the breach by a party of any of its
representations, warranties, covenants or agreements set forth in this Agreement
shall relieve such party of any liability or damages, including any such case in
which a Termination Fee is, or any expenses of CEI or the Company in connection
with the transactions contemplated by this Agreement are, payable pursuant to
this Section 9.3 to CEI or the Company, as the case may be (the " Injured
Party"), to the extent any such liability or damage suffered by the Injured
Party exceeds the amount of any Termination Fee and/or any expenses payable
pursuant to this Section 9.3 to the Injured Party.
(c) Expenses. The parties agree that the agreements contained in this
Section 9.3 are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty. Notwithstanding
anything to the contrary contained in this Section 9.3, if one party fails to
promptly pay to the other any fees or expenses due under Sections 9.3(a) or (b),
in addition to any amounts paid or payable pursuant to such sections, the
defaulting party shall pay the costs and expenses (including legal fees and
expenses) in connection with any action, including the filing of any lawsuit or
other legal action, taken to collect payment, together with interest on the
amount of any unpaid fees or expenses at the publicly announced prime rate of
The Chase Manhattan Bank from the date such fees or expenses were required to be
paid.
Section 9.4 Amendment. This Agreement may be amended by the Boards of
Directors of the parties hereto, at any time before or after the Company
Shareholders' Approval and prior to the Effective Time, but after the Company
Shareholders' Approval, no such amendment which under applicable law would
require the further approval of the Company's shareholders shall be made without
obtaining such approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 9.5 Waiver. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) subject to the first sentence of Section 9.4, waive
compliance with any of the agreements or conditions contained herein, to the
extent permitted by applicable law. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of any party
to this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.
Section 9.6 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 9.1, an amendment of this
Agreement pursuant to Section 9.4 or an extension or waiver pursuant to Section
9.5 shall, in order to be effective, require, in the case of the Company or CEI,
action by its Board of Directors, or a duly authorized committee of its Board of
Directors to the extent permitted by law.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival; Effect of Representations and
Warranties. No representations or warranties in this Agreement shall survive
the Effective Time.
Section 10.2 Brokers. The Company represents and warrants that,
except for DLJ, whose fees have been disclosed to CEI prior to the date hereof,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The Company has made available to CEI prior to the execution of
this Agreement a copy of the engagement letter of DLJ and, other than as set
forth in such engagement letter, has no understanding or agreement with DLJ
regarding any fees or expenses in connection with the Merger or the transactions
contemplated by this Agreement. CEI represents and warrants that, except for
Salomon Smith Barney, no broker, finder or investment banker is entitled to any
brokerage, finder's or other
fee or commission in connection with the Merger or the transactions contemplated
by this Agreement based upon arrangements made by or on behalf of CEI.
Section 10.3 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) when delivered personally, (b)
when sent by reputable overnight courier service, or (c) when telecopied (which
is confirmed by copy sent within one business day by a reputable overnight
courier service) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(i) If to the Company, to
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza
Pearl River, New York 10965
Attn: D. Louis Peoples
Telecopy: (914) 577-6910
(914) 352-6000
with a copy to
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attn: Sheldon Adler, Esq.
Telecopy: (212) 735-2000
Telephone: (212) 735-3000
and
(ii) if to CEI, to
Consolidated Edison, Inc.
4 Irving Place
New York, New York 10003
Attn: Mr. Kevin Burke
John D. McMahon, Esq.
Telecopy: (212) 677-0601
Telephone: (212) 460-1110
with a copy to
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
Attn: George W. Bilicic, Jr., Esq.
Telecopy: (212) 474-3700
Telephone: (212) 474-1000
Section 10.4 Miscellaneous. This Agreement (including the documents
and instruments referred to herein) and the Confidentiality Agreement (other
than paragraph 11 thereof relating to the parties' standstill obligations) (a)
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof (including paragraph 11 of the
Confidentiality Agreement relating to the parties' standstill obligations) other
than the agreement between the Company and CECONY with respect to the
divestiture of their respective interests in the Bowline Point Generating
Station, (b) shall not be assigned by operation of law or otherwise and (c)
shall be governed by and construed in accordance with the laws of the State of
New York applicable to contracts executed in and to be fully performed in such
State, without giving effect to its conflicts of law rules or principles. The
Company hereby waives the restrictions applicable to CEI pursuant to paragraph
11 of the Confidentiality Agreement relating to the parties' standstill
obligations provided, however that such waiver shall lapse and the provisions of
paragraph 11 of the Confidentiality Agreement will be binding on CEI if (i) this
Agreement is terminated by CEI and (ii) the Termination Fee is required to be
paid pursuant to Section 9.3(a) to CEI (subject, in such case, to payment of the
Termination Fee). If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect. Upon such determination that any term or other provisions
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
Section 10.5 Interpretation. When a reference is made in this
Agreement to Sections or Exhibits, such reference shall be to a Section or
Exhibit of this Agreement, respectively, unless otherwise indicated. The table
of contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation." The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.
Section 10.6 Counterparts; Effect. This Agreement may be executed
in one or more counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same agreement and each of which
shall only become effective when one or more counterparts have been signed by
each party and delivered to the other parties.
Section 10.7 Parties' Interest; No Third Party Beneficiaries. This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto, and, except for rights of Indemnified Parties as set forth in Section
7.5, nothing in this Agreement, express or implied, is intended to confer upon
any other person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
Section 10.8 Waiver of Jury Trial. Each party to this Agreement
waives, to the fullest extent permitted by applicable law, any right it may have
to a trial by jury in respect of any action, suit or proceeding arising out of
or relating to this Agreement.
Section 10.9 Enforcement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the Borough of Manhattan in the City of New York or, if such court
does not have jurisdiction, in any New York state court located in the Borough
of Manhattan in the City of New York, this being in addition to any other remedy
to which they are entitled at law or in equity. In addition, each of the
parties hereto (a) consents to submit itself to the personal jurisdiction of any
federal court located in the Borough of Manhattan in the City of New York or, if
such court does not have jurisdiction, any New York state court located in the
Borough of Manhattan in the City of New York in the event any dispute arises out
of this Agreement or any of the transactions contemplated by this Agreement, (b)
agrees that it will not attempt to deny such personal jurisdiction by motion or
other request for leave from any such court and (c) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal court located
in the Borough of Manhattan in the City of New York or, if such court does not
have jurisdiction, any New York state court located in the Borough of Manhattan
in the City of New York.
IN WITNESS WHEREOF, each of the Company, CEI and the Merger Subsidiary
have caused this Agreement to be signed by their respective officers thereunto
duly authorized as of the date first written above.
Orange and Rockland Utilities, Inc.
By: /s/ D. L. Peoples
-----------------
Name: Denton Louis Peoples
Title: Vice Chairman and Chief Executive Officer
Consolidated Edison, Inc.
By: /s/ Joan S. Freilich
--------------------
Name: Joan S. Freilich
Title: Executive Vice President and Chief
Financial Officer
C Acquisition Corp.
By:/s/ Kevin Burke
---------------
Name: Kevin Burke
Title: President
EXHIBIT D-1
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Consolidated Edison Company of )
New York, Inc. and Orange ) Docket No. EC98-___________-000
and Rockland Utilities, Inc. )
APPLICATION OF CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. AND ORANGE AND ROCKLAND
UTILITIES, INC. AND ITS JURISDICTIONAL SUBSIDIARIES
FOR APPROVAL OF MERGER AND RELATED AUTHORIZATIONS
John D. McMahon G. D. Caliendo
Senior Vice President and General Counsel Senior Vice President and General Counsel
Consolidated Edison Company Orange and Rockland Utilities, Inc.
of New York, Inc. One Blue Hill Plaza
4 Irving Place Pearl River, New York 10965
New York, New York 10003 Phone: (914) 352-6000
Phone: (212) 460-4600
Douglas G. Green
Steven J. Ross
Jane I. Ryan
Steptoe & Johnson LLP
1330 Connecticut Avenue, N.W.
Washington, DC 20036
Phone: (202) 429-3000
Fax: (202) 429-3902
September 9, 1998
TABLE OF CONTENTS
-----------------
I. INTRODUCTION.......................................................................................... 1
II. EXECUTIVE SUMMARY..................................................................................... 3
A. The Merger Will Not Adversely Affect Competition............................................. 3
1. Horizontal Effects.................................................................. 4
2. Interim Mitigation Measures......................................................... 5
3. Vertical Effects.................................................................... 5
4. Conclusion.......................................................................... 6
B. The Merger Will Not Subject Customers To Increased Rates..................................... 7
C. The Merger Will Not Impair The Effectiveness Of Commission And State Regulation.............. 8
III. THE APPLICANTS........................................................................................ 9
A. CEI, Con Edison, And Their Subsidiaries...................................................... 9
1. CEI and Con Edison.................................................................. 9
2. Con Edison Subsidiaries............................................................. 10
3. Other CEI Subsidiaries.............................................................. 10
4. Con Edison's Facilities Pre-Divestiture............................................. 12
5. Con Edison's Generation Divestitures................................................ 13
B. Orange And Rockland And Its Subsidiaries..................................................... 14
1. Orange and Rockland and Its Utility Subsidiaries.................................... 14
2. Other Orange and Rockland Subsidiaries.............................................. 15
3. Orange and Rockland's Facilities Pre-Divestiture.................................... 16
4. Orange and Rockland's Generation Divestitures....................................... 17
C. Interrelationship Of The Applicants' Electric Systems........................................ 18
IV. DESCRIPTION OF THE MERGER............................................................................. 19
V. THE MERGER IS CONSISTENT WITH THE PUBLIC INTEREST..................................................... 21
A. Effect On Competition........................................................................ 21
1. Horizontal Effects.................................................................. 21
a. Appendix A Screening Analysis.............................................. 23
b. Proposed Interim Mitigation Measures....................................... 36
2. The Commission Need Not Wait Until it Rules on Orange and Rockland's Section 203
Divestiture Filing to Rule on the Merger............................................ 37
i
3. Vertical Effects.......................................................................... 38
a. The Applicants Lack Market Power Over Supplies of Commodity Gas.................. 39
b. The Merger Will Not Give the Merged Company the Ability to Exercise Market
Power Over Electric Generators Via Control Over Gas Transportation............... 41
c. The Merger Will Not Create the Incentive or Ability to Exercise Market Power
Through Discriminatory Local Gas Transportation Practices........................ 42
d. The Merger Raises None of the Concerns on Which the Commission Focused in
Enova/Pacific Enterprises........................................................ 44
B. Effect On Rates.................................................................................... 45
C. Effect On Regulation............................................................................... 48
VI. THE MERGER ACCOUNTING....................................................................................... 49
VII. OTHER FILINGS............................................................................................... 51
A. Other Federal Filings.............................................................................. 51
1. SEC....................................................................................... 51
2. Hart-Scott-Rodino......................................................................... 51
B. State Filings...................................................................................... 52
1. New York.................................................................................. 52
2. New Jersey................................................................................ 52
3. Pennsylvania.............................................................................. 52
VIII. INFORMATION SUBMITTED UNDER THE ACQUISITION AND MERGER FILING REQUIREMENTS OF 18 C.F.R.ss.33.2.............. 52
A. Section 33.2(a).................................................................................... 52
B. Section 33.2(b).................................................................................... 53
C. Section 33.2(c).................................................................................... 53
D. Section 33.2(d).................................................................................... 54
E. Section 33.2(e).................................................................................... 54
F. Section 33.2(f).................................................................................... 54
G. Section 33.2(g).................................................................................... 55
H. Section 33.2(h).................................................................................... 55
I. Section 33.2(i).................................................................................... 55
J. Section 33.2(j).................................................................................... 56
K. Section 33.2(k).................................................................................... 56
ii
L. Section 33.2(E11)............................................................................... 56
IX. REQUIRED EXHIBITS UNDER 18 C.F.R.ss.33.3................................................................. 56
X. PROCEDURAL MATTERS....................................................................................... 57
A. Request For Approval Without Hearing............................................................ 57
B. Closing Date.................................................................................... 57
XI. CONCLUSION............................................................................................... 57
iii
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Consolidated Edison Company of )
New York, Inc. and Orange and )
Rockland Utilities, Inc. ) Docket No. EC98-___________-000
APPLICATION OF CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. AND ORANGE AND ROCKLAND
UTILITIES, INC. AND ITS JURISDICTIONAL SUBSIDIARIES
FOR APPROVAL OF MERGER AND RELATED AUTHORIZATIONS
I. INTRODUCTION
------------
Pursuant to section 203 of the Federal Power Act ("FPA"),/1/ and part
33 of the regulations of the Federal Energy Regulatory Commission ("FERC" or
"Commission"),/2/ Consolidated Edison Company of New York, Inc. ("Con Edison"),
a wholly-owned subsidiary of Consolidated Edison, Inc. ("CEI"), and Orange and
Rockland Utilities, Inc. ("Orange and Rockland"), on behalf of itself and its
wholly-owned jurisdictional utility subsidiaries (collectively, the
"Applicants"), submit this Application for the Commission's approval of CEI's
stock purchase acquisition of Orange and Rockland (the "Merger") and for related
authorizations. The Applicants' schedule provides for consummation of the Merger
on or about March 31, 1999. This Application includes all information and
exhibits required pursuant to part 33 of the Commission's regulations and the
Commission's December 1996
_____________________
/1/ 16 U.S.C. (S) 824b (1994).
/2/ 18 C.F.R. (S) 33 (1998).
1
Merger Policy Statement ("Policy Statement")./3/ The Agreement and Plan of
Merger, dated as of May 10, 1998 (the "Merger Agreement"), is included in
Exhibit H.
Pursuant to the Merger Agreement, Orange and Rockland will merge with
a special purpose subsidiary wholly owned by CEI. Orange and Rockland will
survive the Merger and retain its existing subsidiaries. Orange and Rockland
shall thereafter continue its operations as a wholly-owned subsidiary of CEI
separate from CEI's wholly-owned public utility subsidiary, Con Edison.
As demonstrated in this Application and accompanying testimony and
exhibits, the Merger is consistent with the public interest. Moreover, the
Merger is consistent with the current restructuring of the electric utility
industry, including state-level retail choice proposals and the Commission's
Independent System Operator ("ISO") policies. Accordingly, the Applicants
respectfully request that the Commission promptly approve the Merger, without a
hearing,/4/ and issue all other necessary related authorizations./5/
_______________________
/3/ Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592, Docket No. RM96-6-000, 61 Fed. Reg.
68,595 (Dec. 30, 1996), III FERC Stats. & Regs., Regulations Preambles (P)
31,044 (1996) ("Policy Statement").
/4/ If a hearing is ordered, the Applicants respectfully request that the
Commission limit the hearing to specifically identified issues and conduct it
under procedures that will allow the Commission to issue its final order
sufficiently in advance of the expected March 31, 1999 closing date.
/5/ The Applicants are concurrently filing with this Application: (1) a
joint open access transmission tariff ("joint OATT") that will provide access to
the transmission facilities of Con Edison and Orange and Rockland at single
system rates and under terms and conditions consistent with the pro forma tariff
set forth in Order No. 888 and modified in Order Nos. 888-A and 888-B; Promoting
Wholesale Competition Through Open Access Non-Discriminatory Transmission
Services by Public Utilities and Recovery of Stranded Costs by Public Utilities
and Transmitting Utilities, Order No. 888, 61 Fed. Reg. 21,540 (May 10, 1996),
[Regs. Preambles 1991-1996] FERC Stats. & Regs. (P) 31,036 (1996), order on
reh'g, Order No. 888-A, 62 Fed. Reg. 12,274 (Mar. 14, 1997), III FERC Stats. &
Regs. (P) 31,048 (1997), order on reh'g, Order No. 888-B, 62 Fed. Reg. 64,688
(Dec. 9,
(Continued...)
2
II. EXECUTIVE SUMMARY
-----------------
The Applicants expect the Merger to produce significant benefits
resulting from operating efficiencies, mostly in the administrative areas of the
companies, and economies of scale. The combined resources of Con Edison and
Orange and Rockland will contribute to overall business success in many areas,
including utility operations, product development, and corporate services. The
Merger is expected to lower the costs of providing energy and related services
when compared to the stand-alone costs of Con Edison and Orange and Rockland,
and will improve the efficiency of the combined companies by increasing the
customer base and providing synergies.
In accordance with the Policy Statement, this Application, together
with the supporting testimony and exhibits, demonstrate that the Merger will not
create anticompetitive effects, increase customer rates, or impair the
effectiveness of regulation.
A. THE MERGER WILL NOT ADVERSELY AFFECT COMPETITION
Orange and Rockland is a relatively small utility that has agreed to
divest all of its owned generation. Its divestiture plan has been approved by
the New York Public Service Commission ("NYPSC"), and its auction process is
already under way, with winning bidders to be selected on or about October 15,
1998. Because CEI is acquiring a company (Orange and Rockland) that is
divesting all of its owned generation, the Merger will not increase
concentration in generation. Thus, it will have no adverse effect on
competition for
______________________
1997), 81 FERC (P) 61,248 (1997), order on reh'g, Order No. 888-C, 82
FERC (P) 61,046 (1998) (together, "Order No. 888"); and (2) revised Standards of
Conduct for Orange and Rockland consistent with the Commission's Order No. 889
and promulgated as Rule 37.4, 18 C.F.R. (S) 37.4 (1998).
3
sales of electricity. Moreover, the Merger is taking place in an environment of
decreasing concentration and increasing competition in generation. The fact that
Con Edison also is divesting essentially all of its non-nuclear generation
facilities and that both Orange and Rockland and Con Edison will be participants
in the New York ISO ("NYISO") supports the conclusion that the Merger will not
harm competition.
1. HORIZONTAL EFFECTS
The Applicants applied the merger screening criteria set forth in
Appendix A to the Policy Statement to several scenarios -- each making a
different assumption about the timing of the Merger closing vis-a-vis the
completion of Orange and Rockland's and Con Edison's generation divestitures.
Applicants also analyzed the capacity market that will exist under the NYISO
rules. The results demonstrate that after the Orange and Rockland generation
divestiture, expected to be completed by May 31, 1999, the Merger passes the
Commission's screening criteria by an ample margin even if the Con Edison
generation divestiture has not yet occurred.
To the extent that the Merger closes before Orange and Rockland's
generation divestiture is completed, the screening criteria for Total and
Uncommitted Capacity are met; however, the screening criteria for Economic and
Available Capacity would be exceeded by a modest amount in some periods. The
Applicants' analysis demonstrates that they will not possess the ability or the
incentive to exercise market power in the event that there is a brief interim
period prior to Orange and Rockland's divestiture. Nonetheless, to eliminate
any possible market power concerns, the Applicants have proposed interim
mitigation measures to be in effect in the event that there is a brief interval
between the Merger closing and the
4
completion of Orange and Rockland's generation divestiture. This interim period
is expected to be only two months.
2. INTERIM MITIGATION MEASURES
To eliminate any possible market power concerns during any such
interim period, the Applicants have committed that during any such interim they
will: (1) bid all of their respective generation that is sold in the wholesale
energy market at a capped bid that is effectively its variable costs; (2) bid
all of their respective generation that is sold in the NYISO capacity market at
a capped bid that is its avoidable capacity costs; and (3) maintain the
availability of this generation at historical levels. These interim measures
will assure that the Applicants cannot exercise market power. Thus, the Merger
readily passes all of the Appendix A screens post-Orange and Rockland's
divestiture and market power concerns are completely eliminated in the interim.
3. VERTICAL EFFECTS
The Merger will not create or enhance vertical market power. The
primary vertical issue on which the Commission has focused in mergers involving
electric/gas distribution companies has been whether the merger will give the
merged company an increased incentive or ability to manipulate fuel supplies to
favor its own gas generation over that of its rivals. There are several reasons
why the Merger plainly will have no such effect.
First, the Applicants have no market power over fuel supplies.
Neither owns any gas production facilities or any significant storage
facilities. Orange and Rockland does not even engage in the gas marketing
business, and Con Edison is a small player. Thus, a generation competitor would
have no difficulty in purchasing commodity gas from a
5
multiplicity of sellers. Second, the Applicants own no long-haul gas
transportation facilities and do not have market power over the transportation
of gas to potential competitors in the relevant downstream electric markets.
Third, the Applicants today are local gas distribution companies subject to
state public utility commission regulation. The Merger will make no change in
this status or their incentives. Fourth, the Applicants are divesting
essentially all of the gas-fired generation to which they provide distribution
service. Thus, the Merger will not give either company any gas generation that
it could discriminatorily favor, even hypothetically. Finally, the Applicants
are subject to code of conduct requirements before the Commission and the NYPSC
that provide further assurance that no vertical concerns will arise.
For these reasons, and others described in the supporting testimony,
the concerns that the Commission focused on in the Enova/Pacific Enterprises
merger/6/ are not present here. The Merger does not create or enhance vertical
market power.
4. CONCLUSION
This is clearly a merger that will not harm competition. With Orange
and Rockland divesting all of its generation and Con Edison divesting
essentially all of its non-nuclear generation, the merged company will
essentially be a wires company -- one that, as a result of the combination of
the contiguous systems, will be a more efficient transmission provider. The
Commission need not delay approval of this efficiency-enhancing Merger until
Orange and Rockland's divestiture is completed. There will be separate FPA
section
_____________________
/6/ San Diego Gas & Elec. Co., 79 FERC (P) 61,372 (1997), aff'd, 83 FERC
(P) 61,199 (1998).
6
203 applications filed as part of that divestiture in which FERC will have a
full opportunity to assure that any purchaser of Orange and Rockland's assets
meets the public interest and market power standards incorporated in the Policy
Statement. Rather, the Commission should promptly approve the Merger without a
hearing in accordance with the Policy Statement, thereby sending a signal that
merging firms that are divesting the bulk of their generation will receive the
same expeditious treatment as other merger applicants.
B. THE MERGER WILL NOT SUBJECT CUSTOMERS TO INCREASED RATES
The Merger will not adversely affect wholesale sales rates because Con
Edison has no wholesale requirements customers and Orange and Rockland's only
wholesale requirements contracts are with its wholly-owned public utility
subsidiaries, Rockland Electric Company ("RECO") and Pike County Light & Power
Company ("Pike"). Customers of RECO and Pike will have a choice of supplier
under retail access plans effective May 1, 1999. This creates the equivalent of
an "open season" for those customers.
The Merger will not adversely affect transmission rates because the
NYISO Open Access Transmission Tariff ("the ISO tariff"), which will supersede
the individual OATTs of Con Edison and Orange and Rockland, is expected to be in
effect prior to the consummation of the Merger. In the event that the Merger is
consummated prior to the effective date of the ISO tariff, the Applicants
propose to provide transmission service under the joint OATT filed concurrently
with this Application.
The joint OATT charges non-pancaked transmission rates based on the
zone to which power is delivered. Under the joint OATT, the service areas of
Con Edison and Orange and Rockland are treated, for rate purposes, as separate
zones. Customers will pay
7
one transmission rate, based on the point of delivery or point of departure, and
will not pay any additional charge to transmit power through or across the other
zone. The use of this zonal approach (which does not result in any additional
charges for customers during an interim period) is consistent with Commission
precedent in other merger proceedings.
C. THE MERGER WILL NOT IMPAIR THE EFFECTIVENESS OF COMMISSION AND STATE
REGULATION
The Merger will not impair state or federal regulation. The Merger
will not shift authority from the Commission to the Securities and Exchange
Commission ("SEC") because post-merger, CEI and Orange and Rockland will remain
exempt public utility holding companies under the Public Utility Holding Company
Act of 1935 ("PUHCA"). Thus, post-merger transactions between Con Edison and
Orange and Rockland and their affiliates will remain subject to the Commission's
oversight and policies. In the unlikely event that the SEC were to require CEI
to become a registered holding company, the Applicants commit that, for FERC
ratemaking purposes, they will follow FERC's policies regarding the treatment of
costs and revenues associated with intra-company services.
The Applicants have filed petitions requesting the public utility
commissions in the relevant state jurisdictions -- New York, New Jersey, and
Pennsylvania -- to approve the Merger. The Merger thus will not impair state
regulation.
Because the Merger satisfies all of the requirements of FPA section
203, the Commission's regulations, and the Policy Statement, the Commission
should find it to be consistent with the public interest and approve it on an
expedited basis.
8
III. THE APPLICANTS
--------------
A. CEI, CON EDISON, AND THEIR SUBSIDIARIES
1. CEI AND CON EDISON
CEI was organized in 1997, and is a New York corporation. It is an
exempt public utility holding company under section 3(a)(1) of PUHCA. On January
1, 1998, CEI became the holding company for Con Edison, and presently owns all
of Con Edison's issued and outstanding common stock. Con Edison is a New York
corporation with its principal place of business at 4 Irving Place, New York,
New York 10003, and is a public utility under the FPA.
Con Edison supplies electric service in all of New York City (except
part of the Borough of Queens) and most of Westchester County, New York to
approximately three million customers. The Con Edison system has a projected
peak load of 9,585 MW in 1998. Currently, Con Edison provides retail access to
approximately 1,000 MW of customer load, with another 1,000 MW to have retail
access on April 1, 1999, and the balance gaining access thereafter. Con Edison
also supplies gas to approximately one million customers in the Boroughs of
Manhattan, the Bronx and parts of the Borough of Queens and Westchester County,
New York, and steam to approximately 1,900 customers in part of Manhattan.
The NYPSC regulates Con Edison's retail rates, service, accounts,
issuance of securities, and certain other aspects of its business. Pursuant to
the FPA, the Commission has jurisdiction over certain of Con Edison's electric
and gas utility facilities and operations, wholesale sales of power, and related
transactions.
9
2. CON EDISON SUBSIDIARIES
Con Edison has two wholly-owned subsidiaries that own real property in
New York State: Davids Island Development Corporation, and D.C.K. Management
Corporation. Con Edison owns a 28.8 percent interest in Honeoye Storage
Corporation, a New York corporation, which owns and operates a gas storage
facility in western New York. This facility constitutes less than one percent
of the storage capacity in the region.
3. OTHER CEI SUBSIDIARIES
Consolidated Edison Solutions, Inc. ("CES") is a New York corporation
and a wholly-owned subsidiary of CEI. CES provides wholesale and retail energy
and related services. CES also has: (a) a 33 1/3 percent interest in Inventory
Management & Distribution Company, Inc., an energy marketing firm incorporated
in Delaware with its principal place of business in Houston, Texas; and (b) a
14.4 percent interest in Remote Source Lighting International, Inc., a lighting
technology company incorporated in Delaware, with its principal place of
business in Morrisville, North Carolina.
Consolidated Edison Development, Inc. ("CEDI") is a New York
corporation and a wholly-owned subsidiary of CEI. CEDI invests in foreign and
domestic energy and other infrastructure projects and markets Con Edison's
technical services. CEDI has four direct subsidiaries: (a) Con Edison
Development, Guatemala, Ltd., a Cayman Islands corporation that invests in
energy projects in Central America; (b) IEP Global Development, LLC, a limited
liability Delaware corporation (of which CEDI owns a 50 percent interest) that
develops and acquires electric power generation, transmission, and distribution
projects outside of the United States; (c) Consolidated Edison Leasing, Inc., a
Delaware corporation
10
that invests in lease transactions; and (d) CED Ada, Inc. ("CEDA"), a Delaware
corporation. CEDA owns an approximate 96 percent interest in CED/DELTA Ada, LLC,
a Delaware limited liability company, which in turn owns a 49.5 percent limited
partnership interest and a 5 percent general partnership interest in Ada
Cogeneration Limited Partnership ("ACLP"), a Michigan limited partnership. ACLP
owns a 30 megawatt gas-fired cogeneration facility located in Ada, Michigan.
CEDI owns all of the issued and outstanding shares of Carson
Acquisition, Inc. ("Carson Acquisition"), a Delaware corporation. The purpose
of Carson Acquisition is to own an approximate 47.75 percent interest in a
series of limited liability companies, which will in turn acquire and own all of
the limited partnership and general partnership interest in Carson Cogeneration
Company ("Carson Cogen"), a California limited partnership. Carson Cogen is a
lessee of a leasehold interest in a 42 megawatt cogeneration facility in Carson,
California. This acquisition is expected to close in September 1998./7/
Consolidated Edison Energy, Inc. ("CEE") is a New York corporation and
a wholly-owned subsidiary of CEI. CEE was formed in late 1997, to invest in,
operate, and market, the output of electric energy supply facilities in the
United States and to provide specialized wholesale energy services in the
electric power and natural gas markets.
_____________________
/7/ CEDI also owns all of the issued and outstanding shares of Con Edison
Development Guatemala Acquisition and Finance, Ltd. ("CEDGAF"), a corporation
organized under the laws of the Cayman Islands. At present, CEDGAF is a shell
corporation, meaning that it has no assets or operations. It was organized in
connection with a potential investment in Guatemala, which was never made.
11
Consolidated Edison Communications, Inc. ("CECI") is a New York
corporation and a wholly-owned subsidiary of CEI. CECI was formed in late 1997,
to own, operate, and invest in facilities used for telecommunications or
otherwise to compete in the telecommunications industry.
4. CON EDISON'S FACILITIES PRE-DIVESTITURE
ELECTRIC GENERATION: As of early 1999, prior to its divestitures, Con
Edison will have 7,001 MW of capacity that it owns and operates, 1,292 MW of
entitlements to jointly owned units, 2,059 MW of non-utility generation, and 733
MW of other contracts, including a contract for 208 MW of the output of the
Indian Point 3 and Poletti stations from the New York Power Authority ("NYPA")
that expires during 1999.
TRANSMISSION AND DISTRIBUTION: Con Edison's transmission system has
approximately 432 miles of overhead circuits and 378 miles of underground
circuits, most of which operate at 138 kV and 345 kV. It has approximately 267
miles of radial subtransmission circuits operating at 138 kV. Con Edison has 14
transmission substations, which are supplied by circuits operating at 69 kV and
above and have a total transformer capacity of 15,731 MVA. All of Con Edison's
transmission facilities are located in New York City and Westchester, Orange,
Rockland, Putnam, and Dutchess Counties in New York State. Con Edison owns
various electric distribution substations and facilities located throughout New
York City and Westchester County, New York. Con Edison's distribution system
includes 293 distribution substations, with a transformer capacity of 20,168
MVA, 32,368 miles of overhead distribution lines, and 87,455 miles of
underground distribution lines.
12
GAS FACILITIES: Con Edison distributes natural gas to its customers
through approximately 4,200 miles of mains and 367,000 service lines.
STEAM FACILITIES: Con Edison generates steam for distribution in the
Borough of Manhattan in New York City at three steam-electric stations and five
"steam-only" plants. Con Edison supplies steam to its customers through
approximately 86 miles of transmission and distribution mains.
5. CON EDISON'S GENERATION DIVESTITURES
The NYPSC approved Con Edison's electric generation Divestiture Plan
in orders issued July 21, and August 5, 1998. Under the Plan, Con Edison will
auction off its electric generation in three bundles:
. 1,434 MW consisting of the Arthur Kill generating station and
Astoria gas turbines ("Arthur Kill bundle");
. 2,168 MW consisting of the Ravenswood generating station and gas
turbines ("Ravenswood bundle"); and
. 1,858 MW consisting of the Astoria generating station plus the
Gowanus and Narrows turbines ("Astoria bundle").
No purchaser may purchase more than one of the three bundles. Closing on the
sales of these three bundles is expected by the end of the first quarter of
1999.
Under its Steam System Plan, announced on April 15, 1998, Con Edison
will auction off the remainder of its generation in New York City in a fourth
bundle, consisting of 463 MW of units that produce electricity and steam for Con
Edison's steam delivery system ("Steam electric bundle"). Con Edison plans to
close on the sales of the fourth bundle by the end of 1999.
13
The NYPSC, in its July 21, 1998 Order, gave Con Edison the option of
having its unregulated affiliate participate in the auction to purchase one of
the initial three bundles. On July 24, 1998, Con Edison advised the NYPSC that
its affiliate would forego its right to participate in the auction./8/
Accordingly, Con Edison plans to divest all of its in-City generation to third
parties. As part of its Divestiture Plan, Con Edison expects to transfer
certain step-up transformers and other jurisdictional facilities. Thus, the
transfers ultimately will require the Commission's approval under FPA section
203.
In addition, Con Edison will divest its 810 MW interest in Orange and
Rockland's Bowline Point generating station as part of Orange and Rockland's
auction of its generation. Similarly, Con Edison has announced its intention to
divest its 400 MW interest in Central Hudson Gas & Electric Corporation's
Roseton station in conjunction with Central Hudson's divestiture auction.
B. ORANGE AND ROCKLAND AND ITS SUBSIDIARIES
1. ORANGE AND ROCKLAND AND ITS UTILITY SUBSIDIARIES
Orange and Rockland, a New York corporation, is an electric and gas
distribution utility that provides service to about 200,000 electric and 114,000
gas customers in New York in a service area covering all of Rockland County,
most of Orange County, and part of Sullivan County. Orange and Rockland's
historic peak load is 1143 MW. All of
_______________
/8/ Con Edison's relinquishment of its affiliates' right to participate in
the auction was based on certain understandings as to the treatment of any gain
on the sales. On August 5, 1998, the NYPSC approved Con Edison's proposal in
this regard, subject to one modification, which Con Edison accepted on August
10, 1998. Con Edison, accordingly, is proceeding with the divestiture.
14
Orange and Rockland's customers are eligible for retail access for energy
supplies, and they will become eligible for retail access for capacity on May 1,
1999.
Orange and Rockland wholly owns two public utility subsidiaries, RECO,
a New Jersey corporation, and Pike, a Pennsylvania corporation. RECO supplies
electricity to about 67,000 customers in New Jersey in the northern parts of
Bergen and Passaic Counties and small areas in northern Sussex County. Pike
supplies electricity to about 4,100 customers and gas to about 1,000 customers
in the northeastern corner of Pike County, Pennsylvania.
Orange and Rockland is regulated by the NYPSC, RECO by the New Jersey
Board of Public Utilities, and Pike by the Pennsylvania Public Utility
Commission ("PAPUC") as to retail rates, service, and accounts, and issuance of
securities, and in other respects as to service provided in those individual
states. The Commission has jurisdiction under the FPA over certain of the
electric and gas facilities and operations of Orange and Rockland and its
subsidiaries and related transactions.
2. OTHER ORANGE AND ROCKLAND SUBSIDIARIES
Orange and Rockland has two wholly-owned, active non-utility
subsidiaries, Clove Development Corporation ("Clove"), a New York corporation,
and O&R Development, Inc., a Delaware corporation. Clove owns real property
primarily in the Montaup Valley region of Sullivan County, New York. O&R
Development, Inc. promotes industrial and corporate development in Orange and
Rockland's service territory by
15
providing improved sites and buildings. RECO has subsidiaries engaged in energy
services, real estate, and interstate pipeline transmission./9/
3. ORANGE AND ROCKLAND'S FACILITIES PRE-DIVESTITURE
ELECTRIC GENERATION: Prior to divestiture, Orange and Rockland has
approximately 965 MW of owned and operated generating capacity (including 374 MW
of coal-fired capacity, 473 MW of oil/gas steam, 43 MW of hydro, and 74 MW of
combustion turbines). In addition, Orange and Rockland has 19 MW of non-utility
generation ("NUG") contracts and 325 MW of firm purchases (300 MW of which are
summer only and expire in 2000).
TRANSMISSION AND DISTRIBUTION: Orange and Rockland and its two
utility subsidiaries, RECO and Pike, own, in whole or in part, and operate 617
circuit miles of transmission lines, 78 substations, 84,509 in-service line
transformers, 4,967 pole miles of overhead distribution lines, and 2,271 miles
of underground distribution lines. Except for one substation in Grahamsville,
New York, the foregoing transmission and distribution facilities are located in
the New York, New Jersey, and Pennsylvania service territories of Orange and
Rockland, RECO, and Pike respectively.
_______________
/9/ RECO has two wholly-owned, non-utility subsidiaries, Saddle River
Holdings, Corp. and Enserve Holdings, Inc., both Delaware corporations. Enserve
Holdings has three wholly-owned, non-utility subsidiaries, Palisades Energy
Services, Inc., an energy service provider, Compass Resource, Inc., and NORSTAR
Holdings, Inc. ("NHI"), all Delaware corporations. NHI has two wholly-owned,
non-utility subsidiaries, NORSTAR Management, Inc. ("NMI"), a gas marketing
company that is discontinuing operations, and Millbrook Holdings, Inc., which
leases non-utility real estate in Morris County New Jersey, both Delaware
corporations. NMI is the sole general partner of a Delaware limited partnership,
NORSTAR Energy Limited Partnership, of which NHI is the sole limited partner.
The NORSTAR partnership is the majority owner of NORSTAR Energy Pipeline
Company, LLC, a Delaware limited liability company.
16
GAS FACILITIES: Orange and Rockland's consolidated gas operations
include three propane air gas plants at Middletown, Orangeburg, and Suffern, New
York, which together have a combined capacity of 30,600 Mcf per day of natural
gas equivalent. Orange and Rockland's consolidated gas distribution system
includes 1,758 miles of mains.
4. ORANGE AND ROCKLAND'S GENERATION DIVESTITURES
Orange and Rockland is in the process of divesting all of its owned
generation. This includes the divestiture of Con Edison's portion of the
Bowline Point station. The NYPSC approved Orange and Rockland's divestiture
plan on April 16, 1998. The divestiture plan is proceeding on the following
schedule:
. Offering Memorandum/Bidders Information June 1, 1998
. Submittal of Non-Binding Bids Aug. 3, 1998
. Selection of Winning Bidder(s) Oct. 15, 1998
. Final Closing May 31, 1999
Orange and Rockland will seek all necessary regulatory approvals
promptly after selecting the winning bidder(s)./10/ Because Orange and
Rockland's sales will involve the transfer of FERC-jurisdictional substations
and transmission facilities, they will require the Commission's approval under
FPA section 203. In addition, the NYPSC has directed Orange and Rockland to
certify to the NYPSC that the winning bidder(s) comply with the
_______________________
/10/ Orange and Rockland has packaged its generation in four bundles: one
covering its Lovett station, one for the Bowline Point station, one for its
hydroelectric facilities, and one for its gas turbines. Bidders may bid on any
or all of the bundles.
17
Policy Statement./11/ Thus, prospective purchasers will have to satisfy both
state and federal authorities on market power issues.
After the divestiture, Orange and Rockland will own no generating
resources. It will have only 19 MW of NUG contracts, 25 MW of purchases from
NYPA's Blenheim-Gilboa pumped storage facility, and a purchase contract with
Public Service Electric and Gas Company ("PSE&G") for 300 MW that expires in
2000, and is only of value as summer capacity. Orange and Rockland will be
essentially a small transmission and distribution company.
C. INTERRELATIONSHIP OF THE APPLICANTS' ELECTRIC SYSTEMS
Con Edison and Orange and Rockland have contiguous electric service
territories that share interconnected transmission facilities. They jointly own
29.2 miles of transmission consisting of a double circuit 345 kV tower line that
runs from Con Edison's wholly-owned Ramapo substation east to the
Rockland/Westchester County line at the Hudson River. Con Edison and Orange and
Rockland, as tenants in common, own an 85 percent and 15 percent undivided
interest, respectively, in those 345 kV circuits. Con Edison and Orange and
Rockland also jointly own, as tenants in common, the property that supports the
double circuit 345 kV ties between Ramapo and the New York/New Jersey state
line. The companies jointly own (66 2/3 percent by Con Edison, 33 1/3 percent
by Orange and Rockland) the Bowline Point generating facility and the 345 kV
transmission line and substation connecting the Bowline facility to the above-
mentioned transmission facilities.
_________________________
/11/ Case No. 96-E-0900, Order Authorizing the Process for Auctioning of
Generation Plant and Rejecting Joint Agreement, at 11-12 (Apr. 16, 1998).
18
Orange and Rockland is also interconnected with its subsidiaries, RECO
and Pike; they jointly operate a single fully-integrated electric transmission
system. Orange and Rockland is party to Power Supply Agreements with each of
RECO and Pike that are FERC-approved rate schedules. As discussed below, the
Merger will not adversely affect those rate schedules.
IV. DESCRIPTION OF THE MERGER
-------------------------
As a result of deregulation and other changes, the electric and gas
industries are increasingly competitive. Like many other industry participants,
Con Edison and Orange and Rockland have carefully observed these changes to
determine how best, as the Commission phrased it in the Policy Statement, to
"reposition themselves in response to the emerging competitive business
landscape."/12/ CEI and Orange and Rockland concluded that the affiliation of
their utility operations would substantially improve efficiencies and create
synergies that would make them more competitive, to the benefit of the customers
that they serve, and accordingly entered into the Merger Agreement. The Boards
of Directors of CEI and Orange and Rockland have approved the Merger Agreement,
as reflected in Exhibit A to this Application. The respective obligations of
CEI and Orange and Rockland to effect the Merger are subject to express
conditions set forth in the Merger Agreement, including that the parties obtain
all necessary regulatory approvals and the approval of the Merger by two-thirds
of Orange and Rockland's issued and outstanding common stock. At a meeting of
Orange and Rockland's shareholders on August 20, 1998, the Merger received the
requisite shareholder approval.
__________________________
/12/ Policy Statement at 30,111.
19
As set forth in the Merger Agreement, the Merger is a straightforward
stock purchase transaction. A special-purpose, wholly-owned subsidiary of CEI, C
Acquisition Corp., will merge into Orange and Rockland, with Orange and Rockland
to be the surviving corporation. Each issued and outstanding share of Orange and
Rockland common stock will be cancelled in the Merger and converted into the
right of the holder thereof to receive $58.50. Each share of C Acquisition Corp.
will be converted into one share of the surviving corporation, Orange and
Rockland./13/ Upon completion of the Merger, Orange and Rockland will be a
wholly-owned subsidiary of CEI. Orange and Rockland's subsidiaries, including
its two utility subsidiaries, RECO and Pike, shall remain Orange and Rockland
subsidiaries. Going forward, CEI currently expects to retain Con Edison and
Orange and Rockland as separate utilities operating under their respective
names./14/ The Merger is scheduled to close on or about March 31, 1999.
After the Merger, CEI will establish an advisory board, with
approximately equal numbers of CEI and Orange and Rockland members, to provide
advice regarding the implementation of the Merger and CEI's post-Merger
operations. CEI will select one director, who was serving on Orange and
Rockland's Board of Directors at the time of the Merger Agreement, to serve on
CEI's Board. CEI will also maintain a subsidiary office in
__________________________
/13/ The Fairness Opinions that CEI and Orange and Rockland obtained in
connection with the Merger are included as Attachment 1 to this Application.
/14/ Although Con Edison and Orange and Rockland intend to continue to
operate as stand-alone utilities after the Merger, there may from time-to-time
be opportunities to achieve savings from joint procurement of power. Included in
the Merger-related submissions to the NYPSC, which are contained in Exhibit G to
this Application, is a proposed procedure for such joint procurement. As the
proposed arrangement, if effectuated, will not have a sale-for resale feature,
it should not be subject to the Commission's jurisdiction.
20
Rockland County as Orange and Rockland's headquarters for at least three years
following the Merger. CEI has pledged to make charitable contributions to the
communities within the service territories of Orange and Rockland and its two
public utility subsidiaries at a level consistent with Orange and Rockland's and
such subsidiaries' contributions in the two years preceding the consummation of
the Merger.
V. THE MERGER IS CONSISTENT WITH THE PUBLIC INTEREST
-------------------------------------------------
In order to approve an application for a merger, the Commission must
find that the merger "will be consistent with the public interest."/15/ In the
Policy Statement, the Commission explained that it would evaluate three factors
- -- the effect of the merger on competition, rates, and regulation -- in
determining whether a proposed merger was consistent with the public interest.
As demonstrated in this Application and the supporting testimony and exhibits,
the Merger will not adversely effect competition, rates, or regulation.
Therefore, the Commission should approve it.
A. EFFECT ON COMPETITION
1. HORIZONTAL EFFECTS
Under the Commission's Policy Statement, the horizontal effects of a
merger are initially evaluated via HHI screening criteria./16/ These screening
criteria measure the extent to which a merger affects concentration in
generation in order "to identify proposed
_________________________________
/15/ 16 U.S.C. (S) 824b(a).
/16/ The "HHI" is a measure of market concentration that is calculated by
summing the squares of the market shares of market participants. Thus, a market
with five sellers each having a market share of 20 percent has an HHI of 2000
(20 squared is 400 and 400+400+400+400+400 = 2000). The Guidelines' screening
criteria focus on the increase in HHI resulting from a particular merger.
21
mergers that clearly will not harm competition."/17/ Because Orange and Rockland
already is divesting its generation, the Merger will not cause any material
increase in market concentration./18/ Accordingly, as demonstrated in the
testimony of Dr. William H. Hieronymus, who presents the Applicants' competitive
analysis, with Orange and Rockland's divestiture the Merger readily passes all
of the Policy Statement's screens. It therefore falls into the category of
mergers that plainly will not harm competition and can be approved without the
necessity of a hearing.
Although the divestiture of all of Orange and Rockland's generation is
itself sufficient for the Merger to pass the Commission's screening criteria,
two additional key facts amplify the conclusion that the Merger will not harm
competition. First, Con Edison also is divesting the bulk of its generating
facilities. Under Con Edison's NYPSC-approved Divestiture Plan, its in-City
electric generation will be sold to at least three separate buyers. Second, the
companies are and will remain full participants in the NYISO structure and have
subscribed to the ISO tariff. Thus, Con Edison's divestiture will further
deconcentrate the market,/19/ and the merged companies' participation in the
NYISO will assure that transmission will be provided on a non-discriminatory
basis to all customers and competitors.
______________________________
/7/ Policy Statement at 30,111.
/8/ After its divestiture, the only remaining Orange and Rockland
generating resource will be a small amount of purchases from facilities that it
does not control.
/19/ The Divestiture Plan packages Con Edison's in-City fossil electric
generation into three major bundles. Con Edison is also divesting a smaller
fourth bundle containing generation associated with its steam system. The
Divestiture Plan provides that no purchaser may own any more than one of the
three major bundles. Thus, under the Plan, there will be three separate
independent competitors owning these assets, resulting in market
deconcentration.
22
A. APPENDIX A SCREENING ANALYSIS
Dr. Hieronymus' analysis shows that the Merger passes the Policy
Statement's HHI screens by an ample margin. There may be a short period of time,
however, between the date the Merger is consummated and the date Orange and
Rockland completes its divestiture. The Merger is expected to close on March 31,
1999. Orange and Rockland expects to close its divestiture on or about May 31,
1999. In the event that such a brief interim occurs, the screening criteria for
Economic and Available Capacity (the measures relevant to energy markets) would
be exceeded in some time intervals. As Dr. Hieronymus observes, during this
interim period the Applicants will still be substantial net purchasers of
electricity. Thus, they will have no incentive to attempt to increase the price
of energy. Nonetheless, to eliminate any possible market power concerns, even
theoretical ones, the Applicants propose interim measures that will place a
variable cost-based cap on all energy bids of their generating resources and
will require that those resources be made available at their historic levels.
As to capacity, the Appendix A screening criteria for Total and
Uncommitted Capacity will be passed even prior to Orange and Rockland's
divestiture, as will the Commission's traditional screening criteria for the
absence of capacity market power. Thus, under all of the Commission's
traditional screening criteria, Applicants will have no ability during any such
interim period to increase the price of capacity. As explained below, Dr.
Hieronymus also went beyond the four measures in the Policy Statement to assess
the capacity market that will exist under the NYISO rules. He found that while
the Commission's screening criteria will likely be met, it is possible that HHI
safe harbor levels could be slightly exceeded for the NYISO capacity market
prior to Orange and Rockland's
23
divestiture under certain unlikely conditions. Although Dr. Hieronymus concludes
that under the Commission's traditional criteria, the Applicants would have no
market power in such event, to eliminate any doubt or debate, the Applicants
propose interim measures that will place an avoidable cost-based cap on bids
from their generating resources into the NYISO capacity market and that
accordingly will eliminate any possible issue of capacity market power in the
interim prior to Orange and Rockland's divestiture.
In sum, the Commission's horizontal market power screens are readily
passed upon post-Orange and Rockland divestiture, and, in the interim, any
possible concerns would be eliminated.
(I) THE RELEVANT MARKETS
Consistent with Commission precedent, Dr. Hieronymus defines the
relevant product markets as long and short-term capacity and non-firm energy.
Pursuant to the Policy Statement, Dr. Hieronymus performed an HHI screening
analysis for Total Capacity, Uncommitted Capacity, Economic Capacity, and
Available Economic Capacity. He performed his analysis of Total Capacity and
Uncommitted Capacity taking into account the Applicants and their direct
interconnections. For Economic Capacity and Available Economic Capacity, Dr.
Hieronymus identified two relevant geographic markets: (1) the East of the
Total East market, defined by the Total East transmission interface and related
transmission constraints; and (2) the New York City ("in-City") market. These
markets reflect the key transmission interconnections and constraints that
affect the Applicants and are consistent with actual trading patterns.
24
The Total East interface is the primary interface through which power
moves into the eastern half of New York state. When constrained, it can cause
energy prices in the portion of the state that is east of Total East to separate
from the rest of the state. It therefore constitutes a separate relevant
geographic market. There are also transfer capability limitations in the Albany
region and in Long Island Lighting Company's ("LILCO's") service territory that
can limit the amount of generation in those areas that can compete inside the
area east of Total East. In calculating market shares in the East of Total East
market, Dr. Hieronymus took these internal constraints into account./20/ The
East of Total East market represents the narrowest plausible geographic market
in which both of the Applicants' generation facilities are located. It,
therefore, is also the market in which the Applicants will have the largest
possible market share.
This relevant market definition is consistent with the approach that
the Commission endorsed in the Connectiv/21/ and BG&E-Pepco mergers./22/ In
those cases, the Commission recognized that there are circumstances in which
trying to identify separate destination markets for each interconnected utility
may not be appropriate. The Total East transmission constraint slices through
the center of the service territories of several New
________________________
/20/The interface between Con Edison and Orange and Rockland will be
controlled by the NYISO and made available non-discriminatorily. Moreover,
Messrs. Jaeger and Hartwell testify that, in the event the ISO operation is
delayed by unforeseen circumstances, Con Edison and Orange and Rockland have
committed not to reserve additional capacity over such interconnections in the
interim prior to ISO operations. Accordingly, Dr. Hieronymus treated this
interface as available on a non-discriminatory basis. This is consistent with
the Commission's decision in the First Energy case, Ohio Edison Co., 80 FERC (P)
61,039, at 61,103, aff'd, 81 FERC (P) 61,109 (1997).
/21/Atlantic City Elec. Co., 80 FERC (P) 61,126 (1997).
/22/Baltimore Gas & Elec. Co., 79 FERC (P) 61,027 (1997).
25
York utilities. Some of their generation is on one side of the interface and
some on the other. Hence, attempting to define and analyze individual
destination markets rather than evaluate the market as it actually operates
would essentially ignore the key transmission constraints in New York. Nor is
such an approach necessary because neither company has any transmission-
dependent utilities. As the Commission found in Connectiv, by addressing the
effect on buyers in the actual economically relevant market, the competitive
analysis adequately addresses the effect of the merger on individual
customers./23/ Because the Merger passes the Appendix A screening criteria in
this narrowly-defined market, it would necessarily pass by a wider margin in any
broader markets, e.g., in New York as a whole or in the New England Power Pool.
Dr. Hieronymus defined New York City as a separate geographic market
because the City is subject to significant transmission constraints in certain
hours. None of Orange and Rockland's generation is located inside New York
City, and Orange and Rockland is not a major participant in that market. Prior
to divestiture, however, it could theoretically compete for transmission import
capability into the City to make some energy sales. Accordingly, Dr. Hieronymus
also analyzed the in-City market.
Dr. Hieronymus calculated market shares in the East of Total East and
in-City markets using the delivered price test set forth in the Policy
Statement. To analyze these markets under different competitive conditions, Dr.
Hieronymus performed his screening
_________________
/23/Atlantic City Elec. Co., 80 FERC at 61,407.
26
analysis to take into account seasonal and time-of-day price differences for
peak, off-peak, and shoulder periods.
(II) THE SCREENING ANALYSIS IS APPLIED PRE- AND POST-
DIVESTITURE
To evaluate the effects of the planned divestitures, Dr. Hieronymus
applied the Commission's screening criteria under four scenarios:
. A pre-divestiture "base case" reflecting the Applicants' currently
owned generation, and contracts in effect in 1999.
. Scenario 2, wherein Con Edison is assumed to have divested its
first three "bundles" of generation before Orange and Rockland
divests any generation.
. Scenario 3, wherein Orange and Rockland is assumed to have divested
its generation before Con Edison divests, except that Con Edison's
share of the Bowline Point station is assumed to be divested at the
same time that Orange and Rockland sells its share.
. Scenario 4, wherein Con Edison and Orange and Rockland are assumed
to have completed their divestitures, and contracts in effect at
the beginning of 2000 are taken into account.
The following table summarizes those scenarios:
27
- -----------------------------------------------------------------------------------------------
CON EDISON CON EDISON O&R CON EDISON
DIVESTS DIVESTS DIVESTS ALL DIVESTS
BUNDLES 1-3 BUNDLE 4 GENERATION BOWLINE
- -----------------------------------------------------------------------------------------------
BASE CASE -- -- -- --
("PRE-DIVESTITURE")
- -----------------------------------------------------------------------------------------------
SCENARIO 2 X -- -- --
("CON EDISON DIVESTS 1-3")
- -----------------------------------------------------------------------------------------------
SCENARIO 3 -- -- X X
("O&R DIVESTS")
- -----------------------------------------------------------------------------------------------
SCENARIO 4 X X X X
("CON EDISON AND O&R DIVEST")
- -----------------------------------------------------------------------------------------------
Bundle 1 ("Arthur Kill") consists of Arthur Kill steam unit and Astoria GTs.
Bundle 2 ("Ravenswood") consists of Ravenswood steam unit and GTs.
Bundle 3 ("Astoria") consists of Astoria steam unit and Narrows and Gowanus GTs.
Bundle 4 ("Steam Electrics") consist of units producing electricity and steam for distribution.
- -----------------------------------------------------------------------------------------------
(III) TOTAL CAPACITY
The overall size of the Total Capacity market exceeds 55,000 MW of
generation. Con Edison's pre-divestiture share of that capacity is 20 percent;
Orange and Rockland's is 2.4 percent. The market is moderately concentrated.
Even prior to any divestiture, the 94 point change in the HHI brought about by
the Merger passes the Appendix A screen. Accordingly, the screen is readily
passed after divestiture.
28
- --------------------------------------------------------------------------------
TOTAL CAPACITY
- --------------------------------------------------------------------------------
BASE CASE SCENARIO 2 SCENARIO 3 SCENARIO 4
CON EDISON
CON EDISON AND O&R
PRE-DIVESTITURE DIVESTS 1-3 O&R DIVESTS DIVEST
- --------------------------------------------------------------------------------
MWs
- --------------------------------------------------------------------------------
Total 55554 55554 55554 55554
- --------------------------------------------------------------------------------
Con Edison 11085 5628 10275 4147
- --------------------------------------------------------------------------------
O&R 1310 1310 344 344
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
Con Edison 20.0% 10.1% 18.5% 7.5%
- --------------------------------------------------------------------------------
O&R 2.4% 2.4% 0.6% 0.6%
- --------------------------------------------------------------------------------
HHI (pre-merger) 1468 1205 1412 1163
- --------------------------------------------------------------------------------
HHI (post-merger) 1562 1253 1435 1172
================================================================================
Delta HHI 94 48 23 9
================================================================================
(IV) UNCOMMITTED CAPACITY
The Merger also passes the Appendix A screen for Uncommitted Capacity
prior to any divestiture. In the capacity market, there are approximately 7100
MW of uncommitted capacity./24/ Before retail capacity access and generation
divestiture, Orange and Rockland has no uncommitted capacity. Thus, the Merger
causes no change in market concentration, and the HHI delta is zero./25/
Moreover, as Dr. Hieronymus points out, although his analysis treats Con Edison
as having 2000 MW of uncommitted capacity due to
________________________
/24/Uncommitted capacity is total capability minus net peak load and
reserve requirements, the latter being calculated using the 18 percent reserve
margin requirement of the New York Power Pool ("NYPP").
/25/Orange and Rockland's retail access program is energy only until May 1,
1999. There may be a one-month period prior to divestiture when Orange and
Rockland might have some small amount of uncommitted capacity. However, as Dr.
Hieronymus explains, this is so short a term that it should not be a concern for
this measure of capacity. Further, as shown, infra, the Applicants not only meet
the Commission's traditional criteria for lack of market power during this
interim period, they have also committed to interim measures that eliminate any
possible market power concerns.
29
retail access, in fact, all of its capacity currently is committed to load
serving entities participating in its retail access program. The Merger passes
this criterion even under this conservative approach.
- ---------------------------------------------------------------------------
UNCOMMITTED CAPACITY
- ---------------------------------------------------------------------------
BASE CASE SCENARIO 2 SCENARIO 3 SCENARIO 4
CON EDISON
PRE- CON EDISON O&R AND O&R
DIVESTITURE DIVESTS 1-3 DIVESTS DIVEST
- ---------------------------------------------------------------------------
MWs
- ---------------------------------------------------------------------------
Total 7102 10595 8068 13484
- ---------------------------------------------------------------------------
Con Edison 1964 0 1154 0
- ---------------------------------------------------------------------------
O&R 0 0 0 0
- ---------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------
Con Edison 27.7% 0% 14.3% 0%
- ---------------------------------------------------------------------------
O&R 0% 0% 0% 0%
- ---------------------------------------------------------------------------
HHI (pre-merger) 2477 1678 1807 1185
- ---------------------------------------------------------------------------
HHI (post-merger) 2477 1678 1807 1185
===========================================================================
Delta HHI 0 0 0 0
===========================================================================
(V) ECONOMIC CAPACITY
East of Total East Market. The Merger easily passes the Appendix A
-------------------------
screen for Economic Capacity once Orange and Rockland's generation is divested.
Prior to that divestiture, however, in the downstate market the changes in HHIs
for most of the time periods exceed the Appendix A criteria.
The HHI results for Economic Capacity for all four scenarios for the
downstate market are as follows:
30
- -----------------------------------------------------------------------------------------------------------
ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------------------
EAST OF TOTAL-EAST MARKET
BASE CASE PRE-MERGER POST-MERGER
PRE -DIVESTITURE
- -----------------------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------------------
Summer Peak $40 48.7% 4.6% 2717 3165 448
- -----------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 2.6% 1443 1589 146
- -----------------------------------------------------------------------------------------------------------
Winter Peak $30 44.9% 4.7% 2416 2838 422
- -----------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 4.4% 1396 1639 243
- -----------------------------------------------------------------------------------------------------------
Shoulder Peak $30 44.9% 4.8% 2407 2838 431
- -----------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------------------
EAST OF TOTAL-EAST MARKET
SCENARIO 2 PRE-MERGER POST-MERGER
CON ED DIVESTS 1-3
- -----------------------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------------------
Summer Peak $40 26.2% 4.6% 1215 1456 241
- -----------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 2.6% 1443 1589 146
- -----------------------------------------------------------------------------------------------------------
Winter Peak $30 25.2% 4.7% 1178 1415 237
- -----------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 4.4% 1396 1639 243
- -----------------------------------------------------------------------------------------------------------
Shoulder Peak $30 26.0% 4.8% 1198 1448 250
- -----------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -----------------------------------------------------------------------------------------------------------
31
- -----------------------------------------------------------------------------------------------------------
ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------------------
EAST OF TOTAL-EAST MARKET
SCENARIO 3 PRE-MERGER POST-MERGER
O&R DIVESTS
- -----------------------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------------------
Summer Peak $40 44.6% 0.3% 2357 2384 27
- -----------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 0.3% 1411 1458 17
- -----------------------------------------------------------------------------------------------------------
Winter Peak $30 41.0% 0.3% 2101 2126 25
- -----------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 0.3% 1393 1410 17
- -----------------------------------------------------------------------------------------------------------
Shoulder Peak $30 40.7% 0.3% 2073 2097 24
- -----------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------------------
EAST OF TOTAL-EAST MARKET
SCENARIO 4
CON EDISON AND PRE-MERGER POST-MERGER
O&R DIVEST
- -----------------------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------------------
Summer Peak $40 18.6% 0.3% 930 941 11
- -----------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 0.3% 1441 1458 17
- -----------------------------------------------------------------------------------------------------------
Winter Peak $30 19.7% 0.3% 952 964 12
- -----------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 0.3% 1393 1410 17
- -----------------------------------------------------------------------------------------------------------
Shoulder Peak $30 18.9% 0.3% 937 948 11
- -----------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -----------------------------------------------------------------------------------------------------------
Note: Con Edison's market share is lower in Scenario 4 than in Scenario 2
because its share of Bowline is divested with O&R's share and its fourth
bundle is divested.
- -----------------------------------------------------------------------------------------------------------
In-City Market. In the in-City market, even prior to Orange and
--------------
Rockland's divestiture, the HHI screening criteria are met except in peak hours
when they are exceeded only very slightly. After divestiture, the screen is
readily passed.
32
(VI) AVAILABLE ECONOMIC CAPACITY
The calculation of Available Economic Capacity requires knowledge of
each competitor's native and requirements load. New York utilities are in the
process of both retail access and divestiture. The measure of Available Economic
Capacity is thus highly sensitive to the pace of each of these activities. As
Dr. Hieronymus points out, the calculation of Available Economic Capacity,
therefore, is more complicated here than in some other cases.
Two key points, however, emerge at the outset. First, after it divests
all of its generation, Orange and Rockland will have no Available Economic
Capacity, and the Merger will have no effect on market concentration. Hence, the
only relevant time period is the interim prior to Orange and Rockland's
divestiture. Second, as to that period, the interim measures that the Applicants
propose to address Economic Capacity also covers Available Economic Capacity.
Nonetheless, Dr. Hieronymus analyzes Available Economic Capacity
utilizing conservative assumptions as to the pace of the other New York
divestitures and retail access. The results of this analysis are similar to the
analysis of Economic Capacity. They show that prior to Orange and Rockland's
divestiture the analytic screen is exceeded in some time periods, and that upon
Orange and Rockland's divestiture the Merger readily passes the screen.
33
(VII) NEW YORK ISO CAPACITY MARKET
In addition to the analysis described above that the Commission's
Policy Statement dictates, Dr. Hieronymus also analyzed capacity as a product
that load serving entities ("LSEs") in New York must purchase under the NYISO
rules that are expected to be in place. Under these rules, the relevant
geographic markets for capacity in the NYISO capacity market will be different
from in the energy market. Generally, the rules will require each LSE to obtain
capacity reserves equal to 118 percent of its peak load. This capacity may be
located anywhere in New York or be obtained from sources outside the New York
State electric system, as permitted according to the NYISO's locational
requirements. Thus, under the NYISO rules, there will be a state-wide capacity
market unaffected by the Total-East transmission interface. There will, however,
be a locational capacity requirement pertaining to New York City. LSEs in New
York City will be required to obtain specified levels of capacity reserves from
generating capacity located in the City./26/ Thus, there will be a separate in-
City capacity market.
The in-City market can be dealt with summarily. Orange and Rockland
does not own any capacity in New York City, and, therefore, cannot participate
in the in-City capacity market. The Merger thus does not have any effect on
competition in that market, and no interim preventive measures are warranted.
For the New York State capacity market, Dr. Hieronymus finds that the
merged firm will have no market power even before Orange and Rockland's
divestiture. He
___________________
/26/ There will also be a separate locational requirement for capacity in
LILCO's service area; however, neither Applicant owns any capacity in that area.
34
performed two market structure analyses. One analyzes the most likely scenario,
and thus takes account of the announced divestitures of New York State Electric
& Gas Corporation and Niagara Mohawk Power Corporation, now on-going. The other
consists of a "worst case" analysis that ignores both other utilities'
divestitures and the Applicants' native load commitments. The most likely
scenario shows an HHI of only 870, even prior to Orange and Rockland's
divestiture, well within the safe harbor criteria. The worst case analysis shows
a moderately concentrated market and, in the interim, prior to Orange and
Rockland's divestiture, an HHI delta of 142, slightly above the screening
level./27/
Dr. Hieronymus' analysis of other relevant factors as directed by Step
2 of the Policy Statement, however, shows that even in a "worst case" scenario,
Applicants will possess no market power in the New York State capacity market
during this interim period. First, Applicants would have less than 20 percent of
the capacity that can be bid into the New York State market. The Commission has
repeatedly held in market-based rate cases that "Applicants with less than 20
percent of the market have no market power."/28/ The
_____________________
/27/ The screening criteria are readily passed after Orange and
Rockland's divestiture even in this "worst case" analysis.
/28/ Southwestern Public Service Co., 72 FERC (P) 61,208 at p. 61,966
(1955) (Applicants with less than 20 percent of the market have no market
power); Louisville Gas & Electric Co., 62 FERC (P) 61,016 at p. 61,146 (1993);
accord Entergy Services, Inc., 58 FERC (P) 61,234 (1992) merged firm with 27
percent share); Southern Co. Services, Inc., 72 FERC (P) 61,324 (1995) (26
percent market share). Because of the very temporary nature of any possible
market power issue concerning the NYISO state capacity market, the standard used
in market rate applications is logically more appropriately applied in
determining whether any interim mitigation is necessary than the merger standard
used for assessing longer-term market structure. For the reasons stated above,
the key issue here is not ultimate market structure - it is already established
that the divestitures now in process will result in the Merger having no effect
on market concentration - but rather whether the merged firm will be able to
exercise market power during the very brief interim prior to these structural
changes. On this issue, the key facts as to the merged firm's non-dominant
market share, and the other factors discussed above, more than amply confirm the
lack of interim capacity market power.
35
Commission has deemed such a showing to establish a lack of market power subject
only to Commission review after three years. Here, the relevant period is a
month or two. Second, the Applicants will still retain most of their native
load, served at regulated rates. They, therefore, will have neither the
incentive nor the ability profitably to raise prices. Finally, under its New
York restructuring settlement, Con Edison's capacity prices are already capped
by NYPSC and FERC-filed tariff rates. In short, the facts establish that the
Applicants will not possess market power in the New York State capacity market
in the event that there is an interim between the closing of the merger and
Orange and Rockland's divestiture.
Nonetheless, to moot any possible merger-related market power concerns
during such period, Applicants commit to adhere to the interim preventive
measures described below, including measures that preclude the exercise of
market power in the capacity market.
B. PROPOSED INTERIM MITIGATION MEASURES
As shown above, upon Orange and Rockland's divestiture, the Merger
passes all of the Appendix A screens. During any brief interval between the
closing of the Merger and the completion of Orange and Rockland's divestiture,
the Applicants propose that:
. All of their generation resources (i.e., both companies') sold
into the wholesale energy market will be bid into the market at a
capped bid reflecting their variable costs.
. This cap will be based on heat rate curves currently used by the
NYPP to provide economic dispatch and actual fuel costs.
36
. All of their generation resources bid into the NYISO capacity
market will be bid at a capped bid reflecting their "to go" (i.e.,
avoidable) costs./29/
. These measures will also contain availability criteria to ensure
that the Applicants will not withhold their generation from the
market.
These interim mitigation measures,/30/ which are set forth in detail in the
testimony of Andrew L. Jacob, eliminate any possible market power concerns.
They will remain in effect until Orange and Rockland has completed its
divestiture.
2. THE COMMISSION NEED NOT WAIT UNTIL IT RULES ON ORANGE AND
ROCKLAND'S SECTION 203 DIVESTITURE FILING TO RULE ON THE MERGER
The Commission need not wait to ascertain who the buyer(s) of Orange
and Rockland's divested generation will be to evaluate and approve the Merger
for two reasons. First, as described above, Orange and Rockland will make an
FPA section 203 filing with the Commission in connection with its divestiture
sale. Thus, the Commission will be able to review Orange and Rockland's
proposed asset transfer before it is final to ensure that the purchaser(s) meet
the public interest and market power standards in the Policy Statement.
________________
/29/ As explained in Mr. Jacob's testimony, the "to go" costs in each
generating unit are the avoidable costs of keeping a station open and producing
electricity, less any margins earned on the sale of energy and ancillary
services. In other words, the "to go" costs represent the actual costs of
keeping the unit available to provide capacity.
/30/ The Applicants have termed these interim preventive measures
"mitigation measures" in accordance with FERC's practice. However, Applicants
believe that the Merger does not create any market power problems to mitigate.
Rather, these measures serve to prevent any possible market power problems from
arising.
37
Second, the identity of the buyer(s) of Orange and Rockland's divested
generation assets is irrelevant to the Commission's Appendix A criteria and the
calculation of the HHI changes resulting from the Merger./31/ The change in HHI
will be sufficiently low (below 50 points) that the Merger will necessarily pass
the Appendix A screens. Under the Policy Statement, a merger will not harm
competition if the change in HHI is less than 50 points where the post-merger
HHI exceeds 1800, and less than 100 points where the post-merger HHI is between
1000 and 1800. Once Orange and Rockland divests its generation, its share of
the market will be so miniscule (a .003% share of Economic Capacity) that the
change in HHI will be considerably less than 50 points. The change in HHI that
will result from the Merger thus will pass the Appendix A screens no matter who
purchases Orange and Rockland's generation.
3. VERTICAL EFFECTS
The Commission's Policy Statement also requires an inquiry into
whether the vertical effects of a merger will adversely affect competition. The
Commission's recent decisions and notice of proposed rulemaking concerning
mergers identify two primary
________________
/31/ The HHI screens incorporated into both the U.S. Department of
Justice/Federal Trade Commission ("DOJ/FTC") Merger Guidelines and the Policy
Statement to identify mergers that will not harm competition are based on the
change in market concentration that results from the merger. The change in HHI
that results from the Merger does not depend upon the identity of the
purchaser(s) in Orange and Rockland's divestiture auction, which is not related
to the Merger. Indeed, the DOJ/FTC Guidelines make clear that the increase in
concentration associated with a merger can be calculated by reference only to
the market shares of the two merging firms: "The increase in concentration as
measured by the HHI can be calculated independently of the overall market
concentration by doubling the product of the market shares of the merging firms.
For example, the merger of firms with shares of 5 percent and 10 percent of the
market would increase the HHI by 100 (5 x 10 x 2 = 100)." U.S. Department of
Justice and Federal Trade Commission, Horizontal Merger Guidelines, 57 Fed. Reg.
41,552 at 41,558 n.18 (1992).
38
vertical issues in electric/gas distribution convergence mergers: (1) whether
the merger will create the ability or incentive for the merged firm to raise
rivals' costs by using control over gas imports to favor its own gas generation;
and (2) whether the merger will likely result in anticompetitive
coordination./32/ The Commission has also raised the issue of whether a
convergence merger could permit a gas supplier to provide its electric marketing
affiliate with preferential access to commercially valuable information about
gas generator customers./33/ Dr. Hieronymus analyzes each of the relevant
upstream markets and finds that the Merger will not create any of these
concerns.
A. THE APPLICANTS LACK MARKET POWER OVER SUPPLIES OF COMMODITY
GAS
The upstream market involves three activities: (1) the selling of
commodity gas supplies; (2) the transportation of these supplies from gas-
producing regions into the market area; and (3) the local distribution of these
supplies to gas-fired utilities. Dr. Hieronymus first shows that the Applicants
will have no market power over supplies of commodity gas to gas generators.
Neither Con Edison nor Orange and Rockland owns any gas production
facilities and neither is a major aggregator/supplier to unaffiliated retailers
and off-system consumers. Consequently, they have no ability to control or
affect the availability or price of commodity gas sold to gas marketers and
suppliers to gas generators in the market.
______________________
/32/ See, e.g., Long Island Lighting Co., 80 FERC (P) 61,035, at 61,075-76
(1997) aff'd, 82 FERC (P) 61,216 (1998); San Diego Gas & Elec. Co., 79 FERC at
62,560. Notice of Proposed Rulemaking on Revised Filing Requirements Under Part
33 of the Federal Power Act, Docket No. RM98-4-000 (Apr. 16, 1998), 63 Fed. Reg.
20,340 (Apr. 24, 1998) ("Merger NOPR").
/33/ See, e.g., Merger NOPR, 63 Fed. Reg. at 20,353.
39
Dr. Hieronymus' analysis shows that gas to serve generators that can provide
electricity to the downstate electricity market is produced over a large
geographic area served by multiple pipelines connecting the producing basins to
the gas market.
The Applicants' role in the commodity market is as buyers, not
sellers. Although they have purchase contracts for a significant amount of gas,
those purchases amount to at most 6.7 percent of the commodity purchases in the
region, and after the divestiture of their gas-fueled generation, will drop to 4
percent. Moreover, the Applicants have opened their gas systems to retail
access. Consequently, the electric gas generators served by their systems are
free to purchase from any gas marketer and are not captive to the
Applicants./34/
The Merger does not give the merged company any market power over the
marketing of gas as a commodity. Orange and Rockland exited the gas marketing
business in 1996, selling its gas marketing arm to Midcon, now part of KN
Energy. Con Edison's subsidiary, Con Edison Solutions, does engage in marketing
activities, but as Dr. Hieronymus demonstrates, its sales are relatively small.
In short, after the Merger, gas generators will have the same opportunities to
buy commodity gas that they had before the Merger. The market will remain
unchanged -- highly competitive.
___________________
/34/ Indeed, Dr. Hieronymus reports that as of June 1998, 41 independent
gas marketers have been approved to do business with Con Edison's customers and
Con Edison has distributed gas already for 21 of them. Similarly, Orange and
Rockland distributes gas for 22 marketers in its service territory.
40
B. THE MERGER WILL NOT GIVE THE MERGED COMPANY THE ABILITY TO
EXERCISE MARKET POWER OVER ELECTRIC GENERATORS VIA CONTROL
OVER GAS TRANSPORTATION
Dr. Hieronymus' analysis demonstrates that the Merger will not give
the Applicants the ability to affect downstream electricity prices by reason of
control over long-haul gas transportation for gas generators. The relevant
market for gas transportation consists of southeastern New York, northeastern
Pennsylvania, and the northern half of New Jersey. The market is larger than
simply the downstate New York area and is defined by the operating criterion of
essentially interchangeable pipeline delivery points without loss of overall
regional pipeline capacity. The gas transportation network in this area serving
this market is extensive and highly interconnected. It includes numerous
independent long-haul pipeline companies including Columbia Gas Transmission
Corp., Transcontinental Gas Pipeline Co., Texas Eastern Transmission Corp.,
Tennessee Gas Pipeline Co., and Iroquois Gas Transmission System, Inc. --
transporting gas supplies from diverse areas. Together, these pipeline systems
have a transmission capacity of approximately 5.8 billion cubic feet per day.
Other FERC-certificated pipeline facilities are being added, which will have the
effect of expanding the pipeline capacity to serve this market in 1999.
The Applicants will have no market power over long-haul gas
transportation. They do not own any long-haul transportation facilities. They
have certain firm transportation rights, but, as Dr. Hieronymus demonstrates,
these rights will not give them any ability to exercise market power. First,
the merged company will have rights to only 11.1 percent of the long-haul firm
delivery rights that will exist in 1999, and the Merger would result in an HHI
increase of only 50 points. Thus, even if these contractual rights
41
reflected the ability to influence long-haul capacity, the Merger would meet any
possible screening criterion.
Second, and equally important, the ownership of firm capacity
entitlements does not confer the ability to withhold output or raise prices in
any relevant market and is not a measure of market power. The Applicants' firm
rights are principally committed to their full service retail gas customers.
Moreover, the Applicants have no ability to withhold their transportation rights
from the market if they are not using them for this purpose. The only way the
holder of contractual rights to capacity could use them to drive up downstream
gas prices would be if it could restrict available gas delivery to the market by
neither using its rights nor releasing them to others. The Applicants, however,
cannot withhold the pipeline capacity represented by these entitlements. Any
unused capacity simply reverts to the pipeline operator as interruptible
capacity for sale to others or must be released under the Commission's Order No.
636./35/ If the Applicants do not use their rights, they lose them to
others./36/
C. THE MERGER WILL NOT CREATE THE INCENTIVE OR ABILITY TO
EXERCISE MARKET POWER THROUGH DISCRIMINATORY LOCAL GAS
TRANSPORTATION PRACTICES
The Merger also will not give the Applicants any enhanced incentive or
ability to exercise market power by reason of their ownership of local
distribution facilities. Both
_________________
/35/ Pipeline Service Obligations and Revisions to Regulations Governing
Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After
Wellhead Decontrol, 57 Fed. Reg. 13,267 (Apr. 16, 1992), [Regs. Preambles 1991-
1996] FERC Stats. & Regs. (P) 30,939 (1992).
/36/ Finally, Orange and Rockland has no transportation delivery rights
inside New York City. Hence, the Merger also will not affect the transportation
supply opportunities available to generators that locate in the City.
42
Orange and Rockland and Con Edison already operate local distribution businesses
that provide service to competing gas generators pursuant to the strictures of
NYPSC regulation. The Merger will not change this status or affect the
Applicants' incentives. Nor will the Merger give the merged company any
additional gas generation that it might have a new incentive or ability to treat
preferentially. To the contrary, Orange and Rockland and Con Edison are
divesting essentially all of their gas-fueled generation that is served over
their distribution facilities. Furthermore, Dr. Hieronymus demonstrates that all
of the generating stations that the Applicants' local gas distribution
facilities serve have economic bypass alternatives.
The Applicants will also be subject to code of conduct restrictions
that will further protect against possible vertical market power concerns. Con
Edison and Orange and Rockland each has in place Standards of Conduct that meet
the requirements of Order Nos. 888 and 889 and subsequent decisions./37/ In
addition, as part of the settlements of Con Edison's and Orange and Rockland's
retail restructuring proceedings, the NYPSC has approved affiliate transactions
rules and standards of conduct for each company. The Applicants have proposed
to apply these rules to the merged company with certain amendments necessary to
address the relationship between two regulated companies (i.e., Con Edison and
Orange and Rockland). These rules contain various protections regarding
affiliate activities, which Dr. Hieronymus details. Significantly, among them
is the Applicants' commitment not to disclose any proprietary gas customer
information (i.e., account-specific information) to their electric marketing
affiliates without the customer's
________________________
/37/ The Commission is well aware of the requirements of this code of
conduct, and they will not be repeated here. See, e.g., Consolidated Edison
Energy, Inc., 83 FERC (P) 61,236 (1998).
43
consent, and to make available to the affiliate's competitors contemporaneously
any general customer or marketer information that is made available to the
affiliate.
D. THE MERGER RAISES NONE OF THE CONCERNS ON WHICH THE
COMMISSION FOCUSED IN ENOVA/PACIFIC ENTERPRISES
In sum, this Merger raises none of the vertical concerns on which the
Commission has focused in other contexts. In particular, the facts here are
clearly different from those in Enova/Pacific Enterprises. In Enova/Pacific
Enterprises, the concern was that Pacific Enterprises, which had a monopoly over
long-haul gas transportation and dominant control over gas storage, would, by
reason of its affiliation with an electric generating company, obtain the
incentive to manipulate the price and availability of gas to favor its newly
acquired gas generation./38/ There was also a concern that the merged company
might provide information about its gas generator customers on a preferential
basis to its electric marketing affiliate./39/
In this case, the Merger will not create any of these problems.
Applicants are mere local distribution companies. Thus, they lack the market
power over the supply of gas as an input that Pacific Enterprises was alleged to
have. They do not own any long-haul pipelines facilities or any material amount
of storage. They have no market power over commodity gas or long-haul
transportation. Because the Applicants are existing local distribution
companies, the Merger does not change their incentives./40/ Further, because the
___________________
/38/ San Diego Gas & Elec. Co., 79 FERC (P) 61,372.
/39/ Id. at 62,556.
/40/ The Commission held in the LILCO/Brooklyn Union merger that, to the
extent the merger did not change LILCO's status as a combination electric and
gas distribution company on Long Island, "the proposed transaction does not
affect LILCO's incentives." 80 FERC at 61,077. The
(Continued...)
44
Applicants are divesting essentially all of their gas-fueled generation, the
Merger does not give them gas generation that they could favor. Finally, the
Applicants already have codes of conduct in place that cover sharing of customer
information. In short, the Commission's holding in Enova/Pacific Enterprises is
inapplicable here.
No credible argument can be raised that the merged company will have
the ability to control gas input prices and/or supply so as to impact
electricity prices. This is basically a merger between two wires and pipes
companies. It does not raise vertical market power concerns.
B. EFFECT ON RATES
In the Policy Statement, the Commission noted that, in assessing the
effects that a proposed merger could have on costs and rates, it will focus on
ratepayer protection mechanisms. As set forth in the testimony of William A.
Harkins and Frank P. Marino, the Merger will not have any adverse effect on
wholesale rates because Con Edison has no wholesale requirements customers and
Orange and Rockland's only wholesale requirements contracts are with its
subsidiaries, Pike and RECO.
Orange and Rockland sells full requirements wholesale power to its
wholly-owned subsidiaries, Pike in Pennsylvania, and RECO in New Jersey. Pike
and RECO have no employees of their own. They make only retail sales. As Mr.
Marino explains, because of the nature of Orange and Rockland's wholesale
relationship with its utility subsidiaries,
__________________________
Commission found that Brooklyn Union's incentives had been potentially changed,
because it had not been in the electric business prior to the merger. Here, each
of the Applicants is a combination company prior to the Merger, and as noted
earlier, the Merger does not change that status of their incentives.
45
and given Orange and Rockland's plans to divest fully its generation and the
impending availability of retail access in New Jersey and Pennsylvania,
ratepayer protections of the specific type described in the Policy Statement are
not relevant. The Policy Statement suggests that utilities "negotiate with
customers" before filing an "open season" or other ratepayer protection
mechanism to be offered in connection with a merger./41/ This provision was
plainly intended to apply to third-party customers whose contractual bargain may
be affected by a merger, not to the merging parties themselves. The apparent
intent of the Policy Statement is to protect ultimate consumers from the
unanticipated rate impacts of a merger. In this case, even assuming that the
Merger could adversely affect the wholesale rates charged to Pike and RECO, the
ultimate customers would not be negatively impacted. As Mr. Marino states, under
Orange and Rockland's retail access plans, on May 1, 1999, all of Pike's and
RECO's customers will have a choice of supplier. In effect, there will be an
"open season" for those customers.
Likewise, the Merger will not adversely affect the non-requirements
wholesale power sales contracts that Con Edison and Orange and Rockland have.
As stated in the testimony of Messrs. Harkins and Marino, any service that
customers under such contracts take from either Con Edison or Orange and
Rockland is at their choice and governed by their assessment of the economics of
a given transaction. If they believe that the price offered for electric
service is too high for any reason, they simply can buy from someone else or
produce the energy themselves.
_______________________
/41/ Policy Statement at 30,124.
46
Further, as Messrs. Jaeger and Hartwell explain in their testimony,
the rates to firm wholesale transmission customers will not be adversely
impacted by the Merger. The Applicants will offer transmission service pursuant
to the ISO tariff, which the Applicants expect will be operating prior to
consummation of the Merger. The ISO tariff is modeled after, and is consistent
with, Order No. 888. Thus, under the ISO tariff, transmission customers will
not be adversely affected by the Merger.
In the unlikely event that the ISO tariff is not in place prior to
consummation of the Merger, Con Edison and Orange and Rockland are filing, in
conjunction with this Application, a joint OATT, which provides access across
both companies' systems under a zonal approach. The joint OATT, which if it
takes effect would only be in place until the ISO tariff takes effect, allows
Con Edison and Orange and Rockland to maintain their present rates. As Messrs.
Jaeger and Hartwell describe, because the rates under the joint OATT will be in
effect for a short, interim period, if at all, adoption of a consolidated rate
is not warranted at this time. The Applicants, therefore, proposal zonal
transmission rates that will enhance access to their transmission systems by
eliminating rate panicking. The Applicants believe that this approach is
reasonable, especially because the proposal holds all current customers at least
harmless and offers greater access at one rate to new customers. Again, under
the joint OATT, rates to transmission customers will not be adversely affected.
Finally, Con Edison has a number of long-term firm transmission
contracts that were not made under its OATT, and Orange and Rockland has a non-
OATT transmission agreement with NYPA under which Orange and Rockland transmits
NYPA hydroelectric power to PSE&G. As noted in Messrs. Jaeger's and Hartwell's
testimony, Con
47
Edison and Orange and Rockland commit that neither will seek to increase rates
under these transmission agreements to recover any Merger-related costs.
C. EFFECT ON REGULATION
The Commission focuses on two issues in deciding whether a proposed
merger would impair effective regulation: (1) whether the merger would shift
authority from the Commission to the SEC; and (2) whether affected states have
the authority to act on the merger./42/ The Merger will not result in any
shift of regulation from the Commission to the SEC. Further, each of the states
that regulate the merging parties has jurisdiction to approve the Merger.
Consequently, the Merger will not impair regulation.
As described in Mr. Harkins' testimony, it is anticipated that post-
acquisition transactions between Con Edison and Orange and Rockland and their
affiliates will be exempt from SEC regulation because CEI will remain an exempt
public utility holding company under section 3(a)(1) of PUHCA. Orange and
Rockland also will continue as an exempt holding company under section 3(a)(2)
of PUHCA. Accordingly, those transactions will remain subject to the
Commission's oversight and will be conducted in accordance with the Commission's
policies on intra-company services.
As Mr. Harkins testifies, in those mergers where the merged company
has been required to become a registered holding company under PUHCA, FERC has
conditioned merger approval on the merged firm's agreement to abide by the
Commission's policies with respect to intra-system transactions within the
newly-formed holding company
__________________
/42/ Policy Statement at 30,124-25.
48
structure. The Applicants do not believe that the SEC will require CEI to become
a registered holding company. If the SEC were to require such registration as a
condition of Merger approval, however, the Applicants commit that for FERC
ratemaking purposes, they will follow the Commission's policies regarding
treatment of costs and revenues associated with intra-company services.
As to the issue of whether affected states have the authority to act
on the Merger, the Applicants have requested approval of the Merger by the state
public utility commissions in all of the relevant state jurisdictions -- New
York, New Jersey, and Pennsylvania. Accordingly, any impact that the Merger
might have on state regulatory authority will be addressed in the state
proceedings and need not affect this proceeding. Of course, each state
regulatory agency may intervene as of right in this proceeding.
VI. THE MERGER ACCOUNTING
---------------------
The Policy Statement states that "proper accounting treatment is . . .
a requirement for all mergers."/43/ As described in the testimony of Hyman
Schoenblum, Con Edison and Orange and Rockland will each record as a regulatory
asset in FERC Account 182 the respective costs that they incur to achieve the
Merger. Assuming that the Merger is approved, such costs will be amortized over
the five years beginning July 1, 1999. The July 1999 date was selected to match
the period when synergy savings are expected to begin, thereby matching the
Merger costs with the Merger savings. The amortization of the regulatory asset
will be a charge to Miscellaneous General Expenses (FERC Account 930.2).
____________________
/43/ Policy Statement at 30,126 (footnote omitted).
49
Journal entries for CEI, Con Edison, and Orange and Rockland illustrating how
the companies intend to account for the costs of the Merger are included in
Exhibit No. APP-103 to Mr. Schoenblum's testimony. In addition, Exhibits C, E
and F to the Application, which include pro forma balance sheets of CEI and
Orange and Rockland, also illustrate the accounting treatment of the costs of
the Merger.
The Merger is an acquisition of the common stock of Orange and
Rockland by CEI and will be recorded using the purchase method of accounting for
business combinations in accordance with Accounting Principles Board Opinion No.
16. The purchase price will be compared to the fair value of Orange and
Rockland's net assets (which is assumed to be book value) at the time that the
transaction is completed, with the difference reflected as goodwill on CEI's
books and amortized over a 40-year period. As shown on the pro forma journal
entries, Con Edison and Orange and Rockland will reimburse CEI for their
appropriate share of goodwill expenses. The charges for the subsidiaries'
shares of goodwill will be "below-the-line" expenses charged to Miscellaneous
Amortizations (FERC Account 425).
As Mr. Schoenblum also testifies, post-Merger Con Edison and Orange
and Rockland will share many of the administrative functions that are currently
performed by two separate organizations. These areas include accounting,
auditing, information resources, treasury, legal, and corporate. In accordance
with general instruction No. 14 of the Uniform System of Accounts, records will
be kept reflecting the details of the post-Merger consolidation of
administrative functions.
50
VII. OTHER FILINGS
-------------
In addition to the approval and related authorizations requested from
the Commission pursuant to FPA sections 203, and the joint OATT and revised
Standards of Conduct for Orange and Rockland that the Applicants are filing
contemporaneously with the Commission under FPA section 205, the Applicants have
also filed, or will hereafter file, the following requests for Federal and State
regulatory approvals in connection with the Merger:
A. OTHER FEDERAL FILINGS
1. SEC
As stated above, CEI owns all of Con Edison's issued and outstanding
common stock and is a public utility holding company under section 3(a)(1) of
PUHCA. The Applicants, therefore, must file for approval of the Merger before
the SEC pursuant to PUHCA section 9(a)(2). The Applicants expect to file for
such approval within approximately the next 30 days. CEI and Orange and
Rockland shall continue to claim their exemptions from registration under PUHCA
after the Merger.
2. HART-SCOTT-RODINO
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended ("HSR"), the Merger may not be consummated until certain information has
been submitted to the DOJ and the FTC and the HSR waiting period has been
satisfied. It is expected that CEI and Orange and Rockland will submit their
respective notification and report forms and all required information to the DOJ
and FTC in the fourth quarter of this year.
51
B. STATE FILINGS
1. NEW YORK
Con Edison and Orange and Rockland are subject to the jurisdiction of
the NYPSC. On June 22, 1998, the Applicants filed a petition with the NYPSC
requesting approval of the Merger, a copy of which is included in Exhibit G to
this Application.
2. NEW JERSEY
Orange and Rockland's utility subsidiary, RECO, is subject to the
jurisdiction of the New Jersey Board of Public Utilities ("NJBPU"). On July 2,
1998, the Applicants filed a petition with the NJBPU requesting approval of the
Merger, a copy of which is included in Exhibit G to this Application.
3. PENNSYLVANIA
Orange and Rockland's other utility subsidiary, Pike, is subject to
the jurisdiction of the PAPUC. On July 2, 1998, the Applicants filed a petition
with the PAPUC requesting approval of the Merger, a copy of which is included in
Exhibit G to this Application.
VIII. INFORMATION SUBMITTED UNDER THE ACQUISITION
-------------------------------------------
AND MERGER FILING REQUIREMENTS OF 18 C.F.R. (S) 33.2
----------------------------------------------------
A. SECTION 33.2(A)
THE EXACT NAME AND ADDRESS OF THE PRINCIPAL BUSINESS OFFICE OF THE
APPLICANTS.
Consolidated Edison Company of New York, Inc.
4 Irving Place
New York, New York 10003
52
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza
Pearl River, New York 10965
B. SECTION 33.2(B)
NAME AND ADDRESS OF THE PERSONS AUTHORIZED TO RECEIVE NOTICES AND
COMMUNICATIONS WITH RESPECT TO THE APPLICATION.
For Con Edison:
--------------
Donald J. Stauber
Associate Counsel
Consolidated Edison Company of New York, Inc.
4 Irving Place
Room 1815-S
New York, New York 10003
For Orange and Rockland:
-----------------------
G.D. Caliendo
Senior Vice President & General Counsel
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza
Pearl River, New York 10965
Counsel:
-------
Douglas G. Green
Steptoe & Johnson LLP
1330 Connecticut Avenue, N.W.
Washington, D.C. 20036
The Applicants request that the names of these persons be placed upon
the official service list compiled by the Secretary of the Commission in this
proceeding.
C. SECTION 33.2(C)
DESIGNATION OF THE TERRITORIES SERVED, BY COUNTIES AND STATES.
This information is contained in Section III of this Application.
53
D. SECTION 33.2(D)
A GENERAL STATEMENT BRIEFLY DESCRIBING THE FACILITIES OWNED OR
OPERATED FOR TRANSMISSION OF ELECTRIC ENERGY IN INTERSTATE COMMERCE OR
THE SALE OF ELECTRIC AT WHOLESALE IN INTERSTATE COMMERCE.
This information is contained in Section III of this Application.
E. SECTION 33.2(E)
WHETHER THE APPLICATION IS FOR DISPOSITION OF FACILITIES BY SALE,
LEASE, OR OTHERWISE, A MERGER OR CONSOLIDATION OF FACILITIES, OR FOR
PURCHASE OR ACQUISITION OF SECURITIES OF A PUBLIC UTILITY, ALSO A
DESCRIPTION OF THE CONSIDERATION, IF ANY, AND THE METHOD OF ARRIVING
AT THE AMOUNT THEREOF.
The Merger involves the acquisition by CEI of the common stock of
Orange and Rockland for the consideration of $58.50 per share, as described in
Section IV of this Application.
F. SECTION 33.2(F)
A STATEMENT OF FACILITIES TO BE DISPOSED OF, CONSOLIDATED, OR MERGED,
GIVING A DESCRIPTION OF THEIR PRESENT USE AND OF THEIR PROPOSED USE
AFTER DISPOSITION, CONSOLIDATION, OR MERGER. STATE WHETHER THE
PROPOSED DISPOSITION OF FACILITIES OR PLAN FOR CONSOLIDATION OR MERGER
INCLUDES ALL THE OPERATING FACILITIES OF THE PARTIES TO THE
TRANSACTION.
A description of the facilities to be merged is set forth in Section
III of this Application. As a result of the Merger, Orange and Rockland will
become a wholly-owned subsidiary of CEI. Orange and Rockland will retain
ownership of all of its subsidiaries, including its two public utility
subsidiaries, RECO and Pike. The Merger includes all of the operating facilities
of Orange and Rockland. All jurisdictional facilities shall be operated after
the consummation of the Merger in substantially the same manner as they
currently are operated.
54
G. SECTION 33.2(G)
A STATEMENT (IN THE FORM PRESCRIBED BY THE COMMISSION'S UNIFORM SYSTEM
OF ACCOUNTS FOR PUBLIC UTILITIES AND LICENSEES) OF THE COST OF THE
FACILITIES INVOLVED IN THE SALE, LEASE, OR OTHER DISPOSITION OR MERGER
OR CONSOLIDATION. IF ORIGINAL COST IS NOT KNOWN, AN ESTIMATE OF
ORIGINAL COST BASED, INSOFAR AS POSSIBLE, UPON RECORDS OR DATA OF THE
APPLICANT OR ITS PREDECESSORS MUST BE FURNISHED, TOGETHER WITH A FULL
EXPLANATION OF THE MANNER IN WHICH SUCH ESTIMATE HAS BEEN MADE, AND A
DESCRIPTION AND STATEMENT OF THE PRESENT CUSTODY OF ALL EXISTING
PERTINENT DATA AND RECORDS.
The costs of the facilities involved in the Merger are set forth in
the financial statements attached hereto as Exhibit C in accordance with section
33.3 of the Commission's regulations.
H. SECTION 33.2(H)
A STATEMENT AS TO THE EFFECT OF PROPOSED TRANSACTION UPON ANY CONTRACT
FOR THE PURCHASE, SALE, OR INTERCHANGE OF ELECTRIC ENERGY.
The Merger will have no material effect upon any contract of the
Applicants for the purchase, sale, or interchange of electric energy.
I. SECTION 33.2(I)
A STATEMENT AS TO WHETHER OR NOT ANY APPLICATION WITH RESPECT TO THE
TRANSACTION OR ANY PART THEREOF IS REQUIRED TO BE FILED WITH ANY OTHER
FEDERAL OR STATE REGULATORY BODY.
The other federal and state filings required in connection with the
Merger are set forth in Section VII of this Application.
55
J. SECTION 33.2(J)
THE FACTS RELIED UPON BY THE APPLICANTS TO SHOW THAT THE PROPOSED
DISPOSITION, MERGER, OR CONSOLIDATION OF FACILITIES OR ACQUISITION OF
SECURITIES WILL BE CONSISTENT WITH THE PUBLIC INTEREST.
The facts relied upon by the Applicants to show that the Merger will
be consistent with the public interest are set forth in this Application, and
the related exhibits and testimony herewith submitted.
K. SECTION 33.2(K)
A BRIEF STATEMENT OF FRANCHISES HELD, SHOWING DATE OF EXPIRATION IF
NOT PERPETUAL.
Con Edison and Orange and Rockland each submit that it possesses
franchises, consents, or other rights necessary for its provision of electric,
gas or steam service in its service territory. A brief statement of the
franchises held by the Applicants is hereto attached as Attachment 2.
L. SECTION 33.2(L)
FORM OF NOTICE.
A form of notice suitable for publication in the Federal Register that
briefly summarizes the facts contained in this Application is hereto attached.
An electronic version of the notice is also submitted herewith on a 3 1/2 "
diskette, in WordPerfect 5.1 for DOS.
IX. REQUIRED EXHIBITS UNDER 18 C.F.R. (S) 33.3
------------------------------------------
The exhibits required pursuant to section 33.3 of the Commission's
regulations are included with this filing as Exhibits A through I.
56
X. PROCEDURAL MATTERS
------------------
A. REQUEST FOR APPROVAL WITHOUT HEARING
The Applicants respectfully request that the Commission approve the
Merger without a hearing on the basis of the facts and analyses set forth in
this Application and supporting testimony and exhibits, which demonstrate that
the Merger will not have an adverse effect on competition, rates, or regulation.
B. CLOSING DATE
The Merger is scheduled to close on or before March 31, 1999. The
Applicants shall advise the Commission of the actual closing date promptly upon
its occurrence.
XI. CONCLUSION
----------
For the reasons set forth in this Application and the supporting
testimony and exhibits, the Applicants respectfully request that the Commission:
1. Find that the Merger will not have a potential adverse effect on
competition, rates, or regulation, and that this filing with the
Commission satisfies all applicable requirements for
authorization of the Merger under section 203 of the Federal
Power Act and part 33 of the Commission's regulations;
2. Approve the Merger and grant any and all other authorizations or
approvals incidental thereto that may be required;
57
3. Issue such approvals and related authorizations based on the
Application and supporting materials, without hearing; and
4. Waive any filing requirement or other regulation as the
Commission may find necessary or appropriate to allow this
Application to be accepted for filing and granted.
Respectfully submitted,
___________________________________
Douglas G. Green
Steven J. Ross
Jane I. Ryan
Steptoe & Johnson LLP
1330 Connecticut Avenue, N.W.
Washington, DC 20036
Phone: (202) 429-3000
Fax: (202) 429-3902
John D. McMahon G. D. Caliendo
Senior Vice President and General Counsel Senior Vice President and General
Consolidated Edison Company Counsel
of New York, Inc. Orange and Rockland Utilities, Inc.
4 Irving Place One Blue Hill Plaza
New York, New York 10003 Pearl River, New York 10965
Phone: (212) 460-4600 Phone: (914) 352-6000
September 9, 1998
58
TESTIMONY OF
HYMAN SCHOENBLUM
ON BEHALF OF
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
AND
ORANGE AND ROCKLAND UTILITIES, INC.
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Hyman Schoenblum and my business address is 4 Irving Place, New
York, New York 10003.
Q. BY WHOM ARE YOU EMPLOYED?
A. I am employed by Consolidated Edison Company of New York, Inc. ("Con
Edison" or the "Company") as Vice President and Controller.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND, PROFESSIONAL QUALIFICATIONS
AND BUSINESS EXPERIENCE.
A. I was graduated from Baruch College in 1970, with a Bachelor of Business
Administration Degree in Accounting. In June 1977, I received a Masters
Degree in Finance from Baruch College.
I have been employed by Con Edison since July 1971. I worked for ten
years in the Accounting Research and Procedures Section of the Corporate
Accounting Department, rising to the position of Section Manager. In July
1981, I was promoted to Assistant Controller. From
November 1993 until June 1996, I was a Director in the Corporate Planning
Department working on various aspects of the electric restructuring
proceeding conducted by the New York Public Service Commission ("NYPSC").
In July 1996, I returned to Corporate Accounting as a Director responsible
for the accounting and financial matters associated with electric
restructuring. In March 1997, I was promoted to Vice President and
Treasurer, and in October 1997, I was appointed to my current position of
Vice President and Controller.
Q. HAVE YOU APPEARED AS A WITNESS BEFORE ANY REGULATORY COMMISSIONS?
A. Yes, I have appeared before the NYPSC on numerous occasions as a witness in
support of Con Edison rate applications.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
A. My testimony is submitted in support of the proposed acquisition by
Consolidated Edison, Inc. ("CEI") of the common stock of Orange and
Rockland Utilities, Inc. ("Orange and Rockland") (the "Merger"). As
background, I will describe Con Edison, its corporate structure, and the
planned divestiture of its generation assets. I also will describe
generally the reasons why CEI decided to merge with Orange and Rockland,
the structure of the Merger, the expected costs and savings associated with
the Merger, and the proposed accounting treatment for those costs and
savings. I also will identify other witnesses testifying in support of the
Merger.
-2-
EXISTING CORPORATE STRUCTURE
- ----------------------------
Q. PLEASE DESCRIBE CON EDISON AS IT IS CURRENTLY ORGANIZED.
A. Con Edison is an electric, gas, and steam corporation organized under the
laws of the State of New York and has its principal place of business at 4
Irving Place, New York, New York 10003. Con Edison is a public utility
subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC" or "Commission") under the Federal Power Act ("FPA"). Con Edison
is a wholly-owned subsidiary of CEI, whose formation FERC authorized in
1997 (81 FERC (P) 62,070 (1997)). CEI is a public utility holding company
under the Public Utility Holding Company Act of 1935 ("PUHCA") and is
exempt from regulation by the Securities and Exchange Commission ("SEC") in
accordance with section 3(a)(1) of PUHCA. The current corporate structure
of CEI is reflected in Exhibit No. APP-101 to my testimony.
Q. PLEASE DESCRIBE CON EDISON'S ELECTRIC SERVICE TERRITORY AND ITS CUSTOMERS.
A. Con Edison supplies retail electric service in all of New York City (except
part of the Borough of Queens) and in most of Westchester County, New York
to approximately three million customers. The Con Edison system has a
projected peak load of 9,585 MW in 1998. Currently, Con Edison provides
retail access to approximately 1,000 MW of customer load, with
-3-
another 1,000 MW to have retail access on April 1, 1999, and the balance
gaining access thereafter. Con Edison has no wholesale electric
requirements customers, but does make off-system electric sales, as
described in the testimony of William A. Harkins. Con Edison's wholesale
transmission service arrangements are described in the joint testimony of
William L. Jaeger and James Hartwell.
Q. HOW HAS CON EDISON STRUCTURED ITSELF TO RESPOND TO CHANGES IN THE ELECTRIC
INDUSTRY?
A. Con Edison has functionally separated its merchant function from its
transmission system operations. The merchant function activities are
conducted by Con Edison's MegaWatt Hour Store. The transmission system is
operated by the System and Transmission Operations Department.
CEI has formed three unregulated subsidiaries (Con Edison Energy
("CEE"), Con Edison Solutions ("CES"), and Consolidated Edison Development
("CEDI")) to engage in energy transactions and to acquire and operate
electric generation capacity. It is envisioned that any future acquisitions
of generating capacity will be through CEE or CEDI, rather than by Con
Edison.
After the divestiture of its generation capacity, which I will
describe shortly, Con Edison will focus chiefly on the provision of
transmission and distribution services. Con Edison's restructuring is
complemented by the
-4-
creation of a New York Independent System Operator ("NYISO"), which will
provide and administer transmission services rendered over Con Edison's
system. The status of the NYISO and its impact on transmission
arrangements post-Merger are discussed in the testimony of Messrs. Jaeger
and Hartwell.
Q. PLEASE DESCRIBE GENERALLY CON EDISON'S GAS BUSINESS.
A. Con Edison provides retail gas service to approximately one million
customers in Manhattan, the Bronx, and parts of Queens and Westchester
Counties. As of December 31, 1997, the gas distribution system included
4,189 miles of mains. The highest historical maximum firm daily gas
sendout of 803 mdth (thousands of dekatherms) occurred on January 18, 1997.
Con Edison has a maximum daily firm gas delivery capability of 910 mdth,
which is available from the following sources: direct purchases - 584
mdth; storage withdrawals - 160 mdth, and Company LNG (liquefied natural
gas) - 166 mdth.
Con Edison has firm gas supply contracts with 16 gas suppliers for an
aggregate annual quantity of approximately 128 million dth. In addition to
its long-term supply sources, Con Edison purchases spot gas from producers
and marketers. During 1997, Con Edison purchased 117 million dth of firm
supply and 115 million dth of spot gas. Con Edison made
-5-
purchases for electric generation of approximately 110 million dth of gas,
or 46 percent of the total gas delivered.
Con Edison's gas purchases are delivered under firm and interruptible
transportation agreements with seven major interstate pipeline companies:
Texas Eastern Transmission Corporation ("Texas Eastern"), Transcontinental
Gas Pipeline Corporation ("Transco"), Tennessee Gas Pipeline Company
("Tennessee"), Algonquin Gas Transmission Company, Iroquois Gas
Transmission System, National Fuel Gas Supply Corporation, and CNG
Transmission Corporation ("CNG"). With regard to gas storage, Con Edison
is part owner of the Honeoye Storage facility and a customer of the storage
service provided by that facility, and has long-term firm gas storage
contracts with Tennessee, Transco, Texas Eastern, and CNG.
As of July 1998, Con Edison provides firm and interruptible gas
transportation for approximately 11,500 industrial, commercial, and
residential customers in its gas service territory that have elected to
participate in Con Edison's gas retail access program and obtain their gas
supplies from third-party suppliers. During 1997, Con Edison transported
approximately 25.5 million dth of gas under this program.
Gas for the Company's full service customers and its gas retail access
program are managed on a day-to-day basis by Con Edison's Gas Supply
Department. Gas purchases for electric generation are managed on
-6-
a day-to-day basis by Con Edison's Energy Management Department. The
distribution of gas to Con Edison's gas service customers and electric
generation stations is managed on a day-to-day basis by the Gas Operations
Department and the Gas Control Section of the Gas Supply Department.
Q. PLEASE DESCRIBE ORANGE AND ROCKLAND AS IT CURRENTLY EXISTS.
A. Orange and Rockland is an electric and gas corporation, organized under the
laws of the State of New York and has its principal place of business at
One Blue Hill Plaza, Pearl River, New York 10965. Orange and Rockland is
a public utility subject to FERC's jurisdiction under the FPA. Orange and
Rockland has two wholly-owned utility subsidiaries: Rockland Electric
Company ("RECO"), a New Jersey corporation; and Pike County Light & Power
Company ("Pike"), a Pennsylvania corporation. Orange and Rockland is a
public utility holding company that is exempt from SEC regulation under
section 3(a)(2) of PUHCA.
Q. PLEASE DESCRIBE ORANGE AND ROCKLAND'S SERVICE TERRITORY AND ITS CUSTOMERS.
A. Orange and Rockland supplies retail gas and electric service in all of
Rockland County, most of Orange County, and part of Sullivan County, New
York. In New Jersey, Orange and Rockland's utility subsidiary, RECO,
supplies retail electric service in parts of Bergen County, Passaic County,
and Sussex County. In Pennsylvania, Orange and Rockland's
-7-
utility subsidiary, Pike, supplies retail gas and electric service in parts
of Pike County. More details concerning Orange and Rockland and its
business functions are provided in the testimony of G. D. Caliendo and
Frank P. Marino. As Mr. Marino's testimony describes, Orange and Rockland's
corporate structure is such that it provides full requirements wholesale
service to RECO and Pike pursuant to FERC-approved tariffs. Mr. Marino also
describes Orange and Rockland's off-system wholesale sales. Messrs. Jaeger
and Hartwell describe Orange and Rockland's wholesale transmission service
arrangements. RECO and Pike have no wholesale electric customers.
Orange and Rockland currently owns 964 MW of installed generating
capacity. In its Electric Rate and Restructuring Plan, dated November 6,
1996, which the NYPSC approved in its orders dated November 26, and
December 31, 1997, Orange and Rockland agreed to divest all of its electric
generating assets. On April 16, 1998, the NYPSC approved the process for
the auctioning of Orange and Rockland's electric generating assets. The
divestiture process, which is expected to be completed by May 31, 1999, is
described in Mr. Marino's testimony.
THE MERGER
- ----------
Q. PLEASE DESCRIBE THE BACKGROUND TO THE MERGER.
-8-
A. Dramatic changes are occurring in the electric and gas industries at the
federal and state levels, resulting in an increasingly competitive
environment in which traditionally-regulated gas and electric utilities
must do business. As a consequence of this industry transformation, Con
Edison and Orange and Rockland have each engaged in an on-going evaluation
of the energy industry to determine how best to respond to these changes.
As described further in the testimony of Mr. Caliendo, several months ago,
the companies commenced exploratory discussions to determine whether some
form of business combination might provide a mutually beneficial setting
for responding to this evolving and increasingly competitive energy
marketplace. Those discussions culminated in a series of intensive
meetings, and ultimately in an agreement on the terms and conditions of a
business combination that are set forth in the Agreement and Plan of
Merger, dated as of May 10, 1998 ("Merger Agreement"), a copy of which is
attached as Exhibit H to the Application. The Boards of Directors of
Orange and Rockland and CEI, respectively, approved the Merger Agreement.
Orange and Rockland's shareholders approved it on August 20, 1998. CEI
shareholder approval is not required.
Q. PLEASE DESCRIBE THE MERGER.
A. In accordance with the terms and conditions of the Merger Agreement, CEI
proposes to acquire all of the common stock of Orange and Rockland for
-9-
$58.50 per share in cash. To effect the Merger, C Acquisition Corp., a
special purpose subsidiary of CEI, will merge with and into Orange and
Rockland. Each outstanding share of Orange and Rockland stock will be
converted into the right to receive $58.50, and each share of C Acquisition
Corp. will be converted into a share of Orange and Rockland. As a result,
Orange and Rockland will be the surviving corporation and will become a
subsidiary of CEI. The existing subsidiaries of Orange and Rockland, both
regulated and unregulated, are expected to remain Orange and Rockland
subsidiaries. Attached as Exhibit No. APP-102 is a chart depicting the
post-Merger corporate organization of the merging companies. It is
expected that Con Edison, Orange and Rockland, RECO, and Pike each will
retain its separate corporate identity and name, assets and liabilities,
franchises, and certificates of public convenience and necessity. The
Merger is forecasted to close on or about March 31, 1999.
DIVESTITURE OF GENERATION CAPACITY
- ----------------------------------
Q. PLEASE DESCRIBE CON EDISON'S GENERATION DIVESTITURE PROGRAM.
A. Con Edison has undertaken a comprehensive restructuring of its retail
electric service pursuant to a settlement agreement ("Restructuring
Agreement"), which the NYPSC approved by orders issued September 23, and
November 3, 1997, in Case 96-E-0897, subject to certain conditions and
understandings. The Restructuring Agreement committed Con Edison to
-10-
divest at least 50 percent of its New York City fossil-fueled electric
generating capacity ("In-City Capacity") to unaffiliated third parties by
year-end 2002. In addition, the Restructuring Agreement required Con Edison
to transfer to its unregulated affiliates, by year-end 2002, all of its
electric generating plants not sold to third parties, except for the Indian
Point No. 2 nuclear generating facility and its associated gas turbines.
On February 27, 1998, Con Edison filed with the NYPSC a plan
("Divestiture Plan") to implement the divestiture of its electric
generating facilities. On April 15, 1998, Con Edison also proposed to
divest its steam/electric (co-generating) units located in New York City,
as set forth in its Steam System Plan.
The Merger does not affect the Divestiture Plan. Pursuant to the
Divestiture Plan, Con Edison will auction off its electric generating
facilities in three bundles:
. 1,434 MW consisting of the Arthur Kill generating station and
Astoria gas turbines ("Arthur Kill bundle");
. 2,168 MW consisting of the Ravenswood generating station and gas
turbines ("Ravenswood bundle"); and
. 1,858 MW consisting of the Astoria generating station plus the
Gowanus and Narrows gas turbines ("Astoria bundle").
Closing on the sales of these three bundles is expected by the end of the
first quarter of 1999. No purchaser may purchase more than one of these
-11-
three bundles. Under Con Edison's Steam System Plan, Con Edison will
auction off the remainder of its generation in New York City in a fourth
bundle consisting of 463 MW of units that produce electricity and steam for
Con Edison's steam delivery system ("Steam electric bundle"). Con Edison
plans to close on the sales of the fourth bundle by the end of 1999.
The NYPSC, in its July 21, 1998 Order, gave Con Edison the option of
having its unregulated affiliate participate in the auction to purchase one
of the initial three bundles, subject to certain conditions. On July 24,
1998, Con Edison advised the NYPSC that its affiliate would forego its
right to participate in the auction based on the understanding that Con
Edison would receive certain treatment of any gains from the sales. The
NYPSC approved Con Edison's proposal on August 5, 1998. Accordingly, Con
Edison plans to divest all of its In-City Capacity generation to third
parties. As part of the Divestiture Plan, Con Edison expects to transfer
certain step-up transformers and other jurisdictional facilities. Thus, the
transfers ultimately will require the Commission's approval under FPA
section 203.
Con Edison filed with FERC on June 1, 1998, localized market power
mitigation measures designed to facilitate its Divestiture Plan. These
localized market power measures will prevent the new owners of Con Edison's
generation from exercising localized market power due to the unique local
transmission constraints and reliability rules in New York City.
-12-
Con Edison is seeking FERC approval of these measures now because the
new buyers need to know the economic consequences of localized In-City
constraints before they can value their bids in the divestiture auction.
The individual buyers, of course, will also have to obtain market-based
pricing authority from FERC before they can sell this generation at market
prices in the broader markets outside the City.
Con Edison is also divesting its two-thirds interest in the Bowline
Point generating station that it co-owns with Orange and Rockland, which
owns the remaining one-third interest. By agreement with Orange and
Rockland, Con Edison's two-thirds (810 MW) interest will be sold (with
Orange and Rockland acting as Con Edison's agent) in connection with Orange
and Rockland's auction of all of its electric generation assets, as
discussed in Mr. Marino's testimony. Similarly, Con Edison has announced
its intention to divest its 400 MW interest in Central Hudson Gas &
Electric Corporation's Roseton station in conjunction with Central Hudson's
divestiture auction.
Merger Benefits
- ---------------
Q. HOW DOES THE MERGER FIT WITH CON EDISON'S STRATEGIC GOALS?
A. Con Edison's plan is to enlarge its transmission and distribution business
and customer base. The Merger will contribute to that goal, and it will
create efficiencies and facilitate the enhancement of customer services.
-13-
Q. WHAT BENEFITS WILL THE MERGER PRODUCE?
A. The benefits from the Merger are driven by the operating efficiencies,
mostly in the administrative areas of the companies, and from expected
economies of scale.
Q. PLEASE EXPLAIN HOW INCREASED EFFICIENCIES CAN BE ACHIEVED.
A. As competition intensifies within the industry, the combined resources of
Con Edison and Orange and Rockland will contribute to overall business
success. The combination of resources will benefit many areas, including
utility operations, product development, and corporate services. The
Merger is expected to lower the costs of providing energy and related
services when compared to the stand-alone costs of Con Edison and Orange
and Rockland, and will improve the efficiency of the combined companies by
increasing the customer base and providing synergies for the merged
companies.
Q. IS BRINGING THE PERSONNEL OF THE TWO COMPANIES TOGETHER AN IMPORTANT
BENEFIT OF THE MERGER TO CUSTOMERS?
A. Yes, it is. Con Edison and Orange and Rockland are expected to remain
independent companies following the Merger. However, the Merger will
facilitate the integration of the capabilities, talents, and strengths of
the personnel of the two companies as well as the adoption of the best
practices
-14-
of the two companies to facilitate efficiencies. The result will be a whole
that is greater than the sum of its parts, an arrangement that will
facilitate each company's ability to provide reliable transmission and
distribution services at reasonable rates.
ACCOUNTING MATTERS
- ------------------
Q. PLEASE DESCRIBE THE COSTS ASSOCIATED WITH THE MERGER.
A. Costs associated with the Merger consist of transaction, transition, and
employee costs. Transaction costs incurred to accomplish the Merger
include investment banking, legal, and consulting fees. Transition costs
are costs, other than transaction and employee costs, necessary to achieve
the combination of the companies. Examples of such costs include
information systems integration and communication costs, and the cost of
regulatory approvals. Employee costs include separation costs, relocation,
and training costs.
Q. HOW WILL THESE COSTS BE ACCOUNTED FOR ON CON EDISON'S AND ORANGE AND
ROCKLAND'S BOOKS?
A. The costs to achieve the Merger will be incurred by both Con Edison and
Orange and Rockland and will be recorded as a regulatory asset in FERC
Account 182 for the respective companies. Assuming that the Merger is
approved, such costs will be amortized over the five years beginning July
1,
-15-
1999. The July 1999 date was selected to match the period when the
synergy savings are expected to begin, thus matching the Merger costs with
the synergy savings. The five-year amortization period is consistent with
the time period that Con Edison has historically utilized, and the NYPSC
has approved, to recover significant expenditures such as the costs of its
demand side management and enlightened energy programs. The amortization
of the regulatory asset will be a charge to Miscellaneous General Expenses
(FERC Account 930.2). Attached as Exhibit No. APP-103 are pro forma
journal entries for CEI, Con Edison, and Orange and Rockland that
illustrate how the companies intend to account for the costs of the Merger.
I also am sponsoring Exhibit Nos. C, E, and F to the Application, which
include pro forma balance sheets of CEI and Orange and Rockland that also
illustrate the accounting treatment of the costs of the Merger.
Q. HOW WILL THE ACQUISITION OF THE COMMON STOCK OF ORANGE AND ROCKLAND BE
ACCOUNTED FOR?
A. The acquisition is a purchase of Orange and Rockland by CEI and will be
recorded using the purchase method of accounting for business combinations
in accordance with Accounting Principles Board Opinion No. 16. The
purchase price will be compared to the fair value of Orange and Rockland's
net assets (which is assumed to be book value) at the time
-16-
that the transaction is completed, with the difference reflected as
goodwill on CEI's books and amortized over a 40-year period. As shown by
the pro forma journal entries in Exhibit No. APP-103, Con Edison and Orange
and Rockland will reimburse CEI for their appropriate shares of goodwill
expenses. The charges for the subsidiaries' shares of goodwill will be
"below-the-line" expenses charged to Miscellaneous Amortizations (FERC
Account 425).
Q. WHAT TYPES OF SERVICE WILL CON EDISON AND ORANGE AND ROCKLAND PROVIDE TO
EACH OTHER POST-MERGER?
A. The two companies will share many of the administrative functions that are
currently performed by two separate organizations. These areas include
accounting, auditing, information resources, treasury, legal, and
corporate.
Q. HOW WILL THE COSTS OF THE JOINT ADMINISTRATIVE FUNCTIONS BE ALLOCATED AMONG
THE REGULATED SUBSIDIARIES?
A. In accordance with general instruction No. 14 of the Uniform System of
Accounts, records will be kept reflecting the details of the post-Merger
consolidation of administrative functions.
SUMMARY OF THE FILING
- ---------------------
Q. PLEASE SUMMARIZE THE COMPANIES' FILING IN THIS PROCEEDING.
-17-
A. The Application, together with the supporting testimony and exhibits,
demonstrate the following:
(1) the Merger will not adversely affect competition;
(2) the Merger will not subject customers to increased rates;
(3) the Merger will not impair the effectiveness of Commission and
state regulation; and
(4) the accounting treatment for the Merger complies with the
Commission's rules and generally accepted accounting principles.
Consequently, FERC should find that the Merger is consistent with the
public interest.
Q. PLEASE DESCRIBE GENERALLY OTHER TESTIMONY SUBMITTED IN SUPPORT OF THE
MERGER.
A. The following additional testimony is submitted in support of the Merger:
Exhibit No. APP-200: William A. Harkins discusses the Merger's effect
on regulation and rates from the Con Edison perspective.
Exhibit No. APP-300: G. D. Caliendo explains the Merger benefits from
the Orange and Rockland perspective.
-18-
Exhibit No. APP-400: Frank P. Marino describes the status of Orange
and Rockland's state restructuring efforts and the effect of the Merger on
rates from the Orange and Rockland perspective.
Exhibit No. APP-500: William L. Jaeger and James Hartwell describe the
establishment of the NYISO and the transmission service arrangements that
Con Edison and Orange and Rockland currently implement and propose to
implement post-Merger.
Exhibit No. APP-600: Andrew L. Jacob describes the interim market
power mitigation measures that the Applicants propose.
Exhibit No. APP-700: William H. Hieronymus presents the results of the
empirical analyses performed in accordance with the Commission's
requirements to determine the effect of the proposed Merger on competition.
Q. DOES THIS COMPLETE YOUR TESTIMONY?
A. Yes, it does.
-19-
EXHIBIT APP-200
TESTIMONY OF
WILLIAM A. HARKINS
ON BEHALF OF
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
AND
ORANGE AND ROCKLAND UTILITIES, INC.
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is William A. Harkins and my business address is 4 Irving Place,
New York, New York 10003.
Q. BY WHOM ARE YOU EMPLOYED?
A. I am employed by Consolidated Edison Company of New York, Inc. ("Con
Edison") as Vice President-Energy Management.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND, PROFESSIONAL QUALIFICATIONS
AND BUSINESS EXPERIENCE.
A. I graduated from Manhattan College in 1967 with a Bachelor of Engineering
degree, and from Rensselaer Polytechnic Institute in 1968 with a Master of
Science degree, both with majors in Mechanical Engineering. I also
received a Masters of Business Administration degree from Fordham
University in 1971. I am licensed as a Professional Engineer in New York
State.
I was first employed by Con Edison in 1968, as an Assistant Engineer
in Mechanical Engineering. From 1970 to 1978, I served in various positions
with increasing responsibilities in the area of nuclear fuel supply. In
1978, I was promoted to the position of Chief Generation Planning Engineer
in Con Edison's Planning Department. In 1983, I was elected Assistant Vice
President for Fuel Supply, and in 1986, I was assigned additional
responsibilities for Environmental Affairs. In 1989, I was promoted to the
position of Vice President for Planning and Inter-Utility Affairs.
Following a reorganization of certain functions, Planning and Inter-Utility
Affairs was renamed Energy Management.
Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES.
A. My responsibilities include, among other things, planning for the Company's
electric and steam systems, managing the regulated wholesale electricity
trading function, managing purchased power contracts, and overseeing the
divestiture of certain Con Edison generation assets as part of its
restructuring plans.
Q. HAVE YOU APPEARED AS A WITNESS BEFORE ANY REGULATORY COMMISSIONS?
A. Yes. I have testified before the New York Public Service Commission
("NYPSC") on numerous occasions.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
-2-
A. My testimony addresses the questions of whether the proposed acquisition by
Consolidated Edison, Inc. ("CEI") of the common stock of Orange and
Rockland Utilities, Inc. ("Orange and Rockland") (the "Merger") will have
an impact on (1) Con Edison's wholesale electric sales rates; and (2) state
and federal regulation of Con Edison and Orange and Rockland (the
"Applicants").
EFFECT ON RATES
- ---------------
Q. DOES CON EDISON HAVE ANY WHOLESALE ELECTRIC REQUIREMENTS CUSTOMERS?
A. No, it does not.
Q. DOES CON EDISON MAKE OFF-SYSTEM SALES OF ENERGY AND CAPACITY?
A. Yes. Con Edison has several interconnection, interchange, and bilateral
arrangements that provide for energy and capacity transactions. These
agreements have been submitted to the Federal Energy Regulatory Commission
("FERC" or "Commission") and have designated FERC rate schedules.
Q. HOW ARE SALES UNDER THESE AGREEMENTS PRICED?
A. The rates for customers under some arrangements are capped at average
system embedded cost; some are fixed and some are set by formula and
periodically updated. Sales under most of these agreements are made at
-3-
negotiated rates subject to a cost-based ceiling. Sales for some customers
are made at market-based rates under the appropriate rate schedule.
Q. WILL THE MERGER HAVE ANY ADVERSE IMPACT ON THESE SALES CUSTOMERS?
A. No. Con Edison's existing cost-based interconnection and electric capacity
and/or energy sales agreements are "framework" or enabling agreements that
establish the ground rules under which a customer can purchase power from
Con Edison whenever such a transaction would be in the customer's economic
self-interest and Con Edison agrees to the particular transaction. The
customer is not obligated to purchase any specified quantity of power; it
---
is always free to purchase its power from other suppliers.
If, after the Merger, Con Edison attempted to increase the price for
sales under these agreements, the customers could simply not buy any power
under them. Given the Merger synergies, what is more likely to happen is a
reduction in costs, resulting in lower rates being available to such
customers should they choose to buy from Con Edison post-Merger.
Customers that purchase power under Con Edison's market-based rates
tariff likewise can simply choose not to purchase power from Con Edison
post-Merger. Moreover, for the brief interval between the closing of the
Merger and the completion of Orange and Rockland's generation divestiture,
the Applicants have committed to mitigation measures that, among other
things, circumscribe the pricing of their generation resources
-4-
in the wholesale energy market. These mitigation measures are described in
the testimony of Andrew L. Jacob. In short, no wholesale sales customer of
Con Edison will be negatively impacted by the Merger.
EFFECT ON REGULATION
- --------------------
Q. WHAT GOVERNMENTAL APPROVALS ARE THE APPLICANTS SEEKING SO THAT THEY CAN
CONSUMMATE THE MERGER?
A. In addition to seeking FERC's approval, the Applicants are making the
following governmental filings in connection with the Merger:
(1) Securities and Exchange Commission. Because of its ownership of
----------------------------------
all the issued and outstanding common stock of Con Edison, CEI is
a public utility holding company under the Public Utility Holding
Company Act ("PUHCA"). Approval of the Securities and Exchange
Commission ("SEC") pursuant to section 9(a)(2) of PUHCA will be
required to consummate the Merger. A petition requesting such
approval is expected to be filed within approximately 30 days of
the date of this Application.
(2) New York Public Service Commission. Both Con Edison and Orange
and Rockland are regulated by the NYPSC. A petition requesting
the NYPSC's approval of the Merger was
-5-
filed on June 22, 1998. A copy is included in Exhibit G to the
Application.
(3) New Jersey Board of Public Utilities. Rockland Electric Company,
------------------------------------
a wholly-owned utility subsidiary of Orange and Rockland, is
subject to the jurisdiction of the New Jersey Board of Public
Utilities ("NJBPU"). A petition requesting the NJBPU's approval
of the Merger was filed on July 2, 1998. A copy is included in
Exhibit G to the Application.
(4) Pennsylvania Public Utility Commission. Pike County Light & Power
--------------------------------------
Company, a wholly-owned utility subsidiary of Orange and
Rockland, is subject to the jurisdiction of the Pennsylvania
Public Utility Commission ("PAPUC"). A petition requesting the
PAPUC's approval of the Merger was filed on July 2, 1998. A copy
is included in Exhibit G to the Application.
(5) Hart-Scott-Rodino. Under the Hart-Scott-Rodino Antitrust
-----------------
Improvements Act of 1976, as amended ("HSR"), the Merger may not
be consummated until the requisite notifications and report forms
have been filed with the Antitrust Division of the Department of
Justice and the Federal Trade Commission and
-6-
the HSR waiting period requirements have been satisfied. It is
anticipated that the necessary HSR filings will be made in the
fourth quarter of this year.
Q. WILL THE NON-ENERGY SERVICES PROVIDED BY CON EDISON AND ORANGE AND ROCKLAND
TO THEIR AFFILIATES BE SUBJECT TO REGULATION BY THE SEC?
A. No. It is anticipated that post-acquisition transactions between Con Edison
and Orange and Rockland and their affiliates will be exempt from SEC
regulation because CEI will remain an exempt public utility holding company
under section 3(a)(1) of PUHCA. Accordingly, those transactions will remain
subject to the Commission's and the NYPSC's oversight and will be conducted
in accordance with the Commission's and the NYPSC's policies on intra-
company services.
Q. IN THOSE MERGERS WHERE THE MERGED COMPANY HAS BEEN REQUIRED TO BECOME A
REGISTERED HOLDING COMPANY UNDER PUHCA, FERC HAS CONDITIONED MERGER
APPROVAL ON THE AGREEMENT BY THE MERGED FIRM TO ABIDE BY THE FERC'S
POLICIES WITH RESPECT TO INTRA-SYSTEM TRANSACTIONS WITHIN THE NEWLY-FORMED
HOLDING COMPANY STRUCTURE. WILL THE APPLICANTS MAKE SUCH A COMMITMENT IN
THE EVENT THAT THE SEC REQUIRES THE MERGED FIRM TO BECOME A REGISTERED
HOLDING COMPANY?
A. Yes. As I said, the Applicants do not believe that the SEC will require the
merged firm to become a registered holding company. If, however, the
-7-
SEC were to make this a condition of Merger approval, the Applicants commit
that for FERC ratemaking purposes, they will follow FERC's policies
regarding treatment of costs and revenues associated with intra-company
services.
Q. COULD THE MERGER IMPAIR EFFECTIVE STATE REGULATION?
A. No. As I noted earlier, the Applicants have requested approval of the
Merger by the state public utility commissions in all three of the relevant
jurisdictions. Accordingly, any impact that the Merger might have on state
regulatory authority will be addressed in the state proceedings and need
not affect this proceeding. Of course, each state regulatory agency may
intervene as of right in this proceeding.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
-8-
EXHIBIT APP-300
TESTIMONY OF
G. D. CALIENDO
ON BEHALF OF
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
AND
ORANGE AND ROCKLAND UTILITIES, INC.
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is G. D. Caliendo and my business address is One Blue Hill
Plaza, Pearl River, New York 10965.
Q. BY WHOM ARE YOU EMPLOYED?
A. I am employed by Orange and Rockland Utilities, Inc. ("Orange and
Rockland" or the "Company") as Senior Vice President, General Counsel,
Corporate Secretary and Compliance Officer.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND, PROFESSIONAL QUALIFICATIONS
AND BUSINESS EXPERIENCE.
A. I hold a B.A. from New York University and a J.D. from Fordham University
Law School. Before joining Orange and Rockland in early 1995, I served as
Senior Vice President, General Counsel and Secretary at Pennsylvania Power
& Light Company headquartered in Allentown, Pennsylvania. At Orange and
Rockland, I am responsible for the Company's legal, corporate
communications, public policy, environmental
services, security, safety, and regulatory affairs functions. I am admitted
to practice law in New York, Pennsylvania, and the District of Columbia.
Q. HAVE YOU APPEARED AS A WITNESS BEFORE ANY REGULATORY COMMISSIONS?
A. No, I have not.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
A. I will generally describe the corporate structure of Orange and Rockland,
why Orange and Rockland agreed to have its common stock acquired by
Consolidated Edison, Inc. ("CEI"), and why Orange and Rockland believes
that such acquisition (the "Merger") is in the public interest.
CORPORATE STRUCTURE
- -------------------
Q. PLEASE DESCRIBE ORANGE AND ROCKLAND AS IT IS CURRENTLY ORGANIZED.
A. Orange and Rockland is an electric and gas corporation organized under the
laws of the State of New York and is an exempt public utility holding
company under section 3(a)(2) of the Public Utility Holding Company Act of
1935. Orange and Rockland has two wholly-owned public utility
subsidiaries, Rockland Electric Company ("RECO"), a New Jersey corporation,
and Pike County Light & Power Company ("Pike"), a Pennsylvania corporation.
The combined operations of Orange and Rockland and RECO and Pike
supply electricity and gas to service territories covering approximately
-2-
1,350 square miles. Orange and Rockland supplies electric and gas service
in all of Rockland County, most of Orange County, and part of Sullivan
County, New York. In New Jersey, RECO supplies retail electric service to
the northern parts of Bergen and Passaic Counties and small areas in
northern Sussex County. Pike supplies retail electric and gas service to
the northeastern corner of Pike County, Pennsylvania. Orange and Rockland,
RECO, and Pike furnish retail electric service to approximately 269,000
customers in 96 communities with an estimated population of 681,000 and gas
service to approximately 114,000 customers in 57 communities with an
estimated population of 482,000. Approximately 77 percent of Orange and
Rockland's consolidated retail energy sales are from Orange and Rockland,
with 21 percent of consolidated retail energy sales from RECO, and
approximately one percent of consolidated retail energy sales from Pike.
Orange and Rockland's wholesale electric sales and its natural gas
business are described in the testimony of Frank P. Marino. The
transmission services that Orange and Rockland provides are described in
the joint testimony of William L. Jaeger and James Hartwell.
Orange and Rockland has two wholly-owned, active non-utility
subsidiaries, Clove Development Corporation ("Clove"), a New York
corporation, and O & R Development, Inc., a Delaware corporation. Clove
holds approximately 5,200 acres of real estate, located primarily in the
-3-
Mongaup Valley region of Sullivan County, New York. O & R Development,
Inc. was formed to promote industrial and corporate development in Orange
and Rockland's service territory by providing improved sites and buildings.
RECO has two wholly-owned, non-utility subsidiaries, Saddle River
Holdings, Corp. and Enserve Holdings, Inc., both Delaware corporations.
Enserve Holdings has three wholly-owned, non-utility subsidiaries,
Palisades Energy Services, Inc., an energy service provider, Compass
Resources, Inc., and NORSTAR Holdings, Inc. ("NHI"), all Delaware
corporations. NHI has two wholly-owned, non-utility subsidiaries, NORSTAR
Management, Inc. ("NMI"), a gas marketing company that is discontinuing
operations, and Millbrook Holdings, Inc., which leases non-utility real
estate in Morris County, New Jersey, both Delaware corporations. NMI is
the sole general partner of a Delaware limited partnership, NORSTAR Energy
Limited Partnership, of which NHI is the sole limited partner. The NORSTAR
partnership is the majority owner of NORSTAR Energy Pipeline Company, LLC,
a Delaware limited liability company.
BACKGROUND TO MERGER AGREEMENT
- ------------------------------
Q. PLEASE DESCRIBE THE BACKDROP AGAINST WHICH ORANGE AND ROCKLAND AGREED TO
THE MERGER.
-4-
A. As described in more detail in Mr. Marino's testimony, in Orange and
Rockland's Electric Rate and Restructuring Plan dated November 6, 1997,
approved by the New York Public Service Commission in orders dated November
26, and December 31, 1997, in Case 96-E-0900, Orange and Rockland has
agreed to divest by auction all of its electric generating facilities.
Prior to agreeing to divest its electric generating facilities, Orange
and Rockland's management and Board of Directors ("Board"), in conjunction
with Orange and Rockland's financial advisors, J. P. Morgan & Co., Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), reviewed the
increasingly competitive environment in the electric utility industry. DLJ
pointed out that once divestiture was complete, Orange and Rockland would
be only a transmission and distribution company facing deregulation and
regulatory risks, a consolidating industry, and limited growth prospects.
Accordingly, the Board authorized management and DLJ to explore the
possibility of combining Orange and Rockland with another entity, either
through the sale of Orange and Rockland or some other strategic
combination. From November through December 1997, a number of potential
strategic partners were contacted in order to determine their interest in
either merging with or acquiring Orange and Rockland. In
-5-
January 1998, Orange and Rockland requested such parties to provide it
with non-binding indications of interest.
On February 3, and 4, 1998, preliminary, non-binding letters of
interest were received from certain of the entities that had expressed
interest in acquiring or merging with Orange and Rockland. After reviewing
those preliminary, non-binding letters of interest, the Board determined to
permit a limited number of the parties who expressed interest, including
CEI, to meet with management and conduct due diligence. During the period
February through April 1998, those parties performed due diligence and met
with management.
Between May 1, and May 4, 1998, proposals were received from each of
the interested parties. Each proposal included a draft merger agreement,
which contained the terms of the proposed merger, and which was revised to
include any changes that would be necessary to enter into a binding
agreement with Orange and Rockland.
On May 4, 5, and 6, 1998, Orange and Rockland considered the proposals
that it had received. On May 7, 1998, the Board authorized management,
together with DLJ and Orange and Rockland's legal counsel, to proceed with
negotiations with respect to the proposal that CEI had submitted. On May
8, and 9, 1998, representatives of management, DLJ, and Orange and
Rockland's legal counsel negotiated the terms of a merger
-6-
agreement with CEI and its legal counsel. On May 10, 1998, the Board held a
special meeting to review the terms of the transaction that had been
negotiated with CEI. After various presentations and full discussion and
analysis, the Board, by unanimous vote, approved the Merger.
Q. HOW DOES THE MERGER FIT WITH ORANGE AND ROCKLAND'S STRATEGIC GOALS?
A. The Merger will create a regional company from two companies that share a
common vision of the strategic path necessary to succeed in the
increasingly competitive utility and energy services marketplace. Both
companies have committed to comprehensive generation divestiture programs
and will focus chiefly on the provision of transmission and distribution
services.
Q. IS SHAREHOLDER APPROVAL OF THE MERGER REQUIRED?
A. Yes. The Agreement and Plan of Merger dated as of May 10, 1998, requires
the approval of the holders of two-thirds of the outstanding common stock
in Orange and Rockland. At a meeting held on August 20, 1998, the
requisite shareholder approval was obtained.
MERGER BENEFITS
- ---------------
Q. HOW WILL ORANGE AND ROCKLAND'S CUSTOMERS BENEFIT FROM THE MERGER?
A. The Merger will provide the opportunity to achieve cost savings through
greater efficiencies and economies of scale and scope in areas such as
-7-
utility operations, product development, advertising, and corporate
services. Although post-Merger, Orange and Rockland and CEI's utility
subsidiary, Consolidated Edison Company of New York, Inc. ("Con Edison")
will be separate operating companies owned by CEI, the Merger should also
strengthen the ability of Orange and Rockland and its affiliates to offer
additional services to their customers by providing access to innovative
technology and methods that Con Edison now uses. In addition, Orange and
Rockland will be able to draw on Con Edison's expertise to assure continued
system reliability.
As other witnesses demonstrate in their testimony supporting this
filing, the Merger will not adversely affect competition, rates, or
regulation. Consequently, the Federal Energy Regulatory Commission should
find the Merger to be consistent with the public interest and approve it.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes.
-8-
EXHIBIT APP-400
TESTIMONY F
FRANK P. MARINO
ON BEHALF OF
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
AND
ORANGE AND ROCKLAND UTILITIES, INC.
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Frank P. Marino and my business address is One Blue Hill Plaza,
Pearl River, New York 10965.
Q. BY WHOM ARE YOU EMPLOYED?
A. I am employed by Orange and Rockland Utilities, Inc. ("Orange and Rockland"
or the "Company") as Director - Compliance.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND, PROFESSIONAL QUALIFICATIONS
AND BUSINESS EXPERIENCE.
A. I received a Bachelor of Science degree in Accounting from the State
University of New York at Plattsburgh in May 1987. In May 1991, I earned a
Masters of Business Administration degree in Finance from Fairleigh
Dickinson University. In addition, I am licensed as a certified public
accountant by the State of New Jersey. Since joining Orange and Rockland
as an Associate Financial Analyst in June 1987, I have progressed through
several positions of increasing responsibility. In March 1991, I was
promoted to the position of Administrator - Rate Matters. In
January 1994, I was promoted to Manager - Regulatory Affairs, where my
responsibilities included coordinating and preparing rate case filings and
related analyses and proposals for Orange and Rockland and its utility
subsidiaries and representing Orange and Rockland and its utility
subsidiaries before regulatory agencies. In October 1995, I was promoted to
my current position of Director - Compliance. In my current position, I am
responsible for Orange and Rockland's and its utility subsidiaries'
environmental, regulatory affairs, regulatory audits, demand-side
management, safety, and security functions.
Q. HAVE YOU APPEARED AS A WITNESS BEFORE ANY REGULATORY COMMISSIONS?
A. Yes. I have testified before the New York Public Service Commission
("NYPSC") in Orange and Rockland's last two gas base rate proceedings,
Cases 91-G-0128 and 92-G-0050, its last electric base rate proceeding, Case
95-E-0491, and its electric restructuring proceeding, Case 96-E-0900. I
have also testified before the New Jersey Board of Public Utilities in
Rockland Electric Company's ("RECO") electric restructuring proceedings,
BPU Docket Nos. E97070464/E097070465/E097070466, OAL Docket No. PUC-7309-
97/PUC-7310-97, and before the Pennsylvania Public Utility Commission
("PAPUC") in Pike County Light & Power Company's ("Pike") electric
restructuring proceeding, Docket No. R-00974150.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
-2-
A. I will describe generally the status of Orange and Rockland's state
restructuring efforts, including the planned divestiture of its generation
assets. I also will describe Orange and Rockland's gas business. Finally, I
will address the effects of the proposed acquisition of Orange and
Rockland's common stock by Consolidated Edison, Inc. (the "Merger") on
Orange and Rockland's electric wholesale sales rates.
GENERATION DIVESTITURE
- ----------------------
Q. PLEASE DESCRIBE GENERALLY THE RESTRUCTURING OF ORANGE AND ROCKLAND'S
ELECTRIC BUSINESS.
A. On November 26, and December 31, 1997, the NYPSC issued orders approving
Orange and Rockland's Electric Rate and Restructuring Plan ("Restructuring
Plan"). The Restructuring Plan provides, among other things, for the sale
of all of Orange and Rockland's electric generating assets. By order
issued April 16, 1998, the NYPSC authorized the auction process for the
divestiture of Orange and Rockland's electric generating assets.
Q. WHAT IS THE CURRENT SCHEDULE FOR THE DIVESTITURE OF ORANGE AND ROCKLAND'S
ELECTRIC GENERATING ASSETS?
A. Orange and Rockland is auctioning all of its electric generating facilities
(including its one-third interest in the Bowline Point Generating Station)
as
-3-
well as Consolidated Edison Company of New York, Inc.'s two-thirds
interest in the Bowline Station. Orange and Rockland has proceeded under a
two-phase auction process. Under Phase I, participants submitted non-
binding bids by August 3, 1998. A subset of those bidders has been
selected to proceed to Phase II. The current expected schedule provides
that winning bidder(s) will be selected in mid-October 1998. At that time,
filings will be made for the regulatory approvals required to effectuate
the sale(s). (In addition, the individual buyers will have to obtain
market-based pricing authority from the Federal Energy Regulatory
Commission ("FERC") before they can sell the generation at market-based
prices.) It is expected that final closings to transfer the assets will
occur by May 31, 1999.
RETAIL ACCESS
- -------------
Q. DOES ORANGE AND ROCKLAND'S RESTRUCTURING PLAN ADDRESS RETAIL ACCESS IN
ADDITION TO PROVIDING FOR THE DIVESTITURE OF ORANGE AND ROCKLAND'S
GENERATION?
A. Yes. The Restructuring Plan further provides that full retail access to a
competitive energy and capacity market will be available for all Orange and
Rockland customers by May 1, 1999.
Pike, a wholly-owned utility subsidiary of Orange and Rockland, which
supplies electric and gas service in parts of Pike County,
-4-
Pennsylvania, has likewise committed to full retail access to all of its
electric customers by May 1, 1999. In a recommended decision issued July 1,
1998, a PAPUC Administrative Law Judge approved a settlement, among Pike
and all other parties, which provides for full retail access by May 1,
1999. That settlement now awaits PAPUC approval. Orange and Rockland's
other wholly-owned utility subsidiary, RECO, also has committed to full
retail access to its customers in New Jersey by May 1, 1999.
THE GAS BUSINESS
- ----------------
Q. PLEASE DESCRIBE GENERALLY ORANGE AND ROCKLAND'S GAS BUSINESS.
A. Orange and Rockland and Pike distribute purchased natural gas, supplemented
at times of peak load by gas produced in its propane air gas plants, to
approximately 114,000 customers in Rockland and Orange Counties, New York
and Pike County, Pennsylvania. As of December 31, 1997, the gas
distribution system included 1,758 miles of mains. The highest historical
maximum firm daily gas sendout of 206,038 Mcf occurred on January 19, 1994.
Orange and Rockland and Pike have a maximum daily firm gas delivery
capability of 225,839 Mcf, which is available from the following sources:
direct purchases - 118,471 Mcf; storage withdrawals - 76,768 Mcf; and
Company manufactured gas - 30,600 Mcf.
-5-
Orange and Rockland has firm, long-term gas supply contracts with
seven gas marketers. Together these contracts account for all of Orange and
Rockland's and Pike's firm gas requirements and include a contract with a
Canadian producer, which accounts for approximately 28 percent of the total
contracted supply. Contracts for the remaining 72 percent of the Company's
firm gas supply have been executed with six marketers for domestic gas
supplies.
In addition to its long-term supply sources, Orange and Rockland
purchases spot gas from producers and marketers primarily for the Company's
use in electric generation. During 1997, Orange and Rockland made spot
purchases of approximately 13.7 million Mcf of gas, or 34 percent of the
total gas supply.
To supplement purchased gas, Orange and Rockland manufactures gas at
its propane air gas plants located in Middletown, Orangeburg, and Suffern,
New York, which have a combined capacity of 30,600 Mcf per day of natural
gas equivalent. This capacity, together with gas purchases under contracts
between Orange and Rockland and its suppliers, is expected to provide
adequate peak day supplies to serve existing customers.
In addition to the gas supply contracts, Orange and Rockland has
provided for the transportation of gas through firm, long-term
transportation agreements with four major upstream pipeline companies:
-6-
Tennessee Gas Pipeline Company ("Tennessee"), Columbia Gas Transmission
Corporation ("Columbia"), Algonquin Gas Transmission Company, and Texas
Eastern Transmission Corporation ("Texas Eastern"). Orange, and Rockland
has twelve points of interconnect with these four pipelines and an
interconnect with Transcontinental Gas Pipeline Corporation. The Company
also has entered into interruptible transportation agreements with these
same pipeline companies. The Company has long-term gas storage contract
arrangements with Tennessee, Columbia, and Texas Eastern.
As of July 1998, Orange and Rockland provides firm and interruptible
gas transportation for approximately 1,700 industrial, commercial, and
residential customers in its gas service territory in New York who elect to
obtain their own direct gas supplies. Residential and small commercial and
industrial customers are currently served through aggregation groups.
During 1997, approximately 4.5 Bcf of gas was transported for Orange and
Rockland's gas transportation customers.
The purchase and transportation of gas for Orange and Rockland's gas
service customers is managed on a day-to-day basis by the Company's Energy
Resources Department. The purchase and transportation of gas for electric
generation is managed on a day-to-day basis by the Company's Electric
Production Department. The distribution of gas to Orange and
-7-
Rockland's gas service customers is managed on a day-to-day basis by the
Gas Control Department.
EFFECT ON ELECTRIC RATES
- ------------------------
Q. DOES ORANGE AND ROCKLAND HAVE ANY WHOLESALE ELECTRIC REQUIREMENTS
CUSTOMERS?
A. Orange and Rockland has no third-party wholesale electric requirements
customers. Due to its corporate structure, Orange and Rockland does sell
to its wholly-owned utility subsidiaries, RECO and Pike, under FERC
jurisdictional wholesale requirements contracts. These are designated as
FERC Rate Schedules 61 and 60, respectively. RECO, which has no employees
of its own, provides retail electric service in New Jersey. Pike, which
has no employees of its own, provides retail electric and gas service in
Pennsylvania. Neither RECO nor Pike has any wholesale electric customers.
Q. WILL THE MERGER HAVE ANY IMPACT ON THE RATES CHARGED TO RECO AND PIKE?
A. No, it will not. First, I would note that FERC's emphasis in analyzing a
merger's impact on wholesale rates has been on ratepayer protection
mechanisms that the merging parties are expected to negotiate with their
third-party requirements customers. Those customers are generally
-8-
municipal electric companies that have long-term contracts with one of the
merging parties. Orange and Rockland has no such customers. Because
Orange and Rockland wholly owns RECO and Pike, it would be negotiating with
itself over ratepayer protection mechanisms.
Second, in light of Orange and Rockland's state restructuring
commitments, the traditional relationship between Orange and Rockland, its
utility subsidiaries, and the ultimate consumers will be changing. As noted
above, Orange and Rockland has agreed to divest all of its electric
generating assets. Once the divestiture is complete, Orange and Rockland
will need to purchase in the wholesale market the power required for RECO
and Pike to meet the obligations of providers of last resort. As of May 1,
1999, RECO's and Pike's customers will have the right to choose a different
electric supplier. Consequently, if these customers become dissatisfied
with either Orange and Rockland's purchasing practices or the Merger, they
are free to go elsewhere for their electric supply. Full retail access is
the equivalent of an "open season" for such customers.
Q. DOES ORANGE AND ROCKLAND MAKE OFF-SYSTEM SALES OF ENERGY AND CAPACITY?
A. Yes. Orange and Rockland has several interconnection, interchange, and
bilateral arrangements that provide for energy and capacity transactions.
-9-
These agreements have been submitted to FERC and have designated FERC rate
schedules.
Q. HOW ARE SALES UNDER THESE AGREEMENTS PRICED?
A. The rates for customers under some arrangements are capped at average
system embedded cost; some are fixed and some are set by formula and
periodically updated. Sales under most of these agreements are made at
negotiated rates subject to a cost-based ceiling. Sales for some customers
are made at market-based rates under the appropriate rate schedule.
Q. WILL THE MERGER HAVE ANY ADVERSE IMPACT ON THESE SALES CUSTOMERS?
A. No. Orange and Rockland's existing cost-based interconnection and electric
capacity and/or energy sales agreements are "framework" or enabling
agreements that establish the ground rules under which a customer can
purchase power from Orange and Rockland whenever such a transaction would
be in the customer's economic self-interest and Orange and Rockland agrees
to the particular transaction. The customer is not obligated to purchase
---
any specified quantity of power; it is always free to purchase its power
from other suppliers.
If, after the Merger, Orange and Rockland attempted to increase the
price for sales under these agreements, the customers could simply not buy
any power under them. Given the Merger synergies, what is more likely to
-10-
happen is a reduction in costs, resulting in lower rates being available to
such customers should they choose to buy from Orange and Rockland post-
Merger.
Customers that purchase power under Orange and Rockland's market-based
rates tariff likewise can simply choose not to purchase power from Orange
and Rockland post-Merger. Moreover, for the brief interval between the
closing of the Merger and the completion of Orange and Rockland's
generation divestiture, Con Edison and Orange and Rockland have committed
to mitigation measures that, among other things, circumscribe the pricing
of their generation resources in the wholesale energy market. These
mitigation measures are described in the testimony of Andrew L. Jacob. In
short, no wholesale sales customer of Orange and Rockland will be
negatively impacted by the Merger.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes.
-11-
EXHIBIT APP-500
TESTIMONY OF
WILLIAM L. JAEGER AND JAMES HARTWELL
ON BEHALF OF
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
AND
ORANGE AND ROCKLAND UTILITIES, INC.
Q. PLEASE STATE YOUR NAMES AND BUSINESS ADDRESSES.
A. My name is William L. Jaeger. My business address is 4 Irving Place, New
York, New York 10003.
My name is James Hartwell. My business address is 390 West Route 59,
Spring Valley, New York 10977.
Q. MR. JAEGER, BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am employed by Consolidated Edison Company of New York, Inc. ("Con
Edison"). My position is Chief Engineer, Planning and Engineering, System
and Transmission Operations.
Q. PLEASE STATE YOUR QUALIFICATIONS.
A. I earned a Bachelors Degree in Electrical Engineering from the City College
of the City University of New York in 1969, and have been a registered
Professional Engineer licensed by the State of New York since 1976. I have
been employed by Con Edison since 1969. Most of my career has been focused
on overall bulk power system planning. I held a number
of positions of increased responsibility and, in 1983, I was promoted to
the position of Chief Engineer, Generation Planning. In 1989, I was re-
assigned to Fossil Power as a Plant Manager, a position I held until 1993,
when I assumed my current position.
Q. DEFINE YOUR CURRENT DUTIES AS CHIEF ENGINEER.
A. I am responsible for the overall planning and development of the Company's
bulk power transmission system, engineering for the Company's underground
and overhead transmission system, load forecasting, and interfacing with
the Northeast Power Coordinating Council ("NPCC") and the New York Power
Pool ("NYPP") on transmission-related issues. I am currently Con Edison's
representative on the NPCC Reliability Coordinating Committee and was the
Chairperson of the NYPP Planning Committee during 1996. I also am currently
active in the restructuring of the NYPP. Part of my responsibility includes
transmission contract negotiations, dispute resolution, and the preparation
of tariff rates for transmission contracts.
Q. MR. HARTWELL BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am employed by Orange and Rockland Utilities, Inc. ("Orange and
Rockland") as a Principal in the Electric Resources Department.
Q. PLEASE STATE YOUR QUALIFICATIONS.
-2-
A. In my prior position as Manager, Inter-Utility Affairs, I was involved in
power contracting and developing transmission service agreements for Orange
and Rockland, and prior to that, I held the title of Chief of System
Operations, System Operations Department and Manager of Engineering
Services, Engineering Department.
For the past four and one-half years, I have been assigned to work on
the development of the New York Independent System Operator ("NYISO") and
currently serve as the Chairman of the Transmission Issues Resolution Team
of the NYPP Working Group.
Before joining Orange and Rockland, I was a consultant with Charles T.
Main, Inc., Boston, Massachusetts; a consultant for Jackson and Moreland
Engineers, Boston; Design Engineer for Boston Edison Company, Boston; and,
Design Engineer for Central Vermont Public Service Corporation, Rutland,
Vermont.
I hold a Bachelor of Science in Electrical Engineering from Norwich
University and a Masters of Science in Engineering Management from
Northeastern University. I am a licensed Professional Engineer in the State
of Massachusetts.
Q. DEFINE YOUR CURRENT DUTIES AS ELECTRIC RESOURCES PRINCIPAL.
-3-
A. As a Principal in the Electric Resources Department of Orange and Rockland,
I am responsible for negotiating and administering Orange and Rockland's
electric capacity and energy agreements.
Q. MR. JAEGER, HAVE YOU PREVIOUSLY TESTIFIED BEFORE ANY REGULATORY
COMMISSIONS?
A. Yes, I have provided testimony on behalf of Con Edison in a number of
proceedings before the New York State Public Service Commission ("NYPSC")
and once before the Federal Energy Regulatory Commission ("FERC" or
"Commission") in support of Con Edison's open access transmission tariff
("OATT") filing in Docket No. OA96-138-000.
Q. MR. HARTWELL, HAVE YOU PREVIOUSLY TESTIFIED BEFORE ANY OTHER REGULATORY
COMMISSIONS?
A. I have provided testimony in a number of proceedings before the NYPSC.
Q. GENTLEMEN, WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. We are submitting this testimony in support of the proposed acquisition by
Consolidated Edison, Inc. ("CEI") of the common stock of Orange and
Rockland (the "Merger"). Our testimony describes the establishment of the
NYISO and the transmission service arrangements that Con Edison and Orange
and Rockland currently implement and propose to implement upon consummation
of the Merger.
-4-
For purposes of the Section 205 fi ling, we discuss the joint open
access transmission tariff ("joint OATT") that the companies are filing
concurrently with the Application for Merger to be effective should the
NYISO transmission tariff not yet be effective as of the date that the
Merger is consummated. In addition, this testimony supports Orange and
Rockland's revised Order No. 889 Standards of Conduct.
THE NYISO
- ---------
Q. WHAT EFFORTS HAVE BEEN MADE TO ESTABLISH THE NYISO?
A. The eight Member Companies of the NYPP have proposed a NYISO that will
replace many of the functions currently undertaken by the NYPP and will
assume certain additional responsibilities. The NYISO is intended to
complete the transition to full compliance with all of the requirements of
Order No. 888, including open membership, a governance structure not
dominated by any class of market participants, and open transmission access
to all market participants. The NYISO proposal is the product of an
extensive collaborative process that has taken place in New York State over
several years. The NYISO's structure was conditionally accepted by the
Commission in an order issued on June 30, 1998.
Q. WHEN DO YOU ANTICIPATE THAT THE NYISO WILL COMMENCE OPERATION?
-5-
A. It is currently contemplated that the NYISO will commence operation on or
about December 1, 1998.
Q. WHAT ROLE WILL THE NYISO PERFORM AS TO TRANSMISSION SERVICE?
A. The NYISO's primary functions will be to assure the reliable and efficient
operation of the bulk power system in New York State (including the
coordination of maintenance outage schedules), to provide open access
transmission services consistent with the principles of Order No. 888, and
to administer the NYISO tariff. The NYISO will have operational control
over a major portion of the bulk power system and will provide a security-
constrained unit commitment and dispatch of generation facilities. It will
also administer and maintain an open access same-time information system
("OASIS") for the New York State bulk power system.
Q. PLEASE DESCRIBE THE PROPOSED NYISO TARIFF AND SERVICE ARRANGEMENTS.
A. The NYISO tariff establishes comprehensive terms and conditions for
transmission service, including eligibility, application procedures,
transmission operations, billing, and dispute resolution. Under the tariff,
the NYISO will provide all transmission services in New York State,
including ancillary services. The NYISO will be the sole point of
application for transmission service in the State. The NYISO will maintain
the safety and reliability of the transmission systems throughout the
State.
-6-
The NYISO will administer transmission access, pricing and
settlements, and facilitate the commercial capacity, energy, ancillary
service, and transmission transactions throughout the State.
Q. PLEASE DESCRIBE THE RATES THAT WILL APPLY TO TRANSMISSION SERVICE UNDER THE
NYISO TARIFF.
A. When the NYISO tariff takes effect, it will supersede the individual
transmission providers' OATTs and will govern transmission service over the
New York transmission system, except for enumerated grandfathered
transactions. The NYISO transmission charge is based on three components:
1. Transmission Service Charge ("TSC"): This charge ensures recovery
of the embedded cost of each Transmission Provider's transmission
system. This charge will be assessed to customers located within
each Transmission Provider's service territory and to deliveries
made at the point of exit from the New York Control Area ("NYCA")
for wheels through or out of the NYCA.
2. Transmission Usage Charge ("TUC"): This charge, assessed to all
transactions, covers the cost of marginal losses and, during
periods when the transmission system is constrained,
-7-
the cost of congestion. In general, the congestion cost is based
on the difference in locational-based marginal energy prices on
either side of a transmission constraint. Customers can "hedge"
the cost of congestion and potentially mitigate congestion
charges by purchasing Transmission Congestion Contracts.
3. NYPA Transmission Adjustment Charge ("NTAC"): This is a surcharge
on all energy transactions designed to ensure recovery of the
annual transmission revenue requirement of the New York Power
Authority ("NYPA"). This charge will be assessed to all load
statewide, as well as to transmission customers that wheel
through and out of the NYCA.
Q. WHAT ARE THE WHOLESALE TSCS THAT ARE PROPOSED FOR CON EDISON AND ORANGE AND
ROCKLAND?
A. The wholesale TSCs proposed for Con Edison and Orange and Rockland as filed
with FERC on December 19, 1997, are $9.1759 per MWh and $7.3726 per MWh,
respectively, applied to actual energy deliveries for load served within
the NYCA and/or hourly schedules for wheels through and out of NYCA.
-8-
THE APPLICANTS' CURRENT TRANSMISSION TARIFFS AND RATES
- ------------------------------------------------------
Q. WHAT TARIFFS CURRENTLY GOVERN TRANSMISSION SERVICE PROVIDED BY THE MERGER
APPLICANTS?
A. Con Edison and Orange and Rockland each has filed with the Commission, and
provides wholesale transmission service under, an OATT in accordance with
the pro forma tariff required under Order No. 888. In addition, Con Edison
has filed and provides retail transmission service under service agreements
attached to its OATT. The Commission has approved the terms and conditions
of the Con Edison OATT (including Con Edison's retail service agreements)
and the Orange and Rockland OATT. It should be noted that the Orange and
Rockland OATT provides for service over the transmission facilities of
Rockland Electric Company and Pike County Light & Power Company, New Jersey
and Pennsylvania companies, respectively, that are wholly-owned utility
subsidiaries of Orange and Rockland.
Q. WHAT RATES APPLY TO WHOLESALE TRANSMISSION SERVICES UNDER THE CON EDISON
OATT AND THE ORANGE AND ROCKLAND OATT?
A. Con Edison's rates on file for wholesale transmission service under its
OATT are $42.81/kW-yr for firm point to point service and $44.05/kW-yr for
network service. These rates are in effect subject to refund. A
-9-
settlement regarding these rates was certified to the Commission on
February 28, 1998, in Docket No. OA96-138-000, and currently is pending
Commission approval. The settlement is supported by the active parties to
the case. Three issues relating to ancillary service rates were reserved
for hearing and are pending an initial decision by the presiding
administrative law judge.
Orange and Rockland's rates on file for wholesale transmission service
under its OATT are $33.87/kW-yr for firm point to point service. The rate
for network service is determined by multiplying the ratio of a
transmission customer's network load coincident to Orange and Rockland's
peak load times Orange and Rockland's annual transmission revenue
requirement ($35,578,482).
Q. WHAT RATES APPLY TO RETAIL TRANSMISSION SERVICES PROVIDED UNDER THE CON
EDISON OATT?
A. Con Edison's proposed rates for retail transmission service reflect a rate
design methodology that the NYPSC approved and that the Commission accepted
on June 12, 1998, in Docket No. ER98-2943-000.
Q. WHAT RATES APPLY TO RETAIL TRANSMISSION SERVICES UNDER THE ORANGE AND
ROCKLAND OATT?
-10-
A. Orange and Rockland has not yet filed these rates. They will be filed
shortly.
Q. WHAT TARIFF WILL GOVERN TRANSMISSION SERVICES ON THE CON EDISON AND ORANGE
AND ROCKLAND SYSTEMS AFTER THE NYISO COMMENCES OPERATION?
A. The NYISO tariff will supersede Con Edison's and Orange and Rockland's
respective OATTs. As of the date on which the NYISO commences operation,
the NYISO will be the sole provider of transmission service in New York
State. The NYISO tariff will govern transmission service over the Con
Edison and Orange and Rockland transmission systems.
POST-MERGER TRANSMISSION TARIFFS AND RATES
- ------------------------------------------
Q. WILL THE MERGER AFFECT THE APPLICABILITY OF THE NYISO TARIFF TO
TRANSMISSION SERVICES OVER THE CON EDISON AND ORANGE AND ROCKLAND SYSTEMS?
A. No. The application of the NYISO tariff will not be affected by the Merger.
Assuming that the NYISO tariff is in effect at the time that the Merger is
consummated, it will be available for all eligible customers to use for
transmission service over the Con Edison and Orange and Rockland systems.
Q. WHAT TARIFF WILL BE AVAILABLE SHOULD THE NYISO TARIFF NOT BE IN EFFECT AT
THE TIME THAT THE MERGER IS CONSUMMATED?
-11-
A. In accordance with the Commission's policy in other merger cases, Con
Edison and Orange and Rockland are submitting for filing in a separate
docket, but concurrently with the Merger Application, a single-system joint
OATT.
Q. DO CON EDISON AND ORANGE AND ROCKLAND PROPOSE TO FILE CONSOLIDATED RATES
UNDER THE JOINT OATT?
A. As indicated above, the current transmission rates of Con Edison and Orange
and Rockland differ. Because the rates under the joint OATT will be in
effect for a short, interim period, if at all, adoption of a consolidated
rate is not warranted at this time. The Companies, therefore, propose zonal
transmission tariff rates that will enhance access to their transmission
systems by eliminating rate pancaking.
Q. WHAT RATES WILL THE COMPANIES USE IN THEIR JOINT OATT?
A. In order to eliminate cumulative charges for transmission services that
traverse the companies' systems, Con Edison and Orange and Rockland propose
to waive one of the transmission rates and will assess only the
transmission charge applicable at the point of withdrawal. Each company
will use the rates currently on file in its existing OATT. If the joint
OATT becomes effective because the NYISO tariff is not effective as of the
date of the consummation of the Merger, Con Edison and Orange and Rockland
-12-
will submit revised rates if necessary to reflect any changes to those
rates required as a result of Commission action on Con Edison's currently
pending settlement.
Q. WHAT IS THE PROPOSED EFFECTIVE DATE OF THE JOINT OATT?
A. Con Edison and Orange and Rockland request that the joint OATT become
effective on the date on which the Merger is consummated, provided that the
NYISO tariff has not already become effective. In other words, if the NYISO
tariff becomes effective prior to the consummation of the Merger, it will
apply to transmission service over the Con Edison and Orange and Rockland
systems. In that event, the joint OATT will have no applicability and
should be deemed withdrawn.
Q. IS IT LIKELY THAT THE JOINT OATT WILL BECOME EFFECTIVE?
A. No. Given the scheduled dates for consummation of the Merger and for
commencement of NYISO operations, Con Edison and Orange and Rockland do not
anticipate that the joint OATT will ever become effective.
Q. PLEASE DESCRIBE THE TERMS OF THE JOINT OATT.
A. The joint OATT is predicated upon the companies' current OATTs and reflects
only those changes necessary to render it jointly applicable to Orange and
Rockland and Con Edison. The changes, which are shown in a redlined
version, consist largely of definitional changes (Sections 1.47,
-13-
1.51, and 1.52), changes to state separately the zonal rates for
transmission and ancillary services (to eliminate pancaked rates) and real
power losses (Sections 15.7, 28.5, 34, Schedules 1 through 8 ), and the
incorporation of provisions regarding Orange and Rockland's PowerPick
Retail Access Program (Article IV and Schedule 9).
Q. WOULD YOU PROVIDE EXAMPLES OF HOW THIS RATE PROPOSAL WILL BE APPLIED?
A. Yes. Point to point customers making deliveries on the Con Edison system
will pay Con Edison's point to point rates, even if they have power wheeled
over the Orange and Rockland system in addition to the Con Edison system.
Point to point customers that wheel through both systems will pay only the
rate of the system at which the power exits to a third-party control area.
Network customers will pay the network rate of the system from which their
network loads are served. The ancillary services will track the
transmission services, so that a customer paying the Orange and Rockland
transmission rate would pay the Orange and Rockland rates for the
applicable ancillary services.
Q. HOW WILL A CUSTOMER APPLY FOR SERVICE UNDER THE JOINT OATT?
A. All customers requesting transmission service will submit written
applications to Con Edison as set out in Section 17.1 of the tariff. Con
Edison and Orange and Rockland each will determine the available
-14-
transmission capacity ("ATC") applicable to its system and ensure that ATC
is posted on NYPP's OASIS. Con Edison and Orange and Rockland will treat
parties that previously executed a service agreement with either company as
having executed a service agreement under the joint OATT; i.e., no new
service agreements will be required.
Q. UNDER THE JOINT OATT, HOW DO THE COMPANIES INTEND TO TREAT THE CAPACITY
AVAILABLE OVER THE INTERCONNECTIONS BETWEEN CON EDISON AND ORANGE AND
ROCKLAND?
A. The companies do not intend to reserve additional capacity over such
interconnections for native load uses during any time that the joint OATT
is in effect. In other words, should the joint OATT go into effect,
whatever capacity is then available at the time the Merger is consummated
will be posted as ATC and available for third-party use.
Q. DOES CON EDISON CURRENTLY HAVE IN PLACE ANY LONG-TERM FIRM TRANSMISSION
CONTRACTS THAT WERE NOT MADE UNDER THE CON EDISON OATT?
A. Yes. Con Edison has a number of long-term firm transmission contracts that
were not made under its OATT.
The most significant of these contracts provides for the delivery of
NYPA power to its preference customer load located within the Con Edison
-15-
service territory. NYPA has a number of other supply programs for the
benefit of certain customers within the service territory for which
delivery service from Con Edison is required. These include deliveries for
Economic Development Power, Power for Jobs and for municipal agencies in
New York City and Westchester County. Con Edison also provides firm
transmission service to NYPA for its supply to selected customers on Long
Island. Con Edison provides firm transmission service to New York State
Electric and Gas Corporation for the supply of its load in Brewster, New
York. Con Edison also provides firm transmission service to the Long Island
Power Authority for delivery of firm resources located in upstate New York.
Con Edison commits that it will not seek to increase the rates under these
transmission agreements to recover any Merger-related costs.
Q. DOES ORANGE AND ROCKLAND HAVE IN PLACE ANY LONG-TERM FIRM TRANSMISSION
CONTRACTS THAT WERE NOT MADE UNDER THE ORANGE AND ROCKLAND OATT?
A. Yes. Orange and Rockland has a transmission agreement with NYPA under which
NYPA hydroelectric power is transmitted to Public Service Electric and Gas
Company for redelivery to various municipal and cooperative utilities in
New Jersey. The Commission accepted the most recent amendment to that
contract on December 30, 1997, in Docket No.
-16-
ER98-487-000. Orange and Rockland commits that it will not seek to increase
the rates under that agreement to recover any Merger-related costs.
Q. WHAT STEPS ARE THE APPLICANTS TAKING TO COMPLY WITH THE ORDER NO. 889
STANDARDS OF CONDUCT?
A. Each of the companies previously has filed with the Commission Standards of
Conduct and implementation procedures that are consistent with the
requirements of Order No. 889. On June 30, 1998, Con Edison filed, in
Docket No. ER98-2491-001, revised standards which, among other things,
reflect the proposed Merger by treating Orange and Rockland as an
"affiliate" of Con Edison. This revision will have the effect of ensuring
that any dealings between Con Edison transmission personnel and Orange and
Rockland merchant function personnel are restricted in the same manner as
would be any dealings between Con Edison transmission personnel and Con
Edison merchant function personnel. That filing also revised Con Edison's
and its marketing affiliates' codes of conduct under the market-based
tariffs to treat Orange and Rockland as an affiliate of Con Edison (and its
marketing affiliates). Orange and Rockland made a similar filing on June
30, 1998, that was accepted by the Commission in Docket No. ER98-3560-000
on July 28, 1998.
In the Section 205 filing being made today, Orange and Rockland is
submitting revisions to its Order No. 889 Standards of Conduct that will
-17-
assure that neither merchant function personnel of Con Edison nor any of
Con Edison's marketing affiliates will have preferential access to
transmission information or transmission service over the Orange and
Rockland system. Orange and Rockland has been operating consistent with
these revised standards since the Merger was announced.
Q. DOES THIS COMPLETE YOUR TESTIMONY?
A. Yes, it does.
-18-
EXHIBIT APP-600
TESTIMONY OF
ANDREW L. JACOB
ON BEHALF OF
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
AND
ORANGE AND ROCKLAND UTILITIES, INC.
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Andrew L. Jacob. I am Chief Engineer, Energy Management for the
Consolidated Edison Company of New York, Inc. ("Con Edison"), in its
offices at 4 Irving Place, New York, New York 10003.
Q. WHAT IS YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND?
A. I graduated from Manhattan College in 1969 with a Bachelor's Degree in
Mechanical Engineering. I also received a Master's Degree in Business
Administration from Pace University in 1974. I am licensed as a
Professional Engineer in New York State. From 1969 to 1983, I was employed
by American Electric Power Service Corporation in various Engineering
positions with increasing responsibilities. From 1983 to 1985, I was
Manager of Facilities Engineering at Columbia University. In 1985, I began
my career at Con Edison as Executive Assistant to the Executive Vice
President. From 1986 to 1989, I was
Plant Engineer of Con Edison's Ravenswood Electric Generating Station. In
1989, I was named Manager of Electric Generation Planning. In 1991, I was
promoted to my current position.
Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES.
A. As Chief Engineer, Energy Management, my responsibilities include planning
for Con Edison's electric and steam generating systems; estimating fuel
requirements for Con Edison's generating facilities; analyzing, planning,
and negotiating power purchase and sales contracts; and directing economic
studies relating to Con Edison's electric and steam systems. I am also
serving as the Director of Con Edison's divestiture plan, responsible for
achieving a successful and timely completion of the sale of the Company's
generating plants.
Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE ANY REGULATORY BODY?
A. Yes. I have testified on numerous occasions before the New York State
Public Service Commission ("NYPSC") and two times before this Commission.
INTRODUCTION AND SUMMARY OF TESTIMONY
- -------------------------------------
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to specify Applicants' proposed Interim
Market Power Mitigation Measures, consistent with Dr. Hieronymus'
testimony. Dr.
2
Hieronymus, applying this Commission's merger guidelines, finds that with
Orange and Rockland Utilities, Inc.'s ("Orange and Rockland") divestiture
of its owned generating resources, the proposed merger between Con Edison
and Orange and Rockland (collectively, the "Applicants") presents no market
power concerns and readily passes all of the Commission's analytical
screening criteria.
However, Dr. Hieronymus notes that there is expected to be a short
(one or two month) period of time between the date the merger is
consummated and the date Orange and Rockland completes its divestiture, and
that during this brief interim period, certain of the Commission's
screening criteria would be exceeded./1/ Applicants do not believe they
would have any market power in the brief interim prior to Orange and
Rockland's divestiture. Dr. Hieronymus, moreover, points out that
Applicants would have no economic incentive to try to raise prices during
this interval. Nonetheless, to eliminate any possible market power
concerns, Applicants are committing to abide by certain mitigation measures
during any such interim period./2/
________________________
/1/ Of course, there may not be such an interval if the consummation date
of the merger slips slightly or if Orange and Rockland can complete its
divestiture ahead of schedule.
/2/ Applicants term these measures "interim mitigation measures" in
accordance with FERC practice. However, as noted above, Applicants do not
believe that the merger creates any interim market power problems that require
"mitigation." These preventive measures are intended to preclude any possible
problem from arising.
3
My testimony describes Applicants' proposed Interim Mitigation
Measures. These measures cap Applicants' bids for energy at variable costs,
cap Applicant's bids for capacity at their "to-go" (i.e., avoidable) costs,
and specify certain minimum availability criteria.
INTERIM MITIGATION MEASURES
- ---------------------------
Q. HAVE YOU SET OUT APPLICANTS' PROPOSED INTERIM MITIGATION MEASURES AS AN
EXHIBIT TO THIS TESTIMONY?
A. Yes. These measures are attached to my testimony as Exhibit APP-601.
Q. WHAT IS THE TERM OF THESE INTERIM MITIGATION MEASURES?
A. These measures will extend from the closing of the merger until the
completion of Orange and Rockland's divestiture program.
Q. WHAT GENERATING RESOURCES WILL BE SUBJECT TO THESE MEASURES DURING THIS
INTERIM PERIOD?
A. The interim mitigation measures will be applicable to all of Applicants'
generating resources, both Con Edison's and Orange and Rockland's.
Q. PLEASE DESCRIBE THE INTERIM MITIGATION MEASURES THAT THE APPLICANTS
PROPOSE.
A. Applicants propose interim measures regarding both energy and capacity.
With respect to energy, these measures will cap all bids the Applicants
submit to the
4
New York Independent System Operator ("NYISO") for the sale of energy./3/
More specifically, the interim mitigation measures will require that all of
Applicants' bids into the NYISO's Day Ahead and Balancing (or Real Time)
Energy Markets be capped at variable costs. The variable costs will be
determined on the basis of the units' established heat rate curves and the
applicable fuel cost for the type of unit in question.
With respect to capacity, the proposed measures require that any
capacity that the Applicants bid into the NYISO capacity market will be bid
at the applicable generator's "to-go" (i.e., avoidable) costs. The "to go"
costs for each owned generating unit are the avoidable costs of keeping a
station open and producing electricity, less any net revenues earned on the
sale of energy and ancillary services. In other words, the "to go" costs
represent the actual costs of keeping the unit available to provide
capacity. As described below, the NYPSC is developing procedures for
calculating such "to go" costs.
Q. PLEASE DESCRIBE THE AVAILABILITY CRITERIA THAT WILL BE IMPOSED BY THE
PROPOSED INTERIM MEASURES.
________________________
/3/ The interim measures would cover bids into the ISO directly or through
a power exchange.
5
A. Applicants, over any 60 day period, must make the subject generating
resources available to the NYISO energy market (on a self-scheduled or bid
basis) at the level of availability achieved on average during the same
period over the last three years or explain any shortfall to the
satisfaction of the NYISO. Applicants must also make the resources
available to the capacity market. This will ensure that Applicants will
not withhold their generation from the market during any interim period
prior to Orange and Rockland's divestiture. In addition, the NYISO
monitoring program will be able to review the overall operation of these
resources and may investigate any anomalous behavior given overall market
conditions.
Q. WILL APPLICANTS RETAIN THE RIGHT TO SELF-SCHEDULE THE GENERATORS COVERED IN
THE INTERIM MITIGATION MEASURES?
A. Yes. Orange and Rockland expects to self-schedule its generation to meet
the needs of its remaining regulated retail customer base. The interim
mitigation measures will apply to the extent Orange and Rockland has any
generation remaining after meeting load pocket and native load
requirements. Con Edison is required by its retail restructuring
settlement approved by the NYPSC to bid all of its owned electric
generation (fossil fueled and nuclear generation) into the NYISO energy and
capacity markets, and the mitigation measures will cover such bids. Con
Edison reserves the option to self-schedule its remaining generating
resources to meet retail customer requirements.
6
Q. YOU MENTIONED THAT THE NYPSC IS IN THE PROCESS OF DEVELOPING A METHODOLOGY
FOR CALCULATING "TO GO" COSTS? PLEASE ELABORATE.
A. As a condition of its retail restructuring Settlement Agreement with the
New York Public Service Commission in Case 96-E-0897, Con Edison is already
required to bid its electric capacity (fossil-fired and nuclear generation)
into the capacity market at no less than its "`to go' or avoidable costs."
Settlement Agreement at para. 11(d), Exhibit No. APP 602. The interim
mitigation measures proposed here would cap Applicant's capacity bids at
this level until completion of Orange and Rockland's divestiture. Con
Edison's NYPSC Settlement requires Con Edison to calculate its "to go"
costs according to procedures that will be verified and approved by the
NYPSC Staff. In complying with the proposed mitigation measures,
Applicants plan to calculate the "to go" costs of their generating
resources in accordance with these procedures. Their bids will be
auditable by the NYPSC and by NYISO's monitoring program.
Q. DOES THIS COMPLETE YOUR TESTIMONY?
A. Yes.
7
Page 1
EXHIBIT APP-700
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Consolidated Edison Company of New York, Inc. ) Docket No. _________
Orange and Rockland Utilities, Inc. )
PREPARED DIRECT TESTIMONY
AND EXHIBITS OF
WILLIAM H. HIERONYMUS
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is William H. Hieronymus. I am a managing director of Putnam,
Hayes & Bartlett, Inc. ("PHB") in its office at One Memorial Drive,
Cambridge, MA 02142.
I. QUALIFICATIONS
Q. WHAT IS YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND?
A. I received a bachelor's degree from the University of Iowa in 1965, a
master's degree in economics in 1967, and a doctoral degree in economics in
1969 from the University of Michigan, where I was a Woodrow Wilson Fellow
and National Science Foundation Fellow. After serving in the US Army, I
began my consulting career.
In 1973, I joined Charles River Associates Inc. and specialized initially
in antitrust economics. By the mid-1970s, my focus was principally on the
economics of energy and network industries. In 1978, I joined PHB where my
consulting practice has continued to focus on network industries,
particularly electric utilities.
During the past twenty-odd years, I have completed numerous assignments for
electric utilities, state and federal government agencies and regulatory
bodies; energy and equipment companies; research organizations and trade
associations; independent power
Page 2
producers and investors; international aid and lending agencies; and
foreign governments. While I have worked on most economics-related aspects
of the utility sector, a major focus has been public policies and their
relation to the operation of utility companies.
Since 1988, I have focused primarily on electric utility industry
restructuring, regulatory innovation and privatization. In that year I
began consulting on the restructuring and privatization of the electric
utility industry of the United Kingdom, an assignment on which I worked
nearly full-time through the completion of restructuring in 1990. During
that period, as well as after, I also have completed major assignments
related to utility restructuring in other western European countries,
eastern and central Europe, the former Soviet Union and New Zealand.
With my return to the United States in 1993, I began work on the
restructuring and regulatory reform of the US electricity industry. Much
of this work has focused on market power; I have testified before the FERC
and state commissions on market power issues concerned with mergers, power
pools and market rate applications. Included in that body of testimony is
testimony in Docket Nos. ER97-705-000, ER97-707-000 and ER97-1523-000,
which assesses the effects of transmission constraints on Con Edison's
potential market power in the context of FERC's grant of market rate
authority to Con Edison and its marketing subsidiary, ProMark Energy, Inc.,
which since has changed its name to Consolidated Edison Solutions, Inc. I
also recently filed testimony in connection with mitigation measures
associated with Con Edison's divestiture of generation in New York City.
More generally, I have testified before state and federal regulatory
commissions, federal and state courts, and legislatures on numerous matters
concerning the electric utility and other network industries. My resume is
attached as Exhibit No. APP-701.
Page 3
II. INTRODUCTION AND SUMMARY OF TESTIMONY
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. I have been asked by Consolidated Edison, Inc. ("Con Edison") and Orange
and Rockland Utilities, Inc. ("O&R") (collectively, the "Applicants") to
determine the potential competitive impact of their proposed merger on
electricity markets. My analysis is conducted to be consistent with the
Competitive Analysis Screen described in Appendix A to the Commission's
Merger Policy Statement ("Order No. 592")/1/ which in turn is intended to
comport with the Department of Justice and Federal Trade Commission
("DOJ/FTC") Merger Guidelines ("Guidelines"). I also have analyzed
potential vertical market power issues arising from the market,
particularly those arising from Applicants' status as combination utilities
owning local gas distribution companies.
Q. WHAT ARE YOUR PRINCIPAL CONCLUSIONS?
A. Based on the results of the analyses I have conducted, I conclude that the
proposed merger poses no market power concerns except, perhaps, for minor
concerns in the short period prior to O&R's generation divestiture in the
first half of 1999. O&R is a relatively small utility that has agreed to
full divestiture of its owned generation. Closing is scheduled for the end
of May 1999, approximately the anticipated date of merger completion. No
affiliate of either O&R or Con Edison will bid on the divested facilities.
As a consequence of this divestiture, the merger will combine Con Edison's
remaining generation (i.e., that which remains after its own divestiture of
significant generation, most of which also is scheduled in the first half
of 1999) with only the very small amount of purchases that O&R still will
be required to make from existing long-term contracts. Even these small
purchase amounts are from facilities that are not controlled by O&R. Most
or all purchases that constitute O&R's remaining Economic or Available
Economic
Page 4
Capacity will either be scheduled bilaterally or be bid into the New York
pool by unaffiliated parties, with the result that they cannot be used by
the post-merger company to affect prices in the New York electricity
market. Further, none of O&R's existing owned or purchased capacity is
located in the constrainable New York City area, which I treated as a
separate destination market. For these reasons, the merger results in
virtually no change in Con Edison's pre-existing share of any relevant
electricity market. With O&R's divestiture, the merger easily passes all of
the HHI screens in the Commission's merger guidelines.
In evaluating the merger, notice also should be taken of the fact that Con
Edison is divesting virtually all of its In-City generation, which
constitutes about 70 percent of its total owned generation. Nearly all of
Con Edison's divestiture is scheduled to be completed in the first quarter
of 1999./2/ The merged company will be a participant in the New York
Independent System Operator ("NYISO" or "ISO"), turning over effective
control over most transmission facilities to it. At the conclusion of
their planned divestiture, the merged Applicants will be principally a
wires company with some retained nuclear generation and power purchases,
with regulated provider-of-last-resort responsibilities and competitive
retail and wholesale marketing functions.
Other New York utilities also are divesting the bulk of their generation.
While the ownership patterns in New York markets cannot be predicted with
certainty, it is highly likely that relevant New York power markets will be
at most moderately concentrated. In
___________________________________________
/1/ Inquiry Concerning The Commission's Merger Policy Under The Federal Power
Act: Policy Statement, Order No. 592, & 31,044 (1996).
/2/ As detailed below, Con Edison is divesting its In-City generation in two
phases: three of the four In-City bundles will be divested in the first
quarter of 1999; and the fourth bundle (the steam-producing units) will be
sold subsequently, most likely in late 1999. The divestiture of Con
Edison's share of Bowline will be completed contemporaneously with O&R's
divestiture of the station. Its divestiture of its steam-producing units
will likely occur late in 1999. It also is divesting its unit power
contract share of the Roseton station contemporaneously with Central Hudson
Electric & Gas's divestiture of the station. At the end of this process,
the merged company will retain only a residuary ownership of a nuclear unit
and responsibility to take power under power purchase contracts.
Page 5
any event, upon O&R's divestiture, this merger passes the Commission's HHI
screens even without taking into account the de-concentrating effect of
other utilities' divestitures./3/
However, there may be a short period of time between the date the merger is
consummated and the date O&R completes its divestiture in which the
screening criteria for Economic and Available Economic Capacity set out in
Appendix A of FERC's Order No. 592 are failed in some time periods
(generally high price, on-peak periods). O&R is scheduled to select its
winning bidders on October 15, 1998, and plans to close the sale on or
about May 31, 1999. The merger is expected to close in April 1999, one to
two months earlier. During this period, Applicants will still retain
sufficient native load or "supplier of last resort" load such that they
remain substantial net purchasers. For this reason, they have no incentive
to increase power prices. Nonetheless, Applicants have proposed interim
mitigation measures requiring 1) that all generation bid into the ISO/4/ be
bid on an auditable variable cost basis, 2) that all generation be made
available to the market at its historic levels of availability, and 3) that
capacity bid into the New York ISO capacity auction be bid at a capped rate
that is based on the "to go" costs of the generating unit and is
substantially below the FERC-approved tariff rate for Applicants' capacity.
This mitigates any potential market power concerns. Thus, the Commission's
horizontal market power screen is passed for the post-O&R divestiture
period and any possible interim market power is mitigated fully.
____________________________
/3/ It is not necessary to wait to see to whom O&R sells its generation to in
order to reach this conclusion. The delta HHI will be sufficiently low
(i.e., less than 50 points) such that there is no appearance of market
power created by the merger even if the market structure changes. The
divestiture is not merger related, so changes in market concentration
resulting from the divestiture are not merger-related. Moreover, O&R will
file a section 203 application at FERC in connection with its divestiture
and also has been required by the New York Public Service Commission
("NYPSC") to demonstrate that the buyer(s) of its generation satisfy the
Commission's Appendix A screen.
/4/ Bidding into the ISO could be accomplished by bidding such generation into
a power exchange, which would then bid the generation to the ISO.
Page 6
My analysis was conducted to conform to the requirements of Appendix A of
Order No. 592. For the Economic and Available Economic Capacity products,
I examined market structure and the effect of the merger on it for multiple
time periods and market price levels. The geographic markets considered
were the City of New York, a constrainable subset of Con Edison's service
area in which Con Edison owns or controls most of the generation, and the
downstate portion of New York state (that portion that is East of the
Total-East transmission constraint). Con Edison and O&R generation is
physically located in the East of Total-East market. The focus on the East
of Total-East market, to the exclusion of other "destination markets" that
might have been defined, follows from the fact that the operation of
transmission constraints causes Applicants' share of this market to be
higher than in any other market. This approach is consistent with recent
Commission precedent.
I also examined the effect of the merger on FERC's traditional Total
Capacity and Uncommitted Capacity measures. For both measures, the
screening criteria are passed for all relevant time periods, including
prior to divestiture. O&R has no uncommitted capacity before retail access
for capacity and divestiture, both of which are scheduled for May 1999.
In addition to examining the market measures described in Order No. 592, I
examined the effect of the merger on the capacity markets established by
the rules of the New York Power Pool and proposed New York ISO. In New
York, capacity is a separate product with defined geographic areas that
differ somewhat from the energy market areas that I examined.
Specifically, there will be a New York State capacity market in which all
in-State capacity and eligible out-of-State capacity compete, and an In-
City market, for which only In-City capacity qualifies./5/ The merger has
no effect on the latter, since O&R
______________________________
/5/ There also is expected to be a Long Island capacity market in which
Applicants cannot compete but which is taken into account in my analysis of
the New York State market since it reduces the ability of capacity on Long
Island to bid into the broader New York market.
Page 7
has no In-City capacity. With respect to the former, I examined the
structure of sellers of such capacity. Currently, the merger has no impact
on this market. Prior to May 1, 1999, O&R has no capacity to sell and Con
Edison, which is currently selling its capacity to load serving entities
("LSEs") at auction-based prices, likely will have no uncommitted capacity
for the New York State market. Post-divestiture, the screen is easily
passed.
Any possible failure of the screening criteria will result from slight
differences in the timing for divestiture and reductions in capacity
responsibility. This period will be limited to the period between May 1,
1999 when the merger is scheduled to close, and the completion of O&R's
divestiture, forecast to occur at the end of May. I analyzed two cases
pertinent to this period. The most conservative case ignores the effect on
market structure of the ongoing generation divestiture in New York. In
this case, the market is moderately concentrated and the Guidelines' change
in HHI is slightly exceeded. However, Applicants' share of the total
market is less than 20 percent, (i.e., less than the threshold FERC has
applied in granting market rate authority). In the second case, which
takes the generation divestitures by other New York utilities into account,
the market is unconcentrated even in the post-merger period before the O&R
divestiture is completed, and the Guidelines' test is passed.
Nevertheless, as summarized above, Applicants propose to mitigate any
possible market power in the New York state capacity market during this
interim period by capping their bids into the market at the "to go" cost of
the generating units./6/
I also have examined potential vertical market power issues arising from
the merger and concluded that the merger does not create any competitive
problems in this regard. Transmission access for new generators is assured
both by the Commission's open access policies and by the NYISO control over
the operation of the transmission system and the
_______________________
/6/ While Con Edison is required under the terms of its Settlement to bid all
capacity into the auction, the Applicants are considering requesting
authorization from the NYPSC for it to self-schedule capacity to serve
native load and its retail access load in the event that the ISO capacity
market is not fully operational on a timely basis.
Page 8
transmission system expansion process. Applicants will not possess dominant
control over potential generating sites.
Applicants are both combination utilities, but neither has gas production
facilities and neither owns or operates long-distance pipelines or large
storage facilities. Applicants have no ability to exercise sellers' market
power for commodity gas; even if their role as buyers of gas, principally
on behalf of their regulated retail customers, was deemed relevant to
commodity gas market power, their share of purchases from relevant basins
is far too low to cause concern. Con Edison has a subsidiary that is one
of many gas marketers; O&R has exited the gas marketing business, so the
merger has no impact on the gas marketer "market."
While both Con Edison and O&R have firm transmission rights on the gas
pipelines serving the area, their combined share is less than 13 percent.
This will be reduced to about 11 percent in 1999-2000 due to new pipeline
construction. Moreover, Applicants cannot withhold these rights to reduce
supply since failure to use rights simply increases the amount of non-firm
capacity that the pipelines can sell to any willing buyer, including
competitors in both the gas and electricity marketing business. Further,
O&R has no transportation rights that could be used to deliver gas into New
York City.
Applicants both have regulated gas distribution operations. These
operations serve some of the gas-fired generation facilities located in the
downstate area. Con Edison provides distribution service to two of its own
large gas-fired steam units plus its gas-fired peakers. It also
distributes gas to the New York Power Authority's ("NYPA's") Poletti
station. O&R distributes gas to its Bowline station (currently co-owned
with Con Edison), the gas-fired unit at its Lovett steam station, its
peakers and the Lederle cogeneration
Page 9
facility./7/ O&R has no ability to deliver gas to generation located in the
constrained New York City electricity market.
There is no basis for concern that Applicants will use self-dealing or
other means of using the gas LDC to favor affiliated activities. Applicants
are divesting all of the owned gas-fired facilities to which they provide
distribution service. Even if they were not, distribution tariffs are
regulated by the NYPSC, and New York statutes forbid discriminatory pricing
of distribution. Price transparency required by NYPSC policies would make
any discrimination easy to detect for both the New York Commission and
affected generators. Further, there are low cost bypass alternatives that
constrain distribution tariffs for all major gas-fired generation
facilities to below cost-of-service rates. Finally, codes of conduct
required by existing NYPSC orders bar any information flowing from the
regulated gas distribution company to any affiliate, such as an electricity
or gas marketer, that theoretically could benefit from preferential access
to such information. In short, none of the vertical concerns that the
Commission focused upon in the Enova-Pacific Enterprises merger exist in
this merger and the transaction does not create or enhance vertical market
power.
Q. HOW IS THE REMAINDER OF YOUR TESTIMONY ORGANIZED?
A. In Section III, I outline the Applicants' business operations. Section IV
provides a framework for the analysis. In Section V, I focus on the
analysis of horizontal market power, including first, a description of the
data, assumptions and methodology I used in conducting the analysis and,
second, my analysis of the merger's impact on competition. Section VI
contains my analysis of vertical market power issues.
_______________________
/7/ The facilities for which O&R provides gas service include about 1,284 MW
of mid-merit gas steam (including 1,215 MW jointly-owned Bowline station),
74 MW of gas-fired peakers and 19 MW of NUGs, adding a total of 1,378 MW of
gas-fired generation to that which is served by or controlled by Con
Edison. While all three units at Lovett are capable of burning gas, the
two larger units use coal as their primary fuel.
Page 10
III. DESCRIPTION OF THE PARTIES
Q. PLEASE DESCRIBE CON EDISON.
A. Con Edison is an energy company whose primary subsidiary, Consolidated
Edison Company of New York, Inc., provides regulated electric service to
customers in New York City (with the exception of part of Queens) and
Westchester County, New York; gas service in Manhattan, the Bronx and parts
of Queens and Westchester County; and steam service in parts of Manhattan.
Other subsidiaries include Con Edison Solutions, an energy services
company; Con Edison Development, which invests in energy infrastructure
projects;/8/ and Con Edison Energy, which will market energy, capacity and
risk management services to wholesale customers.
At the beginning of 1999, Con Edison will have approximately 7,001 MW of
capacity that it owns and operates, 1,292 MW of entitlements to jointly
owned units, 2,059 MW of non-utility generation ("NUG") contracts and 733
MW of other contracts, including a contract of 208 MW for part of the
output of the Indian Point 3 and Poletti stations that expires in 1999./9/
This total of 11,085 MW serves an expected peak load of 9,730 MW (10,973 MW
before load management)./10/ Nearly 1,000 MW of Con Edison area load is
served by other LSEs pursuant to Con Edison's retail access program.
However, nearly all LSEs have chosen to purchase energy and capacity from
Con Edison under tariff rates set by FERC and the NYPSC, in most cases, all
of their requirements. Up to 2,000 MW of customer load of Con Edison's
customers (about 20 percent) will have retail access beginning on April 1,
1999, with the balance gaining retail access subsequently.
_______________________
/8/ None of Con Edison Development's current generation investments are located
in New York.
/9/ All load and capacity data are from the New York Power Pool's Load and
--------
Capacity Data, dated July 1, 1998.
-------------
/10/ Con Edison's latest forecast projects a 1998 peak load of 11,375 MW.
Page 11
Con Edison has no traditionally defined transmission-dependent utilities
("TDUs") in its service area, although some NYPA customers are located
within Con Edison's service territory. NYPA has its own generating
facilities and transmission rights that permit it to serve its customers.
Con Edison is directly interconnected with O&R, NYPA, Niagara Mohawk
("NiMo"), Central Hudson Gas & Electric ("CHG&E"), New York State Electric
and Gas Corporation ("NYSEG"), and Long Island Lighting Company ("LILCO").
Rochester Gas and Electric (RG&E) could be deemed to be directly connected
by reason of the tariffs of the New York Power Pool. It also is directly
connected to the Connecticut Light and Power Company (Northeast Utilities)
in the New England Power Pool ("NEPOOL"); and Public Service Electric and
Gas Company ("PSE&G") in the Pennsylvania-New Jersey-Maryland
Interconnection ("PJM").
Con Edison plans to divest, in four bundles,/11/ essentially all of its In-
City generation. Con Edison expects to accomplish its divestiture in two
phases: three of the four In-City bundles will be divested in the first
quarter of 1999; and the fourth bundle (the steam-producing units) will be
sold subsequently, most likely in late 1999. Con Edison also is selling
its share of the Bowline Station which it owns jointly with O&R as part of
the O&R divestiture which is scheduled to be completed by the end of May
1999./12/
After divestiture, Con Edison will retain control over 1,002 MW in New York
City, consisting of (i) NUG contracts (926 MW); and (ii) a small amount of
generation (76
____________________________
/11/ The four bundles include (1) 1,433 MWs consisting of Arthur Kill steam
station and Astoria gas turbines ("Arthur Kill"); (2) 2,168 MWs consisting
of Ravenswood steam station and gas turbines ("Ravenswood"); (3) 1,856 MWs
consisting of Astoria steam station plus Gowanus and Narrows gas turbines
("Astoria"); and (4) 463 MW of units that produce electricity as well as
steam for Con Edison's steam delivery system in New York City ("Steam
Electrics").
/12/ Con Edison also plans to divest its contract share of CHG&E's Roseton
station. However, this divestiture is not likely to be completed within
the 1999 timeframe of my analysis. It also plans to sell or close its
small remaining stations, totaling 76 MW, at some future date.
Page 11
MW). Outside of the City, Con Edison will maintain interests totaling an
additional 3,146 MW of capacity, consisting of (i) owned generation (1,488
MW); (ii) power purchase contracts (525 MW, of which 400 MW is summer
only); and (iii) NUG contracts (1,133 MW). This capacity is primarily gas
and oil fired, except for Indian Point 2, a 931 MW nuclear station.
With respect to its gas business, Con Edison sells and transports natural
gas to its customers through its distribution facilities located in
Manhattan, the Bronx, Westchester County and the northwest corner of
Queens. Con Edison owns a liquefied natural gas peak shaving facility in
Queens and a 28.8 percent interest in the Honeoye Storage facility in
upstate New York. All of Con Edison's gas customers have had retail access
since 1996. Con Edison has contracts for the purchase of firm
transportation and storage services with seven interstate pipelines; firm
gas purchase contracts with 17 merchant and pipeline suppliers; and
interruptible gas purchase and transportation contracts. None of its long
term firm contracts are assigned to supply in its electricity generation.
It distributes gas to two of its large steam stations (Astoria and
Ravenswood) and to NYPA's Poletti station, as well as to a number of its
combustion turbines. Its NUGs, Narrows (a large peaking facility) and its
third large steam station, Arthur Kill, are supplied by other gas
distributors.
Q. PLEASE DESCRIBE O&R.
A. O&R's utility subsidiaries supply electricity and gas in portions of
southeastern New York, northern New Jersey; and northeastern Pennsylvania.
Both O&R and Rockland Electric Company, one of its subsidiaries, have non-
utility subsidiaries that are engaged in energy services ventures and land
development.
Prior to divestiture, O&R will have approximately 1,310 MW of total
generation capacity. This includes 965 MW of owned and operated capacity
(374 MW of coal-fired capacity at the Lovett units 4&5, 474 MW of oil/gas
steam, 43 MW hydro and 74 MW of combustion turbines), 19 MW of NUG
contracts and 325 MW of firm purchases (300 MW of which is summer-only and
expires in 2000) against a 1999 peak load forecast of
Page 12
1,140 MW (1,265 before load management). In 1997, O&R purchased almost 50
percent of its energy requirements.
O&R's customers have full retail access for energy which began in May 1998
and are scheduled to have full retail access for energy and capacity in May
1999. O&R has no TDU customers.
In addition to its direct interconnection with Con Edison, O&R is also
interconnected with CHG&E in the NYPP and PSE&G in PJM, both of which are
also direct interconnections of Con Edison.
O&R expects to complete the divestiture of all of its generation, according
to the terms of its offering letter, by the end of May 1999. This includes
the sale of Bowline, co-owned with Con Edison. After divestiture, it will
have purchase rights to only 344 MW, consisting of (i) its NUG contract (19
MW); (ii) a contract with PSE&G expiring in 2000 (300 MW);/13/ and (iii) a
contract with NYPA's Blenheim-Gilboa pumped storage facility (25 MW)./14/
With respect to its gas business, O&R has firm, gas supply contracts with
seven gas marketers, and also purchases spot gas supplies. O&R also has
firm, long-term transportation agreements with four pipelines (Tennessee
Gas Pipeline, Columbia Gas Transmission, Algonquin Gas Transmission, and
Texas Eastern Transmission); interruptible transportation agreements; and
long-term gas storage contracts with Tennessee, Columbia and Texas Eastern.
It supplies interruptible gas and interruptible
________________________
/13/ While formally this contract is a summer capacity and energy contract, the
contract price of energy is such that energy is rarely purchased. Hence,
this contract contributes no Economic Capacity. When O&R is not taking
energy from the facilities that implicitly stand behind this contract,
PSE&G is free to sell the energy on its own account.
/14/ Under the market rules for the NYISO, partial ownership in a generating
facility will not confer control over the bidding and generation dispatch
of that facility. Only one entity will be permitted to submit bids and/or
schedules for a generating facility.
Page 14
transportation to its gas-fired stations and spot gas sales delivered under
a firm withdrawable contract to its 19 MW NUG. Firm gas transportation to
its electricity generation is sufficient only to provide ignition fuel.
Both utilities participate in the NYPP and in the NYISO. Salient features
of the ISO arrangements are discussed later in my testimony.
IV. FRAMEWORK FOR THE ANALYSIS
Q. WHAT ARE THE GENERAL MARKET POWER ISSUES RAISED BY MERGER PROPOSALS?
A. Market power analysis of a merger proposal examines whether the merger
would cause a material increase in the merging firms' market power or a
significant reduction in the competitiveness of relevant markets. Market
power is defined as the ability of a firm or group of firms to profitably
sustain a small but significant increase in the price of their products
above a competitive level.
In assessing mergers, the critical issue is the change in market
competitiveness due to the merger. While the pre-merger competitiveness of
markets may, as under the DOJ/FTC Guidelines, affect the amount of such
change that is acceptable, the focus remains on the change in market
------
competitiveness caused by the merger.
This focus on the effects of the merger means that the merger analysis
examines those business areas where the merging firms are competitors. In
most instances, the merger will not affect competition in markets in which
the merging firms do not compete. This is recognized in Commission
procedures which exempt mergers between firms that do not compete in
relevant geographic and product areas from the need to submit a screening
analysis. Analysis of the effects of a merger on market power in
businesses in which the merging firms both participate is sometimes
referred to as horizontal market power assessment. In FERC merger
analyses, the primary horizontal focus is on competition in bulk power
markets.
Page 15
It is also necessary to consider the possibility of vertical market power.
Vertical market power relates to the effect of the merger on the merging
firms' ability and incentives to use their market position in a related
business to affect competition. For example, vertical market power could
result if the merger of two electric utilities created an opportunity and
incentive to operate transmission in a manner that created market power for
the generation activity of the merged company that did not exist
previously. The Commission also has identified market power as potentially
arising from dominant control over potential generation sites or over fuels
supplies and delivery systems. The Commission has stated that these forms
of vertical market power could undercut the presumption that long-run
generation markets are competitive./15/
Q. WHAT ARE THE MAIN ELEMENTS IN DEVELOPING AN ANALYSIS OF MARKET POWER?
A. Understanding the competitive impact of a merger first requires defining
the relevant market (or markets) in which the merging firms participate.
Participants in a relevant market include all suppliers and, in some
instances potential suppliers, who can compete to supply the products
produced by the merging parties and whose ability to do so diminishes the
ability of the merging parties to increase prices. Hence, determining the
scope of a market is fundamentally an analysis of the potential for
competitors to respond to an attempted price increase. Typically, markets
are defined in two dimensions: geographic and product. Thus, the relevant
market is composed of companies that can supply a given product (or its
close substitute) to customers in a given geographic area. Once markets
are defined, the analysis proceeds to examine the structure of sellers to
determine if a merger might significantly increase market power.
_________________________
/15/ Under some circumstances, the control over fuels supplies and delivery
systems also may be found potentially to affect short term energy markets.
See the Order in Docket No. EC-97-12-001 et al. (Enova-Pacific
Enterprises).
Page 16
Q. HOW HAS THE COMMISSION TYPICALLY EXAMINED PROPOSED MERGERS INVOLVING
ELECTRIC UTILITIES?
A. Historically, under its Commonwealth standards, the Commission examined
------------
mergers by focusing on specific product markets and by using a "hub-and-
spoke" screening test to evaluate whether a further examination of
potential market power was warranted. With the issuance of Order No. 592
in December 1996, the Commission changed its analytic approach and adopted
a "delivered price test." Appendix A (the "Competitive Analysis Screen")
of Order No. 592 outlines in detail the analytic method that applicants are
required to follow in their applications and that the Commission will use
in screening the competitive impact of mergers. If a proposed merger
raises no market power concerns (i.e., passes the Appendix A screen), the
inquiry is generally complete. If a proposed merger raises potential
market power concerns, applicants can propose mitigation measures at the
time of application.
Q. WHAT PRODUCTS HAS THE COMMISSION GENERALLY CONSIDERED?
A. With electric markets, the Commission generally has defined the relevant
product markets to be long-term capacity, short-term capacity ("Uncommitted
Capacity"), and non-firm energy ("Available Economic Capacity" and
"Economic Capacity"). The Commission has determined that long-term
capacity markets are presumed to be competitive, unless special factors
exist that limit the ability of new generation to be sited or receive fuel.
The Commission recently has considered vertical issues arising from
mergers. The principal issue that it has identified is whether the merger
may create or enhance the ability of the merged firm to exercise market
power in downstream electricity markets by control over the supply of
inputs to rival producers of electricity./16/ Three potential
_________________________
/16/ In addition to Enova, a recent discussion can be found in the Notice of
-----
Proposed Rulemaking on Revised Filing Requirements Under Part 33 of the
Federal Power Act, Docket No. RM98-4-000.
Page 18
abuses have been identified: the upstream firm acts to raise rivals costs
or foreclose them from the market in order to increase prices received by
the downstream affiliate; the upstream firm acts to facilitate collusion
among downstream firms; or transactions between vertical affiliates are
used to frustrate regulatory oversight of the cost/price relationship of
prices charged by the downstream electricity supplier./17/
Q. HOW HAS THE COMMISSION ANALYZED GEOGRAPHIC MARKETS?
A. To examine geographic markets, the Commission traditionally has focused on
the utilities that are directly interconnected to the applicant companies.
This "destination market" approach was continued in Order No. 592. Each
utility that is directly interconnected to the Applicants is considered a
separate "destination market." Additionally, the Commission has suggested
that utilities who historically have been customers of Applicants are also
potential "destination markets." In some recent cases, the Commission has
found that analyses based on geographic markets larger than a single
destination market are appropriate./18/
The supply alternatives to each destination market are defined using the
"delivered price test," which identifies suppliers that can reach a
destination market at a cost no more than 5 percent over the pre-merger
market price. The supply is considered economic if a supplier's generation
can be delivered to a destination market, including delivery costs (which
include transmission rates, transmission losses and ancillary services), at
a cost that is within 105 percent of the destination market price.
Physical transmission constraints also are taken into consideration in
determining the potential supply to the destination market. Thus, unlike
the "hub-and-spoke" methodology, competing suppliers are no longer defined
by bright lines. Competing suppliers are defined as those who have
____________________________
/17/ Id. at pp. 45-49
--
/18/ In BG&E-Pepco, the relevant market was PJM utilities collectively (79 FERC
----------
(P)61,027 at 61,116). In Conectiv, the relevant markets were PJM and
--------
eastern PJM (80 FERC (P)61,126 at 61,407).
Page 18
capacity (energy) that is physically and economically deliverable to the
destination market. Their importance in the market (i.e., their market
share) is determined by the amount of such capacity.
This test is intended to be a conservative screen to determine whether
further analysis of market power is necessary. If the Appendix A analysis
shows that a company will not be able to exercise market power in its
first-tier generation markets, it generally follows that the applicants
will not have market power in more broadly defined and more geographically
remote markets. The screen is the first step in determining whether there
is a need for further investigation. If the screening test is not passed,
leaving open the issue of whether the merger will create market power, the
Commission invites applicants to propose mitigation remedies targeted to
reduce potential anti-competitive effects to safe harbor levels. In the
alternative, the Commission will initiate a proceeding to determine whether
unmitigated market power concerns mean that the merger is contrary to the
public interest.
Q. WHAT FRAMEWORK DOES THE COMMISSION USE TO DETERMINE WHETHER A MERGER POSES
POTENTIAL MARKET POWER CONCERNS?
A. In Order No. 592, the Commission adopted the DOJ/FTC Guidelines for
measuring market concentration levels by the Herfindahl-Hirschman
Index./19/ To determine whether a proposed merger will have a significant
anti-competitive impact, the DOJ and FTC consider the level of the HHI
after the merger (the post-merger HHI) and the change in the HHI that
results from the merger. Markets with a post-merger HHI of less than 1000
are considered "unconcentrated." The DOJ and FTC generally consider mergers
in such markets to have no anti-competitive impact. Markets with post-
merger HHIs of 1000 to 1800 are considered "moderately concentrated." In
those markets, mergers that result in
_____________________________
/19/ The HHI is calculated as the sum of the squares of each company's market
share, expressed in percentage terms.
Page 19
an HHI change of 100 points or fewer are considered unlikely to have anti-
competitive effects. Finally, post-merger HHIs of more than 1800 are
considered to indicate "highly concentrated" markets. The Guidelines
suggest that in these markets, mergers that increase the HHI by 50 points
or fewer are unlikely to have a significant anti-competitive impact, while
mergers that increase the HHI by more than 100 points are considered likely
to reduce market competitiveness.
Q. DOES YOUR ANALYSIS OF HORIZONTAL MARKET POWER IN THIS CASE FOLLOW THE
GUIDELINES SET DOWN IN ORDER NO. 592?
A. I have generally followed this framework. There are three departures from a
"cookbook" adherence to Appendix A, all of which were made to better inform
the Commission concerning the effects of the merger. In each instance these
arise from the specific factual setting in which the merger is occurring.
First, rather than analyzing each destination market separately, I have
focused on two geographic markets: inside New York City and the downstate
region of New York. The In-City market is smaller than a destination market
as defined in Order No. 592; I have analyzed it since it is a transmission
constrained subset of the Con Edison destination market. The relevant
market contains Applicants' generation and is defined by constraints
limiting imports into it during high load periods. The factual basis for
selecting these destination markets is discussed more fully later in my
testimony. I believe that this modification to the Appendix A methodology
is warranted factually and consistent with Commission precedent.
Second, because of the pending divestiture of generation by both
Applicants, and the rapid introduction of retail access in New York, the
structure of Economic Capacity and Available Economic Capacity markets is
changing rapidly. In order to fully investigate horizontal market power,
including that which the merger might facilitate during the transition
period before completion of divestiture, I have examined market conditions
ranging from the pre- to full post-divestiture markets.
Third, because there currently is a separate identifiable capacity product
in the NYPP, I have analyzed a separate capacity market consistent with the
proposed rules of the
Page 20
NYISO. This is in addition to analyzing Uncommitted Capacity, the
Commission's usual measure of short-term capacity.
V. ANALYSIS OF HORIZONTAL MARKET POWER
DATA SOURCES AND METHODOLOGY FOR THE COMPETITIVE ANALYSIS SCREEN
Q. PLEASE DESCRIBE THE NATURE OF THE ANALYSIS UNDERTAKEN TO COMPLETE THE
APPENDIX A COMPETITIVE ANALYSIS SCREEN.
A. PHB has developed the Competitive Analysis Screening model ("CASm") to
facilitate Appendix A analyses. This model implements the delivered price
test and other calculations required in Appendix A by determining potential
supply both pre- and post-merger for each (i) destination market, (ii)
relevant time period and (iii) relevant supply measure. From these results,
the model also calculates pre- and post-merger HHIs. The relevant
geographic market is determined based on the economics of supply (including
generation costs, transmission rates, losses and ancillary services) and
the physical transmission capacity available to the competing suppliers on
an open access basis. In CASm, each transmission path has a fixed maximum
capacity; CASm also incorporates simultaneous transmission constraints. To
determine the potential supply to a destination market, the model
determines an economic delivery route for supply that meets the delivered
price test via existing transmission paths, each of which has a capability,
transmission rate and transmission losses associated with it. CASm
determines the maximum supply that can be delivered to the destination
market within the parameters of the delivered price test and consistent
with cost minimization. The model is described in Exhibit No. APP-702.
Q. WHAT DATA ARE REQUIRED TO CONDUCT A COMPETITIVE ANALYSIS SCREEN?
A. The key data requirements for implementing the screening analysis include:
. Generating capability
Page 21
. Capacity purchases and sales
. Variable costs of generation
. Transmission capability
. Transmission rates
. Transmission line losses
. Native loads
. Market prices
To the maximum practical extent, I have used publicly available data
consistent with those detailed in Appendix B of Order No. 592. My study
generally is based on historic data (e.g., loads and fuel costs), but my
modeling assumptions are intended to approximate a future (1999 or 2000)
market structure.
Q. WHAT UTILITIES DID YOU INCLUDE IN YOUR DATA SET?
A. I included utilities in the NYPP, PJM, and NEPOOL, as well as Hydro Quebec
("HQ") and Ontario Hydro ("OH") (see Exhibit No. APP-703).
Notably, this list of candidate suppliers does not pre-judge the question
of the geographic scope of the market. CASm determines (based on economics
of supply, transportation and deliverability) which of these candidate
suppliers, and to what degree, are competitors to serve a particular
destination customer.
For ease of modeling, I did not include in my data set generation owned by
small municipalities or cooperatives located within the regions. This
exclusion tends to increase Applicants market shares and is, therefore,
conservative.
Q. ARE THERE ANY OTHER PERTINENT ASSUMPTIONS IN YOUR TREATMENT OF POTENTIAL
COMPETITORS?
A. I have modeled both PJM and NEPOOL as single suppliers, treating all
suppliers from each region as single entities. This assumption increases
HHIs and is thus conservative.
Most New York utilities are in the process of divesting generating
capacity. In general, these divestitures are likely to decrease
concentration in New York electricity markets. NYSEG has announced the
winning bidders in its divestiture auctions and Niagara
Page 22
Mohawk has completed the first round of its auction and the restructuring
of most of its NUG contracts, including the divestiture of the majority of
them. However, until the divestitures are completed, it is not possible to
know precisely what the post-divestiture structure of generation ownership
will be. In calculating energy market HHIs, I have assumed ownership of
assets is unchanged, except to the extent that Applicants divest their own
generation. This is a highly conservative assumption and will overstate
concentration in the market. For example, I assume that NYSEG continues to
own its generation, whereas there will actually be three owners. For
purposes of modeling, I assume that Applicants' divested generation is
purchased by suppliers that do not control other generation in New
York./20/
Although I calculate and report HHIs, I recognize that the level of the
HHIs depends on the outcomes of the New York utilities' divestiture
auctions and cannot be predicted with great confidence. However, the change
in HHIs due to the merger does not. The change in HHIs is caused by the
combining of Applicants' previously separate shares and can be calculated
readily by what is generally referred to as the "2ab method."/21/
Q. WHAT DID YOU ASSUME ABOUT THE TIMING OF DIVESTITURE?
A. Both Applicants have firm expectations as to the timing of the sale of
their assets. In O&R's case, which is the most critical to evaluating the
effects of the merger, the date is May 31, 1999. Con Edison anticipates
completing the divestiture of Bowline in concert
_______________________
/20/ Specifically, I have assumed O&R's generation, other than Bowline, is
divested in a single bundle. (This may be conservative from the standpoint
of calculating concentration statistics, given that O&R is actually selling
its assets bundled in four packages.) Con Edison's generation is divested
in the bundles described above. Bowline, jointly owned by Applicants, is
divested as a single unit.
/21/ "2ab" refers to the change in HHI resulting from the merger of company A
(with market share a) and Company B (with market share b). This formula is
derived from the HHI calculation as follows:
Applicants' pre-merger HHI = a/2/ + b/2/
Applicants' post-merger HHI = (a+b)/2/ = a/2/ + b/2/ + 2ab
Thus, the change in HHI resulting from the merger equals 2ab.
Page 23
with O&R's divestiture and the divestiture of three In-City bundles in the
first quarter of 1999. The steam cogenerating units will be sold later,
most likely toward the end of 1999. This is the schedule upon which I have
based my analysis.
However, I recognize that there is no certainty as to exact dates for which
sales will be consummated. During the pendency of the merger proceeding,
new information concerning schedules may become available. In order better
to assure that this analysis will still be pertinent in view of that new
information, I have analyzed the market and the potential for market power
under four scenarios that relate to the status of the divestiture efforts.
In the pre-divestiture "Base Case," I have assumed the status quo
continues, with both Applicants retaining all currently owned generation.
Contracts in effect during 1999 are also taken into account. Scenario 2
assumes that Con Edison has successfully completed the divestiture of
Bundles 1, 2 and 3 before O&R divests its assets. Scenario 3 assumes that
O&R divests its generation before Con Edison, except that Con Edison's
share of Bowline is divested at the same time that O&R sells its share.
Finally, Scenario 4 shows the effects of the merger after both Con Edison
and O&R have completed the planned divestiture of all assets scheduled to
be divested in 1999. In Scenario 4, I reflect Applicants' contracts in
effect at the beginning of 2000./22/
These scenarios can be summarized as follows:
________________________
/22/ This means that, in Scenario 4, Con Edison's 208 MW purchase from NYPA's
Indian Point3/Poletti unit also has terminated.
Page 24
- -----------------------------------------------------------------------------------------------
CON EDISON CON EDISON O&R CON EDISON
DIVESTS DIVESTS DIVESTS ALL DIVESTS
BUNDLES 1-3 BUNDLE 4 GENERATION BOWLINE
- -----------------------------------------------------------------------------------------------
Base Case -- -- -- --
("Pre-Divestiture")
- -----------------------------------------------------------------------------------------------
SCENARIO 2 X -- -- --
("CON EDISON
DIVESTS 1-3")
- -----------------------------------------------------------------------------------------------
SCENARIO 3 -- -- X X
("O&R DIVESTS")
- -----------------------------------------------------------------------------------------------
SCENARIO 4 X X X X
("Con Edison and O&R Divest")
- -----------------------------------------------------------------------------------------------
Bundle 1 ("Arthur Kill") consists of Arthur Kill steam unit and Astoria GTs.
Bundle 2 ("Ravenswood") consists of Ravenswood steam unit and GTs.
Bundle 3 ("Astoria") consists of Astoria steam unit and Narrows and Gowanus GTs.
Bundle 4 ("Steam Electrics") consist of units producing electricity and steam for distribution.
- -----------------------------------------------------------------------------------------------
All the bundles being divested by Con Edison consist of In-City generation.
The interpretation of these scenarios is as follows. The Base Case shows
the effects of the merger if it is approved and consummated before any
divestiture takes place. This is the starting point for designing
mitigation. Scenario 2 is appropriate for the period April 1 through May
31, 1999, assuming that the existing schedules are adhered to. Scenario 3
is intended to show conditions if, counter to current plans, O&R completes
its divestiture first. Scenario 4 is the longer run outcome, reflecting
conditions from roughly the end of 1999.
Q. WHAT SOURCES DID YOU USE FOR GENERATING CAPABILITY DATA?
A. Data on generating plant capability (winter and summer capacity), including
NUGs, were obtained from NYPP's 1998 report Load & Capacity Data. I took
--------------------
into account planned retirements and capacity additions through 1999.
Q. HOW DID YOU RATE THE PRODUCTION CAPACITY OF GENERATORS?
A. When appropriate for the particular supply measure (i.e., measures of non-
firm energy markets), I assumed that generation capacity would be
unavailable during some hours of the year for either (planned) maintenance
or forced (unplanned) outages. I assumed that
Page 25
maintenance would be scheduled during the non-peak seasons and forced
outages would occur uniformly throughout the year. For this purpose, I used
data reported in the NERC Generating Availability Data System ("GADS") for
the average equivalent availability factor to estimate total outages, and
the average equivalent forced outage rate to estimate forced outages for
fossil and nuclear plants. GADS reports five-year average availability and
outages based on unit type and size. These data were supplemented, for new
technology combined cycle units, by data in the Electric Power Research
Institute Technical Assessment Guide.
Q. HOW DID YOU TREAT PURCHASES AND SALES?
A. Data on long-term capacity purchase and sales were obtained primarily from
Load & Capacity Data. These transactions are long-term (one year or more)
--------------------
firm transactions.
To the extent a utility has sold capacity under a long-term agreement, it
is assumed that control over that resource passes to the buyer. Generation
ownership is adjusted to reflect the transfer of control by assuming that
the sale resulted in a decrease in capacity for the seller and a
corresponding increase in capacity for the buyer. /23/ Sales are assumed to
be comprised of the lowest-cost supply for the seller. Therefore, the
seller's lowest-cost supply was reduced by the amount of the sale and the
buyer's supply was increased by the amount of the purchase./24/ Prices for
purchase contracts were based on published data (from FERC Form 1 data)
where available, or an estimate if not available. To the extent that long-
term sales could be identified specifically as unit sales, I have tied the
sale to the capacity of a specific generating unit.
As noted earlier, Applicants have several long-term contracts. Con Edison
purchases power under contracts with NYPA (Gilboa and Indian Point
3/Poletti), HQ and six NUGs
________________________
/23/ Consistent with this assumption, NUGs were assumed to be under the control
of the purchasing utility.
/24/ "[T]he lowest running cost units are used to serve native load and other
firm contractual obligations" (Appendix A, p. 11).
Page 26
(Indeck, Selkirk, Sithe and, within New York City, Cogen Technologies,
Brooklyn Navy Yard Cogeneration and York Warbasse.) The Indian Point
3/Poletti contract terminates at the end of 1999.
O&R has a contract with PSE&G, NYPA (Gilboa) and a small amount of NUG
purchases (19 MW). The PSE&G contract ends after the summer of 2000. For
all these contracts, I have treated Applicants as controlling the asset.
This overstates the amount of capacity that Applicants have available to
potentially affect electric energy prices. Under NYISO rules, a single bid
must be submitted for each unit. Hence, the pricing of Gilboa and Con
Edison's share of Roseton (co-owned with CHG&E) are not within their
control. Nor are Applicants capable of controlling the level of output of
these units. The same is true for O&R's PSE&G purchase. Thus, Applicants
can neither bid up the prices of this purchased electricity nor withhold
its supply from the market./25/
Further, Applicants have at most limited dispatch rights concerning their
NUG contracts. These are primarily "must take"; the Power Purchase
Agreements specify the level of output and Applicants must schedule it or
bid it into the pool in a way that assures that it runs when power is
produced according to the terms of the Power Purchase Agreement.
In this merger analysis, the relevant competitive issue concerns the effect
of Con Edison's acquisition of O&R. The merger can enhance Con Edison's
pre-merger ability to increase prices only if O&R can (a) withhold any of
its post-divestiture purchases from the market, or (b) bid any of its
purchases into the market in a way that even theoretically could increase
prices in NYPP. As explained above, the purchase of O&R in fact brings zero
post-divestiture megawatts of capacity that could be used to exercise
market power to the merger. Nonetheless, in order to comply literally with
the Commission's
_______________________
/25/ If O&R or Con Edison elected not to schedule their entitlements, and if
they were economic, the owner of this generation (e.g., NYPA in the case of
Gilboa) could sell it into the marketplace. As I noted earlier, with
respect to O&R's contract with PSE&G, the contract is effectively a
capacity-only contract because energy is priced such that it is generally
not economic to purchase.
Page 27
guidelines, the HHI calculations in my analysis treat these purchases as
indistinguishable from owned generation.
Q. WHAT SOURCES DID YOU USE FOR THE COST OF GENERATION?
A. I used data from several sources to estimate the incremental cost of
generation.
. Heat rates from EIA Form 860.
. 1997 Fuel costs from Form 423, supplemented by data from other
sources, mainly RDI's COALDAT(R). I based the estimated dispatch cost
on spot or interruptible fuel prices. To the extent all fuel purchases
in 1997 had been made under contract rather than at spot prices, I
estimated an incremental price based on reported spot or interruptible
prices in the relevant region.
. An estimate of variable O&M (by type of unit) and an SO2 adder./26/
. For NUGs, I set the variable costs at zero, in effect assuming NUGs
were must-run. I did not identify any NUGs as dispatchable./27/
Q. WHAT SOURCES DID YOU USE TO DETERMINE TRANSMISSION CAPABILITY?
A. I relied primarily on transfer capability data published by the NYPP in
Load & Capacity Data. These data reflect transfer capabilities between
--------------------
market areas within New York (under normal conditions) as well as import
capability into New York.
Q. WHY DID YOU USE THESE DATA INSTEAD OF OASIS DATA ON ATCS OR TTCS?
A. As I noted earlier, geographic markets larger than a single destination
market are sometimes appropriate in conducting an Appendix A analysis; as I
discuss immediately below, this is the appropriate approach in this case
due to transmission constraints that do
_________________________
/26/ I used an estimate for variable O&M of $1/MWh for gas and oil steam units,
$3/MWh for scrubbed coal-fired units and $2/MWh for other coal-fired units.
The SO2 adder reflects the value of allowances.
/27/ Several New York utilities, including, for example, NiMo, are restructuring
their NUG contracts. However, I was unable to identify which contracts have
been restructured to include dispatchability provisions.
Page 28
not coincide with utility boundaries. However, this being the case, OASIS
data are difficult to re-state in a manner consistent with this broader
geographic market approach. OASIS postings are typically individual
utility-to-utility transfer limits, whereas the only transmission
constraints relevant to this merger is primarily internal to utilities.
However, the Load & Capacity Data report does include the necessary
--------------------
information to conduct an Appendix A analysis for the relevant geographic
markets.
RELEVANT GEOGRAPHIC MARKETS
- ---------------------------
Q. PLEASE DESCRIBE THE RELEVANT GEOGRAPHIC MARKETS.
A. I examined two relevant geographic markets for the analysis of Economic
Capacity and Available Economic Capacity: (1) the "East of Total-East"
market, defined by the Total-East transmission interface and related
transmission limitations, and (2) an "In-City" (that is, New York City)
market. For the Total Capacity and Uncommitted Capacity measures, I used a
traditional "hub-and-spoke" method to define the market to include those
utilities directly interconnected with Applicants. Additionally, since the
NYISO will apply a capacity requirement for New York overall and for the
In-City area, I also evaluated these capacity markets.
Q. WHY IS THE EAST OF TOTAL-EAST MARKET A RELEVANT MARKET?
A. The "Total-East" interface within NYPP is the primary interface through
which power moves into the eastern half of New York State. This interface
constitutes a transmission constraint that can cause marginal production
costs to differ, sometimes substantially, between the downstate and
upstate portions of the state, thus creating a separate market. On the
representation in Exhibit No. APP-704, transmission areas F through K are
included in the East of Total-East region. The Total-East interface runs
from Vermont through New York and into New Jersey. Total-East cuts New
York roughly in half, dividing the western portion of the state from the
eastern and southern portion. At the
Page 29
southern end of the interface, Total-East cuts into PJM. The current Total-
East transfer limit is 5300 MW./28/ The other corridor through which power
moves into eastern New York is through the interface between NYPP and
NEPOOL, which has a transfer limit of 1,575 MW.
There also are potential transmission constraints within the east of Total-
East area that I have accounted for in my analysis. In particular, there
are transfer capability limitations between the Albany sub-region and the
rest of the East of Total-East area and between LILCO's service area and
the rest of the region. These can limit the amount of generation within
these two sub-areas that can compete inside the rest of East of Total-East.
Accordingly, in my analysis, I have included as located within the East of
Total-East market only that amount of generation located in the Albany and
LILCO areas that can reach the market within the limits of these internal
constraints./29/ This approach defines the East of Total-East market as
that area in which O&R and Con Edison, absent the merger, would potentially
compete when transmission constraints exist both at the Total-East
interface and at the interfaces with the Albany and LILCO areas. This
approach to market definition isolates the smallest area in which Con
Edison's and O&R's generation is located. It represents the area of
maximum competitive overlap. Since both Applicants are located within the
constraint into downstate New York (and up from Long Island) there is no
other market in which their shares will be greater. That is, Applicants
are on the upstream ("wrong") side of any transmission constraint affecting
any other market.
Q. PLEASE EXPLAIN WHY THE IN-CITY MARKET IS A RELEVANT MARKET.
________________________
/28/ The NYPSC Staff's Load Pocket study reports the total import limit into
the East of Total-East market as 6,600 MW, including imports across total
east and from NEPOOL. This is consistent with the NYPP estimate of 5,300
MW plus 1,300 MW of direct interconnection between NEPOOL and the East of
Total-East market.
/29/ As noted above, the East of Total-East region covers areas F-K as defined
by the State load pocket study. In calculating market shares for this
market, I have taken into account the transfer limits from the Albany
region (area F) and the LILCO region (area K) and I have included as in the
market only the Economic Capacity that is deliverable within those transfer
limits.
Page 30
A. In some hours, there also are constraints within Con Edison's territory.
According to Con Edison's "load pocket" study, there are six load pockets
in Con Edison's service territory, including the city as a whole (area J)
and sub-areas within the City./30/ I have examined the In-City market as a
separate relevant market for purposes of my study. I did not find it
necessary to consider the individual load pockets within the city as
individual destination markets. Since O&R owns no generation inside the
City, its ability to affect prices within sub-areas of the City is
restricted by the City import limit and it will have a correspondingly and
commonly restricted share of sub-markets within the City.
Q. WHY DIDN'T YOU FEEL IT WAS NECESSARY TO SEPARATELY ANALYZE EACH TRADITIONAL
DESTINATION MARKET SEPARATELY?
A. The markets I have examined should provide sufficient evidence of whether
or not the merger creates the potential for market power and, as I noted
earlier, defining a geographic market larger than a single destination
market is consistent with the approach the Commission has accepted in
similar circumstances./31/ The geographic markets I have defined take into
account transmission constraints. With the exception of the transmission
limits that my analysis takes into account in defining these areas, there
are no identified constrained facilities. That is, O&R, the non-City parts
of Con Edison, and the portions of other utilities' service areas located
in the East of Total-East market are not constrained from each other. Where
there are constraints that I have identified for example, between Con
Edison and LILCO or westward across Total-East or into PJM or NEPOOL
Applicants are both located on the upstream ("wrong") side of the
constraint.
__________________________
/30/ A load pocket is a geographic load area that, because of transmission
limitations, must have internal generation to ensure reliable service in
the area under normal and contingency conditions.
/31/ Conectiv, 80 FERC (P)61,126 at 61,407; Pepco/BGE, 79 FERC (P)61,027 at
-------- ---------
61,116.
Page 31
The constraints will reduce their shares of Economic and Available Economic
Capacity in these other markets relative to their shares in the East of
Total-East market.
Conversely, had I used traditional destination markets, defined as utility
service areas, I would have essentially ignored the key constraints in New
York. Utilities that straddle the Total-East constraint and the constraint
that sometimes separates northeast New York from the downstate area can be
accessed from either side of the constraints, thereby enlarging the amount
of capacity that can reach them. Because my East of Total-East analysis
focuses only on the portions of the destination markets that are within the
constraints (hence unconstrained with respect to Applicants but constrained
relative to capacity on the other side of constraints), it follows
necessarily that an Appendix A analysis of the East of Total-East market is
a more rigorous screen than a traditional service area-based destination
market analysis.
Q. IN CHOOSING THE DESTINATION MARKETS TO EVALUATE, DID YOU CONSIDER
APPLICANTS' HISTORICAL TRADING PARTNERS?
A. Yes, although this did not alter my conclusion as to the appropriate
destination markets to consider. Exhibit No. APP-705 shows the Applicants'
recent purchases and sales. Notably, both Applicants are net purchasers.
The Applicants have historically made very few non-firm energy sales into
markets outside of the NYPP. O&R sold a de minimis amount of energy
outside of New York, totaling 700 MWh to PSE&G during 1995 and 1996.
Although Con Edison had somewhat more significant sales outside of New
York, the combination of the two firms clearly will not impact competition
in any market outside of the NYPP. Since O&R has not traditionally sold
power outside of New York, no competitor is being removed from the market.
Q. WHAT IMPORT LIMITS DID YOU ASSUME INTO THE EAST OF TOTAL-EAST MARKET THAT
YOU ANALYZED?
A. As noted above, the Total-East interface limit is 5,300 MW. Once in the
East of Total-East area, the interface limits (essentially moving from
North to South) are 4,950 MW UPNY-SENY (area F to area G on Exhibit No.
APP-704); 5,650 MW UPNY-Con Edison (area G to area H); 8,000 MW Millwood-
South (area H to area I) and, finally, 5,000 MW
Page 32
Sprainbrook/Dunwoodie South (area I to area J). I assumed that the
interface limit into the downstate area (areas G through J) was the minimum
of the transfer limit F-G, G-H, H-I, and I-J, which is 4,950 MW./32/
The import limit from PJM to NYPP overall is 2,000 MW, and I used an import
limit into the East of Total-East market of 1,000 MW./33/ The import limit
from NEPOOL is 1,575 MW into NYPP overall, and I used an import limit into
the East of Total-East market of 1,135 MW./34/ Finally, the import limit
from LILCO is 1,050 MW. Thus, the overall import capability I assumed into
the East of Total-East market was 8,135 MW.
Q. HOW DID YOU TAKE INTO ACCOUNT FIRM COMMITMENTS ON THESE TRANSMISSION
INTERFACES?
A. I reduced these import by the amount of the firm sales to utilities in the
downstate region from power sources outside of that region for which they
have firm long-term contracts or participation shares. In my analysis, as
described below, I explicitly made this adjustment for Con Edison's
purchase from Sithe, Selkirk and Indeck, all located outside of the
relevant market. Con Edison's purchase from HQ, however, is treated as a
resource outside of Total-East that must compete for transmission into the
East of Total-East market because Con Edison must compete to schedule
energy over that interface. This is consistent with the grandfathering
policies of the NYISO.
The difference between total transfer capability into southeastern New York
and any relevant reservations is available transfer capacity ("ATC") and is
available for prorating the economic energy from all outside sources.
_______________________
/32/ Mechanically, imports from West of Total-East are limited to 5,300 MW and
then squeezed into the 4,950 MW UPNY/SENY interface. This assumption is
conservative relative to an assumption that 5,300 MW can be imported into
the relevant market from West of Total-East.
/33/ See Exhibit TEM-17, Testimony of Timothy E. McClive, Request for Market-
Based Authority, Market Power Analyses, and Proposed Monitoring Plan
(Docket No. ER97-1523-000 and OA97-470-000).
/34/ Based on information from Con Edison's transmission department.
Page 33
Q. IN ALLOCATING THE AVAILABLE TRANSMISSION, HOW DID YOU TREAT NON-NEW YORK
UTILITIES?
A. They were treated in a broadly similar fashion. For the Economic and
Available Economic Capacity measure, transfers into New York were prorated
according to the amount of capacity that could be economically delivered
into the relevant market. Specifically, the import capability from PJM
into West of Total-East was adjusted to reflect NYSEG's share of Homer
City. I did not make a similar adjustment for import capability from PJM
to reflect O&R's contract with PSE&G because O&R does not have firm rights
for this transaction and, indeed, it is rarely economic to import energy
under the contract.
Q. PLEASE EXPLAIN FURTHER HOW YOU ALLOCATE TRANSMISSION.
A. Shares are allocated at each interface, diluting as they get closer to the
destination market. In other words, when there is economic supply
competing to get through a constrained transmission interface into market
area, the transmission capability was allocated to the suppliers in
proportion to the amount of economic supply each supplier has outside the
interface./35/
Specifically, CASm uses the amount of power that each supplier could
deliver to the edge of the constrained interface as the basis for assigning
shares on the transmission path in question. The algorithm does this for
each constrained path on the system, thereby "squeezing down" the amount of
power supplied by more distant utilities.
This method of prorationing favors suppliers who are closer to the
destination market since their supply will not be "squeezed" down by the
transmission limits behind the constrained interface. Since applicants'
resources are generally close to the relevant destination markets,
allocating transmission capacity in this manner is conservative in that
applicants' capacity tends to subjected only to the last "squeeze down."
That is, this
________________________
/35/ This is consistent with the Commission's approach in FirstEnergy (80 FERC
-----------
(P)61,039 at 61,104).
Page 34
method of allocating transmission capacity puts a greater share of the
applicants' supply into the destination market as compared to other
possible methods. Thus, all of Applicants' capacity located in the East of
Total-East market and most of the Economic Capacity with generation located
in other areas is not subject to proration and is fully counted in the East
of Total-East market.
Q. HOW DID YOU TREAT THE "INTERNAL" LINE THAT WILL CONNECT CON EDISON AND O&R
POST-MERGER?
A. I treat Con Edison and O&R, as I do all other utilities within the East of
Total-East market, as having unconstrained transmission within that East of
Total-East market. The interconnection between Con Edison and O&R will be
controlled by the ISO, and no native load preference exists for
interconnections controlled by the ISO. This will not change as a result
of the merger./36/ This treatment is consistent with the Commission's
decision in FirstEnergy./37/
TRANSMISSION CHARGES AND TRANSMISSION CONGESTION CONTRACTS
- ----------------------------------------------------------
Q. WHAT DID YOU ASSUME ABOUT TRANSMISSION CHARGES AND LOSSES?
A. As stated in the NYISO Tariff, transmission charges in the restructured New
York Power Pool have three components a congestion charge, a charge for
losses and a Transmission Service Charge ("TSC").
___________________________
/36/ The ISO is expected to be operational by the end of 1998. The merger is
not expected to close until April 1999. Thus, the ISO will be operational
before the merger. In the event that the ISO operation is delayed by
unforeseen circumstances, Con Edison has committed, as described in the
Jaeger/Hartwell testimony, not to reserve any native load priority over
that interface in the interim prior to ISO operations.
/37/ (P)61,039 at 61,103.
Page 35
The congestion and losses charges of the NYISO Tariff are designed to
ensure economically efficient pricing of transmission at the short-run
marginal cost of service./38/ My analysis presented herein implicitly
accounts for congestion by modeling sub-regions of New York the East of
Total-East market and New York City as separate destination markets. Losses
are modeled with a simplifying assumption; imports into the East of Total-
East market from other New York regions incur 2.5 percent losses (an
approximation of one wheel).
The TSC recovers the fixed cost of the transmission system. While the TSC
may be different for each of the New York utilities, there is no pancaking
of charges for transmission across multiple regions of New York State.
Rather, each LSE pays the TSC of the service provider where its customer is
located, regardless of the location of the generation source within the
state.
Q. WHAT DID YOU ASSUME ABOUT TRANSMISSION CHARGES INTO NEW YORK FROM REGIONS
OUTSIDE THE STATE?
A. LSEs in the New York markets that purchase energy from outside the state
may be subject to transmission charges for "through or out" service from
the region from which they purchased the energy. Consistent with Appendix
A, I used the maximum filed rates including ancillary services for imports
from PJM and NEPOOL.
For imports from HQ, I used its filed rates;/39/ for imports from OH (for
which I could not locate a separate transmission tariff, I used an estimate
of $5/MWh, which approximates the maximum filed rates that I have seen for
utilities in the ECAR and Northeast regions.
________________________
/38/ The congestion charge for each hour is equal to the difference in the
hourly locational based marginal pricing ("LBMP") between the point of
receipt and the point of delivery within New York State. The charge for
losses is the incremental cost of the losses incurred between the point of
receipt and the point of delivery.
/39/ H.Q. Energy Services (U.S.) Inc., Docket No. ER97-851-000.
Page 36
Q. DID YOU CONSIDER FIRM TRANSMISSION RIGHTS IN YOUR ANALYSIS OF THE ENERGY
MARKET IN THE EAST OF TOTAL-EAST REGION?
A. Yes. Under the NYISO Tariff, grandfathered transmission rights are
conferred through the ownership of Transmission Congestion Contracts
("TCCs"). Con Edison has a NUG contract with Sithe, located on the west
side of Total-East, for 740 MW. The contract is for the delivery of energy
to the border of Con Edison's service territory, and Sithe owns
grandfathered transmission rights (TCCs) which are specified in Attachment
H of the NYISO Tariff for delivery of energy across the Total-East
interface. Therefore, economically the Sithe contract can be treated as a
NUG contract located at Pleasant Valley (the border of Con Edison's control
area) which is East of Total-East. I accounted for this in my analysis by
adjusting the transfer capability of the Total-East interface to account
for the Sithe transmission rights. I treated Con Edison's share of Selkirk
and Indeck, located in the Albany region, similarly.
Q. OTHER THAN THE THESE NUG CONTRACTS, DID YOU CONSIDER OWNERSHIP OF FIRM
TRANSMISSION RIGHTS OR TCCS IN YOUR STRUCTURAL ANALYSIS OF THE MARKET?
A. No. The NYISO treats revenues associated with grandfathered TCCs owned by
transmission providers as an offset against that transmission provider's
TSC. Thus, any economic value conferred to a transmission provider through
grandfathered TCCs is automatically transferred to all customers of that
transmission provider regardless of whether the transmission provider is
the retail service provider as well. That is to say, for instance, that
Con Edison's grandfathered TCCs can in no way benefit Con Edison's
shareholders nor its retail service customers at the expense of retail
customers who chose an alternative retail access provider.
Further, it is impossible to know at this time who will own the TCCs. The
NYISO Tariff requires transmission providers to periodically sell, at a
minimum, the TCCs in excess of
Page 37
their native load responsibility./40/ This may occur at the TCC Auction run
by the NYISO, in which excess TCCs that are not grandfathered will also be
sold. Thus, it is impossible to assign TCC ownership to any specific market
participant.
Finally, a structural analysis that considers TCCs instead of imports
allocated on a pro rata basis does not appropriately reflect the extent of
potential competition in a given geographic area when transmission is
unconstrained.
Q. GOING BACK TO THE SITHE, SELKIRK AND INDECK CONTRACTS, WHY ARE YOU TREATING
THESE DIFFERENTLY THAN OTHER GRANDFATHERED FIRM TRANSMISSION RIGHTS?
A. These contracts are designated Third-party TWA (Transmission Wheeling
Agreement) in the NYISO Tariff. As such, revenues from these TCCs are not
credited against Con Edison's TSC as is the case with other Con Edison-
owned grandfathered TCCs. In this particular case, the transmission rights
are defined and easily assignable. Furthermore, by treating power
delivered under these contracts as being from units located within the East
of Total-East market, I conservatively have increased Con Edison's share in
this market.
Q. ARE THERE OTHER THIRD-PARTY TWAS LISTED THE NYISO TARIFF?
A. Yes. There are 1,417 MW of Third-party TWAs over the Total-East interface,
of which Sithe accounts for 837 MW./41/ However, other than the Sithe
contract, most of these grandfathered rights are owned by unaffiliated
small parties such as municipal utilities, most of which are not explicitly
modeled in CASm. Again, exclusion of these parties is a conservative
assumption. Indeck and Selkirk have TWAs over the interface into downstate
from the Albany region, which I have taken into account.
______________________
/40/ Revenue from the sale of these TCCs is also credited against the TSC.
/41/ The difference between the 740 MW of capacity that Con Edison has
contracted with Sithe and the 837 MW of its grandfathered transmission
rights arises because Sithe apparently has TCCs relating to contracts with
NiMo (continued)
Page 38
There are also Third-Party TWAs for the New York City cable interface, most
of which belong to NYPA customers in the City. None are owned by Con Edison
or companies with Con Edison contracts. Again, excluding consideration of
these TCCs is conservative since the amount of capacity represented by
these TWAs is assumed to be available for prorationing, including to Con
Edison generation located outside of the City.
OTHER RELEVANT DATA
- -------------------
Q. WHAT DATA SOURCES DID YOU USE FOR NATIVE LOADS?
A. For analyses in which such data were required, I used hourly load data from
FERC Form 714. These are 1996 data; I estimated 1999 loads based on
average annual load growth reported in the Load & Capacity Data.
--------------------
With respect to Total Capacity and Uncommitted Capacity, I analyzed peak
supply conditions based on data from the 1998 Load & Capacity Data report.
--------------------
Q. WHAT DID YOU ASSUME ABOUT RESERVE MARGIN REQUIREMENTS?
A. Reserve margin requirements are relevant only for the Uncommitted Capacity
measure and for assessing demand in the NYPP capacity market. For summer
peaking companies in the NYPP, the required reserve margin is 18 percent
(against summer Net Load after demand-side management). For winter peaking
companies, the required reserve margin is also 18 percent, but is adjusted
to a maximum no greater than 27 percent above summer net load.
__________________________
as well. To be conservative, I treat the remaining 97 MW of Sithe capacity
as also being located at Pleasant Valley, in the East of Total-East market.
Page 39
Q. DID YOU USE THE FILED SYSTEM LAMBDA DATA TO DERIVE MARKET PRICES IN YOUR
DESTINATION MARKETS?
A. No. Filed system lambdas were not available for these relevant destination
markets. To the best of my knowledge, New York utilities do not file
individual system lambda data and NYPP files a single system lambda for all
its reporting companies and, therefore, does not provide information on
market prices for either Applicant or for the relevant markets I have
identified. Indeed, it is not clear whether the filed system lambda is for
the east or west of Total-East or is some average. Given the prevalence of
transmission constraints in New York, no single filing can be appropriate
for all areas.
As the best available data, I relied on 1997 data published by Power
Markets Week, which reports daily prices and a weekly range of low and high
on- and off-peak prices for East New York as the starting point for
estimating the market prices that I used. Based on these data, I developed
a series of on- and off-peak prices which provide a range of competitive
market prices for all seasons that bracket the Power Markets Week data.
The table below shows both the high and low prices reported for East New
York and the range of prices I analyzed for each peak and off-peak period.
As is shown in this table, I analyzed HHIs over a substantially broader
range of prices than would have been necessary had I simply relied on
prices reported in Power Markets Week.
Page 40
--------------------------------------------------------------
PERIOD PRICE RANGE
REPORTED IN POWER
MARKETS WEEK PRICE RANGE ANALYZED
($/MWH) ($/MWH)
--------------------------------------------------------------
Summer Peak $26-30 $25, $30, $35, $40
--------------------------------------------------------------
Summer Off-Peak $18-21 $12, $15, $20, $25
--------------------------------------------------------------
Winter Peak $30-34 $25, $30, $35, $40
--------------------------------------------------------------
Winter Off-Peak $20-23 $12, $15, $20, $25
--------------------------------------------------------------
Shoulder Peak $24-29 $25, $30, $35, $40
--------------------------------------------------------------
Shoulder Off-Peak $16-19 $12, $15, $20, $25
--------------------------------------------------------------
THE IMPACT OF THE MERGER ON COMPETITION IN ELECTRICITY MARKETS
Q. PLEASE IDENTIFY THE RELEVANT PRODUCT MARKETS YOU ANALYZED.
A. Consistent with the product markets the Commission has typically evaluated
in the context of mergers, I considered the relevant product markets to be
long-term capacity, short-term capacity and non-firm energy. Consistent
with Commission guidance, the product measures on which I concentrated were
deliverable Economic Capacity and Available Economic Capacity. These are
used to measure market structure in energy markets. Consistent with
Commission guidance, I also considered Uncommitted and Total Capacity
measures. Finally, I analyzed capacity as a separate product market.
Because each of the New York utilities, including Applicants, is in the
process of implementing retail access plans, I also took into consideration
partial retail access scenarios that fall within the range of the Economic
Capacity analysis (no native load obligation) and the full retention of
native load obligation. Under the terms of the various Settlements with
the NYPSC, incumbent utilities are likely to retain responsibility to serve
some portion of existing customers that choose to remain with the utility.
I assumed that, for relevant periods after merger closure but prior to
O&R's divestiture
Page 41
(presumed to occur in the second quarter of 1999), Con Edison would retain
80 percent of its retail load (equivalent to the planned 2,000 MW of retail
access/42/) and O&R would retain 70 percent of its retail load (based on an
assessment I described in my August 1997 testimony on behalf of Con
Edison)./43/ Relevant excerpts from this testimony are included in Exhibit
No. APP-706. For purposes of the testimony here, I made the following
assumptions:
-----------------------------------------------------------------------------------------
Retail Access Assumptions
-----------------------------------------------------------------------------------------
Base Case Scenario 2 Scenario 3 Scenario 4
Con Edison
Con Edison and O&R
Pre-Divestiture Divests 1-3 O&R Divests Divest
-----------------------------------------------------------------------------------------
Con Edison 2000 MW 2000 MW 2000 MW 2000 MW
-----------------------------------------------------------------------------------------
O&R [1] 0 0 30% 30%
-----------------------------------------------------------------------------------------
CHG&E 12% 12% 12% 12%
-----------------------------------------------------------------------------------------
NYSEG 0 0 0 10%
-----------------------------------------------------------------------------------------
NiMo 15% 15% 15% 15%
-----------------------------------------------------------------------------------------
RGE [2] 0 0 0 17%
-----------------------------------------------------------------------------------------
[1] O&R customers have energy retail access now, but capacity access begins May 1,
1999. In my energy analyses, I used 30 percent for all scenarios.
[2] RGE customers have energy retail access as of July 1, 1998, but capacity access
begins July 1, 1999. In my energy analyses, I used 17 percent for all scenarios.
----------------------------------------------------------------------------------------
Because the Commission has determined that long-term capacity markets are
presumed to be competitive, and because neither Applicant has dominant
control over sites for new generation or fuel supplies, as described in the
section of my testimony on vertical issues, I did not conduct a
quantitative analysis of long-term capacity markets. In any event, in
___________________
/42/ Con Edison's Settlement calls for only 500 MW of retail access in April
1998 and 1,500 MW of retail access in April, 1999. Because its 1998 access
program was over-subscribed, Con Edison increased the amount of access to
1,000 MW effective June 1, 1998. I have assumed that it will add the 1,000
MW of incremental access for 1999 that the Settlement specifies to that
higher base.
/43/ O&R's responsibility will be reviewed and proposals made to the NYPSC by
May 1999.
Page 42
long term (i.e., post-divestiture), it is clear from my analysis that
Applicants will lack market power in the NYPP capacity market.
Q. WHAT DID YOU ASSUME ABOUT THE SCOPE OF THE RELEVANT GEOGRAPHIC MARKET IN
YOUR ANALYSIS OF UNCOMMITTED CAPACITY AND TOTAL CAPACITY?
A. The scope of the geographic market for purposes of an analysis of
Uncommitted Capacity or Total Capacity is not addressed in Order No. 592
and Appendix A. Neither of these tests are based on economic
deliverability, and, as the Commission notes, Total Capacity merely
provides a "sense of the overall size of a supplier"/44/ to be included in
the market. These tests are part of the old Commonwealth standards, and I
have relied on the geographic definitions used in filings under that
standard. For both of these measures I included the Applicants and
utilities directly interconnected to them as being in the relevant
market./45/ Consistent with the practice under Commonwealth, capacities
were not adjusted to take transmission limitations into account.
ANALYSIS OF TOTAL CAPACITY
- --------------------------
Q. WHAT DOES YOUR ANALYSIS OF TOTAL CAPACITY SHOW?
A. Even in the pre-divestiture base case, the merger is within the safe harbor
of the Appendix A screens for Total Capacity. After divestiture of either
of the Applicants' generation, it passes the screen by a wide margin.
The overall size of the market (consisting of Applicants and their direct
interconnections) is in excess of 55,000 MW, with Con Edison, pre-
divestiture, controlling 20.0 percent of
_______________________
/44/ Order No. 592, page 65.
/45/ The actual Commonwealth methodology included all utilities directly
------------
connected to the destination market, including those that could reach it
via Applicants' open access tariff. Applicants and their direct
interconnections thus are included in the market definition. Utilities that
are directly connected to the destination market but not to Applicants also
would be included. By not including this latter group of competitors in my
analysis, I conservatively increase Applicants' market share.
Page 43
the capacity and O&R controlling 2.4 percent of the capacity. The market is
moderately concentrated and the change in HHI resulting from the merger is
94, within the HHI screen. Applicants' combined share falls and the delta
HHI is well within the HHI screen in each of the divestiture scenarios.
This is shown below and in Exhibit No. APP-707.
--------------------------------------------------------------------------------------------
Total Capacity
--------------------------------------------------------------------------------------------
Base Case Scenario 2 Scenario 3 Scenario 4
Con Edison Con Edison and
Pre-Divestiture Divests 1-3 O&R Divests O&R Divest
--------------------------------------------------------------------------------------------
MWs
--------------------------------------------------------------------------------------------
Total 55554 55554 55554 55554
--------------------------------------------------------------------------------------------
Con Edison 11085 5628 10275 4147
--------------------------------------------------------------------------------------------
O&R 1310 1310 344 344
============================================================================================
Shares
--------------------------------------------------------------------------------------------
Con Edison 20.0% 10.1% 18.5% 7.5%
--------------------------------------------------------------------------------------------
O&R 2.4% 2.4% 0.6% 0.6%
============================================================================================
HHI (pre-merger) 1468 1205 1412 1163
--------------------------------------------------------------------------------------------
HHI (post-merger) 1562 1253 1435 1172
============================================================================================
Delta HHI 94 48 23 9
============================================================================================
ANALYSIS OF UNCOMMITTED CAPACITY
- --------------------------------
Q. PLEASE DESCRIBE YOUR ANALYSIS OF UNCOMMITTED CAPACITY.
A. I considered Uncommitted Capacity to be a relevant measure for assessing
short term capacity markets. "Uncommitted" capacity for purposes of this
calculation is capability minus net peak load and capacity reserve
requirements, based on an 18 percent reserve margin.
Page 44
Before retail capacity market access and generation divestiture, O&R has no
uncommitted capacity. O&R's energy-only retail access program presently in
effect does not create uncommitted capacity./46/ Moreover, although
technically Con Edison has about 2,000 MW of uncommitted capacity (i.e.,
post-merger and pre-divestiture), it really has none./47/ Con Edison's
retail access program is designed to allocate access pro rata between City
and non-City loads. Hence, about 85 percent of its initial 1,000 MW of
access is within the city of New York. Under its settlement, the LSE
serving In-City load must buy capacity equal to 70 percent (for the first
phase) of their In-City load from In-City generation, effectively from Con
Edison, at a capped rate limited by a FERC-approved cost of service-based
tariff./48/ In fact, for the current tranche of retail access, which goes
until March 31, 1999, nearly all of the capacity purchased by LSEs
(including capacity for out-of-City customers) has been purchased from Con
Edison. Hence, contrary to the assumption underlying the analysis below,
retail access has not materially reduced Con Edison's tariff sales of
capacity to its historic native load customers.
In any event, as is shown below and in Exhibit No. APP-708, the change in
HHI is zero since O&R has no uncommitted capacity.
______________________
/46/ Recall that O&R's retail access program is energy only as of May 1, 1998
and energy and capacity as of May 1, 1999. There may be a one-month period,
following the introduction of retail access for capacity for O&R and prior
to divestiture, when O&R may have uncommitted capacity. However, this is so
short-term that it should not be a concern even for this measure of
capacity. In any event, I analyze the capacity market in this period below,
and Applicants have mitigated any potential market power issues arising
during it.
/47/ If I analyzed Uncommitted Capacity with zero retail access (the typical
Appendix A calculation), Con Edison would have no uncommitted capacity in
1999. For example, based on the latest Load & Capacity Data, Con Edison's
--------------------
reserve margin in 1999 would be 13.9 percent, below the NYPP required
reserve of 18 percent.
/48/ NYPA is the only other owner of In-City generation, given that Con Edison
is treated as the owner of contracted NUG capacity. NYPA is short of In-
City capacity and has none to sell. Further, it is barred from selling
energy and capacity to LSEs serving Con Edison's retail loads.
Page 45
---------------------------------------------------------------------------------------------
Uncommitted Capacity
---------------------------------------------------------------------------------------------
Base Case Scenario 2 Scenario 3 Scenario 4
Con Edison
Pre- Con Edison O&R and O&R
Divestiture Divests 1-3 Divests Divest
---------------------------------------------------------------------------------------------
MWs
---------------------------------------------------------------------------------------------
Total 7102 10595 8068 13484
---------------------------------------------------------------------------------------------
Con Edison 1964 0 1154 0
---------------------------------------------------------------------------------------------
O&R 0 0 0 0
=============================================================================================
Shares
---------------------------------------------------------------------------------------------
Con Edison 27.7% 0% 14.3% 0%
---------------------------------------------------------------------------------------------
O&R 0% 0% 0% 0%
=============================================================================================
HHI (pre-merger) 2477 1678 1807 1185
---------------------------------------------------------------------------------------------
HHI (post-merger) 2477 1678 1807 1185
=============================================================================================
Delta HHI 0 0 0 0
=============================================================================================
ANALYSIS OF ECONOMIC CAPACITY
- -----------------------------
Q. WHAT DOES YOUR ANALYSIS SHOW FOR ECONOMIC CAPACITY IN THE EAST OF TOTAL-
EAST MARKET?
A. The results indicate that the merger readily passes the Appendix A screen
once O&R's generation is divested (Scenarios 3 and 4). However, the screen
is failed in most time periods prior to divestiture of O&R's generation
even if Con Edison has completed its divestiture of the three In-City
electric generation bundles. (Base Case and Scenario 2).
The tables on the following pages summarize the results in the East of
Total-East market at a representative range of prices. The results for all
scenarios, including at all price levels analyzed (as described earlier in
my testimony), are contained in Exhibit No. APP-709./49/
___________________________
/49/ It should be noted that these figures attribute all purchases and NUGs to
Applicants' market share, which, as described supra, under NYISO rules and
-----
the terms of their contracts overstates Applicants' market position.
Page 46
- -------------------------------------------------------------------------------------------------------------
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
East of Total-East Market
BASE CASE Pre-Merger Post-Merger
Pre Divestiture
- -------------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
Market Market
($/MWh) Share Share HHI HHI HHI
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 48.7% 4.6% 2717 3165 448
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 2.6% 1443 1589 146
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 44.9% 4.7% 2416 2838 422
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 4.4% 1396 1639 243
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 44.9% 4.8% 2407 2838 431
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
East of Total-East Market
Scenario 2 Pre-Merger Post-Merger
Con Ed Divests 1-3
- -------------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
Market Market
($/MWh) Share Share HHI HHI HHI
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 26.2% 4.6% 1215 1456 241
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 2.6% 1443 1589 146
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 25.2% 4.7% 1178 1415 237
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 4.4% 1396 1639 243
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 26.0% 4.8% 1198 1448 250
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -------------------------------------------------------------------------------------------------------------
Page 47
- -------------------------------------------------------------------------------------------------------------
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
East of Total-East Market
Scenario 3 Pre-Merger Post-Merger
O&R Divests
- -------------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
Market Market
($/MWh) Share Share HHI HHI HHI
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 44.6% 0.3% 2357 2384 27
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 0.3% 1411 1458 17
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 41.0% 0.3% 2101 2126 25
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 0.3% 1393 1410 17
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 40.7% 0.3% 2073 2097 24
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Economic Capacity
- -----------------------------------------------------------------------------------------------------------
East of Total-East Market
Scenario 4 Pre-Merger Post-Merger
Con Edison and
O&R Divest
- -----------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
Market Market
($/MWh) Share Share HHI HHI HHI
- -----------------------------------------------------------------------------------------------------------
Summer Peak $40 18.6% 0.3% 930 941 11
- -----------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 28.0% 0.3% 1441 1458 17
- -----------------------------------------------------------------------------------------------------------
Winter Peak $30 19.7% 0.3% 952 964 12
- -----------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 27.6% 0.3% 1393 1410 17
- -----------------------------------------------------------------------------------------------------------
Shoulder Peak $30 18.9% 0.3% 937 948 11
- -----------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 27.7% 0.3% 1478 1495 17
- -----------------------------------------------------------------------------------------------------------
Note: Con Edison's market share is lower in Scenario 4 than in Scenario 2 because its share of Bowline
is divested with O&R's share and its fourth bundle is divested.
- -----------------------------------------------------------------------------------------------------------
Page 48
Q. IS THERE A MORE COMPACT WAY TO SHOW THESE RESULTS?
A. Yes. Under the Economic Capacity test, load levels do not matter; all that
matters is the market price in the destination market./50/ Hence, I can
summarize results by price levels independently from season or from on-peak
and off-peak conditions. Results for each price level are as follows:
- -----------------------------------------------------------------------------------------------------------
East of Total-East Market: Economic Capacity
- -----------------------------------------------------------------------------------------------------------
Price Base Case Scenario 2 Scenario 3 Scenario 4
($/MWH) Con Edison and
Pre-Divestiture Con Edison Divests 1-3 O&R Divests O&R Divest
- -----------------------------------------------------------------------------------------------------------
$12 No problem No problem No problem No problem
- -----------------------------------------------------------------------------------------------------------
$15 No problem No problem No problem No problem
- -----------------------------------------------------------------------------------------------------------
$20 Exceeds HHI screen Exceeds HHI screen No problem No problem
- -----------------------------------------------------------------------------------------------------------
$25 Exceeds HHI screen Exceeds HHI screen No problem No problem
- -----------------------------------------------------------------------------------------------------------
$30 Exceeds HHI screen Exceeds HHI screen No problem No problem
- -----------------------------------------------------------------------------------------------------------
$35 Exceeds HHI screen Exceeds HHI screen No problem No problem
- -----------------------------------------------------------------------------------------------------------
$40 Exceeds HHI screen Exceeds HHI screen No problem No problem
- -----------------------------------------------------------------------------------------------------------
These results demonstrate that the Appendix A screen is passed by a wide
margin once O&R's generation is divested. Hence, mitigation can be limited
to the period prior to that divestiture.
Q. HAVE YOU ALSO EXAMINED ECONOMIC CAPACITY IN THE IN-CITY DESTINATION MARKET?
A. Yes. O&R has no generation located in the City, and can access this market
only by competing with other generation for transmission access into the
City. For this reason, O&R's share of the In-City market is generally
small. During high priced periods, however, Con Edison's share of
deliverable Economic Capacity in the City is high.
_________________________
/50/ There is some seasonal difference in the amount of energy available,
relating to different assumptions about outages.
Page 49
Hence, it still is possible that O&R's small increment of Economic Capacity
could cause the screen to be violated.
As is shown below, and in Exhibit No. APP-710, in the Base Case the market
is highly concentrated in peak periods. However, even in those periods,
O&R's contribution to changing the HHI is relatively small, leading to a
change of 36 to 71 points, at the bottom of the range that indicates a
basis for concern. The partial divestiture of Con Edison's In-City
generation sufficiently reduces its share such that even in these periods,
there is no basis for concern. As was the case in the analysis of the East
of Total-East market, there are no market power concerns whatsoever once
O&R's generation is divested (Scenarios 3 and 4).
The four tables below summarize the results in the In-City market at a
range of prices. The results for all scenarios are contained in Exhibit
No. AP-710.
- -------------------------------------------------------------------------------------------------------------
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
In-City Market
BASE CASE Pre-Merger Post-Merger
Pre Divestiture
- -------------------------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 59.4% 0.6% 3808 3879 71
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 31.9% 0.5% 1689 1721 32
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 55.5% 0.6% 3430 3497 67
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 30.7% 0.7% 1626 1669 43
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 54.2% 0.6% 3283 3348 65
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 22.9% 0.2% 1421 1430 9
- -------------------------------------------------------------------------------------------------------------
Page 50
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
In-City Market
Scenario 2 Pre-Merger Post-Merger
Con Ed Divests 1-3
- -------------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 23.8% 0.6% 1303 1332 29
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 31.9% 0.5% 1689 1721 32
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 23.1% 0.6% 1264 1292 28
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 30.7% 0.7% 1626 1669 43
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 24.0% 0.6% 1262 1291 29
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 22.9% 0.2% 1421 1430 9
- -------------------------------------------------------------------------------------------------------------
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
In-City Market
Scenario 2 Pre-Merger Post-Merger
O&R Divests
- -------------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 59.0% 0.1% 3756 3768 12
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 31.9% 0.2% 1689 1702 13
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 55.1% 0.1% 3383 3394 11
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 30.7% 0.2% 1626 1638 12
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 53.7% 0.1% 3223 3244 10
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 22.9% 0.2% 1421 1430 9
- -------------------------------------------------------------------------------------------------------------
Page 51
- -------------------------------------------------------------------------------------------------------------
Economic Capacity
- -------------------------------------------------------------------------------------------------------------
In-city Market
Scenario 4 Pre-Merger Post-Merger
Con Edison And
O&R Divest
- -------------------------------------------------------------------------------------------------------------
Price Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -------------------------------------------------------------------------------------------------------------
Summer Peak $40 17.8% 0.1% 1115 1119 4
- -------------------------------------------------------------------------------------------------------------
Summer Off-Peak $20 31.9% 0.2% 1689 1702 13
- -------------------------------------------------------------------------------------------------------------
Winter Peak $30 20.0% 0.1% 1139 1143 4
- -------------------------------------------------------------------------------------------------------------
Winter Off-Peak $25 30.7% 0.2% 1626 1638 12
- -------------------------------------------------------------------------------------------------------------
Shoulder Peak $30 18.9% 0.1% 1108 1112 4
- -------------------------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 22.9% 0.2% 1421 1430 9
- -------------------------------------------------------------------------------------------------------------
Note: Con Edison's market share is lower in Scenario 4 than in Scenario 2 because its share of Bowline
is divested with O&R's share and its fourth bundle is divested.
- -------------------------------------------------------------------------------------------------------------
Q. CAN YOU SUMMARIZE THESE RESULTS IN A SIMILAR FASHION TO YOUR PREVIOUS
SUMMARY FOR THE EAST OF TOTAL-EAST MARKET?
A. Yes. The results can be summarized across price bands as follows:
- ------------------------------------------------------------------------------------------------------------
In-City Market: Economic Capacity
- ------------------------------------------------------------------------------------------------------------
Price Base Case Scenario 2 Scenario 3 Scenario 4
($/MWH) Pre-Divestiture Con Edison Divests O&R Divests Con Edison and O&R
1-3 Divest
- ------------------------------------------------------------------------------------------------------------
$12 No problem No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
$15 No problem No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
$20 No problem No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
$25 No problem No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
$30 gray area (65-68) No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
$35 gray area (65-68) No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
$40 gray area (59-71) No problem No problem No problem
- ------------------------------------------------------------------------------------------------------------
The only prices at which potential market problems occur in the Base Case
are potentially at $30/MWh and above, which are on-peak prices. At these
price levels, the change in HHIs is in the "gray area" between 50 and 100
points where the screen is neither passed nor failed. The results shown
above and in Exhibit No. APP-710 conclusively
Page 52
demonstrate that the screen is passed for the In-City market after either
Con Edison or O&R divests their generation. Any concerns that there may be
about the In-City energy markets in the short transition period between
completion of the merger and divestiture are mooted by the proposed
mitigation.
ANALYSIS OF AVAILABLE ECONOMIC CAPACITY
- ---------------------------------------
Q. HAVE YOU ANALYZED AVAILABLE ECONOMIC CAPACITY?
A. Yes, although at the outset it is worth noting that the rapidly moving
restructuring of the New York electricity industry complicates the analysis
of Available Economic Capacity since the balance between retained load and
generation will change, literally month to month, during the period of
interest. Post-divestiture, O&R will not have Available Economic Capacity,
so that any possible concerns raised by this measure are limited to the
interim period prior to divestiture. Moreover, the mitigation designed to
deal with Economic Capacity also will moot any concerns that might arise
from an analysis of Available Economic Capacity.
Q. WHAT IS IT ABOUT THE NEW YORK RESTRUCTURING THAT MAKES AN ANALYSIS OF
AVAILABLE ECONOMIC CAPACITY PROBLEMATIC?
A. The main reason is that the calculation of Available Economic Capacity
requires knowledge of each competitor's native and requirements load and
economic level of generation for each time period analyzed. New York
utilities are in the process of both retail access and divestiture. The
Available Economic Capacity measure is highly sensitive to the relative
pace of these two activities. Any analysis, particularly if there is a
short time period during the New York transition that is of interest (i.e.,
the period between the consummation of this merger and the O&R
divestiture), will be highly dependent on assumptions that are quite
uncertain.
In the longer run, when the announced divestitures have been completed, the
level of HHIs still will be sensitive to the (unknown) nature of who buys
which assets and to the amount of remaining native load responsibility of
New York utilities under Supplier of Last Resort provisions. Further, the
assumption that each utility uses its lowest cost
Page 53
capacity to meet native load, that is part of the Appendix A Available
Economic Capacity methodology, will be incorrect once restructuring is
completed and supplier of last resort responsibilities are met on a market
basis. Indeed, in this longer run, when all or nearly all load is met with
market-priced resources, the test will be irrelevant in its current form.
Q. WHY DO YOU CONCLUDE THAT O&R WILL NOT HAVE ANY MATERIAL AMOUNT OF AVAILABLE
ECONOMIC CAPACITY POST-DIVESTITURE?
A. Since O&R is divesting all of its generation (but likely will retain at
least some native load obligation under supplier of last resort
provisions), it cannot have any significant Available Economic Capacity
post-divestiture. All that it will retain are its purchases. As the
analysis of Economic Capacity demonstrated, these purchases provide very
little Economic Capacity. Even if all of it is assumed to be "available,"
O&R still will contribute very little to the post-merger share of the
Applicants.
Even before divestiture, O&R has little Available Economic Capacity. In
1997, O&R purchased almost 50 percent of its energy requirements. O&R is a
net buyer about 75-80 percent of the time, and tends to be a net seller
only when its gas/oil units (primarily in 400 MW share of Bowline) are
economic.
In fact, because O&R will be purchasing from the market in order to meet
its remaining native load obligations, any incentive to raise market prices
is eliminated.
Q. WHAT DID YOU ASSUME ABOUT THE RETAIL ACCESS AND DIVESTITURE PLANS IN YOUR
AVAILABLE ECONOMIC CAPACITY ANALYSIS?
A. I assumed that Con Edison retained responsibility for 80 percent of its
load (all but 2,000 MW) and that O&R retained 70 percent of its load;
assumptions for other New York utilities were as I discussed earlier. I
calculated market shares for the two scenarios in which O&R retains its
generation: Base Case (Pre-Divestiture) and Scenario 2 (Con Edison Divests
1-3). Thus, the only divestiture factored into the analysis is Con Edison's
divestiture of the first three bundles of generation.
Page 54
Q. WHAT DID YOU ASSUME ABOUT AVAILABLE TRANSMISSION CAPACITY IN YOUR ANALYSES?
A. I reduced the transmission capacity values used in the economic capacity
analysis to reflect the fact that some of the Total-East transmission
capacity is used by utilities to meet their own loads. Consistent with the
Commission's guidelines, I assumed that each utility dispatched its lowest
cost units to fulfill their native load responsibilities; any generating
capacity available after this amount was potentially available to supply
the market.
Since I divided New York into regions based on transmission constraints, a
significant amount of transmission capacity was used to allow each utility
to meets its own native load. For example, during the summer peak about
2,800 MW of transmission capacity into Area J is used by Con Edison and
NYPA to meet their In-City loads. Thus, transmission capacity into the city
was reduced to account for these existing flows. Also, almost 2,000 MW of
transmission capacity into across the Total East interface is used by New
York utilities to serve load in the East of Total-East area and nearly
1,400 MW of the transmission capacity into downstate (Area F to G) is used
by NYPA and NYSEG (and some NUGs). This reduces the amount of imports that
can physically flow into the East of Total-East and In-City markets. This
approach is generally conservative in determining Available Economic
Capacity in the East of Total-East market since imports into that market
are limited by the reduced amount of available transmission capacity.
Q. WHAT ARE YOUR RESULTS FOR THE EAST OF TOTAL-EAST MARKET?
A. As summarized the tables below and Exhibit No. APP-711, the HHI screen is
violated mainly during peak (i.e., higher-priced) periods in the East of
Total-East market. This result is due largely to the conservative
assumption that I have made regarding O&R's native load responsibilities,
i.e., that O&R has only 70% of its native load obligation, but all of its
generation. At relatively high market prices, O&R's share in the Bowline
units becomes economic, thereby giving O&R a small share of the market. The
combination of O&R's small amount of Available Economic Capacity combined
with Con Edison's existing share induces changes in the HHI that exceed the
safe-harbor level.
Page 55
The only change between the Base Case and Scenario 2 is that Con Edison is
assumed to divest three bundles, which reduces Con Edison's market share in
Scenario 2. Since the purchaser of the bundles will not have any native
load obligations, all of the capacity of these bundles becomes potential
supply for the Available Economic Capacity measure. Hence, Con Edison's
share is reduced both because it controls less generation and because the
Available Economic Capacity market is larger.
- ----------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC CAPACITY
- ----------------------------------------------------------------------------------------------
EAST OF TOTAL-EAST MARKET
BASE CASE PRE-MERGER POST-MERGER
PRE-DIVESTITURE
- ----------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- ----------------------------------------------------------------------------------------------
Summer Peak $40 59.2% 4.3% 3934 4443 509
- ----------------------------------------------------------------------------------------------
Summer Off-Peak $20 0.0% 0.0% 2284 2284 0
- ----------------------------------------------------------------------------------------------
Winter Peak $30 50.6% 4.8% 3094 3577 486
- ----------------------------------------------------------------------------------------------
Winter Off-Peak $25 0.0% 0.0% 1983 1983 0
- ----------------------------------------------------------------------------------------------
Shoulder Peak $30 51.0% 4.6% 2930 3399 469
- ----------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 0.0% 0.0% 2956 2956 0
- ----------------------------------------------------------------------------------------------
Page 56
- -----------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------
EAST OF TOTAL-EAST MARKET
SCENARIO 2 PRE-MERGER POST-MERGER
CON ED DIVESTS 1-3
- -----------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------
Summer Peak $40 0.0% 3.0% 1085 1085 0
- -----------------------------------------------------------------------------------------------
Summer Off-Peak $20 0.0% 0.0% 2284 2284 0
- -----------------------------------------------------------------------------------------------
Winter Peak $30 1.4% 3.7% 1015 1025 10
- -----------------------------------------------------------------------------------------------
Winter Off-Peak $25 0.0% 0.2% 1995 1995 0
- -----------------------------------------------------------------------------------------------
Shoulder Peak $30 14.7% 4.2% 947 1070 123
- -----------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 0.0% 0.0% 2956 2956 0
- -----------------------------------------------------------------------------------------------
Q. ARE THE RESULTS SIMILAR FOR THE IN-CITY MARKET?
A. Because the Available Economic Capacity that O&R has is fully counted in
the East of Total-East market, but is allocated a pro rata share of the
transmission capacity into the In-City market, the changes in HHI are lower
in the In-City market than in the East of Total-East market. This is shown
below and in Exhibit No. APP-712.
Page 57
- -----------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------
IN-CITY MARKET
BASE CASE PRE-MERGER POST-MERGER
PRE DIVESTITURE
- -----------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------
Summer Peak $40 49.5% 0.4% 2937 2977 40
- -----------------------------------------------------------------------------------------------
Summer Off-Peak $20 0.0% 0.0% 2404 2404 0
- -----------------------------------------------------------------------------------------------
Winter Peak $30 43.6% 0.1% 2921 2930 9
- -----------------------------------------------------------------------------------------------
Winter Off-Peak $25 0.0% 0.1% 2745 2745 0
- -----------------------------------------------------------------------------------------------
Shoulder Peak $30 54.7% 0.5% 3584 3639 55
- -----------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 0.0% 0.0% 4449 4449 0
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC CAPACITY
- -----------------------------------------------------------------------------------------------
IN-CITY MARKET
SCENARIO 2 POST-MERGER
CON ED DIVESTS 1-3 PRE-MERGER
- -----------------------------------------------------------------------------------------------
PRICE Con Ed O&R Delta
($/MWH) Market Market HHI HHI HHI
Share Share
- -----------------------------------------------------------------------------------------------
Summer Peak $40 0.0% 0.7% 1409 1409 0
- -----------------------------------------------------------------------------------------------
Summer Off-Peak $20 0.0% 0.0% 2397 2397 0
- -----------------------------------------------------------------------------------------------
Winter Peak $30 1.8% 1.0% 1292 1296 4
- -----------------------------------------------------------------------------------------------
Winter Off-Peak $25 0.0% 0.1% 2745 2745 0
- -----------------------------------------------------------------------------------------------
Shoulder Peak $30 7.3% 0.9% 1238 1251 13
- -----------------------------------------------------------------------------------------------
Shoulder Off-Peak $15 0.0% 0.0% 3966 3966 0
- -----------------------------------------------------------------------------------------------
Q. WILL O&R HAVE ANY AVAILABLE ECONOMIC CAPACITY AFTER IT HAS DIVESTED ITS
GENERATION?
A. No. The tables below show the derivation of O&R's Available Economic
Capacity with retail access but with O&R's current ownership of generating
capacity, and the post-divestiture. As shown, O&R has Available Economic
Capacity from its Bowline units
Page 58
during the peak periods; during winter off-peak, load is low enough that,
at the specified price, Lovett 5 is economic./51/ These results are
consistent with the historical facts: in 1999, O&R purchased almost 50
percent of its energy requirements; and O&R is a net buyer about 75-80
percent of the time, and tends to be a net seller only when its gas/oil
units (Bowline) are economic.
- ------------------------------------------------------------------------------------------------------------------------
RETAIL ACCESS (NO DIVESTITURE) SEASON
- ------------------------------------------------------------------------------------------------------------------------
O&R Profile SUMMER SUMMER WINTER WINTER SHOULDER SHOULDER
PEAK OFF-PEAK PEAK OFF-PEAK PEAK OFF- PEAK
- ------------------------------------------------------------------------------------------------------------------------
1999 LOAD (MW) 792 572 648 508 618 464
- ------------------------------------------------------------------------------------------------------------------------
70% OF 199 LOAD (MW) 555 400 454 355 433 325
- ------------------------------------------------------------------------------------------------------------------------
MARKET PRICE ($/MWH) $40 $20 $30 $25 $30 $15
- ------------------------------------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC UNITS Bowline 1
None Bowline 1 Lovett 5 Bowline 1 None
Bowline 2 Bowline 2 Bowline 2
Lovett 5
Lovett 3 Gilboa
- ------------------------------------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC CAPACITY (MW) 278 0 346 10 420 0
- ------------------------------------------------------------------------------------------------------------------------
The table below shows O&R's Available Economic Capacity after it has
completed its divestiture. Indeed, post-divestiture, O&R's minimum load,
-------
at the assumed 30 percent retail access, is 327 MW, as compared to the
capacity it will control of 43 MW (not counting the 300 MW purchase from
PSE&G, which is never economic under the delivered price test). Thus, the
merger can have no effect on concentration.
_________________
/51/ The incremental costs of the Bowline units are $28.81/MWh for unit 1 and
$30.09/MWh for unit 2. The incremental cost of Lovett 5 is $21.96/MWh.
Page 59
- ---------------------------------------------------------------------------------------------------------------------
RETAIL ACCESS (DIVESTITURE) SEASON
- ---------------------------------------------------------------------------------------------------------------------
O&R Profile SUMMER SUMMER WINTER WINTER SHOULDER SHOULDER
PEAK OFF-PEAK PEAK OFF-PEAK PEAK OFF- PEAK
- ---------------------------------------------------------------------------------------------------------------------
1999 LOAD (MW) 792 572 648 508 618 464
- ---------------------------------------------------------------------------------------------------------------------
70% OF 199 LOAD (MW) 555 400 454 355 433 325
- ---------------------------------------------------------------------------------------------------------------------
MARKET PRICE ($/MWH) $40 $20 $30 $25 $30 $15
- ---------------------------------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC UNITS None None None None None None
- ---------------------------------------------------------------------------------------------------------------------
AVAILABLE ECONOMIC CAPACITY (MW) 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------
Q. DID YOU PREPARE A SUMMARY TABLE FOR THE AVAILABLE ECONOMIC CAPACITY RESULTS
SIMILAR TO YOUR SUMMARY TABLES FOR ECONOMIC CAPACITY?
A. No. The Available Economic Capacity measure does not lend itself to such a
summary because price is not the only relevant parameter; native load must
be taken into consideration as well.
Q. GIVEN THAT APPENDIX A ISSUES ARE LIMITED TO THE PRE-DIVESTITURE BASE CASE,
IS THERE ANY PERIOD OF TIME FOR WHICH THE SCREEN IS LIKELY TO BE VIOLATED?
A. No. Since Con Edison is expected to complete its divestiture of the three
In-City bundles prior to completion of the merger, there is no post-merger
period to which the base case applies. In the unlikely event that the
merger is consummated before the divestiture of the In-City bundles, the
mitigation designed to cure screen violations of the Economic Capacity test
will also cure any violation of the Available Economic Capacity test.
ANALYSIS OF NYISO CAPACITY MARKETS
- ----------------------------------
Q. DID YOU CONDUCT ANY OTHER ANALYSES?
A. Yes. As stated earlier, I conducted an analysis of capacity as a product
that LSEs in New York must purchase. The relevant geographic markets are
determined by the NYISO
Page 60
rules and consist of a New York state and an In-City market. The In-City
market can be dealt with summarily. Only capacity that is physically
located within the City can compete in this NYISO local capacity
market./52/ Hence the merger cannot increase concentration in the market or
otherwise contribute to Con Edison's market power.
Applicants advise me that the NYISO's capacity market is now not expected
to commence prior to May 1, 1999 at the earliest. In any event, O&R will
have no capacity to sell prior to May 1, 1999. According to the terms of
O&R's settlement, there will be no retail access in capacity prior to that
date; all of its existing capacity is needed to meet its native load
requirements under NYPP rules. Also according to the settlement, if the
NYISO's energy and capacity markets are not fully operational by December
1998, as now appears highly likely, O&R can petition the NYPSC on an
expedited basis to defer capacity market retail access. In any event, O&R
is likely to have little capacity to sell into the NYISO capacity market
prior to its divestiture. O&R remains responsible for supplying customers
who do not elect retail access. There has been little take-up of energy
market retail access by O&R's customers, despite the fact that all
customers have the option to select other energy suppliers. The lack of
movement to alternative suppliers reflects the fact that O&R has little
industrial load and few large customers, facts that will militate against
any material movement to retail access for some time into the future.
Q. HAVE YOU PERFORMED AN ANALYSIS OF THE NYISO'S NEW YORK STATE CAPACITY
MARKET?
A. Yes. I have performed two analyses of this market. The first is a worst
case analysis that assumes that neither Con Edison nor O&R retains native
load requirements and that neither has divested any capacity that can be
bid into the New York state capacity market.
__________________
/52/ The In-City capacity market reflects the existence of locational capacity
requirements in New York City for reliability purposes. Con Edison's
NYPSC-approved restructuring settlement provides that prior to June 1999,
LSEs in the City will have to purchase capacity equal to 70 percent of
their In-City load from In-City resources. Con Edison must make up the
remaining 10 percentage points of the In-City 80 percent requirement.
After June 1999, the LSEs will be responsible for the full In-City capacity
requirement (80 percent or such other level as the NYISO may determine to
be appropriate).
Page 61
It similarly assumes that no other generation owner in New York reserves
capacity for native load purposes, and has assumed away all of the
announced generation divestiture. This analysis is, at most, pertinent to
the month of May 1999, assuming that the O&R divestiture schedule is
maintained. Even for May 1999, the analysis is correct only if one assumes
that the deconcentrating effect of other utilities' divestitures has not
occurred. Under these worst case assumptions, I also analyzed cases
reflecting Applicants' divestiture of generation that parallel the cases
analyzed for the energy markets. The second analysis that still assumes no
divestiture by Applicants in the relevant period and no native load
reservation, but takes into account the effect of the announced
divestitures of other parties' market structure.
Q. HOW DID YOU DETERMINE CAPACITY SHARES IN THESE ANALYSES OF THE NYISO
CAPACITY MARKET?
A. For the New York capacity market, I determined the amount of capacity that
each generation owner controls that can be used to meet NYPP reserve
requirements, plus capacity that could be imported from PJM and NEPOOL. I
took into account the capacity that must be reserved to meet the locational
capacity requirements for New York City and Long Island. This analysis is
an update of the analysis contained in my August 1997 testimony in Docket
No. ER97-1523-000. As stated previously, I ignored all native load
commitments in this analysis.
Q. WHAT DOES YOUR "WORST CASE" ANALYSIS OF THE NEW YORK STATE CAPACITY MARKET
SHOW?
A. It shows that the New York state capacity market is only moderately
concentrated; pre-divestiture, Con Edison's share is 14.7 percent and O&R's
is 4.9 percent. As shown below and in Exhibit No. APP-713, the merger
produces a change in HHI of 142 during the period prior to O&R's
divestiture./53/ I should emphasize that this result assumes no remaining
native load responsibility for either Con Edison or O&R, whereas both will
in fact retain substantial native load. After divestiture of O&R's
generation, the screen is readily passed, with an HHI delta of 30.
_______________________
/53/ Con Edison's divestiture of generation in the first quarter of 1999
(Scenario 2) has no affect on the analysis due to the fact that all of the
divested capacity is within New York City and is unavailable to serve the
more general New York capacity market.
Page 62
remaining native load responsilbility for either Con Edison or O&R, whereas
both will in fact retain substantial native load. After divestiture of
O&R's generation, the screen is readily passed, with a HHI delta of 30.
--------------------------------------------------------------------------------------------
NEW YORK CAPACITY MARKET
--------------------------------------------------------------------------------------------
BASE CASE Scenario 2 Scenario 3 Scenario 4
Con Edison
Pre- Con Edison O&R and O&R
Divestiture Divests 1-3 Divests Divest
--------------------------------------------------------------------------------------------
MWs
--------------------------------------------------------------------------------------------
Total 26977 26977 26977 26977
--------------------------------------------------------------------------------------------
Con Edison 3956 3956 3146 3146
--------------------------------------------------------------------------------------------
O&R 1310 1310 344 344
============================================================================================
Shares
--------------------------------------------------------------------------------------------
Con Edison 14.7 14.7 11.7 11.7
--------------------------------------------------------------------------------------------
O&R 4.9 4.9 1.3 1.3
============================================================================================
HHI (pre-merger) 1642 1642 1566 1566
--------------------------------------------------------------------------------------------
HHI (post-merger) 1784 1784 1596 1596
============================================================================================
Delta HHI 142 142 30 30
============================================================================================
Q. WHAT ARE THE RESULTS OF THE ANALYSIS THAT TAKES ANNOUNCED DIVESTITURE BY
UTILITIES OTHER THAN CON EDISON AND O&R INTO ACCOUNT?
A. As is shown below and in Exhibit No. APP-714, the primary result is that
the New York capacity market is unconcentrated both before and after the
merger. The announced divestitures by Niagara Mohawk and NYSEG reduce
their shares substantially. Specifically, I have taken into account
NYSEG's announced sale of its share of Homer City to Edison Mission Energy
and its sale of its fossil capacity to AES. In the case of Niagara Mohawk,
I have reflected sale of the fossil stations and hydro units that it is
selling, as well as the announced termination of contracts with 1100 MW of
NUGs. My understanding is that Niagara Mohawk has received the bids on its
generation sales but has not yet announced the winners. Taking these
divestitures into account results in a pre-merger HHI of 728 and a post-
merger (but pre-Con Edison and O&R divestiture)
Page 63
HHI of 870. Thus, the post-merger HHI is less than 1,000, within the safe
harbor limits of the Merger Guidelines test.
--------------------------------------------------------------------------------------------
NEW YORK CAPACITY MARKET (TAKING INTO ACCOUNT NY DIVESTITURE)
--------------------------------------------------------------------------------------------
BASE CASE Scenario 2 Scenario 3 Scenario 4
Con Edison
Pre- Con Edison O&R And O&R
Divestiture Divests 1-3 Divests O&R Divest
--------------------------------------------------------------------------------------------
MWs
--------------------------------------------------------------------------------------------
Total 26977 26977 26977 26977
--------------------------------------------------------------------------------------------
Con Edison 3956 3956 3146 3146
--------------------------------------------------------------------------------------------
O&R 1310 1310 344 344
============================================================================================
Shares
--------------------------------------------------------------------------------------------
Con Edison 14.7 14.7 11.7 11.7
--------------------------------------------------------------------------------------------
O&R 4.9 4.9 1.3 1.3
============================================================================================
HHI (pre-merger) 728 728 652 652
--------------------------------------------------------------------------------------------
HHI (post-merger) 870 870 682 682
============================================================================================
Delta HHI 142 142 30 30
============================================================================================
Q. WHAT CONCLUSIONS FLOW FROM THIS ANALYSIS?
A. The merger passes all analytical screening criteria prior to May 1, 1999
and after O&R's divestiture. It also is apparent that the merged firm will
not possess market power in the New York state capacity market during any
brief period that might exist between merger closing and O&R's divestiture.
If such an interim occurs, the likely event that Niagara Mohawk and NYSEG
will have completed their currently on-going divestiture of generating
plant will result in an unconcentrated market, with an HHI well under 1000.
Even the strictest screening criterion will be passed. If those
divestitures are wholly uncompleted, my "worst case" analysis shows a
moderately concentrated market and an HHI delta of 142, slightly in excess
of the screening level. However, an analysis of other relevant factors, as
directed by Step 2 of the DOJ/FTC Merger Guidelines adopted by the
Commission shows that even in such a "worst case" Applicants will possess
no market power in the New York state capacity market during this brief
period.
Page 64
First, Applicants would have less than 20 percent of the capacity that can
be bid into the market. The Commission has long held that firms with such
a market share do not have market power./54/ The Commission has found such
a showing adequate to resolve market power concerns for a period of three
years. Here the relevant period is expected to be only 30 days (May 1 to
May 31). Second, Applicants in fact still will retain most of their native
load, served at regulated prices, to which they will need to dedicate their
capacity. Con Edison's first round of retail access is completed and the
amount of out-of-City retail access that it will have in 1999 is known./55/
It will only be about 150 MW until April 1999 and 300 MW for a year
thereafter. O&R's retail access program, as noted above, is energy only at
least until May 1, 1999. O&R's current experience suggests that it will
have very little capacity retail access in the period between May 1 and the
expected completion of its divestiture. The merged firm thus will have
very little actual uncommitted capacity. Third, during this period the
NYISO capacity market will be oversupplied due to upstate utilities'
significant excess capacity. None of Applicants' uncommitted capacity will
be needed in order to meet demand in the New York state market./56/
Finally, I note that, under Con Edison's settlement, its capacity prices
are capped by NYPSC and FERC-filed tariff rates. For all of these reasons,
Applicants will
________________________
/54/ Southwestern Public Service Co., 72 FERC (P) 61,208 at p. 61,966 (1955)
-------------------------------
(Applicants with less than 20 percent of the market have no market power);
Louisville Gas & Electric Co., 62 FERC (P) 61,016at p. 61,146 (1993);
-----------------------------
accord Entergy Services, Inc., 58 FERC (P)61,234 (1992) merged firm with 17
percent share); Southern Co. Services, Inc., 72 FERC (P)61,324 (1995) (26
---------------------------
percent market share). Because of the very temporary nature of any
possible market power issue concerning the NYISO state capacity market, the
standard used in market rate applications is logically more appropriately
applied in determining whether any interim mitigation is necessary than the
merger standard used for assessing longer-term market structure.
/55/ By design, Con Edison's retail access program prorates access such that
the percentage of retail access outside of the City equals the percentage
of its total load that is outside of the City. That percentage is
approximately 15 percent; out-of-City retail access thus is 15 percent of
the total April, 1999 retail access of 2,000 MW, or 300 MW. Moreover, to
date nearly all participating LSEs have elected to take service under Con
Edison's tariff, whereby it is obligated to provide capacity to such LSEs.
Thus, the first tranche of Con Edison's retail access has not created any
uncommitted Con Edison capacity, and it is not clear that further retail
access will un-commit any Con Edison capacity.
/56/ This conclusion holds under any plausible assumptions about Applicants'
retail access and the serving LSEs purchase of capacity from them.
Page 65
not possess the ability profitably to raise prices in the New York state
capacity market, even in the event that there is an interim period between
the closing of the merger and O&R's divestiture.
Nevertheless, in order to dispel any possible market power issues,
Applicants are proposing to adhere to the interim mitigation measures
described below that will effectively moot any merger-related market power
concerns in the NYISO capacity market in the event that the merger closes
prior to O&R's divestiture.
PROPOSED INTERIM MITIGATION MEASURES PENDING O&R'S DIVESTITURE
Q. YOU MENTIONED EARLIER THAT THE MERGER SATISFIED THE APPENDIX A SCREENING
CRITERIA IN ALL CASES ONCE O&R'S DIVESTITURE OCCURS, AND IN THE INTERIM
EXCEEDS CERTAIN SCREENS (GENERALLY ONLY BY MODEST AMOUNTS). WHAT DOES THE
COMMISSION MERGER POLICY SAY ABOUT SUCH CIRCUMSTANCES?
A. Order No. 592 states that if the screening criteria are exceeded, the
Commission invites applicants to propose mitigation remedies targeted to
reduce potential anti-competitive effects. Among the potential remedies
specifically identified is divestiture, but the Order does not identify in
what circumstances interim measures may be necessary if such divestiture is
not coincident with merger consummation.
Q. WHAT IS THE EXPECTED TIMING OF O&R'S DIVESTITURE VIS-A-VIS THE CLOSING OF
THE MERGER?
A. O&R's winning bidders will be identified on October 15, 1998 and final
closing of the divestiture is expected on May 31, 1999. The targeted
closing date of the merger is in April 1999. Thus, there is potentially a
one to two month period between the closing of the merger and the closing
of O&R's divestiture, at which time any market power problems resulting
from the merger are eliminated.
Q. IF O&R'S DIVESTITURE DOES NOT OCCUR UNTIL AFTER CONSUMMATION OF THE MERGER,
ARE APPLICANTS PROPOSING MITIGATION THAT DEALS EFFECTIVELY WITH THE
BREACHES OF THE APPENDIX
Page 66
A screen for short-term energy as measured by Economic and Available
Economic Capacity?
A. Yes. Applicants' proposed mitigation is described in Mr. Jacob's
testimony. Applicants propose that all of Con Edison's generation will be
bid into the market at a capped bid equal to its variable costs. They
propose that O&R will self-schedule its generation, primarily to meet the
needs of its remaining regulated customer base and bid any generation that
is not self-scheduled at its variable costs./57/ Since the pure competitor
in the economists' theoretical perfect competition will offer its product
to the market at variable, or short-run marginal, costs, this ensures that
the generation will be bid competitively. The proposed mitigation also
ensures that the merged Applicants will not withhold the generation from
the New York energy market. Applicants propose that they must make their
generation available to the New York pool (on a self-scheduled or bid
basis) with the same level of availability as during the same season in the
prior three years, or explain any shortfall from such availability to the
ISO. The ISO's monitoring function will thus be able to confirm that any
availability shortfall is unavoidable and not in furtherance of attempts to
exercise market power.
Q. DO APPLICANTS PROPOSE TO MITIGATE THE BIDDING OF THEIR PURCHASED GENERATION
INTO ENERGY MARKETS?
A. Yes, insofar as the Applicants are the parties that bid the purchased
generation. The mitigation is intended to control the bid price and
availability of all generation that Applicants operate or that they can bid
into the market. That is, it is intended to eliminate their theoretical
ability to manipulate prices. In most or all cases, this will not include
purchases. As noted earlier, contracts with generating units controlled by
others, or system contracts not backed by specific generating units, do not
give Applicants the right
_____________________
/57/ The impact of self-scheduling on price formation in the Power Exchange is
identical to bidding the generation at zero. Further, since self-scheduled
generation does not receive the market price, self-scheduling creates
neither the ability nor incentive to increase Power Exchange prices.
Page 67
to control availability, nor to bid the energy into the market. Must-take
contracts, such as the NUG contracts, result in energy production whenever
the unit can run. Since Applicants are required to take and pay for the
energy, they either will have to self-schedule the energy, in which case it
will not participate in market price formation, or bid it into the market
at prices low enough to assure that it is scheduled by the ISO.
With respect to the post-divestiture period, my Appendix A analysis
demonstrates that the addition of O&R's retained purchase entitlements adds
so little to Applicants' controlled deliverable Economic, Available
Economic and Total Capacity that no mitigation is necessary.
Q. DO APPLICANTS PROPOSE TO MITIGATE CAPACITY BIDS ?
A. Yes. While, for the reasons I have discussed, mitigation should be
unnecessary, Applicants have proposed to mitigate their bids into the
capacity market. As is described in Mr. Jacob's testimony, Applicants
agree to make all of their capacity available and any capacity that is bid
into the NYISO capacity market will be subject to a bid cap. In its
compliance with its NYSPC Settlement Agreement, Con Edison has agreed to
bid its capacity (both company-owned generation and purchase contracts)
into the NYISO capacity market at its going forward or "to go" costs.
Applicants agree that the bid cap will apply also to all O&R capacity that
is bid into the NYISO auction. Both Applicant's calculations of "to go"
costs will be according to procedures approved by NYPSC Staff and subject
to review by that staff. Consistent with its settlement, Con Edison filed
proposed procedures with the NYPSC Staff on June 1, 1998. "To go" costs
are the avoidable costs of keeping a station open and producing energy from
it, less revenues earned in energy and ancillary services markets./58/
They do not include recovery of sunk costs or unavoidable costs. The "to
go" costs will be both the floor and ceiling bids for capacity bids made by
Applicants.
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The Applicants reserve the right to "self-schedule" capacity needed to
serve their retail customer installed capacity requirements with the
ISO./59/ The costs for self-scheduled capacity shall be recovered in retail
rates set by the NYPSC for capacity used to support remaining native load
or under FERC rates for any capacity sales made to LSEs serving Applicants'
retail access customers.
Q. HOW LONG WILL THE MITIGATION REMAIN IN EFFECT?
A. The mitigation will remain in effect until the divestiture of O&R's fossil
generation is completed. Obviously, once divestiture is complete, O&R's
divested generation will no longer be controlled by Applicants and it will
no longer contribute to Applicants' market share. While the precise dates
of merger consummation and O&R's divestiture are not known with certainty,
the period is likely to be only a few months at most.
VI. VERTICAL ISSUES
Q. PLEASE DESCRIBE THE VERTICAL ISSUES THAT YOU HAVE ADDRESSED.
A. FERC has identified two areas of potential concern that could rebut the
presumption that long term capacity markets are competitive. These are
dominant control over potential generating sites and control over essential
fuels supplies or delivery systems. Recent decisions and other orders
concerning "convergence mergers" have indicated that the analysis also
should consider whether the merger materially increases control over inputs
to electricity. My analysis examines each of these areas.
_____________________
/58/ "To go" costs for Con Edison's nuclear units are being considered in a
separate proceeding by the NYPSC.
/59/ Self-scheduling has no impact on the price of capacity. As is the case
with energy, self-scheduling has an effect on price formation in the Power
Exchange that is the same as if the generation had been bid into the
exchange at a bid price of zero. Further, since self-scheduled generation
does not receive the market price, or a price influenced by the market
price, self-scheduling creates neither the ability nor the incentive to
increase Power Exchange prices.
Page 69
Q. IS THERE REASON TO BE CONCERNED THAT THE MERGER WILL GIVE APPLICANTS AN
UNTOWARD DEGREE OF CONTROL OVER GENERATING SITES?
A. No. Outside of New York City, there should be no unique difficulty in
siting generating facilities. The east of Total-East area is large and
includes major parts of the service territories of several utilities other
than Applicants, including CHG&E, NYSEG, NiMo and MarketSpan. Applicants
are divesting several sites, including an O&R site adjacent to Bowline that
is a potential generating site. There is no reason to suppose that
Applicants control the available sites.
Within New York City, there are sites available that are not controlled by
Con Edison./60/ Further, Con Edison has committed to divest several sites
that it does control. In its open session on July 15, 1998, the NYPSC
required that Con Edison submit its plan for divesting excess real
property, including several potential generation sites, within 30 days of
beginning the first phase of its generation divestiture.
Q. WHAT IS THE ISSUE CONCERNING AN APPLICANTS' CONTROL OVER ESSENTIAL FUELS OR
DELIVERY SYSTEMS?
A. In the context of long term capacity markets, the issue is whether
applicants can foreclose or impede the entry of competing generators.
Q. DO THESE APPLICANTS HAVE THE ABILITY TO FRUSTRATE ENTRY DUE TO THEIR
CONTROL OVER FUELS OR FUEL DELIVERY SYSTEMS?
A. No. Applicants' only potentially relevant activities arise from their role
as combination utilities. As described more fully below, Applicants lack a
concerning degree of control over fuels supplies. Neither controls gas
production facilities. An entrant into generation in the region in which
they are located would have no difficulty in purchasing commodity
_____________________
/60/ Feasibility Study for In-City Electric Generation, Stone & Webster, April
22, 1998, page 2.
Page 70
gas from a multiplicity of sellers. Applicants do not control long distance
transmission facilities that arguably might be used to disadvantage
entrants. Applicants are gas distribution companies. As already discussed,
an entrant competitor in electricity generation to serve the East of Total-
East market would not need to locate in the electric service areas of
Applicants. This applies with even greater force to their gas service
areas, which are smaller. Even within their gas service areas, Applicants
cannot use their role as gas distribution companies to impede entry. Their
distribution activities are regulated by the NYPSC, from whom an entrant
generator who felt disadvantaged could gain redress. As public utilities,
Applicants are obligated by New York State statute to initiate gas service
upon request./61/ Applicants are further required to render that service in
a non-discriminatory fashion./62/ The NYPSC actively oversees Applicants'
compliance with these statutory requirements.
Further, as discussed below in the context of existing generating
facilities, direct connection to a transmission pipeline is feasible and
relatively inexpensive. Hence, even if the distribution activities of
Applicants' gas operations were to somehow deny service to entrants on a
reasonable basis, the entrants likely could bypass Applicants, taking
service from a transmission pipeline directly. Finally, as was already
discussed, entrants seeking to provide power in any area large enough to
encompass both Applicants (so that there is a possible effect of the
merger) would not need to locate in areas served by Applicants' gas
distribution.
Q. WHAT ISSUES HAVE ARISEN IN THE CONTEXT OF CONVERGENCE MERGERS?
A. The Commission has indicated that under some circumstances a merger
involving a supplier of generating fuels could give rise to vertical
concerns. Potential market power arising from gas operations is discussed
by the Commission in its final order on the
___________________
/61/ Transportation Corporations Law, Section 12.
/62/ New York Public Service Law, Section 65.
Page 71
Enova/Pacific Enterprises merger in 1997,/63/ and the recent FERC Notice of
Proposed Rulemaking (NOPR) on mergers./64/ Briefly, the main areas of
concern are the creation of incentives for the upstream activities (i.e.,
gas-related) to raise rivals costs, facilitate coordination of pricing in
upstream or downstream markets or evade regulation, primarily through self
dealing. The Commission has also expressed concerns that convergence
mergers involving an upstream gas supplier serving the downstream merger
partner, as well as competitors of that partner, could provide preferential
terms of service or access to commercially valuable information to its new
affiliate. As shown below, none of these concerns will be appropriate to
this merger.
Q. WHAT ARE THE BUSINESS ACTIVITIES INTO WHICH THE UPSTREAM AND DOWNSTREAM
MARKETS CAN BE DIVIDED?
A. In the upstream market, these include (a) control over commodity gas
supplies, (b) the transportation of these supplies from gas-producing
regions and remote storage facilities into the market area and (c) the
local distribution of these supplies to gas-fired electric generating
facilities.
The only relevant downstream product for purposes of this portion of my
analysis is bulk or wholesale electric energy traded within the East of-
Total-East and In-City markets. I have not investigated any larger market,
such as New York State, since Applicants' market power in such a market
will, of necessity, be less than in these more local markets in which their
gas operations are located.
Q. PLEASE FOCUS FIRST ON THE COMMODITY GAS MARKET. DO APPLICANTS HAVE
POTENTIAL MARKET POWER IN THAT MARKET?
_______________________
/63/ Order in Docket No. EC-97-12-001 et al. (Enova-Pacific Enterprises).
/64/ Notice of Proposed Rulemaking on Revised Filing Requirements Under Part 33
of the Federal Power Act, Docket No. RM98-4-000.
Page 72
A. Clearly not. Since neither Applicant is a gas producer, nor a major gas
aggregator/supplier to unaffiliated retailers and off-system consumers,
they have no ability to control or affect the availability or price of gas
delivered to the relevant geographic area. Gas to fuel generators that can
provide electricity to the downstate region originates in basins scattered
across the entire North American continent, and is transported by multiple
pipelines connecting these producing basins to downstate New York.
Applicants' sole role in the commodity market is as buyers. Hence, they
cannot have sellers' market power. While Applicants have purchase
contracts for significant volumes of gas, they account for but a small
portion of the production volumes. A conservative measure of the size of
the commodity market in which they participate would include gas delivered
to the Mid-Atlantic and New England states. While gas consumed in other
areas also is produced in the basins that serve downstate New York, even
this conservatively defined measure of the size of the market is sufficient
to make the point that Applicants are a small factor in the commodity gas
market.
Con Edison's purchases totaled 207 MMdt in 1996, and O&R's totaled 33.5
MMdt for a total of 240.5 MMdt./65/ These figures compare to 1996 gas
consumption in the Mid-Atlantic and New England states of approximately
3,600 MMdt. Thus, Applicants combined account for at most 6.7 percent of
gas commodity purchases in the region. Of this combined 240.5 MMdt, 93.6
MMdt was burned in Applicants' generating facilities, with all but 14 MMdt
of the balance resold to utility ratepayers. Upon sale of the fossil
generating assets, assuming their new owners obtain fuel supply from one of
many available alternative sources, the Applicants' combined market share
would drop by 93.6 MMdt to about 4 percent of this conservatively defined
commodity market.
______________________
/65/ Form EIA-176, Annual Report of Natural and Supplemental Gas Supply and
Disposition, 1996.
Page 73
Moreover, Applicants' failure to take gas could not result in "withholding"
it from the market, since volumes not taken would be available to other
users. Nor could Applicants artificially increase their demands to the
point of denying supplies to other electricity generators. Gas taken must
be either burned or stored. Applicants have no control over the
consumption of their customers and, as further discussed below, little
storage injection or withdrawal capacity relative to the overall commodity
market./66/ Hence, quite clearly, Applicants lack market power in commodity
gas.
Q. IF THE COMMISSION WERE TO DEFINE A PRODUCT AS GAS DELIVERED TO THE UPSTREAM
MARKET, WOULD APPLICANTS HAVE A MARKET SHARE THAT COULD CAUSE CONCERN?
A. No. Obviously, since Applicants are the franchise gas utilities in their
gas service areas, they are the purchasers of a significant share of the
gas delivered to those areas. However, the gas that they purchase to meet
the needs of their customers cannot be counted as potentially available to
gas-fired electricity generators. As franchise suppliers, Applicants are
obligated to provide gas to their customers. In any event, it is not
sensible to define a commodity gas market as narrowly as the service areas
of Applicants or even the downstate New York area. At a minimum,
geographic market definition must recognize that the commodity portion of
the price of gas delivered to downstate New York is determined by arbitrage
among deliveries to a much wider geographic area./67/
_______________________
/66/ Combined, Applicants have maximum daily storage injection rights of 116
Mdt/d and withdrawal rights of 241 Mdt/d in a market area with daily gas
delivery capacity of approximately 6,000 Mdt/d (see discussion of long-haul
gas transportation below).
/67/ It is important to recognize the basis for distinguishing the relevant
market area for generation assets from that of gas supply to fuel these
same assets. The physical distribution of gas production and
transportation facilities differs dramatically from that of electric
generation and transmission facilities. The North American gas transmission
network east of the Rocky Mountains is broadly characterized by gas flows
originating in the major producing regions to the south and west and
terminating in major markets to the north and east. The relevant
geographic area in which a downstate New York power plant fuel manager
looks to source competitively priced bulk gas commodity supply and
transportation is quite different from that which the plant's power
marketer looks to access and sell competitively priced bulk electricity.
Page 74
There are further reasons why even this remaining level of
concentration in utility gas sales is not cause for concern. The NYPSC
and the Pennsylvania Public Utility Commission ("PaPUC") closely
monitor retail sales tariffs./68/ Moreover, retail gas marketing,
particularly to large customers such as power generators, is a highly
competitive business. Since 1996, every retail customer on both
systems has had the option of seeking alternative gas suppliers./69/
Competition, particularly for large customers such as electricity
generators, is intense./70/
Q. DO APPLICANTS ENGAGE IN GAS SALES THAT ARE NOT TIGHTLY REGULATED?
A. Only Con Edison is involved in commodity sales by utility affiliates.
Its subsidiary, Con Edison Solutions, competes in Northeastern US gas
markets; its June 1998 sales averaged 55 Mdt/d, quite small in
comparison to the top twenty North American gas marketers in 1997,
which reported sales from 2,500 Mdt/d (Exxon) to 9,900 Mdt/d
(Enron)./71/ O&R previously competed in this business, but in 1996
sold its gas marketing activity to Midcon, now part of KN Energy.
Thus, the merger has no effect on market structure in gas marketing.
Moreover, gas marketing is a fiercely competitive business. A national
survey lists over 300 companies that identify themselves as gas
marketers,/72/ confirmation that barriers to business entry in gas
marketing are very low.
________________________
/68/ O&R does not provide gas service in New Jersey.
/69/ Approximately 2,500 of O&R's more than 100,000 gas customers reside in
Pennsylvania, where retail gas unbundling legislation is still pending.
/70/ As of June 1998, Con Edison was transporting and distributing gas for 21
independent gas marketers (41 have been approved to do business with Con
Edison's customers), serving 9,570 firm and 241 interruptible customers.
These firm customers already represent 11 percent of Con Edison's annual
firm throughput. O&R transports and delivers gas for 22 marketers serving
1,597 firm and 83 interruptible customers. It is reasonable to conclude
that the LDC sales levels achieved by Con Edison and O&R in 1996 will be
increasingly difficult to repeat, must less surpass, with this level of
competition for the retail customer.
/71/ Natural Gas Week, June 1, 1998, p. 9.
/72/ Benjamin Schlesinger and Associates, Natural Gas Marketing Companies, 11th
Edition (May 1997).
Page 75
Q. PLEASE DESCRIBE THE CURRENT COMPETITIVE CONDITIONS FOR LONG-HAUL GAS
TRANSPORTATION SERVICES.
A. The relevant geographic market for gas transportation is more
restricted than the commodity market, consisting of southeastern New
York, northeastern Pennsylvania and the northern half of New Jersey. I
will call this the "New Jersey Metro" market. The transportation
market is larger than simply the downstate New York area and is
defined by the operating criterion of essentially interchangeable
pipeline delivery points without loss of overall regional pipeline
delivery capacity./73/ As shown in Exhibit No. APP-715, the regional
gas transmission network in this area is highly interconnected, and is
supplied by no less than five independent long-haul pipeline companies
delivering gas supplies from diverse geographic regions across the
North American continent. Columbia, Transco, Texas Eastern and
Tennessee transport gas supplies from the Gulf Coast and Southwest. In
addition, Tennessee transports gas produced in western Canada, as does
Iroquois. Columbia is also a major transporter of gas produced in the
Appalachian Basin.
Given the interconnected nature of these transmission facilities, and
the operating impact of non-coincident peaks in disparate market
areas, it is difficult to estimate with precision the delivery
capacity of any one pipeline system serving the New Jersey Metro
market. However, Exhibit No. APP-716 provides estimates of the stand-
alone transmission capacity of each pipeline system,/74/ indicating
total firm transmission capacity into the region of 5.8 billion
MMdt/d.
________________________
/73/ This criterion would not be met in the instance of a requested change in
delivery point from Manhattan to Camden or Philadelphia, thereby excluding
southern New Jersey and metropolitan Philadelphia.
/74/ These estimates were developed from discussions with representatives of the
pipeline companies listed and are based on a review of the firm
transportation commitments of these pipelines for deliveries within the
defined market area. See Exhibit No. APP-716 for source information.
Page 76
Over the next several years, the current pipeline configuration will
be significantly and predictably altered, resulting in a still larger
scope for commodity gas competition. The preponderance of gas supplies
delivered into the New England gas market currently passes through the
New Jersey metro market area and uses this delivery capability.
However, new pipeline transmission facilities and expansions to
existing pipeline systems will deliver significant quantities of new
gas supplies to New England from non-traditional sources without
transiting through New York and New Jersey. Gas production from the
Sable Island Offshore Project will flow into the existing New England
gas transmission system from the northeast via the Maritimes &
Northeast Pipeline ("MNP"). Additional western Canadian gas production
will also arrive from the north via the Portland Natural Gas
Transmission System ("PNGTS"). Additional liquefied natural gas
("LNG") supplies from new production facilities in the Caribbean Basin
will arrive at the Distrigas of Massachusetts ("DOMAC") terminal in
Everett, Massachusetts, which is expanding its vaporization and
compression capabilities. Competition between gas transported though
the New Jersey metro area and gas delivered over these new facilities
will expand the area over which the price of delivered gas is
arbitraged. Therefore, I have considered both the gas transmission
network as it is configured today, and as it will be configured in
November 1999 (based on the addition of FERC-certificated new
facilities scheduled to be in service within that timeframe), in my
evaluation of the transportation services market. A tabulation of
these facilities, their estimated net regional delivery capacities and
the merging parties' contract entitlements thereto is also provided in
Exhibit No. APP-716./75/
Q. DO APPLICANTS COMPETE IN THE GAS TRANSMISSION BUSINESS?
A. No. Neither Applicant owns long-haul transmission facilities.
________________________
/75/ There are several additional major planned capacity additions, well
advanced but not yet FERC-certificated, that I have excluded from this
tabulation.
Page 77
Q. DO APPLICANTS HAVE FIRM TRANSMISSION RIGHTS FOR GAS TRANSMISSION?
A. Yes. The exhibit shows that Con Edison has rights to 525 Mdt/d,
approximately 9.1 percent of regional firm delivery capacity, and O&R
has rights to 202 Mdt/d, about 3.5 percent of regional firm delivery
capacity, based on my earlier estimation of (approximately 5.8 MMdt/d)
of currently available firm pipeline capacity in the relevant
geographic market area.
Q. DOES THIS CONCENTRATION OF CAPACITY RIGHTS ENHANCE THE ABILITY OF THE
COMBINED COMPANIES TO AFFECT THE PRICE OR AVAILABILITY OF LONG-HAUL
TRANSPORTATION CAPACITY?
A. No. First, the effect of the merger is very small. As indicated above
and in Exhibit No. AP-716, the merger creates a combined market share
of 12.6 percent and an increase in concentration of 64 points./76/
Pipeline capacity enhancements scheduled to be completed by November
1999 further reduce this share to 11.1 percent (and a delta HHI of
50)./77/ Thus, even if firm delivery rights were considered to be an
upstream "product", the merger does not create market power in it.
Moreover, Applicants' ownership of firm transportation (FT) capacity
entitlements does not confer market power in any relevant market.
First, Applicants rights are principally dedicated to serving their
full service retail customers and are not available to serve
competitors in the downstream electricity generation market. Second,
Applicants cannot withhold the pipeline capacity represented by their
firm contracts. The hypothetical ability of a holder of firm
transportation rights to exercise market power rests on the
________________________
/76/ The absolute HHI number is not a meaningful statistic because of the
literally hundreds of LDCs, marketers, producers and gas consumers that now
hold and trade pipeline capacity rights on the major interstate systems
serving the Jersey Metro area.
/77/ Further, Applicants' firm pipeline capacity requirements to serve their
distribution customers can only continue to diminish as universal retail
gas competition in New York State, begun in November 1996, continues to
encroach on Applicants' core gas sales markets. Applicants' share of the FT
capacity market can be expected to decline proportionately.
Page 78
assumption that it could reduce available gas delivery capacity to the
gas transportation market by neither using its rights nor releasing
them to other users. This is not feasible. In a manner similar to
commodity gas supply, any attempt to "withhold" firm transportation
capacity simply creates available interruptible capacity and an
incremental revenue opportunity for a pipeline operator. Hence,
failure to exercise the firm right does not result in a reduction in
available gas delivery capability.
Further, Applicants (and all other New York LDCs) are expected to
mitigate the predominantly fixed cost of firm transportation contracts
held on behalf of their sales customers by releasing unneeded FT
capacity during periods of low gas demand. This surplus capacity is
sold into the secondary markets that have developed pursuant to the
Commission's rules and procedures on capacity release established in
Order No. 636, as modified. Price transparency is a primary Commission
objective for secondary pipeline capacity markets, and secondary firm
capacity directly competes with every pipeline's available non-firm
capacity on a daily basis. Therefore, there would appear to be
absolutely no opportunity for the Applicants to somehow distort
pipeline capacity price and availability in the region by withholding
capacity.
Q. IF THE COMMISSION WERE TO DEEM FIRMLY DELIVERABLE GAS TO BE A RELEVANT
UPSTREAM PRODUCT, IS IT AN ESSENTIAL INPUT TO DOWNSTREAM ELECTRICITY
GENERATION?
A. No. Utility generators (and, increasingly, independent producers)
generally avoid holding long-term firm transportation rights for fuel
supply, because of the high fixed costs associated with such rights
and because such rights create inflexibility in sourcing alternative
gas supplies and alternative fuels in response to fluctuations in
relative price and availability. More typically, utility fuel
managers, including those of the Applicants, manage a portfolio of
short-term firm and interruptible capacity rights acquired from
numerous parties, including their LDC affiliates. This allows them to
avoid the cost of long term firm service. Moreover, spot gas commodity
prices typically are quite high on those winter days when pipeline
capacity becomes scarce, making alternative types of fuels
economically more attractive, particularly in view of the high cost of
firm transportation rights covering such periods. Applicants inform me
that actual physical
Page 79
curtailment of gas supply to the generating facilities may occur
anywhere from zero to 30 days in a given year, with 7 to 10 days more
typical.
As I discussed earlier, Con Edison has no long term firm
transportation contracts used in its electricity generating business
unit and O&R has firm contracts that are only sufficient to provide
ignition fuel. The fact that Applicants operate their generation
without long term transmission contract cover demonstrates that long-
term firm transportation contracts are not necessary for competing in
the electric generating business. This is confirmed also by the
behavior of other electric utilities in New York. According to the
EIA, less than 10 percent of gas burned by electric utilities in New
York was delivered using firm transmission./78/
Q. IS THERE ANY IMPACT OF THE MERGER RESULTING FROM COMBINING NATURAL GAS
STORAGE ASSETS?
A. No. O&R owns no storage assets, while Con Edison owns a minority
interest (28.8%) in the Honeoye Storage Facility in western New York
State, effectively controlling 1.2 billion cubic feet of working
storage capacity, representing a de minimus market share of the
storage fields predominantly located in central Pennsylvania and
western New York./79/ In addition, the Applicants have contractual
entitlements in market area storage fields owned and operated by other
parties. Con Edison holds 11.7 MMdt of working capacity, while O&R
holds 6.9 MMdt, out of the total regional working capacity of 477.3
MMdt. If, for the sake of argument, one treats these contract
quantities as equivalent to outright ownership, the concentration of
storage ownership/entitlement represented by
________________________
/78/ Energy Information Administration, Natural Gas Annual 1996, Washington DC,
-----------------------
September, 1997, p. 159. The average for the most recent four years was
approximately 14 percent.
/79/ This system consists of numerous gas storage fields, which are connected to
the major gas transmission facilities in the region. An INGAA survey
identified 477.3 billion cubic feet of working gas storage capacity in the
Mid-Atlantic region (New Jersey, New York and Pennsylvania). These storage
facilities essentially maintain pressure throughout the gas transmission
network during periods of high demand. (Foster Associates, Inc., Profile of
Underground Natural Gas Storage Facilities and Market Hubs, prepared for
the Interstate Natural Gas Association of America (INGAA) Foundation, Inc.,
1995, Figure 3.)
Page 80
this merger represents a delta HHI of eight points. Thus, the merger
has no effect on the market for gas storage./80/
Q. DO APPLICANTS SERVE ELECTRICITY GENERATORS AS LOCAL DISTRIBUTION
COMPANIES?
A. Yes. Both Con Edison and O&R provide gas distribution services to
generators in their service areas. Con Edison's gas-fired generating
facilities, other than the Arthur Kill and Narrows stations,/81/ are
supplied by gas delivered via the company's gas distribution
facilities under an unbundled transportation tariff. In addition,
NYPA's Poletti generating facility receives its gas supply via Con
Edison's gas distribution system./82/ Similarly, O&R's gas-capable
generating facilities, along with one NUG (the 19 MW Lederle
cogeneration facility), receive their gas supplies via the Company's
gas distribution facilities.
The merger does not change the status of the two companies as state-
regulated LDCs. Quite simply, Applicants had little ability to affect
the cost of gas for the generators that they serve before the merger
and no additional ability as a result of the merger.
Nor does the merger materially change concentration in the gas-fired
generation controlled by Applicants since O&R is divesting all its
generation. Hence, the merger
________________________
/80/ Like most LDCs, Applicants operate peak shaving facilities within their
service territories, designed to manage sudden weather-related swings in
firm customer demand within each Applicant's distribution system. O&R
operates three small air-propane facilities on its system; Con Edison
operates an LNG facility in Astoria. Inasmuch as they are operated to
maintain operating integrity within the confines of the low-pressure
distribution system, however, gas production from these local peak shaving
facilities does not participate in the broader regional peaking supply
markets. These facilities, with their low operating pressures, are
physically isolated from the high-pressure regional gas storage system,
providing service and contract capacity to LDCs and gas consumers
throughout New Jersey, New York and Pennsylvania.
/81/ Brooklyn Union Gas Company provides gas service to these facilities under a
special transportation tariff designed to guarantee recovery of Brooklyn
Union's fully allocated cost of service. Con Edison-served utilities
include Astoria, Ravenswood and those steam producing and peaking
facilities that use gas as their primary fuel.
/82/ NUGs supplying power to Con Edison under long-term contract are not located
on O&R or Con Edison gas distribution facilities.
Page 81
creates no new or enhanced incentive to (somehow) use LDC activities
to raise prices in the electricity market.
Q. WOULD IT BE APPROPRIATE TO TREAT THE FACT THAT APPLICANTS SERVE
ELECTRICITY GENERATORS AS LDCS AS SOMEHOW GIVING THEM CONTROL OVER
THOSE GENERATORS IN A MANNER SIMILAR TO DIRECT OWNERSHIP OF THEM?
A. No. As regulated LDCs, Applicants have very little even theoretical
ability to affect the cost or availability of these generators. The
Commission has considered combination mergers between gas and electric
utilities located in the same geographic area in the Enova-Pacific
Enterprises merger and the Brooklyn Union Gas ("BUG")-LILCO merger.
The facts in this case are readily distinguished.
In Enova-Pacific Enterprises, the concern was that Pacific Enterprises
would, by reason of its affiliation with an electric generator,
acquire an incentive to manipulate the price and availability of gas
to favor the newly affiliated electricity generation activity. The
concern that it might have the ability to do so was due to its control
of the transmission pipeline that served a large and constrainable
electric generation area, and its control over all of the gas storage
in the area and its flexibility in using that storage to meet its
large sendout requirements. I participated in the Enova-Pacific
Enterprises merger and am very familiar with the intervenor
allegations to which the Commission responded in that proceeding.
Applicants in this case, as mere LDCs, lack the ability to affect
electricity prices that Southern California Gas was alleged to have.
In particular, they do not control high pressure pipelines covering a
wide and constrained area. Nor do they control material amounts of
storage that hypothetically might be used to manipulate short term
prices. Since they are selling essentially all of their gas-fired
generation, they cannot favor affiliated generators. Their remaining
generation is inflexible (primarily must-take contracts and a nuclear
unit, and cannot benefit from market information that their gas
operations might (but for code of conduct restrictions) make
available.
In BUG-LILCO, the concern was that BUG might have gained an incentive
to impede the siting of generation in the LILCO service area due to a
desire to raise the price received by LILCO generation. In this case,
Con Edison and O&R already are combination
Page 82
utilities serving some of the potential generating sites in their
electric service territories. Neither can deliver gas to generators in
the other's electric service area. Hence, any incentive issues of the
type that concerned the Commission in BUG-LILCO, to the extent they
exist at all, are pre-merger and not affected by the merger. Indeed
the planned generation divestitures will markedly reduce any such
incentive that previously existed.
The constrainable area in this merger that parallels the area of
concern in BUG-LILCO is the City of New York. Con Edison plans to
divest its In-City generation. Hence, it will lack even the
hypothetical incentive to impede the development of new gas-fired
generation in the City.
Q. IF THE LDC ACTIVITY WERE, HYPOTHETICALLY, DEEMED TO CONFER CONTROL,
DOES THE MERGER MATERIALLY INCREASE APPLICANTS' CONTROL OF GAS-FIRED
GENERATION?
A. No. O&R serves only the Bowline station, the small unit at Lovett that
uses gas as a primary fuel, and the 19 MW Lederle NUG and two small
peaking units. These units account for only a small portion of the
generation serving the East of Total-East region. Moreover, any
theoretical ability to somehow affect the costs of the gas-fired
generators that Applicants serve is tightly circumscribed by the
threat of bypass.
Q. PLEASE DESCRIBE THE POTENTIAL FOR BYPASSING APPLICANTS' DISTRIBUTION
SERVICES.
A. All of the large generating stations served by Applicants have
relatively low cost bypass alternatives. Evidence of this for Con
Edison's existing stations is the record in a recent case establishing
the rates charged by Con Edison's gas division for service to its gas
generating stations. As discussed in the Recommendation of the Gas &
Water Division, adopted by the NYPSC, Con Edison submitted a detailed
study showing the total cost of bypass pipelines to connect its
electric generation facilities that are served by its gas LDC directly
to transmission facilities not owned by Con Edison (or O&R) to be
approximately $75 million, resulting in an amortized incremental cost
of local
Page 83
transportation service of just $0.01 per dt. Commission staff found
the estimate to be reasonable./83/
Exhibit No. APP-717 provides relevant facts concerning economic
bypass. For example, NYPA, the owner of the Poletti station, received
a transportation discount from Con Edison by threatening to bypass the
distribution system. This would have entailed the construction of 3.4
miles of new 24-inch diameter pipe crossing upper Manhattan and two
rivers in order to reach Transco facilities in New Jersey, at an
estimated cost of $36 million. This exhibit indicates that the
distance and other barriers to LDC bypass are comparable, if not less
than, the situation faced by Poletti. O&R's Lovett plant is just 0.75
miles from Algonquin gas transmission facilities following an existing
Conrail right-of-way. Bowline is 5.2 miles from Algonquin along the
same right-of-way, a clear option for a plant of its size, but will be
immediately adjacent to Columbia's 700 Mdt/d Millennium Pipeline
project upon its completion in November 2000. Applicants will be under
direct market pressure to maintain service to either plant prior to
the completion of Millennium; they are unlikely to be able to retain
the Bowline service contract beyond that point. The Lederle
cogeneration unit, is located just 2.0 miles (along a Conrail right-
of-way) from the Tennessee Gas pipeline that is currently supplying
long-haul transportation service to the facility.
Q. CAN APPLICANTS' LDC ACTIVITIES DISCRIMINATE IN FAVOR OF THEIR OWNED
FACILITIES AS WAS ALLEGED IN ENOVA-PACIFIC ENTERPRISES?
A. There is no basis for this concern since Applicants are divesting
essentially all of their gas-fired generation. Even were this not the
case, both distribution prices and the terms of service, most notably
curtailments, are regulated by the NYPSC.
Q. CAN APPLICANTS' GAS LDCS CHARGE DIFFERENT PRICES TO DIFFERENT
ELECTRICITY GENERATORS?
________________________
/83/ Case 95-G-1037, Recommendation by the Gas & Water Division, April 4, 1996,
p. 7.
Page 84
A. Yes. Current NYPSC policy permits discounted pricing on a customer-by-
customer basis to avoid the loss of contribution caused by uneconomic
bypass. These negotiated prices are subject to a floor of the
incremental cost of delivery and a ceiling of the otherwise applicable
tariff rate. Both the generation currently operated by Applicants and
the generation that they serve that is owned by others receive
discounted distribution services. This is the result of the low bypass
cost discussed above.
Negotiated prices for gas transportation are required by statute to be
non-discriminatory and are publicly available, so that customers can
determine what like-situated customers are paying. Individually
negotiated contracts were reconsidered in the Gas Restructuring
Proceeding. The NYPSC concluded that "...price differentiation should
be permitted if it does not result in injuries to competition in
either the primary market (either natural gas alone or all relevant
sources [of] energy...) or secondary markets (the various lines of
business in which customers in a given region are engaged)."/84/
The NYPSC recently concluded that the restructuring of the electricity
industry in New York requires that it revisit the issue of
individually negotiated delivery charges, citing potential injuries to
competition in the electricity market./85/ This proceeding is ongoing.
Should the NYPSC decide that negotiated prices to electricity
generators are no longer appropriate, it will change its policy as it
deems necessary.
Q. SETTING ASIDE THE ISSUE OF PRICING, ARE THERE OTHER WAYS IN WHICH
APPLICANTS' GAS LDCS COULD AFFECT GAS AVAILABILITY OR OTHERWISE
SIGNIFICANTLY IMPACT COMPETITION IN THE ELECTRICITY MARKET?
________________________
/84/ Opinion No. 94-26 (issued December 20, 1994), p.45 as quoted in Order
Instituting Proceeding and Technical Conference, Case 98-G-0122 Proceeding
on Motion of the Commission to Review the Bypass Policy Relating to the
Pricing of Gas Transportation for Generation, pp.2-3.
/85/ Order Instituting Proceeding and Technical Conference, Case P8-G-0122, op.
---
cit. p. 3.
----
Page 85
A. No. Concerning existing generation facilities, the only plausible way
in which Applicants might seek to either favor one over another is to
curtail availability, interrupting the ill-favored generator. In fact,
curtailment of deliveries must be allocated on a pro rata basis in an
established succession of service categories or priorities, beginning
with interruptible dual-fuel customers./86/ If one such customer is
notified of a 30 percent curtailment in gas deliveries due to low
system pressure, for example, all similar customers must be curtailed
to the same degree. In any event, Applicants have no incentive to
engage in discriminatory behavior since they will not own gas-fired
generation.
Q. DOES THE MERGER ELIMINATE COMPETITION TO SERVE GENERATION LOCATED IN
THE CONSTRAINED NEW YORK CITY AREA?
A. No. O&R does not have facilities within the City.
CODE OF CONDUCT
- ---------------
Q. WILL THE APPLICANTS BE SUBJECT TO CODE OF CONDUCT RESTRICTIONS THAT
FULLY INHIBIT ANY POSSIBLE VERTICAL MARKET POWER ABUSES THAT MIGHT
ARISE FROM THEIR ACTIVITIES AS ELECTRICITY TRANSMISSION AND
DISTRIBUTION COMPANIES, REGULATED ELECTRICITY SUPPLIERS TO REMAINING
NATIVE LOAD CUSTOMERS OR GAS LDCS?
A. Yes. Because Applicants will have a power marketing affiliate, they
will be subject to the FERC Code of Conduct requirements set out in
Orders 888 and 889 and subsequent decisions. I will not enumerate
these, since the Commission is well aware of them, but will focus
instead on the Code of Conduct restrictions imposed by the NYPSC which
are less familiar.
________________________
/86/ O&R's tariff allows interruptible customer curtailment according to a
prioritization based on revenue contribution. The principle is, however,
the same: curtailment priorities are not discretionary.
Page 86
In the Con Edison Settlement as approved by the NYPSC there are code
of conduct restrictions that in some respects go beyond FERC's
requirements. The relevant section of the settlement, Section V is at
pp. 43 to 53 of the Settlement. Similar provisions apply also to O&R.
O&R's code of conduct restrictions do not directly apply to its gas
LDC. However, I am informed that Applicants will agree to apply the
Con Edison code of conduct restrictions to all elements of the
combined company, including O&R's gas operations. Hence, I will focus
on the Con Edison code of conduct.
Q. WILL THE GAS AND ELECTRIC DISTRIBUTION ACTIVITIES OF APPLICANTS BE
SEPARATED FROM UNREGULATED GENERATION AND WHOLESALE AND RETAIL
MARKETING ACTIVITIES?
A. Yes. As part of its reorganization, the "RegCo" will be functionally
separated from all unregulated activities. The RegCo initially will
include, along with regulated generating facilities, electric and gas
distribution, transmission and the steam system. After divestiture
occurs, the RegCo will no longer own fossil generating facilities. It
will continue to own Indian Point 2 and hold Con Edison's NUG and
other purchase contracts. Within the RegCo, generation is, and will
continue to be, a separate business unit. O&R's regulated T&D company
will hold its remaining contracts. Generation currently buys its own
fuel, including gas, and will continue to do so. However, RegCo will
require no further gas supply for electric generation after
divestiture.
Q. WHAT ARE THE PRIMARY VERTICAL ISSUES ADDRESSED BY THE NYPSC CODE OF
CONDUCT?
A. These principally address (a) separation of activities, including
personnel; (b) the pricing of assets and services between RegCo and
other corporate entities; (c) discrimination by the RegCo in favor of
providing and pricing services to affiliates; (d) the preferential
provision of customer information by RegCo to affiliates; and (e)
representation to customers that RegCo will give priority in serving
the customers of affiliates or, more generally assisting affiliates'
marketing activities.
Q. PLEASE EXPLAIN THE BUSINESS SEPARATION REQUIREMENTS BETWEEN REGCO AND
AFFILIATES.
Page 87
A. RegCo and affiliates cannot be co-located in the same building. They
must have separate operating personnel and non-administrative
officers. Any personnel transferred between RegCo and an affiliate, or
visa versa, cannot be re-transferred within 18 months.
Q. WHAT PROVISIONS GOVERN TRANSACTIONS BETWEEN REGCO AND AFFILIATES?
A. All asset transfers and provision of services other than tariff
services provided by RegCo to affiliates must be pursuant to written
contracts filed with the NYPSC. Asset transfers from RegCo to
affiliates (other than generation plant which is covered separately in
the Settlement) will be at the higher of cost or market. Corporate
services will be provided on a fully loaded cost basis, under NYSPC-
mandated cost allocation principles. Other services will be provided
at fully loaded cost plus 10 percent or at the price charged non-
affiliates. RegCo marketing personnel cannot be used to provide
services to an affiliate in Con Edison's service area. Services
provided by affiliates to RegCo will be at market value.
Q. WHAT PROVISIONS LIMIT DISCRIMINATION IN FAVOR OF AFFILIATES IN THE
PROVISION OF SERVICES?
A. In addition to the above, RegCo is required to apply tariffs equally
to affiliates and non-affiliates alike. When there is discretion in
application of the tariff provision, it must be applied in the same
manner to affiliates and non-affiliates. FERC standards are applied to
FERC jurisdictional activities.
Q. WHAT ARE THE STANDARDS GOVERNING THE RELEASE OF CUSTOMER INFORMATION
TO AFFILIATES?
A. All proprietary customer information is releasable only at the
customer's direction and only to parties to whom the customer directs
it be released. No customer or energy marketer information relative to
RegCo's service territory will be released by it to any affiliate
except on a fully equal basis to the affiliate's competitors.
Q. WHAT STANDARDS GOVERN THE REGCO ASSISTING AFFILIATES' MARKETING
ACTIVITIES?
A. The RegCo cannot give affiliates marketing leads. It cannot give the
appearance that it speaks for the affiliate or that the affiliate
speaks for it. If a customer requests information about competitive
services within the service area, it must provide a list of all
Page 88
suppliers of the service. The RegCo cannot represent that any
customer, supplier or third party will gain any advantage in using
RegCo's services from trading with an affiliate. More generally, it
cannot promote its affiliate.
Q. DOES THE NYPSC HAVE SUBSTANTIAL ABILITIES TO ENFORCE THESE CODE OF
CONDUCT RESTRICTIONS?
A. Yes. The Settlement establishes a complaint procedure that results in
prompt referral to the NYPSC for complaints that cannot be resolved
informally. Under the terms of the Settlement, Con Edison agrees that
the Commission has the authority to impose remedial action, including
redress and penalties. If there is a consistent pattern of material
violations, the NYPSC can order the divestiture of the affiliate that
is involved and bar Con Edison from reentering the activities that had
been the business of the subsidiary.
Q. ARE THERE POTENTIAL VERTICAL ISSUES WITHIN THE REGCO?
A. I do not believe that there are any of significance. RegCo will not be
allowed to make retail sales outside its service territory. In terms
of potential vertical issues concerning generation viz either electric
or gas transmission and distribution, it is important to note that
Indian Point 2 and the NUGs are not dispatchable or in any
economically relevant sense biddable by Applicants. Further, Indian
Point does not participate in energy markets, in that Indian Point 2
remains under cost of service regulation for the remainder of its
life. Hence, even if RegCo has information that is potentially
relevant to the bulk power markets in which its owned generation is
sold, for example, concerning the availability of competing generators
or their planned gas burn, it would not be of economic value to its
generating activities.
CONCLUSION
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes.
TESTIMONY AND EXHIBITS OF WILLIAM H. HIERONYMUS
Exhibit No. APP-700 Testimony of William H. Hieronymus
Exhibit No. APP-701 Resume of William H. Hieronymus
Exhibit No. APP-702 Description of CASm
Exhibit No. APP-703 Utilities Included and Abbreviations
Exhibit No. APP-704 Transmission Areas of New York
Exhibit No. APP-705 Applicants' Purchases and Sales
Exhibit No. APP-706 Excerpts from Hieronymus Testimony in ER97-1523-000
Exhibit No. APP-707 Total Capacity
Exhibit No. APP-708 Uncommitted Capacity
Exhibit No. APP-709 Economic Capacity, East of Total East Market
Exhibit No. APP-710 Economic Capacity, In-City Market
Exhibit No. APP-711 Available Economic Capacity, East of Total East Market
Exhibit No. APP-712 Available Economic Capacity, In-City Market
Exhibit No. APP-713 New York Capacity Market
Exhibit No. APP-714 New York Capacity Market (adjusted for NY divestitures)
Exhibit No. APP-715 Regional Gas Transmission Network
Exhibit No. APP-716 Estimates of Stand-Alone Pipeline Transmission Capacity
Exhibit No. APP-717 Gas Transportation Options for Gas-Fired Generating
Facilities
PAGE 1 OF 9
WILLIAM H. HIERONYMUS MANAGING DIRECTOR
- --------------------------------------------------------------------------------
William Hieronymus has consulted extensively to managements of electricity and
gas companies, their counsel, regulators and policy makers. His principal areas
of concentration are the structure and regulation of network utilities and
associated management, policy and regulatory issues. He has spent the last
several years working on restructuring and privatization of utility systems
internationally and on changing regulatory systems and management strategies in
mature electricity systems. In his twenty-plus years of consulting to this
sector he also has performed a number of more specific functional tasks
including the selection of investments, determining procedures for contracting
with independent power producers, assistance in contract negotiation, tariff
formation, demand forecasting and fuels market forecasting. Dr. Hieronymus has
testified frequently on behalf of utility clients before regulatory bodies,
federal courts and legislative bodies in the United States and United Kingdom.
Since joining Putnam, Hayes & Bartlett, Inc. (PHB) he has contributed to
numerous projects, including the following:
ELECTRICITY SECTOR STRUCTURE, REGULATION AND
RELATED MANAGEMENT AND PLANNING ISSUES
U.S. ASSIGNMENTS
. Dr. Hieronymus served as an advisor to a western electric utility on
restructuring and related regulatory issues and has worked with senior
management in developing strategies for shaping and adapting to the
emerging competitive market in electricity. As a part of this general
assignment he helped develop, and testified respecting, a settlement
with the state regulatory commission staff that provides, among other
things, for accelerated recovery of strandable assets. He also prepared
numerous briefings for the senior management group on various topics
related to restructuring.
. For several utilities seeking merger approval he has prepared and
testified to market power analyses at FERC and before state commissions.
He also has assisted in discussions with the Antitrust Division of the
Department of Justice and in responding to information requests. The
analyses he has sponsored cover the destination market-oriented
traditional FERC tests, Justice Department-oriented market structure
tests similar to the Order 592 required analyses, behavioral tests of
the ability to raise prices and examination of vertical market power
arising from ownership of transmission and generation and from ownership
of distribution facilities in the context of retail access. The mergers
on which he has testified include both electricity mergers and
combination mergers involving electricity and gas companies.
. For utilities and power pools preparing structural reforms, he has
assisted in examining various facets of proposed reforms. This analysis
has included both features of the proposals affecting market efficiency
and those that have potential consequences for market power. Where
relevant, the analysis also has examined the effects of alternative
reforms on the client's financial performance and achievement of other
objectives.
PAGE 2 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
. For the New England Power Pool he examined the issue of market power in
connection with its movement to market-based pricing for energy,
capacity and ancillary services. He also assisted the New England
utilities in preparing their market power mitigation proposal. The main
results of his analysis were incorporated in NEPOOL's market power
filing before FERC.
. As part of a large PHB team he assisted a midwest utility in developing
an innovative proposal for electricity industry restructuring. This work
formed the basis for that utility's proposals in its state's
restructuring proceeding.
. Dr. Hieronymus has contributed substantially to PHB's activities in the
restructuring of the California electricity industry. In this context he
also is a witness in California and FERC proceedings on the subject of
market power and mitigation.
. He has testified in state securitization and stranded cost
quantification proceedings, primarily in forecasting the level of market
prices that should be used in assessing the future revenues and the
operating contribution earned by the owner of the utilities' assets in
energy and capacity markets. The market price analyses are tailored to
the specific features of the market in which the utility will operate
and reflect transmission-constrained trading over a wide geographic
area. He also has testified in rebuttal to other parties' testimony
concerning stranded costs and assisted companies in internal stranded
cost and asset valuation studies.
. He has contributed to the development of benchmarking analyses for U.S.
utilities. These have been used in work with PHB's clients to develop
regulatory proposals, set cost reduction targets, restructure internal
operations and assess merger savings.
. Dr. Hieronymus was a co-developer of a market simulation package that
PHB has tailored to region-specific applications. He and other PHB
personnel have provided numerous multi-day training sessions using the
package to help our utility clients in educating management personnel in
the consequences of wholesale and retail deregulation and in developing
the skills necessary to succeed in this environment.
. Dr. Hieronymus has made numerous presentations to U.S. utility
managements on the U.K. electricity system and has arranged meetings
with senior executives and regulators in the U.K. for the senior
managements of U.S. utilities.
. For a task force of utilities, regulators, legislators and other
interested parties created by the Governor's office of a northeastern
state he prepared background and briefing papers as part of a PHB
assignment to assist in developing a consensus proposal for electricity
industry restructuring.
PAGE 3 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
. For an East Coast electricity holding company, he prepared and testified
to an analysis of the logic and implementation issues concerning
utility-sponsored conservation and demand management programs.
. In connection with nuclear generating plants nearing completion, he has
testified in Pennsylvania, Louisiana, Arizona, Illinois, Missouri, New
York, Texas, Arkansas, New Mexico and before the Federal Energy
Regulatory Commission in plant-in-service rate cases on the issues of
equitable and economically efficient treatment of plant cost for tariff
setting purposes, regulatory treatment of new plants in other
jurisdictions, the prudence of past system planning decisions and
assumptions, performance incentives and the life-cycle costs and
benefits of the units. In these and other utility regulatory
proceedings, Dr. Hieronymus and his colleagues have provided extensive
support to counsel, including preparation of interrogatories, cross-
examination support and assistance in writing briefs.
. On behalf of utilities in the states of Michigan, Massachusetts, New
York, Maine, Indiana, Pennsylvania, New Hampshire and Illinois, he has
submitted testimony in regulatory proceedings on the economics of
completing nuclear generating plants that are currently under
construction. His testimony has covered the likely cost of plant
completion, forecasts of operating performance and extensive analyses of
ratepayer and shareholder impacts of completion, deferral and
cancellation.
. For utilities engaged in nuclear plant construction, Dr. Hieronymus has
performed a number of highly confidential assignments to support
strategic decisions concerning continuing the construction projects.
Areas of inquiry included plant cost, financial feasibility, power
marketing opportunities, the impact of potential regulatory treatments
of plant cost on shareholders and customers and evaluation of offers to
purchase partially completed facilities.
. For an eastern Pennsylvania utility that suffered a nuclear plant
shutdown due to NRC sanctions relating to plant management, he filed
testimony regarding the extent to which replacement power cost exceeded
the costs that would have occurred but for the shutdown.
. For a major midwestern utility, he headed a team that assisted senior
management in devising its strategic plans including examination of such
issues as plant refurbishment/life extension strategies, impacts of
increased competition and diversification opportunities.
. On behalf of two West Coast utilities, he testified in a needs
certification hearing for a major coal-fired generation complex
concerning the economics of the facility relative to competing sources
of power, particularly unconventional sources and demand reductions.
PAGE 4 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
. For a large western combination utility, Dr. Hieronymus participated in
a major 18-month effort to provide it with an integrated planning and
rate case management system. His specific responsibilities included
assisting the client in design and integration of electric and gas
energy demand forecasts, peak load and load shape forecasts and
forecasts of the impacts of conservation and load management programs.
. For two midwestern utilities, he prepared an analysis of intervenor-
proposed modifications to the utilities' resource plans. He then
testified on their behalf before a legislative committee..
. For a major combination electric and gas utility, he directed the
adaptation of a PHB-developed financial simulation model for use in
resource planning and evaluation of conservation programs.
U.K. ASSIGNMENTS
. Following promulgation of the White Paper setting out the general
framework for privatization of the electricity industry in the United
Kingdom, Dr. Hieronymus participated extensively in the task forces
charged with developing the new market system and regulatory regime. His
work on behalf of the Electricity Council and the twelve regional
electricity councils focused on the proposed regulatory regime,
including the price cap and regulatory formulas, and distribution and
transmission use of system tariffs. He was an active participant in
industry-government task forces charged with creating the legislation,
regulatory framework, initial contracts and rules of the pooling and
settlements system. He also assisted the regional companies in the
valuation of initial contract offers from the generators, including
supporting their successful refusal to contract for the proposed nuclear
power plants that subsequently were canceled as being non-commercial.
. During the preparation for privatization, he assisted several of the
U.K. individual electricity companies in understanding the evolving
system, in development of use of system tariffs, and in developing
strategic plans and management and technical capabilities in power
purchasing and contracting. He continued to advise a number of clients,
including regional companies, power developers, large industrial
customers and financial institutions on the U.K. power system for a
number of years after privatization.
. Dr. Hieronymus assisted four of the regional electricity companies in
negotiating equity ownership positions and developing the power purchase
contracts for an 1,825 megawatt combined cycle gas station. He also
assisted clients in evaluating other potential generating investments
including cogeneration and non-conventional resources.
PAGE 5 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
. He also has consulted on the separate reorganization and privatization
of the Scottish electricity sector. PHB's role in that privatization
included advising the larger of the two Scottish companies and, through
it, the Secretary of State on all phases of the restructuring and
privatization, including the drafting of regulations, asset valuation
and company strategy.
. He has assisted one of the Regional Electricity Companies in England and
Wales in the 1993 through 1995 regulatory proceedings that reset the
price caps for its retailing and distribution businesses. Included in
this assignment have been policy issues such as incentives for economic
purchasing of power, the scope of the price control, and the use of
comparisons among companies as a basis for price regulation. His model
for determining network refurbishment needs was used by the regulator in
determining revenue allowances for capital investments.
. He assisted this same utility in its defense against a hostile takeover,
including preparation of its submission to the Cabinet Minister who had
the responsibility for determining whether the merger should be referred
to the competition authority.
ASSIGNMENTS OUTSIDE THE U.S. AND U.K.
. Dr. Hieronymus has assisted a large state-owned European electricity
company in evaluating the impacts of the 1997 EU directive on
electricity that inter alia requires retail access and competitive
markets for generation. The assignment includes advice on the
organizational solution to elements of the directive requiring a
separate transmission system operator and the business need to create a
competitive marketing function.
. For the European Bank for Reconstruction and Development he performed
analyses of least cost power options, evaluation of the return on a
major plant investment that the Bank was considering and forecasts of
electricity prices in support of assessment of a major investment in an
electricity intensive industrial plant.
. For the OECD he performed a study of energy subsidies worldwide and the
impact of subsidy elimination on the environment, particularly on
greenhouse gases.
. For the Magyar Villamos Muvek Troszt, the electricity company of
Hungary, he developed a contract framework to link the operations of the
different entities of an electricity sector in the process of moving
from a centralized command and control system to a decentralized,
corporatized system.
. For Iberdrola, the largest investor-owned Spanish electricity company,
he assisted in development of their proposal for a fundamental
reorganization of
PAGE 6 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
the electricity sector, its means of compensating generation and
distribution companies, its regulation and the phasing out of subsidies.
He also has assisted the company in evaluating generation expansion
options and in valuing offers for imported power.
. Dr. Hieronymus contributed extensively to a project for the Ukrainian
Electricity Ministry, the goal of which is to reorganize the Ukrainian
electricity sector and prepare it for transfer to the private sector and
the attraction of foreign capital. The proposed reorganization will be
based on regional electricity companies, linked by a unified central
market, with market-based prices for electricity.
. At the request of the Ministry of Power of the USSR, Dr. Hieronymus
participated in the creation of a seminar on electricity restructuring
and privatization. The seminar was given for 200 invited Ministerial
staff and senior managers for the USSR power system. His specific role
was to introduce the requirements and methods of privatization.
Subsequent to the breakup of the Soviet Union, he continued to advise
the Russian energy and power ministry and government-owned generation
and transmission company on restructuring and market development issues.
. On behalf of a large continental electricity company he analyzed the
proposed directives from the European Commission on gas and electricity
transit (open access regimes) and on the internal market for
electricity. The purpose of this assignment was to forecast likely
developments in the structure and regulation of the electricity sector
in the common market and assist the client in understanding their
implications.
. For the electric utility company of the Republic of Ireland, he assessed
the likely economic benefit of building an interconnector between Eire
and Wales for the sharing of reserves and the interchange of power.
. For a task force representing the Treasury, electric generating and
electricity distribution industries in New Zealand, he undertook an
analysis of industry structure and regulatory alternatives for achieving
economically efficient generation of electricity. The analysis explored
how the industry likely would operate under alternative regimes and
their implications for asset valuation, electricity pricing, competition
and regulatory requirements.
TARIFF DESIGN METHODOLOGIES
AND POLICY ISSUES
. Dr. Hieronymus participated in a series of studies for the National Grid
Company of the United Kingdom and for ScottishPower on appropriate
pricing methodologies for transmission, including incentives for
efficient investment and location decisions.
PAGE 7 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
. For a U.S. utility client, he directed an analysis of time-
differentiated costs based on accounting concepts. The study required
selection of rating periods and allocation of costs to time periods and
within time periods to rate classes.
. For EPRI, he directed a study that examined the effects of time-of-day
rates on the level and pattern of residential electricity consumption.
. For the EPRI-NARUC Rate Design Study, Dr. Hieronymus developed a
methodology for designing optimum cost-tracking block rate structures.
. On behalf of a group of cogenerators, he filed testimony before the
Energy Select Committee of the UK Parliament on the effects of prices on
cogeneration development.
. For the Edison Electric Institute (EEI), he prepared a statement of the
industry's position on proposed federal guidelines on fuel adjustment
clauses. He also assisted EEI in responding to the U.S. Department of
Energy (DOE) guideline on cost-of-service standards.
. For private utility clients, he assisted in the preparation of comments
on draft Federal Energy Regulatory Commission (FERC) regulations and in
preparing their compliance plans for PURPA Section 133.
. For the EEI Utility Regulatory Analysis Program, he co-authored an
analysis of the DOE position on the purposes of the Public Utilities
Regulatory Policies Act of 1978. The report focused on the relationship
between those purposes and cost-of-service and ratemaking positions
under consideration in the generic hearings required by PURPA.
. For a state utilities commission, Dr. Hieronymus assessed its utilities'
existing automatic adjustment clauses to determine their compliance with
PURPA and recommended modifications.
. For the DOE, he developed an analysis of automatic adjustment clauses
currently employed by electric utilities. The focus of this analysis was
on efficiency incentive effects.
. For the commissioners of a public utility commission, he assisted in
preparation of briefing papers, lines of questioning and proposed
findings of fact in a generic rate design proceeding.
SALES FORECASTING METHODOLOGIES
FOR GAS AND ELECTRIC UTILITIES
. For the White House Sub-Cabinet Task Force on the future of the electric
utility industry, Dr. Hieronymus co-directed a major analysis of "least-
cost planning studies" and "low-growth energy futures." That analysis
was the sole demand-
PAGE 8 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
side study commissioned by the task force and formed an important basis
for the task force's conclusions concerning the need for new facilities
and the relative roles of new construction and customer side-of-the-
meter programs in utility planning.
. For a large eastern utility, he developed a load forecasting model
designed to interface with the utility's revenue forecasting system-
planning functions. The model forecasts detailed monthly sales and
seasonal peaks for a 10-year period.
. For the DOE, he directed the development of an independent needs
assessment model for use by state public utility commissions. This major
study developed the capabilities required for independent forecasting by
state commissions and constructed a forecasting model for their interim
use.
. For several state regulatory commissions, Dr. Hieronymus has consulted
in the development of service area level forecasting models of electric
utility companies.
. For EPRI, he authored a study of electricity demand and load forecasting
models. The study surveyed state-of-the-art models of electricity demand
and subjected the most promising models to empirical testing to
determine their potential for use in long-term forecasting.
. For a midwestern electric utility, he has provided consulting assistance
in improving its load forecast and has testified in defense of the
revised forecasting models.
. For an East Coast gas utility, he testified with respect to sales
forecasts and provided consulting assistance in improving the models
used to forecast residential and commercial sales.
OTHER STUDIES PERTAINING TO
REGULATED AND ENERGY COMPANIES
. In a number of antitrust and regulatory matters, Dr. Hieronymus has
performed analyses and litigation support tasks. These include both
Sherman Act Section One and Two cases, contract negotiations, generic
rate hearings, ITC hearings and a major asset valuation suit. In a major
antitrust case, he testified with respect to the demand for business
telecommunications services and the impact of various practices on
demand and on the market share of a new entrant. For a major electrical
equipment vendor he has testified on damages with respect to alleged
defects and associated fraud and warranty claims. In connection with
mergers for which he is the market power expert, he is assisting clients
in responding to the Antitrust Division of the U.S. Department of
Justice's Hart-Scott-Rodino requests.
PAGE 9 OF 9
WILLIAM H. HIERONYMUS
MANAGING DIRECTOR
- --------------------------------------------------------------------------------
. For a private client, he headed a project that examined the feasibility
and value of a major synthetic natural gas project. The study analyzed
both the future supply costs of alternative natural gas sources and the
effects of potential changes in FPC rate regulations on project
viability. The analysis was used in preparing contract negotiation
strategies.
. For a industrial client considering development and marketing of a total
energy system for cogeneration of electricity and low-grade heat, he
developed an estimate of the potential market for the system by
geographic area.
. For the U.S. Environmental Protection Agency (EPA), Dr. Hieronymus was
the principal investigator in a series of studies for forecasting future
supply availability and production costs for various grades of steam and
metallurgical coal to be consumed in process heat and utility uses.
Dr. Hieronymus has addressed a number of conferences on such issues as market
power, industry restructuring, utility pricing in competitive markets,
international developments in utility structure and regulation, risk analysis
for regulated investments, price squeezes, rate design, forecasting customer
response to innovative rates, intervenor strategies in utility regulatory
proceedings, utility deregulation and utility-related opportunities for
investment bankers.
Before joining PHB, Dr. Hieronymus was program manager for Energy Market
Analysis at Charles River Associates. Previously, he served as a project
director at Systems Technology Corporation and as an economist while serving in
the U.S. Army. He is a present or past member of the American Economics
Association and the International Association of Energy Economists, and a past
member of the Task Force on Coal Supply of the New England Energy Policy
Commission. He is the author of a number of reports in the field of energy
economics and has been an invited speaker at numerous conferences.
Dr. Hieronymus received a B.A. from the University of Iowa and M.A. and Ph.D.
degrees in economics from the University of Michigan.
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$25 ON-PEAK LAMBDAS; $12 OFF-PEAK LAMBDAS
ECONOMIC CAPACITY: EAST OF TOTAL EAST MARKET
BASE CASE SCENARIO 2
("PRE-DIVESTITURE") ("CON EDISON DIVESTS 1-3")
-------------------------------------------------- --------------------------
CON EDISON O&R CON EDISON
MARKET ANALYSIS PERIOD MARKET SHARE MARKET SHARE HHI CHANGE MARKET SHARE
NYPP_ETE Economic Capacity S_P 28.0% 4.6% 1,429 258 28.0%
NYPP_ETE Economic Capacity S_OP 29.7% 0.3% 1,603 18 29.7%
NYPP_ETE Economic Capacity W_P 28.0% 4.5% 1,453 252 28.0%
NYPP_ETE Economic Capacity W_OP 29.8% 0.3% 1,614 18 29.8%
NYPP_ETE Economic Capacity SH_P 26.2% 4.4% 1,363 231 26.2%
NYPP_ETE Economic Capacity SH_OP 27.7% 0.3% 1,520 17 27.7%
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$30 ON-PEAK LAMBDAS; $15 OFF-PEAK LAMBDAS
ECONOMIC CAPACITY: EAST OF TOTAL EAST MARKET
BASE CASE SCENARIO 2
("PRE-DIVESTITURE") ("CON EDISON DIVESTS 1-3")
---------------------------------------------- -------------------------------------
CON EDISON O&R CON EDISON
MARKET ANALYSIS PERIOD MARKET SHARE MARKET SHARE HHI CHANGE MARKET SHARE
NYPP_ETE Economic Capacity S_P 46.4% 4.9% 2,529 455 27.0%
NYPP_ETE Economic Capacity S_OP 29.7% 0.3% 1,564 18 29.7%
NYPP_ETE Economic Capacity W_P 44.9% 4.7% 2,416 422 25.2%
NYPP_ETE Economic Capacity W_OP 29.8% 0.3% 1,574 18 29.8%
NYPP_ETE Economic Capacity SH_P 44.9% 4.8% 2,407 431 26.0%
NYPP_ETE Economic Capacity SH_OP 27.7% 0.3% 1,478 17 27.7%
Competitive Analysis Screening Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$35 ON-PEAK LAMBDAS;$20 OFF-PEAK LAMBDAS
ECONOMIC CAPACITY: EAST OF TOTAL EAST MARKET
BASE CASE SCENARIO 2
("PRE-DIVESTITURE") ("CON EDISON DIVESTS 1-3")
---------------------------------------------------- -----------------------------
CON EDISON O&R CON EDISON
MARKET ANALYSIS PERIOD MARKET SHARE MARKET SHARE HHI CHANGE MARKET SHARE
NYPP_ETE Economic Capacity S_P 46.5% 4.8% 2,541 446 27.4%
NYPP_ETE Economic Capacity S_OP 28.0% 2.6% 1,443 146 28.0%
NYPP_ETE Economic Capacity W_P 45.0% 4.6% 2,432 414 25.6%
NYPP_ETE Economic Capacity W_OP 28.1% 2.6% 1,453 146 28.1%
NYPP_ETE Economic Capacity SH_P 45.0% 4.7% 2,421 423 26.4%
NYPP_ETE Economic Capacity SH_OP 26.2% 2.5% 1,370 131 26.2%
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$40 ON-PEAK LAMBDAS; $25 OFF-PEAK LAMBDAS
ECONOMIC CAPACITY: EAST OF TOTAL EAST MARKET
BASE CASE SCENARIO 2
("PRE-DIVESTITURE") ("CON EDISON DIVESTS 1-3")
-------------------------------------------------------- --------------------------
CON EDISON O&R CON EDISON
MARKET ANALYSIS PERIOD MARKET SHARE MARKET SHARE HHI CHANGE MARKET SHARE
NYPP_ETE Economic Capacity S_P 48.7% 4.6% 2,717 448 26.2%
NYPP_ETE Economic Capacity S_OP 27.5% 4.4% 1,386 242 27.5%
NYPP_ETE Economic Capacity W_P 47.8% 4.3% 2,652 411 24.3%
NYPP_ETE Economic Capacity W_OP 27.6% 4.4% 1,396 243 27.6%
NYPP_ETE Economic Capacity SH_P 47.3% 4.5% 2,597 426 25.3%
NYPP_ETE Economic Capacity SH_OP 25.7% 4.2% 1,315 216 25.7%
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$30 ON-PEAK LAMBDAS; $15 OFF-PEAK LAMBDAS
ECONOMIC CAPACITY: IN-CITY MARKET
BASE CASE SCENARIO 2
("Pre-Divestiture") ("Con Edison Divests 1-3")
---------------------------------------------------- --------------------------
Con Edison O&R Con Edison
MARKET ANALYSIS PERIOD MARKET SHARE MARKET SHARE HHI CHANGE MARKET SHARE
NYPP_CTY Economic Capacity S_P 56.5% 0.6% 3,508 68 25.0%
NYPP_CTY Economic Capacity S_OP 32.8% 0.2% 1,745 13 32.8%
NYPP_CTY Economic Capacity W_P 55.5% 0.6% 3,430 67 23.1%
NYPP_CTY Economic Capacity W_OP 32.8% 0.2% 1,741 13 32.8%
NYPP_CTY Economic Capacity SH_P 54.2% 0.6% 3,283 65 24.0%
NYPP_CTY Economic Capacity SH_OP 22.9% 0.2% 1,421 9 22.9%
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$35 ON-PEAK LAMBDAS; $20 OFF-PEAK LAMBDAS
ECONOMIC CAPACITY: IN-CITY MARKET
BASE CASE SCENARIO 2
("Pre-Divestiture") ("Con Edison Divests 1-3")
---------------------------------------------------- --------------------------
Con Edison O&R Con Edison
MARKET ANALYSIS PERIOD MARKET SHARE MARKET SHARE HHI CHANGE MARKET SHARE
NYPP_CTY Economic Capacity S_P 56.5% 0.6% 3,508 68 25.0%
NYPP_CTY Economic Capacity S_OP 32.8% 0.2% 1,745 13 32.8%
NYPP_CTY Economic Capacity W_P 55.5% 0.6% 3,430 67 23.1%
NYPP_CTY Economic Capacity W_OP 32.8% 0.2% 1,741 13 32.8%
NYPP_CTY Economic Capacity SH_P 54.2% 0.6% 3,283 65 24.0%
NYPP_CTY Economic Capacity SH_OP 22.9% 0.2% 1,421 9 22.9%
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$40 On-Peak Lambdas; $25 Off-Peak Lambdas
ECONOMIC CAPACITY: IN-CITY MARKET
BASE CASE SCENARIO 2
("PRE- DIVESTITURE") ("CON EDISON DIVESTS 1-3")
--------------------------------------------------- --------------------------
EDISON EDISON
MARKET ANALYSIS PERIOD MARKET MARKET HHI CHANGE MARKET
SHARE SHARE SHARE
NYPP_CTY Economic Capacity S_P 59.4% 0.6% 3,808 71 23.8%
NYPP_CTY Economic Capacity S_OP 30.9% 0.8% 1,632 49 30.9%
NYPP_CTY Economic Capacity W_P 58.5% 0.5% 3,701 59 21.0%
NYPP_CTY Economic Capacity W_OP 30.7% 0.7% 1,626 43 30.7%
NYPP_CTY Economic Capacity SH_P 57.2% 0.6% 3,583 69 22.9%
NYPP_CTY Economic Capacity SH_OP 21.8% 0.7% 1,341 31 21.8%
Competitive Analysis Screening Model (CASm v5.5k)
HHI Report. Created 07/23/98 21:13:37
Con Ed and O&R Divestiture
$40 On-Peak Lambdas; Off-Peak Lambdas
ECONOMIC CAPACITY: IN-CITY MARKET
BASE CASE SCENARIO 2
("PRE-DIVESTITURE") ("CON EDISON DIVESTS 1-3")
--------------------------------------------- --------------------------
EDISON EDISON
MARKET ANALYSIS PERIOD MARKET MARKET HHI CHANGE MARKET
SHARE SHARE SHARE
NYPP_CTY Economic Capacity S_P 59.4% 0.6% 3,800 71 23.8%
NYPP_CTY Economic Capacity S_OP 30.9% 0.8% 1,632 49 30.9%
NYPP_CTY Economic Capacity W_P 58.5% 0.5% 3,701 59 21.0%
NYPP_CTY Economic Capacity W_OP 30.7% 0.7% 1,626 43 30.7%
NYPP_CTY Economic Capacity SH_P 57.2% 0.6% 3,583 69 22.9%
NYPP_CTY Economic Capacity SH_OP 21.8% 0.7% 1,341 31 21.8%
Exhibit No. APP-717
Page 1 of 1
Gas Transportation Options for Gas-Fired Generating Facilities/1/
with Current Con Edison/2/ or O&R Gas Service
- ------------------------------------------------------------------------------------------------------------------------------
Current Owner Divestiture Nearest Alternate Supply
Facility Location Status Source
- ------------------------------------------------------------------------------------------------------------------------------
Astoria Con Edison Queens @ East River Steam plant to be 3.4 miles to Transco;
retained, turbines to 4.0 miles to BUG
be sold
- ------------------------------------------------------------------------------------------------------------------------------
Bowline Con Ed/O&R Rockland County, NY @ To be sold 5.2 miles to Algonquin via
Hudson River Conrail/O&R ROW/3/
- ------------------------------------------------------------------------------------------------------------------------------
E. 60/th/ St. Con Edison Central Manhattan @ East To be sold 2.9 miles to Transco, 1.9
River miles to BUG
- ------------------------------------------------------------------------------------------------------------------------------
East River Con Edison Lower Manhattan @ East River To be sold 5.3 miles to Transco, 0.9
miles to BUG
- ------------------------------------------------------------------------------------------------------------------------------
Hillburn O&R Western Rockland County To be sold 0.5 miles to Algonquin via
near NY/NJ border Conrail ROW
- ------------------------------------------------------------------------------------------------------------------------------
Lederle American Home Central Rockland County N.A. 2.0 miles to Tennessee via
Products near NY/NJ border Conrail ROW
- ------------------------------------------------------------------------------------------------------------------------------
Lovett O&R Rockland County @ Hudson To be sold 0.75 miles to Algonquin via
River Conrail ROW
- ------------------------------------------------------------------------------------------------------------------------------
Poletti NYPA Queens @ East River N.A. 3.4 miles to Transco;
4.0 miles to BUG
- ------------------------------------------------------------------------------------------------------------------------------
Ravenswood Con Edison Queens @ East River To be sold 2.5 miles to Transco, 2.1
miles to BUG
- ------------------------------------------------------------------------------------------------------------------------------
Shoemaker O&R Western Orange County, NY To be sold 9.5 miles to Columbia
- ------------------------------------------------------------------------------------------------------------------------------
W. 59/th/ St. Con Edison Central Manhattan @ Hudson To be sold 1.1 miles to Transco
River
- ------------------------------------------------------------------------------------------------------------------------------
Waterside Con Edison Central Manhattan @ East To be sold 3.8 miles to Transco, 1.3
River miles to BUG
- ------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------
Facility Comments
- -----------------------------------------------------------------------
Astoria Bypass to Transco requires Hudson River crossing
- -----------------------------------------------------------------------
Bowline See Note 3 below
- -----------------------------------------------------------------------
E. 60/th/ St. Either bypass option requires river crossing
(Hudson or East River)
- -----------------------------------------------------------------------
East River Either bypass option requires river crossing
(Hudson or East River)
- -----------------------------------------------------------------------
Hillburn
- -----------------------------------------------------------------------
Lederle
- -----------------------------------------------------------------------
Lovett Earlier bypass effort resulted in current O&R
"firm withdrawable service" transportation rate
(30 day/year capacity recall right)
- -----------------------------------------------------------------------
Poletti Transco bypass requires river crossing; earlier
bypass effort by NYPA resulted in current Con
Ed negotiated transportation rate
- -----------------------------------------------------------------------
Ravenswood Bypass to Transco requires Hudson River crossing
- -----------------------------------------------------------------------
Shoemaker
- -----------------------------------------------------------------------
W. 59/th/ St. Bypass requires Hudson River crossing
- -----------------------------------------------------------------------
Waterside Either bypass option requires river crossing
(Hudson or East River)
- -----------------------------------------------------------------------
- ----------------
/1/ All facilities have dual-fuel (gas/oil) capability.
/2/ Con Edison's Arthur Kill and Narrows generating plants are fueled via
Brooklyn Union facilities.
/3/ Columbia Gas Transmission's 700 Mdt/d Millennium Pipeline project, with a
scheduled in-service date of 11/2000, will transit immediately adjacent to
the Bowline facility.
EXHIBIT NO. APP-715
PAGE 1 OF 1
MAJOR NATURAL GAS PIPELINES AND SUPPLY SOURCES
TO SERVE THE MID-ATLANTIC AND NEW ENGLAND REGIONS
[MAP APPEARS HERE]
EXHIBIT K
---------
[ORGANIZATIONAL CHARTS APPEARS HERE]
[ORGANIZATIONAL CHART APPEARS HERE]
EXHIBIT D-2
JOINT PETITION OF
CONSOLIDATED EDISON, INC.,
ORANGE AND ROCKLAND UTILITIES, INC.,
AND
CONSOLIDATED EDISON COMPANY OF
NEW YORK, INC.
FOR APPROVAL OF MERGER
AND STOCK ACQUISITION
AND RELATED RELIEF
PUBLIC SERVICE COMMISSION
STATE OF NEW YORK
- --------------------------------------------------------X
Joint Petition of Consolidated Edison, Inc., Orange and :
Rockland Utilities, Inc., and Consolidated Edison : JOINT PETITION
Company of New York, Inc. Under Sections 70 and 108 :
of the Public Service Law for Approval of Merger and :
Stock Acquisition :
Case No. :
- --------------------------------------------------------X
TO THE PUBLIC SERVICE COMMISSION
OF THE STATE OF NEW YORK:
On May 10, 1998, Consolidated Edison, Inc. ("CEI"), Orange and Rockland
Utilities, Inc. ("Orange and Rockland") and C Acquisition Corp., a wholly-owned
subsidiary of CEI (the "Merger Subsidiary"), entered into an Agreement and Plan
of Merger ("Merger Agreement") under which the Merger Subsidiary will merge with
and into Orange and Rockland (the "Merger") and Orange and Rockland will be the
surviving corporation and will become a wholly-owned subsidiary of CEI, which is
also the parent of Consolidated Edison Company of New York, Inc. ("Con Edison").
Con Edison and Orange and Rockland are both regulated New York utilities. (Con
Edison and Orange and Rockland are jointly referred to herein as the
"Utilities.") Upon the effectiveness of the Merger, the holders of Orange and
Rockland's Common Stock, $5 par value ("Orange and Rockland's Common Stock"),
will receive $58.50 per share in cash. (CEI, Orange and Rockland and Con Edison
are jointly referred to herein as "Petitioners".)
2
Petitioners request that the Public Service Commission ("the Commission")
approve the Merger and provide related relief as set forth in this Joint
Petition. The Merger is clearly in the public interest. The Merger creates the
potential for increased operating efficiencies and operational and regulatory
synergies for both Utilities. Both Utilities are operating in an increasingly
competitive energy industry. Both are in the process of divesting large portions
of their generating assets to create competition, and both are in the process of
transforming their utility operations into regulated companies which utilize
their "wires and pipes" infrastructure to provide the energy delivery system
critical to the competitive marketplace.
A. INTRODUCTION
1. Con Edison is an electric, gas and steam corporation organized under the
laws of the State of New York, including the Transportation Corporations
Law, and has its principal place of business at 4 Irving Place, New York,
New York 10003.
2. Con Edison supplies electric service in all of New York City (except part
of Queens) and in most of Westchester County; gas service in Manhattan, the
Bronx and parts of Queens and Westchester Counties; and steam service in
part of Manhattan.
3. Orange and Rockland is an electric and gas corporation, organized under the
laws of the State of New York, including the Transportation Corporations
Law, and has its principal place of business at One Blue Hill Plaza, Pearl
River, New York 10965. Orange and Rockland has two wholly-owned utility
subsidiaries, Rockland Electric Company ("RECO"), a New Jersey corporation,
and Pike County Light & Power Company ("Pike"), a Pennsylvania corporation.
3
4. Orange and Rockland supplies electric and gas service in all of Rockland
County, most of Orange County and part of Sullivan County. In New Jersey,
Orange and Rockland's utility subsidiary, RECO, supplies electric service
in parts of Bergen, Passaic and Sussex Counties. In Pennsylvania, Orange
and Rockland's utility subsidiary, Pike, supplies electric and gas service
in parts of Pike County. Orange and Rockland is exempt from registration
under the Public Utility Holding Company Act of 1935 ("PUHCA").
5. CEI is a corporation organized under the laws of the State of New York. On
January 1, 1998 it became the holding company for Con Edison. CEI has
various non-utility subsidiaries./1/ It is exempt from registration under
PUHCA.
6. Certified copies of Con Edison's Certificate of Incorporation and Orange
and Rockland's Restated Certificate of Incorporation and each amendment or
restatement of each such Certificate have been filed with the Commission.
Certified copies of CEI's and the Merger Subsidiary's Certificates of
Incorporation are attached hereto as Appendices A and B, respectively.
B. RELIEF SOUGHT
7. In accordance with the terms and conditions of the Merger Agreement, a copy
of which is annexed hereto as Appendix C, each outstanding share of Orange
and Rockland's Common Stock will be converted into the right to receive
$58.50 in cash and, after the consummation of the transactions described in
the Merger
- ------------------------------
/1/The Merger Subsidiary is a recently-organized corporation that has not
conducted any business except in conjunction with the Merger Agreement. The
principal offices of CEI and the Merger Subsidiary are located at 4 Irving
Place, New York, New York 10003.
4
Agreement, Orange and Rockland will become a wholly-owned subsidiary of
CEI. CEI hereby seeks the approval of the Commission under Section 70 of
the Public Service Law to acquire the stock of Orange and Rockland as
contemplated in and pursuant to the terms of the Merger Agreement.
Petitioners hereby also seek Commission approval under Section 108 of the
Public Service Law of a certificate of merger between Orange and Rockland
and the Merger Subsidiary, which will be delivered for filing to the
Department of State of the State of New York.
8. By its orders issued on September 23 and November 3, 1997, in Case 96-E-
0897, the Commission approved, subject to certain conditions and
understandings, an Agreement and Settlement, dated September 19, 1997,
among Con Edison, Staff and other parties ("the Con Edison Settlement
Agreement")./2/ Among other things, the Con Edison Settlement Agreement
permits the formation of a holding company and sets forth provisions and
standards of conduct governing the relationship of Con Edison with the
holding company and with its unregulated affiliates. The holding company,
CEI, has been formed.
9. By its orders issued on November 26 and December 31, 1997 in Case 96-E-
0900, the Commission approved an Electric Rate and Restructuring Plan,
dated November 6, 1997, among Orange and Rockland, Staff and other parties
("the
- ---------------------------
/2/Case 96-E-0897 - Consolidated Edison Company of N.Y., Inc., Order Adopting
----------------------------------------- --------------
Terms of Settlement Subject to Conditions and Understandings (September 23,
- ------------------------------------------------------------
1997), Confirming Order (October 1, 1997); and Opinion No. 97-16 (November
3, 1997).
5
Orange and Rockland Restructuring Plan")./3/ Among other things, the
Orange and Rockland Restructuring Plan provides for Orange and Rockland to
form a holding company that would be registered under PUHCA, subject to
obtaining shareholder and other regulatory approvals. The Orange and
Rockland Restructuring Plan also sets forth provisions and standards of
conduct that will govern holding company and affiliate relations under the
holding company structure.
10. Orange and Rockland will not form a registered holding company under PUHCA,
but instead, as a result of the Merger, Orange and Rockland will become a
wholly-owned subsidiary of CEI. (It is expected that CEI will remain
exempt from registration under PUHCA.) Accordingly, Petitioners request
Commission approval of conforming modifications to the corporate structure
and related provisions in both the Orange and Rockland Restructuring Plan
and the Con Edison Settlement Agreement to reflect the corporate structure
that will result from the Merger. The conforming modifications are set
forth in Appendix F hereto.
11. In addition, Petitioners request that the Commission approve the cost
allocation methodology and accounting procedure described in Appendix G
hereto, which provides procedures for the allocation of direct charges and
common costs among and between CEI, Con Edison and Orange and Rockland and
their affiliates. The proposed cost allocation methodology and accounting
procedure is consistent with the allocation and accounting framework
contained in the Con Edison Settlement
- -----------------------------------
/3/Case 96-E-0900 - Orange and Rockland Utilities, Inc., Order Adopting Terms of
------------------------------------------------------------
Settlement (November 26, 1997) and Opinion No. 97-27 (December 31, 1997).
- -----------
6
Agreement and the Orange and Rockland Restructuring Plan. The transactions
between CEI and Orange and Rockland and between Orange and Rockland and
Petitioners' unregulated affiliates would be governed by the affiliate
rules and standards of conducts set forth in the Orange and Rockland
Restructuring Plan, as modified by Appendix F. Similarly, transactions
between CEI and Con Edison and between Con Edison and Petitioners'
unregulated affiliates would be governed by the affiliate rules and
standards of conduct set forth in the Con Edison Settlement Agreement, as
modified by Appendix F.
12. The proposed cost allocation methodology and accounting procedure described
in Appendix G hereto also sets forth rules that would govern transactions
between Con Edison and Orange and Rockland. These rules are consistent in
all substantive respects with the terms of the Con Edison Settlement
Agreement and the Orange and Rockland Restructuring Plan. Allocation of
costs among Orange and Rockland and its New Jersey and Pennsylvania utility
subsidiaries (RECO and Pike, respectively) would continue to be governed by
the existing service contracts between Orange and Rockland and its utility
subsidiaries. The transfer of assets between regulated Con Edison and
Orange and Rockland would be permitted as set forth in the procedures and
rules.
13. The Con Edison Settlement Agreement provides for a five-year electric rate
plan through March 31, 2002. The Orange and Rockland Restructuring Plan
provides for a four-year electric rate plan through November 30, 2001.
7
14. The Con Edison Settlement Agreement's rate plan provides for electric rate
reductions of $1.1 billion on a cumulative basis over the five-year period
ending March 31, 2002. All customers under this plan will receive rate
reductions of at least 10 percent, with some receiving reductions of up to
25 percent. These savings are exclusive of the savings that electric
customers may achieve through participation in newly competitive electric
markets being shaped pursuant to the Con Edison Settlement Agreement. Con
Edison's customers will continue to receive the substantial benefits of the
Con Edison Settlement Agreement's rate plan and, if this Joint Petition is
approved, will receive additional benefits as set forth herein as a
consequence of the Merger .
15. The Orange and Rockland Restructuring Plan provides for cumulative electric
rate reductions over its four-year term of approximately $32.4 million,
exclusive of the savings that electric customers may achieve through the
new competitive markets. Orange and Rockland's customers also will
continue to benefit from the Orange and Rockland Restructuring Plan, and
they will receive additional benefits described herein as a consequence of
the Merger.
D. THE MERGER
16. Dramatic changes are occurring in the regulation of the electric and gas
industries at the federal and state levels, resulting in an increasingly
competitive environment in which gas and electric utilities must operate.
Con Edison and Orange and Rockland have each been engaged in an ongoing
evaluation of this transformation of the energy industry to determine how
best to respond to these changes. Petitioners have agreed that the terms
of the business combination set
8
forth in the Merger Agreement will, subject to obtaining required
regulatory and shareholder approvals, provide a mutually beneficial setting
for responding to this evolving and increasingly competitive energy
marketplace. The respective Boards of Directors of Petitioners have
approved the Merger Agreement. The Merger Agreement requires the approval
of the holders of two-thirds of Orange and Rockland's Common Stock which is
outstanding. Orange and Rockland intends to hold a meeting of its
shareholders in the third quarter of 1998 to vote on the approval of the
Merger Agreement. CEI's shareholders are not required to approve the Merger
Agreement.
17. To effect the Merger, the Merger Agreement provides for the Merger
Subsidiary to merge with and into Orange and Rockland, with Orange and
Rockland being the surviving corporation. Each outstanding share of Orange
and Rockland stock will be converted into the right to receive $58.50 in
cash. As a result, Orange and Rockland will become a subsidiary of CEI at
the time of the Merger. Orange and Rockland's existing regulated
subsidiaries, Pike and RECO, will remain its subsidiaries and will not be
transferred to CEI.
18. It is expected that Con Edison and Orange and Rockland, each a direct
wholly owned subsidiary of CEI, will continue to operate under their
respective names.
19. The obligations of CEI and Orange and Rockland to effect the transactions
contemplated by the Merger Agreement are subject to a number of conditions
including, but not limited to, the approval of the Merger Agreement by
Orange and Rockland's shareholders and obtaining all required regulatory
and governmental approvals and consents.
9
20. Until the Merger is consummated, Orange and Rockland has committed in the
Merger Agreement to conduct its businesses in the ordinary course
consistent with past practices and in accordance with the Orange and
Rockland Restructuring Plan. Among other things, Orange and Rockland is
required by the Merger Agreement to use its best efforts to enter into a
definitive agreement(s) to divest its generating assets pursuant to the
Orange and Rockland's Commission-approved divestiture plan.
E. THE BENEFITS OF THE MERGER
21. The Merger will be beneficial to the customers of both Orange and Rockland
and Con Edison. With the Merger, Petitioners will realize operating
efficiencies. Petitioners will maintain customer service and system
reliability following consummation of the Merger. The Merger should
facilitate the development of competitive markets.
22. The Merger will make available rate savings above and beyond the
substantial savings captured by the Con Edison Settlement Agreement and the
Orange and Rockland Restructuring Plan and the transition to competition.
The rate benefits from the Merger are driven by the operating efficiencies
expected from the Merger. The forecast ten-year net synergy savings are
set forth in Appendix H. Appendix H indicates that the Merger is
anticipated to result in cost savings, net of transaction costs and costs
to achieve,/4/ of $467.6 million over the first ten years
- ----------------------------------------
/4/Transaction costs and costs to achieve are the incremental legal, financial,
employee and organizational costs incurred and to be incurred to effectuate and
implement the merger. Transaction and cost to achieve expenses in 1998 will,
subject to Commission approval, be deferred for disposition in this proceeding.
10
following the closing of the transaction (assumed closing date of March 31,
1999). Petitioners' propose a reasonable allocation of these synergy
savings between consumers and investors. Such a sharing is both consistent
with the established practice of apportioning such savings equitably
between customers and investors and an appropriate recognition of the
investment required to bring about desirable and efficient combinations
such as the Merger.
23. As set forth in Appendix H, New York customers of Con Edison and Orange and
Rockland will benefit by one-half the synergy savings over the 10-year
period ending March 31, 2009, receiving a total benefit of $236.3 million.
The allocation of the anticipated savings is further detailed in Appendix
I. The methodology for the allocation of synergies after March 2002 is
reflected in Appendix I, section (IV). As detailed in Appendix I, the
Merger will result in cost savings for Con Edison's gas operations and for
other services will forestall or reduce near-term rate increases and offset
the accumulation of debits expected to build to future rate increases. The
nominal-dollar rate decreases will occur as scheduled per the Con Edison
Settlement Agreement and the Orange and Rockland Restructuring Plan ($1.1
billion for Con Edison customers and $32.4 million for Orange and Rockland
customers). Through March 2002, the Merger will create additional
ratepayer credits, beyond the Con Edison Settlement and the Orange and
Rockland Restructuring Plan, amounting to $4.9 million for Orange and
Rockland customers and $36.5 million for Con Edison customers./5/
- -----------------------------
/5/ The Orange and Rockland Restructuring Plan provides for $1 million over four
years for the costs incurred in establishing a registered holding company.
Since as a result of the Merger, Orange and
11
24. Ability to Finance Utility Operations - Under the terms of the Merger, Con
Edison and Orange and Rockland will be separate subsidiaries of CEI. As a
consequence, the transaction will not impair the ability of Con Edison or
Orange and Rockland to continue to raise debt or preferred equity capital
in the future. Moreover, additional equity capital, whether raised
publicly at the CEI level or generated internally, will be invested in Con
Edison and Orange and Rockland, as appropriate, to fund utility capital
expenditures while maintaining a cost-effective capital structure at the
utility level. In addition, Con Edison and Orange and Rockland will remain
as separate regulated utilities, subject to Commission jurisdiction.
Hence, Commission approval pursuant to Section 69 of the Public Service Law
will continue to be required for any additional debt or preferred equity
financing by the New York regulated utilities.
25. Customer Service - The proposed transaction will facilitate the achievement
of the customer service quality goals set forth in the Con Edison
Settlement Agreement and Orange and Rockland Restructuring Plan. Both
agreements provide incentives to prevent customer service from
deteriorating to unacceptable levels, and those incentive provisions will
continue to apply to the respective utilities. Since both Con Edison and
Orange and Rockland will remain regulated utilities subject to the full
jurisdiction of the Commission, the proposed transaction would
- ------------------------------------------------------------------------------
Rockland will not establish a registered holding company, Orange and
Rockland will apply the unexpended portion of this amount as prescribed by its
Restructuring Plan. Specifically, Orange and Rockland will apply this amount to
offset regulatory assets in accordance with Section I.E, Accounting Provisions,
set forth on pages 10-12 of the Orange and Rockland Restructuring Plan.
12
not limit the Commission's authority to take appropriate action to further
address customer needs for either or both utilities if required.
26. The combination of the two utilities should strengthen the ability of both
operating companies to offer additional services to customers. This will
include utilization of best practices and innovative technology now
available in the separate companies in responding to service needs. Orange
and Rockland, for example, has successfully implemented the integration of
multiple telephone call centers into one central call area, an experience
that will prove beneficial to Con Edison as it implements its existing plan
to consolidate call centers. Similar potential also appears to exist with
respect to the phasing in of voice-response unit technology currently
employed by Con Edison and in the growth of options afforded to customers
in the use of the internet to carry out customer transactions (bill
payment, etc.). There are other potential benefits in the application of
internet technology, particularly in the data-transmission area, in
implementing retail access.
27. Electric System Service and Reliability - The Con Edison Settlement
Agreement and the Orange and Rockland Restructuring Plan contain explicit
commitment to the provision of high levels of reliability. This commitment
will continue in effect after the Merger. The combination of the two
utilities will enable the utilities to draw on the combined expertise and
strengths of their respective workforces to meet commitments and assure
continued system reliability.
28. Because of its size and service area characteristics, Con Edison has
developed comprehensive systems to support reliability. These include
managerial systems
13
such as performance tracking and root-cause analysis; systematic operating
procedure and specification development; remote substation and overhead
system monitoring; outage management systems; and power quality services.
These systems may be adapted to enhance similar existing Orange and
Rockland systems.
29. Employee Benefits - The Merger would also offer unique opportunities to
employees. The combined utilities should provide greater opportunity for
advancement, as well as training and career development. Con Edison has
maintained a long-term commitment to the career development of its
employees through, among other things, courses and career development
programs offered at Con Edison's Learning Center. The employees of Orange
and Rockland will benefit from these programs. While the Utilities will
seek to identify and eliminate redundant functions in their operations, the
Merger Agreement provides for the honoring of all collective bargaining
agreements and for any workforce reductions to be made on a fair and
equitable basis reflecting employees' prior experience and skills and
without regard to prior affiliation.
30. Commitment to Communities and to Economic Development - As a result of the
Merger, both Con Edison and Orange and Rockland will be better positioned
to maintain their strong commitment to the economic development and welfare
of their respective service territories. This commitment will be enhanced
by the improved ability of the combined entity to compete in the energy
marketplace. Both utilities have a strong record of community involvement
and charitable contributions which will be maintained after the Merger. The
Merger Agreement
14
expressly provides for the continuation of charitable contributions in the
Orange and Rockland service area at comparable levels to those provided by
Orange and Rockland.
31. Economic development has been and will continue as a core objective of the
Utilities. The Competitive Opportunities proceeding created significant new
incentives for increased economic activity in both service areas. The
Merger will add to this not only through a measurable increase in the
efficiency of the energy infrastructure of the area, but also by the
favorable impact that the Merger will have in facilitating the transition
to competition for customers served by the Utilities.
32. Effect on Competition - The proposed business combination will not have an
adverse impact on competition in the electric industry. Indeed, the Merger
can be expected to advance competitive interests. Both companies have
committed to comprehensive generation divestiture programs and have
established open access transmission tariffs consistent with the rules and
requirements of the Federal Energy Regulatory Commission ("FERC"). The
technological innovations that have played a major role in facilitating
competition, allowing new markets to form and expanding the types of
transactions that utilities can accommodate, cannot be as effectively
supported or encouraged on a small scale. Business combinations such as the
Merger will provide the resources to foster innovation and will thus add
vitality and strength to the drive to competition and thereby increase the
savings available to consumers.
15
33. In terms of the competitive restructuring already underway, both utilities
have committed themselves firmly to the development of a competitive
electric market in their respective service areas and have implemented
retail access programs in compliance with the Con Edison Settlement
Agreement and Orange and Rockland Restructuring Plan. The Merger will not
diminish this commitment and should have no impact on competition in the
gas industry. Both Con Edison and Orange and Rockland have opened up their
gas systems in full compliance with all Commission orders in the gas
industry restructuring case./6/ The open competition for gas sales in the
service territories of Con Edison and Orange and Rockland not only obviates
any concern that the transaction will enable CEI to exercise market power
in retail gas sales, but also prevents CEI from exercising control over gas
commodity sales for electric generation or for end-use applications as a
substitute for electricity.
34. Effect on Regulation - The proposed business combination is not expected to
impact the Commission's jurisdiction over Con Edison and Orange and
Rockland. It will not impede the Commission's regulatory authority over the
rates, service, operations, and the financial condition of Petitioners'
utility business. Both utilities will continue in existence and be subject
to the same governmental orders to which they were subject immediately
prior to the Merger.
F. REQUIRED REGULATORY APPROVALS
- -------------------------
/6/ Case 93-G-0932 - Proceeding on Motion of the Commission to Address Issues
--------------------------------------------------------
Associated with the Restructuring of the Emerging Competitive Natural Gas
- -------------------------------------------------------------------------
Market.
- ------
16
35. In addition to the regulatory approvals requested hereby, the Petitioners
are required to obtain the following Federal and State regulatory approvals
to effect the transaction contemplated by the Merger Agreement (none of
which have been obtained as of the date hereof):
a. Federal Energy Regulatory Commission. Con Edison and Orange and
Rockland are subject to the jurisdiction of FERC under Section 205 of
the Federal Power Act ("FPA") with respect to certain wholesale
electric
17
sales and transmission services. FERC has also asserted jurisdiction
over any transfer of ownership and control over FERC jurisdictional
facilities under section 203 of the FPA. An application seeking the
approval of the FERC will be filed shortly after the date of filing
this Joint Petition.
b. Securities and Exchange Commission. Because of its ownership of all
of the issued and outstanding common stock of Con Edison, CEI is a
public utility holding company under PUHCA. Approval of the
Securities and Exchange Commission ("SEC") pursuant to Section 9(a)(2)
of PUCHA will be required to consummate the acquisition by CEI of
Orange and Rockland's common stock. It is anticipated that an
application seeking SEC approval will be filed in July 1998. CEI
currently is exempt from registration under PUCHA under Section
3(a)(1) of the Act as a "predominantly intrastate" public utility
holding company. Orange and Rockland is exempt from registration
under Section 3(a)(2) of the Act as an operating utility holding
company serving contiguous states. It is expected that CEI and Orange
and Rockland will continue to qualify for exemptions from registration
under PUHCA under Sections 3(a)(1) and 3(a)(2), respectively,
following the Merger. CEI and Orange and Rockland will file
statements with the SEC claiming the exemptions.
c. New Jersey Board of Public Utilities. RECO is subject to the
jurisdiction of the New Jersey Board of Public Utilities ("NJBPU")
and, therefore, the Merger may require approval of the NJBPU under the
New Jersey Public
18
Utilities Law. A petition requesting that the NJBPU approve the Merger
will be filed in the same time frame as this Joint Petition.
d. Pennsylvania Public Utility Commission. Pike is subject to the
jurisdiction of the Pennsylvania Public Utility Commission ("PAPUC")
and, therefore, the Merger will require the approval of the PAPUC
pursuant to the Pennsylvania Public Utility Code. A petition
requesting PAPUC approval will be filed in the same time frame as this
Joint Petition.
e. Hart-Scott-Rodino. Under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended ("HSR"), the share acquisitions by CEI may not
be consummated until the requisite notifications and report forms have
been filed with the Antitrust Division of the Department of Justice
and the Federal Trade Commission and the HSR waiting period
requirements have been satisfied./7/
36. The following appendices, which are attached to this Joint Petition, are
incorporated herein and made a part hereof.
a. Appendix A - Certified Copy of CEI's Certificate of Incorporation
b. Appendix B - Certified Copy of Merger Corporation's Certificate of
Incorporation
c. Appendix C- Agreement and Plan of Merger
- ------------
/7/ Per the Merger Agreement, application will also be made to the New Jersey
Department of Environmental Protection in accordance with the New Jersey
Industrial Site Recovery Act.
19
d. Appendix D - Statement of Financial Condition of Con Edison as of
December 31, 1997
e. Appendix E - Statement of Financial Condition of Orange and Rockland
as of December 31, 1997
f. Appendix F - Conforming Changes to Affiliate Rules and Standards of
Conduct
g. Appendix G - Conformed Cost Allocation Methodology and Accounting
Procedure
h. Appendix H - Quantification and Allocation of Synergy Savings
i. Appendix I - Benefit Disposition and Methodology
G. EFFECT ON THE SETTLEMENT AGREEMENT AND RESTRUCTURING PLAN
37. Except for the conforming modifications described in Appendices F and G,
and the disposition of synergy benefits proposed herein, the Merger will
have no effect on the provisions of the Con Edison Settlement Agreement and
the Orange and Rockland Restructuring Plan, including the provisions
relating to rate reductions, retail access programs and divestiture of
generating facilities./8/
38. Petitioners respectfully request that the Merger described herein be
considered and approved on an expeditious basis. Accordingly, Petitioners
propose that the Commission adopt a procedural schedule for the processing
of this Joint Petition with the objective of obtaining a final Commission
decision hereon in as
20
expeditious a manner as possible but in no event later than nine months
from the date of this Joint Petition.
H. OTHER MATTERS
39. Each Petitioner respectfully reserves the right to withdraw this Joint
Petition at any time prior to a final Commission decision, and further
reserves the right to decide not to consummate the transactions described
herein, to the extent either of them is permitted to do so pursuant to the
terms of the Merger Agreement. Petitioners waive no rights under their
respective settlement agreements and particularly waive no rights
respecting the duration, scope and terms of rate and rate-related
provisions contained therein.
I. CORRESPONDENCE AND COMMUNICATIONS
40. All communications and correspondence with respect to this Joint Petition
should be addressed to the following:
Chanoch Lubling, Esq.
Associate General Counsel
Consolidated Edison Company of New York, Inc.
4 Irving Place, New York, New York 10003
G. D. Caliendo, Esq.
Senior Vice President and General Counsel
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza, Pearl River, New York 10965
- ---------------------
/8/ The Merger Agreement expressly requires Orange and Rockland to use its best
efforts to enter into a contract to divest its generation assets by May 1, 1999,
and to consummate the sale as soon as practicable after executing such
agreement.
21
J CONCLUSION AND REQUEST FOR RELIEF
41. For all of the foregoing reasons, Petitioners believe that their proposed
business combination is in the public interest, fully consistent with
relevant statutory and regulatory standards, and should be approved.
Accordingly, Petitioners request for an order: (1) authorizing Petitioners
under Section 70 of the Public Service Law to consummate the transactions
as set forth in the Merger Agreement, as described and subject to the
conditions proposed herein; (2) approving a certificate of merger under
Section 108 of the Public Service Law; (3) approving the conforming
amendments to the Con Edison Settlement Agreement and to the Orange and
Rockland Restructuring Plan described in Appendix F; (4) approving the
Proposed Cost Allocation Methodology and Accounting Procedure attached
hereto as Appendix G; (5) approving the accounting and rate treatment of
the synergy savings as set forth herein; and (6) granting Petitioners such
other and further relief to which Petitioners may be entitled.
Dated: New York, New York
June 22, 1998
Respectfully submitted,
Consolidated Edison, Inc.
4 Irving Place
New York, New York 10003
Consolidated Edison Company of New York, Inc. Orange and Rockland Utilities, Inc.
4 Irving Place One Blue Hill Plaza
New York, New York 10003 Pearl River, New York 10965
Tel: 212-460-6330 Tel: 914-577-2424
By:__________________________ By__________________________
John D. McMahon G. D. Caliendo
Their Attorney Its Attorney
VERIFICATION
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
Joan S. Freilich, being duly sworn, deposes and says: I am Executive Vice
President and Chief Financial Officer of Consolidated Edison, Inc. and
Consolidated Edison Company of New York, Inc., petitioners in the within matter.
I have read the attached Petition, and the same is true to the best of my
knowledge, information and belief.
________________________
Joan S. Freilich
Sworn to and subscribed
before me this ____ day
of June, 1998
VERIFICATION
STATE OF NEW YORK )
) ss.:
COUNTY OF ROCKLAND )
R. LEE HANEY, being duly sworn, deposes and says: I am Senior vice
President and Chief Financial Officer of both Rockland Electric Company,
petitioner in the within matter, and its corporate parent Orange and Rockland
Utilities, Inc. I have read the attached Petition, and the same is true to the
best of my knowledge, information and belief.
_______________________
R. Lee Haney
Sworn to and subscribed
before me this ____ day
of June, 1998
APPENDIX F
CONFORMING MODIFICATIONS TO
CORPORATE STRUCTURE AND RELATED PROVISIONS OF
CON EDISON SETTLEMENT AGREEMENT AND
ORANGE AND ROCKLAND RESTRUCTURING PLAN
--------------------------------------
Except as otherwise discussed herein, the corporate structure section of
the Con Edison Settlement Agreement (Article V and Appendix J) and the corporate
structure and affiliate rules sections of the Orange and Rockland Restructuring
Plan (Article IV.A - C and Appendices E, H and I) continue unchanged. The
changes set forth below are conforming in nature and do not change the substance
of the settlement agreements.
These modifications will take effect when approved by the Commission.
CON EDISON SETTLEMENT AGREEMENT
-------------------------------
FORMATION OF HOLDING COMPANY
- ----------------------------
Section V.1.(iv) - Defining "Subsidiary" and "Affiliate" As described in
--------------------------------------------------------
the Joint Petition, Orange and Rockland will become a direct subsidiary of CEI.
The subsidiaries of Orange and Rockland will therefore become indirect
subsidiaries of CEI and affiliates of CEI's other subsidiaries, including Con
Edison and CEI's existing unregulated subsidiaries.
Section V.1(iv) of the Con Edison Settlement Agreement states that
"subsidiaries other than Con Edison are referred to collectively as `the
unregulated subsidiaries' or `unregulated affiliates.'" CEI will now have more
than one regulated subsidiary, and this provision will therefore be conformed to
reflect the fact that the terms "subsidiary" and "affiliate" will include both
regulated and unregulated subsidiaries and affiliates. Any provision intended
to apply only to either regulated or unregulated subsidiaries and affiliates
----
will be amended, where necessary, to make such limitation clear.
2
Affiliate Relations - In General
- --------------------------------
Section V.4(i) - Separate Building This provision provides that "[n]o
----------------------------------
unregulated affiliate may be located in the same building as Con Edison beyond
180 days after its formation. Con Edison and CEI may occupy the same building."
This provision will be conformed to make it clear that Con Edison and Orange and
Rockland may be located in the same building, subject to the provisions of the
merger agreement.
Transfer of Assets
- ------------------
Section V.5(i)- Transfers Between Regulated Affiliates This provision will
------------------------------------------------------
be amended to recognize that transfers of assets between the Con Edison and
Orange and Rockland will not require the Commission's approval under Section 70
of the Public Service Law.
Section V.5(ii) - Transfers Between Regulated Affiliates This provision
--------------------------------------------------------
will be amended to permit transfers of assets between regulated affiliates at
net book value.
Personnel
- ---------
Section V.6(i) - Separate Operating Employees This provision will be
---------------------------------------------
amended to expressly permit Con Edison and Orange and Rockland to share
operating employees. Accounting will be in accordance with the amended
accounting procedures (Joint Petition, Appendix G).
Section V.6(iii) - Officers This provision provides that "[o]fficers of
---------------------------
CEI may be officers of Con Edison." This provision will be amended by adding
the words "and Orange and Rockland, Rockland Electric Company and Pike County
Light & Power Company" to the quoted language.
Sections V.6(iv) and (v) - Employee Transfers These provisions will be
---------------------------------------------
amended to expressly permit the transfer of employees between Con Edison and
Orange and Rockland and to recognize that the service limitation and
compensation applicable to transfers with unregulated affiliates will not be
applicable to the utility transfers.
Sections V.6(viii) - Common Benefit Plans This provision permits employees
-----------------------------------------
of CEI, Con Edison and CEI's unregulated subsidiaries to participate in common
pension and benefit plans. This provision will be amended to also permit
employees of Orange and Rockland and other regulated affiliates to participate
in such plans.
3
Provision of Services and Goods
- -------------------------------
Section V.7(i) - Corporate Services This provision will be amended to
-----------------------------------
permit Con Edison to provide corporate services to Orange and Rockland. Such
services will be provided by Con Edison in accordance with the amended
accounting procedures (Joint Petition, Appendix G).
Section V.7(ii) - Other Services This provision will be amended to permit
--------------------------------
Con Edison to provide services other than corporate services to Orange and
Rockland and to provide such services at fully-loaded cost, except as otherwise
required under PSL sec. 110. Such services will be provided in accordance with
the amended accounting procedures (Joint Petition, Appendix G).
Section V.7(iii) - Services Purchased From Affiliates This section will be
-----------------------------------------------------
amended to recognize that CEI and Con Edison may purchase services from
regulated affiliates, including Orange and Rockland. Such services will be
provided in accordance with the amended accounting procedures (Joint Petition,
Appendix G).
Section V.7(iv) - Common Insurance This provision will be amended to
----------------------------------
permit CEI and all of its subsidiaries to be covered by common property/casualty
and other business insurance policies.
Orange and Rockland Restructuring Plan
--------------------------------------
The affiliate rules applicable to Orange and Rockland are included in
Article IV and Appendices H and I of the Orange and Rockland Restructuring Plan.
Corporate Structure
- -------------------
Section IV.A - Holding Company This section will be amended to conform to
------------------------------
the merger agreement, pursuant to which Orange and Rockland will not form a
registered holding company but instead will become a subsidiary of CEI.
This section will also be amended to recognize that to effectuate the
mechanics of the merger, Orange and Rockland will transfer ownership of its
common equity to CEI.
Appendix H - Standards of Competitive Conduct - A statement will be added to
- ---------------------------------------------
this appendix to make clear that the use of the term "Holding Company" refers to
CEI rather than to the registered holding company that Orange and Rockland had
intended to form.
4
Appendix I - Transfer of Assets
- -------------------------------
Sections 2(a) and (b) - Transfer of Assets These sections will be
------------------------------------------
conformed to the changes indicated for Sections V.5(i) and (ii) of the Con
Edison agreement, described, supra.
-----
Appendix I - Personnel
- ----------------------
Sections 3(a),(c) and (d) - Separate Operating Employees and Employee
---------------------------------------------------------------------
Transfers These sections will be conformed to the changes indicated for
- ---------
Sections V.6(i), 6(iv) and 6(v) of the Con Edison agreement, described, supra.
-----
Sections 3(f) - Compensation This provision, which permits the stock of
----------------------------
the Holding company to be used as an element of compensation of common officers
of the Holding company and the Delivery company, will be conformed to substitute
CEI for the Holding company.
Sections 3(g) - Common Benefit Plans This provision permits employees of
------------------------------------
the registered holding company that Orange and Rockland had intended to form,
Orange and Rockland and its unregulated subsidiaries to participate in common
pension and benefit plans. This provision will be amended to eliminate the
reference to the to-be-formed holding company and also permit employees of
Orange and Rockland and its affiliates to participate in common pension and
benefit plans with CEI and its other subsidiaries consistent with the change
indicated for Section V.6(viii) of the Con Edison agreement, described, supra.
-----
Appendix I - Provision of Services and Goods
--------------------------------------------
Section 4(a) - Corporate Services This provision was written with the
---------------------------------
expectation that Orange and Rockland would form a registered holding company
with a service company that would provide services to a "Delivery Company"
(i.e., Orange and Rockland) and unregulated subsidiaries. This provision will
be conformed to reflect the merger.
Section 4(b) - Other Services This provision will be amended to recognize
-----------------------------
that Orange and Rockland may provide non-corporate services to Con Edison and to
provide such services at fully-loaded cost, except as otherwise required under
PSL sec. 110. Such
5
services will be provided in accordance with the amended accounting procedures
(Joint Petition, Appendix G).
Section 4(d) - Common Insurance This provision would be conformed to
-------------------------------
permit CEI and all of its subsidiaries to be covered by common property/casualty
and other business insurance policies consistent with the change indicated for
Section V.7(iv) of the Con Edison agreement described, supra.
-----
* * * *
Development of a single set of procedures is indicated, and the Petitioners
are willing to discuss such a step if other parties also believe such a step to
be feasible.
APPENDIX G
CONFORMING MODIFICATIONS TO
AFFILIATE TRANSACTIONS ACCOUNTING PROCEDURES OF
CON EDISON SETTLEMENT AGREEMENT AND
ORANGE AND ROCKLAND RESTRUCTURING PLAN
Except as otherwise discussed herein, the accounting appendices to the Con
Edison Settlement Agreement (Appendix I) and the Orange and Rockland
Restructuring Plan (Appendix J) would continue unchanged./1/ The changes set
forth below are conforming in nature and do not change the substance of the
settlement agreements.
Modifications to Appendix I To Con Edison Settlement Agreement
--------------------------------------------------------------
Section 3.1 - Background This provision will be amended to (1) recognize
------------------------
Orange and Rockland and its subsidiaries as direct and indirect subsidiaries of
CEI and as affiliates of Con Edison and CEI's other unregulated subsidiaries and
(2) make this accounting procedure also applicable to Orange and Rockland.
Section 3.2(a) - Transfer of Assets This section will be amended to
-----------------------------------
conform to the change to Section V.5(i) of the settlement, which establishes
that transfers of assets between regulated affiliates will be made at net book
cost.
Section 3.3(a) - Provision of Goods and Services This section will be
------------------------------------------------
amended to conform to the changes to Sections V.7(i) and (ii) of the settlement,
which permit Con Edison to provide corporate and other services to Orange and
Rockland. This section will also recognize that the provision of electric
energy or gas to Orange and Rockland shall be governed by PSL sec. 110, subject
to any applicable FERC requirements, and that Con Edison will charge Orange and
Rockland the same rates for Con Edison's tariff services as Con Edison charges
all similarly-situated customers.
Section 3.3(d) - Provision of Goods and Services This section will be
------------------------------------------------
amended to conform to the change to Section V.7(iii), which recognizes that Con
Edison may purchase goods and services from Orange and Rockland and that the
pricing of such services shall be in accordance with the accounting guidelines
set forth in the Orange and Rockland Restructuring Plan.
__________________
/1/ The cost allocation guidelines in Appendix J to the Plan were in draft form.
Orange and Rockland committed to "file with the Director of the Office of
Accounting and Finance of the Department of Public Service all amendments and
supplements to the guidelines, thirty days prior to making such change(s)" and
the Plan provided that such changes would be considered in either the unbundling
phase of the proceeding or as part of the application to form a holding company
(Appendix I, section 1(b)). In light of the proposed merger, Orange and
Rockland proposes that these changes be considered as part of the Joint Petition
and will submit a copy of this Appendix G to the Director in satisfaction of the
aforementioned filing requirement.
2
Section 3.4(a)(1) - Direct Cost Allocations This section will be amended
-------------------------------------------
to conform to the change to Section V.7(ii), which provides that other (non-
corporate) services provided by Con Edison to Orange and Rockland will be
provided on a fully-loaded cost basis.
Sections 3.4(c)(2) and (3) - Proportional and Other Allocations These
---------------------------------------------------------------
sections will be amended to conform to the changes to Sections V.6(viii) and
7(iv), which permit (1) Orange and Rockland employees to participate in common
pension and benefit plans and (2) CEI and all affiliates to be covered by common
property/casualty and other business insurance policies, respectively.
Modifications to Appendix J to Orange and Rockland Restructuring Plan
---------------------------------------------------------------------
Section 3.1 - Background This provision will be amended to (1) recognize
------------------------
Orange and Rockland and its subsidiaries as direct and indirect subsidiaries of
CEI and as affiliates of Con Edison and CEI's other unregulated subsidiaries and
(2) make this accounting procedure also applicable to Con Edison.
Section 3.2 - Transfers of Assets and Employees A section will be added to
-----------------------------------------------
Appendix J to provide accounting guidelines for transfers of assets and
employees, consistent with the rules set forth in sections 2 and 3 of Appendix
I.
Section 3.3(c) - Provision of Goods and Services This section will be
------------------------------------------------
amended to conform to the changes to Sections V.7(i) and (ii) of the Con Edison
Settlement Agreement, which permits Con Edison to provide corporate and other
services to Orange and Rockland at fully-loaded cost, recognizing that Con
Edison's provision of electric energy or gas to Orange and Rockland shall be
governed by PSL sec. 110, subject to any applicable FERC requirements, and that
Orange and Rockland will pay the same rates for Con Edison's tariff services as
all similarly-situated customers.
Sections 3.4(c)(2)/2/ and Exhibit A, Section (4) - Cost Causative
-----------------------------------------------------------------
Allocations - These sections will be amended to clarify the bases for allocating
- -----------
costs by deleting, for example, references to consolidated assets.
Sections 3.4(c)(2)/3/ and (3) - Proportional and Other Allocations
-------------------------------------------------------------------
These sections will be amended to conform to the changes to Sections 3(g) and
4(d) of the Orange and Rockland Restructuring Plan, which permit (1) employees
of CEI, Con Edison, Orange and Rockland and their affiliates to participate in
common pension and benefit plans and (2) CEI and all affiliates to be covered by
common property/casualty and other business insurance policies, respectively.
_____________________
/2/ Note: there are two provisions numbered "(c)2." The proposed change
relates to the second one.
/3/ Note: there are two provisions numbered "(c)2." This proposed change
relates to the second one.
3
* * * *
Development of a single set of procedures is indicated, and the Petitioners
are willing to discuss such a step if other parties also believe such a step to
be feasible.
APPENDIX H
QUANTIFICATION AND ALLOCATION OF SYNERGY SAVINGS
(THOUSANDS OF DOLLARS)
RY 3-00* RY 3-01 RY 3-02 RY 3-03 RY 3-04 RY 3-05 RY 3-06 RY 3-07 RY 3-08 RY 3-09
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE $19,991 $39,315 $45,195 $47,141 $49,163 $51,226 $53,357 $55,569 $57,865 $60,249
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE (5,928) (7,905) (7,905) (7,905) (7,905) (1,976) - - - -
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 14,063 31,410 37,290 39,237 41,258 49,250 53,357 55,569 57,865 60,249
DISPOSITION OF SAVINGS
O&R CUSTOMER BENEFIT*** 922 922 3,049 3,496 3,965 5,579 6,449 6,964 7,502 8,067
CON ED CUSTOMER BENEFIT*** 7,409 13,484 15,597 16,122 16,664 19,046 20,229 20,821 21,430 22,058
TOTAL CUSTOMER BENEFIT 8,331 14,406 18,645 19,618 20,629 24,625 26,678 27,784 28,933 30,125
CEI SHAREHOLDER BENEFIT 5,732 17,004 18,645 19,618 20,629 24,625 26,678 27,784 28,933 30,125
TOTAL DISPOSITION $14,063 $31,410 $37,290 $39,237 $41,258 $49,250 $53,357 $55,569 $57,865 $60,249
Total
-----
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE $479,072
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE (39,523)
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 439,549**
DISPOSITION OF SAVINGS
O&R CUSTOMER BENEFIT*** 46,914 21%
CON ED CUSTOMER BENEFIT*** 172,860 79%
TOTAL CUSTOMER BENEFIT 219,774 100%
CEI SHAREHOLDER BENEFIT 219,774
TOTAL DISPOSITION $439,549
* Synergies begin July 1, 1999 and RY 3-00 includes 9 months of savings.
** Total savings of $467,576 inclusive of Orange and Rockland's out-of-state
utility operations.
*** Total customer savings, inclusive of gross receipts taxes, amount to
$50,445 for Orange and Rockland customers and $185,871 for Con Edison
customers.
APPENDIX I
Benefit Disposition and Methodology
-----------------------------------
I. Framework:
---------
i) Amortize actual costs to achieve and transaction costs over five-year
period ending June 2004.
ii) Allocate to customers one-half estimated synergies, net of transaction
costs and costs to achieve, through March 31, 2002. Disposition thereof is
per this appendix.
iii) For post March 2002 period, apply merger savings retention procedure
(below, sec. IV) as part of next general rate case for each service
indicated.
II. Application to Orange and Rockland
----------------------------------
Electric Operations
-------------------
The following amounts will be accrued for electric ratepayer benefit
on the books of Orange and Rockland and used to offset other deferred debits
accrued under the Orange and Rockland Restructuring Plan:
12 months ending March 31, 2000: - $ 694,000
12 months ending March 31, 2001: - $ 694,000
12 months ending March 31, 2002: - $2,296,000
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $1,716,000
12 months ending March 31, 2001: - $2,288,000
12 months ending March 31, 2002: - $2,288,000
2
Gas Operations
--------------
The estimated share of benefits that will be applied to Orange and
Rockland gas customers is:
12 months ending March 31, 2000: - $227,000
12 months ending March 31, 2001: - $227,000
12 months ending March 31, 2002: - $752,000
In the absence of a settlement agreement in effect, specific
prospective application of such estimated savings benefit would be addressed in
Orange and Rockland's next gas rate case.
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $562,000
12 months ending March 31, 2001 - $750,000
12 months ending March 31, 2002: - $750,000
Post March 31, 2002:
-------------------
Subject to the merger savings retention prescribed below (sec. IV),
Orange and Rockland's electric and gas customers will realize merger savings
under the revenue requirement set forth in Orange and Rockland's next general
rate cases.
III. Application to Con Edison
-------------------------
Electric Operations
-------------------
The following amounts will be accrued for ratepayer benefit on the
books of Con Edison and used to benefit electric customers under the Con Edison
Settlement Agreement:
12 months ending March 31, 2000: - $ 6,001,000
12 months ending March 31, 2001: - $10,922,000
12 months ending March 31, 2002: - $12,633,000
3
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $ 2,956,000
12 months ending March 31, 2001: - $ 3,942,000
12 months ending March 31, 2002: - $ 3,942,000
Gas Operations
--------------
The estimated share of benefits applicable to Con Edison gas customers
is:
12 months ending March 31, 2000: - $ 1,111,000
12 months ending March 31, 2001: - $ 2,023,000
12 months ending March 31, 2002: - $ 2,339,000
These amounts will be credited to gas customers through the gas
adjustment in the period indicated.
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $547,000
12 months ending March 31, 2001: - $730,000
12 months ending March 31, 2002: - $730,000
Steam Operations
----------------
The following amounts will be accrued for steam ratepayers benefit on
the books of Con Edison and used to benefit customers:
12 months ending March 31, 2000: - $296,000
12 months ending March 31, 2001: - $539,000
12 months ending March 31, 2002: - $624,000
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $146,000
12 months ending March 31, 2001: - $195,000
12 months ending March 31, 2002: - $195,000
4
Post March 31, 2002:
-------------------
Subject to the merger savings retention prescribed below (sec. IV),
Con Edison electric, gas and steam customers will realize merger savings under
the revenue requirement set forth in Con Edison's next general rate case for
each service.
IV. Merger Savings Retention Procedure
----------------------------------
The 50% shareholder retention in RY 3-03 through RY 3-09 will be based
on actual achieved synergy savings. The respective utilities' cost of service
will reflect the full realized synergy savings, offset by an entry to reflect
the one-half sharing with the shareholder calculated in the manner herein set
forth. The calculation compares the actual (reduced by synergy savings) cost
of the affected areas to a target (i.e, projection of costs in the absence of
---
Merger), crediting 50% of the difference to the shareholder up to a maximum
annual amount. The target will be the actual 1998 costs of the affected areas
shown on the attached, escalated by the CPI and reduced for non-synergy
productivity of 2% annually. The shareholder benefit will be contingent on
actual costs being below targeted levels, ensuring customer benefit. The
maximum annual shareholder benefit will be 150% of the estimated savings for
customers set forth in Appendix H. Under the methodology, the investor share
can exceed estimated investor benefit only when customers' benefits are also
in excess of the estimate.
The calculation of shareholder benefit will be done on a total company
basis and allocated proportionately among services. Disposition of savings
after RY 3-09 will be determined at that time.
CENTRAL FUNCTIONS AFFECTED BY SYNERGIES
Accounting (including public accounts)
Tax
Treasurer/Shareholders Services
Rate Engineering/Compliance
Auditing
Business Development
Office of CEO
Public Affairs
Employee Relations
Environmental, Health & Safety
Purchasing
Information Resources
R&D (including EPRI & GRI dues)
Legal
Corporate and Fiscal Expenses
Associations & Dues
Note: The target for the cost centers shown above for either company will be
the actual costs recorded for the year 1998, adjusted to reflect
generation divestiture and normalized for major organizational changes
or extraordinary expenses or credits that may occur. The resulting
target will be increased by the annual CPI and reduced by non-synergy
productivity of 2% annually.
APPENDIX A
CONSOLIDATED EDISON, INC.
CERTIFICATE
-----------
I, ARCHIE M. BANKSTON, Secretary of CONSOLIDATED EDISON, INC. (the
"Company"), do hereby certify that:
(a) The Restate Certificate of Incorporation was filed by the New York
Department of State on December 8, 1997, and there have been no amendments to
the Certificate of Incorporation.
(b) Attached hereto as Exhibit A is a true and correct copy of the
Restated Certificate of Incorporation.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the
Company this 15th day of June, 1998.
/s/ Archie M. Bankston
--------------------------
Archie M. Bankston
Secretary
SEAL
[CONFORMED COPY]
================================================================================
________________________________________________________________________________
RESTATED CERTIFICATE OF INCORPORATION
OF
CONSOLIDATED EDISON, INC.
UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW
_____________
STATE OF NEW YORK
DEPARTMENT OF STATE
FILED DEC. 8, 1997
Filing Fee - $60
Tax - $28,000
________________________________________________________________________________
================================================================================
PETER A. IRWIN, ESQ.
4 IRVING PLACE
NEW YORK, NEW YORK 10003
RESTATED CERTIFICATE OF INCORPORATION
OF
CONSOLIDATED EDISON, INC.
under
Section 807 of the Business Corporation Law
The undersigned, being the Senior Vice President and Chief Financial Officer and
the Senior Vice President, General Counsel and Secretary of Consolidated Edison,
Inc., a New York corporation, DO HEREBY CERTIFY as follows:
1. The name of the corporation is Consolidated Edison, Inc.
2. The certificate of incorporation of the corporation was filed by the
Department of State of the State of New York on September 3, 1997.
3. This restated certificate of incorporation was authorized by the board of
directors of the corporation by unanimous written consent, dated December
5, 1997, followed by the unanimous written consent of the shareholder of
the corporation, dated December 5, 1997.
4. The certificate of incorporation of the corporation is hereby amended, as
authorized by the Business Corporation Law of the State of New York, to (i)
increase the authorized number of Common Shares from 100 to 500,000,000;
(ii) authorize the issuance of 6,000,000 Preferred Shares of the par value
of $1.00 per share; and (iii) provide for the limitation of liability and
indemnification of directors or officers, a maximum number of directors,
removal of directors, only for cause, amendment of the by-laws by the board
of directors, shareholders not to have any preemptive rights and the
required approval for certain transactions. The text of the certificate of
incorporation of the corporation is hereby restated as so amended to read
as follows:
FIRST. The name of the corporation is Consolidated Edison, Inc. (the
"Company").
SECOND. The purpose for which the Company is formed is to engage in any
lawful act or activity for which corporations may be organized under the
Business Corporation Law of the State of New York; provided, however, that
the Company is not formed to engage in any act or activity requiring the
consent or approval of any state official, department, board, agency, or
other body without such consent or approval first being obtained.
THIRD. The office of the Company in the State of New York is to be located
in the County of New York, State of New York.
FOURTH. Authorized Shares.
1. The aggregate number of shares which the Company shall have authority
to issue is 506,000,000 of which 6,000,000 shares of the par value of $1.00 per
share shall be designated "Preferred Shares" and 500,000,000 shares of the par
value of $.10 per share shall be designated "Common Shares".
2. Authority is hereby expressly granted to the Board of Directors of
this Company from time to time to issue the Preferred Shares as Preferred Shares
of any series and, in connection with the creation of each such series, to fix
by resolution or resolutions providing for the issuance thereof the number of
shares of such series, and the designations, relative rights, preferences, and
limitations of such series, including provisions for sharing dividends and other
distributions of assets with other series of Preferred Shares in the event that
dividends and amounts payable on liquidation are not paid in full, to the full
extent now or hereafter permitted by the law of the State of New York, except
that that holders of Preferred Shares shall not be entitled to more than one
vote for each share of Preferred Shares held. The Preferred Shares shall have no
voting rights except as fixed by the Board of Directors pursuant to this
paragraph and as otherwise required by applicable law.
FIFTH. THE Secretary of State of the State of New York is hereby designated
as the agent of the Company upon whom process against it may be served, and the
post office address to which the Secretary of State shall mail a copy of any
process against the Company which may be served upon him or her is: Consolidated
Edison, Inc., 4 Irving Place, New York, New York 10003; Attention: Corporate
Secretary.
SIXTH. Except to the extent limitation of liability or indemnification is
not permitted by applicable law: (i) a Director or officer of the Company shall
not be liable to the Company or any of its shareholders for damages for any
breach of duty in such capacity, and (ii) the company shall fully indemnify any
person made, or threatened to be made, a party to an action or proceeding,
whether civil or criminal, including an investigative, administrative or
legislative proceeding, and including an action by or in the right of the
company or any other corporation of any type or kind, domestic or foreign, or
any partnership, limited liability company, joint venture, trust, employee
benefit plan or other enterprise ("Other Enterprise"), by reason of the fact
that the person, or the testator or intestate of the person, is or was a
Director or officer of the Company, or is or was serving at the request of the
Company any Other Enterprise as a director, officer or in any other capacity,
against any and all damages incurred as a result of or in connection with such
action or proceeding or any appeal thereof, and, except in the case of an action
or proceeding specifically approved by the Board of Directors of the Company,
the Company shall pay expenses incurred by or on behalf of such person in
defending such action or proceeding or any appeal thereof in advance of the
final disposition
2
thereof promptly upon receipt by the Company, from time to time, of a written
demand of the person for the advancement, together with an undertaking by or on
behalf of the person to repay any expenses so advanced to the extent that the
person is ultimately found not to be entitled to indemnification for the
expenses. For purposes of this Article Sixth, "damages" shall mean judgments,
fines, amounts paid in settlement, penalties, punitive damages, excise or other
taxes assessed with respect to an employee benefit plan and reasonable expenses,
including attorneys' fees and disbursements actually and necessarily incurred.
This Article Sixth shall be deemed to constitute contractual obligations of the
Company, subject to any amendment of this Certificate of Incorporation, and
shall not limit or exclude, but shall be in addition to, any other rights which
may be granted by or pursuant to any statute, certificate of incorporation,
by-law, resolution or agreement. Any repeal or modification of this Article
Sixth shall not adversely affect any limitation of liability or right,
Indemnity, immunity or protection of a Director or officer of the Company or
other person existing hereunder with respect to any act or omission occurring
prior to the repeal or modification. The Company may, if authorized by the Board
of Directors, enter modification. The Company may, if authorized by the Board of
Directors, enter into an agreement with any person who is, or is about to
become, a Director or officer of the Company, or who is serving, or is about to
serve, at the request of the Company, any Other Enterprise as a director,
officer or in any other capacity, which agreement may provide for
indemnification of the person and advancement of defense expenses to the person
upon such terms, and to the extent, as may be permitted by law. It is the intent
of this Article Sixth to require the Company to indemnify the persons referred
to herein for the aforementioned damages, in each and every circumstance in
which such indemnification could lawfully be permitted by an express provision
of this Certificate of Incorporation, and the indemnification required by this
Article Sixth shall not be limited by the absence of an express recital of the
circumstances.
SEVENTH. The number of Directors of the Company shall be not more than 16, the
exact number of the Directors to be determined from time to time solely by the
affirmative vote of a majority of the total number of Directors the Company
would have if there were no vacancies in the Board of Directors. A Director may
be removed from office only for cause, except that any Director elected by a
series of Preferred Shares may be removed upon such terms as may be fixed by the
Board of Directors in connection with the creation of the series of Preferred
Shares pursuant to Article Fourth hereof.
EIGHTH. The By-laws of the Company may be adopted, amended or repealed by the
affirmative vote of a majority of the Directors then in office.
NINTH. No holder of shares or the Company of any class shall have any preemptive
right to purchase or subscribe for any part of the shares of the Company or of
any shares of the Company to be issued by reason of any increase of the
authorized shares of the Company, or to purchase or subscribe for any bonds,
certificates of indebtedness, debentures or other securities convertible into or
carrying rights, options or warrants to purchase shares of the
3
Company or to purchase or subscribe for any shares of the Company purchased
by or on behalf of the Company, or to have any preemptive rights as now or
hereafter defined by applicable law.
TENTH. Except as otherwise required by applicable law, the approval of the
Board of Directors followed by the affirmative vote of a majority of all
outstanding shares of the Company entitled to vote thereon shall be
required for (i) a merger or consolidation to which the Company is a party,
other than a merger between the Company and a subsidiary of the Company for
which authorization by the shareholders of the Company is not required by
applicable law; (ii) the sale, lease, exchange or other disposition of all
or substantially all the assets of the Company; or (iii) a binding share
exchange to which the Company is a party.
IN WITNESS WHEREOF, we have made, signed, and subscribed this restated
certificate of incorporation this 5/th/ day of December 1997 and affirm that the
statements contained herein are true under the penalties of perjury.
/s/ Joan S. Freilich
-------------------------------
Joan S. Freilich
Senior Vice President and
Chief Financial Officer
/s/ Peter J. O'Shea Jr.
-------------------------------
Peter J. O'Shea, Jr.
Senior Vice President,
General Counsel and Secretary
4
APPENDIX B
C Acquisition Corp.
CERTIFICATE
-----------
I, PETER A. IRWIN, Secretary of C ACQUISITION CORP. (the "Company"),
do hereby certify that:
(a) The Certificate of Incorporation was filed by the New York Department
of State on February 25, 1998, and there have been no amendments to the
Certificate of Incorporation.
(b) Attached hereto as Exhibit A is a true and correct copy of the
Certificate of Incorporation.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the
Company this 15th day of June, 1998.
/s/ Peter A. Irwin
-----------------------
Peter A. Irwin
Secretary
SEAL
CERTIFICATE OF INCORPORATION
OF
C ACQUISITION CORP.
under
Section 402 of the Business Corporation Law
I, Paul H. Zumbro, being a natural person over the age of 18 years,
for the purpose of forming a corporation pursuant to Section 402 of the Business
Corporation Law of the State of New York (the "Business Corporation Law of the
State of New York (the "Business Corporation Law"), do hereby certify as
follows:
ARTICLE FIRST
The name of the corporation (the "Corporation") is C Acquisition Corp.
ARTICLE SECOND
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Business Corporation
Law; provided, however, that the Corporation is not formed to engage in any act
-------- -------
or activity requiring the consent or approval of any state official, department,
board, agency or other body without such consent or approval first being
obtained.
ARTICLE THIRD
The office of the Corporation in the State of New York is to be
located in the County of New York, State of New York.
ARTICLE FOURTH
The aggregate number of shares which the Corporation shall have
authority to issue shall be 1,000 shares of Common Stock, par value $.01 per
share.
2
ARTICLE FIFTH
The Secretary of State of the State of New York is designated as agent
of the Corporation upon whom process against the Corporation may be served. The
post office address to which the Secretary of State shall mail a copy of any
process against the Corporation served upon him is: CT Corporation System, 1633
Broadway, New York, New York 10019.
ARTICLE SIXTH
The Corporation's registered agent shall be CT Corporation System (the
"Registered Agent"). The Registered Agent's address is: 1633 Broadway, New York,
New York 10019. The Registered Agent is the agent of the Corporation upon whom
process against it may be served.
ARTICLE SEVENTH
Pursuant to Section 402(b) of the Business Corporation law, the
personal liability of the Corporation's directors to the Corporation or its
shareholders for damages for any breach of duty in such capacity shall be
eliminated to the fullest extent permitted by the Business Corporation Law, as
such exists on the date hereof or as such may hereafter be amended. No amendment
to or repeal of this ARTICLE SEVENTH shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
IN WITNESS WHEREOF, I have executed this Certificate of Incorporation
this 25th day of February, 1998.
/s/ Paul H. Zumbro
------------------------------
Paul H. Zumbro
Sole Incorporator
Mailing Address:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
3
ACKNOWLEDGMENT
STATE OF NEW YORK, )
) ss.:
COUNTY OF NEW YORK, )
On this 25th day of February, 1998, personally came before me Paul H.
Zumbro, a person known to me to be the person who executed the foregoing
Certificate of Incorporation, and he acknowledged that he signed said
Certificate of Incorporation and acknowledged the same as his free act and deed.
Given under my hand and seal the day and year first above written.
/s/ Louise Mello
-----------------------------------
Notary Public
[NOTARY STAMP APPEARS HERE]
APPENDIX C
APPENDIX D
PAGE 1
SCHEDULE A
----------
STATEMENT OF FINANCIAL CONDITION
--------------------------------
AS OF DECEMBER 31, 1997
-----------------------
(a)
CONSOLIDATED BALANCE SHEET CONSOLIDATED EDISON, INC.
ASSETS
At December 31 (thousands of Dollars) 1997 1996
--------------------------------------------------------------------------------------------------------------------------
Utility plant, at original cost (Note A)
Electric $ 11,743,745 $ 11,588,344
Gas 1,741,562 1,642,231
Steam 576,206 536,672
General 1,203,427 1,152,001
--------------------------------------------------------------------------------------------------------------------------
Total 15,264,940 14,919,248
Less: Accumulated depreciation 4,392,377 4,285,732
--------------------------------------------------------------------------------------------------------------------------
Net 10,872,563 10,633,516
Construction work in progress 292,218 332,333
Nuclear fuel assemblies and components, less accumulated amortization 102,321 101,461
--------------------------------------------------------------------------------------------------------------------------
Net utility plant 11,267,102 11,067,310
--------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and temporary cash investments (Note A) 183,458 106,882
Funds held for refunding of debt 328,874 -
Accounts receivable - customer, less allowance for uncollectible accounts of $21,600
in 1997 and 1996 581,163 544,004
Other receivables 60,759 42,056
Regulatory accounts receivable (Note A) (1,682) 45,397
Fuel, at average cost 53,697 64,709
Gas in storage, at average cost 37,209 44,979
Materials and supplies, at average cost 191,759 204,801
Prepayments 75,516 64,492
Other current assets 16,457 15,167
--------------------------------------------------------------------------------------------------------------------------
Total current assets 1,527,210 1,132,487
--------------------------------------------------------------------------------------------------------------------------
Investments and nonutility property (note A) 292,397 177,224
--------------------------------------------------------------------------------------------------------------------------
Deferred charges (Note A)
Enlightened Energy program costs 117,807 133,718
Unamortized debt expense 126,085 130,786
Recoverable fuel costs (Note A) 98,301 101,462
Power contract termination costs 80,978 58,835
Other deferred charges 239,559 271,081
--------------------------------------------------------------------------------------------------------------------------
Total deferred charges 662,730 695,882
--------------------------------------------------------------------------------------------------------------------------
Regulatory asset - future federal income taxes (Notes A and I) 973,079 984,282
--------------------------------------------------------------------------------------------------------------------------
Total $ 14,722,518 $ 14,057,185
--------------------------------------------------------------------------------------------------------------------------
PAGE 2
CAPITALIZATION AND LIABILITIES
At December 31 (Thousands of Dollars) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Capitalization (see Consolidated Statement of Capitalization)
Common shareholders' equity $ 5,930,079 $ 5,727,568
Preferred stock subject to mandatory redemption (Note B) 84,550 84,550
Other preferred stock (Note B) 233,468 238,098
Long-term debt 4,188,906 4,238,622
- ------------------------------------------------------------------------------------------------------------------------------------
Total capitalization 10,437,003 10,288,838
- ------------------------------------------------------------------------------------------------------------------------------------
Noncurrent liabilities
Obligations under capital leases 39,879 42,661
Other noncurrent liabilities 106,137 80,499
- ------------------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 146,016 123,160
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Long-term debt due within one year (Note B) 529,385 106,256
Accounts payable 440,114 431,115
Customer deposits 161,731 159,616
Accrued taxes 65,736 27,342
Accrued interest 85,613 83,090
Accrued wages 82,556 80,225
Other current liabilities 183,122 147,968
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,548,257 1,035,612
- ------------------------------------------------------------------------------------------------------------------------------------
Provisions related to future federal income taxes and other deferred credits (Notes A and I)
Accumulated deferred federal income tax 2,307,835 2,289,092
Accumulated deferred investment tax credits 163,680 172,510
Other deferred credits 119,727 147,973
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred credits 2,591,242 2,609,575
- ------------------------------------------------------------------------------------------------------------------------------------
Contingencies (Note F)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 14,722,518 $ 14,057,185
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
PAGE 3
CONSOLIDATED INCOME STATEMENT CONSOLIDATED EDISON, INC.
Year Ended December 31 (Thousands of Dollars) 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------------
Operating revenues (Note A)
Electric $5,635,575 $5,541,117 $5,389,408
Gas 1,093,880 1,015,070 813,356
Steam 391,799 403,549 334,133
-------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 7,121,254 6,959,736 6,536,897
-------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Purchased power 1,349,421 1,272,854 1,107,223
Fuel 596,824 573,275 504,104
Gas purchased for resale 479,218 418,271 259,789
Other operations 1,108,845 1,163,159 1,139,732
Maintenance 474,788 450,815 512,102
Depreciation and amortization (Note A) 502,779 496,412 455,776
Taxes, other than federal income tax 1,181,081 1,166,199 1,120,232
Federal income tax (Notes A and I) 382,910 397,160 396,560
-------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 6,075,866 5,946,145 5,495,518
-------------------------------------------------------------------------------------------------------------------------------
Operating income 1,045,388 1,013,591 1,041,379
-------------------------------------------------------------------------------------------------------------------------------
Other income (deductions)
Investment income (Note A) 11,554 8,327 16,966
Allowance for equity funds used during construction (Note A) 4,448 3,468 3,763
Other income less miscellaneous deductions (18,696) (8,749) (8,149)
Federal income tax (Notes A and I) 3,190 970 (1,060)
-------------------------------------------------------------------------------------------------------------------------------
Total other income 496 4,016 11,520
-------------------------------------------------------------------------------------------------------------------------------
Income before interest charges 1,045,884 1,017,607 1,052,899
-------------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 318,158 307,820 301,917
Other interest 17,083 17,331 28,954
Allowance for borrowed funds used during construction (Note A) (2,180) (1,629) (1,822)
-------------------------------------------------------------------------------------------------------------------------------
Net interest charges 333,061 323,522 329,049
-------------------------------------------------------------------------------------------------------------------------------
Net income 712,823 694,085 723,850
Preferred stock dividend requirements (18,344) (19,859) (35,565)
Gain on refunding of preferred stock (Note B) - 13,943 -
-------------------------------------------------------------------------------------------------------------------------------
Net income for common stock $ 694,479 $ 688,169 $ 688,285
-------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share $ 2.95 $ 2.93 $ 2.93
Average number of shares outstanding during each year (235,082,063; 234,976,697 and
234,930,301)
-------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
PAGE 4
CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED EDISON, INC.
Year Ended December 31 (thousands of Dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 712,823 $ 694,085 $ 723,850
Principal non-cash charges (credits) to income
Depreciation and amortization 502,779 496,412 455,776
Deferred recoverable fuel costs 3,161 (42,008) (61,937)
Federal income tax deferred 22,620 40,600 69,020
Common equity component of allowance for funds used during construction (4,321) (3,274) (3,546)
Other non-cash charges 17,268 9,602 14,382
Changes in assets and liabilities
Accounts receivable - customer, less allowance for uncollectibles (37,159) (46,789) (56,719)
Regulatory accounts receivable 47,079 (51,878) 32,827
Materials and supplies, including fuel and gas in storage 31,824 (26,505) 43,341
Prepayments, other receivables and other current assets (31,017) 5,117 4,566
Enlightened Energy program costs 15,911 10,564 25,919
Power contract termination costs 11,551 30,827 55,387
Accounts payable 8,999 10,263 46,383
Other - net (62,978) (19,679) (72,785)
- --------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 1,238,540 1,107,337 1,276,464
- --------------------------------------------------------------------------------------------------------------------------
Investing activities including construction
Construction expenditures (654,221) (675,233) (692,803)
Nuclear fuel expenditures (14,579) (48,705) (12,840)
Contributions to nuclear decommissioning trust (21,301) (21,301) (18,893)
Common equity component of allowance for funds used during construction 4,321 3,274 3,546
- --------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities including construction (685,780) (741,965) (720,990)
- --------------------------------------------------------------------------------------------------------------------------
Financing activities including dividends
Issuance of long-term debt 480,000 525,000 228,285
Retirement of long-term debt (106,256) (183,524) (10,889)
Advance refunding of preferred stock and long-term debt - (412,311) (155,699)
Issuance and refunding costs (8,930) (18,480) (5,269)
Funds held for refunding of debt (328,874) - -
Common stock dividends (493,711) (488,756) (479,262)
Preferred stock dividends (18,413) (22,711) (35,569)
- --------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities including dividends (476,184) (600,782) (458,403)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and temporary cash investments 76,576 (235,410) 97,071
- --------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at January 1 106,882 342,292 245,221
- --------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at December 31 $ 183,458 $ 106,882 $ 342,292
- --------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 310,310 $ 309,279 $ 309,953
Income taxes 335,631 346,755 344,754
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
PAGE 5
CONSOLIDATED STATEMENT OF RETAINED EARNINGS CONSOLIDATED EDISON, INC.
Year Ended December 31 (Thousands of Dollars) 1997 1996 1995
---------------------------------------------------------------------------------------------------
Balance, January 1 $ 4,283,935 $ 4,097,035 $3,888,010
Net income for the year 712,823 694,085 723,850
---------------------------------------------------------------------------------------------------
Total 4,996,758 4,791,120 4,611,860
---------------------------------------------------------------------------------------------------
Dividends declared on capital stock
Cumulative Preferred, at required annual rates 18,148 18,145 35,259
Cumulative Preference, 6% Convertible Series B 198 284 304
Common, $2.10, $2.08 and $2.04 per share 493,711 488,756 479,262
---------------------------------------------------------------------------------------------------
Total dividends declared 512,055 507,185 514,825
---------------------------------------------------------------------------------------------------
Balance, December 31 $ 4,484,703 $ 4,283,935 $4,097,035
---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
PAGE 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CORPORATE RESTRUCTURING
On January 1, 1998 Consolidated Edison Company of New York, Inc. (Con
Edison), the regulated utility, became a subsidiary of its new parent
holding company. Consolidated Edison, Inc. (CEI), when the outstanding
shares of common stock, $2.50 par value, of Con Edison were exchanged on a
share-for-share basis for shares of common stock, $.10 par value, of CEI.
Con Edison's debt securities and preferred stock remained securities of Con
Edison.
OPERATIONS
CEI, through its subsidiaries, provides a wide range of energy-related
products and services to its customers. The principal subsidiaries, by
addition to Con Edison, are Con Edison Solutions and Con Edison
Development. Con Edison supplies electric service in all of New York City
(except part of Queens) and most of Westchester County, a service area with
a population of more than eight million. It also supplies gas in Manhattan,
the Bronx and parts of Queens and Westchester, and steam in part of
Manhattan. Con Edison Solutions is a full-service energy company offering
wholesale and retail electricity and natural gas sales, as well as energy-
related products and services, primarily in the Northeast. Con Edison
Development invests in energy infrastructure projects and markets technical
services worldwide.
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of Con Edison and its wholly-owned
subsidiaries and, therefore, also represent the consolidated financial
statements of CEI and its wholly-owned subsidiaries. Intercompany
transactions have been eliminated.
PSC SETTLEMENT AGREEMENT The New York State Public Service Commission
(PSC). by order issued and effective May 20, 1996 in its Competitive
Opportunities proceeding, endorsed a fundamental restructuring of the
electric utility Industry In New York State, based on competition in the
generation and energy services sections of the industry. The PSC, by order
issued and effective September 23, 1997, approved a settlement agreement
between Con Edison, the PSC staff and certain other parties (the Settlement
Agreement).
The Settlement Agreement provides for a transition to a competitive
electric market through the development of a "retail access" plan, a rate
plan for the period ended March 31, 2002 (the Transition), a reasonable
opportunity for recovery of "???? costs" and the divestiture by Con Edison
to unaffiliated third parties of at least 50 percent of its New York City
fossil-fueled electric generating capacity.
The "retail access" plan will eventually permit all of Con Edison's
electric customers to buy electricity from other suppliers. The delivery of
electricity to customers will continue to be through Con Edison's
transmission and distribution systems. Con Edison's electric fossil-fueled
generating capacity not divested to third parties will be transferred by
December 31, 2002 to an unregulated subsidiary of CEI. Con Edison's
contracts with non-utility
PAGE 7
generators (NUGs), absent renegotiation of these contracts, will remain
contractual obligations of Con Edison, which could resell electricity provided
under the contracts in the competitive energy supply market. The Settlement
Agreement does not contemplate the divestiture or transfer of Con Edison's
Indian Point 2 nuclear generating unit. In August 1997 the PSC solicited
comments as to the future treatment of nuclear generating facilities in New
York.
Con Edison's potential electric "strandable costs" are those prior utility
investments and commitments that may not be recoverable in a competitive energy
supply market, including the unrecovered cost of Con Edison's electric
generating plants, the future cost of decommissioning the Indian Point nuclear
generating station and charges under contracts with NUGs. During the Transition
Con Edison will continue to recover its potential electric strandable costs in
the rates it charges all customers, including those customers purchasing
electricity from others. Following the Transition Con Edison will be given a
reasonable opportunity to recover, through a non-bypassable charge to customers,
remaining strandable costs, including a reasonable return on investments. For
remaining fossil-related strandable costs, the recovery period will be 10 years.
For the remaining nuclear-related strandable costs, the recovery period will be
the then-remaining life of Con Edison's Indian Point 2 nuclear unit (the
operating license for which extends to 2013). With respect to its NUG contracts,
Con Edison will be permitted to recover at least 90 percent of the amount, if
any, by which the actual costs of its purchases under the contracts exceed
market value after the Transition. Any potential NUG contract disallowance after
the Transition will be limited to the lower of (i) 10 percent of the above-
market costs or (ii) $300 million (net present value in 2002). The potential
disallowance will be offset by the amount of NUG contract mitigation achieved by
Con Edison after April 1, 1997 and 10 percent of the gross proceeds of
generating unit sales to third parties. Con Edison will be permitted a
reasonable opportunity to recover any costs subject to disallowance that are not
offset by these two factors if it makes good faith efforts in implementing
provisions of the Settlement Agreement leading to the development of a
competitive electric market in its service territory and the development of an
independent system operator (which is expected to administer the wholesale
electric market in New York State).
ACCOUNTING POLICIES The accounting policies of CEI and its subsidiaries conform
to generally accepted accounting principles. For regulated public utilities,
generally accepted accounting principles include Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation," and, in accordance with SFAS No. 71, the accounting requirements
and rate-making practices of the Federal Energy Regulatory Commission (FERC) and
the PSC.
In September 1997 Con Edison applied the standards in SFAS No. 101. "Regulated
Enterprises - Accounting for the Discontinuation of Application of the Financial
Accounting Standards Board (FASB) Statement No. 71," to the non-nuclear electric
supply portion of its business that is being deregulated as a result of the
Settlement Agreement (the Deregulated Business). The Deregulated Business
includes all of Con Edison's fossil electric generating assets, which had a net
book value of approximately $1.4 billion at December 31, 1997, including
approximately $196 million relating to Con Edison's share of the Bowline Point
and Roseton stations (which are located outside New York City and operated by
other utilities). The application of SFAS No. 101 to the Deregulated Business
had no material adverse effect on Con Edison's Financial position or results of
operations.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," requires certain assets to be reviewed for
impairment if the carrying amount of the assets may not be recoverable, requires
that assets to be disposed of be carried at the lower of net book value or fair
value, and amends SFAS No. 71 to require that regulatory assets be charged to
earnings if such assets are no longer considered probable of recovery. Con
Edison has not recognized an impairment of its fossil generating assets because
the estimated cash flows from the operation and/or sale of the assets, together
with the cash flows from the strandable cost recovery provisions of the
Settlement Agreement, will not be less than the net carrying amount of the
generating assets.
Certain deferred charges (regulatory assets) principally relating to future
federal income taxes and certain deferred credits (regulatory liabilities) have
resulted from transactions relating or allocated to the Deregulated Business. At
December 31, 1997 regulatory assets net of regulatory liabilities amounted to
approximately $1.4 billion, of which approximately $300 million is attributable
to the Deregulated Business. Con Edison has not written-off against earnings any
net regulatory assets because recovery of the assets is probable under the
Settlement Agreement.
SFAS No. 5, "Accounting for Contingencies," requires accrual of a loss if it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Con Edison has not accrued a loss for its contracts with
NUGs because it is not probable that the charges by NUGs under the contracts
will exceed the cash flows from the sale by Con Edison of the electricity
provided by the NUGs, together with the cash flows provided pursuant to the
Settlement Agreement.
UTILITY PLANT AND DEPRECIATION The capitalized cost of additions to utility
plant includes indirect costs such as engineering, supervision, payroll taxes,
pensions, other benefits and an allowance for funds used during construction
(ATDC). The original cost of property, together with removal cost, less salvage,
is charged to accumulated depreciation as property is retired.
PAGE 8
The cost of repairs and maintenance is charged to expense, and the cost of
betterments is capitalized.
Dates used for ATDC include the cost of borrowed funds and a reasonable rate on
Con Edison's own funds when so used, determined in accordance with PSC and FERC
regulations. The ATDC rate was 9.1 percent in 1997, 9.0 percent in 1996 and 9.1
percent in 1995. The rate was compounded semiannually, and the amounts
applicable to borrowed funds were treated as a reduction of interest charges.
The annual charge for depreciation is computed on the straight line method for
financial statement purposes using rates based on average lives and net salvage
factors, with the exception of the Indian Point 2 nuclear unit, Con Edison's
share of the Roseton generating station, certain leaseholds and certain general
equipment, which are depreciated on a remaining life amortization method.
Depreciation rates averaged approximately 3.4 percent in 1997 and 1998 and 3.3
percent in 1995. In 1996 an additional provision for depreciation of $13.9
million was accrued in connection with a preferred stock refunding. See Note B.
Con Edison is a joint owner of two 1,200 megawall (MW) electric generating
stations: (1) Bowline Point, operated by Orange and Rockland Utilities, Inc.,
with Con Edison owning a two-thirds interest, and (2) Roseton, operated by
Central Hudson Gas & Electric Corp., with Con Edison owning a 40 percent
interest. Central Hudson has the option to acquire Con Edison's interest in the
Roseton station in 2004. Con Edison's share of the investment in these stations
at original cost and as included in its balance sheet at December 31, 1997 and
1996 was:
(thousand of dollars) 1997 1996
- --------------------------------------------------------------------------
Bowline Point: Plant in service $206,128 $204,484
Construction work in progress 1,796 2,788
Roseton: Plant in service 146,066 146,623
Construction work in progress 652 846
- --------------------------------------------------------------------------
Con Edison's share of accumulated depreciation for the Roseton station at
December 31, 1997 and 1996 was $75.3 million and $70.3 million, respectively. A
seperate depreciation account is not maintained for Con Edison's share of the
Bowline Point station. Con Edison's share of operating expenses for these
stations is included in its income statement. Both Orange and Rockland and
Central Hudson have agreed to divest generation as part of their Competitive
Opportunities settlements with the PSC.
NUCLEAR DECOMMISSIONING. Depreciation charges include a provision for
decommissioning both the Indian Point 2 and the retired Indian Point 1 nuclear
units. Decommissioning costs are being accrued ratably over the Indian Point 2
license period, which extends to the year 2013. Con Edison has been accruing for
the costs of decommissioning within the internal accumulated depreciation
reserve since 1975. In 1989 the PSC permitted Con Edison to establish an
external trust fund for the costs of decommissioning the nuclear portions of the
plants, pursuant to Nuclear Regulatory Commission (NRC) regulations.
Accordingly, beginning in 1989, Con Edison has made contributions to such a
trust. The external trust fund is discussed below under "Investments" in this
Note A.
Accumulated decommissioning provisions at December 31, 1997 and 1996, which
include earnings on funds externally invested, were as follows:
Amounts included in
Accumulated Depreciation
- -------------------------------------------------------------------------------
(Millions of Dollars) 1997 1996
- -------------------------------------------------------------------------------
Nuclear $211.7 $164.7
Non-Nuclear 58.2 57.0
- -------------------------------------------------------------------------------
Total $269.9 $221.7
- -------------------------------------------------------------------------------
In 1994 a site-specific decommissioning study was prepared for both the Indian
Point 2 and the retired Indian Point 1 nuclear units. Based upon this study, the
estimated decommissioning cost in 1993 dollars is approximately $657 million, of
which $252 million is for extended on site storage of spent nuclear fuel. Using
a 3.25 percent annual escalation factor, the estimated cost in 2016, the assumed
midpoint for decommissioning expenditures, is approximately $1,372 million.
Under a 1995 electric rate agreement, effective April 1995, the PSC approved an
annual decommissioning expense allowance for the nuclear and non-nuclear
portions of the plants of $21.3 million and $1.8 million, respectively, to fund
the future estimated costs of decommissioning. The annual expense allowance
assumes a 6 percent after-tax annual return on fund assets.
The FASB is currently reviewing the utility industry's accounting treatment of
nuclear and certain other plant decommissioning costs. In an exposure draft
issued in February 1996, the FASB concluded that decommissioning costs should be
accounted for as a liability at present value, with a corresponding asset in
utility plant, rather than as a component of depreciation. Discussions of issues
addressed in the exposure draft are ongoing.
PAGE 9
NUCLEAR FUEL Nuclear fuel assemblies and components are amortized to operating
expenses based on the quantity of heat produced in the generation of
electricity. Fuel costs also include provisions for payments to the U.S.
Department of Energy (DOE) for future off-site storage of the spent fuel and for
a portion of the costs to decontaminate and decommission the DOE facilities used
to enrich uranium purchased by Con Edison. Such payments amounted to $7.4
million in 1997. Nuclear fuel costs are recovered in revenues through base rates
or through the fuel adjustment clause.
LEASES In accordance with SFAS No. 71, those leases that meet the criteria for
capitalization are capitalized for accounting purposes. For rate-making
purposes, all leases have been treated as operating leases.
REVENUES Revenues for electric, gas and steam service are recognized on a
monthly billing cycle basis. Pursuant to the 1992 and 1995 electric rate
agreements, actual electric net revenues (operating revenues less fuel and
purchased power costs and revenue taxes) were adjusted by accrual to target
levels established under the agreements in accordance with an electric revenue
adjustment mechanism (ERAM). Revenues were also increased (or decreased) each
month to reflect rewards (or penalties) earned under incentive mechanisms for
the Enlightened Energy (demand side management) program and for customer service
activities. The agreements provided that the net regulatory asset (or liability)
thus accrued in each rate year would be reflected in customers' bills in the
following rate year. Effective April 1, 1997 the Settlement Agreement eliminated
the ERAM and the Enlightened Energy and electric customer service incentives.
The Settlement Agreement includes a penalty mechanism (estimated maximum, $26
million per year) for failure to maintain certain customer service standards.
The 1994 gas rate agreement provided for revenues to be increased (or decreased)
each month to reflect rewards (or penalties) earned under incentive mechanisms
related to gas customer service and system improvement targets. The 1997 gas
rate agreement discontinued the incentive mechanisms effective October 1, 1997,
after which Con Edison is subject to a penalty (maximum, $1.7 million per year)
if it fails to maintain targeted levels of customer service.
RECOVERABLE FUEL COSTS Fuel and purchased power costs that are above the
levels included in base rates are recoverable under electric, gas and steam fuel
adjustment clauses. If costs fall below these levels, the difference is credited
to customers. For electric and steam, such costs are deferred until the period
in which they are billed or credited to customers (40 days for electric, 30 days
for steam). For gas, the excess or deficiency is accumulated for refund or
surcharge to customers on an annual basis.
Effective April 1992 a partial pass-through electric fuel adjustment clause
(PPFAC) was implemented with monthly targets for electric fuel and purchased
power costs. Con Edison retains for stockholders 30 percent of any savings in
actual costs below the target amount, but must bear 30 percent of any excess of
actual costs over the target. For each rate year there is a $35 million cap on
the maximum incentive or penalty, with a limit (within the $35 million) of $10
million for costs associated with generation at Con Edison's Indian Point 2
nuclear unit.
REGULATORY ACCOUNTS RECEIVABLE Regulatory accounts receivable at December 31,
1997 amounted to a credit due customers of $1.7 million, reflecting an accrual
for the PPTAC. The amounts accrued under the PPTAC are billed or credited to
customers on a monthly basis through the electric fuel adjustment clause.
Effective April 1, 1997 the Settlement Agreement eliminated the modified ERAM
and the Enlightened Energy and electric customer service incentives; at that
time, the regulatory accounts receivable recorded for the modified ERAM and
these incentives were, along with certain other debit and credit balances in Con
Edison's financial statements, eliminated. The elimination of these balances had
no material adverse effect on Con Edison's financial position or results of
operations.
ENLIGHTENED ENERGY PROGRAM COSTS In accordance with PSC directives, Con Edison
deferred the costs of its Enlightened Energy program for future recovery
from ratepayers. Such deferrals amounted to $117.8 million at December 31, 1997
and $133.7 million at December 31, 1996. In accordance with the 1992 and 1995
electric rate agreements, deferred charges for the Enlightened Energy program
are generally recoverable over a five-year period.
TEMPORARY CASH INVESTMENTS Temporary cash investments are short-term, highly
liquid investments which generally have maturities of three months or less. They
are stated at cost which approximates market. CEI and Con Edison consider
temporary cash investments to be cash equivalents.
INVESTMENTS For 1997 investments consisted primarily of the nuclear
decommissioning trust fund ($211.7 million at December 31, 1997) and investments
of Con Edison Solutions and Con Edison Development ($66.0 million at December
31, 1997). For 1996 investments consisted primarily of the nuclear
decommissioning trust fund ($164.7 million at December 31, 1996). The nuclear
decommissioning trust fund is stated at market; investments of Con Edison
Solutions and Con Edison Development are stated at cost. Earnings on the nuclear
decommissioning trust fund are not recognized in income but are included in the
accumulated depreciation reserve. See Nuclear Decommissioning in this Note A.
GAS HEDGING Con Edison purchases put options and sells futures contracts under
its gas hedging program in order to protect its gas inventory against adverse
market price fluctuations. Con Edison defers the related hedging gains and
losses until the underlying gas commodity is withdrawn from storage and then
adjusts the cost of its gas in storage accordingly.
PAGE 10
All hedging gains or losses are credited or charged to customers through Con
Edison's gas fuel adjustment clause. Con Edison Solutions uses futures contracts
to hedge natural gas transactions in order to minimize the risk of unfavorable
market price fluctuations. Gains or losses on these futures contracts are
deferred until gas is purchased, at which time gas expense is adjusted
accordingly. At December 31, 1997 deferred gains or losses on open positions
were not material.
Neither CEI nor any of its consolidated subsidiaries, including Con Edison,
enters into derivative transactions that do not meet the criteria for hedges and
that do not qualify for deferred accounting treatment. If for any reason a
derivative transaction were no longer classified as a hedge, inventory or gas
expense, as appropriate, would be adjusted for unrealized gains and losses
relating to the transaction.
FEDERAL INCOME TAX In accordance with SFAS No. 109, "Accounting for Income
Taxes," Con Edison has recorded an accumulated deferred federal income tax
liability for substantially all temporary differences between the book and tax
bases of assets and liabilities at current tax rates. In accordance with rate
agreements, Con Edison has recovered amounts from customers for a portion of the
tax expense it will pay in the future as a result of the reversal or
"turn-around" of these temporary differences. As to the remaining temporary
differences. In accordance with SFAS No. 71, Con Edison has established a
regulatory asset for the net revenue requirements to be recovered from customers
for the related future tax expense. In 1993 the PSC issued an Interim Policy
Statement proposing accounting procedures consistent with SFAS No. 109 and
providing assurances that these future increases in taxes will be recoverable in
rates. The final policy statement is not expected to differ materially from the
interim policy statement. See Note 1.
Accumulated deferred investment tax credits are amortized ratably over the lives
of the related properties and applied as a reduction in future federal income
tax expense.
Con Edison and its subsidiaries file, and CEI expects that it and its
subsidiaries will file, a consolidated federal income tax return. Income taxes
are allocated to each company based on its taxable income.
RESEARCH AND DEVELOPMENT COSTS Research and development costs relating to
specific construction projects are capitalized. All other such costs are charged
to operating expenses as incurred. Research and development costs in 1997, 1996
and 1995, amounting to $25.9 million, $32.3 million and $45.0 million,
respectively, were charged to operating expenses. No research and development
costs were capitalized in these years.
NEW FINANCIAL ACCOUNTING STANDARDS The FASB has issued the following two
standards effective for fiscal years beginning after December 15, 1997: SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The application of these
standards will not have a material effect on CEI's financial position or results
of operations or materially change its current disclosure practices.
RECLASSIFICATION Certain prior year amounts have been reclassified to conform
with current year presentation.
ESTIMATES The accompanying consolidated financial statements reflect judgments
and estimates made in the application of the above accounting policies.
NOTE B CAPITALIZATION
COMMON STOCK AND PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION In
December 1997 Con Edison redeemed its Series B preference stock. Each share of
Series B preference stock was convertible into 13 shares of common stock at a
conversion price of $7.69 per share. During 1997, 1996 and 1995, 38,158 shares,
2,869 shares and 3,928 shares of Series B preference stock were converted into
496,054 shares, 37,297 shares and 51,064 shares of common stock, respectively.
The prices at which Con Edison has the option to redeem its preferred stock
other than Series I and Series J (in each case, plus accrued dividends) are as
follows:
- ----------------------------------------------------------
$5 Cumulative Preferred Stock $ 105.00
- ----------------------------------------------------------
Cumulative Preferred Stock:
Series A $ 102.00
Series B 102.00
Series C 101.00
Series D 101.00
- ----------------------------------------------------------
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Con Edison is required to redeem 25,000 of the Series I shares on May 1 of each
year in the five-year period commencing with the year 2002 and to redeem the
remaining Series I shares on May 1, 2007. Con Edison is required to redeem the
Series J shares on August 1, 2002. In each case the redemption price is $100 per
share plus accrued and unpaid dividends to the redemption date. In addition, Con
Edison may redeem Series I shares at redemption price of $103.60 per share, plus
accrued dividends, if redeemed prior to May 1, 1998 (and thereafter at prices
declining annually to $100 per share, plus accrued dividends, after April 30,
2002). Neither Series I nor Series J shares may be called for redemption while
dividends are in arrears on outstanding shares of $5 cumulative preferred stock
or cumulative preferred stock.
PAGE 11
PREFERRED STOCK REFUNDING In March 1996 Con Edison canceled approximately $227
million of its preferred stock purchased pursuant to a lender offer and redeemed
an additional $90 million of its preferred stock. In accordance with the PSC
order approving the issuance of subordinated deferrable interest debentures to
refund the preferred stock, Con Edison offset the net gain of $13.9 million by
accruing an additional provision for depreciation equal to the net gain.
DIVIDENDS Beginning in 1998, dividends on CEI's common shares will depend
primarily on the dividends and other distributions that Con Edison and the other
subsidiaries will pay to CEI and the capital requirements of CEI and its
subsidiaries. The PSC Settlement Agreement limits the dividends that Con Edison
may pay to not more than 100 percent of Con Edison's income available for
dividends, calculated on a two-year rolling average basis. Excluded from the
calculation of "income available for dividends" are non-cash charges to income
resulting from accounting changes or charges to income resulting from
significant unanticipated events. The restriction also does not apply to
dividends necessary to transfer to CEI proceeds from major transactions, such as
asset sales, or to dividends reducing Con Edison's equity ratio to a level
appropriate to Con Edison's business risk.
Payment of Con Edison common stock dividends to CEI is subject to certain
additional restrictions. No dividends may be paid, or funds set apart for
payment, on Con Edison's common stock until all dividends accrued on the $5
cumulative preferred stock and cumulative preferred stock have been paid, or
declared and set apart for payment, and unless Con Edison is not in arrears on
its mandatory redemption obligation for the Series I and Series J cumulative
preferred stock. No dividends may be paid on any of Con Edison's capital stock
during any period in which Con Edison has deferred payment of interest on its
subordinated deferrable interest debentures.
LONG-TERM DEBT In December 1997 Con Edison issued $330 million of 10-year
6.45% Series 1997 B debentures to refund in January 1998 three series of
tax-exempt debt that Con Edison issued through the New York State Energy
Research and Development Authority: 7-1/2% Series 1986 A, 9-1/4% Series 1987 B
and 7-3/4% Series 1989 A.
Long-term debt maturing in the period 1998-2002 is as follows:
- ---------------------------------------------------------------
1998 $ 200,000,000
1999 225,000,000
2000 275,000,000
2001 300,000,000
2002 300,000,000
- ---------------------------------------------------------------
Con Edison's long-term debt is stated at cost which, as of December 31, 1997,
approximates fair value. The fair value of the company's long-term debt is
estimated based on current rates for debt of the same remaining maturities.
NOTE C SHORT-TERM BORROWING
Con Edison has been authorized by FERC to issue short-term debt of up to $500
million outstanding at any one time. At December 31, 1997 Con Edison had no
short-term debt outstanding. In January 1998 Con Edison initiated a $500 million
commercial paper program, supported be revolving credit agreements with banks.
Bank commitments under the revolving credit agreements may terminate upon a
change in control of CEI and borrowings under the agreements are subject to
certain conditions, including that Con Edison's ratio (calculated in accordance
with the agreements) of debt to total capital not at any time exceed 0.65 to 1.
At December 31, 1997 this ratio was 0.43 to 1. Borrowings under the commercial
paper program or the revolving credit facilities are expected to be at
prevailing market rates.
NOTE D PENSION BENEFITS
Con Edison has pension plans that cover substantially all of its employees and
certain employees of other CEI subsidiaries. The plans are designed to comply
with the Employee Retirement Income Security Act of 1974 (ERISA). Contributions
are made solely by Con Edison and the other subsidiaries based on an actuarial
valuation, and are not less than the minimum amount required by ERISA. Con
Edison's policy is to fund the actuarially computed net pension cost as such
cost accrues subject to statutory maximum (and minimum) limits. Benefits are
generally based on a final five-year average pay formula.
In accordance with SFAS No.87, "Employers' Accounting for Pensions," Con Edison
uses the projected unit credit method for determining pension cost. Pension
costs for 1997, 1996 and 1995 amounted to $11.8 million, $73.2 million and $11.4
million, respectively, of which $9.3 million for 1997, $57.8 million for 1996
and $8.9 million for 1995 was charged to operating expenses. Pension costs
reflect the amortization of a regulatory asset established pursuant to SFAS
No.71 to offset the $33.3 million increase in pension obligations from a special
retirement program Con Edison offered in 1993, which provided special
termination benefits as described in SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." Pension cost for 1995 also includes an actuarially
determined credit of $7.3 million representing a prepayment on one of the plans.
This credit reduced pension funding in 1996.
Con Edison recognizes investment gains and losses over five years and amortizes
unrecognized actuarial gains and losses over ten years.
PAGE 12
The components of net periodic pension cost for 1997, 1996 and 1995 were as
follows:
(Millions of Dollars) 1997 1996 1995
- ------------------------------------------------------------------------------
Service cost - benefits earned
during the period $ 111.4 $ 120.2 $ 98.2
Interest cost on projected
benefit obligation 334.3 320.1 296.7
Actual return on plan assets (878.6) (593.6) (865.8)
Unrecognized investment gain
(loss) deferred 471.3 217.6 521.6
Net amortization (28.8) 6.7 (41.5)
- ------------------------------------------------------------------------------
Net periodic pension cost 9.6 71.0 9.2*
- ------------------------------------------------------------------------------
Amortization of regulatory asset 2.2 2.2 2.2
- ------------------------------------------------------------------------------
Total pension cost $ 11.8 $ 73.2 $ 11.4
- ------------------------------------------------------------------------------
* Includes a prepayment credit of $7.3 million.
The funded status of the pension plans as of December 31, 1997, 1996 and 1995
was as follows:
(Millions of Dollars) 1997 1996 1995
- ------------------------------------------------------------------------------
Actuarial present value of
benefit obligation:
Vested $ 3,800.7 $3,525.9 $3,319.2
Nonvested 175.9 190.5 267.9
- ------------------------------------------------------------------------------
Accumulated to date 3,976.6 3,716.4 3,587.1
Effect of projected future
compensation levels 964.0 906.6 1,070.3
- ------------------------------------------------------------------------------
Total projected benefit obligation 4,940.6 4,703.0 4,657.4
Plan assets at fair value 5,988.7 5,269.3 4,775.8
- ------------------------------------------------------------------------------
Plan assets less projected
benefit obligation 1,048.1 566.3 118.4
Unrecognized net gain (1,157.4) (703.0) (240.3)
Unrecognized prior service cost* 90.4 100.1 85.3
Unrecognized net transition liability
at January 1, 1987* 11.3 14.3 17.2
- ------------------------------------------------------------------------------
Accrued pension cost** $ (7.6) $ (23.1) $ (19.4)
- ------------------------------------------------------------------------------
* Being amortized over approximately 15 years.
** Accrued liability primarily for special retirement program, reduced in 1997
by a prepayment credit.
To determine the present value of the projected benefit obligation, the discount
rates assumed were 7.25 percent for 1997 and 1996 and 7 percent for 1995. A
weighted average rate of increase in future compensation levels of 5.8 percent
and long-term rate of return on plan assets of 8.5 percent were assumed for all
years.
The pension plan assets consist primarily of corporate common stocks and bonds,
group annuity contracts and debt of the United States government and its
agencies.
NOTE E POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
Con Edison has a contributory comprehensive hospital, medical and prescription
drug program for all retirees, their dependents and surviving spouses. Con
Edison also provides life insurance benefits for approximately 6,400 retired
employees. All of Con Edison's employees becomes eligible for these benefits
upon retirement, except that the amount of life insurance is limited and is
available only to management employees and to those bargaining unit employees
who participated in the optional program prior to retirement. Con Edison has
reserved the right to amend or terminate these programs.
Con Edison's policy is to fund in external trusts the actuarially determined
annual costs for retiree health and life insurance subject to statutory maximum
limits.
Con Edison recognizes investment gains and losses over five years and amortizes
unrecognized actuarial gains and losses over ten years.
The cost to Con Edison for retiree health benefits for 1997, 1996 and 1995
amounted to $76.7 million, $89.2 million and $65.5 million, respectively, of
which $61.0 million for 1997, $70.5 million for 1996 and $51.6 million for 1995
was charged to operating expenses. The cost of the retiree life insurance plan
for 1997, 1996 and 1995 amounted to $20.8 million, $22.8 million and $18.0
million, respectively, of which $16.5 million for 1997, $18.0 million for 1996
and $14.2 million for 1995 was charged to operating expenses.
PAGE 13
the components of postretirement benefit (health and life insurance) costs for
1997, 1996 and 1995 were as follows:
(Millions of Dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
Service cost - benefits earned during the
period $ 15.7 $ 17.4 $ 10.7
Interest cost on accumulated postretirement
benefit obligation 71.0 68.9 61.2
Actual return on plan assets (100.3) (51.3) (60.8)
Unrecognized investment gain (loss)
deferred 63.8 23.5 40.4
Amortization of transition obligation and
unrecognized net loss 47.3 53.5 32.0
- -------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 97.5 $ 112.0 $ 83.5
- -------------------------------------------------------------------------------
The following table sets forth the program's funded status at December 31, 1997,
1996 and 1995:
(Millions of Dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ 470.6 $ 471.1 $ 447.7
Employees eligible to retire 240.1 248.8 250.7
Employees not eligible to retire 253.4 279.2 305.6
- -------------------------------------------------------------------------------
Total projected benefit obligation 964.1 999.1 1,004.0
Plan assets at fair value 574.1 444.2 322.2
- -------------------------------------------------------------------------------
Plan assets less accumulated postretirement
benefit obligation (390.0) (554.9) (681.8)
Unrecognized net loss 41.3 139.9 240.8
Unrecognized net transition liability
at January 1, 1993* 322.6 415.0 441.0
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost $ (26.1) $ 0 $ 0
- -------------------------------------------------------------------------------
* Being amortized over a period of 20 years.
To determine the accumulated postretirement benefit obligation, the discount
sales assumed were 7.25 percent for 1997 and 1996 and 7 percent for 1995. The
assumed long-term rate of return on plan assets was 8.5 percent for these
years. The health care cost trend rate assumed for 1997 was 8.5 percent, for
1998, 8 percent, and then declining one-half percent per year to 5 percent for
2004 and thereafter. If the assumed health care cost trend rate were to be
increased by one percentage point each year, the accumulated postretirement
benefit obligation would increase by approximately $114.8 million and the
service cost and interest component of the net periodic postretirement benefit
cost would increase by $12.6 million.
Postretirement plan assets consist of corporate common stocks and bonds, group
annuity contracts, debt of the United States government and its agencies and
short-term securities.
NOTE F CONTINGENCIES
INDIAN POINT Nuclear generating units similar in design to Con Edison's Indian
Point 2 unit have experienced problems that have required steam generator
replacement. Inspections of the Indian Point 2 steam generators since 1976 have
revealed various problems, some of which appear to have been arrested, but the
remaining service life of the steam generators is uncertain. The projected
service life of the steam generators is reassessed periodically in the light of
the inspections made during scheduled outages of the unit. Based on the latest
available data and current NRC criteria. Con Edison estimates that steam
generator replacement will not be required before 2001. Con Edison has
replacement steam generators, which are stored at the site. Replacement of the
steam generators would require estimated additional expenditures of
approximately $108 million (1997 dollars, exclusive of replacement power costs)
and an outage of approximately four months. However, securing necessary permits
and approvals or other factors could require a substantially longer outage if
steam generator replacement is required on short notice.
NUCLEAR INSURANCE The insurance policies covering Con Edison's nuclear
facilities for property damage, excess property damage, and outage costs permit
assessments under certain conditions to cover insurers' losses. As of December
31, 1997, the highest amount that could be assessed for losses during the
current policy year under all of the policies was $24 million. While
assessments may also be made for losses in certain prior years, Con Edison is
not aware of any losses in such years that it believes are likely to result in
an assessment.
Under certain circumstances, in the event of nuclear incidents at facilities
covered by the federal government's third-party liability indemnification
program, Con Edison could be assessed up to $79.3 million per incident, of which
not more than $10 million may be assessed in any one year. The per incident
limit is to be adjusted for inflation not later than 1990 and not less than once
every five years thereafter.
Con Edison participates in an insurance program covering liabilities for
injuries to certain workers in the nuclear power industry. In the event of such
injuries, Con Edison is subject to assessment up to an estimated maximum of
approximately $3.1 million.
PAGE 14
ENVIRONMENTAL MATTERS The normal course of Con Edison's operations
necessarily involves activities and substances that expose it to potential
liabilities under federal, state and local laws protecting the environment. Such
liabilities can be material and in some instances may be imposed without ___ to
fault, or may be imposed for past acts, even though such past acts may have been
lawful at the time they occurred. Sources of such potential liabilities include
(but are not limited to) the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (Superfund), a 1994 settlement with the
New York State Department of Environmental Conservation (DEC), asbestos, and
electric and magnetic fields (EMF).
SUPERFUND By its terms Superfund imposes joint and several strict liability,
regardless of fault, upon generators of hazardous substances for resulting
removal and remedial costs and environmental damages. Con Edison has received
process or notice concerning possible claims under Superfund or similar state
statutes relating to a number of sites at which it is alleged that hazardous
substances generated by Con Edison (and, in most instances, a large number of
other potentially responsible parties) were deposited. Estimates of the
investigative, removal, remedial and environmental damage costs (if any) that
Con Edison will be obligated to pay with respect to each of these sites range
from extremely preliminary to highly refined. Based on these estimates Con
Edison had accrued at December 31, 1997 a liability of approximately $25.4
million. There will be additional costs with respect to those and possibly other
sites, the materiality of which is not presently determinable.
DEC SETTLEMENT In 1994 Con Edison agreed to a consent order settling a civil
administrative proceeding instituted by the DEC alleging environmental
violations by the company. Pursuant to the consent order, Con Edison has
conducted an environmental management systems evaluation and an environmental
compliance audit. Con Edison also must implement "best management practices"
plans for certain facilities and undertake a remediation program at certain
sites. At December 31, 1997 Con Edison had an accrued liability of $16.9 million
for these sites. Expenditures for environmental-related capital projects in the
five years 1998-2002, including expenditures to comply with the consent order,
are estimated at $148 million. These estimated expenditures do not reflect
divestiture by Con Edison of generating plants pursuant to the Settlement
Agreement (see Note A) or otherwise.
ASBESTOS CLAIMS Suits have been brought in New York State and federal courts
against Con Edison and many other defendants, wherein several hundred plaintiffs
sought large amounts of compensatory and punitive damages for deaths and
injuries allegedly caused by exposure to asbestos at various premises of Con
Edison. Many of these suits have been disposed of without any payment by Con
Edison, or for immaterial amounts. The amounts specified in all the remaining
suits total billions of dollars but Con Edison believes that these amounts are
greatly exaggerated, as were the claims already disposed of. Based on the
information and relevant circumstances known to Con Edison at this time, it is
the opinion of Con Edison that these suits will not have a material adverse
effect on the company's financial position, results of operations or liquidity.
EMF Electric and magnetic fields are found wherever electricity is used. Con
Edison is the defendant in several suits claiming properly damage resulting from
EMF. The aggregate amount sought in these suits is not material. In the event,
however, that a causal relationship between EMF and adverse health effects is
established, or independently of any such causal determination, in the event of
adverse developments in related legal or public policy doctrines, there could be
a material adverse effect on the electric utility industry, including Con
Edison.
NOTE G NON-UTILITY GENERATIONS (NUGS)
Con Edison has contracts with NUGs for 2,059 MW of electric generating capacity.
Payments by Con Edison under the contracts are reflected in rates. Assuming
performance by the NUGs, Con Edison is obligated over the terms of these
contracts (which extend for various periods, up to 2036) to make capacity
and other fixed payments.
For the years 1998 - 2002, capacity and other fixed payments are estimated to be
$510 million, $508 million, $478 million, $485 million and $494 million. Such
payments gradually increase to approximately $600 million in 2013, and
thereafter decline significantly.
For energy delivered under these contracts, Con Edison is obligated to pay
variable prices that are estimated to be approximately at market levels.
NOTE H STOCK-BASED COMPENSATION
Under CEI's Stock Plan, options may be granted to officers and key employees for
up to 10,000,000 shares of CEI's common stock. Generally, options become
exercisable three years after the grant date and remain exercisable until ten
years from the grant date.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," CEI has
elected to follow Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of CEI's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
PAGE 15
Disclosure of pro-forma information regarding net income and earnings per share
is required by SFAS No. 123. This information has been determined as if CEI had
accounted for its employee stock options under the fair value method of that
statement. The fair values of 1997 and 1996 options are $2.84 and $2.49 per
share, respectively. They were estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions
used for grants in 1997 and 1996, respectively; risk-free interest rates of 6.46
percent and 6.74 percent; expected lives of eight years for 1997 and 1996;
expected volatility of 14.00 percent and 16.28 percent; and dividend yields of
6.67 percent and 7.46 percent.
Had CEI used SFAS No. 123, basic and diluted earnings per share for 1997 and
1996 would be unaffected and pro-forma net income for common stock would be
$693,680,000 or $799,000 less than the amount reported for 1997, and
$687,938,000 or $231,000 less than the amount reported for 1996.
A summary of the status of the Plan as of December 31, 1997 and 1996 and changes
during those years is as follows:
1997 1996
-------------------- ------------------
Exercise Exercise
Options Price Options Price
- --------------------------------------------------------------------
Outstanding at
beginning of year 697,200 $ 27.875 0 $ -
Granted 834,600 31.50 704,200 27.875
Exercised 0 0
Forfeited (14,000) 29.62 (7,000) 27.875
- --------------------------------------------------------------------
Outstanding at end
of year 1,517,700 $ 29.85 697,200 $ 27.875
- --------------------------------------------------------------------
Options exercisable at
end of year 0 0
Fair value of options
granted during the year $ 2.84 $ 2.49
- --------------------------------------------------------------------
The following summarizes the Plan's stock options outstanding at December 31,
1997 and 1998:
Options
Plan Exercise Outstanding Remaining
Year Price at 12/31/97 Contractual Life
- ---------------------------------------------------
1997 $ 31.50 827,600 9 years
1996 $ 27.875 689,900 6 years
- ---------------------------------------------------
NOTE 1 FEDERAL INCOME TAX
The net revenue requirements for the future federal income tax component of
accumulated deferred federal income taxes (see Note A) at December 31, 1997 and
1996 are shown on the following table:
(Millions of Dollars) 1997 1996
- ------------------------------------------------------------------------
Future federal income tax liability
Temporary differences between the book and
tax bases of assets and liabilities:
Property related $ 5,791.0 $ 5,595.0
Reserve for injuries and damages (57.4) (55.7)
Other (112.9) 16.7
- -------------------------------------------------------------------------
Total 5,620.7 5,556.0
- -------------------------------------------------------------------------
Future federal income tax computed at
statutory rate - 35% 1,967.2 1,944.6
Less: Accumulated deferred federal income
taxes previously recovered 1,334.7 1,304.8
- -------------------------------------------------------------------------
Net future federal income tax expense
to be recovered 632.5 639.8
- -------------------------------------------------------------------------
Net revenue requirements for above
(Regulatory assets - future federal income taxes)* 973.1 904.3
Add: Accumulated deferred federal income taxes
previously recovered
Depreciation 1,188.7 1,115.5
Unbilled revenues (98.3) (94.6)
Advance refunding of long-term debt 30.1 32.7
Other 214.2 251.2
- -------------------------------------------------------------------------
Subtotal 1,334.7 1,304.8
- -------------------------------------------------------------------------
Total accumulated deferred federal income tax $ 2,307.8 $ 2,289.1
- -------------------------------------------------------------------------
* Net revenue requirements will be offset by the amortization to federal income
tax expense of accumulated deferred investment tax credits, the tax benefits
of which Con Edison has already realized. Including the full effect therefrom,
the net revenue requirements related to future federal income taxes at
December 31, 1997 and 1996 are $809.4 million, and $811.8 million
respectively.
NOTE 1 FEDERAL INCOME TAX, continued PAGE 16
Year Ended December 31 (Thousands of Dollars) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Charged to: Operations $ 382,910 $ 397,160 $ 396,560
Other income (3,190) (970) 1,060
- -----------------------------------------------------------------------------------------------------------------
Total federal income tax 379,720 396,190 397,620
- -----------------------------------------------------------------------------------------------------------------
Deconciliation of reported net income with taxable income
Federal income tax - current 357,100 355,590 328,600
Federal income tax - deferred 31,450 49,510 78,330
Investment tax credits deferred (8,830) (8,910) (9,310)
- -----------------------------------------------------------------------------------------------------------------
Total federal income tax 379,720 396,190 397,620
Net income 712,823 694,085 723,850
- -----------------------------------------------------------------------------------------------------------------
Income before federal income tax 1,092,543 1,090,275 1,121,470
- -----------------------------------------------------------------------------------------------------------------
Effective federal income tax rate 34.8% 36.3% 35.5%
- -----------------------------------------------------------------------------------------------------------------
Adjustments decreasing (increasing) taxable income
Tax depreciation in excess of book depreciation:
Amounts subject to normalization 215,370 201,760 202,230
Other (64,502) (99,576) (85,538)
Deferred recoverable fuel costs (3,161) 42,008 61,937
Regulatory accounts receivable (47,079) 51,878 (32,827)
Excess research and development 14,980 (13,025) (2,969)
Pension and other postretirement benefits (6,820) (34,136) 38,102
Power contract termination costs (40,657) (38,759) (56,397)
Other - net (9,200) (45,729) 25,356
- -----------------------------------------------------------------------------------------------------------------
Total 58,931 64,421 149,894
- -----------------------------------------------------------------------------------------------------------------
Taxable income 1,033,612 1,025,854 971,576
- -----------------------------------------------------------------------------------------------------------------
Federal income tax - current
Amount computed at statutory rate - 35% 361,764 359,049 340,052
Tax credits (4,664) (3,459) (11,452)
- -----------------------------------------------------------------------------------------------------------------
Total 357,100 355,590 328,600
- -----------------------------------------------------------------------------------------------------------------
Charged to: Operations 359,300 357,000 328,200
Other income (2,200) (1,410) 400
- -----------------------------------------------------------------------------------------------------------------
Total 357,100 355,590 328,600
- -----------------------------------------------------------------------------------------------------------------
Federal income tax - deferred
Charged to: Operations 32,440 49,070 77,670
Other income (990) 440 660
- -----------------------------------------------------------------------------------------------------------------
Total $ 31,450 $ 49,510 $ 78,330
- -----------------------------------------------------------------------------------------------------------------
PAGE 17
NOTE J FINANCIAL INFORMATION BY BUSINESS SEGMENTS(a)
Electric Steam
---------------------------------------- ----------------------------------------
(Thousands of Dollars) 1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------- ----------------------------------------
Operating revenues* $ 5,646,916 $ 5,552,247 $ 5,401,524 $ 393,418 $ 405,040 $ 335,694
- ------------------------------------------------------------------------------- ----------------------------------------
Operating expenses
Purchased power 1,319,472 1,269,092 1,107,223 29,949 3,762 -
Fuel 429,324 377,351 354,086 167,500 195,924 150,018
Other operations and maintenance* 1,311,983 1,331,801 1,372,715 82,100 83,837 79,929
Depreciation and amortization 429,407 425,397 393,382 16,239 15,900 13,064
Taxes, other than federal income 989,791 980,309 951,095 53,108 51,361 45,788
Federal income tax 311,878 330,103 339,863 8,442 14,131 12,598
- ------------------------------------------------------------------------------- ----------------------------------------
Total operating expenses* 4,791,855 4,714,053 4,518,364 357,338 364,915 301,397
- ------------------------------------------------------------------------------- ----------------------------------------
Operating income 855,061 838,194 883,160 36,080 40,125 34,297
- ------------------------------------------------------------------------------- ----------------------------------------
Construction expenditures 504,644 515,006 538,454 29,905 38,290 27,559
- ------------------------------------------------------------------------------- ----------------------------------------
Net utility plant** 9,251,149 9,150,261 9,027,031 489,091 458,019 399,028
Fuel 51,629 64,231 40,444 2,068 478 62
Other identifiable assets 1,669,957 1,703,906 1,724,005 66,448 42,817 51,969
- ------------------------------------------------------------------------------- ----------------------------------------
* Intersegment rentals included in segments' income but eliminated for total:
Operating revenues $ 11,341 $ 11,130 $ 12,116 $ 1,619 $ 1,491 $ 1,561
Operating expenses 2,605 2,472 2,513 12,519 12,190 13,102
- ------------------------------------------------------------------------------------------------------------------------------
Gas Total
---------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------- ----------------------------------------
Operating revenues* $ 1,096,057 $ 1,017,124 $ 815,307 $ 7,121,254 $ 6,959,736 $ 6,536,897
- ------------------------------------------------------------------------------- ----------------------------------------
Operating expenses
Purchased power - - - 1,349,421 1,272,854 1,107,223
Fuel - - - 596,824 573,275 504,104
Gas purchased for resale 479,218 418,271 259,789 479,218 418,271 259,789
Other operations and maintenance* 204,687 221,011 214,818 1,583,633 1,621,974 1,651,834
Depreciation and amortization 57,133 55,115 49,330 502,779 496,412 455,776
Taxes, other than federal income 138,182 134,529 123,349 1,181,081 1,166,199 1,120,232
Federal income tax 62,590 52,926 44,099 382,910 397,160 396,560
- ------------------------------------------------------------------------------- ----------------------------------------
Total operating expenses* 941,810 881,852 691,385 6,075,866 5,946,145 5,495,518
- ------------------------------------------------------------------------------- ----------------------------------------
Operating income 154,247 135,272 123,922 1,045,388 1,013,591 1,041,379
- ------------------------------------------------------------------------------- ----------------------------------------
Construction expenditures 119,672 121,937 126,790 654,221 675,233 692,803
- ------------------------------------------------------------------------------- ----------------------------------------
Net utility plant** 1,526,862 1,459,030 1,388,344 11,267,102 11,067,310 10,814,403
Fuel and gas in storage 37,209 44,979 26,452 90,906 109,688 66,958
Other identifiable assets 165,977 197,033 177,374 1,902,382 1,943,756 1,953,348
Other corporate assets 1,462,128 936,431 1,115,181
- ------------------------------------------------------------------------------- ----------------------------------------
Total assets $14,722,518 $14,057,185 $13,949,890
- ------------------------------------------------------------------------------- ----------------------------------------
* Intersegment rentals included in segments' income but eliminated for total:
Operating revenues $ 2,177 $ 2,054 $ 1,951 $ 15,137 $ 14,675 $ 15,628
Operating expenses 13 13 13 15,137 14,675 15,628
** General Utility Plant was allocated to Electric and Gas on the departmental
use of such plant. Pursuant to PSC requirements the Steam department is
charged an interdepartmental rent for general plant used in Steam
operations, which is credited to the Electric and Gas departments.
- --------------------------------------------------------------------------------
(a) Con Edison supplies electric service in all of New York City (except part
of Queens) and most of Westchester County. It also supplies gas in
Manhattan, the Bronx and parts of Queens and Westchester, and steam in part
of Manhattan.
PAGE 18
CONSOLIDATED EDISON INC.
------------------------
FINANCIAL DATA
--------------
(b)
Year Year Year
1997 1996 1995
---- ---- ----
Interest coverage (Times)
SEC-Book 4.09 4.18 4.20
Earnings per share $ 2.95 $ 2.93 $ 2.93
Return on average common
Equity 12.1% 12.3% 12.8%
Book value per share
Average $ 24.49 $ 23.74 $ 22.89
End of period 25.18 24.37 23.51
Effective tax rate 34.8% 36.3% 35.5%
Capitalization ratios:
SEC Basis
Long term debt 40.1% 41.2% 38.9%
Preferred stock 3.1 3.1 6.3
Common equity 56.8 55.7 54.8
----- ----- -----
100.0% 100.0% 100.0%
PSC Basis
Long term debt 40.8% 41.3% 39.4%
Preferred stock 2.9 3.0 6.1
Customer deposits 1.5 1.5 1.5
Common equity 54.8 54.2 53.0
----- ----- -----
100.0% 100.0% 100.0%
PAGE 19
(c) The complete terms, preferences, privileges and voting powers of the $5
Cumulative Preferred Stock, Cumulative Preferred Stock 5-3/4% Series A, 5-
1/4% Series B, 4.65% Series C, 4.65% Series D, 5-3/4% Series E, 6.20%
Series F, 7.20% Series I, 6-1/8% Series J and Cumulative Preference Stock,
6% Convertible Series B, are as set forth in Con Edison's Certificate of
Incorporation, as amended, previously filed with the Commission to which
reference is made. In March 1996 Con Edison canceled approximately $227
million of its preferred stock purchased pursuant to a tender offer and
redeemed an additional $90 million of its preferred stock. In December 1997
Con Edison redeemed its Series B preference stock. In general the
preferences of such stocks are as follows:
$5 Cumulative Preferred Stock
The $5 Cumulative Preferred Stock shall be entitled to receive, when and
as declared from surplus or net profits, dividends at the rate of five
dollars a share per annum and no more, which dividends shall be
cumulative from the dividend date next preceding the date of issue of
the respective shares (or from the date of issue if that be a dividend
date), and shall be payable quarterly on the first day of February, May,
August, and November in each year.
Upon any liquidation or distribution of capital assets, the $5
Cumulative Preferred Stock shall be entitled to receive $100 a share and
in addition thereto, a sum equivalent to all unpaid dividends
accumulated thereon, and any preferred stock of any class ranking
equally with the $5 Cumulative Preferred Stock in the distribution of
capital assets shall be entitled to receive an equivalent amount before
any distribution shall be made to any other preferred stock or common
stock, which shall be entitled to receive all the remainder of such
capital assets so distributed in accordance with provisions governing
their respective rights thereto.
Con Edison shall have the right to redeem the $5 Cumulative Preferred
Stock on any dividend date, either in whole or in such portions as, from
time to time, the Board of Trustees may determine, upon the payment of
the sum of $105 a share and the amount of all unpaid dividends
accumulated thereon to the date fixed for such redemption, provided,
that, if less than all of the outstanding shares of $5 Cumulative
Preferred Stock shall be redeemed at any time, the shares to be redeemed
shall be selected in such manner as the Board of Trustees may determine.
PAGE 20
(c) (Continued)
Cumulative Preferred Stock
The Cumulative Preferred Stock may be issued from time to time in one
or more series, the Board of Trustees having the authority to fix from
time to time the designations, preferences, privileges and voting
powers of each series except for such provisions as are to be
applicable to all series. The $5 Cumulative Preferred Stock shall
rank superior in all respects to the new Cumulative Preferred Stock
except that one or more series of new Cumulative Preferred Stock may
rank equally with the $5 Cumulative Preferred Stock with respect to
priority in the payment of dividends and the distribution of assets if
the earnings of Con Edison and its affiliated companies, as defined,
for the fiscal year ending next prior to the date of issue of the new
Cumulative Preferred Stock are at least equal to three times the
annual dividend on all shares of preferred stock to be outstanding
immediately after the issue of such new Cumulative Preferred Stock. In
such case, however, any series of new Cumulative Preferred Stock
theretofore or thereafter issued shall also rank equally with the $5
Cumulative Preferred Stock and shall also comply or have complied with
such earnings requirements.
With respect to each series of new Cumulative Preferred Stock, the
Board of Trustees may determine, among other things, the provisions
relating to the dividend rate, the sum per share (not less than $100)
payable upon voluntary or involuntary dissolution, liquidation or
winding up of Con Edison, the redemption price and the conversion
rights and sinking fund provisions, if any, applicable thereto and any
other provisions not inconsistent with the provisions applicable to
all shares.
Cumulative Preferred Stock, 5-3/4% Series A
The Cumulative Preferred Stock, 5-3/4% Series A has a par value of
$100 per share; is entitled to receive (1) on voluntary liquidation an
amount equal to the redemption price then in effect and (2) on
involuntary liquidation $100 per share plus accrued but unpaid
dividends thereon and is redeemable at $102 per share plus accrued but
unpaid dividends to the redemption date.
Cumulative Preferred Stock, 5-1/4% Series B
The Cumulative Preferred Stock, 5-1/4% Series B has a par value of
$100 per share; is entitled to receive (1) on voluntary liquidation an
amount equal to the redemption price then in effect and (2) on
involuntary liquidation $100 per share plus accrued but unpaid
dividends thereon and is redeemable at $102 per share plus accrued but
unpaid dividends to the redemption date.
PAGE 21
(c) (Continued)
Cumulative Preferred Stock, 4.65% Series C
The Cumulative Preferred Stock, 4.65% Series C has a par value of $100
per share; is entitled to receive (1) on voluntary liquidation an amount
equal to the redemption price then in effect and (2) on involuntary
liquidation $100 per share plus accrued but unpaid dividends thereon and
is redeemable at $101 per share plus accrued but unpaid dividends to the
redemption date.
Cumulative Preferred Stock, 4.65% Series D
The Cumulative Preferred Stock, 4.65% Series D has a par value of $100
per share; is entitled to receive (1) on voluntary liquidation an amount
equal to the redemption price then in effect and (2) on involuntary
liquidation $100 per share plus accrued but unpaid dividends thereon and
is redeemable at $101 per share plus accrued but unpaid dividends to the
redemption date.
Cumulative Preferred Stock, 5-3/4% Series E
The Cumulative Preferred Stock, 5-3/4% Series E had a par value of $100
per share; was entitled to receive (1) on voluntary liquidation an amount
equal to the redemption price then in effect and (2) on involuntary
liquidation $100 per share plus accrued but unpaid dividends thereon.
Cumulative Preferred Stock, 6.20% Series F
The Cumulative Preferred Stock, 6.20% Series F had a par value of $100
per share; was entitled to receive (1) on voluntary liquidation an amount
equal to the redemption price then in effect and (2) on involuntary
liquidation $100 per share plus accrued but unpaid dividends thereon.
Cumulative Preferred Stock, 7.20% Series I
The Company is required to redeem 25,000 of the Series I shares on May 1
of each year in the five-year period commencing with the year 2002 and to
redeem the remaining Series I shares on May 1, 2007. The redemption price
is $100 per share plus accrued and unpaid dividends to the redemption
date. In addition, the Company may redeem Series I shares at a redemption
price of $103.60 per share, plus accrued dividends, if redeemed prior to
May 1, 1998. Series I shares may not be called for redemption while
dividends are in arrears on outstanding shares of $5 Cumulative Preferred
Stock or Cumulative Preferred Stock. Nevertheless, the redemption
obligation of Con Edison with respect to such shares is cumulative and if
the redemption requirement is in arrears Con Edison may not purchase or
redeem or pay any dividends on the common stock or any other stock
ranking junior as to dividends or assets to the Cumulative Preferred
Stock, except for payments or distributions in common stock or such
junior stock.
PAGE 22
(c) (Concluded)
Cumulative Preferred Stock, 6-1/8% Series J
Con Edison is required to redeem the Series J shares on August 1, 2002.
The redemption price is $100 per share plus accrued and unpaid dividends
to the redemption date. Series J shares may not be called for redemption
while dividends are in arrears on outstanding shares of $5 Cumulative
Preferred Stock or Cumulative Preferred Stock. Nevertheless, the
redemption obligation of Con Edison with respect to such shares is
cumulative and if the redemption requirement is in arrears Con Edison may
not purchase or redeem or pay any dividends on the common stock or any
other stock ranking junior as to dividends or assets to the Cumulative
Preferred Stock, except for payments or distributions in common stock or
such junior stock.
Cumulative Preference Stock
The Cumulative Preference Stock was issued from time to time in one or
more series, the Board of Trustees having the authority to fix from time
to time the designations, preferences, privileges and voting powers of
each series except for such provisions as are applicable to all series.
The $5 Cumulative Preferred Stock and the Cumulative Preferred Stock rank
superior in all respects to the Cumulative Preference Stock. No holder of
any Cumulative Preference Stock had any preemptive rights and, except as
otherwise provided by law and the Certificate of Incorporation, as
amended, had any voting rights.
With respect to each series of Cumulative Preference Stock, the Board of
Trustees determined, among other things, the provisions relating to the
dividend rate, the sum per share (not less than $100) payable upon
voluntary or involuntary dissolution, liquidation or winding-up of Con
Edison, the redemption price, the conversion rights and sinking fund
provisions, if any, applicable thereto and any other provisions not
inconsistent with the provisions applicable to all shares.
Cumulative Preference Stock, 6% Convertible Series B
The Cumulative Preference Stock, 6% Convertible Series B had a par value
of $100 per share; was convertible, unless previously redeemed, into
Common Stock at a conversion price of $7.69 per share subject to
adjustment under certain conditions; was redeemable at $100 per share,
plus dividends accrued to the redemption date.
PAGE 23
(d) Rate and amount of dividends declared upon
the Capital Stock and the amount of
dividends paid during each of the years
1993 to 1997.
Dividends Declared Dividends
------------------
Rate Amount Paid
---- ------ ---------
$5 Cumulative Preferred Stock
1993 $ 5.00 $ 9,576,595 $ 9,576,595
1994 5.00 9,576,595 9,576,595
1995 5.00 9,576,595 9,576,595
1996 5.00 9,576,595 9,576,595
1997 5.00 9,576,595 9,576,595
Cumulative Preferred Stock
5-3/4% Series A
1993 5.75 3,450,000 3,450,000
1994 5.75 3,450,000 3,450,000
1995 5.75 3,450,000 3,450,000
1996 5.75 406,019 406,019
1997 5.75 406,019 406,019
5-1/4% Series B
1993 5.25 3,937,500 3,937,500
1994 5.25 3,937,500 3,937,500
1995 5.25 3,937,500 3,937,500
1996 5.25 726,800 726,800
1997 5.25 726,800 726,800
4.65% Series C
1993 4.65 2,790,002 2,790,002
1994 4.65 2,790,002 2,790,002
1995 4.65 2,790,002 2,790,002
1996 4.65 712,828 712,828
1997 4.65 712,828 712,828
4.65% Series D
1993 4.65 3,487,502 3,487,502
1994 4.65 3,487,502 3,487,502
1995 4.65 3,487,502 3,487,501
1996 4.65 1,033,836 1,033,836
1997 4.65 1,033,835 1,033,835
5-3/4% Series E
1993 5.75 2,875,003 2,875,003
1994 5.75 2,875,002 2,875,002
1995 5.75 2,875,002 2,875,002
PAGE 24
(d) Rate and amount of dividends declared upon
the Capital Stock and the amount of
dividends paid during each of the years
1993 to 1997.
Dividends Declared Dividends
------------------
Rate Amount Paid
---- ------ ---------
6.20% Series F
1993 6.20 $ 2,480,000 $ 2,480,000
1994 6.20 2,480,000 2,480,000
1995 6.20 2,480,000 2,480,000
7.20% Series I
1993 7.20 3,600,000 3,600,000
1994 7.20 3,600,000 3,600,000
1995 7.20 3,600,000 3,600,000
1996 7.20 3,420,000 3,420,000
1997 7.20 3,420,000 3,420,000
6-1/8% Series J
1993 6.125 3,062,500 3,062,500
1994 6.125 3,062,500 3,062,500
1995 6.125 3,062,500 3,062,500
1996 6.125 2,269,313 2,269,313
1997 6.125 2,269,313 2,269,313
Cumulative Preference Stock
6% Convertible Series B
1993 6.00 354,555 362,559
1994 6.00 325,715 331,974
1995 6.00 303,801 310,112
1996 6.00 283,562 287,370
1997 6.00 198,324 198,324
Common Stock
1993 $ 1.94 453,902,284 453,902,284
1994 2.00 469,560,742 469,560,742
1995 2.04 479,262,332 479,262,332
1996 2.08 488,755,428 488,755,428
1997 2.10 493,711,770 493,711,770
(e) No Contingent Assets. See footnotes to Financial Statements for Contingent
Liabilities.
APPENDIX E
SCHEDULE A
Page 1 of 19
ORANGE AND ROCKLAND UTILITIES, INC.
----------------------------------
FINANCIAL CONDITION AS OF DECEMBER 31, 1997
-------------------------------------------
(As defined by Part 3 of the Rules of Procedure of
the New York Public Service Commission)
(a) Capital Stock Authorized by Amended Certificate of Incorporation
----------------------------------------------------------------
Preferred Stock - 1,000,000 shares - $100 Par value $100,000,000
Preference Stock - 1,500,000 shares - No Par value -
Common Stock - 50,000,000 shares - $5 Par value 250,000,000
-------------
$350,000,000
=============
(b) Commission Authorization for Capital Stock Outstanding
------------------------------------------------------
Date of Number
Commission of Par Amount
Case Order Shares Value Outstanding
- -----------------------------------------------------------------------------------------------
Common Stock
- ------------
1322 8/05/25 885
(855)*
-
3058 4/28/26 515,000
2/09/28 200,000
-------
715,000 $10 $7,150,000
(400)* $10 (4,000)
714,600 $10 $ 7,146,000
4135 2/09/28 261,535 $10 2,615,350
4577 11/01/28 125,000 $10 1,250,000
5062 12/20/28 120,000
2/07/30 137,509
-------
257,509 $10 2,575,090
(5,591)* $10 (55,910)
251,918 $10 2,519,180
15786 12/17/52 122,000 $10 1,220,000
16438 10/06/53 210,721 $10 2,107,210
18542 10/07/57 144,580 $10 1,445,800
18672 1/28/58 127,905 $10 1,279,050
21156 4/12/60 117,429 $10 1,174,290
22666 5/28/63 2,075,688 2 for 1 Stock Split None
23966 4/12/66 200,736 $ 5 1,003,680
25419 1/08/70 700,000 $ 5 3,500,000
26036 2/22/71 700,000 $ 5 3,500,000
26168 11/03/71 1,000,000 $ 5 5,000,000
26301 9/26/72 1,500,000 $ 5 7,500,000
26557 2/14/74 1,500,000 $ 5 7,500,000
27067(1) 11/09/76 750,000 $ 5 3,750,000
27067(2) 11/09/76 20,916 $ 5 104,580
27369 7/25/78 44,190 $ 5 220,950
27638 1/08/80 1,000,000 $ 5 5,000,000
27645 10/08/80 40,019 $ 5 200,095
27858 12/30/80 8,606 $ 5 43,030
27878 1/27/81 150,000 $ 5 750,000
28078 12/09/81 43,794 $ 5 218,970
28295 10/06/82 778,453 $ 5 3,892,265
28297 12/22/82 26,820 $ 5 134,100
28449 4/20/83 31,305 $ 5 156,525
88M055 5/25/88 1,008,696 $ 5 5,043,480
97M1302 12/31/97 (65,900) $ 5 (329,500)
---------- -----------
Total Common Stock 13,589,011 $67,945,055
========== ===========
SCHEDULE A
Page 2 of 19
DATE OF NUMBER
COMMISSION OF PAR AMOUNT
CASE ORDER SHARES VALUE OUTSTANDING
- --------------------------------------------------------------------------------
$1.52 Convertible Cumulative Preference Stock, Series A
- -------------------------------------------------------
23966 4/12/66 159,669
(148,030)** 11,639 None $ 379,310
---------
Preferred Stock Series A
- ------------------------
14865 6/06/50 50,000 $100 5,000,000
Preferred Stock Series B
- ------------------------
16842 7/27/54 40,000 $100 4,000,000
Preferred Stock Series D
- ------------------------
18672 1/28/58 3,443 $100 344,300
Preferred Stock Series F
- ------------------------
23234 8/11/64 75,000 $100 7,500,000
Preferred Stock Series G
- ------------------------
25007 12/17/68 110,000 $100 11,000,000
Preferred Stock Series H
- ------------------------
26285 8/01/72 150,000 $100 15,000,000
------------
TOTAL PREFERRED STOCK 42,844,300
------------
TOTAL OUTSTANDING CAPITAL STOCK $111,168,665
============
* Authorization canceled prior to issue.
** Converted to Common Stock.
(c) Information re: Capital Stock
-----------------------------
AMOUNT ACTUALLY
PAID TO
CORPORATION
---------------
Common Stock - $5 Par value
(Includes Premium of $132,715,599) $200,660,654
$1.52 Convertible Preference Stock, Series A -
No Par Value*** 379,310
Preferred Stock, Series A - $100 Par Value
(Includes Premium of $26,000) 5,026,000
Preferred Stock, Series B - $100 Par Value 4,000,000
Preferred Stock, Series D - $100 Par Value 344,300
Preferred Stock, Series F - $100 Par Value 7,500,000
Preferred Stock, Series G - $100 Par Value 11,000,000
Preferred Stock, Series H - $100 Par Value
(Includes Premium of $243,750) 15,243,750
------------
Total Amount Actually Paid to Corporation $244,154,014
============
***Net of shares converted to Common Stock. Original amount paid-$5,202,353.
SCHEDULE A
Page 3 of 19
(d) TERMS OF PREFERENCE FOR PREFERRED STOCK
---------------------------------------
Series A
--------
The holders of the 50,000 shares of Cumulative Preferred Stock, Series A,
4.65%, now outstanding, are entitled to receive, when and as declared by
the Board of Directors, in preference to any dividends or other
distributions on the preference and common stock, cumulative preferential
dividends at the rate of 4.65% per annum, payable quarterly on the first
days of February, May, August and November.
The Cumulative Preferred Stock, Series A, 4.65% is redeemable at a price of
$104.25 per share, plus an amount equal to all dividends accumulated and
unpaid to the date fixed for redemption.
The amount payable to the holders of the Cumulative Preferred Stock, Series
A, 4.65%, upon the voluntary liquidation, dissolution or winding up of the
corporation shall be the redemption price per share in effect at the time
of such voluntary liquidation, dissolution or winding up, and upon the
involuntary liquidation, dissolution or winding up of the corporation shall
be $100.00 per share, together, with a sum, in each case, equal to all
dividends accumulated and unpaid to the date fixed for the payment of such
distributive amounts.
There shall be no sinking fund with respect to the shares of the Cumulative
Preferred Stock, Series A, 4.65%; and
The shares of the Cumulative Preferred Stock, Series A, 4.65%, shall not be
convertible or exchangeable for other securities of the Company.
Series B
--------
The holders of the 40,000 shares of Cumulative Preferred Stock, Series B,
4.75%, now outstanding, are entitled to receive, when and as declared by
the Board of Directors, in preference to any dividends or other
distributions on the preference and common stock, cumulative preferential
dividends at the rate of 4.75% per annum, payable quarterly on the first
days of January, April, July and October.
The Cumulative Preferred Stock, Series B, 4.75% is redeemable at a price of
$102.00 per share, plus an amount equal to all dividends accumulated and
unpaid to the date fixed for redemption.
The amount payable to the holders of the Cumulative Preferred Stock, Series
B, 4.75%, upon the voluntary liquidation, dissolution or winding up of the
corporation shall be the redemption price per share in effect at the time
of such voluntary liquidation, dissolution or winding up, and upon the
involuntary liquidation, dissolution or winding up of the corporation shall
be $100.00 per share, together, with a sum, in each case, equal to all
dividends accumulated and unpaid to the date fixed for the payment of such
distributive amounts.
There shall be no sinking fund with respect to the shares of the Cumulative
Preferred Stock, Series B, 4.75%; and
The shares of the Cumulative Preferred Stock, Series B, 4.75%, shall not be
convertible into or exchangeable for other securities of the Company.
SCHEDULE A
Page 4 of 19
Series D
- --------
The holders of the 3,443 shares of Cumulative Preferred Stock, Series D, 4%, now
outstanding, are entitled to receive, when and as declared by the Board of
Directors, in preference to any dividends or other distributions of the
preference and common stock, cumulative preferential dividends at the rate of 4%
per annum, payable quarterly on the first days of January, April, July and
October.
The Cumulative Preferred Stock, Series D, 4%, is redeemable at a price of
$100.00 per share plus an amount equal to all dividends accumulated and unpaid
to the date fixed for redemption.
The amount payable to the holders of the Cumulative Preferred Stock, Series D,
4%, upon the voluntary liquidation, dissolution or winding up of the corporation
and upon the involuntary liquidation, dissolution or winding up of the
corporation shall be $100.00 per share, together, with a sum, in each case,
equal to all dividends accumulated and unpaid to the date fixed for the payment
of such distributive amounts.
There shall be no sinking fund with respect to the shares of the Cumulative
Preferred Stock, Series D, 4%; and
The shares of Cumulative Preferred Stock, Series D, 4%, shall not be convertible
into or exchangeable for other securities of the Company.
Series F
- --------
The holders of the 75,000 shares of Cumulative Preferred Stock, Series F, 4.68%,
now outstanding, are entitled to receive, when and as declared by the Board of
Directors, in preference to any dividends or other distributions on the
preference and common stock, cumulative preferential dividends at the rate of
4.68% per annum, payable quarterly on the first days of January, April, July and
October.
The Cumulative Preferred Stock, Series F, 4.68% is redeemable at a price of
$102.00 per share, plus an amount equal to all dividends accumulated and unpaid
to the date fixed for redemption.
The amount payable to the holders of the Cumulative Preferred Stock, Series F,
4.68%, upon the voluntary liquidation, dissolution or winding up of the
corporation shall be the redemption price per share in effect at the time of
such voluntary liquidation, dissolution or winding up, and upon the involuntary
liquidation, dissolution or winding up of the corporation shall be $100.00 per
share, together, with a sum, in each case, equal to all dividends accumulated
and unpaid to the date fixed for the payment of such distributive amounts.
There shall be no sinking fund with respect to the shares of the Cumulative
Preferred Stock, Series F, 4.68%; and
The shares of the Cumulative Preferred Stock, Series F, 4.68%, shall not be
convertible into or exchangeable for other securities of the Company.
SCHEDULE A
Page 5 of 19
Series G
- --------
The holders of the 110,000 shares of Cumulative Preferred Stock,Series G, 7.10%,
now outstanding, are entitled to receive, when and as declared by the Board of
Directors, in preference to any dividends or other distributions on the
preference and common stock, cumulative preferential dividends at the rate of
7.10% per annum, payable quarterly on the first days of January, April, July and
October.
The Cumulative Preferred Stock, Series G, 7.10%, is redeemable at a price of
$101.00 per share together, with a sum, in each case, equal to all dividends
accumulated and unpaid to the date fixed for redemption.
The amount payable to the holders of the Cumulative Preferred Stock, Series G,
7.10% upon the voluntary liquidation, dissolution or winding up of the
corporation shall be the redemption price per share in effect at the time of
such voluntary liquidation, dissolution or winding up, and upon the involuntary
liquidation, dissolution or winding up of the corporation shall be $100.00 per
share, together, with a sum, in each case, equal to all dividends accumulated
and unpaid to the date fixed for the payment of such distributive amounts.
There shall be no sinking fund with respect to the shares of the Cumulative
Preferred Stock, Series G, 7.10%; and
The shares of the Cumulative Preferred Stock, Series G, 7.10% shall not be
convertible into or exchangeable for other securities of the Company.
Series H
- --------
The holders of the 150,000 shares of Cumulative Preferred Stock, Series H,
8.08%, now outstanding, are entitled to receive, when and as declared by the
Board of Directors, in preference to any dividends or other distributions on the
preference and common stock, cumulative preferential dividends at the rate of
8.08% per annum, payable quarterly on the first days of January, April, July and
October.
The Cumulative Preferred Stock, Series H, 8.08%, is redeemable at a price of
$102.43 per share together, with a sum, in each case, equal to all dividends
accumulated and unpaid to the date fixed for redemption.
The amount payable to the holders of Cumulative Preferred Stock, Series H, 8.08%
upon the voluntary liquidation, dissolution or winding up of the corporation
shall be the redemption price per share in effect at the time of such voluntary
liquidation, dissolution or winding up, and upon the involuntary liquidation,
dissolution or winding up of the corporation shall be $100.00 per share,
together, with a sum, in each case, equal to all dividends accumulated and
unpaid to the date fixed for the payment of such distributive amounts.
There shall be no sinking fund with respect to the shares of the Cumulative
Stock, Series H, 8.08%; and
The shares of the Cumulative Preferred Stock, Series H, 8.08% shall not be
convertible into or exchangeable for other securities of the Company.
Series I
- --------
On January 6, 1997, the Company redeemed the remaining 13,896 shares of
Redeemable Cumulative Preferred Stock, Series I, 8 1/8% then outstanding, at
$100 per share.
SCHEDULE A
Page 6 of 19
$1.52 Convertible Cumulative Preference Stock, Series A
- -------------------------------------------------------
The holders of the 11,639 shares of $1.52 Convertible Cumulative Preference
Stock, Series A, now outstanding, are entitled to receive, when and as declared
by the Board of Directors, after all dividends through the current period have
been paid, or declared and funds set apart for payment, on the outstanding
shares of the Company's Cumulative Preferred Stock, in preference to any
dividends or other distributions on the common stock, cumulative preferential
dividends at the rate of $1.52 per annum, payable quarterly on the second days
of February, May, August and November.
The $1.52 Convertible Cumulative Preference Stock, Series A is redeemable at a
price of $32.50 per share plus an amount equal to all dividends accumulated and
unpaid to the date fixed for redemption.
The amount payable to the holders of the $1.52 Convertible Cumulative Preference
Stock, Series A upon the voluntary liquidation, dissolution or winding up of the
corporation shall be the redemption price per share in effect at the time of
such voluntary liquidation, dissolution or winding up, and upon involuntary
liquidation, dissolution or winding up of the corporation shall be $32.50 per
share, together, with a sum, in each case, equal to all dividends accumulated
and unpaid to the date fixed for the payment of such distributive amounts.
There shall be no sinking fund with respect to the shares of the $1.52
Convertible Cumulative Preference Stock, Series A.
The $1.52 Convertible Cumulative Preference Stock, Series A is convertible into
Common Stock of the Company at any time. The conversion price is reduced upon
issuance of additional shares of common stock according to the formula set forth
in the Company's Certificate of Incorporation.
SCHEDULE A
Page 7 of 19
(e) Information re: No-Par Stock
----------------------------
$1.52 Convertible Cumulative Preference Stock, Series A - No Par Value
----------------------------------------------------------------------
Number of
Shares Stated Value
------ ------------
Issued May 2, 1966 (Case 23966) 159,669 $5,202,353
Converted to Common Stock during
the period:
5/02/66 - 3/31/67 5 163
4/01/67 - 9/30/68 62 2,020
10/01/68 - 9/30/69 459 14,954
10/01/69 - 11/30/70 440 14,335
12/01/70 - 8/31/71 383 12,478
9/01/71 - 4/30/72 169 5,506
5/01/72 - 5/31/72 10 326
6/01/72 - 12/31/72 331 10,784
1/01/73 - 10/31/73 3,239 105,527
11/01/73 - 8/31/74 870 28,345
9/01/74 - 4/30/75 1,080 35,186
5/01/75 - 7/31/76 10,174 331,469
7/31/76 - 12/31/76 11,806 384,639
1/01/77 - 6/30/77 28,515 929,019
7/01/77 - 9/30/77 7,875 256,568
10/01/77 - 3/31/78 17,362 565,654
4/01/78 - 7/31/79 24,935 812,382
8/01/79 - 6/30/80 9,814 319,740
7/01/80 - 12/31/80 1,895 61,739
1/01/81 - 6/30/81 1,698 55,321
7/01/81 - 5/31/82 3,032 98,782
6/01/82 - 11/30/82 2,584 84,202
12/01/82 - 6/30/83 1,913 62,344
7/01/83 - 6/30/84 1,516 49,407
7/01/84 - 3/31/85 1,577 51,394
4/01/85 - 12/31/87 4,616 150,436
1/01/88 - 3/31/89 784 25,550
4/01/89 - 12/31/90 6,529 212,780
1/01/91 - 6/30/92 1,378 44,909
7/01/92 - 9/30/92 271 8,832
0/01/92 - 9/30/94 1,169 38,097
10/01/94 - 9/30/96 957 31,188
10/01/96 - 12/31/96 41 1,336
1/01/96 - 3/31/97 84 2,738
4/01/97 - 12/31/97 457 14,893
------ --------
Balance as of December 31, 1997 11,639 $ 379,310
====== ========
(f) Commission Authorization for Bonds and Other Long-Term Debt
-----------------------------------------------------------
Date of
Commission Face Value
Case Order Description Series Percent Due Outstanding
--------------------------------------------------------------------------------------------------
89-M-120 9/01/89 Debentures A 9.375 3/15/00 80,000,000
92-M-0862 10/22/92 Debentures C 6.14 3/01/00 20,000,000
92-M-0862 10/22/92 Debentures D 6.56 3/01/03 35,000,000
97-M-0822 08/26/97 Debentures E/F 6.50 12/01/27 80,000,000
91-M-0437 09/14/92 Pollution Control Bonds 1994 6.09 10/01/14 55,000,000
95-M-0229 06/11/95 Pollution Control Bonds 1995 Variable 8/01/15 44,000,000
-----------
Total Face Value Outstanding $314,000,000
===========
SCHEDULE A
Page 8 of 19
(g) On October 1, 1997 the Company's First Mortgage Bonds, Series I, 6
1/2% were redeemed at maturity. The Series I Bonds were the final
series of bonds outstanding under the Orange and Rockland Utilities,
Inc. First Mortgage Indenture, and the Company has canceled its First
Mortgage and discharged the lien thereon.
SCHEDULE A
Page 9 of 19
(h) Information re: Bonds and Other Long-Term Debt
----------------------------------------------
Outstanding
Date of Date of Authorized at
Title Issue - Maturity and Issued Dec. 31, 1997
---------------------------------------------------------------------------------------------------
Orange and Rockland Utilities, Inc.
-----------------------------------
Promissory Notes:
Note 1(a) 6.90% 8/15/95 7/15/99 23,650 10,451
Note 2(a) 6.90% 8/15/95 7/15/99 24,000 10,601
Note 7 6.90% 8/15/95 7/15/99 26,016 17,636
Note 3 6.90% 2/15/95 1/15/01 27,865 22,087
Note 8 6.90% 2/15/95 1/15/01 27,865 22,087
Note 9 6.97% 5/15/95 4/15/01 27,310 23,696
Unsecured Promissory Notes:
Pollution Control Bonds:
1994 Series, 6.09% 8/31/94 10/01/14 55,000,000 55,000,000
1995 Series, Variable Rate 8/01/95 8/01/15 44,000,000 44,000,000
Debentures:
Series A, 9.375% 3/15/90 3/15/00 80,000,000 80,000,000
Series C, 6.14% 3/10/93 3/01/00 20,000,000 20,000,000
Series D, 6.56% 3/10/93 3/01/93 35,000,000 35,000,000
Series E/F, 6.50% 12/18/97 12/01/27 80,000,000 80,000,000
-----------
$314,106,558
===========
(i) Indebtedness to Affiliated Companies, December 31, 1997
-------------------------------------------------------
Payables to Associated Companies $ 255,022
===========
(j) Other Indebtedness, December 31, 1997
-------------------------------------
Customers' Deposits $ 3,530,817
===========
(k) Interest Expense and Rates of Interest - Year Ended December 31, 1997
---------------------------------------------------------------------
Long-Term Debt:
Mortgage Bonds Series I 6.50% $ 1,121,250
Promissory Notes 6.9% 7,729
Unsecured Promissory Notes:
Pollution Control Bonds:
1994 Series, 6.09% 3,349,500
1995 Series, Variable Rate 1,566,904
Debentures:
Series A, 9.375% 7,500,000
Series B, 6.50% 2,830,208
Series C, 6.14% 1,228,000
Series D, 6.56% 2,296,000
Series E/F, 6.50% 216,667
-----------
Total Interest on Long-Term Debt $ 20,116,258
===========
SCHEDULE A
Page 10 of 19
Short-Term Debt:
Interest on Short-Term Debt - 5.36% - 6.97% $7,072,763
Interest on Underground Deposits - 5.65% 33,316
Interest on Customer Accounts Receivable 5.65% 104,761
Interest on Unrefundable Share of Savings from
Gas Used in Generation - 5.65 - 7.875% 184,255
Interest on Customer Deposits - 5.65% 192,139
Interest on Deferred Directors Fees - 9.04% 84,346
Interest on Pipeline Supplier Refunds - 7.40% 56,167
Interest on GAC Revenues - 7.40% 140,348
Interest on Utility Low Income Energy Efficiency Program - 7.40% 6,672
Interest on Least Costs Annual Power Supply - 7.40% 51,754
Interest on Insurance Policy - 11.70% 189,857
Interest on Tax Audits - 7.00 - 11.00% 653
Interest on Pensions - 11.62% - 13.10% 234,260
Interest on OPEBs - 11.62% - 13.10% 15,704
Interest on Tilcon Settlement - 9.00% 181,587
----------
Total Other Interest Expenses $8,548,582
==========
(i) Dividends Declared and Paid
---------------------------
Year Rate Declared Paid
---- ---- -------- ----
Common Stock
------------
1997 $2.58 $35,228,840 $35,228,840
1996 2.58 35,227,108 35,227,108
1995 2.57 35,088,740 35,088,740
1994 2.54 34,486,055 34,486,055
1993 2.49 33,693,780 33,586,839
$1.52 Convertible Preference Stock Series A - No Par Value
----------------------------------------------------------
1997 $1.52 $ 17,983 $ 17,983
1996 1.52 18,807 18,807
1995 1.52 16,241 16,241
1994 1.52 20,877 20,877
1993 1.52 21,093 21,093
Preferred Stock Series A
------------------------
1997 $4.65 $ 232,500 $ 232,500
1996 4.65 232,500 232,500
1995 4.65 232,500 232,500
1994 4.65 232,500 232,500
1993 4.65 232,500 232,500
Preferred Stock Series B
------------------------
1997 $4.75 $ 190,000 $ 190,000
1996 4.75 190,000 190,000
1995 4.75 190,000 190,000
1994 4.75 190,000 190,000
1993 4.75 190,000 190,000
SCHEDULE A
Page 11 of 19
Preferred Stock Series D
------------------------
1997 $ 4.00 $ 13,772 $ 13,772
1996 4.00 13,772 13,772
1995 4.00 13,772 13,772
1994 4.00 13,772 13,772
1993 4.00 13,772 13,772
Preferred Stock Series F
------------------------
1997 $ 4.68 $ 351,000 $ 351,000
1996 4.68 351,000 351,000
1995 4.68 351,000 351,000
1994 4.68 351,000 351,000
1993 4.68 351,000 351,000
Preferred Stock Series G
------------------------
1997 $ 7.10 $ 781,000 $ 781,000
1996 7.10 781,000 781,000
1995 7.10 781,000 781,000
1994 7.10 781,000 781,000
1993 7.10 781,000 781,000
Preferred Stock Series H
------------------------
1997 $ 8.08 $1,212,000 $1,212,000
1996 8.08 1,212,000 1,212,000
1995 8.08 1,212,000 1,212,000
1994 8.08 1,212,000 1,212,000
1993 8.08 1,212,000 1,212,000
Preferred Stock Series I
------------------------
1997 $8.125 $ 1,568 $ 1,568
1996 8.125 197,202 225,371
1995 8.125 305,457 337,399
1994 8.125 422,775 450,304
1993 8.125 562,770 590,938
(m) Contingent Assets and Liabilities
---------------------------------
There are no contingent assets or liabilities.
(n) Analysis of Unearned Surplus
----------------------------
There is no unearned surplus.
SCHEDULE A
Page 12 of 19
(o) Amortization of Deferred Debits and Credits
-------------------------------------------
Unamortized Debt Discount:
-------------------------
Yearly Amortization Original Amortized to Balance at
Description Amortization Period to Discount-Gross Dec. 31, 1997 Dec. 1, 1997
-----------------------------------------------------------------------------------------------------------------
Debenture
---------
Series A 9.375% $17,920 3/15/00 $179,200 $139,626 $39,574
-------
Total Unamortized Discount on Debt - Dec. 31, 1997 $39,574
=======
Unamortized Debt Expenses:
-------------------------
Yearly Amortization Cost of Amortized to Balance at
Description Amortization Period to Issuing-Gross Dec. 31, 1997 Dec. 31, 1997
-----------------------------------------------------------------------------------------------------------------
First Mortgage Bonds
--------------------
Series K 7.50% 8,336 4/01/01 499,236 342,849 156,387
Series L 8% 5,479 12/01/01 347,375 190,389 156,986
Series M 8.50% 17,072 5/15/03 877,692 420,407 457,285
Pollution Control Bonds
-----------------------
1985 9% 66,384 8/01/15 2,471,473 288,388 2,183,135 (A)
1984 10.25% 53,835 10/01/14 2,544,525 413,485 2,131,040 (B)
1994 Var. Rate 100,000 10/01/14 2,000,000 325,000 1,675,000
1995 Var. Rate 55,455 08/01/15 1,109,109 129,248 979,861
Debentures
----------
Series A 9.375% 80,699 3/15/00 806,986 628,776 178,210
Series C 6.14% 30,754 3/01/00 212,718 143,520 69,198
Series D 6.56% 39,375 3/01/03 390,740 183,751 206,719
Series E/F 6.50% 27,500 12/01/97 825,000 1,146 823,854
---------
Total unamortized Debt Expense - Dec. 1, 1997 $9,017,675
=========
(A) $44 million of Pollution Control Debt was refinanced in July 1995. The net
unamortized balance of $2,471,472 was transferred from PSC Account 181-
Unamortized Debt Expense to PSC Account 189-Loss on Reacquired Debt and is
being amortized over 20 years.
(B) $55 million of Pollution Control Debt was refinanced in September 1994. The
net unamortized balance of $2,544,525 was transferred from PSC Account 181-
Unamortized Debt Expense to PSC Account 189-Loss on Reacquired Debt and is
being amortized over 20 years.
SCHEDULE A
Page 13 of 19
Amortization of Deferred Debits:
-------------------------------
Balance at
Dec. 31, 1997
-------------
1) Electric and Gas Rate Case Costs - By NYPSC Order in
connection with Case 89-E-175 issued June 26, 1990, the
deferral and amortization of program costs are covered
by the Commission RDM Accounting Procedures and in Case
92-G-050 issued October 23, 1992 as outlined in the Order $ 370,459
2) Electric Underground Cable - By NYPSC Order dated
February 13, 1993, in connection with Case 92-E-0866, the
Company received permission to defer and amortize costs
previously capitalized. $ 4,251,034
SCHEDULE A
Page 14 of 19
Amortization of Deferred Credits:
- --------------------------------
Balance at
Dec. 31, 1997
-------------
1) Refunds from Natural Gas Suppliers - Refunds received during
the year are refunded over the next twelve-month period. $ 954,086
2) Fuel Savings from Gas Used in Electric Generation - Savings
deferred during the year are refunded over the next
twelve-month period. $3,940,767
3) Stony Point Gate Station - By NYPSC Order dated June 20,
1984, in connection with Case No. 27554. Current amortization
period is for fifteen years commencing December 1, 1985. $ 12,478
4) TRANSCO Project - By NYPSC Order dated March 5, 1986 in
connection with Case No.'s 27910 and 19047. Current
amortization period is for fifteen years commencing March 1,
1986. $ 81,153
SCHEDULE A
Page 15 of 19
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
BALANCE SHEET AT DECEMBER 31, 1997
----------------------------------
ASSETS AND OTHER DEBITS
- -----------------------
Utility Plant
- -------------
Electric Plant in Service* $ 880,453,423
Gas Plant in Service** 231,265,803
Common Utility Plant in Service 64,501,371
Electric Plant Held for Future Use 2,152,274
Gas Plant Held for Future Use 88,153
Construction Work in Progress 61,116,991
--------------
Utility Plant 1,239,578,015
--------------
Accumulated Provision for Depreciation:
Electric 308,903,705
Gas 81,803,458
Common 27,227,703
Electric Plant Held for Future Use 160,938
Gas Plant Held for Future Use 2,055
Accumulated Provision for Amortization:
Electric 1,973,257
Gas 6,933
--------------
Total Accumulated Provisions 420,078,049
--------------
Net Utility Plant 819,499,966
--------------
Other Property and Investments
- ------------------------------
Non-Utility Property 264,076
Accumulated Provision for Depreciation (160,788)
Investments in Subsidiary Companies 114,226,843
Other Investments 6,628
--------------
Total Other Property and Investments 114,336,759
--------------
Current and Accrued Assets
- --------------------------
Cash 1,245,871
Other Special Deposits 1,000
Working Funds 42,824
Notes Receivable 29,827
Customer Accounts Receivable 49,909,007
Other Accounts Receivable 19,712,394
Deferred Accounts Receivable 400,762
Accumulated Provision for Uncollectible Accounts (2,427,954)
Accounts Receivable from Associated Companies 11,675,406
Materials and Supplies 17,213,972
Gas Stored Underground 11,103,456
Prepayments 23,315,519
Accrued Utility Revenue 20,545,578
Miscellaneous Current and Accrued Assets 19,138,309
--------------
Total Current and Accrued Assets 171,905,971
--------------
SCHEDULE A
Page 16 of 19
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
BALANCE SHEET AT DECEMBER 31, 1997
----------------------------------
(continued)
Deferred Debits
- ---------------
Unamortized Debt Expense $ 9,017,675
Preliminary Survey and Investigation Charges 295,102
Miscellaneous Deferred Debits 119,058,241
Research and Development (2,016,195)
Accumulated Deferred Federal Income Tax 28,196,559
-------------
Total Deferred Debits 154,551,382
-------------
TOTAL ASSETS AND OTHER DEBITS $1,260,294,078
=============
*Electric Plant in Service includes Franchise - $20,657
**Gas Plant in Service includes Franchise - $20,826
SCHEDULE A
Page 17 of 19
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
BALANCE SHEET AT DECEMBER 31, 1997
----------------------------------
LIABILITIES AND OTHER CREDITS
- -----------------------------
Proprietary Capital
- -------------------
Common Stock Issued (13,589,011 shares outstanding) $ 67,945,055
Preference Stock Issued (11,639 shares outstanding) 379,310
Preferred Stock Issued (428,443 shares outstanding) 42,844,300
Premium on Capital Stock 132,985,349
Capital Stock Expense (6,058,678)
Retained Earnings 96,349,510
Unappropriated Undistributed
Subsidiary Earnings 85,123,123
--------------
Total Proprietary Capital 419,567,969
--------------
Long-Term Debt
- --------------
Other Long-Term Debt 314,106,558
Unamortized Discount on Debt (39,574)
--------------
Total Long-Term Debt 314,066,984
--------------
Current and Accrued Liabilities
- -------------------------------
Notes Payable 147,457,000
Accounts Payable 56,721,241
Accounts Payable to Associated Companies 255,022
Customer Deposits 3,530,817
Taxes Accrued 999,189
Interest Accrued 4,702,621
Dividends Declared 636,493
Miscellaneous Current and Accrued Liabilities 39,272,302
--------------
Total Current and Accrued Liabilities 253,574,685
--------------
Deferred Credits
- ----------------
Customer Advances for Construction 1,134,505
Other Deferred Credits 17,592,661
Accumulated Deferred Investment Tax Credits 12,313,109
Accumulated Deferred Income Taxes:
Accelerated Amortization 13,088,521
Liberalized Depreciation 135,583,054
Other 48,679,490
--------------
Total Deferred Credits 228,391,340
--------------
Non-Current Liabilities
- -----------------------
Obligations Under Capital Leases 1,641,203
Accumulated Provision for Contingencies 43,051,897
--------------
Total Non-Current Liabilities 44,693,100
--------------
TOTAL LIABILITIES AND OTHER CREDITS $1,260,294,078
==============
SCHEDULE A
Page 18 of 19
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
INCOME STATEMENT
----------------
YEAR ENDED DECEMBER 31, 1997
----------------------------
Electric Gas
Department Department Total
---------- ---------- -----
Operating Revenues
- ------------------
Residential Sales $154,491,511 114,574,204 $269,065,715
Commercial and Industrial Sales 161,411,333 48,606,480 210,017,813
Public Street & Highway Lighting 3,952,282 - 3,952,282
Other Sales to Public Authorities 2,754,846 - 2,754,846
Sales for Resale 78,743,718 763,715 79,507,433
Interdepartmental Sales 10,047 28,561 38,608
----------- ----------- -----------
Total Sales Revenues 401,363,737 163,972,960 565,336,697
----------- ----------- -----------
Miscellaneous Service Revenue 145,773 2,925 148,698
Rent from Operating Property 4,998,282 33,072 5,031,354
Transportation of Gas for Others - 4,506,212 4,506,212
Other Operating Revenue 5,924,866 (184,441) 5,740,425
----------- ----------- -----------
Total Miscellaneous Revenues 11,068,921 4,357,768 15,426,689
----------- ----------- -----------
Total Operating Revenues 412,432,658 168,330,728 580,763,386
----------- ----------- -----------
Operating Expenses
- ------------------
Production 163,264,201 66,764,495 230,028,696
Storage Well Rents - 3,237,500 3,237,500
Transmission 8,540,466 31,169,976 39,710,422
Distribution 21,400,219 11,398,976 32,799,195
Customer Accounts 11,517,792 3,750,138 15,267,930
Customer Service 6,128,817 1,211,620 7,340,437
Sales Promotion 90,113 1,639 91,752
Administrative and General 41,464,855 13,174,167 54,639,022
Depreciation 25,373,256 4,958,573 30,331,829
Amortization of Limited Term Plant 847,230 125,411 972,641
Taxes Other than Income Taxes 61,513,743 17,162,443 78,676,186
Federal Income Taxes 14,023,071 1,325,625 15,348,696
Deferred Federal Income Taxes 3,664,826 1,180,819 4,845,645
----------- ----------- -----------
Total Operating Expenses 357,828,589 155,461,382 513,289,971
----------- ----------- -----------
Net Operating Income $ 54,604,069 $ 12,869,346 67,473,415
=========== =========== ===========
Other Income
- ------------
Non-Operating Rental Income 13,025
Equity in Earnings of Subsidiary Companies (7,896,157)
Interest Income 976,242
Allowance for Funds Used During Construction 1,347,797
Miscellaneous Non-Operating Income or (Loss) (115,021)
-----------
Total Other Income (5,674,114)
-----------
Total Income - Carried Forward 61,799,301
===========
SCHEDULE A
Page 19 of 19
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
INCOME STATEMENT
----------------
YEAR ENDED DECEMBER 31, 1997
-----------------------------
(CONTINUED)
Total Income - Carried Forward $61,799,301
-----------
Other Income Deductions
- -----------------------
Miscellaneous Income Deductions 3,116,497
-----------
Total Other Income Deductions 3,116,497
-----------
Taxes Applicable to Other Income and Deductions
- -----------------------------------------------
Taxes Other than Income Taxes 206,404
Federal Income Tax (1,084,931)
Deferred Federal Income Tax 28,700
Investment Tax Credit Adjustment (689,336)
-----------
Total Taxes on Other Income and Deductions (1,539,163)
-----------
Interest Charges
- ----------------
Interest on Long-Term Debt 20,116,258
Amortization of Debt Discount and Expense 1,209,133
Amortization of Premium on Debt (Credit) (1,150)
Interest on Debt to Associated Companies 843,435
Other Interest Expense 8,548,582
-----------
Total Interest Charges 30,716,258
-----------
Net Income $29,505,709
===========
- -------------------------------------------------------------------------------------------------------------------------------
Name of Respondent This Report Is: Date of Report Year of Report
Orange and Rockland Utilities, Inc. (1) [X] An Original (Mo, Da, Yr)
(2) [_] A Resubmission 04/30/98 Dec. 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF RETAINED EARNINGS FOR THE YEAR
- --------------------------------------------------------------------------------
1. Report all changes in appropriated retained earnings, unappropriated
retained earnings, and unappropriated undistributed subsidiary earnings for the
year.
2. Each credit and debit during the year should be identified as to the
retained earnings account in which recorded (Accounts 433, 436 - 439 inclusive).
Show the contra primary account affected in column (b).
3. State the purposes and amount of each reservation or appropriation of
retained earnings.
4. List first account 439, Adjustments to Retained Earnings, reflecting
adjustments to the opening balance of retained earnings. Follow by credit, then
debit items in that order.
5. Show dividends for each class and series of capital stock.
6. Show separately the State and Federal income tax effect of items shown
in account 439, Adjusted Retained Items.
7. Explain in a footnote the basis for determining the amount reserved or
appropriated. If such reservation or appropriation is to be recurrent, state the
number and annual amounts to be reserved or appropriated as well as the totals
eventually to be accumulated.
8. If any notes appearing in the report to stockholders are applicable to
this statement, include them on pages 122-123.
- -------------------------------------------------------------------------------------------------------------------------------
Contra
Primary
Line Item Account Amount
No. Affected
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------------------
UNAPPROPRIATED RETAINED EARNINGS (Account 216)
- -------------------------------------------------------------------------------------------------------------------------------
1 Balance - Beginning of Year $99,040,619
- -------------------------------------------------------------------------------------------------------------------------------
2 Changes (Identify by prescribed retained earnings accounts)
- -------------------------------------------------------------------------------------------------------------------------------
3 Adjustments to Retained Earnings (Account 439)
- -------------------------------------------------------------------------------------------------------------------------------
4 Credit: 0
- -------------------------------------------------------------------------------------------------------------------------------
5 Credit:
- -------------------------------------------------------------------------------------------------------------------------------
6 Credit:
- -------------------------------------------------------------------------------------------------------------------------------
7 Credit:
- -------------------------------------------------------------------------------------------------------------------------------
8 Credit:
- -------------------------------------------------------------------------------------------------------------------------------
9 TOTAL Credits to Retained Earnings (Acc. 439) (Total of lines 4 thru 8) 0
- -------------------------------------------------------------------------------------------------------------------------------
10 Debit: Common Stock Repurchase Program (2,064,312)
- -------------------------------------------------------------------------------------------------------------------------------
11 Debit:
- -------------------------------------------------------------------------------------------------------------------------------
12 Debit:
- -------------------------------------------------------------------------------------------------------------------------------
13 Debit:
- -------------------------------------------------------------------------------------------------------------------------------
14 Debit:
- -------------------------------------------------------------------------------------------------------------------------------
15 TOTAL Debits to Retained Earnings (Acc. 439) (Total of lines 10 thru 14) ($2,064,312)
- -------------------------------------------------------------------------------------------------------------------------------
16 Balance Transferred from Income (Account 433 less Account 418.1) * Note A 37,401,866
- -------------------------------------------------------------------------------------------------------------------------------
17 Appropriations of Retained Earnings (Account 436)
- -------------------------------------------------------------------------------------------------------------------------------
18
- -------------------------------------------------------------------------------------------------------------------------------
19
- -------------------------------------------------------------------------------------------------------------------------------
20
- -------------------------------------------------------------------------------------------------------------------------------
21
- -------------------------------------------------------------------------------------------------------------------------------
22 TOTAL Appropriations of Retained Earnings (Acc. 436) (Total of lines 18 thru 21)
- -------------------------------------------------------------------------------------------------------------------------------
23 Dividends Declared - Preferred Stock (Account 437)
- -------------------------------------------------------------------------------------------------------------------------------
24 Preferred Stock 238 (2,781,840)
- -------------------------------------------------------------------------------------------------------------------------------
25 Preference Stock 238 (17,983)
- -------------------------------------------------------------------------------------------------------------------------------
26
- -------------------------------------------------------------------------------------------------------------------------------
27
- -------------------------------------------------------------------------------------------------------------------------------
28
- -------------------------------------------------------------------------------------------------------------------------------
29 TOTAL Dividends Declared - Preferred Stock (Acct. 437) (Total of lines 24 thru 28) (2,799,823)
- -------------------------------------------------------------------------------------------------------------------------------
30 Dividends Declared - Common Stock (Account 438)
- -------------------------------------------------------------------------------------------------------------------------------
31 Common Stock 238 (35,228,840)
- -------------------------------------------------------------------------------------------------------------------------------
32
- -------------------------------------------------------------------------------------------------------------------------------
33
- -------------------------------------------------------------------------------------------------------------------------------
34
- -------------------------------------------------------------------------------------------------------------------------------
35
- -------------------------------------------------------------------------------------------------------------------------------
36 TOTAL Dividends Declared - Common Stock (Acct. 438) (Total of lines 31 thru 35) ($35,228,840)
- -------------------------------------------------------------------------------------------------------------------------------
37 Transfers from Acct. 216.1, Unappropriated Undistributed Subsidiary Earnings
- -------------------------------------------------------------------------------------------------------------------------------
38 Balance - End of Year (Total of lines 01, 09, 15, 16, 22, 29, 36 and 37) $96,349,510
- -------------------------------------------------------------------------------------------------------------------------------
FERC FORM NO. 1 (ED. 12-96) Page 118
- ----------------------------------------------------------------------------------------------------------------------------------
Name of Respondent This Report is: Date of Report Year of Report
Orange and Rockland Utilities, Inc. (1) [X] An Original (Mo. Da. Yr)
(2) [_] A Resubmission 04/30/98 Dec. 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF RETAINED EARNINGS FOR THE YEAR (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Line Item Amount
No. (a) (b)
- ----------------------------------------------------------------------------------------------------------------------------------
APPROPRIATED RETAINED EARNINGS (Account 215)
State balance and purpose of each appropriated retained earnings amount at end of year and give
accounting entries for any applications of appropriated retained earnings during the year.
- ----------------------------------------------------------------------------------------------------------------------------------
39
40
41
42
43
44
- ----------------------------------------------------------------------------------------------------------------------------------
45 TOTAL Appropriated Retained Earnings (Account 215)
- ----------------------------------------------------------------------------------------------------------------------------------
APPROPRIATED RETAINED EARNINGS-AMORTIZATION RESERVE, FEDERAL
(Account 215.1)
State below the total amount set aside through appropriations of retained earnings, as of the end
of the year, in compliance with the provisions of Federally granted hydroelectric project licenses
held by the respondent. If any reductions or changes other than the normal annual credits hereto have
been made during the year, explain such items in a footnote.
- ----------------------------------------------------------------------------------------------------------------------------------
46 TOTAL Appropriated Retained Earnings - Amortization Reserve, Federal (Account 215.1)
- ----------------------------------------------------------------------------------------------------------------------------------
47 TOTAL Appropriated Retained Earnings (Account 215, 215.1) (Enter total of lines 45 and 46) 0
- ----------------------------------------------------------------------------------------------------------------------------------
48 TOTAL Retained Earnings (Account 215, 215.1, 216) (Enter total of lines 38 and 47) $96,349,510
- ----------------------------------------------------------------------------------------------------------------------------------
UNAPPROPRIATED UNDISTRIBUTED SUBSIDIARY EARNINGS (ACCOUNT 216.1)
- ----------------------------------------------------------------------------------------------------------------------------------
49 Balance -- Beginning of Year (Debit or Credit) 93,019,280
- ----------------------------------------------------------------------------------------------------------------------------------
50 Equity in Earnings for Year (Credit) (Account 418.1) (7,896,157)
- ----------------------------------------------------------------------------------------------------------------------------------
51 (Less) Dividends Received (Debit)
- ----------------------------------------------------------------------------------------------------------------------------------
52 Other Changes (Explain)
- ----------------------------------------------------------------------------------------------------------------------------------
53 Balance -- End of Year (Total of Lines 49 Thru 52) $85,123,123
- ----------------------------------------------------------------------------------------------------------------------------------
Note A
------
Net Income $29,505,709
Equity in Earnings of Subsidiary Companies (7,896,157)
-----------
$37,401,866
===========
- ----------------------------------------------------------------------------------------------------------------------------------
Page 119
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Respondent This Report Is: Date of Report Year of Report
Orange and Rockland Utilities, Inc. (1) [X] An Original (No. Da. Yr.)
(2) [ ] A Resubmission 04/30/98 Dec. 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
1. If the notes to the cash flow statement in the respondents annual stockholders report are applicable to this statement, such
notes should be included in pages 122-123. Information about noncash investing and finacing activities should be provided on
pages 122-123. Provide also on pages 122-123 a reconciliation between "Cash and Cash Equivalents at End of Year" with related
amounts on the balance sheet.
2. Under "Other" specify significant amounts and group others.
3. Operating Activities - Other: Include gains and losses pertaining operating activities only. Gains and losses pertaining to
investing and financing activities should be reported in those activities. Show on pages 122-123 the amount of interest paid (net
of amounts capitalized) and income taxes paid.
- ------------------------------------------------------------------------------------------------------------------------------------
Line Description (See Instruction No.5 for Explanation of Codes) Amounts
No. (a) (b)
- ------------------------------------------------------------------------------------------------------------------------------------
1 Net Cash Flow from Operating Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
2 Net Income (Line 722(c) on page 117) $29,505,709
- ------------------------------------------------------------------------------------------------------------------------------------
3 Noncash Charges (Credits) to Income:
- ------------------------------------------------------------------------------------------------------------------------------------
4 Depreciation and Depletion 31,304,470
- ------------------------------------------------------------------------------------------------------------------------------------
5 Amortization of (Specify)
- ------------------------------------------------------------------------------------------------------------------------------------
6 Debt Discount and Expense 1,207,983
- ------------------------------------------------------------------------------------------------------------------------------------
7
- ------------------------------------------------------------------------------------------------------------------------------------
8 Deferred Income Taxes (Net) 5,380,355
- ------------------------------------------------------------------------------------------------------------------------------------
9 Investment Tax Credit Adjustment (Net) (689,336)
- ------------------------------------------------------------------------------------------------------------------------------------
10 Net (Increase) Decrease in Receivables (14,921,638)
- ------------------------------------------------------------------------------------------------------------------------------------
11 Net (Increase) Decrease in Inventory 646,115
- ------------------------------------------------------------------------------------------------------------------------------------
12 Net (Increase) Decrease in Allowances Inventory
- ------------------------------------------------------------------------------------------------------------------------------------
13 Net Increase (Decrease) in Payables and Accrued Expenses (25,821,745)
- ------------------------------------------------------------------------------------------------------------------------------------
14 Net (Increase) Decrease in Other Regulatory Assets 14,774,328
- ------------------------------------------------------------------------------------------------------------------------------------
15 Net Increase (Decrease) in Other Regulatory Liabilities 5,512,299
- ------------------------------------------------------------------------------------------------------------------------------------
16 (Less) Allowance for Other Funds Used During Construction
- ------------------------------------------------------------------------------------------------------------------------------------
17 (Less) Undistrributed Earnings from Subsidiary Companies (7,896,157)
- ------------------------------------------------------------------------------------------------------------------------------------
18 Other Allowance for Borrowed Funds Used During Construction (1,347,797)
- ------------------------------------------------------------------------------------------------------------------------------------
19 * See insert page 120A 3,105,433
- ------------------------------------------------------------------------------------------------------------------------------------
20
- ------------------------------------------------------------------------------------------------------------------------------------
21
- ------------------------------------------------------------------------------------------------------------------------------------
22 Net Cash Provided by (Used in) Operating Activities (Total of Lines 2 thru 21) $56,552,333
- ------------------------------------------------------------------------------------------------------------------------------------
23
- ------------------------------------------------------------------------------------------------------------------------------------
24 Cash Flows from Investment Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
25 Construction and Acquisition of Plant (Including Land):
- ------------------------------------------------------------------------------------------------------------------------------------
26 Gross Additions to Utility Plant (less nuclear fuel) (39,391,745)
- ------------------------------------------------------------------------------------------------------------------------------------
27 Gross Additions to Nuclear Fuel
- ------------------------------------------------------------------------------------------------------------------------------------
28 Gross Additions to Common Utility (28,932,600)
- ------------------------------------------------------------------------------------------------------------------------------------
29 Gross Additions to Nonutility Plant (83,451)
- ------------------------------------------------------------------------------------------------------------------------------------
30 (Less) Allowance for Other Funds Used During Construction
- ----------------------------------------------------------------------------------------------------------------------------------
31 Other: Allowance for Borrowed Funds During Construction 1,347,797
- ------------------------------------------------------------------------------------------------------------------------------------
32
- ------------------------------------------------------------------------------------------------------------------------------------
33
- ------------------------------------------------------------------------------------------------------------------------------------
34 Cash Outflows for Plant (Total of lines 26 thru 33) ($67,059,999)
- ------------------------------------------------------------------------------------------------------------------------------------
35
- ------------------------------------------------------------------------------------------------------------------------------------
36 Aquisition of Other Noncurrent Assets (d)
- ------------------------------------------------------------------------------------------------------------------------------------
37 Proceeds from Disposal of Noncurrent Assets (d)
- ------------------------------------------------------------------------------------------------------------------------------------
38
- ------------------------------------------------------------------------------------------------------------------------------------
39 Investments in and Advances to Assoc. and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
40 Contributions and Advances from Assoc. and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
41 Disposition of Investments in (and Advances to)
- ------------------------------------------------------------------------------------------------------------------------------------
42 Associated and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------------------------------
43
- ------------------------------------------------------------------------------------------------------------------------------------
44 Purchase of Investment Securities (a)
- ------------------------------------------------------------------------------------------------------------------------------------
45 Proceeds from Sales of Investment Securities (a)
- ------------------------------------------------------------------------------------------------------------------------------------
FERC FORM NO.1 (ED. 12-96) Page 120
- ---------------------------------------------------------------------------------------------------
Name of Respondent This Report is Date of Report Year of Report
Orange and Rockland Utilities, Inc. An Original 04/30/98 Dec. 31, 1997
- ---------------------------------------------------------------------------------------------------
Utility Plant (Net)
-------------------
Depreciation Reserve:
Depreciation charged to clearing accounts 3,764,084
Depreciation held for future use 6,752
Salvage (net) (1,154,060)
Retirements (5,553,935)
Other debits and credits to reserve (17,397)
Adjustments, transfers, retirements of utility plant 4,639,972
Nonutility Property (Net)
------------------------
Depreciation Reserve:
Depreciation accrual 23,162
Salvage (net) 15,577
Other
-----
Prepaid and other current assets (1,464,426)
Other investments (234)
Preliminary survey and investigation charges (89,188)
Miscellaneous deferred debits 4,302,673
Research and development 524,124
Unamortized debt expense (825,000)
Capital stock expense (13,706)
Reserve for claims and damages 693,266
Pension and other benefits 3,117,160
Provision for rate refunds (1,132,434)
Customer advances for construction 207,138
Other deferred credits (3,938,095)
--------------
$ 3,105,433
==============
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash paid during the year for:
Interest $27,965,546
Federal income taxes $10,000,000
1. Cash and Cash Equivalents 1997 1996
---- ----
Account 131 - Cash $ 1,245,871 $2,793,353
Account 135 - Working Funds 42,824 16,836
Account 136 - Temporary Cash Investments 0 0
-------------- -----------
$1,288,695 $2,810,189
============== ===========
Net Change ($1,521,494)
============
- --------------------------------------------------------------------------------
FERC FORM NO. 1
Page 120A
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Respondent This Report Is: Date of Report Year of Report
Orange and Rockland Utilities, Inc. (1) [X] An Original (Mo. Da. Yr.)
(2) [_] A Resubmission 04/30/98 Dec. 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
4. Investing Activities 5. Codes used:
Include at Other (line 31) net cash outflow to acquire other (a) Net proceeds or payments.
companies. Provide a reconciliation of assets acquired with (b) Bonds, debentures and other long term debt.
liabilities assumed on pages 122-123. (c) Include commercial paper.
Do not include on this statement the dollar amount of Leases (d) Identify separately such items as investments, fixed
capitalized per US of A General Instruction 20; instead assets, intangibles, etc.
provided a reconciliation of the dollar amount of Leases 6. Enter on pages 122-123 clarifications and explanations.
capitalized with the plant cost on pages 122-123.
- ------------------------------------------------------------------------------------------------------------------------------------
Line Description (See Instruction No. 5 for Explanation of Codes) Amounts
No. (a) (b)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
46 Loans Made or Purchased
- ------------------------------------------------------------------------------------------------------------------------------------
47 Collections on Loans
- ------------------------------------------------------------------------------------------------------------------------------------
48
- ------------------------------------------------------------------------------------------------------------------------------------
49 Net (Increase) Decrease in Receivables
- ------------------------------------------------------------------------------------------------------------------------------------
50 Net (Increase) Decrease in Inventory
- ------------------------------------------------------------------------------------------------------------------------------------
51 Net (Increase) Decrease in Allowances Held for Speculation
- ------------------------------------------------------------------------------------------------------------------------------------
52 Net Increase (Decrease) in Payables and Accrued Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
53 Other:
- ------------------------------------------------------------------------------------------------------------------------------------
54
- ------------------------------------------------------------------------------------------------------------------------------------
55
- ------------------------------------------------------------------------------------------------------------------------------------
56 Net Cash Provided by (Used in) Investing Activities
- ------------------------------------------------------------------------------------------------------------------------------------
57 (Total of lines 34 thru 55) ($67,059,999)
- ------------------------------------------------------------------------------------------------------------------------------------
58
- ------------------------------------------------------------------------------------------------------------------------------------
59 Cash Flows from Financing Activities:
- ------------------------------------------------------------------------------------------------------------------------------------
60 Proceeds from Issuance of:
- ------------------------------------------------------------------------------------------------------------------------------------
61 Long - Term Debt (b) 81,928,423
- ------------------------------------------------------------------------------------------------------------------------------------
62 Preferred Stock
- ------------------------------------------------------------------------------------------------------------------------------------
63 Common Stock 17,138
- ------------------------------------------------------------------------------------------------------------------------------------
64 Other:
- ------------------------------------------------------------------------------------------------------------------------------------
65
- ------------------------------------------------------------------------------------------------------------------------------------
66 Net Increase in Short - Term Debt (c) 47,725,000
- ------------------------------------------------------------------------------------------------------------------------------------
67 Other:
- ------------------------------------------------------------------------------------------------------------------------------------
68
- ------------------------------------------------------------------------------------------------------------------------------------
69
- ------------------------------------------------------------------------------------------------------------------------------------
70 Cash Provided by Outside sources (Total of lines 61 thru 69) $129,670,561
- ------------------------------------------------------------------------------------------------------------------------------------
71
- ------------------------------------------------------------------------------------------------------------------------------------
72 Payments for Retirement of:
- ------------------------------------------------------------------------------------------------------------------------------------
73 Long - term Debt (b) (78,237,201)
- ------------------------------------------------------------------------------------------------------------------------------------
74 Preferred Stock (1,407,231)
- ------------------------------------------------------------------------------------------------------------------------------------
75 Common Stock (3,011,294)
- ------------------------------------------------------------------------------------------------------------------------------------
76 Other:
- ------------------------------------------------------------------------------------------------------------------------------------
77
- ------------------------------------------------------------------------------------------------------------------------------------
78 Net Decrease in Short - Term Debt (c)
- ------------------------------------------------------------------------------------------------------------------------------------
79
- ------------------------------------------------------------------------------------------------------------------------------------
80 Dividends on Preferred Stock (2,799,823)
- ------------------------------------------------------------------------------------------------------------------------------------
81 Dividends on Common Stock (35,228,840)
- ------------------------------------------------------------------------------------------------------------------------------------
82 Net Cash provided by (Used in) Financing Activities
- ------------------------------------------------------------------------------------------------------------------------------------
83 (Total of lines 70 thru 81) $8,986,172
- ------------------------------------------------------------------------------------------------------------------------------------
84
- ------------------------------------------------------------------------------------------------------------------------------------
85 Net Increase (Decrease) in Cash and Cash Equivalents
- ------------------------------------------------------------------------------------------------------------------------------------
86 (Total of lines 22, 57, and 83) ($1,521,494)
- ------------------------------------------------------------------------------------------------------------------------------------
87
- ------------------------------------------------------------------------------------------------------------------------------------
88 Cash and Cash Equivalents at Beginning of Year 2,810,189
- ------------------------------------------------------------------------------------------------------------------------------------
89
- ------------------------------------------------------------------------------------------------------------------------------------
90 Cash and Cash Equivalents at End of Year 1,288,695
- ------------------------------------------------------------------------------------------------------------------------------------
FERC FROM NO. 1 (ED. 12-96) Page 121
Orange and Rockland Utilities, Inc.
Financial Data
December 31, 1997
Interest Coverage (Times)
SEC - Book N/A
Earning per Average Common Share:
Continuing Operations $ 3.09
Discontinued Operations (1.13)
-------
Consolidated Earnings per Average Common Share 1.96
=======
Return on average common equity 7.09%
Book value per share
Average $ 27.60
End of Period 27.69
Effective tax rate 33%
Capitalization Ratios:
SEC Basis
Common Stock Equity 51.30%
Non-Reedemable Preferred and Preference Stock 5.89%
Long-Term Debt (includes current portion) 42.81%
-------
100.00%
=======
PSC Basis
Common Stock Equity 51.05%
Non-Reedemable Preferred and Preference Stock 5.86%
Long-Term Debt (includes current portion) 42.61%
Customer Deposits 0.48%
-------
100.00%
=======
APPENDIX F
APPENDIX F
CONFORMING MODIFICATIONS TO
CORPORATE STRUCTURE AND RELATED PROVISIONS OF
CON EDISON SETTLEMENT AGREEMENT AND
ORANGE AND ROCKLAND RESTRUCTURING PLAN
--------------------------------------
Except as otherwise discussed herein, the corporate structure section of
the Con Edison Settlement Agreement (Article V and Appendix J) and the corporate
structure and affiliate rules sections of the Orange and Rockland Restructuring
Plan (Article IV.A - C and Appendices E, H and I) continue unchanged. The
changes set forth below are conforming in nature and do not change the substance
of the settlement agreements.
These modifications will take effect when approved by the Commission.
Con Edison Settlement Agreement
-------------------------------
Formation of Holding Company
- ----------------------------
Section V.1.(iv) - Defining "Subsidiary" And "Affiliate" As described in
--------------------------------------------------------
the Joint Petition, Orange and Rockland will become a direct subsidiary of CEI.
The subsidiaries of Orange and Rockland will therefore become indirect
subsidiaries of CEI and affiliates of CEI's other subsidiaries, including Con
Edison and CEI's existing unregulated subsidiaries.
Section V.1(iv) of the Con Edison Settlement Agreement states that
"subsidiaries other than Con Edison are referred to collectively as 'the
unregulated subsidiaries' or 'unregulated affiliates.'" CEI will now have more
than one regulated subsidiary, and this provision will therefore be conformed to
reflect the fact that the terms "subsidiary" and "affiliate" will include both
regulated and unregulated subsidiaries and affiliates. Any provision intended to
apply only to either regulated or unregulated subsidiaries and affiliates will
----
be amended, where necessary, to make such limitation clear.
2
Affiliate Relations - In General
- --------------------------------
Section V.4(i) - Separate Building This provision provides that "[n]o
----------------------------------
unregulated affiliate may be located in the same building as Con Edison beyond
180 days after its formation. Con Edison and CEI may occupy the same building."
This provision will be conformed to make it clear that Con Edison and Orange and
Rockland may be located in the same building, subject to the provisions of the
merger agreement.
Transfer of Assets
- -------------------
Section V.5(i) - Transfers Between Regulated Affiliates This provision
-------------------------------------------------------
will be amended to recognize that transfers of assets between Con Edison and
Orange and Rockland will not require the Commission's approval under Section 70
of the Public Service Law.
Section V.5(ii) - Transfers Between Regulated Affiliates This provision
--------------------------------------------------------
will be amended to permit transfers of assets between regulated affiliates at
net book value.
Section V.6(i) - Separate Operating Employees This provision will be
---------------------------------------------
amended to expressly permit Con Edison and Orange and Rockland to share
operating employees. Accounting will be in accordance with the amended
accounting procedures (Joint Petition, Appendix G).
Section V.6(iii) - Officers This provision provides that "[o]fficers of
---------------------------
CEI may be officers of Con Edison." This provision will be amended by adding the
words "and Orange and Rockland, Rockland Electric Company and Pike County Light
& Power Company" to the quoted language.
Section V.6(iv) AND (v) - Employee Transfers These provisions will be
--------------------------------------------
amended to expressly permit the transfer of employees between Con Edison and
Orange and Rockland and to recognize that the service limitation and
compensation applicable to transfers with unregulated affiliates will not be
applicable to the utility transfers.
Section V.6(viii) - Common Benefit Plans This provision permits employees
----------------------------------------
of CEI, Con Edison and CEI's unregulated subsidiaries to participate in common
pension and benefit plans. This provision will be amended to also permit
employees of Orange and Rockland and other regulated affiliates to participate
in such plans.
3
Provision of Services and Goods
- -------------------------------
Section V.7(i) - Corporate Services This provision will be amended to
-----------------------------------
permit Con Edison to provide corporate services to Orange and Rockland. Such
services will be provided by Con Edison in accordance with the amended
accounting procedures (Joint Petition, Appendix G).
Section V.7(ii) - Other Services This provision will be amended to permit
--------------------------------
Con Edison to provide services other than corporate services to Orange and
Rockland and to provide such services at fully-loaded cost, except as otherwise
required under PSL sec. 110. Such services will be provided in accordance with
the amended accounting procedures (Joint Petition, Appendix G).
Section V.7(iii) - Services Purchased From Affiliates This section will be
-----------------------------------------------------
amended to recognize that CEI and Con Edison may purchase services from
regulated affiliates, including Orange and Rockland. Such services will be
provided in accordance with the amended accounting procedures (Joint Petition,
Appendix G).
Section V.7(iv) - Common Insurance This provision will be amended to permit
----------------------------------
CEI and all of its subsidiaries to be covered by common property/casualty and
other business insurance policies.
Orange and Rockland Restructuring Plan
--------------------------------------
The affiliate rules applicable to Orange and Rockland are included in
Article IV and Appendices H and I of the Orange and Rockland Restructuring Plan.
Corporate Structure
- -------------------
Section IV.A - Holding Company This section will be amended to conform to
------------------------------
the merger agreement, pursuant to which Orange and Rockland will not form a
registered holding company but instead will become a subsidiary of CEI.
This section will also be amended to recognize that to effectuate the
mechanics of the merger, Orange and Rockland will transfer ownership of its
common equity to CEI.
Appendix H - Standards of Competitive Conduct - A statement will be added to
- ---------------------------------------------
this appendix to make clear that the use of the term "Holding Company" refers to
CEI rather than to the registered holding company that Orange and Rockland had
intended to form.
4
Appendix I - Transfer of Assets
- -------------------------------
Sections 2(a) and (b) - Transfer of Assets These sections will be
------------------------------------------
conformed to the changes indicated for Sections V.5(i) and (ii) of the Con
Edison agreement, described, supra.
-----
Appendix I - Personnel
- ----------------------
Sections 3(a), (c) and (d) - Separate Operating Employees and Employee
----------------------------------------------------------------------
Transfers These sections will be conformed to the changes indicated for
- ---------
Sections V.6(i), 6(iv) and 6(v) of the Con Edison agreement, described, supra.
-----
Sections 3(f) - Compensation This provision, which permits the stock of
----------------------------
the Holding company to be used as an element of compensation of common officers
of the Holding company and the Delivery company, will be conformed to substitute
CEI for the Holding company.
Sections 3(g) - Common Benefit Plans This provision permits employees of
------------------------------------
the registered holding company that Orange and Rockland had intended to form,
Orange and Rockland and its unregulated subsidiaries to participate in common
pension and benefit plans. This provision will be amended to eliminate the
reference to the to-be-formed holding company and also permit employees of
Orange and Rockland and its affiliates to participate in common pension and
benefit plans with CEI and its other subsidiaries consistent with the change
indicated for Section V.6(viii) of the Con Edison agreement, described, supra.
-----
Appendix I - Provision of Services and Goods
--------------------------------------------
Section 4(a) - Corporate Services This provision was written with the
---------------------------------
expectation that Orange and Rockland would form a registered holding company
with a service company that would provide services to a "Delivery Company"
(i.e., Orange and Rockland) and unregulated subsidiaries. This provision will be
conformed to reflect the merger.
Section 4(b) - Other Services This provision will be amended to recognize
-----------------------------
that Orange and Rockland may provide non-corporate services to Con Edison and to
provide such services at fully-loaded cost, except as otherwise required under
PSL sec. 110. Such
5
services will be provided in accordance with the amended accounting procedures
(Joint Petition, Appendix G).
Section 4(d) - Common Insurance This provision would be conformed to
-------------------------------
permit CEI and all of its subsidiaries to be covered by common property/casualty
and other business insurance policies consistent with the change indicated for
Section V.7(iv) of the Con Edison agreement described, supra.
-----
* * * *
Development of a single set of procedures is indicated, and the Petitioners
are willing to discuss such a step if other parties also believe such a step to
be feasible.
APPENDIX G
APPENDIX G
CONFORMING MODIFICATIONS TO
AFFILIATE TRANSACTIONS ACCOUNTING PROCEDURES OF
CON EDISON SETTLEMENT AGREEMENT AND
ORANGE AND ROCKLAND RESTRUCTURING PLAN
Except as otherwise discussed herein, the accounting appendices to the Con
Edison Settlement Agreement (Appendix I) and the Orange and Rockland
Restructuring Plan (Appendix J) would continue unchanged./1/ The changes set
forth below are conforming in nature and do not change the substance of the
settlement agreements.
MODIFICATIONS TO APPENDIX I TO CON EDISON SETTLEMENT AGREEMENT
--------------------------------------------------------------
Section 3.1 - Background This provision will be amended to (1) recognize
------------------------
Orange and Rockland and its subsidiaries as direct and indirect subsidiaries of
CEI and as affiliates of Con Edison and CEI's other unregulated subsidiaries and
(2) make this accounting procedure also applicable to Orange and Rockland.
Section 3.2(a) - Transfer of Assets This section will be amended to
-----------------------------------
conform to the change to Section V.5(i) of the settlement, which establishes
that transfers of assets between regulated affiliates will be made at net book
cost.
Section 3.3(a) - Provision of Goods and Services This section will be
------------------------------------------------
amended to conform to the changes to Sections V.7(i) and (ii) of the settlement,
which permit Con Edison to provide corporate and other services to Orange and
Rockland. This section will also recognize that the provision of electric energy
or gas to Orange and Rockland shall be governed by PSL sec. 110, subject to any
applicable FERC requirements, and that Con Edison will charge Orange and
Rockland the same rates for Con Edison's tariff services as Con Edison charges
all similarly-situated customers.
Section 3.3(d) - Provision of Goods and Services This section will be
------------------------------------------------
amended to conform to the change to Section V.7(iii), which recognizes that
Con Edison may purchase goods and services from Orange and Rockland and that the
pricing of such services shall be in accordance with the accounting guidelines
set forth in the Orange and Rockland Restructuring Plan.
___________________
/1/ The cost allocation guidelines in Appendix J to the Plan were in draft form.
Orange and Rockland committed to "file with the Director of the Office of
Accounting and Finance of the Department of Public Service all amendments and
supplements to the guidelines, thirty days prior to making such change(s)" and
the Plan provided that such changes would be considered in either the unbundling
phase of the proceeding or as part of the application to form a holding company
(Appendix I, section 1(b)). In light of the proposed merger, Orange and Rockland
proposes that these changes be considered as part of the Joint Petition and will
submit a copy of this Appendix G to the Director in satisfaction of the
aforementioned filing requirement.
Section 3.4(a)(1) - Direct Cost Allocations This section will be amended
-------------------------------------------
to conform to the change to Section V.7(ii), which provides that other (non-
corporate) services provided by Con Edison to Orange and Rockland will be
provided on a fully-loaded cost basis.
Section 3.4(c)(2) and (3) - Proportional and Other Allocations These
--------------------------------------------------------------
sections will be amended to conform to the changes to Sections V.6(viii) and
7(iv), which permit (1) Orange and Rockland employees to participate in common
pension and benefit plans and (2) CEI and all affiliates to be covered by common
property/casualty and other business insurance policies, respectively.
MODIFICATIONS TO APPENDIX J TO ORANGE AND ROCKLAND RESTRUCTURING PLAN
---------------------------------------------------------------------
Section 3.1 - Background This provision will be amended to (1) recognize
------------------------
Orange and Rockland and its subsidiaries as direct and indirect subsidiaries of
CEI and as affiliates of Con Edison and CEI's other unregulated subsidiaries and
(2) make this accounting procedure also applicable to Con Edison.
Section 3.2 - Transfers of Assets and Employees A section will be added
-----------------------------------------------
to Appendix J to provide accounting guidelines for transfers of assets and
employees, consistent with the rules set forth in sections 2 and 3 of Appendix
I.
Section 3.3(c) - Provision of Goods and Services This section will be
------------------------------------------------
amended to conform to the changes to Sections V.7(i) and (ii) of the Con Edison
Settlement Agreement, which permits Con Edison to provide corporate and other
services to Orange and Rockland at fully-loaded cost, recognizing that Con
Edison's provision of electric energy or gas to Orange and Rockland shall be
governed by PSL sec. 110, subject to any applicable FERC requirements, and that
Orange and Rockland will pay the same rates for Con Edison's tariff services as
all similarly-situated customers.
Section 3.4(c)(2)/2/ and Exhibit A, Section (4) - Cost Causative
----------------------------------------------------------------
Allocations - These sections will be amended to clarify the bases for allocating
- -----------
costs by deleting, for example, reference to consolidated assets.
Sections 3.4(c)(2)/3/ and (3) - Proportional and Other Allocations These
------------------------------------------------------------------
sections will be amended to conform to the changes to Sections 3(g) and 4(d) of
the Orange and Rockland Restructuring Plan, which permit (1) employees of CEI,
Con Edison, Orange and Rockland and their affiliates to participate in common
pension and benefit plans and (2) CEI and all affiliates to be covered by common
property/casualty and other business insurance policies, respectively.
****
____________________
/2/ Note: there are two provisions numbered "(c)2." The Proposed change relates
to the second one.
/3/ Note: there are two provisions numbered "(c)2." This proposed change relates
to the second one.
Development of a single set of procedures is indicated, and the Petitioners
are willing to discuss such a step if other parties also believe such a step to
be feasible.
APPENDIX H
APPENDIX H
QUANTIFICATION AND ALLOCATION OF SYNERGY SAVINGS
(THOUSANDS OF DOLLARS)
RY 3-00 RY 3-01 RY 3-02 RY 3-03 RY 3-04 RY 3-05 RY 3-06 RY 3-07 RY -3-08 RY 3-09
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE $19,991 $39,315 $45,195 $47,141 $49,163 $51,226 $53,357 $55,569 $57,865 $60,249
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE (5,928) (7,905) (7,905) (7,905) (7,905) (1,976) - - - -
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 14,063 31,410 37,290 39,237 41,256 49,250 53,357 55,569 57,865 60,249
DISPOSITION OF SAVINGS
O&R CUSTOMER BENEFIT*** 922 922 3,049 3,496 3,965 5,579 6,449 6,964 7,502 8,067
CON ED CUSTOMER BENEFIT*** 7,409 13,484 15,597 16,122 16,664 19,046 20,229 20,821 21,430 22,058
TOTAL CUSTOMER BENEFIT 8,331 14,406 18,645 19,618 20,629 24,625 26,678 27,784 28,933 30,125
CEI SHAREHOLDER BENEFIT 5,732 17,004 18,645 19,618 20,629 24,625 26,678 27,784 28,933 30,125
TOTAL DISPOSITION $ 14,063 $31,410 $37,290 $39,237 $41,258 $49,250 $53,357 $55,569 $57,865 $60,249
Total
-----
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE $479,072
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE (39,523)
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 439,549**
DISPOSITION OF SAVINGS
O&R CUSTOMER BENEFIT*** 46,914 21%
CON ED CUSTOMER BENEFIT*** 172,860 79%
TOTAL CUSTOMER BENEFIT 219,774 100%
CEI SHAREHOLDER BENEFIT 219,774
TOTAL DISPOSITION $439,549
* Synergies begin July 1, 1999 and RY 3-00 includes 9 months of savings.
** Total savings of $467,576 inclusive of Orange and Rockland's out-of-state
utility operations.
*** Total customer savings, inclusive of gross receipts taxes, amount to
$50,445 for Orange and Rockland customers and $185,871 for Con Edison
customers.
APPENDIX I
APPENDIX I
BENEFIT DISPOSITION AND METHODOLOGY
-----------------------------------
I. FRAMEWORK:
---------
i) Amortize actual costs to achieve and transaction costs over five-
year period ending June 2004.
ii) Allocate to customers one-half estimated synergies, net of
transaction costs and costs to achieve, through March 31, 2002.
Disposition thereof is per this appendix.
iii) For post March 2002 period, apply merger savings retention procedure
(below, sec. IV) as part of next general rate case for each service
indicated.
II. APPLICATION TO ORANGE AND ROCKLAND
----------------------------------
Electric Operations
-------------------
The following amounts will be accrued for electric ratepayer benefit
on the books of Orange and Rockland and used to offset other deferred debits
accrued under the Orange and Rockland Restructuring Plan:
12 months ending March 31, 2000: - $ 694,000
12 months ending March 31, 2001: - $ 694,000
12 months ending March 31, 2002: - $ 2,296,000
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $ 1,716,000
12 months ending March 31, 2001: - $ 2,288,000
12 months ending March 31, 2002: - $ 2,288,000
Gas Operations
--------------
The estimated share of benefits that will be applied to Orange and
Rockland gas customers is:
12 months ending March 31, 2000: - $227,000
12 months ending March 31, 2001: - $227,000
12 months ending March 31, 2002: - $752,000
In the absence of a settlement agreement in effect, specific
prospective application of such estimated savings benefit would be addressed in
Orange and Rockland's next gas rate case.
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $ 562,000
12 months ending March 31, 2001 - $ 750,000
12 months ending March 31, 2002: - $ 750,000
POST MARCH 31, 2002:
-------------------
Subject to the merger savings retention prescribed below (sec. IV),
Orange and Rockland's electric and gas customers will realize merger savings
under the revenue requirement set forth in Orange and Rockland's next general
rate cases.
III. APPLICATION TO CON EDISON
-------------------------
Electric Operations
-------------------
The following amounts will be accrued for ratepayer benefit on the
books of Con Edison and used to benefit electric customers under the Con Edison
Settlement Agreement.
12 months ending March 31, 2000: - $ 6,001,000
12 months ending March 31, 2001: - $10,922,000
12 months ending March 31, 2002: - $12,633,000
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $2,956,000
12 months ending March 31, 2001: - $3,942,000
12 months ending March 31, 2002: - $3,942,000
Gas Operations
--------------
The estimated share of benefits applicable to Con Edison gas customers
is:
12 months ending March 31, 2000: - $1,111,000
12 months ending March 31, 2001: - $2,023,000
12 months ending March 31, 2002: - $2,339,000
These amounts will be credited to gas customers through the gas
adjustment in the period indicated:
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $547,000
12 months ending March 31, 2001: - $730,000
12 months ending March 31, 2002: - $730,000
Steam Operations
----------------
The following amounts will be accrued for steam ratepayers benefit on
the books of Con Edison and used to benefit customers:
12 months ending March 31, 2000: - $296,000
12 months ending March 31, 2001: - $539,000
12 months ending March 31, 2002: - $624,000
The following amounts will be amortized ratably to expense (subject to
reconciliation):
12 months ending March 31, 2000: - $146,000
12 months ending March 31, 2001: - $195,000
12 months ending March 31, 2002: - $195,000
POST MARCH 31, 2002:
-------------------
Subject to the merger savings retention prescribed below (sec. IV),
Con Edison electric, gas and steam customers will realize merger savings under
the revenue requirement set forth in Con Edison's next general rate case for
each service.
IV. MERGER SAVINGS RETENTION PROCEDURE
----------------------------------
The 50% shareholder retention in RY 3-03 through RY 3-09 will be based
on actual achieved synergy savings. The respective utilities' cost of service
will reflect the full realized synergy savings, offset by an entry to reflect
the one-half sharing with the shareholder calculated in the manner herein set
forth. The calculation compares the actual (reduced by synergy savings) cost of
the affected areas to a target (i.e, projection of costs in the absence of
---
Merger), crediting 50% of the difference to the shareholder up to a maximum
annual amount. The target will be the actual 1998 costs of the affected areas
shown on the attached, escalated by the CPI and reduced for non-synergy
productivity of 2% annually. The shareholder benefit will be contingent on
actual costs being below targeted levels, ensuring customer benefit. The maximum
annual shareholder benefit will be 150% of the estimated savings for customers
set forth in Appendix H. Under the methodology, the investor share can exceed
estimated investor benefit only when customers' benefits are also in excess
of the estimate.
The calculation of shareholder benefit will be done on a total
company basis and allocated proportionately among services. Disposition of
savings after RY 3-09 will be determined at that time.
CENTRAL FUNCTIONS AFFECTED BY SYNERGIES
Accounting (including public accounts)
Tax
Treasurer/Shareholders Services
Rate Engineering/Compliance
Auditing
Business Development
Office of CEO
Public Affairs
Employee Relations
Environmental, Health & Safety
Purchasing
Information Resources
R&D (including EPRI & GRI dues)
Legal
Corporate and Fiscal Expenses
Associations & Dues
Note: The target for the cost centers shown above for either company will
be the actual costs recorded for the year 1998, adjusted to reflect
generation divestiture and normalized for major organizational
changes or extraordinary expenses or credits that may occur. The
resulting target will be increased by the annual CPI and reduced by
non-synergy productivity of 2% annually.
EXHIBIT D-3
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
Joint Petition of Orange and Rockland Utilities, Inc.)
and Consolidated Edison, Inc., For Approval Of ) BPU Docket No. EM98070433
The Agreement And Plan Of Merger And Transfer )
Of Control ) VERIFIED JOINT PETITION
_____________________________________________________)
INTRODUCTION
------------
1. Pursuant to N.J.S.A. 48:2-51.1 and 48:3-10 and/or any other provisions
-------
of Title 48 deemed applicable by the Board of Public Utilities ("Board"), Orange
and Rockland Utilities, Inc. ("Orange and Rockland") and Consolidated Edison,
Inc. ("CEI") (collectively "Petitioners"), by their undersigned counsel, hereby
petition the Board: for approval of the Agreement and Plan of Merger ("Merger
Agreement") entered into by CEI, Orange and Rockland and C Acquisition Corp., a
wholly-owned subsidiary of CEI (the "Merger Subsidiary"); for authority to take
all necessary actions to transfer control of Orange and Rockland to CEI and to
consummate a subsequent corporate reorganization; and for certain other relief
as set forth below. Petitioners respectfully request that the Board act on this
Petition on or before February 1, 1999. In support of this Petition, petitioners
submit the following information:
2. Orange and Rockland is the corporate parent of Rockland Electric
Company ("RECO"), a public utility authorized by the Board to provide electric
service within northern parts of Bergen and Passaic Counties and small areas in
the northeastern and northwestern parts of Sussex County, New Jersey. RECO has
offices at 82 East Allendale Road, Suite 8, Saddle River, New Jersey 07458. CEI
is the corporate parent of Consolidated Edison Company of New York, Inc. ("Con
Edison"), a public utility that provides service to
customers in New York City and Westchester County, New York. Neither Orange and
Rockland nor RECO are currently affiliated with either CEI or Con Edison.
3. As described below, the proposed transfer of control will be
accomplished through a transaction whereby the Merger Subsidiary will merge with
and into Orange and Rockland (the "Merger") and Orange and Rockland will be the
surviving corporation and will become a wholly-owned subsidiary of CEI.
Following completion of the proposed transaction, RECO will continue to exist,
will retain its present name and will remain an operating subsidiary of Orange
and Rockland. RECO will continue to offer service under existing tariffs and
service arrangements. Exhibit A compares the pre-and post-merger corporate
structures of the entities involved in these transactions.
THE PARTIES
Orange and Rockland
- -------------------
4. Orange and Rockland is a New York public utility, incorporated in New
York State, with a principal business office at One Blue Hill Plaza, Pearl
River, New York 10965. Orange and Rockland with its two wholly-owned utility
subsidiaries, RECO, and Pike County Light & Power Company ("Pike"), a
Pennsylvania public utility, jointly operate a single fully integrated electric
production and transmission system ("System") serving parts of New Jersey, New
York and Pennsylvania. Orange and Rockland supplies electric and gas service in
all of Rockland County, most of Orange County and part of Sullivan County, New
York. Pike supplies electric and gas service in parts of Pike County,
Pennsylvania. Orange and Rockland is an exempt holding company under the Public
Utility Holding Company Act of 1935 ("PUHCA"). The stock of Orange and Rockland
is publicly held. Orange and Rockland is the sole shareholder of both RECO and
Pike.
5. Recent information concerning Orange and Rockland is provided in
Exhibit B, Orange and Rockland's most recent Form 10-K Annual Report, which
contains
comprehensive information on Orange and Rockland's financial status, operations,
management, and services.
CEI
- ---
6. CEI is a corporation organized under the laws of the State of New York
and is an exempt holding company under PUHCA. CEI's principal business office is
at 4 Irving Place, New York, New York 10003. The stock of CEI is publicly held.
CEI is the sole common shareholder of Con Edison. A corporation organized under
the laws of the State of New York, Con Edison provides electric service in all
of New York City (except part of Queens) and in most of Westchester County, New
York. Con Edison also provides gas service in Manhattan, the Bronx and parts of
Queens and Westchester County, New York and steam service in part of Manhattan.
Its electric, gas and steam retail rates are established by the New York Public
Service Commission ("NYPSC"). Con Edison's principal business office is at 4
Irving Place, New York, New York 10003.
7. Recent information concerning CEI is provided in Exhibit C, CEI's most
recent Form 10-K Annual Report, which contains comprehensive information on
CEI's financial status, operations, management and services.
Designated Contacts
- -------------------
8. The designated contacts for questions concerning this Joint Petition
are:
For Orange and Rockland:
Vincent J. Sharkey, Jr., Esq.
James C. Meyer, Esq.
Riker, Danzig, Scherer, Hyland & Perretti
Headquarters Plaza
One Speedwell Avenue
Morristown, New Jersey 07962-1981
Phone: 973-538-0800
Fax: 973-538-1984
with a copy to:
John L. Carley
Senior Counsel
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza
Pearl River, New York 10965
Phone: 914-577-2426
Fax: 973-577-2959
For CEI:
John D. McMahon
Deputy General Counsel
Consolidated Edison Company
of New York, Inc.
4 Irving Place
New York, New York 10003
Phone: 212-460-6330
Fax: 212-677-5850
REQUEST FOR APPROVAL OF THE MERGER
9. Orange and Rockland and CEI respectfully request that the Board
approve the Merger. Orange and Rockland, CEI and the Merger Subsidiary have
executed the Merger Agreement, a copy of which is attached hereto as Exhibit D.
In the Merger, the Merger Subsidiary, a newly formed New York subsidiary of CEI
created specifically for the purpose of consummating the transaction, will merge
with and into Orange and Rockland and Orange and Rockland will be the surviving
corporation and will become a wholly-owned subsidiary of CEI.
10. As set forth in Article II of the Merger Agreement, upon consummation
of the Merger:
(i) each issued and outstanding share of Orange and Rockland's common
stock not owned by CEI, Orange and Rockland or an Orange and
Rockland subsidiary will be canceled and converted into the right
to receive cash in the amount of $58.50; and
(ii) any shares of Orange and Rockland's common stock that are owned
by Orange and Rockland as treasury stock or by CEI or by any
Orange and Rockland subsidiary will be canceled and retired.
Prior to the consummation of the Merger, Orange and Rockland's Preferred Stock
as well as Orange and Rockland's Preference Stock will have been redeemed.
11. The Merger will result in a change in the ultimate owners of Orange
and Rockland but will not change the manner in which RECO provides electric
transmission and delivery service to its customers. The services currently being
provided by RECO will continue to be offered pursuant to tariffs on file with
the Board upon the consummation of the Merger.
12. The respective Boards of Directors of CEI and Orange and Rockland have
approved the Merger Agreement. The Merger Agreement requires the approval of the
holders of two-thirds of the outstanding common stock in Orange and Rockland.
Orange and Rockland will hold a meeting of its shareholders on August 20, 1998
to vote on the approval of the Merger Agreement. CEI's shareholders are not
required to approve the Merger Agreement.
13. Consummation of the Merger is contingent upon obtaining certain
required regulatory approvals, including approvals from this Board, if
applicable. In addition to this filing, filings have been, or will be, made with
the Federal Energy Regulatory Commission ("FERC"), the Securities and Exchange
Commission, the U.S. Department of Justice and Federal Trade Commission, the
NYPSC, and the Pennsylvania Public Utility Commission. RECO will provide the
Board with copies of all such filings. Moreover, pursuant to the New Jersey
Industrial Site Recovery Act, RECO must obtain certain determinations from or
execute certain agreements with the New Jersey Department of Environmental
Protection for three service centers located in New Jersey.
14. The target date for receiving all necessary regulatory approvals,
fulfilling all other conditions of the Merger Agreement, and closing the Merger
is March 31, 1999.
Delays beyond that time would likely increase the total transaction and
transition costs while delaying the benefits of the Merger. RECO, therefore,
requests that the Board expedite consideration of this Petition and render its
determination sufficiently in advance of the closing date, i.e., by February 1,
1999. Consistent with the Board's usual practice with respect to petitions
regarding changes in the ownership or control of New Jersey utilities or similar
transactions,1 Petitioners ask that the Board retain this matter for direct
review and approval.
15. The primary purpose of the Merger is to create a regional company from
two companies that share a common vision of the strategic path necessary to
succeed in the increasingly competitive utility and energy services marketplace.
As set forth below, the Merger will not have an adverse impact on the public
interest factors set forth in N.J.S.A. 48: 2-51.1.
--------
16. The Merger will not have an adverse effect on competition among
suppliers of electric utility services. RECO owns no generating assets. Both
RECO's corporate parent, Orange and Rockland, and Con Edison have committed to
comprehensive generation divestiture programs and have established open access
transmission tariffs consistent with the rules and requirements of the FERC. In
fact, the Merger Agreement requires Orange and Rockland to use its best efforts
to enter into a definitive agreement(s) to divest its generating assets pursuant
to Orange and Rockland's NYPSC- approved divestiture plan.
17. The Merger should foster RECO's ability to compete fairly with the
other large New Jersey utility companies due to cost reductions through greater
efficiencies and economies of scale and scope, a more diverse customer base, and
a regional platform for growth. More specifically the Merger will provide the
opportunity to achieve cost savings through greater operating efficiencies than
would otherwise be possible. Scale has importance
_____________________
/1/ See, e.g., Joint Petition of AT&T Corp. and Teleport Communications Group,
---- ---------------------------------------------------------------
Inc. for Declaratory Ruling that the Board Lacks Jurisdiction Over the Agreement
- --------------------------------------------------------------------------------
and Plan of Merger, or, in the Alternative, for Approval of the Agreement and
- -----------------------------------------------------------------------------
Plan of Merger, BPU Docket No. TM98020050, Order (May 15, 1998).
- ---------------
in many areas, including utility operations, product development, advertising
and corporate services. The Merger also will create a regional platform for
marketing utility and non-utility services which will strengthen the ability of
the combined company to offer additional services to customers, consistent with
Board-approved standards of conduct.
18. The technological innovations that have played a major role in
facilitating competition, allowing new markets to form and expanding the types
of transactions that utilities can accommodate, cannot be as effectively
supported or encouraged on a small scale. The Merger will provide the resources
to foster innovation and will add vitality and strength to the drive to
competition and thereby increase operating efficiencies.
19. RECO has committed itself firmly to the development of a competitive
electric market in its service areas and to the implementation of full retail
access by May 1999. The Merger will not diminish this commitment. As the Board
moves forward with its Energy Master Plan process and the restructuring of the
electric industry in New Jersey, RECO expects that it will be better able to
contribute to the new competitive environment as a result of the Merger. The end
result will be a benefit to electric competition in New Jersey, as changes come
to the industry. At the same time, the existence of the other competitors in the
region will ensure that the combined companies have no market power over
electricity supplies in their traditional service territories.
20. The Merger will not have a substantial impact on jobs located in New
Jersey. RECO has no operating employees. As a wholly-owned subsidiary of Orange
and Rockland, all the service requirements of RECO's customers, including
transmission, distribution, new business, commercial, and general and
administrative operations are furnished by Orange and Rockland. Orange and
Rockland bills RECO for these services
pursuant to the terms of the Joint Operating Agreement between them dated
February 5, 1976./2/ RECO will maintain its Saddle River, New Jersey office.
Orange and Rockland, itself, will continue to maintain a significant local
workforce. While the Petitioners will seek to identify and eliminate redundant
functions in their operations, the Merger Agreement provides for the honoring of
all collective bargaining agreements and for fair and equitable workforce
reductions based upon prior experience and skills and without regard to prior
affiliation. The Petitioners recognize that a local workforce is necessary to
maintain excellent service levels and to respond to the particular needs within
each of the States that the operating utilities will serve.
21. Indeed, the Merger will not adversely affect RECO's service to its
customers in New Jersey in any manner. The companies are committed to
maintaining RECO's existing high standards of reliability and customer service.
Merger-related cost reductions will be obtained primarily through achieving
economies of scale, such as elimination of duplicative departments and systems.
As a result, the Merger will not have an adverse effect on the provision of
safe, adequate and proper utility service at just and reasonable rates.
22. The Merger should strengthen the ability of RECO to offer additional
services to its customers by providing access to innovative technology and
methods now employed by Con Edison. For example, potential appears to exist with
respect to the phasing in of voice-response unit technology currently employed
by Con Edison and in the growth of options afforded to customers in the use of
the Internet to pay bills and carry out other customer transactions. There are
other significant potential benefits in the application of Internet technology,
particularly in the data-transmission area, in implementing retail access.
_______________________
/2/ After the consummation of the Merger, RECO will continue to be billed
pursuant to the cost allocation methodologies set forth in the Joint Operating
Agreement.
23. The Merger also will enable RECO to draw on Con Edison's expertise to
assure continued system reliability. Because of its size and service area
characteristics, Con Edison has developed comprehensive systems to support
reliability. These include managerial systems such as performance tracking and
root-cause analysis, systematic operating procedure and specification
development, remote substation and overhead system monitoring, outage management
systems and power quality services. With the Merger, Orange and Rockland will
have the ability to consider improvements and enhancements to its own similar
systems.
24. As a result of the Merger, RECO will be better positioned to maintain
its strong commitment to the economic development and welfare of its service
territory. This commitment will be enhanced by the improved ability of the
combined entity to compete in the energy marketplace. In addition, RECO has a
strong record of community involvement and charitable contributions which will
be maintained after the Merger. The Merger Agreement provides for the
continuation of charitable contributions in the RECO service area at levels
comparable to those provided by RECO.
25. Economic development has been and will continue as a core objective of
RECO. The Energy Master Plan Proceeding is creating significant new incentives
for increased economic activity in RECO's service area. The Merger will add to
this not only through a measurable increase in the efficiency of the energy
infrastructure in the RECO service area, but also by the favorable impact that
the Merger will have in facilitating the transition to competition for customers
served by RECO.
26. The Merger Agreement provides that Con Edison and Orange and Rockland
will remain separate operating utilities owned by CEI. RECO will remain as a
wholly owned subsidiary of Orange and Rockland. As a consequence, the
transaction will not impact the ability of RECO to continue to raise debt or
preferred equity capital in the future. Moreover,
additional equity capital, whether raised publicly at the CEI level or generated
internally, will be invested in Con Edison and Orange and Rockland (including
RECO), as appropriate, to fund utility capital expenditures while maintaining a
cost-effective capital structure at the utility level.
27. On November 3, 1993, Orange and Rockland entered into a Joint
Cooperation Agreement with the Office of the Rockland County District Attorney,
pursuant to which Orange and Rockland agreed:
to establish independent from Orange and Rockland the
position of Inspector General, for a period of at least
seven (7) years, which will be assigned the authority and
resources necessary, including staff, to investigate and
report on improper or unethical conduct by Orange and
Rockland officers or employees.
Orange and Rockland has established such an Inspector General and the
Petitioners agree that Orange and Rockland will maintain such Inspector General
for the seven year term set forth in the Joint Cooperation Agreement.
28. Petitioners voluntarily propose to make available for sharing with
customers certain net savings above and beyond the savings proposed by RECO in
its Stranded Cost Filing/3/ provided that the Board grants the remainder of the
relief requested in this Joint Petition. Among other things, the Petitioners
request that RECO's customers' share of such net savings be applied toward any
minimum rate reduction target established by the Board in its electric
restructuring proceedings./4/ The net savings from the Merger are driven by the
operating efficiencies expected from the Merger. The forecast ten-year net
synergy savings are set forth in Exhibit E. This exhibit indicates that the
business combination of Orange and
___________________
/3/ In the Matter of Rockland Electric Company's Stranded Cost Filing, BPU
------------------------------------------------------------------
Docket No. E097070464, OAL Docket No. PUC 7310-97. RECO's Stranded Cost Filing
was made in compliance with the Board's directives contained in Restructuring
-------------
the Electric Power Industry in New Jersey: Findings and Recommendations, BPU
- ------------------------------------------------------------------------
Docket No. EX94120585Y (April 30, 1997).
/4/ Although the rate benefits of the Merger should be applied toward the
restructuring proceeding rate reduction targets, the merger application can be
processed apart from the restructuring proceeding and is being filed in a
separate docket in order to facilitate such separate processing.
Rockland and Con Edison is anticipated to result in cost savings of
approximately $468 million, net of transaction costs and costs to achieve, over
the first ten years following the closing on the transaction (assumed closing
date of March 31, 1999). Petitioners propose a reasonable allocation of the
synergy savings between consumers and investors in the combined company. Such
sharing will apportion synergy savings equitably between customers and investors
and recognize the investment required to bring about desirable and efficient
combinations such as the Merger.
29. Pursuant to the proposal set forth in Exhibit E, Orange and Rockland's
net synergy savings over the 10-year period ending March 31, 2009 are
approximately $121.9 million. RECO's customers' share (which reflects 50% of
RECO's pro rata share of Orange and Rockland's net synergy savings) is $13.4
million. The allocation of these benefits is set forth in Exhibit E. RECO
proposes to reduce its electric rates by $263,000 or 0.2% effective April 1,
1999 and by $871,000 or 0.6% (cumulative) effective April 1, 2001.
30. RECO proposes to implement the rate reductions set forth in Exhibit E
even if the achieved savings are less than projected. If, on the other hand,
actually achieved savings are greater than projected, such savings will foster
rate stability by delaying the need for future rate increases.
31. For accounting purposes, the Merger is treated as an acquisition by
CEI of Orange and Rockland. As such, the Merger will be recorded using the
"purchase method" of accounting for business combinations in accordance with
Accounting Principles Board Opinion No. 16. The purchase price will be compared
to the book value of Orange and Rockland when the Merger is consummated with the
difference reflected as "Goodwill" on the books and records of CEI.
32. RECO will defer its pro rata share of direct transaction costs related
to the Merger and will amortize these expenses against synergy savings to be
realized from the
combination before any benefits are passed on to ratepayers or shareholders. The
direct transaction costs will be deferred in FERC account 182 "regulatory
assets" and amortized against FERC account 930.2 "miscellaneous general expense"
over a five year period. RECO will expense its pro rata share of indirect
transaction and internal labor costs as incurred.
33. RECO will be charged its pro rata share of the amortization of the
"Goodwill" balance that will be charged to Orange and Rockland. Assuming the
relief sought in this Petition is granted, RECO would amortize this cost "below
the line". The amortization will be on a straight-line basis over a period not
to exceed forty years.
34. Separate financial statements, substantially the same as the current
financial statements of Orange and Rockland and RECO, will continue to be
issued. The assets of Orange and Rockland and RECO will continue to be recorded
on their books and records at the same values as before the Merger.
35. The Merger will not deprive the Board of its continuing jurisdiction
over RECO. It will in no way diminish the Board's statutory authority over the
rates, service and the financial condition of RECO's utility business.
36. The following exhibits are attached to this Petition, incorporated
herein and made a part hereof:
a. Exhibit A - Comparison of Pre- and Post-Merger Corporate
Structures;
b. Exhibit B - Orange and Rockland's Form 10-K Annual Report;
c. Exhibit C - CEI's Form 10-K Annual Report;
d. Exhibit D - Agreement and Plan of Merger; and
e. Exhibit E - Forecast of Net Synergy Savings.
37. The Merger Agreement provides that, prior to the closing date, the
Merger Agreement may be terminated for a variety of different reasons. In the
event that the
Merger Agreement is so terminated in accordance with its terms, each Petitioner
respectfully reserves the right to withdraw this Petition, and further reserves
the right to decide not to consummate the transactions described herein, to the
extent either of them is permitted to do so pursuant to the Merger Agreement.
38. In conclusion, Petitioners respectfully submit that the Merger will
not have an adverse impact on competition in the electric industry, on either
RECO's rates or the ability of the Board to regulate those rates, on RECO's
obligations to its employees (since RECO has no operating employees), or on the
provision of safe, adequate and proper service at just and reasonable rates.
Accordingly, Petitioners respectfully request the approval of the Board under
N.J.S.A. 48:2-51.1, 48:3-10 and any other provision of Title 48 deemed
- --------
applicable by the Board.
REQUEST FOR RELIEF
39. The allegations of paragraphs 1 to 38 are incorporated herein by
reference as if set forth herein at length.
40. Orange and Rockland and CEI respectfully request that the Board issue
an Order: (1) finding that the Merger will not negatively impact competition,
will not negatively impact the rates of RECO customers, will not impact the
employees of RECO, and will not impact the provision of safe, adequate and
proper services; (2) approving the Agreement and Plan of Merger attached hereto
as Exhibit D; (3) permitting Orange and Rockland and CEI to take all actions
necessary to consummate the proposed transfer of control and proposed subsequent
corporate reorganization; (4) applying RECO's customers' share of any net
savings from the Merger toward any minimum rate reduction percentage target
established by the Board in its electric restructuring proceedings; (5)
retaining this matter for final disposition before the Board; and (6) granting
all other relief as may be necessary and appropriate to
effectuate the Merger. Orange and Rockland and CEI respectfully request that the
Board grant its approval on or before February 1, 1999.
Respectfully submitted,
ORANGE AND ROCKLAND UTILITIES, INC.
By __________________________________
Vincent J. Sharkey, Jr., Esq.
Riker, Danzig, Scherer, Hyland & Perretti
Headquarters Plaza
One Speedwell Avenue
Morristown, New Jersey 07962-1981
John L. Carley, Esq.
Senior Counsel
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza
Pearl River, New York 10965
Attorneys for Orange and Rockland Utilities, Inc.
John D. McMahon, Esq.
Deputy General Counsel
Consolidated Edison Company of New York, Inc.
4 Irving Place
New York, New York 10003
Attorney for Consolidated Edison, Inc.
Dated: July 2, 1998
VERIFICATION
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
JOAN S. FREILICH, being duly sworn, according to law, upon her oath deposes
and says:
1. I am Executive Vice President and Chief Financial Officer of
Consolidated Edison, Inc., petitioner in the within matter, and in
that capacity I make the within Verification.
2. I have read the attached Petition, and the same is true to the best of
my knowledge, information and belief.
_________________________________
Joan S. Freilich
Sworn to and subscribed
before me this _____ day
of July, 1998.
__________________________
Notary Public
VERIFICATION
STATE OF NEW YORK )
) ss.:
COUNTY OF ROCKLAND )
R. LEE HANEY, being duly sworn, according to law, upon his oath deposes and
says:
1. I am Senior Vice President and Chief Financial Officer of Orange and
Rockland Utilities, Inc., petitioner in the within matter, and in that
capacity I make the within Verification.
2. I have read the attached Petition, and the same is true to the best
of my knowledge, information and belief.
_________________________________
R. Lee Haney
Sworn to and subscribed
before me this _____ day
of June, 1998
__________________________
Notary Public
EXHIBIT A
EXHIBIT A
---------
[ORGANIZATIONAL CHART APPEARS HERE]
[ORGANIZATIONAL CHART APPEARS HERE]
EXHIBIT E
EXHIBIT E
PAGE 1
QUANTIFICATION AND ALLOCATION OF SYNERGY SAVINGS
(THOUSANDS OF DOLLARS)
TWELVE MONTHS ENDED
------------------------------------------------------------------------------
3/31/00* 3/31/01 3/31/02 3/31/03 3/31/04 3/31/05 3/31/06 3/31/07
------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED NET SYNERGY SAVINGS
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE 20,448 41,549 47,924 50,137 52,439 54,786 57,210 59,728
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE (6,609) (8,812) (8,812) (8,812) (8,812) (2,203) - -
------------------------------------------------------------------------------
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 13,837 32,737 39,112 41,325 43,627 52,583 57,210 59,728
==============================================================================
ORANGE AND ROCKLAND NET SYNERGY SAVINGS
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE 1,976 9,714 11,864 13,026 14,245 15,476 16,752 18,087
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE (2,859) (3,945) (3,945) (3,945) (3,945) (966) - -
------------------------------------------------------------------------------
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE (983) 5,769 7,919 9,081 10,300 14,490 16,752 18,087
==============================================================================
ROCKLAND ELECTRIC ALLOCATION (22%) (216) 1,269 1,742 1,998 2,266 3,188 3,685 3,979
==============================================================================
CUSTOMER BENEFIT (50%) 263 263 671 999 1,133 1,594 1,843 1,990
==============================================================================
SHAREHOLDER BENEFIT (50%) 263 263 671 999 1,133 1,594 1,843 1,990
==============================================================================
TWELVE MONTHS ENDED
---------------------------------
3/31/08 3/31/09 TOTAL
------- ------- -----
CONSOLIDATED NET SYNERGY SAVINGS
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE 62,347 65,069 511,635
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE - - (44,060)
--------------------------------
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 62,347 65,069 467,575
================================
ORANGE AND ROCKLAND NET SYNERGY SAVINGS
NET SYNERGY SAVINGS
BEFORE COSTS TO ACHIEVE 19,405 20,955 141,560
5-YEAR AMORTIZATION OF
COSTS TO ACHIEVE - - (19,725)
--------------------------------
NET SYNERGY SAVINGS
AFTER COSTS TO ACHIEVE 19,485 20,955 121,855
================================
ROCKLAND ELECTRIC ALLOCATION (22%) 4,267 4,610 26,008
================================
CUSTOMER BENEFIT (50%) 2,144 2,305 13,405
================================
SHAREHOLDER BENEFIT (50%) 2,144 2,305 13,405
================================
* Synergies begin July 1, 1999 and the twelve months ended March 31, 2000
includes 9 months of savings.
EXHIBIT E
BENEFIT DISPOSITION AND METHODOLOGY
-----------------------------------
I. FRAMEWORK:
---------
i. Amortize actual costs to achieve and transaction costs over
five-year period ending June 2004.
ii. Allocate to customers one-half estimated synergies, net of
transaction costs and costs to achieve, through March 31, 2002.
Disposition thereof is per this appendix.
iii. For post March 2002 period, apply merger savings retention
procedure (below, sec. III) as part of next general rate case
for electric service.
II. APPLICATION TO ROCKLAND ELECTRIC COMPANY ("RECO")
-------------------------------------------------
RECO will reduce its electric rates by the following cumulative
amounts:
12 months ending March 31, 2000: $263,000
12 months ending March 31, 2001: $263,000
12 months ending March 31, 2002: $871,000
The following amounts will be amortized ratably to expense
(subject to reconciliation)
12 months ending March 31, 2000: $651,000
12 months ending March 31, 2001: $868,000
12 months ending March 31, 2002: $868,000
Post March 31, 2002
-------------------
Subject to the merger savings retention procedures prescribed
below (sec. III), RECO's customers will realize merger savings
under the revenue requirements set forth in RECO's next
general rate case (assumed date 3/31/02).
III. MERGER SAVINGS RETENTION PROCEDURE
----------------------------------
The 50% shareholder retention for the twelve months ended March
31, 2003 through March 31, 2009 will be based on actual achieved
synergy savings. RECO's cost of service will reflect the full
realized synergy savings, offset by an entry to reflect the one-
half sharing with the shareholder calculated in the manner herein
set forth. The calculation compares the actual (reduced by
synergy savings) cost of the affected areas to a target (i.e.,
projection of costs in the absence of the Merger), crediting 50%
of the difference to the shareholder up
2
EXHIBIT E
to a maximum annual amount. The target will be the actual 1998 costs
of the affected areas shown on the attached, escalated by the CPI and
reduced for non-synergy productivity of 2% annually. The shareholder
benefit will be contingent on actual costs being below targeted
levels, ensuring the customer benefit. The maximum annual shareholder
benefit will be 150% of the estimated savings for customers set forth
in the first page of this Exhibit. Under this methodology, the
investor share can exceed estimated investor benefit only when
customers' benefits are also in excess of the estimate.
The calculation of the shareholder benefit will be done on a total
company basis and allocated proportionately among the jurisdictions
and services. Disposition of savings after March 31, 2009 will be
determined at that time.
3
EXHIBIT E
CENTRAL FUNCTIONS AFFECTED BY SYNERGIES
Accounting (including public accountants)
Tax
Treasurer/Shareholders Services
Rate Engineering/Compliance
Auditing
Business Development
Office of CEO
Public Affairs
Employee Relations
Environmental, Health & Safety
Purchasing
Information Resources
R&D (including EPRI & GRI dues)
Legal
Corporate and Fiscal Expenses
Association & Dues
NOTE:
The target for the cost centers shown above for RECO will be its
pro-rata share of the actual costs recorded for the year 1998,
adjusted to reflect generation divestiture and normalized for
major organizational changes or extraordinary expenses or credits
that may occur. The resulting target will be increased by the
annual CPI and reduced by non-synergy productivity of 2%
annually.
4
EXHIBIT D-4
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
In Re: Application of Pike County Light )
& Power Company for a Certificate of )
Public Convenience Evidencing Approval )
under Section 1102(a)(3) of the Public )
Utility Code of the Transfer from Orange ) Docket No:
and Rockland Utilities, Inc. to Consolidated ) A--
Edison, Inc. by Merger the Title to, or the )
Possession or Use of, All Property of Pike )
County Light & Power Company, Used or )
Useful in the Public Service )
TO THE PENNSYLVANIA PUBLIC UTILITY COMMISSION:
A. Introduction
1. By this Application, Pike County Light & Power Company ("Pike"),
seeks, pursuant to Section 1102(a)(3) of the Public Utility Code, 66 Pa.C.S. (S)
1102(a)(3), as interpreted in the Statement of Policy on Utility Stock
Transfers, at 52 Pa. Code (S) 69.901, a certificate of public convenience
evidencing the Pennsylvania Public Utility Commission's ("Commission") approval
of the transfer by merger from Orange and Rockland Utilities, Inc. ("Orange and
Rockland") to Consolidated Edison, Inc. ("CEI") the title to, or the possession
or use of, all property of Pike, that is used or useful in the public service.
2. The complete name and address of the Applicant is:
Pike County Light & Power Company
One Blue Hill Plaza
Pearl River, New York 10965
3. The names, addresses and telephone numbers of the Applicant's
attorneys are:
David B. MacGregor
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Tel: (215) 963-5448
Fax: (215) 963-5299
1
Michael W. Hassell
Morgan, Lewis & Bockius LLP
One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Tel: (717) 237-4024
Fax: (717 237-4004
4. The name, address and telephone numbers of an additional attorney for
Pike is:
John L. Carley
Senior Counsel
Orange and Rockland Utilities, Inc.
One Blue Hill Plaza
Pearl River, NY 10965
Tel: (914) 577-2426
Fax: (914) 577-2959
5. The name, address and telephone numbers of the attorney for CEI is:
John D. McMahon
Deputy General Counsel
Consolidated Edison Company
of New York, Inc.
4 Irving Place
New York, New York 10003
Tel: (212) 460-6330
Fax: (212) 677-5850
B. The Parties to the Proposed Transaction
6. Pike is a Pennsylvania corporation organized in 1910, which provides
electric and gas public utility service in the northeastern corner of Pike
County, Pennsylvania. As shown in Exhibit F, Schedule 1 hereto, as of March 31,
1998, Pike served approximately 5,000 customers. Pike provides service
throughout a 51 square mile service territory in Pike County. For the twelve
months ended March 31, 1998, Pike's jurisdictional electric sales amounted to
approximately 56,900 MWH and its jurisdictional gas sales amounted to
approximately 129,000 MCF. As shown in Exhibit H, Schedule 1 hereto, for the
same period, Pike's annual operating revenues were approximately $6,230,000.
Pike's system does not include any bulk
2
transmission lines operating at or above 230,000 volts and it includes
approximately 118 miles of other transmission and distribution lines operating
at less than 230,000 volts.
7. Orange and Rockland is a public utility, incorporated in New York
State, with a principal business office at One Blue Hill Plaza, Pearl River, New
York 10965. Orange and Rockland with its two wholly-owned utility subsidiaries,
Pike and Rockland Electric Company ("RECO"), a New Jersey public utility,
jointly operate a single fully integrated electric production and transmission
system ("Orange and Rockland System") serving parts of Pennsylvania, New Jersey
and New York. Orange and Rockland is an exempt holding company under the Public
Utility Holding Company Act of 1935 ("PUHCA"). The stock of Orange and Rockland
is publicly held. Orange and Rockland is the sole stockholder of both Pike and
RECO. Orange and Rockland, along with Pike and RECO, is a member system of the
New York Power Pool ("NYPP"). Orange and Rockland's NYPP operations and other
wholesale services are subject to the regulatory jurisdiction of the Federal
Energy Regulatory Commission ("FERC").
8. CEI is a corporation organized under the laws of the State of New York
and is an exempt holding company under PUHCA. CEI's principal business office
is at 4 Irving Place, New York, New York 10003. The stock of CEI is publicly
held. CEI is the sole stockholder of Consolidated Edison Company of New York,
Inc. ("Con Edison"). A corporation organized under the laws of the State of New
York, Con Edison provides electric service in all of New York City (except part
of Queens) and in most of Westchester County, New York. Con Edison also
provides gas service in Manhattan, the Bronx and parts of Queens and Westchester
County, New York and steam service in part of Manhattan. Its electric, gas and
steam retail rates are established by the New York Public Service Commission
("NYPSC"). Con Edison's
3
principal business office is at 4 Irving Place, New York, New York 10003. Con
Edison is a member system of the NYPP./1/
C. Description of the Merger
9. The following is a summary of the principal steps which will be, or
have been, taken to effect the proposed merger. A complete copy of the
Agreement and Plan of Merger, dated as of May 10, 1998 ("Merger Agreement"), is
provided as Exhibit A hereto.
a. CEI has caused a new wholly-owned subsidiary, C Acquisition Corp. (the
"Merger Subsidiary"), to be organized under the laws of New York for
the purposes of the proposed merger.
b. The Merger Subsidiary will be merged into Orange and Rockland
("Merger"). Orange and Rockland will be the surviving corporation, and
the Merger Subsidiary will cease to exist.
c. As set forth in Article II of the Merger Agreement, upon consummation
of the Merger:
(i) each issued and outstanding share of Orange and Rockland's common
stock not owned by CEI, Orange and Rockland or an Orange and
Rockland subsidiary will be canceled and converted into the right
to receive cash in the amount of $58.50; and
(ii) any shares of Orange and Rockland's common stock that are owned
by Orange and Rockland as treasury stock or by CEI or by any
Orange and Rockland subsidiary will be canceled and retired.
Prior to the consummation of the Merger, Orange and Rockland's Preferred Stock
as well as Orange and Rockland's Preference Stock will have been redeemed.
___________
/1/ Con Edison Solutions, Inc., another wholly-owned subsidiary of CEI, is
licensed to market energy in Pennsylvania.
4
d. The Merger will result in a change in the ultimate owners of Orange
and Rockland but will not involve any immediate change in the manner
in which Pike provides electric transmission and delivery service to
its customers. Pike will continue to exist, will retain its present
name, and will operate as a wholly- owned subsidiary of Orange and
Rockland. The services currently being provided by Pike will continue
to be offered pursuant to Commission-approved tariffs. Exhibit K
compares the pre- and post-merger corporate structures of the entities
involved in these transactions.
D. Benefits of the Merger
10. The Merger is expected to produce benefits, including cost savings
through greater efficiencies and economies of scale and scope, a more diverse
customer base, and a regional platform for growth. More specifically the Merger
will provide the opportunity to achieve cost savings through greater operating
efficiencies than would otherwise be possible. Scale has importance in many
areas, including utility operations, product development, advertising and
corporate services. The Merger also will create a regional platform for
marketing utility and non-utility services will strengthen the ability of the
combined company to offer additional services to customers.
11. The Merger will not have an adverse effect on competition among
suppliers of electric utility services. Pike owns no generating assets. Both
Pike's corporate parent, Orange and Rockland, and Con Edison have committed to
comprehensive generation divestiture programs and have established open access
transmission tariffs consistent with the rules and requirements of the FERC. The
technological innovations that have played a major role in facilitating
competition, allowing new markets to form and expanding the types of
transactions that utilities can accommodate, cannot be as effectively supported
or encouraged on a small
5
scale. This Merger will provide the resources to foster innovation and will add
vitality and strength to the drive to competition and thereby increase the
savings available to consumers. As a result, the Merger will not result in
either anticompetitive or discriminatory conduct and will not prevent retail
customers from obtaining the benefits of a competitive retail electricity
market.
12. In its electric restructuring proceeding,/2/ Pike has entered into a
complete settlement with the Office of Trial Staff, Office of the Consumer
Advocate and Office of Small Business Advocate. A Joint Petition for Complete
Settlement dated May 15, 1998 has been filed with the Commission. The Merger
will not alter the terms of that settlement and Pike remains fully committed to
carrying through the terms of that settlement fully and completely. Pike has
committed itself firmly to the development of a competitive electric market in
its service area and plans to implement full retail access by May 1999. As the
Commission moves forward with its restructuring of the electric industry in
Pennsylvania, Pike expects that it will be better able to contribute to the new
competitive environment as a result of the Merger. The end result will be a
benefit to electric competition in Pennsylvania, as changes come to the
industry. At the same time, the existence of the other competitors in the region
will ensure that the combined companies have no market power in the restructured
electric power market.
13. The Merger will not have a substantial impact on jobs located in
Pennsylvania. Pike has no operating employees. As a wholly-owned subsidiary of
Orange and Rockland, all the service requirements of Pike's customers, including
transmission, distribution, new business, commercial, and general and
administrative operations are furnished by Orange and
_______________
/2/ Pennsylvania Public Utility Commission v. Pike County Light & Power Company,
---------------------------------------------------------------------------
Docket No. R-00974150.
6
Rockland. Orange and Rockland bills Pike for these services pursuant to the
terms of the Joint Operating Agreement between them dated October 24, 1962./3/
Orange and Rockland will
continue to maintain a significant local workforce. The combined companies
recognize that a local workforce is necessary to maintain excellent customer
service levels and to respond to the particular needs within each of the States
that the operating utilities will serve. The manner in which Orange and Rockland
provides services to Pike should remain largely unaffected.
14. The Merger will not adversely affect Pike's service to its customers
in Pennsylvania. The companies are committed to maintaining Pike's existing high
standards of reliability and customer service. Merger-related savings will be
obtained primarily through achieving economies of scale, such as elimination of
duplicative departments and systems. As a result, the Merger will not have an
adverse effect on the provision of safe, adequate and proper utility service at
just and reasonable rates.
15. The Merger should strengthen the ability of Pike to offer additional
services to its customers by providing access to innovative technology and
methods now employed by Con Edison. For example, potential appears to exist with
respect to the introduction of voice-response unit technology currently employed
by Con Edison and in the growth of options afforded to customers in the use of
the Internet to carry out customer transactions (e.g., bill payment). There are
other significant potential benefits in the application of Internet technology,
particularly in the data-transmission area, in implementing retail access.
16. The Merger also will enable Pike to draw on Con Edison's expertise to
assure continued system reliability. Because of its size and service area
characteristics, Con Edison has developed comprehensive systems to support
reliability. These include managerial
_______________
/3/ After the consummation of the Merger, Pike will continue to be billed
pursuant to the cost allocation methodologies set forth in the Joint Operating
Agreement.
7
systems such as performance tracking and root-cause analysis, systematic
operating procedure and specification development, remote substation and
overhead system monitoring, outage management systems and power quality
services. With the Merger, these systems may be adopted to enhance similar
systems presently operational on the Orange and Rockland System.
17. As a result of the Merger, Pike will be better positioned to maintain
its strong commitment to the economic development and welfare of its service
territory. This commitment will be enhanced by the improved ability of the
combined entity to compete in the energy marketplace.
18. The Merger Agreement provides that Con Edison and Orange and Rockland
will remain separate operating utilities owned by CEI. Pike will remain as a
wholly owned subsidiary of Orange and Rockland. As a consequence, the
transaction will not impact on the ability of Pike to continue to raise debt or
preferred equity capital in the future. Moreover, additional equity capital,
whether raised publicly at the CEI level, or generated internally, will be
invested in Con Edison and Orange and Rockland (including Pike), as appropriate,
to fund utility capital expenditures while maintaining a cost-effective capital
structure at the utility level.
19. The Merger will make available certain net savings for sharing with
customers which are driven by the operating efficiencies expected from the
Merger. The forecast ten-year net synergy savings are set forth in Exhibit J.
This exhibit indicates that the business combination of Orange and Rockland and
Con Edison is anticipated to result in cost savings, net of transaction costs
and costs to achieve, of approximately $468 million over the first ten years
following the closing of the transaction (assumed closing date of March 31,
1999). Petitioners' propose a reasonable allocation of the synergy savings
between consumers and investors in the combined company. Such sharing will
apportion such savings equitably
8
between customers and investors and an appropriately recognizes investment
required to bring about desirable and efficient combinations such as the Merger.
20. Pursuant to the proposal set forth in Exhibit J, electric and gas
customers of Pike will benefit by one-half the savings over the 10-year period
ending March 31, 2009, receiving a total benefit of $0.613 million. The
disposition of these benefits is set forth in Exhibit J.
21. Pike would be at risk to achieve the level of projected savings and
customers would benefit even if the achieved savings are less than projected.
If, on the other hand, actually achieved savings are greater than projected,
such savings will foster rate stability by delaying the need for future rate
increases.
22. For accounting purposes, the Merger is treated as an acquisition by
CEI of Orange and Rockland. As such, the Merger will be recorded using the
"purchase method" of accounting for business combinations in accordance with
Accounting Principles Board Opinion No. 16. The purchase price will be compared
to the book value of Orange and Rockland when the Merger is consummated with the
difference reflected as "Goodwill" on the books and records of CEI.
23. Pike will defer its pro rata share of direct transaction costs related
to the Merger and amortize these expenses against synergy savings to be realized
from the combination before any benefits are passed on to ratepayers or
shareholders. The direct transaction costs will be deferred in FERC account 182
"regulatory assets" and amortized against FERC account 930.2 "miscellaneous
general expense" over a five year period. Pike will expense its pro rata share
of indirect transaction and internal labor costs as incurred.
24. Pike will be charged its pro rata share of the amortization of the
"Goodwill" balance. Pike will amortize this cost "below the line". The
amortization will be on a straight-line basis over a period not to exceed forty
years.
9
25. Separate financial statements, substantially the same as the current
financial statements of Orange and Rockland and Pike, will continue to be
issued. The assets of Orange and Rockland and Pike will continue to be recorded
on their books and records at the same values as before the Merger.
E. Rates
26. Presently, Pike provides service to Pennsylvania jurisdictional
customers under tariffs and rates reviewed and approved by the Commission.
Pike's rates will not change as a result of the Merger. As described in Exhibit
K, customer benefits will be accumulated in the form of credits to offset future
cost increases.
F. Service
27. As noted above in Sections 13-15, service provided by Pike will not be
affected by the Merger.
G. Corporate Approvals
28. The Merger has been approved by the Board of Directors of Orange and
Rockland and the Board of Directors of CEI.
29. The Merger Agreement requires the approval of the holders of shares of
common stock in Orange and Rockland. Orange and Rockland will hold a meeting of
its shareholders on August 20, 1998 to vote on the approval of the Merger
Agreement. CEI's shareholders are not required to approve the Merger Agreement.
H. Regulatory Approvals
30. The Merger is subject to approval by this Commission as well as the
NYPSC and the New Jersey Board of Public Utilities.
31. The proposed merger is subject to approval by the United States
Securities and Exchange Commission ("SEC") under the PUHCA.
10
32. The Merger is subject to approval by the FERC under Section 203 of the
Federal Power Act.
33. The expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, will be required.
34. The target date for receiving all necessary regulatory approvals,
fulfilling all other conditions of the Merger Agreement, and closing the Merger
is March 31, 1999. Delays beyond that time would likely increase the total
transaction and transition costs while delaying the benefits of the Merger.
Pike, therefore, requests that the Commission expedite consideration of this
Petition.
I. Service Territories
35. Provided as Exhibit B hereto are copies of Pike's tariff sheets which
identify the areas where it provides gas and electric service in Pennsylvania.
Exhibit C hereto is a map depicting the portions of Pennsylvania where Pike
provides service.
36. The gas and electric service territories of Pike would not be changed
by the Commission's approval of this Application or by the consummation of the
transaction proposed herein.
J. Pike Corporate History
37. Pike was organized in 1910 as a subsidiary of the Orange County Public
Service Company of Port Jervis, New York. In 1913, Pike merged with Matamoras
Gas Company and Pike Gas Company to form Pike County Light & Power Company. In
1914, Pike County Light & Power Company merged with Milford Electric Company,
Milford Township Electric Company, and Westfall Electric Company to become what
is known today as Pike County Light & Power Company. Pike County Light & Power
Company was acquired by the Tenney Company in 1926 and merged into Rockland
Light and Power Company. On February
11
28, 1958, Orange and Rockland Electric Company merged into Rockland Light and
Power Company and the merged company became Orange and Rockland Utilities, Inc.
K. Supporting Data
38. Pike will employ, in furnishing service, plant in service presently
used by it to furnish service, together with plant presently under construction
and plant which may be added in the future prior to approval of this
Application. Exhibit E is a Statement for Pike of the original cost, by primary
account, of plant in service. Also shown on Exhibit E is the reserve for
depreciation associated with plant in service. Approval by the Commission of
this Application and the consummation of the transaction proposed herein will
not alter the original cost of plant in service or the depreciation reserve of
each company.
39. Exhibit F hereto indicates for Pike the number of customers, by class,
as of March 31, 1998. Approval by the Commission of this Application and the
consummation of the transaction proposed herein will not alter the number of
customers served by Pike.
40. Exhibit G hereto contains balance sheets for Pike as of March 31,
1998. Approval by the Commission of this Application and the consummation of the
transaction proposed herein will have no material effect upon Pike's balance
sheets.
41. Exhibit H hereto is the statement of income for Pike, for the twelve
months ended March 31, 1998. Approval by the Commission of this Application and
the consummation of the transaction proposed herein will not affect Pike's
income statement.
42. Exhibit I hereto is the Statement of Financial Condition of CEI as of
December 31, 1997.
L. Miscellaneous
43. All of the annual reports, tariffs and other documents filed by Pike
with the Commission and filings by its predecessors, are made a part hereof by
reference.
12
44. The following exhibits are attached to this Petition, incorporated
herein and made a part hereof:
a. Exhibit A - Agreement and Plan of Merger;
Exhibit B - Description of Territory
Exhibit C - Map of Pike
Exhibit D - Tariff sheets
Exhibit E - Statement of Pike Original Cost Plant in Service
(March 31, 1998)
Exhibit F - Customers Served as of March 31, 1998
Exhibit G - Pike Balance Sheet
Exhibit H - Pike Statement of Income
Exhibit I - Statement of Financial Condition of CEI as of
December 31, 1997
Exhibit J - Synergy Savings
Exhibit K - Comparison of Pre- and Post Merger Corporate
Structure
45. The Merger Agreement provides that, prior to the closing date, the
Merger Agreement may be terminated for a variety of reasons. In the event that
the Merger Agreement is so terminated in accordance with its terms, Pike
respectfully reserves the right to withdraw this Petition.
13
WHEREFORE, for all the foregoing reasons, Pike County Light & Power Company
respectfully requests that the Pennsylvania Public Utility Commission approve
this Application and issue a certificate of public convenience approving the
transfer from Orange and Rockland Utilities, Inc. to Consolidated Edison, Inc.
by merger the title to, or the possession or use of, all property of Pike County
Light & Power Company, that is used or useful in the public service.
Respectfully submitted,
_______________________________________
John L. Carley David B. MacGregor
Senior Counsel Morgan, Lewis & Bockius LLP
Orange and Rockland Utilities, Inc. 2000 One Logan Square
One Blue Hill Plaza Philadelphia, PA 19103-6993
Pearl River, NY 10965 Tel: (215) 963-5000
Tel: (914) 577-2426 Fax: (215) 963-5299
Fax: (914) 577-2959
Attorney for Pike County Light Michael W. Hassell
& Power Company Morgan, Lewis & Bockius LLP
One Commerce Square
John D. McMahon 417 Walnut Street
Deputy General Counsel Harrisburg, PA 17101-1904
Consolidated Edison Company
of New York, Inc. Tel: (717) 237-4024
4 Irving Place Fax: (717) 237-4004
New York, New York 10003
Attorney for Consolidated
Edison, Inc.
Of Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Attorneys for Pike County Light & Power
Company, Orange and Rockland Utilities,
Inc., and Consolidated Edison, Inc.
Dated: July 2, 1998
14
AFFIDAVIT
---------
STATE OF NEW YORK :
: SS.
COUNTY OF ROCKLAND :
G. D. CALIENDO, being duly sworn according to law, deposes and states that
he is Senior Vice President, General Counsel and Secretary of Pike Light & Power
Company; that he is authorized to and does made this affidavit for it; and that
the facts set forth above related to Pike Light & Power Company are correct to
the best of his knowledge, information and belief.
________________________________
R. Lee Haney
Sworn to and subscribed
before me this ____ day
of June, 1998.
________________________
Notary Public
PIKE COUNTY LIGHT & POWER COMPANY
---------------------------------
BALANCE SHEET
-------------
ASSETS AND OTHER DEBITS
-----------------------
Mar. 31,
1998
----------
Utility Plant
- -------------
Electric Plant in Service $7,307,305
Gas Plant in Service 845,327
Common Utility Plant in Service 68,406
Gas Plant Held for Future Use 10,096
Construction Work in Progress 152,881
----------
Total Utility Plant 8,384,015
----------
Accumulated Provision for Depreciation:
Electric 1,725,378
Gas 267,149
Gas Held for Future Use 4,336
Common 38,318
----------
Total Accum. Provision for Depreciation 2,035,181
----------
Net Utility Plant 6,348,834
----------
Other Property and Investments
- ------------------------------
Nonutility Property 39,365
Accumulated Provision for Depreciation (15,226)
----------
Total Other Property and Investments 24,139
----------
Current And Accrued Assets
- --------------------------
Cash 307,975
Special Deposits 96,259
Working Funds 150
Customer Accounts Receivable 427,085
Other Accounts Receivable 30,229
Accumulated Prov. for Uncollectible Accounts (50,953)
Accounts Receivable from Assoc. Companies 4,179
Materials and Supplies 257,247
Prepayments 191,115
Accrued Utility Revenue 448,141
----------
Total Current and Accrued Assets 1,711,427
----------
Deferred Debits
- ---------------
Unamortized Debt Expense 47,682
Preliminary Survey and Investigation Charges 12,081
Miscellaneous Deferred Debits 1,268,555
Accumulated Deferred Federal Income Tax 294,628
----------
Total Deferred Debits 1,622,946
----------
Total Assets and Other Debits $9,707,346
==========
PIKE COUNTY LIGHT & POWER COMPANY
---------------------------------
BALANCE SHEET
-------------
LIABILITIES AND OTHER CREDITS
-----------------------------
Mar. 31,
1998
----------
Proprietary Capital
- -------------------
Common Stock Issued $ 137,000
Miscellaneous Paid-In Capital 500,000
Retained Earnings 2,919,779
----------
Total Proprietary Capital 3,556,779
----------
Long Term Debt
- --------------
Bonds 2,683,500
----------
Non-Current Liabilities
- -----------------------
Accum. Prov. for Pensions and Benefits 99,056
----------
Current and Accrued Liabilities
- -------------------------------
Accounts Payable 25,498
Accounts Payable to Assoc. Companies 1,294,555
Customer Deposits 53,433
Taxes Accrued (8,223)
Interest Accrued 42,563
Misc. Current and Accrued Liabilities 302,625
----------
Total Current and Accrued Liabilities 1,710,451
----------
Deferred Credits
- ----------------
Customer Advances For Construction 7,856
Other Deferred Credits 109,446
Accum. Deferred Investment Tax Credits 65,758
Accumulated Deferred Income Taxes:
Liberalized Depreciation 1,051,357
Other 423,143
----------
Total Deferred Credits 1,657,560
----------
Total Liabilities & Equity $9,707,346
==========
PIKE COUNTY LIGHT & POWER COMPANY
Net Book Value of Electric Plant in Service
March 31, 1998
Accumulated
Electric Provision for
Plant Depreciation & Net Book
in Service Amortization Value
------------------ ------------------- ------------------
INTANGIBLE PLANT
- ----------------
(302) Franchise and Consents $ 2,675 $ $ 2,675
------------------ ------------------- ------------------
Total Intangible Plant 2,675 2,675
------------------ ------------------- ------------------
DISTRIBUTION PLANT
- ------------------
(360) Land and Land Rights 46,091 15,314 30,777
(361) Structures and Improvements 2,327 2,524 (197)
(362) Station Equipment 32,422 25,485 6,937
(364) Poles, Towers and Fixtures 2,091,580 531,336 1,560,244
(365) Overhead Conductors & Devices 1,982,750 245,826 1,736,924
(366) Underground Conduit 207,339 21,927 185,412
(367) Underground Conductors & Devices 512,287 82,774 429,513
(368) Line Transformers 1,551,327 523,295 1,028,032
(369) Services 467,204 157,700 309,504
(370) Meters 299,093 87,906 211,187
(373) Street Lighting & Signal Systems 112,210 39,431 72,779
------------------ ------------------- ------------------
Total Distribution Plant 7,304,630 1,733,518 5,571,112
------------------ ------------------- ------------------
Retirement Work in Progress 0 (8,140) 8,140
------------------ ------------------- ------------------
Total 7,304,630 1,725,378 5,579,252
------------------ ------------------- ------------------
Depreciation Deficiency * 0 0 0
------------------ ------------------- ------------------
Total $7,307,305 $1,725,378 $5,581,927
================== =================== ==================
PIKE COUNTY LIGHT & POWER COMPANY
Net Book Value of Gas Plant in Service
March 31, 1998
Accumulated
Gas Prov. for
Plant Deprec. & Net Book
in Service Amortization Value
---------- ------------ --------
DISTRIBUTION PLANT
- ------------------
(374) Land and Land Rights $ 1,551 $ 372 $ 1,179
(376) Mains 484,572 147,832 336,740
(378) Meas. and Reg. Equip. - General 67,784 23,722 44,062
(380) Services 246,624 77,374 169,250
(381) Meters 20,651 6,810 13,841
(382) Meter Installations 23,115 7,936 15,179
(384) House Regulator Installations 1,030 110 920
-------- -------- --------
Total General Plant 845,327 264,156 581,171
-------- -------- --------
Retirement Work in Progress 0 0
-------- -------- --------
Depreciation Deficiency 2,993 (2,993)
-------- -------- --------
Total $845,327 $267,149 $578,178
======== ======== ========
PIKE COUNTY LIGHT & POWER COMPANY
Net Book Value of Common Plant in Service
March 31, 1998
Accumulated
Common Prov. for
Plant Deprec. & Net Book
in Service Amortization Value
---------- ------------ --------
GENERAL PLANT
- -------------
(389) Land and Land Rights $ 3,771 $ $ 3,771
(390) Structures and Improvements 38,592 16,034 22,558
(391) Office Furniture & Equipment 17,927 19,226 (1,299)
(392) Transportation Equipment
(393) Stores Equipment
(394) Tools, Shop & Garage Equipment
(395) Laboratory Equipment
(396) Power Operated Equipment
(397) Communication Equipment 6,113 2,024 4,089
(398) Miscellaneous Equipment 2,003 1,034 969
------- ------- -------
Total General Plant 68,406 38,318 30,088
------- ------- -------
Retirement Work in Progress
Total $68,406 $38,318 $30,088
======= ======= =======
PIKE COUNTY LIGHT & POWER COMPANY
---------------------------------
Statement of Income for Year Ending March 31, 1998
Company Electric Gas
Utility Operating Income Total Dept. Dept.
- ------------------------ ------------- ------------- ------------
Operating Revenue $6,230,156 $5,392,214 $837,942
------------- ------------- ------------
Operating Expenses:
Operation and Maintenance 5,094,432 4,308,537 785,895
Depreciation Expense 220,898 217,201 3,697
Taxes Other than Income Taxes 371,893 313,132 58,761
Federal Income Taxes 99,545 107,234 (7,689)
Provision for Deferred Income Taxes 137,830 130,947 6,883
Provision for Deferred Income Taxes - Cr. (153,287) (131,556) (21,731)
Investment Tax Credit Adjustments (5,420) (5,196) (224)
------------- ------------- ------------
Total Operating Expenses 5,765,891 4,940,299 825,592
------------- ------------- ------------
Total Utility Operating Income 464,265 $ 451,915 $ 12,350
------------- ============= ============
Other Income
------------
Revenue from Nonutility Operations 0
Non-Operating Rental Income (487)
Interest and Dividend Income 7,970
Allowance for Funds Used During Construction 0
Miscellaneous Non-Operating Income (134)
-------------
Total Other Income 7,349
-------------
Other Income Deductions
-----------------------
Loss on Disposition of Property 0
Miscellaneous Income Deductions 6,647
-------------
Total Other Income Deductions 6,647
-------------
Taxes - Other Income Deductions
- -------------------------------
Taxes Other Than Income Taxes 1,094
Federal Income Taxes (1,071)
Deferred Federal Income Taxes 300
Investment Tax Credit Adjustment 0
-------------
Total Taxes - Other Income Deductions 323
-------------
Net Other Income and Deductions 379
-------------
Interest Charges
- ----------------
Interest on Long Term Debt 258,615
Amortization of Debt Discount & Expense 3,291
Interest on Debt to Assoc. Companies 29,475
Other Interest Expense (2,931)
Allowance for Borrowed Funds Used
During Construction (477)
-------------
Total Interest Charges 287,973
-------------
Net Income $ 176,671
=============
[Orange and Rockland Utilities, Inc Electric Service Areas Map appears here.]
[Orange and Rockland Utilities, Inc Gas Service Areas Map appears here.]
EXHIBIT J
SECURITIES AND EXCHANGE COMMISSION
{RELEASE NO. 35 - ________}
FILINGS UNDER THE PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935, AS AMENDED ("ACT")
Notice is hereby given that the following filing has been made with the
Commission pursuant to provisions of the Act and rules promulgated thereunder.
All interested persons are referred to the application for complete statements
of the proposed transactions summarized below. The application and any
amendments thereto are available for public inspection through the Commission's
Office of Public Reference.
Interested persons wishing to comment or request a hearing on the
application should submit their views in writing by ______________, 1999, to the
Secretary, Securities and Exchange Commission, Washington, D.C. 20549, and
serve a copy on the relevant applicants at the addresses specified below. Proof
of service (by affidavit or, in the case of an attorney at law, by certificate)
should be filed with the request. Any request for hearing shall identify
specifically the issues of fact or law that are disputed. A person who so
requests will be notified of any hearing, if ordered, and will receive a copy of
any notice or order issued in the matter. After said date, the application, as
filed or as amended, may be granted and/or permitted to become effective.
CONSOLIDATED EDISON, INC.
Consolidated Edison, Inc. ("CEI"), a New York corporation located at 4
Irving Place, New York, New York 10003, and an exempt holding company under
Section 3(a)(1) of the Act, has filed an application under Sections 9(a)(2) and
10 of the Act. CEI's principal subsidiary is Consolidated Edison Company of New
York, Inc. ("Con Edison"), a New York corporation and an electric and gas
utility company. CEI seeks authorization to acquire all of the issued and
outstanding common stock of Orange and Rockland Utilities, Inc. ("Orange and
Rockland"), an exempt holding company under Section 3(a)(2) of the Act and an
electric and gas utility company. Orange and Rockland has two public utility
company subsidiaries, Rockland Electric Company ("RECO"), a New Jersey electric
utility company and Pike County Light & Power Company ("Pike"), a Pennsylvania
electric and gas utility company.
Con Edison supplies electric service in all of New York City (except
portions of the Borough of Queens) and most of Westchester County, New York.
Con Edison supplies gas service in the Boroughs of Manhattan, the Bronx and
parts of Queens and Westchester County, New York, and steam in part of
Manhattan. For the twelve months ended September 30, 1998, Con Edison's total
operating revenues were $7.22 billion, of which approximately $5.74 billion was
derived from electric operations, $1 billion from gas operations, and $355
million from steam operations. Consolidated assets of Con Edison as of
September 30, 1998 were $14.5 billion. Con Edison is subject to the
jurisdiction of the New York Public Service Commission.
Orange and Rockland provides electric and gas service in all of Rockland
County, most of Orange County and a part of Sullivan County, New York. RECO
supplies electricity to parts of Bergen, Passaic and Sussex Counties, New
Jersey. Pike supplies electricity and gas to a portion of Pike County,
Pennsylvania. For the twelve months ended September 30, 1998, Orange and
Rockland's consolidated revenues were $643 million, of which approximately $496
million was derived from electric sales and $146 million from gas sales.
Approximately 77 percent of consolidated revenues was derived from Orange and
Rockland's operations in New York, and 22 percent of consolidated revenues was
provided by the operations of Orange and Rockland's subsidiaries in New Jersey
and Pennsylvania. Consolidated assets of Orange and Rockland and its
subsidiaries at September 30, 1998 were approximately $1.3 billion.
Orange and Rockland is exempt from registration under the Act pursuant to
Section 3(a)(2) by order of the Commission. Rockland Light and Power Company, 1
SEC 354 (1936). Orange and Rockland is subject to the jurisdiction of the New
York Public Service Commission. RECO is subject to the jurisdiction of the New
Jersey Board of Public Utilities, and Pike is subject to the jurisdiction of the
Pennsylvania Public Utilities Commission.
Pursuant to the terms of the Agreement and Plan of Merger among Orange and
Rockland, CEI and C Acquisition Corp., dated as of May 10, 1998 ("Merger
Agreement"), Orange and Rockland will be merged with and into C Acquisition
Corp., a New York corporation and wholly-owned subsidiary of CEI, with Orange
and Rockland continuing as the surviving corporation and becoming a wholly-
owned subsidiary of CEI. The Merger will be effected through the purchase of
Orange and Rockland stock. Each share of Orange and Rockland stock will be
cancelled and converted into the right to receive $58.50 in cash payable to the
holder of each share upon surrender. Any Orange and Rockland common stock owned
by Orange and Rockland as treasury stock or by CEI will be cancelled and no
payment due to such holders. All preferred stock and preference stock of Orange
and Rockland will be redeemed, prior to the effective date of the Merger, at a
redemption price equal to the respective amount set forth in Orange and
Rockland's restated Certificate of Incorporation, together with all dividends
accrued and unpaid to the date of redemption.
The boards of directors of both Orange and Rockland and CEI have approved
the Merger Agreement. Orange and Rockland held a meeting of its common
shareholders on August 24, 1998, and the requisite two-third votes of Orange and
Rockland's shareholders approved the Merger.
Following consummation of the Merger, CEI contends that it will qualify for
an exemption from registration under the Act pursuant to Section 3(a)(1), and
that Orange and Rockland will remain exempt from registration under Section
3(a)(2) of the Act pursuant to the Commission's order.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
2
EXHIBIT K-1
BEFORE THE NEW YORK STATE
PUBLIC SERVICE COMMISSION
- -------------------------------------------------x
In the Matter of Consolidated Edison Company :
of New York, Inc.'s plans for (1) electric rate/
restructuring pursuant to Opinion No. 96-12, :
and (2) the formation of a holding company
pursuant to PSL, Sections 70, 108 and 110, and :
certain related transactions.
PSC Case No. 96-E-0897 :
- -------------------------------------------------x
[AMENDED AND RESTATED]
AGREEMENT AND SETTLEMENT
[CONFORMED COPY OF AGREEMENT AND SETTLEMENT
DATED AUGUST 29, 1997, INCORPORATING REVISIONS
MADE BY ADDENDUM DATED SEPTEMBER 19, 1997]
Dated: September 19, 1997
Table of Contents
-----------------
I. INTRODUCTION............................................................................................... 1
------------
1. The Commission's May 20, 1996 Order..................................................................... 1
a. Procedural History and Background....................................................................... 1
b. The Requirements of the May 20, 1996 Order.............................................................. 2
c. Con Edison's October 1, 1996 Filing..................................................................... 3
2. Negotiations Among The Parties.......................................................................... 3
II. RATE PLAN................................................................................................. 4
---------
Objectives and Time Period Covered......................................................................... 4
Paragraph 1................................................................................................ 4
Paragraph 2................................................................................................ 5
Paragraph 3................................................................................................ 5
Rate and Revenue Levels................................................................................ 5
Paragraph 4................................................................................................ 5
Paragraph 5................................................................................................ 6
Paragraph 6................................................................................................ 7
Paragraph 7................................................................................................ 7
Applicability of Case 94-E-0334 Settlement Agreement................................................... 8
Paragraph 8................................................................................................ 8
Paragraph 9................................................................................................ 8
Pensions/OPEBs and Exceptions to Base Rate Freeze...................................................... 9
Paragraph 10............................................................................................... 9
Paragraph 11............................................................................................... 10
Paragraph 12............................................................................................... 12
Disposition of Strandable Costs........................................................................ 12
Paragraph 13............................................................................................... 12
Paragraph 14............................................................................................... 14
Paragraph 15............................................................................................... 17
Comprehensive Nature of Settlement Agreement........................................................... 18
Paragraph 16............................................................................................... 18
Reporting.............................................................................................. 18
i
Paragraph 17.............................................................................................. 18
Calculation and Disposition of Certain Earnings....................................................... 18
Paragraph 18.............................................................................................. 18
Rate Design and Revenue Allocation.................................................................... 19
19. Case 94-E-0334 Rate Design Changes................................................................ 19
20. Unbundled Tariffs................................................................................. 19
21. Residential Time-of-Use Rates..................................................................... 20
22. Industrial Employment Growth...................................................................... 21
23. Low Income Rate Program........................................................................... 21
24. RY1 Through RY5 Tariffs Implementing This Agreement............................................... 22
25. Rate Design Flexibility........................................................................... 22
26. System Benefits Charge Program.................................................................... 23
27. Miscellaneous Rate Provision...................................................................... 25
28. Economic Development Rate Programs................................................................ 25
29. Retail Access Tariff and Retail Access Regulation................................................. 26
30. Regulatory Reform, Customer Operations Procedures, and Classification of Facilities.............. 27
31. NYPA.............................................................................................. 29
(i) Revenue Deficiency Under the 1994 Cost-of-Service Study........................................... 29
(ii) In-City Generation; Application of Transportation/Delivery Charge................................. 29
(iii).................................................................................................. 31
32. Fuel Adjustment Clause................................................................................ 31
33. Customer Service and Electric Service Reliability Incentives.......................................... 33
34. SC No. 11 Buy-Back Energy Rates....................................................................... 33
III. RETAIL ACCESS PROGRAM................................................................................ 34
---------------------
Objectives and Phase-in Target Dates................................................................. 34
Paragraph 1............................................................................................... 34
Paragraph 2............................................................................................... 35
Paragraph 3............................................................................................... 35
Paragraph 4............................................................................................... 35
Paragraph 5............................................................................................... 36
Retail Access Prior to A Fully Operational ISO....................................................... 36
Paragraph 6............................................................................................... 36
Paragraph 7............................................................................................... 37
Paragraph 8............................................................................................... 37
ii
Retail Access After A Fully Operational ISO........................................................... 38
Paragraph 9............................................................................................... 38
Paragraph 10.............................................................................................. 39
Paragraph 11.............................................................................................. 39
IV. DIVESTITURE.............................................................................................. 41
-----------
1. Requirements for Divestiture........................................................................... 41
2. Divestiture Parameters and Methodology................................................................. 41
3. Divestiture Plan Procedures............................................................................ 42
4. Post-Rate Plan Period.................................................................................. 43
V. CORPORATE STRUCTURE....................................................................................... 43
-------------------
1. Formation of Holding Company........................................................................... 43
2. Functional Unbundling.................................................................................. 44
3. The RegCo.............................................................................................. 45
4. Affiliate Relations - In General....................................................................... 45
5. Transfer of Assets..................................................................................... 46
6. Personnel.............................................................................................. 46
7. Provision of Services and Goods........................................................................ 47
8. Maintaining Financial Integrity........................................................................ 48
9. Standards of Competitive Conduct....................................................................... 49
10. Access to Books and Records and Reports............................................................... 51
11. Independent Auditor................................................................................... 51
12. Royalty............................................................................................... 51
13. Miscellaneous......................................................................................... 52
VI. RESTRUCTURING-RELATED ACTIONS............................................................................ 53
-----------------------------
VII. CUSTOMER EDUCATION PROGRAM.............................................................................. 55
--------------------------
VIII. MISCELLANEOUS.......................................................................................... 55
-------------
1. Provisions Not Separable: Effect of Commission Modifications.......................................... 55
2. Provisions Not Precedent............................................................................... 56
iii
BEFORE THE NEW YORK STATE
PUBLIC SERVICE COMMISSION
- -------------------------------------------------x
In the Matter of Consolidated Edison Company :
of New York, Inc.'s plans for (1) electric rate/
restructuring pursuant to Opinion No. 96-12, :
and (2) the formation of a holding company
pursuant to PSL, Sections 70, 108 and 110, and :
certain related transactions.
:
P.S.C. Case No. 96-E-0897
- -------------------------------------------------x
[AMENDED AND RESTATED]*
AGREEMENT AND SETTLEMENT
I. INTRODUCTION
------------
1. The Commission's May 20, 1996 Order
-----------------------------------
a. Procedural History and Background
---------------------------------
In 1993, the Public Service Commission (the "Commission") initiated a
proceeding aimed at addressing numerous issues related to potential competition
in the regulated energy markets in New York State. Case 93-M-0229, Proceeding on
-------------
Motion of the Commission to Address Competitive Opportunities Available to
- --------------------------------------------------------------------------
Customers of Electric and Gas Service and Develop Criteria for Utility
- ----------------------------------------------------------------------
Responses, Order Instituting Proceeding (March 19, 1993) (changed to Case 94-E-
- ---------------------------------------
0952, by order dated November 30, 1994, to reflect new focus on electric
service) (the "COB proceeding").
On July 11, 1994, the Commission issued its Opinion and Order
-----------------
Regarding Flexible Rates, Opinion No. 94-15, Case 93-M-0229 (July 11, 1994). In
- --------- --------------
the July 11, 1994 order, the Commission announced "a possible second phase of
this proceeding: an investigation into the appropriate market structure and
regulatory regime for the future." Id. at 32.
---
- ------------------
/*/ Conformed copy of Agreement and Settlement dated August 29, 1997,
incorporating revisions made by Addendum dated September 19, 1997.
On August 9, 1994, the Commission instituted phase II of the COB
proceeding, Order Instituting Phase II of Proceeding, Case 93-M-0229 (August 9,
----------------------------------------
1994). This phase of the COB proceeding was intended "to identify regulatory
and ratemaking practices that will assist in the transition to a more
competitive electric industry designed to increase efficiency in the provision
of electricity while maintaining safety, environmental, affordability, and
service quality goals." Id. at 1-2. Parties to phase II of the COB proceeding
--
were urged to work together to "examine issues related to the establishment of a
fully efficient wholesale market for electricity and any pricing reforms
necessary to reflect those market efficiencies in retail customer rates." Id.
--
at 3.
On June 7, 1995, the Commission adopted "final principles" to guide
the transition to greater competition in the electric industry. See Opinion No.
95-7, Case 94-E-0952 (June 7, 1995).
On December 21, 1995, Administrative Law Judge Judith A. Lee and
Ronald Liberty, then-Deputy Director of the Energy and Water Division, issued a
Recommended Decision addressing implementation of the restructuring principles.
On May 20, 1996, the Commission issued its Opinion and Order Regarding
---------------------------
Competitive Opportunities for Electric Service, Opinion No. 96-12 ("May 20, 1996
- ----------------------------------------------
order").
b. The Requirements of the May 20, 1996 Order
------------------------------------------
The Commission's stated vision for the electric utility industry is
"(1) effective competition in the generation and energy services sectors; (2)
reduced prices resulting in improved economic development for the State as a
whole; (3) increased consumer choice of supplier and service company; (4) a
system operator that treats all participants fairly and ensures reliable
service; (5) a provider of last resort for all consumers and the continuation of
a means to fund necessary public policy programs; (6) ample and accurate
information for consumers to use in making informed decisions; and (7) the
availability of information that permits adequate oversight of the market to
ensure its fair operation." Id. at 24-25. In its May 20, 1996 order, the
--
Commission directed Consolidated Edison Company of New York, Inc. ("Con Edison"
or "the Company") and four other electric utilities to each file a
rate/restructuring plan consistent with the Commission's policy and vision for
increased competition. Id. at 74-75; see also id. at 92.
-- --
The Commission stated that these utility plans "should address, at a
minimum," matters including "(1) the structure of the utility both in the short
and long term, . . . a description of how that structure complies with our
vision and, in cases where divestiture is not proposed, effective mechanisms
that adequately address resulting market power concerns; (2) a schedule for the
introduction of retail access to all of the utility's customers, and a set of
unbundled tariffs that is consistent with the retail access program; (3) a rate
plan to be effective for a significant portion of the transition" and numerous
other issues relating to strandable costs, load pockets, energy services, and a
system benefits charge. Id. at 75-76, 90.
--
2
In addition, the Commission directed the utilities to collaborate with
the Department of Public Service Staff ("Staff") and other interested parties to
"accomplish technical studies" on subjects including load pockets, market
prices, energy services companies and reporting requirements. Collaborative
efforts were also directed on public educational forums and on "necessary FERC
filings," which have centered on development of the Independent System Operator
and Power Exchange. Id. at 63-64.
--
c. Con Edison's October 1, 1996 Filing
------------------------------------
On October 1, 1996, Con Edison filed a rate/restructuring plan in
response to the May 20, 1996 order (the "October 1, 1996 plan"). The October 1,
1996 plan proposed a transition to a competitive electric market, including a
plan for retail competition, a multi-year rate plan, and a corporate
reorganization into a holding company structure.
2. Negotiations Among The Parties
------------------------------
The Commission established Case 96-E-0897 to examine Con Edison's
plan, and the Hon. Judith A. Lee was appointed as presiding Administrative Law
Judge. Nearly 70 parties intervened and about 40 actively participated in the
proceeding. By Order Establishing Procedures and Schedule (issued October 9,
------------------------------------------
1996 as a one-Commissioner order and confirmed by the full Commission on October
24, 1996) ("the October 9 order"), the Commission established a schedule for
this proceeding. Stating that "a negotiated outcome is preferable to a
litigated outcome," the Commission stated that "discussions and negotiations
among the parties are strongly encouraged" and established a "90-day
[negotiating] period." Id., p. 3. To facilitate negotiations, the Commission's
---
October 9 order waived certain of its settlement guidelines (Id.; Case 90-M-
---
0255, Settlement and Stipulation Agreements, Opinion No. 92-2, issued March 24,
1992).
Over the period of October 15 to December 20, 1996, Con Edison
conducted a series of twelve "technical" meetings with the parties to this
proceeding at which the Company provided detailed presentations on its October
1, 1996 plan, provided supporting data, and answered parties' questions and
listened to their observations and concerns. Also during this period, the
parties conducted extensive discovery of Con Edison. Following notice of
impending settlement negotiations filed with the Secretary of the Commission and
sent to all parties, Con Edison and the parties, including Staff, began
settlement negotiations on November 20, 1996 to determine whether they could
reach accord on a negotiated settlement of the issues presented by the
Commission's vision for the electric industry and Con Edison's plan. All-party
negotiation conferences were conducted on November 20, 22, 26, December 6 and
11, 1996, and February 25, 1997, and numerous other conferences among various
parties were conducted as well.
On November 4 and 26, and December 16, 1996, Judge Lee conducted
procedural conferences at which the parties, inter alia, reported on the
----- ----
progress of settlement negotiations. At these conferences, the Judge monitored
the progress of the parties to assure compliance with the scheduling mileposts
of the Commission's October 9 order. The Secretary of the Commission
3
subsequently issued notice of various extensions of the negotiating period to
facilitate settlement negotiations. In her December 20, 1996 Notice, Judge Lee
stated that it was the "Commission's explicit preference for a negotiated
resolution of this proceeding instead of a litigated outcome" and urged the
parties "to continue to make good faith efforts to reach a settlement, if at all
possible." Case 96-E-0897, Procedural Ruling, December 20, 1996, pp. 2-3.
-----------------
On January 16, 1997, the Company and Staff informed the parties that
they had made significant progress in resolving the issues to this case and that
they were seeking to prepare a detailed settlement proposal. On March 13, 1997,
an "Agreement and Settlement" dated March 12, 1997 ("the March 12, 1997
settlement agreement") was submitted to the Commission. By orders issued March
27, 1997 and April 9, 1997, the Commission set procedures to govern the
settlement while it was being considered. Four days of hearings were conducted
to review the March 12, 1997 settlement agreement. A Recommended Decision was
issued June 20, 1997, and, as a result of the recommendations contained therein,
the parties attempted to negotiate changes to the March 12, 1997 settlement
agreement, but no changes were made prior to the Commission's scheduled August
20, 1997 consideration of the March 12, 1997 settlement agreement. At its
August 20, 1997 session, the Commission requested Staff to seek to negotiate
certain modifications to the March 12, 1997 settlement, with any such
modifications to be filed by August 29, 1997, for consideration by the
Commission at its September 10, 1997 session. Accordingly, a further all-
parties' meeting was held on August 26. The undersigned have agreed to the
terms set forth in this settlement agreement.
The issues involved in this proceeding are complex, and their
resolution is likely to have long-term impacts on the New York City metropolitan
area, including impacts on the cost of electric service, on the way electricity
is provided in Con Edison's service area and on Con Edison's business.
Nevertheless, after thorough investigation and discussion, the parties to this
settlement have agreed to resolve these complex and vital issues by settlement
rather than litigation. The signatories believe that this settlement gives fair
consideration to the interests of Con Edison's customers, investors and other
stakeholders and will facilitate implementation of the Commission's vision for a
competitive electric industry as stated in its May 20, 1996 order.
II. RATE PLAN
---------
Objectives and Time Period Covered
----------------------------------
1. The Commission's May 20, 1996 order envisioned that a "rate plan" be
established "to be effective for a significant portion of the transition."
May 20, 1996 order, p. 76. The parties have agreed to the elements of such
a "rate plan." The rate plan is designed with several objectives, including
the following: to provide ratepayers with meaningful rate reductions during
the transition to competition in order to enhance the economic vitality of
the service area; to establish reasonable rate and revenue levels over an
extended period to facilitate the transition to competition; to provide Con
Edison with opportunities to earn reasonable rates of return on shareholder
investment required for the development of the electric energy
infrastructure in New York City and Westchester
4
County; to resolve difficult rate and rate-related issues arising from the
transition, including the rate treatment of "strandable" costs; and to
provide the Company with the ability to maintain the integrity and
reliability of the electricity supply and delivery systems in its service
territory.
2. The rate plan covers the five-year period ending March 31, 2002. The first
year of the plan ("RY1") is the twelve months ending March 31, 1998. The
second rate year ("RY2") is the twelve months ending March 31, 1999. The
third rate year ("RY3") is the twelve months ending March 31, 2000. The
fourth rate year ("RY4") is the twelve months ending March 31, 2001. The
fifth rate year ("RY5") is the twelve months ending March 31, 2002. The
rate plan (Section II. 11, 15, 16) also establishes certain principles to
be considered in establishing revenue requirements in the period following
RY5.
3. This rate plan covers Con Edison's rates and charges for retail electric
sales and for electric delivery services. As currently effective, Con
Edison's rates and charges for electric service are contained in Con
Edison's Schedule for Electricity Service PSC No. 9 Electricity (this rate
schedule and successors thereto are referred to herein as "PSC No. 9" or
the "PSC No. 9 rate schedule"); in the PASNY No. 4 (FERC No. 96) Delivery
Service Rate Schedule Implementing and Part of the Service Agreement
between the Power Authority of the State of New York (PASNY) and the
Consolidated Edison Company of New York, Inc. (the Company), dated March
10, 1989, for the delivery by the Company of Power and Associated Energy to
Authority Public Customers (this rate schedule and successors thereto are
referred to herein as "PASNY No. 4" or the "PASNY No. 4 rate schedule");
and in the Economic Development Delivery Service No. 2 (FERC Nos. 92 and
96) Economic Development Delivery Service Rate Schedule Implementing and
Part of: (1) the "Service Agreement for the Delivery of Power and Energy"
between the Power Authority of the State of New York ("PASNY") and the
Consolidated Edison Company of New York, Inc. ("the Company"), dated March
10, 1989, for the Delivery by the Company of Power and Associated Energy to
Authority Economic Development Customers; (2) the "Agreement for the
Delivery of Power and Energy from the James A. FitzPatrick Power Project"
between the County of Westchester, acting through the Westchester Public
Utility Service Agency and the Company, made April 24, 1987; and (3) the
"Agreement between the City of New York and Consolidated Edison Company of
New York, Inc. for the Delivery of Power and Energy from the James A.
FitzPatrick Nuclear Power Project" between the City of New York, acting
through the New York Public Utility Service and the Company, made October
23, 1987 (this rate schedule and successors thereto are referred to herein
as "EDDS" or the "EDDS rate schedule"). An additional tariff covering
retail access will be established pursuant to Section III of this
Agreement.
Rate and Revenue Levels
-----------------------
4. The rate plan: (i) reduces PSC No. 9 rates and, therefore, the revenues
that Con Edison will receive over the five-year period ending March 31,
2002 compared to the level it would receive had the PSC No. 9 schedule in
effect as of the date of this rate settlement
5
remained in effect and implements the increase to the PASNY No. 4 tariff as
authorized by the Commission in Case 94-E-0334 ("the Case 94-E-0334
settlement agreement") and as specifically described in Section II.31(i);
(ii) implements rate design changes to the PSC No. 9 rate schedule in order
to implement rate design provisions of the Case 94-E-0334 settlement
agreement and to facilitate the transition to competition; and (iii)
provides a framework for the transition to competition. This transition
framework addresses mitigation and recovery of stranded costs, allocation
of certain cost reductions and benefits that many expect to flow from the
transition to competition, encourages the future infrastructure investments
essential to support continued electric reliability, makes limited
provision for increased costs associated with unanticipated developments
possible during the transition, and provides incentives to maintain service
quality and reliability during the transition.
5. Rates of all service classes in the PSC No. 9 rate schedule will be reduced
under the rate plan. The allocation of these revenue benefits to the rate
years covered by the rate plan and to the affected customers are set forth
in the table below:
Revenue Reductions (incl. grt)
($millions)
P.S.C. No. 9 RY1 Cumulative Revenue
Customer Group 3 mos. RY2 RY3 RY4 RY5 Reduction by end of RY5
- -------------- ------ --- --- --- --- -----------------------
. SC 4 Rate II and 9 -
Rate II
Revenue reductions $ 4.7 $ 37.4 $ 56.1 $ 74.9 $ 93.6 $ 266.7
Est. % average bill
reduction 2.0% 4.0% 6.0% 8.0% 10.0%
. All other*
Revenue reductions 20.9 83.4 144.6 228.7 418.7 896.3
Est. % average bill
reduction 2.0% 2.0% 3.5% 5.5% 10.0%
. Industrial employment
growth program per
Section II.22 2.1 8.6 8.6 8.6 8.6 36.5
Total revenue reductions $27.7 $129.4 $209.3 $312.2 $520.9 $1,199.5
- ---------------------
/*/ "All other" customer classes in PSC No. 9 rate schedule are Service
Classification ("SC") No. 1 (residential and religious), 2 (general-small), 3
(back-up service), 4-Rates I and III (commercial and industrial-redistribution),
5 (electric traction systems), 6 (public and private street lighting), 7
(residential and religious - heating), 8 (multiple dwelling - redistribution),
9 -Rates I and III (general-large), 10 (supplementary service), 12 (multiple
dwelling-space heating) and 13( bulk power-high tension-housing developments).
6
The above table includes, among other items, the application to ratepayer
benefit of $36.0 million in credits to be accrued in the period April 1 -
December 31, 1997. In order to effectuate the ratepayer benefit implicit
in the table, the $36.0 million amount will be credited to income as
follows: $4.8 million in RY1, $19.2 million in RY2, $6.0 million in RY4
and $6.0 million in RY5.
6. The rate and revenue benefits reflected in Section II.5 will become
effective on January 1, 1998 and are subject to being increased during the
transition. Additional savings can be derived from successful
implementation of state programs authorizing "securitization" of certain
generation and purchased power costs, from the successful implementation of
utility tax reform in New York, from net gains available from sales of
generating plants, and from the efficiency benefits of a competitive
electricity market. Pending securitization legislation in New York would
authorize the Commission to issue rate orders guaranteeing the application
of specific utility revenue streams to trusts or other financing vehicles
established for the purpose of financing (at lower cost) generation and
generation-related assets and liabilities viewed as strandable under a
fully competitive electric market. Legislation to reform the method of
utility taxation in the state from a revenue-based method to an income-
based method has also been under consideration and would be consistent with
the need expressed in the May 20, 1996 order (pp. 91-92) to "ease the high
tax burdens" in the state. Progress has recently been made in utility tax
reform, and the gross receipts tax reductions prescribed by Chapter 389 of
the 1997 Laws of the State of New York, which will be flowed through to
customers under the Statement of Percentage Increase in Rates and Charges
to the Company's electric rate schedule, are reflected in the revenue
benefits set forth in Section II.5. Under this settlement agreement,
unless otherwise required by law and subject to Section II.26, the
financing savings resulting from securitization will be applied to benefit
the PSC No. 9 customers based on class revenue ratios. Further tax reform
savings, if achieved, are, unless otherwise required by law, anticipated to
be applied to the benefit of the customers currently bearing the tax
expenses under the Company's rate schedules. While it is difficult to
predict the extent of the efficiency savings that will be produced by
competition both during and after the transition, the achieved efficiency
benefits of competition should generally accrue to all.
7. Other than as provided in Sections II. 11, 12, 25, 27 of this settlement
agreement, the base rates established in the Company's PSC No. 9, PASNY No.
4, and EDDS rate schedules for RY1 through RY5 in compliance with the
Commission order approving this settlement agreement will neither be
increased nor decreased prior to April 1, 2002, from the rate levels to be
set forth in the rate schedules from January 1, 1998 through March 31,
2002. The RY1-RY5 base rates will be set to achieve the base rate
reductions reflected in Section II.5 herein. The Company's "base rates"
are the demand, energy and customer charges in the PSC No. 9, PASNY No. 4,
EDDS and retail access rate schedules; "base rates" do not include the fuel
adjustment (applicable to PSC No. 9), the Statement of Percentage Increase
in Rates and Charges (covering revenue and similar taxes), the Statement of
Case 96-E-0897 Adjustments (Section II.11 herein) and the system benefits
charge (Section II.26 herein). The rate plan precludes the Company from
7
increasing rates due to increased costs or lower sales levels prior to
April 1, 2002, except as provided in Sections II. 11, 12 of this settlement
agreement. The rate plan has the immediate impact of eliminating the $87.1
million electric rate increase filed on October 2, 1996 to implement the
Case 94-E-0334 settlement agreement. This disposition of the Case 94-E-
0334 settlement agreement equates to an additional estimated total five-
year savings to customers of $436 million. The plan also requires the
Company to absorb expected inflation through March 31, 2002.
Applicability of Case 94-E-0334 Settlement Agreement
----------------------------------------------------
8. Con Edison's current electric rates are governed by the Case 94-E-0334
settlement agreement. The third year in the Case 94-E-0334 settlement
agreement is the twelve months ending March 31, 1998, and the third rate
year, therefore, covers the same twelve months as RY1 of the rate plan. As
stated in Section II.7, the parties agree that, in light of the rate plan,
the provisions of the Case 94-E-0334 settlement agreement prescribing
overall electric revenue levels for Con Edison for the twelve months ended
March 31, 1998, will be superseded by this settlement agreement. The other
provisions of the Case 94-E-0334 settlement agreement (e.g., rate design,
----
incentive mechanisms) will be implemented as prescribed in Section II.9
below and in Sections II. 19, 31, 32 of this settlement agreement.
9. Implementation of the principal accounting and general ratemaking
provisions of the Case 94-E-0334 settlement agreement in RY1 will be as
follows:
(i) the revenue requirement increase for the third rate year (12 months
ending March 31, 1998) (Case 94-E-0334 settlement agreement, pp. 14-
18) is agreed to be eliminated and all credits and debits recorded
in order to implement the ratemaking provisions of the Case 94-E-
0334 settlement agreement as of March 31, 1997 will be reversed and
the effects of such reversals reflected in income; the Company will
provide to Staff journal entries implementing this prescribed
accounting within 30 days following Commission approval of this
settlement agreement.
(ii) the revenue per customer clause (Case 94-E-0334 settlement
agreement, p. 16 and Appendix C) will be terminated beginning with
the month of April 1997.
(iii) the following expenses required to be reconciled (in full or in
part) under the Case 94-E-0334 settlement agreement will no longer
be subject to reconciliation beginning with the month of April 1997
(except insofar as reconciliation of them is implemented for the
system benefits charge per Section II. 26 herein): demand-side
management expenses, independent power production capacity charges,
Home Insulation and Energy Conservation Act expenses,
8
pension and other post-employment benefits ("pension/OPEBs")
expenses, research and development expenses, renewables expenses and
property tax expenses (Case 94-E-0334 settlement agreement, pp. 9-
10, 17). Recovery of pensions/OPEBs is subject to Section II.10 of
this settlement agreement; recovery of property tax expense is
subject to Section II.11 of this settlement agreement.
(iv) the following provisions of the Case 94-E-0334 settlement agreement
will not be effective for RY1 of the rate plan or thereafter: the
demand-side management incentive, the customer service incentive,
the electric service reliability incentive, the earnings
calculations provision and the "miscellaneous provisions" provision
(Case 94-E-0334 settlement agreement, Sections F, K, L, M and P
[except subsection (iv) thereof, "nuclear refueling expense"],
respectively).
(v) the following provisions of the Case 94-E-0334 settlement agree-
ment, as implemented in Section II. 19, 31, 32 of this settlement
agreement, will continue in effect in RY1: the electric fuel adjust-
ment, buy back rates and marginal energy costs provision, and the
rate design and revenue allocation provision (Case 94-E-0334
settlement agreement, Sections G and H and Appendix D,
respectively).
Pensions/OPEBs and Exceptions to Base Rate Freeze
-------------------------------------------------
10. The Commission's policy statement on accounting and ratemaking for
pensions/OPEBs was issued in 1993 and scheduled for re-examination
beginning in 1998. Case 91-M-0890, Statement of Policy and Order
-----------------------------
Concerning the Accounting and Ratemaking Treatment for Pensions and
-------------------------------------------------------------------
Postretirement Benefits other than Pensions, issued September 7, 1993, p.
-------------------------------------------
5. The parties have considered the application of the policy statement to
Con Edison in view of the rate plan. The parties agree that, subject to
approval of the settlement agreement by the Commission, effective April 1,
1997, the policy statement will no longer apply to Con Edison's electric,
gas and steam rates and to its accounting policies, and the Company may
determine to implement the "corridor" approach for pensions/OPEBs in
accordance with Statement of Financial Accounting Standards Nos. 87 and
106. Con Edison agrees that during the term of the rate plan, it will fund
its pensions/OPEBs expense to the maximum extent possible on a tax-
effective basis. Con Edison also intends to manage its pension/OPEB
expenses in a manner designed to produce equivalent levels of expense,
subject to the implementation of the "corridor," after the rate plan period
as if it had still been subject to the Commission's "true-up" policy. The
Company's Annual Report to the Commission will contain information
regarding pension/OPEB funding and expense levels that will enable Staff to
verify that the Company's expense and funding levels are consistent with
the foregoing objectives.
9
11. The Company's PSC No. 9, PASNY No. 4, EDDS and retail access base electric
rates are subject to adjustment prior to March 31, 2002 for the following:
(i) If any law, rule, regulation, order, or other requirement or
interpretation (or any repeal or amendment of an existing rule,
regulation, order or other requirement) of a state, local or
federal government body (including a requirement or
interpretation resulting in Con Edison's refunding its tax-
exempt debt and including income or other state, local and
federal tax and state, local and federal fees and levies but
excluding local property tax), results in a change in Con
Edison's annual utility costs, compared to the levels in the
year ending March 31, 1997, in excess of $7.5 million in any
year, Con Edison will defer on its books of account the total
effect of all such annual cost changes in excess of $7.5
million, with any such deferrals to be reflected in rates as
set forth in this paragraph.
(ii) Con Edison's total local property taxes are estimated to be
$525.9 million in RY1, $540.1 million in RY2, $554.6 million in
RY3, $569.6 million in RY4, and $585.0 million in RY5. These
rate-year estimates will be adjusted for the purposes of this
subparagraph solely to reflect reductions in property taxes
actually experienced due to the retirement, sale or transfer of
generating units. Con Edison will defer on its books of account
the full amount of its actual total property taxes above these
estimated total levels (as adjusted as per the preceding
sentence), with any such deferrals to be reflected in rates as
set forth in this paragraph. The foregoing excludes the effects
of property tax refunds. Eighty-six percent of any property-tax
refund received by the Company in the RY1 through RY5 period
will be deferred for the benefit of customers; the remaining 14
percent will be retained by the Company.
(iii) Con Edison will defer on its books of account and reflect in
rates as prescribed by this paragraph the following
environmental costs: (i) site investigation and remediation
("SIR") costs for electric operations in excess of $5 million
annually (SIR costs are the costs Con Edison incurs to
investigate, remediate, or pay damages (including natural
resource damages but excluding personal injury damages) with
respect to industrial and hazardous waste or contamination,
spills, discharges and emissions for which Con Edison is
responsible); and (ii) environmental compliance, prevention
10
and improvement costs (excluding SIR costs) in excess of $10
million in annual revenue requirement (i.e., expenses plus
---
carrying charges on capital additions not reflected in the
Company's 1997-2001 capital forecast) (these costs are the
costs of complying with legislative, regulatory, judicial or
other government rules or policies, including consent decrees,
related to the environment, and the costs of proactive
environmental initiatives not required by law, undertaken
either by the Company alone or in conjunction with others to
improve the environment). Any costs deferred under this
subparagraph will be net of recoveries of these costs under
insurance policies or from third parties. Amounts deferred
hereunder will not be included as a cost of divestiture
(Section IV.2 herein)
(iv) If in any rate year covered by the rate plan, the GDP Implicit
Price Deflator as measured by Blue Chip Economic Indicators
increases by an amount greater than four percent, Con Edison
will, in such rate year, defer on its books of account an
amount equal to the product of the actual experienced
percentage increase above 4 percent times the escalation base
in effect for that rate year, with such deferred amount to be
reflected in rates as set forth in this paragraph. The
escalation base in RY1 will be $1,050 million; the escalation
base in RY2 through RY5 will be the escalation base in RY1
increased by the actual percentage increase in the GDP Implicit
Price Deflator in the succeeding rate year or rate years except
that the escalation base will be reduced to reflect reductions
in operations and maintenance production expenses due to the
retirement, sale or transfer of generating units. Expenses
deferred under this subparagraph will be deferred in each
succeeding year through RY5 but such succeeding deferrals will
be netted against the amount by which escalation in a
succeeding or preceding rate year falls below four percent
multiplied by the escalation base for that year. If the GDP
Implicit Price Deflator is no longer published or is re-
constituted so as to make it unusable, a suitable alternative
means of inflation measurement will be determined by the
Commission.
(v) Deferrals of extraordinary expenses, including extraordinary
operating and maintenance or capital costs, not covered by
subparagraphs (i) through (iv) above, will be on petition to
the Commission and subject to such materiality and other
standards as may then apply as per PSC Case No. 94-M-0667, In
--
the Matter of Developing Guidelines for Use in Deferral
-------------------------------------------------------
11
Accounting in Ratemaking Matters for All Regulated Utilities or
------------------------------------------------------------
other Commission determination.
Amounts deferred on Con Edison's books of account under this paragraph and
Section II.22 and VI.2 herein, whether they are credits or debits, will be
reflected in rates through rate adjustments to be implemented in RY3 and
RY5 of the rate plan. Deferred debits or credits remaining on the
Company's books after RY5 will be reflected in rates set after March 31,
2002. Interest on deferred debits and credits will be applied at the
Commission-determined unadjusted customer deposit rate. Any rate
adjustment effective under this paragraph will be implemented pursuant to
the "Statement of Case 96-E-0897 Adjustments" to be effective under the
Company's rate schedules pursuant to this settlement agreement beginning in
RY3. The Statement and changes thereto will be filed with the Commission
and annexed to the Company's rate schedules. The Statement will set forth
any adjustments to become applicable under this paragraph on a cents per
kWhr basis for energy-only service classifications and on a cents per kWhr
and kW basis for demand-billed service classifications. Such rate
adjustments will be based on each class' relative contribution to total
pure base electric revenues; generation related costs will not be allocated
to the PASNY No. 9 and EDDS tariffs.
12. If a circumstance occurs which, in the judgment of the Commission, so
threatens the Company's economic viability or ability to maintain safe and
adequate service as to warrant an exception to this undertaking, Con Edison
shall be permitted to file for an increase in base electricity rates at any
time under such circumstances. Con Edison may seek a general rate increase
should its forecast return on common equity fall below 8 percent (pro-
formed to a common equity capitalization of 52 percent).
The parties recognize that the Commission reserves the authority to act on
the level of Con Edison's base electricity rates pursuant to the provisions
of the Public Service Law should it determine that intervening
circumstances have such a substantial impact upon the range of Con Edison's
earnings levels or equity costs envisioned by the agreement as to render
the Company's electric rates unjust or unreasonable for the provision of
safe and adequate service.
13. Disposition of Strandable Costs
-------------------------------
13. Strandable costs are "those costs incurred by utilities that may become
unrecoverable during the transition from regulation to a competitive market
for electricity." May 20, 1996 order, p. 46. Con Edison's October 1, 1996
plan estimated its strandable electric generation costs to range from $4.7
billion to $6.2 billion, with about 60 percent of such costs attributable
to costs of required power purchase contracts between Con Edison and non-
utility generators ("NUGs"). The parties have not agreed to any estimate
of strandable costs but as part of the rate plan have agreed on the rate
treatment to be utilized for such costs.
12
Con Edison's October 1, 1996 plan maintained that to date the Company had
mitigated the ratepayer impacts of strandable costs attributable to NUGs by
$2.2 billion and its other generation costs by additional, substantial
amounts. The parties have agreed to the following steps toward reducing
generation costs under the rate plan:
(i) In developing the unbundled tariffs prescribed by Section II.20,
the revenue reductions set forth in Section II.5 herein,
exclusive of gross receipts taxes, will be allocated to the
generation component of the applicable PSC No. 9 rates. These
reductions reflect the mitigation of generation-related costs
borne by ratepayers in the RY1 through RY5 period while
additional mitigation of strandable costs is carried out as
prescribed in the subparagraphs below.
(ii) During RY1 through RY5, Con Edison will continue to depreciate
its generation plant at the rates prescribed by the Case 94-E-
0334 settlement agreement. Con Edison commits, in furtherance of
the rate plan, to mitigate strandable costs of its fossil
generating units through the application of credits (reductions)
to its generation plant balances during the period RY1 through
RY5 in a total amount of $75 million above the depreciation
accruals authorized by the Case 94-E-0334 settlement agreement.
These credits will be recorded as depreciation expense for the
Company's steam-electric generating stations (i.e., Waterside
-----
and 74/th/ Street). Con Edison will record this increased
depreciation expense in RY 3 and RY4. Con Edison will notify
Staff of the plant as to which these depreciation expense
accruals are to be made under this subparagraph 30 days prior to
the application of such accruals.
(iii) Mitigation of strandable costs will also be addressed through
the application of 25 percent of the Company's common equity
earnings in excess of 12.9 percent (calculated per Section
III.18 herein) against generation-related plant balances during
the period prescribed in Section II.18.
(iv) NUG contract cost mitigation efforts will continue in the RY1
through RY5 period and thereafter as per Section II.14 herein.
As an additional incentive to mitigate NUG costs during the RY1
through RY5 period, the Company will, subject to Section
II.14.(i)(c), retain (a) the full reductions in fixed NUG costs
during the five-year period, and (b) thirty percent of
reductions in variable NUG costs for a period of eighteen
months, resulting from the renegotiation, termination, "buyout"
or "buydown" of NUG contracts, exclusive of the financing-
related savings resulting from securitization. The Company will
petition the Commission to defer costs of contract terminations,
"buyout" or "buydown" for recovery pursuant to the parameters
set forth in Section II.15(ii) herein. After RY5, the net
benefits of any NUG contract renegotiation, termination,
"buyout" or "buydown"
13
will be included in the calculation of mitigated amounts as
prescribed by Section II.14(i)(a) and, in addition, allocated
for ratemaking purposes as follows: 25 percent will be applied
to credit (reduce) generation plant balances; 75 percent will be
applied directly to rates in a manner to be determined by the
Commission.
(v) Section IV of this agreement requires Con Edison to develop and
submit a plan for the divestiture of electric generating plant
and prescribes a minimum divestiture commitment by Con Edison.
The Company will seek to mitigate strandable costs by developing
a divestiture plan that yields the maximum sales or transfer
price reasonably achievable under such plan. The Company will
retain the first $50 million of after-tax gains realized from
the divestiture of generation capacity. This retention amount
reflects amounts on which the rate reductions set forth in
Section II.5 are premised. This retention will be effectuated
out of available after-tax gains from divestiture up to $50
million, net of any preceding after-tax losses. Divestiture
costs defined in Section IV will not be considered in
determining the availability of these net gains. Additional
after-tax gains or losses resulting from the divestiture of
generation during the rate plan (or the transfer to an
affiliate), inclusive of divestiture costs per Section IV of
this agreement, will be deferred on the Company's books of
account for disposition by the Commission and, commencing with
the first rate year beginning after each sale, interest at the
Commission-prescribed other customer-contributed capital rate
will be applied to such deferrals.
Following RY5 (March 31, 2002), Con Edison will reconcile the
remaining book cost of plant to the "market values" defined by
divestiture (including deferred gains or losses and excluding
any gains retained by Con Edison pursuant to this paragraph) and
the balance thereof (positive or negative) will be reflected in
the post-rate plan period rates consistent with Section II.15
below.
14. Consistent with the Commission's order in the COB case, it is the objective
of the parties to allow the Company a reasonable opportunity to recover the
above-market costs of NUG contracts after RY5, while at the same time
putting recovery of a portion of such stranded NUG costs at some reasonable
degree of risk. Such recovery would be contingent upon the Company's
success in mitigating these stranded costs or, to the extent stranded costs
are not reduced or eliminated through mitigation, upon the implementation
of the provisions of this settlement agreement intended to carry out the
transition to a competitive electricity market.
Accordingly, the Company would be at risk for the disallowance of the
lesser of (i) 10 percent of the actual or then estimated (on a net present
value basis) above-market costs in each rate year after RY5 of all of the
Company's now existing NUG contracts, and (ii) a maximum total of $300
million (net present value at the end of RY5), subject to the following two
provisions:
14
(i) The Company will have the following opportunities to mitigate its
stranded costs and thereby reduce or eliminate the disallowance risk.
a. if NUG contract costs are mitigated at any time after the
beginning of RY1 (e.g., through successful renegotiation of NUG
-----
contracts concluded after, but not prior to, the beginning of
RY1), the total reduction in NUG costs after RY5 (other than the
30 percent of mitigated variable NUG costs that may continue to
be retained by the Company after RY5 pursuant to Section 13.iv)
and 100 percent of reductions in NUG costs subject to flow
through to ratepayers during RY1 through RY5 resulting from such
mitigation will offset the amount at risk for disallowance;
provided, however, that if the stranded costs under a NUG
contract are mitigated not for reasons directly or indirectly
related to the Company's efforts (including contract enforcement
and administration), but for totally unforeseen and unnatural
reasons (i.e., the destruction of a plant), such stranded costs
----
would be considered fully mitigated but the resulting savings
would not offset the remaining amount at risk. All the Company's
NUG contracts would be potential sources of mitigation and NUG
costs will be treated as a total, so that mitigation of an amount
greater than 10 percent of above-market costs in one contract
would be credited against other stranded NUG costs in determining
the reduction in the Company's allowance risk.
b. to the extent payments under NUG contracts are securitized, the
financing-related savings are expected to flow to ratepayers and
would not offset any amounts at risk for disallowance. If as part
of securitization the Company negotiates a buydown of the
contract or the NUG contract is terminated through a buy-out, all
above-market contract costs, even if securitized, would continue
to be considered stranded costs for the purposes of determining
the Company's 10 percent disallowance risk, and any reductions in
total expected payments under the contract negotiated by the
Company would offset any amounts at risk for disallowance.
c. this settlement agreement (Section II.13.iv) provides that the
Company will retain the benefit of all mitigation in fixed NUG
costs achieved during RY1 through RY5 and 30 percent of
mitigation in variable NUG costs achieved during RY1 through RY5
for a period of 18 months. The Company will have the option to
defer any and all such savings, in order to apply them towards
disallowed NUG costs; provided, however, that if it later
develops that the Company is able to achieve the 10 percent
mitigation target without applying those deferred savings toward
mitigation, it may then credit the deferred savings to income.
d. the settlement agreement provides for mitigation and divestiture
of the Company's fossil generating units. Ten percent of the
proceeds of divestiture
15
(sale to third parties) of such generation will be applied as an
offset to the amount of NUG costs at risk under this paragraph.
e. the Company would have the option of absorbing any ratemaking
disallowance after RY5 in a lump-sum amount, with the amount of
such absorption (only insofar as it relates to estimation of
stranded costs remaining) to be subject to the Commission's
approval. The Company would thereafter be permitted to retain all
savings resulting from later mitigation efforts up to the lump
sum amount absorbed by the Company.
(ii) For any amounts of stranded costs at risk that are not mitigated or
eliminated through the mitigation efforts described in the previous
subparagraph (i), the Company will nevertheless be permitted a
reasonable opportunity to recover such amounts if the Company makes
good faith efforts in implementing provisions of this agreement
leading to development of a competitive electric market in the
service area. The parties recognize that the development of a
competitive electric market will depend to a large extent on
developments outside the Company's control, and the Commission's
assessment of the Company's efforts will reflect this fact. The
Commission would not disallow an opportunity for recovery provided
that the Company's efforts were otherwise sufficient. The Commission
will consider the Company's actions in the following broad areas:
divestiture, retail access, price levels and NUG mitigation. Each of
these broad areas contain efforts that the Commission will consider
in assessing the Company's success. For divestiture, the Company's
development of a comprehensive divestiture plan, the pace and
magnitude of the divestiture process, the successful development of a
competitive electric market, and the Company's actions to facilitate
the development of the ISO, will all be considered. For retail
access, the Company's implementation of retail access in relation to
the targets set for retail access, including timing regarding the
scope and participation in retail access, and the Company's
interactions with energy service companies and marketers in the
program will be considered as well as the extent to which the Company
facilitates the substantial construction of new generation capacity.
The Company's success in implementing the affiliate relationship
rules of this agreement, without substantial verified (i.e.,
----
substantiated) complaints of non-compliance will also be considered.
Concerning NUG mitigation, in addition to the quantifiable mitigation
addressed in the preceding subparagraph (i), the Company's
participation in available programs to securitize above-market
payments will also be considered. Regarding price levels, the level
of base electric rates in the post-RY5 period will be considered;
this consideration will reflect experienced inflation since RY1 and
the trend in prices charged by similarly-situated utilities. These
activities are illustrative of the steps to be taken towards
development of the market, and it is not the parties' expectation
that the actions or lack thereof taken as to any single action or
category would mean that full allowance or
16
disallowance would result; the intent will be to reasonably assess
the Company's actions leading to the transition on a generalized or
overall basis.
15. The parties recognize the extensive litigation already conducted and
related policy differences over the recovery of strandable costs. In light
of the numerous factors and trade-offs reflected in this agreement, and
subject to the limitation prescribed by Section II.14 herein, the parties
agree that, subject to approval of this settlement agreement by the
Commission, Con Edison will be given a reasonable opportunity to recover
stranded and strandable costs remaining at March 31, 2002, including a
reasonable return on investments. Parameters under which recovery will be
carried out including, where applicable, the time period during which this
reasonable opportunity is to be afforded, are as follows:
(i) charges for all customers served under the PSC No. 9 and retail
access tariffs (and for PASNY No. 4 and EDDS customers to the extent
set forth in Section II.31 herein) will reflect a non-bypassable
charge for the continued collection of generation and generation-
related costs as set forth in Sections II.29 and III.7, 11 herein.
(ii) the recovery period of NUG termination, "buy-out" or "buy-down"
costs, if securitized, will be determined by the Commission at the
time of securitization, but such recovery is expected to match the
life of the securitized bonds. The recovery period of non-securitized
NUG termination, "buy-out" or a "buy-down" costs, if any, will also
be determined by the Commission, but not exceed the life of the
specific contract. The recovery period of purchases made under NUG
contracts will be the life of the contract.
(iii) for IP2, in the absence of securitization, the unit's costs,
including above-market costs, and decommissioning expense for IP2 and
the retired Indian Point No. 1 unit, will be recovered over a period
no longer than the end of the unit's license term in the year 2013.
Reconciliation of estimated and actual decommissioning costs may be
reflected in rates after 2013.
(iv) for fossil generation, in the absence of securitization, stranded
costs remaining after RY5 will be recovered over a period not to
exceed the 10-year period ending March 31, 2012.
(v) recovery of Con Edison's other stranded costs will be over a period
to be determined by the Commission.
(vi) the Company will petition the Appellate Division of the Supreme Court
for permission to withdraw its December 24, 1996 appeal in Energy
------
Ass'n of N.Y.S. v. Public Service Commission, Albany County Index No.
--------------- -------------------------
5830-96, with prejudice, following final Commission approval of this
agreement (i.e., when any appeals from such approval are exhausted or
----
the time to appeal has
17
expired). Until this petition is granted, the Company will
discontinue its appeal to the extent it is able to do so without
forfeiting the right to appeal.
Comprehensive Nature of Settlement Agreement
--------------------------------------------
16. The foregoing reflects the parties' efforts to resolve complex revenue
requirement and rate level issues in this proceeding. In this proceeding, the
issues involved difficult questions arising from stranded cost recovery as well
as issues arising from the corporate restructuring under review in this
proceeding, including the issue of the need for and measurement of an imputation
of "royalties." In developing the rate plan, the parties intended to develop a
comprehensive plan that accounts for both typical revenue-requirement issues
such as expected productivity achievement as well as for claims regarding
stranded cost recoverability and the payment of "royalties." The rate plan is
intended as a permanent and comprehensive resolution of the Company's revenue
requirement in RY1 through RY5, of the principles under which stranded and
strandable costs will be recovered after RY5 (pursuant to Section II.13-15
herein), and of claims that the Company should record as revenues royalties
collected or imputed from its parent, affiliates or subsidiaries both before and
after RY5 beyond any amounts specifically required by this settlement agreement.
The plan resolves these issues on a basis that will allow the Company to remain
under the Statement of Financial Accounting Standards No. 71 requiring regulated
companies to follow cost-based ratemaking.
Reporting
---------
17. The Company will make available to Staff, for its review, unbundled
financial statements in the fourth quarter of 1997. The Company will also
report to the Commission Staff, no later than 90 days after the close of each
rate year (RY1 through RY5), the utility common equity earnings and supporting
computations for the preceding rate year.
Calculation and Disposition of Certain Earnings
-----------------------------------------------
18. The Company will calculate its rate of return on common equity capital
following RY1 through RY5. The Company will allocate the revenue equivalent of
its earnings in excess of 12.9 percent in any rate year as follows: 50 percent
will be retained by the investors; 25 percent will be applied to the benefit of
utility customers through rate reductions or as otherwise determined by the
Commission; and 25 percent will be applied to the Company's generation plant, as
depreciation expense, to reduce plant balances. The earnings for any rate year
will be calculated on a per books basis excluding the effects of incentives
prescribed by Section II.11(ii), 13(iv) and 32 herein. In calculating earned
return to determine if sharing is to be implemented, the Company will include
amounts by which its earnings fell below 11.9 percent (excluding the effects of
incentives) in any earlier rate year (RY1 through RY4) of this settlement
agreement. The Company will not be subject to the earnings sharing prescribed by
this paragraph beginning with the first rate year (i) in which the Company has
divested (sold to third parties) 50 percent or more of the in-City fossil plants
(measured in megawatt-rated capacity) owned by Con Edison as of the date of this
settlement agreement (net of later re-ratings or retirements) or (ii) in which
15
18
percent or more of the service area peak load (excluding load served by NYPA as
of the date of this agreement) is supplied by other than Con Edison.
Rate Design and Revenue Allocation
- ----------------------------------
19. Case 94-E-0334 Rate Design Changes
----------------------------------
The following rate design changes to the PSC No. 9 rates prescribed by the
Case 94-E-0334 settlement agreement will be implemented beginning on April 1,
1997 (or the date the Company's tariffs implementing RY1 of this settlement
agreement become effective, if later):
(i) The Case 94-E-0334 settlement agreement (Appendix D, p. 7), prescribes
that the customer charge in PSC No. 9 for SC Nos. 1 (residential and
religious), 2 (small -general) and 7 (residential and religious-
heating) will be gradually increased over a seven-year period. The
annual increase of $0.57 per month is to take effect each April 1
through RY5, with the increase in revenues due to the customer-charge
increase deducted from the energy charge revenue for the affected
service classification. This Case 94-E-0334 settlement provision will
continue in effect under the rate plan.
(ii) The Case 94-E-0334 settlement agreement (Appendix D, pp. 6-7)
prescribes that the energy charges in PSC No. 9 for SC No. 4-Rate II
(commercial and industrial-redistribution), 8-Rate II (multiple
dwellings-redistribution), 9-Rate II (general-large), 12-Rate II,
(multiple dwelling space heating) and 13 (bulk power-high tension-
housing developments) will be reduced on April 1, 1997 and on April 1,
1998 (if rates were changed at that time pursuant to the Case 94-E-
0334 settlement agreement). The reduction in the energy charge would
equal 25 percent of the difference between the level of marginal
energy costs adopted in Case 94-E-0334 and the level of the energy
charge for the affected classes in effect at the time of the Case 94-
E-0334 settlement agreement. The reduction in revenues associated
with this change would be offset in full by adjusting the generation,
transmission and distribution charges in the affected classifications.
This Case 94-E-0334 settlement provision will be implemented under the
rate plan by implementing the scheduled reduction in energy charges
effective April 1, 1997 and April 1, 1998, offsetting the associated
revenue reduction in full by increases to the transmission and
distribution charges in the affected classification.
20. Unbundled Tariffs
-----------------
Con Edison's October 1, 1996 plan included sample unbundled tariffs for two
of its PSC No. 9 service classifications (SC No. 1 - residential and religious
and SC No. 9 - general-large).
19
The sample tariffs disaggregate the major cost components of Con Edison's
electric system (i.e., generation capacity, energy, transmission and
distribution) to provide improved information about the cost structure on which
the rates are based. The sample PSC No. 9 tariffs would not permit customers to
purchase individual elements of the Company's major cost components. The Company
agrees to continue with the process of reformatting its PSC No. 9 rate schedule
to reflect the October 1, 1996 approach to "unbundling" or "disaggregating"
major cost components to provide improved information to consumers and, on
Commission approval of this settlement agreement, will file such unbundled rates
for PSC No. 9 rate schedule by January 15, 1998 for all classes to become
effective April 1, 1998:
(i) The unbundled PSC No. 9 rate components will be based on the
"1994 Electric Embedded Cost of Service Study" ("1994 embedded
cost study") that the Company provided to the parties in this
proceeding and will include generation, transmission and
distribution components, and per Section II.26 of this settlement
agreement, a system benefits component. The unbundled tariffs
will be revenue-neutral on a class-by-class basis.
(ii) The unbundling process begun in this settlement agreement is
expected ultimately to lead to customers having the ability to
choose from among the unbundled cost elements set forth in the
tariffs. The Commission will not be precluded from implementing
such service unbundling following approval of this settlement
agreement. It is the intention of the parties that any such
unbundling be consistent with the principle that the purchasers
of such unbundled services not be subsidized by the Company or
its other customers and that stranded costs resulting from such
unbundling be allocated consistent with this no-subsidy
principle.
21. Residential Time-of-Use Rates
-----------------------------
There currently exists a mandatory TOU (time-of-use) rate for large-use
residential customers (SC Nos. 1 and 7). The parties agree that the provision
of TOU service will be voluntary beginning in October 1997 and, in anticipation
of this change, the mandatory TOU customers have been informed that, subject to
the Commission's approval of this settlement provision, commencing on the
anniversary date they first received mandatory TOU service, they will be billed
on the conventional rate or, if the customer so requests, on the voluntary TOU
rate. The Company will recover the resulting revenue shortfalls either through
rate adjustment when shortfalls are experienced or through deferred accounting,
but the amounts to be recovered will be reduced by the amount of the late
payment charge revenue recovered per Appendix A, Section 2.v herein.
20
22. Industrial Employment Growth
----------------------------
The Company will make provision in SC No. 4 -Rate II (commercial and
industrial - redistribution) and SC No. 9 - Rate II (general - large) providing
"industrial employment growth" credits, to industrial customers served
thereunder. The term "industrial customers" to determine eligibility for the
credits will include any mandatory SC No. 4 - Rate II or SC No. 9 - Rate II
account, other than governmental customers, where 75 percent or more of the
account's electric usage is used directly for manufacturing, i.e., the assembly
----
of goods to create a new product, the processing, fabrication or packaging of
goods, including biotechnology products, electronic products and recycling; and,
research and development by customers having greater than 2,000 workers engaged
in research and development in the Con Edison service area. Industrial
employment growth credits will not be available to retail establishments,
restaurants, hotels, hospitals, schools, cultural, religious or public
institutions or customers engaged in provision of services such as financial,
insurance, real estate, legal or similar services. Customers taking service
under Rider I (Area Development Rate), Rider J (Business Incentive Rate), Rider
L (Economic Development Zones) or Rider O (Curtailable Electric Service) will
not be eligible for industrial employment growth credits. Customers will not be
eligible for industrial employment growth credits until written application for
such credits is made by the customer and accepted by the Company. The industrial
employment growth credits will, for each customer served thereunder, constitute
the equivalent of a twenty-five percent reduction, exclusive of any separately-
stated system benefits charge implemented per Section II.26 herein, from the
applicable rates and charges under Rate II of SC Nos. 4 and 9 in effect as of
the date of this settlement agreement. The Company will provide notice of the
availability of this rate to all customers currently served under Rate II of SC
4 and 9.
The annual revenue reductions reflected in Section II.5 herein for large
industrial customers reflect certain assumptions about the numbers of existing
PSC No. 9 customers eligible for this program. If the actual revenue shortfall
for this program (i.e., the difference in revenues calculated under the
----
applicable rates and charges under Rate II of SC Nos. 4 or 9 in effect as of the
date of this settlement agreement and under the applicable industrial employment
growth credits) in any rate year (RY 1 through RY5) varies from the revenue
reduction level attributable to this program per Section II.5 herein, the
variation will be deferred and reflected in the Statement of Case 96-E-0897
Adjustments per Section II.11 herein. In calculating revenue variations under
this subparagraph, the Company will exclude revenue variations due to increases
in load after a customer commences service under this program, and it will
exclude the entire load of customers commencing manufacturing operations in the
service territory after the date of this settlement agreement.
23. Low Income Rate Program
-----------------------
In its Opinion and Order Approving Settlement in Case 95-E-0964 (Opinion
--------------------------------------
No. 96-6, dated March 27, 1996), the Commission approved a settlement agreement
establishing a low-income rate program. The program included a targeted rate
component under which the
21
customer charge of certain SC Nos. 1 and 7 customers would remain fixed at $5.00
per month through March 31, 1999 (id. at 2). The parties agree to continue the
--
rate component of the low-income settlement in effect through RY5, following the
same revenue-neutrality provisions applicable to the low-income settlement
approved in Opinion No. 96-6, and to continue the energy efficiency component of
the program through October 1999.
24. RY1 Through RY5 Tariffs Implementing This Agreement
---------------------------------------------------
Following approval of this agreement, the Company will make a compliance
filing to cover the rate changes required by this agreement for the period
commencing January 1998. The compliance tariffs implementing RY1 through RY5
base rate reductions will be filed at least 30 days prior to their proposed
effective date and will be subject to review in accordance with procedures
generally applicable to compliance tariff filings. Con Edison may request the
Commission to implement the RY5 base rate reductions via a base rate credit
mechanism. Except where this settlement agreement prescribes specific filing
requirements or schedules, all other tariff revisions will be filed in
accordance with generally applicable Commission filing requirements, and
reasonably in advance to allow reasonable Commission review.
25. Rate Design Flexibility
-----------------------
During the term of the agreement, the Company will have the right to seek
to change rates in a revenue-neutral manner as set forth herein. All rate
changes will be filed with the Commission and be subject to its approval and be
consistent with the terms of the settlement agreement. The changes that may be
proposed pursuant to this provision are as follows:
. Reallocation of revenues among customer groups based on changes in the
cost of service not known or foreseen at the time of this settlement
agreement
. Additions, deletions or other changes to rate blocks or seasonal
differentials
. Segmentation of service classes according to consumption levels, load
factors, and end-uses
. Reallocation of revenues within a class between demand, energy and
customer charges, as applicable
. De minimis rate changes.
-- -------
Where the Company is to propose more than one rate change to take
effect at approximately the same time, it will, to the extent practicable,
combine such proposals in a single filing with the Commission. Nothing herein
is intended to preclude the Commission from initiating the rate change proposals
covered by this paragraph. Nor is the Company precluded from proposing
flexible rate programs pursuant to the Commission's Opinion and Order
-----------------
Authorizing Flexible Rates, Opinion No. 94-15, issued July 11, 1994, and the May
- --------------------------
20, 1996 order.
22
26. System Benefits Charge Program
------------------------------
The Commission's May 20, 1996 order (p. 90) stated that "[c]osts required
to be spent on necessary environmental and other public policy programs that
would not otherwise be recovered in a competitive market will generally be
recovered by a non-bypassable system benefits charge." The expenditures
reflected in the SBC are for research and development (R&D), energy efficiency,
environmental protection, and low income programs that are required or approved
by the Commission to be funded by the SBC. In this settlement agreement and
subject to prospective modification by the Commission following resolution of
the generic system benefits charge proceeding (Case 94-E-0952, et al., Order
-- -- -----
Modifying Procedure, issued February 6, 1997), expenditure levels for system
- -------------------
benefits charge programs will initially be covered in base rates, but they will
be non-bypassable in any event. The formation of a third-party administrator,
appropriately implemented, would serve the objectives embodied in the
Commission's May 20, 1996 order. Therefore, subject to the Commission's
approval, there will be a third-party administrator, and the Commission will
choose the administrator of the SBC-funded programs. All SBC funds are expected
to be allocated by the statewide administrator, although prior contractual and
regulatory commitments will be honored.
R&D: The costs of R&D programs required by the
---
Commission (excluding NYSERDA contributions) or
that would likely not be funded by the Company
in a competitive environment will be recovered
in the SBC.
Energy efficiency: The costs of new energy efficiency programs
-----------------
required by the Commission will be recovered as
a surcharge in the SBC.
Low income: The costs of any new, existing or expanded low
----------
income programs, including low-income energy
efficiency programs, approved or directed by the
Commission will be recovered in the system
benefits charge.
Environmental Protection: The costs of environmental protection programs,
------------------------
as deemed necessary by the Commission, that are
not likely to be carried out in a competitive
market, including programs designed to mitigate
environmental impacts of electric industry
restructuring, will be recovered in the SBC.
23
Mechanism: Costs of programs ordered by the Commission in excess of the
---------
amounts set forth below in this Section II.26 will be
recovered through a non-bypassable SBC surcharge. The SBC
formula will be set forth in all rate schedules (PSC No. 9,
PASNY No. 4, EDDS and retail access). The Company may
unbundle the current SBC expenditures from base rates in a
revenue-neutral manner in its January 15, 1998 filing
pursuant to Section II.20 herein. The charge will not be
subject to the rate increase limitation established in
Section II.7 of this settlement agreement and will be set to
cover costs when spending levels are re-set.
The Company's expenditures for R&D and for energy
efficiency, other than those included in the SBC, will be
determined by the Company in its internal budgeting process,
and beginning with the calendar year 1998, a demand side
management plan will no longer be filed with the Commission.
Con Edison will be authorized to pursue both efficient sales
growth and sales reduction initiatives utilizing customer-
focused and other incentives. The NYPA (PASNY No. 4 and
EDDS) SBC component will exclude generation-related costs.
Notwithstanding the foregoing provisions of this Section II.26, Con Edison
will allocate $70.7 million of the amounts set forth in Appendix B for the four-
year period ending December 31, 2001, inclusive of all Appendix B amounts for
the year 2001, to system benefits charge programs over the three-year period
ending March 31, 2001 (RY4). In addition, Con Edison will allocate to SBC
programs over the three-year period ending in RY4, an additional amount of $35.0
million, for a three year total of $111.0 million. This expenditure level is
approximately 1 mill per kWhr over this three-year period. Con Edison will
defer unallocated program funding of $5.3 million from the year 1997 to the year
1998. Beginning in RY2, all energy efficiency expenditures will be expensed
currently for rate making purposes (RY1 amortization will follow Case 94-E-0334
settlement agreement). SBC funding after RY4 will be determined by the
Commission, with the full amount of SBC funding in such period to be recovered
under the SBC surcharge mechanism set forth in this section.
The Company's system benefits charge programs for energy efficiency will be
determined following procedures that are expected to be prescribed by the
Commission. Ten percent of energy efficiency spending over the RY2-RY4 period
will be allocated to low-income energy efficiency programs. Con Edison supports
reasonable use of system benefits charge amounts to develop clean on-site
generation technologies that are not presently, but that have reasonable
potential to become, commercially feasible (e.g., fuel cells). The Company and
---
Staff recommend that if financing savings become available through the enactment
of securitization, the Commission, if permitted by law, consider allocating a
portion of such savings for energy efficiency and new clean technologies.
24
27. Miscellaneous Rate Provisions
-----------------------------
Con Edison's October 1, 1996 plan contained rate proposals that the Company
maintained were needed in order to facilitate the transition to competition.
Rate changes to implement a minimum monthly charge for demand-billed customers
will be implemented effective April 1, 1998, as provided in Appendix A and rate
changes to reflect the unbundling of certain charges will be implemented for Con
Edison effective as prescribed in Appendix A hereto. In addition, the Company's
October 2, 1996 filing to implement the third-stage of the Case 94-E-0334
settlement agreement contained proposals to institute a new real time pricing
program; to modify eligibility rules in the provision of service under Rider J
(Business Incentive Rate); and to clarify the PSC No. 9 tariff in respect to
demand meter installation procedures and the correction of a cross-reference in
the tariff. These Case 94-E-0334 rate proposals will be implemented effective
as prescribed in Appendix A hereto. The parties agree to support in principle
the Con Edison modified high-tension proposal and DC service proposals, both
contained in Con Edison's October 1, 1996 plan and described in Appendix C
hereto, when filed after the date of this settlement agreement.
The Company will explore the development of a hedging program to be made
available to full-service customers interested in a full or partial non-
adjustable fixed rate for electric service. The Company will report the results
of its review and submit any proposals resulting therefrom to the Commission by
November 15, 1997.
28. Economic Development Rate Programs
----------------------------------
The parties agree that electric rates can be useful in promoting economic
development, and they have reflected this principle in the allocation of rate
reductions in the rate plan. Con Edison's tariffs in effect as of the date of
this settlement agreement provide economic-development rate reductions
principally pursuant to two location-specific programs, Rider I - Area
Development ("ADR") and Rider L - Rate Available Under New York State Economic
Development Zones Act ("EDZ") and one service-area wide program, Rider J -
Business Incentive Rate ("BIR"). The parties have agreed in the context of the
rate plan to institute a phase-out of the application of the Company's location-
specific rate programs (Riders I and L), and, accordingly, applications under
those programs will not be accepted after March 31, 1997. The Company will
continue to consider, and will implement on a revenue-neutral basis, new
economic development programs developed during the rate plan. The ADR, EDZ and
BIR rate programs will be adjusted to provide customers approximately the same
level of bill reductions provided under these riders as of the date of this
agreement using a combination of the RY1 through RY5 bill reductions provided to
all similarly-situated business customers under this agreement and rider-
specific bill reductions (except as prescribed in the Commission's March 27,
1997 order in this proceeding (p. 7)).
25
29. Retail Access Tariff and Retail Access Regulation
-------------------------------------------------
The Company will prepare and file retail access tariffs in order to
implement the retail access program set forth in Section III herein, and the
provisions of Section III will be considered to be part of this "rate plan." At
the outset, the retail access tariffs will include the same number of service
classifications, with the same applicability rules for each class, adapted to a
retail access program, as set forth in PSC No. 9 for the Company's retail sale
of electricity, but Staff and the Company will confer on ways to reduce the
number of service classifications and rate programs applicable under the retail
access tariffs. Pending such effort, the retail access tariffs will be prepared
following the same methods and format utilized in the sample retail access
tariffs included in Appendix 9 to the Company's October 1, 1996 plan. The
following charges in retail access tariffs will equal the charges set forth in
the corresponding PSC No. 9 tariff: customer charge, distribution charge, and
transmission charge. As set forth in Section III, the transportation/delivery
component of the retail access charge will be set to collect the portion of the
generation demand and energy charges set forth in the corresponding PSC No. 9
tariff that are not avoided by the provision of power and energy via the retail
access tariffs. Therefore, the transportation/delivery component of the retail
access tariff will include the generation and energy charges in effect for the
corresponding PSC No. 9 service classification, subject to adjustment as
prescribed in Section III herein.
The Company's retail access tariff will be filed with the Commission and
cover all components of the retail access tariff described herein. If the
Federal Energy Regulatory Commission ("FERC") should require that the
transmission or other component of retail access service be provided under the
Company's "open access" tariff under FERC Order 888 or another FERC tariff, the
Company and Staff will cooperate in the development of retail access tariffs
that carry out the commitments of this settlement agreement. Adjustments will
be made in the rates remaining subject to the Commission's jurisdiction to
offset any differences (positive or negative) in rate levels for retail access
service that are set by FERC compared to the rates provided by this settlement
agreement.
Any generator supplying power on an interstate radial that it paid for
directly and for which it continues to directly or indirectly pay the
maintenance will not be deemed to be taking transmission service for the use of
that line, regardless of the line's ownership. Nor will use of such a radial
line incur any charges of any type for transmission service (e.g., transmission
----
service charges).
26
30. Regulatory Reform, Customer Operations
--------------------------------------
Procedures, and Classification of Facilities
--------------------------------------------
(i) Legislative action for the prospective repeal of the mandatory
purchase requirements of the Public Utility Regulatory
Policies Act of 1978 ("PURPA") (16 USC (S)824a-3) and Public
Service Law Section 66-c (McKinney) is expected as the
transition to competition in the electric utility industry is
implemented. Implementation of these requirements is a matter
of Commission judgment. Case 93-E-0912, Order Denying
-------------
Petitions For Rehearing, issued December 27, 1994, pp. 2-4.
-----------------------
Therefore, pending repeal of these requirements, and subject
to Commission approval of this settlement agreement, Con
Edison will be permitted to condition payments under mandated
contracts requiring fixed payments for a period longer than
one year upon recovery of such payments in rates.
(ii) Con Edison will not be responsible for the performance of
energy service companies ("ESCOs"). Con Edison's ESCO will
have the same duties (licensing requirements and load serving
entity ["LSE"] duties) as other ESCOs.
(iii) To facilitate the Company's operations under the rate plan,
provisions of Part 11, Part 13, Part 140, and Part 273 of 16
N.Y.C.R.R. and the requirements for a plain language bill
format adopted in Case 28080, Order Requiring Gas and Electric
--------------------------------
Utilities To File Revised Billing Formats (Oct. 31, 1985), are
-----------------------------------------
waived to the extent that any such provisions are inconsistent
with the Company's ability to:
a. institute non-discriminatory procedures which require an
applicant to provide reasonable proof of the applicant's
identity as a condition of service;
b. modify its bill content and format in response to
industry restructuring; provided, however, the Company's
bills will contain the following:
. an explanation of how bills may be paid
. total charges due
. due date
. unit price of energy consumed or other appropriate
itemization of charges (including sales taxes and
other informative tax itemization)
. complete name and address of customer
. unique account number or customer number assigned to
the customer
. meter readings
. period of time associated with each product or
service
27
. name of entity rendering bill
. local or toll-free telephone number customers may call
with inquiries
c. include non-tariffed items in a bill; provided, however,
that customer payments are credited first to tariffed items
and service cannot be terminated for failure to pay non-
tariffed items.
(iv) Con Edison will be permitted to disclose residential and non-
residential customers' current payment status information to
other service providers to the extent such information is limited
to: whether or not a deposit could be requested from the
customers by Con Edison due to delinquency, as defined in 16
NYCRR (S)11.12(d)(2) or in 16 NYCRR (S)13.1(b)(13), or for any
reason provided in 16 NYCRR (S)13.7(a)(1); whether or not a
customer could be denied service by Con Edison due to unpaid
bills on an existing or prior account; or, whether a customer's
service could be terminated by Con Edison, provided that:
. such information is to be used by other service
providers only for the purposes of determining whether
unregulated energy services will be provided to the
customer, whether a deposit will be collected from such
customer, or for other purposes approved by the
Commission;
. ownership of the data remains with Con Edison; and
. such information request is made by a service provider
in response to a bona fide request from the customer to
---- ----
the service provider for electric service or with other
customer consent.
Changes to Parts 11 and 13 of the Commission's regulations are
expected to be made. If changes are not made, the Company may petition
for further waiver of such rules.
(v) The Company will be permitted to accept credit card payments for
utility service, provided, however, that any costs imposed on Con
Edison associated with the receipt of payment by credit card are to be
considered among the general costs of doing business and will not be a
separate additional charge to the customers whose payments are made by
credit card.
(vi) In its May 20, 1996 order (p. 73), the Commission expected "filings by
each utility" to it and subsequently to FERC "to distinguish and
classify transmission and distribution facilities." Con Edison's 138
kV feeders, which radially supply the area substations, are currently
classified as transmission facilities in the Company's records.
However, these area substations supply only local distribution load
within the Company's service area. Therefore, these feeders, along
with ancillary equipment, will be reclassified as distribution
facilities following
28
approval thereof by the Commission consistent with Commission Opinion
No. 97-12 in Case 97-E-0251 (July 24, 1997), and the FERC. Staff
currently supports the Company's position and planned application to
FERC.
31. NYPA
----
(i) Revenue Deficiency Under the 1994 Cost-of-Service Study
-------------------------------------------------------
Con Edison's 1994 embedded cost study indicates that the rates and
charges applicable to the PASNY No. 4 rate schedule should be
increased by $22 million annually in order to bring the revenue
contribution provided by this service to the overall average return
(consistent with the tolerance band) for the Con Edison system. The
third year of the Case 94-E-0334 settlement agreement (App. D, p. 3),
provides for a $9 million annual increase in NYPA's revenues from
delivery service to take effect beginning April 1, 1997.
Implementation of the Case 94-E0334 increase, would reduce the
indicated revenue deficiency to $13 million annually. The Case 94-E-
0334 increase will be implemented hereunder by increasing the PASNY
No. 4 delivery rates by a total of $45 million over the rate plan
period. This amounts to an annual increase of $9 million. The amount
that would have been collected over the April 1, 1997 - December 31,
1997 period will be collected in three equal monthly payments over the
period January 1, 1998 -March 31, 1998. The increased revenues
received pursuant to this section in RY1-RY4 will be deferred and
credited to income in RY5. The $13 million deficiency is addressed in
the Memorandum of Agreement on 25 Cycle Service attached hereto as
Appendix D.
(ii) In-City Generation. If NYPA becomes subject to specific locational
------------------
generation capacity requirements by an ISO, Con Edison will credit
NYPA with Con Edison's available in-City generation capacity resources
in excess of Con Edison's own locational requirements (including
capacity maintained on behalf of LSEs through June 1, 1999) and
capacity sold to LSEs through RY5 and provide the reimbursement
prescribed herein, provided NYPA maintains for its PASNY No. 4 and
EDDS loads the committed NYPA resources (i.e., NYPA's current level of
----
committed resources totaling 822 MW, such amount to be increased to
account for any increase in the capacity of the Poletti unit or any
termination of Con Edison's purchase of Poletti capacity plus any
other increase in NYPA's in-City capacity) and provided further that
NYPA obtains any additional capacity required for it to comply with
the ISO. The reimbursement will cover the full amount of NYPA's
reasonable increased in-City generation capacity costs less the
reasonable value of an equal amount of NYPA's out-of-City capacity,
such reimbursement to be provided in the manner described in this
provision. Reimbursement under this paragraph will be made through
RY5, both with respect to PASNY No. 4 loads at or below the load
levels stated in Appendix E and with respect to EDDS accounts at or
below the aggregate allocation level of 185 MW. Above those levels,
NYPA will cover in-City requirements from the
29
"other" increases in NYPA's in-City capacity included in the above
description of committed NYPA resources and receive no benefit from
available Con Edison capacity and receive no reimbursement. To obtain
reimbursement for the capacity costs for which reimbursement is to be
provided, NYPA will submit its request for payment and supporting
documentation to the Commission Staff and Con Edison, and, subject to
Commission review of the requested payments for reasonableness, Con
Edison will recover amounts to be paid to NYPA on a non-bypassable
basis through the fuel adjustment or such other adjustment mechanism
prescribed by the Commission if the fuel adjustment is no longer in
effect. NYPA will submit any such requests for payment to Con Edison
on a current basis, and Con Edison will make payments to NYPA as and
to the extent they are recovered from customers. Con Edison's right to
sell, transfer or otherwise dispose of its generation capacity would
not be restricted by this mechanism (i.e., if capacity is sold or is
----
unavailable or becomes unavailable for another reason, such capacity
would not be required to be made available to NYPA).
Reimbursement of NYPA transition costs provided herein will terminate
immediately after RY5, and it is the parties' understanding that prior
thereto NYPA will act in a manner, in respect of costs, loads or other
relevant factors, that minimizes reimbursement amounts. NYPA will not
be responsible under the program for more in-City generation capacity
than required to meet requirements prescribed by the ISO.
Application of Transportation/Delivery Charge. The
---------------------------------------------
transportation/delivery (i.e., stranded cost) charge component of Con
----
Edison's retail access tariff, which will be a wires charge applicable
to other retail access customers served by Con Edison, will not apply
to service under the PASNY No. 4 tariff to the extent that the
weather-adjusted contribution of the PASNY No. 4 customers to the
franchise area peak load does not exceed the load stated in Appendix E
for such year. Nor will the transportation/delivery charge be
applicable to service under the EDDS tariff to the extent that the
aggregate allocations to the EDDS customers do not exceed 185 MW. If
such amounts under either tariff are exceeded, the charge will apply
to such excess. Customers served under PASNY No. 4 as of October 1,
1996 will not be subject to charges for stranded generation capacity
costs irrespective of the Con Edison tariff under which they receive
service. If such PASNY No. 4 customers transfer to another tariff and
do not pay stranded costs under the other tariff, then the cap set
forth in Appendix E will be reduced by the amount of such transferred
load. Conversely, the cap will not be reduced where a former PASNY
No. 4 customer or successor customer pays stranded costs under the
tariff to which the customer transfers. When a customer served under
PASNY No. 4 as of October 1, 1996 adds additional accounts to that
tariff (other than accounts transferred to the PASNY No. 4 tariff from
the PSC No. 9 tariff, EDDS tariff or retail access tariff), the
additional account will be considered part of the customer's load
served as of October 1, 1996. "In-rem" accounts of the City of New
York listed in the October 16, 1996 letter from the City of New York
to Con
30
Edison and accounts of the New York State Urban Development
Corporation at the Queens West Development will be considered part
of such customers' load served as of October 1, 1996 whenever
transferred to the PASNY No. 4 tariff. The transportation/delivery
charge will be applicable to EDDS customers served under any other
retail access tariff. Nothing in this subparagraph affects any
rights of any party respecting eligibility for NYPA service.
(iii) Con Edison agrees not to challenge, either before NYPA or in the
courts, the allocation of economic development power recommended by
the New York State Economic Development Power Allocation Board dated
December 17, 1996 (agenda item No. 2) or future extensions of such
allocation, including novations.
32. Fuel Adjustment Clause
----------------------
The incentive electric fuel adjustment prescribed by the Case 94-E-0334
settlement agreement will continue to operate in RY1 through RY5, except as
limited below in paragraph vi:
(i) the 30-70 Company-customer sharing ratio for variations from targets
will be retained.
(ii) the Company's overall cap (i.e., the maximum reward or penalty in
----
any rate year, including the effect of IP2 generation and its
replacement) will continue to be $35.0 million. The Indian Point 2
sub-cap (i.e., the maximum reward or penalty in any rate year for
----
the target for the IP2 capacity factor and its replacement
generation) will continue to be $10 million.
(iii) for each rate year through RY5, the capacity factor for IP2 will
continue to be set at an annual period level of 73.5 percent. The
setting of an annual equivalent capacity factor between refuelings
will be in accordance with the Case 94-E-0334 settlement agreement,
p. 25. By April 1, 1997, the Company will provide to Staff a
forecast of the IP2 outage schedule through RY5.
(iv) the fuel targets for RY1 will be based on the PROMOD data base set
forth in Appendix F. The parties will continue to cooperate in
exploring alternate methods for establishing performance-based
incentives, including market-price-based indexing when a visible
energy market is sufficiently developed.
(v) the monthly fuel targets will continue to be calculated using the
monthly adjustments set forth in Appendix F.
(vi) the monthly fuel adjustment will be credited with the actual
reliability-related and other unavoidable energy costs to be
recovered from retail access customers through the
transportation/delivery service charges, as provided in Sections
III.8.(i) and III.11.(i). In addition, the following cost factors
will be fixed in base rates at their actual annualized 1996 cost
levels and will be eliminated from the calculation of the fuel
adjustment and the reward/penalty provisions:
31
- oil storage and handling charges
- fixed gas transportation charges (i.e., local transportation
----
facilities use charges)
Furthermore, commencing April 1, 1997 (or the date of the tariffs
filed to implement RY1 in compliance with this settlement agreement
following Commission approval, if later), the Company will allocate
to base rates the costs, fixed as of the date of this agreement, of
diversity power (capacity and transmission fixed charges) from
Hydro-Quebec purchased through NYPA, and of the capacity purchased
from NYPA's Indian Point 3 and Poletti stations, and the costs of
the 2.6 cents/kWh fixed "adder" applicable to 6,600 GWH pursuant to
the energy purchase agreement with Sithe Energies, Inc. In addition,
the Company will recover through the fuel adjustment clause (not
subject to the reward/penalty provisions) payments for energy to
Sithe (excluding the 2.6 cents/kWh adder) that would be due absent
the discount to the buy-back tariff rate specified by contract
beginning in the sixth year of the contract term (i.e., payments at
----
the full buy-back tariff rate). The parties will consider continuing
such recovery after RY5. The base cost of fuel will be established
at 2.2 cents/kilowatthour.
(vii) the incentive applicable to contract renegotiations with NUGs
(including terminations, buyouts or buydowns) set forth in Sections
II.13(iv) will be implemented in a manner to carry out its incentive
objective irrespective of any monthly adjustments for such NUGs
under the preceding paragraph (v). E.g., if the Company successfully
----
negotiates improved contract terms with a NUG which lower the
Company's energy costs, the incentive set forth in Section II.13
(iv) would be implemented by permitting the Company to collect, in
addition to actual energy costs, thirty percent of the energy cost
reductions through the fuel adjustment clause (not subject to the
reward/penalty provision) for a period of eighteen months.
(viii) when the ISO assumes control of energy dispatch in the state, the
parties will cooperate in revising the framework of the fuel
adjustment and its incentive mechanism as may be necessary to
reflect the spot market purchase price and other applicable costs
resulting from the establishment of the ISO/PE (e.g., transmission-
----
related costs). Con Edison will submit a proposed revised framework
within 180 days after the point at which the ISO assumes control of
energy dispatch in the state.
(ix) the Company will amortize over RY1 the deferred fuel and purchased
power costs resulting from the transfers to base rates specified in
paragraph (vi) above. At the end of RY1, the Company will reconcile
the actual costs and the amounts collected, with appropriate credits
or charges for overcollections or undercollections at the time of
this reconciliation.
32
33. Customer Service and Electric Service Reliability Incentives
------------------------------------------------------------
To address the importance of a satisfactory level of service to its customers
over the term of this agreement, a customer service and electric service
reliability incentive program will be implemented. This mechanism is set forth
in Appendix G herein.
34. SC No. 11 Buy-Back Energy Rates
-------------------------------
(i) The SC No. 11 Buy-Back energy rates applicable to RY1 were adopted
by the Commission in Case 96-E-0798, Order Adopting Settlement
-------------------------
Agreement, June 24, 1997.
---------
(ii) The SC No. 11 Buy-Back energy rates for transmission-level sellers
applicable to RY2 will be as set forth in Appendix K herein. The
Company will file revised tariff leaves reflecting these energy
rates by February 1, 1998.
(iii) The parties agree that, after the ISO is fully operational, the SC
No. 11 Buy-Back energy rates may, if consistent with PURPA, be based
on appropriate market data to be available from the ISO. To that
end, the parties agree to convene technical conferences during the
month of November 1998 to discuss the method for setting the SC No.
11 Buy-Back energy rates for RY3. The rates applicable to RY 2 set
forth in the preceding sub-paragraph (ii) will not be revised as a
result of such conferences. Among the issues to be addressed during
these conferences are the point in time at which the ISO is
sufficiently developed, both in terms of commercial operation
experience and volume of energy and related products processed, to
yield data that may appropriately be used to determine the SC11 Buy-
Back energy rates and the specific market data available from the
ISO which should be so used. If the parties are unable to reach a
consensus by November 30, 1998, the parties will request the
assignment of a settlement judge, and no party will oppose a request
to the settlement judge for evidentiary hearings followed by briefs
and a recommended decision if such request is made by half or more
of the parties.
(iv) In the event that the SC No. 11 Buy-Back energy rates for RY3, or a
part thereof, are to be administratively set (e.g., because of the
----
unavailability of appropriate ISO market data), and the parties are
unable to reach a consensus on such revised rates for RY3 by
November 30, 1998, then the Company will file proposed rates for RY3
with the Commission by no later than December 30, 1998, which shall
be subject to formal discovery and public comment under SAPA. The
Company's filing will also propose a procedure for setting rates for
RY4.
(v) Nothing in the settlement agreement is intended to affect the
determination of the SC No. 11 Buy-Back capacity rates for RY1 and
beyond.
33
III. RETAIL ACCESS PROGRAM
---------------------
Objectives and Phase-in Target Dates
- ------------------------------------
1. A capacity and energy retail access program for up to 500 MW will begin no
later than nine months following Commission approval of this settlement
agreement (i.e., by June 1, 1998, assuming approval is obtained no later than
----
September 30, 1997).
(i) This schedule is contingent upon approval, within one hundred and
twenty days of the settlement approval order, of the retail access
implementation plan prescribed by the settlement agreement and the
retail access tariffs (to be filed with the Commission and FERC, as
applicable) governing this program substantially as submitted. Con
Edison will file the plan and tariffs, including operating and
enrollment procedures governing this program for at least the
initial twelve months, within thirty days following the issuance of
the settlement approval order. The schedule will be subject to
reasonable change if significant revisions to the plan or tariffs
are required or if approval of the plan and tariffs are otherwise
delayed.
(ii) A total of up to 300 MW will be made available to up to
approximately 100 customers who have real time metering (i. e.,
-----
large TOU customers).
(iii) A total of up to 200 MW will be made available to up to
approximately 160 groups of non-TOU customers from all service
classifications, totaling about 60,000 customers subject to
aggregation rules, to test the use of load shapes instead of real
time metering. A group is a number of customers in a single service
classification with homogenous load characteristics served by a
single LSE. Low income aggregation in multi-family buildings (five
or more units) in low-income neighborhoods and low-income small home
residential aggregation will be targeted. The Company's retail
access implementation plan will include proposals for a program to
encourage participation in this initial phase by small (SC 1, 2 and
7) non-TOU customers. The programs to be considered will include,
among others, a temporary, non-recurring increase to the backout
credit as well as a payment to encourage the enrollment of such
customers during the initial phase. The total one-time incremental
cost of the program will be approximately, but not exceed, $5
million. Any portion of the $5 million not used for the program will
be deferred for credit to the "all other" customer groups defined in
Section II.5 herein.
(iv) The number of non-TOU customers in each service classification will
be set to bring the minimum group size to approximately 1 MW.
(v) Hourly energy usage for customers in the aggregated groups will be
derived from the monthly energy usage through the use of customer
load shapes to be determined by Con Edison from its load research
data subject to Staff review.
34
(vi) The parties recognize that implementation of retail access
within nine months of Commission approval of this settlement
agreement is contingent upon the timely establishment of the
aggregation, eligibility and other rules applicable to retail
access. The parties will fully cooperate in this development.
Within 30 days of approval of this settlement agreement, the
Company will file with the Commission, with a copy to all
parties, a plan and proposed retail access tariffs outlining
the manner in which the Company will carry out this initial
phase (first twelve months) of the retail access plan.
Following the Company's filing, the parties will collaborate in
reviewing the filed plan and in developing procedures for its
periodic evaluation. Otherwise eligible utilities and their
affiliates may participate along with other LSEs in the retail
access program except that, if Con Edison or its affiliates are
restricted from participating in retail access programs being
conducted by utilities, participation by such other utilities
and their affiliates in Con Edison's programs will be similarly
restricted.
2. The retail access program will be expanded by 1,000 MW, to a total of 1,500
MW, within 10 months of the date on which the initial 500 MW program
begins. To the extent feasible, the Company will begin to phase in this
program expansion beginning six months after the initial 500 MW program
begins. Assuming resolution of administrative and operational problems
that are likely to be encountered in implementing the first 500 MW of
retail access, participation will be encouraged from all customer classes,
subject to aggregation and eligibility requirements and other applicable
rules.
3. Within 12 months after the beginning of the second phase of the retail
access program, (i.e., the 1,000 MW program expansion) and within each 12
----
months thereafter, retail access will be expanded by 1,000 MW or more. The
Company would target the phase-in of retail access to make it available to
all customers by the earlier of 18 months after a fully operational ISO is
implemented, or year-end 2001. For purposes of this agreement, the ISO
will be considered to be "fully operational" when energy is being provided
via a competitive wholesale market facilitated by the ISO and upon
commencement of the first period during which capacity is being provided
pursuant to a statewide (i.e., including the Con Edison service area)
----
capacity auction or capacity rules, or it has been determined that there is
to be no separate statewide capacity program.
4. The parties recognize that even with widespread discussion of retail
access, there has been little actual experience with retail access to date,
particularly on a large scale, and that industry experience to date
indicates that approximately one-half the customers eligible for similar
programs would choose to participate in such programs in the initial period
that retail access is made available. The parties also recognize the need
for customer input and a gradual and orderly phase-in of retail access to
allow for the proper resolution of unexpected, but inevitable, operational
difficulties and customer-related issues. Accordingly, the parties
acknowledge that the retail access objectives and phase-in dates specified
herein are targets and that flexibility to change the program schedule
indicated herein as issues and obstacles are addressed more slowly (or more
rapidly) than anticipated is essential. The schedule, therefore, will
(with appropriate
35
Commission oversight) be subject to adjustment (e.g., via queuing, phasing,
----
or similar procedures) to address these developments.
5. The parties also acknowledge that the transition to a competitive market,
which is desirable, needs to address the Company's statutory service
obligation. Specifically, the parties acknowledge the Company's concern
that it may be acting in a manner inconsistent with its statutory duty to
serve if it were to make irrevocable commitments toward a competitive
capacity market, such as divesting generation or shutting down generating
stations, without recognizing that Con Edison's ability to carry out its
service obligation reliably may be threatened by such commitments. Con
Edison will not be required to make irrevocable commitments that are
inconsistent with its obligations at the time.
Retail Access Prior to A Fully Operational ISO
----------------------------------------------
It is the intent of the parties that the rates charged to LSEs for energy
and/or capacity and the rates charged to retail access customers for
transportation/delivery service would not result in subsidization of such
LSEs and retail access customers by the Company or its full service
customers and that stranded costs resulting from retail access be allocated
consistent with this no-subsidy principle. Subject to this principle, the
method of determining the capacity charges to LSEs and the related
Generation Capacity Adjustments set forth below will be re-evaluated prior
to the second year of the retail access program.
6. Energy: LSEs, including Con Edison's ESCO, providing service to retail
access customers will have the option of purchasing energy directly from
suppliers through bilateral arrangements (subject to operational
requirements), or from Con Edison at FERC-filed energy tariff rates. These
tariff rates, expressed on a cents/kWh basis, will be set at the applicable
SC No. 11 Buy-Back energy rates or will reflect the Company's hourly
incremental costs, and will be applicable to energy purchases by LSEs as
set forth below. Any LSEs desiring to purchase energy from Con Edison at
the SC No. 11 Buy-Back energy rates will be required to contract with the
Company for the purchase of all or a pre-determined fixed portion of the
LSE's load within thirty days of the Commission's order setting the
applicable SC No. 11 Buy-Back energy rate, but in no event later than the
commencement of the 12-month period for which such energy rates are fixed.
The contracting LSE will be required to purchase the pre-determined fixed
percentage of its energy requirement during all hours of the year. All
other energy purchases by LSEs from the Company, including energy above
contracted-for percentage levels (e.g., during import curtailments), will
----
be priced at the Company's hourly incremental costs (differentiated, as
necessary, to reflect in-City generation costs). As to bilateral
arrangements:
. Deliveries will be scheduled through the NYPP and/or Con Edison
and must be curtailable for reasons such as in-City generation
requirements for the purpose of reliability. LSEs will be
required to purchase energy from in-City sources to replace
curtailed deliveries.
. LSEs will be required to provide Con Edison with any necessary
data needed to evaluate this program.
. LSEs will be responsible for delivery to Con Edison's franchise
area border.
36
. LSEs will be responsible for delivery of sufficient energy to
cover all losses in delivery to customers' premises, with such
loss factors reflected in applicable tariffs.
. Con Edison will verify LSEs' deliveries and will provide
balancing services for LSEs at a charge to be filed with FERC.
. LSEs serving in-City load should have no greater rights (or
access) to the available transmission capacity for energy imports
into NYC than their pro-rata share of such available capacity if
the location based marginal cost transmission congestion contract
approach proposed by NYPP is not approved by FERC in time for its
implementation herein.
7. Capacity: LSEs, including Con Edison's ESCO, providing service to retail
access customers, will have the option of purchasing capacity from Con
Edison at FERC-filed capacity tariff rates, expressed on a $/kW-year basis.
Such tariff rates will not, at least for RY1, exceed the PSC No. 9
generation component charge and will be established annually based on an
auction to be conducted by the Company for the sale of installed capacity
in excess of capacity required for its full service customers and its in-
City capacity requirements. LSEs will also be able to provide capacity from
any other available source subject to the following:
. LSEs will be required to contract for capacity equal to 118
percent of the coincident peak load to be supplied.
. Until June 1, 1999, LSEs will be required to contract for
capacity from in-City sources equal to no less than 70 percent of
the in-City peak load to be supplied by such LSEs. During such
time, to the extent that the in-City capacity obtained by LSEs is
less than 80 percent of the in-City peak load to be supplied by
such LSEs, Con Edison will maintain existing in-City generating
capacity to cover such difference. Thereafter, until the ISO
establishes locational generation capacity requirement rules
applicable to New York City, LSEs will be required to contract
for capacity from in-City sources equal to 80 percent of the in-
City peak load to be supplied, unless the Commission orders
otherwise. The Company will not be required to contract for or
construct in-City generation capacity to meet LSEs' in-City
capacity requirements.
. Capacity obtained from sources other than Con Edison will be
subject to the same reliability requirements to which Con
Edison's resources are subject, such as NYPP rules for capacity
reliability/availability, including installed capacity criteria,
and disqualification of capacity obtained from generators that
have committed the same capacity to another entity.
. Con Edison will prepare and file with the Commission a proposed
program to allow customer-owned emergency generation facilities
to address applicable locational generation requirements. The
program will be designed to cover not greater than 100 MW of
emergency generation when initially effective inclusive of any
load participation by NYPA customers.
8. Delivery Service: The transportation/delivery service rate for all retail
access customers will be equal to the full service rate in the applicable PSC
No. 9 tariff (e.g., large commercial retail access customers will be subject to
----
the rates and charges in the PSC No. 9 tariff rate for large
37
commercial customers), subject to the adjustments to the energy and generation
capacity components of the full service rate described below. The transmission
and distribution component and customer charge component of the PSC No. 9 rate
will not be impacted.
(i) Energy Adjustment: Subject to any program to encourage participation
in the initial phase of the retail access program by small customers
adopted pursuant to Section III.1.(iii), the applicable PSC No. 9 energy
component charge (on a cents/kWh basis, after adjustment to reflect total
actual energy costs net of revenues received from sales of energy to LSEs)
will be credited on a monthly basis for all retail access customers by an
amount equal to the lesser of the SC No. 11 Buy-Back energy rate (including
appropriate loss factors) or such applicable PSC No. 9 energy component
charge. The remaining portion of the energy component charge included in
the transportation/delivery service rate (e.g., reliability-related and
----
other unavoidable energy costs) would be subject to adjustment for actual
costs as required. To the extent the energy tariff approved by FERC
provides for the recovery of less than the full energy costs incurred by
the Company, including the reliability-related and other unavoidable energy
costs, such shortfall shall be recovered from all retail access customers
through the transportation/delivery service rate.
(ii) Generation Capacity Adjustment: The applicable PSC No. 9 generation
capacity component charge (on a $/kW year basis) will be credited on an
annual basis for all retail access customers by an amount equal to the
ratio of: (1) the actual revenues to be received by Con Edison in such year
from sales of capacity made available at auction, if any, including
capacity sales to LSEs serving Con Edison delivery customers, plus
estimated identifiable capacity-related savings, if any, resulting to the
Company directly from the purchase of capacity by LSEs from third parties
(excluding savings associated with contract terminations and reductions in
capacity purchases from Hydro Quebec and I.P.3/Poletti), divided by (2) the
total amount of capacity made available for sale at auction to LSEs;
provided, however, that the total credit cannot exceed the then-current-
applicable PSC No. 9 generation capacity component charge. To the extent
the capacity tariff rate approved by FERC is less than the filed tariff
rate, any resulting revenue shortfalls shall be recovered from all retail
access customers through the transportation/delivery service rate.
Retail Access After A Fully Operational ISO
-------------------------------------------
9. Energy: Same options and requirements as prior to a fully operational ISO
(as described above, paragraph 6), except that:
. LSEs will also have the option of purchasing energy directly
through a Power Exchange.
. ISO will schedule energy deliveries obtained through bilateral
arrangements.
. ISO will provide for any in-City requirements for energy.
. ISO will provide verification of LSEs' deliveries and balancing
services.
38
10. Capacity: Same options and requirements as prior to a fully operational
ISO (as described above, paragraph 7), except that ISO reliability rules
will govern. The parties will actively support the expeditious adoption of
in-City capacity requirements by the ISO. In the event that the ISO
requires that LSEs contract for in-City capacity in excess of 70 percent of
the in-City peak load to be supplied prior to June 1, 1999, LSEs will be
required to provide no more than 70 percent of such in-City peak load until
June 1, 1999, and Con Edison will maintain sufficient existing in-City
generation capacity to provide the additional in-City capacity required by
the ISO.
11. Delivery Service: Same starting point for determining the
transportation/delivery service rate as prior to a fully operational ISO
(as described above, paragraph 8), except that:
(i) The Company would bid its energy into the ISO/Power Exchange
("PE") at a price which would be expected to reflect the
avoidable (i.e., marginal and other "running") energy costs, at a
---
minimum (or at a higher price, up to the expected market clearing
price for energy, consistent with the market structure that
develops). Under the Energy Adjustment, the applicable PSC No. 9
energy component charge (after adjustment to reflect total actual
energy costs net of revenues received from the sales of energy to
LSEs) would be credited for all retail access customers by an
amount equal to the lesser of the market price of energy or such
applicable PSC No. 9 energy component charge. Any remaining
portion of the energy component charge included in the
transportation/delivery service rate (i.e., unavoidable energy
----
costs not reflected in the market value of energy) would be
subject to adjustment for actual costs as required.
(ii) To the extent practical and prudent, the Company would bid all of
its capacity into the ISO/PE at a price which would be expected
to reflect the "to go" (or avoidable) costs (or at a higher
price, provided that such price does not exceed total embedded
costs, including unrecovered energy costs, until market power
concerns have been addressed). Under the Generation Capacity
Adjustment, subject to necessary adjustments based upon the
operation of the ISO, the applicable PSC No. 9 generation
capacity component charge would be credited for all retail access
customers by the lesser of the market value of capacity or such
applicable PSC No. 9 generation capacity component charge.
(iii) A system-wide delivery rate will apply until the ISO is
operational and thereafter until the Commission determines based
on consideration of all relevant factors that a separate rate
should apply to Westchester County.
(iv) In bidding its fossil-fueled capacity and energy into the ISO/PE
at a price which would be expected to reflect, at least, the "to
go" or avoidable costs, the Company will consider all costs
avoidable as a result of a generating unit being backed down,
taken off line, placed on cold standby or retired, and will
include in its bid all "to go" costs that are appropriately
considered avoidable for the action that it plans to take if the
unit is not successful in that auction. The Company will have
the discretion to choose the action appropriate for each unit it
bids into the
39
ISO/PE. The categories of avoidable costs to be evaluated include fuel
and other variable and fixed costs such as equipment and supplies,
labor and outside services, allocated administrative and general (A&G)
expenses and property taxes. As a general rule, being backed down
would entail the lowest level of avoidable costs, followed by, in
ascending order of avoidable costs, being taken off line and being
placed on cold standby, and lastly, by retirement.
(v) Until Con Edison sells or transfers all of its fossil units, Staff
will review the appropriateness of Con Edison's energy and capacity
bids associated with any remaining units to ensure that all "to go"
costs are properly bid. To facilitate such review, the Company will
submit to Staff, by June 1, 1998, detailed procedures for identifying
and allocating all direct and indirect costs related to generation,
along with criteria for including such costs in the Company's bids
consistent with the actions that the Company plans to take if its bids
were unsuccessful. The Company's submission will also include
appropriate procedures for bidding generation from Indian Point No. 2
at applicable "to go" costs. These procedures and criteria will form
the baseline analysis that will guide Con Edison's bidding actions and
facilitate Staff's review of the appropriateness of those actions.
Based upon an audit of the procedures and criteria proposed by Con
Edison and by an independent analysis of the costs of generation, both
direct and indirect, Staff will ascertain and verify, by September 1,
1998, the propriety and reasonableness of the baseline analysis
proposed by the Company, including the actions that the Company plans
to take if its bids were unsuccessful. No later than thirty days after
each bidding period, Con Edison will provide Staff with the bids that
it has submitted to the ISO/PE. Competitive bid data are considered to
be commercially valuable and, assuming the data qualify for trade
secret protection under then- applicable Commission rules, the
Company's bid data would be subject to trade secret and other
confidentiality protections against disclosure to any party other than
Staff. For capacity bids, these submissions will be made no less than
every six months and no more often than once a month, depending on the
period covered by the capacity auctions. Energy bids will be submitted
no more often than once a month, Staff will review the bids for
conformity to the bidding procedures and criteria submitted by the
Company. In addition, Staff will audit once a year the details of Con
Edison's bids, using the appropriate baseline analysis, to determine
if the "to go" costs are being appropriately included in the bid for
each plant. At such time as the Company seeks rate recovery of
generation costs, the Commission may disallow recovery of costs
related to imprudent bidding actions.
40
Disposition of Petitions
In light of the retail access plan set forth herein, the retail access
pilot petitions referred to this proceeding in the Commission's Order Concerning
----------------
Retail Access Proposals in Case 94-E-0385 (issued February 25, 1997) are
- -----------------------
incorporated solely to the extent consistent with this settlement agreement and
denied in all other respects. The petitioners will not be foreclosed from
participating in the retail access program set forth herein for which they are
otherwise eligible.
IV. DIVESTITURE
-----------
Consistent with the objective of developing a fully competitive electric
market, the Company commits to divest at least 50 percent of its in-City
electric generating fossil-fueled MW capacity (i.e., the in-city fossil plants,
----
either in service or on reserve shutdown owned by Con Edison as of the date of
this settlement agreement, net of re-ratings or retirements that occur after the
date of this settlement agreement) by year-end 2002. The Company will develop a
plan with the objective of divesting and transferring all plants, with the
exception of Indian Point No. 2 and its associated gas turbines, to unregulated
entities, including third parties and affiliates, by year-end 2002. This plan
will be designed with the objective of developing a fully competitive electric
market and maximizing the sales proceeds of divestiture.
1. Requirements for Divestiture
----------------------------
The parties agree that the divestiture program outlined herein will be a
major step toward the development of a competitive, deregulated electricity
market. The Company will, therefore, implement its divestiture commitment. The
only exceptions would be (i) if the Commission found that the level of
divestiture should be delayed or reduced (for example, to address factors such
as the need to maximize the sales price or avoid a "fire sale" of assets, to
address unforeseen legislative, regulatory, economic, business or other
developments, or a force majeure, or to address the electric system integrity)
-------------
or (ii) pending issuance of a finding by the Commission, upon petition by the
Company to which parties will be offered opportunity to comment, that such
divestiture commitment by the Company is consistent with the Company's then-
existing obligation to serve the load related to customers whose loads (and
associated locational and reserve margin requirements) exceed the Company's
remaining generation and that the extent of the Commission's then-existing
regulation of electricity prices is not inconsistent with the objective of
maximizing the sales price of assets to be divested.
2. Divestiture Parameters and Methodology
---------------------------------------
The divestiture of plants to third parties and the transfer of plants to
the Company's unregulated subsidiary will be carried out through a process that
will result in fair and reasonable treatment of all parties, including Company
investors and customers. This process will be fully
41
developed in the divestiture plan.
Per Section II.13.v, after tax gains or losses will reflect the
netting out of divestiture costs (which have been deferred by the Company for
recovery), i.e., the costs of developing and implementing the plan, including
----
the incremental financial, environmental, transaction and employee costs
associated with the plan, and the divestiture carried out to implement the plan,
and any tax implications thereof. Employee costs will cover divestiture-related
costs, if any, associated with plant and direct-support employees. The use of
cash proceeds from the sale of any plants will be at the discretion of the
Company subject to the provisions of Section V.8 (iii) of this settlement
agreement. Any after-tax gains or losses made on the transfer or sale of
divested assets, net of amounts retained per Section II.13.v, will be reflected
in the determination of stranded costs to be collected after RY5 as prescribed
in Section II.13-15 of this settlement agreement.
The divestiture plan will identify the units to be divested consistent
with the objective of developing a competitive electric market in the service
area without the need for continuing regulation. This includes the objective of
addressing market power issues in the in-city area including the "sub-load
pockets." Resolution of market power issues should not include mitigation
measures such as price controls, revenue caps or other means which could limit
the revenues of the future owner of the generating unit. The divestiture plan
submitted by the Company will also identify how plants and units would be
packaged for sale or transfer; what restrictions, if any, would be placed on the
capacity that any one generating company could purchase; the procedures to be
followed in the sale or transfer of generating assets; key dates and milestones
to achieve the schedule of divestiture; and which properties Con Edison would
make available for sale for the purpose of constructing new generating
facilities by third parties. If the disposition of generating assets is not
proposed to be carried out through a competitive auction process, then the
Company's plan will justify the use of an alternative process. The schedule for
divestiture would provide for the Company to initiate the divestiture process
with respect to at least 30 percent of the in-City fossil-fueled electric
generation within ninety days after the Commission's approval of a divestiture
plan is obtained and, if justified in the Company's plan in order to maximize
the sales proceeds of divestiture, not later than ninety days after the ISO in-
City capacity requirement rules become effective. Con Edison's affiliates,
consistent with the objective of achieving workable competition, will be
included among the potential transferees in the Company's divestiture plan, and
Con Edison's affiliate would be able to participate along with other unregulated
sellers in the competitive electric market. As a market participant in the in-
City load pocket, the unregulated affiliate will be allowed to own generation in
amounts comparable to other unregulated unaffiliated market participants and not
be restricted by virtue of its utility affiliation. The plan will also ensure
that the process for, and the terms and conditions of, the transfer of plant to
Con Edison's affiliate would be satisfactory to a neutral third party (the
Commission or another party).
3. Divestiture Plan Procedures
---------------------------
The Company will submit its divestiture plan to the Commission within
six months of the Commission order approving this settlement agreement. The
Company will keep Staff and the parties informed about the development of the
plan and submit to Staff for its comment a draft scope of work for the plan and
the Company will brief Staff on the progress of the plan during its
42
development. These steps are intended to be informal and informational with
minimum intrusion on the plan's development. No rights of formal discovery or
similar procedural requirements are intended to be provided although the Company
will cooperate with reasonable inquiries during the plan's development and
participate in collaborative efforts requested by Staff. The Company will submit
the plan to the Commission following its completion, and interested parties will
be given an opportunity to file comments on the submitted plan within sixty days
of its submission. If the Company requests an exception from its divestiture
commitment, the Commission will rule on the request expeditiously. If the
Commission otherwise comments on the plan or recommends that to address market
power or other concerns the plan should be modified, the Commission will either
initiate a proceeding to consider such comments or recommendations or request
Con Edison to respond to such comments or recommendations. The parties will
propose to the Commission a schedule for such a proceeding or response that
would allow for a Commission order on the plan by year-end 1998. Thereafter, the
Commission will approve the plan or modify it in a manner consistent with the
terms and conditions prescribed by this Section IV. The parties expect that the
Commission's order on the plan will also identify the plants that should not be
divested due to the need for continued regulation of such plants. The Company
will not challenge the Commission's authority to implement this subparagraph,
including any Commission implementation that modifies the plan submitted by the
Company in a manner consistent with the overall parameters of this Section IV
provided such modifications may be challenged on the grounds that they are
arbitrary, capricious, and an abuse of discretion or not supported by
substantial evidence. Nothing in this subparagraph precludes the Company from
petitioning the Commission separately at any time for authorization to transfer
generation or other plant pursuant to Section 70 of the Public Service Law.
4. Post-Rate Plan Period
---------------------
Any residual unrecovered costs for fossil generation will be recovered through
charges established as prescribed in Section II.15 of this settlement agreement.
V. CORPORATE STRUCTURE
-------------------
1. Formation of Holding Company
(i) The Company is permitted to reorganize into a holding company form
through the mechanism of a binding share exchange, after which Con
Edison (referred to in this Section as "the RegCo") will be a
subsidiary of the Holding Company ("the HoldCo")./*/ In addition to
Commission and shareholder approval, the approval of the Federal
Energy Regulatory Commission ("FERC") and the consent of the Nuclear
Regulatory Commission ("NRC") will be required to form the holding
company structure.
- ------------------
/*/ In the other Sections of this settlement agreement, "Con Edison" and "the
Company" refer to the corporation existing as of the date of the settlement
agreement and, where the settlement agreement applies to periods after formation
of Holdco, to the RegCo.
43
(ii) Upon the formation of the HoldCo, Con Edison's existing
unregulated subsidiaries, Promark Energy, Inc. (established
pursuant to the Commission's order dated May 13, 1993 in Case 92-
G-0841, as amended by order dated January 7, 1994 in Case 92-G-
0841, order dated October 12, 1994 in Case 93-G-0996, and order
dated November 16, 1994 in Case 94-G-0294) (the "ESCO"), and
Gramercy Development, Inc., (established pursuant to the
Commission's order dated July 12, 1996 in Case 95-M-0418), will
be transferred to and become direct or indirect subsidiaries of
the HoldCo.
(iii) The HoldCo may form other subsidiaries from time to time,
including an Energy Supply Company. To the extent that the
RegCo's existing fossil-fueled generating stations are retained
within the holding company structure, they will be transferred
during the transition period from the RegCo to the Energy Supply
Company in accordance with the RegCo's divestiture plan, where
they will compete in the unregulated generation market. NUG
contracts that are not securitized would remain with the RegCo.
(iv) An initial organization chart is attached as Appendix H. The
subsidiaries other than the RegCo are referred to collectively as
"the unregulated subsidiaries" or "unregulated affiliates." The
HoldCo may also establish one or more intermediate subsidiary
holding companies to hold its Con Edison common stock and the
stock of its other subsidiaries, provided the Commission's rights
under this settlement agreement are not impaired by such action.
2. Functional Unbundling
(i) Within the RegCo, the operations of its generating system,
including fuel and power purchases, will be functionally
unbundled from its transmission and distribution systems in a
"business unit" structure.
(ii) Common services (including administrative, accounting, legal,
purchasing, etc.) will continue to be provided within the RegCo
to all of the RegCo business units.
(iii) The business unit structure contemplates realignment of existing
organizations along functional lines. The latest step in the
realignment was effective on December 1, 1996. The wholesale
electricity purchasing function for franchise area customers was
aligned with the purchase of fuel for fossil generation within
the generation organization. The transmission pricing and
planning functions were aligned within the transmission
organization, increasing the separation of the generation and
transmission functions. Future changes include realignment of the
transmission organization with the distribution organization
within the RegCo. Also the maintenance and construction
organization will be realigned to provide functional separation
between transmission and generation.
44
3. The RegCo
(i) At the inception of the holding company structure, the RegCo will
continue to own all generation, transmission, electric and gas
distribution and steam systems.
(ii) To the extent the RegCo continues to own generation assets or NUG
contracts, it would be permitted to make wholesale electric energy
sales outside its service territory, retail and wholesale electric
energy sales within its service territory, and retail electric
energy sales outside its service territory until the RegCo has an
unregulated affiliate with all necessary approvals to make retail
sales outside the RegCo's service territory. The RegCo will be
permitted to provide service for the remaining terms of any
contracts for retail sales outside the service territory in effect
on the date the RegCo's authority to make additional sales otherwise
terminates or assign its rights and obligations, under one or more
of such contracts to its affiliates if permitted by the contract(s).
(iii) The RegCo may also continue to provide certain services, i.e.,
----
advisory services and maintenance and repair shop services provided
by the Van Nest maintenance facility (until transferred to an
unregulated subsidiary), both within and outside the service
territory. After RY5, Van Nest, if still owned by RegCo, may not
provide any service that the RegCo will stop providing pursuant to
Section V.3(iv).
(iv) Through RY5, to the extent that the RegCo continues to have sales
customers, the RegCo would be permitted to provide the full range of
energy products and services to those sales customers, including
"behind the meter" products and services, except for any behind the
meter service that the Commission determines generically that the
utilities should not provide, in which case the RegCo would
terminate any such existing service(s) by the later of the date
provided in the generic order or three (3) years from the effective
date of the order approving this settlement. RegCo may, however,
elect to provide only basic commodity service and advise customers
to seek energy-related services from competitive energy service
companies that offer such products and services. After RY5, the
RegCo will, unless otherwise authorized by the Commission, not
provide any separately offered and separately priced behind-the-
meter gas or electric services that are available from unregulated
providers, except: (a) those services that were part of its
historical bundled service and (b) those reasonably necessary to
provide transmission and distribution service (e.g., services
necessary to ensure the safety and adequacy of service; incidental
environmental work).
4. Affiliate Relations - In General
(i) The RegCo and the HoldCo's other subsidiaries will be operated as
separate entities. No unregulated affiliate will be located in the
same building as the
45
RegCo beyond 180 days after its formation. The RegCo and the
HoldCo may occupy the same building.
(ii) Any transfer of assets or the provision of goods or services,
other than tariffed services and corporate services (such as
corporate governance, administrative, legal and accounting
services), by the RegCo to an unregulated subsidiary or an
unregulated subsidiary to the RegCo, will be pursuant to written
contracts that will be filed with the PSC.
(iii) Cost allocation guidelines are attached as Appendix I. These
guidelines will be amended and/or supplemented, if necessary, to
reflect affiliate transactions not contemplated by the initial
guidelines set forth in Appendix I. The Company will file with
the Director of the Office of Accounting and Finance of the
Department of Public Service all amendments and supplements to
the guidelines thirty days prior to making such change(s).
5. Transfer of Assets
(i) Transfers of assets from the RegCo to an affiliate or from an
affiliate to the RegCo will not require prior Commission approval
except for the transfer of generating stations and other assets
from the RegCo whose transfer requires Commission approval under
PSL Sec. 70.
(ii) For all assets other than generating stations (whose value will
be determined in the section 70 proceeding), transfers of assets
from the RegCo to an affiliate shall be at the higher of net book
value or fair market value and transfers of assets from an
affiliate to the RegCo shall be on a basis not to exceed fair
market value except that the RegCo may, as part of its
reorganization, transfer to the HoldCo (at no charge) title to
office furniture, equipment and other assets having an aggregate
net book value not to exceed $5 million.
(iii) Fair market value shall be determined in accordance with the cost
allocation guidelines (Appendix I). For example, the RegCo may
transfer to an affiliate any computer software system that the
RegCo is authorized to transfer, without data, at a price at
which the RegCo would sell such software to an unaffiliated third
party.
(iv) In general, the transfer of generating assets will be consistent
with the divestiture plan.
6. Personnel
(i) The RegCo and the unregulated subsidiaries will have separate
operating employees.
46
(ii) Non-administrative operating officers of the RegCo will not be
operating officers of any of the unregulated subsidiaries.
(iii) Officers of the HoldCo may be officers of the RegCo.
(iv) Employees may be transferred between the RegCo and an unregulated
subsidiary upon mutual agreement. Transferred employees may not
be reemployed by the RegCo for a minimum of 18 months from the
transfer date. Employees returning to the RegCo may not be
transferred to an unregulated subsidiary for a minimum of 18
months from the date of return. The forgoing limitations will not
apply to employees covered by a collective bargaining agreement.
(v) For employees transferred from the RegCo to an unregulated
subsidiary, the unregulated subsidiary shall compensate the RegCo
with an amount equal to 25 percent of the employee's prior year's
annual salary on a one-time basis, except that there shall be no
compensation (i) for employees transferred to an unregulated
subsidiary not later than six months from the date the HoldCo
becomes the parent of the RegCo or the unregulated subsidiary to
which the employee is transferred is formed, whichever is later;
(ii) for the transfer of employees covered by a collective
bargaining agreement; or (iii) where the employee's transfer is
attributable to the transfer or reduction of a RegCo function or
major asset (e.g., a generating station).
---
(vi) The foregoing provisions in no way restrict any affiliate from
loaning employees to RegCo to respond to an emergency that
threatens the safety or reliability of service to consumers.
(vii) The compensation of RegCo employees may not be tied to the
performance of any of the unregulated subsidiaries, provided,
however, that stock of the HoldCo may be used as an element of
compensation and the compensation of common officers of the
HoldCo and RegCo may be based upon the operations of the HoldCo
and RegCo.
(viii) The employees of HoldCo, RegCo and the unregulated subsidiaries
may participate in common pension and benefit plans.
7. Provision of Services and Goods
(i) The RegCo may provide corporate services (such as corporate
governance, administrative, legal and accounting) for the HoldCo
and the HoldCo's unregulated subsidiaries may purchase such
services from the RegCo. The services would be provided on a
fully-loaded cost basis.
(ii) The RegCo may provide other services to an unregulated affiliate,
except that the RegCo may not use any of its marketing or sales
employees to provide services to
47
an unregulated affiliate for business within the RegCo's service
territory. The unregulated affiliate shall compensate the RegCo
for the services of employees performing such services at the
higher of the employees' fully-loaded cost plus 10 percent or the
price that the RegCo charged a third party for such employees'
services.
(iii) The unregulated affiliates may provide services to the HoldCo and
the RegCo. Any management, construction, engineering or similar
contract between the RegCo and an affiliate and any contract for
the purchase by the RegCo from an affiliate of electric energy or
gas shall be governed by PSL (S)110, subject to any applicable
FERC requirements. All other goods and services will be provided
to the RegCo at a price that shall not be greater than fair
market value, determined in accordance with the cost allocation
guidelines (Appendix I).
(iv) The RegCo, the HoldCo, and the unregulated affiliates may be
covered by common property/casualty and other business insurance
policies. The costs of such policies shall be allocated among the
RegCo, the HoldCo and the unregulated affiliates in an equitable
manner.
8. Maintaining Financial Integrity
(i) The debt of RegCo would be raised directly by the RegCo and would
not be derived from the HoldCo.
(ii) Without the prior permission of the Commission, the RegCo will
not (i) make loans to the HoldCo or any of the unregulated
subsidiaries, (ii) guarantee the obligations of either the HoldCo
or any of the unregulated subsidiaries; (iii) pledge its assets
as security for the indebtedness of the HoldCo or any affiliate.
(iii) The RegCo will not pay out more than 100% of income available for
dividends calculated on a two-year rolling average basis.
Excluded from the calculation of "income available for dividends"
for the purposes of this provision will be non-cash charges to
income resulting from accounting changes or charges to income
resulting from significant unanticipated events. The foregoing
restriction will also not apply to dividends necessary to
transfer to the HoldCo revenues from major transactions, such as
asset sales, divestiture or securitization or to dividends
reducing the RegCo's equity capital ratio to a level appropriate
to the RegCo's business risk. Senior management personnel of the
RegCo will discuss with senior Commission Staff personnel, on a
confidential basis, the possibility of the payment of a dividend
that would exceed the foregoing restriction at least 10 business
days before declaration of such dividend.
(iv) The RegCo will be required to certify annually to the Commission
that the RegCo has retained or otherwise has access to sufficient
capital to maintain and upgrade
48
its plant, works and system in order to continue the provision of
safe and reliable service.
(v) Senior management personnel of the RegCo and the HoldCo will meet
annually with senior Commission Staff personnel to discuss, on a
confidential basis, the RegCo's and the HoldCo's activities,
including plans related to capital attraction and financial
performance.
9. Standards of Competitive Conduct
The following standards of competitive conduct shall govern the RegCo's
relationship with any energy supply and energy service affiliates:
(i) There are no restrictions on affiliates using the same name,
trade names, trademarks, service name, service mark or a
derivative of a name, of the HoldCo or the RegCo, or in
identifying itself as being affiliated with the HoldCo or the
RegCo. However, the RegCo will not provide sales leads for
customers in its service territory to any affiliate, including
the ESCO, and will refrain from giving any appearance that the
RegCo speaks on behalf of an affiliate or that an affiliate
speaks on behalf of the RegCo. If a customer requests information
about securing any service or product offered within the service
territory by an affiliate, the RegCo may provide a list of all
companies known to RegCo operating in the service territory who
provide the service or product, which may include an affiliate,
but the RegCo will not promote its affiliate.
(ii) The RegCo will not represent to any customer, supplier, or third
party that an advantage may accrue to such customer, supplier, or
third party in the use of the RegCo's services as a result of
that customer, supplier or third party dealing with any
affiliate. This standard does not prohibit two or more of the
unregulated subsidiaries from lawfully packaging their services.
(iii) All similarly situated customers, including energy services
companies and customers of energy service companies, whether
affiliated or unaffiliated, will pay the same rates for the
RegCo's utility services and the RegCo shall apply any tariff
provision in the same manner if there is discretion in the
application of the provision.
(iv) Transactions subject to FERC's jurisdiction will be governed by
FERC's orders or standards as applicable.
(v) Release of proprietary customer information relating to customers
within the RegCo's service territory shall be subject to prior
authorization by the customer and subject to the customer's
direction regarding the person(s) to whom the information may be
released. If a customer authorizes the release of information
49
to a RegCo affiliate and one or more of the affiliate's
competitors, the RegCo shall make that information available to
the affiliate and such competitors on an equal basis.
(vi) The RegCo will not disclose to its affiliate any customer or
marketer information relative to its service territory that it
receives from a marketer, customer or potential customer, which
is not available from sources other than the RegCo, unless it
discloses such information to its affiliate's competitors
contemporaneously on an equal basis to the extent practicable.
(vii) If any competitor or customer of the RegCo believes that the
RegCo has violated the standards of conduct established in this
section of the agreement, such competitor or customer may file a
complaint in writing with the RegCo. The RegCo will respond to
the complaint in writing within twenty (20) business days after
receipt of the complaint. Within fifteen (15) business days after
the filing of such response, the RegCo and the complaining party
will meet in an attempt to resolve the matter informally. If the
RegCo and the complaining party are not able to resolve the
matter informally, the matter will be referred promptly to the
Commission for disposition.
(viii) The Commission may impose on the RegCo remedial action (including
redress or penalties, as applicable) for the RegCo's violations
of the standards of competitive conduct. If the Commission finds
that the RegCo has engaged in a consistent pattern of material
violations of the standards of competitive conduct during the
course of this Agreement, it shall provide the RegCo notice of a
reasonable opportunity to remedy such conduct. If the RegCo fails
to remedy such conduct within a reasonable period after receiving
such notice, the Commission may take remedial action with respect
to the HoldCo to prevent the RegCo from further violating the
standard(s) at issue. Such remedial action may include directing
the HoldCo to divest the unregulated subsidiary, or some portion
of the assets of the unregulated subsidiary, that is the subject
of the RegCo's consistent pattern of material violations but
exclude directing the HoldCo to divest the RegCo or imposing a
service territory restriction on the unregulated subsidiary. If
the HoldCo is directed to divest an unregulated subsidiary, it
may not thereafter, without prior Commission approval, use a new
or existing subsidiary of the HoldCo to conduct within its
service territory the same business activities as the divested
subsidiary (e.g., energy services). The RegCo and the Holdco may
---
exercise any or all of their administrative and judicial rights
to seek a reversal or modification of remedial actions ordered by
the Commission and may seek to obtain any and all legal and/or
equitable relief from such remedial actions, including but not
limited to injunctive relief. Con Edison will not challenge the
Commission's authority to implement this subparagraph.
50
10. Access to Books and Records and Reports
(i) Staff will have access, on reasonable notice and subject to
appropriate resolution of confidentiality and privilege concerns,
to the books and records of the HoldCo and the HoldCo's majority-
owned subsidiaries.
Staff will have access, on reasonable notice and subject to
appropriate resolution of confidentiality and privilege concerns,
to the books and records of all other HoldCo subsidiaries to the
extent necessary to audit and monitor any transactions which have
occurred between the RegCo and such subsidiaries, to the extent
the HoldCo has access to such books and records.
(ii) The RegCo will supplement the information that the Commission's
regulations require it to report annually with the following
information: Transfers of assets to and from an affiliate, cost
allocations relative to affiliate transactions, identification of
RegCo employees transferred to an affiliate, and a listing of
affiliate employees participating in common benefit plans.
(iii) The HoldCo will provide a list on a quarterly basis to the
Commission of all filings made with the Securities and Exchange
Commission by the HoldCo and any subsidiary of the HoldCo,
including the RegCo.
(iv) A senior officer of the HoldCo and the RegCo will each designate
a company employee, as well as an alternate to act in the absence
of such designee, to act as liaison between the HoldCo, the RegCo
and Staff ("Company Liaisons"). The Company Liaisons will be
responsible for ensuring adherence to the established procedures
and production of information for Staff, and will be authorized
to provide Staff access to any requested information to be
provided in accordance with this Agreement.
(v) Access to books and records shall be subject to claims of
privilege and confidentiality concerns as set forth in Appendix J
hereto.
11. Independent Auditor
(i) The Commission may, during the term of this agreement, require
that an independent auditor review the compliance of the HoldCo,
the RegCo and the unregulated subsidiaries with the terms of this
agreement. The identity of the independent auditor will be
determined by the Commission. The cost of such audit and review
shall be reasonable under the circumstances and shall be recorded
by RegCo as a deferred debit and be recoverable from ratepayers.
12. Royalty
(i) The rate plan covers all royalties that otherwise would be
credited to RegCo's customers, at any time, including after the
expiration of the agreement.
51
13. Miscellaneous
(i) If Con Edison has not received shareholder or other regulatory
approvals necessary to form HoldCo prior to issuance of the order
approving the settlement, Con Edison is permitted to use up to 5%
of its consolidated capital to fund unregulated subsidiaries that
currently exist or that it may form and the relationships among
and restrictions on affiliates shall be governed by this
settlement agreement. Accordingly, upon the date of the
Commission's order approving this settlement, the existing
limitations on the services that ProMark may provide are
eliminated. ProMark, which will likely become the ESCO, will be
permitted to offer all the retail and wholesale energy services
and related services and products, both within and outside Con
Edison's service territory, that other unregulated energy service
companies are permitted to offer. Affiliate transactions between
Con Edison and its subsidiaries, including the transfer of assets
and employees and provision of goods and services, shall be
governed in accordance with the terms of this agreement. Con
Edison may, in its sole discretion, continue to seek the
necessary approvals to reorganize into a holding company
structure.
(ii) Upon the date of the Commission's order approving this settlement
agreement, Con Edison's relationships with its existing and
future affiliates will be governed prospectively by this
settlement agreement. Accordingly, the following Commission
orders will not apply to Con Edison:
. Order Approving Use Of Up To $50 Million To Invest In
------------------------------------------------------
Unregulated Subsidiaries, issued July 12, 1996, in Case No.
------------------------
95-M-0418;
. Order Approving Use Of Utility Revenue To Establish A Gas
----------------------------------------------------------
Marketing Subsidiary, issued May 13, 1993, and Order Denying
--------------------- -------------
Petition For Reconsideration, issued January 7, 1994, in
----------------------------
Case No. 92-G-0841; and
. order approving use up to an additional $26,000,000 of
utility revenue to invest in Con Edison Gas Marketing, Inc.,
filed in 92-G-0841, issued November 16, 1994, in Case No.
94-G-0294.
Similarly, Section 1.A.v of the June 7, 1994 Agreement and
-------------
Settlement Concerning Gas Rates of Consolidated Edison of New
-------------------------------------------------------------
York, Inc. in Case 93-G-0996 and Section L.7 of the October 24,
---------
1996 Settlement Agreement in Case 96-G-0548, which address
--------------------
royalty and other affiliate issues, will have no prospective
effect.
(iii) The standards of conduct set forth in this Agreement will apply
in lieu of any existing generic standards of conduct (e.g., the
----
interim gas standards established in Case 93-G-0932) and in lieu
of any future generic standards of conduct established by the
Commission through RY5 and will continue to apply after RY5 given
the Company's need for stability in rules governing the HoldCo
structure.
52
Thereafter, before the Commission makes any changes to these
standards, it will consider the Company's specific circumstances,
including its performance under the existing standards.
VI. RESTRUCTURING-RELATED ACTIONS
-----------------------------
1. Con Edison has an issue of Cumulative Preference Stock 6% Convertible
Series B. At December 31, 1996, 46,305 shares remained outstanding. Each
share of stock is convertible at the option of the holder into 13 shares of
common stock and is also redeemable by the Company at a redemption price of
$100. Following the formation of HoldCo, all of Con Edison's common stock
will be held by HoldCo. Con Edison's preferred stock will remain
outstanding stock of Con Edison. To avoid having an issue of preferred
stock that would be convertible into a minority common stock interest of
Con Edison, Con Edison is authorized, subject to Commission approval of
this settlement agreement, to call for redemption the remaining shares of
the 6% Convertible Series B Cumulative Preference Stock.
2. The transition to competition envisioned by the Commission's May 20, 1996
order and this settlement agreement could have an impact on Company
employees other than as a result of divestiture measures addressed in
Section IV of this settlement agreement. To address this prospect,
incremental retraining costs and severance payment, outplacement and
related costs, if any, incurred in the RY1 through RY5 period and not
covered in Section IV will be deferred and reflected in the Statement of
Case 96-E-0897 Adjustments per Section II.11 herein. The cost of any
pension modification intended to promote early retirement will be amortized
to pension expense over a period approximating the remaining service period
for the Company's employees, and unamortized costs will be reflected in
rates after RY5. The programs covered by this subparagraph will be subject
to review to assure that they are related to the transition to competition
and reasonable compared to the cost and scope of similar programs
implemented by other companies.
The parties recognize that the Company and Local 1-2 Utility Workers' Union
of America, AFL-CIO, are subject to a collective bargaining agreement
effective through June 24, 2000, which includes a provision entitled
"Successor Clause and Notice," but nothing in this settlement adds to,
subtracts from or otherwise modifies any rights, duties or obligations set
forth in said collective bargaining agreement.
3. Nothing in this settlement agreement is intended to preclude the
Commission, at the time it exercises its authority over such actions under
Sections 70 and 108 of the Public Service Law, from allocating to
ratepayers appropriate savings resulting from a merger that takes place
between Con Edison and another electric or gas utility or a purchase of
another gas or electric utility by Con Edison or a purchase of Con Edison
by any other utility.
53
4. The Company agrees to address certain restructuring-related issues raised
by the Natural Resources Defense Council and others as follows:
Deferral of T&D
Capital Projects: The Company will continue to develop detailed
annual forecasts of transmission and distribution
("T&D") capital budget requirements and will
identify for each major T&D project (i.e.,
----
projects of $10 million or more), the location,
reason for project, scope of project, projected
capital costs, appropriate load and other data.
The Company will also perform load monitoring
consisting of monitors at a significant sample of
the transmission and area substations scheduled
for expansion/upgrade in the five-year T&D capital
plan. The Company will evaluate and implement
cost-effective measures as alternatives to major
T&D projects that defer major T&D system projects
through the use of technologies or services that
could reduce peak T&D loads. For such cost-
effective projects, consideration will be given to
technologies or services that minimize the
environmental impacts of electricity usage
including demand side and other new technologies
where practicable. Con Edison will continue to
seek to minimize costs and environmental impacts
for T&D projects that are not major T&D projects.
Customer Information: The Company and Staff agree that customer choice
would be enhanced by the availability of
environmental information concerning the power
being provided to them. To effectuate such
disclosure, Con Edison and Staff agree to work
with LSEs and others to develop and implement,
where feasible, meaningful and cost-effective, an
approach to providing customers with fuel mix and
emission characteristics of the generation sources
relied on by the load serving entity. Such an
approach would facilitate informed customer
choice, promote resource diversity and improve
environmental quality.
Building Codes: Con Edison supports the adoption of improved
building codes and standards as an appropriate
mechanism for improving the energy efficiency of
buildings and, in particular, their use of
electricity. Con Edison supports the Summary of
the Basic Requirements of the 1995 Model Energy
Code and ASHRAE 90.1 (1989). Nothing herein
requires any party to support different proposals
for energy efficiency standards.
54
Performance-Based
Ratemaking: In its first major electric rate filing following
Commission approval of this agreement, Con Edison
will address the merits of performance-based
ratemaking including the relationship between
sales and distribution revenues and energy
efficiency and make ratemaking proposals as
warranted.
VII. CUSTOMER EDUCATION PROGRAM
--------------------------
Con Edison will continue to develop and implement programs and materials
that will aid its customers in understanding the changes in the electricity
market that are coming and the nature of the services that customers can expect
to receive from the Company in the future. Con Edison's overall goals in
conducting these programs are to enable customers, particularly small customers,
to make informed choices about utility service while understanding their rights
and responsibilities as a utility customer and to get customer input into the
design of the retail access program. For retail access and energy services
choices in the competitive energy market, the Company's efforts would be
complemented by those of the participating providers of competitive services,
who can be expected to provide prospective retail access customers with
information about the energy choices becoming available to consumers. The
program will also attempt to reach out to customers eligible for the industrial
employment growth program.
Con Edison will seek to achieve its goals through outreach and education
activities. The outreach and education program will utilize the core outreach
and education tools currently in use: communication through the Customer
Handbook provided to new residential customers; customer information packages;
"Customer News," which is mailed four or five times each year to all three
million customers; and in-person presentations to groups, including the
Company's Advisory Councils, social services providers' groups, and different
segments of the Company's customer base. The Company will supplement this core
program with a message on the Company's voice response unit telephone service,
which will be available to more than 600,000 callers who contact the Company
each month.
The Company will provide annually to Staff on September 30 of each year
beginning 1998 a summary of its customer education efforts. This submission
will include an assessment of the progress made by these efforts.
VIII. MISCELLANEOUS
-------------
1. Provisions Not Separable: Effect of Commission Modifications
-------------------------------------------------------------
The parties have negotiated and accepted this agreement in toto with each
-------
provision in
55
consideration for, in support of, and dependent on the others. If the Commission
does not approve this agreement in its entirety, without modification, any
signatory may withdraw its acceptance of this agreement by serving written
notice on the other parties, and shall be free to pursue its position in this
proceeding without prejudice.
If the Commission approves this settlement agreement or modifies it in a
manner acceptable to the parties, the parties intend that this settlement
thereafter be implemented in accordance with its terms. If a material
modification is thereafter authorized or required by the Commission that is
unacceptable to any party to this settlement agreement adversely affected by
such modification, then, in addition to any other remedies a party may have,
such party may withdraw from the agreement and will not be bound thereafter to
its provisions.
2. Provisions Not Precedent
------------------------
The terms and provisions of this agreement apply solely to and are binding
only in the context of the purposes and results of this agreement. None of the
terms and provisions of this agreement and none of the positions taken herein by
any party may be referred to, cited or relied upon by any other party in any
fashion as precedent in any other proceeding before this Commission or any other
regulatory agency or before any court of law except in furtherance of the
purposes and results of this agreement.
Staff of the Department
of Public Service
________________________________
Consolidated Edison Company
of New York, Inc.
________________________________
(Signatures continued on the following pages)
56
/s/___________________________________
Association For Energy Affordability
/s/____________________________________
Cogen Technologies Linden Venture, L.P.
/s/_______________________________________
Independent Power Producers of New York, Inc.
/s/________________________________________
Multiple Intervenors
/s/________________________________________
Natural Resources Defense Council
/s/_______________________________________
New York Power Authority
/s/________________________________________
NYS Consumer Protection Board
/s/________________________________________
NYS Department of Economic Development
/s/________________________________________
NYS Department of Law
/s/_________________________________
Owners Committee On Electric Rates, Inc.
/s/________________________________________
Sithe Energies, Inc.
/s/________________________________________
Strategic Power Management, Inc.
/s/________________________________________
U.S. Generating Company
/s/_________________________________
Utility Workers Union of America,
Local 1-2
Appendix A - Miscellaneous Tariff Changes
Appendix B - SBC Amounts
Appendix C - Other Rate Changes
Appendix D - 25 Cycle System
Appendix E - NYPA Load
Appendix F - Fuel Targets
Appendix G - Service/Reliability Incentives
Appendix H - Corporate Structure
Appendix I - Cost Guidelines
Appendix J - Privilege
Appendix K - SC No. 11 Buy-Back Rates
APPENDIX A
APPENDIX A
MISCELLANEOUS TARIFF CHANGES
1. Minimum Monthly Charge for Demand-Billed Customers
---------------------------------------------------
The Company will implement a minimum monthly charge applicable to all
demand-billed customers. This charge will be in lieu of the contract demand
charge proposed in the Company's October 1, 1996 plan and is designed to
minimize the number of customers impacted by the charge while effectuating the
overall objective of a cost-based rate to customers with highly variable loads.
The charge is designed to be applicable to all demand-billed classes and follows
the rate design principles approved by the Commission in Case 27574, On-Site
-------
Generation, Opinion No. 82-10 (May 12, 1982), at pp. 44-45 and Order Concerning
- ---------- ----------------
Compliance Filing (Feb. 4, 1983), p. 14. The charge will ensure that a
- -----------------
customer pays, at least, one-half of the distribution demand costs associated
with meeting the customer's maximum demand. The applicability of a minimum
monthly charge to all demand-billed classes would ensure that on-site generators
taking back-up service from Con Edison under the "firm-rate option" (Special
Provision A) will pay for the cost of that service.
Each month, the Company will determine for each customer, (i) the monthly
pure base revenue calculated under the rates and charges applicable to such
customer without reference to the minimum monthly charge and (ii) the minimum
monthly charge. "Pure base revenues" are the total electric charges calculated
for the customer each month under the rates and charges applicable to such
customer without reference to the minimum monthly charge less the average cost
of fuel applicable to the month and less revenue taxes. The minimum monthly
charge equals the customer's contract demand multiplied by one-half the
distribution demand charge applicable to such customer under the rate schedule.
Each month the customer's charge for electric service will be the charge
calculated under the rates and charges applicable to the customer's rate
classification without reference to the minimum monthly charge unless the
minimum monthly charge exceeds the pure base revenue, in which case the
customer's charge for electric service will equal the minimum monthly charge
plus the base cost of fuel and the applicable fuel adjustment for the month
(inclusive of revenue taxes and system benefits charges).
The initial contract demand for a customer will be the customer's highest
registered de-mand, or the predecessor customer's, at the premises in the
previous 18 months.* The 18-month
________________________
* The following rules would apply to "new customer" situations. When the
customer is occupying previously-occupied premises, the contract demand will be
the contract demand of the predecessor customer and be subject to adjustment in
the same manner as contract demands applicable to other customers are adjusted,
i.e., on a going-forward basis. When the "new customer" is taking occupancy of
- ----
premises that have not previously been occupied, the company will not set a
contract demand at the outset, allowing the actual demands of the customer to
set the contract level (e.g., in the first month of service, the contract will
----
equal the new customer's actual maximum demand in that month. In the second
month, the contract demand will be the higher of the first or second month,
etc.)
period will roll forward with the contract demand thereafter being the highest
demand billed in the rolling 18-month period. *
Any customer could request revision of the contract demand, and the
contract demand will be adjusted to a lower level if the customer demonstrates
to the Company, in advance, permanent changes in the electrical load in its
premises through changes in equipment or changes in the kind of business or
activity conducted that make it highly improbable that the contract demand for
which the customer is then being billed (highest demand in last 18 months) will
be experienced in the future. No such adjustment may be based on expectations
of the weather being different in the future than it has been in the past.
After being reduced, the contract demand is subject to being increased in the
same manner as for all other customers, i.e., at any time the customer's billed
---
demand exceeds the contract demand level.
In order to introduce this new but important billing concept to customers
and to reasonably address potential customer impacts, the Company will phase in
the minimum monthly charges beginning April 1, 1998. The minimum monthly charge
will be phased in as follows: In any month in RY2 in which the minimum monthly
charge would otherwise apply, the customer's bill will be equal to the greater
of (1) the charge calculated without reference to the minimum monthly bill
charge or (2) the minimum monthly charge multiplied by 25%. The 25% amount will
be increased in succeeding years as follows: RY3-50%. RY4-75%, RY5-100%.
2. Charges For Services
--------------------
i. Special Services at Stipulated Rates
------------------------------------
To better reflect the economics of the services provided, the charges
for high-potential proof tests and for insulating fuel ("dielectric fluid")
tests performed by the Company at a customer's request will be increased,
effective April 1, 1997,** as follows: (a) The charge for making the first high
potential proof test will be $400 for up to two hours plus $200 for each
additional hour or portion thereof. The charge for each additional test
immediately following the first test will be $100; (b) The charge for taking and
testing a sample of dielectric fluid, when the test is incidental to Company
work at the premises, will be $65 per sample. The charge will be $270 for the
first sample taken by the Company when the test is not incidental to Company
work at the premises, and $65 for each additional sample taken by the Company at
the same time. There will be a $65 charge for testing each customer-obtained
sample.
ii. Special Services at Cost
------------------------
To address customers' requests for special metering, which may
increase with increased service options, the Company will be permitted,
effective April 1, 1997, to install, as a special service at cost, customer-
requested metering beyond that which is required to bill the
__________________________
* For customers taking back-up (SC 3), supplementary (SC 10) or buy-back (SC
11) service, the contract demand will be based on the higher of the contract
demand specified in the application for service or on the maximum demand taken
by the customer in any previous month.
** In this Appendix A, the changes to become effective on April 1, 1997, will
become effective on the date the Company's tariffs implementing RY1 of this
settlement agreement become effective.
-2-
customer under the rates and charges of the appropriate service classification.
Where a metering device has remote communications capabilities, the customer
shall furnish and maintain the communications equipment, arrange for the
communications service, and pay ongoing costs associated with the communications
service.
iii. Excess Distribution Facilities
------------------------------
The tariff provision regarding installation of excess distribution
facilities will be modified, effective April 1, 1997, to permit the provision to
be applicable to customer requests for additional facilities.* The tariff
provision will indicate that the Company will provide, at the customer's
expense, distribution facilities in excess of those normally provided by the
Company. The Company will give customers the option to pay the tax and
maintenance charges either in annual charges or in a lump sum on a net present
value basis. Additionally, the application form for construction for excess
distribution facilities will clarify that, after five years, the Company can
withdraw from use only those facilities that are redundant.
iv. Services
--------
By order issued July 16, 1997, the Commission approved tariff
revisions implementing revised charges for certain services. The services
covered included:
~ Theft of Service Investigation
~ Seasonal Turn On/Off
~ Special Meter Reading
~ Multi Dwelling Collection Charges
~ Collection Fees (non-residential only)
~ Dishonored Payments
~ Street Disconnect/Reconnect (non-residential only)
~ Collection Agency Fees (non-residential only)
~ Damaged Meter
Similar filings made during the term of this settlement agreement are not
precluded.
v. Residential Late Payment Charge
-------------------------------
A residential late payment charge for electric, gas and steam service
will become effective in RY1 following Commission approval of this settlement
agreement. The Company and Staff shall agree on an implementation plan that
provides for advance notice to customers of the institution of the charge in the
applicable service tariffs and for waiver of the first charge imposed on
customers. Electric late payment charge revenues will be used to offset rate
adjustments and accounting deferrals otherwise prescribed by Section II.21
(Residential Time-of-Use Rates).
_________________________
* The existing tariff language limits the provision to distribution
facilities in excess of those normally provided by the Company "for the purpose
of supplying equipment the operation of which involves inrush currents above the
values otherwise allowed by the Company, or for the purpose of providing a
service line in addition to that otherwise provided for supply to the Customer's
premises."
-3-
vi. Incidental Environmental Remediation Work
-----------------------------------------
Irrespective of other limitations prescribed for the Company by this
agreement including limitations on "behind the meter" services, Con Edison will
be permitted to perform and be reimbursed at cost for incidental environmental
remediation work on customer premises associated with Con Edison's performance
of its T&D service obligations. Company employees sent to a customer's premises
to perform work in furtherance of the Company's utility operations who identify
the area of the premises where work must be performed as potentially
environmentally unsafe as a Company workplace would explain to the customer that
OSHA imposes on Con Edison a safe-workplace requirement and that the customer
has the obligation to prove that the area is safe or to make the area safe. The
Company would inform the customer that many qualified contractors could perform
the necessary environmental remediation work or, where the work is of an
incidental nature that the Company would perform it, that the customer could
choose to have the Company's employees perform the work. The Company will seek
to perform such work with the customer's consent.
3. Real-Time Pricing Pilot Program
-------------------------------
The Company has had an experimental real-time pricing ("RTP") program since
1992.* The Company will institute a pilot RTP program. The program will
provide customers with energy prices that vary by hour based on the Company's
day-ahead forecasts of marginal fuel costs. This program is expected to help
participants begin to adapt to a competitive generation market. Up to 50
customers served under time-of -day rates in SC 4 or SC 9, plus any customers
voluntarily transferring from the experimental RTP program in effect as of the
date of this settlement agreement, will be eligible for service in this pilot
program.
4. Rider J Business Incentive Rate (BIR)
-------------------------------------
Changes are being made to the Business Incentive Rate (Rider J) to improve
the effectiveness of the tariff as a marketing tool to prospective business
applications. No material substantive change is intended. The following
changes, effective April 1, 1997, would be made:
. customers who qualify for the Rider because they receive both the
comprehensive package of economic benefits and real property tax incentives
or benefits will, for comprehensive packages negotiated after March 31,
1997, be considered to be eligible based solely on the "comprehensive
package" criterion (and not "as of right") but the allocation will,
nevertheless, continue to be allocated per Rider J (A)(2)(b).
. governmental agencies will be permitted to designate loads
eligible for the Rider and to adjust the load levels; the dates previously
governing new and vacant premises were deleted; and the minimum aggregate
demand provision for vacant premises was deleted.
. the Rider will explicitly state that it is utilized for job
attraction in addition to job retention, that separately metered
residential usage does not affect the rider's applicability; that, for "as
of right" applications, applications must be submitted within
_____________________
* The current program termination date was extended until December 31, 1997
by Commission order dated December 23, 1996 (Case 96-E-0837).
-4-
30 days of applying for the property tax or similar qualifying governmental
incentive but service need not be taken immediately; that the distribution
facilities cost test does not double count Rider J reductions.
. the second sentence of the first unnumbered paragraph after
Section (A)(1)(b) of Rider J, which states that certain customers are
ineligible for Rider J, will be deleted.
In addition, the Company will increase the total allocation of BIR power by
65 megawatts over the maximum amount already reflected in Rider J. Revenue
shortfalls from the first 20 megawatts of this 65 megawatt increment will not be
recovered. Of this increment, 50 megawatts will be allocated to the
"comprehensive" program. Rate plan revenue shortfalls resulting from BIR
allocations in excess of 20 megawatts out of this 65 megawatt increment will be
deferred and recovered, either in the RY 3 and RY 5 rate changes prescribed by
Section II.11 or in RY 6. Allocation to businesses reflecting new electric
loads and new jobs would be assumed not to result in revenue shortfalls. BIR
allocations made in Westchester County and New York City from this increment
will be assumed to follow program experience.
5. Other Items
-----------
1. The wording relating to installation of demand meters based on kilowatt-hour
usage, for Service Classification Nos. 2 and 12, will be clarified effective
April 1, 1997, to reflect the longstanding administration of the provisions
(Leaf Nos. 213 and 316).
2. On Leaf No. 21, a cross-reference to another tariff leaf will be revised
effective April 1, 1997, to state the correct page reference.
-5-
APPENDIX B
APPENDIX B
Items and Expense Levels* Above Which Will Be Included In The
System Benefits Charge (SBC)
----------------------------
(Thousands of Dollars)
Expense Levels
----------------------------------------
Year DSM** R&D Low Income
- ------ ------- ------ ------------
1997 $48,400 $7,700 $1,800
1998 $15,000 $7,700 $2,100
1999 $ 6,000 $7,700 $2,100
2000 $ 6,000 $7,700 $2,100
2001 $ 6,000 $7,700 $2,100
______________________
* Approximates average of one mill/kwhr through 10/99.
** Includes curtailable electric service.
APPENDIX C
APPENDIX C
SUPPLEMENTAL TARIFF FILINGS
1. Modified High Tension
---------------------
Customers are presently permitted to take high-tension service through
non-standard high-tension service installations, including non-standard
installations resulting from the purchase of Company equipment. This practice,
and the tariff provisions that supported it by allowing customers who own only
transforming equipment and not switchgear to be treated as high-tension
customers, should be withdrawn. The service, dubbed "modified high tension,"
which was established as an early economic development program, is no longer
necessary given the other economic development programs now available. In
addition, modified high-tension rates are not cost justified. Customers with
non-standard installations will continue to be billed at high tension rates, but
no new customers will be permitted to take high tension service except through
standard high-tension service installations. Customers that have modified high-
tension applications or a documented dispute pending as of October 1996, and
complete requirements for the service prior to June 30, 1998 will be billed at
the high tension rate. Customers that have not resolved their applications
(i.e., entered into a purchase and/or maintenance agreement) with Con Edison by
----
June 30, 1998 will have the option to file a customer complaint with the Public
Service Commission by that date. In such event, requirements for modified high
tension service must be satisfied by the customer by a date certain specified by
the Commission or its designee in a final unappealable decision or order
resolving the customer complaint.
2. DC Service
----------
The Company currently provides non-standard DC service to about 5,000
customers, primarily for operating elevator motors, pumps and fire alarms. Since
Con Edison's system is adequate to provide equivalent AC service for the entire
DC load, DC customers should pay the total cost associated with Con Edison's
continued operation of the DC system.
The unit cost of DC service is much greater than the unit cost of AC
service because the DC system is much more lightly loaded than the AC system.
Moreover, the DC system is old and, in general, requires additional maintenance
and has a higher than average burnout rate. The Company is proposing to charge
DC customers, all of whom also take AC service, for the costs incurred to serve
them in order to encourage customers to convert to modern AC service and
eliminate the subsidy provided by AC service.
The majority of customers taking DC service are located in Manhattan, with
a few DC customers located in Brooklyn. On average, for customers taking DC
service, the DC service represents only about 2 percent of the customers' total
AC and DC loads. This means that increases in the cost of DC service would not
generally have a major impact on DC customers' total electric charges.
The surcharge being proposed is based on the embedded cost of providing DC
service. It would have two components: an incremental energy charge and a
customer charge that would vary by service classification. Based on costs, the
incremental energy charge would be 10 cents per kWhr and the incremental
customer charge would be $9 per month for non-demand-billed customers and for
unmetered DC fire alarms (Rider D) and $340 per month for demand-billed
customers. The Company will develop a program to phase in these DC charges
beginning in April 1998, depending on customer impacts.
-2-
APPENDIX D
-3-
APPENDIX D
UNCHANGED FROM 3/12/97 SETTLEMENT
-1-
APPENDIX E
-1-
APPENDIX E
NYPA PASNY NO. 4 PEAK LOAD AMOUNTS
Year MW
- -------------------------------
1998 1727
1999 1766
2000 1800
2001 1847
2002 1885
2003 1938
2004 1974
2005 2013
2006 2047
2007 2080
2008 2112
2009 2144
2010 2178
-1-
APPENDIX F
APPENDIX F
FUEL TARGETS
I. The fuel targets for RY1 will be based on the updated PROMOD data base
filed by Con Edison on November 15, 1996, with the following changes:
a) Reduce NYC DRA requirement from 80 to 70%
b) Delete must-run requirements for Roseton and Bowline units (on both
the UBAS and UAPR records)
c) Add corrected capacity & energy to Peekskill (PEEKSK2) - TCAP and TENG
records
d) Add corrected capacity & energy to O&R sales (OR SA WD) - TCAP and
TENG records
e) Change NYSEG (NUGCGNSE31) FOR to 5%
f) Remove extra June entries for (NUGHCHG3)
g) Remove undated (TOWN) records & add TOW2 record for HQFRMO1 & RGEHQO1
h) Remove undated UCAP, UFOR & UHRD records for HILLBN T 1
i) Correct capacity & energy for O&RIPP1 - TCAP and TENG records
j) Change NYSEG NUG (NUGCGNSD27) fuel to ID #140
k) Reduce NMPC Sithe generation (NUGEONMC) to 960 GWh
l) Move NMPC NUG (NUGCGNMF35) to area 4
m) Delete O&R unit (NUGBDORG)
n) Retire Hickling unit 2, Jennison units 1 & 2, and NMPC NUG
(NUGCGNME27)
II. Each month, the PFAC data base will be updated for the following
parameters:
a) the currently existing indexed oil price mechanism, subject to
updating of the "adders" and "factors"and target heat content for Con
Edison's units, including Bowline and Roseton. As to the "adders" and
"factors" and target heat content for units of other NYPP members
(other than Bowline and Roseton), the current approach will continue
to be used, unless Staff and the Company are able to develop updated
data.
b) actual quantity and price of gas used by Con Edison.
c) other utilities' gas prices updated consistent with the Con Edison
price.
d) actual generation and cost for new independent power producers through
the sixth month of commercial operation.
e) actual energy and price of purchases from NUGs and/or sales to LSEs
under the SC No. 11 buy-back tariff, including the actual generation
and cost for purchases from the Westchester RESCO plant.
f) the currently existing method for adjusting the economy/HQ purchase
price target wherein the monthly target price formula will be TP = SPP
x SF + MF, subject to the following:
1. The Starting Purchase Price (SPP) will be the weighted average
price of the two-party and economy purchases for the 12-month
period ending February 1997, increased by $1.0/MWh.
2. The Seasonal Factor (SF), used to adjust the SPP, will reflect the
12-month period ending February 1997.
3. The Market Factor (MF) will be 80% of the difference between the
actual weighted average price of two-party and economy purchases
for each month and the weighted average price in the corresponding
month in the 12-month period ending February 1997.
4. The target price formula will apply in all months in which the
actual weighted average price of two-party and economy purchases is
less than the specified trigger price. The trigger price will be
updated to reflect the changes to be made to the SPP, MF and SF.
When utilized, the trigger mechanism will operate so as to set a
Target Price (TP) equal to the actual weighted average price of the
two-party and economy purchases in a given month in lieu of a
PROMOD derived NYPP purchased power price.
5. An additional monthly update will be performed to adjust the target
to reflect actual purchases of "Basic" energy from Hydro Quebec
(HQ). A portion of the total purchases equal to the amount of HQ
"Basic" energy purchased each month will be priced at the actual HQ
"Basic" energy price in lieu of the target price otherwise set for
economy purchases.
g) actual deliveries and cost of purchases by Con Edison under its
contracts with Selkirk Cogen, Indeck-Corinth, Cogen Technologies and
Brooklyn Navy Yard Cogeneration Partners (BNYCP).
h) Selkirk Cogen fuel cost adjusted to reflect the allocation per the
contract between fuel costs and capacity costs.
i) Indian Point 2 outages or deratings resulting from regulatory
directives -- upon mutual agreement or showing of good cause. Outages
required for fish protection in the Hudson River, including any
outages taken under the amended consent decree in NRDC v. NYSDEC
(Albany County Index No. 6570-91), will be considered outages or
deratings resulting from regulatory directives.
j) other adjustments that are required to reflect the allocation of costs
to base rates as specified in the settlement agreement (Section
II.32.vi).
k) variable NUG costs mitigated prior to RY1 that may be retained by the
Company pursuant to the Case 94-E-0334 settlement agreement, p. 25.
l) actual costs to be recovered from retail access customers and credited
to the fuel adjustment as specified in this settlement agreement
(Section II.32.vi).
m) actual proportion of Con Edison full service customers' load to retail
access customers' load.
III. The Company will continue to utilize PROMOD version 96.20.09 for its fuel
target in RY1. In the absence of an alternate method for establishing an
incentive fuel adjustment clause acceptable to Staff and the Company, the
fuel targets for RY2-RY5 will be updated in accordance with the procedures
set forth in the Case 94-E-0334 settlement agreement, pp. 28-29, using
PROMOD or another acceptable production cost model. The monthly fuel
targets will continue to be calculated using the monthly adjustments set
forth in the preceding paragraph, subject to updating and revisions as
agreed to by Staff and the Company.
APPENDIX G
APPENDIX G
----------
Service Quality and Reliability Incentive
1. Operation of Incentive
The incentive mechanism will be in effect for the term of this agreement.
Con Edison's customer service performance and electric service reliability
will be evaluated first against customer satisfaction with the Company's
performance in four areas: PSC contacts, satisfaction of electric emergency
callers, other callers to the Company's telephone centers, and visitors to the
Company's service centers, as follows:
if PSC contacts are maintained below the "minimum" threshold established
in this agreement, or
if PSC contacts are within the range defined in this agreement as the
"acceptable range" and all three measures of customer satisfaction are at
or above the threshold levels,
then service quality and reliability performance will be deemed fully
satisfactory without reference to other measurements, and no penalties will
accrue.
However,
if PSC contacts are above the "maximum" threshold defined in this
agreement, or (irrespective of the level of PSC contacts) all three
customer satisfaction measures are below the threshold levels, or
if PSC contacts are in the "acceptable range" and any one of the customer
satisfaction measures is below the threshold level,
then a penalty review involving ten internal measures of performance will be
conducted.
The Company's performance in these ten activities must fall within the
standards set in this settlement agreement or be offset as described below to
avoid penalties of up to 35 basis points on common equity (revenue requirement
equivalent). Performance of any customer service activity worse than the
threshold will be offset if the two-year (current year and prior or succeeding
year) average performance of that activity is better than the threshold.
Performance on any electric service reliability measure worse than the threshold
will be offset by performance better than the threshold on any other electric
service reliability measure in the same year or if the two-year (current year
and succeeding year) average performance of the same measure is better than the
penalty level. The threshold standards and penalty levels are stated on the
attachment to this appendix.
Any resulting penalties will be deferred and credited to ratepayers in the
second year following the measurement period in which the penalty would have
been assessable. The measurement periods are the successive twelve-month
periods ending March 31, 1998, 1999,
2000, 2001, and 2002. The threshold ranges and penalty and offset levels
established in this agreement are fixed for the life of this agreement except as
provided in Paragraph 2.ii. below.
2. Exclusions
i. For measurement purposes, results from periods having abnormal operating
conditions will not be considered.
For purposes of customer service activities, abnormal operating conditions
are deemed to occur during any period of emergency, catastrophe, strike,
natural disaster, major storm, or other unusual event affecting more than
ten percent of the customers in an operating area during any month. "Major
storm" is defined as a period of adverse weather resulting in a service
interruption affecting at least ten percent of the customers in an
operating area or causing customers to be without electric service for at
least 24 hours. In the event that normal operating conditions are
interrupted in one of the Company's six geographical areas and the
interruption affects the Company's ability to perform any activity that is
part of this mechanism, the data for the geographic area(s) experiencing
the interruption will be omitted from the calculation for the period of the
interruption and the Company's results in the measured areas will be
measured only by the data from the other geographic area(s). If normal
operating conditions are interrupted in more than three geographical areas
so that monthly results cannot be measured for a given activity, the month
will be eliminated in the calculation of the actual annual average
performance for each activity for the purpose of determining any penalty.
In the event that normal operating conditions are interrupted in more than
three geographical areas for an entire rate year, the activity will be
inapplicable in that year unless Staff and the Company agree on an
alternative method of determining how to allocate any assessable penalties
and offsets under this incentive mechanism.
For the purposes of the electric reliability incentive, the following
incidents shall be excluded from calculations of the reliability
performance measures:
(a) any incident that occurs when the average wet dry bulb ("AWD") is
above 86 degrees calculated as follows: the sum of 70% of the maximum
AWD of the day of the incident, 20% of the maximum AWD of the previous
day, and 10% of the maximum AWD of the day before the previous day.
This formula represents the Company's design criteria for its
transmission and distribution systems;
(b) any major storm as currently measured (more than 10% of the customers
interrupted within a currently defined operating area or customers out
of service for more than 24 hours);
(c) any incident resulting from a catastrophic event beyond the control of
the Company, including but not limited to water main break, plane
crash, or natural disaster;
(d) any incident occurring during a strike;
2
(e) any incident when a problem involving generation or the bulk
transmission system is the key factor in the outage and any event
directly leading to the outage is not under the direct control of the
Company; and
(f) one incident every 5 years selected by the Company that does not
otherwise meet the criteria for an excludable incident.
ii. If changes in Company operations render it impractical to continue to
measure performance in an agreed-upon activity, the measurement method
and/or threshold standard will be revised, an alternative method or
activity selected, or the penalties or offsets associated with the affected
activities spread proportionately among all remaining activities for the
remainder of the period during which the incentive mechanism is operative.
Any such modifications must be mutually agreed upon by Staff and the
Company in writing.
3. Reporting
The Company will prepare an annual report on its performance that will be filed
with the Director of the Consumer Services Division staff. The annual report
will address (a) any changes anticipated to be implemented in the following
measurement period in any activity reflected in this Agreement and (b) a summary
of any significant changes in operations which led to the reported performance
level during the measurement period. These reports are subject to an audit and
review by Staff. The Company will maintain sufficient records to support such
reports.
4. Establishment of performance criteria
The threshold standard for each activity is derived from the standards set in
Cases 90-E-1119, 94-E-0334, and 95-E-0165 as modified herein. The threshold
standards for Electric Reliability, Investigations, Billing Accuracy, New and
Additional Service, Percentage of Calls Answered, and customer satisfaction
surveys are the standards established in the above cited cases. The threshold
standards for Percentage of Meters Read and PSC Contacts are shown in the
Attachment.
5. Performance measurement:
The Company's performance is measured in each activity as follows:
i. "PSC Contacts" is the number of complaints per 100,000 Con Edison customers
received by the Consumer Services Division of the Public Service
Commission. A complaint is a contact by a customer, applicant, or
customer's or applicant's agent that follows a contact with the utility
about the issue of concern as to which the utility, having been given a
reasonable opportunity to address the matter, has not satisfied the
customer. The issue of concern must be one within the utility's
responsibility and control, including an action, practice or conduct of the
utility or its employees, not matters within the responsibility or control
of an alternative service provider. One or more contacts by a rate
consultant raising the same issue as to more than one account, whether such
contacts are made at the same time or different times, shall not be counted
as more than one complaint if the issue
3
is under consideration by the Department or the Commission and no utility
deficiency is found. Contacts by customers about the Shared Meter Law
shall not be complaints if the contact is about the requirements of the
shared meter law and no utility deficiency is found.
ii. "Days to Complete Routine Investigation" is the number of calendar days
to complete investigation of a customer inquiry, received by telephone,
mail, facsimile or in person, that cannot be resolved on the day it is
received. Performance in any month will be measured by the number of
investigations completed within 30 calendar days, when the date of
completion falls within that month, divided by the total number of
investigations completed during the reporting month.
iii. "Call Answer Rate" is the percentage of calls answered by Company Call
Centers between the hours of 9:00 AM and 5:00 PM Monday through Friday
(excluding holidays). The performance rate is the sum of the system-wide
number of calls answered divided by the sum of the system-wide number of
calls offered. Calls offered are calls received by the operating areas'
Automatic Call Distributors. Calls abandoned are calls where the customer
hangs up before the voice response unit ("VRU") responds or when the
customer choses to speak to a representative but hangs up before contact
is made. The number of calls answered is equal to the number of calls
received minus the number of calls abandoned.
iv. "Satisfaction of Callers, Visitors, and Emergency Center Contacts" means
the average of the satisfaction index ratings on the two semi-annual
surveys (second and fourth quarter surveys) of callers, visitors, and
emergency center contacts (electric portion only) conducted by Cambridge
Research or other professional survey organization during each reporting
year.
v. "Days to Complete (Initial Phase)" means, with respect to initial phase
of work orders, the average number of business days from receipt of the
customer's request for an electric non-vault service job by the Energy
Services Department to issuance of a service layout to the customer for
all initial phase jobs completed in the reporting month. The date of
receipt of the customer's request will be the earlier of (1) the date on
the Contractor Work Request Form or (2) the receipt date entered in the
Commercial Operations Reporting System. The date of issuance of the
service layout (Form 2-80) to the customer will be the earlier of (1) the
date shown in the service date confirmation letter issued to the customer
or (2) the completion date recorded in the Commercial Operations
Reporting System.
vi. "Days to Complete (Final Phase)" means, with respect to final phase of
work orders, on all non-vault electric final phase jobs completed in the
reporting month, the average number of business days measured from
receipt of a city certificate or completion of final inspection,
whichever is later, to the date of final inspection displayed on the
"field call sheets," which must be retained until staff has verified the
reported performance level.
vii. "Percentage of Meters Read on Schedule" is determined by dividing the sum
of actual meter readings obtained in the reporting month by the total
number of meters scheduled to be read for all operating areas in the
reporting month, as indicated in the Cycle Meter Reading Statistics
Report. Actual meter readings are readings obtained from meter
4
readers in the field, or through receipt of completed customer "drop
cards" or through phoned-in readings from customers, either directly to a
customer service representative or by message left on a VRU.
viii. "Bill Accuracy" means the number of bills not adjusted as a result of a
Company error in the reporting month divided by the total number of bills
rendered during the reporting month.
ix. "Electric Reliability" means the System Average Interruption Frequency
Index ("SAIFI") and the Customer Average Interruption Duration Index
("CAIDI") for both the radial and network systems. Penalty and offset
levels for electric servic reliability will be applied to each of these
service measures.
5
Attachment
Customer Service and Electric Service Reliability Incentive
(threshold standards and penalty levels)
NEW AND INITIAL SERVICE JOBS METER READING
FINAL PHASE PERCENT READ ON CYCLE
- ----------------------------------------------------------- ------------------------------------------------------------
Performance Basis Points Performance Basis Points
- ----------------------------------------------------------- ------------------------------------------------------------
* 10 days 0.000 **86.9 0.000
- ----------------------------------------------------------- ------------------------------------------------------------
10.0 - 10.9 days -2.08 86.0 - 86.9 -2.08
- ----------------------------------------------------------- ------------------------------------------------------------
= ** 11.0 days -4.17 =* 85.9 -4.17
- ----------------------------------------------------------- ------------------------------------------------------------
INITIAL PHASE TELEPHONE CALLS PERCENT
ANSWERED
- ----------------------------------------------------------- ------------------------------------------------------------
Performance Basis Points Performance Basis Points
- ----------------------------------------------------------- ------------------------------------------------------------
*7.5 days 0.000 **94.9 0.000
- ----------------------------------------------------------- ------------------------------------------------------------
7.5 - 8.3 days -2.08 93.6 - 94.9 -2.08
- ----------------------------------------------------------- ------------------------------------------------------------
=** 8.4 days -4.17 =*93.5 -4.17
- ----------------------------------------------------------- ------------------------------------------------------------
SYSTEM AVERAGE INTERRUPTION FREQUENCY INDEX RADIAL SYSTEMS SYSTEM AVERAGE INTERRUPTION FREQUENCY INDEX NETWORK SYSTEMS
(MINIMUM = 467) (MINIMUM = 11.78)
- ----------------------------------------------------------- ------------------------------------------------------------
Performance Basis Points Performance Basis Points
- ----------------------------------------------------------- ------------------------------------------------------------
* 350 2.5 * 7.54 2.5
- ----------------------------------------------------------- ------------------------------------------------------------
350 - 537 0.000 7.54 -13.55 0.000
- ----------------------------------------------------------- ------------------------------------------------------------
** 537 (115% of minimum) -2.5 ** 13.55 ( 115% of minimum) -2.5
- ----------------------------------------------------------- ------------------------------------------------------------
CUSTOMER AVERAGE INTERRUPTION DURATION INDEX - RADIAL CUSTOMER AVERAGE INTERRUPTION DURATION INDEX - NETWORK
SYSTEMS SYSTEMS
(MINIMUM = 1.58 HOURS) (MINIMUM = 3.05 HOURS)
- ----------------------------------------------------------- ------------------------------------------------------------
Performance Basis Points Performance Basis Points
- ----------------------------------------------------------- ------------------------------------------------------------
*1.18 hours 2.5 *2.27 hours 2.5
- ----------------------------------------------------------- ------------------------------------------------------------
1.18-1.81 hours 0.000 2.27-3.5 hours 0.000
- ----------------------------------------------------------- ------------------------------------------------------------
**1.81 hours (115% of minimum) -2.5 **3.5 hours (115% of minimum) -2.5
- ----------------------------------------------------------- ------------------------------------------------------------
* Less than
** Greater than
BILLING ACCURACY ROUTINE INVESTIGATIONS
% BILLS NOT ADJ. DUE TO CO. ERROR PERCENT COMPLETED WITHIN 30 DAYS
- --------------------------------------------------------- ----------------------------------------------------------
Performance Basis Points Performance Basis Points
- --------------------------------------------------------- ----------------------------------------------------------
**97.2 0.000 **94.9 0.000
- --------------------------------------------------------- ----------------------------------------------------------
95.8 - 97.2 -2.08 93.7 - 94.9 -2.08
- --------------------------------------------------------- ----------------------------------------------------------
=* 95.7% -4.17 =*93.6 -4.17
- --------------------------------------------------------- ----------------------------------------------------------
PSC CONTACTS CUSTOMER SATISFACTION SURVEYS
RATE PER 100,000 CUSTOMERS INDEX RATING (THRESHOLD LEVEL)
- -------------------------------------------------------- ----------------------------------------------------------
Minimum Threshold 8.0 Emergency Calls (electric only) 80.5
- -------------------------------------------------------- ----------------------------------------------------------
Acceptable Range 8.0 - 8.99 Telephone Center Calls 83.5
(non-emergency)
- -------------------------------------------------------- ----------------------------------------------------------
Maximum Threshold 8.99 Service Center Visitors 84.2
- -------------------------------------------------------- ----------------------------------------------------------
* Less than
** Greater than
SUMMARY
New and Additional Service
Initial Phase -4.17
Final Phase -4.17
Calls Answered -4.17
Bill Accuracy -4.17
Investigations -4.17
Meter Reading -4.17
Interruption Frequency Index
Radial +2.5/-2.5
Network +2.5/-2.5
Duration Index
Radial +2.5/-2.5
Network +2.5/-2.5
APPENDIX H
Corporate Structure
PROPOSED CORPORATE STRUCTURE
------------
HoldCo, Inc.
------------
------------- ---------- ------------------ ------------------
Con Edison Esco, Inc. Energy Supply, Inc New Ventures, Inc.
(RegCo, Inc.)
------------- ---------- ------------------ ------------------
APPENDIX I
Appendix I
ACCOUNTING FOR AFFILIATE TRANSACTIONS
1.0 PURPOSE -- To provide accounting guidelines for the transfer of assets and
-------
employees and the provision of goods and services among the Holding Company
and its affiliates.
2.0 APPLICATION - . Corporate Accounting
-----------
Accounting Research and
Procedures ("ARP")
Accounts Payable/Accounts
Receivable ("AP/AR")
General Accounts ("GA")
. Treasury
. Real Estate
. Employee Relations
. Payroll
. All Other Applicable
Organizations
3.0 PROCEDURES -
----------
3.1 Background
----------
On October 1, 1996, in the Competitive Opportunities proceeding,
Con Edison submitted to the New York State Public Service Commission
("PSC") a petition which set forth a plan for corporate restructuring.
Under this plan, Con Edison's regulated and unregulated businesses
would be conducted through separate corporate entities which would be
direct or indirect subsidiaries of a holding company. The holding
company ("HoldCo") and its subsidiaries, including the regulated
company ("RegCo") are considered affiliates for purposes of this
procedure. The procedures outlined herein are designed to properly
allocate costs among the HoldCo, the RegCo and unregulated affiliates.
3.2 Transfer of Assets and Employees
---------------------------------
a. Transfer of Assets
------------------
The transition from the existing corporate structure to a
holding company structure will require the transfer of assets
from the RegCo to one or more of the affiliates.
Transfers of assets from the RegCo to an affiliate (other
than generating stations whose value will be determined in the
Section 70 proceeding) will be recorded at the higher of net book
value or fair market
value. Transfers of assets from an affiliate to the RegCo will be
recorded on a basis not to exceed fair market value.
The fair market value of an asset will be determined by one
of the following methods: (1) appraisals from qualified
independent appraisers; or (2) bid and ask prices as published in
newspapers or trade journals; or (3) on any other basis
acceptable to both the RegCo and PSC Staff.
In order to ease administrative burdens for immaterial
transactions, asset transfers may be recorded at net book value
if this valuation is more easily determined than fair market
value. In this case, immateriality is defined as an asset having
an estimated fair market value or a net book value of $100,000 or
less.
b. Transfer of Employees
---------------------
For employees transferred from the RegCo to an unregulated
subsidiary, the unregulated subsidiary will compensate the RegCo
on a one-time basis, with an amount equal to 25% of the
employee's prior year's annual salary except that there will be
no compensation (i) for employees transferred to an unregulated
subsidiary within six months of the date the HoldCo becomes the
parent of the RegCo or the unregulated subsidiary to which the
employee is transferred is formed, whichever is later; (ii) for
the transfer of employees covered by a collective bargaining
agreement; or (iii) where the employee's transfer is attributable
to the transfer or reduction of a RegCo function or major asset
(e.g., a generating station).
3.3 Provision of Goods and Services
-------------------------------
a. Corporate operations under the new holding company structure will
require the provision of goods and services from the RegCo and the
HoldCo to one or more of the affiliates. The RegCo and the HoldCo
will employ cost allocation procedures to ensure that all costs
incurred on an affiliate's behalf are appropriately identified and
assigned to the affiliate on a fully-loaded cost basis.
b. The cost allocations set forth in this procedure have been
developed utilizing guidelines established by the (1) Securities
and Exchange Commission's Staff Accounting Bulletin No. 55,
"Allocation of Expenses and Related Disclosure in Financial
Statements of Subsidiaries, Divisions or Lesser Business Components
of Another Entity"; and (2) Cost Accounting Standards Board's
Standard 403, "Allocation of Home Office Expenses to Segments,"
Standard 410, "Allocation of Business Unit General and
Administrative Expenses to Final Cost Objectives," and Standard
418, "Allocation of Direct and Indirect Costs."
c. Expenses incurred by the RegCo and the HoldCo in support of an
affiliate will be allocated directly to that affiliate to the
maximum extent practicable.
2
Expenses that are not directly allocable will be accumulated into
homogenous cost categories and allocated on a cost causative basis.
If cost drivers cannot be determined, then allocations will be
based upon reasonable and related proportional relationships (i.e.,
capitalization, number of employees, revenues, etc.).
d. The unregulated affiliates may provide services to the HoldCo and
the RegCo. Any management, construction, engineering or similar
contract between the RegCo and an affiliate and any contract for
the purchase by the RegCo from an affiliate of electric energy or
gas will be governed by PSL (S)110, subject to any applicable FERC
requirements. All other goods and services will be provided to the
RegCo at a price that will not be greater than fair market value,
determined through reference within a specified market. In the
absence of a specified market, fair market value may be determined,
for example, by using independent qualified appraisers as described
in paragraph 3.2a.
3.4 Costs Incurred by the RegCo on Behalf of Affiliates
----------------------------------------------------
a. Direct Cost Allocations
-----------------------
1. Salaries and labor related expenses incurred by the RegCo in
support of affiliate activities will be directly assigned
and billed to affiliates each month based on appropriate,
fully costed allocation methods. RegCo corporate services
(such as legal and accounting) will be billed on a fully-
loaded cost basis while other RegCo services (such as
engineering) will be billed on the higher of a fully-loaded
cost basis plus a 10% additional charge or the price the
RegCo charged a third party for such employee's services.
(See Exhibit A.)
2. A cost allocation methodology has been developed for the
following categories of RegCo personnel:
. Category I
----------
Category I includes RegCo employees who serve as
directors or officers of affiliates. Category I
salaries and labor related expenses are charged to the
affiliate based on an estimate of the percentage of
time expected to be devoted to affiliate activities
during the reporting period. (See Exhibit B.) This
percentage will be reviewed and updated by ARP
annually, or more frequently as changing circumstances
warrant.
. Category II
-----------
Category II includes all other RegCo employees who
provide services (both corporate and project specific)
to
3
affiliates. Category II salaries and labor related
expenses are charged to the affiliate based on the
number of hours devoted to affiliate activities as
reported on the Time Record Form. (See Exhibits C, D, E
and F.)
b. Cost Causative Allocations
--------------------------
1. Administrative support services incurred by the RegCo
on behalf of the affiliates and which cannot be
allocated directly will be billed to the affiliates
each month based on appropriate cost causative
allocations. These administrative support services may
include, but are not limited to transactions processed
by the following RegCo organizations: AP/AR, Employee
Relations, Payroll, and Treasury.
2. The costs associated with these administrative support
services will be allocated to the affiliates, as
appropriate, based on one or a combination of the
following measures of cost causation:
. the number of affiliate transactions processed in
relation to the total number of transactions processed;
. the number of hours spent processing affiliate
transactions in relation to the number of hours spent
processing all transactions; or
. the value of affiliate transactions processed in relation
to the value of all transactions processed.
c. Proportional and Other Allocations
----------------------------------
1. The RegCo will bill affiliates for a proportionate share of
corporate governance costs related to Board of Trustees and
committee meetings, financial communications and investor
relations, and public affairs. These costs will be billed
to the affiliates based on the ratio of the affiliates'
assets to total consolidated assets. This ratio will be
updated each quarter at March 31, June 30, September 30, and
December 31.
2. Affiliate employees may have the opportunity to participate
in the benefit programs of the RegCo. These programs may
include medical and hospitalization coverage as well as
pension and other post retirement benefits. The RegCo will
be reimbursed by the affiliates for costs associated with
these benefits.
4
3. The RegCo, the HoldCo, and the unregulated affiliates may be
covered by common property/casualty and other business
insurance policies. The costs of such policies will be
allocated among the RegCo, the HoldCo and the unregulated
affiliates in accordance with the use or occupancy of such
property.
3.5 Costs Incurred by the HoldCo on Behalf of Affiliates
-----------------------------------------------------
a. Costs incurred by the HoldCo that are specifically attributable
to the affiliates will be charged to the affiliates by direct
cost allocations (as described in Section 3.4a) or cost causative
allocations (as described in Section 3.4b).
b. Costs incurred by the HoldCo that are of a general corporate
nature, such as organization costs and development stage
activities, will be charged to the affiliates by proportional
cost allocations (as described in Section 3.4c).
4.0 ADVICE: The Manager, ARP, will advise on this
-------
procedure.
5.0 EXHIBITS
--------
Exhibit A-Allocation of Expenses Between the
RegCo and Affiliates
Exhibit B-Allocation of Salaries and Other
Expenses (Category I Employees)
Exhibit C-Time Record Form-Corporate Nature
(Category II Employees)
Exhibit D-Allocation of Salaries and Other
Expenses-Corporate Nature
(Category II Employees)
Exhibit E-Time Record Form-Project Basis
(Category II Employees)
Exhibit F-Allocation of Salaries and Other
Expenses-Project Basis
(Category II Employees)
5
EXHIBIT A
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
ALLOCATION OF EXPENSES BETWEEN THE REGCO AND
---------------------------------------------
AFFILIATES
----------
Description of Expense Basis for Allocation
- ---------------------- --------------------
1) Compensation
A) Salaries Category I Employees: Percentage of time
devoted to affiliate operations.
Category II Employees: Number of hours
devoted to affiliate operations.
B) Other Compensation Includes deferred compensation and
imputed income and reimbursement for
usage of Company cars.
Allocated on same basis as salaries.
C) Support Services Allocated on same basis as salaries of
individuals for whom the support
personnel work.
D) Fringe Benefits RegCo fringe benefit rate to be applied
to all straight-time labor.
E) Administrative and General RegCo Administrative and General rate to
Overhead be applied to all straight time labor.
2) Employee Expenses
A) Office Space Charged at the market rate per square
foot, including utilities and building
service maintenance (as provided by the
Real Estate Department); multiplied by
the space utilized (as provided by
Facilities Management).
B) Office Supplies & Expenses Overhead percentage to be applied
(excluding expenses directly to total salary and other compensation
assignable to the affiliate (based on RegCo ratio of Office
or included in the office Supplies and Expenses-PSC Account 921,
space charge) less Building Service costs and
Trustee and Committee Meeting Fees
to Administrative and General
Salaries).
3) Corporate Governance Expenses Ratio of affiliate assets to total
consolidated assets.
4) Other Expenses Directly Assignable These costs will be charged to an
to Affiliates affiliate account and paid directly
by the affiliate.
2
EXHIBIT B
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
ALLOCATION OF SALARIES AND OTHER EXPENSES
-----------------------------------------
CATEGORY I EMPLOYEES
--------------------
NAME: JOANNE RILEY CATEGORY: DIRECTOR
(I)
ANNIVERSARY: 7/14/9x
COMPENSATION
SALARY, INCLUDING DEFERRED COMPENSATION $20,000
SALARY OF SUPPORT PERSONNEL (A) 5,000
OTHER COMPENSATION 250
-----------
TOTAL SALARY & OTHER COMPENSATION $25,250
FRINGE BENEFITS AND A&G OVERHEAD
(41.67% x TOTAL SALARY & OTHER COMPENSATION) 10,522
-----------
TOTAL SALARY, COMPENSATION & BENEFITS $35,772
OFFICE SUPPLIES & EXPENSES 4,641
OFFICE SPACE ALLOCATIONS
(958 X SQ.FT. x $27 PER SQ. FT./12) 2,156
-----------
TOTAL - FULLY-LOADED COST $42,569
AFFILIATE ALLOCATION (TOTAL x 3%) $ 1,277
SUPPORT SERVICES:
(A) NAME ANNIVERSARY POSITION SALARY
T. CARR 8/1/9x SECRETARY $ 5,000
EXHIBIT C
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
TIME RECORD FORM
----------------
CATEGORY II EMPLOYEES
---------------------
(INCLUDING SUPPORT SERVICES)
----------------------------
Name: Joyce Forman Organization: ARP
------------ ---
Employee Number: 75000 Department: Corporate Accounting
----- --------------------
Roll Number: 93804
-----
Date Service Time
--------------------
Performed Description of Activity Hours Quarters
- ----------- ----------------------- ----- --------
1/1/9x to 1/31/9x Prepare & update Workpapers, journal
- --------------------- ------------------------------------ ----- --------
entries, ledgers, financial statements; 40 0
- --------------------- --------------------------------------- ----- --------
consult affiliate personnel
- --------------------- --------------------------------------- ----- --------
Total No. of Hours 40 0
Support Services
----------------
Name: None
-----------------------------------------
Position: -----------------------------------------
Employee Number: -----------------------------------------
Roll Number: -----------------------------------------
Date Service Time
------------------
Performed Description of Activity Hours Quarters
--------- ----------------------- ----- --------
- ---------- ----------------------------- ----- --------
- ---------- ----------------------------- ----- --------
- ---------- ----------------------------- ----- --------
- ---------- ----------------------------- ----- --------
Total No. of Hours ----- --------
Prepared By: ______________________
Approved By: ______________________
EXHIBIT D
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
ALLOCATION OF SALARIES AND OTHER EXPENSES
-----------------------------------------
CATEGORY II EMPLOYEES
---------------------
NAME: JOYCE FORMAN CATEGORY: OTHER (II)
ANNIVERSARY: 2/1/9x
COMPENSATION
SALARY $ 8,000
SALARY OF SUPPORT PERSONNEL (A) 0
OTHER COMPENSATION 200
-------
TOTAL SALARY & OTHER COMPENSATION $ 8,200
FRINGE BENEFITS AND A&G OVERHEAD
(41.67% x TOTAL SALARY & OTHER COMPENSATION)
3,417
-------
TOTAL SALARY, COMPENSATION & BENEFITS $11,617
OFFICE SUPPLIES & EXPENSES 109
OFFICE SPACE ALLOCATIONS
(225x SQ.FT. x $27 PER SQ. FT./12) 506
-------
TOTAL - FULLY-LOADED COST $12,232
AFFILIATE ALLOCATION (TOTAL x 40/174 hrs) $ 2,812
SUPPORT SERVICES:
(A) NAME ANNIVERSARY POSITION SALARY
_______ ____________ ________ ________
_______ ____________ ________ ________
_______ ____________ ________ ________
_______ ____________ ________ ________
EXHIBIT E
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
TIME RECORD FORM
----------------
CATEGORY II EMPLOYEES
---------------------
(INCLUDING SUPPORT SERVICES)
----------------------------
Name: John King Organization: Central Operations
--------- ------------------
Employee Number: 76000 Department: Engineering
----- -----------
Roll Number: 00000
-----
Date Service Time
-----------------
Performed Description of Activity Hours Quarters
--------- ----------------------- ----- --------
1/1/9x to 1/31/9x Prepare Engineering specifications at 40 0
- ----------------- ------------------------------------- ----- --------
_________________ the request of affiliate X for job XYZ _____ ________
--------------------------------------
_________________ _____ ________
Total No. of Hours 40 0
Support Services
----------------
Name: None
-----------------------------------------
Position: _________________________________________
Employee Number: _________________________________________
Roll Number: _________________________________________
Date Service Time
--------------------
Performed Description of Activity Hours Quarters
- ---------- ----------------------- ----- --------
__________ ___________________________ _____ ________
__________ ___________________________ _____ ________
__________ ___________________________ _____ ________
__________ ___________________________ _____ ________
Total No. of Hours _____ ________
Prepared By: ______________________
Approved By: ______________________
EXHIBIT F
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
---------------------------------------------
ALLOCATION OF SALARIES AND OTHER EXPENSES
-----------------------------------------
CATEGORY II EMPLOYEES
---------------------
NAME: John King CATEGORY: OTHER (II)
ANNIVERSARY: 2/1/9x
COMPENSATION
SALARY $ 8,000
SALARY OF SUPPORT PERSONNEL (A) 0
OTHER COMPENSATION 200
-------
TOTAL SALARY & OTHER COMPENSATION $ 8,200
FRINGE BENEFITS AND A&G OVERHEAD
(41.67% x TOTAL SALARY & OTHER COMPENSATION) 3,417
-------
TOTAL SALARY, COMPENSATION & BENEFITS $11,617
OFFICE SUPPLIES & EXPENSES 109
OFFICE SPACE ALLOCATIONS
(225x SQ.FT. x $27 PER SQ. FT./12) 506
-------
TOTAL - FULLY-LOADED COST $12,232
5% Add-on 612
Total $12,844
AFFILIATE ALLOCATION (TOTAL x 40/174 hrs) $ 2,953
SUPPORT SERVICES:
(A) NAME ANNIVERSARY POSITION SALARY
_______ ___________ ________ _________
_______ ___________ ________ _________
_______ ___________ ________ _________
_______ ___________ ________ _________
APPENDIX J
APPENDIX J
----------
Privileged Information
----------------------
Nothing in this Agreement requires or will be construed to require the
RegCo, the HoldCo or an unregulated subsidiary to provide Staff access to, or to
make disclosure to Staff, of any information as to which the entity in
possession of such information would be entitled to assert a legal privilege,
such as the attorney-client privilege, if, either (i) the privilege could be
asserted against Staff pursuant to CPLR 4503, CPLR 3101 (or any other applicable
statute or constitution) in a judicial proceeding, action, trial or hearing, or
(ii) providing Staff access to or making disclosure of such information to Staff
would impair in any manner the right of the entity in possession of such
information to assert such privilege against third parties.
If Staff seeks access to or disclosure of any information that either the
RegCo, the HoldCo or an unregulated subsidiary believe is exempt from access or
disclosure under the terms of this Agreement, counsel for the entity asserting
such privilege will so inform Staff, detailing, to the extent practical without
destroying the privilege, the reasons why the privilege is being claimed in
sufficient detail to permit Staff to determine whether or not to dispute the
claim of privilege. If Staff decides to dispute such claim, it may request that
an assigned administrative law judge conduct an in camera review of such
information to determine whether it is in fact exempt from access or disclosure
under the terms of this section, which disclosure shall not be deemed waiver of
the privilege. Such determination will be subject to review by the Commission
and, if necessary, judicial review.
Confidentiality of Records
--------------------------
The HoldCo and the RegCo shall designate as confidential any non-public
information to or of which Staff requests access or disclosure, and which the
HoldCo, the RegCo or an unregulated subsidiary believe is entitled to be treated
as a trade secret. Any party will have the right to contest the trade secret
nature of such designated confidential information.
Each member of Staff who is accorded access to, or to whom disclosure is
made of, designated confidential portions of books and records, financial
information, contracts, minutes, memoranda, business plans, and the like, will
agree to maintain such information as confidential, other than information that
previously has been made public. For the purposes of this Agreement,
"information that previously has been made public" will mean information that
either (i) has been disclosed by either the HoldCo, the RegCo or any unregulated
subsidiary in financial or other literature to the financial community or to the
public at large, (ii) appears in documents contained in the public files of a
local, state or federal agency, body or court and which has not been accorded
trade secret protection, or (iii) information that otherwise is in the public
domain.
In the event that Staff receives any information designated as confidential
pursuant to the procedures described in this settlement agreement and desires to
use such information in a litigated proceeding before the Commission, Staff will
first notify counsel for the RegCo and the HoldCo and the unregulated
subsidiary, if applicable, of the nature of such information as well as its
intention to use such information in such proceeding and afford the RegCo, the
unregulated
subsidiary and/or the HoldCo the opportunity to apply to the administrative law
judge presiding over such proceeding within ten (10) business days for a ruling
designed to maintain the confidentiality of such information under Part 6-1 of
the Commission's Rules of Procedure (16 NYCRR). Staff and any other party may
object to any such application on the grounds that such information is not
entitled to be treated as a trade secret under Part 6-1.
In the event that a member of Staff receives any information designated as
confidential pursuant to the procedures described in this settlement agreement
and desires to use or refer to such information in a memorandum or other
document which may become an "agency record" as that term is defined in the New
York Freedom of Information Law, Staff first shall notify the Company Liaisons
of the nature of such information as well as its intended use, and afford the
RegCo, the unregulated subsidiary, if applicable, and/or the HoldCo the
opportunity to apply to the Commission under Part 6-1 of the Commission's Rules
of Procedure within ten (10) business days for a protective order designed to
maintain the confidentiality of such information. Staff and any other party may
object to any such application on the grounds that such information is not
entitled to be treated as a trade secret under Part 6-1.
2
APPENDIX K
APPENDIX K
Con Edison
S.C. No. 11 Buy-Back Rates
Applicable to Transmission Level Sellers
By Month and Period
($/MWh)
ON PEAK SHOULDER OFF-PEAK
Apr-98 25.54 - 18.69
May-98 25.58 - 18.95
June-98 27.20 23.18 20.32
Jul-98 31.19 29.05 19.76
Aug-98 33.09 28.72 19.92
Sep-98 28.13 26.40 18.72
Oct-98 23.38 - 18.34
Nov-98 27.81 - 22.78
Dec-98 35.19 - 26.51
Jan-99 36.73 - 28.76
Feb-99 32.92 - 25.89
Mar-99 32.07 - 24.33
EXHIBIT K-2
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
- --------------------------------------------------------------------
Case 96-E-0900 - In the Matter of Orange and Rockland
Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to
Opinion No. 96-12.
-------------------------------------------------------------------
Electric Rate and
Restructuring Plan
Dated: November 6, 1997
Albany, New York
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
- ---------------------------------------------------------
Case 96-E-0900 - In the Matter of Orange and Rockland
Utilities, Inc.'s Plans for Electric Rate/Restructuring
Pursuant to Opinion No. 96-12.
- ---------------------------------------------------------
Electric Rate and
Restructuring Plan
Overview of O&R Plan
This Electric Rate and Restructuring Plan (the "Plan") has been developed
with three major goals in mind:
. Improve customer service and customer choice while ameliorating current
price levels and introducing competition;
. Promote jobs and economic development in the region by significantly
reducing industrial rates immediately;
. Continue steps taken in prior years to reduce rates for all other
customers by further reducing their rates in 1997 and 1998 (with first
claim going to non-Large Industrial Customers for benefits produced by the
customers' share of net gains on the disposition of generating assets/1/),
in order to reduce the impact of the cost of electricity on the budgets of
all customers other than Large Industrial customers.
The signatories to this Plan view the accomplishment of these goals as
essential to the future welfare of the region. Integral to this Plan is the
principle that these economic goals can be pursued successfully while
maintaining reliability, quality customer service and protection; maintaining
essential environmental programs; and seeking ways to reduce the effects of
energy prices on low-income customers.
Upon Commission approval, this Plan will further reduce rates for all O&R
ratepayers. In the past two years, residential ratepayers have already
experienced rate decreases, on average, of 4%. Commercial and industrial
classes have experienced decreases between 4% and 14%.
Rate Plan
- -----------------
/1/ Hereinafter referred to as "Generating Assets" which include all units at
Lovett and Bowline Generating stations, the Company's hydro-electric
facilities and gas turbines.
. The Plan covers a four-year period.
. Large Industrial Customers have the opportunity to realize an average
electric price of six cents per kWh beginning with the effective date of
new rates. The Peak Activated Rate will be made optional.
. The rates of all other customers will be reduced in the first year by
1.09% and by another 1.0% effective one year later. Gross Receipts Tax
Reform will result in additional savings./2/ Additional benefits to all
other customers, up to the equivalent of an overall 5% rate reduction, are
possible should sufficient net gains on the sale of Generating Assets be
realized.
. The cumulative rate reductions over the four-year period are
approximately $32.4 million. Additional opportunities for savings for all
customers will become available with the expansion of the PowerPick(TM)
program and the Gross Receipts Tax Reform./3/
. For each of the four rate years that this Plan is in effect, earnings on
regulated electric operations in excess of 11.4% in New York will be shared
with 75% being used to offset Commission-approved deferrals or otherwise
inure to the benefit of O&R customers; and 25% being retained by O&R's
shareholders.
. A flexible rate tariff will be designed and filed with the Commission.
It will provide for the possibility of rate discounts for commercial and
industrial customers who are currently taking service and who are at
serious risk of relocating or closing their facilities.
Transition to Retail Access
. Full retail access to a competitive energy and capacity market will be
available on May 1, 1999 for all customers.
. The existing PowerPick(TM) program (choice of purchasing energy from
alternate suppliers) will be expanded to all customers on May 1, 1998. For
Large Industrial Customers, the PowerPick(TM) program will be expanded at
the time of Commission approval of the Plan.
- ------------------
/2/ Additional savings of about 1% for all customers including Large Industrial
Customers are expected from the recent passage of Gross Receipts Tax
Reform.
/3/ The $32.4 million does not include: 1) an opportunity for Large Industrial
Customers to realize additional savings of about 3 1/2% in annual bill
reductions from the expansion of the PowerPick(TM) program, 2) an
opportunity for all customers other than Large Industrial Customers to
realize benefits over the term of the Plan of about 2% in annual bill
reductions beginning with the expansion of PowerPick(TM) in May 1998, and
3) the Gross Receipts Tax Reform. The PowerPick(TM) Program is intended to
refer to the "Retail Access Pilot Program" as described in Appendix D to
the Settlement approved by the Commission by Order Concerning Settlement
Agreements issued May 3, 1996, in Cases 95-E-0491, 93-M-0849 and 93-G-0779.
. O&R will file proposed unbundled rates for electric service one month
after Commission approval of the Plan.
Divestiture and Corporate Structure
. Upon Commission approval of the Plan, the Company will immediately
commence a process to auction all of its electric Generating Assets. The
Company will seek to restructure itself as a Registered Holding company to
create structurally separate subsidiaries such as one or more unregulated
Energy Services companies ("ESCOs"), and a regulated Transmission and
Distribution company or Delivery company.
. Upon commencement of retail access, the Delivery company will provide
basic energy services, including energy, capacity, ancillary services,
metering and billing within the service territory.
. Unless and until relieved of the obligation, the Delivery company will
be the Provider of Last Resort for all customers choosing to continue to
purchase "packaged" energy services from it, for those customers who do not
choose an energy provider, and for those customers who purchase from other
providers but who later return as customers purchasing power from the
Delivery company. The parties have agreed to study transferring this
obligation to the competitive market and will present recommendations to
the Commission by May 1, 1999.
. After issuance of the Staff report on metering issues ordered by the
Commission in Opinion No. 97-13 (August 1, 1997), and before March 31,
1999, O&R will submit a plan regarding the provision of competitive
metering services by December 31, 1999.
. Other companies will be able to enter into the market for providing
billing services to Orange and Rockland's Delivery company customers
consistent with the manner and in accordance with the schedule prescribed
by the Commission.
Allocation of Net Book Gains and Losses from
the Disposition of Generating Assets
. The New York share of combined net book gains/losses from the
divestiture of the Generating Assets shall be allocated on the following
basis:/4/
. If the Company selects a winning bidder prior to May 1, 1999, any
gains shall be allocated between shareholders and customers on a 25/75
basis and any losses shall be allocated between shareholders and
customers on a 5/95 basis.
- -------------------
/4/ 100% of the net book gains/losses shall be allocated among New York, New
Jersey and Pennsylvania in accordance with the then-effective FERC-approved
Power Supply Agreements. The sharing percentages (customers/shareholders)
shall be applied to New York's share of the net book gains/losses. The
parties intend that the allocation of the net book gains/losses among the
three states be determined by FERC based upon appropriate consideration of
the positions of the regulatory authorities in each state.
. If the Company selects a winning bidder on or after May 1, 1999,
any gains or losses shall be allocated between shareholders and
customers on a 20/80 basis.
. There shall be a cap of $20 million on the New York share of net
book gains allocated to shareholders as a result of the divestiture of
the Generating Assets.
. The Company will recover in full its Commission-approved regulatory
assets and the remaining commitments to purchases from non-utility
generators.
Performance Standards
. The Performance Standards, which were agreed to in the Company's most
recent case, will be continued. There are five areas: three focus on
customer service standards and two on reliability standards.
. If the Company fails to meet the target levels for these performance
standards, there will be a downward adjustment of up to 25 basis points to
the 11.4% return on equity sharing threshold.
Low Income Program
. A Low Income Customer Assistance Program will be conducted for a four-
year period for approximately 400 customers in the City of Port Jervis.
The Program will address energy efficiency, payment patterns, and/or
arrears forgiveness. Energy efficiency measures, including refrigerator
replacement, will be the first priority for expenditures.
. The Company will allocate up to $200,000 of DSM overcollections to
support the development of a pilot program that would aggregate low income
customers.
Customer Outreach and Education
. In conjunction with the parties, the Company will continue to develop
and implement programs and materials that will aid its customers in
understanding the changes in the electric industry that are coming and the
nature of the services that customers can expect to receive from O&R in the
future. The overall goals are to enable customers, particularly small
customers, to make informed choices about utility service while
understanding their rights and responsibilities as utility customers.
These efforts will be complemented by those of participating energy
providers.
. Up to $1 million of the present value of the fourth year equivalent of
SBC funding levels will be spent on educating the Company's Residential and
Commercial customers about electric competition. The Staff will develop a
proposal to implement this education program and circulate it to the active
parties by December 31, 1997.
Public Interest Program
. Public interest programs will be continued through a competitively
neutral Systems Benefit Charge.
This summary is intended to be a general description of the terms of the Plan.
The complete text of the Plan will control in the event of any conflict.
Table of Contents
Overview of O&R Plan....................................................... i
Introduction............................................................... 1
Terms of Plan.............................................................. 4
I. Rate Plan 4
A. Electric Price Reductions............................... 4
. Large Industrial Customers
. All Other Customers
. Cumulative Price Reduction Summary
. Sources of Price Reductions ($000)
B. Return on Equity Sharing................................ 7
C. Performance Standards................................... 9
D. Rate Design............................................. 9
E. Accounting Provisions................................... 10
II. Transition to Retail Access....................................... 12
A. Sequence of Events...................................... 12
B. Reciprocity............................................. 12
C. Expansion of PowerPick(TM) Program...................... 13
D. Full Retail Access...................................... 13
E. Unbundled Tariffs....................................... 13
F. System Benefits Charge.................................. 15
G. Low Income Program...................................... 16
III. Strandable Costs................................................ 17
A. Regulatory Assets....................................... 17
B. NUG Contract Purchased Power Costs...................... 17
C. Divestiture............................................. 18
D. Allocation of Net Book Gains and Losses from the
Disposition of Generating Assets........................ 23
E. Other Strandable Costs.................................. 24
F. Proceeds of Divestiture................................. 24
IV. Corporate Structure.............................................. 24
A. Holding Company......................................... 24
B. Section 107 Preauthorization............................ 25
C. Delivery Company and Affiliated ESCOs................... 25
D. Metering Services....................................... 27
E. Billing Services........................................ 27
F. Load Pockets............................................ 27
G. System Upgrades......................................... 28
V. Other Provisions.................................................. 28
A. Force Majeure........................................... 28
B. Changes in Laws or Regulations.......................... 29
C. Confidentiality and Privileged Information.............. 29
D. Changes in Rates........................................ 29
E. Rate Design Flexibility................................. 29
F. Regulatory Reform and Customer Operations Procedures........ 30
G. Customer Outreach and Education............................. 31
H. Interdepartmental Transfers................................. 32
I. Other Accounting Provisions................................. 33
J. Flex Rates and Economic Development Rate.................... 33
K. Securitization.............................................. 33
L. Gross Receipts and Franchise Taxes.......................... 34
M. Merger...................................................... 34
N. Arrangements with Third Parties............................. 34
O. Comprehensive Nature of Plan................................ 34
P. Provisions Not Separable.................................... 34
Q. Provisions Not Precedent.................................... 35
R. Plan Modification........................................... 35
S. Term and Time Line.......................................... 35
T. Effect of Plan.............................................. 35
U. Dispute Resolution.......................................... 36
V. Additional Public Statement Hearings........................ 36
Appendices
Appendix A - Time Line for Certain Actions
Appendix B - Standard Industrial Codes
Appendix C - Eligibility Guidelines for Large Industrial Customer
Classification
Appendix D - Sources of Price Reductions
Appendix E - Privileged Information
Appendix F - Customer Service and Reliability Performance Mechanism
Appendix G - Low Income Customer Assistance Program
Appendix H - Standards of Competitive Conduct
Appendix I - Affiliate Relations
Appendix J - Accounting for Affiliate Transactions
Appendix K - Interdepartmental Transfers
Introduction
On May 20, 1996, the New York State Public Service Commission (the
"Commission") issued its Opinion and Order Regarding Competitive Opportunities
for Electric Service, Opinion No. 96-12 in Case 94-E-0952 (the "Competitive
Opportunities Proceeding").
In Opinion No. 96-12 (at 24-25), the Commission articulated a vision for
the electric utility industry that includes the following market
characteristics:
1. effective competition in the generation and energy services sectors;
2. reduced prices resulting in improved economic development for the State
as a whole;
3. increased opportunities for consumers to choose suppliers and service
companies;
4. a system operator that treats all participants fairly and ensures
reliable service;
5. a provider of last resort for all consumers and the continuation of a
means to fund necessary public policy programs;
6. ample and accurate information for consumers to use in making informed
decisions; and
7. the availability of information that permits adequate oversight of the
market to ensure its fair operation.
The Commission directed Orange and Rockland Utilities, Inc. ("Orange and
Rockland" "O&R" or "the Company") and four other electric utilities to file a
rate/restructuring plan consistent with the Commission's policy and vision for
increased competition. Id., at 74-75. The plans to be filed were to address such
matters as the structure of the utility both in the short and long term, a
schedule for transition to retail access for all of the utility's customers and
a rate plan to be effective for a significant portion of the transition.
The Commission directed the utilities to collaborate with the Staff and
other interested parties in developing a number of technical studies,
undertaking public informational and educational forums and determining what
Federal Energy Regulatory Commission ("FERC") filings were necessary to
implement the Independent System Operator ("ISO"), Power Exchange ("PE") and
Reliability Council.
On October 1, 1996, Orange and Rockland filed a rate/restructuring plan in
response to Opinion No. 96-12. The Company's filing included a rate plan that
would go beyond the third year of the rate settlement approved in Case 95-E-
0491, a schedule for expanding its PowerPick(TM) Program and introducing retail
access to all customers, a plan to separate the generation function from the
regulated delivery function and a means of addressing the strandable cost issue.
By its Order Establishing Procedures and Schedule dated October 9, 1996,
the Commission initiated Case 96-E-0900 to examine Orange and Rockland's October
1, 1996 filing. The Commission established a procedural schedule, including a
90-day negotiation period during which the parties were strongly encouraged to
reach a negotiated settlement instead of pursuing a litigated outcome. To
facilitate these negotiations, the Commission's Order of October 9, 1996, waived
certain settlement guidelines established in Case 90-M-0255, Settlement and
Stipulation Agreements, Opinion No. 92-2 (March 24, 1992).
Between October 29 and November 7, 1996, Orange and Rockland and Staff
hosted four technical meetings with the intervenors in this case. The Company
provided detailed presentations on its October 1, 1996 filing, furnished
supporting data and responded to numerous questions of the parties.
Preliminary settlement negotiations were conducted between the Company and
Staff during January and February 1997. After agreement in principle was
attained, the negotiations included the Consumer Protection Board, the
Industrial Energy Users Association and other parties. By notices issued
December 19, 1996, January 9, 1997, February 13, 1997, February 26, 1997, and
March 6, 1997, the Secretary of the Commission extended the 90-day negotiation
period established in the Order of October 9, 1996 to March 25, 1997.
On February 28, 1997, the Company and Staff informed the active parties
that they had made significant progress in resolving the issues in this
proceeding and a summary of settlement terms was circulated to the active
parties. The parties were invited to attend settlement negotiations on March 4,
1997, in order to discuss the summary of settlement terms and indicate their
willingness to participate in the preparation of a detailed settlement proposal
for submission to the Commission. Subsequent meetings of the active parties took
place on March 11, 18 and 24, 1997, to review drafts of a detailed settlement
proposal.
A Settlement Agreement was signed on March 25, 1997. Evidence relating to
the terms of the proposed Settlement was submitted by the Company, the Staff and
several other parties and hearings were held in Albany on May 19, 20 and 22,
1997, before Administrative Law Judge Stewart C. Boschwitz. Judge Boschwitz'
Recommended Decision was issued on July 2, 1997, and after briefing by the
parties was considered by the Commission at its session on September 10, 1997.
At that session, the Commission expressed concerns about the terms of the
Settlement Agreement and directed the parties to resume negotiations to address
those concerns. The parties met on September 15, 16 and 22 and October 15 and
30, 1997, participated in several conference calls and renegotiated a number of
Settlement terms consistent with the concerns expressed by the Commission. This
Plan was signed on November 6, 1997, by the Company, the Staff, the New York
State Department of Economic Development, the Industrial Energy Users
Association, the National Association of Energy Service Companies, The Joint
Supporters, the Independent Power Producers of New York, Inc., and Pace Energy
Project. This Plan has been reviewed and approved by Orange and Rockland's Board
of Directors as submitted at the Board meeting on November 6, 1997.
The term of this Plan is four years from the date of the effectiveness of
new rates. The times for various actions to be accomplished by the various
parties are set forth on Appendix A.
Terms of Plan
I. Rate Plan
Orange and Rockland shall implement a rate plan for the four years
beginning with the effectiveness of new rates, which shall include the following
provisions.
A. Electric Price Reductions
. In the event that the Commission approves the terms of this Plan on
November 25, 1997, new rates shall become effective on November 26, 1997.
. Large Industrial Customers
Large Industrial Customers/5/ will be provided the opportunity to
realize an average electric price of six cents per kWh beginning with
the effectiveness of new rates. This electric price reduction
opportunity is to be achieved through a combination of energy choice
(i.e., PowerPick(TM)) and rate reductions (i.e., one-time credits and
base rate reductions).
Cents/ Revenue
kWh Equivalent
($000)
Average Price 6.82 $31,661
Electric Price Reductions:
PowerPick(TM) Savings Opportunity/6/ -.24 $ 1,108
- ---------------
/5/ Large Industrial Customers are all customers in the existing S.C.9 class
whose facilities are classified by the Standard Industrial Manual
(1987 ed. or supplement thereto) as Mining [Division B] or
Manufacturing [Division D] and where 60% or more of the account's
electric usage is used directly for manufacturing and/or mining per
the Standard Industrial Codes ("SIC") codes set forth in Appendix B.
/6/ The PowerPick(TM) savings opportunity is based on an estimate and
represents energy-only choice for all energy requirements of the Large
Industrial Customers. The Company will
(Footnote continued on next page)
Scheduled Rate Reductions -.58 2,707
---- -------
Total -.82 $ 3,815
Average Price Opportunity 6.00 $27,846
. All Other Customers
Reduce electric rates, through one-time credits and base rate
reductions, by 1.09% at the time of the effectiveness of new rates, and
an additional 1% effective one year later.
Revenue Levels @ Rate Reductions Cumulative
Classification May 3, 1996 Rates Year 1 (1.09%) Year 2 (1%) Total
$000 $000 $000
Large Commercial $ 25,600 -$ 280 -$ 256 -$ 536
Small C&I 120,298 - 1,317 - 1,203 - 2,520
Residential 146,023 - 1,599 - 1,460 - 3,059
-------- --------- --------- ---------
Total $291,921 -$ 3,196 -$ 2,919 -$ 6,115
. Cumulative Price Reduction Summary ($000)
Year 1 Year 2 Year 3 Year 4 Total
Lg. Industrial -$ 2,707 -$ 2,707 -$ 2,707 -$ 2,707
All Other - 3,196 - 6,115 - 6,115 - 6,115
--------- --------- --------- ---------
Sub.Total -$ 5,903 -$ 8,822 -$ 8,822 -$ 8,822 -$ 32,369
Lg. Industrial
PowerPick(TM) -$ 1,108 -$ 1,108 -$ 1,108 -$ 1,108 -$ 4,432
--------- --------- --------- --------- ---------
Total -$ 7,011 -$ 9,930 -$ 9,930 -$ 9,930 $ 36,801
________________
(Footnote continued from previous page)
permit all Large Industrial Customers to participate in the
PowerPick(TM) program (energy-only) for all of their energy
requirements at the time of the effectiveness of new rates. Guidelines
for eligibility are set forth in Appendix C.
. Sources of Price Reductions ($000)/7/
Year 1 Year 2 Year 3 Year 4 Total
PowerPick/8/ -$1,108 -$1,108 -$1,108 -$1,108
Deferred Credits - 4,271 - 3,256 - 3,256 0
Expired Surcharge - 498 - 498 - 1,849 - 7,150
Cost Reductions - 1,342 - 2,076 - 1,672 - 1,672
Total -$7,219 -$6,938 -$7,885 -$9,930 -$31,972
The sources of the above price reductions underlie the agreed-upon changes
in rate levels./9/ The main objectives of this component of the Plan are 1) to
achieve price reductions to Large Industrial Customers so that they have a
reasonable opportunity starting in the first rate year to reduce their average
price to 6 cents per kWh; and 2) to reduce all other customers' average rates by
1.09% in the first rate year, and by another 1% effective one year later. For
Large Industrial Customers these price reduction opportunities are intended to
remain in effect through the four-year term of this Plan; the 1.09% reduction
for all other customers is intended to remain in place for the first rate year
and the 2.09% reduction for all other customers is intended to remain in place
through the end of the four-year term. It is the intention of the parties that
cumulative rate reductions over the four-year period will equal approximately
$32.4/10/ million. The parties acknowledge that the form of any price reduction
provided for herein will vary among permanent base rate reductions and temporary
credits which will expire when the related funding source is depleted.
_____________
/7/ A detailed schedule of each source of price reductions is set forth in
Appendix D.
/8/ Estimated savings for Large Industrial Customers are based on their
participation in the PowerPick(TM) program for all of their energy
requirements. For all other customers they are based on such customers
being provided the opportunity to choose alternative providers under
the PowerPick(TM) program effective May 1, 1998. In order to provide
the opportunity to achieve the 6c/kWh rate for the first rate year,
the Company will permit all Large Industrial Customers to participate
in the PowerPick(TM) program (energy-only) at the time of the
effectiveness of new rates. "Dump" energy losses incurred as a result
of the expansion of the PowerPick(TM) program prior to the
implementation of wholesale competition due to system load falling
below minimum load requirements of the Company's generating plants
will not be recoverable through the FCA.
/9/ The parties acknowledge that the difference between the cumulative
price reductions and the sources of price reductions is $4,829,000 and
that this Plan does not identify the sources of such price reductions.
/10/ This amount does not reflect the potential net book gain/loss
associated with the divestiture of the Generating Assets. The $32.4
million does not include: 1) an opportunity for Large Industrial
Customers to realize additional savings of about 3 1/2% in annual bill
reductions from the expansion of the PowerPick(TM) program, 2) an
opportunity for all customers other than Large Industrial Customers to
realize benefits over the term of the Plan of about 2% in annual bill
reductions beginning with the expansion of PowerPick(TM) in May 1998,
and 3) the Gross Receipts Tax Reform.
After rates are unbundled in accordance with the provisions of Section II.E
herein, the cost of Power Supply will not be included in rates for Delivery
services. Delivery service customers will be charged for authorized services at
the regulated rates approved by the Commission as a result of the Company's
unbundling filing. Delivery service customers will be billed for power supply at
market prices as charged by the customers' energy supplier plus any amounts
necessary to cover stranded costs recoverable in accordance with Section III
herein. It is expressly understood that the tariff reductions provided for in
this Plan will be reflected in the unbundled Delivery rates and that the sources
supporting these reductions will likewise be reflected in unbundled Delivery
rates.
All parties acknowledge that there is no guarantee that the Company will
realize a net book gain from the sale of the Generating Assets. In the event
that the Company does realize a net book gain from the sale of the Generating
Assets, the Company will file a plan with the Commission that will return the
customers' share of such net gain over an appropriate period of time consistent
with the principle of maintaining rate stability. These benefits will first be
provided to customers other than Large Industrial Customers so that "All Other"
customers could receive the annual equivalent of an additional 2.91% rate
reduction that, when combined with the rate reduction of 2.09%, yields the
annual equivalent of a 5% rate reduction. The parties acknowledge that such net
gain, if any, may not be sufficient to provide an amount of customer benefits
necessary to produce the full 2.91% equivalent rate reduction. Should the net
gain be sufficient to provide customer benefits greater than the 2.91%
equivalent rate reduction, the Company will propose for Commission approval the
manner in which such additional benefits will be allocated among customer
classes.
In the event the Company realizes a net book loss from the sale of the
Generating Assets, the customers' share shall be recovered through a non-
bypassable wires charge component of regulated delivery company rates over an
appropriate period of time. The Company shall submit a proposal to recover the
customers' share. Staff and other parties shall submit comments on the Company's
proposal within 60 days after receiving such proposal. The Commission shall
consider the Company's proposal expeditiously. The parties agree that the
customers' share of any net book losses shall be recovered in rates as soon as
practicable consistent with rate stability considerations.
. Total Rate Reductions Since 1995 ($000)
The rate plan provides for the further rate reductions for all O&R
customers. Since May 1995, customers have already been provided
significant rate reductions. Total electric rate reductions from May
1995 through 1998 and the annual benefit of the Gross Receipts Tax
Reform once fully phased in by January 1, 2000, are as follows:
GRT
1995-96 1997 1998 Total Reform
Large Industrial $ (4,702) $(2,707) $ -- $ (7,409) $
All Other Customers $(17,241) $(3,196) $(2,919) $(23,356)
-------- ------- ------- --------
Total $(21,943) $(5,903) $(2,919) $(30,765) $(3,315)
-------- ------- ------- -------- -------
-6.4% -1.8% -0.9% -9.0% -1.0%
B. Return on Equity Sharing
For each of the four rate years, earnings in excess of 11.4% on regulated
New York electric operations will be shared as follows:
. 75% to be used to offset Commission-approved deferrals or otherwise
inure to the benefit of customers;
. 25% to be credited to Orange and Rockland's shareholders.
To the extent that the Rate Settlement approved in Case 95-E-0491 provides
for an adjustment to the calculation of the annual earnings for the earnings
sharing mechanism incorporated in such Rate Settlement to take into account the
levelized rate reduction, a similar adjustment will be permitted from the
effective date of this Plan until April 30, 1999. Additional adjustments to the
calculation of the actual return on equity set forth in the Rate Settlement will
include:
. Any earned incentive or penalty from the partial pass-through Fuel Cost
Adjustment (while still in effect), off-system sales imputations, property
tax refunds, or other incentive or penalty mechanism made effective during
the three-year rate period pursuant to an Order of the Commission.
. Revenues associated with the equalization of the return on equity
provided by the Power Supply Agreements as approved by the Federal Energy
Regulatory Commission and the 10.4% return on equity provided for in the
Commission's Order Approving Settlement Agreements in Cases 95-E-0491, 89-
E-0175 and 93-M-0849 (May 3, 1996).
Upon the implementation of full retail access, the return on equity will be
calculated based on Delivery company operations excluding the assets, revenues
and operating costs associated with generation.
The Company and Staff acknowledge that this Plan is intended to finally
resolve a number of accounting and rate matters currently pending before the
Commission, including calculations of earnings for any prior period (in
accordance with the settlement approved by Commission Order Approving Settlement
Agreements in Cases 95-E-0491, 89-E-0175 and 93-M-0849 (May 3, 1996)), deferral
accounting petitions and compliance filings or studies submitted in accordance
with the settlement approved by the Commission in Case 95-E-0491. These resolved
matters include:
1. Earnings calculations (95-E-0491, 89-E-175 and 93-M-0849);
2. Accounting procedures and journal entries (95-E-0491);
3. Low income program;
4. Labor panel recommendations;/11/
5. Property tax benefits associated with March 1996 Special Franchise Tax
Settlement;
6. The filing of studies associated with bus bar costs, transfer gas mark-
up and cost allocation; and
7. DSM performance mechanism.
Pending the completion of Staff's analysis, the Company will be authorized to
defer a maximum of $2,985,000 of expenditures it incurred to terminate the
Company's contract for coal supply with Pittston Coal Sales Corporation (Case
96-M-1145) provided those expenditures can be matched to verifiable savings
flowed through to customers. This deferral and any regulatory assets approved by
the Commission during the term of this Plan may be deferred and written off
against reductions in NUG contract purchased power costs below those reflected
in rates, or any source of price reductions set forth in Appendix D when the
total of such sources exceeds the totals shown on page 6 under "Sources of Price
Reductions" for any of the four 12-month periods shown.
The Company will be given 60 days after the end of the relevant time period
to submit to the Director of Accounting and Finance of the Department of Public
Service any earnings calculations required herein. These calculations will be
submitted in summary form to other requesting parties at the same time that the
detailed calculations are provided to Staff. Other parties may request the
detailed calculations subject to appropriate confidentiality protections. Staff
will be given 60 days to review any such calculations and if the Company
receives no written objections or comments from Staff or other parties, the
Company's calculations will be deemed approved. Written objections or comments,
if not resolved within 30 days from the date of receipt, shall be submitted to
the Commission for a determination. Staff and the Company agree that any
commercially sensitive data underlying any calculations submitted in accordance
with this Plan will be given protection against disclosure as described in
Appendix E.
C. Performance Standards
. The Company agrees to continue to operate under the performance
standards incorporated in the Commission-approved settlement in Case 95-E-
0491. These performance standards are set forth in detail in Appendix F and
include customer service standards and reliability standards.
. The Company agrees to a maximum downward adjustment to the return on
equity sharing threshold of 25 basis points for failure to meet the
performance standards each year (five basis points per performance
standard).
D. Rate Design
________________
/11/ Subject to Staff field verification.
. Consistent with the Commission's order in Case 97-E-1795, the Company
will submit a plan to phase out mandatory Time-of-Use Residential Rates for
customers presently taking such service. No new residential customers will
be added as mandatory Time-of-Use Customers. The Company will, however,
continue to offer Time-of-Use rates to Residential customers on an optional
basis. The Company shall be permitted to defer any revenue shortfalls that
may result from changing the mandatory nature of this rate.
. The Company will offer the Peak Activated Rate ("PAR") for the SC-9 and
Large Industrial Customers on an optional basis.
. The Company will eliminate the mandatory nature of the PAR by applying
the rate decrease proposed for this customer class in this Plan. Should
that decrease not cover the full elimination of the PAR, the Company shall
make such related rate design changes as are required to ensure revenue
neutrality.
. In response to requests from Staff and other signatory parties, the
Company did not implement the PAR provisions of the existing SC-9 tariffs
in 1997. Because the rate reductions and associated new rate design
provisions of this Plan were not made effective until after the end of the
PAR period, September 30, 1997, the Company deferred the resulting revenue
requirement shortfall for the period June 1, 1997, through September 30,
1997. The parties agree that this treatment is appropriate.
E. Accounting Provisions
Orange and Rockland will defer all prudent and verifiable incremental costs
associated with divesting its Generating Assets, such as developing an auction
plan, obtaining approval of the plan, conducting the auction, transferring title
to the Generating Assets, and any related environmental, transaction, financial
and litigation costs. In addition, the parties recognize that all reasonable
employee-related transition costs, including retraining, outplacement,
severance, early retirement and employee retention programs should be recovered
from customers. The Company will defer up to $7.5 million (New York electric
share) of prudent and verifiable non-officer employee costs, such as retraining,
outplacement, severance, early retirement and employee retention programs
associated with the divestiture plan. Orange and Rockland shall be able to
petition the Commission for recovery of employee costs in excess of $7.5
million./12/
Orange and Rockland will defer the $2,649,900 revenue shortfall associated
with eliminating the mandatory PAR. The regulatory asset associated with the
deferred PAR revenue requirement will be written off by the application of
Orange and Rockland's share of PowerPickTM savings in accordance with the Retail
Access Pilot Program approved by the Commission in Case 95-E-0491 and other
customer credits that become available during the term of the Plan. Any
remaining regulatory asset not otherwise offset will be addressed in Orange and
Rockland's next base rate case or other suitable proceeding.
________________________
/12/ The costs of such programs for employees transferred to unregulated
affiliates shall not be paid for by customers.
Orange and Rockland will be permitted to establish a major storm damage
reserve/13/ of up to $3.0 million by transferring to a storm damage account
overcollections from other cost elements which are subject to reconciliation.
The Company will be permitted to charge storm damage costs incurred after the
date of the Commission's approval of the Plan in excess of any costs included in
rates (i.e., $200,000) to the storm damage reserve and will notify Staff
accordingly. Storm costs charged to the reserve shall be subject to Staff
verification and review.
Orange and Rockland will defer its New York share of incremental costs
associated with establishing an ISO, PE and Reliability Council and, if not
otherwise offset, these incremental costs will be addressed in the Company's
next base rate case or other suitable proceeding.
Orange and Rockland will be permitted to defer environmental costs caused
by the operation of the Generating Assets up to the date of transfer of
title./14/ This provision is designed to protect the Company by providing for
the recovery of reasonable and prudent expenditures incurred in connection with
the investigation and/or remediation of environmental conditions associated with
the ownership and operation of the Generating Assets.
Consistent with the terms of the approved settlement in Case 95-E-0491, the
Company will retain 10% of any property tax refunds. The customers' 90% share
of any property tax refunds shall be deferred and used to offset other
regulatory assets or otherwise be returned to customers. This provision will
remain in effect through the term of this Plan.
Consistent with the objectives set forth elsewhere in this Plan, the
Company will have the discretion to offset deferred regulatory assets against
deferred regulatory liabilities established in accordance with this Plan or
pursuant to prior Commission approval. The Company will submit to Staff and
other interested parties for its review an annual report showing the offsets
recorded within 60 days after the end of each rate year covered by this Plan.
II. Transition to Retail Access
A. Sequence of Events
The parties anticipate the following sequence of events:
___________________
/13/ A "major storm" is defined as a period of adverse weather during which
service interruptions affect at least 10% of the Company's customers within
an operating area and/or results in customers being without electric
service for durations of at least 24 hours.
/14/ These costs shall not include the cost of any NOx allowances purchased
under applicable environmental laws and regulations.
. Expansion of PowerPick(TM) Program (energy only) to all Large Industrial
Customers at the time of the effectiveness of new rates and to all other
customers on May 1, 1998./15/
. The ISO becomes fully operational.
. Full retail access (energy and capacity) to all customers on May 1,
1999.
Unbundled tariffs, as described in detail below, should become effective at
least several months prior to the effectiveness of full retail access in order
to allow customers a reasonable time to understand and react properly to the
pricing signals that will be in effect when full retail access is implemented.
B. Reciprocity
Staff and O&R agree that implementation of full retail access in O&R's
service territory before O&R is able to gain comparable access to other New York
electric utilities' service territories could result in a substantial financial
disadvantage for O&R. Prior to the implementation of full retail access in O&R's
service territory, the Commission is expected to determine the appropriate
standards for reciprocity with respect to other New York utilities or their
affiliates operating in O&R's service territory. Until the time of such
Commission determination, the Company will not be required unconditionally to
accommodate a full retail transaction between an O&R customer and a New York
utility or affiliated company that does not offer comparable access to O&R. This
provision is not applicable to the New York Power Authority ("NYPA").
C. Expansion of PowerPick(TM) Program
The existing PowerPick(TM) program (energy only) will be expanded to all
customers on May 1, 1998. O&R affiliates (other than the Delivery company) will
not be precluded from participating in the expanded PowerPick(TM) program. If it
should appear that the energy-only ISO would not be in place by April 1998, and,
in the Company's view, the failure to implement the energy-only ISO would
present technical or financial obstacles to the expansion of the PowerPick(TM)
program, the Company may petition the Commission and show cause why relief from
this commitment, in whole or in part, is required. Staff will join the Company
in requesting the Commission to address the petition expeditiously.
In order to enhance the participation of smaller customers (non-Large
Industrial) in the retail access programs provided in this Plan, a competitive
enhancement fund of $250,000 will be created for the first 12 months after the
May 1, 1998 expansion of the PowerPick(TM) program. Funding shall be the equal
responsibility of both customers and shareholders (50/50 sharing). The $250,000
fund is designed to produce a temporary stimulus to encourage the participation
of small customers in the retail access program. Staff will initiate a process
to determine the necessary details by December 31, 1997.
____________________
/15/ Customers in the PowerPick(TM) Program as of December 31, 1997, will
remain eligible to participate through April 30, 1998.
D. Full Retail Access
Effective May 1, 1999, full retail access (capacity and energy) will be
available to all customers. In the event the ISO is not fully operational on an
energy and capacity basis by December 1998, and, in the Company's view, the
failure to implement the ISO would present technical obstacles to the
implementation of full retail access, the Company may petition the Commission
and show cause why relief from this commitment, in whole or in part, is
required. Staff will join the Company in requesting that the Commission address
the petition expeditiously.
E. Unbundled Tariffs
O&R agrees to file with the Commission within one month of Commission
approval of this Plan proposed unbundled draft electric tariffs based on an
updated embedded cost of service study, or other appropriate studies, using
calendar 1996 data, subject to necessary confidentiality protections. The
proposed tariffs will disaggregate the Commission-approved bundled rate for each
rate class into its functionalized components in a revenue neutral manner among
classes. It is the parties intention that the unbundled tariffs will be designed
to produce the same total revenue requirement underlying the rate levels
reflected in Section I.A. of this Plan. It is anticipated that the Company's
filing will separate the cost of:
-- Power Supply (energy and capacity)
-- Power Delivery
-- Metering
-- Billing
-- Governmental Tax Surcharges
-- Systems Benefits (mandated public policy programs)
-- Competitive Transition Charge
-- Non-Bypassable Wires Charge
Should the cost of service study show that one of the above cost components
should be subdivided into more than one component or that other cost components
should be separately identified, O&R will be permitted to propose them in its
unbundling submittal . The transitional rate design proposed by IPPNY, including
rate and bill impact concerns, particularly for low-use or low-income customers,
will be addressed by the parties in the proceeding following the Company's
filing. The parties agree that the entire record already developed on the
transitional rate design proposed by IPPNY will be incorporated into the record
developed in the phase of this proceeding involving unbundled rates.
The Power Supply component will be used to bill customers for energy and
capacity costs, regardless of the provider, unless other approved billing
procedures are chosen by the customer. Until the wholesale energy market becomes
effective and/or full retail access is implemented, energy costs will continue
to be charged through the existing FAC and the fixed costs of O&R's generation
and purchased power will continue to be recovered through the base rates
approved as part of this Plan. When wholesale competition is implemented, the
FAC will reflect energy purchases at market prices made by the regulated
delivery function on behalf of its customers. The embedded capacity cost of
O&R's generation plant not yet transferred in accordance with the auction
procedure provided for herein will continue to be charged at tariff
rates until the implementation of full retail access. Any margin (wholesale
revenues from sales of energy in excess of fuel costs) realized by the O&R
generation function will be used as a mitigation measure to offset NUG purchased
power costs during the interval between the implementation of wholesale
competition and full retail access. In the event NUG purchased power costs
incurred during that interval are fully offset, additional margins will be
shared between the customers and the Company on an 80/20 basis. The parties
acknowledge that the current FAC will need to be re-examined and may require
modification in accordance with changes occurring in electricity markets and
rates.
The Power Delivery charge(s) will recover the costs associated with
transmission and distribution, and customer services (e.g., metering and
billing). All regulatory assets will also be recovered in the Power Delivery
charge(s).
The Governmental Tax Surcharge component will identify separately all gross
receipts and franchise taxes and governmental surcharges to the extent
consistent with the Tax Law.
The CTC, as described in Section III.C. herein, will also be separately
identified as necessary and appropriate in the Company's unbundling filing.
The customers' share of any net gain or loss from the sale of Generating
Assets as determined in accordance with Sections I.A. and III.D. of this Plan
shall be recovered or refunded through a non-bypassable wires charge included in
the regulated rates of the Delivery company. In addition, any stranded costs
approved by the Commission resulting from the introduction of competitive
metering and/or billing services in accordance with Sections IV.D. and E. of
this Plan shall also be recovered through the non-bypassable wires charge.
It is contemplated that O&R's Generation Assets will continue to operate
until title is transferred in accordance with the divestiture process set forth
herein. The CTC, which will commence on May 1, 1999, if title has not been
transferred by that time, will allow O&R to recover in customers' rates a
portion of above-market generation costs as more fully described in Section
III.C. herein. The CTC component of rates will be filed with Staff 90 days
before its proposed effective date. Such filing shall be subject to review by
Staff and approval by the Commission before implementation. In addition, the
Company will provide to other requesting parties. Orange and Rockland can remove
information it designates as confidential from copies of the filing provided to
parties other than Staff and seek trade secret status for such designated
confidential information in accordance with the Commission's rules of procedure.
Any written objections to or comments on the CTC recalculation, if not resolved
within 30 days from the date of receipt, shall be submitted to the Commission
for a determination on an expedited basis.
With respect to transmission required to provide wheeling service to retail
customers under the Plan, the Company will use its Open Access Transmission
Tariff ("OATT") currently on file with the FERC, until such time as there is a
pool-wide tariff available from the Independent System Operator. The Company
will file, for the Commission's review and approval, a revised OATT which will
contain those changes to the OATT that are necessary to implement retail
wheeling. In the filing the Company will propose and justify requested changes
to non-rate terms and conditions, and also indicate how rates should be designed
for retail customers using the OATT. Following Commission approval, the Company
will file the
amended OATT and Commission order approving the tariff with the FERC with a
request that the FERC defer to the state-approved tariff.
F. System Benefits Charge
Opinion No. 96-12 provides that "[c]osts required to be spent on necessary
environmental and other public policy programs that would not otherwise be
recovered in a competitive market will generally be recovered by a non-
bypassable system benefits charge." The System Benefits Charge ("SBC") will be
used to collect the costs of mandated public policy programs. This non-
bypassable charge will be imposed on all Delivery company customers. The
expenditures reflected in the SBC are for research and development ("R&D"),
energy efficiency, environmental protection, and low income programs that are
required or approved by the Commission to be funded by the SBC. One way of
disbursing such expenditures would be by means of a standard performance
contract with stipulated pricing approved by the Commission. In this Plan,
expenditure levels of one mill per kWh on average for the first three years of
this Plan for SBC programs will initially be covered in base rates and
subsequently broken out in accordance with the unbundled rates approved by the
Commission, but they will be non-bypassable in any event. The price levels
established in this Plan include specific annual rate allowances for the costs
of mandated public policy programs. Increases in these annual rate allowances
are not provided for in the targeted price levels for the Large Industrial
Customers, nor in the rate reductions proposed for all other customers. The
parties agree that any increases in these spending levels resulting from changes
required by law (including by order of the Commission) will be fully
recoverable.
The parties agree that the Commission may appoint a third-party
administrator to administer the SBC funded programs. All SBC funds will be
allocated by the statewide administrator, although the establishment of such a
statewide administrator shall not preempt program funding for commitments made
prior to the date of this Plan. The statewide administrator may continue
implementation of certain Company programs.
Over or under collections of SBC funds will be accumulated for future SBC
program use. Commission-approved low income energy efficiency assistance program
services for persons not included in the Port Jervis low income assistance
program will be provided as a portion of the energy efficiency SBC budget.
Appropriate funding levels for the SBC in Year 4 will be revisited by the
Commission via a formal proceeding or other public process at the discretion of
the Commission.
G. Low Income Program
The Company agrees to implement the Low Income Customer Assistance Program
developed pursuant to the Commission-approved Settlement in May 1996. The
specific provisions of this Program are set forth in detail in Appendix G
hereto. The cost of this Program will not be included in the SBC.
The Program will commence as soon as practicable after the effectiveness of
new rates and terminate four years after the effectiveness of new rates. The
Program will be conducted solely for the residents of the City of Port Jervis,
New York and residents of the zip code area 12771. The goal of the Program is
to serve approximately 400 customers in total, and
approximately 100 customers in each rate year. Expenditures per customer will be
capped at $1,000. This expenditure includes the cost of an energy audit,
disaggregated billing analysis, energy efficiency measures, and arrears
forgiveness. Funding for this program including $35,000 of administrative costs
per year shall come from unexpended DSM funds accumulated prior to the
commencement of the SBC funding mechanism. Should unexpended DSM funds not be
sufficient to cover this Program the remaining costs shall be deferred. Any
additional unexpended DSM funds shall be deferred for future disposition in
accordance with the Accounting Plan submitted in accordance with Section E
above.
The Company will allocate up to $200,000 of DSM overcollections accumulated
prior to the commencement of the SBC funding mechanism for the purpose of
developing a pilot program that would aggregate low income customers. Such a
pilot program could help advance the state of knowledge and experience with such
programs if it included 1) several towns within the service territory (and one
or more towns in the Eastern Division which can experience load pocket
conditions) and 2) a representative mix of multi- and single-family homes. Staff
will develop a proposal to implement the program and will circulate it to the
active parties by March 31, 1998. The parties agree to meet thereafter to begin
the development of this pilot. As directed by the Commission in its Order
Concerning Retail Access Proposals, issued February 25, 1997, in Case 94-E-0385,
the parties shall consider the petition of the New York State Division of
Housing and Community Renewal, et al., in Case 97-E-0073.
III. Strandable Costs
A. Regulatory Assets
Generation-related regulatory assets/16/ established in accordance with
Commission orders, policies or practices will be fully recoverable in regulated
Delivery company rates. At the time rates are unbundled, an appropriate
allowance for these regulatory assets will be identified in the rates for the
Delivery company.
B. NUG Contract Purchased Power Costs
Until rates are unbundled, these costs will continue to be recovered
through the FAC. When rates are unbundled, the recovery of these costs will be
identified in the regulated rates for the Delivery company. The costs of these
contracts escalate during their initial years and decline in later years.
Therefore, these costs are to be recovered by means of a fixed annual rate until
full recovery. An estimate of recoverable NUG purchased power costs will be made
at the time of unbundling and converted to a fixed charge to be included in
Delivery rates. Recoverable NUG purchased power costs will consist of actual NUG
contract payments less an estimate of the revenues received from the resale of
the NUG purchased power. A full reconciliation of recoverable NUG purchased
power costs shall be permitted.
C. Divestiture
____________________________
/16/ Excluding FAS 109 effects related to divestiture.
Upon the Commission's approval of the Plan, the Company will immediately
commence a process to auction all of its electric generating assets (i.e.,
Lovett, Bowline, hydro-electric facilities and gas turbines) (collectively
referred to as the "Generating Assets"). Neither the Company nor any of its
affiliates will bid in such auction./17/
The divestiture of the Generating Assets to third parties will be carried
out through a process that will result in a fair and reasonable treatment of all
parties, including the Company, its employees, investors and customers. The
Company will submit its divestiture plan to Staff and the other parties in this
proceeding within three months of the Commission approving the Plan. Staff and
the other parties shall submit their comments to the Company within 30 days of
their receipt of the divestiture plan. This divestiture plan will identify how
the Generating Assets will be packaged for sale; what restrictions, if any, will
be placed on the capacity that any one bidder may purchase; the procedures to be
followed in the sale of the Generating Assets, including minimum bids; and key
dates and milestones to achieve the scheduled divestiture. The divestiture plan
will also address the resolution of market power issues in any load pocket
areas. At the time the Company submits its divestiture plan, it will submit
supporting documentation subject to appropriate protection being provided for
confidential information in accordance with Appendix E. The Company further
agrees to provide a copy of the collective bargaining agreement to any party
that indicates an interest in bidding in any auction of the Generating Assets.
The parties recognize that the Company and Local No. 503 of the
International Brotherhood of Electrical Workers are subject to a collective
bargaining agreement effective through midnight May 31, 2000, which includes the
following provisions:
This Agreement is made by and between Orange and Rockland Utilities,
Inc., (hereinafter called the "Company") and Local Union No. 503 of
the International Brotherhood of Electrical Workers (hereinafter
called the "Union").
This Agreement is made for the purpose of establishing stabilized
conditions of employment, including rates of pay, and working
conditions, facilitating the peaceful adjustment of differences that
may arise between the parties hereto from time to time, and of
promoting harmony and efficiency, to the end that the Company and the
Union may be better able
_____________________
/17/ The Company and Con Edison are tenants in common in the Bowline
Generating Station. The Company will attempt to coordinate the divestiture of
its interest in Bowline with Con Edison. The agreement between the Company and
Con Edison for the operation and maintenance of Bowline provides that if either
tenant wishes to convey its ownership interest in Bowline to a third party, the
other tenant shall have a six-month right of first refusal to purchase such
interest in Bowline under the terms and conditions offered by the third party.
For purposes of this Plan, the Company shall be deemed to have selected the
winning bidder for its interest in Bowline on the date the Company selects the
winning bidder's offer for the its interest in Bowline, regardless of whether
Con Edison exercises its right of first refusal.
to fulfill their obligation to furnish uninterrupted and adequate
electric and gas service to the public.
Identity of contracting parties: The parties to this Contract agree
that it shall have force and effect as between them as herein named
and described, and that this Contract, for any part of its term, shall
be binding on the parties, their lawful successors and assigns. An
absolute precondition to the sale, lease, transfer or takeover by
sale, transfer, lease, assignment, corporate reorganization,
receivership, bankruptcy proceeding of the entire operation or any
part thereof is that any purchaser, transferee, lessee, assignee,
etc., shall agree and become party to and bound by all the terms,
conditions and obligations of this agreement.
If the above-named Local Union is merged into or consolidated with any
other Local Unions of the Brotherhood, this Contract shall continue in
force as between the Company and the successor Local Unions resulting
from such merger or consolidation, when such merger or consolidation
is sanctioned in accordance with the constitution of the International
Brotherhood of Electrical Workers, AFL-CIO.
Agreement made by and between the Orange and Rockland Utilities, Inc.,
a corporation organized and existing under and pursuant to the
Transportation Corporations Law of the State of New York, its
successors or assigns, hereinafter referred to as the "Company" and
Local 503 of the International Brotherhood of Electrical Workers
hereinafter referred to as the "Union" the "Company shall provide
notice of the existence of the terms of this Collective Bargaining
Agreement to any purchaser, transferee, assignee or lessee. Such
notice shall be in writing with a copy to the Union."
Nothing in this Plan in intended to add to, subtract from or otherwise modify
any rights, duties or obligations set forth in said collective bargaining
agreement.
Within six months of the Commission approving the Plan, the Company will
submit a revised expanded divestiture plan. Staff and interested parties will
be given an opportunity to file comments on the revised divestiture plan within
thirty days of its submission. The Commission will review and act expeditiously
on this plan and any comments submitted. Once the divestiture plan is approved,
Orange and Rockland will use its best efforts to expeditiously complete the
auction process and select the winning bidder(s) of the Generating Assets.
Following implementation of the ISO, Orange and Rockland agrees that its
bids for energy from its fossil fuel resources shall not fall below the
incremental cost of fuel plus variable O & M costs./18/
It is the objective of the parties that the Company should implement full
divestiture, by an auction, of Orange and Rockland's Generating Assets. If
title to the Generating Assets is
_________________________
/18/ Variable O&M costs are estimated at one mill per kwh of generation.
transferred prior to the implementation of retail access on May 1, 1999, no CTC
will be required (other than to recover any net book losses associated with
divestiture of the Generating Assets). In the event there is a delay in the
transfer of title beyond May 1, 1999, Orange and Rockland will recover above-
market generation costs by means of an incentive based CTC commencing May 1,
1999. The CTC will be established by identifying the non-variable electric
production costs using an embedded cost of service study using 1996 as a guide.
The unbundling process will establish the precise amount of non-variable
production costs to be used in the calculation of the CTC.
Should a CTC be required, Orange and Rockland will be authorized to recover
the difference between Orange and Rockland's non-variable cost of generation as
identified in the unbundling proceeding and the revenues, net of fuel and
variable O&M expenses, derived from the operation of Orange and Rockland's
generation plants in a deregulated competitive market with the exception of 25%
of fixed production labor expenses and property taxes on generation properties
that cannot be recovered from customers, but should instead be recovered through
the competitive market. The CTC will remain in effect until the earlier of the
date title to the Generating Assets is transferred or April 30, 2000.
The Company will consider alternative, economically comparable means of
allowing an individual customer to pay for its allocable share of above-market
embedded fixed costs of generation that customers would otherwise pay through
the CTC and/or a non-bypassable wires charge.
If title to the Generating Assets has not transferred as of May 1, 2000,
the CTC will be modified to increase to 35% the level of fixed production labor
expense and property taxes that cannot be recovered from customers, but should
instead be recovered through the competitive market. The modified CTC will
remain effective until the earlier of the date title to the Generating Assets is
transferred or October 31, 2000. In the event title to the generation assets
will not transfer by October 31, 2000, the Company may petition the Commission
for permission to continue a CTC until the date title to the Generating Assets
is transferred.
The parties acknowledge that the CTC does not allow for the recovery of
inflationary increases in non-fuel O&M production costs, property tax increases,
wage rate increases, and increased costs associated with capital additions or
changes in the cost of capital applicable to production costs.
An illustration of the CTC mechanism is shown on the following page.
Illustration of CTC Mechanism
Market Revenues Realized
Below Above Above
@ Risk @ Risk @ Risk
Competitive Market Revenues Amount Amount Amount
Annual Competitive GENCO Revenues $ 25 $100 $ 500
Less: Variable O&M & Fuel (12) (50) (250)
----- ---- -----
Revenue Available for Fixed Costs $ 13 $ 50 $ 250
Regulatory Revenue Requirement
for Fixed Generation Costs:
"Going Forward Costs":
Fixed Production Labor $ 50 $ 50 $ 50
Property Taxes 50 50 50
Other Production Costs 10 10 10
----- ---- -----
Total "Going Forward Costs" 110 110 110
-----
Capital Costs:
Depreciation 25 25 25
Interest 25 25 25
Return & FIT 30 30 30
----- ---- -----
Total Capital Costs 80 80 80
Total Regulated Revenue Requirement $ 190 $190 $ 190
CTC Mechanism
Competitive GENCO Revenues -- Net $ 13 $ 50 $ 250
Less: 25% of Fixed Production Labor and
Property Taxes (25) (25) (25)
----- ---- -----
Available for CTC Eligible Costs 0 25 225
Less: Eligible "Going Forward Costs" (85) (85) (85)
Less: Capital Costs (80) (80) (80)
----- ---- -----
CTC Charge to Customers(A) $ 165 $140 ($60)
O&R Cost Recovery
Competitive GENCO Revenues -- NET $ 13 $ 50 $ 250
CTC Charge to Customers 165 140 (60)
----- ---- -----
Total Recovered $ 178 $190 $ 190
Revenue Impact on Company ($12) $ 0 $ 0
(A) CTC established to recover generation costs except 25% of Fixed
Production Labor and Property Taxes, as defined above, which must be
recovered through competitive market. If market revenues exceed total
generation costs, the excess will be credited to customers.
Illustration
Gain (Loss) on Sale of Generation Assets
($000s)
Gain Loss
On Sale On Sale
(New York Share) (New York Share)
Sale Price (Winning Bid) $185,000 $140,000
-------- --------
Cost of Sale:
Net Book Value of Assets Sold(A) 150,000 150,000
Divestiture Plan Costs (Legal, Financial, etc.)(B) 7,500 7,500
Employee Costs(B) 7,500 7,500
NYS Revenue Taxes 995 -
-------- --------
Total Cost of Sale 165,995 165,000
-------- --------
Gain (Loss) Before Taxes 19,006 (25,000)
-------- --------
Reversal of FAS 109 Regulatory Asset 3,500 3,500
-------- --------
Federal Income Tax Expenses:
Current FIT expense 24,152 8,750
Reversal of FAS 109 Deferred FIT (3,500) (3,500)
Reversal of Funded Deferred FIT (14,000) (14,000)
-------- --------
Total Federal Tax Expense 6,652 (8,750)
-------- --------
Net Gain (Loss) Eligible for Sharing $ 8,854 $(19,750)
CTC Mechanism
Refund 75% of Net Gain(C) $ (6,640)
--------
Recover 95% of Net Loss(C) $ 18,763
--------
(A) Includes generation plant in service, net of accumulated provision for
depreciation and related CWIP, fuel inventories, spare parts inventory,
prepaid property taxes and insurance, etc.
(B) In accordance with the terms of the Plan, Section III, Para. D.
(C) Net gain or loss to be refunded or surcharged to customers with
interest calculated on unamortized balance at the Commission-approved
after-tax overall rate of return over appropriate period of time as
determined by the Commission.
D. Allocation of Net Book Gains and Losses
from the Disposition of Generating Assets
The parties agree that the combined net book gains/losses from the
divestiture of the Generating Assets shall be determined as follows:
Net Book Gain or Loss = Bid - Cost of Sale - Tax Effects/19/
Where:
Bid = The Winning Bid
Cost of Sale = Net Book Value of the Generating Assets
+ Costs of Developing and Implementing the
Divesture Plan (including all incremental
financial,/20/ environmental, transaction and
litigation costs)
+ Employee Costs/21/
Tax Effects = Revenue Taxes
+ State, Federal and Local Taxes
These costs shall be prudent and verifiable. The net book gains/losses
shall be allocated as follows:
(a) If the Company selects a winning bidder prior to May 1, 1999, the
New York share of any net book gains shall be allocated between
shareholders and customers on a 25/75 basis and any net book losses
shall be allocated between shareholders and customers on a 5/95 basis.
(b) If Orange and Rockland selects a winning bidder on or after May 1,
1999, the New York share of any net book gains or losses shall be
allocated between shareholders and customers on a 20/80 basis.
There shall be a $20 million cap on the New York share of net book gains to
shareholders from the divestiture of the Generating Assets.
E. Other Strandable Costs
Orange and Rockland's Delivery service rates will be set so that the
Company is provided a reasonable opportunity to recover from all customers other
prudent and verifiable stranded
________________________
/19/ All tax effects related to the divesture of the Generating Assets
consistent with avoiding any violation of the IRS rules and regulations
governing tax normalization and Investment Tax Credits.
/20/ Including any prepayment penalties incurred as a result of the
redemption of the Company's financial obligations.
/21/ As defined under "Accounting Provisions."
costs associated with depreciable assets used in connection with the metering
and billing functions.
F. Proceeds of Divestiture
The parties agree that the provisions of Public Service Law (S)(S) 70 and
107 shall not apply to any proceeds from the divestiture of the Generating
Assets.
For ten years from the date of the Commission order approving the Plan,
Orange and Rockland agrees that neither it nor any of its affiliates shall
purchase or otherwise acquire an ownership interest in the Generating Assets or
in generating assets owned by Con Edison, New York State Electric and Gas
Corporation or Central Hudson Gas & Electric Corporation or any other utility in
a service territory contiguous to the Orange and Rockland system. At the
determination of the Commission, when considering an application for a merger or
acquisition, this provision may or may not apply to any third party which merges
with or acquires Orange and Rockland or a Company affiliate after the approval
date of the Commission order approving the Plan. In the event that Orange and
Rockland or any affiliated company acquires another company, the newly created
company is prohibited from purchasing or acquiring an ownership interest in the
Generating Assets until after the expiration of ten years from the date of the
Commission order approving the Plan.
It is the intention of the parties that any winning bidder shall be free to
own and/or operate the Generating Assets as an exempt wholesale generator
pursuant to Section 32 of the Public Utility Holding Company Act of 1935 without
first securing any additional approval from the Commission.
IV. Corporate Structure
A. Holding Company
Orange and Rockland agrees to apply to the appropriate regulatory
authorities for permission to form a registered holding company. The formation
of a registered holding company is intended to further the public interest by
avoiding barriers to full and fair competition. Implementation of this holding
company structure is conditioned upon shareholder and regulatory (i.e., Federal
Energy Regulatory Commission ("FERC"), Securities and Exchange Commission
("SEC"), the Commission, the New Jersey Board of Public Utilities ("NJBPU") and
the Pennsylvania Public Utility Commission ("PAPUC")) approvals. Orange and
Rockland agrees to move expeditiously to secure such approvals and will use its
best efforts to form a registered holding company prior to the introduction of
full retail competition. The parties acknowledge, however, that shareholder
approval can be obtained no earlier than the Company's April 1998 annual
meeting. Staff will join the Company in requesting that the Commission act
expeditiously on the petition required to implement this structural separation.
At the time that a registered holding company is formed, it will become the
successor to Orange and Rockland as signatory hereto. Standards of Competitive
Conduct and rules governing affiliate relations are set forth in Appendices H
and I, respectively.
B. Section 107 Preauthorization
Orange and Rockland will be allowed to invest up to $15 million of retained
earnings derived from revenues received from the rendition of public service
within New York State without the need to make separate application under
Section 107 of the Public Service Law for each investment. Orange and Rockland
will limit its investments to energy services and marketing, telecommunication
services, environmental services and related developmental projects. Staff will
be given access to the books and records of each unregulated subsidiary which
receives such investments in order to review any and all transactions between
Orange and Rockland and such unregulated subsidiaries. This investment authority
would be subject to immediate and automatic suspension by the Commission should
the Standard and Poor's bond rating of Orange and Rockland (or the successor
entity subject to a bond rating) fall to BBB- or below. In addition, Orange and
Rockland would commit to entering into written contracts for all exchanges of
goods and services between the Company and any unregulated subsidiary
established pursuant to this pre-authorization which receives such investments
and to file all such contracts with the Commission at least 30 days prior to
their effective dates. The Company agrees that any purchase of electric supply
(i.e., the commodity) from an unregulated affiliate shall be pursuant to
competitive bidding.
C. Delivery Company and Affiliated ESCOs
At the time the Transmission and Distribution ("T&D") segment of O&R's
electric system in New York is separated from Orange and Rockland's generation
operations, the Delivery company will be authorized to continue to provide basic
energy services, including energy, capacity, ancillary services, metering and
billing within the service territory. In accordance with Paragraphs A and B
herein, subject to certain conditions, O&R will be authorized to create an
affiliated unregulated Energy Services Company ("ESCO"). O&R's affiliated ESCO
will be authorized to provide energy services and products at market prices.
O&R's affiliated ESCO shall operate in accordance with Standards of Competitive
Conduct designed to prevent it from gaining an unfair competitive advantage as a
result of its affiliation with the Delivery company. O&R's affiliated ESCO will
be subject to the same regulatory requirements applicable to any other
comparably situated ESCO. The Standards of Competitive Conduct that will govern
the relationship between the Delivery company and its affiliated ESCO are set
forth in Appendix H.
Affiliated ESCOs may be subjected to an annual examination by the Staff, if
necessary, to determine whether the manner in which they conduct business
impedes competition in the energy-related service or product markets within
O&R's service territory in which they operate. The Company agrees that the
Commission has authority to initiate an investigation and set a schedule to
consider allegations of the Company's failure to meet the Standards of
Competitive Conduct. The purpose of these conditions is to ensure the Commission
can act promptly to eliminate unwarranted barriers to competition or require
correction of anti-competitive behavior, consistent with its obligations and
responsibilities under the Public Service Law. Remedial action for violations of
the Standards of Competitive Conduct is covered in Appendix H, subp. (viii).
Upon separation of the Delivery company from generation pending
divestiture, there will be no bilateral agreements between Delivery company and
the generation department (except if
necessary to address load pockets or other reliability issues, including
ancillary transmission services). As part of its responsibility to continue to
minimize energy costs, the Delivery company may petition the Commission for a
waiver of the above restriction on bilateral agreements. Any such bilateral
agreement shall be in writing and filed with the Commission for a review of its
consistency with the transition to competition.
The Parties acknowledge that the Commission has determined that Provider of
Last Resort ("POLR") responsibility should continue to exist to meet the needs
of end-use customers including those who require service but have not chosen an
ESCO or who require temporary service, and end-use customers who are unable to
obtain service from an ESCO. The Commission has also concluded that, for the
time being, this responsibility should be performed by the regulated utility
company, although the Commission did not rule out alternatives to the regulated
utility performing this function and specifically invited such alternative
proposals. The parties agree that the transfer of the regulated utility's
responsibility to serve as POLR to ESCOs through a competitive bid process is a
desirable goal to explore. Accordingly, the parties agree that by May 1, 1999,
they will submit their recommendations on this issue to the Commission for its
consideration. Staff will initiate the process of this examination by May 1,
1998.
Unless and until relieved of its obligation, the Delivery company shall be
the POLR for all customers choosing to continue to purchase "packaged" energy
services from the Delivery company or failing to choose an energy provider and
those customers deciding to purchase from providers other than the Delivery
company, but who later return as customers purchasing power from the Delivery
company.
To the extent that a disproportionate amount of higher risk, lower usage
customers will continue to be supplied with power by the Delivery company, rates
shall reflect an appropriate allowance for the billing and collection costs
associated with such customers.
D. Metering Services
Following issuance of the Staff report required by Commission Opinion No.
97-13 (August 1, 1997), on or before March 31, 1999, O&R will submit a plan
designed to make metering competitive by December 31, 1999. In the event that
there remain significant implementation obstacles (such as open architecture,
customer protections or necessary changes to Parts 92 and 93 of the Commission's
regulations) which cannot be timely resolved, the Company may petition the
Commission to delay the implementation schedule. Should the Commission order
that metering services become competitive earlier than the schedule contemplated
herein, the Company shall meet the schedule prescribed by the Commission and
offer such services in the manner and to the extent prescribed by the
Commission. Any resulting stranded costs/22/ approved by the Commission shall be
fully recoverable (via a non-bypassable wires charge with recovery to commence
during the term of this Plan) over an appropriate period of time as determined
by the Commission. After the time that metering services become competitive, the
Company may continue to provide such services to remaining customers at such
rates as are determined by the Commission to be appropriate.
_________________
/22/ Including the costs of implementing this program (e.g., meter removal
costs incurred by the Company, if any).
E. Billing Services
Other companies will be able to enter into the market for providing billing
services to Orange and Rockland's Delivery company customers consistent with the
manner and in accordance with the schedule prescribed by the Commission. Any
resulting stranded costs shall be fully recoverable (via a non-bypassable wires
charge with recovery to commence during the term of this Plan) over an
appropriate period of time as determined by the Commission.
F. Load Pockets
Orange and Rockland has identified two separate load pocket areas in its
service territory. A process will be established in which Staff, the Company,
and other interested parties will address different measures,/23/ analyses of
which are to be submitted in January 1998, for mitigating load pocket conditions
in O&R's service territory. Incremental costs associated with a load pocket
mitigation measure will be fully recovered in rates. The January 1998 filing
will include a proposal to provide for such interim relief as may be necessary
pending a final Commission determination. The parties anticipate that the
divestiture plan will address the load pocket issue on an interim basis pending
a final Commission determination on the load pocket issue.
G. System Upgrades
The Company will continue its annual forecasts of T&D capital budget
requirements. For each major T&D upgrade (projects of $2 million or more), the
Company shall identify the location, reason, scope and projected capital costs,
and shall monitor circuit peaks for any affected substation and the load on any
affected transmission lines. When deciding whether to implement major T&D
upgrades, the Company shall consider a full range of alternative measures, their
cost-effectiveness and their environmental impacts, including demand-side
technologies and practices, fuel cells, photovoltaic systems or other
alternatives that may both defer the need for implementing the upgrades and
minimize the environmental impacts of electricity usage. The Company will also
continue to seek to minimize costs and environmental impacts for T&D projects
that are not major projects.
In the Company's first major electric rate filing following Commission
approval of the Plan, unless otherwise directed by the Commission, Staff will
address the merits of performance-based ratemaking, including the relationship
among sales and distribution revenues and energy efficiency and concerning the
appropriate measure of cost-effectiveness for alternatives to T&D projects, and
make ratemaking proposals as warranted.
V. Other Provisions
A. Force Majeure
______________________
/23/ Examples of such measures are existing and new local distributed
generation or energy efficiency/management measures.
If the Company because of an event of Force Majeure is rendered wholly or
partly unable to perform its obligation under the Plan to select a winning
bidder for its Generating Assets by May 1, 1999, or to transfer title to the
Generating Assets by October 31, 2000, Orange and Rockland shall be excused from
the performance affected by the Force Majeure and to the extent so affected, the
time of performance shall be extended for a period equal to the time lost by
reason of such Force Majeure. Orange and Rockland shall not be liable for the
damage caused by such non-performance. The Company shall provide the Commission
prompt notice of the occurrence of the Force Majeure, including an estimate of
its expected duration and probable impact on the performance of the Company's
obligations hereunder, and shall submit satisfactory evidence for Commission
review of the existence of the Force Majeure.
For purposes of the Plan, the term "Force Majeure" shall include, but not
be limited to acts of God, fires, floods, earthquakes, landslides, storms,
lightning, strikes, labor disputes, riots, nuclear emergencies, insurrections,
acts of war (whether declared or otherwise), changes in laws, regulation or
ordinances and unforeseeable acts or failures to act by governmental, regulatory
or judicial bodies, failure of any party to submit a bid for the Generating
Assets or any other unforeseeable causes beyond the reasonable control of and
without the fault and negligence of Orange and Rockland. Orange and Rockland
shall use its best efforts to remedy expeditiously its inability to perform.
Orange and Rockland shall not be required to settle any strike, walkout, lockout
or other labor dispute on terms which in its sole judgment, are contrary to its
interest. When Orange and Rockland is able to resume performance of its
obligations under the Plan, it shall provide written notice to that effect to
Staff and the Commission.
B. Changes in Laws or Regulations
If any law, rule, regulation, order or other requirement (or any repeal or
amendment of an existing rule, regulation, order or other requirement) of a
state, local or federal government body,/24/ results in a change of 5% or more
in the Company's net income from regulated electric operations, O&R will defer
on its books of account the total effect of all such annual cost changes in
excess of 5% of net income, with any such deferrals to be reflected in rates in
a manner found reasonable and appropriate by the Commission.
C. Confidentiality and Privileged Information
Pursuant to the provisions of this Plan, the Company is required to and may
be requested to provide information to the Commission and other parties. In
responding to these requirements and/or requests, the Company reserves the right
to assert the legal privileges and/or the right to designate as confidential
certain information as described in Appendix E.
D. Changes in Rates
The Commission reserves the authority to act on the level of Orange and
Rockland's base electric rates in the event of unforeseen circumstances that, in
the Commission's opinion, have such a substantial impact upon the return on
equity contemplated in this Plan as to render the Company's return unreasonable
and unnecessary for the provision of safe and adequate service. If a
circumstance occurs that, in the judgment of the Commission, so threatens the
Company's economic viability or ability to maintain safe and adequate service,
the Company shall be
_________________________
/24/ Excluding Gross Receipts and Franchise Taxes.
permitted to file for a change in base electric rates at any time. In the event
of cost inflation (as measured by a generally accepted economic index, such as
the GDP Price Deflator) in excess of 4% per year, the Company may petition the
Commission for appropriate relief.
E. Rate Design Flexibility
During the term of this Plan, the Company will have the right to seek to
change regulated rates in a revenue-neutral manner or to propose de minimis rate
changes. All rate changes will be filed with the Commission and subject to its
approval.
Where the Company proposes more than one rate change to take effect at
approximately the same time, it will, to the extent practicable, combine such
proposals in a single filing with the Commission.
Any changes in rate design will fairly reflect underlying costs of service
in order to avoid or minimize the likelihood of customers using electricity
uneconomically or wastefully.
F. Regulatory Reform and Customer Operations
Procedures
In consideration of the Company's implementation of retail competition as
described in this Plan and in light of the increased uncertainty of accurately
forecasting avoided costs as competition is introduced, the parties agree that,
upon the Commission's approval of this Plan, Orange and Rockland's obligation to
purchase from qualifying facilities under the Public Utility Regulatory Policies
Act of 1978 shall be limited to "as available" purchases or contracts for a
period of no longer than two years setting forth the price schedules based on
projections of Orange and Rockland's system avoided costs.
To facilitate the Company's operations under the rate plan, the parties
agree that the provisions of Part 11, Part 13, Part 140, and Part 273 of 16
N.Y.C.R.R. and the requirements for a plain language bill format adopted in Case
28080, Order Requiring Gas and Electric Utilities To File Revised Billing
Formats (Oct. 31, 1985), should be waived to the extent that any such provisions
are inconsistent with the Company's ability to:
. institute non-discriminatory procedures which require an applicant to
provide reasonable proof of the applicant's identity as a condition of
service;
. modify its bill content and format in response to industry
restructuring; provided, however, the Company's bills will contain the
following:
. an explanation of how bills may be paid
. total charges due
. due date
. dates of present and previous meter readings
. whether the consumption levels were based on estimated or actual
readings
. the amount of any penalty charges
. any credits from past bills
. any amounts owed and unpaid from previous bills
. the customer service classification
. any budget plan information, if applicable
. unit price of energy consumed or other appropriate itemization of
charges (including sales taxes and other informative tax itemization)
. complete name and address of customer
. unique account number or customer number assigned to the customer
. meter readings
. period of time associated with each product or service
. name of entity rendering bill
. local or toll-free telephone number customers may call with
inquiries
. include non-tariffed items in a bill; provided, however, that customers'
current payments are credited first to tariffed items and that service
cannot be terminated for failure to pay non-tariffed items.
Upon appropriate customer authorization, the Delivery company shall
disclose to qualifying ESCOs and other service providers agreeing to such
protective conditions as the Commission finds appropriate, residential and non-
residential customers' current payment status information to other service
providers to the extent such information is limited to: whether or not a deposit
could be requested from the customers by the Delivery company due to
delinquency, as defined in 16 NYCRR (S) 11.12(d)(2) or in 16 NYCRR (S)
13.1(b)(13), or for any reason provided in 16 NYCRR (S) 13.7(a)(1); whether or
not a customer could be denied service by the Delivery company due to unpaid
bills on an existing or prior account; or, whether a customer's service could be
terminated by the Delivery company, provided that:
. such information is to be used by other service providers only for the
purposes of determining whether unregulated energy services will be
provided to the customer, whether a deposit will be requested from such
customer, or for other purposes approved by the Commission; and
. such information request is made by a service provider in response to a
bona fide request from the customer to the service provider for electric
service or with other customer consent.
The Company supports the concept of informed customer choice and agrees
that consumers are entitled to meaningful environmental information concerning
the power provided to them. To effectuate such disclosure, the Company agrees to
work with interested parties to develop and implement on a statewide basis a
feasible, meaningful and cost-effective approach to providing customers with
fuel-mix and emissions characteristics of the generating resources relied upon
by the load serving entity.
G. Customer Outreach and Education
In conjunction with the parties, Orange and Rockland will continue to
develop and implement programs and materials that will aid its customers in
understanding the changes in the electricity market that are coming and the
nature of the services that customers can expect to receive from the Company in
the future. Such programs will include information on environmental programs as
described above. The Company's overall goals in conducting these
programs are to enable customers, particularly small customers, to make informed
choices about utility service while understanding their rights and
responsibilities as a utility customer. For retail access and energy services
choices in the competitive energy market, the Company's efforts would be
complemented by those of the participating providers of competitive services,
who can be expected to provide prospective retail access customers with
information about the energy choices becoming available to consumers.
The Company will provide to Staff by June 30 of each year of this Plan, a
summary of its customer education efforts. This submission will include, but not
be limited to, an assessment of the progress made by these efforts and the
various methods used to communicate the information, how the information was
distributed, and the most frequently asked questions by customers. The first
report is due June 30, 1998.
As partial retail access is being offered to all customers by May 1998 and
full retail access by May 1999, it is essential that the Company's customers are
educated so that they can make informed energy choices. To achieve this goal, an
information campaign would be undertaken by early next year. The Company agrees
to the use of up to the equivalent of $1 million of the present value/25/ of
fourth year SBC funds for the purpose of educating Residential and Commercial
customers about electric competition. Staff will develop a proposal to implement
the program to educate customers about electric competition and will circulate
it to the active parties by December 31, 1997.
H. Interdepartmental Transfers
For purposes of this Plan, electric prices will be reduced by $375,000
annually to reflect an imputation of cost savings resulting from the separation
of the gas and electric purchasing functions and the anticipated ensuing cost
reduction in gas purchased for electric generation. Cost savings in excess of
$375,000 will be preserved for the benefit of customers in the form of future
price reductions or mitigation of stranded costs. The $375,000 annual imputation
will initially be in the form of a credit to the FAC and, in the event of
changes in the FAC, in an appropriate form of equivalent dollar impact.
As part of the Company's proposal to separate the gas and electric
departments (to allow the electric department to purchase in an open market),
the Company proposed a $.05 per Mcf rate for all gas volumes transported to the
electric department for electric generation. Consistent with the principles set
forth in Appendix K, the Company will submit to the Commission no later than
January 1, 1998, proposed changes in the FAC and Gas Adjustment Clause that will
accomplish the pricing contemplated herein. Staff will support such pricing and
join with the Company in seeking expeditious consideration of the Company's
proposal. This proposed charge to the electric department will be a minimum of
$1,275,000. The actual annual dollar amount paid to the gas department will be
dependent on the volume of gas transported (at $0.05 per MCF) each year for
O&R's electric generation, but in no event will the total annual charge be less
than $1.275 million. The Company's proposal will provide for a review of the
minimum at two-year intervals unless the Company or Staff requests review within
a shorter interval.
- -------------------------
/25/ Discounted at the authorized overall rate of return of 8.79%.
I. Other Accounting Provisions
Consistent with Commission policy and precedent and subject to Staff review
for reasonableness, reconciliation and/or deferral accounting of the following
costs will continue in effect through the term of this Plan for regulated
operations, including 1) R&D, 2) Pensions, 3) Other Post Employment Benefits
("OPEBs"), 4) Demand-Side Management ("DSM"), 5) Cable gasification, 6) the Gas
Turbine Maintenance Reserve, and 7) West Nyack and Manufactured Gas Plant site
investigation and remediation costs.
J. Flex Rates and Economic Development Rate
The Flex Rate and Economic Development provisions contained in the approved
Settlement in Case 95-E-0491 will remain in effect through the term of this
Plan. Any existing NYPA EDP business customers served pursuant to the current
statutory program, including Economic Development Power and high load factor
customers served under Rider G, would be exempted from strandable cost recovery
to the extent that portion of the customer's usage is provided by NYPA resources
and so long as that customer continues to take service under Rider G or any
successor tariff rider.
The Company will design and file a flexible rate tariff for commercial and
industrial customers who are currently taking service and who are at serious
risk of relocating or closing their facility absent a discount rate. Such
tariffs will be available regardless of the supplier of electricity and such
discounts will be fashioned in a competitively neutral manner. Additionally, a
customer must be receiving a comprehensive package of economic incentives from a
State or local authority to qualify for the discount, which, coupled with the
rate discount, will enable the business to remain in New York. The mechanism for
sharing net lost revenues caused by the discounts resulting from such a rate
will be consistent with the Flexible Rate Tariff Provisions approved by the
Commission in Case 95-E-0941. The Company will file the tariff within 60 days
after the approval of this Plan.
K. Securitization
In the event of enactment of statewide securitization legislation providing
cost savings to Orange and Rockland, the Company agrees to submit appropriate
filings to provide the benefits to Large Commercial, Small Commercial and
Industrial and Residential customers, unless otherwise prescribed by such
statute or order of the Commission. The Commission will also consider the use of
these savings for energy efficiency programs and clean energy technologies.
L. Gross Receipts and Franchise Taxes
Any changes in Gross Receipts and Franchise Taxes will be flowed through to
Orange and Rockland's customers.
M. Merger
Should the regulated utility, within the next five years, merge, purchase
or be purchased by any regulated utility or other company in this or any other
state, such an event will be considered to be unforeseen for the purpose of this
Plan. Such merger or purchase will not, in any manner, restrict the Commission's
authority to consider appropriate actions regarding any savings that may result,
or from taking any other action that the Commission deems reasonable.
N. Arrangements with Third Parties
Prior to the implementation of full retail competition, the Company may
enter into arrangements with third parties. The Company acknowledges that the
Commission may exercise such authority as is provided by the Public Service Law
to approve or disapprove such an agreement or consider actions regarding any
savings that may result from any such arrangements and to take any other action
that the Commission deems reasonable, including the modification of this Plan.
O. Comprehensive Nature of Plan
The foregoing reflects the parties' efforts to resolve complex revenue
requirement and rate level issues in this proceeding. The issues involved
difficult questions arising from stranded cost recovery as well as issues
arising from the corporate restructuring under review in this proceeding. In
developing the rate plan, the parties intended to develop a comprehensive plan
that accounts for both typical revenue-requirement issues such as expected
productivity improvements as well as for claims regarding stranded cost
recoverability. The rate plan is intended as a permanent and comprehensive
resolution of the Company's revenue requirement for the four-year term of the
Plan. The plan resolves these issues on a basis that is intended to allow the
Company to remain under the Statement of Financial Accounting Standards No. 71
requiring regulated companies to follow cost-based ratemaking.
P. Provisions Not Separable
The parties have negotiated this Plan with each provision being in
consideration for, support of, and dependent upon all others. This Plan is,
therefore, presented for the Commission's approval as an integrated whole. If
the Commission does not approve this Plan in its entirety, without modification,
any signatory hereto may withdraw its acceptance of this Plan by serving written
notice on the other parties, and shall be free to pursue its position in this
proceeding without prejudice.
Q. Provisions Not Precedent
The terms and provisions of this Plan apply solely to and are binding only
in the context of the purposes and results of this Plan. None of the terms and
provisions of this Plan and none of the positions taken herein by any party may
be referred to, cited or relied upon by any other party in any fashion as
precedent in any other proceeding before this Commission or any other regulatory
agency or before any court of law except in furtherance of the purposes of this
Plan.
R. Plan Modification
Upon mutual agreement, the signatories may modify this Plan in writing to
take into consideration material information that may become available after the
execution of this Plan and submit such written modification to the Commission
for its approval.
S. Term and Time Line
The term of this Plan runs for four years from the effective date of the
new rates implemented upon Commission approval of this Plan. The dates scheduled
for expansion of the PowerPick(TM) Program and the implementation of full retail
access shall remain May 1, 1998 and
May 1, 1999, respectively. The times for various actions to be accomplished by
the various parties are set forth on Appendix A.
T. Effect of Plan
. The Company will petition the Appellate Division of the Supreme Court
for permission to withdraw its December 24, 1996 appeal in Energy
Association of N.Y.S. v. Public Service Commission, Albany County Index No.
5830-96, with prejudice, following final Commission approval of this
agreement (i.e., when any appeals from such approval are exhausted or the
time to appeal has expired). Until this petition is granted, the Company
will discontinue its appeal to the extent it is able to do so without
forfeiting the right to appeal.
The Company has made the following additional concessions:
. Providing for substantial price reductions to large industrial
customers and all other customers.
. Divestiture of the Generating Assets pursuant to an auction
process.
. Allocating equity earnings in excess of the sharing threshold
between shareholders and customers and to writing down Commission-
approved deferred costs.
. Expanding PowerPick(TM) (energy only) to all Large Industrial
Customers at the time of the effectiveness of new rates and to all
other customers in 1998.
. Providing full retail access (energy and capacity) to all customers
in 1999.
. Agreeing to address alternative ways of providing metering and
billing services.
It is the express intention of the signatories hereto that Orange and
Rockland be provided with:
. A reasonable rate of return while maintaining the overall level of
rates for the term of the Plan.
. A reasonable opportunity to recover prudently incurred strandable
costs as a result of divesting the Generating Assets, or otherwise
during the effectiveness of the CTC.
The parties agree that the provisions of this Plan will result in
rates that are just and reasonable to both customers and shareholders
through the four-year term of this Plan.
. Future generic determinations by the Commission will be addressed in
good faith by the parties to this Plan and will provide guidance for
potential tailoring or application of those determinations or this
agreement, as appropriate, to preserve this agreement and associated
considerations and obligations of Orange and Rockland and the Commission.
U. Dispute Resolution
In the event of any disagreement over the interpretation of this Plan or
the implementation of any of the provisions of this Plan, which cannot be
resolved informally among the parties hereto, such disagreement shall be
resolved in the following manner: the parties shall promptly attempt to convene
a conference and in good faith shall attempt to resolve such disagreement. If
any such disagreement cannot be resolved by the parties within 30 days, any
party may petition the Commission for relief on a disputed matter.
V. Additional Public Statement Hearings
The parties agree that additional public statement hearings should be held
in the Company's service territory prior to the Commission acting on this Plan
in order to receive and consider public input on important matters included
within this Plan. The parties strongly encourage the Secretary to schedule such
hearings.
Orange and Rockland Utilities, Inc.
- -------------------------------------------------------------------------------
G.D. Caliendo, Esq.
Senior Vice President, General Counsel and
Corporate Secretary
New York State Department of Public Service
------------------------------------------------------------------------------
Saul A. Rigberg, Esq.
Assistant Counsel
New York State Department of
Economic Development
- -------------------------------------------------------------------------------
Jeffrey Schnur
Director of Energy Policy
National Association of Energy Service Companies
- -------------------------------------------------------------------------------
Ruben S. Brown
The Joint Supporters
By: The E Cubed Company
- -------------------------------------------------------------------------------
Ruben S. Brown
Industrial Energy Users Association
- -------------------------------------------------------------------------------
Thomas A. Condon, Esq.
Birbrower, Montalbano, Condon & Frank, P.C.
- -------------------------------------------------------------------------------
L.M. DiValentino
Strategic Power Management, Inc.
Exceptions to the following provisions of the Plan:
________________________
________________________
Independent Power Producers of New York, Inc.
________________________________________________________________________________
Carol E. Murphy
Executive Director
Pace Energy Project
________________________________________________________________________________
David R. Wooley
Counsel for the Energy Project
Center for Environmental Legal Studies
Pace University School of Law
Time Line for Certain Actions
.November 6, 1997 Plan filed
. Commission approves Plan
_______________________________________
. O&R withdraws from Article 78
_______________________________________
appeal (4 months after
Commission approval)
.Effectiveness of new rates O&R provides Large Industrial
Customers with opportunity to
realize an electric price of
6c/kWh and reduces electric
rates for all other customers by
1.09%. PowerPick(TM) is expanded
to include all Large Industrial
Customers (energy only)
.December 1997 O&R files proposed draft
unbundled electric tariffs
.February 1998 O&R submits initial divestiture
plan
.May 1, 1998 O&R expands PowerPick(TM)
(energy only) to all customers
.May 1998 O&R submits detailed divestiture
plan
.One year after effectiveness of new rates O&R reduces rates for all other
customers by an additional 1%
. O&R forms Holding company
____________________
. Unbundled electric tariffs
____________________
become effective
.March 31, 1999 O&R submits metering proposal
.April 30, 1999 O&R selects winning bidders of
auction
.May 1, 1999 O&R introduces full retail
choice (energy and capacity) to
all customers
.May 1, 1999 Recommendations on POLR
obligation submitted
.May 1, 1999 CTC commences, if necessary
.December 31, 1999 Metering proposal becomes
effective assuming significant
technical obstacles are resolved
.October 31, 2000, or earlier CTC terminates
.Four years after effectiveness of new rates Plan terminates
Standard Industrial Codes
Division B
Mining
The Division as a Whole
This division includes all establishments primarily engaged in mining. The
term mining is used in the broad sense to include the extraction of minerals
occurring naturally; solids, such as coal and ores; liquids, such as crude
petroleum; and gases such as natural gas. The term mining is also used in the
broad sense to include quarrying, well operations, milling (e.g., crushing,
screening, washing, flotation), and other preparation customarily done at the
mine site, or as a part of mining activity.
Exploration and development of mineral properties are included. Services
performed on a contract or fee basis in the development or operation of mineral
properties are classified separately, but within this division. Establishments
which have complete responsibility for operating mines, quarries, or oil and gas
wells for others on a contract or fee basis are classified according to the
product mined rather than as mineral services.
Mining operations are classified, by industry, on the basis of the
principal mineral produced, or, if there is no production, on the basis of the
principal mineral for which exploration or development work is in process. The
mining of culm banks, ore dumps, and tailing piles is classified as mining
according to the principal mineral product derived.
The purification and distribution of water is classified in Transportation
and Public Utilities, Industry 4941, and the bottling and distribution of
natural spring and mineral waters is classified in Wholesale Trade, Industry
5149.
Crushing, grinding, or otherwise preparing clay, ceramic, and refractory
minerals; barite; and miscellaneous nonmetallic minerals, except fuels, not in
conjunction with mining or quarrying operations, are classified in
Manufacturing, Industry 3295. Dressing of stone or slab is classified in
Manufacturing, Industry 3281, whether or not mining is done at the same
establishment.
Division D
Manufacturing
The Division as a Whole
The manufacturing division includes establishments engaged in the
mechanical or chemical transformation of materials or substances into new
products. These establishments are usually described as plants, factories, or
mills and characteristically use power driven machines and materials handling
equipment. Establishments engaged in assembling component parts of manufactured
products are also considered manufacturing if the new product is neither a
structure nor other fixed improvement. Also included is the blending of
materials, such as lubricating oils, plastics, resins or liquors.
The materials processed by manufacturing establishments include products of
agriculture, forestry, fishing, mining, and quarrying as well as products of
other manufacturing establishments. The new product of a manufacturing
establishment may be finished in the sense that it is ready for utilization or
consumption, or it may be semifinished to become a raw material for an
establishment engaged in further manufacturing. For example, the product of the
copper smelter is the raw material used in electrolytic refineries; refined
copper is the raw materials used by copper wire mills; and copper wire is the
raw material used by certain electrical equipment manufacturers.
The materials used by manufacturing establishments may be purchased
directly from producers, obtained through customary trade channels, or secured
without recourse to the market by transferring the product from one
establishment to another which is under the same ownership. Manufacturing
production is usually carried on for the wholesale market, for interplant
transfer, or to order for industrial users, rather than for direct sale to the
domestic consumer.
There are numerous borderline cases between manufacturing and other
divisions of the classification system. Specific instances will be found in the
descriptions of the individual industries. The following activities, although
not always considered as manufacturing, are:
Milk bottling and pasteurizing; Various service industries to the
Fresh fish packaging (oyster manufacturing trade, such as
shucking, fish filleting); typesetting, engraving, plate
Apparel jobbing (assigning of printing, and preparing electrotyping
materials to contract factories and stereotype plates, but not
or shops for fabrication or other blue-printing or photocopying
contracting operations) as well services;
as Electroplating, plating, metal heat
contracting on materials treating, and polishing for the trade;
owned by others; Lapidary work for the trade;
Publishing; Fabricating of signs and advertising
Ready-mixed concrete production; displays.
Leather converting;
Logging;
Wood preserving;
There are also some manufacturing-type activities performed by
establishment which are primarily engaged in activities covered by other
divisions, and are, thus not classified as manufacturing. A few of the more
important examples are:
Agriculture, Forestry, and Fishing
Processing on farms is not considered manufacturing if the raw materials
are grown on the farm and if the manufacturing activities are on a small scale
without the extensive use of paid labor. Other exclusions are threshing and
cotton ginning.
Mining
The dressing and beneficiating of ores; the breaking, washing, and grading
of coal; the crushing and breaking of stone; and the crushing, grinding, or
otherwise preparing of sand, gravel, and nonmetallic chemical and fertilizer
minerals other than barite are classified in Mining.
Construction
Fabricating operations performed at the site of construction by contractors
are not considered manufacturing, but the prefabrication of sheet metal,
concrete, and terrazzo products and similar construction materials is included
in the Manufacturing Division.
Wholesale and Retail Trade
Establishments engaged in the following types of operations are included in
Wholesale or Retail Trade; cutting and selling purchased carcasses; preparing
feed at grain elevators and farm supply stores; stemming leaf tobacco at
wholesale establishments; and production of wiping rags. The breaking of bulk
and redistribution in smaller lots, including packaging, repackaging, or
bottling products, such as liquors or chemicals, is also classified as Wholesale
or Retail Trade. Also included in Retail Trade are establishments primarily
engaged in selling, to the general public, products produced on the same
premises from which they are sold, such as bakeries, candy stores, ice cream
parlors, and custom tailors.
Services
Tire retreading and rebuilding, sign painting and lettering shops, computer
software production, and the production of motion picture films (including video
tapes) are classified in Services. Most repair activities are classified as
Services. However, some repair activity such as shipbuilding and boatbuilding
and repair, the rebuilding of machinery and equipment on a factory basis, and
machine shop repair are classified as Manufacturing.
Eligibility Guidelines for
Large Industrial Customer Classification
The following guidelines shall serve as eligibility requirements to take
service under the Large Industrial Customer classification:
(i) General primary, substation and transmission service customers who
maintain a minimum demand of 1,000 kW during any two of the previous twelve
months.
(ii) The facility is classified by the Standard Industrial Classification
Manual (1987 edition or supplements thereto) as Mining (Division B) or
Manufacturing Division).
(iii) Energy use for mining or manufacturing purposes must be at least 60%
of their total energy usage as determined by the Company.
(iv) At time of application for Large Industrial Classification a Minimum
Eligibility Requirement for that facility representing 60% of customer's
total energy usage at time of application will be established.
(v) If a customer's actual kWh energy usage for minings or manufacturing
purposes falls below the Minimum Eligibility Requirement established in
(iv) above by more than 25% the customer will be removed from this rate and
transferred to as appropriate service classification.
(vi) A customer who fails to maintain criteria set forth in (i), (ii) and
(iii) above may at the customer's option transfer to another appropriate
service classification.
Sources of Price Reductions
Description Year 1 Year 2 Year 3 Year 4 Total
- -------------------------------------------------------------------------------------------------------------
Expiring Surcharges:
RDM Rate Allowance $ 468,000 $ 468,000 $ 468,000 $ 468,000
Allowance for Rate Case Costs 253,000 253,000
Amort. of OPEBs 1,016,000 1,016,000
NUG Amortization 4,978,000 (A)
---------- ---------- ---------- -----------
Subtotal 468,000 468,000 1,737,000 6,715,000
---------- ---------- ---------- -----------
One-Time Refunds (3 year Amortization):
Ramapo Tax Settlement 1,855,600 902,200 902,200
R&D Overcollection 541,000 541,000 541,000
RDM Overcollection 82,000 82,000 82,000
Investigation Refund Shortfall 40,000 40,000 40,000
Unallocated Depreciation
Reserve -- Net (71%) 1,491,873 1,491,873 1,491,873
---------- ---------- ---------- -----------
Subtotal 4,010,473 3,057,073 3,057,073 0
---------- ---------- ---------- -----------
Other Cost Reductions
Special Franchise Property Tax Savings 185,000 185,000 185,000 185,000
DSM Program Reductions 645,000 1,335,000 1,335,000 1,335,000
R&D Reductions 300,000 300,000 300,000 300,000
Gas Transfer Pricing (71%) 380,069 380,069 0 0
Incremental Holding Company Costs(B) -250,000 -250,000 -250,000 -250,000
---------- ---------- ---------- -----------
Subtotal 1,260,069 1,950,069 1,570,000 1,570,000
---------- ---------- ---------- -----------
Total Cost Reductions (Excl. GRT) $5,738,542 $5,475,142 $6,364,073 $ 8,285,000
GRT Gross-up 371,858 354,789 412,392 536,868
Cost Reductions (Incl. GRT) $6,110,400 $5,829,931 $6,776,465 $ 8,821,868
PowerPick(TM) Savings Opportunity (Incl. GRT) $1,108,000 $1,108,000 $1,108,000 $ 1,108,000
---------- ---------- ---------- ----------- -----------
Total Sources of Price Reduction (Incl. GRT) $7,218,400 $6,937,931 $7,884,465 $ 9,929,868 $31,970,664
(A) Total NUG Amortization of $5,292,000 less amount applied to other regulatory
assets in the amount of $314,000.
(B) Costs up to maximum of $1.0 million incurred in establishment of Holding
company will be deferred and amortized over term of settlement.
Privileged Information
Nothing in this Plan requires or will be construed to require the Delivery
company, the Holding company or an unregulated subsidiary to provide Staff or
any other party access to, or to make disclosure of any information as to which
the entity in possession of such information would be entitled to assert a legal
privilege, such as the attorney-client privilege, if, either (i) the privilege
could be asserted pursuant to CPLR 4503, CPLR 3101 (or any other applicable
statute or constitution) in a judicial proceeding, action, trial or hearing, or
(ii) providing access to or making disclosure of such information would impair
in any manner the right of the entity in possession of such information to
assert such privilege against third parties.
If Staff or any other party seeks access to or disclosure of any
information that either the Delivery company, the Holding company or an
unregulated subsidiary believe is privileged and not subject to access or
disclosure under the terms of this Plan, counsel for the entity asserting such
privilege will detail, to the extent practical without destroying the privilege,
the reasons why the privilege is being claimed in sufficient detail to permit a
determination of whether or not to dispute the claim of privilege. If Staff or
any other party decides to dispute such claim, it may request that an assigned
administrative law judge conduct an in camera review of such information to
determine whether it is in fact exempt from access or disclosure under the terms
of this section, which disclosure shall not be deemed waiver of the privilege.
Such determination will be subject to review by the Commission and, if
necessary, judicial review.
Confidentiality of Records
The Holding company and the Delivery company shall designate as
confidential any non-public information to or of which Staff or any other party
requests access or disclosure, and which the Holding company, the Delivery
company or an unregulated subsidiary believe is entitled to be treated as a
trade secret. The Holding company, Delivery company or unregulated subsidiary
shall provide the requesting party with a redacted version of the information
deemed to be confidential together with a non-confidential description of the
information and a full explanation of why the information should be provided
"trade secret" status. Any party will have the right to contest the trade secret
nature of such designated confidential information in accordance with the
Commission's Rules of Procedure.
Anyone who is afforded access to, or to whom disclosure is made of,
designated confidential portions of books and records, financial information,
contracts, minutes, memoranda, business plans, and the like, will agree to
maintain such information as confidential, other than information that
previously has been made public. For the purposes of this Plan, "information
that previously has been made public" will mean information that either (i) has
been disclosed by either the Holding company, the Delivery company or any
unregulated subsidiary in financial or other literature to the financial
community or to the public at large, (ii) appears in documents contained in the
public files of a local, state or federal agency, body or court and which has
not been accorded trade secret protection, or (iii) information that otherwise
is in the public domain.
In the event that Staff or any other party receives any information
designated as confidential pursuant to the procedures described in this Plan and
desires to use such information
in a litigated proceeding before the Commission, Staff or the party will first
notify counsel for the Delivery company and the Holding company and the
unregulated subsidiary, if applicable, of the nature of such information as well
as its intention to use such information in such proceeding and afford the
Delivery company, the unregulated subsidiary and/or the Holding company the
opportunity to apply to the administrative law judge presiding over such
proceeding within ten (10) business days for a ruling designed to maintain the
confidentiality of such information under Part 6-1 of the Commission's Rules of
Procedure (16 NYCRR). Staff and any other party may object to any such
application on the grounds that such information is not entitled to be treated
as a trade secret under Part 6-1.
In the event that a member of Staff receives any information designated as
confidential pursuant to the procedures described in this Plan and desires to
use or refer to such information in a memorandum or other document which may
become an "agency record" as the term is defined in the New York Freedom of
Information Law, Staff first shall notify the Company Liaisons (as defined in
Appendix H, p. 4, paragraph (iv)) of the nature of such information as well as
its intended use, and afford the Delivery company, the unregulated subsidiary,
if applicable, and/or the Holding company the opportunity to apply to the
Commission under Part 6-1 of the Commission's Rules of Procedure within ten (10)
business days for a protective order designed to maintain the confidentiality of
such information. Staff and any other party may object to any such application
on the grounds that such information is not entitled to be treated as a trade
secret under Part 6-1.
Should O&R or any of its affiliates come into possession of any information
protected by the provisions of Part 6-1 of the Commission's regulations, such
information shall be afforded the same protection by the Company as is afforded
the Company's confidential information under the provisions of this Appendix.
Contract and pricing terms between Delivery company customers and providers
other than O&R or its affiliates shall constitute confidential information and
will be used by the Company solely as needed to comply with its required
customer and supplier billing function under PowerPick(TM). O&R shall provide
such confidential information to its own personnel on a need-to-know basis only
and will not disclose such information to any affiliate without the written
consent of the party with proprietary rights in the information. Any
confidential information provided to O&R shall be clearly marked on every page
to the effect that the information is confidential and protected by the
Commission's rules on confidentiality and non-disclosure.
Customer Service and Reliability Performance Mechanism
Customer Service
The Company shall continue the customer service performance mechanism
consisting of: 1) an annual Residential Customer Assessment Score ("RCAS"), 2)
an annual Commercial and Industrial Customer Assessment Score ("CICAS"), and 3)
an annual PSC complaint rate target.
The customer satisfaction surveys that will be used as the basis to
establish the targets discussed below are intended to evaluate Company
performance as rated by customers in the categories of overall favorableness,
value and loyalty. The customer satisfaction survey shall be conducted for each
year of this Plan. At the commencement of retail access, the Company and Staff
will assess the appropriateness of the survey upon which the CAS is based and
determine whether a modified survey is necessary.
The RCAS target shall be 2.73 for each rate year of the Plan. The actual
RCAS will be subject to adjustment to account for any applicable margin of
error. If the actual RCAS as adjusted falls below the 2.73 target or the
customer satisfaction survey is not performed in any rate year, the Sharing
Threshold (as defined in this Plan) will be reduced by five basis points in that
rate year.
The CICAS target shall be 2.65 for each rate year of the Plan. The actual
CICAS will be subject to adjustment to account for any applicable margin of
error. If the actual CICAS, as adjusted, falls below the 2.65 target or the
customer satisfaction survey is not performed in any rate year, the Sharing
Threshold will be reduced by five basis points in that rate year.
The annual PSC Complaint Rate target shall be 10.6 complaints per 100,000
customers for each rate year. The actual complaint rate shall be calculated
using a 12-month average. If the actual complaint rate exceeds 10.6 in any rate
year, the Sharing Threshold will be reduced by five basis points in that rate
year.
The Company will, upon request from Staff, provide such information as is
available to verify survey results. Any confidential information or trade
secrets given to Staff shall be held and used in accordance with Appendix E.
Average Duration of Interruptions
The weighted Company-wide average duration of interruption level target it
1.54 Hrs./Int. ("Interruption Duration Target"), which is a composite of the
following minimum acceptable values established by the Commission's Order of May
30, 1995, in Case 95-E-0165:
MINIMUM
OPERATING AREA INTERRUPTION STANDARD (HRS./INT.)
Eastern Duration 1.46
Central Duration 1.70
Western Duration 1.53
If, for any of the rate years covered by this Plan, Orange and Rockland fails to
achieve the Interruption Duration Target, the Sharing Threshold (as defined in
this Plan) applicable to that rate year shall be reduced by five basis points.
Average Frequency of Interruptions
The weighted Company-wide average frequency of interruption level target is
1.70 Int./Cust. ("Interruption Frequency Target") which is a composite of the
following minimum acceptable values established by the Commission in its order
dated May 30, 1995, in Case 95-E-0165:
MINIMUM
OPERATING AREA INTERRUPTION STANDARD (INT./CUST.)
Eastern Frequency 1.46
Central Frequency 1.70
Western Frequency 2.25
If, for any of the rate years covered by this Plan, Orange and Rockland fails to
achieve the Interruption Frequency Target, the Sharing Threshold applicable to
that rate year shall be reduced by five basis points.
Low Income Customer Assistance Program
Introduction
On April 2, 1996, Orange and Rockland Utilities, Inc. ("Orange and
Rockland" or the "Company"), New York State Department of Public Service Staff
("Staff"), the New York State Consumer Protection Board ("CPB") and the
Industrial Energy Users Association ("IEUA") entered into a settlement agreement
on electric rates in Case 95-E-0941 ("Rate Case Settlement Agreement") in this
proceeding. As part of the Rate Case Settlement Agreement, the parties agreed to
meet and discuss the feasibility of developing a new low income program. The
Rate Case Settlement Agreement was approved by the Commission in Opinion No. 96-
21 issued August 12, 1996.
Since the issuance of Opinion No. 96-21, representatives of the Company,
Staff, Pace Energy Project ("Pace") and Public Utility Law Project of New York,
Inc. ("PULP") have met on various occasions to discuss the development of a new
low income program. The parties have agreed that the Company shall implement a
low income program ("Program") in accordance with the terms and conditions set
forth below.
1. Term
The Program will commence as soon as practicable after the effectiveness of
new rates and terminate four years thereafter.
2. Eligible Customers
The Program will be conducted solely for the residents of the City of Port
Jervis, New York and/or residents of the zip code area 12771. The goal of the
Program is to serve approximately 400 customers in total, or approximately 100
customers for each of the four years included in this Plan. To be eligible, a
customer must have been the current customer of record and been receiving
service for at least one year at the present location.
3. Program Expenditures
Program expenditures will include all expenses for energy efficiency,
arrears forgiveness, evaluation and administration. Funding for this Program,
including $35,000 of administrative costs per year, shall come from unexpended
DSM funds.
Expenditures per customer will be capped at $1,000. This expenditure
includes the cost of an energy audit, disaggregated billing analysis, energy
efficiency measures, and arrears forgiveness. If the Company finds that it is
spending consistently less than $1,000 per customer, it will attempt to recruit
more customers (in excess of the original 400 customers) into the Program in
order to fully expend the available funds.
4. Financial Eligibility Criteria
Customers must be at or below 150% of the Federal Poverty Level to qualify
for entry into the Program. HEAP eligibility guidelines will be used.
Participating customers must apply for HEAP benefits, and, where applicable,
customers also must apply to the Neighbor Fund for a grant.
The Company's target for recruiting customers who are on a direct payment
program with the Department of Social Services will be 10% of the total
customers served.
5. Budget Program
Participating customers will be required to participate in the Company's
budget program.
6. Landlord Contribution
If a customer lives in a leased premise, a landlord contribution of 25%
will be required for energy conservation measures. If the landlord does not
contribute, the customer will not be eligible to participate in the Program.
7. Energy Audit
An energy audit will be conducted for each participant to identify the
potential for the installation of an energy efficient refrigerator and/or
weatherization measures. Weatherization measures will be considered for electric
or gas heating customers only. The final determination of which measures, if
any, to install will be based on the cost of the measures and the benefits to
the customer.
8. Contract
A participating customer must execute a contract with the Company which
sets forth the terms of the agreement including: the budget payments to be made,
the amount of arrears forgiveness agreed on (if any), the energy measures to be
installed, and the conditions upon which continued participation will be
allowed. The contract will also provide that the customer will be removed from
credit action while participating in the Program.
9. Program Measures
The Program will address energy efficiency, payment patterns, and/or
arrears forgiveness, depending upon a customer's circumstances. Energy
efficiency measures (including refrigerator replacement) will be the first
priority for Program expenditures.
10. Arrears Forgiveness
Arrears forgiveness, capped at $250 per participant, is a customer option
in the Program. Customers who choose this option will be required to make on-
time monthly budget payments. If a customer fails to make three monthly payments
by the due date for those payments, the customer will be removed automatically
from the Program, will forfeit any further arrears forgiveness, will be returned
to normal credit action.
All accounts complying with the payment criteria, as well as all other
Program requirements, will then have 25% of the arrears agreed on between the
customer and the Company removed from the customers account at the end of each
successful three-month segment.
If a participating customer chooses not to take advantage of the arrears
forgiveness component, the customer will be required to participate and remain
on a mutually agreeable payment plan to address the customers arrears condition.
At the conclusion of a customer's participation in the Program, any arrears
still existing will be subject to a mutually agreeable payment plan, and all
normal collection activity will be reinstated.
11. Program Evaluation
At the conclusion of the Program's first year, the Company will prepare and
provide to Staff a brief status report on the Program. The Company will evaluate
the Program and prepare a detailed report within 75 days of the Program's
conclusion.
12. Legislative, Regulatory or Related Actions
If any law, rule, regulation, order or other requirement (or any repeal or
amendment of an existing rule, regulation, order or other requirement) of the
state, local or federal government results in a material change in the terms of
this Plan, the parties agree to reconvene promptly and consider any appropriate
changes to this Plan.
Standards of Competitive Conduct
General Principles
The following standards of competitive conduct shall govern the Delivery
company's relationship with any energy supply and energy service affiliates:
(i) There are no restrictions on affiliates using the same name, trade
names, trademarks, service names, service mark or a derivative of a name,
of the Holding company or the Delivery company or in identifying itself as
being affiliated with the Holding company or the Delivery company. The
Delivery company will not provide sales leads involving customers in its
service territory to any affiliate, including the ESCO, and will refrain
from giving any appearance in promotional advertising or otherwise that the
Delivery company speaks on behalf of an affiliate or that an affiliate
speaks on behalf of the Delivery company. If a customer requests
information about securing any service or product offered within the
service territory by an affiliate, the Delivery company will provide a list
of companies of which it is aware operating in the service territory who
provide the service or product, which may include an affiliate, but the
Delivery company will not promote its affiliate.
(ii) The Delivery company will not provide services to its marketing
affiliates or customers of its marketing affiliates on preferential terms,
nor represent that such terms are available, exclusively to customers who
purchase goods or services from, or sell goods or services to, an affiliate
of the Delivery company. The Delivery company will not purchase goods or
services on preferential terms offered only to suppliers who purchase goods
or services from, or sell goods or services to an affiliate of the Delivery
company. The Delivery company will not represent to any customer, supplier,
or third party that an advantage may accrue to such customer, supplier, or
third party in the use of the Delivery company's services as a result of
that customer, supplier or third party dealing with any affiliate. This
standard does not prohibit two or more of the unregulated affiliates from
lawfully packaging their services. The Delivery company must process all
similar requests for distribution services in the same manner and within
the same period of time.
(iii) All similarly situated customers, including energy services
companies and customers of energy service companies, whether affiliated or
unaffiliated, will pay the same rates for the Delivery company's utility
services and the Delivery company shall apply any tariff provision in the
same manner if there is discretion in the application of the provision. The
Delivery company must strictly enforce a tariff provision for which there
is no discretion in the application of the provision.
(iv) Transactions subject to FERC's jurisdiction over the provision of
sales or services in interstate commerce will be governed by FERC's orders
or standards as applicable.
(v) Release of proprietary customer information relating to customers
within the Delivery company's service territory shall be subject to prior
authorization by the customer and subject to the customer's direction
regarding the person(s) to whom the information may be released.
(vi) The Delivery company will not disclose to its affiliate any customer
or market information relative to its service territory, including, but not
limited to utility customer lists, that it possesses or receives from a
marketer, customer, potential customer, or agent of such customer or
potential customer other than information available from sources other than
the Delivery company, unless it discloses such information to its
affiliate's competitors on an equal basis and subject to the consent of the
marketer, customer, or potential customer.
(vii) The Delivery company shall establish a complaint process consistent
with the following. If any competitor or customer of the Delivery company
believes that the Delivery company has violated the standards of
competitive conduct established in this section of the agreement, such
competitor or customer may file a complaint in writing with the Delivery
company. The Delivery company will respond to the complaint in writing
within twenty (20) business days after receipt of the complaint, including
a detailed factual report of the complaint and a description of any course
of action proposed to be taken. After the filing of such response, the
Delivery company and the Complaining party will meet, if necessary, in an
attempt to resolve the matter informally. If the Delivery company and the
complaining party are not able to resolve the matter informally within 15
business days, the matter will be referred promptly to the Commission for
disposition.
(viii) The Commission may impose on the Delivery company remedial action
for violations of the standards of competitive conduct. If the Commission
believes that the Delivery company has engaged in material violations of
the standards of competitive conduct during the course of this Plan, it
shall provide the Delivery company notice of and a reasonable opportunity
to remedy such conduct or explain why such conduct is not a violation. If
the Delivery company fails to remedy such conduct within a reasonable
period after receiving such notice, the Commission may take remedial action
with respect to the Holding company to prevent the Delivery company from
further violating the standard(s) at issue. Such remedial action may
include directing the Holding company to divest the unregulated subsidiary,
or some portion of the assets of the unregulated subsidiary, that is the
subject of the Delivery company's material violation(s), but exclude
directing the Holding company to divest the Delivery company or imposing a
service territory restriction on the unregulated subsidiary. If the Holding
company is directed to divest an unregulated subsidiary, it may not
thereafter, without prior Commission approval, use a new or existing
subsidiary of the Holding company to conduct within the Delivery company's
service territory the same business activities as the divested subsidiary
(e.g., energy services). The Delivery company and the Holding company may
exercise any and all legal and/or equitable relief from such remedial
actions, including, but not limited to injunctive relief. Neither Orange
and Rockland nor any affiliate or subsidiary will challenge the
Commission's legal authority to implement the provisions of this
subparagraph.
(ix) The Standards of Competitive Conduct set forth in this Plan will
apply in lieu of any existing generic standards of conduct (e.g., the
interim gas standards established in Case 93-G-0932) and may be proposed as
substitutes for any future generic Standards of Competitive Conduct
established by the Commission through the term of this Plan. Unless
otherwise ordered by the Commission, the Standards of Competitive Conduct
set forth in this Plan will continue to apply after the expiration of the
term of this Plan, given the Company's need for stability in rules
governing its structure. Before the Commission
makes any changes to these standards, it will consider the Company's
specific circumstances, including its performance under the existing
standards.
(x) The rate levels provided for in this Plan cover all royalties that
otherwise would be credited to the Delivery company's customers, at any
time, including after the expiration of this Plan.
Access to Books and Records and Reports
(i) Staff will have access, on reasonable notice and subject to
appropriate resolution of confidentiality and privileges, to the books and
records of the Holding company and the Holding company majority-owned
subsidiaries.
Staff will have access, on reasonable notice and subject to the
provisions of Appendix E regarding confidentiality and privileges, to
the books and records of all other Holding company subsidiaries to
the extent necessary to audit and monitor any transactions which have
occurred between the Delivery company and such subsidiaries, to the
extent the Holding company has access to such books and records.
(ii) The Delivery company will supplement the information that the
Commission's regulations require it to report annually with the following
information: Transfers of assets to and from an affiliate, cost allocations
relative to affiliate transactions, identification of Delivery company
employees transferred to an affiliate, and a listing of affiliate employees
participating in common benefit plans.
(iii) The Holding company will provide a list on a quarterly basis to the
Commission of all filings made with the Securities and Exchange Commission
by the Holding company and any subsidiary of the Holding company including
the Delivery company.
(iv) A senior officer of the Holding company and the Delivery company will
each designate a company employee, as well as an alternate to act in the
absence of such designee, to act as liaison among the Holding company, the
Delivery company and Staff ("Company Liaisons"). The Company Liaisons will
be responsible for ensuring adherence to the established procedures and
production of information for Staff, and will be authorized to provide
Staff access to any requested information to be provided in accordance with
this Plan.
(v) Access to books and records shall be subject to claims of privilege
and confidentiality as set forth in Appendix E hereto.
Affiliate Relations
1. General
a) The Delivery company and the Holding company's other subsidiaries will
be operated as separate entities, with separate books of account and other
business records, within 180 days of formation of the Holding company.
Unregulated affiliates will establish and maintain separate and distinct
offices and work space from the Delivery company in a separate building or
leasehold.
b) Draft cost allocation guidelines are attached as Appendix J. These
guidelines are fully reviewable and non-binding proposals that may be
amended and/or supplemented as necessary. The Company will file with the
Director of the Office of Accounting and Finance of the Department of
Public Service all amendments and supplements to the guidelines, thirty
days prior to making such change(s). At the discretion of the Commission,
these guidelines will be considered in either the unbundling phase of this
proceeding or as part of the Company's application to form a Holding
company as appropriate.
c) Neither the Delivery company nor marketing affiliate personnel shall
communicate with any customer, supplier or third party that any advantage
may accrue to such customer supplier or third party in the use of the
Delivery company's service as a result of their dealing with the marketing
affiliate.
d) If the Delivery company offers its affiliate or a customer of its
affiliate a discount or special arrangement for distribution service,
billing, metering on any other service offered, it must contemporaneously
offer the same arrangement to all similarly situated non-affiliate
merchants and must file with the Commission procedures that will enable the
Commission to determine how the Delivery company is complying with those
standards.
2. Transfer of Assets
a) Transfers of assets from an affiliate to the Delivery company will not
require prior Commission approval. Transfers of assets from the Delivery
company to an affiliate will not require prior Commission approval, except
for assets of the Delivery company whose transfer requires Commission
approval under Public Service Law, (S) 70.
b) For all assets other than generating stations, transfers of assets from
the Delivery company to an affiliate shall be at the higher of net book
value or fair market value net of deferred Federal income taxes, except
that the Delivery company may, as part of its reorganization, transfer to
the Holding company or affiliate, at no charge, title to office furniture,
equipment and other assets having an aggregate net book value not to exceed
$250,000 (on a system basis). Transfers of assets from an affiliate to the
Delivery company shall be on a basis not to exceed fair market value.
c) Fair market value shall be determined in accordance with the cost
allocation guidelines. For example, the Delivery company may transfer to an
affiliate any computer software system that the Delivery company is
authorized to transfer, without data, at a
price at which the Delivery company would sell such software to an
unaffiliated third party.
3. Personnel
a) The Delivery company and the unregulated affiliates will have separate
operating employees.
b) Officers of the Delivery company may not be officers of the ESCO.
c) Employees may be transferred from the Delivery company to an
unregulated affiliate upon mutual agreement. Transferred employees may not
be reemployed by the Delivery company for a minimum of one year after the
transfer date. Employees returning to the Delivery company may not be
transferred again to an unregulated affiliate until one year after the date
of return. The Delivery company will file annual reports to the Commission,
beginning 45 days after the end of the first calendar quarter following
structural separation showing transfers between the Delivery company and
unregulated affiliates by employee name, former company, former position,
new company, new position, and salary or annualized base compensation.
d) For each employee transferred from the Delivery company to an
unregulated affiliate, the unregulated affiliate shall compensate the
Delivery company by paying an amount equal to 25% of the employee's prior
year's annual salary on a one-time basis, except that there shall be no
compensation (i) for employees transferred to an unregulated affiliate not
later than six months from the date of structural separation or the
unregulated affiliate to which the employee is transferred is formed,
whichever is later; (ii) for the transfer of employees covered by a
collective bargaining agreement; or (iii) where the employee's transfer is
attributable to the transfer or reduction of a Delivery company function or
major asset.
e) The foregoing provisions do not restrict any affiliate from loaning
employees to Delivery company to respond to an emergency that threatens the
safety or reliability of service to consumers.
f) The compensation of Delivery company employees may not be tied to the
performance of any of the unregulated subsidiaries, provided, however, that
stock of the Holding company may be used as an element of compensation and
the compensation of common officers of the Holding company and Delivery
company may be based upon the operations of the Holding company and
Delivery company.
g) The employees of Holding company, Delivery company and the unregulated
subsidiaries may participate in common pension and benefit plans, provided
that funding requirements for employees remaining with the regulated entity
are readily determined. If the plans are maintained or amended in such a
manner that employees of the unregulated entities are treated
inconsistently with the employees of the regulated entity, then the plans
of the regulated entity will be segregated and made independent.
4. Provision of Services and Goods
a) Corporate services (such as corporate governance, administrative,
legal, purchasing and accounting) may be provided by the Holding company to
or on behalf of
the Delivery company and unregulated affiliates at a price equal to fully-
loaded cost. This guideline will not operate as a prescription of the
ratemaking treatment of requested allowances for the costs of such
services.
b) The Delivery company may provide services to an unregulated affiliate,
except that the Delivery company may not use any of its marketing or sales
employees to provide services to any affiliated ESCO relating to business
within the Delivery company's service territory. The unregulated affiliate
shall compensate the Delivery company for the services of employees at the
higher of the employees' fully-loaded cost or the price that the Delivery
company would charge a third party for such employees' services. This
guideline will not operate as a limitation on the projections of revenues
from such services adopted for ratemaking purposes.
c) Subject to the provisions of this Appendix, the Company's unregulated
affiliates may provide services to the Delivery company. Any management,
construction, engineering or similar contract between the Delivery company
and an affiliate and any contract for the purchase by the Delivery company
from an affiliate of electric energy or gas will be filed with the Public
Service Commission pursuant to Public Service Law (S) 110, and will be
subject to any applicable FERC requirements. (As noted in Section IV.B.
herein, certain electric supply contracts will be subject to competitive
bidding.) All other goods and services will be provided to the Delivery
company at a price that shall not be greater than fair market value. This
guideline will not operate as a prescription of the ratemaking treatment of
requested allowances for the costs of such services.
d) The Delivery company, the Holding company, and the unregulated
affiliates may be covered by common property/casualty and other business
insurance policies. The costs of such policies shall be allocated among the
Delivery company, the Holding company and the unregulated affiliates in an
equitable manner.
Interdepartmental Transfers
The Company's submission to the Commission to modify its Fuel Adjustment
Clause and Gas Adjustment Charge will be consistent with the following
principles:
1. The existing agreement in which the Company's gas department provided a
bundled gas service (i.e., acquired gas and transported from production
area to generation site) for generation is changed.
2. The new agreement functionally separates the electric and gas departments'
business relationship. Electric department will now purchase gas separate
from the gas department.
3. The gas department will not be obligated to provide gas services (including
natural gas, transportation, capacity or balancing services upstream of the
citygate) to electric department, except: under separately negotiated
contracts at market based prices.
4. The new Transportation price will incorporate a charge of $0.05 per Mcf
for all volumes transported to the electric department by the gas
department, but in no event will the total annual charge be less than
$1.275 million (Bowline By-Pass).
5. All gas transactions between gas and electric business units will be arms
length, with separate purchasing personnel.
6. Negotiated agreements between gas and electric departments will be at
posted bulletin board prices (market prices), consistent with FERC
standards and regulations. Copies of agreements will be filed with the
Commission by the gas business unit. This will include:
. transportation and capacity services from production areas to citygate
(i.e., all upstream capacity);
. price of gas (commodity) sold; and
. balancing services.
7. Absent a separate balancing agreement approved by the Commission, the
electric department must balance its gas deliveries to the citygate and
from the citygate to the generator site within the limits established for
transportation customers, as described in the gas transportation tariff, or
face penalty charges detailed in the gas tariff.
8. Expenditures associated with the upgrade of the existing pipeline to
Bowline, in order to allow the pipeline to operate it at a higher pressure,
and not for instance due to general safety considerations, will be
allocated to the Company's electric department.
EXL-1(P)
[ORGANIZATIONAL CHART APPEARS HERE]
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[ORGANIZATIONAL CHART APPEARS HERE]
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT
1,000
12-MOS 12-MOS 12-MOS 12-MOS
JAN-01-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998
DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
MAR-31-1998 MAR-31-1998 MAR-31-1998 MAR-31-1998
PER-BOOK PRO-FORMA
11,264,989 935,276 437,708 12,637,973
331,970 10,505 0 342,475
1,277,449 165,983 (72,976) 1,370,456
590,088 67,279 35,200 692,567
938,053 76,829 0 1,014,882
14,402,549 1,255,872 399,932 16,058,353
588,724 67,594 (67,594) 588,724
856,661 126,244 (126,244) 856,661
4,531,810 183,625 (194,984) 4,520,451
5,977,195 377,463 (388,822) 5,965,836
84,550 0 0 84,550
233,468 43,220 0 276,688
4,198,152 356,637 790,000 5,344,789
0 0 0 0
0 0 0 0
0 0 0 0
200,000 121,398 0 321,398
0 0 0 0
39,180 1,603 0 40,783
2,778 173 0 2,951
3,667,226 355,378 (1,246) 4,021,358
14,402,549 1,255,872 399,932 16,058,353
7,133,644 628,536 0 7,762,180
377,796 22,916 (19,670) 381,042
5,712,848 528,536 20,023 6,261,407
6,090,644 551,452 353 6,642,449
1,043,000 77,084 (353) 1,119,731
10,487 2,037 0 12,524
1,053,487 79,121 (353) 1,132,255
330,819 31,893 47,400 410,112
0 (10,834) 0 (10,834)
722,668 36,394 (47,753) 711,309
233,468 43,200 0 276,688
0 0 0 0
306,016 23,1010 47,400 376,426
1,247,507 90,878 (861,730) 476,655
2.99 2.47 0 2.93
2.99 2.47 0 2.93
