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FILE NO. 70-9613
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO
APPLICATION/DECLARATION
ON
FORM U-1
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CONSOLIDATED EDISON, INC. NORTHEAST UTILITIES
4 Irving Place 174 Brush Hill Ave
New York, New York 10003 West Springfield, MA 01090-0010
(Names of companies filing this statement and addresses of principal
executive offices.)
Consolidated Edison, Inc.
(Name of top registered holding company)
Peter A. Irwin Cheryl W. Grise
Consolidated Edison, Inc. General Counsel
4 Irving Place Northeast Utilities Service Company
New York, New York 10003 107 Selden Street
Berlin, CT 06037
(Name and address of agents for service)
The Commission is requested to mail signed copies of all orders, notices and
communications to:
J.A. Bouknight, Jr. Jeffrey C. Miller, Esq.
Douglas G. Green Assistant General Counsel
James B. Vasile Northeast Utilities
Steptoe & Johnson LLP Service Company
1330 Connecticut Ave, NW 107 Selden Street
Washington, D.C. 20036-1795 Berlin, CT 06037
TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
A. Introduction
1. Overview
2. General Request
B. Description of the Parties
1. CEI and its Subsidiaries
(a) CECONY and its Subsidiaries
(b) O&R and its Subsidiaries
(c) Other CEI subsidiaries
(d) Divestiture of Generating Assets
2. Northeast Utilities and its Subsidiaries
(a) The Electric Utility System
(b) Other Subsidiaries of NU
(c) Divestiture of Generating Assets
(d) The Gas Utility System
(e) Other YES Subsidiaries
3. New CEI
4. The New York Power Pool and the New England Power Pool
C. Description of the Merger
1. Background to the Merger
2. CEI's Reason for the Merger
3. NU Reasons for the Merger
4. The Mergers
ITEM 2. FEES, COMMISSIONS AND EXPENSES
ITEM 3. APPLICABLE STATUTORY PROVISIONS
A. Section 9(a)(2)
B. Section 10(b)
1. Section 10(b)(1)
2. Section 10(b)(2)
3. Section 10(b)(3)
C. Section 10(c)
1. Integration of the Electric Systems
(a) Changes in the Electric Utility Industry
(b) Restructuring of NEPOOL and NYPP into Open,
Competitive and coordinated Markets
(i) The NYPP and NYISO
(ii) NEPOOL and ISO-NE
(iii) Coordination between ISO-NE and NYISO
(a) Interface transfer capacity
(b) Coordination and joint planning by CEI
and NU through the NYSIO and ISO-NE
(c) Integrating effects of NYISO and ISO_NE
Transmission Tariffs
(c) Statutory Standards For Electric Integration
2. Integration of Gas Utility Operations
3. Combination of Electric and Gas Utility Operations
(a) Section 10(c)(1)
(i) Section 8
(ii) Section 11
(b) "ABC" Clauses
4. Retention of Other Businesses
(a) The Steam Business
(b) The NU Nonutility Subsidiaries
(c) The CEI Nonutility Subsidiaries
5. Economies and Efficiencies from the Merger (Section 10(c)(2))
6. Section 10(f)
ITEM 4. REGULATORY APPROVALS
A. Federal Energy Regulatory Commission
B. Nuclear Regulatory Commission
C. United States Antitrust Law
D. State Laws
ITEM 5. PROCEDURE
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
a.1 Certificate of Incorporation of New CEI (Incorporated by
reference to Exhibit A to the Merger Agreement of Consolidated Edison and
Northeast Utilities' Joint Proxy and Registration Statement on Form S-4 filed
on March 1, 2000, Registration No. 333-31390).
b.1 Amended and Restated Agreement and Plan of Merger (Incorporated by
reference to Annex A of Consolidated Edison and Northeast Utilities' Joint
Proxy and Registration Statement on Form S-4 filed on March 1,2000,
Registration No. 333-31390).
c.1 Joint Proxy and registration Statement on Form S-4 (Incorporated
by reference to Consolidated Edison and Northeast Utilities' Joint Proxy and
Registration Statement on Form S-4 filed on March 1,2000, Registration No.
333-31390).
d-1 Application to FERC
d.1-1 Prepared Direct Testimony and Exhibits of William H. Hieronymus
d.1-2 FERC Order
d.2-1 Filing made with the DPUC
d.2-2 DPUC Order
d.3-1 Filing made with the MPUC
d.3-2 Order of the MPUC
d.4 Filing made with DTE
[No Order required]
d.5 Intentionally Ommitted
d.6-1 Filing made with the NHPUC
d.6-2 NHPUC Order
d.7 Filing made with the NJBPU
[No Order required]
d.8-1 Filing made with the NYPSC
d.8-2 NYPSC Order
d.9-1 Filing made with the PAPUC
d.9-2 PAPUC order
d.10-1 Filing made with the VPSB
d.10-2 Order of the VPSB
d.11-1 Filing made with the NRC
d.11-2 NRC Order
f.1 Legal Opinions
g.1 Financial Data Schedules
h.1 Form of Notice
i.1 Gas retention analysis for the CEI Gas Properties
i.2 Gas Retention analysis for the NU Gas Properties
j. Nonutility Subsidiaries of New CEI
k.1 Corporate Structure of Consolidated Edison, Inc. Pre-merger
k.2 Corporate Structure of Northeast Utilities Pre-merger
k.3 Corporate Structure of Combined Companies, Post-merger
l. CEI and PricewaterhouseCoopers, LLP Letters
(b) Financial Statements
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Application/Declaration in this file, as amended, is hereby further
amended and restated as follows:
"ITEM 1. Description of Proposed Transaction
A. Introduction
1. Overview
This Application/Declaration seeks approvals relating to the proposed
combination of Consolidated Edison, Inc. ("CEI"), a New York corporation
currently a holding company exempt from the Public Utility Holding Company
Act of 1935 (the "Act"), and Northeast Utilities ("NU"), a registered holding
company under the Act. Under the proposal, CEI will merge with and into
Consolidated Edison, Inc. (formerly CWB Holdings, Inc.), a new Delaware
holding company ("New CEI") which is currently a wholly-owned subsidiary of
CEI, with New CEI being the surviving entity, and NU will merge with N
Acquisition LLC, a Massachusetts limited liability company controlled by New
CEI, with NU being the surviving entity, all as set forth in an Amended and
Restated Agreement and Plan of Merger dated as of January 11, 2000 (the
"Merger Agreement"). Upon consummation of the merger, (i) the holders of
CEI's common shares and NU's common shares will together own all of New CEI's
outstanding shares of common stock, (ii) New CEI will register as a public
utility holding company under the Act, (iii) New CEI will own all of the
assets of CEI and (iv) NU will be a wholly-owned subsidiary of New CEI and
continue to be registered under the Act. The mergers described above are
sometimes referred to herein, collectively, as the "Merger" or the
"Transaction" and CEI and NU are sometimes referred to herein as the
"Applicants". The Applicants will file one or more additional applications-
declarations on Form U-1 under the Act with the Commission with respect to
authorization for the financing transaction to satisfy the cash portion of
the merger consideration, ongoing activities of, and other matters pertaining
to, the combined company after giving effect to the Merger.
The Merger is expected to produce benefits to investors and consumers
and will meet all applicable standards of the Act. Among other things, the
Applicants believe 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, CEI and NU will be able to improve the
operations of the combined public utility systems. Their adjacent gas and
electric service territories will create synergies and operating efficiencies
that would not be available absent the Merger. The expected benefits of the
Merger are discussed in more detail in Item 3 below.
The Transaction was unanimously approved by the Board of Directors of
CEI and by the Board of Trustees of NU on October 12, 1999. CEI and NU
submitted a combined proxy statement and prospectus and registration
statement on Form S-4 on a confidential basis to the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933 and the
Securities Exchange Act of 1934 (the "Exchange Act") on November 17, 1999.
The Applicants have also filed or shortly will file applications or other
filings, as required, with the various public utility commissions of New
York, New Jersey, Pennsylvania, Connecticut, Massachusetts, New Hampshire and
Vermont. CEI and NU will make the required filings with the Antitrust
Division of the U.S. Department of Justice and the Federal Trade Commission
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
shortly. The Applicants also filed an application seeking the approval of
the Nuclear Regulatory Commission ("NRC") on January 13, 2000 and the Federal
Energy Regulatory Commission ("FERC") under the Federal Power Act on January
14, 2000. See Item 4 below for additional detail regarding these regulatory
approvals. In order to permit timely consummation of the Transaction and the
realization of the benefits it is expected to produce, the Applicants request
that the Commission's review of this Application/Declaration proceed as
expeditiously as practicable, and that the Commission order be issued no
later than June 30, 2000. To the extent that all of the state and other
regulatory approvals have not been received by that time, the Applicants ask
the Commission to condition the effectiveness of its order upon receipt of
all necessary state and other regulatory approvals.
2. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, New CEI hereby requests
authorization and approval of the Commission to acquire, by means of the
mergers described below, all of the issued and outstanding common stock of NU
and its public utility subsidiaries. New CEI also hereby requests that the
Commission approve (i) the retention by New CEI of the gas properties of the
utility subsidiaries of CEI and NU and the continuation of such subsidiaries
as either gas utilities or combination gas and electric utilities, as the
case may be, and (ii) the retention by New CEI of the non-utility businesses
of CEI and NU.
B. Description of the Parties
1. CEI and its Subsidiaries
CEI is a public utility holding company for Consolidated Edison Company
of New York, Inc. ("CECONY") and Orange and Rockland Utilities, Inc. ("O&R")
and certain non-utility subsidiaries and is not itself an operating company.
CEI is exempt from all provisions of the Act by virtue of Section 3(a)(1)
except for Section 9(a)(2) thereof. CECONY provides electric service and
natural gas service to customers in New York City and Westchester County.
CECONY also supplies steam service to customers in parts of Manhattan. O&R
provides electric service and natural gas service to customers in
southeastern New York State and, through its public utility subsidiaries,
adjacent sections of New Jersey and Pennsylvania. O&R is exempt from all
provisions of the Act by virtue of Section 3(a)(2) except for Section 9(a)(2)
thereof.
For the 12 month period ending March 31, 2000, CEI had approximately $8
billion in consolidated operating revenues. CEI's common stock is listed on
the New York Stock Exchange. As of March 31, 2000, CEI had outstanding
211,959,922 common shares ($.10 par value per share).
CEI has four non-utility subsidiaries which provide electric and gas
supply services, invest in energy infrastructure projects and market
technical services, and develop and manage infrastructure for a
communications business.
(a) CECONY and its subsidiaries
CECONY, a New York corporation incorporated in 1884, provides franchised
retail electric service to over 3 million customers and gas to over one
million customers in New York City and Westchester County. It has a service
area of about 660 square miles and approximately 2,148 mw of generating
assets, including the 1,000 Mw the Indian Point 2 nuclear generating facility
(CEI's unregulated subsidiaries own approximately 608 Mw of additional
generating assets). At December 31, 1999, CECONY's transmission system had
approximately 430 miles of overhead circuits operating at 138, 230, 345 and
500 kilovolts and approximately 380 miles of underground circuits operating
at 138 and 345 kilovolts. The company's transmission facilities are located
in New York City and Westchester, Orange, Rockland, Putnam and Dutchess
counties in New York State. At December 31, 1999, CECONY's distribution
system had approximately 32,500 miles of overhead distribution lines and
approximately 88,200 miles of underground distribution lines. Natural gas is
delivered by pipeline to Con Edison of New York at various points in its
service territory and is distributed to customers by the company through
approximately 4,200 miles of mains and 366,000 service lines. At December
31, 1999, CECONY had 13,025 employees. CECONY also supplies steam service
to customers in parts of Manhattan. CECONY is regulated by the New York
Public Service Commission ("NYPSC") as well as the FERC and the NRC. CECONY
has three wholly-owned subsidiaries: Davids Island Development Corporation
("Davids Island") and D.C.K. Management Corporation ("DCK") both New York
corporations and Steam House Leasing LLC, a Delaware company ("Steam House").
Davids Island owns real property acquired as a possible site for an electric
generating plant in Dutchess and Columbia Counties in New York State and is
in the process of disposing of the property. DCK owns real property in New
York City. Steam House leases a steam generating plant that produces steam
for CECONY's steam distribution business.
CECONY 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.
(b) O&R and its Subsidiaries
O&R, a New York corporation incorporated in 1926, is a wholly-owned utility
subsidiary of CEI, and it, along with its public utility subsidiaries,
supplies franchised retail electricity to approximately 275,640 customers and
gas to approximately 117,283 customers in 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 territory of CECONY. O&R has two utility subsidiaries, Rockland
Electric Company ("RECO"), a New Jersey corporation incorporated in 1899, and
Pike County Light and Power Company ("Pike"), a Pennsylvania corporation
incorporated in 1914. RECO supplies electricity to parts of New Jersey and
Pike supplies electricity and gas to the northeastern corner of Pike County
in Pennsylvania. CECONY and O&R (including RECO and Pike) jointly operate a
single integrated electric transmission and distribution system serving parts
of New York, New Jersey and Pennsylvania and an integrated gas distribution
system in New York and Pennsylvania. As of December 31, 1999, O&R and its
utility subsidiaries, RECO and Pike own, in whole or in part, transmission
and distribution facilities which include 601 circuit miles of transmission
lines, and 5,046 pole miles of overhead distribution lines and 2,493 miles of
underground distribution lines. O&R and Pike own their gas distribution
systems, which include 1,780 miles of mains. As of December 31, 1999, O&R
had 1,001 employees. Neither RECO nor Pike have employees.
O&R 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. O&R, Pike and RECO also are subject to regulation by
FERC. O&R 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 owns 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 O&R's service territory by providing improved sites
and buildings, owns real estate which is 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. and Compass Resources, Inc. ("Compass"), both
inactive Delaware corporations. SRH has one wholly-owned non-utility
subsidiary, NORSTAR Holdings, Inc. ("NHI") a Delaware corporation. 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 is the majority owner of
NORSTAR Energy Pipeline Company, LLC, a Delaware limited liability company,
which is inactive.
(c) Other CEI subsidiaries
(i) Consolidated Edison Solutions, Inc. ("CES") is a wholly-owned
subsidiary of CEI, organized in New York, that provides wholesale and retail
energy and related services. CES has a 50 percent fully diluted interest
in Inventory Management & Distribution Company, Inc. ("IMD"), an energy
marketing firm organized in Delaware which is in the process of being
dissolved. CES also has a 14.4 percent interest in Remote Source Lighting
International, Inc. ("RSLI"), a lighting technology company organized in
Delaware.
(ii) Consolidated Edison Development, Inc. ("CEDI") is wholly-owned by
CEI and organized in New York. It is in the business of investing in foreign
and domestic energy and other infrastructure projects and the marketing of
CECONY's technical services. CEDI has ten direct subsidiaries: (i) Con
Edison Development Guatemala, Ltd., organized under the laws of the Cayman
Islands and in the business of investing in energy projects in Central
America; (ii) Consolidated Edison Leasing, Inc., a Delaware corporation,
which has an investment in a leveraged lease transaction in a power plant in
the Netherlands; (iii) Con Edison Leasing, LLC, a Delaware limited liability
company, which has an investment in a leveraged lease transaction in a gas
distribution system in the Netherlands; (iv) CED Ada, Inc., a Delaware
corporation, which owns an approximate 96 percent interest in CED/DELTA Ada,
LLC, a Delaware limited liability company, which owns a 49.5 percent limited
partnership interest and a 0.5 percent general partnership interest in Ada
Cogeneration Limited Partnership, a Michigan limited partnership ("ACLP")
(ACLP owns a 30 megawatt ("MW") gas-fired qualifying cogeneration facility
under the Public Utility Regulatory Policies Act of 1978 ("PURPA") in Ada,
Michigan); (v) Carson Acquisition, Inc., a Delaware corporation ("CAI"),
formerly owned an interest in a 42 MW qualifying cogeneration facility under
PURPA in Carson, California); at present, CAI is inactive; (vi) approximately
95% of CED/SCS Newington, LLC, a Delaware limited liability company, which in
turn owns 100% of Newington Energy, LLC, a Delaware limited liability
company, which is currently developing a 525 MW electric generating facility
in Newington, New Hampshire; (vii) CED GTM 1, LLC, a Delaware limited
liability company, which in turn owns an approximate one-half interest in GTM
Energy LLC, a Delaware limited liability company, which was formed to pursue
an opportunity to develop electric generating facilities in New York City,
which is no longer being pursued, (viii) Consolidated Edison Energy
Massachusetts, Inc. ("CEEMI"), a Delaware company, which was
established for the purpose of owning and operating 290 MW of generation
facilities acquired from Western Massachusetts Electric Company, a wholly-
owned subsidiary of NU, in July 1999, (ix) CED Generation Holding Company,
LLC, a Delaware company which indirectly owns and manages a 236 MW power
plant located in Lakewood, New Jersey and (x) CEDST, LLC, a Delaware company
which owns 100% of CED 42, LLC, both formed to invest in low-income housing
transactions to achieve tax credits for the system.
CEDI also owns all of the issued and outstanding shares of Con Edison
Development Acquisition and Finance, Ltd. ("CEDAF"), and Con Edison El
Salvador One, Ltd ("CEES"), each a corporation organized under the laws of
the Cayman Islands. At present, both CEDAF and CEES have no assets or
operations. CEDAF was organized in connection with a potential investment in
Guatemala, which was never made. CEES was organized in connection with a
potential investment in El Salvador, which was never made.
(iii) Consolidated Edison Energy, Inc. ("CEEI") is a wholly-owned
subsidiary of CEI, organized in 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.
(iv) Consolidated Edison Communications, Inc. ("CECI") is a wholly-
owned subsidiary of CEI, organized in New York in late 1997 to own, operate
or invest in facilities used for telecommunications or otherwise to compete
in the telecommunications industry. On November 23, 1999, CECI agreed to
acquire a 10.75% stock interest in Northeast Optic Network, Inc. ("NEON"), a
provider of broadband telecommunications services in the northeast United
States, in exchange for certain telecommunication facilities and rights of
way in New York City. NU owns approximately 30% of NEON's common shares.
The nonutility subsidiaries of CEI are described in Exhibit j attached
hereto.
(d) Divestiture of Generating Assets
In September 1997, the NYPSC approved a settlement agreement among
CECONY, the Staff of the NYPSC and other parties (the "CECONY Settlement
Agreement") providing for: (i) the transition to a competitive electric
market in CECONY's service area, through the development of a "retail access"
plan, (ii) a rate plan providing for substantial retail rate reductions by
CECONY through March 31, 2002, (iii) a reasonable opportunity for CECONY to
recover its prior investments and commitments and (iv) the divestiture by
CECONY to unaffiliated third parties of at least 50 percent of its New York
City fossil-fueled electric generating capacity. Pursuant to the CECONY
Settlement Agreement, CECONY submitted a divestiture plan for its fossil-
fueled electric generation in New York City (the "Divestiture Plan") which
the NYPSC approved in orders issued July 21, and August 5, 1998. Under the
Divestiture Plan, CECONY has divested almost all of its 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;
2,168 MW consisting of the Ravenswood generating station and gas
turbines; and
1,858 MW consisting of the Astoria generating station plus the Gowanus
and Narrows gas turbines.
In addition, CECONY has agreed to divest approximately 400 MW interest
in the Roseton Station located in Central Hudson Gas and Electric
Corporation's ("Central Hudson") service area in conjunction with Central
Hudson's divestiture auction. In December 1999, CECONY announced its
intention to explore alternatives to the continued ownership and operation of
its Indian Point nuclear power plant. In February 2000 CECONY announced an
auction process for the Indian Point 2, and the retired Indian Point 1.
Although CECONY has disposed of a majority of its electric generating
capacity, it will retain an obligation to serve load in its service
territory. In order to serve that load, CECONY will rely on generation from
its remaining electric capacity, on long term capacity contracts it has with
non-utility generators, and from purchases in the wholesale competitive
market. CECONY retains about 460 MW of generating capacity that produces
both electricity and steam for its steam distribution system in Manhattan and
some small combustion turbines located in various facilities in New York City
and Westchester County.
Similarly, O&R 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 O&R's
Final Divestiture Plan. O&R's Final Divestiture Plan provided for the
divestiture of 100 percent of O&R's generating assets by auction. In July,
1999, O&R sold all of its electric generating facilities, including its one-
third interest in the Bowline Point Station. Also included in this sale was
CECONY's two-thirds interest in the Bowline Point Station.
2. Northeast Utilities and its Subsidiaries
(a) The Electric Utility System
Northeast Utilities is the parent of a number of companies comprising
the Northeast Utilities system (the "System") and is not itself an operating
company. The System furnishes franchised retail electric service in
Connecticut, New Hampshire and western Massachusetts through three of NU's
wholly-owned subsidiaries, The Connecticut Light and Power Company ("CL&P"),
Public Service Company of New Hampshire ("PSNH") and Western Massachusetts
Electric Company ("WMECO"), and additionally furnishes retail electric
service to a limited number of customers through another wholly-owned
subsidiary, Holyoke Water Power Company ("HWP"), doing business in and around
Holyoke, Massachusetts. In addition to their retail electric service
business, CL&P, PSNH, WMECO and HWP (including its wholly-owned subsidiary,
Holyoke Power and Electric Company) (collectively, the "NU Operating
Companies") together furnish wholesale electric service to various
municipalities and other utilities throughout the Northeast. The System
serves approximately 30 percent of New England's electric needs and had 9,099
employees as of December 31, 1999. For the 12 month period ending March 31,
2000, NU had approximately $4.8 billion of operating revenues. The Common
Shares of NU are listed on the New York Stock Exchange. As of March 31,
2000, NU had approximately 143,150,550 shares ($5.00 per share par value)
outstanding.
CL&P, a corporation organized under the laws of Connecticut in 1905,
furnishes retail delivery franchise service to approximately 1,120,846
customers in 149 cities and towns in Connecticut. As of December 31, 1999,
CL&P owned 1,286 pole miles (1,638 circuit miles) of overhead transmission
lines and 36 bank miles (167.8 cable miles) of underground transmission
lines, and 18,202 pole miles of overhead and 746 bank miles (7,271 cable
miles) of underground distribution lines. CL&P also owns an 81% interest in
the 870 Mw Millstone 2 nuclear generating facility ("Millstone 2") and
approximately 53% of the 1,154 Mw Millstone 3 nuclear generating facility
("Millstone 3") located in Waterford, Connecticut, and approximately 4% of
the 1,148 Mw Seabrook nuclear generating facility ("Seabrook") located in
Seabrook New Hampshire. As of December 31, 1999, CL&P employed 2,377
employees. PSNH, a New Hampshire corporation formed in 1926, furnishes
retail delivery franchise service to 427,694 customers in 198 towns and
cities in New Hampshire. As of December 31, 1999, PSNH owned approximately
974 pole miles (974 circuit miles) of overhead transmission lines and 11,188
pole miles of overhead distribution lines and 1102 bank miles (1102 cable
miles) of underground distribution lines. PSNH has 1,258 employees. WMECO,
a Massachusetts corporation formed in 1886, provides retail delivery to
approximately 198,012 customers in 59 cities and towns in Massachusetts. As
of December 31, 1999, WMECO owned approximately 342 pole miles of overhead
transmission lines (446 circuit miles) and 8 bank miles (28 cable miles) of
underground transmission lines. WMECO also owns 3,660 pole miles of overhead
distribution lines and 267 bank miles (2,416 cable miles) of underground
distribution lines. WMECO also owns a 19% interest in Millstone 2 and
approximately 13% in Millstone 3. WMECO has 482 employees. In addition to
regulation by their respective state commissions of their states of
operation, CL&P, WMECO and PSNH are also regulated by FERC and the NRC. HWP,
a Massachusetts corporation formed in 1859, owns 200 Mw of generating assets
and 13.3 pole miles (14.5 circuit miles) of overhead transmission lines and
18.47 pole miles of overhead distribution lines and 2.24 bank miles (4.3
cable miles) of underground distribution lines. HWP has 78 employees and
serves 32 retail customers in Holyoke, Massachusetts under contracts
regulated by FERC.
North Atlantic Energy Corporation ("NAEC") is a special-purpose
operating subsidiary of NU, organized under the laws of New Hampshire, that
owns a 35.98 percent interest in Seabrook. . NAEC sells its share of the
capacity and output from Seabrook to PSNH under two life-of-unit, full-cost
recovery contracts. These contracts are regulated by FERC. NAEC has no
employees.
(b) Other Subsidiaries of NU
Several wholly-owned subsidiaries of NU provide support services for the
System companies and, in some cases, for other New England utilities.
(i) Northeast Utilities Service Company ("NUSCO") is a wholly owned
subsidiary of NU and provides centralized accounting, administrative,
information resources, engineering, financial, legal, operational, planning,
purchasing and other services to the NU System companies.
(ii) North Atlantic Energy Service Corporation ("NAESCO") is wholly
owned by NU. NAESCO has operational responsibility for Seabrook.
(iii) Northeast Nuclear Energy Company ("NNECO") is a wholly-owned
subsidiary of NU. NNECO acts as agent for the System companies and other New
England utilities in operating the Millstone Nuclear generating facilities
located in Waterford, Connecticut.
(iv) Three other subsidiaries, Rocky River Realty Company, The
Quinnehtuk Company (both wholly-owned by NU) and Properties, Inc., wholly-
owned by PSNH, construct, acquire or lease some of the property and
facilities used by the NU System companies.
(v) NU Enterprises, Inc. ("NUEI") is a wholly-owned subsidiary of NU.
NUEI acts as the holding company for NU's unregulated businesses. Northeast
Generation Company ("NGC"), a subsidiary of NUEI, was formed to acquire and
manage generating facilities. Northeast Generation Services Company ("NGS"),
another subsidiary of NUEI, was formed to provide services to the electric
generation market as well as to large commercial and industrial customers in
the Northeast. In January 1999, NU transferred to NUEI the stock of three
other of its subsidiaries, making them wholly-owned subsidiaries of NUEI:
Select Energy, Inc. ("Select Energy"), HEC Inc. ("HEC") and Mode 1
Communications, Inc. ("Mode 1"). These companies engage, either directly or
indirectly through subsidiaries, in a variety of energy-related and
telecommunications activities, as applicable, primarily in the unregulated
energy retail and wholesale commodity, marketing and services fields. In
addition, Select Energy Portland Pipeline, Inc., a subsidiary of NUEI was
formed as a single purpose Rule 58 subsidiary to hold a 5% partnership
interest in the Portland Natural Gas Transmission System Partnership, the
partnership that owns and operates the Portland Natural Gas Transmission
Pipeline
(c) Divestiture of Generating Assets
The NU Operating Companies own and operate a fully integrated electric
utility business. Restructuring legislation in New Hampshire, Massachusetts
and Connecticut, however, now requires PSNH, WMECO and CL&P, respectively, to
separate the distribution and transmission functions of their business from
the generation function by mandating the sale of fossil fuel and
hydroelectric generation. To that end, CL&P and WMECO each offered their
non-nuclear generating assets for sale. In July 1999, WMECO closed on the
sale to CEEI of 240 MW of fossil fuel and hydroelectric generating plants.
On July 6, 1999, CL&P and WMECO announced the results of their auction of
CL&P's non-nuclear generating assets and WMECO's remaining non-nuclear
generating assets. Approximately 2,235 MW of fossil-fueled generating assets
were awarded to a NRG Energy, Inc., a subsidiary of Northern States Power
Company and 1,329 MW of hydro-powered generating assets were awarded to NGC,
with aggregate sale proceeds of approximately $1.3 billion. The sale of the
generating assets to NRG Energy, Inc. was completed on December 15, 1999 and
the sale of the generating assets to NGC was completed in March 2000.
(d) The Gas Utility System
On March 1, 2000, Yankee Energy System, Inc. merged with and into a
wholly-owned subsidiary of NU, which was renamed Yankee Energy System, Inc.
("YES"). YES is primarily engaged in the retail distribution of natural gas
through its wholly-owned subsidiary, Yankee Gas Services Company ("Yankee
Gas"), a Connecticut public utility service company. Yankee Gas, a
Connecticut corporation formed in 1988, purchases, distributes and sells
natural gas to approximately 185,000 residential, commercial and industrial
users in Connecticut. Its service territory consists of 69 cities and towns,
and covers approximately 1,995 square miles, all in Connecticut and all
within the service territory of CL&P. Yankee Gas owns approximately 2,820
miles of distribution mains, 133,033 service lines, and 185,000 active meters
for customer use, all located in Connecticut. In addition to being regulated
by the Connecticut Department of Public Utility Control (the "DPUC"), Yankee
Gas is also regulated by FERC.
(e) Other YES Subsidiaries
YES is a public utility holding company incorporated in Connecticut in
1988. In addition to being the holding company for Yankee Gas, it also is
the holding company for four active non-utility subsidiaries, NorConn
Properties, Inc. ("NorConn"), Yankee Energy Financial Services Company
("Yankee Financial"), Yankee Energy Services Company ("YESCo") and R.M.
Services, Inc. ("RMS"). These companies are referred to collectively herein
as "the Yankee Energy System." All four non-utility subsidiaries of YES are
Connecticut corporations. As of December 31, 1999, the YES companies had
approximately 790 employees. For the 12 month period ending March 31,
2000, YES had approximately $327.1 million of operating revenues.
(i) NorConn was formed in 1988 to hold property and facilities of the
Yankee Energy System.
(ii) Yankee Financial, incorporated in 1992, provides customers with
financing for energy equipment installations.
(iii) YESCo provides a wide range of energy-related services for its
customers. Through its YESCo Controls division, such services include
comprehensive building automation with engineering, installation and
maintenance of building control systems. Through its YESCo Mechanical
Services division, customers are provided comprehensive heating, ventilation
and air-conditioning (HVAC), boiler and refrigeration equipment services and
installation.
(iv) RMS was formed in 1994 to provide debt collection service to
utilities and other businesses nationwide.
YES, Yankee Gas, Yankee Financial, NorConn, and YESCo, are predominantly
intrastate in character.
3. New CEI
After the Merger is consummated, New CEI will be a registered public
utility holding company under the Act. It will own, directly, two public
utilities, O&R and CECONY, a public utility holding company, NU, and various
nonutility subsidiaries. O&R will also own two public utilities, Pike and
RECO, and various nonutility subsidiaries. O&R will remain an exempt holding
company under Section 3(a)(2) of the Act. NU will continue as a registered
public utility holding company under the Act and will own, directly, five
public utilities, WMECO, CL&P, PSNH, NAEC and HWP, along with various other
non-utility subsidiaries. NU will also own, directly, YES, which will be an
exempt public utility holding company under the Act which will own one public
utility, Yankee Gas, and various other nonutility subsidiaries. Charts
showing the corporate structure of CEI and NU prior to the Mergers are
attached as Exhibits k.1 and k.2 hereto. A chart showing the corporate
structure of New CEI post Merger, prior to any corporate restructuring, is
attached hereto as Exhibit k.3.
4. The New York Power Pool and the New England Power Pool
Prior to the commencement of operations of the New York Independent
System Operator ("NYISO") on November 11, 1999, CECONY and O&R were members
of the New York Power Pool ("NYPP"). Upon the commencement of NYISO's
operations, all of the functions of the NYPP were transferred to the NYISO.
CECONY and O&R are "transmission owner market participants" in the NYISO.
The NYISO is a New York not-for-profit corporation. It is governed by a
Management Committee consisting of representatives from all of New York
State's market participants (including CEI) which reports to an independent
Board of Directors. The NU Operating Companies are members of the New
England Power Pool ("NEPOOL") and have transferred control over most of
their transmission facilities to Independent System Operator-New England
("ISO-NE"). NEPOOL is a cooperative association of the major electric
utilities operating in the New England region.
Following the Merger, CECONY and O&R (including RECO and Pike) will
continue to be transmission owner market participants of NYISO, and the NU
Operating Companies will continue to be members of NEPOOL. All of these
companies will continue to coordinate operations in accordance with
applicable ISO or power pool procedures.
C. Description of the Merger
1. Background to the Merger
Prior to entering merger discussions with CEI, NU had carefully followed
recent developments in the electric and natural gas industries in the
northeastern United States that have made it difficult for medium-sized
utility companies to compete as effectively as larger utilities. In early
1998, NU began to develop a strategic plan to focus its regulated
subsidiaries on electric and natural gas distribution, while focusing its
unregulated affiliates on energy marketing and generation. To effectively
compete in each of these businesses, NU determined that it would need to
increase its scale of operations and the size of its customer base.
NU determined that possible mergers with neighboring electric and
natural gas distribution companies would help achieve its goals. In that
regard, NU's proposed merger with YES is an important part of NU's overall
strategy. Over the past year, NU also engaged in confidential discussions
with a number of other regional electric and gas distribution companies to
explore various forms of strategic transactions, including asset sales,
acquisitions and mergers. None of these other discussions, other than those
with YES, resulted in a substantive agreement, and all such other discussions
were terminated. While NU considered the acquisition of YES to be an
important step toward achieving its strategic goals, NU concluded that a
business combination with a larger partner, such as CEI, would be required to
attain the size necessary to compete in the northeast energy markets.
CEI has also focused on its core transmission and distribution business.
It has pursued a strategy of growing this business in its service territory
and has carefully pursued expansion in the northeast region through mergers
and acquisitions. In addition to the transmission and distribution business,
CEI is applying its expertise in energy supply, energy delivery and customer
service to growing its unregulated businesses by focusing on complementary
energy and infrastructure-related services in the northeast.
CEI has approached its mergers and acquisitions strategy in what it
believes to be a correctly planned and disciplined fashion. The merger with
O&R, completed in July 1999, was an important initial step to this strategy.
The merger with NU is a further important step in this strategy. CEI
believes that the Merger with NU will reinforce CEI's position as one of the
leading electric and gas transmission and distribution companies in the
country. On October 13, 1999, the parties entered into an agreement and plan
of merger. This merger agreement was subsequently amended and restated as
of January 11, 2000.
2. CEI's Reasons for the Merger
CEI believes that the common vision of CEI and NU and their
complementary strategies, in combination with their management, personnel,
technical expertise and financial strength, will create a company with the
capabilities and resources better positioned to succeed and grow in the new
competitive energy marketplace.
CEI believes the Merger joins two well-managed companies, providing
substantial strategic and financial benefits to CEI shareholders, employees
and customers. The combination of CEI and NU is expected to provide New CEI
with the size, resources and large customer base necessary for achieving
competitive investor returns in the rapidly changing electricity and natural
gas industries. In addition, CEI and NU anticipate merger savings in their
regulated and unregulated businesses from the elimination of duplicate
corporate and administrative programs and greater efficiency in operations
and business processes and increased purchasing efficiencies.
3. NU Reasons for the Merger
NU believes that the Merger will join two well-managed companies with
complementary and contiguous operations as well as a shared vision of the
future of the energy markets in the Northeast. Based on the prospects of
utility deregulation and the increasing competitive pressure faced by
electric and gas utility companies, NU believes that, in order to succeed in
such a market, NU must have a larger customer base with increased economies
of scale to be an efficient, low cost supplier of energy and related
services. NU believes that the Merger will result in the greatest overall
value to its shareholders as well as to employees and customers of NU and its
subsidiaries, while creating the size and scale necessary to be successful in
a restructured energy market. The Merger will allow the combined company to
accelerate NU's and CEI's shared strategies for growth in unregulated
markets. The NU Board of Trustees fully evaluated other strategic options
available and concluded that the Merger will provide the greatest overall
value to NU shareholders. NU believes that benefits resulting from the
Merger include:
(i) The Merger will create one of the leading electric and gas transmission
and distribution companies in the country and provide a strong regional
foundation with the expanded scale and scope necessary to be an effective
participant in the emerging and increasingly competitive energy markets. The
combined company will be the nation's largest electric distribution utility
with over 5,000,000 electric customers and over 1.4 million natural gas
customers.
(ii) The combined company will be substantially stronger financially than
NU, with revenues on a pro forma basis of approximately $13.1 billion dollars
and total assets of approximately $27.8 billion dollars. This financial
strength will provide significant benefits to NU's regulated and unregulated
businesses.
(iii) The combined company's larger customer base and distribution channels
will allow it to offer additional products and services. The Merger will
create a company that will be able to offer integrated energy products and
services and telecommunications products and services.
(iv) Neighboring service territories, including the largest customer base
in both New York and New England , will allow the combined company to take
advantage of operating efficiencies, economies of scale and cross-selling
opportunities. In addition, by integrating management, the larger company
will be able to draw on a larger and more diverse pool of talent while
allowing for the elimination of duplicate corporate and administrative
functions.
(v) NU Shareholders will receive approximately $25 in value per NU share,
subject to adjustment, to be paid either in cash, shares of New CEI stock or
a combination of the two, which represents an approximate 36% premium over
the October 6, 1999 closing price of NU common shares, the last full trading
day prior to the time public reports appeared speculating about discussions
between CEI and NU (or a 44% premium if NU satisfies the divestiture
condition (hereinafter described) and the closing occurs on December 31,
2000). In addition, NU shareholders who receive New CEI shares will receive
a significant increase in their quarterly dividend, based on CEI's current
dividend policy.
4. The Mergers
Under the Merger Agreement, (i) CEI will merge into New CEI, with New
CEI being the surviving corporation, and (ii) N Acquisition LLC, a
Massachusetts limited liability company controlled by CEI, will merge with
and into NU, with NU being the surviving entity. Upon completion of the
Merger, the holders of CEI common shares and NU common shares will together
own all of New CEI's outstanding shares of common stock, New CEI will own all
of the assets of CEI and NU will be a wholly-owned subsidiary of New CEI.
The Merger of NU into New CEI will be accounted for using the "purchase
method" of accounting and will result in the creation of approximately $1.6
billion of good will. See Pro Forma Financial Statements of New CEI filed
with Amendment No. 2 in this File. New CEI will not push down this good will
to NU or its subsidiaries, based on the authority contained in Staff
Accounting Bulletin 54, Topic 5.J, question 2, which grants an exception to
push down accounting for companies with significant public debt or preferred
stock. See Exhibit l, which comprises a letter of explanation from CEI with
an accompanying letter from its independent public accountants.
The Merger Agreement provides that each CEI common share outstanding
immediately prior to the closing of the Merger will, at closing, be converted
into one share of New CEI common stock. Any CEI common shares held by CEI as
treasury shares or owned by New CEI will be canceled without any payment for
those shares.
The Merger Agreement provides that NU shareholders may elect to receive,
for each NU common share they own, a fraction (the "Exchange Ratio") of a
share of New CEI common stock equal to a numerator of $25.00 divided by the
weighted average trading price of a CEI common share over 20 trading days
randomly selected from the 40 trading days ending five trading days prior to
the closing. However, the CEI share price used to calculate the Exchange
Ratio will not be less than $36.00 nor greater than $46.00. Also, $1.00 will
be added to the numerator if, prior to the closing of the Merger, certain NU
subsidiaries enter into binding agreements to sell to one or more non-
affiliated third parties their respective interests in the Millstone Station
Unit 2 and Millstone Station Unit 3 nuclear power plant assets, in
accordance, in all material respects, with applicable law and the rules and
regulations of the DPUC for approval of such agreements and (x) the Utility
Operations and Management Unit of the DPUC has submitted a formal written
recommendation to the DPUC for approval of the agreements or (y) the DPUC has
issued a final order approving the agreements (the "divestiture condition").
In addition, in the event the Merger does not close by August 5, 2000,
$.0034 will be added to the numerator for each day after August 5, 2000
through the day prior to the closing of the Merger.
In the alternative, holders of NU common shares may elect to receive
cash consideration equal to $25.00 per NU common share, provided that an
additional $1.00 per share will be payable if, prior to the closing of the
Merger, NU satisfies the divestiture condition and an additional $.0034 per
share will be payable for every day after August 5, 2000 through the day
prior to the closing of the Merger.
If the Merger closes on or prior to December 31, 2000, and the
divestiture condition has not been satisfied but thereafter and on or prior
to December 31, 2000, NU satisfies the divestiture condition, then each NU
shareholder (whether the shareholder elected stock or cash consideration)
will be entitled to $1.00 per converted NU common share to be paid in cash by
New CEI.
Elections for stock consideration or cash consideration will also be
subject to allocation and proration procedures. If greater than 50% of the
outstanding NU common shares eligible to be converted into merger
consideration (the "Maximum Stock Election Number") elect or are deemed to
elect stock consideration, then all holders that elected or were deemed to
have elected to receive stock (the "Requested Stock Amount") will receive,
with respect to each NU share for which an election has been made or deemed
made:
(i) a number of shares equal to the product of the Exchange Ratio and a
fraction (the "Stock Proration Factor"), the numerator of which is the
Maximum Stock Election Number and the denominator of which is the Requested
Stock Amount; and
(ii) cash in an amount equal to the product of one minus the Stock
Proration Factor and $25.00.
If greater than 50% of the outstanding NU common shares eligible to be
converted into merger consideration (the "Maximum Cash Election Number")
elect or are deemed to elect cash consideration, then all holders that
elected or were deemed to have elected to receive cash (the "Requested Cash
Amount") will receive, with respect to each NU share for which an election
has been made or deemed made:
(i) cash in an amount equal to the product of $25.00 and a fraction
(the "Cash Proration Factor"), the numerator of which is the Maximum Cash
Election Number and the denominator of which is the Requested Cash Amount;
and
(ii) a number of shares equal to the product of one minus the Cash
Proration Factor and the Exchange Ratio.
As a result of the above-mentioned allocation and proration, the amount
of New CEI common stock and cash received by holders of shares of NU may
differ from their actual election. If New CEI common stock is over-subscribed
by holders of shares of NU, those holders who elected to receive New CEI
common stock may instead receive part of their consideration in the form of
cash. If cash is over-subscribed by holders of shares of NU, those holders
who elected to receive cash may instead receive part of their consideration
in the form of shares.
The Merger Agreement is subject to customary mutual closing conditions
such as approval by the CEI and NU shareholders, absence of legal
prohibitions on completion of the Merger, New CEI's registration statement on
Form S-4 not being subject to any stop order or proceeding seeking a stop
order, and approval for listing on the New York Stock Exchange of the shares
of New CEI common stock to be issued in the Merger, subject to official
notice of issuance. In addition, the Merger Agreement is subject to customary
closing conditions specific to each party, such as the accuracy of the
representations and warranties given by the other party, the absence of a
material adverse change in the financial condition of the other party and
receipt of all regulatory approvals.
The Merger Agreement also contains certain covenants relating to the
conduct of business by NU pending the consummation of the Transaction, which
are customarily contained in merger transactions generally. Among other
things, NU must carry on its business in the ordinary course consistent with
past practice, and may not increase dividends beyond specified levels or
issue capital stock, all except as otherwise specified. The Merger Agreement
also contains customary restrictions on, among other things, charter and
bylaw amendments, capital expenditures, acquisitions, dispositions,
incurrence of indebtedness and certain increases in employee compensation and
benefits and affiliate transactions.
The Merger Agreement also contains termination provisions, which are
customary for merger transactions generally and include termination fees due
from one party to the other under certain circumstances.
ITEM 2. Fees, Commissions And Expenses
The information required by Item 2 will be provided by amendment.
ITEM 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder
are or may be applicable to the authorization being sought hereunder by the
Applicant: 6(a), 7, 8, 9(a), 10 and, by reference, Section 11 and Rule 58.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Transaction, such sections and rules
should be considered to be set forth in this Item 3.
A. Section 9(a)(2)
Section 9(a)(2) makes it unlawful, without 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 [under Section 2(a)(11)(A) of the Act] . . . of such company and
of any other public utility or holding company, or will by virtue of such
acquisition become such an affiliate." Under the definition set forth in
Section 2(a)(11)(A), an "affiliate" of a specified company means "any person
that directly or indirectly owns, controls, or holds with power to vote, 5
per centum or more of the outstanding voting securities of such specified
company" and "any company 5 per centum or more of whose outstanding voting
securities are owned, controlled, or held with power to vote, directly or
indirectly, by such specified company."
CEI, NU and YES are holding companies as defined in Section 2(a)(5) of
the Act. As a result of the Merger, CEI, directly or indirectly, will
acquire more than five percent of the voting securities of the public utility
subsidiaries of both NU and YES. CEI will thus become an "affiliate," as
defined in Section 2(a)(11)(A) of the Act, of the public utility subsidiaries
of both NU and YES. Accordingly, CEI must obtain the approval of the
Commission for the Merger under Sections 9(a)(2) and 10 of the Act. The
statutory standards to be considered by the Commission in evaluating the
proposed transaction are set forth in Sections 10(b), 10(c) and 10(f) of the
Act.
The Applicants believe that the Merger complies with all of the
applicable provisions of the Act and should be approved by the Commission.
Specifically, as the following discussion more fully explains:
- the Merger will not create detrimental interlocking relations or
concentration of control;
- the consideration to be paid in the Merger is fair and reasonable;
- the Merger will not result in an unduly complicated capital structure
for the post-Merger New CEI system;
- the Merger will be in the public interest and the interests of
investors and consumers;
- the Merger is consistent with Sections 8 and 11 of the Act;
- the Merger tends toward the economical and efficient development of
an integrated public utility system; and
- the Merger will comply with all applicable state laws.
The Transaction also provides an opportunity for the Commission to
follow certain of the interpretive recommendations made in the "Letter of the
Division of Investment Management to the Securities and Exchange Commission,
1995 Report" (the "1995 Division Report") as well as certain of the
Commission's recent precedents concerning the formation of new holding
companies consisting of both electric utilities and gas utilities. A number
of the recommendations contained in the 1995 Division Report serve to
strengthen the Applicants' analysis and provide support for the acquisition
of NU by CEI, in order to create a company better able to compete in the
rapidly evolving utility industry. The Division's overall recommendation
that the Commission "act administratively to modernize and simplify holding
company regulation . . . and minimize regulatory overlap, while protecting
the interests of consumers and investors," should be applied in reviewing
this Application/Declaration since, as demonstrated below, the Transaction
will benefit both consumers and shareholders of CEI and NU and it is
anticipated that the other federal and state regulatory authorities with
jurisdiction over this Transaction will approve it as being in the public
interest. Among other things, the 1995 Division Report recommends that the
Commission should apply a more flexible interpretation of the integration
requirements under the Act; the geographic requirements of Section
2(a)(29)(A) should be interpreted flexibly, recognizing technical advances
consistent with the purposes and provisions of the Act; the Commission's
analysis should focus on whether the resulting system will be subject to
effective regulation; the Commission should liberalize its interpretation of
the "A-B-C" clauses and permit combination systems where the affected states
agree, and the Commission should "watchfully defer" to the work of other
regulators. The Applicants believe that this Transaction is in accord with
the recent Commission decisions approving the retention of gas properties by
newly merged combination electric and gas companies under a registered
holding company and also is consistent with, and furthers the policy of,
fostering the creation of competitive energy services companies as the energy
industry continues its evolution towards a more competitive market.
B. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an
extent detrimental to the public interest or the interests of investors or
consumers;
(2) in case of the 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 Applicants or will be detrimental to the public
interest or the interests of investors or consumers or the proper functioning
of such holding company system.
1. Section 10(b)(1)
Section 10(b)(1) requires that the Commission shall approve an
acquisition under Section 9(a) unless such acquisition will tend towards
interlocking relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the public interest or
the interests of investors or consumers. Section 10(b)(1) is intended to
avoid "an excess of concentration and bigness" while preserving the
"opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves
and generally more efficient operations" afforded by the coordination of
local utilities into an integrated system. (American Electric Power Co., 46
S.E.C. 1299, 1309 (1978)). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will
create "the type of structures and combinations at which the Act was
specifically directed." (Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700
(1968)). As discussed below, the Merger will not create a "huge, complex,
and irrational system," but rather will afford the opportunity to achieve
economies of scale and efficiencies which are expected to benefit investors
and consumers.
Interlocking Relations. With regard to interlocking relations, any merger,
by its nature, results in new links between theretofore unrelated companies.
However, these links are not the types of interlocking relationships targeted
by Section 10(b)(1), which was primarily aimed at preventing business
combinations unrelated to operating synergies. Under the terms of the Merger
Agreement, following consummation of the Transaction, the New CEI Board of
Directors will include four directors designated by NU with the remainder of
the directors being designated by CEI. In addition, Michael Morris,
President and Chief Executive Officer of NU will be named President of New
CEI. Eugene R. McGrath, currently the Chairman of the Board and Chief
Executive Officer of CEI, will continue to hold those positions in New CEI.
This combination of existing CEI and NU management is necessary to integrate
NU fully into the New CEI system and will help New CEI realize the expected
synergies from the Merger. In addition, such continuity in management will
help to assure the responsiveness of New CEI management to local regulation
and to other essentially local interests (e.g., consumers, labor, etc.).
Regulation. CECONY, O&R and its public utility subsidiaries, the NU
Operating Companies and Yankee Gas are currently, and following the Merger
will remain, subject to the jurisdiction of the various state utility
commissions with regard to rates, terms and conditions for service, affiliate
transactions, service territory and various other matters. The regulatory
authority of these commissions will not be adversely affected by the Merger.
Accordingly, the presence of continuing state regulation will help to ensure
that the Merger will not have a detrimental effect on the public interest or
consumers. Moreover, rather than providing a means for evading regulation,
the Transaction, by virtue of the fact that New CEI will become a registered
holding company under the Act, will in fact increase the regulation to which
CEI is currently subject and will not affect the regulation to which NU is
subject. In the 1995 Division Report at pp. 73-4, the Division of
Investment Management recommended that the Commission approach its analysis
on merger and acquisition transactions in a flexible manner, with an emphasis
on whether the transaction creates an entity subject to effective regulation
and is beneficial for shareholders and customers, as opposed to focusing on
rigid, mechanical tests. The Transaction meets this standard.
Concentration of Control. Section 10(b)(1) is intended to avoid "an excess
of concentration and bigness" while preserving the "opportunities for
economies of scale, the elimination of duplicate facilities and activities,
the sharing of production capacity and reserves and generally more efficient
operations" afforded by the restructuring of local utilities into an
integrated system. As discussed below, the Merger will not create a "huge,
complex, and irrational system" of a type at which the Act is directed, but
rather will afford the opportunity to achieve economies of scale and
efficiencies that are expected to benefit investors and consumers. American
Electric Power Co., 46 S.E.C. 1299, 1307 (1978). The Merger will not lead
to the type of concentration of control over utilities, unrelated to
operating efficiencies, that Section 10(b)(1) was intended to prevent. The
primary objective of CEI and NU in the Merger is to become positioned to
participate in the growing and increasingly competitive northeastern United
States energy market. The Applicants believe that their combination provides
a unique opportunity for CEI, NU and YES and their respective shareholders,
customers and employees to participate in the formation of a competitive
energy services provider in the rapidly evolving energy services business and
to share in the benefits of industry restructuring which is well underway in
the northeastern United States.
Efficiencies and Economies. The Commission has rejected a mechanical size
analysis under Section 10(b)(1) in favor of assessing the size of the
resulting system with reference to the efficiencies and economies that can be
achieved through the integration and coordination of utility operations.
American Electric Power Co., 46 S.E.C. 1299, 1309. More recent
pronouncements of the Commission confirm that size is not determinative.
Thus, in Centerior Energy Corp., HCAR No. 24073 (April 29, 1986), the
Commission stated flatly 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." See also Entergy
Corporation, HCAR No. 25952 (December 17, 1993).
By virtue of the Transaction, CEI and NU, as a combined company, will be
in a position to realize substantial opportunities to become a more effective
competitor in a rapidly deregulating and increasingly competitive energy
market that neither, acting alone, would be in a position to achieve. In
addition, the combined company will over time be able to produce capital
expenditure savings through the elimination of duplicate facilities and
activities, labor cost savings, administration and general savings and cost
of capital savings. These expected economies are described in greater detail
elsewhere in this Application. The combination of CEI and NU offers the same
type of synergies and efficiencies that were sought and are now being
realized by the applicants (both exempt and registered) in TUC Holding
Company, HCAR No. 26749 (Aug. 1, 1997); Houston Industries Incorporated,
HCAR No. 26744 (July 24, 1997); WPL Holdings, Inc., HCAR No. 26856 (April
14, 1998); and New Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997).
Size. As of March 31, 2000, CEI had total assets of $15.5. billion and had
operating revenues for the 12-month period ending March 31, 2000 of
approximately $8 billion, and had approximately 3.2 million electric utility
customers in New York, New Jersey and Pennsylvania and 1.1 million gas
utility customers in New York, Pennsylvania and New Jersey. As of March 31,
2000, NU had total assets of $9.8 billion (not including YES assets) and had
total revenues for the 12-month period ending March 31, 2000 of $4.8 billion
and had approximately 1.7 million electric utility customers in Connecticut,
Massachusetts and New Hampshire. YES had total assets of $926.3 million for
the period ended March 31, 2000 and total revenues for the 12-month period
ended March 31, 2000 of $327.1 million and served approximately 185,000
customers in Connecticut. On a pro forma basis, giving effect to the Merger
(and including YES with NU), as of March 31, 2000, the combined assets of
New CEI (including goodwill adjustments) would have totaled approximately
$27.8 billion; and New CEI would have had combined revenues for the 12-month
period ending March 31, 2000 totaling approximately $13.1 billion and
approximately 5 million electric utility customers and 1.4 million gas
utility customers.
By comparison, the Commission has approved acquisitions involving, at
the time of approval, comparably sized operating utilities (see, e.g., The
Southern Company, HCAR No. 24579 (Feb. 12, 1988), approving the acquisition
of Savannah Electric and Power Company to create a system with assets of $36
billion). On completion of the Transaction, several utilities and utility
holding companies will be larger than New CEI including The Southern Company
($36 billion in assets), Edison International ($32 Billion in assets) and
PG&E Corp. ($31 billion in assets).
Competitive Effects: The Transaction will have no adverse effect on the
competitive environments in which CECONY, O&R and its utility subsidiaries,
or the NU Operating Companies operate. Following the Transaction, both CEI's
and NU's electric businesses will face the same competitive forces from other
electric suppliers as prior to the Transaction. Neither will the Transaction
have any adverse effect on the competitive environments in which YES' or
CEI's gas businesses operate. Following the Transaction, both CEI's and YES'
gas businesses will face the same competitive forces from other gas suppliers
as prior to the Transaction.
As the Commission noted in Northeast Utilities, HCAR No. 25221 (Dec. 21,
1990), the "antitrust ramifications of an acquisition must be considered in
light of the fact that public utilities are regulated monopolies and that
federal and state administrative agencies regulate the rates charged
consumers." CEI and NU will shortly file Premerger Notification and Report
Forms with the Antitrust Division of the Department of Justice and the
Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1974, as amended (the "HSR Act") and it is a condition to
the consummation of the Merger that the applicable waiting periods under the
HSR Act expire and clearances be obtained.
In addition, the competitive impact of the Merger is currently being
considered pursuant to the filing of CEI and NU with FERC under the Federal
Power Act. A detailed explanation concerning why such merger will not
threaten competition in the relevant geographic and product markets is set
forth in the prepared testimony of William Hieronymus, filed with the FERC
application. A copy of the FERC application, including Dr. Hieronymus'
prepared testimony as an attachment, is filed as Exhibit d.1 hereto. It is
anticipated that FERC will rule that the Merger will not significantly affect
competition in any relevant market.
For these reasons, the Transaction 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
investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
Section 10(b)(2) provides that an acquisition of securities or utility
assets should be approved, unless 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.
Fairness of Consideration. For the reasons set forth below, the requirements
of Section 10(b)(2) regarding consideration are satisfied in this
Transaction. In its determinations as to whether or not a price meets such
standard, the Commission has considered whether the price was decided as the
result of arms length negotiations (In the Matter of American Natural Gas
Company, HCAR No. 15620 (Dec. 12, 1966)), whether each of the parties'
Board of Directors has approved the purchase price, the opinions of
investment bankers (Consolidated Natural Gas Company, HCAR No. 25040 (Feb.
14, 1990)) and the earnings, dividends, book and market value of the shares
of, the company to be acquired (In the Matter of Northeast Utilities, HCAR
No. 15448 (Apr. 13, 1966)).
In its determinations as to whether or not a price meets the
reasonableness standard, the Commission has considered whether the price
was decided as the result of arms-length negotiations and the opinions of
investment bankers, among other things. For the reasons given below, there
is no basis in this case for the Commission to make any negative findings
concerning the consideration being offered by CEI in the Merger. The Merger
Agreement was approved by the Board of Trustees of NU and the Board of
Directors of CEI acting in accordance with their fiduciary duties to
shareholders. The amount of consideration to be paid to NU shareholders
under the Merger Agreement is the product of a process of extensive and
vigorous arms-length negotiations between CEI and NU. These negotiations
were preceded by thoughtful analysis and evaluation of the assets,
liabilities and business prospects of NU and involved careful due diligence
by NU and CEI. These negotiations concluded with the parties agreeing on
consideration consisting of a combination of cash and New CEI common shares
in the amount of $25.00 per NU share, subject to adjustments as described
above. As recognized by the Commission in Ohio Power Co., 44 S.E.C. 340,
346 (1970), prices arrived at through arms-length negotiations are
particularly persuasive evidence that Section 10(b)(2) is satisfied. An
extensive discussion of the negotiations that took place in connection with
the Merger is found in the Joint Proxy Statement, incorporated by reference
as Exhibit c.2
NU employed SG Barr Devlin ("Barr Devlin") and Morgan Stanley & Co.,
Inc. ("Morgan Stanley") as investment advisors and each of them reviewed
extensive information concerning the Merger, analyzed the conversion ratios
employing a variety of valuation methodologies, and opined in fairness
opinions that the consideration was fair, from a financial point of view, to
the holders of NU common shares.
CEI engaged Salomon Smith Barney, Inc. ("Salomon") with respect to the
Merger. Salomon also employed a variety of valuation methodologies and
provided an opinion to the CEI Board of Directors that the consideration was
fair from a financial point of view to the holders of CEI common shares.
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Merger, the
Applicants believe that the consideration falls within the range of
reasonableness, and the consideration to be paid in the NU Merger bears a
fair relation to the sums invested in, and the earning capacity of NU.
Reasonableness of Fees. CEI and NU believe that the overall fees,
commissions and expenses incurred and to be incurred in connection with the
Transaction will be reasonable and fair in light of the size and complexity
of the Transaction relative to other transactions and the anticipated
benefits of the Transaction to the public, investors and consumers; that they
are consistent with recent precedent; and that they meet the standards of
Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, CEI and NU will
provide their estimate of fees, commissions and expenses in connection with
the Transaction in an amendment to this filing. However, the Applicants
believe that the estimated fees and expenses will bear a fair relation to the
value of the combined company and the strategic benefits to be achieved by
the Merger.
3. Section 10(b)(3)
Section 10(b)(3) directs approval of an acquisition unless the
Commission finds that the Transaction 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. The
Commission has found that an acquisition satisfies this requirement where the
effect of a proposed acquisition on the acquirer's capital structure is
negligible and the equity position is at or above the traditionally
acceptable 30 percent level prescribed by the Commission. (See, e.g., Entergy
Corp., 55 S.E.C. 2035 (Dec. 17, 1993). The Commission has approved common
equity to total capitalization ratios as low as 27.6 percent. (Northeast
Utilities, 47 S.E.C. 1279 (1990). Under these standards, the proposed
combination of NU and CEI will not unduly complicate the capital structure of
the combined system.
In the Transaction, the common shareholders of CEI and NU will receive
New CEI Common Stock in exchange for their shares of CEI Common Stock and NU
Common Shares, respectively. New CEI will own 100% of the common shares of
NU and there will be no minority common stock interest remaining in NU.
Set forth below are summaries of the historical capital structures of
CEI and NU/YES as of March 31, 2000 and the pro forma consolidated capital
structure of post-Merger New CEI as of March 31, 2000:
CEI and NU
Historical Consolidated Capital Structures
(as of March 31, 2000)
(Dollars in thousands)
(unaudited)
CEI NU/YES
Common Stock Equity $5,424,129 $2,363,999
Preferred stock not subject 212,563 136,200
to mandatory redemption
Preferred stock subject to
mandatory redemption 37,050 119,789
Long-Term Debt $4,375,030 $2,443,989
Total $10,048,772 $5,063,977
Post-Merger New CEI Pro Forma Consolidated Capital Structure
(Dollars in millions)
(unaudited)
Common Stock Equity (incl.
additional paid in capital) $7,391.6 44%
Preferred stock not subject to
mandatory redemption (of subsidiaries) $ 348.8 2%
Preferred stock subject to
mandatory redemption (of subsidiaries) $ 156.8 1%
Long-Term Debt $8,786.5 53% -
Total $16,683.7 100%
As can be seen from these tables, post-Merger New CEI's consolidated
common equity to total capitalization will be approximately 44 percent, which
will be significantly higher than Northeast Utilities' approved 27.6 percent
common equity position and will exceed the traditionally accepted 30 percent
level. The capital structure of post-Merger New CEI will also be
substantially similar to the capital structures approved by the Commission in
other orders. (See, e.g., Ameren Corporation HCAR No. 26809 (December 30,
1997); CINergy Corp., HCAR No. 20934 (November 2, 1998).
Protected interests: As set forth more fully elsewhere in this
Application/Declaration, the Transaction is expected, over time, to result in
otherwise unavailable cost savings and benefits to the public and to
consumers and investors of CEI and NU, and will integrate and improve the
efficiency of the CEI and NU utility systems. Moreover, as noted by the
Commission in Entergy Corporation, HCAR 25952 (December 17, 1993), "concerns
with respect to investors' interests have been largely addressed by
developments in federal securities laws and the securities market
themselves." CEI, CECONY, O&R, NU, YES, and four of the NU Operating
Companies are reporting companies subject to the continuous disclosure
requirements of the Exchange Act and, with the exception of NU, will continue
to be so following completion of the Transaction, which will provide
investors with readily available information concerning these companies.
Furthermore, the Transaction is subject to state regulatory approval, which
will have been obtained prior to the consummation of the Merger (see Item 4
Regulatory Approvals, below).
The economic benefits achievable through the combination of natural gas
operations with electric power operations serve the public interest through
enabling energy suppliers to satisfy the needs of consumers more efficiently.
In Consolidated Natural Gas Co., HCAR No. 35-26512 (April 30, 1996), the
Commission acknowledged the nature of the market energy suppliers must
prepare to satisfy: "fundamental changes in the energy industry are leading
to an increasingly competitive and integrated market in which marketers deal
in interchangeable units of energy expressed in British thermal unit values,
rather than natural gas or electricity. To retain and attract wholesale and
industrial customers, utilities need to provide competitively priced power
and related customer services . . . . It now appears that the
restructuring of the electricity industry now underway will dramatically
affect all United States energy markets as a result of growing
interdependence of natural gas transmission and electric generation; and the
interchangeability of different forms of energy, particularly gas and
electricity." The Merger is designed to position the Applicants to be
responsive to these emerging market conditions and is therefore consistent
with the public interest. For these reasons, CEI and NU submit that the
Commission would have no basis for making a negative finding under Section
10(b)(3).
C. Section 10(c)
The relevant provisions of Section 10(c) of the Act state that,
notwithstanding the provisions of Section 10(b), the Commission shall not
approve:
(1) an acquisition of securities or utility assets, or of 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.
Section 8 Analysis. Section 10(c)(1) requires that an acquisition not be
"unlawful under the provisions of Section 8." Section 8 prohibits registered
holding companies from acquiring, owning interests in or operating both a gas
and an electric utility serving substantially the same area if prohibited by
state law. Following the Transaction, the utility subsidiaries of New CEI
will provide electric and gas services in New York, Pennsylvania and
Connecticut and electric service in New Jersey, Massachusetts and New
Hampshire. Since none of these states have laws which would prohibit
combination gas and electric utilities serving the same area, the Transaction
does not raise any issue under Section 8 or, accordingly, the first clause of
Section 10(c)(1). Indeed, Section 8 indicates that a registered holding
company may own both gas and electric utilities where the relevant state
utility commissions support such an arrangement, as the Applicants anticipate
in this case. CEI and NU have made or will shortly make the appropriate
filings with the relevant state utility commissions and anticipate that the
Transaction will be approved.
Section 11 Analysis. Section 10(c)(1) further requires that an acquisition
not be detrimental to carrying out the provisions of Section 11 of the Act.
Section 11(a) of the Act requires the Commission to examine the corporate
structure of registered holding companies to ensure that unnecessary
complexities are eliminated and voting powers are fairly and equitably
distributed. As described above, the Merger will not result in unnecessary
complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding
company system to limit its operations "to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system," a combination integrated gas and electric system
within a registered holding company is permissible under Section 8. In
pertinent part, Section 11(b)(1) generally confines the utility properties of
a registered holding company to "a single integrated public utility system,"
either gas or electric. The Commission has stated that it is not of the view
that the Act "expresses a Federal policy against combined gas and electric
operations as such. The Act is concerned with interstate holding company
activities and within that area it prescribes tests of retainability which
must be met." WPL Holdings Inc., HCAR No. 26856 (April 14, 1998); New
England Electric System, 41 S.E.C. 888, 892-93 (1964), rev'd on other
grounds; SEC v. New England Electric System, 346 F. 2d 399 (1st Cir.
1966), rev'd and remanded, 384 U.S. 176 (1965); and New Century Energies,
Inc., HCAR No. 26748 (Aug 1, 1997). An exception to the single integrated
system requirement is provided in section 11(b)(1)(A)-(C) (the "ABC
clauses"). A registered holding company may own more than one integrated
system, if each system meets the criteria of these clauses. WPL Holdings,
Inc., HCAR No. 26856 (April 14, 1998). Specifically the Commission must
find that (A) the additional system "cannot be operated as an independent
system without the loss of substantial economies which can be secured by the
retention of control by the holding company of such system, (B) the
additional system is located in one or more adjoining states, and (C) the
combination of systems under the control of the single holding company is not
so large . . . as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation." The standards of
each clause must be satisfied. (WPL Holdings, Inc., HCAR No. 26856 (April
14, 1998) Note 29).
As detailed below, the Merger will not be detrimental to the carrying
out of the provisions of Section 11. The combination of NU's electric system
and CEI's electric operations will result in a single, integrated electric
utility system (the "New CEI Electric System"). Integration of the New CEI
Electric System will be facilitated by a direct 345 Kilovolt ("kV") intertie
between CL&P and CECONY and with additional interties between adjacent,
highly interconnected and coordinated ISOs in which the CEI and NU systems
participate. Further, the combination of NU's current gas system (i.e.,
Yankee Gas' operations) with the gas operations of CEI will result in a
single, integrated gas utility system with operations in the same states as
the electric system or states adjoining those states (the "New CEI Gas
System"). The Commission should accordingly find that the New CEI Electric
System will be the primary integrated public utility system for purposes of
Section 11(b)(1) and the New CEI Gas System is a permissible additional
system under Section 11(b)(1)A-C.
Furthermore, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward
the economical and efficient development of an integrated public utility
system. Section 10(c)(1) also requires that the Transaction not be
detrimental to the carrying out of the provisions of Section 11. This
Section 10(c)(2) standard is met where the likely benefits of the acquisition
exceed its likely cost. (See City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir.
1992)) As discussed below, the Merger will result in the creation of an
integrated electric utility system and an additional integrated gas utility
system and will produce economies and efficiencies more than sufficient to
satisfy the standards of Section 10(c)(2).
1. Integration of the Electric Systems
Section 2(a)(29)(A) defines an integrated public-utility system, as
applied to electric utility properties, to mean:
a system consisting of one or more units of generating plants and/or
transmission lines 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 . . . the advantages of
localized management, efficient operations, and the effectiveness of
regulation.
The Commission has established four standards under the statutory
integration requirement:
(1) The utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) The utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) The system must be confined in its operations to a single area or
region; and
(4) The system must not be 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. (See,
e.g., Environmental Action, Inc. v. Sec, 895 F.2d 1255, 1263 (9th Cir.
1990), citing Electric Energy, Inc., 38 S.E.C. 658, 668 (1958)).
The Commission has usually evaluated merger applications for the
combination of two electric utilities which have been involved in all three
levels of utility operations: generation, transmission, and distribution.
Thus, the Commission has evaluated whether the Act's integration standard has
been met when combining the assets of fully integrated utilities. Where, as
here, the applicants are utilities that previously were vertically
integrated, but are in the process of divesting most of their generating
assets and will become more engaged in transmission and distribution, the
Commission should, consistent with earlier precedent, find that an integrated
public utility system can be comprised of two or more
transmission/distribution companies. (The Commission has previously
determined that, without regard to the combining of operations of generating
facilities, transmission facilities, on their own, can comprise an
"integrated public utility system." See In re Sierra Pacific Power Company,
40 S.E.C. Docket 103 (Jan. 28, 1988), aff'd sub nom., Environmental Action,
Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990). As a consequence the
provisions of the Act, such as Section 10(c)(2), that incorporate or refer to
this term must be interpreted so as not to thwart the Congressional intent.)
Since the function of transmission and distribution facilities is to
transfer electric energy from points of generation, or point of receipt from
another system, to load, or point of delivery with another system,
transmission facilities in and of themselves can, in appropriate
circumstances, constitute an integrated system and can perform an integrating
function. CEI and NU are physically interconnected by a 345 kV intertie
between CECONY and CL&P. In addition, because of the contiguous, highly
interconnected, and coordinated relationships between the power pools and
ISOs to which CEI and NU belong, their transmission and distribution systems
are now used, and in the future will be used even more, to accomplish
transfers of power between generation and load within the New York and the
New England control areas and for transfers of power to, and through, both
systems.
As described in more detail in this Application, the Applicants share
contiguous service territories such that distribution assets abut one another
and a strong transmission interconnection corridor exists between the two
systems. These geographically based attributes will provide opportunities
for synergies between companies in electric delivery functions including
accessibility to transmission capacity and sharing of resources during
emergencies.
The integrated systems will develop common practices and procedures for
planning, engineering, operating, constructing and maintaining their
transmission and distribution systems. Efficiency in energy delivery will be
improved by utilizing best practices of each company across both companies.
Additionally, specifications for commonly purchased electric delivery
materials and outside services will be merged permitting more cost effective
procurement of materials and services for both companies.
(a) Changes in the Electric Utility Industry
This section and the following sections describe the sweeping structural
changes that have taken place in the electric utility industry over the last
two decades. These changes include transformation of the markets at both the
wholesale and retail levels. Both this Commission and FERC have recognized
the significance of the changes. Recent FERC initiatives are likely to
promote the transformation of the industry even further. FERC's recent
Order No. 2000, Regional Transmission Organizations, (Docket No. RM99-2-000,
December 20, 1999) ("Order 2000") will promote further regional transmission
integration efforts in order to facilitate even more competitive generation
markets.
The concept of a non-vertically integrated, generation-only business
enterprise was introduced with the enactment of the Public Utility Regulatory
Policies Act of 1978 ("PURPA"). By the mid-1980's, non-utility generation
had out-paced utility generation additions. Power marketers, which generally
own no generating assets, but purchase and resell power, also had become
prevalent by the early 1990's. The Energy Policy Act of 1992 further
contributed to the elimination of vertical integration of electric utilities
by enabling stand-alone generation of any type, with no restriction on
utility ownership or technology, to be exempted from "electric utility
company" status under the Act, and by significantly expanding the FERC's
authority to require utilities to provide non-discriminatory transmission for
third-party wholesale transactions.
In April 1996, in its Order Nos. 888 and 889, the FERC established the
framework for the development of fully competitive wholesale power markets in
the United States. These orders required vertically-integrated utilities
functionally to separate operation of their transmission systems from their
wholesale "merchant" function -- i.e., their role as a generator and seller,
and/or reseller of purchased power, to wholesale customers. Order No. 888
required all transmission-owning public utilities to establish open access
non-discriminatory transmission tariffs containing "pro forma" terms and
conditions. Utilities were also required to functionally unbundle wholesale
power services, so that they obtained wholesale transmission services under
the same tariff of general applicability as do unaffiliated third parties.
Under Order No. 889, utilities were required to establish or participate in
an Open Access Same-time Information System ("OASIS") , through which any
eligible customer can obtain information regarding a public utility's
transmission availability and can reserve transmission capacity through the
Internet pursuant to a transparent, non-discriminatory process. Finally,
utilities were required to comply with standards of conduct designed to
prevent employees engaged in wholesale power marketing functions from
obtaining preferential access to pertinent transmission system information.
In summary, PURPA, the Energy Policy Act of 1992, and Order Nos. 888
and 889 transformed the industry to a more competitive structure. Where
previously vertically integrated companies combined generation, transmission
and distribution functions to provide a "bundled" product, delivered
electricity to retail customers within franchised service areas, under the
new functionally, or operationally, separated industry structure, separate
companies, or separate functional/operational components of companies,
perform the generation, merchant, transmission and distribution functions,
with the goal of fostering competition in the generation sector
Finally, many state commissions and legislatures have implemented or are
considering open access at the retail level. As of October 1, 1999, twenty-
four states have enacted policies, either through legislation or
administrative action, requiring utilities to offer open access to retail
customers. Where open retail access is provided, retail customers have the
ability to "shop" for their electric power from a power supplier other than
their traditional distribution utility. The distributor is obligated to
deliver the third party power supplies to the customer. In addition, many of
these states have required utilities to divest their generating assets.
In the early years of the Act, the Commission construed the integration
standard to preclude significant geographic expansion by holding company
systems. However, the Commission has acknowledged that the Act must "keep
pace with changing economic and regulatory climates." Thus, the Commission
has attempted to "respond flexibly to the legislative, regulatory, and
technological changes that are transforming the structure and shape of the
utility industry." The 1995 Division Report states that
"The statute recognizes that the application of the integration
standards must be able to adjust in response to changes in "the state of the
art." [T]he Division believes the SEC must respond realistically to the
changes in the utility industry and interpret more flexibly each piece of the
integration equation." (1995 Division Report at 66).
(b) Restructuring of NEPOOL and NYPP into Open, Competitive and Coordinated
Markets
Both CEI's and NU's utility subsidiaries are members of power pools in
which transmission-owning members have turned over operational control of
their transmission assets to ISOs. As indicated earlier, CEI's utility
subsidiaries were members of the NYPP and effective December 2, 1999
transferred control over significant portions of their transmission
facilities to the NYISO; NU is a member of NEPOOL and has transferred control
over its transmission facilities to ISO-New England ("ISO-NE"). As noted by
the FERC in its Order 2000, the NYISO and ISO-NE were established on the
platform of existing tight power pools following FERC's encouragement in
Order No. 888. NYISO was formed based upon the NYPP and ISO-NE was formed
based upon NEPOOL.
The two ISOs administer competitive, bid-based markets for electric
energy and other electric power products, provide non-discriminatory
transmission service, and facilitate transmission planning and expansion on a
regional basis. NYISO and ISO-NE are contiguous along a 500-mile border and
are interconnected by eight different interties with aggregate transfer
capability of 1,600 to 2,300 MW, depending on direction and system
conditions. Trade between the two ISOs is significant. Scheduled energy
transfers between the New York and New England control area were
approximately 7,100,000 MWh per year for the three years ending December 31,
1998. This is equivalent to the transfer of 1,707 MW during every peak hour
of the year. Thus, the eight existing interties between NYISO and NEPOOL
provide significant transfer capability between these control areas.
The two ISOs engage in regular coordinated activities to ensure reliable
interregional operations and to encourage robust competitive markets by
simplifying interregional transactions. Both ISOs operate as non-profit
organizations and include investor-owned utility ("IOU") and non-IOU
participants, and both operate centralized power markets. In addition, both
perform congestion management to free up transmission capacity for the most
economic uses of the system. Through these activities, the NYISO and ISO-NE
have largely accomplished the integration function that is the legislative
goal of Sections 2(A)(29)(A) and 10(c)(2) and 11(b) of the Act. As a result,
the Merger will further enhance integration between the NYISO and ISO-NE with
respect to CEI and NU beyond that which has already been accomplished by the
coordinated activities of the two ISOs.
(i) The NYPP and NYISO
Opinion No. 96-12 ( Case 96-E-0952 - In the Matter of Competitive
Opportunities Regarding Electric Service, Opinion No. 96-12, issued May 20,
1996), issued by the NYPSC, sets forth the NYPSC's vision and goals for the
future electric regulatory regime for the State. The NYPSC's stated vision
includes the following factors: (1) effective competition in the generation
and energy services sectors; (2) reduced prices resulting in improved
economic development for New York 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.
The NYPSC directed CECONY, O&R (and three other electric utilities) to
submit a rate and restructuring plan consistent with the NYPSC's policy and
vision for increased competition. These plans were to address, at a minimum:
(1) the structure of the utility, both in the short and long term, including
a description of how that structure complies with the NYPSC's 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 (4) numerous
other issues relating to prior investments and commitments, load pockets,
energy services and public policy costs.
In addition, in Order 888, the FERC required that tight power pools,
such as the NYPP and NEPOOL, reform their governance structures to open them
up to non-transmission owning market participants and provide open access
transmission service on a non-discriminatory basis.
On January 31, 1997, pursuant to the NYPSC's directive, the
transmission-owning Member Systems of the NYPP filed a proposal with the FERC
to establish a fully competitive electric market in New York by forming an
ISO and a power exchange. This filing was supplemented on December 19, 1997.
The Member Systems also proposed a joint Open Access Transmission Tariff
("OATT") to be administered by the NYISO. Under this arrangement, operation
of the combined transmission systems of the Member Systems has been turned
over to the NYISO, the governance structure of which ensures the independence
of the NYISO board. These filings proposed the establishment of an hourly
spot energy market, the implementation of congestion pricing for transmission
services, the creation of transmission congestion contracts and markets for
ancillary services. The Member Systems also sought authorization to engage
in market-based rates for sales of energy into the NYISO administered spot
market. On June 30, 1998, FERC conditionally approved the Member Systems'
proposal to establish the NYISO. Subsequently, on January 27, 1999, FERC
conditionally accepted the NYISO OATT and related market rules, and
authorized market-based rates for energy sales by the Member Systems into the
NYISO administered spot market. In response to FERC's January 1999 order, on
April 30, 1999, the member systems made a compliance filing which created the
two-tariff system that is now in place at the NYISO. Under the two-tariff
system, the NYISO has one tariff for transmission and ancillary services and
a separate tariff for the facilitation of the energy and capacity markets.
On September 15, 1999, FERC issued an order approving the member systems'
governance settlement agreement, which created the committee governance
structure that is currently in place and the NYISO became operational on
December 2, 1999.
The establishment of the NYISO and its assumption of operational control
of the bulk power transmission system in New York State, will ensure that all
participants in the newly-established competitive market have access to the
transmission system on an open and non-discriminatory basis. The creation of
a competitive market for electricity, coordinated and administered by the
NYISO, will ensure that all sellers and purchasers are able to use voluntary
bids to create an energy market with substantial liquidity and to allow the
ISO to optimize the efficiency of the spot market for electricity. The
implementation of locational based marginal pricing for electricity sales and
transmission service will ensure that power sold in the spot market is priced
on an economically sound basis, and that the price paid for transmission
service reflects the true economic cost of using the combined Member Systems'
transmission systems.
Finally, in accordance with the requirements of FERC Order No. 888
governing "tight" power pools, transmission customers transmitting power (i)
within New York State, (ii) out of New York State, (iii) into New York State,
or (iv) through New York State, pay only one transmission charge under a
"license plate" rate approach. This is in contrast to the traditional
"pancaked" rate approach where the customer paid a separate transmission
charge for the use of each utility's system. Under the "license plate"
approach, only the transmission charge of the utility system to which power
is delivered, or which is the point of export from the NYISO, is assessed.
The elimination of pancaked transmission rates greatly reduces the cost of
transmitting electricity which, in turn, increases the competition among
suppliers to serve wholesale and retail customers and thus reduces prices.
In summary, the establishment of the NYISO creates a competitive
electricity market in which every generator and every reseller of energy, can
participate in a competitive market. The NYISO administers a bid-based
energy sales system. Each day, energy from sellers submitting the bids at or
below the marginal price of energy in a region will be selected to serve the
load of those customers that are participating in the NYISO's centralized
market. The bid approach differs from traditional "economic dispatch" of
generation only in that the seller's offered bid price, rather than its
"cost-of-service," determines the rank in which it is selected to meet load.
Pursuant to the NYISO's, transmission tariff, every system under the control
of the NYISO will be used to transmit power to meet load from the most
competitive suppliers, whether in state or out-of-state. including power that
may come through NU and CEI's transmission systems . Each component of the
restructured functions will be part of an optimally integrated NYISO system.
In other words, there are no artificial constraints or electrically isolated
subsystems or areas that are not included in the larger, optimized system.
Consistent with the terms of its OATT, the NYISO will also have the
responsibility to facilitate transmission capacity additions to alleviate
transmission constraints which primarily occur during periods of high demand.
As a result, through the creation of a workably competitive market structure
and the "invisible hand" of supply and demand, the operations of the NYISO
establish a fully integrated system for the generation, transmission and
distribution by participants in the markets served by the NYISO. As
discussed elsewhere in this Application, because of the strong
interconnections between NYISO and NEPOOL/ISO-NE, market participants in
NEPOOL and ISO-NE are able, merely by using the Internet-based OASIS, to sell
to, or purchase, from buyers or sellers, respectively, into the NYISO and to
reserve transmission rights to consummate such transactions, including
transactions to, or through, CEI's and NU's systems.
(ii) NEPOOL and ISO-NE
On December 31, 1996, NEPOOL Members filed a comprehensive proposal to
comply with FERC Order No. 888 and to restructure NEPOOL. Among the key
elements of the NEPOOL filing were (1) the formation of ISO-NE, an
independent system operator that would assume operational control of NEPOOL
Members' high-voltage pool-related transmission facilities, (2) a NEPOOL OATT
which replaced "pancaked" rates with a single transmission rate under the
"license plate" approach, and later transactions to a single pool-wide
"postage stamp" rate (3) the creation of a power exchange, and (4)
authorization for participants in NEPOOL to charge market-based rates for
power and ancillary services. FERC conditionally approved the filing and
required further changes. As required, NEPOOL adopted the FERC's pro forma
tariff policies regarding open admission to NEPOOL, with a modification,
concerning the obligations of transmission utilities to determine the need
for new transmission facilities or upgrades of the NEPOOL transmission
system.
Under the restructured NEPOOL, any "eligible customer" under the FERC's
pro forma tariff may, upon compliance with the applicable requirements,
become a member of NEPOOL. A member of NEPOOL may participate fully in the
competitive, integrated market including NEPOOL and adjacent areas connected
by transmission. Operational control over all "Pool Transmission Facilities"
("NEPOOL PTF") has been transferred to ISO-NE, and transmission anywhere on
the integrated NEPOOL PTF network is provided under the ISO-NE administered
OATT. In compliance with Order No. 888, NEPOOL provides for transmission
service to any retail or wholesale customer located within the NEPOOL area,
or service "through" the NEPOOL grid, to an interconnected utility at a
single, non-pancaked transmission charge. Thus, transmission from any point
on the NEPOOL PTF grid to another control area, such as the NYISO, is subject
to only a single transmission charge, irrespective of the number of
individual utility transmission systems used to transmit the power to the New
York border. Moreover, under the NEPOOL OATT, retail and wholesale customers
are responsible for payment of transmission charges for use of the NEPOOL
PTF. Irrespective of how many NEPOOL Members' transmission systems are used,
there are no additional charges for use of NEPOOL PTF. Thus, there is no
additional charge for power imported from, for example, the NYISO and
delivered to a customer on the NEPOOL PTF system.
NEPOOL and ISO-NE presently operate and administer a bid-based
competitive market for electricity, in which sellers submit bids for any of
seven electric power products and services: energy, ten minute spinning
reserve, automatic generation control, ten minute non-spinning reserve,
thirty minute operating reserve, operating capability, and installed
capability. Based on these bids and on rules reflecting system conditions
and constraints, NEPOOL determines which sellers will be selected to meet the
aggregate load and establishes the market clearing price for those products.
Based on its finding that no market participant in NEPOOL has market
power, the FERC has authorized participants in the NEPOOL market to charge
competitive, market-based rates, which are reflected in sellers' bids. These
bids, in turn, are subject to competitive pressure which prevents excessive
proposals. In addition, ISO-NE monitors the market and identifies patterns
of anomalous conduct, particularly withholding of supply, to ensure the
proper functioning of the market.
In summary, under the restructured NEPOOL and ISO-NE, the high voltage
grids of each transmission-owning utility in New England are combined (as
they were under the prior NEPOOL Agreement) to form a single integrated
transmission system. In contrast to the prior NEPOOL structure, which
enabled only utility members to participate, the restructured NEPOOL allows
any seller or buyer to obtain nondiscriminatory access to the fully
integrated NEPOOL transmission system. Power sellers and purchasers can use
this entire system by paying a single "poolwide" rate, to transmit power
through and out of the NEPOOL system, to a retail or wholesale customer
within NEPOOL, or as part of a sale to or purchase from one of the NEPOOL
competitive markets for power described above. Through this open,
transparent structure, every generator located within NEPOOL (or that can
transmit its power to NEPOOL's interfaces at its border) is able to transmit
power to any load within NEPOOL, or, through an interface, to load outside of
NEPOOL, including in the NYISO's control area . Included in this category of
transactions are transmission arrangements over the systems of CEI and NU.
(iii) Coordination between ISO-NE and NYISO
As demonstrated below, CEI and NU are actively engaged, and, if the
Merger is approved, will be increasingly engaged, in coordinated activities.
These activities include their membership in the NYISO and ISO-NE, the strong
interties, active trading, and coordinated activities of these ISOs, the
active participation by their representatives in inter-ISO working groups,
and their participation in the Northeast Power Coordinatiing Council
("NPCC"). Pursuant to the above-cited precedent, these coordinated
activities provide an additional basis for finding that the Merger satisfies
the integration standard.
(a) Interface transfer capacity
NU and CEI have adjacent retail electric, and with the acquisition of
YES, adjacent retail gas service territories. They are also directly
interconnected by a 345 kV intertie between CL&P and CECONY. In addition,
NYISO and ISO-NE are adjacent along the entire New York
State/Vermont/Massachusetts/Connecticut border, which extends from Canada to
the Long Island Sound. The ISOs are interconnected through seven separate
interties in addition to the one directly interconnecting CL&P and CECONY,
referred to as the New York/New England Interface: four in Vermont, one in
Massachusetts, and two in Connecticut. The other interties consist of (1) a
345 kV intertie between WMECO in NEPOOL and Niagara Mohawk Power Company
("Niagara Mohawk") in NYISO; (2) a 230 kV intertie between the New England
Electric System in NEPOOL and Niagara Mohawk in NYISO; (3) a 115 kV intertie
between Vermont Electric Power Company ("Vermont Electric") in NEPOOL and the
New York Power Authority in NYISO; (4) a 115 kV intertie between Vermont
Electric in NEPOOL and Niagara Mohawk in NYISO; (5) an additional 115 kV
intertie between Vermont Electric in NEPOOL and Niagara Mohawk in NYISO; (6)
a 69 kV intertie between CL&P in NEPOOL and Central Hudson in NYISO; and (7)
a 138 kV intertie between CL&P in NEPOOL and Long Island Power Authority in
NYISO.
(b) Coordination and joint planning by CEI and NU through the NYISO
and ISO-NE
CEI and NU both operate substantial transmission and distribution
facilities as major electric utilities in the northeastern United States.
The design, operation and maintenance of these is coordinated and will
become increasingly so following the Merger, at several different levels to
insure compliance with accepted industry standards and to maintain reliable
service to the region's electric consumers.
Both CEI and NU are members of the NPCC, a major reliability region of
the North American Electric Reliability Council (NERC). Under the umbrella
of NPCC, representatives from CEI and NU actively work with other members of
NPCC and the regional ISOs to establish operating guides and criteria,
perform joint reliability studies, and coordinate seasonal, weekly, and daily
operation for the NPCC region. These efforts under NPCC impact the operating
practices in both the New York and New England control areas.
CEI and NU coordinate the operation of their facilities with the NYISO
and ISO-NE, in accordance with the operating practices established by each of
these organizations. As control area operators, the NYISO and ISO-NE work
closely with each other to insure reliable operation between the two control
areas. In addition, the NYISO and ISO-NE have an intimate working
relationship that includes both a real time and near time operation
component.
The real time and near time dispatch decisions are supported by sharing
of real time operational information between the two ISO computer systems and
through multiple voice communication paths between the two ISOs. Computer
data is shared electronically to allow each ISO to perform transmission
reliability analysis that encompasses information from adjacent control
areas. The type of information exchanged between the ISOs includes generator
output and operating status and transmission line flows and transmission
facility operating status. Included in this data exchange between ISOs is
the operational information on critical facilities owned and operated by both
CEI and NU.
The ISO operators talk, at a minimum, on an hourly basis and often more
frequently to properly manage abnormal operating conditions. This
communication is supported by leased telephone lines, and satellite phone
technology to serve as a back up in case the primary system is lost or
unavailable.
Maintenance outages of all the transmission lines that form the New York
- - New England control area boundary are coordinated between the two ISOs to
insure coordinated operation and reliability on both sides. Several of these
facilities are owned and operated by CEI and NU who provide data to the ISOs
to insure this level of coordination.
The ISOs in New England and New York dispatch generation on an economic
merit order basis as determined by competitive bidding, and will coordinate
regional dispatch to relieve congestion at the New York/New England
interface, thus assuring that the transmission system will be dispatched and
controlled on a coordinated basis. FERC concluded in Order No. 2000 that
participation by transmission owners in such Regional Transmission
Organizations, and control of transmission access by entities independent of
the transmission owners, is important to assure regional efficiency and
reliability and required all utilities not already in such organizations to
submit plans to join one. Thus, the Applicants' participation in their
respective ISOs and those ISOs' control over the real-time operation of
Applicants' transmission facilities is consistent with the pro-competitive
evolution of the industry.
In applying the integration standard, the Commission looks beyond simply
the coordination of the generation and transmission within a system to the
coordination of other activities. ( See, e.g., General Public Utilities
Corp., HCAR No. 13116 (Mar. 2, 1956); Middle South Utilities, Inc., HCAR
No. 11782 (March 20, 1953), petition to reopen denied, HCAR No. 12978
(Sept. 13, 1955), rev'd sub nom., Louisiana Public Service Comm'n. v. SEC,
235 F. 2d. 167 (5th Cir. 1956), rev'd, 353 U.S. 368, (1957) reh'g
denied, 354 U.S. 928 (1957); North American Company, HCAR No. 10320 (Dec.
28, 1950)). In that regard, on August 9, 1999, ISO-NE and NYISO entered into
a memorandum of understanding ("MOU"), in which, based on their recognition
that better coordination among these ISOs "would result in more robust,
competitive markets and facilitate interregional monitoring." The ISOs
agreed to:
Place a high priority on studying the feasibility of increasing intertie
capacity;
Identify and address market interface issues to facilitate broader
competitive markets;
Encourage market participants and others to contribute to the process of
improving competition and interregional coordination, and
Require staff of the ISOs to report periodically to the ISO CEOs, market
participants and other constituencies on the status and progress of their
joint interregional coordination activities.
The ISOs have established four joint working groups to carry out the
goals of the MOU. The Operations Working Group will develop and implement
procedures and practices to maximize the efficiency of markets while
protecting bulk power system reliability and security. Among other things,
this group will implement uniform procedures for confirming transactions and
schedules between control areas and will establish a uniform procedure for
administering dispatchable contracts.
The Planning Working Group is charged with enhancing the overall
coordination of reliability planning among the two ISOs. It will establish
protocols for coordinating planning activities between the ISOs; establish
technical processes to strengthen coordination between the ISOs' planning and
assessment procedures; and investigate the feasibility of increasing inter-
tie capacity.
The Business Practices Working Group is charged with furthering the
seamless interfaces between the ISOs, minimizing the potential for contract
curtailments, and identifying business practices that promote market
effectiveness and efficiency. It will identify rules or practices that need
to be addressed to enhance seamless markets; develop guidelines to mitigate
the need for Transmission Load Relief by identifying and coordinating
regional redispatch opportunities, and identify and provide consistent
information required to support competitive markets. Finally, the Public
Information Working Group will seek to optimize the information available to
market participants to facilitate multi-regional trading and will focus on
using information technologies to create synergies within the ISOs' on-line
trading systems.
(c) Integrating effects of NYISO and ISO-NE Transmission Tariffs
With the introduction of non-pancaked transmission charges within the
New York and New England control areas, the historic pattern of significant
energy exchanges between the New York and New England control areas is likely
to increase. This is due to a number of factors, including the elimination
of pancaked rates in the two ISOs; the elimination of pancaked losses; the
ease of conducting transactions over the two ISOs' OASIS sites; the active
marketing efforts by the new generating capacity owners and marketers; the
expected construction of new so-called "merchant plant" generating capacity
to serve distant loads; and the planned increase in New York-New England
interface capacity. The combination of increased centralized control within
the New England and the New York control areas, decreased pancaking, one-stop
shopping for transmission service, and the direct interconnection of the two
control area operators that administer service over the CEI and NU systems
will enhance the integration of CEI and NU.
Due to changes in the electric industry, most owners of generating
facilities in New York and New England today do not own transmission or
distribution. Under the terms of the ISO-NE and NYISO transmission tariffs,
these companies can reserve transmission capacity, including, if necessary,
across the New York/New England Interface, and thereby access markets
anywhere within the New England and New York control areas. The NYISO has
operational control over most of the transmission facilities in New York. In
New England, in accordance with existing NEPOOL policies, NEPOOL PTFs are
controlled by ISO-NE, while control over lower voltage and other non-NEPOOL
PTF facilities is retained by their utility owner. Access over non-NEPOOL
PTF transmission facilities is available pursuant to each individual
utility's open access transmission tariff.
(d) Statutory Standards For Electric Integration
As demonstrated below, the Merger satisfies all four of the previously
cited standards under the integration requirement.
(i) Physical interconnection or capability of physical
interconnection
In applying the requirement that the electric generation and/or
transmission and/or distribution facilities comprising the system be
"physically interconnected or capable of physical interconnection," the
Commission historically focused on physical interconnection through
facilities that the parties owned or, by contract, controlled. (See, e.g.,
Northeast Utilities, HCAR No. 35-25221 (Dec. 21, 1990); Centerior Energy
Corp., HCAR No. 35-24073 (April 29, 1986)). As described above, NU and CEI
are physically interconnected through a 345 kV intertie owned by CL&P and
CECONY and their respective service territories share a common border.
Accordingly, this requirement is met.
(ii) Coordination of electric operations
Section 2(a)(29)(a) further requires that the utility assets, under
normal conditions, may be "economically operated as a single interconnected
and coordinated system." The Commission has interpreted this language as
requiring that, in addition to physical interconnection, "the properties
[must] be so connected and operated that there is coordination among all
parts, and that those parts bear an integral operating relationship to each
other." (UNITIL Corp., at 1992 SEC LEXIS 1016, at *14, note 31, citing Cities
Service Co., 14 S.E.C. at 55). The Commission must find that "the isolated
territories are or can be so operated in conjunction with the remainder of
the system that central control is available for the routing of power within
the system," North Am. Co. (11 S.E.C. 194, 242, aff'd, 133 F.2d 148 (2d
Cir. 1943), aff'd on constitutional issues, 327 U.S. 686 (1946)). The
Commission has explained that this language "refers to the physical operation
of utility assets as a system in which, among other things, the generation
and/or flow of current within the system may be centrally controlled and
allocated as need or economy directs." In UNITIL, the Commission observed
that with regard to coordinated operations of an integrated utility system:
Congress did not intend to impose rigid concepts but instead expressly
included flexible considerations to accommodate changes in the electric
utility industry. Thus, the Commission has considered advances in technology
and the particular operating circumstances in applying the integration
standards. (UNITIL Corp., at 1992 SEC LEXIS 1016, at *15, citing Mississippi
Valley Generating Co., 36 S.E.C. 159,186 (1955), cited in Yankee Atomic
Elec. Co., 36 S.E.C. at 565).
The requirement regarding a single interconnected system is intended to
prevent the evils that arise when holding companies are expanded to include
properties the operation of which has no relationship to the other
properties, i.e., to prohibit ownership of properties that are electrically
isolated from, and not operated in coordination with, other utility
properties owned by the holding company. The opposite of that scenario is
the case here.
As described above, the transmission facilities of CEI and NU are
physically interconnected (i) through the 345 kV intertie between CL&P and
CECONY, (ii) through the ISOs , and (iii) through the New York/New England
Interface, which provides transfer capability of approximately 1,600 MW for
transactions between the two ISOs and the electric companies in the New CEI
System. Transactions between the New England and New York are frequent,
amounting to an average of 7,100,000 MWh for years 1995-1998. Power flows
over the combined transmission systems are being centrally directed by the
two ISOs, in accordance with reservations for transmission use made by
transmission users, i.e., sellers or purchasers seeking to use one or both
systems to accomplish transactions. Simply by accessing the two ISOs via the
Internet, transmission customers can arrange for seamless transmission on the
CEI and NU systems, including access through the New York/New England
Interface, and thereby transmit power to either system, or, using "through
and out" service, to other interconnected utilities.
As indicated above, in addition to coordination of systems by NU and
CEI, the electric utility subsidiaries of NU and CEI are also coordinated
through their participation in the NYISO and ISO-NE. Both NYISO and ISO-NE
coordinate their operations by operating their systems in parallel, by
coordinating the scheduling of repair outages and by providing support to
each other in meeting generating capacity and energy transmission needs.
Both NYISO and ISO-NE have centralized computer systems that monitor the
available capacity on their systems and the demand for energy of all of their
respective members to determine which sources of capacity should be used to
reliably and efficiently provide energy to meet customer demand. The NYISO
and ISO-NE administer centralized bid-based markets for the sale of electric
energy and other electric products. Under the current NYISO structure, each
transmission owner owns its separate transmission system. With certain
exceptions, the NYISO exercises control over the transmission facilities
within New York State. Access to those systems is available through the
NYISO's open access transmission tariff. Under ISO-NE's structure, the ISO-
NE has operational control over a significant portion of the member
utilities' transmission system. Those not under operational control of the
ISO-NE are subject to individual Open Access Transmission Tariffs.
The NU and CEI systems will also be coordinated after the Merger as the
operating utility subsidiaries of New CEI will retain the ownership and the
responsibility for planning, construction and maintenance of their
transmission and distribution facilities. After the transition is completed,
it is expected that the planning and engineering functions for transmission
and distribution will be performed on a coordinated basis through a service
company. The Applicants' Transition Team is presently studying the details
of this coordination now. For example, they are already studying criteria
for the merged company's transformers, cables, and other system components
which are expected to be designed and procured on an integrated basis. CEI
is a world leader in operating and maintaining underground cables, and NU has
extensive experience in overhead cable systems. The Applicants expect to
utilize this combined expertise on a coordinated basis in planning,
building, and maintaining their system. Because of the contiguity of the
utility systems, close coordination and sharing of resources during emergency
conditions is feasible and will be implemented. For example, following CEI's
acquisition of O&R in July 1999, CECONY and O&R were able to closely
coordinate the emergency response to the devastation caused by Hurricane
Floyd, which was the most devastating storm in O&R's 100-year history -
almost 147,000 customers were left without power. Gas service was also
affected in certain areas. To help restore service, CECONY and O&R closely
coordinated operations to a far greater extent than would have been done if
the utilities were not part of the same system and additional studies are
underway to further coordinate emergency operations. The Applicants expect
to be able to apply many of the same emergency response procedures to their
contiguous electric and gas systems.
In addition, customer and regulatory response to the nationwide outages
this past summer have placed a renewed focus on electric distribution
operation and design as a means toward achievement of increased electric
reliability levels. For example, CECONY is adopting as a long-term
initiative exploring the feasibility of increased use of thermal monitoring
of underground distribution systems. This and other reliability-based
initiatives will benefit both the CEI and NU systems as an integrated
company.
Furthermore operating expertise in the transmission system will continue
to be critical for NU and CEI's utility reliability; this expertise will
depend not only on maintaining and developing up-to-date technology and
maintaining the highest qualified system operators but also through continued
focus on maintaining the operating integrity of the bulk transmission grid as
it relates to the local distribution system and overall reliability of
service delivered to the consumer. This local transmission and distribution
focus is illustrated in the NYISO mechanism establishing local reliability
rules instituted and maintained by the local utility, subject to overall
supervision of the ISO; these rules are appropriately instituted by the local
utility due to the fact that the local transmission system operators have
greatest familiarity with local operating conditions potentially affecting
system reliability. Integration of the CEI and NU utilities will facilitate
and enhance transmission operations through the resources available to
enhance planning, training and advancement opportunity in a larger
transmission operating organization
The administrative and management functions that support transmission
and distribution, including purchasing, accounting, human resources,
financial analysis, and information technology will be provided for all of
the utility operating companies on a coordinated basis by a common service
company. For example:
The Transition Team is currently in the process of analyzing the
various software systems being used by each of the Applicants in
order to identify the single best system to be used to support the
combined system in each area.
The CEI and NU systems have each created centralized procurement
organizations that assist business units in preparing bid
solicitations, procuring materials and supplies, and managing the
inventory required to support the assets of each business unit.
Post-merger the Applicants expect to use a single organizational
structure to accomplish these activities.
As noted above, the utility operating companies of CEI and NU either
have divested or are in the process of divesting the majority of their
generation. However, they retain provider of last resort ("POLR")
obligations. In New York, these obligations will be met only in small part
by CEI's retained generation and power purchase contracts, and will be
supplied primarily through purchases from the regional power market. In
Connecticut, as part of the state-approved restructuring program, NU has been
required to meet half of its POLR obligations through competitive auction and
has been permitted to provide the other half through a marketing affiliate.
In Massachusetts, NU has been required to procure all of its POLR supply from
unaffiliated suppliers; in New Hampshire, the settlement pending before the
state regulators would also require NU to meet its POLR supply via purchases.
The Applicants plan to coordinate their procurement activities in response to
these POLR obligations so that they procure the lowest cost supplies
possible. As both CEI and NU will be buying electricity in the same regional
market to meet their remaining POLR obligations, these activities will assure
a coordinated, low cost source of supply.
Because access between ISO-NE and NYISO is not restricted by any
artificial barriers, each generator that provides power to the transmission
systems of CEI and NU, and the transmission and distribution facilities of
those companies over which such power flows, are "so connected and operated
that there is coordination among all parts, and that those parts bear an
integral operating relationship to the other."
The resulting optimization of resource use that occurs through the
combination of the contiguous, mutually-accessible competitive markets in New
York and New England and the joint activities of CEI and NU and of NYISO and
ISO-NE in electric transmission and distribution functions, satisfies the
requirement that the resulting system be capable of being economically
operated as a single integrated and coordinated system.
(iii) Single area or region
The Commission's third requirement for integration is also satisfied.
The New CEI electric system will operate in a single area or region. The
electric system will operate in New York, New Jersey, Pennsylvania,
Connecticut, Massachusetts and New Hampshire, all adjacent states. In
addition, although the service territories of CEI and NU do not overlap, they
are adjacent and are all within the same general region
The Commission has made clear that the "single area or region"
requirement does not mandate that a system's operations be confined to a
small geographic area or a single state. In considering size, the Commission
has consistently found that utility systems spanning multiple states satisfy
the single area or region requirement of the Act. (See, e.g., Entergy,
supra, (approving power system covering portions of four states); Southern
Co., HCAR No. 24579 (Feb. 12, 1988); (approving power system covering
portions of four states); New Century Energies, Inc., HCAR No. 26748 (Aug.
1, 1997) (approving integrated system covering portions of five states);
Northeast Utilities, HCAR No. 25114 (July 3, 1990) (approving formation of
HEC Inc. to provide services to a single region consisting of New England and
New York).
It should be noted that in the 1995 Division Report, the Division stated
that the evaluation of the "single area or region" portion of the integration
requirement "should be made in light of the effect of technological advances
on the ability to transmit electric energy economically over longer
distances, and other developments in the industry, such as brokers and
marketers, that affect the concept of geographic integration." The 1995
Division Report also recommends that primacy be given to "demonstrated
economies and efficiencies to satisfy the statutory integration
requirements." As set forth in Item 3.C.3, the Merger will result in
numerous economies and efficiencies for the utilities and, in turn, their
customers. Additionally, as discussed above, given the high level of
interpool transactions and ready transmission access between NEPOOL and
NYISO, the net effect is a regional northeast U.S. grid, from both an
operational and economic standpoint. By virtue of their common memberships
in the highly interactive ISOs, CEI and NU will be part of the same region.
(iv) Not so large as to impair advantages of localized management,
efficient operation, and the effectiveness of regulation
Finally, with respect to the Commission's fourth requirement, the New
CEI system will not be so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation. The
Commission's past decisions on "localized management" show that the
Transaction fully preserves the advantages of localized management. In such
cases, the Commission has evaluated localized management in terms of: (i)
responsiveness to local needs, see American Electric Power Co., HCAR No.
20633 (Jul. 21, 1978) (advantages of localized management evaluated in terms
of whether an enlarged system could be "responsive to local needs"); General
Public Utilities Corp., 37 S.E.C. 28, 36 (1956) (localized management
evaluated in terms of "local problems and matters involving relations with
consumers"); (ii) whether management and directors were drawn from local
utilities, see Centerior Energy Corp., HCAR No. 24073 (April 29, 1986)
(advantages of localized management would not be compromised by the
affiliation of two electric utilities under a new holding company because the
new holding company's "management [would be] drawn from the present
management" of the two utilities); (iii) the preservation of corporate
identities, see Northeast Utilities, HCAR No. 25221 (December 21, 1990)
(utilities "will be maintained as separate New Hampshire corporations...
[t]herefore the advantages of localized management will be preserved");
Columbia Gas System, Inc., HCAR No. 24599 (March 15, 1988) (benefits of local
management maintained where the utility to be added would be a separate
subsidiary); and (iv) the ease of communications, see American Electric Power
Co., HCAR No. 20633 (Jul. 21, 1978) (distance of corporate headquarters from
local management was a "less important factor in determining what is in the
public interest" given the "present-day ease of communications and
transportation").
Each of the NU Operating Companies, CECONY and O&R will retain its
separate corporate organization under the laws of the respective state in
which it operates and will retain its offices in their respective service
territories. New CEI is expected to maintain its principal office in New
York City. This structure will preserve all the benefits of localized
management that each of the companies presently enjoy while simultaneously
allowing for the efficiencies and economies that will derive from the Merger.
Additionally, the post-Merger New CEI system will not impair the
effectiveness of state regulation. CECONY, O&R, RECO, Pike, CL&P, WMECO,
PSNH and Yankee Gas will continue their separate existence as before and
their utility operations will remain subject to the same regulatory
authorities by which they are presently regulated, namely the NYPSC, NJBPU,
PAPUC, DPUC, Massachusetts Department of Telecommunication and Energy, New
Hampshire Public Utility Commission, the FERC and the NRC. CEI and NU are
working closely with all agencies to the extent necessary to ensure they are
well informed about the Merger, and the Merger will not be consummated unless
all required regulatory approvals are obtained. Pursuant to the
recommendations contained in the 1995 Division Report this last factor is
significant, as the Division stated therein "where the affected state and
local regulators concur, the [Commission] should interpret the integration
standard flexibly to permit non-traditional systems if the standards of the
Act are otherwise met."
The electric operations of CEI and NU are coordinated through joint
planning with, and for, NYISO and ISO-NE and joint transmission and
distribution activities. Given the close coordination of NYISO and ISO-NE,
the area encompassed should be considered a single area or region and given
the maintenance of corporate headquarters in Connecticut and New York and
ongoing regulation by various state and federal authorities, there is no
impairment of localized management, efficient operation or effective
regulation.
2. Integration of Gas Utility Operations
Section 2(a)(29)(B) defines an integrated public-utility system, as
applied to gas utility properties, to mean:
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 . . . the
advantages of localized management, efficient operations, 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.
(a) Located or related so that substantial economies may be effectuated
by being operated as a single coordinated system
The gas properties of CEI (i.e. the gas properties of O&R, CECONY and
Pike, the "CEI Gas Properties") are currently part of a single integrated gas
system. (HCAR No. 35-27021 (May 13, 1999). Post-merger, the gas properties
of NU (i.e. Yankee Gas, the "NU Gas Properties") will also be part of the
same integrated gas system with the CEI Gas Properties. The CEI Gas
Properties and the NU Gas Properties are in adjacent states. After the
combination, the gas systems will realize economies of scale and purchasing
synergies while preserving the advantages of localized management and the
effectiveness of regulation.
The NU Gas Properties and the CEI Gas Properties share access to market
and supply area locations through several pipelines. The combined properties
plan to coordinate and jointly manage their portfolios of supply and storage
and to combine and centralize their gas transportation function. The
Applicants also intend to engage in joint and coordinated gas purchasing and
planning.
(b) Single Region or Area
The gas systems will be confined to several counties in southern New
York, parts of the State of Connecticut 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 and the gas assets
of NU are in the adjacent state of Connecticut. Thus, following the Merger,
the gas systems of New 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.
The CEI Gas Properties and the NU Gas Properties obtain a substantial amount
of gas from the Canadian basin while the CEI Gas Properties also obtain a
substantial amount of gas from the Gulf Coast Basin.
The CEI Gas Properties and the NU Gas Properties also obtain
transportation services from several of the same interstate gas pipelines:
Algonquin Gas Transmission, Tennessee
Gas Pipeline, and Texas Eastern Transmission. As noted above, the Applicants
intend to coordinate and jointly manage their portfolios of supply and
storage.
(c) The Size of the Gas Systems is not so large as to
impair the advantages of localized management, efficient operations, and the
effectiveness of regulation
The CEI Gas Properties currently serve over 1.2 million customers while
the NU Gas Properties serves less than 200,000 customers. The combination of
the two gas properties will not increase the size of the existing gas system
dramatically. The combination 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 where they are located. Thus, the Merger of the gas systems will
not have an adverse effect on localized management, efficient operations or
effective regulation.
3. Combination of Electric and Gas Utility Operations
(a) Section 10(c)(1))
New CEI's acquisition of the gas operations of NU as well as New CEI's
retention of the CEI Gas Properties, is lawful under Section 8 of the Act and
would not be detrimental to the carrying out of Section 11 of the Act.
(i) Section 8
Section 8 of the Act provides that:
"[w]henever a State law prohibits, or requires approval or authorization of,
the ownership or operation by a single company of the utility assets of an
electric utility company and a gas utility company serving substantially the
same territory, it shall be unlawful for a registered holding company, or any
subsidiary company thereof (1) to take any step, without the express approval
of the state commission of such state, which results in its having a direct
or indirect interest in an electric utility company and a gas company serving
substantially the same territory; or (2) if it already has any such interest,
to acquire, without the express approval of the state commission, any direct
or indirect interest in an electric utility company or gas utility company
serving substantially the same territory as that served by such companies in
which it already has an interest."
A fair reading of this section indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both integrated electric utility systems and integrated gas utility
systems.
New CEI, as a combination company, is permissible pursuant to the terms
of Section 8 of the Act and is in the public interest. First, the
combination of electric and gas operations in New CEI is lawful under all
applicable state laws and regulations. The Merger will not result in any
change in the provision of gas and electric services of any so-called
combination system within a given state. New CEI, through CECONY and O&R in
New York, and through Pike in Pennsylvania, will continue to provide electric
and gas service in those states, and NU, through CL&P and Yankee Gas, will
continue to provide electric and gas service in the State of Connecticut.
Since New York, Pennsylvania and Connecticut have already permitted such
combination companies to exist, the Merger does not raise any issue under
Section 8. Moreover, earlier concerns that a holding company such as New CEI
would be able to greatly emphasize one form of energy over the other based on
its own agenda have, for all practical purposes, been eliminated because of
the competitive nature of the energy market, which requires utilities to meet
customer demand for energy in whatever form and the increasing availability
of retail choice under which utility customers can choose their own
competitive suppliers. Furthermore, state regulators will have sufficient
control over, and are unlikely to approve, a combination company that
attempts to undertake such practices.
(ii) Section 11
Even if Section 8 of the Act were not interpreted as generally
permitting the combination of separate gas systems where such combination is
approved and accepted by the relevant state commissions, Sections 10 and 11
of the Act contain additional provisions that permit the retention by New
CEI of CEI's existing integrated gas system (consisting of the Gas
Properties) and the acquisition of the NU Gas Properties.
As indicated above, Section 11(b)(1) of the Act generally confines the
utility properties of a registered holding company to a "single integrated
public-utility system," either gas or electric but an exception to the
requirement of a "single system" is provided in the ABC clauses). A
registered holding company may own one or more additional integrated public
utility systems -- i.e., gas as well as electric -- if each system meets the
criteria set forth in these clauses. As discussed below, post-Merger New CEI
qualifies under the exception established pursuant to the ABC clauses to
retain the integrated gas system, comprised of the gas operations of CECONY,
O&R, Pike and Yankee Gas.
(b) "ABC" Clauses
Section 11(b)(1) of the Act permits a registered holding company to
control one or more additional integrated public utility systems if:
(A) each of such additional systems cannot be operated as an
independent
system without the loss of substantial economies which can be secured by the
retention of control by such holding company of such system;
(B) all of such additional systems are located in one state, adjoining
states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of such
holding company is not so large (considering the state of the art and the
area or region affected) as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation.
For the reasons set forth below, a divestiture order would be contrary
to the public interest and New CEI therefore requests that the Commission
authorize retention of CEI's existing gas operations and the acquisition of
the gas operations of Yankee Gas.
Clause A. In the 1995 Division Report, the Commission Staff recommended
that the Commission "liberalize its interpretation of the 'ABC' clauses." In
its recent decisions in New Century Energies, Inc.,( New Century Energies,
Inc., HCAR No. 26749 (1997)), Conectiv, Inc., ( Conectiv, Inc., HCAR No.
26832 (19988), and WPL Holdings, Inc. (WPL Holdings, Inc., HCAR No. 26856
(1998), the Commission applied the ABC clauses to a proposed acquisition by
a to-be-registered holding company. The Commission reconsidered and rejected
the implicit requirement, in many of its earlier decisions, of evidence of a
severe, even crippling, effect of divestiture upon the separated system,
stating that this approach is outmoded in the contemporary utility industry,
and explained that as a result of the convergence of the gas and electric
industries now under way, separation of gas and electric businesses may cause
the separated entities to be weaker competitors than they would be together,
and that this factor operates to compound the loss of economies represented
by increased costs. The above-cited decisions support a favorable
consideration by the Commission of the instant Application.
Historically, the Commission considered the question of whether a
registered electric system could retain a separate gas system under a strict
standard that required a showing of loss of substantial economies before
retention would be permitted. New England Electric System, 41 SEC 888 (1964).
In its affirmation of that decision, the United States Supreme Court declared
that a loss of substantial economies could be demonstrated by the inability
of the separate gas system to survive on a stand-alone basis. SEC v. New
England Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation
of the requirements of Section 11(b)(1) has been explicitly rejected by the
Commission in its most recent decisions under Sections 9(a) and 10 of the
1935 Act both with respect to exempt holding companies, TUC Holding Company,
HCAR No. 35-26749 (Aug. 1, 1997) and Houston Industries Incorporated, HCAR
No. 35-26744 (July 24, 1997), and newly formed registered holding companies.
WPL Holdings, Inc., HCAR No. 35-26856 (April 14, 1998) and New Century
Energies, Inc., HCAR No. 35-26748 (Aug. 1, 1997).
In these recent decisions, the Commission acknowledged that as a
result of the transformation of utilities' status as franchised monopolies
with captive ratepayers to competitors and also as a result of the
convergence of the electric and gas industries that was then underway (and
which continues today and of which the Transaction is a prime example), the
historical standards of review had become outdated and that separated
electric and gas companies might be weaker competitors than they would be
together in the same market. WPL Holdings, Inc., HCAR No. 35-26856 (April
14, 1998); TUC Holding Company, HCAR No. 35-26749 (Aug. 1, 1997); New Century
Energies, Inc., HCAR No. 35-26748 (Aug. 1, 1977); and Houston Industries
Incorporated, HCAR No. 35-26744 (July 24, 1997). Thus, newer transactions,
such as the Mergers described herein, should be evaluated on the basis of new
Commission precedent and policy in light of changing industry standards and
should not be evaluated against criteria that have been repudiated by recent
Commission decisions.
Applicants believe the Commission should approve the Transaction as a
matter of policy and as a matter of fairness and can approve the Transaction
as a matter of law. First, the Commission has already acknowledged that the
electric and gas industries are converging and that combination companies may
be more effective competitors in a given market. The Commission has
recognized and accepted the changing nature of the energy industry and, in
particular, the fact that the combination of electric and gas operations in a
single company offers that company a means to compete more effectively in the
emerging energy services business in which a few cents can make the
difference between economic success and economic failure. WPL Holdings,
Inc., et al., HCAR No. 35-26856 (April 14, 1998), aff'd sub nom., Madison Gas
and Electric Company v. Securities and Exchange Commission (D.C. Cir. 1999).
In the instant situation, the lost economies that would follow from denial of
approval for the Transaction are substantial, both quantitatively and
qualitatively. The companies have prepared two lost economies studies, one
for the CEI Gas Properties (the "CEI Study") and the other for the NU Gas
Properties (the "NU Study"), a copy of each of which is annexed hereto as
Exhibits i.1 and i.2, which measure the quantitative loss associated with the
forced divestiture of such gas operations from the other operations of the
combined company.
The CEI Study indicates that a divestiture of the CEI Gas Properties
into a separate stand-alone company would result in increased operating
expenses primarily due to higher labor and overhead costs for the new gas
company. The total annual impact of lost economies for the CEI Gas
Properties is stated to be $63.2 million. Cumulative incremental staffing
requirements include 2600 full-time positions. The estimated total
incremental labor costs are expected to be $28 million annually.
From the customer perspective, divestiture of CEI Gas Properties is also
likely to be disadvantageous. The CEI Study states that, assuming that rate
increases are allowed to recover lost economies, the projected effect on the
gas customers of the new gas company would be as follows:
Annual Effects of Lost Economies on Customers
($000's)
Rate Revenue New Gas Company
Pre-Spin-Off $1,108,576
Post-Spin-Off $1,175,818
Dollar Increase $ 67,242
Percent Increase 6.07%
The CEI Study concludes that the economies that CEI realizes from
combined electric and gas operations provide significant benefits to
customers and shareholders. The CEI Study demonstrates that spinning off the
gas business into a separate entity would be inefficient due to lost
economies, which would be passed on to gas customers, electric customers
and/or to shareholders. Without increased rates, the immediate negative
effect on shareholders' earnings would be substantial, making ownership of
shares in the new gas company unattractive. In addition, the process of
divesting a parallel business so closely aligned with the electric business
is complex and would hurt shareholders by forcing management to focus
substantial resources on divestiture instead of pursuing other strategic
initiatives.
The CEI Study also concludes that the pass-through of increased costs to
gas customers would cause significant increases in gas rates, with no
increase in the level or quality of service. The rate increase required to
operate the new gas company is estimated at $67.2M. Such an increase would
make the new gas company less competitive at a time when competition in the
energy industry is rapidly increasing due to federal and state regulatory
initiatives.
With regard to the economies lost if Yankee Gas were not able to be
retained, however, the analysis is different. The Commission's decision in
past precedents pertaining to the retention of additional utility systems by
registered holding companies involved estimating the amount of expenses which
would be incurred by the gas company in order to create a stand alone
company. These expenses can be calculated, at least in part, at a specific
point in time, post-divestiture. In Yankee Gas' case, the economies of being
a combination company with NU have not yet been realized because the
companies have not yet fully implemented their combination.. Consequently,
the lost economies in the divestiture of Yankee Gas should be measured as
those economies that are expected to be gained over time by the merger of YES
with NU and which would not be realized if Yankee Gas were required to be
divested.
The combination of the gas operations of YES into the NU system are
presently expected to realize $13.0 million of annual savings by the end of
2001, gradually increasing to $15.5 million at the end of five years.. The
amount of annual cost savings, once realized, are compared with Yankee Gas'
1999 gas operating revenues of $276 million, Yankee Gas' 1999 gas operating
revenue deductions (excluding depreciation and other taxes) of $193 million;
Yankee Gas' 1999 gas gross income of $29 million; and Yankee Gas' 1999 gas
net income of $16 million and are set forth in the NU Study.
Divestiture would also result in the loss to consumers of the economies
offered by the "energy services" approach of NU and CEI to the utility
business. While the losses cannot be fully quantified, they are clearly
substantial. For the energy services company, providing gas and electric
products is only the start of the utility's job. The utility must also
provide enhanced service to the consumer by providing an entire package of
both energy products and services. In this regard, the efforts of NU and CEI
reflect a trend by utilities to organize themselves as energy service
companies consisting of regulated utilities providing transmission and
distribution services and unregulated energy service affiliates, which
provide a total package of energy services. The goal of an energy service
company is to retain its current customers and obtain new customers in an
increasingly competitive environment by meeting customers' needs better than
competing energy services companies. An energy service company can provide
the customer with a low cost energy (i.e., gas, electricity or conservation)
option without inefficient subsidies.
The full energy services company offers a wide range of benefits. For
customers, an energy service company provides the convenience and efficiency
of service by a single energy provider and reduces transaction costs incurred
in gathering and analyzing information, contacting energy suppliers,
negotiating terms of services and paying bills. For the communities in which
an energy service company operates, combining gas and electric operations
simplifies community planning on energy-related matters. For society, an
energy service company is best able to ensure an environmentally efficient
allocation of energy. For utility shareholders and employees, an energy
service company is better able to respond to a competitive environment and to
remain an attractive investment opportunity for shareholders and an appealing
employer for utility employees.
Section 10(c)(1) does not require that the Commission rigidly
enforce Section 11(b)(1) without consideration of the lost economies that
would result from divestiture of additional systems in considering
acquisitions under Section 9(a). As the Court of Appeals stated In Madison
Gas and Electric Company v. SEC (D.C. Cir. 1999):
By its terms ..., section 10(c)(1) does not require that new
acquisitions comply to the letter with section 11. In contrast
to its strict incorporation of section 8 ..., with respect to
section 11, section 10(c)(1) prohibits approval of an
acquisition only if it "is detrimental to the carrying out of
[its] provisions. The Commission has consistently read this
provision to import into section 10's regime not only the
integration requirement of 11(b)(1)'s main clause but also the
exception to the requirement in the ABC clauses.
As noted above, the gas and electric industries are converging
nationwide and in the northeastern region in particular, and in these
circumstances separation of electric and gas businesses would likely cause
the separated entities to be weaker competitors than they would be together.
As competition has developed in the utility industry, those companies in the
retail energy delivery business have found that they must be able to offer
customers a range of options to meet their energy needs. Potential non-
quantifiable costs to customers which would result from divestiture of the
combined gas operations involve the additional expenses of doing business
with two public utility companies instead of one and the costs associated
with making multiple companies supply information to shareholders and publish
reports required by the Exchange Act..
The Commission has adopted a new model of regulation under the 1935 Act
which permits convergence of energy services under a registered holding
company and which promotes competition among energy providers. The
Transaction is consistent with that policy. For all of the foregoing
reasons, the Commission should hold that the combination of electric and
gas operations under a newly formed registered holding company is lawful
under the provisions of Section 8 and is not detrimental to the carrying out
of the provisions of Section 11.
Clause B. With respect to Clause B, as the Commission noted in WPL
Holdings, "[c]lause B contemplates the location of an additional system in
the same state as the principal system or in adjoining states." Here, New
CEI's principal system (the integrated electric system) will be located in
New York, New Jersey, Pennsylvania, Connecticut, Massachusetts and New
Hampshire, and the "additional system" -- the integrated natural gas system -
- -- will be located in the same states of New York , Pennsylvania and
Connecticut. Hence Clause B of the ABC clauses is satisfied.
Clause C. With respect to Clause C, the continued combination of the
gas operations under New CEI is not so large (considering the state of the
art and the area or region affected) as to impair the advantages of localized
management. The CEI Gas Properties and the NU Gas Properties will continue
to be the same as they are today with some 1.4 million customers in three
states.
As the Commission has recognized elsewhere, the determinative
consideration under this criterion is not size alone or size in the absolute
sense, either big or small, but size in relation to its effect, if any, on
localized management, efficient operation and effective regulation.( See,
e.g., Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998)). Management
currently is and will remain geographically close to gas operations, thereby
preserving the advantages of localized management. From the standpoint of
regulatory effectiveness, each gas operation is organized in a separate
corporation by regulatory jurisdiction thus facilitating state regulation.
Finally, as detailed above, the gas operations of the New CEI will realize
additional economies as a result of the Merger. Far from impairing the
advantages of efficient operation, the continued combination of the gas
operations under New CEI will facilitate and enhance the efficiency of gas
operations. Moreover, as the Applicants have demonstrated, the standard is
met with respect to the electric operations and the gas operations on a
smaller scale in the same service territory.
4. Retention of Other Businesses
As a result of the Transaction, the non-utility subsidiaries of CEI
described in Item 1.B.1.(c) and Exhibit j and the non-utility subsidiaries of
NU described in Item 1.B.2.(c) above will become indirect subsidiaries of New
CEI. In addition CECONY will continue to provide steam services to
approximately 2,000 customers in Manhattan.
Standard for Retention: Section 11(b)(1) permits a registered holding company
to retain "such other businesses as are reasonably incidental, or
economically necessary or appropriate, to the operations of [an] integrated
public utility system."
Under the cases interpreting Section 11, an interest is retainable if
(1) there is an operating or functional relationship between the operations
of the utility system and the non-utility business sought to be retained, and
retention is in the public interest (see, e.g. Michigan Consolidated Gas
Co., 44 S.E.C. 361 (1970) aff'd 444 F.2d 913 (D.C. Cir. 1971)) or if (2)
the business evolved out of the system's utility business, the investment is
not significant in relation to the system's total financial resources, and
the investment has the potential to produce benefits for investors and/or
consumers. (see, e.g. CSW Credit, Inc., HCAR No 25995 (1994); Jersey
Central Power and Light Co., HCAR No. 24348 (March 18, 1987)). In addition,
the Commission has stated that "retainable non-utility interests should
occupy a clearly subordinate position to the integrated system constituting
the primary business of the registered holding company." (See, e.g. United
Light and Railways Co., 35 S.E.C. at 519). With respect to new
acquisitions, the Commission has interpreted Section 10(c)(1) of the Act to
mean that "any property whose disposition would be required under Section
11(b)(1) may not be acquired. (WPL Holdings, Inc., HCAR No. 26856 (April
14,1998)). The non-utility business interests that post-Merger New CEI will
directly or indirectly hold all meet the Commission's standards for
retention. The existing direct and indirect non-utility business interests
of CEI and NU fall within the ambit of Rule 58, are "exempt wholesale
generators" ("EWG"), within the meaning of section 32 of the Act, Foreign
Utility Companies ("FUCO") within the meaning of Section 33 of the Act, are
"exempt telecommunications companies" ("ETC") within the meaning of Section
34 of the Act or are retainable, consistent with prior Commission precedent.
Consistent with the Commission's decisions in New Century Energies, Inc.,
(HCAR No. 26748 (Aug. 1, 1997)) and Conectiv, Inc.,( HCAR No. 26832 (Feb. 25,
1998)), investments made by CEI prior to the effective date of the Mergers
should not count in the calculation of the 15 percent limit for purposes of
Rule 58 in view of the fact that CEI was not subject to the restrictions that
section 11(b)(1) and relevant Commission precedent places upon the nonutility
investment of registered holding companies. All additional investments made
by New CEI in energy-related companies subsequent to the effective date of
the Mergers would, of course, be included in the 15 percent test.
(a) The Steam Business
As stated earlier, CECONY currently, and subsequent to the Mergers,
will continue to provide steam services to approximately 2,000 customers in
Manhattan. Steam revenues constitute less than 5% of CEI's operating
revenues. CECONY's steam business is integral to its electric and gas
business in New York City. Much of the steam is first used to generate
electricity before being distributed to customers. Steam heat and air
conditioning serve to reduce the peak loads on its electric and gas
distribution systems thereby reducing the need for construction of additional
electric and gas facilities in the very congested underground infrastructure
of Manhattan. The Commission has previously approved the retention or
acquisition of similar businesses. See Cinergy Corp., HCAR No. 8767 (February
20, 1996); The Southern Company, HCAR No. 26468 (February 2, 1996)
(acquisition of energy-related companies that derive substantially all of
their revenue from the production, conversion, or distribution of steam);
Mississippi Power Co., HCAR No. 16791(July 28, 1970); General Public
Utilities Corp., 32 SEC 807, 840-41 (1951)(retention of steam heating systems
in which steam was used to both generate electricity and was sold to
customers for steam heating purposes). Such a business is reasonably
incidental to the operation of an electric utility system and is therefore
retainable
(b) The NU Nonutility Subsidiaries
The formation of NU's nonutility subsidiaries (other than those
nonutility subsidiaries of YES) was done pursuant to Commission authority as
NU was a registered holding company under the Act. Similarly, the retention
of the nonutility subsidiaries of YES was separately approved by the
Commission (see, HCAR No. 27127, January 31, 2000). Accordingly, as
retention by New CEI of these subsidiaries by a registered holding company
has already been approved, retention of these same subsidiaries by New CEI
should likewise be approved by the Commission
(c) The CEI Nonutility Subsidiaries
CEI conducts non-utility operations through four active subsidiaries,
CES, CEDI, CEEI, and CECI, and their respective subsidiaries as well as the
steam business through CECONY mentioned above. Rule 58 of the Act provides
additional evidence of the types of permissible non-utility activities
retainable by registered systems as it exempts from Section 9(a) of the Act
acquisitions by registered holding companies of the securities of an energy
related company provided that after such an acquisition, the holding
company's aggregate investment in such energy related company does not exceed
the greater of $50 million or 15% of the consolidated capitalization of the
registered holding company. Rule 58 defines 'energy related company' as a
company that, directly or indirectly, derives substantially all of its
revenues from certain enumerated activities. Several of the non-utility
businesses of CEI which New CEI seeks to retain after the Mergers are
specifically enumerated activities under Rule 58, and are described in
Exhibit j. Similarly, the Act also allows registered holding companies to
acquire and maintain interests in the following exempt entities: ETCs
(Section 34), FUCOs (Section 33) and EWGs (Section 32).
All of CEI's non-utility businesses either meet the retention
standards set out by the Commission, fall within the exemption for energy-
related activities in Rule 58, are otherwise exempt entities or constitute a
de minimis activity in the utility's local service territory. This is set
out more fully on Exhibit j. The retention of these non-utility businesses
will also produce benefits for New CEI's present and future customers and
shareholders, and therefore the retention of all the non-utility businesses
should be permitted.
A number of general considerations also support New CEI's retention of
the steam business and non-utility businesses of CEI. First, as indicated
above, the businesses in question provide benefits to customers, investors
and the public. Second, the Transaction is, at heart, a utility combination,
in which the non-utility businesses, excluding the steam business, are small
and only incidentally involved, amounting, in the aggregate, to less than 5%
of consolidated revenues of the CEI system for the fiscal year ended December
31, 1999 and less than 5% of the pro forma 1998 consolidated revenues of the
New CEI system after giving effect to the Merger. Accordingly, the
nonutility businesses sought to be retained will clearly occupy a subordinate
position to the integrated electric and gas systems which will constitute the
primary business of New CEI. Third, this is not a case in which an existing
registered holding company system is acquiring solely non-utility interests;
rather, New CEI is only seeking authorization to retain the non-utility
interests held by CEI (and those previously authorized by the Commission and
held by NU) before the Transaction. Lastly, in the case of CECI, management
is seeking qualification for it as an ETC under Section 34 of the Act and the
Federal Communications Commission's ("FCC") regulations implementing that
section. For these reasons, New CEI submits that the Commission should find
that retention of CEI's non-utility systems as subsidiaries in the New CEI
system is permitted under section 11(b)(1).
5. Economies and Efficiencies from the Merger (Section 10(c)(2))
As discussed above, Section 10(c)(2) requires that the Commission
approve a proposed transaction if it will serve the public interest by
tending toward the economical and efficient development of an integrated
public utility system. Through the Merger, CEI and NU will create an entity
that is well situated to compete effectively in an increasingly competitive
energy market. The efficiencies and economies brought about through the
Merger, and described in more detail below, thereby serve the public
interest, as required by Section 10(c)(2) of the Act.
Although many of the anticipated economies and efficiencies will be
fully realizable only in the longer term, they are properly considered in
determining whether the standards of Section 10(c)(2) have been met. (See
American Electric Power Co., 46 SEC 1299, 1320-1321 (1978). Some
potential benefits cannot be precisely estimated; nevertheless they should
be considered. (Centerior Energy Corp., HCAR No. 24073 (April 29, 1986); see
also In Re Consolidated Edison, Inc., HCAR No. 2702 (May 13, 1999)) In
addition, Section 10(c)(2) of the Act does not require that the future
savings be large in relation to the gross revenues of the companies involved.
The Applicants believe that the Merger will provide significant
financial and organizational advantages and, as a result, the potential for
substantial economies and efficiencies should be found to meet the standard
of Section 10(c)(2) of the Act. The parties to the Merger expect to realize
some $1.3 billion in net merger savings in the regulated operations during
the first 10 years following the Merger. These estimated savings were
derived by combining the costs and workforces of the two companies and
applying general reduction factors that normally result from a combination of
similar sized companies. The reductions are mainly in the administrative
areas and while specific reductions in certain areas will be overestimated or
underestimated, it is the expectation of both CEI and NU that the overall
level of merger savings can be realized over time.
The geographical locations of the respective electric energy service
territories of CEI and NU, which operate in contiguous ISOs, provide an
opportunity to integrate their electric utility operations efficiently. The
combined system can be operated as a single, larger cohesive system. As the
structure of the electric utility industry continues to evolve, the
marketplace will create additional opportunities for the Applicants to create
value through integrated operations and increased efficiencies.
The Applicants believe that their combination offers significant
strategic and financial benefits to each company and shareholders, as well as
to their respective employees and customers. These benefits include, among
others: (i) maintenance of competitive rates that will improve the combined
entity's ability to meet the challenges of the increasingly competitive
environment in both the electric and gas utility industry, (ii) over time a
reduction in operating costs and expenditures resulting from integration of
corporate and administrative functions, and savings in areas such as outside
legal, audit, directors and consulting fees, (iii) greater purchasing power
for gas supply and for items such as electric and gas equipment,
transportation services and other operational goods and services, (iv)
reduced aggregate inventory levels and associated carrying costs, (v)
enhanced opportunities for expansion into non-utility businesses, (vi)
expanded management resources and ability to select leadership from a larger
and more diverse management pool, and (vii) a financially stronger company
that, through the use of the combined capital, management, and technical
expertise of each company, will be able to achieve greater financial
stability and strength and greater opportunities for earnings growth,
reduction of operating costs, efficiencies of operation, better use of
facilities for the benefit of customers, improved ability to use new
technologies, greater retail and industrial sales diversity, improved
capability to compete in wholesale power markets and joint management and
optimization of their respective portfolios of gas supply, transportation and
storage assets. The Applicants believe that over time the Merger will
generate efficiencies and economies which would not be available to the
separate companies absent the Merger and which will enable post-Merger New
CEI to be a low-cost competitor in the marketplace.
(i) Corporate Operations
The Applicants anticipate Merger-related savings in areas where costs
are relatively fixed and do not vary with an increase or decrease in the
number of customers served. These areas include legal services, finance,
sales, support services, transmission and distribution, customer service,
accounting, human resources and information services.
(ii) Administration
Savings will be realized through cost avoidance in those areas where CEI
and NU incur many costs for items which relate to the operation of each
company, but which are not directly attributable to customers. Eleven such
areas have been identified: administrative and general overhead; benefits
administration; insurance; shareholder services; advertising; association
dues; directors' fees; and vehicles. Achieving cost savings through greater
efficiencies will permit each of the operating utilities to offer more
competitively-priced electric service and energy-related products and
services than would otherwise be possible.
(iii) Non-Gas Supply Purchasing Economies
Savings will be realized through increased order quantities and the
enhanced utilization of inventory for materials and supplies. As a direct
result of the combination, savings can be realized through the procurement of
both materials and services, as well as in costs associated with the
maintenance of inventory levels.
(iv) Gas Supply
Savings will be realized through the bundling of natural gas purchases
in the form of larger quantities or volumes. It is anticipated that New CEI
will be able to take advantage of commodity savings based on higher total
volumes of natural gas acquisition. This results in competitive market
prices for all gas utility companies.
Savings from these sources will be offset by the costs that must be
incurred for activities essential to achieving the savings. CEI and NU have
formed a Transition Team, which will diligently pursue ways in which to avoid
or minimize such offsetting costs.
(v) Additional Expected Benefits
In addition to the benefits described above, there are other benefits
which, while presently difficult to quantify, are nonetheless substantial.
These other benefits include:
Increased Scale-- As competition intensifies within the gas and electric
industry, CEI and NU believe scale will be one dimension that will contribute
to overall business success. Scale has importance in many areas, including
utility operations, product development, advertising and corporate services.
Competitive Prices and Services-- Sales to industrial, large commercial and
wholesale customers are considered to be at greatest near-term risk as a
result of increased competition in the electric utility industry. The
Merger will enable New CEI to meet the challenges of the increased
competition and will create operating efficiencies through which New CEI will
be able to provide more competitive prices to customers.
More Balanced Customer Base-- The Merger will create a larger company with a
more diverse customer base. This should reduce New CEI's exposure to adverse
changes in any sector's economic and competitive conditions.
Expanded Management Resources: In combination, CEI and NU will be able to
draw on a larger and more diverse mid- and senior-level management pool to
lead New CEI forward in an increasingly competitive environment for the
delivery of energy and should be better able to attract and retain the most
qualified employees. The employees of CEI and NU should also benefit from
new opportunities in the expanded organization.
For the above stated reasons, the Commission should find that the
integration criteria are satisfied and approve the proposed Merger.
6. 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 to 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 in Item 4 of this Application/Declaration, and as evidenced
by the application made by the Applicants to the various state commissions
listed in Item 4 below, CEI and NU intend to comply with all applicable state
laws related to the proposed transaction.
ITEM 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that CEI and NU
expect to obtain in connection with the Merger in addition to the approval of
the Commission under the Act.
A. Federal Energy Regulatory Commission
Section 203 of the Federal Power Act provides that no public utility may
sell or otherwise dispose of its jurisdictional facilities, directly or
indirectly merge or consolidate its facilities with those of any other
person, or acquire any security of any other public utility without first
having obtained authorization from the FERC. Because CEI and NU own
"jurisdictional facilities" under the Federal Power Act, FERC approval under
Section 203 is required before CEI and NU may consummate the Merger.
Section 203 provides that the FERC is required to grant its approval if the
Merger is found to be "consistent with the public interest."
The FERC stated in its 1996 Utility Merger Policy Statement that, in
analyzing a merger under Section 203, it will evaluate the following
criteria:
(i) the effect of the merger on competition in wholesale electric power
markets, utilizing an initial screening approach derived from the
Department of Justice/Federal Trade Commission Horizontal Merger
Guidelines to determine if a merger will result in an increase in an
applicant's market power;
(ii) the effect of the merger on the applicant's FERC jurisdictional
ratepayers; and
(iii) the effect of the merger on state and federal regulation of the
applicants.
On January 14, 2000, an application was filed requesting the required
FERC approvals. Approval from the FERC was received on May 31, 2000. See
Exhibit d.1.2.
B. Nuclear Regulatory Commission
The Atomic Energy Act provides that an NRC license for nuclear
generating facilities may not be transferred or in any manner disposed of,
directly or indirectly, through transfer of control, unless the NRC finds
that the transfer complies with the Atomic Energy Act and consents to the
transfer. Subsidiaries and affiliates of CEI and NU hold licenses for their
nuclear generating facilities. On January 13, 2000 CEI and NU filed an
application with the NRC seeking approval of the transfer of control
resulting from the Merger.
C. United States Antitrust Law
The HSR Act and the related rules and regulations prohibit CEI and NU
from completing the Merger until each company submits required information to
the Antitrust Division of the Department of Justice (the "DOJ") and the
Federal Trade Commission (the "FTC") and until certain waiting period
requirements have been satisfied. CEI and NU do not believe that the Merger
will violate federal antitrust laws. The required filing with the DOJ and
FTC was made and the DOJ has issued a "second request" for further
information. If the Merger is not completed within 12 months after the
expiration of the initial HSR Act waiting period, CEI and NU would be
required to submit new information to the FTC and DOJ and a new HSR Act
waiting period would begin.
D. State Laws
Certain state regulatory approvals and filings will be obtained and
made, as applicable, prior to the consummation of the Merger including those
with the following regulatory agencies:
(i) the Connecticut Department of Public Utility Control (the "DPUC"),
CL&P is a public utility subject to regulation by the DPUC. A copy of
the Application to the DPUC is attached as Exhibit d.2.
(ii) the Maine Public Utilities Commission (the "MPUC"). A copy of the
Application to the MPUC is attached as Exhibit d.3 Approval from the
MPUC has been received and is attached as Exhibit d.3-2.
(iii) the Massachusetts Department of Telecommunications and Energy (the
"DTE") and the Massachusetts Department of Revenue (the "DOR"). WMECO
is a public utility subject to the regulation of the DTE. An
information filing was made with the DTE. A copy of such filing is
attached as Exhibit d.4. HWP is subject to regulation by the DOR but no
filing is required to be made with the DOR.
(iv) the New Hampshire Public Utilities Commission (the "NHPUC"). PSNH is
a public utility subject to regulation by the NHPUC. A copy of the
filing made with the NHPUC is attached as Exhibit d.6.
(v) the New Jersey Board of Public Utilities (the "NJBPU"). RECO is a
public utility subject to regulation by the NJBPU. A copy of the filing
made with the NJBPU is attached as Exhibit d.7.
(vi) the New York State Public Service Commission. CECONY is a public
utility subject to regulation by the NYPSC. A copy of the filing made
with the NYPSC is attached as Exhibit d.8.
(vii) the Pennsylvania Public Utility Commission (the "PAPUC"). RECO is
a public utility subject to regulation by the PAPUC. A copy of the
filing made with PAPUC is attached as Exhibit d.9. Approval of the
PAPUC has been received and is attached as Exhibit d.9-2.
(vii) the Vermont Public Services Board (the "VPSB"). A copy of the filing
made with the VPSB is attached as Exhibit d.10. Approval from the VPSB
has been received and is attached as Exhibit d.10-2.
ITEM 5: Procedure
The Applicants hereby request that the Commission publish a notice under
Rule 23 with respect to the filing of this Application as soon as practicable
and that the Commission's order be issued as soon as possible. A form of
notice suitable for publication in the Federal Register is attached hereto as
Exhibit h.1. The Applicants respectfully request the Commission's approval,
pursuant to this Application/Declaration, of all transactions described
herein, whether under the sections of the Act and Rules thereunder enumerated
in Item 3 or otherwise. It is further requested that the Commission issue an
order authorizing the transactions proposed herein at the earliest
practicable date but in any event not later than September 30, 2000.
Additionally, the Applicants (i) request that there not be any recommended
decision by a hearing officer or by any responsible officer of the
Commission, (ii) consent to the Office of Public Utility Regulation within
the Division of Investment Management assisting in the preparation of the
Commission's decision, and (iii) waive the 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective, since it is desired that the Commission's order, when issued,
become effective immediately.
ITEM 6. Exhibits and Financial Statements
(a) Exhibits
a.1 Certificate of Incorporation of New CEI (Incorporated by
reference to Exhibit A to the Merger Agreement of Consolidated
Edison and Northeast Utilities' Joint Proxy and Registration
Statement on Form S-4 filed on March 1, 2000, Registration
No. 333-31390).**
b.1 Amended and Restated Agreement and Plan of Merger
(Incorporated by reference to Annex A of Consolidated Edison
and Northeast Utilities' Joint Proxy and Registration
Statement on Form S-4 filed on March 1, 2000, Registration
No. 333-31390).**
c.1 Joint Proxy and Registration Statement on Form S-4
(Incorporated by reference to Consolidated Edison and
Northeast Utilities' Joint Proxy and Registration Statement on
Form S-4 filed on March 1, 2000, Registration No. 333-
31390).**
d.1 Application to FERC**
d.1-1 Prepared Direct Testimony and Exhibits of William H. Hieronymus**
d.1-2 FERC Order
d.2-1 Filing made with the DPUC**
d.2-2 DPUC Order*
d.3-1 Filing made with the MPUC**
d.3-2 Order of the MPUC**
d.4 Filing made with the DTE**
[No Order required]
d.5 Intentionally Omitted***
d.6-1 Filing made with the NHPUC**
d.6-2 NHPUC Order*
d.7 Filing made with the NJBPU**
[No Order required]
d.8-1 Filing made with the NYPSC**
d.8-2 NYPSC Order*
d.9-1 Filing made with the PAPUC**
d.9-2 PAPUC Order*
d.10-1 Filing made with the VPSB**
d.10-2 Order of the VPSB**
d.11-1 Filing made with the NRC**
d.11-2 NRC Order*
f.1 Legal Opinions*
g.1 Financial Data Schedules*
h.1 Form of Notice**
i.1 Gas Retention Analysis for the CEI Gas Properties*
i.2 Gas retention Analysis for the NU Gas Properties*
j. Nonutility Subsidiaries of New CEI
k.1 Corporate Structure of Consolidated Edison, Inc. Pre-merger*
k.2 Corporate Structure of Northeast Utilities Pre-merger*
k.3 Corporate Structure of Combined Companies, Post-merger*
l. CEI and PricewaterhouseCoopers, LLP Letters
(b) Financial Statements*
* To be filed by amendment
** Previously Filed
*** No Filing Required or Made with the DOR
ITEM 7. Information as to Environmental Effects
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms
are used in Section 102(2)(C) of the National Environmental Policy Act, 42
U.S.C. Sec. 4321 et seq. The only federal actions related to the Transaction
pertain to the Commission's declaration of the effectiveness of the
Registration Statement of CEI and NU on Form S-4, the approvals and actions
described under Item 4 and Commission approval of this
Application/Declaration. Consummation of the Transaction will not result in
changes in the operations of CEI, NU or any of their respective subsidiaries
that would have any impact on the environment. No federal agency is
preparing an environmental impact statement with respect to this matter.
SIGNATURES
Pursuant to the requirement of the Public Utility Holding Company Act of
1935, as amended, the undersigned companies have duly caused this statement
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: August 11, 2000
Consolidated Edison, Inc.
By /s/ Joan S. Freilich
Name: Joan S. Freilich
Title: Executive Vice President and
Chief Financial Officer
Northeast Utilities
By /s/ Cheryl W. Grise
Name: Cheryl W. Grise
Title: Senior Vice President,
Secretary and General Counsel
Exhibit d.1.2
91 F.E.R.C. P61,225; 2000 FERC LEXIS 1102, *
Consolidated Edison, Inc., Northeast Utilities
Docket No. EC00-49-000
FEDERAL ENERGY REGULATORY COMMISSION - COMMISSION
91 F.E.R.C. P61,225; 2000 FERC LEXIS 1102
ORDER APPROVING MERGER
June 1, 2000
HISTORY: [*1]
As Revised June 22, 2000.
CORE TERMS: merger, transmission, proposed merger, subsidiary, merged, pool,
concentration, competitive, commit, merger-related, post-merger, generation,
adversely affect, public utility, hold harmless, downstream, premium,
consolidated, tariff, concentrated, membership, vertical, customer, entity,
merger-induced, acquisition, sensitivity, generating, transition, switch
PANEL:
Before Commissioners: James J. Hoecker, Chairman; William L. Massey, Linda
Breathitt, and Curt Hebert, Jr.
OPINION:
On January 14, 2000, Consolidated Edison, Inc. (CEI) and Northeast Utilities
(NU) (collectively, Applicants) filed a joint application pursuant to section
203 of the Federal Power Act (FPA) n1 for approval of the merger of CEI and
NU. The proposed merger would create an exempt holding company structure in
which "New CEI" would be the surviving parent company (to be referred to,
post-merger, as Consolidated Edison, Inc.) and CEI and NU would be the
operating utility subsidiaries, as described more fully below.
As discussed below, the Commission has reviewed the proposed merger under the
Commission's Merger Policy Statement. n2 In this order, we will approve the
merger, as proposed.
[*2]
I. Background
A. Description of the Parties to the Merger
1. CEI and its subsidiaries
a. CEI
CEI is an exempt public utility holding company under section 3(a)(1) of the
Public Utility Holding Company Act (PUHCA) n3 . It is the holding company for
Consolidated Edison Company of New York, Inc. (ConEd) and presently owns all
of
ConEd's issued and outstanding common stock. As a result of a Commission-
approved merger, n4 CEI also became the holding company for Orange and
Rockland
Utilities, Inc. (Orange and Rockland) and presently owns all of Orange and
Rockland's issued and outstanding common stock. n5
b. ConEd
ConEd supplies electric service in most of New York City and most of
Westchester County, New York. ConEd also supplies natural gas to the Boroughs
[*3] of Manhattan and the Bronx and parts of the Borough of Queens and
Westchester County, New York. n6
ConEd has 1,485 MW of generating capacity that it owns and operates, 462 MW
of entitlements to jointly owned units, 2,090 MW of non-utility generation
(NUG) contracts, and 550 MW of other contracts.
Orange and Rockland is an electric and gas distribution utility that has two
wholly-owned public utility subsidiaries: Rockland Electric Company and Pike
County Light & Power Company. Orange and Rockland does not own any generating
facilities. It has 19 MW of NUG contracts and certain power purchase
contracts.
Orange and Rockland's consolidated gas operations include three propane air
gas
plants that have a combined capacity of 30,600 Mcf per day of natural gas
equivalent.
CEI also wholly owns several [*4] non-utility subsidiaries.
2. NU and Its Subsidiaries
NU is a registered public utility holding company. It directly owns six
subsidiaries that are public utilities under the FPA: Connecticut Light &
Power
Company (CL&P), Western Massachusetts Electric Company (WMECO), Holyoke Water
Power Company (HWP), Holyoke Power and Electric Company (HPE), Public Service
Company of New Hampshire (PSNH), and North Atlantic Energy Corporation
(NAEC).
NU also owns several non-utility subsidiaries.
NU and its subsidiaries (including non-utility subsidiaries) own 3,893 MW of
generating capacity and have total capacity, including net contract
purchases,
of 4,530 MW.
B. Description of Proposed Merger
Applicants state that the merger between CEI and NU would occur through two
simultaneous mergers: the merger of CEI into New CEI (a newly formed Delaware
corporation that will become the ultimate post-merger holding company) and
the
merger of an indirect wholly-owned subsidiary of CEI with NU. Upon
completion,
New CEI will own all of the assets of CEI and NU will be a wholly-owned
subsidiary of New CEI. The merged company's name will be Consolidated Edison,
Inc. The utility subsidiaries of CEI and NU would [*5] retain their original
names and identities and continue to serve their respective service
territories.
CEI shareholders would receive one share of New CEI common stock for each CEI
common share. NU shareholders would receive payment for each NU common share,
calculated from a base amount of $ 25.00 for each NU common share, in either
cash or New CEI common stock, depending on their election and upon allocation
and proration procedures specified in the Merger Agreement. The base amount
will be adjusted upward if certain conditions set forth in the Merger
Agreement
are met.
In order to eliminate any adverse rate impacts, Applicants commit to hold
harmless, for a period of five years, all wholesale requirements and
transmission customers from any merger-related costs in excess of merger
savings.
The NU and CEI operating companies are members of the New England Power Pool
(NEPOOL) and the New York Power Pool (NYPP) respectively. These are tight
power
pools in which transmission-owning members have turned over operational
control
of their transmission facilities to the ISO New England, Inc. (ISO-NE) and
New
York Independent System Operator (NYISO), respectively. NYISO and ISO-NE are
contiguous [*6] along a 400-mile border and are interconnected by eight
separate interties, with aggregate transfer capability of 1,600 MW to 2,300
MW,
depending on direction and system conditions. Applicants are directly
interconnected by the 398 Line, owned by CL&P and ConEd, one of the interties
that comprise the NYISO/ISO-NE Interface. The 398 Line operates at 345 kV and
has a summer normal rating of 1195 MW. Access to the NYISO/ISO-NE Interface
is
provided on a non-discriminatory basis under the NYISO and NEPOOL Tariffs
administered by NYISO and ISO-NE.
II. Notices of Filing, Interventions, and Answers
Notice of Applicants' merger filing was published in the Federal Register,
65 Fed. Reg. 4409 (2000), with comments, interventions, and protests due
on or before March 14, 2000. n7
The Massachusetts Municipal Wholesale Electric Company and the Connecticut
Municipal Electric Energy Cooperative (collectively, Municipals) filed a
timely
motion to intervene and protest. Municipals state that the merged company
would
have rights over and ownership of assets that link the New York and New
England
control areas and express concern over the effects on pricing and capacity
should either CEI or NU join the other's power pool. Municipals state that
the
Commission should conduct a probing evaluation of the proposed merger, and
that
any approval of the merger should be conditioned on a commitment by
Applicants
that neither CEI or NU will switch their respective power pool memberships.
The United Illuminating Company (United Illuminating) filed a timely motion
to
intervene and protest. United Illuminating finds fault with Applicants'
proposals concerning the proposed merger's effect on rates and argues that
that
the proposed merger would have an adverse effect upon United Illuminating's
transmission rates. Specifically, United Illuminating believes that
Applicants
have not proposed adequate ratepayer protections related to: (1) preserving
the
current NEPOOL Regional Network [*8] Service (RNS) rate and NU Local Network
Service (LNS) rate (collectively, the NEPOOL Rates) paid by United
Illuminating; (2) preventing any acquisition premium and other merger-related
costs from affecting transmission rates in any manner until Applicants obtain
regulatory approval for recovering either the premium or other merger-related
expenses; and (3) protecting ratepayers against cost increases that would
arise
from the merged entity withdrawing NU or its current utility subsidiaries
from
NEPOOL. In addition, United Illuminating claims that Applicants fail to set
forth any commitment to protect against changes in the use of the 398 Line.
United Illuminating requests that the Commission adopt the following
mitigation
measures: (1) condition approval of the merger upon Applicants' commitment to
maintain the status quo with respect to the NEPOOL RNS and NU LNS
transmission
rates during the NEPOOL transition period, particularly if Applicants choose,
or are required, to develop a single system-wide rate for service over their
combined system; (2) require Applicants to commit that they will not attempt
to recover their merger acquisition premium or other merger-related costs
until
[*9] they have obtained authorization to do so from the Commission; (3)
require
Applicants to commit that NU and the NU subsidiaries will continue to provide
transmission service under the NEPOOL tariff and the NU subsidiaries'
own individual open access transmission tariffs until the end of the
transition
period; and (4) require Applicants to commit that the 398 Line will remain a
regional asset operated on a non-discriminatory basis and that the use of the
tie will not change through the end of the transition period.
Further, United Illuminating states that a large transmission-owning entity
such as NU has the incentive and ability to influence NEPOOL transmission
decisions in ways that are preferential to its power marketing business.
United Illuminating argues that, as a condition of approving the merger,
the Commission should preclude the merged entity from participating in
decisions relating to the provision of transmission service or the rates,
terms and conditions pursuant to which that service is provided for as long
as the merged entity actively engages in power marketing in the same markets.
In the alternative, United Illuminating argues, the merged entity should be
required [*10] to end its active participation in the power markets in which
it participates in decisions relating to the provision of transmission
service
or the rates and the terms and conditions pursuant to which that service is
provided.
On March 29, 2000, Applicants filed an answer to the protests filed by
Municipals and United Illuminating in which they respond to certain requests
for conditions. Applicants accept certain of Municipals' and United
Illuminating's proposed conditions. Specifically, Applicants commit to the
following: (1) not to switch their power pool memberships without Commission
approval; (2) not to include any part of the acquisition premium or other
merger-related costs in any Commission-jurisdictional rates without
Commission
approval, specifically, in formula rates for transmission service under
individual or power pool tariffs; and (3) not to assert rights to obtain
access
to the 398 Line on a basis different from other pool participants without
Commission approval.
Applicants argue, among other things, that other further conditions sought by
Municipals and United Illuminating would require the Commission to prejudge
how
the region should be configured and would involve [*11] issues that are not
before the Commission in this proceeding, or would require the Commission to
modify the scope of the regional settlement in NEPOOL and would thus disrupt
the balanced framework that the Commission has repeatedly stated it will not
alter in merger cases.
On May 1, 2000, United Illuminating filed a motion for leave to file an
answer
and an answer.
III. Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure, n8
the timely, unopposed motions to intervene and notice of intervention serve
to make those who filed them parties to this proceeding. Due to the absence
of any undue prejudice or delay, the Commission will grant the late,
unopposed motion to intervene in this proceeding of NRG Power Marketing, Inc.
Pursuant to Rule 213 of the Commission's Rules of Practice and Procedure, n9
we will accept the answer of March 29, 2000 submitted by Applicants, as it
assists in our understanding and resolution of the issues in this [*12]
proceeding. Also, pursuant to Rule 213 we will reject the answer of
May 1, 2000 submitted by United Illuminating, as this pleading is largely
repetitive and, as we stated in the Merger Policy Statement, n10 considering
such a pleading would merely bog down the process of considering mergers.
B. The Merger
1. Standard of Review
Section 203(a) of the FPA n11 provides as follows:
No public utility shall sell, lease, or otherwise dispose of the whole of its
facilities subject to the jurisdiction of the Commission, or any part thereof
of a value in excess of $ 50,000, or by any means whatsoever, directly or
indirectly, merge or consolidate such facilities or any part thereof with
those
of any other person, or purchase, acquire, or take any security of any other
public utility, without first having secured an order of the Commission
authorizing it to do so.
Under section 203(a), the Commission must approve a proposed merger if it
finds
that the [*13] merger "will be consistent with the public interest." n12
In 1996, the Commission issued its Merger Policy Statement updating and
clarifying its procedures, criteria and policies applicable to public utility
mergers. n13 The Merger Policy Statement provides that the Commission will
generally take account of three factors in analyzing proposed mergers: (a)
the effect on competition; (b) the effect on rates; and (c) the effect on
regulation.
For the reasons discussed below, we find that Applicants' proposed merger,
with its mitigation commitments, is consistent with the public interest.
Accordingly, we will approve the merger without further investigation.
2. Effect on Competition
a. Applicants' Analysis
Applicants analyze the horizontal and vertical competitive effects of the
proposed merger. These [*14] effects are related to the consolidation of
generation controlled by Applicants and the consolidation of generation and
delivered gas controlled by Applicants, respectively. While Applicants have
plans to divest considerable portions of their generating assets, the
analysis
provided by Applicants includes only those divestitures that have been
completed. Applicants state that their analysis shows that the proposed
merger will not adversely affect competition as a result of consolidating
generation. Furthermore, Applicants claim that because of their limited gas
operations, the proposed merger raises no vertical concerns.
Applicants identify non-firm energy as the relevant product. They use
economic
capacity and available economic capacity as proxies for suppliers' ability to
participate in relevant markets. Applicants identify and define six relevant
geographic ("destination") markets in NEPOOL and NYPP. n14 They consider
various seasonal market conditions in evaluating the effect of the merger
on relevant geographic markets. Thus, Applicants assess market concentration
for the peak, off-peak, and super-peak non-firm energy product under summer,
winter, and spring/fall conditions, [*15] for a total of nine periods. For
the
purposes of estimating market prices, Applicants use daily data published by
Power Markets Week from 1998 to 1999.
The results of Applicants' economic capacity analysis show that there are no
merger-induced increases in market concentration (as measured by the HHI
statistic) that exceed the thresholds specified in the Merger Policy
Statement.
For the year 2000 analysis, post-merger concentration in the NEPOOL and
NYPP-West markets is below 1,000, and it is below 1,209 in the NYPP-East,
NYC, and PJM markets, with pre- to post-merger increases in concentration of
64
and less. The Long Island market is the most concentrated, with maximum
post-merger concentration of 6,095 and merger-induced increase in
concentration
of 31 or less. For the year 2001 analysis, post-merger markets are either
unconcentrated or merger-induced [*16] increases in concentration do not
exceed
the thresholds. n15
Applicants evaluate the vertical effects of the proposed merger in the NYPP
and
NEPOOL geographic markets. n16 In support of their conclusion that the
proposed
merger would not adversely affect competition, Applicants make a number of
points. First, they explain that they own a small amount of gas
transportation
assets. NU has a five percent share of Portland Natural Gas
Transmission Services pipeline, which accounts for ten percent of total
capacity into New England and serves only one [*17] generator, which is
owned by Applicants. Therefore, Applicants claim, they have no rivals whose
costs they could raise by withholding gas.
Second, Applicants explain that they hold about 16 percent of firm
transportation rights (FTRs) on pipelines serving the combined Metro New York
and southern New England market. They point out that these FTRs are used by
ConEd's subsidiaries to serve their local distribution company (LDC)
customers
and that they could not raise rival generators' costs because they use all
FTRs
to serve LDC native load requirements. However, they assess market
concentration on the basis of market shares for FTRs; they show that the
market
is moderately concentrated (1,361 HHI) and therefore raises no competitive
concerns. Applicants also argue that their ownership of LDCs poses no
competitive issues because all of the large generating [*18] stations served
by their LDC affiliates have low-cost bypass alternatives such that a
strategy
of withholding gas by the merged company would be unprofitable. n17
Finally, Applicants note that the proposed merger raises no vertical
competitive issues arising from control of transmission because all relevant
transmission facilities and control area and security coordinator functions
are
controlled by their respective ISOs.
b. Commission Determination
We find that the proposed merger will not adversely affect competition as a
result of: (1) consolidating generation controlled by Applicants; or (2)
consolidating generation and gas delivery facilities controlled by
Applicants.
We note that intervenors do not raise concerns regarding Applicants'
competitive analysis in this proceeding. In regard to horizontal competitive
issues, Applicants' analysis demonstrates that the merger does not produce
increases in market concentration in the six relevant [*19] geographic
markets
they define. n18
In regard to vertical [*20] competitive issues, the proposed merger will not
create or enhance the merged company's ability and/or incentive to adversely
affect prices and output in downstream electricity markets. Five of the six
relevant downstream electricity markets are not highly concentrated. This
dispells any concern that the merged company could adversely affect prices
or output through, for example, raising rivals' costs or foreclosure, which
requires that both downstream and upstream delivered gas markets be highly
concentrated (i.e., not conducive to competitive outcomes). n19 As a result,
in these markets, further investigation into the competitive conditions in
the
upstream market or the merged company's ability and incentive to adversely
affect electricity prices or output is unnecessary. The remaining downstream
relevant market (Long Island) is highly concentrated. However, we note that
there is no significant "overlap" in the upstream and downstream relevant
markets in which Applicants compete, nor is there a significant incentive for
the merged company to adversely affect prices or output in the Long Island
market. n20
Finally, we are satisfied that the proposed merger raises no vertical
concerns
related to combining generation and transmission because Applicants'
transmission facilities and control area and security coordinator functions
are under the control of ISO-NE and NYISO. We rely upon this fact in
approving the merger. With regard to United Illuminating's concern over the
proposed merger's effect upon the usage of the 398 Line, Applicants commit
not to assert rights to access the 398 Line on a basis different from other
pool participants without Commission approval. As explained by Applicants in
their response, operational control over the 398 Line has been turned over to
the NYISO. Again, any change to the treatment of the 398 Line would require
Commission approval, and the consequences of such a change would be examined
at that juncture.
Moreover, as to United Illuminating's concern about the merged company's
voting
rights in NEPOOL,we note that the governance structure [*22] of NEPOOL has
been
approved by this Commission and, as NEPOOL has previously explained, its
restructuring proposal was the product of over two years of intensive
discussions, facilitated by the Commission's Office of Dispute Resolution,
among all affected parties, including United Illuminating. n21 In addition,
NU's voting rights within NEPOOL will not change as a result of the proposed
merger. Any concerns regarding Applicants' use of their rights under the
NEPOOL Agreement to unduly discriminate on behalf of their own power
marketing
affiliates could be brought to the Commission's attention in a complaint
filed
under section 206 of the FPA.
In light of these considerations, the proposed merger does not raise
competitive concerns.
3. Effect of the Merger on Rates
Applicants have made certain proposals in response to conditions sought by
United Illuminating and Municipals concerning the NEPOOL Rates, n22 the
merger
acquisition [*23] premium, transmission service during the transition period,
and the consequences of any potential decision by ConEd and/or NU to join the
other's power pool, absent a general consolidation of the two power pools.
Applicants respond to these concerns by making the following commitments: (a)
not to switch power pool memberships without Commission approval; and (b) not
to include any part of the acquisition premium or other merger-related costs
in any Commission-jurisdictional rates without Commission approval.
In addition, Applicants offer a hold harmless commitment as an assurance that
the proposed merger will not have an adverse effect on rates. Applicants
commit
that, for the five year period following the consummation [*24] of the
proposed
merger, they will hold harmless all existing wholesale requirements and
transmission customers from any merger-related costs to the extent that those
costs are not offset by merger-related savings. In regard to wholesale
transmission rates specifically, Applicants state that for a period of five
years following the consummation of the proposed merger, they will not seek
to include any increased costs attributable to the merger in their
transmission
revenue requirements under either the NYISO and ISO-NE tariffs or under NU's
individual open access transmission tariff.
In the Merger Policy Statement, we explain that one of the types of ratepayer
protection that can be proposed is a general hold harmless provision in which
an applicant commits that it will protect wholesale customers from any
adverse
rate effects resulting from the merger for a significant period of time
following the merger. Such a provision must be enforceable and
administratively
manageable. n23 Applicants' hold harmless commitment n24 meet these
requirements. n25
In response to the concerns of United Illuminating and Municipals related to
the adverse effects that may occur if either of Applicants switches its power
pool membership, Applicants state they have no plans at this time to change
their power pool membership post-merger and that they will not switch
their existing power pool membership without obtaining Commission approval.
Any adverse effects of such a change would therefore be appropriately
examined
at such time as it may occur. n26 United Illuminating's concern regarding
changes to NU's current transmission service under the NEPOOL Tariff and NU's
individual open access transmission tariff would also be examined by the
Commission if and when such changes are proposed.
[*26]
Therefore, given Applicants' hold harmless provisions and other commitments,
as
expanded in their response and explained above, we believe the proposed
merger
will not have an adverse effect on rates.
4. Effect of the Merger on Regulation
As explained in the Merger Policy Statement, the Commission's primary concern
with the effect on regulation of a proposed merger involves possible changes
in the Commission's jurisdiction, specifically with regard to intra-company
sales of non-power goods and services, when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange
Commission (SEC). n27 We are also concerned with the effect on state
regulation where a state does not have authority to act on a merger and
has raised concerns about the effect on its regulation of the merged entity.
n28
In this case, NU is currently a registered holding company regulated by the
SEC, and CEI is currently an [*27] exempt holding company under PUHCA section
3(a)(1). However, the new, merged company, according to the application, will
be required to be registered under PUHCA section 5. Applicants, therefore,
commit that they will follow the Commission's policies regarding the
treatment
of costs and revenues associated with intra-company services. However, as
explained above, our concern lies with both goods and services. Therefore, in
order to avoid a hearing on the issue of the proposed effect of the merger on
federal regulation, Applicants, within 30 days of the date of this order,
must
agree to abide by the Commission's policies with respect to intra-system
transactions involving non-power goods as well as services.
In regard to state regulation, Applicants contend that they are making
appropriate filings with the state public utility commissions in Connecticut,
Maine, Massachusetts, New Hampshire, New York, New Jersey, Pennsylvania and
Vermont. Applicants also explain that their public utility subsidiaries
subject
to state regulation will remain so post-merger.
Accordingly, in light of the facts and commitments stated above, we are
satisfied that the proposed merger will not adversely affect [*28] federal
or state regulation. n29
5. Accounting Issues
Applicants state that the merger will be recorded using the purchase method
of
accounting. Applicants also state that any premium paid above the fair market
value of NU's assets will be reflected as goodwill on New CEI's consolidated
balance sheet. The pro forma consolidated balance sheet provided with the
application reflects approximately $ 1.5 billion of goodwill. In previous
applications the Commission has approved the use of the purchase method of
accounting. n30 Because the transaction is structured so that the merger
occurs at the holding company level without any changes to the accounting
records or financial statements of the Commission-jurisdictional
subsidiaries,
we have no objection to Applicants' use of the purchase method of accounting.
[*29]
We further understand that the goodwill will remain on the books of New CEI
and
that the merger will not affect the account balances or financial statements
of the jurisdictional subsidiaries, except for certain costs to achieve the
merger. With respect to certain costs to achieve the merger, Applicants
intend
to record the costs as a regulatory asset in Account 186, Miscellaneous
Deferred Debits. Although the application is unclear as to whether the
costs will be recorded on the books of the holding company or the
Commission-jurisdictional subsidiaries, amounts recorded on the books
of the jurisdictional subsidiaries that would otherwise be charged to
expense but for it being probable that the amounts will be recovered in
future rates shall be recorded in Account 182.3, Other Regulatory Assets. n29
The Commission orders:
(A) The untimely motion to intervene is hereby granted.
(B) Intervenor's request for hearing is hereby denied.
(C) The answers are hereby accepted and rejected to [*30] the extent
discussed in the body of this order.
(D) Applicants' proposed merger is hereby approved as discussed in the
body of this order.
(E) Applicants are hereby directed to file, within 30 days of the date of
this order, a statement indicating that they agree to abide by the
Commission's
policies regarding the treatment of costs and revenues associated with
intra-system transactions involving non-power goods and services, as
discussed
in the body of this order.
(F) Applicants shall advise the Commission within 10 days of the date the
merger is consummated.
(G) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, services,
account, valuation, estimates, or determinations of cost, or any other matter
whatsoever now pending or that may come before the Commission.
(H) The accounting for the merger, including certain costs to achieve the
merger, shall be implemented consistent with the body of this order.
Applicants
shall inform the Commission of any change in the circumstances that would
reflect a departure from the facts the Commission has relied
upon.
(I) The Commission retains authority under section [*31] 203(b) of the
FPA
to issue supplemental orders as appropriate.
By the Commission.
Footnotes:
n1 16 U.S.C Section 824b (1994)
n2 Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996) FERC
Statutes
and Regulations P31,044 (1996),reconsideration denied, Order No. 592-A,
62 Fed. Reg. 33,341 (1997), 79 FERC P61,321 (1997) (Merger Policy Statement).
n3 15 U.S.C. 79a et seq.
n4 Consolidated Edison Co. of New York and Orange and Rockland Utilities.,
Inc., 86 FERC P61,064 (1999).
n5 ConEd and Orange and Rockland are public utilities under the FPA.
n6 ConEd has two wholly-owned subsidiaries that own real property in New
York
State. ConEd also owns a 28.8 percent interest in Honeoye Storage
Corporation,
which owns and operates a gas storage facility in western New York.
n7 Timely motions to intervene were filed by the Utility Workers Union of
America, AFL-CIO, Local 1-2; Chicopee Municipal Lighting Plant and South
Hadley
Electric Light Department; the New Hampshire Electric Cooperative, Inc.; Long
Island Power Authority and its subsidiary, LIPA; Connecticut Industrial
Energy
Customers; 1st Rochdale Cooperative Group, Ltd. and Coordinated Housing
Services, Inc.; Southern Energy Bowline, LLC, Southern Energy Lovett, LLC,
and Southern Energy NY-GEN, LLC. The Public Service Commission of the State
of New York (New York Commission) filed a notice of intervention. A late
motion
to intervene was filed on April 3, 2000, by NRG Power Marketing, Inc. The
above-listed motions and notice raised no substantive issues.
n8 18 C.F.R. Section 385.214 (1999).
n9 18 C.F.R. Section 385.213(2) (1999).
n10 Merger Policy Statement at 30,127.
n11 See supra note 1.
n12 Id.
n13 See supra note 2.
n14 These markets are NYPP, NEPOOL, NYPP east of the Total East Interface
(NYPP-East), NYPP west of the Total East Interface (NYPP-West), New York City
(NYC), and Long Island.
n15 Results for available economic capacity indicate that merger-induced
increases in concentration fall within the thresholds. To simulate retail
access penetration for this analysis, Applicants assume a native load offset
of twenty-five percent in NYPP and PJM, and ten percent in New England
(except
for Vermont which, they state, has no definitive restructuring plans in
place).
Applicants present no results for the PJM market. See Affidavit of William H.
Hieronymus, at 70.
n16 They exclude PJM because the gas delivery facilities they control serve
no generation in PJM and because they are minor participants in downstream
electricity markets.
n17 These affiliates are ConEd and Yankee Gas, which operates in Connecticut
n18 This conclusion is based on market concentration results relied on by
Applicants(i.e., produced by Dr. William Hieronymus in his "baseline"
analysis)
and certain results based on sensitivity analyses conducted by Dr.
Hieronymus.
These sensitivity analyses consider price ranges that differfrom prices in
the
"baseline" analysis by plus or minus five dollars per megawatt. We consider
these sensitivities because in a number of the "baseline" cases using
economic
capacity, the prices used are above the range of observed prices, while in
the
sensitivities they largely fall within the range of observed prices. In
contrast to the "baseline" results, these sensitivities show that merger-
induced concentration exceeds the thresholds in the NYPP-East market in the
winter off-peak period (i.e., an increase in concentration of 146 HHI in a
moderately concentrated post-merger market ). However, we do not view this
isolated case as symptomatic of a competitive problem.
n19 See Dominion Resources, Inc. et al., 89 FERC P61,162 (1999) and San
Diego
Gas & Electric Co. et al.,79 FERC P61,372 (1997). [*21]
n20 This is because, in this particular case, Applicants have a relatively
small amount of generation in the downstream Long Island market.
n21 New England Power Pool, 88 FERC P61,079 (1999), reh'g pending.
n22 United Illuminating cites New England Power Co., 88 FERC P61,292 at
61,889
(1999) (New England Power), where the Commission required two merging parties
to maintain the status quo with respect to the NEPOOL RNS and NU LNS
transmission rates during the transition period.
n23 Merger Policy Statement at 30,124.
n24 Specifically, Applicants commit that, with respect to transmission
rates,
they will not include merger-related costs in those rates without: (1)
specifically identifying them; (2) demonstrating that the costs included in
the
rates are exceeded by the savings produced by the merger; and (3) in the
event of a dispute, bearing the burden of proof that the merger savings
exceed
the merger costs charged to the customer. [*25]
n25 On the issue of the duration of the hold harmless commitment, we believe
that United Illuminating has not adequately demonstrated any inadequacy of
the
five year time frame. See, e.g.,Sierra Pacific Power Co., 87 FERC P61,077
(1999); Public Service Co. of Colorado, 78 FERC P61,267 (1997).
n26 United Illuminating's reliance on New England Power is misplaced. There,
two merger applicants, both of which were members of NEPOOL, proposed a
single-system LNS rate which would change the LNS transmission rate charged
to their customers. In the instant proceeding, no such change has been
proposed, and as explained above, any such change would have to be approved
by the Commission before it can be adopted.
n27 Merger Policy Statement at 30,124-25.
n28 Merger Policy Statement at 30,124-25.
n29 Entergy Services, Inc. and Gulf States Utilities Company, Opinion No.
385, 65 FERC P61,332 (1993).
n30 Entergy Services, Inc. and Gulf States Utilities Company, Opinion No.
385, 65 FERC P61,332 (1993).
EXHIBIT J
1. CEI NONUTILITY SUBSIDIARIES
A. Consolidated Edison Solutions ("CES") is a wholly-owned subsidiary of
CEI that provides wholesale and retail energy and related services. CES is
retainable as a company formed pursuant to Rule 58 (a "Rule 58 Company").
CES has two subsidiaries.
(i) CES has a 50 percent interest in Inventory Management &
Distribution Company, Inc. ("IMD"), an energy marketing firm organized in
Delaware and located in Houston, Texas. In April 2000, the shareholders of
IMD voted to dissolve the company, adopted a plan of dissolution and retained
a liquidating agent to effectuate the dissolution.
(ii) CES also has a 14.4 percent interest in Remote Source Lighting
International, Inc. ("RSLI"), a company, organized in Delaware, that designs
and manufactures fiber optic lighting systems, with its principal offices in
San Juan Capistrano, California . RSLI is retainable as a Rule 58 Company.
B. Consolidated Edison Development, Inc. ("CEDI") is a wholly-owned
subsidiary of CEI that is in the business of investing in foreign and
domestic energy and other infrastructure projects and the marketing of
CECONY's technical services. CEDI is retainable as a Rule 58 Company. CEDI
has ten direct subsidiaries:
(i) Con Edison Development Guatemala, Ltd.("CEDG"), organized under
the laws of the Cayman Islands, is in the business of investing in energy
projects in Central America. CEDG owns a 92.273% interest in Energy Finance
Partners of Central America, L.P, ("EFP") a Cayman Islands limited
partnership, which in turn owns a 47.56% interest in Generadora Electica del
Norte, S.R.L., which is a sociedad de responsabilidad limitada organized
under the laws of the Republic of Guatemala which owns a 40 MW electric
generating station in Guatemala and is a FUCO. CEDG and its holdings are
retainable under Rule 58 and Section 33 of the Act.
(ii) Consolidated Edison Leasing, Inc. ("CELI"), a Delaware
corporation, which has an investment in a leveraged lease transaction in a
power plant in the Netherlands. CELI leased an undivided interest in the
power plant, and subleased it back to its lessor. CELI is retainable pursuant
to Commission precedent (Ameren Corporation, HCAR No. 26809, December 30,
1997; Central and South West Corp. HCAR 23578, January 22, 1985).
(iii) Con Edison Leasing, LLC ("CEL"), a Delaware limited liability
company, which has an investment in a leveraged lease transaction in a gas
distribution system in the Netherlands. CEL leased an undivided interest in
the gas distribution system, and subleased it back to its lessor. CEL is
retainable under Commission precedent. (Id.).
(iv) CED Ada, Inc. ("CED"), a Delaware corporation, which owns an
approximate 96 percent interest in CED/DELTA Ada, LLC, a Delaware limited
liability company, which owns a 49.5 percent limited partnership interest and
a 0.5 percent general partnership interest in Ada Cogeneration Limited
Partnership, a Michigan limited partnership ("ACLP"). ACLP owns a 30
megawatt ("MW") gas-fired qualifying cogeneration facility under the Public
Utility Regulatory Policies Act of 1978 ("PURPA") in Ada, Michigan. CED and
its holdings are retainable as Rule 58 Companies.
(v) Carson Acquisition, Inc. ("CAI"), a Delaware corporation, which
formerly owned an interest in a 42 MW qualifying cogeneration facility under
PURPA in Carson, California. At present CAI is a "shell company" and is
inactive;
(vi) Approximately 95% of CED/SCS Newington, LLC ("CED/SCS"), a
Delaware limited liability company, which in turn owns 100% of Newington
Energy, LLC, a Delaware limited liability company, which is currently
developing a 525 MW electric generating facility in Newington, New Hampshire,
which will qualify as an exempt wholesale generator ("EWG"). CED/SCS is
retainable under Section 32 of the Act;
(vii) 100% of CED Generation Holding Company, LLC, a Delaware limited
liability company ("Holding"). Holding owns (i) 100% of CED Management
Company, Inc., a Delaware corporation ("Management"), and (ii) a 99% limited
partners interest in CED Operating Company, L.P., a Delaware limited
partnership ("Operating"). Management owns the other 1% of Operating, and
serves as its general partner. Operating provides operating and
administrative services to Lakewood Cogeneration, L.P., a Delaware limited
partnership ("Lakewood Cogen"), which owns a 236MW power plant located in
Lakewood New Jersey. Lakewood Cogen is an EWG. Holding also owns 100% of
HCE-Lakewood, Inc., a New York corporation ("HCE" ), which in turn owns 100%
of CMS Generation Lakewood Company, a Delaware corporation ("CGLC"). HCE and
CGLC each owns a 1% general partnership interest (i.e., 2% altogether) in
Lakewood Cogen. Holding owns a 78% limited partnership interest in Lakewood
Cogen. Holding and its subsidiaries, including Lakewood Cogen, are
retainable under Rule 58 and Section 32 of the Act. Holding also owns 100%
of Lakewood Expansion Management Company, Inc., a Delaware corporation
("Expansion"), which may be used in connection with a possible expansion of
the Lakewood generating plant. At this time, Expansion is a shell company
and is inactive;
(viii) Consolidated Edison Energy Massachusetts, Inc. ("CEEMI"), which
was established for the purpose of owning and operating 290 MW of generation
facilities acquired from WMECO. CEEMI is retainable as an EWG under Section
32 of the Act;
(ix) CED-GTM 1, LLC ("CED/GTM"), a Delaware limited liability company,
which in turn owns an approximate one-half interest in GTM Energy LLC ("GTM
Energy"), a Delaware limited liability company, which was formed to pursue
an opportunity to develop an electric generating facility in New York City,
which if developed, would have qualified as an EWG. It has recently been
decided to discontinue the pursuit of the opportunity. CED/GTM and GTM
Energy are retainable under Rule 58 and Section 32 of the Act; and
(x) CEDST, LLC, a Delaware limited liability company, which owns 100%
of CED 42, LLC, a Delaware limited liability company. These entities have
been formed to invest in a low-income housing transaction, which will
generate tax credits under Section 42 of the Internal a Revenue Code of 1986,
as amended. These companies are retainable under Commission precedent.
(Alliant Energy Corporation, HCAR No. 27060 (August 13, 1999).
CEDI also owns all of the issued and outstanding shares of Con Edison
Development Acquisition and Finance, Ltd. ("CEDAF"), and Con Edison El
Salvador One, Ltd ("CEES"), each a corporation organized under the laws of
the Cayman Islands. At present, both CEDAF and CEES have no assets or
operations and are inactive. CEDAF was organized in connection with a
potential investment in Guatemala, which was never made. CEES was organized
in connection with a potential investment in El Salvador, which was never
made.
C. Consolidated Edison Energy, Inc. ("CEEI") is a wholly-owned subsidiary
of CEI invests in, operates and markets the output of electric energy supply
facilities in the United States and provides specialized wholesale energy
services in the electric power and natural gas markets. CEEI is retainable
as a Rule 58 Company.
D. Consolidated Edison Communications, Inc. ("CECI") is a wholly-owned
subsidiary of CEI, organized to own, operate or invest in facilities used for
telecommunications or otherwise to compete in the telecommunications
industry. CECI will qualify as and be retainable as an exempt
telecommunications facility.
II. NONUTILITY SUBSIDIARIES OF CECONY
A. Davids Island Development Corporation ("Davids Island") is a wholly-
owned subsidiary of CECONY and owns real property acquired as a possible site
for an electric generating plant in Dutchess and Columbia Counties in New
York State and is in the process of disposing of the property. The
Commission has permitted a number of registered holding companies to
establish and/or retain real estate subsidiaries. (See New Century Energies,
Inc., HCAR No. 27116 (Dec. 22, 1999), UNITIL Corporation, HCAR No. 25524
(April 24, 1992)).
B. D.C.K. Management Corporation ("DCK") is a wholly-owned subsidiary of
CECONY and owns real property in New York City. DCK is retainable pursuant
to Commission precedent. (See New Century Energies, Inc., HCAR No. 27116
(Dec. 22, 1999), UNITIL Corporation, HCAR No. 25524 (April 24, 1992)).
C. Steam House Leasing LLC ("SHL"), a Delaware Limited Liability Company,
a wholly owned subsidiary of CECONY that leases a steam generating plant that
produces steam for CECONY's steam distribution business. SHL is retainable
under Rule 58.
D. CECONY 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. This business is retainable as a Rule 58
activity.
III. NONUTILITY SUBSIDIARIES OF O&R
A. Clove Development Corporation ("Clove") is a wholly-owned subsidiary
of O&R, a New York corporation which owns real estate, located primarily in
the Mongaup Valley region of Sullivan County, New York. Clove is retainable
pursuant to Commission Precedent (See New Century Energies, Inc., HCAR No.
27116 (Dec. 22, 1999), UNITIL Corporation, HCAR No. 25524 (April 24, 1992)).
B. O&R Development, Inc. ("ORDI")is a wholly-owned subsidiary of O&R
which was formed to promote industrial and corporate development in O&R's
service territory by providing improved sites and buildings and owns real
estate which is being marketed for sale. ORDI is retainable pursuant to
Commission Precedent (See New Century Energies, Inc., HCAR No. 27116 (Dec.
22, 1999), UNITIL Corporation, HCAR No. 25524 (April 24, 1992)).
C. O&R Energy Development, Inc. is an inactive wholly-owned subsidiary of
O&R.
IV. NON-UTILITY SUBSIDIARIES OF RECO
A. Saddle River Holdings Corp. ("SRH") is a wholly-owned nonutility
holding company subsidiary of RECO and has one wholly-owned non-utility
subsidiary, NORSTAR Holdings, Inc. ("NHI"). NHI is a holding company
retainable under Rule 58 and has two wholly-owned non-utility subsidiaries:
(a) NORSTAR Management, Inc. ("NMI"), 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 is the majority owner of NORSTAR Energy Pipeline Company, LLC, a
Delaware limited liability company, which is inactive. NMI and its holdings
are retainable as Rule 58 Companies.
(b) Millbrook Holdings, Inc. ("Millbrook"). Millbrook holds a
leasehold interest in non-utility real estate in Morris County, New Jersey.
Millbrook is retainable pursuant to Commission Precedent (See New Century
Energies, Inc., HCAR No. 27116 (Dec. 22, 1999), UNITIL Corporation, HCAR No.
25524 (April 24, 1992)).
B. Enserve Holdings, Inc. ("Enserve") is a wholly-owned nonutility
holding company subsidiary of RECO and has two wholly-owned, non-utility
subsidiaries:
(a) Palisades Energy Services, Inc., an inactive corporation
(b) Compass Resources, Inc., an inactive corporation
EXHIBIT L
[Consolidated Edison Logo]
August 10, 2000
Office of Public Utility Regulation
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Attention: Mr. David E. Marsh
Financial Analyst
Commission File No. 70-09613
Consolidated Edison, Inc.
Ladies and Gentlemen:
This letter is in response to your request that Consolidated Edison, Inc.
("Con Edison") explain the basis upon which Con Edison has determined not to
record ("push down") the purchase accounting adjustments which will result
from its proposed acquisition of Northeast Utilities ("Northeast") in the
financial statements of Northeast and its subsidiaries.
Con Edison's acquisition of Northeast will be accounted for in accordance
with APB No. 16 "Business Combinations" utilizing the purchase method of
accounting. APB 16 does not specifically address "push down" accounting.
"Push down" accounting is addressed in SEC Staff Accounting Bulletin No. 54,
Topic 5J. Staff Accounting Bulletin No. 54, Topic 5 J is the basis for Con
Edison's decision to not push down the purchase accounting adjustments. In
particular, Con Edison relied on question 2 of Topic 5J and its related
interpretive response which states:
Question 2: What is the staff's position if Company A acquired less
than substantially all of the common stock of Company B or Company
B had publicly held debt or preferred stock at the time Company B
became wholly owned?
Interpretive Response: The staff recognized that the existence of
outstanding public debt, preferred stock or a significant minority
interest in a subsidiary might impact the parent's ability to
control the form of ownership. Although encouraging its use, the
staff generally does not insist on the application of push down
accounting in these circumstances.
You also requested that we advise you whether Northeast and its subsidiaries
will have material amounts of public debt and preferred outstanding at the
time the acquisition is completed.
Northeast has advised us that Northeast and its subsidiaries, on a
consolidated basis, have approximately $3.95 billion of debt and preferred
stock outstanding at June 30, 2000. Northeast estimates that approximately
56% of that debt and preferred stock is subject to an ongoing public
reporting requirement under the Securities Exchange Act of 1934.
Finally, you asked us to provide you with information about whether Northeast
and its subsidiaries will continue to have material amounts of public debt
and preferred stock outstanding following completion of the acquisition.
State regulatory approval is generally required for the issuance of debt or
preferred stock by the utility subsidiaries of Northeast. Commission approval
under the 1935 Act will be required for issuance of debt or preferred stock
by Con Edison or Northeast and, in those instances where state regulatory
approval is not required, for issuance of debt or preferred stock by their
utility subsidiaries. Con Edison and Northeast have submitted an application
to the Commission with respect to their ongoing financing activities
subsequent to the proposed merger (Commission File No. 070-09711).
Northeast has advised us that the indentures pursuant to which public debt of
its subsidiaries has been issued include restrictions on additional bonded
indebtedness and other restrictive covenants common to such agreements. Any
significant modification of the terms of the indentures would require
securityholder approval. Generally, the securityholders have superior claims
to Northeast with respect to the rights to receive assets upon liquidation or
reorganization of the subsidiaries.
Con Edison has no intent to cause Northeast or its subsidiaries to redeem
their public debt or preferred stock following the merger. Northeast has
advised Con Edison that it has no intent to redeem its or its subsidiaries'
public debt or preferred stock other than at maturity, through economic
refundings or in connection with the ongoing utility industry restructuring.
Northeast's subsidiaries as part of the restructuring, among other things,
are expected to redeem public debt and preferred stock with the proceeds of
new public debt secured by payments from customers relating to certain
regulatory assets or from the proceeds of asset sales.
In no event is it expected that Northeast and its subsidiaries, on a
consolidated basis, will at any time have less than a material amount of
public debt or preferred stock outstanding relative to total debt and
preferred stock outstanding.
Very truly yours,
/s/Joan S. Freilich
Executive Vice President &
Chief Financial Officer
[PRICEWATERHOUSE COOPERS LOGO]
Mr. Hyman Schoenblum
Vice President and Controller
Consolidated Edison, Inc.
4 Irving Place
New York, NY 10003
August 10, 2000
Dear Mr. Schoenblum
We have been engaged to comment on the appropriate reporting for the excess
of purchase price over net book value of net assets acquired in the separate
financial statements of Northeast and certain of its subsidiaries with
respect to the proposed Consolidated Edison, Inc. ("Con Edison") acquisition
(the "proposed acquisition") of Northeast Utilities, Inc. and its
subsidiaries (collectively referred to as "Northeast"), as more fully
described below. This letter is being issued to Con Edison for assistance in
evaluating such reporting.
Description of the Acquisition
We have read the Registration Statement on Form S-4 of Consolidated Edison,
Inc. dated February 29, 2000 (the "S-4") which describes the proposed
acquisition of Northeast by Con Edison. We concur with Con Edison's
representation to us that nothing in the Form S-4 indicates that Con Edison
has any intention of retiring the Northeast public debt and/or preferred
stock that will be subject to ongoing reporting requirements under the
Securities and Exchange Act of 1934 as an integrated planned series of
transactions to be undertaken in connection with the proposed acquisition of
Northeast. In addition, we have discussed the proposed acquisition of
Northeast by Con Edison with the following officials of Con Edison:
Hyman Schoenblum, Vice President and Controller
Joseph Miller, Department Manager of Accounting Research and
Procedures
Peter Barrett, Associate Counsel
Con Edison is proceeding to acquire Northeast in a business combination to be
accounted for as a purchase business combination in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations ("APB 16").
Based on the purchase price Con Edison has represented that it will incur for
the proposed Northeast acquisition, this transaction will result in a new
basis of accounting for the purchased Northeast assets and liabilities. Con
Edison has determined not to record ("push down") the purchase accounting
adjustments that will result from the acquisition in the separate financial
statements of Northeast and the separate financial statements of its
subsidiaries. Con Edison expects that the proposed acquisition of Northeast
will be completed in the fourth quarter of 2000.
As part of the acquisition, Con Edison has made a preliminary determination
of the amount of Northeast's debt and preferred stock that will remain
outstanding after its acquisition of Northeast and that will be subject to
ongoing public reporting requirements under the Securities Exchange Act of
1934 (the "public debt and/or preferred stock"). Such determination is based
on representations from Con Edison that the public debt and/or preferred
stock will be repaid based on scheduled maturity dates. For each Northeast
entity that will have continuing SEC reporting requirements as a result of
having public debt and/or preferred stock outstanding, this determination is
necessary to establish that the public debt and/or preferred stock to remain
outstanding on the date of the acquisition is quantitatively significant, as
discussed below.
Con Edison has specifically identified and represented to us that the public
debt and/or preferred stock of each of the Northeast entities that will have
SEC reporting requirements is as follows:
Northeast Utilities, Inc. ("Northeast Consolidated")
Connecticut Light and Power Company ("CL&P")
Public Service of New Hampshire ("PSNH")
Western Massachusetts Electric Company ("WMECO")
North Atlantic Energy Corporation ("NAEC")
Attachment A contains a table with public debt and/or preferred stock
information for Northeast and its subsidiaries, including each of the
Northeast entities subject to ongoing SEC reporting requirements. In order to
illustrate the level of quantitative significance of such public debt and/or
preferred stock of each such SEC reporting entity, the following comparisons
have been made:
Percentage of publicly held long-term debt to total debt, and
Percentage of publicly held long-term debt to total capitalization and
liabilities.
Appropriate Accounting References
Con Edison has asked that we comment on their conclusion not to push down the
purchase accounting adjustments resulting from their proposed acquisition of
Northeast.
APB 16 does not specifically address push down accounting. Push down
accounting is addressed in SEC Staff Accounting Bulleting No. 54, Topic 5-J
and an additional relevant SEC position is contained in a December 9, 1999
speech give by Eric W. Casey, Professional Accounting Fellow, Office of the
Chief Accountant of the SEC (the "December 1999 Speech").
Staff Accounting Bulletin No. 54, Topic 5-J is the principal basis for a
decision as to the appropriateness of not applying push down accounting to
the purchase adjustments arising in an acquisition accounted for by the
purchase accounting method described in APB 16. Question 2 of Staff
Accounting Bulletin No. 54, Topic 5-J and its related interpretive response
states:
Question 2: What is the staff's position if Company A acquired less
than substantially all of the common stock of Company B or Company
B had publicly held debt or preferred stock at the time Company B
became wholly owned?
Interpretive Response: The staff recognizes that the existence of
outstanding public debt, preferred stock or a significant minority
interest in a subsidiary might impact the parent's ability to
control the form of ownership. Although encouraging its use, the
staff generally does not insist on the application of push down
accounting in these circumstances.
For each Northeast entity that will be subject to SEC reporting requirements
due to its public debt and/or preferred stock outstanding, in order to not
push down the excess of proposed purchase price over net book value of net
assets acquired, the amount of Northeast and its subsidiaries' public debt
and/or preferred stock estimated to be outstanding on the date of the
proposed Northeast acquisition must be quantitatively significant. The
December 1999 Speech provides guidance with regard to the SEC staff's views
as to quantitatively significant amounts upon completion of purchase
accounting transactions.
Con Edison has also represented to us that pursuant to the terms of the
public debt and/or preferred stock indentures, the public debt and/or
preferred stock may be repaid in one of two ways, as follows:
(1) On the scheduled maturity date(s), or
(2) Prepaid prior to scheduled maturity, which may include prepayment
penalties.
However, Con Edison has represented to us that there is no present intention
to retire such public debt and/or preferred stock prior to maturity as a part
of an integrated, planned series of transactions to be undertaken in
connection with the proposed acquisition of Northeast.
Based on the facts, circumstances and representations noted in this letter,
we concur with the conclusion of Con Edison management that it is appropriate
to not push down the purchase accounting adjustments to the separate
financial statements of each Northeast entity subject to SEC reporting
requirements. Such concurrence is due to the quantitative significance of
each such entity's public debt and/or preferred stock outstanding on the date
the proposed acquisition of Northeast by Con Edison is estimated to be
completed and the representation by Con Edison management that it has no
intention of retiring such public debt and/or preferred stock as part of an
integrated, planned series of transactions to be undertaken in connection
with the proposed acquisition of Northeast. Such conclusion of Con Edison
management is based on the following SEC guidance:
Staff Accounting Bulletin 54, Topic 5-J, and
The December 9, 1999 speech give by Eric W. Casey, Professional
Accounting Fellow, Office of the Chief Accountant of the SEC.
Concluding Comments
The ultimate responsibility for the decision on the appropriate reporting for
the excess of purchase price over the net book value in the separate
financial statements of Northeast and certain of its subsidiaries with
respect to the proposed Northeast acquisition rests with Con Edison as the
preparer of its financial statements. The appropriate reporting must be
determined based on the specific facts and circumstances in place on the
consummation date of the Northeast acquisition. Our judgement on the
appropriate reporting for the excess of purchase price over the net book
value with respect to the acquisition of Northeast as described above, is
based solely on the facts, circumstances and representations provided to us
as described above; should these facts, representations and
circumstances differ, our conclusion may change. This letter is not intended
to, and does not, address the business and other risks related to the
proposed acquisition of Northeast. Further, we assume no responsibility to
update this letter for events and circumstances occurring after the date of
this letter.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
Attachment A
Northeast Utilities and its Subsidiaries
Push Down Accounting Issue - Determination of Quantitatively Significant
Balances at June 30, 2000
$000s
Line Northeast
# Description Consolidated CL&P PSNH WMECO NAEC
1 Preferred Stock - not $136,200 $116,200 $ - $20,000 $ -
subject to redemption
2 Preferred Stock - 15,000 - - 15,00 -
subject to redemption
3 Long-term Debt 2,211,019 1,066,669 516,485 198,004 65,000
4 Current portion 479,834 160,000 25,000 1,500 270,000
5 Short-term Debt 1,104,000 90,000 - 118,000 -
6 Total debt and 3,946,053 1,432,869 541,485 352,504 335,000
preferred stock
Less non-public debt and preferred stock:
7 Short-term debt 1,104,000 90,000 - 118,000 -
(line 5)
8 Spent Nuclear Fuel 232,969 188,705 44,264 - -
Disposal Costs
9 ESOP debt (A) 152,000 - - - -
10 Yankee Gas/Norconn 158,139 - - - -
debt (A)
11 Holyoke PCBs (A) 38,300 - - - -
12 Rocky River Realty 13,279 - - - -
Mortgage Note (A)
13 HEC - Tobyhanna 26,477 - - - -
Project (A)
Sub-total 1,725,164 278,705 44,264 118,000 -
14 Publicly held debt $2,220,889 $1,154,164 $497,221 $234,504 $335,000
and preferred stock
15 Total capitalization $10,762,243 $4,764,533 $2,588,003 $1,082,077 $751,613
and liabilities
16 Percentage of publicly
held debt and preferred
stock (line 14) to total
debt and preferred stock
(line 6) 56% 81% 92% 67% 100%
17 Percentage of publicly
held debt and preferred
stock (line 14) to total
capitalization and
liabilities (line 15) 21% 24% 19% 22% 45%
(A) The Northeast Consolidated column includes $388,195 of debt that will
not have an ongoing public reporting requirement and has been excluded from
the disaggregated totals.