SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: November 3, 2000
Commission Exact name of registrant as specified in its charter State of I.R.S. Employer
File Number and principal office address and telephone number Incorporation I.D. Number
1-14514 Consolidated Edison, Inc. New York 13-3965100
4 Irving Place, New York, New York 10003
(212) 460-4600
1-1217 Consolidated Edison Company
of New York, Inc. New York 13-5009340
4 Irving Place, New York, New York 10003
(212) 460-4600
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INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99. Joint Petition of Consolidated Edison, Inc. and Northeast Utilities to the
Connecticut Department of Public Utility Control (DPUC), dated November 3,
2000, for Reconsideration of the DPUC's Decision, dated October 19, 2000,
with respect to the Joint Application of Consolidated Edison, Inc. and
Northeast Utilities for Approval of a Change of Control.
ITEM 9. REGULATION FD DISCLOSURE
The material attached hereto as Exhibit 99, which is incorporated in this Item 9
by reference thereto, is furnished pursuant to Regulation FD.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONSOLIDATED EDISON, INC.
CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC.
By: HYMAN SCHOENBLUM
Hyman Schoenblum
Vice President and Controller
DATE: November 3, 2000
STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
JOINT APPLICATION OF :
CONSOLIDATED EDISON, INC. : DOCKET NO. 00-01-11
AND NORTHEAST UTILITIES :
FOR APPROVAL OF A : November 3, 2000
CHANGE OF CONTROL :
PETITION FOR RECONSIDERATION
I. INTRODUCTION
Pursuant to Conn. Gen. Stat.ss.ss.4-181a and 16-9, CEI 1 and NU hereby
petition the Department to reconsider its final decision ("Decision") in the
above-captioned proceeding on the grounds that an error of fact or law should be
corrected, relevant new information is now available and other good cause for
reconsideration exists.
The Applicants recognize that the Decision improves upon the draft
decision in several important areas. The Applicants appreciate those changes and
acknowledge the difficult challenge confronting the Department to equitably
balance the interests of customers, shareholders and other concerned parties.
The Applicants are, therefore, prepared to accept the great majority of the
conditions set forth in the Decision. However, as described below, the Decision
imposes certain conditions that, left unchanged, jeopardize the Applicant's
ability to
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1 Capitalized terms used in this petition that are not defined herein
have the same meanings as assigned in the Applicants' briefs filed in this
proceeding.
deliver the significant benefits that would be created by the proposed
merger. In some instances, those conditions appear to be based on an
inaccurate understanding of an underlying fact. In other instances, new
information available after the record closed may affect the Department's view.
Section II of this petition identifies the specific conditions for which the
Applicants seek modification.
The Applicants have committed to substantial customer benefits that
exceed those volunteered by the merging companies in previous Connecticut
dockets. The Applicants do not seek a windfall, but rather request a reasonable
opportunity to share in the merger benefits so that the proper incentive will be
created to proactively pursue and achieve cost savings for CL&P, Yankee Gas and
their customers.
As the Department is undoubtedly aware, substantial uncertainty remains
as to whether the merger will proceed based on the conditions currently imposed
by the Decision. The Applicants ask that the Department not lose sight of the
benefits of the merger that include, but also transcend, mere cost reductions.
Without question, CEI is financially stronger than NU, which should prove to be
a critical advantage as the electric utility industry continues to evolve. CEI's
higher earnings, stronger bond ratings, robust equity ratio and significantly
higher capitalization will also help to support the infrastructure investments
needed by the Connecticut utilities in order to meet the ever increasing demand
for reliable service. In addition, the Connecticut utilities will share the
expertise, experience and best practices of CECONY in both electric and gas
operations. Thus, good cause exists for the Department to modify the Decision in
the areas identified in this petition so that the merger can go forward. The
Applicants are fully prepared and committed to support any additional
proceedings that the Department determines to be necessary in reconsidering its
Decision.
2
The Decision requires the Applicants to acknowledge and agree to comply
with the conditions within 30 days of the date of their final decision to
consummate the merger.2 In light of this certification requirement, the
Applicants also ask that the Department either clarify or confirm the
Applicants' understanding of the conditions set forth in Section III of this
petition.
II. CONDITIONS REQUIRING MODIFICATION
A. The Decision Should Be Corrected So That Any Yankee Gas Rate
Cut Will Reflect Only Yankee Gas' Share Of Synergies From
The NU/Yankee Merger
The Decision states that "immediate reductions to Yankee rates are
required to reflect reductions in its [i.e., Yankee Gas'] operating costs due to
the NU/Yankee merger in the amounts reported as estimated synergies in
post-merger filings in that docket." Decision at 3 (emphasis added). The
Decision later states that:
A reduction in Yankee's rates is necessary to provide sufficient assurance
of benefit. Accordingly, the Department will require that Yankee's rates be
reduced to reflect reductions in its [i.e., Yankee Gas'] operating costs
due to the NU/Yankee merger, as a condition of approving the proposed
NU/CEI Merger. The amount of the rate reduction shall be the level of the
annual synergy savings for 2001, which is approximately $13 million. Tr.
7/27/00, p. 4005; Docket No. 99-08-02, Order No. 11 Compliance, April 3,
2000 (Protected).
Decision at 73 (emphasis added).
The Applicants respectfully submit that this element of the Decision
should be modified. Most importantly, while the Decision's apparent intent is to
credit Yankee Gas customers the amount of the savings that Yankee Gas will
obtain as a result of the NU/Yankee merger, the
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2 The Applicants interpret the condition to mean that they need not
give the certification until 30 days after they have made their final decision
to consummate the merger, which will of course only occur after all other state
and federal regulatory approvals are received and the Applicants have had an
opportunity to review any conditions imposed by the other approvals. If the
Applicant's interpretation is not correct and Department's intent is to require
the Applicants to accept the conditions irrespective of merger consummation, the
Applicants request the Department to make it clear that the 30 days begins to
run after it takes final action on this petition for reconsideration.
3
amount actually identified in the Decision as Yankee Gas' savings is
incorrect. The $13 million identified in the Decision, comprises the total
amount of projected savings from the NU/Yankee merger among all of NU's
subsidiaries (i.e., CL&P, Yankee Gas, WMECO, PSNH, etc.), not Yankee Gas'
alone.3 Yankee Gas' share of the savings, which must be determined in compliance
with GAAP and SEC accounting rules, is now projected to be approximately $6
million in 2001.4 Accordingly, this condition is based on an error of fact and
should be corrected.
Furthermore, the requirement that all benefits allocable to Yankee Gas
from the NU/Yankee merger be reflected as a reduction in rates runs counter to
the Department's principle that there be an incentive on the part of utility
companies to merge, as discussed in the next section of this petition.5 For
these reasons, the Applicants request that the Department permit Yankee Gas to
comply with this condition by filing a plan for a rate decrease based on an
approximately equal sharing between customers and the company of Yankee Gas'
projected share of the NU/Yankee merger synergies in 2001.6
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3 NU's compliance filing in Docket No. 99-08-02 was made pursuant to
the Department's order requiring that the company "file an update of the
projected merger savings identifying the source of all regulated and unregulated
savings [emphasis supplied]." Accordingly, the compliance filing included the
total expected synergy savings to all of NU's subsidiaries.
4 To the extent that the Department has any concerns as to the proper
allocation of the savings among NU's subsidiaries, it will have the opportunity
to review the allocation and sharing of the NU/YES merger synergies as part of
the pre-merger filing contemplated in the Decision.
5 In accordance with the conditions imposed by the Department, Yankee
Gas will file a rate case in 2001 that, among other things, will include a
proposal to share the future synergy savings from both the NU/Yankee Gas and the
NU/CEI mergers that are attributable to Yankee Gas.
6 In addition to operating cost savings, the CEI/NU merger will
immediately bring gas cost savings to Yankee Gas customers. In fact, the record
evidence clearly established that the largest potential benefit to Yankee Gas
customers from the CEI/NU merger is an estimated three percent reduction in
their commodity costs (net of market price changes for gas affecting all
purchasers), 100 percent of which will be immediately passed on to customers
through Yankee Gas' PGA. Tr. 3726-27; LF-62. Mr. Adger of the Department's
Staff expressly agreed with that conclusion. Tr. 3380.
4
B. The Decision Should Be Modified To Provide Reasonable Incentives
To Consummate The Merger
1. The Department Should Modify the Financial Conditions to Create an Equitable
Sharing of Merger Savings
The financial conditions in the Decision related to CL&P do not yet
reflect an appropriate balancing of the interests of customers and shareholders.
The Department "does recognize that there should be some incentives for utility
companies to pursue mergers that benefit ratepayers and the citizens of
Connecticut." Decision at 68. The Decision also articulates the appropriate
standard for evaluating the merger -- "ensure benefits to ratepayers while
creating the right incentive to merge." Id. However, in establishing the
specific financial conditions, the Decision has not satisfied the standard, and
thus has failed to provide the necessary shareholder incentives to fulfill the
Department's policy objective.
The Applicants appreciate that the Department has responded to one of
their major concerns by providing that the sharing mechanism for CL&P may go
beyond 2003 if it proves effective. Unfortunately, not only are there no
guidelines or parameters established for such future sharing, but the Decision
states that, whatever the merits of continued sharing may be, there will be no
sharing whatsoever once new rates are established, which could be as early as
January 1, 2004. Decision at 72. Further, the Department reserves the
discretionary right to terminate the synergy sharing in 2004 even if new rates
are not established.
The Applicants request that the Decision be modified to clarify that it
is the Department's intent that under appropriate circumstances sharing will be
permitted beyond 2003 and to set forth standards to be applied in determining
the circumstances under which such sharing may occur. This request is important
to the Applicants because the first three years are a time when the net merger
savings are minimal, as is the case with many mergers. In the initial three
years
5
following this proposed merger, net synergy savings allocable to
Connecticut are expected to total about $20 million, a small fraction of the
total 10-year savings of about $360 million.7 It is the prospect of a continued
sharing of benefits that would create an appropriate incentive for the
Applicants to move forward. For example, a sharing approach that allows
Applicants up to one-half the synergy savings during the several years following
2003, based on savings that are demonstrated by Applicants to have been actually
achieved, would provide the Applicants with valuable insight about the
Department's intent to implement its expressed policy of providing merger
incentives.
The Decision establishes for CL&P an immediate three percent reduction
in distribution rates, a reduction in stranded costs of $60 million and a 50/50
sharing of earnings in excess of an 11.3 percent return on equity ("ROE").
Decision at 78-79. The Applicants trust that the Department intended to
implement its policy pronouncement of "creating the right incentive to merge"
when it imposed these conditions and that the Department believed that, with
these conditions, a reasonable opportunity remains for the Applicants to share
in merger benefits. However, the actual effect of these conditions is to
allocate virtually all of the merger savings to customers, thereby thwarting the
Department's stated objective.8
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7 Specifically, the synergy study shows that the net savings
attributable to CL&P total $21.5 million for the first three years after the
merger is consummated. LF-9 at 3. Yet, the Decision has given customers a three
percent rate reduction, or about $51 million over three years (21/2 times the
cumulative three year synergy savings), plus a $60 million stranded cost
write-off (3 times the cumulative three year synergy savings).
8 The Decision also refers to a "new regulatory compact that in
exchange for recovery of those uneconomic assets, the utility has a
responsibility to mitigate those stranded costs." Decision at 77. CL&P has done
exceptionally well in mitigating its stranded costs associated with its
generation assets and power purchase agreements. The Decision appears to ignore
those accomplishments and concludes that customers have the "right to realize
value" from the $1 price enhancement paid to NU shareholders for meeting the
Millstone divestiture condition contained in the merger agreement. In essence,
the Decision provides that CEI's shareholders should pay twice for the
divestiture condition -- $131 million to the NU shareholders and $60 million to
CL&P's customers in the form of a write-off of stranded costs. Apparently, had
CEI not agreed to pay the price enhancement, under the Decision's reasoning
there would be no basis for such a write-off. The write-off is unwarranted
because there is simply no relationship between the $131 million payment and the
level of CL&P's stranded costs.
6
It is important that the Department have an accurate understanding of
the settlement reached by CEI in New York. The dissenting opinion seems to imply
that this new development shows that Connecticut customers are being
shortchanged by the merger. Dissent at 8. That could not be further from the
truth. The New York settlement reflects the same merger synergy study submitted
in this proceeding, as does the New Hampshire settlement. The New York agreement
also proposes a more modest annual rate reduction of $18.5 million related to
the merger, reflecting 50 percent of the 10-year stream of merger savings
discounted to the year 2001. That same calculation for CL&P would provide an
annual rate decrease of $9.8 million. Further, the New York agreement extends
over four years and provides CEI with an opportunity to share savings for a
ten-year period. Moreover, the agreement provides for no stranded cost
write-offs related to the merger, nor has CECONY otherwise written off any
stranded costs. For the 12 months ending March 31, 2001, there is no sharing of
earnings with customers. In 2002, the 50/50 earnings sharing begins at an ROE
level of 12.90 percent and continues at 11.75 percent thereafter.9 Finally,
CECONY's share of synergy savings is excluded from the earnings sharing
calculations, so that whatever the company's overall earnings, it is assured of
retaining 50 percent of the stipulated merger savings, provided of course that
it is able to achieve those savings. This provision provides a powerful
incentive for CECONY to strive to realize at least that level of savings for
both itself and its customers.
Instead of proving that Connecticut is being shortchanged, the New York
settlement demonstrates that the conditions set forth in the Decision go well
beyond providing for an
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9 The New York plan also permits increasing the ROE sharing trigger
based on performance criteria on customer service and reliability to offset the
initial write-off.
7
equitable sharing of the merger benefits. The Applicants suggest that a
structure similar to the New York agreement (i.e., a rate reduction equal to the
present value of the 10-year stream of projected merger savings, no stranded
cost write-off, an appropriate earnings cap with 50/50 sharing and an
opportunity to share savings beyond the initial rate period) would be a very
suitable framework for providing an appropriate balancing of interests for
customers in Connecticut.
The Applicants respectfully ask that the Department carefully consider
these facts in order that it may fulfill its policy objective of creating
incentives for beneficial utility mergers. The Applicants request that the
Department modify the components of the financial conditions to provide for a
more equitable sharing of merger savings during the first three years. Further,
the Applicants request that the Department provide a clearer pronouncement that
shareholders may be permitted to continue to share in merger synergies after
2003, by articulating a framework and parameters for such future sharing.
2. The Department Should Modify the Dividend Restrictions to Permit
the Applicants Greater Financial Flexibility
While the electric utility industry is undergoing fundamental change,
utility investors in companies whose focus remains on regulated transmission and
distribution operations continue to regard a consistent dividend policy as a
major factor in their investment decisions. In an effort to balance this
investor consideration with the need to ensure that CL&P and Yankee Gas continue
to have the financial resources required to provide safe and reliable service,
the Applicants committed that CL&P and Yankee would not dividend to their parent
company more than 100 percent of income available for dividends calculated on a
two-year rolling average basis beginning in year 2000. That commitment, which
mirrors the commitment that the parties have
8
agreed to in New York, reasonably balances CEI's need for flexibility in
managing the combined company and maintaining the consistent dividend
policy that is so important to its investors, with adequate protection of
Connecticut's interests in maintaining the financial integrity of CEI's
operating utility subsidiaries.10
The Decision unnecessarily "strengthens" this commitment by restricting
the payout to 100 percent of net income available for dividends to NU in any one
year "in light of CEI's increased cash flow requirements to finance the IP2
nuclear outage." Decision at 40. The Applicants believe the Department's
apprehension regarding a cash flow drain from Connecticut to CEI to cover costs
at IP2, on which it apparently based its dividend condition, is misplaced.
Whatever the costs of the IP2 outage are, those costs are expected to affect the
year 2000 only. Therefore, looking ahead, the cloud that the Department sees
hovering over IP2 may well be cleared before the proposed merger is consummated.
Moreover, any concern related to IP2 will be totally eliminated within the next
year by the anticipated divestiture of IP2 by CEI. Thus, at a minimum, the
dividend limitation should expire upon the announced sale of IP2.
Significantly, the Applicants also believe that the strict dividend
condition is not in the interests of CL&P and Yankee Gas. Both of these
utilities have a strong interest in CEI maintaining its financial strength and,
in particular, its ability to attract investment at a reasonable cost. It would
be impossible to totally insulate the subsidiaries from CEI, both from
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10 It should be noted that the Applicants' proposal also restricts
dividends to the parent company to 100 percent of the subsidiaries' net income;
the two-year averaging simply provides more flexibility to the combined company.
The need for this flexibility is heightened by the fact that the Decision also
rejects Applicants' request to exclude from the calculation of income certain
one-time events, which would include the $60 million write-off of CL&P's
stranded costs. This makes it more likely that the events of a single year could
potentially jeopardize the ability of CEI to maintain a consistent dividend
policy. This write-off of stranded costs will by itself restrict the income
available for dividends and should be removed from the dividend calculation.
9
the very favorable association that comes from being part of a financially
strong company like CEI, and from a negative association if CEI were to
encounter financial challenges. A steady and predictable dividend stream is
important to investors in the utility industry and to the ability to attract
capital at reasonable rates. Accordingly, it is important for the operating
companies that the parent remain financially strong and attractive to investors
so that strength will flow over to the cost of capital for the operating utility
affiliates.
The dividend restrictions are also a significant and unprecedented
departure from the Department's recent merger approval decisions, in which no
such conditions were imposed. Further, New York, New Jersey, and Pennsylvania
have accepted the two-year rolling average dividend limitation with respect to
CECONY and O&R dividends to the parent CEI.11
The Department's confidence that it will be able to protect the
interests of Connecticut customers going forward should be bolstered by the fact
that another condition provides that: "CL&P and Yankee will report annually to
the DPUC that it has retained, or otherwise has access to, sufficient capital to
maintain its plant, property and system in order to continue the provision of
safe and reliable service." Decision at 41. That condition establishes the
necessary Department oversight. If the required annual report is not
satisfactory or if available capital is not sufficient to satisfy the
Department, the Department retains the requisite powers under existing
Connecticut law to address its concerns.
3. The Department Should Modify the Equity Ratio Conditions to Reflect
More Current Conditions
The Decision requires that both CL&P and Yankee Gas maintain, at a
minimum, their current common equity ratios on a ratemaking basis as indicated
in Tables 11 and 12, which
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11 There are also no dividend restrictions in the New Hampshire settlement.
10
reflect the ratios as of December 31, 1999. Decision at 31-37. While the
Applicants have no objection to, and in fact support, conservative equity
ratios for both CL&P and Yankee Gas in the 38-43 percent range, it would be
difficult for the Applicants to commit to attain such a ratio for CL&P in the
near term.
Unfortunately, CL&P's actual equity ratio of approximately 34 percent
as of June 30, 2000 is already lower than that required in the Decision.
Further, the current equity ratio does not reflect the effects of the Decision's
proposed $17 million annual rate reduction or the required $60 million write-off
which would further reduce the ratio in the year of the merger. It is
injudicious to require the maintenance of an outdated equity ratio level when
these "known" events make it impossible to attain that level in the near term.
For these reasons, the Applicants request that the condition be eliminated, or,
in the alternative, that it be modified to reflect the most current ratemaking
capital structure for CL&P, including the effect of the conditions imposed by
the Department.
C. The Department Should Modify The Employment Condition Regarding
Salary Base Equivalence To Allow The Applicants The Flexibility
To Achieve Synergy Savings
The merger promises to benefit consumers through more efficient
operations of the combined company. Unduly strict limitations on the management
of those operations will impede the central merger goal of increasing efficiency
and limit the ability of the Applicants to realize the projected synergies. For
example, the Decision imposes an employment condition that requires the
Applicants to "commit to maintaining a salary base between New York and
Connecticut until December 31, 2003, that is approximately equivalent." Decision
at 87. Even assuming that the term "approximately equal" is not intended to mean
"approximately 50 percent" but rather "approximately proportionate," this
condition would restrict management's
11
discretion to locate job functions in the most cost effective and efficient
manner, particularly in light of the difference in the job markets and
compensation levels between New York and Connecticut.
This condition also creates a significant administrative burden. The
functions performed by the service company in support of the regulated
operations will be located mainly in New York and Connecticut, but some
functions will also be located in the other states. Service company personnel
will, in all likelihood, be paid from a single payroll no matter where the
employees are physically located. It would be extremely burdensome to track and
account for the location of each individual service company employee so that the
equivalence of the salary bases may be evaluated.
Each of the involved states may understandably be concerned that
employees within its borders are protected. However, if each of the six states
in which the combined company will operate adopted the approach required in this
condition, there would be no possibility of eliminating duplicative functions.
The net result of such dueling state employment conditions would undercut the
principal source of merger synergy savings.
In recognizing the legitimate concern for equitable treatment, the
Applicants are prepared to accept a condition that if job functions are
transferred from Connecticut to New York, an equivalent number of positions
would be transferred to or created in Connecticut. Id. at 81. This approach
would allow CEI to manage the combined company without unnecessary and
prohibitive restrictions, while protecting Connecticut from undue job losses.
The Applicants also believe that this approach would be a more efficient and
less burdensome way to implement the Decision's goal of ensuring "approximate
equivalence" among the states.
12
III. CONDITIONS REQUIRING CLARIFICATION
A. The Employment Condition Regarding Service Company Functions
Should Be Interpreted To Allow The Applicants To Achieve Synergy
Savings
The Decision sets a condition that "[a]ll service company functions
relating to the New England operations shall be located in Central Connecticut."
Decision at 86. The intent of this condition appears to be consistent with the
Applicants' commitment that the service company headquarters for operations in
the New England states be located in Connecticut.12 Id. at 81. However, a
literal reading of the condition, which describes the functions to be performed,
as opposed to the location of the "service company headquarters," creates a
question as to whether any services for the New England states could ever be
performed by personnel anywhere except Connecticut. Such a prohibition against
the performance of any service company functions outside of Connecticut would
obviously prevent the Applicants from realizing a substantial portion of the
merger cost savings, thereby harming customers not only in Connecticut but also
in the other states.
In contrast, when CEI integrated the operations of CECONY and O&R after
that merger, some functions were moved in their entirety to New York City, while
others were moved to Rockland County. For example, the accounts payable
functions for O&R are now performed in New York City, while the processing of
customers payments for CECONY are performed in an O&R office in Rockland County.
By relocating these functions, the combined company was able to achieve the
economies necessary to provide long-term savings for customers, while at the
same time limiting the need for workforce reductions.
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12 Also, the Department's October 19, 2000 press release was consistent
with the Applicants' commitment, stating that the Decision would require "the
service company headquarters for New England operations" to remain in
Connecticut.
13
The Decision clearly contemplates that the Applicants may achieve
synergies by consolidating various service company functions. Decision at 81-82.
The Decision also acknowledges that while "[e]mployees providing services to the
NU operating companies would remain in Connecticut," these companies might also
receive support services from personnel outside of Connecticut. Id. at 121-22.
This practice would be consistent with the current manner in which service
company functions are provided to the NU operating company subsidiaries in
Connecticut, Massachusetts and New Hampshire. While the service company is now
headquartered in Connecticut, not all service company functions are performed in
Connecticut. The Applicants contemplate that a similar arrangement will continue
following the merger, with the main service company headquarters located in New
York and the service company headquarters for New England operations located in
Connecticut.
The Department should also be aware that this condition has already
created controversy in other jurisdictions due to the favoritism it appears to
grant Connecticut employees. For example, the attached letter from United States
Senator Charles E. Schumer of New York to CEI's Chairman expresses his concern
that the Connecticut employee protections undercut New York jobs. CECONY's union
has also alerted the Department to the danger of overly protective employee
conditions. In fact, because of the employment conditions favorable to
Connecticut, the union has withdrawn its support of the merger, which had been
based on the Applicants' proposed employment commitments coupled with the
union's knowledge that there had been no layoffs in the integration of the
CECONY and O&R workforces and that efforts were made to train and place in new
positions any employees whose functions were relocated.
For these reasons, the Applicants request that the Department confirm
the Applicants' understanding that this condition does not prohibit the
provision of services to the NU operating
14
companies, including CL&P and Yankee Gas, from locations outside Central
Connecticut, provided the service company headquarters for the New England
operations is maintained in Central Connecticut.
B. The Pension Conditions Should Be Interpreted To Be Consistent With
Applicable Law And Practical Considerations
The Decision imposes a condition that requires the Applicants to obtain
the Department's approval prior to making any changes to NU's Defined Benefit
plan, including funding changes that affect Connecticut customers. If this
condition is intended to require the Department's approval when the combined
company makes changes in pension funding policies, then the Applicants do not
object. The Applicants assume, however, that the Department does not intend the
condition to require its prior approval for all changes, major or minor,
affecting Connecticut customers. Such an interpretation would require the
combined company to obtain the Department's approval for any pension proposal,
including proposals that might be at issue in union negotiations, which could
seriously hamper such negotiations and would in fact be contrary to federal
labor relations law. The Applicants request that the Department confirm that the
Decision should be interpreted in a way that does not create these problems.
Two other pension conditions for which the Applicants requested
clarification in its Written Exceptions were unchanged in the Decision. The
Applicants are hopeful that the Department deemed it unnecessary to clarify the
conditions because it agreed with the Applicants' interpretation. The first such
pension condition requires that the plan assets be separately maintained. To
allow for significant administrative cost savings, the Applicants again request
confirmation of its interpretation that this condition permits the commingling
of the NU pension fund assets with CEI's pension fund assets, provided that
there is separate accounting
15
and actuarial analysis for each such plan. A broader restriction would be
costly to customers and is unnecessary to protect their interests because
substantial federal safeguards for pension funds are already in place. The
second pension condition requires that customers receive the full benefit of
any overfunding. The Applicants request confirmation of its understanding
that this condition requires that Connecticut customers receive any rate
benefit that results from pension overfunding in the future, subject to
ERISA requirements.
C. The Decision Should Be Interpreted To Permit The Applicants To
Charge The Costs To Achieve On A Below The Line Basis
The Decision requires that executive separation costs will not be
direct charged or allocated to CL&P or Yankee Gas customers now or in the
future, except to the extent that they are included in rates. The Applicants
accept the principle that these costs should not be charged to customers in any
manner.13 However, to properly account for these costs, they must be booked by
the subsidiaries making the payments. The Applicants intend to record the
charges for executive separation below the line, so that customers will not be
affected by these costs. The Applicants request confirmation that this approach
is acceptable.
IV. CONCLUSION
For the foregoing reasons, the Applicants respectfully request the
Department to grant this petition for reconsideration and to modify and clarify
the Decision as set forth above.
The Applicants appreciate this opportunity to express their views on
this very important
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13 Similarly, the Applicants have agreed that the acquisition premium
should be accounted for below-the-line for all ratemaking purposes. The
Applicants have been informed that the SEC will require New CEI to allocate the
tax benefits of the interest deductions relating to the borrowing necessary for
New CEI to acquire NU to the affiliates, including CL&P and Yankee Gas, even
though the debt is non-recourse to the affiliates. Consistent with the
Department's non-recognition of the acquisition premium for ratemaking purposes,
the tax effect will receive below-the-line treatment at all of the regulated
affiliates.
16
matter before the Department. The Applicants recognize that this has been a very
difficult and somewhat contentious process that may have created a degree of
tension, whether real or perceived, between the Applicants and the Department.
That was clearly not the intent of the Applicants. NU, under its current
management, has had a very constructive relationship with the Department. CEI is
also proud of its constructive regulatory relationships in New York. The
Applicants look forward to working with the Department to create an environment
that will benefit all of the constituencies in the State of Connecticut.
Respectfully Submitted,
CONSOLIDATED EDISON, INC. NORTHEAST UTILITIES
By: By:
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Edwin Scott William J. Quinlan
Vice President and Deputy General Assistant General Counsel
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