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FILE NO. 70-9711
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
APPLICATION/DECLARATION
ON
FORM U-1
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CONSOLIDATED EDISON, INC.
NORTHEAST UTILITIES
(a New York Corporation)
Consolidated Edison, Inc.
(a Delaware Corporation)
Consolidated Edison Company
of New York, Inc.
4 Irving Place
New York, N.Y. 10003
Consolidated Edison Solutions, Inc.
Consolidated Edison Energy, Inc.
701 Westchester Avenue, Suite 201 West
White Plains, N.Y. 10604
Consolidated Edison
Development, Inc.
CED/SCS Newington, LLC
CED Generation Holding Company, LLC
CED Management Company, Inc.
CED Operating Company, L.P.
Consolidated Edison Energy Massachusetts, Inc.
CED-GTM 1, LLC
CED Ada, Inc.
Lakewood Cogeneration , L.P.
CED - Lakewood Inc.
CED Generation Lakewood Company
111 Broadway, 16th Floor
New York, N.Y. 10006
Consolidated Edison
Communications, Inc.
132 West 31st Street, 13th Floor
New York, N.Y. - 10001
Orange and Rockland Utilities, Inc.
Rockland Electric Company
Pike County Light & Power Company
1 Blue Hill Plaza
Pearl River, NY 10965
Western Massachusetts
Electric Company
The Quinnehtuck Company
174 Brush Hill Road
West Springfield, MA 01089
The Connecticut Light and Power Company
Northeast Utilities Service Company
Yankee Energy System, Inc.
NU Enterprises, Inc.
Northeast Generation Company
Northeast Generation Services Company
Select Energy, Inc.
Mode 1 Communications, Inc.
The Rocky River Realty Company
Northeast Nuclear Energy Company
Select Energy Portland Pipeline, Inc.
Charter Oak Energy, Inc.
107 Selden Street
Berlin, CT 06037
North Atlantic Energy Service Corporation
North Atlantic Energy Corporation
Public Service Company of New Hampshire
1000 Elm Street
Manchester, NH 03101
Holyoke Water Power Company
1 Canal Street
Holyoke, MA 01040
HEC Inc.
Reeds Ferry, Inc.
24 Prime Parkway
Natick, MA 01760
Yankee Gas Services Company
Yankee Energy Financial Services Company
NorConn Properties, Inc.
599 Research Parkway
Meriden, CT 06450-1030
Yankee Energy Services Company
148 Norton Street
P.O. Box 526
Milldale, CT 06467
R.M. Services, Inc.
639 Research Parkway
Meriden, CT 06450-1030
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 Service Company
107 Selden Street
Steptoe & Johnson LLP Berlin, CT 06037
1330 Connecticut Ave, NW
Washington, D.C. 20036-1795
Table of Contents
Item 1 Description of the Proposed Transaction
A. Introduction
B. Description of New CEI and its Subsidiaries
C. Summary of Requested Approvals
D. Use of Proceeds
E. Issuance of Securities; Incurrence of Indebtedness, Provision of
Guarantees and Other Credit Support
1. Merger Indebtedness
2. New CEI and the Subsidiaries other than NU and its Subsidiaries
a) New CEI
(i) Financing Arrangements
(ii) Financing Subsidiaries
(iii) New CEI Investments in and Support of Nonutility
Subsidiaries
(iv) Investment in EWGs and FUCOs and Calculation of
Consolidated Retained Earnings
b) The Intermediate Holding Companies and the Utility
Subsidiaries
F. New CEI Money Pool
G. Consolidation and Reorganization of Nonutility Subsidiaries
H. Payment of Dividends by New CEI Non-Utility Subsidiaries
I. Establishment of Service Companies and Approval of Service Agreements
J. Provision of Services by the Non-Utility Subsidiaries to Other Non-
Utility Subsidiaries at Other than "Cost"
K. Activities of Rule 58 Subsidiaries Outside the United States
L. New CEI Stock Plans
1. The New CEI Drip
2. Incentive Compensation Plans
3. Other Plans
M. Interest Rate Hedges
N. Tax Allocation Agreement
O. Certificates of Notification
Item 2 Fees, Commissions and Expenses
Item 3 Applicable Statutory Provisions
A. Issuance of Securities, Incurrence of Indebtedness, Provisions of
Guarantees
B. Services Among Non-Utility Subsidiaries at Other than "Cost"
C. Inclusion of NU CREs in New CEI's Calculation of CREs for purposes of
Rule 53(a)
D. Compliance with Rules 53 and 54
Item 4. Regulatory Approvals
Item 5 Procedure
Item 6 Exhibits and Financial Statements
Item 7 Information as to Environmental Effects
Item 1. Description of Proposed Transaction
A. Introduction
1. Consolidated Edison, Inc. ("CEI"), a New York corporation
currently a public utility holding company exempt from the provisions of the
Public Utility Holding Company Act of 1935 (the "Act") by virtue of Section
3(a)(1)of the Act, and Northeast Utilities ("NU"), a Massachusetts business
trust currently a registered public utility holding company under the Act,
filed an Application/Declaration on Form U-1 on January 20, 2000 (See File
70-9613) seeking approvals relating to the proposed combination of NU with
CEI (the "Merger Application"). 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 (the "CEI Merger"). New CEI will be the surviving entity of this merger.
NU will merge with N Acquisition LLC, a Massachusetts limited liability
company controlled by New CEI, with NU being the surviving entity (the "NU
Merger" and together with the CEI Merger collectively, the "Mergers"). The
Mergers are more fully described in the Amended and Restated Agreement and
Plan of Merger dated as of January 11, 2000 (the "Merger Agreement") and
described in more detail in the Merger Application, which description is
incorporated by reference herein. Upon consummation of the Mergers, New CEI
intends to register as a holding company pursuant to Section 5 of the Act.
New CEI, CEI and NU herein seek authorization and approval of the Commission
with respect to the ongoing financing activities of New CEI and its
subsidiaries, intrasystem extensions of credit, the creation of service
companies, the payment of dividends out of capital and unearned surplus and
other related matters pertaining to the combined company after giving effect
to the Mergers.
B. Description of New CEI and its Subsidiaries
2. New CEI is authorized under its Amended and Restated
Certificate of Incorporation (see Exhibit A-1 hereto), to issue 510,000,000
shares consisting of 500,000,000 shares of Common Stock, par value $.10 per
share ("Common Stock") and 10,000,000 shares of preferred stock, par value
$.01 per share ("Preferred Stock"). Immediately following the Mergers, New
CEI expects that it will have issued and outstanding approximately
270,000,000 shares of Common Stock. New CEI has not issued any Preferred
Stock. The cash portion of the consideration to be paid in the Mergers will
be financed by the issuance of approximately $2.2 billion of unsecured debt
or a mix of unsecured debt and hybrid debt securities (the "Acquisition
Debt") or a combination of the Acquisition Debt and Preferred Stock and cash
on hand. The hybrid securities, which are considered debt for financial
statement purposes, would be structured to have characteristics of both debt
and equity (for example, the ability of the issuer to defer interest) and may
have maturities ranging up to 50 years. The terms and conditions of the
Acquisition Debt and Preferred Stock, if any, have not been negotiated as of
the time of this filing. The choice of hybrid securities would come from any
of several proprietary structures currently marketed by established financial
institutions. It is expected that the Acquisition Debt will ultimately have
a maturity of not more than 50 years. Immediately after the Mergers, it
is projected that common equity as a percentage of the pro forma consolidated
capitalization of New CEI and its subsidiaries will be approximately 35%.
3. Upon completion of the Mergers, New CEI will own, directly or
indirectly, interests in the following public utility companies, each of whom
will be wholly-owned by companies in the New CEI system:
Consolidated Edison Company of New York, Inc. ("CECONY"), a New York
corporation which provides gas and electric service to its customers in New
York City and Westchester County and steam service to customers in part of
Manhattan.
Orange and Rockland Utilities, Inc. ("O&R"), a New York corporation, provides
retail gas and electric services to its customers in the southeastern section
of New York. O&R is a public utility holding company exempt from the
provisions of the Act by virtue of Section 3(a)(2).
Rockland Electric Company ("RECO"), a New Jersey corporation and subsidiary
of O&R, provides electric service to customers in parts of New Jersey.
Pike County Light and Power Company ("Pike"), a Pennsylvania corporation and
subsidiary of O&R, provides electric and gas service to customers in the
northeast corner of Pike County in Pennsylvania.
The Connecticut Light and Power Company ("CL&P"), a Connecticut corporation,
provides electric service to customers in Connecticut.
Western Massachusetts Electric Company ("WMECO"), a Massachusetts corporation
provides electric service to customers in the western part of Massachusetts.
Public Service Company of New Hampshire ("PSNH"), a New Hampshire
corporation, provides electric retail service to customers in portions of New
Hampshire.
North Atlantic Energy Corporation ("NAEC"), a New Hampshire corporation, is a
special-purpose operating subsidiary that owns a 35.98 percent interest in
the Seabrook Nuclear Generating Facility ("Seabrook") in Seabrook, New
Hampshire and sells its share of the capacity and output from Seabrook to
PSNH under two life-of-unit, full-cost recovery contracts.
Holyoke Water Power Company ("HWP"), a Massachusetts corporation, provides
electric service to a limited number of customers in Holyoke, Massachusetts
and has a public utility subsidiary, Holyoke Power and Electric Company
("HPE").
Yankee Gas Services Company ("Yankee Gas"), a Connecticut corporation,
provides gas services to customers in parts of Connecticut.
Northeast Nuclear Energy Company, a Connecticut corporation, is a nuclear
management service company subsidiary that operates the Millstone Nuclear
Power Plants.
4. Collectively, the twelve subsidiaries (including HPE) referenced
above are referred to herein as the "Utility Subsidiaries." In addition, NU
will remain in existence as a first-tier registered public utility holding
company .subsidiary of New CEI following the Mergers and Yankee Energy
System, Inc. ("YES") will remain as a public utility holding company under
NU. NU and YES, along with O&R, are sometimes referred to herein as the
"Intermediate Holding Companies."
5. Upon completion of the Mergers, New CEI will also own interests in
four companies owning nuclear power plants, namely, Maine Yankee Atomic Power
Company, which has permanently shut down its nuclear electric generating
plant located in Wiscasset, Maine, Yankee Atomic Electric Company, which has
permanently shut down its plant located in Rowe, Massachusetts, Connecticut
Yankee Atomic Power Company, which has permanently shut down its plant in
Haddam, Connecticut and Vermont Yankee Nuclear Power Company, which has
contracted to sell its nuclear plant located in Vernon, Vermont. In
addition, CL&P and WMECO each own an interest in the Millstone 1 and 2
nuclear power plants located in Waterford, Connecticut (Millstone 1 has been
permanently shut down), CL&P, WMECO and PSNH each own an interest in the
Millstone 3 nuclear power plant, NAEC and CL&P each own an interest in
Seabrook and CECONY owns the Indian Point 1 nuclear power plant, which has
been permanently shut down, and the Indian Point 2 nuclear power plant. On
August 17, 2000. CL&P, WMECO and PSNH (along with most other joint owners of
Millstone 3) entered into a purchase agreement with Dominion Resources, Inc.
("DRI") pursuant to which DRI will purchase the owners' respective interests
in Millstone 1, 2 and 3, along with the related nuclear fuel, for an
aggregate of approximately $1.287 billion. This transaction is expected to
close by April 1, 2001. On November 9, 2000, CECONY announced it had reached
an agreement with Entergy Corporation for the sale of Indian Point Units 1
and 2 and related gas turbines and facilities for $602 million.
6. Upon completion of the Mergers, New CEI will also directly or
indirectly own approximately 50 other active subsidiary companies that are
not public utility companies, service companies or public utility holding
companies under the Act. Such entities are listed on Exhibit I-2 hereto and
those nonutility companies, other than service companies, which are
applicants hereto are collectively referred to herein as the "Nonutility
Subsidiaries." A more complete description of the Utility Subsidiaries and
Nonutility Subsidiaries may be found in the Merger Application, which
descriptions are incorporated herein by reference. Attached as Exhibit I-1
is a chart showing the proposed pro forma corporate chart of the combined
companies prior to any restructuring or movement of subsidiaries. The
Utility Subsidiaries, the Nonutility Subsidiaries and the Intermediate
Holding Companies, along with companies that become subsidiaries of New CEI
subsequent to the Mergers are sometimes referred to herein as the
"Subsidiaries."
C. Summary of Requested Approvals.
7. New CEI and the Subsidiaries, as specified below, hereby request
approval for a program of external financing, credit support arrangements,
and other related proposals for the period through September 30, 2004
("Authorization Period"), as follows:
(i) New CEI requests authority to issue up to 60 million shares of its
Common Stock to shareholders of NU and to issue the Acquisition Debt, both in
connection with the NU Merger;
(ii) New CEI and the Subsidiaries, including NU and its subsidiaries,
request authority to maintain in effect through the Authorization Period, all
existing credit facilities and financing arrangements and to maintain
outstanding all indebtedness and similar obligations created thereunder as of
the date of the closing of the Merger (including the Acquisition Debt) and to
amend, renew, extend, and/or replace any of such credit facilities, financing
arrangements, indebtedness or similar obligations up to the aggregate dollar
amounts specified below, subject to the terms and conditions set forth below;
(iii) New CEI requests authority to issue and sell from time to time,
pursuant to its dividend reinvestment plan and stock-based management
incentive and employee benefit plans or in exchange for securities or assets
being acquired from other companies, up to 50 million shares of Common Stock
(as such number may hereafter be adjusted to reflect any stock split);
(iv) New CEI requests authority to issue and sell from time to time (A)
Preferred Stock of up to $750 million and (B) secured or unsecured
indebtedness having maturities of one year or less ("Short-term Debt"), and
secured or unsecured long term debt ("Debentures") with an aggregate
principal amount at any time outstanding (including the Acquisition Debt) of
not more than the sum of (i) $4.75 billion plus (ii) the amount of Short-term
Debt and Debentures issued, as discussed below, in place of NU's authorized
Short-term Debt (currently $400 million) or Yes Acquisition Debt ($275
million)(the aggregate of (i) plus (ii) not to exceed $5.425 billion, the
"New CEI Debt Limit") provided that New CEI's consolidated equity
capitalization immediately following the issuance of any such Short-term Debt
or Debentures would not be not less than 30%. NU received Commission
authorization to issue up to $400 million in Short-term Debt through June 30,
2002 (Holding Co. Act Rel. 35-27328, File No. 70-9755 (December 28, 2000)).
New CEI and NU request authorization for NU to continue being able to issue
debt up to such amount from time to time through the Authorization Period.
NU received Commission authorization to issue up to $275 million in short or
long term debt for the purpose of acquiring YES (the "YES Acquisition Debt")
through June 30, 2002 (Holding Co. Act Rel. 27127, January 31, 2000). New
CEI and NU request authorization for NU to amend, renew, extend, and/or
replace the YES Acquisition Debt through the Authorization Period. New CEI
may determine to substitute the issuance by CEI of Short-term Debt and
Debentures for the issuance by NU of all or part of the NU authorized Short-
term Debt and the YES Acquisition Debt. Any short or long-term debt of New
CEI which will be secured debt will not be secured by shares of stock or
other securities or property of the Utility Subsidiaries.
(v) The Utility Subsidiaries and Intermediate Holding Companies request
authority to issue, sell and have outstanding at any one time Short-term Debt
in the following aggregate principal amounts:
Utility Subsidiaries Aggregate Principal Amount
CECONY $800 million
Pike 2 million
RECO 60 million
CL&P $ 375 million*
WMECO $ 250 million*
PSNH $ 225 million*#
NAEC $ 260 million*#
Yankee Gas $ 100 million*
HWP $ 5 million*
NNECO $ 75 million*
Intermediate Holding Company Aggregate Principal Amount
O&R $113 million
NU $400 million*
YES $ 50 million*
* The amounts listed above for NU and its subsidiaries were previously
authorized by the Commission in Holding Co. Act Rel. No. 35-27328, File No.
70-9755 (December 28, 2000). No increase in such short-term debt limits is
being requested in this Application.
# PSNH and NAEC only seek short-term debt authorization for amounts up to
10% of each company's respective net fixed plant, any amount of short-term
debt in excess of such amount requires approval of the New Hampshire Public
Utilities Commission ("NHPUC").
(vi) New CEI requests authority to provide guaranties and other forms of
credit support ("New CEI Guaranties") with respect to the securities or other
obligations of its Nonutility Subsidiaries in an aggregate principal or
nominal amount not to exceed $2.5 billion at any one time outstanding. NU
intends to continue to provide guaranties and other forms of credit support
with respect to the securities or other obligations ("NU Guaranties") of the
nonutility subsidiaries of NU in an aggregate amount not to exceed $500
million, as authorized through December 31, 2002 in Commission order Holding
Co. Act Rel. No. 35-27093 (October 21, 1999). NU herein seeks authority to
continue to be able to issue NU Guaranties up to such amount through the
Authorization Period. New CEI also requests authority to undertake an
additional $500 million of guaranties so that it may assume any of the NU
Guaranties it deems necessary and appropriate to acquire. In such event, the
New CEI Guaranties could aggregate up to $3.0 billion.
(vii) New CEI and, to the extent not exempt under Rule 52, the Subsidiaries
request authority to enter into hedging transactions ("Interest Rate Hedges")
with respect to outstanding indebtedness of such companies in order to manage
and minimize interest rate costs. Such companies also request authority to
enter into hedging transactions ("Anticipatory Hedges") with respect to
anticipatory debt issuances in order to lock-in current interest rates and/or
manage interest rate risk exposure;
(viii) New CEI requests authority to establish and maintain a corporate
services company, by transferring the stock of Northeast Utilities Service
Company to New CEI and renaming it Consolidated Edison, Inc. Service Company
("CEISCO") and Nonutility Service Company ("Nonutility ServCo") as subsidiary
service companies of New CEI and requests approval of the Service Agreements
described herein;
(ix) As permitted by Rule 87(b)(1), Nonutility Subsidiaries may from time to
time provide services and sell goods to each other. To the extent not exempt
pursuant to Rule 90(d), such companies request authority to perform such
services and to sell such goods to each other at fair market prices, without
regard to "cost," as determined in accordance with Rules 90 and 91, subject
to certain limitations that are noted herein;
(x) New CEI requests authority on behalf of any current and future
subsidiary formed pursuant to Rule 58 promulgated under the Act ("Rule 58
Subsidiaries") to engage in certain categories of activities permitted
thereunder outside the United States;
(xi) New CEI requests authority to acquire the equity securities of one or
more special-purpose subsidiaries ("Financing Subsidiaries") organized for
the sole purpose of issuing and selling securities, lending, dividending or
otherwise transferring the proceeds thereof to New CEI or an entity
designated by New CEI, and engaging in transactions incidental thereto,
subject to the New CEI Debt Limit and the other conditions set forth herein;
(xii) New CEI requests approval for an agreement among New CEI and the
Subsidiaries to allocate consolidated income tax (the "Tax Allocation
Agreement") as described herein;
(xiii) New CEI and the Subsidiaries seek authorization to maintain a money
pool for companies within the New CEI System (the "New CEI Money Pool")
through the Authorization Period;
(xiv) New CEI seeks authorization to include the amount of consolidated
retained earnings of NU as of the date immediately prior to the Mergers in
New CEI's calculation of its consolidated retained earnings for purposes of
Rule 53(a)(1)(ii); ; and
(xvi) New CEI seeks authorization to consolidate or otherwise reorganize all
or any part of its direct and indirect ownership interests in Nonutility
Subsidiaries under one or more new or existing subsidiaries.
_________________
Rule 53 (a), subject to conditions specified in Rule 53(b), allows a
registered holding company to issue or sell securities equal to up to 50% of
its "average consolidated retained earnings" to finance the acquisition of an
exempt wholesale generator or foreign utility company.
_________________
D. Use of Proceeds.
8. The proceeds from the financings authorized by the Commission pursuant
to this Application/Declaration will be used for general corporate purposes,
including (i) the refunding of the Acquisition Debt and the YES Acquisition
Debt, (ii) financing, in part, investments by and capital expenditures of New
CEI and its Subsidiaries, including, without limitation, the funding of
future investments in exempt wholesale generators ("EWG"), Foreign Utility
Companies ("FUCO"), Rule 58 Subsidiaries, and exempt telecommunications
companies ("ETC"), (iii) the repayment, redemption, refunding or purchase by
New CEI or any Subsidiary of any of its own securities from non-affiliates
pursuant to Rule 42, and (iv) financing working capital requirements of New
CEI and its Subsidiaries.
9. New CEI represents that no financing proceeds will be used to acquire
the securities of, or other interests in, any company unless such acquisition
has been approved by the Commission in this proceeding or in a separate
proceeding or is in accordance with an available exemption under the Act or
rules thereunder, including Sections 32 and 33 and Rule 58. New CEI states
that the aggregate amount of proceeds of financing and New CEI Guaranties
approved by the Commission in this proceeding used to fund investments in
EWGs and FUCOs will not, when added to New CEI's "aggregate investment" (as
defined in Rule 53) in all such entities at any point in time, exceed 50% of
New CEI's "consolidated retained earnings" (also as defined in Rule 53).
Further, New CEI represents that proceeds of financing and New CEI Guaranties
and NU Guaranties utilized to fund investments in Rule 58 Subsidiaries will
adhere to the limitations of that rule.
______________________
NU received an order from the Commission authorizing the investment in
Northeast Generation Company, an EWG, in an amount equal to 83% of NU's
average consolidated retained earnings ("CRE") (Holding Co. Act Rel. 35-
27148(March 7, 2000)). As a result of the Merger, such authorization will no
longer be needed as the aggregate EWG and FUCO investment by the New CEI
system will be within the safe harbor provisions of Rule 53 (50% of average
CREs).
______________________
E. Issuance of Securities; Incurrence of Indebtedness; Provision of
Guarantees and other Credit Support.
1. Securities Issued In Connection with the Merger
a. The Acquisition Debt
10. New CEI is not currently a holding company. Subsequent to the CEI
Merger and prior to the closing of the NU Merger, New CEI will be a holding
company exempt from the registration requirements of the Act and, thus, will
not be subject to Sections 6(a) and 7 of the Act. Subsequent to the Mergers,
New CEI will become a registered holding company under the Act. NU now is,
and following completion of the Mergers, will continue to be, a registered
holding company subject to the provisions of Sections 6(a) and 7 of the Act.
11. In connection with the CEI Merger, each share of CEI common stock will
be converted, without exchange or other action of the shareholders, to a
share of New CEI common stock. The CEI Merger and the exchange of New CEI
common stock thereby contemplated do not require Commission approval under
the Act.
12. New CEI will, in connection with the NU Merger, incur the Acquisition
Debt and will also issue common stock and deliver cash to the shareholders of
NU. New CEI anticipates that the cash portion of the consideration given for
the NU Shares will initially be obtained through the issuance of the
Acquisition Debt. New CEI requests Commission authorization to issue the
Acquisition Debt from time to time through the Authorization Period in an
amount sufficient to satisfy the cash portion of the consideration in
connection with the NU Merger, estimated not to exceed $2.2 billion, and to
refund and replace any and all Acquisition Debt initially issued. The
Acquisition Debt may include short or long-term notes, debentures, medium-
term notes and hybrid securities and/or borrowings from banks and other
financial institutions. Any long-term debt security will have such
designations, aggregate principal amounts, maturities, interest rate(s) or
methods of determining the same, terms of payment of interest, redemption
provisions, non-refunding provisions, sinking fund terms and other terms and
conditions will be established by negotiation or competitive bidding.
13. The effective cost of money on short-term Acquisition Debt will not
exceed at issuance 500 basis points over the comparable term London Interbank
Offered Rate ("LIBOR") Securities. The effective cost of money on long-term
Acquisition Debt will not exceed at issuance 500 basis over comparable term
U.S. Treasury Securities. The maturity of any such indebtedness will not
exceed 50 years from the date of issuance. The underwriting fees,
commissions, or other similar remuneration paid in connection with the non-
competitive issue, sale or distribution of a security pursuant to the
Application will not exceed 5.0 % of the principal or total amount of the
financing.
b. Stock Issued
14. The New CEI common stock to be issued to NU and CEI shareholders as
consideration in connection with the Mergers has been registered on Form S-4
under the Securities Act of 1933 (Registration No. 333-31390, the "New CEI
Registration Statement"). Subject to the rights of any holders of preferred
stock of New CEI, if any, each holder of New CEI common stock will be
entitled to cast one vote for each share held of record on all matters
submitted to a vote of the shareholders, including the election of directors.
Holders of New CEI common stock will be entitled to receive dividends or
other distributions as declared by the New CEI Board of Directors at its own
discretion. The right of the New CEI Board of Directors to declare
dividends, however, will be subject to the rights of any holders of New CEI
preferred stock, if any, of New CEI and certain requirements of Delaware law.
15. The New CEI Common Stock is described in the New CEI Registration
Statement, which was declared effective by the Commission on March 1, 2000.
The New CEI Registration Statement is hereby incorporated by reference herein
and listed as Exhibit C-1. New CEI hereby requests authorization to issue up
to 60 million shares of New CEI Common Stock to NU shareholders to satisfy
the stock portion of the merger consideration.
16. New CEI and its Subsidiaries (including NU and the NU Subsidiaries)
seek to maintain their existing financing arrangements and other commitments
and to continue to carry on their newly combined business without undue
interruption. Consequently, New CEI requests that the Commission authorize
New CEI, NU and their respective subsidiaries, through the Authorization
Period, to continue to finance their operations in the same manner as prior
to closing of the Merger all as more specifically described herein. In that
connection, New CEI commits that, from and after the Mergers and for the
period through the Authorization Period, New CEI, as the registered holding
company parent of the combined consolidated CEI-NU system, will maintain and
will cause each of its public utility subsidiaries to maintain at least 30%
common equity in its respective capital structure, except that under certain
circumstances set forth in an application/declaration on Form U-1 filed by NU
in File No. 70-9541 related to restructuring of the electric industry in New
England, NU's consolidated common equity ratio, and the common equity ratio
of NU's utility subsidiaries may, as allowed by Commission order therein
(Holding Co. Act Rel. No. 35-27147, File No. 70-9541, March 7, 2000), decline
below 30% for the periods described therein. Following the Mergers, New
CEI's consolidated common equity ratio is not expected to fall below 30% and,
as a result of utility restructuring, New CEI and NU commit that the common
equity ratio of NU will be restored above 30% by December 31, 2002. In File
No. 9541, NU had anticipated that NU's common equity ratio would be above 30%
by December 31, 2001. That estimate was based on an anticipated issuance of
rate reduction bonds during the first half of 2000. This new date is based
on the fact that, because of delays by regulators in approving such issuance,
no bonds have yet been issued. NU expects that, as of the end of each fiscal
year set forth below, its consolidated common equity ratio will be as
follows:
Year Ratio
2001 27.87%
2002 30.01%
2003 31.82%
2004 34.82%
2005 37.58%
2. Post-Merger Financing
a. New CEI
i. Financing Arrangements
17. CEI currently maintains in effect two revolving credit agreements which
will be assumed by New CEI pursuant to the CEI Merger. The first is a
$175,000,000 facility with seven major banks which terminates on December 3,
2003. The second is a $175,000,000 facility with thirteen major banks which
terminates on November 28, 2001 (collectively, the "CEI Credit Facility").
18. CEI may borrow directly against these facilities or may use them to
support the issuance of commercial paper, which is sold through dealers to
the market, at a discount from par.
19. In addition, CEI may borrow funds from Hawkeye Funding ("Hawkeye").
Hawkeye is a limited partnership and is the lessor on a synthetic lease of a
generating station which is currently under construction. This station will
be leased to Newington Energy, LLC ("Newington"), an indirect subsidiary of
CEI. Hawkeye will lend funds to CEI up to the amount of the unexpended
proceeds of a debenture issued by Hawkeye for the purpose of providing
construction funding for the generating station.
20. As discussed above, New CEI will incur the Acquisition Debt to finance
the cash component of the consideration to be paid to NU shareholders in
connection with the NU Merger. In addition, it is possible that, prior to
the Mergers, CEI will seek to increase the commitments of the lenders, and
borrow, under the CEI Credit Facility and/or enter into additional credit
facilities renewing, extending and/or replacing the CEI Credit Facility.
21. New CEI hereby requests Commission authorization to assume and maintain
in effect the above described financing arrangements, any additional
financing arrangements entered into by CEI prior to the completion of the
Mergers and any amendments, renewals, extensions or replacements thereof
entered into prior to completion of the Mergers, obligations under which will
not in the aggregate exceed the New CEI Debt Limit. New CEI further requests
authority through the Authorization Period for New CEI to amend, renew,
extend and/or replace any financing arrangement entered into by CEI prior to
completion of the Mergers and which remains in effect on the date the Mergers
are completed and to enter into additional financing arrangements similar to
those described above for the period from and after the Mergers through the
Authorization Period; provided that the aggregate principal amount of debt
obligations incurred by New CEI (including the debt assumed from CEI and the
Acquisition Debt) pursuant to this request for authorization shall not exceed
the New CEI Debt Limit, the cost of money relative to such financing
(including the Acquisition Debt) shall not exceed 500 basis points over LIBOR
for comparable short term debt or variable rate debt or 500 basis points over
comparable Treasury Securities for long term debt and the final maturity of
securities issued shall not exceed 50 years from date of issuance. Any
underwriting fees, commissions or other similar remuneration paid in
connection with the issuance of this debt, will not exceed 5.0% of the
principal or total amount of the financing. New CEI commits to only issue
Long-term Debt that is at the investment grade level as established by a
nationally recognized statistical rating organization, as that term is used
in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the Securities
Exchange Act of 1934. Further, New CEI commits that any secured short or
long-term debt which it issues will not be secured by shares of stock or
other securities or property of the Utility Subsidiaries.
22. Within 90 days following completion of the Mergers, New CEI will,
pursuant to Rule 24, notify the Commission of all financing arrangements
entered into by CEI prior to the Mergers and which will be assumed by New CEI
and remain in effect upon the closing of the Mergers. Thereafter, New CEI
will, pursuant to Rule 24, notify the Commission of all New CEI financings
occurring within any fiscal quarter of New CEI within 60 days following the
end of such fiscal quarter.
23. In addition to the foregoing financing facilities, CEI also supports the
operations of its non-utility subsidiaries through capital contributions,
guarantees and other support arrangements. New CEI's non-utility businesses
will be principally conducted through "Non-Utility Holding Company," a new
wholly owned subsidiary of New CEI (together with its subsidiaries, the
"Non-Utility Subsidiaries.") The Non-Utility Subsidiaries are principally
involved in energy-related and telecommunications businesses.
ii. Preferred Stock
24. The Preferred Stock for which New CEI is seeking authorization to issue
after the Mergers is described in the New CEI Registration Statement. The
New CEI Board of Directors has the full authority permitted by law to issue
the Preferred Stock in one or more classes or series and, with respect to
each class or series, to determine the voting powers, if any, and the
preferences and relative, participating, optional or other special rights, if
any, and any qualifications, limitations or restrictions thereof, of the
shares of any class or series of preferred stock, except that holders of
Preferred Stock will not be entitled to more than one vote for each share of
Preferred Stock held. The powers, preferences and relative, participating,
optional and other special rights of each class or series of Preferred Stock
and the qualifications, limitations or restrictions, if any, thereof may
differ from those of any other classes or series at any time outstanding.
Except as otherwise required by law, as provided in the certificate of
incorporation or as determined by the New CEI Board of Directors, holders of
Preferred Stock will not have any voting rights and will not be entitled to
any notice of shareholder meetings.
iii. Financing Subsidiaries
25. New CEI requests authority to acquire, directly or indirectly, the
equity securities of one or more corporations, trusts, partnerships or other
entities (hereinafter, "Financing Subsidiaries") created specifically for the
purpose of facilitating the financing of the authorized and exempt activities
(including exempt and authorized acquisitions) of such companies through the
issuance of long-term debt or equity securities, including but not limited to
hybrid securities, to third parties and the transfer of the proceeds of such
financings by such Financing Subsidiaries to New CEI or to a Subsidiary, as
the case may be. New CEI may, if required, guaranty or enter into expense
agreements in respect of the obligations of any Financing Subsidiary which it
organizes. The Subsidiaries may also provide guaranties and enter into
expense agreements, if required, on behalf of any Financing Subsidiaries
which they organize pursuant to Rules 45(b)(7) and 52, as applicable.
26. If the direct parent company of a Financing Subsidiary is authorized in
this proceeding or any subsequent proceeding to issue long-term debt or
similar types of equity securities, then the amount of such securities issued
by that Financing Subsidiary would count against the limitation applicable to
its parent for those securities. In such cases, however, the guaranty by the
parent of that security issued by its Financing Subsidiary would not be
counted against the limitations on New CEI Guaranties or NU Guaranties, as
the case may be, set forth above. In other cases, in which the parent
company is not authorized herein or in a subsequent proceeding to issue
similar types of securities, the amount of any guaranty not exempt pursuant
to Rules 45(b)(7) and 52 that is entered into by the parent company with
respect to securities issued by its Financing Subsidiary would be counted
against the limitation on New CEI Guaranties or NU Guaranties, as the case
may be. The Commission has previously authorized registered holding
companies and their subsidiaries to create financing subsidiaries, subject
to substantially the same terms and conditions. See NiSource, Inc. et al.,
Holding Co. Act Rel. 27265 (November 1, 2000), New Century Energies, Inc., et
al., Holding Co. Act Rel. No. 27000 (April 7, 1999); and Ameren Corp., et
al., Holding Co. Act Rel. No. 27053 (July 23, 1999).
iv. New CEI Investment in and Support of the Non-Utility Subsidiaries.
27. As of December 31, 2000, CEI had issued guaranties ("CEI Guaranties")
which guarantee payment and performance obligations of the Non-Utility
Subsidiaries up to approximately $700 million, pursuant to various
agreements, which guaranties will be assumed by New CEI as a result of the
CEI Merger. A current list of CEI Guarantees is attached as Exhibit K-2. In
addition, NU has Commission authorization to issue up to $500 million in NU
Guaranties (Holding Co. Act Release No. 27093). It is expected that some of
the NU Guaranties may be assumed by New CEI.
28. New CEI hereby requests authorization to maintain in place the CEI
Guaranties and other credit support arrangements outstanding at the time of
the Mergers. New CEI further requests authorization for the period from and
after the Mergers through the Authorization Period to provide additional
guaranties or other credit support for the Non-Utility Subsidiaries,
including through the assumption of NU Guaranties; provided that the
aggregate amount guaranteed by New CEI pursuant to this authorization does
not exceed $2.5 billion or up to $3.0 billion if New CEI has to assume the NU
Guaranties. Securities issuances, including guaranties and other credit
support, made by New CEI and the other Non-Utility Subsidiaries will be
effected in compliance with all applicable laws and regulations, including,
if applicable, the Act and Rule 52. NU requests that the Commission grant NU
authorization to issue up to $500 million in Guaranties to support the
existing nonutility subsidiaries of NU through the Authorization Period
replacing the authority granted in Commission Order 35-27093. New CEI and NU
believe that, subsequent to the Mergers, certain beneficiaries of the NU
Guaranties may seek an assumption by New CEI of the NU Guaranties, in effect
obtaining a replacement of the NU Guaranties by New CEI Guaranties. For that
reason, in addition to the $2.5 billion of New CEI Guaranties for which
authorization is sought herein, New CEI requests authority to assume or
replace some or all of the NU Guaranties up to an additional $500 million.
In no event will the sum of the aggregate amount of outstanding guaranties
issued by NU and the aggregate amount of NU Guaranties assumed or replaced by
New CEI Guaranties exceed $500 million.
29. Within 90 days following completion of the Mergers, New CEI will,
pursuant to Rule 24, notify the Commission of all equity investments in, and
guaranties or other credit support for or on behalf of, the Non-Utility
Subsidiaries made or provided prior to the Mergers and which will remain in
effect upon closing of the Mergers. Thereafter, New CEI will, pursuant to
Rule 24, notify the Commission of all further equity investments in, and
guaranties or other credit support for or on behalf of, the Non-Utility
Subsidiaries made or provided during any fiscal quarter of New CEI within 60
days following the end of such fiscal quarter.
v. Investment in EWGs and FUCOs and Calculation of CREs.
30. Each of CEI and NU holds investments in various EWGs and FUCOs. CEI's
specific EWG and FUCO investments are described in detail in Exhibit J-1.
31. NU owns one EWG, Northeast Generation Company ("NGC"), which owns and
operates various hydro-electric and pumped storage electric generation plants
in Massachusetts and Connecticut. This EWG investment is described in more
detail in NU's application/declaration on Form U-1, as amended, in File No.
70-9543. On a pro forma consolidated basis, at September 30, 2000, CEI and
NU together had invested $644.8 million in EWGs and FUCOs which represents
approximately 12.9% of New CEI's pro forma "average consolidated retained
earnings" for the last four quarterly periods ("CREs") (as calculated for
purposes of Rule 53) as of September 30, 2000 ($5 billion), after giving
effect to the accounting treatment for the Mergers which does not include the
amount of NU's CREs in the calculation of New CEI's CREs. This percentage is
well within the "safe harbor" provisions of the Rules. However, if the
Commission grants the request herein to credit to New CEI's CREs the amount
of NU's "average" CREs immediately prior to the Mergers (approximately $639.5
million at September 30, 2000), the percentage decreases to approximately
11.4 %.
b. The Intermediate Holding Companies and the Utility Subsidiaries
32. The Intermediate Holding Companies and the Utility Subsidiaries
currently maintain in effect the following credit and financing facilities:
33. CECONY maintains two revolving credit agreements. The first is a
$375,000,000 facility with eight major banks which terminates December 23,
2002. The second is a $125,000,000 facility with thirteen major banks which
terminates on November 28, 2001. CECONY may enter into additional revolving
credit facilities aggregating up to an additional $300 million.
34. O&R maintains a $100,000,000 facility with thirteen major banks which
terminates on November 28, 2001.
35. CECONY and O&R may borrow directly against these facilities or may use
them to support the issuance of commercial paper, which is sold through
dealers to the market, at a discount from par.
36. These facilities do not include letters of credit supporting CECONY and
O&R tax-exempt debt. The debt issues of CEI's subsidiaries themselves are
listed in Exhibit K-1
37. NU maintains a short-term Credit Agreement dated as of November 17, 2000
("NU Credit Agreement"), among NU and several banks with United Bank of
California as Administrative Agent. The NU Credit Agreement provides a
credit facility of up to $400 million comprised of borrowing commitments and
letter of credit commitments. The NU Credit Agreement has a termination date
of November 16, 2001. NU also maintains a short term credit facility in the
amount of $266 million for the YES Acquisition Debt which terminates February
28, 2001.
38. Also outstanding is a short-term Credit Agreement dated as of November
17, 2000 ("Regulated Credit Agreement"), among CL&P and WMECO on the one hand
and several banks with Citibank, N.A. as Administrative Agent on the other.
The Regulated Credit Agreement provides a credit facility of up to $350
million comprised of borrowing commitments. The Regulated Credit Agreement
has a termination date of November 16, 2001.
39. On November 9, 2000 NAEC entered into an unsecured $200 million 364-day
Term Credit Agreement with four banks which was approved by the NHPUC.
40. Yankee Gas currently has a revolving line of credit of $60 million,
which was extended on November 17, 2000, to a termination date of November
16, 2001.
41. The financing arrangements of the Utility Subsidiaries described above
which are in excess of one year are subject to approval of the respective
state utility commission and therefore would be exempt from the Act pursuant
to Rule 52 thereunder. New CEI hereby requests, on behalf of the
Intermediate Holding Companies and the Utility Subsidiaries, to the extent
not exempted by Rule 52(a), Commission authorization to maintain in effect
the above described financing arrangements which are jurisdictional to the
Commission, any additional financing arrangements entered into by such
Intermediate Holding Companies and Utility Subsidiaries prior to the
completion of the Mergers and any amendments, renewals, extensions or
replacements thereof entered into prior to completion of the Mergers. These
financing arrangements are not expected to exceed $800 million in the case of
CECONY, $113 million in the case of O&R, $2 million in the case of Pike, $60
million in the case of RECO, $375 million in the case of CL&P, $250 million
in the case of WMECO, $225 million in the case of PSNH, $260 million in the
case of NAEC, $100 million in the case of Yankee Gas, $5 million in the case
of HWP, $75 million in the case of NNECO, $400 million in the case of NU and
$50 million in the case of YES (collectively, the "New CEI Subsidiary
Limits"). Any Utility Subsidiary financing arrangements in excess of one
year will be subject to the approval of the appropriate state regulatory
agency and will be exempt from the Act under Rule 52.
42. New CEI further requests, on behalf of the Intermediate Holding
Companies and the Utility Subsidiaries, to the extent not exempted by Rule
52(a), Commission authorization, during the period from and after the Mergers
through the Authorization Period, to amend, renew, extend and/or replace any
financing arrangement entered into by the Intermediate Holding Companies and
the Utility Subsidiaries prior to completion of the Mergers and which remain
in effect on the date the Mergers are completed; provided that no such
amendments, renewal, extension and/or replacement which is effected following
completion of the Mergers shall exceed the respective New CEI Subsidiary
Limits, or provide for a cost of money to exceed 500 basis points over LIBOR
for comparable short term or variable rate debt unless the Commission shall
otherwise approve or such amendment, renewal, extension and/or replacement
shall not require Commission approval under the Act and the rules and
regulations promulgated thereunder. New CEI further requests, on behalf of
the Intermediate Holding Companies and the Utility Subsidiaries, to the
extent not exempted under Rule 52(a), authorization to enter into additional
financing arrangements similar to those described above for the period from
and after the Mergers through the Authorization Period; provided that the
cost of money relative to such financing shall not exceed 500 basis points
over LIBOR for comparable term securities; the final maturity of securities
issued shall not exceed 364 days and the additional aggregate principal
amount of debt obligations incurred by the CEI Utility Subsidiaries shall not
exceed the respective New CEI Subsidiary Limit. .
_________________________
PSNH and NAEC require the approval of the NHPUC to incur short-term
debt in excess of 10% of their respective net plants (as of June 30, 2000
$68.6 million in the case of PSNH and $53.3 million in the case of NAEC.)
Authorization is sought herein for short term borrowings of PSNH and NAEC up
to 10% of their respective net plant with a maximum of $225 million for PSNH
and $260 million for NAEC.
_________________________
F. New CEI Money Pool
43. New CEI and the Subsidiaries propose establishing a system-wide Money
Pool (the "Money Pool"), in which New CEI and the Subsidiaries (other than
CEISCO and any FUCO subsidiary of New CEI) will be participants and which
will be administered and maintained through the Authorization Period by
CEISCO, at cost, under the direction of an officer in the CEISCO Treasury
Organization. The Money Pool will consist principally of surplus funds
in the treasury of Money Pool participants, including New CEI. The funds
available to the Money Pool will be loaned on a short-term basis to those
Subsidiaries, other than any public utility holding company, including NU,
YES and O&R, any EWG or FUCO, including NGC, Consolidated Edison Energy
Massachusetts, Inc. ("CEEMI"), Lakewood Cogeneration LP ("Lakewood") and
CED/SCS Newington, LLC ("CED/SCS"), and any direct or indirect exempt
telecommunications company subsidiary of New CEI, including Mode 1, Inc.
("Mode 1") and Consolidated Energy Communications, Inc. ("CECI", and together
with NU, YES, O&R, NGC, CEMMI, Lakewood, CED/SCS and Mode 1, the
"Nonborrowing Companies"), that have a need for short-term funds, subject to
certain limitations described therein . Funds would be made available
from such sources in such order as CEISCO, as administrator of the Money
Pool, may determine would result in a lower cost of borrowing, consistent
with the individual borrowing needs and financial standing of the companies
providing funds to the pool. The determination of whether a Money Pool
participant at any time has surplus funds to lend to the Money Pool or shall
lend funds to the Money Pool would be made by such participant's chief
financial officer or treasurer, or by a designee thereof, on the basis of
cash flow projections and other relevant factors, in such participant's sole
discretion. See Exhibit L-1 for a copy of the Form of Money Pool Agreement.
____________________
CEISCO will not be a member of the Money Pool and seeks authorization
to administer the Money Pool solely under Section 13 of the Act and Rules 90
and 91.
Under Massachusetts law. WMECO may not invest in its affiliates through
the money pool without specific Massachusetts Department of Telecommunication
and Energy ("MDTE") approval. Such approval has not yet been sought. The
Applicants request that the Commission authorize the participation by WMECO
in the Money Pool but reserve jurisdiction over any contributions of funds by
WMECO to the Money Pool pending completion of the record.
___________________
44. Borrowings from the Money Pool would require authorization by the
borrower's chief financial officer or treasurer, or by a designee thereof
and, for the Utility Subsidiaries, will count towards the short term debt
limit sought herein. No party would be required to effect a borrowing
through the Money Pool if it is determined that it could (and had authority
to) effect a borrowing at lower cost directly from banks or through the sale
of its own commercial paper. No loans through the Money Pool would be made
to, and no borrowings through the Money Pool would be made by the
Nonborrowing Companies. Funds not required by the Money Pool to make loans
(with the exception of funds required to satisfy the Money Pool's liquidity
requirements) would ordinarily be invested in one or more short-term
investments, including: (i) interest-bearing accounts with banks; (ii)
obligations issued or guaranteed by the U.S. government and/or its agencies
and instrumentalities, including obligations under repurchase agreements;
(iii) obligations issued or guaranteed by any state or political subdivision
thereof, provided that such obligations are rated not less than "A" (or "A-1"
or "P-1" or their equivalent for short term debt) by a nationally recognized
rating agency; (iv) commercial paper rated not less than "A-1" or "P-1" or
their equivalent by a nationally recognized rating agency; (v) moneymarket
funds; (vi) bank certificates of deposit, (vii) Eurodollar funds; and (viii)
such other investments as are permitted by Section 9(c) of the Act and Rule
40 thereunder and, with respect to contributions from WMECO, approved by the
Massachusetts Department of Telecommunications and Energy pursuant to
Massachusetts General Laws Chapter 164, Section 17A and the regulations
thereunder.
45. In addition to surplus funds, funds borrowed by New CEI through the
issuance of short-term notes or other borrowings, by selling commercial paper
are a source of funds for making loans or open account advances to certain of
its Subsidiaries through the Money Pool. The potential recipients of such
open account advances will be all the companies in the New CEI System with
the exception of the Nonborrowing Companies. Such sorts of arrangements are
anticipated to result in a reduction in borrowing costs to the recipients
because the parent often has access to funds at lower interest rates than its
subsidiaries and/or because the transaction costs of arranging several small
financings to meet the needs of the smaller subsidiaries are higher than the
costs of arranging one larger financing by the parent. The amounts to be
borrowed by New CEI for the purpose of making open account advances and to be
borrowed through the Money Pool by the Subsidiaries (other than the
Nonborrowing Companies) will also be subject to the short-term limits on the
aggregate amount outstanding for which approval is sought in this filing.
46. PSNH and NAEC are currently prohibited, by New Hampshire statute from
borrowing short-term funds in excess of 10% of their respective net fixed
plant, without NHPUC authorization.
47. Accordingly, the Applicants request that the Commission approve the
participation by PSNH and NAEC in the new CEI Money Pool, to the extent the
borrowings of each company through the New CEI Money Pool, when aggregated
with each company's outstanding short-term debt do not exceed 10% of each
Company's respective net plant, up to $225 million in the case of PSNH and
$260 million in the case of NAEC.
48. Money Pool transactions will be designed to match, on a daily basis, the
available cash of New CEI and the Subsidiaries and the short-term borrowing
requirements of the Subsidiaries (other than the Nonborrowing Companies),
thereby minimizing the need for short-term borrowings to be made by the
Subsidiaries (other than the Nonborrowing Companies) from external sources.
To this end, it is anticipated that the short-term borrowing requirements of
the Subsidiaries (other than the Nonborrowing Companies) will be met, in the
first instance, with the proceeds of borrowings available through the Money
Pool, and thereafter, to the extent necessary, with the proceeds of external
short-term borrowings. Those participants in the Money Pool without access
to the commercial paper market will have priority as borrowers from the Money
Pool, and all the companies in the New CEI system, with the exception of the
Nonborrowing Companies, will be eligible to borrow through the Money Pool
from the proceeds of external borrowings by New CEI. If at any time there
are funds remaining in the Money Pool after satisfaction of the borrowing
needs of the borrowers, CEISCO, as agent for the Money Pool, will invest
those funds as described above and allocate the earnings on any such
investments among the Money Pool participants, providing such excess funds on
a pro rata basis according to the amount of the funds so provided.
49. All borrowings from and contributions to the Money Pool, including the
open account advances, will be documented and will be evidenced on the books
of each participant that is borrowing from or contributing surplus funds to
the Money Pool. Any participant contributing funds to the Money Pool may
withdraw those funds at any time without notice to satisfy its daily need for
funds. Loans made by the Pool will be open account advances for periods of
less than 12 months, although the Agent may receive upon demand a promissory
note evidencing the transaction. All loans made by the Pool from Surplus
Funds are payable on demand by the Agent, except for loans from the proceeds
of external borrowings by New CEI at any time without premium or penalty and
will bear interest for both the borrower and lender, payable monthly, equal
to the daily Federal Funds Effective Rate as quoted by the Federal Reserve
Bank of New York. Loans from the proceeds of external borrowings by New CEI
will bear interest at the same rate paid by New CEI on its borrowings, and no
such loans may be prepaid unless New CEI is made whole for any additional
costs that may be incurred because of such prepayment. New CEI will be fully
reimbursed for all costs that it incurs in relation to loans made to the
other participants.
50. New CEI and the Subsidiaries believe that the cost of the proposed
borrowings through the Money Pool will generally be more favorable to the
borrowing companies than the comparable cost of external short-term
borrowings, and that the yield to the Subsidiaries contributing available
funds to the Money Pool will generally be the same as the typical yield on
short-term investments. However, if on any given day the funds available
through the Money Pool are insufficient to satisfy the short-term borrowing
requirements of a Subsidiary, such Subsidiary may effect short-term
borrowings through lending institutions and/or through the sale of commercial
paper, if appropriate.
51. New CEI and the Nonutility Subsidiaries hereby request that, to the
extent borrowings from the money pool by the Nonutility Subsidiaries are not
exempt under Rule 52, there be no limit on borrowings made through the money
pool by the Nonutility Subsidiaries (other than the Nonborrowing Companies).
A limit on Nonutility Subsidiary borrowing could result in unnecessary third
party borrowing by the New CEI System. For example, if the Nonutility
Subsidiary had a pre-arranged limit (i.e. $15 million), there could exist a
scenario where some Subsidiaries have money invested in the Money Pool but a
certain Nonutility Subsidiary might have a need to borrow more than its
limit. Even though there would be funds available in the Money Pool, the
Nonutility Subsidiary who had reached its borrowing limit would have to make
a borrowing directly from New CEI of funds borrowed by New CEI from external
sources, while the excess funds in the Money Pool which would not be
available to such Nonutility Subsidiary would be invested with third parties.
This series of transactions would be ineffective and detrimental to the New
CEI System, as a whole. Accordingly, New CEI, on behalf of the Nonutility
Subsidiaries (other than the Nonborrowing Companies), requests that, to the
extent borrowings through the Money Pool are not exempt under Rule 52, there
be no limit on the amount of borrowings which the Nonutility Subsidiaries
(other than the Nonborrowing Companies) may make through the Money Pool. A
similar request was made by Conectiv and granted by the Commission in Holding
Co. Act Rel. No. 12711 (December 14, 1999).
G. Consolidation and Reorganization of Nonutility Subsidiaries
52. New CEI may determine from time to time to consolidate or otherwise
reorganize all or any part of its direct and indirect ownership interests in
Nonutility Subsidiaries under one or more new or existing subsidiaries. To
effect any such consolidation or other reorganization, New CEI could, among
other things, directly or indirectly contribute to a new or existing
subsidiary all of the outstanding equity securities of one or more Nonutility
Subsidiaries or sell the equity securities of one or more Nonutility
Subsidiaries to a new or existing subsidiary. Alternatively, a Nonutility
Subsidiary could dividend the securities of one or more Nonutility
Subsidiaries to a new or existing subsidiary.
53. To the extent such transactions are not exempt from the Act or otherwise
authorized or permitted by rule, regulation or order of the Commission issued
thereunder, New CEI hereby requests authorization under the Act to
consolidate or otherwise reorganize, under one or more new or existing
subsidiaries, New CEI's ownership interests in one or more of Nonutility
Subsidiaries not currently owned, directly or indirectly, by a utility
company, the acquisition of the securities of which is exempt from Commission
approval under the Act. As indicated above, such transactions may take the
form of such Nonutility Subsidiaries selling, contributing or transferring in
the form of a dividend to new or existing subsidiaries, and such subsidiaries
acquiring, directly or indirectly, the equity securities of such Nonutility
Subsidiaries. Each such transaction would be effected in compliance with all
applicable state or foreign laws and accounting requirements, and any sale
transaction would be effected for a consideration equal to the book value of
the equity securities of the Nonutility Subsidiary being sold. New CEI will
report on the completion of each such transaction in the next quarterly
certificate filed pursuant to Rule 24 in this File.
H. Payment of Dividends by New CEI Nonutility Subsidiaries.
54. New CEI also requests authorization, on behalf of CEI's current and New
CEI's future non-exempt Nonutility Subsidiaries, other than Nonutility
Subsidiaries which are NU Subsidiaries and other than Nonutility Subsidiaries
that are subsidiaries of public utility companies, that such companies be
permitted to pay dividends to each subsidiary's direct parent with respect to
the securities of such companies, from time to time through the Authorization
Period, out of capital and unearned surplus. This type of authorization has
been granted to NU (see, Northeast Utilities, et al., Holding Co. Act Rel.
No. 35-27147 (March 7, 2000)) through December 31, 2005. The Applicants
request that this order remain in effect after the Mergers but only through
the Authorization Period. The Commission has also granted similar approvals
to other registered holding companies. (See Entergy Corporation, et al.,
Holding Co. Act Rel. No. 35-27039 (June 22, 1999); Interstate Energy
Corporation, et al., Holding Co. Act Rel. No. 35-27069 (August 26, 1999)).
55. New CEI anticipates that there may be situations in which one or more of
such Nonutility Subsidiaries will have unrestricted cash available for
distribution in excess of any such company's current and retained earnings.
In such situations, the declaration and payment of a dividend to its direct
parent would have to be charged, in whole or in part, to capital or unearned
surplus.
56. Further, there may be periods during which unrestricted cash available
for distribution by such Nonutility Subsidiary exceeds current and retained
earnings due, for example, to the difference between accelerated depreciation
allowed for tax purposes, which may generate significant amounts of
distributable cash, and depreciation methods required to be used in
determining book income.
57. New CEI, on behalf of each such current and future non-exempt Nonutility
Subsidiary represents that it will not declare or pay any dividend out of
capital or unearned surplus in contravention of any law restricting the
payment of dividends. New CEI also states that the Nonutility Subsidiaries
will comply with the terms of any credit agreements and indentures that
restrict the amount and timing of distributions to shareholders.
58. Accordingly, Consolidated Edison Communications, Inc., Consolidated
Edison Energy, Inc., Consolidated Edison Development, Inc. ("CEDI") and
Consolidated Edison Solutions, Inc. seek authorization to pay dividends out
of capital and unearned surplus to New CEI; CED Ada, Inc., Consolidated
Edison Leasing, Inc., Carson Acquisition, Inc., Con Edison Leasing, LLC.,
CEDST, LLC, CED/SCS Newington, LLC, CED Generation Holding Company, LLC,
Consolidated Edison Energy Massachusetts, Inc., CED-GTM 1, LLC, seek
authorization to pay dividends out of capital and unearned surplus to CEDI;
CED Management Company, Inc., CED Operating Company, L.P., Lakewood
Cogeneration, L.P., and CED-Lakewood Inc. seek authorization to pay dividends
out of capital and unearned surplus to CED Generation Holding Company; and
CED Generation Lakewood Company seeks authorization to pay dividends out of
capital and unearned surplus to CED Lakewood Inc. Ada Cogeneration L.P.
seeks authorization to pay dividends out of capital and surplus to CED/DELTA
Ada, LLC and CED/DELTA Ada, LLC seeks authorization to pay dividends out of
capital and surplus to CED Ada, Inc. Newington Energy, LLC . seeks
authorization to pay dividends out of capital and surplus to CED/SCS
Newington, LLC GTM Energy, LLC. seeks authorization to pay dividends out of
capital and surplus to CED-GTM 1, LLC. CED 42, LLC seeks authorization to
pay dividends out of capital and surplus to CEDST, LLC. Lakewood
Cogeneration, L.P. seeks authorization to pay dividends out of capital and
surplus to CED-Lakewood, Inc. and CED Generation Lakewood Company.
I. Establishment of Service Companies and Approval of Service Agreements.
59. As noted below, New CEI intends to establish an arrangement for the
system-wide provision of services that conforms to traditional Commission
precedent with respect to both the number of service companies within the
combined system and traditional pricing terms under the Commission's "at-
cost" rules.
60. As an exempt holding company, CEI currently provides a number of
services to its affiliates and subsidiaries principally through its regulated
subsidiaries CECONY and O&R. As a registered holding company, NU established
Northeast Utilities Service Company ("NUSCO") in 1966 as a service company
pursuant to Section 13(b) of, and Rule 88 under, the Act. The basic form of
service agreement, including exhibits thereto which described the services
offered and methods of allocation of costs, was an exhibit to NU's
application-declaration seeking authority for NUSCO and made effective by the
Commission. In addition, NU has filed an application/declaration on Form U-1
on February 28, 2000 seeking authorization to create and maintain a service
company for its nonutility subsidiaries.
61. As part of their business combination, CEI and NU anticipate
centralization of some of the service functions in the combined company but
have not yet completed their analysis of how best to accomplish this goal, a
task that is not expected to be completed until after the consummation of the
Mergers. However, New CEI, in accordance with the order of the NHPUC
approving the Merger (see discussion below), currently anticipates forming
two subsidiary service companies to perform services for the companies in the
New CEI System. In that connection, prior to closing of the Mergers, New CEI
anticipates that it will establish one new subsidiary service company,
Nonutility ServCo as a subsidiary of newly-formed Non-Utility Holding
Company, and immediately subsequent to the merger, NU will transfer to New
CEI, through sale, at book value, all of the stock of NUSCO, which will be
renamed and is referred to herein as CEISCO. CEISCO and Nonutility ServCo
will, subsequent to the Mergers, assume from CECONY, O&R and NUSCO all of the
service functions currently performed for affiliates by CECONY, O&R and
NUSCO, however, such an assumption of duties will require study and analysis.
Accordingly, the Applicants request a transition period of 15 months from the
date of the Order issued herein before being required to effectuate these
changes. CEISCO will be a direct subsidiary of New CEI and Nonutility ServCo
will be a direct subsidiary of the proposed Non-Utility Holding Company.
Employees performing such functions will become employees of either
Nonutility ServCo or CEISCO. Upon closing of the Mergers, New CEI and the
Subsidiaries (including the Non-Utility Subsidiaries) will enter into a new
single systemwide Service Agreement with CEISCO and the Nonutility
subsidiaries will also enter into a Nonutility Service Agreement with
Nonutility ServCo. New CEI seeks authorization for it and its Subsidiaries
from the Commission to enter into the form of Service Agreement annexed as
Exhibit M-1 with CEISCO which contemplates that the services to be offered to
system companies may include, but will not be limited to:
1. Accounting. CEISCO will offer advice and assistance to system
companies in accounting matters, including the development of accounting
practices, procedures and controls, the preparation and analysis of financial
reports, and the processing of certain accounts such as accounts payable,
payroll, customer and cash management.
2. Auditing. CEISCO's internal auditing staff will provide periodic
auditing of the accounting records and other records maintained by system
companies, coordinating their examination, where applicable, with that of
independent public accountants.
3. Legal and Regulatory. CEISCO will offer advice and assistance with
respect to legal and regulatory issues as well as regulatory compliance,
including 1935 Act authorizations and compliance and regulatory matters under
other Federal and State laws.
4. Information Technology, Electronic Transmission and Computer Services.
CEISCO will provide the organization and resources for the operation of an
information technology function including the operation of a centralized data
processing facility and the management of a telecommunications network.
5. Software Pooling. CEISCO will accept from system companies ownership
of and rights to use, assign, license or sublicense all software owned,
acquired or developed by or for system companies, if any, which system
companies can and do transfer or assign to it. CEISCO will preserve and
protect the rights to all such software to the extent reasonable and
appropriate under the circumstances; to license system companies, on a non-
exclusive, no-charge or at-cost basis, to use all software which the relevant
service company has the right to sell, license or sublicense; and, at the
relevant system companies' expense, to permit system companies to enhance any
such software and to license others to use all such software and enhancements
to the extent that CEISCO shall have the legal right to so permit.
6. Employee Benefits/Pension Investment. CEISCO will provide central
accounting for employee benefit and pension plans of system companies.
7. Employee Relations. CEISCO will advise and assist system companies in
the formulation and administration of employee relations policies and
programs relating to the relevant system companies' labor relations,
personnel administration, training, wage and salary administration and
safety.
8. Operations. CEISCO will advise and assist system companies in the
study, planning, engineering and construction of facilities of each system
company and of the System as a whole, and will advise, assist and manage the
planning, engineering (including maps and records) and construction
operations of system companies electing this service.
9. Executive and Administrative. CEISCO will advise and assist system
companies in the solution of major problems and in the formulation and
execution of the general plans and policies of system companies electing this
service. CEISCO will advise and assist system companies as to operations,
the issuance of securities, the preparation of filings arising out of or
required by the various Federal and State securities, business, public
utilities and corporation laws, the selection of executive and administrative
personnel, the representation of system companies before regulatory bodies,
proposals for capital expenditures, budgets, financing, acquisition and
disposition of properties, expansion of business, rate structures, public
relationships and other related matters.
10. Business & Operations Services. CEISCO will advise and assist system
companies in all matters relating to operational capacity and the preparation
and coordination of operating studies. Additionally, CEISCO will perform
general administrative support services, including travel services, aviation,
fleet, mail and facilities management.
11. Risk Management. CEISCO will advise and assist system companies in
securing requisite insurance, in the purchase and administration of all
property, casualty and marine insurance, in the settlement of insured claims
and in providing risk prevention advice.
12. Environmental Compliance. CEISCO will provide consulting, cleanup and
other service activities as required to ensure full compliance with
applicable environmental statutes and regulations.
13. Corporate Planning. CEISCO will advise and assist system companies
in studying and planning in connection with operations, budgets, economic
forecasts, capital expenditures and special projects.
14. Purchasing. CEISCO will advise and assist system companies in the
purchase of materials, supplies and services, will conduct purchase
negotiations, prepare purchasing agreements and will administer programs of
material control.
15. Rates. CEISCO will advise and assist system companies in the
analysis of their rate structure in the formulation of rate policies and in
the negotiation of large contracts. CEISCO will also advise and assist
system companies in proceedings before regulatory bodies involving the rates
and operations of system companies and of other competitors where such rates
and operations directly or indirectly affect system companies.
16. Research. CEISCO will investigate and conduct research into problems
relating to production, utilization, testing, manufacture, transmission,
storage and distribution of energy and other services.
17. Tax. CEISCO will advise and assist system companies in the
preparation of Federal and other tax returns, and will generally advise
system companies as to any problems involving taxes including the provision
of due diligence in connection with acquisitions.
18. Corporate Secretary. CEISCO will provide all necessary functions
required of a publicly held corporation; coordinating information and
activities among shareholders, the transfer agent, and Board of Directors;
providing direct services to security holders; preparing and filing required
annual and interim reports to shareholders and the SEC; conducting the annual
meeting of shareholders and ensuring proper maintenance of corporate records.
19. Investor Relations. CEISCO will provide fair and accurate analysis
of New CEI and its operating subsidiaries and its outlook within the
financial community, enhancing New CEI's position in the energy industry;
balancing and diversifying shareholder investment in New CEI through a wide
range of activities; providing feedback to New CEI and its operating
subsidiaries regarding investor concerns, trading and ownership; holding
periodic analysts meetings; and providing various operating data as requested
or required by investors.
20. Customer Service. CEISCO will provide services and systems
dedicated to customer service, including billing, remittance, credit,
collections, customer relations, call centers, energy conservation support
and metering
21. Treasury/Finance. CEISCO will provide services related to managing
all administrative activities associated with financing, including
management of capital structure; cash, credit and risk management activities;
investment and commercial banking relationships; oversight of decommissioning
trust funds and general financing activities.
22. External Affairs. CEISCO will provide services in support of
corporate strategies for managing relationships with federal, state and local
governments, agencies and legislative bodies. CEISCO will formulate and
assist with public relations and communications programs and administration
of corporate contribution and community affairs programs.
23 . Office Space and Equipment. CEISCO will assist in the leasing of
land, buildings, furnishings and equipment, including computer hardware and
software and transportation equipment.
62. As compensation for services performed, the Services Agreement will
provide for the client companies to pay to CEISCO the cost of such services,
computed in accordance with the applicable rules and regulations (including,
but not limited to Rules 90 and 91) under the Act and appropriate accounting
standards. Under the terms of the Service Agreement, CEISCO will render
services to the subsidiary companies of New CEI at cost. CEISCO will account
for, allocate and charge its costs of the services provided on a full cost
reimbursement basis under a work order system consistent with the Uniform
System of Accounts for Mutual and Subsidiary Service Companies. Costs
incurred in connection with services performed for a specific subsidiary
company will be billed 100% to that subsidiary company. Where more than one
company is involved in or has received benefits from a service performed, the
Services Agreement will provide that client companies will pay their fairly
allocated pro rata share in accordance with the methods set out in a schedule
to the Services Agreement. Indirect costs incurred by CEISCO which are not
directly allocable to one or more subsidiary companies will be allocated in
proportion to how either direct salaries or total costs are billed to the
subsidiary companies depending on the nature of the indirect costs
themselves. The time CEISCO employees spend working for each subsidiary will
be billed to and paid by the applicable subsidiary on a monthly basis, based
upon time records. Each subsidiary company will maintain separate financial
records and detailed supporting records showing CEISCO's charges. A copy of
the Policies and Procedures concerning the New CEI Service Companies is
attached hereto as Exhibit M-2. Thus, charges for all services provided by
CEISCO to affiliated Utility Subsidiaries and Nonutility Subsidiaries will be
on an "at cost" basis as determined under Rules 90 and 91 of the Act.
63. NU and CEI believe that their approach to service company arrangements
provides them with the appropriate degree of flexibility to integrate their
operations in a manner consistent with applicable laws and regulations.
CEISCO will provide general administrative and corporate services system wide
to all system companies. Nonutility ServCo will provide specified
competitive services to the Nonutility Subsidiaries. This is in compliance
with the order issued by the NHPUC (See Exhibit O-1). In that order the
NHPUC stated
"In summary, then, we approve the Merger Settlement Agreement and will
permit Consolidated Edison to consummate the merger contemplated in the
Petition. However, in addition to the commitments made by the Joint
Petitioners in the Merger Settlement Agreement, our approval is
expressly conditioned on the Joint Petitioners agreeing to the following
conditions:
4. Subsequent to the merger, Consolidated Edison will form separate
service companies to provide services to its regulated and unregulated
subsidiaries."
NHPUC Order No. 23,594, Docket No. DE 00-009, December 6, 2000, slip op.
at 117.
64. The services that Nonutility ServCo is expected to provide to the
Nonutility Subsidiaries include, without limitation, employee recruiting,
engineering, hedging and financial derivatives and arbitrage services,
electric purchasing for resale, purchasing of electric transmission, system
operations and marketing. Moreover, the Commission has found in similar
(albeit considerably more complex) circumstances that the simplicity
requirements of Section 11(b)(2) of the Act are aimed at preventing the
"leverage and pyramiding device" that gave rise to the Act and that those
requirements do not prohibit the organization of additional service companies
in the same holding company system to the extent it "offers various
benefits," including "afford[ing] separation between the utility and non-
utility businesses [within the holding company system]," especially where it
is legally required. Entergy Corp., Holding Co. Act Rel. No. 27039 (June 22,
1999). See, also, Entergy Corp., Holding Co. Act Rel. No. 26322 (June 30,
1995). Here, as in the Entergy matter, the formation of Nonutility ServCo
will allow the Applicants and the other companies in the New CEI system to
separate their regulated utility and the competitive non-utility businesses
and afford stronger compliance with code of conduct requirements that may
arise in the jurisdictions in which the New CEI companies do business. The
Nonutility ServCo Service Agreement will be substantially identical to the
CEISCO Service Agreement filed as Exhibit M-1 hereto.
65. No change in the organization of CEISCO or Nonutility ServCo, the type
and character of the companies to be serviced, the methods of allocating cost
to associate companies, or in the scope or character of the services to be
rendered subject to Section 13 of the Act, or any rule, regulation or order
thereunder, shall be made unless and until New CEI shall first have given the
Commission written notice of the proposed change not less than 60 days prior
to the proposed effectiveness of any such change. If, upon the receipt of
any such notice, the Commission shall notify New CEI within the 60-day period
that a question exists as to whether the proposed change is consistent with
the provisions of Section 13 of the Act, or of any rule, regulation or order
thereunder, then the proposed change shall not become effective unless and
until New CEI shall have filed with the Commission an appropriate declaration
regarding such proposed change and the Commission shall have permitted such
declaration to become effective.
66. Rule 88 (b) provides that "(a) finding by the commission that a
subsidiary company of a registered holding company . . . is so organized and
conducted, or is to be so conducted, as to meet the requirements of Section
13(b) of the Act with respect to reasonable assurance of efficient and
economical performance of services or construction or sale of goods for the
benefit of associate companies, at cost fairly and equitably allocated among
them (or as permitted by (Rule 90), will be made only pursuant to a
declaration filed with the Commission on Form U-13- 1, as specified in the
instructions for that form, by such company or the persons proposing to
organize it." Notwithstanding the foregoing language, the Commission has on
at least two recent occasions made findings under Section 13(b) based on
information set forth in an application on Form U-1, without requiring the
formal filing on a Form U-13-1. See Unitil Corp., 51 SEC Docket 562 (Apr.
24, 1992); CINergy Corp., 57 SEC Docket 2353 (Oct. 21, 1994). In this
Application, New CEI has submitted substantially the same application
information as would have been submitted in a Form U-13-1.
67. Accordingly, it is submitted that it is appropriate to find that CEISCO
and Nonutility ServCo will be so organized and shall be so conducted as to
meet the requirements of Section 13(b), and that the filing of a Form U-13-1
is unnecessary, or, alternatively, that this Application should be deemed to
constitute a filing on Form U-13-1 for purposes of Rule 88.
68. Accordingly, New CEI requests authorization to maintain, subsequent to
the Mergers, Non-Utility Holding Company, CEISCO and Nonutility ServCo.
Initially, Non-Utility Holding Company will issue 1000 shares of common
stock, at no or nominal par value, all of which will be subscribed to by New
CEI at a price of $1 per share. NU will transfer all of its shares in NUSCO
to CEI and NUSCO will be renamed. Nonutility ServCo will issue 1000 shares
of common stock, at no or nominal par value, all of which will be subscribed
to by Non-Utility Holding Company at a price of $1 per share. New CEI will
file with the Commission, within the 15 month transition period, a post-
effective amendment to this Application seeking a supplemental order
concerning the maintenance of the two service companies, the finalized
service agreements, the cost allocations and the New CEI policies and
procedures.
69. In addition, Pike and RECO, two utility subsidiaries of New CEI, have no
employees. Traditionally, utility services provided by these companies to
their customers have been provided by employees of O&R. Such services are
provided at cost. New CEI, on behalf of O&R, Pike and RECO, seek
authorization for this arrangement to continue pursuant to Section 13(b).
J. Provision of Services by the Nonutility Subsidiaries to other Nonutility
Subsidiaries at other than Cost
70. Nonutility ServCo and the Nonutility Subsidiaries propose to provide
services to each other at any price they deem appropriate, including, but not
limited to, cost or fair market prices, and request an exemption pursuant to
Section 13(b) and Rule 100(a) from the "at cost requirement" of Rules 90 and
91 to the extent that a price other than "cost" is charged. (Authority for
NGS to provide certain services to NGC at other than at cost has been
separately requested in NU's application/declaration, as amended, in File No.
70-9543). Nonutility ServCo and the Nonutility Subsidiaries propose to
retain the option to provide services to each other at cost, consistent with
Rules 90 and 91, if reasonable business considerations call for such an at-
cost charge. Nonutility ServCo will not perform any services for any of New
CEI's regulated public utility subsidiaries or enter into any other
transactions in which those public utility subsidiaries would be required to
make payments directly to Nonutility ServCo. Any services provided by the
Nonutility Subsidiaries to CEI's regulated public utility subsidiaries will
be provided at "cost" consistent with Rules 90 and 91. Nonutility ServCo and
the Nonutility Subsidiaries will not provide services to any associate
company that, in turn, provides such services or sells such goods, directly
or indirectly, to any other associate company that is not a Nonutility
Subsidiary, except pursuant to the requirements of the Commission's rules and
regulations under Section 13(b) or an exemption therefrom obtained in a
separate filing.
71. Accordingly, the Nonutility Subsidiaries request authorization to
provide services to each other (other than services provided by NGS to NGC)
at other than cost. However, such services will not be provided at other
than cost to an associate power project unless one or more of the following
conditions is satisfied:
(i) the project is a FUCO or an EWG which derives no part of its income,
directly or indirectly, from the generation, transmission, or
distribution of electric energy for sale within the United States;
(ii) the project is an EWG which sells electricity at market-based rates
which have been approved by the Federal Energy Regulatory Commission,
provided that the purchaser is not one of the Utility Subsidiaries.
(iii) the project is a "qualifying facility" ("QF") within the meaning of
the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA")
that sells electricity exclusively (a) at rates negotiated at arms'-
length to one or more industrial or commercial customers purchasing such
electricity for their own use and not for resale, and/or (b) to an
electric utility company (other than a Utility Subsidiary) at the
purchaser's "avoided cost" as determined in accordance with the
regulations under PURPA; or
(iv) the project is a domestic EWG or QF that sells electricity at rates
based upon its cost of service, as approved by FERC or any state public
utility commission having jurisdiction, provided that the purchaser
thereof is not one of the Utility Subsidiaries; or
(v) the project is a Rule 58 Subsidiary or any other Nonutility
Subsidiary that (a) is partially-owned by New CEI, provided that the
ultimate purchaser of such goods or services is not a Utility Subsidiary
(or any other entity that New CEI may form whose activities and
operations are primarily related to the provision of goods and services
to the Utility Subsidiaries), (b) is engaged solely in the business of
developing, owning, operating and/or providing services or goods to
Nonutility Subsidiaries described in clauses (i) through (iv) immediately
above, or (c) does not derive, directly or indirectly, any material part
of its income from sources within the United States and is not a public-
utility company operating within the United States.
72. These circumstances for which market based pricing authority is being
requested are substantially the same as those approved by the Commission in
other cases. See Entergy Corporation, et al., Holding Co. Act Rel. No. 27039
(June 22, 1999); Ameren Corp., et al., Holding Co. Act Rel. No. 27053 (July
23, 1999); and Interstate Energy Corporation, Holding Co. Act Rel. No. 27069
(August 26, 1999).
K. Activities Of Rule 58 Subsidiaries Outside The United States.
73. New CEI, on behalf of any current or future Rule 58 Subsidiaries,
requests authority to engage in the type of business activities listed in
Rule 58 outside the United States. Such activities may include:
(i) the brokering and marketing of electricity, natural gas and other energy
commodities ("Energy Marketing"), though the Applicants request that the
Commission reserve jurisdiction over the provision of Energy Marketing
outside the United States and Canada;
(ii) energy management services ("Energy Management Services"), including the
marketing, sale, installation, operation and maintenance of various products
and services related to energy management and demand-side management,
including energy and efficiency audits; facility design and process control
and enhancements; construction, installation, testing, sales and maintenance
of (and training client personnel to operate) energy conservation equipment;
design, implementation, monitoring and evaluation of energy conservation
programs; development and review of architectural, structural and engineering
drawings for energy efficiencies, design and specification of energy
consuming equipment; and general advice on programs; the design,
construction, installation, testing, sales and maintenance of new and
retrofit heating, ventilating, and air conditioning ("HVAC"), electrical and
power systems, alarm and warning systems, motors, pumps, lighting, water,
water-purification and plumbing systems, and related structures, in
connection with energy-related needs; and the provision of services and
products designed to prevent, control, or mitigate adverse effects of power
disturbances on a customer's electrical systems; and
(ii) engineering, consulting and other technical support services
("Consulting Services") with respect to energy-related businesses, as well as
for individuals. Such Consulting Services would include technology
assessments, power factor correction and harmonics mitigation analysis, meter
reading and repair, rate schedule design and analysis, environmental
services, engineering services, billing services (including consolidation
billing and bill disaggregation tools), risk management services,
communications systems, information systems/data processing, system planning,
strategic planning, finance, feasibility studies, and other similar services.
74. The Commission previously authorized similar activities with similar
reservations in Progress Energy, Inc. Holding Co. Act Rel. 27297 (December
12, 2000), Interstate Energy Corporation, Holding Co. Act Rel. 35-27069
(August 26, 1999), Energy East Corp., Holding Co. Act Rel. 35-27228
(September 12, 2000) and Southern Energy, Inc., Holding Co. Act Rel. 35-27020
(May 13, 1999).
L. New CEI Stock Plans and other Employee Benefit Plans.
75. New CEI proposes, from time to time during the Authorization Period, to
issue and/or acquire in open market transactions or by some other method
which complies with applicable law and Commission interpretations then in
effect up to 50 million shares of New CEI common stock under New CEI's
dividend reinvestment and cash payment plan, certain incentive compensation
plans and certain other employee benefit plans and employment or other
agreements described below.
1. The New CEI Drip
76. Both CEI and NU currently maintain dividend reinvestment plans with a
direct stock purchase feature. New CEI will have a similar plan (the "New CEI
Drip"). Participants in the CEI plan and NU plan will be eligible to become
participants in the New CEI Drip.
77. The purpose of the New CEI Drip is to provide eligible participants with
a convenient and economical way to purchase New CEI common stock by
reinvesting dividends and/or making optional monthly investments.
Shareholders of New CEI would be eligible to participate. Foreign citizens
are eligible to participate as long as their participation would not violate
any laws in their home countries.
78. At New CEI's discretion, shares of New CEI common stock purchased under
the New CEI Drip will be either newly issued or purchased on the open market
by an independent agent. Any determination by New CEI to change the manner
in which shares will be purchased for the New CEI New Drip, and
implementation of any such change, will comply with applicable law and
Commission interpretations then in effect.
79. Net proceeds from the sale of newly issued shares of New CEI common
stock will be added to the general corporate funds of New CEI and will be
used to meet its capital requirements and the capital requirements of its
subsidiaries. New CEI will not receive any proceeds from shares acquired in
the open market
2. Incentive Compensation Plans.
80. CEI and NU currently maintain employee stock option plans. NU also
maintains an incentive compensation plan under which stock options and
restricted shares may be granted. On completion of the Mergers, New CEI
will assume the CEI and NU stock option plans and each outstanding CEI and NU
stock option issued under the various CEI and NU plans. It is currently
anticipated that prior to the Mergers, CEI will adjust the terms of all
outstanding CEI employee stock options to provide that the options will
constitute options to acquire shares of New CEI common stock, on the same
terms and conditions as apply to the CEI stock options. Prior to the Mergers
NU will adjust the terms of all outstanding NU employee stock options to
provide that the options will constitute options to acquire, on the same
terms and conditions as apply to the NU employee stock options, the same
number of shares of New CEI common stock (rounded down to the nearest whole
share) as the holder of the option would have received in the NU Merger had
the holder exercised the option in full immediately prior to the NU Merger.
The amount of the exercise price per share of New CEI common stock (rounded
up to the nearest cent) under any option will be equal to the aggregate
amount of the exercise price of the NU common shares subject to the NU option
divided by the total number of shares of New CEI common stock to be subject
to the option.
3. Other Plans.
81. Both CEI and NU maintain various stock plans for employees and
directors, including investments in company stock through the employee's
401(k) plan. New CEI has not yet decided what specific plans will be
maintained for employees or directors subsequent to the Mergers.
82. In addition, prior to the Mergers, CEI may enter into employment or
other agreements with certain of its officers and employees that may provide
for grants of stock options and/or restricted stock or units, which would be
satisfied through open market purchases. Subsequent to the Mergers, New CEI
may enter into employment or other agreements with certain officers and
employees providing for similar grants.
83. Accordingly, New CEI requests authority to issue and sell, from time to
time, pursuant to its dividend reinvestment plan, stock-based management
incentive plans, and other employee and director benefit plans, up to 50
million shares of New CEI common stock (as such number may hereafter be
adjusted to reflect any stock split).
M. Interest Rate Hedges.
84. New CEI, and to the extent not exempt pursuant to Rule 52, the
Subsidiaries, request authorization to enter into interest rate hedging
transactions with respect to outstanding indebtedness ("Interest Rate
Hedges"), subject to certain limitations and restrictions, in order to reduce
or manage interest rate costs. Interest Rate Hedges would only be entered
into with counterparties ("Approved Counterparties") whose senior debt
ratings, or the senior debt ratings of the parent companies of the
counterparties, as published by Standard and Poor's, are equal to or greater
than BBB-, or an equivalent rating from Moody's Investors Service, Fitch
Investor Service or Duff and Phelps.
85. Interest Rate Hedges will involve the use of financial instruments
commonly used in today's capital markets, such as interest rate swaps, caps,
collars, floors, and structured notes (i.e., a debt instrument in which the
principal and/or interest payments are indirectly linked to the value of an
underlying asset or index), or transactions involving the purchase or sale,
including short sales, of U.S. Treasury obligations. The transactions would
be for fixed periods and stated notional amounts. Fees, commissions and other
amounts payable to the counterparty or exchange (excluding, however, the swap
or option payments) in connection with an Interest Rate Hedge will not exceed
those generally obtainable in competitive markets for parties of comparable
credit quality.
86. Anticipatory Derivatives. In addition, New CEI and the Subsidiaries
request authorization to enter into interest rate derivative transactions
with respect to anticipated debt offerings (the "Anticipatory Derivatives"),
subject to certain limitations and restrictions. Such Anticipatory
Derivatives would only be entered into with Approved Counterparties, and
would be utilized to fix and/or limit the interest rate risk associated with
any new issuance through (i) a forward sale of exchange-traded U.S. Treasury
futures contracts, U.S. Treasury obligations and/or a forward swap (each a
"Forward Sale"), (ii) the purchase of put options on U.S. Treasury
obligations (a "Put Options Purchase"), (iii) a Put Options Purchase in
combination with the sale of call options on U.S. Treasury obligations (a
"Zero Cost Collar "), (iv) transactions involving the purchase or sale,
including short sales, of U.S. Treasury obligations, or (v) some combination
of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other
derivative or cash transactions, including, but not limited to structured
notes, caps and collars, appropriate for the Anticipatory Derivatives.
87. Anticipatory Derivatives may be executed on-exchange ("On-Exchange
Trades") with brokers through the opening of futures and/or options positions
traded on the Chicago Board of Trade ("CBOT"), the opening of over-the-
counter positions with one or more counterparties ("Off-Exchange Trades"), or
a combination of On-Exchange Trades and Off-Exchange Trades. New CEI or a
Subsidiary will determine the optimal structure of each Anticipatory
Derivatives transaction at the time of execution. New CEI or a Subsidiary
may decide to lock in interest rates and/or limit its exposure to interest
rate increases. All open positions under Anticipatory Derivatives will be
closed on or prior to the date of the new issuance and neither New CEI nor
any Subsidiary will, at any time, take possession or make delivery of the
underlying U.S. Treasury Securities.
88. New CEI and the Subsidiaries will comply with the then existing
financial statement requirements of the Financial Accounting Standards Board
associated with derivative transactions and will attempt to structure
derivatives transactions such that they will qualify for derivative
accounting treatment under the applicable standards of the Financial
Accounting Standards Board then in effect.
N. Tax Allocation Agreement
89. New CEI and the Subsidiaries ask the Commission to approve an agreement
for the allocation of consolidated tax among New CEI and the Subsidiaries
(the "Tax Allocation Agreement"). Approval is necessary because the proposed
Tax Allocation Agreement may provide for the retention by New CEI of certain
payments for tax losses incurred from time to time, rather than the
allocation of such losses to Subsidiaries without payment as would otherwise
be required by Rule 45(c)(5) Attached as Exhibit N-1 is a copy of the
proposed Tax Allocation Agreement.
90. Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule
45 thereunder. Rule 45(a) of the Act generally prohibits any registered
holding company or subsidiary company from, directly or indirectly, lending
or in any manner extending its credit to or indemnifying, or making any
donation or capital contribution to, any company in the same holding company
system, except pursuant to a Commission order. Rule 45(c) provides that no
approval is required for a tax allocation agreement between eligible
associate companies in a registered holding company system, that "provides
for allocation among such associate companies of the liabilities and benefits
arising from such consolidated tax return for each tax year in a manner not
inconsistent with" the conditions of the rule. Rule 45(c)(5) provides that:
The agreement may, instead of excluding members as provided in
paragraph(c)(4), include all members of the group in the tax allocation,
recognizing negative corporate taxable income or a negative corporate tax,
according to the allocation method chosen. An agreement under this paragraph
shall provide that those associate companies with a positive allocation will
pay the amount allocated and those subsidiary companies with a negative
allocation will receive current payment of their corporate tax
credits. The agreement shall provide a method for apportioning such
payments, and for carrying over uncompensated benefits, if the consolidated
loss is too large to be used in full. Such method may assign priorities to
specified kinds of benefits.
91. Under the rule, only "subsidiary companies," as opposed to "associate
companies" (which includes the holding company in a holding company system),
are entitled to be paid for corporate tax credits. However, if a tax
allocation agreement does not fully comply with the provisions of Rule 45(c),
it may nonetheless be approved by the Commission under Section 12(b) and Rule
45(a).
92. In connection with the 1981 amendments to Rule 45, the Commission
explained that the distinction between associate companies, on the one hand,
and subsidiary companies, on the other, represented a policy decision to
preclude the holding company from sharing in consolidated return savings.
The Commission noted that exploitation of utility companies by holding
companies through the misallocation of consolidated tax return benefits was
among the abuses examined in the investigations underlying the enactment of
the Act. Holding Co. Act Rel. No. 21968 (March 25, 1981), citing Sen. Doc.
92, Part 72A, 70th Congress, 1st Sess. at 477-482. The Commission has
recognized that there is discretion on the part of the agency to approve tax
allocation agreements that do not, by their terms, comply with Rule 45(c) --
so long as the policies and provisions of the Act are otherwise satisfied.
In this matter, where the holding company is seeking only to receive payment
for tax losses that have been generated by it, the proposed arrangement will
not give rise to the types of problems (e.g., upstream loans) that the Act
was intended to address.
93. As a result of the Mergers, New CEI will be creating tax credits that
are non-recourse to the Subsidiaries. As a result, New CEI should retain the
benefits of those tax credits. This authorization requested is similar to
the authorization sought of the Commission by SCANA Corporation in File No.
70-9533 over which jurisdiction was reserved by the Commission. Accordingly,
the Applicants request that the Commission reserve jurisdiction over the Tax
Allocation Agreement discussed herein.
O. Certificates of Notification.
94. It is proposed that, with respect to New CEI, the reporting system of
the 1933 Act and the 1934 Act be integrated with the reporting system under
the Act. This would eliminate duplication of filings with the Commission that
cover essentially the same subject matters, resulting in a reduction of
expense for both the Commission and New CEI. To effect such integration, the
portion of the 1933 Act and 1934 Act reports containing or reflecting
disclosures of transactions occurring pursuant to the authorization granted
in this proceeding would be incorporated by reference into this proceeding
through Rule 24 certificates of notification. The certificates would also
contain all other information required by Rule 24, including the
certification that each transaction being reported on had been carried out in
accordance with the terms and conditions of and for the purposes represented
in this Application. Such certificates of notification would be filed within
60 days after the end of each of the first three calendar quarters, and 90
days after the end of the last calendar quarter, in which transactions occur.
95. The Rule 24 certificates will contain the following information for the
reporting period:
(a) The sales of any Common Stock by New CEI and the purchase price
per share and the market price per share at the date of the agreement of
sale;
(b) The total number of shares of Common Stock issued or issuable
under options granted during the quarter under New CEI's employee benefit
plans and dividend reinvestment plan or otherwise, including any plans
hereafter adopted;
(c) If Common Stock has been transferred to a seller of securities of
a company or assets being acquired, the number of shares so issued, the value
per share and whether the shares are restricted to the acquirer;
(d) The amount and terms of any Debentures issued during the quarter;
(e) The amount and terms of any financings consummated by any
Nonutility Subsidiary during the quarter that are not exempt under Rule 52;
(f) The notional amount and principal terms of any Interest Rate Hedge
or Anticipatory Derivative entered into during the quarter and the identity
of the parties to such instruments;
(g) The name, parent company, and amount invested in any Intermediate
Holding Company or new Subsidiary or Financing Subsidiary during the
quarter;;
(h) A list of Form U-6B-2 statements filed with the Commission during
the quarter, including the name of the filing entity and the date of the
filing;
(i) The amount and terms of any short-term debt issued by New CEI
during the quarter;
(j) The amount and terms of any short-term debt issued by any Utility
Subsidiary during the quarter;
(k) The amount and terms of any short-term debt issued by any
Intermediate Holding Company during the quarter;
(l) Consolidated balance sheets as of the end of the quarter, and
separate balance sheets as of the end of the quarter for each company,
including New CEI, that has engaged in financing transactions during the
quarter.
(m) The name of the guarantor and of the beneficiary of any guarantied
note, New CEI Guaranty or Intermediate Holding Company Guaranty issued during
the quarter, and the amount, terms and purpose of the guaranty;
(n) Consolidated balance sheets as of the end of the quarter and
separate balance sheets as of the end of the quarter for each company,
including New CEI, that has engaged in jurisdictional financing transactions
during the quarter;
(o) A table showing, as of the end of the quarter, the dollar and
percentage components of the capital structures of New CEI on a consolidated
basis, each Intermediate Holding Company and each Utility Subsidiary; and
(p). A retained earnings analysis of New CEI on a consolidated basis,
each Intermediate Holding Company and each Utility Subsidiary detailing gross
earnings, goodwill amortization, dividends paid out of each capital account,
and the resulting capital account balances at the end of the quarter.
_______________
Any of the information described in items a. through p. that is
provided under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, may be incorporated into the rule 24
certificate by reference.
_______________
Item 2. Fees, Commissions and Expenses
96. The information required by Item 2 will be provided by amendment.
Item 3. Applicable Statutory Provisions.
97. The following sections of the Act and the Commission's rules thereunder
are or may be directly or indirectly applicable to the proposed transactions
for which authorization is sought in this Application.
Section of/Rule under Transactions to which such Section/Rule is
the Act or may be applicable
- -----------------------------------------------------------------------
Sections 6(a), 7, 9(a),Issuance of Securities; Incurrence of
10, 12, 12(f) Indebtedness;
Sections 9(a), 10 Acquisition of Interest in a Business
Section 12(b), Rule 45 Provision of Guarantees and other Credit
Support
Sections 13, 13(b) Establishment of Service Company; Approval
of Rules 80-92 Service Agreement; Exemption of Certain Transactions from At-
Cost Rules
Section 12, Rule 45 Tax Allocation Agreement
Rule 42 Dividend Reinvestment Plans and Stock-Based
Employee Benefit Plans
Sections 6, 7, 9 and 10 Consolidation and Reorganization of Interests
in Nonutility Subsidiaries
Sections 32 and 33 Investments in EWGs and FUCOs
Section 43 and 44 Intra-system loans and participation in the
New CEI Money Pool
A. Issuance of Securities; Incurrence of Indebtedness; Provision of
Guarantees
98. New CEI's proposed issuance of securities in connection with the Mergers
including the proposed issuance of common stock to shareholders of NU in
connection with the NU Merger is expressly permitted by Section 7(c)(2)(A) of
the Act as such securities are to be issued "solely... for the purpose of
effecting a merger." New CEI's credit support for its non-utility
subsidiaries is also expressly permitted by the Act under Section 7(c)(1)(C).
The particular question that arises in the current situation relates to the
existence and future issuance of long-term debt securities (the "Proposed
Securities") by New CEI generally.
99. Issuances and sales by New CEI of the Proposed Securities and of the
guaranties by New CEI of issuances of the Proposed Securities by the
Financing Subsidiaries are subject to sections 6(a), 7 and 12(b) of the Act
and rule 45 under the Act.
100. Section 7(c) addresses the kinds of securities that a registered
holding company may issue, subject to the standards of section 7(d), which
addresses the quality and cost of the securities to be issued. Section
7(c)(1), which specifies the types of securities a registered holding company
may issue, omits long-term unsecured debt securities.
101. The types of securities described in section 7(c)(1) are: (A) common
stock having a par value and being without preference as to dividends or
distribution over and having at least equal voting rights with, any
outstanding security of the declarant; (B) bonds (i) secured by a first lien
on the physical property of the declarant, or (ii) secured by an obligation
of a subsidiary company of the declarant secured by a first lien on physical
property of such subsidiary company, or (iii) secured by any other assets of
the type and character which the Commission by rules and regulations or order
may prescribe as appropriate in the public interest or for the protection of
investors; (C) guaranties of, or assumption of liability on, a security of
another company; or (D) receiver's or trustee's certificate[s] duly
authorized by the appropriate court or courts.
102. Section 7(c)(2)(D) provides an exception for other securities not
specified in section 7(c)(1) that are issued for "necessary and urgent
corporate purposes" of the issuer ("Necessary and Urgent Clause"). This
clause permits a registered holding company to issue or sell securities,
subject to section 7(d), "for [its] necessary and urgent corporate purposes
... where the requirements of ...[section 7(c)(1)] would impose an
unreasonable financial burden upon the [registered holding company] and are
not necessary or appropriate in the public interest or for the protection of
investors or consumers."
103. For many years, the Commission has authorized registered gas holding
companies to issue long-term unsecured debt to finance their subsidiaries
operations. In addition, the Commission has traditionally administered the
Necessary and Urgent Clause so as to limit issuances of long-term debt by an
electric holding company primarily to cases where there was a short-term need
to provide funds for its utility operations, together with an expectation
that the debt would be replaced with either equity or increased retained
earnings in the foreseeable future. In a recent order granted by the
Commission for the Southern Company (Holding Co. Act Rel. 35-27134 (Feb. 9,
2000) (the "Southern Order"), the Commission authorized the holding company
to issue long-term unsecured debt stating that in today's increasingly
competitive environment which electric systems face and the changing mix of
holding company businesses, such an issuance met the requirements of the Act.
__________________
See, e.g., Northeast Utilities, Holding Co. Act Rel. No. 19519
(stating an expectation that the required funds would be raised on a
permanent basis through the issuance of equity "if and when [the registered
holding company would be] in a position to do so on satisfactory terms");
GPU, Inc., Holding Co. Act Rel. No. 16540 (relying on a representation by the
registered holding company that the utility subsidiary companies requiring
the funds would in the future finance their own capital requirements as their
earnings improved).
__________________
104. As was the case in the Southern order, the proposed financings by New
CEI are for a necessary and urgent corporate purpose resulting from the
competitive nature of the energy markets within which New CEI must compete.
In addition, certain non-utility subsidiaries of New CEI are unable
efficiently to secure financing for their operations on their own and thus
must look to New CEI to obtain such funds. Also, compliance with the
provisions of Subparagraph (1) of Section 7(c) would impose an unreasonable
financial burden on New CEI by imposing a more costly and unnecessary means
of raising needed capital. Compliance with the provisions of Subparagraph
(1) of Section 7(c) is not necessary or appropriate in the public interest or
for the protection of investors or consumers.
105. The financings are for necessary and urgent corporate purposes.
Congress has authorized registered holding companies to acquire EWGs, FUCOs
and ETCs and the Commission has authorized registered holding companies
either by rule or order to engage in a variety of nonutility businesses.
(e.g. energy-related companies formed under Rule 58). These businesses are
deemed by the Act to be "consistent with the operation of an integrated
public utility system. "Many of these businesses, unlike utilities, are
often unable to raise funds by themselves on a cost-effective basis. As a
consequence, the Commission, in the Southern Order, found that a prohibition
imposed by a restrictive interpretation of section 7(c)(2)(D) on the use by
electric registered holding companies of securities other than equity and
short-term debt to fund these businesses would unduly burden their
participation in nonutility activities that either the Commission or Congress
have authorized. The Commission recognized as necessary and urgent those
purposes which a holding company finds to be compelling or crucial to its
operations, whether utility or nonutility. The Commission also found that is
prudent to refinance short-term debt when it has been incurred to acquire a
long-term asset and that it is often uneconomical to refinance this debt
through the issuance of securities by the acquired company or the issuance of
holding company common stock.
106. Limiting New CEI's financing options may impose an unreasonable
financial burden. As noted above, in prior financing orders relying on the
Necessary and Urgent Clause, the Commission had concluded that the holding
company could not favorably access the equity markets in order to meet its
financing requirements. The financing cost differential between equity and
either unsecured debt or hybrid securities can be very substantial. Failure
to approve the application would result in a substantial financing cost
burden on New CEI.
107. In addition, exclusive reliance on short-term debt subjects the issuer
to interest rate fluctuations and limits the ability to realize the economic
value of long-term assets. Short-term loan agreements also typically subject
the issuer to more restrictive covenants than are prevalent in long-term
financing. Exclusive reliance on equity will increase the after-tax cost of
capital and will, in the short-term, dilute earnings per share. Although New
CEI intends to also rely on a financing subsidiary to issue authorized
securities, it seeks authority to do so directly in such circumstances it may
deem to be more appropriate in light of circumstances, such as market
conditions and transaction costs. As noted above, in the Southern Order, the
Commission recognized that this sort of financing flexibility is needed by a
registered holding company and that requiring a holding company to issue
equity under circumstances when debt financing may be less expensive could
impose an unreasonable financial burden on the company. In this regard, New
CEI represents that it will not issue any proposed debt security unless it
has evaluated all relevant financial considerations (including without
limitation the cost of equity capital) and has determined that to do so is
preferable to issuing common stock or short-term debt.
108. For the reasons discussed above, the Commission should find that the
issuance of the Proposed Securities is permitted under the Necessary and
Urgent Clause and that such issuance presents no detriment to the interests
protected under the Act
B. Services Among the Nonutility Subsidiaries at Other than Cost
109. Section 13(b) of the Act generally requires that intrasystem sales,
service and construction contracts be performed at cost, "as necessary or
appropriate in the public interest or for the protection of investors or
consumers and to ensure that such contracts are performed economically and
efficiently for the benefit of such associate companies at cost, fairly and
equitably allocated among such companies." Section 13 was "designed to
protect public-utility companies against the tribute heretofore exacted from
them in the performance of service, sales, and construction contracts by
their holding companies and by servicing, construction, and other companies
controlled by their holding companies." (S. Rep. No. 621, 74th Cong., 1st
Sess. 36 (1935). See, also section 1(b)(2) of the Act).
110. Section 13(b), however, also authorizes the Commission to exempt from
the at-cost requirement transactions that "involve special or unusual
circumstances or are not in the ordinary course of business." The Commission
has previously granted exemptions under section 13(b) in circumstances where
a market rate would not "adversely affect consumers." (See, Interstate Energy
Corporation, et al., Holding Co. Act Rel. No. 35-27069, August 26, 1999,
Ameren Corporation, Holding Co. Act Rel. No. 35-27053, July 23, 1999, Cinergy
Corp. Holding Co. Act Rel. No. 35-26984 (March 1 1999), Central and South
West Corporation, et al. Holding Co. Act Rel. No. 35-26887 (June 19, 1998),
the "Exemption Orders"). For example, some orders granting an exemption from
the at-cost requirement involve power projects that (1) do not derive their
income from sales of electricity within the United States, (2) sell
electricity at rates that have been approved by federal or state regulators,
(3) sell electricity to industrial or commercial customers at arms-length
negotiated rates, or (4) sell electricity, but not to associate companies
that are retail public-utility companies, at rates based upon cost of service
and approved by federal or state regulators. The authorization requested is
similar to those the Commission has previously granted "where structural
protections to protect consumers against any adverse effect of pricing at
market rates were in place." (Entergy Corporation, Holding Co. Act Rel. No.
35-27039 (June 22, 1999)). The purpose of the structural protections was to
ensure that "departure from the at cost standard will not adversely affect
consumers." (Cinergy Corp. Holding Co. Act Rel. No. 35-26984 (March 1 1999)).
111. The requested exemption from the "at-cost" requirements of the Act in
the circumstances described in Item 1.J, above is entirely consistent with
Section 13(b) and the rules thereunder. First, as the electric industry
restructures, it is important that the subsidiaries of public utility holding
companies that are involved in competitive, unregulated businesses be free to
conduct those businesses according to the same ground rules as are used in
other competitive industries, including providing services to each other at
prices other than "cost". Also, because the Nonutility Subsidiaries will be
free to obtain services from unaffiliated companies, there will be structural
safeguards in place to permit the Nonutility Subsidiaries to deal with each
other on an appropriate, arms-length basis with respect to services provided
at a price other than cost. In addition, as long as there are structural
safeguards in place to protect ratepayers from any deviation from the cost
standard, market rates charged by the Nonutility Subsidiaries would not
"adversely affect consumers." Nonutility ServCo and the Nonutility
Subsidiaries will adhere to Section 13 of the Act and the Commission's rules
promulgated thereunder with respect to the allocation of their costs to their
customer companies. Any allocation method that is used will be consistent
with the Commission's rules with respect to allocations of costs to
affiliated companies. Any amount billed for services performed by an
affiliate under a service agreement with a Nonutility Subsidiary will be
billed directly to that Nonutility Subsidiary. Nonutility ServCo and the
Nonutility Subsidiaries will keep complete and accurate accounts of all
receipts and expenditures in accordance with the Commission's rules and the
Uniform System of Accounts prescribed by the Federal Energy Regulatory
Commission. The Nonutility Subsidiaries will therefore comply with Rule 93
by following the Commission's System of Accounts set forth in 17 C.F.R. Part
256 and the Federal Energy Regulatory Commission's Uniform System of Accounts
after which the Commission's System of Account was modeled.
112. This authorization requested is similar to other exemptions from the "at
cost" standards of Rules 90 and 91 granted by the Commission. (See,
Interstate Energy Corporation, et al., Holding Co. Act Rel. No. 35-27069,
August 26, 1999, Ameren Corporation, Holding Co. Act Rel. No. 35-27053, July
23, 1999, Cinergy Corp. Holding Co. Act Rel. No. 35-26984 (March 1 1999),
Central and South West Corporation, et al. Holding Co. Act Rel. No. 35-26887
(June 19, 1998), the "Exemption Orders").
C. Inclusion of NU's Consolidated Retained Earnings in New CEI's Calculation
of its Consolidated Retained Earnings for purposes of Rule 53(a)(1)(ii).
113. As stated earlier, at the time immediately before the effectiveness of
the Mergers, it is expected that NU will have CREs of more than $700 million
(at September 30, 2000, NU had CREs of $691 million). New CEI hereby seeks
authority to include the amount of NU's CREs as of immediately before the
Mergers in the calculation of New CEI's CREs for purposes of Rule 53(a)(1).
In addition, on a going forward basis, New CEI hereby seeks authorization and
approval to include the amount of CREs of NU in New CEI's calculation of its
CREs for purposes of Rule 53(a)(1).
D. Compliance With Rules 53 And 54.
114. The transactions proposed herein are also subject to Rules 53 and 54.
Under Rule 53(a), the Commission shall not make certain specified findings
under Sections 7 and 12 in connection with a proposal by a holding company to
issue securities for the purpose of acquiring the securities of or other
interest in an EWG, or to guaranty the securities of an EWG, if each of the
conditions in paragraphs (a)(1) through (a)(4) thereof are met, provided that
none of the conditions specified in paragraphs (b)(1) through (b)(3) of Rule
53 exists. Rule 54 provides that the Commission shall not consider the effect
of the capitalization or earnings of subsidiaries of a registered holding
company that are EWGs or FUCOs in determining whether to approve other
transactions if Rule 53(a), (b) and (c) are satisfied. These standards are
met.
115. Rule 53(a)(1): Immediately following the Mergers, New CEI's pro forma
"aggregate investment" in EWGs and FUCOs as of September 30, 2000 will be
approximately $635.4 million, or approximately 12.7% of New CEI's pro forma
"average consolidated retained earnings" as of September 30, 2000
(approximately $5 billion) not including NU's average CREs as of September
30, 2000 of $638.8 million. (When NU's CREs are included within New CEI's
CRE's, the percentage drops to 11.2%)
116. Rule 53(a)(2): New CEI will maintain books and records enabling it to
identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly acquires and holds an interest. New CEI will cause
each domestic EWG in which it acquires and holds an interest, and each
foreign EWG and FUCO that is a majority-owned subsidiary, to maintain its
books and records and prepare its financial statements in conformity with
U.S. generally accepted accounting principles. All of such books and records
and financial statements will be made available to the Commission, in
English, upon request.
117. Rule 53(a)(3): No more than 2% of the employees of the Utility
Subsidiaries will, at any one time, directly or indirectly, render services
to EWGs and FUCOs.
118. Rule 53(a)(4): New CEI will submit a copy of the
Application/Declaration in this proceeding and each amendment thereto, and
will submit copies of any Rule 24 certificates required hereunder, as well as
a copy of New CEI's Form U5S, to each of the public service commissions
having jurisdiction over the retail rates of the Utility Subsidiaries.
119. In addition, New CEI states that the provisions of Rule 53(a) are not
made inapplicable to the authorization herein requested by reason of the
occurrence or continuance of any of the circumstances specified in Rule
53(b). Rule 53(c) is inapplicable by its terms.
Item 4. Regulatory Approvals.
120. The Connecticut Department Public Utilities Commission ("DPUC") has
issued interaffiliate transaction rules and regulations. The Applicants have
an obligation to comply with such interaffiliate rules and regulations.
121. NYPSC has jurisdiction over the issuance of securities by CECONY and
O&R, other than indebtedness with maturities of one year or less. The DPUC
has jurisdiction over the issuance of securities by CL&P, other than
indebtedness with maturities of one year or less. NHPUC has jurisdiction
over the issuance of securities by PSNH and NAEC, other than indebtedness of
up to one year not exceeding a stated limit. MDTE has jurisdiction over the
issuance of securities by WMECO other than indebtedness with maturities of
one year or less and has jurisdiction over the investment of WMECO funds,
including through the New CEI Money Pool. Pennsylvania Public Utility
Commission has jurisdiction over the issuance of securities by Pike, other
than indebtedness with maturities of one year or less. The New Jersey Board
of Public Utilities has jurisdiction over the issuance of securities by RECO
other than indebtedness with maturities of one year or less. These financing
arrangements subject to the jurisdiction of state agencies are exempt from
Commission jurisdiction pursuant to Rule 52 under the Act.
122. Except as stated above, no state commission, and no federal commission,
other than the Commission, has jurisdiction over any of the proposed
transactions.
Item 5: Procedure
123. New CEI and the Subsidiaries 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. New CEI and the Subsidiaries respectfully request the
Commission's approval, pursuant to this Application, 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. Additionally, New CEI and the Subsidiaries (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
* To be filed by amendment
** Previously filed
(a) Exhibits
C-1 Registration Statement on Form S-4 (incorporated by reference to
File
No. 333-31390)
F-1 Opinion of Counsel*
G-1 Financial Data Schedule**
H-1 Form of Notice**
I-1 New CEI Corporate Chart*
I.2 List of Nonutility Subsidiaries**
J- 1 CEI Investments in EWGs and FUCOs**
K-1 Debt Issuances of CEI Subsidiaries**
K-2 List of CEI Guarantees**
L-1 Proposed New CEI Money Pool Terms**
M-1 Form of CEISCO Service Agreement**
M-2 Service Company Policies and Procedures**
N-1 Form of Tax Allocation Agreement**
O-1 New Hampshire Public Utilities Commission Order No. 23,594,
Docket No. DE 00-009, December 6, 2000
(b) Financial Statements**
Item 7. Information as to Environmental Effects
124. 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 and Commission approval of
this Application. Consummation of the Transaction will not result in changes
in the operations of New CEI, CEI, NU, YES 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: February, 2001
Consolidated Edison, Inc.
(a Delaware Company)
By: /s/ John D. McMahon
John D. McMahon
Vice President and General Counsel,
Consolidated Edison, Inc.
(a New York Company)
Consolidated Edison Company of New York, Inc.
By: /s/ John D. McMahon
John D. McMahon
Senior Vice President and General Counsel,
Consolidated Edison Solutions, Inc.
By:/s/ Paula F. Jones
Paula F. Jones
Secretary
Consolidated Edison Energy, Inc.
By: /s/ Brian Cray
Brian Cray
Secretary
Consolidated Edison Development, Inc.
CED Ada, Inc.
CED/SCS Newington, LLC
CED Generation Holding Company, LLC
CED Management Company, Inc.
CED Operating Company, L.P.
Consolidated Edison Energy Massachusetts, Inc.
CED-GTM 1, LLC
Lakewood Cogeneration, L.P.
CED - Lakewood Inc.
CED Generation Lakewood Company
By: /s/ Andrew W. Scher
Andrew W. Scher
Secretary
Consolidated Edison Communications, Inc.
By: /s/ Edward P. Reardon
Edward P. Reardon
Secretary
Orange and Rockland Utilities, Inc.
Rockland Electric Company
Pike County Light & Power Company
By: /s/ Peter A. Irwin
Peter A. Irwin
Secretary
Northeast Utilities
Western Massachusetts Electric Company
The Quinnehtuck Company
The Connecticut Light and Power Company
Northeast Utilities Service Company
NU Enterprises, Inc.
Northeast Generation Company
Northeast Generation Services Company
Select Energy, Inc.
Mode 1 Communications, Inc.
The Rocky River Realty Company
Northeast Nuclear Energy Company
Select Energy Portland Pipeline, Inc.
Charter Oak Energy, Inc.
Select Energy Contracting, Inc.
North Atlantic Energy Service Corporation
North Atlantic Energy Corporation
Public Service Company of New Hampshire
Holyoke Water Power Company
HEC Inc.
Reeds Ferry, Inc.
Yankee Energy System, Inc.
Yankee Gas Services Company
Yankee Energy Financial Services Company
NorConn Properties, Inc.
Yankee Energy Services Company
R.M. Services, Inc.
By: /s/ Cheryl W. Grise,
Name: Cheryl W. Grise,
Title: Senior Vice President, Secretary and General Counsel - Northeast
Utilities Service Company, as Agent for all of the above named
companies.
(Corrected Version - December 8, 2000)
DE 00-009
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, NORTH ATLANTIC ENERGY CORPORATION,
NORTH ATLANTIC ENERGY SERVICE CORPORATION, NORTHEAST UTILITIES AND
CONSOLIDATED EDISON, INC.
Joint Petition for Approval of Merger
Order Approving Settlement Agreement with Additional Conditions
ORDER NO. 23,594
December 6, 2000
APPEARANCES: Robert A. Bersak, Esq. for Public Service Company of New
Hampshire, North Atlantic Energy Corporation, North Atlantic Energy Service
Corporation and Northeast Utilities; Edwin Scott, Esq. and Mary Krayeske,
Esq. for Consolidated Edison, Inc.; New Hampshire Legal Assistance by Alan M.
Linder, Esq. for the Save Our Homes Organization; John Crosier for the
Business & Industry Association of New Hampshire; Representative Jeb E.
Bradley, pro se; Kenneth A. Colburn for the Air Resources Division,
Department of Environmental Services; Associate Attorney General Stephen J.
Judge, Senior Assistant Attorney General Wynn E. Arnold and Foley, Hoag &
Eliot LLP by James K. Brown, Esq. for the Governor's Office of Energy and
Community Services; Michael W. Holmes, Esq., Office of Consumer Advocate on
behalf of residential ratepayers; Morrison & Hecker, LLP by John E.
McCaffrey, Esq. for Staff Advocates and Donald M. Kreis, Esq. for the Staff
of the New Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
On January 18, 2000, Public Service Company of New Hampshire (PSNH), North
Atlantic Energy Corporation (NAEC), North Atlantic Energy Service Corporation
(NAESCO), Northeast Utilities (NU) and Consolidated Edison, Inc. (CEI)
(collectively, Joint Petitioners) filed with the New Hampshire Public
Utilities Commission (Commission) a petition (with supporting testimony and
exhibits) seeking the Commission's approval of the proposed acquisition of NU
by CEI (FN1) PSNH, an NU subsidiary, is New Hampshire's largest electric
utility. NU subsidiary NAEC owns an approximate 36 percent share of the
Seabrook Nuclear Power Plant. NU subsidiary NAESCO is the operator of the
plant. NU, located in Berlin, Connecticut, is also the parent company of
Connecticut Light & Power Co., Western Massachusetts Electric Co. and Yankee
Energy System, Inc. CEI, headquartered in New York City, is the parent
company of Consolidated Edison Company of New York, Inc. and Orange &
Rockland Utilities, Inc., which serve electric, gas and steam customers in
New York, New Jersey and Pennsylvania.
Pursuant to RSA 369:8, II(b)(4), the Commission advised the Joint Petitioners
on February 16, 2000 that it would extend the time for making a preliminary
determination as to whether the proposed transaction would have an adverse
effect on rates, terms service or operation of NU's New Hampshire
subsidiaries. The Commission conducted a pre-hearing conference on March 16,
2000 at which the Office of Consumer Advocate (OCA) entered an appearance on
behalf of residential ratepayers. Thereafter, by Order No. 23,432 (March 27,
2000), the Commission (1) established a procedural schedule to govern the
remainder of the proceedings in this docket, (2) approved petitions to
intervene submitted by the Save Our Homes Organization (SOHO), the Governor's
Office of Energy and Community Services (GOECS) and the Seacoast Anti-
Pollution League, (FN2) and (3) determined that, to the extent the procedural
schedule is inconsistent with RSA 369:8, II(b), the Joint Petitioners had
explicitly waived their rights under the statute. The Commission also noted
that the Joint Petitioners had agreed that the issue of "adverse impact"
within the meaning of RSA 369:8, II(b) would be deferred pending the
Commission's ultimate resolution of the issues in the docket, notwithstanding
any right the Joint Petitioners might otherwise enjoy under the statute to
preliminary determinations.
Discovery and technical sessions ensued (FN3) On May 3, 2000, the Commission
notified the parties that it had engaged Morrison & Hecker, LLP to provide
the Commission with certain assistance in connection with this docket (FN4)
The Commission requested that Morrison & Hecker retain the consulting
services of Richard LaCapra of LaCapra Associates, invoking its authority
under RSA 363:32 to designate both LaCapra Associates and John E. McCaffrey,
Esq. of Morrison & Hecker as Staff Advocates.
On June 12, 2000, Governor Shaheen signed into law Chapter 249 of the Session
Laws of 2000. Among the provisions of Chapter 249 are certain conditions,
codified as RSA 369- B:3, IV(b)(4), that relate to the proposed merger at
issue in this docket. Pursuant to RSA 369-B:3, IV, a determination by the
Commission that these conditions are not satisfied would preclude the
Commission from issuing a finance order in the PSNH Restructuring Settlement
Agreement docket, No. DE 99-099. The Commission has made the requisite
findings. See Order No. 23,550 (September 8, 2000), slip op. at 52-53.
While the Legislature was considering Chapter 249, certain parties to this
docket entered into settlement negotiations. On May 25, 2000 and again on
June 20, 2000, the Commission approved revisions to the procedural schedule
in order to accommodate the ongoing negotiations.
On June 27, 2000, the Joint Petitioners and the Commission Staff
(collectively, the Settling Parties) filed with the Commission a Settlement
Agreement (hereinafter the Merger Settlement Agreement) along with supporting
pre-filed testimony. Pursuant to the procedural schedule as it was then in
effect, certain parties submitted pre-filed testimony either prior to the
filing of the Merger Settlement Agreement or contemporaneously with it,
obviously without an opportunity to comment on the agreement therein.
Accordingly, the Commission gave the non-settling parties until July 6, 2000
to submit pre-filed testimony concerning the Merger Settlement Agreement.
Certain non-settling parties took up this invitation, and the Joint
Petitioners also filed rebuttal testimony pursuant to the original procedural
schedule.
The Commission conducted a merits hearing on July 10, 12, 13, 17, 18 and 19,
2000 (FN5) Pursuant to the schedule established at hearing, the parties that
participated in the hearings submitted briefs and reply briefs. On August 23,
2000, four parties - GOECS, Rep. Bradley, OCA and BIA - moved pursuant to RSA
363:32 to designate Michael Cannata, James Cunningham, Andrew Kosnaski and
Donald Kreis and Amanda Noonan of the Commission Staff (FN6) as advocacy
Staff, thus precluding their serving as advisors to the Commission during its
deliberations. The Settling Parties filed written oppositions to the motion.
The Commission denied the motion on September 11, 2000 (Order No. 23,551).
In addition to requiring this Commission's approval, the proposed merger of
NU and CEI is subject to review by the Maine Public Utilities Commission, the
Vermont Public Service Board, the Connecticut Department of Public Utility
Control (DPUC), the New York Public Service Commission, the Pennsylvania
Public Utility Commission, the Federal Energy Regulatory Commission (FERC),
the Nuclear Regulatory Commission (NRC) and the Securities and Exchange
Commission (SEC). The merger is also subject to antitrust review by the U.S.
Department of Justice and the Federal Trade Commission. The FERC, the NRC,
the Pennsylvania Public Utility Commission, the Vermont Public Service Board
and the New York Public Service Commission have given their approvals; the
Maine Public Utilities Commission approved the merger subject to this
Commission's ruling in favor of it. In a decision rendered in final form on
November 22, 2000, the DPUC endorsed the merger subject to certain
conditions; CEI has issued a public statement to the effect that it would
await the New Hampshire decision (as well as that of the New York Public
Service Commission, subsequently issued) before deciding whether it would
accept the Connecticut conditions. On December 4, 2000, Connecticut's
Attorney General filed an appeal of the DPUC's decision in that state's
Superior Court.
II. THE MERGER
Under the Amended and Restated Agreement and Plan of Merger entered into by
CEI and NU on January 11, 2000, CEI would acquire NU for a base price of $25
per common share, subject to certain adjustments. The Agreement permits NU
shareholders to elect to receive cash compensation or fractional shares of
CEI common stock. NU shareholders opting for stock compensation would receive
a number of shares equal to $25.00 divided by the weighted average trading
price of CEI stock, over 20 trading days randomly selected from a period just
prior to the consummation of the merger, but subject to a `collar' of $36.00
to $46.00. The merger agreement contains allocation and proration provisions
designed to assure that half of NU shares will be converted to cash and the
other half to CEI stock. Further, the value of the transaction to each NU
shareholder would increase by $1.00 per NU share if, prior to the closing of
the merger, NU enters into a binding agreement to sell its Millstone nuclear
assets in Connecticut. Finally, the agreement increases in value to NU
shareholders by $0.0034 per NU share for each day beyond August 5, 2000 that
the merger remains unconsummated. According to the Joint Petitioners, the
aggregate price to be paid by CEI for NU would be not more than $3.8 billion.
Following the merger, NU would become a wholly owned subsidiary of CEI, which
would remain headquartered in New York City. NU would remain the parent of
PSNH as well as its other current regulated subsidiaries. Although CEI is
currently an exempt holding company under the federal Public Utility Holding
Company Act of 1935 (PUHCA), following the merger it would become a
registered holding company under PUHCA. The Joint Petitioners have indicated
that Eugene R. McGrath, currently chairman and chief executive officer of
CEI, would retain his post and that Michael G. Morris, currently chairman and
chief executive officer of NU, would become president of CEI. Mr. Morris and
three other members of NU's board of trustees would join the CEI board of
directors under the merger agreement.
III. MERGER SETTLEMENT AGREEMENT
The Merger Settlement Agreement entered into by the Settling Parties would
authorize the Joint Petitioners to consummate the merger of CEI and NU,
subject to certain additional conditions. Assuming the adoption of those
conditions by the Commission, the Settling Parties stipulated to the merger
being in the public interest under all applicable provisions of New Hampshire
law without setting any precedent as to the appropriate standard of review
for the Commission to apply to future merger proceedings. Under the Merger
Settlement Agreement, the term "acquisition premium" is defined as the amount
to be paid by CEI to acquire NU that is in excess of NU's book value. The
Settling Parties agreed that, consistent with RSA 369-B:3, IV(b)(4)(C), the
acquisition premium shall not in any way increase rates payable by New
Hampshire customers at any time from what they would have been without the
acquisition premium. The Merger Settlement Agreement further provides that
CEI will record the acquisition premium at the holding company level, with
the acquisition premium having no direct or indirect effect on PSNH rates at
any time.
The Merger Settlement Agreement contains provisions related to the sharing of
savings arising out of the CEI/NU merger, keyed to the Synergy Study
commissioned by the two companies at the time they negotiated the merger.7
The Joint Petitioners agreed to guarantee that PSNH ratepayers would be
credited with 75 percent of the merger-related savings as estimated by the
Synergy Study and as are allocable to PSNH, subject to certain temporal
limitations. Specifically, the Merger Settlement Agreement provides that the
mechanism by which this savings-sharing guarantee would inure to the benefit
of PSNH ratepayers would not be implemented until the earlier of (1) the
effective date of the rates established by the first PSNH rate case conducted
by the Commission pursuant to the PSNH Restructuring Settlement Agreement
approved in Docket No. DE 99-099 or (2) January 1, 2004. An additional
provision guarantees that the ratepayer-guaranteed savings would begin
accruing no later than January 1, 2004, earning a return at the rate
stipulated in Docket No. DE 99-099. The Settlement Agreement contains an
attachment (Attachment A) binding the Joint Petitioners to the synergy
study's estimate of $105,874,000 in merger-related savings attributable to
PSNH for the full ten-year period ending in 2010.
Attachment B to the Merger Settlement Agreement comprises a "mechanism agreed
upon by the Settling Parties" for determining that the 75-percent savings-
sharing guarantee has been fulfilled. Pursuant to the mechanism, the
Commission would use a test year to determine PSNH's revenue requirements
under a traditional rate proceeding, based upon PSNH's actual costs. This
revenue requirement would then be adjusted by subtracting 75 percent of the
corresponding year's estimated synergy savings as contained in Attachment A.
Then, to the extent that PSNH is able "to clearly demonstrate that the
synergy savings have actually been achieved," it would be permitted to gross
up the adjusted revenue requirement by up to 100 percent of the estimated
savings from Attachment A. PSNH's return on equity for ratemaking purposes
would be established prior to any cost-of-service adjustments made in
accordance with the sharing mechanism.
Attachment B also contains a set of indicators that the Settling Parties
"felt would adequately demonstrate" the merger-related savings. Under this
so-called demonstration mechanism, savings "would be primarily demonstrated
by setting 1999 Corporate Center Charges related to PSNH transmission and
distribution as the baseline," with these charges adjusted to reflect actual
wage increases since 1999, changes in services or functions, productivity
gains and other items, yet to be determined, that are deemed unrelated to the
merger. Test-year corporate center charges would be subtracted from the 1999
corporate center charges, as adjusted, with the results divided by 60 percent
to reflect that an estimated 60 percent of merger savings are related to
corporate center functions. PSNH would be required to present supporting
documentation for the savings attributable to corporate center charges. The
Settling Parties agreed that if the result of this calculation is greater
than the estimated net savings set forth in Attachment A, PSNH would be
deemed to have adequately demonstrated its entitlement to its share of the
savings, but if the results were less than the level of savings specified in
Attachment A then the gross-up to PSNH's adjusted revenue requirement would
be limited on a pro rata basis to the results of the demonstration.
Attachment B further provides that, "at the time of any future rate
proceedings, intervenors retain the right to argue in favor of or against the
ability of these indicators to actually demonstrate savings."
Under the Merger Settlement Agreement, the Joint Petitioners agree to provide
certain information to the Commission: (1) the journal entries made on CEI's
books to record the merger, (2) the merged company's corporate organization
chart showing CEI, its affiliates and their relationship to each other, (3) a
copy of the report of the Joint Petitioners' transition team within five days
of its acceptance by management, (4) all reports currently required under
existing statutes, rules and Commission orders, (5) access to the books and
records of CEI, its affiliates and service companies whether regulated or
unregulated, as those books and records "relate to PSNH," (6) the proposed
cost allocation methodology related to any CEI service companies at such time
the methodology is submitted to the SEC, plus a cost-impact statement
summarizing the direct and indirect service company cost allocations for PSNH
transmission and distribution operations under both the existing allocation
methodology and the new methodology presented for SEC approval, and (7) any
agreement between PSNH and any affiliated service companies at the time such
agreements are executed.
The Merger Settlement Agreement provides that certain expenditures are
reviewable by the Commission for prudence: (1) merger-related expenses used
to offset merger-related costs, (2) service company costs allocated to PSNH,
and (3) all other expenses currently reviewed by the Commission for prudence.
On the issue of market power, the Joint Petitioners agreed that CEI would
commission a market power study for unregulated electric commodity services
in New England within two years of the merger's consummation, with subsequent
studies performed as ordered by the Commission. Each such study would be
performed by an independent market power expert agreed upon by the Joint
Petitioners and Commission Staff and subject to the approval of the
Commission. Under this provision of the Merger Settlement Agreement, the
Commission Staff would have input into the methodologies used in each study.
Each study would then be submitted to both the Commission and OCA for review.
The Merger Settlement Agreement contains an explicit provision concerning the
Commission's jurisdiction. The Settling Parties agreed that the jurisdiction
of the Commission over the operations of PSNH would not be changed by the
approval of the merger.
With regard to service reliability, the Joint Petitioners agreed that PSNH
would continue to fully fund its transmission and distribution vegetation
management programs through 2010. The Merger Settlement Agreement further
provides that the Commission's previous determinations regarding herbicide
notification and service trimming would remain in effect through 2010, and
that responsibility for the reliability of the PSNH system subsequent to the
merger would be vested directly in an executive officer of PSNH to be located
in New Hampshire. The Joint Petitioners agreed that PSNH would expend funds
at the rate of $900,000 per year for 33 months after the merger in order to
fund capital projects whose sole purpose is to improve system reliability,
with the appropriate level to be determined thereafter in the next PSNH rate
case. The Joint Petitioners agreed that control and operation of PSNH's 34.5
kV system would remain the responsibility of PSNH's Electric Systems Control
Center in Manchester, with functions that are unique to the 34.5 kV system
remaining in New Hampshire. Finally, the Merger Settlement Agreement
explicitly notes that the Settling Parties intend there to be no degradation
in the current level of reliability provided to PSNH customers as a result of
the merger, with any performance targets subsequently provided for by statute
or Commission order taking precedence over the targets in the Merger
Settlement Agreement if they are more stringent.
The Settling Parties agreed that improvements to service quality, as distinct
from service reliability, is a desired outcome of the merger. The Merger
Settlement Agreement includes the following performance targets:
80 percent of all calls shall be answered within 30 seconds. The speed of
answer for calls during major storms, as defined in the PSNH Restructuring
Settlement Agreement pending in Docket No. DE 99-099 shall be tracked
separately.
PSNH shall respond to calls from the Commission's Consumer Affairs Division
on the day received unless Staff indicates at the time of the call that a
later response is acceptable.
PSNH shall resolve 95 percent of customer service complaints forwarded to it
by Commission Staff to the satisfaction of Staff within two weeks. For
purposes of this target, customer complaints do not include claims against
PSNH for property damage or personal injury.
The Joint Petitioners further agreed that all service quality indices
currently employed by PSNH would be retained, that the Joint Petitioners
would provide the Commission and OCA with the results of all customer surveys
performed by CEI or its subsidiaries related to PSNH, and that PSNH would
work with the Commission Staff to implement a "percentage of bills accurate"
performance target for PSNH. The Joint Petitioners agreed to work with
Commission staff to develop a satisfactory service quality report for
submission to the Commission on a quarterly basis. The Settling Parties
agreed that service performance targets would be subject to review by the
Commission at the request of either PSNH or the Commission Staff. Finally,
the Joint Petitioners agreed that any shift in responsibility for responding
to inquiries from PSNH customers to a call center outside of New Hampshire
would be subject to review by the Commission.
On the subject of providing assistance to large commercial and industrial
customers (i.e., customers with estimated loads in excess of 1,000
kilowatts), the Joint Petitioners agreed that CEI would consider the PSNH
service territory on an equal basis with other areas served by CEI when
providing assistance with such customers' business location decisions. The
Joint Petitioners agreed that PSNH would, within 60 days of the end of each
calendar year through 2010, file an annual report describing the number of
inquiries made by prospective large commercial/industrial customers
concerning location decisions. Finally, the Joint Petitioners agreed that
PSNH would file a report within 30 days of the merger's consummation
describing any existing economic development or business retention programs
that have been implemented by any affiliate of CEI or NU, and a similar
report within 60 days of the establishment of any new or proposed economic
development or business retention programs by CEI or its subsidiaries through
2010.
The last subject covered in the Merger Settlement Agreement concerns employee
location decisions. The Joint Petitioners agreed that CEI would consider the
PSNH service territory on an equal basis with the territory of other CEI
subsidiaries when making decisions on the location of corporate functions.
The Joint Petitioners further agreed that PSNH would file an annual report
within 30 days of the end of each calendar year through 2010 describing the
number of corporate function location decisions that have been made, the
territory finally chosen and an explanation for the basis of each decision.
IV. DISCUSSION OF THE ISSUES
A. Standard of Review
Although the Merger Settlement Agreement purports to avoid the issue of what
standard of review applies to the merger, by essentially suggesting that the
merger as conditioned by the agreement meets any standard we might apply, we
find it necessary to state with precision the legal benchmarks by which we
must scrutinize the proposed transaction.
According to the Joint Petitioners, relying on our decision in Eastern
Utilities Associates, 76 NH PUC 236 (1991), and the decision of the New
Hampshire Supreme Court in Grafton County Electric Light & Power Co. v.
State, 77 N.H. 539 (1915), but for the existence of a finance order in Docket
No. DE 99-099, a longstanding "no harm" test would apply to this proposed
merger. The Joint Petitioners note, however, that the issuance of such a
finance order, approving the partial securitization of PSNH's stranded
costs, (FN8) triggers the following provisions:
(A) [The merger] shall be subject to the jurisdiction of the commission
under RSA 369, RSA 374, RSA 378 or other relevant provisions of law, and [the
merger] shall be approved only if it is shown to be in the public interest[.]
(B) In recognition of the extraordinary benefits provided to PSNH from rate
reduction financing [i.e., securitization], should PSNH or its parent company
be acquired or otherwise sold or merged, such merger, acquisition or sale
shall be subject to the jurisdiction of the commission under the standard set
forth in the original proposed settlement [in Docket No. DE 99-099]. The
Commission may approve such a merger if such approval results in the receipt
by PSNH customers of a just and reasonable amount of the cost savings that
result from such merger, acquisition or sale.
(C) No acquisition premium paid by an acquiring company for the assets or
securities of any acquired company, resulting from any such merger,
acquisition or sale, may in any way increase rates at any time from what they
would have been without such acquisition premium[.]
RSA 369-B:3, IV(b)(4). The Joint Petitioners further invoke the Legislature's
determination that "[d]elays resulting from court orders have heightened the
need to consider negotiated settlements to expedite restructuring, near term
rate relief for customers, and customer choice." Laws 1998, ch. 191:1, II.
This legislative determination, the Joint Petitioners suggest, militates in
favor of approving the negotiated settlement at issue here.
GOECS urges the Commission to approve the merger only upon a determination
that it will result in net benefits to PSNH ratepayers and New Hampshire
generally. GOECS concedes that in a "typical" merger, a no harm standard
would apply, but contends that "this is clearly not a typical merger, given
the unique relationship that PSNH has had with New Hampshire, as well as the
recent legislation" authorizing partial securitization of PSNH's stranded
costs. GOECS Brief at 3. Relying at least in part on the testimony given in
this proceeding by Representative Bradley, GOECS takes the position that the
reference to the "public interest" in RSA 369-B:3, IV(b)(4)(A) unambiguously
conveys a legislative direction to apply a "net benefits" test (FN9) Further,
according to GOECS, the Commission should not simply assess net benefits on a
financial basis, but should also apply the standard to the issues of
"reliability, customer service quality, employee protections, charitable
giving, corporate citizenship, community support (including initiatives for
renewable resources, R&D for clean energy technologies, energy education and
low-income protections), assurance of regulatory authority, and governance."
GOECS Brief at 5. In its reply brief, GOECS takes the position that the
language concerning the net harm test in Eastern Utilities Associates was
dicta, and that the Commission should disregard Grafton County as a case
whose discussion of corporate liberties is archaic.
The Staff Advocates concede that, under a traditional "no harm" analysis, the
merger would pass muster at least insofar as the issues Staff Advocates have
addressed are concerned. Like GOECS and the Joint Petitioners themselves,
Staff Advocates urge the Commission to look to RSA 369-B:3, IV(b)(4) for
further guidance, pointing out that the use of the phrase "just and
reasonable" therein vests the Commission with considerable discretion in
allocating merger-related savings between shareholders and customers. Staff
Advocates also direct the Commission's attention to the prescription in the
Restructuring Act at RSA 374-F:4, V that utilities may recover stranded costs
when the Commission deems such recovery to be "equitable, appropriate, and
balanced" as well as "in the public interest." According to the Staff
Advocates, this provides a basis for the Commission to revisit the issue of
PSNH's stranded costs in light of the merger of CEI and NU.
Commission Analysis
In the Grafton County case, decided when utility regulation in New Hampshire
was in its infancy, the New Hampshire Supreme Court found occasion to expound
upon the meaning of the phrase "public good" as it appears in the statute now
codified at RSA Chapter 369. According to the Court in Grafton County,
"public good" within the meaning of
Chapter 369
is equivalent to a declaration that the proposed action must be one not
forbidden by law, and that it must be a thing reasonably to be permitted
under all the circumstances of the case. If it is reasonable that a person or
a corporation have liberty to take a certain course with his or its property,
it is also for the public good. It is the essence of free government that
liberty be not restricted save for sound reason. Stated conversely: it is not
for the public good that public utilities be unreasonably restrained of
liberty of action, or unreasonably denied the rights as corporations which
are given to corporations not engaged in public service.
Grafton County, 77 N.H. at 540. The Court has quoted this passage with
approval as recently as 1984, see Appeal of Easton, 125 N.H. 205, 212 (1984),
and the Commission explicitly relied on it in 1991 when it first declared
that utility mergers within the Commission's jurisdiction should be subject
to a "no harm" test, see Eastern Utilities Associates, 76 NH PUC at 252.
We agree with GOECS that the discussion in Eastern Utilities Associates of
"no harm" versus "net benefits" as the appropriate standard for reviewing
mergers is dicta. In that case the Commission concluded that the petitioner
"ha[d] not met the threshold public interest standard under either the `no
harm' or `net benefit' test." Eastern Utilities Associates, 76 NH PUC at 253.
More recently, we have stressed both the "public interest" standard
articulated in RSA 374:33 and the question of "adverse effect on rates,
terms, service or operation of the public utility in the state" as required
by RSA 369:8, II(b)(1). See Energy North Natural Gas, Inc., Order No. 23,470
(May 8, 2000), slip op. at 15 (concluding, pursuant to those statutes, that
the proposed merger in that case was "lawful, proper and in the public
interest").
Ultimately, it is impossible to use this case to establish or even to refine
a generalized legal benchmark for evaluating utility mergers because, as all
parties recognize, the Legislature has enumerated specific requirements for
the review of this particular transaction in exchange for offering PSNH (and
through PSNH to purchasers of rate reduction bonds) the right to a recovery
of certain PSNH stranded costs under state law. We agree with those who view
RSA 369-B:3, IV(b)(4) as an unambiguous message from the Legislature that we
may approve this merger only upon an affirmative showing by the Joint
Petitioners of certain public benefits arising out of the transaction. We
reach that conclusion not based on anyone's testimony, see Bradley Real
Estate Trust v. Taylor, 128 N.H. 441, 446 (1986), but because RSA 369-B:3,
IV(b)(4)(A) plainly purports to heighten and supplement the scrutiny to which
this transaction would otherwise be subject under "RSA 369, RSA 374, RSA 378
or other relevant provisions of law" by additionally advising that the
proposed combination "shall be approved only if it is shown to be in the
public interest[.]" At a very minimum, the referenced antecedent law required
a "no net harm" analysis; to suggest that the Legislature's additional
reference to a required public interest showing does not heighten the
scrutiny would be to reduce the clause to meaningless surplusage.
In light of the foregoing, we have reviewed the proposed Merger Settlement
Agreement in conjunction with the entire record and, for the reasons
discussed below, conclude that if certain modifications are implemented, the
agreement will result in a merger that yields net benefits for New Hampshire
ratepayers and is otherwise consistent with all applicable requirements of
New Hampshire law, including RSA 369-B:3, IV.
B. Acquisition Premium
There appears to be little dispute concerning a central issue in the case:
the extent to which CEI should be able to recover from PSNH ratepayers the
acquisition premium that CEI proposes to pay in order to gain control of NU
and its subsidiaries. The Joint Petitioners have repeatedly reaffirmed that a
key aspect of the Merger Settlement Agreement is their assurance that "no
acquisition premium will directly or indirectly affect PSNH's rates." Initial
Brief of Joint Petitioners at 5. Staff notes that, while the Joint
Petitioners provided ambiguous statements earlier in the proceeding regarding
their proposed treatment of the acquisition premium, ultimately the Joint
Petitioners "unambiguously and irreversibly committed themselves to below-
the- line treatment of the acquisition premium . . ., so that the existence
of the acquisition premium will neither increase rates nor stand in the way
of a rate decrease that would otherwise take effect." Staff Brief at 5.
Representative Bradley urges the Commission to reaffirm the prohibition on
acquisition premium recovery in its final order. The Staff Advocates likewise
endorse the prohibition, but argue that such an outcome is clearly required
under the recently enacted RSA 369-B:3, IV(b)(4)(C) and, thus, the Joint
Petitioners' commitment to non-recovery of acquisition premium does not, in
itself, represent a concession that the Commission should weigh in favor of
approving the merger.
Commission Analysis
We agree that New Hampshire law precludes CEI from recovering the acquisition
premium from New Hampshire ratepayers in any manner, either by increasing
rates or by failing to pass along a rate decrease. As already noted, RSA 369-
B:3, IV(b)(4)(C) places such a limitation specifically on the sale of PSNH or
its parent company. The Legislature adopted this as an explicit quid pro quo
for the securitization of certain of PSNH's stranded costs. See RSA 369-B:3,
IV(b) (precluding Commission from issuing finance order approving
securitization plan absent determination that certain conditions are met,
including above-described condition relating to acquisition premium). As
noted, supra, we have already issued a finance order in docket No. DE 99-099
certifying that these conditions have been met. See Order No. 23,550
(September 8, 2000), slip op. at 53. Thus, whatever our treatment of an
acquisition premium may have been in other merger cases, here we are
constrained to impose an outright ban on the recovery of an acquisition
premium, now or in the future, in connection with the merger of CEI and NU.
In that regard, we are aware that an issue has arisen in the analogous
proceeding before the Connecticut Department of Public Utility Control
concerning the extent to which retail electric customers of NU's subsidiaries
in that state could ultimately be required to compensate CEI for some portion
of the acquisition premium if the FERC approves such treatment at the
wholesale level. We do not believe this can become an issue in New Hampshire.
In Docket No. DE 99-099, PSNH has indicated its acceptance of the
securitization conditions imposed by the Legislature, including the outright
ban on any recovery of acquisition premium from PSNH ratepayers. Thus, PSNH
or its parent(s) would be stopped from arguing in a future proceeding, either
on supremacy grounds or otherwise, that a FERC-approved treatment of some
portion of the acquisition premium arising out of this transaction should
result in New Hampshire ratepayers seeing the premium reflected in any way in
their rates.
C. Savings Sharing
The hearings generated relatively little dispute among the parties that, as a
general proposition, it is just and reasonable to share merger-related
savings by crediting 75 percent of the estimated savings to ratepayers, 25
percent of estimated savings to shareholders and any actual savings in excess
of the estimates to ratepayers, as proposed by the Merger Settlement
Agreement (FN10) The only outright objection came from OCA. In his prefiled
testimony on the Merger Settlement Agreement, Kenneth Traum of OCA
characterized 75 percent as "obviously better for customers
than a lower percentage." Exh. 56, 2:10-11. But Mr. Traum nevertheless
refused to concede that any departure from traditional cost-of- service rate
making principles is justified. Thus, OCA argues in favor of ratepayer
retention of 100 percent of merger-related savings, with incentives for the
achievement of those savings, if any, coming through return on shareholder
equity. Plainly, however, the Legislature's reference to the "receipt by PSNH
customers of a just and reasonable amount of the cost savings that result"
from the merger, see RSA 369- B:3, IV(b)(4)(B), reflects a determination that
a departure from traditional cost-of-service principles may be justified here
in the interest of, inter alia, enhancing the incentive for the Joint
Petitioners to create the savings that can then be justly and reasonably
passed on to customers.
In the context of this statutory requirement for just and reasonable sharing
of merger-related savings, the Joint Petitioners stress that the Merger
Settlement Agreement "guarantees that customers will receive savings -
regardless of whether the projected synergies actually produce the expected
lower costs." Joint Petitioners' Brief at 4-5 (emphasis in original).
According to the Joint Petitioners, customers "will receive a minimum of
$74.8 million in savings." Id. at 5, citing prefiled testimony of Staff
witness Andrew Kosnaski, Exh. 31, 17:15. In the view of the Joint
Petitioners, this guarantee exceeds the statutory requirement because RSA
369-B:3, IV(b)(4)(B) requires the sharing of savings that "result" from the
merger, whereas the Merger Settlement Agreement shares estimated savings
whether they ultimately occur or not. And to those who would suggest that the
amount of savings to be guaranteed ratepayers is insubstantial, the Joint
Petitioners point out that, assuming annual sales of approximately 7,000
gigawatt-hours and a delivery charge of $0.028 per kilowatt-hour, the shared
merger savings will represent nearly eight percent of PSNH's post-
restructuring delivery service charges.
Mr. Kosnaski testified on behalf of Staff that the Joint Petitioners'
estimate of merger-related savings appears to be reasonable. According to Mr.
Kosnaski, the Joint Petitioners estimate that their merger-related synergies
will comprise roughly seven percent of their annual operations and
maintenance expense, which is very close to the median and mean expectations
in other comparable transactions between electric utilities. Exh. 31, 11:6-
10. Mr. Kosnaski further testified that eight percent of the estimated
synergy savings from the overall merger were allocated to PSNH, based on
proportions of revenues and assets. Id. at 14:4. According to Mr. Kosnaski,
his estimate of $74.8 million on sharing guarantees over the ten-year period
will have a present value of $46.9 million at the time the sharing begins.
Id. at 17:7- 9.
GOECS expresses a concern about a "possible disconnect" between the guarantee
of 75 percent of estimated merger-related savings and the actual mechanism by
which the Merger Settlement Agreement would deliver those savings to PSNH
customers. On behalf of GOECS, John Antonuk criticizes the Merger Settlement
Agreement for relying on rate cases to generate the savings sharing,
contending that "[t]here is no assurance that rate cases during the remaining
seven years will occur often enough to capture the increase in savings that
the [Joint Petitioners] project." Exh. 27 at 3:67-68. Mr. Antonuk praises the
Demonstration Mechanism contained in Attachment B to the Merger Settlement
Agreement as a "good-faith attempt," but he goes on to say that the proposed
mechanism fails to assuage his concerns "about how hard it is to verify
PSNH's entitlement to the potential $25 million in additional revenues that
it may obtain under the merger settlement agreement." Id. at 4:82-85.
At hearing, Mr. Morris testified on behalf of the Joint Petitioners that,
whatever the virtues of the mechanism set forth in Attachment B,
whenever we get to that ultimate undertaking, I have every faith that the
Commission Staff and the ratemaking group inside of PSNH will come to some
reasonable way to ensure that [i.e., ratepayer receipt of guaranteed merger
savings] happens. It's a guarantee. We'll make sure that happens. That's what
the word means.
Tr. III, 150:12-17. GOECS expresses "relief" that Mr. Morris made such a
commitment under oath at hearing. GOECS Brief at 12. However, GOECS still
asserts that a straightforward "merger credit" is a simpler and more reliable
method for delivering the savings to ratepayers. In its reply brief, GOECS
takes the position that the Commission should condition approval of the
merger on the Joint Petitioners guaranteeing that PSNH ratepayers will
receive $82,345,000 in merger-related savings - calculated by taking 75
percent of the $105,874,000 in merger-related savings that Attachment A to
the Merger Settlement Agreement sets forth, less 75 percent of PSNH's eight
percent share of the $49 million in transaction costs that GOECS contends
should be the exclusive responsibility of NU and CEI shareholders. FN11)
On behalf of OCA, Mr. Traum argues in favor of traditional cost-of-service
ratemaking principles that would return 100 percent of any merger-related
savings to ratepayers, absent regulatory lag (allowing PSNH to keep some
portion of the savings through delays in the regulatory process) or the
institution of performance-based ratemaking (which would explicitly tie rates
to the achievement of certain service-related objectives). OCA is
particularly concerned about the demonstration mechanism, expressing the view
that PSNH and its parents have every incentive to pour considerable resources
into gaming the mechanism so that PSNH is able to retain (through its share
of merger-related savings under the Merger Settlement Agreement) savings that
would ordinarily inure to ratepayers in connection with divestiture,
securitization, NU's acquisition of Yankee Gas in Connecticut, productivity
gains, etc.
BIA analogizes the process of overseeing the merger savings guarantee to the
process of selling PSNH's generation assets. According to BIA, just as it is
necessary to have an independent expert oversee the sale process, so should
the Joint Petitioners be required here to fund an "independent verification
process" to be managed by the Commission. BIA Brief at 2.
Commission Analysis
We note at the outset that, despite the reference in parties' arguments to
"75 percent of savings," we make no finding that the $74.8 million in savings
passed through to consumers represents 75 percent of the allocable savings
that actually will be realized. Indeed, given regulatory lag and the general
uncertainty of merger savings, $74.8 million may well represent more than 75
percent of the total savings allocable to PSNH consumers. The question
becomes whether the amount of guaranteed savings to consumers is just and
reasonable. We conclude that the Settlement Agreement's guarantee of $74.8
million in savings passed through to PSNH customers is consistent with the
public good, and constitutes a just and reasonable provision of savings to
ratepayers, as required by RSA 369-B:3, IV(b)(4)(B).
We deem it laudable that CEI is willing to guarantee that ratepayers will
receive benefits regardless of whether predicted savings actually
materialize. Despite the flurry of utility mergers occasioned by
restructuring and other factors, no other utility with operations in New
Hampshire has been willing to make such a commitment. We will hold the Joint
Petitioners to their word that the guarantee applies whether or not the
anticipated savings are actually achieved in whole or in part. We also note
that the savings sharing mechanism provides an incentive for CEI to maximize
the savings. This is because, during the initial ten-year period after
consummation of the merger, CEI is able to retain savings realized over the
initial $74.8 million passed through to customers, up to a limit of $31
million.
Further, we agree with those parties who take the position that the guarantee
is only meaningful if we make clear that the actual receipt by customers of
their $74.8 million must occur, even if the mechanisms set forth in the
Merger Settlement Agreement prove inadequate to the task. The record here
contains only speculation that the good faith effort to arrive at a savings
sharing mechanism will not achieve the desired objective. Nevertheless,
phenomena such as regulatory lag and gaming are real. We wish to make it
understood, therefore, that we will hold Mr. Morris to his word on behalf of
the Joint Petitioners that a guarantee really is a guarantee, and that PSNH
ratepayers will actually receive the merger-related savings to which they are
entitled under the Merger Settlement Agreement that we approve today with
conditions. Further, we stress that part of what we deem the Joint
Petitioners to have guaranteed is that ratepayers will retain any savings
actually achieved that are in excess of 100 percent of those estimated in the
Synergy Study.
As noted by Mr. Antonuk, the Demonstration Mechanism appended to the Merger
Settlement Agreement represents a good faith effort by the Settling Parties,
as well as the other intervenors that participated in the discussions, to
confront the challenging task of making good on the guarantee offered by the
Joint Petitioners. Because, in our opinion, the record establishes no basis
for determining at this point that the mechanism is flawed, we presume that
the mechanism is viable. But we stress that we deem the Joint Petitioners'
guarantee to be absolute and will not hesitate to order a different mechanism
should that become necessary in order to make the guarantee effective. In
that regard, we do not agree with BIA that it is necessary for us to create a
special process for independent verification of merger-related savings. We
believe that Staff, employing outside consultants if it becomes necessary,
can discharge this function satisfactorily.
Our last general point concerning the guaranteed sharing of merger-related
savings concerns executive separation costs. As is made clear by Attachment A
to the Merger Settlement Agreement, the Joint Petitioners have agreed to
exclude $12,465,000 in executive separation costs from the calculation of
guaranteed merger-related savings to be passed on to New Hampshire
ratepayers. The Merger Settlement Agreement itself makes clear that expenses
relating to executive severance "shall not be recovered from New Hampshire
customers either directly or indirectly." Exh. 1 at 6, IV(8). In his
testimony, Staff witness Cunningham explained that the executive severance
costs were deemed to be "disproportionate." Tr. VI, 62:12 and 18. In other
words, the benefits to ratepayers, if any, of these payments do not bear the
appropriate relationship to the size of the payments in order to justify
ratepayers being responsible for them, either directly or indirectly. No
party appears to disagree with this proposition. In these circumstances, we
expressly condition our approval of the Merger Settlement Agreement on
ratepayers not being responsible, either directly or indirectly, for any
portion of the executive separation costs the Joint Petitioners incur as a
result of the merger.
D. Savings-Sharing During Initial 33-Month Period; Transaction Costs
One of the most contentious issues to emerge at the hearings in this docket
concerns the sharing of merger-related savings during the 33 months following
the consummation of the merger. Messrs. Hyman Schoenblum and Stephen Hall, in
prefiled testimony submitted on behalf of the Joint Petitioners, note that
there is no "formal tie" between the initial 33-months of retail competition,
during which PSNH delivery service rates would be fixed at $0.028 per
kilowatt-hour, and the similar period under the Merger Settlement Agreement
during which CEI would be able to retain all actually achieved merger-related
savings allocable to PSNH. See Exh. 5, 5:124-127. However, as Mr. Hall noted
at hearing, the effect of such a provision would be to permit PSNH to retain
any merger-related savings during the 33 months, thus reducing its costs and
relieving some of what PSNH has contended will be a $10-$14 million annual
revenue shortfall during the period of fixed delivery charges leading up to
the first PSNH post-restructuring rate case. See Tr. I, pages 39- 46; see
also Exh. 6 at 4, lines 7-10 (reducing delivery service charge during initial
33-month period to account for merger savings would "only widen [the] gap").
According to Messrs. Schoenblum and Hall, Attachment A to the Merger
Settlement Agreement demonstrates that there are negative savings during the
first two years of the initial period, that as a result "the amount of net
savings during that initial 33- month period is limited, at best," and that
requiring PSNH to pass savings on to customers during this period will
threaten efforts to upgrade the company's investment rating. Exh. 6 at page
4, lines 11-20.
On behalf of Staff, Mr. Cannata noted in his prefiled testimony that, in
light of PSNH's strong belief that it will be grappling with a significant
revenue shortfall during those initial 33 months post-restructuring, "this
item was the lever that enabled such a disproportionate percentage of the
savings to be guaranteed for customers" over the life of the Merger
Settlement Agreement. Exh. 33 at page 8:2-5.
GOECS argues emphatically that merger-related savings must be shared with
customers immediately. GOECS notes that it did not agree with PSNH's
prediction of a revenue shortfall for the initial 33 months when GOECS and
PSNH were among those in negotiation over the Restructuring Settlement
Agreement, and finds even less reason to agree with such a prediction now,
given what GOECS characterizes as significant increases in PSNH's sales
volumes and a continuing delay in the advent of restructuring that continues
to inure to the financial benefit of PSNH.
In support of its position, GOECS invokes RSA 369- B:3, IV(b)(3), which
provides in part that the Commission may not issue a securitization-related
finance order unless it determines that "[c]ustomer savings [resulting from
PSNH restructuring] shall be not less than $450,000,000, excluding savings
from rate reduction financing and merger savings." According to GOECS, this
reflects a legislative intent that (1) merger savings must be in addition to
any savings related to restructuring and (2) such merger-related savings must
begin flowing to customers without delay.
According to GOECS, a 33-month delay in flowing merger-related savings to
customers results in a reduction in the net present value of the savings by
either $3 million or $6 million, depending on the treatment of the $49
million in transaction costs that GOECS elsewhere argues shareholders should
bear. GOECS rejects the notion that the pass-through of merger savings should
be delayed because most of the costs to achieve the merger will be incurred
during this period. In that regard, GOECS notes that the Joint Petitioners
propose to amortize merger costs over a 40-year period. Thus, according to
GOECS, "[f]rom an accounting point of view, the savings will start
immediately." GOECS Brief at 9 n. 1. GOECS points out that costs to achieve
the merger, as incurred during the initial 33 months, were lower than
anticipated in the merger of CEI and Orange & Rockland Utilities and may also
be lower than anticipated here. Finally, GOECS notes that, in the period
immediately after the consummation of the merger, a great deal of the time
and effort of PSNH employees and NUSCO employees that would normally be
devoted to serving New Hampshire customers will instead be devoted to
integrating their companies with the CEI system and worrying about their
future as employees of the combined system. In these circumstances, according
to GOECS, it is fair to assure that ratepayers begin receiving their
guaranteed 75 percent of merger-related savings right from the consummation
of the deal.
As noted in the prefiled testimony of GOECS witness Antonuk, the mechanism
GOECS proposes for flowing merger-related savings to PSNH customers
immediately is a "merger credit" of 0.5 mils per kilowatt-hour to apply until
the first post-restructuring PSNH rate case. According to Mr. Antonuk, this
will yield approximately $10 million, or 75 percent of the estimated savings
attributable to PSNH over the first three years of the merger exclusive of
transaction costs and executive severance payments. See Exh. 26 at 22-23.
Representative Bradley agrees with GOECS that the ratepayers' 75 percent
share of the merger-related savings should begin flowing immediately, not 33
months after the merger is consummated. He views such immediacy as necessary
under the requirement in RSA 369-B:3, IV(b)(4)(B) that the sharing of merger
savings be "just and reasonable." However, in his prefiled testimony,
Representative Bradley noted that the Joint Petitioners have implied that
savings will not occur in the first 18-24 months after the merger is
consummated. The implication is that the process of consolidation and the
corresponding synergy savings takes this period of time to be implemented.
Such a claim on the part of the Joint Petitioners may be reasonable if
verified by the Commission. Thus, it may be reasonable for the Commission to
proceed by allocating the synergy savings 18-24 months after the completed
merger . . . .
Exh. 47 at 7-8.
The Staff Advocates also take the position that a just and reasonable sharing
of the merger-related savings requires their flow-through to customers during
the initial 33-month period. They point to the testimony of their witness,
Mr. LaCapra, to the effect that $78 million to $117 million represents a
reasonable range of values for PSNH customers to receive (in the form of
shared savings) as a result of the merger. According to the Staff Advocates,
the Merger Settlement Agreement provides only $74.8 million; they attribute
the shortfall to the failure to provide for shared savings during the initial
period. The Staff Advocates urge the Commission to reject the notion that
savings should not flow to customers during the initial period because
incurred costs to achieve the merger will be significant during the period.
The Staff Advocates estimate net savings during the period to be $5.1 million
and, as did GOECS, they point out that, because the Joint Petitioners propose
to amortize the costs to achieve the merger, ratepayers will not escape these
costs simply by eschewing their share of merger-related savings during the
initial period.
The Staff Advocates dispute the Joint Petitioners' contention that reducing
the PSNH delivery service charge during the 33-month initial period would
only widen an already-expected revenue shortfall of between $10 and $14
million. The Staff Advocates point out that cost-savings would reduce any
revenue shortfall absent an offsetting rate reduction. Thus, the Staff
Advocates argue, as long as the Joint Petitioners are able to retain some
portion of the savings achieved during the initial 33 months, any revenue
shortfall would narrow rather than widen. The Staff Advocates point out that
the Commission never found that such a shortfall exists when it approved the
Restructuring Settlement Agreement in Docket No. DE 99-099.
The Staff Advocates reject any contention by the Joint Petitioners that the
sharing of merger-related savings during the initial period will have any
effect on PSNH's investment rating. According to the Staff Advocates, this is
at odds with the views of Mr. Schoenblum and Staff Witness Kosnaski that,
overall, the merger can be expected to improve the investment ratings of the
NU operating companies.
Additionally, the Staff Advocates draw the Commission's attention to Mr.
Hall's testimony at hearing that "[t]o the extent that there are any savings
[during the initial period], it will be a windfall that wasn't even
anticipated during the restructuring negotiations." Tr., Day I, page 44,
lines 4-5. In the view of the Staff Advocates, PSNH and its corporate parents
should not be permitted to retain a windfall. Their position is that "[t]he
merger savings are a new and separate source of value that PSNH should not be
permitted to retain based upon claims that it cannot afford to live with the
deal it made with the State in the Restructuring Proceeding." Staff Advocates
Brief at 12.
The Staff Advocates take exception to the views expressed by Messrs.
Schoenblum and Hall in their prefiled rebuttal testimony to the effect that,
because the Restructuring Settlement Agreement does not provide for an
adjustment to the delivery service charge during the initial period in the
event of a merger, the Commission is precluded from ordering such an
adjustment here. See Exh. 6 at page 5, lines 1-12. The Staff Advocates
characterize this argument as a "red herring," pointing out that the
Commission determined in Docket No. DE 99-099 that there had been no meeting
of the minds among the parties to the Restructuring Settlement Agreement
concerning the effect of the merger on the restructuring issues decided in
that docket.
Finally, the Staff Advocates contend that nothing in RSA 369-B or other
provisions of the chapter law with which RSA 369-B was enacted precludes a
merger-based adjustment of PSNH's delivery rates during the initial period.
Under RSA 369-B:3, IV(b)(5), the Commission in its securitization finance
order was required to determine that "[t]he delivery service charge . . .
shall be fixed for a period of 33 months from competition day at $0.028 per
kilowatt-hour[.]" According to the Staff Advocates, even assuming that this
provision precludes a reduction in the delivery service charge, the
Commission could use other mechanisms (e.g., a reduction in stranded cost
charges) to pass merger-related savings on to customers during the initial
period.
BIA agrees with those parties who seek sharing of merger savings immediately.
According to BIA, it is important to the state's business community to bring
PSNH's electric rates to the regional average as quickly as possible.
In rebuttal, the Joint Petitioners make two points. First, they contend that
nothing in RSA 369-B:3, IV(b)(4)(B) requires a specific time period or a
specific amount with regard to the just and reasonable sharing of merger
savings. Secondly, they essentially offer a more specific variation on Mr.
Cannata's point that ratepayers receive real value in exchange for foregoing
merger savings during the initial period. According to the Joint Petitioners,
if one is to "correct" the savings calculations to allow for flow-through of
savings during the initial period, then ratepayers would have to give up
these concessions made by the Joint Petitioners: $63.4 in gas-supply savings
that are not really allocable to PSNH (because PSNH has no gas operations and
gas-related savings in the merger overall are attributable to NU operations
in other states) and the use of an 8 percent allocation figure to compute
PSNH's share of the merger savings when, in fact, PSNH's true share is really
7.8 percent. According to the Joint Petitioners, these adjustments would
yield a PSNH customer share of $73.7 million in merger savings, $1 million
less than the guarantees contained in the Merger Settlement Agreement as
calculated by Mr. Kosnaski. See Joint Petitioners' Reply Brief at 3, citing
Exh. 31 at 17.
An issue that we deem to be related to savings sharing during the initial 33
months concerns the extent to which CEI may net transaction costs - i.e.,
fees associated with investment bankers, attorneys, accountants and
consultants incurred in connection with the actual consummation of the merger
transaction - against the amount of synergy savings to be shared with
ratepayers (FN12) In his prefiled Rebuttal testimony, Mr. Antonuk contends
that transaction costs should not be deducted from the merger-related savings
to be shared with ratepayers. Mr. Antonuk places these transaction costs in
the same analytical category as the executive severance costs that the Merger
Settlement Agreement would exclude from the savings calculus. According to
Mr. Antonuk,
[t]he benefits of [the merger] transaction flow to NU shareholders who obtain
the acquisition premium and to Con Ed shareowners who achieve value through
the acquisition of NU. Therefore, those costs should be attributed to
benefits that shareowners obtain through the merger transaction, not to
reductions in utility-service cost.
Exh. 27 at 22:439 to 23:440-442. Mr. Antonuk elaborated in his oral
testimony:
Ratepayers don't get the acquisition premium that results from the
transaction, they shouldn't pay the cost of the transaction. If ratepayers
don't get control of NU as a result of the transaction, they should not pay
the costs of the transaction. If you make the transaction costs relevant to
customers, you make the acquisition premium relevant to customers in my
analytical judgment.
Tr. II, 149:15-22.
On behalf of the Joint Petitioners, witnesses Hall and Edward Rasmussen
disagreed with Mr. Antonuk's view of transaction costs. According to the
prefiled testimony of Messrs. Hall and Rasmussen, Mr. Antonuk's position
assumes that in order to achieve synergies and savings, the merger would have
happened anyway. Where savings will be guaranteed under the Merger Settlement
Agreement, the steps needed to accomplish the merger and their related costs
are a prerequisite to achieving the savings. The Joint [Petitioners] have
agreed that the merger-related transaction costs will be booked along with
the Acquisition Premium as a holding company cost; however, if the Commission
decides to pass through the savings from the onset of the merger (which the
Joint [Petitioners] oppose), the costs to achieve the merger should be netted
against any savings realized during this period. The majority of the
transaction costs to achieve the merger are incurred well before the first 33
months is over; therefore, if the Commission does not flow through merger
related savings during the initial period, the majority of merger-related
transaction costs will not be a factor either.
Exh. 6 at 7:3-15. On behalf of Staff, Mr. Cunningham agreed with the Joint
Petitioners, commenting that transaction costs "should be recoverable by the
jurisdictional subsidiaries, because these costs are generating, are the
source of huge amounts of savings that the jurisdictional companies are
achieving. Therefore, out of equity, they should also be given an opportunity
to recover those costs." Tr. VI, 49:19- 24 to 50:1-2. Staff witness Cannata
agreed with counsel for GOECS that treatment of the transaction costs only
becomes relevant in the event that savings are flowed through to customers
during the initial 33-month period, given that the transaction costs will be
incurred during that time. Id. at 51:15-24 to 52:1-18. However, Mr.
Cunningham noted that, for accounting purposes, these transaction costs will
be recorded at the holding company level and amortized over a 40-year period.
Id. at 54:1-16.
Commission Analysis
After careful consideration, we have concluded that it is in the public
interest to accept the provisions of the Merger Settlement Agreement that
defer the sharing of merger-related savings for the first 33 months. While
expressing no view here as to the validity of PSNH's ongoing contention that
it will suffer a revenue shortfall during the period, we accept Staff's
contention that this provision of the Merger Settlement Agreement represents
a reasonable compromise, i.e., the foregoing of a relatively small amount of
ratepayer relief in the short term in favor of long-range guaranteed sharing
of merger savings that is of a greater magnitude than it would otherwise have
been.
We are unable to agree with those parties who contend that RSA 369-B:3,
IV(b)(4)(B) requires the immediate sharing of merger-related savings. This
provision is silent as to timing, simply requiring that the sharing of
merger-related savings be just and reasonable. We conclude that deferring the
pass-through of savings during the 33-month period is just and reasonable, in
the context of the Merger Settlement Agreement as a whole and of the
guarantee of $74.8 million in savings.
The fact that CEI plans to amortize the transaction costs over 40 years for
accounting purposes is of no consequence. GOECS stresses this issue
apparently to bolster its contention that ratepayers are entitled to share in
merger savings immediately regardless of what accounting devices CEI uses.
However, as we have already concluded, we deem the deferral of savings
sharing to be a reasonable compromise in the circumstances.
E. Acquisition Premium and Stranded Cost Recovery
A year ago, when we approved the proposed merger of New England Electric
System (NEES) (parent company of New Hampshire utility Granite State Electric
Company (GSEC)) with National Grid Group plc in Order No. 23,308 (October 4,
1999), we noted that we did not believe that "our statutory mandate to
scrutinize utility mergers permits us to seize on behalf of ratepayers any
portion of the capital gains reaped by the shareholders of the selling
entity." Id., slip op. at 18-19. However, on rehearing, we agreed with OCA
that the Restructuring Act, RSA 374-F, "provides us with the authority to
revisit the issue of [a utility's] stranded cost recovery in appropriate
circumstances." Order No. 23,353 (November 29, 1999), slip op. at 4.
Accordingly, we ruled that our future review of NEES' divestiture of its
nuclear generation assets would "provide an appropriate opportunity to
consider what effect, if any, that the gain on the sale of NEES would have on
the amount of stranded costs associated with GSEC's share of NEES' nuclear
assets."
As it did in the NEES case, OCA takes the position that a crucial and
outcome-determinative relationship exists between an electric utility's
approved stranded cost recovery and any acquisition premium paid for that
utility by an acquiring company once recovery of stranded costs has been
authorized. According to OCA, ratepayers are being forced to bear 84 percent
of PSNH's stranded costs and, therefore, the Commission should "credit" PSNH
ratepayers with 84 percent of the acquisition premium attributable to PSNH.
OCA Brief at 5.
Testifying on behalf of OCA, Peter Bradford expresses the view that the
principle of symmetry of risk and reward requires the Commission to claim a
portion of the acquisition premium on behalf of PSNH ratepayers who have
and/or will be expected to pay PSNH stranded costs. Quoting writings of such
utility experts as Dr. Alfred Kahn and Dr. Kenneth Gordon, and citing cases
from the Maine Supreme Judicial Court as well as Democratic Central Committee
of the District of Columbia v. Washington Metropolitan Area Transit
Commission, 485 F.2d 786 (D.C. Cir. 1973), Mr. Bradford argues that "fairness
and established regulatory principles give the customers [of PSNH] the first
claim on the gains" from the sale of PSNH to CEI. Exh. 57 at 6-9.
Democratic Central Committee concerned capital gains on a regulated transit
company's sale of real estate. The federal appeals court concluded that
"[c]onsumers become entitled to capital gains on operating utility assets
when they have discharged the burden of preserving the financial integrity of
the state which investors have in such assets." Democratic Central Committee,
485 F.2d at 821. (FN13) In its brief, OCA anticipates the argument that a
merger can and should be distinguished from an asset sale on the grounds that
ratepayers are never to be held liable for shareholder losses related to the
fluctuating price of a utility's stock. In essence, OCA contends that the
present transaction is indistinguishable from an asset sale, given that the
once-vertically integrated PSNH is essentially being disassembled - with the
generation assets being, in essence, purchased by ratepayers through the
process of stranded cost recovery and the transmission and distribution
assets being purchased by CEI. OCA labels the proceeds of the latter
transaction as "stranded benefits," OCA Brief at 6, and maintains that
sharing them with ratepayers is simply the logical extension of sharing
stranded costs with customers.
OCA also anticipates that merger proponents will argue that claiming some
portion of the acquisition premium on behalf of ratepayers would have the
effect of preventing such mergers altogether, eliminating synergy savings as
well. According to OCA, the Joint Petitioners should have but did not
demonstrate that this is so, and also failed to meet their burden of proof on
the larger question of whether ratepayers would be better off in the long run
if the merger is allowed to go forward. Further, OCA argues that all of the
anticipated savings in at least one major cost category simply come from
expecting that NU's efficiency level will match that which CEI has already
achieved. In these circumstances, according to OCA, the notion of such
savings being merger-related is illusory because the Commission should be
expecting NU to achieve such economies in any event.
OCA agrees with Staff witness Kosnaski, see Tr., Day VI at 189:12-13, that
claiming some portion of the acquisition premium on behalf of ratepayers may
trigger a situation in which CEI could call off the merger, at least under
its present terms.
The Staff Advocates also support the concept of considering the gains of NU
shareholders as a result of the merger as a basis for recalculating PSNH's
recoverable stranded costs. According to the Staff Advocates, (1) the
Commission in the NEES/National Grid decision specifically reserved its right
to take such action in appropriate circumstances, and (2) nothing in RSA 369-
B or the Restructuring Settlement Agreement precludes such a determination.
Testifying on behalf of the Staff Advocates, Mr. LaCapra expressed the view
that, while cost savings remain a major factor in the current trend toward
mergers in the electric industry, "it is competition, or more accurately, the
fear of competition that is driving the current wave of mergers." Exh. 29A at
25:20-22. In other words, according to Mr. LaCapra, with the advent of a
competitive market in electricity generation, "[m]ergers and acquisitions
enable utilities to position themselves to deal more effectively with
competitive threats and grow their businesses." Id. at 25:22 to 26:1-2.
According to Mr. LaCapra, the nation's electric utilities "will need to
become bigger and more flexible to capitalize on the new business
opportunities." Id. at 26:11-12.
In Mr. LaCapra's opinion, the divestiture of generation assets and attendant
resolution of stranded cost issues has increased the value of electric
utilities at the very time that restructuring has driven them into the merger
marketplace. According to Mr. LaCapra, "[f]inancial analysts and industry
experts agree that the bulk of the risk faced by integrated utilities lies
primarily with the generation function." Id. at 28:21-22. His conclusion:
[T]he very market forces that are purportedly leaving PSNH with stranded
costs, i.e., retail competition, also contribute to the desire for companies
such as NU and CEI to join forces. Thus, if it is found that the gain from
the sale of transmission and distribution assets associated with non-utility
income derived from industry deregulation or the use of utility assets in new
activities or ventures, then basic fairness demands that a portion of the
gain be used to offset losses caused by deregulation.
Id. at 30:20 to 31:1-7.
Mr. LaCapra contends there is precedent for such treatment in the netting of
above-book proceeds from the sale of New England Power's non-nuclear
generation assets against the below-book value of the company's regulatory
assets and nuclear power plants, as well as, generally, the reduction in fuel
costs or base rates to reflect gains on surplus capacity and energy sold into
the unregulated wholesale market. As did OCA and its witnesses, Mr. LaCapra
rejects the distinction between asset sales and merger. According to Mr.
LaCapra, "[regardless of the merits of that argument, the law governing the
determination and recovery of stranded costs by New Hampshire utilities
requires that the outcome be equitable, appropriate and balanced." Id. at
34:4-7.
These views, as expressed by Mr. LaCapra, account for the high end of Staff
Advocates' proposed "reasonable range" of between $78 and $117 million as the
value that PSNH ratepayers should receive in connection with the merger if it
is to be approved. See Staff Advocates Brief at 8. According to the Staff
Advocates, the $117 million figure represents 80 percent of the acquisition
premium attributable to PSNH. Like OCA, the Staff Advocates believe the
ratepayers are entitled to roughly 80 percent of this sum because they are
being held responsible for 80 percent of PSNH's stranded costs.
Citing Burrows v. City of Keene, 121 N.H. 590 (1981), and Appeal of Public
Service Company of New Hampshire, 122 N.H. 1062 (1982), the Joint Petitioners
contend that any recalculation of PSNH's stranded costs to take into account
the acquisition premium in the NU/CEI merger would amount to an
unconstitutional taking without just compensation. According to the Joint
Petitioners, the merger also provides no economic basis for allowing
ratepayers to avoid paying what would otherwise be legitimate stranded costs
because, after the merger, PSNH will continue to exist and continue to
provide service precisely as it did prior to the merger. In the Joint
Petitioners' view, OCA and the Staff Advocates are asking the Commission to
require CEI to pay twice for PSNH's common equity: once to NU shareholders
and second to ratepayers via a write-off of approved stranded costs.
The Joint Petitioners vehemently disagree with Mr. Bradford's articulation of
the so-called symmetry principle. According to the Joint Petitioners, the
symmetry principle is correctly applied when PSNH sells its generation assets
pursuant to the Restructuring Settlement Agreement and applies any gain to
offsetting otherwise recoverable stranded costs. In the view of the Joint
Petitioners, because ratepayers have never borne the risk of losses
associated with declines in the value of the merging companies' securities,
they have no entitlement to any gains associated with increases in such
values.
Commission Analysis
To the extent that any party is arguing that, outside the context of
establishing a utility's level of recoverable stranded costs under RSA 374-F,
we should conclude that ratepayers are entitled to a share of the acquisition
premium from this proposed merger, our previous conclusion in the
NEES/National Grid Group case, quoted supra, must govern. As we said there,
nothing in our enabling legislation permits us as a general proposition to
seize on behalf of ratepayers any portion of the capital gains on a utility's
stock reaped by the shareholders of the selling entity.
With regard to the more specific question of whether we should revisit PSNH's
recoverable stranded costs in light of the acquisition premium in this case,
we conclude that we are precluded from doing so given the unique legal
circumstances in which this proceeding arises. As has already been discussed,
this case is unlike any other merger proceeding in that it arises in the
unique context of the ongoing litigation between PSNH and the State of New
Hampshire concerning restructuring and stranded costs. More importantly, the
case arises in the context of the Legislature's specific consideration of the
relationship between this merger and PSNH stranded cost recovery. Just as the
Legislature is presumed to be aware of then-existing statutes at the time of
an enactment, see Appeal of Public Service Co. of New Hampshire, 141 N.H. 13,
25-26 (1996), as well as the state of the common law at the time, see Appeal
of Hickey, 139 N.H. 586, 588 (1995) (citation omitted), we must assume that
when the Legislature enacted RSA 369-B in June of 2000, it was well aware of
the pendency of this merger proceeding as well as our previous suggestion
that it could be appropriate to revisit a utility's recovery of stranded
costs when the utility is acquired at a premium by another entity, see Cannon
v. University of Chicago, 441 U.S. 677, 697 (1979) (noting, generally, that
"[it is always appropriate to assume that our elected representatives, like
other citizens, know the law"). Presumably bearing these things in mind, the
Legislature created in RSA 369-B:3, IV(b)(4)(B) a specific blueprint for the
Commission to employ in assessing the relationship between PSNH's stranded
cost recovery on the one hand and issues such as the acquisition premium and
sharing of merger savings in this docket on the other. While RSA 369-B speaks
to a multitude of issues relating to the restructuring of PSNH, it is
noticeably silent on the issue of whether an acquisition premium or any
portion of it should be returned to ratepayers. In these circumstances, we
must conclude that the Legislature deliberately opted not to mandate a
reduction in stranded cost recovery to account for the acquisition premium.
See St. Joseph Hospital of Nashua v. Rizzo, 141 N.H. 9, 11-12 (1996) (noting
that, "[n]ormally the expression of one thing in a statute implies the
exclusion of another") (citations omitted).
In so holding, we stress that we do not reach the substance of the argument
of OCA and the Staff Advocates that principles of symmetry and equity would
justify our adjusting recoverable stranded costs when a utility that has
undergone restructuring and then is sold at a price that enables the
utility's shareholders to reap gains through an acquisition premium. We leave
that issue to another case, in which the Legislature has not so explicitly
weighed the equities for us.
F. Market Power
We next turn to the issue of market power. As noted, supra, the Merger
Settlement Agreement calls for CEI to commission a market power study for
"unregulated electric commodity services in New England" within two years of
the merger, with subsequent studies as ordered by the Commission. According
to Staff, these provisions are adequate to address any market power concerns
because nothing in the record suggests that CEI would exercise market power
in the immediate wake of the merger and neither NU nor CEI have acquisition
plans that would make market power a significant concern in the future.
Staff directs the Commission's attention to the following evidence: (1) the
testimony of John Roman of NU that his company plans to retain approximately
1,300 megawatts of generation capacity (out of a total capacity of between
25,000 and 30,000 megawatts for all of New England) following its full
restructuring in New Hampshire, Connecticut and Massachusetts, tr. I, 185:2-
21; (2) the testimony of Mr. Schoenblum on behalf of CEI that, overall, the
combined companies plan to own approximately 2,500 megawatts of capacity, id.
at 186:13; and (3) Exhibit 62, which is the market power study that NU and
CEI submitted to the FERC in connection with that agency's consideration of
the proposed merger. Staff notes that, in the study, antitrust expert William
H. Hieronymus concludes that the merger will result in neither vertical nor
horizontal market power. In this context, vertical market power relates to
the ability of CEI to use its transmission and distribution system to affect
competition in energy markets adversely, whereas horizontal market power
refers to CEI's ability to control energy prices through concentrated
ownership or control of generation resources.
Staff witness Kosnaski also discusses market power issues in his prefiled
testimony. According to Mr. Kosnaski, Staff has a market power concern that
arises out of NU's joint ownership of transmission and distribution resources
combined with its role in the New England Power Pool (NEPOOL). Specifically,
Mr. Kosnaski notes, it may be possible for NU to use its rights within NEPOOL
to discriminate unduly on behalf of the power marketing affiliates of NU or
CEI. However, according to Mr. Kosnaski, this potential market power problem
exists with or without the merger and, in that sense, is not merger-related.
In Mr. Kosnaski's opinion, because both CEI and NU have filed open-access
transmission tariffs as required by FERC, each company is precluded from
favoring the NU/CEI generation or transmission systems over others. Further,
according to Mr. Kosnaski, both NEPOOL and the New York Power Pool have or
are developing congestion management systems that will mitigate any financial
implications of transmission congestion in the regions. Finally, Mr. Kosnaski
cites a study conducted by the Maine Public Utilities Commission concluding
that, based on the Herfindahl-Hirschmann Index, that the New England power
market would be "moderately concentrated" in the summer of 2000. Exh. 31 at
26:3. According to Mr. Kosnaski, NU divestitures since this study have only
tended to lessen the extent to which this market is concentrated.
According to the Joint Petitioners, the merger would actually enhance rather
than reduce opportunities for further retail competition. They dismiss views
to the contrary as speculation. The Joint Petitioners assert that neither CEI
nor NU presently enjoy market power in their respective power pools, NEPOOL
is growing more diversified each day as formerly vertically integrated
utilities divest their generation assets, and the merger will have no effect
on transmission because NU and CEI have turned over management and control of
their transmission systems to the New England and New York independent system
operators (ISOs), respectively.
OCA contends that the merger would not be consistent with the public interest
unless the Commission imposes additional conditions designed to address
market power concerns. Specifically, Mr. Traum testified that the Commission
should either limit CEI to being solely a transmission and distribution
company, with no energy operations, or at a minimum the Commission should
limit CEI to controlling 2,000 megawatts of generation capacity - the extent
of ownership envisioned by Mr. Morris in his testimony in Docket No. DE 99-
099. (FN14)
Mr. Bradford provided extensive testimony on behalf of OCA concerning market
power issues. According to Mr. Bradford, because electricity is already a
highly concentrated industry in which effective competition has not taken
hold, and because a "clear consequence" of the merger would be the
elimination of NU and CEI as competitors in each other's service territory,
the Joint Petitioners have not but should be required to demonstrate that
anticompetitive effects of the merger have been either mitigated or
outweighed by other public benefits. Exh. 57 at 17-19. In Mr. Bradford's
view, particularly because New Hampshire has made enhanced retail customer
choice an explicit objective of electric industry restructuring, see RSA 374-
F:3, II, the Commission "cannot just deregulate entry and step back." Exh. 57
at 20:5-6. He argues that "regulatory commissions seeking to establish
customer choice in sectors where competition does not presently exist
confront a challenge that is fundamentally different from the one that
confronts antitrust authorities." Id. at 19:22-24. According to Mr. Bradford,
quoting the chief of the U.S. Justice Department's antitrust division,
mergers are very difficult to undo after they prove to be anticompetitive and
. . . during a transition to competition, there is unlikely to be any
prospect for meaningful relief after the damage is done. Missed opportunities
for the emergence of competition at the outset of the transition are forever
lost, with potentially substantial social costs.
Id. at 20:20-24. Mr. Bradford posits as the ideal situation a set of merger
guidelines promulgated by the Commission prior to proceedings such as this
one. "In their absence," he contends, "a firm decision defining the public
interest in an individual case like this one serves much the same purpose in
setting a clear precedent for future mergers that will be proposed to this
commission." Id. at 22:15-18.
Testifying on behalf of the Joint Petitioners, economist and consultant
Eugene Meehan dismisses Mr. Bradford's concerns about the competitive effects
of the merger as "speculative" and "illogical." Exh. 58 at 13:8 and 12.
According to Mr. Meehan, for Mr. Bradford's concerns to be valid "one would
have to believe that the economic benefits of retail competition were
contingent upon utilities forming unregulated retail affiliates and becoming
leading competitors in the service territories of neighboring utilities." Id.
at 13:12-15. Mr. Meehan identifies as the benefits of competition "activities
such as efficiently procuring generation in the wholesale market, managing
price and supply risks, providing load control and load management services
and providing customized energy use tracking and billing services." Id. at
13:24-26. He contends that the unregulated affiliates of NU or CEI would not
be in a position to dominate the retail market in New Hampshire by providing
these services.
Mr. Meehan points out that CEI has to date not engaged in any retail
electricity sales anywhere in New England, and that competitors in the New
England retail market "exist across a broad spectrum" from utilities, oil
companies, entities formed especially to participate in the market and so-
called `dot com' companies. Id. at 14:1-13. Thus, Mr. Meehan concludes,
"competition is just beginning and the potential for new entry is vast. Mr.
Bradford fails to consider the potential for entry and the factors that will
likely result in successful entry." Id. at 14:25-27.
In Mr. Meehan's view, the combination of the competitive energy subsidiaries
of NU and CEI will not have a negative effect on customer choice because (1)
there are multiple retailers that will enter the New Hampshire market if
there is a reasonable expectation of profit, (2) CEI's unregulated
subsidiary, Consolidated Edison Solutions, has not applied for a retail
license in New Hampshire and (3) there is no evidence that CEI would have any
special advantage in the New Hampshire market.
Representative Bradley believes that the market power study proposed in the
Merger Settlement Agreement is necessary but not sufficient to address the
market power concerns raised by this docket. According to Mr. Bradley, "it is
an extraordinary leap of faith to believe there is no potential for market
power issues to arise if there are no constraints upon the ability of the
Joint Petitioners to acquire a significant amount of generation in the
future." Bradley Brief at 4. Like OCA, Mr. Bradley would hold CEI to the
2,000 megawatt estimate that Mr. Morris gave in Docket No. DE 99-099,
stressing that he believes that it is also in the public interest for CEI to
move forward with its project (launched independently of the merger) to
construct a 500-megawatt gas-fired power plant in Newington.
In Mr. Bradley's view, the Joint Petitioners' refusal to commit to any market
power constraints beyond the commissioning of a study justifies the inference
"that the Joint Petitioners are preserving their ability to once again become
significant generation providers." Id. at 5. He suggests one of two outcomes:
either an outright limitation on the amount of generation capacity CEI may
own following the merger, or a condition that the Joint Petitioners "accept
any remedial conditions that a market power study finds would be necessary to
achieve a truly competitive market and a level playing field." Id.
Commission Analysis
In our view, it is important to examine market power issues in the assessment
of the public interest implications of this proposed merger. We agree with
Messrs. Bradford and Bradley that a failure to address market power issues
adequately, when the dominant electric utility in New York proposes to
acquire the dominant electric utility in New England in a restructuring-
driven transaction, could easily undermine the very objectives that electric
restructuring was designed to achieve. However, the Joint Petitioners
correctly point out that, because the restructured PSNH is still in the
process of emerging from its vertically integrated chrysalis, it is difficult
if not impossible to assess in any meaningful way the likely effect of the
CEI/NU merger on competitive issues arising in the PSNH service territory. In
other words, we do not agree with those parties contending that we must
definitively resolve market power issues now, before approving the merger.
Our hesitancy is also driven by a concern about the state of the record in
this docket. In our opinion, it is inappropriate to conclude that, because NU
and CEI plan to own a relatively small amount of generation assets in the New
England and New York regional power markets, the potential for market power
is greatly limited. Yet the record here contains little insight beyond those
assertions. And, indeed, the relevant facts themselves are more than subject
to debate because, as OCA vehemently points out, CEI has steadfastly refused
to commit itself definitively to a limit of 2,500 megawatts in capacity that
Mr. Morris currently identifies as the combined companies' capacity target.
What the record notably lacks is any insight, or any facts from which
appropriate insights can be drawn, concerning the manner in which a combined
NU/CEI is likely to operate given the current bidding rules in the New
England and New York ISOs. In the face of this uncertainty, it is not enough
to conclude that market power concerns are satisfied because NU and CEI will
own a relatively small proportion of the regions' generation assets. The
other highly relevant questions concern how NU and CEI are likely to behave
in the market, given the existence of their unregulated energy affiliate or
affiliates, and given their control of much of the two regions' transmission
systems. We stress that we draw no negative inferences about NU and/or CEI in
this regard, concluding only that the record lacks a basis for making an
adequate assessment.
In these circumstances, it is reasonable for the Joint Petitioners to have
agreed as a condition of merger approval to the conducting of a full market
power study two years after the merger, presumably at a time when the
functioning of the regional electricity markets and the merged entity's role
in them can be better assessed. As a condition of merger approval, we will
therefore hold the Joint Petitioners to their commitment to fund a market
power study two years hence for "unregulated electric commodity services in
New England," subject to our understanding that such a study will concern
itself with both horizontal and vertical market power issues as they arise in
the wholesale electricity market that includes New England, (FN15) and
subject to our further understanding that we may order additional studies in
future years as we deem necessary. The Merger Settlement Agreement provides
that each such study "shall be performed by an independent market power
expert agreed upon by the Joint Petitioners and the Commission Staff and
subject to the approval of the Commission." We endorse this language, except
insofar as it may purport to give the Joint Petitioners veto power over the
choice of consultants. The Joint Petitioners may make their views known, but
the Commission will retain the absolute authority to choose the consultants.
Finally, it should be explicitly understood that, as a condition of merger
approval, the Joint Petitioners must agree that the Commission retains the
right to order appropriate market power mitigation measures in response to
any market power study performed pursuant to the Merger Settlement Agreement.
The prophylaxis contemplated by the market power provisions of the agreement
would be illusory indeed if the Commission were to have no ability to address
any issues that are identified by the market power studies for which the
Merger Settlement Agreement so laudably provides.
G. Affiliate Issues
Related to market power concerns are certain recommendations in the testimony
of Mr. Traum of OCA concerning the relations among CEI affiliates after the
merger. Specifically, Mr. Traum recommends that merger approval should be
conditioned on (1) "affiliated interest allocations, including allocations by
the service company," being subject to Commission oversight for ratemaking
purposes, (2) mandated "asymmetric" pricing of transactions between CEI
regulated and unregulated affiliates, (3) an 18-month limitation on the
retransfer of an employee who moves between a regulated and an unregulated
affiliate, and (4) the payment of a "headhunter's fee" when an employee
transfers from a regulated affiliate to an unregulated one. Exh. 55 at 9:15-
22 to 10:1-9. Mr. Traum explains that "asymmetric pricing" means that
the prices for services, products, and the use of assets provided by a
regulated entity to its non-regulated affiliate should be priced at the
higher of fully allocated costs or prevailing market prices, while the prices
for services, products and the use of assets provided by a non-regulated
affiliate to a regulated affiliate should be the lower of fully allocated
costs or prevailing market prices.
Id. at 9:20-22 to 10:1-3.
In addition to the points raised by Mr. Traum in his testimony, OCA in its
brief asks the Commission to condition merger approval on the Commission
retaining the authority to override for ratemaking purposes any cost
allocations established by the SEC. According to OCA, allowing the SEC to
make these determinations in a manner that is binding on PSNH's rates would
effectively prohibit the OCA and other intervenors from participating in such
decisions, given budgetary and other logistical constraints. Further, OCA
strongly recommends that the Commission require CEI to maintain separate
service companies - one for regulated entities and the other for unregulated
ones - as a condition of merger approval. On behalf of Staff, Mr. Cunningham
testified that the establishment of two separate service companies along
these lines is "definitely" an important element in his decision to support
the merger because it addresses his "concerns about affiliated service
companies and the related cross subsidization that could happen." Tr. VI,
169:18-22.
The Joint Petitioners do not address these recommendations in any
comprehensive way. In their reply brief, they note simply that the "current
plan" is to have two service companies in the manner suggested by OCA, but
suggest that to condition the merger on such a structure would be to deny
them the flexibility to implement the most cost effective corporate
structure. Joint Petitioners' Reply Brief at 6-7.
Commission Analysis
We will adopt the recommendation of Messrs. Traum and Cunningham to require,
as a condition of merger approval, that CEI follow through with its present
plans to maintain separate service companies, one to provide services to
unregulated operations and the other to provide service to regulated ones. We
find unconvincing the Joint Petitioners' sole objection to such a condition -
that it would limit their flexibility to achieve maximum cost efficiency. The
testimony of Messrs. Traum and Cunningham provides an adequate basis for
concluding that any hypothetical efficiency losses are outweighed by the
public interest benefits of assuring that PSNH ratepayers are not somehow
subsidizing CEI's unregulated operations through shared service company
costs. With regard to the allocation issue, we agree with OCA that it is
appropriate to impose on this merger the same condition we imposed on NEES
and NGG: that "any SEC or FERC determination relating to the merger or to the
allocation of the acquisition premium shall not be binding on, or have any
precedential effect before, the Commission." See Order No. 23,308, slip op.
at 26. Finally, with regard to the remainder of Mr. Traum's recommendations,
we express no view other than concluding that the issues raised therein are
best addressed in the context of a proceeding considering affiliate
transaction rules rather than a merger.
H. Corporate Governance
In the prefiled testimony he submitted on behalf of OCA, Mr. Bradford relied
upon his experience as former chairman of both the New York Public Service
Board and the Maine Public Utilities Commission to conclude that PSNH "will
undergo a virtual rechartering as it is absorbed into Con Ed." Exh. 57 at
page 23, line 12. According to Mr. Bradford,
[t]he concerns and controversies in electric power over the last three
decades demonstrate that utility outlook and leadership - as well as the
ability of regulators to make their concerns clearly and effectively heard -
has been vital to the economies of New Hampshire and of New England. It is
likely that the larger entity - governed from New York - that will emerge
from this merger will be less responsive to New Hampshire concerns than NU
would have been.
Id. at page 23:16-22.
Other parties and witnesses also commented on the problem of PSNH becoming a
much smaller portion of the operations of its parent company after the merger
than it was as a subsidiary of only NU, as well as the related question of
PSNH being owned by a parent whose New York headquarters is even farther away
from New Hampshire than the already-distant Berlin, Connecticut headquarters
of NU is. Testifying on behalf of SOHO, Mr. Roger Colton spoke of
"remoteness" and "dilution" in the context of PSNH's responsiveness to the
needs of low-income customers when the company's owner is so distant from
those customers. See Exh. 22 at 20-22. On behalf of GOECS, Mr. Antonuk
proposed the creation of a New Hampshire advisory board to provide CEI's
senior management with a New Hampshire perspective. See Tr., Day II, page
104, lines 14-24. Mr. Cannata expressed a similar view on behalf of Staff.
See Tr., Day VI, page 88, lines 17- 24 and page 89, lines 1-8. Representative
Bradley described the lack of New Hampshire representation on the CEI board
of directors as "problematic." Tr. IV, 10:24.
The Joint Petitioners oppose either the creation of a New Hampshire advisory
board for CEI or a requirement that New Hampshire be represented directly on
CEI's board of directors. At hearing, Mr. Hall testified that board
representation would be unnecessary because the merger will have no effect on
the Commission's oversight of PSNH and because PSNH has committed itself to
maintaining an executive officer based in New Hampshire. Tr. I, 181:24 to
182:1-6. The Joint Petitioners further point out that PSNH will maintain its
own board of directors after the merger, which will include New Hampshire
residents who are not employees. According to the Joint Petitioners, the
creation of an advisory board would usurp the authority of PSNH's board of
directors and thus run afoul of the provision in the New Hampshire Business
Corporation Act providing that "[a]ll corporate powers must be exercised by
or under the authority of, and the business and affairs of the corporation
managed under the direction of, its board of directors." RSA 293-A:8.01(b).
Generally, the Joint Petitioners remind the Commission of the New Hampshire
Supreme Court's declaration of "public policy that the owners of a utility do
not surrender to the PUC their rights to manage their own affairs merely by
devoting their private business to a public use." Appeal of Public Service
Co. of N.H., 122 N.H. 1062, 1066-67 (1982).
GOECS favors the creation of an advisory board over mandating New Hampshire
representation on the CEI board of directors. Mr. Antonuk testified that he
do[es] not believe in forcing a company to take into its fold in terms of
making its strategic decisions and even tactical decisions people whose
interests are in essence immitigable, possibly in opposition to the interests
of the company. I don't believe in boards that have constituent
representatives. I think it's an interesting idea but I think it just, from
my understanding of the way boards operate, I think it's just not a
functional arrangement to create. So I think you have to start with the
premise that these should be people in whom the company is willing to place
confidence and trust.
Tr. II, 104:15-24 to 105:1-3. However, in its post-hearing brief, GOECS
points to Exhibit 43 - an NU brochure entitled "Reaching Out to Communities -
to argue that pre-merger NU has evidenced a more demonstrable commitment to
community involvement in its home state than in New Hampshire, adding: "Our
concern here is that, without representation on the Board, this apparent fact
of corporate life will be magnified. And our concerns are increased now that
PSNH is poised to become a relatively smaller piece of an even larger
corporate pie that will be headquartered in New York City." GOECS Brief at
21. GOECS further notes that NU's current board has 11 outside directors,
including two from New Hampshire and one from Massachusetts, and that
Entergy - a utility serving customers in Arkansas, Louisiana, Mississippi and
Texas - has representation from each of those states on its 14-member board.
Commission Analysis
We share the view of those witnesses who contend that there is a danger that
the interests of New Hampshire electric customers, and the public policy
needs of New Hampshire generally, will receive less consideration from a
holding company of which PSNH represents a significantly smaller interest,
and from which New Hampshire is significantly more distant, than the current
arrangement. We accept as a baseline the parties' working assumption that,
under the merger, PSNH will go from being roughly 20 percent of NU to
approximately 8 percent of CEI. See Tr. III, 133:5-23 (colloquy between
counsel for GOECS and CEI Chairman McGrath). In our judgment, it is
inevitable without mitigating measures that the interests of New Hampshire
and its ratepayers will receive less consideration at the parent company
level after the merger than they do now. Thus, it is critical to a
determination that this merger is for the public good that CEI be required to
include New Hampshire representation on its board of directors.
In a sense, we are simply holding Mr. McGrath to the policy he articulated
during his testimony at hearing. Conceding that the CEI board would not
"initially" have a New Hampshire representative following the merger, Mr.
McGrath stated that, at CEI, "we tend to try to have a diverse board, in
terms of, you know, geography from our service territory." We find this to be
sound public policy and will condition the approval of the merger
accordingly. Specifically, we will require CEI to include on its board of
directors one person who is a resident of New Hampshire.
Notwithstanding the Joint Petitioners' implication that such a directive
would improperly usurp corporate autonomy or power, we believe that such
authority is fairly implied from the legislation under which we are reviewing
the proposed merger. See Appeal of PSNH, 122 N.H. at 1066 ("The PUC is a
creation of the legislature and as such is endowed with only the powers and
authority which are expressly granted or fairly implied by statute.")
(citation omitted). We are vested with specific statutory authority under RSA
369:8, II(b)(1) to assure no adverse impact on the "rates, terms, service, or
operation" of PSNH in New Hampshire as a result of this merger, a mandate we
believe compels us to assure that New Hampshire's voice is heard on the CEI
board. From a constitutional standpoint, and even given that CEI is also
regulated by other competent jurisdictions on the federal and state levels,
it is well established that such minimal circumscription of a utility's
corporate autonomy is completely permissible. See, e.g., Northwestern
Electric Co. v. Federal Power Commission, 321 U.S. 119, 124(1944) (affirming
regulatory authority to require utility to maintain books according to
specified system of accounts); Rubin v. Chicago South Shore & South Bend
Railroad, 217 F.2d 177, 181 (7th Cir. 1954) (affirming requirement that
directors of regulated company be residents of state). Accordingly, we will
require CEI to certify to us, within 120 days of the consummation of the
merger, that it has complied with the requirement of a New Hampshire resident
on its board.
I. Low-Income Customers
SOHO has devoted considerable effort to urge the Commission in this docket to
pay particular attention to the needs of low-income customers and the effect
of the merger on such ratepayers. In particular, SOHO proposes that as a
condition of merger approval the Commission require the Joint Petitioners to
create and fund what SOHO describes as a "Community Energy Partnership
Program," which it describes as "a package of remedies that includes energy
efficiency, arrearage forgiveness, low-income advocacy funding, adjunct
community offices and a deployment of the BOSS/Chronicles software program."
SOHO Brief at 18. SOHO is also proposing "a reporting system through which
specifically defined low-income universal service outcomes can be measured in
a post-merger environment." Id.
SOHO contends that certain legal principles require that the merger be
conditioned on relief targeted specifically to low-income customers.
According to SOHO, in assessing the merger, the Commission must "(1)
delineate what the relevant markets are, and (2) determine the impacts of the
merger on each market." Id. at 1.
SOHO acknowledges that the process of market definition is "ubiquitous in
antitrust analysis" but not confined exclusively to antitrust cases. Id. at
2. SOHO additionally distinguishes the market definition process it advances
from the creation of customer classes for ratemaking purposes, contending
that the latter but not the former is a function of cost causation
principles. According to SOHO, "the delineation of an economically relevant
market involves an assessment of the degree of product substitutability." Id.
at 3. According to SOHO, application of these principles requires the
Commission to identify low-income customers as a separate and distinct market
for purposes of evaluating the merger.
Focusing on the language in RSA 369-B:3, IV(b)(4)(B) requiring the receipt by
PSNH customers of a "just and reasonable amount of cost savings that result"
from the merger, SOHO contends that this requirement places New Hampshire
among those jurisdictions that would evaluate this merger according to a
"consumer welfare" standard. SOHO Brief at 7. In turn, according to SOHO, the
consumer welfare standard requires the "passing on" of merger savings to
customers. Id. According to SOHO, assessing how a merged firm will pass on
merger benefits to consumers must take into account not simply price but also
the provision of service.
SOHO contends that its witness, Mr. Colton, presented the only record
evidence concerning the merger's effects on the separately identified market
of low-income customers. According to SOHO, low-income customers constitute a
distinct market because of low elasticity, i.e., the relative unlikelihood
that low income customers would react to price signals by either switching to
a different fuel or reducing consumption. As further evidence of low-income
customers as a distinct market, SOHO points to the industry and public
recognition of this group as a distinct market, and the fact that "the
service demanded by low-income customers is different from the service
demanded by residential customers generally." Id. at 10. Specifically,
according to Mr. Colton:
There are multiple service components that low-income customers use that
distinguish them from the residential market generally. The services provided
through [PSNH] involving the treatment of payment-troubles are more likely to
be used by low-income consumers than by residential customers as a whole. The
services provided through the Company involving the need to make personal
contact with the Company, whether to deal with payment-troubles or to make
monthly payments, distinguish low-income customers from the residential class
generally. The services involving the provision of information about public
bill-paying assistance distinguish low-income customers from the residential
class generally.
Exh. 22, 13:6-14.
SOHO additionally contends that the merger of NU and CEI will have an adverse
impact on the services offered by PSNH to low-income customers. According to
Mr. Colton, PSNH figures show that 70 percent of their customers receiving
fuel assistance through the federal LIHEAP (Low-Income Home Energy Assistance
Program) are in arrears on their payments to the utility, with the average
arrearage at $217. Id. at 42:18-20.
Mr. Colton further testified that consolidation will result in CEI using one
data processing platform, system-wide, regardless of whether PSNH continues
to maintain a call center within New Hampshire. Thus, according to SOHO, "one
impact of consolidation . . . will be to take discretion away from whatever
PSNH customer service representatives remain to deliver the very services
which that 70% of the low-income population rely on." SOHO Brief at 12. In
SOHO's view, this company-wide uniformity will have an impact whenever PSNH
representatives must act within regulations or statutes that allow them some
discretion, such as in the area of security deposits, termination for non-
payment, deferred payment options, etc. SOHO further complains that any
merger-related staff reductions at the PSNH call center or call centers will
have an adverse effect on low-income customers. According to SOHO, this is
especially true given this particular combination of companies because
Consolidated Edison's low-income customers in New York face greater
electricity "burdens" than their counterparts in the PSNH service territory.
Thus, in SOHO's view, the "conclusion is inescapable" that, after the merger,
CEI will be devoting fewer resources to its payment-troubled customers in New
Hampshire. SOHO Brief at 15-16.
SOHO further contends that under the Merger Settlement Agreement as it is
presently drafted, low-income customers would receive a disproportionately
small share of the merger benefits provided to consumers generally. According
to SOHO, the Joint Petitioners' synergy study shows that the "major areas" of
merger-related cost savings include corporate and administrative programs,
corporate and administrative labor, field labor and "administrative and
general variable overhead." Id. at 16. Thus in SOHO's view, it is unfair to
low-income customers to share savings on a per-energy-unit basis because (1)
customer service costs are not incurred on a per-energy-unit basis and (2)
low-income customers use less energy per household than other customers do.
Mr. Colton testified that low-income customers represent 13.5 percent of
PSNH's customer base, but only 5.1 percent of electric usage. Exh. 22 at
31:11-13. Thus, according to Mr. Colton, "[o]n a per thousand dollar basis .
. . if benefits are distributed on the basis of usage (5.1%) rather than
numbers of customers (13.5%), low income customers will `lose' roughly $85."
Id. at 31:13-15.
To redress the problems it identifies with the Merger Settlement Agreement,
SOHO urges the Commission to adopt a three-year series of programmatic
remedies it describes as a "Community Energy Partnership Program." Id. at
32:17. The program would consist of (1) a pilot program, involving the use of
the Benefit Outreach and Screening Software (BOSS) program, with a commitment
to expand its use if the software is found "to successfully deliver benefits
to low-income consumers," (2) a "base load electric energy efficiency program
directed toward low-income customers," (3) an arrearage assistance program,
(4) the funding of a low-income energy advocate "to represent the interests
of low-income customers during the initial years of the merger, as well as
the initial years of a competitive electric industry in New Hampshire," (5)
the funding of three community action agencies to serve as "adjust offices"
for the purpose of resolving payment troubles of low-income customers, and
(6) the implementation of an "Outcome-based Performance Reporting System
(OPRS) through which the customer service outcomes to low-income customers
can be systematically tracked over time." Id. at 33:1-18.
SOHO urges the Commission to impose remedies now as distinct from waiting to
see if the merger has any adverse consequences for low-income ratepayers.
According to Mr. Colton, the necessary "metrics" do not exist to assess
longterm impacts. SOHO Brief at 21. SOHO also contends that it is unnecessary
to "wait and see" if the merger generates the "harm" of "misallocation of
benefits." Id. Finally, SOHO notes that low-income customers are
disproportionately mobile and, therefore, deferring remedies risks depriving
current low-income customers of remedies to which they would otherwise be
entitled.
Finally, although SOHO has proposed financing its remedies out of the merger-
related savings that would accrue during the three years of the program, the
organization stresses that other funding mechanisms could be used, e.g.,
capitalizing the costs and amortizing them over a longer period. According to
SOHO, amortization makes "eminent sense" because its proposed set of remedies
can be viewed as simply additional costs to achieve the merger savings. Id.
at 22.
While not explicitly endorsing SOHO's set of remedies, GOECS takes the
position that "the absence of any assured low-income provisions would only
serve to further marginalize a merger proposal that already falls short of
being in the public interest." GOECS Brief at 18. According to GOECS,
approvals of recent utility mergers in Pennsylvania and Rhode Island have
involved special remedies for low-income customers - as did the recent merger
of Consolidated Edison and Orange & Rockland Utilities in New York.
GOECS asks the Commission to condition the approval of the merger on at least
$225,000 in low-income initiatives, to be treated as among the costs to
achieve the merger that would be borne by the Joint Petitioners. As a basis
for this figure, GOECS draws the Commission's attention to this testimony
from Mr. Antonuk:
[U]nder a newly enacted federal law (contained in the Fiscal Year 2000
Interior and Related Agencies Omnibus Appropriations Bill), effective April
2001, states including New Hampshire will be required, as a condition of
continued receipt of federal funds, to provide a 25 percent match, or forego
all federal Low Income Weatherization Program funds that currently provide
assistance in reducing energy costs to hundreds of low-income households each
year. A commitment of roughly $225,000 per year to qualifying low-income
program activities would thus ensure that New Hampshire could continue to
have access to about $890,000 annually in federal weatherization funds.
Exh. 26, 31:608-616.
This issue of federal matching funds prompted the Commission to pose a record
request of GOECS on October 3, 2000. Through its general counsel, the
Commission asked GOECS to explain "why this [$225,000] amount would or could
not be considered satisfied based upon the other low income expenditures in
effect or planned by the State's utilities (including the anticipated low
income energy efficiency program)?" Letter of 10/3/2000 of General Counsel
Gary Epler in Docket No. DE 00-009. The Commission also asked GOECS to
comment on whether it is certain that the local matching amount could be
provided by a utility-funded expenditure rather than a state-funded one.
Finally, the Commission asked GOECS to state what proportion of the state-
wide total weatherization expenditures under this program would be made for
the benefit of PSNH ratepayers.
GOECS responded on October 10, 2000. According to GOECS, the 25-percent
matching requirement was contained in an appropriations bill passed by
Congress in 1999 with instructions for the U.S. Department of Energy (DOE) to
promulgate the necessary rules. However, GOECS notes, DOE still had not acted
as of the date of its letter even though the requirement is scheduled to take
effect on April 1, 2001. According to GOECS, DOE intends to issue a "grant
guidance" memorandum in December that "should clarify critical questions such
as defining the eligible low-income population." Letter of 10/10/2000 from
Senior Assistant Attorney General Wynn T. Arnold on behalf of GOECS. GOECS
states that it "anticipate[s] that certain utility expenditures will be
countable," but it is not clear how the state must track and verify funds
received from third parties or whether "countable expenditures are based on
the prior year or coming year projections." GOECS points to additional
"confusion" in the fact that, as of October 10, it was not certain what New
Hampshire's share of federal weatherization funds would be for fiscal year
2001. The GOECS letter contains speculation that New Hampshire's matching
obligation would be $253,943. GOECS also notes the possibility that the
fiscal 2001 appropriation for this program may allow states to seek a waiver
of the 25- percent matching requirement in favor of a 12.5 percent local
share.
According to GOECS, there is no question that low-income conservation and
energy efficiency expenditures - as distinct from general affordability
measures - will be the expenditures that will count toward the federal
matching requirement. GOECS notes that traditional utility demand-side
management funds that serve low-income households would count toward the
match, but that the amount of these expenditures is uncertain because the
Commission has not yet rendered decisions in conservation and load-management
dockets for 2001. GOECS notes that, once restructuring has been fully
implemented, "the Commission's decisions relative to the report of the Energy
Efficiency Working Group, and the split of limited system benefits charges
for PSNH, as well as program design and class allocation issues, will further
determine what utility-sponsored programs may exist to meet this match
requirement." Id. According to GOECS, these decisions will likely not have
been made at the time match verifications must be made for the coming year
and, thus, the GOECS request "for some low income commitment as a condition
of merger approval was a means to seek to ensure that no federal dollars
would be lost in this vital program." Id.
GOECS avers in its letter that the state can meet the matching requirements
through utility-contributed funds and in-kind contributions as well as actual
state expenditures. GOECS did not respond directly to the question concerning
the proportion of statewide weatherization expenditures to be made on behalf
of PSNH ratepayers. Rather, GOECS stated in response to this question that "a
utility-specific program designed to serve only PSNH income eligible
customers would still meet the federal match requirement. (FN16)
The Joint Petitioners take the position that SOHO's proposal should not be
adopted. According to the Joint Petitioners, the negative customer-service
impacts described in Mr. Colton's testimony have no support in the record.
The Joint Petitioners point to (1) their commitment to maintain the PSNH call
center in New Hampshire until the Commission grants permission otherwise, (2)
the fact that the Commission's jurisdiction over PSNH will remain unchanged
after the merger is consummated, (3) the existence of customer service
standards in the Merger Settlement Agreement, and (4) the fact that
management for direct customer service functions will remain in New
Hampshire.
According to the Joint Petitioners, the remedies proposed by Mr. Colton are
beyond the normal ratemaking powers of the Commission and thus not within the
Commission's statutory mandate. The Joint Petitioners also direct the
Commission's attention to the Legislature's expressed view in the
Restructuring Act that "[p]rograms and mechanisms that enable residential
customers with low incomes to manage and afford essential electricity
requirements should be included as a part of industry restructuring." RSA
374-F:3, V(a). According to the Joint Petitioners, the existence of this
language reflects a legislative intention to address low-income issues in
restructuring proceedings, as opposed to merger dockets.
The Restructuring Act also authorizes "[a] nonbypassable and competitively
neutral systems benefits charge applied to the use of the distribution
system" to be "used to fund public benefits related to the provision of
electricity." RSA 374-F:3, VI. Such benefits may include "programs for low-
income customers" and "energy efficiency programs," inter alia. Id. The Joint
Petitioners note that when the Legislature enacted RSA 369-B, it fixed the
total PSNH system benefits charge at $0.002 per kilowatt-hour through the
first 33 months from the advent of restructuring, to be divided between low-
income assistance and energy conservation. RSA 369-B:3, IV(b)(6)(B).
According to the Joint Petitioners, this language, along with the requirement
elsewhere in RSA 369-B:3 that merger-related savings be shared with PSNH
ratepayers on a just and reasonable basis, suggests that the Legislature
intended merger-related savings to be shared across-the-board with the needs
of low-income customers receiving special attention, if necessary, only
through the system benefits charge.
Both the Joint Petitioners and Staff question the legal basis for SOHO's
positions. Specifically, they contend that nothing in New Hampshire law
supports SOHO's view that the Commission is obligated to embark upon a
market-identification process yielding a conclusion that low-income customers
are a distinct market requiring specially targeted merger relief. In the view
of both the Joint Petitioners and Staff, SOHO has confused antitrust
principles with the tasks that confront the Commission in evaluating utility
mergers under state law.
To rebut Mr. Colton's assertions, the Joint Petitioners offered the testimony
of Gilbert Gelineau, PSNH's manager of marketing support services and the
company's representative to the Commission's Low Income Working Group and
Energy Efficiency Working Group. According to Mr. Gelineau, the remedies
proposed by Mr. Colton would be duplicative of those recommended by the two
working groups. SOHO responds by taking the position that the Low Income
Working Group's proposed Electric Assistance Program will serve only half the
low-income households in New Hampshire, and that the Energy Efficiency
Working group has estimated it will take approximately 20 years to address
the energy efficiency needs of low-income customers in New Hampshire.
On behalf of the Joint Petitioners, Mr. Gelineau also testified that low-
income customers receive more services from PSNH currently than other
residential customers do, but will nevertheless share equally in merger
benefits. He questions SOHO's baseline assumption that merger-related savings
will flow to customers on a per-kilowatt-hour basis, noting that the savings
sharing mechanism will be applied in the next PSNH rate case, which in turn
will involve allocating all distribution-related costs among customer classes
according to established ratemaking principles. It is further Mr. Gelineau's
testimony that customers with payment troubles will experience no merger-
related service changes because "[m]ost of the merger-related savings will be
achieved through reductions in corporate center functions such as accounting,
treasury, finance and other departments that do not provide the direct
services to customers who have bill payment problems." Exh. 21 at 6:14-16.
With regard to the specific remedies proposed by SOHO, Mr. Gelineau contends
that (1) trained intake workers at social service agencies, not PSNH
employees using SOHO's proposed software, should have responsibility to
inform citizens whether they are eligible for low-income assistance programs,
(2) a low-income customer advocate would be duplicative of the functions of
the Office of Consumer Advocate, (3) PSNH does not gather income information
from its customers and thus could not implement SOHO's proposed Outcome-Based
Performance Reporting System, and (4) the remainder of SOHO's proposed
initiatives are duplicative of other efforts.
In response to the Commission's record request, the Joint Petitioners advise
that they have not done the requisite legal analysis to determine whether the
State could use utility-funded expenditures to meet the matching requirement
of the federal low-income weatherization program. However, assuming that the
answer to that question is yes, the Joint Petitioners contend that no further
relief is justified here because PSNH's present spending on low-income
programs alone already surpasses the $225,000 that GOECS asserts is necessary
to receive full federal funding. Further, the Joint Petitioners contend that
if utility expenditures are relevant to the calculus, it is also necessary to
consider similar spending by other New Hampshire electric utilities. Finally,
the Joint Petitioners point out that, if the Commission were to decide to
split the PSNH system benefits charge authorized by RSA 369-B:3 equally
between low-income and energy efficiency programs, PSNH would thereby
generate approximately $7,153,000 in revenues for energy efficiency
initiatives. According to the Joint Petitioners, this compares to a current
figure of $2,700,000 per year.
On behalf of Staff, Mr. Kosnaski emphatically disagrees with Mr. Colton's
premise that the Merger Settlement Agreement provides a disproportionately
small share of merger-related savings to low-income customers. According to
Mr. Kosnaski, "the agreement accomplishes just the opposite and provides
proportionately larger savings for low income customers." Exh. 31 at 18:14-
15. In Mr. Kosnaski's view, "at a fixed level of consumption, the benefit of
equal per kWh rate reductions increases as income decreases." Id. at 19:3- 5.
Agreeing with Mr. Kosnaski, the Joint Petitioners contend providing merger-
related rate relief on anything other than a per-energy-unit basis would run
afoul of RSA 369-B:3, IV(b)(9), which states that
[a]ny changes in the [PSNH] delivery service charge, stranded cost recovery
charge, transition service charge, systems benefit [sic] charge, or any other
charge between the amounts in the April 19 order [of the Commission,
approving the Restructuring Settlement Agreement] and 24 months after
competition day shall be applied as an equal change in the cost per kilowatt-
hour for all classes to which they apply.
Commission Analysis
Our assessment of the parties' positions and evidence on low-income issues
must begin with the conclusion that SOHO's legal analysis suffers from a
significant flaw. As noted by the Joint Petitioners and Staff, the market
analysis process that SOHO contends is necessary here is a concept derived
from federal antitrust law. In an antitrust case arising under federal law,
market definition becomes essential in ascertaining whether a monopoly
exists. See, e.g., United States v. E.I. duPont de Nemours & Co., 351 U.S.
377, 394 (1956) ("[w]hen a product is controlled by one interest, without
substitutes available in the market, there is monopoly power"). This is not a
case that requires us to discern whether the Joint Petitioners would have
monopoly power, either before or after the merger. Thus, even accepting
SOHO's view that low-income customers comprise a distinct `market,' based on
lack of demand elasticity or for other reasons, as that concept is employed
in antitrust cases like duPont and others cited by SOHO, it does not follow
that applicable New Hampshire law requires us to see that benefits flow to
this `market' in order to approve the proposed merger. We cannot agree with
SOHO's suggestion that when the Legislature mandated merger savings-sharing
that is "just and reasonable," it meant that the Joint Petitioners must
target merger-related relief to particular groups of customers. When, in the
context of restructuring or the regulation of PSNH in particular, the
Legislature believes public policy requires special attention to the needs of
low-income customers, it has shown itself capable of making that view clear.
See RSA 369-B:3, IV(b)(6) (setting PSNH system benefits charge and requiring
that at least some of it be targeted to low-income assistance); RSA 374-F:3,
V(a) ("Programs and mechanisms that enable residential customers with low
incomes to manage and afford essential electricity requirements should be
included as a part of industry restructuring"). Moreover, we agree with Mr.
Kosnaski that the savings-sharing mechanism in the Merger Settlement
Agreement does not provide a disproportionately small share of merger-related
rate relief to low-income customers. Our conclusion in that regard is that,
to the extent that ensuing PSNH rate cases result in merger-related rate
relief on a per-kilowatt- hour basis, the requirement for "just and
reasonable" savings sharing is met notwithstanding any unique characteristics
of low-income customers.
As Mr. Colton persuasively noted in his testimony, low-income customers
generally require more in the way of customer service than other ratepayers,
in the context of requiring representatives of the utility to make
discretionary decisions (about payment arrangements, shutoffs, etc.) that can
have significant implications for the daily lives of the customers involved.
Given that reality, we share Mr. Colton's concern that when, as is proposed
here, a utility becomes bigger and its management more remote, the level of
responsiveness to low income customers and others who require the company's
particular assistance may suffer. In our view, at least in the context of the
record adduced in this case, the answer lies in vigorous enforcement of
service quality standards - an objective contained in the Merger Settlement
Agreement.
Further, the responses to our post-hearing record request make clear that it
is not necessary for us to condition approval of the merger on the Joint
Petitioners funding the state's required match of any federal funds received
under the federal low-income energy assistance program. The Energy Act of
2000, now apparently pending before the President for his signature, repeals
any requirement that federal weatherization funds be matched with state
dollars. Even assuming the continued existence of a matching requirement,
GOECS noted in its response that utility contributions could count toward the
state match; the Joint Petitioners noted that PSNH's existing contribution is
already sufficient to meet any state matching requirement. In these
circumstances, we need take no further action here.
J. Reliability and Service Quality
The provisions of the Merger Settlement Agreement relating to reliability and
service quality generated relatively little controversy during the hearings.
With regard to reliability, Mr. Cannata explained that the issue is "local in
nature" and "currently dealt with on a local basis" under the jurisdiction of
the Commission. Exh. 33 at 5:22-23 to 6:1. According to Mr. Cannata, the
reliability provisions of the Merger Settlement Agreement assure that this
relationship will continue into the future by (1) extending relevant
standards previously imposed on PSNH in two reliability dockets, DE 95-194
and DE 97-034, for an additional ten years, (2) providing that corporate
responsibility for PSNH's reliability will vest in an executive officer
located in New Hampshire, (3) maintaining existing reporting requirements,
and (4) assuring that functions unique to PSNH's 34.5 kV system remain in New
Hampshire. Mr. Cannata notes that the requirements of the two reliability
dockets include fully funded vegetation management programs, herbicide
notifications, trimming programs and certain reliability-related capital
projects.
According to Mr. Cannata, with regard to PSNH's commitment to service
reliability, "[o]ne always has concerns about funding when becoming part of a
larger organization. Those concerns were present when PSNH merged with NU but
did not materialize because of local control. I do not see that as a concern
here for the same reason." Id. at 6:17-19. He notes that reliability problems
could subject PSNH to fines of up to $25,000 per day. Mr. Cannata dismisses
concerns arising out of the outage CEI experienced in the Washington Heights
section of Manhattan in the summer of 1999, noting that "[e]very utility has
an area where reliability could be better despite honest efforts to improve
reliability." His implicit contention is that reliability problems arising in
CEI's underground distribution system in New York City are not likely to
affect reliability in New Hampshire so long as the Commission maintains
strict local oversight of reliability performance.
Ms. Noonan, the Commission's Director of Consumer Affairs, testified that the
provisions in the Merger Settlement Agreement relative to customer service
alleviate the concerns she would otherwise have about the proposed
transaction. Absent such provisions, according to Ms. Noonan, "the quality of
service to New Hampshire customers could be degraded as a result of the
merger due to staffing reductions at PSNH in the functions that deal directly
with customers." Exh. 34 at 3:10-13. However, the service-quality benchmarks
contained in the Merger Settlement Agreement will, in Ms. Noonan's opinion,
both help to ensure service quality and aid the Commission's monitoring of
it. According to Ms. Noonan, "[i]t is important to note that there is no
current requirement for PSNH to report to the Commission on service quality
or to work with the Commission Staff to develop appropriate performance
targets and service quality measurements." Id. at 4:13-16. According to Ms.
Noonan, "[a]s long as responsibility for customer calls remains in New
Hampshire, I believe that customers will see higher levels of service as a
result of the merger." Id. at 5:10-11.
GOECS indicates its assent to the reliability and customer service provisions
of the Merger Settlement Agreement. OCA states that, although it sees no
current reliability problems with regard to PSNH, it is concerned that Mr.
Cannata's testimony at hearing suggests that PSNH's "historic reliability has
been deteriorating." OCA Brief at 16. In particular, OCA directs the
Commission's attention to Mr. Cannata's discussion of Exhibit 37, which
provides PSNH reliability statistics from 1991 through the first quarter of
2000. Mr. Cannata conceded that the reliability indices the Commission tracks
with regard to PSNH have increased over the period, suggesting decreased
reliability. However, Mr. Cannata stated that it is not possible to compare
today's reliability with the company's record from 1991, because the
Commission has been requiring PSNH to increase efficiency over the period.
Tr. VI, 66:19-24 to 67:1-14. Mr. Cannata stressed that the Commission has
"not seen a significant increase in customer complaints" about PSNH's
reliability. Id. at 69:8-9.
According to OCA, the Commission should be "suspicious" of the notion that
the merger would add CEI's expertise to the NU system with regard to
reliability. OCA Brief at 16. OCA recommends that the Commission condition
approval of the merger on the provision of an "extended outage credit," with
the specifics to be developed subsequently by the parties to the docket in
consultation with Staff.
Representative Bradley takes the position that the reliability commitments in
the Merger Settlement Agreement are "helpful" but "do not go far enough."
Bradley Brief at 2. According to Representative Bradley, reliability is a
"significant issue" in the CEI service territory. Representative Bradley
refers to a 1989 steam explosion in Manhattan's Gramercy Park section, a 1998
fire at a CEI generating station on Staten Island in New York, the July 1999
Washington Heights outage, a June 2000 outage on Manhattan's upper east side,
and the steam generator problem that shut down CEI's Indian Point 2 nuclear
power plant in February. According to Representative Bradley, the Commission
must assure itself that similar incidents will not take place in New
Hampshire as a result of the merger. Like OCA, Representative Bradley
believes that the proper course of action is for the Commission to impose an
extended outage credit on PSNH as an additional merger condition. (FN17)
Commission Analysis
In our view, the evidence of record supports a determination that the service
quality and reliability provisions of the Merger Settlement Agreement do not
require further amendment in order for the merger to gain Commission
approval. We note that PSNH has, in recent years, maintained a good track
record with regard to service quality. We will expect PSNH to continue to
maintain excellent service quality and reliability, and we approve the
relevant provisions of the Merger Settlement Agreement subject to the
explicit understanding that the Commission retains the right to take any
appropriate action in the future to assure that PSNH's levels of service
quality and reliability are consistent with the public interest. The Joint
Petitioners should be commended for their commitment not to move the PSNH
call center out of state without Commission approval. We adopt this
commitment as an express condition of merger approval, noting that we will
continue to monitor the operation of the call center closely and reserve the
right to address any customer service issues that may subsequently arise.
We agree with OCA and Representative Bradley that an extended outage credit
may be an appropriate way to assure that an electric utility maintains an
acceptable level of service reliability. The appropriate place to consider
such an initiative is in a proceeding that would apply to all New Hampshire
electric utilities.
K. Renewables, Environment Energy Education and Research and Development
GOECS asks the Commission to order the Joint Petitioners to undertake
"affirmative commitments to continue and expand financial and in-kind support
for initiatives targeted at environmental improvement, research and
development (R&D) of clean energy technologies, and energy education." GOECS
Brief at 20. According to GOECS, PSNH had demonstrated a growing commitment
to these areas through its support of the Wind Resource Assessment Project as
well as the Solar on Schools program. At the same time, GOECS complains that
PSNH's commitment has been "extremely limited" and that the system benefits
charge being imposed as part of the restructuring of PSNH is not currently
slated to fund any renewable energy projects. Id. According to GOECS, this
places New Hampshire behind Connecticut, Massachusetts and Rhode Island in
terms of commitments to the development of renewable energy initiatives.
The Joint Petitioners object to this request, suggesting that such mandated
expenditures would have to be recorded above rather than below the line, and
thus included in rate base.
In a statement presented to the Commission during the merits hearings,
Kenneth Colburn of the Air Resources Division of the Department of
Environmental Services (DES) urged the Commission to condition approval of
the merger on requiring the Joint Petitioners to fund initiatives related to
alternative energy, distributed generation and sustainable development. DES
praises the present commitment of PSNH and NU to such initiatives and
contends that it would be in the public interest to mandate that such
commitment be perpetuated as a condition of merger approval.
Commission Analysis
We agree with the Joint Petitioners that it is not appropriate to condition
the merger on additional expenditures by PSNH on renewable energy projects.
This is largely a concern driven by restructuring, not a merger-related
effect that must be addressed in this docket. However, we do believe it is
appropriate to condition the merger on PSNH continuing to make comparable
expenditures in the areas of renewable energy, energy education, safety
education, community relations and research and development following the
merger, taking into account its smaller size post-restructuring. We also
believe that PSNH must examine distributed generation issues as part of its
effort to insure reliable service and that it will be required by state and
federal law to meet environmental standards.
L. Employee Location Decisions
No party objected to the provisions of the Merger Settlement Agreement
relating to employee location decisions. GOECS points out that Mr. Morris
stated in his prefiled testimony that the headquarters of PSNH would remain
in New Hampshire, that existing labor contracts will be honored and that "it
is likely the impact of the merger on PSNH employees will be minimal." See
Exh. 4, 5:2-4, 7:15 and 8:14-15.
Commission Analysis
We conclude that it is not necessary to add any employee-related conditions,
beyond those contained in the Merger Settlement Agreement.
M. Large Commercial/Industrial Customers
Likewise, there were no objections raised by any party concerning the
provisions of the Merger Settlement Agreement requiring the Joint Petitioners
to consider the PSNH service territory on an equal basis with other
territories served by CEI when providing assistance to certain large
commercial or industrial customers. These provisions also require an annual
reporting of certain contacts between PSNH and such customers, as well as
regular reporting of economic development initiatives undertaken by CEI or
its subsidiaries in other jurisdictions through 2010. According to Mr.
Cannata, the purpose of these provisions is to assure that PSNH will not be
"disadvantaged" in the economic development process and to "allow[] the NHPUC
to monitor the corporate process to satisfy itself in this matter." Exh. 33
at 7:17- 20.
Commission Analysis
We believe the objective articulated by Mr. Cannata is an appropriate one. We
approve this aspect of the Merger Settlement Agreement, making explicit what
is implicit therein, that the Commission can and should require CEI to
exercise comparable levels of effort within New Hampshire as it exercises
elsewhere with regard to the cultivation of large industrial or commercial
customers.
N. Charitable Contributions
GOECS criticizes the Merger Settlement Agreement for lacking "a condition
that [PSNH] maintain or expand its level of charitable giving and corporate
citizenship at the local level." GOECS Brief at 17. Further, GOECS criticizes
CEI for being willing to undertake commitments in this regard in order to
gain approval of its acquisition of Orange & Rockland Utilities, as well as
at the Connecticut Department of Public Utility Control with regard to the
instant merger. GOECS rejects Mr. Morris' contention, expressed at hearing,
that PSNH could not be expected to maintain existing levels of charitable
giving, and other below-the-line public initiatives, because PSNH "is a much
smaller company going forward than it was prior to restructuring." Tr. III,
139:20- 22. According to GOECS, this assertion is unconvincing because (1)
divestiture of PSNH's generation assets still remains to be accomplished, (2)
CEI is willing to maintain existing levels of contributions for other
regulated subsidiaries that are divesting their generation assets and (3)
CEI's unregulated businesses are expected to grow even as the regulated
utilities shrink. It should be noted that Mr. Morris responded on the stand
to the GOECS suggestion that CEI should match here the commitments it made in
Connecticut relative to corporate giving, suggesting that CEI's Connecticut
commitment was "part of the give-and-take of negotiations with a number of
people in the Connecticut process." Id. at 145:18-20.
On behalf of Staff, Mr. Cannata indicated his concern that requiring a
specified level of charitable contributions from PSNH in this or any other
proceeding would be the equivalent of requiring PSNH to write off expenses
that could otherwise be included in its revenue requirement. Tr. VI, 231:24
to 232:1-5. Mr. Cannata also agreed with Mr. Morris' view that expectations
should be adjusted to reflect the downsizing of PSNH. Id. at 232:15-24 to
233:1-5.
Commission Analysis
We do not believe the Legislature has vested us with authority, in this or
any other docket, to require a specified level of charitable giving by a
utility. Accordingly, we decline to adopt the recommendation of GOECS that we
condition merger approval on a specified commitment by PSNH to making
charitable contributions. We do note, however, Mr. Morris' view that "it's
important for companies like Public Service of New Hampshire to continue to
be a good neighbor" and his statement that PSNH "will continue to do good
works." Tr. III, 139:10 to 140:15. We believe this philosophy, while not
reflected in any rules or decisions of the Commission, is appropriate,
laudable and consistent with longstanding corporate tradition at PSNH.
O. Access to Books and Records
Several parties expressed concern about the language in the Merger Settlement
Agreement that commits the Joint Petitioners to providing the Commission with
access to the books and records of CEI and its affiliates "as these books and
records relate to PSNH." Exh. 1, IV:18.
Commission Analysis
This issue requires little discussion. Elsewhere, the Merger Settlement
Agreement makes clear that the jurisdiction of the Commission over the
operations of PSNH will not be changed as a result of the merger. Id. at
IV:24. We will not interpret the Merger Settlement Agreement as limiting in
any way the authority of the Commission or its Staff to inspect all the books
and records of CEI and its affiliates. We agree that in some instances
certain books and records in the possession of CEI or its affiliates may be
irrelevant to matters within the Commission's jurisdiction, but in every
instance it shall be the Commission and not CEI or its affiliates that will
make the relevance determination. Because we expect such inquiries to be
conducted in a manner consistent with the Commission's rules, any concerns
about the confidentiality of such records can be easily addressed at the
appropriate time.
P. Staff Involvement
Likewise, several parties express the view that certain language in
Attachment B to the Merger Settlement Agreement could improvidently limit the
ability of the Commission Staff to advise the Commission fully and
impartially in future proceedings. At issue is the language setting forth
that "at the time of any future proceedings, intervenors retain the right to
argue in favor of or against the ability of these indicators to actually
demonstrate savings." Exh. 1 at 17.
Commission Analysis
Again, this subject requires little discussion. We do not understand the
Merger Settlement Agreement to reflect an effort by the Commission Staff to
bargain away its responsibility to provide fair, neutral and unfettered
advice and assistance to the Commission in the discharge of the Commission's
duties. Indeed, had Staff purported to enter into such an agreement, we would
have concluded that Staff lacked the authority to circumscribe its ability to
provide assistance to the Commission.
Q. "Most Favored Nation" Status
Both Representative Bradley and Mr. Traum, on behalf of OCA, ask the
Commission to condition the merger on New Hampshire being granted what OCA
describes as "most favored nation" status. As Representative Bradley
characterizes it, "[s]hould another state action provide better terms for
customers, than New Hampshire, the Commission should make those improved
terms available to PSNH customers." Exh. 47 at 13.
Commission Analysis
We decline to impose such a blanket condition. The Commission has carefully
monitored the parallel dockets before the other state utility commissions
with jurisdiction over this proposed merger. All have advanced to the stage
where at least a settlement agreement or draft order is in place. It is
apparent that the issues and concerns varied somewhat from jurisdiction to
jurisdiction, (FN18) such that it would be unfair and unreasonable to require
the Joint Petitioners to match here every concession they may have made
elsewhere. We are confident that the Joint Petitioners made no concessions
elsewhere that tend to undercut a determination here that the merger-related
conditions we today approve are not appropriate under applicable New
Hampshire law.
R. Cost of Capital
The last issue we take up is one that was not stressed by any of the parties,
at least in their post-hearing submissions. In his testimony in support of
the Merger Settlement Agreement, Mr. Schoenblum of CEI stated that the Joint
Petitioners expected PSNH's credit rating to be "favorably impacted" by the
merger. Tr. I, 84:19-21. Mr. Schoenblum went on to testify that, "to the
extent that there is an improvement in [PSNH's] credit [rating] and there are
cost savings related to cost of capital, certainly when rates are reset these
cost savings will be reflected in the cost of service." Id. at 175:21-24. On
behalf of Staff, Mr. Kosnaski described this as an "indirect benefit" of the
merger." Tr. III, 66:24. Mr. Schoenblum made clear that this anticipated
benefit of the merger is not reflected in the Synergy Study because it is
"difficult to quantify." Tr. I, 84:19-21.
Reducing PSNH's cost of capital, and thereby providing rate relief to
consumers, is the central justification for the securitization of certain
PSNH's stranded costs as approved in Docket No. DE 99-099. See PSNH Proposed
Restructuring Settlement, Order Addressing Financing Issues, Order No. 23,550
(September 8, 2000), slip op. at 7. Here, although the Joint Petitioners have
made no concrete commitments with regard to the cost of PSNH's capital, we
are mindful that anticipated improvements in the credit rating of PSNH are
clearly among the significant benefits that the Joint Petitioners have touted
in seeking approval of the transaction. Presumably, and as implicitly
acknowledged by Mr. Schoenblum, since the effects of improved capital costs
are not reflected in the Synergy Study and the Synergy Study is the basis for
the savings-sharing mechanism in the Merger Settlement Agreement, when the
merger results in lower capital costs for PSNH there will be corresponding
rate impacts beyond those that are guaranteed in the Merger Settlement
Agreement.
The likelihood that the merger will improve PSNH's credit rating, reduce its
overall cost of capital and thus provide additional rate relief to PSNH
customers is, in our view, a significant element in the determination that
the merger will result in net benefits to New Hampshire ratepayers. We do not
impose specific credit-rating or cost-of- capital targets as a condition of
merger approval. We do, however, place the Joint Petitioners on notice that
we expect this benefit to materialize. In future proceedings where PSNH's
cost of capital is at issue, we expect to hold PSNH and its owners to their
declaration here that a PSNH operating as a CEI subsidiary will fare better
in this regard than PSNH would if it were simply to remain an NU company.
V. CONCLUSION
In conclusion, we wish to commend all parties for the quality of their
participation in this docket. In our view, the Joint Petitioners,
intervenors, OCA, Staff Advocates and Staff made effective and commendable
use of the discovery, settlement negotiation and hearing process to narrow
and focus the issues in a manner that allows us to make an informed decision
based on a thorough record.
We particularly commend the Joint Petitioners for their implicit concession
that additional commitments on their part, beyond those contained in their
original petition, were necessary in order for the proposed merger of NU and
CEI to merit approval under applicable New Hampshire law. Although it is
understandable that some parties criticize the Joint Petitioners for being
unwilling to make further concessions and commitments, the fact remains that
Northeast Utilities and Consolidated Edison have taken steps that are
unprecedented in New Hampshire in the context of utility mergers. We refer
specifically to Consolidated Edison's guarantee to PSNH ratepayers that they
will receive savings-related rate relief, whether or not the merger actually
produces predicted synergies. Now that PSNH is metamorphosing into a
transmission and distribution company, at the same time it seeks to become a
Consolidated Edison subsidiary, it is fully consistent with the public good
that Consolidated Edison share with those ratepayers some of the financial
rewards arising out of PSNH's transformation. In our view, the merger savings
guarantee and the other commitments the Joint Petitioners have made here will
have, assuming consummation of the merger, set an appropriately positive tone
for Consolidated Edison's new relationship with New Hampshire and its
electric customers.
In summary, then, we approve the Merger Settlement Agreement and will permit
Consolidated Edison to consummate the merger contemplated in the Petition.
However, in addition to the commitments made by the Joint Petitioners in the
Merger Settlement Agreement, our approval is expressly conditioned on the
Joint Petitioners agreeing to the following conditions:
1. The amount of merger-related savings guaranteed to ratepayers in the
Merger Settlement Agreement may be effectuated by other reasonable means as
ordered by the Commission in the event that the specific mechanism set forth
in the Merger Settlement Agreement proves to be inadequate in any respect.
2. There shall be no direct or indirect recovery of executive severance
costs in connection with the merger.
3. The Joint Petitioners must not only fund a study of horizontal and
vertical market power of unregulated electric commodity services in the
relevant regional wholesale market in two years, as contemplated in the
Merger Settlement Agreement, but also future studies to be ordered at their
expense as needed, and the Joint Petitioners must agree that the Commission
retains absolute authority to choose the consultants performing the study or
studies as well as the right to order market power mitigation measures after
notice and hearing.
4. Subsequent to the merger, Consolidated Edison will form separate service
companies to provide services to its regulated and unregulated subsidiaries.
5. Any SEC or FERC determination relating to the merger or to the
allocation of the acquisition premium shall not be binding on, or have any
precedential effect before, the Commission.
6. Within 120 days of consummating the merger, Consolidated Edison shall
certify to the Commission that at least one New Hampshire resident is serving
on its Board of Directors, and Consolidated Edison shall thereafter maintain
at least one New Hampshire resident on its Board.
7. PSNH must continue to make comparable expenditures in the areas of
renewable energy, energy education, safety education, community relations and
research and development following the merger, taking into account its
smaller size post-restructuring.
8. Nothing in the Merger Settlement Agreement shall be construed as
limiting in any way the Commission's right to inspect the books and records
of Consolidated Edison, Northeast Utilities, PSNH or any of their affiliates.
Finally, we note that when the Settling Parties concluded the Merger
Settlement Agreement, they drafted it in a manner that assumes the ten-year
savings-sharing period would run through the year 2010. Given that the merger
may not be consummated until after January 1, 2001, we will interpret the
Merger Settlement Agreement to provide that the savings sharing must continue
for the full ten years regardless of when the merger is actually consummated.
We conclude that, subject to these conditions and those in the Merger
Settlement Agreement, approval of the merger of Northeast Utilities and
Consolidated Edison is for the public good and otherwise consistent with
applicable New Hampshire law.
Based upon the foregoing, it is hereby
ORDERED, that the Merger Settlement Agreement, entered into in this docket
between the Joint Petitioners and the Commission Staff, is APPROVED, subject
to the additional conditions enumerated above; and it is
FURTHER ORDERED, that Northeast Utilities and Consolidated Edison may
consummate their proposed merger as contemplated by the Merger Settlement
Agreement, subject to the additional conditions set forth in this Order; and
it is
FURTHER ORDERED, that the Joint Petitioners shall notify the Commission
within ten days of this order as to whether they accept the additional
conditions set forth in this Order; and it is
FURTHER ORDERED, that the authority granted to the Joint Petitioners by this
Order to consummate the merger of Northeast Utilities and Consolidate Edison,
Inc. shall be exercised within one year, and shall not be exercised
thereafter without further order of the Commission.
By order of the Public Utilities Commission of New Hampshire this sixth day
of December, 2000.
Douglas L. Patch
Chairman
Susan S. Geiger
Commissioner
Attested by:
Claire D. DiCicco
Assistant Secretary
DE 00-009
Dissent of Commissioner Brockway
Because I cannot agree that the merger, as conditioned in the Merger
Settlement Agreement and the Commission's order, is in the public interest, I
believe the merger application should be denied. My reasoning follows.
A. Standard of Review
I agree with my colleagues about the standard of review we must apply in this
case, although not in every particular of the reasoning leading to this
conclusion. RSA 369-B:3, IV(b)(4) is an unambiguous standard established by
the Legislature for the review of a merger such as this:
(A) [The merger] shall be subject to the jurisdiction of the commission
under RSA 369, RSA 374, RSA 378 or other relevant provisions of law, and [the
merger] shall be approved only if it is shown to be in the public interest[.]
(B) In recognition of the extraordinary benefits provided to PSNH from rate
reduction financing [i.e., securitization], should PSNH or its parent company
be acquired or otherwise sold or merged, such merger, acquisition or sale
shall be subject to the jurisdiction of the commission under the standard set
forth in the original proposed settlement [in Docket No. DE 99-099]. The
Commission may approve such a merger if such approval results in the receipt
by PSNH customers of a just and reasonable amount of the cost savings that
result from such merger, acquisition or sale.
RSA 369-B:3, IV(b)(4)(emphasis supplied).
The Commission has previously applied a "no net harm" standard to mergers,
even under a statute that requires a finding that the transaction is in the
public good or public interest. I believe that the Legislature pointed our
attention to the "public interest" language negotiated in the Restructuring
Settlement Agreement, and included a specific reference to "public interest"
in RSA 369-B:3, IV(b)(4)(A), to stress that the Legislature draws a
distinction between the "no net harm" test and the "public interest" test.
This reading is reinforced by the language of RSA 369:8, II(b)(Supp. 2000),
in which the Legislature uses both the threshold standard of "no adverse
effect" and the ultimate standard of "public interest."
With this in mind, I believe that where the Legislature requires a finding of
"no adverse effect," this standard can be satisfied by a determination that
the benefits and burdens of the proposed merger are in equipoise. However,
the standard that a transaction must be in the public good or in the public
interest is a higher standard.
Accordingly, under RSA 369-B:3, IV(b)(4)(A), I agree that we may not approve
the merger unless the Joint. Petitioners make an affirmative showing of net
public benefit resulting from the merger.
B. Benefits of Merger
The clearest benefit of the proposed merger to consumers in New Hampshire is
the pass-through to customers of synergy savings achieved by the combination
of two companies. Under the proposed Merger Settlement Agreement, consumers
would receive 75 percent of certain defined savings, and all of savings above
100 percent of that amount, or an estimated $75 million in rate reductions
over ten years (roughly $50 million in today's dollars). Under the various
proposals of non-signatories, New Hampshire consumers would receive between
$75 million and $195 million in rate reductions over the same period, if we
were to accept their arguments and so condition the merger.
Claims were also made by the Joint Petitioners, but contested by certain
intervenors, that the merger would provide benefits in the areas of customer
service and reliability. Specifically, in addition to measures designed to
prevent degradation of customer service quality, CEI agrees it would work
with the Commission Staff to develop a satisfactory service quality report
for submission to the Commission on a quarterly basis, subject to review by
the Commission at the request of either PSNH or the Commission Staff. With
respect to reliability, CEI's witness testified to the high reliability
provided by CEI to its New York customers, and stated that CEI would transfer
its expertise in maintaining its systems to NU, along with CEI's corporate
training approach, which CEI credits for its successful performance.
I do not count it as a benefit of the merger that the Company has agreed to
work with the Commission to develop a "bills-rendered" metric, nor committed
to develop service-quality targets. The Commission could develop such
standards without regard to the pendency of a merger. Indeed, the problems
that some sister states have experienced with service quality degradation
after mergers suggests that such new quality targets are not a benefit of the
merger, but rather a mechanism intended to prevent an adverse effect of the
merger.
Similarly, the merger does not offer net benefits to New Hampshire consumers
in the area of reliability, and may have an adverse effect, despite important
safeguards negotiated by Staff. The experience of CEI and its outage
frequency numbers are based largely on experience with underground
facilities, of which there are a limited amount in New Hampshire. Even this
superior record was tarnished recently by the extensive distribution outages
in the summers of 1999 and 2000. The staff training and development program
may well be superlative, as asserted, but its results are not confirmed in
the various generator and gas system failures recently experienced by the
Company.
Similarly, CEI's commitment to honor existing settlements to fund tree
trimming and other similar maintenance obligations adds nothing to PSNH's
current duties to invest as necessary to ensure reliability. Nor does the
agreement to continue providing required reports, as well as the agreement to
maintain an executive with responsibility for New Hampshire reliability in
the state, indicate a net benefit of the merger. Thus, in the area of
reliability, as with customer service, the provisions of the Merger
Settlement Agreement are more focused on preventing adverse effects than on
achieving new benefits.
The remainder of the benefits claimed of the merger dealt with impacts on
shareholders, or on the unregulated portions of the business of NU and CEI.
For example, the ability to respond to competition, cited by Mr. Morris as a
benefit of the merger, redounds to the benefit of those portions of the NU
business subject to threats from competitors. Under the PSNH Restructuring
Agreement, PSNH will remain a monopoly transmission and distribution utility,
and to the extent it plays any role in providing transition or default
service, it will be doing so as a regulated utility. Finally, with respect to
the desire for growth in earnings per share, while I fully respect the desire
of shareholders to increase this financial statistic, the Joint Petitioners
made no effort to demonstrate, and it would be difficult to demonstrate, that
such shareholder benefits would redound proportionately to the benefit of
consumers. We may not unreasonably deny a utility corporation the opportunity
to take a step a non-regulated utility may take, Grafton County, supra, and
we are generally charged with balancing the interests of consumers and
shareholders, RSA 363:17-a. However, in the case of mergers, and this merger
in particular, we are specifically directed to look to the impacts on New
Hampshire consumers, and in so doing, we cannot count shareholder benefits on
the plus side of the ledger.
With respect to the level of rate reductions anticipated as a result of the
merger, the parties differed considerably in their assessment of what is
required by the legislation and permissible within sound public policy. A
number of parties argued that, in addition to the $74.8 million in savings
proposed to be passed to consumers in New Hampshire under the Merger
Settlement Agreement, $49 million in transaction costs should be removed from
the cost of achieving the savings, resulting in higher net savings. Non-
signatories also insisted that it would be unjust and unreasonable to require
consumers to wait 33 months, as proposed in the Merger Settlement Agreement,
before seeing the promised rate reductions associated with the merger. These
two adjustments, if made, would add an estimated $6 million in net present
value to the benefit to consumers, according to testimony by Mr. Antonuk. The
resulting net benefit would be roughly $55 million, net present value.
Mr. LaCapra, testifying for Staff Advocates, estimated PSNH's share of merger
savings at $78 million, nominal dollars. In the alternative, he suggested
that the Commission could adopt the control premium as the measure of
anticipated merger savings due to consumers. Tying the control premium to the
stranded cost recovery awarded PSNH, and urging that gains and losses on
generation and transmission and distribution be treated equitably, Mr.
LaCapra reasoned that customers should receive approximately 80 percent of
the $146 million above-market premium attributable to PSNH, or $117 million.
Staff Advocates argued that consumers should receive either measure of merger
savings, but not both. Accordingly, Mr. LaCapra proposed that the rate
benefits of the merger to be flowed through to consumers be in the range of
$78 to $117 million, nominal dollars.
The Office of Consumer Advocate urged that the merger be conditioned not only
on a just and reasonable provision of synergy savings benefits, but also on
an appropriate sharing with consumers of the run-up in value of the
transmission and distribution assets, given the anticipated successful
resolution of PSNH's restructuring and stranded cost issues. OCA argued that
consumers are holding the company harmless for approximately 84 percent of
its stranded generation costs, and should accordingly share the same
percentage of its Transmission and Distribution (T&D) surplus with the
consumers who have supported the T&D assets in rates. Using either the PSNH-
allocable merger savings calculated by the Joint Petitioners of $54.5 million
(Exh. 59), or Mr. LaCapra's estimate of $146 million in PSNH-allocable
control premium, OCA calculates that the just and reasonable T&D value-
accretion benefit sharing with consumers is between about $40 million and
$117 million. OCA would add that amount to the $78 million in merger synergy
savings, producing a total cash flow-through to consumers of between $118 and
$195 million, nominal dollars.
I continue not to understand the relationship Mr. LaCapra asks us to draw
between the merger savings and the sharing of T&D asset value increases. I
continue to view these as separate issues, and as not being mutually
exclusive. In principle, then, consumers might be entitled to as much as $195
million in value from the merger.
At $195 million, I would have to conclude that this merger is in the public
interest. Such a large benefit to consumers in the form of lower rates would
overcome the costs I outline below. However, for a number of reasons, such an
amount is unlikely to be realizable for consumers. First, I doubt the
transaction would be concluded if the existing stockholders were forced to
share such a significant portion of the inflation in the value of their
stock. I am assuming, of course, that upon announcement of such a condition
by this Commission, the buyer would invoke the "material adverse condition"
language of the merger agreement, and either withdraw the merger or seek to
renegotiate the price downward (it would be the buyer, after all, who would
be responsible for flowing through the reduced revenue requirement in reduced
rates).
Second, I believe that the Legislature's action in approving the stranded
cost provisions of the Restructuring Agreement and the specific language on
review of this merger, without discussing the sharing of the increased value
of the Company's T&D assets, at least provides room for the Joint Petitioners
in this particular case to make an argument that the consumers do not have
the legal right to recover, above and beyond the merger savings, what one
might consider their fair share of the increased T&D value. Third, there
remains a question in my mind as to whether passing through the inflation in
T&D value would require restating T&D assets on the books at this fair market
value. This topic received no attention during the hearings. If fairness
required it, the result would be to remove the benefit of passing through the
increase in T&D value, albeit over time.
For these reasons, the realizable value of any claim consumers have to the
increase in value of the T&D assets brought about by the resolution of PSNH's
stranded cost disputes must be discounted.
I conclude that the benefit offered to New Hampshire consumers from the
merger consists of rate reductions in the range of $75 to $125 million,
depending on this Commission's determination on certain contested issues.
This translates to a net present value roughly in the range of $50 to $80
million in benefit to consumers realizable from the merger.
C. Adverse Effects of Merger
The single largest risk posed by this merger is the erosion of our ability to
protect New Hampshire consumers if Consolidated Edison and Northeast
Utilities combine. This risk is likely to emerge in a number of ways, and in
a number of subject matter areas.
1. Remoteness and Relative Size
First, I share the view of those witnesses who observe that the interests of
New Hampshire electric customers, and the public policy needs of New
Hampshire generally, are likely to receive less consideration from a holding
company of which PSNH represents a significantly smaller interest, and from
which New Hampshire is significantly more distant, than the current
arrangement. I accept as a baseline the parties' working assumption that,
under the merger, PSNH will go from being roughly 20 percent of NU to
approximately 8 percent of CEI. See Tr. III, 133:5- 23 (colloquy between
counsel for GOECS and CEI Chairman McGrath). This is a reduction of more than
two times in New Hampshire's importance to the entire corporation.
Various parties have pointed to this danger, and asked for the Commission to
condition the merger on commitments from the new owner of PSNH to maintain
the same type and level of contributions to New Hampshire as PSNH has done
under NU's ownership. For example, GOECS has asked us to require that CEI
match here the commitments it made in Connecticut relative to charitable
contributions and corporate giving. GOECS similarly asks the Commission to
order the Joint Petitioners to make affirmative commitments to continue and
expand financial and in-kind support for initiatives targeted at
environmental improvement, R&D and energy education. Such conditions are
insufficient to address the problem of remoteness in this general area of
community involvement.
As a practical matter, regulation cannot reliably exact or enforce
commitments of this kind. As specified by the majority, we could condition
the merger on CEI's agreement to make contributions to such efforts
comparable to those made by PSNH before the merger, scaled to PSNH's smaller
post-restructuring size. But such a condition is too vague to be meaningful.
Also, if a party felt that CEI had violated the condition, the question would
arise whether and to what extent the Commission could enforce a commitment in
areas arguably outside the province of economic regulation. Thus, such a
condition would provide a false sense of protection for New Hampshire's
concerns in this area, and does not overcome the risk to the state of
exacerbating management's remoteness from the state.
In addition to the fact that New Hampshire customers' concerns will be
further remote from the focus of the combined company's management, the
removal of New Hampshire to the outer periphery of the consolidated entity
will make it considerably more difficult for New Hampshire to supervise the
activities of the corporation in the interests of New Hampshire consumers.
Here we move from a generalized sense of remoteness to a concrete danger that
the Commission cannot fulfill its statutory duties.
The customer service area provides one example of the impact of consolidation
of control in remote management, coupled with diminution of New Hampshire
influence on corporate policy. With respect to customer service, Mr. Colton
testified that consolidation will result in CEI using one data processing
platform, system-wide, regardless of whether PSNH continues to maintain a
call center within New Hampshire. Thus, according to SOHO, "one impact of
consolidation . . . will be to take discretion away from whatever PSNH
customer service representatives remain to deliver the very services which
that [many customers] rely on." SOHO Brief at 12. We have seen similar
utility consolidation diminish local management's flexibility to agree to
state-specific regulations and procedures, where they conflict with a
centralized policy from corporate headquarters.
We have also seen instances in which commitments to abide by particular
merger agreements (such as to provide the Commission with advance notice of
call-center closing) have been honored in name, but not in spirit, by the
new, out-of-state owners of jurisdictional utilities in New Hampshire.
In addition, the further afield from New Hampshire and New England the
headquarters of a utility migrates, the fewer the informal lines of
communication and the fewer the shared regulatory norms with our sister New
England commissions on which we have relied historically to aid in
supervising New Hampshire subsidiaries.
Remoteness of management, and New Hampshire's relatively small size in the
overall corporation, also creates a situation in which local New Hampshire
management must compete with their co-equals in other subsidiaries for their
share of capital investment budgets. As Chief Engineer Cannata explained,
"[o]ne always has concerns about funding when becoming part of a larger
organization." Exh. 33 at 6:17-19. Mr. Cannata went on to say that he was not
concerned with this risk in the instant case, because Staff has negotiated
the same local control commitments contained in the NU/PSNH merger.
The NU merger, however, took place in a different context, before substantial
diversification further diluted management's concentration on regulated
subsidiary priorities. Even so, the Commission has had to open dockets on
various reliability problems, DE 95-194 and DE 97-034, and Staff had to
negotiate detailed spending plans and commitments with NU, in order to
reassure the Commission that sufficient maintenance and investment spending
was forthcoming. The merger of NU and PSNH was in a sense necessary, given
the dire financial straights of PSNH at the time. By contrast, the instant
merger is purely discretionary on the part of NU management, and there is no
need to exacerbate the existing problem that scarce regulatory resources must
be applied to micromanage reliability activities in order to obtain basic
performance by the utility.
One counterweight to this tendency could be a requirement that CEI include at
least one New Hampshire resident on its Board of Directors. However, even if
CEI were willing to agree to such a condition, it has not been suggested that
this Commission or any other representative of New Hampshire's consumers
determine the identity of such a representative, there is no way to guarantee
the Board member's fidelity to New Hampshire consumer concerns, and even if
there were, a single Board member is easily outvoted. While requiring CEI to
include someone with a New Hampshire perspective on the Board is a good first
step, it does not dispose of the underlying concern that this Commission will
be unable to protect New Hampshire consumers from the effects of a remote CEI
management, focused on unregulated activities or exercising its considerable
and increased political heft at the Federal Energy Regulatory Commission.
The many demands for conditions presented by various intervenors, from
dictates about charitable giving to insistence on specific low-income
programs to calls for customer reimbursement in the event of outages, can all
be traced back to the increasing remoteness and size of PSNH's ultimate
owner, should this merger be approved. A company that is smaller, that is
headquartered nearer to home, in which PSNH plays a larger part, whose
boundaries are within the network of political and cultural institutions,
such as NECPUC, upon which the Commission relies to help ensure that regional
companies operate in the public interest, is more likely to be responsive to
the myriad demands of its local community.
2. Dominance of Wholesale and Retail Markets
As CEI Chairman McGrath reported to his company's shareholders at their
annual meeting in May, if this merger proceeds CEI will become the nation's
largest electric distribution utility, with more than five million electric
service customers, annual revenues of $12 billion and more than 20,000
employees. Exh. 42 at 2. CEI will join the ranks of mega-utilities, forming
since the late 1990's in a wave of consolidation not seen since the 1920's.
As of 1999, an Energy Information Administration (EIA) study summarized the
recent merger activity as follows:
Since 1992, 26 mergers or acquisitions have been completed between investor-
owned utilities (IOUs) or between IOUs and independent power producers
(IPPs). Sixteen mergers have been announced and are now pending stockholder
or Federal and State government approval. The size of IOU mergers, in terms
of value of assets, is also getting larger. Between 1992 and 1998, only four
mergers were completed in which the combined assets of the companies in each
merger were greater than $10 billion. More recently, 10 mergers either
completed in 1999 or pending completion each have combined assets greater
than $10 billion.
The Changing Structure of the Electric Power Industry 1999: Mergers and Other
Corporate Combinations, December 1999, Energy Information Administration,
Office of Coal, Nuclear, Electric and Alternate Fuels, U.S. Department of
Energy, Washington, DC., Chapter 3(footnote omitted).
One of the concerns that electric industry consolidation raises is that of
horizontal market power: the concentration of generation resources under
control of one corporate entity. The EIA report notes the growing trend
towards such concentration, even as utilities divest as part of
restructuring:
Mergers and acquisitions among IOUs over the past few years have resulted in
fewer electric utilities owning generation capacity. In 1992, 172 IOUs owned
generation capacity in the United States. By 1998 that number had decreased
to 161. Assuming that all mergers pending as of September 1999 will be
approved and completed by 2000, the number of operating IOUs owning
generation capacity will decrease to 143. Power plant divestitures ... have
also reduced the total number of IOUs owning generation capacity.
Id. (footnote omitted).
The Executive Summary of the study describes the growing concentration of
generation capacity as follows:
One effect of these mergers is that the industry is becoming more
concentrated. In 1992 the 10 largest IOUs owned 36 percent of total IOU-held
generation capacity, and the 20 largest IOUs owned 56 percent of IOU-held
generation capacity ... By 2000, the 10 largest IOUs will own an estimated 51
percent of IOU-held generation capacity, and the 20 largest will own an
estimated 73 percent.
This may be compared with the period leading up to the enactment of the
Public Utility Holding Company Act of 1935 and the Securities and Exchange
Act of 1935:
At their peak in the late 1920s, the 16 largest electric power holding
companies controlled more than 75 percent of all U.S. generation. (footnote
omitted)
As detailed in Chapter 3 of the study, when looked at from the perspective of
the holding company, the level of concentration is even more pronounced:
The effect of mergers on consolidation of the industry is more evident when
ownership capacity is aggregated by holding company. In 1992, there were 70
holding companies owning 78 percent of the IOU-held generation capacity
(Table 4). By 1998 the number of holding companies decreased to 68, but yet
the percent of total IOU-owned capacity increased to 83 percent, primarily
because of mergers and acquisitions between IOUs. Assuming that all mergers
pending as of September 1999 are completed by 2000, the number of holding
companies will decrease to 53, and the generation capacity they own will
increase to about 89 percent of the total IOU-owned capacity. The number of
holding companies will decrease because most of the pending mergers are
between holding companies, which indicates that relatively large companies
are becoming even larger.
(Emphasis supplied.)
Where will CEI be in this ranking of generation owners? How much market power
will CEI enjoy as a result of its merger of CEI and NU assets? The record in
this merger proceeding shows that in the short term, the two companies will
own a much reduced, but still strategically significant amount of generation
capacity in New England and New York. See Exh. 39 (showing that, post
divestiture, combined company would own 12 percent of NEPOOL generation
assets and 6 percent of New York Power Pool generation assets). It also
reveals that market power studies so far conducted of the proposed merger
have not yet examined and ruled out the risk of new-CEI market power abuses
facilitated by the retention of strategic generation resources combined with
the inadequate market power rules and monitoring at the wholesale level in
New England. No behavioral analysis was done, and the HHI indeces calculated
by the Joint Petitioners' witness did not include present and potential
independent power under firm contract to the petitioners. The recent
announcement by the ISO-NE that its congestion management system and
multisettlements bidding will not be available for several years heightens
the risk that a market participant could wield market power unchecked.
The record further reveals that new CEI is unwilling to commit to any
limitation on its ownership or control of generation assets. During his
testimony in this docket, Mr. Morris stated on behalf of the Joint
Petitioners that, "when you look at us going forward in a generation sense .
. . should this merger be approved . . . we may own 2,500 megawatts." Tr.
III, 165:9-12. Mr. Holmes of OCA asked Mr. Morris if CEI would be willing to
commit to not controlling capacity in excess of 3,000 megawatts during the
first five years after the merger. Mr. Morris responded that it would be
"very premature" to make such a commitment. Id. at 166:21-22. He went on to
state:
... to make a commitment today to [a 3,000 megawatt limit] would be ill-
advised. The marketing group [of CEI] might end up selling 10 million
kilowatt-hours and we might need to own 4,000 megawatts to satisfy that
demand. There's no reason for us to constrict our potential future with some
commitment that really wouldn't mean much today.
Id. at 167:1-8.
Mr. Morris testified that new CEI "will not be allowed to become some
dominant monopoly player in generation, if that's your concern." Id. But
neither of the Joint Participants gave any indication of the mechanism by
which such dominance would be prevented in the absence of a commitment to
limit generation. Instead, they rebuffed suggestions that CEI be required to
agree to divest generation should a market power study reveal a need for such
mitigating measures.
Peter Bradford, speaking with the authority of over 30 years observing the
behavior of regulated utilities, warned of the consequences of CEI's refusal
to accede to limitations on its acquisition of generation assets, as well as
its demand to continue as a retail marketer in the same areas where it
proposes to serve as the monopoly distribution utility. As Mr. Bradley notes,
the Joint Petitioners' refusal to commit to any market power constraints
beyond the mere commissioning of a study justifies the inference "that the
Joint Petitioners are preserving their ability to once again become
significant generation providers." Bradley Brief at 5. He also warned of the
dangers to the emerging retail market should the merged company be allowed to
continue its participation in the retail markets. Indeed, combining the
refusal to limit future generation holdings, the insistence on retaining
distribution at the same time the firm pushes forward in marketing, and Mr.
Morris' explicit linkage between generation and marketing, the picture
emerges of a firm with plans to create a deregulated vertically-integrated
electric utility.
Mr. Bradford suggested that at the least the firm be obliged to agree to
whatever mitigation measures are required as a result of the market power
study. Such a post-merger remedy, however, suffers from the same weakness as
the post-merger remedies suggested for the customer service and reliability
concerns. The time to consider market power and prevent it from being a
possibility is now, however. Once the merger is concluded, should a market
power study suggest CEI must divest generation, we will face the same
pressures to avoid such a remedy that we have faced from vertically-
integrated companies seeking to retain some of their existing generation
market functions, but we will have lost all practical leverage. Once the
merger is in place, it is not enough to say we could order a further
divestiture down the road; to rest our protection of consumers on such an
exercise of raw regulatory power based on a study sure to be hotly contested
provides little comfort that the Commission would be able to fulfill its
obligations to New Hampshire consumers. As Economics professor William
Shepherd of the University of Massachusetts, puts it:
If electricity mergers and anticompetitive actions are allowed to proliferate
now, it may soon become necessary to launch an even more flamboyant attempt
to get severe divestiture .... That may in fact be impossible. And that
irreversibility makes it particularly important to set strict policies now,
without delay.
Shepherd, Monopoly and Antitrust Policies in Network-Based Markets such as
Electricity, RPI Symposium on the Virtual Utility (1996), p. 24 (quoted in
Exh. 57, at 20, emphasis supplied).
Mr. Bradford also cited the view of the former head of the Justice
Department's Antitrust Division, Joel Klein, who observed that:
... mergers are very difficult to undo after they prove to be anticompetitive
and ... during a transition to competition, there is unlikely to be any
prospect for meaningful relief after the damage is done. Missed opportunities
for the emergence of competition at the outset of the transition are forever
lost, with potentially substantial social costs.
Id. (quoting from Making the Transition from Regulation to Competition:
Thinking About Merger Policy during the Transition to Electric Power
Restructuring, FERC Distinguished Speakers Series, January 21, 1998, p. 12).
The record also demonstrates that the merger will heighten risks of abuse by
new CEI of its position as a dominant owner of transmission in the region.
The nation is presently undergoing a great debate regarding the future of the
electric industry, and the structure and powers of wholesale market
organizations. See, e.g., F.E.R.C. Order 2000. By combining NU and CEI into
one transmission-owning entity spanning 8 states (if we include Maine and
Vermont), we will have created an entity capable of dominating the debate,
and drowning out the voices of other market participants and observers. I
believe we have reached a point in the re-evolution of the electric industry
in the United States where we need to control the sheer size of utilities, so
as to prevent the result that their dominance and their holding company
structures make effective state regulation impossible.
3. Heightened Risks of Interaffiliate Abuses
The great increase in size and remoteness of the holding company, and its
insistence on retaining ownership of affiliates doing business in related
fields, would exacerbate the existing risk of inter-affiliate transaction
abuses. An asymmetric pricing system, coupled with the employee transfer and
other affiliate transaction measures suggested by OCA, would help to
alleviate some of the worst abuses of the holding company system with regards
to cross-subsidization, but these measures are not sufficient. No regulators,
however well funded, can manage such a behemoth. In order to police any
pricing scheme designed to defeat cross-subsidization, significant regulatory
resources must be brought to bear for near-constant auditing. The issue of
allocations and the determination of market pricing for comparison purposes
are fraught with judgment calls. The data are largely housed at inconvenient
locations. The criterion in the proposed Merger Settlement Agreement that
this Commission's authority to examine affiliate books is limited to issues
concerning PSNH has already spawned litigation over its meaning: who gets to
decide? We may condition the merger on saying "we decide," but we will
inevitably encounter disputes over what the condition means, and how to
determine its applicability in any given case, which will at least frustrate
the auditing effort, if not significantly impede it. These are not conditions
conducive to a light hand of regulation. Worse yet, long regulatory
experience shows that under such conditions much mischief can be accomplished
in the way of cross-subsidization, without any practical ability of the
Commission to catch more than the most obvious abuses.
D. Conclusion
The statutes enacted in the 1930's, after the collapse of the Insull holding
company empire, not only specified that service areas of proposed holding
company subsidiaries be contiguous, as these are, but that state regulators
certify that they would be able to regulate in the public interest if the
merger were concluded. This we cannot do, in view. The question then remains,
is the prospect of roughly $50 to $80 million dollars of reduced rates worth
the risk that the merged entity will be too remote and large to concern
itself with the needs of New Hampshire and its New Hampshire customers, will
dominate regional wholesale markets and New Hampshire's retail markets for
electricity, will be more able to engage in interaffiliate abuses without
effective oversight, and will in general become so large, dominant and remote
that effective New Hampshire regulation is threatened?
The burden is on the Joint Petitioners to make the case that the risks
demonstrated by long regulatory history are outweighed by the cash benefit to
consumers. They have made no convincing attempt to do so. Their own offer of
merger benefits amounts to roughly 2% of PSNH revenues annually. It is not
hard to imagine that wholesale market dominance, retail market power, inter-
affiliate abuses, and growing pressures on customer service and distribution
reliability could outweigh such a rate benefit.
Considering all these factors, I conclude that the proposed merger is not in
the public interest, and further that it presents a significant risk of
causing an adverse effect on New Hampshire.
None of these observations is to point the finger at NU or ConEd. Rather, the
problems and risks enumerated here are endemic to the creation of huge
holding companies remote from state jurisdiction and in a position to
dominate markets. To conclude that this merger will not bring net benefits to
New Hampshire, and will rather pose risks of adverse harm, does not require a
finding of bad faith on the part of either management.
I join with the majority in thanking the parties, including the Staff and the
Joint Petitioners, for their long efforts to develop a settlement framework,
and for the savings guarantee provisions that were developed. While other
considerations lead to my view that we should deny approval of the merger,
the ability to put benefits of the merger on one side of the ledger in such a
concrete form was most helpful, and had other aspects of the merger not been
problematic and essentially beyond the ability of settlement to resolve, the
Merger Settlement Agreement framework would have provided a solid basis for
the work of establishing appropriate conditions.
Approval of this merger would tip the balance between customer and company
inevitably on the side of the company, and we will not be able to fulfill our
statutory duty to right the balance. I respectfully dissent.
Nancy Brockway
Commissioner
December 6, 2000
Attested by:
Claire D. DiCicco Assistant Secretary
Footnotes:
1. NU and CEI entered into an Agreement and Plan of Merger on October 13,
1999, which was amended and restated on January 11, 2000. The boards of the
two companies approved the merger on October 12, 1999, and their shareholders
endorsed the transaction in separate votes on April 14, 2000.
2. The Commission subsequently granted petitions to intervene filed by the
Campaign for Ratepayers' Rights, Rep. Jeb E. Bradley and the Business &
Industry Association of New Hampshire (BIA). There were no objections to any
of the intervention petitions.
3. In connection with the parties' discovery, on June 23, 2000, the
Commission entered Order No. 23,516 granting in part and denying in part a
motion for confidential treatment submitted by the Joint Petitioners.
4. Morrison & Hecker is the law firm retained by the Commission through the
New Hampshire Department of Justice to advise the Commission in all matters
relating to the electric restructuring dockets pending before the Commission.
5. Not all parties appeared at the hearing. Specifically, the Campaign for
Ratepayers Rights and the Seacoast Anti-Pollution League did not participate.
6. Mr. Cannata, Mr. Cunningham, Mr. Kosnaski and Ms. Noonan are the four
witnesses who testified on behalf of Staff at the hearing. Mr. Kreis served
as their counsel.
7. The Synergy Study is of record in this proceeding as a confidential
exhibit (Exh. 8).
8. Stranded costs are defined in the Restructuring Act as costs, liabilities
and investments, such as uneconomic assets, that electric utilities would
reasonably expect to recover if the existing regulatory structure with retail
rates for the bundled provision of electric service continued and that will
not be recovered as a result of restructured industry regulation that allows
retail choice of electricity suppliers, unless a specific mechanism for such
cost recovery is provided. Stranded costs may only include costs of:
(a) Existing commitments or obligations incurred prior to the effective date
of [the Restructuring Act];
(b) Renegotiated commitments approved by the commission; and
(c) New mandated commitments approved by the commission.
RSA 374-F:2, IV.
9. Representative Bradley takes the same position in his brief, without
elaboration. However, in his prefiled testimony, he indicated that [t]he
unambiguous intent of [RSA 369-B] is that the public interest standard means
that the merger can only be approved if it provides net benefits to customers
as opposed to merely satisfying a `no net harm' test." Exh. 47 at 3. As noted
by GOECS, Representative Bradley reiterated this view at hearing.
10. As noted, infra, the dispute in this docket about savings sharings
relates not to the percentages used but to the timing of the sharing
mechanism.
11. The issue of the $49 million in transaction costs is discussed, infra.
12. In its brief, GOECS places the relevant figure at $49 million. The Joint
Petitioners' estimate of transaction costs is contained in the Synergy Study
(Exhibit 8). Both the Synergy Study and the discussion of it, including
discussion of the Joint Petitioners' estimate of transaction costs, are
included in the confidential portion of the record here.
13. In its brief, OCA also relies on several other cases discussing the
treatment of gain on the sale of utility-owned real estate: Bridgeport
Hydraulic Co. v. Council on Water Company Lands, 453 F.Supp. 942 (D. Conn.
1977); Kansas Power & Light Co. v. Kansas Corporation Commission, 620 P.2d
329 (Kan. Ct. App. 1981); Appeal of City of Nashua, 121 N.H. 874 (1981);
Pennichuck Water Works v. State, 103 N.H. 49 (1960); and Chicopee Mfg. Co. v.
Public Service Co., 98 N.H. 3 (1953). OCA also cited Gulf States Utilities
Co. v. Public Utility Comm'n of Texas, 784 S.W.2d 519 (Tex. Ct. App. 1990).
14. During his testimony in this docket, Mr. Morris gave a somewhat
different assessment. He stated that, "when you look at us going forward in a
generation sense . . . should this merger be approved . . . we may own 2,500
megawatts." Tr. III, 165:9-12. Mr. Holmes of OCA asked Mr. Morris if CEI
would be willing to commit to not controlling capacity in excess of 3,000
megawatts during the first five years after the merger. Mr. Morris responded
that it would be "very premature" to make such a commitment. Id. at 166:21-
22. He went on to state:
We will not be allowed to become some dominant monopoly player in generation,
if that's your concern. But to make a commitment today to [a 3,000 megawatt
limit] would be ill-advised. The marketing group [of CEI] might end up
selling 10 million kilowatt-hours and we might need to own 4,000 megawatts to
satisfy that demand. There's no reason for us to constrict our potential
future with some commitment that really wouldn't mean much today.
Id. at 167:1-8.
15. We are aware that, although ISO New England is currently responsible for
stewardship of the region's wholesale electricity market, the nature and
scope of the market are in a state of flux. It is possible, for example, that
at the time the contemplated market power study or studies is commissioned,
the relevant wholesale market may include but not be limited to the six New
England states. We will interpret the commitment in the Merger Settlement
Agreement, concerning market power studies of "unregulated electric commodity
services in New England," to include studies of whatever regional market or
markets include New England at the time any study is undertaken.
16. The Joint Petitioners also provided a response to the Commission's
record request. It is discussed infra. On November 9, 2000, GOECS provided a
further written update with regard to the relevant congressional activity.
According to GOECS, on October 24, 2000, Congress approved the Energy Act of
2000, which "contains a provision that repeals the requirement that states
receiving federal Weatherization Program funds from the US Department of
Energy (DOE) will be required to cost-share 25% of their grant award." Letter
from Senior Assistant Attorney General Wynn E. Arnold dated November 9, 2000
at 1. According to GOECS, President Clinton was expected to sign this measure
into law prior to the close of the current session of Congress.
17. In its brief, OCA also suggests that the Commission use the Gramercy
Park, Washington Heights and Indian Point incidents to make a negative
determination about CEI's "corporate culture." OCA Brief at 20. We discuss
that issue, infra.
18. For example, in Connecticut there were unique employment and economic
concerns arising out of the fact that the parent company headquarters would
be leaving that state for the first time. This is obviously an issue that New
Hampshire confronted long ago with respect to PSNH. Likewise, the parties to
the Connecticut proceeding were far more concerned with recent outages and
incidents in the New York service territory, so that an extensive record was
developed on those issues before the DPUC. In New York, the staff of the
Public Service Commission reached a settlement with the Joint Petitioners in
which merger-related issues were resolved in the context of a much larger
proceeding involving the impact of restructuring-related divestitures on
rates.