<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 1
ON FORM U-1/A
APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
BEC ENERGY
BOSTON EDISON COMPANY
800 Boylston Street
Boston, Massachusetts 02199
(Name of company or companies filing this statement and
address of principal executive offices)
BEC ENERGY
BOSTON EDISON COMPANY
c/o Theodora S. Convisser, Esq.
BOSTON EDISON COMPANY
800 Boylston Street
Boston, Massachusetts 02199
Telephone: (617) 424-2000
(Names and addresses of agents for service)
Copies to:
David A. Fine, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Telephone: (617) 951-7000
<PAGE>
BEC Energy, a Massachusetts business trust ("Holding Company"), hereby
amends its Application on Form U-1 in File No. 70-9057 as follows:
1. "Item 1. Description of Proposed Transaction" is amended by deleting
the words "the Massachusetts Department of Public Utilities (the "Massachusetts
DPU") appearing in the last sentence of the first paragraph of "Parties" (Item
1.A), and replacing them with the words "the Massachusetts Department of
Telecommunications and Energy (formerly, the Massachusetts Department of Public
Utilities) (the "Massachusetts DPU" or "DPU")". This change is made to reflect
the recent change in the name of the referenced state agency from the Department
of Public Utilities to the Department of Telecommunications and Energy.
2. "Item 3. Applicable Statutory Provisions" is amended by amending and
restating "Economies and Efficiences" (Item 3.A.2.b.1) in its entirety as
follows:
"Many economies and efficiencies would result from the holding company
structure, in the areas of financing opportunities, proper allocation of risk,
and decreased regulatory burden.
(a) Capital Structure and Financing Opportunities
As the Commission has found in analogous cases, a holding company structure
permits adjustments of a utility's capital ratios to appropriate levels through
dividends to, or equity investments from, the holding company. See, e.g., WPL
Holdings, Inc., 49 SEC Docket at 1257. This ability to adjust the components of
Boston Edison's capital structure would also increase general financial
flexibility, allowing Boston Edison to take advantage of more attractive
financing opportunities that might not otherwise be available. See CIPSCO Inc.,
47 SEC Docket at 179.
The flexibility associated with a balanced capital structure permits the
issuance of various types of securities under any conditions and thus increases
the potential for cost reduction. As the Commission has noted in similar
circumstances, "(l)ower-cost financing can enhance efficient utility operations
and benefit ratepayers and senior security holders." KU Energy Corp., 50 SEC
Docket at 296.
<PAGE>
The Restructuring should also help to broaden the holding company system's
financial base and its investment appeal by reducing the system's dependence on
its utility operations. This diversity should also increase financing
alternatives and efficiencies, since financing may be tailored to the specific
needs and circumstances of the individual utility and non-utility businesses.
(b) Insulation and Separation of Utility from Non-Utility Business.
The holding company structure will help insulate Boston Edison's customers
and Boston Edison's security holders from the risks of unregulated businesses by
allowing the enterprise to pursue such businesses through newly created
subsidiaries of Holding Company. Because non-utility businesses of the holding
company will be conducted through separate subsidiaries, any liabilities
incurred by those subsidiaries will generally not constitute liabilities of the
utility subsidiaries. Under the current structure, in which unregulated activity
is conducted through subsidiaries of the utility, the risks of diversified
business ventures are considered when determining the overall risk of the
utility operations. By separating unregulated ventures into separate corporate
entities, the holding company structure reduces the riskiness of the utility.
This reduced risk exposure should enable Boston Edison to raise new preferred
and debt capital at a lower cost than might be possible if unregulated
businesses were direct subsidiaries of Boston Edison. As the Commission has
stated in similar circumstances, "(t)he insulation of the utility
businesses... from any risks of diversification and the resulting lower costs
should tend toward more efficient and economical operation of the utility
businesses . . . ." CIPSCO, Inc., 47 SEC Docket at 180. Ratepayers benefit
because a utility's balanced capital structure and financial flexibility can
reduce the utility's overall cost of capital. Since the cost of
<PAGE>
capital is one element in determining rates, lower cost of capital results in
lower rates for electricity customers.
(c) Regulatory Efficiency
Although much of the anticipated benefits from reorganization are not yet
quantifiable, one area in which Boston Edison expects savings from the proposed
restructuring is in the area of regulatory expense. Without a holding company
structure, Boston Edison must seek Massachusetts DPU approval under M.G.L. ch.
164 17A whenever it desires to invest funds in diversified activities. Based
upon its experiences with the regulatory process, Boston Edison anticipates that
the employee time and regulatory expense for outside consultants involved in
obtaining such approvals would be significant. As an example, in 1993 Boston
Edison petitioned for authorization under Massachusetts law to invest up to $45
million in a wholly owned non-utility subsidiary to invest in certain business
ventures. The process of securing such regulatory approval in that case took
approximately three months and cost over $200,000. Because Boston Edison is a
utility company, additional investments in these ventures and other similar
investments it may make in the future would require obtaining Massachusetts DPU
approval and, therefore, making similar expenditures of time and money,
expenditures which a non-utility generator would not face.
The Commission has noted in analogous cases that these kinds of financial
and organizational advantages satisfy Section 10(c)(2). See KU Energy
Corporation, 50 SEC Docket at 297; CIPSCO, Inc., 47 SEC Docket at 180; WPL
Holdings, Inc., 49 SEC Docket at 1258. Moreover, a Commission finding of
"efficiencies and economies" may be based "on the potential for economies
presented by the acquisition even where these are not precisely quantifiable."
In
<PAGE>
the Matter of American Elec. Power Co., Holding Company Act Release
No. 35-20633, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) Para. 81, 647, at
80, 608 (July 21, 1978). In this case, the Restructuring promises to provide
significant financial and organizational advantages, and the resulting
substantial potential economies and efficiencies should be found to meet the
standard of Section 10(c)(2)."
3. "Item 6. Exhibits and Financial Statements" is amended by (i)
supplying Exhibit D-2, "Determination of the DPU"; (ii) restating the Method of
Filing of Exhibit D-2 in its entirety as "Filed herewith"; (iii) supplying
Exhibit D-4, "Determination of the FERC"; (iv) restating the Method of Filing of
Exhibit D-4 in its entirety as "Filed herewith"; (v) supplying Exhibit D-6,
"Determination of the NRC"; and (vi) restating the Method of Filing of
Exhibit D-6 in its entirety as "Filed herewith".
<PAGE>
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this statement to be
signed on its behalf by the undersigned thereunto duly authorized.
BEC ENERGY
Date: April 22, 1998 By: /s/ JAMES J. JUDGE
----------------------------------
James J. Judge, Senior Vice
President and Treasurer
(Signature and printed name
and title of signing officer)
BOSTON EDISON COMPANY
Date: April 22, 1998 By: /s/ JAMES J. JUDGE
----------------------------------
James J. Judge, Senior Vice
President and Treasurer
(Signature and printed name
and title of signing officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION DESIGNATIONS (IF ANY)
<S> <C> <C>
D-2 Determination of the DPU
D-4 Determination of the FERC
D-6 Determination of the NRC
</TABLE>
<PAGE>
EXHIBIT 99.D-2
April 17, 1998
D.P.U./D.T.E. 97-63
Petition of Boston Edison Company and Boston Edison Mergeco Electric Company,
Inc. for approval by the Department of Telecommunications and Energy of a merger
in accordance with an agreement and plan of merger.
______________________________________________________________________________
APPEARANCES: Theodora S. Convisser, Esq.
Boston Edison Company
800 Boylston Street
Boston, Massachusetts 02199
-and-
David A. Fine, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
FOR: BOSTON
EDISON COMPANY AND BOSTON EDISON
MERGECO ELECTRIC COMPANY,
INCORPORATED
Petitioners
-----------
L. Scott Harshbarger, Attorney General
By: Joseph W. Rogers
Assistant Attorney General
200 Portland Street
Boston, Massachusetts 02114
Intervenor
----------
Mary Beth Gentleman, Esq.
Wayne Barnett, Esq.
John M. Stevens, Esq.
Jill B. Levine, Esq.
Foley, Hoag & Eliot, L.L.P.
One Post Office Square
Boston, Massachusetts 02109-2170
-and-
<PAGE>
Robert F. Sidney, Esq.
Anna Blumkin, Esq.
100 Cambridge Street, 15/th/ Floor
Boston, MA 02202
FOR:
COMMONWEALTH OF
MASSACHUSETTS DIVISION OF ENERGY
RESOURCES
Intervenor
----------
Jeffrey M. Bernstein, Esq.
Kenneth L. Kimmell, Esq.
Suzanne LaMantia, Esq.
Bernstein, Cushner & Kimmell, P.C.
One Court Street, Suite 700
Boston, Massachusetts 02108
-and-
Burton E. Rosenthal, Esq.
Segal, Roitman & Coleman
11 Beacon Street, Suite 500
Boston, Massachusetts 02108
FOR: UTILITY
WORKERS UNION OF AMERICA LOCAL 387
Intervenor
----------
Cameron Kerry, Esq.
Sally Everett Williamson, Esq.
A.W. Phinney, III, Esq.
Mintz, Levin, Cohen, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
-and-
Thomas Murtagh, Esq.
Barbara Brenner, Esq.
Couch, White, Brenner, Howard & Feigenbaum, LLP
540 Broadway
Albany, New York 12201-2222
FOR:
CABLEVISION SYSTEMS
CORPORATION
Limited Participant
-------------------
Alan D. Mandl, Esq.
Ottenberg, Dunkless, Mandl & Mandl
260 Franklin Street
<PAGE>
Boston, Massachusetts 02110
FOR:
NEW ENGLAND CABLE TELEVISION
ASSOCIATION
Limited Participant
-------------------
Timothy N. Cronin, Esq.
COM/Energy
One Main Street
Cambridge, Massachusetts 02142-9150
FOR:
CAMBRIDGE ELECTRIC LIGHT
COMPANY, COMMONWEALTH ELECTRIC LIGHT
COMPANY, CANAL ELECTRIC
Limited Participant
-------------------
James Avery, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, Massachusetts 02108
FOR: BERKSHIRE
GAS COMPANY
Limited Participant
-------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
I. INTRODUCTION Page 1
II. PROCEDURAL HISTORY AND RULINGS Page 1
------------------------------
III. COMPANIES' PROPOSAL Page 4
-------------------
IV. POSITIONS OF THE PARTIES Page 6
------------------------
V. CONSISTENCY OF HOLDING COMPANY PROPOSAL WITH THE
------------------------------------------------
PUBLIC INTEREST Page 7
---------------
A. Standard of Review Page 7
------------------
B. Corporate Restructuring Generally Page 8
---------------------------------
C. Specific Considerations Page 12
-----------------------
1. Impact on Rates Page 13
---------------
2. Impact on Quality of Service Page 14
----------------------------
3. Impact on Competition Page 16
---------------------
4. The Financial Integrity of the Post-Merger Entity Page
--------------------------------------------------
18
5. Societal Costs Page 19
--------------
6. Impact on Economic Development Page 20
------------------------------
7. Alternatives to the Merger Page 21
--------------------------
D. Conclusion Page 22
----------
VI. CONDITIONS OF APPROVAL Page 22
----------------------
A. Dividend Policy Page 22
---------------
1. Introduction Page 22
------------
2. Positions of the Parties Page 23
------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3. Analysis and Findings Page 25
---------------------
B. Cost of Capital Page 27
---------------
C. Asset Transfers Page 27
-------------------------------
1. Description of Company Proposal Page 27
-------------------------------
2. Analysis and Findings Page 28
---------------------
a. Zero Transaction Policy Page 29
----------------------
b. Pricing Method Page 31
--------------
c. Prior Asset Transfers Page 34
---------------------
d. Preapproval of Asset Transfers Page 35
-------------------------------
e. Intangible Assets Page 37
----------------
f. Non-Rate Base Assets Page 40
--------------------
g. Employee Transfers and Services Page 43
-------------------------------
h. Conclusion on Asset Transfers Page 45
-------------------------------
D. Investment Policy Page 45
-----------------
1. Positions of the Parties Page 45
------------------------
2. Analysis and Findings Page 47
---------------------
E. Reporting Requirements Page 48
----------------------
1. Positions of the Parties Page 48
------------------------
2. Analysis and Findings Page 49
---------------------
F. Information Sharing Page 53
-------------------
1. Positions of the Parties Page 53
------------------------
2. Analysis and Findings Page 53
---------------------
G. Joint Advertising Page 54
-----------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
1. Positions of the Parties Page 54
------------------------
2. Analysis and Findings Page 54
---------------------
VII. MANAGEMENT SERVICES AGREEMENT Page 55
-------------------------------
A. Description Page 55
-----------
B. Positions of the Parties Page 57
------------------------
C. Analysis and Findings Page 62
---------------------
VIII. TAX SHARING AGREEMENT Page 68
-------------------------------
A. Description Page 68
-----------
B. Positions of the Parties Page 69
------------------------
C. Analysis and Findings Page 69
---------------------
IX. STOCK ISSUANCE Page 71
--------------
X. ORDER Page 73
-----
</TABLE>
<PAGE>
I. INTRODUCTION
------------
On May 28, 1997, Boston Edison Company ("BECo" or "Company") and Boston
Edison Mergeco Electric Company, Inc. ("Mergeco") (together "Companies") filed
an Agreement and Plan of Merger with the Department of Telecommunications and
Energy, then known as the Department of Public Utilities ("Department"), for
approval pursuant to G.L. c. 164, (S) 96. The Agreement and Plan of Merger are
part of BECo's proposed corporate reorganization plan that would create a
holding company to own directly the common stock of BECo. The Companies also
requested Department approval of transactions to be made in connection with the
proposed corporate restructuring. This Order conditionally approves the
Companies' petition and sets forth certain ratepayer protections that the
Companies must implement as a condition of their corporate restructuring in
order to safeguard the public interest.
II. PROCEDURAL HISTORY AND RULINGS
------------------------------
The procedural history of this docket is complex and fully memorialized in
a number of Hearing Officer Rulings and Department procedural Orders that
primarily address petitions to intervene and the scope of this proceeding./1/
In this section, the Department will not repeat the lengthy procedural history,
but recites only those aspects relevant to our rulings and findings contained in
this Order.
/1/ These rulings and Orders include: Hearing Officer Ruling on Discovery
Disputes (October 23, 1997 Tr. at 47-51); Hearing Officer Ruling on
Confidentiality of Union Record Request Three (Tr. 5, at 110-111); D.P.U. 97-63,
Interlocutory Order on the Scope of the Proceeding and Petitions for Leave to
- ------------------------------------------------------------------------------
Intervene (September 2, 1997) ("September 2 Interlocutory Order"); D.P.U. 97-63,
- ---------
Interlocutory Order on Motion to Vacate and Reconsider by Cablevision Systems
- ------------------------------------------------------------------------------
Corporation and Motion for Reconsideration by New England Cable Television
- ------------------------------------------------------------------------------
Association, Inc. (October 10, 1997) ("October 10 Interlocutory Order"); D.P.U.
- -----------------
97-63, Hearing Officer Ruling on the Admissibility of Certain Exhibits Offered
-----------------------------------------------------------------------
by the Attorney General (November 26, 1997); D.P.U. 97-63, Interlocutory Order
- ----------------------- -------------------
on Appeal of of Utility Workers of America Local 387 of Hearing Officer Ruling
- ------------------------------------------------------------------------------
Regarding Union Record Request Three (December 12, 1997).
- ------------------------------------
<PAGE>
On February 26, 1998, the Department received motions from the Attorney
General and Cablevision requesting that the Department reopen the record/2/ and
defer a final decision until after the Department concludes its investigation of
Boston Edison's past affiliate transactions in Boston Edison Company, D.P.U. 97-
---------------------
95. The D.P.U. 97-95 investigation involves asset transfers by BECo to its
subsidiary, Boston Energy Technology Group ("BETG"). The Attorney General and
Cablevision seek to admit discovery material from the BETG investigation into
the record in the instant proceeding, claiming that new information has surfaced
demonstrating that the Company has improperly transferred assets to its
affiliate or has underestimated the value of assets transferred. Cablevision
argues that the Department's ability to protect electric customers through
appropriate safeguards and remedies will be severely reduced if the Department
approves the holding company petition before it completes the BETG
investigation. The Companies respond that the Department has previously decided
that past affiliate transactions are beyond the scope of this proceeding. The
Companies argue that approval of the holding company would not limit the
Department's authority with respect to the BETG investigation. The Division of
Energy Resources' ("DOER") response to the Companies' opposition to the motions
argues more for the safeguards that should be established as conditions of any
holding company approval than for the necessity of deferring a decision in this
matter, pending the completion of the BETG investigation.
As an initial matter, Cablevision has no standing to file a motion to
reopen the record. The Department determined that Cablevision did not satisfy
our standard for intervention as a full party and limited Cablevision's
participation in this proceeding to attending hearings and conferences,
- -----------------------
/2/ The evidentiary record was closed on November 21, 1997, and briefs were
filed on December 29, 1997 and on January 13, 1998.
<PAGE>
receiving copies of pleadings, and filing briefs. September 2 Interlocutory
Order at 16-17./3/ The Department finds that the filing of the motion at issue
exceeds Cablevision's role as a limited participant.
Even if the Department had determined that Cablevision has standing to file
this type of motion, which we did not, the Department would dismiss it on the
same grounds that we find to dismiss the Attorney General's motion. Through
their respective motions, Cablevision and the Attorney General seek, in essence,
Department reconsideration of the September 2 Interlocutory Order wherein the
Department determined the scope of this proceeding. The Department refused to
reconsider our determination on scope when requested to do so on September 10,
1997 and refuses to do so now. At the time the Department determined the scope
of this proceeding, we were aware of the allegations concerning the Company's
transactions with its affiliates. The Department was confident that we could
proceed with the present case without sacrifice of authority to order a remedy
in the BETG investigation if those allegations proved true. Neither Cablevision
nor the Attorney General has persuaded the Department otherwise. Therefore, the
Department denies the motions of Cablevision and the Attorney General and will
proceed on this record as developed during the course of this investigation./4/
III. COMPANIES' PROPOSAL
-------------------
Currently, BECo is an investor-owned public utility with two direct
subsidiaries (Exh. BE-DH-5, at 2). BECo's wholly-owned subsidiary, Harbor
Electric Energy Company ("HEEC") delivers
- ------------------------------
/3/ Cablevision has filed an appeal of the Department determination regarding
its intervention status with the Supreme Judicial Court, docket SJ 97-0611. The
appeal is pending.
/4/ The evidentiary record includes the direct testimony and cross examination
of Douglas S. Horan, Robert Weafer, Michael Farrell, and John J. Reed on behalf
of the Companies, Francis H. Cummings on behalf of DOER, Paul L. Chernick on
behalf of the Union and David J. Effron on behalf of the Attorney General; 55
Company exhibits; 66 Department exhibits; 91 Attorney General exhibits; 82 Union
exhibits; 14 DOER exhibits; and the Company's responses to several record
requests.
<PAGE>
electric energy from the Company to a large retail customer (id.). The Company
also wholly owns an unregulated subsidiary, BETG, which in turn has a number of
subsidiaries, including Boston Edison Services, Inc., BecoCom, Inc., and Coneco
Corporation (Exh. UWUA-59). In addition, BETG owns a 75 percent interest in
Northwind Boston, L.L.C. (id.). Boston Edison Services, Inc. owns a 50 percent
interest in EnergyVision, L.L.C., a joint venture with the Williams Energy
Services Company, which markets electricity, natural gas, and energy-related
services to retail customers (id.). BECoCom has entered into a joint venture
with RCN Telecom Services, Inc. to provide local and long-distance telephone
service, video, and high speed Internet access (id.).
--
The Companies request Department approval of an Agreement and Plan of
Merger that is part of their corporate restructuring plan to create a holding
company that would hold directly the common stock of BECo (Exh. BE-DH-1, at 1).
Pursuant to its corporate reorganization plan, BECo has formed BEC Energy,/5/ a
Massachusetts business trust, and BEC Energy's wholly-owned subsidiary, Mergeco,
a Massachusetts utility corporation (id. at 15). BECo, Mergeco and BEC Energy
---
have entered into an Agreement and Plan of Merger under which BECo would become
a subsidiary of BEC Energy through the merger of Mergeco with and into BECo,
with BECo being the surviving corporation (id. at 15-16).
---
The Companies propose that each share of BECo's common stock issued and
outstanding immediately prior to the merger would be changed and converted into
one BEC Energy common share (id. at 16). The shares of BECo's preferred stock
---
issued and outstanding immediately prior to the merger would not be converted
and will continue to be one issued and outstanding share of BECo preferred
stock, with the same preferences, designations, relative rights, privileges and
powers, and
- --------------------
/5/ By Order dated February 28, 1997, the Department approved the investment by
BECo in BEC Energy of such amounts required to submit the proposed merger
to BECo's stockholders and regulatory authorities having jurisdiction.
Boston Edison Company, D.P.U. 97-17 (1997).
---------------------
<PAGE>
subject to the same restrictions, limitations and qualifications as were
applicable to such stock prior to the merger (id.). Each share of Mergeco
---
common stock issued and outstanding immediately prior to the merger would be
changed and converted into one share of common stock, $1 par value, of BECo, all
of which would then be owned by BEC Energy and each share of BEC Energy common
stock issued and outstanding immediately prior to the merger would be cancelled
(id.). Thus, as a result of the merger, BECo would become a wholly-owned
---
subsidiary of BEC Energy, and all of the BEC Energy common shares outstanding
immediately after the merger will be owned by the holders of BECo's common stock
outstanding immediately prior to the merger (id.).
---
IV. POSITIONS OF THE PARTIES /6/
------------------------
The Attorney General and DOER assert that the Department should not approve
the Agreement and Plan of Merger or the associated transactions without imposing
conditions that, according to them, are necessary to ensure that the public
interest is protected (Attorney General Brief at 3; DOER Brief at 1)./7/
Cablevision, NECTA and the Union argue, for various reasons discussed below,
that the Companies' corporate restructuring plan is not in the public interest
and thus should be rejected (Cablevision Brief at 26; NECTA Brief at 4; Union
Brief at 2, 22). Cablevision and NECTA have suggested, in the alternative, that
the Department condition any approval of the holding company proposal on the
Companies' implementation of safeguards to protect the public interest
(Cablevision Brief at 26; NECTA Brief at 5).
- ---------------------
/6/ The Department received several petitions for leave to intervene in this
proceeding. The Attorney General of the Commonwealth ("Attorney General")
filed a notice of intervention as of right pursuant to G.L. c. 12, (S) 11E.
In addition, the Department granted the petitions for leave to intervene of
DOER and the Utility Workers Union of America, AFL-CIO, Local 387
("Union"). The Department granted Cablevision, NECTA, Berkshire Gas
Company ("Berkshire Gas"), Cambridge Electric Light Company, Canal Electric
Company and Commonwealth Electric Company ("COM/Electric") limited
participant status.
/7/ The Attorney General modified his position in his February 26 motion to
reopen the record and defer ruling in this matter, discussed above.
<PAGE>
V. CONSISTENCY OF HOLDING COMPANY PROPOSAL WITH THE PUBLIC INTEREST
----------------------------------------------------------------
A. Standard of Review
------------------
The Companies' holding company proposal is in essence a merger between BECo
and Mergeco, a Massachusetts utility corporation that has no present business or
properties of its own. Through this merger, BECo would be transformed from a
publicly traded stock corporation to a corporation whose equity would be
entirely owned by a holding company. BECo is currently the only G.L. c. 164,
(S) 2 electric company not so held.
The Department's authority to review and approve mergers and acquisitions
is found at G.L. c. 164, (S) 96, which requires the Department to find that
mergers and acquisitions are "consistent with the public interest." In Boston
------
Edison Company, D.P.U. 850, at 8 (1983), the Department construed Section 96's
- --------------
standard of consistency with the public interest as requiring a balancing of the
costs and countervailing benefits attendant on any proposed merger or
acquisition. The Department considers the special factors of an individual
proposal to determine whether it is consistent with the public interest.
Mergers and Acquisitions, D.P.U. 93-167-A at 7-9 (1994). The Department stated
- ------------------------
that, in order to meet this consistency standard, the costs or disadvantages of
a proposed merger must be accompanied by benefits that warrant their allowance.
Id. at 18-19. The Department has also indicated that it would likely consider
- ---
various factors in determining whether a proposed merger or acquisition is
consistent with the public interest pursuant to G.L. c. 164, (S) 96, such as (1)
impact on rates; (2) impact on the quality of service; (3) resulting net
savings; (4) impact on competition; (5) the financial integrity of the post-
merger entity; (6) fairness of the distribution of benefits resulting between
shareholders and ratepayers; (7) societal costs, such as lost jobs; (8) impact
on economic development; and (9) alternatives to the merger or acquisition. Id.
---
at 8-10.
<PAGE>
The Department also has stated that, because the public interest is at
stake, we decline to view the Companies' proposal as a mere mechanical
transaction but rather would examine the merits of the resulting corporate
restructuring and its effect on the regulated surviving entity. September 2
Interlocutory Order at 12. Thus, the factors identified above are considered
not just in terms of the mechanical transaction of the merger but also of the
corporate restructuring generally. Id.
---
B. Corporate Restructuring Generally
---------------------------------
The Companies claim that the Department-sponsored electric industry
restructuring is the driving force behind their proposal to form a holding
company structure (Companies Brief at 7)./8/ According to the Companies,
restructuring promotes the development of competitive markets for energy and
other related services, with utilities participating through affiliates subject
to appropriate standards of conduct (id. at 8). The Companies state that
---
forming a holding company is essential to BECo's ability to adapt to and thrive
in a restructured industry (Exh. BE-DH-1).
The Union and Attorney General counter that neither D.P.U. 96-100 nor the
Restructuring Act suggest or dictate the formation of a holding company
structure (Union Brief at 7-8; Attorney General Reply Brief at 2). NECTA
responds that the Companies' claims that electric industry restructuring is the
driving force behind their proposal either lack support in the record or are
contradicted by the record (NECTA Brief at 14). NECTA states that the
Companies' witness, Mr. Horan, conceded that
- ---------------------------
/8/ The Department's order in Electric Industry Restructuring Plan: Model
--------------------------------------------
Rules and Legislative Proposal, D.P.U. 96-100 (December 30, 1996), together with
- ------------------------------
the legislation entitled "An Act Relative to Restructuring the Electric Utility
Industry in the Commonwealth, Regulating the Provision of Electricity and Other
Services, and Promoting Enhanced Consumer Protections Therein," enacted by the
Massachusetts Legislature and signed by the Governor on November 25, 1997 (the
"Restructuring Act"), outline a framework for restructuring the electric utility
industry.
<PAGE>
nothing in D.P.U. 96-100, the Company's Settlement,/9/ or the Restructuring Act
requires electric distribution companies to rely on a holding company corporate
structure (id. at 15, citing Tr. 1, at 70-74).
-- ------
The fact that the Restructuring Act does not mandate corporate separation
is not determinative. In the Department's view, the Legislature has set forth
in the Restructuring Act the minimum acceptable corporate structure in a
restructured electric industry. St. 1997, c. 164, (S) 93, (G.L. c. 164, (S)
1A(b)(2)). The Legislature did not amend G.L. c. 164, (S) 96 in any way
dispositive of this proceeding and has left vested in the Department Section 96
authority to determine whether a corporate reorganization plan such as the one
proposed by the Companies is in the public interest. We make that determination
pursuant to our standard of review set forth in D.P.U. 93-167-A and reliance on
other Department precedent and policy, as discussed below.
In D.P.U. 96-100, at 77-78, the Department recognized that there are three
corporate structures, each with a different level of protection against
anticompetitive affiliate transactions in a competitive industry: (1)
divestiture; (2) corporate separation within a holding company; and (3)
functional separation. Although we considered it the cleanest solution to the
potential problem of anticompetitive actions or market power abuse, we declined
to endorse mandatory divestiture, given, among other things, our view that the
Department lacked the requisite authority to implement such a mandate. D.P.U.
96-100, at 68. The Department determined that we also lacked authority to order
corporate separation, at least with respect to several of the electric companies
that we regulate. Id. Given the limits of our authority, the Department
---
determined that functional separation of generation, transmission, and
distribution divisions within an integrated company, with clear, enforceable
- ----------------------------
/9/ On July 9, 1997, the Company, together with several other parties,
submitted an Offer of Settlement ("Settlement") of electric industry
restructuring issues. The Department approved the Settlement on January 28,
1998. Boston Edison Company, D.P.U./D.T.E. 96-23 (1998).
---------------------
<PAGE>
corporate rules of conduct to govern how the divisions interact, is the minimum
acceptable approach to corporate structure for the electric companies. Id. at
---
75, 79. However, the Department subsequently reiterated our preference for
corporate structures that may afford a utility company the flexibility to
accomplish its objectives while furthering the goals of fostering competition
and streamlining regulatory review, such as a holding company structure. Bay
---
State Gas Company, D.P.U. 97-24 (1997).
- -----------------
As earlier noted, BECo is the only Massachusetts-based, investor-owned
electric utility not already organized in a holding company structure (Companies
Brief at 11, Exh. BE-DH-1, at 6). The Companies claim that the regulatory
requirements imposed on the Company due to its lack of a holding company
structure significantly impair timely access to opportunities in new competitive
businesses (Exh. BE-DH-1, at 6). Specifically, Boston Edison could not invest
in an entity to pursue competitive activities without prior approval by the
Department (id. at 7). By contrast, other Massachusetts utilities that are part
---
of holding company systems can finance and support their activities in
competitive markets without the same constraints (Companies Brief at 12).
The Attorney General argues that there is no evidence that suggests that
BECo has been unable to pursue competitive ventures because of its present
corporate structure (Attorney General Reply Brief at 2). He further argues that
notwithstanding the question of whether it was authorized, the Company's joint
venture with Residential Communications Network ("RCN") is proof that there have
been no impediments.
The fact that the propriety of the Company's dealings with its affiliates
and participation in unregulated activities has been questioned is another
consideration that leads the Department to
<PAGE>
conclude that a holding company structure is appropriate for this Company, under
certain conditions./10/ The corporate form used to engage in unregulated
activities should be that which insulates ratepayers from the financial
performance of such activities to the greatest extent possible, and does not
undermine the robustness of competition in the unregulated arena. The Department
determines that the Company's proposed holding company structure would provide
the appropriate degree of protection through structural separation, and thus is
preferable to relying on functional separation through pure cost allocations
within a corporate entity, as the way to insulate ratepayers from the risks
inherent in a utility's engaging in both regulated and unregulated businesses.
As stated by FERC, the proposed corporate structure, by separating the cost
impacts of non-utility operations from utility costs and revenues, should
facilitate regulatory monitoring of possible cross-subsidization between
regulated and non-regulated businesses. Boston Edison Company and BEC Energy,
------------------------------------
Order Conditionally Authorizing Disposition of Jurisdictional Facilities to
Implement a Corporate Restructuring, 80 FERC (P) 61,274, at 61,992 (1997).
The Department determines that through formation of a holding company, BEC
Energy, like other Massachusetts utility holding companies, will be able to
pursue unregulated business opportunities in competitive markets without the
delays inherent in the regulatory process. This will allow BEC Energy to
respond to competitive forces and pursue unregulated business opportunities in a
timely fashion. We further find that the holding company structure will allow
the use of financing techniques, including joint ventures and financial
guarantees, that are more suited to the particular
- ----------------------
/10/ The Department emphasizes that, in reaching this conclusion, we need not
make a finding regarding the issue of the propriety of past transactions.
It is sufficient that the issue is raised. Even if the Department were to
determine at the conclusion of D.P.U. 97-95 that no impropriety exists
with respect to the Company's past transactions, we cannot ignore our
responsibility to serve the public interest by not establishing safeguards
against the potential abuse that might occur.
<PAGE>
requirements, characteristics and risks of the unregulated operations without
affecting the capital structure or creditworthiness of Boston Edison, and thus
the risks to its ratepayers.
C. Specific Considerations
-----------------------
The Department has developed a nine-factor test to examine the benefits and
costs of a proposed merger of utility companies. D.P.U. 93-167-A (1994).
Because the standard of review was designed to apply to mergers between
operating companies or acquisitions by one company of another, not all of the
factors are relevant to or determinative of the issues raised by this holding
company proposal. In considering the special circumstances of this proposal,
the Department's analysis focuses on the following factors: (1) impact on
rates; (2) impact on the quality of service; (3) impact on competition; (4) the
financial integrity of the post-merger entity; (5) societal costs; (6) impact on
economic development; and (7) alternatives to the merger or acquisition.
1. Impact on Rates
---------------
The Union argues that the Company has not proposed any rate decrease or
demonstrated cost savings to the regulated utility as a result of creating a
holding company (Union Brief at 8). However, the Department may find that a
proposal is consistent with the public interest if, upon consideration of its
significant aspects viewed as a whole, the public interest is at least as well
served by approval of the proposal as by its denial. Boston Edison Company,
---------------------
D.P.U. 850 (1983). Thus, the Companies need not demonstrate that BECo's rates
will decrease upon the formation of the holding company, but that the rates will
not be adversely affected.
The Union also claims that to the extent that the approval of the holding
company serves as an incentive for the Company to allocate common costs to the
regulated utility first, its rates will be negatively affected (Union Brief at
8, citing Exh. AG-107, at 19-22). Further, Cablevision contends that the
------
Company's ratepayers would be negatively affected by this proposal to the extent
that the
<PAGE>
Company transfers the costs of unregulated company operations to ratepayers and
that BECo's assets and capital are diverted to its competitive affiliates
(Cablevision Brief at 10). The Union suggests that no form of qualifications on
the holding company can adequately mitigate these risks (Union Brief at 9). The
Department disagrees.
The formation of a holding company, assuming the adoption of appropriate
safeguards by the Department, need have no adverse impact on Boston Edison's
rates because BECo will continue to operate and be regulated in virtually the
same manner as under the current structure. The Companies' proposal is not a
merger whereby two entities seek enhanced efficiency through the elimination of
duplicate services and departments. In the instant case, the regulated business
of BECo will operate the same before and after the formation of the holding
company. In the short term, the Company's rates are established pursuant to the
terms of the Settlement as approved by the Department. D.P.U./D.T.E. 96-23,
Compliance Filing Approval (1998). Thereafter, any adjustments to the Company's
rates will be subject to the same regulatory scrutiny applied today. See G.L.
---
c. 164, (S) 94. The public will be held harmless in accordance with the
standard in Boston Edison Company, D.P.U. 850, at 8 (1983). In addition, as
---------------------
discussed below, the Department will ensure through appropriate safeguards that
ratepayers will not pay increased rates due to cross-subsidization or excessive
dividend payments, and the Department's ability to ensure compliance with these
safeguards is in fact enhanced under a holding company structure.
2. Impact on Quality of Service
----------------------------
The Union cites BECo's alleged poor past performance in support of its
proposition that as the Company diverts resources to new ventures, the quality
of service will suffer even more (Union Brief at 9-10). The Attorney General
shares the Union's concern if the Company's resources were to be diverted to
non-utility businesses (Exh. AG-107, at 28). The Union posits that the pending
proposal,
<PAGE>
in connection with the approval of the Company's Settlement, will lead
to a "downturn in employment" by BECo (Union Brief at 11). According to the
Union, the level of staffing for the Company is tied to quality of service
(id.).
---
In response, the Company states that as its core mission, it will remain
committed to providing exceptional service to its electricity customers
(Companies Brief at 34). In addition to the general regulatory safeguards for
quality of service provided by the General Laws, the Company notes that by the
terms of the Settlement, the Company agreed to implement certain ratepayer
protections in the form of performance benchmarks that will apply solely to the
Company (Companies Brief at 34).
The Company has stated that its desire to enter other business ventures is
driving, at least in part, the present proposal to restructure its corporate
organization (Exh. BE-DH-1, at 6-7). The Department recognizes that as a
regulated utility enters new areas of unregulated business the potential exists
for the diversion of the regulated utility's resources to the unregulated
business, resulting in degradation of service quality. Likewise a potential
exists that the less profitable resources of an affiliated unregulated company
may be transferred to the regulated business leading to poor service quality in
the regulated business. However, in the present situation, the Department
determines that adequate means and safeguards exist to promote improvement and
to protect against a degradation in the Company's quality of service.
First, in approving the Company's Settlement, the Department found that the
performance-based regulation features of the Settlement provide ratepayers with
a level of protection against a decline in service standards by ensuring
historic levels of reliability and customer service. D.P.U./D.T.E. 96-23, at
55. The Department finds here that the performance benchmarks included in the
Settlement provide a strong incentive for the Company to ensure that its
ratepayers will be protected as the Company explores energy and other related
ventures upon formation of a holding
<PAGE>
company. Second, the Department anticipates a generic proceeding to review and
establish new service quality standards applicable for all regulated electric
distribution companies. The Department's approval of the Settlement was based in
part on the Company's conceding to be governed by any generic standards the
Department establishes. Id. at 54-55. Therefore, the Department concludes that
--
the formation of a holding company need not and likely will not have an adverse
effect on quality of service.
3. Impact on Competition
---------------------
This D.P.U. 93-167-A factor contemplates an analysis of the competitive
impact in the electric service market. In determining the scope of this
proceeding, the Department declined to broaden our standard of review to include
anything other than an analysis of competition in the electric service market.
October 10 Interlocutory Order at 10. FERC has found that the Company's
proposal will have no adverse affect on competition. 80 FERC (P) 61, 274, at
61,994. FERC reasoned that although a change in ownership would occur, no
change in the operation of the Company's facilities or other inputs that could
be used for an anti-competitive effect should result. Id. The Department
---
similarly determines that no adverse impact on competition in the electric
industry would result from the approval of the Companies' proposal. On the
contrary, the Department determines that the effect on competition would be
positive. As noted above, the Department has encouraged this type of corporate
structure to maintain clear lines between and among competitive and non-
competitive business ventures. Further, corporate separation of the Company's
energy marketing enterprise, EnergyVision, from its regulated business would
ensure a more level playing field for participants in the electric market. The
Department notes that such structural separation of marketing affiliates is also
mandated by the Restructuring Act. St. 1997, c. 164, (S) 193 (G.L.c. 164, (S)
1C)).
<PAGE>
The Company agrees that an analysis of the impact of the proposal on
competition generally in emerging competitive markets for energy and other
related services is also appropriate (Companies Brief at 29). According to the
Companies, the public will be best served if all participants in these markets
have an equal opportunity to compete for market opportunities -- that is,
without regulatory barriers impeding some participants in the market more than
others (id. at 29-30). In the Companies' view, the public benefits from
---
additional entrants in a competitive market because the array of available goods
and services will be wider (id. at 30).
---
The Union argues that the Company has not established that it brings
anything new to the unregulated markets it seeks to enter (Union Brief at 14).
Cablevision and NECTA argue that competition is not served by the participation
of an entity that uses its monopoly position in a regulated market to gain
advantages in the competitive market (Cablevision Brief at 11; NECTA Brief at
21).
Having ruled the issue beyond the scope of the proceeding, the Department
did not develop a record on the impact on competition in other industries. To
do so would have been impracticable given the vast array of markets a company
may choose to pursue and the number of interests involved.
<PAGE>
4. The Financial Integrity of the Post-Merger Entity
-------------------------------------------------
The Department determines that no change to the "financial integrity" of
the utility under a holding company structure is likely to occur. The major
difference between the current structure of BECo and the proposed holding
company structure will be the accounting treatment of the utility. The
Department agrees with the positions set forth by the Union, Attorney General
and DOER that there may be additional risk to ratepayers upon formation of the
holding company (Union Brief at 15-16; Attorney General Brief at 28; DOER Brief
at 18-19). Diversification, without appropriate ratepayer protections, could
possibly result in an increase to the overall risk profile of the Boston Edison
corporate family. The Companies suggest that this risk is the same as that
currently faced, without adverse consequences they add, by virtually all
ratepayers of other Massachusetts electric utilities, since those utilities are
already part of holding company systems (Companies Brief at 35). The Department
is not persuaded by this argument. While other companies may face the same
risk, the Department must determine whether such risks are appropriate for the
Company's ratepayers. They are not.
The Companies believe that the risks of increased diversification into
energy and other related businesses should be borne by shareholders, not
ratepayers (id.). The Department shares this belief. Thus, the Department
---
determines that formation of a holding company will not affect the financial
stability of the post-merger entity as long as appropriate safeguards are
established to protect ratepayers from the risks inherent in increased
diversification. These safeguards are discussed in Section VI, below.
<PAGE>
5. Societal Costs
--------------
An analysis of this factor focuses on the public benefits anticipated by a
proposal, and specifically looks to the impact on employment. D.P.U. 93-167-A
at 8. The Companies claim that one of the direct benefits attributable to its
proposal is an increase in employment in the greater Boston Area (Companies
Brief at 32). The Companies argue that the Department's analysis of the impact
on employment should not be so narrow as to consider only union jobs at the
Company. As an example, the Companies state that if the proposal creates five
non-union jobs, even while deregulation and divestiture activities cause the
loss of three union jobs, the net impact on jobs would be positive (id.). The
---
Companies note that whether or not a holding company is formed, divestiture of
the Company's generating assets will result in lost jobs (id. at 33). However,
---
the Companies claim that formation of a holding company will allow Boston Edison
to adapt and thrive in a restructured electric industry, and thereby mitigate
some of the societal costs of lost jobs by creating other new jobs (id.). Thus,
---
according to the Companies, although a merger or acquisition typically results
in some loss of jobs where two companies possess redundant capacities, formation
of a holding company may create employment opportunities for displaced utility
workers (id.). In response to the Union's suggestions that the Company should
---
be limited to activities in the wires business, the Companies state such a
course is likely to result in further employment reductions (Union Brief at 18;
Companies Brief at 32).
The Department is persuaded by many of the Companies' arguments. While the
Department is concerned about the welfare of union workers, our analysis of the
proposal's impact on employment must encompass employment issues of the public
in general and not focus on union employees alone. The dislocation of employees
anticipated and acknowledged by the Companies is a result of the
<PAGE>
divestiture process and not of the holding company proposal./11/ While not a
determinative factor here, given the Companies' plans to enter into new markets,
employment opportunities may be created thus mitigating any negative affect
divestiture may have on employment.
6. Impact on Economic Development
------------------------------
The Companies claim that one of the most significant public benefits of
their holding company proposal is its impact on economic development (Companies
Brief at 28). The Companies assert that direct benefits include an increase in
employment in the greater Boston area and an increase in the quality and
quantity of goods and services offered to the public (id.). According to the
---
Companies, indirect benefits flow from the joint ventures and ripple through the
economy as well (id.). However, the Attorney General and Union assert that the
---
record is devoid of any evidence that a holding company is necessary for the
creation of economic development (Attorney General Reply Brief at 4; Union Reply
Brief at 5).
Forecast of economic development resulting from any action can never be
certain. However, the Department recognizes that economic development is
affected by, among other things, changes in employment opportunities, levels of
wages, and the quality of goods and services offered. The Department has
determined, above, that the Companies' proposal likely would not have a negative
impact on employment. Moreover, the Department has determined that the quality
of the Companies' service would not suffer as a result of implementing this
proposal. Given these findings, the Department determines that there would
appear to be no real likelihood of negative impact on economic development as a
result of the formation of the holding company. Thus, the D.P.U. 850 standard
underlying D.P.U. 93-167-A is satisfied.
7. Alternatives to the Merger
--------------------------
- -------------------------
/11/ The Department notes that the Restructuring Act provides certain
protections for union employees. See e.g. St.
--- ----
<PAGE>
When a utility requests approval for a traditional merger or acquisition,
the Department may review many alternatives, including other acquisition or
merger partners, creation of affiliates and reorganization of existing assets.
The Companies contend that in the instant proceeding, the only alternative to
the formation of a holding company is the status quo (Companies Brief at 35).
The Union, arguing that the Companies failed to analyze any alternatives, imply
that as an alternative to the holding company the Company could pursue expanding
its transmission and distribution system (Union Brief at 19). During cross-
examination of the Companies' witnesses, the Union seems to suggest that the
Companies should consider divesting BECo's other ventures (Tr. 1, at 125-126).
The Department stated that analysis of this factor would not focus on
alternatives to the Company's joint ventures but rather on alternatives to the
holding company proposal. December 12 Interlocutory Order at 7-9. The
Department finds that no intervenor has suggested any practical alternative to
the holding company structure that brings any of the benefits of structural
separation to the public and the Company's ratepayers. As discussed above, the
Department considers the public interest to be served by allowing new entrants
into competitive markets. We concur with the Companies that reducing the number
of market participants, particularly those with expertise in energy production
and service, is not likely to be in the public interest (Companies Brief at 36).
- --------------------------------------------------------------------------------
1997, c. 164, (S) 193 (G.L. c. 164, (S) 1E(a).
<PAGE>
D. Conclusion
----------
Based on the foregoing, the Department determines that the holding company
structure is appropriate for the Company. However, the Department has some
specific concerns given the potential for abuse inherent in this structure that
would be addressed by the imposition of certain conditions on the Companies'
formation of a holding company. Accordingly, we find that with appropriate
conditions, the public interest will be served by the approval of the Companies'
proposal. We address these conditions in Section VI.
VI. CONDITIONS OF APPROVAL
----------------------
A. Dividend Policy
---------------
1. Introduction
------------
Under the current corporate structure, BECo pays dividend to its
shareholders and may not, without Department approval, reinvest its earnings in
its unregulated businesses. However, under the proposed holding company
structure, BECo would pay dividends to BEC Energy which may choose to invest
some or all of the dividend income received from BECo into its non-utility
subsidiaries without Department approval, retain it, or disburse it to its own
shareholders as dividends. The issue is whether the Department should condition
the approval of the holding company proposal on the Company's adopting a
particular dividend policy.
The Companies state that "[i]t is appropriate for the Department to
consider safeguards to assure that only the appropriate level of funds is
transferred from the regulated utility business to BEC Energy" (Exh. BE-DH-1, at
13). In order to address these potential concerns, in their initial filing, the
Companies state that BECo's dividend policy will be established by BECo's Board
of Directors only and that the Board of Directors would give first priority to
the capital needs of the regulated utility (Exh. BE-DH-1, at 13). In their
brief, the Companies provide a revised proposal pursuant to
<PAGE>
which the Company would not be able to declare dividends greater than income
available for common dividends, based on a rolling three year average, if the
common equity falls below 30 percent of the total capital structure and its bond
rating falls below investment grade (BECo Brief at 53).
2. Positions of the Parties
------------------------
The intervenors assert that there is a greater risk of excessive dividend
payments under the proposed holding company structure than under the current
corporate structure (Attorney General Brief at 24; DOER Brief at 18; NECTA Brief
at 35-36; Cablevision Brief at 24). According to the intervenors, the potential
for high growth in the unregulated businesses in which BEC Energy is expected to
be involved is likely to put pressure on BECo to increase its dividend payments
to BEC Energy (DOER Brief at 18-19; NECTA Brief at 35-36; Cablevision Brief at
24). The intervenors argue that this problem could be exacerbated by the
overlap of directors of BECo and BEC Energy because of a conflict in their
fiduciary duties towards the two companies, resulting in the interests of BEC
Energy taking precedence (Attorney General Brief at 25; DOER Brief at 18).
Some intervenors recommend restrictions on the level of dividend payments
by BECo to BEC Energy (Cablevision Brief at 24-25; Attorney General Brief at 26-
27, DOER Brief at 19). Cablevision recommends that the dividend payout ratio of
BECo be subject to an upper limit of 78.6 percent, which is equal to the average
plus one standard deviation of the historical levels of the dividend payout
ratio/12/ (Cablevision Brief at 25). The Attorney General and DOER recommend
that the Department should require the Company to obtain Department approval any
time its dividend payments exceed 100 percent of its net income in any year
(Attorney General Brief at 26-27, DOER Brief at 19).
- --------------------
/12/ The dividend payout ratio is calculated as the dividends per share paid by
the utility divided by the utility's earnings per common share.
<PAGE>
The Company asserts that the Attorney General's and DOER's positions
requiring Department approval for dividends greater than net income in any year
places unnecessary restrictions on the Company when more appropriate remedies
exist (BECo Brief at 51). Specifically, the Company states that its dividend
policy is reviewed during rate case proceedings, and the Department can adjust
rates and rectify any harm to ratepayers due to an improper dividend policy
(BECo Brief at 51). The Attorney General points out that there can be long
periods between rate cases which could result in an unacceptable delay in the
review of the Company's dividend policy (Attorney General Reply Brief at 8).
The Company responds that the Department could review its dividend policy during
the review of the annual filings made pursuant to its Restructuring Settlement
in order to review its rate of return (BECo Brief at 52).
The Company further asserts that its revised proposal regarding dividend
payments is "basically consistent" with the Attorney General's proposal (BECo
Brief at 53). According to the Company, the Attorney General is concerned about
the level of dividends because it could result in a less than reasonable equity
ratio, causing financial harm to BECo (BECo Reply Brief at 16). The Company
argues that its revised proposal ensures that the equity ratio will be
maintained at a reasonable level because BECo could only make a dividend payment
in excess of net income in a given year if its equity ratio remains above 30
percent (BECo Reply Brief at 16).
3. Analysis and Findings
---------------------
The Department is not persuaded at this time by the intervenors' arguments
for restricting the level of dividend payments by BECo to BEC Energy under the
proposed structure. Traditionally, the level of dividend payments is the
prerogative of the management of the company. The decision to pay dividends and
the total amount to be paid is made by the firm's board of directors, after
taking a number of factors into consideration. Among these factors are legal
constraints, capital structure
<PAGE>
concerns, earnings stability, taxes, and the fact that management may use its
dividend policy as a way of providing signals to investors about the utility's
financial strength and future profit potential. Moshe Ben-Horim, Essentials of
-------------
Corporate Finance at 337-340 (1987). After considering all these factors, a
- -----------------
utility may decide that a certain level of dividend payments, regardless of its
earnings, is necessary to accomplish its financial goals. In addition, for some
companies with historically moderate levels of growth, such as electric
utilities, maintaining a consistent and uninterrupted level of dividend payments
might be necessary for keeping and attracting sufficient levels of equity
capital. Further, once a dividend payment level has been established, other
variables such as earnings and common shares outstanding will contribute to the
reported level of the payout ratio for any given year. Specifically, even if a
company maintains a consistent level of dividend payments over time, lower
earnings could increase the payout ratio above the historical average, or even
above the 100 percent level.
In rare circumstances in the past, the Department has put restrictions on
the level of dividends payments or related items for a company. However, this
has been done to protect the financial integrity of companies that were already
in a financially difficult condition. East Northfield Water Company,
-----------------------------
D.P.U./D.T.E. 97-36, at 6 (1997); see also Blackstone Gas Company, D.P.U. 1135,
--- ---- ----------------------
at 7, 23 (1982). In the current proceeding, restrictions on BECo's dividend
payments would not be appropriate because the Company's financial health is not
in jeopardy. Further, the Company's actions have not been such that
restrictions that would reduce the Company's flexibility and infringe on its
management's prerogative are warranted. The Department notes that other holding
companies in the Commonwealth are not subject to restrictions on the level of
dividends paid by the regulated entity to the parent company. Without evidence
that the Company's actions with respect to dividend policy were harming BECo,
imposing such restrictions on BECo alone would be unduly
<PAGE>
discriminatory. Therefore, the Department declines to adopt any of the proposed
dividend restrictions.
Finally, the Department acknowledges the intervenors' concerns about the
overlap of directors of BECo and BEC Energy. However, the Department notes that
this overlap does not reduce the fiduciary responsibility of the Board of
Directors of BECo to give first priority to the capital needs of the regulated
utility and to protect its financial integrity. The Department will monitor the
dividend payments by BECo and BEC Energy, and therefore directs the Company to
report the level of payments to the Department whenever dividends are declared.
If a pattern of inappropriate levels of dividend payments threatens to emerge,
the Department will investigate and could impose restrictions at that time, if
necessary. For the reasons given above, the Department finds that no
restrictions on dividend payments unique to BECo are necessary at this time.
B. Cost of Capital
---------------
The Attorney General asserts that if BEC Energy issues its own debt and
equity to finance unregulated investments, then BECo's cost of capital may be
affected (Attorney General Brief at 27). The Attorney General argues that the
cost of service for BECo's ratepayers should not be affected by BEC Energy's
investments in other affiliates (Attorney General Brief at 27). The Attorney
General recommends that the Department require that in future rate cases, BECo
establish that its cost of capital has not increased due to BEC Energy's
unregulated activities, and that if there is any increase in the cost of capital
for BECo it should not be passed on to ratepayers (Attorney General Brief at 27-
28). The Department understands the Attorney General's concern and would not
allow BECo to pass on to ratepayers any increases in its cost of capital due to
BEC Energy's investments in non-utility activities. We will not, however,
require the Company to prove a negative as the Attorney General has suggested
(id.). Further, the Department reaffirms its long-standing policy of
- ----
determining an
<PAGE>
operating utility's cost of capital on a stand-alone basis, and not on the basis
of the holding company's cost of capital.
C. Asset Transfers
---------------
1. Description of Company Proposal
-------------------------------
In their initial filing, the Companies stated that, as a condition of the
merger, BECo would agree that any transfers of utility-related rate base assets
to its unregulated affiliates would be made only at the higher of net book value
or fair market value (Exhs. BE-DH-1, at 13; AG-42). In the case of transfers of
assets from unregulated affiliates to BECo, the Companies stated that such
transfers would be priced at a rate no higher than market value (Exh. BE-DH-1,
at 13). The Companies also proposed that, in the case of employee services
provided to its affiliates, these services would be priced at cost (Exh. BE-WF-
1, at 5; Tr. 2, at 56-57). In the case of transfers of intangible assets, such
as the value of BECo's name or goodwill, the Companies stated that these would
be considered on a case-by-case basis (Exh. DPU-56). During the evidentiary
proceedings, the Companies recognized that if certain assets, such as leases or
rights to employee services, could be shown to have a value greater than the
cost to BECo, then these services would be appropriately priced at market value
(Tr. 1, at 56, 151, 153, 200-201). Nevertheless, the Companies anticipated that
most transactions would continue to be billed at cost (Tr. 1, at 201).
The intervenors propose that the Companies be subject to an asset pricing
policy whereby any asset transfers, or provision of goods and services, by BECo
to its affiliates be priced at the higher of the Company's cost or fair market
value, with any transfers from an affiliate to the Company priced at the lower
of the affiliate's cost or fair market value (Exhs. AG-107, at 3-4; DOER-FC-1,
at 3-4). The intervenors seek to apply their proposed pricing policy to both
tangible and intangible assets, including goodwill and employee services (Exhs.
AG-107, at 11-13; DOER-FC-1, at 5-8).
<PAGE>
2. Analysis and Findings
---------------------
In determining the appropriate asset transfer policy, if any, to impose as
a condition of approval, the Department evaluates the following specific
proposals advocated during this proceeding: (a) imposing a "zero transaction"
policy; /13/ (b) establishing an appropriate pricing method; (c) addressing
prior asset transfers made by the Company; (d) requiring prior approval for
future asset transfers; (e) including intangible assets in the asset transfer
policy; (f) including employee transfers and services in the asset transfer
policy; and (g) including non-rate base assets in the asset transfer policy.
a. Zero Transaction Policy
-----------------------
Cablevision maintains that the Department must retain its authority to
impose a "zero transaction" rule upon BECo and its affiliates, especially if the
Department's ongoing investigation in D.P.U./D.T.E. 97-95 demonstrates that the
Company has violated the Department's order in Boston Edison Company, D.P.U. 93-
---------------------
37 (Cablevision Brief at 14-15). At a minimum, Cablevision urges the Department
to adopt a zero transaction rule pending the outcome of the investigation in
D.P.U./D.T.E. 97-95 (id. at 14-15). In the alternative, Cablevision argues that
---
BECo must be prohibited from engaging in any affiliate transactions other than
purchases and sales made under tariff, except in very limited circumstances (id.
---
at 15).
Cablevision cites on brief two New York Public Service Commission decisions
in which a zero transaction rule was adopted as part of settlement agreements.
Brooklyn Union Gas Co., 173 P.U.R. 4/th/ 339, 1996 WL 583720 (N.Y.P.S.C. 1996);
- ----------------------
Rochester Telephone Co., 160 P.U.R. 4/th/ 554, 1994 WL 728535 (N.Y.P.S.C. 1994).
- -----------------------
The Department notes that these provisions were entered into as a result of
settlement negotiations, and intended, at least in part, to allay what appears
to be long-
<PAGE>
standing concerns of the New York Commission about holding companies.
Rochester Telephone Company, 160 P.U.R. 4th 554 at 561. As discussed in Section
- ---------------------------
V.B, above, the Department does not share the New York Commission's concerns
about holding companies, generally, and considers that the existence of holding
companies is not, in and of itself, inimical to the interests of ratepayers.
1932 Annual Report of the Department to the Legislature at 7; see also Bay State
--- ---- ---------
Gas Company, D.P.U. 97-24, at 25 n.8 (1997); Electric Restructuring, D.P.U. 96-
- ----------- ----------------------
100, at 69-70 (1996).
The Department has acted to restrict a utility's dealings with affiliates
to prevent abuses in affiliate transactions. Fitchburg Gas and Electric Light
--------------------------------
Company, DPU 16113-B at 4 (1970) (activities of unregulated subsidiaries
- -------
restricted as initial step towards merger). The Department notes that it has
ample authority to review and proscribe a distribution company's relationship
with its affiliates, particularly where such transactions may have ratemaking
implications. G.L. c. 164, (S)(S) 76A, 76C, 85, 85A, 94A, 94B, 94C; see
---
Standards of Conduct, D.P.U. 96-44, at 7 n.5 (1996); Electric Industry
- -------------------- -----------------
Restructuring, D.P.U. 95-30, at 40-43 (1995). The Department's scope of
- -------------
authority seems broad enough to impose a zero transaction rule upon utilities
and their affiliates, where a pattern of abuse appears and where imposition of
such a prohibition is proportionate to the offense and is in the public
interest. It is a remedy to be applied only when the utility's actions warrant
such treatment.
While Cablevision advocates that the Department impose a zero transaction
rule or a modified version upon BECo pending the resolution of D.P.U./D.T.E. 97-
95, the Department has stated that the present case can proceed without
abandoning our legitimate authority with respect to the investigation in
D.P.U./D.T.E. 97-95 if those allegations are proved to be true. See Section II,
---
above. The Department finds that approval of the Company's petition will not
adversely affect our
- --------------------------------------------------------------------------------
/13/ Under a "zero transaction" rule, the Company would be prohibited from
engaging in any tranactions with any of its
<PAGE>
ability to oversee the transactions between BECo and its affiliates. Given this
finding, the Department considers Cablevision's proposal to be unduly
restrictive. Therefore, the Department declines to adopt Cablevision's proposed
zero transaction rule, or alternative restriction.
b. Pricing Method
--------------
The Attorney General, DOER, Cablevision, and NECTA contend that, in order
to prevent cross-subsidization of nonutility affiliates by BECo, any asset
transfers, or provision of goods or services, by BECo to its affiliates should
be priced at the higher of the cost to the Company or the fair market value
(Attorney General Brief at 13-14; DOER Brief at 16-26; Cablevision Brief at 15-
16; NECTA Reply Brief, at 2). With respect to transfers from affiliates to
BECo, the Attorney General proposes that these asset transfers be priced at the
lower of the cost to the affiliate or the fair market value (Attorney General
Brief at 17). DOER concludes that the Department should condition any approval
of a holding company on the requirement that all transfers from BECo to its
unregulated affiliates be priced at the higher of book or market value, except
that, with the prior approval of the Department, transfers may be made for a
price less than cost but no less than market value (DOER Brief at 26).
In response, the Companies contend that their proposed policy of pricing
rate base assets transferred to affiliates at the higher of net book value or
fair market value maximizes the value of the transferred assets and ensures that
ratepayers who supported those assets receive the benefit of any associated
gains (Companies Brief at 54). The Companies argue that their proposed
affiliate-to-utility transaction pricing policy of a rate no greater than fair
market value would provide BECo with flexibility to deal with affiliates at
arms'-length and ensure that the affiliate is not subsidized by an above-market
price (id. at 59). The Companies argue that the intervenors' proposed
---
affiliate-to-utility
- --------------------------------------------------------------------------------
affiliates, except in precisely-defined circumstances (Cablevision Brief
at 14).
<PAGE>
pricing policies would unfairly preclude BEC Energy's affiliates from dealing
with BECo, possibly to the detriment of ratepayers (id. at 60). The Companies
---
reason that an efficient affiliate whose costs were below market, but sold at
market, would not rationally deal with BECo if it could only sell at cost (id.).
---
Consequently, the Companies claim that BECo would be unable to purchase the
services from the affiliate, even if it were willing to pay market rates for the
service (id.).
---
Department policy has required that asset transfers from regulated
companies to affiliates not subject to rate base regulation be priced on the
basis of the market value of the asset at the time of the sale or transfer. New
---
England Telephone and Telegraph Company, D.P.U. 86-33-G at 204-205 (1989));
- ---------------------------------------
Commonwealth Electric Company, D.P.U. 88-135/151, at 90-94 (1988); New England
- ----------------------------- -----------
Telephone and Telegraph Company, D.P.U. 86-17, at 15 (1986). This policy
- -------------------------------
anticipated that market value of a distribution company's asset would be higher
than the book value and ensured that ratepayers were not deprived of the
potential gain that could be realized if the transfer had been to an unrelated
third party. The development of electric restructuring now demonstrates that
utility assets may have a higher book than market value. In order to protect
ratepayers from bearing the burden associated with above-market costs, the
transfer of assets in rates to an affiliate should be at the higher of net book
or market value. Accordingly, the Department finds that any sale or transfer of
assets in rates from BECo to its unregulated affiliates must be priced at the
higher of net book or fair market value.
Turning to the Companies' proposed affiliate-to-utility transfer policy, a
review of Department precedent indicates that the specific issue of affiliate-
to-utility transfers has not been previously addressed. However, the Department
has addressed other issues related to services provided by affiliates, and these
cases provide assistance in determining the issue at hand. Specifically, the
Department has found that, in order for payments to affiliated companies to
qualify for inclusion in
<PAGE>
rates, the utility must demonstrate that its affiliated charges (1) represent
activities specifically beneficial to the utility and not duplicative of work
being directly performed by that utility; (2) are at a competitive and
reasonable price; and (3) are allocated according to a cost-effective and
nondiscriminatory formula. NYNEX, D.P.U. 94-50, at 339 (1995); Oxford Water
----- ------------
Company, D.P.U. 88-171, at 17 (1989); AT&T, D.P.U. 85-137, at 51-52
- ------- ----
(1985). Applying this policy to affiliate-to-utility asset transfers, the
Department concludes that a price no greater than fair market value meets the
conditions prescribed above. In this way, the Company can deal with its
affiliates without the risk of anti-competitive behavior or pricing abuse by the
affiliate. Imposing a rule requiring transfers from the affiliate to the
distribution company to be at no more than book value is likely to preclude the
professed intent of capturing all benefits of integration for customers of the
regulated firm. An unregulated firm is unlikely to transfer property to the
utility at book value if it could sell that property on the market for a higher
price. Accordingly, the Department finds that any asset sales or transfers from
BECo's unregulated affiliates to the Company must be priced at no greater than
fair market value.
c. Prior Asset Transfers
---------------------
Cablevision and NECTA fault the Companies' proposed asset transfer policy
for their failure to take into consideration prior asset transfers (Cablevision
Brief at 1, 5; NECTA Brief at 32). Therefore, NECTA proposes that its proposed
asset transfer policy be applied to all rate base assets that the Company
transferred to BEC Energy or any affiliate prior to the date of the Department's
decision in this case (NECTA Brief at 33). Cablevision urges the Department to
defer its decision in this case until the resolution of D.P.U./D.T.E. 97-95
(Cablevision Brief at 6). The Companies characterize Cablevision's and NECTA's
proposals as beyond the scope of this proceeding, self-serving, and devoid of
any analysis (Companies Reply Brief at 3-6).
<PAGE>
The Department has repeatedly stated that any question relative to prior
affiliate transactions between BECo and its affiliates is beyond the scope of
this proceeding, and is the subject of separate investigation. December 12
Interlocutory Order at 8-9; September 2 Interlocutory Order at 13-14; November
26 Hearing Officer Ruling at 5. The Department is currently examining the
Company's prior affiliate transactions as part of D.P.U./D.T.E. 97-95, and will
rule on what measures, if any, are appropriate in light of the results of the
investigation. Accordingly, the Department declines to adopt NECTA's proposed
asset transfer policy governing prior asset transfers.
d. Preapproval of Asset Transfers
------------------------------
The Attorney General contends that the future transfer of assets from BECo
to its affiliates, subject to some materiality threshold, should be subject to
prior Department approval (Attorney General Brief at 17; Attorney General Reply
Brief at 16). The Attorney General argues that, while a rate case proceeding
may be an appropriate forum for evaluating the rate impacts of asset transfers,
such a proceeding is inadequate for ensuring that such transfers do not
negatively affect the Company's ability to provide adequate and reasonably
priced service, maximize benefits to ratepayers, minimize after-the-fact
disputes about the transfer, and ensure that the relevant information is readily
available (Attorney General Brief at 17; Attorney General Reply Brief at 16).
The Companies argue that the Attorney General's proposal that prior
approval be obtained for asset transfers would only serve to hinder transactions
that would be beneficial to ratepayers, and that his preapproval process would
only serve to maximize speculation on the propriety of the transaction under
consideration (Companies Brief at 70-71). Moreover, the Companies contend that
the Department's current practice of examining asset transfers as part of rate
proceedings would both protect ratepayers from improperly priced transactions
and reduce the burden associated with prior approval petitions (id.).
---
<PAGE>
The Department is not persuaded that the claimed benefits of preapproval
would outweigh the administrative burden associated with a preapproval process
and the risk that preapproval proceedings may hinder the Company's ability to
obtain the most advantageous terms for asset transfers. Regulatory delay and
the potential for abuse of a preapproval process by competitors are not
conducive to a utility management's ability to respond to changing market
conditions. The Department finds that the propriety and ratemaking treatment of
asset transfers are best examined in the context of rate proceedings.
Accordingly, the Department declines to accept the Attorney General's
recommended preapproval process.
While the Department has determined that asset transfers are best addressed
in the context of rate proceedings, we recognize the inherent problems that may
arise from examining the Company's asset transfers on an after-the-fact basis,
particularly if a number of years have elapsed since the last rate proceeding.
The problems identified by the intervenors concerning the review of utility
asset transfers in the context of a G.L. c. 164, (S) 94 rate proceeding are a
function of data collection. To remedy the potential problems, the Department
hereby directs BECo to provide, as part of its initial filing in future rate
case proceedings, detailed information concerning asset transfers made since the
end of the test year used in the Company's previous rate case filing. Such
information should include, for each asset that has been sold or transferred
since the end of the test year used in the Company's previous rate case filing,
the following information: (1) a description of the sold or transferred asset;
(2) the original and net book value of the asset; (3) the date of the sale or
transfer; (4) the party to whom the asset had been sold or transferred, further
identifying whether the acquiring party is an affiliate of the Company as
defined by G.L. c. 164, (S) 85; (5) the sale or transfer price of the asset; and
(6) an estimate of the market value of the asset, and the basis for such an
estimate. In order to ensure the most reliable market data, the required market
value estimates shall be prepared at or near
<PAGE>
the time the asset is actually sold or transferred. Failure to include this
information in the initial rate case filing, without first affirmatively seeking
a waiver of the requirement for good cause, will render the filing subject to
rejection or dismissal. Western Massachusetts Electric Company, D.P.U. 1300,
--------------------------------------
at 12-13 (1983).
e. Intangible Assets
-----------------
The Attorney General, DOER, Cablevision, and NECTA emphasize the need to
compensate the Company fairly for the use of intangible assets, including
goodwill, by its affiliates (Attorney General Brief at 19; DOER Brief at 20-22;
Cablevision Brief at 23-24; NECTA Brief at 33). In support of their proposals,
the Attorney General and Cablevision maintain that the Restructuring Act
requires BECo to mitigate transition costs by amounts received for the use of
intangible assets (Attorney General Reply Brief at 14, citing St. 1997, c. 164,
------
(S)(S) 189, 193 (G.L. c. 164, (S) 1G(4)); Cablevision Reply Brief at 11). The
intervenors also point to regulatory and judicial decisions in Florida, New
York, and Oklahoma, which found that ratepayers were entitled to compensation
for goodwill (DOER Brief at 21-22; DOER Reply Brief at 14-15). According to
DOER, a transfer of goodwill is not materially different from a transfer of
interest in real property, and that by allowing affiliates to use the corporate
name, BECo is transferring assets akin to real property, right-of-way use, or
the services of those employees engaged in work for the unregulated affiliate
(DOER Brief at 25). DOER contends that, while compensation for goodwill may
have been inappropriate in a regulated market, the development of a competitive
energy market gives rise to goodwill for a utility, for which ratepayers must be
compensated (id. at 21; DOER Reply Brief at 9, 13). Cablevision analogizes
---
goodwill to a fully-depreciated rate base item, for which ratepayers have borne
the associated costs and therefore would be entitled to any gains arising from
its use by others (Cablevision Brief at 22).
<PAGE>
The Attorney General and DOER state that the record provides some possible
methods for the valuation of intangible assets, and the Attorney General
suggests that the Department consider basing royalty payments to BECo on a
percentage of revenue associated with BEC Energy's joint ventures (Attorney
General Brief at 20; DOER Reply Brief at 16). Cablevision proposes that the
Department impose a royalty payment on BECo's affiliates for an initial period
of three years, to be continued if the Department permits the Company's
affiliates to use the Boston Edison name (Cablevision Brief at 24).
The Companies argue that whether they are labeled as payments for goodwill
or the use of intangible assets, the issue of royalty payments is beyond the
scope of the proceeding (Companies Reply Brief at 9, citing September 2
------
Interlocutory Order). Noting that the California PUC decision was the product
of a generic proceeding involving a legion of parties with varied interests, the
Companies state that the California commission expressly declined to reconsider
its earlier decisions that ratepayers had no claim to the name or reputation of
utilities (Companies Reply Brief at 12-13). The Companies conclude that the
Department acted properly in finding that the issue of royalties was a broad-
based issue of public policy that could not be adequately resolved in this
proceeding (id., at 10-11).
---
The Department has previously found that issues concerning royalties
represent broad policy issues that are beyond the scope of this proceeding, and
more appropriately addressed in another forum. September 2 Interlocutory Order
at 14. DOER seeks to distinguish between royalties and goodwill, claiming that
royalties represent streams of payments, while goodwill may represent a one-time
payment or proxy payment (Exh. DOER-FC-1 at 7). While DOER's argument is
plausible on its surface at least, the Department questions the basis for
distinguishing goodwill from royalties solely by the number of payments involved
in the related transactions. The issue presented here involves
<PAGE>
compensation for the use of the Company's goodwill, versus the particulars of
the compensation mechanism. Moreover, the Department disagrees with DOER's
assessment that the advent of competition in the electric industry justifies the
recognition of goodwill as a utility asset. Once divestiture has taken place,
BECo's core business will be the distribution of electricity (Exh. DPU-53). Even
in a restructured industry, BECo's transmission and distribution systems will
remain regulated. D.P.U. 95-30, at 28-29. Therefore, the Department finds that
the advent of restructuring does not translate into a finding that goodwill
payments are warranted for distribution companies.
In addition to these considerations, the Department recognizes that the
unregulated affiliates of other holding companies, including New England
Electric Systems, are not required to make goodwill payments to the regulated
distribution utility. Imposing such a requirement on BECo's affiliates in this
case, without a similar requirement of affiliates of other utilities, raises the
concern of inequitable treatment of utility affiliates. Thus, the Department
reiterates that the question of compensation for goodwill is a broad-based
public question that should be addressed, if need be, in the context of an
appropriately noticed generic proceeding.
Both the Attorney General and Cablevision rely on the Restructuring Act in
their positions that, because intangible plant must be considered in evaluating
a utility's mitigation efforts, ratepayers must be compensated for the use of
BECo's intangible assets by affiliates. General Laws c. 164, (S) 1, defines
mitigation as including, among other things,
any market value in excess of net book value associated with the sale,
lease, transfer, or other use of the assets of the company unrelated
to the provision of transmission service or distribution service at
regulated prices, including, but not limited to, rights-of-way,
property, and intangible assets when the costs associated with the
acquisition of those assets have been reflected in the company's rates
for regulated service; provided, however, that the [D]epartment shall
determine their market values based on the highest price that such
assets could reasonably realize after an open and competitive sale ...
St. 1997, c. 164, (S) 189 (emphasis added).
--------------
<PAGE>
Contrary to the Attorney General's and Cablevision's interpretation, we
find nothing in the Restructuring Act that mandates that utilities capture the
benefits of their nonregulated operations to mitigate stranded costs. The
statute does not require that all transfers from an electric company to an
affiliate recover any excess of market value over book value, only transfers of
assets "when the costs associated with the acquisition of those assets have been
reflected in the company's rates for regulated service." Even if the Department
were to agree with the Attorney General's and Cablevision's interpretation of
the Restructuring Act, the determination of whether BECo has mitigated its
stranded costs is clearly beyond the scope of this proceeding. Therefore,
Department declines to expand its asset transfer policy to intangible assets.
f. Non-Rate Base Assets
--------------------
The Attorney General, Cablevision, and NECTA argue that their proposed
pricing rule should apply to all assets whether or not they were ever included
in rate base (Attorney General Brief at 15-16, citing Interruptible
------ -------------
Transportation/Capacity Release, D.P.U. 93-141-A at 55-56 (1996); Commonwealth
- ------------------------------- ------------
Electric Company, D.P.U. 88-135/151, at 93-94 (1989); New England Telephone and
- ---------------- -------------------------
Telegraph Company, D.P.U. 86-17, at 15 (1986); Cablevision Reply Brief at 11;
- -----------------
NECTA Reply Brief at 18). While the Attorney General states that he does not
propose to automatically credit the Company's ratepayers for any gain on the
sale of non-rate base assets, his intent is to reflect such gains on the books
of BECo so that the Department may make a determination of whether such gains
should be flowed through to ratepayers (Attorney General Reply Brief at 11-12).
Similar to their arguments concerning intangible assets, Cablevision points to
the Restructuring Act to support its contention that all gains on non-rate base
assets must be flowed back to ratepayers (Cablevision Reply Brief at 10-11).
<PAGE>
In response, the Companies argue that the case and statutory law relied
upon by the intervenors fail to support their positions (Companies Reply Brief
at 23). The Companies contend that the cases cited by the Attorney General
clearly stand for the proposition that ratepayers are entitled to gains on the
sale or transfer of utility assets if those assets had been included in rate
base (id. at 23-25). Furthermore, the Companies maintain that a plain reading
---
of the Restructuring Act makes it clear that mitigation obligations do not
include non-rate base assets (id. at 24, citing St. 1997, c. 164, (S) 189).
--- ------
The Department's long-standing policy with respect to gains on the sale of
utility property has been to require the return to ratepayers of the entire gain
associated with the sale. If utility assets are recorded above-the-line,
ratepayers support those assets through the utility's allowed rate of return.
Therefore, if the property is later sold by the utility, an adjustment is
necessary to flow through to ratepayers the appreciation on assets that they
have supported in rates as reflected by a return on the investment. Barnstable
----------
Water Company, D.P.U. 93-223-B at 12-13 (1994); D.P.U. 88-135/151, at 92 (1989).
- -------------
This policy also applies to non-utility plant if such plant had ever been
previously included in utility plant in service, regardless of the length of
time the plant had been treated as plant in service. Western Massachusetts
---------------------
Electric Company, D.P.U. 88-250, at 38-39 (1989).
- ----------------
In this case, a number of intervenors propose that gains on the sale or
transfer of utility assets that had never been placed into BECo's plant in
service account be included in the asset transfer policy. The intervenors have
misconstrued the Department's precedent on this point: in fact, utility assets
that have never been placed into service for the benefit of ratepayers represent
shareholder assets for which ratepayers have never borne the associated costs or
risks of maintaining. In these situations, the utility's management, acting on
behalf of the utility's shareholders, may acquire or dispose of such assets for
the benefit of shareholders. See D.P.U. 88-250, at 38 n.3; see also Lowell
--- --- ---- ------
<PAGE>
Gas Company, D.P.U. 19037/19037-A at 17 (1977) (tax benefits associated with
- -----------
sale of yacht that had never been booked to company's plant accounts accrue to
shareholders, not ratepayers).
Cablevision cites the Restructuring Act as support of its proposed asset
transfer policy. As we have noted in Section VI.C.2.e, above, the Restructuring
Act does not mandate that all of the benefits of a utility's unregulated
operations be flowed back to ratepayers. Accordingly, the Department declines
to expand its asset transfer policy to non-rate base assets.
g. Employee Transfers and Services
-------------------------------
The Attorney General, DOER, and Cablevision argue that ratepayers should
receive any gain associated with Company transfers of employees to its
unregulated affiliates, or services provided by BECo to its affiliates (Attorney
General Brief at 18-19; DOER Brief at 22-24; Cablevision Brief at 15).
Cablevision argues that the provision of goods or services by BECo to its
affiliates should be priced at the higher of the cost to the Company or the fair
market value, while transfers from affiliates to BECo should be priced at the
lower of the cost to the affiliate or the fair market value (Cablevision Brief
at 15). The Attorney General, DOER, and NECTA fault the Companies for failing
to seek meaningful measures of the market value of employee services,
particularly in view of the Companies' statement during the hearings that at
least some transfers should be at the higher of cost or market value (Attorney
General Reply Brief at 14; DOER Brief at 23-24, citing Tr. 1, at 56, 151, 153,
------
200-201; NECTA Brief at 33-34). The intervenors point to decisions by the
California, Virginia, and Wisconsin regulatory commissions governing affiliate
transactions as support for their proposed pricing policy (DOER Brief at 15-16;
Cablevision Reply Brief at 10).
The Companies argue that the intervenors' proposed employee service and
transfer policies would unfairly preclude BEC Energy's affiliates from dealing
with BECo, possibly to the detriment of ratepayers (Companies Brief at 60). The
Companies reason that an efficient affiliate whose costs are
<PAGE>
below market, and who sells assets at market value, would not rationally deal
with BECo if it could only sell at cost (id.). Consequently, the Companies claim
---
that it would be unable to purchase the services from the affiliate, even if it
were willing to pay market rates for the service (id.).
---
The Department previously has held that employees do not represent company
assets. D.P.U. 86-33-G at 209. When a company incurs expenditures on employee
training, or when employees enhance the value of their services to the utility
beyond the value of their compensation through enhanced learning and experience,
ratepayers recoup, in general, at least a portion of the benefits of that
employee's training and experience through the employee's service for that
company. To the extent that there are any residual benefits from company
training and employee expertise, those benefits accrue to the employee, and not
the company. In a free labor market, where employees are free to leave one
position for another, no compensable interest in them can be acquired. Id.
---
What the intervenors seek would strain even a court's equitable powers.
The intervenors put forth a number of proposals by which employee transfers
could be regulated, including prior Department approval of BEC Energy's new
business lines, "cooling-off" periods for affiliate hires, and notifying
potential competitors of employees to be transferred so that competitors may
make counteroffers to these employees (Tr. 4, at 63-64). These proposals are
overly restrictive and, more importantly, either beyond the Department's
jurisdiction or inimical to a free labor market. Moreover, even if the
Department's authority or discretion extends as far as the intervenors suggest,
we decline on policy and discretionary grounds to go so far. Accordingly, the
Department rejects the intervenors' proposals governing employee transfers.
With respect to the issue of employee services, we note that BECo intends
to provide these services to BEC Energy and its unregulated subsidiaries under
the proposed management services
<PAGE>
agreement. Accordingly, the Department addresses the issue of employee services
provided by BECo to its affiliates in Section VII.C of this Order.
h. Conclusion on Asset Transfers
-----------------------------
The Companies have proposed that transfers of rate base assets from BECo to
its affiliates be priced at the greater of net book value or fair market value,
with transfers from affiliates to the Company priced at a rate no greater than
fair market value. In contrast, the Attorney General, DOER, Cablevision, and
NECTA have urged the Department to require the pricing of all asset transfers
from BECo to its affiliates, including non-rate base assets, intangible assets,
and employee transfers and services, at the greater of net book value or fair
market value, as well as impose additional restrictions on the Companies. The
Department has found that transfers of rate base assets from BECo to its
affiliates must be priced at the greater of net book or fair market value, with
transfers from affiliates to the Company priced at a rate up to fair market
value. Additionally, the Department has found that employee services shall be
priced at fully-allocated costs.
D. Investment Policy
-----------------
1. Positions of the Parties
------------------------
During the proceeding, NECTA proposed that the Department impose a cap on
BEC Energy's investments as a condition of the merger, along with other changes
in the corporate organization (NECTA Brief at 39-40). NECTA contends that the
Department must condition future investments by BEC Energy in its unregulated
affiliates upon prior Department approval (id. at 35). Noting that the
---
Company's core business is predicated upon reliable distribution service at a
reasonable cost, NECTA expresses its concern that BEC Energy will "conscript"
the earnings of BECo in order to invest in unregulated affiliates, thereby
weakening the Company's financial health to the detriment of ratepayers (id. at
---
36-37). NECTA advocates the adoption of the policies of the Wisconsin Public
<PAGE>
Service Commission, which imposed limitations upon the amount of nonutility
investment that could be made by WICOR, Inc. (id. at 38-40, citing WICOR, Inc.,
--- ------ -----------
83 P.U.R. 4/th/ 639 (Wis PSC 1987 at 641) ("WICOR")). Specifically, NECTA
-----
proposes that BEC Energy be limited to an investment balance equal to the amount
invested as of the date of the Department's decision in this proceeding, noting
that this approach provides a more effective safeguard for ratepayers than the
dividend policies offered by the Company and other intervenors (NECTA Brief at
37, 40).
Furthermore, NECTA argues that if the Department approves the Company's
holding company proposal, BecoCom, currently a subsidiary of BETG, should remain
a direct subsidiary of BECo (id. at 26-27). NECTA reasons that by separating
---
BecoCom's telecommunications and cable services from BETG's energy operations,
nonaffiliated energy marketing companies lacking exclusive, long-term rights to
the Company's poles and rights-of-way would be able to compete fairly with
BecoCom. Such separation would also permit the Department to retain control
over future investments in BecoCom (id. at 27). NECTA emphasizes the need to
---
maintain Department jurisdiction over investment activities in BecoCom, given
the ongoing investigations in D.P.U./D.T.E. 97-95, D.P.U./D.T.E. 97-96, and
D.P.U./D.T.E. 97-82 (id.). According to NECTA, Department approval of any
---
Company investment in unregulated subsidiaries, such as BecoCom, pursuant to
G.L. c. 164, (S) 17A, would not unduly burden BECo (NECTA Reply Brief at 9-10).
The Companies assail NECTA's proposals concerning BecoCom and future
investments by BEC Energy as unnecessary and "blatantly self-serving" (Companies
Reply Brief at 5). The Companies maintain that the investment restrictions set
forth by the Wisconsin PSC in WICOR were done to maintain that utility's
-----
financial integrity, which is the same purpose of the Companies' proposed
dividend policy, and that the record is devoid of any discussion of the
potential harms or benefits of NECTA's proposed investment restrictions (id.,
---
n.7). The Companies argue that retaining
<PAGE>
BecoCom as a direct subsidiary of BECo would result in less clarity of reporting
and less separation of regulated and unregulated activities, and would only
serve to hinder and delay competition in the cable industry (id. at 8).
---
2. Analysis and Findings
---------------------
BEC Energy is a Massachusetts business trust created pursuant to G.L. c.
182 (Exh. BE-DH-5, at 21). As constituted, BEC Energy will not itself operate
an electric utility business, but is intended to function as an exempt holding
company under the Public Utilities Holding Company Act of 1935 (Exh. BE-DH-5, at
20; 15 U.S.C. (S)(S) 79 et seq.). While G.L. c. 164, (S) 17A confers the
-- ----
Department with jurisdiction over investments made by operating utilities, the
Department has no jurisdiction over such investments made by holding companies.
Massachusetts-American Water Company, D.P.U. 95-41, at 9 (1995). Accordingly,
- ------------------------------------
the Department rejects NECTA's proposal to impose prior investment conditions on
BEC Energy. While the Union expressed its concern that the loss of investment
jurisdiction over BEC Energy pursuant to G.L. c. 164, (S) 17A negates the
Department's ability to oversee the operations of the Company (Union Brief at
21-22), the Department notes that approval of the holding company proposal would
have no impact upon the requirement that BECo receive prior approval of
investments made in affiliates. The Company would still need Department
approval to make any investment in its affiliates. On this basis, the
Department concludes that our ability to regulate BECo's investment decisions
remains unaffected.
Turning to NECTA's proposal that BecoCom remain a subsidiary of BECo, NECTA
argues that this is necessary in order to promote fairness for nonaffiliated
energy marketing companies. However, the Department finds no evidence in this
case that BecoCom's affiliate relationship with the Company results in
nonaffiliated energy companies being treated in a discriminatory manner.
Moreover, NECTA's proposal would confound the reporting and recordkeeping
requirements
<PAGE>
intended for separation of regulated and nonregulated entities. While NECTA
seeks to draw a parallel between HEEC and BecoCom, the Department notes that
because HEEC is a regulated Massachusetts electric company, there is a greater
nexus between BECo and HEEC than between BECo and BecoCom, and little risk of
BECo subsidizing HEEC. Therefore, the Department rejects NECTA's proposal that
the Company be required to retain BecoCom as a direct subsidiary.
E. Reporting Requirements
----------------------
1. Positions of the Parties
------------------------
The Attorney General advocates that, in order to avoid any future conflicts
on the Department's jurisdiction, any approval of the holding company proposal
must be conditioned upon BECo's commitment to provide all necessary information
so that the Department may fulfill its statutory obligations (Attorney General
Brief at 8). A number of parties proposed to impose specific access and
reporting requirements on BEC Energy and its affiliates. In order to facilitate
a review of the transactions among BECo, BEC Energy and its unregulated
affiliates, Cablevision recommends that the Department require all such
transactions be reduced to writing and maintained in separate books and accounts
for annual audit by both the Department and an independent auditor, with annual
reports detailing all affiliated transactions (Cablevision Brief at 25-26).
NECTA recommends that in addition to annual audits, the Department place
specific reporting requirements on the Company, BEC Energy, and their
affiliates, along the lines of those prescribed in WICOR (NECTA Brief at 40).
-----
These include (1) separation of investment funds from operating funds, (2) the
annual shareholders report, (3) an explanation and description of all affiliates
and their relationship to one another, (4) the percentage of assets held by each
affiliate, (5) identification of all assets or confidential information with a
monetary value or potential monetary value, (6) names of all officers and
directors with shared managers and time breakdowns between affiliates, and (7)
audited financial statements (id. at 40-41,
---
<PAGE>
citing WICOR at 650). DOER advocates that in any case where BEC Energy
- ------ -----
has more than a de minimis interest in an affiliate, that affiliate should
-- -------
be deemed an affiliated company for purposes of Department jurisdiction (DOER
Brief at 10).
2. Analysis and Findings
---------------------
General Laws c. 164, (S) 76A confers the Department with general
supervisory authority over affiliated companies/13/ with respect to their
transactions involving the regulated utility. The Department has the authority
to inquire into transactions between regulated utilities and affiliated
companies under G.L. c. 164, (S) 85. See Western Massachusetts Electric
--- ------------------------------
Company, D.P.U. 85-270, at 184 (1986); also see D.P.U. 88-135/151, Interlocutory
- ------- ---- --- -------------
Order on Appeal of Hearing Officer Ruling, at 3-5 (October 28, 1988). This
- -----------------------------------------
statute also provides the Department with access to the books and records of
BECo and all affiliated companies with respect to transactions involving the
utility. General Laws c. 164, (S) 85A provides that contracts between
affiliated companies and their regulated utilities must be filed with the
Department, and authorizes the Department to order an affiliated company to be
joined as a party respondent with its regulated utility affiliate as part of any
proceedings entered into pursuant to G.L. c. 164, (S)(S) 93 or 94. General Laws
c. 164, (S) 94B requires Department approval of any contract between affiliated
companies and their regulated utilities with a term of one year or more that
requires any compensation paid by the utility. Moreover, the
- ----------------
/14/ Under G.L. c. 164, (S) 85, the Department is authorized to
examine the books, contracts, records, documents and memoranda or the
physical property of any affiliated company with respect to any
relations, transactions or dealings, direct or indirect, between such
affiliated company and any company so subject. The word `affiliated
company' shall include any corporation, society, trust, association,
partnership, or individual (a) controlling a company subject to this
chapter, either directly, by ownership of a majority of its voting
stock or of such minority thereof as to give it substantial control of
such company, or indirectly, by ownership of such a majority or
minority of the voting stock of another corporation or association so
controlling such company; or (b) so controlled by a corporation,
society, trust, association, partnership or individual controlling as
aforesaid, directly or indirectly, a company subject to this chapter;
or (c) standing in such a relation to a company subject to this chapter
that there is an absence of equal bargaining power between the
corporation, society, trust, association, partnership or individual and
the company so subject, in respect to their dealings and transactions.
<PAGE>
Department has prescribed standards of conduct to govern the relationship
between regulated utilities and their energy marketing affiliates, including a
requirement for separate books between affiliates and the regulated entity.
Standards of Conduct, D.P.U. 96-44 (1996); 220 C.M.R. (S) 12.03(14).
- --------------------
Accordingly, the Department finds that it has significant authority over BECo
and its affiliated companies.
The parties in this proceeding consider BEC Energy and its unregulated
affiliates to be affiliates of the Company, as defined by G.L. c. 164, (S) 85
(Attorney General Brief at 7-8; Companies Brief at 40-42; DOER Brief at 8-10;
Cablevision Brief at 25). At the present time, both BEC Energy and BETG are
wholly-owned subsidiaries of the Company, which is itself a stand-alone electric
utility, not affiliated with a holding company. As such, neither BEC Energy nor
BETG fits the definition of an affiliated company as found in either G.L. c.
164, (S)(S) 85(a) or 85(b). However, the Department's current jurisdiction over
BECo's unregulated affiliates, including BEC Energy and BETG, is based on G.L.
c. 164, (S) 85(c). Under the proposed merger, BEC Energy would control the
Company through its ownership of the entire outstanding stock of BECo.
Therefore, the Department finds that once the merger takes place, BEC Energy
would be affiliated with BECo for purposes of G.L. c. 164, (S) 85(a).
Massachusetts-American Water Company, D.P.U. 95-118, at 76 (1996). Likewise, as
- ------------------------------------
a result of the proposed merger, BEC Energy would become the parent of BETG,
through the transfer of the Company's interest in BETG to BEC Energy.
Accordingly, the Department finds that once the merger takes place, BETG's
affiliation with BECo would arise from G.L. c. 164, (S) 85(b).
With respect to Boston Edison Services, Northwind, and Coneco, the
Department notes that these subsidiaries of BETG would be controlled indirectly
by BEC Energy through BETG.
<PAGE>
Therefore, the Department finds that once the merger takes place, these BETG
subsidiaries' affiliated status with BECo would be defined by G.L. c. 164, (S)
85(b).
Northwind Boston, EnergyVision, and RCN/BecoCom are organized as limited
liability companies ("LLCs"), owned in part by unaffiliated entities. /15/ The
Department finds that these BETG subsidiaries are, and would remain, affiliates
of BECo by virtue of BEC Energy's control of both the Company and BETG. See
---
D.P.U. 88-135/151, Interlocutory Order on Appeal of Hearing Officer Ruling, at 4
-------------------------------------------------------
(October 28, 1988).
DOER urges the Department to adopt a standard that would confer affiliate
status on any BEC Energy affiliate in which BEC Energy has more than a de
--
minimis interest. The definition of an affiliated company as found in G.L. c.
- -------
164, (S) 85 is unambiguous; the statute does not establish interest above a de
--
minimis level as equivalent to control. Accordingly, the Department declines to
- -------
adopt DOER's proposed de minimis standard for defining affiliated companies./16/
-- -------
In order to assist the Department in regulating BECo's affiliate
transactions, NECTA has recommended that specific reporting requirements be
imposed upon BEC Energy and its affiliates, some of which are not currently
required of other holding companies operating in Massachusetts. Imposing such a
requirement on BECo's affiliates in this case, without a similar requirement of
affiliates of other utilities, raises the concern of inequitable treatment of
utility affiliates. The issue of affiliate reporting requirements raises broad
policy issues concerning their general applicability to other holding companies
and their affiliates. Accordingly, the Department finds that the issue of
- -----------------------------------
/15/ Unicom Thermal Technologies, Boston owns 25 percent of Northwind Boston
(Exh. UWUA-59). Boston Energy Services owns 50 percent of EnergyVision,
with the remaining 50 percent owned by Williams Energy Services; and
BecoCom owns 49 percent of RCN/BecoCom, with RCN Telecom Services owning
the remaining 51 percent (id.).
---
/16/ General Laws c. 164, (S) 85 sets control or absence of equal bargaining
power as the threshold for affiliates within the ambit of Department
regulation. The notion of a threshold based on an interest that is merely
de minimi s (or "trifling," to use the common definiens) would distort
-- -------
Section 85. Black's Law Dictionary (6th ed.).
<PAGE>
reporting requirements is more appropriately addressed as part of the
Department's standards of conduct proceeding, D.P.U./D.T.E. 97-96.
F. Information Sharing
-------------------
1. Positions of the Parties
------------------------
NECTA argues that, as a condition of the proposed holding company, the
Company be prohibited from sharing customer-specific information with its
affiliates (NECTA Brief at 41-42). NECTA contends that by imposing this
condition independently of the Department's Standards of Conduct, 220 C.M.R.
(S)(S) 12.00 et seq., the Department would create a strong deterrent against
-- ----
violations by BECo, thus providing a significant safeguard for ratepayers and
competitors (id. at 42).
---
2. Analysis and Findings
---------------------
Under 220 C.M.R. (S) 12.03(9), the Company is prohibited from releasing any
customer-specific information without the consent of the customer. NECTA's
proposal would deny all of the Company's affiliates, including those competitive
affiliates covered by 220 C.M.R. (S)(S) 12.00 et seq., access to customer-
-- ----
specific information, even when consent has been received from the customer in
accordance with Department regulation. Such a restriction provides no
additional protection to ratepayers, and constitutes a measure that only serves
to hinder the development of a competitive market. Accordingly, the Department
rejects NECTA's proposal.
G. Joint Advertising
-----------------
1. Positions of the Parties
------------------------
Citing BECo's monopoly status and consequent name recognition in service
areas, Cablevision points out that the Company has developed favorable name
associations that will help BECo's competitive affiliate EnergyVision to market
its services (Cablevision Brief at 22). Cablevision argues that both the
current Standards of Conduct for energy-related affiliates of regulated
utilities and the
<PAGE>
Restructuring Act prohibit the Company from engaging in joint advertising with,
or otherwise speaking on behalf of, its competitive affiliates (id. at 23-24).
---
2. Analysis and Findings
---------------------
Section 12.03(12) of the Standards of Conduct provides, in pertinent part,
that distribution companies shall refrain from giving any appearance of speaking
on behalf of their competitive affiliates in any communications with customers
or potential customers, and shall not engage in any joint advertising or
marketing programs with competitive affiliates. EnergyVision is a competitive
affiliate of the Company. Therefore, the Department finds that the provisions
of 220 C.M.R. (S) 12.03(12) would extend to BECo's relationships with
EnergyVision. With respect to joint advertising between the Company and its
nonenergy-related affiliates, the Department finds that these issues are more
appropriately addressed in D.P.U./D.T.E. 97-96, given the generic nature of that
proceeding.
<PAGE>
VII. MANAGEMENT SERVICES AGREEMENT
-----------------------------
A. Description
-----------
Although BEC Energy will have no employees of its own for some time to
come, it will be required to maintain some corporate functions, such as
shareholder relations, investor relations, and accounting and legal operations
(Exhs. BE-WF-1, at 5; UWUA-39; Tr. 5, at 38-39). In order to provide BEC Energy
with the requisite services, the Company has entered into a Management Services
Agreement ("Management Agreement") with BEC Energy (Exhs. BE-WF-1, at 4; BE-WF-
5)./17/ After the close of evidentiary hearings, the Companies offered a revised
Management Services Agreement ("Revised Agreement"), that the Companies stated
was intended to address certain concerns raised during the hearings by the
parties, and embodies what the Companies consider to be a more accurate
reflection of the intent of the agreement (RR-DPU-3)./18/
The Revised Agreement provides that BECo will furnish BEC Energy and its
affiliates specific services upon request, provided the Company has available
personnel and resources (RR-DPU-3; Tr. 3, at 93-94). If, after consultation
with BEC Energy, the Company determines that third-party services are necessary,
BECo will arrange for the appropriate services on behalf of BEC Energy (RR-DPU-
3, at 2-3; Tr. 3, at 98-99). However, BEC Energy is not obligated to obtain any
of its management services from BECo (RR-DPU-3, at 2).
- -------------------------------
/17/ The current management services agreement between BECo and HEEC, as
approved in D.P.U. 90-288-A (1991), is still in effect and will continue as such
(RR-DPU-5).
/18/ These included, among other modifications, the clarification that the
Company will only provide services if it has available personnel and resources,
and the elimination of the force majeure clause contained in the original
----- -------
agreement.
<PAGE>
BEC Energy would request the desired services on an as-needed basis through
purchase orders, which may be amended from time to time through written change
orders (id. at 2-3). In return, BEC Energy would compensate BECo for those
---
services, based on direct labor, indirect labor, and capital expenditures (RR-
DPU-3, exh. C). Consistent with Securities and Exchange Commission affiliate
rules, BECo generally proposes to charge BEC Energy fully-loaded costs for the
services provided, as described below. However, if there is a measurable market
for such services, the Company proposes to charge BEC Energy and its affiliates
a rate based on the fair market value of those services, as determined by BECo
(RR-DPU-3, at 3-4). If BECo's charges to BEC Energy are different from the
Company's full embedded costs, the Company will record reasonable third-party
offers to provide like services at market prices, and maintain records comparing
each rate to BECo's own marginal costs of providing such services (id. at 5).
---
Under the fully-loaded costing method, the Company's charges to a BECo
affiliate consist of (1) the individual's hourly wage rate and (2) an indirect
overhead rate (Exh. UWUA-15; RR-DPU-1). The Company intends to charge overhead
costs to BEC Energy based on an allocation method currently in use as part of
its management services agreements with BETG and HEEC (Exhs. DPU-19; AG-1; RR-
DPU-3). The allocation method, which was initially developed by an outside
consulting firm as part of D.P.U. 93-37, relies on a single step-down allocation
procedure to distribute projected costs for the upcoming year among separate
Company functions (Exhs. AG-26; UWUA-15; Tr. 3, at 96). These costs, in turn,
are then converted to fully-loaded hourly rates which vary by function (Exh.
DPU-19; RR-DPU-1; Tr. 3, at 95-98). Since 1993, the Company has applied an
overhead
<PAGE>
allocation rate of 91.407 percent to its present Management Services Agreement
with BETG; while a recent review of projected 1997 data suggested a slight
reduction in the overhead allocation rate, BECo elected to maintain the higher
rate in view of the relatively minor difference from 1993 operations (RR-DPU-1).
B. Positions of the Parties
------------------------
The intervenors contend that the Revised Agreement is inadequate to protect
ratepayer interests (Attorney General Brief at 21; DOER Brief at 33; Union Brief
at 22; Cablevision Brief at 19; NECTA Brief at 31). The Attorney General
maintains that under the Revised Agreement, the allocation of administrative and
general costs to BEC Energy and its affiliates in the absence of specific
service requests, as well as the allocation of nonattributable common costs
(i.e., those costs that BECo would incur related to BEC Energy and its
- -----
affiliates solely by the existence of these entities), remains unclear (Attorney
General Brief at 21-22). The Attorney General argues that the Department should
conduct separate hearings to develop appropriate allocators for these
nonattributable costs through a reasonable and rational basis that recognizes
the relative size of the entities for which costs are incurred (id. at 23-24).
---
The intervenors fault the Revised Agreement as failing to provide that
transfers from BECo to its affiliates will be at the higher of book or market
value, and failing to ensure that transfers by the Company to BEC Energy fully
reflect the costs incurred by BECo (Attorney General Brief at 18-19; DOER Brief
at 34-35; Cablevision Brief at 15; NECTA Brief at 31, citing RR-DTE-2, 3).
------
Consequently, these intervenors argue that such an arrangement would result in
ratepayer cross-subsidization of affiliates and a distortion of competitive
markets (Attorney General Brief at 18-19; NECTA Brief at 31). Moreover, the
Attorney General argues that the Company's proposed pricing standard for
personnel services fails to ensure that affiliates do not gain competitive
advantages at the expense of ratepayers (id. at 18-19). DOER contends that post
--- ----
hoc review of cost allocations in rate proceedings is an inadequate solution to
- ---
issues of cross-subsidization, and that prospective rules,
<PAGE>
articulated in advance, are sound from both a legal and a practical position
(DOER Reply Brief at 5-7).
As a solution, the Attorney General and Cablevision propose that any
services provided by BECo to a non-utility affiliate be priced in the same
manner as the intervenors proposed to apply to asset transfers (Attorney General
Brief at 3; Attorney General Reply Brief at 14; Cablevision Brief at 15). DOER
advocates that the actual cost of personnel services provided by BECo to its
affiliates be considered the presumptive floor price, thus preventing affiliates
from paying too little for services and serving ratepayer interests by
establishing a baseline that services will not be provided at prices lower than
the rate for which ratepayers have paid for those services (DOER Brief at 23).
NECTA contends that BECo's non-electric affiliates must be billed at least the
fully distributed costs of those services (NECTA Brief at 32).
In addition to their proposed pricing policies, the Attorney General and
DOER urge the Department to consider requiring as a condition of any approval
that the Company create a service company subsidiary/19/ that would be
responsible for all corporate costs and shared services between BEC Energy and
its affiliates (Attorney General Brief at 24; Attorney General Reply Brief at
10; DOER Brief at 29-30). DOER advises that all or most BECo personnel who
would be providing services for BEC Energy and its affiliates be assigned to the
service company, with the associated expense allocated among BECo and its
affiliates proportionately to the use of such services by the affiliated
companies (DOER Brief at 29-30). The Union maintains that, even with the
proposed modifications sought by the Attorney General and DOER to the Company's
proposal, including those
- -------------------------
/19/ Under a service company structure, a separate subsidiary provides services
to the holding company and its other subsidiaries, with the related costs
charged among the respective entities on the basis of various allocators (Tr. 3,
at 180-181).
<PAGE>
related to the Revised Agreement, the resulting holding company structure would
provide few, if any public benefits and many risks to ratepayers (Union Brief at
22).
DOER, Cablevision, and NECTA maintain that the Revised Agreement still
provides no real protection to ratepayers because of the presence of overlapping
officers and directors among BECo, BEC Energy and its affiliates (DOER Brief at
33-34; Cablevision Brief at 18-19; NECTA Brief at 28-29). Specifically, NECTA
argues that a complete overlap of officers and directors among BECo, BEC Energy,
and its other affiliates, as contemplated by the Company, would lead to
inevitable conflicts involving the fiduciary duties of these officers and
directors to their respective corporations (NECTA Brief at 28-29; NECTA Reply
Brief at 19-20). The Union states that these potentials for conflict may too
easily be resolved in favor of non-utility affiliates by "rationalization," to
the detriment of regulated operations (Union Brief at 15-16). DOER argues that,
unless BECo's management and directors are independent of BEC Energy, any
management agreement would be merely a statement of principles, not a genuine
agreement (id. at 34).
---
Therefore, the intervenors argue that any approval of the holding company
structure must be preconditioned upon alterations in BECo's proposed Management
Services Agreement. DOER and Cablevision recommend that the senior managers of
BECo be separate from those of BEC Energy, and that a majority of the Company's
and BEC Energy's respective boards of directors not be directors of the other
corporation, within one year after approval of the Company's petition (DOER
Brief at 27; Cablevision Brief at 19-20). NECTA urges that the Company and BEC
Energy be required to maintain separate boards of directors, or at least provide
that the respective boards of directors have no more than one-third of its
members overlapping with the other board, with the non-overlapping directors
having no commercial ties to their board (NECTA Brief at 30). In addition,
NECTA
<PAGE>
recommends the use of separate officers and legal counsel by the Company,
BEC Energy, and its other affiliates (id. at 30-31; NECTA Reply Brief at 20).
---
With respect to other provisions in the Revised Agreement, DOER faults the
Revised Agreement for eliminating the force majeure provisions (DOER Brief at
----- -------
35). DOER contends that events beyond the Company's control, such as a
hurricane, may prevent BECo from performing services that had been previously
agreed to under a purchase order, and that the Company should not be held in
breach of contract under those conditions (id.). In addition, the Union argues
---
that the potential for abuses arising from interlocking directorates and
officers is accentuated by those provisions in the Revised Agreement which limit
the liability of management and contain broad indemnification provisions (Union
Brief at 16 n.12, citing Exhs. BE-WF-5; UWUA-54; UWUA-55).
------
In response, the Companies contend that the Revised Agreement ensures that
all joint costs are properly allocated by the Company to BEC Energy and its
other affiliates (Companies Brief at 61-62). The Companies argue that the
method for determining joint costs is the same as was approved by the Department
in Boston Edison Company, D.P.U. 93-37 (1993) (id. at 62). While the Companies
--------------------- ---
acknowledge that if BEC Energy's affiliates do not request sufficient direct
services, there may be certain administrative or overhead costs that may not be
sufficiently allocated to these affiliates, they propose that these overhead
costs may be allocated based on specific methodologies to be determined in
BECo's rate case proceedings (id.).
---
The Companies defend their proposal to price any services to affiliates at
a rate no higher than fair market value (id. at 59). The Companies contend that
---
the Attorney General's proposal to price services at the higher of cost or
market value is unsound, because an employee's expertise and experience belongs
solely to that employee, and as such ratepayers have no compensable interest in
the employee (id. at 62, citing New England Telephone and Telegraph Company,
--- ------ -------------------------------------------
D.P.U. 86-33-G at
<PAGE>
209 (1989)). Additionally, the Companies argue that the Attorney General's
proposal would harm ratepayers by precluding BECo from transferring its services
to affiliates, even when the utility's costs exceeded market value, thus
requiring the affiliate to purchase these services from third parties (Companies
Brief at 63). Consequently, the Companies reason that the Attorney General's
proposal would deny BECo the opportunity to recoup some of its cost for those
services and thus reduce the burden on ratepayers (id.).
---
The Companies dispute the potential for harm arising from interlocking
directorates between itself, BEC Energy, and its other affiliates (Companies
Reply Brief at 20). The Companies argue that, to the extent that specific
potential harms exist, they relate primarily to the financial integrity and
quality of service of BECo (id.). The Companies contend that their proposed
---
dividend restriction policy and the Department's long-standing commitment to
quality of service fully address any concerns raised by the intervenors (id. at
---
20-21). Moreover, the Companies point to the Department's "significant
experience and success" in regulating utilities with interlocking directorates
and officers (id. at 21). The Companies conclude that while the issue of
---
overlapping officers and directors may become the subject of review in
D.P.U./D.T.E. 97-96 or some other proceeding, the intervenors here have failed
to demonstrate any harms arising from interlocking directorates and officers
(id.).
- ----
C. Analysis and Findings
---------------------
Section 94B subjects contracts entered into by electric companies and an
affiliated company to Department review and approval. The statute does not set
forth an explicit standard of review and, therefore, Department case precedent
provides the basis for reviewing Section 94B proposals. In evaluating Section
94B proposals, the Department requires utilities to demonstrate that (1) the
proposal provides a reasonable method of allocating liabilities and benefits
between a utility company and its affiliate, and (2) the methods employed in
structuring the proposal are sufficient to protect the
<PAGE>
interests of a utility company's ratepayers. D.P.U. 93-37, at 17-18; Harbor
------
Electric Energy Company/Boston Edison Company, D.P.U. 90-288-A (1991); Harbor
- --------------------------------------------- ------
Electric Energy Company/Boston Edison Company, D.P.U. 90-288 (1991)./20/
- ---------------------------------------------
As an initial matter, the Department addresses the issue of interlocking
officers and directors. In D.P.U. 96-44, at 12-13, the Department has found
that the sharing of employees by utilities and competitive affiliates may be
anticompetitive, if such personnel are privy to specific and competitively
sensitive information and have the opportunity to use such information to give
the affiliate a competitive advantage. 220 C.M.R. (S) 12.03(13). Because BEC
Energy's activities as a voluntary association would not include the selling or
marketing of natural gas, electricity, or related services on a competitive
basis as described in 220 C.M.R. (S)12.02(2), BEC Energy would not be a
competitive affiliate of the Company, and thus not be subject to the
restrictions contained in 220 C.M.R. (S)(S) 12.00 et seq.. The Department is
-- ----
aware of the potential, at least, for anticompetitive behavior and other abuses,
resulting from what may be the conflicting obligations of corporate officers and
directors. Even so, the Department is confident that the current regulatory
framework is capable of identifying such abuses when they occur, as well as
acting to correct them. Holding companies are not new features of utility
structure in Massachusetts. The Department finds no reason at this time to
mandate separate officers and directors for BEC Energy and the Company. If the
Department finds credible evidence that anticompetitive behavior or other
corporate abuses are the result of the Company's practice of having interlocking
officers and directors, we shall act expeditiously on the matter.
- -----------------------
/20/ The Department has a long-standing policy of examining management, and
other affiliate, contracts. As noted by the Department on page 7 of its 1932
Annual Report to the Legislature, "The holding companies, in their efforts to
derive income in addition to that obtained through dividends, frequently resort
to all sorts of contractual relations with the operating utilities which they
control. These contracts in any rate proceeding necessarily are subject to
suspicion and to careful scrutiny." Much has changed since the heyday of Samuel
Insull, and much of the potential for abuse has been wrung out of the utility
holding company structure (Tr. 2, at 78-80). But "careful scrutiny" remains
necessary./20/ The Department has a long-standing policy of examining
management, and other affiliate, contracts. As noted by the Department on page 7
of its 1932 Annual Report to the Legislature, "The holding companies, in their
efforts to derive income in addition to that obtained through dividends,
frequently resort to all sorts of contractual relations with the operating
utilities which they control. These contracts in any rate proceeding necessarily
are subject to suspicion and to careful scrutiny." Much has changed since the
heyday of Samuel Insull, and much of the potential for abuse has been wrung out
of the utility holding company structure (Tr. 2, at 78-80). But "careful
scrutiny" remains necessary.
<PAGE>
During the proceedings, there was testimony as to the relative merits of a
service company structure versus reliance on a management agreement for
allocating costs among affiliates (Tr. 3, at 180-181; Tr. 5, at 42-44, 51-52).
The Department notes that certain costs, such as corporate governance expenses,
would be incurred by BEC Energy and other nonregulated affiliates even in the
absence of a specific request from services by BECo. However, the Revised
Agreement does not provide for the allocation of these and other common costs
between BECo and its affiliates in the absence of service requests by the
Company's affiliates. Under these conditions, the Company faces the increased
risk that it would become the default entity for costs not otherwise explicitly
allocated to other affiliates. This concern is particularly appropriate here,
where the Companies' holding company proposal is driven by a need to compete
effectively in the marketplace. Historically, regulated utilities have formed
affiliates for the purpose of performing a discrete set of activities which
required a minimal outlay of utility resources. Western Massachusetts Electric
------------------------------
Company, D.P.U. 97-13 (1997); Fall River Gas Company, D.P.U. 11655 (1956).
- ------- ----------------------
However, the advent of restructuring and rise of competitive forces in the
electric industry make it likely that a utility's nonregulated ventures will
command a greater percentage of resources and effort than in the past, and thus
increase the complexity of transactions between the utility and its affiliates.
While a well-structured service company arrangement might result in a more
explicit allocation of common costs among multiple affiliates than what may be
offered through a management services agreement, the formation of a service
company would be a form of corporate separation, which the Department has
previously determined that we lack clear authority to mandate. D.P.U. 96-100,
at 68. The holding company structure we approve here is relatively simple, and
so at this time a service company does not appear to be warranted. However,
future circumstances (for example, mergers, acquisitions, or further energy
diversification) might make a service company's creation beneficial to
<PAGE>
ratepayers. In order to evaluate the circumstances in which it might be
beneficial to ratepayers for BEC Energy to organize a service company affiliate,
the Company is hereby directed to engage an independent consultant of its own
choosing to advise it on the conditions in which a service company option may be
more suitable for BEC Energy rather than a management services agreement. This
review should take into consideration a variety of issues, including ratepayer
interests and BEC Energy's emerging business plans. As part of this study, the
Company is also directed to examine the advisability of diversifying the
membership of the holding company's board of directors in the interest of BECo
ratepayers. This review should reference the experience of other utility
holding companies in Massachusetts. The results of the Company's review, with
the independent consultant's study, shall be submitted to the Department no
later than 18 months from the date of this Order. The Department's purpose in
directing the examination of these two questions is to ensure that a structure
acceptable under current circumstances be evaluated in light of probable future
developments. The Department shall examine the report and take whatever action
we is deemed appropriate.
The significant revisions to the Management Agreement, as contained in the
Revised Agreement, include the clarification that BECo will provide management
services to BEC Energy as well as other affiliates of BEC Energy, and that the
current management agreement with BETG will be terminated (RR-DTE-2; RR-DTE-3).
The Revised Agreement further specifies that BECo is required to provide
services only to the extent that it has the personnel and resources to do so,
and addresses the issues of non-performance by the Company and the liability of
BEC Energy and its affiliates for services provided in the absence of a purchase
order (id.). The Department finds that the amended language addresses nearly
---
all of the concerns raised during these proceedings, including the pricing of
services in the presence of a competitive market and BECo's obligations to BEC
Energy.
<PAGE>
Furthermore, the amended language more accurately reflects the terms under which
BECo will provide service to BEC Energy and its affiliates than those reflected
in the original agreement.
While the Union objects to the Revised Agreement's indemnification
clause,/21/ the Department finds that the record evidence in this case supports
a finding that the indemnification clause contained in the Revised Agreement is
intended to provide a measure of predictability in business transactions and
avoid unnecessary litigation (Exhs. UWUA-54; UWUA-55). Despite this
consideration, the Department finds that the elimination of the force majeure
provision from the Revised Agreement leaves the Company open to legal action in
the event that it is unable to perform certain services for its affiliates
because of circumstances beyond its control, such as a storm. The Department
agrees with DOER that the Company should not be held in breach of contract under
force majeure conditions.
- ----- -------
The Department has examined the cost allocation method proposed by BECo,
which relies on the same method as the Management Services Agreement approved in
D.P.U. 93-37-A. As we noted in Section VI.C.2.g, above, an employee's expertise
properly belongs to that employee, and not his employer. So long as ratepayers
are compensated for an employee's time and related overhead provided to a third
party (whether that third party is an affiliate of the utility or is unrelated)
there is no cross-subsidization of that third party by ratepayers. In fact,
transfers at fully-allocated cost will allow customers of the regulated company
to share in the economies of scope and scale with the customers of the
unregulated affiliate. Furthermore, the Department's Standards of Conduct
promulgated for energy-related affiliates in D.P.U. 96-44 and those standards
for non-energy affiliates under consideration in D.P.U./D.T.E. 97-96 provide
sufficient assurance that affiliates would not gain competitive advantages at
the expense of ratepayers. With respect to the Attorney General's proposal
- ---------------------
/21/ The limitation of liability clause provides that neither party nor its
officers, directors, agents, employees, successors and assigns are liable or
responsible to the other party for direct, incidental, indirect, consequential
or other damages connected to performance or nonperformance (Exh. BE-WF-5, at 5;
RR-DPU-2, 3).
<PAGE>
to establish nonattributable cost allocators through separate hearings, the
Department finds that the fully-loaded hourly rates provided for in the Revised
Agreement provide sufficient compensation to BECo's ratepayers for those costs
incurred by the Company in providing BEC Energy and its affiliates with
administrative and general services, as well as compensating the Company for
nonattributable common costs. Accordingly, the Department finds it unnecessary
to impose the additional regulatory burden of separate hearings. Based on the
foregoing, the Department concludes that the allocation methodology for joint
costs proposed in the Revised Agreement is a reasonable method of allocating
liabilities and benefits among the Company, BEC Energy, and its other
affiliates.
Based on the foregoing, the Department approves the Revised Agreement
subject to satisfaction of a single condition. The condition for final approval
is that the Company remedy the deletion of the force majeure clause. The
----- -------
Company is directed to submit a second revision of an executed Management
Services Agreement that contains a force majeure clause identical to the force
----- ------- -----
majeure clause included in the Management Agreement contained in Exhibit BE-WF-
- -------
5. Satisfaction of this condition will result in final, unconditional approval
of the Management Services Agreement.
VIII. TAX SHARING AGREEMENT
---------------------
A. Description
-----------
The proposed Tax Sharing Agreement provides that, each year, BEC Energy and
its subsidiaries, including BECo, would calculate their income tax liability on
a stand-alone basis (Exhs. BE-WF-6, at 5; DPU-26, at 5; Tr. 2, at 92-93)./22/ In
turn, each subsidiary would make tax payments to BEC Energy based on the
calculation of its stand-alone tax liability, if any liability exists (Exh. DPU-
26, at 7). In the event that a subsidiary generates a tax loss or other tax
benefit that is
- -----------------------
/22/ Several modifications to the stand-alone method have been incorporated in
order to comply with the United States Tax Code, including the treatment of
dividends paid to affiliates and limitations on utilization of tax benefits
(Exhs. DPU-24; DPU-26, at 5).
<PAGE>
available to BEC Energy in its consolidated income tax return, BEC Energy would
make payments to the subsidiary consistent with the value of such tax benefits
at the marginal tax rate (id.; Exh. BE-WF-1, at 5). According to the Companies,
---
because certain tax items must be treated on a consolidated basis, to the extent
that a particular subsidiary's specific tax benefits are applied to the
consolidated return, that subsidiary is allocated the benefit of that tax item
for purposes of determining its share of the consolidated tax liability (Exh.
DPU-24). Payments of any amount due under the tax sharing agreement may be made
in cash or otherwise recognized on the books of BEC Energy and its subsidiary
(Exhs. BE-WF-1, at 5-6; DPU-26, at 7).
/22/ Several modifications to the stand-alone method have been incorporated in
order to comply with the United States Tax Code, including the treatment of
dividends paid to affiliates and limitations on utilization of tax benefits
(Exhs. DPU-24; DPU-26, at 5).
B. Positions of the Parties
------------------------
The Companies maintain that the Tax Sharing Agreement is a common form of
agreement entered into between parent corporations and their subsidiaries
(Companies Brief at 63-64). The Companies contends that the Tax Sharing
Agreement here is identical to that approved in D.P.U. 93-37-A, and that no
party has submitted any evidence to suggest that the Tax Sharing Agreement
approved in that proceeding is no longer consistent with the public interest
(id.). No other party addressed this issue.
- ----
C. Analysis and Findings
---------------------
Pursuant to G.L. c. 164, (S) 17A, a gas or electric company must obtain
written Department approval in order to "loan its funds to, guarantee or endorse
the indebtedness of, or invest its funds in the stock, bonds, certificates of
participation or other securities of, any corporation, association or trust . .
. ." The Department has indicated that such proposals must be "consistent with
the public interest," that is, a Section 17A proposal will be approved if the
public interest is at least as well served by approval of the proposal as by its
denial. Bay State Gas Company, D.P.U. 91-165, at 7 (1992); see Boston Edison
--------------------- --- -------------
Company, D.P.U. 850 (1983).
- -------
<PAGE>
The Department has stated that it will interpret the facts of each Section
17A case on its own merits to make a determination that the proposal is
consistent with the public interest. D.P.U. 91-165, at 7. The Department will
base its determination on the totality of what can be achieved rather than a
determination of any single gain that could be derived from the proposed
transactions. Id.; see D.P.U. 850, at 7. Thus, the Department's analysis must
--- ---
consider the overall anticipated effect on ratepayers of the potential harms and
benefits of the proposal. D.P.U. 91-165, at 8. Assessing the effect on
ratepayers weighs a number of factors, including, but not limited to: the
nature and complexity of the proposal; the relationship of the parties involved
in the underlying transaction; the use of funds associated with the proposal;
the risks and uncertainties associated with the proposal; the extent of
regulatory oversight on the parties involved in the underlying transaction; and
the existence of safeguards to ensure the financial stability of the utility.
Id.
- ---
The Department notes that the Tax Sharing Agreement is substantially
identical to that reviewed and approved in D.P.U. 93-37-A. The Department's
requirement, as set forth above, that the Company report back on creating a
service company does not negate the need for a tax agreement among the
affiliated entities to address issues arising from their consolidated tax return
filings. The Department finds that the Tax Sharing Agreement provides a
reasonable method of allocating liabilities and benefits among the Company, BEC
Energy, and its other affiliates. The Department also finds that the methods
employed in the Tax Sharing Agreement are sufficient to protect the interests of
the Company's ratepayers. Accordingly, the Tax Sharing Agreement is hereby
approved.
<PAGE>
IX. STOCK ISSUANCE
--------------
Mergeco has an authorized capitalization consisting of 200,000 shares of
common stock, $1 par value, of which 100 shares have been subscribed for by BEC
Energy, and subject to the approval of the Department, will be issued and sold
to BEC Energy at a price of $1 per share (Petition at 2). The Companies request
that the Department authorize and approve the proposed issuance of 100 shares of
Mergeco common stock to BEC Energy (id. at 5). The Companies claim the proposed
---
issuance is reasonably necessary to effect the holding company structure
(Petition at 5).
In order for the Department to approve the issuance of stock, bonds, coupon
notes, or other types of long-term indebtedness/23/ by an electric or gas
company, the Department must determine that the proposed issuance meets two
tests. First, the Department must assess whether the proposed issuance is
reasonably necessary to accomplish some legitimate purpose in meeting a
company's service obligations, pursuant to G.L. c. 164, (S) 14. Fitchburg Gas &
---------------
Electric Light Company v. Department of Public Utilities, 395 Mass. 836, 842
- --------------------------------------------------------
(1985) ("Fitchburg II"), citing Fitchburg Gas & Electric Light Company v.
------------ ------ -----------------------------------------
Department of Public Utilities, 394 Mass. 671, 678 (1985) ("Fitchburg I").
- ------------------------------ -----------
Second, the Department must determine whether the Company has met the net plant
test./24/ Colonial Gas Company, D.P.U. 84-96 (1984).
--------------------
The Court has found that, for the purposes of G.L. c. 164, (S) 14,
"reasonably necessary" means "reasonably necessary for the accomplishment of
some purpose having to do with the obligations of the company to the public and
its ability to carry out those obligations with the greatest possible
efficiency." Fitchburg II at 836, citing Lowell Gas Light Company v. Department
------------ ------ --------------------------------------
of Public Utilities, 319 Mass. 46, 52 (1946). In cases where no issue exists
- -------------------
about the reasonableness of
- -----------------------
/23/ Long-term refers to periods of more than one year after the date of
issuance. G.L. c. 164, (S) 14.
/24/ The net plant test is derived from G.L. c. 164, (S) 16.
<PAGE>
management decisions regarding the requested financing, the Department limits
its Section 14 review to the facial reasonableness of the purpose to which the
proceeds of the proposed issuance will be put. Canal Electric Company, et al.,
---------------------- ------
D.P.U. 84-152, at 20 (1984); see, e.g., Colonial Gas Company, D.P.U. 90-50, at 6
--------------------
(1990).
The Fitchburg I and II and Lowell Gas cases also established that the
------------------ ----------
burden of proving that an issuance is reasonably necessary rests with the
company proposing the issuance, and that the Department's authority to review a
proposed issuance "is not limited to a `perfunctory review.'" Fitchburg I at
-----------
678; Fitchburg II at 842, citing Lowell Gas at 52. Regarding the net plant
------------ ------ ----------
test, a company is required to present evidence that its net utility plant
(original cost of capitalizable plant, less accumulated depreciation) equals or
exceeds its total capitalization (the sum of its long-term debt and its
preferred and common stock outstanding) and will continue to do so following the
proposed issuance. Colonial Gas Company, D.P.U. 84-96, at 5 (1984).
--------------------
Where issues concerning the prudence of the Company's capital financing
have not been raised or adjudicated in a proceeding, the Department's decision
in such a case does not represent a determination that any specific project is
economically beneficial to a company or to its customers. In such
circumstances, the Department's determination in its Order may not in any way be
construed as ruling on the appropriate ratemaking treatment to be accorded any
costs associated with the proposed financing. See, e.g., Boston Gas Company,
--- ---- ------------------
D.P.U. 95-66, at 7 (1995).
Regarding the net plant test, a company is required to present evidence
that its net utility plant (original cost of capitalizable plant, less
accumulated depreciation) equals or exceeds its total capitalization (the sum of
its long-term debt and its preferred and common stock outstanding) and will
continue to do so following the proposed issuance. Colonial Gas Company, D.P.U.
--------------------
84-96, at 5 (1984). If the Department determines at that time that the fair
structural value of the net plant and
<PAGE>
land and the fair value of the nuclear fuel, gas inventories, and fossil fuel
inventories owned by such a utility are less than its outstanding stock and
debt, it may prescribe such conditions and requirements as it deems best to make
good within a reasonable time the impairment of the capital stock. G.L. c. 164,
(S) 16.
The record indicates that Mergeco has no assets in plant, and thus would
not meet the net plant test as contemplated by G.L. C. 164, (S) 16. However,
the Department notes that the purpose of the stock issuance is to set up a
framework or straw for the consummation of the merger. The merger would
extinguish the corporate existence of Mergeco, and consequently, any resultant
effect on Mergeco's capital structure. See Sheffield Water Company, D.P.U. 92-
--- -----------------------
168, at 7 (1992). Therefore, the Department exempts Mergeco from the
requirements of the net plant test for the proposed stock issuance.
X. ORDER
-----
After due notice, hearing and consideration, the Department
VOTES: That pursuant to Section 14 of Chapter 164, the proposed issuance of
-----
common stock of Boston Edison Mergeco Electric Company, Inc. to BEC Energy is
reasonably necessary to effect corporate restructuring; and
VOTES: That pursuant to Section 14 of Chapter 164, the proposed issuance of
-----
common stock of Boston Edison Mergeco Electric Company, Inc. to BEC Energy is in
the public interest; and it is
ORDERED: That pursuant to Section 14 of Chapter 164, the issuance by
-------
Mergeco of 100 shares of its common stock to BEC Energy in consideration of
payment of $100 by BEC Energy is hereby approved and authorized; and it is
<PAGE>
FURTHER ORDERED: That pursuant to Section 96 of Chapter 164, the merger to
---------------
form a holding company structure for Boston Edison and the terms thereof are
consistent with the public interest; and it is
FURTHER ORDERED: That pursuant to Section 96 of Chapter 164, the Agreement
---------------
and Plan of Merger dated as of March 25, 1997, and the merger of Mergeco into
Boston Edison pursuant thereto is hereby approved and authorized; and it is
FURTHER ORDERED: That pursuant to Sections 17A and 94B of Chapter 164, the
---------------
Tax Sharing Agreement between Boston Edison and BEC Energy is hereby approved
and authorized; and it is
FURTHER ORDERED: That pursuant to Section 94B of Chapter 164, the
---------------
Department approves the Management Services Agreement between Boston Edison and
BEC Energy, subject to the filing of an amended and executed Management Services
Agreement which conforms to the Department's directive next apprearing; and it
is
FURTHER ORDERED: That Boston Edison and BEC Energy submit a revised
---------------
Management Services Agreement, amended to include the force majeure clause that
-------------
appeared in the originally filed Management Services Agreement, consistent with
the directives contained in this Order; and it is
FURTHER ORDERED: That Boston Edison comply with all directives contained in
---------------
this Order.
By Order of the Department,
Janet Gail Besser, Chair
James Connelly, Commissioner
<PAGE>
W. Robert Keating, Commissioner
Paul B. Vasington, Commissioner
<PAGE>
EXHIBIT 99.D-4
--------------
EXHIBIT D-4
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, and William L. Massey.
Boston Edison Company ) Docket No. EC97-39-000
BEC Energy )
ORDER CONDITIONALLY AUTHORIZING
DISPOSITION OF JURISDICTIONAL FACILITIES
TO IMPLEMENT A CORPORATE REORGANIZATION
(Issued September 11, 1997)
In this order, the Commission conditionally authorizes a disposition of
jurisdictional facilities that will, through a corporate reorganization, result
in the formation of a holding company. As a result of this restructuring,
Boston Edison Company (Boston Edison) will become a wholly-owned subsidiary of
BEC Energy, a public utility holding company.
1. Background
----------
1. Description of Boston Edison and Its Current Corporate Structure
----------------------------------------------------------------
Boston Edison is an investor-owned public utility that is currently engaged
in the generation, transmission, distribution, and sale of electric energy.
Boston Edison supplies electricity at retail to an area of 590 miles in
Massachusetts, including the City of Boston and surrounding cities and towns,
and also sells electric energy at wholesale to, and transmits electric energy in
interstate commerce for, other electric utilities and municipal electric
departments under rate schedules on file with the Commission./1/ Boston Edison
States/2/ that it is a public
- ------------------------------
/1/Application of Boston Edison and BEC Energy for Authority to Implement
Proposed Corporate Reorganization (Application) at 2.
/2/Application at 2.
<PAGE>
utility as defined in section 201(e) of the Federal Power Act (FPA)/3/ and also
is an "exempt holding company" under the Public Utility Holding Company Act of
1935 (PUHCA)./4/
- ------------------------------
/3/16 U.S.C. [S] 824 (1994).
/4/15 U.S.C. [SS] 79 - 79z-6 (1994).
<PAGE>
Boston Edison's wholly-owned subsidiary, Harbor Electric Energy Company
(Harbor Electric), delivers electric energy from Boston Edison to a large retail
customer, the Massachusetts Water Resources Authority. Harbor Electric owns a
small distribution system that is used only for local distribution. According to
Boston Edison and BEC Energy (collectively, the Applicants), Harbor Electric is
not subject to the Commission's jurisdiction because it does not sell electric
energy for resale in interstate commerce, or own or operate any interstate
transmission facilities./5/
- ------------------------------
/5/Boston Edison and BEC Energy Supplemental Information Filing of July 18,
1997 (Supplemental Filing) at 1-2.
<PAGE>
Boston Edison also currently wholly owns an unregulated subsidiary, Boston
Energy Technology Group (BETG), which, along with several of the latter's
subsidiaries, is engaged in various businesses. For example, one BETG
subsidiary owns a 50 percent interest in EnergyVision, L.L.C. (EnergyVision), a
joint venture that markets electricity, natural gas, and energy-related services
to retail customers in New England. According to the Applicants, EnergyVision
does not own electric transmission lines or interstate gas pipelines, does not
provide electric transmission or natural gas transportation services, and limits
itself to retain transactions./6/ In addition, BETG, through another subsidiary,
has entered into a telecommunications joint venture with RCN Telecom Services,
Inc. to provide local and long-distance telephone service, video and high-speed
Internet access./7/
2. The Proposed Corporate Reorganization
-------------------------------------
According to the Applicants, to effect the proposed corporate
restructuring, Boston Edison has formed BEC Energy and BEC Energy's wholly-owned
subsidiary, Boston Edison Mergeco Electric Company (Mergeco), neither of which
currently has any business or properties of its own. All outstanding BEC Energy
common shares are currently owned by Boston Edison, while the authorized stock
of Mergeco is currently subscribed for by BEC Energy and will be issued to BEC
Energy upon approval of the Massachusetts Department of Public Utilities
(Massachusetts Commission). Boston Edison, Mergeco, and BEC Energy have entered
into a Merger Agreement dated March 25, 1997, under which, subject to
shareholder approval, Boston Edison will become a wholly-owned subsidiary of BEC
Energy through the merger of Mergeco with and into Boston Edison, with Mergeco
ceasing to exist. In the merger, Boston Edison common shares will be exchanged
on a share-for-share basis for BEC Energy common shares. None of Boston
Edison's other equity securities, including cumulative preferred shares, or its
debt would be altered by the merger./8/
- ------------------------------
/6/Supplemental Filing at 2.
/7/Boston Edison Proxy Statement/Prospectus dated March 26, 1997 (Proxy
Statement) at 11.
/8/Application at 4; Proxy Statement at 12. After the merger is consummated,
BEC Energy common stock will be publicly traded on the New York Stock Exchange
and Boston Stock Exchange. Application at 4. The Applicants state that the
merger is structured as a "reverse
<PAGE>
- ------------------------------
triangular merger" for tax purposes. Supplemental Filing at 2.
<PAGE>
Immediately after the merger, Boston Edison will transfer the stock of BETG
to BEC Energy. Harbor Electric will remain a wholly-owned subsidiary of Boston
Edison./9/
According to the Applicants, neither BEC Energy nor Mergeco will conduct
any operations until all necessary regulatory approvals have been obtained and
the merger occurs, at which time BEC Energy will wholly own Boston Edison and
Mergeco will cease to exist./10/ The merger is subject to regulatory approval by
this Commission, the Massachusetts Commission, the Nuclear Regulatory
Commission, and the Securities and Exchange Commission (SEC), and is also
subject to the approval of Boston Edison's shareholders./11/
3. Reasons for the Proposed Reorganization
---------------------------------------
Boston Edison states that the principal reason for the reorganized
corporate structure is "to provide increased financial, managerial, and
organizational flexibility in order to better position Boston Edison to operate
in the changing electric utility industry." The holding company structure will
allow BEC Energy to conduct non-utility business in a more timely manner, and
will clearly separate BEC Energy's utility and non-utility businesses./12/
- ------------------------------
/9/Application at 4; Proxy Statement at 12.
/10/Supplemental Filing at 2.
/11/Application at 3.
/12/Proxy Statement at 13.
<PAGE>
Boston Edison adds that the Massachusetts Commission has recently commenced
several inquiries into restructuring the electric utility industry in
Massachusetts aimed at promoting competition and allowing customers to choose
their electricity suppliers. In March 1996, the Massachusetts Commission
initiated a rulemaking to promulgate regulations that would apply to all
Massachusetts electric companies' restructuring plans; the Massachusetts
Commission encourages companies subject to its jurisdiction to enter into
negotiated settlements consistent with the principles established in that
rulemaking, one of which is "the legal or functional separation of the
generation and distribution businesses."/13/
- ------------------------------
/13/Id.
--
<PAGE>
In December 1996, Boston Edison, the Massachusetts Attorney General, the
Massachusetts Division of Energy Resources (Energy Resources), and several other
parties entered into such a negotiated settlement (Settlement Agreement) that,
if approved by the Massachusetts Commission, would allow all retail customers in
the Boston Edison's service territory to choose their electricity suppliers
starting January 1, 1998. The Settlement Agreement also provides that Boston
Edison will divest itself of all fossil-fueled generating units. Boston Edison
will continue to own the Pilgrim Nuclear Power Station, which would be its only
electric generating facility. After the divestiture, Boston Edison's principal
business would be electric distribution, along with some transmission business.
According to Boston Edison, this is why it "has identified the need to increase
its long-term growth potential through investment in related non-utility new
business." Boston Edison states that it believes that the holding company
structure provides benefits for the conduct of such business by allowing more
timely responses to business opportunities, more flexible financing
opportunities, and by clearly separating Boston Edison's electric utility
business from the non-utility businesses of other BEC Energy subsidiaries./14/
2. The Application
---------------
- ------------------------------
/14/Id. at 13-15; Supplemental Filing at 3-4.
--
<PAGE>
On June 12, 1997, as completed on July 18, 1997, the Applicants filed an
application for authorization to dispose of jurisdictional facilities in order
to implement the proposed corporate reorganization described above. In the
application, the Applicants explain that because the proposed restructuring
entails the transfer of ownership of Boston Edison's common stock from existing
shareholders to BEC Energy, they are seeking approval under section 203 of the
FPA./15/ The Applicants assert that the proposed restructuring is consistent
with the public interest, and analyze their proposal under the six so-called
Commonwealth Edison factors./16/ They request that the Commission act on their
- -------------------
application by no later than September 30, 1997./17/
- ------------------------------
/15/Application at 5 (citing Illinois Power Co., 67 FERC
[P]61,136 (1994); Central Vermont Pub. Serv. Corp., 39 FERC
[P]61,295 (1987).
/16/Id. (citing Commonwealth Edison Co., 36 FPC 927, 936-42 (1966), aff'd sub
---------
nom. Utility Users League v. FPC, 394 F.2d 16 (7th cir.), cert. denied, 393 U.S.
- --- ------------
953 (1968) (Commonwealth Edison)).
-------------------
We recently updated our merger policy, and no longer require analysis under
all six of the Commonwealth Edison factors; rather, in analyzing proposed
-------------------
mergers, we now principally focus on three factors: the effect on
competition, the effect on rates, and the effect on regulation. Inquiry
Concerning the Commission's Merger Policy Under the Federal Power Act,
Policy Statement, Order No. 592, FERC Stats. & Regs. [p]31,044 at
30,111, 30,113-14 (1996), order on reconsideration, 79 FERC [P]61,321
------------------------
(1997) (Merger
<PAGE>
The Applicants state that the proposed restructuring will not affect Boston
Edison's operating costs or rate levels because (1) the costs of the
reorganization will not be included in rates, and (2) any future changes in
Boston Edison's wholesale power or transmission rates will continue to be
subject to the Commission's review./18/ They assert that the proposed
restructuring will have no adverse effect on competition because it does not
affect the ownership or control of generation or transmission assets or other
inputs that can be used as barriers to entry. In fact, they add, the proposed
restructuring could have positive effects on competition by insulating utility
ratepayers from some of the risks associated with non-regulated activities,
which would now be undertaken by more clearly-separated affiliates./19/
- ------------------------------
Policy Statement).
/17/Application at 1.
/18/Id. at 6.
--
/19/Id. at 7.
--
<PAGE>
Lastly, the Applicants argue that the proposed reorganization would not
impair the effectiveness of state or federal regulation because Boston Edison's
utility services, rates, and facilities will continue to be subject to
regulation by this Commission and the Massachusetts Commission. Specifically,
the Applicants state that the restructuring will not impair the Massachusetts
Commission's ability to regulate Boston Edison because the utility (and Harbor
Electric) will be subject to the same degree of regulation before the
reorganization. They note that under Massachusetts law, transactions between BEC
Energy and its subsidiaries are subject to the Massachusetts Commission's review
and approval. The Applicants assert that making BETG a wholly-owned subsidiary
of BEC Energy, rather than of Boston Edison, will, by increasing the
"operational delineation" between the public utility and its non-utility
affiliates, enhance regulatory auditing of utility costs and revenues. Moreover,
aster the restructuring, while BEC Energy will be a holding company, both it and
Boston Edison will apply for exempt holding company status under PUHCA, thereby
leaving this Commission's jurisdiction over Boston Edison intact, according to
the Applicants./20/
- ------------------------------
/20/Id.; Supplemental Filing at 5.
--
<PAGE>
In their Supplemental Filing, the Applicants state that because they
propose a corporate reorganization rather than the merger of two independently-
owned utilities, there are no "customer impact concerns." Nonetheless, they
add, mechanisms to prevent adverse customer impact are in place; these include
the Standards of Conduct for affiliate transactions recently promulgated by the
Massachusetts Commission, which would govern transactions between Boston Edison
and those of its affiliates that engage in energy transactions. The Applicants
state that the Standards of Conduct are designed to ensure that regulated
companies do not favor their affiliates over other competitors, and that they
treat affiliated and non-affiliated parties on a comparable basis./21/
Another customer protection device is the Management Services Agreement and
Tax Sharing Agreement (Management Agreement) between Boston Edison and BEC
Energy that is required under Massachusetts law. According to the Applicants,
this agreement is designed to ensure proper allocation of costs between a public
utility's utility and non-utility businesses. A new version of the agreement
will extend its policies and procedures to all Boston Edison affiliates to
ensure that transactions between Boston Edison and its affiliates are at arms-
length./22/
Lastly, the Applicants state that the holding company structure itself, by
clearly separating Boston Edison's regulated utility business form its non-
utility businesses, will afford this Commission and the Massachusetts Commission
a better opportunity to monitor the potential for cross-subsidization of costs
or transfer of business risk from unregulated to regulated lines of
business./23/
3. Notice of Application, Interventions, and Responsive Pleadings
--------------------------------------------------------------
- ------------------------------
/21/Supplemental Filing at 4. The Standards of Conduct are included in the
Supplemental Filing as Exhibit D.
Id.
--
Id.
--
<PAGE>
Notice of the application was published in the Federal Register,/24/ with
interventions or comments due on or before July 18, 1997. Notice of the
Applicants' Supplemental Filing was published in the Federal Register,/25/ with
interventions or comments due on or before August 5, 1997. Notices of
intervention or timely motions to intervene were filed by the Massachusetts
Commission, Commonwealth Electric Company (Commonwealth Electric), Energy
Resources, the Massachusetts Attorney General, and the Concord Municipal Light
Plant (Concord). The latter two entities also filed protests, which are
discussed below. Motions to intervene out of time were filed by the Town of
Reading Municipal Light Department (Reading) and the Massachusetts Bay
Transportation Authority (MBTA).
- ------------------------------
/24/62 Fed. Reg. 34,250 (1997).
/25/62 Fed. Reg. 40,810 (1997).
<PAGE>
In its protest, the Massachusetts Attorney General argues that the proposed
restructuring will adversely affect utility operating costs and rate levels and
will diminish overall effectiveness of regulatory supervision./26/ Specifically,
the Massachusetts Attorney General alleges that the creation of a holding
company would facilitate cross-subsidization; for example, BETG's
telecommunications joint venture will use Boston Edison's existing fiber optic
cable, plant facilities, and rights of way without any assurance that the joint
venture is paying fair market value for use of these utility assets. The
Massachusetts Attorney General also maintains that the unregulated affiliates
will "reap substantial benefit from the goodwill and name recognition" of Boston
Edison, which it characterizes as "an uncompensated for benefit that flows
directly from the ratepayers themselves."/27/
Lastly, the Massachusetts Attorney General argues that by adding "a new
layer of corporate formalities and management control, regulators' ability to
protect consumers' interests will be reduced. It adds that the Commission
should not act on the application before the Massachusetts Commission does and
requests that the Commission reject the application./28/
- ------------------------------
/26/Motion to Intervene and Protest of the Massachusetts Office of the
Attorney General (Massachusetts Attorney General Protest) at 3.
/27/Massachusetts Attorney General Protest at 4-5.
/28/Id. at 5-6.
--
<PAGE>
Concord states that, under its long-term contract with Boston Edison, it
takes full requirements service from Boston Edison until May 31, 2002 under a
rate consisting of a stated demand charge and a fuel adjustment clause (FAC)
which includes both Boston Edison's fuel costs and fuel costs charged under its
purchased power contracts./29/
- ------------------------------
/29/Motion to Intervene and Protest of Concord Municipal Light Plant (Concord
Protest) at 2-3. From June 1, 2002 until May 31, 2004, Concord is required to
purchase power from Boston Edison at rates based on Boston Edison's embedded
cost of service. Thereafter, Concord may terminate the agreement or reduce this
level of service upon two years' prior notice. Concord Protest at 2-3.
<PAGE>
According to Concord, the proposed reorganization could adversely affect
its contract with Boston Edison since the agreement is with the "existing" (that
is, pre-reorganization) Boston Edison and is not assignable. It questions
whether the agreement can be transferred to the "new" (that is, post-
reorganization) Boston Edison. In addition, Concord asserts that the
restructuring creates the opportunity for the "new" Boston Edison to impose
greater costs on Concord than were anticipated when the agreement was
negotiated. This might occur, Concord maintains, if, pursuant to the Settlement
Agreement, BEC Energy subsidiaries were to buy new generating units and set them
up as exempt wholesale generators (EWGS) that sell power to their affiliates.
Under this scenario, Concord argues, "the BEC Energy EWGS could potentially sell
power with low fuel costs to BETG's 'non-utility' marketing business while
selling power with high fuel cos's to [Boston Edison], which, in turn, passes on
the high fuel costs" to Concord under the Boston Edison-Concord contract./30/
Lastly, Concord claims that the Applicants want to switch their generation-
related business to non-regulated companies in order to avoid regulatory
oversight, and Concord is concerned that "its contractual rights will be
squeezed between the regulated and unregulated functions." It requests a hearing
on these issues./31/
- ------------------------------
/30/Id. at 5-6.
--
/31/Id. at 7-8.
--
<PAGE>
On August 1, 1997, the Applicants filed an answer to the Massachusetts
Attorney General's motion to reject the application and Concord's motion for a
hearing, requesting that the Commission deny both motions. In response to the
Massachusetts Attorney General's assertions that the BETG telecommunications
joint venture creates a potential for cross-subsidization, the Applicants state
that the joint venture is unrelated to the proposed reorganization and, in fact,
its creation preceded the filing of the application. Moreover, the formation of
a holding company structure will not increase any potential for cross-
subsidization, but rather would strengthen the "corporate lines of demarcation"
between Boston Edison and its unregulated non-utility affiliates, according to
the Applicants./32/
- ------------------------------
/32/Boston Edison Company's Answer to Motions to Reject and for a Hearing
(Answer) at 1-2'
<PAGE>
The Applicants reiterate that the proposed reorganization will not increase
Boston Edison's retail rates, which are fixed by the Settlement Agreement
between Boston Edison and the Massachusetts Attorney General, or its wholesale
rates, which are the product of negotiation and also fixed by contract. They
add that both the Massachusetts Commission and this Commission will retain
authority over Boston Edison's retail and wholesale rates respectively, and can
disallow improper costs. In addition, they note, because BEC Energy and Boston
Edison intend to seek exempt holding company status under PUHCA, this Commission
will not yield jurisdiction over affiliated transactions to the SEC, and the
Massachusetts Commission will retain the right to consider the effect on retail
rates of all transactions between Boston Edison and its non-regulated
affiliates./33/ Lastly, the Applicants argue that the Massachusetts Attorney
General has not shown any reasons why this Commission's decision on the
application should be delayed pending action by the Massachusetts
Commission./34/
In response to Concord's argument that its contract with Boston Edison
might not be assignable to the "new" Boston Edison, the Applicants state that
the same company that served Concord before the creation of the holding company
will serve it after the reorganization, and thus there is no "new" Boston Edison
and no need for the assignment of the Boston Edison-Concord contract. They
argue that Concord's real grievance" seems to be Boston Edison's planned
divestiture of its fossil generating plants pursuant to the Settlement
Agreement, which is a different issue than the planned reorganization and which
does not warrant the holding of a hearing in this proceeding. Lastly, as for
Concord's stated fears that the reorganization will facilitate the future
creation of EWGs that sell low-cost power to marketing affiliates and high-cost
power to Boston Edison, the Applicants respond that the existence of non-utility
affiliates is unrelated to the proposed formation of a holding company, that
Boston Edison affiliates will continue to exist without regard to whether the
Commission approves the instant application, and that appropriate safeguards
against preferential dealings among affiliates can be implemented when any
Boston Edison-affiliated EWGs are created./35/
4. Discussion
----------
1. Procedural Matters
------------------
- ------------------------------
/33/Answer at 2-3.
/34/Id. at 3.
--
/35/Id. at 3-4.
--
<PAGE>
Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure,/36/ the notice of intervention of the Massachusetts Commission and
the timely, unopposed motions to intervene of the Massachusetts Attorney
General, Energy Resources, Concord, and Commonwealth Electric serve to make them
parties to the proceeding. Given their interests, the early stage of the
proceeding, and the lack of prejudice, we will grant the motions to intervene
out of time of Reading and the MBTA./37/
- ------------------------------
/36/18 C.F.R. [P]385-214 (1996).
/37/18 C.F.R. [P]385.214(d) (1996).
<PAGE>
2. Basis of Commission Jurisdiction
--------------------------------
Boston Edison is a public utility within the meaning of the FPA./38/ In
Central Vermont Public Service Corporation,/39/ the Commission concluded that
- ------------------------------------------
the transfer of ownership and control of jurisdictional facilities through a
transfer of a public utility's common stock from existing shareholders to a
newly-created holding company constitutes a disposition of jurisdictional
facilities requiring prior Commission approval under section 203 of the FPA.
Consistent with the Commission's holding in Central Vermont, as Boston Edison's
---------------
proposed restructuring involves the transfer of ownership of its common stock
from existing shareholders to BEC Energy, the proposed disposition is subject to
the requirements of section 203.
3. The Proposed Disposition
------------------------
We have determined that the Applicants' proposed disposition is consistent
with the public interest and, accordingly, we approve it, conditioned as
described below.
1. Effect on Regulation
--------------------
We find that, as conditioned, the proposed disposition will not have any
adverse effect on the ability of this Commission, or other regulatory agencies,
including the Massachusetts
- ------------------------------
/38/See 16 U.S.C. [S] 824 (1994).
---
/39/39 FERC [P]61,295 (1987) (Central Vermont).
---------------
<PAGE>
Commission, to regulate Boston Edison or its affiliates./40/ The Massachusetts
Attorney General's allegation that the creation of a holding company structure
will add an additional layer of formality which will make the task of regulation
more difficult is unsupported and unpersuasive. After the reorganization, this
Commission will maintain its regulatory authority to consider any and all
wholesale power sale rate-related and/or transmission service rate-related
issues arising from the reorganization, including authority over the justness
and reasonableness of Boston Edison's jurisdictional rates. In addition, Boston
Edison (and Harbor Electric) will continue to be subject to retail rate
regulation by the Massachusetts Commission and transactions between BEC Energy
and its affiliates will be subject to the approval of the Massachusetts
Commission, in accordance with Massachusetts law.
We find Concord's allegation that the Applicants are undertaking
restructuring to avoid regulatory oversight to be equally unconvincing. There
will be no diminution of regulatory oversight over jurisdictional facilities,
transactions, or rates by virtue of the creation of BEC Energy and the
associated reorganization of the Boston Edison system. To the contrary, after
the restructuring, BEC Energy will conduct its non-utility businesses through
BETG and its subsidiaries, rather than through Boston Edison and its
subsidiaries. The new company structure,
- ------------------------------
/40/We have held that the most appropriate place in which to consider a
proposed merger's effect on state regulation is in proceedings before the
relevant state commission(s). Wisconsin Elec. Power Co., et al., 74 FERC [P]
-----
61,069 at 61,193 (1996), aff'd in relevant part and rev'd. in part, Opinion No.
------------------------------------------
413, 79 FERC [P]61, 741 (1997); Merger Policy Statement at 30,124-25. In light
of the Massachusetts Commission's review authority over the proposed
reorganization, we have focused on the effect of the reorganization on our own
jurisdiction.
The Massachusetts Attorney General requests that we defer acting on this
application pending action by the Massachusetts Commission. However, in the
by separating the cost impacts of non-Merger Policy Statement, we stated
that we would not delay processing merger utility operations from utility
costs and revenues, should facilitate regulatory applications to allow
states to compete their own reviews. Merger Policy monitoring of possible
cross-subsidization between the two lines of business. Statement at 30,127-
28. The Massachusetts Attorney General has not persuaded us to depart from
this policy.
<PAGE>
by separating the cost impacts of non-utility operations from utility costs and
revenues, should facilitate regulatory monitoring of possible
cross-subsidization between the two lines of business.
We note, however, that the effect of the reorganization will be to create a
new holding company (BEC Energy). In Union Electric Company and Central Illinois
-------------------------------------------
Public Service Company;/41/ and Public Service Company of Colorado and
- ---------------------- --------------------------------------
Southwestern Public Service Company,/42/ the Commission stated that undero
- -----------------------------------
Ohio Power,/43/ if a public utility subsidiary of a registered holding company
- ----------
enters into a contract for non-power goods or services with an associate
company, and obtained SEC approval of that contract, the Commission would lack
authority to determine whether, and to what extent, the utility should be
allowed to recover the costs incurred under the contract in its Commission-
jurisdictional wholesale power and transmission rates./44/ The costs would be
flowed through to ratepayers, even if the goods or services were obtained at
above-market prices or the costs were imprudently incurred./45/
- ------------------------------
/41/77 FERC [P]61,026 (1996), reh'g pending (Union Electric).
------------- --------------
/42/75 FERC [P]61,325 (1996), order conditionally approving settlement and
--------------------------------------------
conditionally authorizing proposed merger, 78 FERC [P]61,267 (1997)
- -----------------------------------------
(PS Colorado).
-----------
/43/Ohio Power Co. v. FERC, 954 F.2d 779, 782-86 (D.C. Cir.), cert. denied, 498
------------
U.S. 73 (1992) (Ohio Power).
----------
/44/See Union Electric, 77 FERC at 61,108-09; PS Colorado, 75 FERC at 62,046.
--- -------------- -----------
/45/See Union Electric, 77 FERC at 61,109.
--- --------------
<PAGE>
In the Merger Policy Statement, we stated that in response to the issues
raised by Ohio Power, we would continue to use the two-option approach adopted
----------
in PS Colorado and Union Electric./46/ That is, where a merger involves a
----------- --------------
registered public utility holding company, the applicants may commit themselves
to abide by this Commission's policies with respect to intra-system transactions
within the newly-formed holding company structure, or go to hearing on the issue
of the effect of the merger on effective regulation.
The Applicants state that they expect both BEC Energy and Boston Edison to
be exempt holding companies and that the Commissions will thereby not lose
jurisdiction over intra-company transactions./47/ However, the Applicants have
not yet filed an application with the SEC requesting exempt holding company
status./48/ Additionally, while the filing of such an application in good faith
exempts the applicant from SEC regulation under PUHC until the SEC acts upon the
application, the SEC may grant or, after notice and an opportunity for hearing,
deny or otherwise dispose of the application./49/ If the SEC were to determine
that BEC Energy or Boston Edison does not qualify for exempt holding company
status, but instead one or the other becomes a registered holding company, Ohio
----
Power would deprive this Commission of authority over certain intra-company
- -----
transactions.
Thus, because the Applicants' status as holding companies under PUHCA is
unclear, and because the Commission may not be able to adequately protect
ratepayers from affiliate abuse should either Boston Edison or BEC Energy become
a registered holding company, we will condition approval of the proposed
reorganization on the Applicants' agreeing to abide by our policies with respect
to intra-corporate transactions. The Applicants shall inform the Commission
within 15 days of the date of this order whether this condition is acceptable.
Accordingly, we find that the proposed disposition will, as conditions, not
have any adverse effect on regulation.
- ------------------------------
/46/Merger Policy Statement at 30,125; see PS Colorado, 75 FERC at 62,046 &
--- -----------
n. 23.
/47/Supplemental Filing at 5.
/48/See id.
--- --
/49/15 U.S.C. [SS]79b, 79c (1994).
<PAGE>
2. Effect on Rates
---------------
Concord raises issues involving the future divestiture of generating assets
by Boston Edison, the creation of EWGs by Boston Edison affiliates, and the
potential for those EWGs to sell low-cost power to affiliates other than Boston
Edison, while selling high-cost power to Boston Edison, thereby forcing Concord
to absorb Boston Edison's higher purchased power costs under the FAC of its full
requirements contract./50/
- ------------------------------
/50/It is not entirely clear whether these allegations raise issues involving
the effect of the proposed reorganization on rates, regulation, or competition.
We have chosen to consider them in the first category.
<PAGE>
We agree with the Applicants that these issues are not germane to the
instant application to dispose of jurisdictional facilities in order to create a
holding company, and that these issues have been raised prematurely. First,
given that the Settlement Agreement governs Boston Edison's divestiture of its
fossil generating units, and divestiture itself is a crucial aspect of the
Massachusetts Commission's restructuring initiative, it is more appropriate for
Concord to address its concerns regarding divestiture, and any other issues
involving the not yet approved Settlement Agreement, to that agency. Second,
Concord will have opportunities, at both the state and federal level, to raise
any concerns it has regarding the possible effects of divestiture (including any
adverse impact on its contract with Boston Edison) at such time when the
specific details of Boston Edison's divestiture plan became known. For example,
the Settlement Agreement requires Boston Edison to file with the Massachusetts
Commission its proposed plan for divestiture of its generating unites, and any
contracts for the sale of its generating units must be filed with the
Massachusetts Commission for approval./51/ In addition to these state
proceedings,/52/ at such time that Boston Edison proposes to dispose of any
jurisdictional facilities, or any of Boston Edison's affiliates seek to sell it
power for resale, appropriate applications must be filed with this Commission.
Concord may seek to intervene or file a protest in these proceedings, and we
will consider whether to grant or deny the applications, and the need to impose
any safeguards, at that time. However, we will not set the instant application
for hearing simply because the Massachusetts Commission's restructuring
initiative involves future divesture and unbundling.
- ------------------------------
/51/Settlement Agreement at 26.
/52/Under PUHCA section 32(c), before any of Boston Edison's rate-based
facilities could be an eligible facility, the Massachusetts Commission would
have to find that such action (1) will benefit consumers, (2) is in the public
interest, and (3) does not violate state law. 15 U.S.C. [S]79z-5a(c) (1994).
<PAGE>
Lastly, we note that, in its protest, Concord concedes that it is currently
negotiating with Boston Edison regarding Settlement Agreement-related issues and
is not seeking a Commission determination of the "continued validity" of its
contract with Boston Edison./53/ Concord itself suggests (and we agree that some
of its contract-related concerns -- which presumably include the propriety of
FAC charges -- are more appropriately raised in a separate complaint
proceedings./54/ Under these circumstances, we find that a hearing on Concord's
allegations is not warranted in this proceeding, and we deny Concord's motion
for a hearing./55/
In its protest, the Massachusetts Attorney General alleges the proposed
reorganization will facilitate cross-subsidization among the affiliates and that
Boston Edison may not be adequately compensated by its non-utility subsidiaries
for the latter's possible use of Boston Edison's utility assets and the
utility's name and good will. However, we agree with the Applicants that none
of the Massachusetts Attorney General's allegations warrants rejecting the
application, and we deny the Massachusetts Attorney General's motion for
rejection. The Massachusetts Commission's Standards of Conduct and the
Management Agreement, as it will be modified for the reorganized BEC Energy
system, will both act to help protect against cross-subsidization between the
utility and non-utility affiliates and ensure comparable treatment between
affiliates and non-affiliates as well as arm's-length relationships among
affiliates. With these customer protection mechanisms in place, the creation of
a holding company structure for Applicants will not increase the potential for
affiliate abuse or preferential dealings. Moreover, as the Applicants point
out, it is not clear what relationship the creation of a holding company has to
any concerns the Massachusetts Attorney General might have regarding non-utility
affiliates' adverse effects on Boston Edison's rates; the non-utility affiliates
have been in existence and operating unregulated businesses since before the
instant application was filed.
- ------------------------------
/53/Protest of Concord at 4-5, n.3.
/54/Id.
--
/55/In addition, we agree with the Applicants that there is no issue
involving the assignment of the Boston Edison-Concord agreement. While Boston
Edison will become a wholly-owned subsidiary of BEC Energy, it will continue to
operate as the seller as it did before, and under its own name. Thus, Boston
Edison will not need to assign any of its contracts to a successor.
<PAGE>
Accordingly, we find that the proposed disposition will not have any
adverse effect on rates.
3. Effect on Competition
---------------------
We find that the proposed disposition will have no adverse effect on
competition. While the proposed reorganization results in a change in ownership
or control of jurisdictional facilities by virtue of the creation of the new
holding company, it involves only Boston Edison and its affiliates and does not
itself result in any change in the operation of Boston Edison's facilities or
other inputs that could be used as barriers to entry, that would have an anti-
competitive effect.
4. Other Matters
-------------
1. Indirect Mergers
----------------
While BEC Energy or Boston Edison is not proposing to merge with another
holding company at this time, it is possible that in the future such a merger
may take place. In an order approving a similar reorganization,/56/ the
Commission clarified its jurisdiction under section 203 regarding the effect
that mergers of public holding companies have on their public utility
subsidiaries. While noting that it does not have jurisdiction over public
utility holding company mergers or consolidations, the Commission concluded that
ordinarily, when holding companies merge, an indirect merger involving their
public utility subsidiaries also takes place. Consequently, the Commission
stated:
- ------------------------------
/56/Illinois Power Co., 67 FERC [P]61,136 (1994) (Illinois Power).
--------------
<PAGE>
We therefore will presume, subject to rebuttal, that mergers between
public utility holding companies also accomplish an indirect merger of
their public utility subsidiaries. If the public utilities can rebut
the presumption, we will find that jurisdiction will not attach until
such time as the public utility subsidiaries formally merge or
consolidate their facilities. If the public utilities cannot rebut the
presumption, section 203 approval of the indirect merger of the public
utilities will be required./57/
To rebut the presumption, the public utility subsidiaries must show:
(1) that they will continue to exercise independent decision-making
authority; (2) that their proprietary, financial and corporate
information will not be available to each other, either directly or
indirectly; and (3) that they will compete on price and service in the
same markets to the same extent they have competed in the past./58/
- ------------------------------
/57/Illinois Power, 67 FERC at 61,354-55 (footnote omitted).
--------------
/58/Id. at 61,355 (footnote omitted).
--
<PAGE>
If the public utilities are able to rebut the presumption, the Commission will
not exercise its section 203 jurisdiction "until such time that the public
utility subsidiaries formally merge or consolidate their facilities."/59/
Accordingly, the Applicants are advised that, in the event that BEC Energy
or Boston Edison seek to merge with another public utility holding company, the
affected public utility subsidiaries of the holding companies are required to
file under section 203 for approval of the indirect merger of the public
utilities, or, alternatively, to file evidence to rebut the presumption that the
holding company merger would not result in an indirect merger of the public
utility subsidiaries.
3. Accounting Treatment
--------------------
The Applicants have not indicated what accounts will be charged with the
costs associated with the formation of the holding company structure.
Therefore, we will direct Boston Edison to record all costs incurred in the
formation of BEC Energy that are not passed on to BEC Energy in Account 426.5,
Other Deductions.
The Commission orders:
- ----------------------
(A) The proposed disposition of jurisdictional facilities of Boston
Edison in the above-described corporate restructuring is consistent with the
public interest and is hereby conditionally authorized, as discussed in the body
of this order.
(B) The Commission retains authority under section 203(b) of the Federal
Power Act to issue supplemental orders as appropriate.
(C) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, service,
accounts, valuation, estimates or determinations of cost or any other matter
whatsoever now pending or which may come before the Commission.
(D) Nothing in this order shall be construed to imply acquiescence in
any estimate or determination of cost or any valuation of property claimed or
asserted.
(E) Boston Edison shall record all costs involved in the formation of
BEC Energy that are not passed on to BEC Energy in Account 426.5, Other
Deductions.
(F) In the event that BEC Energy or Boston Edison should seek to merge
with another public utility holding company, the public utility subsidiaries of
those companies are required to make appropriate filings under section 203 of
the Federal Power Act, as discussed in the body of this order.
- ------------------------------
/59/Id. at 61,354.
--
<PAGE>
(G) The Applicants shall inform the Commission within 15 days of the
date of this order whether they agree to abide by the Commission's policies with
respect to intra-corporate transactions within a newly-formed holding company
structure, as discussed in the body of this order.
(H) The motions to intervene out of time of Reading and the MBTA are
hereby granted.
<PAGE>
(I) The Massachusetts Attorney General's motion for rejection and
Concord's motion for a hearing are hereby denied, as discussed in the body of
this order.
By the Commission.
(S E A L)
/s/ Lois D. Cashell
Lois D. Cashell,
Secretary
<PAGE>
BOSTON EDISON
Executive Offices
800 Boylston Street
Boston, Massachusetts 02199
September 25, 1997
The Honorable Lois D. Cashell
Secretary
Route ES-1, Room 11G-1
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, DC 20426
Re: Boston Edison Company and BEC Energy,
Docket No. EC97-39-000
-------------------------------------
Dear Ms. Cashell:
In accordance with the Commission's September 11, 1997 order in the
captioned proceeding and in compliance with Ordering Paragraph G thereof, I
write on behalf of the Applicants to inform you that the Applicants commit for
Commission ratemaking purposes to abide by the Commission's policy regarding the
treatment of costs and revenues associated with intra-corporate transactions.
Very truly yours,
/s/ Theodora S. Convisser
-------------------------
Theodora S. Convisser
Counsel for BEC Energy and
Boston Edison Company
TSC/cmc
cc: Service List
<PAGE>
EXHIBIT 99.D-6
--------------
EXHIBIT D-6
UNITED STATES
NUCLEAR REGULATORY COMMISSION
Washington, D.C. 20555-0001
February 11, 1998
Mr. Leon J. Olivier
Vice President - Nuclear/Station Director
Boston Edison Company
Pilgrim Nuclear Power Station
RFD #1 Rocky Hill Road
Plymouth, MA 02360
SUBJECT: ORDER APPROVING THE APPLICATION REGARDING THE PROPOSED
CORPORATE RESTRUCTURING OF BOSTON EDISON COMPANY BY
ESTABLISHMENT OF A HOLDING COMPANY (TAC NO. M99326)
Dear Mr. Olivier:
The enclosed Order was issued in response to an application from Boston Edison
Company (BECo) dated June 9, 1997, requesting approval pursuant to Section 50.80
of Title 10 of the Code of Federal Regulations in connection with the proposed
---------------------------
corporate restructuring that will result in the creation of a holding company
under the name "BEC Energy," of which BECo would become a wholly owned
subsidiary. The staff's safety evaluation in support of the Order is also
enclosed.
The Order has been forwarded to the Office of the Federal Register for
publication.
If you have any questions, please contact me at 301-415-1445.
Sincerely,
/s/ Alan Wang
-------------------------------------
Alan B. Wang, Project Manager
Project Directorate 1-3
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
Docket No. 50-293
Enclosures: 1. Order
2. Safety Evaluation
<PAGE>
UNITED STATES OF AMERICA
------------------------
NUCLEAR REGULATORY COMMISSION
-----------------------------
In the Matter of }
)
BOSTON EDISON COMPANY ) Docket No. 50-293
)
(Pilgrim Nuclear Power Station) )
ORDER APPROVING APPLICATION REGARDING THE CORPORATE
RESTRUCTURING OF BOSTON EDISON COMPANY
BY ESTABLISHMENT OF A HOLDING COMPANY
I.
Boston Edison Company (BECo) is sole owner of the Pilgrim Nuclear Power
Station (Pilgrim). BECo holds Facility Operating License No. DPR-35 issued by
the U.S. Atomic Energy Commission pursuant to Part 50 of Title 10 of the Code of
-------
Federal Regulations (10 CFR Part 50) on June 8, 1972. Under this license, BECo
- -------------------
has the authority to own and operate Pilgrim. Pilgrim is located in Plymouth
County, Massachusetts.
II.
By an application dated June 9, 1997, BECo requested that the Commission
approve under 10 CFR 50.80 the transfer of control of the license that would
result from a proposed corporate restructuring of BECo. Under the
restructuring, a holding company under the name "BEC Energy" will be created of
which BECo would become a wholly owned subsidiary. The holders of BECo common
stock would automatically become holders of common stock of the new parent
company on a share-for-share basis, according to the application. Notice of
this application for consent was published in the FEDERAL REGISTER on December
12, 1997 (62 FR 65448); and an Environmental Assessment and a Finding of No
Significant Impact was published in the FEDERAL REGISTER on December 15, 1997
(62 FR 65716).
Under 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through transfer of control of the license unless the Commission
shall give its consent in writing. Upon review of the information submitted in
the application dated June 9, 1997, the staff of the U.S. Nuclear Regulatory
Commission has determined that the proposed restructuring of BECo will not
affect the qualifications of BECo as holder of the license for Pilgrim and that
the transfer of
<PAGE>
control of the license, to the extent effected by the restructuring of BECo, is
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission, subject to the conditions set forth herein. These
findings are supported by a safety evaluation dated February 11, 1998.
III.
Accordingly, pursuant to Sections 161b, 1611, 161o, and 164 of the Atomic
Energy Act of 1954, as amended; 42 USC [SS]2201(b), 2201(1), 2201(o), and 2234;
and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the
application regarding the proposed restructuring of BECo subject to the
following: (1) BECo shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filed, to transfer
(excluding grants of security interests or liens) from BECo to its proposed
parent or to any other affiliated company, facilities for the production,
transmission, or distribution of electric energy having a depreciated book value
exceeding 10 percent (10%) of BECo's consolidated net utility plant, as recorded
on BECO's book of account, and (2) should the restructuring of BECo not be
completed by December 31, 1998, this Order shall become null and void, provided,
however, on application and for good cause shown, such date may be extended.
This Order is effective upon issuance.
IV.
By March 19, 1998, any person adversely affected by this Order may file a
request for a hearing with respect to issuance of the Order. Any person
requesting a hearing shall set forth with particularity how that interest is
adversely affected by this Order and shall address the criteria set forth in CFR
2.714(d).
If a hearing is to be held, the Commission will issue an order designating
the time and place of such hearing.
The issue to be considered at any such hearing shall be whether this Order
should be sustained.
Any request for a hearing must be filed with the Secretary of the
Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001,
Attention: Rulemakings and Adjudications Staff, or may be delivered to the
Commission's Public Document Room, The Gelman Building, 2120 L Street, NW.,
Washington, D.C. by the above date. Copies should be also sent to the Office of
the General Counsel and to the Director, Office of Nuclear Reactor Regulation,
U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, and to William S.
Stowe, Esq., Boston Edison Company, 800 Boylston Street, Boston, MA 02199,
Assistant General Counsel for BECo.
For further details with respect to this action, see the application for
approval regarding the corporate restructuring dated June 9, 1997, and the
safety evaluation dated February 11, 1998, which are available for public
inspection at the Commission's Public Document Room, The Gelman Building, 2120 L
Street, NW., Washington, DC, and at the local public document room located at
the Plymouth Public Library, 11 North Street, Plymouth, Massachusetts.
Dated at Rockville, Maryland, this 11th day of February 1998.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/ Samuel J. Collins
------------------------------------
Samuel J. Collins, Director
Office of Nuclear Reactor Regulation
<PAGE>
UNITED STATES
NUCLEAR REGULATORY COMMISSION
Washington, D.C. 20555-0001
SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION
-------------------------------------------------------------
PROPOSED CORPORATE RESTRUCTURING
--------------------------------
OF BOSTON EDISON COMPANY
------------------------
DOCKET NO. 50-293
-----------------
PILGRIM NUCLEAR POWER STATION
-----------------------------
1.0 INTRODUCTION
------------
By application dated June 9, 1997, Dr. E. Thomas Boulette, Senior Vice President
- - Nuclear, of Boston Edison Company (BECo), informed the U.S. Nuclear Regulatory
Commission (NRC) that a corporate restructuring of BECo had been proposed that
will result in the creation of a holding company under the name "BEC Energy," a
Massachusetts business trust, of which BECo would become a wholly owned
subsidiary. BECo is the 100-percent owner and operator of the Pilgrim Nuclear
Power Station. Under the restructuring, the holders of BECo common stock will
become the holders of common stock of the parent company, BEC Energy, on a
share-for-share basis. After the restructuring, BECo will continue to be a
public utility providing the same utility services as it did immediately before
the reorganization. BECo will continue to be the licensee of the Pilgrim
Nuclear Power Station, and no direct transfer of the operating license or
interests in the unit will result from the proposed restructuring. Approval for
the transfer of control of the license resulting from the restructuring is being
sought from the NRC pursuant to 10 CFR 50.80.
Pursuant to 10 CFR 50.80, the Commission may approve the transfer of the control
of a license, after notice to interested persons. Such action is contingent
upon the Commission's determination that the holder of the license following the
transfer of control is qualified to hold the license and the transfer is
otherwise consistent with applicable provisions of law, regulations, and orders
of the Commission.
2.0 FINANCIAL QUALIFICATIONS ANALYSIS
---------------------------------
According to BECo's application, following the proposed restructuring, BECo will
continue as the sole owner and operator of the Pilgrim Nuclear Power Station and
will remain an electric utility as defined in 10 CFR 50.2, engaged in the
generation, transmission, and distribution of
<PAGE>
electric energy for wholesale and retail markets. The Federal Energy Regulatory
Commission will still regulate BECo's wholesale electric rates, and the
Massachusetts Department of Public Utilities will also maintain jurisdiction
over the licensee's retail electric rates.
The application states that the proposed restructuring will have no impact on
the revenues and expense of BECo regarding the operation of Pilgrim and that the
decommissioning funding will not be affected. As an electric utility, BECo is
exempt from further financial qualifications review, pursuant to 10 CFR
60.33(f). However, in view of the NRC's concern that restructuring can lead to
a diminution of assets necessary for the safe operation and decommissioning of a
licensee's nuclear power plant, the NRC's practice has been to condition license
transfer approvals upon a requirement that the licensee not transfer significant
assets from the licensee to an affiliate without first notifying the NRC. This
requirement assists the NRC in assuring that a licensee will continue to
maintain adequate resources to contribute to the safe operation and
decommissioning of its facility. Thus, the following should be made a condition
of the order approving the application regarding the proposed restructuring:
BECo shall provide the Director of the Office of Nuclear Reactor Regulation
a copy of any application, at the time it is filed, to transfer (excluding
grants of security interests or liens) from BECo to its proposed parent, or
to any other affiliated company, facilities for the production,
transmission, or distribution of electric energy having a depreciated book
value exceeding ten percent (10%) of BECo's consolidated net utility plant
as recorded on BECo's books of accounts.
3.0 TECHNICAL QUALIFICATIONS
------------------------
BECo stated in its application that there will be no changes as a result of the
proposed restructuring in any "key station personnel, operators, or management."
The holding company structure will retain the utility as a discrete and wholly
separate entity that will function in the same fashion as it did before
restructuring. Based on the foregoing, the staff concludes that the proposed
restructuring will not affect BECo's technical qualifications.
4.0 ANTITRUST REVIEW
----------------
Section 105 of the Atomic Energy Act of 1954, as amended (the Act), requires the
Commission to conduct an antitrust review in connection with an application for
a license to construct or operate a facility under Section 103. The Pilgrim
Nuclear Power Station was licensed under Section 104b and, as a result, is not
subject to an antitrust review by the staff in connection with the application
regarding the proposed creation of a holding company, BEC Energy.
<PAGE>
5.0 FOREIGN OWNERSHIP, CONTROL, OR DOMINATION
-----------------------------------------
The licensee indicated in its application that after restructuring is
implemented, BEC Energy will become the sole holder of BECo outstanding common
stock and that the current holders of BECo's common stock will become holder of
the common stock of BEC Energy on a share-for-share basis. Thus, the previous
holders of BECo common stock will own BEC Energy common stock in the same
proportion as they held BECo common stock. According to the application, BECo is
not now, and will not be following the proposed restructuring, owned,
controlled, or dominated by an alien, foreign corporation, or foreign
government. The staff does not know or have reason to believe otherwise.
6.0 CONCLUSIONS
-----------
In view of the foregoing, the NRC staff concludes that the proposed
restructuring of BECo by creation of a holding company will not adversely affect
the financial or technical qualifications of BECo with respect to the operation
and decommissioning of Pilgrim. Also, there do not appear to be any problematic
antitrust or foreign ownership considerations that would result from the
proposed restructuring. Thus, the proposed restructuring will not affect the
qualifications of BECo as holder of the license for Pilgrim, and the transfer of
control of the license, to the extent effected by the proposed restructuring, is
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission pursuant thereto. Accordingly, the NRC should approve
the application regarding the proposed restructuring, subject to the condition
discussed above concerning significant asset transfers.
Principal Contributor: M.A. Dusanlwskyl
Dated February 11, 1998
<PAGE>
For further details with respect to this action, see the application
for approval regarding the corporate restructuring dated June 9, 1997, and the
safety evaluation dated February 11, 1998, which are available for public
inspection at the Commission's Public Document Room, The Gelman Building, 2120 L
Street, NW., Washington, DC, and at the local public document room located at
the Plymouth Public Library, 11 North Street, Plymouth, Massachusetts.
Dated at Rockville, Maryland, this 11th day of February 1998.
FOR THE NUCLEAR REGULATORY COMMISSION
ORIGINAL SIGNED BY
SAMUEL J. COLLINS
Samuel J. Collins, Director
Office of Nuclear Reactor Regulation
