SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM U-1
APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Energy East Corporation
P.O. Box 12904
Albany, New York 12212-2904
and
Energy East Enterprises, Inc.
c/o Energy East Corporation
P.O. Box 12904
Albany, New York 12212-2904
(Name of company or companies filing this statement and
address of principal executive offices)
Kenneth M. Jasinski, Esq.
Senior Vice President and General Counsel
c/o Energy East Corporation
P.O. Box 12904
Albany, New York 12212-2904
Telephone: (518) 434-3019
(Names and addresses of agents for service)
Copies to:
Frank Lee, Esq.
Huber Lawrence & Abell
605 Third Avenue
New York, New York 10158
Telephone: (212) 682-6200
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Item 1. Description of Proposed Transaction.
A. Introduction
Pursuant to Sections 3(a)(1), 9(a)(2) and 10 of the Public
Utility Holding Company Act of 1935, as amended (the "Act"),
Energy East Corporation ("EEC"), a New York corporation and an
exempt public utility holding company, hereby requests that the
Securities and Exchange Commission (the "Commission") authorize
the transaction described herein (the "Transaction") pursuant to
which EEC, through Energy East Enterprises, Inc. ("EEC
Enterprises"), a Maine corporation and a wholly-owned subsidiary
of EEC, will acquire at least 50% of the voting securities of CMP
Natural Gas, L.L.C. ("Maine GasCo"), a Maine limited liability
company. Maine GasCo will construct, own and operate a small
local natural gas distribution system (the "Maine GasCo System")
which will provide on a non-exclusive basis natural gas service
in certain areas of Maine which do not currently receive natural
gas service. The remaining voting securities of Maine GasCo will
be held by CMP Group, Inc. ("CMP Group"),1 an exempt public
utility holding company, through New England Gas Development
Corporation ("New England Gas"), a wholly-owned subsidiary of CMP
Group, pursuant to a Joint Venture Agreement dated as of November
13, 1997, as amended (the "Joint Venture Agreement") between
Central Maine Power Company ("CMP"), a subsidiary of CMP Group
and New York State Electric & Gas Corporation ("NYSEG"), a
wholly-owned subsidiary of EEC. The Joint Venture Agreement is
attached hereto as Exhibit B-1.
As noted above, EEC is currently a public utility holding
company exempt from all provisions of the Act, except Section
9(a)(2), under Section 3(a)(1) of the Act by order of the
Commission dated March 4, 1998. See, Energy East Corporation,
Holding Co. Act Release No. 26834 (1998). EEC owns all of the
outstanding common stock of two public utility companies as
defined under the Act: NYSEG and NGE Generation, Inc. ("NGE
Generation"), both of which are organized and operate virtually
exclusively in the State of New York.2
EEC seeks an order of exemption for itself and for EEC
Enterprises following the consummation of the Transaction.
Notwithstanding the fact that Maine GasCo (when it begins
commercial operation) will be a public utility subsidiary of EEC
organized and operating in Maine, EEC will continue to be a
_____
1 CMP Group is filing a contemporaneous application on Form
U-1 in connection with the Transaction.
2 Among its other activities, NGE Generation sells some
electricity at wholesale from certain of its generating
stations into the Pennsylvania-New Jersey-Maryland
Interconnection (PJM Power Pool) which sales in 1997
accounted for less than 5% of NYSEG's total operating
revenues. However, as noted below, NGE Generation has
accepted offers to purchase its Generation Assets and
therefore, after consummation of the sale of the Generation
Assets, NGE Generation will no longer make such sales into
the PJM Power Pool. See footnote 4, below.
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public utility holding company entitled to an exemption under
Section 3(a)(1) of the Act because Maine GasCo will only account
for a de minimis part of EEC's utility operations.3 Thus, EEC
and each public utility subsidiary from which it derives a
material part of its income (i.e., NYSEG and NGE Generation) will
continue to be organized and to operate predominantly in the
State of New York. In addition, upon consummation of the
Transaction, EEC Enterprises will become a public utility holding
company within the meaning of the Act by virtue of its ownership
of at least 50% of the voting securities of Maine GasCo (which
will be a public utility subsidiary when it begins commercial
operation). After consummation of the Transaction, EEC
Enterprises will be entitled to an exemption under Section
3(a)(1) of the Act because EEC Enterprises and Maine GasCo will
both be organized and carry on their business in the State of
Maine, and neither EEC Enterprises nor Maine GasCo will derive a
material part of its income from a public utility subsidiary that
carries on its business and/or is organized outside of the State
of Maine.
B. EEC
1. Description of EEC and Subsidiaries
On May 1, 1998, EEC became the holding company for (i)
NYSEG, a combination electric and gas utility company engaged in
the business of transmitting and distributing electricity,
transporting and distributing natural gas and generating
electricity from its nuclear and hydroelectric stations all in
the State of New York; and (ii) NGE Generation, an electric
utility company as defined under the Act, engaged in the business
of generating electricity. EEC's common stock is publicly traded
on the New York Stock Exchange. EEC's principal executive
offices are located at P.O. Box 12904, Albany, York 12212-2904.
EEC Enterprises was organized in 1998 and was formed to hold
the voting securities of Maine GasCo. EEC Enterprises is a
wholly-owned subsidiary of EEC. It currently holds no public
utility assets and is neither a "public utility company" nor a
"holding company" under the Act.
_____
3 Specifically, it is projected that EEC's share of Maine
GasCo's revenues in 1999 and 2000 will account for less than
1% of EEC's consolidated revenues. Although the term
"material part of its income" is not defined in the Act, in
many instances, holding companies with out-of-state utility
subsidiaries accounting for a substantially higher
percentage of holding company revenues have been permitted
to claim an exemption under Section 3(a)(1). For example,
in Yankee Atomic Electric Co., 36 S.E.C. 552 (1948), the
Commission granted an exemption under Section 3(a)(1) in a
case where 2% of the holding company's revenues were derived
from an out-of-state utility subsidiary. See also,
Commonwealth Edison, 28 S.E.C. 172 (1948) (holding that
utility subsidiary accounting for between 2.7% and 3.3% of
system revenues is not providing a material part of income).
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EEC also has a number of direct and indirect subsidiaries
that are not "public utility companies" under the Act. These
include Somerset Railroad Corporation ("SRC"), a New York
corporation, and NGE Enterprises, Inc. ("NGE Enterprises"), a
Delaware corporation. SRC is a wholly-owned subsidiary of NGE
Generation and was formed in August 1979 to own and operate a
rail line that primarily transports coal and other materials to
NGE Generation's Kintigh generating station. NGE Enterprises is
a wholly-owned subsidiary of EEC and was formed in April 1992 to
hold the stock of certain non-utility subsidiaries and to conduct
energy service business activities through its direct and
indirect subsidiaries. NGE Enterprises' current direct and
indirect subsidiaries are as follows:
NYSEG Solutions, Inc. ("Solutions"), a New York corporation,
is a wholly-owned subsidiary of NGE Enterprises and was formed to
market electricity and natural gas to end users and provide
wholesale commodities to retail electric suppliers in the
Northeast.
Energy East Telecommunications, Inc., a Delaware
corporation, is a wholly-owned subsidiary of NGE Enterprises and
was formed to provide telecommunication services, including the
construction and operation of fiber optic networks.
NGE Technology Corporation ("NGE Technology"), a Delaware
corporation, is a wholly-owned subsidiary of NGE Enterprises and
was formed to own NGE Enterprises' investment in EnerSoft
Corporation.
EnerSoft Corporation, a Delaware corporation, is a wholly-
owned subsidiary of NGE Technology. It is in the process of
dissolving.
NGE Environmental, Inc. ("NGE Environmental"), a Delaware
corporation, is a wholly-owned subsidiary of NGE Enterprises and
was formed to own NGE Enterprises' investments in environmental
engineering and consulting services businesses.
NGE Funding Corporation, a Delaware corporation, is a
wholly-owned subsidiary of NGE Enterprises and provides financial
services such as loans and leases for energy services-related
equipment installations.
NGE EnergyPoints, Inc., a Delaware corporation, is a wholly-
owned subsidiary of NGE Enterprises and provides energy usage
information, utility bill consolidation and bill payment services
for large, multi-site industrial customers.
S-H-N Technologies, L.L.C. ("S-H-N"), a Delaware limited
liability company, is owned 50% by NGE Environmental and 50% by
S-H-U USA Corp., a subsidiary of the German firm Saarberg-Holter
Umweltechnick GmBH. S-H-N provides clean air solutions for the
international utility market.
XENERGY Inc. ("XENERGY"), a Massachusetts corporation, is a
wholly-owned subsidiary of NGE Enterprises and is an energy
services, information systems and consulting company that
specializes in energy management, conservation engineering and
demand-side management. In addition, by order of the Federal
Energy Regulatory Commission ("FERC") dated June 9, 1997, XENERGY
<PAGE>
received authorization to sell wholesale power at market-based
rates.
XENERGY Canada, Inc., incorporated in Quebec, Canada, is a
wholly-owned subsidiary of XENERGY and is the software developer
of a utility client management system.
XENERGY International, Inc. ("XENERGY International"), a
Delaware corporation, is a wholly-owned subsidiary of XENERGY and
is an energy services, information systems and consulting company
that specializes in energy management, conservation engineering
and demand-side management in the United Kingdom and Spain.
KENETECH Energy Management, Inc. ("KENETECH"), a
Massachusetts corporation, is a wholly-owned subsidiary of
XENERGY and is an energy services company specializing in energy
management.
KEM 1991, Inc. ("KEM 1991"), a Delaware corporation, is a
wholly-owned subsidiary of KENETECH and is an energy services
company specializing in energy management.
KENETECH Energy Management International, Inc. ("KENETECH
International"), a Delaware corporation, is a wholly-owned
subsidiary of KENETECH and is an energy services company
specializing in energy management.
KEM Partners 1991, L.P., a Delaware limited partnership, is
a wholly-owned subsidiary of KEM 1991, and is an energy services
company specializing in energy management.
KENETECH Energy Management, Limited ("KENETECH Limited"), a
limited company formed in Ontario, Canada, is a wholly-owned
subsidiary of KENETECH International and is an energy services
company specializing in energy management.
2. Existing Utility Operations
As mentioned above, NYSEG, a regulated public utility
incorporated under the laws of the State of New York, is engaged
in the business of transmitting and distributing electricity,
transporting and distributing natural gas and generating
electricity from its nuclear and hydroelectric stations all in
the central, eastern and western parts of the State of New York.
NYSEG provides electricity to approximately 815,000 customers and
provides natural gas to approximately 240,000 customers. In
providing this service, NYSEG is subject to regulation with
respect to retail rates by the Public Service Commission of the
State of New York (the "NYPSC") under the Public Service Law of
the State of New York and to regulation with respect to wholesale
rates by the FERC.
NYSEG currently provides natural gas service to customers
throughout twenty-nine counties, incorporating eighty-two cities
and villages, and one hundred thirty-eight towns in the State of
New York. NYSEG's natural gas business consists primarily of
rural natural gas distribution, covering 6,116 square miles with
a population of 1,072,000 people. NYSEG operates and maintains
approximately 400 miles of transmission pipeline, 3,600 miles of
distribution main, 3,400 miles of service laterals and 88
purchase stations. NYSEG has transportation and/or storage
contracts with eight major interstate pipelines, two major
<PAGE>
intrastate pipelines, the TransCanada Pipeline and four New York
local distribution companies.
NYSEG began offering open access gas transportation to its
large commercial and industrial customers in 1986. In 1988,
NYSEG began offering unbundled transportation to small commercial
customers. In 1996, NYSEG began its aggregation transportation
program for residential and small commercial customers. NYSEG
currently has over one thousand transportation-only customers,
which constitute more than one-third of its system throughput.
NYSEG operates its local natural gas distribution business
through thirteen division offices, each capable of constructing,
operating and maintaining a non-contiguous gas system. A
Corporate Engineering, Operations, and Quality Assurance
Department supports all field operations, operates a gas meter
testing laboratory and performs gas quality testing from
suppliers. NYSEG generally performs all engineering, operation
and maintenance work with its internal work force. Pipeline
contractors perform ninety percent of all new pipeline
construction. Independent heating dealers perform consumer
equipment conversions and new installations. NYSEG also
maintains an active trade ally program that provides training,
advertising, feedback, and other support to heating, ventilation
and air conditioning contractors. NYSEG provides gas emergency
response training to fire departments and emergency responders in
every community it serves. Additionally, NYSEG's state-of-the-
art gas control facilities include real-time data communications
from purchase stations and transportation customers. NYSEG also
contracts for and manages pipeline capacity and gas supply for
existing and new franchises in order to remain competitive with
alternative fuels.
NYSEG brings to the joint venture substantial expertise in
the natural gas industry, especially in distributing natural gas
to a disaggregated service territory. NYSEG also has experience
in providing unbundled transportation customers with ancillary
services such as balancing, a gas supply pool, a capacity
assignment tariff and an electronic bulletin board. In addition,
NYSEG operates the only operational bedded salt storage facility
in the northeastern United States. In an effort to control
pipeline costs, it is also an active releaser of pipeline
capacity and participates in the off-system repackaged gas
market. Approximately 28.5% of NYSEG's gas supply originates
from the Western Canadian Sedimentation Basin, 63% from the Texas
and Louisiana basins, 7.2% from Appalachia, and 1.3% from other
sources.
EEC owns 100% of the capital stock of NGE Generation, which
was organized to engage in the generation business. NGE
Generation currently owns 50% of the Homer City generating
station and owns and operates the Kintigh, Milliken, Goudey,
Greenidge, Hickling and Jennison generating stations and certain
<PAGE>
associated assets and liabilities ("Generation Assets").4 NGE
Generation is subject to light regulation by the NYPSC and to
regulation by the FERC with respect to wholesale rates.
C. Description of the Proposed Transaction
1. The Joint Venture Agreement
NYSEG and CMP have executed the Joint Venture Agreement,
which provides for among other things, the formation of a joint
venture company, Maine GasCo. Maine GasCo is a Maine limited
liability company, governed in accordance with the terms and
conditions of the Joint Venture Agreement. In contemplation of
the formation of holding company structures for both parties,
the Joint Venture Agreement was made assignable by both parties
to their respective affiliates. NYSEG and CMP have assigned
their interests in the Joint Venture Agreement to EEC Enterprises
and New England Gas, respectively.
The Joint Venture Agreement provides that Maine GasCo will
engage in the business of owning, constructing, and operating a
small local natural gas distribution system that will distribute
natural gas and provide other related local services in certain
areas of Maine which do not currently receive natural gas
service. EEC Enterprises and New England Gas will be the initial
members of Maine GasCo. EEC Enterprises will hold at least 50% of
the membership interests and New England Gas will hold the
remaining membership interests. Each member's ownership interest
is subject to adjustment in accordance with the Joint Venture
Agreement. EEC Enterprises and New England Gas will each
contribute their respective shares of the initial capital of
Maine GasCo in amounts proportionate to the ownership percentages
of each such Maine GasCo member and will contribute all or some
portion of this sum in cash when the Management Committee
requires the contribution. Maine GasCo members will make
additional capital contributions if the Maine GasCo members
holding a majority interest vote to require such contributions,
_____
4 In August 1998, NGE Generation accepted offers to sell the
Generation Assets to The AES Corporation and Edison Mission
Energy. The contract with The AES Corporation is for the
purchase of the generation assets in New York State, and the
contract with Edison Mission Energy is for the purchase of
the Homer City generating station in Pennsylvania. The
total sales price provides full recovery of the net book
value of the Generation Assets. Pursuant to NYSEG's
restructuring plan approved by the NYPSC in January 1998,
all proceeds, net of taxes and transaction costs, in excess
of the net book value of the Generation Assets, less funded
deferred taxes, will be used to write down NYSEG's 18%
investment in Nine Mile Point nuclear generating unit No. 2.
This transaction will not adversely affect the financial
condition of EEC or any of its subsidiaries. The sales are
expected to close early next year after NYSEG and NGE
Generation have obtained the approval of the sales from all
of the appropriate regulatory bodies.
<PAGE>
or if the Manager determines that Maine GasCo's cash reserves and
reasonably anticipated revenues are less than its budgeted
working capital needs for the next six succeeding months.
Pursuant to the Joint Venture Agreement, net profits and net
losses will be allocated between the Maine GasCo members in
proportion to the ownership percentage that each Maine GasCo
member holds.
The Joint Venture Agreement establishes a Management
Committee consisting of three EEC Enterprises appointees and
three New England Gas appointees and generally vests a designated
Manager, who will be located in Maine, with exclusive authority
to manage the business of Maine GasCo within the limitations set
forth in the Joint Venture Agreement, the Articles of
Organization, or any Statement of Authority under the Maine
Limited Liability Company Act. The Joint Venture Agreement
authorizes the Manager to perform any and all acts customary or
incident to the business of Maine GasCo. The Joint Venture
Agreement also authorizes the Manager to delegate authority and
to hire or contract for appropriate and necessary services.
Certain actions may be taken by the Manager only upon the
affirmative vote of a majority of the members of the Management
Committee. These actions include the following: incurring
indebtedness, issuing obligations, confessing certain judgments,
incurring certain liabilities, making certain capital
expenditures or incurring certain operating expenses,
consummating transactions between Maine GasCo and a Maine GasCo
affiliate or Maine GasCo member, establishing certain reserves,
making distributions to Maine GasCo members, contravening the
Joint Venture Agreement, causing Maine GasCo to become bankrupt
or dissolve, transferring substantially all of the assets of
Maine GasCo, entering into derivative transactions, declaring a
distribution of profits, engaging in business acquisitions,
calling for certain additional capital contributions, appointing
or removing an officer, and establishing employee compensation.
A vote of the Maine GasCo members holding at least a
majority of the voting interests may remove the Manager with or
without cause. The Maine GasCo member who appoints a person to
the Management Committee may remove such person with or without
cause at any time. The Manager and any Management Committee
member may resign at any time. Maine GasCo members holding a
majority of the voting interests may fill any vacancies in the
position of Manager by affirmative vote, which Manager will hold
the position until the election and qualification of a successor,
or the Manager's resignation or removal. The Joint Venture
Agreement limits the liability of a Maine GasCo member for any
debts or losses of Maine GasCo to its respective capital
contribution to Maine GasCo, except as otherwise required by law.
The Joint Venture Agreement provides for the resolution of
stalemates or impasses among the Management Committee by appeal
to the Chief Executive Officers of the Maine GasCo members, and
by arbitration in the event that the Chief Executive Officers are
unable to resolve the impasse.
<PAGE>
The Joint Venture Agreement contains customary
representations and warranties, including representations
regarding corporate existence and authority to execute the Joint
Venture Agreement. The Joint Venture Agreement requires that any
and all disputes arising therefrom will be settled by arbitration
in accordance with the procedures described above for the
resolution of stalemates or impasses, but authorizes injunctive
relief when an arbitrator's award would not adequately protect
the rights of a party. The parties to the Joint Venture
Agreement have also agreed not to compete with one another with
regard to the business of Maine GasCo. In addition, any party
that ceases to be a Maine GasCo member will not hire employees of
Maine GasCo for three years after that party ceases to be a Maine
GasCo member, and the parties have agreed that Maine GasCo and
any of its subsidiaries will not employ the employees of a Maine
GasCo member or an affiliate under certain conditions. The Joint
Venture Agreement contains other customary terms and conditions,
including provisions regarding indemnification, the use of
confidential information, the holding and conduct of meetings,
distributions to Maine GasCo members, transfers of membership
interests in Maine GasCo, dissolution, and interpretation of the
Joint Venture Agreement.
2. Operations of Maine GasCo
Maine GasCo currently expects to furnish natural gas service
in Maine on a non-exclusive basis in the Bethel and Windham
areas, the greater Augusta area, the greater Waterville area, the
greater Bangor area, and the coastal area including Brunswick and
Bath. Maine GasCo also anticipates furnishing natural gas
service to other towns, which are listed in Appendix A to this
Application. Maine GasCo expects to provide both merchant sales
and transportation services. Maine GasCo has evaluated whether
it will provide transportation services to small commercial and
residential monthly metered customers. Due to the small size of
Maine GasCo, the low load factors of such small customers, and
the lack of planned storage on the available pipelines, as well
as the administrative difficulty of tracking usage and
operationally balancing such usage and nominations for small
pools of monthly metered customers, Maine GasCo has determined
that provision of such transportation services is currently not
feasible. If and when such transportation service does become
feasible, Maine GasCo expects to propose a small customer
transportation service based upon its operational capabilities.
As set forth in more detail in Item 4 - Regulatory
Approvals, CMP Group received authorization from the Maine Public
Utilities Commission ("MPUC"), in Docket No. 96-786, to furnish
on a non-exclusive basis, through Maine GasCo, natural gas
service in such areas. In this order, the MPUC noted that
authorizing more than one local distribution company to provide
service in a given area will result in beneficial competition to
obtain customer load so that system expansion may ultimately be
greater in a given area than it would be if only one entity was
authorized to provide service in such area. A copy of this order
is attached hereto as Exhibit D-1. In addition, on May 1, 1998,
<PAGE>
the MPUC, in Docket No. 98-077, issued its order, attached hereto
as Exhibit D-2, authorizing the formation of New England Gas and
Maine GasCo, and authorizing the initial capitalization of Maine
GasCo. In accordance with this approval and the terms of the
Joint Venture Agreement, the proposed capital structure of Maine
GasCo will be based on fifty percent (50%) equity and fifty
percent (50%) debt, which would finance an initial $40 million
construction program. EEC Enterprises and New England Gas plan
to initially capitalize Maine GasCo with an aggregate of $20
million in equity contributions made by each party in proportion
to its ownership percentage. EEC Enterprises and New England Gas
also plan to make available additional capital as necessary and
consistent with the rules and conditions established by the MPUC.
Maine GasCo expects to derive its supply of natural gas from
the Western Canadian Sedimentation Basin via the proposed
Portland Natural Gas Transmission System pipeline ("PNGTS") and
from the gas fields near Sable Island off Nova Scotia via the
proposed Maritimes & Northeast pipeline ("M&N"), both of which
are currently under development. The FERC has issued
certificates under Section 7 of the Natural Gas Act authorizing
the construction of these pipelines. Development of these
pipelines is proceeding on schedule. PNGTS expects commercial
operation in December, 1998, and M&N expects commercial operation
in November, 1999.
The NYSEG and Maine GasCo systems will be coordinated in
order to enable Maine GasCo to enter the natural gas business
with an experienced management team in place. In addition,
affiliates of EEC Enterprises and New England Gas will provide
administrative and consulting services to Maine GasCo.5 The
services may include, among other things: accounting, financial
planning and analysis, financial reporting, human resources,
regulatory affairs, information systems, insurance, legal,
payroll, purchasing, tax, treasury, transportation, billing
support, telecommunications, meter installation and reading, real
estate, facilities management, call center services, engineering,
construction and environmental services, mapping, training, meter
services and testing, marketing, gas supply and control, gas
transportation and general administrative support.
_____
5 Coordination of NYSEG's system with the Maine GasCo System
and the provision of any services by NYSEG or any other EEC
subsidiary will be done in accordance with NYPSC approved
affiliate transaction procedures. Allocations of cost will
be done pursuant to NYPSC approved cost allocation
guidelines. It is currently contemplated that the provision
of services to Maine GasCo by NYSEG will be pursuant to a
master services agreement which will conform to NYPSC rules
and guidelines.
<PAGE>
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with the Transaction,
inclusive of legal fees and expenses, are estimated at not more
than $65,000.
Item 3. Applicable Statutory Provisions.
Sections 3(a)(1), 9(a)(2) and 10 of the Act apply to the
Transaction. Section 9(a)(2) of the Act makes it unlawful,
without approval of the Commission under Section 10, "for any
person ... to acquire, directly or indirectly, any security of
any public utility company, if such person is an affiliate ... of
such company and of any other public utility or holding company,
or will by virtue of such acquisition become such an affiliate."
Because EEC presently is an "affiliate" of two public utility
companies (i.e., NYSEG and NGE Generation) and by virtue of the
Transaction will also become an "affiliate" of Maine GasCo, which
will become a gas utility company within the meaning of Section
2(a)(4) of the Act on or after the date on which it commences
making residential and commercial sales of natural gas, the
Transaction will require Commission approval under Sections
9(a)(2) and 10 of the Act. In addition, upon consummation of the
Transaction, both EEC and EEC Enterprises will be holding
companies within the meaning of Section 2(a)(7) of the Act and
will be required to register unless they can qualify for
exemptions. Accordingly, EEC and EEC Enterprises request an
order under Section 3(a)(1), exempting EEC and EEC Enterprises
from all provisions of the Act except Section 9(a)(2).
For the reasons explained below, the Commission should grant
approval of the Transaction pursuant to Section 9(a)(2) of the
Act based upon the Transaction's compliance with the applicable
standards of Section 10 of the Act. In addition, for the reasons
described below, the Commission should by order grant EEC and EEC
Enterprises exemptions pursuant to Section 3(a)(1) from all of
the provisions of the Act (except for Section 9(a)(2) thereof).
A. Approval of the Transaction under Section 9(a)(2)
Sections 10(b), 10(c) and 10(f) of the Act set forth the
standards for approval of the Transaction. The Transaction
satisfies all of the requirements of Section 10 and should
therefore be approved. Specifically, as the following discussion
more fully explains:
- - the Transaction will not tend towards interlocking relations
or the concentration of control of public utility companies
to the detriment of investors and consumers;
- - the consideration, including all commissions and fees, to be
paid in connection with the Transaction is reasonable;
- - the Transaction will not unduly complicate the capital
structure of the EEC holding company system;
- - the Transaction is in the public interest and the interests
of consumers and investors;
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- - the Transaction will tend towards the development of an
integrated gas utility system; and
- - the Transaction will comply with all applicable State laws.
1. Section 10(b)
Section 10(b) of the Act requires the Commission to approve
an acquisition pursuant to Section 9(a)(2) unless the Commission
finds that:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public
utility companies, of a kind or to an extent
detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility
assets, the consideration, including all fees,
commissions, and other remuneration, to whomsoever
paid, to be given, directly or indirectly, in
connection with such acquisition is not reasonable or
does not bear a fair relation to the sums invested in
or the earning capacity of the utility assets to be
acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital
structure of the holding company system of the
applicant or will be detrimental to the public interest
or the interest of investors or consumers or the proper
functioning of such holding company system.
The Applicants respectfully submit that no adverse finding should
be made under any of these paragraphs.
a. Section 10(b)(1)
Section 10(b)(1) provides that, if the requirements of
Section 10(f) are satisfied, the Commission shall approve an
acquisition unless:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public
utility companies, of a kind or to an extent
detrimental to the public interest or the interest of
investors or consumers.
Section 10(b)(1) requires a finding that control is "of a kind or
to an extent detrimental to the public interest or the interest
of investors or consumers." The framers of the Act sought
through Section 10(b)(1) to avoid "an excess of concentration and
bigness" and "huge, complex and irrational holding company
systems," while preserving the "opportunities for economies of
scale, the elimination of duplicative facilities and activities,
the sharing of production capacity and reserves and generally
more efficient operations" afforded by certain combinations.
American Electric Power Co., Inc., 46 S.E.C. 1299, 1307-1309
<PAGE>
(1978). The acquisition by EEC, through EEC Enterprises, of at
least 50% of the voting securities of Maine GasCo, which will own
a small local natural gas distribution system, will not increase
the size of EEC in any meaningful way. EEC will be vastly larger
than Maine GasCo and will derive only a de minimis part of its
revenues (less than 1%) from Maine GasCo's operations. The
Transaction will not create an "excess of concentration and
bigness" or a "huge, complex or irrational system" but rather, as
discussed in more detail below, will afford Maine GasCo the
opportunity to achieve the economies of scale and efficiencies,
particularly in the areas of management expertise and gas supply,
that the Act's framers intended to preserve for the benefit of
investors and consumers.
EEC's current subsidiary utility operations are confined
almost exclusively to the State of New York, and its operations
will remain predominantly intrastate in character even after
acquiring Maine GasCo, which will be immaterial to EEC in terms
of size. Furthermore, the Transaction is not undertaken for the
purpose of extending EEC's control over regulated public
utilities and will not lead to the type of concentration of
control over utilities, unrelated to operating efficiencies that
Section 10(b)(1) was intended to prevent. EEC's primary
objective in acquiring an interest in Maine GasCo is to position
itself to participate, through Maine GasCo, in the growing and
increasingly deregulated New England energy market and to provide
natural gas service to areas which do not currently receive
natural gas service. As explained below, the Transaction will
combine the strengths of EEC and Maine GasCo, which will enable
them to offer customers a broader array of energy products and
services than either company alone could offer, and at the same
time create a larger and more diverse asset and customer base,
which will create opportunities for operating efficiencies.
Finally, Maine GasCo will have its own local management team and
work force. The only management interlocks that may be created
are only those which are necessary and desirable in order to
integrate Maine GasCo fully into EEC's system.
<PAGE>
b. Section 10(b)(2)
Section 10(b)(2) provides that an acquisition should be
approved unless the price paid:
is not reasonable or does not bear a fair
relation to the sums invested in or the
earning capacity of the utility assets to be
acquired or the utility assets underlying the
securities to be acquired.
In its determinations as to whether or not a price meets such
standard, the Commission has considered whether the price was
decided as the result of arm's length negotiations,6 whether the
purchaser's Board of Directors has approved the purchase price,7
the opinions of investment bankers8 and the earnings, dividends,
and the book and market value of the shares of the company to be
acquired.9
In this case, EEC, through EEC Enterprises, and CMP Group,
through New England Gas, will each make initial capital
contributions in proportion to their respective ownership
interests so that the total initial capital contribution will
equal $20 million. Since Maine GasCo is a newly formed,
privately held entity and, as part of the parties' efforts to
minimize costs, no outside investment bankers are involved in the
Transaction, the Commission cannot look to investment banker
opinions or publicly traded stock information to review the
reasonableness of the price. However, the amounts to be invested
were determined as a result of arm's length negotiations based on
an evaluation of what facilities would be necessary to serve
natural gas customers in Maine and were reviewed by the
respective Boards of Directors of each party to the Joint Venture
Agreement. Furthermore, these financing arrangements have been
approved by the MPUC. The MPUC can continue to monitor Maine
GasCo's expenditures through its ratemaking proceedings and
regulations with regard to other matters. In addition, each
party's contribution is to be used to finance the construction
and start up of the Maine GasCo System and effectively amounts to
a purchase made at cost. In summary, the following factors all
lead to the conclusion that the amount to be invested by EEC is
fair and does not warrant any of the negative findings that call
for disapproval under Section 10(b)(2) of the Act: (i) the amount
of the equity contributions to be made have been approved by the
_____
6 In the Matter of American Natural Gas Company, Holding Co.
Act Release No. 15620 (Dec. 12, 1966).
7 Consolidated Natural Gas Company, Holding Co. Act Release
No. 25040 (Feb. 14, 1990).
8 Id.
9 In the Matter of Northeast Utilities, Holding Co. Act
Release No. 15448 (April 13, 1966).
<PAGE>
MPUC as being in the public interest, (ii) these arrangements
were negotiated among the parties on an arm's length basis; and
(iii) as discussed below, the investment constitutes a de minimis
portion of EEC's overall capital.
c. Section 10(b)(3)
Section 10(b)(3) directs approval of an acquisition unless
the Commission finds that:
(3) such acquisition will unduly complicate
the capital structure of the holding company
system of the applicant ... or will be
detrimental to ... the proper functioning of
such holding company system.
Section 10(b)(3) (along with Section 10(c)(1), discussed below)
relates to the corporate simplification standards of Section
11(b)(2), which require that each registered holding company take
the necessary steps
to ensure that the corporate or continued
existence of any company in the holding-
company system does not unduly or
unnecessarily complicate the structure ... of
such holding-company system.
The intent of these requirements is to assure the financial
soundness of the holding company system, with a proper balance of
debt and equity. No such complexities will result from the
Transaction. The Transaction will have a very minimal impact on
the capitalization and earnings of EEC. EEC's investment in
Maine GasCo, through EEC Enterprises, will take the form of a
straightforward equity contribution which will not complicate
EEC's capital structure.
As set forth more fully in the discussion of the standards
in Section 10(c)(2), below, and elsewhere herein, the Transaction
will create opportunities for EEC's gas operations and Maine
GasCo to achieve savings, chiefly in the areas of management
expertise and joint management of their respective portfolios of
gas supply, transportation and storage assets. In addition,
since Maine GasCo will provide, on a non-exclusive basis, natural
gas service in areas not currently receiving natural gas service,
consumers will benefit from the existence of competition among
gas companies and by having more energy choices. The Transaction
will therefore be in the public interest and the interest of
investors and consumers, and will not be detrimental to the
proper functioning of EEC's holding company system. Moreover, as
noted by the Commission in Entergy Corporation, et al., 55 SEC
Docket 2035 at 2045 (December 17, 1993), "concerns with respect
to investors' interests have been largely addressed by
developments in the federal securities laws and the securities
markets themselves." EEC is currently, and will continue to be,
<PAGE>
a reporting company subject to the continuous disclosure
requirements of the Securities Exchange Act of 1934 following
completion of the Transaction, which will provide investors with
readily available information concerning EEC. Furthermore, the
Transaction is subject to various state regulatory approvals
which have been obtained (see Item 4 - Regulatory Approvals,
below). For these reasons, the Applicants submit that the
Commission would have no basis for making a negative finding
under Section 10(b)(3).
2. Section 10(c)
The relevant provisions of Section 10(c) of the Act state
that the Commission shall not approve:
(1) an acquisition of securities or
utility assets, or of any other interest,
which is unlawful under the provisions of
section 8 or is detrimental to the carrying
out of the provisions of section 11; or
(2) the acquisition of securities or
utility assets of a public utility or holding
company unless the Commission finds that such
acquisition will serve the public interest by
tending towards the economical and the
efficient development of an integrated public
utility system.
The Applicants respectfully submit that the requirements of
Section 10(c) are satisfied.
Section 10(c)(1) requires that the proposed acquisition not
be "unlawful under the provisions of Section 8" or "detrimental
to the carrying out of the provisions of Section 11." Section 8,
by its terms, only applies to registered holding companies and
thus, the Transaction could not be unlawful under Section 8
because EEC is an exempt holding company. Approval of the
Transaction will not be detrimental to the carrying out of the
provisions of Section 11, which provides, in subsection (b)(1)
thereof, that every registered holding company and its
subsidiaries shall limit their operations "to a single integrated
public-utility system . . . ." As indicated above, EEC is an
exempt holding company and will continue to be entitled to its
current exemption following the acquisition of Maine GasCo's
voting securities. In this regard, the Commission has held on
several occasions that, because Section 11 by its terms applies
only to registered holding companies, Section 10(c)(1) does not
preclude an acquisition by an exempt holding company of the
securities of another public-utility company, even though the
existing properties of the exempt holding company and those of
the company to be acquired together would not constitute a single
integrated system, provided that the acquisition is not unlawful
under Section 8 and would have the integrating tendencies
required by Section 10(c)(2). See Union Electric Company, 45 SEC
489, 501 (1974), aff'd without opinion sub nom., City of Cape
Girardeau v. SEC, 521 F.2d 324 (D.C. Cir. 1975); WPL Holdings,
<PAGE>
Inc., Holding Co. Act Release No. 24590 (February 26, 1988),
aff'd in part and rev'd in part sub nom., Wisconsin's
Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989),
reaffirmed 49 SEC Docket 1255 (September 18, 1991); In the Matter
of Gaz Metropolitain, Inc., et al., Holding Co. Act Release No.
26170 (November 23, 1994); TUC Holding Company, et al., 65 SEC
Docket 301 at 305 (August 1, 1997); and BL Holding Corp., Holding
Co. Act Release No. 26875 (May 15, 1998). Accordingly, as long
as the acquisition of Maine GasCo by EEC would have the
integrating tendencies required by Section 10(c)(2), discussed
below, it is of no consequence that other existing properties of
EEC (e.g., NYSEG's electric system) would not form a part of the
same integrated system as Maine GasCo's gas properties.
Section 10(c)(2) requires that an acquisition not be
approved unless the Commission finds that:
[S]uch acquisition will serve the public
interest by tending towards the economical
and efficient development of an integrated
public-utility system.
Section 2(a)(29)(B) defines an "integrated public utility system"
as applied to gas utility companies as:
[A] system consisting of one or more gas
utility companies which are so located and
related that substantial economies may be
effectuated by being operated as a single
coordinated system confined in its operation
to a single area or region, in one or more
States, not so large as to impair
(considering the state of the art and the
area or region affected) the advantages of
localized management, efficient operation,
and the effectiveness of regulation:
Provided, that gas utility companies deriving
natural gas from a common source of supply
may be deemed to be included in a single area
or region.
Unlike the definition of an "integrated electric utility
system" in Section 2(a)(29)(A) of the Act, physical
interconnection of the component parts of a gas utility system is
not required. Furthermore, the Commission has not traditionally
required that the pipeline facilities of an integrated system be
interconnected.10
_____
10 See In the Matter of Pennzoil Company, Holding Co. Act
Release No. 15963 (1968) (finding an integrated system where
respective facilities both connected with an unaffiliated
transmission company but not each other). See also, In the
Matter of American Natural Gas Company, Holding Co. Act
Release No. 15620 (1966) ("it is clear the integrated or
coordinated operations of a gas system under the Act may
exist in the absence of [physical] interconnection").
<PAGE>
The acquisition by EEC of at least 50% of the voting
securities of Maine GasCo will satisfy the integration standard
set forth in Section 2(a)(29)(B) of the Act for the following
reasons:
EEC's investment in, and its ongoing involvement with, Maine
GasCo's operations, will be critical to the development of a
gas utility system in an area which does not currently
receive natural gas service;
Maine GasCo and NYSEG's gas systems will share a "common
source of supply" (the Western Canadian Sedimentation Basin)
and will be operated as a "single coordinated system;"
Maine GasCo will be able to achieve "substantial economies"
in gas supply through the increased purchasing power and gas
supply coordination that will result from being part of the
larger NYSEG gas system; Maine GasCo and its customers will
also benefit from NYSEG's expertise in such areas as
engineering, construction, mapping, training, meter services
and testing, marketing and gas transportation;
Taking into account the current "state of the art," the area
or region served by NYSEG in New York and by Maine GasCo
will not be "so large as to impair . . . the advantages of
localized management, efficient operation, and the
effectiveness of regulation." To the contrary, the day-to-
day operations of Maine GasCo will be under the direction of
its Manager, who will be located in Maine. The management
of Maine GasCo will be independent of, but coordinated with
(in order to promote efficient operation) that of NYSEG, and
will be subject to effective local regulation by the MPUC;
and
Because of Maine GasCo's size, EEC will continue to qualify
for an exemption under Section 3(a)(1) of the Act as an
"intrastate" holding company even after acquiring Maine
GasCo's voting securities.
Under these circumstances, and because the acquisition of Maine
GasCo will have the integrating features required by Sections
10(c)(2) and 2(a)(29)(b), the Commission should approve the
Transaction.
a. Single Area or Region
Although the NYSEG and Maine GasCo retail gas service areas
will be separated by a distance of several hundred miles and are
located in non-contiguous states, such factors by themselves are
not determinative. See MCN Corporation, 62 SEC Docket 2379
(September 17, 1996) (approving acquisition of an interest in a
gas utility company by an exempt gas utility holding company
whose service area is located more than 500 miles distant in a
non-adjoining state). On the contrary, Section 2(a)(29)(B)
specifically contemplates that "gas utility companies deriving
natural gas from a common source of supply may be deemed to be
included in a single area or region." Moreover, in considering
whether an "area or region" is so large as to impair "the
<PAGE>
advantages of localized management, efficient operation, and the
effectiveness of regulation," the Commission must consider the
"state of the art" in the industry. Both the Commission's
precedent and the "state of the art" in the natural gas industry
lead to the conclusion that, with the Maine GasCo System
included, EEC's gas utility system will operate as a coordinated
system confined in its operation to a single area or region
because Maine GasCo and NYSEG will derive natural gas from a
common source of supply.
Neither the Act, the Commission's orders and rulings nor the
Commission staff's no-action letters provide a definition as to
what constitutes a "common source of supply." Historically, in
determining whether two gas companies share a "common source of
supply," the Commission has looked to such issues as from whom
the distribution companies within the system receive a
significant portion of their gas supply.11 The Commission has
also considered both purchases of gas from a common pipeline12 as
well as from different pipelines when the gas originates from the
same gas field.13 Since the time of most of these decisions, the
state of the art in the industry has developed to allow efficient
operation of systems whose gas supplies derive from many sources.
Following consummation of the Transaction, both NYSEG and
Maine GasCo will derive a significant amount of their gas from a
common source of supply under Section 2(a)(29)(B). As previously
mentioned, NYSEG receives approximately 28.5% of its gas supply
from the Western Canadian Sedimentation Basin through the
TransCanada Pipeline. Maine GasCo will take gas initially from
the proposed PNGTS pipeline, which will be interconnected with
the TransCanada Pipeline, running out of the Western Canadian
Sedimentation Basin. Moreover, when fully developed, Maine GasCo
will continue to receive at least 50% of its gas supply from the
_____
11 See e.g., In the Matter of Philadelphia Company and
Standard Power and Light Company, Holding Co. Act Release
No. 8242 (1948) ("most of the gas used by these companies in
their operations is obtained from common sources of
supply"); Consolidated Natural Gas Company, Holding Co. Act
Release No. 25040 (1990) (finding integrated system where
each company derived natural gas from two transmission
companies, although one such company also received gas from
other sources).
12 In the Matter of the North American Company, Holding Co. Act
Release No. 10320 (1950) (finding Panhandle Eastern pipeline
to be a common source of supply).
13 See In the Matter of Central Power Company and Northwestern
Public Service Company, Holding Co. Act Release No. 2471
(1941), in which the Commission declared an integrated
system to exist where two entities purchase from different
pipeline companies since "both pipelines run out of the Otis
field, side by side, and are interconnected at various
points in their transmission system; and that they are
within two miles of each other at Kearney."
<PAGE>
Western Canadian Sedimentation Basin through the TransCanada
Pipeline and the PNGTS pipeline. As noted above, purchases from
a common pipeline, as well as purchases from a common gas field,
have been found to satisfy the "common source of supply"
requirement of Section 2(a)(29)(B) of the Act. Accordingly, there
is substantial evidence that NYSEG and Maine GasCo will share a
common source of supply for a significant amount of their
respective gas supplies. In addition, when the Maine GasCo
System is fully developed, it is anticipated that its gas
purchasing needs may become significant enough for economic
efficiencies to arise by having consolidated gas purchasing for
both NYSEG and Maine GasCo. Thus, some of NYSEG's and Maine
GasCo's gas supply could be handled on a coordinated basis.
Any determination of the appropriate size of the area or
region calls for consideration of the "state of the art" in the
gas industry. In this regard, the "state of the art" in the gas
industry continues to evolve and change, primarily as a result of
decontrol of wellhead prices, the continuing development of an
integrated national gas transportation network, the construction
of new pipeline capacity, the emergence of marketers and brokers,
and the "un-bundling" of the commodity and transportation
functions of pipelines and local distribution companies in
response to various FERC and state initiatives.14 Of particular
importance has been the development, evolution and operation of
market centers, trading hubs, and pooling areas. Today, trading
activity conducted at market centers and trading hubs play an
increasingly vital role in the overall management of the assets
in a gas portfolio (supply, transportation and storage).
Market centers, trading hubs and pooling areas essentially
serve to facilitate transactions through information exchanges,
physical exchanges of gas, the provision of transportation
related services (e.g., storage, parking), and the aggregation of
supplies of all merchants. Trading hubs function primarily as
physical transfer points between intersecting pipelines where
buyers, sellers and traders can sell, exchange or trade gas or
pipeline capacity or redirect deliveries to a different pipeline.
Further, various types of unbundled services are typically
available at trading hubs, such as temporary storage, parking and
_____
14 The Commission has taken notice of the regulatory and
technological changes that have reshaped the natural gas
industry over the past two decades. See "The Regulation of
Public-Utility Holding Companies," Report of the Division of
Investment Management (June 1995), pp. 29 - 31. In its
Report, the Division of Investment Management recommended
that the Commission "interpret the single area or region'
requirement [of Section 2(a)(29)] flexibly, recognizing
technological advances, consistent with the purposes and
provisions of the Act." Id. at 73. The Division also
stated that the focus of inquiry under Section 10(c)(2)
should be on whether a transaction would promote the
economic and efficient development of a utility system and
on whether the resulting system would be subject to
effective regulation.
<PAGE>
loaning of gas, and balancing. Market centers are easily
accessible from many parts of the country. They can be used to
arrange storage, transportation or other ancillary services.
Pooling areas facilitate the title transfer of title gas at both
production and market points. In addition to the operation of
pooling areas by interstate pipelines, several marketing
companies provide services by which interested buyers and sellers
can exchange gas at such pooling points for a fee. At some
market centers, hub services, such as parking, loaning, wheeling,
and in some instances, title transfer, are also available. Thus,
a producer in a given basin may, through such market mechanisms,
sell gas to a buyer several pipeline systems away without the
payment of additional transportation costs, thus making gas
produced in one basin more competitive with gas produced in a
geographically closer locale.
This represents a significant change from the last 50 years
when LDC's typically bought all of their gas at the city-gate
from the interconnecting pipeline. Such creative arrangements,
however, are dependent upon the existence of significant physical
interconnections and market centers between the production area
and ultimate delivery point. While these conditions may not
currently exist throughout all of the contiguous 48 states, the
nation's interstate pipeline system continues to expand at a
significant rate, in terms of both long-haul capacity and
interregional interconnections. Between 1990 and the end of
1997, capacity additions on the long-haul pipeline systems
totaled 12.4 billion cubic feet (Bcf) per day, an increase of
about 17%, while interregional capacity additions totaled 11.4
Bcf per day, or about 15%, in the same period. More than 40
projects were completed in 1997 alone. See, Energy Information
Agency, "Deliverability on the Interstate Natural Gas Pipeline
System," DOE/EIA-0618(98) (Washington, D.C., May 1998), pp. 32-
34. Several new expansion projects have been announced to
alleviate capacity constraints in those few areas of the country
where they still exist. Moreover, as previously described,
market centers and storage capacity are becoming increasingly
integrated into the pipeline network. In summing up the current
state of the nation's pipeline delivery system, taking into
account completion by the end of the year 2000 of projects that
will expand transportation capacity from the Rocky Mountains, New
Mexico, and West Texas producing areas to Midwest and Northeast
markets, the Department of Energy has observed that "the
interstate natural gas pipeline network will come closer to being
a national grid where production from almost any part of the
country can find a route to customers in almost any area."
(Emphasis added).
As a result of these developments, coordination of the
operations of two non-contiguous gas companies is no longer
dependent solely upon having contractual capacity on the same
interstate pipelines, so long as the two companies both have
access to one or more common market centers or trading hubs.
Importantly, these developments in the state of the art in the
gas industry now allow gas distribution companies operating in a
much larger area or region of the country to realize operating
economies and efficiencies from coordinated operation that were
<PAGE>
once thought to be achievable only by contiguous or nearly
contiguous gas companies supplied by the same interstate
pipelines.
As indicated above, because NYSEG and Maine GasCo will
potentially share access through their respective pipeline
transporters to industry-recognized market and supply-area hubs,
they will have the ability to physically coordinate and manage
their portfolios of supply, transportation and storage. Through
such interstate and intrastate pipeline interconnections, market
participants such as NYSEG and Maine GasCo will be able to
support, if necessary, the underlying physical side of various
financial derivatives as a means of managing price volatility.
Maine GasCo expects that such instruments, if appropriate, would
be arranged through NYSEG, which already purchases such
instruments in order to help manage its gas costs.
Given that there is substantial evidence that the
acquisition will have integrating features (e.g., common source
of supply, local management, realization of substantial economies
and efficiencies through coordinated operation and effective
local regulation) and that exempt holding companies like EEC are
not subject to the strict integration standards of Section
11(b)(1), the Commission should have little reason to interpret
the integration standards of Section 10(c)(2) and Section
2(a)(29)(B), as applied to the Transaction, in a narrow or
restrictive manner. In other recent cases involving acquisitions
by exempt holding companies, such as Gaz Metropolitain, Inc., et
al., TUC Holding Company, et al., and MCN Corporation, the
Commission has exhibited a willingness to interpret the
integration standards of Section 10(c)(2) flexibly, focusing
instead on the demonstrated benefits of the transaction from the
perspectives of both investors and consumers. It should do the
same here.
b. Economies and Efficiencies
EEC's ownership of an interest in Maine GasCo will be
beneficial to the management and operations of the Maine GasCo
System and will result in the requisite economies and
efficiencies. 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." See American Electric Power Co., 46 SEC 1299,
1322 (1978); accord, Centerior Energy Corp., Holding Co. Act
Release No. 24073 (April 29, 1986) ("specific dollar forecasts of
future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not
precisely quantifiable"). In this case, the Applicants believe
that the Transaction will provide significant financial and
organizational advantages to Maine GasCo and as a result, the
substantial potential economies and efficiencies should be found
to meet the standard of Section 10(c)(2) of the Act.
In general, it is important to remember that Maine GasCo
will have very limited direct staffing personnel to operate the
local natural gas distribution system. At each step in the
construction, development, operation, marketing and promotion of
the Maine GasCo System, the Maine GasCo System has and will
benefit from NYSEG's existing expertise in these areas as well as
<PAGE>
NYSEG's rate and pricing expertise. Thus far, NYSEG's management
and engineering personnel have been closely involved in the
process of making day-to-day determinations with regard to the
installation and location of Maine GasCo's main pipeline and
distribution system. Similarly, NYSEG has worked with Maine GasCo
to decide the type of meter reading system that Maine GasCo will
use and has lent its expertise with both automated and labor
intensive meter reading systems to evaluate the best option for
the Maine GasCo System. NYSEG has also provided advice with
respect to pipeline system safety and gas appliance
infrastructure and marketing. In each instance, NYSEG has
provided Maine GasCo with existing expertise in operating a local
natural gas distribution system in this decision making process,
which will allow Maine GasCo to develop an efficient system in an
efficient manner. Without NYSEG's existing expertise in these
areas, Maine GasCo would have to hire consultants to provide the
ongoing training of its personnel as well as hire additional
personnel to conduct these operations.
NYSEG's experience in operating a local natural gas
distribution system will enable Maine GasCo to construct a safe
and efficient system of its own. Maine GasCo plans to construct
its system to current NYSEG standards, ensuring a higher level of
safety than most utilities provide. NYSEG's expertise in the gas
industry will be instrumental to establishing and maintaining
this level of safety. Furthermore, Maine GasCo has followed, and
will continue to follow, NYSEG's approach to contracting with
third parties for the provision of construction and mapping
services. Maine GasCo has entered into "alliance" contracts in
which it will work as a team with the contractors in order to
complete the project successfully. NYSEG has used this approach
in New York to its significant benefit.
NYSEG's experience in the market for gas supply will also
benefit Maine GasCo. It is expected that NYSEG's access to gas
supplies will prove useful to Maine GasCo, and will complement
the financial strength EEC brings to Maine GasCo's operations.
Similarly, by increasing the purchasing power of EEC as a result
of its providing gas and other purchasing services to Maine
GasCo, the addition of the Maine GasCo System to NYSEG's existing
gas system will create a larger combined system able to capture
greater economies of scale in such purchasing activities.
Furthermore, since NYSEG sells gas primarily to temperature-
sensitive residential and small commercial customers, NYSEG's
system's load factor will be similar to Maine GasCo's. NYSEG has
substantial experience in operating a disaggregated service
territory, much like the proposed natural gas system of Maine
GasCo, which will operate off of two pipelines with multiple gate
stations. NYSEG's experience in a similar environment will no
doubt benefit Maine GasCo.
Similarly, as Maine GasCo will provide a new service in its
territory, its marketing plans are of particular importance. Here
again, centralized planning has benefitted, and will continue to
benefit, Maine GasCo. Maine GasCo's initial promotional material
and informational booklets distributed to potential customers
were modeled on (and are virtually identical to) those used by
NYSEG. NYSEG currently oversees the advertising, promotions and
<PAGE>
direct mailings for Maine GasCo and will help to develop
incentive programs for Maine GasCo.
In addition, combining the systems of Maine GasCo and NYSEG
will tend toward the economic and efficient development of a
coordinated gas system because NYSEG and Maine GasCo will have
the opportunity to centralize certain computer systems. It is
currently contemplated that Maine GasCo will use NYSEG's Gas
Control system ("GC System") to monitor its operations around the
clock. Significant day-to-day centralization between the Maine
GasCo System and the existing NYSEG gas system can occur via
NYSEG's GC System. The GC System handles all customer-related
information needs, including large customer account information
and gas consumption monitoring. The Maine GasCo System will have
a direct line to the GC System and large customer or marketer
inquiries can be handled through an internet Electronic Bulletin
Board. Moreover, NYSEG's GC System personnel can provide
frequent consulting services to the Maine GasCo personnel on how
to operate their link with the GC System and how to handle other
customer service related matters.
If Maine GasCo were to attempt to develop its own GC system,
it would incur significant start-up costs. In addition, Maine
GasCo would have to hire additional employees to operate the
system and would also incur other personnel and personnel
training costs. This arrangement will also benefit NYSEG by
permitting it to more efficiently use existing personnel and
computer resources. Finally, as previously discussed, NYSEG's
management is highly trained and experienced in providing gas
distribution services. It has brought its technological,
operations, gas purchasing, customer service and regulatory
expertise to Maine GasCo, and can pass on that expertise to Maine
GasCo. CMP Group does not have an equivalent level of experience
in operating a local natural gas distribution company and will
derive substantial benefits from NYSEG's expertise. Although the
parties have not tried to quantified the value of these services,
they believe that having experienced management advice readily
available to Maine GasCo will increase the efficiency of Maine
GasCo's operations significantly and will also permit EEC to
utilize its personnel in a more efficient manner.
The EEC system will also meet the requirement that it be
"not so large as to impair (considering the state of the art and
the area or region affected) the advantages of localized
management, efficient operation and the effectiveness of
regulation." In In The Matter of American Natural Gas Company,
Holding Co. Act Release No. 15620 (Dec. 12, 1966), the Commission
found that the American Natural Gas system would meet the above
requirement after its acquisition of an Indiana gas utility:
Although American Natural will provide
certain central facilities, equipment and
personnel ... Central Indiana will retain its
own local management and board of directors,
a majority of whom will be residents of
Indiana. Central Indiana will continue to
be subject to regulation by the Public
Service Commission of Indiana.
<PAGE>
Maine GasCo will be operated in a similar manner. While, as
discussed above, Maine GasCo may receive a number of centralized
services from NYSEG (i.e., gas supply and control, gas
transportation, engineering, construction, mapping, training,
meter services and meter testing and marketing), allowing it to
capture economies and efficiencies for the Maine GasCo System,
the Maine GasCo System will be operated on a day-to-day basis by
a local operator (Maine GasCo), and the Maine GasCo System will
be regulated by the MPUC with regard to rates and other matters.
Thus, the Maine GasCo System will be locally operated and locally
regulated, but will have the economic advantage of certain
centralized services.
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any
acquisition ... under this section unless it
appears to the satisfaction of the Commission
that such State laws as may apply in respect
of such acquisition have been complied with,
except where the Commission finds that
compliance with such State laws would be
detrimental to the carrying out of the
provisions of section 11.
As explained below in Item 4 - Regulatory Approvals, certain
aspects of the Transaction require approval of the MPUC. The
MPUC has authorized CMP Group, through Maine GasCo, to provide on
a non-exclusive basis natural gas service in certain areas in
Maine and has approved the formation and initial capitalization
of Maine GasCo. Copies of such orders are attached hereto as
Exhibits D-1 and D-2, respectively.
B. The Exemption under Section 3(a)(1)
Neither EEC nor EEC Enterprises intends to register as a
holding company under the Act. As demonstrated below, EEC and
EEC Enterprises respectfully submit that they should both be
granted, by Commission order, exemptions under Section 3(a)(1) of
the Act. Section 3(a)(1) of the Act exempts a "holding company"
from all of the provisions of the Act (except for Section 9(a)(2)
thereof) if:
such holding company, and every subsidiary
company thereof which is a public-utility
company from which such holding company
derives, directly or indirectly, any material
part of its income, are predominately
intrastate in character and carry on their
business substantially in a single State in
which such holding company and every such
subsidiary company thereof are organized.
EEC and EEC Enterprises will satisfy such requirements.
EEC, NYSEG and NGE Generation all are organized and carry
on their business substantially in the State of New York.
Neither EEC, NYSEG, nor NGE Generation will derive any material
part of its income from a utility company that carries on its
<PAGE>
business and/or is organized outside of the State of New York.
Maine GasCo will be significantly smaller than EEC. (See
footnote 3, above). The acquisition and ownership of Maine GasCo
voting securities by EEC will therefore have no impact on the
continuing entitlement of EEC to its exemption under Section
3(a)(1) of the Act.
In addition, EEC Enterprises should also be granted an
exemption under Section 3(a)(1) below. EEC Enterprises and Maine
GasCo are both organized and will carry on their business in the
State of Maine and neither EEC Enterprises nor Maine GasCo will
derive any part of its income from a utility company that carries
on its business and/or is organized outside of the State of
Maine.
Section 3(a) of the Act provides that, if an applicant
satisfies the objective requirements for an exemption, the
applicant shall be granted the exemption, "unless and except
insofar as [the Commission] finds the exemption detrimental to
the public interest or the interest of investors or consumers."
In assessing whether a proposed exemption is "detrimental," the
Commission has focused upon the presence of state regulation,
establishing that federal intervention is unnecessary when state
control is adequate. See, e.g., KU Energy Corp., Holding Co. Act
Release No. 25409 (November 13, 1991); CIPSCO Inc., Holding Co.
Act Release No. 25152 (September 18, 1990).15
The Commission should find that sufficient safeguards exist
under state law to ensure that no potential adverse consequences
would result from the Transaction. As discussed above, the MPUC
has approved the formation and initial capitalization of Maine
GasCo and the MPUC will regulate Maine GasCo with regard to rates
and other matters.
Item 4. Regulatory Approvals.
The formation of Maine GasCo and the construction and
financing of Maine GasCo's natural gas distribution system are
subject to the jurisdiction of the MPUC. The MPUC has issued
orders authorizing CMP Group to provide natural gas service on a
non-exclusive basis,16 through Maine GasCo, in certain areas of
_____
15 Furthermore, the Commission Staff has stated its support for
greater flexibility in the administration of existing
exemptions in consultation and cooperation with state
regulators. See, Division of Investment Management, The
Regulation of Public Utility Holding Companies, supra, at
119-20.
16 In authorizing CMP Group, through Maine GasCo, to provide
natural gas service on a non-exclusive basis, the MPUC noted
at page 5 of its order in Docket No. 96-786:
"[A]s a general matter, authorizing more than
one LDC to serve an area will result in
beneficial competition to obtain adequate
customer load to build and serve an area in a
manner that may very likely "grow the market"
<PAGE>
Maine not currently receiving natural gas service and has also
authorized the formation and initial capitalization of Maine
GasCo. Copies of such orders are attached hereto as Exhibits D-1
and D-2, respectively.
No other state or federal commission has jurisdiction over
the Transaction.
Item 5. Procedure.
The Applicants hereby request that the Commission publish a
notice under Rule 23 with respect to the filing of this
Application as soon as practicable and that the Commission's
order be issued as soon as possible in order that Maine GasCo can
begin serving Maine customers in December, 1998. A form of
_____
so that system expansion may ultimately be greater than
it would be if only a single entity was authorized to
serve. Nor do we expect that market inefficiencies,
such as uneconomic duplication of facilities and lost
economies of scale, will predominate or necessarily
result in higher prices to end-users. We expect that
the efficiencies and product diversification that are
the hallmarks of competition will result in system
expansion that is at least as socially beneficial as
that which could be achieved by traditional means as a
regulated monopoly service.
Moreover, we do not believe that, if
customers are the selecting mechanism,
benefits would accrue to only the largest
customers to the detriment of smaller
customers. Beneficial deals and discounts to
large customers may make it more imperative
for the entity to obtain additional small
customers in order to increase throughput and
achieve an adequate return on infrastructure
development. Consequently, competition among
providers could ultimately drive deeper
penetration levels within a given area.
Consequently, we conclude that economic
efficiencies and the public interest in safe
and adequate service and facilities and
orderly infrastructure development will be
amply served by allowing multiple gas
utilities to compete to serve an area . . .
The policy has encouraged aggressive and
innovative proposals for development of
service to previously unserved areas. We see
no benefit in cutting off competition at this
point and foreclosing further benefits that
it may provide."
<PAGE>
notice suitable for publication in the Federal Register is
attached hereto as Exhibit H-1.
The Applicants do not believe that there should be a
recommended decision by a hearing officer or any other
responsible officer of the Commission or that there should be a
30-day waiting period between the issuance of the Commission's
order and the date on which it is to become effective. The
Applicants request that the Commission's order become effective
immediately upon the entry thereof. The Applicants consent to
the Division of Investment Management assisting in the
preparation of the Commission's decision or order in this matter,
unless such Division opposes this application.
<PAGE>
Item 6. Exhibits and Financial Statements.
NO. DESCRIPTION METHOD OF FILING
(a) Exhibits
A-1 Articles of Organization of CMP Natural Gas, Filed herewith.
L.L.C. ("Maine GasCo.")
B-1 Joint Venture Agreement dated as of November Filed herewith.
13, 1997 between Central Maine Power
Company ("CMP") and New York State Electric
& Gas Corporation.
D-1 Order of the MPUC in Docket No. 96-786 Filed herewith.
authorizing CMP Group to furnish, through
Maine GasCo, natural gas service in
certain areas of Maine.
D-2 Order of the MPUC in Docket No. 98-077 Filed herewith.
authorizing the formation and capitalization
of Maine GasCo.
E-1 Map of natural gas service area of Filed herewith.
Maine GasCo. (paper format
filing)
F-1 Preliminary opinion of Huber Lawrence & To be filed by
Abell, counsel to Energy East Corporation amendment.
and Energy East Enterprises, Inc.
F-2 Past-tense opinion of Huber Lawrence & To be filed by
Abell, counsel to Energy East Corporation amendment.
and Energy East Enterprises, Inc.
H-1 Proposed form of Federal Register Notice. Filed herewith.
(b) Financial Statements
1.1 Balance sheet of Energy
East Corporation
(consolidated)
as of June 30, 1998.
1.2 Statement of Income and
Retained Earnings of Energy
East Corporation
(consolidated) as of June
30, 1998.
<PAGE>
Incorporated herein by
reference to Form 10-Q for the
quarter ended June 30, 1998
filed by Energy East
Corporation - File No. 1-
14766.
Incorporated herein by
reference to Form 10-Q for the
quarter ended June 30, 1998
filed by Energy East
Corporation - File No. 1-
14766.<PAGE>
Item 7. Information as to Environmental Effects.
The Applicants do not believe that the Transaction would involve
a "Major federal action" nor would it "significantly affect the
quality of the human environment" as those terms are used in Section
102(2)(c) of the National Environmental Policy Act. The only federal
actions related to the Transaction pertain to the Commission's
approval of this application and granting of the exemptions requested
herein. The Transaction would not result in changes in the operations
of EEC that would have any impact on the environment. No Federal
agency has prepared or is preparing an environmental impact statement
with respect to the Transaction.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused this
statement to be signed on their behalf by the undersigned thereunto
duly authorized.
Energy East Corporation
Date: September 24, 1998 By: Kenneth M. Jasinski
Kenneth M. Jasinski
Senior Vice President
and General Counsel
Energy East Enterprises, Inc.
Date: September 24, 1998 By: Kenneth M. Jasinski
Kenneth M. Jasinski
Treasurer and Chief
Financial Officer
<PAGE>
APPENDIX A
PROPOSED SERVICE AREAS
Rumford Hampden Bath
Mexico Orrington Freeport
Dixfield Bucksport Yarmouth
Bethel Clinton North Yarmouth
Farmington Waterville Baileyville
(Woodland)
Wilton Winslow Bridgton
Jay Fairfield Casco
Livermore Madison Durham
Livermore Falls Oakland Gray
Millinocket Skowhegan Harrison
East Millinocket Norridgewock Naples
Medway Augusta Norway
Lincoln Gardiner Otisfield
Howland Randolph Oxford
Orono Hallowell Paris
Old Town Farmingdale Pownal
Milford Manchester Raymond
Veazie Winthrop Standish
Bangor Topsham Windham
Brewer Brunswick
EXHIBIT A-1
<PAGE>
Exhibit A-1
Page 1 of 2
DOMESTIC
LIMITED LIABILITY COMPANY
STATE OF MAINE
ARTICLES OF ORGANIZATION OF
LIMITED LIABILITY COMPANY
Pursuant to 31 MRSA sect. 622, the undersigned adopts the
following articles of organization:
FIRST: The name of the limited liability company is CMP
Natural Gas, L.L.C.
SECOND: The name of its Registered Agent, an individual Maine
resident or a corporation, foreign or domestic,
authorized to do business or carry on activities in
Maine, and the address of the registered office shall
be
Joseph D. Fay
83 Edison Drive
Augusta, Maine 04336
THIRD: 1. The management of the company is vested in a
manager or managers. The minimum number shall be
1 manager and the maximum number shall be 2
managers.
2. If the initial managers have been selected, the
name and business, residence or mailing address of
each manager is:
Name Address
Tim D. Kelley New York State Electric & Gas
Corporation
4500 Vestal Parkway East
Binghamton, NY 13902
Darrel R. Quimby CMP Group, Inc.
83 Edison Drive
Augusta, Maine 04336
<PAGE>
Exhibit A-1
Page 2 of 2
ORGANIZER DATED September 1, 1998
Central Maine Power Company
By Anne M. Pare
Anne M. Pare, Secretary and Clerk
The undersigned hereby accepts the appointment as registered
agent for the above named limited liability company
REGISTERED AGENT DATED September 1, 1998
Joseph D. Fay
Joseph D. Fay
EXHIBIT B-1
CMP GAS COMPANY, L.L.C.
JOINT VENTURE AGREEMENT
<PAGE>
CMP GAS COMPANY, L.L.C.
JOINT VENTURE AGREEMENT
TABLE OF CONTENTS
ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Formation. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Principal Place of Business; Principal Executive
Office.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4 Registered Office and Registered Agent . . . . . . . . . . . . 8
ARTICLE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1 Management . . . . . . . . . . . . . . . . . . . . . . 9
5.2 Limitations on Manager s Authority . . . . . . . . . . . . . . 9
5.3 Number, Tenure, and Qualifications of Manager,
Members of the Management Committee. . . . . . . . . . . . . . 11
5.4 Removal and Resignation of the Manager and Members
of the Management Committee; Manner of Acting. . . . . . . . . 11
5.5 Duties of the Manager, Members of the Management
Committee, and the Members.. . . . . . . . . . . . . . . . . . 12
5.6 The Manager, Members of the Management Committee,
and the Members Have No Exclusive Duty to Company. . . . . . . 13
5.7 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 Indemnification of the Members, Manager, Members
of the Management Committee, Employees, and Other
Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.9 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.10 Delegation of Authority. . . . . . . . . . . . . . . . . . . . 17
5.11 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.12 Employee Costs . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.1 Limitation of Liability. . . . . . . . . . . . . . . . . . . . 18
6.2 Company Debt Liability.. . . . . . . . . . . . . . . . . . . . 18
6.3 Company Books. . . . . . . . . . . . . . . . . . . . . . . . . 18
6.4 Priority and Return of Capital.. . . . . . . . . . . . . . . . 18
ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.1 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.2 Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . 19
7.3 Notice of Meetings.. . . . . . . . . . . . . . . . . . . . . . 19
7.4 Meeting of all Members . . . . . . . . . . . . . . . . . . . . 19
7.5 Record Date. . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.6 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.7 Manner of Acting.. . . . . . . . . . . . . . . . . . . . . . . 20
7.8 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.9 Action by Members Without a Meeting. . . . . . . . . . . . . . 20
7.10 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . 20
7.11 Stalemates or Impasses . . . . . . . . . . . . . . . . . . . . 20
7.12 Frequency of Meetings. . . . . . . . . . . . . . . . . . . . . 21
7.13 Notice of Meetings; Management Committee . . . . . . . . . . . 21
7.14 Location and Conduct of the Meetings;
Adjournments . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.15 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . 22
7.16 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.17 Quorum; Management Committee . . . . . . . . . . . . . . . . . 22
7.18 Action by Management Committee Without a Meeting . . . . . . . 22
ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.1 Members' Initial Capital Contributions . . . . . . . . . . . . 22
8.2 Additional Capital Contributions . . . . . . . . . . . . . . . 23
8.3 Capital Accounts.. . . . . . . . . . . . . . . . . . . . . . . 23
8.4 Withdrawal or Reduction of Members' Contributions
to Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.5 Debt/Equity Ratio. . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.1 Allocations of Profits and Losses from
Operations.. . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.2 Special Allocations to Capital Accounts and
Certain Other Income Tax Allocations.. . . . . . . . . . . . . 25
9.3 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 26
9.4 Limitation Upon Distributions. . . . . . . . . . . . . . . . . 26
9.5 Accounting Principles. . . . . . . . . . . . . . . . . . . . . 27
9.6 Interest On and Return of Capital Contributions. . . . . . . . 27
9.7 Accounting Period. . . . . . . . . . . . . . . . . . . . . . . 27
9.8 Records and Reports. . . . . . . . . . . . . . . . . . . . . . 27
9.9 Returns and other Elections. . . . . . . . . . . . . . . . . . 28
ARTICLE X. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.2 Right of First Refusal.. . . . . . . . . . . . . . . . . . . . 29
10.3 Transfers by Operation of Law. . . . . . . . . . . . . . . . . 31
ARTICLE XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE XII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.1 Dissolution. . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.2 Effect of Filing of Dissolving Statement . . . . . . . . . . . 32
12.3 Winding Up, Liquidation, and Distribution of
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.4 Certificate of Cancellation. . . . . . . . . . . . . . . . . . 34
12.5 Return of Capital Contribution - Nonrecourse . . . . . . . . . 34
12.6 Breach of Joint Venture Agreement; Remedies;
Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE XIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE XV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE XVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
16.1 Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
16.2 Books of Account and Records. . . . . . . . . . . . . . . . . 37
16.3 Application of Maine Law. . . . . . . . . . . . . . . . . . . 37
16.4 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . 37
16.5 Execution of Additional Instruments . . . . . . . . . . . . . 37
16.6 Construction. . . . . . . . . . . . . . . . . . . . . . . . . 37
16.7 Headings and Pronouns . . . . . . . . . . . . . . . . . . . . 37
16.8 Waivers.. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
16.9 Rights and Remedies Cumulative. . . . . . . . . . . . . . . . 38
16.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . 38
16.11 Heirs, Successors and Assigns . . . . . . . . . . . . . . . . 38
16.12 Creditors . . . . . . . . . . . . . . . . . . . . . . . . . . 38
16.13 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 38
16.14 Integration . . . . . . . . . . . . . . . . . . . . . . . . . 38
16.15 Maine Securities Law. . . . . . . . . . . . . . . . . . . . . 38
16.16 Public Announcements. . . . . . . . . . . . . . . . . . . . . 39
16.17 Indemnification.. . . . . . . . . . . . . . . . . . . . . . . 39
16.18 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 39
16.19 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . 40
16.20 Equitable Relief. . . . . . . . . . . . . . . . . . . . . . . 40
16.21 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 40
16.22 No Partnership Created. . . . . . . . . . . . . . . . . . . . 41
16.23 Audit Rights. . . . . . . . . . . . . . . . . . . . . . . . . 41
16.24 Agreement Jointly Drafted.. . . . . . . . . . . . . . . . . . 41
16.25 Ratification by CMP Gas Company, L.L.C. . . . . . . . . . . . 41
16.26 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 41
APPENDICES
<PAGE>
JOINT VENTURE AGREEMENT
OF
CMP GAS COMPANY, L.L.C
THIS JOINT VENTURE AGREEMENT ("Agreement") is made and
entered into as of this 13th day of November, 1997, by and
between Central Maine Power Company ( CMP ), a Maine corporation,
and New York State Electric & Gas Corporation ( NYSEG ), a New
York corporation, and is to take effect on the later of (a) the
date of this Joint Venture Agreement or, (b) the date on which
the CMP Gas Company, L.L.C's ("Company's") initial Articles of
Organization are filed with the Secretary of State of the State
of Maine in substantial compliance with the requirements of the
Act or, (c) the date on which NYSEG and CMP have received both
Boards of Directors and all necessary regulatory approvals to
enter into this Agreement ("the "Effective Date").
WITNESSETH:
In consideration of the mutual covenants contained in this
Joint Venture Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 In addition to the terms defined elsewhere in this
Joint Venture Agreement, the following terms shall have the
following respective meanings:
(a) "Act" means the Maine Limited Liability Company Act, 31
M.R.S.A. sect. 601 et seq., and all amendments thereto.
(b) "Affiliate" means, with respect to any Person, (i) any
Person directly or indirectly controlling, controlled by, or
under common control with such Person, (ii) any Person owning or
controlling ten percent (10%) or more of the outstanding voting
interests of such Person, (iii) any officer, director, or general
partner of such Person, or (iv) any Person who is an officer,
director, general partner, trustee, or holder of ten percent
(10%) or more of the voting interests of any Person described in
clauses (i) through (iii) of this sentence. For purposes of this
definition, the terms "controls," "is controlled by," or "is
under common control with" shall mean the possession, directly or
<PAGE>
indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the
ownership of voting securities, by contract, or otherwise.
(c) "Articles of Organization" means the Articles of
Organization of the Company as filed with the Secretary of State
as the same may be amended from time to time by the vote of
Members holding a majority of the Capital Interests by action
taken as provided in Article V, Section 7.7 or Section 7.9
hereof, as applicable.
<PAGE>
(d) "Capital Account" means, as of any given date, the
Capital Contribution to the Company by a Member as adjusted up to
the date in question pursuant to Article VIII herein.
(e) "Capital Contributions" means the total amount of cash,
and the value, determined by a majority of the members of the
Management Committee, of all tangible or intangible property or
services, which a Member or its predecessor in interest has
contributed or has agreed to contribute to the Company net of
liabilities secured thereby that the Company is considered to
assume or to be subject to under Section 752 of the Code.
(f) "Capital Interest" means the proportion that a Member's
positive Capital Account bears to the aggregate positive Capital
Accounts of all Members whose Capital Accounts have positive
balances, all as adjusted from time to time as provided in this
Agreement.
(g) "Code" means the Internal Revenue Code of 1986, as
amended.
(h) "Company" means the limited liability company to be
formed pursuant to this Operating Agreement.
(i) "Deficit Capital Account" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital
Account as of the end of the taxable year, after giving effect to
the following adjustments:
(i) credit to such Capital Account any amount that
such Member is obligated to restore under Section
1.704-1(b)(2)(ii)(c) of the Treasury Regulations, as well as
any addition thereto pursuant to the next to last sentence
of Sections 1.704-2(g)(1) and (i)(5) of the Treasury
Regulations, after taking into account thereunder any
changes during such year in limited liability company
minimum gain attributable to any member non-recourse debt
(as determined under Section 1.704-2(i)(3) of the Treasury
Regulations); and
(ii) debit to such Capital Account the items described
in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the
Treasury Regulations.
<PAGE>
This definition of Deficit Capital Account is intended to comply
with the provisions of Treasury Regulations Section
1.704-1(b)(2)(ii)(d) and 1.704-2, and will be interpreted
consistently with those provisions.
(j) "Depreciation" means, for each Fiscal Year, an amount
equal to the depreciation, amortization, or other cost recovery
deduction allowable with respect to an asset for such Fiscal
Year, except that if the Gross Asset Value of an asset differs
from its adjusted basis for federal income tax purposes at the
beginning of such Fiscal Year, Depreciation shall be an amount
which bears the same ratio to such beginning Gross Asset Value as
the federal income tax depreciation, amortization, or other cost
recovery deduction for such Fiscal Year bears to such beginning
adjusted tax basis; provided, however, that if the adjusted basis
for federal income tax purposes of an asset at the beginning of
such Fiscal Year is zero, Depreciation shall be determined with
reference to such beginning Gross Asset Value using any
reasonable method selected by the Manager.
(k) "Distributable Cash" means all cash, revenues, and
funds received by the Company, less the sum of the following to
the extent paid or set aside by the Company: (i) all principal
and interest payments on indebtedness of the Company and all
other sums paid to lenders; (ii) all cash expenditures incurred
incident to the normal operation of the Company's business; and
(iii) Reserves.
(l) "Economic Interest" means a Member's share of one or
more of the Company's Net Profits, Net Losses, and distributions
of the Company's assets pursuant to this Joint Venture Agreement
and the Act.
(m) PURPOSEFULLY LEFT BLANK.
(n) PURPOSEFULLY LEFT BLANK.
(o) "Entity" means any general partnership, limited
partnership, limited liability company, corporation, joint
venture, trust, business trust, cooperative, or association or
any foreign trust or foreign business organization.
(p) "Fiscal Year" means the Company's fiscal year which
shall be the calendar year.
(q) "Gross Asset Value" means, with respect to any asset,
the asset's adjusted basis for federal income tax purposes,
except as follows:
<PAGE>
(i) The initial Gross Asset Value of any asset
contributed by a Member to the Company shall be the gross
fair market value of such asset, as determined by a majority
of the members of the Management Committee.
(ii) The Gross Asset Values of all Company assets
shall be adjusted to equal their respective gross fair
market values, as determined by a majority of the members of
the Management Committee as of the following times: (a) the
acquisition of an additional interest by any new or existing
Member in exchange for more than a de minimis Capital
Contribution; (b) the distribution by the Company to a
Member of more than a de minimis amount of property as
consideration for a Membership Interest or Economic
Interest; and (c) the liquidation of the Company within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g);
provided, however, that adjustments pursuant to clauses (a)
and (b) above shall be made only if a majority of the
members of the Management Committee reasonably determine
that such adjustments are necessary or appropriate to
reflect the relative Economic Interests of the Members in
the Company;
(iii) The Gross Asset Value of any Company asset
distributed to any Member shall be adjusted to equal the
gross fair market value of such asset on the date of
distribution as determined by a majority of the members of
the Management Committee; and
(iv) The Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the
adjusted basis of such assets pursuant to Code Section
734(b) or Code Section 743(b), but only to the extent that
such adjustments are taken into account in determining
Capital Accounts pursuant to Regulation Section
1.704-1(b)(2)(iv)(m) and Section 8.3 and subparagraph (iv)
under the definition of Net Profits and Net Losses;
provided, however, that Gross Asset Values shall not be
adjusted pursuant to this definition to the extent a
majority of the members of the Management Committee
determine that an adjustment pursuant to subparagraph (ii)
of this definition is necessary or appropriate in connection
with a transaction that would otherwise result in an
adjustment pursuant to this subparagraph (iv).
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to subparagraph (i), (ii), or (iv) of this
definition, then such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to
such asset for purposes of computing Net Profits and Net Losses.
<PAGE>
(r) "Majority Interest" means one or more Capital Interests
of Members which, taken together, exceed fifty percent (50%) of
the aggregate of all Capital Interests.
(s) Management Committee means a four-person body, two
(2) of whom shall be appointed by NYSEG and two (2) of whom shall
be appointed by CMP. The Initial Management Committee shall be
composed of the following individuals: Arthur W. Adelberg and
David E. Marsh, who are the designees of CMP, and Michael I.
German and George E. Bonner, who are the designees of NYSEG. The
initial Chairman of the Management Committee shall be Arthur W.
Adelberg. The Chairmanship of the Management Committee shall be
for a one year term. The Chairmanship shall alternate year to
year between a designee of CMP and NYSEG. CMP and NYSEG shall
each be entitled to designate two (2) alternate members of the
Management Committee, a primary alternate and a secondary
alternate. The initial primary alternate and secondary alternate
for CMP are Joseph D. Fay and Chad P. Clark, respectively. The
initial primary alternate and secondary alternate for NYSEG are
Michael D. Eastman and Steven R. Adams, respectively. Alternative
members of the Management Committee may serve as alternates for
either of their Management Committee Members. Alternates shall
serve in the absence of the designated member(s) of the
Management Committee. The Management Committee members shall
have the right to remove their designated alternates and to
designate their replacements, in each case by written notice to
the other party.
(t) "Manager" means a Person(s) initially designated as
such by this Joint Venture Agreement or the Articles of
Organization or thereafter elected to such position in accordance
with Section 5.3, until removal, resignation, or replacement.
(u) "Member" means each of the parties who executes a
counterpart of this Joint Venture Agreement as a Member and each
of the parties who may hereafter become Members, until
withdrawal.
(v) "Membership Interest" means a Member's entire interest
in the Company including such Member's Economic Interest and such
other rights and privileges that the Member may enjoy by being a
Member.
<PAGE>
(w) "Net Cash Flow" means the Net Profits (or Net Losses)
for the Fiscal Year as shown on the Company's books and records,
including dividends, capital gains, involuntary conversions, and
gains or losses from Section 1231 property, as defined in the
Code:
(i) increased by the amount of Depreciation and
amortization deductions taken in computing such taxable
income;
(ii) decreased by payments upon the principal of any
indebtedness, secured or unsecured, of the Company;
(iii) decreased by expenditures for the acquisition of
property, capital improvements, additions, or replacements
(except to the extent financed through any Company
indebtedness, secured or unsecured); and
(iv) increased or decreased as appropriate for changes
in reserves for additional acquisitions of property,
improvements, replacements, and, subject to the limitations
contained in Section 1.1(bb) of this Agreement, such
reserves for repairs and to meet anticipated expenses or
unexpected and unforeseen expenses and for working capital
as a majority of the members of the Management Committee
shall deem to be reasonably necessary in the efficient
conduct of the Company's business, and any cash outlays or
receipts not otherwise taken into account in this
definition.
(x) "Net Profits" and "Net Losses" mean for each taxable
year of the Company an amount equal to the Company's net taxable
income or loss for such year as determined for federal income tax
purposes (including separately stated items) in accordance with
the accounting method and rules used by the Company and in
accordance with Section 703 of the Code with the following
adjustments:
(i) any items of income, gain, loss, and deduction
allocated to Members pursuant to Section 9.2 shall not be
taken into account in computing Net Profits or Net Losses
for purposes of this Joint Venture Agreement;
(ii) any income of the Company that is exempt from
federal income tax and not otherwise taken into account in
computing Net Profits and Net Losses (pursuant to this
definition) shall be added to such taxable income or loss;
<PAGE>
(iii) any expenditure of the Company described in
Section 705(a)(2)(B) of the Code and not otherwise taken
into account in computing Net Profits and Net Losses
(pursuant to this definition) shall be subtracted from such
taxable income or loss;
(iv) in the event the Gross Asset Value of any Company
asset is adjusted pursuant to clause (ii) or (iii) of the
definition of Gross Asset Value, the amount of such
adjustment shall be taken into account as gain or loss from
the disposition of such asset for purposes of computing Net
Profits and Net Losses;
(v) gain or loss resulting from any disposition of any
Company asset with respect to which gain or loss is
recognized for federal income tax purposes shall be computed
with reference to the Gross Asset Value of the asset
disposed of, notwithstanding that the adjusted tax basis of
such asset differs from its Gross Asset Value;
(vi) in lieu of the depreciation, amortization and
other cost recovery deductions taken into account in
computing such taxable income or loss, there shall be taken
into account Depreciation for such Fiscal Year; and
(vii) to the extent an adjustment to the adjusted tax
basis of any Company asset pursuant to Section 734(b) of the
Code or Section 743(b) of the code is required pursuant to
Section 1.704-1(b)(2)(iv)(m)(4) of the Treasury Regulations
to be taken into account in determining Capital Accounts as
a result of a distribution other than in liquidation of a
Membership Interest, the amount of such adjustment shall be
treated as an item of gain (if the adjustment decreases the
basis of the asset) from the disposition of the asset and
shall be taken into account for purposes of computing Net
Profits or Net Losses.
(y) PURPOSEFULLY LEFT BLANK.
(z) "Person" shall mean any individual or Entity, and the
heirs, executors, administrators, legal representatives,
successors, and assigns of such Person where the context so
permits.
<PAGE>
(aa) "Reserves" shall mean, with respect to any fiscal
period, funds set aside or amounts allocated during such period
to reserves which shall be maintained in amounts deemed
sufficient by a majority of the members of the Management
Committee for working capital and to pay taxes, insurance, debt
service, or other costs or expenses incident to the ownership or
operation of the Company's business.
(bb) "Secretary of State" means the Secretary of State of
the State of Maine.
(cc) "Selling Member" means any Member which sells,
assigns, or otherwise transfers for consideration all or any
portion of its Membership Interest.
(dd) "Statement of Authority" means a statement of limited
liability company authority with respect to the Company adopted
by the Members and filed with the Secretary of State or recorded
in any registry of deeds pursuant to Section 626 of the Act, as
amended.
(ee) "Transferring Member" shall mean a Selling Member.
(ff) "Treasury Regulations" shall include proposed,
temporary, and final regulations promulgated under the Code in
effect as of the date of filing the Articles of Organization and
the corresponding sections of any regulations subsequently issued
that amend or supersede such regulations.
ARTICLE II
FORMATION OF COMPANY
2.1 Formation. The parties hereby agree to the formation of
a Joint Venture Company that shall take the form of a Maine
Limited Liability Company ( L.L.C. ). The L.L.C. shall be formed
and operated in accordance with the terms of this Agreement. The
Company shall be formed at the time of the filing of the initial
Articles of Organization with the Secretary of State in
substantial compliance with the Act, and, until such time, no
Person shall be authorized to take any action pursuant to this
Joint Venture Agreement except for the purpose of effecting such
formation. Provided further, the parties understand and agree
that, absent mutual consent of the parties, no filing of Articles
of Organization for the Company shall take place, and that this
<PAGE>
Agreement shall become null and void, unless both parties receive
Board of Directors approval to enter into this Joint Venture and
to enter into this Joint Venture Agreement on or before December
31, 1997, and unless both parties receive all necessary
regulatory approvals on or before September 30, 1998, to permit
the parties to form the Company and to expend the monies
necessary to set up, own and operate a natural gas distribution
company business in Maine, which regulatory approvals the parties
agree they will in good faith diligently pursue. The parties
agree that similar regulatory approvals will be sought for a
natural gas distribution business in portions of New Hampshire,
but failure to receive necessary New Hampshire regulatory
approvals in a timely fashion shall not make this Agreement null
and void.
2.2 Name. The name of the Company is CMP Gas Company,
L.L.C.
2.3 Principal Place of Business; Principal Executive
Office. The Company's initial principal place of business shall
be Augusta, Maine, and its principal executive office shall be at
83 Edison Drive, Augusta, Maine 04336. The Company may relocate
its principal place of business or its principal executive office
from time to time as a majority of the members of the Management
Committee deems advisable.
2.4 Registered Office and Registered Agent. The address of
the Company's initial registered office shall be 83 Edison Drive,
Augusta, Maine 04336. The name and address of the Company's
initial registered agent shall be Joseph D. Fay, 83 Edison Drive,
Augusta, Maine 04336. The registered office and registered agent
may be changed from time to time as the Manager deems advisable
by filing notice of such changes with the Secretary of State in
accordance with Section 607 of the Act.
ARTICLE III
BUSINESS OF COMPANY
The Company exists for the purpose of (a) engaging in the
business of owning, constructing, and operating a local
distribution company to provide natural gas distribution and
related services to customers in Maine and to customers in the
proximity of Portland Natural Gas Transmission System ("PNGTS")
and/or Maritimes and Northeast Pipeline, L.L.C. ("Maritimes") in
<PAGE>
New Hampshire and to engage in such other businesses as may be
subsequently agreed to by the Management Committee. Provided,
however, the New Hampshire portion of the business may be
structured as a separate entity or, in the alternative, may be
owned by either or both Members by a separate wholly-owned entity
of such Member or by a wholly-owned entity to be formed by such
Member(s) to the extent such separate entity is necessary from a
regulatory or economic standpoint or to avoid adverse
consequences under the Public Utility Holding Company Act of
1935. The parties agree to cooperate in the re-structuring of
the New Hampshire portion of the business to the extent either or
both parties desire to break the New Hampshire portion of the
business into a separate business entity as set forth in this
Section, provided they can do so without adverse consequences to
either party.
The provisions of this Article III shall be applied in any
interpretation of the duties of Members or the Manager under 31
M.R.S.A. sect. 652 or this Joint Venture Agreement, and the
rights and duties of the Manager as provided in Sections 5.1,
5.3, 5.5, and 5.6 hereof. The authority granted to the Manager
under this Joint Venture Agreement or the Act to bind the Company
shall be limited to actions necessary or convenient to this
business purpose, and shall be further limited as provided in
Article V hereof, in the Articles of Organization, and in any
Statement of Authority.
ARTICLE IV
IDENTITY OF MEMBERS
The names and addresses of the Members, their respective
Capital Interests, and their initial Capital Contributions are to
be set forth on a schedule maintained by the Manager at the
Company's principal office. The initial version of such schedule
is attached hereto as Exhibit A. Such schedule shall be modified
from time to time to reflect changes thereto made in accordance
with this Joint Venture Agreement and the Act and shall be made
available to any Member upon request.
<PAGE>
ARTICLE V
RIGHTS AND DUTIES OF THE MANAGER,
THE MANAGEMENT COMMITTEE AND THE MEMBERS
5.1 Management. The Manager is charged with the
responsibility for, and is vested with the exclusive authority to
manage, the Company's business, except as limited by this Joint
Venture Agreement, the Articles of Organization, or any Statement
of Authority, and except in those cases in which the approval of
the Members or the Management Committee is expressly required by
this Joint Venture Agreement or by the Act. No Member who is not
also a Manager shall have authority or take any action to bind
the Company, other than as provided in the Articles of
Organization or in a Statement of Authority or as expressly
contemplated by this Agreement. In furtherance of its authority,
subject to the provisions of Section 5.2 hereof, the Manager is
authorized and empowered to perform any and all acts customary or
incident to the management of the Company's business. The
Company shall be bound by the act of the Manager for the purpose
of apparently carrying on in the usual way the business or
affairs of the Company, including the exercise of the authority
indicated in this Article V, except as to Persons having
knowledge (as defined in 31 M.R.S.A. sect. 752 (or any successor
provision) that such act was in contravention of this Article V,
the Articles of Organization, a Statement of Authority, the Act
or any other provision of this Joint Venture Agreement, and no
person dealing with the Company shall have any obligation to
inquire into the power or authority of the Manager if so acting
on behalf of the Company.
5.2 Limitations on Manager s Authority.
(a) Management Committee Authorization Required.
Notwithstanding anything to the contrary contained in this
Article V, the Manager shall have no authority to take any of the
following actions on behalf of the Company without first
obtaining the affirmative vote of a majority of the members of
the Management Committee, to which exclusive authority is
reserved with respect to the following matters:
(i) incur any indebtedness for borrowed money on
behalf of the Company or refinance any such indebtedness of
the Company; issue notes, bonds, or other obligations or
securing obligations by mortgage or pledge of any of its
property or income or assuming any liabilities, in any
transaction or series of transactions, if such transactions
are not in the ordinary course of business of the Company;
<PAGE>
(ii) confess a judgment against the Company in an
amount in excess of $50,000, or release, settle or
compromise any claim or right in favor of the Company having
a value in excess of $50,000;
(iii) cause the Company to incur any liabilities in
any single transaction or series of related transactions in
excess of $100,000;
(iv) (A) make capital expenditures in any single
transaction or series of related transactions in excess of
$100,000, or (B) incur operating expenses in excess of
amounts authorized in the annual operating budget approved
by a majority of the members of the Management Committee;
(v) other than as expressly contemplated by this
Agreement, consummate any transaction between the Company
and any Member or any Affiliate of any Member;
(vi) establish Reserves as contemplated by Section
1.1(bb) hereof;
(vii) make distributions to Members with respect to
their relative Membership Interests;
(viii) admit new Members to the Company or issue any
interest in the Company;
(ix) knowingly do any act in contravention of this
Joint Venture Agreement;
(x) knowingly do any act which would make it
impossible to carry on the ordinary business of the Company,
except as otherwise provided in this Joint Venture
Agreement;
(xi) cause the Company to voluntarily take any action
that would cause a bankruptcy or dissolution of the Company;
(xii) sell or otherwise transfer all or substantially
all of the assets of the Company, act to dissolve the
Company and wind up its affairs, or cause the Company to
merge or consolidate with or into any Entity;
(xiii) enter into derivative transactions;
(xiv) declare a distribution of profits;
<PAGE>
(xv) appoint an independent auditor of the Company or
approve the annual budget;
(xvi) consolidate or merge the Company with another
entity;
(xvii) engage in business acquisitions;
(xviii) except as provided in Paragraph 8.2, call for
additional Capital Contributions;
(xix) appoint or remove an officer of the Company; or
(xx) determine compensation, pay bonuses, establish or
modify pension, profit sharing, stock option, benefit or
incentive plans.
(b) Permitted Transactions. Notwithstanding anything to
the contrary contained in this Agreement, the Manager is
expressly authorized to negotiate and execute any agreements
related to any other agreements necessary to carry out the
business purposes of the Company as authorized by the
Management Committee, subject to the limitations contained in
Section 5.2 (a) herein.
5.3 Number, Tenure, and Qualifications of Manager, Members
of the Management Committee. The initial Manager(s) of the
Company shall be Tim D. Kelley and Darrel R. Quimby, and their
titles shall be President & Chief Executive Officer and Vice
President (hereinafter collectively referred to as Manager ),
respectively. The President & Chief Executive Officer ("CEO")
and Vice President shall act in such capacity as Manager and with
the aforesaid titles at the discretion of the Management
Committee. In the event the President & CEO and Vice President
disagree on any issue within the scope of the Manager s
responsibility, the decision of the President & CEO shall be
controlling. The Manager shall have no contractual right to such
position independent of this Joint Venture Agreement. The Manager
shall hold office until his or her successor shall have been
elected and qualified unless he or she resigns or is removed
under Section 5.4 herein. The Management Committee shall, as
provided in Section 1.1 (s) hereof, initially be comprised of
four members, each of whom shall serve until his or her removal
or resignation or until his or her successor is elected. Any
vacancy in the Management Committee created by removal or
resignation of any of its members shall be filled by action of
the Member entitled to appoint the member of the Management
Committee whose removal or resignation gave rise to the vacancy.
<PAGE>
5.4 Removal and Resignation of the Manager and Members of
the Management Committee; Manner of Acting.
(a) Removal. The Manager may be removed at any time, with
or without cause, by a vote of the Members holding at least a
Majority Interest. Any member of the Management Committee may be
removed at any time, with or without cause, by action of the
Member who designated such Committee member. Upon removal of a
member of the Management Committee, the Member's primary
alternate will serve as the acting member of the Management
Committee for that member until such time as the Member appoints
a permanent member.
(b) Resignation. The Manager and any member of the
Management Committee may resign such position by giving written
notice to each Member, and (if an individual) shall be deemed to
have resigned upon his or her death.
(c) Manner of Acting. Any action required or permitted to
be taken by the Manager or the Management Committee pursuant to
this Joint Venture Agreement may be taken either at a meeting or
by written consent executed by the Manager or by the number of
members of the Management Committee, as the case may be, whose
vote or consent is required for the taking of the action
described therein. Action may be taken based upon teleconference
authorizations, if agreed to by the Members, and all meetings may
be held by teleconference or using similar communications
equipment allowing all persons participating in the meeting to
hear each other at the same time, if agreed to by the Members.
Participation by such means shall constitute presence in person
at the meeting.
5.5 Duties of the Manager, Members of the Management
Committee, and the Members.
(a) The Manager, each member of the Management Committee,
and each Member shall exercise its or his powers and discharge
its or his duties in good faith with a view to the interests of
the Company and its Members with that degree of diligence, care,
and skill that ordinarily prudent persons would exercise under
similar circumstances in like positions. The Manager, the
members of the Management Committee, and the Members may in all
cases, if acting reasonably and in good faith, rely upon
financial statements of the Company that were either certified in
writing by an independent or certified public accountant or firm
of such accountants fairly to reflect the Company s financial
<PAGE>
condition, or reported to such Manager, Management Committee
member, or Member to be correct by the Manager or Member having
charge of the books of accounts of the Company. A Manager,
Management Committee member, or Member may not be held personally
liable for monetary damages for failure to discharge any duty as
a Manager, Management Committee member, or Member unless the
Manager, Management Committee member or Member is found not to
have acted honestly or in the reasonable belief that the action
was in or not opposed to the best interests of the Company or its
Members.
(b) Every Member, every member of the Management Committee,
and the Manager must account to the Company and hold as trustee
for it any profit or benefit derived by that Person from any
transaction connected with the conduct of the Company's business
or winding up of the Company, or any use by the Manager or any
such Management Committee member or Member of the Company's
property, including, but not limited to, confidential or
proprietary information of the Company entrusted to the Person as
a result of that Person's status as a Manager, Management
Committee member, or Member, unless that Person has obtained the
consent of more than one half by number of the disinterested
Members; provided, however, it is not intended that payments made
by the Company to Members pursuant to the Support Services
Agreements (See Exhibits C and D) are to be accounted to the
Company.
(c) The Manager shall prepare and submit to the Management
Committee for approval by a majority of the members thereof
annual an operating budget for the Company, and shall report to
the Management Committee on a quarterly basis with respect to the
Company s actual performance for the preceding fiscal quarter and
for the fiscal year to date as compared to the budget then in
effect.
5.6 The Manager, Members of the Management Committee, and
the Members Have No Exclusive Duty to Company. Notwithstanding
the provisions of Section 5.5 hereof, any Member and, provided
that such activities do not violate or conflict with the terms of
any written employment, consulting, independent contractor, or
other agreement between the Company and such Manager or committee
member, the Manager, or any member of the Management Committee
may have other business interests and may engage in other
activities in addition to those relating to the Company, other
than interests or activities substantially similar to or
competitive with the activities of the Company described in
<PAGE>
Article III hereof, as modified from time to time. Neither the
Company nor any Member shall have any right, by virtue of this
Joint Venture Agreement, to share or participate in such other
permitted investments or activities of the Manager, any committee
member or any Member or to the income or proceeds derived
therefrom. No Manager, committee member, or Member shall incur
any liability to the Company or to any of the Members as a result
of engaging in any such other permitted business or venture.
5.7 Bank Accounts. The Manager may from time to time open
bank accounts in the name of the Company, and any officer or
other designee of the Manager shall be a signatory thereon,
unless a majority of the members of the Management Committee
determines otherwise.
5.8 Indemnification of the Members, Manager, Members of the
Management Committee, Employees, and Other Agents.
(a) General. The Company shall in all cases indemnify any
person who is or was a Member, Management Committee member or
Manager, and may (subject to Section 5.8(d)) indemnify any other
person, who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a Member,
Manager, Management Committee member, employee, or agent of the
Company, or is or was serving at the request of the Company as a
member, principal, director, officer, trustee, partner,
fiduciary, employee, or agent of another Entity, pension, or
other employee benefit plan or other enterprise, against
expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement to the extent actually and reasonably
incurred by that person in connection with such action, suit, or
proceeding; provided that no indemnification may be provided for
any person with respect to any matter as to which that person
shall have been finally adjudicated:
(i) Not to have acted honestly or in the reasonable
belief that that person's action was in or not opposed to
the best interests of the Company or its Members or, in the
case of a person serving as a fiduciary of an employee
benefit plan or trust, in or not opposed to the best
interests of that plan or trust, or its participants, or
beneficiaries;
(ii) With respect to any criminal action or
proceeding, to have had reasonable cause to believe that
that person's conduct was unlawful; or
<PAGE>
(iii) To have acted without authorization under or in
violation of this Joint Venture Agreement.
The termination of any action, suit or proceeding by judgment,
order or conviction adverse to that person, or by settlement or
plea of nolo contendere or its equivalent, shall not of itself
create a presumption that (i) that person did not act honestly or
in the reasonable belief that that person's action was in or not
opposed to the best interests of the Company or its Members or,
in the case of a person serving as a fiduciary of an employee
benefit plan or trust, in or not opposed to the best interests of
that plan or trust or its participants or beneficiaries, (ii)
with respect to any criminal action or proceeding, had reasonable
cause to believe that that person's conduct was unlawful, or
(iii) that person acted without authorization under or in
violation of this Joint Venture Agreement.
(b) Derivative Actions. Notwithstanding any provision of
Section 5.8(a) or (d), the Company shall not indemnify any person
with respect to any claim, issue, or matter asserted by or in the
right of the Company as to which that person is finally
adjudicated to be liable to the Company unless the court in which
the action, suit, or proceeding was brought shall determine that,
in view of all the circumstances of the case, that person is
fairly and reasonably entitled to indemnity for such amounts as
the court shall deem reasonable.
(c) Special Right to Indemnification in Certain Cases. Any
provisions of Section 5.8(a), (b), or (d) to the contrary
notwithstanding, to the extent that a Member, Manager, Management
Committee member, employee, or agent of the Company, or any other
person whom the Company has authority to indemnify under Section
5.8(a), has been successful on the merits or otherwise in defense
of any action, suit, or proceeding referred to in Section 5.8(a)
or (b), or in defense of any claim, issue, or matter referred to
therein, that person shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred by
that person in connection therewith. The right to
indemnification granted by this Section 5.8(c) may be enforced by
a separate action against the Company if an order for
indemnification is not entered by a court in the action, suit, or
proceeding wherein that Member, Manager, Management Committee
member, employee, agent, or other person was successful on the
merits or otherwise.
<PAGE>
(d) Mandatory Indemnification for Members, Management
Committee Members, and Manager; Determinations in Specific Cases
for Others. Any indemnification under Section 5.8(a), unless
ordered by a court or required by this Section 5.8, shall be made
by the Company only as authorized in the specific case upon a
determination that indemnification of any Member, Manager,
Management Committee member, employee, agent, or other person is
proper in the circumstances and in the best interests of the
Company; provided that no such determination shall be required
with respect to any person who is or was a Member or Manager and
indemnification of any such person under Section 5.8(a) shall be
required in all cases, regardless of the capacity in which such
Member, Management Committee member, or Manager is or was made or
threatened to be made a party to the action, suit or proceeding.
Where such a case specific determination is required, that
determination shall be made by the Members by a majority vote of
a quorum consisting of a majority of the Members who were not
parties to that action, suit, or proceeding, or if such a quorum
is not obtainable, or even if obtainable, if a quorum of
disinterested Members so directs, by independent legal counsel in
a written opinion. Such a determination once made may not be
revoked and, upon the making of that determination, the employee,
agent, or other person may enforce the indemnification against
the Company by a separate action notwithstanding any attempted or
actual subsequent action by the Members.
(e) Advancement of Expenses. Except in the case of any
person who is or was a Member, Management Committee member, or
Manager, expenses incurred in defending a civil, criminal,
administrative, or investigative action, suit, or proceeding may
be authorized and paid by the Company in advance of the final
disposition of that action, suit, or proceeding upon a
determination made in accordance with the procedure established
in Section 5.8(d) that, based solely on the facts then known to
those making the determination and without further investigation,
the person seeking indemnification satisfied the standard of
conduct prescribed by Section 5.8(a), and upon receipt by the
Company of:
(i) A written undertaking by or on behalf of the
person to repay that amount if that person is finally
adjudicated:
<PAGE>
(A) Not to have acted honestly or in the
reasonable belief that that person's action was in or
not opposed to the best interests of the Company or its
Members or, in the case of a person serving as a
fiduciary of an employee benefit plan or trust, in or
not opposed to the best interests of such plan or trust
or its participants or beneficiaries;
(B) With respect to any criminal action or
proceeding, to have had reasonable cause to believe
that the person's conduct was unlawful;
(C) To have acted without authorization under or
in violation of this Joint Venture Agreement; or
(D) With respect to any claim, issue or matter
asserted in any action, suit or proceeding brought by
or in the right of the Company, to be liable to the
Company, unless the court in which that action, suit or
proceeding was brought permits indemnification in
accordance with Section 5.8(b); and
(ii) A written affirmation by the person that he has
met the standard of conduct necessary for indemnification by
the Company as authorized in this Section 5.8.
The undertaking required by clause (i) shall be an unlimited
general obligation of the person seeking the advance, but need
not be secured and may be accepted without reference to financial
ability to make the repayment. With respect to any person who is
or was a Member, Management Committee member, or Manager, such
expenses shall in all cases be advanced by the Company, as
reasonably requested from time to time, upon receipt by the
Company, at the time of the initial advance, of the undertaking
described in clause (i) and the affirmation described in clause
(ii) above.
(f) Indemnification Rights Under Joint Venture Agreement
Not Exclusive; Enforceable by Separate Action. The
indemnification and entitlement to advances of expenses provided
by this Section 5.8 shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any
agreement, vote of Members, or otherwise, both as to action in
that person's official capacity and as to action in another
capacity while holding such office, and shall continue as to a
<PAGE>
person who has ceased to be a Member, Manager, Management
Committee member, employee, agent, trustee, partner, or fiduciary
and shall inure to the benefit of the heirs, executors, and
administrators of such a person. A right to indemnification
required by this Section 5.8 may be enforced by a separate action
against the Company, if an order for indemnification has not been
entered by a court in any action, suit, or proceeding in respect
to which indemnification is sought.
(g) Insurance. The Company shall purchase and maintain
insurance on behalf of any person who is or was a Member,
Manager, or Management Committee member, and shall have power to
purchase and maintain insurance on behalf of any person who is or
was an employee or agent of the Company, or is or was serving at
the request of the Company as a member, principal, director,
officer, trustee, partner, fiduciary, employee, or agent of
another Entity, pension, or other employee benefit plan or other
enterprise, against any liability asserted against that person
and incurred by that person in any such capacity, or arising out
of that person's status as such, whether or not the Company would
have the power to indemnify that person against such liability
under this Section 5.8.
(h) Miscellaneous. For purposes of this Section 5.8,
references to the "Company" shall include, in addition to the
surviving Entity or new Entity, any participating Entity in a
consolidation or merger. For purposes of this Section 5.8, the
Company shall be deemed to have requested a person to serve an
employee benefit plan whenever the performance by the person of
the person s duties to the Company also imposes duties on, or
otherwise involves services by, the person to the plan or
participants or beneficiaries of the plan; excise taxes assessed
on a person seeking indemnification with respect to an employee
benefit plan pursuant to applicable law shall be deemed "fines";
and action taken or omitted by the person with respect to an
employee benefit plan in the performance of the person s duties
for a purpose reasonably believed by the person to be in the
interests of the participants or beneficiaries of the plan shall
be deemed to be for a purpose which is in the best interests of
the Company.
(i) Amendment. Any amendment, modification, or repeal of
this Section 5.8 shall not deny, diminish, or otherwise limit the
rights of any person to indemnification or advance hereunder with
respect to any action, suit, or proceeding arising out of any
conduct, act, or omission occurring or allegedly occurring at any
time prior to the date of such amendment, modification, or
repeal.
<PAGE>
(j) Indemnification by Members, Management Committee
Members, and Managers. A Member, Management Committee member, or
Manager who takes any unauthorized action purportedly on behalf
of the Company shall indemnify and hold the Company and the other
Members, Management Committee members, and Managers harmless from
any costs (including, without limitation, reasonable attorneys'
fees) or damages incurred by any such indemnified parties as a
result thereof. The Company and any Member, Management Committee
member, or Manager entitled to indemnification under this Section
5.8(j) shall be entitled to set off against, withhold, proceed
against, or collect or receive from the Company, as applicable,
all or any part of the indemnifying Member's Membership Interest,
any amounts distributable with respect thereto or, following the
withdrawal of such Member or the dissolution of the Company, any
amounts payable to the indemnifying Member pursuant to this Joint
Venture Agreement, or any amounts payable to the indemnifying
Manager or Management Committee member, as the case may be, by
the Company, under an employment agreement or otherwise, in order
to enforce its, his, or her rights hereunder. The obligations of
the Members, Management Committee members, and Managers hereunder
shall survive the withdrawal of any Member or the termination of
a Manager's or Management Committee member s status as such and
the dissolution or termination of the Company.
5.9 Vacancies. Subject to the provisions of Section 5.3
hereof, any vacancy occurring for any reason in the position of
Manager shall be filled by the affirmative vote of Members
holding a majority of the Capital Interests. A Manager elected
to fill a vacancy shall hold office until his or her successor
shall be elected and shall qualify or until his or her earlier
resignation or removal.
5.10 Delegation of Authority. The Manager shall be
authorized to delegate to any Member, employee, or agent of the
Company any of the authority conferred upon the Manager pursuant
to this Joint Venture Agreement.
5.11 Employees. The parties currently contemplate that
certain services will be provided to the Company by employees of
both of the Members. The Management Committee will make the
determination as to which services will be provided to the
Company by employees of the Members. The Manager will have the
responsibility to hire or contract for such other services as may
be appropriate and necessary for the proper functioning of the
Company, subject to the limitations on Manager s authority
contained in Section 5.2.
<PAGE>
5.12 Employee Costs. Except as otherwise determined by the
Management Committee, at such time as the Articles of
Organization are filed for the Company and the Company has been
duly formed, the Support Services Agreements, in substantially
the form as set forth in Exhibits C and D, shall be employed for
purpose of establishing the cost reimbursement procedures for the
use by Company of Member employee and other assets. The parties
agree that the costs associated with the time Management
Committee Members expend on the Company shall not be reimbursed
by the Company but that Management Committee Members shall be
reimbursed by the Company for all out-of-pocket expenses
associated with Management Committee activities, including, but
not limited to, travel expenses.
ARTICLE VI
RIGHTS AND OBLIGATIONS OF MEMBERS
6.1 Limitation of Liability. Each Member's liability shall
be limited as set forth in this Joint Venture Agreement, the Act,
and other applicable law.
6.2 Company Debt Liability. A Member will not be
personally liable for any debts or losses of the Company beyond
its respective Capital Contributions and any obligation of the
Member under Section 8.1 or 8.2 to make Capital Contributions,
except as otherwise required by law.
6.3 Company Books. In accordance with Section 9.8 hereof,
the Manager shall maintain and preserve, during the term of the
Company, and for the length of time thereafter as may be required
to meet the records retention requirements of any taxing or
regulatory body having direct or indirect jurisdiction, all
accounts, books, and other relevant Company documents. Upon
reasonable request, each Member shall have the right, during
ordinary business hours, to inspect and copy such Company
documents at the requesting Member's expense; provided, however,
that the Manager shall be authorized, in its discretion, to
withhold from or to restrict or condition the access of one or
more Members to information of the Company as and to the extent
contemplated by 31 M.R.S.A. sect. 655(2)(c).
6.4 Priority and Return of Capital. Except as may be
expressly provided in this Agreement hereof, no Member shall have
priority over any other Member, either as to the return of
Capital Contributions or as to Net Profits, Net Losses, or
distributions; provided that this Section shall not apply to
loans (as distinguished from Capital Contributions) that a Member
has made to the Company.
<PAGE>
ARTICLE VII
MEETINGS OF MEMBERS
7.1 Meetings. Meetings of the Members for any purpose may
be called by the Manager, by a majority of the members of the
Management Committee, or by any Member or Members holding at
least thirty percent (30%) of the Capital Interests.
7.2 Place of Meetings. The Person or Persons calling a
meeting pursuant to Section 7.1 hereof may designate any place,
within or outside the State of Maine, as the place of meeting for
any meeting of the Members. If no designation is made, the place
of meeting shall be the principal executive office of the
Company. The Members and the Management Committee may, by
agreement of the Members, meet, act and conduct business through
teleconference meetings or meetings using other similar
communications equipment allowing all persons participating in
the meeting to hear each other at the same time. Participation
in such teleconference(s) shall constitute presence in person at
a meeting.
7.3 Notice of Meetings. Written notice stating the place,
day, and hour of the meeting and the purpose or purposes for
which the meeting is called shall be delivered not less than ten
(10) nor more than sixty (60) days before the date of the
meeting, either personally, by mail, or facsimile, by or at the
direction of the Manager or Person(s) calling the meeting, to
each Member entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered three (3) business days
after being deposited in the United States mail, addressed to the
Member at its address as it appears on the books of the Company,
with postage thereon prepaid. The business transacted at each
annual and special meeting shall be limited to the purpose(s)
stated in the notice of the meeting.
7.4 Meeting of all Members. If all of the Members shall
meet at any time and place and consent to the holding of a
meeting at such time and place, such meeting shall be valid
without call or notice, and at such meeting lawful action may be
taken.
7.5 Record Date. For the purpose of determining Members
entitled to notice of or to vote at any meeting of members or any
adjournment thereof, or Members entitled to receive payment of
any distribution, the date on which notice of the meeting is
<PAGE>
mailed or the date on which the resolution declaring such
distribution is adopted, as the case may be, shall be the record
date for such determination of Members. When a determination of
Members entitled to vote at any meeting of Members has been made
as provided in this Section, such determination shall apply to
any adjournment thereof.
7.6 Quorum. Members holding at least a majority of the
Capital Interests of all Members, represented in person or by
proxy, shall constitute a quorum at any meeting of Members. In
the absence of a quorum at any such meeting, a majority of the
Capital Interests so represented may adjourn the meeting from
time to time for a period not to exceed 60 days without further
notice. However, if the adjournment is for more than 60 days, or
if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be
given to each Member of record entitled to vote at the meeting.
At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. The Members
present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal during
such meeting of that number of Capital Interests whose absence
would cause there to be present less than a quorum.
7.7 Manner of Acting. If a quorum is present, the
affirmative vote of Members holding a majority of the Capital
Interests represented in person or by proxy shall be the act of
the Members, unless the vote of a greater or lesser proportion or
number is otherwise required by the Act, by the Articles of
Organization, or by this Joint Venture Agreement. Unless
otherwise expressly provided herein or required under applicable
law, Members who have an interest (economic or otherwise) in the
outcome of any particular matter upon which the Members vote or
consent may vote or consent upon any such matter and their
Capital Interest, vote or consent, as the case may be, shall be
counted in the determination of whether the requisite matter was
approved by the Members.
7.8 Proxies. At all meetings of Members a Member may vote
in person or by proxy executed in writing by the Member or by a
duly authorized attorney-in-fact. Such proxy shall be filed with
the Manager before or at the time of the meeting. No proxy shall
be valid after eleven months from the date of its execution,
unless otherwise provided in the proxy.
<PAGE>
7.9 Action by Members Without a Meeting. Action required
or permitted to be taken at a meeting of Members may be taken
without a meeting if the action is evidenced by one or more
written consents describing the action taken, signed by a
sufficient number of Members or Members holding the requisite
Capital Interests, as applicable, whose vote is necessary for the
taking of the action described therein and delivered to the
Manager for inclusion in the minutes or for filing with the
Company records. Action taken under this Section is effective
when Members in the requisite number or holding the requisite
Capital Interests, as applicable, have signed the consent, unless
the consent specifies a different effective date. The record date
for determining Members entitled to take action without a meeting
shall be the date the first Member signs a written consent.
7.10 Waiver of Notice. When any notice is required to be
given to any Member, a waiver thereof in writing signed by the
person entitled to such notice, whether before, at, or after the
time stated therein, shall be equivalent to the giving of such
notice. Attendance at any meeting shall constitute a waiver of
notice unless there has been made a proper objection to the
meeting or to the items that are to be discussed.
7.11 Stalemates or Impasses. In the event the Management
Committee is deadlocked on any issue, a Member may request that
the stalemate or impasse be resolved by appeal to the Chief
Executive Officer of the Members who shall then attempt to
resolve the stalemate or impasse. In the event the Members'
Chief Executive Officers cannot resolve the stalemate or impasse,
resort will then be had to a single arbitrator who shall be
agreed to by the Chief Executive Officers of the Members. Such
arbitration shall take place in accordance with the Rules and
Regulations of the American Arbitration Association. Such
arbitration decision shall be final and binding on the parties
and judgement may be entered upon the arbitration decision or
award in accordance with applicable law in any court of competent
jurisdiction. The arbitrator appointed shall be an individual
knowledgeable about public accountancy. The arbitration shall be
held in Augusta, Maine, unless otherwise agreed by the Members
and the arbitrators shall set a schedule to resolve the dispute
within ninety (90) days of the panel arbitrator being chosen.
Each party shall share equally the costs and fees of such
arbitration, including compensation to the arbitrator for his or
her time spent in arriving at a determination. The award
rendered by the arbitrator shall be final and binding, and
<PAGE>
judgment may be entered upon the award in accordance with
applicable law in any court of competent jurisdiction. The
parties agree to use all means available to resolve disputes
before resorting to arbitration.
7.12 Frequency of Meetings. Except as otherwise required
by the Act, the Management Committee is not required to conduct
annual or other regular meetings. A special meeting of the
Management Committee may be called for any purpose or purposes at
any time by one or more members of the Management Committee. The
Person calling the special meeting shall give notice of such
meeting, complying with Section 7.13.
7.13 Notice of Meetings; Management Committee. Written
notice of each meeting of the Management Committee, stating the
date, time, place and the purpose or purposes, must be given to
each member of the Management Committee at least five (5)
business days prior to the meeting. The business transacted at
each meeting of the Management Committee is limited to the
purposes stated in the notice of the meeting.
7.14 Location and Conduct of the Meetings; Adjournments.
(a) Each meeting of the Management Committee will be held at the
Company's principal place of business or at some other location
agreed to by the Management Committee.
(b) A Person chosen by the members of the Management
Committee from time to time will chair all meetings of the
Management Committee.
(c) Any meeting of the Management Committee may be
adjourned from time to time to another date and time or to
another place. If at the time of adjournment the Person chairing
the meeting announces the date, time, and place at which the
meeting will be reconvened, it is not necessary to give any
further notice of the reconvening.
(d) Any one or more of the members of the Management
Committee may participate in a meeting of the Management
Committee by means of a teleconference or similar communications
equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting.
<PAGE>
7.15 Waiver of Notice. (a) A member of the Management
Committee may waive notice of the date, time, place, and purpose
or purposes of a meeting of the Management Committee. A waiver
may be made before, at, or after the meeting, in writing, orally,
or by attendance.
(b) Attendance by a member of the Management Committee
at a meeting is a waiver of notice of that meeting, unless such
member objects at the beginning of the meeting to the transaction
of business because the meeting is not properly called or
convened, or objects before a vote on an item of business because
the item may not properly be considered at that meeting and does
not participate in the consideration of the item at that meeting.
7.16 Proxies. A member of the Management Committee may
cast or authorize the casting of a vote by filing a written
appointment of a revocable proxy with the Company at or before
the meeting at which the appointment is to be effective. Such
member may sign or authorize the written appointment by fax, or
other means of electronic transmission stating, or submitted with
information sufficient to determine, that such member authorized
the transmission. Any copy, facsimile, telecommunication, or
other reproduction of the original of either the writing or the
transmission may be used in lieu of the original, if it is a
complete and legible reproduction of the entire original.
7.17 Quorum; Management Committee. For any meeting of the
Management Committee, a quorum consists of a majority of the
members of the Management Committee. If the departure of a
member originally present leaves less than the proportion
otherwise required for a quorum, the members present may continue
to transact business.
7.18 Action by Management Committee Without a Meeting. Any
action required or permitted to be taken at a meeting of the
Management Committee may be taken without a meeting by written
action signed by all the members of the Management Committee.
The written action is effective when signed by all of the members
of the Management Committee, unless a different effective time is
provided therein.
<PAGE>
ARTICLE VIII
CONTRIBUTIONS TO THE COMPANY AND CAPITAL ACCOUNTS
8.1 Members' Initial Capital Contributions. Each Member
shall be obligated to contribute the amount of capital and, if
applicable, other property set forth on Exhibit A hereto as its
initial Capital Contribution; provided, however, from a timing
perspective, an individual Member shall not be required to
actually make all or any portion of its initial Capital
Contribution to the Company until such time as the Management
Committee determines that all or, from time to time, that some
portion of the initial Capital Contribution shall be made by each
Member and further determines the date by which such initial
Capital Contribution or portion of the initial Capital
Contribution shall be required to be made. Except as otherwise
determined by the Management Committee, the initial Capital
Contribution or portions thereof shall be made in cash, as set
forth in Exhibit A. Each member shall be required to make
Capital Contributions in equal amounts when called upon to make
the initial Capital Contribution(s)
8.2 Additional Capital Contributions. No Member shall be
required to make any Capital Contribution in addition to those
contemplated by Section 8.1. No Member shall be permitted to make
any Capital Contributions in addition to those contemplated by
Section 8.1 hereof unless Members holding a Majority Interest
vote to permit such additional Capital Contributions. In the
event that Members holding a Majority Interest vote to permit
additional Capital Contributions as provided herein, the Members
shall have the opportunity (but not the obligation) to
participate in such additional Capital Contributions on a pro
rata basis in accordance with their Capital Interests. No
additional Capital Contributions may be made other than in cash
without the approval of Members holding a Majority Interest. In
the event some Members make additional Capital Contributions in
accordance with this Agreement and other Members do not, the non-
contributing Members' Membership Interest shall be diluted.
Dilution shall be based upon the Capital Account balance at the
time additional Capital Contributions are made. A Member s Units
of Membership and its allocation of the Net Profits and Net
Losses of the Company shall be adjusted proportionally to the
relative positive Capital Accounts of the Members at the time any
additional Capital Contributions are made.
<PAGE>
Anything to the contrary contained herein notwithstanding,
in the event that the Manager reasonably determines that the
Company s cash reserves and reasonably anticipated revenues are
less than its budgeted working capital needs during the
succeeding six (6) months, the Manager shall be empowered to seek
additional Capital Contributions from the Members sufficient in
the reasonable judgment of the Manager to fund the anticipated
shortfall.
8.3 Capital Accounts.
(a) A separate Capital Account shall be maintained for each
Member in accordance with the capital accounting rules of Section
704(b) of the Code. The beginning balance in each Member's
Capital Account shall be the amount of such Member's initial
Capital Contribution made pursuant to Section 8.1 above (as set
forth on Exhibit A hereto). Thereafter, a Member's Capital
Account shall be credited with (i) the amount of any subsequent
Capital Contribution to the Company by such Member; (ii) such
Member's distributive share of items of Company income and gain;
and (iii) such other amounts as may be required for the Capital
Account to be determined and maintained in accordance with the
rules of Section 1.704-1(b)(2)(iv) of the Treasury Regulations
(including Section 1.704-1(b)(2)(iv)(g) thereof). A Member's
Capital Account shall be debited with (i) such Member's
distributive share of items of Company loss and deduction; (ii)
the amount of cash or the fair market value of any property
distributed from the Company to such Member (reduced by the
amount of debt, if any, assumed by such Member in connection with
the distribution); and (iii) such other amounts as may be
required for the Capital Account to be determined and maintained
in accordance with the rules of Section 1.704-1(b)(2)(iv) of the
Treasury Regulations (including Section 1.704-1(b)(2)(iv)(g)
thereof). It is the parties' specific intent that Capital
Accounts shall be maintained in accordance with the capital
account maintenance rules contained in section 704(b) of the
Code, including the regulations thereunder, and this Section
8.3(a) shall be construed and applied to achieve such result.
(b) Upon liquidation of the Company (or any Member's
Membership Interest), liquidating distributions will be made in
accordance with the positive Capital Account balances of the
Members, as determined after taking into account all Capital
Account adjustments for the Company's taxable year during which
the liquidation occurs. Liquidation proceeds will be paid in
<PAGE>
accordance with Section 12.3 herein. The Company may offset
damages for breach of this Joint Venture Agreement by a Member
whose interest is liquidated (either upon the withdrawal of the
Member or the liquidation of the Company) against any other
amount otherwise distributable to such Member.
(c) Except as otherwise required in the Act (and subject to
Sections 8.1 and 8.2 herein), no Member shall have any liability
to restore all or any portion of a deficit balance in such
Member's Capital Account.
8.4 Withdrawal or Reduction of Members' Contributions to
Capital.
(a) A Member shall not receive out of the Company's
property any part of its Capital Contribution until all
liabilities of the Company, except liabilities to Members on
account of their Capital Contributions, have been paid.
(b) A Member, irrespective of the nature of its Capital
Contribution, has only the right to demand and receive cash in
return for its Capital Contribution.
(c) A Member may choose to withdraw by voluntary act from
the Company pursuant to section 692(3) of the Act, but the
parties agree that such act shall constitute a breach of this
Joint Venture Agreement and, notwithstanding the other provisions
of this Agreement, such withdrawal shall entitle the non-
withdrawing Member(s) to recover any amounts owed by such
withdrawing Member to the date of such voluntary withdrawal.
Provided further, the Member who is voluntarily withdrawing shall
remain obligated for any liabilities, including liability for
claims or damages that exist as of the date of the voluntary
withdrawal.
8.5 Debt/Equity Ratio. The Management Committee will make
all determinations relative to the debt/equity ratio of the
Company and concerning how debt may be issued, acquired, retired,
cancelled or re-acquired by the Company.
<PAGE>
ARTICLE IX
ALLOCATIONS, INCOME TAX, DISTRIBUTIONS,
ELECTIONS, AND REPORTS
9.1 Allocations of Profits and Losses from Operations. The
Net Profits and Net Losses of the Company for each Fiscal Year
will be allocated among the Members in proportion to the Units of
Membership Interest held by Members.
9.2 Special Allocations to Capital Accounts and Certain
Other Income Tax Allocations. Notwithstanding Section 9.1
hereof:
(a) In the event any Member unexpectedly receives any
adjustments, allocations, or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Treasury Regulations,
which create or increase a Deficit Capital Account of such
Member, then items of Company income and gain (consisting of a
pro rata portion of each item of Company income, including gross
income, and gain for such year and, if necessary, for subsequent
years) shall be specially allocated to such Member in an amount
and manner sufficient to eliminate, to the extent required by the
Treasury Regulations, the Deficit Capital Account so created as
quickly as possible. It is the parties' intent that this Section
9.02(a) be interpreted to comply with the alternate test for
economic effect set forth in Section 1.704-1(b)(2)(ii)(d) of the
Treasury Regulations.
(b) In the event any Member would have a Deficit Capital
Account at the end of any Company taxable year which is in excess
of the sum of any amount that such Member is obligated to restore
to the Company under Section 1.704-1(b)(2)(ii)(c) of the Treasury
Regulations and such Member's share of minimum gain as defined in
Section 1.704-2(g)(1) of the Treasury Regulations (which is also
treated as an obligation to restore in accordance with Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations), the Capital
Account of such Member shall be specially credited with items of
Membership income (including gross income) and gain in the amount
of such excess as quickly as possible.
(c) Notwithstanding any other provision of this Section
9.2, if there is a net decrease in the Company's minimum gain as
defined in Treasury Regulation Section 1.704-2(d) during a
taxable year of the Company, then the Capital Accounts of each
Member shall be allocated items of income (including gross
<PAGE>
income) and gain for such year (and if necessary for subsequent
years) equal to that member's share of the net decrease in
Company minimum gain. This Section 9.2(c) is intended to comply
with the minimum gain charge-back requirement of Section 1.704-2
of the Treasury Regulations and shall be interpreted consistently
therewith. If in any taxable year that the Company has a net
decrease in the Company's minimum gain, if the minimum gain
charge-back requirement would cause a distortion in the economic
arrangement among the Members and it is not expected that the
Company will have sufficient other income to correct that
distortion, the Manager may in its discretion (and shall, if
requested to do so by a Member) seek to have the Internal Revenue
Service waive the minimum gain charge-back requirement in
accordance with Treasury Regulation Section 1.704-2(f)(4).
(d) Items of Company loss, deduction, and expenditures
described in Section 705(a)(2)(B) of the Code that are
attributable to any non-recourse debt of the Company and are
characterized as partner (Member) non-recourse deductions under
Section 1.704-2(i) of the Treasury Regulations shall be allocated
to the Members' Capital Accounts in accordance with said Section
1.704-2(i) of the Treasury Regulations.
(e) Beginning in the first taxable year in which there are
allocations of "nonrecourse deductions" (as described in Section
1.704-2(b) of the Treasury Regulations), such deductions shall be
allocated to the Members in the same manner as Net Profit or Net
Loss is allocated for such period.
(f) In accordance with Section 704(c)(1)(A) of the Code and
Section 1.704(b)(2)(i)(iv) of the Treasury Regulations, if a
Member contributes property with a fair market value that differs
from its adjusted basis at the time of contribution, income,
gain, loss, and deductions with respect to the property shall,
solely for federal income tax purposes (and not for Capital
Account purposes), be allocated among the Members so as to take
account of any variation between the adjusted basis of such
property to the Company and its fair market value at the time of
contribution.
(g) Any credit or charge to the Capital Accounts of the
Members pursuant to Sections 9.2 (a), (b), (c), (d), and/or (e)
hereof shall be taken into account in computing subsequent
allocations of profits and losses pursuant to Section 9.1, so
that the net amount of any items charged or credited to Capital
Accounts pursuant to Sections 9.1 and 9.2 (a), (b), (c), (d),
and/or (e) shall to the extent possible, be equal to the net
<PAGE>
amount that would have been allocated to the Capital Account of
each Member pursuant to the provisions of this Article IX if the
special allocations required by Sections 9.2 (a), (b), (c), (d),
and/or (e) hereof had not occurred.
9.3 Distributions. Except as provided in Section 8.3(d),
all distributions of Distributable Cash shall be made to the
Members pro rata in proportion to the respective interests of the
Members in Net Profits and Net Losses as set forth in Section 9.1
on the record date of such distribution. Except as provided in
Section 9.4, all distributions of Distributable Cash and property
shall be made at such time as determined by a majority of the
members of the Management Committee. All amounts withheld
pursuant to the Code or any provisions of state or local tax law
with respect to any payment or distribution to the Members from
the Company shall be treated as amounts distributed to the
relevant Member or Members pursuant to this Section 9.3.
9.4 Limitation Upon Distributions. No distribution shall
be declared and paid if, in the determination of a majority of
the members of the Management Committee after giving effect to
the distribution:
(a) the Company would not able to pay its debts as they
become due in the usual course of business; or
(b) all liabilities of the Company, other than liabilities
to Members on account of their Membership Interests and
liabilities for which the recourse of creditors is limited to
specified property of the Company, would exceed the fair value of
the Company's assets, except that the fair value of property that
is subject to a liability for which the recourse of creditors is
limited shall be included in the Company's assets only to the
extent the fair value of that property exceeds that liability.
As contemplated by Section 675(2) of the Act, the members of
the Management Committee may base the determination under this
Section on either:
(a) financial statements prepared on the basis of
accounting practices and principles that are reasonable under the
circumstances; or
(b) a fair valuation or other method that is reasonable
under the circumstances.
<PAGE>
The members of the Management Committee shall make their
determination under this Section and authorize any distribution
which they elect to make under Section 9.3 hereof in accordance
with the standards of Section 657 of the Act and not more than
120 days prior to the date the distribution is made.
In the event that the members of the Management Committee
elect to make a distribution in the form of indebtedness of the
Company, their determination under this Section 9.4 must be made
not more than 120 days before each payment of principal or
interest thereunder, as contemplated by Section 675(6) of the
Act.
9.5 Accounting Principles. The profits and losses of the
Company shall be determined in accordance with generally accepted
accounting principles applied on a consistent basis using the
accrual method of accounting.
9.6 Interest On and Return of Capital Contributions. No
Member shall be entitled to interest on its Capital Contribution
or to return of its Capital Contribution, except as otherwise
specifically provided for herein.
9.7 Accounting Period. The Company's accounting period
shall be the calendar year.
9.8 Records and Reports. At the expense of the Company, the
Manager shall maintain records and accounts of all operations and
expenditures of the Company. As contemplated by Section 655(1) of
the Act, at a minimum the Company shall keep at its principal
place of business the following records and shall be prepared to
make such records available to regulatory agencies as may be
required by law:
(a) a current list and a past list with the full names and
last known mailing addresses of each Member and each member of
the Management Committee;
(b) a copy of the Articles of Organization and all
amendments thereto, together with executed copies of any powers
of attorney pursuant to which any Articles of Organization, or
amendments thereto, or certificates have been executed;
(c) copies of the Company's federal, state, and local
income tax returns and financial statements for the six most
recent years;
<PAGE>
(d) copies of the current and all past written Joint
Venture Agreements of the Company, including all amendments
thereto;
(e) a writing setting forth the amount of cash and the
agreed value of other property or services contributed by each
Member;
(f) copies of any separate agreements pertaining to a
Member's obligation to contribute cash, property, or services;
and
(g) minutes of meetings of the Members, the Management
Committee, or the Manager and any written consents obtained from
Members, the Management Committee, or the Manager in lieu of a
meeting; and
(h) such other records as the Management Committee deems
appropriate.
9.9 Returns and other Elections. The Manager shall cause
the preparation and timely filing of all tax returns required to
be filed by the Company pursuant to the Code and all other tax
returns deemed necessary and required in each jurisdiction in
which the Company does business. Copies of such returns, or
pertinent information therefrom, shall be furnished to the
Members within a reasonable time after the end of the Company's
Fiscal Year.
All elections permitted to be made by the Company under
federal or state laws shall be made by the Manager in its sole
discretion, provided that the Manager shall make any tax election
requested by Members owning a Majority Interest.
ARTICLE X
TRANSFERABILITY
10.1 General. Except as otherwise specifically provided
herein, without the affirmative vote of Members holding a two-
thirds of the Capital Interests of all Members (excluding the
Capital Interest of the transferring Member) shall not have the
right to sell, assign, transfer, exchange, or otherwise transfer
for consideration (collectively, "sell" or "sale"), whether or
not by operation of law, all or any part of its Membership
Interest.
<PAGE>
Notwithstanding the foregoing, no such vote shall be
required in order for a Member to sell all or any part of its
Membership Interest and it shall be permissible for a member to
sell, assign or transfer its Membership Interest and/or this
Agreement to any wholly-owned subsidiary or to any wholly-owned
subsidiary thereof or in connection with any merger or
consolidation to which it is the surviving party, a sale of
substantially all of its natural gas assets, or any
reorganization, recapitalization, or similar transaction
involving such Member, it being the understanding of the parties
that both parties are in the process of corporate reorganizations
for the purpose of forming a holding company under the Public
Utility Holding Company Act of 1935 whereby the parties hereunder
would become wholly-owned subsidiaries of a holding company. It
shall be specifically permissible for the parties to become
wholly-owned subsidiaries of such holding company or to become
wholly-owned subsidiaries of any such subsidiary of any such
holding company by transfer of Membership Interests or assignment
of this Agreement and it shall be specifically permissible for a
Member to sell, transfer or assign its Membership Interest and/or
this Agreement to a new corporation or other entity to be formed
which would become the wholly-owned subsidiary or the wholly-
owned subsidiary of any such subsidiary of the holding company
that is or may be formed. Provided further, in the event of a
transfer by a Member to any such wholly-owned subsidiary or a
transfer that may occur in connection with any merger or
consolidation where the Member is the surviving entity, or a sale
of substantially all of the transferring Members natural gas
assets, or any reorganization, recapitalization, or similar
transaction involving such transferring Member or relating to the
establishment of a holding company structure, the Right of First
Refusal Provisions of Article 10.2 shall not apply.
Each Member hereby acknowledges the reasonableness of the
restrictions on sale and gift of Membership Interests imposed by
this Joint Venture Agreement in view of the Company's purposes
and the relationship of the Members. Accordingly, the
restrictions on sale and gift contained herein shall be
specifically enforceable. In the event that any Member pledges
or otherwise encumbers any of its Membership Interest as security
for repayment of a liability, any such pledge or hypothecation
shall be made pursuant to a pledge or hypothecation agreement
that requires the pledgee or secured party to be bound by all the
terms and conditions of this Article X.
<PAGE>
10.2 Right of First Refusal.
(a) A Selling Member that desires to sell all or any
portion of its Membership Interest in the Company to a qualified
third party purchaser shall obtain from such third party
purchaser a bona fide written offer to purchase such interest,
stating the terms and conditions upon which the purchase is to be
made and the consideration offered therefor. The Selling Member
shall give written notification to the other Member, by certified
mail or personal delivery, of its intention to so transfer such
interest, which other Member shall have the right to purchase all
(but not less than all) of the interest proposed to be sold by
the Selling Member upon the same terms and conditions as stated
in the aforesaid written offer to purchase by giving written
notification to the Selling Member, by certified mail or personal
delivery, of its intention to do so within thirty (30) days after
receipt by such other Member of written notice from the Selling
Member. If the non-selling Member fails to so notify the Selling
Member of its desire to exercise this right of first refusal
within said period, the right of first refusal as to such offer
shall terminate and the Selling Member shall be entitled to
consummate the sale of its interest in the Company to such third
party purchaser on the terms set forth in the notice given to the
non-selling Member.
In the event the non-selling Member gives written notice to
the Selling Member of its desire to exercise this right of first
refusal and to purchase all of the Selling Member's interest in
the Company, which the Selling Member desires to sell upon the
same terms and conditions as are stated in the aforesaid written
offer to purchase, the non-selling Member shall have the right to
designate the time, date, and place of closing, provided that the
date of closing shall be within the later of sixty (60) days
after receipt by the non-selling Member of written notification
from the Selling Member of the third party offer to purchase or
sixty (60) days of receipt of any required regulatory approval
for such transfer.
(b) In the event of the purchase of the Selling Member's
interest in the Company by a third party purchaser, and as a
condition to recognizing one or more of the effectiveness and
binding nature of any such sale and (subject to Section 10.3
below) substitution of a new Member as against the Company or
otherwise, the non-transferring Member may require the Selling
Member and the proposed purchaser to execute, acknowledge, and
deliver to the Company such instruments of transfer, assignment,
and assumption and such other certificates, representations, and
<PAGE>
documents, and to perform all such other acts, which the
non-transferring Member may reasonably deem necessary or
desirable to:
(i) constitute such purchaser as a Member;
(ii) confirm that the person to be admitted as a
Member, has accepted, assumed, and agreed to be subject and
bound by all of the terms, obligations, and conditions of
the Joint Venture Agreement, as the same may have been
further amended;
(iii) preserve the status of the Company as a foreign
or domestic limited liability company after the completion
of such sale, transfer, assignment, or substitution under
the laws of each jurisdiction in which the Company is
qualified, organized, or does business;
(iv) maintain the status of the Company as a
partnership for federal tax purposes; and
(v) assure compliance with any applicable state and
federal laws, including, without limitation, securities laws
and regulations.
(d) Any sale of a Membership Interest in compliance with
this Article X shall be deemed effective as of the last day of
the calendar month in which the remaining Member s consent
thereto was given, or, if no such consent was required pursuant
to Section 10.3, then on such date that the successor in interest
complies with Section 10.2(c). The Transferring Member agrees,
upon request of the non-transferring Member, to execute such
certificates or other documents and perform such other acts as
may be reasonably requested by the non-transferring Member from
time to time in connection with such sale, transfer, assignment,
or substitution. The Transferring Member hereby indemnifies the
Company and the remaining Members against any and all loss,
damage, or expense (including, without limitation, tax
liabilities or loss of tax benefits) arising directly or
indirectly as a result of any transfer or purported transfer in
violation of this Article X.
(e) The provisions of this Section 10.2 shall be
inapplicable to a transfer described in the second paragraph of
Section 10.1 hereof.
10.3 Transfers by Operation of Law.
<PAGE>
(a) In the event that a Member (i) files a voluntary
petition under any bankruptcy or insolvency law, or a petition
for the appointment of a receiver, or makes an assignment for the
benefit of creditors, or (ii) is subjected involuntarily to such
a petition or assignment, or to an attachment or other legal or
equitable interest with respect to its Membership in the Company,
and such involuntary petition, or assignment, attachment, or
other interest is not discharged within ninety (90) days after
its date, or (iii) is otherwise subject to a transfer of its
Membership Interest by operation of law or pursuant to judicial
decree or settlement of judicial proceedings, said Member shall
be deemed to have offered all of its Membership Interest to the
other Member as provided in this Section 10.3. Such offer shall
be irrevocable for a period of ninety (90) days and within said
time period the other Member may, by delivering a written notice
of acceptance to such Member, accept the offer in respect of all,
but not less than all, of said Membership Interest. If the other
Member does not notify said selling Member of its decision in
respect of the Membership Interest within the applicable ninety
(90) day offering period, said offer to sell shall be deemed not
to have been accepted by the other Member.
(b) Purchase Price. The purchase price at which the other
Member may elect to purchase a Membership Interest hereunder
shall be the fair market value of the selling party's Membership
Interest, as mutually agreed to by the Members, or, failing such
agreement, the fair market value shall be determined in
accordance with the procedures for resolving Stalemates and
Impasses as set forth in Section 7.11.
(c) Payment of Purchase Price. If the other Member elects
to purchase a Membership Interest in accordance with the
provisions of this Section 10.3, transfer of said Membership
Interest shall be made at the office of the Company on a mutually
satisfactory business day within the later of thirty (30) days of
acceptance of the offer to sell by the other Member or thirty (30
days of receipt of any required regulatory approvals for such
transfer. Delivery of instruments evidencing such transfer to
the other Member, shall be made upon receipt by the selling
Member of cash representing the aggregate purchase price for the
Membership Interest or, at the option of the purchaser, of a
promissory note for the purchase price substantially in the form
attached hereto as Exhibit B hereto.
<PAGE>
ARTICLE XI
ADDITIONAL MEMBERS
No new Members shall be entitled to any retroactive
allocation of losses, income, or expense deductions incurred by
the Company. The Manager may, at its option, at the time a
Member is admitted, close the Company books (as though the
Company's tax year had ended) or make pro rata allocations of
loss, income, and expense deductions to a new Member for that
portion of the Company's tax year in which a Member was admitted
in accordance with the provisions of Section 706(d) of the Code
and the Treasury Regulations promulgated thereunder.
ARTICLE XII
DISSOLUTION AND TERMINATION
12.1 Dissolution.
(a) The Company shall be dissolved upon the occurrence of
any of the following events:
(i) the written agreement of Members holding a
Majority Interest; or
(ii) the sale or other disposition of all or
substantially all of the assets of the Company or the
permanent cessation of the Company's business operations.
(b) As soon as possible following the occurrence of any of
the events specified in this Section 12.1 effecting the
dissolution of the Company, the appropriate representative of the
Company shall execute a statement of intent to dissolve in such
form as shall be prescribed by the Act and file same with the
office of the Secretary of State.
12.2 Effect of Filing of Dissolving Statement. Upon the
filing of a statement of intent to dissolve with the Secretary of
State, the Company shall cease to carry on its business, except
insofar as may be necessary for the winding up of its business,
but its separate existence shall continue until a certificate of
cancellation has been issued by the Secretary of State or until a
decree dissolving the Company has been entered by a court of
competent jurisdiction.
<PAGE>
12.3 Winding Up, Liquidation, and Distribution of Assets.
(a) Upon dissolution, the Manager shall immediately proceed
to wind up the affairs of the Company in accordance with the
requirements of the Act and other applicable law. In furtherance
of the winding up of the Company, the Manager shall:
(i) sell or otherwise liquidate all of the Company's
assets as promptly as practicable (except to the extent the
Manager may determine to distribute any assets to the
Members in kind);
(ii) discharge or make reasonable provision for all
liabilities of the Company, including liabilities to Members
who are also creditors (other than liabilities to Members
for distributions and the return of capital) and establish
such Reserves as may be reasonably necessary to provide for
contingent liabilities of the Company (for purposes of
determining the Capital Accounts of the Members, the amounts
of such Reserves shall be deemed to be an expense of the
Company);
(iii) distribute the remaining assets of the Company
in the following order of priority:
(1) To each Member, with respect to the
cumulative amount of all accrued but unpaid
pre-dissolution distributions for which the Company is
liable to such Member, the amount of such liability;
(2) The balance of any remaining assets shall be
distributed to each Member in accordance with the
Members' Capital Account balance, after giving effect
to contributions, allocations, and distributions for
all periods.
(b) The Members shall cause an accounting to be made by the
Company's independent accountants of the accounts of the Company
and of the Company's assets, liabilities and operations, from the
date of the last previous accounting until the date of
dissolution.
(c) If any assets of the Company are distributed in kind,
the net fair market value of such assets as of the date of
dissolution shall be determined by independent appraisal or by
agreement of the Members. Such assets shall be deemed to have
been sold to the Members in proportion to their Capital
<PAGE>
Interests as of the date of dissolution for their fair market
value, and the Capital Accounts of the Members shall be adjusted
to reflect such deemed sale.
(d) Notwithstanding anything to the contrary in this
Agreement, upon a liquidation, if any Member has a Deficit
Capital Account (after giving effect to all contributions,
distributions, allocations, and other Capital Account adjustments
for all taxable years, including the year during which such
liquidation occurs), such Member shall have no obligation to make
any Capital Contribution, and the negative balance of such
Member's Capital Account shall not be considered a debt owed by
such Member to the Company or to any other person for any purpose
whatsoever.
12.4 Certificate of Cancellation. Upon completion of the
winding up, liquidation, and distribution of the assets, the
Company shall be deemed terminated and the Manager shall
forthwith file with the Secretary of State a certificate of
cancellation. Thereafter, the Manager, as liquidating trustees,
shall have authority to distribute any Company property
discovered after termination, convey real estate and take such
other action as may be necessary on behalf of and in the name of
the Company.
12.5 Return of Capital Contribution - Nonrecourse. Except
as provided by law or as expressly provided in this Agreement,
upon dissolution, each Member shall look solely to the assets of
the Company for the return of his Capital Contribution. If the
Company property remaining after the payment or discharge of the
debts and liabilities of the Company is insufficient to return
the Capital Contribution of a Member, such Member shall have no
recourse against any other Member.
12.6 Breach of Joint Venture Agreement; Remedies; Survival.
The parties agree and acknowledge that, in addition to any other
remedies specifically set forth herein, in the event of a breach
of any provision of this Joint Venture Agreement by a Member, the
Company and the non-breaching Members shall be entitled to
receive from the breaching Member any and all damages suffered by
them as a result of such breach, together with all expenses
incurred in connection with the enforcement of this Joint Venture
Agreement and the collection of such damages, including
reasonable attorneys' fees. Without limitation of any other
means of recourse, in order to collect any amounts owing
hereunder, the Company and such non-breaching Members shall be
<PAGE>
entitled to set off against, withhold, proceed against, or
collect or receive directly from the Company, as applicable, all
or any part of the breaching Member's Membership Interest, any
distributions with respect thereto and, following the withdrawal
of such Member or the dissolution of the Company, any amounts
payable to the breaching Member pursuant to this Joint Venture
Agreement. The obligations of the Members hereunder shall
survive the withdrawal of any Member and the dissolution or
termination of the Company.
ARTICLE XIII
REPRESENTATIONS AND WARRANTIES
Each Member hereby represents and warrants to the other as
follows:
(a) It has been duly incorporated and is validly existing
and in good standing under the laws of its state of
incorporation, and is duly qualified to conduct business as a
foreign corporation in each jurisdiction in which such
qualification is required.
(b) The execution and delivery by it of this Agreement, and
the performance of its obligations hereunder, have been duly
authorized by all necessary corporation action, and upon the
receipt of Board of Directors and necessary regulatory approvals
as set forth in Section 2.1, do not conflict with or violate any
of its constituent documents or any agreement or instrument to
which it is a party or by which it or its properties are subject
and do not violate, or conflict with, or result in a breach of or
constitute a default under, or result in the creation of a right
of cancellation under, or result in the impairment of any right
of or result in the creation or imposition of any lien upon the
party under any mortgage, indenture, agreement, instrument,
judgment, statute, law, decree, court order, writ, injunction,
permit, regulation or rule to which it is a party or by which it
is bound.
(c) There are no actions, suits, claims, proceedings,
investigations or inquiries pending or, to the best knowledge of
the party s knowledge threatened against it, or against any of
its officers or employees which (i) seek to prevent the
acquisition of an interest in the Company or the other
transactions contemplated hereby; or (ii) call into question the
validity, or materially hinder the enforceability or performance
<PAGE>
of this Agreement. To the best knowledge of a party, after due
inquiry, there are no events or conditions which would provide
the basis for any such litigation, proceeding or investigation.
(d) Neither party has employed any broker or finder or
incurred any liability for any brokerage fees, commissions, or
finders' fees in connection with the acquisition of an interest
in the Company or the other transactions contemplated by this
Agreement.
(e) Neither party nor any of its Affiliates is, nor will
the Company as a result of holding an interest in the Company be,
an "investment company" as defined in, or subject to regulation
under, the Investment Company Act of 1940.
(f) Each party is acquiring its interest in the Company
based upon its own investigation, and the exercise by a party of
its rights and the performance of its obligations under this
Agreement will be based upon its own investigation, analysis and
expertise. Each party's acquisition of its interest in the
Company is being made for its own account for investment, and not
with a view to the sale or distribution thereof.
(g) No representation or warranty by a party contained in
this Agreement (including, but not limited to, the Exhibits and
Schedules hereto) contains or will contain any untrue statement
of a material fact, or omits or will omit to state any material
fact required to make the statements contained herein or therein
not misleading.
ARTICLE XIV
ARBITRATION AND INJUNCTION
Any and all disputes arising out of, under, in connection
with, or relating to this Joint Venture Agreement, the breach or
any alleged breach thereof, including disputes regarding the
Capital Accounts, shall be settled in accordance with the
procedures and structure established for handling stalemates or
impasses, as set forth in Paragraph 7.11. Because of the unique
relationship of the Members in the Company and the unique value
of their interests therein, this provision for arbitration shall
not prevent any party from applying for and obtaining injunctive
relief (i) as provided in Section 12.6, or (ii) in instances
where, in the absence thereof, the rights of such party cannot be
adequately protected by an arbitrator's award.
<PAGE>
ARTICLE XV
RELATIONSHIP OF THE PARTIES
15.1 The parties agree not to compete with one another
in developing, owning, and operating a natural gas local
distribution company to customers in Maine and to customers in
the proximity of PNGTS and/or Maritimes in New Hampshire. For
the purposes of this Agreement, the phrase "agrees not to
compete" means that neither party will, for any reason,
voluntarily or involuntarily, without the prior written consent
of the other party, directly or indirectly, acquire any interest
in or otherwise act, with or without compensation, during the
term of the Agreement and for a period of three (3) years
following termination of this Agreement, or following any
withdrawal, transfer or assignment of this Agreement or its
Membership Interest therein, for itself or any corporation,
entity, or business that is at the time involved in the
ownership, development, or operation of a natural gas local
distribution company in Maine and New Hampshire. The parties
agree that such limitation on competition is reasonable.
15.2 Until the expiration of three (3) years after either
party ceases to be a Member of the Company, no party nor their
respective Affiliates will newly employ, engage or seek to employ
or engage, directly or indirectly, any employee of the Company or
any employee of the remaining Members of the Company who are
providing services to the Company without the written consent of
the Company, unless such employee has been discharged by the
Company or by such Member or such employee is employed by an
entity that is acquired by a Party or one of its Affiliates;
provided, however, that the foregoing provisions shall not apply
to any employment or solicitation of employment by a previous
employer (or its Affiliates) of an employee of the Company.
15.3 The Parties will insure that the Company and its
Subsidiaries will not employ, engage or seek to employ or engage,
directly or indirectly, any employee of a Party or of an
Affiliate thereof, without the written consent of such Party,
unless such employee has been discharged by such Party or its
Affiliate or such employee is employed by an entity that is
acquired, directly or indirectly, by the Company.
<PAGE>
ARTICLE XVI
MISCELLANEOUS PROVISIONS
16.1 Notices. Any notice, demand, or communication required
or permitted to be given by any provision of this Joint Venture
Agreement shall be deemed to have been sufficiently given or
served for all purposes if delivered personally to the party or
to an executive officer of the party to whom the same is directed
or, if sent by registered or certified mail, postage and charges
prepaid, or by facsimile, addressed to the Member's and/or
Company's address, as appropriate, which is set forth in this
Joint Venture Agreement. Any such notice given by mail shall be
deemed to be given three business days after the date on which
the same was deposited in a regularly maintained receptacle for
the deposit of United States mail, addressed and sent as
aforesaid.
16.2 Books of Account and Records. Proper and complete
records and books of account shall be kept or shall be caused to
be kept by the Manager in which shall be entered fully and
accurately all transactions and other matters relating to the
Company's business in such detail and completeness as is
customary and usual for businesses of the type engaged in by the
Company. Such books and records shall be maintained as provided
in Section 9.9. The books and records shall be at all times be
maintained at the principal executive office of the Company and
shall be open to the reasonable inspection and examination of the
Members or their duly authorized representatives, during
reasonable business hours.
16.3 Application of Maine Law. This Joint Venture
Agreement, and the application and interpretation hereof, shall
be governed exclusively by its terms and by the laws of the State
of Maine, excluding conflict of laws principles.
16.4 Amendments. Other than as expressly provided herein,
this Joint Venture Agreement may not be amended except by the
written consent of each Member.
16.5 Execution of Additional Instruments. Each Member
hereby agrees to execute such other and further statements of
interest and holdings, designations, powers of attorney, and
other instruments necessary to comply with any laws, rules, or
regulations.
<PAGE>
16.6 Construction. Whenever the singular number is used in
this Joint Venture Agreement and when required by the context the
same shall include the plural and vice versa, and the masculine
gender shall include the feminine and neuter genders and vice
versa.
16.7 Headings and Pronouns. The headings in this Joint
Venture Agreement are inserted for convenience and are in no way
intended to describe, interpret, define, or limit the scope,
extent, or intent of this Joint Venture Agreement or any
provision hereof. All pronouns and only variations thereof shall
be deemed to refer to masculine, feminine, or neuter, singular or
plural as the identity of the Person or Persons may require.
16.8 Waivers. The failure of any party to seek redress for
violation of or to insist upon the strict performance of any
covenant or condition of this Joint Venture Agreement shall not
prevent a subsequent act, which would have originally constituted
a violation, from having the effect of an original violation.
16.9 Rights and Remedies Cumulative. The rights and
remedies provided by this Joint Venture Agreement are cumulative
and the use of any one right or remedy by any party shall not
preclude or waive the right to use any or all other remedies.
Said rights and remedies are given in addition to any other
rights the parties may have by law, statute, ordinance or
otherwise.
16.10 Severability. If any provision of this Joint Venture
Agreement or the application thereof to any person or
circumstance shall be invalid, illegal, or unenforceable to any
extent, the remainder of this Joint Venture Agreement and the
application there of shall not be affected and shall be
enforceable to the fullest extent permitted by law.
16.11 Heirs, Successors and Assigns. Each and all of the
covenants, terms, provisions and agreements herein contained
shall be binding upon and inure to the benefit of the parties
hereto and, to the extent permitted by this Joint Venture
Agreement, their respective heirs, legal representatives,
successors and assigns.
16.12 Creditors. None of the provisions of this Joint
Venture Agreement shall be for the benefit of or enforceable by
any creditors of the Company except as required by the Act.
<PAGE>
16.13 Counterparts. This Joint Venture Agreement may be
executed in counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same
instrument.
16.14 Integration. This Joint Venture Agreement together
with a Memorandum of Understanding between the parties and dated
July 14, 1997 ("MOU") constitute the parties' entire agreement
with respect to the subject matter hereof and thereof, and
supersede any and all prior oral or written agreements or
understandings with respect thereto. To the extent of any
inconsistency between the MOU and this Agreement, this Agreement
shall control.
16.15 Maine Securities Law. THE SECURITIES REPRESENTED BY
MEMBERSHIP INTERESTS IN THE COMPANY ARE BEING SOLD PURSUANT TO AN
EXEMPTION FROM REGISTRATION WITH THE BANK SUPERINTENDENT OF THE
STATE OF MAINE UNDER SECTION 10502(2)(P) OF TITLE 32 OF THE MAINE
REVISED STATUTES. THESE SECURITIES MAY BE DEEMED RESTRICTED
SECURITIES AND AS SUCH THE HOLDER MAY NOT BE ABLE TO RESELL THE
SECURITIES UNLESS PURSUANT TO REGISTRATION UNDER STATE OR FEDERAL
SECURITIES LAWS OR UNLESS AN EXEMPTION UNDER SUCH LAWS EXISTS.
16.16 Public Announcements. The Members agree that before
they or any of their respective Affiliates issue any press
releases or otherwise make any public statements with respect to
this Agreement or issue any further press releases or otherwise
make any public statements with respect to the transactions
contemplated hereby, they will obtain the consent of each of the
other Parties hereto to such press release or public statement.
Neither the Members nor any of their Affiliates shall issue a
press release or make any public statement without such prior
consent except, in each case, in the reasonable opinion of
counsel to the disclosing party, as may be required by applicable
law, rule, regulation or order or by obligations pursuant to any
listing agreement with any securities exchange on which any of
its or their securities may be listed, upon prior written notice
to the other party, where such notice is practicable.
16.17 Indemnification. Each Member agrees to indemnify and
hold harmless the Company and the other Member, and their
directors, officers and employees from and against any losses,
claims, liabilities, damages, diminutions in value of any kind,
costs, penalties, interest on any amounts payable or expenses
(including reasonable attorneys' fees incurred by an indemnified
party in any action or proceeding between itself and the
<PAGE>
indemnifying party or between the indemnified party and any third
party or otherwise) incurred in connection with investigating,
pursuing or defending any claims or actions between the Members
and/or between the Members and third parties (collectively
"losses") which such Parties may sustain as a result of: (a) the
non-performance of any obligation to be performed by the other
party under this Agreement; and (b) the breach of any
representation, warranty, covenant, or agreement of the other
Member contained in this Agreement for the period such
representation, warranty, covenant, or agreement shall survive
hereunder.
16.18 Confidentiality. The Members agree as follows with
respect to information (whether in the form of documents, oral
communications, visual examination of facilities, or otherwise),
which, in the case of tangible items will be marked as such,
disclosed by any Member to any other Member in the course of the
formation of the Company or in course of the Company s operations
(the "Confidential Information"):
(a) Subject to the exceptions set forth in Sections 16.18
(b), (c) and (d), the Members (i) will treat all Confidential
Information as confidential, (ii) will not use Confidential
Information for any purpose other than in connection with the
Business or their interest in the Company and (iii) will not
disclose any Confidential Information to third parties. Each
Member shall, at all times, be responsible for compliance by its
Management Committee Members, managers, directors, officers,
employees and agents with the obligations under this Section
16.18.
(b) The confidentiality obligations of the Members
contained in Section 16.18(a) shall not apply to any Confidential
Information which (i) is or becomes publicly known through no
fault of the Member receiving the Confidential Information,
(ii) is disclosed to the Party receiving the Confidential
Information on a non-confidential basis by a third party who such
Party believes after due inquiry is entitled to disclose it,
(iii) the Member receiving the Confidential Information can
demonstrate on the basis of written records was already known to
it on a non-confidential basis prior to receipt, (iv) is
subsequently developed by the Member receiving the Confidential
Information independently of Confidential Information, or (v)
subject to Section 16.18(c), is required to be disclosed by law
or legal process.
<PAGE>
(c) Provided circumstances permit, each Member will provide
the Company and the other Members hereto with prior notice of
each instance in which Confidential Information is required to be
disclosed by law or legal process. Such notice shall be given as
promptly as is practicable under the circumstances.
(d) The Members shall be entitled to disclose Confidential
Information to their Affiliates, agents, financial advisors,
representatives, consultants (including, without limitation,
legal counsel and accountants), lenders and joint venture
partners (if any) (collectively, the "Associated Third Parties")
as they may determine to be appropriate in connection with the
Company or their interest in the Company. In addition, the
Parties shall have the right to discuss the Business, if
required, with the staff or members of regulatory agencies which
would have jurisdiction over the Company s Business or in
connection with the Member's relationship with the Company and
with rating agencies such as Standard & Poors, Moody's Investors
Service or Fitch Investors Service.
(e) The obligations of this Section 16.18 shall survive the
termination of this Agreement.
16.19 No Third Party Beneficiaries. Except as expressly
provided herein, nothing in this Agreement shall entitle any
person other than the Members or their respective successors and
assigns permitted hereby to any claim, cause of action, remedy or
right of any kind.
16.20 Equitable Relief. The Members agree that irreparable
damage would occur in the event that any of the provisions of
this Agreement, including, without limitation, Section 16.18
hereof, were not performed in accordance with their specific
terms or were otherwise breached. Accordingly, it is agreed that
the Members shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and, subject to the provisions
of Section 16.3, to enforce specifically the terms and provisions
hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which
they are entitled at law or in equity.
16.21 Counterparts. This Agreement may be executed in
any number of counterparts, no one of which needs to be executed
by all of the Members, and this Agreement shall be binding upon
all the Members with the same force and effect as if all the
Members had signed the same document, and each such signed
counterpart shall constitute an original of this Agreement.
<PAGE>
16.22 No Partnership Created. It is the express
intention of the Members that the representations, warranties,
covenants and agreement contained in this Agreement do not create
a partnership among the Parties hereto.
16.23 Audit Rights. Each Member shall be have the
right, at their own expense, upon reasonable advance notice, to
audit the books and records of the Company, and it is agreed that
the Company, when formed, shall have the right, upon reasonable
advance notice, to audit the books and records of the Members for
purposes associated with the performance of the Agreements
attached as Exhibits C and D hereto.
16.24 Agreement Jointly Drafted. The Members agree that
the Agreement was jointly drafted and that no interpretive
presumption shall exist against either Member as a result of
authorship of this Agreement.
16.25 Ratification by CMP Gas Company, L.L.C. The
Members agree that at such time as the Company is formed that the
Members shall cause the Company to ratify the terms and
conditions of this Joint Venture Agreement and so become subject
to all of the provisions hereof.
16.26 Further Assurances. The Members agree to use
their best efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper or
advisable to carry out all of their respective obligations under
this Agreement and to make effective the Contributions and the
and other transactions contemplated by this Agreement.
<PAGE>
IN WITNESS WHEREOF, the Members have signed and sealed this
Joint Venture Agreement as of the date first written above.
MEMBERS
CENTRAL MAINE POWER
COMPANY
By: David T. Flanagan
David T. Flanagan
President & CEO
NEW YORK STATE ELECTRIC &
GAS CORPORATION
By: Wesley W. von Schack
Wesley W. von Schack
Chairman, President and
Chief Executive Officer
<PAGE>
EXHIBIT A
TO
CMP GAS COMPANY, L.L.C.
JOINT VENTURE AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
List of Members
Units of
Initial Capital Membership
Name Address Capital Contribution Interests (%) Interest
Central Maine Power 83 Edison Drive $10 million in cash 50.00% 100
Company Augusta, ME 04336
Attn: Darrel Quimby
New York State Electric 4500 Vestal Pkwy. East $10 million in cash 50.00% 100
& Gas Corporation Binghamton, NY 13902
Attn: Tim Kelley
</TABLE>
<PAGE>
EXHIBIT B
PROMISSORY NOTE
$_________
Portland,
Maine
[date]
FOR VALUE RECEIVED, _______________________
(the "Maker"), promises to pay to the order of
________________________ (the "Holder") the
principal sum of ___________________________________
Dollars ($__________), with interest from the date
hereof upon said principal sum, or so much thereof
as from time to time remains unpaid, at the fixed
rate of ______% per annum [insert applicable federal
rate in effect at the time of delivery of the note
for obligations of like maturity]. Payment of this
Note shall be made in thirty-six (36) equal
consecutive monthly payments of principal and
interest of $___________ each, commencing on
_______________ and continuing on the _________ day
of each succeeding month thereafter, and in a final
payment of all unpaid principal and interest due
hereunder on ___________.
<PAGE>
The Maker may make prepayments of principal due
hereunder at any time and from time to time without
payment of any penalty or premium. Any such
prepayments shall be applied, first, to any costs
due hereunder to the Holder from the Maker, second,
to accrued but unpaid interest hereunder and, third,
to unpaid principal. Any partial prepayments of
principal shall be applied to remaining scheduled
principal payments due hereunder in inverse order of
their due dates.
If default be made in payment of any amount due
under this Note, and if such default is not cured
within fifteen (15) days after receipt by Maker of
written notice thereof, or if any kind of insolvency
or bankruptcy proceeding shall be commenced in any
court of competent jurisdiction by or against the
Maker (which proceeding, in the case of a proceeding
commenced against the Maker, shall not be dismissed
within ninety (90) days after filing), or if the
Maker shall be adjudicated insolvent or a bankrupt
by any court of competent jurisdiction or if the
Maker shall make an assignment for the benefit of
creditors, the entire principal sum and accrued
interest shall become due and payable upon written
notice, at the option of the Holder of this Note.
Failure to exercise this option shall not constitute
a waiver of the right to exercise the same in the
event of any subsequent default.
Except as provided in the preceding paragraph,
the Maker waives presentment, demand, notice and
protest and agrees to pay all costs of collection or
attempted collection, including reasonable
attorneys' fees.
WITNESS: MAKER:
_________________ By:____________
Name:___________
Title:_______
<PAGE>
Exhibit C
SUPPORT SERVICES AGREEMENT
BETWEEN
CENTRAL MAINE POWER COMPANY
AND
CMP GAS COMPANY, L.L.C.
<PAGE>
INDEX
PAGE
ARTICLE I - General Scope of Services. . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - Payment for Services . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III - Term of Contract . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE IV - Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE V - Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE VI - Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE VII - Insurance and Indemnification. . . . . . . . . . . . . . . . . . 4
ARTICLE VIII- General Limitations of Liability and Waiver. . . . . . . . . . . 5
ARTICLE IX - Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE X - Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . 6
EXHIBIT A
Description of Central Maine Power Company Support Services. . . . . . . . . .8
EXHIBIT B
Determination of Cost of Service and Allocation Thereof. . . . . . . . . . . . 9
<PAGE>
SUPPORT SERVICES AGREEMENT
This Agreement is made as of __________, 199__, by and
between Central Maine Power Company, a Maine corporation with its
principal place of business in Augusta, Maine ("CMP"), and CMP
Gas Company, L.L.C., a Maine Limited Liability Company with its
principal place of business in Augusta, Maine ("CMP Gas").
WHEREAS, CMP is willing to provide support services to CMP
Gas; and
WHEREAS, CMP Gas requires support services and desires to
use and purchase such services from CMP; and
WHEREAS, CMP Gas is willing to provide support services to
CMP.
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I - GENERAL SCOPE OF SERVICES
1. CMP shall provide, as needed, support services to CMP
Gas, enumerated in Exhibit A, attached hereto and made a part
hereof, subject to the applicable provisions of this Agreement;
provided, however, that CMP and CMP Gas shall not be responsible
for policy or management decisions of the other, such functions
being reserved exclusively for each party to this Agreement,
respectively.
2. CMP shall provide support services using personnel
from within its own organization. In addition, CMP may use
persons from outside its organization with the other party's
approval, such approval not to be unreasonably withheld.
ARTICLE II - PAYMENT FOR SERVICES
1. All of the support services rendered under this
Agreement shall be charged to the other at actual cost. Support
services that benefit both CMP and CMP Gas shall be fairly and
equitably allocated between the parties. The methods of
determining the costs and the allocation thereof are set forth in
Exhibit B, attached hereto and made a part hereof; provided that
these methods may be modified or changed by either party with the
prior written approval of the other party. If either party
objects, in writing, to the proposed changes or modifications,
the parties agree to make a good faith effort to re-negotiate the
terms and conditions of Exhibit B. If no agreement can be
reached within sixty (60) days of the proposal to modify Exhibit
B, the proposed modifications will not take effect and either
party may terminate this Agreement as provided herein.
<PAGE>
2. CMP shall submit itemized invoices for services
rendered, including, when requested or required by CMP Gas, all
sales, use, excise, or similar taxes that may be applicable to
such services, as soon as practicable after the close of each
month. All invoices submitted by CMP shall have adequate
documentation to justify all labor and material costs. CMP Gas
shall pay such invoice within thirty days after receipt, to the
extent the costs are not disputed. Such disputes must be raised
within eighteen (18) months after receipt of the invoice with the
disputed cost. Simple annual interest at the prime rate then in
effect at The First National Bank of Boston, plus 1.5%, shall
accrue on any undisputed invoice items not paid within thirty
days after receipt by the other, interest computed from the 31st
day following the date of receipt.
3. Upon the written request of CMP Gas, CMP shall permit
CMP Gas reasonable access to its books and records for the
purpose of auditing charges billed by CMP.
ARTICLE III - TERM OF CONTRACT
This Agreement shall commence on the date first written
above and continue until terminated by either party by at least
two (2) months prior written notice to the other.
ARTICLE IV - CHANGES
No waiver, alteration, amendment, consent, or modification
of any of the provisions of this Agreement shall be binding
unless in writing and signed by a duly authorized representative
of both parties.
ARTICLE V - ASSIGNMENT
Neither CMP nor CMP Gas may assign any of its rights or
obligations hereunder, except with the prior written consent of
the other.
ARTICLE VI - FORCE MAJEURE
Force Majeure means an event that is beyond the reasonable
control of, and without the fault or negligence of, the party
claiming Force Majeure, which delays, hinders, or prevents
performance of that party's obligations under this Agreement.
<PAGE>
CMP or CMP Gas shall not be liable to the other for loss or
damage resulting from (1) any delay in performance, in whole or
in part, or (2) nonperformance of its contractual obligations, in
whole or in part, insofar as such delay or nonperformance is
caused by Force Majeure, provided that the party invoking Force
Majeure provides written notice to the other party of the
circumstances giving rise to such delay or nonperformance within
a reasonable time after learning of such circumstances and, to
the extent possible, takes reasonable steps to correct or
alleviate the circumstances that led to the Force Majeure event.
ARTICLE VII - INSURANCE AND INDEMNIFICATION
1. CMP may, with respect to the services performed under
this Agreement, self-insure or obtain insurance coverage with
respect to its facilities and shall maintain the following
coverage, naming the other party to this Agreement as an
additional insured, as applicable:
a) Workers' Compensation Insurance that complies with
the provisions of applicable law.
b) Employer's Liability Insurance with limits not
less than $100,000 each occurrence;
c) General Liability Insurance with limits not less
than $1,000,000 combined bodily injury and
property damage liability; and
d) Automobile Liability Insurance with limits not
less than $1,000,000 combined bodily injury and
property damage.
2. Each party shall defend (at the other's option),
indemnify, and hold harmless the other, its directors, officers,
employees, contractors, agents, successors, and assigns from and
against, any actions, penalties, claims, costs (including, but
not limited to, reasonable attorney's fees), or damages of any
nature arising out of or related to the services performed
pursuant to this Agreement and shall defend the other from such
claims.
<PAGE>
ARTICLE VIII - GENERAL LIMITATIONS OF LIABILITY AND WAIVER
1. CMP shall provide well-qualified and experienced
staff to perform services covered by this Agreement. Names and
backgrounds of said personnel shall be provided to CMP Gas on
request.
2. Services provided by CMP hereunder shall be performed
in a prudent, professional, and workmanlike manner. If any such
services provided by NYSEG fail to conform to this standard, CMP
Gas shall, at its option, have the right to correct or re-perform
such services.
3. Except for the obligation in (2) above to correct or
re-perform services, NYSEG shall not be liable for any reason to
the other for claims for direct, incidental, indirect,
consequential, or other damages of any nature connected with or
resulting from the performance or non-performance of this
Agreement by CMP or CMP Gas, whether or not due to negligence by
CMP or CMP Gas.
4. Except for the obligation imposed upon it for the
payment of support services pursuant to Article III, neither
party shall be liable to the other for claims for direct,
incidental, indirect, consequential, or other damages of any
nature connected with or resulting from performance or non-
performance of this Agreement by CMP or CMP Gas, whether or not
due to negligence by CMP or CMP Gas.
5. EXCEPT AS MAY BE PROVIDED IN PARAGRAPHS 1 AND 2 OF
THIS ARTICLE, NO WARRANTIES OF ANY KIND WHETHER STATUTORY,
WRITTEN, ORAL OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, SHALL APPLY TO SERVICES PERFORMED HEREUNDER.
<PAGE>
ARTICLE IX - NOTICE
1. All communications and notices by CMP Gas to CMP
under this Agreement shall be sent to and addressed as follows:
Central Maine Power Company
83 Edison Drive
Augusta, ME 04336
Attn: Darrel Quimby
2. All communications and notices by CMP to CMP Gas
under this Agreement shall be sent to and addressed as follows:
CMP Gas Company, L.L.C.
4500 Vestal Parkway East
Binghamton, NY 13902-3607
Attn: Tim Kelley
3. Either party may change the address set forth by
written notice to the other.
ARTICLE X - APPLICABLE LAW
1. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maine.
2. This Agreement shall be subject to approval by any
regulatory body whose approval is a legal prerequisite to its
execution, delivery, or performance.
3. This Agreement constitutes the entire Agreement
between the parties for the services to be provided hereunder,
and supersedes all prior representations and Agreements, whether
written or oral, between the parties as to such services.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their duly authorized
representatives, to become effective as of the date first written
above.
CENTRAL MAINE POWER COMPANY
By:
Its:
CMP GAS COMPANY, L.L.C.
By:
Its:
<PAGE>
EXHIBIT A
GENERAL DESCRIPTION OF CENTRAL MAINE POWER COMPANY
SUPPORT SERVICES
The services available under this Agreement that are to be
provided under this Agreement and are the services normally
furnished by CMP Gas are as follows:
<PAGE>
EXHIBIT B
DETERMINATION OF COST OF SERVICE AND ALLOCATION THEREOF
CMP shall bill CMP Gas for costs incurred on behalf of
performing services as described in the attached "Description of
Billing Costs and Procedures."
Where services performed by CMP benefit other entities, CMP
shall equitably allocate the costs of such services among the
entities benefiting from such services.
CMP shall maintain records adequate to support the costs to
be charged to CMP Gas. These records shall be made available to
the other for audit as requested.
DESCRIPTION OF BILLING COSTS AND PROCEDURES
For certain types of billing activity such as requests for the
construction or repair of customer owned property, the billable
charges will be reported by indicating on the appropriate source
documents (work reports, vouchers, etc.) the Management Project
Number and an approved work order number or service request job
number. The charges will be accumulated in the Unbilled Jobbing
Account and billed as specified in the agreement (i.e., monthly,
quarterly or when the job is completed). The General Accounting
Section of the Accounting Department will review the Unbilled
Jobbing Account detail, and prepare and mail the Sundry Billing
invoice to the customer as specified.
The Unbilled Jobbing Account detail can be separated into six
major categories; personnel, vehicle and equipment, inventory
materials, special materials, expenses, and other costs not
previously identified. Each of the foregoing categories is
described below:
<PAGE>
A. Personnel
Payroll cost of service and allocation thereof is determined
as follows:
Personnel - The salary and wage cost of the
Company's personnel, excluding Management Committee
Members, shall be charged in conformance with the
Company's standard accounting practice. The times such
personnel are engaged directly in the performance of
services for the billable activity shall be multiplied
by the individual's current charge factor. The charge
factor is composed of direct labor costs, direct
payroll overheads, administrative, and general expense
overhead.
Salary and wage costs are charged directly by Company
personnel to the specific work activity performed by
employees at each employee's current rate of pay. In other
words, if an employee of the Company, who is paid at rate of
$10 per hour, works five hours on a billable working
activity, the Company bills the customer $50 for the
services provided.
<PAGE>
In addition to the employee's current rate of pay, the
Company includes overheads for two separate categories of
expenses; administrative and general expense overhead and
direct payroll overheads. The total personnel costs are
charged to the customer in accordance with the following
formula:
Personnel Costs = (H x R) + ((H x R)(OHp + A&G))
where: H = hours actually worked
R = employee's actual rate of pay
OHp = A
B-C
where: OHp = payroll overhead rate
A = estimated annual payroll overhead expense
B = estimated annual base payroll
C = estimated annual base payroll not
receiving payroll overheads
A&G = D&E
F
Where: A&G = administrative and general expense rate
D = administrative and general expense
E = general office allocation
F = actual base payroll
Administrative and general expenses (D) include indirect
administrative and general expenses and costs incurred by
the Company not otherwise charged to specific work projects,
such as human resources, administrative, and legal. The
general office allocation (E) includes costs related to
general plant (e.g., expenses associated with the Company's
General Office in Augusta, Maine). The current A&G rate is
____________%.
<PAGE>
Payroll overheads for the Company include all costs related
to employee benefits such as payroll taxes, medical, life
insurance, pension, lost time, and other similar costs. The
amounts used in the payroll overhead formula are estimated
at the beginning of each year. The estimates are revised
during the course of the calendar year as actual data
becomes available. Base payroll not receiving overheads (C)
includes cost categories such as vacation and personal
leave.
B. Vehicles and Equipment
The Company charges direct vehicle and equipment costs to
customers as follows:
Vehicle and Equipment - Vehicle and equipment
usage shall be charged, at the cost thereof by vehicle
class, for the miles or time devoted to performance of
services to customers, in accordance with the Company's
standard accounting practice.
There are two types of vehicle and equipment costs charged
to customers by the Company: use of Company fleet vehicles
and equipment (such as trailers) by Company employees on
billable work activities and use of personal vehicles by
Company employees on billable work activities. Company
employees are currently reimbursed at the rate of 30 cents
per mile.
The Company calculates fleet vehicle and equipment charges
in accordance with the following formula:
V&E costs = H x Rv
where: H = actual hours of vehicle and equipment
Rv = A/C
B
where: Rv = vehicle and equipment rate
A = the estimated expenses incurred by each
vehicle and equipment class for a 12-month
period
<PAGE>
B = number of vehicles and equipment in each
class
C = hours used by each vehicle and equipment
in each class
As the preceding formula indicates, the Company aggregates
all direct costs related to fleet vehicles and equipment by
vehicle classification and then divides these costs by the
number of vehicles or pieces of equipment in that class.
That amount is then divided by the number of hours the
Company estimates the vehicles or equipment will be used
during a given year.
C. Materials
Expenses for material, equipment, tools, or other items
withdrawn from the Company's materials and supplies
inventory are charged as follows:
Materials - Materials, equipment, tools, or other
items withdrawn from the Company's materials and supplies
inventory will be charged at the average commodity inventory
price, plus the Company's stores handling charge computed in
accordance with standard accounting practice. The stores
handling charges will not apply to items purchased from
vendors for use directly by or on behalf of the customer.
The Company calculates materials and supplies inventory
withdrawal charged to customers in accordance with the
following formula:
Materials = (U x P) + (U x P x S)
where: U = units actually issued
P = actual average unit price
S = stores handling rate used by
location
<PAGE>
The stores handling charge consists of costs of warehousing,
lobby stores(i.e., low cost items used in conjunction with
materials and supplies) and administrative support. Lobby
stock may also be withdrawn directly for work on a billable
work activities or added to special materials purchased
specifically for use in performing services for customers.
D. Special Materials
In the case where the Company purchases special materials
for customers, the allocation is as follows:
Generally, special materials can be purchased under special
conditions using a Company Purchase Order. Special
materials shall include any materials, supplies, tools,
equipment, and other items purchased, rented, or leased
directly from vendors specifically for use in performing
services for customers. Special materials shall be billed
at invoice costs, including taxes and including all cost of
transportation, loading, unloading, storage, operation,
maintenance, and repair. A cost-based stores handling
charge may be added to charges for special materials
temporarily stored or under the care of the Company.
E. Expenses
Items ordinarily included in this category include air fare,
taxi expenses, stationery and office supplies, lodging,
meals, books and periodicals, and software. The Company
charge amounts in this category at actual cost. Charges for
travel, meals, or other personnel expenses are as follows:
Expenses - Travel, meals, or other personnel
expenses incurred in connection with services provided by
the Company's employees, including, but not limited to
meals, lodging, and other subsistence and travel expenses,
as well as telephone charges, special purpose tools and
supplies, reproduction and similar items, shall be charged
in accordance with the Company's customary practice.
<PAGE>
F. Other
Other expenses not previously identified are charged under
this category as follows:
Other - Other costs incurred in providing services
hereunder to customers shall be billed at cost.
Items that may be charged by the Company under the category
"Other" included direct costs associates with audit services
provided by an independent auditor, legal services provided by a
private law firm, contracted tree trimming by a private firm,
aerial line survey expenses, sub-contractor services and
insurance expenses.
<PAGE>
Exhibit D
SUPPORT SERVICES AGREEMENT
BETWEEN
NEW YORK STATE ELECTRIC & GAS CORPORATION
AND
CMP GAS COMPANY, L.L.C.
<PAGE>
INDEX
PAGE
ARTICLE I - General Scope of Services . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - Payment for Services. . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III - Term of Contract. . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE IV - Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE V - Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE VI - Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE VII - Insurance and Indemnification . . . . . . . . . . . . . . . . . 4
ARTICLE VIII - General Limitations of Liability and Waiver . . . . . . . . . . 5
ARTICLE IX - Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE X - Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . 6
EXHIBIT A
Description of New York State Electric & Gas Corporation Support Services. . .8
EXHIBIT B
Determination of Cost of Service and Allocation Thereof. . . . . . . . . . . . 9
<PAGE>
SUPPORT SERVICES AGREEMENT
This Agreement is made as of __________, 199__, by and
between New York State Electric & Gas Corporation, a New York
corporation with its principal place of business in Ithaca, New
York ("NYSEG"), and CMP Gas Company, L.L.C., a Maine Limited
Liability Company with its principal place of business in
Augusta, Maine ("CMP Gas").
WHEREAS, NYSEG is willing to provide support services to CMP
Gas; and
WHEREAS, CMP Gas requires support services and desires to
use and purchase such services from NYSEG; and
WHEREAS, CMP Gas is willing to provide support services to
NYSEG.
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I - GENERAL SCOPE OF SERVICES
1. NYSEG shall provide, as needed, support services to
CMP Gas, enumerated in Exhibit A, attached hereto and made a part
hereof, subject to the applicable provisions of this Agreement;
provided, however, that NYSEG and CMP Gas shall not be
responsible for policy or management decisions of the other, such
functions being reserved exclusively for each party to this
Agreement, respectively.
2. NYSEG shall provide support services using personnel
from within its own organization. In addition, NYSEG may use
persons from outside its organization with the other party's
approval, such approval not to be unreasonably withheld.
ARTICLE II - PAYMENT FOR SERVICES
1. All of the support services rendered under this
Agreement shall be charged to the other at actual cost. Support
services that benefit both NYSEG and CMP Gas shall be fairly and
equitably allocated between the parties. The methods of
determining the costs and the allocation thereof are set forth in
Exhibit B, attached hereto and made a part hereof; provided that
these methods may be modified or changed by either party with the
prior written approval of the other party. If either party
objects, in writing, to the proposed changes or modifications,
the parties agree to make a good faith effort to re-negotiate the
terms and conditions of Exhibit B. If no agreement can be
reached within sixty (60) days of the proposal to modify Exhibit
B, the proposed modifications will not take effect and either
party may terminate this Agreement as provided herein.
<PAGE>
2. NYSEG shall submit itemized invoices for services
rendered, including, when requested or required by CMP Gas, all
sales, use, excise, or similar taxes that may be applicable to
such services, as soon as practicable after the close of each
month. All invoices submitted by NYSEG shall have adequate
documentation to justify all labor and material costs. CMP Gas
shall pay such invoice within thirty days after receipt, to the
extent the costs are not disputed. Such disputes must be raised
within eighteen (18) months after receipt of the invoice with the
disputed cost. Simple annual interest at the prime rate then in
effect at The First National Bank of Boston, plus 1.5%, shall
accrue on any undisputed invoice items not paid within thirty
days after receipt by the other, interest computed from the 31st
day following the date of receipt.
3. Upon the written request of CMP Gas, NYSEG shall
permit CMP Gas reasonable access to its books and records for the
purpose of auditing charges billed by NYSEG.
ARTICLE III - TERM OF CONTRACT
This Agreement shall commence on the date first written
above and continue until terminated by either party by at least
two (2) months prior written notice to the other.
ARTICLE IV - CHANGES
No waiver, alteration, amendment, consent, or modification
of any of the provisions of this Agreement shall be binding
unless in writing and signed by a duly authorized representative
of both parties.
ARTICLE V - ASSIGNMENT
Neither NYSEG nor CMP Gas may assign any of its rights or
obligations hereunder, except with the prior written consent of
the other.
ARTICLE VI - FORCE MAJEURE
Force Majeure means an event that is beyond the reasonable
control of, and without the fault or negligence of, the party
claiming Force Majeure, which delays, hinders, or prevents
performance of that party's obligations under this Agreement.
<PAGE>
NYSEG or CMP Gas shall not be liable to the other for loss or
damage resulting from (1) any delay in performance, in whole or
in part, or (2) nonperformance of its contractual obligations, in
whole or in part, insofar as such delay or nonperformance is
caused by Force Majeure, provided that the party invoking Force
Majeure provides written notice to the other party of the
circumstances giving rise to such delay or nonperformance within
a reasonable time after learning of such circumstances and, to
the extent possible, takes reasonable steps to correct or
alleviate the circumstances that led to the Force Majeure event.
ARTICLE VII - INSURANCE AND INDEMNIFICATION
1. NYSEG may, with respect to the services performed
under this Agreement, self-insure or obtain insurance coverage
with respect to its facilities and shall maintain the following
coverage, naming the other party to this Agreement as an
additional insured, as applicable:
a) Workers' Compensation Insurance that complies with
the provisions of applicable law.
b) Employer's Liability Insurance with limits not
less than $100,000 each occurrence;
c) General Liability Insurance with limits not less
than $1,000,000 combined bodily injury and
property damage liability; and
d) Automobile Liability Insurance with limits not
less than $1,000,000 combined bodily injury and
property damage.
2. Each party shall defend (at the other's option),
indemnify, and hold harmless the other, its directors, officers,
employees, contractors, agents, successors, and assigns from and
against, any actions, penalties, claims, costs (including, but
not limited to, reasonable attorney's fees), or damages of any
nature arising out of or related to the services performed
pursuant to this Agreement and shall defend the other from such
claims.
<PAGE>
ARTICLE VIII - GENERAL LIMITATIONS OF LIABILITY AND WAIVER
1. NYSEG shall provide well-qualified and experienced
staff to perform services covered by this Agreement. Names and
backgrounds of said personnel shall be provided to CMP Gas on
request.
2. Services provided by NYSEG hereunder shall be
performed in a prudent, professional, and workmanlike manner. If
any such services provided by NYSEG fail to conform to this
standard, CMP Gas shall, at its option, have the right to correct
or re-perform such services.
3. Except for the obligation in (2) above to correct or
re-perform services, NYSEG shall not be liable for any reason to
the other for claims for direct, incidental, indirect,
consequential, or other damages of any nature connected with or
resulting from the performance or non-performance of this
Agreement by NYSEG or CMP Gas, whether or not due to negligence
by NYSEG or CMP Gas.
4. Except for the obligation imposed upon it for the
payment of support services pursuant to Article III, neither
party shall be liable to the other for claims for direct,
incidental, indirect, consequential, or other damages of any
nature connected with or resulting from performance or non-
performance of this Agreement by NYSEG or CMP Gas, whether or not
due to negligence by NYSEG or CMP Gas.
<PAGE>
5. EXCEPT AS MAY BE PROVIDED IN PARAGRAPHS 1 AND 2 OF
THIS ARTICLE, NO WARRANTIES OF ANY KIND WHETHER STATUTORY,
WRITTEN, ORAL OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, SHALL APPLY TO SERVICES PERFORMED HEREUNDER.
ARTICLE IX - NOTICE
1. All communications and notices by CMP Gas to NYSEG
under this Agreement shall be sent to and addressed as follows:
New York State Electric & Gas Corporation
4500 Vestal Parkway East
Binghamton, New York 13902-3607
Attn: Michael Eastman
2. All communications and notices by NYSEG to CMP Gas
under this Agreement shall be sent to and addressed as follows:
CMP Gas Company, L.L.C.
4500 Vestal Parkway East
Binghamton, NY 13902-3607
Attn: Tim Kelley
3. Either party may change the address set forth by
written notice to the other.
ARTICLE X - APPLICABLE LAW
1. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maine.
2. This Agreement shall be subject to approval by any
regulatory body whose approval is a legal prerequisite to its
execution, delivery, or performance.
3. This Agreement constitutes the entire Agreement
between the parties for the services to be provided hereunder,
and supersedes all prior representations and Agreements, whether
written or oral, between the parties as to such services.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their duly authorized
representatives, to become effective as of the date first written
above.
NEW YORK STATE ELECTRIC &
GAS CORPORATION
By:
Its:
CMP GAS COMPANY, L.L.C.
By:
Its:
<PAGE>
EXHIBIT A
GENERAL DESCRIPTION OF NEW YORK STATE ELECTRIC & GAS
CORPORATION SUPPORT SERVICES
The services available under this Agreement that are to be
provided under this Agreement and are the services normally
furnished by CMP Gas are as follows:
<PAGE>
EXHIBIT B
DETERMINATION OF COST OF SERVICE AND ALLOCATION THEREOF
NYSEG shall bill CMP Gas for costs incurred on behalf of
performing services as described in the attached "Description of
Billing Costs and Procedures."
Where services performed by NYSEG benefit other entities,
NYSEG shall equitably allocate the costs of such services among
the entities benefiting from such services.
NYSEG shall maintain records adequate to support the costs
to be charged to CMP Gas. These records shall be made available
to the other for audit as requested.
<PAGE>
DESCRIPTION OF BILLING COSTS AND PROCEDURES
For certain types of billing activity such as requests for the
construction or repair of customer owned property, the billable
charges will be reported by indicating on the appropriate source
documents (work reports, vouchers, etc.) the Management Project
Number and an approved work order number or service request job
number. The charges will be accumulated in the Unbilled Jobbing
Account and billed as specified in the agreement (i.e., monthly,
quarterly or when the job is completed). The General Accounting
Section of the Accounting Department will review the Unbilled
Jobbing Account detail, and prepare and mail the Sundry Billing
invoice to the customer as specified.
The Unbilled Jobbing Account detail can be separated into six
major categories; personnel, vehicle and equipment, inventory
materials, special materials, expenses, and other costs not
previously identified. Each of the foregoing categories is
described below:
A. Personnel
Payroll cost of service and allocation thereof is determined
as follows:
Personnel - The salary and wage cost of the
Company's personnel, excluding Management Committee
Members, shall be charged in conformance with the
Company's standard accounting practice. The times such
personnel are engaged directly in the performance of
services for the billable activity shall be multiplied
by the individual's current charge factor. The charge
factor is composed of direct labor costs, direct
payroll overheads, administrative, and general expense
overhead.
Salary and wage costs are charged directly by Company
personnel to the specific work activity performed by
employees at each employee's current rate of pay. In other
words, if an employee of the Company, who is paid at rate of
$10 per hour, works five hours on a billable working
activity, the Company bills the customer $50 for the
services provided.
<PAGE>
In addition to the employee's current rate of pay, the
Company includes overheads for two separate categories of
expenses; administrative and general expense overhead and
direct payroll overheads. The total personnel costs are
charged to the customer in accordance with the following
formula:
Personnel Costs = (H x R) + ((H x R)(OHp + A&G))
where: H = hours actually worked
R = employee's actual rate of pay
OHp = A
B-C
where: OHp = payroll overhead rate
A = estimated annual payroll
overhead expense
B = estimated annual base payroll
C = estimated annual base payroll
not receiving payroll overheads
A&G = D&E
F
Where: A&G = administrative and general
expense rate
D = administrative and general
expense
E = general office allocation
F = actual base payroll
<PAGE>
Administrative and general expenses (D) include indirect
administrative and general expenses and costs incurred by
the Company not otherwise charged to specific work projects,
such as human resources, administrative, and legal. The
general office allocation (E) includes costs related to
general plant (e.g., expenses associated with the Company's
General Office in Augusta, Maine). The current A&G rate is
____________%.
Payroll overheads for the Company include all costs related
to employee benefits such as payroll taxes, medical, life
insurance, pension, lost time, and other similar costs. The
amounts used in the payroll overhead formula are estimated
at the beginning of each year. The estimates are revised
during the course of the calendar year as actual data
becomes available. Base payroll not receiving overheads (C)
includes cost categories such as vacation and personal
leave.
B. Vehicles and Equipment
The Company charges direct vehicle and equipment costs to
customers as follows:
Vehicle and Equipment - Vehicle and equipment
usage shall be charged, at the cost thereof by vehicle
class, for the miles or time devoted to performance of
services to customers, in accordance with the Company's
standard accounting practice.
There are two types of vehicle and equipment costs charged
to customers by the Company: use of Company fleet vehicles
and equipment (such as trailers) by Company employees on
billable work activities and use of personal vehicles by
Company employees on billable work activities. Company
employees are currently reimbursed at the rate of 30 cents
per mile.
<PAGE>
The Company calculates fleet vehicle and equipment charges
in accordance with the following formula:
V&E costs = H x Rv
where: H = actual hours of vehicle and
equipment
Rv = A/C
B
where: Rv = vehicle and equipment rate
A = the estimated expenses incurred by
each vehicle and equipment class
for a 12-month period
B = number of vehicles and equipment
in each class
C = hours used by each vehicle and
equipment in each class
As the preceding formula indicates, the Company aggregates
all direct costs related to fleet vehicles and equipment by
vehicle classification and then divides these costs by the
number of vehicles or pieces of equipment in that class.
That amount is then divided by the number of hours the
Company estimates the vehicles or equipment will be used
during a given year.
C. Materials
Expenses for material, equipment, tools, or other items
withdrawn from the Company's materials and supplies
inventory are charged as follows:
Materials - Materials, equipment, tools, or other
items withdrawn from the Company's materials and supplies
inventory will be charged at the average commodity inventory
price, plus the Company's stores handling charge computed in
accordance with standard accounting practice. The stores
handling charges will not apply to items purchased from
vendors for use directly by or on behalf of the customer.
<PAGE>
The Company calculates materials and supplies inventory
withdrawal charged to customers in accordance with the
following formula:
Materials = (U x P) + (U x P x S)
where: U = units actually issued
P = actual average unit price
S = stores handling rate used by
location
The stores handling charge consists of costs of warehousing,
lobby stores(i.e., low cost items used in conjunction with
materials and supplies) and administrative support. Lobby
stock may also be withdrawn directly for work on a billable
work activities or added to special materials purchased
specifically for use in performing services for customers.
D. Special Materials
In the case where the Company purchases special materials
for customers, the allocation is as follows:
Generally, special materials can be purchased under special
conditions using a Company Purchase Order. Special
materials shall include any materials, supplies, tools,
equipment, and other items purchased, rented, or leased
directly from vendors specifically for use in performing
services for customers. Special materials shall be billed
at invoice costs, including taxes and including all cost of
transportation, loading, unloading, storage, operation,
maintenance, and repair. A cost-based stores handling
charge may be added to charges for special materials
temporarily stored or under the care of the Company.
E. Expenses
Items ordinarily included in this category include air fare,
taxi expenses, stationery and office supplies, lodging,
meals, books and periodicals, and software. The Company
charge amounts in this category at actual cost. Charges for
travel, meals, or other personnel expenses are as follows:
<PAGE>
Expenses - Travel, meals, or other personnel
expenses incurred in connection with services provided by
the Company's employees, including, but not limited to
meals, lodging, and other subsistence and travel expenses,
as well as telephone charges, special purpose tools and
supplies, reproduction and similar items, shall be charged
in accordance with the Company's customary practice.
F. Other
Other expenses not previously identified are charged under
this category as follows:
Other - Other costs incurred in providing services
hereunder to customers shall be billed at cost.
Items that may be charged by the Company under the category
"Other" included direct costs associates with audit services
provided by an independent auditor, legal services provided by a
private law firm, contracted tree trimming by a private firm,
aerial line survey expenses, sub-contractor services and
insurance expenses.
<PAGE>
FIRST AMENDMENT TO JOINT VENTURE AGREEMENT
THIS FIRST AMENDMENT TO JOINT VENTURE AGREEMENT ("the First
Amendment") is made the 7th day of May 1998, by and between New
York State Electric & Gas Corporation, ("NYSEG"), a New York
State Corporation, having offices at 4500 Vestal Parkway East,
Binghamton, New York and Central Maine Power Company ("CMP"),
having offices for the transaction of business at 83 Edison
Drive, Augusta, ME 04336.
WITNESSETH
WHEREAS, NYSEG and CMP have previously entered into a Joint
Venture Agreement dated November 13, 1997 (the "Agreement") under
which CMP and NYSEG have agreed to jointly engage in the business
of owning, constructing and operating a local natural gas
distribution company to provide natural gas distribution and
related services to customers in Maine and to customers in the
proximity of Portland Natural Gas Transmission System ("PNGTS")
and/or Maritimes and Northeast Pipeline, L.L.C. ("Maritimes") in
New Hampshire and to engage in such other businesses as may be
subsequently agreed to by the Management Committee of the Maine
Limited Liability Company ("L.L.C.") that the parties will
constitute and establish; and
WHEREAS, CMP and NYSEG desire to amend and modify the
Agreement to provide for six (6) in lieu of four (4) Management
Committee members.
NOW, THEREFORE, in consideration of the premises and
covenants herein contained, the sufficiency of which each party
acknowledges, NYSEG and CMP desire and agree to amend the
Agreement between the parties as follows:
1. Article 1.1 (s) of the Agreement shall be deleted in
its entirety and shall be replaced by the following:
(s) "Management Committee" means a six (6) person body,
three (3) of whom shall be appointed by NYSEG or its
parent Energy East Corporation and three (3) of whom
shall be appointed by CMP. The Chairmanship of the
Management Committee shall be for a one year term. The
Chairmanship shall alternate year to year between a
designee of CMP and NYSEG. CMP and NYSEG shall each be
entitled to designate two (2) alternate members of the
Management Committee, a primary and a secondary
alternate. Alternate members of the Management
Committee may serve as alternates for any Management
Committee member. Alternates shall serve in the
absence of the designated member(s) of the Management
Committee. The Management Committee members shall have
the right to remove their designated alternates and to
designate their replacements, in each case by written
notice to the other party.
2. In Section 5.3 of the Agreement, the word "four", which
is the last word on the twelfth line of that section,
shall be deleted and replaced with the word "six".
3. In all other respects and as to all of its other terms
and conditions, the Joint Venture Agreement dated
November 17, 1997 between the parties shall remain
unchanged and shall remain in full force and effect.
4. The Effective Date of this First Amendment shall be the
date first set forth above.
5. The parties agree that a facsimile signature will serve
as an original and that the Statute of Frauds shall be
waived as to any claim associated with the acceptance
of a facsimile signature. This First Amendment may be
signed in counterpart but shall not be effective until
such time as both parties have separately signed this
First Amendment.
IN WITNESS WHEREOF, the parties have executed this First
Amendment on the date first written above.
CENTRAL MAINE POWER NEW YORK STATE ELECTRIC
COMPANY & GAS CORPORATION
By: David Flanagan By: Wesley W. von Schack
David Flanagan Wesley W. von Schack
President & CEO Chairman, President and
Chief Executive Officer
EXHIBIT D-1
<PAGE>
EXHIBIT D-1
REDACTED VERSION
(Confidential information is indicated by blank spaces on pages
17, 19, 28, 33 and 36)
STATE OF MAINE Docket No. 96-786
PUBLIC UTILITIES COMMISSION
August 17, 1998
CENTRAL MAINE POWER COMPANY ORDER
Petition for Approval to Furnish
Gas Service In and To Areas Not
Currently Receiving Natural Gas
WELCH, Chairman; NUGENT, Commissioner
_________________________________________________________________
TABLE OF CONTENTS
I. SUMMARY OF DECISION..........................................4
II. PROCEDURAL HISTORY..........................................4
III. INTRODUCTION:COMMISSION POLICY REGARDING THE DEVELOPMENT
OF GAS DISTRIBUTION SYSTEMS IN MAINE ...........................4
A. Overview.....................................................4
IV. STANDARD OF REVIEW..........................................7
A. Statutory Framework..........................................7
B. Mid-Maine....................................................8
1. Service Authority Tests......................................8
2. Public Convenience and Necessity............................10
3. Regulatory vs. Market Role..................................10
4. Policy Confirmation.........................................13
V. OVERVIEW OF CMP/NYSEG S PROPOSAL............................14
VI. ANALYSIS OF PROPOSAL.......................................16
A. Engineering Plans & Safety..................................16
1. Design and Construction Expertise...........................16
2. Construction Schedule.......................................16
B. Resource Plan...............................................17
C. Financing Plan..............................................18
D. Ability to Provide Service at Just and Reasonable Rates.....18
1. Cost of Service and Rate of Return Studies..................18
a. Economies of Scale..........................................19
b. Marketing Assessment........................................20
c. Revenue Projections.........................................21
d. Rate of Return and Financial Viability......................21
2. Rate Plan...................................................22
a. Terms and Conditions of Service.............................22
b. Confidential Treatment of CMP s Rate Proposal...............22
c. Customer Charges............................................23
d. Composition of Base Rates...................................24
e. Late Collection Fee.........................................24
f. Gas Costs...................................................25
g. FPO and IPO Gas Pricing Options.............................25
3. Corporate Organization......................................26
4. Conclusion..................................................28
VII. ANALYSIS OF NEED and PUBLIC NECESSITY.....................28
A. Need........................................................29
B. Public Convenience and Necessity............................29
1. Current Authority in Unserved Areas.........................29
<PAGE>
2. The Bath/Brunswick Coastal Area.............................30
a. Cost........................................................31
b. Failure to Serve............................................32
c. Commitment To Expand........................................33
d. Economies of Scale..........................................34
e. Timing......................................................34
f. Rate Comparisons............................................35
g. Bath/Brunswick Area Conclusion..............................35
3. The Bangor Area.............................................36
4. The Augusta, Bethel, Waterville,and Windham Areas...........37
C. Suspension of Service Territory Authority...................37
D. Reporting Requirement for All Authorized LDCs...............39
VIII. NECESSARY TERMS OF REVISED PROPOSAL......................39
XI. CONCLUSION.................................................40
Appendix A: Procedural History.................................41
<PAGE>
Order - 4 - Docket No. 96-786
I. SUMMARY OF DECISION
We grant Central Maine Power Company (CMP)1 unconditional
authority to serve in the areas it has proposed in its Phase II
filing, subject to the submission and approval of a revised
proposal as outlined in this Order. In so doing, we endorse the
Mid-Maine policy of allowing competition for customers among
local distribution companies in Maine unless there is evidence of
harm to the public interest.
II. PROCEDURAL HISTORY
The Procedural History is contained in Appendix A to this
Report.
III. INTRODUCTION: COMMISSION POLICY REGARDING THE
DEVELOPMENT OF GAS DISTRIBUTION SYSTEMS IN MAINE
A. Overview
Over the last few years there have been dramatic
changes in the prospects for increased availability of natural
gas to the State of Maine. Whereas Maine has been at the end of
the national natural gas transmission system with one established
local distribution company (LDC), it now enjoys the prospect of
two new international pipelines bringing new gas supplies
through, and to, much of Maine s developed area. This has
created a vibrant interest in the expansion of natural gas
infrastructure and service in Maine, resulting in numerous
applications for service authority for various regions of the
state by would-be local distribution companies.
Our task, starting with Mid-Maine Gas Utilities, Inc. s
(MMGU s) application for preliminary service authority to serve
in the Bangor area in 1996, has been to identify and establish
the best public policy for allocating service authority
consistent with our statutory obligations. See Mid-Maine Gas
Utilities Inc., Request for Approval to Furnish Gas Service,
Docket No. 96-465, (granting Mid Maine preliminary or conditional
(2104) approval to serve in the municipalities of Bangor, Brewer,
Old Town, Orono, and Veazie)(Mid-Maine), Order (March 7, 1997).
Our goals include encouraging and promoting the development of
gas infrastructure and assisting in bringing an additional,
______
1
CMP filed this application on behalf of its proposed joint
venture with New York State Gas and Electric (NYSEG) to form a
gas utility to provide service within Maine. In this report we
will refer to the applicants as CMP Natural Gas (CMP NG), the
proposed name for the joint venture.
<PAGE>
Order - 5 - Docket No. 96-786
beneficial fuel source to the broadest array of customers that is
economically supportable.
In Mid-Maine, the Commission stated that it would
consider granting multiple service authority applications in
discrete areas of the State if all project proposals were sound.
The expectation was that market forces would -- and could better
- -- determine which of the certificated entities would actually
serve in a given area. Because of the strong market presence of
oil and electricity as well-established fuel alternatives in
Maine, natural gas is subject to substantial competitive price
pressure from these alternatives.
After much evidence and debate throughout this and
similar proceedings (e.g., Bangor Gas Company L.L.C., Petition
for Approval to Provide Gas Service in the Greater Bangor Area,
Docket No. 97-795 Order (June 30, 1998) (Bangor Gas)), we
continue to be persuaded that local natural gas distribution
service is best selected for entry to an area by the market and
societal forces that come into play in the organization and
start-up of an LDC. While local distribution service has some of
the hallmark characteristics of a natural monopoly -- for
example, installation of natural gas infrastructure is capital
intensive and one distribution system investment in an area is
generally less costly than more than one -- we believe the
potential benefits of competition outweigh the potential harms.
The economic facts are that it may not be possible in many areas
to obtain sufficient load, due to the typically low population
density in Maine, to support two utilities and that the total
cost of service will likely be higher where two utilities exist.
We expect the competing utilities will take these factors into
account, with the result that uneconomic duplication of
infrastructure and detrimental "races to the trench" are not
likely given the economic incentives of the entities.
From this we conclude that, as a general matter,
authorizing more than one LDC to serve an area will result in
beneficial competition to obtain adequate customer load to build
and serve an area in a manner that may very likely "grow the
market" so that system expansion may ultimately be greater than
it would be if only a single entity was authorized to serve. Nor
do we expect that market inefficiencies, such as uneconomic
duplication of facilities and lost economies of scale, will
predominate or necessarily result in higher prices to end-users.
We expect that the efficiencies and product diversification that
are the hallmarks of competition will result in system expansion
that is at least as socially beneficial as that which could be
achieved by traditional means as a regulated monopoly service.
<PAGE>
Order - 6 - Docket No. 96-786
Moreover, we do not believe that, if customers are the
selecting mechanism, benefits would accrue to only the largest
customers to the detriment of smaller customers. Beneficial
deals and discounts to large customers may make it more
imperative for the entity to obtain additional small customers in
order to increase throughput and achieve an adequate return on
infrastructure development. Consequently, competition among
providers could ultimately drive deeper discounts to all
customers as well as deeper penetration levels within a given
area.
We do not expect a policy allowing competition among
LDCs to unduly burden municipal officials. The evidence in this
case suggests that entities will not seek to construct
overlapping facilities, nor is it likely that they will begin
construction without assuring that they have secured an adequate
number of customers to recover their costs. Utilities may also
be able to negotiate mutually beneficial arrangements of joint
use of facilities like that accomplished by Maritimes & Northeast
Pipeline and Portland Natural Gas Transmission Service (PNGTS).
See Portland Natural Gas Transmission System and Maritimes &
Northeast Pipeline, L.L.C., FERC Docket No. CP97-238-000 (Joint
Facilities).
Should problems arise, we urge municipal officials to
bring the matter directly to us for resolution. However, we will
expect parties to bring only evidence of an actual problems, not
simply concerns that a problem may arise in the future.
Consequently, we conclude that economic efficiencies
and the public interest in safe and adequate service and
facilities and orderly infrastructure development will be amply
served by allowing multiple gas utilities to compete to serve an
area. The policy explored in Mid-Maine has inspired lively
competition for service authority franchises before this
regulatory agency, demonstrating significant value in opening the
door to competition for this service. The policy has encouraged
aggressive and innovative proposals for development of service to
previously unserved areas. We see no benefit in cutting off
competition at this point and foreclosing further benefits that
it may provide.
We do not preclude the possibility of limiting the
number of authorized distribution utilities to serve within a
given municipality if the evidence demonstrates that multiple
utilities are not in the public interest. It is possible that
there may be circumstances where a shared service territory would
not be beneficial. However, we find no evidence before us at
this time to support not allowing two local distribution gas
<PAGE>
Order - 7 - Docket No. 96-786
utilities to actively compete to provide service to these
unserved municipalities.
With this policy framework in mind, we will consider
the issues raised in this proceeding.
IV. STANDARD OF REVIEW
A. Statutory Framework
Title 35-A Section 2104 requires every gas utility to
obtain commission approval before furnishing service in or to any
municipality even if no other gas utility is furnishing or is
authorized to furnish gas service therein.
Section 2102(1) requires a public utility to obtain the
approval of the Commission before it may furnish service in or
to any municipality in or to which another public utility is
furnishing or is authorized to furnish service...
Section 2105(1) further states:
.... no approval required by 2102, 2103, or
2104 and no license, permit or franchise may
be granted to any person to operate, manage
or control a public utility named in section
2101 in a municipality where there is in
operation in a public utility engaged in
similar service or authorized to provide
similar service, until the commission has
made a declaration, after public hearing of
all parties interested, that public
convenience and necessity require a 2nd
public utility.
(emphasis added.)
Both sections 2104 and 2105 require us to determine, as
a public interest matter, that the proposed service will be
provided in a safe and adequate manner at rates that are just and
reasonable. See Mid-Maine at 6.
At least one utility is already authorized to serve in
all areas of the state.2 Thus, we will examine the evidence
_____
2
Northern s statewide service authority derives from Northern
Utilities, Inc., Re: Petition for consent to furnish natural gas
service in and to any city or town in the State of Maine, U.
#2782 (June 27, 1969). Bangor Gas, the other entity that
currently has unconditional service authority in Maine (for five
municipalities in the Bangor area), obtained authority in Bangor
Gas Company, L.L.C., Petition for Approval to Provide Gas Service
in the Greater Bangor Area, Docket No. 97-795, Order (June 30,
1998). Mid Maine Gas Utilities, Inc. also has conditional
service authority in these five Bangor area municipalities in
Docket No. 96-465.
<PAGE>
Order - 8 - Docket No. 96-786
presented in this proceeding to determine whether, in our
judgment, the public convenience and necessity require the
authorization of a second utility to serve the areas in question.
This determination may turn on issues of fact and policy as we
consider each area.3 An applicant generally has the burden of
proof to show that there is a need for service in areas in which
it proposes to serve and that it is able to, in a timely manner,
provide safe and adequate service at just and reasonable rates.
See 35-A M.R.S.A. sect. 1314. However, a previously authorized
utility contesting an application can present evidence to the
contrary. See 35-A M.R.S.A. sect. 2105(2).
These standards guide our review of applications
submitted pursuant to 35-A M.R.S.A. sect. 2105.
B. Mid-Maine
1. Service Authority Tests
Under the standards set out in Mid-Maine for
grants of service authority, applicants must show that 1) a need
for the proposed service exists, 2) the applicant has the
technical ability to provide service, 3) the applicant has
adequate financial resources to complete the project, and 4) the
applicant s proposal will provide safe and reliable service at
just and reasonable rates.
Need exists if the service is not being provided.
See Mid-Maine at 10. This applies to municipalities which a
utility is authorized to serve but where it is not currently
serving customers.
The standard enunciated in Mid-Maine for review of
the merits of an applicant s proposal is that
the Commission must determine that the grant
of authority will promote safe, reasonable,
and adequate services at rates which are just
_____
3
See Order Granting Northern s Motion for Reconsideration, May
14, 1998 at 5.<PAGE>
Order - 9 - Docket No. 96-786
and reasonable to customers and public
utilities.
Mid-Maine at 6.
Finally, the grant of service authority to a
second utility pursuant to 35-A M.R.S.A. sect. 2105 must serve
the public convenience and necessity. Mid-Maine refers to the
importance of ultimately considering public interest issues when
making findings in support of a certificate of authority:
A finding of need is not conclusive on the
issue of whether or not an applicant should
be granted authority to provide service. The
Commission must also assess the technical and
financial capability of the applicant and
address issues such as uneconomic duplication
of facilities, fairness to existing
investors, and any other factor implicated by
the Commission s broad public policy
standard.
Mid-Maine at 10.
In Mid-Maine we concluded that the evidence before
us supported a grant of conditional (2104) authority to Mid Maine
because: 1) the applicant had presented an identified project
based on generally reasonable assumptions, 2) the applicant had
conducted a reasonable preliminary analysis, 3) the risks of
project cost and marketability would largely be borne by the
applicant s (Mid Maine s) investors, not ratepayers, and 4)
alternate fuels would limit Mid Maine s ability to recover
uneconomic costs from future ratepayers. Lastly, Mid Maine was
required to file and receive approval of more detailed plans for
construction, engineering, and financing before it would be fully
authorized to serve.
As in Mid-Maine and Bangor Gas, our review of CMP
NG s application depends on evidentiary findings as to 1) whether
granting the proposal will promote the provision of safe and
adequate service at rates which are just and reasonable to
customers and public utilities, and 2) whether the public
convenience and necessity require a second utility in any of the
areas in which CMP NG proposes to serve. If CMP NG s proposal is
found to meet the statutory test articulated in 1) above, then
the determination becomes an area-specific determination of
public convenience and necessity based on policy and evidence.
<PAGE>
Order - 10 - Docket No. 96-786
2. Public Convenience and Necessity
In Mid-Maine we stated:
Likewise, under sect. 2015, in determining what
showing an applicant must make to demonstrate
that the public convenience and necessity
would be served by the grant of a second
utility certificate, the Commission must
interpret that statute to consider the
overall statutory scheme..... Thus:
...The public interest is shown by
Title 35 to encompass those facets of
the Commission s regulatory functions
that are directed to ensuring that
the public receives adequate service,
delivered in a safe and reliable
manner, at a charge just and
reasonable in relation to the public
utility s costs of providing service.
(citations omitted)
Mid-Maine at 7 (emphasis added). Regarding this public
interest requirement, the order further states:
The public interest requires careful
consideration of a spectrum of issues. In
ruling on such petitions, this Commission
will look to further the public policy
objectives embodied in statute. Will granting
a certificate promote the orderly and
efficient development of infrastructure?
Will the grant of a certificate adversely or
beneficially affect economic development in
other sectors of the economy? Other areas of
the Commission mandate may be implicated as
well, including oversight of affiliate
transactions or general supervisory authority
under sect. 1302 and sect.1303.
Mid-Maine at 8.
3. Regulatory vs. Market Role
In Mid-Maine, we articulated our view of the
active role that markets would play in the provision of LDC
service as follows:
<PAGE>
Order - 11 - Docket No. 96-786
Moreover, given the inter-fuel competition
for the end uses Mid Maine seeks to serve, we
believe it is reasonable to assume that there
is and will be a market-imposed limit on Mid
Maine s ability to recover uneconomic costs
from future ratepayers That limit will be
the comparative costs of current or potential
alternatives.
Still, we acknowledged a continued role for Commission oversight.
There is a risk that some customers could
make poorly informed choices or that
marketers could misrepresent the value of
reliability of their product to induce load.
These concerns justify careful Commission or
other oversight of utility customer relations
and trade practices. There is currently an
active market for the end uses Mid Maine
seeks to provide. We believe that the
market, in conjunction with continued
oversight of utility practices under 35-A,
protects consumers adequately.
Mid-Maine at 14.
Finally, the Mid-Maine order addressed parties
concerns regarding the orderly development of infrastructure and
the risk of duplication of facilities. Some parties argued that
the Commission should not authorize two utilities to serve the
same service area due to the possibility of uneconomic
development or delay in infrastructure development created by a
situation in which neither utility could secure enough load to
warrant expansion. The Order found that the risk of two mains
being constructed on the same street was slight, based on
testimony in that proceeding.
Further, we stated our view that it is markets,
not the Commission, that should make the ultimate determinations
of service area for LDCs.
It follows that a Commission attempt to
dictate a priori spheres of development
would be economically misguided and largely
arbitrary.
Mid-Maine at 17.
Based upon this evidence we believe that
there is little risk of large-scale
<PAGE>
Order - 12 - Docket No. 96-786
duplication of facilities. We believe
knowledgeable investors will act rationally
in determining which projects to pursue and
that, absent specific evidence of uneconomic
duplication, the economies of scale inherent
in the industry can be relied upon to make
themselves felt without extensive Commission
oversight.
There is a potential risk that permitting two
or more utilities to compete for load in the
same area may delay the development of
infrastructure by making it more difficult to
recruit the critical mass of load. However,
this risk must be balanced against the
potential benefits to consumers of having two
or more entrepreneurs competing on the basis
of price and service quality to serve their
needs. Moreover, it is possible that the
threat of competition may accelerate the
development of gas infrastructure as each
party strives to foreclose others by being
the first to provide service in a given area.
We do not believe it is merely fortuitous
that Mid Maine s petition should have
triggered requests by others, notably CMP,
for similar authority, and prompted less
formal expressions of interest by NU in not
being foreclosed from petitioning the
Commission to serve these areas in the
future. Weighing these factors, we conclude
that the public interest would best be served
by encouraging competition in the provision
of this service and intervening in the
operations of the market only where there is
evidence, rather than speculation, that
consumers and investors would benefit from
such action. We do not at this time
foreclose the possibility that the public
interest may demand such intervention in the
future. Nothing in this record, however,
persuades us that it would be beneficial at
this time.
Mid-Maine at 19.
Thus, while the decision in Mid Maine relies on
specific evidence and frequent references are made to basing
service authority awards on public interest determinations and
case-specific evidentiary reviews, the overarching theme
<PAGE>
Order - 13 - Docket No. 96-786
throughout the Mid-Maine order indicates a new policy direction
based on the balance between regulatory oversight and market
forces. In essence, our Order established a presumption that,
due to market forces, Commission involvement in local
distribution company entry into unserved markets would not be
required or exercised, absent evidence to the contrary.
4. Policy Confirmation
The July 13th Examiner s Report (ER or Report) in
this docket suggested a policy that would modify the Mid-Maine
regulatory hands off/market forces determinative approach by
finding that LDC service is a natural monopoly -- capital
intensive, displaying clear economies of scale, such that more
than one such investment in an area can generally not be
economically supported. The ER concluded that the public
interest warrants orderly and efficient development of service
and facilities, that competition between multiple LDCs would
foster an undesirable race to the trench and waste of resources,
and, consequently, that entry by a utility into a service area
should be supervised by this Commission. However, as in
Mid-Maine, the articulated policy presumption does not preclude a
finding that more than one utility might be authorized to serve
within a given municipality if supported by evidence.
The policies set out in Mid-Maine and in the ER do
not modify the fundamental standards for awarding service
authority: specific evidentiary findings must be made to certify
the applicant and its proposal and public interest or policy
issues must also be considered. However, the Report s policy
statements would have shifted the presumption as to whether the
Commission is likely to certify multiple LDCs in a given area.
Mid-Maine states that the Commission presumes that market forces
will adequately resolve service area issues so that, absent
evidence to the contrary, multiple applications may be approved
and allowed to compete in the local area. In contrast, the
Report concluded that it generally will not be economic for more
than one entity to serve in an area, that higher costs and lower
service levels will exist if competition is allowed at the local
level, and, accordingly that it is in the public interest for the
Commission to control entry to a service area based on evidence
that it will enhance, not deplete, service offerings. Either
policy allows for the presumption to be disproved with specific
evidence.
We decline to adopt the policy framework and
policy findings set out in the Examiner s Report. Rather, we
remain convinced that the policy established in Mid-Maine is
still valid and confirm it by our decision here. Specifically,
<PAGE>
Order - 14 - Docket No. 96-786
we do not believe that it would necessarily be the case that, in
a one-utility scenario, service will be provided to a larger area
because of lower total system costs. Under a competitive model,
utilities will strive to obtain greater load to reduce their unit
costs and boost profits at the margins. Two entities making such
an effort may actually grow the market. Next, it is not a
certainty that higher system costs will translate into higher
prices to end users. Insofar as it is in the utility s interest
to maximize load on its system, utilities may provide services at
lower margins in order to obtain more customers and reach an
acceptable overall earnings level. We believe that there is
ample evidence in this proceeding to confirm that the policy
stated in Mid-Maine serves the public interest with regard to LDC
development. Most notably, this evidence includes: Northern s
apparent response to competitive pressures presented by CMP NG,
the Town s support for CMP NG, and the Town s appeal to us to
keep competitive pressure alive to spur greater growth and
earlier service to their areas.
Finally, as we make clear below, the risks
associated with a distribution company s startup and uneconomic
expansion in this competitive circumstance must fall on a
utility s shareholders, not ratepayers. Setting this as a ground
rule for all Maine gas utilities for future system expansion to
unserved areas places all LDCs on equal footing.
V. OVERVIEW OF CMP/NYSEG S PROPOSAL
On February 23, 1998, CMP and NYSEG filed a request for
unconditional authorization to furnish gas service to Bethel, the
Windham area, the greater Augusta area, the greater Bangor area,
and the Brunswick, Bath, and southern coastal area. The filing
reveals an ambitious plan to bring natural gas service to these
areas by 1999. Included in the filing was the testimony of 12
CMP and NYSEG witnesses dealing with a variety of technical
topics. Much of the information contained in the filing has been
designated as confidential and only the Office of Public Advocate
(OPA) and Commission Advisory Staff have had access to all the
data.
CMP NG proposed to undertake the construction activities
necessary to serve customers in Bethel, the Windham/Standish and
Bath/Brunswick areas beginning November 1, 1998, contingent on
Commission approval in May of 1998. In an attempt to hold its
construction costs down, CMP NG has entered into alliance
contracts with contractors in which the CMP NG and its
contractors work as a team towards a common objective of overall
project success. CMP NG has attempted to use locally-based
contractors to the maximum extent possible.
<PAGE>
Order - 15 - Docket No. 96-786
The CMP NG s proposed rates have been designed to compete
with the price of No. 2 and (where appropriate) No. 6 fuel oil.
CMP NG would provide both bundled and unbundled (transportation)
services for its customers. Unbundled service would initially be
provided only to customers with daily metering capability, i.e.
generally large commercial and industrial customers. CMP NG
states that, if authorized to serve in Maine, it intends to
propose a small customer transportation program at some time in
the future. In addition, CMP NG has furnished a set of tariffs
for the services it intends to offer.
CMP NG would offer bundled sales service customers two
options, the Indexed Price Option (IPO) and the Fixed Price
Option (FPO), for their purchase of gas commodity. Both the IPO
and FPO represent a means of adjusting gas prices to reflect New
York Mercantile Exchange (NYMEX) oil and gas market conditions.
Under the IPO, a base cost of gas is adjusted monthly to reflect
changes in the oil and gas commodity markets. Each month, the
spot month closing settlement price of gas traded at the Henry
Hub is averaged with a No. 2 heating oil spot month closing
settlement price.4 The resulting price is called the Total
Settlement, and the IPO Adjustment is the adjustment necessary
(positive or negative) to raise or lower the base price to the
settlement price.
The FPO adjustment is a longer term adjustment which works
in a manner similar to the IPO, but uses NYMEX futures contracts
rather than monthly closing spot prices in order to lock in
prices for longer periods of time. Customers choosing the FPO
would be able to select gas price contracts ranging in duration
from three months up to two years. The purpose of including oil
prices in with gas prices is ostensibly to assure customers their
gas prices are competitive. CMP NG s plan obviates the need for
seasonal cost of gas adjustment proceedings because gas prices
are either adjusted monthly, or are locked in by the futures
market.
CMP NG s non-gas distribution service prices 5 were
multiplied by the forecast gas throughput to develop forecast
revenues. The revenue forecast was then used along with a cost
of service study to forecast earnings over a 6-year period.
_____
4
After the $/gallon units have been converted to $/therm in order
to make the units equivalent.
5
CMP NG s Exhibits hold prices constant for the study period.
<PAGE>
Order - 16 - Docket No. 96-786
VI. ANALYSIS OF PROPOSAL
A. Engineering Plans and Safety
CMP NG possessed an adequate degree of technical
ability to support a grant of conditional service authority. See
Order (March 11, 1998) at 9.
In Phase II, CMP NG presented diagrams indicating the
location of its distribution mains in all project areas.
1. Design and Construction Expertise
CMP NG s engineering witnesses generally provided
credible evidence of sound planning practices, an adequate degree
of technical expertise, and expressed a clear intention to abide
by federally required safety standards. CMP NG plans on
constructing its system in accordance with Title 49 of the Code
of Federal Regulations (CFR), Parts 191 and 192. In addition,
CMP NG intends to exceed those requirements by installing gas
flow limiters on all residential services and by exceeding the
prescribed odorization requirements.
One point of exception to CMP NG s otherwise
sufficient expertise and planning was its lack of awareness that
winter construction moratoria may exist in most, if not all,
Maine communities in which CMP NG proposes to construct its
system in time to provide service in 1998. 6 This fact means
that the timing for its proposed plans to serve in 1998, if
construction during the winter months is required, would likely
not be feasible. However, this oversight by itself does not
cause us to lack confidence in the overall capability and
expertise of the CMP NG engineering and construction team.
The CMP NG plans generally exhibit a level of
engineering and construction competence similar to that
demonstrated by Bangor Gas. The engineering and construction
proposal overall appears reasonable in terms of safety and
expertise.
2. Construction Schedule
CMP NG s initial construction schedule indicated
that the Bath/Brunswick area steel mains to anchor customers
would be installed in time to provide gas service in 1998. In
_____
6
We find this omission puzzling given that we also heard
testimony from the Towns praising CMP NG for its active
involvement with the municipalities regarding its proposal.
<PAGE>
Order - 17 - Docket No. 96-786
addition, portions of the Bethel and Windham stations were also
expected to be in service for the 1998-1999 heating season. This
original schedule is not feasible at this time. It will take
approximately five months, once it receives all necessary
approvals, for CMP NG to have an operable take station on the
gas transmission facilities. This facility is necessary to
provide the gas supply for service to the Bath/Brunswick area.
In addition, many of the towns under consideration
prohibit public street openings after the hot asphalt plants
close in early winter, making late-season construction less
likely. Based on the record, we find it is unlikely that CMP NG
will be able to deliver gas to the communities in 1998 as
initially proposed. CMP NG should provide a revised construction
schedule with any modified proposal filed for review.
B. Resource Plan
While we rely primarily on competition from other
fuels to ensure that prices paid by customers for gas service
remain just and reasonable, we are nevertheless concerned that,
in its filing, CMP s gas supply cost estimates may be
unrealistic. See Section VI.D.2.f. below. Where ratepayers may
be at risk for gas costs, we require a more complete
demonstration of the basis for gas cost projections than has been
provided by CMP NG here, including information on how it would
obtain supplemental supplies and how this would affect overall
gas costs.
Because, as indicated below, we will require that
CMP NG s investors bear the risks of project failure, we are less
concerned than we would be in a more conventional regulated
monopoly setting about the accuracy of CMP NG s projected gas
costs. Instead, we will focus on whether CMP NG s proposed
resource plan is realistic and that it will have gas supplies
adequate to provide the services that it proposes. See Bangor
Gas, Order Granting Unconditional Authority Service at 12-14.
CMP NG has demonstrated that it has begun
discussions with the gas marketing community. In addition, it
has discussed with
At the May technical conference,
CMP NG had not determined the cost or confirmed the viability of
this resource supply arrangement. We require CMP NG to file
further evidence of its available supplies for its winter heating
loads so we can be assured that it will have adequate and
reliable gas supplies for the service it plans to provide.
<PAGE>
Order - 18 - Docket No. 96-786
C. Financing Plan
In our March 11, 1998 Order in this docket (Phase I),
we granted CMP NG conditional authority to serve as a public gas
utility in 66 municipalities in Maine. The grant of authority
was based on a finding that the joint venture between CMP,
Maine s largest electric utility serving more than 521,000
customers in an 11,000-square-mile area, and NYSEG, New York
State s third largest investor-owned utility, had adequate
financial capability to develop a natural gas utility. In 1997,
NYSEG served 241,000 gas customers and 811,000 electric customers
and had operating revenues exceeding $2 billion and total
capitalization of $3.2 billion. Both entities have had ample
experience operating as public utilities in their respective
jurisdictions.
CMP and NYSEG plan to initially capitalize this joint
venture with $20 million equity contributions ($10 million each).
The proposed capital structure will be 50% equity and 50% debt.
We have already approved the CMP portion of this investment.7
See Central Maine Power Company, Application for Approval of
Reorganizations, of Transactions with Affiliated Interests, and
Transfer of Assets, Docket No. 97-930, (June 30, 1998) and
Central Maine Power Company, Application for Approval of
Reorganizations, Affiliated Interest Transactions and Sale of
Assets in Connection with Gas Ventures, Docket No. 98-077 (May 1,
1998).
No specific financing information has yet been filed by
CMP NG. As in Bangor Gas, it is not necessary for applicants to
show that they have already obtained financing and investment for
a specific project to be granted full authority to serve.
However, as a public utility, prior to obtaining financing, CMP
NG must receive Commission approval under 35-A M.R.S.A. sect.
902.
D. Ability to Provide Service at Just and Reasonable Rates
1. Cost of Service and Rate of Return Studies
As discussed above, before awarding unconditional
authority to serve as a public utility, we must determine whether
CMP NG s project proposal merits approval on its own terms --
i.e. whether it serves the public interest by providing service
that is safe and adequate at reasonable rates.
_____
7
We approved a comprehensive reorganization of CMP s corporate
family into a holding company structure under which CMP (the
electric utility) and CMP NG would be separate subsidiaries. The
approved investment flows from the holding company parent, not
CMP (the electric utility).
<PAGE>
Order - 19 - Docket No. 96-786
CMP NG witnesses described the total project and
area-specific rate of return, revenue projections, and cost of
service estimates. CMP NG estimates its cost of service by
combining the area-specific construction cost estimates with
estimates of gas operation and maintenance expense. In addition,
depreciation, interest, and Federal and State Income tax expenses
for each area are included in the cost of service calculation.
a. Economies of Scale
CMP NG witnesses state that their project
gains important economies of scale from inclusion of the entire
area CMP NG proposes to serve. To preserve these economies, they
urge approval of the entire proposed service territory. We do
not find that this argument adds much weight to CMP NG s request.
First, the particular economies of scale are
not clear from the record. The only apparent project aspect
contributing to economies of scale is gas O&M. Gas O&M expenses
represent about of the proposed gas utility s annual expenses.
Where possible, gas O&M expenses have been broken down into
direct costs by specific project areas. Certain gas O&M costs
however, are assigned to each area based on the area s share of
projected net revenues, year-end plant in service, and directly
assigned expenses.
Allocated costs represent approximately
of the total gas O&M costs. It may be inferred, therefore, that
any economies of scale must derive from this portion of total
costs because they are costs which cannot be directly assigned.
This being so, the economies of scale must be relatively small 8
since they are based on savings from a relatively small
piece of the annual expense pie. It is even less clear whether,
if CMP NG does not receive approval to serve in areas that appear
to promise smaller than average returns, the balance will be
significantly different.
We find similarly unconvincing is CMP NG s
assertion that it may not be able to serve smaller load areas if
it does not succeed in also serving the largest load areas of the
state -- notably the Bangor and Bath/Brunswick coastal areas.
According to the evidence in this proceeding, NYSEG (comprising
one half of the joint venture s expertise base), has been
particularly successful in developing small customer load areas
in upstate New York. We expect the same possibility exists for
development of small load areas in Maine and, given NYSEG s
experience, we would be disappointed if CMP NG did not pursue all
areas of the state that are feasible for development.
_____
8
<PAGE>
Order - 20 - Docket No. 96-786
However, in light of our decision herein to
open all of the proposed areas to competition among LDC s, it is
not necessary for us to find that such economies exist. Rather,
CMP NG will make its own determination as to which areas it is
economically able to serve at risk of by-passing an area which
will therefore receive service from another entity. Finally, a
policy in which investors bear the risk of project development,
whatever its scope, insulates ratepayers.
b. Marketing Assessment
The Towns and OPA have argued that CMP NG
alone should receive an unconditional certificate to serve the
Bath/Brunswick areas, in part based on the belief that CMP NG
will have a higher market penetration or serve a higher
percentage of potential customers than Northern would achieve.
The somewhat confused record on this issue does not provide
convincing support for this conclusion.
CMP NG used historical penetration rates
based on NYSEG s experience in upstate New York. Similarly,
Northern used historical penetration rates based on its
experience when it expanded service under normal marketing
circumstances in its current service territory.
There are some differences over the
definition of penetration rate. Is it: 1) the percentage of all
businesses and households in a municipality, 2) the percentage of
potential customers in the portion of a municipality where
service infrastructure is available, or 3) the percentage of
potential customers along installed mains? All of these uses can
be found in the record, often without distinction. Because in
many municipalities in both NU s and NYSEG s service territories
only a portion of a municipality is served, it is clear that the
first definition will often not be a useful measure for current
purposes.
If we assume that the installation of mains
is based on a prior economic assessment, the third definition is
probably the best measure of the LDC s marketing success. Two
similar utilities should arrive at roughly the same economic
assessments. It would seem that the second definition will
reflect differences in the spatial distribution of load, more
than marketing success or the economics of main location, which
seems to be the more important issue in estimating market
potential or assessing marketing success. We make no attempt to
sort out the record here but request that all parties be clear
and explicit in any future presentations of penetration analyses.
<PAGE>
Order - 21 - Docket No. 96-786
In any event, what ultimately will drive the
expansion of gas infrastructure in Maine is the economics of
providing gas service. In fact, both CMP/NYSEG, and Northern
testified that they would decide which loads to serve based on
economic analyses.
c. Revenue Projections
CMP NG s projected revenues are based on the
customer penetrations, load usage, and expected margins of each
customer class. Specifically, the revenues are a direct function
of the rates charged and volumes transported. While we are not
fully persuaded that CMP NG s estimates here will be achieved
(for example, CMP NG witnesses have offered contradictory
testimony on whether penetration assumptions, and therefore
revenues, include the loss of customers to competing LDCs such as
Northern and Bangor Gas),9 we do not view our concerns as
bearing on whether CMP NG should be permitted to try to achieve
its revenue objectives. Once again, the risk of failure is borne
by shareholders, not ratepayers.
d. Rate of Return and Financial Viability
CMP NG has projected area-specific rate of
return calculations for all municipalities included in CMP NG s
Phase II certificate request. Aside from CMP NG, only the
Commission Advisory Staff and the OPA had access to this
material.
While we might differ with the calculations
of returns and whether those returns are adequate, we choose not
to second-guess entrepreneurial investment decisions where
investors, rather than ratepayers, are subject to the risk of
project failure or uneconomic expansion. Consequently, we will
not reject CMP NG s proposal on this basis if the Company submits
a revised proposal shifting risk as we describe below.
_____
9
CMP NG states that it did not expect to be awarded an exclusive
franchise to serve in its proposed areas yet all of its project
calculations are based on total potential customers in each area.
CMP witness Kelley also stated that they would not expect that it
would be economically viable for CMP NG to serve only part of an
area, such as Bath/Brunswick, sharing the area with another gas
utility.
<PAGE>
Order - 22 - Docket No. 96-786
2. Rate Plan
In this section we will examine some features of
CMP NG s rate proposals in order to assist CMP NG in preparing a
revised proposal that addresses our concerns.
a. Terms and Conditions of Service
We have not conducted an in-depth review of
all of CMP NG s proposed terms and conditions of service.
Besides the features discussed here, the details of proposed
Terms and Conditions for CMP NG would require further review,
either in a compliance or further proceeding for review of a
revised proposal.10
b. Confidential Treatment of CMP NG s Rate Proposal
The Towns complain in their Brief that they
have been precluded from a meaningful review of much of the
important information regarding CMP NG s proposal because of the
confidentiality restrictions. In particular, the Towns note they
have had
a very limited opportunity to review the
applicant s proposed rates, as specific rates
were subject to a protective order. As
CMP/NYSEG s rates will presumably soon become
publicly filed tariffs, keeping this
information from public access during this
proceeding makes little sense.
We agree. However, it is not obvious that the Towns would have
been precluded from access to this information if they had
requested a modification of the protective order.11 We note that
the Towns intervened very late in this case, approximately one
week prior to the hearings. As a result, perhaps all involved
simply overlooked the fact that the Towns did not have access to
this information.12
______
10
MODA s issue regarding the Service Contract section of CMP
NG s Terms and Conditions could be considered in that review.
11
Under the terms of our standard protective orders, any party may
seek to have information removed from the protective terms where
warranted. The Examiner received no requests from the Towns.
12
Or there may have been other reasons that the applicants wished
to keep the information proprietary from the Towns that have not
yet been articulated to the Bench.
<PAGE>
Order - 23 - Docket No. 96-786
As a general rule, we agree that proposed
rate information should not be proprietary and withheld from
parties such as the Towns if it will be the basis for approved
rates. In this case, CMP NG sought protection, initially, of
rate information and other details of its marketing and business
plan, in order to keep competitors from gaining an undue
competitive advantage. Later, all parties except the Maine Oil
Dealers Association (MODA) (and the late-intervening Towns) were
allowed access to this information.
Our regulatory policy is to keep the minimum
necessary information confidential because of the obvious public
interest in the issues that come before us. CMP NG is now on
notice that, should it submit a revised rate plan, it is unlikely
that its details will be protected from parties with a legitimate
(i.e. not competitive) interest in the gas utility s rates.
c. Customer Charges
OPA and BGC have objected to CMP NG s
comparatively high customer charges. We have generally allowed
customer charges or minimum bills that collect all legitimate
fixed customer costs. Moreover, where the utility is essentially
one of several competitors in a robust market, we are inclined to
grant significant flexibility in rate design. Nevertheless, we
remain concerned that rate design bear at least some relationship
to cost structure.
The record on customer charges in this
proceeding is insufficient to reach a decision on whether the
proposed charge is close enough to costs. We will delegate the
review of this charge to the Director of Technical Analysis,
requiring that the Director find only that the charge bears a
reasonable relationship to cost. We will require CMP NG to make
the level of its charges and rates known to potential customers.
As long as customers are aware of the utility s proposed monthly
charge, they will possess sufficient knowledge to decide for
themselves whether they wish to accept service from CMP NG or to
select another fuel alternative. Given our stipulation that
investors will bear the risk of CMP NG s project development in a
competitive market, the matter of rates and charges is more a
marketing issue for CMP NG, than a rate matter requiring
exhaustive regulatory review.
<PAGE>
Order - 24 - Docket No. 96-786
d. Composition of Base Rates
Various objections have been made to CMP NG s
base rates including gas costs. We have allowed the inclusion
of gas costs in base rates, provided the utility discloses to
customers 13 what costs are for gas and what costs are for local
distribution.14 Similarly, we do not object in principle to
including legitimate upstream transportation and storage costs in
gas costs, again provided that the utility disclosures make these
cost distinctions intelligible to customers, especially to allow
them to assess their options under gas-on-gas competition and
unbundled services. However, given the current movement toward
unbundled services and rates designed to foster gas commodity
competition, we may in the future require CMP NG to more clearly
present gas costs and rate information, thus to facilitate
customers understanding and ability to participate effectively
in competitive, unbundled gas commodity markets.
e. Late Collection Fee
CMP NG s proposed late collection fee of $98
far exceeds existing utility late collection costs in Maine and
nationally.
Because we are opening service areas to
competition between gas utilities and because gas utilities will
be subject to competition from fuel alternatives, the necessity
for strict regulation of rates and charges or a requirement that
such charges be strictly cost-based is diminished. As with the
customer charge noted above, if a plausible case can be made to
support a finding by the Director of Technical Analysis that the
charge is reasonably related to cost, we will allow it on
condition that CMP NG disclose to every customer potentially
subject to it what the charge is and when it will be applied.
With CMP NG s investors absorbing development risk, this charge
becomes primarily a marketing issue for CMP NG, placing it at
risk that potential customers will not find significantly
higher-than-historic late collection charges an acceptable term
of service and decline to take the service offered by CMP NG.
_____
13
CMP NG should provide all information in which it makes this
disclosure to customers for our review. We expect that this
would include terms and conditions, marketing or advertising
information and possibly contracts.
14
Northern s current, but not its proposed, base rates are
designed in this manner.
<PAGE>
Order - 25 - Docket No. 96-786
f. Gas Costs
The Examiner s Report concluded that CMP NG s
gas cost projections are understated because it has not factored
in necessary supply costs in developing its projections and gas
price indices. This may account for some the instances where CMP
bills are lower.
As in Bangor Gas, the condition that
investors will bear the risks of project failure eliminates the
need for us to ensure that CMP NG s projected gas costs are
accurate because ratepayers will not be subject to the risk that
rates will be higher than currently projected. If ratepayers
were at risk for CMP NG s gas costs, we would require a more
complete demonstration of the basis for CMP NG s gas cost
projections, including detail on how it would obtain supplemental
supplies and what effects this would have on overall gas costs.
With the condition of investor risk, however, we need only review
CMP NG s proposed resource plan to determine that it is realistic
and that it will have adequate gas supplies to provide the
services that it proposes.
g. FPO and IPO Gas Pricing Options
Parties and Advisory Staff expressed a number
of concerns regarding CMP NG s FPO and IPO gas pricing options.
In particular, Staff questioned whether Henry Hub futures or spot
prices can be relied on to predict CMP NG s gas costs, which will
be incurred (at least in part) in different supply regions,
especially Sable Island and western Canada, under competitive
conditions that are yet to be observed. Similarly, Staff doubts
that NYMEX oil futures or spot prices will be good predictors of
CMP NG gas costs. Finally, certain parties assert that
unbundling and gas-on-gas competition will be distorted if CMP NG
gas prices do not reflect its market gas costs and it is also
possible that differences between actual gas costs and gas
revenues derived from an oil/gas average price could cause CMP NG
to prefer sales over transportation service. On the other hand,
CMP NG presented plausible evidence that the indices it chose do
bear some relationship to changes in gas costs (however measured)
over time.
We find CMP NG s proposed rate offerings
acceptable and do not believe that a different treatment of gas
costs (such as a traditional cost of gas adjustment (CGA)) is
necessary. Competition, coupled with the placing of project
failure risk squarely on shareholders, substantially reduces our
concern over how rates are developed. Customers may decide for
themselves whether or not they find the price structure offered
by CMP NG attractive before committing to it. We decline here
<PAGE>
Order - 26 - Docket No. 96-786
second guess the entrepreneurial instincts of business developers
where the risks of failure to achieve market acceptance do not
fall on ratepayers.
Moreover, if necessary in the future, we may
require CMP NG to inform its customers about gas costs so that
they will be better able to participate in the competitive market
for gas supply once it develops.
3. Corporate Organization
Bangor Gas argued that we cannot grant CMP NG any
authority beyond conditional authority because the entity
purporting to provide gas service (CMP NG) has not been created
and CMP s proposed corporate reorganization into a holding
company structure had not been approved by the Securities and
Exchange Commission (SEC).15
CMP responded in brief that the matter of its
formal corporate organization could be easily resolved simply by
having the Commission modify here its order in Docket No. 98-077
to permit CMP to create and own a gas company subsidiary on a
temporary basis until the final approval of the SEC for the
holding company reorganization is obtained.
We have considered and approved CMP s proposed
reorganization, the formation of and investment in subsidiaries
under a holding company structure for the purpose of becoming a
gas utility in Maine.16 See Central Maine Power Company,
Application for Approval of Reorganizations, Affiliated Interest
Transactions and Sale in Connection with Gas Ventures, Docket No.
98-077 Orders dated May 1, 1998 and June 10, 1998 (approved
formation of subsidiaries of holding company and permissible
investment limitations). See also Central Maine Power Company,
Request for Approval of Affiliated Interest Transaction and
Reorganization and Transfer of Assets, Docket No. 97-930, Orders
dated May 1, 1998 and June 30, 1998 (approving holding company
reorganization).
We have not considered or approved (because CMP
did not request that we do so) whether CMP could, in the interim,
_____
15
CMP reported at the end of hearings that it did not know when
an SEC ruling will be issued.
16
The approved gas-related subsidiaries of the holding company are
Gasco and Maine Natural Gas Limited Liability Company, now
renamed CMP Natural Gas. The investment is approved from the
holding company, not from CMP.
<PAGE>
Order - 27 - Docket No. 96-786
form and invest in a subsidiary to operate as a gas utility. In
our Order in Docket No. 98-077 at p. 9, we explicitly stated:
For purposes of this order, we approve the
transactions and arrangements contained in
the Joint Venture Agreement subject to the
condition that the Agreement be transferred
to Gasco. We do not here approve CMP s
entering into the joint venture agreement.
If CMP itself wants to pursue this venture,
it must seek separate approval of the
Commission.
Therefore, we do not now know whether we would allow CMP to
create and invest in a gas subsidiary.
While we applaud CMP NG s aggressively pursuing
competitive opportunities for natural gas distribution company
development in Maine, there are necessary preconditions that it
must meet before it can proceed as a public utility.17 Until the
SEC approves the proposed holding company structure or until CMP
obtains additional reorganization approval from this Commission,
formation of or investment in 18 the gas entity is not
permitted.19
______
17
CMP mischaracterized the ER on this point as presenting a
reason for denying its current project application. See Adelburg
(oral exceptions) at Tr. I-16-17. See also CMP s July 20, 1998
Motion for Reconsideration of our Order Granting Certificate to
Bangor Gas Company in Docket No. 97-795 at 2. This point was
made simply to confirm that additional time would be required for
CMP NG to resolve these matters, delaying its in-service timing
goal, and to make clear what steps were necessary in the event
CMP wished to proceed pursuant to another form of organization.
18
35-A M.R.S.A. Section 708(2) states: Unless exempted by rule
or order of the commission, no reorganization may take place
without the approval of the commission. Section 708(1)(A)
defines reorganization, in part, as: any creation....of an
affiliated interest as defined in section 707...
19
On August 12, 1998, CMP filed a letter reporting that it had
received SEC approval and provided a copy of the SEC s order
dated August 7, 1998. CMP states that it is working toward a
September 1, 1998 effective date for the organization of CMP
Natural Gas and the implementation of the holding company
structure. Thus, these organizational issues are largely moot.
<PAGE>
Order - 28 - Docket No. 96-786
4. Conclusion
Our assessment of CMP NG s proposal reveals that
its estimates of gas costs and time required for system
construction may be understated; its penetration and revenue
levels may be overstated. And, even using CMP NG s own
assumptions and estimates, CMP NG has not shown that
Under traditional regulatory treatment,
, are realistic possibilities.20
Consequently, we will only fully authorize CMP NG
to serve the proposed municipalities if it puts forth a rate
freeze or cap proposal that clearly protects ratepayers from the
risk of marketing and pricing error and of uneconomic
development. In this way, consumers will be protected from
potentially adverse impacts of entrepreneurs decision during
project development even beyond the protection they will have
from the existence of competitive alternatives.
Much of CMP NG s proposal and activities to date
- -- such as its engineering and operational expertise and its
expansion enthusiasm -- display positive attributes that
recommend a grant of service authority in Maine. Accordingly, we
urge CMP NG to present a revised proposal that would protect
ratepayers from the risks of project development assumptions and
uneconomic system build-out. Such a proposal would be granted
prompt approval.
VII. ANALYSIS OF NEED AND PUBLIC NECESSITY
CMP requests unconditional authority to furnish gas service
to six areas comprising of various municipal groupings: the
Bath/Brunswick coastal area, the Windham area, the Augusta area,
the Waterville area, the Bangor area, and Bethel. Many of the
areas for which CMP NG requests service authority include small
communities for which gas service would not be economical on a
stand alone basis without large anchor customers or additional
customer base.
A. Need
______
20
MODA argued that the possibility of rate increases in CMP NG s
rate plan affects the terms of competition between oil and gas
providers and creates asymmetric risks that are adverse to oil
dealers. MODA urges us to ensure that competition between oil
and gas will not be unfairly skewed by regulatory effects.
Accordingly, MODA argues that the risk of its venture should be
placed on the company, not consumers.
<PAGE>
Order - 29 - Docket No. 96-786
CMP NG must demonstrate need for service in all
proposed municipalities. None of the areas is currently
receiving gas service. The demonstration of need, as defined in
Mid-Maine, is straightforward in the entire CMP NG proposed
project area.
We hold that an applicant seeking to serve an
area which is unserved or to provide a type
of service which is not being provided need
make no further evidentiary showing to
demonstrate that a need for the proposed
service exists. Nor will such an applicant
be required to demonstrate that existing
service to the area is inadequate. This rule
shall apply regardless of whether any other
utility holds a franchise for the currently
unserved area or has authority to provide the
service not currently provided.
Mid-Maine at 10.
As further established in the Order, however, a showing
of need does not compel a grant of service authority.
A finding of need is not conclusive on the
issue of whether or not an applicant should
be granted authority to provide service. The
Commission must also assess the technical and
financial capability of the applicant and
address issues such as uneconomic duplication
of facilities, fairness to existing
investors, and any other factor implicated by
the Commission s broad public policy
statement.
Mid-Maine at 10.
Thus, we must consider whether it serves the public
convenience and necessity to authorize a second utility to serve
in these municipalities.
B. Public Convenience and Necessity
1. Current Authority in Unserved Areas
Northern, Maine s only operating LDC, is currently
authorized to serve the entire state with the exception of the
Bangor core area. Northern stated a commitment to provide
service in 1999 to the Bath/Brunswick coastal area (which
<PAGE>
Order - 30 - Docket No. 96-786
includes Bath, West Bath, Brunswick, Topsham, Freeport, Falmouth,
Yarmouth, and Cumberland) and is currently providing service to
nearby communities. Northern presented evidence in this
proceeding of cost and service economies that exist for it to
expand its existing system to provide service to contiguous or
nearby areas, specifically Bath, Brunswick, Freeport, Topsham,
Falmouth, and Yarmouth.
For these areas, Northern provided evidence of its
plans to serve these municipalities and proposes to serve the
Bath/Brunswick/Freeport areas by the 1999 heating season and the
southern coastal area (Freeport, Yarmouth, and Falmouth) by
December 31, 1999.
Similarly, in the core Bangor Area (i.e.,
Bangor, Brewer, Orono, Old Town, and Veazie), Bangor Gas is
authorized to serve. In June, Bangor Gas began to construct the
infrastructure necessary to serve this five-municipality, or
core , Bangor area upon the arrival of gas via the proposed
Maritimes pipeline in 1999.
In all remaining areas, Northern is authorized to
serve but currently has offered no concrete plans or other
evidence to demonstrate that it will soon do so. These areas
include Windham, Waterville, Augusta, Bethel, and the communities
surrounding the Bangor area (Milford, Hermon, Holden, Hampden,
Orrington, and Bucksport).21 With the exception of Windham,
these areas are not near Northern s existing infrastructure, and
whether it will ever actually serve these areas is uncertain.
The policy we established in Mid-Maine, and
confirm in this Order, dictates that we would authorize
additional utilities to serve in all of these areas, barring
convincing evidence that it would not serve the public interest.
We must determine, then, whether there are particular economies
or other factors that weigh toward limiting service in these
areas to just one LDC. We will do so by discussing these areas
in sequence.
2. The Bath/Brunswick Coastal Area
Because of the public policy we have established
and because the evidence does not persuade us to the contrary, we
find that the public interest requires a second utility to serve
the communities defined in CMP NG s request as the Bath/Brunswick
Coastal Area: Bath, West Bath, Brunswick, Topsham, Freeport,
Yarmouth, and Cumberland.
_____
21
BGC has also recently requested authority to serve in
surrounding towns in the Bangor area (Docket No. 98-468).
<PAGE>
Order - 31 - Docket No. 96-786
We now review the evidence and arguments raised in
this proceeding in order to explain our assessment of that
evidence and our reasons for concluding that this evidence does
not outweigh our determination that competition to serve will
best serve the public interest.
a. Cost
The Examiner s Report concluded that because
Northern s existing system infrastructure runs through adjacent
or nearby communities,22 Northern s cost to serve the
Bath/Brunswick and southern coastal communities will be lower
than CMP NG s. The Report gives the following reasons:
- To reach consumers in the Bath/Brunswick area,
CMP would have to install substantially more
miles of steel distribution main at greater
cost per foot and at greater total cost than
does Northern.
- CMP will incur additional costs to serve the
Bath/Brunswick coastal area because it will
need to construct an LDC city gate or take
station interface with the transmission
pipeline at substantial cost to obtain its
gas supply. Northern will not have to incur
such costs to serve the Bath/Brunswick or
coastal area because it can serve the area
using gas supplied to its system through the
same tap to PNGTS as it will use to serve
its existing customers.
- Northern will not have to build service
centers or add personnel to serve
Bath/Brunswick coastal areas. Because CMP is
a start-up utility without an existing
in-state presence, it must incur these
additional costs.23
_____
22
These municipalities include Lisbon Falls, Lewiston, Auburn, and
Portland.
23
The testimony of Messrs. Eastman, Miller and McCarthy indicates
that new employees will have to be hired, some will need to be
trained, and a service center will either have to be built or
space rented from CMP.
<PAGE>
Order - 32 - Docket No. 96-786
We do not find this evidence compelling.
While it may be true that Northern could serve the Bath/Brunswick
coastal region at lower total cost than can CMP NG, the record
does not allow us to make that determination with sufficient
certainty of the magnitude of the cost difference to provide a
basis to restrain competition in the area. Nor would we be
inclined to change our decision even if we could establish with
certainty that expansion to the area would be at substantially
lower cost for Northern. It is not clear that lower cost will
mean lower prices to consumers: competition may sufficiently
suppress price to all classes of customers that service would be
provided at lower prices and margins, if not cost.
Consequently, we do not find that the public
necessity requires us to limit service to this area to Northern
on this basis.
b. Failure to Serve
Throughout this proceeding, CMP NG has argued
that it should be allowed to serve these areas because, despite
having authority to serve these areas, Northern has neglected to
do so. We find this evidence to have no value whatsoever.
We are fully aware of the gas supply
constraints that Northern has faced and the measures it has taken
in recent years in response to those circumstances. Northern has
acted prudently to contain its growth within available supply
levels.24 There is no doubt that the potential reduced level of
supply that would exist without fortuitous extensions of the
Portland Pipe Line lease or without the successful completion of
the Portland Natural Gas Transmission System (PNGTS) would have
left Northern in a precarious position with respect to its
ability to maintain supply to its existing customer base.
Furthermore, CMP itself acknowledges
expansion of the gas industry in Maine has been constrained by a
lack of interstate pipeline capacity and that expansions depend
on these new sources of gas supply.
Therefore, we do not find that Northern has
neglected or failed to expand its system when conditions would
have otherwise allowed.
_____
24
During 1997, Northern held a number of meetings with the
Commission to discuss its contingency plan and partial marketing
moratorium. In Docket No. 97-311, Northern requested, and the
Commission approved, terms and conditions enabling a moratorium
on active sales and promotional efforts, and to allow a freeze on
connecting new services, if it became necessary.
<PAGE>
Order - 33 - Docket No. 96-786
We offer no further comment at this time on
the contention that Northern has responded too slowly to the
demand and interest that has been developing in the
Bath/Brunswick coastal area in anticipation of PNGTS s being
in-service in late 1998. What is apparent on this record is that
Northern is now moving ahead with development. We believe that
it is clearly in the public interest for Northern to expand its
system or increase penetration in a safe, adequate, and economic
manner wherever possible.
c. Commitment To Expand
Northern has demonstrated that it will be
cost-effective for it to serve the Bath/Brunswick coastal area.
he communities of Bath and Brunswick are part of Northern s
1998/1999 expansion plans. In addition, the CMP NG intends to
serve the Falmouth to Freeport areas in 1999. Northern s
management has specifically approved expanding its system in the
Bath, Brunswick, and Freeport areas without waiting to contract
with anchor customers.
The development of the CMP NG system in all areas contained
in its application depends
When asked whether CMP NG would continue to
develop LDC infrastructure absent
Mr. Kelley indicated that project economics
would require further review. This difference in emphasis on
obtaining anchor customers likely reflects the cost and risk
differences faced by the two entities. It also lends an element
of uncertainty to CMP NG s proposal to serve in any particular
area, at least until
However, CMP NG s strategy is consistent with prudent
business practice in that it follows a tiered approach.
Initially, the distribution system will be built to serve large,
so-called anchor, customers that wish to have gas service. From
these mains, CMP NG will only extend its system to areas where
there is a manifest interest to have gas service. In short,
investment will be made only when it makes economic sense,
i.e. sufficient demand for the service is a prerequisite for any
capital outlay.
In sum, while the record evidence suggests
that Northern s proposal to serve the Bath/Brunswick and coastal
area may be a more secure and cost-effective manner to serve
these areas, we do not find that these benefits are sufficiently
clear or compelling to outweigh the benefits of allowing
competition for service to this area. Thus, we find that
competition among LDC s best serves the public interest.
<PAGE>
Order - 34 - Docket No. 96-786
d. Economies of Scale
We have also reviewed the estimated costs to
serve the loads in the area and the market studies of both CMP NG
and Northern. It is not surprising to find that both companies
would attempt to recruit many of the same potential anchor
customers. Because the market is relatively small and
geographically concentrated, we expect that the two companies
would also compete for many of the smaller customers and loads
identified in their market studies. The cost studies reveal that
a significant initial capital investment is required by either
firm to extend service to this market area. Were we to allow two
firms to serve in this area, the evidence suggests that the
result would be higher total costs to serve essentially the same
loads; a demonstration that subadditivity of costs exist in the
extension of gas service to the area. Because we do not here
allow costs eventually to translate into rates, however, it is
not clear that choosing the lower cost option to obtain the same
service best serves the public interest and convenience.
e. Timing
The Towns urge us to grant CMP NG service
authority because it has proposed to provide service earlier to
the Bath/Brunswick coastal area. Northern argues that CMP NG s
time frame for construction is not feasible and notes
contradictory statements made by CMP/NYSEG witnesses regarding
the speed with which they could construct a distribution system
and serve the area.
We agree that a number of factors weigh
against CMP NG s projected timetable, such as its incomplete
corporate organization, winter construction moratoria, uncertain
anchor customer commitments, and other preliminary construction
matters. Additionally, Northern s decision to lower costs by
beginning construction in the spring of 1999 appears to be
reasonable. Northern also stated that it could press forward on
an earlier schedule if necessary.
In light of the customer and municipal
interest in the area, we encourage any entity to explore the
possibility of meeting service needs of potential customers in
the Bath/Brunswick area earlier if it can be done economically.
We do not find the timing of proposed service by either Northern
or CMP NG to provide a basis for or against authorizing CMP NG.
f. Rate Comparisons
A number of rate comparisons between CMP NG
and NU have been offered in this proceeding. The most
<PAGE>
Order - 35 - Docket No. 96-786
comprehensive and comparable is the joint response of CMP NG and
NU to ODR-05, which is based on a number of shared assumptions,
although the two utilities use different methods for determining
gas costs. The rate comparisons consist of a series of 26 total
bill comparisons, where bills for assumed usage levels are
calculated using CMP NG rates and NU rates. Bills are calculated
for the years 1998, 2000, and 2002, in order to reflect the
effects of projected changes in NU s rates (CMP NG s rates are
assumed not to change during the entire period of the
comparison).
As might be expected, some total bills are
lower for CMP NG, some are lower for NU. In a number of cases
the comparison shifts over time in favor of NU, as NU implements
its proposed series of phased-in rate reductions to larger
customers.
Our overall assessment is that these rate
comparisons, based in part on projections of future costs of gas,
do not show any clear superiority of one utility s rates over the
others of such significance that our decision on whether a second
utility is required in Bath/Brunswick would turn on this issue.
Even if one was clearly superior, these rate comparisons would
provide an uncertain basis for such a decision for several
reasons. First, we note that we have not approved either of
these rate proposals.25 In addition, as noted above, the gas
cost component of the CMP rate may understate costs and rates.
More importantly, even if proposed rates were approved, neither
utility guaranteed that it will not seek increases during the
period of the comparison.
In sum, we conclude that these rate
comparisons do not provide an adequate basis for deciding whether
public convenience and necessity requires a second utility in the
Bath/Brunswick areas.
g. Bath/Brunswick Coastal Area Conclusion
In sum, based on our determination in
Mid-Maine and the evidence in this proceeding, we find that it
will better serve the public convenience and necessity to
authorize a second utility to serve in what has been defined as
CMP s Bath/Brunswick project area, if presented with a revised
proposal addressing the concerns described in this Order.
3. The Bangor Area
______
25
Northern s rate proposal is currently under investigation in
Docket No. 97-393.
<PAGE>
Order - 36 - Docket No. 96-786
As noted above, Bangor Gas has authority to serve
Bangor, Brewer, Veazie, Old Town, and Orono. Bangor Gas proposes
to construct a local distribution system in this area during 1998
and 1999 and to serve these municipalities when the Maritimes
pipeline is placed in service in 1999. Northern is authorized to
serve the nearby towns identified in CMP s petition but has not
presented plans to serve the area.
We will authorize CMP NG to serve the communities it
defines in its petition as the Greater Bangor Area if it files a
revised proposal that addresses the concerns we have outlined in
this order.
Again, we believe competition will reflect the economic
efficiencies and guide the development of providing local
distribution service to the greater Bangor area.
The economics supporting the provision of service to
these communities demonstrates that it is uncertain whether the
balance of costs and revenues in these areas would support more
than one local distribution utility. To the extent the customer
base is shared between the two utilities, the unit cost to serve
will be higher for remaining customers of each entity and the
possibility of an acceptable return on project investment to each
entity is diminished. For more than one entity to serve the
Bangor area will require more taps into the pipeline and other
duplication of costs to establish two foundational sets of
facilities and services. However, we are confident that the
workings of the competitive market will determine whether one of
the entities, or both, will serve the area.
Moreover, our review of the development plans of Bangor
Gas and CMP NG reveals a different marketing and expansion
strategy. CMP NG s system development philosophy
Bangor Gas s proposal
does not
Perhaps, then, there may be separate roles for the
two entities in the area.
As previously stated, we will revisit this issue if evidence
to the contrary is brought forward. We have within our power
various options to remedy the situation if service to the area is
unreasonably lacking at any point in the future. At this time,
however, we do not find that to be the case.
4. The Augusta, Bethel, Waterville, and Windham Project
Areas
<PAGE>
Order - 37 - Docket No. 96-786
As indicated in our Phase I Order granting conditional
authority to CMP NG in this docket, we believe that CMP NG has
the technical and financial ability to serve as a public gas
utility in these areas. Need exists in these areas by virtue of
the fact that no service is currently being provided. In
addition, no compelling evidence has been presented to persuade
us that certificating an additional utility to compete to serve
the area does not serve the public interest. These facts lead us
to conclude that we will grant CMP NG service authority in these
areas if fully satisfied with its project details.
C. Suspension of Service Territory Authority
CMP NG seeks authority to serve several areas in
which Northern has had service authority for nearly 30 years but
does not currently furnish service. See n. 2. Prominent among
these areas is the Bath/Brunswick area, which Northern argues it
has been planning to serve and which is contiguous to its
existing system. In this proceeding, Northern presented its
plans to construct and serve this area during 1999. The evidence
shows that Northern will likely be able to serve the area at a
lower cost than could CMP NG.
The OPA argued that the Commission should suspend
Northern s authority to serve in these areas and, in its stead,
CMP NG should be granted authority to serve them. OPA believes
that CMP NG has been more aggressive in its efforts to serve the
area and the risks to consumers of allowing two LDCs to develop
the same area outweigh any benefits.26 These risks include: the
possibility of inefficient expenditure of resources, the negative
effects of utility failure, the substitution of municipal
permitting officials for utility regulators in controlling
development of utility service, and inviting bidding wars to
secure critical anchor loads with adverse impacts on small
consumers rates.
The Towns also urge the Commission to exercise its
authority to prevent potentially harmful trench warfare that
would likely occur between two authorized utilities competing to
serve the Bath/Brunswick coastal area. Accordingly, the Towns
suggest that the Commission declare that
______
26
Although OPA bases its recommendation on its belief that it is
poor public policy to grant more than one LDC service authority
in a municipality, it then argues contradictorily in its Brief
that it cannot oppose granting CMP a certificate in the Bangor
area because it was without an evidentiary or procedural basis
to do so. Logically, sound public policy would apply equally to
both areas.
<PAGE>
Order - 38 - Docket No. 96-786
in general, once an LDC begins providing
service in a given town, the burden should
shift to any other LDC to demonstrate that
competitive service in that municipality will
be in the public interest; i.e. it will
result in better service available to more
customers at competitive rates, and not
poorer service to fewer customers at higher
overall rates.
In other words, the Towns argue, Northern s authority to serve
the Towns should be modified to be made essentially
conditional . As such, the Towns explain, Northern could not
commence construction until it presents and the Commission
approves specific construction, marketing, financial, and
resource plans, such as have been reviewed for CMP/NYSEG in this
proceeding.
The requirement suggested by the Towns (concerning
construction plans) appears consistent with the language of 35-A
M.R.S.A. Section 2102 which requires the Commission to approve
the expansion of a public utility into a municipality in which
another public utility is already authorized to serve.27 It also
presents a fair and consistent policy with respect to our
exercise of authority in supervising and approving the furnishing
of public utility service to municipalities should the
competitive policy prove unworkable.
In light of our conclusion that competition to
provide local distribution service best serves the public
interest, we will not limit Northern s (or any other previously
authorized utility s) ability to compete to serve the areas in
which we authorize CMP NG. We will, however, keep this
possibility in mind for future situations in which limitation of
authority may be warranted. Additionally, pursuant to 35-A
M.R.S.A. sect. 1321 and 1322, we can reopen our orders granting
service authority and modify them as we determine warranted.
D. Reporting Requirement for All Authorized LDCs
27
Section 2102, on its face, is applicable to any authorized
public utility, regardless of whether it was authorized prior to
or subsequent to another authorized public utility. By monitoring
and affirmatively approving when an entity may furnish service in
any municipality once another public utility is authorized, the
Commission could control the entry and provision of monopoly
utility service in any area. Such control could be used to guard
against the development of duplicative or uneconomic, or
otherwise adverse, facilities and service.
<PAGE>
Order - 39 - Docket No. 96-786
Due to the concerns that competitive pressure might
create unforeseen problems, and to ensure that nothing we do
herein discourages some entity from moving ahead in a timely and
aggressive manner to serve the area, we will monitor all
authorized utilities progress to ensure that system development
and service to this and other areas are accomplished within a
reasonably expeditious and certain period of time. We will
require all authorized utilities to report on their system
expansion progress every six months, beginning October 1, 1998.28
Public utilities have an obligation to serve within
their service territory where it is economic to do so. Moreover,
it is within our authority to require a utility to serve where we
determine it is reasonable and necessary, such as where a
demonstrated demand for the service exists. Alternatively, we
could find that that the public interest would be better served
by authorizing another entity to serve an unserved area.
VIII. NECESSARY TERMS OF REVISED PROPOSAL
We will grant service authority to CMP NG in all of its
proposed project area, if it presents an acceptable revised
proposal. First, CMP NG should revise its rate plan to assure us
that CMP NG s proposal has addressed the concerns we have
identified with respect to particular rates, that the rates will
remain stable over time, and that the risk of errors in project
cost or revenue estimates will not be borne by ratepayers.
Shareholders must bear the risks of uneconomic development. We
emphasize that we do not require any particular relationship
between costs (however estimated) and prices. We fully expect
CMP NG to set its prices at levels that will enable it to attract
customers. As we found in Bangor Gas, the discipline of the
market is likely to be superior to our own prognostications
concerning cost and customer behavior. See Bangor Gas Order
Approving Rate Plan (June 26, 1998) and Order Granting
Unconditional Service Authority (June 30, 1998). We insist,
however, that - whatever price levels CMP NG chooses to offer -
ratepayers not be at risk for rate increases to save investors
from the consequences of their own poor projections. It is true
that, at some level of increase, ratepayers will likely convert
(or convert back) to another fuel source. It would be poor
regulation, however, to place ratepayers at risk even of
reconversion costs where, as we find here, shareholders should
bear the risk (and, not coincidentally, enjoy the benefits) of
their investment choices. Our primary examination of CMP NG s
_____
28
We will issue separate notification to all LDCs to this effect
with additional details.
<PAGE>
Order - 40 - Docket No. 96-786
proposal, then, will be whether risks have been allocated
appropriately.29
Also, prior to beginning construction or contracting with
customers, CMP NG must meet the conditions regarding formation of
a gas venture specified in our conditional certificate approval.
Finally, CMP NG must present a more complete resource plan.
In the event that a revised CMP NG proposal is crafted quite
differently in its operational and engineering or other
supporting details, it will be necessary to review and approve
the modifications in order to grant unconditional authority to
serve in the remaining project areas. Because these are
fundamental elements of our review to determine whether a
proposal serves the public convenience and necessity, we will not
grant CMP NG unconditional authority without reviewing modified
project information.
XI. CONCLUSION
For the foregoing reasons, we do not grant CMP NG
unconditional authority to serve in its proposed areas at this
time, but will do so upon submission and approval of an
acceptable revised proposal as outlined in this Order.
Dated at Augusta, Maine this 17th day of August, 1998.
BY ORDER OF THE COMMISSION
___________________________
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: WELCH
NUGENT
This document has been designated for publication.
Appendix A: Procedural History
Phase I
_____
29
Our decisions in Bangor Gas should provide guidance in this
area.
<PAGE>
Order - 41 - Docket No. 96-786
On December 20, 1996, CMP filed a petition for approval to
furnish natural gas service in 60 municipalities that may be
served from the Maritimes & Northeast Pipeline (MNE) or Portland
Natural Gas Transmission System (PNGTS) including Rumford,
Mexico, Dixfield, Bethel, Farmington, Wilton, Jay, Livermore,
Livermore Falls, Millinocket, East Millinocket, Medway, Lincoln,
Howland, Orono, Old Town, Milford, Veazie, Bangor, Brewer,
Hampden, Orrington, Bucksport, Clinton, Waterville, Winslow,
Fairfield, Madison, Oakland, Skowhegan, Norridgewock, Augusta,
Gardiner, Randolph, Hallowell, Farmingdale, Manchester, Winthrop,
Topsham, Brunswick, Bath, Freeport, and Yarmouth. With its
direct testimony, filed on October 31, 1997, CMP amended this
list to include Baileyville(Woodland), Bridgton, Casco, Durham,
Gray, Harrison, Naples, North Yarmouth, Norway, Otisfield,
Oxford, Paris, Pownal, Raymond, Standish, and Windham.
A prehearing conference was held on March 5, 1997 at which
the Hearing Examiner granted the petitions to intervene of the
Office of the Public Advocate (OPA), Mid-Maine Gas Utilities,
Inc. (MMGU), the Town of Jay, the Industrial Energy Consumer
Group (IECG), and Northern Utilities, Inc. (Northern). The
Examiner deferred ruling on the petitions of the Maine Council -
Atlantic Salmon Federation (ASF), MNE, Madison Electric Works
(MEW), and the Town of Cumberland, all of which did not appear at
the prehearing conference. The list of parties now includes ASF
and MNE.
By Procedural Order dated March 12, 1997, the parties were
invited to comment by March 26, 1997 on a threshhold question as
to whether it would serve the public interest to allow an
electric utility to also provide gas service.30 An Examiner s
Report on the threshold issue was issued on August 25, 1997. The
Commission issued its Interim Order on September 26, 1997 holding
that CMP s application to provide gas service could be processed
in accordance with the standards of approval delineated in Docket
No. 96-465 and that CMP would be permitted to provide gas service
only through a separate corporate subsidiary.
On October 27, 1997, CMP filed a proposed schedule for the
remainder of the proceeding to which several parties had
indicated no objection. On October 28, 1997 CMP filed a Motion
for Protective Order to allow it to limit distribution to only
Staff and the Public Advocate of certain market analyses and
confidential business strategy information. On October 29, 1997,
the IECG filed an objection to CMP s request to limit
distribution to Staff and OPA. On November 25, 1997, the Hearing
______
30
On June 27, 1997, the Examiners assigned to this and three other
natural gas dockets (97-177, 97-267, 97-310) issued a Notice of
Temporary Suspension of these cases to allow the Commission to
conduct a generic inquiry (Docket No. 97-267) into the
development of the natural gas industry in Maine.
<PAGE>
Order - 42 - Docket No. 96-786
Examiners granted the protective order and established a schedule
for the proceeding including a case management conference and
hearings on January 26, 28, and 29. CMP filed its Direct
Testimony and Exhibits on October 31, 1997. CMP filed
Confidential Exhibit QKE-6 pursuant to protective order on
November 26, 1997.
The Examiner issued Protective Order No. 1 on December 5,
1997. The IECG filed a Motion for Reconsideration with
Incorporated Memorandum of Law on December 15, 1997. CMP filed
its response on December 23, 1997. The Examiners denied the
IECG s motion by Procedural Order dated December 30, 1997.
The Maine Oil Dealers Association (MODA) and Bangor Gas
Company, L.L.C. s (Bangor Gas) late-filed petitions to intervene
were granted by Procedural Order on December 24, 1997 on
condition that they take the case as they find it . MODA s
intervention was limited to providing information concerning gas
and oil pricing, environmental comparisions, or conversion costs
and data at this stage of the proceeding.
None of the intervenors filed testimony in this proceeding.
The Examiners issued a Procedural Order on January 23, 1998
requiring parties to provide prehearing memoranda outlining their
cases for the hearings scheduled for January 28th and 29th. On
January 26, 1998, the Examiner held a Case Management Conference
at which CMP presented a draft stipulation supported by CMP, the
Public Advocate, and MNE. Northern Utilities indicated that it
would take no position on the stipulation.
Also on January 26, 1998, Bangor Gas filed a Motion to
Compel Responses to Data Requests it had issued on December 31,
1997. CMP objected, on January 21, 1998, that Bangor had filed
its data requests well after the discovery deadline that had been
established in this case. Bangor Gas then sought to obtain
responses to its discovery through cross-examination at hearing.
No other party submitted areas for cross-examination of CMP s
witnesses.
On January 27, 1998, by Procedural Order, the Examiners
denied Bangor Gas motion to compel, overruled Bangor Gas stated
objection to CMP s application, and canceled the scheduled
hearings. That order also allowed written comment by the parties
on the proposed stipulation by February 4th. The executed
stipulation was filed on February 3, 1998. Objections to the
stipulation and to the application were filed by IECG and Bangor
Gas.
<PAGE>
Order - 43 - Docket No. 96-786
An Examiners' Report was issued on February 20, 1998.
Northern, IECG and Bangor Gas filed exceptions. Deliberations
were held on March 9, 1998.
By Order dated March 11, 1998 (March 11th Order), the
Commission granted Central Maine Power Company (CMP), on behalf
of its joint venture with New York State Electric and Gas
(NYSEG), conditional authority to serve within 60 cities and
towns in Maine pursuant to 35-A M.R.S.A. sect. 2104 and 2105,
finding that the joint venture possesses the general financial
and technical capability to serve as a public utility and that
need exists in the designated municipalities because natural gas
service is currently not being provided in those areas. The March
11th Order did not allow CMP to construct or operate a natural
gas system public utility until the Commission has reviewed and
approved detailed financing, construction and resource plans,
granting CMP full, or unconditional, service authority.
On March 31, 1998, Northern filed a Motion for
Reconsideration of the March 11th Order, claiming that the
Commission failed to consider the overall public interest in
granting CMP authority to serve in an area where Northern is
already authorized to serve. Northern requested that the
Commission reopen Phase I to consider these issues in its
determination of need, or, alternatively, to consider these
issues in Phase II of the CMP proceeding. Responsive comments
were filed by CMP, MNE, OPA, and Bangor Gas.
Briefs on issues raised by Northern s request for reconsideration
were filed on April 17th by Bangor Gas, OPA, CMP MNE,and
Northern.
The Commission deliberated Northern s Motion for
Reconsideration on April 28, 1998 and issued its Order Granting
Northern Utilities, Inc. s Motion For Reconsideration on May 14,
1998. Northern was allowed to supplement its testimony in the
Phase II proceeding to present public interest issues regarding
authorizing a second utility in areas in which Northern already
was authorized to serve.
Related Parallel Proceedings
In December 1997, CMP filed a request for approval of a
comprehensive reorganization of all its corporate affiliates into
a holding company structure. This was docketed as 97-930. CMP
also requested that the Commission also approve the formation and
investment in a gas subsidiary of the holding company formed for
the purpose of becoming a public utility, as CMP NG. This was
separately considered in Docket No. 98-077.
Phase II
<PAGE>
Order - 44 - Docket No. 96-786
On February 23, 1998, CMP filed its Phase II proposal for
unconditional authority in thirty-five municipalities, including
1) the greater Augusta area (Augusta, Gardiner, Hallowell,
Farmingdale, Randolph, Chelsea and Manchester); 2) the greater
Waterville area (Waterville, Fairfield, Winslow, Oakland and
Vassalboro); 3) the greater Bangor area (Bangor, Brewer, Old
Town, Orono, Veazie, Milford, Hermon, Holden, Hampden, Orrington
and Bucksport); 4) the Bath/Brunswick coastal area (Bath, West
Bath, Brunswick, Topsham, Freeport, Falmouth, Yarmouth and
Cumberland); 5) the Windham area (Windham, Raymond, Standish);
and 6) Bethel.
The initial schedule for Phase II established intervenor
testimony on April 17th, a hearing on May 15th, and a final
decision on the application by June 26th.
The Examiner issued Protective Order No. 2, protecting
information relating to potential customers of the CMP/NYSEG
joint venture, on April 2, 1998. Under Protective Order No. 3,
issued April 13, 1998, CMP/NYSEG released to Bangor Gas, Northern
and MNE information relating to rates based on its project
planning assumptions. On May 5, 1998, a Protective Order was
issued relating to Northern s analyses of gas markets in Maine,
project analyses and related materials and business strategy
information including financial, cost and market information.
Technical conferences on the Phase II filing were held on
April 10th and May 7th.
On May 12, 1998, the Examiner issued a modified schedule for
Phase II to reflect the Commission s ruling on Northern s Motion
for Reconsideration. The schedule allowed CMP to file testimony
on the additional issues raised by Northern s motion, followed by
an opportunity for intervenors to file testimony.
On May 13th, CMP filed a letter protesting the schedule,
stating that it had nothing further to present at this time on
the issue of whether CMP should be allowed to provide service in
municipalities in which Northern is already authorized to serve.
CMP urged the Commission to resolve its application as soon as
possible.
On May 14th, the Examiner issued a revised schedule, finding
that CMP, as applicant, had waived its opportunity to file
additional testimony, and advancing the filing dates for
Northern s opportunity to provide testimony. In addition, the
Examiner allowed other parties to file responsive testimony.
<PAGE>
Order - 45 - Docket No. 96-786
On May 15th, Northern filed a letter objecting to the May
14th schedule. By Procedural order dated May 18, 1998, the
Examiner further revised the schedule and limited the scope of
further testimony and hearings to those areas that CMP had
identified as priorities for 1998 construction: the
Bath/Brunswick area, Bethel, and the Windham/Standish area. The
procedural order also required CMP to propose by May 20, 1998, a
separate schedule for the remainder of the areas in which it
seeks approval or, alternatively, to indicate why it is not
possible to bifurcate review of its application in this manner.
CMP filed nothing in response to this directive.
On June 1, 1998, Northern filed the testimonies of John
Flumerfelt, Patricia Dyer, and Danny Cote.
Hearings were held on June 17th and 19th. CMP witnesses
supplied the rebuttal testimony of Tim Kelly and Darryl Quimby.
Northern s witnesses gave brief oral surrebuttal.
Cross-examination was allowed on all witnesses.31
Comments of the parties on whether there would be a need for
further proceedings to evaluate the remaining areas contained in
CMP s application were filed on June 24th by OPA, Bangor Gas,
CMP,and Northern. No party requested additional hearings or
testimony at this time.
Briefs on CMP s entire application were filed July 1 by OPA,
MODA, Bangor Gas, CMP, and Northern. Reply briefs were filed by
Northern, Bangor Gas, CMP and MODA. The Examiner s Report was
issued on July 13, 1998. Oral exceptions were made on July 17th
and deliberations were held on July 23, 1998.
_____
31
Bangor Gas witness Jan Van Lierop was made available by
telephone.
<PAGE>
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. sect. 9061 requires the Public Utilities
Commission
to give each party to an adjudicatory proceeding written notice
of the party's rights to review or appeal of its decision made at
the conclusion of the adjudicatory proceeding. The methods of
adjudicatory proceedings are as follows:
1. Reconsideration of the Commission's Order may be
requested under Section 6(N) of the Commission's Rules of
Practice and Procedure (65-407 C.M.R.11) within 20 days of
the date of the Order by filing a petition with the
Commission stating the grounds upon which consideration is
sought.
2. Appeal of a final decision of the Commission may be
taken to the Law Court by filing, within 30 days of the date
of the Order, a Notice of Appeal with the Administrative
Director of the Commission, pursuant to 35-A M.R.S.A. sect. 1320
(1)-(4) and the Maine Rules of Civil Procedure, Rule 73 et
seq.
3. Additional court review of constitutional issues or
issues involving the justness or reasonableness of rates may
be had by the filing of an appeal with the Law Court,
pursuant to 35-A M.R.S.A. sect. 1320 (5).
Note:The attachment of this Notice to a document does not
indicate the Commission's view that the particular document
may be subject to review or appeal. Similarly, the failure
of the Commission to attach a copy of this Notice to a
document does not indicate the Commission's view that the
document is not subject to review or appeal.
EXHIBIT D-2
<PAGE>
Exhibit D-2
STATE OF MAINE Docket No. 98-077
PUBLIC UTILITIES COMMISSION
May 1, 1998
CENTRAL MAINE POWER COMPANY ORDER
Application for Approval of
Reorganizations, Affiliated
Interest Transactions and Sale
in Connection with Gas Ventures
I. Summary
In this Order we approve affiliated interest transactions
and reorganizations requested by Central Maine Power Company
(CMP) pursuant to 35-A M.R.S.A. sect. 707, 708, subject to
certain conditions.
II. Background
On December 9, 1997, CMP filed a request for approval of a
major reorganization, including formation of a Maine-based
holding company. This request was assigned Docket No. 97-930.
CMP requested approval of 21 separate arrangements and
transactions.1 Following a pre-hearing conference on January 14,
1998, the Examiner issued a procedural order requiring that
certain issues be taken up in a separate gas proceeding. The gas
proceeding was assigned Docket No. 98-077. All parties in Docket
No. 97-930 were made parties to this proceeding: Bangor Gas,
Bangor-Hydro Electric Company, Coalition for Sensible Energy,
Enron, Industrial Energy Consumer Group, Independent Energy
Producers of Maine, Maritimes and Northeast Pipeline, Maine Oil
Dealers Association, Northern Utilities and the Public Advocate.
The Hearing Examiner identified the following five proposed
transactions as those the Commission would examine in Docket No.
98-077:
1. The transfer, lease or license by CMP of interests in
its rights-of-way and transmission and distribution
structures to entities involved in pipeline and gas
distribution projects;
_____
1 At CMP's request, the Commission issued an order on January
27, 1998 granting interim approval to incorporate a holding
company for the limited purpose of allowing CMP to make required
Securities and Exchange Commission filings.
<PAGE>
2. The transactions and arrangements described in the CMP
Gas Company, L.L.C. Joint Venture Agreement;
3. The creation of a limited liability company (referred
herein as Maine Natural Gas Company (See response to
Advisors' Data Request 01-01) to develop, own and
operate a natural gas distribution business in Maine in
which a new wholly-owned subsidiary of the holding
company (HoldCo) will have a 50 percent membership
interest and New York State Electric & Gas Corporation
or its affiliate will have the other 50 percent
membership interest.
4. The creation of the new wholly-owned subsidiary of
HoldCo, referred to as GasCo, that will hold a 50
percent membership interest in Maine Natural Gas
Company; and
5. The creation of one or more entities, one of which may
be a wholly-owned subsidiary of HoldCo, to participate
in gas distribution in New Hampshire.
The Examiner directed CMP to prefile testimony in support of
its request for approval of these transactions by February 12,
1998. CMP filed the testimony of Arthur Adelberg in support of
its requests. Parties conducted discovery between February 23
and March 10. The only intervenor filing responsive testimony
was the Public Advocate. He sponsored the testimony of Scott
Rubin.
On March 26, 1998, CMP filed a motion for summary judgment.
In the Motion, CMP argued that following the filing of
testimonies, there were no material issues of fact and that any
legal issues are addressed by Chapter 820 of the Commission
rules.
The Examiner offered the parties an opportunity to respond
to the Motion. In response, the OPA claimed that two factual
matters needed to be resolved: whether the use of CMP's name in
gas marketing constitutes use of the corporate name necessitating
payment of royalties under Chapter 820; and how royalties owed
will be determined. OPA otherwise did not contest CMP's motion.
Bangor Gas opposed the Motion on two grounds. First, it
claimed that it would be premature for the Commission to decide
these five issues before deciding whether to approve the holding
company structure in Docket No. 97-930. Second, Bangor Gas
argued that the Motion was not supported by an affidavits or a
Statement of Material Facts Not in Dispute as required by Maine
Rules of Civil Procedure 7(d).
On April 15, 1998, the Hearing Examiner issued a draft
proposed order containing the recommendation of the Examiner and
Advisory Staff. Parties were allowed to file responses or
exceptions by April 27, 1998. Only CMP filed a response.
III. Standard of Review
The purpose of this proceeding is to consider five
reorganization requests that relate to CMP's planned entry into
the natural gas business. As proposed, the natural gas
operations will be conducted by an affiliate of CMP. This
affiliate will be part of the reorganized holding company
approved by the Commission on May 1, 1998 in Docket No. 97-930.
The gas operations will operate as follows:
HOLDING COMPANY
/ | \
/ | \
/ | \
NYSEG GASCO CMP T&D OTHER SUBSIDIARIES
\ /
\ /
\ /
MAINE NATURAL GAS LLC
The Commission must find that the reorganizations are
consistent with the interests of the utility's ratepayers and
investors. 35-A M.R.S.A. sect. 708 (2)(A). In granting the
approvals the Commission may impose terms, conditions or
requirements it determines are necessary to protect the interests
of ratepayers. These may include conditions to assure:
reasonable access to books and records; the continued ability of
the Commission to regulate transactions between affiliated
interests; the utility's continued ability to provide safe
reasonable adequate service; the utility's credit is not impaired
or adversely affected; and reasonable limits on total level of
investment in nonutility business. 35-A M.R.S.A. sect.
708(2)(A)(1-9).
CMP has proposed certain conditions applicable to these gas
reorganization transactions that the Commission could impose in
approving these transactions. These include:
1. The Commission would have access to all books and
records of GasCo and Maine Natural Gas Company, LLC;
2. The Commission would receive quarterly and annual
financial statements for GasCo and Maine Natural Gas
Company, LLC;
3. As a regulated utility, Maine Natural Gas Company LLC's
transactions with affiliates would require Commission
approval;
4. Appropriate protections would be applied to proprietary
information;
5. Transfers of assets, at this time expected to be
furniture and computers, on the same terms as those
<PAGE>
established in Docket No. 95-092 (e.g., allowing CMP to
transfer assets with a value not exceeding $100,000 per
transaction up to an annual amount of $1,000,000,
without further Commission approval; notification
required for right-of-way transactions). In its Motion
for Summary Judgment, CMP claims such transfers of
assets would be governed by newly-enacted Chapter 820;
6. Dividends paid by CMP [T&D] to HoldCo must be based
solely on the financial performance, needs and health
of CMP [T&D] without regard to the rest of the holding
company system; and
7. GasCo and Maine Natural Gas Company, LLC should be
permitted to form affiliates for the purpose of
furthering the gas business without need for Commission
review or approval.
IV. Motion for Summary Judgment
Under the Maine Rules of Civil Procedure, applicable to the
Commission pursuant to 35-A M.R.S.A. sect. 1311, summary judgment
may be granted only where there has been a showing that there is
"no genuine issue as to any material fact and that any party is
entitled to judgment on a matter of law." M.R. Civ. P. 56(c).
As the Law Court has stated, "even if the parties differ as to
the legal conclusion to be drawn from the historical facts before
the court, if there is no serious dispute as to what those facts
are, consideration of a summary judgment is proper." North East
Ins. Co. v. Soucy, 1997 ME 106 para. 8, 693 A.2d 1141, 1143.
CMP's Motion for Summary Judgment could also be viewed as a
Motion for Judgment as a Matter of Law pursuant to Rule 50(d) of
the Maine Rules of Civil Procedure. While there have been no
hearings on this matter and no testimony has technically been
admitted as evidence, the Company's prefiled testimony is
properly before the Commission and hence part of the record for
purposes of considering this motion. Rule 50(d) allows a party
to move at any time for judgment as a matter of law on any claim.
Either type of motion raises the issue of how to treat a
case where the decision maker must make determinations on matters
of public policy as well as matters of fact and law. For this
reason, Commission cases often do not lend themselves to the
rules that are applicable in the courts.
In this instance, CMP is asking the Commission to decide the
case on the evidence presented in its initial filing and prefiled
testimony (and the technical conference transcripts and data
responses). No party has filed testimony refuting the
information presented by the Company. CMP also contends that
there are no factual issues in dispute that warrant a hearing.
The Commission agrees that this case can be decided based on
the record developed to date. The issues raised by the two
<PAGE>
parties opposing the Motion can be adequately addressed in this
Order and we do so as described below.
V. Analysis and Decision
A. Request 1 - Rights-of-Way
In its prefiled testimony and during the technical
conference on January 30, 1998, CMP stated that it no longer
plans to transfer rights-of-way to its affiliate gas interests.
Since CMP is no longer requesting approval of any transfers of
rights-of-way, Request 1 is moot. CMP should seek Commission
approval prior to any future transfers.
B. Request 2 - Transactions and Arrangements described in
the CMP Gas Company LLC Joint Venture Agreement
Request 3 - Creation of Limited Liability Company
Request 4 - Creation of GasCo
The regulated natural gas distribution business will be
operated as a Maine limited liability company. The activities it
may undertake are currently the subject of a separate docket,
Docket No. 96-786 (Phase II). GasCo will be the entity that
acquires the 50% membership interest in the LLC. CMP claims the
need to form GasCo to hold the limited liability interest in
order for HoldCo to maintain its "non-operating" characteristics.
GasCo will not be a "gas utility" because it will not own,
control, operate or manage any gas plant.
The testimony of Mr. Adelberg describes how LLCs
operate and the advantages of such a formation. According to
CMP:
The limited liability company ("LLC")
combines aspects of both corporations and
limited partnerships. Like those two forms
of doing business, forming an LLC in Maine
requires compliance with certain statutory
formalities, including the filing of Articles
of Organization with the Secretary of State.
The owners of an LLC are called "members"
rather than shareholders, and their ownership
rights are referred to as "interests." Like
shareholders of a corporation, the liability
of members of an LLC is limited to their
investment in the entity. Unlike a limited
partnership, members can actively participate
in the management of the business without
incurring liability to third parties. Rather
than having a member-run LLC, day-to-day
operations can be delegated to one or more
persons that serves as a manager of the LLC.
Use of an LLC also has tax advantages. There
is no income tax at the entity level; rather,
if the LLC is properly structured, taxes are
<PAGE>
passed through to the members, just as with partners in
partnerships. The Maine LLC statute contemplates the
use of an operating agreement, which has as its
parallel the partnership agreement in limited
partnerships, and in corporations, the corporation's
by-laws. Typically, the operating agreement addresses
management authority, membership, voting rights,
allocation of profits and losses, investments, and
other items. By combining the best features of
corporations with limited partnerships, that is,
limited liability, management flexibility and favorable
tax treatment, the LLC provides a particularly
favorable structure for a joint venture between two or
more corporations, as is proposed by CMP and NYSEG with
respect to the gas LDC business. Use of the LLC form
of doing business will avoid the double tax situation
that would exist from corporate taxes on the
participating entities and on a new corporation, avoid
the liability concerns for partners in a general
partnership, and avoid the questions of who should
serve as a general partner if a limited partnership
were employed as the organizational form.
No parties raised questions about the limited liability form of
organization. As described by CMP, it appears to be a reasonable
form of organization for these gas ventures. It also is
reasonable for CMP to establish GasCo.
A number of issues arise about specific provisions in
the Agreement. Article II, 2.2. states that the name of the
Company is CMP Gas Company, L.L.C. CMP has recently clarified
that it does not propose to use this name, due to Chapter 820
royalty requirements. Although Chapter 820 will not be in effect
until after June 30, 1998, CMP has agreed that Chapter 820's
provisions will be applicable to these transactions.2 The rule
will require the Commission to establish for an initial 3-year
period an annual amount that must be paid by the affiliate for
use of goodwill. The use of goodwill is conclusively established
where the affiliate uses the name of the utility or the affiliate
engages in joint marketing or joint advertising with the utility.
_____
2 The Commission provisionally adopted Chapter 820, which
governs transactions between affiliates, on February 18, 1998.
The Legislature approved this major substantive rule, with
certain amendments, by resolve enacted on March 30, 1998.
Therefore, the rule will be effective following the Commission's
adoption of it with the required amendments after June 30, 1998
(the effective date of the resolve.)
<PAGE>
CMP asks the Commission to assume for purposes of this
docket that the name will be Maine Natural Gas, LLC (LLC). We
will approve the Agreement with the understanding that in the
event CMP's name is used in the name of LLC, Chapter 820's
requirements will apply. CMP, in its response to the Proposed
Draft Order, also argues that it should be permitted to disclose
the affiliation of Maine Natural Gas to CMP without paying
royalties. We reiterate that the provisions of Chapter 820 will
be applicable to this situation. Maine Natural Gas, LLC's use of
the CMP identity in its marketing or advertising constitutes the
use of goodwill under the definition in Chapter 820(2)(F).
Chapter 820 includes a presumption that the goodwill is valued at
1% of the total capitalization of the affiliate or 2% of the
gross revenues of affiliate, whichever is less. The rule
specifically allows a utility to present evidence that the value
of the goodwill is less. Chapter 820 (4)(C). If CMP believes
the value of goodwill in the case is less than that presumed by
the rule it should make such a showing and ask for different
treatment. Otherwise, Chapter 820 presumptions about goodwill
will apply. The only exception we will allow to Chapter 820's
royalty requirements for the use of the name will be in
situations where a state or federal law requires such disclosure.
In that case, disclosure (limited to the minimum amount required
by the relevant law) can be made without payment of a royalty.
CMP also requested 60 days from the date of this Order to
allow it to inform "potential" customers of the name change of
CMP Natural Gas to Maine Natural Gas, without payment of any
royalties. We will permit such communications without royalty
payments as long as the communications are limited to informing
persons who were previously contacted by CMP about the new name
for the purpose of avoiding confusion. This does not mean that
CMP can conduct a general advertising campaign, touting its
affiliation with the newly-named company, without paying
royalties.
The agreement also includes a form support services
agreement for services provided by CMP to LLC. At this time we
do not approve the agreement between LLC and CMP included in
Exhibit G, attachment to CMP's December 1997 filing in Docket No.
97-930. That agreement contains provisions that are not
consistent with Chapter 820. CMP should resubmit a revised
contract complying with the requirements of Chapter 820. We
delegate our authority to approve the agreement to the General
Counsel upon her finding that the agreement complies with Chapter
820.
The major provision of the Joint Agreement that we must
consider is contained in Articles IV, VIII and Exhibit A to the
Agreement. These provide that the initial capital contribution
of each member will be $10 million. CMP requests that the
Commission authorize its GasCo subsidiary to invest $10 million
in the limited liability company. No party disputes this $10
million investment. We find that the investment of $10 million
by HoldCo in GasCO is reasonable. Since this investment is made
<PAGE>
by HoldCo to GasCo, it helps to insulate CMP's ratepayers. As a
subsidiary of HoldCo, CMP's capital structure and cash flows
would be unaffected by HoldCo's investment in GasCo and therefore
CMP's ratepayers would be well-insulated from any risks that
would flow from this investment. This gives us confidence that
HoldCo's participation in this project will not harm CMP's
ratepayers. CMP in its response to the Proposed Draft Order
suggests that this limit should only apply until Maine Natural
Gas is granted its gas distribution franchise. We believe the
limit as proposed in CMP's original application is appropriate.
If CMP desires to invest additional amounts at a later date, it
can seek approval at that time.
Finally, we note that the Agreement is between CMP and
NYSEG. Article X of the Agreement permits the transfer of any
membership interest acquired by CMP to another entity in its
holding company. For purposes of this order, we approve the
transaction and arrangements contained in the Joint Venture
Agreement subject to the condition that the Agreement be
transferred to GasCo. We do not here approve CMP's entering into
the joint venture agreement. If CMP itself wants to pursue this
venture, it must seek separate approval of the Commission.
C. Request 5 - Creation of One or More Entities to
Participate in Gas Distribution in New Hampshire
According to CMP, if a CMP affiliate participates in the gas
business in New Hampshire it would likely be a wholly-owned
subsidiary of HoldCo, either GasCo or a separate wholly-owned
subsidiary of either GasCo or HoldCo. CMP seeks Commission
approval of the creation of one or more entities, one of which
may be a wholly-owned subsidiary of HoldCo, to participate in the
gas distribution business in New Hampshire. Sufficient
information does not exist for us to grant this approval. When
its plans become more definite, CMP can apply for approval at
that time. Therefore this request is denied.
D. Response to Opposition to Summary Judgment
The Public Advocate's primary concern relates to the
application of Chapter 820's royalty provisions to these gas
ventures. As described above, CMP states that it no longer plans
to use the CMP name in the name of its gas venture. As explained
in V.B. above, if CMP continues to be identified in the marketing
of the gas venture in the manner described in the CMP marketing
materials attached to Mr. Rubin's testimony, Chapter 820 royalty
requirement will be applicable.
Bangor Gas argues that we cannot grant CMP's requests for
gas reorganization approvals until after we decide whether to
approve the formation of the holding company. On May 1, 1998, we
approved the formation of the holding company; therefore Bangor
Gas's objection is moot. Bangor Gas also complains that CMP
failed to include affidavits with its motions. We consider the
<PAGE>
prefiled testimony as the equivalent of affidavits. In addition,
on April 22, 1998, CMP submitted the affidavit of Mr. Adelberg
swearing to the truthfulness of its application in Docket No. 97-
930, the prefiled testimony in Docket No. 98-077, all data
responses in Docket No. 97-930 and 98-077 and responses during
the technical conferences in Docket No. 97-930.
VI. CONCLUSION
As described above, we approve CMP's request for creation of
GasCo and Maine Natural Gas Limited Liability Company. We also
approve the Joint Venture Agreement included as Exhibit G of
CMP's December 9, 1997 filing, in Docket No. 97-930, with the
condition that the agreement is transferred to GasCo from CMP.
We do not approve the transfer of any rights-of-way from CMP nor,
at this time, do we approve the creation of one or more entities
to participate in the gas distribution business in New Hampshire.
CMP should resubmit the support services agreement between Maine
Natural Gas and CMP T&D with revised provisions that conform with
Chapter 820. Non-core activities and transactions between
affiliates will be governed by Chapter 820 of the Commission
Rules. We accept conditions 1, 2, 3, 4 and 6 as proposed by CMP
and described in Section III above, as necessary to further
protect the interests of CMP's ratepayers.
Dated at Augusta, Maine, this 1st day of May, 1998.
BY ORDER OF THE COMMISSION
Dennis L. Keschl
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: Welch
Nugent
Commissioner Hunt did not
participate in this decision.
<PAGE>
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. sect. 9061 requires the Public Utilities
Commission to give each party to an adjudicatory proceeding
written notice of the party's rights to review or appeal of its
decision made at the conclusion of the adjudicatory proceeding.
The methods of adjudicatory proceedings are as follows:
1. Reconsideration of the Commission's Order may be
requested under Section 6(N) of the Commission's Rules of
Practice and Procedure (65-407 C.M.R.11) within 20 days of
the date of the Order by filing a petition with the
Commission stating the grounds upon which consideration is
sought.
2. Appeal of a final decision of the Commission may be
taken to the Law Court by filing, within 30 days of the date
of the Order, a Notice of Appeal with the Administrative
Director of the Commission, pursuant to 35-A M.R.S.A. sect.
1320 (1) - (4) and the Maine Rules of Civil Procedure, Rule
73 et seq.
3. Additional court review of constitutional issues or
issues involving the justness or reasonableness of rates may
be had by the filing of an appeal with the Law Court,
pursuant to 35-A M.R.S.A. sect. 1320 (5).
Note: The attachment of this Notice to a document does not indicate the
Commission's view that the particular document may be subject to
review or appeal. Similarly, the failure of the Commission to
attach a copy of this Notice to a document does not indicate the
Commission's view that the document is not subject to review or
appeal.
EXHIBIT E-1
(Filed in paper format)
EXHIBIT H-1
<PAGE>
Exhibit H-1
UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
Energy East Corporation ) File No.
)
Energy East Enterprises, Inc. ) ____________
Notice of Filing
Take notice that Energy East Corporation ("EEC"), P.O. Box 12904,
Albany, New York 12212-2904, an exempt public utility holding company
pursuant to Section 3(a)(1) of the Public Utility Holding Company Act
of 1935, as amended (the "Act"), has filed an Application pursuant to
Sections 3(a)(1), 9(a)(2) and 10 of the Act in which EEC requests that
the Securities and Exchange Commission authorize the transaction (the
"Transaction") pursuant to which EEC, through Energy East Enterprises,
Inc. ("EEC Enterprises"), a wholly-owned subsidiary of EEC, will
acquire at least 50% of the membership interests of CMP Natural Gas,
L.L.C. ("Maine GasCo"), a Maine limited liability company.1 Maine GasCo
will construct, own and operate a small local natural gas distribution
system in Maine.
EEC's principal subsidiary, New York State Electric & Gas
Corporation ("NYSEG"), a combination electric and gas utility company
incorporated under the laws of the State of New York, is engaged in
the business of transmitting and distributing electricity, transporting
and distributing natural gas and generating electricity from its
nuclear and hydroelectric stations all in the central, eastern and
western parts of the State of New York. NYSEG's natural gas business
consists primarily of rural natural gas distribution, covering 6,116
square miles with a population of 1,072,000 people. Approximately
28.5% of NYSEG's gas supply originates from the Western Canadian
Sedimentation Basin, 63.0% from the Texas and Louisiana basins, 7.2%
from Appalachia and 1.3% from other sources. The natural gas NYSEG
receives from the Western Canadian Sedimentation Basin is delivered
through the TransCanada Pipeline.
The Maine Public Utilities Commission ("MPUC") has authorized
Maine GasCo to furnish natural gas service, on a non-exclusive basis,
in certain areas of Maine not currently receiving natural gas service.
Maine GasCo expects to derive its supply of natural gas from the
Western Canadian Sedimentation Basin via the proposed Portland Natural
Gas Transmission System pipeline ("PNGTS"), which will be
_____
1 The remaining membership interests of Maine GasCo will be held
by New England Gas Development Corporation ("New England Gas"), a
subsidiary of CMP Group, Inc. ("CMP Group") an exempt public utility
holding company and the parent holding company of Central Maine Power
Company ("CMP").
<PAGE>
interconnected with the TransCanada Pipeline, and from the gas fields
near Sable Island off Nova Scotia via the proposed Maritimes &
Northeast pipeline. When fully developed, Maine GasCo will continue to
receive at least 50% of its gas supply from the Western Canadian
Sedimentation Basin through the TransCanada Pipeline and the PNGTS
pipeline. As a public utility under Maine Law, Maine GasCo will be
subject to regulation by the MPUC as to rates and other matters.
It is currently contemplated that EEC, through EEC Enterprises,
will acquire at least 50% of the membership interests of Maine GasCo
and CMP Group, through New England Gas, will hold the remaining
membership interests. The MPUC has authorized initial capital
contributions by the members of Maine GasCo totaling $20 million.
EEC Enterprises and New England Gas are parties to a Joint
Venture Agreement dated as of November 13, 1997, as amended (the "Joint
Venture Agreement"), which provides for, among other things, the
formation of Maine GasCo. Each member's ownership interest is subject
to adjustment in accordance with the Joint Venture Agreement. The Joint
Venture Agreement establishes a Management Committee consisting of
three EEC Enterprises appointees and three New England Gas appointees
and generally vests a designated Manager, who will be located in Maine,
with exclusive authority to manage the business of Maine GasCo within
the limitations set forth in the Joint Venture Agreement. The Joint
Venture Agreement authorizes the Manager to perform any and all acts
customary or incident to the business of Maine GasCo. The Joint
Venture Agreement also authorizes the Manager to delegate authority and
to hire or contract for appropriate and necessary services. Certain
actions may be taken by the Manager only upon the affirmative vote of
a majority of the members of the Management Committee. The Joint
Venture Agreement provides for the resolution of stalemates or impasses
among the Management Committee by appeal to the Chief Executive
Officers of the Maine GasCo members, and by arbitration in the event
that the Chief Executive Officers are unable to resolve the impasse.
The applicant states that the Transaction will satisfy all of the
requirements of Section 10 of the Act, including Section 10(c)(2) of
the Act. Specifically, (1) the Transaction will not tend towards
interlocking relations or the concentration of control of public
utility companies to the detriment of investors and consumers; (2) the
consideration, including all commissions and fees, to be paid in
connection with the Transaction is reasonable; (3) the Transaction will
not unduly complicate the capital structure of the EEC holding company
system; (4) the Transaction is in the public interest and the interests
of consumers and investors; (5) the Transaction will tend towards the
development of an integrated gas utility system; and (6) the
Transaction will comply with all applicable State laws
Section 10(c)(2) of the Act provides that the Commission shall not
approve "the acquisition of securities or utility assets of a
public-utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated
public-utility system." Specifically, the applicant states that the
<PAGE>
acquisition by EEC of such voting securities of Maine GasCo will
satisfy the integration standard set forth in Section 2(a)(29)(B) of
the Act, in that Maine GasCo and NYSEG's gas systems will share a
common source of supply (the Western Canadian Sedimentation Basin) and
will be operated as a single coordinated system. Furthermore, the
applicant asserts that their investment in Maine GasCo, as well as
their ongoing involvement with Maine GasCo's operations, will be
critical to the development of a gas utility system in an area which
does not currently receive natural gas service. Finally, the applicant
states that, taking into account the current "state of the art" in the
natural gas industry, the area or region served by NYSEG in New York
and by Maine GasCo will not be "so large as to impair ... the
advantages of localized management, efficient operation, and the
effectiveness of regulation." To the contrary, the applicant notes
that the day-to-day operations of Maine GasCo will be under the
direction of its Manager. The management of Maine GasCo will be
independent of, but coordinated with (in order to promote efficient
operation) NYSEG, and will be subject to effective local regulation by
the MPUC.
The applicant believes that the Transaction will provide
significant financial and organizational advantages to Maine GasCo and
as a result, substantial potential economies and efficiencies should be
found to meet the standard of Section 10(c)(2) of the Act. The
Transaction will create opportunities for EEC's gas operations and
Maine GasCo to achieve savings, chiefly in the areas of management
expertise and joint management of their respective portfolios of gas
supply, transportation and storage assets. Maine GasCo will be able to
achieve substantial economies in gas supply through the increased
purchasing power and gas supply coordination that will result from
being part of the larger NYSEG gas system. Maine GasCo and its
customers will also benefit from NYSEG's expertise in such areas as
procurement and materials management; finance and accounting; and gas
system engineering and construction management.
The applicant states that EEC will continue to qualify for
exemption under Section 3(a)(1) of the Act as an "intrastate" holding
company even after acquiring Maine GasCo's voting securities because
Maine GasCo will only account for a de minimis part of EEC's income.
In this regard, EEC estimates that Maine GasCo will account for less
than 1% of its consolidated income in 1999 and 2000. In addition, the
applicant states that EEC Enterprises will be entitled to an exemption
under Section 3(a)(1) of the Act because EEC Enterprises and Maine
GasCo will both be organized and carry on their business in the State
of Maine, and neither EEC Enterprises nor Maine GasCo will derive a
material part of its income from a public utility subsidiary that
carries on its business and/or is organized outside of the State of
Maine.
All interested persons are referred to the application for
complete statements of the proposed transaction summarized above. The
application is available for public inspection through the Commission's
Office of Public Reference.
<PAGE>
Interested persons wishing to comment or request a hearing on the
application should submit their views in writing by ______________ __,
____, to the Secretary, Securities and Exchange Commission, Washington,
DC 20549, and serve a copy on the applicant at the address specified
above. Proof of service (by affidavit or, in case of an attorney at
law, by certificate) should be filed with the request. Any request for
hearing shall identify specifically the issues of fact or law that are
disputed. A person who so requests will be notified of any hearing, if
ordered, and will receive a copy of any notice or order issued in the
matter. After said date, the application, as filed or as amended, may
be granted.
