File No. 70-09569
Securities and Exchange Commission
Washington, D.C.
Amendment No. 3 to
FORM U-1
APPLICATION/DECLARATION
UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Energy East Corporation, One Canterbury Green, Stamford, Connecticut 06904
CMP Group, Inc., 83 Edison Drive, Augusta, Maine 04336
CTG Resources, Inc., 100 Columbus Boulevard, Hartford, Connecticut 06103
Berkshire Energy Resources, 115 Cheshire Road, Pittsfield, Massachusetts 01201
(Name of company or companies filing this statement and
address of principal executive offices)
Kenneth M Jasinski Arthur W. Adelberg
Executive Vice President and General Executive Vice President and
Counsel Chief Financial Officer
Energy East Corporation CMP Group, Inc.
One Canterbury Green 83 Edison Drive
Stamford, Connecticut 06904 Augusta, Maine 04336
Telephone: (203) 325-0690 Telephone: (207) 623-3521
Arthur C. Marquardt Scott S. Robinson
Chairman, President and Chief Executive President and Chief Executive
Officer Officer
CTG Resources, Inc. Berkshire Energy Resources
100 Columbus Boulevard 115 Cheshire Road
Hartford, Connecticut 06103 Pittsfield, Massachusetts 01201
Telephone: (860) 727-3000 Telephone: (413) 442-1511
(Names and addresses of agents for service)
Copies to:
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Adam Wenner, Esq. William T. Baker, Jr., Esq.
Vinson & Elkins L.L.P. Thelen Reid & Priest
The Willard Office Building 40 West 57th Street
1455 Pennsylvania Avenue, N.W. New York, New York 10019
Washington, D.C. 20004-1008 Telephone: (212) 603-2106
Telephone: (202) 639-6500
Frank Lee, Esq.
Huber Lawrence & Abell
605 Third Avenue
New York, New York 10158
Telephone: (212) 682-6200
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<PAGE>
This Amendment No. 3 to the Form U-1 of Energy East Corporation, originally
filed with the Securities and Exchange Commission on October 29, 1999 and
amended December 3, 1999 and February 7, 2000, amends Items 4 and 6 as indicated
below:
ITEM 4. REGULATORY APPROVALS
The following language should replace, in its entirety, the second
paragraph of Item 4.E., relating to the approval of the MPUC regarding the
merger between CMP Group and Energy East:
Maine: Under Maine law, the MPUC has jurisdiction over the indirect
transfer of control of Central Maine Power and of CMP Group's other utility
subsidiaries resulting from the CMP Group Merger, under a standard that requires
a finding that the merger is consistent with the interests of customers and
shareholders. CMP Group filed with the MPUC for approval of its merger with
Energy East on July 1, 1999.
On January 4, 2000, the MPUC issued its order approving the merger of CMP
Group with Energy East. This order, along with the MPUC's February 24, 2000
Order on Reconsideration, is attached as Exhibit D-4. In approving the CMP
Group Merger, the MPUC stated that the Maine statute governing approval of the
CMP Group Merger required the MPUC to retain the ability to detect, identify,
review and approve or disapprove all transactions between affiliated
interests.(1) The MPUC thus required, as a condition of its approval of the CMP
Group Merger, that Energy East and its affiliates, to the extent that their
activities relate to or in any way impact the operations, costs, or revenues of
Central Maine Power in Maine, be subject to the MPUC's jurisdiction for
discovery purposes and that they participate as a party in any proceeding when
deemed necessary by the MPUC. (2)
In order to assure the MPUC that it would also retain oversight over
affiliate transactions for ratemaking purposes after completion of the Merger,
CMP Group and Energy East agreed to request that this Commission include, in any
order approving the merger of CMP Group and Energy East, the following language:
It is the Commission's intention that the Maine Public Utilities
Commission will retain the right to review and disallow costs of
Services rendered by or to any Maine public utility company in
the Energy East Corporation registered holding company system that may
be subject to recovery in rates.
Energy East and CMP Group thus hereby request that, as part of any order
approving the Merger, the Commission reiterate the above-cited language in
fulfilment of the MPUC's condition of approval.
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(1) Order Approving Request for Approval of Reorganization and Affiliated
Interest Transactions, MPUC Docket No. 99-411 at 26 (Jan. 4, 2000).
(2) Id.
<PAGE>
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
The following exhibits are being filed with this Amendment No. 3:
NO. DESCRIPTION METHOD OF FILING
- ---- --------------------------------------------------- ----------------
D-4 MPUC Order in Docket No. 99-411 (January 4, 2000 Attached
Order Approving Request for Approval of
Reorganization and Affiliated Interest Transaction
and February 24, 2000 Order on Reconsideration)
D-10 NRC Order Attached
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(3) Amendment No. 2 to the Energy East U-1, filed on February 7, 2000, had
indicated that the MPUC Order in Docket No. 99-411 was being filed as an
exhibit in that document. However, Exhibit D-4 in Amendment No. 2 provided only
an errata notice issued by the MPUC, while omitting the order itself. This
Amendment No. 3 corrects the inadvertent omission made in Amendment No. 2,
and provides the MPUC order in Docket No. 99-411 in its entirety.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Amendment No. 3 to be
signed on their behalf by the undersigned thereunto duly authorized.
Energy East Corporation
Date: March 3, 2000 By /s/ Kenneth M. Jasinski
--------------------------
Kenneth M. Jasinski
Executive Vice President
and General Counsel
CMP Group, Inc.
Date: March 3, 2000 By /s/ Arthur W. Adelberg
-------------------------
Arthur W. Adelberg
Executive Vice President
and Chief Financial Officer
CTG Resources, Inc.
Date: March 3, 2000 By /s/ Arthur C. Marquardt
---------------------------
Arthur C. Marquardt
Chairman, President and
Chief Executive Officer
Date: March 3, 2000 Berkshire Energy Resources
By /s/ Scott S. Robinson
---------------------------
Scott S. Robinson
President and Chief
Executive Officer
<PAGE>
STATE OF MAINE Docket No. 99-411
PUBLIC UTILITIES COMMISSION
January 4, 2000
CMP GROUP, INC. ET AL ORDER
Request for Approval of Reorganization
And of Affiliated Interest Transactions
WELCH, Chairman; NUGENT and DIAMOND, Commissioners
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TABLE OF CONTENTS
I. SUMMARY...................................................................4
II. MERGER APPROVAL - LEGAL STANDARD .........................................4
III. DECSRIPTION OF PLANNED MERGER.............................................5
IV. POSITIONS OF PARTIES .....................................................7
A. Petitioners............................................................7
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B. OPA....................................................................8
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C. IECG...................................................................8
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D. Friends of the Coast - Opposing Nuclear Pollution .....................9
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E. Coalition for Sensible Energy..........................................9
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F. Independent Energy Producers of Maine .................................9
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V. DISCUSSION ........................................ .......................10
A. Benefits .............................................................10
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1. Cost Savings.....................................................10
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2. Sharing of Best Practices and Personnel ........................ 11
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3. Access to Capital............................................... 11
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B. Risks Other Than Those Associated With The Acquisition Adjustment.....13
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<PAGE>
Order 2 Docket No. 99-411
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1. Reliability and Customer Service ................................13
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2. Over-Expansion...................................................14
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3. Attention to Maine Operations ...................................14
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4. Increased Difficulty of Regulating the Merged Entity and of........
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Monitoring Affiliated Transactions .............................15
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5. Litigation Practices ............................................15
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C. Rates and the Acquisition Premium ....................................17
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1. Overview ........................................................17
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2. Analysis ........................................................19
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D. Risks, Rates and ARP 2000.............................................21
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E. Conclusion............................................................22
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VI. CONDITIONS ...............................................................23
A. Merger Conditions.....................................................24
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1. Service Quality Standards........................................24
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2. Capital Spending Targets.........................................25
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3. Commission Access to Books and Records ..........................25
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4. Commission Jurisdiction Over Energy East and Affiliates .........26
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5. Commission's Authority to Order CMP Divested.....................27
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6. Acquisition Premium .............................................27
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7. Protection Against Rate Increase from merger Inefficiencies .....28
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8. Rate Plan .......................................................28
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9. Energy East Agrees To All Conditions ............................29
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B. Proposed Conditions Not Adopted ......................................29
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<PAGE>
Order 3 Docket No. 99-411
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C. CMP's Request to Lift Certain Conditions Imposed in
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Docket No. 97-930 ...................................................30
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1. Restriction on Investments.......................................30
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2. Limits on Debt Insurances........................................31
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3. Royalty Payments for Use of CMP Name by CMP Gas..................32
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VII. ORDERING PARAGRAPH.......................................................34
Appendix A................................................................... 35
<PAGE>
Order 4 Docket No. 99-411
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I. SUMMARY
In this Order, we approve the merger of CMP Group, Inc. and Energy East,
with certain conditions. These conditions relate to: 1) maintaining service
quality; 2) capital budgeting; 3) access to books and records; 4) jurisdiction
over Energy East and affiliates; 5) the Commission's authority to order
divestiture; 6) limits on recovery of any acquisition premium; 7) protection
against rate increases; 8) Energy East's and CMP's commitment to a rate plan;
and 9) Energy East's written agreement to these conditions.
II. MERGER APPROVAL - LEGAL STANDARD
On July 1, 1999, CMP Group, Inc. (CMP Group), Central Maine Power Company
(CMP), MaineCom Services, Maine Electric Power Company, Inc., NORVARCO, Chester
SVC Partnership, Maine Yankee Atomic Power Company and CMP Natural Gas, L.L.C.
(CMPNG) (collectively, Petitioners) and Energy East Corporation (Energy East)
filed their Petition seeking approval of a merger between Petitioners and Energy
East.1
The proposed merger (the purchase of all outstanding stock of CMP Group,
Inc. by Energy East) constitutes a "reorganization" under 35-A M.R.S.A. 708 and
thus requires Commission approval. Under this section, the Commission may
approve a reorganization only if the applicant establishes that approval is
consistent with the interests of a utility's ratepayers and investors. The
Commission has previously found that the approval requirements of section 708
are met if the rates or services to customers of the former utility will not be
adversely affected by the transaction. See e.g., Consumers Maine Water Co.
Request for Approval of Reorganization Due to Merger with Philadelphia Suburban
Corp., Docket No. 98-648 (Jan. 12 1999); New England Telephone Telegraph Company
and NYNEX Corp. Reorganization Intended to Effect the Merger with Bell Atlantic,
Docket No. 96-388 (Feb. 6, 1997) (Bell Atlantic); Bangor Hydro-Electric Company
and Stonington and Deer Isle Power Company, Joint Application to Merge Property,
Franchises and Permits and for Authority to Discontinue Service, Docket No.
87-109, Order Approving Stipulation and Merger (Nov. 10, 1987); and Greenville,
Millinocket and Skowhegan Water Company, Application for Authorization to Sell
Utility Property to Wanakah Water Company and to Discontinue Service, Docket No.
92-250, Order Approving Stipulation (Dec. 15, 1992). Thus, the merger should be
approved if the total benefits flowing from the merger are equal to or greater
than the detriments or risks resulting from the transaction for both ratepayers
and shareholders. Bell Atlantic at 8. As stated in section 708, the burden of
proof is on the applicant to make this showing. 35-A M.R.S.A. 708(2) (no
reorganization may be approved unless it is established by the applicant that
the reorganization is consistent with the interests of ratepayers and
investors).
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1 The complete procedural history of this case is contained in Appendix A to
this Order.
<PAGE>
Order 5 Docket No. 99-411
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Given these standards, we must review the evidence presented by the
Petitioners and the other parties and determine whether the benefits of the
merger put forth by the Petitioners are at least equal to any likely risks, to
ensure no harm to ratepayers and shareholders. Our role is not entirely passive,
however; section 708 provides that if we grant approval, we shall impose such
conditions as "are necessary to protect the interests of ratepayers." Thus, in
weighing the risks, it is appropriate for us to consider the mitigating effect
of any such conditions. Finally, because shareholders are clearly protected by
the purchase of their shares at a premium and their right to vote to approve the
merger, we will review the impact of the reorganization on ratepayers.(2)
III. DESCRIPTION OF PLANNED MERGER
This section briefly describes the events leading up to the proposed
merger, the proposed merger and the planned accounting for the merger
transaction.
During a September 1998 meeting of CMP Natural Gas (CMPNG), an affiliate of
both Energy East and CMP, Energy East's chairman, president and chief executive
officer, Wesley W. von Schack, indicated to David T. Flanagan, the president and
chief executive officer of CMP Group, that Energy East might be interested in a
strategic combination with CMP Group. No further conversations were held until
February 1999, when Mr. von Schack expressed a continuing interest. (3)
CMP Group engaged the services of SBC Warburg Dillon Read LLC to act as CMP
Group's exclusive financial advisor and Thelen Reid & Priest LLP to act as CMP
Group's legal counsel. Following a special board meeting on February 18, 1999,
the CMP Group board of directors instructed management to investigate a merger
or sale of the Company.
In March 1999, Energy East and CMP Group continued discussions of a
potential combination. On April 29, 1999, Energy East submitted a draft proposal
and invited CMP Group to negotiate in the context of that proposal. During this
process, SBC Warburg Dillon Read, on behalf of CMP Group, developed a list of
other prospective merger partners and began confidential inquiries with respect
to those other companies. Energy East and two of the other companies signed
confidentiality agreements to allow the review of financial and other relevant
information.
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(2) OPA argues that the Commission should require the Petitioners to meet a
higher standard of clear and convincing evidence in showing there will be
no harm to ratepayers. It urges this higher standard "because of the
complete lack of specific evidence of potential savings" to offset the
costs of the merger. We reject this request. OPA provides no legal support
or Commission precedent for its request.
(3) The information in this and the following five paragraphs is based upon
information included in the CMP Group Proxy Statement mailed to
shareholders on or about September 3, 1999.
<PAGE>
Order 6 Docket No. 99-411
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On May 20, 1999, the CMP Group board of director's instructed management
and Warburg Dillon Read to solicit final determinative bids from the three
potential merger partners. The bids were to include the amount and type of
consideration to be received by CMP Group shareholders as well as any material
conditions or obstacles the bidders had identified to completion of a merger.
The bids were submitted by May 24, 1999. The board of directors, along with SBC
Warburg Dillon Read and Thelen Reid & Priest, met on May 25, 1999 to consider
the bids.
In terms of the amount of consideration offered, the Energy East bid was
equal to the higher of the other two bids. The CMP Group board of director's
decided to pursue negotiations with Energy East on an exclusive basis. On May
27, 1999, CMP Group executed an agreement to negotiate exclusively with Energy
East for a two-week period and suspended its discussions with the other two
bidders.(4)
On June 14, 1999, the CMP Group board of directors held a special meeting
to review the terms of the final proposed merger agreement and related
transactions. At this meeting, the board approved the proposed merger agreement
and the transactions it described. On June 15, 1999, the merger was publicly
announced. At a special meeting on October 7, 1999, CMP Group shareholders
approved the merger.
The merger proposal would result in a cash payment to shareholders of
$29.50 per share.(5) In addition, the transaction included employment contracts
for David T. Flanagan, Arthur W. Adelberg, Sara J. Burns, and F. Michael
McClain, Jr. The transaction results in a total payment of approximately $957
million for all of the outstanding common stock of CMP Group, approximately 77%
more than book value. CMP Group has estimated that the book value of its common
stock equity at the transaction's close will be approximately $541.5 million.
The estimated transaction costs are approximately $6.5 million to $7 million for
CMP Group and approximately $11 million for Energy East. The difference between
the purchase price and the book value plus Energy East's transaction costs is
the preliminary goodwill amount. (6)
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(4) Energy East also entered into merger agreements effective April 23, 1999
and June 29, 1999 with Connecticut Energy and CTG Resources, respectively.
Both companies would become wholly owned subsidiaries of Energy East. In
addition, on November 10, 1999, Energy East announced that it has reached
an agreement with Berkshire Energy Resources under which Energy East would
acquire all of the common shares of Berkshire.
(5) The closing price of CMP Group, Inc. on June 14, 1999, the day before the
merger announcement, was $20.0625.
(6) The terms goodwill and acquisition premium/adjustment have been used
interchangeably during the course of this case. Goodwill is the terminology
used in Generally Accepted Accounting Principles (GAAP), while Acquisition
Premium/Adjustment is the term used in regulatory settings. Essentially
both mean the difference between the purchase price and book value of an
asset. This is.
<PAGE>
Order 7 Docket No. 99-411
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Near the time of closing, Energy East plans to revalue CMP Group's
non-regulated subsidiaries (MaineCom Services, NORVARCO, and Chester SVC
Partnership) to their current market values and record the appropriate
adjustment to the books and records of each subsidiary. Any difference between
the book value of these companies and the established market value will be
adjusted from the total goodwill amount. The net of the preliminary goodwill and
the amount allocated to the non-regulated subsidiaries will be considered
goodwill for CMP.7 This amount will be subject to a maximum amortization period
of 40 years under Generally Accepted Accounting Principles (GAAP). CMP will
record the goodwill in Account 114, Electric Plant Acquisition Adjustments. The
amortization will be expensed below the line in Account 425, Miscellaneous
Amortization, on a straight-line basis over the 40-year amortization period. CMP
has acknowledged that the GAAP requirements do not bind this Commission when it
determines the ratemaking effect and treatment of these items.
IV. POSITION OF PARTIES
A. Petitioners
-----------
Petitioners claim that the merger will not adversely affect service
quality or rates and that total benefits will exceed any risks. With regard to
service quality, Petitioners claim that CMP's past performance has been superior
and that Energy East has a reputation for, and a commitment to, excellent
customer service. CMP and Energy East state that they will maintain CMP's
existing service quality and reliability targets in any future ARP.
With regard to rates, CMP has not included any of the costs of the
merger or costs of achieving merger synergies in this case or in its current
rate case (Docket No. 97-580). Because rates are being set without considering
the merger, Petitioners argue there will be no adverse effect on rates due to
the merger.
Other benefits Petitioners claim will result from the merger include:
fewer financial risks for CMP as part of a larger company, access to greater
management experience, sharing of best practices, and a heightened focus on
economic development. Petitioners argue these more than offset the risks raised
by other parties
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distinguished from "good will" as used in 35-A M.R.S.A. 713 and Chapter 820 of
the Commission's rules. There goodwill is a benefit or advantage to the utility
of having an established reputation or customer relationships, including the use
of name and reputation. Chapter 820(2)(F). See also, Section VI (C) of this
Order.
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(7) Energy East has indicated that it is unsure whether any goodwill would be
allocated to CMP Natural Gas as part of this transaction.
<PAGE>
Order 8 Docket No. 99-411
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(e.g. affiliate abuses, increased financial risk for CMP, management inattention
to core business, diversification).(8)
Petitioners ask the Commission to affirm in its order approving this
merger "that Energy East will be accorded a reasonable opportunity to recover
the acquisition premium through net synergies achieved by the merger." The
Petitioners also ask that the Commission remove three restrictions imposed as
part of CMP's reorganization in Docket Nos. 97-930 and 98-077: limits on
investments and debt issuance, and payment of royalties by its gas affiliate for
the use of the CMP name.
B. OPA
---
OPA argues that the Petitioners have failed to provide sufficient
evidence of potential merger cost savings to offset potential harms. Potential
harms include the risk that rates will be higher, service quality and
reliability will be reduced to achieve cost savings, and management will be
distracted due to Energy East's expansion into four additional states.
If the Commission chooses to approve the merger, the OPA urges the
Commission to reject Petitioners' request for an explicit opportunity for the
future recovery of an acquisition adjustment. OPA argues that the ARP 2000
proceeding will allow an opportunity to consider this issue; any pronouncement
now will set a dangerous precedent for future mergers, and such assurance would
not address how such recovery would be treated in years after ARP 2000 expires.
The OPA proposes four conditions: maintaining CMP Group's $240 million
investment limit on future investments in non-utility activities; continuing the
royalty payment by CMPNG to CMP pursuant to the stipulation approved in Docket
No. 98-077; continuing CMP Group's debt limitation at 50% of total
capitalization; and making no reference to the future recovery in rates of any
acquisition premium.
C. IECG
----
IECG argues that the Petitioners have failed to show how any
substantial risks to ratepayers will be mitigated by any benefits. Risks include
potential negative impacts on rates; less attention to Maine ratepayers from
management; fewer employees, leading to decreased service quality; less capital
investment; and increased difficulty in regulating CMP as part of a multi-state
holding company. IECG claims any offsetting benefits, including any possible
merger savings claimed by Petitioners, are too vague and are not verifiable.
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(8) CMP claims the largest benefit comes from being able to "offer"
its proposed ARP 2000 rate plan. Since that plan is not in this case and no
discovery or review of it has taken place, we will not consider the terms of
CMP's specific proposal in weighing the potential benefits and risks associated
with the merger.
<PAGE>
Order 9 Docket No. 99-411
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IECG argues that unless stringent conditions are imposed, the
Commission should deny approval of the merger. These conditions include: not
allowing any implicit or explicit recovery of an acquisition premium; flowing
any savings related to the provision of electricity service directly to CMP's
ratepayers; imposing the existing ARP performance criteria related to service
quality with a graduated penalty system; setting annual capital expenditure
target levels; requiring the consideration of merger costs and savings as part
of any new ARP; and requiring acknowledgement by Energy East of the Commission's
findings from Docket No. 97-580 (Phases I and II).
IECG further argues the Commission should remove the investment and
debt limits imposed in Docket No. 97-930; keep the royalty payment; require the
filing of copies of SEC reports with the Commission; not grant blanket
reorganization approval 9 ; allow dissolution of CMP Group if required by the
SEC; and allow for revisiting conditions if the Public Utility Holding Company
Act (PUHCA) is repealed.
D. Friends of the Coast - Opposing Nuclear Pollution
-------------------------------------------------
The Friends of the Coast asks the Commission to stay approval of the
proposed merger until CMP Group and Energy East have demonstrated that the
proposal includes a fully informed plan to address decommissioning and waste
storage issues at Maine Yankee Atomic Power Station (MYAPS) and related public
and community issues. The Friends of the Coast also requests that the Commission
withhold any approval until ownership transfer issues are resolved before the
Nuclear Regulatory Commission and the Federal Energy Regulatory Commission. E.
E. Coalition for Sensible Energy
-----------------------------
The Coalition for Sensible Energy requests that the Commission
disallow the merger unless certain conditions related to public information,
energy management, quality of service and communications are made part of the
Commission's decision. The CSE requests that these conditions be imposed to
satisfy its concern that none of the parties in the new entity expressed any
interest in the "public good" at either the technical conference or hearing.
F. Independent Energy Producers of Maine
-------------------------------------
IEPM urges the Commission to reject the merger as the record does not
support a finding that the merger is in the public interest as neither CMP Group
nor Energy East has demonstrated that merger-related savings will exceed merger
transaction costs and the acquisition premium. If the Commission does find the
merger
- ----------------------------
(9) In their original Petition, Petitioners asked for blanket section 708
approval so that non-utility affiliates can enter into one or more joint
ventures, general partnerships, limited partnerships, membership in limited
liability companies or other affiliations. Petitioners in their brief make no
mention of this request. We therefore do not consider it here.
<PAGE>
Order 10 Docket No. 99-411
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to be in the public interest, the IEPM recommends that the risk of merger costs
exceeding merger-related savings be borne by the acquiring company. If the
merger-related savings do not exceed the merger costs, including the acquisition
premium, the shareholders should not recover any deficit or shortfall from
ratepayers. The IEPM also argues that the ratepayer protections adopted in
Docket No. 97-930 should not be eliminated as part of the merger.
V. DISCUSSION
As described above in Section II, we must consider whether the benefits of
the merger as put forth by the Petitioners are at least equal to any potential
risks. Those benefits and risks are discussed below.
A. Benefits
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1. Cost Savings
------------
One of the primary arguments advanced in favor of utility mergers is
that it is generally less expensive for a larger utility to provide service than
for a smaller one. The record in this case includes suggestions from both the
Petitioners, in testimony from Dr. Gordon, and the IECG, through Dr. Silkman's
testimony, that they generally expect that the merger will result in lower
costs. But neither of those witnesses, or any others in this case, has analyzed
the likely range of possible savings or even identified the areas of the
business where savings are likely.
Apparently, CMP and Energy East have simply assumed that because other
similar mergers have produced savings in the range of five percent of non-fuel
operations and maintenance costs, they could expect similar results. In fact,
Energy East indicated that this simple rule of thumb was all that was necessary
to justify its decision to offer a premium of roughly 77% over book value for
CMP common stock. Petitioners argue that studies which attempt to estimate cost
savings stemming from mergers are inherently uncertain and, as a result, do
little more than waste resources in a "costly battle of experts" over the likely
level of savings.
The fact that competing studies of cost savings might be expensive
carries little weight for a transaction involving close to $1 billion,
especially since much of the $18 million in transaction costs for CMP Group and
Energy East was for fairness opinions to consider whether the deal was in the
best interests of their respective stockholders. While the cost of the study
should thus not be a consideration, there may be merit to the argument that even
the best study of potential merger savings would likely have a large margin for
error, thus limiting its ultimate usefulness.
More troubling than the lack of a detailed cost savings analysis is
the absence, at least in the record before us, of a reasonably specific plan to
determine what cost centers are likely candidates for efficiency savings and the
general magnitude.
<PAGE>
Order 11 Docket No. 99-411
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of potential savings. It is reasonable to assume that a decision to invest more
than $1 billion and a promise that future rates will not increase would have
something more than an investment banker's industry-wide "rule of thumb" as a
foundation.10 But Energy East represents that no such plan exists.
We conclude that it is reasonably likely that some level of cost
savings would occur as a result of the merger. However, in the absence of a
reasonable estimate of possible cost savings, or a plan to achieve savings which
would allow us to develop our own sense of the likely range of savings, we are
left to balance an uncertain level of possible future benefit against an
uncertain risk of future harm. As discussed below, this uncertainty weighs
heavily in our decision to impose certain conditions to ensure that the benefits
outweigh the risks.
2. Sharing of Best Practices and Personnel
---------------------------------------
The Petitioners claim that the proposed merger will benefit
consumers by allowing CMP access to "greater management experience, sharing of
best practices and heightened focus on economic development." The Petitioners
also state that mergers have the potential to provide benefits through
"economies from specialization." They further assert that a larger organization
would give employees broader professional opportunities, thus improving morale
and efficiency.
The other parties argue that these potential benefits are
amorphous, insufficiently supported and have not been quantified. Specifically,
the IECG notes that no plan for the sharing of best practices has been
developed. The IECG also suggests that Energy East's statements contradict CMP's
assertion that it will have the benefit of Energy East's management.
While we agree that, in theory, mergers have the potential to
produce such benefits, actually realizing these benefits depends both on the
individual characteristics of the corporations and their respective managements.
We agree with the intervening parties that the Petitioners have not provided
sufficient specificity to determine whether or not any of these particular
benefits are likely to be achieved as a result of this particular merger.
3. Access to Capital
-----------------
The Petitioners argue that one benefit of the merger is that CMP
will have better access to capital markets at lower costs. We agree that there
may be some benefits when a securities issue is larger, because there are fixed
issuance costs for both debt and equity securities. However, given the specific
circumstances of CMP
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(10) Magnifying this concern is the fact that the combined value of all
four of Energy East's recently announced acquisitions, including purchases of
common stock and assumption of debt and preferred stock, amounts to more than
$2.56 billion based on Energy East press releases and published accounts.
<PAGE>
Order 11 Docket No. 99-411
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and Energy East today, these appear remote. Energy East's total capitalization
is expected to be from $4.1 to $4.8 billion when all four of its pending mergers
are closed, while CMP Group's total capitalization was approximately $801
million at September 30, 1999. To the extent that Energy East would be able to
coordinate its public issuances of debt and equity to meet future capital
requirements of all its subsidiaries simultaneously, it may then be able to do
larger, less frequent issuances, thereby spreading its fixed issuance costs over
a larger base.
To illustrate an order of magnitude, evidence provided in Maine Public
Utilities Commission, Investigation of Stranded Cost Recovery Transmission and
Distribution, Utility Revenue Requirements, and Rate Design of Bangor
Hydro-Electric Co., Docket No. 97-596, and Maine Public Utilities Commission
Investigation of Central Maine Power Company's Stranded Costs, Transmission and
Distribution Utility Revenue Requirements, and Rate Design, Docket No. 97-580
(Phase I), indicated that fixed costs of recent common equity issuances for
electric utilities ranged between $115,000 and $500,000 and averaged roughly
$230,000. Obviously, the ability to go from an (hypothetical) issuance of $50
million to $100 million will effectively reduce the cost of new capital. In this
example, the fixed cost as a percent of proceeds would fall from 46 basis points
to 23. The effect would be similar for debt issuances although the absolute
dollar savings would be smaller since debt issuances are generally not as costly
as new equity issuances.
While we believe these potential benefits likely are real, we are
aware that future capital costs could either remain the same, or even increase
following the merger. Capital costs for both debt and equity securities could
remain unchanged for the following reasons. To the extent that Energy East
subsidiaries wished to issue secured debt, such issuances would likely be done
at the operating company level, since we would not allow the holding company to
pledge utility assets as collateral. This means that CMP would issue new debt in
similar amounts at similar costs whether or not the merger occurs.
While it might be possible for a larger Energy East to negotiate lower
fixed issuance costs on secured debt or to instead use unsecured debt from the
holding company, these potential benefits are speculative. For future common
equity issuances, there is little doubt that larger issuances will indeed occur.
What is less clear, however, is how far into the future such benefits would be
realized. Both Energy East and CMP Group, following the divestiture of their
generation assets, have relatively high equity ratios (51% & 72% respectively at
9/30/99), indicating that new equity issuances are not in either company's
near-term plans. In fact, despite its recent acquisitions, Energy East
apparently remains committed to share repurchases.
Moody's acknowledged the possibility of higher capital costs in its
June 30, 1999 report on Energy East following its merger announcement with CTG
Resources in Connecticut, noting:
<PAGE>
Order 13 Docket No. 99-411
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[W]e will continue to evaluate the financial policies that Energy
East might pursue for each of the utility subsidiaries in the
future. A marked change toward more aggressive financial policies
than those currently contemplated could add pressure on the
ratings of any one or more of the companies.
In the same report, Moody's mentioned that one of Energy East's newsubsidiaries,
Southern Connecticut Gas Company (SCG), could experience a ratings downgrade
from A2 to A3 because Energy East and SCG's soon-to-be sister subsidiaries were
currently rated at A3. On balance, however, we do not expect CMP to suffer a
similar downgrade. First, because CMP currently has an A3 bond rating from
Moody's, it would not be looking at a downgrade resulting from the merger.
Second, the holding company structures used by Energy East and CMP insulate the
utility subsidiaries to some degree from non-regulated investments that may be
riskier than distribution businesses, a factor also noted by Moody's. Because
Commission approval is required for a utility to encumber (or "mortgage") its
assets, we would be able to monitor the financial conditions at the utility
level in a post-merger scenario. Overall, while the possibility of improved
access to capital for a post-merger CMP exists, the timing and size of the
potential benefits are uncertain.
B. Risks Other Than Those Associated with the Acquisition Adjustment
-----------------------------------------------------------------
In addition to the risk associated with the acquisition adjustment
(which is discussed below in V (C)), the intervenors raise a number of other
potential areas of risk. Interestingly, in a mirror image of the intervenors'
criticism of Petitioners' assertion of benefits, Petitioners argue that the
Commission should put no value on the intervenors' assertions of risk, as they
are unsubstantiated and not specific to this particular merger.
We agree that potential risks cannot be qualified with any
confidence. However, section 708 requires that to approve the merger, we must
determine that no net harm will result to ratepayers. We must therefore evaluate
these risks, determine their likelihood, and decide what if any conditions could
be imposed to ensure that the requirements of section 708 are met.
1. Reliability and Customer Service
--------------------------------
Several parties raise concerns that the merger could result in a
deterioration of customer service. The IECG and CSE note that for the merger to
produce savings, it is likely that the workforce at CMP will be reduced, which
could reduce service quality. The IECG points out that CMP has already reduced
its work force significantly since the early 1990s and that further cuts may be
detrimental.
We agree that maintaining a high standard of service quality is
Very important. Further, as suggested by recent experiences with Bell-Atlantic-
Maine (See Docket No. 98-808, Bell Atlantic-Maine Notice of Merger with GTE
Corporation, Order
<PAGE>
Order 14 Docket No. 99-411
- --------------------------------------------------------------------------------
on Reconsideration (Aug. 25. 1999) (noting decline in quality of service and
management attention)), service quality may deteriorate when a Maine utility
becomes a part of a larger, multi-state firm. Such a decline is unacceptable.
Therefore, as discussed below, we could only approve this merger with
appropriate service quality conditions.
2. Over-Expansion
--------------
According to the OPA witness, Mr. Talbot, Energy East has been on
a "buying binge", and this growth strategy brings financial risk. Mr. Talbot
also testified that Energy East's common equity ratio target of 40% is too low
and that such an aggressive target is inappropriate. Messrs. Chernick and Talbot
also describe the poor track record of utilities that have invested in
unregulated areas.
Mr. Adelberg responded to these assertions by suggesting that a
40% target equity ratio, while perhaps inappropriate for CMP on a stand-alone
basis, is a reasonable target for the larger Energy East. Mr. Adelberg also
suggests that Energy East's public statements and practices indicate that it
intends to focus on energy delivery and related services, not speculative
unregulated ventures. Moreover, Mr. Adelberg asserts that Energy East's larger
size makes it better able to absorb risks associated with diversification than
CMP alone.
A larger T&D utility may be stronger financially. We agree
however, that there is a danger that Energy East might over-expand, placing
increased risk on CMP. Of course, there is no guarantee that CMP Group would not
run into similar problems absent the merger. Energy East's recent spate of
acquisitions does suggest some basis for concern.
3. Attention to Maine Operations
-----------------------------
The OPA's witness, Mr. Chernick, points to the possibility that
Energy East's management could be distracted by having service territories in
four states besides Maine. IECG notes that CMP ratepayers will lose their two
most experienced top executives, Messrs. Adelberg and Flanagan, and that the new
board that will govern CMP will be dominated by NYSEG and Energy East board
members, with only four members from CMP. They suggest this will reduce CMP's
autonomy. IECG also argues that the fiduciary responsibilities associated with
non-Maine based stockholders requires an orientation that is focused less on
Maine activities and suggests that the merger may increase the tendency to
invest more capital in areas with stronger economies than Maine.
As described earlier, our experience with Bell Atlantic-Maine
demonstrates that there is a risk that local operations may be compromised when
a Maine utility becomes part of a larger, multi-state utility. While it is not
clear that this is specifically caused by management distraction associated with
multi-state operations, it may be a contributing factor. Therefore, we find this
to be a possibility that cannot be.
<PAGE>
Order 15 Docket No. 99-411
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easily mitigated. We cannot conceive of a condition that could directly compel
Energy East to focus more management attention on its Maine operations. However,
service quality conditions may indirectly accomplish this end and can be
designed to insulate customers from the consequences of any such inattention.
4. Increased Difficulty of Regulating the Merged Entity and of
------------------------------------------------------------------
Monitoring Affiliated Transactions
------------------------------------
The IECG argues that the merger will result in a significantly more
complex corporate structure that will be more difficult to regulate than CMP
prior to the merger. Further, the IECG asserts that because PUHCA was instituted
in response to the difficulties associated with regulating such holding
companies, the repeal of PUHCA would further put ratepayers at risk. Mr.
Adelberg asserts that 35-A M.R.S.A. 707 and Chapter 820 are adequate protection
against affiliate abuses.
We agree that the larger, more complex structure of the merged
corporation may be more difficult to monitor and regulate than CMP is today.
This difficulty necessarily brings with it the risk that regulation will be more
expensive and less effective at protecting ratepayers. Therefore, if this merger
is to be approved, certain conditions are necessary to address this risk.
Additionally, because there is a risk that Maine's authority to review affiliate
transactions and make associated ratemaking decisions could be preempted
pursuant to federal law, we have included a condition to deal with this
contingency.
5. Litigation Practices
--------------------
In addition to increased regulatory scrutiny and costs that would
likely result from the merger, this proceeding has highlighted an additional
concern regarding future difficulties and the potential for reduced cooperation
in the regulatory process. This concern arises from what we perceive as Energy
East's lack of reasonable diligence, consistency, and openness in producing
information and responding to written and oral questions in this case. We
discuss several examples below.
Perhaps the most troubling illustration of this concern involves
responses to questions about cost savings and synergies resulting from the
merger. In several data responses, Energy East stated that it had not prepared
any cost savings studies or analyses related to the merger and it had no
documents relating to the coordination or consolidation of activities among
affiliates. Energy East did state that it estimated 5% savings in combined O&M
expenses based on experience with other mergers, but it had no documentation of
that estimate. Despite these statements, Energy East's due diligence materials
contain discussions of potential cost savings and coordination among affiliates.
However, most of this material was inappropriately redacted and Energy East did
not make this material available until ordered to do so by the Hearing Examiner.
Docket No. 99-411, Procedural Order (Sept. 13, 1999). In light of the obvious
interest from the parties and the Bench in cost savings information, it is
<PAGE>
Order 16 Docket No. 99-411
- --------------------------------------------------------------------------------
difficult to understand why Energy East did not reference its due diligence
materials (with any disclaimers it wished regarding what the materials did, or
did not, represent).
Another example involves data requests for financial analyst
reports. In response, Energy East provided several such documents but failed to
provide numerous other documents responsive to the requests.11 In answer to a
request for an explanation of this lapse (Docket No. 99-411 Procedural Order
(Sept. 14, 1999)), Energy East submitted a letter (dated September 20, 1999)
that at best shows an absence of reasonable diligence in responding to discovery
and at worst calls into question Energy East's credibility.12
An additional concern involves a data response and discussion
during the September 2, 1999 technical conference regarding Energy East's
proposal on recovery of the acquisition adjustment and the finding it is seeking
from the Commission in this case. In its response, Energy East stated it would
propose a multi-year rate plan that would specify the exact recovery method.
However, the response then described in some detail (with an attached
illustrative schedule) the "proposed Earning Sharing Mechanism" and stated that,
"CMP will make an explicit request that the Commission make a finding in this
case that will allow . . . this Earning Sharing Mechanism to be employed so that
management will be appropriately incented to achieve sufficient efficiencies to
benefit both customers and investors." During questioning at the technical
conference that appeared to show that the mechanism did not operate as
purported, Energy East stated that the mechanism was not its proposal and
suggested that this should have been clear from the statement in the data
response conveying its intent to file a multi-year rate plan.
Finally, we observed inconsistencies in testimony regarding the
taking of notes and the retention of notes and drafts of documents. Some parties
had sought notes and other documents regarding merger negotiations. During the
September 2, 1999 technical conference, Mr. Jasinski stated that neither he nor
Mr. von Schack kept notes of the merger negotiations. Later, Mr. Jasinski
explained in detail a "corporate policy" that is "rigorously followed," whereby
notes and drafts are not retained. However, during the November 2, 1999 hearing,
Mr. Jasinski testified that he
- --------------------
(11) One of the excluded documents was a Merrill Lynch report stating that
"the Company indicated it could achieve synergies of around $30 million." Energy
East later explained that the $30 million came from the 5% estimate derived from
observations of other mergers.
(12) For example, the letter stated that two analyst reports on Energy East
mergers with Connecticut Gas Utilities were not provided because Energy East in
good faith did not believe they were requested. However, the data requests
clearly referenced financial analysts' reports on Energy East. Additionally,
Energy East stated that it interpreted the request to be for reports in CMP
Group's possession when the request specified "in the possession of the
Petitioners or Energy East."
<PAGE>
Order 17 Docket No. 99-411
- --------------------------------------------------------------------------------
may have kept notes of the negotiations, but that he did not currently have
them. He also stated that there is no corporate policy on keeping notes and
drafts, but there is a document retention policy that states that important
documents should be kept and periodically files should be cleaned out.13
By recounting these matters, we do not accuse Energy East of any
intentional misconduct. These lapses may have resulted from some combination of
misunderstandings of how the regulatory process is conducted in Maine, general
confusion, carelessness, or overly literal readings of information requests.
When concerns were raised, Energy East did provide explanations, but these often
were confusing, inconsistent or inadequate. Taken as a whole, the litigation
activities of Energy East may indicate a pattern of behavior that raises
concerns regarding the continuation of the good faith cooperation we have
observed with CMP. Thus, we conclude that the proposed merger presents a risk of
reduced cooperation regarding the regulatory process and increased costs and
efforts necessary for regulatory oversight.
C. Rates and the Acquisition Premium
---------------------------------
1. Overview
--------
In considering the proposed merger from the perspective of
ratepayers, the greatest risks and benefits involve the impact of the merger on
customers' rates. In this case, the rate impact question revolves around two
issues, neither of which is directly before us: the ratemaking treatment of the
acquisition premium and the next incentive rate plan for CMP. While neither
issue is ripe for decision, together they are central to determining whether the
proposed merger can be approved.
Acquisition premiums create a serious dilemma for regulation, in
part due to the circularity that they present. The premium is the amount over
book value that the acquirer offers to existing shareholders to induce them to
sell their shares. The value of a utility to a potential acquirer is the present
value of the revenue stream which the buyer anticipates receiving. But if rates
are set based upon the buyer's cost of acquiring the firm, then by making a high
offer, the buyer simultaneously raises the rates that will be charged to the
monopoly customers. The logical result of automatically including the
acquisition premium in rates is that the offering price will rise to the point
where rates are set at the same level that an unregulated monopoly firm would
charge its customers. Such an outcome is clearly undesirable as a matter of both
law and economics.
- -------------------------
(13) Utilities generally have the burden to demonstrate the reasonableness
or prudence of their actions. We put Energy East and CMP on notice that the lack
of proper documentation may hinder their ability to demonstrate that their
actions were reasonable and prudent.
<PAGE>
Order 18 Docket No. 99-411
- --------------------------------------------------------------------------------
While this simple logic suggests that we should ignore any
acquisition premium for purposes of ratemaking, that approach could, if adopted
uncritically, lead to higher costs and rates. As we noted some years ago:
[E]xperience ... shows that significant cost savings can be
achieved in certain merger situations. In such cases, ratepayers
may be better served by a policy that provides some incentive to
shareholders to merge. In such cases, if the record shows that
the customers of the surviving utility will realize benefits of
efficiency gains, then the utility might be entitled to recover
some of its costs in excess of net book value.
Bangor Hydro-Electric Company and Stonington and Deer Isle Power Company, Joint
Application to Merge Property, Franchises and Permits and for Authority to
Discontinue Service, Docket No. 87-109, Order at 2 (Nov. 10, 1987) (Stonington).
Energy East is paying $29.50 per share for CMP, which is
approximately 77% more than the net book value of CMP common stock. For
accounting purposes, this will result in a substantial amount of goodwill being
booked on CMP's balance sheet.14 Energy East states that it intends to amortize
the goodwill for accounting purpose over 40 years, resulting in an annual charge
of about $10 million, depending on the actual level of goodwill.
In general, a utility's accounting for a particular item has no
bearing on how we would treat the item for ratemaking purposes, and that is true
as well here. Moreover, Energy East is not asking for any statement from us that
some or all of the premium will be allowed in rates, but only that it has a
reasonable opportunity to recover it from net savings. That said, the issue
remains before us in four contexts.
First, a utility generally keeps its books in conformance with
Generally Accepted Accounting Principles (GAAP) unless the Commission, or some
other regulatory body such as the FERC, takes action that implies some different
treatment. For example, if we were to issue an order stating that under no
circumstances would we allow any portion of the acquisition premium in rates,
then CMP might be forced to write-off the goodwill immediately. Energy East has
requested that we not rule out the possibility of recovering the premium.
Second, the amount of goodwill is likely to be large enough so
that if CMP is unable to recover it from ratepayers, either directly in rates or
indirectly through keeping a portion of the efficiency savings which result from
the merger, it could significantly harm CMP's, and ultimately Energy East's,
financial position. This could
- -----------------------------
(14) Energy East estimates that this would result in goodwill of
approximately $470 million, although the actual figure will undoubtedly be
somewhat lower as a result of revaluing the non-utility holdings of CMP Group.
<PAGE>
Order 19 Docket No. 99-411
- --------------------------------------------------------------------------------
harm ratepayers if it caused an unreasonable reduction in capital and/or O&M
budgets, forced management to focus exclusively on short-run earnings, or caused
difficulty in attracting capital.
Third, if the acquisition premium is included in rates, it is
large enough that it could swamp any merger efficiency savings, resulting in
higher rates.
Finally, Energy East has proposed that we institute a new
incentive ratemaking plan that is tied to the acquisition premium in two ways.
First, the rate plan would allow CMP to avoid a rate case for a number of years
(seven years in the ARP 2000 proposal). Under its proposal, rates would be set
largely ignoring any merger savings, and CMP would then use some or all of the
savings to offset the acquisition premium. Second, under the ARP 2000 proposal,
the acquisition premium would be an explicit component of the earnings sharing
formula. If actual earnings are above a dead band, a portion of the excess that
might otherwise go toward reducing rates (or reducing the size of a rate
increase) would be used to offset the amortization of the acquisition premium.
2. Analysis
--------
While we have never explicitly invoked the dicta from the
Stonington case, we continue to support the concept we enunciated there.
However, the policy is not easily put into practice, particularly in a case such
as this where the source of any merger savings, to say nothing of their
magnitude, is speculative at best. On one hand, to the extent that a merger
actually results in demonstrable cost savings, it would be reasonable to use a
portion of those savings to offset the cost of undertaking the merger, including
the premium. On the other hand, if that policy is implemented poorly, for
example by overestimating the cost savings deriving from the merger (rather than
from some other cause), then we are inviting potential merger suitors to simply
bid up the price of a utility to the point where monopoly rents become
available. Such an outcome would clearly be unacceptable.
To balance these conflicting concerns, we will not rule
out allowing Energy East to include some level of the acquisition premium in a
future rate request upon a clear and persuasive showing that the savings
resulting from the merger itself (and not from some other cause) exceed the
costs imposed by the merger. In other words, the only portion of the savings
from which shareholders can recoup any portion of the premium is the portion
that would not have existed "but for" the merger. If net efficiency savings from
the merger can be demonstrated, we will allow recovery of the acquisition
premium through rates subject to the following limitations:
a) the acquisition premium will not be considered in any
way where the effect of including the premium in any
rate calculations would be to increase rates above
levels that would exist absent the merger (in other
words, there must be.
<PAGE>
Order 20 Docket No. 99-411
- --------------------------------------------------------------------------------
demonstrable benefits available to ratepayers
sufficient to offset all merger related-costs); and
b) Maine ratepayers receive a reasonable portion of the
net savings from the merger.
We take this opportunity to offer some insight into how
we would analyze a request to recover some or all of the acquisition premium.
First, as we stated in Stonington, to allow recovery of some or all of an
acquisition premium, there must be a clear and demonstratable showing of net
merger-related savings. That will not be an easy showing. The record in this
case contains numerous assertions, particularly by the Petitioners and Energy
East, that efficiency gains are difficult to quantify before the fact,
essentially because of the need to forecast the costs of the newly merged
entity. Efficiency gains may be similarly difficult to qualify after the fact,
because we would have to compare the actual costs of the merged entity with the
forecast or expected costs that would have been incurred had the merger not gone
forward. This task will become increasingly difficult over time. Energy East is
proposing to amortize the acquisition premium over 40 years. Long before that,
within 5 or 10 years, it may be impossible to develop any reasonable estimate of
merger specific efficiencies. Thus, there will be an increasingly difficult
burden on Energy East to demonstrate that savings are indeed the result of the
merger as time passes.
Second, once a reasonable estimate of merger savings
has been developed, we would have to consider whether the Maine ratepayers
should be responsible for any of the premium.15 Energy East witnesses have
testified that they expect that the merger will produce efficiency benefits at
both CMP and NYSEG, Energy East's utility subsidiary in New York. We would have
to consider whether it would be reasonable to charge Maine ratepayers for any
premium which was producing savings elsewhere in the Energy East family but not
benefiting Maine ratepayers. In their brief, Petitioners argue against this
approach for three reasons. First, they argue that it is inconsistent with GAAP,
although they concede that GAAP does not bind the Commission for ratemaking
purposes. They also argue that so long as there is no "net harm to ratepayers"
it is sensible to allow the full adjustment to be charged to Maine ratepayers.
While the issue is not squarely before us, we are not persuaded by the
Petitioners' argument at this time. If, for example, two-thirds of the gross
benefits of the
- -----------------------------
(15)A related issue which was not explored in this case is the question of
whether any premium allowed in rates should be limited to the difference between
the acquisition price and the market price of the stock immediately before the
merger was publicly announced. This is sometimes referred to as the "control
premium" because it represents the additional value, over the market price of
the stock, which the acquiring firm paid to gain control and, therefore, to
obtain any synergies. If a request for recovery of the premium were to come
before us, we would also consider whether the control premium, rather than the
total premium, was the appropriate measure. See e.g., Guidelines and Standards
for Acquisition and Mergers of Utilities, 155 P.U.R. 4 th 320, 327 (Mass.
D.P.U.1994).
<PAGE>
Order 21 Docket No. 99-411
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merger flow to New York customers, and one-third flow to Maine customers, we
might consider the proposition that Maine should be liable for only one-third of
the costs. On the other hand, under the Petitioners' approach, it is possible
that the Maine efficiencies could precisely offset the full acquisition
adjustment and that one hundred percent of the net benefits would therefore flow
to New York customers and/or to stockholders. This appears unreasonable.
Finally, the Petitioners are concerned that such an approach
would intrude on the jurisdiction of the New York Public Service Commission
(NYPSC), "which has the responsibility to determine the effect on NYSEG's
earnings of synergies created by Energy East mergers." While we appreciate the
Petitioners' concern for the NYPSC's jurisdiction, their argument is
unpersuasive. The NYPSC has authority to allocate NYSEG's net benefits between
NYSEG ratepayers and EE stockholders. We do not see how any action we might take
would influence any decision the NYPSC might wish to make.
D. Risks, Rates, and ARP 2000
---------------------------
Fundamentally, deciding this case requires that we consider the
possible benefits and risks of the proposed merger, weighing one against the
other. As we have suggested, the categories of risks and benefits are easy to
identify. Placing even reasonably estimated dollar values on either group,
however, has been impossible. While this might provide a basis for rejecting the
merger, on the grounds that the Petitioners had failed to carry their burden
under section 708, we are concerned that insisting on greater quantification
might frustrate many potentially beneficial mergers. We prefer, instead, to
continue to explore whether we have the regulatory tools available to ensure
that, even if Petitioners' suggested benefits do not flow, ratepayers
nevertheless are held harmless.
Put another way, our most basic task is to ensure that rates will not
be higher (and service quality will not deteriorate) as a result of the merger.
There are at least three ways one might demonstrate that electric rates are
likely to be no higher as a result of a merger:
1. Estimate the savings from the merger directly,
2. Describe a plan for reducing costs as a result of the merger, for
example by determining which operational areas offer potential
for benefits and the processes by which these might be achieved,
or
3. Adopt a rate plan that produces lower rates (or at least not
higher rates) than a similar plan which would be adopted absent
the merger.
The record in this case does not include either estimates of the
cost savings or a plan to produce those savings. CMP's ARP 2000 filing in Docket
No. 99-
<PAGE>
Order 22 Docket No. 99-411
- --------------------------------------------------------------------------------
666 appears to be an attempt to use the third approach to demonstrate that the
merger is in the public interest. However, that case was filed too late to be
incorporated into this proceeding and thus does not, at this time, provide a
firm basis on which we can conclude that rates are likely to be lower, or at
least not higher, if the merger goes forward. Some observations concerning ARP
2000 are nevertheless warranted.
Under ARP 2000, CMP proposes that we institute a 7-year incentive
mechanism under which rates will increase at the overall rate of inflation less
a productivity offset that begins at 1.00% in 2001, rising at 0.25% per year
until it reaches 1.75% in 2004, and then holding at that level for through 2006,
the last year of the plan. CMP suggests that the increases in the productivity
offset above 1.00%, the level of the offset under the current ARP, represent
assumed merger savings and ensure that the merger will provide lower rates than
would exist without the merger.
We have not, however, had occasion yet to test the premises of ARP
2000. If, for example, we were to conclude that a productivity offset of 1.50%
per year was reasonable for a stand-alone CMP, we would perforce also have to
conclude that the merger, coupled with ARP 2000, would result in higher, not
lower rates and would be forced to reject it. As indicated below, however, we
consider ARP 2000 to be a reasonable starting point for discussion and further
review, and condition our approval on CMP's continued willingness to abide by
its terms.
E. Conclusion
The record in this case brings us close to a finding that the evidence
of both potential gain and potential harm is so amorphous that we cannot satisfy
section 708. On balance, however, we are satisfied that the merger creates the
potential for significant savings for CMP, and thus significant benefits for
CMP's ratepayers, and that we should approve the merger so CMP's customers have
at least a chance to share those benefits. Because the realization and magnitude
of these benefits are uncertain, however, we must impose conditions that protect
ratepayers in the event that the savings expected by Petitioners and Energy East
fail to materialize. Therefore, in any proceeding for CMP following the merger,
we will require that the rates charged customers be at least as low, and service
quality at least as high, as could be expected of CMP absent the merger. The
conditions we establish below are designed to ensure that we are able to secure
those objectives.
<PAGE>
Order 23 Docket No. 99-411
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VII. CONDITIONS
Section 708 (2)(A) states that the Commission has the authority to impose
such terms, conditions or requirements as, in its judgment, are
necessary to protect the interests of ratepayers. These conditions
shall include provisions which assure the following . . . .
The statute then lists nine conditions,16 including one (number 9: "that neither
ratepayers nor investors are adversely affected by the reorganization") that is
almost identical to the general approval standard. As we explained in our Bell
Atlantic Order, we do not view the attachment of conditions as a requirement of
the statute. Although the statute provides that "these conditions shall include
provisions which assure the following . . . ", the preceding sentence indicates
that the Commission has the discretion to attach such conditions as it believes
appropriate under the circumstances. Where the Commission cannot find that the
reorganization will be in the interests of ratepayers and stockholders in the
absence of conditions, it must impose appropriate conditions. If the Commission
has found that a reorganization is in the interests of ratepayers and
stockholders even absent conditions, it does not necessarily follow that it
should refrain
- --------------------------
(16) Section 708 provides that these conditions must assure that:
1. The Commission will have reasonable access to books, records,
documents and other information relating to the utility or any of
its affiliates;
2. The Commission will have all reasonable powers to detect,
identify, review and approve or disapprove all transactions
between affiliated interests;
3. The utility's ability to attract capital on reasonable terms,
including the maintenance of a reasonable capital structure, will
not be impaired;
4. The ability of the utility to provide safe, reasonable and
adequate service will not be impaired;
5. The utility will continue to be subject to applicable laws,
principles and rules governing the regulation of public
utilities;
6. The utility's credit will not be impaired or adversely affected;
7. The Commission must impose reasonable limitations on the total
level of investment in non-utility business
8. The Commission must have reasonable remedial power, including the
ability to order divestiture of or by the utility if necessary to
protect the interest of the utility, ratepayers or investors;
9. Neither ratepayers nor investors may be adversely affected by the
reorganization.
See generally, 35-A M.R.S.A. 708(2)(A)(1-9).
<PAGE>
Order 24 Docket No. 99-411
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from imposing a condition if that condition will help to ensure that the
Commission's conclusion was correct. Bell Atlantic at 13.
While the intervenors recommended that we disapprove the merger
entirely, they proposed in the alternative a variety of conditions that we
should impose if we approve the merger. In our discussion below we describe the
conditions that we will impose as well as our reasons for declining to adopt
some of the conditions proposed by the intervenors.
A. Merger Conditions
1. Service Quality Standards
The IECG proposed that if the merger is allowed, CMP should
continue to be bound by the existing ARP service quality standards. In addition,
the IECG proposed that the financial penalties associated with non-compliance
should be increased, with graduated penalties for continuing non-compliance.
Further, the IECG recommended that if the standards are violated, CMP should be
prohibited from paying dividends to Energy East until the standards are
achieved.
CMP indicated that the Commission should make its service
quality expectations known, but that the exact mechanisms should be determined
in the rate case. Specifically, the Company asserted that the IECG's proposed
dividend restriction would be micromanaging and disproportionate to the risk of
service quality problems.
We decline to adopt the IECG's proposal of a prohibition on
dividend payments as an automatic sanction for violations of service quality
standards. We prefer the flexibility to determine the appropriate sanction based
on the facts and circumstances existing at the time of the violations. However,
we would find any erosion in service quality unacceptable and there should thus
be a penalty mechanism for service quality issues pending the conclusion of the
next rate case. Therefore, we will extend the ARP service quality standards
until a new mechanism is set, presumably in the next rate case or ARP
proceeding. CMP should continue to track its performance under the ARP service
quality standards contained in Attachment 6 of the ARP Stipulation approved by
the Commission in Docket No. 92-345 (II), Central Maine Power Company, Proposed
Increase in Rates (Jan. 10, 1995). CMP should file a report on its progress on
July 31, 2000 and every six months thereafter until we establish a new ARP or
otherwise expressly terminate CMP's obligations under the current standards. We
also make it clear that to the extent the Company violates these standards, we
retain the right to open an investigation into what penalties or sanctions are
appropriate. The right of the Commission to impose appropriate penalties or
sanctions, including a prohibition on the payment of dividends, is an explicit
condition of the approval of this merger
<PAGE>
Order 25 Docket No. 99-411
- --------------------------------------------------------------------------------
We also put CMP on notice that we expect to closely examine
service quality standards in the ARP 2000 proceeding. Given the risks involved
in this merger, we will likely strengthen the standards relative to those in the
existing ARP. We note that the standards in NYSEG's current rate plan are
considerably more stringent than CMP's, and we expect to consider whether moving
to, or beyond, the NYSEG level would be appropriate. In this context, we would
also examine appropriate penalties and sanctions for violating the service
quality standards.
2. Capital Spending Targets The IECG suggested that we establish
targets for capital expenditures for the first five years after the merger to
prevent Energy East from cutting CMP's O&M and capital expenditure budgets in a
way that could compromise reliability. The IECG suggests that this could be done
by requiring investments in its delivery system and facilities either equal to
the levels invested prior to the merger (adjusted for inflation) or equal to the
Company's 5-year capital budget, if that capital budget was prepared previous to
the merger announcement. The CSE recommends that CMP be required to maintain
staff and facilities sufficient to assure that the service quality in the period
2000 through 2010 will be the same as it was from 1998 to 1999.
We do not believe such spending targets are necessary or especially
useful.(17) We expect the Company to maintain its level of service quality, but
will largely leave the details of how it accomplishes this to the Company's
discretion. To the extent reliability problems surface, we intend to impose
penalties on the Company necessary to compensate ratepayers for past
deficiencies and protect them from future failures. We will, nevertheless,
require the Company to file its annual budget each December and to explain any
significant reductions in either the capital or O&M budgets. We may remove this
filing requirement when a rate plan is considered.
3. Commission Access to Books and Records
--------------------------------------
As a condition of the merger, the Commission must have access to the
books and records of Energy East and all its affiliates whose activities relate
to or, in any way impact, the operations, costs or revenues of CMP in Maine, to
the same extent as the Commission has authority to obtain such information from
a utility pursuant to 35-A M.R.S.A. 112. See also, Bell Atlantic Maine, Notice
of Merger with GTE Corp. Docket No. 98-808 (Dec. 2, 1999). The determination of
whether the affiliates' activities relate to or in anyway impact the operation,
costs or revenues of CMP will be in the sole discretion of the Commission. This
condition will allow us to monitor activities to determine whether any improper
affiliate transactions or other abuses are occurring.
- ----------------------------
(17) We included such targets as a condition of the NYNEX/Bell Atlantic
merger. However, we lifted them a year later. Public Utilities Commission,
Investigation into Regulatory Alternatives for the New England Telephone and
Telegraph Company d/b/a NYNEX, Docket No. 94-123 (Mar. 17, 1998).
<PAGE>
Order 26 Docket No. 99-411
- --------------------------------------------------------------------------------
Energy East must provide this access in a reasonable and timely manner. At the
Commission's request, this access must be available in Maine. Should we choose
to review detailed information supporting a CMP request or transaction, the
original documentation must be available to us.
4. Commission Jurisdiction Over Energy East and Affiliates
-------------------------------------------------------
Although it was not raised by any of the parties, 35-A M.R.S.A.
708(2)(A)(1) and (2) are clear that the Commission must have the ability to
"detect, identify, review and approve or disapprove all transactions between
affiliated interests" and that the Commission must have "reasonable access to
books, records, documents and other information relating to the utility or any
of its affiliates." Therefore, to assure this protection, we will require as a
condition of the merger that Energy East and any of its affiliates, to the
extent their activities relate to or in any way impact the operations, costs or
revenues of CMP in Maine, be subject to the Commission's jurisdiction for
discovery purposes and participate as a party in any proceeding when deemed
necessary by the Commission, in its sole discretion.
During the hearings, questions were raised about the SEC's
jurisdiction over affiliate transactions. Because Energy East is a holding
company operating in more than one state, the SEC governs transactions between
affiliates. In response to questions raised in the Hearing Examiner's Report,
CMP filed a legal memorandum on December 14, 1999, explaining that the
Commission's authority in 35-A M.R.S.A. 707 over affiliate transactions is not
preempted by Sections 12 and 13 of Public Utilities Holding Company Act (PUHCA).
According to CMP, PUHCA does not preempt this Commission's authority to review
and approve service agreements, asset transfers or other transactions. Likewise
PUHCA does not preempt the Commission's authority to review, and disallow from
rates, any costs relating to those service agreements, asset transfers and other
transactions.
To address this concern CMP proposed (and Energy East supports)
the following condition:
CMP Group and Energy East will request the SEC to include in any
order approving the merger the following language:
"It is the Commission's intention that the Maine Public Utilities
Commission will retain the right to review and disallow costs of
services rendered by or to any Maine public utility company in
the Energy East Corporation registered holding company system
that may be subject to recovery in rates."
We adopt this as a condition of the merger. We impose the further condition that
CMP, CMP Group and Energy East must agree to waive any claim or defense that
the.
<PAGE>
Order 27 Docket No. 99-411
- --------------------------------------------------------------------------------
Commision's jurisdiction over reorganizations and affiliate transactions (as
defined by Maine law) and the Commission's ratemaking authority, as it relates
to cost allocations among affiliates, is preempted by PUHCA or any other Federal
statute.
5. Commission's Authority to Order CMP Divested
--------------------------------------------
35-A M.R.S.A.708(2)(A)(8) specifically allows the Commission
"the power, after notice to the utility and all affiliated entities of the
issues to be determined and the opportunity for an adjudicatory proceeding, to
order divestiture of or by the utility in the event that divestiture is
necessary to protect the interest of the utility, ratepayers or investors." We
specifically condition approval of the merger on the ability of the Commission
in the future to require divestiture of CMP if necessary, in a manner consistent
with section 708(2)(A)(8). We recognize that divestiture is a harsh measure, and
acknowledge that the Commission should resort to divestiture as a remedy only in
the most extreme cases. Nevertheless, the level of uncertainty concerning the
potential benefits of the merger, when coupled with the risks to which
ratepayers may be exposed, persuade us that we should preserve the authority
established in the statute. We would take such action only upon finding that no
other available remedy is adequate to reasonably address the harm.
6. Acquisition Premium
-------------------
We have already discussed the acquisition premium in detail.
Consistent with that discussion, we hereby impose, as a condition of the merger,
that recovery in rates in any way of any portion of the acquisition premium is
limited to circumstances where the savings resulting from the merger itself (and
not from some other source) exceed the costs imposed by the merger. Moreover,
any such recovery will be subject to the following limitations:
a) the acquisition premium will not be considered in any
way where the effect of including the premium in any
rate calculations would be to increase rates above
levels that would exist absent the merger (in other
words, there must be demonstrable benefits available to
ratepayers sufficient to offset all merger
related-costs); and
b) Maine ratepayers receive a reasonable portion of the
net savings from the merger.
The burden of making that clear showing will rest squarely upon the utility.
At the November 2 hearing, Energy East's witness
testified that Energy East sought a "reasonable opportunity to", but not a
guarantee that it could recover the acquisition premium. We consider the
criteria listed above to provide a reasonable opportunity and, from the
testimony of Mr. Jasinski and Mr. Rude, we believe that Energy East would agree.
For that reason, we will condition the merger on
<PAGE>
Order 28 Docket No. 99-411
- --------------------------------------------------------------------------------
the acceptance by Energy East that these conditions do, in fact, represent a
reasonable opportunity and that CMP will not seek recovery of the premium except
to the extent that those conditions are met.
7. Protection Against Rate Increase from Merger Inefficiencies
-----------------------------------------------------------
The preceding discussion of the rate impact of the merger
focused on the circumstances under which we would allow recovery of some or all
of the acquisition premium. We must also consider the possibility that, even
excluding the acquisition premium, the merger will produce net incremental costs
rather than net savings, presumably because it turns out that CMP operates less
efficiently as part of the Energy East corporate family than it would otherwise
have operated. To deal with this possibility, we make it a condition of our
approval of the merger that CMP will not be allowed to recover in rates costs
resulting from the merger (i.e., costs that would not have occurred but for the
merger) to the extent that those costs exceed savings generated by the merger
(i.e., savings that would not have occurred but for the merger). In contrast
with our treatment of the acquisition premium, where the burden is on CMP to
show that the preconditions to recovery have been satisfied, those who would
invoke this condition to deny CMP recovery of costs would have the burden to
show that the merger-generated costs exceeded the merger-generated savings and
the extent to which that were the case.
8. Rate Plan
---------
We agree generally with CMP that an incentive rate plan may
provide the mechanism to ensure that the rate conditions we impose here are met.
Petitioners claim that their proposed ARP 2000 will achieve this objective.
While we cannot, of course, commit prior to further consideration to adoption of
ARP 2000 in its current form, we nevertheless seek assurances from Energy East
that it will continue to support ARP 2000 and the principles it embodies.
Moreover, public confidence in Energy East and CMP will be enhanced if they
demonstrate a continued willingness to commit to a plan that will, in their
view, ensure benefits for CMP's ratepayers.
As a condition of our approval, therefore, we seek a
commitment from Energy East and CMP that they will continue to support the
adoption of ARP 2000, without material modification, for a period of two years
from the date of this Order.18
- ---------------------------
18 The Commission recognizes, of course, that CMP/Energy East must be free
to contend that any substantive modification to ARP 2000 proposed by another
party or adopted by the Commission is a sufficient departure from ARP 2000 to
justify CMP/Energy East's withdrawal of support. CMP/Energy East would also be
free, under this condition, to seek permission from the Commission to withdraw
its support for ARP 2000 in the event of a significant unforeseen change in
circumstances.
<PAGE>
Order 29 Docket No. 99-411
- --------------------------------------------------------------------------------
9. Energy East Agrees To All Conditions
------------------------------------
As a condition of the merger, Energy East must file a
letter with the Commission prior to closing, stating its agreement to the
conditions and terms contained in this Order.
B. Proposed Conditions Not Adopted
-------------------------------
Several of the intervenors proposed additional conditions.
We do not find implementation of the following conditions necessary to approve
the merger. We will briefly discuss each proposed condition and the reason we
have declined to impose it.
The CSE proposed that CMP/Energy East shareholders be
required to pay for a public education campaign designed to educate consumers
regarding the fuel types and the emissions associated with the generation they
are purchasing. CSE also sought a requirement that each monthly utility bill
from March 2000 through February 2001 include a copy of the full Uniform
Disclosure Label regarding the generation that consumers are purchasing. We
reject these conditions because they relate to industry restructuring, not the
proposed merger. The proposed merger should have no effect whatsoever on the
fuel sources or emissions associated with generation that is provided to
consumers. Further, we believe the current requirements and voluntary efforts
for consumer education regarding industry restructuring are adequate.
The CSE also proposed that the Commission require CMP to
devote one page of each month's bill to information on how consumers can save
electricity, to update and redistribute a 1992 informational pamphlet on the
subject and to provide evidence that all energy management measures have been
installed whenever CMP seeks to increase T&D capacity. We reject these
conditions as well. Generally, the level of energy management that a utility is
required to achieve is set by state energy policy and this Commission. The CSE
has not demonstrated that the proposed merger will have any effect on this level
or the utility's ability to achieve it. Further, we would not require the
utility to achieve all potential energy management measures prior to expanding
T&D capacity but only those that are cost effective. To do otherwise would
likely result in the inefficient use of resources.
The CSE also suggested that CMP/Energy East be required to
maintain a Maine-based outage call center for the next five years and that the
elderly or disabled have the ability to immediately reach a live person. We
presume that the concern with a non-Maine based outage call center would be
delays and difficulties in resolving outages and service quality issues. We
believe this will be addressed through the service quality requirements. CSE's
second point is an issue that is not directly related to the merger. If elderly
and disabled individuals need easy access to a live person, this could be a
problem that exists even without the merger and should be
<PAGE>
Order 30 Docket No. 99-411
- --------------------------------------------------------------------------------
addressed through a change to the consumer protection rules, not as part of this
proceeding.
The Friends of the Coast urged the Commission to withhold
approval of the merger until CMP and Energy East demonstrate that they have
adequately informed themselves regarding the Maine Yankee decommissioning and
waste disposal issues and are prepared to address the public's concerns in these
areas. We reject this proposal. It is the NRC's responsibility to determine the
appropriateness of transferring the Maine Yankee license to Energy East.
The IECG proposed that if the Commission approves the
merger, it should condition its approval on the ability to revisit these
conditions if the Public Utilities Holding Company Act (PUHCA) is repealed. We
find this unnecessary. As described above, we have made clear that consistent
with Section 708(2)(A)(8), the Commission maintains the power to make remedial
changes necessary to protect the interest of the utility, ratepayers or
investors. If the merger occurs and PUHCA is subsequently repealed and such
changes are necessary, we will make them.
IECG also asked that the Commission condition the
merger on acknowledgement by Energy East of the Commission's findings in Docket
No. 97-580. We do not believe such an explicit condition is necessary. CMP will
remain subject to all Maine statutes and previous Commission orders. Energy
East, as CMP's parent holding company, will be required to ensure that CMP is
managed in a manner that conforms with Maine law and Commission orders and
precedent. Energy East witnesses acknowledged this during the hearing (19) and
we see no need to condition what is so obviously required.
C. CMP's Request to Lift Certain Conditions Imposed in
-------------------------------------------------------
Docket No. 97-930
-----------------
1. Restriction on Investments
--------------------------
For the following reasons, we find that the investment
limits imposed on CMP Group in Dockets 97-930 should be lifted as requested by
CMP. Our reasoning is generally consistent with the positions of the Company and
the IECG. Assuming that all of Energy East's proposed acquisitions (including
Berkshire Energy Resources) close, its total capitalization will be between $4.1
and $4.8 billion (see Merrill Lynch Report dated July 1, 1999), compared to
CMP's pre-divestiture capitalization of approximately $1.2 billion and its
recent capitalization of roughly $801 million. In either case, Energy East's
common equity balance will be slightly more than $1.9 billion and its common
equity ratio will be between 41% and 48%. The combination of the size of the new
Energy East, the holding company structures being
- --------------------------
(19) For example, Energy East witnesses testified that Energy East did not
have a marketing affiliate in Maine and did not intend to establish one as it
understood this to be prohibited by 35-A M.R.S.A. 3205(6).
<PAGE>
Order 31 Docket No. 99-411
- --------------------------------------------------------------------------------
employed and Energy East's focus on acquiring low-risk transmission and
distribution (or "pipes and wires") businesses allows us to look favorably on
the Petitioners' request.
We are not persuaded by the OPA's argument that new business
risks require maintenance of the investment limits. When we approved the $240
million investment limit in Docket No. 97-930, we effectively allowed CMP the
opportunity to invest up to 20% of its pre-divestiture capital structure in
non-utility ventures. At CMP's current capitalization, this would be roughly a
30% limit. If we were to place such a limit on the Energy East holding company
it would be on the order of 5% to 6% of total capital (at $4.1 to $4.8 billion
in total capital). We agree with CMP that retaining the $240 million limit on
CMP Group, Inc. (intermediate holding company) could give Energy East the
incentive to invest in other states rather than Maine. CMP Group, Inc. will not
issue new common equity on its own, and it will quite likely be unable to borrow
new debt since it will not be able to offer its utility assets as collateral
without our approval. We do not believe it is appropriate to reset the
investment limit at 20% to 30% of Energy East's total capitalization, since this
would effectively be a number close to, or exceeding, 100% of CMP Group, Inc.'s
capitalization.
2. Limits on Debt Issuances
------------------------
For many of the same reasons noted above, we agree with the
Petitioners and the IECG that the 50% limitation on debt imposed in Docket No.
97-930 is no longer practical. The total size of the organization, the fact that
we cannot directly limit the borrowing activities of Energy East, the corporate
focus on low-risk transmission and distribution businesses and the possibility
that we could discourage future investment in Maine by retaining such a
requirement cause us to eliminate this requirement. As we noted above, CMP Group
will not be in a position to issue common equity, and it is unlikely to be able
to issue new debt because it cannot offer utility assets as collateral without
our approval. If, in time, CMP Group, Inc.'s unregulated subsidiaries become
creditworthy enough to support their own borrowing, this will not be a detriment
to CMP Group's utilities. The unregulated subsidiaries, with higher business
risk profiles, will be able to borrow relatively less than the electric utility
(i.e. will be required by lenders to have higher equity ratios than an electric
utility). The credit markets will, in effect, limit the leverage ratio of CMP
Group, Inc. and its unregulated subsidiaries even if all of them grow
substantially.
We also are aware that the credit rating agencies have
consistently stated in the past two years that the "wire and pipes" transmission
and distribution businesses have the lowest business-risk profiles in the energy
industry. They have also stated that lower business risks allow companies
pursuing those strategies to have higher leverage ratios (and lower cash flow
and interest coverage ratios) while maintaining their credit ratings. Energy
East's corporate target of a 40% common equity ratio in the future does not
appear unreasonable based on studies presented in Docket No. 97-580 (Phase I)
and Docket No. 97-596. We are, again, unable to find any likely harm to CMP's
utility ratepayers if the condition limiting debt to
<PAGE>
Order 32 Docket No. 99-411
- --------------------------------------------------------------------------------
50% of total capital is lifted. We will, as always, retain our ability to ignore
the capital structure of CMP Group, Inc. and of Energy East, in calculating
CMP's cost of capital.
3. Royalty Payments for Use of CMP Name by CMP Gas
-----------------------------------------------
Petitioners ask that CMPNG no longer be required to pay
royalties for use of the CMP name. They claim that the terms of the stipulation
that require the payment should be set aside in light of recent statutory
changes and CMPNG's more remote connection to CMP under the proposed new
structure. OPA objects to eliminating the stipulation's provisions. We decline
to remove this condition.
On May 1, 1998, we approved the creation of CMP Natural Gas
(referred to then as "GasCo") as a joint venture of CMP Group, Inc. and New York
State Electric and Gas Co., Docket No. 98-077, Central Maine Power Company,
Request for Approval of Reorganization and of Affiliate Interest Transactions
and Sale of Assets in Connection With Gas Ventures. Our approval was conditioned
on the application of Chapter 820's requirements, if the CMP name was used in
the name of the gas subsidiary:
Use of the CMP identity in the marketing or advertising
constitutes the use of good will under the definition in
Chapter 820(2)(F). Chapter 820 includes a presumption that
the good will 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 good will is less.
Chapter 820 (4)(C).20
- -------------------
20 Chapter 820(4)(C) provides:
C. Value of Good will. The value of the utility's goodwill used by an
affiliate must be determined as follows:
1. The value of goodwill to be paid annually by an affiliate must
be determined on an annual basis for an initial 3-year period
beginning on the date that the affiliated transaction is approved or
upon the date that the affiliate will commence use of the good will,
whichever is later.
2. At the end of the initial3-year period, the Commission shall
reexamine the value of good will to be paid by the affiliate for the
use of goodwill for the next 3 years.
3. The value ofgoodwill shall be presumed to be, and calculated
as, 1% of the total capitalization of the
<PAGE>
Order 33 Docket No. 99-411
- --------------------------------------------------------------------------------
After the Order was issued, the gas affiliate decided to use the
name CMP Natural Gas. In response to the Docket No. 98-077 royalty requirement,
CMP entered into a stipulation with the Public Advocate. They filed their
Agreement for Commission approval on May 7, 1998. The Agreement allows CMP to
convey its corporate name and good will for a one-time payment of $500,000, to
be made upon the earlier of: (i) six years from the date the affiliate is
formally created, or (ii) 120 days after the conclusion of the first calendar
year in which the affiliate earns its authorized return on equity. The
stipulation also provides an alternative payment method in the event CMPNG's
return on equity (net income) does not exceed $5 million in any of its first
five years. The Commission approved the stipulation by Order issued on June 10,
1998.
During its last session, the Legislature amended 35-A M.R.S.A.
715 (effective September 18, 1999). This section now provides that Chapter 820
"may not establish a presumption with regard to the value of good will used by
an affiliated interest regulated by the Commission." P.L. 1999, ch. 158, sec. 2.
This provision requires the Commission to eliminate Chapter 820's presumption
about good will where two utility affiliates are involved. It does not, however,
prohibit the Commission from determining that such royalty payments are
appropriate in specific circumstances.
The amendment does not affect a pre-existing stipulation. CMP
voluntarily chose to enter into a stipulation with OPA, forgoing the alternative
of presenting evidence to the Commission about the value of the good will
associated with the CMP name. The Agreement did not even use the presumption
contained in the rule, but rather crafted an alternative method for establishing
the royalty payment. We plan to amend Chapter 820 to remove the presumption and
simply require a utility to make its case on the value of the good will,
something CMP could have done in 1998. It chose not to pursue that option and we
see no reason to disturb its stipulation with the OPA.
- --------------------------------------------------------------------------------
affiliate, or 2% of the gross revenues of the affiliate,
whichever is less, and shall be paid annually by the
affiliate. Where the name of the utility has been used in
Maine by the utility for less than 3 years, the value of
good will shall be presumed to be zero. At the end of six
years from the date the affiliated transaction is approved
or upon the date that the affiliated commences use of the
good will, whichever is later, the value of good will is
zero.
4. Any party may present evidence that the value of
good will is greater than, or less than, the presumptions
stated in paragraph 3. . . .
<PAGE>
Order 34 Docket No. 99-411
- --------------------------------------------------------------------------------
VII. ORERING PARAGRAPH
Accordingly, we
O R D E R
The merger between CMP Group and Energy East Corporation is approved,
consistent with the discussion contained, and subject to the conditions imposed,
in this Order.
Dated at Augusta, Maine, this 4th day of January, 2000.
BY ORDER OF THE COMMISSION
_______________________________
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: Welch
Nugent
Diamond.
<PAGE>
Order 35 Docket No. 99-411
- --------------------------------------------------------------------------------
Appendix A - Procedural History
On June 14, 1999, CMP Group, Inc., Central Maine Power Company (CMP),
MaineCom Services, Maine Electric Power Company, Inc., NORVARCO, Chester SVC
Partnership, Maine Yankee Atomic Power Company and CMP Natural Gas, L.L.C.
(CMPNG) (collectively, Petitioners) and Energy East Corporation (Energy East)
executed a merger agreement under which CMP Group will become a wholly-owned
subsidiary of Energy East. On July 1, 1999, Petitioners filed their Petition
seeking approval pursuant to 35-A M.R.S.A. 708. Included with the Petition was
the Prefiled Direct Testimony of Arthur W. Adelberg and Dr. Kenneth Gordon. The
Commission held a technical conference on July 7, 1999 to give Petitioners the
opportunity to present an overview of the case and to allow the parties to ask
preliminary questions.
The Hearing Examiner granted intervenor status to the following parties:
Office of the Public Advocate (OPA), the Industrial Energy Consumer Group
(IECG), the Independent Energy Producers of Maine (IEPM), the Coalition for
Sensible Energy (CSE), UAH-Hydro Kennebec Limited Partnership, the American
Association of Retired Persons (AARP), FPL Energy Maine, and Friends of the
Coast. Bangor Gas Company and Bangor Hydro-Electric Company were granted
intervenor status on a discretionary basis pursuant to Chapter 110 721.
On July 13,1999, the Hearing Examiner issued a Procedural Order requesting
that Petitioners file supplemental testimony concerning the savings associated
with the merger and how CMP planned to treat such savings. The Examiner also
asked Petitioners to clarify how they expected the rate plan discussed at the
July 7 conference to relate to this proceeding.
On July 22,1999, Petitioners filed the Supplemental Prefiled Direct
Testimony of Arthur W. Adelberg describing their position concerning the rate
treatment of merger costs and savings.21 At the same time, CMP Group filed a
Motion to Clarify Scope of Proceeding, or in the Alternative, Appeal to the
Commission. The motion asked the Hearing Examiner to confirm that rate issues
related to the treatment of merger costs and savings are not part of this
proceeding but are more appropriately addressed in a rate plan CMP planned to
file in the near future. OPA responded to CMP's Motion on July 28,1999.
The Hearing Examiner issued a Procedural Order on August 2, 1999,
determining that specific rate making treatment is not within the scope of this
proceeding. However, the Examiner found that costs and savings associated with
the merger are relevant to the question of whether any harms associated with a
merger are
- -------------------------------
(21) Mr. Adelberg stated that CMP planned to file by early fall a proposed
performance based rate plan to take the place of its ARP. CMP made its filing on
September 30, 1999. Central Maine Power, Request for Post-Merger Alternative
Rate Plan, Docket No. 99-666
<PAGE>
Order 36 Docket No. 99-411
- --------------------------------------------------------------------------------
outweighed by thebenefits. Therefore, discovery on this subject was permitted.
The Examiner warned that CMP risked not meeting its burden of proof by not
providing evidence of merger costs and savings.
On July 22, 1999, the IECG, OPA, IEPM and AARP jointly filed a Motion for
Joinder of Energy East and a supporting Memorandum of Law. On July 29, 1999, CMP
Group filed its Memorandum of Law in Opposition to the IECG's Motion. On August
6, 1999, the Hearing Examiner denied the Motion for Joinder. The Examiner did
require that Energy East be subject to discovery and provide a witness at the
hearings. Parties conducted extensive written discovery and a technical
conference was held on September 2, 1999.
On September 15, 1999, the OPA filed the Direct Testimony and Exhibits of
Paul Chernick and Neil Talbot. IECG filed the testimony and exhibits of Dr.
Richard Silkman, and Raymond Shadis filed testimony for Friends of the Coast. On
September 23, 1999, CMP Group filed a Motion to Strike Portions of the
Testimony of Richard Silkman related to the Letter Agreement entered into
between CMP and FPL Energy Maine, Inc. and the application of the findings in
Docket No. 97-580, Maine Public Utilities Commission Investigation of Central
Maine Power Company's Stranded Costs, Transmission and Distribution Utility
Revenue Requirements, and Rate Design, to "CMP as an affiliate of Energy East."
After considering the responses of IECG and FPL, the Examiner in a Procedural
Order dated October 15, 1999, granted CMP's Motion to Strike those portions
Related to the Letter Agreement, but not to the Docket No. 97-580 findings.
(22)
Public Witness Hearings were held on September 27, 1999 in Portland and
September 29, 1999 in Waterville.
On October 13, 1999, CMP filed the Rebuttal Testimony of Arthur W. Adelberg
and Kenneth Gordon. Hearings to cross-examine witnesses were held on November 2
and 3, 1999.
A Hearing Examiner's Report was issued on December 2, 1999. CMP, IECG, OPA
and Friends of the Coast filed exceptions. The Commission deliberated this
matter on December 16, 1999.
- --------------------------
(22) Page 7, lines 5-7, Page 18 lines 11-26, Page 19 lines 1-21 and Page 38
line 8 through Page 39 line 23 of Dr. Silkman's prefiled testimony were
stricken.
<PAGE>
Order 37 Docket No. 99-411
- --------------------------------------------------------------------------------
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. 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 review or appeal of PUC decisions at the conclusion
of an adjudicatory proceeding are as follows:
1. Reconsideration of the Commission's Order may be requested under Section
1004 of the Commission's Rules of Practice and Procedure (65-407 C.M.R.110)
within 20 days of the date of the Order by filing a petition with the Commission
stating the grounds upon which reconsideration 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.
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. 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.
<PAGE>
STATE OF MAINE Docket No. 99-411
PUBLIC UTILITIES COMMISSION
February 24, 2000
CMP GROUP, INC. ET AL ORDER ON
Request for Approval of Reorganization
RECONSIDERATION
And of Affiliated Interest Transactions
WELCH, Chairman; NUGENT and DIAMOND, Commissioners
- --------------------------------------------------------------------------------
I. SUMMARY
In this Order, we reject petitions to reconsider our Order of January 4,
2000 (January Order) received from Friends of the Coast (FOTC), Sam Miller and
the Public Advocate. We clarify our January Order in certain respects as
requested by Energy East. Unless specifically addressed in this Order, all
other aspects of our January Order stand as articulated in that Order.
II. DISCUSSION OF REQUESTS FOR RECONSIDERATION
The Public Advocate, FOTC, and Sam Miller all filed timely letters asking
the Commission to reconsider its January Order. Energy East filed a letter on
January 24, 2000 responding to the Commission's directive that it file a letter
prior to closing stating that it agreed to the terms and conditions contained in
the January Order. Energy East states it accepts the terms and conditions at
pages 24-29 of the Order based upon certain clarifications contained in its
letter. After review of the letter, it appears that Energy East is actually
seeking clarification or reconsideration of certain parts of the Order. We
therefore treat the January 24 letter as a Petition for Reconsideration and
address certain issues as described in Section D below.
A. FOTC
----
FOTC asks for reconsideration because, it argues, the Commission did
not address whether Energy East had adequately informed itself regarding
liabilities and other long-term considerations at Maine Yankee Atomic Power
Station, thereby ensuring that Maine citizens will be protected with the change
of ownership. To the extent our Order was unclear concerning FOTC's concerns,
we address them here.
Nothing in the record before us indicates that Energy East, as the
parent company of CMP, will be unable to fulfill its obligation to complete the
decommissioning of Maine Yankee safely. The record shows that Energy East,
prior to agreeing to the
<PAGE>
Order 2 Docket No. 99-411
- --------------------------------------------------------------------------------
merger, reviewed a vast number of documents related to CMP, including
documents related to Maine Yankee. Energy East's due diligence reports also
show that Energy East reviewed the Maine Yankee asset. Energy East's operating
subsidiary in New York, NYSEG, is an experienced nuclear plant operator and its
nuclear expert conducted NYSEG's due diligence related to CMP's nuclear
investments. Energy East's witness Mr. Rude testified that the merger does not
affect CMP's continuing obligations related to Maine Yankee. Maine Yankee has
entered into certain agreements at FERC concerning the costs of its
decommissioning. CMP, as a Maine Yankee owner, will continue to be obligated to
comply with those agreements and FERC's directives. In addition FERC must
approve the merger and the NRC must consent to the transfers of control of
nuclear assets.
We find that that Energy East was aware of what it was purchasing and
of its continuing obligations as they relate to Maine Yankee. We find that the
public interest in safe service is not in any way hindered by the merger with
Energy East. Therefore, no additional conditions related to Maine Yankee are
necessary.
B Sam Miller
-----------
Mr. Sam Miller,(1) a CMP shareholder, asks for reconsideration,
claiming the merger is not consistent with the interests of shareholders and the
Commission did not adequately address its responsibility to shareholders in the
January Order. He asserts that CMP failed to adequately disclose the increase
in value of its investment in Northeast Optic Network, Inc. (NEON) in its proxy
statement provided to shareholders on August 31, 1999 and that because of this
increase, the price offered per share is inadequate.
Title 35-A section 708(2) does require the Commission to find that the
merger is "consistent with the interests" of CMP's investors. In this regard,
we give substantial weight to the requirement that shareholders vote to approve
the merger. In this case, CMP Group's shareholders voted overwhelming in favor
of the merger. Additionally, the section 708(2) requirement regarding
shareholder interests involves issues particular to utilities and is not
intended to address generic corporate issues. Mr. Miller's basic complaint is
that CMP Group will not receive enough for its shares. This is a common
shareholder complaint unrelated to CMP's public utility status. Thus, that
matter should be dealt with under the applicable corporate laws, not the public
utilities statutes.
Mr. Miller's concern that the proxy statement inadequately disclosed
the status of NEON is a question over which the SEC has jurisdiction. We offer
no opinion as to whether CMP's disclosures fail to meet any SEC requirements for
proxy statements. We do note that the NEON stock price has been extremely
volatile, and the
- ------------
(1) Although Mr. Miller is not a party to this case, we consider the issues
raised in his petition on our own motion.
<PAGE>
Order 3 Docket No. 99-411
- --------------------------------------------------------------------------------
stock price would have been available to any shareholder wishing to look it up
on any given day. We decline to modify our Order based on Mr. Miller's
request.
C. Public Advocate
----------------
The Public Advocate (OPA) asks that we clarify footnote 18 on page 28
of the January Order related to the condition that CMP and Energy East must
continue to support ARP 2000 as originally submitted by CMP on September 30,
1999. We do not, as a consequence of this Order, require either company to
support any materially modified plan which may in the future be proposed by
other parties or adopted by this Commission. This requirement is not intended
to discourage parties from further negotiations or CMP/Energy East from
additional constructive proposals. Based on this clarification, we deny OPA's
request to modify the footnote.
D. Issues Raised By Energy East's Response to Conditions
------------------------------------------------------------
1. Status of Energy East's Letter
----------------------------------
We first note that our decisions concerning the merger are
reflected only in our orders. Energy East's letter of January 24, 2000 has no
legal significance in any future interpretation of our orders. Our silence on
any issue raised in the letter means our January Order stands on that particular
point.
2. Energy East's Right to Contest a Condition Following the Merger
------------------------------------------------------------------
Several times in its letter, Energy East states that its
acceptance of the Order "does not constitute a waiver of rights" or "expand or
confer statutory authority." For example, Energy East states it reserves the
right to contest a penalty or sanction that it deems inappropriate and it
"reserves its constitutional rights" concerning the divestiture condition.
Nothing in our orders is intended to prevent Energy East or CMP
from arguing at some future time that we have implemented a condition in an
arbitrary or capricious manner or in some way that deprives it of rights to due
process. However, to the extent Energy East believes the Commission lacks
statutory or constitutional authority to impose any of the merger conditions,
(2) it should make that concern known now by either asking for reconsideration
or appealing this order as permitted by law. It is out intention that by
closing on the merger, Energy East and CMP will have waived any statutory or
constitutional objections to the imposition of the conditions described in our
orders. If Energy East disagrees with or opposes this condition or desires
further
- -----------------
(2) This would include the belief that the Legislature exceeded its
constitutional authority in granting the Commission the power to impose a
particular condition.
<PAGE>
Order 4 Docket No. 99-411
- --------------------------------------------------------------------------------
clarification, it should seek reconsideration of this Order within 20 days of
the date of this Order or otherwise appeal our decision prior to closing.
3. Dividend Payments
------------------
Energy East states that it understands that the Commission's
authority to limit dividend payments will be exercised "only when other
available remedies are found to be inadequate" or "to remedy egregious
circumstances." Our order discussing possible penalties for violations of
service quality standards contained no such limitations (January Order at 24).
We therefore reject what we treat as Energy East's request that we incorporate
Energy East's limiting language into our Order.
4. Filing of Capital Budgets
----------------------------
We directed CMP to file its annual capital expenditure budget each
December. Energy East asks that it be permitted to file it either in December
or promptly after approval, as its corporate budgets are typically approved in
January. It also asks if it may request confidential treatment. We agree that
CMP should file its capital budget promptly after approval and that it may
request confidential treatment of those budgets.
5. Books and Records
-------------------
Energy East suggests different language with regard to Commission access to the
books and records of Energy East and all of its affiliates. The language in our
January Order (Order at 25-26) represents our intentions and we decline to
change it.
6. SEC-related Matters
--------------------
Energy East states that it agrees to waive any claim or defense based
on preemption of Commission authority over affiliate transactions and rate
making "assuming it is not prohibited by law." To the extent it is necessary, we
clarify that we do not intend Energy East to break any laws in complying with
our Order.
7. Acquisition Premium
--------------------
Energy East seeks clarification that partial recovery of the
acquisition premium is possible and that we will allow recovery to the extent it
meets the recovery tests described in the Order. This is our intention, but we
agree that the language in the Order could be clearer. To conform the condition
imposed on page 27 of the Order with the discussion on page 19, we revise the
second sentence of the first paragraph in Section 6 on page 27 to read
"Consistent with that discussion, we hereby impose, as a condition of the
merger, that recovery of any portion of the acquisition.
<PAGE>
Order 5 Docket No. 99-411
- --------------------------------------------------------------------------------
premium will only be allowed where the savings resulting from the merger itself
(and not from some other source) exceed the costs imposed by the merger."
We also believe that further elucidation of our discussion on
pages 18 - 21 concerning the amount of goodwill that could be amortized on CMP's
book is warranted. At footnote 14, page 18, we indicate that the amount of any
goodwill will depend, in part, on the reevaluation of the non-utility holdings
of CMP Group. With regard to those valuations, we expect such valuations to be
done in good faith and consistent with sound accounting principles. We reserve
the right to review when and how the valuations have been made and to determine
how they will be used in any rate making proceeding. We also reiterate that the
amount of goodwill assigned to CMP for accounting purposes will not restrict the
Commission's discretion in any way in determining the amount of goodwill that
may be subject to recovery from ratepayers.
8. ARP 2000
---------
Energy East states its understating that its agreement to support
the ARP 2000 proposal is premised on no material changes being made in specified
areas (e.g., starting point, productivity factor, duration) and on the
Commission processing the case within 6 months, or up to 2 years "only for just
and reasonable circumstances." We agree that if the Commission orders, or other
parties propose, material modifications to the proposed ARP 2000, Energy East
and CMP would not be obligated to support that modified plan. Our condition
requires Energy East to support its proposed ARP 2000 through at least January
2002. With regard to the timing of the ARP 2000 proceeding, we intend to
process the case as expeditiously as possible. However, we deny what we treat
as Energy East's request that only under certain circumstances may we take
longer than six months.
E. Correction of Notice of Appeal
----------------------------------
The Commission attaches Notice of Rights to Review or Appeal to every
final order, as required by 5 M.R.S.A. 9061. An incorrect version of the
notice was mistakenly attached to our original order (it contained language only
applicable to certain telecommunication cases). The correct version is attached
to this Order.
III. CONCLUSION
As described above, our Order of January 4, 2000 stands except for the
clarifications described in Section II. D above. In our January Order, we
asked Energy East to acknowledge in writing its acceptance of all conditions and
terms contained in the Order. We will require no further written documentation
of Energy East's acceptance of the clarifications contained in this Order.
Instead, Energy East's closing.
<PAGE>
Order 6 Docket No. 99-411
of the merger will serve as its acknowledgement that it will be bound by all
conditions and terms contained in the January 4, 2000 Order, as modified by this
Order.
Dated at Augusta, Maine, this 24th day of February, 2000.
BY ORDER OF THE COMMISSION
_______________________________
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: Welch
Nugent
Diamond
<PAGE>
Order 7 Docket No. 99-411
NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. 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 review or appeal of PUC decisions at the conclusion of an
adjudicatory proceeding are as follows:
1. Reconsideration of the Commission's Order may be requested under
---------------
Section 1004 of the Commission's Rules of Practice and Procedure
(65-407 C.M.R.110) within 20 days of the date of the Order by filing a
petition with the Commission stating the grounds upon which
reconsideration 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. 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.
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.
<PAGE>
[SEAL OF UNITED STATES
NUCLEAR REGULARTORY
COMMISSION]
UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20565-0001
February 4, 2000
Mr. A. P. Necci - Vice President
Nuclear Oversight and Regulatory Affairs
c/o Mr. David A. Smith
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385-0128
SUBJECT: ORDER APPROVING APPLICATION REGARDING PROPOSED MERGER
(ACQUISITION OF CMP GROUP, INC., BY ENERGY EAST CORPORATION)
(TAC NO. MA6923)
Dear Mr. Necci:
The enclosed Order is in response to the application pursuant to Section 50.80
of Title 10 of the Code of Federal Regulations transmitted by Central Maine
Power Company (Central Maine) through counsel by letter dated October 6,1999.
The application requested approval of the indirect transfer of Operating License
NPF-49 for the Millstone Nuclear Power Station, Unit 3, to the extent held by
Central Maine, which would result from the proposed merger of CMP Group, Inc.,
Central Maine's parent company, and Energy East Corporation. Under the proposed
merger, Energy East Corporation would become the direct or indirect parent of
Central Maine. The enclosed Order gives consent to the proposed transfer,
subject to the conditions described therein.
The Order has been forwarded to the Office of the Federal Register for
publication.
Sincerely,
/S/ John A. Nakoski
----------------------
John A. Nakoski, Senior Project Manager, Section 1
Project Directorate IV
Division of Licensing Project Management
Office of Nuclear Reactor Regulation
Docket No. 50423
Enclosures: 1. Order
2. Safety Evaluation
cc w/encls: See next page
<PAGE>
Millstone Nuclear Power Station
Unit 3
cc:
Ms. L. M. Cuoco
Senior Nuclear Counsel
Northeast Utilities Service Company
P.O. Box 270
Hartford, CT 06141-0270
Edward L. Wilds, Jr., Ph.D.
Director, Division of Radiation
Department of Environmental Protection
79 Elm Street
Hartford, CT 06106-5127
Regional Administrator, Region I
U.S. Nuclear Regulatory Commission
475 Allendale Road
King of Prussia, PA 19406
First Selectmen
Town of Waterford
15 Rope Ferry Road
Waterford, CT 06385
Mr. M. H. Brothers
Vice President - Nuclear Operations
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Mr. M. R. Scully, Executive Director
Connecticut Municipal Electric
Energy Cooperative
30 Stott Avenue
Norwich, CT 06360
Mr. J. T. Carlin
Vice President - Human Services
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Mr. F. C. Rothen
Vice President - Nuclear Operations
Northeast Nuclear Energy Company
P. 0. Box 128
Waterford, CT 06385
Ernest C. Hadley, Esquire
1040 B Main Street
P.O. Box 549
West Wareham, MA 02576
Mr. James S. Robinson, Manager
Nuclear Investments and Administration
New England Power Company
25 Research Drive
Westborough, MA 01582
Deborah Katz, President
Citizens Awareness Network
P.O. Box 83
Shelburne Falls, MA 03170
Mr. Allan Johanson, Assistant Director
Office of Policy and Management
Policy Development & Planning Division
460 Capitol Avenue - MS# 52ERN
P.O. Box 341441
Hartford, CT 06134-1441
Ms. Terry Concannon
Co-Chair
Nuclear Energy Advisory Council
415 Buckboard Lane
Marlborro, CT 06447
<PAGE>
Millstone Nuclear Power Station
Unit 3
cc:
Mr. Evan W. Woollacott
Co-Chair
Nuclear Energy Advisory Council
128 Terry's Plain Road
Simsbury, CT 06070
Mr. John W. Beck, President
Little Harbor Consultants, Inc.
Millstone - ITPOP Project Office
P.O. Box 0630
Niantic, CT 06357-0630
Mr. L. J. Olivier
Senior Vice President and
Chief Nuclear Officer - Millstone
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Mr. C. J. Schwarz
Station Director
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Senior Resident Inspector
Millstone Nuclear Power Station
c/o U.S. Nuclear Regulatory Commission
P.O. Box 513
Niantic, CT 06357
Nicholas J. Scobbo, Jr., Esquire
Ferriter, Scobbo, Caruso, & Rodophele, P.C.
75 State Street, 7th Floor
Boston, MA 02108-1807
Mr. G. D. Hicks
Director - Nuclear Training Services
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Citizens Regulatory Commission
ATTN: Ms. Geri Winslow
P.O. Box 199
Waterford, CT 06385
Mr. William 0. Meinert
Nuclear Engineer
Massachusetts Municipal Wholesale
Electric Company
P.O. Box 426
Ludlow, MA 01056
Mr. B. D. Kenyon
President and Chief Executive Officer-
NNECO
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Mr. 0. B. Amerine
Vice President - Engineering Services
Northeast Nuclear Energy Company
P.O. Box 128
Waterford, CT 06385
Mr. D. A. Smith
Manager - Regulatory Affairs
Northeast Nuclear Energy Company
P. 0. Box 128
Waterford, CT 06385
Ms. Nancy Burton
147 Cross Highway
Redding Ridge, CT 00870
<PAGE>
UNITED STATES OF AMERICA
------------------------
NUCLEAR REGULATORY COMMISSION
-----------------------------
In the Matter of )
)
NORTHEAST NUCLEAR ENERGY ) Docket No. 50-423
COMPANY, et at, )
)
(Millstone Nuclear Power Station, Unit 3) )
ORDER APPROVING APPLICATION REGARDING PROPOSED MERGER
(ACQUISITION OF CMP GROUP, INC., BY ENERGY EAST CORPORATION)
I.
Northeast Nuclear Energy Company is authorized to act as agent for the
joint owners of the Millstone Nuclear Power Station, Unit 3 (Millstone 3), and
has exclusive responsibility and control over the physical construction,
operation, and maintenance of the facility as reflected in Facility Operating
License No. NPF-49. Central Maine Power Company (Central Maine), one of the
joint owners, holds a 25-percent possessory interest in Millstone 3. The U.S.
Nuclear Regulatory Commission (NRC) issued Facility Operating License No NPF-49
on January31, 1986, pursuant to Part 50 of Title 10 of the Code of Federal
Regulations (10 CFR Part 50). The facility is located in New London County, on
the southern coast of the State of Connecticut.
II.
By letter dated October 6, 1999, through counsel, Central Maine informed
the NRC of a proposed merger involving the acquisition of Central Maine's
parent, CMP Group, Inc. (CMP), by Energy East Corporation (Energy East),
Central Maine requested that the NRC determine that the proposed merger and
acquisition would not, in fact, constitute a transfer of Facility
<PAGE>
Operating License NPF-49 for Millstone 3, to the extent held by Central Maine in
regard to Central Maine's 2.5-percent ownership interest in Millstone 3.
Central Maine also requested if the NRC does find that the proposed acquisition
of CMP would constitute an indirect transfer of Facility Operating License
NPF-49 to the extent it is held by Central Maine, that the NRC consent to the
indirect transfer of Central Maine's license to Energy East. The NRC determined
that an indirect transfer of the license, to the extent that it is held by
Central Maine, would be involved and that approval pursuant to 10 CFR 50.80
would be required. The NRC informed Central Maine of this decision in a letter
dated November 15, 1999.
III.
Central Maine is an electric utility primarily engaged in the transmission,
sale, and distribution of electricity in the State of Maine and is incorporated
in Maine. CMP holds all the common stock of Central Maine and also is
incorporated in the State of Maine. Energy East is an investor-owned holding
company incorporated in New York. Through its subsidiaries, Energy East is an
energy delivery, products, and services company with operations in New York and
several other northeastern States.
According to Central Maine's October 6,1999, submittal (the "application"),
on June 14, 1999, CMP and Energy East signed a definitive merger agreement for
the acquisition of CMP by Energy East. To accomplish the acquisition, EE Merger
Corporation, a Maine corporation that is a wholly owned subsidiary of Energy
East, will merge with and into CMP, with CMP being the surviving corporation.
Upon completion of the merger, CMP will become a wholly owned subsidiary of
Energy East, with Energy East acquiring all of CMP's common stock. CMP will
continue its corporate existence under the laws of the State of Maine, and CMP
will continue to own all of Central Maine's common stock. The application
notes, however, that in the event that the Securities and Exchange Commission
does not permit Energy East to maintain CMP as
<PAGE>
an intermediate holding company, Energy East plans to hold Central Maine
directly
Whether Central Maine becomes directly or indirectly held by Energy East,
Central Maine will continue to hold and to be the licensee for its 2.5-percent
ownership interest in Millstone 3. In the case of either direct or indirect
ownership by Energy East, an indirect transfer of the license to the extent it
is held by Central Maine will occur as a result of the merger.
Approval of the indirect license transfer was requested pursuant to 10 CFR
5ft80. Notice of the application for approval and an opportunity for a hearing
was published in the Federal Register on November 16, 1999 (64 FR 62230). No
hearing requests or written comments were filed.
Under 10 CFR 50.80, no license, or any right thereunder, shall be
transferred, directly or indirectly, through transfer of control of the license,
unless the Commission shall give its consent in writing. Upon review of the
information in the application and other information before the Commission, the
NRC staff has determined that the subject merger will not affect the
qualifications of Central Maine to hold the Millstone 3 license to the extent
currently held, and that the indirect transfer of the license, to the extent
effected by the proposed merger, is otherwise consistent with applicable
provisions of law, regulations, and orders issued by the Commission pursuant
thereto, subject to the conditions set forth below. The foregoing findings are
supported by a safety evaluation dated February 4. 2000.
IV
Accordingly, pursuant to Sections 161 b, 161 I, 1610, and 184 of the AEA,
as amended, 42 USC ** 2201(b), 2201(i), 2201(o), and 2234; and 10 CFR 50.80, IT
IS HEREBY ORDERED that the license transfer referenced above is approved,
subject to the following conditions:
(1)Central Maine shall provide the Director of the Office of Nuclear
Reactor
<PAGE>
Regulation a copy of any application, at the time it is filed, to transfer
(excluding grants of security interests or liens) from Central Maine to
its current or proposed direct or indirect parent or to any other
affiliated company, facilities for the production, transmission, or
distribution of electric energy having a depreciated book value exceeding
10 percent (10%) of Central Maine's consolidated net utility plant, as
recorded on Central Maine's books of account.
The foregoing condition shall supersede Condition (1) of the Order dated
June 2,1998. which approved the application regarding the restructuring of
Central Maine by establishment of a holding company.
(2) Should the proposed merger of CMP and Energy East not be completed
by January 30, 2001, this Order shall become null and void, provided,
however, on application and for good cause shown, such date may be
extended.
This Order is effective upon issuance.
For further details with respect to this Order, see the application dated
October 6,1999, which is available for public inspection at the Commission's
Public Document Room, the Gelman Building, 2120 L Street, NW., Washington, DC,
and accessible electronically through the ADAMS Public Electronic Heading Room
link at the NRC Web site http://www.nrc.gov.
Dated at Rockville, Maryland, this 4th day of February 2000.
FOR THE NUCLEAR REGULATORY COMMISSION
/S/ Samuel J. Collins
-------------------
Samuel J. Collins, Director
Office of Nuclear Regulation
<PAGE>
UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 2O555-OOO1
SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION
-------------------------------------------------------------
PROPOSED MERGER OF CMP GROUP. INCAND ENERGY EAST CORPORATION
--------------------------------------------------------------
MILLSTONE NUCLEAR POWER STATION, UNIT 3
---------------------------------------
DOCKET NO. 50-423
------------------
1.0 INTRODUCTION
------------
By a letter dated October 6,1999, Central Maine Power Company (Central Maine),
through counsel Arthur H. Domby of Troutman Sanders, requested that the U.S.
Nuclear Regulatory Commission (NRC) determine that the proposed acquisition of
Central Maine's parent, CMP Group, Inc. (CMP), by Energy East Corporation
(Energy East) under a merger agreement between CMP and Energy East does not, in
fact, constitute a transfer of Facility Operating License NPF-49 for the
Millstone Nuclear Power Station, Unit 3 (Millstone 3), to the extent held by
Central Maine in regard to Central Maine's 2.5-percent ownership interest in
Millstone 3. The letter also requested if the NRC does find that the proposed
acquisition of CMP constitutes an indirect transfer of Facility Operating
License NPF-49 to the extent it is held by Central Maine, that the NRC consent
to the indirect transfer of Central Maine's license to Energy East. Attachment
A to the letter provided the NRC with additional information pertinent to this
request for consent; therefore, the letter and its Attachment A are hereinafter
referred to as the "application."
The NRC staff reviewed the application and determined that an indirect transfer
of the license to the extent that it is held by Central Maine is involved and
that approval of the application would be required prior to the indirect
transfer. The staff informed Central Maine of this decision and of a Federal
-------
Register notice pertaining to it in a letter dated November 15, 1999.
- --------
Central Maine is an electric utility primarily engaged in the transmission,
sale, and distribution of electricity in the State of Maine and is incorporated
in Maine. Central Maine is a subsidiary of CMP, which holds all the common
stock of Central Maine and also is incorporated in the State of Maine. Energy
East is an investor-owned holding company incorporated in New York. Through its
subsidiaries, Energy East is an energy delivery, products, and services company
with operations in New York and several other northeastern States.
On June 14,1999, CMP and Energy East signed a definitive merger agreement for
the acquisition of CMP by Energy East. To accomplish the acquisition, EE Merger
Corp., a Maine corporation that is a wholly owned subsidiary of Energy East,
will merge with and into CMP, with CMP being the surviving corporation. Upon
completion of the merger, CMP will become a wholly owned subsidiary of Energy
East, with Energy East acquiring all of CMP's common stock CMP will continue its
corporate existence under the laws of the State of Maine, and CMP will continue
to own all of Central Maine's common stock. Central Maine's application noted,
<PAGE>
-2-
however, that in the event that the Securities and Exchange Commission does not
permit Energy East to maintain CMP as an intermediate holding company, Energy
East plans to hold Central Maine directly.
Whether Central Maine becomes directly or indirectly held by Energy East,
Central Maine will continue to hold and to be the licensee for its 2.5-percent
ownership interest in Millstone 3. In the case of either direct or indirect
ownership by Energy East, an indirect transfer of the license to the extent it
is held by Central Maine will occur as a result of the merger.
Northeast Nuclear Energy Corporation (NNECO), a co-owner of Millstone 3, has
exclusive authority under the license to operate the facility. NNECO is not
involved in the merger, and the application states that the merger will have no
adverse impact on ownership or operation of Millstone 3 and that it will not
change the managerial, technical, or financial qualifications of NNECO as the
operator of Millstone 3. Also, the application states that the merger will not
impact the revenues and expenses of Central Maine relative to the operation of
Millstone 3 or the ability of Central Maine to fund its share of decommissioning
funds for the facility.
In addition to its interest in Millstone 3, Central Maine is a minority
shareholder in four companies, each of which owns, and is the licensee for, a
nuclear plant in New England (the "Yankee Companies"). These four companies,
and Central Maine's ownership interest in each and the nuclear plants owned by
each, are as follows: a 4-percent interest in Vermont Yankee Nuclear Power
Corporation (which owns the Vermont Yankee Nuclear Power Station); a 38-percent
interest in Maine Yankee Atomic Power Company (which owns the Maine Yankee
Atomic Power Station); a 9.5-percent interest in Yankee Atomic Electric Company
(which owns the Yankee Nuclear Power Station); and a 6-percent interest in
Connecticut Yankee Atomic Power Company (which owns the Haddam Neck. or
Connecticut Yankee, Plant). (1)
The merger will be occurring during the transition period in Maine to a more
competitive electric power industry. The Maine Electric Utility Restructuring
Ad of 1997 (referred to herein as "the 1997 Maine Act") requires investor-owned
utilities in Maine to do the following: (1) divest their non-nuclear generating
assets and generation-related activities by March 1, 2000, at which time all
Maine retail customers will have the right to purchase electric generation
services directly from competitive providers; (2) limit their electric utility
operations to transmission and distribution services after that date; and (3)
create separate corporate entities for the marketing and sale of electricity to
retail customers. During this transition period, the State of Maine is not
requiring the sale of Central Maine's ownership interest in Millstone 3, but it
does require that Central Maine sell the energy to which it is entitled to from
Millstone 3 through bids from prospective buyers prior to March 1, 2000.
Pursuant to 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through the transfer of control of the license, unless the
Commission shall give its consent in writing. Such
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(1) Central Maine is not a licensee of any of the four nuclear facilities
owned by the Yankee Companies and is a minority owner of each of these
companies, so it does not directly control the plants or their licensed
activities. No direct or indirect transfer of a license is involved for Central
Maine with respect to any of these four nuclear facilities as a result of the
merger, and, therefore, no NRC approval is required with regard to their
licenses.
<PAGE>
-3-
action is contingent upon the Commission's determination in indirect transfer
cases that the underlying transaction, here the CMP and Energy East merger, will
not affect the qualifications of the holder of the license, and that the
transfer is otherwise consistent with applicable provisions of law, regulations,
and orders of the Commission.
2.0 FINANCIAL QUALIFICATIONS ANALYSIS
-----------------------------------
Following the merger, Central Maine will maintain its current ownership interest
in Millstone 3 and will continue to be an "electric utility" as defined in 10
CFR 50.2 under the jurisdiction of State regulatory agencies and the Federal
Energy Regulatory Commission. Under the terms of the merger, Central Maine will
continue to be responsible for providing funds to decommission its portion of
Millstone 3. The application states that the merger will not affect the ability
of Central Maine to provide the funds necessary for its share of costs for the
decontamination and decommissioning of Millstone 3 and that the 1997 Maine Act
requires the Maine Public Utilities Commission to include "decommissioning
expenses associated with a nuclear unit" in Central Maine's rates as "required
by federal law, rule or order." Central Maine currently includes in its
transmission and distribution revenue requirements (costs of service that are
recovered through electric rates) the decommissioning trust fund payments for
Millstone 3, and this inclusion will continue after the merger. As an electric
utility, Central Maine is exempt from further financial qualifications review,
pursuant to 10 CPA 50.33(f).
The application states that after the proposed merger is completed, Central
Maine will remain subject to the condition regarding asset transfers in the NRC
Order of June 2,1998. The wording of the condition in the 1998 Order should be
modified for the current Order by replacing any reference to "CMP" in the 1998
Order with "Central Maine," and to reflect the new proposed corporate structure,
so that the new condition for the current Order would read as follows:
Central Maine shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filed, to transfer
(excluding grants of security interests or liens) from Central Maine to its
current or proposed direct or indirect parent or to any other affiliated
company, facilities for the production, transmission, or distribution of
electric energy having a depreciated book value exceeding 10 percent (10%) of
Central Maine's consolidated net utility plant, as recorded on Central Maine's
books of account,
3.0 TECHNICAL QUALIFICATIONS
-------------------------
The application states that the "proposed transaction will not result in any
change in the design or operation of Millstone Units, nor any change in the
terms or conditions of the existing licenses or Technical Specifications related
to the plant. The plant personnel having control over licensed activities will
not change as a result of the transaction." The staff has no basis to conclude
that the proposed merger and indirect license transfer will affect the technical
qualifications of NNECO to perform its obligations under the license.
<PAGE>
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4.0 ANTITRUST REVIEW
-----------------
The Atomic Energy Act (AEA) does not require or authorize antitrust reviews of
post-operating license transfer applications. Kansas Gas and Electric Co., et
-------------------------------
al. (Wolf Creek Generating Station, Unit 1), CLI-99-19, 49 NRC 441 (1999).
- ---
Therefore, since the transfer application postdates the issuance of the
Millstone 3 operating license, no antitrust review is required or authorized.
5.0 FOREIGN OWNERSHIP. CONTROL OR DOMINATION
--------------------------------------------
Section 1 03d of the AEA prohibits the Commission from issuing a license for a
nuclear power plant under Section 103 to "any corporation or other entity if the
Commission knows or has reason to believe it is owned, controlled, or dominated
by an alien, a foreign corporation, or a foreign government." Central Maine,
CMP, and Energy East are all U,S. corporations, and all of the current officers
and directors of these three companies are U.S. citizens. Currently, the
shares of Central Maine common stock are held by CMP, and the shares of CMP
common stock are widely held. The shares of Energy East common stock are also
widely held. The staff does not know or have any reason to believe that any of
these three companies are now, or will be following the proposed merger, owned,
controlled, or dominated by an alien, foreign corporation, or foreign
government.
6.0 ENVIRONMENTAL CONSIDERATION
----------------------------
The subject application is for approval of the indirect transfer of a license
issued by the NRC. Accordingly, the action involved meets the eligibility
criteria for categorical exclusion set forth in 10 CFR 50.22(c)(21). Pursuant
to 10 CFR 51.22(b), no environmental impact statement or environmental
assessment need be prepared in connection with approval of the application.
7.0 CONCLUSIONS
-----------
In view of the foregoing discussion, the staff concludes that the proposed
merger that would effect an indirect transfer of the operating license for
Millstone 3 to Energy East with respect to Central Maine's 2.5-percent ownership
interest in Millstone 3 will not adversely affect either the technical
qualifications of the Millstone 3 management and staff to operate that facility
or the financial qualifications of Central Maine with respect to its ongoing
provision of its share of funds for the operation and eventual decommissioning
of Millstone 3. Also, there do not appear to be any problematic foreign
ownership considerations related to the proposed merger. Accordingly, the staff
concludes that Central Maine will remain qualified to hold the license with
respect to its 2.5-percent ownership interest in Millstone 3 following the
proposed merger of CMP and Energy East, and that the indirect transfer of the
license, to the extent effected by the proposed merger, is otherwise consistent
with applicable provisions of law, regulations, and orders issued by the
Commission pursuant thereto, subject to the condition regarding asset transfers
discussed above.
Principal Contributor: A. McKeigney
Date: February 4, 2000
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