No. 070-09569
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 5 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, Executive Vice President
General Counsel and Secretary and 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 President and Chief Executive Officer
Chief Executive Officer Berkshire Energy Resources
CTG Resources, Inc 115 Cheshire Road
100 Columbus Boulevard Pittsfield, Massachusetts 01201
Hartford, Connecticut 06103 Telephone: (413) 442-1511
Telephone: (860) 727-3000
(Names and addresses of agents for service)
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Copies to:
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
The Form U-1 Application/Declaration in this proceeding originally filed with
the Securities and Exchange Commission on October 29, 1999, as previously
amended by Amendment No. 1 filed December 3, 1999, Amendment No. 2 filed
February 7, 2000, Amendment No. 3 filed March 3, 2000, and Amendment No. 4 filed
March 30, 2000 is hereby amended and restated in its entirety as follows:
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TABLE OF CONTENTS
<S> <C> <C> <C>
ITEM 1. DESCRIPTION OF PROPOSED MERGERS . . . . . . . . . . . . . . . . . . . . . . .1
A. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Request. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Overview of the Mergers. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
a. CMP Group Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
b. CTG Resources Merger. . . . . . . . . . . . . . . . . . . . . . . . . .3
c. Berkshire Energy Merger. . . . . . . . . . . . . . . . . . . . . . . . 3
B. DESCRIPTION OF THE PARTIES TO THE MERGER. . . . . . . . . . . . . . . . . . . . .3
1. Energy East. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
a. Public Utility Operations of Energy East . . . . . . . . . . . . . .4
b. Non-Public Utility Affiliates of Energy East . . . . . . . . . . . .6
c. Non-Public Utility Affiliates of Connecticut Energy . . . . . . . . . . .8
2. CMP Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
a. Public Utility Operations of CMP Group. . . . . . . . . . . . . . . . . .9
b. Non-Public Utility Affiliates of CMP Group. . . . . . . . . . . . . . . 11
3. CTG Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
a. Public Utility Affiliate of CTG Resources. . . . . . . . . . . . . . . .12
b. Non-Public Utility Affiliates of CTG Resources. . . . . . . . . . . . . 12
4. Berkshire Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
a. Public Utility Affiliate of Berkshire Energy. . . . . . . . . . . . . . 14
b. Non-Public Utility Affiliates of Berkshire Energy. . . . . . . . . . . .14
C. DESCRIPTION OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
1. CMP Group Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . .14
2. CTG Resources Merger Agreement . . . . . . . . . . . . . . . . . . . . . . .15
3. Berkshire Energy Merger Agreement . . . . . . . . . . . . . . . . . . . . . 15
D. MANAGEMENT AND OPERATION OF THE COMPANIES FOLLOWING THE
MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ITEM 2. FEES, COMMISSIONS AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 3. APPLICABLE STATUTORY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . .17
A. SECTION 9(A)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
B. SECTION 10(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
1. Section 10(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
2. Section 10(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
a. Reasonableness of Consideration . . . . . . . . . . . . . . . . . . . 23
b. Reasonableness of Fees . . . . . . . . . . . . . . . . . . . . . . . .26
3. Section 10(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
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C. SECTION 10(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
1. Acquisition Must Be Lawful . . . . . . . . . . . . . . . . . . . . . . . . .33
2. Combination and Integration of Electric Utility Operations . . . . . . . . . . 35
a. Changes in the Electric Utility Industry . . . . . . . . . . . . . 36
b. Restructuring of NEPOOL and NYPP into Open, Competitive and
Coordinated Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3. Statutory Standards For Electric Integration Will Be Satisfied . . . . . . .45
a. Physical interconnection or capability of physical interconnection . . .46
b. Economic and Coordinated Operation . . . . . . . . . . . . . . . . . 47
c. Coordination Between NYSEG and Central Maine Power . . . . . . . .48
d. Single area or region . . . . . . . . . . . . . . . . . . . . . . . .55
e. Not so large as to impair advantages of localized management, efficient
operation, and the effectiveness of regulation . . . . . . . . . . 56
4. Combination of Gas Utility Operations . . . . . . . . . . . . . . . . . . .57
a. Section 10(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
b. "ABC" Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
c. Gas utility integration standards (Section 10(b)(2)) . . . . . . . 62
5. Economies and Efficiencies from the Merger (Section 10(c)(2)) . . . . . . .67
6. Retention of Non-Utility Businesses . . . . . . . . . . . . . . . . . . . . 70
D. SECTION 10(F) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
ITEM 4. REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
A. ANTITRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
B. FEDERAL POWER ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
C. ATOMIC ENERGY ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
D. TELECOMMUNICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
E. STATE PUBLIC UTILITY REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . .73
ITEM 5. PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 74
A. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
B. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS . . . . . . . . . . . . . . . . . .78
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ITEM 1. DESCRIPTION OF PROPOSED MERGERS
A. INTRODUCTION
This Application/Declaration seeks approvals relating to the proposed
combinations of Energy East Corporation ("Energy East") with CMP Group, Inc.
("CMP Group"), Energy East with CTG Resources, Inc., and Energy East with
Berkshire Energy Resources ("Berkshire Energy") (collectively, the "Companies")
pursuant to which CMP Group, CTG Resources, and Berkshire Energy will each
become a direct subsidiary of Energy East (the proposed combinations are
referred to collectively as the "Merger"). Following the consummation of the
Merger, Energy East will register with the Securities and Exchange Commission
(the "SEC" or "Commission") as a holding company under the Public Utility
Holding Company Act of 1935 (the "Act").(1)
The Act was intended, among other things, to prevent the evils that arise
"when the growth and extension of holding companies bears no relation to the
economy of management and operation or integration and coordination of related
operating properties "In contrast, post-Merger Energy East will exemplify the
growth that promotes economies and coordination of related operating properties
within a single region in a manner consistent not only with the policies of the
Act, but also with the policies of both the Federal Energy Regulatory Commission
("FERC") and with state regulatory initiatives. Moreover, as discussed in detail
below, integration of New York State Electric & Gas Corporation ("NYSEG") and
Central Maine Power Company ("Central Maine Power") as members of adjacent,
highly interconnected and coordinated power pools and independent system
operators ("ISOs") represents a reasoned evolution of the integration
requirements under the Act. Here, through the combination of membership in
highly integrated power pools and ISOs, the instant availability of open access,
non-discriminatory intra- and inter- pool transmission through internet-based
Open Access Same-time Information Systems ("OASIS") sites, the reduction of
"pancaked" transmission charges, and coordinated electric utility operations,
the Merger will increase the efficiency of the competitive markets in the
northeastern United States, thereby "serv[ing] the public interest by tending
toward the economical and efficient development of an integrated public utility
system."
The Merger is expected to produce substantial benefits to the public,
investors and consumers, and meets all applicable standards of the Act. The
Companies believe that the Merger will allow shareholders and consumers to
participate in a larger, financially stronger company that, through a
combination of the capital, management, and technical expertise of each Company,
will be a viable competitor in the rapidly evolving market for energy and energy
services, will be able to achieve increased financial stability and strength,
greater opportunities for earnings growth, reduction of operating costs,
efficiencies of operation, better use of facilities for the benefit of
customers, improved ability to use new technologies, greater retail and
industrial sales diversity, and optimization of their respective portfolios of
gas supply and transportation through joint management. The Companies believe
the Merger will significantly improve the competitive positions of their utility
subsidiaries and create greater opportunities for growth.
-----------------------
(1) Prior to completion of the Merger, the Companies expect to file one or
more additional applications/declarations under the Act with respect to ongoing
financing activities, intrasystem services and other matters pertaining to
Energy East after the Merger. To this end, the Companies filed on January 10,
2000 an application/declaration seeking authorization and approval with respect
to ongoing financing activities of Energy East and its subsidiaries, intrasystem
extensions of credit, the creation, acquisition or sale of the non-utility
subsidiaries, the payment of dividends out of capital and unearned surplus and
other related matters pertaining to Energy East and its subsidiaries.
<PAGE>
The shareholders of CMP Group, CTG Resources and Berkshire Energy approved
their mergers with Energy East at meetings held on October 7, 1999, October 18,
1999, and February 29, 2000, respectively. Energy East, CMP Group and CTG
Resources have submitted applications requesting approval of the CMP Group and
CTG Resources transactions and/or related matters to the appropriate state and
federal regulators, including the Maine Public Utilities Commission ("MPUC"),
the Connecticut Department of Public Utility Control ("DPUC"), the FERC, the
Nuclear Regulatory Commission ("NRC"), and the Federal Communications Commission
("FCC"). Finally, all four Companies have made the required filings with the
Antitrust Division of the U.S. Department of Justice ("DOJ") and the Federal
Trade Commission ("FTC") under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended ("HSR Act"). See Exhibits D-1 through D-15 and Item 4 below
for additional detail regarding these regulatory approvals. FERC approval was
granted on March 29, 2000, and the FERC's order is attached hereto at Exhibit
D-2. The remaining FCC license transfer orders are attached hereto as Exhibit
D-14.
In order to permit timely consummation of the Merger and the realization of
the substantial benefits it is expected to produce, Energy East requests that
the Commission's review of this Application/Declaration commence and proceed as
expeditiously as practicable, and that the Commission order be issued no later
than August 31, 2000. To the extent that all of the state and other approvals
have not been received by that time, Energy East asks the Commission to
condition the effectiveness of its order upon receipt of all necessary state and
other regulatory approvals.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, Energy East hereby requests
authorization and approval of the Commission to acquire, by means of the Merger,
100 percent of the issued and outstanding common shares of each of CTG
Resources, CMP Group, and Berkshire Energy, exclusive of dissenters' shares, if
any. A chart of the proposed corporate structure of Energy East following
consummation of the Merger is attached hereto as Exhibit E-5. Energy East also
hereby requests that the Commission approve:
(i) the operation of Energy East as a combination electric and gas utility
holding company; and
(ii) the retention by Energy East of its non-utility activities, businesses
and investments and the acquisition by Energy East of the non-utility
activities, businesses and investments of CMP Group, CTG Resources,
and Berkshire Energy.
2. Overview of the Mergers
a. CMP Group Merger
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Pursuant to an Agreement and Plan of Merger, dated as of June 14, 1999 (the
"CMP Group Merger Agreement"), EE Merger Corp., a Maine corporation and a
wholly-owned subsidiary of Energy East, will be merged with and into CMP Group,
with CMP Group being the surviving corporation (the "CMP Group Merger"). Subject
to regulatory and shareholder approval, Energy East will purchase all common
shares of CMP Group, exclusive of dissenters' shares, for $29.50 in cash per
share, for a total cash value of $957 million. Energy East will also assume
approximately $271 million of preferred stock and long-term debt. A copy of the
CMP Group Merger Agreement is incorporated by reference as Exhibit B-2 hereto.
As a result of these transactions, CMP Group will become a direct subsidiary of
Energy East. Energy East will establish a new corporate office in Portland,
Maine.
b. CTG Resources Merger
Pursuant to an Agreement and Plan of Merger, dated as of June 29, 1999 (the
"CTG Resources Merger Agreement"), CTG Resources will be merged with and into
Oak Merger Co., a Connecticut corporation and a wholly-owned subsidiary of
Energy East, with Oak Merger Co. being the surviving corporation (the "CTG
Resources Merger"). Oak Merger Co. will continue to conduct CTG Resource's
businesses under the name "CTG Resources, Inc." as a direct, wholly owned
subsidiary of Energy East. The common shareholders of CTG Resources will receive
for each issued and outstanding share of common stock the right to receive
$41.00 in cash, Energy East common stock or a combination of cash and Energy
East common stock. A copy of the CTG Resources Merger Agreement is incorporated
by reference as Exhibit B-1 hereto. As a result of these transactions, CTG
Resources will become a direct subsidiary of Energy East.
c. Berkshire Energy Merger
Pursuant to an Agreement and Plan of Merger, dated as of November 9, 1999
(the "Berkshire Energy Merger Agreement"), Mountain Merger LLC, a Massachusetts
limited liability company and subsidiary of Energy East, will be merged with and
into Berkshire Energy, with Berkshire Energy being the surviving company (the
"Berkshire Energy Merger"). Subject to regulatory and shareholder approval,
Energy East will purchase all common shares of Berkshire Energy for $38.00 in
cash per share, for a total cash value of approximately $96 million. Energy East
will also assume approximately $40.3 million of preferred stock and long-term
debt. A copy of the Berkshire Energy Merger Agreement is filed herewith as
Exhibit B-3. As a result of these transactions, Berkshire Energy will become a
direct subsidiary of Energy East.
B. DESCRIPTION OF THE PARTIES TO THE MERGER
1. Energy East
On May 1, 1998, Energy East became the parent of NYSEG. Energy East neither
owns nor operates any physical properties. Energy East is currently a public
utility holding company exempt from all provisions of the Act, except Section
9(a)(2), under Section 3(a)(1) of the Act by order of the Commission dated
February 2, 2000.(2)
---------------------------
2 Energy East Corp. et al., HCAR Release 26976 (February 12, 1999) ("Energy
East").
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a. Public Utility Operations of Energy East
New York State Electric & Gas Corporation ("NYSEG"), a regulated public
utility incorporated under the laws of the State of New York, is a combination
electric and gas utility serving approximately 830,000 electric customers and
approximately 246,000 natural gas customers in upstate New York. NYSEG has
divested substantially all of its generating assets. It retains
hydroelectric.(3) See Energy East Corporation, et al., Holding Co. Act Release
("HCAR") No. 27128 (Feb. 2, 2000). Facilities with an aggregate capacity of 59
MW, non-utility generation ("NUG") contracts and contracts pursuant to which the
New York Power Authority ("NYPA") sells power to NYSEG, as well as an 18 percent
ownership interest in the Nine Mile Point Unit 2 nuclear plant ("NM2"). NYSEG
filed a petition with the Public Service Commission of the State of New York
(PSC) asking for approval of proposed auction protocols and ratemaking treatment
for the sale of its interest in NM2.(4) NYSEG is engaged in the business of
purchasing, transmitting and distributing electricity and purchasing,
transporting and distributing natural gas. NYSEG also generates electricity from
its 18 percent share of NM2 and from its hydroelectric stations.
NYSEG's service territory, 99 percent of which is located outside the
corporate limits of cities, is in the central, eastern and western parts of the
State of New York. NYSEG's service territory has an area of approximately 19,900
square miles and a population of 2,500,000. The larger cities in which NYSEG
serves both electricity and natural gas customers are Binghamton, Elmira,
Auburn, Geneva, Ithaca and Lockport, New York. The service territory reflects a
diversified economy, including high-tech firms, light industry, colleges and
universities, agriculture and recreational facilities. No customer accounts for
five percent or more of either electric or natural gas revenues. During 1997
through 1999, approximately 84 percent of NYSEG's operating revenue was derived
from electric service with the balance derived from natural gas service.
After the sale of its interest in NM2, NYSEG will be engaged almost
entirely in the transmission and distribution of electricity and the
distribution of natural gas. As of December 31, 1999, NYSEG's electric
transmission system consisted of approximately 4,384 circuit miles of line.
NYSEG's electric distribution system consisted of 33,891 pole-miles of overhead
lines and 2153 miles of underground lines. NYSEG, which is a member of the New
York Power Pool ("NYPP"), has transferred control of its transmission system to
the New York Independent System Operator ("NYISO").(5) The NYISO, an independent
operator of utilities' transmission systems, operates the transmission systems
of all of the public utility systems in New York.(6)
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(3) Energy East, through its subsidiaries, is an energy delivery products
and services company with operations in New York, Connecticut, Massachusetts,
Maine, New Hampshire, Vermont and New Jersey. Energy East has offices in New
York and Connecticut. Energy East's common stock is publicly traded on the New
York Stock Exchange under the symbol "NEG." Energy East's principal executive
offices are located at One Canterbury Green, P.O. Box 1196, Stamford,
Connecticut 06904-1196.
(4) In June 1999 NYSEG announced that it had agreed to sell its 18%
interest in NM2 to AmerGen Energy Company. On May 11, 2000, NYSEG and AmerGen
executed a termination agreement related to the sale. On May 31, 2000, NYSEG
filed a petition with the PSC asking for approval of proposed auction protocols
and ratemaking treatment for the sale of its interest in NM2. NYSEG has not
received a response from the PSC on the petition. NYSEG's participation in the
auction of NM2 awaits PSC approval.
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MAINE NATURAL GAS LLC
Maine Natural Gas LLC (formerly, CMP Natural Gas, L.L.C.) ("Maine Gas Co.")
was established to furnish natural gas distribution service, on a non-exclusive
basis, in certain areas of Maine, including, among others, the Bethel, Windham,
Augusta, Waterville and Bangor metropolitan areas, and the coastal area,
including Brunswick and Bath. Maine Gas Co. began to provide service to retail
customers in May 1999. Maine Gas Co. is a joint venture between New England Gas
Development Corp., a wholly-owned subsidiary of CMP Group, and Energy East
Enterprises, Inc., a wholly-owned subsidiary of Energy East.
CONNECTICUT ENERGY CORPORATION
On February 8, 2000, Energy East completed its merger with Connecticut
Energy Corporation ("Connecticut Energy"). The Commission approved that merger
on February 2, 2000.(7)
Connecticut Energy, an exempt holding company that neither owns nor
operates any physical property, is primarily engaged in the retail distribution
of natural gas through its principal wholly-owned subsidiary, The Southern
Connecticut Gas Company ("Southern Connecticut Gas"). Connecticut Energy,
through its subsidiaries, is an energy delivery, products and services company
that provides an array of energy commodities and services to commercial and
industrial customers throughout New England. Connecticut Energy's principal
executive offices are located at 855 Main Street, Bridgeport, Connecticut 06604.
Connecticut Energy and its subsidiaries had 473 full-time employees as of
December 31, 1999. Southern Connecticut Gas had 459 employees as of December 31,
1999.
SOUTHERN CONNECTICUT GAS
Southern Connecticut Gas, a public service company incorporated under the
laws of the State of Connecticut, is engaged in the retail distribution of
natural gas for residential, commercial and industrial users and the
transportation of natural gas for commercial and industrial users. Southern
Connecticut Gas is a "gas utility company" as defined in Section 2(a)(4) of the
Act. Southern Connecticut Gas serves approximately 163,000 customers in the
State of Connecticut, primarily in 22 towns along the southern Connecticut coast
from Westport to Old Saybrook, which include the urban communities of Bridgeport
and New Haven. Southern Connecticut Gas is the sole distributor of natural gas,
other than bottled gas, in its service area.
-------------------------
(5) Central Hudson Gas & Electric Corp., et al., 87 F.E.R.C. 61,135 (1999).
(6) A detailed description of the history, purpose, and regulatory
authority of the NYISO appears in Item 3.C.2.(b).(i).
(7) See Energy East Corporation, et al., HCAR No. 27128 (Feb. 2, 2000).
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<PAGE>
b. Non-Public Utility Affiliates of Energy East
Energy East also has a number of direct and indirect subsidiaries that are
not "public utility companies" under the Act. These include Energy East
Enterprises ("Enterprises"), a Maine corporation, XENERGY Enterprises, Inc.
("XENERGY Enterprises"), a Delaware corporation, and Energy East Management
Corporation ("Energy East Management"), a Delaware corporation.
Enterprises was organized in 1998 and owns natural gas and propane air
distribution companies. Enterprises is a wholly-owned subsidiary of Energy East.
It is currently an exempt public utility holding company under the Act by order
of the Commission dated February 12, 1999.(8) It indirectly holds public utility
assets through its ownership of a controlling interest in Maine Gas Co., a gas
utility company.
XENERGY Enterprises was organized in 1992 and invests in providers of
energy and telecommunications services. XENERGY Enterprises is a wholly-owned
subsidiary of Energy East. It currently holds no public utility assets and is
neither a "public utility company" nor a "holding company" under the Act. Energy
East Management was organized in 1999 and invests the proceeds of the sale of an
affiliate's generation assets. Energy East Management is a wholly-owned
subsidiary of Energy East. It currently holds no public utility assets and is
neither "a public utility company" nor a "holding company" under the Act.
Enterprises' current direct non-utility subsidiaries are as follows:
New Hampshire Gas Corporation, a New Hampshire corporation, is a
wholly-owned subsidiary of Enterprises and is an energy services company in New
Hampshire specializing in propane air distribution systems.
Southern Vermont Natural Gas Corporation, a Vermont corporation, is a
wholly-owned subsidiary of Enterprises and is currently developing a combined
natural gas supply and distribution project that will include an extension of a
pipeline from New York to Vermont by the Iroquois Gas Transmission System, and
the development of natural gas distribution systems in Vermont.
Seneca Lake Storage, Inc., a New York corporation, is a wholly-owned
subsidiary of Enterprises and proposes to own and operate a gas storage facility
in New York.
XENERGY Enterprises' current direct and indirect subsidiaries are as
follows:
Energy East Solutions, Inc. ("Energy East Solutions"), a Delaware
corporation, is a wholly-owned subsidiary of XENERGY Enterprises and markets
electricity and natural gas to end-users and provides wholesale commodities to
retail electric suppliers in the Northeast.
NYSEG Solutions, Inc., a New York corporation, is a wholly-owned subsidiary
of Energy East Solutions and markets electricity and natural gas to end-users
and provides wholesale commodities to retail electric suppliers in the State of
New York.
-----------------------
(8) See Energy East Corporation, et al., HCAR No. 26976 (Feb. 12, 1999).
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South Jersey Energy Solutions, LLC, a Delaware limited liability company,
is a partially-owned subsidiary of Energy East Solutions and was formed to
market retail electricity and energy management services in the mid-Atlantic
region of the United States.
Energy East Solutions, LLC, a Delaware limited liability company, is a
partially-owned subsidiary of Energy East Solutions and CNE Energy Services
Group, Inc. (discussed below) and sells natural gas, fuel oil and other
services, and markets a full range of energy-related planning, financial,
operational and maintenance services to commercial, industrial and municipal
customers in New England.
Energy East Telecommunications, Inc., a Delaware corporation, is a
wholly-owned subsidiary of XENERGY Enterprises and was formed to provide
telecommunications services, including the construction and operation of fiber
optic networks.
Telergy East, LLC, a New York limited liability company, is a
partially-owned subsidiary of Energy East Telecommunications, Inc., and was
formed to construct, own and operate a fiber optic network.
Cayuga Energy, Inc. ("Cayuga"), a Delaware corporation, is a wholly-owned
subsidiary of XENERGY Enterprises and invests in co-generation facilities.
Carthage Energy, LLC, a New York limited liability company, is a
wholly-owned subsidiary of Cayuga and owns a co-generation facility in upstate
New York. It is an exempt wholesale generator as defined in Section 32 of the
Act.
South Glens Falls Energy, LLC, a New York limited liability company, is a
partially-owned subsidiary of Cayuga and owns a co-generation facility in
upstate New York. It is an exempt wholesale generator as defined in Section 32
of the Act.
XENERGY Inc. ("XENERGY"), a Massachusetts corporation, is a wholly-owned
subsidiary of XENERGY Enterprises and is an energy services, information systems
and consulting company that specializes in energy management, conservation
engineering and demand-side management.
XENERGY Canada, Inc., incorporated in Quebec, Canada, is a wholly-owned
subsidiary of XENERGY and provides software services related to a utility client
management system.
XENERGY International, Inc., a Delaware corporation, is a wholly-owned
subsidiary of XENERGY and is an energy services, information systems and
consulting company that specializes in energy management, conservation
engineering and demand-side management in the United Kingdom and Spain.
KENETECH Energy Management, Inc. ("KENETECH"), a Massachusetts corporation,
is a wholly-owned subsidiary of XENERGY and is an energy services company
specializing in energy management.
KENETECH Energy Management International, Inc. ("KENETECH International"),
a Delaware corporation, is a wholly-owned subsidiary of KENETECH and is an
energy services company specializing in energy management.
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<PAGE>
KENETECH Energy Management, Limited, a limited company formed in Ontario,
Canada, is a wholly-owned subsidiary of KENETECH International and is an energy
services company specializing in energy management.
KEM 1991, Inc. ("KEM 1991"), a Delaware corporation, is a wholly-owned
subsidiary of KENETECH and is an energy services company specializing in e
energy management.
KEM Partners 1991, L.P., a Delaware limited partnership, is an energy
services company specializing in energy management. All of its interests are
owned by KENETECH and KEM 1991.
c. Non-Public Utility Affiliates of Connecticut Energy
Connecticut Energy also has a number of direct and indirect subsidiaries
that are not "public-utility companies" under the Act. These include CNE Energy
Services Group, Inc. ("CNE Energy"), CNE Development Corporation ("CNE
Development") and CNE Venture-Tech, Inc. ("CNE Venture-Tech"). All three of
these non-utility subsidiaries are Connecticut corporations.
CNE Energy, a wholly-owned subsidiary of Connecticut Energy, provides an
array of energy products and services to commercial and industrial customers
throughout New England, both on its own and through its participation as a
member of various energy-related limited liability companies. CNE Energy's
principal subsidiaries are: (i) Energy East Solutions, LLC, a Delaware limited
liability company described above; (ii) Total Peaking Services, LLC, a
wholly-owned subsidiary of CNE Energy, which operates a 1.2 billion cubic foot
liquefied natural gas open access storage facility in Milford, Connecticut; and
(iii) Conectiv/CNE Peaking, LLC, a wholly-owned subsidiary of CNE Energy, which
provides a firm in-market supply source to assist energy marketers and local gas
distribution companies in meeting the maximum demands of their customers by
offering firm supplies for peak-shaving and emergency deliveries.
CNE Development, a wholly-owned subsidiary of Connecticut Energy, is a 20
percent equity participant in East Coast Natural Gas Cooperative, LLC, which
purchases and stores gas spot supplies, provides storage service utilization
services and is involved in bundled sales.
CNE Venture-Tech, a wholly-owned subsidiary of Connecticut Energy, invests
in ventures that produce or market technologically advanced energy-related
products. CNE Venture-Tech's investments include a 7.8884 percent limited
partnership interest in Nth Power Technologies Fund I, L.P., which invests in
companies that develop, produce and market innovative energy-related products;
and CIS Service Bureau, LLC, a service bureau which provides access to
customer-billing software and other related services for local distribution and
other utility-type companies (including Southern Connecticut Gas) and which is
wholly-owned by CNE Venture-Tech.
For the twelve months ended June 30, 2000, electric revenues of
approximately $1,815,895,000 and gas revenues of approximately $457,361,000
accounted for approximately 80 percent and 20 percent, respectively, of Energy
East's consolidated gross utility revenues. Energy East's utility operating
income and utility net income available for common stock were $471,151,000 and
$207,870,000, respectively. Consolidated assets of Energy East and its
subsidiaries as of June 30, 2000, were approximately $4.1 billion, consisting of
$2.4 billion in net utility plant and $1.7 billion in other utility and
non-utility assets. For the twelve months ended June 30, 2000, consolidated
operating revenues, operating income and net income for Energy East and its
subsidiaries were approximately $2,372,588,000, $458,619,000, and $226,018,000,
respectively. Connecticut Energy's operating revenues totaled approximately
$292,007,303 for the twelve months ended June 30, 2000. Connecticut Energy's
consolidated net income for the same period was $7,995,301.
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2. CMP Group
CMP Group is a holding company by virtue of owning, among others, directly
or indirectly, more than five percent of the voting securities of Central Maine
Power, Maine Electric Power Company, Inc. ("MEPCo"), NORVARCO and Maine Gas Co.,
all public utility companies as defined in the Act. CMP Group is exempt from all
provisions of the Act, except Section 9(a)(2), under Section 3(a)(1) of the Act,
by order of the Commission dated February 12, 1999.(9) CMP Group's principal
utility subsidiary, Central Maine Power is primarily engaged in transmitting and
distributing electricity generated by others to retail customers in Maine. As of
June 30, 2000, there were 32,442,552 outstanding shares of common stock for CMP
Group.
a. Public Utility Operations of CMP Group
Central Maine Power
-------------------
Central Maine Power is the largest electric utility in Maine and serves
over 544,000 customers in its 11,000 square-mile service area in southern and
central Maine. Central Maine Power had approximately $917 million in
consolidated electric operating revenues in the twelve month period ended June
30, 2000. Central Maine Power is subject to the regulatory authority of the MPUC
and FERC.
Central Maine Power has divested and/or relinquished control over all of
its generating assets and purchase power contracts and now functions as an
electric transmission and distribution utility. Central Maine Power has sold its
hydroelectric, fossil and biomass generating assets.(10) It has sold its
entitlements to purchase capacity and energy under the NUG contracts, as well as
its entitlements to energy from its 2.5% interest in the Millstone 3 nuclear
plant ("Millstone 3") and from its 4% interest in the Vermont Yankee nuclear
plant ("Vermont Yankee"), and its entitlement in a firm energy contract with
Hydro Quebec. Further, Central Maine Power recently entered into an agreement to
sell its ownership interest in Vermont Yankee, and it has reached an agreement
with Northeast Utilities, the majority owner of Millstone 3 whereby Northeast
Utilities will include Central Maine Power's interest in its planned auction of
Millstone 3. The sales of generating capacity and entitlements to purchase
capacity and energy under NUG contracts, nuclear interests and the Hydro Quebec
contract were conducted pursuant to the requirements of Maine's recently enacted
electric utility restructuring legislation and MPUC Rules and Regulations.(11)
As of March 1, 2000, Central Maine Power no longer controls generation
resources. Also beginning March 1, 2000, all retail electric consumers in Maine
were authorized to choose their electric supplier. Under Maine law, Central
Maine Power would be unable to serve retail customers except through the
creation of a marketing affiliate or as directed by the MPUC. CMP Group has
elected not to take the steps required under Maine's electric utility
restructuring legislation to participate, through an affiliate, as a retail
electric supplier. Under an order of the MPUC, Central Maine Power is required
to arrange standard offer energy service for its medium and large commercial and
industrial customers who do not select an electricity supplier. Central Maine
Power has arranged service for those classes.
-----------------------
(9) See CMP Group, Inc., et al., HCAR No. 26977 (Feb. 12, 1999) ("CMP
Group").
(10) Central Maine Power sold these assets to a non-affiliated third party,
FPL Energy, a subsidiary of FPL Group.
(11) 35-A M.R.S.A. S 3204; and Chapt. 307 MPUC Rules and Regulations.
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As of December 31, 1999, Central Maine Power's delivery system consisted of
2,288 miles of overhead transmission lines, 19,754 pole-miles of distribution
lines and 155 miles of network underground and submarine cable. Central Maine
Power is a member of the New England Power Pool ("NEPOOL") and has transferred
control over its pool transmission facilities ("PTF") system to ISO New England
Inc. ("ISO-NE").12 It maintains high-voltage connections with other electric
systems at the New Hampshire and New Brunswick, Canada borders. As of June 30,
2000, there were 31,211,471 outstanding shares of Central Maine Power common
stock.
MEPCo and NORVARCO
------------------
Central Maine Power currently has two electric utility subsidiaries,
organized and operating exclusively in Maine: MEPCo and NORVARCO. (Central Maine
Power, MEPCo and NORVARCO are referred to collectively as the "CMP Electric
Utilities.") MEPCo owns and operates a 345kV transmission interconnection
between the Maine-New Brunswick, Canada international border at Orient, Maine.
Central Maine Power owns a 78.3 percent voting interest in MEPCo, with the
remaining interests owned by two other Maine utilities. Also, NORVARCO holds a
50 percent general partnership interest in Chester SVC Partnership, a general
partnership which owns a static var compensator located in Chester, Maine,
adjacent to MEPCo's transmission interconnection.
Maine Gas Co.
-------------
Maine Gas Co., a natural gas distribution company, is a joint venture of
New England Gas Development Corporation and Enterprises. New England Gas
Development Corporation, a wholly-owned subsidiary of CMP Group, holds an
approximately 17.2 percent interest in Maine Gas Co.
Other Nuclear Interests
-----------------------
Central Maine Power owns a 38 percent voting interest in Maine Yankee
Atomic Power Company, which owns the Maine Yankee nuclear electric generating
plant in Wiscasset, Maine. Maine Yankee's plant was permanently shut down on
August 6, 1997. Central Maine Power also holds (i) a 9.5 percent voting interest
in Yankee Atomic Electric Company, which has permanently shut down its plant
located in Rowe, Massachusetts, and (ii) a six percent voting interest in
Connecticut Yankee Atomic Power Company, which has permanently shut down its
plant in Haddam, Connecticut.
------------------------
(12) New England Power Pool, 79 F.E.R.C. 61,374 (1997). The ISO-NE operates
the transmission systems of all of the public utility system in New England. A
detailed description of the ISO-NE appears in Item 3.C.2.(b).(ii).
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<PAGE>
b. Non-Public Utility Affiliates of CMP Group
CMP Group's non-utility subsidiaries are as follows (All companies involved
in telecommunication are either exempt telecommunication companies under Section
34 of the Act or applicant expects to seek ETC status with respect to such
companies.):
-- CNEX (trade name for CMP International Consultants) previously
provided consulting, planning, training, project management, and
information and research services to foreign and domestic utilities
and government agencies in various aspects of utility operations and
utility support services. CNEX has been dissolved, effective August
28, 2000.
-- MaineCom Services ("MaineCom") provides telecommunications services,
including point-to-point connections, private networking, consulting,
private voice and data transport, carrier services, and long-haul
transport. It is subject to regulation by the MPUC with respect to
making available a fiber optics cable for public use in Maine. MainCom
has three subsidiaries, New England Business Trust, New England
Investment Corporation, and New England Security Corp., that have or
will obtain status as exempt telecommunications companies.
-- NorthEast Optic Network, Inc. ("NEON") develops, constructs, owns and
operates a fiber optic telecommunications system in New York and New
England. New England Business Trust, a wholly-owned subsidiary of
MaineCom, owns 26.8 percent of NEON's common stock.
-- TeleSmart previously provided, for utility companies, collections and
related accounts receivable management services and had a division
which collected charged-off accounts. TeleSmart ceased operations on
May 1, 2000, and was dissolved on July 11, 2000.
-- Central Securities Corporation owns and leases office and service
facilities in Central Maine Power's service territory for the conduct
of Central Maine Power's business. Central Maine Power owns all of the
outstanding common stock of Central Securities.
-- Cumberland Securities Corporation also owns and leases office and
service facilities in Central Maine Power's service territory for the
conduct of Central Maine Power's business. Central Maine Power owns
all of the outstanding common stock of Cumberland Securities. As
described in Exhibit H-5, Applicants will dispose of real property
used for agricultural and mobile home lot purposes within three years.
-- The Union Water-Power Company ("Union Water") provides utility
construction and support services (On Target division); energy
efficiency performance contracting and energy use and management
services (Combined Energies division); and utility-related real estate
development services (UnionLand Services). Union Water's Maine
HomeCrafters division, which was in the business of brokering and
financing pre-fabricated housing, has been sold. As described in
Exhibit H-5, Applicants request that the Commission reserve
jurisdiction for nine months, pending completion of the record,
regarding the retainability of certain real estate properties owned by
UnionLand. Union Water is a wholly-owned subsidiary of CMP Group.
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<PAGE>
For the twelve months ended June 30, 2000, CMP Group's operating revenue on
a consolidated basis was approximately $962,000,000, of which approximately
$917,000,000 was derived from electric operations, and $45,000,000 from other
operations. Consolidated assets of CMP Group and its subsidiaries at June 30,
2000 were approximately $828,104,000 in net electric utility property, plant and
equipment; and approximately $938,679,000 in other corporate assets.
3. CTG Resources
CTG Resources is the parent company of Connecticut Natural Gas Corporation
("CNGC"), a regulated local natural gas distribution company, and of CNG Realty
Corp. ("CNGR") and The Energy Network, Inc. ("TEN"), non-utility subsidiaries.
CTG Resources is a holding company by virtue of owning all of the common stock
of CNGC, a public utility company as defined in the Act, which owns and operates
a local natural gas distribution system in the State of Connecticut. CTG
Resources is currently exempt from all provisions of the Act, except Section
9(a)(2), under Section 3(a)(1) of the Act and Rule 2 thereunder. As of June 30,
2000, there were 8,620,212 outstanding shares of CTG Resources common stock.
a. Public Utility Affiliate of CTG Resources
Connecticut Natural Gas Corporation
-----------------------------------
CNGC, the regulated subsidiary of CTG Resources, distributes gas to
approximately 145,000 customers in 22 Connecticut communities, principally in
the Hartford-New Britain area and Greenwich. CNGC's gas distribution business is
subject to regulation by the DPUC as to franchises, rates, standards of service,
issuance of securities, safety practices and certain other matters. Retail sales
of gas by CNGC and deliveries of gas owned by others are made pursuant to rate
schedules and contracts filed with and subject to DPUC approval. As of June 30,
2000, there were 10,634,496 outstanding share of CNGC common stock.
b. Non-Public Utility Affiliates of CTG Resources
-- CNGR, formed in 1977, owns the Operating and Administrative Center
located on a seven-acre site in downtown Hartford, Connecticut. CNGR
engages in no other business activity.
-- TEN is an unregulated subsidiary of CTG Resources, which was
incorporated in 1982. TEN and its wholly-owned subsidiary, The
Hartford Steam Company ("HSC"), provide district heating and cooling
services to a number of large buildings in Hartford, Connecticut.
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<PAGE>
-- TEN's wholly-owned subsidiary, TEN Transmission, owns CTG Resources'
4.87 percent interest in Iroquois Gas Transmission System.
-- TEN's partially-owned subsidiary, Downtown Cogeneration Associates
Limited Partnership, owns and operates a cogeneration facility in
Hartford, Connecticut.
-- TEN's wholly owned subsidiary, ENI Gas Services, Inc., owns a 99%
interest in KBC Energy Services, a partnership that previously was
engaged in gas marketing services. KBC Energy Services ceased
operations in November 1998, and it is anticipated that KBC Energy
Services will be dissolved by the end of 2000. After KBC Energy
Services is dissolved, ENI Gas Services, Inc. will be dissolved or
merged into TEN.
-- TEN's wholly owned subsidiary, TEN Gas Services, Inc., owns a 1%
interest in KBC Energy Services, a partnership that previously was
engaged in gas marketing services. KBC Energy Services ceased
operations in November 1998, and it is anticipated that KBC Energy
Services will be dissolved by the end of 2000. After KBC Energy
Services is dissolved, TEN Gas Services, Inc. will be dissolved or
merged into TEN.
-- KBC Energy Services, a partnership that is 99% owned by ENI Gas
Services, Inc., and 1% owned by TEN Gas Services, Inc., previously was
engaged in gas marketing services. KBC Energy Services ceased
operations in November 1998, and it is anticipated that KBC Energy
Services will be dissolved by the end of 2000.
-- TEN's other unregulated operating divisions offer energy equipment
rentals, property rentals and financing services and own a 3,000
square foot building in Hartford, Connecticut.
For the twelve months ended June 30, 2000, CTG Resources' operating
revenues on a consolidated basis were approximately $320,091,000, of which
approximately $292,376,000 were derived from gas operations and $27,715,000 were
from other operations. Consolidated assets of CTG Resources and its subsidiaries
at June 30, 2000 were approximately $295,507,000 in gas utility property, plant
and equipment; and approximately $191,490,000 in other corporate assets.
4. Berkshire Energy
Berkshire Energy is the parent company of The Berkshire Gas Company
("Berkshire Gas"), a regulated local natural gas distribution company, Berkshire
Propane, Inc. ("Berkshire Propane"), a retail propane company, and Berkshire
Service Solutions, Inc. (formerly Berkshire Energy Marketing, Inc.)("Service
Solutions"), an energy marketing and energy services business. Berkshire Energy
is a public utility holding company by virtue of its owning all of the common
stock of Berkshire Gas, a public utility company as defined in the Act.
Berkshire is currently exempt from all provisions of the Act, except Section
9(a)(2), under Section 3(a)(1) of the Act and Rule 2 thereunder. As of June 30,
2000, there were 2,528,819 outstanding shares of Berkshire Energy common stock.
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<PAGE>
a. Public Utility Affiliate of Berkshire Energy
The Berkshire Gas Company
-------------------------
Berkshire Gas, the regulated public utility subsidiary of Berkshire Energy,
sells and distributes natural gas to approximately 34,000 retail customers in 19
communities in western Massachusetts. Berkshire Gas operates a natural gas
distribution system comprising some 694 miles of natural gas distribution mains.
Berkshire Gas is subject to regulation by the Massachusetts Department of
Telecommunications and Energy ("MDTE"). Berkshire Gas is a "natural gas company"
under Section 2(6) of the Natural Gas Act, 15 U.S.C. 717(a)(6), with respect to
certain sales for resale of natural gas. Berkshire Gas has secured a "blanket
certificate" for such transactions from the FERC. As of June 30, 2000, there
were 2,528,819 outstanding shares of Berkshire Gas common stock.
b. Non-Public Utility Affiliates of Berkshire Energy
The non-public utility affiliates of Berkshire Energy are Berkshire Propane
and Service Solutions.
-- Berkshire Propane provides propane service to more than 6,000
customers in more than 100 communities across a 5,000 square mile area
in western Massachusetts, eastern New York and southern Vermont.
-- Service Solutions provides one-stop natural gas services to commercial
and industrial customers. Service Solutions entered into a strategic
alliance with Energy East Solutions, LLC.
For the twelve months ended June 30, 2000, Berkshire Energy's operating
revenues on a consolidated basis were approximately $55,807,000, of which
approximately $47,056,000 were derived from natural gas operation. Consolidated
assets of Berkshire Energy and its subsidiaries as of June 30, 2000 were
approximately $82,870,000 in natural gas utility property, plant and equipment,
and approximately $31,129,000 in other corporate assets.
C. DESCRIPTION OF THE MERGER
1. CMP Group Merger Agreement
On June 14, 1999, CMP Group, Energy East and EE Merger Corp. entered into
the CMP Group Merger Agreement, pursuant to which, EE Merger Corp. will merge
with and into CMP Group, with CMP Group being the surviving corporation and
becoming a wholly-owned subsidiary of Energy East. The CMP Group Merger, which
was unanimously approved by the respective boards of directors of CMP Group,
Energy East and EE Merger Corp., is expected to occur shortly after all of the
conditions to the consummation of the CMP Group Merger, including the receipt of
required regulatory and shareholder approvals, are satisfied.
Under the terms of the CMP Group Merger Agreement, each outstanding share
of CMP Group's common stock, $5.00 par value per share, other than dissenting
shares and any treasury shares or shares owned by CMP Group, Energy East or any
of their subsidiaries, will be converted into the right to receive $29.50 in
cash. Pursuant to the CMP Group Merger Agreement, approximately $957 million in
cash will be paid to holders of shares of CMP Group common stock.
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<PAGE>
2. CTG Resources Merger Agreement
On June 29, 1999, CTG Resources entered into the CTG Resources Merger
Agreement with Energy East and Oak Merger Co. ("Oak"), pursuant to which CTG
Resources will merge with and into Oak.
Under the terms of the CTG Resources Merger Agreement, each outstanding
share of CTG Resources common stock, other than dissenting shares, will be
converted into the right to receive: (i) $41.00 in cash ("CTG Resources Cash
Consideration"); or (ii) a number of shares of Energy East common stock equal to
the Exchange Ratio; or (iii) the right to receive a combination of cash and
shares of Energy East common stock. The "Exchange Ratio" shall be equal to the
CTG Resources Cash Consideration divided by either: (i) the Energy East share
price if the Energy East share price is equal to or less than $30.13 and equal
to or more than $23.67, (ii) $30.13 if the Energy East share price is greater
than $30.13, in which case the Exchange Ratio will equal 1.3609, or (iii) $23.67
if the Energy East share price is less than $23.67, in which case the Exchange
Ratio will equal 1.7320. The Energy East share price will equal the average of
the closing prices of Energy East common stock as reported in the Wall Street
Journal, for the 20 trading days immediately preceding the second trading day
prior to the effective time of the CTG Resources Merger. The aggregate number of
shares of CTG Resources' common stock that is convertible into cash is limited
to 55 percent of the total number of shares of CTG Resources common stock issued
and outstanding as of the effective time of the CTG Resources Merger.
3. Berkshire Energy Merger Agreement
On November 9, 1999, Berkshire Energy, Energy East and Mountain Merger LLC
entered into the Berkshire Energy Group Merger Agreement, pursuant to which
Mountain Merger LLC will merge with and into Berkshire Energy, with Berkshire
Energy being the surviving company and becoming a wholly-owned subsidiary of
Energy East. The Berkshire Energy Merger, which was unanimously approved by the
participating members of the board of trustees of Berkshire Energy, the board of
directors of Energy East and the managers of Mountain Merger LLC, is expected to
occur shortly after all of the conditions to the consummation of the Berkshire
Energy Merger, including the receipt of required regulatory and shareholder
approvals, are satisfied.
Under the terms of the Berkshire Energy Merger Agreement, each outstanding
Berkshire Energy common share, without par value, other than any treasury shares
or shares owned by Berkshire Energy, Energy East or any of their subsidiaries,
will be converted into the right to receive $38.00 in cash. Pursuant to the
Berkshire Energy Merger Agreement, approximately $96 million in cash will be
paid to holders of Berkshire Energy common shares.
D. MANAGEMENT AND OPERATION OF THE COMPANIES FOLLOWING THE MERGER
At the effective date of the CMP Group Merger, David T. Flanagan, the
current President and Chief Executive Officer of CMP Group, and two current
directors of CMP Group will be elected as members of the Board of Directors of
Energy East. At that time, Mr. Flanagan will become President of Energy East and
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Chairman, President and Chief Executive Officer of CMP Group following its
merger with EE Merger Corp. (which will be a subsidiary of Energy East), and
Arthur W. Adelberg, who currently serves as Executive Vice President and Chief
Financial Officer of CMP Group, will become a Senior Vice President and the
Chief Financial Officer of Energy East. Sara J. Burns, who currently serves as
President of Central Maine Power, will continue serving as President of Central
Maine Power after consummation of the CMP Group Merger. F. Michael McClain, Vice
President, Corporate Development of CMP Group, will serve as the President of
one or more non-utility subsidiaries of Energy East, Xenergy Enterprises, and/or
CMP Group after the CMP Group Merger becomes effective.
Commencing at the effective date of the CTG Resources Merger, and
continuing until his successor is duly elected, Arthur C. Marquardt will be
President and Chief Executive Officer of CTG Resources following its merger with
Oak Merger Co. and will hold other positions in other subsidiary corporations of
Energy East as specified in his employment agreement. One director of CTG
Resources will become a director of Energy East.
The officers of Oak Merger Co. immediately prior to the consummation of the
CTG Resources Merger will be the initial officers of the surviving corporation
(except that Mr. Marquardt will be the President and Chief Executive Officer of
the surviving corporation) and will hold office from the effective date until
their respective successors are duly elected or appointed and qualified in the
manner provided in the certificate of incorporation and by-laws of the surviving
corporation.
At the effective date of the Berkshire Energy Merger, Robert M. Allessio,
the current President and Chief Operating Officer of Berkshire Gas and Vice
President of Berkshire Energy, will become President and Chief Executive Officer
of Berkshire Energy (which will be a subsidiary of Energy East) and of Berkshire
Gas. Michael J. Marrone, who currently serves as Vice President, Treasurer and
Chief Financial Officer of Berkshire Gas, will continue serving as Vice
President, Treasurer and Chief Financial Officer of Berkshire Gas after the
Berkshire Energy Merger. Cheryl M. Clark, who currently serves as Clerk of
Berkshire Gas, will continue serving as Clerk of Berkshire Gas after the
Berkshire Energy Merger.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by the Companies in connection with the Merger, including the
solicitation of proxies, the payment of legal and investment banker fees and
other related matters are estimated as follows:
Commission filing fee for the Registration Statement on Form S-4
in connection with the CTG Resources Merger $ 67,915.
Commission filing fee for the CMP Group Proxy Statement 194,289.
Commission filing fee for the Berkshire Energy Proxy Statement 19,178.
Accountants' fees 550,000.
Legal fees and expenses 6,500,000.
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<PAGE>
Shareholder communication and proxy solicitation 451,900.
Investment bankers' fees and expenses 22,075,000.
Consulting fees related to the Merger 1,750,000.
Expenses related to integrating the operations of the merged company
and miscellaneous 6,891,718.
TOTAL $38,500,000.
============
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed transaction:
Section of the Act Transactions to which section or rule is or may be
applicable -
9(a)(2), 10 Acquisition indirectly by Energy East of common stock of public
utility subsidiaries of CMP Group, CTG Resources, and Berkshire Energy.
8, 11(b) Retention by Energy East of its existing retail gas utility
operations; retention by Energy East of non-utility businesses of Energy East,
CMP Group, CTG Resources, and Berkshire Energy; and operation of Energy East as
a combination electric and gas utility holding company.
3(a)(1) Exemption of CTG Resources, Connecticut Energy, Berkshire Energy
from registration under the Act.
3(a)(2) Exemption of Central Maine Power from registration under the Act.
To the extent that other sections of the Act are deemed applicable to the
Merger, such sections should be considered to be set forth in this Item 3.
Background
As discussed in detail below, until recently both NYSEG and Central Maine
Power were vertically integrated utilities, and each provided "bundled" sales
service (i.e., energy, capacity, ancillary services, transmission and local
distribution, combined to be a single product -- delivered electricity) to
wholesale and retail customers. Prior to its recent divestiture of generating
assets, NYSEG owned approximately 2,557 MW of generating capacity and Central
Maine Power owned approximately 1,070 MW of generating capacity. Also, within
their franchised service areas, both NYSEG and Central Maine Power were granted
the exclusive right to provide electricity to their retail customers.
The historical industry structure of vertically integrated utilities
providing electric service within franchised service areas began to change with
the development of the "generation-only" power business that was mobilized by
the enactment of the Public Utility Regulatory Policies Act of 1978 ("PURPA")
and the Energy Policy Act of 1992. Also contributing to this change were the
actions of state and federal regulators in attempting to overcome the inherent
incentive for vertically integrated companies to use their transmission and
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<PAGE>
distribution systems to favor sales from their own (or affiliated) generating
resources or their purchased power contracts, over energy provided by
unaffiliated suppliers. Regulators were concerned that utilities would limit
competition at the generation level, which would otherwise have imposed downward
pressure on prices, to the advantage of customers. As described more fully
below, the policy underlying recent state and federal policy has been to reduce
or eliminate the incentives and opportunities for vertically integrated
utilities to constrain competition, by requiring utilities to divest generation,
to separate "functionally" their merchant functions from their transmission
functions, and to transfer operational control of their transmission systems to
Regional Transmission Organizations ("RTOs"). Many state and federal policy
makers have concluded that competition at the generation level is fostered by
according retail customers the right to obtain "unbundled" electric energy from
a supplier of their choice, and, with respect to retail and wholesale customers,
by requiring utilities to provide open-access, nondiscriminatory transmission
and distribution service over their transmission and distribution systems.
In states in which these types of structural changes have been implemented,
transmission-owning utilities no longer have the ability to dictate which
generation units or purchased power contracts will be dispatched to serve
customer load. Instead, that selection is made through a competitive process,
either in the form of bilateral contracts between the seller and buyer (or
representatives of either) or through an established centralized market or power
exchange. In either case, the operation and dispatch of generation is no longer
performed or controlled by the transmission-owning distribution utility, but
rather by unaffiliated buyers and sellers responding to the laws of supply and
demand in accordance with the policies of an RTO.
The fundamental changes in the historical structure of the utility industry
have profound effects on the "integration" and operation as a "single
interconnected and coordinated system," as these terms are used in the Act. The
Companies are well aware of the considerable challenge the Commission faces in
applying the Act to an evolving industry structure. Thus, the Companies are
including in this section of the Application/Declaration a detailed description
of the industry restructuring to date in both New York and New England in order
to assist in the Commission's review and to establish the framework for
integration as applied to the Merger.
A. SECTION 9(A)(2)
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person to acquire, directly or indirectly,
any security of any public utility company, if such person is an affiliate of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Under the definition set
forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a specified company
means "any person that directly or indirectly owns, controls, or holds with
power to vote, 5 per centum or more of the outstanding voting securities of such
specified company," and "any company 5 per centum or more of whose outstanding
voting securities are owned, controlled, or held with power to vote, directly or
indirectly, by such specified company."
Energy East, CMP Group, CTG Resources, and Berkshire Energy are holding
companies as defined in Section 2(a)(5) of the Act. As a result of the Merger,
Energy East, directly or indirectly, will acquire more than five percent of the
voting securities of the public utility subsidiaries of CMP Group, CTG
Resources, and Berkshire Energy. Energy East will thus become an "affiliate," as
defined in Section 2(a)(11)(A) of the Act, of the public utility subsidiaries of
CMP Group, CTG Resources, and Berkshire Energy. Accordingly, Energy East must
obtain the approval of the Commission for the Merger under Sections 9(a)(2) and
10 of the Act. The statutory standards to be considered by the Commission in
evaluating the proposed transaction are set forth in Sections 10(b), 10(c) and
10(f) of the Act.
- 18 -
<PAGE>
The Companies believe that the Merger complies with all of the applicable
provisions of Section 10 of the Act and should be approved by the Commission.
Thus:
- the Merger will not create detrimental interlocking relations or
concentration of control;
- the consideration to be paid in the Merger is fair and reasonable;
- the Merger will not result in an unduly complicated capital structure
for the post-Merger Energy East system;
- the Merger is in the public interest and the interests of investors
and consumers;
- the Merger is consistent with Sections 8 and 11 of the Act;
- the Merger tends toward the economical and efficient development of an
integrated public utility system; and
- the Merger will comply with all applicable state laws.
The Commission's approval of this Application/Declaration will facilitate
the creation of a holding company which will be better able to compete in the
rapidly evolving utility industry, and is consistent with the Commission's
precedents for transactions previously approved by the Commission under the Act.
Additionally, the Merger and the requests contained in this
Application/Declaration are consistent with the interpretive recommendations
made by the Division of Investment Management (the "Division") in the report
issued by the Division in June 1995 entitled "The Regulation of Public Utility
Holding Companies" (the "1995 Report").(13) The Division's overall
recommendation that the Commission "act administratively to modernize and
simplify holding company regulation and minimize regulatory overlap, while
protecting the interests of consumers and investors," is germane to the
Commission's review of this Application/Declaration since, as demonstrated
below, the Merger will benefit both consumers and shareholders of post-Merger
Energy East and since the other federal and state regulatory authorities with
jurisdiction over the Merger are expected to approve the Merger as in the public
interest. In addition, as discussed in more detail in each applicable item
below, the specific recommendations of the Division with regard to utility
ownership(14) and diversification,(15) in particular, are applicable to the
Merger.
---------------------------
(13) Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
(14) Among other things, the 1995 Report recommends that the Commission
should apply a more flexible interpretation of the integration requirements
under the Act; interconnection through power pools, reliability councils and
wheeling arrangements can satisfy the physical interconnection requirement of
Section 2(a)(29); the geographic requirements of Section 2(a)(29)(A) should be
interpreted flexibly, recognizing technical advances consistent with the
purposes and provisions of the Act; the Commission's analysis should focus on
whether the resulting system will be subject to effective regulation; the
Commission should liberalize its interpretation of the "A-B-C" clauses and
permit combination systems where the affected states agree, and the Commission
should "watchfully defer" to the work of other regulators. 1995 Report at 71-77.
(15) The 1995 Report recommends that, for example, the Commission should
promulgate rules to reduce the regulatory burdens associated with energy-related
diversification and the Commission should adopt a more flexible approach in
considering all other requests to enter into diversified activities. 1995 Report
at 88-90. The recommendations regarding energy-related diversification were
incorporated in Rule 58.
- 19 -
<PAGE>
B. SECTION 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to
an extent detrimental to the public interest or the interests of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the
proper functioning of such holding company system.
1. Section 10(b)(1)
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system.(16) In applying
Section 10(b)(1) to utility acquisitions, the Commission must Determine whether
the acquisition will create "the type of structures and combinations at which
the Act was specifically directed."(17) As discussed below, the Merger will not
create a "huge, complex, and irrational system," but rather will afford the
opportunity to achieve economies of scale and efficiencies which are expected to
benefit investors and consumers.(18)
---------------------------
(16) American Elec. Power Co., 46 S.E.C. 1299, 1309 (1978).
(17) Vermont Yankee Nuclear Corp., 43 S.E.C. 693,700 (1968).
(18) American Elec. Power Co., 46 S.E.C. at 1307 (1978).
- 20 -
<PAGE>
The Merger is not being undertaken for the purpose of extending Energy
East's control over regulated public utilities and will not lead to the type of
concentration of control over utilities, unrelated to operating efficiencies,
that Section 10(b)(1) was intended to prevent. The primary objective of Energy
East in the Merger is to become positioned to participate in the growing and
increasingly competitive northeastern United States energy market. The
Applicants believe that their combination provides a unique opportunity for
Energy East, CMP Group, CTG Resources, and Berkshire Energy and their respective
shareholders, customers and employees to participate in the formation of a
competitive energy services provider in the rapidly evolving energy services
business and to share in the benefits of industry restructuring which is already
occurring in New York, Maine, Connecticut, Massachusetts and other states.
Size: If approved, the post-Merger Energy East system will serve
approximately 1,374,000 electric customers in two states, and approximately
594,000 gas customers in four states. At June 30, 2000, (1) the combined assets
of post-merger Energy East, CMP Group, CTG Resources, and Berkshire Energy would
have totaled approximately $6.6 billion ; and (2) the combined operating
revenues of these Companies for the twelve months ended June 30, 2000, would
have totaled approximately $3.7 billion.
By comparison, there are several companies that are significantly larger
than the post-Merger Energy East system. The tables attached as Exhibit K-1 to
this Application/Declaration show the post-Merger Energy East system's relative
size as compared to other electricity and gas companies in terms of operating
revenues, assets and customers, on both a regional and a national basis. This
chart supercedes the chart submitted in Amendment 4, page 31.
As illustrated by the tables in Exhibit K-1, Energy East will be small in
comparison to the total of electricity and gas utilities operating in contiguous
regions, as well as in comparison to the total of all utilities in the United
States. The assets, operating revenues and customers of Energy East will
comprise a relatively small percentage of electricity and gas utilities
operating in contiguous regions, and a very small percentage of total electric
and gas all utilities in the United States. Energy East's operations will not
exceed the economies of scale of current electric generation and transmission
technology, or gas transportation technology, or provide undue power or control
to Energy East in the region in which it will provide service.(19)
Efficiencies and economies: The Commission has rejected a mechanical size
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. More recent
pronouncements of the Commission confirm that size is not determinative,
particularly in light of the improved economies of scale that can be achieved
through a combination.(20)
---------------------------
(19) Source: U.S. Securities and Exchange Commission, Financial and
Corporate Report, Holding Companies Registered under the Public Utility Holding
Company Act of 1935 as of July 1, 1999 (data provided is as of Dec. 31, 1998).
(20) See, e.g., 1995 Report at 73-4; Centerior Energy Corp., HCAR No. 24073
(April 29, 1986).
- 21 -
<PAGE>
By virtue of the Merger, post-Merger Energy East will be in a position to
realize the "opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves and
generally more efficient operations" described by the Commission in American
Electric Power Co.(21) Among other things, the Merger is expected to yield
significant capital expenditure savings through facilities consolidation,
corporate and administrative programs, non-fuel purchasing economies and
combined gas supply. These expected economies and efficiencies from the combined
utility operations are described in greater detail below.
Competitive Effects: In Northeast Utilities(22) the Commission stated that
"antitrust ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal and state
administrative agencies regulate the rates charged consumers." Energy East, CMP
Group, CTG Resources and Berkshire Energy will file Notification and Report
Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the
Merger on competition in the relevant markets. It is a condition to the
consummation of each of the CMP Group, CTG Resources and Berkshire Energy
Mergers that the applicable waiting periods under the HSR Act shall have expired
or been terminated.
In addition, the competitive impact of the CMP Group Merger has been
considered pursuant to the October 1, 1999 filing of Energy East and CMP Group
with FERC under Section 203 of the Federal Power Act. A detailed explanation
concerning why such merger will not threaten competition in even the most
narrowly drawn geographic and product markets is set forth in the prepared
testimony of Stephen Henderson, an economist and Vice President of PHB Hagler
Bailly, filed with the FERC application. Mr. Henderson's testimony addresses
potential horizontal and vertical market power issues by analyzing not only
Energy East's merger with CMP Group, but also its acquisition of the natural gas
operations of Connecticut Energy and CTG Resources.(23) Mr. Henderson concludes
that no market power concerns are raised by the proposed transactions. A copy of
the FERC application, including Mr. Henderson's prepared testimony as an
attachment, has been filed as Exhibit D-1. On March 29, 2000 FERC ruled that the
CMP Group Merger will not significantly affect competition in any relevant
market. FERC's order is attached hereto at Exhibit D-2.
--------------------------
(21) American Elec. Power Co., Inc., 46 S.E.C. 1299, 1309 (1978).
(22) Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990).
(23) Energy East and CMP Group amended their FERC application to include a
supplemental affidavit from Mr. Henderson, to account for vertical market power
effects of the acquisition of Berkshire Energy. A copy of the amended FERC
application was filed as an amendment to Exhibit D-1 to this
Application/Declaration.
- 22 -
<PAGE>
The Merger has been carefully structured to protect the interests of
consumers and other local interests while ensuring that the only management
interlocks created are those which are necessary to integrate CMP Group, CTG
Resources and Berkshire Energy into the Energy East system. Furthermore, there
will be continuity of management because, following the Merger, the management
of the regulated utility subsidiaries of CMP Group, CTG Resources and Berkshire
Energy will largely be comprised of their respective current management. In
addition, the CMP Group Merger Agreement provides that the current Central Maine
Power Board of Directors will serve as an advisory board to Central Maine Power,
the CTG Resources Merger Agreement provides that the current CTG Resources Board
of Directors will serve as an advisory board to the surviving company, and the
Berkshire Energy Merger Agreement provides that the current Berkshire Energy
Board of Trustees will serve as an advisory board to Berkshire Energy. Such
continuity of management oversight will help to assure that the management of
the regulated utility subsidiaries of CMP Group, CTG Resources and Berkshire
Energy remain responsive to local regulation and to other essentially local
interests. For the reasons set forth above, the Merger will not "tend toward
interlocking relations or the concentration of control" of public utility
companies, of a kind or to the extent detrimental to the public interest or the
interests of investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
a. Reasonableness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by Energy East to the holders of CMP Group common
stock, CTG Resources common stock, and Berkshire Energy common shares in
connection with the Merger, including fees and expenses of the Merger, is
reasonable and whether it bears a fair relation to the investment in and earning
capacity of the utility assets underlying the securities being acquired. Market
prices at which securities are traded have always been strong indicators as to
values. As shown in the table below, the most recent quarterly price data, high
and low, for CMP Group, CTG Resources, and Berkshire Energy common shares
provide support for the consideration paid in the Merger. Comparative Per Share
Market Price:
<TABLE>
<CAPTION>
PRICE RANGE
ENERGY EAST HIGH LOW
1997
<S> <C> <C>
First Quarter $ 12.25 $ 10.625
Second Quarter $ 11.25 $10.3125
Third Quarter $13.5938 $10.4063
Fourth Quarter $ 17.875 $ 12.875
1998
First Quarter $ 20.25 $16.5313
Second Quarter $22.0938 $19.4689
Third Quarter $25.6875 $19.9375
Fourth Quarter $ 29.00 $ 23.375
- 23 -
<PAGE>
1999
First Quarter $ 28.625 $24.5625
Second Quarter $ 28.125 $ 24.75
Third Quarter $27.0625 $ 22.625
</TABLE>
*Per share amounts have been restated to reflect Energy East's
two-for-one common stock split effective April 1, 1999.
<TABLE>
<CAPTION>
PRICE RANGE
CMP GROUP HIGH LOW
1997
<S> <C> <C>
First Quarter $ 11.625 $ 10.50
Second Quarter $ 12.75 $ 10.00
Third Quarter $13.5625 $12.0625
Fourth Quarter $ 15.50 $ 12.875
1998
First Quarter $17.8125 $ 15.25
Second Quarter $ 20.375 $17.0625
Third Quarter $ 20.50 $16.9375
Fourth Quarter $ 20.00 $ 16.75
1999
First Quarter $19.5625 $ 16.25
Second Quarter $ 26.75 $ 17.75
Third Quarter $ 27.00 $ 26.00
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE
CTG RESOURCES HIGH LOW
1997
<S> <C> <C>
First Quarter $ 25.375 $ 21.375
Second Quarter $ 22.25 $ 20.75
Third Quarter $23.8125 $ 21.625
Fourth Quarter $ 26.50 $ 22.75
1998
First Quarter $ 26.75 $ 23.375
Second Quarter $25.9375 $21.9375
Third Quarter $ 24.50 $ 22.375
Fourth Quarter $26.3125 $ 22.625
1999
First Quarter $ 26.375 $ 22.25
Second Quarter $ 36.75 $ 22.125
Third Quarter $ 37.188 $ 34.25
</TABLE>
- 24 -
<PAGE>
<TABLE>
<CAPTION>
PRICE RANGE
BERKSHIRE ENERGY HIGH LOW
1997
<S> <C> <C>
First Quarter 17-1/2 15-1/4
Second Quarter 16 15
Third Quarter 17-3/8 15-1/4
Fourth Quarter 23-1/2 16-1/4
1998
First Quarter 25-5/8 21-1/2
Second Quarter 24-3/4 21-5/8
Third Quarter 25 19-1/2
Fourth Quarter 24-1/4 20
1999
First Quarter 23-1/8 18-1/2
Second Quarter 23-3/4 16-1/4
Third Quarter 26-7/8 23-1/2
</TABLE>
On June 14, 1999, the last full trading day before the public announcement
of the execution and delivery of the CMP Group Merger Agreement, the closing
price per share of CMP Group common stock as reported on the NYSE -- Composite
Transaction of CMP Group common stock was $20-1/16. On June 29, 1999, the last
full trading day before the public announcement of the execution and delivery of
the CTG Resources Merger Agreement, the closing price per share of CTG Resources
common stock as reported on the NYSE-- Composite Transaction of CTG Resources
common stock was $35.625. On November 9, 1999, the last full trading day before
the public announcement of the execution and delivery of the Berkshire Energy
Merger Agreement, the closing price per share of Berkshire Energy common shares
as reported by the National Quotation Bureau, Incorporated was $33.
In its determinations as to whether or not a price meets the reasonableness
standard, the Commission has considered whether the price was decided as the
result of arms length negotiations(24) and the opinions of investment
bankers,(25) among other things. For the reasons given below, there is no basis
in this case for the Commission to make any negative findings concerning the
consideration being offered by Energy East in the Merger. The Commission has
previously recognized that when the consideration to be paid in an acquisition
is the result of arms length negotiations between the management of the
companies involved, supported by opinions of financial advisors, there is
persuasive evidence that the requirements of Section 10(b)(2) have been
satisfied.(26) The agreed-upon level of consideration was the product of
extensive and vigorous arms length negotiations between Energy East and each of
CMP Group, CTG Resources and Berkshire Energy. These negotiations were preceded
by appropriate due diligence, analysis and
----------------------
(24) In the Matter of American Natural Gas Company, HCAR No. 15620 (Dec.
12, 1966).
(25) Consolidated Natural Gas Company, HCAR No. 25040 (Feb. 14, 1990).
(26) Entergy Corporation, et al, HCAR No. 25952 (Dec. 17, 1993); The
Southern Company, et al., 40 S.E.C. Docket 350 at 352 (Feb. 12, 1988).
- 25 -
<PAGE>
evaluation of the assets, liabilities and business prospects of the respective
companies. An extensive discussion of the negotiations that took place in
connection with the CMP Group Merger is found at pages 17-20 of the CMP Group
Proxy Statement, incorporated by reference as Exhibit C-2. An extensive
discussion of the negotiations that took place in connection with the CTG
Resources Merger is found at pages 27-32 of the CTG Resources Proxy
Statement/Prospectus, incorporated by reference as Exhibit C-1. An extensive
discussion of the negotiations that took place in connection with the Berkshire
Energy Merger is set forth in the Berkshire Energy Proxy Statement, which was
filed as Exhibit C-3.
Investment bankers for CMP Group, CTG Resources, and Berkshire Energy have
reviewed extensive information concerning the CMP Group Merger, the CTG
Resources Merger and the Berkshire Energy Merger, have analyzed the conversion
ratios employing a variety of valuation methodologies, and have opined that the
conversion ratios are fair, from a financial point of view, to the respective
holders of CMP Group common stock, CTG Resources common stock and Berkshire
Energy common shares. The investment bankers' analyses and opinions are
incorporated by reference as Exhibits G-1, G-2 and G-2a. A copy of Warburg
Dillon Read's opinion is attached as Appendix B to the CMP Group Proxy
Statement, incorporated by reference as Exhibit C-2. A copy of PaineWebber's
opinion is attached as Appendix B to the CTG Resources Proxy
Statement/Prospectus, incorporated by reference as Exhibit C-1. A copy of Tucker
Anthony Cleary Gull's ("Tucker Anthony") opinion was attached as Appendix B to
the Berkshire Energy Proxy Statement, which was filed as Exhibit C-3.
Finally, Energy East engaged Morgan Stanley Dean Witter and Co. with
respect to the CTG Resources Merger, Goldman Sachs & Co. with respect to the CMP
Merger and Chase Securities, Inc. with respect to the Berkshire Energy Merger.
Each provided a "fairness" opinion regarding these respective transactions to
the Energy East Board of Directors. In light of these opinions and an analysis
of all relevant factors, including the benefits that may be realized as a result
of the Merger, the Companies believe that the conversion ratios fall within the
range of reasonableness, and the consideration to be paid in the CMP Group
Merger, the CTG Resources Merger and the Berkshire Energy Merger bears a fair
relation to the sums invested in, and the earning capacity of, the utility
assets of CMP Group, CTG Resources and Berkshire Energy.
b. Reasonableness of Fees
The Companies believes that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Merger are reasonable and
fair in light of the size and complexity of the Merger relative to other
transactions and the anticipated benefits of the Merger to the public, investors
and consumers, that they are consistent with recent precedent, and that they
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, Energy East, CMP
Group, CTG Resources and Berkshire Energy, together, expect to incur a combined
total of approximately $34 million in fees, commissions and expenses in
connection with the Merger, excluding expenses related to integrating the
operations of the merged company. Such fees will be paid on an arms length basis
to third parties and are consistent with fees, commissions and expenses paid for
similar transactions and approved by the Commission as reasonable. For example,
Northeast Utilities alone incurred $46.5 million in fees and expenses in
connection with its acquisition of Public Service of New Hampshire, and Entergy
incurred $38 million in fees in connection with its recent acquisition of Gulf
States Utilities -- which amounts all were approved as reasonable by the
Commission.(27)
----------------------
(27) See Northeast Utilities, HCAR No. 25548 (June 3, 1992); Entergy Corp.,
HCAR No. 5952 (Dec. 17, 1993).
- 26 -
<PAGE>
The Companies also believe that the financial advisory fees payable to
their respective investment bankers are fair and reasonable for similar reasons.
Pursuant to its engagement letter, CMP Group paid Warburg Dillon Read $1 million
upon the rendering of Warburg Dillon Read's fairness opinion. In addition,
Warburg Dillon Read received $100,000 upon the execution of the engagement
letter and is receiving a $50,000 quarterly retainer. Upon the approval of the
CMP Group Merger Agreement by shareholders, Warburg Dillon Read received an
additional $1 million. At the completion of the CMP Group Merger, Warburg Dillon
Read will receive a fee equal to 0.6 percent of the aggregate consideration paid
in the CMP Group Merger, which fee is expected to equal approximately $5.74
million, less the amount of all fees previously paid. CMP Group has agreed to
indemnify Warburg Dillon Read against certain liabilities under federal
securities laws, relating to or arising out of its engagement.
Pursuant to its engagement letter with CTG Resources dated June 25, 1998,
PaineWebber has earned a retention fee of $200,000 and a fee of approximately
$1,742,000 for the rendering of a fairness opinion. In addition, PaineWebber
will receive a fee of approximately $1,642,000 upon completion of the CTG
Resources Merger, and will be reimbursed for certain related expenses.
PaineWebber will not be entitled to any additional fees or compensation in the
event the CTG Resources Merger is not approved or otherwise completed. CTG
Resources also separately agreed to indemnify PaineWebber against certain
liabilities, including liabilities under federal securities laws.
Pursuant to the engagement letter between Berkshire Energy and Tucker
Anthony Cleary Gull, Berkshire Energy paid Tucker Anthony $300,000 upon the
rendering of Tucker Anthony's fairness opinion. In addition, Tucker Anthony
received a $25,000 payment upon the execution of the engagement letter. Upon the
approval of the merger agreement by the shareholders of Berkshire Energy, Tucker
Anthony will receive an additional payment of approximately $1.2 million.
Berkshire Energy has agreed to indemnify Tucker Anthony against certain
liabilities under federal securities laws, relating to or arising out of its
engagement.
Pursuant to the engagement letter between Energy East and Goldman Sachs,
Energy East paid Goldman Sachs $2.3 million upon the public announcement of the
CMP Group Merger Agreement. In addition, Goldman Sachs received $2.3 million
upon the approval of the CMP Group Merger Agreement by the shareholders of CMP
Group. Goldman Sachs will receive an additional payment of $2.4 million at the
completion of the CMP Group Merger. Energy East has agreed to indemnify Goldman
Sachs against certain liabilities under federal securities laws, relating to or
arising out of its engagement.
Pursuant to the engagement letter between Energy East and Morgan Stanley
Dean Witter, Energy East paid Morgan Stanley Dean Witter $1.2 million upon the
public announcement of the CTG Resources Merger Agreement. In addition, Morgan
Stanley Dean Witter received $1.2 million upon the approval of the CTG Resources
Merger Agreement by the shareholders of CTG Resources. Morgan Stanley Dean
Witter will receive an additional payment of $1.3 million at the completion of
the CTG Resources Merger. Energy East has agreed to indemnify Morgan Stanley
Dean Witter against certain liabilities under federal securities laws, relating
to or arising out of its engagement.
- 27 -
<PAGE>
Pursuant to the engagement letter between Energy East and Chase Securities,
Energy East paid Chase Securities $350,000 upon the public announcement of the
Berkshire Energy Merger Agreement. Energy East has agreed to indemnify Chase
Securities against certain liabilities under federal securities laws, relating
to or arising out of its engagement.
The investment banking fees paid by CMP Group, CTG Resources, Berkshire
Energy, and Energy East are lower than fees paid in other similar transactions
and approved by the Commission as reasonable. The fees reflect the financial
marketplace, in which investment banking firms actively compete with each other
to act as financial advisors to merger partners.
3. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the Merger
will unduly complicate Energy East's capital structure or will be detrimental to
the public interest, the interests of investors or consumers or the proper
functioning of Energy East's system.
The Commission has found that an acquisition satisfies this requirement
where the effect of a proposed acquisition on the acquirer's capital structure
is negligible and the equity position is at or above the traditionally
acceptable 30 percent level prescribed by the Commission.(28) The Commission has
approved common equity to total capitalization ratios as low as 27.6
percent.(29) Under these standards, the proposed combination of Energy East, CMP
Group, CTG Resources and Berkshire Energy will not unduly complicate the capital
structure of the combined system.
Set forth below are summaries of the historical capital structures of
Energy East, CMP Group, CTG Resources, and Berkshire Energy as of June 30, 2000,
and the pro forma consolidated capital structure of post-Merger Energy East as
of June 30, 2000:
---------------------------
(28) See, e.g., Entergy Corp., 55 S.E.C. 2035 (Dec. 17, 1993); Northeast
Utilities, 47 S.E.C. 1279 (1990).
(29) See Northeast, supra.
- 28 -
<PAGE>
<TABLE>
<CAPTION>
Energy East, CMP Group and CTG Resources
Historical Consolidated Capital Structures
(Dollars in thousands)
------------------------------------------------------------------------------------------------
Pre-Merger CMP CTG Berkshire
Energy East % Group % Resources % Energy %
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Equity $ 1,584,997 51.6 $ 585,183 70.6 $ 140,748 38.9 $ 37,193 40.4
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
Preferred stock
not subject to
mandatory
redemption 10,159 0.3 35,528 4.3 850 0.3 310 0.3
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
Preferred stock
subject to
mandatory
redemption 910 0.1
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
Noted Payable
and Interim
Financing 167,426 5.4 750 0.1 14,595 15.9
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
Long-Term
Debt, including
current maturities 1,311,512 42.7 206,595 24.9 219,817 60.8 40,000 43.4
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
Total $ 3,074,094 100 828,966 100 $ 361,415 100 $ 92,098 100
------------------ ------------ ----- ---------- ----- ---------- ----- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
Post-Merger Energy East Pro Forma Consolidated Capital Structure
(Dollars in thousands)
(unaudited)
-------------------------------------------------------------------------------------------
Post-Merger Energy East
------------ -----------
<S> <C> <C>
Common Stock Equity (incl. additional paid in capital) $ 1,744,553 40.0
------------ -----------
Preferred stock not subject to mandatory redemption (of 46,847 1.1
subsidiaries)
------------ -----------
Preferred stock subject to mandatory redemption of subsidiaries) 910 0.0
------------ -----------
Notes Payable and Interim Financing 292,771 6.7
------------ -----------
Long-Term Debt, including current maturities 2,277,924 52.2
------------ -----------
Total 4,363,005 100.0
------------ -----------
</TABLE>
- 29 -
<PAGE>
As can be seen from these tables, post-Merger Energy East's pro forma
consolidated equity to total capitalization will be 40.0 percent, which will be
significantly higher than Northeast Utilities' approved 27.6 percent common
equity position and will exceed the traditionally accepted 30 percent level. The
capital structure of post-Merger Energy East will also be substantially similar
to the capital structures approved by the Commission in other orders.(30)
The capital structure of the Energy East system will be similar in most
respects to capital structures approved by the Commission in other recent cases.
See, e.g., American Electric Power Company, Inc., Holding Co. Act Release No.
27186 (June 14, 2000) and Dominion Resources, Inc., Holding Co. Act Release No.
27113 (Dec. 15, 1999). In the Mergers, the current shareholders of CMP Group,
CTG Resources and Berkshire Energy will receive cash and, in the case of the CTG
Resources Merger, common stock of Energy East. Energy East will acquire and own
100% of the common stock of CMP Group, CTG Resources and Berkshire Energy,
which, in turn, with the exception of Maine Gas Co., own 100% of the outstanding
voting securities of their respective public utility subsidiaries.(31) Hence,
the Mergers will not create any publicly-held minority stock interest in any
public utility company in contravention of the policies underlying Section
11(b)(2) of the Act. The existing debt and preferred securities of the public
utility subsidiaries of CMP Group, CTG Resources and Berkshire Energy will
likewise remain outstanding without change. The only voting securities of Energy
East that will be publicly-held after the Mergers will be the common stock of
Energy East.
The continued existence of CMP Group, CTG Resources, Berkshire Energy,
Connecticut Energy and Energy East Enterprises as secondary holding companies in
the same holding company system will not unduly complicate Energy East's capital
structure. The costs associated with maintaining these intermediate holding
companies are minimal and Energy East's management and the managements of CMP
Group, CTG Resources, Berkshire Energy and Connecticut Energy have determined
that their continued existence will contribute to shareholder value and to the
effectiveness of local regulation of their operating utility subsidiaries. At
the same time, it is not contemplated that the five intermediate holding
companies will have any operational functions. As intermediate holding
companies, they will simply serve as conduits between Energy East and certain of
Energy East's public utility subsidiaries with respect to capital contributions
and dividends. Importantly, with the exception of existing short-term debt and
guarantees on behalf of their subsidiaries, none of the intermediate holding
companies will be used for external financing purposes, to make future
acquisitions, or to perform service, sales or construction contracts.
Similarly, Energy East Enterprises was formed, in part, in order to
facilitate Energy East's indirect ownership of a 50% member interest in Maine
Gas Co.; the remaining 50% interest is held by New England Gas Development
Corporation. Following the Merger, it is anticipated that these interests will
be combined.
------------------------
(30) See, e.g., Ameren Corporation, HCAR No. 26809 (Dec. 30, 1997); CINergy
Corp., HCAR No. 26934 (Nov. 2, 1998); and Centerior Energy Corp., HCAR No. 24073
(April 29, 1986).
(31) In this respect, the CMP Group Merger will result in Energy East's
ownership of 100% of the voting securities of Maine Gas Co.
- 30 -
<PAGE>
The Commission has permitted the continued existence of a secondary holding
company in a holding company system where it appeared that the overall benefits
of an acquisition would outweigh any historical preference for a single holding
company structure. See American Electric Power and Dominion Resources, supra.
Moreover, Section 11(b)(2) of the Act by its terms permits two tiers of holding
companies in a registered holding company system.
As was true in Dominion Resources, supra, the continued existence of CMP
Group, CTG Resources, Berkshire Energy, Connecticut Energy and Energy East
Enterprises will preserve certain structural and financial benefits that have
already been achieved by these companies. Further, the continued existence of
these secondary holding companies will help to preserve favorable tax attributes
that would be lost if they were eliminated.(32) As indicated above, CMP Group is
an exempt holding company pursuant to Section 3(a)(1) of the Act.(33)
Connecticut Energy, CTG Resources and Berkshire Energy are also holding
companies. Each claims an exemption pursuant to Section 3(a)(1) of the Act and
Rule 2 thereunder.(34) Following the Merger, each of these intermediate holding
companies will continue to be exempt under Section 3(a)(1) in its capacity as a
holding company. However, such exemptions will not affect the Commission's
jurisdiction over these companies as subsidiary companies of Energy East, a
registered holding company. Energy East represents that, for so long as the
intermediate holding companies shall continue to exist, they will not engage in
any transaction that a registered holding company could not engage in unless
approved by the Commission.
During merger discussions between Energy East and CMP Group, CTG Resources,
Connecticut Energy and Berkshire Energy, it became apparent that maintaining a
local presence with separate operations and management in each of the affected
jurisdictions would be a critical issue in gaining the support of the state
public service commissions. It was also apparent that the state commissions were
very sensitive to, and needed to ensure, the separation of regulated and
non-utility activities within each of the companies.(35) In gaining approval of
these mergers, Energy East committed to a corporate structure model which
incorporates the intermediate holding companies. This structure preserves local
name recognition, operations and supervision, yet allows efficiencies to be
captured. It also provides maximum separation of utility and non-utility
ventures, insulating each utility from any potential economic impact of other
initiatives.
--------------------------
(32) In American Electric Power Holding Company Act, Release No. 27186
(June 14, 2000) ("AEP") the applicant's reasons for wishing to retain Central
and South West Corporation as a secondary holding company were primarily tax
driven. The applicant indicated that, by preserving Central and South West as a
subsidiary, it would have the same federal income tax basis in Central and South
West as the aggregate tax basis of Central and South West's shareholders, which,
it was asserted, would be economically important to shareholders in the event of
possible future asset divestitures. Energy East's reasons for wishing to
preserve the secondary holding companies are also partly tax driven, as there
are some tax efficiencies gained from their continued existence, including, in
particular, the added flexibility of the companies to join in filing combined
state tax returns. See Memorandum Analyzing Potential Holding Company Tax
Benefits, filed confidentially as Exhibit L-1 hereto.
(33) See CMP Group, Inc., et al., Holding Company Act Release No. 26977
(Feb. 12, 1999). New England Gas Development Corporation, a direct subsidiary of
CMP Group, and Enterprises, a direct subsidiary of Energy East, are also exempt
holding companies with respect to Maine Gas Co.
(34) See File Nos. 69-244 (Connecticut Energy), 69-415 (CTG Resources), and
69-461 (Berkshire Energy).
(35) For example, the Maine Public Utilities Commission stated, at page 4
of its order approving the formation of CMP Group as a holding company (Docket
No. 97-930):
We find that a basic advantage of the holding company
organizational structure is that non-utility activities can be
more cleanly separated from utility activities. In particular,
the capital structures of utility entities are separated from
non-utility entities with the holding company form, which better
"insulates" ratepayers from the activities of the HoldCo's
non-utility affiliates.
Similarly, the Connecticut Department of Public Utility Control stated, at
page 5 of its order approving the formation of CTG Resources as a holding
company (Docket No. 96-09-10):
The holding company structure will establish a clear line between
the regulated and the unregulated activities of the Company,
which will provide several advantages. First, the Department will
be able to review the regulated operating subsidiary in a more
direct fashion than it currently does since in a rate case the
Department and the Company must back out the unregulated
activities of CNG. As a regulated operating subsidiary of CTG
Resources, CNGCo's financial and operational results will be
directly identifiable. Second, ratepayers should benefit as this
structure may provide an additional degree of insulation from the
risks of the unregulated operations, which will no longer be
direct subsidiaries of the regulated company. Third, the holding
company structure will clearly define the responsibilities of the
two CTG subsidiaries, CNGCO and TEN, allowing each to meet its
business needs.
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<PAGE>
In addition to these structural and regulatory benefits, the continued
existence of CTG Resources will also preserve the benefits associated with
certain existing financing arrangements. Specifically, The Energy Network, a
wholly-owned non-utility subsidiary of CTG Resources, currently has
approximately $60 million of private placement bonds outstanding that are
supported by CTG Resources under the terms of a Forward Equity Purchase
Agreement. The elimination of CTG Resources would constitute an event of default
under the notes and the holders would have the right to "put" the bonds to the
issuer. Given that the existing bonds have coupon rates below 7% through 2009,
refinancing those bonds in today's interest rate environment would result in an
estimated $1 million in additional interest costs annually, or the equivalent of
nearly 5% of CTG Resource's earnings for its latest fiscal year.
Given the aforementioned strategic and economic benefits (which are
expected to continue in the future), as well as the potential for further tax
planning initiatives, Energy East proposes to maintain CMP Group, CTG Resources,
Berkshire Energy, Connecticut Energy and Energy East Enterprises as intermediate
holding companies for a period of up to five years after the Mergers are
consummated. Energy East will file a post-effective amendment with the
Commission to request an order extending such five-year period if it appears
that the financial, tax, regulatory or structural benefits of preserving any of
the intermediate holding companies will continue beyond such date. Each of CTG
Resources, Berkshire Energy, and Connecticut Energy hereby requests that the
Commission issue an order granting an exemption under Section 3(a)(1) of the
Act, and each represents that it satisfies the applicable standards under the
Act for such an exemption. Also, each of CMP Group and Energy East Enterprises,
which have previously obtained orders granting exemptions under Section 3(a)(1)
of the Act,(36) requests the Commission to confirm that, following the merger,
they will continue to be exempt under Section 3(a)(1). Finally Central Maine
Power hereby requests that the Commission issue an order granting it an
exemption under section 3(a)(2) of the Act.
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<PAGE>
Protected interests: As set forth more fully in Item 3.C.4 (Efficiencies
and Economies from the Merger (Section 10(c)(2)), Item 3.C.2(b)(iii)
(Coordination between ISO-NE and NYISO), and elsewhere in this
Application/Declaration, the Merger is expected to result in economies and will
integrate and improve the efficiency of the Energy East, CMP Group, CTG
Resources and Berkshire Energy utility systems. The Merger will create an entity
poised to respond effectively to the fundamental changes taking place in the
markets for natural gas and electric power and to compete effectively for
consumers' business. The Merger will therefore be in the public interest and the
interests of investors and consumers, and will not be detrimental to the proper
functioning of the resulting holding company system.
As indicated previously, consummation of the Merger is conditioned upon
receipt not only of the Commission's approval, but also on several state and
other federal regulatory approvals. Those regulatory approvals give additional
assurance that the interests of retail customers are adequately protected.
FERC's approval of the CMP Group Merger will further assure that there is no
significant adverse effect on competition. In sum, because the Merger does not
add any complexity to Energy East's capital structure, is in the interest of
investors and consumers, and is consistent with the public interest, the
requirements of Section 10(b)(3) are met.
C. SECTION 10(C)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a public utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and the
efficient development of an integrated public utility system.
1. Acquisition Must Be Lawful
Section 10(c)(1) requires that an acquisition be lawful under Section 8.
Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. As discussed below, the
Merger does not raise any issue under Section 8. Indeed, Section 8 indicates
that a registered holding company may own both gas and electric utilities where,
as here, the acquisition is subject to approval by the state utility commissions
with jurisdiction over the acquired companies. The applications filed by CMP
Group and CTG Resources with the MPUC and the DPUC to carry out their respective
mergers have been approved. See Exhibits D-4, D-6 and D-8. As discussed in Item
4 below, MDTE approval of the Berkshire Energy Merger is not required.
---------------------------
(36) CMP Group and Energy East, supra.
--------- -----------
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<PAGE>
Section 10(c)(1) further requires that an acquisition not be detrimental to
carrying out the provisions of Section 11 of the Act. Section 11(a) of the Act
requires the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. As described above, the Merger will
not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding company
system to limit its operations "to a single integrated public utility system,
and to such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public utility
system," a combination integrated gas and electric system within a registered
holding company is permissible under Section 8.37 Additionally, Section 11(b)(1)
provides that "one or more additional integrated public utility systems" may be
retained if, as here, certain criteria are met. Section 11(b)(2) directs the
Commission "to ensure that the corporate structure or continued existence of any
company in the holding company system does not unduly or unnecessarily
complicate the structure, or unfairly or inequitably distribute voting power
among security holders, of such holding company system."
As detailed below, the Merger will not be detrimental to the carrying out
of the provisions of Section 11. The combination of NYSEG's electric system and
CMP Group's electric operations will result in a single, integrated electric
utility system (the "new Energy East Electric System"). Interconnection and
coordination of the new Energy East Electric System will be facilitated by a
firm transmission contract between Central Maine Power and NYSEG, and
coordination will be enhanced by NYSEG's and Central Maine Power's memberships
in adjacent, highly interconnected and coordinated power pools and participation
in their ISOs
Further, the combination of Energy East's current gas system (i.e., NYSEG's
gas operations, Connecticut Energy and Maine Gas Co.) with the gas operations of
CMP Group, CTG Resources and Berkshire Energy will result in a single,
integrated gas utility system with operations in the same states as the electric
system or states adjoining those states (the "new Energy East Gas System"). The
Commission should accordingly find that the new Energy East Electric System will
be the primary integrated public utility system for purposes of Section 11(b)(1)
and the new Energy East Gas System is a permissible additional system under
Section 11(b)(1)A-C.
Furthermore, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward the
economical and efficient development of an integrated public utility system.
This Section 10(c)(2) standard is met where the likely benefits of the
acquisition exceed its likely cost.38 As discussed below, the Merger will result
in the creation of an integrated electric utility system and an additional
integrated gas utility system and will produce economies and efficiencies more
than sufficient to satisfy the standards of Section 10(c)(2).
------------------------
(37) See, e.g., New Century Energies, Inc., supra.
(38) See City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992).
- 34 -
<PAGE>
2. Combination and Integration of Electric Utility Operations
Section 2(a)(29)(A) of the Act defines an "integrated public utility
system," as applied to electric utilities, as:
a system consisting of one or more units of generating plants
and/or transmission lines and/or distributing facilities, whose
utility assets, whether owned by one or more electric utility
companies, are physically interconnected or capable of physical
interconnection and which under normal conditions may be
economically operated as a single interconnected and coordinated
system confined in its operation to a single area or region, in
one or more states, not so large as to impair (considering the
state of the art and the area or region affected) the advantages
of localized management, efficient operation, and the
effectiveness of regulation.
(emphasis added)
The Commission has established four standards under the statutory
integration requirement:
(1) The utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) The utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) The system must be confined in its operations to a single area or
region; and
(4) The system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
The Commission has traditionally been called upon to evaluate merger
applications that involve the combination of two traditional electric utilities.
That is, the utility applicants have been involved in all three levels or
sectors of utility operations: generation, transmission, and distribution. Thus,
the Commission has evaluated whether the Act's integration standard has been met
when combining the assets of fully integrated utilities.(39) Where, as here, the
applicants are utilities that previously were vertically integrated, but have
become almost entirely engaged in transmission and distribution, the Commission
should, consistent with earlier precedent, find that an integrated public
utility system can be comprised of two or more transmission/distribution
companies.(40)
-------------------------
(39) See , e.g., Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263
(9th Cir. 1990), citing Electric Energy, Inc., 38 S.E.C. 658, 668 (1958).
(40) The Commission has previously determined that, without regard to the
combining of operations of generating facilities, transmission facilities, on
their own, can comprise an "integrated public utility system." See In re Sierra
Pacific Power Company, 40 S.E.C. Docket 103 (Jan. 28, 1988), aff'd sub nom.,
Environmental Action, Inc. v. SEC, 895 F.2d 1255 (9th Cir. 1990). As a
consequence the provisions of the Act, such as Section 10(c)(2), that
incorporate or refer to this term must be interpreted so as not to thwart the
Congressional intent.
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<PAGE>
Since the function of transmission and distribution facilities is to
transfer electric energy from points of generation, or point of receipt from
another system, to load, or point of delivery with another system, transmission
facilities in and of themselves can, in appropriate circumstances, constitute an
integrated system and can perform an integrating function. Because of the
contiguous, highly interconnected, and coordinated relationships between the
power pools and ISOs to which NYSEG and Central Maine Power belong, their
transmission and distribution systems are now used, and in the future will
increasingly be used, to accomplish transfers of power between generation and
load within NYPP and NEPOOL and for transfers of power to, and through, both
systems. Additional power transfer will be facilitated by see 50 MW firm
transmission path that will directly interconnect the NYSEG and Central main
Power systems. If the Merger is approved, the Companies will implement their
proposal to reduce transmission charges for transactions involving the NYSEG and
Central Maine systems; that price reduction should result in increased use of
the NYSEG and Central Maine Power transmission facilities and therefore an
increased degree of integration.
a. Changes in the Electric Utility Industry
This section and the following sections describe the sweeping structural
changes that have taken place in the electric utility industry over the last two
decades. These changes include transformation of the markets at both the
wholesale and retail levels. Both this Commission and FERC have recognized the
significance of the changes. Recent FERC initiatives are likely to promote the
so-called "de-integration" of the industry even further. FERC's recent RTO NOPR
is promoting further regional transmission integration efforts in order to
facilitate even more competitive generation markets.(41)
The concept of a non-vertically integrated, generation-only business
enterprise was introduced with the enactment of PURPA. By the mid-1980's,
non-utility generation had out-paced utility generation additions. Power
marketers, which generally own no generating assets, but purchase and resell
power, also had become prevalent by the early 1990's. The Energy Policy Act of
1992 further contributed to the elimination of vertical integration of electric
utilities by enabling stand-alone generation of any type, with no restriction on
utility ownership or technology, to be exempted from "electric utility company"
status under the Act, and by significantly expanding the FERC's authority to
require utilities to provide non-discriminatory transmission for third-party
wholesale transactions.
--------------------------
(41) Notice of Proposed Rulemaking, Regional Transmission Organizations,
Docket No. RM99-2-000, 87 F.E.R.C. 61,173 at 33,693 (May 13, 1999) ("RTO NOPR").
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<PAGE>
In April 1996, in its Order Nos. 888 and 889, the FERC established the
framework for the development of fully competitive wholesale power markets in
the United States. These orders required vertically-integrated utilities
functionally to separate operation of their transmission systems from their
wholesale "merchant" function -- i.e., their role as a generator and seller,
and/or reseller of purchased power, to wholesale customers. Order No. 888
required all transmission-owning public utilities to establish open access
non-discriminatory transmission tariffs containing "pro forma" terms and
conditions. Utilities were also required to functionally unbundle wholesale
power services, so that they obtained wholesale transmission services under the
same tariff of general applicability as do unaffiliated third parties. Under
Order No. 889, utilities were required to establish or participate in an OASIS,
through which any eligible customer can obtain information regarding a public
utility's transmission availability and can reserve transmission capacity
through the Internet pursuant to a transparent, non-discriminatory process.
Finally, utilities were required to comply with standards of conduct designed to
prevent employees engaged in wholesale power marketing functions from obtaining
preferential access to pertinent transmission system information.
In summary, PURPA, the Energy Policy Act of 1992, and Order Nos. 888 and
889 transformed the industry to a more competitive structure. Where previously
vertically integrated companies combined generation, transmission and
distribution functions to provide a "bundled" product -- delivered electricity
-- to retail customers within franchised service areas, under the new
functionally, or operationally, separated industry structure, separate
companies, or separate functional/operational components of companies, perform
the generation, merchant, transmission and distribution functions, with the goal
of fostering competition in the generation sector.
Among other things, these structural changes have resulted in the rapid
development of wholesale markets through which load-serving utilities, retail
aggregators, and individual retail customers are able to obtain needed
electricity products. Also, there has been significant growth in the volume of
trading in the wholesale electricity market, from 1.8 million MWh in the first
quarter of 1995 to 513 million MWh in the second quarter of 1998.(42) Actual
separation of utility generation and transmission functions has resulted from
widespread divestiture of generating assets, in some cases required by state
legislatures or state regulatory commissions. As reported in the RTO NOPR, since
August 1997 approximately 50,000 MW of utility generating capacity has been
sold, or is under contract to be sold, and an additional 30,000 MW is currently
for sale; this represents more than 10 percent of all generating capacity in the
United States. FERC reports that 27 utilities have sold all or some of their
generating assets and seven others have assets for sale.
Finally, many state commissions and legislatures have implemented or are
considering open access at the retail level. As of October 1, 1999, twenty-four
states have enacted policies, either through legislation or administrative
action, requiring utilities to offer open access to retail customers. Where open
retail access is provided, retail customers have the ability to "shop" for their
electric power from a power supplier other than their traditional distribution
utility. The distributor is obligated to deliver the third party power supplies
to the customer.
-------------------------
(42) RTO NOPR at 33,690.
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<PAGE>
b. Restructuring of NEPOOL and NYPP into Open, Competitive and
Coordinated Markets
NYSEG and Central Maine Power have committed to maintain a firm
transmission path between their systems and to reduce the effects of rate
pancaking between the NYISO and ISO-NE for transactions that use both NYSEG's
and Central Maine Power's transmission systems. As a result, the Merger will
further enhance integration between the NYISO and ISO-NE with respect to NYSEG
and Central Maine Power beyond that which has already been accomplished by the
coordinated activities of the two ISOs.
With respect to the two ISOs, both NYSEG and Central Maine Power are
members of power pools in which transmission-owning members have turned over
operational control of their transmission assets to ISOs. As indicated earlier,
NYSEG is a member of the NYPP and has transferred control over its transmission
facilities to the NYISO; Central Maine Power is a member of NEPOOL and has
transferred control over its transmission facilities to ISO-NE. As noted by the
FERC in its RTO NOPR, the NYISO and ISO-NE were established using the existing
tight power pools following FERC's encouragement in Order No. 888. NYISO was
formed based upon the NYPP and ISO-NE was formed based upon NEPOOL. From an
operational standpoint, these pools function in the same fashion as they did
when the Commission found them to constitute integrated public utility systems.
Moreover, through their strong interties, their combined and seamless market
operations, and the coordinated actions of the two ISOs, they also function as a
single tight power pool which coordinates all of the facilities and operations
of their members.
The two ISOs administer competitive, bid-based markets for electric energy
and other electric power products, provide non-discriminatory transmission
service at a single, embedded cost-based rate, and facilitate transmission
planning and expansion on a regional basis. NYISO and ISO-NE are contiguous
along a 500-mile border and are interconnected by eight different interties with
aggregate transfer capability of 1,600 to 2,300 MW, depending on direction and
system conditions. Trade between the two ISOs is significant. Scheduled energy
transfers between NEPOOL and New York were approximately 7,100,000 MWh per year
for the three years ending December 31, 1998. This is equivalent to the transfer
of between NYISO and ISO-NE, of 1,707 MW during every peak hour of the year.(43)
The two ISOs engage in coordinated activities so that they function as a
single market, with free-flowing interties that are available, on an open-access
basis, to purchasers and sellers of electric energy and related energy products.
The two ISOs operate the bid-based market on a competitive basis that is
equivalent to economic dispatch. Also, the two ISOs and individual members of
both pools, including NYSEG and Central Maine Power, participate in joint pool
and regional transmission planning and reliability studies. Both ISOs operate as
non-profit organizations and include investor-owned utility ("IOU") and non-IOU
members, and both operate centralized power markets. In addition, both perform
congestion management to free up transmission capacity for the most economic
uses of the systemFinally, all of the states in which transmission-owning
utility members of the NYISO and ISO-NE are located, with the exception of
Vermont, have established requirements for retail choice. These state
initiatives frequently include a requirement that the utilities divest some or
all of their generating assets. This is designed to mitigate or eliminate the
utilities' generation market power, thus making generation markets more
competitive.
------------------------
(43) The peak hours of the year for electricity demand are the 16 "on peak"
hours Monday through Friday.
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<PAGE>
(i) The NYPP and NYISO
Opinion No. 96-12,(44) issued by the New York Public Service Commission
("NYPSC"), sets forth the vision and goals for the future electric regulatory
regime. The NYPSC's stated vision includes the following factors: (1) effective
competition in the generation and energy services sectors; (2) reduced prices
resulting in improved economic development for New York as a whole; (3)
increased consumer choice of supplier and service company; (4) a system operator
that treats all participants fairly and ensures reliable service; (5) a provider
of last resort for all consumers and the continuation of a means to fund
necessary public policy programs; (6) ample and accurate information for
consumers to use in making informed decisions; and (7) the availability of
information that permits adequate oversight of the market to ensure its fair
operation.(45)
The NYPSC directed NYSEG (and four other electric utilities) to submit a
rate and restructuring plan consistent with the NYPSC's policy and vision for
increased competition. These plans were to address, at a minimum: (1) the
structure of the utility, both in the short and long term, including a
description of how that structure complies with the NYPSC's vision and, in cases
where divestiture is not proposed, effective mechanisms that adequately address
resulting market power concerns; (2) a schedule for the introduction of retail
access to all of the utility's customers, and a set of unbundled tariffs that is
consistent with the retail access program; (3) a rate plan to be effective for a
significant portion of the transition; and (4) numerous other issues relating to
strandable costs, load pockets, energy services and public policy costs.(46) On
October 9, 1997, NYSEG filed its plan in the form of an "Agreement Concerning
the Competitive Rate and Restructuring Plan" (the "Agreement"). By orders issued
January 27, 1998 and March 5, 1998, the NYPSC approved the Agreement with
modifications.(47)
The Agreement provides for the continued operation of NYSEG in a holding
company structure and the formation of a competitive generating company to
facilitate a subsequent divestiture of generation assets, and established a
five-year period (the "Price Cap Period"), beginning March 3, 1998, during which
NYSEG will reduce its retail rates. In addition, NYSEG committed to make retail
access available in phases, beginning on August 1, 1999. Retail access became
available to all industrial, commercial, public authority, and residential
customers taking service at standard retail rates. NYSEG also agreed to unbundle
its retail rates over the five year Price Cap period.
---------------------------
(44) Case 96-E-0952 - In the Matter of Competitive Opportunities Regarding
Electric Service, Opinion No. 96-12, issued May 20, 1996.
(45) Id. at 24.
(46) Id. at 75-76, 90.
(47) Opinion No. 96-12, May 20, 1996, Case 94-E-0952.
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<PAGE>
NYSEG also committed to divest its coal-fired generation plants and agreed
to sell its interest in the NM2. NYSEG agreed to be the provider of last resort
during the Price Cap Period, subject to change by the NYPSC. As authorized by
FERC order,(48) NYSEG's generating company affiliate, NGE Generation, Inc., sold
its 50% interest in the 1,884 MW Homer City coal plant to an affiliate of Edison
Mission Energy Co. NGE Generation sold six remaining coal units, representing
1,334 MW of capacity, to affiliates of the AES Corporation.(49) NYSEG
subsequently entered into a contract to sell its 18% share of the NM2,
representing 205 MW, to AmerGen.(50) The only generation assets or contracts
which will remain after that sale are NYSEG's hydroelectric projects, amounting
to 62 MW, its NUG contracts and the contracts pursuant to which NYSEG purchases
power from the NYPA. In sum, NYSEG has completed divestiture of all of its
fossil-fired generation, amounting to approximately 2,500 MW, and is functioning
almost exclusively as a transmission/distribution company engaged exclusively in
transmitting electricity from unaffiliated producers to wholesale and retail
customers, located both within New York State and in adjacent states.
On January 31, 1997, pursuant to the NYPSC'S directive, the
transmission-owning member systems of the NYPP(51) filed a proposal with the
FERC to establish a fully competitive electric market in New York by forming an
ISO and a power exchange. The Member Systems also proposed a joint Open Access
Transmission Tariff ("OATT") to be administered by the ISO. Under this proposal,
operation of the combined transmission systems of the Member Systems will be
turned over to the NYISO, the governance structure of which ensures the
independence of the NYISO board. On December 19, 1997, the Member Systems
submitted a supplemental filing proposing the establishment of an hourly spot
energy market, the implementation of congestion pricing for transmission
services, the creation of transmission congestion contracts and markets for
ancillary services. The Member Systems also sought authorization to engage in
market-based rates for sales of energy into the NYISO administered spot market.
On June 30, 1998, FERC conditionally approved the Member Systems' proposal to
establish the NYISO.(52) Subsequently, on January 27, 1999, FERC conditionally
accepted the NYISO OATT and related market rules, and authorized market-based
rates for energy sales by the Member Systems into the NYISO administered spot
market.(53) The NYISO has now satisfied the conditions under FERC's orders and
has become operational.
---------------------------
(48) New York State Electric & Gas Corp., et al., 86 FERC 61,020 (1999).
(49) New York State Electric & Gas Corp., et al., 86 FERC 62,079 (1999).
(50) As discussed in Section I.B.1.a above, in December 1999, RG&E, an NM2
cotenant, exercised its right of first refusal in connection with the sale of
the plants, and stated that it would match AmerGen's offer and accept the terms
and conditions of the AmerGen agreement. RG&E has contracted with a subsidiary
of Entergy Corporation to lease, operate and maintain the plants. The NYPSE
began settlement negotiations in January 2000 seeking modifications to the
proposed terms of the sale, whether to AmerGen or RG&E. Energy East cannot
predict the effect of this event on the sale of NM2.
(51) Central Hudson Gas & Electric Corp. ("Central Hudson"), Consolidated
Edison Co. of New York, Inc. ("Con Ed"), Long Island Lighting Co. ("LILCO"),
NYSEG, Niagara Mohawk Power Corp. ("Niagara Mohawk"), Orange and Rockland
Utilities, Inc. ("O&R"), Rochester Gas and Electric Corp. ("RG&E"), and NYPA.
(52) Central Hudson Gas & Electric Co., et al., 83 FERC 61,352 (1998).
(53) Central Hudson Gas & Electric Co., et al., 86 FERC 61,062 (1999).
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<PAGE>
The establishment of the NYISO and its concomitant assumption of
operational control of the bulk power transmission system in New York State
insures that all participants in the newly-established competitive market have
access to the transmission system on an open and non-discriminatory basis. The
creation of a competitive market for electricity, coordinated and administered
by the NYISO, insures that all sellers and purchasers are able to use voluntary
bids to create a market of energy with substantial liquidity and to allow the
ISO to optimize the efficiency of the spot market for electricity. The
implementation of locational based marginal pricing for electricity sales and
transmission service will ensure that power sold in the spot market is priced on
an economically sound basis, and that the price paid for transmission service
reflects the true economic cost of using the combined Member Systems'
transmission systems.
Finally, in accordance with the requirements of FERC Order No. 888
governing "tight" power pools, transmission customers transmitting power (i)
within New York State, (ii) out of New York State, (iii) into New York State, or
(iv) through New York State, pay only one transmission charge under a "license
plate" rate approach. This is in contrast to the traditional "pancaked" rate
approach where the customer paid a separate transmission charge for the use of
each utility's system. Under the "license plate" approach, only the transmission
charge of the utility system to which power is delivered, or which is the point
of export from the NYISO, is assessed. The elimination of pancaked transmission
rates greatly reduces the cost of transmitting electricity which, in turn,
increases the competition among suppliers to serve wholesale and retail
customers and thus reduces prices.
In summary, the establishment of the NYISO creates a competitive
electricity market in which every generation and every reseller of such power,
can participate in a competitive market. The NYISO administers a bid-based power
sales system. Each day, power from sellers submitting the lowest bid will be
selected to serve the aggregate customer load that participates in the market.
The bid approach differs from traditional "economic dispatch" of generation only
in that the seller's offered bid price, rather than its "cost-of-service,"
determines the rank in which it is selected to meet load. In the restructured
NYPP and NYISO, every transmission system under the control of the NYISO will be
used to transmit power to meet load from the most competitive suppliers, whether
in state or out-of-state, including to, or through, NYSEG's and Central Maine
Power's systems. Each component of the restructured functions will be part of an
optimally integrated system. In other words, there are no artificial constraints
or electrically isolated subsystems or areas that are not included in the
larger, optimized system.
Consistent with the terms of its since OATT, since the NYISO became
operational, it also has the responsibility to facilitate transmission capacity
additions to alleviate transmission constraints which occur during periods of
high demand. As a result, through the creation of a workably competitive market
structure and the "invisible hand" of supply and demand, the operations of the
NYISO establish a fully integrated system for the generation, transmission and
distribution by participants in the markets served by the NYISO. As discussed
below, because of the strong interconnections between NYPP/NYISO and
NEPOOL/ISO-NE, market participants in NEPOOL and ISO-NE are able, merely by
using the Internet-based OASIS, to sell to, or purchase, from buyers or sellers,
respectively, into the NYPP/NYISO and to reserve transmission rights to
consummate such transactions, including transactions to, or through, NYSEG's and
Central Maine Power's systems.
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<PAGE>
(ii) NEPOOL and ISO-NE
On December 31, 1996, NEPOOL Members filed a comprehensive proposal to
comply with FERC Order No. 888. Among the key elements of the NEPOOL filing were
(1) the formation of ISO-NE, an independent system operator that would assume
operational control of NEPOOL Members' high-voltage pool-related transmission
facilities, (2) a NEPOOL OATT which replaced "pancaked" rates with a single
transmission rate that initially incorporates features of the "license plate"
approach, and later transactions to a single, pool-wide "postage stamp" rate,
(3) the creation of a power exchange, and (4) authorization for participants in
NEPOOL to charge market-based rates for power and ancillary services. FERC
conditionally approved the filing and required further changes. As required,
NEPOOL adopted the FERC's pro forma tariff policies regarding open admission to
NEPOOL, with a modification, concerning the obligations of transmission
utilities to determine the need for new transmission facilities or upgrades of
the NEPOOL transmission system.(54) NEPOOL, as such, continues to operate as a
tight power pool; ISO-NE and NYISO simply further integrate two existing
integrated systems.
Under the restructured NEPOOL, any "eligible customer" under the FERC'S pro
forma tariff may, upon compliance with the applicable requirements, become a
member of NEPOOL.(55) A member of NEPOOL may participate fully in the
competitive, integrated market including NEPOOL and adjacent areas connected by
transmission. Operational control over all "Pool Transmission Facilities"
("NEPOOL PTF")(56) has been transferred to ISO-NE, and transmission anywhere on
the integrated NEPOOL PTF network is provided under the ISO-NE administered
OATT. In compliance with Order No. 888, NEPOOL provides for transmission service
to any retail or wholesale customer located within the NEPOOL area, or service
"through" the NEPOOL grid, to an interconnected utility at a single,
non-pancaked
------------------------
(54) New England Power Pool, et al., 83 FERC at 61,045 (1998).
(55) FERC defines an "eligible customer" as: (i) Any electric utility
(including the Transmission Provider and any power marketer), federal power
marketing agency, or any person generating electric energy for sale for resale.
Electric energy sold or produced by such entity may be electric energy produced
in the United States, Canada or Mexico. However, with respect to transmission
service that the FERC is prohibited from ordering by Section 212(h) of the
Federal Power Act, such entity is eligible only if the service is provided
pursuant to a state requirement that the Transmission Provider offer the
unbundled transmission service, or pursuant to a voluntary offer of such service
by the Transmission Provider, (ii) any retail customer taking unbundled
transmission service pursuant to a state requirement that the Transmission
Provider offer the transmission service, or pursuant to a voluntary offer of
such service by the Transmission Provider, is an Eligible Customer under the
Tariff.
(56) The NEPOOL PTFs, generally transmission facilities rated 69kV and
above, constitute the bulk transmission system operated by ISO-NE.
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<PAGE>
transmission charge.(57) Thus, transmission from any point on the NEPOOL PTF
grid to another control area, such as the NYISO, is subject to only a single
transmission charge, irrespective of the number of individual utility
transmission systems used to transmit the power to the New York border.
Moreover, under the NEPOOL OATT, retail and wholesale customers are responsible
for payment of transmission charges for use of the PTF. Irrespective of how many
NEPOOL Members' transmission systems are used, there are no additional charges
for use of PTF. Thus, there is no additional charge for power imported from, for
example, the NYISO and delivered to a customer on the NEPOOL PTF system.
NEPOOL and ISO-NE presently operate and administer a bid-based competitive
market for electricity, in which sellers submit bids for any of seven electric
power products and services: energy, ten minute spinning reserve, automatic
generation control, ten minute non-spinning reserve, thirty minute operating
reserve, operating capability, and installed capability. Based on these bids and
on rules reflecting system conditions and constraints, NEPOOL determines which
sellers will be selected to meet the aggregate load and establishes the market
clearing price for those products.
Based on its finding that no market participant in NEPOOL has market power,
the FERC has authorized participants in the NEPOOL market to charge competitive,
market-based rates, which are reflected in sellers' bids. These bids, in turn,
are subject to competitive pressure which prevents excessive proposals. In
addition, ISO-NE monitors the market and identifies patterns of anomalous
conduct, particularly withholding of supply, to ensure the proper functioning of
the market.
Under a 1997 State of Maine law restructuring electric utilities in the
State of Maine, Central Maine Power has divested all of its non-nuclear
generating assets. On April 7, 1999, Central Maine Power completed the sale of
its fossil, hydroelectric and biomass generating assets to an affiliate of FPL
Group, Inc. It has sold its entitlements to purchase capacity and energy under
the NUG contracts, as well as its entitlements to energy from its 2.5% interest
in the Millstone 3 nuclear plant and from its 4% interest in the Vermont Yankee
nuclear plant, and its entitlement in a firm energy contract with Hydro Quebec.
Further, Central Maine Power recently entered into an agreement to sell its
ownership interest in Vermont Yankee, and it has reached an agreement with
Northeast Utilities, the majority owner of Millstone 3, whereby Northeast
Utilities will include Central Maine Power's interest in its planned auction of
Millstone 3.(58)
-----------------------------
(57) The Member Systems of NEPOOL offer service over their non-NEPOOL PTFs,
i.e., non-bulk power transmission facilities that remain under the operational
control of individual utilities, under Local OATTs administered by the
individual member systems.
(58) Elsewhere in New England, full customer choice began in Massachusetts
on March 1, 1998; several Massachusetts utilities have divested generation
assets. In Connecticut, as of January 1, 2000, up to 35 percent of peak load of
each rate class in certain municipalities may choose their electric suppliers;
there will be full customer choice in Connecticut by July 1, 2000. In New
Hampshire, government officials expect to begin customer choice in early 2000.
In Rhode Island, customer choice will occur within three months after retail
access becomes available to 40 percent of customers (measured by energy sales)
in New England. Vermont has not yet adopted customer choice.
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<PAGE>
(iii) Coordination Between ISO-NE And NYISO
. As demonstrated by the Franchise Area Map of Major Utilities in the
Northeast attached as Exhibit E-1, NYISO and ISO-NE are adjacent along the
entire New York State/Vermont/Massachusetts/Connecticut border, which extends
from Canada to the Long Island Sound. The ISOs are interconnected through eight
separate interties: four in Vermont, one in Massachusetts, and three in
Connecticut (including the undersea Long Island Sound Cable). These interties,
referred to as the New York/NEPOOL Interface, consist of (1) a 345 kilovolt
("kV") intertie between Connecticut Power & Light ("CP&L") in NEPOOL and ConEd
in NYPP; (2) a 345 kV intertie between Massachusetts Electric Co. in NEPOOL and
Niagara Mohawk in NYPP; (3) a 230 kV intertie between the New England Electric
System in NEPOOL and Niagara Mohawk in NYPP; (4) a 115 kV intertie between
Vermont Electric Power Company ("Vermont Electric") in NEPOOL and the NYPA in
NYPP; (5) a 115 kV intertie between Vermont Electric in NEPOOL and Niagara
Mohawk in NYPP; (6) an additional 115 kV intertie between Vermont Electric in
NEPOOL and Niagara Mohawk in NYPP; (7) a 69 kV intertie between CP&L in NEPOOL
and Central Hudson in NYPP; and (8) a 138 kV intertie between CP&L in NEPOOL and
LIPA in NYPP.
The New York/NEPOOL Interface has aggregate transfer capacity -- between
1,600 to 2,300 MW, depending on direction and system conditions.(59) As noted
previously, transfers between NEPOOL and NYPP averaged 7,100,000 MWh per year
over the three years from 1995 to 1998, equal to an average of 1,707 MW of
transfers for every peak hour of the year, and to an average of 810.5 MW of
transfers for all hours of the year.(60) As new generation is added in Maine,
transfer capability increases, and NYSEG and Central Maine Power implement their
transmission pricing proposal, transfers between NYPP and NEPOOL are expected to
increase significantly.
Vermont Electric has proposed to expand the Interface capacity by
constructing a new 230 kV transmission line under Lake Champlain interconnecting
to the NYPA system, which would add 400-500 MW of transfer capability. In
addition to transmission-owning utilities in NYPP and NEPOOL, new entrants have
announced plans to add significant new transmission facilities between NYISO and
ISO-NE. For example, TransEnergie U.S. LTD., a subsidiary of Hydro-Quebec, has
submitted an application to the FERC seeking rate approvals for a high voltage
direct current ("HVDC") transmission interconnection, via 26 miles of cable
underneath Long Island Sound, that would connect the United Illuminating
Company's 345 kV system with LIPA's 138 kV system.(61) This project would
provide fully controllable, bi-directional transfer capability of approximately
600 MW between the control areas of the NYISO and ISO-NE.
--------------------------
(59) Prior to its divestiture of generating assets, the aggregate capacity
of all of NYSEG's fossil generation was 2,366 MW, and Central Maine Power's
fossil, hydroelectric and biomass generation represented approximately 1,070 MW.
Thus the existing NYPP/NEPOOL Interface is capable of transferring virtually all
of the power output of NYSEG's divested fossil plants to Central Maine Power
customers, and more than twice the amount needed for transfers from former
Central Maine Power units to NYSEG customers.
(60) Peak hours are 16 hours Monday for five days a week.
(61) Petition of TransEnergie U.S. LTD. For Order Accepting Tariff For
Transmission Interconnector and Granting Related Authorizations and Waivers,
TransEnergie U.S. LTD.,ER00-1-000 (Oct. 1, 1999).
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<PAGE>
The interties between the two ISOs are all free-flowing, alternating
current ("AC") connections. To insure that the flow of power over the interties
corresponds to the scheduled transactions between the ISOS, ISO-NE and NYISO are
in continuous, real-time communication, and they coordinate their dispatch of
generation in each pool to correspond to schedules established through the
energy markets that each ISO maintains. In addition, the two ISOs engage in
joint actions to implement and monitor the performance of those scheduled
operations on a second-to-second basis, to insure that power flows over the
interties correspond to the scheduling plans.
Enabling these inter-ISO transactions to occur and ensuring the reliability
of the bulk power transmission system requires a high level of coordination
between New York and New England and across the transmission facilities that
comprise the New York/New England Interface. The NY-ISO and ISO-NE jointly
perform such coordination. Through their joint activities, the two ISO's plan in
advance, and adjust, in real-time, based on actual physical conditions, the
transfer capability of the interface and energy transfers that can flow in
either direction between the two pools. Absent such coordination, it would not
be possible to maintain a reliable interconnection between the two regions, and
the economies and added reliability benefits enjoyed by market participants from
their ability to access supply resources over the larger geographic range of the
two pools would not exist.
As in North Am. Co., supra, the joint actions of NYISO and ISO-NE insure
that the flow of power between these ISOs is "centrally controlled and
allocated, as need and economy direct." Here, need and economy are determined by
the "invisible hand" of supply and demand in the open-bidding markets operated
by these ISOs; however, it takes the coordinated actions of the two ISOs to
insure that the results of these auctions is carried out and that power flows
throughout the systems correspond to the schedules established through this
process.
In summary, under the restructured NEPOOL and ISO-NE, the high voltage
grids of each transmission-owning utility in New England are combined (as they
were under the prior NEPOOL Agreement) to form a single integrated transmission
system. In contrast to the prior NEPOOL structure, which enabled only utility
members to participate, the restructured NEPOOL, in addition, allows any seller
or buyer to obtain nondiscriminatory access to the fully integrated NEPOOL
transmission system. In essence, ISO-NE adds to the existing integrated utility
system of NEPOOL a structure to enable non-traditional utilities the opportunity
to participate in NEPOOL. Power sellers and purchasers can use this entire
system by paying a single "poolwide" rate, to transmit power through and out of
the NEPOOL system, to a retail or wholesale customer within NEPOOL, or as part
of a sale to or purchase from one of the NEPOOL competitive markets for power
described above. Through this open, transparent structure, every generator
located within NEPOOL (or that can transmit its power to NEPOOL's interfaces at
its border) is able to transmit power to any load within NEPOOL, or, through an
interface, to load outside of NEPOOL, including in NYPP. Included in this
category of transactions are transmission arrangements over the systems of
Central Maine Power and NYSEG.
3. Statutory Standards For Electric Integration Will Be Satisfied
As demonstrated below, the Merger satisfies all four of the previously
cited standards under the integration requirement.
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<PAGE>
a. Physical interconnection
In applying the requirement that the electric generation and/or
transmission and/or distribution facilities comprising the system be "physically
interconnected or capable of physical interconnection," the Commission focuses
on physical interconnection through facilities that the parties own or, by
contract, control.(62) In the recent AEP decision, the Commission found that a
fixed term transmission contract connecting the applicants' systems and a
commitment by the applicants either to extend their right to use the contract
transmission path or to file a post-effective amendment explaining how the
merged company system will continue to satisfy the interconnection requirements
if its rights with respect to the contract path are not extended satisfied the
interconnection requirement.
The NYSEG and Central Maine Power systems satisfy the requirement that they
be "physically interconnected or capable of physical interconnection" through a
contract providing for 50 MW of firm transmission, for east-to-west firm
point-to point transmission service from the Central Maine Power system to
NYSEG's system (the "Contract Path").(63) The initial term of the Contract Path
is from September 2, 2000 to March 31, 2003.(64) The Contract Path permits
NYSEG and Central Maine Power to transfer electric energy over six of the eight
transmission lines that comprise the Intertie between ISO-NE and the NY ISO.(65)
As required by FERC Order No. 888, the transmission contract between NYSEG and
ISO-NE, like the transmission contracts between applicants and intervening
utilities that were relied upon to establish interconnection in prior cases, is
a legally binding contract with which neither the ISO nor any third party can
interfere.(66) Under the NEPOOL OATT, NYSEG and Central Maine Power have the
right of first refusal to renew the Contract Path. Applicants provide the same
commitment as that made by the applicants in AEP: namely, they commit either to
extend their right to use the Contract Path prior to March 31, 2003, or to
file a post-effective amendment explaining how the Energy East System will
continue to satisfy the interconnection requirement if its rights with respect
to the Contract Path are not extended.
-----------------------
(62) See, e.g., American Electric Power Company, Inc. and Central and South
West Corporation, HCAR No. 35-27186 (June 14, 2000) ("AEP") (interconnection
based on one-way transmission through partial ownership of jointly-owned line
and through purchase of additional transmission capacity from non-affiliated
owner of another share of the line); Northeast Utilities, HCAR No. 35-25221
(Dec. 21, 1990) ("Northeast Utilities") at note 85, supplemented, HCAR No. 25273
(March 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir.
1992) Northeast had the right to use a Vermont Electric line for ten years, with
automatic two-year extensions, subject to termination upon two years notice, in
order to provide power to a Northeast affiliate); Centerior Energy Corp., HCAR
No. 35-24073 (April 29, 1986) (Cleveland Electric Illuminating Company and
Toledo Edison Company were connected by a line owned by Ohio Edison. All three
were members of the Central Area Power Coordination Group ("CAPCO"). The line
connecting Cleveland Electric, Ohio Edison and Toledo was a CAPCO line with
segments owned by each of the three named utilities.); Cities Service Power &
Light Co., 14 S.E.C. 28, 53, at note 44 (1943) (two companies in the same
holding company system were found to be interconnected where energy was
transmitted between two separated parts of the system over a transmission line
owned by the United States Bureau of Reclamation, under an arrangement which
afforded the system the privilege of using the line).
(63) In AEP, the Commission approved a one-directional, 250 MW transmission
interconnection between two utilities with a combined generating capacity of
37,964 MW (14,205 MW for Central and South West Corporation and 23,759 for
American Electric Power). Prior to divestiture, the combined capacity of NYSEG
and Central Maine Power was 3,436 MW (NYSEG - 2,366 MW; Central Maine Power -
1,070 MW).
(64) Under applicable ISO-NE procedures, Applicants have submitted separate
applications to reserve the Contract Path for the period from September 2, 2000
through March 31, 2001, and for two subsequent annual reservations, which extend
to March 31, 2003. Applicants have submitted, in Exhibit M-1, copies of their
reservation requests, and will submit a post-effective amendment by November 1,
2000, with NE-ISO confirmation of these arrangements.
(65) The transmission facilities that comprise the Contract Path are owned
by a number of other utilities, including Northeast Utilities, Vermont Electric
Power Company, National Grid USA, Consolidated Edison of New York, Inc., and
Niagara Mohawk Power Corp. Pursuant to Order No. 888, which requires a single
charge for transmission across the systems of a tight power pool, only one,
"non-pancaked," transmission charge is assessed for the ISO-NE transmission.
With respect to the NY ISO portion of the transaction, no specific transmission
path is established; instead, NYSEG is assessed a Transmission Usage Charge
("TUC"), including a congestion charge component from the external proxy bus to
the point of delivery to the customer within NYSEG's service territory, and a
marginal losses charge component calculated based on the Marcy reference bus.
(66) FERC Order No. 888 requires that holders of firm transmission
contracts make available, for reservation through the OASIS, transmission
capacity over which transactions are not scheduled. Accordingly, at times when
neither NYSEG nor Central Maine Power has scheduled transactions over the
Contract Path, they will make it available for use by third parties.
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<PAGE>
NYSEG and Central Maine Power will use the Contract Path as a firm
extension of the NYSEG system, which, by providing a firm reserved path from the
Central Maine power system, will assist NYSEG in satisfying its obligations as
provider of last resort to procure and provide electric energy to its
customers.(67) The Applicants note that in order to fulfill its provider of last
resort obligations, NYSEG must have the ability to procure sufficient energy to
serve customers that do not select an alternative energy supplier. By reserving
the Contract Path capacity, NYSEG gains assurance that it will have access to
import capacity for purchases from New England. In sum, following the merger,
the Energy East system, pursuant to well-established Commission precedent, as
recently followed in AEP, will satisfy the interconnection requirement through a
firm transmission path between the electric utility subsidiaries of the merged
company.
b. Economic and Coordinated Operation
Section 2(a)(29)(A) further requires that the utility assets, under normal
conditions, may be "economically operated as a single interconnected and
coordinated system." The Commission has interpreted this language as requiring
that, in addition to physical interconnection, "the properties [must] be so
connected and operated that there is coordination among all parts, and that
those parties bear an integral operating relationship to each other."(68) The
Commission must find that "the isolated territories are or can be so operated in
conjunction with the remainder of the system that central control is available
for the routing of power within the system."(69) The Commission has explained
that this language "refers to the physical operation of utility assets as a
system in which, among other things, the generation and/or flow of current
within the system may be centrally controlled and allocated as need or economy
directs."(70)
------------------------
(67) The New York Public Service Commission has issued several orders
implementing the requirement of the New York Public Service Law that electric
utilities, including NYSEG, serve as the provider of last resort to all
customers. See e.g. Opinion No. 96-12, Case 94-E-0952, "In the Matter of
Competitive Opportunities Regarding Electric Service," May 20, 1996.
(68) UNITIL Corp., at 1992 SEC LEXIS 1016, at *14, note 31, citing Cites
Service Co., 14 S.E.C. at 55.
(69) North Am. Co., 11 S.E.C. 194, 242, aff'd, 133 F.2d 148 (2d Cir. 1943),
aff'd on constitutional issues, 327 U.S. 686 (1946).
(70) Id.
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<PAGE>
(i) Direct Coordination Between NYSEG and Central Maine Power
The activities of NYSEG and Central Maine Power will be coordinated in a
variety of other ways. First, NYSEG and Central Maine Power will coordinate
their activities, on a daily, and when appropriate, more frequent basis, so as
to optimize the day-to-day operation of their utility systems. As discussed
above, NYSEG retains provider of last resort obligations for all customers; in
addition, Central Maine Power currently retains an obligation to serve as
provider of last resort to medium and large non-residential customers.(71) In
order to enable NYSEG to fulfill these obligations, NYSEG and Central Maine
Power will coordinate through joint marketing efforts, both as a buyer and a
seller, consistent with the provider of last resort obligations that each
company retains. Each company has extensive familiarity with generators,
suppliers, planned new generation, and with the multitude of activities and
opportunities for power supply in or near its service area. The obligation of
NYSEG to supply retail load, as well as the diversity of weather and localized
economic conditions can create opportunities for each utility to assist the
other in procuring energy supplies. In addition, their combined purchasing power
can provide efficiencies in their ability to obtain economies of scale in
purchasing power, and will provide a ready market for power supplies that turn
out to be in excess of one of the individual utility's needs.
For example, NYSEG would ordinarily procure power on a monthly basis, in
quantities sufficient to satisfy its projected load for the month. If, during
that month, load turns out to be less than expected, NYSEG would have excess
energy supplies available, and would work, on a daily basis, with Central Maine
Power, to find opportunities to maximize the benefits that can be obtained from
the sale of such excess power supplies.
Subject to the limitations established by the FERC in Order No. 889
relating to separation of transmission and merchant functions, the two utilities
will also coordinate their activities on a daily basis, so as to obtain maximum
benefit from the localized knowledge of each, with respect to making
arrangements for transmission of power supplies to one another. Through these
efforts, for example, Central Maine Power staff, which have extensive
familiarity with the New England market, will identify supply opportunities for
NYSEG, and, subject to FERC Order No. 889 constraints, could determine the
transmission routing, timing, and pricing strategies on the NEPOOL system that
would maximize the benefits of the transaction.
-----------------------------------
(71) 35-A, M.R. S.A., Section 32-12, Subsection 1-D; Chapter 301, Section
8(B); Order dated December 3, 1999, Docket No. 99-111, "Order Designating
Standard Offer Provider and Rejecting Certain Bids." Under Section 32-12, Maine
Public Utilities Commission will conduct periodic solicitations for bids for
standard offer service. To the extent acceptable bids are not received, CMP will
be the provider of last resort.
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<PAGE>
Similarly, both NYSEG and Central Maine Power procure and provide certain
ancillary services, including black-start restoration services (through the
provision of transmission operations functions) and voltage support to retail
and wholesale customers. Following the Merger, the two companies will
communicate, on a regular basis, to determine the best strategies and
opportunities for providing such services.
The NYSEG and Central Maine Power personnel will communicate, on a daily
basis, and even more frequently if necessary, to coordinate their activities in
these areas. In addition, Energy East commits that within 90 days following the
Merger, NYSEG and Central Maine Power will enter into a coordination agreement
in which the companies will formalize their obligations to engage in the
coordination activities described herein.
As part of these coordinated operations, the two companies will coordinate
to maximize the efficient use the Contract Path. Through this reserved firm
path, power supplies can be transported from and through Central Maine Power's
system, as well as from anywhere in New England, to NYSEG's system, thus
insuring that tight market conditions in ISO-NE will not interfere with NYSEG's
ability to obtain power imports from New England. Central Maine Power and NYSEG
will coordinate their activities in scheduling transactions over the Contract
Path.
With respect to longer-term coordination, NYSEG and Central Maine Power
will engage in joint purchasing of transmission and distribution equipment and
related services. Moreover, by taking advantage of gas/electric "convergence"
opportunities (such as swapping gas supplies for power, when economic to do so)
created by the ownership of the gas utilities, NYSEG and Central Maine Power
will jointly take advantages of opportunities for innovation in the evolving
energy markets on coordinated and efficient basis.
Also, NYSEG and Central Maine Power will coordinate their activities in the
following areas, and will continue to seek to identify additional areas in which
efficiencies can be realized through joint and coordinated actions. These
include coordination in research and development efforts; coordination in
managing compliance with FERC structural regulation, including Orders 888, 889
and 2000, which impose obligations on utilities with respect to open-access
transmission, codes of conduct and OASIS operation, and participation in a
regional transmission organization; compliance with state regulation;
participation in ISO and inter-ISO activities; emergency responses, including
storm management; development of policies and procedures to implement retail
open access programs; development of policies regarding standardized
interconnection agreements and other non-utility generation-related matters.
Second, representatives of these two electric utilities will participate in
numerous committees, including those established by the Memorandum of
Understanding and by the Northeast Planning Coordinating Council, which focus on
increasing reliability and economies among utilities in the region. As
representatives of a holding company system with subsidiaries in two ISOs, these
representatives will advocate policies designed to enhance the broader interests
of the new Energy East system as a whole. Also, representatives of NYSEG and
Central Maine Power will participate in joint Energy East task forces on
transmission planning, distribution planning and operations, emergency planning,
and system reliability, as part of the effort to enhance the benefits to, and
operations of, the new Energy East system as a whole.
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Finally, as discussed in detail in Item 3.C.3, Economies and Efficiencies
from the Merger, coordinated operations of NYSEG and CMP will result in
synergies resulting from joint management, development of joint operation and
maintenance systems, elimination of duplicative administration and general
services, and more efficient operations in the areas of support services,
customer service, purchasing and information services.
(ii) Coordination Through NYSEG's and Central Maine Power's Firm
Transmission Path
The Contract Path between these two transmission/distribution companies
reserves transmission capacity between the NYSEG and Central Maine Power
systems, thus insuring that these companies can coordinate their operations. As
explained above, NYSEG remains obligated, as a provider of last resort, to
procure supplies to serve its retail load. As a consequence, as subsidiaries of
the same holding company, Central Maine Power and NYSEG will engage in
coordinated efforts to identify power supplies available to the Central Maine
system and use the Contract Path to ship energy from these sources of supply end
users connected to the NYSEG system. In addition, the integrated transmission
system formed by the Central Maine Power/Contract Path/NYSEG system can be used
to transmit power to transmission systems connected to the NYSEG system for
ultimate delivery to other customers. The Contract Path thus serves to
coordinate and integrate Central Maine Power's and NYSEG's transmission systems
into a continuous transmission highway that operates as a single coordinated
system that can ship power from Maine to New York and beyond.
(iii) Coordination Resulting From NYSEG's and Central Maine
Power's Transmission Pricing Proposal
As discussed above, most owners of generating facilities in New York and
New England today do not own transmission or distribution. Under the terms of
the ISO-NE and NYISO transmission tariffs, these companies as well as companies
such as NYSEG and Central Maine Power (see the Contract Path, infra) can reserve
transmission capacity, including, if necessary, across the NEPOOL-NYPP
Interface, and thereby access markets anywhere within NEPOOL or NYPP. The NYISO
has become operational and has control over all transmission facilities in that
State. In New England, in accordance with existing NEPOOL policies, NEPOOL PTFs
are controlled by ISO-NE, while control over lower voltage and other non-NEPOOL
PTF facilities is retained by their utility owner. Access over non-PTF
transmission facilities is available pursuant to each individual utility's open
access transmission tariff. Central Maine Power, for example, provides service
over its non-PTF, consisting primarily of 34.5kV facilities, under its Local
OATT.
As part of their filing with the FERC under Section 203 of the Federal
Power Act, NYSEG and Central Maine Power have developed a proposal that will
further integrate their two transmission systems without disrupting the current
operations of the NYISO and ISO-NE or the carefully constructed ISO tariff
mechanisms that are already in place. To the extent that NYSEG and Central Maine
Power are able to assess charges for transactions that use both of their
transmission systems, the applicants have committed to eliminate the effects of
one of the two system charges, thereby reducing "pancaking" effects for those
transactions. Although control of all
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New England utilities' PTF, is under the operational control of ISO-NE, New
England utilities, including Central Maine Power, directly provide transmission
service over their non-transferred facilities, i.e., their non-PTF system, under
the terms of their individual OATTs. In the FERC application, the applicants
committed that, upon consummation of the CMP Group Merger, they would eliminate
the local point-to-point transmission charge under Central Maine Power's OATT in
situations where a generator could be assessed charges by both Central Maine
Power and NYSEG with respect to wheeling transactions over both the CMP and
NYSEG systems. A more detailed explanation of the proposal is contained in the
FERC application including the joint affidavit of Messrs. Garwood and McKinney.
See Exhibit D-1. Reducing the charges for these types of transmission
arrangements will increase the quantity of economic transactions between sellers
and purchasers with access to the NYSEG and Central Maine Power systems, thus
increasing the degree of integration between these companies. At present, more
than 5,000 MW of new generation capacity has been proposed for development in
Maine, and approximately 1,700 MW of new "merchant" plant capacity is currently
under construction in Maine. Reductions in the cost of transmitting the output
of these plants to markets in New York will inevitably result in greater sales
and increased integration between these two systems and increasing power flows
to and through the two systems. in the NYISO and ISO-NE, the strong interties,
active trading, and coordinated activities of these ISOs, the active
participation by their representatives in inter-ISO working groups, and their
participation in the NPCC
(iv) Coordination Based on Joint Planning by NYSEG and Central
Maine Power
In applying the integration standard, the Commission looks beyond simply
the coordination of the generation and transmission within a system to the
coordination of other activities.(72) In that regard, on August 9, 1999, ISO-NE
and NYISO entered into a memorandum of understanding ("MOU"), in which, based on
their recognition that better coordination among these ISOs "would result in
more robust, competitive markets and facilitate interregional monitoring." The
ISOs agreed to:
- Place a high priority on studying the feasibility of increasing
intertie capacity;
- Identify and address market interface issues to facilitate broader
competitive markets;
----------------------------
(72) See, e.g., General Public Utilities Corp., HCAR No. 13116 (Mar. 2,
1956) (coordination of maintenance and construction requirements); Middle South
Utilities, Inc., HCAR No. 11782 (March 20, 1953), petition to reopen denied,
HCAR No. 12978 (Sept. 13, 1955), rev'd sub nom., Louisiana Public Service
Comm'n. v. SEC, 235 F. 2d. 167 (5th Cir. 1956), rev'd,353 U.S. 368 (1957), reh'g
denied, 354 U.S. 928 (1957) (integration accomplished through an operating
committee which makes and keeps records and necessary reports, coordinates
construction programs and provides for all other interrelated operations
involved in the coordination of generation and transmission); North American
Company, HCAR No. 10320 (Dec. 28, 1950) (coordination of future power demand,
sharing of extensive experience with regard to engineering and other operating
problems, and furnishing of financial aid to the company being acquired are
elements of integration).
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<PAGE>
- Encourage market participants and others to contribute to the process
of improving competition and interregional coordination, and
- Require staff of the ISOs to report periodically to the ISO CEOs,
market participants and other constituencies on the status and
progress of their joint interregional coordination activities.
The ISOs have established four joint working groups to carry out the goals
of the MOU. The Operations Working Group will develop and implement procedures
and practices which maximize the efficiency of markets while protecting bulk
power system reliability and security. Among other things, this group will
implement uniform procedures for confirming transactions and schedules between
control areas and will establish a uniform procedure for administering
dispatchable contracts.
The Planning Working Group is charged with enhancing the overall
coordination of reliability planning among the three ISOs. It will establish
protocols for coordinating planning activities between the ISOs; establish
technical processes to strengthen coordination between the ISOs' planning and
assessment procedures; and investigate the feasibility of increasing inter-tie
capacity.
The Business Practices Working Group is charged with furthering the
seamless interfaces between the ISOs, minimizing the potential for contract
curtailments, and identifying business practices that promote market
effectiveness and efficiency. It will identify rules or practices that need to
be addressed to enhance seamless markets; develop guidelines to mitigate the
need for Transmission Load Relief by identifying and coordinating regional
redispatch opportunities, and identify and provide consistent information
required to support competitive markets. Finally, the Public Information Working
Group will seek to optimize the information available to market participants to
facilitate multi-regional trading and will focus on using information
technologies to create synergies within the ISOs' on-line trading systems.
Also, representatives of Central Maine Power and NYSEG presently serve as
members of working groups and committees that address, on a continuing basis,
the issues of coordination between ISO-NE and NYISO. Following the CMP Group
Merger, these representatives will continue to be engaged in these activities.
As representatives of subsidiaries of the same company, Energy East, NYSEG and
Central Maine Power will have an increased focus on the development and
implementation of inter-pool activities, such as enhanced inter-pool
transmission, "loop-flow" coordination, reserve sharing, maximization of
interpool trades, and other activities which enhance the benefits of economic
and efficient coordination for the Energy East electric companies.
(v) Coordination Through Joint Membership in Subregional
Reliability Coordinating Council
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<PAGE>
The functions and services performed by ISO-NE in New England and the NYISO
in New York are performed pursuant to the reliability criteria upon Control Area
Operators as prescribed by the Northeast Power Coordinating Council ("NPCC"), a
subregional reliability coordinating council of the North American Electric
Reliability Council ("NERC").(73) Both NYSEG and Central Maine Power are members
of the NPCC. The NPCC provides reliability coordination for five control areas
including New York, New England, Ontario, Quebec and the Maritime Provinces.
NPCC's reliability criteria permit the reliable and efficient operation of the
international, interconnected bulk power systems in the Northeastern North
America. Under the NPCC Membership Agreement, the NPCC establishes reliability
criteria, facilitates competitive markets, coordinates system planning, design,
and operations, and performs compliance assessment. The NPCC thus also plays a
role in coordinating the operations of ISO-NE and NYISO, and of their members,
including NYSEG and Central Maine Power; through their compliance with the
requirements of the NPCC, these ISOs and utilities coordinate their activities,
in compliance with the Act's coordination requirement.
(vi) Coordination Through Membership In ISOs and Through
Inter-ISO Coordination
Historically, coordination was performed by the holding company's
integration of the operations of its vertically-integrated utility subsidiaries.
However, in UNITIL, the Commission held that a third party, such as a tight
power pool, can provide the requisite coordination to support a finding that the
utility assets owned by separate companies form an integrated public utility
system.
The facts in UNITIL are analogous to those in the instant case. Prior to
its acquisition of Fitchburg Gas and Electric Light Company ("Fitchburg"),
UNITIL Corporation had three wholly owned public-utility subsidiary companies,
two of which, Concord Electric Co. ("Concord") and Exeter & Hampton Electric Co.
("Exeter") owned no generation and thus were transmission and distribution-only
utilities that sold retail power. The third subsidiary, UNITIL Power Corp.,
supplied wholesale power to the two transmission/distribution utility
subsidiaries. All of the subsidiary companies were members of NEPOOL. UNITIL
proposed to acquire the common stock of Fitchburg, which leased and operated a
generating facility and held other ownership entitlements to generating capacity
in NEPOOL.
UNITIL and Fitchburg were not connected through transmission lines that
they owned. Rather,
[T]he Companies are indirectly interconnected through
NEPOOL-designated transmission facilities ("PTF") and other
nonaffiliate transmission facilities pursuant to the NEPOOL Agreement
and other separate agreements with nonaffiliate companies.(74)
--------------------------
(73) Within NERC there are nine subregional reliability coordinating
councils. The NPCC, which was formed in 1966, is the third largest reliability
coordinating council.
(74) UNITIL Corp. at 1997 SEC LEXIS 1016, at *12. In 1998, in the Conectiv
case, based on UNITIL, the Commission found that Delmarva Power & Light Company
and Atlantic Energy, Inc. met the physical interconnection requirements of
Section 2(a)(29)(A) through their common membership in PJM Interconnection, LLC
("PJM"), which was a regional power pool and the first FERC-approved,
operational ISO. Conectiv, Inc. HCAR No. 35-26832 (Feb. 25, 1998 ("Conectiv").
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<PAGE>
The Commission noted that NEPOOL is a "tight" power pool, which consists of
electric systems "which coordinate the planning and/or operation of their bulk
power facilities for the purpose of achieving greater economy and reliability in
accordance with a contractual agreement that establishes each member's
responsibilities." The Commission stated that tight power pools "have
centralized dispatch of generating facilities, whereby energy and operating
reserves are interchanged among the participant systems and transferred over
facilities owned by the individual participants. Participants have contractual
requirements relating to generating capacity and operating reserves, together
with specific financial penalties if these requirements are not met. Sufficient
transmission capacity is made available to realize the full value of operating
and planning coordination."(75) The Commission further found that NYPP similarly
is a tight pool, in terms of its level of centralization and automation.(76)
As discussed above, NYSEG and Central Maine Power have transferred
scheduling and operational control over their high-voltage transmission
facilities to ISO-NE and NYISO, respectively. Like the tight power pools from
which these two ISOs evolved, NEPOOL and the NYPP, these two ISOs operate the
combined transmission and generation assets of their participants as a single
electrical system, insuring that generation is economically dispatched (through
market-based bidding) and that transmission capacity is provided to enable the
market to function. Moreover, as discussed above, based on the high degree of
interconnected operations between these two ISOs, the two ISOs coordinate their
scheduling and operations so as to enable "cross-border" transactions to occur
seamlessly. The high degree of integrated operations insures that the two
systems are operated as a coordinated system in which the flow of energy is
"centrally controlled and allocated, as need and economy direct," and in which
no generator, purchaser, or transmission owner operates in isolation.
In the AEP decision the Commission noted that the Act does not, by its
terms "specify the measures that are required for a finding of economic and
coordinated operations," and stated that the applicants' approach to
coordination:
reflects the extent to which actions of Congress, the FERC and the
states are shaping the contemporary electric industry. The unbundling
of generation and transmission and the new forms of central control
and coordination that are developing are the direct result of federal
and state efforts to promote a competitive energy market - a goal
consistent with the purpose of the Act to promote "economy of
management and operation" of public-utility companies."(77)
-----------------------------
(75) Id. at * 11. Through its membership in NEPOOL or the NYPP, a member
utility was permitted to avail itself of the bulk power facilities owned by each
of the other members and could receive the benefits of the coordinated planning
and operation of the pool's combined facilities. In exchange for accepting the
burdens of membership (including cost responsibility and the loss of complete
control of the utility's operations and planning authority), a member utility
could participate in an interconnected and coordinated system, in which all of
the properties are connected and operated in coordination. UNITIL, supra, at
*14.
(76) Id.
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<PAGE>
The instant case involves the combination of two utilities which, pursuant
to state directives, have divested their generation and which are participants
in contiguous ISO-controlled systems in which open-access transmission and
bid-based markets reflect the state-of-the-art in competitive energy markets. As
in AEP, the Commission should find that the companies' activities, within these
evolving structures, satisfy the Act's goals regarding the coordination
requirement of section 2(29)(A).
c. Single area or region
The Commission's third requirement for integration is also satisfied. The
Energy East electric system will operate in a single area or region. The
electric system will operate in upstate New York and central and southern Maine
in the northeast region of the United States. Although the service territories
of NYSEG and CMP do not touch or overlap, they are within the same general
region. The Commission has approved a number of similar combinations of electric
utilities.
The Commission has made clear that the "single area or region" requirement
does not mandate that a system's operations be confined to a small geographic
area or a single state. In considering size, the Commission has consistently78
found that utility systems spanning multiple states satisfy the single area or
region requirement of the Act.79
It should be noted that in the 1995 Report, the Division has stated that
the evaluation of the "single area or region" portion of the integration
requirement "should be made in light of the effect of technological advances on
the ability to transmit electric energy economically over longer distances, and
other developments in the industry, such as brokers and marketers, that affect
the concept of geographic integration."80 The 1995 Report also recommends that
primacy be given to "demonstrated economies and efficiencies to satisfy the
statutory integration requirements."81 As set forth in Item 3.C.4, the Merger
will result in numerous economies and efficiencies for the utilities and, in
turn, their customers. Additionally, as discussed above, given the high level of
interpool transactions and ready transmission access between NEPOOL and NYPP,
and the elimination of rate pancaking, the net effect is a regional northeast
U.S. grid, from both an operational and economic standpoint. By virtue of their
common memberships in the highly interactive NYPP and NEPOOL tight pools, and
their respective ISOs, NYSEG and Central Maine Power will be part of the same
region.
-------------------------
(77) AEP, slip op. at 50.
(78) See, e.g., WPS Resources Corp., HCAR No. 26922 (Sept. 28, 1998).
(79)
(80) 1995 Report at 73.
(81) 1995 Report at 73.
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<PAGE>
d. Not so large as to impair advantages of localized
management, efficient operation, and the effectiveness of
regulation
Finally, with respect to the Commission's fourth requirement, the Energy
East system will not be so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation.
Connecticut Energy will maintain its corporate headquarters in Bridgeport. See,
e.g., Entergy, supra, (approving power system covering portions of four states):
Southern Co., HCAR No. 24579 (Feb. 12, 1988); (approving power system covering
portions of four states); New Century Energies, Inc., HCAR No. 26748 (Aug. 1,
1997) (approving integrated system covering portions of five states).
Connecticut. After the Merger, Energy East will maintain its principal office in
Stamford, Connecticut, while CMP Group will continue to maintain its corporate
headquarters in Augusta, Maine, CTG Resources will continue to maintain its
corporate headquarters in Hartford, Connecticut, and Berkshire Energy will
continue to maintain its corporate headquarters in Pittsfield, Massachusetts.
The management of post-Merger Energy East will be drawn primarily from the
existing management of Energy East, Connecticut Energy, CMP Group, CTG
Resources, Berkshire Energy, and their subsidiaries.82 This structure will
preserve all the benefits of localized management that Energy East, CMP Group,
CTG Resources, and Berkshire Energy presently enjoy while simultaneously
allowing for the efficiencies and economies that will derive from the Merger.
Additionally, the post-Merger Energy East system will not impair the
effectiveness of state regulation. NYSEG, CMP Group's, CTG Resources', and
Berkshire Energy's utility subsidiaries will continue their separate existence
as before and their utility operations will remain subject to the same
regulatory authorities by which they are presently regulated, namely the NYPSC,
MPUC, DPUC, MDTE, the FERC and the NRC. Energy East, CMP Group and CTG
Resources, and Berkshire Energy are working closely with all agencies to the
extent necessary to ensure they are well informed about the Merger, and the
Merger will not be consummated unless all required regulatory approvals are
obtained. Pursuant to the recommendations contained in the 1995 Report this last
factor is significant, as the Division stated therein "where the affected state
and local regulators concur, the [Commission] should interpret the integration
standard flexibly to permit non-traditional systems if the standards of the Act
are otherwise met,"83 especially since the Merger will result in a system
similar to the traditional registered holding company system.
The electric operations of NYSEG and Central Maine Power are coordinated
through joint planning with, and for, NYISO and ISO-NE and joint distribution
activities. Given the close coordination of NYISO and ISO-NE, the area
encompassed should be considered a single area or region and given the
maintenance of corporate headquarters in Connecticut, Maine New York and
Massachusetts, and ongoing regulation by various state and federal authorities,
there is no impairment of localized management, efficient operation or effective
regulation.
---------------------------
(82) The Commission has found that an acquisition does not impair the
advantages of localized management where the new holding company's "management
[would be] drawn from the present management," (Centerior, supra) or where the
acquired company's management would remain substantially intact. (AEP, supra).
(83) 1995 Report at 74.
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Maine Electric Power Company
----------------------------
MEPCo owns and operates a 345-kV transmission interconnection between
Wiscasset, Maine and the Maine-New Brunswick international border at Orient,
Maine, where its lines connect with the portion of the interconnection
constructed in the province of New Brunswick, Canada, by The New Brunswick Power
Corporation. Central Maine Power owns 78.3% of MEPCo's common stock. The
remaining voting stock of MEPCo is owned by two other Maine electric utilities,
Bangor Hydro Electric Company and Maine Public Service Company. MEPCo provides
service over its facilities pursuant to a non-discriminatory FERC approved OATT.
Long-term transmission capacity on MEPCo's facilities is fully reserved. MEPCo
is directly connected to Central Maine Power and the two transmission systems
are fully integrated; as shown above, Central Maine Power will be a fully
integrated component of the new Energy East Electric System. Therefore, MEPCo
satisfies the Act's requirements for integration of electric utility systems.
NORVARCO
--------
NORVARCO holds a 50% general partnership interest in Chester SVC
Partnership, a general partnership which owns a static var compensator, in
Chester, Maine, adjacent to MEPCo's transmission interconnection. Operation of
the static var compensator helps to ensure the reliable interconnection between
NEPOOL and Canadian utilities (New Brunswick Power and Hydro-Quebec), by
providing voltage control on the New Brunswick transmission interconnection that
prevents the loss of the MEPCO line that might otherwise occur following the
loss of the Hydro-Quebec transmission interconnection. Following the CMP Group
Merger, NORVARCO would similarly function as a fully integrated component of the
new Energy East Electric System and thus will satisfy the Act's integration
standard.
4. Combination of Gas Utility Operations
a. Section 10(c)(1)
Energy East's acquisition of the gas operations of CMP Group, CTG Resources
and Berkshire Energy as well as Energy East's retention of NYSEG's, Connecticut
Energy's and Maine Gas Co.'s existing gas operations, is lawful under Section 8
of the Act and would not be detrimental to the carrying out of Section 11 of the
Act.
(i) Section 8
Section 8 of the Act provides that:
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single company of
the utility assets of an electric utility company and a gas utility
company serving substantially the same territory, it shall be unlawful
for a registered holding company, or any subsidiary company thereof
(1) to take any step, without the express approval of the state
commission of such state, which results in its having a direct or
indirect interest in an electric utility company and a gas company
serving substantially the same territory; or (2) if it already has any
such interest, to acquire, without the express approval of the state
commission, any direct or indirect interest in an electric utility
company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest.
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<PAGE>
A fair reading of this section indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both integrated electric utility systems and integrated gas utility
systems.
Energy East, as a combination company, is permissible pursuant to the terms
of Section 8 of the Act and is in the public interest. First, the combination of
electric and gas operations in Energy East is lawful under all applicable state
laws and regulations. The Merger will not result in any change in the provision
of gas and electric services of any so-called combination system within a given
state. Energy East, through NYSEG, will continue to provide electric and gas
service in the State of New York and CMP Group, through its utility
subsidiaries, will continue to provide electric service in the State of Maine.
Since New York and Maine both permit combination gas and electric utilities
serving the same area, the Merger does not raise any issue under Section 8.
Moreover, earlier concerns that a holding company such as Energy East would be
able to greatly emphasize one form of energy over the other based on its own
agenda have substantially receded because of the competitive nature of the
energy market, which requires utilities to meet customer demand for energy in
whatever form. Furthermore, state regulators will have sufficient control over,
and are unlikely to approve, a combination company that attempts to undertake
such practices. Indeed, with regard to retail sales of electric power, Energy
East and CMP Group have divested virtually all of their generation assets, and
Central Maine Power and NYSEG have transferred operational control of their
transmission facilities(84) to an ISO, effectively depriving the utilities (and
their holding companies) of both the ability and the incentive to favor one form
of energy over the other.
(ii) Section 11
Even if Section 8 of the Act were not interpreted as generally permitting
the combination of separate gas systems where such combination is approved and
accepted by the relevant state commissions, Sections 10 and 11 of the Act
contain additional provisions that permit the retention by Energy East of its
existing integrated gas system (consisting of the gas operations of NYSEG,
Connecticut Energy and Maine Gas Co.) and the acquisition of the gas operations
of CMP Group, CTG Resources and Berkshire Energy. Section 10(c)(1) prevents the
Commission from approving an acquisition that "would be detrimental to the
carrying out of the provisions of Section 11." Section 11(b)(1) of the Act
generally confines the utility properties of a registered holding company to a
"single integrated public-utility system," either gas or electric.
An exception to the requirement of a "single system" is provided in Section
11(b)(1) A-C (the "ABC clauses").(85) A registered holding company may own one
or more additional integrated public utility systems -- i.e., gas as well as
electric -- if each system meets the criteria set forth in these clauses. As
discussed below, post-Merger Energy East qualifies under the exception
established pursuant to the ABC clauses to retain the integrated gas system,
comprised of the gas operations of NYSEG, Connecticut Energy, Maine Gas Co., CTG
Resources and Berkshire Energy.
---------------------------
(84) As noted above, Central Maine Power has retained control of its
"non-PFT" facilities.
(85) See, generally, NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10,
1999).
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<PAGE>
b. "ABC" Clauses
Section 11(b)(1) of the Act permits a registered holding company to control
one or more additional integrated public utility systems if:
(A) each of such additional systems cannot be operated as an independent
system without the loss of substantial economies which can be secured
by the retention of control by such holding company of such system;
(B) all of such additional systems are located in one state, adjoining
states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of such
holding company is not so large (considering the state of the art and
the area or region affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation.
For the reasons set forth below, a divestiture order would be contrary to
the public interest and Energy East therefore requests that the Commission
authorize retention of Energy East's existing gas operations. Furthermore,
Energy East requests that the Commission authorize Energy East's acquisition of
the gas operations of CMP Group, CTG Resources, and Berkshire Energy.
In the 1995 Report, the Commission Staff recommended that the Commission
"liberalize its interpretation of the 'ABC' clauses."86 In its recent decisions
in New Century Energies, Inc.,87 Conectiv, Inc.,88 and WPL Holdings, Inc.,89 the
commission applied the ABC clauses to a proposed acquisition by a
to-be-registered holding company. The Commission reconsidered and rejected the
implicit requirement, in many of its earlier decisions, of evidence of a severe,
even crippling, effect of divestiture upon the separated system, stating that
this approach is outmoded in the contemporary utility industry, and explained
that as a result of the convergence of the gas and electric industries now under
way, separation of gas and electric businesses may cause the separated entities
to be weaker competitors than they would be together, and that this factor
operates to compound the loss of economies represented by increased costs. The
above-cited decisions support a favorable consideration by the Commission of the
instant application/declaration.
-------------------------------
(86) 1995 Report at 74.
(87) New Century Energies, Inc., HCAR No. 26749 (1997)
(88) Conectiv, Inc., HCAR No. 26832 (1998).
(89) WPL Holdings, Inc., HCAR NO. 26856 (1998).
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Historically, under its previous narrow interpretation of section
11(b)(1)(a), as a guide to determining whether lost economies are "substantial,"
the Commission has given consideration to ratios which measure the projected
loss of economies as a percentage of: (1) total gas operating revenues; (2)
total gas expense or "operating revenue deductions;" (3) gross gas income; and
(4) net gas income or net gas utility operating income. Although the Commission
has declined to draw a bright-line numerical test under section 11(b)(1)(a), it
has indicated that cost increases resulting in a 6.78 percent loss of operating
revenues, a 9.72 percent increase in operating revenue deductions, a 25.44
percent loss of gross income and a 42.46 percent loss of net income would afford
an "impressive basis for finding a loss of substantial economies."(90)
Here, the lost economies that would be experienced if the gas properties of
Energy East were to be operated on a stand-alone basis exceed these numbers,
without any increase in benefits to consumers from such divestiture. The
Companies have provided, at Exhibit J-1, an "Analysis of the Economic Impact of
a Divestiture of the Gas Operations of Energy East." As shown in Table I-1 of
that analysis, divestiture of the NYSEG segment of Energy East's gas business
into a stand-alone gas company would result in a 9.6 percent loss of operating
revenue, a 10.2 percent increase in operating revenue deductions; a 147.3
percent loss of gross income, and a 239.3 percent loss of net income. These
figures show that the lost economies associated with the divestiture of the
NYSEG segment of Energy East's gas business are substantial, even under a narrow
interpretation of Section 11(b)(1)(A).
The spin-off of CNGC, Southern Connecticut and Berkshire Gas following the
Merger would also result in lost economies. As was the case with regard to the
above-referenced analysis of the spin-off of NYSEG's gas business, lost
economies are typically analyzed with respect to the divestiture of an existing,
and hence operationally integrated, utility. In these cases, a significant
percentage of lost economies are associated with the replication of services
heretofore performed by the combination company, the loss of economies of scale
relating to physical plant and office space and purchasing, and other factors.
In contrast, when lost economies are assessed in the context of companies which,
at present, are operating as stand-alone entities, the lost economies equal the
foregone savings that would have been realized had the Merger taken place. In
the latter case, the lost economies, representing economies associated with the
Merger, are not the dramatic changes that result from separation of ongoing
businesses that have operated long-term on a combined basis, but rather, are
economies that could have been realized over time through the combination of
previously unconnected businesses. By definition, measurement of lost economies
associated with acquisition of currently stand-alone companies is more
speculative. Energy East's divestiture analysis therefore appropriately focuses
on the more concrete lost economies associated with divestiture of the gas
division of NYSEG.
In addition to the quantified economic losses associated with the
divestiture of the gas operations of CNGC, Southern Connecticut and Berkshire
Gas, divestiture would cause a significant, although difficult to quantify,
amount of damage to post-Merger Energy East's customers and would disrupt plans
of its regulators to create a fluid and efficient total energy marketplace, and
set of services. Likewise, divestiture would interfere with Energy East's
ability to compete in the marketplace. Such costs to customers involve the
additional expenses of doing business with two utilities instead of one (i.e.,
additional telephone ---- calls for service and billing inquiries, and cost of
providing access to meters and other facilities for two utilities) and costs
associated with making the entities supply information to shareholders and
publish the reports required by the Act. Similarly, increased costs would
involve additional duties for the staffs of the NYPSC, the DPUC, the MPUC and
the MDTE as a result of each agency dealing with one to two additional
utilities. These additional duties would largely be the result of duplicating
existing functions, such as separate requests for approval of financing and rate
case requests.
-------------------------
(90) Engineers Public Service Co., 12 S.E.C. 41, 59 (1942) (citation
omitted).
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<PAGE>
Energy East's competitive position in the market would also suffer from
divestiture of the Companies' gas operations because, as the utility industry
moves toward a complete energy services concept, competitive companies must be
able to offer customers a range of options to meet their energy needs.
Divestiture of gas operations would render Energy East unable to offer its
customers a significant and important option, namely gas services, and could
damage Energy East's long-term competitive potential. As the Commission
recognized in New Century Energies, Inc., in a competitive utility environment,
any loss of economies threatens a utility's competitive position, and even a
"small" loss of economies may render a utility vulnerable to significant erosion
of its competitive position.(91)
With respect to Clause B, as the Commission noted in WPL Holdings, Inc., et
al.,(92), "[c]lause contemplates the location of an additional system in the --
same state as the principal system or in adjoining states."(93) Here, Energy
East's principal system (the integrated electric system) will be located in New
York and Maine, and the "additional system" -- the integrated natural gas system
-- will be located in the same states of New York and Maine and in the adjoining
States of Connecticut and Massachusetts. Hence Clause B of the ABC clauses is
satisfied.
With respect to Clause C, the continued combination of the gas operations
under Energy East is not so large (considering the state of the art and the area
or region affected) as to impair the advantages of localized management. The gas
operations of the four Companies will continue to be the same as they are today
with some 579,800 customers in four states and confined to a relatively small
area.(94) As the Commission has recognized elsewhere, the determinative
consideration under this criterion is not size alone or size in the absolute
sense, either big or small, but size in relation to its effect, if any, on
localized management, efficient operation and effective regulation.(95)
Management currently is and will remain geographically close to gas operations,
thereby preserving the advantages of localized management. From the standpoint
of regulatory effectiveness, each gas operation is organized in a separate
corporation by regulatory jurisdiction thus facilitating state regulation.
Finally, as detailed above, the gas operations of the four Companies will
realize additional economies as a result of the Merger. Far from impairing the
advantages of efficient operation, the continued combination of the gas
operations under Energy East will facilitate and enhance the efficiency of gas
operations.
-----------------------------------
(91) New Century Energies, Inc., HCAR No. 26749, citing 1995 Report at 71.
See also WPL Holdings, Inc., HCAR No. 26856 (April 14, 1998), citing 1995 Report
at 71.
(92) HCAR No. 26856 (April 14, 1998).
(93) Id. at n.44.
(94) The relative sizes of the NYSEG, Southern Connecticut Gas, Maine Gas
Co., CNGC and and Berkshire Gas gas operations are shown on one of the maps
contained in Exhibit E-1.
(95) See, e.g., Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
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<PAGE>
In summary, the gas operations of Maine Gas Co., which are very limited in
size, currently operate as a single, integrated public utility system in central
Maine, and are currently operated jointly with Energy East pursuant to a Joint
Venture agreement. The Merger will not affect that integrated operation. The
addition of CNGC to the Energy East system in the State of Connecticut, where
Southern Connecticut Gas already serves 158,000 customers and which state
adjoins NYSEG's operations, will add 143,300 natural gas customers in
Connecticut to Energy East's existing base of over 244,000 customers. The
addition of Berkshire Gas to the Energy East system will add approximately
34,500 retail customers in western Massachusetts, which state adjoins both New
York and Connecticut. Such additions will bring about the benefits described
above. Energy East should therefore be permitted to retain its existing gas
operations (i.e., NYSEG, Southern Connecticut Gas, and Maine Gas Co.) while
being allowed to acquire and retain the natural gas utility assets of CMP Group,
CTG Resources and Berkshire Energy.
c. Gas utility integration standards (Section 10(b)(2))
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
[A] system consisting of one or more gas utility companies which are
so located and related that substantial economies may be effectuated
by being operated as a single coordinated system confined in its
operation to a single area or region, in one or more states, not so
large as to impair(considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
Unlike the definition of an "integrated electric utility system" in Section
2(a)(29)(A) of the Act, physical interconnection of the component parts of a gas
utility system is not required. Furthermore, the Commission has not
traditionally required that the pipeline facilities of an integrated system be
interconnected.(96)
The combination of Energy East's gas facilities -- NYSEG and Southern
Connecticut Gas -- with the gas facilities of CMP Group (Maine Gas Co.), CTG
Resources (CNGC) and Berkshire Energy (Berkshire Gas) will satisfy the
integration standard set forth in Section 2(a)(29)(B)of the Act for the
following reasons:
----------------------------
(96) See In the Matter of Pennzoil Company, HCAR No. 15963 (1968) (finding
an integrated system where respective facilities both connected with an
unaffiliated transmission company but not each other). See also In the Matter of
American Natural Gas Co., HCAR No. 15620 (1966) ("it is clear the integrated or
coordinated operations of a gas system under the Act may exist in the absence of
[physical] interconnection").
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<PAGE>
- All four gas facilities will share a "common source of supply" and
will be operated as a "single coordinated system." Indeed, pursuant to
a joint venture agreement, NYSEG's gas division and Maine Gas Co. are
already being jointly operated.
- All four gas facilities will be able to achieve "substantial
economies" in gas supply through the increased purchasing power and
gas supply coordination that will result from being part of the larger
combined gas system;
- As the two smallest of the combined gas operations, Maine Gas Co. and
Berkshire Gas and the customers of these two gas companies will
particularly benefit from these efficiencies, as well as from the
expertise of NYSEG, Southern Connecticut Gas and CNGC in such areas as
engineering, construction, training, meter service, testing, marketing
and gas transportation; and
- The area or region served by the four gas facilities will not be "so
large as to impair the advantages of localized management, efficient
operation, and the effectiveness of regulation." To the contrary, the
management of CMP Group's, CTG Resources' and Berkshire Energy's
utility subsidiaries will largely remain intact after the consummation
of the Merger, and the Maine Gas Co., CNGC and Berkshire Gas gas
systems will be independent of, but coordinated with (in order to
promote efficient operation), that of Energy East's current gas
system, and will be subject to effective local regulation by the MPUC,
DPUC and MDTE, respectively.
(i) Section 2(a)(29)(B): "substantial economies may be
effectuated by being operated as a single coordinated
system"
The four gas departments will be operated in a coordinated fashion as to
portfolio design and strategy, procurement, storage optimization, price risk
management and contract administration. Energy East, CMP Group, CTG Resources
and Berkshire Energy are in the process of identifying specific components of
their gas portfolios which, through joint management and coordination, will
enable the combined companies to exploit opportunities for savings in the
marketplace.(97)
With regard to natural gas service, Energy East, CMP Group, CTG Resources
and Berkshire Energy gas subsidiaries purchase significant amounts of gas from
the same supply basins in Western Canada and Texas/Louisiana, holding capacity
on the Tennessee, Iroquois and Algonquin pipelines, and contract for storage
services in Pennsylvania and New York. These common portfolio resources may
bring long-term benefits to the Companies' customers. Moreover, as the dynamics
and structure of the natural gas industry continue to change, the marketplace
will create even more options for the Companies to create value through
coordination of their respective gas supply portfolios. For example, demand and
pricing differentials now exist and will continue to occur and, through
coordinated management of their portfolios of physical and contractual assets,
the Companies will be better positioned to take advantage of changing market
conditions.
--------------------------
(97) See, e.g., Item 3.C.3 Economics and Efficiencies from the Merger
(Section 10(c)(2)) for information concerning Merger economies and efficiencies.
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<PAGE>
(ii) Section 2(a)(29)(B): "a single area or region in one or more
states"
After consummation of the Merger, Energy East's gas operations will be
located in a single region -- the northeastern United States. Although the
Energy East, CNGC, Maine Gas Co. and Berkshire Gas retail gas service areas will
be separated by a distance of several hundred miles and, in the case of Maine
Gas Co., are located in non-contiguous states, such factors by themselves are
not determinative. The Commission has made clear that systems separated by
intervening territories are in the same region because they procure gas from a
"common source of supply."(98)
Section 2(a)(29)(B) specifically contemplates that "gas utility companies
deriving natural gas from a common source of supply may be deemed to be included
in a single area or region." Moreover, in considering whether an "area or
region" is so large as to impair" the advantages of localized management,
efficient operation, and the effectiveness of regulation," the Commission must
consider the "state of the art" in the industry. Both the Commission's precedent
and the "state of the art" in the natural gas industry lead to the conclusion
that, with the CTG Resources, CMP Group and Berkshire Energy gas systems
included, Energy East's gas utility system will operate as a coordinated system
confined in its operation to a single area or region because all three systems
will derive almost all of their natural gas from a common source of supply.
Neither the Act, the Commission's orders and rulings, nor the Commission
staff's no-action letters provide a definition as to what constitutes a "common
source of supply." Historically, in determining whether two gas companies share
a "common source of supply," the Commission has looked to such issues as from
whom the distribution companies within the system receive a significant portion
of their gas supply.(99) The Commission has also considered both purchases of
gas from a common pipeline.(100) as well as from different pipelines when the
gas originates from the same gas field.(94) Since the time of most of these
decisions, the state of the art in the industry has developed to allow efficient
operation of systems whose gas supplies derive from many sources.
--------------------------
(98) See, e.g., NIPSCO, HCAR No. 26975 (Feb. 10, 1999) (authorizing holding
company with operating company in Indiana to acquire a gas utility in
Massachusetts where the gas utilities in each state received significant amounts
of gas from the same supply basin)
(99) See, e.g., In the Matter of Philadelphia Company and Standard Power
and Light Co., HCAR No. 8242 (1948) ("most of the gas used by these companies in
their operations is obtained from common sources of supply"); Consolidated
Natural Gas Co., HCAR No. 25040 (1990) (finding integrated system where each
company derived natural gas from two transmission companies, although one such
company also received gas from other sources).
(100) In the Matter of the North American Co., HCAR No. 10320 (1950)
(finding Panhandle Eastern pipeline to be a common source of supply). (94) See
In the Matter of Central Power Company and Northwestern Public Service Co., HCAR
No. 2471 (1941), in which the Commission declared an integrated system to exist
where two entities purchase from different pipeline companies since "both
pipelines run out of the Otis field, side by side, and are interconnected at
various points in their transmission system; and that they are within two miles
of each other at Kearney."
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<PAGE>
Following consummation of the Merger, all four gas facilities will derive
substantially all of their gas from a common source of supply under Section
2(a)(29)(B). NYSEG receives approximately 63 percent of its gas supply from the
Texas and Louisiana Basins and approximately 28.5 percent of its gas supply from
the Western Canadian Sedimentary Basin, which together account for over 91
percent of NYSEG's gas supply. In addition, over 36 percent of NYSEG's total
transportation capacity requirements are carried on the Tennessee, Iroquois,
Algonquin and Texas Eastern pipelines. Southern Connecticut Gas receives
approximately 64 percent of its gas supply from the Texas and Louisiana Basins
and approximately 35 percent of its gas supply from the Western Canadian
Sedimentary Basin, which together account for 99 percent of Southern Connecticut
Gas's gas supply. In addition, nearly all of Southern Connecticut Gas's total
transportation capacity requirements from each of the basins mentioned above are
carried on the Tennessee, Iroquois, Algonquin and Texas Eastern pipelines. With
regard to CTG Resources' gas subsidiary, CNGC, approximately 73 percent of
CNGC's gas supply is received from the Texas and Louisiana basins, and
approximately 26 percent of its gas supply is received from the Western Canadian
Sedimentary Basin, which together account for over 99 percent of CNGC's gas
supply. Approximately 98 percent of CNGC's total transportation capacity
requirements are carried on the Tennessee, Iroquois, Algonquin, and Texas
Eastern pipelines. With regard to Maine Gas Co., approximately 100 percent of
Maine Gas Co.'s gas supply is currently received from the Portland Natural Gas
Transmission System ("PNGTS") pipeline, which is interconnected with the
TransCanada Pipeline, carrying Western Canadian Sedimentary Basin gas. When
fully developed, Maine Gas Co. will continue to receive at least 50 percent of
its gas supply from the Western Canadian Sedimentary Basin through the
TransCanada Pipeline and the PNGTS pipeline. With regard to Berkshire Energy's
gas subsidiary, Berkshire Gas, approximately 92 percent of Berkshire Gas' gas
supply is received from the Texas and Louisiana basins, and approximately 3
percent of its gas supply is received from the Western Canadian Sedimentary
Basin, which together account for 95 percent of Berkshire Gas' gas supply. 100
percent of Berkshire Gas' total transportation capacity requirements are carried
on the Tennessee pipeline.
In addition, Sable Island gas supply from offshore Nova Scotia via the
newly constructed Maritimes & Northeast Pipeline will be available to Maine Gas
Co., NYSEG and Berkshire Gas via the Tennessee Gas Pipeline, which connects to
the Maritimes & Northeast Pipeline at Dracut, Massachusetts to provide service
to New England, and to Southern Connecticut Gas and CNGC via the Algonquin Gas
Pipeline, which connects to the Maritimes & Northeast Pipeline at Salem,
Massachusetts to provide service to Massachusetts, New York and Connecticut. It
is anticipated that, as Sable Island is developed, the NYSEG, Southern
Connecticut Gas, CNGC, Maine Gas Co. and Berkshire Gas gas facilities will draw
a growing percentage of supplies from this important new supply basin.
Purchases from and through a common pipeline, as well as purchases from a
common gas field, have been found to satisfy the "common source of supply"
requirement of Section 2(a)(29)(B) of the Act.(101) There is thus substantial
evidence that NYSEG, Southern Connecticut Gas, CNGC, Maine Gas Co. and Berkshire
Gas will share a common source of supply for a significant amount of their
respective gas supplies.
------------------------
(101) See, e.g., NIPSCO, supra.
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<PAGE>
Any determination of the appropriate size of the area or region calls for
consideration of the "state of the art" in the gas industry. In this regard, the
"state of the art" in the gas industry continues to evolve and change, primarily
as a result of decontrol of wellhead prices, the continuing development of an
integrated national gas transportation network, the construction of new pipeline
capacity, the emergence of marketers and brokers, and the "un-bundling" of the
commodity and transportation functions of pipelines and local distribution
companies in response to various FERC and state initiatives.(102) Of particular
importance has been the development, evolution and operation of market centers,
trading hubs, and pooling areas. Today, trading activity conducted at market
centers and trading hubs play an increasingly vital role in the overall
management of the assets in a gas portfolio (supply, transportation and
storage).
As a result of these developments, coordination of the operations of two
non-contiguous gas companies is no longer dependent solely upon having
contractual capacity on the same interstate pipelines, so long as the two
companies both have access to one or more common market centers or trading hubs.
Importantly, these developments in the state of the art in the gas industry now
allow gas distribution companies operating in a much larger area or region of
the country to realize operating economies and efficiencies from coordinated
operation that were once thought to be achievable only by contiguous or nearly
contiguous gas companies supplied by the same interstate pipelines.(103)
As indicated above, because NYSEG, Southern Connecticut Gas, CNGC, Maine
Gas Co. and Berkshire Gas will potentially share access through their respective
pipeline transporters to industry-recognized market and supply area hubs, they
will have the enhanced ability to physically coordinate and manage their
portfolios of supply, transportation and storage and to support, if necessary,
the underlying physical side of various financial derivatives as a means of
managing price volatility.
(iii)Section 2(a)(29)(B): System size from perspective of "the
advantages of local management, efficient operation and the
effectiveness of regulation."
The integrated gas system to be formed by the combination of NYSEG,
Southern Connecticut Gas, CNGC, Maine Gas Co. and Berkshire Gas will not be "so
large as to impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation and the
effectiveness of regulation." Although the CNGC, Maine Gas Co. and Berkshire Gas
gas supply personnel will report to an officer of Energy East, and the Maine Gas
Co. supply personnel will report to an officer of Enterprises, CNGC will retain
gas supply personnel in Connecticut, Maine Gas Co. will retain gas supply
personnel in Maine, and Berkshire Gas will retain gas supply personnel in
Massachusetts. Further, the affiliation of these four gas companies is expected
to result in economies and efficiencies, as discussed in more detail below.
Finally, the Merger will not have an adverse effect upon effective
regulation. Following the Merger, each utility will remain subject to regulation
by its current state regulator(s). Accordingly, the Commission should find that
the size requirements of Section 2(a)(29)(B) of the Act are satisfied.
------------------------
(102) See, e.g., NIPSCO; 1995 Report at 29-31.
(103) See, e.g., New Century Energies, Inc., supra.
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<PAGE>
For all of the above reasons, the combined gas operations of Energy East
(including Southern Connecticut Gas), CTG Resources, CMP Group and Berkshire
Energy will constitute a single integrated gas utility system.
5. Economies and Efficiencies from the Merger (Section 10(c)(2))
As discussed above, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward the
economical and efficient development of an integrated public utility system.
Through the Merger, the Companies will create an entity that is well situated to
compete effectively in an increasingly active market.
In total, the Companies expect to achieve total cost savings resulting from
the Merger, including the merger with Connecticut Energy, of approximately $550
million over the first ten years. The efficiencies and economies brought about
through the Merger, and described in more detail below, thereby serve the public
interest, as required by Section 10(c)(2) of the Act.
Although many of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met.(104) Furthermore,
Section 10(c)(2) of the Act does not require that the future savings be large in
relation to the gross revenues of the companies involved.(105) In addition, some
potential benefits cannot be precisely estimated; nevertheless they should be
considered.(106) The Companies believe that the Merger will provide significant
financial and organizational advantages and, as a result, the potential for
substantial economies and efficiencies should be found to meet the standard of
Section 10(c)(2) of the Act.
With respect to the CTG Resources Merger, the Applicants have identified
the following areas in which the merged Company may achieve savings: growth
margin, gas supply, labor, administrative and general expenses, and non-fuel
purchasing economies. Applicants estimate total cost savings resulting from the
CTG Resources Merger at approximately $149.8 million over the first ten years.
(This figure has been adjusted to reflect $2.3 million of costs that are
expected to be incurred to achieve these savings.) Although the recently
completed merger with Connecticut Energy is not the subject of this
Application/Declaration, it should be noted that, as a result of economies of
scale, the combined synergies of the CTG Resources Merger and the Connecticut
Energy merger are expected to exceed the sum of the synergies that could be
obtained by the individual mergers, particularly in the areas of gas supply and
labor. On an aggregate basis, these incremental synergies are expected to result
in an additional cost savings of $73.4 million over a ten-year period. This
figure reflects $1.0 million of costs that are expected to be incurred to
achieve these incremental savings. Applicants estimate total cost savings
resulting from the Connecticut Energy merger on a stand-alone basis at
approximately $119.9 million over the first ten years. (This figure has been
adjusted to reflect $6.1 million of costs that are expected to be incurred to
achieve these savings.)
----------------------------
(104) See American Electric Power Co., 46 SEC 1299, 1320-1321 (1978).
(105) See American Natural Gas Co.,43 S.E.C. 203 at 208 (1966).
(106) "[S]pecific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable." Centerior Energy Corp., HCAR No. 24073 (April
29, 1986) (citation omitted); see also In Re Consolidated Edison, Inc., HCAR No.
27021 (May 13, 1999); National Grid Group PLC, HCAR No. 27154 (March 15, 2000).
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<PAGE>
Parties to the CMP Group Merger and the Berkshire Energy Merger have
identified areas where joint management, coordination and/or consolidation
should enable the companies to achieve synergies. As stated previously,
synergies would result from elimination of duplicative administration and
general services, including legal, accounting, finance, insurance, benefits
administration, and shareholder services. In addition, synergies are expected to
result from more efficient operations in the areas of support services, customer
service, purchasing and information services. Specifically, the parties continue
to believe that synergies equivalent to 5% of the combined non-fuel operating
and maintenance expenses of Central Maine Power and NYSEG will result from the
CMP Group Merger. These synergies are estimated to be permanent annual synergies
of $25-30 million, or $250-300 million over a ten-year period. The Parties
estimate additional cost savings resulting from the Berkshire Energy Merger to
be approximately $25-30 million over a ten-year period.
Several areas of synergies have been estimated with respect to the CTG
Resources Merger:
(a) Growth Margin - CNGC has approximately 66,000 potential growth
customers who are either existing low-use customers or non-use
customers located along CNGC's existing distribution system. The
Applicants will develop a three year customer growth program, aimed at
acquiring approximately 1,720 new heating customers per year.
Applicants estimate that benefits in this area, in the form of
additional margins resulting from the Merger, over a ten year period
will amount to $26.1 million.
(b) Gas Supply - The Applicants anticipate that the bundling of natural
gas purchases in the form of larger quantities or volumes and the
opportunity to blend the loads and storage utilization of the NYSEG
and CNGC systems should lower commodity costs and the total peaking
capacity requirements of these two companies. Both companies are
projected to benefit from combined utilization of supply hedging
tools. Supply costs can also be reduced by introducing certain methods
in CNGC's system leak repair programs. Applicants estimate that
savings in this area over a ten year period will amount to $26.3
million. In addition, the incremental synergies in this area resulting
from economies of scale as a result of the Connecticut Energy merger
is estimated at $8.2 million.
(c) Labor and Associated Overhead - Over a period of years, enhanced
employee attrition will create the opportunity to adjust workforce
levels and eliminate redundancies associated with corporate,
administrative, field and technical support functions. These areas
include legal services, finance, sales, support services, delivery
service, customer service, accounting, human resources and information
services. Applicants estimate that savings in these areas over a ten
year period will amount to $82.1 million. In addition, the incremental
synergies in these areas resulting from economies of scale as a result
of the Connecticut Energy merger is estimated at $29 million.
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<PAGE>
(d) Administrative and General Expenses - Reductions in non-labor programs
and expenses, resulting from economies of scale and cost avoidance
have been identified: administrative and general overhead; office
supplies; insurance; shareholder services; outside legal and
professional services; and directors' fees. Applicants estimate that
savings in these areas over a ten year period will amount to $14.3
million.
(e) Purchasing Economies (non-fuel) - Aggregation of materials and supply
volumes and telecommunication voice and data service contracts should
increase purchasing power and contribute to lower costs for these
items. Applicants estimate that savings in these areas over a ten year
period will amount to $3.3 million.
The geographical locations of the respective electric energy service
territories of NYSEG and Central Maine Power, which operate in contiguous ISOs,
provide an opportunity to integrate their electric utility operations
efficiently. The combined system can be operated as a single, larger cohesive
system, with virtually no modification needed with respect to existing
transmission facilities. As the structure of the electric utility industry
continues to evolve, the marketplace will create additional opportunities for
the Companies to create value through integrated operations and increased
efficiencies.
The Companies believe that their combination offers significant strategic
and financial benefits to each company and shareholders, as well as to each
company's respective employees and customers. These benefits include, among
others: (i) maintenance of competitive rates that will improve the combined
entity's ability to meet the challenges of the increasingly competitive
environment in both the electric and gas utility industry, (ii) over time a
reduction in operating costs and expenditures resulting from integration of
corporate and administrative functions, including limiting duplicative capital
expenditures for administrative and customer service programs and information
systems, and savings in areas such as outside legal, audit and consulting fees,
(iii) greater purchasing power for gas supply and for items such as
transportation services and operational goods and services, (iv) enhanced
opportunities for expansion into non-utility businesses, (v) expanded management
resources and ability to select leadership from a larger and more diverse
management pool, and (vi) a financially stronger company that, through the use
of the combined capital, management, and technical expertise of each company,
will be able to achieve greater financial stability and strength and greater
opportunities for earnings growth, reduction of operating costs, efficiencies of
operation, better use of facilities for the benefit of customers, improved
ability to use new technologies, greater retail and industrial sales diversity,
improved capability to compete in wholesale power markets and joint management
and optimization of their respective portfolios of gas supply, transportation
and storage assets. The Applicants believe that over time the Merger will
generate efficiencies and economies which would not be available to the separate
companies absent the Merger and which will enable post-Merger Energy East to
continue to be a low-cost competitor in the marketplace.
In addition to the benefits described above, there are other benefits
which, while presently difficult to quantify, are nonetheless substantial. These
other benefits include:
- Increased Scale-- As competition intensifies within the gas and
electric industry, the Companies believe scale will be one dimension
that will contribute to overall business success. Scale has importance
in many areas, including utility operations, product development,
advertising and corporate services. The Merger is expected to improve
the profitability of the combined company by adding approximately
874,800 customers to Energy East's existing customer base and
providing increased economies of scale in all of these areas.
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<PAGE>
- Competitive Prices and Services-- Sales to industrial, large
commercial and wholesale customers are considered to be at greatest
near-term risk as a result of increased competition in the electric
utility industry. The Merger will enable Energy East to meet the
challenges of the increased competition and will create operating
efficiencies through which Energy East will be able to provide more
competitive prices to customers.
- More Balanced Customer Base-- The Merger will create a larger company
with a more diverse customer base. This should reduce post-Merger
Energy East's exposure to adverse changes in any sector's economic and
competitive conditions.
- Financial Flexibility-- By creating a company with a larger market
capitalization than had been previously experienced by any of the
Companies considered on an individual basis, the Merger should improve
Energy East's overall credit quality and liquidity of the securities
and therefore improve Energy East's ability to fund continued growth.
- Regional Platform for Growth-- The combination of Energy East, CMP
Group, CTG Resources, and Berkshire Energy will create a regional
platform for growth in the northeastern United States. Energy East
plans to expand relationships with existing customers and to develop
relationships with new customers in the region. Energy East will use
its combined distribution channels to market a portfolio of
energy-related products throughout the region and will follow regional
relationships to other geographical areas. For the above stated
reasons, the Commission should find that the integration criteria are
satisfied and approve the proposed Merger.
6. Retention of Non-Utility Businesses
As a result of the Merger, the non-utility businesses and interests of CMP
Group, CTG Resources and Berkshire Energy will become businesses and interests
of Energy East. Additionally, as a result of the Merger, non-utility assets held
by Energy East, currently an exempt holding company, will become businesses and
interests of post-Merger Energy East, a registered holding company. The total
assets of all non-utility investments of Energy East, CMP Group, CTG Resources
and Berkshire Energy as of September 30, 1999 totaled approximately $280
million. Energy East also had $800 million of cash and temporary investment
proceeds from the sale of its coal-fired generation assets, that will be used to
complete the mergers and continued common stock repurchases.
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Corporate charts showing the subsidiaries, including non-utility
subsidiaries, of Energy East, CMP Group, CTG Resources and Berkshire Energy are
filed as Exhibits E-2 through E-4a. A corporate chart showing the projected
arrangement of these subsidiaries under post-Merger Energy East immediately
after consummation of the Merger is filed as Exhibit E-5.
Section 11(b)(1) generally limits a registered holding company to retain
"such other businesses as are reasonably incidental, or economically necessary
or appropriate, to the operations of [an] integrated public utility system."
Although the Commission has traditionally interpreted this provision to require
an operating or "functional" relationship between the non-utility activity and
the system's core non-utility business, in its recent release promulgating Rule
58,(107) the Commission stated that it "has sought to respond to developments in
the industry by expanding its concept of a functional relationship." The
Commission added "that various considerations, including developments in the
industry, the Commission's familiarity with the particular non-utility
activities at issue, the absence of significant risks inherent in the particular
venture, the specific protections provided for consumers and the absence of
objections by the relevant state regulators, made it unnecessary to adhere
rigidly to the types of administrative measures" used in the past. Furthermore,
in the 1995 Report, the SEC Staff recommended that the Commission replace the
use of bright-line limitations with a more flexible standard that would take
into account the risks inherent in the particular venture and the specific
protections provided for consumers.(108) The non-utility business interests that
post-Merger Energy East will directly or indirectly hold all meet the
Commission's standards for retention.
The existing direct and indirect non-utility business interests of Energy
East, CMP Group, CTG Resources and Berkshire Energy fall within the ambit of
newly adopted Rule 58 or are "exempt telecommunications companies" within the
meaning of Section 34 of the Act. Exhibit H-5, filed herewith, contains a
comprehensive listing of all non-utility subsidiaries that Energy East will hold
directly or indirectly and sets forth the basis for retention by Energy East
after the Merger.
Consistent with the Commission's recent decisions in New Century Energies,
Inc.,(109) and Conectiv, Inc.,(110) investments made by Energy East, CMP Group,
CTG Resources, and Berkshire Energy prior to the effective date of the Merger
should not count in the calculation of the 15 percent limit for purposes of Rule
58. All additional investments made by Energy East in energy-related companies
subsequent to the effective date of the Merger would, of course, be included in
the 15 percent test.
D. SECTION 10(F)
Section 10(f) provides that:
-----------------------------
(107) Exemption of Acquisition by Registered Public-Utility Holding
Companies of Securities of Non-utility Companies Engaged in Certain
Energy-related and Gas-related Activities, HCAR No. 26667 (Feb. 14, 1997) ("Rule
58 Release").
(108) 1995 Report at 81-87, 91-92.
(109) New Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997).
(110) Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
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The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described in Item 4 of this Application/Declaration, and as evidenced by
the applications before the DPUC and MPUC relating to the Merger, Energy East
intends to comply with all applicable state laws related to the proposed
transaction. MDTE approval of the Berkshire Energy Merger is not required under
Massachusetts law.
ITEM 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that Energy East
has obtained or expects to obtain in connection with the Merger.
A. ANTITRUST
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Merger) may not be consummated until certain
information has been submitted to the DOJ and FTC and the specified HSR Act
waiting period requirements have been satisfied. Energy East, CTG Resources, CMP
Group and Berkshire Energy submitted Notification and Report Forms and all
required information to the DOJ and FTC. The last of the applicable HSR Act
waiting periods expired March 8, 2000.
If the Merger is not consummated within twelve months after the expiration
or earlier termination of the initial HSR Act waiting period, Energy East, CTG
Resources, CMP Group and Berkshire Energy would be required to submit new
information to the DOJ and the FTC, and a new HSR Act waiting period would have
to expire or be earlier terminated before the Merger could be consummated.
B. FEDERAL POWER ACT
Section 203 of the Federal Power Act as amended provides that no public
utility shall sell or otherwise dispose of its jurisdictional facilities or
directly or indirectly merge or consolidate such facilities with those of any
other person or acquire any security of any other public utility, without first
having obtained authorization from the FERC. Energy East and CMP Group submitted
a joint application for approval of the CMP Group Merger to the FERC on October
1, 1999.(111) See Exhibit D-1. On March 29, 2000, the FERC ruled that the CMP
Group Merger will not significantly affect competition in any relevant market
and approved the application. The FERC's order is attached hereto at Exhibit
D-2.
--------------------------------
(111) As noted earlier, Energy East and CMP Group intend to amend their
FERC application to include an analysis of the vertical market power effects of
the Berkshire Energy acquisition.
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C. ATOMIC ENERGY ACT
Central Maine Power holds an NRC non-operating license with respect to its
2.5% ownership interest in the Millstone No. 3 nuclear unit in Waterford,
Connecticut. The Atomic Energy Act currently provides that a license may not be
transferred or in any manner disposed of, directly or indirectly, to any person
unless the NRC finds that such transfer is in accordance with the Atomic Energy
Act and consents to the transfer. Pursuant to the Atomic Energy Act, Central
Maine Power submitted an application on October 6, 1999 for the consent of the
NRC. See Exhibit D-9. The NRC approved the application on February 4, 2000. See
Exhibit D-10.
D. TELECOMMUNICATIONS
Central Maine Power and MEPCo, public utility subsidiaries of CMP Group,
have received FCC approval for the upstream transfers of control and radio
microwave licenses. See Exhibit D-14 attached hereto. The transfer of control
applications for Central Maine Power and MEPCo were previously filed as Exhibit
D-11. CNGC, the public utility subsidiary of CTG Resources, has received FCC
approval for the upstream CNGC transfers of control of certain radio and
microwave licenses. See Exhibit D-14 attached hereto. The transfer of control
application for CNGC was previously filed as Exhibit D-12. Berkshire Gas, public
utility subsidiary of Berkshire Energy, has received FCC approval for the
upstream transfers of control of certain radio and microwave licenses. See
Exhibit D-14 attached hereto. The transfer of control application for Berkshire
Gas was previously filed as Exhibit D-13.
E. STATE PUBLIC UTILITY REGULATION
Connecticut: The DPUC has jurisdiction over CNGC and over Central Maine
Power. CNGC is a public service company under Connecticut law because it is a
gas company distributing gas for heat or power within Connecticut. Central Maine
Power is a "public service company" under Connecticut law as a result of its 2.5
percent Millstone Unit No. 3 ownership interest. Energy East and CTG Resources
have filed a joint application with the DPUC. See Exhibit D-7. Central Maine
Power filed an application with the DPUC, a copy of which was filed as Exhibit
D-5. DPUC approvals of both applications have been obtained. See Exhibits D-6
and D-8.
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, was previously filed 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.(112) 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.(113)
-------------------------------
(112) Order Approving Request for Approval of Reorganization and Affiliated
Interest Transactions, MPUC Docket No. 99-411 at 26 (Jan. 4, 2000).
(113) Id.
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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
fulfillment of the MPUC's condition of approval.
Massachusetts: The MDTE has jurisdiction over Berkshire Gas which is a
public utility company under Massachusetts law because it is a natural gas
company distributing natural gas within Massachusetts. However, the MDTE does
not have jurisdiction over the merger between Energy East and Berkshire Energy,
but would have jurisdiction with respect to any rate plan seeking recovery of
merger-related costs from Berkshire Gas ratepayers.
ITEM 5. PROCEDURE
The Commission is respectfully requested to issue and publish the requisite
notice under Rule 23 with respect to the filing of this Application as soon as
possible.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Merger. The Division of Investment Management may assist in the preparation of
the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A-1 Restated Certificate of Incorporation of Energy East filed in the
Office of the Secretary of State of the State of New York on April 23,
1998 (filed as Exhibit 4.1 to Energy East's Post-effective Amendment
No. 1 to Registration No. 033-54155, and incorporated herein by
reference).
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A-2 Certificate of Amendment of the Certificate of Incorporation of Energy
East filed in the Office of the Secretary of State of the State of New
York on April 26, 1999 (filed as Exhibit 3.3 to Energy East's Form
10-Q for the quarter ended March 31, 1999, File No. 1-14766 and
incorporated herein by reference).
A-3 By-Laws of Energy East as amended April 23, 1999, (filed as Exhibit
3.4 to Energy East's Form 10-Q for the quarter ended March 31, 1999,
File No. 1-14766, and incorporated herein by reference).
A-4 Amended and Restated Certificate of Incorporation of CTG Resources
(filed as Exhibit 3.2 to the Registration Statement on Form S-4
Registration No. 333-16297 and incorporated herein by reference).
A-5 Restated Certificate and Articles of Incorporation of CMP Group (filed
in the office of the Secretary of State of the State of Maine on June
11, 1999, -- File No. 199811590D, and previously filed on Form S-E).
A-6 Declaration of Trust of Berkshire Energy Resources (filed as Exhibit
3.1.1, to Registration No. 333-46799 and incorporated herein by
reference).
B-1 Agreement and Plan of Merger between Energy East and CTG Resources
(filed as Exhibit 2.1 to the Registration Statement on Form S-4,
Registration No. 333-85333 and incorporated herein by reference).
B-2 Agreement and Plan of Merger between Energy East and CMP Group (filed
as Appendix A to CMP Group's definitive Proxy Statement dated August
30, 1999, filed with the Commission on September 1, 1999, and
incorporated herein by reference).
B-3 Agreement and Plan of Merger between Energy East and Berkshire Energy
(previously filed on Form SE).
C-1 Registration Statement of Energy East on Form S-4, including Proxy
Statement of CTG Resources and Prospectus of Energy East (filed on
August 16, 1999, Registration No. 333-85333 and incorporated herein by
reference).
C-2 Definitive Proxy Statement of CMP Group dated August 30, 1999 (filed
with the Commission on September 1, 1999 and incorporated herein by
reference).
C-3 Definitive Proxy Statement of Berkshire Energy Resources (filed with
the Commission on January 12, 2000 and incorporated herein by
reference).
D-1 Application of Energy East Corporation and CMP Group to the FERC under
Section 203 of the FPA, Docket No. EC00-001, dated October 1, 1999
(previously filed).
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D-2 Order of the FERC in Docket No. EC00-001 (filed herewith).
D-3 Application of CMP Group, Inc. to the MPUC, Docket No. 99-411
(previously filed).
D-4 MPUC Order in Docket No. 99-411 (previously filed).
D-5 Application of CMP Group, Inc. to DPUC (previously filed).
D-6 DPUC Order (previously filed).
D-7 Joint Application of Energy East and CTG Resources to the DPUC, Docket
No. 99-08 (previously filed).
D-8 DPUC Order in Docket No. 99-08 (previously filed).
D-9 Application of Central Maine Power to the NRC (previously filed).
D-10 NRC Order (previously filed).
D-11 Applications of Central Maine Power and MEPCo (public utility
subsidiaries of CMP Group) to the FCC for indirect transfer of radio
and microwave licenses relating to certain communications equipment.
(previously filed on Form S-E.)
D-12 Application of CNGC (CTG Resources' public utility subsidiary) to the
FCC for transfer of radio and microwave licenses relating to certain
communications equipment (previously filed on Form S-E).
D-13 Application of Berkshire Gas (public utility subsidiary of Berkshire
Energy Resources) to the FCC for transfer of radio and microwave
licenses relating to certain communications equipment (previously
filed on Form S-E).
D-14 FCC Order(s) relating to transfer of radio and microwave licenses
(orders approving license transfers for Central Maine Power and MEPCo
were previously filed on Form S-E).
D-14aFCC Order(s) relating to transfer of radio and microwave licenses
(orders approving license transfers for CNGC and Berkshire Gas are
filed herewith).
E-1 Maps for Energy East, CMP Group, CTG Resources, and Berkshire Energy:
Franchise Areas of Major Utilities in the Northeast (previously filed
on Form S-E); Energy East Electric Franchise Areas (post-merger)
(previously filed on Form S-E); and Energy East Natural Gas Franchise
Areas (post-Merger) (previously filed on Form S-E).
E-2 Energy East corporate chart (previously filed on Form S-E).
E-3 CMP Group corporate chart. (previously filed on Form S-E.)
E-4 CTG Resources corporate chart. (previously filed on Form S-E.)
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E-4a Berkshire Energy corporate chart (previously filed on Form S-E).
E-5 Energy East (post-Merger) corporate chart. (previously filed on Form
S-E.)
F-1 Preliminary opinion of Huber Lawrence & Abell, counsel to Energy East
(filed herewith).
F-2 Past-tense opinion of Huber Lawrence & Abell, counsel to Energy East
(to be filed by amendment).
G-1 Opinion of Warburg Dillon Read (filed as Appendix B to CMP Group's
Definitive Proxy Statement dated August 30, 1999, and incorporated
herein by reference).
G-2 Opinion of PaineWebber Incorporated (filed as Appendix B to Proxy
Statement/Prospectus included in Registration No.333-05333, and
incorporated herein by reference).
G-2a Opinion of Tucker Anthony Cleary Gull (filed as Appendix B-1 to
Berkshire Energy Resources Definitive Proxy Statement and incorporated
herein by reference).
G-3 Financial Data Schedule (filed herewith and titled "Exhibit 27").
H-5 Retention of Non-Utility Subsidiaries (filed herewith).
I-1 Proposed Form of Notice (previously filed).
J-1 Analysis of the Economic Impact of a Divestiture of the Gas Operations
of Energy East (previously filed).
K-1 Electric and Gas Statistics (filed herewith)
L-1 [filed confidentially pursuant to Rule 104 under the Public Utility
Holding Company Act of 1935]
M-1 Confirmation of Reservation of 50 MW Transmission Path (filed
herewith)
B. FINANCIAL STATEMENTS
FS-1 Pre-Merger and pro forma combined condensed balance sheet of Energy
East as of June 30, 2000, and pre-Merger and pro forma combined
condensed statement of income and statement of retained earnings of
Energy East for the twelve months ended June 30, 2000 (filed
herewith).
FS-2 Balance sheet of CMP Group as of June 30, 2000, and statement of
income and statement of retained earnings of CMP Group for the twelve
months ended June 30, 2000, included in the balance sheet, statement
of income and statement of retained earnings of Energy East (filed
herewith as FS-1).
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FS-3 Balance sheet of CTG Resources as of June 30, 2000, and statement of
income and statement of retained earnings of CTG Resources for the
twelve months ended June 30, 2000, included in the balance sheet,
statement of income and statement of retained earnings of Energy East
(filed herewith as FS-1).
FS-3aBalance sheet of Berkshire Energy as of June 30, 2000, and statement
of income and statement of retained earnings of Berkshire Energy for
the twelve months ended June 30, 2000, included in the balance sheet
statement of income and statement of retained earnings of Energy East
(filed herewith as FS-1).
FS-4 Statements of income and surplus of CMP Group for the fiscal year
ended December 31, 1999, 1998 and 1997 (included in CMP Group's Form
10-K for the year ended December 31, 1999, File No. 001-14786 and
incorporated herein by reference).
FS-5 Statements of income and surplus of CTG Resources for the fiscal years
ended September 30, 1999, 1998 and 1997 (included in CTG Resources
Form 10-K for the year ended September 30, 1999, File No. 1-12859 and
incorporated herein by reference).
FS-6 Statements of income and surplus of Berkshire Energy for the fiscal
years ended June 30, 1999, 1998 and 1997 (included in Berkshire Energy
Resources Form 10-K for the year ended June 30, 1999, File No. 0-29812
and incorporated herein by reference).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Merger neither involves a "major federal action" nor "significantly
affect[s] the quality of the human environment" as those terms are used in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321
et seq. The only federal actions related to the Merger pertain to the
Commission's declaration of the effectiveness of CMP Group's Proxy Statement,
Energy East's Registration Statement on Form S-4, and Berkshire Energy's Proxy
Statement, the expiration of the applicable waiting period under the HSR Act,
approval of the application filed by Energy East and CMP Group with the FERC
under the Federal Power Act, approval of the application filed by Central Maine
Power with the NRC under the Atomic Energy Act, approval of the applications
filed by Central Maine Power, MEPCo, CTGC and by Berkshire Energy with the FCC,
and this Commission's approval of this Application/Declaration. Consummation of
the Merger will not result in changes in the operations of the Companies that
would have any impact on the environment. No federal agency is preparing an
environmental impact statement with respect to this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this Amendment No. 5 to Form
U-1 Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Energy East Corporation
August 30, 2000, By: /s/ Kenneth M. Jasinski
Kenneth M. Jasinski
Executive Vice President,
General Counsel and Secretary
CMP Group, Inc.
August 30, 2000, By: /s/ Arthur W. Adelberg
Arthur W. Adelberg and Chief Financial
Officer
Executive Vice President
CTG Resources, Inc.
August 30, 2000, By: /s/ Arthur C. Marquardt
Arthur C. Marquardt
Chairman, President and Chief
Executive Officer
Berkshire Energy Resources
August 30, 2000, By: /s/ Scott S. Robinson
Scott S. Robinson
President and Chief Executive Officer
Berkshire Energy
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