UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
William L. Massey, Linda Breathitt,
and Curt Hebert Jr.
Energy East Corporation Docket No. ECOO-1-000
and CMP Group, Inc.
ORDER APPROVING DISPOSITION OF
JURISDICTIONAL FACILITIES
(Issued April 3,2000)
I. INTRODUCTION
------------
In October 1, 1999, as amended on December 10, 1999, Energy East
Corporation (Energy East) and CMP Group, Inc. (CMI' Group), on behalf of their
jurisdictional subsidiaries (collectively. Applicants), tiled an application
under section 203 of the Federal Power Act (FPA)1 requesting Commission
authorization for the disposition of jurisdictional facilities. The principal
jurisdictional subsidiary of Energy East is New York State Electric & Gas
Corporation (NYSEO). The principal jurisdictional subsidiary of CMP Group is
Central Maine Power Company (Central Maine). As a result of the proposed
transaction, CMI' Group will be merged into Energy East. The Commission will
approve the transaction as consistent with the public interest. As discussed
below, the Commission concludes that the transaction will not have an adverse
effect on competition, rates, or regulation.
II. BACKGROUND
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A. ENERGY EAST
-----------
Energy East is an exempt public utility holding company which, through its
subsidiaries, is an energy delivery, products and services company with
operations in New York, Massachusetts, Maine, New Hampshire, Vermont and New
Jersey. As a result of the proposed merger with CMP Group, Energy East
anticipates that it will
------------------------
1 16 U.S.C. 824b (1994).
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Docket No. ECOO-1-000 -2-
become a registered public utility holding company under the Public Utility
Holding Company Act of 1935.
1. Jurisdictional Subsidiaries
----------------------------
NYSEG, is a combination electric and gas utility serving 826,000 electric
customers and 244,000 natural gas customers in upstate New York. It has divested
substantially all of its generating assets. It retains certain hydroelectric
facilities, non-utility generation contracts and contracts pursuant to which the
New York Power Authority sells power to NYSEG as well as an 18 percent ownership
interest in the Nine Mile Point Unit 2 Nuclear Plant (Nine Mile).2 After the
sale of its interest in Nine Mile, NYSEG will be engaged almost entirely in the
transmission and distribution of electricity and natural gas. NYSEG, which is a
member of the New York Power Pool, has transferred control of its transmission
system to the New York ISO (NY ISO).3 NYSEG has received market-based rate
authority.4
Energy East has four other subsidiaries that are not traditional public
utilities that have received market-base rate authority from the Commission.
None of these subsidiaries has franchise territories or captive customers. These
companies are:
XENERGY, Inc., an energy services and consulting firm; Carthage Energy, LLC,
(Carthage) an exempt wholesale generator; South Glens Falls, LLC, an EWG; and
NYSEG Solutions, Inc., a supplier of electric and natural gas commodity
services.5 0niy Carthage and South Glens Falls, LLC operate or control
generating capacity (126 MW, collectively).
2. Non Jurisdictional Subsidiaries
---------------------------------
Energy East Enterprises, Inc. (EE Enterprises) is a subsidiary of Energy
East that owns natural gas and propane air distribution companies in Vermont,
New Hampshire and Maine. One of EU Enterprises' subsidiaries is CMP Natural Gas,
LLC, which has a
--------------------------
2 NYSEG states that it has contracted to sell its 18 percent interest in
Nine Mile to Amergen Inc.
3 See Central Hudson Gas & Electric Corp., et al, 87 FERC 61,135 (1999).
---
4 See NYSEG Solutions, Inc. et at 35 FERC 61,~42 (1998).
---
5 See XENERGY, Inc., et at85 FERC 61,303 (1997); Carthage Energy, LLC,
---
87 FERC 62,017 (1999); Energy East South Glens Falls, LLC. 86 FERC 61,254
(1999); and NYSEG Solutions, Inc., et al 85 FERC 61,342 (1998).
<PAGE>
Docket No. EC00-1-000 -3-
joint venture with Central Maine to build a natural gas distribution system in
Maine. EE Merger Corp. is a wholly-owned subsidiary of Energy East, which exists
solely as a means to consummate the merger. After it merges with and into CMP
Group, EE Merger Corp. will cease to exist.6
B. CMP Group
CMP Group is an exempt public utility holding company. CMP Group's
principal subsidiary is Central Maine, which serves approximately 533,000
customers in central and southern Maine.7 Applicants state that Central Maine
has divested and or relinquished control over substantially all of its
generating Meets and purchase power contracts, and now functions primarily as an
electric transmission and distribution utility. In addition, CMP is selling its
entitlement to purchase capacity and energy under the non-utility generation
contracts, as well as its entitlements in two nuclear power plants, Millstone 3
and Vermont Yankee, and its entitlement in a firm energy contract with Hydro
Quebec, pursuant to the Maine Public Utilities Commission Rules and Regulations
and Maine electric utility restructuring legislation. ~ Maine's retail access
program commences on March 1,2000. Central Maine is a member of the New England
Power
-------------------------
6 Energy East slates that it will also acquire Connecticut Energy
Corporation, an exempt public utility holding company that owns the Southern
Connecticut Gas Company and CTQ Resources, Inc., an exempt public utility
holding company that owns Connecticut Natural Gas Corporation. Energy East
contemplates that both Connecticut Energy and CTG Resources will become
wholly-owned subsidiaries of Energy East.
7 Central Maine owns 78,3 percent of Maine Electric Power Company, Inc.
(Maine Electric) which owns and operates a 345 kV transmission interconnection
betweenWiscasset, Maine and the Maine New Brunswick border at Orrington,, Maine.
Maine Electric provides access to its transmission interconnection facilities
Pursuant to a nondiscriminatory open access transmission tariff.
8 See 35-A M.R.SA.3204; and Chapt.307 MPUC Rules and Regulations. See also
--- --------
Electric Industry Restructuring, Me. Laws 1997, ch. 316 - 35A 3204. et seq
-- ---
captioned "An Act to Restructure the State's Electric Industry." Pursuant to
this legislation. investor-owned utilities who principally operate in the state
of Maine are required to, among other things, divest themselves of their
non-nuclear generation assets by March 1,2000. The restructuring requires
Central Maine to sell their entitlements to capacity and energy from undivested
generation assets and purchase power contracts starting March 1, 2000. The
legislation however, does not require the divestiture of nuclear generation
assets or non-utility generation contracts.
<PAGE>
Docket No. ECOO- 1-000 -4-
Pool, and has transferred its pool transmission facilities to the New England
ISO (ISONE). 9 Central Maine has market-based rate authorization. 10
C. Description of the Proposed Merger
--------------------------------------
Under the terms of the Agreement and Plan of Merger between Applicants,
CMP Group will become a wholly-owned subsidiary of Energy East. The BE Merger
Corp. will be merged with and into CMP Group. The proposed merger will be a
stock purchase transaction. The post-merger company will have assets of
approximately $6.4 billion and will serve approximately 1.6 million electric and
gas customers at the retail level. ~
III. Notice of Filing Interventions
---------------------------------
Notices of the application were published in the Federal Register, 64 Fed.
Reg. 56,207 (1999) and 65 Fed. Reg. 766(2000), respectively, with comments,
interventions, and protests due on or before January 20,2000. The Maine Public
Utilities Commission (Maine Commission) filed a notice of intervention. A timely
joint motion to intervene was flied by the Consolidated Edison Company of New
York, Inc. (ConEd) and the Northeast Utilities Service Company (NU), raising no
substantive issues.
Discussion
----------
A. Procedural Matters
-------------------
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,18
C.F.R. 385.214 (1999). the Maine Commission's notice of intervention and the
timely, unopposed motion to intervene of ConEd and NU serve to make them parties
to this proceeding.
----------------------------------------
9 See New England Power Pool, et al79 FERC 61,374 (1997).
---
10 See Central Maine Power Company, 80 FERC 61,246 (1997).
---
11 These statistics do not include Energy East's proposed
acquisition of Connecticut Energy or CTG Resources.
<PAGE>
Docket No. EC00-l-000 -5-
B. Standard of Review
--------------------
Section 203(a) of the FPA provides, in relevant part, as follows:
No public utility shall sell, lease, or otherwise dispose of the whole
Of its facilities subject to the jurisdiction of the Commission, or any
part thereof of a value in excess of $50,000, or by any means whatsoever,
directly or indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire, or take any
security of any other public utility, without first having secured an order
of the Commission authorizing it to do so.
16 US.C. 824b(a) (1994). Under section 203(a), the Commission must approve a
proposed merger if it finds that the merger "will be consistent with the public
interest."
Id.
In 1996, the Commission issued a Merger Policy Statement updating and 12
clarifying its procedures, criteria and policies applicable to public utility
mergers. The Merger Policy Statement provides that the Commission will generally
take account of three factors in analyzing proposed mergers: (a) the effect on
competition; (b) the effect on rates; and (c) the effect on. regulation.
For the reasons discussed below, we find that Applicants' proposed
transaction, together with Applicants' proposed commitments, is consistent with
the public interest Accordingly, we will approve the merger without further
investigation.
C. Effect on Competition
-----------------------
1. Applicants' Analysis
---------------------
Applicants analyze the competitive effects of their proposed merger. These'
effects are related to the consolidation of generation controlled by Applicants
(i.e.; horizontal effects) and the consolidation of generation and delivered gas
controlled by Applicants (i.e., vertical effects). However, Applicants point out
that such effects will become moot after March 1,2000 when Central Maine plans
to completely divest its generation assets
-------------------------------------------
12 See Inquiry Concerning the Commission's Merger Policy Under the Federal
---
Power Act Policy Statement, Order No. 592,61 Fed. Reg. 68,595 (1996), FERC
Stats. & Regs. 31,044 at 30.117-1R (1996), order on reconsideration, Order No.
------------------------
592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC 61,321 (1997) (Merger Policy
Statement).
<PAGE>
Docket No. ECOO-1-000 -6-
in accordance with Maine law. Applicants conclude from their analyses that the
proposed merger does not raise issues related to the horizontal consolidation of
generation or the vertical consolidation of generation and delivered gas
controlled by Applicants.
In regard to consolidating generation, Applicants state that Central Maine
does not plan to control any generation resources by March 1,2000. As a result,
Applicants argue that a "full" Appendix A analysis described in the Merger
Policy Statement is unnecessary. Instead, they use installed capacity to
evaluate conditions in the geographic market area represented by the NY ISO and
ISO NE. Applicants evaluate the effect of the merger in four time periods, which
include the interim period during which Central Maine indicates that the merger
produces small increases in concentration (as measured by the HHI statistic) in
an unconcentrated post-merger market (i.e.. HHI of 1,000 or less). The largest
increase in market concentration--35 HHI resulting in post-merger market
concentration of 836 HHI-is lit the Winter 98/99 period.
In regard to the vertical aspects of the proposed merger, Applicants
evaluate the effect of combining generation with facilities used for delivered
gas controlled by CMP Group and Energy East, including the joint venture "CMP
Natural Gas between CMP Group and Energy East to distribute gas in Maine
Applicants State that if either the upstream delivered gas or downstream
electricity market is competitive, then a merger does not raise vertical
competitive concerns through, for example, foreclosure or raising rivals' costs.
Applicants calculate concentration in the downstream electricity market,
including the merged company's market share of competing generating capacity to
which Energy East provides delivered gas through its gas distribution
facilities. Under this "attribution" method, their results indicate that the
relevant market is unconcentrated in all time periods. For example, pre-merger
market concentration is highest in the Winter 98/99 period (822 HHI).
---------------------------------
13 The time periods are: Winter 1998/99, Summer 1999, Winter 1999/2000, and
Summer 2000. The Winter 1999/2000 period represents the interim period during
which Central Maine will still have generation.
14 Applicants consider the same relevant market and time periods identified
in their horizontal analysis. Applicants argue that in regard to the upstream
delivered gas market, it is important to consider that the merger does not
affect the interstate pipeline portion of the upstream market; and that the
merged company would control only about 24 percent of firm transportation rights
into New York, which arc needed to support their LDC commitments to supply end
users,
<PAGE>
Docket No ECOO-l--000 -7-
Applicants further state that the merged company would not benefit from a
strategy of foreclosure or raising the costs of rival gas-fired generation in
the ISO NE market. This is because most of Energy East's generating capacity is
located in western New York and at peak limes transmission constraints would
exclude such capacity from the relevant market. 15 Applicants state that at
off-peak times, while all of Energy East's generation could reach the relevant
market, most of that capacity is excluded from the relevant market because it is
not economic At peak and off-peak times, Applicants therefore conclude that the
merged company could not collect higher prices on most of Energy East's
generation capacity and, therefore, profit from a foreclosure or raising rivals'
costs strategy.
On the basis of their analyses, Applicants conclude that the proposed
Merger raises neither horizontal nor vertical competitive concerns.
2. Commission Determination
-------------------------
We note that Central Maine has nearly completed the process of relinquish
control over all its generation resources, as it is required to do pursuant to
Maine electric utility restructuring legislation. (16) Thus, in accordance with
the Merger Policy Statement, we are satisfied in this particular case that since
CMP Group and Energy East will no longer have facilities or sell relevant
products in common geographic markets, the proposed merger will not have an
adverse competitive impact related to the consolidation of Applicants'
generation. (17) Thus, the proposed merger raises no horizontal competitive
concerns related to consolidating generation.
-------------------------------
15 Specifically, Applicants state that at peak times, the interfaces between
New England and New York and between eastern and wisent New York arc
constrained.
16 In Central Maine Power Company, et al85 FERC 61,272 (1998), Central
Maine received Commission approval to dispose of jurisdictional facilities
related to the majority of its electric generating plants. By letter dated April
16. 1999, Central Maine closed the transaction thereby completing the sale of
the jurisdictional facilities. In addition, an application requesting Commission
approval to sell the jurisdictional facilities associated with the Vermont
Yankee Nuclear Power Station, including Central Maine's four percent ownership
share of approximately 510 MWs. is currently pending in Docket No. ECOO-46-000.
17 See Merger Policy Statement at 30,136.
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<PAGE>
Docket No. EC00-l-000 -8-
We also find that the proposed merger raises no vertical competitive
concerns related to the consolidation of electric and gas facilities controlled
by Applicants. As Applicants themselves state, the merged company must have the
incentive and ability to adversely affect prices in Downstream delivered gas and
downstream electricity markets.(18) We believe that the merged company will have
no incentive in light of the quantity, location, and costs characteristics of
NYSEG generation relative to the likely scope and competitive conditions in
relevant markets.(19)
In light of the foregoing, we believe that the proposed merger will not
adversely affect competition.
D. Effect of the Merge on Rates
---------------------------------
The Merger Policy Statement explains our concerns that there be adequate
ratepayer protection from adverse rate effects as a result of a merger. It
describes various commitments that may be acceptable means of protecting
ratepayers. such as hold harmless provisions, open seasons for wholesale
customers, rate freezes, and rate reductions. (20)
Applicants state that the proposed merger will not have an adverse effect
on rates. Applicants also St3te that NYSEG, Central Maine and Maine Electric arc
the only jurisdictional subsidiaries that make power sales to customers under
cost-based rate schedules.(21) With respect to wholesale rates, Applicants state
that Central Maine and Maine Electric have no requirements power sales
customers. Applicants contend that the proposed merger will not have an effect
on NYSEG's requirements customers because such customers arc charged negotiated
rates that will not change as a result of the merger. In any event, Applicants
commit to hold their wholesale and transmission customers harmless from the
effects of the proposed merger by excluding all merger transaction
-----------------------
18 Affidavit of J. Stephen Henderson. at 19.
19 We note that Energy East has received authorization to complete the
divestiture of its entitlement in the Nine Mile nuclear facilities, which will
further reduce the size of its remaining generation portfolio See New York State
Electric & Gas Corporation, et al., 89 FERC 61,124 (1999). reh'g pending
-- -- -------------
20 See Merger Policy Statement at 30,123-24.
---
21 Applicants note that NYSEG has three requirements power sales customers
including the following customers: (1) Burlington Electric Department; (2)
Vermont Public Power Supply Authority; and (3) Massena Electric Department.
<PAGE>
Docket No. ECOO-1-000 -9-
related costs, including the acquisition premium, from rates for wholesale power
sales and transmission service. 22
With respect to transmission rates, Applicants state that they will
continue to provide transmission service pursuant to open access transmission
tariffs on file with the Commission, (23) Applicants note that, under certain
circumstances, the Commission has required merger applicants to file single
system transmission tariffs for non-discriminatory transmission access over the
merged company's system. However, Applicants claim that Central Maine and NYSEG
cannot presently offer transmission service over their combined facilities under
a single system tariff because they have transferred their individual
transmission facilities to ISO NE and the NY ISO, respectively Furthermore,
Applicants assert that it would not be in the public interest for Central Maine
and NYSEG to withdraw their transmission facilities from the operational control
of their respective ISO in order to combine such facilities under a single
system transmission tariff. Nevertheless, to the extent that NYSEG and Central
Maine arc able to assess charges for transactions that use both of their
transmission systems, the Applicants state they will eliminate multiple
transmission charges without disturbing current regional ISO operations or
tariffs.
In light of the above, we conclude that the proposed merger will not
adversely affect rates We note that interventions raise no rate or ratepayer
protection issues. The Commission finds Applicants' proposal, to either
eliminate the Central Maine local charge or implement a billing credit, to be
reasonable in the circumstances of this case. Applicants maintain that their
customers will be protected from the multiple transmission charges without the
need to modify the NY ISO Tariff or NEPOOL Tariff. However, we will direct
Central Maine to amend its local OATT, within 30 days of this aide; to include
the provisions that reflect Applicants' commitment to waive Central Maine's
local charge.
-------------------------------
22 Application at 14.
23 According to the application, transmission service will be available
under either: (1) the NEPOOL Tariff which includes all NEPOOL members' Pool
Transmission Facilities (PTF), including those of Central Maine; (2) Central
Maine's local OATT for those services over non-PTF facilities; or (3) the NY ISO
Tariff under which New York public utilities, including NYSEG, have transferred
operational control of their transmission systems. Applicants further state that
the NY ISO control area will be subject to a single zonal rate equal to the
Transmission Service Charge (TSC) of the transmission owner on whose system the
load withdraws the energy or on whose system the energy is wheeled out of or
exported from the NY ISO control area.
<PAGE>
Docket No. EC00-1-000 -10-
E. Effect of the Merger on Regulation
---------------------------------------
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect of a proposed merger an regulation involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange
Commission. We are also concerned with the effect on state regulation where a
state does not have authority to act on a merger. 24
With respect to federal regulation, Applicants state that as a result of
the proposed merger, Energy East expects to become a registered holding company
under the Public Utility Holding Company Act of 1935. Applicants assert that, if
Energy East becomes a registered holding company, it will abide by the
Commission's policies regarding intra-system transitions. 25
With respect to slate regulation, the proposed merger will require
regulatory approval that the Maine Commission and the Connecticut department of
Public Utility Control. 26
Accordingly, the Commission finds that there is no indication that the
proposed merger will have an adverse affect on either federal or slate
regulation.
F. Accounting Issues
------------------
Applicants state that the merger will be recorded using the purchase method
Of accounting. Applicants also state the assets of Central Maine's unregulated
subsidiaries will be reflected at fair value, including an allocation of
goodwill to the subsidiaries, if appropriate. The ramming acquisition premium
will be allocated to Central Maine and will be recorded as an acquisition
adjustment on Central Maine's books in Account 114.
Electric Plant Acquisition Adjustments.27 The Commission has previously approved
the use of the purchase method of accounting and the proposed treatment of the
acquisition
---------------------------
24 See Merger Policy Statement at 30,124-25
---
25 Application at 15.
25 Application at 22.
27 18 C.F.R. Part 101(1999).
<PAGE>
Docket No. EC00-l-000 -11-
premium.28 Accordingly, we have no basis to dispute Applicants' use of the
purchase method of accounting or the treatment of the acquisition premium, and
therefore approve its use.
We will direct Applicants' jurisdictional subsidiaries to submit their
Merger accounting to the Commission for approval within six months after the
merger is consummated in accordance with the Uniform System of Accounts. 29
The Commission orders:
------------------------
(A) Applicants' proposed transaction is hereby approved subject to the
commitments discussed in the body of this order.
(B) Central Maine is hereby directed to tile within 30 days revisions
to its OATT to include the provisions that reflect Applicants' commitment to
waive Central Maine's local charge.
(C) Applicants' proposed use of the purchase method of accounting,
including the treatment of the acquisition premium, is approved. Applicants must
inform the Commission of any change in the circumstances that would reflect a
departure from the facts the Commission has relied upon in granting this
approval. Applicants' jurisdictional subsidiaries must submit their proposed
accounting for the merger when six months of the consummation of the merger.
(D) The foregoing authorization is without prejudice to the authority
of the Commission or any other regulatory body with respect to rates, services,
accounts, variation, estimates or determinations of cost, or any other matter
whatsoever now pending or which may come before the Commission.
(E) Nothing in this order shall be construed to imply acquiescence in
any estimate or determination of cost or any valuation of property claimed or
asserted.
----------------------------
28 See Entergy Services, Inc. and Gulf States Utilities Company, Opinion
---
No. 385, 65 FERC 61,332 (1993). See also Western Resources, Inc et al 86 FERC
--------- -- --
61,312 (1999) and El Paso Electric Company 68 FERC 1 61,181 (1994).
29 Electric Plant Instruction No. 5, Electric Plant Purchased or Sold, and
Account 102, Electric Plant Purchased or Sold, 18 CFR Part 101 (1999)
<PAGE>
Docket No. EC00-1-000 -12-
(F) The Commission retains authority under section 203(b) of the FPA to
issue supplement orders as appropriate.
(G) Applicants shall notify the Commission that the merger has occurred
within 10 days of the date the merger is consummated.
By the Commission.
(S E A L)
/s/ Linwood A. Watson, Yr.,
-----------------------------------
Linwood A. Watson, Yr.,
Acting Secretary.
<PAGE>
