File No. 70-9473
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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The National Grid Group plc New England Electric System
National Grid (US) Holdings 25 Research Drive
Limited Westborough, Massachusetts 01582
National Grid (US)
Investments
National Grid House
Kirby Corner Road
Coventry CV4 8JY
United Kingdom
National Grid (Ireland) 1
Limited
National Grid (Ireland) 2
Limited
8-10 rue Mathias Hardt
BP39, L2010
Luxembourg
National Grid General
Partnership
NGG Holdings, Inc.
10th Floor
Oliver Building
2 Oliver Street
Boston, MA 02109
(Name of company filing this statement and
address of principal executive offices)
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The National Grid Group plc New England Electric System
(Name of top registered holding company
parent of each applicant or declarant)
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Jonathan M. G. Carlton Douglas W. Hawes
The National Grid Group plc Joanne C. Rutkowski
National Grid House Sheri E. Bloomberg
Kirby Corner Road Markian M.W. Melnyk
Coventry CV4 8JY LeBoeuf, Lamb, Greene & MacRae, L.L.P.
United Kingdom 125 West 55th Street
Telephone: 011-44-1203-537-777 New York, NY 10019
Facsimile: 011-44-1203-423-678 Telephone: 212-424-8000
Facsimile: 212-424-8500
NGG Holdings, Inc.
10th Floor
Oliver Building
2 Oliver Street
Boston, MA 02109
Telephone: 617-946-2104
Facsimile: 617-946-2111
Michael E. Jesanis
Kirk L. Ramsauer Clifford M. Naeve
New England Electric System Judith A. Center
25 Research Drive Skadden, Arps, Slate, Meagher
Westborough, Massachusetts 01582 & Flom L.L.P.
1440 New York Avenue, N.W.
Washington, D.C. 20005
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(Names and addresses of agents for service)
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Defined Terms
1. Applicants means the Intermediate Companies, National Grid and NEES.
2. Intermediate Companies means National Grid (US) Holdings Limited,
National Grid (US) Investments, National Grid (Ireland) 1 Limited,
National Grid (Ireland) 2 Limited and National Grid General
Partnership.
3. NEES -- Immediately after the proposed Merger, pursuant to an
amendment to NEES' Agreement and Declaration of Trust, NEES will have
been merged with NGG Holdings, LLC, with NEES as the surviving entity
and then merged again into another LLC (which survives) which in turn
will merge into NGG Holdings, Inc. with NGG Holdings, Inc. as the
surviving entity. The term "NEES" refers to both NEES and NGG
Holdings, Inc. as the surviving entity.
4. National Grid means The National Grid Group plc.
5. National Grid System means National Grid and its subsidiary companies.
6. NEES Group means NEES and the NEES Subsidiary Companies.
7. NEES Subsidiary Companies means the subsidiary companies of NEES.
8. U.S. Subsidiary Companies means NEES, the NEES Subsidiary Companies
and the Intermediate Companies.
9. U.S. Utility Subsidiaries means New England Power Company,
Massachusetts Electric Company, The Narragansett Electric Company,
Granite State Electric Company, Nantucket Electric Company, New
England Electric Transmission Corporation, New England
Hydro-Transmission Corporation, New England Hydro- Transmission
Electric Company, Inc. and Vermont Yankee Nuclear Power Corporation.
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TABLE OF CONTENTS
Item 1. Description of Proposed Merger
A. Introduction
1. General Request
2. Overview of Merger
B. Description of the Parties to the Merger
1. National Grid
2. NEES
C. Description of the Merger
1. Background
2. Merger Agreement
3. Corporate Structure for the Merger
4. Financing the Merger
D. Management and Operations of National Grid and NEES Following the
Merger
E. Industry Restructuring Initiatives Affecting U.S. Operations
F. Reporting
Item 2. Fees, Commissions and Expenses
Item 3. Applicable Statutory Provisions
A. Legal Analysis
1. Section 10(b)
a. Section 10(b)(1)
i. Interlocking Relationships
ii. Concentration of Control
b. Section 10(b)(2) -- Fairness of Consideration
c. Section 10(b)(2) -- Reasonableness of Fees
d. Section 10(b)(3)
2. Section 10(c) a. Section 10(c)(1) b. Section 10(c)(2)
3. Section 10(f)
B. Other Statutory Provisions
Item 4. Regulatory Approvals
A. Antitrust
B. Federal Power Act
C. Atomic Energy Act
D. Exon-Florio
E. State Public Utility Regulation
Item 5. Procedure
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Item 6. Exhibits and Financial Statements
A. Exhibits
B. Financial Statements
Item 7. Information as to Environmental Effects
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This Pre-Effective Amendment No. 5 amends and restates the Form U-1
Application/Declaration in this proceeding, originally filed with the Securities
and Exchange Commission on March 26, 1999, in its entirety as follows:
ITEM 1. DESCRIPTION OF THE PROPOSED MERGER
A. Introduction
This Application/Declaration seeks approvals relating to the proposed
acquisition of NEES, a Massachusetts business trust, by National Grid, a public
limited company incorporated under the laws of England and Wales, pursuant to
which NEES and its subsidiaries will become subsidiaries of National Grid (the
"Merger"). Following consummation of the Merger, National Grid and each of the
Intermediate Companies will register with the Securities and Exchange Commission
(the "Commission") as holding companies under Section 5 of the Public Utility
Holding Company Act of 1935, as amended (the "Act").1 NEES is currently a
holding company registered under Section 5 of the Act and will remain as such
following consummation of the Merger. On February 1, 1999, NEES announced that
it had entered into an agreement to acquire all of the outstanding common stock
of Eastern Utilities Associates ("EUA"), a holding company registered under the
Act. Consummation of the merger between NEES and EUA is not conditional on, and
is proceeding independently from, the closing of the Merger. Authorization under
the Act for NEES' acquisition of EUA will be the subject of a separate
application to the Commission by NEES.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, the Applicants hereby
request authorization and approval of the Commission to acquire, by means of the
Merger, all of NEES' interest in the issued and outstanding common stock of the
subsidiaries of NEES that are public utility companies within the meaning of the
Act, namely New England Power
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1 The Intermediate Companies either have been or will be formed prior to the
consummation of the Merger. They have been added to this Application/Declaration
to enable the Commission to issue a notice. The Intermediate Companies will
require the approval of their respective boards of directors to engage in the
activities contemplated by this filing.
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Company ("NEP"), Massachusetts Electric Company ("Mass. Electric"), The
Narragansett Electric Company ("Narragansett"), Granite State Electric Company
("Granite State"), Nantucket Electric Company ("Nantucket"), New England
Electric Transmission Corporation ("NEET"), New England Hydro-Transmission
Corporation ("N.H. Hydro"), New England Hydro-Transmission Electric Company,
Inc. ("Mass. Hydro") and Vermont Yankee Nuclear Power Corporation. The
Applicants also hereby request that the Commission approve (i) the acquisition
by the Applicants of NEES' interest in the non-utility activities, businesses
and investments of NEES and the retention of National Grid's existing
non-utility activities, businesses and investments; (ii) certain
acquisition-related financing matters, and (iii) certain amendments to the NEES
standard form of service company agreement.
The timing of the Commission's action on the merger of NEES and EUA and the
Merger (i.e., National Grid's acquisition of NEES) is uncertain. Should the
Commission approve the NEES/EUA merger first, Applicants propose that the
authorization requested in this Application/Declaration be deemed a request for
the acquisition of an indirect interest in the EUA subsidiaries and operations
acquired by NEES. Should the Commission approve the Merger first, National Grid
will join NEES as an applicant in the NEES/EUA merger application/declaration
filed with the Commission.
2. Overview of the Merger
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated
as of December 11, 1998 by and among National Grid, NGG Holdings LLC, a
Massachusetts limited liability company and a wholly owned subsidiary of
National Grid, and NEES, NEES will become an indirect, wholly owned subsidiary
of National Grid. The proposed corporate structure of National Grid after the
Merger is discussed in more detail in Item 1.E below.
As consideration for each common share of NEES outstanding at the time of
the Merger, the NEES shareholders will receive $53.75 per share in cash, plus up
to an additional $0.60 in cash per share if the Merger is not consummated within
six months after the NEES shareholders approve the Merger, calculated at a rate
of $0.003288 for each day
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that the Merger closing is delayed past the end of the six month period. The
NEES shareholders will not obtain any stock consideration from National Grid in
the Merger.
As discussed in more detail in Item 3.A. below, in addition to providing
substantial value to NEES shareholders as described above, the Merger will
produce substantial benefits to the public interest and to consumers in New
England, as well as the shareholders of National Grid, by combining a company
with demonstrated expertise in operating in a competitive environment with a
company that having divested the bulk of its generation assets and operating in
states where deregulation initiatives are advanced is well positioned to
compete.
Benefits to customers fall in three categories. First, National Grid has
significant expertise in providing the infrastructure, dispatch and power
exchange necessary for an efficient power supply market. Power supply is the
major cost element of electricity and is crucially influenced by the efficient
development of the market for the product. The efficient provision of the
infrastructure to let the supply market develop will facilitate the increase in
potential suppliers of electricity, with the competition so generated leading to
lower and more stable prices for the unregulated supply component of electric
service.
Second, there will be savings and efficiencies associated with the NEES-
National Grid Merger itself. The two companies are currently in the process of
evaluating integration possibilities, aimed at eliminating duplication and
implementing best practices. National Grid's significantly larger scale, both in
financial and operational terms, will enhance the ability of NEES to use new
developments in transmission and distribution technology, information systems,
and capital markets, where these can be seen to bring economic benefit.
Third, the Merger will allow further pursuit of consolidation in the
electric utility business. The restructuring of the industry in New England and
the divestiture of generation by companies owning transmission and distribution
interests has left a fragmented infrastructure with individual companies of too
small a size to fully exploit economies of scale. NEES, with its already low
distribution prices and profit margins, is not in a position on its own to
pursue significant further regional consolidation. This transaction
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will allow further consolidations and consolidation savings to be pursued, while
maintaining low rates for customers. The agreement for NEES to acquire EUA,
while not in itself conditional on the NEES-National Grid Merger, is entirely
consistent with this strategy.
The Merger also provides NEES employees with the opportunity for growth as
they participate in industry restructuring and allows National Grid to apply its
extensive experience in competitive electricity supply markets to the
electricity industry in the U.S. at a time of strategic significance in the
reform and restructuring of the industry.
The Merger has been approved by the shareholders of NEES and National Grid,
as well as by the Federal Energy Regulatory Commission (the "FERC"), the Vermont
Public Service Board (the "VPSB"), the Connecticut Department of Public Utility
Control (the "CDPUC") and the New Hampshire Public Utilities Commission
("NHPUC"). While the express approval of the Massachusetts Department of
Telecommunications and Energy (the "MDTE") and the Rhode Island Public Utility
Commission (the "RIPUC") are not required, those regulators have issued letters
certifying that they have the authority and resources to protect ratepayers. In
addition, Granite State and NEP have made representations to the NHPUC that the
Merger will not adversely affect their rates, terms, service or operations. The
Nuclear Regulatory Commission (the "NRC") has approved the transaction. Finally,
the Merger has been cleared by the Committee on Foreign Investments in the
United States under the Exon-Florio Provisions of the Omnibus Trade and
Competitiveness Act of 1988 and by the Antitrust Division of the Justice
Department and the Federal Trade Commission under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976.
B. Description of the Parties to the Merger
1. National Grid
National Grid is a holding company formed in 1989. Its principal
subsidiary, The National Grid Company plc ("NGC"), a public limited company
formed under the laws of England and Wales, was created as a result of the
privatization and restructuring of the British electric system. National Grid's
ordinary shares are listed on the London Stock
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Exchange (the "LSE") and National Grid American Depositary Receipts ("ADRs") are
listed on the New York Stock Exchange.
The table below shows the revenues, net income and total assets of National
Grid, NEES and EUA for the twelve months to September 30, 1999, according to
U.S. GAAP.
National Grid NEES EUA
($ mm) ($ mm) ($ mm)
Revenues 2,412 2,513 548
Net Income 1,661 149 17
Total Assets 8,437 4,900 1,481
The table below shows the capitalization of National Grid, NEES, EUA, and
the combined company on a pro forma basis, as of September 30, 1999, according
to U.S. GAAP.2
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2 The figures for revenues, net income and assets were translated into dollars
using a rate of U.S. $1.60 equals one pound. Consistent with U.S. GAAP, National
Grid's share of joint ventures and associate's businesses is included in net
income and assets but is omitted from revenues. For the year ended September 30,
1999, National Grid's share of Energis losses were $26 million (excluding
exceptional profits of $1,427 million).
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<TABLE>
<CAPTION>
National National NEES NEES EUA EUA Pro Forma Pro Forma
Grid Grid (%) ($ mm) (%) ($ mm) (%) Combined Combined
($ mm) ($ mm) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term 404 6.7% 39 1.4% 118 16.8% 561 5.7%
debt
Long-term 3,133 52.3% 1,059 38.8% 190 27.1% 6,6823 68.2%
debt
Preferred - - 20 0.7% 35 5.0% 55 0.6%
stock
Minority 1 - 39 1.4% - - 40 0.4%
interest
Common 2,454 41.0% 1,578 57.7% 358 51.1% 2,454 25.1%4
stock equity
Total 5,992 100% 2,735 100% 701 100% 9,791 100%
</TABLE>
Except for National Grid (US) Holdings Limited, National Grid has one
direct subsidiary, National Grid Holdings Limited ("National Grid Holdings").
National Grid Holdings was formed under the laws of England and Wales in 1999 to
serve as a subholding company over NGC and the other subsidiaries of National
Grid not in the NEES chain of ownership. Prior to consummation of the Merger,
National Grid Holdings will file its notification of foreign utility company
("FUCO") status to qualify as a FUCO within the meaning of Section 33 of the
Act. The parties expect that National Grid Holdings will retain this status
following the Merger and that the activities and operations of National Grid
Holdings' direct and indirect subsidiary companies will be exempt from the Act
as subsidiaries of National Grid Holdings, provided that each derives no part of
its income, directly or indirectly, from the generation, transmission, or
distribution of electric energy for sale or the distribution at retail of
natural or manufactured gas for heat, light, or power, within the US and none
are public utility companies operating in the US. A chart showing
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3 Includes $2,300 million of acquisition financing.
4 Cash balances of $1,074 million (on a pro forma basis) on hand on September
30, 1999 are not shown above.
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National Grid and all of its subsidiaries following the formation of National
Grid Holdings is attached hereto as Exhibit E-2.
The following entities are the direct subsidiaries of National Grid
Holdings and the description of their operations provides a description of the
principal lines of business, as well as some administrative operations, within
the National Grid holding company system.
(1) NGC -- As part of the U.K. government's privatization efforts, the
Central Electricity Generating Board, which owned and operated the vast majority
of electric generation and transmission facilities in England and Wales, was
split into three competing generation companies, and an independent transmission
company, NGC. As a result, NGC is the only transmission company in England and
Wales and now owns 4,300 miles of overhead transmission lines and 400 miles of
underground cables, all in England and Wales, as well as interconnections with
Scotland and France. The principal functions of NGC in the competitive British
power supply market are to provide transmission services on a for-profit,
non-discriminatory basis, and to maintain and make all needed improvements to
optimize access to that system; to procure ancillary services on the
transmission system; to match demand and supply; to manage the daily system of
half-hourly bids for competing generators; and to calculate market prices and
make the payments due from each day's energy trading. NGC is subject to
regulatory controls overseen by the Director General of Electricity Supply with
regard to the prices it may charge for transmission services in England and
Wales. The current transmission price control arrangements for NGC are expected
to remain in force until March 31, 2001.
(2) National Grid Insurance Limited, is an insurance subsidiary formed in
connection with the self-insured retention of NGC's transmission assets.
National Grid owns all of the outstanding ordinary shares of National Grid
Insurance Limited, with preference shares held by Barclays Bank.
(3) National Grid International Limited, is an intermediate holding company
for certain of the overseas operations of National Grid, in particular, its
businesses in South America, India, Africa and the U.S. National Grid
International Limited is
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indirectly engaged in the following businesses: (a) automated meter reading and
billing; (b) telecommunications, and (c) electric transmission and distribution.
Teldata International Limited and National Grid USA Inc. are subsidiaries of
National Grid International Limited with operations in the US. Teldata Inc. and
First Point Services Inc. are Delaware corporations and subsidiaries of Teldata
International Limited that provide metering and billing services to electric,
gas and water utilities and energy service providers. National Grid USA Inc. is
a Delaware corporation that was formed to investigate potential opportunities in
the US market for National Grid. Except as mentioned above, no other National
Grid companies maintain operations in the US. National Grid International
Limited does not directly or indirectly derive any part of its income from the
generation, transmission or distribution of electric energy for sale or the
distribution at retail of natural or manufactured gas for heat, light or power
within the US. None of National Grid International Limited or its subsidiaries
is a public utility company operating in the US.
(4) The National Grid Group Quest Trustees Limited is the trustee company
for National Grid's qualifying employee share ownership trust.
(5) NGG Telecoms Holdings Limited indirectly holds National Grid's interest
(currently at 46.0%) in Energis plc ("Energis"), a telecommunications company
focusing on the business marketplace in the United Kingdom.
(6) Natgrid Finance Holdings Limited is an intermediate holding company for
entities that provide financial management services to National Grid.
2. NEES
NEES is organized and exists as a voluntary association created under the
laws of the Commonwealth of Massachusetts on January 2, 1926. NEES's principal
executive office is located at 25 Research Drive, Westborough, Massachusetts
01582.
NEES is a holding company registered under Section 5 of the 1935 Act, and
it and its subsidiaries are subject to the broad regulatory provisions of the
Act. Various NEES subsidiaries are also subject to regulation by (i) the FERC
under the Federal Power Act ("FPA") with respect to wholesale sales and
transmission of electric power, accounting
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and other matters, and (ii) various state regulatory commissions, as discussed
below. In addition, the activities of nuclear facilities in which NEES and its
subsidiaries have ownership interests are regulated by the NRC.
The common stock, par value of $1.00 per share, of NEES is listed on the
New York Stock Exchange and the Boston Stock Exchange. As of December 31, 1998,
there were 59,171,015 shares of NEES common stock outstanding. On a consolidated
basis for the year ended September 30, 1999, NEES had total assets of $4.90
billion, net utility assets of $2.51 billion, total operating revenues of $2.51
billion, utility operating revenues of $2.24 billion, and net income of $149
million.
NEES owns all of the voting securities of the following four distribution
subsidiaries, Mass. Electric, Narragansett, Granite State and Nantucket, and
99.97 percent of the outstanding voting securities of its principal transmission
subsidiary, NEP. The NEES system covers more than 4,500 square miles with a
population of approximately 3,000,000. At September 30, 1999, NEES and its
subsidiaries had approximately 3,826 employees.
(1) Mass. Electric is a public utility company engaged in the delivery of
electric energy to approximately 980,000 customers in an area comprising
approximately 43 percent of Massachusetts. Mass. Electric's service area
consists of 146 cities and towns, including the highly diversified commercial
and industrial cities of Worcester, Lowell and Quincy. The population of the
service area is approximately 2,160,000, or 36 percent of the total population
of the state. During 1998, 39 percent of Mass. Electric's revenues from the sale
of electricity was derived from residential customers, 39 percent from
commercial customers, 21 percent from industrial customers and 1 percent from
others. In 1998, the utility's 20 largest customers accounted for approximately
7 percent of its electric revenues. As of September 30, 1999, Mass. Electric had
total assets of $1.41 billion, operating revenues of $1.37 billion and net
income of $60.0 million for the twelve months to date. Mass. Electric is subject
to rate regulation by the FERC and the MDTE.
(2) Narragansett is a public utility company engaged in the delivery of
electric energy to approximately 335,000 customers in Rhode Island. Its service
area covers
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about 839 square miles, or 80 percent of the area of the state, and encompasses
27 cities and towns, including Providence, East Providence, Cranston and
Warwick. The population of the service area is approximately 725,000 or 72
percent of the total population of the state. During 1998, 44 percent of
Narragansett's revenues from the sale of electricity was derived from
residential customers, 40 percent from commercial customers, 14 percent from
industrial customers, and 2 percent from others. In 1998, the 20 largest
customers of Narragansett accounted for approximately 10 percent of its electric
revenues. As of September 30, 1999, Narragansett had total assets of $673.4
million, operating revenues of $456.1 million and net income of $30.1 million
for the twelve months to date. Narragansett is subject to regulation by the
FERC, the RIPUC and the Rhode Island Division of Public Utilities and Carriers
("RIDIV").
(3) Granite State is a public utility company engaged in the delivery of
electric energy to approximately 37,000 customers in 21 New Hampshire
communities. The Granite State service territory has a population of
approximately 73,000 and includes the Salem area of southern New Hampshire and
several communities along the Connecticut River. During 1998, 49 percent of
Granite State's revenues from the sale of electricity was derived from
commercial customers, 36 percent from residential customers, 14 percent from
industrial customers, and 1 percent from others. In 1998, the 10 largest
customers of Granite State accounted for approximately 18 percent of its
electric revenue. As of September 30, 1999, Granite State had total assets of
$65.0 million, operating revenues of $60.6 million, and net income of $2.8
million for the twelve months to date. Granite State is subject to regulation by
the FERC and the NHPUC.
(4) Nantucket provides electric utility service to approximately 10,000
customers on Nantucket Island in Massachusetts. Nantucket's year-round
population is approximately 6,000, with a summer peak of approximately 40,000.
Nantucket's service area covers the entire island. During 1998, 62 percent of
Nantucket's revenues from the sale of electricity was derived from residential
customers, 37 percent from commercial customers and 1 percent from others. At
the end of 1998, Nantucket had total assets of $44
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million, operating revenues of $15.1 million, and net income of $567,000.
Nantucket is subject to regulation by the FERC and the MDTE.5
(5) NEP is principally engaged in purchasing, transmitting and selling
electric energy at wholesale. In 1998, 98 percent of NEP's all-requirement
revenue from the sale of electricity was derived from sales for resale to
affiliated companies and 2 percent from sales for resale to municipal and other
utilities. NEP has recently completed the sale of substantially all of its
non-nuclear generating business and currently is attempting to sell its minority
interests in three operating nuclear power plants and one fossil-fueled
generating station in Maine.6 As of September 30, 1999, NEP had total assets of
$2.28 billion, operating revenues of $586.2 million and net income of $70.8
million for the twelve months to date. NEP is subject, for certain purposes, to
regulation by the SEC, the FERC, the NRC, the RIDIV, the MDTE, the NHPUC, the
VPSB, the CDPUC, and the Maine Public Utilities Commission.
(6) NEET, a wholly owned subsidiary of NEES, owns and operates a direct
current/alternating current converter terminal facility for the first phase of
the Hydro-Quebec and New England interconnection (the "Interconnection") and six
miles of high voltage direct current transmission line in New Hampshire.
(7) N.H. Hydro, in which NEES holds 53.97% of the common stock, operates
121 miles of high-voltage direct current transmission line in New Hampshire for
the second phase of the Interconnection, extending to the Massachusetts border.
As of September 30, 1999, N.H. Hydro had total assets of $129.3 million,
operating revenues of $30.7 million, and net income of $4.5 million for the
twelve months to date.
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5 Audited financial statements for the year ended September 30, 1999 are not
available.
6 NEP is also a holding company because it owns 20% of the outstanding voting
securities of Vermont Yankee Nuclear Power Corporation, the licensed operator of
the Vermont Yankee nuclear facility. NEP also has minority interests in Yankee
Atomic Electric Company (30%), Maine Yankee Atomic Power Company (20%) and
Connecticut Yankee Atomic Power Company (15%), all of which have permanently
ceased operations. NEP is an exempt holding company under the Act. Yankee Atomic
Electric Company, Holding Co. Act Release No. 13048 (Nov. 25, 1955); Connecticut
Yankee Atomic Power Company, Holding Co. Act Release No. 14768 (Nov. 15, 1963).
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(8) Mass. Hydro, 53.97% of the voting stock of which is held by NEES,
operates a direct current/alternating current terminal and related facilities
for the second phase of the Interconnection and 12 miles of high-voltage direct
current transmission line in Massachusetts. As of September 30, 1999, Mass.
Hydro had total assets of $155.7 million, operating revenues of $35.5 million,
and net income of $7.3 million for the twelve months to date.
o New England Hydro Finance Company, Inc. ("NE Hydro Finance") is
owned in equal shares by Mass. Hydro and N.H. Hydro and provides
the debt financing required by the owners to fund the capital
costs of their participation in the Interconnection.
(9) NEES Communication, Inc. ("NEESCom") has been declared an exempt
telecommunications company by the Federal Communications Commission. NEESCom
presently focuses on dark fiber leasing. At the end of 1998, NEESCom had total
assets of $12.6 million and a net loss of $1.2 million.7
o NEES Telecommunications Corp. is wholly owned by NEESCom and is
presently inactive.
(10) NEES Global, Inc. ("NEES Global") is a wholly-owned nonutility
subsidiary of NEES that provides principally consulting services and product
licenses to unaffiliated utilities in the areas of electric utility
restructuring and customer choice. On September 21, 1999, NEES Global sold its
wholly-owned subsidiary, New England Water Heater Company, Inc., which is in the
water heater leasing business. As of September 30, 1999, NEES Global had total
assets of $7.8 million, operating revenue of $9.1 million and a net income of
$1.7 million for the twelve months to date. Monitoring Technologies, Inc., Nexus
Energy Software, Inc. and Separation Technologies, Inc. are owned in part by
NEES Global and are described below.
(11) NEES Energy, Inc. ("NEES Energy") is a wholly-owned marketing
subsidiary of NEES. As of September 30, 1999, NEES Energy had total assets of
$195
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7 Audited financial statements for the year ended September 30, 1999 are not
available.
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million, operating revenue of $358.8 million and a net loss of $10.3 million for
the twelve months to date.
o AllEnergy Marketing Company, L.L.C. ("AllEnergy") is a
wholly-owned subsidiary of NEES Energy. AllEnergy markets energy
products and provides a wide range of energy-related services
including, but not limited to, marketing, brokering and sales of
energy, audits, fuel supply, repair, maintenance, construction,
operation, design, engineering and consulting to customers in the
competitive power markets of New England and New York.
o AllEnergy's subsidiary Texas Liquids, L.L.C. (owned 99% by
AllEnergy and 1% by NEES Energy), engages principally in
marketing and sales of propane and energy in the New Jersey area.
Texas Liquids, L.L.C. owns 50% of the voting securities of AEDR
Fuels L.L.C., a company engaged in the home heating oil business,
and approximately 5% of the voting securities of Weatherwise USA,
L.L.C., a company engaged in providing energy management, demand
side management and technical services, and utility hedging
services to reduce weather-related financial uncertainties for
utilities and energy users.
o AllEnergy's wholly-owned subsidiary, Texas-Ohio Gas, Inc. markets
natural gas to industrial and commercial end users throughout the
northeast US.
(12) Granite State Energy, Inc. ("Granite State Energy") is a wholly-owned
nonutility marketing subsidiary of NEES. Granite State Energy provides a range
of energy and energy-related services, including: sales of electric energy,
audits, power quality, fuel supply, repair, maintenance, construction, design,
engineering and consulting. At the
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end of 1998, Granite State Energy had total assets of $304,000, operating
revenues of $718,000 and a net loss of $22,000.8
(13) New England Water Heater Company, Inc. is engaged in the rental,
service, sale and installation of water heaters.9
(14) New England Power Service Company ("Service Company"), provides a
variety of administrative and consulting services for the NEES system pursuant
to a service agreement approved by the Commission in accordance with the
requirements of Rule 90. As of September 30, 1999, Service Company had total
assets of $131.6 million, operating revenues of $197.7 million and net income of
$1.8 million for the twelve months to date.
(15) Metro West Realty, L.L.C., a wholly-owned subsidiary of NEES conducts
real estate investment and management activities.
(16) 25 Research Drive, L.L.C., a wholly-owned subsidiary of NEES, was
formed to facilitate the proposed acquisition of Eastern Utilities Associates.
(17) New England Energy, Inc. ("NEEI"), is a wholly-owned subsidiary of
NEES that owned oil and gas properties that were sold during 1998. NEEI is
currently inactive.
(18) Monitoring Technologies, Inc. ("MTC") designs, develops, manufactures
and markets microprocessor-based products that monitor wear and forecast failure
of components in machinery. NEES Global has a 4% ownership interest in MTC.
(19) Nexus Energy Software, Inc. ("Nexus"), develops and licenses its
software to utilities and operates a website which targets energy consumers for
the purpose of helping them make energy choices. NEES Global has a 40.3%
ownership interest in Nexus.
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8 Audited financial statements for the year ended September 30, 1999 are not
available. 9 The sale of this company was closed effective September 21, 1999.
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(20) Separation Technologies, Inc. ("STI"), is a provider of ash processing
equipment, project financing, operations and marketing services related to its
equipment. NEES Global has a 5.02% ownership interest with a voting stock
ownership interest of 5.67% in STI.
(21) UNITIL Company ("Unitil"), is a registered holding company located in
New England. NEES holds a 0.8% ownership interest in Unitil. NEES acquired the
Unitil interest in exchange for NEES' interest in Fitchburg Gas and Electric
Company when that company was merged with Unitil.
Narragansett and NEP (and AllEnergy) are members of the New England Power
Pool ("NEPOOL"). Mass. Electric, Nantucket and Granite State participate in
NEPOOL through NEP. The FERC recently has approved a restructuring of NEPOOL
involving (i) the formation of an Independent System Operator that will control
the transmission facilities owned by the NEPOOL public utility members and
administer the NEPOOL open-access transmission tariff and (ii) the operation of
a power exchange that will embody a competitive wholesale power market. New
England Power Pool, 85 FERC P. 61,379 (Dec. 17, 1998).
A chart of the organization of NEES is attached hereto as Exhibit E-3.
C. Description of the Merger
1. Background
National Grid has been seeking opportunities to develop earnings from
outside the UK transmission business by applying its core skills in the
development and management of infrastructure assets and systems. The Merger is a
major step toward realizing those goals. From National Grid's perspective, NEES:
o represents a significant investment in an efficient, focused
transmission and distribution business with a strong operational
track record, which will benefit further from National Grid's
core skills;
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o enhances National Grid's earnings per share, before the
amortization of goodwill, and significantly enhances National
Grid's cash flow per share immediately following acquisition;
o provides the right point of entry into the U.S. for National
Grid, given New England's favorable economic climate and its more
advanced state of regulatory evolution towards performance-based
regulation;
o brings National Grid a high-quality management team with proven
distribution expertise and a shared view of the industry's future
development in the Northeast U.S.; and
o provides an excellent regional platform for growth in
transmission and distribution.
The Applicants believe that National Grid and NEES have complementary
skills that can be used to benefit the public interest, as well as the interest
of investors and consumers, the "protected interests" under the Act. National
Grid has considerable experience:
o operating as a facilitator of competition in a regulatory
environment that promotes and rewards efficiency; and
o improving system performance through investing in and managing
complex transmission system networks and the sophisticated
software systems that control the networks in real time.
National Grid believes that this experience complements NEES' proven expertise
in operating efficient distribution businesses in an evolving regulatory
environment and will provide it with an important competitive advantage both in
developing its U.S. transmission and distribution business and pursuing
opportunities elsewhere. Both National Grid and NEES are committed to providing
reliable and efficient service and enhancing overall performance standards for
the benefit of customers and shareholders.
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2. Merger Agreement
Under the terms of the Merger Agreement, each outstanding NEES common
share, other than shares held by NEES as treasury stock or held by any other
NEES subsidiary and shares held by National Grid or any of its subsidiaries, but
including all common shares held as treasury shares under a rabbi trust
maintained by NEES to satisfy certain benefit obligations, will converted into
the right to receive $53.75 in cash per share. This cash payment will increase
by $0.003288 per share, up to a maximum price of $54.35 per share for each day
completion of the Merger is delayed longer than six months after approval of the
Merger by NEES shareholders. The Merger is subject to customary closing
conditions, including receipt of all necessary regulatory approvals, including
the approval of the Commission.
3. Corporate Structure for the Merger
As stated above, the Merger is structured as the indirect acquisition of
NEES by National Grid. Promptly after the Merger is consummated, National Grid
currently intends to convert NEES from a Massachusetts business trust into a
more conventional business corporation. This conversion may result in NEES
having a different corporate name. All references contained in this
Application/Declaration to NEES after consummation of the Merger refer to NEES
and its potential corporate successor. The Intermediate Companies in the
corporate structure between National Grid and NEES create a structure typical
for U.K. cross-border transactions; these entities exist primarily for the
purpose of creating an economically efficient and viable structure for the
transaction and the ongoing operations of NEES. The proposed structure as
currently planned and specific function of each of the Intermediate Companies is
set forth in Exhibit J-2 hereto. The Applicants note that certain adjustments in
the structure may be necessary to reflect tax and accounting changes as well as
management decisions prior to consummation of the Merger. Material changes
between the date of this Application/Declaration and the consummation of the
Merger will be reflected in a pre-effective amendment hereto. National Grid's
direct and indirect interest in each of the Intermediate Companies will flow
through loans and equity interests similar to those indicated in Exhibit J-2. It
should be noted that under this
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structure there will be no outside, third party interests, including no lenders
and no customers, in the Intermediate Companies.10
4. Financing the Merger
National Grid intends to finance the acquisition of NEES through a
combination of borrowings under existing bank facilities and other internal cash
sources. Given the price escalation provisions of the Merger Agreement and the
nature of the transaction, the exact cash purchase price to be paid to NEES
shareholders in the aggregate will depend on the timing of the closing of the
Merger as well as the number of NEES shares outstanding at that time. However,
it is expected that the acquisition price will be approximately $3.2 billion. On
March 5, 1999, National Grid entered into a fully committed bank facility with
six banks providing for up to $2.750 billion in borrowings by National Grid,
wholly-owned National Grid subsidiaries incorporated in the UK (other than NGC),
and other National Grid subsidiaries as approved in writing by the banks, plus a
further 250 million pound sterling facility available to NGC only. The facility
has a maturity of 3 to 5 years. Each of these banks is a sophisticated
commercial lender and the facilities were negotiated at arms' length. It is
expected that additional banks will be added to the facility and subsequent
syndication may bring the number of banks involved to over 70. These facilities
were established both for funding the acquisition and to provide other working
capital needs for National Grid. In addition, National Grid will have access to
other internal sources of funds for the acquisition, namely existing cash
balances. As of September 30, 1999, National Grid had on hand deposits of $2,432
million.
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10 The Intermediate Company structure also will be free of minority equity
interest holders, except that National Grid (US) Holdings Limited ("NGUSH") will
own one share in each of its indirect subsidiary companies, National Grid
(Ireland) 1 Limited and National Grid (Ireland) 2 Limited. NGUSH's wholly-owned
subsidiary company, National Grid (US) Investments ("NGUSI"), will own all the
remaining shares. In addition, National Grid will own 0.1% of the preference
shares issued by NGUSI. All the remaining preference shares (and all the
ordinary shares issued by NGUSI) will be owned by NGUSH.
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D. Management and Operations of National Grid and NEES Following the
Merger
1. National Grid
Following consummation of the Merger, National Grid will become the
indirect parent company to NEES. All of National Grid's other operations will
remain unchanged in the Merger. The Merger Agreement provides that at the
effective time of the Merger, National Grid will appoint Richard P. Sergel, the
NEES president and chief executive officer and one additional NEES director,
Paul Joskow, to National Grid's board of directors. There will be ten directors
in all after the Merger. Both Richard Sergel and Paul Joskow are U.S. citizens
and residents of New England. Robert Faircloth, who is also a U.S. citizen and
part-time resident of New England, currently serves on the National Grid board.
The management of National Grid shall otherwise remain unchanged by the Merger.
National Grid's proposed board composition demonstrates a continued
commitment to maintaining a local presence in the U.S. that is sensitive to
local concerns. Indeed, National Grid intends to expand its presence in the U.S.
as opportunities arise through the restructuring of the electricity industry
and, in particular, within the fragmented New England market. National Grid's
commitment to the New England region is also demonstrated by its commitment to
continue to provide charitable contributions and community support within the
New England region at annual levels substantially comparable to the annual level
of charitable contributions and community support provided, directly or
indirectly, by NEES and its public utility subsidiaries within the New England
region during 1997.11
Upon consummation of the Merger, National Grid and the Intermediate
Companies will register as holding companies under Section 5 of the Act. It is
intended that National Grid Holdings will be qualified as a foreign utility
company within the meaning of
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11 Agreement and Plan of Merger, dated as of December 11, 1998, by and among
NEES, National Grid and NGG Holdings LLC, Section 7.07(c).
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Section 33 of the Act, and that all operations thereunder will claim the benefit
of the FUCO exemption.
2. NEES
Following consummation of the Merger, NEES will become an indirect wholly
owned subsidiary of National Grid and its common shares will be deregistered
under the Securities Exchange Act of 1934, as amended, and delisted from the New
York Stock Exchange and the Boston Stock Exchange. The NEES Agreement and
Declaration of Trust will be replaced by corporate bylaws for the surviving
entity in the Merger. The Merger Agreement provides that the headquarters of
NEES as the surviving entity will remain in Massachusetts, with offices for
utility operations in Massachusetts, Rhode Island and New Hampshire. The
post-Merger NEES board of directors will be comprised of up to nine members
designated from among the officers of National Grid and NEES, as mutually agreed
by National Grid and NEES. In addition, the then-current outside directors of
NEES will be appointed to an advisory board to be maintained for at least two
years after the effectiveness of the Merger. The function of the advisory board
will be to advise the surviving entity's board of directors with respect to
general business opportunities and activities in the surviving entity's market
area as well as customer relations issues. NEES will remain a registered holding
company under the Act.
E. Industry Restructuring Initiatives Affecting U.S. Operations.
NEES' public utility subsidiaries operate in states in which electric
utility restructuring has advanced significantly over the past year and a half.
The Applicants believe that these restructuring efforts will continue to lead to
significant changes in the electric utility industry in New England and will
serve as models for restructuring efforts in other parts of the nation.
Starting in 1996 and continuing through 1998, restructuring legislation was
passed in Massachusetts, Rhode Island and New Hampshire relating to competition
and customer choice of power suppliers, recovery of stranded costs by utilities
and reductions in rates. During this period, and in some cases prior to the
enactment of legislation, NEES'
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public utility subsidiaries entered into settlement agreements with their
relevant state regulators relating to corporate restructuring and the
introduction of retail access to competitive power suppliers. The settlement
agreements were also approved by the FERC. The overriding principle in this
restructuring was that the transition to full competition at the retail level
should be accomplished by separating generation from transmission to create a
regime of independent transmission companies with a competitive market for power
suppliers. Accordingly, NEES and its subsidiaries committed to the divestiture
of all generating facilities, including all nuclear plants, to the extent
practicable. As noted above, in 1998, NEP and Narragansett completed the sale of
substantially all non-nuclear generation facilities, including obligations under
power purchase and sale agreements, to USGen New England, Inc. As a result of
this divestiture, NEES is now primarily a transmission and distribution system
operating in a region undergoing significant restructuring. National Grid, which
is the world's largest privately owned independent transmission company, has
participated in the transition to a competitive electric market in England and
Wales and has had nine years experience in operating in a competitive
environment. The industry restructuring that is occurring in New England is a
critical factor in understanding the rationale and benefits of the Merger, which
are discussed in detail in Item 3.A.2.b below.
Pursuant to Mass. Electric's settlement with state regulators and the FERC,
and in accordance with legislation enacted in Massachusetts in late 1997,
starting in March, 1998, customers of Mass. Electric have been able to choose
their power supplier. The legislation requires electric utilities to provide
customers who do not choose a power supplier with standard offer service at
prices that produce a 10 percent rate reduction from the prices that were in
effect in 1997. The legislation also requires the rate reductions to increase to
15% (in real terms over 1997 prices) on or before September of 1999. The
settlement and legislation also authorized the recovery of stranded costs
resulting from the introduction of customer choice. The MDTE approved the
settlement and found it to be consistent with the legislation. A November 1998
referendum on the ballot in Massachusetts calling for the repeal of the
Massachusetts statute was defeated by the voters.
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Under the Massachusetts settlement agreement providing for customer choice,
recovery of NEP's stranded costs is allowed through a contract termination
charge billed to Mass. Electric and Nantucket, which is in turn collected by
Mass. Electric and Nantucket from all retail delivery customers. The
Massachusetts settlement agreement also required the relevant NEES companies to
divest all of their generation and related properties, and the companies
completed the sale of their non-nuclear generating assets to USGen New England
in 1998. The net proceeds of such sale were used to reduce the transition access
charge from 2.8 cents per kWh initially reflected in the settlement. In
addition, NEES's oil and gas properties were sold to Sameden Oil Corporation as
of January 1, 1998. Through power purchase contracts with USGen New England,
Inc. and TransCanada Power Marketing Ltd., Mass. Electric is providing
transition services to customers who do not choose a power supplier. The
Massachusetts settlement agreement and related transactions were approved by the
MDTE and the FERC.
The State of Rhode Island enacted restructuring legislation in 1996,
allowing certain customers in the state to choose power suppliers pursuant to a
phase in schedule that is now complete. NEP and Narragansett entered into a
settlement agreement with the RIPUC and RIDIV to implement the legislation on
terms similar to the Massachusetts settlement agreement with respect to
divestiture, stranded cost recovery and transition services. This settlement
agreement was approved by the FERC.
While restructuring efforts in New Hampshire began early, with the passage
of legislation in 1996, regulatory efforts have largely been halted as a result
of litigation by other in-state utilities. Granite State entered into a
settlement with the Governor of New Hampshire and several public interest and
customer groups in July 1998 that provided all of its customers with the right
to choose their electricity supplier and guaranteed a rate reduction of 10
percent. Following the sale of the system's non-nuclear generation facilities,
additional savings were passed on to Granite State's customers. Under the
settlement transition service was to be provided by Granite State for a two and
one-half year period. In January 1999, following an auction process, Granite
State selected Constellation Power Source as the supplier for its transition
service offer, replacing USGen New England. Again, this settlement agreement was
approved by the NHPUC and FERC.
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F. Reporting
Applicants will file Form U5S annually with the Commission within 120 days
of the close of National Grid's fiscal year. In addition, National Grid will
file Form 20-F annually with the Commission, a semiannual report containing
earnings information, and reports on Form 6-K containing material announcements
as made. National Grid will provide the staff with paper copies of its filings
on Form 20-F and its semiannual reports when filed with the Commission.
Under UK rules, National Grid must prepare and publish consolidated
financial information semi-annually. In addition, semiannual financial reporting
is consistent with National Grid's ADR listing on the New York Stock Exchange.
Due to National Grid's extensive foreign holdings, it would entail significant
additional work and expense for National Grid to prepare consolidated financial
statements on a quarterly basis. In that regard, in the interest of maintaining
the consistent presentation of financial information, Applicants propose that
their Form U5S filings will comprise National Grid's consolidated financial
statements in the format required by Form 20-F, i.e., U.K. GAAP format with
reconciliations to U.S. GAAP. In addition, Applicants propose to include in
their Form U5S filings: (1) U.S. GAAP financial statements for all the companies
in the NEES Group, and (2) U.S. GAAP financial statements or financial
statements in the format required by Form 20-F for (a) National Grid Holdings,
on a consolidated basis, and (b) the Intermediate Companies. Amounts included in
Form U5S filings will be stated in U.S. dollars. National Grid will provide the
Commission access to the books, records and financial statements, or copies
thereof, of any of its subsidiary companies, in English, as the Commission may
request.
Applicants request an exemption from Rule 26(a)(1) under the Act, regarding
the maintenance of financial statements in conformance with Regulation S-X, for
any subsidiary of National Grid Holdings organized outside the U.S. Any FUCO
acquired directly or indirectly by National Grid subsequent to the issuance of
an order in this Application-Declaration will maintain its financial statements
in U.S. GAAP or reconcile such statements to U.S. GAAP in the same manner as
required by Form 20-F.
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Applicants also will report annually, as a supplement to the Form U-13-60
filed by Service Company, about service transactions among the National Grid
System companies (excepting the NEES Group) and the NEES Group companies. The
report will contain the following:
a. A narrative description of the services rendered by individual
National Grid System companies (excepting the NEES Group) to the NEES
Group and by the NEES Group companies to other National Grid System
companies;
b. Disclosure of the dollar amount of services rendered according to
category or department;
c. Identification of companies rendering services and recipient
companies, including disclosure of the allocation of service costs
among the companies in the NEES Group, and;
d. Disclosure of the number of NEES Group employees engaged in rendering
services to other National Grid System companies on an annual basis
stated on an absolute and percentage of total employees basis.
Item 2. Fees, Commissions and Expenses
Millions
Accountants' fees $6.9
Legal fees and expenses 9.5
Shareholder communication and proxy solicitation expenses 2.3
Investment bankers' fees and expenses 30.7
Consulting fees .8
Miscellaneous 4.0
Total $54.2
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The total fees, commissions and expenses expected to be incurred in
connection with the Merger are estimated to be approximately $54.2 million.
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:
Sections Transactions to which section or rule is or may be applicable:
of the Act
2(a)(7), 2(a)(8) Request for declaration that Intermediate Companies and NEP
are not holding companies or subsidiary companies, solely
for purposes of Section 11(b)(2)
4, 5 Registration of National Grid as a holding company following
the consummation of the Merger
9(a)(2), 10 Acquisition by National Grid of common stock of NEES public
utility subsidiary companies
11(b)(2) Request for declaration that the Intermediate Companies are
not subsidiary companies or holding companies, solely with
respect to the "great-grandfather" provisions of Section
11(b)(2).
13 Approval of the Service Agreement and services provided to
affiliates thereunder by New England Power Service Company.
14, 15 Reporting, books and records.
33 Operations of National Grid Holdings and its subsidiary
companies.
Rules
45(a), 52 Financing transactions, generally.
80-91 Affiliate transactions, generally.
93, 94 Accounts, records and annual reports by subsidiary service
company.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the merger, such sections and rules should
be considered to be set forth in this Item 3.
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A. Legal Analysis
Section 9(a)(2) 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), 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."
Because National Grid directly or indirectly, will acquire more than five
percent of the voting securities of each of the U.S. Utility Subsidiaries as a
result of the merger, and thus will become an "affiliate" as defined in Section
2(a)(11)(A) of the Act of the U.S. Utility Subsidiaries as a result of the
merger, National Grid 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.
As set forth more fully below, the Merger complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission because:
- the consideration to be paid in the Merger is fair and reasonable;
- the Merger will not create detrimental interlocking relations or
concentration of control;
- the Merger will not result in an unduly complicated capital structure
for the National Grid 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;
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- the Merger tends towards the economical and efficient development of
an integrated public utility system; and
- the Merger will comply with all applicable state laws
1. 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.
a. Section 10(b)(1)
i. Interlocking Relationships
By its nature, any merger results in new links between theretofore
unrelated companies. Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("interlocking relationships are necessary to integrate [the two merging
entities]"). The Merger Agreement provides for the Board of
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Directors of National Grid to be composed of members of the Board of Directors
of National Grid and from top management of NEES. This is necessary to integrate
NEES fully into the National Grid system and will therefore be in the public
interest and the interests of investors and consumers. Forging such relations is
beneficial to the protected interests under the Act and thus are not prohibited
by Section 10(b)(1).
ii. Concentration of Control
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. American Electric
Power Co., 46 S.E.C. 1299, 1309 (1978). 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." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968). As discussed
below, the Merger will not create a "huge, complex, and irrational system," but
rather will result in a new holding company over a previously-approved
integrated electric utility system. See WPL Holdings, Inc., Holding Co. Act
Release No. 24590 (Feb. 26, 1988), aff'd in part and rev'd in part sub nom.,
Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989),
reaffirmed, Holding Co. Act Release No. 25377 (Sept. 18, 1991).
Competitive Effects: In Northeast Utilities, Holding Co. Act Release No.
25221 (Dec. 21, 1990), 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." National Grid and NEES have filed Notification and
Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects
of the Merger on competition and the Merger has been cleared by these agencies.
In addition, the competitive impact of the Merger has been fully considered
by the FERC pursuant to Section 203 of the Federal Power Act in its review of
the Merger.
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As explained more fully in the FERC order approving the Merger, a copy of which
is attached hereto as Exhibit D-1.2, the Merger will not have an adverse effect
on competition. NEES and its subsidiary companies, on the one hand, and National
Grid and its related companies, on the other, do not have facilities or sell
products in any common geographic markets. With the exception of NEES Global,
which does some limited consulting work outside of the United States, the NEES
companies operate exclusively in the United States, selling electricity and
transmission, distribution and related energy services. National Grid and its
subsidiary companies operate almost exclusively in the United Kingdom and other
countries outside the United States.
For these reasons, 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).
b. Section 10(b)(2) -- Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by National Grid to the holders of NEES common stock
in connection with the Merger is reasonable and whether it bears a fair relation
to 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
quarterly price data, high and low, for NEES common stock provide support for
the consideration of $53.75 for each share of NEES common stock.
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NEES
High Low Dividends
- --------------------------------------------------------------------------------
1996
First Quarter 40 5/8 36 1/8 $0.59
Second Quarter 36 7/8 32 7/8 0.59
Third Quarter 36 3/8 31 1/8 0.59
Fourth Quarter 35 5/8 31 0.59
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1997
First Quarter 35 5/8 33 3/8 0.59
Second Quarter 37 1/8 33 1/4 0.59
Third Quarter 39 11/16 36 1/4 0.59
Fourth Quarter 43 5/16 37 1/4 0.59
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1998
First Quarter 45 13/16 41 0.59
Second Quarter 45 9/16 40 5/8 0.59
Third Quarter 45 3/8 38 15/16 0.59
Fourth Quarter 49 1/8 40 5/16 0.59
- --------------------------------------------------------------------------------
On December 11, 1998, the last full trading day before the public
announcement of the execution and delivery of the Merger Agreement, the closing
price per share as reported on the NYSE-Composite Transaction of NEES common
stock was $43.
In addition, the consideration is the product of extensive and vigorous
arms-length negotiations between National Grid and NEES. These negotiations were
preceded by months of due diligence, analysis and evaluation of the assets,
liabilities and business prospects of the respective companies. See National
Grid Circular (Exhibit C-2 hereto); NEES proxy statement (Exhibit C-1 hereto).
Finally, internationally-recognized investment bankers for both National
Grid and NEES have reviewed extensive information concerning the companies and
analyzed a variety of valuation methodologies, and have provided advice to the
companies that the consideration is fair, from a financial point of view, to the
holders of National Grid ordinary
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shares and NEES common stock. The investment bankers' analyses are attached
hereto. See National Grid Circular (Exhibit C-2); Opinion of Merrill Lynch,
Pierce, Fenner & Smith, Incorporated (Exhibit G-1).
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, National
Grid believes that the consideration for the Merger bears a fair relation to the
sums invested in, and the earning capacity of, the utility assets of NEES.
c. Section 10(b)(2) -- Reasonableness of Fees
National Grid 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, National Grid and
NEES together expect to incur a combined total of approximately $54.2 million in
fees, commissions and expenses in connection with the Merger. By example,
American Electric Power Company and Central and South West Corporation have
represented that they expect to incur total transaction fees and regulatory
processing fees of approximately $53 million, including financial advisory fees
of approximately $31 million, in connection with their proposed Merger.
The Applicants believe that the estimated fees and expenses in this matter
bear a fair relation to the value of NEES and the strategic benefits to be
achieved by the Merger, and further that the fees and expenses are fair and
reasonable in light of the complexity of the Merger. See Northeast Utilities,
Holding Co. Act Release No. 25548 (June 3, 1992), modified on other grounds,
Holding Co. Act Release No. 25550 (June 4, 1992) (noting that fees and expenses
must bear a fair relation to the value of the company to be acquired and the
benefits to be achieved in connection with the acquisition). Based on the price
of NEES stock on December 11, 1998, the Merger would be valued at
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approximately $3.2 billion. The total estimated fees and expenses of $54.2
million represent approximately 1.69% of the value of the consideration to be
paid by National Grid, and are consistent with percentages previously approved
by the Commission. See, e.g., Entergy Corp., Holding Co. Act Release No. 25952
(Dec. 17, 1993) (fees and expenses represented approximately 1.7% of the value
of the consideration paid to the shareholders of Gulf States Utilities);
Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992)
(approximately 2% of the value of the assets to be acquired).
d. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether a proposed
acquisition will unduly complicate the acquiror's capital structure or will be
detrimental to the public interest or the interest of investors or consumers or
the proper functioning of the resulting system.
For the reasons that follow, the capital structure of National Grid will
not be unduly complicated nor will it be detrimental to the public interest, the
interest of investors or consumers or the proper functioning of the combined
system.
The Applicants are proposing a structure for the Merger that will be
completely transparent between National Grid and NEES and will meet all of the
requirements of the 1935 Act.
In the Merger, current common shareholders of NEES will receive cash (in
the aggregate, the "Cash Consideration") in exchange for their NEES shares.
National Grid proposes to obtain the amount of cash comprising the Cash
Consideration from existing cash resources and through the Bank Loans. The Bank
Loans will be straightforward commercial loans from sophisticated commercial
lenders directly to National Grid. The Bank Loans will be full recourse
obligations of National Grid and will be neither guaranteed by, nor secured by
any assets of, any subsidiary of National Grid which directly or indirectly owns
equity securities of NEES. In no event will National Grid issue any equity or
debt securities to NEES shareholders as consideration for the Merger and the
acquisition of NEES.
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Upon consummation of the Merger, NEES will become a wholly owned indirect
subsidiary of National Grid. National Grid proposes to hold its interest in NEES
through the Intermediate Companies. Each of the Intermediate Companies will be
organized under the laws of either a member state of the European Union with
which the U.S. has a comprehensive Double Taxation Treaty or a state of the U.S.
All of the Intermediate Companies will be directly or indirectly wholly owned by
National Grid and will have no public or private institutional equity or debt
holders. The Intermediate Companies will be capitalized with equity and/or debt
all of which will be held by either National Grid or an Intermediate Company.
The ultimate U.S. parent of NEES will be capitalized with both equity and debt,
to be held by one or more of the Intermediate Companies. Absent such additional
approval as may be required, none of the Intermediate Companies will be engaged
in any business or trade other than the business of owning, directly or
indirectly, equity securities of NEES and the financing transactions which are
the subject of this memorandum and none of the Intermediate Companies will be
regulated by U.K. or other third country regulatory authorities having
jurisdiction over electricity rates and service.
As a wholly owned indirect subsidiary of National Grid, NEES will retain
its designation as a registered holding company under the 1935 Act as well as
its current capital structure. Neither NEES nor any of the NEES Subsidiary
Companies will incur any additional indebtedness or issue any securities to
finance any part of the Cash Consideration. Except with respect to the effect in
corporate structure resulting from the potential conversion of NEES from a
business trust into a business corporation, the acquisition of NEES by National
Grid and the corporate and financing mechanics summarized above are not designed
or intended to alter or otherwise affect the current corporate structure and
financing obligations of the NEES Group companies as members of a registered
holding company system.
It is contemplated that the companies in the NEES Group will each continue
to pay dividends (and, in the case of the NEES Subsidiary Companies, dividends
on
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preferred stock and interest on and principal of long-term debt). Dividends paid
by NEES may ultimately be used by National Grid to service its debt.12
i. The presence of debt at more than one level of the
National Grid system does not "unduly complicate" the
capital structure of that company for purposes of
Section 10(b)(3).
Implementation of the transaction structure requires that a number of steps
be taken in a specified sequence in order to achieve the economic benefits of
the transaction structure as an entirety. While many of the individual
transactional steps necessary to implement the transaction structure will occur
prior to consummation of the Merger at a time when National Grid will continue
to enjoy the benefits of exemption under Rule 5, completion of a number of the
steps necessary to implement the transaction structure will occur shortly
following consummation of the Merger and, thus, will be subject to SEC review.
We request that the SEC view all of the steps necessary to implement the
transaction structure in their entirety as they are, in fact, constituent
elements comprising a single transaction.
In addition, we recognize that, in prior matters involving the formation of
a registered holding company, the SEC has considered preliminary financing
transactions (i.e., transactions occurring prior to the formation of a
registered holding company) in view of their effect on the capital structure of
the resulting holding company. For example, in connection with the merger of
Atlantic Energy, Inc. and Delmarva Power & Light Co., the SEC took occasion to
comment on the fact that the resulting registered holding company would have two
classes of common stock -- notwithstanding that, at the time the letter or
tracking stock was issued, the issuer was not a registered holding company. The
SEC did not address the specific question of whether it had jurisdiction to pass
on the securities issuance but instead noted that, under Section 7(c)(2)(A) of
the 1935 Act, a registered
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12 In a companion filing, National Grid and the U.S. Subsidiary Companies are
requesting authority to pay dividends out of additional paid-in capital up to
the amount of NEES' consolidated retained earnings just prior to the Merger and
out of earnings before amortization of goodwill thereafter. In no event would
dividends be paid if the common stock equity of NEES as a percentage of total
capital was below 35% on a consolidated basis. File No. 70-9519 (the "Financing
Application").
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holding company can issue other than "plain vanilla" securities "solely . . .
for the purpose of effecting a Merger, consolidation, or other reorganization."
Conectiv, Inc., Holding Company Act Release No. 26832 (Feb. 25, 1998).
Accordingly, to the extent that the SEC might choose to treat any element of the
implementation of the transaction structure, such as the borrowing of the Bank
Loans, as a jurisdictional event, there is express statutory provision for such
transactions under Section 7(c)(2)(A) of the 1935 Act.
Nor does the presence of parent level debt to be used for general working
capital represent an undue complication of the capital structure of National
Grid for purposes of Section 10(b)(1). In the first instance, to the extent that
the debt is associated with facilities that have been entered into before
National Grid becomes a registered holding company, it should be grandfathered
for purposes of the Act. Second, and more important, Section 7(c)(2)(D)
expressly provides for the issuance of nontraditional securities if "such
security is to be issued or sold solely for necessary or urgent corporate
purposes of the declarant where the requirements of the provisions of paragraph
(1) would impose an unreasonable financial burden upon the declarant and are not
necessary or appropriate in the public interest or for the protection of
investors or consumers." Registered gas systems have relied on this provision
for years in connection with their routine financing transactions. See, e.g.,
The Columbia Gas System, Inc., Holding Co. Act Release No. 26634 (Dec. 23, 1996)
(authorizing Columbia to issue external, long-term debt which, in the aggregate
with equity financing issued by Columbia, would not exceed $5 billion at any one
time outstanding through December 31, 2001).
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Further, the issue for purposes of Section 10(b)(3) is not the existence of
parent-level debt per se. Rather, the question is whether it is permissible for
a registered system to have debt at more than one level. Again, the Commission
has answered that question in the affirmative. In the 1992 amendments to Rule
52, the Commission eliminated the requirement that a public-utility subsidiary
company could issue debt to nonassociates only if its parent holding company had
issued no securities other than common stock and short-term debt. The rule
release explains:
Condition (6) provides that a public-utility subsidiary company may
issue and sell securities to nonassociates only if its parent holding
company has issued no securities other than common stock and short-term
debt. All eight commenters that considered this condition recommended that
it be eliminated. They noted that it may be appropriate for a holding
company to issue and sell long-term debt and that such a transaction is
subject to prior Commission approval. They further observed that other
controls, that did not exist when the statute was enacted, provide
assurance that such financings will not lead to abuse. These include the
likely adverse reaction of rating agencies to excessive amounts of debt at
the parent holding company level and the disclosure required of companies
seeking public capital. The Commission agrees with these observations and
also noted the power of many state utility commissions to limit the ability
of utility subsidiaries to service holding company debt by restricting the
payment of dividends to the parent company. The Commission concludes that
this provision should be eliminated.
Exemption of Issuance and Sale of Certain Securities by Public-Utility
Subsidiary Companies of Registered Public-Utility Holding Companies, Holding Co.
Act Release No. 25573 (July 7, 1992).
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The Applicants have commissioned a study by Professor Julian Franks of the
London Business School, working with independent consultants from the Brattle
Group, to address the financial strength of the registered holding company
system post-Merger. A copy of the study is attached as Exhibit J-3. The study
examines National Grid's debt level after both the instant Merger and the
acquisition by NEES of EUA, and concludes that National Grid's post-acquisition
debt, relative to its projected rate base, will lie within a range for
comparable U.S. utilities. Credit rating agencies have confirmed that National
Grid will retain a strong credit rating. The debt issuances of National Grid
currently have a rating of "AA" from Standard & Poor's and "A1" from Moody's.
The major rating agencies have indicated that National Grid will retain at least
an "A" rating post-Merger. The financial strength of the company is confirmed by
the competitive terms under which National Grid has been able to secure
financing for the proposed transaction.13
ii. The Merger will not be detrimental to the public
interest or the interest of investors or consumers or
the proper functioning of the registered holding
company system.
For the reasons set forth previously, and discussed below in the context of
Section 10(c)(2), the Applicants believe that the proposed Merger will, in fact,
benefit the protected interests and enhance the functioning of the resulting
holding company systems. NEES and National Grid are requesting an affirmation
from each of the affected state regulators that it has the authority and
resources to protect consumers subject to its jurisdiction and that it intends
to exercise that authority. In addition, National Grid commits that it will not
seek recovery in higher rates to NEES ratepayers for any losses or inadequate
returns that may be associated with its non-NEES investments. Finally, the
Merger is expected to have no adverse effect on the rights of holders of the
outstanding preferred stock and debt securities of the NEES Subsidiary
Companies.14 Accordingly, the proposed
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13 The Applicants are submitting, on a confidential basis, a series of financial
projections for NEES, EUA and the consolidated National Grid. The projections
are intended to demonstrate the ability of National Grid to service its
indebtedness in a reasonable manner. 14 NEES currently has no public security
holders other than common stockholders.
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Merger will not be detrimental to the public interest or the interest of
investors or consumers or the proper functioning of the registered holding
company system.
2. 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 efficient development of an integrated public
utility system.
a. Section 10(c)(1)
Section 10(c)(1), in the first instance, precludes approval of an
acquisition that is unlawful under the standards of Section 8. That section,
which requires compliance with the applicable state laws concerning the
ownership or operation of the utility assets of an electric utility company and
a gas utility company serving substantially the same territory, does not apply
to the instant Merger.
Section 10(c)(1) also requires that an acquisition not be detrimental to
carrying out the provisions of Section 11. Section 11(a) directs the Commission:
to examine the corporate structure of every registered holding
company and subsidiary company thereof, the relationships among the
companies in the holding-company system of every such company and the
character of the interests thereof and the properties owned or
controlled thereby to determine the extent to which the corporate
structure of such holding-company system and the companies therein may
be simplified, unnecessary complexities therein eliminated,
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voting power fairly and equitably distributed among the holders of
securities thereof, and the properties and business thereof confined
to those necessary or appropriate to the operations of an integrated
public-utility system.
Sections 11(b)(1) and 11(b)(2) provide further directions concerning the
specifics of a permissible registered holding company system.
i. The Merger will satisfy the requirements of Section
11(b)(1), as incorporated by Section 10(c)(1).
Section 11(b)(1) directs the Commission:
To require . . . that each registered holding company, and each
subsidiary company thereof, shall take such take such action as the
Commission shall find necessary to limit the operations of the
holding-company system of which such company is a part 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. . . . The Commission
may permit as reasonably incidental, or economically necessary or
appropriate to the operations of one or more integrated public-utility
systems the retention of an interest in any business (other than the
business of a public-utility company as such) which the Commission shall
find necessary or appropriate in the public interest or for the protection
of investors or consumers and not detrimental to the proper functioning of
such system or systems.
For purposes of the single system requirement, the Merger would simply impose a
new holding company structure over a fully-integrated electric utility system.
The question then becomes whether the "other businesses" of National Grid
are retainable under the standards of Section 11 and the statutory amendments
thereto. As previously noted, National Grid Holdings, National Grid's only
direct subsidiary, will claim an exemption as a FUCO under the Act. Thus,
National Grid Holdings and all of its
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subsidiaries will be exempt from regulation, and are retainable, under the Act
in accordance with the provisions of Section 33(a)(1) of the Act.
Although not jurisdictional, the parties note that National Grid's indirect
subsidiaries would be retainable in their own right as well. Attached as Exhibit
J-1 is a description of these subsidiaries and an explanation of the independent
bases for retention of each.
ii. The Merger will satisfy the requirements of Section
11(b)(2), as incorporated by Section 10(c)(1).
Section 11(b)(2) further directs the Commission:
To require . . . that each registered holding company, and each
subsidiary company thereof, shall take such steps as the Commission shall
find necessary 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. In carrying out the provisions of this paragraph the Commission
shall require each registered holding company (and any such company in the
same holding company system with such holding company) to take such action
as the Commission shall find necessary in order that such holding company
shall cease to be a holding company with respect to each of its subsidiary
companies which itself has a subsidiary company which is a holding company.
Except for the purpose of fairly and equitably distributing voting power
among the security holders of such company, nothing in this paragraph shall
authorize the Commission to require any change in the corporate structure
or existence or any company which is not a holding company, or of any
company whose principal business is that of a public-utility company.
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There are two sets of issues under Section 11(b)(2): first, will the corporate
structure or continued existence of any company unduly or unnecessarily
complicate the structure of the National Grid holding company system post-Merger
and, second, will the Merger result in an unfair or inequitable distribution of
voting power among the security holders of National Grid. As explained more
fully below, any apparent complexity in the resulting holding company system is
justified by the economic efficiencies to be achieved thereby. Further, there
will be no inequitable distribution of voting power as a result of the proposed
Merger.
The principal economic effect of the transaction structure will be to
permit National Grid to maximize after-tax returns, given that the consideration
for the Merger will be funded by external borrowings in the U.K. and cash in the
U.K. The only external parties to the contemplated transactions will be the
sophisticated commercial lenders that will be advancing moneys to National Grid
under fully negotiated lending agreements, none of which will involve any
guarantees by, or pledges of assets from, the U.S. Subsidiary Companies,
including NEES and the NEES Subsidiary Companies.
It is common practice for U.K. based multinational corporations to hold
their non-U.K. subsidiaries through one or more intermediary companies
incorporated under the laws of European Union member states. These types of
transaction structures are implemented to minimize the impact of tax on the
repatriation of dividends and interest to the U.K. and are understood by the
U.K. tax authorities. National Grid has used this type of structure in
connection with its other foreign investments. Again, in considering the
appropriateness of the transaction structure, the Applicants ask the staff to
recognize that this type of corporate and financing structure is normal for
cross-border transactions. In that connection, it is worth noting that U.S.
registered holding companies already employ similar structures in connection
with their, albeit out-bound, cross-border transactions. See, e.g., Exhibit H
from the Form U5S filed by The Southern Company for the year ended December 31,
1997, detailing the ownership structure for the system's exempt wholesale
generators ("EWGs") and FUCOs.15
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15 We recognize that Section 11(b)(2) does not, by its terms, apply to
acquisitions of EWGs and FUCOs because these entities, by definition, are not
"public utility companies" within the meaning of the 1935 Act.
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o National Grid's Corporate Structure Will Not Be "Unduly or
Unnecessarily" Complicated.
As noted above, National Grid's proposed transaction structure is more
complicated than the traditional corporate structure commonly used by U.S.
registered holding companies with respect to their U.S. subsidiaries and
operations in that there will be more corporate layers between National Grid and
NEES than there are, for example, between NEES and its operating subsidiaries.
The Applicants believe that the structure is nonetheless appropriate in that the
type of corporate structure proposed by National Grid, with its principal
objective being to maximize after-tax returns to shareholders, is the norm,
rather than the exception, for cross-border transactions generally. Moreover, as
to its future U.S. subsidiaries and regulated utility operations; i.e., the NEES
Group, National Grid proposes to continue the current NEES corporate and holding
company system structure.16
Further, the Intermediate Companies will not be means by which National
Grid seeks to diffuse control of NEES and the NEES Subsidiary Companies. Rather,
these companies will be created as special-purpose entities for the sole purpose
of helping the parties to capture economic efficiencies that might otherwise be
lost in a cross-border transaction. There will be no third-party investors; each
of the Intermediate Companies will be wholly-owned, directly or indirectly, by
National Grid. Nor will the "upper structure" affect the operation of the NEES
Group; indeed, the corporate structure "downstream" from NEES will remain
unaffected as a result of the proposed Merger. Finally, at the end of the day,
both National Grid and NEES will be fully regulated registered holding
companies. Accordingly, the Applicants submit that this is not the type of
situation that concerned the drafters of the Act, and that the Commission should
thus exercise its discretion to find that any apparent complexity of the
proposed transaction structure is neither undue nor unnecessary.
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16 Although NEP is technically a holding company, the structure should not be a
long-term concern due to shut-down/probable sale of Yankee companies.
Nonetheless, the Applicants seek a declaratory order with respect to NEP as
well, solely for purposes of complying with the "great grandfather" provisions
of Section 11(b)(2).
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The Commission has in the past, consistent with its role as the
administrative agency with the expertise, authority and discretion to administer
the 1935 Act in a responsive manner, giving due regard to relevant policy
considerations, recognized the necessity of permitting the continued existence
of intermediate holding companies in registered holding company systems in order
to achieve economic and tax efficiencies that would not otherwise be achievable
in the absence of such arrangements. Thus, in specific cases where the issue was
considered, the Commission exercised reasonable discretion and, on the basis of
other relevant provisions of the 1935 Act, expressly permitted the continued
existence of intermediate holding companies in a registered holding company
system, apparently on a finding of "no harm, no foul" and giving due regard to
the economic desirability of the corporate structure and other arrangements.
See, e.g., West Penn Railways Co., Holding Company Act Release No. 953 (Jan. 3,
1938) (expressly authorizing the continued existence of an intermediate holding
company); and West Texas Utilities Co., Holding Co. Act Release No. 4068 (Jan.
25, 1943) (reserving jurisdiction under Section 11(b)(2) in connection with
acquisition that resulted in the creation of a "great grandfather" company). In
each of these matters, the Commission apparently concluded that the economic
benefits associated with the additional corporate layers in the holding company
system outweighed the potential for harm and the possibility that there could be
a recurrence of the financial abuses that the 1935 Act was intended to
eliminate. See West Penn Railways ("The substantial traction interests of the
West Penn Railways Company make it impractical, from a financial standpoint, to
eliminate it as a separate corporation."); and West Texas Utilities Co. (noting
likely bankruptcy of acquired company in the event transaction not approved).
In the specific cases in which the issue was considered and the Commission
ultimately determined to permit the continued existence of intermediate
companies in a registered holding company system, in an apparent contradiction
of the "great-grandfather" provisions of Section 11(b)(2) (when viewed in
isolation), the Commission, in an exercise of reasonable discretion, relied on
other provisions of the 1935 Act, such as the definitions of "holding company"
and "subsidiary company," to find that such intermediate companies could be
excluded from designation as "holding companies" and "subsidiary companies,"
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respectively, and, thus, could be exempted from the "elimination" provisions of
Section 11(b). Based on that precedent, the Applicants ask the Commission to
exercise its discretion to declare the Intermediate Companies not to be
subsidiary companies or holding companies, solely for purposes of compliance
with the "great-grandfather" provisions of Section 11(b)(2).
It is again worth emphasizing that none of the economic planning reflected
in the proposed transaction structure will result in any change in the corporate
organization of the NEES system (other than the change in organization of NEES
from business trust to corporation) or in the financing transactions undertaken
by NEES and its subsidiaries. NEES will receive cash in the form of equity from
National Grid to pay the Cash Consideration and neither NEES nor any of NEES's
subsidiaries will borrow or issue any security or pledge any assets to finance
any part of the Cash Consideration. Thus, there is no possibility that
implementation and continuance of the proposed transaction structure could
result in an undue or unnecessarily complex capital structure to the detriment
of the public interest or the interest of consumers.
The Applicants thus request that the Commission exercise its authority and
discretion (under all relevant sections of the 1935 Act and considering the
policy of the 1935 Act as a whole) to approve the transaction structure in the
instant situation because, as with "out-bound" investments by U.S. registered
holding companies, the "layers of complication" are in fact the economically
necessary and efficient bridge by which cross-border transactions are generally
accomplished.
o Voting Power Will Be Fairly and Equitably Distributed.
National Grid is a public corporation organized under and domiciled in the
U.K.. Its shares are listed on, and trade on, the London Stock Exchange. The
vast majority of National Grid's 800,000 public shareholders are not U.S.
residents. The government of the U.K. also owns what is commonly referred to as
the "golden share" in National Grid. The golden share is a single non-voting
share that prevents amendments to National Grid's Memorandum and Articles of
Association without the consent of the holder of the golden share. The
Memorandum and Articles of Association contain restrictions on certain classes
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of persons holding more than a prescribed shareholding in National Grid (as the
indirect holder of the England and Wales Transmission License through NGC). In
particular, the Memorandum and Articles of Association restrict companies that
trade electricity in England and Wales from owning more than 1% of the shares of
National Grid and also requires that no party may own more than 15% of National
Grid's shares. The golden share is a means to preserve the status of National
Grid as an independent provider of transmission services and as such does not
restrict shareholder voting rights.
National Grid has a small number of American Depositary Shares in the U.S.
which trade as ADRs and are principally held by U.S. institutions. American
Depositary Shares, in the aggregate, account for less than 1% of National Grid's
publicly issued shares. National Grid's shareholders and ADR holders have
approved the Merger under applicable requirements of the London Stock Exchange.
The moneys necessary to pay the Cash Consideration will be borrowed by National
Grid from sophisticated commercial lenders and the financing has been documented
in fully negotiated loan agreements. None of the Intermediate Companies or NEES
will have any public or private institutional equity or debt holders. While
NEES's operating subsidiaries have, and will continue to have, publicly issued
preferred stock and long-term debt, the terms of these securities will not be
altered or modified or otherwise affected by virtue of the Merger or the
proposed transaction structure. Thus, as there are no direct or indirect
security holders of NEES with whom National Grid must share voting power, there
is no possibility that voting power among security holders of the National Grid
holding company system could be unfairly or inequitably distributed.
o Policy Considerations.
The Commission has publicly confirmed that the 1935 Act does not bar the
acquisition of a U.S. utility by a non-U.S. person. See Gaz Metropolitain, Inc.,
Holding Company Act Release No. 35-26170 (1994). The question now presented is
whether the Commission will permit such transactions to proceed in an
economically desirable and efficient manner. Following the Merger, National Grid
will register as a holding company under Section 5 of the 1935 Act and will be
fully subject to Commission regulation and
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oversight with respect to its U.S. operations. Moreover, no component of the
transaction structure implicates the abuses identified in Section 1(b) of the
1935 Act associated with holding companies prior to 1935. In this regard, the
absence of public and private institutional investors in the National Grid-NEES
ownership chain and the commitment on the part of National Grid to retain the
corporate and financing structure of the NEES Group are critical to the
analysis. No aspect of the proposed transaction structure will work to the
detriment of the public interest or the interests of investors or consumers.
National Grid's intention in implementing the proposed transaction structure is
to bridge the differing legal, regulatory and tax regimes in the U.K. and the
U.S. while maximizing after-tax returns from the National Grid-NEES combination.
In other situations, the Commission has recognized that efforts to achieve
economic efficiencies and synergies through tax savings are "in the ordinary
course of business" of a registered holding company. See Central and South West
Corporation, Holding Company Act Release No. 23578 (1985) ("It can hardly be
argued that for a business to attempt to reduce its tax liability is anything
but an indication of prudent management and is not uncommon in the non-regulated
business sector. For such businesses to attempt such reductions can fairly be
characterized as being in the ordinary course of business . . . The Commission
can think of no argument which suggests that attempting to reduce one's tax
liability should not also be considered to be in the ordinary course of business
for a regulated utility holding company.").
Section 11(b)(2) of the 1935 Act directs the Commission to require the
elimination of any "undue or unnecessary" complication in the capital structures
of registered holding company systems. As an administrative agency, the
Commission has an obligation to use its expertise and authority to achieve
statutory objectives of the 1935 Act. No provision of the 1935 Act, however,
requires the Commission to ignore the realities of commercial practice that are
commonplace in cross-border transactions or the benefits that may be obtained
through the use of sophisticated corporate and financial planning techniques
when such techniques do not result in any detriment to the protected interests
under the 1935 Act. Rather, the Applicants submit that the attempt to maximize
after-tax returns in connection with a Merger is an indication of prudent
management and typical in the non-regulated business sector. Accordingly, the
policy and practice under the 1935 Act
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provide a compelling rationale for approving the proposed transaction structure
for the National Grid-NEES combination.
The Applicants note that maintaining an efficient post-acquisition
structure will require them to respond quickly to changes in matters such as tax
and accounting rules, including by making appropriate revisions after
consummation of the Merger to the "upper structure" between NGG and NEES that
will not have any material impact on the financial condition or operations of
NEES and its subsidiaries or of NGG. For the reasons noted above, and especially
the lack of any third party interests in the upper structure, the Applicants
request authorization to make these non-material corporate structure changes
without having to seek specific authority from the Commission for each change,
subject to the condition that no change (i) will result in the introduction of
any third party interests in the upper structure, (ii) will introduce a
non-European Union or non-U.S. entity into the upper structure or (iii) will
have any material impact on the financial condition or operations of NEES and
its subsidiaries or of National Grid.
b. Section 10(c)(2)
The standards of Section 10(c)(2) are satisfied because the Merger will
tend toward the economical and efficient development of an integrated public
utility system, thereby serving the public interest, as required by that section
of the Act. Integration is not an issue in that the Merger will simply impose a
new holding company structure over an existing integrated electric utility
system. The analysis under Section 10(c)(2) focuses then on the associated
benefits, the so-called "economies and efficiencies" as a result of the proposed
transaction.
The first part of the discussion will focus on the perceived benefits to
customers, employees and shareholders, arising from the transaction. The second
part will then consider the more strategic benefits which the transaction will
bring to New England.
o Benefits to customers, employees and shareholders
NEES shareholders will benefit from the consideration received for their
shares on closure of the transaction. The base consideration of $53.75 per share
is equal to
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125% of the $43 market value of the shares on the last trading day before the
Merger was announced. The purchase price will be subject to adjustment,
dependent on the time of closing, and will be paid in cash. The NEES Board has
received an opinion from Merrill Lynch, Pierce, Fenner & Smith, an investment
banking firm with extensive experience in utility Mergers, that the
consideration for the Merger is fair to shareholders and in line with comparable
utility Mergers.
For NEES employees the transaction represents an opportunity for growth as
the company becomes the U. S. base of operations for a large international
group. National Grid has expressed intentions to expand and consolidate its
operations in this country, which will bring expanded opportunities for
employees. The transaction will ensure that NEES and its employees remain active
in the restructuring debate in the United States, while National Grid's
expanding foreign operations will provide opportunities for NEES employees
abroad.
Benefits to customers fall in three categories. First, National Grid has
significant expertise in providing the infrastructure, dispatch and power
exchange necessary for an efficient power supply market. Power supply is the
major cost element of electricity and is crucially influenced by the efficient
development of the market for the product. The efficient provision of the
infrastructure to let the supply market develop will facilitate the increase in
potential suppliers of electricity, with the competition so generated leading to
lower and more stable prices for the unregulated supply component of electric
service.
Second, there will be savings and efficiencies associated with the NEES-
National Grid Merger itself. The two companies are currently in the process of
evaluating integration possibilities, aimed at eliminating duplication and
implementing best practices. National Grid's significantly larger scale, both in
financial and operational terms, will enhance the ability of NEES to utilize new
developments in transmission and distribution technology, information systems,
and capital markets, where these can be seen to bring economic benefit.
Third, the Merger will allow further pursuit of consolidation in the
electric utility business. The restructuring of the industry in New England and
the divestiture of
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generation by companies owning transmission and distribution interests has left
a fragmented infrastructure with individual companies of too small a size to
fully exploit economies of scale. NEES, with its already low distribution prices
and profit margins, is not in a position on its own to pursue significant
further regional consolidation. This transaction will allow further
consolidations and consolidation savings to be pursued, while maintaining low
rates for customers. The agreement for NEES to acquire EUA, while not in itself
conditional on the NEES-National Grid Merger, is entirely consistent with this
strategy.
o Strategic benefits
National Grid owns, operates and maintains the high voltage network in
England and Wales, which connects power stations with distribution networks.
This transmission network consists of approximately 4,300 route miles of
overhead lines and 400 miles of underground cables, both operating principally
at voltages of 400kV and 275kV. National Grid also owns and operates
interconnectors which enable electricity to be transferred between the England
and Wales market and Scotland and France. National Grid also has investments in
transmission businesses in Argentina and Zambia and direct experience of
operating and maintaining systems in those countries.
A key factor in the efficient development of a competitive electricity
supply market is the provision of open access on non-discriminatory terms to the
electric transmission system. National Grid, as holder of the only transmission
licence for England and Wales, is obliged to facilitate competition in the
generation and supply of electricity and to offer terms for connection to and
use of its transmission system to those who request it. Since 1990, National
Grid has received over 70 applications from generators seeking to use the
transmission system and is obliged to provide a formal offer of connection,
including all technical and commercial terms, within 90 days.
In addition, National Grid is the system operator for England and Wales,
with an obligation to schedule and dispatch generation to meet demand, while
maintaining security of the transmission system and supply quality. Through
wholly-owned subsidiaries, National Grid also provides data collection and
settlement services to facilitate the competitive electricity supply market. The
development of new generation sources and of
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new competing electricity supply companies, since the restructuring of the
electric industry, has seen the price of electricity fall by 15-25% in real
terms, depending on customer class.
Another relevant feature of National Grid's experience is its financial
incentivization. In England and Wales both its wires ownership and system
operation activities are subject to incentive forms of regulation. These provide
a direct stimulus for National Grid to improve the efficiency of its licensed
activities and this has led to significant benefits for both customers and
shareholders. Supply quality is assured through the requirement for National
Grid to work to prescribed standards and to report annually on system
performance to the industry regulator. National Grid's experience of this sort
is not limited to England and Wales, since its operation of the transmission
system in Argentina is also subject to financial incentivization.
The Merger comes at a time of substantial change in the United States
electricity industry, with reform and restructuring proceeding nationwide and in
particular in New England. The intentions of National Grid and NEES to pursue
consolidation and rationalization of transmission and distribution in the region
are seen as being fully consistent with the views of the FERC on the development
of strong Regional Transmission Organizations. NEPOOL and the New England
Independent System Operator are grappling with many complex issues on
transmission pricing, congestion management and market price determination as
they attempt to advance the development of the electric market in New England.
National Grid does not claim that its experience or the solutions which have
been reached for similar issues in England and Wales can be simplistically
transplanted to the United States. However, its experience in addressing and
finding appropriate solutions to similar problems, both in the U.K. and in other
countries, will be important in facilitating the development of electricity
markets in the United States and in the timely achievement of the benefits which
such markets can bring.
Although some 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. See American Electric
Power Co., 46 S.E.C. 1299, 1320-1321 (1978). Further, the Commission has
recognized that while some
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potential benefits cannot be precisely estimated, nevertheless they too are
entitled to be considered: "[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., Holding
Co. Act Release No. 24073 (April 29, 1986) (citation omitted). See Energy East
Corporation, Holding Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing
acquisition based on strategic benefits and potential, but presently
unquantifiable, savings).
3. Section 10(f)
Section 10(f) provides that:
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 and the requested certification from each of the affected state
regulators, the Applicants intend to comply with all applicable state laws
related to the proposed transaction.
B. Other Statutory Provisions
1. Sections 6 and 7, and Rule 53
The Applicants seek confirmation that their preexisting investment in
National Grid Holdings and its direct and indirect subsidiary companies (i.e.,
the FUCO holdings) will not be counted toward the cap on "aggregate investment"
for purposes of Rule 53. The basis for this request is two-fold: First, in an
analogous situation, the Commission has traditionally grandfathered nonutility
investments made before an entity became part of a registered system. See, e.g.,
New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997). Thus,
investments in "energy-related companies" that
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predate registration of the investor are not counted toward "aggregate
investment" for purposes of Rule 58. Although there is no case on point, the
Applicants believe that the same accommodation should be made for preexisting
FUCO investments for purposes of Rule 53, simply as a matter of comity.
Second, and perhaps more important, there is no equitable basis for
including National Grid's preexisting FUCO holdings in the calculation of
"aggregate investment" because, unlike the FUCO investments of U.S. holding
companies, no part of the capital currently invested in National Grid's FUCO
operations can be deemed to be derived, directly or directly, from captive U.S.
ratepayers.
The Applicant also seeks confirmation that National Grid's borrowing under
Credit Facility for purposes of financing the Merger are permissible under the
Act and may be repaid in accordance with the terms of the Credit Facility, which
is attached hereto as Exhibit B-3. Although National Grid will technically incur
this indebtedness just prior to its acquisition of NEES and consequent
registration as a holding company, as previously discussed, the parties
recognize that the Commission will take this financing into account in approving
the transaction. These borrowings will be made from sophisticated commercial
lenders on terms negotiated at arms-length.
2. Section 13 -- Intrasystem Provision of Services
o Interaction with FERC Policy
All services provided by National Grid system companies to other National
Grid system companies will be in accordance with the requirements of Section 13
of the Act and the rules promulgated thereunder. National Grid is aware that
questions concerning the FERC's policy in this area are likely to arise with
respect to affiliate transactions involving NEP, Mass. Electric, Narragansett,
NEET, Mass. Hydro and AllEnergy Marketing Company, L.L.C., companies that are
public utilities under the Federal Power Act. In connection with the requested
FERC authorization, the applicants in that matter have represented, and the FERC
approved the merger subject to their commitment, that "with respect to any
transaction between any member company of the NEES system and National
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Grid and any of its subsidiary or affiliated companies, the NEES Companies will
abide by [FERC] policy regarding intra-affiliate transactions." See FERC
Application, attached hereto as Exhibit D-1.1, and FERC Order, Exhibit D-1.2.
The FERC intra-corporate transactions policy, with respect to non-power goods
and services, generally requires that affiliates or associates of a public
utility not sell non-power goods and services to the public utility at a price
above market; and sales of non-power goods and services by a public utility to
its affiliates or associates be at the public utility's cost for such goods and
services or market value for such goods and services, whichever is higher.
The Applicants recognize that affiliate transactions among the member
companies of National Grid will be subject of the jurisdiction of the Commission
under Section 13(b) of the Act and the rules and regulations thereunder. That
section generally requires that affiliate transactions involving system
utilities be "at cost, fairly or equitably allocated among such companies." See
also Rule 90. Nonetheless, National Grid believes that, as a practical matter,
there should not be any irreconcilable inconsistency between the application of
the Commission's "at cost" standard and the FERC's policies with respect to
intra-system transactions as applied to National Grid.
On this basis, the applicants believe that National Grid will be able to
comply with the requirements of both the FERC and the "at cost" and fair and
equitable allocation of cost requirements of Section 13, including Rules 87, 90
and 91 thereunder, for all services, sale and construction contracts between
associate companies and with the holding company parent unless otherwise
permitted by the Commission by rule or order.17
o Scope of Service
After consummation of the merger, the New England Power Service Company
(the "Service Company"), which has been previously approved by the Commission,
will continue to provide the NEES companies with a variety of administrative,
management and support services. The anticipated services include electric power
planning,
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17 Under circumstances of divergent cost and market prices such that both the
FERC and SEC pricing standards could not be reconciled if the transaction was
performed, National Grid will comply by refraining from performing the affected
service, sales or construction contract.
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electric system operations, materials management, facilities and real estate,
accounting, budgeting and financial forecasting, finance and treasury, rates and
regulation, legal, internal audit, corporate communications, environmental, fuel
procurement, corporate planning, human resources, marketing and customer
services, information systems and general administrative and executive
management services. In addition, members of the National Grid System may
provide services to the NEES Group and, to a lesser extent, NEES Group companies
may provide incidental services to National Grid System companies.
Trans-Atlantic services will fall into two principal categories. The first
category, central administrative services, detailed in Exhibit B-2.1, will be
provided by NGC. The second category encompasses other services that will be
rendered by members of the National Grid System as specifically requested by
members of the NEES Group. The full range of services in the second category is
not presently known, but the Applicants expect that it will include engineering
consulting, laboratory services, research and development projects, and
transmission best practices consulting. Although some trans- Atlantic services
may be performed by NEES Group companies for National Grid System companies, the
Applicants contemplate that the majority of services will flow from the National
Grid System companies to the NEES Group. In particular, NGC, the operating
company for the UK transmission business and a service company for the National
Grid Group, will be the principal entity providing services, and the Service
Company will be the principal recipient of services. The charges to the NEES
Group will be primarily from NGC to the Service Company, and the Service Company
will reallocate the charges as appropriate to members of the NEES Group.
Some services such as corporate finance and business development, for
example, are solely concerned with events outside normal operations. The NEES
Group will not be charged with any costs relating to these departments, unless
their services are specifically requested. In addition, charges for costs
associated with future mergers and acquisitions may be allocated to NEES and/or
to other National Grid Group companies, but not to the NEES Subsidiary
Companies.
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The attached Standard Form of Service Contract ("Standard Form"), Exhibit
B-2, will govern the charges between the Service Company and the NEES Group. It
is contemplated that the Standard Form will be amended to provide for services
to entities that will become associate companies of NEES as a result of future
mergers and acquisitions.
o Allocation of Service Costs Among Members of the NEES Group
The costs of services provided by the Service Company and members of the
National Grid System will be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. The
Applicants expect that the majority of costs billed by members of the National
Grid System to the NEES Group will be paid initially by the Service Company
which will then charge the appropriate service recipient. The Applicants
envision two types of charges.
First, for services rendered specifically for the NEES Group or individual
members, costs will be directly attributed to specific subsidiaries when it is
possible to accurately do so. The costs of engineering or laboratory services
are routinely billed directly based on a employee-hour basis. Exhibit B-2.1
contains a list of services that are expected to be billed directly and those
services that benefit the National Grid System as a whole.
Second, members of the NEES Group will pay a share of services that benefit
them as members of the National Grid System. Their share will be determined by a
two-step process. The NEES Group's portion of these costs will be determined
using measures that reflect the relevant contribution and size of the individual
businesses. Allocation of group costs will follow the methodology adopted by the
UK regulator, the Office of Gas and Electricity Markets ("OFGEM"). The OFGEM
approach uses four measures (revenues, operating profit, employee numbers and
net assets) and allocates the group costs equally across the four. Revenues are
adjusted to exclude the income resulting from sales of purchased power, and
income relating to stranded assets (both within NEES). NGC will use figures from
the latest published accounts to calculate the percentage of revenues, operating
profit, employee numbers and net assets on an annualized basis, and these four
percentages will be averaged to calculate the group allocation. Exhibit B-2.2
sets
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forth an estimated allocation of service costs among the NEES Group, other
members of the National Grid System, and both NEES Group and the National Grid
System.
The Service Company will allocate the costs of service among the NEES Group
using one of several methods. Service Company will choose the method that most
accurately distributes the costs. The method of cost allocation varies based on
the department rendering the service. Exhibit B-2.4 provides an illustration of
allocation of group costs among the NEES Group.
The largest category of costs being billed to the NEES companies are for
the following departments which are relatively similar to a category of costs
currently being incurred by the Service Company: shareholder services, investor
relations and group accounts. In May 1992, in accordance with a 60-day letter to
the SEC, the Service Company implemented a new allocation formula for costs
associated with the annual meeting, annual and interim reports, proxy statements
and shareholder and investor related services to the NEES companies. That method
of allocation was based on total Service Company billings for services rendered
(excluding convenience payments) to the NEES associate companies. The Service
Company believes the costs to be billed by NGC for the departments listed above
are essentially similar in nature to the costs currently incurred and allocated
in accordance with the May 1992 letter. Therefore, the Service Company proposes
to allocate the above costs in accordance with that approved allocation formula.
The next largest category of costs is National Grid's senior management
category of costs. To the extent that a senior manager is working on an issue
specific to a particular NEES subsidiary or group of subsidiaries, NGC will
identify this cost and the applicable NEES subsidiary that should be charged.
However, senior management time and costs may relate to setting corporate-wide
objectives, policies and procedures as well as reviewing corporate-wide
activities and achievements. The Service Company currently has a general
allocation formula that allocates 25% of these costs to NEES (the parent) with
the remainder allocated to the subsidiaries based on operation and maintenance
expenses. In 1998, in connection with the divestiture of NEES' generating
facilities, the Commission reviewed and approved the use of operation and
maintenance expense for the remaining
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75% of the allocator. The Service Company proposes to use this allocation
formula to allocate National Grid's senior management time and costs to the
extent that these costs cannot be attributed to a specific individual NEES
subsidiary.
Another major category of billings is expected to be costs incurred for
human resources, payroll and pension services. The Service Company proposes to
allocate these costs to the NEES Subsidiary Companies using a formula currently
in place that is based on number of employees in each company. This formula
exists specifically for use by NEES' existing human resources and payroll
departments and is appropriate for costs of a similar nature billed by the NGC.
The costs estimated to be billed by the remaining departments are
individually relatively minor and in most cases are of a general nature. Under
the Service Company's accounting system, costs incurred in a department that are
general in nature, such as supervision or secretarial support costs, are charged
to a department overhead account. Department overhead costs are billed out based
on how the payroll of that department is charged to the companies for whom
Service Company performs services. The costs billed by the remaining NGC
departments listed in Exhibit B-2.3 will be charged to the applicable Service
Company department overhead account. These costs will, in turn, be billed out by
the Service Company based on the manner in which that Service Company department
charges its time. Exhibit B-2.3 lists the overhead accounts for the majority of
the NGC departments.
o Calculation of Service Costs
To gather the information necessary to allocate service costs, employees of
the Service Company will record transactions utilizing the existing data capture
and accounting systems of each client company. Costs will be accumulated in
accounts of the Service Company and directly assigned, distributed and allocated
to the appropriate client company in accordance with the guidelines set forth in
Schedule II of the Standard Form. The Service Company's accounting and cost
allocation methods and procedures are structured so as to comply with the
Commission's standards for service companies in registered holding-company
systems. The Service Company's billing system will use the
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"Uniform System of Accounts for Mutual Service Companies and Subsidiary Service
Companies" established by the Commission for service companies of registered
holding-company systems, as may be adjusted to use the FERC uniform system of
accounts. Further, since costs will be equitably allocated, charges for all
services provided by the Service Company to affiliates will be on an "at cost"
basis as determined under Rules 90 and 91 of the Act.
With regard to services provided by NGC to the NEES Group, NGC will use
appropriate policies and procedures to assure that all costs are identified and
attributed to particular projects, programs or work orders for purposes of
direct cost allocation. Records related to services provided by NGC to NEES
companies will be made available to the Commission staff for review. For
example, within NGC there are several general ledger systems, with one being
dedicated to corporate function accounting. Consolidation takes place within a
separate group consolidation system. As such, the corporate ledger is discrete
and auditable.
As required by Rule 91 under the 1935 Act, the costs allocated across the
businesses served by NGC will as far as possible represent the total true cost
of providing the corporate service. The costs considered in the allocation will
include (1) total payroll and associated costs; (2) materials and consumable
costs; (3) building and facilities costs; (4) IS infrastructure costs; and (5)
other departmental costs.
Rates for NGC charges to the Service Company will be calculated by taking
total cost over total time worked. This method of calculation will ensure total
recovery of departmental costs on a monthly basis, with minimal fluctuation of
hourly rates. Budgeted rates will be available for forecasting purposes.
o Billing
NGC will bill the Service Company monthly in arrears. The billing format
will list charges by corporate department, detailing total time applicable to
NEES companies, multiplied by the current rate, to give the total charge for the
month.
If NGC provides services for the benefit of a specific NEES company, the
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charge applicable to that company will be specifically identified in the
invoice. Otherwise, NGC's charges will be allocated to individual NEES companies
through the Service Company's allocation cycle as described above.
o Forecast of NGC's Charges to the Service Company
NGC's UK regulator requires NGC to develop a business plan covering the
upcoming price review period. The output of this planning process forms the
basis for the forecast allocations included in this section. The information
provided below is based upon projections over the six-year plan period. The
figures in Exhibit B-2.2 are based on the forecast for year 2000/01. Direct
costs allocated to the NEES Group is estimated to average about $3.0 million per
annum -- this represents just under 3.0% of total corporate cost incurred by
NGC. Total "group" costs for all the companies in the National Grid System
average about $13 million per annum -- representing 12% of total corporate cost
incurred by NGC. NEES' share of group costs will be approximately 36% of the
total, a charge of about $4.7 million per annum. IS infrastructure costs
allocated to NEES will amount to about $0.3 million per annum -- representing
less than 1% of total infrastructure costs. Building and facility costs
allocated to NEES will amount to about $0.3 million per annum -- representing
approximately 3% of the total cost of NGC's headquarters.
On this basis, total charges to NEES are estimated to be about $8.3 million
per annum, representing approximately 7.5% of total corporate costs. The
Applicants also forecast that the Merger will also reduce the level of certain
services carried out within NEES. Applicants expect that savings will be
approximately $8.4 million annually. The savings are described in Exhibit B-2.5.
Accordingly, the annual cost of transatlantic services provided by NGC to the
NEES Group is approximately equal to the service costs savings attributable to
the Merger.18
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18 The projections of the cost of transatlantic services and the service cost
savings attributable to the Merger include cost and savings projections from the
NEES-EUA merger.
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o Restriction on Amendments
No change in the organization of the Service Company, the type and
character of the companies to be serviced (other than the amendment discussed
above to include services for the National Grid associate companies), the
methods of allocating costs to associate companies, or in the scope or character
of the services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder, shall be made unless and until the Service
Company shall first have given the Commission written notice of the proposed
change not less than 60 days prior to the proposed effectiveness of any such
change. If, upon the receipt of any such notice, the Commission shall notify the
Service Company within the 60-day period that a question exists as to whether
the proposed change is consistent with the provisions of Section 13 of the Act,
or of any rule, regulation or order thereunder, then the proposed change shall
not become effective unless and until the Service Company shall have filed with
the Commission an appropriate declaration regarding such proposed change and the
Commission shall have permitted such declaration to become effective.
3. Sections 14 and 15 -- Jurisdiction
Pursuant to these sections, the Commission has broad authority over, and
access to, the books and records and reporting of companies in a registered
holding company system. As noted previously, National Grid ADRs are now listed
on the New York Stock Exchange. In connection with the ADR listing, National
Grid will provide financial statements for the fiscal year ended March 31, 1999
and semiannually thereafter that include a reconciliation of net income and
shareholders' equity in accordance with US GAAP.
It should be further noted that the utility assets of NGC are accounted for
on the basis required by the U.K. regulator, rather than that used for purposes
of U.S. ratemaking proceedings, and rates for U.K. regulated utilities are also
determined in a different manner than those for U.S. regulated companies. These
issues are discussed at length in the attached paper by Professor Franks. See
Exhibit J-3.
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In addition, National Grid undertakes and agrees to file, and will cause
each of its present and future directors and officers, who is not a resident of
the United States, to file with the Commission irrevocable designation of the
party's custodian as an agent in the United States to accept service of process
in any suit, action or proceeding before the Commission or any appropriate court
to enforce the provisions of the acts administered by the Commission.
4. Section 33 -- Foreign Utility Companies
Neither Section 33 nor the legislative history specifically addresses the
availability of the FUCO exemption to registered holding companies organized in
foreign countries. We do not believe that silence should be construed against
National Grid. To the contrary, in Gaz Metropolitain, Inc. the Commission found
that foreign acquisitions of U.S. utility companies were not barred by the fact
that the Act was silent on the question of foreign ownership.19
Since the Act, on its face, does not distinguish between U.S. and foreign
registered holding companies, the question then becomes how best to provide for
the protection of the public interest and the interest of investors and
consumers (the "protected interests" under the Act), and how to ensure that the
proposed Merger and related transactions do not lead to a recurrence of the
evils that the Act was intended to address.
Applicants make numerous commitments in their application for financing
authorization (File No. 70-9519) to ensure that the proposed financing of the
National Grid System, including financing for purposes of acquiring interests in
EWGs and FUCOs, is consistent with the protected interests. In particular:
o National Grid commits to maintain the common stock equity ratios of NEES
and its retail electric utility subsidiaries at a minimum of 35%;
o National Grid commits to maintain its long-term debt rating at an
investment grade level;
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19 Holding Company Act Release No. 35-26170 (Nov. 23,1994).
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o National Grid commits to maintain its interest cover ratio (Consolidated
EBITDA to Net Interest Payable) at not less than 2.5:1, and;
o National Grid undertakes to cause its common stock equity as a percentage
of total capitalization, measured on a book value US GAAP basis, to be 30%
or above by May 31, 2003.
In addition, National Grid has structurally separated its FUCO activities from
the NEES Group and it will limit the use of employees of the U.S. Utility
Subsidiaries in FUCO operations. Lastly, periodic reporting of National Grid's
aggregate investment in EWGs and FUCOs and a description of new FUCO investments
will allow the Commission to continually monitor National Grid's non-U.S.
activities.
The Commission has nearly thirty years experience dealing with the issues
presented by investments in foreign activities, and the measures necessary to
protect U.S. ratepayers from any adverse effects that might be associated with
those activities.
Beginning in 1971, the Commission authorized a series of investments in
foreign utility and nonutility operations. On the nonutility side, registered
holding companies have been authorized to engage in the marketing and trading of
energy commodities in Canada;20 energy management, consulting services and
related financings;21
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20 American Electric Power Co., Holding Co. Act Release No. 27062 (Aug. 19,
1999); Southern Co., Holding Co. Act Release No. 27020 (May 13, 1999).
21 American Electric Power Co., Holding Co. Act Release No. 26682 (March 7,
1997). See also The Columbia Order ($50 million investment limit worldwide) and
Southern Co., Holding Co. Act Release No. 22132 (July 17, 1981) (granting
foreign consulting authority).
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exploration for and production of natural gas;22 and construction, ownership and
operation of gas pipelines.23
In addition, even prior to the Energy Policy Act of 1992, the Commission
authorized U.S. holding companies to acquire foreign utility operations. See,
e.g., Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992)
(authorizing the acquisition of foreign utility interests by a registered
holding company) and SCEcorp, Holding Co. Act Release No. 25564 (June 29, 1992)
(authorizing the acquisition foreign utility interests by an exempt holding
company). In those orders, the Commission sought to protect the interests of
domestic utility consumers and investors while permitting the acquisition of
foreign utility operations. In the Southern order, the Commission found a number
of means by which consumer interests would be protected. In SCEcorp, the
Commission gave great weight to the statement of the California Public Utility
Commission that it had no objection to the acquisition of a foreign utility
interest so long as the holding company complied with certain conditions
designed to protect the interests of domestic consumers.
Title VII of the Energy Policy Act amended the 1935 Act to create two new
classes of exempt entities, EWGs and FUCOs. By exempting these entities from all
provisions of the Act and providing generally for their acquisition without
prior Commission approval, Congress intended to facilitate the participation in
these activities. See, e.g., Statement of Sen. Riegle, Cong. Rec. S17629 (Oct.
8, 1992) (explaining that "the purpose of section 33 is to facilitate foreign
investment, not burden it.").
- --------
22 Columbia Energy Group, Holding Co. Act Release No. 26820 (Jan. 23, 1998), as
amended, Holding Co. Act Release No. 27055 (July 30, 1999) (authorizing Columbia
to invest up to $55 million in Canadian E&P activities). See also Columbia Gas
System, Inc., Holding Co. Act Release No. 17290 (Sept. 27, 1971) (authorizing
the formation of a wholly-owned Canadian oil and gas exploration and production
subsidiary in connection with an effort to obtain natural gas from the Prudhoe
Bay and Arctic region of Canada), and Holding Co. Act Release No. 18534 (Aug.
16, 1974) (authorizing participation in projects for the development of proven
gas reserves in Alaska and Canada, and for transportation of the gas to the
United States).
23 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26595 (Oct. 25,
1996), and Holding Co. Act Release No. 26608 (Nov. 19, 1996) (authorizing CNG to
invest, on a case-by-case basis, in foreign pipeline projects).
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A question arises because neither Section 33 nor the legislative history
specifically addresses the availability of the exemption to foreign holding
companies. Although the Commission has not yet addressed this issue, we note
that, in a related context, the Commission found that foreign acquisitions of
U.S. utility companies were not barred by the fact that the Act was silent on
the issue. In the Gaz Metropolitain case the Commission staff had opposed the
acquisition by a Canadian parent of a Vermont gas utility company on the basis
that, among other things, Congress had not contemplated foreign ownership of
U.S. utilities when it drafted the Act in 1935. The Commission rejected the
staff's argument, stating:
We do not agree with the staff's analysis. The Act contains no
prohibition against foreign utilities as such. Indeed, nothing in the Act
prevents a foreign company that does not own or control public utility or
holding company securities from acquiring the securities of a domestic
public utility company.
Emphasis added. The Commission's focus, instead, was on whether the proposed
transactions would be detrimental to the public interest or the interest of
investors or consumers, or would lead to a recurrence of the problems that the
Act was intended to address. Cf. Section 1(b) of the Act (describing the abuses
that gave rise to the Act).
Accordingly, we believe it is appropriate for the Commission to rely on the
plain meaning of Section 33, so long as there are adequate safeguards for the
protected interests and it does not appear that the proposed transactions would
lead to a recurrence of the evils that the Act was intended to address. In this
regard, the staff has emphasized the need for a "level playing field" as between
U.S. and foreign registered holding companies. In practical terms, this means
that the foreign holding company should not be able to rely on Section 33 in a
way that is not available to U.S. companies. We believe there are three sets of
issues in this regard:
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1. Reliance on the FUCO exemption for all pre-existing interests
National Grid, through its wholly-owned subsidiary National Grid Holdings,
is the parent of NGC, which owns and operates the England and Wales electric
transmission system, and certain other nonutility interests. Prior to the
closing of the proposed transactions, National Grid Holdings will file a Form
U-57 to perfect its exemption as a FUCO. Thereafter, it is our view that
National Grid Holdings and its subsidiaries, including, for example, Energis
plc, will be exempt from all provisions of the Act -- except with respect to
transactions with National Grid and its non-FUCO subsidiary companies. This
latter set of transactions will continue to be fully regulated under the Act.24
See Section 33(a)(1) of the Act ("A foreign utility company shall be exempt from
all provisions of the Act, except as otherwise provided under this section").
As explained more fully in Exhibit J-1 to this Application, while NGC and
other FUCO interests will form the largest part of National Grid Holdings'
interests, the company will have certain non-FUCO subsidiaries. In particular,
National Grid holds a significant interest in Energis plc ("Energis"), which is
engaged in telecommunications in the U.K. Typically, Energis would be qualified
as an "exempt telecommunications company" or "ETC" under Section 34 of the 1935
Act. In this matter, however, there is no way for National Grid, as a minority
owner, to ensure that Energis will continue to be engaged "exclusively" in
providing telecommunications, information and related goods and services, as
required by the ETC definition.
Accordingly, the Applicants seek to rely on the fact that Section 33
(unlike Sections 32 and 34) does not require that the exempt entity be engaged
"exclusively" in the subject activity. Although there is no discussion of this
point in the legislative history, it does not seem unreasonable that Congress
was attempting to accommodate the nature of the entities exempt under Section
33. Unlike EWGs and ETCs, which are likely to be special purpose entities, FUCOs
may comprise vertically-integrated utility systems and businesses that are
reasonably incidental or economically necessary or appropriate thereto.
- --------
24 The Commission's residual jurisdiction is generally limited to parent-level
financings, affiliate transactions and "the creation or maintenance of any other
relationship between a foreign utility company and a registered holding
company." Section 33(c)(2).
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Indeed, a review of the Forms U5S suggests that U.S. holding companies have
indirectly acquired certain nonexempt interests in connection with their FUCO
holdings.
The Commission should not find these "other businesses" to be inconsistent
with the policies and provisions of the Act, so long as: (i) the nonutility
interests are functionally related to the foreign utility business, in the same
way domestic nonutility interests must be related to domestic utility
operations, (ii) all direct or indirect investments in these businesses for
which there is recourse, directly or indirectly, to the registered holding
company will be counted toward "aggregate investment" for purposes of Rule 53,
and (iii) there are appropriate safeguards, such as those described above, to
protect the interests of U.S. ratepayers from the adverse effects, if any, that
may be associated with the foreign operations.
2. Compliance with Rule 53
In 1992, Congressman Markey expressed concern that Sections 32 and 33
"would invite utilities to shift valuable resources and management -- paid for
by captive retail ratepayers" to new "competitive" ventures. Statement of Rep.
Markey, Cong. Rec. H11446 (Oct. 5, 1992). These concerns were addressed, in
part, when the Commission adopted Rule 53 which, among other things, effectively
limits the amount of ratepayer-generated capital that a registered holding
company can invest in foreign utility operations. While National Grid intends to
comply fully with the substantive requirements of Rule 53 -- including the
limitation on additional aggregate investment in FUCOs -- the Applicants do not
believe that National Grid's existing investments should be counted toward
aggregated investment for purposes of the rule. In contrast to the FUCO
investments of U.S. registereds, none of National Grid's existing investments
have been funded, directly or indirectly, with the proceeds from U.S. utility
operations. A decision to count these interests as aggregate investment would
effectively penalize National Grid for its success in its operations to date
and, further, would place the company at a competitive disadvantage to similarly
situated U.S. holding companies. Accordingly, Applicants are requesting that
National Grid's existing investment in foreign utility operations be
grandfathered for purposes of the limit on "aggregate investment" under Rule 53
of the Act.
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On an ongoing basis, National Grid will comply fully with the substantive
provisions of Rule 53:
(i) National Grid is seeking authority to use the proceeds of
financings to invest in EWGs and FUCOs, only in an amount equal
up to 50% of consolidated retained earnings, and;
(ii) National Grid will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of the U.S. Utility
Subsidiaries' employees in connection with providing services to
EWGs and FUCOs.
In addition, National Grid will provide the information required by Form 20-F to
permit the Commission to monitor the effect of National Grid's EWG and FUCO
investments on National Grid's financial condition. National Grid will also
report to the Commission semiannually regarding its aggregate investment in EWGs
and FUCOs as a percentage of consolidated retained earnings and provide a
description of EWG and FUCO investments acquired during the reporting period.
See File No. 70-9519.
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that National Grid
and NEES expect to obtain in connection with the Merger.
(1) Antitrust
The Merger is subject to the requirements of the HSR Act and the rules and
regulations thereunder, which provide that certain acquisition transactions may
not be consummated until certain information has been furnished to the Antitrust
Division of the Department of Justice (the "Antitrust Division") and the Federal
Trade Commission (the "FTC") and until certain waiting periods have been
terminated or have expired. NEES and National Grid Group filed their premerger
notifications on March 31, 1999 and on April 9, 1999 the waiting period
thereunder was terminated. If the Merger is not consummated within 12 months
after the expiration or earlier termination of the initial HSR Act waiting
period, NEES and National Grid Group would be required to submit new information
to the
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Antitrust Division and the FTC, and a new HSR Act waiting period would have to
expire or be earlier terminated before the Merger could be consummated.
(2) Federal Power Act
Section 203 of the Federal Power Act (the "FPA") provides that no public
utility may sell or otherwise dispose of its facilities subject to the
jurisdiction of the FERC 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.
Because this transaction involves a change in ownership and control of NEES's
public utility subsidiaries, the prior approval of the FERC under FPA Section
203 is required in order to consummate the Merger.
Under Section 203 of the FPA, the FERC is directed to approve a Merger if
it finds such Merger "consistent with the public interest." In reviewing a
Merger, the FERC generally evaluates: (1) whether the Merger will adversely
affect competition; (2) whether the Merger will adversely affect rates; and (3)
whether the Merger will impair the effectiveness of regulation. NEES and
National Grid Group believe the proposed Merger satisfies these standards.
By order dated June 16, 1999, the FERC unconditionally approved the Merger.
New England Power Co., 87 FERC P. 61,287.
(3) Atomic Energy Act
As NEP holds licenses issued by the Nuclear Regulatory Commission ("NRC")
in connection with that subsidiary's interests in various nuclear power plants
and also holds minority common stock interest in corporations that hold such
licenses, the Merger (which would constitute an indirect transfer of NEP's
licenses to National Grid) requires NRC approval under the Atomic Energy Act of
1954. The Atomic Energy Act effectively prohibits foreign ownership or control
of a nuclear license (as distinct from the physical plant). National Grid is a
foreign entity within the meaning of the Atomic Energy Act. NEES and National
Grid believe they can satisfy NRC concerns about foreign ownership and control.
NEP's minority interests in the common stock of corporations that
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hold nuclear licenses does not give NEES control over such facilities or the
licensee for the facilities, and therefore the indirect acquisition by National
Grid of NEP's interest will not be inconsistent with the Atomic Energy Act. In
addition, although NEP owns a minority interest in two nuclear facilities and
therefore has minority, non-operating ownership licenses with respect to those
facilities, NEP has no control over the facilities themselves, and a recently
issued NRC Stranded Review Procedure (SRP) regarding foreign ownership or
control provides that foreign ownership of such minority non-operating licenses
is permissible, provided that the licensee agrees to conditions that prevent
foreign domination or control of the facility.
On March 15, 1999, NEP and National Grid filed an application with the NRC
requesting approval of the indirect transfer of control over NEP's minority,
non-operating interests in the nuclear facilities and corporations. Therein, NEP
and National Grid proposed a negation action plan consistent with the SRP. The
application was noticed on June 30, 1999. Subsidiaries of Northeast Utilities
("NU"), co-owners in the nuclear facilities, intervened in the proceeding and
requested a hearing. On November 4, 1999, the NU subsidiaries filed a notice of
withdrawal of their petitions to intervene and jointly with NEP requested that
the proceeding be terminated. The NRC terminated the proceeding on November 19,
1999. On December 10, 1999 the NRC approved the transfer. See Exhibit D-2.2.
(4) Exon-Florio
The Committee on Foreign Investment in the United States ("CFIUS") may
review and investigate the Merger under Exon-Florio, and the President of the
United States or his designee is empowered to take certain actions in relation
to Mergers, acquisitions and takeovers by foreign persons which could result in
foreign control of persons engaged in interstate commerce in the United States
pursuant to Exon-Florio. In particular, Exon- Florio enables the President to
block or reverse any acquisitions by foreign persons which threaten to impair
the national security of the United States. Before the Merger may be
consummated, any CFIUS review and investigation of the Merger under Exon-Florio
must have terminated, and the President must not have taken any of his
authorized actions under Exon-Florio. The Exon-Florio application in connection
with the Merger was filed on March 30, 1999, and on
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April 29, 1999 the parties were informed by the Department of the Treasury that
action under Exon-Florio had concluded with respect to the Merger.
(5) State Regulatory Approval
The Merger does not require the approval of the MDTE or the RIPUC. The
merger does require the approval of the VPSB and the CDPUC and is subject to
review by the NHPUC.
While the MDTE does not have jurisdiction over the merger, NEES and
National Grid made an informational filing on March 8, 1999 with the MDTE,
describing the merger and the benefits of the merger to ratepayers. As part of
the filing, the companies advised the MDTE that the SEC would be seeking a
certification from the MDTE, the RIPUC and the NHPUC that each of the state
commissions has the authority and resources to protect ratepayers in matter such
as rates, financings, affiliate transactions and the financial integrity of the
operating utility within its state and additionally that the commission intends
to continue to exercise its authority. The MDTE has issued a letter to this
Commission, a copy of which is attached as Exhibit D-3.2.
On March 18, 1999, the companies made a similar informational filing with
the NHPUC and requested certification from the NHPUC to the SEC that it has the
authority and resources to protect ratepayers. The companies also filed
affidavits attesting to the fact that the transaction would not adversely affect
ratepayers and that there would be no change in the NHPUC's jurisdiction over
Granite State and NEP as a result of the merger. On April 21, 1999, the NHPUC
issued an order finding that the merger did not satisfy the requirements for
exemption from the NHPUC's formal review process. A hearing was held before the
NHPUC on June 24-25, 1999 and an order approving the Merger was issued on
October 4, 1999. See Exhibit D-5.3. A motion for rehearing filed by the Office
of Consumer Advocate was denied on November 29, 1999. See Exhibit D-5.4.
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While the RIPUC has indicated that no filing with it is required, a copy of
the informational filing made with the MDTE was given to the RIPUC and a written
request for a letter to the Securities and Exchange Commission was made on June
25, 1999. Additionally, the companies will be meeting with the RIPUC and staff
to answer questions. The RIPUC issued a letter certifying that it has the
authority and resources to protect ratepayers on August 31, 1999. See Exhibit
D-8.
NEP has a small amount of transmission assets in Vermont and therefore is
deemed to be a Vermont public utility. While the VPSB has no regulatory
jurisdiction over NEP's operations, under Vermont law it does have authority to
approve the merger. The application for approval of the Merger by the VPSB was
filed on March 29, 1999. An order approving the Merger was issued on June 15,
1999. A copy is attached as Exhibit D-6.2.
The CDPUC has jurisdiction over the transaction because of NEP's minority
ownership interest in the Millstone III Nuclear Power Plant. On March 31, 1999,
the parties filed a letter with the CDPUC seeking confirmation that CDPUC
approval is not required for the Merger. The CDPUC determined that it did have
jurisdiction. An order from the CDPUC issued on June 30, 1999. A copy is
attached as Exhibit D-7.2.
* * * * *
Finally, pursuant to Rule 24 under the Act, the Applicants represent that the
transactions proposed in this filing shall be carried out in accordance with the
terms and conditions of, and for the purposes stated in, the
declaration-application no later than December 31, 2004.
Item 5. Procedure
The Commission is respectfully requested to issue and publish not later
than July 15, 1999 the requisite notice under Rule 23 with respect to the filing
of this Application, such notice to specify a date not later than August 10,
1999 by which comments may be entered and a date not later than August 30, 1999
as the date after which an order of the Commission granting and permitting this
Application to become effective may be entered by the Commission.
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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
Exhibits
A-1 Memorandum and Articles of Association of The National Grid
Group plc (previously filed).
A-2 Agreement and Declaration of Trust of New England Electric
System (filed as Exhibit 3 to the 1994 NEES Form 10-K (File
No. 1-3446), and incorporated herein by reference).
A-2.2 Proposed amendment to the NEES Agreement and Declaration of
Trust (included in Exhibit C-1 hereto).
B-1 Agreement and Plan of Merger, dated as of December 11, 1998,
by and among NEES, National Grid Group and NGG Holdings LLC
(included in Exhibit C-1 hereto).
B-2 NEES Standard Form of Service Contract, as amended
(previously filed).
B-2.1 List of Direct and Group Central Administrative Services
Provided to NEES
B-2.2 Analysis of Corporate Cost Allocation - 1999 Business Plan
B-2.3 Overhead Accounts for National Grid Company Administrative
Services
B-2.4 Re-allocation of Estimated National Grid Administrative
Service Costs
B.2.5 NEES/GRID Domestic Administrative Service Costs Savings
B-3 National Grid Group Credit Agreement (previously filed).
C-1 Proxy Statement of NEES for the shareholders meeting to be
held in connection with the Merger (filed with the
Commission on March 26, 1999 and incorporated by reference
herein).
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C-2 Circular of National Grid Group for the extraordinary
general meeting of shareholders to be held in connection
with the Merger (previously filed).
D-1.1 Joint Application of New England Power Company,
Massachusetts Electric Company, The Narragansett Electric
Company, New England Electric Transmission Corporation, New
England Hydro- Transmission Corporation, New England
Hydro-Transmission Electric Company Inc., AllEnergy
Marketing Company, L.L.C. and NGG Holdings LLC before the
FERC (previously filed).
D-1.2 Order of the FERC (previously filed).
D-2.1 Application of New England Power Company before the NRC
(previously filed).
D-2.2 Orders of the NRC approving the transaction as it pertains
to the Millstone Nuclear Power Station, Unit 3 and the
Seabrook Station, Unit 1.
D-3.1 Submission to the MDTE (previously filed).
D-3.2 Response from the MDTE (previously filed).
D-4.1 Omitted.
D-4.2 Omitted.
D-5.1 Submission to the NHPUC (previously filed).
D-5.2 Order of the NHPUC Setting the Merger for a Hearing
(previously filed).
D-5.3 Order of the NHPUC Approving the Merger.
D-5.4 Order of the NHPUC on Motion for Rehearing D-6.1 Submission
to the VPSB (previously filed).
D-6.2 Order of the VPSB (previously filed).
D-7.1 Submission to the CDPUC (previously filed).
D-7.2 Order of the CDPUC (previously filed).
D-8 Rhode Island Public Utilities Commission Certification to
the SEC (previously filed).
E-1 Map of service territory of NEES (filed in paper format on
Form SE).
E-2 NGG Corporate Chart, as revised (filed in paper format on
Form SE).
E-3 NEES Corporate Chart (filed in paper format on Form SE).
F-1.1 Opinion of Counsel - National Grid Group.
F-1.2 Opinion of Counsel - NEES.
F-2 Past tense opinion of counsel (to be filed by amendment).
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G-1 Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (included in Exhibit C-1).
H-1 Annual Report of National Grid Group dated March 31, 1998
(previously filed).
H-2 Annual Report on Form 10-K of NEES for the year ended
December 31, 1998 (filed with the Commission on March 31,
1999 and incorporated by reference herein).
H-3 Form U5S of NEES for the year ended December 31, 1998 (filed
with the Commission on May 3, 1999 and incorporated by
reference herein).
H-4 Annual Report of National Grid Group dated March 31, 1999
(filed under cover of Form SE).
I-1 Proposed Form of Notice (previously filed).
J-1 Description of Nonutility Subsidiaries of National Grid, as
revised (previously filed).
J-2 Merger Structure and Description of Intermediate Companies,
as revised (previously filed).
J-3 "The Financial Strength of the National Grid Group and the
Proposed Acquisitions of NEES and EUA," Julian Franks and
the Brattle Group (March, 1999) (filed under cover of Form
SE).
K-1 Response to the Comments of Russell G. Gilmore Financial
Statements
FS-1 National Grid Group Unaudited Pro Forma Condensed
Consolidated Balance Sheet (filed with the Commission on
August 17, 1999 in File No. 70-9519 and incorporated herein
by reference - Confidential Treatment Requested).
FS-2 National Grid Group Unaudited Pro Forma Condensed
Consolidated Statement of Income (filed with the Commission
on August 17, 1999 in File No. 70-9519 and incorporated
herein by reference Confidential Treatment Requested).
FS-3 Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements (filed with the Commission on August
17, 1999 in File No. 70-9519 and incorporated herein by
reference - Confidential Treatment Requested).
FS-4 National Grid Group Consolidated Balance Sheet (previously
filed).
FS-5 National Grid Group Consolidated Profit and Loss Account,
Cash Flow Statement and Statement of Total Recognized Gains
and Losses (previously filed).
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FS-5.1 Notes to National Grid Group Consolidated Financial
Statements (previously filed).
FS-6 NEES Consolidated Balance Sheet as of December 31, 1998
(included in Exhibit H-2).
FS-7 NEES Consolidated Statement of Income for the twelve months
ended December 31, 1998 (included in Exhibit H-2).
Item 7. Information as to Environmental Effects
The Merger neither involves a "major federal action" nor "significantly
affects 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.
Consummation of the Merger will not result in changes in the operations of NEES
and its subsidiaries 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 Applicants have duly caused this Pre-Effective Amendment No. 5 to the
Application-Declaration, File No. 70-9473, to be signed on their behalf by the
undersigned thereunto duly authorized.
The signature of the Applicants and of the persons on their behalf are
restricted to the information contained in this application which is pertinent
to the application of the respective companies.
Date: December 9, 1999
/s/ Jonathan M. G. Carlton
Jonathan M. G. Carlton
Business Development Manager -- Regulation
The National Grid Group plc
/s/ Kirk Ramsauer
Kirk L. Ramsauer
Deputy General Counsel
New England Electric System*
*The name "New England Electric System" means the trustee or trustees for the
time being (as trustee or trustees but not personally) under an agreement and
declaration of trust dated January 2, 1926, as amended, which is hereby referred
to, and a copy of which as amended has been filed with the Secretary of the
Commonwealth of Massachusetts. Any agreement, obligation or liability made,
entered into or incurred by or on behalf of New England Electric System binds
only its trust estate, and no shareholder, director, trustee, officer or agent
thereof assumes or shall be held to any liability therefor.
<PAGE>
EXHIBIT INDEX
Exhibit
B-2.1 List of Direct and Group Central Administrative Services Provided to NEES.
B-2.2 Analysis of Corporate Cost Allocation - 1999 Business Plan.
B-2.3 Overhead Accounts for National Grid Company Administrative Services.
B-2.4 Re-allocation of Estimated National Grid Administrative Service Costs.
B-2.5 NEES/GRID Domestic Administrative Service Costs Savings.
D-2.2 Orders of the NRC approving the transaction as it pertains to the
Millstone Nuclear Power Station, Unit 3 and the Seabrook Station, Unit 1.
D-5.3 Order of the NHPUC Approving the Merger.
D-5.4 Order of the NHPUC on Motion for Rehearing
F-1.1 Opinion of Counsel - National Grid Group.
F-1.2 Opinion of Counsel - NEES.
K-1 Response to the Comments of Russell G. Gilmore
Exhibit B-2.1
Central Administrative Services Provided to NEES
Details of the services provided by corporate departments to NEES are as
follows:
Direct Services
Senior Management
o Senior management time in support of NEES business activities
o "Senior Management" is defined as Group Chief Executive, Group Finance
Director and Managing Director - UK Transmission
o Costs in relation to NEES Board activities will be separately identified,
though it should be noted that this represents a small proportion of senior
management time
Company Secretary & General Counsel
o Legal advice
Corporate Affairs
o Advice and assistance on media, industry and government relations
o Environmental advice
o Development of internal communication links with NEES
Human Resources
o International management training
o Advice on NGG HR policies
Group Finance
o Tax
o Tax planning advice
o Regulatory filings
o Treasury
o Provision of financing including debt
o Credit rating
o Regulatory filings
o Advice on UK GAAP
o Advice on insurance
Group Services (some services are both direct and group)
Strategic Development
o Advice on Corporate Strategy
o Advice on management within a performance based utility regulation
environment.
Internal Audit
o Advice on internal controls
o Audit Committee support
<PAGE>
Corporate Finance
o This department provides corporate finance support, and this will be
charged only if specifically requested by NEES.
Senior Management
o Senior management time in support of the Group.
Company Secretary & General Counsel
o Shareholder register (including US shareholders and ADRs)
o Annual reports and regulatory filings
o Company secretarial function
o Legal advice
Corporate Affairs
o Advice on group policies for media, industry and government relations
o Environmental advice
Investor Relations
o Stock Exchange announcements (London and New York)
o Provision of information to analysts and current/prospective shareholders
Human Resources
o Co-ordination of Group HR policies
o Group succession planning
Group Finance
o Inclusion of NEES in NGG reporting and consolidation systems
o Reported results and financial aspects of regulatory filings
o Risk management
o Group consolidation, co-ordination and reporting systems
o Business Plan advice, co-ordination and reporting systems
Regulation
o Advice on performance based regulation
Exhibit B-2.2
Analysis of Corporate Cost Allocation - 1999 Business Plan
2000/01
---------------------------------------
Cost (pound)000s
- ---------------------------------------------------------------------------
Department NEES Other Group Total
- ---------------------------------------------------------------------------
Stategic Development 0 400 179 579
Internal Audit 0 1,004 112 1,116
Corporate Finance 0 796 0 796
UK Business Development 0 854 0 854
Senior Management 764 2,956 1,376 5,096
Company Secretary 37 164 47 249
Corp/Shareholder Services 0 0 3,718 3,718
Legal Services 27 775 22 825
Group Regulatory Strategy 0 7,743 0 7,743
Corporate Affairs 22 256 624 902
Public Relations 29 3,606 52 3,687
Government & European 12 494 24 529
Group Environmental Management 13 782 150 945
Investor Relations 0 0 823 823
Human Resources 253 8,145 176 8,574
Group Finance - GM 136 612 612 1,360
Group Accounts 0 790 322 1,112
Treasury 135 454 17 605
Tax 103 667 86 855
Business Planning 0 301 129 429
Risk Assesment 0 487 5 492
Financial Services Manager 0 354 0 354
Accounting Services 0 276 78 354
Financial Operations Manager 0 470 5 475
Payroll 1 463 10 475
Pensions 0 470 5 475
Accounts Processing 1 474 0 475
ISG 0 22,470 0 22,470
Director of Regulation 0 365 91 456
- ---------------------------------------------------------------------------
Total Cost 1,533 56,625 8,663 66,821
- ---------------------------------------------------------------------------
Allocation of Group Element 36.10% 63.90%
Group Allocation (cost) 3,127 5,536 8,663
IS Infrastructure 200
Buildings and Facility Costs 200
-------------------- ----------
Total Allocation 5,060 62,161 67,221
==================== ==========
------------------------------------
% allocation (excluding Group allocation)
- ------------------------------------ ------------------------------------
Department NEES Other Group Total
- ------------------------------------ ------------------------------------
Stategic Development 0% 69% 31% 100%
Internal Audit 0% 90% 10% 100%
Corporate Finance 0% 100% 0% 100%
UK Business Development 0% 100% 0% 100%
Senior Management 15% 58% 27% 100%
Company Secretary 15% 66% 19% 100%
Corp/Shareholder Services 0% 0% 100% 100%
Legal Services 3% 94% 3% 100%
Group Regulatory Strategy 0% 100% 0% 100%
Corporate Affairs 2% 28% 69% 100%
Public Relations 1% 98% 1% 100%
Government & European 2% 93% 5% 100%
Group Environmental Management 1% 83% 16% 100%
Investor Relations 0% 0% 100% 100%
Human Resources 3% 95% 2% 100%
Group Finance - GM 10% 45% 45% 100%
Group Accounts 0% 71% 29% 100%
Treasury 22% 75% 3% 100%
Tax 12% 78% 10% 100%
Business Planning 0% 70% 30% 100%
Risk Assesment 0% 99% 1% 100%
Financial Services Manager 0% 100% 0% 100%
Accounting Services 0% 78% 22% 100%
Financial Operations Manager 0% 99% 1% 100%
Payroll 0% 98% 2% 100%
Pensions 0% 99% 1% 100%
Accounts Processing 0% 100% 0% 100%
ISG 0% 100% 0% 100%
Director of Regulation 0% 80% 20% 100%
- ------------------------------------ ------------------------------------
Total Cost 2% 85% 13% 100%
- ------------------------------------ ------------------------------------
-----------------------------
% allocation (including Group allocation)
- --------------------------------------------------------------
Department NEES Other Total
- --------------------------------------------------------------
Stategic Development 11% 89% 100%
Internal Audit 4% 96% 100%
Corporate Finance 0% 100% 100%
UK Business Development 0% 100% 100%
Senior Management 25% 75% 100%
Company Secretary 22% 78% 100%
Corp/Shareholder Services 36% 64% 100%
Legal Services 4% 96% 100%
Group Regulatory Strategy 0% 100% 100%
Corporate Affairs 27% 73% 100%
Public Relations 1% 99% 100%
Government & European 4% 96% 100%
Group Environmental Management 7% 93% 100%
Investor Relations 36% 64% 100%
Human Resources 4% 96% 100%
Group Finance - GM 26% 74% 100%
Group Accounts 10% 90% 100%
Treasury 23% 77% 100%
Tax 16% 84% 100%
Business Planning 11% 89% 100%
Risk Assesment 0% 100% 100%
Financial Services Manager 0% 100% 100%
Accounting Services 8% 92% 100%
Financial Operations Manager 0% 100% 100%
Payroll 1% 99% 100%
Pensions 0% 100% 100%
Accounts Processing 0% 100% 100%
ISG 0% 100% 100%
Director of Regulation 7% 93% 100%
- --------------------------------------------------------------
Total Cost 7% 93% 100%
- --------------------------------------------------------------
Analysis of Group Allocation Percentage
- -----------------------------------------------------------------
Metrics NEES Other Total
- -----------------------------------------------------------------
1) Turnover(pound)m 1,050 1,557 2,607
2) HC Op profit(pound)m 187 583 770
3) Employee Numbers 3,766 3,859 7,625
4) HC Net Assets(pound)m 1,801 4,111 5,912
- -----------------------------------------------------------------
- -----------------------------------------------------
% Allocation based on above NEES Other
- -----------------------------------------------------
1) Turnover 40.28% 59.72%
2) HC Op profit 24.29% 75.71%
3) Employee Numbers 49.39% 50.61%
4) HC Net Assets 30.46% 69.54%
- ------------------------------------------------------
Average percentage 36.10% 63.90%
- ------------------------------------------------------
The above metrics are based on forecast information. For billing purposes,
the latest available full year actuals will be used.
Exhibit B-2.3
Overhead Accounts for National Grid Company Services
NGC Department The Service Company's Dept. Overhead Account
Strategic Development Financial forecasting
Internal audit Internal audit
Company secretary Corporate legal
Legal services Corporate legal
Corporate affairs & Public Corporate legal (NEES' Corporate communications
Relations Departments department is part of Corporate legal)
Government relations Corporate Legal
Group environmental management Environmental
Group finance Treasury/Financial
Treasury Treasury/Financial
Tax Accounting
Business planning Financial forecasting
Risk assessment Treasury/Financial (NEES' risk management
department is part of Treasury/Financial)
Accounting services Accounting
Financial operations manager Treasury/Financial
Accounts processing Accounting
Director of regulation Rates
IS infrastructure costs Information Services
Building and facility costs The Service Company's building and facilities
overhead account
Exhibit B-2.4 shows the expected allocation of the NGC billings to the NEES
companies that are proposed to be reallocated by the Service Company using a
predetermined allocation formula, as described above. This exhibit relies on the
estimates provided by National Grid and assumes that the 1999 allocation
formulas currently in use will be used in 2000. An estimated allocation by
company has not been made for the costs proposed to be reallocated using the
department overhead accounts since such allocation is dependent on individual
employees future work efforts and how they allocate their work effort by
company.
Exhibit B-2.4
Re-allocation of estimated National Grid
bill - 2000/01 (all amounts
in thousands of British Pounds)
----------Type of National Grid cost billed----------
<TABLE>
<CAPTION>
Shareholder Services Senior Mgmt Human Resources Total costs Total costs
Investor Relations Payroll by NEES by NEES
Group Accounts Pensions entity entity
(B) (C) (GBP) (USD)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEES 1.166% 20 25.000% 315 335 553
Nantucket 0.670% 12 0.590% 7 0.635% 2 21 35
Mass Electric 42.416% 746 47.499% 600 46.265% 150 1,496 2,467
MA Hydro 1.592% 28 28 46
NH Hydro 0.374% 7 7 12
NEP 35.565% 624 10.394% 131 2.812% 9 764 1,261
NEET 0.421% 7 7 12
Granite 1.886% 33 1.844% 23 1.633% 5 61 101
Narragansett 13.384% 235 14.673% 185 15.876% 51 471 777
NEES Global 0.906% 16 16 26
NEES Com 0.896% 16 16 26
GS Energy 0.001% 0
NEES Energy 0.192% 3 3 5
AllEnergy 0.531% 9 9 15
NEPSCo (A) 32.779% 106 106 175
----------------------------------------------------------------------------------------------
Total 100.000% 1,756 100.000% 1,261 100.000% 323 3,340 5,511
----------------------------------------------------------------------------------------------
Allocated through Department Overhead pools 1,720 2,838
-------------------------
Total costs allocated to NEES 5,060 8,349
-------------------------
</TABLE>
(A) Nepsco costs will be reallocated following NEPSCo payroll.
Conversion factor 1 GBP = 1.65 USD
(B) This allocation formula allocates 25% to NEES parent with the remaining 75%
being allocated to the NEP and the NEES retail companies using NEPSCO's
operation and maintenance based allocation formula. An alternative allocation
method would have been to use NEPSCO's operation and maintenance based
allocation formula for 100% of the costs but with all companies included in the
calculation in addition to NEP and the NEES retail companies. Had such
alternative calculation been used, the amount allocated to NEP and the NEES
retail companies would have been approximately 95%
(C) Allenergy is not included in the above allocation formula because Allenergy
does not utilize NEPSCO's Human Resources group or NEPSCO's payroll department.
None of NEES' other unregulated subsidiaries have their own employees but
instead utilize NEPSCO employees or outside contractors. Because this formula
includes NEPSCO employees in such allocation calculations, these other
unregulated companies are allocated a portion of the cost of the Human Resources
and payroll function when they utilize NEPSCO employees.
Exhibit B-2.5
NEES/GRID Domestic Service Costs Savings
$000'S
Finance
Commitment/Rating Agency Fees $900
Shareholder Services $1,135
Bank Of NY
Annual Meeting Costs
Director's Fees & expenses $1,100
Annual report $400
System Officers - salary & expenses $1,750
Risk Insurance $1,300
D&O
Consolidation of other lines
Rates - consulting fees $1,100
Membership Dues, EEI etc $700
----
Total $8,385
======
Exhibit D-2.2
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
) Docket No. 50-423
NORTHEAST NUCLEAR ENERGY )
COMPANY, et al. )
)
(Millstone Nuclear Power Station, Unit 3) )
ORDER APPROVING APPLICATION REGARDING MERGER OF
NEW ENGLAND ELECTRIC SYSTEM AND THE NATIONAL GRID GROUP PLC
I.
Northeast Nuclear Energy Company is authorized to act as agent for the
joint owners of the Millstone Nuclear Power Station, Unit 3 (Millstone 3), and
has exclusive responsibility and control over the physical construction,
operation, and maintenance of the facility as related in Facility Operating
License No. NPF-49. New England Power Company (NEP), one of the joint owners,
holds a 12.2 percent1 possessory interest in Millstone 3. The U.S. Nuclear
Regulatory Commission issued Facility Operating License No. NPF-49 on January
31, 1986, pursuant to Part 50 of Title 10 of the Code of Federal Regulations (10
CFR Part 50). The facility is located in New London County, on the southern
coast of the State of Connecticut.
II.
Under cover of a letter dated March 16, 1999, NEP, a subsidiary of New
England Electric Systems (NEES), and National Grid Group plc (National Grid)
submitted an application
- --------
1 A pending merger of New England Electric System with Eastern Utility
Associates, which owns Mortaup Electric Company, would result in an increase in
NEP's ownership interest in Millstone 3 to approximately 15.2 percent.
<PAGE>
requesting approval of the transfer of control of the license, to the extent
held by NEP in connection with its 12.2 percent ownership interest in Millstone
3, regarding a proposed change in the economic ownership of NEES. The
application was supplemented May 20 and June 17, 1999 (collectively hereinafter
"the application").
NEP is incorporated in the Commonwealth of Massachusetts. NEES owns all of
NEP's common stock and 99.71 percent of its voting securities, with the other
0.29 percent being owned by the public in the form of preferred stock with
common voting rights. The requested transfer approval relates to a proposed
merger in which NEES is to be acquired by National Grid, a British company. NEES
and National Grid entered into a merger agreement on December 11, 1998.
National Grid is a public limited company incorporated under the laws of
England and Wales. It is the only transmission company in England and Wales and
is an independent company created as a result of the privatization and
restructuring of the British electric system in 1990. The application states
that National Grid, with its United Kingdom assets and through interconnections
with Scotland and France and through its acquisitions of interests in
transmission systems in other nations, is the largest privately owned
transmission company in the world.
National Grid has formed NGG Holding LLC (NGG Holdings), a U.S. entity that
is a limited liability company organized in Massachusetts and a wholly owned
subsidiary of National Grid. NGG Holdings will merge with and into NEES, with
NEES being the surviving entity from that transaction and maintaining its status
as a U.S. entity subject to all applicable U.S. laws and regulations. The
application states that, for tax purposes, immediately after the merger, NEES
will be converted from a Massachusetts business trust into a corporation;
specifically NEES will be merged into a Massachusetts corporation to be named
NEES Holdings, Inc. which will then
<PAGE>
be the surviving entity. The post-acquisition capital structure of NEES
Holdings, Inc. will be identical to the capital structure of NEES, and NEES
Holdings, Inc., will become a wholly owned indirect subsidiary of National Grid,
with NEP being a subsidiary of NEES Holdings, Inc., and thus also becoming an
indirect subsidiary of National Grid. The application also provides details
regarding several companies that will be created for various business reasons as
intermediaries between National Grid and NEES Holdings, Inc., after the merger
is approved, and all of these companies will be either directly or indirectly
wholly owned by National Grid. National Grid will register as a public utility
holding company under the Public Utility Holding Company Act of 1935.
Approval of the indirect license transfer that would result from the
foregoing transactions was requested pursuant to 10 CFR 50.80. Notice of the
application for approval and an opportunity for a hearing was published in the
Federal Register on June 30, 1999 (64 FR 36191). Pursuant to such notice, joint
Millstone 3 owners Connecticut Light and Power Company (CP&L) and Western
Massachusetts Electric Company (WMECO) filed a timely intervention petition and
hearing request. Following the submission of further pleadings by the applicants
and petitioners, the Commission found that the petitioners had demonstrated
standing and proffered to admissible issues (regarding foreign ownership and
financial qualifications). The Commission set the case for hearing and issued a
schedule for the proceeding. Subsequently, on November 4, 1999, the petitioners
filed a notice of withdrawal of their petition to intervene, and the petitioners
and the applicants jointly moved for termination of the proceeding due to a
settlement reached between the parties. The Commission granted the motion on
November 19, 1999. In doing so, it noted that the staff, in its review of
transfer applications, examines financial qualifications and foreign ownership
issues and should consider concerns specifically raised in the proceeding
<PAGE>
relating to those maters when it takes action on the transfer application, North
Atlantic Energy Service Corp., et al. (Seabrook, Unit 1 and Millstone Station,
Unit 3), CLI-99-28, 50 NRC ___, slip op. (Nov. 19, 1999). The staff has
considered these concerns which are addressed in the safety evaluation
supporting this Order.
Under 10 CFR 50.80, no license, or any right thereunder, shall be
transferred, directly or indirectly, through transfer of control of the license,
unless the Commission shall give its consent in writing. Upon review of the
information in the application, and other information before the Commission, the
NRC staff has determined that the proposed merger of National Grid and NEES will
not affect the qualifications of NEP as a holder of Facility Operating License
NPF-49, and that the indirect transfer of the license, to the extent effected by
the proposed merger, is otherwise consistent with applicable provisions of law,
regulations, and orders issued by the Commission, subject to the conditions set
forth herein. The foregoing findings are supported by a safety evaluation dated
December 10, 1999.
III.
Accordingly, pursuant to Sections 181b, 181i, 181o, and 184 of the Atomic
Energy Act of 1954 (AEA), as amended, 42 USC ss.ss. 2201(b), 2201(i), 2201(o),
and 2234: and 10 CFR 50.80, IT IS HEREBY ORDERED that the indirect license
transfer referenced above is approved subject to the following conditions:
(1) No later than the time the proposed merger with National Grid is
consummated, NEP shall establish and make operational a Special
Nuclear Committee, as described in the application, having the
composition, authority, responsibilities, and obligations specified in
the application, provided, however, the Special Nuclear Committee may
also have exclusive authority on behalf of NEP over taking any
<PAGE>
action which is ordered by the NRC or any other agency or court of
competent jurisdiction. No material changes with respect to the
Special Nuclear Committee may be made without the prior written
consent of the Director, Office of Nuclear Reactor Regulation. The
foregoing provisions may be modified by the Commission upon
application and for good cause shown.
(2) The Special Nuclear Committee shall have the responsibility and
exclusive authority to ensure, and shall ensure, that the business and
activities of NEP with respect to the Millstone 3 license are at all
times conducted in a manner consistent with the protection of the
public health and safety and common defense and security of the United
States.
(3) NEP shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filed, to
transfer (excluding grants of security interests or liens) from NEP to
its direct or indirect parent, or to any other affiliated company,
facilities for the production, transmission, or distribution of
electric energy having a depreciated book value exceeding ten percent
(10 percent) of NEP's consolidated net utility plant, as recorded on
its books of account.
(4) Should the proposed merger not be completed by December 30, 2000, this
Order shall become null and void, provided, however, upon application
and for good cause shown, such data may be extended.
This Order is effective upon issuance.
For further details with respect to this Order, see the initial application
dated March 15, 1999, and the supplements dated May 20 and June 17, 1999, and
the safety evaluation dated December 10, 1999, which are available for public
inspection at the Commission's Public
<PAGE>
Document Room, the Golman Building, 2120 L Street, N.W., Washington, DC, and
accessible electronically through the ADAMS Public Electronic Reading Room link
at the NRC Web site http://www.nrc.gov
Dated at Rockville, Maryland, this 10th day of December, 1999.
FOR THE NUCLEAR REGULATORY COMMISSION
-------------------------
Roy P. Zimmerman, Acting Director
Office of Nuclear Reactor Regulation
<PAGE>
UNITED STATES
NUCLEAR REGULATORY COMMISSION
SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION
PROPOSED MERGER OF NEW ENGLAND ELECTRIC SYSTEM AND
THE NATIONAL GRID GROUP PLC
MILLSTONE NUCLEAR POWER STATION, UNIT 3
DOCKET NO. 50-423
1.0 INTRODUCTION
By application dated March 16, 1999, New England Power Company (NEP) requested
that the U.S. Nuclear Regulatory Commission (NRC) consent to the indirect
transfer of Facility Operating License No. NPF-48 for the Millstone Nuclear
Power Station, Unit 3 (Millstone 3), to the extent held by NEP in regard to
NEP's 12.2-percent ownership interest in Millstone 3. The indirect transfer
would result from a merger involving the parent company of NEP and The National
Grid Group plc (National Grid), which also joined in submitting the application.
The other 18 owners of Millstone 3 have ownership interests ranging from less
than 1 percent up to 52.9 percent. Northeast Nuclear Energy company (NNECO) is
the licensed entity responsible for operating Millstone 3. Supplemental
information was filed on May 20, 1999, which did not expand the scope of the
application as originally noticed in the Federal Register.
The NRC staff reviewed the initial application and determined that additional
information was needed to complete the review. A request for additional
information (RAI) pertaining to foreign ownership and control issues was sent to
counsel for the applicants on June 15, 1999, and they responded with
supplemental information dated June 17, 1999 (referred to as "supplement"). The
supplement did not expand the scope of the application as originally noticed in
the Federal Register.
The application also requested that the NRC consent to the indirect transfer of
the license for the Seabrook Nuclear Power Station, Unit 1 (Seabrook), in
connection with NEP's 9.8-percent ownership interest in Seabrook, and that
request is being addressed in a separate, related safety evaluation (SE).
NEP's parent company is the New England Electric System (NEES), a Massachusetts
business trust. NEP is incorporated in the Commonwealth of Massachusetts. NEES
owns all of NEP's common stock and 99.71 percent of its voting securities, with
the other 0.29 percent being owned by the public in the form of preferred stock
with common voting rights. The requested transfer approval relates to a proposed
merger in which NEES is to be acquired by National Grid, a British company. NEES
and National Grid entered into a merger agreement on December 11, 1998.
<PAGE>
National Grid is a public limited company incorporated under the laws of England
and Wales and was created as a result of the privatization and restructuring of
the British electric system in 1990. It is the only transmission company in
England and Wales. The application states that National Grid, with its United
Kingdom assets and through its interconnections with Scotland and France and its
acquisition of interests in transmission systems in other nations, is the
largest privately owned transmission company in the world.
National Grid has formed NGG Holdings LLC (NGG Holdings), a U.S. entity which is
a limited liability company organized in Massachusetts and a wholly owned
subsidiary of National Grid. NGG Holdings will merge with and into NEES, with
NEES being the surviving entity from that transaction and maintaining its status
as a U.S. entity subject to all applicable U.S. laws and regulations. The
supplement states that, for tax purposes, immediately after the merger, NEES
will be converted from a Massachusetts business trust into a corporation;
specifically, NEES will be merged into a Massachusetts corporation to be named
NEES Holdings, Inc. which will then be the surviving entity. The
post-acquisition capital structure of NEES Holdings, Inc., will be identical to
the capital structure of NEES, and NEES Holdings, Inc., will become a wholly
owned indirect subsidiary of National Grid.
The supplement also provides details regarding several companies that will be
created for various business reasons as intermediates between National Grid and
NEES Holdings, Inc., after the merger is approved, and all of these companies
will be either directly or indirectly wholly owned by National Grid. Section 5.2
of this SE provides more information on these companies. National Grid will
register as a public utility holding company as described in the Public Utility
Holding Company Act of 1935.
NEP will continue to be a licensee for its ownership interest in Millstone 3,
with no change in the direct ownership of its interest in Millstone 3. NEP will
be directly owned by the successor to NEES, NEES Holdings, Inc., after the
proposed merger, and through NEES Holdings, Inc., NEP will become an indirect
subsidiary of National Grid. An indirect transfer of control of the license for
Millstone 3 to the extent held by NEP to National Grid will occur as a result of
the proposed merger.
The application states that the proposed merger will not change any aspects of
the direct ownership, operation, management, license terms or conditions, or
performance of Millstone 3, and that the only change involving that facility
will be the acquisition of NEP's parent company by a subsidiary of National
Grid. NEP will remain obligated to perform all of its current license
obligations for the facility, including providing for decommissioning funding,
and there will be no change in NEP's rights or duties under the license,
ownership agreements regarding the facility, or any other applicable law or
document regarding those rights or obligations.
The application also states that the merger transaction is an important part of
the transition to a fully competitive environment in New England. Pursuant to
legislation and to a Settlement Agreement approved by the Federal Energy
Regulatory Commission (FERC) and the Massachusetts Department of
Telecommunications and Energy (MDTE) in 1997, the Commonwealth of Massachusetts
is committed to full competition at the retail level for the
<PAGE>
electric power industry. Similar legislation was enacted in Rhode Island and New
Hampshire and incorporated into settlement agreements with NEP's affiliates and
approved by FERC.
Such competition is to be achieved, in part, by separating generation from
transmission to create independent transmission companies. Under that
legislative mandate, NEES has committed to the divestiture of all of its
generating facilities, including its nuclear facilities, to the extent
practicable.
In addition to its interests as a minority licensee in Seabrook and Millstone 3,
NEP is a minority shareholder in four companies (the "Yankee Companies"), each
of whom owns and is the licensee for a nuclear plant in New England. These four
companies, along with NEP's ownership interest in each and the nuclear plants
owned by each, are as follows: a 15-percent interest in Connecticut Yankee
Atomic Power Company (which owns the Haddam Neck, or Connecticut Yankee, plant);
a 20-percent interest in Maine Yankee Atomic Power Company (which owns the Maine
Yankee Atomic Power Station); a 20-percent interest in Vermont Yankee Nuclear
Power Corporation (which owns the Vermont Yankee Nuclear Power Station); and a
30-percent interest in Yankee Atomic Electric Company (which owns the Yankee
Nuclear Power Station).1
Pursuant to 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through transfer of control of the license, unless the Commission
shall give its consent in writing. Consent to an indirect license transfer is
contingent upon the Commission's determination that the underlying transaction
(the merger in this case) will not affect the qualifications of the holder of
the license, and that the transfer is otherwise consistent with applicable
provisions of law, regulations and orders of the Commission.
On July 20, 1999, two co-owners of Millstone 3 filed petitions to intervene and
requests for hearing, seeking to oppose NEP's application. On October 21, 1999,
the Commission concluded that the two co-owners had demonstrated standing and
had raised two admissible issues (regarding foreign ownership and financial
qualifications). The Commission set the case for hearing. The co-owners
eventually reached a settlement with NEP and on November 4, 1999, filed a notice
of withdrawal of their petitions to intervene, with all parties jointly moving
for termination of the proceeding. On November 19, 1999, the Commission ordered
termination of the case, concluding that termination would serve the public
interest. The Commission directed the staff, in its review of the transfer
application, to consider the concerns related to financial qualifications and
foreign ownership issues raised during the proceeding. The staff's consideration
of these concerns is reflected herein.
- --------
1 NEP did not apply for approval under 10 CFR 50.80 in regard to the
licenses of any of the four plants owned by the Yankee Companies, claiming that
since NEP is not a licensee of any of these facilities and is a minority owner
of each of the Yankee Companies, it does not control the plants or the conduct
of their licensed activities. Staff comments related to NEP's ownership
interests in the four Yankee Companies are contained in a separate letter to
counsel for the applicants dated April 22, 1999, where the staff concluded that
consent under 10 CFR 50.80 was not required with respect to these four plants
and the National Grid merger.
<PAGE>
2.0 FINANCIAL QUALIFICATIONS AND DECOMMISSIONING FUNDING ASSURANCE ANALYSIS
Following the proposed merger, NEP will maintain its current ownership interest
in Millstone 3 and will remain under the jurisdiction of State regulatory
agencies and FERC. Under the terms of the merger, NEP will continue to be
responsible for providing funds to decommission its portion of Millstone 3. The
application states that NEP has ongoing, assured sources of revenue that will
provide funds to meet its decommissioning obligations. These revenue sources are
NEP's distribution company affiliates under settlement agreements approved by
FERC and the appropriate State commissions. The application states that NEP's
decommissioning funding assurances for Millstone 3 are already in place and will
not be affected by the merger. The application also notes that the merger will
not dilute the financial resources of NEP and that neither Seabrook nor
Millstone 3, nor any other NEP asset will be pledged as security or otherwise
encumbered as a result of the merger. NEP's Price-Anderson indemnity agreement
and the amount of nuclear insurance for both on-site and off-site damages will
not be affected by the merger.
On July 20, 1999, the co-owners intervening against the merger claimed that NEP
had not provided sufficient information to show that it will remain an "electric
utility" or that it would be able to meet its financial obligations with respect
to Millstone 3 and Seabrook following the merger. NEP responded by clarifying
certain information contained in its application regarding its financial
qualifications. On November 4, 1999, the co-owners stated that, based upon this
information, they were satisfied that NEP would be able to meet its financial
obligations with respect to Millstone 3 and Seabrook and they withdrew their
petition to intervene.
Specifically, NEP provided information to the petitioners that it will recover
virtually the entire portion of the costs for Millstone 3 and Seabrook through
rates set by regulators that allow an electric utility tor recover its prudently
incurred costs of generating, transmitting, and distributing electricity. NEP
historically has provided the electric power requirements of its four retail
distribution affiliates. As a result of restructuring initiatives by FERC and by
the States of Massachusetts, Rhode Island, and new Hampshire, NEP agreed: (1) to
divest its generation assets (which it has already done to a significant
extent); and (2) to release its retail affiliates from their all-requirements
electric power contracts with NEP so they could provide retail open access,
while NEP, in turn, is authorized to collect Contract Termination Charges (CTCs)
from its four retail affiliates. Under these CTCs, NEP will be able to recover
substantially all of its costs of generating electricity from Millstone 3 and
Seabrook through cost-of-service based sales. These retail affiliates, in turn,
are authorized to collect through retail distribution rates approved by
regulatory authorities the CTCs that they are required to pay to NEP. The joint
November 4, 1998, pleading filed with the Commission to terminate the proceeding
provided the following specific information (culled from the application)
regarding NEP's ability to recover the costs:
1. The CTC is a regulated rate providing recovery of 100 percent of NEP's
costs for nuclear decommissioning.
<PAGE>
2. NEP is also guaranteed through the CTCs the recovery of 80 percent of
its share of the ongoing capital and operation and maintenance
expenditures of Millstone 3 and Seabrook on a cost-of-service basis.
3. NEP is allowed to recover the additional 20 percent of the share of
the ongoing capital and operation and maintenance expenditures of
Millstone 3 and Seabrook through sales at market-based rates pursuant
to tariffs approved by FERC or through earnings from its other utility
operations.
4. NEP will continue to recover the costs of its transmission activities
through cost- of-service rates regulated by FERC.2
In its review, the staff considered these assertions by NEP in relation to the
guidance contained in footnote eight (on page 9) of NUREG-1577, Rev. 1, which
states:
To the extent that power reactor licensees have received rate
regulator approval to use market-based rates for a significant portion
of their nuclear-related revenues (i.e., greater than 20 percent) the
NRC will not consider them to be subject to traditional cost-of-
service rate regulation for that portion of their rates.
Therefore, since NEP is guaranteed recovery through regulator-approved CTCs of
100 percent of its decommissioning costs and of at least 80 percent of its share
of capital, operation, and maintenance costs for both Millstone 3 and Seabrook,
the staff concludes that NEP is subject to cost-of-service rate regulation for
Millstone 3 and Seabrook. Also, the staff concludes that NEP is subject to FERC
cost-of-service regulation regarding recovery of its transmission costs. Based
upon this information, the staff is satisfied that NEP has provided reasonable
assurance that it is financially qualified to be able to meet its financial
obligations with respect to Millstone 3 and Seabrook.
Additionally, on page 6 of the "Response of New England Power Company to
Requests for Hearing" (July 27, 1999) NEP stated that it has an A+ bond rating.
The staff has confirmed that NEP has investment-grade bond ratings with Moody's
and Value Line. Such a rating is a basis for finding applicants for operating
licenses to be financially qualified, notwithstanding whether they are "electric
utilities" as defined in 10 CFR 50.2. Since this criterion also is a basis for
approving an applicant's financial qualifications for license transfers (see
pages 5-6 of NUREG-1577, Rev. 1), the investment-grade bond rating of NEP
further confirms the staff's finding that NEP meets NRC's financial
qualifications requirements.
However, in view of the NRC's concern that corporate restructuring (involving
either a direct or indirect transfer of control) can lead to a diminution of
assets necessary for the safe operation and decommissioning of a licensee's
nuclear power plant, the NRC's practice has been to condition license transfer
approvals upon a requirement that the licensee not transfer significant assets
from
- --------
2 See "Notice of Withdrawal of Petitions for Leave to Intervene and for
Hearing, and Joint Motion to Terminate Proceeding," (Nov. 4, 1999) at 6-8.
<PAGE>
the licensee to an affiliate without first notifying the NRC. This requirement
assists the NRC in assuring that a licensee will continue to maintain adequate
resources to contribute to the safe operation and decommissioning of its
facility. Thus, the following should be made a condition of the order approving
the application regarding the proposed merger.
NEP shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filled, to
transfer (excluding grants of security interests or liens) from NEP to
its direct or indirect parent, or to any other affiliated company,
facilities for the production, transmission, or distribution of
electric energy having a depreciated book value exceeding ten percent
(10 percent) of NEP's consolidated net utility plant, as recorded on
its books of account.
With respect to decommissioning funding assurance, as noted above, NEP is
allowed to collect 100 percent of its estimated costs of decommissioning through
CTCs. Thus, pursuant to 10 CFR 50.75(e), NEP may continue to use the external
sinking fund method of decommissioning. Also, NEP is collecting at a rate
sufficient to fully fund its pro rata share of Millstone 3 decommissioning costs
as provided in 10 CFR 50.75(c).
In consideration of the foregoing, the staff concludes that the proposed merger
and indirect transfer will not adversely affect the financial qualifications of
NEP to operate or decommission Millstone 3 with respect to its ownership
interest.
3.0 TECHNICAL QUALIFICATIONS
The application states that the transaction will not "change anything about the
direct ownership, operation, management, license terms or conditions, or
performance of Millstone 3 or Seabrook." To support this assertion, the
application states that the merger "will have no effect whatsoever on the
operation, personnel, financial status, physical condition, environmental
effects, business plan, decommissioning capability, or control of Millstone 3 or
Seabrook" and that since "NEP has no responsibility regarding the employees at
Millstone 3 or Seabrook, the merger will not affect the size or performance of
the workforce at either site." The application also nots that NEP will remain
the licensee for Millstone 3 and, as a minority, non-operating licensee, its
primary obligations are "to contribute money and take electricity." NEP will
institute a negation plan designed to prevent foreign control of its minority
interest in Millstone 3, which is described in Section 5.3 herein. The staff
concludes that the proposed merger and indirect license transfer will not affect
the technical qualifications of NNECO to perform its obligations under the
license.
4.0 ANTITRUST REVIEW
The Atomic Energy Act (AEA) does not require or authorize antitrust reviews of
post-operating license transfer applications. Kansas Gas and Electric Co., et
al. (Wolf Creek Generating Station, Unit 1), CLI-99-19, 49 NRC 441 (1999).
Therefore, since the transfer application postdates the issuance of the
Millstone 3 operating license, no antitrust review is required or authorized.
<PAGE>
5.0 FOREIGN OWNERSHIP, CONTROL OR DOMINATION
5.1 Background
Section 103d of the AEA prohibits the Commission from issuing a license for a
nuclear power plant under Section 103 to "any corporation or other entity if the
Commission knows or has reason to believe it is owned, controlled, or dominated
by an alien, a foreign corporation, or a foreign government." The Commission's
regulations at 10 CFR 50.38 contain virtually identical language to implement
this prohibition.
The issue addressed in this section is whether, in the NRC staff's view, the
merger of NEES and National Grid will cause NEP to be owned, controlled, or
dominated by foreign interests such that the foreign ownership and control
prohibition of the AEA would be violated.
The Commission has approved the Final Standard Review Plan on Foreign Ownership,
Control, or Domination (referred to herein as "SRP") to document the process
that the staff uses to analyze whether an applicant is owned, controlled, or
dominated by foreign interests within the meaning of Section 103d. The staff has
used this SRP as guidance for evaluating the foreign ownership considerations of
the proposed merger of NEES and National Grid.
5.2 Organization of NGG Holdings and NEES Holdings, Inc.
National Grid has created NGG Holdings as a U.S. limited liability company
organized in the Commonwealth of Massachusetts. It is an indirectly wholly owned
subsidiary of National Grid that will be merged with and into NEES, with NEES
being the surviving entity from that merger. The supplement states that,
following the merger, five additional companies will be created as intermediates
between National Grid and NEES, all of which will only be under the control of
National Grid and other directly or indirectly wholly owned by National Grid.
Following the merger, NEES will be converted into NEES Holdings, Inc., a
Massachusetts corporation described in Section 1.0 of this SE.
The five additional companies and their places of incorporation will be as
follows: National Grid (US) Holdings Limited, Incorporated in England; National
Grid (US) Investments, incorporated in England; National Grid (Ireland) 1
Limited, Incorporated in Ireland; National Grid (Ireland) 2 Limited,
incorporated in Ireland; and National Grid General partnership, incorporated in
Delaware. The names and identities of the officers and directors of these five
intermediate companies had not been determined as of the date of the supplement
(June 17, 1999) but all the officers and directors are to be citizens of the
United States, the United Kingdom, or a member state of the European Union.
5.3 Information Provided and Measures Proposed to Address Foreign Control
Concerns
Pursuant to Section 4.1 and 4.2 of the SRP, the staff performed threshold and
supplementary reviews of the nature and extent of National Grid's proposed
ownership, control, or domination of NEP. Based upon information contained in
the application and in the supplement, the staff concluded that there will be
interlocking directors among the boards of National Grid, NEES
<PAGE>
Holdings, Inc., and NEP, and that National Grid is a public limited company
owned by a diverse group of stockholders, many of which the staff would presume
to be citizens of various foreign nations. Under Section 4.3 of the SRP, the
staff is to determine the type of actions, if any, that would be necessary to
negate the effects of whatever foreign ownership, control, or domination would
otherwise exist to a level consistent with the AEA and NRC regulations. NEP has
provided the information required by 10 CFR 50.53(d), as well as additional
information in its application and the supplement, on which the staff concludes
that NEP and National Grid have taken, or have committed to take, adequate
mitigating steps to ensure that NEP will not be owned, controlled, or dominated
by an alien, foreign corporation, or foreign government for the purposes of the
AEA and the NRC's regulations, notwithstanding National Grid's proposed
"ownership" of NEP in the ordinary sense. The rest of Section 5.3 of the SEC
provides detailed information about the measures proposed to negate foreign
control over NEP with respect to its minority ownership interest in Millstone 3.
Even though NEP will become an indirect subsidiary of National Grid, the
negation plan set forth in the application is designed to prevent the direct or
indirect transfer of control to National Grid or foreign persons over NEP's
nuclear activities regarding Millstone 3. The plan's focus is on one
establishment of a Special Nuclear Committee (also referred to herein as
"Nuclear Committee" or "Committee") of the NEP Board of Directors, as set forth
in the amended Bylaws of NEP. The Committee will consist of at least three NEP
Board members who are U.S. citizens elected to the Committee by the full NEP
Board, with a majority of the Committee's members being independent Directors,
as defined later in this section. After reviewing the stated purpose and the
design of the Committee, the NRC staff has concluded that it has been
effectively designed to have primary authority over nuclear issues of NEP such
that foreign interests will not be able to control NEP within the meaning of the
AEA and NRC regulations. The remainder of this Section describes the key
features of the Committees which led the staff to reach this conclusion.
The Nuclear Committee will report to the NEP Board of Directors on a quarterly
basis, but for information purposes only. As described in Section 7 of the
amended Bylaws, the Nuclear Committee will have sole discretion to act on behalf
of NEP in all matters related to the operation, maintenance, contribution of
capital, decommissioning, fuel cycle, and other matters relating to Millstone 3
and the other nuclear facilities in which NEP has an interest. The application
stated, however, that there will be three exceptions to these matters in which
the full NEP Board of Directors3 shall be authorized to act on behalf of NEP,
after consultation with the Nuclear Committee. These are as follows:
(1) The right to vote as to whether or not to close a facility and to
begin its decommissioning, and as to whether to seek relicensing.
- --------
3 The supplement listed one U.K. and seven U.S. directors for the initial
composition of the post-merger NEP board; four U.K. and five U.S. directors for
the post-merger NEES board; and six U.K. directors, three U.S. directors, and
one Dutch director for the post-merger National Grid board. However, in response
to concerns raised by interveners, NEP has omitted that following the proposed
merger, all of NEP's Board of Directors and corporate officers will be U.S.
citizens as long as NEP remains a license of Millstone 3 and Seabrook.
<PAGE>
(2) The right to decide to sell, lease, or otherwise dispose of NEP's
interest in a facility.
(3) The right to take any action which is ordered by the NRC or any other
agency or court of competent jurisdiction.
NEP states that these three exceptions are rights essential to the protection of
the economic and legal interests of National Grid and that is the reason for
allowing the full Board to decide them. NEP argues that even with these
exceptions, the possibility of foreign influence over these three types of
decisions being detrimental to the national interest is eliminated because all
decisions reserved to the full NEP Board are limited in a very restrictive way
as described in the amended Bylaws and ultimately will be subject to review and
approval by the NRC and by other U.S. regulatory and/or judicial entities before
they can be implemented.
The intervenors raised concerns on the other hand that the extent of rights
retained by the full NEP Board may have an impact on the effectiveness of the
negation action plan. NEP responded to these concerns by: (1) stating that it
will require that all NEP Board members and corporate officers must be U.S.
citizens as long as NEP remains a licensee of Millstone 3 or Seabrook; and (2)
clarifying to the intervenors' satisfaction the instances in which decisions
related to Millstone 3 and Seabrook are reserved to the full NEP Board.
Specifically, NEP stated that with respect to exception (1) above, a decision to
either decommission or restart is limited only to situations in which
significant costs are involved and a fundamental business decision is required
by the full NEP Board. Once the joint owners of a nuclear unit have made any
such decision to decommission or restart in accordance with the joint ownership
agreements, the decision-making process then will reside with the NEP Nuclear
Committee to provide NEP's inputs to the joint owners regarding the details of
implementing such decisions, with respect to exception (2) above. NEP stated
that this decision also is a fundamental business decision that is governed by
the joint ownership agreements, and any disposition of NEP's interest in a
nuclear unit would require NRC approval. With respect to exception (3) above,
NEP assured the intervenors that its reservation to the full NEP Board of the
right to make decisions concerning compliance with legal or regulatory authority
was not intended to do anything but precisely what government authorities
required. NEP agreed, as part of reaching a settlement with the intervenors, to
eliminate this third right for the full Board.
The intervenors stated in the joint November 4, 1999, pleading filed with the
Commission that, as a result of NEP's clarifications regarding exceptions (1)
and (2) and the elimination of exception (3) as no longer being reserved to the
full NEP Board, they are satisfied that NEP can comply with NRC's requirements
concerning foreign ownership, control, or domination in relation to Millstone 3
and Seabrook.
The staff has noted that NEP has taken steps to avoid any indirect foreign
influences that might affect the Nuclear Committee. Section 1 of Article IV-A of
the amended NEP Bylaws requires that a majority of Committee members at all
times be made up of Independent Directors, which are directors who are not
current or past employees of NEP or any affiliated companies, including National
Grid and its subsidiaries. The application states that this will be done so the
independent
<PAGE>
Directors cannot be influenced by NEP or National Grid through an employment
relationship or by any other manner. Section 2 of that same Article specifies
that each Committee member will be appointed to a fixed term and may be removed
during that term only for specific causes. This step is designed to prevent
foreign citizens from threatening to remove a member. Any member leaving the
Committee can only be replaced by a U.S. citizen. Section 10 of the amended
Bylaws states that any member of the Committee is both empowered and required to
report to the NRC any action by a foreign citizen which the member believes is
designed to unduly influence his or her behavior to the detriment of the
national interest. Finally, NEP will extend to each Committee member the
protection afforded by the NRC's regulations contained in 10 CFR 50.7
(presumably if the protection would not already exist by operation of law),
which prevent any licensee from discriminating against any employee for engaging
in a "protected activity," such as informing government agencies as to possible
non-compliance with the terms of a license or statute.
As the SRP indicates, the Commission will give the foreign control prohibition
an orientation to the common defense and security. NEP's 12.2 percent minority
ownership interest in Millstone 3 does not give NEP any rights to control the
operation of the facility, nor to have access to, or possession of, any Special
Nuclear Materials (SNM) or Restricted Data. Furthermore, the application states
that there is no Restricted Data involved in the Millstone 3 design, technology,
or operation, (Millstone 3 is a Westinghouse pressurized water reactor, using
commonly available technology.) Also, although there is SNM contained in the
trash and spent fuel, it is not in the form of weapon-sensitive materials. Even
if weapon-sensitive materials were involved, the logistics and clearances
required for a foreign citizen to obtain access to such material would seem to
make such access infeasible. In light of the foregoing, there is a reasonable
basis to conclude that there will be no threat to the common defense and
security given NEP's inability to control operation of the facility or to have
access to SNM or Restricted Data.
5.4 Staff Conclusion with Respect to Foreign Ownership and Control
Considerations
The staff has considered guidance contained in the SRP and detailed information
from the applicant with respect to foreign ownership, control, and domination.
The staff has placed substantial weight on the significant safeguards built into
the design of the NEP negation plan, as stated in the application. The staff
regards the safeguards provided in NEP's application as adequate protection to
prevent NEP from being in violation of the foreign control prohibition contained
in Section 103d. The additional safeguards that were agreed to by NEP and the
intervenors, requiring that all NEP Board members and officers must be U.S.
citizens as long as NEP is a licensee for Millstone 3 or Seabrook, and requiring
decisions to comply with agency and court ordered to be made only the Committee,
provide protection above and beyond this initial NEP negation plan. This
additional protection is not inconsistent with the AEA and the Commission's
regulations, and therefore, the staff would not object to such additional
protection.
In consideration of all the foregoing, the staff concludes that the indirect
transfer of control of NEP's 12.2 percent minority ownership interest in the
operating license for Millstone 3 to National Grid would not violate the
prohibitions in the AEA pertaining to foreign ownership, control, or domination,
provided that NEP is subject to the following conditions. The staff believes
that these conditions are consistent with Commission precedent
<PAGE>
1. No later than the time the proposed merger with National Grid is
consummated, NEP shall establish and make operational a Special
Nuclear Committee, as described in the application, having the
composition, authority, responsibilities, and obligations specified in
the application, provided, however, the Special Nuclear Committee may
also have exclusive authority on behalf of NEP over taking any action
which is ordered by the NRC or any other agency or court of competent
jurisdiction. No material changes with respect to the Special Nuclear
Committee may be made without the prior written consent of the
Director, Office of Nuclear Reactor Regulation. The foregoing
provisions may be modified by the Commission upon application and for
good cause shown.
2. The Special Nuclear Committee shall have the responsibility and
exclusive authority to ensure, and shall ensure, that the business and
activities of NEP with respect to the Millstone 3 license are at all
times conducted in a manner consistent with the protection of the
public health and safety and common defense and security of the United
States.
6.0 CONCLUSION
In view of the foregoing discussion, the staff concludes that the proposed
indirect transfer of the operating license for Millstone 3 to the National Grid
with respect to NEP's 12.2 percent ownership interest in Millstone 3 will not
contravene the prohibition against foreign ownership, control, or domination
with the imposition of the conditions described in this Safety Evaluation. Also,
the staff finds that the proposed merger will not adversely impact either the
technical qualifications of the Millstone 3 management and staff, or the
financial qualifications of NEP with respect to its on going provision of its
share of funds for the operation and eventual decommissioning of Millstone 3.
Accordingly, the staff concludes that NEP will remain qualified to hold the
license with respect to the 12.2 percent ownership interest in Millstone 3
following the proposed merger of NEES and National Grid, and that the indirect
transfer of the license, to the extent effected by the proposed merger, is
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission pursuant to the thereto, subject to the conditions set
forth herein.
Principal Contributor: A. McKaignay
Date: December 10, 1999
<PAGE>
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
NORTH ATLANTIC ENERGY SERVICE ) Docket No. 50-443
CORPORATION, et al. )
)
(Seabrook Station, Unit 1) )
ORDER APPROVING APPLICATION REGARDING MERGER OF
NEW ENGLAND ELECTRIC SYSTEM AND THE NATIONAL GRID GROUP PLC
I.
North Atlantic Energy Service Corporation is authorized to act as agent for
the joint owners of the Seabrook Station, Unit 1 (Seabrook), and has exclusive
responsibility and control over the physical construction, operation, and
maintenance of the facility as reflected in Facility Operating License No.
NPF-86. New England Power Company (NEP), one of the joint owners, holds a
9.9-percent possessory interest in Seabrook. The U.S. Nuclear Regulatory
Commission issued Operating License NPF-86 on March 15, 1990, pursuant to Part
50 of Title 10 of the Code of Federal Regulations (10 CFR Part 50). The facility
is located in Seabrook Township, Rockingham County, on the southeast coast of
the State of New Hampshire.
II.
Under cover of a letter dated March 15, 1999, NEP, a subsidiary of New
England Electric System (NEES), and National Grid Group plc (National Grid)
submitted an application requesting approval of the transfer of control of the
license, to the extent held by NEP in connection with its 9.9-percent ownership
interest in Seabrook, regarding a change in the economic ownership of NEES. The
application was supplemented May 20 and June 17, 1999 (collectively hereinafter
"the application").
<PAGE>
NEP is incorporated in the Commonwealth of Massachusetts. NEES owns all of
NEP's common stock and 99.71 percent of its voting securities, with the other
0.29 percent being owned by the public in the form of preferred stock with
common voting rights. The requested transfer approval relates to a proposed
merger in which NEES is to be acquired by National Grid, a British company, NEES
and National Grid entered into a merger agreement on December 11, 1998.
National Grid is a public limited company incorporated under the laws of
England and Wales. It is the only transmission company in England and Wales and
is an independent company created as a result of the privatization and
restructuring of the British electric system in 1990. The application states
that National Grid, with its United Kingdom assets and through interconnections
with Scotland and France and through its acquisitions of interests in
transmission systems in other nations is the largest privately owned
transmission company in the world.
National Grid has formed NGG Holdings LLC (NGG Holdings), a U.S. entity
that is a limited liability company organized in Massachusetts and a wholly
owned subsidiary of National Grid. NGG Holdings will merge with and into NEES,
with NEES being the surviving entity from that transaction and maintaining its
status as a U.S. entity subject to all applicable U.S. laws and regulations. The
application states that, for tax purposes, immediately after the merger, NEES
will be converted from a Massachusetts business trust into a corporation;
specifically, NEES will be merged into a Massachusetts corporation to be named
NEES Holdings, Inc., which will then be the surviving entity. The post
acquisition capital structure of NEES Holdings, Inc., will be identical to the
capital structure of NEES, and NEES Holdings, Inc., will become a wholly owned
indirect subsidiary of National Grid, with NEP being a subsidiary of NEES
Holdings, Inc., and thus also becoming a subsidiary of National Grid. The
application also provides details regarding
<PAGE>
several companies that will be created for various business reasons as
intermediates between National Grid and NEES Holdings, Inc. after the merger is
approved, and all of these companies will be either directly or indirectly
wholly owned by National Grid. National Grid will register as a public utility
holding company under the Public Utility Holding Company Act of 1935.
Approval of the indirect license transfer that would result from the
foregoing transactions was requested pursuant to 10 CFR 50.80. Notice of the
application for approval and an opportunity for a hearing was published in the
Federal Register on June 30, 1999 (64 FR 35190). Pursuant to such notice, joint
Seabrook owners Connecticut Light and Power Company (CL&P) and North Atlantic
Energy Corporation (NAEC) filed a timely intervention petition and hearing
request. Following the submission of further pleadings by the applicants and
petitioners, the Commission found that the petitioners had demonstrated standing
and proffered two admissible issues (regarding foreign ownership and financial
qualifications). The Commission set the case for hearing and issued a schedule
for the proceeding. Subsequently, on November 4, 1999, the petitioners filed a
notice of withdrawal of their petitions to intervene, and the petitioners and
the applicants jointly moved for termination of the proceeding due to a
settlement reached between the parties. The Commission granted the motion on
November 19, 1999. In doing so, it noted that the staff, in its review of
transfer applications, examines financial qualifications and foreign ownership
issues, and should consider concerns specifically raised in the proceeding
relating to those matters when it takes action on the transfer application.
North Atlantic Energy Service Corp., et al. (Seabrook, Unit 1 and Millstone
Station, Unit 3), CLI-99-28, 80 NRC ____, slip op. (Nov. 19, 1999). The staff
has considered those concerns, which are addressed in the safety evaluation
supporting the Order.
<PAGE>
Under 10 CFR 50.80, no license, or any right thereunder, shall be
transferred, directly or indirectly, through transfer of control of the license,
unless the Commission shall give its consent in writing. Upon review of the
information in the application, and other information before the Commission, the
NRC staff has determined that the proposed merger of National Grid and NEES will
not affect the qualifications of NEP as a holder of Facility Operating License
NPF-86, and that the indirect transfer of the license, to the extent effected by
the proposed merger, is otherwise consistent with applicable provisions of law,
regulations, and orders issued by the Commission, subject to the conditions set
forth herein. The foregoing findings are supported by a safety evaluation dated
December 10, 1999.
III.
Accordingly, pursuant to Sections 181b, 181i, 181o and 184 of the Atomic
Energy Act of 1954 (AEA), as amended, 42 USC ss.ss. 2201(b), 2201(i), 2201(o),
and 2234; and 10 CFR 50.80, IT IS HEREBY ORDERED that the indirect license
transfer referenced above is approved, subject to the following conditions:
(1) No later than the time the proposed merger with National Grid is
consummated, NEP shall establish and make operational a Special
Nuclear Committee, as described in the application, having the
composition, authority, responsibilities, and obligations specified in
the application, provided, however, the Special Nuclear Committee may
also have exclusive authority on behalf of NEP over taking any action
which is ordered by the NRC or any other agency or court of competent
jurisdiction. No material changes with respect to the Special Nuclear
Committee may be made without the prior written consent of the
Director, Office of Nuclear
<PAGE>
Reactor Regulation. The foregoing provisions may be modified by the
Commission upon application and for good cause shown.
(2) The Special Nuclear Committee shall have the responsibility and
exclusive authority to ensure, and shall ensure, that the business and
activities of NEP with respect to the Seabrook license are at all
times conducted in a manner consistent with the protection of the
public health and safety and common defense and security of the United
States.
(3) NEP shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filed, to
transfer (excluding grants of security interests or liens) from NEP to
its direct or indirect parent, or to any other affiliated company,
facilities for the production, transmission, or distribution of
electric energy having a depreciated book value exceeding ten percent
(10 percent) of NEP's consolidated net utility plant, as recorded on
its books of account.
(4) Should the proposed merger not be completed by December 30, 2000, this
Order shall become null and void, provided, however, upon application
and for good cause shown, such date may be extended.
This Order is effective upon issuance.
For further details with respect to this Order, see the initial application
dated March 15, 1999, and the supplements dated May 20 and June 17, 1999, and
the safety evaluation dated December 10, 1999, which are available for public
inspection at the Commission's Public Document Room, the Golman Building, 2120 L
Street, NW., Washington, DC and accessible electronically through the ADAMS
Public Electronic Reading Room link at the NRC Web site http://www.nrc.gov.
<PAGE>
Dated at Rockville, Maryland, this 10th day of December 1999.
FOR THE NUCLEAR REGULATORY COMMISSION
Roy B. Zimmerman, Acting Director
Office of Nuclear Reactor Regulation
<PAGE>
SAFETY EVALUATION BY THE OFFICE OF THE
NUCLEAR REACTOR REGULATION PROPOSED MERGER
OF NEW ENGLAND ELECTRIC SYSTEM AND
THE NATIONAL GRID GROUP PLC
SEABROOK STATION, UNIT 1
DOCKET NO. 50-443
1.0 INTRODUCTION
By application dated March 16, 1999, New England Power Company (NEP) requested
that the U.S. Nuclear Regulatory Commission (NRC) consent to the indirect
transfer of Facility Operating License No. NPF-88 for the Seabrook Station, Unit
1 (Seabrook), to the extent held by NEP in regard to NEP's 9.9-percent ownership
interest in Seabrook. The indirect transfer would result from a merger involving
the parent company of NEP and The National Grid Group plc (National Grid), which
also joined in submitting the application. The other 10 owners of Seabrook have
ownership interests ranging from less than 1 percent up to 35.9 percent. North
Atlantic Energy Service Corporation (NAESC) is the licensed entity responsible
for operating Seabrook. Supplemental information was filed on May 20, 1999,
which did not expand the scope of the application as originally noticed in the
Federal Register.
The NRC staff reviewed the initial application and determined that additional
information was needed to complete the review. A request for additional
information (RAI) pertaining to foreign ownership and control issues was sent to
counsel for the applicants on June 15, 1999, and they responded with
supplemental information dated June 17, 1999 (referred to as "supplement"). The
supplement did not expand the scope of the application as originally noticed in
the Federal Register.
The application also requested that the NRC consent to the indirect transfer of
the license for the Milestone Nuclear Power Statio, Unit 3 (Milestone 3), in
connection with NEP's 12.2-percent ownership interest in Milestone 3, and that
request is being addressed in a separate, related safety evaluation (SE).
NEP's parent company is the New England Electric System (NEES), a Massachusetts
business trust. NEP is incorporated in the Commonwealth of Massachusetts. NEES
owns all of NEP's common stock and 99.71 percent of its voting securities, with
the other 0.29 percent being owned by the public in the form of preferred stock
with common voting rights. The requested transfer approval relates to a proposed
merger in which NEES is to be acquired by National Grid, a British company. NEES
and National Grid entered into a merger agreement on December 11, 1998.
<PAGE>
National Grid is a public limited company incorporated under the laws of England
and Wales and was created as a result of the privatization and restructuring of
the British electric system in 1990. It is the only transmission company in
England and Wales. The application states that National Grid, with its United
Kingdom assets and through its interconnections with Scotland and France and its
acquisition of interests in transmission systems in other nations is the largest
privately owned transmission company in the world.
National Grid has formed NGG Holdings LLC (NGG Holdings), a U.S. entity which is
a limited liability company organized in Massachusetts and a wholly-owned
subsidiary of National Grid. NGG Holdings will merge with and into NEES, with
NEES being the surviving entity from that transaction and maintaining its status
as a U.S. entity subject to all applicable U.S. laws and regulations. The
supplement states that, for tax purposes, immediately after the merger, NEES
will be converted from a Massachusetts business trust into a corporation;
specifically, NEES will be merged into a Massachusetts corporation to be named
NEES Holdings, Inc., which will then be the surviving entity. The
post-acquisition capital structure of NEES Holdings, Inc., will be identical to
the capital structure of NEES, and NEES Holdings, Inc. will become a
wholly-owned indirect subsidiary of National Grid.
The supplement also provides details regarding several companies that will be
created for various business reasons as intermediates between National Grid and
NEES Holdings, Inc., after the merger is approved, and all of these companies
will be either directly or indirectly wholly owned by National Grid. Section 5.2
of this SE provides more information on these companies. National Grid will
register as a public utility holding company as described in the Public Utility
Holding Company Act of 1935.
NEP will continue to be a licensee for its ownership interest in Seabrook, with
no change in the direct ownership of its interest in Seabrook. NEP will be
directly owned by the successor to NEES, NEES Holdings, Inc., after the proposed
merger, and through NEES Holdings, Inc., NEP will become an indirect subsidiary
of National Grid. An indirect transfer of control of the license for Seabrook to
the extent held by NEP to National Grid will occur as a result of the proposed
merger.
The application states that the proposed merger will not change any aspects of
the direct ownership, operation, management, license terms or conditions, or
performance of Seabrook, and that the only change involving that facility will
be the acquisition of NEP's parent company by a subsidiary of National Grid. NEP
will remain obligated to perform all of its current license obligations for the
facility, including providing for decommissioning funding, and there will be no
change in NEP's rights or duties under the license, ownership agreements
regarding the facility, or any other applicable law or document regarding those
rights or obligations.
The application also states that the merger transaction is an important part of
the transition to a fully competitive environment in New England. Pursuant to
legislation and to a Settlement Agreement approved by the Federal Energy
Regulatory Commission (FERC) and the Massachusetts Department of
Telecommunications and Energy (MDTE) in 1997, the Commonwealth of Massachusetts
is committed to full competition at the retail level for the
<PAGE>
electric power industry. Similar legislation was enacted in Rhode Island and New
Hampshire and incorporated into settlement agreements with NEP's affiliates and
approved by FERC.
Such competition is to be achieved, in part, by separating generation from
transmission to create independent transmission companies. Under that
legislative mandate, NEES has committed to the divestiture of all of its
generating facilities, including its nuclear facilities, to the extent
practicable.
In addition to its interests as a minority licensee in Seabrook and Millstone 3,
NEP is a minority shareholder in four companies (the "Yankee Companies"), each
of whom owns and is the licensee for a nuclear plant in New England. These four
companies, along with NEP's ownership interest in each and the nuclear plants
owned by each, are as follows: a 15-percent interest in Connecticut Yankee
Atomic Power Company (which owns the Haddam Neck, or Connecticut Yankee, plant);
a 20-percent interest in Maine Yankee Atomic Power Company (which owns the Maine
Yankee Atomic Power Station); a 20-percent interest in Vermont Yankee Nuclear
Power Corporation (which owns the Vermont Yankee Nuclear Power Station); and a
30-percent interest in Yankee Atomic Electric Company (which owns the Yankee
Nuclear Power Station).1
Pursuant to 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through transfer of control of the license, unless the Commission
shall give its consent in writing. Consent to an indirect license transfer is
contingent upon the Commission's determination that the underlying transaction
(the merger in this case) will not affect the qualifications of the holder of
the license, and that the transfer is otherwise consistent with applicable
provisions of law, regulations, and orders of the Commission.
On July 20, 1999, two co-owners of Seabrook filed petitions to intervene and
requests for hearing, seeking to oppose NEP's application. On October 21, 1999,
the Commission concluded that the two co-owners had demonstrated standing and
had raised two admissible issues (regarding foreign ownership and financial
qualifications). The Commission set the case for hearing. The co-owners
eventually reached a settlement with NEP and on November 4, 1999, filed a notice
of withdrawal of their petitions to intervene, with all parties jointly moving
for termination of the proceeding. On November 19, 1999, the Commission ordered
termination of the case, concluding that termination would serve the public
interest. The Commission directed the staff, in its review of the transfer
application, to consider the concerns related to financial qualifications and
foreign ownership issues raised during the proceeding. The staff's consideration
of these concerns is reflected herein.
- --------
1 NEP did not apply for approval under 10 CFR 50.80 in regard to the
licenses of any of the four plants owned by the Yankee Companies, claiming that
since NEP is not a licensee of any of these facilities and is a minority owner
of each of the Yankee Companies, it does not control the plants or the conduct
of their licensed activities. Staff comments related to NEP's ownership
interests in the four Yankee Companies are contained in a separate letter to
counsel for the applicants dated April 22, 1999, where the staff concluded that
concern under 10 CFR 50.80 was not required with respect to these four plants
and the National Grid merger.
<PAGE>
2.0 FINANCIAL QUALIFICATIONS AND DECOMMISSIONING FUNDING ASSURANCE ANALYSIS
Following the proposed merger, NEP will maintain its current ownership interest
in Millstone 3 and will remain under the jurisdiction of State regulatory
agencies and FERC. Under the terms of the merger, NEP will continue to be
responsible for providing funds to decommission its portion of Millstone 3. The
application states that NEP has ongoing, assured sources of revenue that will
provide funds to meet its decommissioning obligations. These revenue sources are
NEP's distribution company affiliates under settlement agreements approved by
FERC and the appropriate State commissions. The application states that NEP's
decommissioning funding assurances for Millstone 3 are already in place and will
not be affected by the merger. The application also notes that the merger will
not dilute the financial resources of NEP and that neither Seabrook nor
Millstone 3, nor any other NEP asset will be pledged as security or otherwise
encumbered as a result of the merger. NEP's Price-Anderson indemnity agreement
and the amount of nuclear insurance for both on-site and off-site damages will
not be affected by the merger.
On July 20, 1999, the co-owners intervening against the merger claimed that NEP
had not provided sufficient information to show that it will remain an "electric
utility" or that it would be able to meet its financial obligations with respect
to Millstone 3 and Seabrook following the merger. NEP responded by clarifying
certain information contained in its application regarding its financial
qualifications. On November 4, 1999, the co-owners stated that, based upon this
information, they were satisfied that NEP would be able to meet its financial
obligations with respect to Millstone 3 and Seabrook and they withdrew their
petition to intervene.
Specifically, NEP provided information to the petitioners that it will recover
virtually the entire portion of the costs for Millstone 3 and Seabrook through
rates set by regulators that allow an electric utility tor recover its prudently
incurred costs of generating, transmitting, and distributing electricity. NEP
historically has provided the electric power requirements of its four retail
distribution affiliates. As a result of restructuring initiatives by FERC and by
the States of Massachusetts, Rhode Island, and new Hampshire, NEP agreed: (1) to
divest its generation assets (which it has already done to a significant
extent); and (2) to release its retail affiliates from their all-requirements
electric power contracts with NEP so they could provide retail open access,
while NEP, in turn, is authorized to collect Contract Termination Charges (CTCs)
from its four retail affiliates. Under these CTCs, NEP will be able to recover
substantially all of its costs of generating electricity from Millstone 3 and
Seabrook through cost-of-service based sales. These retail affiliates, in turn,
are authorized to collect through retail distribution rates approved by
regulatory authorities the CTCs that they are required to pay to NEP. The joint
November 4, 1998, pleading filed with the Commission to terminate the proceeding
provided the following specific information (culled from the application)
regarding NEP's ability to recover the costs:
1. The CTC is a regulated rate providing recovery of 100 percent of NEP's
costs for nuclear decommissioning.
<PAGE>
2. NEP is also guaranteed through the CTCs the recovery of 80 percent of
its share of the ongoing capital and operation and maintenance
expenditures of Millstone 3 and Seabrook on a cost-of-service basis.
3. NEP is allowed to recover the additional 20 percent of the share of
the ongoing capital and operation and maintenance expenditures of
Millstone 3 and Seabrook through sales at market-based rates pursuant
to tariffs approved by FERC or through earnings from its other utility
operations.
4. NEP will continue to recover the costs of its transmission activities
through cost- of-service rates regulated by FERC.2
In its review, the staff considered these assertions by NEP in relation to the
guidance contained in footnote eight (on page 9) of NUREG-1577, Rev. 1, which
states:
To the extent that power reactor licensees have received rate
regulator approval to use market-based rates for a significant portion
of their nuclear-related revenues (i.e., greater than 20 percent) the
NRC will not consider them to be subject to traditional cost-of-
service rate regulation for that portion of their rates.
Therefore, since NEP is guaranteed recovery through regulator-approved CTCs of
100 percent of its decommissioning costs and of at least 80 percent of its share
of capital, operation, and maintenance costs for both Millstone 3 and Seabrook,
the staff concludes that NEP is subject to cost-of-service rate regulation for
Millstone 3 and Seabrook. Also, the staff concludes that NEP is subject to FERC
cost-of-service regulation regarding recovery of its transmission costs. Based
upon this information, the staff is satisfied that NEP has provided reasonable
assurance that it is financially qualified to be able to meet its financial
obligations with respect to Millstone 3 and Seabrook.
Additionally, on page 6 of the "Response of New England Power Company to
Requests for Hearing" (July 27, 1999) NEP stated that it has an A+ bond rating.
The staff has confirmed that NEP has investment-grade bond ratings with Moody's
and Value Line. Such a rating is a basis for finding applicants for operating
licenses to be financially qualified, notwithstanding whether they are "electric
utilities" as defined in 10 CFR 50.2. Since this criterion also is a basis for
approving an applicant's financial qualifications for license transfers (see
pages 5-6 of NUREG-1577, Rev. 1), the investment-grade bond rating of NEP
further confirms the staff's finding that NEP meets NRC's financial
qualifications requirements.
However, in view of the NRC's concern that corporate restructuring (involving
either a direct or indirect transfer of control) can lead to a diminution of
assets necessary for the safe operation and decommissioning of a licensee's
nuclear power plant, the NRC's practice has been to condition license transfer
approvals upon a requirement that the licensee not transfer significant assets
from
- --------
2 See "Notice of Withdrawal of Petitions for Leave to Intervene and for
Hearing, and Joint Motion to Terminate Proceeding," (Nov. 4, 1999) at 6-8.
<PAGE>
the licensee to an affiliate without first notifying the NRC. This requirement
assists the NRC in assuring that a licensee will continue to maintain adequate
resources to contribute to the safe operation and decommissioning of its
facility. Thus, the following should be made a condition of the order approving
the application regarding the proposed merger.
NEP shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filled, to
transfer (excluding grants of security interests or liens) from NEP to
its direct or indirect parent, or to any other affiliated company,
facilities for the production, transmission, or distribution of
electric energy having a depreciated book value exceeding ten percent
(10 percent) of NEP's consolidated net utility plant, as recorded on
its books of account.
With respect to decommissioning funding assurance, as noted above, NEP is
allowed to collect 100 percent of its estimated costs of decommissioning through
CTCs. Thus, pursuant to 10 CFR 50.75(e), NEP may continue to use the external
sinking fund method of decommissioning. Also, NEP is collecting at a rate
sufficient to fully fund its pro rata share of Millstone 3 decommissioning costs
as provided in 10 CFR 50.75(c).
In consideration of the foregoing, the staff concludes that the proposed merger
and indirect transfer will not adversely affect the financial qualifications of
NEP to operate or decommission Millstone 3 with respect to its ownership
interest.
3.0 TECHNICAL QUALIFICATIONS
The application states that the transaction will not "change anything about the
direct ownership, operation, management, license terms or conditions, or
performance of Millstone 3 or Seabrook." To support this assertion, the
application states that the merger "will have no effect whatsoever on the
operation, personnel, financial status, physical condition, environmental
effects, business plan, decommissioning capability, or control of Millstone 3 or
Seabrook" and that since "NEP has no responsibility regarding the employees at
Millstone 3 or Seabrook, the merger will not affect the size or performance of
the workforce at either site." The application also nots that NEP will remain
the licensee for Millstone 3 and, as a minority, non-operating licensee, its
primary obligations are "to contribute money and take electricity." NEP will
institute a negation plan designed to prevent foreign control of its minority
interest in Millstone 3, which is described in Section 5.3 herein. The staff
concludes that the proposed merger and indirect license transfer will not affect
the technical qualifications of NNECO to perform its obligations under the
license.
4.0 ANTITRUST REVIEW
The Atomic Energy Act (AEA) does not require or authorize antitrust reviews of
post-operating license transfer applications. Kansas Gas and Electric Co., et
al. (Wolf Creek Generating Station, Unit 1), CLI-99-19, 49 NRC 441 (1999).
Therefore, since the transfer application postdates the issuance of the
Millstone 3 operating license, no antitrust review is required or authorized.
<PAGE>
5.0 FOREIGN OWNERSHIP, CONTROL OR DOMINATION
5.1 Background
Section 103d of the AEA prohibits the Commission from issuing a license for a
nuclear power plant under Section 103 to "any corporation or other entity if the
Commission knows or has reason to believe it is owned, controlled, or dominated
by an alien, a foreign corporation, or a foreign government." The Commission's
regulations at 10 CFR 50.38 contain virtually identical language to implement
this prohibition.
The issue addressed in this section is whether, in the NRC staff's view, the
merger of NEES and National Grid will cause NEP to be owned, controlled, or
dominated by foreign interests such that the foreign ownership and control
prohibition of the AEA would be violated.
The Commission has approved the Final Standard Review Plan on Foreign Ownership,
Control, or Domination (referred to herein as "SRP") to document the process
that the staff uses to analyze whether an applicant is owned, controlled, or
dominated by foreign interests within the meaning of Section 103d. The staff has
used this SRP as guidance for evaluating the foreign ownership considerations of
the proposed merger of NEES and National Grid.
5.2 Organization of NGG Holdings and NEES Holdings, Inc.
National Grid has created NGG Holdings as a U.S. limited liability company
organized in the Commonwealth of Massachusetts. It is an indirectly wholly owned
subsidiary of National Grid that will be merged with and into NEES, with NEES
being the surviving entity from that merger. The supplement states that,
following the merger, five additional companies will be created as intermediates
between National Grid and NEES, all of which will only be under the control of
National Grid and other directly or indirectly wholly owned by National Grid.
Following the merger, NEES will be converted into NEES Holdings, Inc., a
Massachusetts corporation described in Section 1.0 of this SE.
The five additional companies and their places of incorporation will be as
follows: National Grid (US) Holdings Limited, Incorporated in England; National
Grid (US) Investments, incorporated in England; National Grid (Ireland) 1
Limited, Incorporated in Ireland; National Grid (Ireland) 2 Limited,
incorporated in Ireland; and National Grid General partnership, incorporated in
Delaware. The names and identities of the officers and directors of these five
intermediate companies had not been determined as of the date of the supplement
(June 17, 1999) but all the officers and directors are to be citizens of the
United States, the United Kingdom, or a member state of the European Union.
5.3 Information Provided and Measures Proposed to Address Foreign Control
Concerns
Pursuant to Section 4.1 and 4.2 of the SRP, the staff performed threshold and
supplementary reviews of the nature and extent of National Grid's proposed
ownership, control, or domination of NEP. Based upon information contained in
the application and in the supplement, the staff concluded that there will be
interlocking directors among the boards of National Grid, NEES
<PAGE>
Holdings, Inc., and NEP, and that National Grid is a public limited company
owned by a diverse group of stockholders, many of which the staff would presume
to be citizens of various foreign nations. Under Section 4.3 of the SRP, the
staff is to determine the type of actions, if any, that would be necessary to
negate the effects of whatever foreign ownership, control, or domination would
otherwise exist to a level consistent with the AEA and NRC regulations. NEP has
provided the information required by 10 CFR 50.53(d), as well as additional
information in its application and the supplement, on which the staff concludes
that NEP and National Grid have taken, or have committed to take, adequate
mitigating steps to ensure that NEP will not be owned, controlled, or dominated
by an alien, foreign corporation, or foreign government for the purposes of the
AEA and the NRC's regulations, notwithstanding National Grid's proposed
"ownership" of NEP in the ordinary sense. The rest of Section 5.3 of the SEC
provides detailed information about the measures proposed to negate foreign
control over NEP with respect to its minority ownership interest in Millstone 3.
Even though NEP will become an indirect subsidiary of National Grid, the
negation plan set forth in the application is designed to prevent the direct or
indirect transfer of control to National Grid or foreign persons over NEP's
nuclear activities regarding Millstone 3. The plan's focus is on one
establishment of a Special Nuclear Committee (also referred to herein as
"Nuclear Committee" or "Committee") of the NEP Board of Directors, as set forth
in the amended Bylaws of NEP. The Committee will consist of at least three NEP
Board members who are U.S. citizens elected to the Committee by the full NEP
Board, with a majority of the Committee's members being independent Directors,
as defined later in this section. After reviewing the stated purpose and the
design of the Committee, the NRC staff has concluded that it has been
effectively designed to have primary authority over nuclear issues of NEP such
that foreign interests will not be able to control NEP within the meaning of the
AEA and NRC regulations. The remainder of this Section describes the key
features of the Committees which led the staff to reach this conclusion.
The Nuclear Committee will report to the NEP Board of Directors on a quarterly
basis, but for information purposes only. As described in Section 7 of the
amended Bylaws, the Nuclear Committee will have sole discretion to act on behalf
of NEP in all matters related to the operation, maintenance, contribution of
capital, decommissioning, fuel cycle, and other matters relating to Millstone 3
and the other nuclear facilities in which NEP has an interest. The application
stated, however, that there will be three exceptions to these matters in which
the full NEP Board of Directors3 shall be authorized to act on behalf of NEP,
after consultation with the Nuclear Committee. These are as follows:
(1) The right to vote as to whether or not to close a facility and to
begin its decommissioning, and as to whether to seek relicensing.
- --------
3 The supplement listed one U.K. and seven U.S. directors for the initial
composition of the post-merger NEP board; four U.K. and five U.S. directors for
the post-merger NEES board; and six U.K. directors, three U.S. directors, and
one Dutch director for the post-merger National Grid board. However, in response
to concerns raised by interveners, NEP has omitted that following the proposed
merger, all of NEP's Board of Directors and corporate officers will be U.S.
citizens as long as NEP remains a license of Millstone 3 and Seabrook.
<PAGE>
(2) The right to decide to sell, lease, or otherwise dispose of NEP's
interest in a facility.
(3) The right to take any action which is ordered by the NRC or any other
agency or court of competent jurisdiction.
NEP states that these three exceptions are rights essential to the protection of
the economic and legal interests of National Grid and that is the reason for
allowing the full Board to decide them. NEP argues that even with these
exceptions, the possibility of foreign influence over these three types of
decisions being detrimental to the national interest is eliminated because all
decisions reserved to the full NEP Board are limited in a very restrictive way
as described in the amended Bylaws and ultimately will be subject to review and
approval by the NRC and by other U.S. regulatory and/or judicial entities before
they can be implemented.
The intervenors raised concerns on the other hand that the extent of rights
retained by the full NEP Board may have an impact on the effectiveness of the
negation action plan. NEP responded to these concerns by: (1) stating that it
will require that all NEP Board members and corporate officers must be U.S.
citizens as long as NEP remains a licensee of Millstone 3 or Seabrook; and (2)
clarifying to the intervenors' satisfaction the instances in which decisions
related to Millstone 3 and Seabrook are reserved to the full NEP Board.
Specifically, NEP stated that with respect to exception (1) above, a decision to
either decommission or restart is limited only to situations in which
significant costs are involved and a fundamental business decision is required
by the full NEP Board. Once the joint owners of a nuclear unit have made any
such decision to decommission or restart in accordance with the joint ownership
agreements, the decision-making process then will reside with the NEP Nuclear
Committee to provide NEP's inputs to the joint owners regarding the details of
implementing such decisions, with respect to exception (2) above. NEP stated
that this decision also is a fundamental business decision that is governed by
the joint ownership agreements, and any disposition of NEP's interest in a
nuclear unit would require NRC approval. With respect to exception (3) above,
NEP assured the intervenors that its reservation to the full NEP Board of the
right to make decisions concerning compliance with legal or regulatory authority
was not intended to do anything but precisely what government authorities
required. NEP agreed, as part of reaching a settlement with the intervenors, to
eliminate this third right for the full Board.
The intervenors stated in the joint November 4, 1999, pleading filed with the
Commission that, as a result of NEP's clarifications regarding exceptions (1)
and (2) and the elimination of exception (3) as no longer being reserved to the
full NEP Board, they are satisfied that NEP can comply with NRC's requirements
concerning foreign ownership, control, or domination in relation to Millstone 3
and Seabrook.
The staff has noted that NEP has taken steps to avoid any indirect foreign
influences that might affect the Nuclear Committee. Section 1 of Article IV-A of
the amended NEP Bylaws requires that a majority of Committee members at all
times be made up of Independent Directors, which are directors who are not
current or past employees of NEP or any affiliated companies, including National
Grid and its subsidiaries. The application states that this will be done so the
independent
<PAGE>
Directors cannot be influenced by NEP or National Grid through an employment
relationship or by any other manner. Section 2 of that same Article specifies
that each Committee member will be appointed to a fixed term and may be removed
during that term only for specific causes. This step is designed to prevent
foreign citizens from threatening to remove a member. Any member leaving the
Committee can only be replaced by a U.S. citizen. Section 10 of the amended
Bylaws states that any member of the Committee is both empowered and required to
report to the NRC any action by a foreign citizen which the member believes is
designed to unduly influence his or her behavior to the detriment of the
national interest. Finally, NEP will extend to each Committee member the
protection afforded by the NRC's regulations contained in 10 CFR 50.7
(presumably if the protection would not already exist by operation of law),
which prevent any licensee from discriminating against any employee for engaging
in a "protected activity," such as informing government agencies as to possible
non-compliance with the terms of a license or statute.
As the SRP indicates, the Commission will give the foreign control prohibition
an orientation to the common defense and security. NEP's 12.2 percent minority
ownership interest in Millstone 3 does not give NEP any rights to control the
operation of the facility, nor to have access to, or possession of, any Special
Nuclear Materials (SNM) or Restricted Data. Furthermore, the application states
that there is no Restricted Data involved in the Millstone 3 design, technology,
or operation, (Millstone 3 is a Westinghouse pressurized water reactor, using
commonly available technology.) Also, although there is SNM contained in the
trash and spent fuel, it is not in the form of weapon-sensitive materials. Even
if weapon-sensitive materials were involved, the logistics and clearances
required for a foreign citizen to obtain access to such material would seem to
make such access infeasible. In light of the foregoing, there is a reasonable
basis to conclude that there will be no threat to the common defense and
security given NEP's inability to control operation of the facility or to have
access to SNM or Restricted Data.
5.4 Staff Conclusion with Respect to Foreign Ownership and Control
Considerations
The staff has considered guidance contained in the SRP and detailed information
from the applicant with respect to foreign ownership, control, and domination.
The staff has placed substantial weight on the significant safeguards built into
the design of the NEP negation plan, as stated in the application. The staff
regards the safeguards provided in NEP's application as adequate protection to
prevent NEP from being in violation of the foreign control prohibition contained
in Section 103d. The additional safeguards that were agreed to by NEP and the
intervenors, requiring that all NEP Board members and officers must be U.S.
citizens as long as NEP is a licensee for Millstone 3 or Seabrook, and requiring
decisions to comply with agency and court ordered to be made only the Committee,
provide protection above and beyond this initial NEP negation plan. This
additional protection is not inconsistent with the AEA and the Commission's
regulations, and therefore, the staff would not object to such additional
protection.
In consideration of all the foregoing, the staff concludes that the indirect
transfer of control of NEP's 12.2 percent minority ownership interest in the
operating license for Millstone 3 to National Grid would not violate the
prohibitions in the AEA pertaining to foreign ownership, control, or domination,
provided that NEP is subject to the following conditions. The staff believes
that these conditions are consistent with Commission precedent
<PAGE>
1. No later than the time the proposed merger with National Grid is
consummated, NEP shall establish and make operational a Special
Nuclear Committee, as described in the application, having the
composition, authority, responsibilities, and obligations specified in
the application, provided, however, the Special Nuclear Committee may
also have exclusive authority on behalf of NEP over taking any action
which is ordered by the NRC or any other agency or court of competent
jurisdiction. No material changes with respect to the Special Nuclear
Committee may be made without the prior written consent of the
Director, Office of Nuclear Reactor Regulation. The foregoing
provisions may be modified by the Commission upon application and for
good cause shown.
2. The Special Nuclear Committee shall have the responsibility and
exclusive authority to ensure, and shall ensure, that the business and
activities of NEP with respect to the Millstone 3 license are at all
times conducted in a manner consistent with the protection of the
public health and safety and common defense and security of the United
States.
6.0 CONCLUSION
In view of the foregoing discussion, the staff concludes that the proposed
indirect transfer of the operating license for Millstone 3 to the National Grid
with respect to NEP's 12.2 percent ownership interest in Millstone 3 will not
contravene the prohibition against foreign ownership, control, or domination
with the imposition of the conditions described in this Safety Evaluation. Also,
the staff finds that the proposed merger will not adversely impact either the
technical qualifications of the Millstone 3 management and staff, or the
financial qualifications of NEP with respect to its on going provision of its
share of funds for the operation and eventual decommissioning of Millstone 3.
Accordingly, the staff concludes that NEP will remain qualified to hold the
license with respect to the 12.2 percent ownership interest in Millstone 3
following the proposed merger of NEES and National Grid, and that the indirect
transfer of the license, to the extent effected by the proposed merger, is
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission pursuant thereto, subject to the conditions set forth
herein.
Principal Contributor: A. McKaignay
Date: December 10, 1999
Exhibit D-5.3
DE 99-035
NEW ENGLAND ELECTRIC SYSTEM
Petition regarding the proposed merger between
NEES and the National Grid Group plc
Order Approving Petition
O R D E R N O. 23,308
October 4, 1999
APPEARANCES: Carlos A. Gavilondo, Esq. and Thomas G. Robinson, Esq.
Attorneys for New England Energy System Companies; Scott J. Mueller, Esq. and
Paul Connolly of LeBoeuf, Lamb, Greene & MacRae, LLP for National Grid Group;
Wynn E. Arnold, Esq., Assistant Attorney General, for the Governor's Office of
Energy and Community Services; Michael W. Holmes, Esq. for the Office of
Consumer Advocate, representing residential ratepayers; Dennis A. Hebert for the
Campaign for Ratepayers Rights; Rep. Jeb E. Bradley; Timothy W. Fortier for the
Business & Industry Association of New Hampshire; Larry S. Eckhaus, Esq. for the
Staff of the New Hampshire Public Utilities Commission; and Gary Epler, Esq.,
Commission General Counsel.
I. PROCEDURAL HISTORY
On March 18, 1999, New England Electric System (NEES) and the National Grid
Group plc (NGG) (referred to collectively as the Companies) filed with the New
Hampshire Public Utilities Commission (Commission) certain affidavits, testimony
and related exhibits concerning the proposed acquisition by NGG of all of the
common shares of NEES. The purpose of the filing was to inform the Commission of
the transaction and the Companies' position that the acquisition would have no
adverse effect on New Hampshire ratepayers.
<PAGE>
DE 99-035 -2-
NEES transacts business in New Hampshire through its wholly-owned
subsidiaries Granite State Electric Company (GSEC) and New England Power Company
(NEP). GSEC is a public utility providing retail electric service to
approximately 35,000 customers in New Hampshire. NEP, also a public utility,
provides transmission services to GSEC and other entities within the state. NGG
is a holding company incorporated in the United Kingdom and upon its acquisition
of NEES will be subject to regulation under the federal Public Utility Holding
Company Act (PUHCA), 15 U.S.C. ss. 79 et seq.
The Commission issued Order No. 23,202 (April 21, 1999) determining that
the transaction between NEES and NGG may adversely affect the rates, terms,
service or operation of either GSEC or NEP. Based on that determination, the
Commission concluded that it has authority to conduct further proceedings under
RSA 374:33 notwithstanding language in RSA 369:8,II providing that Commission
approval of merger transactions is not required in certain circumstances.
A Prehearing Conference was held on May 4, 1999. On May 20, 1999, the
Companies filed a Motion for Rehearing of Order No. 23,202, and for Deferral of
Decision on Motion Pending Review Under RSA 374:33. On June 4, 1999, the
Commission approved the request for deferral. After a period of discovery,
testimony was filed by the Office of Consumer Advocate (OCA), Rep. Jeb Bradley
and the Commission Staff on June 11, 1999. The Companies filed
<PAGE>
DE 99-035 -3-
rebuttal testimony on June 18, 1999. Hearings were held on June 24 and 25, 1999.
The Commission deliberated on this proceeding at its public meeting of
August 9, 1999 and adopted minutes of those deliberations one week later.
Construing those minutes as a final order of the Commission, OCA filed a motion
for rehearing on September 8, 1999.
Among the issues raised by the NEES/NGG filing is the extent to which the
Commission should make any determination at this time concerning the acquisition
premium, i.e., the extent to which the purchase price paid by NGG exceeds the
book value and/or the market price of NEES shares. NEES and NGG have represented
that they do not presently intend to recover the acquisition premium from
ratepayers. However, the Companies have indicated that NGG intends to allocate
the acquisition premium to its subsidiaries, including GSEC and NEP, which means
that the books of these subsidiaries may, at some point, carry a portion of the
acquisition premium and costs associated with the merger transaction. They have
also stated that NGG may, in the future, seek to reflect some or all of the
acquisition premium in rates..
<PAGE>
DE 99-035 -4-
II. POSITIONS OF THE PARTIES AND STAFF
A. New England Electric System/National Grid Group, plc
NGG and NEES contend that their merger transaction merits Commission
approval because NGG's plan to acquire all outstanding shares of NEES stock
meets or exceeds the "no net harm" test articulated in Eastern Utilities
Associates, 76 NH PUC 236 (1991). According to the Companies, the merger will
have no adverse impact on rates because the Companies do not seek to recover any
merger-related costs in the instant proceeding. NGG and NEES explicitly reserve
the right to seek recovery in some future Commission proceeding of the
acquisition premium paid by NGG, but aver they will not seek recovery unless
they can demonstrate that any sum so recovered is fully offset by corresponding
savings to ratepayers. The Companies further assert that the merger will have
only a positive impact on service, owing to what they characterize as NGG's size
and experience in the transmission and distribution of electricity, particularly
in a competitive wholesale market. Finally, the Companies contend that the
merger will not adversely affect the Commission's ability to regulate GSEC
because the subsidiary will remain a New Hampshire corporation whose books and
records will be accessible to the agency.
B. Governor's Office of Energy & Community Service
The Governor's Office of Energy and Community Services.
<PAGE>
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(GOECS) urges Commission approval of the merger in light of what GOECS contends
are NGG's expertise in transmission and distribution, the possibility of savings
and efficiency gains through increased economies of scale resulting from the
merger and the likely consolidation and elimination of redundant operations
following completion of the transaction. GOECS asks the Commission to defer the
issue of whether NGG can recover any portion of its acquisition premium from New
Hampshire ratepayers. GOECS further recommends that the Commission condition its
approval of the merger on NGG and NEES giving assurances that (1) it will grant
the Commission the same access to affiliate records as was granted to the
Federal Energy Regulatory Commission (FERC) in obtaining that agency's approval
of the merger under the Federal Power Act and (2) any portion of NGG's
acquisition premium allocated to GSEC by the Securities and Exchange Commission
(SEC) in connection with that agency's review of the merger will not be binding
on the Commission in any future proceeding.
C. Representative Jeb E. Bradley
Representative Jeb E. Bradley of Wolfeboro, Chair of the House Committee on
Science, Technology and Energy, urges Commission approval of the merger and
further takes the position that any determination that NGG may not recover its
acquisition premium is likely both to derail the merger and send an.
<PAGE>
DE 99-035 -6-
inappropriate signal to other potential purchasers of New Hampshire utility
properties whose acquisitions may provide significant benefits to the state's
ratepayers. Representative Bradley further averred that any such determination
would inappropriately circumscribe the Commission's ability to implement a
program of performance-based regulation (PBR) in connection with GSEC. Finally,
Representative Bradley takes the position that a deferral of the
acquisition-premium issue now would have the salutary effect of permitting the
Commission to determine in the future that shareholders and ratepayers should
share the cost of the premium, which he deems to be a laudable objective in
connection with the process of electric industry restructuring in general.
D. Business & Industry Association of New Hampshire
The Business & Industry Association of New Hampshire (BIA) urges approval
of the merger on the grounds that it will benefit ratepayers and strengthen the
regional economy. BIA urges deferral of any issues related to the acquisition
premium on the grounds that avoiding a precedent now will allow for flexibility
in reviewing other mergers and that the Commission retains authority to deny
recovery in connection with NGG in a future proceeding.
E. Office of the Consumer Advocate
The Office of the Consumer Advocate (OCA) urges the
<PAGE>
DE 99-035 -7-
Commission either to disapprove the merger outright or to impose conditions upon
the transaction. With regard to whether the merger creates any benefits to
ratepayers, OCA contends that NGG brings no unique expertise or experience to
the operation of NEES because NGG's experience is either duplicative of that of
NEES, involves transmission systems that operate at a different voltage level
than NEES does and/or does not involve the operation of a regulated monopoly.
Indeed, OCA even goes so far as to suggest that NEES enjoys a record of
performance that is superior to that of NGG. Moreover, in the opinion of OCA the
proponents of the merger have failed to suggest any standard for measuring the
merger's benefits and, therefore, the Companies have not met their burden of
proof.
Assessing the possible harms to ratepayers, OCA contends that NGG's
overestimation of its abilities in the face of unfamiliar operating conditions
may pose a risk to New England electricity consumers. Relying, inter alia, on
testimony from the Companies to the effect that New England's high-cost
utilities appear to be the most profitable in the region, and that investors do
not recognize the difference between high-cost and low-cost companies, OCA
maintains there is no assurance that NGG would maintain, much less improve on,
the cost and quality levels already achieved by NEES. OCA also takes the
position that if NGG incurs additional debt and then seeks to impute that.
<PAGE>
DE 99-035 -8-
debt as equity with regard to its subsidiaries, as suggested on the record, this
will exert upward pressure on NEES rates. OCA expresses concern with the
possibility of future commissions permitting recovery of the acquisition premium
even if this order denies such recovery. Finally, OCA contends NGG's refusal to
abjure ownership of generation facilities in the future suggests that NGG may
not be truly committed to operating in a climate of vigorous competition.
OCA further questions the Companies' underlying premise that NEES'
shareholders should reap the financial benefits of NGG's willingness to pay a
premium for acquiring NEES. In OCA's view, there is no meaningful distinction to
be drawn between the sale of all NEES stock and the sale of its assets. OCA
believes the Commission should treat the instant transaction as an asset sale
because ratepayers have been required to bear the financial burden, through
stranded-cost recovery, of GSEC's sale of other assets, i.e., transmission
facilities and contracts. Thus, in OCA's view, ratepayers should reap the
benefits of a profitable asset sale, albeit one achieved through a stock
transaction, having suffered the adverse financial consequences of an
unprofitable one. OCA also sees a contradiction between the existence of an
acquisition premium and the fact that ratepayers have been paying depreciation
costs on NEES' transmission and distribution assets on the theory that their
value diminishes over time. According to OCA, the Commission should apply the.
<PAGE>
99-035 -9-
"balancing of the equities" test reflected in the case law governing asset
sales, determining here that the equities favor allocating the financial gain to
ratepayers. In OCA's view, case law from New Hampshire and other jurisdictions
supports the view that historic book value is the only appropriate basis for
measuring rate base, and established ratemaking principles demonstrate the
illogic of treating assets as depreciating for some purposes but appreciating
for others. OCA separately argues that NGG should be barred from recovering its
acquisition premium because it failed to respond to OCA's data request seeking
the basis of its decision to purchase NEES. According to OCA, this failure
justifies a determination that NGG never had any expectation that it would
recover the premium from ratepayers. Furthermore, OCA contends the record
supports a determination that, based on existing cash flows, earnings and tax
expenses, NGG will generate all the revenue necessary to cover the capital costs
of a $3.2 billion investment made with borrowed funds. OCA is also concerned
about the precedent this case will set in connection with other utilities,
particularly Public Service Company of New Hampshire.
Finally, OCA draws a distinction between a lack of proof that the public
will be harmed by the proposed merger and a lack of proof that the public will
be held harmless. In OCA's view, this case presents the former circumstance
whereas the Commission should require proof of the latter in order to approve
<PAGE>
DE 99-035 -10-
the transaction under New Hampshire law.
Assuming the Commission approves the merger, OCA proposes several conditions:
(1) Direct NEES to offset GSEC's recoverable stranded costs by an amount
equaling GSEC's share of the acquisition premium, roughly, $16,860,000; (2)
decide that NGG is barred from recovering any acquisition premium, now and in
the future, except possibly through a performance-based regulation mechanism as
outlined by Mr. Traum of OCA in his testimony; and (3) restrict the amount of
generating capacity NGG may own, either directly or indirectly, for possible
sale into the New England electric grid.
F. Granite State Taxpayers, Inc.
Granite State Taxpayers, Inc. (GST) seeks approval of the merger without
any conditions beyond those commitments made by NGG and NEES in their filing.
According to GST, establishing a rule concerning recovery of the acquisition
premium would unnecessarily hamstring the Commission in other proceedings at a
time when consolidation in the electric industry should be encouraged as a means
of achieving efficiencies and cost savings.
G. Commission Staff
The Staff of the Commission urges approval of the NGG/NEES merger subject
to a determination that NGG may not recover its acquisition premium, whether
measured as the difference between the acquisition price and book value or the
difference between the acquisition price and the price of NEES
<PAGE>
DE 99-035 -11-
stock prior to announcement of the merger, now or in the future. Staff's view is
that any recovery of the acquisition premium would transgress the "original
cost" principle as contained in the Uniform System of Accounts. Staff further
contends that any benefits resulting from the merger will be difficult to
quantify and that permitting recovery of the acquisition premium could result in
GSEC ratepayers paying for benefits that actually flow to other NGG customers.
With regard to the Companies' position that they will not seek recovery of the
acquisition premium absent a showing of offsetting benefits to ratepayers,
Staff's view is that the existence of the premium is purely a function of the
accounting method employed by the Companies (the purchase method, as opposed to
pooling-of-interests) and, thus, it would be illogical to conclude that any
benefit to ratepayers is related to the premium in a way that justifies its
recovery. In the opinion of Staff, if ratepayer benefit from any savings
resulting from the merger, performance-based regulation is the appropriate
mechanism to reward NGG and/or NEES for providing such benefits on a
going-forward basis. The Staff further contends that the purchase price of $3.2
billion can be properly characterized as the sum of the market value of NEES
stock, prior to the merger announcement, plus $600 million to reflect the value
of certain tax benefits (chiefly the deductibility of interest payments) that
would accrue to a previously under-leveraged NGG by virtue of taking on
additional debt to finance
<PAGE>
DE 99-035 -12-
the acquisition of NEES. It is also Staff's position that the Companies have
overestimated the acquisition premium by approximately $1 billion, doing so by
calculating it based on NEES' book value as opposed to its market value prior to
the merger announcement. According to Staff, the difference between the purchase
price and the market price prior to the merger announcement is a more realistic,
and therefore more appropriate, measure of the cost to NGG of acquiring and
gaining control of NEES. Staff's point is that, assuming recoverability of the
acquisition premium, it should be limited only to sums that had not already been
factored into NEES' market price and thus could be deemed to reflect the value
of benefits that inure to ratepayers as a direct result of the merger.
III. COMMISSION ANALYSIS
A. Jurisdictional Issues
In considering the proposed acquisition of NEES by NGG, the Commission is
mindful of the statutory framework within which it must act. Our broad mandate
is to assure that all charges made or demanded by a public utility, for any
service rendered or to be rendered, are "just and reasonable." RSA 374:2; see
also RSA 374:3 (vesting commission with "general supervision of all public
utilities"). A public utility holding company such as NGG may not acquire more
than ten percent of the stock of a utility operating in New Hampshire unless we
determine "that such
<PAGE>
DE 99-035 -13-
acquisition is lawful, proper and in the public interest." RSA 374:33. However,
as previously noted in Order No. 23,202, the Legislature has further delineated
our authority over significant changes in utility ownership as follows:
To the extent that the approval of the commission is required by any
other statute for any corporate restructuring, merger, acquisition,
financing, change in long-term or short-term indebtedness, or issuance
of stock involving parent companies of public utilities regulated by
the commission, the approval of the commission shall not be required
if the public utility represents to the commission in writing no less
than 30 days prior to the anticipated completion of the transaction
that the transaction will not adversely affect the rates, terms,
service, or operation of the public utility within the state.
RSA 369:8, II (Supp. 1998)./1
- --------
1/ Subsequent to the filing of the instant proceeding, RSA 369:8 II has
been substantially amended, see 199 N.H. Laws ch. 289 ss. 12, effective on July
1, 1999 but not applicable to transactions entered into before that date, see
id. At ss. 16. We therefore apply the former version of the statute.
We reiterate here the conclusion we previously stated in Order No. 23,202:
We cannot agree with NGG and NEES that the language of RSA 369:8, II requires us
to accept at face value a representation that a proposed transaction such as the
one at issue here will have no adverse impact on rates, terms, service or
operations of a New Hampshire utility.
Our view is grounded in established principles of statutory construction.
The process begins with consideration of "the plain and ordinary meaning" of the
words used in the statute, but this does not "make a fortress out of the
<PAGE>
DE 99-035 -14-
dictionary." Appeal of Ashland Elect. Dep't, 141 N.H. 336, 341 (N.H. 1996)
(citation omitted). Thus, a statute is correctly interpreted "not in isolation,
but in the context of the overall statutory scheme." Appeal of HCA Parkland
Medical Ctr., 143 N.H. 92, 94 (1998) (citation omitted). "Where reasonably
possible, statutes should be construed so that they lead to reasonable results
and do not contradict each other." Sprague Energy Corp. v. Town of Newington,
142 N.H. 804, 806 (1998). An interpretation that renders a statute "meaningless"
is to be avoided, Appeal of Barry, 142 N.H. 284, 287 (1997), and there is a
presumption that the Legislature "did not enact nonsensical and unnecessary
provisions," O'Brien v. O'Brien, 141 N.H. 435, 437 (1996).
In addition to the provisions already cited, giving the Commission general
supervisory authority over utilities, requiring us to assure that rates are just
and reasonable, and imposing upon us the obligation to assure the citizens of
this state that transactions such as the one at issue here are lawful, proper
and in the public interest, we are vested with a specific duty to "keep
informed" as to the operation of all public utilities in the state, RSA 374:4,
and are empowered to "investigate or make inquiry . . . as to any act or thing
having been done, or having been omitted or proposed by any public utility," RSA
365:5 (emphasis added). In the context of a merger
<PAGE>
DE 99-035 -15-
transaction, these provisions would be meaningless if RSA 369:8, II were
interpreted so as to require us simply to accept without investigation any
representation that a change in ownership will have no adverse impact.
Considered in isolation, RSA 369:8, II would appear to require precisely
such rubber-stamp regulatory scrutiny. However, because we must view this
provision in the context of the Commission's overall statutory mandate, which
explicitly grants us investigatory powers, we conclude that we are vested with
both the power and the obligation to conduct an inquiry geared toward verifying
the representations made by the putative partners to the merger. In this
instance, we do so largely based on the information contained in the filing made
by NGG and NEES.
Such a focused inquiry, we conclude, is fully consistent with legislative
intent. To hold otherwise would render the statute a virtual nullity. It would
permit parent companies of New Hampshire utilities to merge without Commission
investigation, thus excepting themselves from the consumer protections contained
in RSA 374:33 based on the untested, bare assertion of compliance with the
statutory standard. We presume the Legislature could not have intended such an
absurd and illogical result.
B. "No Net Harm" Standard
We therefore proceed to the results of that inquiry.
<PAGE>
DE 99-035 -16-
As already noted, NGG's proposed acquisition of NEES is governed by the mandate
in RSA 369:8 that the merger will "not adversely affect the rates, terms,
service, or operation of the public utility within the state." We view this
inquiry as the same one we have historically made under RSA 374:33 (authorizing
Commission approval of mergers that are "lawful, proper and in the public
interest"), to which we apply what has come to be referred to as the "no net
harm" test, see, e.g., Re Consumers New Hampshire Water Company, 82 NH PUC 814,
817-18 (1997), first articulated in Re Eastern Utilities Associates, 76 NH PUC
236, 252-53 (1991) (rejecting proposed "net benefit" test for review of merger
transactions).
"In essence, the 'no net harm' test requires approval of a proposed
transaction if the public interest is not adversely affected." Re CCI
Telecommunications of N.H., Inc., 81 NH PUC 844, 845 (1996). In that regard,
"our obligation is to ensure that the interests of ratepayers are balanced
against the right of shareholders to be free of regulation which unreasonably
restrains legitimate corporate activities." Re Hampton Water Works Co., 80 NH
PUC 468, 473 (1995). In other words, we must assess the benefits and risks of
the proposed merger and determine what the overall effect on the public interest
will be, giving the transaction our approval if the effect is at worst neutral
from the public-interest perspective.
<PAGE>
DE 99-035 -17-
It is apparent that the transaction at issue in this proceeding is likely
to provide certain benefits to GSEC ratepayers and, indeed, electricity
consumers throughout New England. NGG is the world's largest investor-owned
transmission company and, as such, possesses considerable technical expertise in
the planning and operation of transmission systems. NGG has a record of
improving maintenance programming, introducing improvements to the transmission
system, interconnecting new facilities and reducing transmission costs to
customers in Great Britain when the company took over for the state-owned
transmission system at the time of that nation's electric industry
restructuring. It is of particular relevance to New Hampshire and the rest of
New England, where electric restructuring is in its ascendancy, that NGG brings
experience in managing a transmission system in a competitive market. The
Commission believes this experience may assist ISO New England, which operates
the grid in our region, as well as the New England states themselves as each
implements competition in the regional power market. These advantages more than
offset any lack of expertise NGG has in confronting conditions typical of New
England winters. In so determining, we do not minimize the importance of
maintaining service to the public during adverse weather conditions that
commonly occur in New England. We will hold NGG accountable for the service
record it develops in New Hampshire and we will expect NGG to take advantage of
the
<PAGE>
DE 99-035 -18-
expertise it acquires in the transaction.
Similarly, the takeover of a local or regional public utility by a larger,
more remotely-managed and distantly- headquartered company raises concerns about
the successor company's ability to maintain contact with its customers and
remain aware of, and responsive to, local issues. The Commission is satisfied
with the representations of NGG management that the merger will not have a
negative effect on the local operation of GSEC's transmission system or its
customer service. The Commission will continue to monitor operations and
customer service carefully and it will hold the new management to its
commitments.
In Order No. 23,202, we referred to a potential national security concern
raised by a non-domestic corporation owning part of the transmission grid. In
response to this expressed concern, the Companies have filed a copy of a letter
from the federal Committee on Foreign Investment in the United States,
indicating that the committee deems the proposed merger to raise "no issues of
national security sufficient to warrant an investigation." See 50 U.S.C. App.
ss. 2170 (providing for investigation by President or President's designee of
proposed mergers with national security implications and authorizing
presidential suspension of such transactions in appropriate circumstances). This
letter adequately addresses the concern previously expressed by the Commission
in this case.
<PAGE>
DE 99-035 -19-
With respect to NGG's refusal to rule out the possibility it may seek to
own generation facilities in the future, we are unable to agree with OCA that
such a refusal is relevant to the "no net harm" calculus. If we adopted the
theory OCA advances in this regard, to the effect that a merger proponent must
prove that the public will be held harmless in the wake of the transaction, we
would put an acquiring entity in the impossible position of refuting every
possibility of adverse consequences. NGG's task here is to prove that the
present circumstances of the proposed transaction, and those reasonably
foreseeable consequences of it, will result in no net harm. In assessing whether
NGG has met that burden, we will not speculate about future possibilities, even
those that the proponent has refused to rule out. The corollary, of course, is
that our approval of the merger sets no precedent as to how we would treat such
consequences, should they arise. If, as OCA suggests, NGG is not committed to
the competitive paradigm this state has embraced in the context of electricity
deregulation, then NGG is consummating its purchase of NEES at its own risk.
Finally, we do not share OCA's view that our statutory mandate to scrutinize
utility mergers permits us to seize on behalf of ratepayers any portion of the
capital gains reaped by the shareholders of the selling entity. This is so even
though we have previously approved a settlement permitting GSEC to recover
<PAGE>
DE 99-035 -20-
certain stranded costs, see Granite State Electric Company, No. 23,041 (Oct. 1,
1998), a decision that presumably made NEES shareholders (as the ultimate owners
of GSEC) the owners of a more valuable investment than they would have had if
GSEC had simply been forced to write off its stranded costs. By definition,
stranded costs are
costs, liabilities, and investments . . . that electric utilities
would reasonably expect to recover if the existing regulatory
structure with retail rates for the bundled provision of electric
service continued and that will not be recovered as a result of
restructured industry regulation that allows retail choice of
electricity suppliers, unless a specific mechanism for such cost
recovery is provided.
RSA 374-F:2, IV. Thus, recovery of stranded costs is ultimately a
restructuring-driven adjustment of the extent to which a utility's shareholders
may reap a return, ultimately paid to them in dividends, on their investment.
Such recovery will obviously have an impact on the capital gains or losses those
shareholders experience when they sell their right to receive those dividends,
but those transactions take place outside the ratemaking process. We do not
adjust rates with every fluctuation in a utility's share price. Likewise, even
if NGG is willing to compensate NEES shareholders handsomely for the right to
recover on the NEES rate base, that fact is, in itself, of no consequence to our
"no net harm" inquiry. This question may have a different result if the
purchasing utility seeks to recover any of the premiums paid
<PAGE>
DE 99-035 -21-
above book value from customers through rates. See discussion below.
Accordingly, the evidence supports the conclusion that the proposed merger
will itself result in no net harm to New Hampshire ratepayers with respect to
terms, service and operation. The remaining issue is whether we can reach the
same conclusion as to rates -- a question that requires us to confront the
matter of the acquisition premium NGG has agreed to pay in order to acquire all
of NEES' outstanding shares.
C. Acquisition Premium
The record before the Commission in this proceeding allows us to make the
following findings on this important issue: First, the acquisition premium in
this case does not represent the cost of property devoted to public service but,
rather, is a cost related exclusively to the price paid by NGG for NEES stock.
Second, to grant recovery of the acquisition premium would effectively result in
the write-up of the valuation of NEES assets simply because of the financial
transaction and the price NGG agreed to pay for control of NEES. Third, to allow
recovery of the acquisition premium would, in effect, put GSEC ratepayers in the
position of compensating NGG/NEES for the mark-up above book value that NGG paid
NEES stockholders for their shares of NEES stock, i.e., the difference between
the purchase price of
<PAGE>
DE 99-035 -22-
$53.75 per share and the book value of $26.79 per share./2
- --------
2/ We further note that, to the extent that the merger agreement calls for
the payment of an acquisition premium, the Companies may have overstated it. As
the Staff contends, comparing the purchase price to the unaffected market price
of NEES stock may be a more appropriate measure of the acquisition premium than
using the stock's book value as the baseline figure. This is because, at the
time of the announcement of the merger, NEES stock was already trading above
book value and, therefore, the merger price only gives the shareholders
additional value to the extent the merger price exceeds the price at which the
stock was previously trading.
In urging the Commission not to reach the acquisition- premium question in
this proceeding, either as a general policy question or as a specific aspect of
this proposed merger's impact on the affected New Hampshire ratepayers, the
Companies note their lack of any present intention to recover any acquisition
premium from ratepayers. Essentially, their argument is that in the absence of
any such intention their merger proposal meets the "no net harm" test discussed
supra. However, the Companies have also indicated that NGG intends to allocate
the acquisition premium to its subsidiaries, including GSEC and NEP. Therefore,
the books of GSEC and NEP will likely, at some point in the future, carry a
portion of the acquisition premium and costs associated with the transaction.
The Companies readily and clearly acknowledge that the premium does not
represent the cost of property devoted to public service but, rather, is a cost
related solely to the sale of NEES stock.
As already noted, the Companies further indicate that
<PAGE>
DE 99-035 -23-
they will not seek recovery of any acquisition premium in rates absent a showing
of offsetting savings and benefits to customers. Further, the record shows that
NGG did not rely on the prospect of recovering its acquisition premium when it
decided to purchase NEES. If NGG floats additional debt to finance its purchase,
the record shows that NGG will have sufficient revenues from regulated
operations to cover the cost of the purchase over time. In addition, the
experience of NGG with its own communications subsidiary makes it reasonable to
assume that NGG is looking to the possibility of proceeds from unregulated
operations to warrant the payment to NEES shareholders of a 30 percent premium
over market value.
The position of Staff and OCA -- that we should take this opportunity to
deny any present or future recovery of the acquisition premium to be paid by NGG
- -- has considerable appeal. We agree, in principle, that the "no net harm" test
could warrant our conditioning our approval of the merger on such a prohibition.
See, e.g., Entergy Gulf States, Inc. v. Louisiana Pub. Serv. Comm'n, 730 So.2d
890, 895 n.1 (1999) (describing utility stipulation to that effect as
precondition to regulatory approval of merger); Appeal of Richards, 134 N.H.
148, 172 (1991) (Brock, C.J. and Bachelder, J., dissenting) (noting that rate
recovery of acquisition premium is "of little solace to a ratepayer who is
forced to contribute to a return on [an] asset
<PAGE>
DE 99-035 -24-
which presumably does not [provide] electricity but merely helps to indemnify"
investors). Based on the present record, we find merit in the argument that NGG
and/or its putative subsidiaries that will serve New Hampshire ratepayers should
not recover any premium paid in connection with the merger transaction.
However, we do not believe it is appropriate to impose a blanket
prohibition at this juncture on any recovery of the acquisition premium paid by
NGG. The electric industry is undergoing rapid change. In such a climate, we
cannot rule out the possibility that circumstances could justify recovery of at
least part of an acquisition premium and still be regarded as imposing "no net
harm" on ratepayers. However, on the present record, we are unable to determine
what precise circumstances, if any, would justify the recovery of the
acquisition premium or any part thereof. Such issues are appropriately
considered in the context of a rate case. See, e.g., Central Illinois Public
Service Co., 180 PUR 4th 185, 208-09 (Ill. Commerce Comm'n 1997) (approving
proposed merger but noting that "ratemaking treatment of . . . merger-related
costs . . . should not be determined outside the context of a general rate
proceeding in which all elements of the utility's cost of service are
examined"); see also WorldCom, Inc., 185 PUR 4th 153, ___ (Minn. PUC, 1998)
(approving merger of long-distance carriers but refusing to rule on
"speculative" claims such as prediction that merger would
<PAGE>
DE 99-035 -25-
cause anticompetitive pricing among major long-distance carriers). The issue can
be viewed as one of ripeness, which "relates to the degree to which the defined
issues in a case are based on actual facts . . . and are capable of being
adjudicated on an adequately developed record." Appeal of State Employees' Assn.
of N.H., Inc., 142 N.H. 874, 878 (1998) (declining to adjudicate claims based on
"general allegations" of actual harm). In the present circumstances, the parties
seeking a determination now that NGG could never recover any portion of its
acquisition premium are in the same position as litigants who seek a declaratory
judgment in court based on "hypothetical facts," and thus are not entitled to
such a determination because the factual bases for their position are not
"sufficiently complete, mature, proximate and ripe" to permit us to decide the
issue in a manner that would be fair to all parties. See Delude v. Town of
Amherst, 137 N.H. 361, 363-64 (1993). Thus, we stress that our preliminary
determination is without prejudice to the right of NGG and the subsidiaries it
is acquiring to request recovery of an acquisition premium in the future,
assuming that such a request would address the concerns of the Commission as
expressed in this order.
In that regard, we agree with the Companies that it may be appropriate in
the future to provide NGG and its subsidiaries with incentives for cost savings
through some form of
<PAGE>
DE 99-035 -26-
performance-based regulation (PBR). We caution, however, that we are mindful of
Staff's position that implementing a PBR mechanism post-merger would allow the
Companies to make a presentation after the fact to the effect that savings
achieved or to be achieved should be used to offset the acquisition premium.
Using PBR to achieve such a result would not provide any real incentive for a
utility to achieve savings on a going-forward basis. Although there may be a way
to avoid this problem, based on the state of the law and the industry at some
point in the future, we remain skeptical based upon present knowledge that the
PBR paradigm can be applied to the acquisition premium in a manner that
accomplishes the objectives PBR mechanisms are typically designed to accomplish.
See 206.03 (setting forth PBR objectives of enhanced competition; infrastructure
development, investment in technology, plant or equipment; price reduction or
service efficiency). And, in all likelihood, the level of profits available as a
result of a properly structured PBR scheme would not rise to the level of the
acquisition premium called for in this merger proposal.
To permit any future Commission to have the benefit of the record developed
here, should it become necessary for that Commission to consider a request for
recovery of any part of the acquisition premium, we direct that, in any such
request, NGG or its subsidiaries (1) ask the Commission to take administrative
<PAGE>
DE 99-035 -27-
notice of this docket and (2) discuss how the request addresses and responds to
the concerns expressed by Staff and OCA in this docket and by the Commission in
this order. We are convinced the filings in this docket will be of assistance to
any future Commission that finds itself confronted with the question whether to
allow the recovery of all or part of the NGG acquisition premium at issue in
this proceeding.
IV. CONCLUSION
Based upon the foregoing analysis, the Commission concludes that the
parties to the merger have met the "no net harm" test. We therefore approve the
transaction. We do so with the understanding that the Companies will abide by
the conditions proposed by GOECS and explicitly agreed to by the Companies in
their reply brief. These conditions are: allowing the Commission the same access
to books and records accorded to FERC; a commitment that any SEC or FERC
determination relating to the merger or to the allocation of the acquisition
premium shall not be binding on, or have any precedential effect before, the
Commission; and, as already made clear, that our approval of the merger includes
no express or implied determination that NGG or its subsidiaries should recover
any part of the acquisition premium paid in connection with the merger
transaction.
VI. OTHER ISSUES
A. Protective Orders
<PAGE>
DE 99-035 -28-
On July 2, 1999, NGG filed a motion for protective order seeking
confidential treatment of certain information provided in discovery that,
according to NGG, would disclose its confidential business strategies for
considering and implementing potential corporate acquisitions.
Specifically, NGG is seeking protection for a paper prepared by one of its
directors, Stephen Box, concerning the financing and hedging arrangements made
by NGG in connection with the proposed acquisition of NEES. NGG has furnished
this information in response to Record Request No. 16 submitted by the Office of
the Consumer Advocate, which has not opposed the instant motion.
The Commission recognizes that the information contained in the filing is
sensitive commercial information in a competitive market. Thus, based on NGG's
representations, under the balancing test we have applied in prior cases, e.g.,
New England Telephone & Telegraph Company (Auditel), 80 NH PUC 437 (1995); Bell
Atlantic, Order No. 22,851 (February 17, 1998); EnergyNorth Natural Gas, Inc.,
Order No. 22,859 (February 24, 1998), we find that the benefits to NGG of
non-disclosure in this case outweigh the benefits to the public of disclosure.
The information, therefore, is exempt from public disclosure pursuant to RSA
91-A:5,IV and N.H. Admin. Rules, Puc 204.06.
B. Motions for Rehearing
<PAGE>
DE 99-035 -29-
OCA's September 8, 1999 motion for rehearing is denied as premature,
without prejudice to its reassertion in connection with the order herein on the
merits of the case. OCA noted that it made the rehearing motion to protect its
appellate rights in the event the minutes of our August 9, 1999 deliberations
could be deemed a final order within the meaning of RSA 363:17-b; see RSA 541:6
(establishing denial of rehearing motion as prerequisite to appellate
jurisdiction of New Hampshire Supreme Court). Oral deliberations, even when
recorded in the minutes of the Commission's meetings, are not final orders.
Rather, they constitute the Commission's public discussion of the matter in
question prior to the issuance of a final order that meets the specific
requirements of RSA 363:17-b. See Appeal of Concord Natural Gas Corp., 121 N.H.
685, 692 (1981) (noting that requirements of RSA 363:17-b are touchstone of
whether document issued by Commission is final order regardless of its caption).
The Companies' motion for rehearing of Order No. 23,202 remains pending,
having been deferred pending the issuance of the instant order. For the reasons
already discussed, supra, we cannot agree with the arguments in the motion for
rehearing that RSA 369:8, II precluded the Commission from conducting a full
inquiry into the merger. Accordingly, the motion to reconsider Order No. 23,202
is denied.
Based upon the foregoing, it is hereby
<PAGE>
DE 99-035 -30-
ORDERED, that the acquisition by NGG of NEES, and the resulting merger of
the two entities causing NEES to become a wholly owned subsidiary of NGG, is for
the public good and in the public interest and is therefore APPROVED; and it is
FURTHER ORDERED, that the Companies' motion for reconsideration of Order
No. 23,202 is DENIED; and it is
FURTHER ORDERED, that NGG's Motion for Protective Treatment filed on July
2, 1999 is GRANTED; and it is
FURTHER ORDERED, that the determination as to protective treatment made
herein is subject to the ongoing rights of the Commission, on its own motion or
on the motion of Staff, any party or any other member of the public, to
reconsider this Order in light of RSA 91-A, should circumstances so warrant.
<PAGE>
.DE 99-035 -31-
By order of the Public Utilities Commission of New Hampshire this fourth
day of October, 1999.
- ---------------------- --------------------
Douglas L. Patch Susan S. Geiger
Chairman Commissioner
Attested by:
- --------------------
Thomas B. Getz
Executive Director and Secretary
<PAGE>
DE 99-035
NEW ENGLAND ELECTRIC SYSTEM
Petition regarding the proposed merger between
NEES and the National Grid Group plc
Separate Opinion of Commissioner Brockway,
Concurring in Part and Dissenting in Part
My colleagues and I agree that generally a merging utility should not
recover an acquisition premium. We differ on whether the record permits us to
determine the acquisition premium issue in this case today. Ultimately, we
differ about whether the merger can be approved absent such a determination. For
the reasons set out below, I believe we can and should determine the issue
finally today. I am unable to conclude that the merger proposal passes the no
net harm test absent a definitive resolution of the acquisition premium issue at
this time.
We should firmly close the door today on the potential for National Grid
Group to move any part of the acquisition premium above the line and include it
in rates for Granite State Electric Company. We should also put NGG and other
New Hampshire electric companies on notice that we will explore whether it is
proper to require the company to share with its customers gains on the sale of
T&D assets when determining stranded costs.
The significant issues in this case include the standard of review of the
proposed merger, the likely benefits
<PAGE>
DE 99-035 -2-
and risks of the merger, and the disposition of the gain on the sale of NEES.
With respect to the disposition of the gain on the sale of NEES, three important
issues have been raised. OCA, alone among the parties, urges that we require
NEES as a condition of our approval to share with consumers the premium above
book value that its shareholders will enjoy upon conclusion of the sale. OCA and
staff also urge that the merger be approved only subject to the condition that
NGG not be permitted to pass on any part of the acquisition premium in rates,
now or in the future. We also must consider whether we would be preempted from
denying the recovery of the acquisition premium by NGG if the Securities and
Exchange Commission ruled that the premium should be reflected on the books of
the buyer.
A. Standard for Merger Approval
With respect to the standard of review, NGG's proposed acquisition of NEES
is governed by the mandate in RSA 369:8 that the merger "not adversely affect
the rates, terms, service, or operation of the public utility within the state."
This inquiry is the same as the "no net harm" test. The plain language of the
statute indicates that a proposed merger need not show net benefits to gain
approval. Insofar as we are dealing with a merger governed by this statute, I
agree with the majority as to the standard of review.
B. Relative Benefits and Risks of Merger
<PAGE>
DE 99-035 -3-
In my review of the case as we drafted the written order, I have
re-examined the relative benefits and risks of the merger, to apply the no net
harm test in light of my reconsidered opinion on acquisition-premium issues. As
I note here, I put a different emphasis on some of the questions than do my
colleagues. As the majority discusses, the transaction at issue in this
proceeding could potentially provide certain benefits to GSEC ratepayers and,
indeed, electricity consumers throughout New England. NGG is the world's largest
investor-owned transmission company and, as such, possesses considerable
technical expertise in the planning and operation of transmission systems. There
was no specific testimony that NGG's capability in this respect was any better
than NEES'. Rather, witnesses gave conclusory statements to this effect. But it
may be of particular relevance to New Hampshire and the rest of New England,
where electric restructuring is in its ascendancy, that NGG brings experience in
managing a transmission system in a competitive market. This experience may
assist ISO New England, which operates the grid in our region, as well as the
New England states themselves as each implements competition in the regional
power market. There may be some marginal benefit to having this experience among
the management ranks, and not simply purchased on a consulting basis. On the
other hand, these possible advantages may not
<PAGE>
DE 99-035 -4-
offset NGG's relative lack of expertise in providing distribution service or in
confronting operating conditions typical of New England winters. NGG may have to
rely heavily on local management, in which case there would be no particular
benefit from adding NGG management on top of NEES management. This is especially
the case where, as here, the selling utility's management has gained a
reputation over the years as among the best in the country. Also, as Staff
observes, there are few if any synergies likely to exist in operations, given
that the two service areas are an ocean apart, and that management will have to
maintain essentially duplicate operations on both sides of the ocean. Thus, the
benefits to GSEC and its customers are possible, maybe even probable, but
certainly not established.
As to risks, I continue to have concerns about the importation to the
United States of the culture of consumer transactions typical of the English
utility system. For example, Mr. Urwin, testifying for NGG, expressed his
continued belief that prepayment meters are a positive tool for dealing with
non-payment issues. In grappling with the problems facing payment-troubled
customers, and in distinguishing the "can't pay" customer from the "won't pay"
customer, my regulatory experience and a combined 15 years in working with
access to affordable utility service suggests to me that prepayment meters may
be worse than useless in achieving positive payment patterns and low shut-off
rates. The remoteness of NGG management and corporate
<PAGE>
DE 99-035 -5-
culture differences, the full extent of which we cannot anticipate on the
present record, may make positive resolution of such policy differences more
difficult.
The OCA has also argued that risks to the competitive structure we are
building in New England have been brushed aside by NGG, indicating a potential
for backsliding under the new management. NGG does not apparently want to get
into the generation business, but this is only a prediction, and NGG's refusal
to give assurances on this point must be considered.
There is also financial risk to consumers relative to the acquisition
premium, but that is discussed separately below.
Taking all these factors into account, there are not great benefits coming
to GSEC consumers or to New England from this merger, and I do see certain
risks. However, the merger should not simply be denied, despite the appeal of
the OCA's arguments. There is a greater possibility of potential operational
benefits from NGG's participation in the New England grid, and lesser risk of
harm to the competitive structure we are working to build, than OCA sees. While
the evidence is thin in these areas, the companies have shown that no net harm
will be created by the merger, aside from the potential impact of the merger on
rates. The analysis thus turns to the disposition of the acquisition premium.
C. Acquisition Premium
<PAGE>
DE 99-035 -6-
This merger application is unique in that it is the first merger of
electric utilities to come before the Commission in the context of RSA 374-F,
the electric competition mandate for our state. The circumstances of this merger
approval request are also unique in that, while a significant acquisition
premium will be realized as a result of the structure of the transaction, no
request for the recovery of an acquisition premium has been made. Indeed, the
parties have been careful not to seek recovery of an acquisition premium,
although they readily agree that the merger will provide NEES shareholders with
a premium 100% above the book value of the Company, most of the revenues of
which are derived from regulated utility operations. NGG freely admits that it
will seek recovery at some point (undefined) in the future. Accordingly, the
merging parties have asked us not to deny the possible recovery of the
acquisition premium. But since their intention to seek recovery is clear, we
must address the disposition of the premium in order to determine whether the
merger meets the no net harm standard.
Addressing the acquisition premium at this stage will provide guidance not
only to the parties to this merger, who must decide whether to conclude the
transaction given the conditions imposed by us, but also to utilities that may
be negotiating such mergers in the future. There are indications that other
utilities will increasingly be adopting the same strategy (deferral of the
question to a proceeding beyond the actual
<PAGE>
DE 99-035 -7-
approval process) for dealing with the fundamental problem that seeking recovery
of an acquisition premium means seeking recovery for above-book costs.
To the extent we can set out the mutual rights and expectations of selling
shareholders, acquiring shareholders and customers in this case, parties seeking
to negotiate electric utility mergers will be armed with crucial information
about the regulatory disposition of this and other provisions of the deals, and
can adjust their agreements in light of those policy constraints or
opportunities for maximum economic efficiency. The majority and I essentially
agree on this, and differ only on the extent to which we can now identify the
circumstances that would or would not support moving any of the acquisition
premium above the line.
1. Recapture of Gain from Disposition of Assets
The Office of Consumer Advocate argues that we should deny the merger, or
at least condition it on the recapture for consumers of the gain that
shareholders will enjoy upon consummation of the merger.
GSEC argued for and received 100% recovery of stranded generation costs,
and then through its parent NEES sought approval of a sale of the remaining
assets for a substantial gain. It is unfair for shareholders to retain the full
increase in the value of a company when it demands that consumers protect
<PAGE>
DE 99-035 -8-
them from all the reduction in the value of the generation part of the business.
In its reply brief, NEES disarmingly admits to the asymmetry of treatment
it seeks here. Arguing that OCA's position denies the company its fair return on
investment, in the joint reply brief NEES makes an argument that the OCA itself
could have made in opposing stranded cost relief in 1998:
"Indeed, shareholders are entitled to only the market value of their
interest, whether that market value happens to be above, equal to or
below the book value of the underlying company assets."
<PAGE>
DE 99-035 -9-
That the NEES management had this asymmetric treatment in mind before
agreeing to the GSEC restructuring stipulation can be inferred from the fact
that NEES began discussions with NGG in February of 1998, and with at least one
other company shortly thereafter. Further, the approval of the restructuring
stipulation in Order No. 23,041 was separated from the application for approval
of this merger by no more than six months.
Our Supreme Court has established the principle that, in disposition of
gains on utility property, equity requires symmetry of risk and reward. Appeal
of City of Nashua, 121 N.H. 874 (1981)(removal of plant from utility service);
Pennichuck Water Works, 103 N.H. 49 (1960)(sale of land); Chicopee Mfg. Co. v.
Public Service Co., 98 N.H. 5 (1953)(sale of generating plant). In all these
cases, the gain on the transfer of utility property was awarded to shareholders,
the converse of what OCA seeks in this case. However, as OCA notes, in those
cases the Court observed that had the property been sold at a loss, shareholders
would have been at risk. The present case is parallel, except that ratepayers
were put at risk for the loss on the generating assets, and now must be able to
share in the gain from the sale of the remaining assets.
In order to account for the windfall to the utility
<PAGE>
DE 99-035 -10-
shareholders, and to return equity to the risk/reward balance between consumers
and shareholders, OCA suggests that the acquisition premium could be captured at
the moment of stock transfer, by attaching a lien to the proceeds of the stock
transfers. We have no authority for such a maneuver. Our authority is limited to
setting the rates for GSEC. However, we are not without authority to reflect the
increased value of the GSEC assets in rates.
We could, for example, revisit the stranded cost determination, as
instructed by the legislature, to ensure that stranded costs reflect a proper
allocation of risk and reward. We could require that the acquisition premium be
taken as an offset against stranded costs. Indeed, this would seem to be
required by RSA 374-F:3, XII(c) and (d) which requires that companies continue
to take all steps to mitigate stranded costs, and that stranded costs be
determined on a net basis and should be reconciled to actual market conditions
from time to time.\1
- --------
\1 Note that this section also states that stranded costs should not
include transmission and distribution assets. I understand that to mean that a
company can not recover stranded costs for T&D plant, but that it is not a
prohibition against including the T&D assets in the calculation of stranded
costs if they were to be sold at a premium.
It would also be appropriate to entertain suggestions for a sharing of the
gain, and to consider the relative impacts of exogenous factors such as
inflation on the gains or losses of
<PAGE>
DE 99-035 -11-
generation and remaining assets. Further, since accounting principles in a
purchase such as this require that the acquisition premium be written off by NGG
against earnings over time, we would have to consider the implications of this
zeroing out of the acquisition premium on the fairness of gain recapture.
Because as a practical matter the only way to accomplish such a sharing is
to affect the revenue stream of the merged company, potential merging companies
should have fair notice of this intention before they decide to consummate a
merger. In this way, should they so choose, they can renegotiate the terms to
protect themselves from being forced to fund the selling company shareholders'
windfall. In the instant docket, we should let NGG know that this issue may be
raised again in the context of a renewed examination of GSEC's stranded cost
recovery.
2. Recovery by NGG of Acquisition Premium
Even if we were not to insist that stockholders share the risks of
restructuring equitably with consumers, we must not require consumers to pay the
acquiring utility for the excess payment it is making over the book value of the
utility.
Under the original cost method in use in New Hampshire in non-restructuring
transactions, rate base is not changed when the fair market value of utility
plant rises above net book or
<PAGE>
DE 99-035 -12-
drops below net book. For decades, and by law in New Hampshire, plant in service
has been valued at the original cost less accumulated depreciation, or so-called
"net book value." RSA 378:7; RSA 378:27; RSA 378:28; Appeal of City of Nashua,
121 N.H. 874 (1981). Investors are able to recover the original funds invested
in the utility, and not more. They are ordinarily denied the opportunity to
require customers to pay rates inflated to current market value. Similarly, they
are not obligated to reduce rates when their assets' current market values are
less than net book.\2
- --------
2\ Note that government can change the basis of utility rate base
evaluation, as long as it does not shift back and forth between various methods
simply to require investors to bear the risk of bad investments while denying
them the benefit of good investments. Duquesne Light Company, 488 U.S. 299, 315
(1989). Lest this reference be misunderstood, it should also be noted that
restructuring of the electricity industry, with its concommitent deregulation of
commodity prices, is not an instance of whipsawing the utilities; the package of
risks and rewards are rearranged in new ways, and the reduction in plant
valuation to market value is accompanied by new opportunities for company
management.
The Uniform System of Accounts, established by the FERC and adopted for use
in New Hampshire, Puc 308.04, requires that upon sale of utility property the
difference between book value and market value be recorded below the line as
goodwill (or illwill, depending on whether the assets are sold at a gain or at a
loss). This acquisition must be amortized by periodic charges to Account 425,
Miscellaneous Amortization, a below-the-line
<PAGE>
DE 99-035 -13-
account. As a non-utility expense, the amortization of acquisition premiums does
not affect the utility's revenue requirement. Meanwhile, balance sheet Account
114 carries the unamortized balance of the acquisition premium. It would be an
extraordinary event for the commission to deviate from these accounting
principles, and permit amortization of the acquisition premium above the line.
These accounting rules are maintained to ensure adherence to the original
cost method of valuing rate base. The original cost method, in turn, is intended
to preserve an equitable allocation between consumers and utilities of the risks
and rewards, burdens and benefits, of utility operations. The utilities argue
that it would not harm consumers if the aquisition premium were moved above the
line to the extent only of savings that are attributable to the merger. There
are several problems with this argument.
Despite numerous questions in different forms, NEES and NGG were unable or
unwilling to estimate the likely level of cost savings consumers might foresee
from the merger. But it is possible to estimate the level that would be
necessary to provide net savings to customers if the NEES/NGG acquisition
premium treatment were approved. Applying the accounting principles to the facts
of the NEES/NGG merger, the amount booked to Account 114 and allocated to
Granite State would be roughly 3% of $1.6
<PAGE>
DE 99-035 -14-
billion/3, or just under $50 million. Amortizing this premium to 3 Account 425
over 20 years, as proposed in the response to Staff Data Request 1-4 (appendix B
to Exh. 23) would produce an annual charge of $2.5 million per year.
- --------
3/ Using the Staff's method for determining the acquisition premium, the
amount would be closer to 3% of $600 million, or $18 million. Amortized over 20
years, the annual amount of the premium would be $0.9 million. Savings of this
magnitude would still constitute 7% of post-restructuring annual revenues.
What NEES and NGG argue in this case is that if they are able to show
reductions in expenses attributable to the merger, they should be free to seek
recovery of the acquisition premium to the same extent as the savings. Thus, NGG
wishes to retain the option of coming back to the Commission to move up to $2.5
million per year above the line, before being asked to pass any of these savings
on to Granite State consumers./4
- --------
4/ NGG might propose to amortize the entire amount of the acquisition
premium above-the-line until a pre-determined level of estimated savings is
reached, but this approach is unlikely. The timing of recovery, and risk of
non-recovery, would shift in this scenario, but the underlying reversal of
below-the-line treatment would be the same as in the example.
To put this concept into context, we must consider that Granite State's
annual revenues before restructuring are only about $54 million.5/ Thus, merger
savings would have to exceed 5%
- --------
5/ Granite State's operation and maintenance expenses, including purchased
power, were $54,202,977 in 1998, per the firm's FERC Form 1 (Accounts 401 and
402, p. 114). Purchased power was $41,615,327 for the same period (Accounts
555-557, p. 321). Thus, GSEC operating expenses for its residual T&D operations
were $12,587,650 (Accounts 555 through 557 less accounts 401 and 402).
<PAGE>
DE 99-035 -15-
of Granite State's pre-divestiture revenues before consumers would benefit from
this merger. More importantly, post-transition revenue requirements will be
greatly reduced. The portion of the business that is susceptible to cost
reduction will be limited to about $13 million in T&D expense per year. Yet the
$2.5 million annual savings threshold will remain, making the percentage of
expenditures that must be reduced equivalent to about 19%, before ratepayers can
hope to see any benefit from the merger. A 5% merger-related gain in efficiency
would be remarkable; a 20% gain in efficiency would be miraculous. This is
especially so where NGG cannot look to all the typical sources of operating
synergy as areas of potential savings.
<PAGE>
DE 99-035 -16-
It is not necessary, however, to consider the specific likelihood of
ratepayers enjoying the benefit of merger-related savings in order to appreciate
that the NEES/NGG reservation of rights denies consumers fair treatment. To
illustrate the unfairness of permitting the merging parties to pass shareholder
gains through to consumers in rates, consider the case of the depreciation
allowance. The OCA is correct that, if acquisition premiums were granted in
merger cases, it would require a rethinking of depreciation allowances. If
consumers are asked to pay rates based on plant placed in service at a value
inflated to market levels, then no depreciation expenses should be awarded. In
fact, rates should be reduced by appreciation allowances, as the value of the
plant appreciates. And, should the market value of plant decrease relative to
book value, this process should be reversed.
Since the advent of utility price regulation, utilities have been permitted
the opportunity to recover the return of, and a return on, the fair value of
their assets used and useful to serve customers. They are not entitled to earn a
return of investments above book value. The acquisition premium amounts to such
an investment. They may have perfectly good reasons for paying more than the net
present value of net income based on utility ratemaking (as for example the tax
benefits available in Great Britain from increasing the debt leverage of
National Grid Group), but consumers should not be required to provide revenues
<PAGE>
DE 99-035 -17-
based on any higher base than net book and actual cost of service.
Further, as Staff testified, there is a moral hazard in not reaffirming
here our policies regarding book value ratemaking; if potential utility buyers
can expect to recover some or all of their above-book payments from consumers,
they will be open to paying more for a utility than they otherwise would.
Correspondingly, a potential seller utility will be encouraged to seek out
merger partners, and force a bidding up of the premium above book, in order to
reap higher windfall profits from buyers who hope to place the burden of the
purchase on consumers. Seller utilities will also have an incentive to come in
for accelerated depreciation, and then turn around and sell their companies at a
profit, pocketing both the accelerated depreciation and the above-book price.
Such churning should not be encouraged, as it is both unfair and economically
inefficient.
With regard to offsetting merger savings, it should be noted that consumers
under traditional ratemaking bear the risk of operating losses (higher operating
costs) occasioned by the merger. Staff provided an example of just such an
outcome in a recent merger case. NGG does not propose to shield consumers from
this eventuality, and given its inability to suggest areas where robust cost
savings will be possible and the need for dual management teams, the risk of
cost increases cannot be gainsaid. Allowing NGG to offset savings against an
acquisition premium and
<PAGE>
DE 99-035 -18-
thereby recover the acquisition premium would deny to consumers the benefit of
the symmetry of cost-based risk and reward.\6
- --------
6\ It may well be asked why gains on the disposition of the company should
be shared with consumers, a market-value concept, while acquisition premiums
should not be recovered in light of cost-basis principles. But sharing of the
gains, as I discuss above, would merely be an offset to the stranded costs
losses that customers otherwise are asked to bear. And stranded cost recovery is
itself a departure from traditional regulation. Generating assets are in effect
removed from utility rate base when generation prices are deregulated. Stranded
cost recovery amounts to allowing the company to remove such assets at market
price (lower than book), and leaving the excess of net book over market
valuation to be recovered from consumers through a new regulatory asset,
Stranded Cost Recovery. Compare, Appeal of City of Nashua, supra (standard
practice is to remove assets from service at book value, not market). Stranded
cost recovery reverses the traditional accounting for plant removed from
regulation. Through stranded cost recovery, the consumers have already
guaranteed that GSEC will not suffer any loss relating to the difference between
the market value of its generating assets and the book value of those assets.
NGG did not satisfactorily explain in this docket why customers should not be
restored to parity by a share in part of the gain on the sale of the remaining
assets. On the surface, for them to be denied such sharing, and then to pay in
rates for the inflated value of the company's assets, would be to add insult to
injury.
Finally, I must address whether these principles can be applied at this
time, given the fact that the company has not sought recovery now. There is no
reason on this record why a regulatory commission should allow the merger to
proceed if there is a risk that NGG will seek to exact from ratepayers the cost
it was willing to pay above the net book value of GSEC assets devoted to utility
service.7/ The factors that might
- --------
7/ Nor, for that matter, of the portion of the acquisition premium
representing the premium above market value of the stock.
<PAGE>
DE 99-035 -19-
hypothetically justify consideration of such extraordinary treatment are known
today, and do not apply to this merger.
This is not a situation where a merger is practically speaking the only way
to ensure adequate service to customers of a struggling small utility system.
This is not a case in which the buying company is replacing inept management.
This is not a case where irreplaceable expertise is lodged only in the buying
company, and is available only via the mechanism of a merger. This is not the
case of a negotiated settlement taking the largest utility in the state out of
bankruptcy. No other extraordinary circumstances justify consideration of
above-book cost recovery to entice a reluctant suitor to come in and take over
NEES.
I cannot conceive of any circumstance, short of a wholesale rearrangement
in the risk/reward balance or mechanism for such utilities, that could justify a
future change in the treatment of the acquisition premium.8/ Unlike the
majority, I believe we can and should say so today, and leave to a future
legislature or commission the task of determining the equities going forward
upon such hypothetical further sea changes in the basis for utility ratemaking.
Accordingly, I would condition
- --------
8 I would note that incentive regulation does not qualify as such a
dramatic departure from cost-plus ratemaking, in that it merely widens the
boundaries of upside potential and downside reward, but still aims, as with
cost-plus ratemaking, to achieve rates that provide no more than a reasonable
return on prudently- incurred used and useful utility assets.
<PAGE>
DE 99-035 -20-
approval of the merger on the absence of such above-the-line treatment of the
acquisition premium.
3. SEC Pre-emption
With regard to the SEC preemption, the company has stated that the
commission would not be so preempted, and that it will not raise such issues. To
the extent such preemption is a jurisdictional question, it may not avail that
the company makes such representations. However, at the least we should
condition the merger on the company's not coming forward at any time in the
future and claiming that our decision on the acquisition premium issues is
preempted by any accounting treatment prescribed at the SEC.
<PAGE>
DE 99-035 -21-
D. Conclusion
The potential benefits of this merger are small, and the risks cannot be
discounted. It would be unfair to leave customers paying for stranded costs
while shareholders enjoyed a windfall gain from sale of the remaining assets. It
would also be unfair to allow the National Grid Group to depart from cost-based
ratemaking in the case of the regulated monopoly portion of the GSEC business.
For these reasons, I concur in the conditions placed upon the merger by the
majority, and I would further condition approval of the merger on the following:
(1) That NGG agree it will not claim at any time that our decision on
acquisition premium issues is preempted by any accounting treatment
prescribed by the Securities and Exchange Commission, and (2) That no
portion of the acquisition premium be recovered by NGG from GSEC
consumers. I would also put NGG on notice that in a future
reconciliation of GSEC's stranded costs, we will consider whether the
gain on the sale of NEES' remaining assets be shared on an equitable
basis between the company and the shareholders, via a
<PAGE>
DE 99-035 -22-
reconciliation or adjustment of the stranded cost recovery approved in
Order No. 23,041.
---------------------------
Nancy Brockway
Commissioner
October 4, 1999
Attested by:
- --------------------------------
Thomas B. Getz
Executive Director and Secretary
Exhibit D-5.4
DE 99-035
NEW ENGLAND ELECTRIC SYSTEM
Petition Regarding Proposed Merger between
NEES and National Grid Group plc
Order on Motion for Rehearing
O R D E R N O. 23,353
November 29, 1999
APPEARANCES: Carlos A. Gavilondo, Esq. and Thomas G. Robinson, Esq.
Attorneys for New England Energy System Companies; Scott J. Mueller, Esq. and
Paul Connolly of LeBoeuf, Lamb, Greene & MacRae, LLP for National Grid Group;
Wynn E. Arnold, Esq., Assistant Attorney General, for the Governor's Office of
Energy and Community Services; Michael W. Holmes, Esq. for the Office of
Consumer Advocate, representing residential ratepayers; Dennis A. Hebert for the
Campaign for Ratepayers Rights; Rep. Jeb E. Bradley; Timothy W. Fortier for the
Business & Industry Association of New Hampshire; Larry S. Eckhaus, Esq. for the
Staff of the New Hampshire Public Utilities Commission; and Gary Epler, Esq.,
Commission General Counsel.
I. PROCEDURAL HISTORY
This proceeding concerns the proposed acquisition of New England Electric
System (NEES), parent company of Granite State Electric Company (GSEC), by
National Grid Group plc (NGG). On March 19, 1999, NEES and NGG gave the
Commission formal notice of the merger and represented that the acquisition
would have no adverse effect on New Hampshire ratepayers. In Order No. 23,202
(April 21, 1999), we concluded that we had authority to conduct further
proceedings notwithstanding the Companies' representation. Hearings were held on
June 24 and 25, 1999.
<PAGE>
Exhibit D-5.4
DE 99-035 -2-
On October 4, 1999, we issued Order No. 23,308, approving the proposed
merger. We further declined to impose a blanket prohibition on NGG recovery,
through rates charged to GSEC customers in New Hampshire, of some portion of the
acquisition premium, i.e., the sum in excess of NEES' book value that NGG has
agreed to pay NEES shareholders. We concluded that the issue was not ripe for
consideration because the Companies were not seeking recovery of the acquisition
premium in the docket and further indicated that such an issue is properly
considered in the context of a rate case. However, we expressed concerns about
whether NGG could ever demonstrate circumstances - e.g., savings to customers
related to the merger - that would justify recovery of the acquisition premium,
and we directed NGG or its subsidiaries to ask the Commission to take
administrative notice of the record in this docket in the event NGG or its
subsidiaries ever seek recovery of any portion of the acquisition premium from
New Hampshire ratepayers. Commissioner Brockway issued a separate opinion
concurring in part and dissenting in part.
Now pending is a motion for rehearing filed by the Office of Consumer
Advocate (OCA). According to OCA, approving the merger without a condition
ruling out acquisition premium recovery is in derogation of the applicable "no
net harm" test
<PAGE>
Exhibit D-5.4
DE 99-035 -3-
because such an approval leaves ratepayers open to the risk of being required to
pay some portion of the acquisition premium in the future. OCA further contends
that we improperly leave ratepayers exposed to "adverse risk" by not using this
occasion to offset GSEC's previously approved stranded cost recovery to reflect
the gain received by NEES shareholders on the sale of their company to NGG.
According to OCA, we have the authority to do this under the electric utility
restructuring statute, RSA 374-F.
Granite State Taxpayers (GST) has advised the Commission by letter that it
supports OCA's rehearing motion. However, GST states that it does not seek a
reversal or reconsideration of the substantive determinations already made, but
merely requests "clarification that nothing in the Commission's decision allows
for the addition of the acquisition premium to the distribution rate base
without further Commission action" or controls how the Commission would treat
other merger transactions presenting different circumstances.
NEES and NGG oppose OCA's motion. The Business & Industry Association of
New Hampshire has indicated that it does not support OCA's rehearing request.
Staff has not taken a position, nor have any of the other intervenors.
<PAGE>
Exhibit D-5.4
DE 99-035 -4-
II. COMMISSION ANALYSIS
We discern no basis for rehearing. On the issue of whether it is necessary
for us to rule out recovery of any portion of the acquisition premium in order
to approve the proposed merger under the "no net harm" test and any other
applicable legal principles, OCA raises no arguments that were not fully
considered in our previous opinion.
In essence, OCA contends that it is only equitable to require ratepayers
and shareholders to share the gain on the sale of profitable assets when they
are sharing the loss, through stranded cost recovery, from the sale of GSEC's
generation assets at less than book value. To the extent that OCA's argument is
grounded in RSA 374-F, we agree that the electric utility restructuring statute
provides us with the authority to revisit the issue of GSEC's stranded cost
recovery in appropriate circumstances as noted below. See RSA 374-F:3, XII(a)
(authorizing stranded cost recovery in context of rates that are "equitable,
appropriate, and balanced"); (c) (obligating utilities "to take all reasonable
measures to mitigate stranded costs"); (d) (noting that stranded costs must be
determined on net basis and "should be reconciled to actual electricity market
conditions from time to time"); see also RSA 374-F:4, VI ("The commission is
authorized to allow utilities to collect a stranded
<PAGE>
Exhibit D-5.4
DE 99-035 -5-
cost recovery charge, subject to its determination in the context of a rate case
or adjudicated settlement proceeding") (emphasis added). When we approved GSEC'S
proposed restructuring settlement in Docket No. DR 98-012, we indicated that the
Commission's review of the divestiture of NEES' nuclear assets will include a
review of stranded costs under RSA 374-F:3,XII. Order No. 23,041, 83 NHPUC 532
at 553 (1998). This will also provide an appropriate opportunity to consider
what effect, if any, that the gain on the sale of NEES would have on the amount
of stranded costs associated with GSEC's share of NEES' nuclear assets in the
dockets that review the sale of those nuclear assets. In addition, to the extent
necessary, in response to GST's request, we hereby clarify that nothing in our
decision allows for the addition of an acquisition premium in rates without
further Commission action.
Based upon the foregoing, it is hereby
ORDERED, that the pending motion for rehearing is GRANTED to the extent
clarified above and that the motion for rehearing is otherwise DENIED.
<PAGE>
Exhibit D-5.4
DE 99-035 -6-
By order of the Public Utilities Commission of New Hampshire this
twenty-ninth day of November, 1999.
//signed// //signed//
Douglas L. Patch Susan S. Geiger
Chairman Commissioner
Separate Opinion By Commissioner Brockway
Commissioner Brockway concurs in this opinion to the extent of the
clarifications contained therein.
//signed//
Nancy Brockway
Commissioner
Attested by:
//signed//
Thomas B. Getz
Executive Director and Secretary
EXHIBIT F-1.1
December 8, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The National Grid Group plc/New England Electric System Merger
Application, File No. 70-9473
Dear Sirs:
The National Grid Group plc ("National Grid") has applied to the Commission
for authority to acquire the New England Electric System ("NEES") (the
"Merger"). Upon consummation of the Merger, National Grid will register as a
holding company under the Public Utility Holding Company Act of 1935 (the
"Act"). As counsel for National Grid and its subsidiary companies, I deliver
this opinion to you for filing as Exhibit F-1.1 to the Application-Declaration
referenced above. Briefly stated, the Applicants are seeking authority, under
Sections 9(a)(2) and 10 of the Act, to acquire, by means of the Merger, all of
NEES' interest in the issued and outstanding common stock of the subsidiaries of
NEES that are public utility companies within the meaning of the Act, namely New
England Power Company, Massachusetts Electric Company, The Narragansett Electric
Company, Granite State Electric Company, Nantucket Electric Company, New England
Electric Transmission Corporation, New England Hydro-Transmission Corporation,
New England Hydro-Transmission Electric Company, Inc. and Vermont Yankee Nuclear
Power Corporation.
The Applicants are also requesting that the Commission approve (1) the
acquisition by the Applicants of NEES' interest in the non-utility activities,
businesses and investments of NEES and the retention of National Grid's existing
non-utility activities, businesses and investments; (2) certain
acquisition-related financing matters, and (3) certain amendments to the NEES
standard form of service company agreement.
I am a member of the Law Society of England and Wales, the place of
incorporation of National Grid. I am not a member of the bars of any other
country, or any of the United States, states in which certain of the Applicants
are incorporated or qualified to do business, and do not hold myself out as an
expert in the laws of such states, although I have consulted and will consult
with counsel to National Grid who are experts in such laws. For purposes of this
opinion, to the extent I deemed necessary, I have relied on advice from counsel
employed or retained by National Grid, in particular, CMS Cameron McKenna and
LeBoeuf, Lamb, Greene & MacRae, L.L.P., who are expert in the laws applicable to
the Applicants.
In connection with this opinion, I or attorneys in whom I have confidence,
have examined originals or copies, certified or otherwise identified to my
satisfaction, of such records and such other documents, certificates and
corporate or other records as I have deemed necessary or appropriate as a basis
for the opinions expressed in this letter. In my examination, I have
<PAGE>
assumed the genuineness of all signatures, the legal capacity of all persons,
the authenticity of all documents submitted to me as originals, the conformity
to original documents of documents submitted to me as certified or photostatic
copies and the authenticity of the originals of such copies. As to various
questions of fact material to such opinions, I have, when relevant facts were
not independently established, relied upon statements contained in the
Application-Declaration.
The opinions expressed below are subject to the following assumptions,
qualifications, limitations, conditions and exceptions:
o The Commission shall have duly entered an appropriate order or orders
with respect to the proposed transactions, as described in the
Application-Declaration, permitting the Application-Declaration to
become effective under the Act and the rules and regulations
thereunder, and the proposed transactions are consummated in
accordance with the Application-Declaration and the Commission's
orders.
o No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed below.
o Appropriate corporate actions will have been taken by both the issuer
and acquirer of the securities contemplated by the
Application-Declaration and the documents transferring the securities
will have been duly authorized, executed and delivered with all
appropriate transfer or other taxes paid.
o Each of the Applicants, and their subsidiaries involved in the
proposed transactions, will at the time of the proposed transactions
be a duly incorporated corporation or duly formed limited liability
company or partnership in the jurisdiction in which it is domiciled.
Based upon the foregoing and subject to the assumptions, qualifications,
limitations, conditions and exceptions set forth herein, I am of the opinion
that, in the event the proposed transactions are consummated in accordance with
the Application-Declaration:
(a) all state and federal laws applicable to the proposed transactions
will have been complied with;
(b) the issuer of any securities proposed in the Application-Declaration
is duly formed or incorporated under the laws of the jurisdiction in
which it is domiciled;
(c) such securities will be valid and binding obligations of the issuer or
guarantor in accordance with their terms;
(d) the Applicants will legally acquire any securities or assets subject
to this Application-Declaration, and;
<PAGE>
(e) the consummation of the proposed transactions will not violate the
legal rights of the holders of any securities issued by National Grid,
or by any associate company thereof.
I hereby consent to the filing of this opinion as an exhibit to the
Application- Declaration.
Very truly yours,
//s//Fiona Smith
Company Secretary and General Counsel
The National Grid Group plc
EXHIBIT F-1.2
December 8, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The National Grid Group plc/New England Electric System Merger
Application, File No. 70-9473
Dear Sirs:
The National Grid Group plc ("National Grid") has applied to the Commission
for authority to acquire the New England Electric System ("NEES") (the
"Merger"). Upon consummation of the Merger, National Grid will register as a
holding company under the Public Utility Holding Company Act of 1935 (the
"Act"). As counsel for NEES and its subsidiary and associate companies, I
deliver this opinion to you for filing as Exhibit F-1.2 to the
Application-Declaration referenced above. Briefly stated, the Applicants are
seeking authority, under Sections 9(a)(2) and 10 of the Act, to acquire, by
means of the Merger, all of NEES' interest in the issued and outstanding common
stock of the subsidiaries of NEES that are public utility companies within the
meaning of the Act, namely New England Power Company, Massachusetts Electric
Company, The Narragansett Electric Company, Granite State Electric Company,
Nantucket Electric Company, New England Electric Transmission Corporation, New
England Hydro-Transmission Corporation, New England Hydro-Transmission Electric
Company, Inc. and Vermont Yankee Nuclear Power Corporation.
The Applicants are also requesting that the Commission approve (1) the
acquisition by the Applicants of NEES' interest in the non-utility activities,
businesses and investments of NEES and the retention of National Grid's existing
non-utility activities, businesses and investments; (2) certain
acquisition-related financing matters, and (3) certain amendments to the NEES
standard form of service company agreement.
I am a member of the bar of Massachusetts, the place of organization of
NEES. I am not a member of the bar of any other country or state of the United
States in which certain of the Applicants are incorporated or qualified to do
business, and do not hold myself out as an expert in the laws of such states,
although I have consulted and will consult with counsel to NEES who are experts
in such laws. For purposes of this opinion, to the extent I deemed necessary, I
have relied on advice from counsel employed or retained directly or indirectly
by NEES.
In connection with this opinion, I or attorneys in whom I have confidence,
have examined originals or copies, certified or otherwise identified to my
satisfaction, of such records and such other documents, certificates and
corporate or other records as I have deemed necessary or appropriate as a basis
for the opinions expressed in this letter. In my examination, I have assumed the
genuineness of all signatures, the legal capacity of all persons, the
authenticity of all
<PAGE>
documents submitted to me as originals, the conformity to original documents of
documents submitted to me as certified or photostatic copies and the
authenticity of the originals of such copies. As to various questions of fact
material to such opinions, I have, when relevant facts were not independently
established, relied upon statements contained in the Application-Declaration.
The opinions expressed below are limited to NEES and each of its
subsidiaries and associate companies and subject to the following assumptions,
qualifications, limitations, conditions and exceptions:
o The Commission shall have duly entered an appropriate order or orders
with respect to the proposed transactions, as described in the
Application-Declaration, permitting the Application-Declaration to
become effective under the Act and the rules and regulations
thereunder, and the proposed transactions are consummated in
accordance with the Application-Declaration and the Commission's
orders.
o An appropriate order from the Nuclear Regulatory Commission shall have
been issued authorizing the indirect transfer relating to ownership
interest of New England Power Company in nuclear plants.
o No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed below.
o With respect to NEES and each of its subsidiaries and associate
companies, appropriate corporate actions will have been taken by both
the issuer and acquirer of the securities contemplated by the
Application-Declaration and the documents transferring the securities
will have been duly authorized, executed and delivered with all
appropriate transfer or other taxes paid.
o NEES and each of its subsidiaries and associate companies involved in
the proposed transactions, will at the time of the proposed
transactions be a duly incorporated corporation or duly formed limited
liability company or partnership in the jurisdiction in which it is
domiciled.
Based upon the foregoing and subject to the assumptions, qualifications,
limitations, conditions and exceptions set forth herein, it is my opinion that,
with respect to NEES and each of its subsidiaries and associate companies, in
the event the proposed transactions are consummated in accordance with the
Application-Declaration:
(a) all state and federal laws applicable to the proposed transactions
will have been complied with;
(b) the issuer of any securities proposed in the Application-Declaration
is duly formed or incorporated under the laws of the jurisdiction in
which it is domiciled;
(c) such securities will be validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the charter or other document
defining such rights and privileges;
(d) the Applicants will legally acquire any securities or assets subject
to this Application-Declaration, and;
(e) the consummation of the proposed transactions will not violate the
legal rights of the holders of any securities issued by NEES, or any
of its subsidiaries and associate companies.
<PAGE>
I hereby consent to the filing of this opinion as an exhibit to the
Application-Declaration.
Very truly yours,
//s//Kirk L. Ramsauer
Deputy General Counsel
New England Electric System
Exhibit K-1
LeBoeuf, Lamb, Greene & MacRae
L.L.P.
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
1875 Connecticut Avenue, N.W.
Suite 1200
Washington, DC 20009-5728
December 2, 1999
Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
Mail Stop 6-9, Room 6500
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The National Grid Group plc and New England Electric System's Merger and
Financing Applications, File Nos. 70-9473 and 70-9519 respectively.
Dear Secretary Katz:
The National Grid Group plc and the New England Electric System hereby
submit for filing their response to the sole comment submitted in connection
with their merger and financing applications. The National Grid Group and New
England Electric System have provided five copies of this response to the
Assistant Director of the Office of Public Utility Regulation of the
Commission's Division of Investment Management, and another copy to the
commenter, Russell G. Gilmore, 100 Tamarack Drive, East Greenwich, R.I. 02818.
Thank you for your consideration, and please telephone me should you have
any questions regarding this filing.
Respectfully,
//signed//
Joanne C. Rutkowski
Enclosure
cc (with five copies) Ms. Catherine A. Fisher
Assistant Director
Office of Public Utility Regulation
Division of Investment Management
Securities and Exchange Commission
Mail Stop 5-3
450 Fifth Street, N.W.
Washington, D.C. 20549
<PAGE>
CERTIFICATE OF SERVICE
I, Joanne C. Rutkowski, hereby certify that I have this day served a true
and correct copy of this filing by United States mail to:
Russell G. Gilmore
100 Tamarack Drive
East Greenwich, R.I. 02818
This second day of December, 1999
//signed//
____________________________
Joanne C. Rutkowski
LeBoeuf, Lamb, Greene & MacRae L.L.P.
1875 Connecticut Ave., N.W.
Washington, D.C. 20009
<PAGE>
BEFORE THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
The National Grid Group plc | File Nos. 70-9473
New England Electric System | and 70-9519
|
- --------------------------------------------------------------------------
RESPONSE OF THE NATIONAL GRID GROUP PLC AND NEW ENGLAND ELECTRIC
SYSTEM TO THE COMMENTS OF RUSSELL G. GILMORE
This filing responds to the comments submitted by Russell G. Gilmore, in
connection with the proposed acquisition by The National Grid Group plc
("National Grid") of the outstanding voting securities of the New England
Electric System ("NEES"). On October 8, 1999 and October 12, 1999, the
Securities and Exchange Commission (the "Commission") issued notices of the
Merger Application (File No. 70-9473) and the Financing Application (File No.
70-9519), respectively. By letters dated October 21, 1999 and October 23, 1999,
Mr. Gilmore provided comments and indicated his wish to attend any hearing that
might be held in connection with the proposed transactions.
Briefly stated, Mr. Gilmore has not requested a hearing in connection with
either the Merger Application or the Financing Application. Rather, he has
submitted comments on the filings and indicated his wish to attend any hearing
that might be held in this matter. In this regard, Mr. Gilmore makes five
comments, to which the Applicants respond as follows:
1. Mr. Gilmore's first comment relates to whether the merger will be fair
to NEES shareholders (particularly small long-time shareholders) from a
financial point of view. Mr. Gilmore does not gain comfort from the Merrill
Lynch fairness opinion included in the proxy statement, yet the analysis Merrill
Lynch used was described in detail in the proxy statement (see pages 19-24),
including a list of 11 comparable transactions, and Merrill Lynch's potential
conflicts of interest were also fully described.
<PAGE>
With all this information, the shareholders of NEES overwhelmingly approved
the proposed merger. Approximately 94% of the voted shares (representing 75% of
all outstanding shares of NEES) were in favor of the merger. The consideration
for the merger should not be deemed unfair because of the view of a small
minority.
Although the NEES Board could not weigh the consequences of the merger for
every individual shareholder, the Board did consider the tax consequences of the
merger in making its recommendation to the shareholders. It is true that some
shareholders took advantage of the tax laws from 1984 to 1987 to defer taxes on
the reinvestment of quarterly dividends into additional shares. Again, the Board
had to consider the welfare of the shareholders as a whole and not just those
who wished to avoid all tax liability. For example, some shareholders may have
planned to make a gift of their shares upon their death.
In addition, Mr. Gilmore has a remedy under state law for his objections.
Mr. Gilmore has appraisal rights as explained in the proxy statement which
enable him to obtain an independent valuation of his NEES shares, should he so
choose. Mr. Gilmore has reserved his rights of appraisal in this merger.
In conclusion, although clothed with references to the Public Utility
Holding Company Act of 1935 ("the 1935 Act" or "Act"), Mr. Gilmore's concerns go
not to the question of regulatory compliance but, rather, to the underlying
business transaction. In this regard, Mr. Gilmore misapprehends the nature of
the Commission's jurisdiction. The 1935 Act does not, in the first instance,
dictate the particulars of a transaction. Instead, once the parties have
negotiated their deal, the 1935 Act provides the standards for determining that
the proposed transaction will not be detrimental to the public interest or the
interest of investors or consumers, the "protected interests" under the Act. In
particular, the Commission has previously found that investors are adequately
protected by the disclosure required under the other federal securities laws.
See "The Regulation of Public-Utility Holding Companies," Report of the Division
of Investment Management of the United States Securities and Exchange Commission
(June 1995) ("the disclosure requirements of the Securities Act [of 1933] and
the [Securities] Exchange Act [of 1934] and the regulation inherent in the
public securities markets have imposed substantial controls on financing
transactions that were not present when the Act was adopted.").
2. Mr. Gilmore next notes that certain NEES executives may have an interest
in the transaction they approved and that this is not in the best interest of
small shareholders. Again, as explained above, the Merger was approved by 94% of
those shares actually voting (representing 75% of all NEES shares outstanding)
after full disclosure in the proxy statement of the various aspects of the
transaction including those Mr. Gilmore finds objectionable. Approximately 20%
and 25% of NEES shares were held by individual investors holding less than 2,000
and 5,000 shares respectively as of December 31, 1998. Further, Mr. Gilmore
failed to link his concerns to the standards for approving the Merger under the
Act.
3. Mr. Gilmore requests that "the five member Commission exercise its
authority and obtain the information from the CFIUS [the Committee on Foreign
Investment in the United States] and make a recommendation to the CFIUS
according to the Commission's findings of the facts." Mr. Gilmore's concerns go
to the Exon-Florio review which enables the President to block or reverse any
acquisitions by foreign persons which threaten to impair the national security
of the United States. On April 29, 1999, the Applicants were informed that the
CFIUS concluded there were no issues of national security to warrant an
investigation and that action under Exon-Florio had concluded with respect to
the Merger. Further, the Commission has previously addressed the propriety of
foreign acquisitions of U.S. utilities and concluded that: "The Act contains no
prohibition against foreign utilities as such." Gaz Metropolitain, Inc., Holding
Co. Act Release No. 26171 (Nov. 23, 1994).
4. Mr. Gilmore notes that, upon consummation of the Merger, National Grid
will be the indirect owner of property "just 3 to 5 miles south of ... where the
Electric Boat Company, a Division of General Dynamics assembles parts for
nuclear submarines." If Mr. Gilmor's concerns relate to national security, that
issue was addressed above by the approval of the Committee on Foreign Investment
in the United States. The CFIUS has specialized knowledge in approving
transactions with foreign companies that need not be duplicated by the
Commission. Further, Rome Point will continue to be owned by The Narragansett
Electric Company after the Merger, and Narragansett's use of the property will
not change because of the Merger.
5. In his final point, Mr. Gilmore requests that, whether or not the
proposed Merger complies with the Act, the Commission consider the "Moral
Judgment in this proposed merger in favor of the small investor." Applicants do
not believe that compliance with the Act and consideration of small investors
are mutually exclusive. After careful consideration by the Board, in
consultation with experts, the Board found the proposed Merger to be in the best
interests of shareholders--this includes small shareholders. After disclosure of
all the relevant information concerning the proposed merger, NEES shareholders
overwhelmingly voiced their approval for the Merger.
<PAGE>
For the reasons set forth above, Mr. Gilmore's objections are without
merit. To the extent Mr. Gilmore has raised issues of law, those issues can be
addressed by the Commission on the basis of the record before it. The record
before the Commission is comprehensive. Mr. Gilmore has not requested a hearing,
merely an opportunity to be heard should there be a hearing for some other
reason. A hearing at the Commission would be duplicative of other regulatory
proceedings with state commissions and the CFIUS, and as such, would be wasteful
and not in the public interest.
To justify a hearing, a party must show both (i) a genuine issue regarding
a material fact and (ii) a useful purpose to be served by holding a hearing. The
burden is on the party requesting a hearing to make such a showing. Bare
assertions will not suffice, and a request for a hearing will not be granted if
no disputed material facts are set forth. See, e.g., Sempra Energy, 67 S.E.C.
Docket 994, 1012 (1998) (based upon the facts or issues of law in the record, no
hearing necessary in order for the Commission to conclude that the applicable
standards of the Act were satisfied); Centerior Energy Corp., 35 S.E.C. Docket
769, 777-78 (1986) (request for hearing denied for failure to set forth facts
making up a violation of the Act)./1
- --------
1/ See also Entergy Corp., 55 S.E.C. 2035, 2050 (1993) (denying
intervenors' request for a hearing to "develop the record" in light of the
existence of, and intervenors' participation in, "extensive hearings" held
by two state commissions and FERC); City of New Orleans v. S.E.C., 969 F.2d
1163, 1167 fn. 6 (D.C. Cir. 1992) (noting that the court has "recognized
that evidentiary hearings are required only when a genuine issue of
material fact exists"), citing Wisconsin's Environmental Decade, Inc. v.
S.E.C., 882 F.2d 523, 526 (D.C. Cir. 1989); Northeast Utilities., 48 S.E.C.
Docket 694, 698 (1991), aff'd sub nom. City of Holyoke Gas & Elec. Dep't.,
972 F.2d 358 (D.C. Cir. 1992); accord Cajun Elec. Power Coop. v. F.E.R.C.,
No. 92-1461, 1994 WL 326863 (D.C. Cir. July 12, 1994) (per curiam)
(ordering hearing but reiterating standard that hearing is required only
where there are genuine issues of material fact).
Speculative and conclusory allegations do not rise to the level of genuine
material issues and cannot provide a basis for a hearing. Entergy Corp., 55
S.E.C. Docket 2035, 2050 (1993) ("the intervenor cannot rely on bald or
conclusory allegations that [material facts are in dispute]"); Woolen Mills
Assocs. v. F.E.R.C., 917 F.2d 589, 592 (D.C. Cir. 1990) ("mere allegations of
<PAGE>
disputed fact are insufficient to mandate a hearing; a petitioner must make an
adequate proffer of evidence to support them"). An agency need not conduct a
hearing unless doing so would serve a useful purpose. Connecticut Bankers Ass'n.
v. Board of Governors of Fed. Reserve System, 627 F2d 245, 250-51 (D.C. Cir
1980) (in light of the fact that "[e]videntiary hearings consume time, energy,
and resources," such requests cannot be "indiscriminately grant[ed]"); City of
Lafayette v. S.E.C., 454 F.2d 941, 953 (D.C. Cir. 1971) (hearing not required in
matter where ultimate decision would not be "enhanced or assisted by the receipt
of evidence"), aff'd sub nom. Gulf States Utilities Co. v. F.P.C., 411 U.S. 747
(1973); Woolen Mill Assocs., 917 F.2d at 592 (finding allegations of disputed
facts insufficient in light of "no substantial evidence contradicting any
material finding by the Commission" when intervenor "had ample opportunity to
submit whatever evidence it desired throughout the. . . proceeding"). Even where
issues of fact exist, a hearing will not be granted unless the reviewing agency
in its discretion believes that it cannot adequately address the issues upon
written submissions. See, e.g., Cities of Carlisle & Neola v. F.E.R.C., 741 F.2d
429, 431 (D.C. Cir. 1984) (finding no need for more than a paper hearing due to
Commission's ability to consider fully the issues without recourse to more
formal procedures); Boston Carrier, Inc. v. I.C.C., 728 F.2d 1508, 1511 & fn. 5
(D.C. Cir. 1984) (finding the Commission did not "abuse . . . its discretion by
refusing to hold an oral hearing . . . since it reasonably could have found the
factual disputes to be resolvable using its modified procedure").
Accordingly, for all the reasons set forth above, the Applicants ask the
Commission to decline to follow Mr. Gilmore's suggestions and to issue orders
approving the proposed transactions, on or before December 31, 1999.
Respectfully submitted,
//signed//
Joanne C. Rutkowski
LeBoeuf, Lamb, Greene & MacRae L.L.P.
1875 Connecticut Ave., N.W.
Washington, D.C. 20009
(202) 986-8000
Attorney for The National Grid Group plc
Dated: December 2, 1999
