File No. 70-9473
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
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 House 25 Research Drive
Kirby Corner Road Westborough, Massachusetts 01582
Coventry CV4 8JY
United Kingdom
National Grid (US) Holdings
Limited
National Grid (US)
Investments
National Grid (Ireland) 1
Limited
National Grid (Ireland) 2
Limited
National Grid General
Partnership
NGG Holdings, Inc.
(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 New York, NY 10019
Telephone: 011-44-1203-537-777 Telephone: 212-424-8000
Facsimile: 011-4401203-423-678 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 Clifford M. Naeve
Kirk L. Ramsauer Judith A. Center
New England Electric System Skadden, Arps, Slate, Meagher
25 Research Drive & Flom L.L.P.
Westborough, Massachusetts 01582 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, NEES will have been merged
with and into NGG Holdings, LLC, with NEES as the surviving entity and then
merged again into another to-be-formed 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
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. 2 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, the issued and outstanding common stock of the subsidiaries of NEES that
are public utility
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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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companies within the meaning of the Act, namely New England Power 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 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.
To the extent that the Commission approves the acquisition of EUA by NEES
in accordance with a separate application relating thereto to be filed in the
near future, National Grid and the Intermediate Companies hereby request
authorization to acquire an indirect interest in EUA's utility subsidiaries and
certain of EUA's non-utility operations.
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 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.
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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.
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") and the Connecticut Department of Public
Utility Control (the "CDPUC"). 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, the parties to the
Merger are actively seeking support from those agencies in connection with the
1935 Act authorizations sought herein. A letter from the MDTE, affirming its
authority and resources to protect ratepayers served by Mass. Electric is
attached hereto as Exhibit D-3.2. In addition, Granite State and NEP have made
representations to the New Hampshire Public Utilities Commission ("NHPUC") that
the Merger will not adversely affect their rates, terms, service or operations.
Approval has also been requested from the Nuclear Regulatory Commission (the
"NRC"). 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 ("National Grid Company"), 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
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the London Stock Exchange (the "LSE") and National Grid has an unsponsored
American Depositary Receipt ("ADR") program pursuant to which a relatively small
amount of its shares trade in the United States as ADRs. National Grid is
preparing the necessary documentation which will enable it to become listed on a
public exchange in North America through a full ADR program sometime prior to
the closing of this transaction.
Except for certain Intermediate Companies currently held as direct
subsidiaries of National Grid, National Grid has one direct subsidiary, National
Grid Holdings plc. ("National Grid Holdings"). National Grid Holdings was formed
under the laws of England and Wales in 1999 to serve as a subholding company
over National Grid Company 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 parities
expect that National Grid Holdings will retain this status following the Merger.
A chart showing 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) National Grid Company -- 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, National Grid Company. As a result, National Grid Company
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 National Grid Company 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
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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. National Grid Company 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
National Grid Company 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 National Grid Company'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.
(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 48.3%) 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
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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, construction and operation of hydroelectric project, and
accounting 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 at the end of 1998, NEES had total assets of $5.07 billion, net utility
assets of $2.5 billion, total operating revenues of $2.42 billion, utility
operating revenues of $2.24 billion, and net income of $190 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 December 31, 1998, NEES and its
subsidiaries had approximately 3,540 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. At the end of 1998, Mass. Electric had total
assets of $1.45 billion, operating revenues of
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$1.49 billion and net income of $50.4 million. 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 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. At the end of 1998, Narragansett had total assets of $644.1 million,
operating revenues of $475 million and net income of $32.3 million. 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. At the end of 1998, Granite State had total assets of $61.8
million, operating revenues of $65.7 million, and net income of $3.2 million.
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
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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 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) 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.2 At the end of 1998, NEP had total assets of $2.41
billion, operating revenues of $1.2 billion and net income of $122.9 million.
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.
At the end of 1998, N.H. Hydro had total assets of $131 million, operating
revenues of $31.7 million, and net income of $4.8 million.
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2 NEP is also a holding company because it owns more than 10 percent 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, Maine Yankee Atomic Power Company
and Connecticut Yankee Atomic Power Company, 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. At the end of 1998, Mass. Hydro had
total assets of $160 million, operating revenues of $37 million, and net income
of $7.8 million.
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") is an exempt telecommunications
company that provides telecommunications and information-related goods and
services. NEESCom holds a license issued by and is subject to regulation by the
Federal Communications Commission. NEESCom plans to focus on the fiber optics,
cable and infrastructure sectors of the telecommunications industry. At the end
of 1998, NEESCom had total assets of $12.6 million and a net loss of $1.2
million.
(10) NEES Global, Inc. ("NEES Global") is a wholly-owned nonutility
subsidiary of NEES that provides consulting services and product licenses to
unaffiliated utilities in the areas of electric utility restructuring and
customer choice. NEES Global also leases water heaters through its subsidiary,
New England Water Heater Co. At the end of 1998, NEES Global had total assets of
$23.2 million and a net loss of $1.1 million for the year.
(11) NEES Energy, Inc. ("NEES Energy") is a wholly-owned marketing
subsidiary of NEES.
o AllEnergy Marketing Company, L.L.C. ("AllEnergy") is an indirect,
wholly-owned subsidiary of NEES. NEES Energy owns 99 percent of
the voting securities of AllEnergy; NEES Global owns the
remaining 1 percent. AllEnergy markets energy products and
provides a wide range of energy-related services including, but
not
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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.
(12) Granite State Energy, Inc. ("Granite State") is a wholly-owned
nonutility marketing subsidiary of NEES. Granite State 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 end of 1998, Granite State had total assets
of $304,000, operating revenues of $718,000 and a net loss of $22,000.
(13) New England Water Heating Company is engaged in the rental, service,
sale and installation of water heaters.
(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. At the end of 1998, Service Company had total assets of
$123.1 million and net income of $1.8 million.
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-4.
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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;
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
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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.
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 over 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
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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 on Exhibit J-2. It should be noted that under this structure there
will be no outside, third party interests, including no lenders, no minority
equity interest holders and no customers, in the Intermediate Companies.
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, plus a further $250
million available to National Grid 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 up to 40. 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 February 28, 1999, the
National Grid Group had on hand deposits of $1,538 million.
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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. The management of National
Grid shall otherwise remain unchanged by the Merger.
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 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
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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' 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 now has had nine years
experience in operating in a competitive environment. The industry restructuring
that is occurring in New England is a critical factor
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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.
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
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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 suppler 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.
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.
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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 of the Act Transactions to which section or rule is
or may be applicable:
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
13 Approval of the Service Agreement and services provided to
affiliates thereunder by New England Power Service Company
[if any National Grid affiliates are added to Service
Agreement]
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.
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
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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;
- 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
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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 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
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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. 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
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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.
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
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 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
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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 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 Company, 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
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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.
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
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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, UK Finance (as a debtholder only) or
another 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 preferred stock and interest on and principal of long-term debt). Dividends
paid by NEES may ultimately be used by National Grid or UK Finance, as the case
may be, to pay interest on and principal of the Bank Loans.3
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3 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 equity of NEES as a percentage of total capital
was below 30% on a consolidated basis. File No. 70-9519 (the "Financing
Application").
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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 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
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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. The applicants note further that the Commission has previously approved the
use of parent-level debt by a registered electric utility holding company in
connection with a cross-border transaction. In General Public Utilities
Corporation, Holding Co. Act Release No. 26559 (Aug. 23, 1996), the Commission
authorized GPU to issue and sell debentures with terms of one to up to 40 years
and to use the proceeds of such financings to, among other things, "fund the
acquisition of interests, and to make investments, in . . . foreign utility
companies," and "for other GPU corporate purposes."
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). In addition, as noted above, the
Commission has also authorized registered electric systems to issue parent-level
debt for general corporate purposes. General Public Utilities Corporation,
Holding Co. Act Release No. 26559 (Aug. 23, 1996).
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
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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).
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
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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.4
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. Accordingly, the
proposed 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
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4 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.
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(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, 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.
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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 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.
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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.
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.
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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.5
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
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5 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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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.6
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.
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
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6 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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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,"
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
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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
unnecessary 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. 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
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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 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.").
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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 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 NGG.
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
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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 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
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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 utilise 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 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.
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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 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 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
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Organisations. 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 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.
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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 preexisting investments in FUCOs 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 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.
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2. Section 13 -- Intrasystem Provision of Services
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 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
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services, sale and construction contracts between associate companies and with
the holding company parent unless otherwise permitted by the Commission by rule
or order.
The Service Company, which has been previously approved by the Commission,
will continue to provide the NEES companies, pursuant to the Standard Form of
Service Contract ("Standard Form"), with a variety of administrative, management
and support services, including services relating to electric power planning,
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. It is contemplated that the Standard Form will be amended
to provide for services to entities that will become associate companies of NEES
and its subsidiaries, by virtue of the proposed Merger. In accordance with the
Standard Form, Exhibit B-2, services provided by the Service Company will be
directly assigned, distributed or allocated by activity, project, program, work
order or other appropriate basis. To accomplish this, 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 "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.
As compensation for services, the Standard Form states that Services
provided by the Service Company will be rendered "at cost, fairly and equitably
allocated." Where more than one company is involved in or has received benefits
from a service
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performed, the Standard Form provides that costs will be allocated, between or
among such companies on an equitable basis by means of an allocation formula, in
accordance with the methods set forth in Schedule II to the Standard Form. Thus,
for financial reporting purposes, 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.
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 is preparing the
necessary documentation which will enable it to become listed on the New York
Stock Exchange through a full ADR program sometime prior to the closing of this
transaction. For that purpose, National Grid will provide financial statements
for the fiscal year ended March 31, 1999 that include a reconciliation of net
income and shareholders' equity in accordance with US Generally Accepted
Accounting Principles ("US GAAP").
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It should be further noted that the utility assets of National Grid Company
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.
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.
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 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.
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(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
Since 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 Group) 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 Group is a foreign entity within the meaning of the Atomic Energy Act. NEES
and National Grid Group believe they can satisfy NRC concerns about foreign
ownership and control. NEP's minority interests in the common stock of
corporations that 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 Group
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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 review procedure 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. NEES and National Grid Group have filed an
application with the NRC agreeing to such conditions on March 15, 1999. The
application was noticed on June 30, 1999 and comments must be submitted on or
before July 30, 1999. The NRC recently adopted a similar framework to that
proposed by NEES and National Grid Group in its Order Approving Transfer of
License for the Three Mile Island Nuclear Station, Unit 1, from GPU Nuclear,
Inc. et al., to Amergen Energy company LLC and Approving Conforming Amendment,
issued April 12, 1999. NEES and National Grid Group have been informed that the
NRC intends to review the transfer of all licenses in which NEP has an interest,
including through minority positions in common stock, within the context of the
application filed by the parties.
(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 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.
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(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 from that agency is expected to issue in
late summer.
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 any questions they may have and to request that a certification to the
SEC from the RIPUC that it has the authority and resources to protect
ratepayers.
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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.
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.
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Item 6. Exhibits and Financial Statements
1. 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-3 National Grid Group Credit Agreement.
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).
C-2 Circular of National Grid Group for the extraordinary
general meeting of shareholders to be held in connection
with the Merger.
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.
D-2.1 Application of New England Power Company before the NRC
(previously filed).
D-2.2 Order of the NRC (to be filed by amendment).
D-3.1 Submission to the MDTE (previously filed).
D-3.2 Response from the MDTE.
D-4.1 Omitted.
D-4.2 Omitted.
D-5.1 Submission to the NHPUC (previously filed).
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D-5.2 Order of the NHPUC.
D-6.1 Submission to the VPSB.
D-6.2 Order of the VPSB.
D-7.1 Submission to the CDPUC.
D-7.2 Order of the CDPUC.
E-1 Map of service territory of NEES (previously filed).
E-2 NGG Corporate Chart, as revised (filed in paper format on
Form SE).
E-3 NEES Corporate Chart (previously filed).
F-1.1 Opinion of Counsel - National Grid Group (to be filed by
amendment).
F-1.2 Opinion of Counsel - NEES (to be filed by amendment).
F-2 Past tense opinion of counsel (to be filed by amendment).
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 (to be
filed by amendment).
I-1 Proposed Form of Notice (previously filed).
J-1 Description of Nonutility Subsidiaries of National Grid, as
revised.
J-2 Merger Structure and Description of Intermediate Companies
(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) (previously filed).
2. Financial Statements
FS-1 National Grid Group Unaudited Pro Forma Condensed
Consolidated Balance Sheet (to be filed by amendment).
FS-2 National Grid Group Unaudited Pro Forma Condensed
Consolidated Statement of Income (to be filed by amendment).
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FS-3 Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements (to be filed by amendment).
FS-4 National Grid Group Consolidated Balance Sheet.
FS-5 National Grid Group Consolidated Profit and Loss Account,
Cash Flow Statement and Statement of Total Recognized Gains
and Losses.
FS-5.1 Notes to National Grid Group Consolidated Financial
Statements.
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. 1 to the
Application/Declaration on Form U-1 to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: July 9, 1999
/s/ Jonathan M. G. Carlton
Jonathan M. G. Carlton
Business Development Manager -- Regulation
/s/ Kirk Ramsauer
Kirk L. Ramsauer
Deputy General Counsel
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EXHIBIT INDEX
Exhibit
D-1.2 Order of the FERC.
D-3.2 Response from the MDTE.
D-6.2 Order of the VPSB.
D-7.2 Order of the CDPUC.
J-1 Description of Nonutility Subsidiaries of National Grid, as revised.
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Exhibit D-1.2
87 FERC 61,287
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
Linda Breathitt, and Curt H,bert, Jr.
New England Power Company; )
Massachusetts Electric Company; )
The Narragansett Electric )
Company; New England Electric )
Transmission Corporation; New )
England Hydro-Transmission ) Docket No. EC99-49-000
Corporation; New England Hydro- )
Transmission Electric Company, )
Inc.; ALLEnergy Marketing )
Company, L.L.C.; NGG Holdings )
LLC )
ORDER APPROVING MERGER
(Issued June 16, 1999)
On March 10, 1999, as supplemented March 22, March 31, April 7, April 14,
April 27, and May 27, 1999, New England Power Company (NEP), its affiliates
holding jurisdictional assets (collectively, the NEES Companies) 1/, and NGG
Holdings LLC (NGG) (collectively, Applicants) filed an application under section
203 of the Federal Power Act (FPA) 2/ for approval of the merger of NGG into New
England Electric System (NEES). 3/ NEES is the
1/ The NEES Companies are: Massachusetts Electric Company (Massachusetts
Electric); The Narragansett Electric Company (Narragansett); New
England Electric Transmission Corporation (New England Electric); New
England Hydro-Transmission Corporation (New England Hydro); New
England Hydro-Transmission Electric Company, Inc. (New England
Hydro-Electric); and ALLEnergy Marketing Company, L.L.C.
2/ 16 U.S.C. 824b (1994).
3/ Joint Application of New England Power Company, et al., for Approval
of Merger and Related Authorizations (Application) at 1.
Docket No. EC99-49-000
- 2 -
holding company for the NEES Companies. NGG is an indirect wholly-owned
subsidiary of the National Grid Group plc (National Grid). 4/ Through the
merger, NEES, which will be the surviving entity, and the NEES Companies will
become the indirect subsidiaries of National Grid. 5/
As discussed below, the Commission has reviewed the proposed merger under
the Commission's Merger Policy Statement. 6/ In this order, we will approve the
merger as proposed.
I. Background
A. Description of the Parties to the Merger 7/
1. NEES
NEES is a registered public utility holding company headquartered in
Westborough, Massachusetts whose affiliates own and operate electric
transmission and distribution assets and market electric energy and related
services in New England. The affiliates that deliver electric energy serve about
1.3 million customers in Massachusetts, Rhode Island, and New Hampshire. Other
NEES subsidiaries offer telecommunications and other services. NEES does not
directly own any facilities subject to the Commission s jurisdiction.
a. NEP
NEES's wholly-owned subsidiary NEP is a public utility organized and
operated under the laws of Massachusetts. NEP owns and operates about 2,400
miles of transmission facilities located
4/ Id. at 1-2.
5/ Id. at 2.
6/ Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act; Policy Statement, Order No. 562, 61 Fed. Reg. 68,595
(1996), FERC Statutes and Regulations, 31,044 (1996), reconsideration
denied, Order No. 592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC 61,321
(1997)(Merger Policy Statement).
7/ Applicants describe the parties to the merger in the Application at
7-14 and Attachment 1 at 2-6.
Docket No. EC99-49-000
- 3 -
in Massachusetts, New Hampshire, and Vermont. NEP has disposed of almost all of
its non-nuclear generating assets. 8/
b. NEP Affiliates - The NEES Distribution and Transmission
Companies
NEES wholly owns the following distribution companies: Massachusetts
Electric, Granite State Electric Company (Granite State), Nantucket Electric
Company (Nantucket), and Narragansett. 9/ Other NEES affiliates own and operate
transmission facilities interconnecting New England and Quebec. These affiliates
include New England Electric, New England Hydro, and New England Hydro-
Electric. 10/
c. AllEnergy Marketing Company, L.L.C.
NEES, through its subsidiary, NEES Energy, Inc., owns 100 percent of the
voting stock of AllEnergy Marketing Company, L.L.C., a power marketer that sells
electric energy, natural gas and heating oil to commercial, industrial and
residential consumers in the Northeast and markets propane, fuel oil and other
liquid fuels through its subsidiary, Texas Fluids. AllEnergy also sells fuel oil
through its PAL and Griffith operating divisions.
2. National Grid
National Grid originated in 1990 as part of the privatization of the
electric industry in England and Wales. National Grid and its subsidiaries own
and operate the transmission system in England and Wales and the
interconnections between this system and Scotland and France. Through its
subsidiary, National Grid Company, plc (NGC), National Grid matches the
generation of electric energy with demand on a real time basis. NGC also
facilitates the trading of power in the
8/ On September 1, 1998, as part of the electric industry restructuring
efforts of several New England states, NEP completed divestiture of
its fossil and hydroelectric generation assets and its power purchase
contracts to U.S. Generating Company. NEP still owns a 9.3 percent
share in an oil-fired generating unit, which it is attempting to sell.
See Application at 7 and n.10; Attachment 1 at 3-4.
9/ Neither Granite State nor Nantucket owns any jurisdictional
facilities. Application at 9, n.11.
10/ New England Electric is a wholly-owned subsidiary of NEES, which owns
majority interests in New England Hydro and New England
Hydro-Electric.
Docket No. EC99-49-000
- 4 -
electric energy market in England and Wales. In particular, NGC manages the
daily bidding system for generators desiring to sell power, calculates market
prices and payments due by individual traders, and manages the transfer of funds
to settle the trades of electric energy.
Through subsidiaries, National Grid also owns and operates transmission
assets outside of the United Kingdom. Specifically, National Grid indirectly
owns 41.25 percent of the Power Division of Zambia Consolidated Copper Mines,
and, as part of a joint venture with the Karnatka Electricity Board, National
Grid will build a transmission line in southern India. Neither National Grid nor
any of its subsidiaries owns or operates transmission assets in the United
States, Canada, or Mexico. National Grid has almost no assets in the United
States, 11/ and has no assets in the markets that the NEES Companies or their
affiliates serve, nor does National Grid engage in any activity in any United
States utility markets.
National Grid Overseas Limited (National Overseas) is a 41.25 percent
partner in Citelec, S.A., which owns a substantial share in, and is the
registered operator for, the Transener electric transmission network in
Argentina, representing 95 percent of the Argentine high voltage system.
National Overseas is also part of a consortium that will construct a new
communications network in Brazil, intended to cover the major population centers
of that country.
NGG is a wholly-owned indirect subsidiary of National Grid. National Grid
formed NGG for the purpose of merging into NEES and effecting the merger.
B. Description of Proposed Merger
The Merger Agreement establishes that NEES would merge with NGG, with NEES
continuing as the surviving corporation. Applicants would cancel NEES s
outstanding shares upon completion of the merger, and its shareholders would
receive a cash payment of $53.75 per share (subject to upward adjustment). The
total purchase price would be about $3.2 billion. Applicants would convert each
one percent interest in NGG into a share of the surviving company. As a result
of the merger, NEES would be a wholly-owned subsidiary of National Grid.
11/ In the United States, National Grid owns Teldata, Inc., which offers
automatic meter reading and related services.
Docket No. EC99-49-000
- 5 -
NEES would remain a registered public utility holding company under the
Public Utility Holding Company Act (PUHCA) 12/ and would be wholly-owned by
National Grid, which itself would register as a public utility holding company.
13/ National Grid s other utility subsidiaries operating in the United Kingdom
and elsewhere outside the United States will seek foreign utility company status
under PUHCA. The NEES corporate headquarters would remain in Massachusetts and
NEES and its operating subsidiaries would retain their separate corporate status
and names following the merger. 14/
II. Notice of Filing, Interventions, and Answers
Notices of Applicants merger filing and amendments were published in the
Federal Register, 64 Fed. Reg. 13,984 (1999), 64 Fed. Reg. 25,031 (1999), and 64
Fed. Reg. 30,324 (1999), with comments, interventions, and protests due on or
before June 10, 1999.
The New Hampshire Public Utilities Commission (New Hampshire Commission)
filed a timely notice of intervention, raising no substantive issues.
The Office of Energy and Community Services of the State of New Hampshire
(New Hampshire Energy and Community Services), Northeast Utilities Services
Company (Northeast Utilities), U.S. Generating Company (U.S. Generating), the
Attorney General of the State of Rhode Island and the Rhode Island Division of
Public Utilities and Carriers (Rhode Island), and the Massachusetts Department
of Telecommunications and Energy filed timely motions to intervene, raising no
substantive issues.
12/ 15 U.S.C. 79 et seq. (1994).
13/ Application at 17. Between National Grid and NEES there will be one or
more intermediate entities, wholly-owned, directly or indirectly, by
National Grid. Applicants explain that United Kingdom companies with
foreign subsidiaries usually use this type of structure "to avoid
losing United Kingdom tax relief for foreign taxes paid on profits
repatriated to the United Kingdom, and to minimize taxes on the
repatriation of foreign subsidiary profits." Application at 18.
Applicants maintain that "[t]he structure will have no impact on the
control of NEES[,] nor will the structure affect the financial
integrity of NEES or its relationship with National Grid." Id.
14/ Application at 18.
Docket No. EC99-49-000
- 6 -
III. Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission s Rules of Practice and Procedure,
15/ the timely, unopposed notice of intervention and motions to intervene serve
to make the New Hampshire Commission, New Hampshire Energy and Community
Services, Northeast Utilities, U.S. Generating, Rhode Island and the
Massachusetts Department of Telecommunications and Energy parties to this
proceeding.
B. Standard of Review
Section 203(a) of the Federal Power Act (FPA) 16/ provides, in relevant
part, as follows:
No public utility shall sell, lease, or otherwise dispose of the whole
of its facilities subject to the jurisdiction of the Commission, or
any part thereof of a value in excess of $50,000, or by any means
whatsoever, directly or indirectly, merge or consolidate such
facilities or any part thereof with those of any other person, or
purchase, acquire, or take any security of any other public utility,
without first having secured an order of the Commission authorizing it
to do so.
Under section 203(a), the Commission must approve a proposed merger if it finds
that the merger "will be consistent with the public interest." 17/
In 1996, the Commission issued its Merger Policy Statement updating and
clarifying its procedures, criteria and policies applicable to public utility
mergers. 18/ The Merger Policy Statement provides that the Commission will
generally take account of three factors in analyzing proposed mergers: (a) the
effect on competition; (b) the effect on rates; and (c) the effect on
regulation.
For the reasons discussed below, we find that Applicants proposed merger is
consistent with the public interest.
15/ 18 C.F.R. 385.214 (1998).
16/ 16 U.S.C. 824b (1994).
17/ 16 U.S.C. 824b (1994).
18/ See supra note 6.
Docket No. EC99-49-000
- 7 -
Accordingly, we will approve the merger without further investigation.
C. Effect on Competition
1. Applicants Analysis
Applicants point out that neither National Grid nor any of its subsidiaries
provides transmission or distribution services in any geographic area that
overlaps with the areas that the NEES Companies serve. NEES affiliates provide
transmission and distribution services solely in the northeastern United States.
National Grid and its subsidiaries do not provide transmission or distribution
services in North America. NEES transmission or distribution customers cannot
turn to National Grid or its subsidiaries as alternate providers of service.
Applicants further note that the NEES companies do not provide electric
generation services in any geographic area that overlaps the areas that National
Grid or its subsidiaries serve. Applicants state that NEP has sold nearly all of
its generation assets and is attempting to sell the remainder. Applicants
observe that NEP s few remaining generation interests are located in New
England; they note that neither National Grid nor any of its subsidiaries owns
or controls any generation facilities located in New England.
Applicants state that because National Grid, its subsidiaries and the NEES
Companies do not provide any products or services in any overlapping relevant
markets, the proposed merger is not a horizontal merger and will not result in
the elimination of a competitor in any market. They submit that the acquisition
of NEES by National Grid will not result in competitive harm through the
creation or enhancement of market power. 19/
Applicants also conclude that the proposed merger does not raise any
vertical competitive concerns because: (1) they do not supply inputs used in the
generation or delivery of electric products or services in common geographic
regions and (2) since NEES continues to provide service under open access
tariffs, the merger will not affect the ability of the merged company to
restrict access to NEES' transmission or distribution assets. 20/
19/ Application, Attachment 1 at 7-8.
20/ Declaration of Henry J. Kahwaty, at 10.
Docket No. EC99-49-000
- 8 -
2. Commission Determination
In the Merger Policy Statement, the Commission adopted the Department of
Justice/Federal Trade Commission Merger Guidelines (Guidelines) as our basic
framework for analyzing the effect on competition of a proposed horizontal
merger. 21/ The Merger Policy Statement adopted a five-part analytic screen and
set forth the conditions under which the Commission would set the issue of
competition for hearing. 22/ The Commission also stated in the Merger Policy
Statement that:
it would not be necessary for merger applicants to perform the screen
analysis or file the data needed for the screen analysis in cases
where the merging firms do not have facilities or sell relevant
products in common geographic markets. In these cases, the proposed
merger will not have an adverse competitive impact (i.e., there can be
no increase in the applicants' market power unless they are selling
relevant products in the same geographic markets) so there is no need
for a detailed data analysis. 23/
The Commission finds that the proposed merger does not raise competitive
concerns, and notes that no intervenor argues to the contrary. We agree with
Applicants that a screen analysis is unnecessary because the merging firms
clearly do not have facilities or sell relevant products in common geographic
markets. As a result, the proposed merger does not eliminate a competitor and
therefore raises no potential horizontal competitive concerns. We also find that
because Applicants do not supply inputs used to produce electricity products and
do not sell electricity products in common geographic markets, the merger raises
no vertical competitive concerns.
D. Effect on Rates
The Merger Policy Statement explains our concern that there be adequate
ratepayer protection from adverse rate effects as a result of a merger. It
describes various commitments that may be acceptable means of protecting
ratepayers, such as hold harmless
21/ Merger Policy Statement at 30,117-18.
22/ Id., at 30,119. Appendix A of the Policy Statement provides a detailed
illustrative description of the analytic screen.
23/ Id., at 30,136.
Docket No. EC99-49-000
- 9 -
provisions, open seasons for wholesale customers, rate freezes, and rate
reductions. 24/
According to the application, the proposed merger will have no adverse
effect on rates. With respect to wholesale generation rates, no adverse effects
will occur because NEP has divested virtually all of its generation assets (and
plans to sell the remainder). NEP currently makes only limited wholesale sales,
and the arrangements governing those sales are unaffected by the merger. 25/
With respect to transmission rates, the NEES companies will continue to provide
transmission service under currently effective open access transmission tariffs.
Applicants note that there will be an acquisition premium and transaction costs
associated with their proposed merger that Applicants may push down to the
operating companies. 26/ However, Applicants commit not to attempt to recover
these merger-related costs through rates without first receiving specific
regulatory approval to do so. 27/ Applicants assert that their ratepayers will
be held harmless and thus, that the Commission's ratepayer protection goals are
met.
Intervenors raise no rate or ratepayer protection issues.
Upon consideration of the above, we conclude that the proposed merger will
not adversely affect rates.
E. Effect on Regulation
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange Commission
(SEC). We are also concerned with the effect on state
24/ Merger Policy Statement at 30,123-24.
25/ According to the application, NEP retains its existing wholesale
requirements tariff and associated service agreements with its former
large wholesale customers, but only to provide a mechanism to allow
recovery of certain costs that it is permitted to recover from those
customers consistent with various restructuring settlements.
Application at 23.
26/ Application at 24.
27/ Application at 25.
Docket No. EC99-49-000
- 10 -
regulation where a state does not have authority to act on a merger. 28/
With respect to federal regulation, Applicants note that NEES is currently
a registered holding company under PUHCA. Applicants state that, as a result of
the proposed merger, National Grid will also become a registered holding company
under PUHCA. 29/ Since a new registered holding company layer will be created
above NEES, Applicants commit to follow the Commission's policy regarding
intra-corporate transactions between the NEES companies and National Grid and
its affiliates. 30/ National Grid also agrees to make available, upon request by
the Commission, all of its publicly available financial information and related
books and records as well as all information necessary to support the pricing
for the sales of goods and services between the National Grid companies and the
NEES companies. 31/
Applicants state that the proposed merger will have no adverse effect on
state regulation. Applicants maintain that each of the NEES operating companies
subject to state regulation before the merger will continue to be subject to
that regulation after the merger. Furthermore, Applicants note that filings will
be made with all states that either require them or request them. There is no
indication that any state lacks authority to regulate this merger and no state
has raised any concern about the effect on regulation. 32/
Intervenors, including the public utility commissions of the States of New
Hampshire and Rhode Island, raise no issues concerning the merger's effect on
regulation. 33/
When a public utility is acquired by another company, whether a domestic
company or a foreign company, the Commission's ability to adequately protect
public utility ratepayers against
28/ Merger Policy Statement at 30,124-25.
29/ Application at 26.
30/ Application at 26.
31/ Application at 27, n. 38.
32/ See Merger Policy Statement at 32,125. See also Application at 27.
33/ Furthermore, we note that the New Hampshire Commission found that it
has jurisdiction over aspects of the proposed merger and has set the
proposed merger for hearing; NHPUC Order No. 23,202, issued April 21,
1999.
Docket No. EC99-49-000
- 11 -
inappropriate cross-subsidization may be impaired absent access to the parent
companies' books and records. Section 301(c) of the FPA gives the Commission
authority to examine the books and records of any person who controls, directly
or indirectly, a jurisdictional public utility insofar as the books and records
relate to transactions with or the business of such public utility. 34/ In this
case National Grid has made a commitment to make available to the Commission
financial information and books and records necessary to support intracorporate
transactions between National Grid companies and NEES companies. We construe
this commitment as agreeing to provide the Commission access to all books and
records within the lawful scope of section 301(c) of the FPA and our approval of
the proposed acquisition is based on this understanding. 35/
In light of the discussion above, we find that the proposed merger will not
have any adverse effect on regulation.
F. Accounting Issues
Applicants state that they will record the merger using the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16. The
Commission, in previous applications, has approved the use of the purchase
method of accounting. 36/ We have no basis to dispute Applicants' use of the
purchase method of accounting and therefore approve its use.
34/ Section 301(c) of the FPA, 16 U.S.C. 825(c) (1994), provides that:
The books, accounts, memoranda, and records of any person who
controls, directly or indirectly, a licensee or public utility
subject to the jurisdiction of the Commission, and of any other
company controlled by such person, insofar as they relate to
transactions with or the business of such licensee or public
utility, shall be subject to examination on the order of the
Commission.
35/ As we noted earlier, NEES will remain, and National Grid will become,
registered public utility holding companies, subject to the applicable
laws and policies of the United States.
36/ Entergy Services, Inc. and Gulf States Utilities Company, Opinion No.
385, 65 FERC 61,332 (1993), order on reh'g, Opinion No. 385-A, 67 FERC
61,192 (1994), order on compliance filing, 85 FERC 61,356 (1998).
Docket No. EC99-49-000
- 12 -
Applicants propose to recognize "goodwill" consisting of an acquisition
premium of approximately $1.6 billion plus related transaction costs. They
propose to record the goodwill on the books of the non-jurisdictional holding
company and have not decided whether to push down goodwill to the jurisdictional
subsidiaries. Because Applicants have not made this decision, the potential
effects of such a decision on the accounting records of the FERC-jurisdictional
public utilities is unclear. However, Applicants commit to submit their proposed
accounting entries to the Commission for approval within six months after the
merger is consummated. According to Applicants, this submission will provide all
accounting entries necessary to reflect the merger, along with appropriate
narrative explanations describing the bases for the entries. 37/
We will direct Applicants to inform the Commission of any change in the
circumstances that would reflect a departure from the facts that we have relied
on in approving the merger accounting. We will also direct Applicants to submit
their proposed accounting for the merger within six months of the date of
consummation of the merger.
The Commission orders:
(A) Applicants' proposed merger is hereby approved subject to the
commitments and conditions discussed in the body of this order.
(B) The purchase method of accounting for the proposed transaction is
hereby approved. Applicants must promptly inform the Commission of any change in
the circumstances that would reflect a departure from the facts the Commission
has relied upon in approving the merger accounting.
(C) Applicants shall submit their proposed accounting for the merger
consistent with the body of this order within six months of the date of
consummation of the merger.
(D) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, services,
accounts, valuation, estimates or determinations of cost, or any other matter
whatsoever now pending or which may come before the Commission.
(E) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost or any valuation of property claimed or
asserted.
37/ Application at 29.
Docket No. EC99-49-000
- 13 -
(F) The Commission retains authority under section 203(b) of the FPA to
issue supplemental orders as appropriate.
(G) Applicants shall advise the Commission within 10 days of the date on
which the merger is consummated.
By the Commission.
( S E A L )
Linwood A. Watson, Jr.,
Acting Secretary.
Exhibit D-3.2
[SEAL]
COMMONWEALTH OF MASSACHUSETTS
OFFICE OF CONSUMER AFFAIRS AND BUSINESS REGULATION
DEPARTMENT OF
TELECOMMUNICATIONS & ENERGY
100 CAMBRIDGE STREET, 12TH FLOOR
BOSTON, MA 02202
A. PAUL CELLUCCI JANET GAIL BESSER
GOVERNOR CHAIR
JANE SWIFT JAMES CONNELLY
LIEUTENANT GOVERNOR COMMISSIONER
W. ROBERT KEATING
COMMISSIONER
DANIEL A. GRABAUSKAS EUGENE J. SULLIVAN, JR.
DIRECTOR OF CONSUMER AFFAIRS COMMISSIONER
AND BUSINESS REGULATION PAUL B. VASINGTON
COMMISSIONER
June 24, 1999
Ms. Catherine A. Fisher
Assistant Director
Securities and Exchange Commission
455 Fifth Street
Washington, D.C. 20549
Re: SEC File No. 70-9473, State Commission Certification Relating to the
Proposed Merger of National Grid Group, plc and New England Electric
System
Dear Ms. Fisher:
On March 26, 1999, the National Grid Group, plc ("National Grid") and New
England Electric System ("NEES") filed an application-Declaration under the
Public Utility Holding Company Act of 1935 ("1935 Act"), seeking approvals
relating to the proposed acquisition of NEES by National Grid. NEES is the
parent holding company of, among other subsidiaries, Massachusetts Electric
Company and Nantucket Electric Company (together "MECo"). MECo is a retail
electric distribution company and public utility subject to the Department of
Telecommunications and Energy's ("Department") regulatory authority for
ratemaking purposes pursuant to M.G.L. c. 164. The Department understands that,
as a result of the acquisition of NEES by National Grid, the NEES subsidiaries,
including MECo, will become indirect wholly-owned subsidiaries of National Grid.
Representatives of NEES and MECo have informed the Department that the
Securities and Exchange Commission ("Commission") has requested a certification
from regulatory agencies having regulatory jurisdiction over the
<PAGE>
SEC File No. 79-9473
June 24, 1999
retail distribution operating companies of NEES.1 Specifically, the Commission
seeks a certification that if the merger of National Grid and NEES goes forward,
the state agencies will continue to have adequate authority and resources to
protect the ratepayers subject to their jurisdiction and that the state agencies
intend to exercise that authority.
As noted above, MECo is a retail electric distribution company and public
utility subject to the Department's regulatory authority. By this letter, the
Department certifies that, pursuant to M.G.L. c. 164, it has adequate authority
and resources to protect ratepayers served by MECo, including in particular,
matters such as rates, financings, affiliate transactions, and financial
integrity.2 The Department intends to continue to exercise that authority after
the merger of National Grid and NEES.
Please do not hesitate to contact the Department should the Commission
require any further information regarding this matter.
Sincerely,
Massachusetts Department of
Telecommunications and Energy
/s/
Janet Gail Besser, Chair
/s/
James Connelly, Commissioner
/s/
W. Robert Keating, Commissioner
/s/
Paul B. Vasington, Commissioner
- --------
1 See, Section 33(a)(2) of the 1935 Act.
2 In making this certification, the Department neither prejudges, nor takes
any position on issues regarding foreign ownership of an electric company
subject to the Department's jurisdiction, where such issues may be presented in
any pending or future proceeding under M.G.L. c. 164, ss. 96.
<PAGE>
SEC File No. 79-9473
June 24, 1999
/s/
Eugene J. Sullivan, Jr.
Commissioner
cc: Thomas G. Robinson, Esq., Massachusetts Electric Company
George B. Dean, Assistant Attorney General; Commonwealth of
Massachusetts
Exhibit D-6.2
STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 6225
Joint Petition of The National Grid Group plc )
and New England Power Company for )
approval of the indirect acquisition of a )
controlling interest in New England Power )
Company )
Order entered: 6/15/99
PRESENT: Kurt Janson, Esq.
Hearing Officer
APPEARANCES: James Volz, Esq.
for Vermont Department of Public Service
Nancy S. Malmquist, Esq.
Downs Rachlin & Martin PLLC
for New England Power Company
Thomas G. Robinson, Esq.
Carlos A. Gavilondo, Esq.
for New England Power Company
Meabh Purcell, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
for The National Grid Group plc
I. INTRODUCTION
This Docket concerns a joint petition filed by The National Grip Group plc
("National Grid") and New England Power Company ("NEP") (collectively,
the"Petitioners"), seeking Vermont Public Service Board ("Board") approval,
under 30 V.S.A. ss. 107, of the indirect acquisition by National Grid of a
controlling interest
<PAGE>
Docket No. 6225 Page 2
in NEP. In this Proposal for Decision, I recommend that the Board approve the
proposed transaction.
The Petitioners filed the Joint Petition ("Petition") on March 30, 1999,
with prefiled testimony and supporting exhibits attached. A duly noticed
prehearing conference was held on May 14, 1999. At the prehearing conference, as
reflected in the Prehearing Conference Memorandum of May 14, 1999, I requested
that additional information be provided regarding whether the proposed merger
would affect the service NEP provides to two end-use customers in Vermont (the
Island Corporation ("Island") and Simpson Paper Company ("Simpson")). This
information was included in the draft Proposal for Decision filed May 21, 1999.
On May 21, 1999, NEP, National Grid and the Vermont Department of Public
Service ("Department") filed a Stipulation ("Stipulation") and draft Proposal
for Decision ("Joint Proposal for Decision") recommending that this matter be
approved without a hearing.
In the Stipulation, the parties agreed that the record on which the Board
may base its determination in this proceeding shall consist of all testimony,
exhibits and data filed by NEP and National Grid in support of their petition,
including the testimony prefiled by NEP and National Grid on March 29, 1999, the
Joint Proposal for Decision, the Stipulation and other filings or documents
submitted by the Department or the Petitioners in this proceeding. Based upon
the absence of a
<PAGE>
Docket No. 6225 Page 3
request for hearing from any party, the lack of objection of any party to the
Stipulation and Joint Proposal for Decision, and my review of those filings and
the record as a whole, I have determined that an evidentiary hearing is not
necessary.
II. FINDINGS OF FACT
Based on the evidence of record, I hereby report the following findings to
the Board in accordance with 30 V.S.A. ss. 8.
1. NEP is a Massachusetts corporation that owns and operates properties in
Massachusetts, New Hampshire, Connecticut, Maine and Vermont, including
transmission lines, and is a transmission subsidiary of New England Electric
System ("NEES"). NEP owns properties in several Vermont communities used
primarily for the transmission of electricity and has a twenty percent share of
the common stock of Vermont Yankee Nuclear Power Corporation. NEES is a
registered public utility holding company. NEP is qualified to transact business
in Vermont as a foreign corporation. Pet. at 1; Jesanis pf. at 3.
2. NEP does not engage in local distribution of electricity in Vermont,
although NEP does provide service directly to two end-use customers in Vermont,
Island and Simpson. Pet. at 1; Joint Proposal for Decision at 3.
3. National Grid is a holding company registered in England and Wales and
is the world's largest privately-owned, independent transmission company.
National Grid's principal
<PAGE>
Docket No. 6225 Page 4
subsidiary is The National Grid Company plc, a corporation that owns and
operates the transmission system and control area in England and Wales. National
Grid also has indirect interests in transmission systems in Argentina and
Zambia. Pet. at 1-2; Urwin pf. at 4-5, 12-14.
4. In December, 1998,1 National Grid and NEES entered into an Agreement and
Plan of Merger, which provides for a business combination transaction. Pursuant
to the Agreement, NEES will merge with NGG Holdings LLC, a Massachusetts limited
liability company that is wholly owned by National Grid, with NEES being the
surviving entity, wholly owned by National Grid (the "Merger"). Pet at 2;
Jesanis pf. at 6; exh. MEJ-1.
5. Following the Merger, NEP will remain a separate corporation wholly
owned by NEES and will continue to own and conduct a public service business
subject to the jurisdiction of the Board. NEP will also retain its ownership
interest in Vermont Yankee. Pet. at 2; Jesanis pf. at 6-7.
6. The Merger must also be approved by several other regulatory bodies,
including the Securities and Exchange Commission (the "SEC") under the Public
Utility Holding Company
- --------
1 There appears to be a minor inconsistency in the record concerning the
exact date of the merger agreement, but the inconsistency is of no consequence
to the Board's review and approval of the proposed merger. The Joint Petition
and Joint Proposal for Decision each state that National Grid and NEES entered
the Agreement and Plan of Merger on December 14, 1998. The merger agreement
itself (exh. MEJ-1) is dated as of December 11, 1998. The prefiled testimony of
Michael Jesanis (at page 2) states that the merger was announced on December 14,
1998.
<PAGE>
Docket No. 6225 Page 5
Act of 1935 (the "Holding Company Act"), the Federal Energy Regulatory
Commission (the "FERC") under Section 203 of the Federal Power Act, and the
Nuclear Regulatory Commission under the Atomic Energy Act. The Merger also
requires a filing with the U.S. Department of Justice and the Federal Trade
Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. NEES
and National Grid have been granted early termination of the Hart-Scott-Rodino
waiting period on the proposed Merger, effective April 9, 1999. Pet. at 2;
Jesanis pf. at 16-17; Joint Proposal for Decision at 3.
7. Under FERC's merger policy, the transaction will not be approved unless
it is shown that it does not adversely affect competition, rates, or the
effectiveness of federal or state regulation. Approval of the Merger by FERC
will be predicated upon FERC finding that the rates, terms, operations and
service of NEP will not be adversely affected. Flynn pf. at 8.
8. The Merger affects only the ownership of NEES shares of stock and will
have no effect on the ownership or outstanding financial obligations of the
operating utility subsidiaries of NEES, including NEP. Jesanis pf. at 3; Urwin
pf. at 14.
9. After closing, National Grid has agreed that NEES Headquarters will
remain in Massachusetts, that NEES will maintain offices in Massachusetts, Rhode
Island and New Hampshire consistent with current operations, and that collective
<PAGE>
Docket No. 6225 Page 6
bargaining agreements will be honored. Jesanis pf. at 6; Urwin pf. at 17.
10. National Grid will also expand its Board of Directors to include
Richard Sergel, the CEO of NEES, and a non-employee member of the NEES Board.
National Grid will also establish an Advisory Board composed of the remaining
members of the NEES Board of Directors to allow NEES to continue to have access
to the advice and counsel of the NEES Directors for at least two years. Jesanis
pf. at 6-7; Urwin pf. at 17.
11. NEP currently serves two end-use customers in Vermont: Island and
Simpson. The arrangements with Island arise out of an old lease entered into in
1914 between the predecessor of NEP and the predecessor of Island (as well as
other documents dating back to the late 1800's and early 1900's). Under the
lease and documents, Island has the right to up to 300 kW per hour of
electricity in exchange for certain "mill powers." Joint Proposal for Decision
at 4.
12. In 1998, at the time of the transfer by NEP of its hydroelectric
facilities located all or partly in Vermont to USGen New England, Inc. ("USGen
NE"), NEP, Island and USGen NE entered into an amended and restated lease
indenture, and NEP and USGEN NE agreed to continue to provide Island with 300 kW
per hour of electricity at no additional charge. Under the arrangements, USGen
NE sells electricity at wholesale to NEP, sufficient to meet Islands 300 kW
entitlement, for resale by NEP
<PAGE>
Docket No. 6225 Page 7
to Island. USGen NE assumed other applicable obligations contained in the
agreements between Island's and NEP's predecessors, as amended. In addition, at
the time of the transfer of its hydroelectric facilities, NEP confirmed to
Island that it is willing, subject to the requirements of Vermont law, approval
of the Board, and applicable tariff provisions then in effect, to supply service
to Island above 300 kW under special contract if requested by Island in the
future. The arrangements with and commitments to Island remain in effect, and
are not affected by the Merger. Joint Proposal for Decision at 4-5; see Docket
No. 6039, Order of 6/29/98, at 11.
13. Simpson is currently served by NEP pursuant to Special Contract No. 361
which contains a specified rate for electricity. This special contract is
subject to the jurisdiction of the Board. The original contract was dated
November 11, 1930, and has been subsequently amended. On February 5, 1999, the
Board approved an extension of that contract until December 31, 1999. The
arrangements with Simpson and Special Contract No. 361 remain in effect, and are
not affected by the Merger. Joint Proposal for Decision at 5; February 5, 1999,
Board approval of Special Contract No. 361.
14. The NEES Board of Directors received an opinion from Merrill Lynch &
Co., an investment banking firm with expertise in utility mergers, that the
consideration for the merger is fair to
<PAGE>
Docket No. 6225 Page 8
shareholders and in line with comparable utility mergers. Jesanis pf. at 8; exh.
MEJ-4.
15. As a result of the Merger, National Grid may be able to bring
experience to New England that could assist NEPOOL and ISO - New England in
providing the infrastructure, dispatch, and power exchange necessary for an
efficient power supply market. Jesanis pf. at 9; Flynn pf. at 4-7. Also, there
will be possibilities for savings and efficiencies gains associated with the
Merger itself, including implementation of best practices, elimination of
duplication, and increased expertise and financial and other resources. Jesanis
pf. at 10; Urwin pf. at 16-17.
16. The Merger with National Grid will enhance the NEES companies' access
to financial and technical resources which should allow them to maintain and
improve their service and operations. Jesanis pf. at 13.
17. FERC's current ratemaking policy does not allow recovery in
transmission rates of an acquisition premium or transaction costs associated
with mergers. Thus, NEP's transmission rates on file with FERC will not reflect
an acquisition premium or transaction costs from the Merger absent a change in
policy by FERC. Jesanis pf. at 11; exh. PGF-1. In addition, NEP and National
Grid have agreed that acquisition premium or transaction costs from the Merger
will not be included in NEP's transmission rates on file with FERC without the
<PAGE>
Docket No. 6225 Page 9
specific approval of FERC, and would only be included to the extent of
offsetting savings. Exh. PGF-1 at 24-25.
18. To the extent that efficiency gains result in reduced transmission
costs, such reduction would be reflected in NEP's formula rate for transmission
service on file with FERC. Accordingly, the transaction should produce
beneficial effects for NEP's transmission customers, including NEP's customers
in Vermont, taking service under NEP's open access transmission tariff. Jesanis
pf. at 12.
19. National Grid has no business operations in New England, and the Merger
will have no adverse effect on competition. Jesanis pf. at 13; exh. PGF-1.
20. The Merger will result in the registration of the holding company that
will own NEES and National Grid's other assets under the Holding company Act.
The financial activities affecting NEES and its operating subsidiaries will be
subject to the SEC's jurisdiction. Jesanis pf. at 14; Urwin pf. at 14.
21. Neither the Board's jurisdiction over NEP, nor FERC's jurisdiction over
the NEP transmission rates and service, will be affected by the Merger. Also,
the SEC under the Holding Company Act will maintain its full jurisdiction over
the NEES companies, including affiliate transactions and cost allocations.
Jesanis pf. at 17.
22. The Merger has the potential to bring to NEPOOL valuable experience
from National Grid relating to the
<PAGE>
Docket No. 6225 Page 10
functioning power markets and the operating of a transmission system within the
context of functioning markets. Flynn pf. at 4.
23. The Merger with National Grid will provide NEES with a strong
operational cash flow and enhanced ability to attract capital, allowing it the
possibility of funding its capital expenditures, including transmission grid
enhancements, at reduced cost. Urwin pf. at 16.
24. The Merger requires approval of the United Kingdom Secretary of State
for Trade and Industry. On January 19, 1999, National Grid received the
Secretary's approval to proceed with the Merger without further review. Urwin
pf. at 17.
25. The Stipulation, in summary, states that the Department, NEP and
National Grid agree that the indirect acquisition by National Grid of a
controlling interest in a company that directly has a controlling interest in a
company (NEP) subject to the jurisdiction of the Board will promote the public
good of the State of Vermont, and will not result in obstructing or preventing
competition. Joint Stipulation at 2.
III. DISCUSSION AND CONCLUSIONS
Under V.S.A. ss. 107(a), "[n]o company shall directly or indirectly acquire
a controlling interest in any company subject to the jurisdiction of the [Board]
. . . without the approval of the [Board]." "Controlling interest" is defined as
"ten percent or more of the outstanding voting securities of a company" or
<PAGE>
Docket No. 6225 Page 11
such other interest as the Board determines "to constitute the means to direct
or cause the direction of the management or policies of a company." 30 V.S.A.
ss. 107(e)(1). In order to approve the acquisition of such a controlling
interest, the Board must first find that it will "promote the public good." 30
V.S.A. ss. 107(b).
Under 30 V.S.A. ss. 311, the Board can approve a merger of a company
subject to its jurisdiction only if the Board finds that the "merger will not
result in obstructing or preventing competition." The Board has previously held
that this statutory provision applies to a merger involving a parent corporation
of a company under the Board's jurisdiction. Docket No. 5900, Order of 2/26/97,
at 20.
I have reviewed the Stipulation and the evidence in support of it. The
stipulating parties have agreed that the proposed indirect acquisition by
National Grid of a controlling interest in a company (NEES) that directly has a
controlling interest in NEP will promote the public good of the State of
Vermont, and will not result in obstructing or preventing competition. Based on
my review of the evidence, I reached the same conclusions. Therefore, I
recommend that the Board accept the Stipulation.
Consequently, I find that the indirect acquisition by National Grid of a
controlling interest in NEP will promote the public good of the State of
Vermont, and will not result in obstructing or preventing the competition in the
provision of the
<PAGE>
Docket No. 6225 Page 12
services they are currently offering. 30 V.S.A. ss.ss. 107(b) and 311. I thus
recommend that the Board approve the transfer of control of NEP to National
Grid.
The foregoing is hereby reported to the Public Service Board in accordance
with the provisions of 30 V.S.A. ss. 8.
All parties to this proceeding have waived their rights to comment on this
Proposal for Decision in accordance with 3 V.S.A. ss. 811.
Dated at Montpelier, Vermont, this 14th day of June, 1999.
/s/
Kurt Janson, Esq.
Hearing Officer
<PAGE>
Docket No. 6225 Page 13
IV. BOARD DISCUSSION
We concur in the Hearing Officer's findings and conclusions. However, one
issue merits an additional comment. Although NEP has only a minor retail
presence in Vermont, in order to avoid any potential misunderstanding in the
future, we reiterate our long-standing policy that above-book acquisition costs
are not to be included in rates that are subject to our jurisdiction.2
V. ORDER
IT IS HEREBY ORDERED, ADJUDGED AND DECREED by the Public Service Board of
the State of Vermont that:
1. The findings and conclusions of the Hearing Officer are adopted.
2. The Stipulation among the Vermont Department of Public Service, New
England Power Company and The National Grid Group plc is approved.
3. The Joint Petition of New England Power Company and The National Grid
Group plc for the acquisition of control of New England Power Company by The
National Grid Group plc is approved, pursuant to 30 V.S.A. ss.ss. 107 and 311.
4. The Petitioners shall file a letter notifying the Board of the date of
the completion of the merger within ten days following said merger.
Dated at Montpelier, Vermont, this 15th day of June, 1999.
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2 [FOOTNOTE TEXT OMITTED IN ORIGINAL DOCUMENT]
<PAGE>
Docket No. 6225 Page 14
/s/_______________ PUBLIC SERVICE
/s/________________ BOARD
/s/________________ OF VERMONT
OFFICE OF THE CLERK
FILED: June 15, 1999
ATTEST:__________________________________
[SEAL]
Clerk of the Board
Notice to Readers: This decision is subject to revision of technical
errors. Readers are requested to notify the Clerk of the Board of any technical
errors, in order that any necessary corrections may be made.
Appeal of this decision to the Supreme Court of Vermont must be filed with
the Clerk of the Board within thirty days. Appeal will not stay the effect of
this Order, absent further Order by this Board or appropriate action by the
Supreme Court of Vermont. Motions for reconsideration or stay, if any, must be
filed with the Clerk of the Board within ten days of the date of this decision
and order.
Exhibit D-7.2
STATE OF CONNECTICUT
[seal]
DEPARTMENT OF PUBLIC UTILITY CONTROL
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051
DOCKET NO. 99-03-43 APPLICATION OF NEW ENGLAND POWER COMPANY CONCERNING
ACQUISITION BY THE NATIONAL GRID GROUP
June 30, 1999
By the following Commissioners:
Glenn Arthur
Linda Kelly Arnold
Donald W. Downes
DECISION
I. INTRODUCTION
A. APPLICANT'S PROPOSAL
By application dated March 31, 1999 (Application), New England Power
Company (NEP or Company), requests that the Department of Public Utility Control
(Department) either (1) confirm that Department approval is not required for the
acquisition of NEP's parent, New England Electric System (NEES), by The National
Grid Group plc (National Grid), or (2) if such Department approval is needed,
approve such acquisition. By virtue of NEP's ownership in Millstone Unit No. 3
located in Connecticut, NEP, pursuant to the General Statutes of Connecticut
(Conn. Gen. Stat.) ss.16-1(4), is a public service company for all purposes of
Title 16 of the Conn. Gen. Stat.
B. CONDUCT OF THE PROCEEDING
There is no statutory requirement for a hearing and none was held.
<PAGE>
Docket No. 99-03-43 Page 2
C. PARTIES AND INTERVENORS
New England Power Company, 25 Research Drive, Westborough, Massachusetts
01582; The National Grid Group plc, National Grid House, Kirby Corner Road,
Coventry CV4 8JY, United Kingdom; and the Office of Consumer Counsel, Ten
Franklin Square, New Britain, Connecticut 06051, were recognized as parties to
this proceeding.
II. APPLICANT'S EVIDENCE
NEP requests that the Department either (1) confirm the understanding of
NEP that the acquisition of NEP's parent, NEES, by National Grid (Acquisition)
does not require the approval of the Department; or (2) approve the Acquisition
if the Department concludes such approval is required. National Grid has agreed
to acquire all of the common shares of NEES, a registered holding company,
pursuant to a Merger Agreement dated December 11, 1998.
NEES is a registered public utility holding company headquartered in
Massachusetts. Its subsidiaries are engaged in the transmission and distribution
of electricity and the marketing of energy commodities and services. The
electricity delivery companies serve approximately 1.3 million customers in
Massachusetts, Rhode Island and New Hampshire. NEES does not directly own any
generating or transmission assets located in Connecticut. Application, p. 1.
NEP is a foreign electric company, as defined in the Conn. Gen. Stat.
ss.16-246a. Pursuant to the provisions of Conn. Gen. Stat. ss.16-246c(c), NEP
constitutes an electric company and public service company within the meaning of
Conn. Gen. Stat. ss.16-1 by virtue of minority ownership interest in Millstone
Unit No. 3, a nuclear generating asset located in Waterford, Connecticut. Id.
National Grid is a holding company incorporated in England and Wales. It
owns all the shares of The National Grid Company plc, a corporation that is the
world's largest privately-owned, independent electric transmission company. The
National Grid Company owns, operates and maintains the high voltage network in
England and Wales that connects power stations with distribution networks. The
National Grid Company is also responsible for scheduling and dispatching
generation to meet demand and manages and controls the software systems to do
so. Additionally, The National Grid Company owns and operates interconnectors
that enable electricity to be transferred between the England and Wales market
and Scotland and France. Application, p. 2.
The Company admits that because of NEP's status as a foreign electric
company and NEES status as a holding company parent, Conn. Gen. Stat. ss.16-47
may be applicable. As provided under ss.16-47(c):
[N]o corporation, association . . . or person shall take any action that
causes it to become a holding company with control over a gas, electric,
electric distribution . . . or community antenna television company engaged
in the business of supplying service within this state . . . or acquire,
directly or
<PAGE>
Docket No. 99-03-43 Page 3
indirectly, control over such a holding company, without first making
written application to and obtaining the approval of the department.
The Company argues that neither NEES nor NEP engages in the business of
supplying service within the state; therefore, the requirements of approval
under Conn. Gen. Stat. ss.16-47 do not apply. Id.
The second statute potentially applicable to the proposed merger
transaction is Conn. Gen. Stat. ss.16-43, which provides that:
[A] public service company shall obtain the approval of the Department to
directly or indirectly (1) merge, consolidate or make common stock with any
other company, or (2) sell, lease, assign . . . or otherwise dispose of any
essential part of its franchise, plant equipment or other property
necessary or useful in the performance of its duty to the public.
The Company argues that since the proposed transaction does not involve NEP, the
public service company, but NEES, a registered utility holding company parent,
the provisions of Conn. Gen. Stat. ss.16-43 do not apply. However, the Company
admits that it could be argued that the phrase "directly or indirectly" in the
opening section of that statute covers the acquistion of a holding company that
owns a public service company. Application, p. 3.
The proposed transaction is subject to approval by the Securities and
Exchange Commision (SEC), among other agencies, and the SEC has requested a
statement from the Massachusetts Department of Telecommunications and Energy
(MDTE) that the MDTE will have, after the merger, adequate authority and
resources to protect customers subject to the MDTE's jurisdiction and will
continue to exercise that authority. Jesanis PFT, p. 10. Additionally, the
proposed transaction is being scrutinized by the Federal Energy Regulatory
Commission, the Nuclear Regulatory Commission, and the state utility regulatory
agency of the State of Vermont. A representation of no net harm to customers is
required in New Hampshire. The proposed transaction also requires a Hart Scott
Rodino filing with the U.S. Justice Department.1 Finally, although no formal
approval is required by the MDTE, it is reviewing the proposed transaction and
intends to exercise its authority. Application, pp. 3 and 4.
Enclosed with the Application is a copy of the informational filing to the
MDTE by NEES and National Grid, dated March 8, 1999, with accompanying testimony
and supporting exhibits (MDTE Filing). Copies of the Merger Agreement between
NEES and National Grid were included in this filing.
III. DEPARTMENT ANALYSIS
The Department has reviewed NEP's request for any necessary authorization
to proceed with the acquisition of its parent holding company, NEES by National
Grid, to
- --------
1 The Hart-Scott-Rodino Antitrust Improvement Act of 1976, PUB. L. 94-435,
Sept. 30, 1976, requires a filing with the Federal Trade Commission and
Assistant Attorney General prior to the subject acquisition. 15 U.S.C.
ss.18a.
<PAGE>
Docket No. 99-03-43 Page 4
determine if prior approval by the Department is required. By virtue of NEP's
minority ownership interest in Millstone Unit No. 3 located in Connecticut, NEP
is defined as an "electric company" and "public service company" under Conn.
Gen. Stat. ss.16-43. Conn. Gen. Stat. ss.16-246c(c) allows for the waiver of:
[T]he requirements of ss.16-43 with respect to any borrowings or the
issuance of any notes, bonds or other evidences of indebtedness or
securities of any nature, upon determination that authority over such
borrowing or issue has been exercised by the state of domicile of such
foreign electric company.
Conn. Gen. Stat. ss.16-246c(c) does not empower the Department to grant a waiver
with regard to NEP's proposal for the acquisition of its parent holding company.
The Company argues that the Department does not have jurisdiction under
either Conn. Gen. Stat. ss.ss. 16-47 or 16-43 because: (1) neither NEP nor NEES
engage in the business of supplying service within the state as required for
Department jurisdiction to apply under ss.16-47; and, (2) since the transaction
proposed does not involve NEP, the public service company, but NEES, the utility
holding company parent, the provisions of ss.16-43 do not apply. Application,
pp. 2-3. The Department agrees that it does not have jurisdiction over this
transaction under ss.16-47. However, the Company admits, and the Department
agrees, that since the transaction proposed does indirectly involve NEP, the
public service company, Conn. Gen. Stat. ss.16-43 arguably may apply. The
Department determines that it does have jurisdiction under ss.16-43.
The Department has reviewed NEP's application, including the MDTE Filing,
and finds that the proposed transaction will not adversely affect electric
service in Connecticut. NEP and NEES have no ratepayers in Connecticut and are
regulated by the jurisdiction of Massachusetts, where they are domiciled. The
acquisition of NEES by National Grid would not affect Connecticut ratepayers.
Therefore, under Conn. Gen. Stat. ss.16-43, the Department approves NEP's
request for the acquisition of NEES by National Grid, subject to the Company's
compliance with all the requirements by the SEC and by MDTE, which intends to
exercise authority over the proposed transaction.
IV. FINDINGS OF FACT
1. National Grid has agreed to acquire all of the common shares of NEES, the
parent holding company of NEP.
2. NEP has a minority ownership interest in Millstone Unit No. 3 located in
Waterford, Connecticut.
3. Neither NEP nor the parent holding company, NEES, engage in the business of
supplying service within Connecticut.
4. NEP provided the Department with a copy of the informational filing by NEES
and National Grid dated March 8, 1999, filed with the MDTE.
5. NEP has no ratepayers in Connecticut.
<PAGE>
Docket No. 99-03-43 Page 5
V. CONCLUSION AND ORDER
A. CONCLUSION
Pursuant to Conn. Gen. Stat. ss.16-43, the Department approves NEP's
request for the acquisition of NEES by National Grid. The sale of NEP's parent
holding company to National Grid would have no adverse impact on electric
service or ratepayers in Connecticut. The Department's approval is subject to
the Company's compliance with all the requirements by the SEC and by MDTE, which
intends to exercise authority over the proposed transaction.
B. ORDER
1. NEP shall file with the Department any decisions issued by the MDTE
relating to the merger of the holding companies that are subject of the
instant docket within 30 days after each decision becomes available.
<PAGE>
DOCKET NO. 99-03-43 Application of New England Power Company Concerning
Acquisition by The National Grid Group
This Decision is adopted by the following Commissioners:
Glenn Arthur
Linda Kelly Arnold
Donald W. Downes
CERTIFICATE OF SERVICE
The foregoing is a true and correct copy of the Decision issued by the
Department of Public Utility Control, State of Connecticut, and was forwarded by
Certified Mail to all parties of record in this proceeding on the date
indicated.
July 01, 1999
-------------------------------------- --------------
Louise E. Rickard Date
Acting Executive Secretary
Department of Public Utility Control
Exhibit J-1
The National Grid Group
Description of Companies
The following is a description of the one direct and other indirect active
subsidiaries of The National Grid Group plc. National Grid Group has a number of
dormant subsidiaries (often formed for purposes of potential projects that are
not realized) that are not included herein. As noted in the
Application/Declaration, the discussion of the independent bases for retaining
any subsidiary other than National Grid Holdings is provided for the
Commission's information and is not required for purposes of Section 11(b)(1) of
the Act. Except as other noted, all entities listed below are organized under
the laws of England and Wales.
I. National Grid Holdings plc ("National Grid Holdings") is the intermediate
holding company for all of National Grid Group's non-NEES related
operations. On or prior to consummation of the Merger, National Grid
Holdings will be qualified as a "foreign utility company" within the
meaning of the Act. As a result, it and all of its subsidiaries may be
retained by National Grid Group pursuant to the provisions of Section 33(c)
of the Act.
1. The National Grid Company plc. ("NGC") As the electric transmission
company in England and Wales, NGC provides transmission service on a
for-profit, non- discriminatory basis and maintains and makes all
improvements to optimize access to the system, procures ancillary
services on the transmission system of England and Wales, matches
supply and demand, manages the daily system of half-hourly bids for
competing generators and makes payments due from each day's energy
trading. NGC is organized under the laws of England and Wales and is
subject to regulatory controls overseen by the Director General of
Electricity Supply. NGC has seven active subsidiaries, as follows:
a. NGC Nominees Limited serves as a shareholder for a number of
National Grid Group entities, as it is customary in the UK to
have more than one shareholder in most corporate entities. This
company is not otherwise an operating entity.
b. Datum Solutions Limited is engaged in providing metering services
in the United Kingdom at entry and exit points of the U.K.
transmission system, and more widely to customers in the
competitive market.
c. Energy Settlements and Information Services Limited operates the
computer systems needed to calculate prices and payments due as a
result of the daily trading of power across England and Wales.
d. Energy Pool Funds Administration Limited manages the transfer of
funds in payments for the energy traded.
e. NGC Employee Shares Trustee Limited serves as trustee in respect
of the National Grid Profit Sharing Scheme and Employee Benefit
Trust, which
<PAGE>
are trusts set up for employees of National Grid Group. This
company does not have any independent operations.
f. NGC Leasing Limited is engaged in the leasing of motor vehicles
for use by employees of the National Grid Group system.
g. NGC Properties Limited owns and develops property that is not
used for the operation of the transmission system, usually with a
view toward eventual sale.
NGC 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 U.S. None of NGC or its subsidiaries
is a public utility company operating in the U.S. On or prior to
consummation of the Merger, NGC will be qualified as a "foreign
utility company" within the meaning of the Act and it and its
subsidiaries may be retained by National Grid Group pursuant to the
provisions of Section 33(c) of the Act.
2. National Grid Insurance Limited was organized in Guernsey in
connection with the self-insured retention of NGC's transmission
assets. National Grid Group holds all of the outstanding ordinary
shares of National Grid Insurance and Barclays Bank holds its
outstanding preference shares. As noted in the Application, the
Commission has previously authorized other registered holding
companies to engage in self-insurance activities (see The Columbia Gas
System, Inc., Holding Co. Act Release No. 26596 (Oct. 25, 1996)),
thereby clarifying that such insurance is functionally related to core
utility operations and therefore retainable by National Grid Group.
3. National Grid International Limited is the holding company for a
number of the group's non-U.K. investments, including operations in
South America, India, Africa and the U.S. National Grid International
was formed has four direct and a number of indirect subsidiaries, as
follows:
a. National Grid Overseas Limited is an intermediate holding company
above most of the South American, Indian and African interests
held by the National Grid Group.
i. National Grid Holdings BV is organized in the Netherlands
and is a holding company for operations in Brazil and India.
(1) National Grid India BV, another Netherlands organized
company, organizes and controls National Grid Group's
investments in India.
<PAGE>
(2) NGC do Brasil Participacoes Ltda, a Brazilian company
and National Grid Brazil BV, a Netherlands company, serve to
organize and control National Grid Group's investments in
Brazil. They currently own three entities formed under the
laws of Brazil as follows: JVCO Participacoes Ltda (a joint
venture vehicle for National Grid Group and Sprint), Holdco
Participacoes Ltda (an intermediate joint venture vehicle
pursuant to which other investors are involved in Brazilian
telecom operations) and Bonari Holding Ltda, an operating
company engaged in telecommunications operations in Brazil).
ii. National Grid Zambia BV, is formed under the laws of the
Netherlands that organizes and controls National Grid
Group's investments in Zambia.
(1) Copperbelt Energy Corporation plc, a Zambian corporation
that is some 40% owned by National Grid and is engaged in
buying, selling and transmitting electricity to meet the
needs of the copper mining regions of Zambia. NGC Zambia and
National Grid Zambia were formed for the purpose of
facilitating National Grid's ownership and operations of
African operations. Another registered holding company,
CINergy, also owns a significant interest in Copperbelt.
iii. National Grid Finance BV. A company formed under the laws of
the Netherlands that serves as a holding company for
operations in Argentina. National Grid Overseas holds a one
third interest in National Grid Finance directly.
(1) Citelec SA (41.25% interest held by National Grid
Group),
(a) Transener, in which Citelec holds an approximately
65% interest, is the owner of the primary transmission
system that services Argentina and acts as operator
thereof. Transener itself owns a regional transmission
system owner in Argentina (Transba) and is engaged in
the construction of a cross-country transmission line.
b. Teldata International Limited is a holding company for US billing
and energy service operations.
i. Teldata Inc. is a Delaware corporation that provides
complete, end-to-end, automated metering and billing
solutions for electric, gas and water utilities and energy
service providers.
<PAGE>
(1) FirstPoint Services Inc. is a Delaware corporation
engaged in providing billing software solutions for
electric, gas and water utilities and energy service
providers.
c. National Grid USA Inc. is a Delaware corporation formed to
investigate potential opportunities in the U.S. market for
National Grid.
d. National Grid (Isle of Man) Limited is a holding company for
operations on the Isle and is organized under the laws of the
Isle of Man.
i. Manx Cable Company (Isle of Man) is organized under the laws
of the Isle of Man for the purpose of developing an undersea
connector between England and the Isle of Man.
National Grid International 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 U.S. None of
National Grid International or its subsidiaries is a public utility
company operating in the U.S. On or prior to consummation of the
Merger, National Grid International and certain of its subsidiaries
will be qualified as a "foreign utility company" within the meaning of
the Act and it and its subsidiaries may be retained by National Grid
Group pursuant to the provisions of Section 33(c) of the Act.
4. The National Grid Group Quest Trustee Company Limited serves as
trustee with respect to the National Grid Group Qualifying Share
Trust, which is a trust established for employees of National Grid
Group. This company does not have any independent operations.
Applicants note that a number of registered holding companies have
formed or been permitted to retain or invest in separate entities in
connection with employee benefit programs. See New Century Energies,
Inc., Holding Co. Act Release No. 26748) (Aug. 1, 1997) (retention of
subsidiary holding life insurance policies of executives); Northeast
Utilities, Holding Co. Act Release No. 24372 (April 15, 1987)
(authorizing acquisition of common stock of insurer to facilitate
obtaining directors and officers insurance); In the Matter of General
Public Utilities Corporation, Holding Co. Act Release No. 7092 (Dec.
23, 1996) (authorizing acquisition of shares of non-utility subsidiary
engaged in administering employee insurance plans). Thus, retention of
this entity is consistent with the provisions of the Act.
5. NGC Telecoms Holding Limited is a holding company for National Grid
Group's interest in certain telecommunications operations.
a. NGG Telecoms Limited also serves to hold National Grid Group's
interest in these telecommunications operations.
<PAGE>
i. Energis plc is the publicly-traded parent company of Energis
Communications. National Grid Group holds a 48.3% interest
in Energis plc.
(1) Energis Communications Limited owns and operates an
advanced telecommunications network that is astride the NGC
transmission network. The Energis network transfers data, by
voice, picture or data-base, throughout England and Wales.
b. NGG Telecoms Investment Limited is an internal holding company
for part of National Grid Group's interest in Energis plc.
NGG Telecoms is indirectly engaged exclusively in telecommunications
services, information services and services related or incidental
thereto. The Commission has permitted other registered holding
companies to engage in the telecommunications business. See
Consolidated Gas Transmission Corp., Holding Co. Act Release No. 23914
(Nov. 20, 1985) (lease of microwave radio facilities); Appalachian
Power Co., Holding Co. Act Release No. 24772 (Dec. 9, 1988) (lease of
optical fiber systems); Southern Co., Holding Co. Act Release No.
26211 (Dec. 30, 1994) (mobile radio system). Thus, retention of this
entity is consistent with the provisions of the Act.
6. NatGrid Finance Holdings Limited is a holding company for NatGrid
Finance Limited, NG Investment Limited and Natgrid Investments Limited
which are Jersey corporations that provide financial management
services to National Grid Group. For example, this group of companies
is currently involved in investing and managing the proceeds from the
recent public offering by National Grid Group of some of its interest
in the ordinary shares of Energis plc. A number of other registered
holding companies hold subsidiaries that perform financing
transactions for the system. See Central and Southwest Corporation,
Holding Co. Act Release No. 23767 (July 19, 1985) (authorizing
formation of subsidiary to provide factor intrasystem receivables);
Ameren Corporation, Holding Co. Act Release No. 26809 (Dec. 30, 1997)
(permitting retention of subsidiary engaged in investing in securities
for systems companies).
