File No. 70-9473
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 7
TO
FORM U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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The National Grid Group plc New England Electric System
National Grid (US) Holdings 25 Research Drive
Limited Westborough, Massachusetts 01582
National Grid (US)
Investments
National Grid House
Kirby Corner Road
Coventry CV4 8JY
United Kingdom
National Grid (Ireland) 1
Limited
National Grid (Ireland) 2
Limited
8-10 rue Mathias Hardt
BP39, L2010
Luxembourg
National Grid General
Partnership
NGG Holdings, Inc.
10th Floor
Oliver Building
2 Oliver Street
Boston, MA 02109
(Name of company filing this statement and
address of principal executive offices)
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The National Grid Group plc New England Electric System
(Name of top registered holding company
parent of each applicant or declarant)
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Jonathan M. G. Carlton Douglas W. Hawes
The National Grid Group plc Joanne C. Rutkowski
National Grid House Sheri E. Bloomberg
Kirby Corner Road Markian M.W. Melnyk
Coventry CV4 8JY LeBoeuf, Lamb, Greene & MacRae, L.L.P.
United Kingdom 125 West 55th Street
Telephone: 011-44-1203-537-777 New York, NY 10019
Facsimile: 011-44-1203-423-678 Telephone: 212-424-8000
Facsimile: 212-424-8500
NGG Holdings, Inc.
10th Floor
Oliver Building
2 Oliver Street
Boston, MA 02109
Telephone: 617-946-2104
Facsimile: 617-946-2111
Michael E. Jesanis 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, pursuant to an
amendment to NEES' Agreement and Declaration of Trust, NEES will have
been merged with NGG Holdings, LLC, with NEES as the surviving entity
and then merged again into another LLC (which survives) which in turn
will merge into NGG Holdings, Inc. with NGG Holdings, Inc. as the
surviving entity. The term "NEES" refers to both NEES and NGG
Holdings, Inc. as the surviving entity.
4. National Grid means The National Grid Group plc.
5. National Grid System means National Grid and its subsidiary companies.
6. NEES Group means NEES and the NEES Subsidiary Companies.
7. NEES Subsidiary Companies means the subsidiary companies of NEES.
8. U.S. Subsidiary Companies means NEES, the NEES Subsidiary Companies
and the Intermediate Companies.
9. U.S. Utility Subsidiaries means New England Power Company,
Massachusetts Electric Company, The Narragansett Electric Company,
Granite State Electric Company, Nantucket Electric Company, New
England Electric Transmission Corporation, New England
Hydro-Transmission Corporation, New England Hydro- Transmission
Electric Company, Inc. and Vermont Yankee Nuclear Power Corporation.
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TABLE OF CONTENTS
Item 1. Description of Proposed Merger
A. Introduction
1. General Request
2. Overview of Merger
B. Description of the Parties to the Merger
1. National Grid
2. NEES
C. Description of the Merger
1. Background
2. Merger Agreement
3. Corporate Structure for the Merger
4. Financing the Merger
D. Management and Operations of National Grid and NEES Following the
Merger
E. Industry Restructuring Initiatives Affecting U.S. Operations
F. Reporting
Item 2. Fees, Commissions and Expenses
Item 3. Applicable Statutory Provisions
A. Legal Analysis
1. Section 10(b)
a. Section 10(b)(1)
i. Interlocking Relationships
ii. Concentration of Control
b. Section 10(b)(2) -- Fairness of Consideration
c. Section 10(b)(2) -- Reasonableness of Fees
d. Section 10(b)(3)
2. Section 10(c)
a. Section 10(c)(1)
b. Section 10(c)(2)
3. Section 10(f)
B. Other Statutory Provisions
Item 4. Regulatory Approvals
A. Antitrust
B. Federal Power Act
C. Atomic Energy Act
D. Exon-Florio
E. State Public Utility Regulation
Item 5. Procedure
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Item 6. Exhibits and Financial Statements
A. Exhibits
B. Financial Statements
Item 7. Information as to Environmental Effects
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This Pre-Effective Amendment No. 7 amends the Form U-1
Application/Declaration in this proceeding, originally filed with the Securities
and Exchange Commission on March 26, 1999, in its entirety as follows:
ITEM 1. DESCRIPTION OF THE PROPOSED MERGER
A. Introduction
This Application/Declaration seeks approvals relating to the proposed
acquisition of NEES, a Massachusetts business trust, by National Grid, a public
limited company incorporated under the laws of England and Wales, pursuant to
which NEES and its subsidiaries will become subsidiaries of National Grid (the
"Merger"). Following consummation of the Merger, National Grid and each of the
Intermediate Companies will register with the Securities and Exchange Commission
(the "Commission") as holding companies under Section 5 of the Public Utility
Holding Company Act of 1935, as amended (the "Act").1 NEES is currently a
holding company registered under Section 5 of the Act and will remain as such
following consummation of the Merger. On February 1, 1999, NEES announced that
it had entered into an agreement to acquire all of the outstanding common stock
of Eastern Utilities Associates ("EUA"), a holding company registered under the
Act. Consummation of the merger between NEES and EUA is not conditional on, and
is proceeding independently from, the closing of the Merger. Authorization under
the Act for NEES' acquisition of EUA will be the subject of a separate
application to the Commission by NEES.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, the Applicants hereby
request authorization and approval of the Commission to acquire, by means of the
Merger, all of NEES' interest in the issued and outstanding common stock of the
subsidiaries of NEES that are public utility companies within the meaning of the
Act, namely New England Power
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1 The Intermediate Companies either have been or will be formed prior to
the consummation of the Merger. They have been added to this
Application/Declaration to enable the Commission to issue a notice. The
Intermediate Companies will require the approval of their respective boards of
directors to engage in the activities contemplated by this filing.
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Company ("NEP"), Massachusetts Electric Company ("Mass. Electric"), The
Narragansett Electric Company ("Narragansett"), Granite State Electric Company
("Granite State"), Nantucket Electric Company ("Nantucket"), New England
Electric Transmission Corporation ("NEET"), New England Hydro-Transmission
Corporation ("N.H. Hydro"), New England Hydro-Transmission Electric Company,
Inc. ("Mass. Hydro") and Vermont Yankee Nuclear Power Corporation. The
Applicants also hereby request that the Commission approve (i) the acquisition
by the Applicants of NEES' interest in the non- utility activities, businesses
and investments of NEES and the retention of National Grid's existing
non-utility activities, businesses and investments; (ii) certain
acquisition-related financing matters, and (iii) certain amendments to the NEES
standard form of service company agreement.
The timing of the Commission's action on the merger of NEES and EUA and the
Merger (i.e., National Grid's acquisition of NEES) is uncertain. Should the
Commission approve the NEES/EUA merger first, Applicants propose that the
authorization requested in this Application/Declaration be deemed a request for
the acquisition of an indirect interest in the EUA subsidiaries and operations
acquired by NEES. Should the Commission approve the Merger first, National Grid
will join NEES as an applicant in the NEES/EUA merger application/declaration
filed with the Commission.
2. Overview of the Merger
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated
as of December 11, 1998 by and among National Grid, NGG Holdings LLC, a
Massachusetts limited liability company and a wholly owned subsidiary of
National Grid, and NEES, NEES will become an indirect, wholly owned subsidiary
of National Grid. The proposed corporate structure of National Grid after the
Merger is discussed in more detail in Item 1.E below.
As consideration for each common share of NEES outstanding at the time of
the Merger, the NEES shareholders will receive $53.75 per share in cash, plus up
to an additional $0.60 in cash per share if the Merger is not consummated within
six months after the NEES shareholders approve the Merger, calculated at a rate
of $0.003288 for each day
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that the Merger closing is delayed past the end of the six month period. The
NEES shareholders will not obtain any stock consideration from National Grid in
the Merger.
As discussed in more detail in Item 3.A. below, in addition to providing
substantial value to NEES shareholders as described above, the Merger will
produce substantial benefits to the public interest and to consumers in New
England, as well as the shareholders of National Grid, by combining a company
with demonstrated expertise in operating in a competitive environment with a
company that having divested the bulk of its generation assets and operating in
states where deregulation initiatives are advanced is well positioned to
compete.
Benefits to customers fall in three categories. First, National Grid has
significant expertise in providing the infrastructure, dispatch and power
exchange necessary for an efficient power supply market. Power supply is the
major cost element of electricity and is crucially influenced by the efficient
development of the market for the product. The efficient provision of the
infrastructure to let the supply market develop will facilitate the increase in
potential suppliers of electricity, with the competition so generated leading to
lower and more stable prices for the unregulated supply component of electric
service.
Second, there will be savings and efficiencies associated with the
NEES-National Grid Merger itself. The two companies are currently in the process
of evaluating integration possibilities, aimed at eliminating duplication and
implementing best practices. National Grid's significantly larger scale, both in
financial and operational terms, will enhance the ability of NEES to use new
developments in transmission and distribution technology, information systems,
and capital markets, where these can be seen to bring economic benefit.
Third, the Merger will allow further pursuit of consolidation in the
electric utility business. The restructuring of the industry in New England and
the divestiture of generation by companies owning transmission and distribution
interests has left a fragmented infrastructure with individual companies of too
small a size to fully exploit economies of scale. NEES, with its already low
distribution prices and profit margins, is not in a position on its own to
pursue significant further regional consolidation. This transaction
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will allow further consolidations and consolidation savings to be pursued, while
maintaining low rates for customers. The agreement for NEES to acquire EUA,
while not in itself conditional on the NEES-National Grid Merger, is entirely
consistent with this strategy.
The Merger also provides NEES employees with the opportunity for growth as
they participate in industry restructuring and allows National Grid to apply its
extensive experience in competitive electricity supply markets to the
electricity industry in the U.S. at a time of strategic significance in the
reform and restructuring of the industry.
The Merger has been approved by the shareholders of NEES and National Grid,
as well as by the Federal Energy Regulatory Commission (the "FERC"), the Vermont
Public Service Board (the "VPSB"), the Connecticut Department of Public Utility
Control (the "CDPUC") and the New Hampshire Public Utilities Commission
("NHPUC"). While the express approval of the Massachusetts Department of
Telecommunications and Energy (the "MDTE") and the Rhode Island Public Utility
Commission (the "RIPUC") are not required, those regulators have issued letters
certifying that they have the authority and resources to protect ratepayers. In
addition, Granite State and NEP have made representations to the NHPUC that the
Merger will not adversely affect their rates, terms, service or operations. The
Nuclear Regulatory Commission (the "NRC") has approved the transaction. Finally,
the Merger has been cleared by the Committee on Foreign Investments in the
United States under the Exon-Florio Provisions of the Omnibus Trade and
Competitiveness Act of 1988 and by the Antitrust Division of the Justice
Department and the Federal Trade Commission under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976.
B. Description of the Parties to the Merger
1. National Grid
National Grid is a holding company formed in 1989. Its principal
subsidiary, The National Grid Company plc ("NGC"), a public limited company
formed under the laws of England and Wales, was created as a result of the
privatization and restructuring of the British electric system. National Grid's
ordinary shares are listed on the London Stock
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Exchange (the "LSE") and National Grid American Depositary Receipts ("ADRs") are
listed on the New York Stock Exchange.
The table below shows the revenues, net income and total assets of National
Grid, NEES and EUA for the twelve months to September 30, 1999, according to
U.S. GAAP.
National Grid NEES EUA
($ mm) ($ mm) ($ mm)
Revenues 2,412 2,513 548
Net Income 1,661 149 17
Total Assets 8,437 4,900 1,481
The table below shows the capitalization of National Grid, NEES, EUA, and
the combined group on a pro forma basis, as of September 30, 1999, according to
U.S.
GAAP.2
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2 The figures for revenues, net income and assets were translated into
dollars using a rate of U.S. $1.60 equals one pound. Consistent with U.S. GAAP,
National Grid's share of joint ventures and associate's businesses is included
in net income and assets but is omitted from revenues. For the year ended
September 30, 1999, National Grid's share of Energis losses were $26 million
(excluding exceptional profits of $1,427 million).
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<TABLE>
<CAPTION>
National National NEES NEES EUA EUA Pro Forma Pro Forma
Grid Grid (%) (%) Combined Combined
($ mm) ($ mm) (%) ($ mm) ($ mm) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term 404 6.7% 39 1.4% 118 16.8% 561 5.7%
debt
Long-term 3,133 52.3% 1,059 38.8% 190 27.1% 6,682 (3) 68.2%
debt
Preferred - - 20 0.7% 35 5.0% 55 0.6%
stock
Minority 1 - 39 1.4% - - 40 0.4%
interest
Common 2,454 41.0% 1,578 57.7% 358 51.1% 2,454 25.1%4
stock equity
Total 5,992 100% 2,735 100% 701 100% 9,791 100%
</TABLE>
Except for National Grid (US) Holdings Limited, National Grid has one
direct subsidiary, National Grid Holdings Limited ("National Grid Holdings").
National Grid Holdings was formed under the laws of England and Wales in 1999 to
serve as a subholding company over NGC and the other subsidiaries of National
Grid not in the NEES chain of ownership. Prior to consummation of the Merger,
National Grid Holdings will file its notification of foreign utility company
("FUCO") status to qualify as a FUCO within the meaning of Section 33 of the
Act. The parties expect that National Grid Holdings will retain this status
following the Merger and that the activities and operations of National Grid
Holdings' direct and indirect subsidiary companies will be exempt from the Act
as subsidiaries of National Grid Holdings, provided that each derives no part of
its income, directly or indirectly, from the generation, transmission, or
distribution of electric energy for sale or the distribution at retail of
natural or manufactured gas for heat, light, or power, within the US and none
are public utility companies operating in the US. A chart showing
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3 Includes $2,300 million of acquisition financing.
4 Cash balances of $1,074 million (on a pro forma basis) on hand on
September 30, 1999 are not shown above.
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National Grid and all of its subsidiaries following the formation of National
Grid Holdings is attached hereto as Exhibit E-2.
The following entities are the direct subsidiaries of National Grid
Holdings and the description of their operations provides a description of the
principal lines of business, as well as some administrative operations, within
the National Grid holding company system.
(1) NGC -- As part of the U.K. government's privatization efforts, the
Central Electricity Generating Board, which owned and operated the vast majority
of electric generation and transmission facilities in England and Wales, was
split into three competing generation companies, and an independent transmission
company, NGC. As a result, NGC is the only transmission company in England and
Wales and now owns 4,300 miles of overhead transmission lines and 400 miles of
underground cables, all in England and Wales, as well as interconnections with
Scotland and France. The principal functions of NGC in the competitive British
power supply market are to provide transmission services on a for-profit,
non-discriminatory basis, and to maintain and make all needed improvements to
optimize access to that system; to procure ancillary services on the
transmission system; to match demand and supply; to manage the daily system of
half-hourly bids for competing generators; and to calculate market prices and
make the payments due from each day's energy trading. NGC is subject to
regulatory controls overseen by the Director General of Electricity Supply with
regard to the prices it may charge for transmission services in England and
Wales. The current transmission price control arrangements for NGC are expected
to remain in force until March 31, 2001.
(2) National Grid Insurance Limited, is an insurance subsidiary formed in
connection with the self-insured retention of NGC's transmission assets.
National Grid owns all of the outstanding ordinary shares of National Grid
Insurance Limited, with preference shares held by Barclays Bank.
(3) National Grid International Limited, is an intermediate holding company
for certain of the overseas operations of National Grid, in particular, its
businesses in South America, India, Africa and the U.S. National Grid
International Limited is
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indirectly engaged in the following businesses: (a) automated meter reading and
billing; (b) telecommunications, and (c) electric transmission and distribution.
Teldata International Limited and National Grid USA Inc. are subsidiaries of
National Grid International Limited with operations in the US. Teldata Inc. and
First Point Services Inc. are Delaware corporations and subsidiaries of Teldata
International Limited that provide metering and billing services to electric,
gas and water utilities and energy service providers. National Grid USA Inc. is
a Delaware corporation that was formed to investigate potential opportunities in
the US market for National Grid. Except as mentioned above, no other National
Grid companies maintain operations in the US. National Grid International
Limited does not directly or indirectly derive any part of its income from the
generation, transmission or distribution of electric energy for sale or the
distribution at retail of natural or manufactured gas for heat, light or power
within the US. None of National Grid International Limited or its subsidiaries
is a public utility company operating in the US.
(4) The National Grid Group Quest Trustees Limited is the trustee company
for National Grid's qualifying employee share ownership trust.
(5) NGG Telecoms Holdings Limited indirectly holds National Grid's interest
(currently at 36.0%) in Energis plc ("Energis"), a telecommunications company
focusing on the business marketplace in the United Kingdom. Originally known as
Telecom Electric, Energis was created to build a new network for
telecommunications in the U.K., under government license, and to respond to
NGC's need for a high speed telecommunications system that could transmit data
and be used to coordinate operations among NGC's protection, control and
signaling systems. NGC met this need, employing its expertise in network
engineering and certain NGC-developed cable stringing technology, with a fiber
optic network built on top of its existing network of electric transmission
facilities and associated rights of way. NGC leased the physical assets
comprising the telecommunications system to Energis which markets
telecommunications services to the public and to NGC on an arm's-length basis.
(6) Natgrid Finance Holdings Limited is an intermediate holding company for
entities that provide financial management services to National Grid.
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2. NEES
NEES is organized and exists as a voluntary association created under the
laws of the Commonwealth of Massachusetts on January 2, 1926. NEES's principal
executive office is located at 25 Research Drive, Westborough, Massachusetts
01582.
NEES is a holding company registered under Section 5 of the 1935 Act, and
it and its subsidiaries are subject to the broad regulatory provisions of the
Act. Various NEES subsidiaries are also subject to regulation by (i) the FERC
under the Federal Power Act ("FPA") with respect to wholesale sales and
transmission of electric power, accounting and other matters, and (ii) various
state regulatory commissions, as discussed below. In addition, the activities of
nuclear facilities in which NEES and its subsidiaries have ownership interests
are regulated by the NRC.
The common stock, par value of $1.00 per share, of NEES is listed on the
New York Stock Exchange and the Boston Stock Exchange. As of December 31, 1998,
there were 59,171,015 shares of NEES common stock outstanding. On a consolidated
basis for the year ended September 30, 1999, NEES had total assets of $4.90
billion, net utility assets of $2.51 billion, total operating revenues of $2.51
billion, utility operating revenues of $2.24 billion, and net income of $149
million.
NEES owns all of the voting securities of the following four distribution
subsidiaries, Mass. Electric, Narragansett, Granite State and Nantucket, and
99.97 percent of the outstanding voting securities of its principal transmission
subsidiary, NEP. The NEES system covers more than 4,500 square miles with a
population of approximately 3,000,000. At September 30, 1999, NEES and its
subsidiaries had approximately 3,826 employees.
(1) Mass. Electric is a public utility company engaged in the delivery of
electric energy to approximately 980,000 customers in an area comprising
approximately 43 percent of Massachusetts. Mass. Electric's service area
consists of 146 cities and towns, including the highly diversified commercial
and industrial cities of Worcester, Lowell and Quincy. The population of the
service area is approximately 2,160,000, or 36 percent of the total population
of the state. During 1998, 39 percent of Mass. Electric's revenues from the
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sale of electricity was derived from residential customers, 39 percent from
commercial customers, 21 percent from industrial customers and 1 percent from
others. In 1998, the utility's 20 largest customers accounted for approximately
7 percent of its electric revenues. As of September 30, 1999, Mass. Electric had
total assets of $1.41 billion, operating revenues of $1.37 billion and net
income of $60.0 million for the twelve months to date. Mass. Electric is subject
to rate regulation by the FERC and the MDTE.
(2) Narragansett is a public utility company engaged in the delivery of
electric energy to approximately 335,000 customers in Rhode Island. Its service
area covers about 839 square miles, or 80 percent of the area of the state, and
encompasses 27 cities and towns, including Providence, East Providence, Cranston
and Warwick. The population of the service area is approximately 725,000 or 72
percent of the total population of the state. During 1998, 44 percent of
Narragansett's revenues from the sale of electricity was derived from
residential customers, 40 percent from commercial customers, 14 percent from
industrial customers, and 2 percent from others. In 1998, the 20 largest
customers of Narragansett accounted for approximately 10 percent of its electric
revenues. As of September 30, 1999, Narragansett had total assets of $673.4
million, operating revenues of $456.1 million and net income of $30.1 million
for the twelve months to date. Narragansett is subject to regulation by the
FERC, the RIPUC and the Rhode Island Division of Public Utilities and Carriers
("RIDIV").
(3) Granite State is a public utility company engaged in the delivery of
electric energy to approximately 37,000 customers in 21 New Hampshire
communities. The Granite State service territory has a population of
approximately 73,000 and includes the Salem area of southern New Hampshire and
several communities along the Connecticut River. During 1998, 49 percent of
Granite State's revenues from the sale of electricity was derived from
commercial customers, 36 percent from residential customers, 14 percent from
industrial customers, and 1 percent from others. In 1998, the 10 largest
customers of Granite State accounted for approximately 18 percent of its
electric revenue. As of September 30, 1999, Granite State had total assets of
$65.0 million, operating revenues of $60.6 million, and net income of $2.8
million for the twelve months to date. Granite State is subject to regulation by
the FERC and the NHPUC.
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(4) Nantucket provides electric utility service to approximately 10,000
customers on Nantucket Island in Massachusetts. Nantucket's year-round
population is approximately 6,000, with a summer peak of approximately 40,000.
Nantucket's service area covers the entire island. During 1998, 62 percent of
Nantucket's revenues from the sale of electricity was derived from residential
customers, 37 percent from commercial customers and 1 percent from others. At
the end of 1998, Nantucket had total assets of $44 million, operating revenues
of $15.1 million, and net income of $567,000. Nantucket is subject to regulation
by the FERC and the MDTE.5
(5) NEP is principally engaged in purchasing, transmitting and selling
electric energy at wholesale. In 1998, 98 percent of NEP's all-requirement
revenue from the sale of electricity was derived from sales for resale to
affiliated companies and 2 percent from sales for resale to municipal and other
utilities. NEP has recently completed the sale of substantially all of its
non-nuclear generating business and currently is attempting to sell its minority
interests in three operating nuclear power plants and one fossil-fueled
generating station in Maine.6 As of September 30, 1999, NEP had total assets of
$2.28 billion, operating revenues of $586.2 million and net income of $70.8
million for the twelve months to date. NEP is subject, for certain purposes, to
regulation by the SEC, the FERC, the NRC, the RIDIV, the MDTE, the NHPUC, the
VPSB, the CDPUC, and the Maine Public Utilities Commission.
(6) NEET, a wholly owned subsidiary of NEES, owns and operates a direct
current/alternating current converter terminal facility for the first phase of
the Hydro-Quebec and New England interconnection (the "Interconnection") and six
miles of high voltage direct current transmission line in New Hampshire.
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5 Audited financial statements for the year ended September 30, 1999 are
not available.
6 NEP is also a holding company because it owns 20% of the outstanding
voting securities of Vermont Yankee Nuclear Power Corporation, the licensed
operator of the Vermont Yankee nuclear facility. NEP also has minority interests
in Yankee Atomic Electric Company (30%), Maine Yankee Atomic Power Company (20%)
and Connecticut Yankee Atomic Power Company (15%), all of which have permanently
ceased operations. NEP is an exempt holding company under the Act. Yankee Atomic
Electric Company, Holding Co. Act Release No. 13048 (Nov. 25, 1955); Connecticut
Yankee Atomic Power Company, Holding Co. Act Release No. 14768 (Nov. 15, 1963).
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(7) N.H. Hydro, in which NEES holds 53.97% of the common stock, operates
121 miles of high-voltage direct current transmission line in New Hampshire for
the second phase of the Interconnection, extending to the Massachusetts border.
As of September 30, 1999, N.H. Hydro had total assets of $129.3 million,
operating revenues of $30.7 million, and net income of $4.5 million for the
twelve months to date.
(8) Mass. Hydro, 53.97% of the voting stock of which is held by NEES,
operates a direct current/alternating current terminal and related facilities
for the second phase of the Interconnection and 12 miles of high-voltage direct
current transmission line in Massachusetts. As of September 30, 1999, Mass.
Hydro had total assets of $155.7 million, operating revenues of $35.5 million,
and net income of $7.3 million for the twelve months to date.
o New England Hydro Finance Company, Inc. ("NE Hydro Finance") is owned
in equal shares by Mass. Hydro and N.H. Hydro and provides the debt
financing required by the owners to fund the capital costs of their
participation in the Interconnection.
(9) NEES Communication, Inc. ("NEESCom") has been declared an exempt
telecommunications company by the Federal Communications Commission. NEESCom
presently focuses on dark fiber leasing. At the end of 1998, NEESCom had total
assets of $12.6 million and a net loss of $1.2 million.7
o NEES Telecommunications Corp. is wholly owned by NEESCom and is
presently inactive.
(10) Wayfinder Group, Inc. ("Wayfinder") (formerly NEES Global, Inc.) is a
wholly-owned nonutility subsidiary of NEES that provides principally consulting
services and product licenses to unaffiliated utilities in the areas of electric
utility restructuring and customer choice. On September 21, 1999, Wayfinder sold
its wholly- owned subsidiary, New England Water Heater Company, Inc., which is
in the water heater leasing business. As of September 30, 1999, Wayfinder had
total assets of $7.8 million,
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7 Audited financial statements for the year ended September 30, 1999 are
not available.
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operating revenue of $9.1 million and a net income of $1.7 million for the
twelve months to date. Monitoring Technologies, Inc., Nexus Energy Software,
Inc. and Separation Technologies, Inc. are owned in part by Wayfinder and are
described below.
(11) NEES Energy, Inc. ("NEES Energy") is a wholly-owned marketing
subsidiary of NEES. As of September 30, 1999, NEES Energy had total assets of
$195 million, operating revenue of $358.8 million and a net loss of $10.3
million for the twelve months to date.
o AllEnergy Marketing Company, L.L.C. ("AllEnergy") is a wholly- owned
subsidiary of NEES Energy. AllEnergy markets energy products and
provides a wide range of energy-related services including, but not
limited to, marketing, brokering and sales of energy, audits, fuel
supply, repair, maintenance, construction, operation, design,
engineering and consulting to customers in the competitive power
markets of New England and New York.
o AllEnergy's subsidiary Texas Liquids, L.L.C. (owned 99% by AllEnergy
and 1% by NEES Energy), engages principally in marketing and sales of
propane and energy in the New Jersey area.
o AEDR Fuels L.L.C., a company engaged in the home heating oil business,
is 100% owned by AllEnergy.
o Weatherwise USA, L.L.C., a company engaged in providing energy
management, demand side management and technical services, and utility
hedging services to reduce weather-related financial uncertainties for
utilities and energy users, is 4.2% owned by AllEnergy.
o AllEnergy's wholly-owned subsidiary, Texas-Ohio Gas, Inc. markets
natural gas to industrial and commercial end users throughout the
northeast US.
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(12) Granite State Energy, Inc. ("Granite State Energy") is a wholly- owned
nonutility marketing subsidiary of NEES. Granite State Energy provides a range
of energy and energy-related services, including: sales of electric energy,
audits, power quality, fuel supply, repair, maintenance, construction, design,
engineering and consulting. At the end of 1998, Granite State Energy had total
assets of $304,000, operating revenues of $718,000 and a net loss of $22,000.8
(13) New England Water Heater Company, Inc. is engaged in the rental,
service, sale and installation of water heaters.9
(14) New England Power Service Company ("Service Company"), provides a
variety of administrative and consulting services for the NEES system pursuant
to a service agreement approved by the Commission in accordance with the
requirements of Rule 90. As of September 30, 1999, Service Company had total
assets of $131.6 million, operating revenues of $197.7 million and net income of
$1.8 million for the twelve months to date.
(15) Metro West Realty, L.L.C., a wholly-owned subsidiary of NEES conducts
real estate investment and management activities.
(16) 25 Research Drive, L.L.C., a wholly-owned subsidiary of NEES, was
formed to facilitate the proposed acquisition of Eastern Utilities Associates.
(17) New England Energy, Inc. ("NEEI"), is a wholly-owned subsidiary of
NEES that owned oil and gas properties that were sold during 1998. NEEI is
currently inactive.
(18) Monitoring Technologies, Inc. ("MTC") designs, develops, manufactures
and markets microprocessor-based products that monitor wear and forecast failure
of components in machinery. NEES Global has a 4% ownership interest in MTC.
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8 Audited financial statements for the year ended September 30, 1999 are
not available.
9 The sale of this company was closed effective September 21, 1999.
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(19) Nexus Energy Software, Inc. ("Nexus"), develops and licenses its
software to utilities and operates a website which targets energy consumers for
the purpose of helping them make energy choices. NEES Global has a 42.6%
ownership interest in Nexus.
(20) Separation Technologies, Inc. ("STI"), is a provider of ash processing
equipment, project financing, operations and marketing services related to its
equipment. NEES Global has a 5.02% ownership interest with a voting stock
ownership interest of 5.67% in STI.
(21) UNITIL Company ("Unitil"), is a registered holding company located in
New England. NEES holds a 0.8% ownership interest in Unitil. NEES acquired the
Unitil interest in exchange for NEES' interest in Fitchburg Gas and Electric
Company when that company was merged with Unitil.
Narragansett and NEP (and AllEnergy) are members of the New England Power
Pool ("NEPOOL"). Mass. Electric, Nantucket and Granite State participate in
NEPOOL through NEP. The FERC recently has approved a restructuring of NEPOOL
involving (i) the formation of an Independent System Operator that will control
the transmission facilities owned by the NEPOOL public utility members and
administer the NEPOOL open-access transmission tariff and (ii) the operation of
a power exchange that will embody a competitive wholesale power market. New
England Power Pool, 85 FERC P. 61,379 (Dec. 17, 1998).
A chart of the organization of NEES is attached hereto as Exhibit E-3.
C. Description of the Merger
1. Background
National Grid has been seeking opportunities to develop earnings from
outside the UK transmission business by applying its core skills in the
development and management of infrastructure assets and systems. The Merger is a
major step toward realizing those goals. From National Grid's perspective, NEES:
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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
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
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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 per share, up to a maximum price of $54.35 per share for each day
completion of the Merger is delayed longer than six months after approval of the
Merger by NEES shareholders. The Merger is subject to customary closing
conditions, including receipt of all necessary regulatory approvals, including
the approval of the Commission.
3. Corporate Structure for the Merger
As stated above, the Merger is structured as the indirect acquisition of
NEES by National Grid. Promptly after the Merger is consummated, National Grid
currently intends to convert NEES from a Massachusetts business trust into a
more conventional business corporation. This conversion may result in NEES
having a different corporate name. All references contained in this
Application/Declaration to NEES after consummation of the Merger refer to NEES
and its potential corporate successor. The Intermediate Companies in the
corporate structure between National Grid and NEES create a structure typical
for U.K. cross-border transactions; these entities exist primarily for the
purpose of creating an economically efficient and viable structure for the
transaction and the ongoing operations of NEES. The proposed structure as
currently planned and specific function of each of the Intermediate Companies is
set forth in Exhibit J-2 hereto. The Applicants note that certain adjustments in
the structure may be necessary to reflect tax and accounting changes as well as
management decisions prior to consummation of the Merger. Material changes
between the date of this Application/Declaration and the consummation of the
Merger will be reflected in a pre-effective amendment hereto. National Grid's
direct and
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indirect interest in each of the Intermediate Companies will flow through loans
and equity interests similar to those indicated in Exhibit J-2. It should be
noted that under this structure there will be no outside, third party interests,
including no lenders and no customers, in the Intermediate Companies.10
4. Financing the Merger
National Grid intends to finance the acquisition of NEES (and the NEES
acquisition of EUA) through a combination of borrowings under existing bank
facilities and other internal cash sources. Given the price escalation
provisions of the Merger Agreement and the nature of the transaction, the exact
cash purchase price to be paid to NEES shareholders in the aggregate will depend
on the timing of the closing of the Merger as well as the number of NEES shares
outstanding at that time. However, it is expected that the acquisition price
will be approximately $3.2 billion. On March 5, 1999, National Grid entered into
a fully committed bank facility with six banks providing for up to $2.750
billion in borrowings by National Grid, wholly-owned National Grid subsidiaries
incorporated in the UK (other than NGC), and other National Grid subsidiaries as
approved in writing by the banks, plus a further 250 million pound sterling
facility available to NGC only. The facility has a maturity of 3 to 5 years.
Each of these banks is a sophisticated commercial lender and the facilities were
negotiated at arms' length. It is expected that additional banks will be added
to the facility and subsequent syndication may bring the number of banks
involved to over 70. These facilities were established both for funding the
acquisition and to provide other working capital needs for National Grid. In
addition, National Grid will have access to other internal sources of funds for
the acquisition, namely existing cash balances. As of September 30, 1999,
National Grid had on hand deposits of $2,432 million.
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10 The Intermediate Company structure also will be free of minority equity
interest holders, except that National Grid (US) Holdings Limited ("NGUSH") will
own one share in each of its indirect subsidiary companies, National Grid
(Ireland) 1 Limited and National Grid (Ireland) 2 Limited. NGUSH's wholly-owned
subsidiary company, National Grid (US) Investments ("NGUSI"), will own all the
remaining shares. In addition, National Grid will own 0.1% of the preference
shares issued by NGUSI. All the remaining preference shares (and all the
ordinary shares issued by NGUSI) will be owned by NGUSH.
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D. Management and Operations of National Grid and NEES Following the
Merger
1. National Grid
Following consummation of the Merger, National Grid will become the
indirect parent company to NEES. All of National Grid's other operations will
remain unchanged in the Merger. The Merger Agreement provides that at the
effective time of the Merger, National Grid will appoint Richard P. Sergel, the
NEES president and chief executive officer and one additional NEES director,
Paul Joskow, to National Grid's board of directors. There will be ten directors
in all after the Merger. Both Richard Sergel and Paul Joskow are U.S. citizens
and residents of New England. Robert Faircloth, who is also a U.S. citizen and
part-time resident of New England, currently serves on the National Grid board.
The management of National Grid shall otherwise remain unchanged by the Merger.
National Grid's proposed board composition demonstrates a continued
commitment to maintaining a local presence in the U.S. that is sensitive to
local concerns.11 Indeed, National Grid intends to expand its presence in the
U.S. as opportunities arise through the restructuring of the electricity
industry and, in particular, within the fragmented New England market. National
Grid's commitment to the New England region is also demonstrated by its
commitment to continue to provide charitable contributions and community support
within the New England region at annual levels substantially comparable to the
annual level of charitable contributions and community support provided,
directly or indirectly, by NEES and its public utility subsidiaries within the
New England region during 1997.12
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
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11 See also, National Grid's letter to the Attorney General of Rhode Island
stating that the local management of NEES and Narragansett will continue to make
decisions about the disposition of Rhode Island real estate (included as Exhibit
M-1 to this Application).
12 Agreement and Plan of Merger, dated as of December 11, 1998, by and
among NEES, National Grid and NGG Holdings LLC, Section 7.07(c).
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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 surviving entity's board of directors with respect to
general business opportunities and activities in the surviving entity's market
area as well as customer relations issues. NEES will remain a registered holding
company under the Act.
E. Industry Restructuring Initiatives Affecting U.S. Operations.
NEES' public utility subsidiaries operate in states in which electric
utility restructuring has advanced significantly over the past year and a half.
The Applicants believe that these restructuring efforts will continue to lead to
significant changes in the electric utility industry in New England and will
serve as models for restructuring efforts in other parts of the nation.
Starting in 1996 and continuing through 1998, restructuring legislation was
passed in Massachusetts, Rhode Island and New Hampshire relating to competition
and customer choice of power suppliers, recovery of stranded costs by utilities
and reductions in rates. During this period, and in some cases prior to the
enactment of legislation, NEES'
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public utility subsidiaries entered into settlement agreements with their
relevant state regulators relating to corporate restructuring and the
introduction of retail access to competitive power suppliers. The settlement
agreements were also approved by the FERC. The overriding principle in this
restructuring was that the transition to full competition at the retail level
should be accomplished by separating generation from transmission to create a
regime of independent transmission companies with a competitive market for power
suppliers. Accordingly, NEES and its subsidiaries committed to the divestiture
of all generating facilities, including all nuclear plants, to the extent
practicable. As noted above, in 1998, NEP and Narragansett completed the sale of
substantially all non-nuclear generation facilities, including obligations under
power purchase and sale agreements, to USGen New England, Inc. As a result of
this divestiture, NEES is now primarily a transmission and distribution system
operating in a region undergoing significant restructuring. National Grid, which
is the world's largest privately owned independent transmission company, has
participated in the transition to a competitive electric market in England and
Wales and has had nine years experience in operating in a competitive
environment. The industry restructuring that is occurring in New England is a
critical factor in understanding the rationale and benefits of the Merger, which
are discussed in detail in Item 3.A.2.b below.
Pursuant to Mass. Electric's settlement with state regulators and the FERC,
and in accordance with legislation enacted in Massachusetts in late 1997,
starting in March, 1998, customers of Mass. Electric have been able to choose
their power supplier. The legislation requires electric utilities to provide
customers who do not choose a power supplier with standard offer service at
prices that produce a 10 percent rate reduction from the prices that were in
effect in 1997. The legislation also requires the rate reductions to increase to
15% (in real terms over 1997 prices) on or before September of 1999. The
settlement and legislation also authorized the recovery of stranded costs
resulting from the introduction of customer choice. The MDTE approved the
settlement and found it to be consistent with the legislation. A November 1998
referendum on the ballot in Massachusetts calling for the repeal of the
Massachusetts statute was defeated by the voters.
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Under the Massachusetts settlement agreement providing for customer choice,
recovery of NEP's stranded costs is allowed through a contract termination
charge billed to Mass. Electric and Nantucket, which is in turn collected by
Mass. Electric and Nantucket from all retail delivery customers. The
Massachusetts settlement agreement also required the relevant NEES companies to
divest all of their generation and related properties, and the companies
completed the sale of their non-nuclear generating assets to USGen New England
in 1998. The net proceeds of such sale were used to reduce the transition access
charge from 2.8 cents per kWh initially reflected in the settlement. In
addition, NEES's oil and gas properties were sold to Sameden Oil Corporation as
of January 1, 1998. Through power purchase contracts with USGen New England,
Inc. and TransCanada Power Marketing Ltd., Mass. Electric is providing
transition services to customers who do not choose a power supplier. The
Massachusetts settlement agreement and related transactions were approved by the
MDTE and the FERC.
The State of Rhode Island enacted restructuring legislation in 1996,
allowing certain customers in the state to choose power suppliers pursuant to a
phase in schedule that is now complete. NEP and Narragansett entered into a
settlement agreement with the RIPUC and RIDIV to implement the legislation on
terms similar to the Massachusetts settlement agreement with respect to
divestiture, stranded cost recovery and transition services. This settlement
agreement was approved by the FERC.
While restructuring efforts in New Hampshire began early, with the passage
of legislation in 1996, regulatory efforts have largely been halted as a result
of litigation by other in-state utilities. Granite State entered into a
settlement with the Governor of New Hampshire and several public interest and
customer groups in July 1998 that provided all of its customers with the right
to choose their electricity supplier and guaranteed a rate reduction of 10
percent. Following the sale of the system's non-nuclear generation facilities,
additional savings were passed on to Granite State's customers. Under the
settlement transition service was to be provided by Granite State for a two and
one-half year period. In January 1999, following an auction process, Granite
State selected Constellation Power Source as the supplier for its transition
service offer, replacing USGen New England. Again, this settlement agreement was
approved by the NHPUC and FERC.
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F. Reporting
Applicants will file Form U5S annually with the Commission within 120 days
of the close of National Grid's fiscal year. In addition, National Grid will
file Form 20-F annually with the Commission, a semiannual report containing
earnings information, and reports on Form 6-K containing material announcements
as made. National Grid will provide the staff with paper copies of its filings
on Form 20-F and its semiannual reports when filed with the Commission.
Under UK rules, National Grid must prepare and publish consolidated
financial information semi-annually. In addition, semiannual financial reporting
is consistent with National Grid's ADR listing on the New York Stock Exchange.
Due to National Grid's extensive foreign holdings, it would entail significant
additional work and expense for National Grid to prepare consolidated financial
statements on a quarterly basis. In that regard, in the interest of maintaining
the consistent presentation of financial information, Applicants propose that
their Form U5S filings will comprise National Grid's consolidated financial
statements in the format required by Form 20-F, i.e., U.K. GAAP format with
reconciliations to U.S. GAAP. In addition, Applicants propose to include in
their Form U5S filings: (1) U.S. GAAP financial statements for all the companies
in the NEES Group, and (2) U.S. GAAP financial statements or financial
statements in the format required by Form 20-F for (a) National Grid Holdings,
on a consolidated basis, and (b) the Intermediate Companies. Amounts included in
Form U5S filings will be stated in U.S. dollars. National Grid will provide the
Commission access to the books, records and financial statements, or copies
thereof, of any of its subsidiary companies, in English, as the Commission may
request.
Applicants request an exemption from Rule 26(a)(1) under the Act, regarding
the maintenance of financial statements in conformance with Regulation S-X, for
any subsidiary of National Grid Holdings organized outside the U.S. Any FUCO
acquired directly or indirectly by National Grid subsequent to the issuance of
an order in this Application-Declaration will maintain its financial statements
in U.S. GAAP or reconcile such statements to U.S. GAAP in the same manner as
required by Form 20-F.
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Applicants also will report annually, as a supplement to the Form U-13-60
filed by Service Company, about service transactions among the National Grid
System companies (excepting the NEES Group) and the NEES Group companies. The
report will contain the following:
a. A narrative description of the services rendered by individual
National Grid System companies (excepting the NEES Group) to the NEES
Group and by the NEES Group companies to other National Grid System
companies;
b. Disclosure of the dollar amount of services rendered according to
category or department;
c. Identification of companies rendering services and recipient
companies, including disclosure of the allocation of service costs
among the companies in the NEES Group, and;
d. Disclosure of the number of NEES Group employees engaged in rendering
services to other National Grid System companies on an annual basis
stated on an absolute and percentage of total employees basis.
Item 2. Fees, Commissions and Expenses
Millions
Accountants' fees $6.9
Legal fees and expenses 9.5
Shareholder communication and proxy solicitation expenses 2.3
Investment bankers' fees and expenses 30.7
Consulting fees .8
Miscellaneous 4.0
Total $54.2
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The total fees, commissions and expenses expected to be incurred in
connection with the Merger are estimated to be approximately $54.2 million.
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed transaction:
Sections 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
11(b)(2) Request for declaration that the Intermediate Companies are
not subsidiary companies or holding companies, solely with
respect to the "great-grandfather" provisions of Section
11(b)(2).
13 Approval of the Service Agreement and services provided to
affiliates thereunder by New England Power Service Company.
14, 15 Reporting, books and records.
33 Operations of National Grid Holdings and its subsidiary
companies.
Rules
45(a), 52 Financing transactions, generally.
80-91 Affiliate transactions, generally.
93, 94 Accounts, records and annual reports by subsidiary service
company.
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the merger, such sections and rules should
be considered to be set forth in this Item 3.
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A. Legal Analysis
Section 9(a)(2) makes it unlawful, without approval of the Commission under
Section 10, "for any person . . . to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate . . . of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Under the definition set
forth in Section 2(a)(11)(A), an "affiliate" of a specified company means "any
person that directly or indirectly owns, controls, or holds with power to vote,
5 per centum or more of the outstanding voting securities of such specified
company."
Because National Grid directly or indirectly, will acquire more than five
percent of the voting securities of each of the U.S. Utility Subsidiaries as a
result of the merger, and thus will become an "affiliate" as defined in Section
2(a)(11)(A) of the Act of the U.S. Utility Subsidiaries as a result of the
merger, National Grid must obtain the approval of the Commission for the Merger
under Sections 9(a)(2) and 10 of the Act. The statutory standards to be
considered by the Commission in evaluating the proposed transaction are set
forth in Sections 10(b), 10(c) and 10(f) of the Act.
As set forth more fully below, the Merger complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission because:
- the consideration to be paid in the Merger is fair and reasonable;
- the Merger will not create detrimental interlocking relations or
concentration of control;
- the Merger will not result in an unduly complicated capital structure
for the National Grid system;
- the Merger is in the public interest and the interests of investors
and consumers;
- the Merger is consistent with Sections 8 and 11 of the Act;
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- the Merger tends towards the economical and efficient development of
an integrated public utility system; and
- the Merger will comply with all applicable state laws
1. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to
an extent detrimental to the public interest or the interests of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of the
holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the
proper functioning of such holding company system.
a. Section 10(b)(1)
i. Interlocking Relationships
By its nature, any merger results in new links between theretofore
unrelated companies. Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("interlocking relationships are necessary to integrate [the two merging
entities]"). The Merger Agreement provides for the Board of Directors of
National Grid to be composed of members of the Board of Directors of
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National Grid and from top management of NEES. This is necessary to integrate
NEES fully into the National Grid system and will therefore be in the public
interest and the interests of investors and consumers. Forging such relations is
beneficial to the protected interests under the Act and thus are not prohibited
by Section 10(b)(1).
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. American Electric
Power Co., 46 S.E.C. 1299, 1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968). As discussed
below, the Merger will not create a "huge, complex, and irrational system," but
rather will result in a new holding company over a previously-approved
integrated electric utility system. See WPL Holdings, Inc., Holding Co. Act
Release No. 24590 (Feb. 26, 1988), aff'd in part and rev'd in part sub nom.,
Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989),
reaffirmed, Holding Co. Act Release No. 25377 (Sept. 18, 1991).
Competitive Effects: In Northeast Utilities, Holding Co. Act Release No.
25221 (Dec. 21, 1990), the Commission stated that "antitrust ramifications of an
acquisition must be considered in light of the fact that public utilities are
regulated monopolies and that federal and state administrative agencies regulate
the rates charged consumers." National Grid and NEES have filed Notification and
Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects
of the Merger on competition and the Merger has been cleared by these agencies.
In addition, the competitive impact of the Merger has been fully considered
by the FERC pursuant to Section 203 of the Federal Power Act in its review of
the Merger. As explained more fully in the FERC order approving the Merger, a
copy of which is
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attached hereto as Exhibit D-1.2, the Merger will not have an adverse effect on
competition. NEES and its subsidiary companies, on the one hand, and National
Grid and its related companies, on the other, do not have facilities or sell
products in any common geographic markets. With the exception of NEES Global,
which does some limited consulting work outside of the United States, the NEES
companies operate exclusively in the United States, selling electricity and
transmission, distribution and related energy services. National Grid and its
subsidiary companies operate almost exclusively in the United Kingdom and other
countries outside the United States.
For these reasons, the Merger will not "tend toward interlocking relations
or the concentration of control" of public utility companies, of a kind or to
the extent detrimental to the public interest or the interests of investors or
customers within the meaning of Section 10(b)(1).
b. Section 10(b)(2) -- Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by National Grid to the holders of NEES common stock
in connection with the Merger is reasonable and whether it bears a fair relation
to investment in and earning capacity of the utility assets underlying the
securities being acquired. Market prices at which securities are traded have
always been strong indicators as to values. As shown in the table below, the
quarterly price data, high and low, for NEES common stock provide support for
the consideration of $53.75 for each share of NEES common stock.
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, and are consistent with percentages previously approved by the Commission.
See, e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)
(fees and expenses represented approximately 1.7% of the value of the
consideration paid to the shareholders of Gulf States
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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 or an Intermediate Company. The
ultimate U.S. parent of NEES will be capitalized with both equity and debt, to
be held by one or more of the Intermediate Companies. Absent such additional
approval as may be required, none of the Intermediate Companies will be engaged
in any business or trade other than the business of owning, directly or
indirectly, equity securities of NEES and the financing transactions which are
the subject of this memorandum and none of the Intermediate Companies will be
regulated by U.K. or other third country regulatory authorities having
jurisdiction over electricity rates and service.
As a wholly owned indirect subsidiary of National Grid, NEES will retain
its designation as a registered holding company under the 1935 Act as well as
its current capital structure. Neither NEES nor any of the NEES Subsidiary
Companies will incur any additional indebtedness or issue any securities to
finance any part of the Cash Consideration. Except with respect to the effect in
corporate structure resulting from the potential conversion of NEES from a
business trust into a business corporation, the acquisition of NEES by National
Grid and the corporate and financing mechanics summarized above are not designed
or intended to alter or otherwise affect the current corporate structure and
financing obligations of the NEES Group companies as members of a registered
holding company system.
It is contemplated that the companies in the NEES Group will each continue
to pay dividends (and, in the case of the NEES Subsidiary Companies, dividends
on preferred stock and interest on and principal of long-term debt). Dividends
paid by NEES may ultimately be used by National Grid to service its debt.13
- --------
13 In a companion filing, National Grid and the U.S. Subsidiary Companies
are requesting authority to pay dividends out of additional paid-in capital up
to the amount of NEES' consolidated retained earnings just prior to the Merger
and out of earnings before amortization of goodwill thereafter. In no event
would dividends be paid if the common stock equity of NEES as a percentage of
total capital was below 35% on a consolidated basis. File No. 70-9519 (the
"Financing Application").
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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 as
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the borrowing of the Bank Loans, as a jurisdictional event, there is express
statutory provision for such transactions under Section 7(c)(2)(A) of the 1935
Act.
Nor does the presence of parent level debt to be used for general working
capital represent an undue complication of the capital structure of National
Grid for purposes of Section 10(b)(1). In the first instance, to the extent that
the debt is associated with facilities that have been entered into before
National Grid becomes a registered holding company, it should be grandfathered
for purposes of the Act. Second, and more important, Section 7(c)(2)(D)
expressly provides for the issuance of nontraditional securities if "such
security is to be issued or sold solely for necessary or urgent corporate
purposes of the declarant where the requirements of the provisions of paragraph
(1) would impose an unreasonable financial burden upon the declarant and are not
necessary or appropriate in the public interest or for the protection of
investors or consumers." Registered gas systems have relied on this provision
for years in connection with their routine financing transactions. See, e.g.,
The Columbia Gas System, Inc., Holding Co. Act Release No. 26634 (Dec. 23, 1996)
(authorizing Columbia to issue external, long-term debt which, in the aggregate
with equity financing issued by Columbia, would not exceed $5 billion at any one
time outstanding through December 31, 2001).
Further, the issue for purposes of Section 10(b)(3) is not the existence of
parent-level debt per se. Rather, the question is whether it is permissible for
a registered system to have debt at more than one level. Again, the Commission
has answered that question in the affirmative. In the 1992 amendments to Rule
52, the Commission eliminated the requirement that a public-utility subsidiary
company could issue debt to nonassociates only if its parent holding company had
issued no securities other than common stock and short-term debt. The rule
release explains:
Condition (6) provides that a public-utility subsidiary company may
issue and sell securities to nonassociates only if its parent holding
company has issued no securities other than common stock and short-term
debt. All eight commenters that considered this condition recommended that
it be eliminated. They noted that it may be appropriate for a holding
company to issue and sell long-term debt and that such a transaction is
subject to prior
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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 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.14
- --------
14 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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ii. The Merger will not be detrimental to the public
interest or the interest of investors or consumers or
the proper functioning of the registered holding
company system.
For the reasons set forth previously, and discussed below in the context of
Section 10(c)(2), the Applicants believe that the proposed Merger will, in fact,
benefit the protected interests and enhance the functioning of the resulting
holding company systems. NEES and National Grid are requesting an affirmation
from each of the affected state regulators that it has the authority and
resources to protect consumers subject to its jurisdiction and that it intends
to exercise that authority. In addition, National Grid commits that it will not
seek recovery in higher rates to NEES ratepayers for any losses or inadequate
returns that may be associated with its non-NEES investments. Finally, the
Merger is expected to have no adverse effect on the rights of holders of the
outstanding preferred stock and debt securities of the NEES Subsidiary
Companies.15 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
(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.
- --------
15 NEES currently has no public security holders other than common
stockholders.
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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.
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
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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.
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
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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.
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
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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.16
o National Grid's Corporate Structure Will Not Be "Unduly or
Unnecessarily" Complicated.
As noted above, National Grid's proposed transaction structure is more
complicated than the traditional corporate structure commonly used by U.S.
registered holding companies with respect to their U.S. subsidiaries and
operations in that there will be more corporate layers between National Grid and
NEES than there are, for example, between NEES and its operating subsidiaries.
The Applicants believe that the structure is nonetheless appropriate in that the
type of corporate structure proposed by National Grid, with its principal
objective being to maximize after-tax returns to shareholders, is the norm,
rather than the exception, for cross-border transactions generally. Moreover, as
to its future U.S. subsidiaries and regulated utility operations; i.e., the NEES
Group, National Grid proposes to continue the current NEES corporate and holding
company system structure.17
- --------
16 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.
17 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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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
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
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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 corporation) or in the financing transactions undertaken
by NEES and its subsidiaries. NEES will receive cash in the form of equity from
National Grid to pay the Cash Consideration and neither NEES nor any of NEES's
subsidiaries will borrow or issue any security or pledge any assets to finance
any part of the Cash Consideration. Thus, there is no possibility that
implementation and continuance of the proposed transaction structure could
result in an undue or unnecessarily complex capital structure to the detriment
of the public interest or the interest of consumers.
The Applicants thus request that the Commission exercise its authority and
discretion (under all relevant sections of the 1935 Act and considering the
policy of the 1935 Act as a whole) to approve the transaction structure in the
instant situation because, as
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with "out-bound" investments by U.S. registered holding companies, the "layers
of complication" are in fact the economically necessary and efficient bridge by
which cross- border transactions are generally accomplished.
o Voting Power Will Be Fairly and Equitably Distributed.
National Grid is a public corporation organized under and domiciled in the
U.K.. Its shares are listed on, and trade on, the London Stock Exchange. The
vast majority of National Grid's 800,000 public shareholders are not U.S.
residents. The government of the U.K. also owns what is commonly referred to as
the "golden share" in National Grid. The golden share is a single non-voting
share that prevents amendments to National Grid's Memorandum and Articles of
Association without the consent of the holder of the golden share. The
Memorandum and Articles of Association contain restrictions on certain classes
of persons holding more than a prescribed shareholding in National Grid (as the
indirect holder of the England and Wales Transmission License through NGC). In
particular, the Memorandum and Articles of Association restrict companies that
trade electricity in England and Wales from owning more than 1% of the shares of
National Grid and also requires that no party may own more than 15% of National
Grid's shares. The golden share is a means to preserve the status of National
Grid as an independent provider of transmission services and as such does not
restrict shareholder voting rights. The golden share may not be sold or
transferred by the U.K. government, but it may be rescinded.
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
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structure. Thus, as there are no direct or indirect security holders of NEES
with whom National Grid must share voting power, there is no possibility that
voting power among security holders of the National Grid holding company system
could be unfairly or inequitably distributed.
o Policy Considerations.
The Commission has publicly confirmed that the 1935 Act does not bar the
acquisition of a U.S. utility by a non-U.S. person. See Gaz Metropolitain, Inc.,
Holding 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 National Grid.
b. Section 10(c)(2)
The standards of Section 10(c)(2) are satisfied because the Merger will
tend toward the economical and efficient development of an integrated public
utility system, thereby serving the public interest, as required by that section
of the Act. Integration is not an issue in that the Merger will simply impose a
new holding company structure over an
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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 two categories. First, National Grid has
significant expertise in providing the infrastructure, dispatch and power
exchange necessary for an efficient power supply market. Power supply is the
major cost element of electricity and is crucially influenced by the efficient
development of the market for the product. The efficient provision of the
infrastructure to let the supply market develop will facilitate the increase in
potential suppliers of electricity, with the competition so generated leading to
lower and more stable prices for the unregulated supply component of electric
service.
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Second, there will be savings and efficiencies associated with the NEES-
National Grid Merger itself. The two companies are currently in the process of
evaluating integration possibilities, aimed at eliminating duplication and
implementing best practices. National Grid's significantly larger scale, both in
financial and operational terms, will enhance the ability of NEES to utilize new
developments in transmission and distribution technology, information systems,
and capital markets, where these can be seen to bring economic benefit.
o Strategic benefits
National Grid owns, operates and maintains the high voltage network in
England and Wales, which connects power stations with distribution networks.
This transmission network consists of approximately 4,300 route miles of
overhead lines and 400 miles of underground cables, both operating principally
at voltages of 400kV and 275kV. National Grid also owns and operates
interconnectors which enable electricity to be transferred between the England
and Wales market and Scotland and France. National Grid also has investments in
transmission businesses in Argentina and Zambia and direct experience of
operating and maintaining systems in those countries.
A key factor in the efficient development of a competitive electricity
supply market is the provision of open access on non-discriminatory terms to the
electric transmission system. National Grid, as holder of the only transmission
licence for England and Wales, is obliged to facilitate competition in the
generation and supply of electricity and to offer terms for connection to and
use of its transmission system to those who request it. Since 1990, National
Grid has received over 70 applications from generators seeking to use the
transmission system and is obliged to provide a formal offer of connection,
including all technical and commercial terms, within 90 days.
In addition, National Grid is the system operator for England and Wales,
with an obligation to schedule and dispatch generation to meet demand, while
maintaining security of the transmission system and supply quality. Through
wholly-owned subsidiaries, National Grid also provides data collection and
settlement services to facilitate the competitive electricity supply market. The
development of new generation sources and of
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new competing electricity supply companies, since the restructuring of the
electric industry, has seen the price of electricity fall by 15-25% in real
terms, depending on customer class.
Another relevant feature of National Grid's experience is its financial
incentivization. In England and Wales both its wires ownership and system
operation activities are subject to incentive forms of regulation. These provide
a direct stimulus for National Grid to improve the efficiency of its licensed
activities and this has led to significant benefits for both customers and
shareholders. Supply quality is assured through the requirement for National
Grid to work to prescribed standards and to report annually on system
performance to the industry regulator. National Grid's experience of this sort
is not limited to England and Wales, since its operation of the transmission
system in Argentina is also subject to financial incentivization.
The Merger comes at a time of substantial change in the United States
electricity industry, with reform and restructuring proceeding nationwide and in
particular in New England. The intentions of National Grid and NEES to pursue
consolidation and rationalization of transmission and distribution in the region
are seen as being fully consistent with the views of the FERC on the development
of strong Regional Transmission Organizations. NEPOOL and the New England
Independent System Operator are grappling with many complex issues on
transmission pricing, congestion management and market price determination as
they attempt to advance the development of the electric market in New England.
National Grid does not claim that its experience or the solutions which have
been reached for similar issues in England and Wales can be simplistically
transplanted to the United States. However, its experience in addressing and
finding appropriate solutions to similar problems, both in the U.K. and in other
countries, will be important in facilitating the development of electricity
markets in the United States and in the timely achievement of the benefits which
such markets can bring.
Although some of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met. See American Electric
Power Co., 46 S.E.C. 1299, 1320-1321 (1978). Further, the Commission has
recognized that while some potential benefits cannot be precisely estimated,
nevertheless they too are entitled to be
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considered: "[S]pecific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable." Centerior Energy Corp., Holding Co. Act Release
No. 24073 (April 29, 1986) (citation omitted). See Energy East Corporation,
Holding Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based
on strategic benefits and potential, but presently unquantifiable, savings).
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
As described in Item 4 of this Application/Declaration, and as evidenced by the
applications and the requested certification from each of the affected state
regulators, the Applicants intend to comply with all applicable state laws
related to the proposed transaction.
B. Other Statutory Provisions
1. Sections 6 and 7, and Rule 53
The Applicants seek confirmation that their preexisting investment in
National Grid Holdings and its direct and indirect subsidiary companies (i.e.,
the FUCO holdings) will not be counted toward the cap on "aggregate investment"
for purposes of Rule 53. The basis for this request is two-fold: First, in an
analogous situation, the Commission has traditionally grandfathered nonutility
investments made before an entity became part of a registered system. See, e.g.,
New Century Energies, Holding Co. Act elease 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
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same accommodation should be made for preexisting FUCO investments for purposes
of Rule 53, simply as a matter of comity.
Second, and perhaps more important, there is no equitable basis for
including National Grid's preexisting FUCO holdings in the calculation of
"aggregate investment" because, unlike the FUCO investments of U.S. holding
companies, no part of the capital currently invested in National Grid's FUCO
operations can be deemed to be derived, directly or directly, from captive U.S.
ratepayers.
The Applicant also seeks confirmation that National Grid's borrowing under
Credit Facility for purposes of financing the Merger are permissible under the
Act and may be repaid in accordance with the terms of the Credit Facility, which
is attached hereto as Exhibit B-3. Although National Grid will technically incur
this indebtedness just prior to its acquisition of NEES and consequent
registration as a holding company, as previously discussed, the parties
recognize that the Commission will take this financing into account in approving
the transaction. These borrowings will be made from sophisticated commercial
lenders on terms negotiated at arms-length.
2. Section 13 -- Intrasystem Provision of Services
o Interaction with FERC Policy
All services provided by National Grid system companies to other National
Grid system companies will be in accordance with the requirements of Section 13
of the Act and the rules promulgated thereunder. National Grid is aware that
questions concerning the FERC's policy in this area are likely to arise with
respect to affiliate transactions involving NEP, Mass. Electric, Narragansett,
NEET, Mass. Hydro and AllEnergy Marketing Company, L.L.C., companies that are
public utilities under the Federal Power Act. In connection with the requested
FERC authorization, the applicants in that matter have represented, and the FERC
approved the merger subject to their commitment, that "with respect to any
transaction between any member company of the NEES system and National 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
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transactions policy, with respect to non-power goods and services, generally
requires that affiliates or associates of a public utility not sell non-power
goods and services to the public utility at a price above market; and sales of
non-power goods and services by a public utility to its affiliates or associates
be at the public utility's cost for such goods and services or market value for
such goods and services, whichever is higher.
The Applicants recognize that affiliate transactions among the member
companies of National Grid will be subject of the jurisdiction of the Commission
under Section 13(b) of the Act and the rules and regulations thereunder. That
section generally requires that affiliate transactions involving system
utilities be "at cost, fairly or equitably allocated among such companies." See
also Rule 90. Nonetheless, National Grid believes that, as a practical matter,
there should not be any irreconcilable inconsistency between the application of
the Commission's "at cost" standard and the FERC's policies with respect to
intra-system transactions as applied to National Grid.
On this basis, the applicants believe that National Grid will be able to
comply with the requirements of both the FERC and the "at cost" and fair and
equitable allocation of cost requirements of Section 13, including Rules 87, 90
and 91 thereunder, for all services, sale and construction contracts between
associate companies and with the holding company parent unless otherwise
permitted by the Commission by rule or order.18
o Scope of Service
After consummation of the merger, the New England Power Service Company
(the "Service Company"), which has been previously approved by the Commission,
will continue to provide the NEES companies with a variety of administrative,
management and support services. The anticipated services include electric power
planning, 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,
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18 Under circumstances of divergent cost and market prices such that both
the FERC and SEC pricing standards could not be reconciled if the transaction
was performed, National Grid will comply by refraining from performing the
affected service, sales or construction contract.
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human resources, marketing and customer services, information systems and
general administrative and executive management services. In addition, members
of the National Grid System may provide services to the NEES Group and, to a
lesser extent, NEES Group companies may provide incidental services to National
Grid System companies.
Trans-Atlantic services will fall into two principal categories. The first
category, central administrative services, detailed in Exhibit B-2.1, will be
provided by NGC. The second category encompasses other services that will be
rendered by members of the National Grid System as specifically requested by
members of the NEES Group. The full range of services in the second category is
not presently known, but the Applicants expect that it will include engineering
consulting, laboratory services, research and development projects, and
transmission best practices consulting. Although some trans-Atlantic services
may be performed by NEES Group companies for National Grid System companies, the
Applicants contemplate that the majority of services will flow from the National
Grid System companies to the NEES Group. In particular, NGC, the operating
company for the UK transmission business and a service company for the National
Grid Group, will be the principal entity providing services, and the Service
Company will be the principal recipient of services. The charges to the NEES
Group will be primarily from NGC to the Service Company, and the Service Company
will reallocate the charges as appropriate to members of the NEES Group.
Some services such as corporate finance and business development, for
example, are solely concerned with events outside normal operations. The NEES
Group will not be charged with any costs relating to these departments, unless
their services are specifically requested. In addition, charges for costs
associated with future mergers and acquisitions may be allocated to NEES and/or
to other National Grid Group companies, but not to the NEES Subsidiary
Companies.
The attached Standard Form of Service Contract ("Standard Form"), Exhibit
B-2, will govern the charges between the Service Company and the NEES Group. It
is contemplated that the Standard Form will be amended to provide for services
to entities that will become associate companies of NEES as a result of future
mergers and acquisitions.
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o Allocation of Service Costs Among Members of the NEES Group
The costs of services provided by the Service Company and members of the
National Grid System will be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. The
Applicants expect that the majority of costs billed by members of the National
Grid System to the NEES Group will be paid initially by the Service Company
which will then charge the appropriate service recipient. The Applicants
envision two types of charges.
First, for services rendered specifically for the NEES Group or individual
members, costs will be directly attributed to specific subsidiaries when it is
possible to accurately do so. The costs of engineering or laboratory services
are routinely billed directly based on a employee-hour basis. Exhibit B-2.1
contains a list of services that are expected to be billed directly and those
services that benefit the National Grid System as a whole.
Second, members of the NEES Group will pay a share of services that benefit
them as members of the National Grid System. Their share will be determined by a
two-step process. The NEES Group's portion of these costs will be determined
using measures that reflect the relevant contribution and size of the individual
businesses. Allocation of group costs will follow the methodology adopted by the
UK regulator, the Office of Gas and Electricity Markets ("OFGEM"). The OFGEM
approach uses four measures (revenues, operating profit, employee numbers and
net assets) and allocates the group costs equally across the four. Revenues are
adjusted to exclude the income resulting from sales of purchased power, and
income relating to stranded assets (both within NEES). NGC will use figures from
the latest published accounts to calculate the percentage of revenues, operating
profit, employee numbers and net assets on an annualized basis, and these four
percentages will be averaged to calculate the group allocation. Exhibit B-2.2
sets forth an estimated allocation of service costs among the NEES Group, other
members of the National Grid System, and both NEES Group and the National Grid
System.
The Service Company will allocate the costs of service among the NEES Group
using one of several methods. Service Company will choose the method that most
accurately distributes the costs. The method of cost allocation varies based on
the
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department rendering the service. Exhibit B-2.4 provides an illustration of
allocation of group costs among the NEES Group.
The largest category of costs being billed to the NEES companies are for
the following departments which are relatively similar to a category of costs
currently being incurred by the Service Company: shareholder services, investor
relations and group accounts. In May 1992, in accordance with a 60-day letter to
the SEC, the Service Company implemented a new allocation formula for costs
associated with the annual meeting, annual and interim reports, proxy statements
and shareholder and investor related services to the NEES companies. That method
of allocation was based on total Service Company billings for services rendered
(excluding convenience payments) to the NEES associate companies. The Service
Company believes the costs to be billed by NGC for the departments listed above
are essentially similar in nature to the costs currently incurred and allocated
in accordance with the May 1992 letter. Therefore, the Service Company proposes
to allocate the above costs in accordance with that approved allocation formula.
The next largest category of costs is National Grid's senior management
category of costs. To the extent that a senior manager is working on an issue
specific to a particular NEES subsidiary or group of subsidiaries, NGC will
identify this cost and the applicable NEES subsidiary that should be charged.
However, senior management time and costs may relate to setting corporate-wide
objectives, policies and procedures as well as reviewing corporate-wide
activities and achievements. The Service Company currently has a general
allocation formula that allocates 25% of these costs to NEES (the parent) with
the remainder allocated to the subsidiaries based on operation and maintenance
expenses. In 1998, in connection with the divestiture of NEES' generating
facilities, the Commission reviewed and approved the use of operation and
maintenance expense for the remaining 75% of the allocator. The Service Company
proposes to use this allocation formula to allocate National Grid's senior
management time and costs to the extent that these costs cannot be attributed to
a specific individual NEES subsidiary.
Another major category of billings is expected to be costs incurred for
human resources, payroll and pension services. The Service Company proposes to
allocate these costs to the NEES Subsidiary Companies using a formula currently
in place that is based on
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number of employees in each company. This formula exists specifically for use by
NEES' existing human resources and payroll departments and is appropriate for
costs of a similar nature billed by the NGC.
The costs estimated to be billed by the remaining departments are
individually relatively minor and in most cases are of a general nature. Under
the Service Company's accounting system, costs incurred in a department that are
general in nature, such as supervision or secretarial support costs, are charged
to a department overhead account. Department overhead costs are billed out based
on how the payroll of that department is charged to the companies for whom
Service Company performs services. The costs billed by the remaining NGC
departments listed in Exhibit B-2.3 will be charged to the applicable Service
Company department overhead account. These costs will, in turn, be billed out by
the Service Company based on the manner in which that Service Company department
charges its time. Exhibit B-2.3 lists the overhead accounts for the majority of
the NGC departments.
o Calculation of Service Costs
To gather the information necessary to allocate service costs, employees of
the Service Company will record transactions utilizing the existing data capture
and accounting systems of each client company. Costs will be accumulated in
accounts of the Service Company and directly assigned, distributed and allocated
to the appropriate client company in accordance with the guidelines set forth in
Schedule II of the Standard Form. The Service Company's accounting and cost
allocation methods and procedures are structured so as to comply with the
Commission's standards for service companies in registered holding-company
systems. The Service Company's billing system will use the "Uniform System of
Accounts for Mutual Service Companies and Subsidiary Service Companies"
established by the Commission for service companies of registered
holding-company systems, as may be adjusted to use the FERC uniform system of
accounts. Further, since costs will be equitably allocated, charges for all
services provided by the Service Company to affiliates will be on an "at cost"
basis as determined under Rules 90 and 91 of the Act.
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With regard to services provided by NGC to the NEES Group, NGC will use
appropriate policies and procedures to assure that all costs are identified and
attributed to particular projects, programs or work orders for purposes of
direct cost allocation.19 Records related to services provided by NGC to NEES
companies will be made available to the Commission staff for review. For
example, within NGC there are several general ledger systems, with one being
dedicated to corporate function accounting. Consolidation takes place within a
separate group consolidation system. As such, the corporate ledger is discrete
and auditable.
As required by Rule 91 under the 1935 Act, the costs allocated across the
businesses served by NGC will as far as possible represent the total true cost
of providing the corporate service. The costs considered in the allocation will
include (1) total payroll and associated costs; (2) materials and consumable
costs; (3) building and facilities costs; (4) IS infrastructure costs; and (5)
other departmental costs.
Rates for NGC charges to the Service Company will be calculated by taking
total cost over total time worked. This method of calculation will ensure total
recovery of departmental costs on a monthly basis, with minimal fluctuation of
hourly rates. Budgeted rates will be available for forecasting purposes.
o Billing
NGC will bill the Service Company monthly in arrears. The billing format
will list charges by corporate department, detailing total time applicable to
NEES companies, multiplied by the current rate, to give the total charge for the
month.
If NGC provides services for the benefit of a specific NEES company, the
charge applicable to that company will be specifically identified in the
invoice. Otherwise, NGC's charges will be allocated to individual NEES companies
through the Service Company's allocation cycle as described above.
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19 See Exhibit B-4, National Grid Group Policies and Procedures for
Affiliate Transactions.
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o Forecast of NGC's Charges to the Service Company
NGC's UK regulator requires NGC to develop a business plan covering the
upcoming price review period. The output of this planning process forms the
basis for the forecast allocations included in this section. The information
provided below is based upon projections over the six-year plan period. The
figures in Exhibit B-2.2 are based on the forecast for year 2000/01. Direct
costs allocated to the NEES Group is estimated to average about $3.0 million per
annum -- this represents just under 3.0% of total corporate cost incurred by
NGC. Total "group" costs for all the companies in the National Grid System
average about $13 million per annum -- representing 12% of total corporate cost
incurred by NGC. NEES' share of group costs will be approximately 36% of the
total, a charge of about $4.7 million per annum. IS infrastructure costs
allocated to NEES will amount to about $0.3 million per annum -- representing
less than 1% of total infrastructure costs. Building and facility costs
allocated to NEES will amount to about $0.3 million per annum -- representing
approximately 3% of the total cost of NGC's headquarters.
On this basis, total charges to NEES are estimated to be about $8.3 million
per annum, representing approximately 7.5% of total corporate costs. The
Applicants also forecast that the Merger will also reduce the level of certain
services carried out within NEES. Applicants expect that savings will be
approximately $8.4 million annually. The savings are described in Exhibit B-2.5.
Accordingly, the annual cost of transatlantic services provided by NGC to the
NEES Group is approximately equal to the service costs savings attributable to
the Merger.20
o Restriction on Amendments
No change in the organization of the Service Company, the type and
character of the companies to be serviced (other than the amendment discussed
above to include services for the National Grid associate companies), the
methods of allocating costs to associate companies, or in the scope or character
of the services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder, shall be made unless and
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20 The projections of the cost of transatlantic services and the service
cost savings attributable to the Merger include cost and savings projections
from the NEES-EUA merger.
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until the Service Company shall first have given the Commission written notice
of the proposed change not less than 60 days prior to the proposed effectiveness
of any such change. If, upon the receipt of any such notice, the Commission
shall notify the Service Company within the 60-day period that a question exists
as to whether the proposed change is consistent with the provisions of Section
13 of the Act, or of any rule, regulation or order thereunder, then the proposed
change shall not become effective unless and until the Service Company shall
have filed with the Commission an appropriate declaration regarding such
proposed change and the Commission shall have permitted such declaration to
become effective.
3. Sections 14 and 15 -- Jurisdiction
Pursuant to these sections, the Commission has broad authority over, and
access to, the books and records and reporting of companies in a registered
holding company system. As noted previously, National Grid ADRs are now listed
on the New York Stock Exchange. In connection with the ADR listing, National
Grid will provide financial statements for the fiscal year ended March 31, 1999
and semiannually thereafter that include a reconciliation of net income and
shareholders' equity in accordance with US GAAP.
It should be further noted that the utility assets of NGC are accounted for
on the basis required by the U.K. regulator, rather than that used for purposes
of U.S. ratemaking proceedings, and rates for U.K. regulated utilities are also
determined in a different manner than those for U.S. regulated companies. These
issues are discussed at length in the attached paper by Professor Franks. See
Exhibit J-3.
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
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Commission or any appropriate court to enforce the provisions of the acts
administered by the Commission.21
4. Section 33 -- Foreign Utility Companies
Neither Section 33 nor the legislative history specifically addresses the
availability of the FUCO exemption to registered holding companies organized in
foreign countries. We do not believe that silence should be construed against
National Grid. To the contrary, in Gaz Metropolitain, Inc. the Commission found
that foreign acquisitions of U.S. utility companies were not barred by the fact
that the Act was silent on the question of foreign ownership.22
Since the Act, on its face, does not distinguish between U.S. and foreign
registered holding companies, the question then becomes how best to provide for
the protection of the public interest and the interest of investors and
consumers (the "protected interests" under the Act), and how to ensure that the
proposed Merger and related transactions do not lead to a recurrence of the
evils that the Act was intended to address.
Applicants make numerous commitments in their application for financing
authorization (File No. 70-9519) to ensure that the proposed financing of the
National Grid System, including financing for purposes of acquiring interests in
EWGs and FUCOs, is consistent with the protected interests. In particular:
o National Grid commits to maintain the common stock equity ratios of NEES
and its electric utility subsidiaries at a minimum of 35%;23
o National Grid commits to maintain its long-term debt rating at an
investment grade level;
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21 See Exhibit O-1, Appointment of Agent for Service of Process.
22 Holding Company Act Release No. 35-26170 (Nov. 23,1994).
23 New England Electric Transmission Corporation and Vermont Yankee Nuclear
Power Corporation would be excluded from the 35% common stock equity
capitalization standard. In addition, the 35% standard would be applied to the
combined capitalization of Nantucket Electric Company and Massachusetts Electric
Company.
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o National Grid commits to maintain its interest cover ratio (Consolidated
EBITDA to Net Interest Payable) at not less than 3:1, and;
o National Grid undertakes to cause its common stock equity as a percentage
of total capitalization, measured on a book value US GAAP basis, to be 30%
or above by March 31, 2002.
In addition, National Grid has structurally separated its FUCO activities from
the NEES Group and it will limit the use of employees of the U.S. Utility
Subsidiaries in FUCO operations. Lastly, periodic reporting of National Grid's
aggregate investment in EWGs and FUCOs and a description of new FUCO investments
will allow the Commission to continually monitor National Grid's non-U.S.
activities.
The Commission has nearly thirty years experience dealing with the issues
presented by investments in foreign activities, and the measures necessary to
protect U.S. ratepayers from any adverse effects that might be associated with
those activities.
Beginning in 1971, the Commission authorized a series of investments in
foreign utility and nonutility operations. On the nonutility side, registered
holding companies have been authorized to engage in the marketing and trading of
energy commodities in Canada;24 energy management, consulting services and
related financings;25
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24 American Electric Power Co., Holding Co. Act Release No. 27062 (Aug. 19,
1999); Southern Co., Holding Co. Act Release No. 27020 (May 13, 1999).
25 American Electric Power Co., Holding Co. Act Release No. 26682 (March 7,
1997). See also The Columbia Order ($50 million investment limit worldwide) and
Southern Co., Holding Co. Act Release No. 22132 (July 17, 1981) (granting
foreign consulting authority).
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exploration for and production of natural gas;26 and construction, ownership and
operation of gas pipelines.27
In addition, even prior to the Energy Policy Act of 1992, the Commission
authorized U.S. holding companies to acquire foreign utility operations. See,
e.g., Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992)
(authorizing the acquisition of foreign utility interests by a registered
holding company) and SCEcorp, Holding Co. Act Release No. 25564 (June 29, 1992)
(authorizing the acquisition foreign utility interests by an exempt holding
company). In those orders, the Commission sought to protect the interests of
domestic utility consumers and investors while permitting the acquisition of
foreign utility operations. In the Southern order, the Commission found a number
of means by which consumer interests would be protected. In SCEcorp, the
Commission gave great weight to the statement of the California Public Utility
Commission that it had no objection to the acquisition of a foreign utility
interest so long as the holding company complied with certain conditions
designed to protect the interests of domestic consumers.
Title VII of the Energy Policy Act amended the 1935 Act to create two new
classes of exempt entities, EWGs and FUCOs. By exempting these entities from all
provisions of the Act and providing generally for their acquisition without
prior Commission approval, Congress intended to facilitate the participation in
these activities. See, e.g., Statement of Sen. Riegle, Cong. Rec. S17629 (Oct.
8, 1992) (explaining that "the purpose of section 33 is to facilitate foreign
investment, not burden it.").
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26 Columbia Energy Group, Holding Co. Act Release No. 26820 (Jan. 23,
1998), as amended, Holding Co. Act Release No. 27055 (July 30, 1999)
(authorizing Columbia to invest up to $55 million in Canadian E&P activities).
See also Columbia Gas System, Inc., Holding Co. Act Release No. 17290 (Sept. 27,
1971) (authorizing the formation of a wholly-owned Canadian oil and gas
exploration and production subsidiary in connection with an effort to obtain
natural gas from the Prudhoe Bay and Arctic region of Canada), and Holding Co.
Act Release No. 18534 (Aug. 16, 1974) (authorizing participation in projects for
the development of proven gas reserves in Alaska and Canada, and for
transportation of the gas to the United States).
27 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26595
(Oct. 25, 1996), and Holding Co. Act Release No. 26608 (Nov. 19, 1996)
(authorizing CNG to invest, on a case-by-case basis, in foreign pipeline
projects).
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A question arises because neither Section 33 nor the legislative history
specifically addresses the availability of the exemption to foreign holding
companies. Although the Commission has not yet addressed this issue, we note
that, in a related context, the Commission found that foreign acquisitions of
U.S. utility companies were not barred by the fact that the Act was silent on
the issue. In the Gaz Metropolitain case the Commission staff had opposed the
acquisition by a Canadian parent of a Vermont gas utility company on the basis
that, among other things, Congress had not contemplated foreign ownership of
U.S. utilities when it drafted the Act in 1935. The Commission rejected the
staff's argument, stating:
We do not agree with the staff's analysis. The Act contains no
prohibition against foreign utilities as such. Indeed, nothing in the
Act prevents a foreign company that does not own or control public
utility or holding company securities from acquiring the securities of
a domestic public utility company.
Emphasis added. The Commission's focus, instead, was on whether the proposed
transactions would be detrimental to the public interest or the interest of
investors or consumers, or would lead to a recurrence of the problems that the
Act was intended to address. Cf. Section 1(b) of the Act (describing the abuses
that gave rise to the Act).
Accordingly, we believe it is appropriate for the Commission to rely on the
plain meaning of Section 33, so long as there are adequate safeguards for the
protected interests and it does not appear that the proposed transactions would
lead to a recurrence of the evils that the Act was intended to address. In this
regard, the staff has emphasized the need for a "level playing field" as between
U.S. and foreign registered holding companies. In practical terms, this means
that the foreign holding company should not be able to rely on Section 33 in a
way that is not available to U.S. companies. We believe there are three sets of
issues in this regard:
1. Reliance on the FUCO exemption for all pre-existing interests
National Grid, through its wholly-owned subsidiary National Grid Holdings,
is the parent of NGC, which owns and operates the England and Wales electric
transmission
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system, and certain other nonutility interests. Prior to the closing of the
proposed transactions, National Grid Holdings will file a Form U-57 to perfect
its exemption as a FUCO. Thereafter, it is our view that National Grid Holdings
and its subsidiaries, including, for example, Energis, will be exempt from all
provisions of the Act -- except with respect to transactions with National Grid
and its non-FUCO subsidiary companies. This latter set of transactions will
continue to be fully regulated under the Act.28 See Section 33(a)(1) of the Act
("A foreign utility company shall be exempt from all provisions of the Act,
except as otherwise provided under this section").
As explained more fully in Exhibit J-1 to this Application, while NGC and
other FUCO interests will form the largest part of National Grid Holdings'
interests, the company will have certain non-FUCO subsidiaries. In particular,
National Grid holds a significant interest in Energis, which is engaged in
telecommunications in the U.K. Typically, Energis would be qualified as an
"exempt telecommunications company" or "ETC" under Section 34 of the 1935 Act.
In this matter, however, there is no way for National Grid, as a minority owner,
to ensure that Energis will continue to be engaged "exclusively" in providing
telecommunications, information and related goods and services, as required by
the ETC definition.
Accordingly, the Applicants seek to rely on the fact that Section 33
(unlike Sections 32 and 34) does not require that the exempt entity be engaged
"exclusively" in the subject activity. Although there is no discussion of this
point in the legislative history, it does not seem unreasonable that Congress
was attempting to accommodate the nature of the entities exempt under Section
33. Unlike EWGs and ETCs, which are likely to be special purpose entities, FUCOs
may comprise vertically-integrated utility systems and businesses that are
reasonably incidental or economically necessary or appropriate thereto. Indeed,
a review of the Forms U5S suggests that U.S. holding companies have indirectly
acquired certain nonexempt interests in connection with their FUCO holdings.
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28 The Commission's residual jurisdiction is generally limited to
parent-level financings, affiliate transactions and "the creation or maintenance
of any other relationship between a foreign utility company and a registered
holding company." Section 33(c)(2).
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The Commission should not find these "other businesses" to be inconsistent
with the policies and provisions of the Act, so long as: (i) the nonutility
interests are functionally related to the foreign utility business, in the same
way domestic nonutility interests must be related to domestic utility
operations, (ii) all direct or indirect investments in these businesses for
which there is recourse, directly or indirectly, to the registered holding
company will be counted toward "aggregate investment" for purposes of Rule 53,
and (iii) there are appropriate safeguards, such as those described above, to
protect the interests of U.S. ratepayers from the adverse effects, if any, that
may be associated with the foreign operations.
2. Compliance with Rule 53
In 1992, Congressman Markey expressed concern that Sections 32 and 33
"would invite utilities to shift valuable resources and management -- paid for
by captive retail ratepayers" to new "competitive" ventures. Statement of Rep.
Markey, Cong. Rec. H11446 (Oct. 5, 1992). These concerns were addressed, in
part, when the Commission adopted Rule 53 which, among other things, effectively
limits the amount of ratepayer- generated capital that a registered holding
company can invest in foreign utility operations. While National Grid intends to
comply fully with the substantive requirements of Rule 53 -- including the
limitation on additional aggregate investment in FUCOs -- the Applicants do not
believe that National Grid's existing investments should be counted toward
aggregated investment for purposes of the rule. In contrast to the FUCO
investments of U.S. registereds, none of National Grid's existing investments
have been funded, directly or indirectly, with the proceeds from U.S. utility
operations. A decision to count these interests as aggregate investment would
effectively penalize National Grid for its success in its operations to date
and, further, would place the company at a competitive disadvantage to similarly
situated U.S. holding companies. Accordingly, Applicants are requesting that
National Grid's existing investment in foreign utility operations be
grandfathered for purposes of the limit on "aggregate investment" under Rule 53
of the Act.
On an ongoing basis, National Grid will comply fully with the substantive
provisions of Rule 53:
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(i) National Grid is seeking authority to use the proceeds of financings
to invest in EWGs and FUCOs, only in an amount up to 50% of
consolidated retained earnings, and;
(ii) National Grid will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of the U.S. Utility Subsidiaries'
employees in connection with providing services to EWGs and FUCOs.
In addition, National Grid will provide the information required by Form 20-F to
permit the Commission to monitor the effect of National Grid's EWG and FUCO
investments on National Grid's financial condition. National Grid will also
report to the Commission semiannually regarding its aggregate investment in EWGs
and FUCOs as a percentage of consolidated retained earnings and provide a
description of EWG and FUCO investments acquired during the reporting period.
See File No. 70-9519.
Recently, the Commission issued a concept release on Registered Public
Utility Holding Companies and Internationalization ("Concept Release").29 The
Concept Release asks numerous questions regarding the acquisition of domestic
utilities by foreign companies. Applicants believe that, properly structured,
foreign ownership of U.S. utility companies can bring many benefits to
consumers, investors and the public. Exhibit N-1 to this Application provides a
road map showing where each of the issues raised in the Concept Release is
addressed in this Application and the Applicants application for system
financing authorization in File No. 70-9519.
ITEM 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that National Grid
and NEES expect to obtain in connection with the Merger.
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29 Registered Public Utility Holding Companies and Internationalization,
Holding Co. Act Release No. 27110 (Dec. 14, 1999).
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(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.
(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 FERCP. 61,287.
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(3) Atomic Energy Act
As NEP holds licenses issued by the Nuclear Regulatory Commission ("NRC")
in connection with that subsidiary's interests in various nuclear power plants
and also holds minority common stock interest in corporations that hold such
licenses, the Merger (which would constitute an indirect transfer of NEP's
licenses to National Grid) requires NRC approval under the Atomic Energy Act of
1954. The Atomic Energy Act effectively prohibits foreign ownership or control
of a nuclear license (as distinct from the physical plant). National Grid is a
foreign entity within the meaning of the Atomic Energy Act. NEES and National
Grid believe they can satisfy NRC concerns about foreign ownership and control.
NEP's minority interests in the common stock of corporations that hold nuclear
licenses does not give NEES control over such facilities or the licensee for the
facilities, and therefore the indirect acquisition by National Grid of NEP's
interest will not be inconsistent with the Atomic Energy Act. In addition,
although NEP owns a minority interest in two nuclear facilities and therefore
has minority, non-operating ownership licenses with respect to those facilities,
NEP has no control over the facilities themselves, and a recently issued NRC
Stranded Review Procedure (SRP) regarding foreign ownership or control provides
that foreign ownership of such minority non-operating licenses is permissible,
provided that the licensee agrees to conditions that prevent foreign domination
or control of the facility.
On March 15, 1999, NEP and National Grid filed an application with the NRC
requesting approval of the indirect transfer of control over NEP's minority,
non- operating interests in the nuclear facilities and corporations. Therein,
NEP and National Grid proposed a negation action plan consistent with the SRP.
The application was noticed on June 30, 1999. Subsidiaries of Northeast
Utilities ("NU"), co-owners in the nuclear facilities, intervened in the
proceeding and requested a hearing. On November 4, 1999, the NU subsidiaries
filed a notice of withdrawal of their petitions to intervene and jointly with
NEP requested that the proceeding be terminated. The NRC terminated the
proceeding on November 19, 1999. On December 10, 1999 the NRC approved the
transfer. See Exhibit D-2.2.
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(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.30
(5) State Regulatory Approval
The Merger does not require the approval of the MDTE, the RIPUC or the
Maine Public Utilities Commission. 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.31 The MDTE has issued a letter to this
Commission, a copy of which is attached as Exhibit D-3.2.
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30 See Exhibit L-1 to this Application.
31 NEP is not subject to regulation as a utility by the Maine Public
Service Commission, consequently, a certification was not pursued.
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On March 18, 1999, the companies made a similar informational filing with
the NHPUC and requested certification from the NHPUC to the SEC that it has the
authority and resources to protect ratepayers. The companies also filed
affidavits attesting to the fact that the transaction would not adversely affect
ratepayers and that there would be no change in the NHPUC's jurisdiction over
Granite State and NEP as a result of the merger. On April 21, 1999, the NHPUC
issued an order finding that the merger did not satisfy the requirements for
exemption from the NHPUC's formal review process. A hearing was held before the
NHPUC on June 24-25, 1999 and an order approving the Merger was issued on
October 4, 1999. See Exhibit D-5.3. A motion for rehearing filed by the Office
of Consumer Advocate was denied on November 29, 1999. See Exhibit D-5.4.
While the RIPUC has indicated that no filing with it is required, a copy of
the informational filing made with the MDTE was given to the RIPUC and a written
request for a letter to the Securities and Exchange Commission was made on June
25, 1999. Additionally, the companies will be meeting with the RIPUC and staff
to answer questions. The RIPUC issued a letter certifying that it has the
authority and resources to protect ratepayers on August 31, 1999. See Exhibit
D-8.
NEP has a small amount of transmission assets in Vermont and therefore is
deemed to be a Vermont public utility. While the VPSB has no regulatory
jurisdiction over NEP's operations, under Vermont law it does have authority to
approve the merger. The application for approval of the Merger by the VPSB was
filed on March 29, 1999. An order approving the Merger was issued on June 15,
1999. A copy is attached as Exhibit D-6.2.
The CDPUC has jurisdiction over the transaction because of NEP's minority
ownership interest in the Millstone III Nuclear Power Plant. On March 31, 1999,
the parties filed a letter with the CDPUC seeking confirmation that CDPUC
approval is not required for the Merger. The CDPUC determined that it did have
jurisdiction. An order from the CDPUC issued on June 30, 1999. A copy is
attached as Exhibit D-7.2.
* * * * *
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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.
ITEM 6. Exhibits and Financial Statements
o Exhibits
A-1 Memorandum and Articles of Association of The National Grid
Group plc (previously filed).
A-2 Agreement and Declaration of Trust of New England Electric
System (filed as Exhibit 3 to the 1994 NEES Form 10-K (File
No. 1-3446), and incorporated herein by reference).
A-2.2 Proposed amendment to the NEES Agreement and Declaration of
Trust (included in Exhibit C-1 hereto).
B-1 Agreement and Plan of Merger, dated as of December 11, 1998,
by and among NEES, National Grid Group and NGG Holdings LLC
(included in Exhibit C-1 hereto).
B-2 NEES Standard Form of Service Contract, as amended
(previously filed).
B-2.1 List of Direct and Group Central Administrative Services
Provided to NEES (previously filed).
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B-2.2 Analysis of Corporate Cost Allocation - 1999 Business Plan
(previously filed).
B-2.3 Overhead Accounts for National Grid Company Administrative
Services (previously filed).
B-2.4 Re-allocation of Estimated National Grid Administrative
Service Costs (previously filed)
B.2.5 NEES/GRID Domestic Administrative Service Costs Savings
(previously filed)
B-3 National Grid Group Credit Agreement (previously filed).
B-4 National Grid Group Policies and Procedures for Affiliate
Transactions (revised)
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 (previously filed).
D-1.1 Joint Application of New England Power Company,
Massachusetts Electric Company, The Narragansett Electric
Company, New England Electric Transmission Corporation, New
England Hydro-Transmission Corporation, New England
Hydro-Transmission Electric Company Inc., AllEnergy
Marketing Company, L.L.C. and NGG Holdings LLC before the
FERC (previously filed).
D-1.2 Order of the FERC (previously filed).
D-2.1 Application of New England Power Company before the NRC
(previously filed).
D-2.2 Orders of the NRC approving the transaction as it pertains
to the Millstone Nuclear Power Station, Unit 3 and the
Seabrook Station, Unit 1 (previously filed).
D-3.1 Submission to the MDTE (previously filed).
D-3.2 Response from the MDTE (previously filed).
D-4.1 Omitted.
D-4.2 Omitted.
D-5.1 Submission to the NHPUC (previously filed).
D-5.2 Order of the NHPUC Setting the Merger for a Hearing
(previously filed).
D-5.3 Order of the NHPUC Approving the Merger (previously filed).
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D-5.4 Order of the NHPUC on Motion for Rehearing (previously
filed).
D-6.1 Submission to the VPSB (previously filed).
D-6.2 Order of the VPSB (previously filed).
D-7.1 Submission to the CDPUC (previously filed).
D-7.2 Order of the CDPUC (previously filed).
D-8 Rhode Island Public Utilities Commission Certification to
the SEC (previously filed).
E-1 Map of service territory of NEES (filed in paper format on
Form SE).
E-2 NGG Corporate Chart, as revised (filed in paper format on
Form SE).
E-3 NEES Corporate Chart (filed in paper format on Form SE).
E-4 Combined National Grid/NEES corporate chart (filed in paper
format on Form SE).
F-1.1 Opinion of Counsel - National Grid Group (previously filed).
F-1.2 Opinion of Counsel - NEES (previously filed).
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 (filed
with the Commission on May 3, 1999 and incorporated by
reference herein).
H-4 Annual Report of National Grid Group dated March 31, 1999
(filed under cover of Form SE).
I-1 Proposed Form of Notice (previously filed).
J-1 Description of Nonutility Subsidiaries of National Grid, as
revised (previously filed).
J-2 Merger Structure and Description of Intermediate Companies,
as revised (previously filed).
J-3 "The Financial Strength of the National Grid Group and the
Proposed Acquisitions of NEES and EUA," Julian Franks and
the Brattle Group (March, 1999) (filed under cover of Form
SE).
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K-1 Response to the Comments of Russell G. Gilmore (previously
filed).
L-1 Letter from the Committee on Foreign Investment in the
United States, dated April 29, 1999 (previously filed).
M-1 Letter from Fiona Smith, Company Secretary and General
Counsel of The National Grid Group plc, to Sheldon
Whitehouse, Attorney General of Rhode Island, dated January
25, 2000 (previously filed).
N-1 Comparison of the Issues Raised in the Concept Release on
Registered Public Utility Holding Companies and
Internationalization and the Applications of The National
Grid Group plc and New England Electric System (previously
filed).
O-1 Appointment of Agent for Service of Process.
o Financial Statements
FS-1 National Grid Group Unaudited Pro Forma Condensed
Consolidated Balance Sheet (filed with the Commission on
August 17, 1999 in File No. 70-9519 and incorporated herein
by reference - Confidential Treatment Requested).
FS-2 National Grid Group Unaudited Pro Forma Condensed
Consolidated Statement of Income (filed with the Commission
on August 17, 1999 in File No. 70-9519 and incorporated
herein by reference - Confidential Treatment Requested).
FS-3 Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements (filed with the Commission on August
17, 1999 in File No. 70-9519 and incorporated herein by
reference - Confidential Treatment Requested).
FS-4 National Grid Group Consolidated Balance Sheet (previously
filed).
FS-5 National Grid Group Consolidated Profit and Loss Account,
Cash Flow Statement and Statement of Total Recognized Gains
and Losses (previously filed).
FS-5.1 Notes to National Grid Group Consolidated Financial
Statements (previously filed).
FS-6 NEES Consolidated Balance Sheet as of December 31, 1998
(included in Exhibit H-2).
FS-7 NEES Consolidated Statement of Income for the twelve months
ended December 31, 1998 (included in Exhibit H-2).
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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. 7 to the
Application-Declaration, File No. 70-9473, to be signed on their behalf by the
undersigned thereunto duly authorized.
The signature of the Applicants and of the persons on their behalf are
restricted to the information contained in this application which is pertinent
to the application of the respective companies.
Date: February 15, 2000
/s/ Jonathan M. G. Carlton
Jonathan M. G. Carlton
Business Development Manager -- Regulation
The National Grid Group plc
/s/ Kirk Ramsauer
Kirk L. Ramsauer
Deputy General Counsel
New England Electric System*
*The name "New England Electric System" means the trustee or trustees for the
time being (as trustee or trustees but not personally) under an agreement and
declaration of trust dated January 2, 1926, as amended, which is hereby referred
to, and a copy of which as amended has been filed with the Secretary of the
Commonwealth of Massachusetts. Any agreement, obligation or liability made,
entered into or incurred by or on behalf of New England Electric System binds
only its trust estate, and no shareholder, director, trustee, officer or agent
thereof assumes or shall be held to any liability therefor.
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EXHIBIT INDEX
Exhibit
B-4 National Grid Group Policies and Procedures for Affiliate Transactions
(revised)
O-1 Appointment of Agent for Service of Process
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EXHIBIT B-4
THE NATIONAL GRID GROUP PLC
NEW ENGLAND ELECTRIC SYSTEM
NEW ENGLAND POWER SERVICE COMPANY
POLICIES AND PROCEDURES
FOR AFFILIATE TRANSACTIONS
JANUARY 2000
<PAGE>
This manual sets forth the policies and procedures that The National Grid Group
plc (National Grid) companies will use to contract, bill, and account for
affiliate transactions for goods and services covered by the cost regulations of
the Securities and Exchange Commission (SEC) under the Public Utility Holding
Company Act of 1935 (Act) following the acquisition of New England Electric
System (NEES). The manual also contemplates the closing of the NEES acquisition
of Eastern Utilities Associates (EUA) and reflects the merger of the EUA
subsidiaries into the NEES operating companies.
I Corporate Organisation
Upon the closing of the National Grid acquisition of NEES, National Grid
will register as a public utility holding company under the Act. NEES is
already a registered public utility holding company, and, as a result, has
in place accounting and procedures for inter company contracting and
billing that comply with the Act. Specifically, NEES has a service company,
New England Power Service Company (NEPSCO), in place that complies with the
Act and the SEC regulations that are issued thereunder. Following the
National Grid acquisition of NEES, NEPSCO will continue as the source of
most transactions between affiliates located within the United States (the
NEES companies). In addition, NEPSCO will be the exclusive contracting
agent between the NEES companies and National Grid companies operating
outside the United States. NEPSCO will then distribute or allocate charges
and revenues paid to or received from the National Grid companies operating
outside the United States in accordance with the procedures set forth in
this manual.
Following the closing of the NEES and EUA transaction, the NEES and EUA
utility subsidiaries will be merged together, as will NEPSCO and EUA
Service Company (EUA's service company). These mergers and the continuation
of NEPSCO as the surviving service company assure that the procedures for
affiliate contracting and accounting set forth in this manual will continue
after the closing of the NEES acquisition of EUA.
II Treatment of Affiliate Transactions
Following the closing of the National Grid acquisition of NEES, an array of
services will be provided by the various affiliates on the expanded National
Grid system. In the sections below, each kind of affiliate transaction is
discussed in turn. Transactions that are not contemplated in the following
sections or are not structured to comply with the standard procedures set forth
below should be undertaken only following consultation with the Accounting
Departments of NEES and National Grid.
A NEPSCO contracts with NEES Affiliates for NEPSCO Services
Prior to the acquisition by National Grid, NEPSCO used its own personnel to
provide an array of services to its affiliates within NEES. NEPSCO provides
administrative, accounting, supply chain management, human resources,
internal audit, forecasting, information services, treasury operations
including insurance and risk management, corporate communications, legal,
rates and corporate management to the other NEES companies.
Following the acquisition, many of these services will continue to be
provided by NEPSCO to other NEES companies, using established procedures,
allocations, and accounting. Accordingly, NEES companies will continue to
contract with NEPSCO for services using a contract similar to that shown in
Attachment 1. In addition, NEES companies will continue to use the blanket
requests for recurring services or the specific requests for nonrecurring
services shown in Attachment 2. Attachment 2 also includes the Company's
policy for making service requests. The accounting for such transactions
and the allocation of NEPSCO costs and overheads will continue pursuant to
Attachment 3. These contracts and procedures have been reviewed and audited
by the SEC and state regulators in the past, and will continue to be used
for the allocation of NEPSCO costs following the merger.
Many of the regulatory commissions that establish rates for our regulated
utility operations have implemented standards of conduct that require goods
and services supplied by an affiliate to be priced at the lower of cost or
market. Under SEC regulations, services and goods provided by NEPSCO to
NEES operating companies are priced at cost. Management of the NEES
companies has the responsibility as part of ongoing budgeting and planning
to assure that services procured and provided by NEPSCO are competitive
with the cost of equivalent services available in the market. This
responsibility is discharged through continuing reviews of the Company's
structure and staffing and through benchmarking analyses for compensation
and productivity. Specific project requests may also be tested directly in
the market by requesting similar services from unaffiliated vendors.
B NEPSCO contracting with unaffiliated suppliers for goods and services
provided to NEES affiliates
At times, NEPSCO will contract with unaffiliated suppliers for goods or
services that are incurred for the benefit of several subsidiaries. For
example, NEPSCO may contract with a management consultant to review
operating procedures that will benefit several operating companies. Under
this approach, NEPSCO executes a single contract, processes a single
invoice and pays a single bill, and then allocates the contract costs
appropriately to the operating companies without a mark up. This approach
to contracting with unaffiliated entities is not required but may be used
when convenient to administer a contract.
C NEPSCO contracting with National Grid for goods and services provided
to NEES affiliates
National Grid System companies (principally, National Grid Company) will
provide services to the NEES companies following the closing. The services
will be provided exclusively pursuant to work orders and contracts between
the applicable National Grid System company and NEPSCO. The contracts and
service requests will be in a form similar to those included in Attachments
1 and 2. NEPSCO will in turn allocate the charges under the contracts to
the appropriate NEES Company in accordance with allocators, which are
consistent with those that have already been established for transactions
among the NEES companies. This approach assures that all costs billed to
NEES companies from National Grid companies are captured on the NEPSCO
accounts and are appropriately allocated to NEES companies.1/
National Grid companies will provide the Direct or Group Services to the
NEES companies that are shown on Attachment 4. The services will be
provided pursuant to either blanket or specific requests for services
processed through NEPSCO to National Grid Company using a form similar to
that included in Attachment 2. The services provided by National Grid
companies will be provided at cost including overheads to NEPSCO. The
calculation of overheads is shown on Attachment 5, and is discussed below.
NEPSCO will then allocate the costs billed to the appropriate NEES company.
In addition to the Direct and Group Services shown on Attachment 4, the
NEES Companies may add other requests from time to time, as required.
______________________
1 As provided in NEPSCO's service agreements with its affiliates, bills for
services rendered must be paid within 15 days. Thereafter, the amount due and
unpaid accrues interest from the date of the bill at an annual rate of 2% above
the lowest interest rate then being charged by the First National Bank of Boston
on 90-day commercial loans. See Attachment 1 hereto. NEPSCO's service contracts
with the National Grid System companies will also require 15-day payment with
similar late-payment terms.
________________________
For example, National Grid Company's billing to NEPSCO for the service
will depend upon whether the service is Direct or Group. If the service is
a Direct Service, National Grid Company will bill NEPSCO for the cost of
the service plus overheads. The overhead percentages will be derived from
National Grid Company's overhead costs and will be billed through a
percentage loader applied to the direct payroll billed for the underlying
service. National Grid Company will use overhead loaders developed for the
department doing the work, based on the overhead costs allocated to the
department, excluding any profit margin. Direct costs, overheads, and the
costs billed from outside vendors (without any National Grid Company
overhead loading) will be accumulated in a separate work order for billing
to NEPSCO. These costs will be subject to audit and confirmation by the
National Grid Company and NEES Accounting Departments.
National Grid Company will also provide Group Services, which are
general administrative and management services for all the companies in the
Group as a whole, including both NEES Companies and National Grid's foreign
subsidiaries. The costs for these Group Services will be allocated among
all of National Grid's subsidiaries including the consolidated NEES
Companies using the following four factors:
1. Revenues (excluding for the NEES Companies revenues for purchased
power and stranded cost recovery).
2. Operating Profit
3. Employee numbers, and
4. Net Assets
These factors have been adopted for allocations of this kind by National
Grid Company's regulator. The resulting costs will be billed from National
Grid Company to NEPSCO using the methodology set forth in Attachment 5.
These costs will then be reallocated by NEPSCO to NEES subsidiaries using
the allocators that have already been approved by the SEC for the activity
involved.
The budgeting and procurement controls within National Grid Company are
summarised on the last page of Attachment 5. As those procedures set forth,
National Grid Company has budgeting and monitoring procedures in place to
assure that its costs for internal and external services are efficient and
competitive with other providers in the market. National Grid Company's
costs and efficiency are also subject to a rigorous regulatory evaluation
as part of its periodic price review with significant incentives to improve
productivity and produce efficiency gains during the period between price
reviews. These reviews and incentives assure that services provided by
National Grid Company to the NEES companies will be performed cost
effectively. Under the accounting procedures set forth in this manual these
services will be provided to the NEES companies at cost without a profit
margin. Disputes, if any, over accounting, billing, or the services
provided will be resolved using the following procedures: (1) any
accounting or billing disputes between National Grid Company and NEPSCO
shall be referred to representatives of the National Grid Company and NEES
Accounting Departments for resolution; (2) any disputes regarding the kind
and quality of services provided by National Grid Company or NEES to the
other company will be referred to the management of both companies who will
confer and resolve the dispute.
D NEPSCO Billing to National Grid for Services Performed by it or other
NEES Affiliates
Just as the National Grid companies may provide Direct Services to NEES
Companies, NEES Companies may provide Direct Services to National Grid.
These services would also be provided pursuant to a contract and following
a request for services from the National Grid company to NEPSCO. NEPSCO
will then provide the service at cost using either NEPSCO personnel or the
personnel of other NEES Companies. Billings will include the same overheads
that NEPSCO would apply to contracts among NEES companies.
The processing of all billings to and from National Grid through NEPSCO
assures that costs and overheads are accounted for properly and provided a
clear audit trail for affiliate transactions between the NEES Companies and
the balance of the National Grid Companies.
E Contracts for Goods and Services between NEES Operating Companies
other than the Service Company
The NEES Operating Companies also provide services among themselves ranging
from emergency storm restoration services to equipment transfers. These
goods and services are provided pursuant to contracts similar in form to
that included in Attachment 6. Pricing for the service or goods is also at
cost including overheads established in accordance with SEC policy and set
forth in Attachment 7. These contracts are only available for services
among NEES Companies. Contracts between NEES Companies and other affiliates
within National Grid should be executed only by NEPSCO, and not by any
other NEES company.
III Accounting and Modification
NEPSCO will account for all affiliate transactions and billings in
accordance with established procedures and SEC requirements. It will
maintain its accounts in a fashion that allows separate reporting of
transactions between NEES companies and their other affiliates within
National Grid.
NEPSCO's billing procedures and allocations of costs have been filed with
the SEC under the Act. These procedures and cost allocators shall not be
changed without the approval of the Accounting Departments of NEES and
National Grid Company, which will make necessary filings with the SEC at
least 60 days before modifications are implemented.
<PAGE>
Attachment 1
NEW ENGLAND POWER SERVICE COMPANY
25 Research Drive
Westborough, Massachusetts 01582
SERVICE CONTRACT
December 31, 1998
Massachusetts Electric Company
25 Research Drive
Westborough, MA 01582
New England Power Service Company (hereinafter called Service Company) is a
company engaged primarily in the rendering of services to companies in the New
England Electric System holding-company system. The organization, conduct of
business and method of cost allocation of the Service Company are designed to
meet the requirements of Section 13 under the Public Utility Holding Company Act
of 1935 and the rules and regulations promulgated thereunder to the end that
services performed by the Service Company for said associate companies will be
rendered to them at cost, fairly and equitably allocated. Services will be
rendered by Service Company only upon receipt from time to time of specific or
general request therefor. Said requests may always be modified or cancelled by
you at your discretion. The parties hereto agree as follows:
1. The Service Company agrees to furnish you upon the terms and conditions
herein set forth such of the services described in Schedule I hereto as you may
from time to time request. Service Company will also furnish, if available, such
services not described in Schedule I as you may request. Notwithstanding the
foregoing the Service Company shall not furnish under this agreement any
engineering, construction, or maintenance services for a nuclear generating
plant.
2. The Service Company has and will maintain a staff trained and
experienced in the engineering, construction, operation, maintenance and
management of public utility properties. In addition to the services of its own
staff, Service Company will, after consultation with you concerning services to
be rendered pursuant to your request, arrange for services of non-affiliated
experts, consultants, accountants and attorneys.
3. All of the services rendered under this agreement will be at actual cost
thereof. Direct charges will be made for services where a direct allocation of
cost is possible. The methods of determining such costs and the allocation
thereof are set forth in Schedule II hereto. These methods are reviewed annually
and more frequently, if appropriate. Such methods may be modified or changed by
Service Company without the necessity of an amendment of this agreement provided
that in each instance all services rendered hereunder will be at actual cost
thereof, fairly and equitably allocated, and all in accordance with the
requirements of the Public Utility Holding Company Act of 1935 and the rules and
regulations and orders thereunder. You will be advised from time to time of any
material changes in such methods.
4. Bills will be rendered during the first week of each month covering
amounts due for the month calculated on an estimated basis using the actual
expenses incurred to the extent possible during the second previous month. This
estimated amount would be adjusted on the bill to be rendered by the conclusion
of the following month. Any amount remaining unpaid after fifteen days following
receipt of the bill shall bear interest thereon from the date of the bill at an
annual rate of 2% above the lowest interest rate then being charged by the First
National Bank of Boston on 90 day commercial loans. Services will be performed
hereunder for not more than one year commencing January 1, 1999, and continuing
through December 31, 1999, unless terminated at an earlier date by either party
giving thirty days' written notice to the other of such termination at the end
of any month.
5. This agreement will be subject to termination or modification at any
time to the extent its performance may conflict with any federal or state law or
any rule, regulation or order of a federal or state regulatory body having
jurisdiction. The agreement shall be subject to approval of any federal or state
regulatory body whose approval is a legal prerequisite to its execution and
delivery or performance.
NEW ENGLAND POWER SERVICE COMPANY
By: /s/ John G. Cochrane
Treasurer
Accepted December 30, 1998
By /s/ Lawrence J. Reilly
<PAGE>
SCHEDULE I
Description of Services Available from
New England Power Service Company
Accounting:
The keeping of accounts and collateral activities, including billing,
payroll and customer relations; preparation of reports and preservation of
records.
Auditing:
Periodic audits by Service Company auditors and the furnishing of reports
and recommendations.
Construction:
Labor and equipment for construction and maintenance of electric
properties. Assistance in obtaining and supervision of non-affiliated
contractors.
Corporate and Corporate Records:
Cooperation with attorneys, officers and special counsel of associate
companies on corporate matters, financing, regulation, contracts, claims
and litigation. Services in connection with stockholders' and directors'
meetings and keeping of corporate records.
Customer Services:
Services re policy development and functional direction of field business
service departments, including rate application and training, plus
specialized residential, commercial and industrial services.
Emergencies:
Assistance in emergency maintenance and restoration of utility service and
in mobilization of personnel and equipment.
Employee Relations:
Service re labor relations, personnel, wage and salary schedules, employee
training and safety and medical programs.
Engineering:
Civil, mechanical, electrical, and other engineering services: technical
advice, design, installation, supervision, planning, research, testing,
operation of communications, including microwave, and operation and
maintenance of specialized technical equipment.
Executive and Administrative:
Consultation and services in management and administration of all aspects
of electric utility business.
Information Systems:
Maintenance and operation of information systems and equipment for
accounting, engineering, administration and other functions.
SCHEDULE II
Determination of Cost of Service and Allocation Thereof
Cost of service will be determined in accordance with the Public Utility
Holding Company Act of 1935 and the rules and regulations and orders thereunder,
and will include all costs of doing business incurred by the Service Company.
Records will be maintained for each Department and Division of the Service
company in order to accumulate all costs of doing business and to determine the
cost of service. These costs will include wages and salaries of employees and
related expenses such as insurance, taxes, pensions and other employee welfare
expenses, and rent, light, heat, telephone, supplies, and other housekeeping
costs. In addition, records will be maintained of general administrative
expenses, which will include the costs of operating the Service Company as a
corporate entity.
Charges for services rendered and related expenses and non-personnel
expenses (e.g. use of automotive equipment, etc.) will be billed directly to the
serviced companies, either individually or, when the services performed are for
a group of companies, by means of an equitable allocation formula. Each formula
will have an appropriate basis such as customers, meters, employees, plant
investments, inventories or operating revenues.
Charges for services will be determined from the time sheets of employees
and will be computed on the basis of each employee's hourly rate plus a
percentage factor to cover related expenses and general administrative expenses.
Records of such related expenses and general administrative expenses will be
maintained and subjected to periodic review.
Out-of-pocket expenses which are incurred for the serviced companies will
be billed at cost. Charges for non-personnel expenses, such as for use of
automobiles, trucks and heavy equipment, will normally be computed on the basis
of costs per hour or per mile.
<PAGE>
Attachment 2
LOGO NEW ENGLAND POWER SERVICE New England Power Service Company
25 Research Drive
Westborough, MA 01581
Tel. (617) 366-9011
July 9, 1984
Mr. Robert Wason
Securities & Exchange Commission (SEC)
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Wason:
Attached for your information are the two forms that are used by NEES
companies when requesting the services of New England Power Service Company
(NEPSCo). Exhibit A is for Blanket Requests which are recurring in nature. This
form is sent out to each of the operating companies annually. Blanket Requests
numbers that are not wanted are crossed out and the form is then signed by a
"requesting company" officer and, in turn, by a NEPSCo officer (never the same
person).
Exhibit B is used for specific requests which are for services which
are nonrecurring in nature. The principal difference from the Blanket Request
form is the need to describe in detail the nature of the work to be performed.
The same approval procedure, however, is followed for specific requests as is
used for Blanket Requests.
All costs billed to NEES companies are referenced by the applicable
blanket or specific request number. The request procedure, therefore, is not
only an approval process but it is also effectively a work order system.
If you have any further questions, please feel free to call.
Sincerely yours,
Howard W. McDowell
Controller
Attachments:
A New England Electric System Company
<PAGE>
Exhibit A
- --------------------------------------------------------------------------------
FROM: _______________________ ____________ BLANKET REQUEST No. 1-99_______
Company Name Co. No.
TO: NEW ENGLAND POWER SERVICE COMPANY DATE _____________, 19___
YOU ARE REQUESTED TO PERFORM DURING THE YEAR 19___ THE SERVICES OUTLINED BELOW:
- --------------------------------------------------------------------------------
TYPE OF SERVICE
[ ] ENGINEERING (CLASS 3)
(THE EXTENT OF THE SERVICES WILL BE SUBJECT TO ORAL
REQUESTS AND INSTRUCTIONS BY OUR REPRESENTATIVES.)
[ ] SERVICING (CLASS 4)
- --------------------------------------------------------------------------------
DESCRIPTION OF WORK:
<TABLE>
<C> <C>
REQUEST 1 REQUEST 8
PROPERTY TAX CONSUMER SERVICES
- ------------ -----------------
PROPERTY TAX ACTIVITIES CONSUMER SERVICES ACTIVITIES
REQUEST 9
REQUEST 2
ECONOMIC PLANNING
------------------
ENVIRONMENTAL AFFAIRS ECONOMIC PLANNING ACTIVITIES
- ---------------------
ENVIRONMENTAL AFFAIRS ACTIVITIES
REQUEST 10
INFORMATION SERVICES
REQUEST 3 --------------------
INFORMATION SERVICES
ADMINISTRATIVE SERVICES ACTIVITIES
- -----------------------
TRANSPORTATION
COMMUNICATIONS & CONTROL REQUEST 11
BUSINESS INFORMATION SYSTEMS
OFFICE SERVICES PURCHASING, STORES AND MATERIALS CONTROL
----------------------------------------
PURCHASING, STORES AND MATERIAL
CONTROL ACTIVITIES
REQUEST 4 FUEL PROCUREMENT ACTIVITIES
CORPORATE REQUEST 12
- ---------
CORPORATE AND LEGAL ACTIVITIES
RATE
----
RATE ACTIVITIES
REQUEST 5
EMPLOYEE RELATIONS REQUEST 13
- ------------------
EMPLOYEE RELATIONS ACTIVITIES
SAFETY
------
SAFETY ACTIVITIES
REQUEST 6
MEDICAL REQUEST 14
- -------
MEDICAL ACTIVITIES
BUDGETING
---------
BUDGETING ACTIVITIES
REQUEST 7
LABOR RELATIONS
- ---------------
LABOR RELATIONS ACTIVITIES
REQUEST 8
CONSUMER SERVICES
- -----------------
CONSUMER SERVICES ACTIVITIES
REQUEST 9
ECONOMIC PLANNING
- -----------------
ECONOMIC PLANNING ACTIVITIES
REQUEST 10
INFORMATION SERVICES
- --------------------
INFORMATION SERVICES ACTIVITIES
- --------------------------------------------------------------------------------
REQUEST 15 REQUEST 37
TREASURY INVESTOR RELATIONS
- -------- ------------------
TREASURY ADMINISTRATION AND INVESTOR RELATIONS ACTIVITIES
FINANCIAL ACTIVITIES
REQUEST 38
REQUEST 16
AUDIT
-----
RESEARCH AND DEVELOPMENT GENERAL AUDIT ACTIVITIES
- ------------------------
RESEARCH AND DEVELOPMENT ACTIVITIES
REQUEST 17 REQUESTS 39-49 (VACANT)
MANAGEMENT EXEC. AND ADMIN. REQUEST 50
- ----------------------------
MANAGEMENT EXECUTIVE AND ADMIN. ACTIVITIES
ENGINEERING - STEAM POWER GENERATION
------------------------------------
REQUEST 18 OPERATION
MAINTENANCE
TRANSMISSION AND DISTRIBUTION
- -----------------------------
TRANSMISSION AND DISTRIBUTION ACTIVITIES
REQUEST 51
REQUEST 19
ENGINEERING - HYDRAULIC POWER GENERATION
----------------------------------------
INDUSTRIAL ENGINEERING OPERATION
- ---------------------- MAINTENANCE
INDUSTRIAL ENGINEERING ACTIVITIES
REQUEST 20 - 29 (VACANT) REQUEST 52
ENGINEERING - OTHER POWER GEN. & SUPPLY
---------------------------------------
REQUEST 30 OPERATION
MAINTENANCE
TREASURY EXEC. AND ADMIN.
- -------------------------
TREASURY EXECUTIVE AND ADMIN. ACTIVITIES
REQUEST 53
REQUEST 31 ENGINEERING - TRANSMISSION
--------------------------
OPERATION
GENERAL ACCOUNTING MAINTENANCE
- ------------------
GENERAL ACCOUNTING ACTIVITIES
REQUEST 54
REQUEST 32
ENGINEERING - DISTRIBUTION
--------------------------
PLANT ACCOUNTING OPERATION
- ---------------- MAINTENANCE
PLANT ACCOUNTING ACTIVITIES
REQUEST 33 REQUEST 55 - 99 (VACANT)
PAYROLL ACCOUNTING
- ------------------
PAYROLL ACCOUNTING ACTIVITIES
REQUEST 34
CUSTOMER SERVICE
- ----------------
CUSTOMER SERVICE ACTIVITIES
SYSTEM DIVERSIONS
REQUEST 35
REVENUE ACCOUNTING
- ------------------
REVENUE ACCOUNTING ACTIVITIES
REQUEST 36
SHAREHOLDERS SERVICES
- ---------------------
SHAREHOLDER SERVICES ACTIVITIES
REQUEST 37
INVESTOR RELATIONS
- ------------------
INVESTOR RELATIONS ACTIVITIES
REQUEST 38
AUDIT
- ------
GENERAL AUDIT ACTIVITIES
</TABLE>
<TABLE>
<C> <C> <C>
- -------------------------------------------------- -------------- --------------------------------------------------
FOR THE REQUESTING COMPANY NOTED ACCEPTED FOR
Originated BY___________ Date_____ NEW ENGLAND POWER SERVICE COMPANY
Approved by_____________ Date_____ By_______________ Date______________
_____________ Date ____ Date Date
Started___________completed_________
- -------------------------------------------------- -------------- --------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FROM ___________________________ CL. ______ CO.______ REQUEST NO. ____________
COMPANY
TO NEW ENGLAND POWER SERVICE COMPANY DATE ____________________ 19 _____
YOU ARE REQUESTED TO PERFORM THE SERVICES OUTLINED BELOW
- --------------------------------------------------------------------------------------------------------------------
TYPE OF SERVICE
[ ] ENGINEERINAND CONSTRUCTION DIVISION TOTAL ESTIMATE $____________________
-----------------------------------
[ ] CONSTRUCTION DATE OF ESTIMATE ___________________
[ ] ENGINEERING TO BE COMPLETED BY __________ 19 ___
NOTE FOR CONSTRUCTION AND ENGINEERING
REQUESTS, SHOW TOTAL NEPSCO. COST OF
[ ] SERVICING DIVISION PROJECT, INCLUDING ANY
PREVIOUS EXPENDITURES FOR PRELIMINARY
ENGINEERING, INVESTIGATIONS, ETC.
- --------------------------------------------------------------------------------------------------------------------
JOB TITLE:
DESCRIPTION OF WORK
JUSTIFICATION
(DETAIL ON REVERSE SIDE
OR ATTACHED SHEET)
- ------------ ---------
CMS PROJECT
REF. REF.
- ------------ ---------
CLASSIFICATION
--------------
CAPITAL [ ] O&M [ ] R&D [ ]
- ---------------------------- -- ------------ --- ------------ -- -------- -------- ---------- ---------- -----------
LOCATION A CHARGED W CHARGED W ENGRC. FIELD INTEREST CONSTR./ ACCOUNT
(CONSTRUCTION WORK ORDERS) R WORK UNIT O WORK UNIT O FORM ENGRG. & REAL OPER./ OR PLANT
E \NEPSCO/ \OPER.COS./ ORDER & ESTATE MAINT. UNIT CODE
A C C SUPV. TAXES WORK
D D WORK WORK ORDER
ORDER ORDER
N N
E E
P P
S S
C C
O O
- ---------------------------- -- ------------ --- ------------ -- -------- -------- ---------- ---------- -----------
- ---------------------------- -- ------------ --- ------------ -- -------- -------- ---------- ---------- -----------
- ---------------------------- -- ------------ --- ------------ -- -------- -------- ---------- ---------- -----------
- ---------------------------- -- ------------ --- ------------ -- -------- -------- ---------- ---------- -----------
- ---------------------------- -- ------------ --- ------------ -- -------- -------- ---------- ---------- -----------
- --------------------------------------------------------------------------------------------------------------------
FOR FURTHER INFORMATION REFER TO:
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
FOR THE REQUESTING COMPANY NOTED ACCEPTED FOR NEW ENGLAND POWER SERVICE COMPANY
ORIGINATED BY _____________ DATE __________ BY _____________________________ DATE _______________
(VICE PRESIDENT N.E.P.S.CO.)
APPROVED BY _______________ DATE __________ BY _____________________________ DATE _______________
(FUNCTIONAL ACCEPTANCE - ENGINEERING)
_______________ DATE __________ BY _____________________________ DATE _______________
(FUNCTIONAL ACCEPTANCE - CONSTRUCTION)
===========================================================
_______________ DATE __________ (FOR ENGINEERING/CONSTRUCTION USE ONLY)
ESTIMATED ESTIMATED
START DATE ______________COMPLETION DATE ____________
</TABLE>
<PAGE>
LOGO New England Power Service
A NEES Company
MEMORANDUM
To: List Phone: (508) 389-2549
From: A.D. Houston File: Projapr2.wpd
Subject: Service Company Request Approval Date: May 22, 1997
As part of a continuing effort to ensure compliance with various regulatory
agencies, I would like to reiterate the Security and Exchange Commission (SEC)
rules for NEPSCO Request approvals.
The SEC and NEPSCo have an agreement that requires a NEPSCO Request be signed by
a minimum of two people:
1) A Requesting Company Officer
2) An officer of NEPSCo
The two people listed above can never be the same person. If individual
organizations/functions wish to require additional signatures for review
purposes, there are already lines in place on the NEPSCo Request Report
(NEW0/340) for more signatures. Please note, the SEC does not require these
additional signatures.
Once a NEPSCo Request has the required signatures, the original must be sent to
NEPSCo Accounting, located in General Accounting in Westborough. If the NEPSCO
Request does not have the appropriate signatures, it will be returned to the
originator for completion.
Attached for your convenience is a list of company officers for the Retail
Companies, NEP and NEPSCo. All people listed have the ability to approve a
NEPSCo Request for their respective companies.
If you have any questions or comments, you can contact Howard McDowell,
Controller at 22021 or Bill Richer, Manager of General Accounting at 22311.
List: See Attached
<PAGE>
Distribution List
A.H. Aitken M.E. Jesanis A.C. Pini
J.C. Amoroso D.C. Kennedy R.A. Racine
L.E. Bailey R.J. Korsak K.L. Ramsauer
E.A. Capommachio S.M. Larson W.R. Richer
J.G. Cochrane C.A. LaFleur L.J. Reilly
E.P. Cody J.L. Levett T.G. Robinson
D.C. Delurey R.E. Loomis T.E. Rogers
J.A. Donahue J.D. Luchini C.E. Root
R.L. Dumouchel J.F. Malley J.W. Rowe
C.L. Eaton R.L. McCabe M.F. Ryan
P.G. Flynn H.W. McDowell N.H. Sala
R.L. Francazio R.H. McLaren R.P. Sergel
R.W. Frost R.M. Mellor D.E. Snay
D.F. Goodwin C.H. Moser J.D. Tranen
D.F. Grant F.A. Nangle A.H. Turner
M.E. Hachey R. Nadeau J.W. VanSant
R.M. Holmes J.L. Palmer W. Watkins, Jr.
D.L. Holt C.O. Paradise D.G. Webster
B.E. Huston L.M. Pastuszek R.K. Wulff
<PAGE>
Massachusetts Electric Company
Officers (As of May 1, 1997)
Title Name
Chairman Richard P. Sergel
President Lawrence J. Reilly
Vice President John C. Amoroso
Vice President Eric P. Cody
Vice President Charles H. Moser
Vice President Lydia M. Pastuszek
Vice President Anthony C. Pini
Vice President Christopher E. Root
Vice President Nancy H. Sala
Vice President Dennis E. Snay
Treasurer Michael E. Jesanis
Clerk Robert King Wulff
Assistant Treasurer and Controller Howard W. McDowell
Assistant Clerk Thomas G. Robinson
<PAGE>
New England Power Company
Officers (As of May 1, 1997)
Title Name
Chairman John W. Rowe
President Jeffrey D. Tranen
Vice President Andrew H. Aitken
Vice President Lawrence E. Bailey
Vice President Jeffrey A. Donahue
Vice President Cheryl A. LaFleur
Vice President John L. Levett
Vice President John F. Malley
Vice President Arnold H. Tumer
Vice President Jeff W. VanSant
Vice President Michael E. Hachey
Treasurer Michael E. Jesanis
Clerk Robert King Wulff
Assistant Treasurer John G. Cochrane
Controller Howard W. McDowell
Assistant Clerk Kirk L. Ramsauer
<PAGE>
Granite State Electric Company
Officers (As of May 1, 1997)
Title Name
Chairman Richard P. Sergel
President Lawrence J. Reilly
Executive Vice President Cynthia A. Arcate
Treasurer and Assistant Secretary Howard W. McDowell
Secretary Paul R. Marshall
Assistant Treasurer John G. Cochrane
<PAGE>
The Narragansett Electric Company
Officers (As of May 1, 1997)
Title Name
Chairman Richard P. Sergel
President Robert L. McCabe
Executive Vice President William Watkins, Jr.
Vice President Richard W. Frost
Vice President and Treasurer Alfred D. Houston
Vice President Shannon M. Larson
Vice President Richard Nadeau
Vice President Michael F. Ryan
Secretary Thomas G. Robinson
Assistant Secretary Craig L. Eaton
Assistant Treasurer John G. Cochrane
Controller Howard W. McDowell
<PAGE>
New England Power Service Company
Officers (As of May 1, 1997)
- -------------------------------------------------- -----------------------------
Title Name
Chairman John W. Rowe
President Alfred D. Houston
Executive Vice President *David L. Holt
Vice President Andrew H. Aitken
Vice President Ralph E. Loomis
Vice President John G. Cochrane
Vice President Dan C. Delurey
Vice President Peter G. Flynn
Vice President Don F. Goodwin
Vice President *David C. Kennedy
Vice President Cheryl A. LaFleur
Vice President Robert H. McLaren
Vice President *Chester O. Paradise
Vice President Thomas E. Rogers
Treasurer Michael E. Jesanis
Assistant Clerk Kirk L. Ramsauer
Assistant Treasurer John L. Palmer
Controller Howard W. McDowell
- --------------------------------------------------- ----------------------------
* Considered Primary Signers
<PAGE>
Attachment 3
NEPSCO Accounting System
The following is a basic description of how the NEPSCO accounting and billing
system operates:
There are five ways that costs are billed out to the companies served by NEPSCO
1. Direct charges
2. Allocated charges
3. Clearing accounts
4. Service company operating costs
5. Compensation for use of capital
Direct charges
- --------------
These costs include payroll, outside vendor costs, materials, personal expense,
etc. When the costs are incurred, an identification is made as to which company
or companies benefited from the services provided. This identification is made
on a source document such as a time sheet, vendor invoice or expense account.
All NEPSCO employees fill out time sheets indicating the account to be charged
including the company for whom the work was performed.
Allocated charges
- -----------------
The same type of costs described under direct charges can be billed out using a
predetermined allocation formula which are shown on attachment 1. The allocation
formulas are calculated annually and provided to all department heads and
managers in NEPSCO with the instructions that:
Instructions are issued to all NEPSCO employees that the predetermined
allocation formulas "should only be used when the resulting breakdown accurately
reflects both the nature of the effort performed and the companies that benefit
from such effort. However, when it is clear that the charges apply to an
individual company, then that company should be charged directly. In addition
there may be instances in which the percentage allocation is not appropriate. In
those instances, the companies should be listed individually on the document
along with the appropriate allocation of charges." The burden of making this
determination is on the person preparing and the person approving the source
document.
Clearing accounts
- -----------------
A clearing account accumulates costs for a one month period and then distributes
these costs at the end of the month. Clearing accounts are classified into three
types:
The first type accumulates overhead costs such as fringe benefits (e.g.,
pensions, health insurance, other postretirement benefits, etc) and various
support groups (e.g., personnel, reproduction, buildings and grounds, etc). The
costs in these clearing accounts are distributed out to an individual department
overhead clearing account which is the second type of clearing account. This
distribution is based primarily on either each department's manpower (fringe
benefits, personnel) or floor space occupied (building and grounds). These
department overhead clearing accounts also accumulate charges from within the
department itself, such as office supplies and office equipment. The amounts
accumulated in these department overhead accounts is then charged out to those
companies to whom the department's payroll is charged in the same proportions
calculated on a monthly basis.
The third type of clearing account accumulates and allocates costs based on the
usage of specific services performed by NEPSCO such as the computer room,
transportation, etc. The computer room costs are charged out based on an
identification for each job that is run on the computer as to which company such
job is being run for. Transportation costs are charged out based on vehicle
usage tickets on which the user must identify which company should be charged
for such usage.
A complete listing of all the clearing accounts is listed in Attachment 2.
NEPSCO operating costs
- ----------------------
These costs are costs that are incurred for the operating of NEPSCO as a
corporate entity. All costs in this category are allocated to each company based
on the percent of total NEPSCO payroll charged to each company.
NEPSCO compensation for use of capital
- --------------------------------------
NEPSCO is allowed by the SEC to earn a utility (NEP's) rate of return on its
common equity. This rate of return is updated whenever NEP's return changes and
this return including related income taxes is billed out to each company based
on the percent of NEPSCO payroll charged to each company.
Attachment 1
Allocation Methods
0232 Retails only Transmission and Distribution (T&D)
operation and maintenance (O&M)
ex wheeling costs plus customer service
and sales expenses
0235 Retails & NEP Same as 0232
0243 Material control Inventory ex fuel
0247 Cust Acctg # of customers All retails
0249 Diversions # of customers - All retails
0253 Engineering Dist Capital budgets - All retails
0256 T&D supv T&D O&M Budget by company
0257 T&D supv(Ex Narra) T&D O&M budgets by company (ex Narra)
0272 Shareholders Svcs Total NEPSCO billings - assoc. companies
0282 Other Svcs NEES NEES 25%; remainder based on 0235
0297 Shared Microwave Sys Air line circuit miles
0342 Payroll acctg # of employees
0345 Empl Info system # of employees
0346 Time entry # of employees
0352 Personnel & Labor # of employees
0354 Purchasing # of purchase orders
0358 Dielectric testing # of aerial devices
0369 HR # of nonunion employees
0375 Purch,Mtl & payable Checks process, purchase orders,
inventory ex fuel
0380 All Company Alloc. Same formula as 0232 but including all
companies
0471 Archives # of records stored
0447 Customer acctg (I/S) # of customers - All retails -
same as 0247
0435 Legal/Prop. Records (I/S) Same as 0235
0472 Shareholder Svcs (I/S) Same as 0272
Attachment 2
Clearing accounts
Building & grounds
Thrift Plan
Fringe benefits (Group Ins, Health Ins, Medicare, Pension, FAS 106, FAS 112,
etc)
General Liability Insurance & Workers Comp
Office service
Reproduction
Computer Operations
Remote computer operations
Engineering supervision
Department overhead
Rubber gloves testing
Construction department clearing accounts*
Communications and controls
Transportation supervision
R&D
Transportation expense
Heavy equipment expense
Shared Microwave System
Millbury Training Center
Central Warehouse
Although labelled as the Construction department, this group does a variety of
physical work which may be construction or maintenance related.
<PAGE>
Attachment 4
Incorporated by reference to Exhibit B-2.1 (Central Administrative Services
Provided to NEES) to SEC File No. 70-9473.
Attachment 5
Incorporated by reference to Exhibit B-2.2 (Analysis of Corporate Cost
Allocation - 1999 Business Plan), Exhibit B-2.3 (Overhead Accounts for National
Grid Company Services), Exhibit B-2.4 (Reallocation of Estimated National Grid
Bill), and Exhibit B-2.5 (NEES/Grid Domestic Cost Savings) to SEC File No.
70-9473.
Cost Collection and Control within NGC
- --------------------------------------
Individual departmental costs are the responsibility of departmental managers,
and are subject to a range of internal controls from initial procurement to
final payment.
Procurement Controls
Access to raise purchase orders for goods and services is restricted to
personnel with relevant authority, as delegated from management. The levels of
authority are detailed, and are subject to periodic review. Furthermore
individuals are restricted in the budgets against which orders are raised.
Segregation of duties ensures that individuals who raise purchase orders cannot
approve invoices relating to that order.
Invoices are coded to specific budgets based on the information on the purchase
requisition.
In the case of invoices approved by goods receipt notes, once again segregation
of duties ensures that individuals who raised orders cannot raise a goods
receipt note for that purchase order.
Payment Controls
Invoices are not paid unless supported by a purchase order and goods receipt
note.
Cost Controls
Individual departmental budgets are approved by senior management through the
business planning and budget process. Each departmental budget is reviewed
individually by senior management staff. Following this review, the consolidated
plans and budgets are presented for approval to the Board of Directors.
Throughout the year, departmental results are continually measured against
budget, and latest forecast, with detailed variance analyses required for
inclusion in senior management reports. Departmental managers receive dedicated
support from finance staff in order to monitor costs, and investigate variances.
Audit
Individual departmental expenditure is subject to annual review by external
auditors, and periodic review by internal auditors.
Regulatory Review
In addition to the above controls, it should be noted that NGCs costs are
subject to rigorous review by OFGEM, the UK regulator, a process that is
currently underway.
<PAGE>
Attachment 6
MUTUAL ASSISTANCE AGREEMENT
WHEREAS, the Massachusetts Electric Company, Nantucket Electric Company,
The Narragansett Electric Company, Granite State Electric Company, New England
Power Company, New England Electric Transmission, New England Hydro-Transmission
Corporation and New England Hydro-Transmission Electric Company, Inc.
(individually, a Company and together, the Companies) are each an operating
electric utility and an affiliated company within the New England Electric
System, Massachusetts,
WHEREAS, each of the Companies from time to time have required and may
continue to require limited incidental assistance and services to ensure that
their electric utility operations and equipment are maintained and perform in
accordance with good utility practice,
WHEREAS, each of the Companies may find it from time to time economic and
efficient to obtain from one another such needed services and assistance, and to
provide the same to one another at cost,
NOW, THEREFORE, the Companies enter into this Mutual Assistance Agreement.
COVENANTS
1. Each Company will, to the extent possible, respond to requests from any
other Company for specific or general incidental assistance and services. Such
requests may be modified or cancelled by the requesting Company and may be
refused by the responding Company.
2. Requests for incidental assistance and services shall generally be for
the types of services set forth in Exhibit A, attached hereto and incorporated
by reference.
3. All incidental assistance and services rendered under this Mutual
Assistance Agreement will be at actual cost thereof. Direct charges will be made
for assistance and services.
4. Bills for incidental assistance and services will be rendered as soon as
practicable after the close of each month. Bills shall be paid as promptly as
practicable following receipt.
5. This Mutual Assistance Agreement is subject to modification or
termination at any time to the extent that its performance may conflict with any
federal or state law or any rule, regulation or order of a federal or state
regulatory body having jurisdiction thereover. This Agreement is furthermore
subject to approval of any federal or state regulatory body whose approval is a
legal prerequisite to its execution and performance.
6. This Agreement shall be in effect for calendar year 2000.
7. Any number of counterparts of this Mutual Assistance Agreement may be
executed, and each shall have the same force and effect as an original
instrument, as if all parties to all counterparts had signed the same
instrument.
MASSACHUSETTS ELECTRIC COMPANY
By s/Larry Reilly
Title President
NANTUCKET ELECTRIC COMPANY
By s/ Larry Reilly
Title President
THE NARRAGANSETT ELECTRIC COMPANY
By s/ Larry Reilly
Title President
GRANITE STATE ELECTRIC COMPANY
By s/ Larry Reilly
Title President
NEW ENGLAND POWER COMPANY
By s/ John G. Cochrane
Title Treasurer
NEW ENGLAND ELECTRIC TRANSMISSION
By s/ John G. Cochrane
Title Treasurer
NEW ENGLAND HYDRO-TRANSMISSION CORPORATION
By s/ John G. Cochrane
Title Treasurer
NEW ENGLAND HYDRO-TRANSMISSION ELECTRIC COMPANY
By s/ John G. Cochrane
Title Treasurer
<PAGE>
Exhibit A
Description of Assistance and Services Available
Construction and Maintenance
Manpower and equipment for construction, extension, improvement,
maintenance or repair of electric properties.
Emergencies
Assistance in emergency maintenance and restoration of utility service and
in mobilization of personnel and equipment.
Engineering
Engineering services; technical advice, design, installation, supervision,
planning, research, testing, operation of communications, and operation and
maintenance of specialized technical equipment.
Stores
Services re storing of materials, supplies and equipment.
Miscellaneous
Consulting and monitoring services; land and/or real facilities rentals
related to transmission or wholesale power sales; reimbursement of convenience
expenses.
<PAGE>
Exhibit B
Determination of Cost of Service
Cost of service will be determined in accordance with the rules,
regulations and orders of the Securities Exchange Commission, and will include
all costs of doing business incurred by the providing Company.
Records will be maintained for each unit of the providing Company in order
to accumulate all costs of doing business and to determine the cost of service.
These costs will include wages and salaries of employees and related expenses
such as insurance, taxes, pensions and other employee welfare expenses, and
general administrative costs.
Charges for services rendered and related expenses and non-personnel
expenses (e.g., use of automotive equipment, etc.) will be billed directly to
the requesting Company.
Charges for services will be determined from the time sheets of employees
and will be computed on the basis of each employee's hourly rate plus a
percentage factor to cover related expenses and general administrative expenses.
Records of such related expenses and general administrative expenses will be
maintained and subjected to periodic review.
Out-of-pocket expenses which are incurred for the requesting Company will
be billed at cost. Charges for non-personnel expenses, such as for use of
automobiles, trucks and heavy equipment, will normally be computed on the basis
of costs per hour or per mile.
<PAGE>
Attachment 7
Overhead Rates for Indirect Charges of NEES's Intercompany Billing
Types of Costs Billed to Associated Companies
Direct Charges - include payroll, outside vendor costs, materials,
transportation, personal expense and computer expenses. When costs are
incurred, an identification is made as to which company or companies
benefited from the services provided. The identification is made on a
source document such as an employee time sheet, vendor invoice, or
transportation ticket.
Indirect Charges - applied as a percentage to payroll dollars or value
of inventory issued and include overhead costs such as:
a. Time not worked: (an accrual for the payment of hours
an employee does not work, examples
are paid vacation, holidays, and
sick time).
b. Bonus & Goals programs: (employee compensation programs.)
c. Stores handling: (loading percentage added to
inventory issues to recover the cost
of operating the stockrooms.)
d. Employee Benefits: (pensions, health insurance, payroll
taxes, etc.)
e. Supervision & Admin: (loading percentage to recover
supervision, support departments,
other general and administrative
costs that support the employee
performing the service.)
Exhibit O-1
Appointment of Agent for Service of Process
The National Grid Group plc ("National Grid) is organized under the laws of
England and Wales and has its principal place of business at:
National Grid House
Kirby Corner Road
Coventry CV48JY
United Kingdom
(44) 24 7653 7777 (tel).
National Grid, on behalf of its officers and directors who are not
residents of the United States, ("Officers and Directors") hereby designates and
appoints:
Cheryl A. LaFleur ("Agent")
Senior Vice President and General Counsel
New England Electric System
25 Research Drive
Westborough, MA 01582 USA
(508) 589-2000 (tel)
as the agent for the Officers and Directors upon whom may be served any process,
pleadings, subpoenas, or other papers in:
(a) any investigation or administrative proceeding conducted by the
Commission; and
(b) any civil suit or action brought against National Grid or the
Officers and Directors or to which National Grid or the Officers and
Directors have been joined as defendant or respondent, in any
appropriate court in any place subject to the jurisdiction of any
state or of the United States or of any of its territories or
possessions or of the District of Columbia, where the investigation,
proceeding or cause of action arises out of or relates to or concerns
the provisions of the acts administered by the Commission. National
Grid stipulates and agrees that any such civil suit or action or
administrative proceeding may be commenced by the service of process
upon, and that service of an administrative subpoena shall be effected
by service upon such agent for service of process, and that service as
aforesaid shall be taken and held in all courts and administrative
tribunals to be valid and binding as if personal service thereof had
been made.
National Grid stipulates and agrees to appoint a successor agent for
service of process if National Grid discharges the Agent or the Agent is
unwilling or unable to accept service on behalf of National Grid at any time
until National Grid is no longer a registered holding company under the Public
Utility Holding Company Act of 1935. National Grid further
<PAGE>
undertakes to advise the Commission promptly of any change to the Agent's name
and address.
National Grid undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to the provisions of the acts administered by the Commission.
National Grid has duly caused this exhibit to Application-Declaration File
No. 70-9473 to be signed on its behalf by the undersigned thereunto duly
authorized.
The signature of National Grid and of the persons on their behalf are
restricted to the information contained in this exhibit which is pertinent to
the Application-Declaration File No. 70-9473 of the respective companies.
/s/ Fiona B. Smith
---------------------------
Fiona B. Smith
Company Secretary and General Counsel
The National Grid Group plc
February 14, 2000
This statement has been signed by the following person in the capacity and
on the date indicated.
/s/ Cheryl A. LaFleur
---------------------------
Cheryl A. LaFleur
Senior Vice President and General Counsel
New England Electric System
February 14, 2000
