File No. 70-9495
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO THE APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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NSTAR
c/o BEC ENERGY
800 Boylston Street
Boston, MA 02199
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(Name of companies filing this statement and
address of principal executive offices)
None
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(Name of top registered holding company
parent of each applicant or declarant)
Thomas J. May
Chairman of the Board and Chief Executive Officer
Russell D. Wright
President and Chief Operating Officer
NSTAR
c/o BEC ENERGY
800 Boylston Street
Boston, MA 02199
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(Name and address of agents for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
Theodora S. Convisser, Esq. Michael P. Sullivan, Esq.
Clerk and Assistant Vice President, General Counsel
General Counsel and Secretary
BEC Energy Commonwealth Energy System
800 Boylston Street One Main Street
Boston, Massachusetts Cambridge, Massachusetts
02199 02142-9150
<PAGE>
Paul K. Connolly, Jr., Esq.
Timothy E. McAllister, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
260 Franklin Street
Boston, Massachusetts 02110
<PAGE>
This Pre-Effective Amendment No. 1 amends the Form U-1 Application in this
proceeding which originally was filed with the Securities and Exchange
Commission on May 7, 1999 as follows:
A. Item 2 is amended and restated as follows:
Item 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses of NSTAR expected to be paid or
incurred, directly or indirectly, in connection with the transactions described
above are estimated as follows:
Auditors' and Consultants' Fees..........................$ 1.3 million
Legal Fees............................................ . . 8.0 million
Investment Bankers' Fees and Expenses.....................10.1 million
Miscellaneous..............................................2.8 million
Total....................................................$22.2 million
B. Item 3.A.3 is amended and restated as follows:
3. Section 10(b)(2) -- Reasonableness of Fees
NSTAR believes that the overall fees, commissions and expenses incurred and
to be incurred in connection with the Mergers are reasonable and fair in light
of the size and complexity of the Mergers 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, BEC Energy and COM/Energy
together expect to incur a combined total of approximately $22.2 million in
fees, commissions and expenses in connection with the Mergers. By contrast,
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 their combined company and the strategic
benefits to be achieved by the Mergers, and further that the fees and expenses
are fair and reasonable in light of the complexity of the Mergers. 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 BEC Energy and COM/Energy common shares on December 4, 1998, the
Mergers would be valued at approximately $2.8 billion. The total estimated fees
and expenses of $22.2 million represent approximately 0.79% of the value of the
consideration to be paid to the shareholders of BEC Energy and COM/Energy, and
are consistent with (and are in fact generally lower than) percentages
previously approved by the Commission. See, e.g., Entergy Corp., Holding Co. Act
1
<PAGE>
Release No. 25952 (Dec. 17, 1993) (fees and expenses represented approximately
1.7% of the value of the consideration paid to the shareholders of Gulf States
Utilities); Northeast Utilities, Holding Co. Act Release No. 25548 (June 3,
1992) (approximately 2% of the value of the assets to be acquired).
C. Item 3.B.2 is amended to add the following paragraph immediately following
the eighth paragraph thereof:
Although NEPOOL's historical function has recently changed with the advent
of the independent system operator, ISO-New England, and the development of the
Restated NEPOOL Agreement, it may still be characterized as a "tight" power pool
whose objective is to assure adequate reliability in the bulk electric power
supply of New England by coordinating the operation of generation resources and
the planning of transmission resources of its members. Through the Restated
NEPOOL Agreement, NEPOOL continues to be responsible for the development of a
regional transmission tariff which provides for open non-discriminatory access
to the New England transmission system. The tariff, approved by the FERC and
administered by ISO-New England through an agreement with NEPOOL, provides for
access to and use of all NEPOOL participants' pool transmission facilities, or
"PTF." In addition, each transmission owning utility in New England has its own
open access transmission tariff on file with the FERC, thus ensuring
non-discriminatory access to each non-PTF transmission system within New
England. Therefore, the electric utilities within New England continue to be
operated as a single interconnected and coordinated system through their
participation in NEPOOL.
D. Item 6 is amended and restated as follows:
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Declaration of Trust of NSTAR (included in Exhibit C-1 hereto).
A-2 By-laws of NSTAR (included in Exhibit C-1 hereto).
B-1 Merger Agreement (included in Exhibit C-1 hereto).
C-1 Registration Statement on Form S-4 (filed with the Commission on
May 12, 1999 (File No. 333-78285) and incorporated herein by
reference).
C-2 Joint Proxy Statement and Prospectus of BEC Energy and COM/Energy
(included in Exhibit C-1 hereto).
D-1 Joint application to the MDTE (previously filed).
D-2 Massachusetts Order (to be filed by amendment).
D-3 Joint application to the FERC (previously filed).
2
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D-4 FERC Order.
D-5 Boston Edison application to the NRC (previously filed).
D-6 NRC Order (to be filed by amendment).
D-7 Canal Electric application to the NRC (previously filed).
D-8 NRC Order (to be filed by amendment).
E-1 Maps of service areas of BEC Energy and COM/Energy (previously
filed).
F-1 Opinion of counsel.
F-2 Past-tense opinion of counsel (to be filed by amendment).
G-1 Opinion of Goldman, Sachs & Co. (included in Exhibit C-1 hereto)
G-2 Opinion of SG Barr Devlin (included in Exhibit C-1 hereto)
H-1 Annual Report of BEC Energy on Form 10-K/A for the year ended
December 31, 1998 (filed on May 13, 1999 (File No. 1-14768) and
incorporated herein by reference).
H-2 Annual Report of COM/Energy on Form 10-K for the year ended
December 31, 1998 (previously filed).
H-3 COM/Energy Statement Claiming Exemption on Form U-3A-2 for the
year ended December 31, 1998 (previously filed).
I-1 Proposed Form of Notice (previously filed).
B. Financial Statements
FS-1 NSTAR Unaudited Pro Forma Combined Balance Sheets as of December
31, 1998 (included in Exhibit C-1).
FS-2 NSTAR Unaudited Pro Forma Combined Statements of Operations for
the year ended December 31, 1998 (included in Exhibit C-1).
FS-3 BEC Energy Consolidated Balance Sheet as of December 31, 1998,
December 31, 1997 and December 31, 1996 (previously filed).
FS-4 BEC Energy Consolidated Statements of Income for each of its last
three fiscal years (previously filed).
3
<PAGE>
FS-5 COM/Energy Consolidated Balance Sheet as of December 31, 1998,
December 31, 1997 and December 31, 1996 (previously filed).
FS-6 COM/Energy Consolidated Statements of Income for each of its last
three fiscal years (previously filed).
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Application to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: July 9, 1999 NSTAR
By: /s/ Thomas J. May
Chairman of the Board and Chief Executive Officer
4
EXHIBIT D-4
UNITED STATES OF AMERICA 88 FERC P. 61,002
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
Linda Breathitt, and Curt Hebert, Jr.
BEC Energy and Commonwealth ) Docket No. EC99-33-000
Energy System )
ORDER APPROVING DISPOSITION OF
JURISDICTIONAL FACILITIES
(Issued July 1, 1999)
I. Introduction
On February 8, 1999, as supplemented on May 14 and June 4, 1999, BEC Energy
and Commonwealth Energy System (Commonwealth Energy) (collectively, Applicants)
filed on behalf of their jurisdictional utility subsidiaries an application
pursuant to section 203 of the Federal Power Act (FPA) 1 requesting Commission
authorization of the disposition of jurisdictional facilities by the public
utility subsidiaries of BEC Energy and Commonwealth Energy as part of the
proposed merger of BEC Energy and Commonwealth Energy. As a result of the
merger, BEC Energy and Commonwealth Energy will become wholly-owned subsidiaries
of a new holding company, to be named NSTAR.
We will approve, without hearing, the proposed merger as consistent with
the public interest.
II. Background
The merger of BEC Energy and Commonwealth Energy "occurs within the context
of the restructuring of the BEC and Commonwealth Energy regulated subsidiaries
pursuant to state competitive plans." 2 Applicants are in the process of
converting their public utility subsidiaries from vertically integrated
operations into transmission and distribution-only operations.
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1 16 U.S.C. ss. 824b (1994).
2 Application at 2.
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Docket No. EC99-33-000
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A. BEC Energy and Subsidiaries
BEC Energy is an exempt public utility holding company under section
3(a)(1) of the Public Utility Holding Company Act of 1935 (PUHCA). 3 BEC Energy
owns all of the outstanding common stock of Boston Edison, which is a public
utility under section 201(e) of the FPA. 4 Boston Edison provides wholesale and
retail electric service in and around Boston, Massachusetts. Boston Edison also
provides transmission services under its open access transmission tariff (OATT)
and pursuant to individual transmission service contracts. Pursuant to
restructuring proceedings before the Massachusetts Department of
Telecommunications and Energy (Massachusetts Commission), Boston Edison has
divested all of its fossil fuel generation plants to Sithe Energy, Inc. The
Commission approved this application on March 27, 1998, in Boston Edison Co. and
BEC Energy, 82 FERC P. 61,311 (1998). Boston Edison's only remaining owned
generation is its 670 MW Pilgrim nuclear facility which Boston Edison is in the
process of divesting to Entergy Nuclear Generation Company, a subsidiary of
Entergy Corp. The Commission conditionally approved this application on April 7,
1999. 5
BEC Energy has two other subsidiaries, Harbor Electric Energy Company,
which provides distribution service in Massachusetts, and Boston Energy
Technology Group, Inc., which is engaged in non-regulated energy businesses.
Neither of these subsidiaries owns generation or engages in wholesale sales.
B. Commonwealth Energy and Subsidiaries
Commonwealth Energy is an exempt public utility holding company under
PUHCA. Commonwealth Energy wholly owns three franchised public utility
companies, Commonwealth Electric Company (Commonwealth Electric), Cambridge
Electric Light Company (Cambridge Electric), and Canal Electric Company (Canal),
which are engaged in the purchase, transmission, and distribution of electric
power in the state of Massachusetts. Commonwealth Energy also owns two power
marketing subsidiaries, COM/Energy Marketing, Inc. and Medical Area Total Energy
Plant, Inc. (MATEP).
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3 15 U.S.C. ss. 79c(a)(1) (1994).
4 16 U.S.C. ss. 824(e) (1994).
5 See Boston Edison Co. and Entergy Nuclear Generation Co., 87 FERC P.
61,053 (1999), reh'g pending.
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Docket No. EC99-33-000
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Commonwealth Electric sells power at wholesale to other electric utilities,
but has no wholesale requirements customers. According to the application,
Commonwealth Electric recently divested its generation assets. 6 Cambridge
Electric provides power and energy and transmission service to its sole
wholesale requirements customer, the Town of Belmont, Massachusetts (Belmont),
under a Net Requirements Power Supply Agreement (NRA) and a Transmission Service
Agreement (TSA), respectively. Cambridge Electric has divested most of its
generation assets with the exception of its 13.5 MW Blackstone Station. 7 Canal
divested its generation interests to Southern Energy Canal, L.L.C., with the
exception of its 3.52 percent ownership interest in the Seabrook 1 nuclear power
facility. 8
COM/Energy Marketing, Inc., Commonwealth Energy's power marketing
subsidiary, has no physical facilities for the generation, transmission or
distribution of power for sale. Commonwealth Energy's other power marketing
subsidiary, MATEP, owns and operates a 62 MW steam chilled water and electric
generating facility located in Boston, Massachusetts and sells power to its
affiliate, Medical Area Total Energy Plant, L.L.C., for resale to local
hospitals.
In addition, Commonwealth Energy owns two gas companies: (1) Commonwealth
Gas Company, a local gas distribution company serving retail customers and
municipalities in eastern Massachusetts; and (2) Hopkinton LNG Corp., which owns
and operates two liquefied natural gas facilities and is subject to the
Commission's jurisdiction under the Natural Gas Act. 9 Commonwealth Energy's
other subsidiaries include COM/Energy Steam Company, COM/Energy Resources, Inc.,
Energy Investment Services, Inc., COM/Energy Technologies, Inc., and five real
estate trusts.
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6 According to the application, Commonwealth Electric divested its
generation assets to Southern Energy Canal, L.L.C. The Commission approved this
application on November 12, 1998, in Cambridge Electric Co., et. al., 85 FERC P.
61,217 (1998), reh'g pending.
7 Cambridge Electric divested most of its generation assets to Southern
Energy Kendall, L.L.C. This application was approved by the Commission on
November 12, 1998. See id.
8 Id.
9 15 U.S.C. ss. 717, et seq. (1994).
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Docket No. EC99-33-000
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C. Description of the Merger and Post-Merger Operations
Under the terms of the Amended and Restated Merger Agreement between the
parties, BEC Energy and Commonwealth Energy will exchange their shares of common
stock for a combination of common stock and cash in the new holding company,
NSTAR. BEC Energy stockholders may elect to receive one share of NSTAR common
stock or $44.10 in cash for each share of BEC Energy common stock, while
Commonwealth Energy stockholders may choose to receive 1.05 shares of NSTAR
common stock or $44.10 in cash for each Commonwealth Energy share of common
stock. Applicants anticipate that, at the close of the transaction, BEC Energy
stockholders will hold about 68 percent of NSTAR and Commonwealth Energy
stockholders will own approximately 32 percent.
To accomplish the transaction, BEC Energy and Commonwealth Energy propose
to merge with subsidiaries of NSTAR, with BEC Energy and Commonwealth Energy
remaining as the surviving entities, wholly-owned by NSTAR. BEC Energy's and
Commonwealth Energy's public utility subsidiaries will remain separate
wholly-owned subsidiaries of their respective parent holding companies. The
application anticipates that NSTAR will be an exempt public utility holding
company under PUHCA.
III. Notice of Filing, Interventions and Responsive Pleading
Notices of the application and supplemental filing were published in the
Federal Register, 64 Fed. Reg. 9138 and 29,013 (1999), respectively, with
comments, protests, and interventions due on or before April 12 and June 1,
1999, respectively.
On March 12, 1999, the Massachusetts Commission filed a Notice of
Intervention. On April 12, 1999, motions to intervene and protests were filed by
the Municipal Light Department of the Town of Belmont, Massachusetts (Belmont)
and, jointly, by Braintree Electric Light Department and Reading Municipal Light
Department (collectively, Braintree and Reading). In addition, Braintree and
Reading request a hearing on the issues of the merger's effect on competition in
certain geographic markets and the mitigation measures necessary to ensure that
the merger does not adversely affect wholesale transmission rates.
On April 27, 1999, Applicants filed a response to the protests.
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Docket No. EC99-33-000
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Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,
18 C.F.R. ss. 385.214 (1999), the notice of intervention of the Massachusetts
Commission and the timely, unopposed motions to intervene of Belmont, Braintree
and Reading serve to make them parties to this proceeding.
We find good cause to overcome the general prohibition on the filing of
answers to protests, see 18 C.F.R. ss. 385.213(a)(2) (1999), and allow
Applicants' response in this proceeding because it provides additional
information that assists us in the decision-making process.
B. Standard of Review Under Section 203
Section 203(a) of the FPA provides, in relevant part, as follows:
No public utility shall sell, lease, or otherwise dispose of the whole of
its facilities subject to the jurisdiction of the Commission, or any part
thereof of a value in excess of $50,000, or by any means whatsoever,
directly or indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire, or take any
security of any other public utility, without first having secured an order
of the Commission authorizing it to do so.
16 U.S.C. ss. 824b(a) (1994). Under section 203(a), the Commission must approve
a proposed merger if it finds that the merger "will be consistent with the
public interest." Id.
In 1996, the Commission issued a Merger Policy Statement updating and
clarifying its procedures, criteria and policies applicable to public utility
mergers. 10 The Merger Policy
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10 See Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC
Stats. & Regs. P. 31,044 (1996), order on reconsideration, Order No. 592-A, 62
Fed. Reg. 33,341 (1997), 79 FERC P. 61,321 (1997) (Merger Policy Statement).
<PAGE>
Docket No. EC99-33-000
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Statement provides that the Commission will generally take account of three
factors in analyzing proposed mergers: (a) the effect on competition; (b) the
effect on rates; and (c) the effect on regulation.
For the reasons discussed below, we find that Applicants' proposed
commitments and ratepayer protection mechanisms will ensure that the proposed
merger is consistent with the public interest. Accordingly, based on these
commitments and ratepayer protection mechanisms, we will approve the merger.
Intervenors have not raised concerns sufficient to justify conditionally
accepting the merger or setting the proposed merger for hearing.
C. Effect on Competition
Applicants' Analysis
Applicants have evaluated the competitive effects of the proposed merger
using the screen analysis described in Appendix A of the Merger Policy
Statement. Applicants conclude that, due to the divestiture of Boston Edison's
and Commonwealth Electric's fossil-fueled generation, the proposed merger will
have no adverse effect on competition. 11
Applicants identify non-firm energy, short-term capacity and long-term
capacity as relevant products. They further differentiate non-firm energy by
season and time-of-day. 12 Applicants use a number of proxies for suppliers'
ability to participate in these product markets: economic and available economic
capacity for the non-firm energy and uncommitted capacity for short-term
capacity.
Applicants identify customers affected by the merger as all those residing
in NEPOOL, reasoning that the "structure and operation of NEPOOL" is the most
important factor. For example,
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11 Applicants perform supporting analyses assuming the status of
Applicants' owned and purchased capacity as of January 1, 1999. Application at
9-10.
12 Applicants define the summer period as June through August; the winter
period as December through February; and the shoulder period as the remaining
six months of the year. Applicants also define peak and off-peak periods by hour
and a super-peak period as the highest 150 load hours in the year.
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Docket No. EC99-33-000
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Applicants note that because NEPOOL operates under a Commission- approved OATT
for pool transmission facilities (PTF), customers of the merging companies can
purchase bulk power supplies from any member of NEPOOL as easily as they can
from the merging companies. 13 Applicants state that this approach to
identifying customers affected by the merger is consistent with identifying the
customers that are directly interconnected with or are historic trading partners
with Applicants' public utility subsidiaries. 14 Applicants use the delivered
price test described in Appendix A to identify the suppliers in the relevant
geographic market. In addition to suppliers in NEPOOL, Applicants include in the
geographic market supplies that could be imported from systems with which NEPOOL
is directly interconnected, including: New York Power Pool, Hydro Quebec, and
New Brunswick Power. 15 Citing the Commission's recent finding that NEPOOL is
not subject to transmission constraints that could affect market power,
Applicants argue there is no reason to identify or analyze any sub-regions of
NEPOOL as separate geographic markets. 16
Applicants' analysis shows that for economic capacity, the post-merger
market is moderately concentrated (i.e., an HHI statistic between 1,000 and
1,800) in all seven time periods with pre- to post-merger changes in the market
concentration statistic (HHI) between 25 and 47. Applicants report that since
Boston Edison has no available economic capacity or uncommitted capacity in any
time period, the pre- to post-merger increase in market concentration for those
measures is zero. Finally, their installed capacity analysis (performed for the
summer, winter and shoulder periods) shows a moderately concentrated post-merger
market with pre- to post-merger changes in market concentration statistic
between 26 and 28. Because all of these results
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13 Applicants state that the non-PTF open-access transmission tariffs held
by non-PTF transmission system owners provide similar opportunities for
customers.
14 Application Vol. 2, Reed Consulting Group Report, at 17- 18.
15 Applicants limit these supplies to the import capability of the
respective interconnections because, they claim, there is more capacity from
those regions that could economically serve the NEPOOL market than can actually
physically reach the market. See id. at 22.
16 New England Power Pool, 85 FERC P. 61,379 (1998), reh'g pending.
<PAGE>
Docket No. EC99-33-000
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are below the thresholds contained in the Merger Policy Statement, Applicants
conclude the merger will not adversely affect competition.
Applicants also evaluate the "potential vertical market power impact of the
merger on the long-term capacity market." 17 They state that the merger would
not increase their opportunity to exercise vertical market power by interfering
with the competitiveness of existing (or future) entities participating in the
bulk power market because they cannot create barriers to entry. In support of
this, they claim that they do not control access to generation sites, natural
gas supplies or electricgeneration equipment supplies, or transportation of key
inputs for electric generation (e.g., gas pipeline transportation and
distribution). Applicants also state that they supply only a de minimis amount
of natural gas to the downstream electric generation market. 18 Moreover,
Applicants argue that their combined fossil fuel generation divestiture and the
competitive, open-access market structure of NEPOOL significantly mitigate any
potential increase in vertical market power as a result of the merger.
Intervenors' Concerns
Braintree and Reading protest the merger. Braintree and Reading argue that
Applicants' assumption of an all-NEPOOL geographic market--plus import
capability from Hydro Quebec, NYPP and New Brunswick--is inappropriate. They
state that future congestion in NEPOOL could create smaller geographic markets
in which the proposed merger will create significant market concentration,
notwithstanding the divestiture of some of Applicants' generating assets.
Braintree and Reading claim that Applicants have not evaluated the effect of the
merger in such smaller geographic markets or proposed mitigation to remedy the
"excessive" market power that would result from the merger. 19
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17 Application Vol. 2, Reed Consulting Group Report, at 36.
18 While Applicants acknowledge that they do own a limited number of
potential generation sites, they state that there are numerous suitable electric
generation project sites available to supply NEPOOL, as demonstrated by the
number of proposed projects in NEPOOL. They also note that Commonwealth Gas
Company provides gas service to only 0.36 percent of the total generating
capacity in NEPOOL. Id. at 38 and 41.
19 In support of their arguments, Braintree and Reading cite to the March
31, 1999 NEPOOL filing (in Docket No. ER99-2335-000) of a proposed combination
"zonal/nodal congestion management system" in which congestion zones currently
under consideration involve two subregions, Boston-northeastern Massachusetts
and southeastern Massachusetts-Rhode Island, that are effectively bounded by
transmission constraints. Braintree and Reading also cite to the Commission's
recent decision on a dispute involving the impacts of transmission congestion in
the Boston-Northeastern Massachusetts transmission area within NEPOOL in Sithe
New England Holdings, LLC, 86 FERC P. 61,283 (1999). Braintree and Reading
Protest at 9-10.
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Docket No. EC99-33-000
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Applicants rebut Braintree and Reading's claims with a number of arguments.
First, Applicants note that NEPOOL has been free of significant transmission
constraints and that construction of new transmission or generation capacity
could prevent or mitigate future congestion. Moreover, Applicants explain, the
development of a congestion management system, together with NEPOOL's market
power monitoring and mitigation rules, would prevent any party from unfairly
exploiting congestion. Second, Applicants argue that after divestiture, they
will lack sufficient generating capacity to exercise market power. They note
that their as-yet-undivested generating resources are located outside the
constrained areas at issue and could not be used to exploit congestion within
constrained areas. Moreover, Applicants assert that they have limited ability to
withhold purchased power and that they would have no incentive to withhold the
output of the Pilgrim nuclear power plant. Finally, Applicants state that due to
rules established by NEPOOL and the ISO-New England, generators in NEPOOL would
be unable to withhold capacity or manipulate bids. 20
Commission Determination
Applicants' analysis of the competitive effects of their proposed merger
shows that in regard to the horizontal effects of the proposed merger, pre- to
post-merger changes in concentration
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20 Applicants refer to the Sanctions Rule, Resource Performance Monitoring
Rule, and market power monitoring and mitigation rules proposed by NEPOOL and
the ISO New England. Applicants cite to the Commission's conclusion that, "with
the modifications described in this order, NEPOOL's current market rules are
sufficient to restrain exercise of market power and manipulation of the bidding
rules and provide for operation of the market." See New England Power Pool, 85
FERC P. 61,379 at 62,472 (1998).
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Docket No. EC99-33-000
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in the relevant market (i.e., non-firm energy in NEPOOL) do not exceed the
threshold set forth in the Merger Policy Statement. Intervenors Braintree and
Reading dispute Applicants' results, claiming that the relevant geographic
market is far narrower than NEPOOL. In such markets, Braintree and Reading
claim, the consolidation of Applicants' remaining, undivested generation
resources would raise competitive concerns.
We disagree with the intervenors and find that, based on the circumstances
and facts presented by this particular case, the results of Applicants' analysis
are reasonable. We do not dispute the intervenors' contention that congestion
may develop in NEPOOL and that the predictable effect of such congestion would
be narrower geographic markets consisting of sub-regions of NEPOOL at times when
transmission constraints are binding. However, we note that intervenors have not
supported their claim that the merged company could exercise market power in
smaller geographic markets with the remaining generating resources in which it
has an interest. Absent such support, the Commission believes that it is highly
unlikely, given the type and cost of Applicants' resources and the safeguards in
place for trading in NEPOOL (i.e., market monitoring and mitigation) that the
merged company could effectively exercise market power in a smaller relevant
geographic market. In light of Applicants' evaluation of the horizontal and
vertical effects of the proposed merger, we conclude that the proposed merger
will not adversely affect competition.
D. Effect of the Merger on Rates
The Merger Policy Statement explains our concern that there be adequate
ratepayer protection from adverse rate effects as a result of a merger. It
describes various commitments that may be acceptable means of protecting
ratepayers, such as hold harmless provisions, open seasons for wholesale
customers, rate freezes, and rate reductions. 21
Applicants commit that the wholesale requirements and transmission
customers of their public utility subsidiaries will be held harmless from
merger-related cost increases.
According to the application, all of the requirements customers of BEC
Energy's wholly-owned subsidiary Boston Edison are served under various fixed
rate contracts which do not permit
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21 Merger Policy Statement at 30,123-24.
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Docket No. EC99-33-000
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the inclusion of merger-related costs. 22 Applicants further note that
negotiations with Boston Edison's customers have resulted in reductions of
approximately 10 percent in the fixed demand and energy rates for service to the
Towns of Braintree, Reading and Wellesley and MBTA. 23
According to the application, Commonwealth Energy's wholly-owned subsidiary
Commonwealth Electric has no wholesale requirements customers. Cambridge
Electric, also wholly-owned by Commonwealth Energy, has a single wholesale
requirements customer, the Town of Belmont, Massachusetts (Belmont). Applicants
note that Cambridge Electric has reached a settlement with Belmont that provides
for fixed demand and energy rates (with pre-determined annual increases in the
stated energy rate). The application indicates that the settlement rates to
Belmont will be fixed and will not be subject to adjustment based on changes in
Cambridge Electric's cost of service. 24
The application also indicates that the use of PTF owned by Boston Edison,
Commonwealth Electric and Cambridge Electric will be governed by the ISO-New
England, which will eliminate any potential rate pancaking for these facilities.
Access to non-PTF transmission will continue through the OATTs of Boston Edison,
Commonwealth Electric and Cambridge Electric. 25
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22 Boston Edison's requirements customers include the Towns of Braintree,
Concord, Reading, Wellesley, Massachusetts, the Massachusetts Port Authority and
the Massachusetts Bay Transportation Authority (MBTA). Ex. GOL-1 at 11-14.
23 The application states that Boston Edison's negotiations with the Town
of Concord, Massachusetts (Concord) were unsuccessful. However, due to the
similar service arrangements that exist for Concord and Wellesley, Boston Edison
is willing to offer Concord the same rate arrangement negotiated with Wellesley.
24 See joint offer of settlement between Cambridge Electric and Belmont
submitted in Docket No. EC98-50-000, et al., Cambridge Electric Light Co., __
FERC P. _____ (1999), and Ex. MRK-1 at 11-12.
25 Applicants contend that use of the non-PTF transmission of more than one
of their operating utility subsidiaries is unlikely to result in pancaked
non-PTF rates (or local service charges). However, Applicants commit to making a
corrective transmission rate filing, if necessary, pursuant to section 205 to
eliminate any rate pancaking that may arise in the future. Application at 20.
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Docket No. EC99-33-000
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Applicants conclude that their hold harmless commitment for wholesale
requirements and transmission customers, together with their fixed rate
contracts for requirements customers and PTF transmission service provided
through the ISO-New England, ensure that the proposed merger will have no
adverse affect on rates.
Belmont raises concerns regarding Applicants' hold harmless commitment.
Belmont states that Applicants have not specifically stated that, if the pending
settlement is not approved, Belmont will receive the benefits of any
merger-related savings in the rates paid by Belmont to Cambridge Electric under
its Net Requirements Power Supply Agreement (NRA). Belmont similarly contends
that there is no statement in the application that any merger benefits will flow
through to Belmont under the Transmission Service Agreement (TSA) with Cambridge
Electric.
Belmont further argues that certain non-rate terms and conditions of the
NRA and the TSA that may be affected by the proposed merger were not addressed
by Applicants. Specifically, Belmont contends that the option to purchase
"rights of use" on the Cambridge Electric transmission system under the TSA was
not addressed in the application. Additionally, Belmont expresses concern that
the provision for the establishment of an administrative committee under section
17(g) of the TSA would cease to exist upon approval of the merger. Belmont
requests that the Commission condition its approval of the proposed merger upon
Cambridge Electric's written acceptance of the obligation to continue to honor
the use rights and all other provisions of the NRA and TSA, for the remaining
terms of both agreements.
Regarding the Cambridge Electric and Belmont settlement, the application
states that, whether or not the settlement is approved, Cambridge Electric
commits to hold Belmont harmless from any adverse rate impacts arising from the
merger. Applicants' Witness Kirkwood states that Cambridge Electric will hold
Belmont harmless under the TSA and pre-settlement NRA by removing all
merger-related costs allocated to Belmont to the extent they exceed merger
savings. 26 Additionally, Applicants state that Belmont's formula rates under
the NRA and TSA, provide that Belmont's share of any merger benefits will
automatically
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26 See Ex. MRK-1 at 12.
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Docket No. EC99-33-000
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flow through the formula rates. 27 In any event, the Commission is concurrently
approving the settlement agreement by separate order. 28 In light of the above,
the Commission finds that Belmont's rate concerns are satisfied.
Concerning the non-rate terms and conditions of the TSA, Applicants state
that Cambridge Electric's current obligations under the TSA will remain
following the merger. Applicants commit that Cambridge Electric, or any future
corporate successor to Cambridge Electric, will fulfill all obligations to
Belmont pursuant to the TSA. 29 If Belmont believes that Cambridge Electric has
violated the terms of its contract(s) with Belmont, it may file a complaint
pursuant to section 206 of the FPA. If Cambridge proposes any future contract
modifications as a result of the proposed merger, the Commission will review any
proposed contract modifications when filed.
Braintree and Reading contend that Applicants' hold-harmless commitment to
exclude any merger costs that exceed merger savings from transmission rates is
too vague. Braintree and Reading assert that it may be impossible to detect the
presence of merger-related costs, specifically transaction costs and the
acquisition premium, into wholesale transmission rates. Additionally, Braintree
and Reading assert that the application fails to indicate any effort on Boston
Edison's part to negotiate hold harmless provisions with its transmission
customers before filing the application. Braintree and Reading propose that
Applicants be foreclosed from including any merger-related costs, including the
acquisition premium and any increase in the return on common equity, in
determining transmission rates for PTF and non-PTF transmission service. 30
In response, Applicants state that they do not intend for any portion of
the acquisition premium to be included in the books or recovered through the
rates of their public utility subsidiaries. Applicants' response reaffirms their
commitment not to charge any wholesale, requirements or transmission customer,
through either a fixed rate or a formula rate, for any
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27 See Applicants' Response at 4-5.
28 See letter order issued in Docket Nos. ER98-1522-002, et al., 88 FERC P.
______ (1999).
29 Id. at 3.
30 Braintree and Reading Protest at 13.
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Docket No. EC99-33-000
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portion of the acquisition premium without a subsequent filing with the
Commission. 31
In addition, Applicants state that they will not include merger transaction
costs in transmission rates without: (1) specifically identifying them; (2)
demonstrating that the costs included in the rates are exceeded by the savings
produced by the merger; and (3) in the event of a dispute, bearing the burden of
proof that the merger savings exceed the merger costs charged to the customer.
Concerning the negotiation of ratepayer protection mechanisms with
customers, the Commission did not make this a mandatory prerequisite to
submitting a merger application. Rather, the Commission in the Merger Policy
Statement encouraged applicants to negotiate satisfactory ratepayer protection
mechanisms with customers before filing a merger application. 32 Even if
Applicants did not negotiate an agreement with all affected customers, the
Commission finds that Applicants have adequately ensured that ratepayers will
not be adversely affected as a result of the proposed merger. They have done so
through their hold harmless provision and further commitments and supporting
explanation in their response to the protests in this proceeding.
E. Effect of the Merger on Regulation
The Merger Policy Statement outlined the Commission's concerns relating to:
1) creation of a regulatory gap as a consequence of a merger; or 2) shifts of
regulatory authority between the Commission and state commissions or the SEC. 33
Based on a review of the application, the Commission concludes that the proposed
merger will not affect the manner or extent to which this Commission or the
relevant state commissions regulate the transactions and facilities of the
merged entities.
With respect to federal regulation, Applicants state that the Commission's
regulatory authority over BEC Energy
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31 See Applicants' Response at 14.
32 In the Merger Policy Statement, the Commission stated that we believe
that the most promising and expeditious means of addressing ratepayer protection
is for the parties to negotiate an agreement on ratepayer protection mechanisms.
Merger Policy Statement at 30,123.
33 Merger Policy Statement at 30,124-25.
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Docket No. EC99-33-000
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and Commonwealth Energy will be the same after the merger. The Amended and
Restated Merger Agreement provides for a change in the nature of the proposed
new holding company, NSTAR, from a corporation to a Massachusetts business
trust. Applicants state that under the new arrangements, NSTAR will be an exempt
holding company under the Public Utility Holding Company Act.
With respect to state regulation, Applicants maintain that approval of the
merger will not impair existing state regulation. According to the Applicants,
the Massachusetts Department must approve the retail rates and the rate plan
which has been filed with it, in conjunction with the merger.
Intervenors raise no issues concerning the effect of the merger on
regulation.
Upon consideration of the above, we conclude that the proposed merger will
not adversely affect regulation.
F. Accounting Issues
Applicants' proposed use of the purchase method of accounting for the
business combination, including recording the acquisition premium in the books
of NSTAR, is approved.
Applicants must promptly inform the Commission of any change in the
circumstances that would reflect a departure from the facts the Commission has
relied upon in approving the Merger accounting in accordance with Accounting
Principles Board Opinion No. 16.
The Commission orders:
(A) The proposed transaction is hereby approved subject to the commitments
and conditions discussed in the body of this order.
(B) The request of Belmont for conditional acceptance of the proposed
transaction and the request of Braintree and Reading to deny the application and
set the proposed ratepayer protection for hearing are hereby rejected as
discussed in the body of this order.
(C) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, services,
accounts, valuation, estimates or determinations of cost, or any other matter
whatsoever now pending or which may come before the Commission.
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Docket No. EC99-33-000
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(D) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost or any valuation of property claimed or
asserted.
(E) The Commission retains authority under section 203(b) of the FPA to
issue supplemental orders as appropriate.
(F) Applicants shall notify the Commission that the merger has occurred
within 10 days of the date the merger is consummated.
(G) The public utility subsidiaries of BEC Energy and Commonwealth Energy
must submit their accounting for the merger within six months of the date the
merger is completed.
By the Commission.
( S E A L )
Linwood A. Watson, Jr.,
Acting Secretary.
EXHIBIT F-2
ROPES & GRAY
One International Place
Boston, Massachusetts 02110-2624
July 8, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are counsel to NSTAR, a Massachusetts voluntary association organized
under Chapter 182 of the Massachusetts General Laws ("NSTAR"). We have examined
NSTAR's Application on Form U-1 (File No. 70-9495) filed on May 7, 1999 with the
Securities and Exchange Commission (the "Commission") under the Public Utility
Holding Company Act of 1935, as amended (the "Act") (the "Application"),
requesting an order of the Commission under the Act (i) approving the
acquisition by NSTAR of all of the outstanding and reserved common shares of
each of BEC Energy ("BEC"), a Massachusetts voluntary association organized
under Chapter 182 of the Massachusetts General Laws (the "BEC Shares") and
Commonwealth Energy System ("COM/Energy"), a Massachusetts voluntary association
organized under Chapter 182 of the Massachusetts General Laws (the "COM/Energy
Shares") and (ii) granting NSTAR, and each of its subsidiary companies, upon
consummation of such acquisition, an exemption under Section 3(a)(1) of the Act
from all provisions of the Act except Section 9(a)(2). The acquisition is to be
effected by means of an Amended and Restated Agreement and Plan of Merger, dated
as of December 5, 1998 amended and restated as of May 4, 1999 (the "Plan"),
between NSTAR, BEC, COM/Energy, and BEC Acquisition LLC and CES Acquisition LLC
(together the "Acquisition Subs"), a copy of which is included as an exhibit to
the Application.
Based upon our examination of the Application and such other instruments,
documents and matters of law as we have deemed requisite, we are of the opinion
that:
1. NSTAR has been duly organized and is validly existing under the laws of
The Commonwealth of Massachusetts, with full power and authority to own its
properties and conduct its business as described in the Application. To the best
of our knowledge, NSTAR is
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<PAGE>
not qualified as a foreign corporation in any jurisdiction other than
Massachusetts and the nature of its operations are such that it is not required
to be so qualified.
2. Once the Merger has been approved by appropriate action of the
regulatory authorities having jurisdiction, including the Massachusetts
Department of Telecommunications and Energy, the Federal Energy Regulatory
Commission, the Nuclear Regulatory Commission and the Securities and Exchange
Commission (pursuant to the Public Utility Holding Company Act of 1935), and
assuming the proposed Merger is accomplished in accordance with the Plan and as
described in the Application, including the filing of certificates of merger
with the Massachusetts Secretary of State: (i) all laws of The Commonwealth of
Massachusetts applicable to the Merger will have been complied with, (ii) the
NSTAR common shares, $1.00 par value (the Shares") issuable pursuant to the
Merger as contemplated by the Plan, will be legally issued, fully paid and
nonassessable, and the holders thereof will be entitled to the rights
appertaining thereto set forth in the Declaration of Trust of NSTAR, (iii) NSTAR
will legally acquire the BEC Shares and the COM/Energy Shares; and (iv) the
consummation of the transactions proposed in said Application will not violate
the legal rights of the holders of any securities issued by NSTAR or any
associate company thereof.
3. NSTAR is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of NSTAR. However,
NSTAR's Declaration of Trust disclaims shareholder liability for acts or
obligations of NSTAR and requires that notice of such disclaimer be given in
each agreement, obligation and instrument entered into or executed by NSTAR or
its Trustees. The Declaration of Trust provides for indemnification out of the
property of NSTAR for all loss and expense of any shareholder held personally
liable solely by his reason of being or having been a shareholder of NSTAR.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which NSTAR itself would be
unable to meet its obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ ROPES & GRAY
Ropes & Gray
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