File No. 70-09157
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM U-1 APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
BL Holding Corp.
One MetroTech Center
Brooklyn, New York 11201
(Name of company filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent
of each applicant or declarant)
Robert R. Wieczorek Kathleen A. Marion
Vice President, Secretary Vice President and
and Treasurer Corporate Secretary
KeySpan Energy Corporation Long Island Lighting Company
One MetroTech Center 175 East Old Country Road
Brooklyn, New York 11201 Hicksville, New York 11801
(Name and address of agents for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
Lance D. Myers Leonard P. Novello
Cullen and Dykman Senior Vice President and General Counsel
177 Montague Street Long Island Lighting Company
Brooklyn, New York 11201 175 East Old Country Road
Hicksville, New York 11801
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This Amendment No. 1 constitutes a complete restatement of this
Application as previously filed.
Pursuant to Sections 9 (a) (2) and 10 of the Public Utility Holding
Company Act of 1935, as amended (the "Act"), BL Holding Corp., a New York
corporation (the "Company"), hereby requests that the Securities and Exchange
Commission (the "Commission") authorize the following proposed acquisitions:
(1) The acquisition, as described herein, of all of the issued and
outstanding common stock of KeySpan Energy Corporation, a New York
corporation ("KeySpan") pursuant to the terms of the Amended and
Restated Agreement and Plan of Exchange and Merger between The Brooklyn
Union Gas Company (a New York corporation, which as of September 29,
1997, established a holding company structure pursuant to which it
became a subsidiary of KeySpan ("Brooklyn Union")) and Long Island
Lighting Company, a New York corporation ("LILCO"), dated as of June
26, 1997 and as amended by the Amendment, Assignment and Assumption
Agreement among Brooklyn Union, LILCO and KeySpan, dated as of
September 29, 1997 (as amended, the "Exchange and Merger Agreement" and
such amendment, the "Amendment Agreement" ). The series of transactions
related to the Exchange and Merger Agreement is referred to in this
Application as the "Combination".
(2) The acquisition by the Company of the equity interests in one or
more subsidiaries of the Company (one or more of which may be limited
liability companies), and the transfer to such subsidiaries of certain
assets by LILCO if a proposed merger of LILCO into a subsidiary of the
Long Island Power Authority occurs pursuant to an Agreement and Plan of
Merger, dated as of June 26, 1997, among the Company, LILCO, the Long
Island Power Authority, a corporate municipal instrumentality and
political subdivision of the State of New York ("LIPA"), and a to be
formed subsidiary of LIPA (the "LIPA Agreement"). The series of
transactions proposed pursuant to the LIPA Agreement, which involves
the acquisition by the Company of the equity interests of such
subsidiaries, is referred to in this Application as the "LIPA
Transaction".
The parties currently anticipate that the LIPA Transaction and the
Combination will occur either contemporaneously or in close succession. For
purposes of this Application, the Company asks the Commission to consider only
the scenarios in which the LIPA Transaction is consummated, either in connection
with or independent of the Combination.
If both the LIPA Transaction and the Combination occur, then the
Company will acquire both the outstanding common stock of KeySpan and the equity
interests of the subsidiaries of the Company. The consummation of both the LIPA
Transaction and the Combination is referred to herein as the "Modified
Combination". Each of the Combination, the Modified Combination and the LIPA
Transaction is referred to herein individually as a "Transaction" and
collectively as the "Transactions".
The Company also hereby requests that the Commission issue an order
pursuant to Section 3(a)(1) of the Act declaring it exempt from all provisions
of the Act except Section 9(a)(2) following consummation of the Modified
Combination or the LIPA Transaction.
Item 1. Description of Proposed Transactions.
Description of the Parties .
1. Long Island Lighting Company
Long Island Lighting Company ("LILCO") was incorporated in 1910 under the
Transportation Corporations Law of the State of New York and supplies electric
and gas service in Nassau and Suffolk Counties and to the Rockaway Peninsula in
Queens County, all on Long Island, New York. LILCO's service territory covers an
area of approximately 1,230 square miles. The population of the service area,
according to LILCO's 1997 estimate, is
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about 2.74 million persons, including approximately 98,000 persons who reside in
Queens County within the City of New York.
LILCO serves approximately 1.03 million electric customers of which
approximately 928,000 are residential. LILCO receives approximately 49% of its
electric revenues from residential customers, 48% from commercial/industrial
customers and the balance from sales to other utilities and public authorities.
LILCO also serves approximately 465,000 gas customers, 416,000 of which are
residential, accounting for 62% of the gas revenues, with the balance of the gas
revenues made up by the commercial/industrial customers and off-system sales.
2. BL Holding Corp.
BL Holding Corp., a New York corporation, will be the parent holding
company and owner of all the outstanding common stock (or similar equity
interests) of KeySpan, which is an exempt public utility holding company under
the Act, and each of the entities described below to be created in order to
effect the LIPA Transaction. An organizational chart depicting the corporate
structure described below is attached hereto as Exhibit A-5. The principal
business of the Company will be the ownership of all the outstanding shares of
common stock and membership interests of the entities referred to below. The
authorized capital stock of the Company will consist of 450,000,000 shares of
common stock, par value $.01 per share, and 100,000,000 shares of preferred
stock, par value $.01 per share. After giving effect to the Modified Combination
as of December 31, 1997, the value of the Company's assets, on a pro forma
consolidated basis, was $8,272.3 million.
The utility operations of BL Holding Corp. after the Modified
Combination will consist of gas distribution companies and, to a lesser extent,
electric generation and operation companies. For the period ended December 31,
1997, BL Holding Corp. would have had revenues, on a pro forma basis, of
approximately $2,024.1 million attributable to gas operations, $373.6 million
attributable to electric operations and $126.6 million attributable to gas
production and other revenues.
(a) KeySpan Energy Corporation
KeySpan is a New York corporation organized in 1996 and has
its principal executive office at One MetroTech Center, Brooklyn, New
York 11201. KeySpan's principal business is the ownership of all the
outstanding shares of common stock
of Brooklyn Union.
KeySpan's principal wholly- and majority-owned subsidiaries,
directly or indirectly owned, are as follows:
i. Brooklyn Union distributes natural gas in the New
York City Boroughs of Brooklyn, Staten Island and
Queens and is regulated by the Public Service
Commission of the State of New York ("NYSPSC").
Brooklyn Union is a "gas utility company" under
section 2(a)(4) of the Act. As of December 31,
1997, Brooklyn Union had approximately 1,138,096
active meters, of which approximately 1,093,000
were residential. Also as of December 31, 1997,
Brooklyn Union had total revenues of approximately
$1,356.9 million.
ii. The Houston Exploration Company, a Delaware
corporation, is engaged in the exploration,
development and acquisition of domestic natural gas
and oil properties.
iii. Fuel Resources Inc., a Delaware corporation, owns
equity interests in storage fields and participates
in oil and gas investment opportunities.
iv. North East Transmission Co., Inc., a Delaware
corporation, owns an equity interest in an interstate
pipeline.
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v. KeySpan Energy Services Inc., a Delaware corporation,
provides natural gas marketing services.
vi. KeySpan Energy Management Inc., a Delaware
corporation, provides assistance with energy-related
projects and offers technical and maintenance
services for commercial and industrial clients.
vii. In addition, KeySpan either directly or indirectly
owns interests in various other subsidiaries, the
operations of which are not material. One such
subsidiary, KeySpan International Corporation, is
the parent of KeySpan C.I., Ltd., a Cayman Island
company, that owns 24.5% of the voting stock of
Phoenix Natural Gas Limited, a Northern Ireland
company, which has claimed foreign utility company
status under Section 33(a) of the Act and KeySpan
C.I. II, Ltd., a Cayman Island company, that owns
99.9% of the voting stock of its subsidiary, Grupo
KeySpan, D. de R.L. de C.V., a Mexican company,
which owns a 50% voting interest in Finsa
Energeticos, S. de R.L. de C.V., also a Mexican
company, which has claimed foreign utility company
status under Section 33(a) of the Act.
Additional information concerning KeySpan and its affiliates
can be found in its Form U-3A-2, Statement by Holding Company Claiming
Exemption under Rule U-3A-2, dated as of February 26, 1998 and
incorporated herein by
reference.
(b) Gas East Gas Corp.
As contemplated by the LIPA Transaction, LILCO's existing gas
utility assets and operations will be transferred to a wholly-owned
subsidiary of the Company, which subsidiary is to be formed as a
"transportation corporation" under the laws of New York (such entity is
referred to herein as "Gas East Gas Corp."). Gas East Gas Corp.
will be a "gas utility company" under Section 2(a)(4) of the Act and
will provide services to the current LILCO gas customers. Specifically,
Gas East Gas Corp. will distribute natural gas in Nassau and Suffolk
Counties on Long Island, New York, and to the Rockaway Peninsula in the
Borough of Queens of the City of New York. Gas East Gas Corp. will be
regulated by the NYSPSC. Based on operating results for LILCO for the
period ended December 31, 1997, Gas East Gas Corp. would have served
approximately 463,000 gas customers, approximately 415,000 of which are
residential, and would have had revenues of approximately $667.2
million during this period.
(c) Genco
LILCO's existing non-nuclear electric generating assets will
be transferred to a wholly-owned limited liability company of the
Company, to be formed under the laws of New York (such entity is
referred to herein as "Genco"). Genco will be an "electric utility
company" under Section 2(a)(3) of the Act and, as contemplated in the
Power Supply Agreement between LILCO and LIPA dated as of June 26, 1997
(the "PSA"), will directly supply LIPA with capacity from the
Genco-owned generating facilities in order for LIPA to provide
electricity to its customers on Long Island through the transmission
and distribution system to be owned by LIPA. Genco will be regulated by
the Federal Energy Regulatory Commission ("FERC").
In addition to certain internal combustion generating units,
the generating facilities primarily consist of eleven steam generating
units, seven of which are capable of burning gas or oil, two burn gas
only and two burn oil only.
The gas burned at the generating facilities capable of burning such
fuel will be supplied solely by the Gas East Gas Corp. through the
existing on-island gas distribution system.
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(d) T&D Manager
The overall management of LIPA's electric transmission and
distribution system will be performed by a wholly-owned limited
liability company of the Company, to be formed under the laws of New
York (such entity is referred to herein as "T&D Manager"). Pursuant to
the Management Services Agreement between LILCO and LIPA dated as of
June 26, 1997 (the "MSA"), LIPA has engaged the T&D Manager to operate
and maintain LIPA's electric transmission and distribution system. The
T&D Manager's responsibilities under the MSA will include, among other
things: (i) the day to day operation, protection, and maintenance of
the transmission and distribution system, including emergency repairs;
(ii) routine facility additions and improvements, including customer
connections, procurement of goods and services from third-parties and
inventory management; (iii) preparing and monitoring budgets, load and
energy forecasts and power resource models and plans; and (iv)
maintaining an operation and maintenance manual for the transmission
and distribution system. In addition to complying with all applicable
laws and prudent utility practices, the T&D Manager must also comply
with the transmission and distribution system policies and procedures
set by LIPA.
As described in Item 3 below, the applicant does not believe
that the T&D Manager is an "electric utility company" under Section 2(a)(3) of
the Act.
(e) Energy Manager
A wholly-owned limited liability company of the Company, to be
formed under the laws of New York, will be responsible for purchasing
oil and gas required for Genco, gas for Gas East Gas Corp. and for
purchasing and selling electricity on behalf of LIPA (such entity is
referred to herein as the "Energy Manager"). Specifically, the Energy
Management Agreement between LILCO and LIPA dated as of June 26, 1997
(the "EMA") provides that the Energy Manager will dispatch the
generating facilities available to LIPA under the PSA and will arrange
for fuel supplies for these facilities. The Energy Manager will also be
responsible for purchasing capacity and energy to meet the needs of
LIPA's customers on a least-cost basis and to market excess capacity
and energy not required by LIPA, among other responsibilities. The
Energy Manager will not be the owner or operator of any facility used
for the generation, transmission or distribution of electric energy for
sale or of facilities used for the distribution at retail of natural or
manufactured gas for heat, light or power. Accordingly, it is believed
that the Energy Manager will not be subject to the provisions of the
Act.
(f) Service Company
It is currently anticipated that one or more wholly-owned
limited liability companies of the Company, such entities to be formed
under the laws of New York, would provide certain common utility and
corporate services to the Company and its wholly-owned affiliates
(such entities are referred to herein individually as a "Servco" and
collectively as the "Servcos"). Specifically, a Servco may provide
certain common utility functions to Brooklyn Union and Gas East Gas
Corp. such as gas planning and administration, gas system engineering
and gas marketing. In addition, such Servco may also provide certain
common utility functions to Genco, the T&D Manager, and LIPA,
including electric production, planning and administration, electric
marketing/account management and electric engineering.
In addition, a Servco will provide certain corporate
administrative services to the Company and its wholly-owned affiliates
including human resources planning and administration; accounting,
finance and treasury services; insurance and risk management;
regulatory and governmental relations; corporate communications and
external relations; consumer outreach and education; information
systems and technology; materials management and procurement; legal
services; call center operations; corporate and strategic planning;
internal auditing; billing and payment processing; budget
administration; security services; fleet services; building design,
maintenance and management of affiliate-owned or leased buildings.
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The Servcos will not be the owners or operators of any
facility used for the generation, transmission or distribution of
electric energy for sale or of facilities used for the distribution at
retail of natural or manufactured gas for heat, light or power.
Accordingly, it is believed that the Servcos will not be subject to the
provisions of the Act.
(g) Finance Company
It is currently contemplated that a wholly-owned subsidiary of
the Company will be formed under the laws of Vermont, the principal
business of such subsidiary will be to invest the net cash proceeds
received by the Company from the former common shareholders of LILCO,
who receive such proceeds from LIPA, upon consummation of the LIPA
Transaction (such entity is referred to herein as the "Vermont Finance
Company"). Alternatively, the Vermont Finance Company may, through a
wholly-owned subsidiary formed under the laws of Bermuda, provide such
investment services.
2. Long Island Power Authority
LIPA is a corporate municipal instrumentality and political subdivision
of the State of New York authorized under the Long Island Power Authority Act
(the "LIPA Act") to acquire all or any part of LILCO's securities or assets.
LIPA was created primarily for the purpose of acquiring, by agreement or
condemnation, all or any part of the securities or assets of LILCO, with the
intent of providing safe and reliable electric service at rates lower than would
have been charged by LILCO. It is anticipated that LIPA will create a
wholly-owned subsidiary to be formed under the laws of New York, to effect the
LIPA Transaction.
Through a stock transaction, LIPA will acquire, among other things, the
existing LILCO transmission and distribution system, its 18 percent interest in
the Nine Mile Point 2 nuclear power plant ("NMP2"), a nuclear generating
facility located in Oswego, New York and its electric regulatory assets. As of
December 31, 1997, the net book value of the 18 percent interest in NMP2 and the
transmission and distribution assets was $2,036.3 million. As a result of the
LIPA Transaction, LIPA's service territory will cover an area of approximately
1,230 square miles, and LIPA will have the ultimate responsibility for providing
service to approximately 1.03 million electric customers in the existing LILCO
service territory (e.g., Nassau and Suffolk Counties and the Rockaway Peninsula
in Queens County, all on Long Island, New York). As previously described, the
T&D Manager will be retained by LIPA to provide and maintain electric service to
LIPA's customers. As set forth in the MSA, LIPA will be responsible for, among
other things, (i) rate setting; (ii) line extension policies; (iii) service
rules and regulations; (iv) approval of long-term strategic plans; (v) approval
of the T&D Manager's customer service programs; (vi) approval of annual budgets;
(vii) approval of the T&D Manager's load forecast and power resource models and
plans; (viii) governmental relations and reporting; and (ix) oversight of the
T&D Manager's operations and performance.
Pursuant to Section 2(c) of the Act, LIPA and its subsidiary will not
be subject to the provisions of the Act.
Background of the Proposed Transactions
As the efforts of the NYSPSC to restructure the energy utility business
of New York first began to take shape in the NYSPSC's Competitive Opportunities
Proceeding in 1994, Dr. William J. Catacosinos, the Chief Executive Officer of
LILCO, and Mr. Robert B. Catell, the Chief Executive Officer of Brooklyn Union
and KeySpan, began exploratory discussions aimed at determining whether a
business combination of LILCO and Brooklyn Union could provide a mutually
beneficial platform for responding to the potential changes in regulation and
the energy marketplace. Those discussions continued throughout 1994 and 1995.
On October 13, 1994, LIPA and the New York Power Authority made a joint
proposal to acquire all the outstanding LILCO common stock. That proposal was
then superseded on June 20, 1995, by a proposal from LIPA to acquire all of the
outstanding LILCO Common Stock. These offers were made by LIPA pursuant to its
governing statute, the LIPA Act, which grants LIPA the statutory power to
acquire LILCO's equity or debt securities or assets
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through a negotiated transaction, by tender offer or through the exercise of
LIPA's condemnation powers. These offers failed to result in negotiations
between LILCO and LIPA.
At various times during 1995 and 1996, representatives of LILCO and
Brooklyn Union met for further discussions of issues associated with combining
the two companies. Meanwhile, then Governor-elect George Pataki organized a task
force on December 23, 1994, to evaluate the feasibility of a LIPA takeover of
LILCO as proposed in October 1994 under then Governor Mario Cuomo. In September
1995, Governor Pataki announced his administration's commitment to formulate a
State takeover of LILCO.
In September 1995, LIPA retained Bear, Stearns & Co. Inc. ("Bear
Stearns") as its financial advisors and in October 1995 retained the law firms
of Winthrop Stimson Putnam & Roberts as its corporate counsel and Hawkins
Delafield & Wood as its public finance counsel and the accounting firm of Price
Waterhouse LLP.
On December 5, 1995, the Proposal Evaluation Committee of the LIPA
Board of Trustees issued a Technical Report which recommended a transaction
structure under which LIPA would acquire substantially all of LILCO's assets,
sell the generating assets to multiple buyers, sell the gas assets to another
buyer and retain a private party to manage for LIPA's benefit the transmission
and distribution system so acquired.
In the wake of the release of the Technical Report, LILCO and Brooklyn
Union renewed their discussions with respect to a possible business combination.
The two chief executive officers met on February 7, March 1 and March 18, 1996,
to discuss the structure, pricing and other material terms of a business
combination and the potential involvement of LIPA with respect thereto.
Discussions continued during the spring and summer of 1996 and a draft
combination agreement was prepared by LILCO's outside counsel and delivered to
Brooklyn Union on August 15, 1996. No agreement was reached on either price or
corporate governance issues. Negotiations at that point were suspended. On
December 29, 1996, the LILCO Board of Directors met and unanimously approved the
original Agreement and Plan of Exchange ("Original Agreement") and the stock
option agreements between LILCO and Brooklyn Union pursuant to which each party
granted the other party the right, under certain circumstances, to purchase up
to 19.9% of the outstanding common stock of such granting party ("Original Stock
Option Agreements"). Also on December 29, 1996, the Brooklyn Union Board of
Directors met and unanimously approved the Original Agreement and the Original
Stock Option Agreements.
Discussions between LILCO, Brooklyn Union and LIPA continued early in
1997, leading to the execution by LIPA, LILCO and Brooklyn Union of an
"Agreement in Principle" dated as of March 19, 1997, which contemplated the
execution of definitive agreements, the consummation of which would result in
LIPA acquiring, through a stock transaction, the electric transmission and
distribution system, the 18% interest in the Nine Mile Point 2 nuclear power
station in upstate New York and the electric regulatory assets (as well as
certain current assets related to LILCO's electric business) owned by LILCO, and
assuming certain of LILCO's current liabilities, long-term debt obligations and
preferred stock.
LILCO and LIPA entered into the LIPA Agreement as of June 26, 1997,
which contemplates the consummation of such transaction and, on the same day,
LILCO and Brooklyn Union executed and delivered the Exchange and Merger
Agreement, which amended and restated the Original Agreement, and pursuant to
which Brooklyn Union consented to the execution by LILCO of the LIPA Agreement.
On June 26, 1997, LILCO and Brooklyn Union also executed an Amended and Restated
Brooklyn Union Stock Option Agreement and an Amended and Restated LILCO Stock
Option Agreement (collectively, the "Amended Stock Option Agreements") each of
which was amended by the Amendment Agreement. After the consummation of Brooklyn
Union's binding share exchange with its then wholly-owned subsidiary, KeySpan,
Brooklyn Union became a wholly-owned subsidiary of KeySpan and the Exchange and
Merger Agreement was further amended, effective as of September 29, 1997, to
substitute KeySpan for Brooklyn Union in the Combination.
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Description of the Proposed Transactions
Overview
Pursuant to the Exchange and Merger Agreement and the LIPA Agreement,
there are three different possible business combinations that could result:
1. The acquisition by the Company of the issued and outstanding
common stock of KeySpan and LILCO (the "Combination").
2. The acquisition by the Company of the issued and
outstanding common stock of KeySpan and the gas assets
and operations, non-nuclear generating assets and
operations and common plant of LILCO (the "Transferred
Assets") that will be transferred to subsidiaries
(one or more of which may be limited liability
companies) to be organized by the Company (the
"Transferee Subsidiaries") and whose common stock or
other equity interests will be owned by the Company
(the "Modified Combination").
3. The formation by LILCO of the Company and the acquisition by
the Transferee Subsidiaries of such Transferred Assets (the
"LIPA Transaction").
Any one of these alternative Transactions may occur, but for the purposes of
this Application, the Company asks the Commission to consider only the Modified
Combination and the LIPA Transaction.
The Company seeks the Commission's approval of the acquisition by the
Company of either (x) KeySpan and the Transferred Assets pursuant to the
Modified Combination or (y) the Transferred Assets pursuant to the LIPA
Transaction. Under the Modified Combination, the Company , through KeySpan and
one or more Transferee Subsidiaries, would indirectly own and operate the
existing gas utility system owned by Brooklyn Union as well as the gas utility
system and non-nuclear generating facilities currently owned by LILCO . In
addition, the Company, through one or more other Transferee Subsidiaries, would
provide a comprehensive set of operational and management services to LIPA to
assist LIPA in the operation of such electric system (which would continue to be
owned by LILCO as a wholly-owned subsidiary of LIPA). Under the LIPA
Transaction, the Company would own and, through the Transferee Subsidiaries,
operate the gas utility system and non-nuclear generating facilities currently
owned by LILCO and provide electric system operational and management services
to LIPA.
As described more fully infra, under the Modified Combination (i)
shares of LILCO common stock ("LILCO Common Stock") will become the right to
receive shares of common stock (the "Share Exchange"), par value $0.01 per
share, of the Company ("Company Common Stock"), (ii) KeySpan will merge with a
wholly-owned subsidiary of the Company (the "KeySpan Merger") and (iii) shares
of KeySpan common stock ("KeySpan Common Stock") will be converted into shares
of Company Common Stock, all pursuant to the Exchange and Merger Agreement, as
amended by the Amendment Agreement.
Pursuant to the LIPA Agreement, LILCO will merge with LIPA Acquisition
Corp., a New York corporation ("LIPA Sub") to be formed as a wholly-owned
subsidiary of LIPA. Upon consummation of the LIPA Transaction, LIPA Sub will be
merged with and into LILCO, which will be the surviving corporation, for
aggregate cash merger consideration of $2,497,500,000 (subject to adjustment),
LILCO's Series AA Preferred Stock will be exchanged for Series AA preferred
stock of the Company and each outstanding share of the LILCO Series CC Preferred
Stock, Series GG Preferred Stock, Series QQ Preferred Stock and Series UU
Preferred Stock (except for shares whose holders perfect their rights to obtain
judicial appraisal thereof) will be canceled and converted into the right to
receive cash in the applicable amounts set forth in the LIPA Agreement.
Immediately prior to the consummation of the LIPA Transaction, LILCO will
transfer to the Company, or one or more of the Company's wholly-owned
subsidiaries (one or more of which may be limited liability companies), all of
the Transferred Assets. A more complete description of the Modified Combination
and the LIPA Transaction follows.
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1. The Modified Combination
If the LIPA Transaction is consummated before or contemporaneously with
the Combination, KeySpan and certain assets of LILCO will be combined pursuant
to the Modified Combination. In that case, the transactions contemplated by the
Exchange and Merger Agreement and the LIPA Agreement will be consummated as
follows:
i. The Transferred Assets will be transferred to the Company
(which will transfer them to the Transferee Subsidiaries) in
exchange for the Designated Number (as defined below) of
shares of Company Common Stock and up to $75 million face
amount of Company Preferred Stock (the "Private Placement
Preferred Stock"). The "Designated Number" will be the
number of shares of Company Common Stock representing the
net fair market value of the Transferred Assets, as will be
determined in good faith by KeySpan and LILCO, less the face
amount of such Private Placement Preferred Stock;
ii. LIPA Sub will merge with and into LILCO and the
transactions contemplated by the LIPA Agreement will be
consummated, and the cash merger consideration will be
paid to an exchange agent as agent for the holders of
LILCO Common Stock to subscribe for and purchase from
the Company a number of shares of Company Common Stock,
which number of shares, when added to the Designated
Number, shall represent the number of shares of LILCO
Common Stock issued and outstanding immediately prior
to the consummation of the KeySpan Merger, other than
LILCO dissenting shares, multiplied by 0.880; and
iii. promptly thereafter, the KeySpan Merger will be consummated
and each issued and outstanding share of KeySpan Common Stock,
other than dissenting shares, will be converted into the right
to receive one share of Company Common Stock and KeySpan will
become a wholly-owned subsidiary of the Company.
2. The LIPA Transaction
The LIPA Agreement provides that LIPA Sub is to merge with and into
LILCO, with LILCO to be the surviving corporation. Before the closing of the
LIPA Transaction (the "LIPA Closing"), the Company will form the Transferee
Subsidiaries which will enter into certain agreements in connection with the
LIPA Transaction, which are referred to as the "Basic Agreements". Under the
Basic Agreements, one or more of the Transferee Subsidiaries will provide: (1)
certain management services on behalf of LIPA with respect to the operation and
maintenance of the electric transmission and distribution system to be
transferred to LIPA as part of the LIPA Transaction; (2) electric capacity and
energy to LIPA from the generating plants that are among the Transferred Assets;
and (3) energy management services to purchase fuel and electric capacity and
energy and manage the scheduling and sale of electric capacity and energy on
behalf of LIPA.
Schedules A, B, F and G to the LIPA Agreement set out the principles
and procedures to be used to decide which LILCO assets and properties will be
part of the Transferred Assets and which will remain with LILCO as a subsidiary
of LIPA. Generally, the Transferred Assets will consist of all those assets
currently owned and employed by LILCO in the conduct of its gas distribution
business, LILCO's non-nuclear electric generating assets located on Long Island,
and certain common assets used by LILCO in the operation and management of
LILCO's existing gas distribution, electric generation and electric transmission
and distribution system . Attached as Exhibit E-2 is an estimated balance sheet
for the Transferred Assets as of September 30, 1997, showing by asset category
the original cost, vendor's book cost (including basis of determination) and
applicable valuation and qualifying references.
Immediately prior to the LIPA Closing, the Transferred Assets will be
transferred to the Company (which will transfer them to the Transferee
Subsidiaries) in exchange for (x) the Designated Number of shares of Company
Common Stock and (y) the Private Placement Preferred Stock. LILCO will be
obligated to sell the Private Placement Preferred Stock immediately prior to the
LIPA Closing to one or more purchasers in a private placement. It is anticipated
that the Private Placement Preferred Stock will: (i) have a final maturity date
more than five years after the LIPA Closing, (ii) be non-voting (except as a
result of the Company's failure to pay dividends for a
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specified period of time), (iii) be non-convertible, and (iv) have other terms
and conditions to be determined at the time of sale.
At the LIPA Closing, the shares of capital stock of LILCO will be
treated as follows:
i. Common and preferred shares held in treasury (the "Canceled
Shares") will be canceled and retired.
ii. Each issued and outstanding share of LILCO Common
Stock, other than Canceled Shares and shares of LILCO
Common Stock held by any dissenting shareholder, will
be canceled and converted into the right to receive:
(a) an amount in cash equal to the cash merger
consideration divided by the number of shares of LILCO
Common Stock outstanding, and (b) a pro rata
distribution of the Company Common Stock received by
LILCO in exchange for the Transferred Assets.
iii. Each holder of shares of LILCO Common Stock, other than
shares held by any dissenting shareholders, will be
deemed to have appointed an exchange agent as its agent
to receive the cash otherwise due such holder and to
use the cash to subscribe for shares of Company Common
Stock. The total number of shares of Company Common
Stock distributable to holders of LILCO Common Stock in
respect of each share of LILCO Common Stock will
include the number of distributable shares of Company
Common Stock received by LILCO in exchange for the
Transferred Assets, as well as the number of shares
distributable from the purchase by the exchange agent
of additional shares of Company Common Stock out of the
cash purchase price and, in the aggregate, will equal:
(a) 0.880 of a share of Company Common Stock for each
share of LILCO Common Stock (other than the
dissenting shares) if the Combination is consummated
concurrently with the LIPA Transaction, or
(b) one share of Company Common Stock for each share of
LILCO Common Stock (other than the dissenting shares)
if the Combination is not consummated concurrently
with the LIPA Transaction.
iv. Each issued and outstanding share of Series AA
Preferred Stock of LILCO, other than Canceled Shares
and shares of such preferred stock held by any
dissenting shareholder, will be canceled and converted
into the right to receive one fully paid and
nonassessable share of preferred stock of the Company
with identical rights (including dividend rates) and
designations to the Series AA Preferred Stock.
v. Each issued and outstanding share of LILCO Preferred Stock
that is subject to optional redemption by LILCO at or before
the closing date, other than Canceled Shares, will be redeemed
for cash by LILCO not later than such closing date in
accordance with the terms applicable to such shares.
vi. Each issued and outstanding share of LILCO
Preferred Stock, other than Canceled Shares,
dissenting Preferred Shares, shares of Series AA
Preferred Stock and redeemable preferred stock
(collectively, the "Non-redeemable Preferred
Stock"), will be canceled and converted into the
right to receive cash in the amount of the sum of:
(x) the Make-Whole Amount and (y) accrued but
unpaid dividends in respect of such shares through
the closing date. As used in this Application,
"Make-Whole Amount" means, with respect to such
shares, an amount equal to the present value of:
(a) the face or liquidation preference amount of such
share, and
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(b) the remaining dividend payments due on such share
between the LIPA Closing Date (defined below) and the
applicable redemption date computed using a discount
rate equal to the applicable Fair Market Rate divided
by 0.95.
"Fair Market Rate" is defined as the Generic General
Obligation Fair Market Yield for Baa rated Low/Medium Coupon
General Municipal Obligations at the time of the computation
as reported on Bloomberg, with a maturity most nearly equal to
the period between cancellation and final redemption of such
series of Non-redeemable Preferred Stock. The period between
cancellation and redemption refers to the period between the
closing date of the LIPA Transaction (the "LIPA Closing Date")
and:
(a) August 1, 2002, with respect to the Series CC
Preferred Stock;
(b) March 1, 1999, with respect to the Series GG
Preferred Stock;
(c) May 1, 2001, with respect to the Series QQ Preferred
Stock; and
(d) October 16, 2018, with respect to the Series UU
Preferred Stock.
The amount by which the aggregate amount payable exceeds 100%
of the aggregate face or liquidation preference amounts for
all shares of Non-redeemable Preferred Stock shall be paid by
the Company to LILCO promptly after the LIPA Closing.
The cash merger consideration is based upon the assumption that the
total long term indebtedness of LILCO on the LIPA Closing Date will not exceed
$3,576,000,000 (the "Retained Debt Amount"). The Retained Debt Amount will be
adjusted based upon LILCO's net book value, as reflected on LILCO's audited
consolidated balance sheet as of such date, as follows. The Retained Debt Amount
will be either:
i. increased by the amount, if any, by which the net book
value of the Retained Assets exceeds $2,500,800,000; or
ii. decreased by the amount, if any, by which the net
book value of the Retained Assets is less than
$2,500,800,000.
As of the LIPA Closing Date, the Company will, and will cause each of
the Transferee Subsidiaries to, execute and deliver promissory notes (the
"Promissory Notes") on the following terms:
i. The aggregate principal amount will be equal to the excess, if
any, of the indebtedness of LILCO outstanding on such date
over the Retained Debt Amount.
ii. The rates and maturities will correspond to each portion of
debt underlying the indebtedness of LILCO on such date;
provided, however, that the interest and principal payment
dates will be adjusted to require payment by the Company 30
days prior to the corresponding payment dates on the
underlying debt.
LILCO currently has a series of 7.3% Debentures due July 15, 1999, with
an approximate aggregate principal amount currently outstanding of $397 million,
and a series of 8.20% Debentures due March 15, 2023, with an approximate
aggregate principal amount currently outstanding of $270 million. Subject to
obtaining all required consents, the Company will assume these obligations as of
the LIPA Closing Date pursuant to an exchange offer to be registered on Form S-4
with the Commission. Certain other tax-exempt authority financing notes will be
identified by the parties to the LIPA Agreement and economically allocated to
the Company.
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Reasons for the Transactions
KeySpan and LILCO believe that the combined company, its shareholders
and its customers can benefit significantly from the strategic benefits which
they expect to result from the Transactions, which include the following:
o Customers of Brooklyn Union and LILCO will realize lower rates
as a result of the synergy savings anticipated to be realized
through the combination of certain aspects of the companies'
operations .
o LILCO's current electric customers will realize substantially
lower rates as a result of LIPA's exemption from payment of
federal income tax and its refinancing of LILCO's debt with
tax-exempt financing.
o The greater financial and operational resources available to
the Company should create a stronger competitor in the
continuing development of a competitive energy marketplace.
o Shareholders of both KeySpan and LILCO will have the
opportunity to participate in the upside potential of the
convergence of gas and electric companies within the energy
industry. The Company is expected to create a platform to
market, trade and arrange physical delivery of energy products
and related services on a large scale to major market areas.
o By combining certain aspects of the businesses of
KeySpan and LILCO as separate subsidiaries owned by a
holding company, the Company should benefit from
greater flexibility in conducting and financing
non-regulated operations than is currently available to
either Brooklyn Union (as the principal utility
subsidiary of KeySpan) or LILCO. The Company should
also have greater flexibility to invest in new lines of
business than is currently available to either Brooklyn
Union or LILCO. With greater flexibility to raise and
commit capital to non-regulated operations in the
energy business, the Company will be better positioned
to take advantage of the market opportunities presented
in the increasingly competitive energy industry.
KeySpan and LILCO believe that these strategic benefits will be further
enhanced through consummation of the LIPA Transaction. The estimated net
after-tax proceeds of approximately $1.7 billion will provide the Company with
substantial financial resources that KeySpan and LILCO anticipate will be used,
in part, to make acquisitions that will complement the operations of the
Company. Particularly in light of the significant proposed restructurings,
divestitures and acquisitions announced by energy utilities in New York State
and elsewhere in the United States, the Company should be well positioned
financially to take advantage of the increased opportunities which are likely to
be presented over the next several years to expand its business. No
determination with respect to any such acquisition opportunity has yet been made
by either KeySpan or LILCO, although as a condition to obtaining approval by the
New York Public Authorities Control Board ("PACB"), the Company is committed to
investing $1.3 billion in Long Island over the next decade, a substantial
portion of which is anticipated to be in natural gas infrastructure.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred by the
Company, KeySpan (or Brooklyn Union) and LILCO in connection with the proposed
Transactions including, but not limited to, the reorganization, mergers,
solicitation of proxies, registrations and other related matters, are estimated
as follows:
Commission filing fee relating to Joint Proxy
Statement/Prospectus and
Registration Statement on Form S-4 $1,469,000
Commission filing fee relating to the Registration
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Statement on Form S-4 with respect to the debt
exchange $198,000
Auditors' Fees $2,712,000
Legal Fees $15,200,000
Printing $2,000,000
Investment Bankers' Fees $31,800,000
Miscellaneous $2,278,000
Total $55,657,000
Item 3. Applicable Statutory Provisions.
The following sections of the Act are directly or indirectly applicable
to the proposed Transactions: Section 9(a)(2) and Section 10. To the extent that
other sections or rules are deemed applicable to the Transactions, such sections
and rules should be considered to be set forth in this Item 3.
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 any other public utility or holding company, or will by virtue
of such acquisition become such an affiliate." By virtue of the LIPA
Transaction, the Company will become an affiliate of the Transferee
Subsidiaries, which will include a "gas utility company" (Gas East Gas Corp.)
and an "electric utility company" (Genco) as those terms are defined in the Act
and, by virtue of the Modified Combination, the Company will become an affiliate
of Brooklyn Union (as the principal public utility of KeySpan), another "gas
utility company". Accordingly, Section 9(a)(2) requires approval by the
Commission of each proposed Transaction under Section 10. The Company believes
that each proposed Transaction meets the requirements of Section 9(a)(2) and
Section 10.
The Transactions and the requests contained in this Application are
well within the precedent of transactions approved by the Commission as
consistent with the Act. In addition, a number of the recommendations made by
the Division of Investment Management (the "Division") in the report issued by
the Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report") support the Applicant's analysis. The
Commission's approval of the Transactions would be consistent with previous
Commission rulings (see, e.g., CINergy Corp., Holding Co. Act Release No. 26146
(Oct. 21, 1994)), and would also be consistent with the Division's overall
recommendation in the 1995 Report that the Commission "act administratively to
modernize and simplify holding company regulation. . . and minimize regulatory
overlap, while protecting the interests of consumers and investors," since, as
demonstrated below, the Transactions will benefit both consumers and
shareholders of the Company, and the other federal and state regulatory
authorities with jurisdiction over the Transactions will have approved it as in
the public interest.
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:
(i) 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
interest of investors or consumers;
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(ii) 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
(iii) 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.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(i) 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
(ii) 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 the efficient development of an
integrated public utility system.
3. Discussion
Treatment of the T&D Manager under Section 2(a)(3)
Section 2(a)(3) of the Act defines an "electric utility company" as
"any company which owns or operates facilities used for the generation,
transmission or distribution of electric energy for sale".
The T&D Manager will provide a broad range of services (collectively,
the "O&M Services") to LIPA in connection with the transmission and distribution
system that will be owned by LIPA's wholly-owned subsidiary after consummation
of the LIPA Transaction or the Modified Combination.
O&M Services will include development, engineering, design,
construction and construction management, long-term operations and maintenance,
fuel procurement, management and supervision, technical and training,
administrative support, and any other managerial or technical services required
to operate and maintain the transmission and distribution system to be owned by
LIPA (the "T&D System").
The T&D Manager will provide O&M Services using its own workforce, as
well as personnel and resources of certain of its affiliates. The T&D Manager's
use, if any, of personnel from such affiliates would be made pursuant to the
NYSPSC's order approving the Combination. Such order requires that such
affiliates be reimbursed by the respective nonutility business of the Company
for the fully allocated cost of any services provided to the T&D Manager, or to
any nonutility associate, plus 10%.
In evaluating the activities of the T&D Manager, the Applicant believes
that the following factors demonstrate that, consistent with the precedents
referred to above, the T&D Manager is not "an electric utility company":
o The T&D Manager will not have any ownership interest
in transmission, distribution or generation
facilities except for certain common plant. See
Section 3.1(A) of the Management Services Agreement
entered into by LIPA and LILCO (the latter on behalf
of the T&D Manager) (the "MSA").
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o The T&D Manager may not transmit or distribute
electricity except that obtained by, on behalf of or
with the approval of LIPA (MSA Section 4.1(B)).
o Although the T&D Manager is granted authority to
conduct the day-to-day operations of the T&D System,
LIPA "retains the ultimate authority and control over
the assets and operations of the T&D System and the
right to direct the [T&D] Manager" (MSA Section
4.5(A)).
o Among the specific rights reserved by LIPA (see
MSA Section 4.5(A)) are, among others, the right
to determine all rates and charges and service
rates; policies applicable to the O&M Services;
review and approval of all annual operating and
capital expenditure budgets; the determination of
the long-range strategic plan for the T&D System;
the right to determine customer service programs
and customer and public communications policy;
review and approval of all power resource plans
for the T&D System; the determination of all
energy efficiency and conservation and load
management plans; control over all financing
aspects for the T&D System; overall legal and
governmental relations responsibilities for the
T&D System; and general oversight of the T&D
Manager and policymaking for the T&D System.
o All major capital improvements and public works
improvements to the T&D System will be owned by LIPA
and must be approved by LIPA in writing before
commenced (MSA Sections 5.1(A) and 5.4).
o The T&D Manager will receive a fixed management
fee of $10 million per year, which may be adjusted
up or down based on cost savings and its
performance on a variety of T&D System criteria
(including system reliability and safety). The
T&D Manager's fee will not vary based on the
amount of electricity purchased, produced or
distributed, the level of customer rates or T&D
System revenues.
o Upon the occurrence of a variety of events of default
(and, in some cases, a failure to cure within the
prescribed cure period), LIPA may terminate the T&D
Manager and require it to facilitate the appointment
of a successor entity
to serve as LIPA's manager (MSA Sections
7.1-7.5).
Both in terms of the MSA provisions described above and in terms of the actual
operations of the T&D System contemplated by the parties, the T&D Manager is not
performing the policymaking functions that would require a conclusion that it
should be classified as an "electric utility company" under Section 2(a)(3) of
the Act. The public interest of electric consumers will in this instance be
fully satisfied by the direct power and authority exercised by LIPA as both the
owner of the T&D System and the state agency charged by the New York State
legislature with the power and responsibility to regulate electric rates on Long
Island.
Section 10(b)(1).
It is well settled that the public interest is to be judged primarily
in the context of the problems with which the Act was designed to deal, as set
forth in Section 1(b) thereof. Vermont Yankee Nuclear Power Corporation, 43
S.E.C. 693, 700 (1968), rev'd on other grounds, 413 F.2d 1052 (D.C. Cir. 1969).
Viewed from this perspective, the Transactions in no way contradict the
requirements of Section 10(b)(1). As described below, none of the Transactions
will tend toward interlocking relationships or concentrations of control that
would be detrimental to the public interest or the interest of investors or
consumers.
Interlocking Relationships. The Modified Combination will not result in
interlocking relationships and concentrations of control of a kind or to an
extent detrimental to the public interest or the interest of investors or
consumers. Following the Modified Combination, there will exist among the
Company and its public utility subsidiaries interlocking directors and officers
only of such nature and to such extent as normally exist in public
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utility holding company systems among affiliated and associated companies. See
CIPSCO, Inc., Holding Co. Act Release No. 25152, 47 S.E.C. Docket 174, 178
(1990).
Upon completion of the Combination , Dr. William J. Catacosinos,
currently Chairman and Chief Executive Officer of LILCO, will become Chairman
and Chief Executive Officer of the Company. Mr. Robert B. Catell, currently
Chairman and Chief Executive Officer of KeySpan and Brooklyn Union, will become
President and Chief Operating Officer of the Company. One year after the closing
of the Combination or Modified Combination, Mr. Catell will succeed Dr.
Catacosinos as Chief Executive Officer, with Dr. Catacosinos remaining as
Chairman.
The Board of Directors of the Company will consist of fifteen members:
six to be designated by the KeySpan Board; six to be designated by the LILCO
Board; and three to be jointly selected by a committee consisting of two current
KeySpan directors and two current LILCO directors. This combination of existing
KeySpan and LILCO management is necessary to fully integrate the two
corporations and will help enable the Company to realize the expected synergies
from the Modified Combination and will, therefore, be in the public interest and
the interest of investors and consumers.
If only the LIPA Transaction occurs, it is expected that the Company
would have substantially the same officers and directors as LILCO has today.
Since the utility operations conducted by the Company through the Transferee
Subsidiaries in such event would be the same as those that are currently
conducted by LILCO as a single entity, the interlocking relationships among the
Company and the Transferee Subsidiaries that will conduct utility operations
will not implicate any policy concern expressed in Section 10(b)(1). In this
scenario, moreover, there will be a complete absence of interlocking
relationships between the officers and trustees or directors of LIPA and LILCO
(as LIPA's subsidiary), on the one hand, and the Company and the Transferee
Subsidiaries, on the other. As a result, the ownership and control of LILCO's
existing electric transmission and distribution system will be severed from any
interlocking relationship with LILCO's existing gas utility services and the
non-nuclear electric generation business.
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 Power Corporation, 43
S.E.C. at 700. As discussed below, none of the Transactions will create a "huge,
complex, and irrational system" of a type at which the Act is directed, but
rather will afford the opportunity to achieve economies of scale and
efficiencies which are expected to benefit investors and consumers. American
Electric Power Co., 46 S.E.C. 1299, 1307 (1978).
The Commission has rejected a mechanical size analysis under Section
10(b)(1) in favor of assessing the size of the resulting system with reference
to the efficiencies and economies that can be achieved through the integration
and coordination of utility operations. American Electric Power Co., 46 S.E.C.
at 1309. More recent pronouncements of the Commission confirm that size alone is
not determinative. Thus, in Centerior Energy Corp., Holding Co. Act Release No.
24073 (April 29, 1986), the Commission stated flatly that a "determination of
whether to prohibit enlargement of a system by acquisition is to be made on the
basis of all the circumstances, not on the basis of size alone." See also
Entergy Corp., Holding Co. Act Release No. 25952 (December 17, 1993). In
addition, the Division recommended in the 1995 Report that the Commission's
analysis of merger and acquisition transactions be flexible, with emphasis on
whether any Transaction creates an entity subject to effective regulation and is
beneficial for stockholders and customers as opposed to focusing on rigid,
mechanical tests. 1995 Report at 73-4.
The utility operations of the Company will remain subject to regulation
by the NYSPSC and the business combination of LILCO and Brooklyn Union (as the
principal public utility of KeySpan) will not increase the size of the utility
systems at issue and will result in the combination of two utilities with
contiguous service territories. If the Modified Combination is consummated, the
combined utility operations of the Company will be smaller than those of two
other gas and electric utility systems in the State of New York and will consist
solely of providing
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gas utility services to the contiguous service areas currently served by
Brooklyn Union and LILCO, the ownership of electric generating facilities
located on Long Island and the management under an agreement with LIPA of the
electric transmission and distribution system and related assets to be acquired
by LIPA through its stock acquisition of LILCO. In that event, the retail
electric utility operations currently conducted by LILCO and its nuclear
generating assets will be owned and regulated by LIPA, a New York State
governmental agency specifically organized and authorized by the State for that
purpose.
If only the LIPA Transaction is consummated, the Company's operations
will be smaller than LILCO's current operations by reason of the divestiture of
the electric transmission and distribution system and nuclear generating assets.
Consummation of the Modified Combination would result in a holding
company whose management will be based in the New York City metropolitan area
and whose combined public utility service area will consist of five counties in
the southeastern part of the State of New York, portions of three of which are
in Brooklyn Union's service territory (all within the City of New York) and
portions of three of which are in Gas East Gas Corp.'s service territory. If
only the LIPA Transaction is consummated, the Company's management will be based
in the same area and its service area will be limited to the three counties in
New York State currently served by LILCO. Accordingly, regardless of which of
the Transactions is consummated, the Company will have the appropriate local
focus to realize the synergies and related cost savings that are a significant
purpose of the Transactions. In considering these Transactions pursuant to
Section 10(b)(1) of the Act in light of Section 1(b)(4) thereof, there is no
basis for concluding that any of the Transactions will involve the growth or
extension of a holding company that bears no relation to economies of management
and operation or the integration and coordination of related operating
properties.
As the Commission noted in Northeast Utilities, Holding Co. Act Release
No. 25221, 47 SEC Docket 1270 (December 21, 1990), supplemented, Northeast
Utilities, Holding Co. Act Release No. 25273 (March 15, 1991), aff'd, City of
Holyoke Gas & Elec. Dept. v. S.E.C., 792 F.2d 358 (D.C. Cir. 1992), the
"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." Filings were made
with the Department of Justice (the "DOJ") and the Federal Trade Commission (the
"FTC") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), describing the effects of the Modified Combination on
competition in the relevant market and the applicable waiting periods have now
expired. As the LIPA Transaction involves an acquisition by a state agency, it
is exempt from the filing requirements of the HSR Act, pursuant to a
longstanding federal policy of limiting federal antitrust review of transactions
undertaken by states.
The competitive impact of each Transaction was fully considered by the
FERC before it approved each such Transaction . In addition, the NYSPSC fully
considered the competitive impact of the Combination before it approved the
Combination. A detailed explanation of the reasons why the Combination will not
threaten competition in relevant geographic and product markets is set forth in
the market study and supporting testimony included in the Application of LILCO
filed with the FERC and the Joint Application of LILCO and Brooklyn Union filed
with the NYSPSC. The Commission may appropriately rely upon the FERC with
respect to such matters. Entergy Corporation, supra, citing City of Holyoke Gas
& Electric Dept. v. S.E.C., 972 F.2d at 363-64, quoting Wisconsin Environmental
Decade, Inc. v. S.E.C., 882 F.2d 523, 527 (D.C. Cir. 1989).
Section 10(b)(2).
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given to the holders of KeySpan Common Stock and LILCO
Common Stock in connection with the Transactions is reasonable and whether it
bears a fair relation to the investment in, and earning capacity of, the utility
assets underlying the securities being acquired.
The investment banking firms of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Dillon, Read & Co. Inc. ("Dillon Read") have
passed upon the fairness of the ratio at which shares of KeySpan Common Stock
will be converted into shares of Company Common Stock and the ratio at which
shares of LILCO
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Common Stock will be converted into shares of Company Common Stock under the
Modified Combination. The opinions also pass upon the ratios applicable to the
Combination. The Merrill Lynch opinion is attached hereto as Exhibit F-3. The
Dillon Read opinion is attached hereto as Exhibit F-4.
Moreover, the fairness of the consideration involved in the Modified
Combination is evidenced by the fact that the ratios are the product of
extensive and vigorous arms-length negotiations between Brooklyn Union (prior to
the restructuring with KeySpan) and LILCO, and by the fact that the Exchange and
Merger Agreement was approved by the Boards of Directors of Brooklyn Union
(prior to the restructuring with KeySpan) and LILCO acting in accordance with
their fiduciary duties to their respective shareholders and by the shareholders
of each of Brooklyn Union and LILCO at meetings held on August 7, 1997.
With respect to the LIPA Transaction, the fairness of the terms thereof
to the shareholders of LILCO is also addressed in the Dillon Read opinion and
likewise reflected extensive and vigorous arms-length negotiations between LILCO
and LIPA and is approved by the LILCO Board and the shareholders of LILCO. These
negotiations were preceded by thoughtful analysis and evaluation of the assets,
liabilities and business prospects of each of the respective companies,
including the investment in, and earning capacity of, the utility assets
underlying the securities being acquired, and involved careful due diligence by
both parties.
In addition, the fees, commissions and expenses incurred and to be
incurred in connection with the Transactions are reasonable and fair in light of
their size and nature. As set forth in Item 2 of this Application, LILCO and
KeySpan together expect to incur a combined total of approximately $55.4 million
in fees, commissions and expenses in connection with the Transactions. By
contrast, The Cincinnati Gas & Electric Company and PSI Resources Inc. incurred
$47.1 million in fees, commissions and expenses in connection with their
reorganization as subsidiaries of CINergy Corporation; Northeast Utilities alone
incurred $46.5 million in fees, commissions and expenses in connection with its
acquisition of Public Service Company of New Hampshire; and Entergy Corporation
alone incurred approximately $38 million in fees, commissions and expenses in
connection with its acquisition of Gulf States Utilities -- all of which amounts
were approved as reasonable by the Commission. See CINergy, supra; Northeast
Utilities, Holding Co. Act Release No. 25548 (June 3, 1992); Entergy Corp.,
supra. Consequently, the consideration and fees underlying the acquisition of
securities contemplated by the Modified Combination meet the standards of
Section 10(b)(2).
The Company believes the fees payable to Merrill Lynch and Dillon Read
are comparable to the fees paid to investment banks in other merger and
acquisition transactions comparable in terms of the size and nature of services
rendered. Finally, the fees paid to Merrill Lynch and Dillon Read reflect the
competition of the marketplace. Investment banking firms actively compete with
each other to act as financial advisors to merger partners and the fees charged
by the investment banks in the Modified Combination (and in others) reflect this
competition for services.
Section 10(b)(3).
Section 10(b)(3) requires the Commission to determine whether the
Transactions will unduly complicate the Company's capital structure or will be
detrimental to the public interest, the interests of investors or consumers or
the proper functioning of the Company's system.
Capital Structure: The consolidated capital structure of the Company
after either Transaction will not be unduly complicated. Upon completion of
either the Modified Combination or the LIPA Transaction, the authorized capital
stock of the Company will consist of 450,000,000 shares of common stock, par
value $.01 per share, and 100,000,000 shares of preferred stock, par value $.01
per share, and up to $1.8 billion of debt, including taxable and tax-exempt
debt, and the Promissory Notes (approximately $900 million of debt if only the
LIPA Transaction is consummated). In the Modified Combination, the shareholders
of LILCO and KeySpan will receive shares of Company Common Stock; in the LIPA
Transaction, only the shareholders of LILCO will receive shares of Company
Common Stock. After the Modified Combination, the Company will own 100% of the
common stock of KeySpan and the Transferee Subsidiaries . If only the LIPA
Transaction is consummated, then the Company will own 100% of the common stock
of the Transferee Subsidiaries and no equity interest in KeySpan.
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In the Modified Combination, it is anticipated that the Company will
organize several Transferee Subsidiaries to engage in various operations,
including subsidiaries to provide gas utility services to the public in LILCO's
and Brooklyn Union's current gas service territories, a subsidiary to own and
operate the non-nuclear power generating plants currently owned by LILCO and one
or more other subsidiaries to engage in energy management and purchasing
activities, to hold and develop real estate constituting a portion of the
Transferred Assets and to engage in other activities, including providing
corporate services to the Company and its other subsidiaries. For corporate
planning and tax purposes, some or all of these Transferee Subsidiaries may be
organized as limited liability companies.
The Company and each Transferee Subsidiary that is an "electric utility
company" or "gas utility company" as defined in the Act will be organized under
the laws of New York. It is not anticipated that any person or entity other than
the Company or another Transferee Subsidiary will have any equity interest in
any Transferee Subsidiary. Since no equity interests in any of the Transferee
Subsidiaries will be held by any person other than the Company or its
subsidiaries, the Congressional concerns about complex holding company
structures and the pyramiding of levels of ownership will not in any event apply
to the Company's determination to organize one or more Transferee Subsidiaries
as limited liability companies. The Company anticipates that one or more
Transferee Subsidiaries will seek to obtain third party debt financing. Any such
debt financing incurred by the Transferee Subsidiary that conducts the gas
utility business now conducted by LILCO will be subject to the approval of the
NYSPSC and any debt incurred by any other Transferee Subsidiary that provides
cost-based services to LIPA in connection with the electric utility business to
be conducted by LIPA through LILCO will have negotiated limitations on the
pass-through of any third party debt financing costs pursuant to the applicable
services agreement between LIPA and the relevant Transferee Subsidiary.
Protected Interests: As more fully set out below in the discussion of
Section 10(c)(2), the Modified Combination is expected to result in substantial
cost savings to the regulated utility customers of both Brooklyn Union and
LILCO. The LIPA Transaction by itself will result in substantial rate decreases
for LILCO's electric customers. Each Transaction will benefit the shareholders
of the affected companies through participation in the upside potential of the
convergence of gas and electric companies. Each Transaction also is expected to
result in further benefits due to greater flexibility in conducting and
financing non-regulated activities. Each of the Transactions will, therefore, be
in the public interest and the interests of investors and consumers, and will
not be detrimental to the proper functioning of the resulting holding company
system. Moreover, as noted by the Commission in Entergy Corporation, Holding Co.
Act Release No. 25952 (December 17, 1993), "concerns with respect to investors'
interests have been largely addressed by developments in federal securities laws
and the securities markets themselves." The Company will be a reporting company
subject to the continuous disclosure requirements of the Securities Exchange Act
of 1934 (the "1934 Act") following consummation of any of the Transactions .
Section 10(c)(1).
Section 10(c)(1) requires that an acquisition be lawful under Section 8
and not be detrimental to the carrying out of the provisions of Section 11.
Sections 8 and 11, by their terms, apply only to registered holding companies
and since, as discussed more fully infra, the Company and its utility
subsidiaries will be exempt from registration under the provisions of Section
3(a)(1) of the Act, the Transactions are not unlawful under Section 8 nor
detrimental to the carrying out of the provisions of Section 11 of the Act.
However, even if these sections were applied to exempt holding companies, the
Transactions would not be unlawful as there is no state law, regulation or
policy against combination companies (those with gas and electric operations)
and the conditions of Section 11 would, in any event, be met.
Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. As discussed above, none
of the Transactions raises any issue under Section 8 or, accordingly, the first
clause of Section 10(c)(1). Indeed, Section 8 indicates that a registered
holding company may own both gas and electric utilities where, as here, the
relevant state utility commissions support such an arrangement.
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The Commission has previously determined that an exempt holding company
can own both gas and electric assets and operations so long as the relevant
state authorities agreed and could continue to provide effective regulation of
the combined company. See WPL Holdings, Inc., Holding Co. Act Release No. 24590
(February 26, 1988), aff'd in part and rev'd in part sub non. Wisconsin's
Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989), reaffirmed
Holding Co. Act Release No. 25377 (September 18, 1990). As discussed below, this
Application requests the Commission's concurrence that the Company will be an
exempt holding company pursuant to Section 3(a)(1) of the Act. Moreover, the
Combination has been approved by the NYSPSC, the LIPA Transaction has been
approved by the PACB and the transfer of the Transferred Assets in connection
with the LIPA Transaction has been approved by the NYSPSC. In addition, the gas
rates to be charged by the Company after the closing will be subject to
regulation by the NYSPSC and the electric rates to be charged after the closing
will be regulated by LIPA if either the Modified Combination or the LIPA
Transaction is consummated. Based on the text of Section 11, the Commission's
precedents, the transaction-based New York State governmental approvals that
must be obtained before any Transaction can be completed and the continuing
direct New York State governmental regulation of both gas and electric rates
after closing under any of the Transactions, the Company's ownership and
operation on an intrastate basis of the gas and electric utility systems should
satisfy the requirements of Sections 8 and 11 and not require Commission
consideration of the question of registered combination companies.
As previously stated, Section 10(c)(1) also requires that an
acquisition not be detrimental to carrying out the provisions of Section 11.
Section 11(a) of the Act requires the Commission to examine the corporate
structure of registered holding companies to ensure that unnecessary
complexities are eliminated and voting powers are fairly and equitably
distributed. Moreover as described below, none of the Transactions will result
in unnecessary complexities or unfair voting powers.
Section 11(b)(1) of the Act generally requires a registered holding
company to limit its operations to a "single integrated public-utility system,
and to such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public utility
system." The combined utility assets of BL Holding Corp. will not together
constitute an "integrated public-utility system" within the meaning of the Act,
but, instead, each separate system (i.e., the gas utility operations and the
electric utility operations) will remain an integrated public utility system as
more fully described below.
Section 11(b)(1) makes provision for the acquisition and retention of
more than one integrated system only if the requirements of Section
11(b)(1)(A)-(C) ("ABC clauses") are satisfied. By its terms, however, Section
11(b)(1) applies only to registered holding companies. The Commission has
previously determined that a holding company may acquire utility assets that
will not, when combined with the acquiring company's existing utility assets,
make up an integrated system or comply fully with the ABC clauses, provided that
there is de facto integration of contiguous utility properties and the holding
company will be exempt from registration under Section 3 of the Act following
the acquisition. See, e.g., TUC Holding Company, et al., Holding Co. Act Release
No. 26749 (August 1, 1997). Despite the believed inapplicability of Section 11,
the proposed Transactions discussed herein do, in any event, meet the conditions
of Section 11(b)(1).
The respective service territories of the gas systems are contiguous
and each of the gas systems will be coordinated administratively. The
Combination under a holding company structure will not give rise to any of the
abuses, such as ownership of scattered utility properties, inefficient
operations, lack of local management or evasion of state regulation, that
Section 11(b)(1) and the Act generally were intended to address. Furthermore,
the combination of the utility systems will have no effect upon the ability of
ratemaking authorities to carry out their statutory duties.
Integrated Public Utility System
Because Section 2(a)(29) specifies separate definitions for gas and
electric systems, the Commission has historically taken the view that gas and
electric properties together cannot constitute a single integrated public
utility system. See New Century Energies, Inc., supra at 286, citing SEC v. New
England Electric System, 384 U.S. 176,
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178 n.7; In the Matter of Columbia Gas & Electric Corporation, Holding Co. Act
Release No. 2477, 8 S.E.C. 443, 462-463 (Jan. 10, 1941). However, Commission
authority is equally clear that Section 10(c)(2) does not limit Commission
approval to acquisitions resulting in only one integrated system. "[W]e have
indicated in the past that acquisitions may be approved even if the combined
system will not be a single integrated system. Section 10(c)(2) requires only
that the acquisition tend "towards the economical and the efficient development
of an (emphasis in the original) integrated public-utility system." See Gaz
Metropolitain, Inc., supra note 13 at 192, quoting In the Matter of Union
Electric Company, Holding Co. Act Release No. 18368, 45 S.E.C. 489, 505 (April
10, 1974), aff'd without op. sub nom. City of Girardeau, Missouri v. S.E.C., 521
F.2d 324 (D.C. Cir. 1975). See also, New Century Energies, supra.
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
a system consisting of one or more utility companies which are
so located and related that substantial economies may be
effectuated by being operated as a single coordinated system
confined in its operations to a single area or region, in one
or more States, not so large as to impair (considering the
state of the art and the area or region affected) the
advantages of localized management, efficient operation, and
the effectiveness of regulation: Provided, that gas utility
companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
The Gas East Gas Corp./Brooklyn Union gas utility system will meet the standard
set forth in Section 2(a)(29)(B) and, therefore, will satisfy the requirements
of Sections 10(c)(1) and (2) and should be approved by the Commission. The
operational relationships, described below, respecting LILCO and Brooklyn Union
will continue with respect to Gas East Gas Corp. and Brooklyn Union upon
acquisition of LILCO's gas operations by Gas East Gas Corp.
First, LILCO's and Brooklyn Union's gas systems are already physically
interconnected. LILCO's and Brooklyn Union's gas supplies are transported by the
same four interstate pipelines under FERC jurisdiction from domestic and
Canadian supply sources to the New York City gate. The annual capacity available
for such transportation from Transcontinental Gas Pipeline Company, Texas
Eastern Transmission Corporation, Iroquois Gas Transmission System and Tennessee
Gas Pipeline Company total about 275 MMDth (LILCO -- 100 MMDth and Brooklyn
Union -- 175 MMDth). During the winter, this capacity is supplemented by
approximately 60MMDth of capacity (LILCO -- 24 MMDth and Brooklyn Union -- 36
MMDth) from mostly the same market area storage services from three of these
pipelines (excluding Iroquois) plus Consolidated Natural Gas Company. Both LILCO
and Brooklyn Union contract with the same companies for production area storage.
LILCO and Brooklyn Union contract for firm long term supply and spot
gas supplies of about 275 MMDth that are transported under firm transport. This
is supplemented by spot purchases under interruptible capacity. In LILCO's case,
this brings the total annual deliveries to about 140 MMDth which is split 50/50
between the gas and electric system. For Brooklyn Union, total gas purchases of
about 175 MMDth is provided to gas customers only.
LILCO has two direct physical interconnections with Brooklyn Union. One
is a transmission custody transfer point between the two gas systems and the
other is an interconnection from LILCO's 60 psig system into Brooklyn Union's
low pressure system.
The primary interconnection between LILCO and Brooklyn Union is via the
Cambria Heights Bi-directional Metering Station in Cambria Heights, Queens. The
Cambria Heights station is owned and operated by Brooklyn Union and resides
within Brooklyn Union's service territory. This station is bi-directional in
that it is capable of metering gas flow in either direction (into LILCO's
service territory or into Brooklyn Union's service territory). The station
connects LILCO's and Brooklyn's 350 psig transmission systems.
The second interconnection between LILCO and Brooklyn Union is the
Woodmere Meter Station. This station provides support to Brooklyn Union's low
pressure system during peak load periods. The station is located
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in LILCO's service territory and provides service to Brooklyn Union via a 60
psig to 6" water column regulator station. This station has a separate meter
account number and is billed to Brooklyn Union at LILCO's standard commercial
gas tariff rate for firm service.
LILCO receives its interstate gas supply in part by displacement via
the New York Facilities System. The New York Facilities System consists of
Brooklyn Union, Con Edison and LILCO. The three companies are connected by a 350
psig gas transmission system that is severally owned and operated by the three
companies. Through the New York Facilities System, the companies can deliver gas
to seven interstate delivery points. Three of these delivery points are in Con
Edison's service territory, two are in Brooklyn Union's service territory and
two are in LILCO's service territory. Through an exchange of total gas supply
into each of the companies, the companies balance their gas supply contracts
such that the sum of all deliveries and receipts equals zero.
The gas utilities to be owned by Gas East Gas Corp. and Brooklyn Union
will, consistent with the limitations imposed on them by reason of the "two
county" rule of Section 103 of the Internal Revenue Code, pursuant to which
Brooklyn Union has issued tax exempt bonds to finance facilities for the local
furnishing of gas in its service territory, operate in a substantially
coordinated way. In particular, in order to achieve the approximately $1.1
billion of synergy savings estimated to be achieved over a ten-year period, net
of costs, from the combined gas operations under the Modified Combination, the
Company will implement a number of coordination programs consistent with
applicable federal income tax guidelines:
o The two gas utilities will coordinate their management of
additional firm gas supply, storage capacity and associated
transportation, and interstate pipeline capacity to defer or
reduce the amount of supply, storage and capacity that would
otherwise be required to ensure firm gas supply for each gas
utility were it to continue to be operated independently.
o The gas supply portfolios of the two gas utilities will be
managed in a coordinated way, thereby providing a greater
degree of diversity at a lower cost than could otherwise be
obtained.
o Gas East Gas Corp. and Brooklyn Union are currently pursuing
different strategies for managing their respective gas assets,
but expect to develop an integrated gas asset management
strategy upon the expiration (scheduled for April 1999) of
Brooklyn Union's proposed gas asset management agreement with
affiliates of Enron Corporation.
o The operating management of each of Gas East Gas Corp. and
Brooklyn Union will report to a single executive vice
president of the Company responsible for providing common
oversight of all Company gas delivery activities.
o Each gas utility will make its workforce available to the
other for emergency purposes in accordance with a common plan
for emergency response.
o As described above, corporate administrative services (such as
accounting, legal, human resources and similar corporate
services), as well as gas planning and administration, gas
system engineering and gas marketing, will be provided to each
gas utility through
a Servco.
The gas utility system to be operated by Gas East Gas Corp. and
Brooklyn Union will operate in a substantially coordinated manner confined in
its operation to a single area or region consisting of the interconnected gas
service areas currently served by LILCO and Brooklyn Union located within five
counties in the New York City metropolitan area. As set forth above in this Item
3, localized management will be preserved. As described above, the operations of
the gas utilities will be sufficiently coordinated to provide an estimated $1.1
billion of efficiency savings. Finally, the NYSPSC will maintain the same
jurisdiction over the gas operations of the two gas utilities as it currently
exercises over the gas operations of LILCO and Brooklyn Union.
Based on management's current understanding of the requirements of the
"two county" rule and the provisions of the NYSPSC order approving the
Combination, the Gas East Gas Corp. and Brooklyn Union gas
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systems will continue to have separate operations providing gas distribution
services to separate customers under separate tariffs. The Company is currently
seeking guidance as to the extent to which these gas utility systems can be
further integrated consistent with the "two county" rule and intends to
implement such additional integration and will preserve for the benefit of the
Brooklyn Union gas customers the continued availability of the existing
tax-exempt debt.
With respect to Genco, seven of Genco's eleven steam generating plants
are capable of burning either natural gas or oil to generate electricity. During
the twelve months ended March 31, 1998, fully 35% of the fuel used by these
plants was natural gas. Because Genco's sources of natural gas are in fact the
same sources to be used by Gas East Gas Corp. and Brooklyn Union for their
retail gas distribution sale and services, and because the gas pipelines
servicing Genco are physically interconnected with those of Gas East Gas Corp.
and Brooklyn Union, Genco is in fact an integrated component of such integrated
gas utility system.
This single integrated system will operate in a single region covering
three counties in the New York City metropolitan area. As set forth below, the
Transactions will result in economies and efficiencies for the utilities and, in
turn, their customers.
Finally, the system is not so large as to impair the advantages of
localized management, efficient operations, and the effectiveness of regulation.
The Commission's past decisions on "localized management" show that the
Transactions fully preserve the advantages of localized management. In these
cases, the Commission has evaluated localized management in terms of: (i)
responsiveness to local needs; see In the Matter of American Electric Power Co.,
supra, 1312 (advantages of localized management evaluated in terms of whether an
enlarged system could be "responsive to local needs"), General Public Utilities
Corp., Holding Co. Act Release No. 13116, 37 S.E.C. 28, 36 (Mar. 2, 1956)
(localized management evaluated in terms of "local problems and matters
involving relations with consumers"); (ii) whether management and directors
drawn from local management would not be compromised by the affiliation of two
electric utilities under a new holding company because the new holding company's
"management [would be] drawn from the present management" of the two utilities);
Northeast Utilities, supra, at 1285 (advantages of localized management would be
preserved in part because the board of New Hampshire Utility, which was to be
acquired by an out-of-state holding company, included "four New Hampshire
residents"); (iii) the preservation of corporate identities, see Id. (utilities
"will be maintained as separate New Hampshire corporations. . .[t]herefore the
advantages of localized management will be preserved"); Columbia Gas & Electric
Corporation, supra, note 23 (benefits of local management maintained where the
utility to be added would be a separate subsidiary); and (iv) the ease of
communications, see In the Matter of American Electric Power Co. supra, at 1312
(distance of corporate headquarters from local management was a "less important
factor in determining what is in the public interest" given the "present-day
ease of communication and transportation").
Section 10(c)(2).
Section 10(c)(2) requires the Commission to determine that the
acquisition will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. As demonstrated
above, the Modified Combination will result in the Company owning two existing
utilities with contiguous service territories. If the Modified Combination is
consummated, then the Company will own gas assets and electric production assets
in a contiguous five county area of southeastern New York State (Kings, Queens,
Richmond, Nassau and Suffolk) , and LIPA will, through its ownership of LILCO's
stock, own LILCO's transmission and distribution assets in Nassau, Suffolk and
the Rockaway Peninsula in Queens. The Modified Combination will create an
economical and efficient integrated public utility system.
Efficiencies and Economies
Although the extent to which the gas distribution systems of LILCO and
Brooklyn Union can be integrated is limited to some extent due to the fact that
Brooklyn Union has issued tax exempt debt under Section 103 of the Internal
Revenue Code, which requires that the facilities financed for the local
furnishing of gas be either in two contiguous counties or wholly within a city
and one contiguous county, there are substantial opportunities for the Company
to integrate the administrative and general functions of the two utilities in
such areas as planning,
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accounting, treasury, human resources, legal services, information systems and
technology, purchasing and insurance and risk management, as will result in
significant economies and efficiencies satisfying the standards of Section
10(c)(2).
Generally, economies and efficiencies will be realized over time as
coordinated practices become standardized. These long-term efficiencies and
economies are properly considered in determining if the standards of Section
10(c)(2) of the Act have been met. See American Electric Power Co., 46 S.E.C.
1299, 1321 (1978) ("[t]he affiliation . . . is intended to be permanent . . .
and we should look to long-term considerations"); see also Centerior, supra, 35
SEC Docket (CCH) 769 at 775 ("a demonstrated potential for economies will
suffice even when these are not precisely quantifiable").
Savings expected as a result of the Modified Combination, which are
detailed below, dwarf the savings claimed in a number of recent acquisitions
approved by the Commission. See, e.g., Kansas Power and Light Co., Holding Co.
Act Release No. 25465 (Feb. 5, 1992) (expected savings of $140 million over five
years); IES Industries, Holding Co. Act Release No. 25325 (June 3, 1991)
(expected savings of $91 million over ten years); Midwest Resources, Holding Co.
Act Release No. 25159 (Sept. 26, 1990) (estimated savings of $25 million over
five years).
These economies and efficiencies are described more fully below:
CORPORATE AND OPERATIONS LABOR COST SAVINGS: The Company estimates that
a net reduction in labor costs of approximately $621 million on a nominal dollar
basis can be achieved over the ten years following the closing as a result of
the Modified Combination. These savings, deriving from eliminating overlap and
duplication in functional performance, can only be realized by combining LILCO
and KeySpan.
CORPORATE AND ADMINISTRATIVE PROGRAMS SAVINGS: The Company estimates
that a reduction in non-labor corporate and administrative expenses totalling
approximately $196 million on a nominal dollar basis can be achieved over such
ten years through consolidation of duplicative programs. These include savings
related to information systems, insurance costs, outside services, shareholder
services, benefits administration and other general and administrative
overheads. The aggregate cost of these items for the companies on a stand-alone
basis is greater than the cost will be to the combined new company. An example
would be the hiring of one outside professional service (external auditors,
attorneys, consultants, etc.) instead of two.
FACILITIES INTEGRATION SAVINGS: These are cost savings that the Company
expects to realize from consolidating space and neighboring business offices,
service centers and related facilities. The Company estimates a net cost savings
of approximately $62 million on a nominal dollar basis over such ten years from
these consolidations.
NON-FUEL PURCHASING ECONOMIES SAVINGS: These are the savings which will
result from the new, larger company having greater purchasing power and
centralizing the purchasing and inventory functions related to the construction,
operation and maintenance of service centers, warehouses and headquarters, as
well as standardizing system components. The Company will be able to coordinate
its purchasing needs, buy in greater quantity, negotiate with vendors and
receive larger discounts. The Company estimates cost savings of approximately
$113 million on a nominal dollar basis from such economies over ten years.
GAS SUPPLY COST SAVINGS: The Company estimates that savings of
approximately $290 million on a nominal dollar basis over ten years can be
achieved by the reduction of combined commodity procurement cost, due to larger
purchasing volumes and greater purchasing power.
STATE GROSS RECEIPTS TAX: Because the other transaction-related savings
created by the companies will reduce the revenue requirements for the Company's
operating utility subsidiaries, the corresponding base on which this New York
State tax will be calculated will be lower, yielding an estimated nominal dollar
savings of approximately $52 million over ten years.
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COSTS TO ACHIEVE AND TRANSACTION COSTS: These consist of merger costs
such as investment bankers' fees, attorney and accountant fees, and severance
and other employee reduction-related costs. Item 2 provides details of some of
these components and their estimated amounts.
The total estimated savings are approximately $1.1 billion on a nominal
dollar basis over a ten year period, net of estimated costs to achieve and
transaction costs.
ADDITIONAL EXPECTED BENEFITS: In addition to the benefits described
above, there are other benefits which, while presently difficult to quantify,
are nonetheless substantial. These other benefits include maintenance of
competitive rates and services, increased size and stability, diversification of
service territory, coordination of diversification programs, complementary
operational functions and complementary management.
MAINTENANCE OF COMPETITIVE RATES: The Modified Combination would allow
the electric customers of LILCO to enjoy an average 20% rate reduction initially
and an average rate reduction of no less than 14% for the first ten years after
closing. The Modified Combination is forecast to provide a 3.9% average rate
reduction for all gas customers of LILCO and a 3.0% average reduction for all
gas customers of Brooklyn Union. Furthermore, the Company will be more effective
in meeting the challenges of the increasingly competitive environment in the
utility industry than either applicant standing alone due to the economies of
scale available to the Company. The impact of these economies of scale will help
to position the Company to deal effectively with increased competition with
respect to rates. The Modified Combination, by creating the potential for
increased economies of scale in the gas utility business, will create the
opportunity for strategic, financial and operational benefits for customers in
the form of more competitive rates over the long term and for shareholders in
the form of greater financial strength and financial flexibility.
MORE DIVERSE SERVICE TERRITORY: While lying within a single region, the
combined gas service territory of the Company will be larger and more diverse
than any of the discrete service territories of Brooklyn Union or LILCO. This
increased customer and geographical diversity is expected to reduce the exposure
to changes in economic or competitive conditions in any given sector of the
combined service territory.
EXPANDED MANAGEMENT RESOURCES: The Company will be able to draw on a
larger and more diverse mid- and senior-level management pool to lead the
Company forward in an increasingly competitive environment for the delivery of
energy and should be better able to attract and retain the most qualified
employees. The employees of the Company should also benefit from new
opportunities in the expanded organization.
If only the LIPA Transaction is consummated, the cost savings and
related efficiencies described above, which depend largely on the combination of
LILCO and KeySpan, will not be realized. However, because of the financial
efficiencies attributable largely to LIPA's status as a tax-exempt governmental
agency, consummation of the LIPA Transaction by itself will permit average
electric rate reductions of approximately 14% over a ten year period. Since the
LIPA Transaction cannot be consummated without a statutory rate determination by
the LIPA Board of Trustees that electric rates will not increase as a result of
the LIPA Transaction and since LIPA has agreed with the PACB that such closing
will not occur unless estimated electric rate savings are at least 14%, the
consummation of the LIPA Transaction will result in very significant rate
reductions.
In light of these cost savings and various efficiencies, the
requirements of the economical and efficient development of an integrated
utility system set forth in Section 10(c)(2) of the Act will clearly be met by
each Transaction.
Section 10(f).
Each Transaction is consistent with the provisions of Section 10(f) of
the Act which provides that the Commission may not approve an acquisition unless
it appears to the Commission that such state laws which may apply in respect of
such acquisition have been complied with. Unlike Section 8, Section 10(f)
applies to exempt companies. Each Transaction satisfies this requirement. It is
a condition to the consummation of the Transactions that state approval thereof
be first obtained. On March 14, 1997, LILCO and Brooklyn Union filed a joint
petition
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requesting approval of the NYSPSC under Section 70 of the New York Public
Service Law to allow each of them to become subsidiaries of the Company through
the Combination. An amendment to the joint petition was filed on May 16, 1997,
and a further amendment on July 7, 1997. On December 12, 1997, Brooklyn Union
and LILCO filed with the NYSPSC a comprehensive settlement agreement among them,
the Staff of the Department of Public Service, the Natural Resource Defense
Council, the Association for Energy Affordability Inc. and Trigen-Nassau Energy
Corp., which agreement resolves among the signatories all issues in the NYSPSC
proceeding and authorizes LILCO and KeySpan to consummate the Combination,
subject to the NYSPSC's approval of the settlement agreement. The NYSPSC acted
to approve the settlement agreement by an abbreviated order issued on February
5, 1998 and again by full order issued April 14, 1998. An application with
respect to the transfer of the Transferred Assets, seeking NYSPSC approval of
certain transfers so they may occur prior to the consummation of the LIPA
Transaction was made on January 20, 1998, and was approved by the NYSPSC by
order issued on May 1, 1998.
Section 3(a)(1).
After the Modified Combination, the Company, which will be incorporated
in New York, will own, directly or indirectly, all of the common stock of (1)
KeySpan, a New York corporation conducting all of its utility operations in the
State of New York, and (2) one or more Transferee Subsidiaries succeeding to the
gas distribution and electric generating business currently conducted by LILCO,
another New York corporation conducting all of its utility business in the State
of New York. If only the LIPA Transaction occurs, the Company will own all of
the equity interests in the Transferee Subsidiaries. In each case, each
Transferee Subsidiary that is a "gas utility company" or an "electric utility
company" for purposes of the Act will be organized under the laws of the State
of New York. As such, the Company will qualify under each Transaction for an
exemption from registration under Section 3(a)(1) of the Act.
The Company requests that the Commission issue an order under Section
3(a)(1) declaring that the Company is exempt from all provisions of the Act
except Section 9(a)(2). Section 3(a)(1) of the Act provides that the Commission
may issue the above-requested order to a holding company, if:
such company, and every subsidiary company thereof which is a
public utility company from which such company derives, directly
or indirectly, any material part of its income, are predominantly
intrastate in character and carry on their business substantially
in a single State in which such company and every such subsidiary
company thereof are organized.
As previously stated, the utility operations of BL Holding Corp will
consist of gas distribution companies and, to a lesser extent, electric
generation and operation companies. For the period ended December 31, 1997, BL
Holding Corp would have had revenues, on a pro forma basis, of approximately
$2,524.3 million attributable to gas operations.
Based on the foregoing, the Company respectfully requests that the
Commission issue an order approving each Transaction.
Item 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that Brooklyn
Union and LILCO have obtained or expect to obtain in connection with the
Transactions.
(1) State Approvals. As discussed above, LILCO and Brooklyn Union filed
a joint petition requesting approval of the NYSPSC of the Combination on March
14, 1997 and filed amendments to that petition on May 16, 1997, and again on
July 7, 1997. On February 5, 1998 NYSPSC issued an abbreviated order adopting
the terms of the settlement subject to conditions and changes (which conditions
and changes have been accepted by LILCO and Brooklyn Union), thereby approving
the Combination. A full order adopting the terms of the settlement and
explaining the reasons therefor was issued on April 14, 1998. An additional
application with respect to the transfer of the Transferred Assets, seeking
NYSPSC approval of certain transfers so they may occur prior to the consummation
of the LIPA Transaction was filed on January 20, 1998 and was approved by NYSPSC
by order issued on May 1, 1998.
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<PAGE>
(2) FERC. On July 16, 1997, the FERC approved the Combination. On
February 12, 1998 the FERC approval of the LIPA Transaction under Section 203
was granted. In addition, on September 30, 1997, LILCO filed an application with
the FERC under Section 205 of the Federal Power Act, seeking the FERC's approval
of an initial rate to be charged by LILCO (through the generation subsidiary of
the Company to be formed) to LIPA for electric power and energy.
On December 22, 1997, LILCO filed with the FERC a Settlement Agreement
it reached with LIPA concerning LILCO's October 1, 1997 rate filing under
Federal Power Act Section 205. That rate filing addressed LILCO's proposed sale
of capacity and energy (through its yet to be formed subsidiary, Genco) to LIPA
pursuant to the PSA. On February 12, 1998, the FERC issued an order accepting
the proposed rate for filing and set for hearing the proposed filing. In
addition, the FERC will institute an investigation under Section 206 of the
Federal Power Act and establish a refund effective date if necessary.
(3) Antitrust Considerations. Under the HSR Act and the rules and
regulations promulgated thereunder, the Modified Combination may not be
consummated until the requisite notifications and report forms have been filed
with the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") and the specified HSR
Act waiting period requirements have been satisfied. The HSR Act waiting period
expired for LILCO and KeySpan on March 7, 1998 and March 5, 1998, respectively.
If the Modified Combination is not consummated within twelve months
after the expiration or earlier termination of the HSR Act waiting period, LILCO
and KeySpan will be required to submit new filings to the Antitrust Division and
the FTC, and a new HSR Act waiting period would have to expire or be earlier
terminated before the Modified Combination could be consummated. It should be
noted that the FERC's review of the Transactions also involved a review of
antitrust considerations. The FERC's orders stated that no such antitrust issues
were raised by either Transaction. A similar review will be conducted prior to
the FERC's issuance of an order regarding the LIPA Transaction.
(4) Atomic Energy Act. Operation of Nine Mile Point 2, a nuclear power
plant in which LILCO has an 18% ownership interest, is subject to regulation by
the Nuclear Regulatory Commission ("NRC"). The Atomic Energy Act of 1954, as
amended (the "Atomic Energy Act"), provides that such an ownership interest may
not be transferred or in any manner disposed of, directly or indirectly, to any
person through transfer of control unless the NRC finds that such transfer is in
accordance with the Atomic Energy Act and consents to the transfer. Pursuant to
the Atomic Energy Act and the LIPA Agreement, LILCO submitted on September 8,
1997, its application for approval of the Modified Combination by the NRC. On
December 29, 1997, the NRC granted its approval of LILCO's application regarding
the acquisition of LILCO's ownership interest in Nine Mile Point 2 by LIPA.
(5) Public Authorities Control Board. On July 16, 1997, the PACB
approved the LIPA Transaction. The PACB approved on April 22, 1998, the bond
financing to be undertaken by LIPA to finance the cash merger consideration for
the LIPA Transaction and various refinancings of LILCO debt.
(6) New York State Controller. The terms of any negotiated sale of
LIPA's bonds must be approved by the New York State Controller.
(7) General. LILCO and Brooklyn Union possess municipal franchises and
environmental permits and licenses that may need to be renewed or replaced as a
result of the Transactions. The companies do not anticipate any difficulties at
the present time in obtaining such renewals or replacements.
Item 5. Procedure.
The Commission issued and published the requisite notice under Rule 23
with respect to the filing of this Application on March 6, 1998 (Release No.
35-26838) and such notice specified a date not later than March 30, 1998 by
which comments were to be entered. The Commission is respectfully requested to
issue its order granting and permitting this application to become effective as
soon as practicable.
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<PAGE>
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed with respect to the
Transactions. 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.
The following exhibits and financial statements are filed as a part of
this Application.
Exhibits listed below which have been filed with the Commission pursuant to the
Securities Act of 1933, as amended, or the 1934 Act, as amended, and which were
filed as noted below, are hereby incorporated by reference and made a part of
this Application with the same effect as if filed herewith.
A-1 Form of Certificate of Incorporation of the Company
(filed as Annex G to Registration Statement on Form
S-4, No. 333-30353, on June 30, 1997).
A-2 Form of By-laws of the Company (filed as Annex H to
Registration Statement on Form S-4, No. 333-30353, on
June 30, 1997).
A-3 Restated Certificate of Incorporation of Long Island
Lighting Company dated November 11, 1993 (filed as an
Exhibit to Long Island Lighting Company's Form 10-K for
the Year Ended December 31, 1993) and By-laws of Long
Island Lighting Company, as amended on December 18,
1996 (filed as Exhibit 3(b) to Long Island Lighting
Company's Form 10-K for the Year Ended December 31,
1996).
A-4 Restated Certificate of Incorporation and By-laws of
KeySpan (filed as Annex L to Registration Statement on
Form S-4, No. 333-30353, on June 30, 1997).
A-5 Organizational Chart for BL Holding Corp. and KeySpan Energy
Corporation (filed on Form S-E).
B-1 Amended and Restated Agreement and Plan of Exchange and Merger
dated June 26, 1997 between The Brooklyn Union Gas Company and
Long Island Lighting Company dated as of June 26, 1997 (filed
as Annex A to Registration Statement on Form S-4, No.
333-30353, on June 30, 1997).
B-2 Amendment, Assignment and Assumption Agreement dated as of
September 29, 1997 by and among The Brooklyn Union Gas
Company, Long Island Lighting Company and KeySpan Energy
Corporation (filed as Exhibit 2.5 to Schedule 13D by Long
Island Lighting Company on October 24, 1997).
B-3 Agreement and Plan of Merger dated as of June 26, 1997
by and among BL Holding Corp., Long Island Lighting
Company, Long Island Power Authority and LIPA
Acquisition Corp. (filed as Annex D to Registration
Statement on Form S-4, No. 333-30353 on June 30, 1997).
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<PAGE>
B-4 Amended and Restated LILCO Stock Option Agreement
between The Brooklyn Union Gas Company and Long Island
Lighting Company dated as of June 26, 1997 (filed as
Annex B to Registration Statement on Form S-4, No.
333-30353, on June 30, 1997).
B-5 Amended and Restated Brooklyn Union Stock Option Agreement
between Long Island Lighting Company and The Brooklyn Union
Gas Company dated as of June 26, 1997 (filed as Annex C to
Registration Statement on Form S-4, No. 333-30353, on June 30,
1997).
B-6 Management Services Agreement between Long Island Power
Authority and Long Island Lighting Company dated as of June
26, 1997 (filed as Exhibit A to Form 8-K by Long Island
Lighting Company, No. 1-3571 on July 3, 1997).
B-7 Power Supply Agreement between Long Island Lighting Company
and Long Island Power Authority dated as of June 26, 1997
(filed as Exhibit B to Form 8-K by Long Island Lighting
Company, No. 1-3571 on July 3, 1997).
B-8 Energy Management Agreement between Long Island Lighting
Company and Long Island Power Authority dated as of June 26,
1997 (filed as Exhibit C to Form 8-K by Long Island Lighting
Company, No. 1-3571 on July 3, 1997).
C-1 Registration Statement of KeySpan Energy Corporation on
Form S-4 (filed June 30, 1997, No. 333-18025, as
amended).
C-2 Joint Proxy Statement of Long Island Lighting Company
and The Brooklyn Union Gas Company and Prospectus of BL
Holding Corp. and KeySpan Energy Corporation (filed on
June 30, 1997 included in Exhibit C-1), as amended by
Post-Effective Amendment No. 1 to Form S-4 (filed July
3, 1997, No. 333-30353).
*D-1.1 Application of Long Island Lighting Company for Approval of
Reorganization before the FERC dated March 17, 1997, Docket
No. EC97-19-000.
*D-1.2 FERC Order Approving Disposition of Facilities
Issued July 16, 1997.
*D-2 Application of Long Island Lighting Company for
Approval of Transaction and Disposition of Assets
before the FERC.
**D-2.2 FERC Order Authorizing Disposition of Jurisdictional
Facilities Issued February 12, 1998, Docket No.
EC97-45-000.
*D-3 Initial Rate Filing for Sale of Capacity of Energy to
Long Island Power Authority before the FERC dated
September 30, 1997.
**D-3.2 FERC Order Accepting for Filing Proposed Rate,
Initiating Investigation, Establishing Hearing
Procedures and Refund Effective Date, and
Consolidating Dockets Issued February 12, 1998,
Docket Nos. ER98-71-000 and EL98-22-000.
*D-4 Joint Petition of Long Island Lighting Company and The
Brooklyn Union Gas Company for Approval of Share Exchanges,
Property Transfers and Amendment of Company Agreement before
the NYSPSC dated March 14, 1997.
- --------
* Previously Filed.
** Filed Herewith.
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<PAGE>
**D-4.2 NYSPSC Order Adopting Terms of Settlement Subject to
Conditions and Changes: Case 97-M-0567 Joint Petition of
Long Island Lighting Company and The Brooklyn Union Gas
Company for Authorization under Section 70 of Public Service
Law to Transfer Ownership to an Unregulated Holding Company
and Other Related Approvals, issued and effective February
5, 1998.
**D-4.3 NYSPSC Order Adopting Negative Declaration: Case 97-M-0567
Joint Petition of Long Island Lighting Company and The
Brooklyn Union Gas Company for Authorization under Section
70 of Public Service Law to Transfer Ownership to an
Unregulated Holding Company and Other Related Approvals,
issued and effective January 29, 1998.
**D-4.4 NYSPC Order Adopting Terms of Settlement and Explaining
Reasons therefor: Case 97-M-0567 Joint Petition of Long
Island Lighting Company and The Brooklyn Union Gas Company
for Authorization under Section 70 of Public Service Law to
Transfer Ownership to an Unregulated Holding Company and
Other Related Approvals, issued and effective April 14,
1998 (without attachments).
**D-4.5 NYPSC Order Approving Asset Transfers, Assumption of
Liabilities and Issuance of Promissory Notes: Case
98-M-0074, issued and effective May 1, 1998.
*D-5.1 Long Island Power Authority request for approval
to the New York State Public Authorities Control
Board dated April 30, 1997.
*D-5.2 New York State Public Authorities Control Board
Resolution 97-LI-1 approving certain Specified
Projects of the Long Island Power Authority dated
July 16, 1997.
*D-6.1 Long Island Lighting Company Request for NRC Consent to
LILCO's Indirect Transfer of Control Over Its Interests In
Nine Mile Point Nuclear Power Station, Unit 2 dated
September 8, 1997.
*D-6.2 Long Island Lighting Company Request for NRC Consent to
LILCO's Indirect Transfer of Control Over Its Interests In
Nine Mile Point Nuclear Power Station, Unit 2 dated October
8, 1997.
**D-6.3 NRC Order Approving Application Regarding Acquisition of
Long Island Lighting Company by Long Island Power Authority
dated December 29, 1997, Docket No. 50-410.
**D-6.4 NRC Environmental Assessment and Finding of No Significant
Impact dated December 18, 1997, Docket No. 50-410.
**D-7.1 Petition of Long Island Lighting Company Under Sections 69
and 70 of the Public Service Law for Approval of Transfers
of Assets and Assumption of Liabilities and Debt to
Affiliate or Affiliates before the NYSPSC dated January 19,
1998.
**D-7.2 NYSPSC Order Adopting Negative Declaration: Case 98-M-0074
Petition of Long Island Lighting Company for Approval to:
(a) under Section 70 of the Public Service Law to transfer
certain assets from LILCO to newly formed subsidiaries of a
new holding company; (b) for the subsidiaries receiving the
assets to assume certain liabilities associated with those
transferred assets; and (c) under PSL Section 69 for the
issuance of promissory notes by those same subsidiaries,
issued and effective February 6, 1998.
*E-1 Map of service areas of Long Island Lighting Company and The
Brooklyn Union Gas Company (filed on Form S-E).
**E-2 Estimated Balance Sheet for Transferred Assets, as of
December 31, 1997.
**F-1 Opinion of Counsel.
- --------
* Previously Filed.
** Filed Herewith.
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<PAGE>
F-2 Past-tenses Opinion of Counsel (to be filed by
amendment).
F-3 Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (filed as Annex E to Registration
Statement on Form S-4, No. 333-30353, on June 30,
1997).
F-4 Opinion of Dillon, Read & Co. (filed as Annex F to
Registration Statement on Form S-4, No. 333-30353,
on June 30, 1997).
**G Financial Data Schedule
(B) Financial Statements
FS-1 Company Unaudited Pro Forma Consolidated Condensed
Balance Sheet as of December 31, 1997 (filed on Form 8-K
April 14, 1998).
FS-2 Company Unaudited Pro Forma Consolidated Condensed
Statement of Income for the 12-month period ended
December 31, 1997 (filed on Form 8-K April 14, 1998).
FS-3 Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements (filed on Form 8-K April 14, 1998).
FS-4 Long Island Lighting Company Unaudited Condensed Balance
Sheet as of December 31, 1997 (filed on Form 10-Q, February
17, 1998).
FS-5 Long Island Lighting Company Unaudited Condensed Statement
of Income for the 12-month period ended December 31, 1997
(filed on Form 10-Q, February 17, 1998).
FS-6 KeySpan Energy Corporation and Subsidiaries Consolidated
Balance Sheet as of December 31, 1997 (filed on Form 10-Q,
February 13, 1997).
FS-7 KeySpan Energy Corporation and Subsidiaries Consolidated
Statement of Income for the 12-month period ended December
31, 1997 (filed on Form 10-Q, February 13, 1998).
Item 7. Information as to Environmental Effects.
The Transactions neither involve a "major federal action" nor
"significantly affect 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. The only federal actions related to each of the Transactions
are:
o the Commission's declaration of effectiveness on
June 30, 1997, of the Joint Proxy
Statement/Prospectus on Form S-4
o the Commission's declaration of effectiveness of
the Company's Registration Statement on Form S-4
relating to the proposed debt exchange offer
o the expiration of the applicable waiting period
under the HSR Act
o approval by FERC of LILCO's application under
Section 205 of the Federal Power Act
o approval by FERC of LILCO's application under
Section 203 of the Federal Power
Act for the Combination
o approval by the NRC of LILCO's application under
the Atomic Energy Act
- --------
** Filed Herewith.
- 31 -
<PAGE>
o the issuance by the Internal Revenue Service of
private letter rulings requested by the parties
o the Commission's approval of this Application.
Consummation of any Transaction will not result in changes in the operations of
any public utility system owned by LILCO or Brooklyn Union 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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<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this amendment to be signed on
its behalf by the undersigned thereunto duly authorized.
BL HOLDING CORP.
By: LONG ISLAND LIGHTING COMPANY
By: /s/ Anthony Nozzolillo
--------------------------
Name: Anthony Nozzolillo
Title: Senior Vice President - Finance and
Chief Financial Officer
By: KEYSPAN ENERGY CORPORATION
By: /s/ Vincent D. Enright
----------------------
Name: Vincent D. Enright
Title: Senior Vice President, Chief Financial
Officer and Chief Accounting Officer
Date: May 12, 1998
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<PAGE>
D-2.2
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman; Vicky A. Bailey, William L.
Massey, Linda Breathitt, and Curt Hebert, Jr.
Long Island Lighting Company
Docket No. EC97-45-000
ORDER AUTHORIZING DISPOSITION OF JURISDICTIONAL FACILITIES
(Issued February 12, 1998)
On July 30, 1997, Long Island Lighting Company (LILCO, or Applicant) filed an
application for Commission authorization under section 203 of the Federal Power
Act (FPA) [FN1]to dispose of certain jurisdictional facilities to Long Island
Power Authority (LIPA), a municipal subdivision of the State of New York. LIPA's
acquisition of certain LILCO assets (LILCO/LIPA Transaction) is part of a plan
developed and authorized by the State of New York to restructure LILCO and
provide rate relief to electric consumers on Long Island.
In this order, the Commission finds that the proposed disposition of
jurisdictional facilities will not adversely affect competition, rates or
regulation. This is the first occasion since Order No. 888 [FN2]was issued in
which we have had a public utility seeking to dispose of interstate transmission
facilities, that are subject to open access transmission, to a non-public
utility. We do not believe it is in the public interest to approve this
disposition unless we are assured that the transferred facilities will continue
to be available on a comparable basis to all wholesale market participants. In
this case, LIPA has voluntarily committed to file an open access tariff that
conforms to the provisions of Order Nos. 888 and 888-A. On this basis, we can
approve the proposed disposition. We accept LIPA's voluntary commitment as the
basis for finding that this transaction is consistent with the public interest.
Our approval of the proposed disposition is subject to the outcome of Long
Island Lighting Company (Docket No. ER98-11-000).
Background
Description of the Parties
A. LILCO
LILCO is a combination electric and gas utility company that provides
wholesale and retail electric and gas service to customers on Long Island in the
State of New York. LILCO has no full requirements wholesale customers or
wholesale customers with long-term power purchase contracts. LILCO sells only
limited amounts of short-term economy energy and mutual assistance energy at
wholesale to three municipal electric utilities within its service territory
[FN3]and to other neighboring utilities. LILCO owns 3,978 MW of capacity from
gas and
<PAGE>
oil-fired generating stations located on Long Island. Additionally, LILCO owns
an 18 percent interest (203 MW) in the Nine Mile Point Two Nuclear Power
Station. LILCO provides electric transmission service to NYPA, the Municipal
Distribution Agencies of the Counties of Nassau and Suffolk, New York, and
Consolidated Edison Company of New York, Inc. [FN4]LILCO is also a member of the
New York Power Pool.
On July 16, 1997, the Commission approved a proposed merger between LILCO and
Brooklyn Union Gas Company (Brooklyn Union). Upon consummation of the merger,
LILCO and Brooklyn Union will operate as separate subsidiaries of a new holding
company (HoldCo). [FN5]
B. LIPA
LIPA is a municipal subdivision of the State of New York, created under the Long
Island Power Authority Act of 1986 (LIPA Act) [FN6]solely to acquire LILCO's
securities or assets. As a state agency, LIPA is not a public utility subject to
the Commission's jurisdiction under the FPA. LIPA currently owns no generation,
transmission or distribution assets. In addition, LIPA does not control any
generation capacity under contract, and is not involved in the production,
transportation or sale of natural gas. [FN7]
Under the LIPA Act, LIPA is authorized, among other things, to acquire all or
any part of the securities or assets of LILCO, provided that LIPA first
determines that its rates for a reasonable time after such acquisition will
"result in rates equal to or less than the rates which would result if LILCO
were to continue in operation." [FN8]In addition, LIPA transactions under the
LIPA Act are subject to the jurisdiction of the Public Authorities Control Board
of New York (Control Board). [FN9]
Proposed Transaction
LILCO requests approval for the disposition, through a stock acquisition by
LIPA, of certain jurisdictional facilities (the LILCO/LIPA Transaction),
pursuant to "An Agreement and Plan of Merger By and Among BL Holding Corp., Long
Island Lighting Company, Long Island Power Authority and LIPA Acquisition Corp."
(LIPA Agreement), dated June 26, 1997. [FN10]
The LIPA Agreement provides that several special purpose subsidiaries will be
formed by HoldCo into which certain LILCO assets will be transferred prior to
LIPA's acquisition of LILCO's common stock. The assets include LILCO's non-
nuclear electric generating assets and operations, natural gas assets and
operations and common plant. The subsidiaries will, as applicable, enter into
certain agreements with LIPA which will allow LIPA to make the transition to a
full-service utility providing electric service in LILCO's service territory.
[FN11]
After the transfer of assets to HoldCo's subsidiaries, LIPA will acquire the
remainder of LILCO's assets and liabilities through the acquisition of LILCO's
common stock. [FN12]These acquisitions include LILCO's transmission and
distribution facilities, its 18 percent share in the Nine Mile Point Two nuclear
power plant and associated transmission plant, its power purchase and
transmission contracts, most of its electric regulatory assets, and an
allocation of accounts receivable and other assets and liabilities.
LILCO will then be merged into LIPA Acquisition Corp. (LIPA Sub), a newly-
created subsidiary of LIPA. LILCO, the surviving corporation, will become a
wholly-owned subsidiary of LIPA. As noted above, Brooklyn Union will remain a
separate, indirect subsidiary of HoldCo.
<PAGE>
Its gas distribution facilities will not be affected by the transfer of LILCO's
non-jurisdictional assets to other HoldCo subsidiaries. [FN13]
Upon consummation of the LILCO/LIPA Transaction, LIPA will be substituted as the
wholesale and retail utility service provider on Long Island and will continue
serving LILCO's wholesale customers. Genco, one of the subsidiaries of HoldCo,
will provide jurisdictional electric power sales service to LIPA under the power
sales agreement filed with the Commission by LILCO on October 1, 1997, in Docket
No. ER98-11-000. LILCO's transmission and distribution facilities will be owned
by LIPA and, as such, will no longer be subject to the Commission's section
205/206 jurisdiction. However, LILCO's wholesale sales (as assumed by Genco)
will continue to be subject to the Commission's review. In addition, LIPA has
committed to provide open access transmission consistent with Order Nos. 888 and
888-A and the Commission's decisions on transmission by tax-exempt non- public
utility entities.
Retail services currently provided by LILCO will no longer be regulated by the
Public Service Commission of the State of New York (New York Commission). LIPA
will set the retail rates; however, the LILCO/LIPA Transaction will remain
subject to the approval of the Control Board.
On July 16, 1997, the Control Board approved the LILCO/LIPA Transaction subject
to several conditions. Among the conditions is a requirement that LIPA not
implement an increase in average customer rates exceeding two and one-half
percent over a twelve month period without approval from the New York
Commission. [FN14]LIPA has agreed to that condition.
LIPA also offers a hold-harmless provision for LILCO's current transmission
customers in which it commits to pass savings from the transaction along to
customers and further commits not to increase rates for the first three years
after the consummating the proposed transaction. According to the application,
LIPA will introduce the Long Island Choice Program for retail wheeling shortly
after closing the LILCO/LIPA Transaction and introduce full retail wheeling
within the next ten years. [FN15]
LILCO requests approval of the transaction without a hearing, claiming that the
LILCO/LIPA Transaction will have no adverse effect on competition, rates or
regulation.
Notice of Filing, Interventions and Pleadings
Notice of the application was published in the Federal Register, 62 Fed. Reg.
42,774 (1997), with comments, protests, and interventions due on or before
September 29, 1997.
Timely motions to intervene raising no substantive issues were filed by Brooklyn
Union, NYPA, Consolidated Edison Company of New York, Inc. (ConEd), Citizens
Advisory Panel (Citizens), LIPA, and County of Suffolk, New York (Suffolk
County). Untimely motions to intervene were filed by Suffolk County Electrical
Agency (Suffolk Agency) and the County of Nassau, New York (Nassau County).
Suffolk Agency raised no substantive issues, and Nassau County submitted
supplemental comments in support of the application. [FN16]
Long Island Municipals (LILCO's current wholesale municipal customers) filed a
motion to intervene, protest and request for hearing. They object to LIPA's
acquisition of LILCO's major assets in the face of the lack of competition and
transmission constraints on Long Island and argue, therefore, that the proposed
LILCO/LIPA Transaction should be examined at a hearing.
Consumers and Potential Competitors of LILCO and LIPA (Consumers and
Competitors) [FN17]filed a timely motion to intervene, protest and request for
hearing (Consumers and
<PAGE>
Competitors' Hearing Request). Consumers and Competitors also filed a separate
motion to reject the filing or, in the alternative, stay the proceeding and
consolidate it with an anticipated related filing (Consumers and Competitors'
Motion to Reject). In their Hearing Request, Consumers and Competitors urge the
Commission to reject the LILCO/LIPA Transaction, including the power supply
agreement between LIPA and LILCO that had not yet been filed (but was later
filed in Docket No. ER98-11-000). Consumers and Competitors claim that the
transaction will allow LILCO to foreclose retail and wholesale competition on
Long Island, cause Long Island's retail rates to remain high, and result in lost
tax revenues.
In their Motion to Reject, Consumers and Competitors request that the Commission
reject the application or, in the alternative, stay the proceeding until LILCO
files additional materials in connection with the power supply agreement between
LILCO and LIPA, a forward-looking competitive analysis of the transaction, and
accounting information regarding the assets it is selling to LIPA. Consumers and
Competitors also request that this filing be consolidated with the
then-anticipated FPA section 205 proceeding regarding the power supply agreement
between LILCO and LIPA (later filed in Docket No. ER98-11-000), and set the
consolidated proceedings for hearing.
LILCO and LIPA each filed answers in opposition to Consumers and Competitors'
and Long Island Municipals' various requests for relief.
Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure, 18
C.F.R. s 385.214 (1997), the timely, unopposed motions to intervene of Brooklyn
Union, NYPA, ConEd, Citizens, LIPA, Suffolk County, Long Island Municipals, and
Consumers and Competitors serve to make them parties to this proceeding. We will
grant the untimely motions to intervene of Suffolk Agency and Nassau County, in
light of the interests they represent, the early stage of this proceeding, and
the absence of any prejudice to any party from their participation as parties in
this proceeding. In addition, we find good cause to overcome the general
prohibition on the filing of answers to protests, see 18 C.F.R. s 385.213(a)(2)
(1997), in light of the various representations by LILCO and LIPA in their
answers that assist in our understanding and resolution of the issues raised;
accordingly, we will accept their answers.
B. Standard of Review Under FPA Section 203 and the Merger Policy Statement
1. Statutory Criteria
Section 203 requires Commission authorization before a public utility may: (1)
sell, lease, or otherwise dispose of its jurisdictional facilities; (2) directly
or indirectly, merge or consolidate any part of its jurisdictional facilities
with the jurisdictional facilities of any other person; or (3) purchase,
acquire, or take any security of any other public utility. In this case, the
proposed disposition of LILCO's jurisdictional facilities to LIPA requires our
authorization under section 203 of the FPA. [FN18]
2. The Merger Policy Statement
The Commission's Merger Policy Statement sets forth the criteria and
considerations for evaluating applications under section 203. [FN19]The
Commission examines three factors in analyzing whether a proposed transaction is
consistent with the public interest: the effect on
<PAGE>
competition, the effect on rates, and the effect on regulation. As discussed
below, Applicant has demonstrated that the proposed disposition of
jurisdictional facilities is consistent with the public interest.
C. Evaluation of the Proposed Disposition of Facilities
1. Effect on Competition
We find that the LILCO/LIPA Transaction does not present any horizontal market
power concerns. Currently, LIPA does not own, either directly or through
contract, any electric generation, transmission or local distribution
facilities. Therefore, the acquisition of certain of LILCO's assets will not
result in an increase in concentration in any relevant market. [FN20]
With regard to generation market power, because HoldCo is retaining some of
LILCO's generating assets, the transaction will result in a decrease in
concentration in the short-term energy market (which is often evaluated using
installed capacity as the measure for the short-term energy product).
With regard to transmission market power, the LILCO/LIPA Transaction will not
result in any increase in control over transmission assets because LIPA will own
the same electric transmission facilities that LILCO has owned in its electric
service territory. [FN21]Further, LIPA commits to providing open access
transmission under a tariff that substantially conforms to that provided under
Order Nos. 888 and 888-A, consistent with the Commission's rulings regarding
non-public utility entities. [FN22]Therefore, the proposed LILCO/LIPA
Transaction will have no effect on transmission market power. [FN23]
We have also concluded that the LILCO/LIPA Transaction poses no vertical market
power concerns. According to the application, LILCO will transfer its natural
gas distribution facilities to GasCo, a newly-formed subsidiary of HoldCo, prior
to LIPA's acquisition of LILCO. [FN24]As noted above, LIPA owns no natural gas
distribution facilities or firm capacity rights on pipelines. Thus, the proposed
transaction will not result in an increase in vertical market power.
2. Effect on Rates
The Merger Policy Statement explains that the Commission's primary focus
regarding the effects of a section 203 transaction on rates is ratepayer
protection. The Merger Policy Statement also describes various commitments which
may, in particular cases, be an acceptable means of protecting ratepayers, such
as hold-harmless provisions, open seasons for wholesale customers, rate freezes,
and/or rate reductions. [FN25]As discussed below, we believe that the LILCO/LIPA
Transaction provides commitments that should provide adequate protection for
ratepayers.
In this case, LIPA proposes a hold-harmless provision for LILCO's current
transmission customers under which it commits not to increase rates for the
first three years after the proposed transaction and further commits to pass its
savings from the transaction along to customers. LIPA will assume LILCO's
existing contracts for wholesale transmission service and will carry out the
terms and conditions of service set forth in those contracts. [FN26]LIPA also
commits to provide open access transmission service to all wholesale customers
pursuant to an open access tariff that will be consistent with the Commission's
rulings on transmission by tax-exempt non-public utility entities. [FN27]LIPA
will also conduct an "open season" after it assumes responsibility for LILCO's
wholesale transmission service, during which it will offer transmission
customers the choice either to continue to receive transmission service under
their existing contracts or to receive service under the proposed LIPA open
access transmission tariff. [FN28] The application also provides that LIPA will
continue to serve LILCO's existing wholesale
<PAGE>
power customers by assuming LILCO's wholesale power sale contract rights and
obligations in effect as of the closing of the LILCO/LIPA Transaction. LILCO
notes that because all of its wholesale power sales contracts are for short-term
service, its customers effectively already have a continuing open season because
they have a choice of power seller. [FN29]
Regarding retail rates, LILCO states that the Control Board conditioned its
approval of the proposed transaction on: (1) LIPA's agreement not to increase
the average customer rates by more than two and one-half percent over a 12-
month period without approval of the New York Commission following a full
evidentiary hearing; and (2) LIPA's guarantee to reduce retail rates 14 percent
from LILCO's current base rates over the next 10 years. [FN30]In response, LIPA
has agreed to the first condition, and estimates that the LIPA/LILCO Transaction
will reduce retail rates by an average of 17 percent. [FN31]LIPA has also
indicated that it intends to introduce the "Long Island Choice" program for
retail wheeling shortly after closing the LILCO/LIPA Transaction. [FN32]Pursuant
to the Control Board's resolution, LIPA also must establish a retail open access
plan by July 15, 1998, including a timetable for full retail wheeling by 2007.
[FN33]
Consumers and Competitors raise several concerns about the rate aspects of the
transaction. First, they assert that LILCO intends to mark up the acquisition
price of LILCO's transmission and distribution assets by $334 million which will
increase transmission and distribution rates. [FN34]Consumers and Competitors
state that LILCO should be directed to revise its application to include the
accounting treatment for the instant transaction. Second, Consumers and
Competitors claim that, unlike LILCO, LIPA will not be a member of the
Independent System Operator for the New York Power Pool (New York ISO).
Therefore, Consumers and Competitors argue that the LILCO/LIPA Transaction will
result in rate pancaking because transmission users between on-Island and
off-Island facilities will have to pay transmission costs to both the New York
ISO and LIPA. Third, Consumers and Competitors contend that the proposed
transaction will allow LILCO to recover more than 100 percent of its stranded
costs associated with the sale of the Shoreham nuclear plant and the Nine Mile
Point Two Power Station. They further claim that the instant transaction will
allow LILCO to avoid the payment of accumulated deferred taxes. Finally,
Consumers and Competitors argue that the pending introduction of retail
competition in New York may result in lower rates for customers than will result
from the proposed LILCO/LIPA Transaction. [FN35] The Commission has found no
evidence that LILCO intends to write up the acquisition price of its
transmission and distribution assets. We note in this regard LIPA's
representation that it is acquiring LILCO's stock for slightly less than book
value. [FN36] With respect to the allegations of insufficient accounting for the
transaction, the Commission will direct LILCO to provide the accounting
information for the transfer and disposition of jurisdictional assets defined in
the application. (See infra, at subsection 4.) Consumers and Competitors raise
concerns that LIPA will not be a member of the New York ISO and as a result,
that transmission users will pay multiple transmission rates to access LIPA's
system from points off-Long Island. The Commission has encouraged participation
in regional ISOs. As the Commission stated in Order No. 888, ISOs have the
potential to provide significant benefits to a competitive market, including the
ability to facilitate economically efficient transmission pricing. [FN37]We are
encouraged by LIPA's statement in its reply comments that it is considering
membership in an ISO if one is created. [FN38]With respect to Consumers and
Competitors' concerns regarding rate pancaking, because the New York Power
Pool's proposal to form an ISO is currently pending before the Commission, it is
premature to address those issues
<PAGE>
at this time.
We further find Consumers and Competitors' allegations concerning LILCO's
recovery of stranded costs and payment of accumulated deferred taxes to be
beyond the scope of this proceeding. [FN39]
Finally, we will not entertain Consumers and Competitors' argument that the
introduction of retail competition in New York may result in rates lower than
the rate reduction in the proposed agreement. The New York State legislature
enacted the LIPA Act that is the basis for the transaction at issue in this
proceeding. This transaction has been determined by the State of New York to be
the most appropriate means to restructure LILCO, after protracted evaluation and
investigation. There are no alternative plans that have been advanced by the
State nor any that apparently produce the benefits of the proposed
restructuring. The Commission will not second-guess a state's proposal that
otherwise meets our statutory criteria.
In sum, the Commission believes that the Applicant's proposed ratepayer
protection is adequate and that the proposed transaction will not have an
adverse effect on rates.
3. Effect on Regulation
In this case, it appears that neither state nor federal regulation will be
impaired by approval of the proposed disposition of facilities.
In the Merger Policy Statement, the Commission found that when a state has
authority to act on a section 203 transaction, we ordinarily will not set this
issue for a trial-type hearing. [FN40]The New York legislature and New York
Commission were instrumental in establishing LIPA. The State bodies devised what
they considered to be the best plan to restructure LILCO and provide relief to
ratepayers. The New York State legislature authorized the Control Board to
establish conditions and approval requirements for the proposed transaction. The
Control Board conditioned its approval of the transaction, among other things,
upon the New York Commission's review of any rate increase in excess of two and
one-half percent over a 12-month period. We find that the continued supervision
of and conditions established by the Control Board ensure that state regulatory
authority will not be impaired by virtue of the proposed disposition of
facilities.
With respect to federal regulation, after the transaction, LILCO's existing
wholesale power sales agreements will no longer be subject to the Commission's
review. However, as LILCO has noted, the wholesale power sales subject to the
Commission's jurisdiction may nevertheless actually increase as a result of the
proposed LILCO/LIPA Transaction (due to the long-term sale of power and energy
from Genco to LIPA).
The situation with transmission is somewhat different. LIPA is not a public
utility under the FPA and the transmission facilities it acquires from LILCO in
the proposed disposition will, therefore, not be subject to the Commission's
section 205 and 206 jurisdiction. However, LIPA has committed to file an open
access transmission tariff that conforms to the provisions of Order Nos. 888 and
888-A. We will approve the proposed disposition of facilities based on LIPA's
voluntary commitment to file an open access transmission tariff under the
provisions of Order Nos. 888 and 888-A. Such tariff should be effective as of
the date of the transfer of the facilities. As a result of LIPA's voluntary
commitment, we do not believe that the Commission's regulation will be impaired
as a result of the proposed transaction.
4. Accounting for the Transaction Applicant did not provide accounting
information on the transfer and disposition of assets and liabilities to HoldCo,
HoldCo subsidiaries and LIPA. Applicant is required to submit information
<PAGE>
under the Uniform System of Accounts to record this transaction. We therefore
require LILCO to submit information regarding the transfer of LILCO's assets and
liabilities in accordance with the Uniform System of Account's Electric Plant
Instruction No. 5, and the information required in Account 102, Electric Plant
Purchased or Sold within six months of the transaction.
5. Consolidation and Hearing Issues
Consumers and Competitors and Long Island Municipals request that the proposed
LILCO/LIPA Transaction be consolidated with the proceeding in Docket No.
ER98-11-000 regarding the power sales agreement between LILCO and LIPA, because
these proceedings are closely related. They request that the issues in these
proceedings be set for hearing.
We do not believe that consolidation or a hearing is necessary. While the two
proceedings are clearly related, each is evaluated under different criteria. The
Merger Policy Statement is used as the basis for evaluating this FPA section 203
application, while cost of service and rate design principles are used to
evaluate the power sales agreement under FPA section 205. [FN41]
As noted above, contemporaneously with issuance of the order in this proceeding,
we are issuing an order in Docket No. ER98-11-000 in which we are setting for
hearing the power sales agreement at issue in that proceeding. As discussed
above, consolidation of the two proceedings is unnecessary. However, because the
proceedings are related, our findings in this proceeding remain subject to the
outcome of the proceeding in Docket No. ER98-11-000.
The Commission orders:
(A) Consumers and Competitors' alternative motions to reject, or stay and
consolidate proceedings are hereby denied.
(B) The untimely motions to intervene of Suffolk Agency and Nassau County are
hereby granted.
(C) LILCO's application is hereby approved, based on LIPA's commitment to file
an open access transmission tariff pursuant to Order Nos. 888 and 888-A, as
discussed in the body of this order.
(D) This proceeding is subject to the outcome of the proceeding in Docket No.
ER98-11-000, as discussed in the body of this order.
(E) LILCO is required to submit information regarding the transfer of LILCO's
assets and liabilities in accordance with the Uniform System of Account's
Electric Plant Instruction No. 5, and the information required in Account 102,
Electric Plant Purchased or Sold within six months of the transaction.
(F) The Commission retains authority under section 203(b) of the FPA to issue
supplemental orders as appropriate.
(G) The foregoing authorization is without prejudice to the authority of this
Commission or any other regulatory body with respect to the rates, service,
accounts, valuation, estimates, determinations of cost, or any other matter
whatsoever now pending or which may come before this Commission.
(H) 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.
(I) LILCO should promptly notify the Commission when the proposed disposition
of facilities is consummated.
By the Commission.
( S E A L )
David P. Boergers,
Acting Secretary.
<PAGE>
FN1. 16 U.S.C. s 824b (1994).
FN2. See Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities; Recovery of Stranded
Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed.
Reg. 21,540 (1996), FERC Stats. & Regs. p 31,036 at 31,824-26 (1996), order on
reh'g, Order No. 888-A, 62 Fed. Reg. 12,274 (1997), FERC Stats. & Regs. p 31,048
at 30,413-415 (1997), order on reh'g, Order No. 888-B, 81 FERC p 61,248 (1997),
order on reh'g, Order No. 888-C, 82 FERC p 61,046 (1998).
FN3. LILCO's wholesale municipal customers are the Villages of Freeport,
Greenport, and Rockville Centre (jointly, Long Island Municipals). These three
customers obtain the bulk of their electric service either through their own
generation or from the Power Authority of the State of New York (NYPA).
FN4. Application Vol. I. at 9-10.
FN5. See Long Island Lighting Company (LILCO), 80 FERC p 61,035 (1997), reh'g
pending.
FN6. N.Y. Pub. Auth. Law, ss 1020 et seq. Application Vol. II., Exhibit H,
Article V at 23, and Witness Hulkower Testimony at 2.
FN7. Application Vol. I. at 11.
FN8. Application Vol. I. at 8 and 11.
FN9. The Control Board, among other things, is responsible for approving
LIPA's securities issuances and contracts with a total consideration of more
than $1 million that do not involve LIPA's day-to-day operations. Witness
Hulkower Testimony at 3-4.
FN10. Application Vol. I, Attachment H.
FN11. Witness Madsen Testimony at 6-7, and LILCO's Answer at 2.
FN12. Under the terms of the LIPA Agreement, LIPA will pay approximately
$2.5 billion in cash, and assume, redeem or refinance $3.5 billion in LILCO
debt. The net proceeds to HoldCo will be $1.7 billion. The purchase price is
based on the estimated net book value of the assets to be transferred to LIPA by
virtue of the LILCO/LIPA Transaction. Application Vol. I. at 15.
<PAGE>
FN13. Application Vol. I. at 2-3.
FN14. Witness Hulkower Testimony at 6.
FN15. Application Vol. I. at 28-29.
FN16. The New York State Restaurant Association and the Nassau-Suffolk
Hospital Council, Inc. also submitted comments in support of the LILCO/LIPA
Transaction.
FN17. Consumers and Competitors is comprised of: the Initiative for
Competitive Energy, New York Citizens for a Sound Economy Foundation, New York
Public Interest Research Group, Inc., Public Citizen, CILCORP Inc., Wheeled
Electric Power Competition, and Electric Rate Savers, L.L.C. Consumers and
Potential Competitors later filed a motion to direct that the completed power
supply agreement in Docket No. ER98-11-000 be filed in this proceeding and that
a hearing be conducted on the completed application.
FN18. See LILCO, 80 FERC at 61,074 & n.16.
FN19. Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592, FERC Stats. & Regs. Regulations
Preambles p 31,044 at 30,111 (1996), reconsideration denied, Order No. 592-A, 79
FERC p 61,321 (1997) (Merger Policy Statement).
FN20. After the transaction, separate entities (Genco and LIPA, respectively)
will own LILCO's generating and transmission facilities in its current electric
service territory. Moreover, LIPA, as a state agency, is a not-for-profit entity
and therefore should have no incentive to exercise market power.
FN21. Witness Spann Testimony at 5 and 6.
FN22. Application Vol. I. at 4-5 and 21.
FN23. Consumers and Competitors argue that the power sales agreement between
LILCO and LIPA (filed under FPA section 205 in Docket No. ER98-11-000) will
effectively eliminate competition on Long Island at both the wholesale and
retail levels and raise retail rates. Consumers and Competitors assert that
because retail competition is being initiated in the State of New York, the
Commission should require the filing of a forward-looking competitive analysis
in this proceeding. As discussed below, in an order being issued
contemporaneously with this order, the Commission is setting for hearing the
power sales agreement in Docket No. ER98-11-000. See Long Island Lighting
Company, 82 FERC p ______ (1998).
FN24. Witness Madsen Testimony at 7.
FN25. Merger Policy Statement, FERC Stats. & Regs. at 30,123-24.
<PAGE>
FN26. Witness Hulkower's Testimony at 7, and Application Vol. I. at 6 and
23- 25.
FN27. Witness Madsen's Testimony at 14, and Application Vol. I at 24.
FN28. The application provides that LIPA intends to carry out the mandate of
the Control Board resolution that "[a]ll customer protections existing at the
date of this resolution, at a minimum, must be maintained." The application
further states that LIPA and LILCO are contacting all recent wholesale
transmission customers to assure them that they will not suffer adverse rate
consequences or experience a decrease in their service levels as a result of the
transaction. Witness Hulkower's Testimony at 10-11.
FN29. Application Vol. I. at 24-25.
FN30. Exhibit G, Witness Hulkower's Testimony at 5-6, and Application Vol.
I. at 26.
FN31. Witness Hulkower's Testimony at 5-6, and Application Vol. I. at 25.
The application indicates that savings will result primarily from: (1) LIPA's
issuance of tax-exempt bonds to finance LILCO's acquisition; (2) LIPA's
exemption from federal income taxes; and (3) the settlement of Shoreham property
tax litigation initiated by LILCO against Suffolk County. Witness Hulkower's
Testimony at 4-5.
FN32. Under the program, customers will be able to purchase 50-100 MW of
power from alternative suppliers and receive wheeling for such loads from LIPA.
Application Vol. I. at 28-29.
FN33. Application Vol. I. at 29.
FN34. Consumers and Competitors' Hearing Request at 38-40.
FN35. Id. at 40-47.
FN36. LIPA's Answer to Consumers and Competitors' Hearing Request at 23.
FN37. See Order No. 888, FERC Stats. & Regs. at 31,655.
FN38. LIPA's Answer to Consumers and Competitors' Hearing Request at 23.
FN39. We note that the New York Commission, in a prudence investigation, has
already reviewed LILCO's investment in Shoreham.
FN40. Merger Policy Statement, FERC Stats. & Regs. at 30,125.
FN41. In this regard, we will deny Consumers and Competitors' motion to reject
the filing or in the alternative, stay the proceeding and consolidate it with
the proceeding in Docket No.
ER98-11-000.
<PAGE>
D.3-2
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman; Vicky A. Bailey, William L.
Massey, Linda Breathitt, and Curt Hebert, Jr.
Long Island Lighting Company
Docket Nos. ER98-11-000 and EL98-22-000
ORDER ACCEPTING FOR FILING PROPOSED RATE, INITIATING INVESTIGATION,
ESTABLISHING HEARING PROCEDURES AND REFUND EFFECTIVE DATE, AND
CONSOLIDATING
DOCKETS
(Issued February 12, 1998)
Introduction
Long Island Lighting Company (LILCO) has filed a proposed Power Supply Agreement
(PSA) for the sale of capacity and energy by LILCO, through a yet-to- be formed
generation subsidiary, GENCO, to the Long Island Power Authority (LIPA). [FN1]In
this order, we accept, suspend, make effective subject to refund, and set for
hearing the proposed filing (with an effective date of the date on which service
commences). We also will institute an investigation under section 206 of the
Federal Power Act, 16 U.S.C. s 824e (1994), and establish a refund effective
date.
Background
On July 16, 1997, the Commission issued an order which approved the disposition
of certain jurisdictional facilities as part of the combination of LILCO and the
Brooklyn Union Gas Company (Brooklyn Union). [FN2]In the July 16 order, the
Commission noted that the parties stated that negotiations were underway between
LILCO, Brooklyn Union, and LIPA regarding LIPA's purchase of LILCO's
transmission and distribution system, LILCO's regulatory assets and some or all
of LILCO's generation capacity (LIPA Agreement).
On October 1, 1997, LILCO filed an unexecuted proposed PSA for the sale of
capacity and energy by LILCO, through GENCO, to LIPA. [FN3]LILCO requests waiver
of the prior notice requirement, [FN4]to permit an effective date of April 1,
1998.
Notice of the filing was published in the Federal Register, 62 Fed. Reg. 55,802
(1997), with comments, protests, and interventions due on or before November 4,
1997.
The Public Service Commission of the State of New York (New York Commission)
filed a notice of intervention, challenging the justness and reasonableness of
the proposed rates and requesting an investigation.
A group calling itself the Consumers and Potential Competitors of LILCO and LIPA
(Consumers and Competitors) filed a joint motion to intervene, protest, request
for a hearing and
<PAGE>
motion to consolidate the instant docket with Docket No. EC97-45-000 (LILCO
disposition docket). Consumers and Competitors allege that the proposed rates
are excessive and that there are common issues of rate level and competitive
impact which arise in the instant docket as well as in the LILCO disposition
docket.
LIPA filed a motion to intervene and motion for rejection of the proposed
filing. Alternatively, LIPA seeks summary disposition, a hearing, and the
establishment of a refund period pursuant to section 206.
Brooklyn Union filed a motion to intervene, which raises no substantive
issues. The New York State Restaurant Association (Restaurant Association) filed
a motion to intervene with comments that support the filing. LILCO filed an
answer to LIPA's pleading. While opposing the requests for summary disposition,
rejection, and consolidation, LILCO states that it does not oppose the
establishment of hearing procedures and a refund period pursuant to section 206.
LILCO also filed an answer opposing the Consumers and Competitors' request for
consolidation of the dockets.
The County of Suffolk, New York (Suffolk County) filed a motion to intervene,
protest, and motion to reject. Alternatively, Suffolk County seeks a hearing,
consolidation with the LILCO disposition docket and the institution of a section
206 proceeding. LILCO filed an answer opposing Suffolk County's motion to
intervene as untimely. LIPA also filed an answer to Suffolk County's filing.
LIPA does not oppose the intervention, but it does oppose the request to reject
the filing and the alternative requests for a hearing, for a section 206
investigation and for consolidation of the instant docket with the LILCO
disposition docket. [FN5]
Subsequently, on December 22, 1997, LILCO filed an amendment to the PSA, which
it characterized as a settlement between it and LIPA which resolved all of the
issues between these two parties.
Notice of the amendment was published in the Federal Register, 63 Fed. Reg.
2,972 (1998), with comments, protests, and motions to intervene due on or before
January 20, 1998.
Consumers and Competitors filed comments in opposition. They assert that the
amendment is only between LILCO and LIPA, and does not represent the interests
of the ultimate consumers. Consumers and Competitors point out that the
amendment does not address competition issues. According to Consumers and
Competitors, the amendment still leaves LILCO a substantial competitive
advantage. Consumers and Competitors further allege that LILCO has unreasonably
increased its depreciation rates, that the PSA has an excessive rate of return
on equity, and that LILCO's otherwise uneconomic generating plants will not be
retired because LIPA's purchase of power pursuant to the PSA will subsidize the
plants.
The New York State American Federation of Labor and Congress of International
Organizations, Long Island Federation of Labor (Labor Unions) filed a motion to
intervene and comments supporting the proposed PSA as amended.
The New York Commission filed comments which support the proposed amendment.
LILCO filed an answer to Consumers and Competitors' comments. LILCO maintains
that the proposed amendment resolved all the rate issues raised by LIPA and
Consumers and Competitors. LILCO also points out that Consumers and Competitors
will not be a direct customer of LIPA, thus the retail rates that they will pay
will only be indirectly affected by the PSA.
Discussion
<PAGE>
Procedural Matter
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure, 18
C.F.R. s 385.214 (1997), the timely, unopposed motions to intervene of LIPA,
Consumers and Competitors, Brooklyn Union, Suffolk County, [FN6]Labor Unions,
and the Restaurant Association, and the notice of intervention filed by the New
York Commission serve to make them parties to this proceeding. Motion to Reject
Suffolk County has asked that the filing be rejected. It seeks rejection
arguing that the filing is not consistent with the parties' agreement. Suffolk
County also seeks rejection of the filing because of the improper tying of
variable costs not incurred by LILCO for energy not actually purchased by LIPA,
to the purchase price LIPA pays. Suffolk County also argues that the filing
should be rejected because the tax provisions are inherently unreasonable.
We are not persuaded that the filing should be summarily rejected. We find
that the proposed PSA, as amended, is consistent with the parties' agreement; in
fact, both LILCO and LIPA urge its acceptance. We further find that the variable
cost issue and the tax issue raise factual questions and are best addressed in
the hearing we order below.
Motions to Consolidate
Suffolk County and Consumers and Competitors ask that the instant docket be
consolidated with the LILCO disposition docket. The basis for the requests is
the complex and comprehensive restructuring of LILCO. They allege that the
interrelationships of the various agreements involved in the two dockets that
are the outgrowth of that restructuring require consolidation of the dockets.
We do not believe that the instant docket should be consolidated with the
LILCO disposition docket, which is being acted on contemporaneously with our
order in this docket. [FN7]LILCO's application in the LILCO disposition docket
requests authority to dispose of its transmission facilities and certain
jurisdictional contracts to LIPA. An evaluation of that request does not require
a final determination on the PSA and the proposed rates.
Hearing Issues
LILCO explains that the proposed cost-based formula rate recovers all costs,
except fuel, which will be supplied by LIPA. LILCO provides a projected cost of
service study for 1999 in support of the rates. However, intervenors have raised
factual issues which warrant an evidentiary hearing. In addition, we have
concerns that the proposed formula rate may lack specificity and include
components which generally are not allowed in formula rates. These issues should
also be addressed at hearing.
Suffolk County also seeks a hearing on the issue of whether LIPA should have
bargained for more favorable rates or whether LILCO exercised market power. We
will not institute an investigation into these issues. The Commission does not
investigate whether a customer has bargained for the best deal. See Pennsylvania
Power & Light Company, 23 FERC p 61,325 at 61,716 (1983); Philadelphia Electric
Company, 15 FERC p 61,264 at 61,601 (1981). Furthermore, the Commission does not
examine a seller's market power when considering cost-based rates. See Toledo
Edison Company, 79 FERC p 61,088 at 61,420 (1997), reh'g pending.
Rate Analysis and Hearing Procedures
Our preliminary analysis of the proposed rate indicates that it has not been
shown to be just and reasonable, and may be unjust, unreasonable, unduly
discriminatory or preferential, or otherwise unlawful. As a result, we will
accept the rate for filing, suspend the rate for a nominal period and
<PAGE>
allow the rate to go into effect on the date service commences, subject to
refund, and set the rate for hearing as ordered below. Because the PSA may
ultimately be viewed as a change in rates, we will suspend the proposed rates.
However, because it may ultimately be determined that the PSA between GENCO and
LIPA represents a new service for a new customer, and therefore instead
represents an initial rate, see Southwestern Public Service Company, 72 FERC p
61,104 at 61,559 (1995), reh'g pending, we will suspend the proposed rate for
only a nominal period and allow it to go into effect on the date service
commences, subject to refund. For that same reason, we will also commence an
investigation of the proposed rate under section 206 in Docket No. EL98-22-000,
and establish a refund effective date.
In cases where, as here, the Commission institutes a section 206 investigation
on its own motion, section 206(b) requires that the Commission establish a
refund effective date that is no earlier than 60 days after publication of
notice of the Commission's investigation in the Federal Register, and no later
than five months subsequent to the expiration of the 60- day period. In order to
give maximum protection to consumers, [FN8]we will establish a refund effective
date of 60 days from the date on which notice of our initiation of the
investigation in Docket No. EL98-22-000 is published in the Federal Register if
service has already commenced by that date, or the date when service commences,
but in no event will the refund effective date be later than 5 months subsequent
to the expiration of the 60-day period. [FN9]
Section 206(b) also requires that, if no final decision is rendered in the
Commission's investigation by the refund effective date or by the conclusion of
a 180-day period commencing upon initiation of a proceeding pursuant to section
206, whichever is earliest, the Commission shall state the reasons why it has
failed to do so and shall state its best estimate as to when it reasonably
expects to make such a decision. To implement that requirement, we will direct
the presiding judge to provide a report to the Commission 15 days in advance of
the refund effective date in the event the presiding judge has not by that date:
(1) certified to the Commission a settlement which, if accepted, would dispose
of the proceeding; or (2) issued an initial decision. The judge's report, if
required, shall advise the Commission of the status of the investigation and
provide an estimate of the expected date of certification of an initial decision
or of a settlement.
Because we find that there are common issues of fact and law involved in
Docket Nos. ER98-11-000 and EL98-22-000, we will consolidate the dockets for
purposes of hearing and decision.
The Commission orders:
(A) The motions to reject the filing are hereby denied.
(B) The motions to consolidate the filing with the LILCO disposition docket
are hereby denied.
(C) The proposed PSA, as amended, is hereby accepted for filing, suspended for a
nominal period and allowed to become effective on the date that service
commences, subject to refund.
(D) Pursuant to the authority contained in and subject to the jurisdiction
conferred upon the Federal Energy Regulatory Commission by section 402(a) of the
Department of Energy Organization Act and by the Federal Power Act, particularly
sections 205 and 206 thereof, and pursuant to the Commission's Rules of Practice
and Procedure and the regulations under the Federal Power Act (18 C.F.R.,
Chapter I), a public hearing shall be held in Docket No. ER98-11-000 concerning
the justness and reasonableness of the proposed rate.
<PAGE>
(E) Pursuant to the authority contained in and subject to the jurisdiction
conferred upon the Federal Energy Regulatory Commission by section 402(a) of the
Department of Energy Organization Act and by the Federal Power Act, particularly
section 206 thereof, and pursuant to the Commission's Rules of Practice and
Procedure and the regulations under the Federal Power Act (18 C.F.R., Chapter
I), a public hearing shall be held in Docket No. EL98-22-000 concerning the
justness and reasonableness of the proposed rate.
(F) Docket Nos. ER98-11-000 and EL98-22-000 are hereby consolidated for
purposes of hearing and decision.
(G) A presiding administrative law judge, to be designated by the Chief
Administrative Law Judge, shall convene a prehearing conference, to be held
within approximately fifteen days of the date of this order in a hearing room of
the Federal Energy Regulatory Commission, 888 First Street, N.E. Washington,
D.C. 20426. The presiding judge is authorized to establish procedural dates, and
to rule on all motions (except motions to dismiss) as provided in the
Commission's Rules of Practice and Procedure.
(H) The Secretary shall promptly publish in the Federal Register a notice of
the Commission's initiation of the proceeding in Docket No. EL98-22-000.
(I) The refund effective date in Docket No. EL98-22-000, established pursuant
to section 206(b) of the Federal Power Act, will be 60 days from the date on
which notice of our initiation of the investigation is published in the Federal
Register if service has already commenced by that date, or the date when service
commences, but in no event will the refund effective date be later than 5 month
subsequent to the expiration of the 60-day period.
(J) The presiding administrative law judge shall advise the Commission, no
later than 15 days prior to the refund effective date established in Docket No.
EL98-22-000, in the event that the presiding judge has not by that date
certified to the Commission a settlement, which, if accepted, would dispose of
the proceeding or issued an initial decision, as to the status of the proceeding
and a best estimate when the proceeding will disposed of by the presiding judge.
(K) LILCO shall notify the Commission that service has commenced within 15
days of the date service commences.
(L) LILCO is hereby informed of the following rate schedule:
LILCO GENCO Rate Schedule FERC No. 1
By the Commission.
( S E A L )
David P. Boergers,
Acting Secretary.
FN1. As discussed below, the proposed cost-based formula rate at issue here
will not become effective until service commences.
FN2. Long Island Lighting Company, 80 FERC p 61,035 (1997), reh'g pending
(July 16 Order).
<PAGE>
FN3. LILCO expects to sell its non-nuclear generating capacity to GENCO; its
nuclear generating capacity will be conveyed to LIPA.
FN4. 18 C.F.R. s 35.3 (1997).
FN5. LIPA sought rejection of the original filing. According to LIPA, the
subsequent amendment addressed its concerns so that rejection is no longer
appropriate. In fact, LIPA now supports acceptance of the amendment.
FN6. LILCO's characterization of the filing which it made on December 22,
1997, as a settlement is incorrect. LILCO's resolution of rate issues with LIPA
is a pre-filing agreement between the power seller and its customer that
necessitated an amendment to the pending application. The December 22 filing
thus is properly characterized as an amendment to the original filing, see
generally Cajun Electric Power Cooperative v. Louisiana Power & Light Company,
55 FERC p 61,272 at 61,868-69 (1991), which allows the institution of a new
period for interested persons to intervene and file comments or protests. The
deadline for interventions based on that amendment occurred after Suffolk County
moved to intervene. Thus, Suffolk County's motion to intervene is timely, and
LILCO's objection (on the basis of a lack of timeliness) is of no moment.
FN7. See Long Island Lighting Company, 82 FERC p ______ (1998).
FN8. See, e.g., Canal Electric Company, 46 FERC p 61,153, reh'g denied, 47
FERC p 61,275 (1989).
FN9. We will direct LILCO to notify us that service has commenced within 15
days of the date service commenced.
<PAGE>
CASE 97-M-0567
D-4.2
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
At a session of the Public
Service Commission held in the
City of Albany on February 4, 1998
COMMISSIONERS PRESENT:
John F. O'Mara, Chairman
Maureen O. Helmer
Thomas J. Dunleavy
CASE 97-M-0567 - Joint Petition of Long Island Lighting Company and
The Brooklyn Union Gas Company for Authorization under Section
70 of the Public Service Law to Transfer Ownership to an
Unregulated Holding Company and Other Related Approvals.
ORDER ADOPTING TERMS OF SETTLEMENT
SUBJECT TO CONDITIONS AND CHANGES
(Issued and Effective February 5, 1998)
BY THE COMMISSION:
INTRODUCTION
A settlement filed December 12, 1997 (the Settlement) would merge
The Brooklyn Union Gas Company (Brooklyn Union) and Long Island Lighting Company
(LILCO) by creating a new parent holding company (HoldCo) whose subsidiaries
would include KeySpan Energy Corp. (Brooklyn Union's parent) and LILCO. The new
subsidiaries also would include service companies created to support the
Brooklyn Union and LILCO utility operations. Insofar as necessary to enable
HoldCo and the service companies to conduct their business, Brooklyn Union and
LILCO would be allowed to transfer utility assets to them.
<PAGE>
CASE 97-M-0567
The Settlement was executed by the Association for Energy
Affordability, Brooklyn Union, LILCO, Natural Resources Defense Council, New
York State Consumer Protection Board, staff of the New York State Department of
Public Service (Staff), and Trigen-Nassau Energy Corporation. Under an amendment
executed on or about December 30, 1997 by the above parties and Local 1049,
International Brotherhood of Electrical Workers and Local 101, Transport Workers
Union of America, affiliate companies after the merger either will accept
pre-existing collective bargaining agreements, or will accept restrictions on
layoffs and on the designation of bargaining agents.
On careful review of the Settlement, the comments received, and the
evidence and arguments in this proceeding, we adopt the terms of the Settlement
subject to the modification and clarification set forth below. Subsequent to
this abbreviated order, we shall issue a more comprehensive opinion and order
describing the bases of the decision announced here. The statute of limitations
for filing petitions for rehearing or clarification of our decision will be
deemed to run from the date of issuance of that opinion.
THE SETTLEMENT
The Settlement enables Brooklyn Union and LILCO to
adapt to the emergence of competition in a manner that will provide cost savings
and enhanced choices for customers, stimulate the economy of the combined
companies' service territories, and provide the companies a reasonable
opportunity to earn a fair return on investment in the new competitive
environment.
The Settlement represents a negotiated modification of a merger
proposal filed by Brooklyn Union and LILCO in March 1997. That proposal was the
subject of six public statement hearings in May 1997, each preceded by a Staff
sponsored educational and informational forum. After the Settlement was
submitted in December 1997, parties filed position statements and
<PAGE>
CASE 97-M-0567
testimony supporting or opposing it. The testimony was examined
in evidentiary hearings, which were followed by a round of
briefs.
Our review of this record leads us to conclude that the Settlement's
specified equity return caps for Brooklyn Union, which set the levels at which
earnings will become subject to sharing between customers and shareholders,
should be lowered. Our approval of the Settlement therefore will be conditioned
on the following change. The Settlement (P. V.A.5.j.) provides that, in the case
of Brooklyn Union, excess earnings will be subject to sharing insofar as the
company's actual after-tax return on common equity for a given fiscal year
exceeds a cap level that ranges from 14.0% to 13.25% (depending on the year). We
adopt this provision on the condition that these stated percentages are altered
to define Brooklyn Union's earnings cap as 13.75% for fiscal year 1998; 13.50%
for fiscal years 1999, 2000, and 2001; and 13.25% for the next succeeding fiscal
years thereafter.
In addition, this order will put the companies on notice that we
have identified a potential issue concerning Brooklyn Union's accounting for
pensions and other post- employment benefits (OPEBs) under its June 1996 Holding
Company Agreement (HCA).1 We are directing Staff to review this matter
consistently with the HCA's terms and procedures. Further, in view of this
potential issue, we note for clarification our understanding of the companies'
pension and OPEB funding obligations under the Settlement's rate plans. We
expect Brooklyn Union and LILCO to manage their pension and OPEB programs over
the term of the rate plans in a manner that does not bias the results to the
detriment of customers.
CONCLUSION
--------
1 The HCA is entitled "June 25, 1996 Stipulation and Agreement Resolving
Corporate Structure Issues and Establishing Multi-Year Rate Plan in Case
95-G-0671."
<PAGE>
CASE 97-M-0567
Taking into account our overall responsibility to set just and
reasonable rates and to determine whether a proposed merger is in the public
interest, the companies' statutory burden of proof, and our Settlement
Guidelines,2 and having considered the evidence, comments, and arguments, we
find that the terms of the Settlement, subject to the above described
modification and clarification, are reasonable and in the public interest.
Among other things, these terms, conditions, modification, and
clarification are expected to provide customers bill reductions or credits
averaging 3.00%, 2.47%, and 3.85% respectively for Brooklyn Union gas service,
LILCO electric service, and LILCO gas service. These savings will help retain
and attract businesses and stimulate economic activity in the combined
companies' service territories. Moreover, with the Settlement's framework and
expected competition in the energy services sector, customers can anticipate not
only lower bills but also greater choices among energy providers and services.
The Settlement also protects customers' interests by providing for
sharing of excess earnings; rules and standards governing affiliate transactions
and competitive conduct; and penalty formulas and dividend restrictions to
ensure that the utilities' management remains focused on service quality and
reliability. Additionally, the Settlement provides assistance programs for
low-income gas customers, and other public benefit programs. The amendment to
the Settlement adds provisions to safeguard the interests of Brooklyn Union's
and LILCO's employees. The Settlement terms also provide a sound response to
environmental concerns during the transition to a fully competitive market.
Accordingly, the Settlement's terms are adopted in their entirety
subject to the modification and clarification described above, and they are
incorporated by reference into this
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2 Cases 90-M-0255 ET AL., PROCEDURES FOR SETTLEMENTS AND STIPULATION
AGREEMENTS, Opinion No. 92-2 (issued March 24, 1992), Appendix B, p. 8.
<PAGE>
CASE 97-M-0567
order. Inasmuch as the terms of the Settlement are interrelated, as are the
provisions of this order, if any term, condition, change, or clarification is
modified, vacated, or otherwise materially affected by judicial review, we may
re-examine our entire decision.
THE COMMISSION ORDERS:
1. The terms of the Settlement Agreement (Settlement) filed in this
proceeding December 12, 1997, including the amendment executed on or about
December 30, 1997, modified and clarified as described above, are adopted in
their entirety and are incorporated as part of this order.
2. Long Island Lighting Company (LILCO) is directed to file, no
later than the issuance date of this order, to become effective on that same
date, such tariff amendments as are necessary to effectuate the immediate rate
reductions under the LILCO gas rate plan contemplated by the Settlement as
adopted.
3. LILCO shall serve copies of its filing upon all parties to this
proceeding. Any comments on the filing must be received at the Commission's
offices within ten days of service of the company's proposed amendments. The
amendments shall not become effective on a permanent basis until approved by the
Commission. The requirement of ss.66(12) of the Public Service Law that
newspaper publication be completed prior to the effective date of the proposed
amendments is waived, provided that LILCO shall file with the Commission, no
later than March 19, 1998, proof that a notice to the public of the changes
proposed by the amendments and their effective date has been published once a
week for four successive weeks in a newspaper having general circulation in the
area affected by the amendments.
4. Brooklyn Union and LILCO must submit a written statement of
unconditional acceptance of the conditions, changes, and clarification contained
in this order, signed and acknowledged by a duly authorized officer of each of
the two companies, by February 11, 1998. If such acceptance of this
<PAGE>
CASE 97-M-0567
order is not so filed, the adoption of the terms of the Settlement may be
revoked. This statement should be filed with the Secretary of the Commission and
served on all parties in this proceeding.
5. This proceeding is continued.
By the Commission,
(SIGNED)
JOHN C. CRARY
Secretary
<PAGE>
CASE 97-M-0567
D-4.3
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
At a session of the Public Service
Commission held in the City of
Albany on January 21, 1998
COMMISSIONERS PRESENT:
John F. O'Mara, Chairman
Maureen O. Helmer
Thomas J. Dunleavy
CASE 97-M-0567 - Joint Petition of Long Island Lighting Company and The Brooklyn
Union Gas Company for Authorization under Section 70 of the Public Service
Law to transfer ownership to an unregulated holding company and other
related approvals.
ORDER ADOPTING NEGATIVE DECLARATION
(Issued and Effective January 29, 1998)
BY THE COMMISSION:
BACKGROUND AND DESCRIPTION OF THE ACTION
This proceeding commenced upon the filing on March 13, 1997 of a "Joint
Petition" by The Brooklyn Union Gas Company (Brooklyn Union) and Long Island
Lighting Company (LILCO) for authorization under Section 70 of the Public
Service Law to transfer ownership to an unregulated holding company and other
related approvals. Amendments were made to the Joint Petition dated May 15, 1997
and July 7, 1997. Finally, a Settlement Agreement in this proceeding was
executed on December 10, 1997 by Brooklyn Union, LILCO, Staff and other parties
(hereinafter "Settlement"). The Settlement was filed with the Commission on
December 12, 1997.
The Joint Petition and Settlement provide a proposed framework for
the business combination of LILCO and KeySpan Energy Corp. (KeySpan) - -
Brooklyn Union's parent company - - in a holding company form to be effectuated
in a share exchange between the new holding company (HoldCo) and LILCO, and a
merger
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<PAGE>
CASE 97-M-0567
between KeySpan and a to-be-formed subsidiary of HoldCo, such that LILCO and
KeySpan become subsidiaries of HoldCo. The combination of Brooklyn Union and
LILCO proposes to enable the consolidation and integration of similar functions
and processes and create opportunities for cost reduction or cost avoidance,
such as the elimination of duplicative functions and positions, streamlining
corporate activities, aggregating purchases of goods and services and avoiding
planned capital expenditures. The proposed Settlement contains a number of
safeguards related to cost allocation, affiliate transactions, the separation of
the operations of unregulated affiliates from utility operations, access to the
books and records of unregulated affiliates, safety and reliability, and
customer service quality. The Settlement also provides proposed standards of
competitive conduct that govern the relationship among the utility subsidiaries,
the holding company, and energy services affiliates, and a dispute resolution
mechanism.
For LILCO gas customers, the Settlement proposes immediate rate
reductions averaging 3.66% (bill reductions averaging 2.18%) as a result of
negotiated rate-case-type adjustments. Upon consummation of the business
combination, it is proposed that LILCO gas customers will receive additional
rate reductions and estimated fuel savings bringing their total savings pursuant
to the Settlement up to 5.25% in average rate reductions, and 1.74% in average
estimated fuel cost reductions (total bill reductions averaging 3.85%). It is
proposed that the new lower rates will remain in effect until at least November
30, 2000. The proposed Settlement also provides for a limited revenue
reallocation on December 1, 1999 and the imposition of certain new charges.
Upon consummation of the business combination, it is proposed that
LILCO electric customers will receive rate reduction credits and estimated fuel
savings bringing their total savings pursuant to the Settlement to 3.21% in
average rate reduction credits, and 0.63% in average estimated fuel cost
reductions (total bill reduction credits averaging 2.47%).
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<PAGE>
CASE 97-M-0567
Upon consummation of the business combination, it is proposed that
Brooklyn Union customers will receive rate reductions and estimated fuel savings
bringing their savings pursuant to the Settlement to 3.74% in average rate
reductions, and 1.94% in average estimated fuel cost reductions (total bill
reductions averaging 3.00%). It is proposed that the new lower rates will remain
in effect until at least September 30, 2002.
In addition, the Settlement proposes financial disincentives for the
failure to maintain system safety, reliability and customer service; proposes to
establish or maintain low income programs for all gas customers; proposes
environmental and public benefit programs; and proposes the elimination of
appliance repair services.
THE ENVIRONMENTAL ASSESSMENT
Brooklyn Union and LILCO have submitted a full EAF in
this proceeding. The EAF was filed by the Companies on August 20, 1997. Parties
were originally directed to submit comments within 10 business days of the
filing,1 but the comment period was later extended until September 10, 1997.2
Comments were submitted by Natural Resources Defense Council (NRDC) and Citizens
Advisory Panel (CAP). The comments of CAP were joined in by Oil Heat Institute
of Long Island, Inc. (OHILI) and New York Public Interest Research Group
(NYPIRG).
Responses to EAF comments were due on September 19, 1997,3 but subsequent
extensions were granted. Brooklyn Union and LILCO submitted a response dated
September 22, 1997 to the comments of CAP and was granted extensions until
November 6, 1997 to respond to the comments of NRDC.
- --------
1 Case 97-M-0567, Procedural Ruling Concerning SEQRA Compliance (issued
August 14, 1997).
2 Case 97-M-0567, Ruling Granting Third Extension of Case Schedule and EAF
Comments (issued August 14, 1997).
3 Case 97-M-0567, Ruling Granting Third Extension of Case Schedule and EAF
Comments (issued August 14, 1997).
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<PAGE>
CASE 97-M-0567
By letter dated September 26, 1997, Peter Quinn, Intervenor PRO SE
with the Long Island Progressive Coalition, (Peter Quinn) filed a response to
the companies' response to CAP. By letter dated October 14, 1997, Brooklyn Union
and LILCO requested that the Peter Quinn filing be rejected as untimely and
unrelated to the proposed merger.
By a filing dated November 5, 1997, Brooklyn Union and LILCO
submitted a Supplement to the EAF (SEAF) and a response to the comments of NRDC.
By letter dated November 6, 1997, NRDC provided comments regarding the SEAF.
NYPIRG was also granted an opportunity to comment on the SEAF and did so by
letter dated November 26, 1997. Finally, Brooklyn Union and LILCO, by a filing
dated December 8, 1997, responded to NYPIRG's comments on the SEAF.
The EAF and SEAF note that the organizational restructuring
components of the business combination are not expected to have environmental
impacts as there will be no material change in the way the companies' operations
are conducted. Except for common administrative and general functions that will
be performed by the holding company or a service company to realize post-merger
savings, LILCO and Brooklyn Union will continue to conduct their respective
utility operations as they do now.
The EAF and SEAF anticipate that the business combination will not
have a material effect on the demand for electricity and accordingly there will
be no need for new electric transmission or distribution facilities. The level
of electric generation is not expected to increase as a result of the
combination beyond small elasticity effects and growth levels projected by LILCO
without the combination. LILCO's Integrated Electric Resource Plan (IERP)
forecasts are unchanged due to the combination. Pursuant to the Settlement,
LILCO will continue with its Demand Side Management (DSM) and Research and
Development (R&D) programs after the business combination. LILCO's DSM budget
for 1998 will be $10.4 million.
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<PAGE>
CASE 97-M-0567
The merger of Brooklyn Union and LILCO will put the combined company
in a business position that will tend to encourage more aggressive marketing and
use of clean and efficient natural gas on Long Island as a replacement for
dirtier and less efficient fuels. In addition, the Settlement requires positive
environmental initiatives including:
a. the establishment of an internal multi- disciplinary committee to
keep informed of emerging trends regarding renewable and clean
distributed technologies, including fuel cells and photovoltaics
("PVs"), as well as pending and prospective legislation affecting
such energy technologies;
b. the establishment of a fuel cell and PV demonstration program to
further the use of these technologies on Long Island;
c. the continuation of LILCO's DSM and R&D programs and the
continuation of Brooklyn Union's R&D program, including
alternative and renewable energy programs such as fuel cells and
PVs;
d. the establishment of low-income energy efficiency programs for
LILCO including DSM low-income programs and a consumer affairs
program targeted at coordinating energy efficiency packages for
low-income customers;
e. a commitment by LILCO to continue working with the Commission on
various electric ratemaking proposals which will require
evaluation of a number of issues including energy efficiency,
load shifting, fixed price services, performance-based ratemaking
and conservation;
f. a commitment by LILCO to continue with its participation in the
Ozone Transport Region Utility Group as it monitors and
influences industry restructuring developments and the Ozone
Transport Assessment Group process, and to join
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<PAGE>
CASE 97-M-0567
the Ozone Attainment Coalition (a group of Northeast utilities
and environmental advocacy groups, including NRDC) to influence
regulatory policy towards an equitable solution to the attainment
of the present ozone standard in the Northeast and reducing
emissions from upwind sources that are transported into the
Northeast;
g. a commitment by LILCO to encourage the use of cost-effective
energy efficiency and small distributed generating technologies
as alternatives to conventional power generation additions and
new T&D infrastructure;
h. a commitment by LILCO to work with the load serving entities and
others to develop, where feasible, a meaningful and
cost-effective approach to informing customers of the fuel mix
and emission characteristics of the generation sources relied on
by the load serving entity;
i. a commitment by LILCO to participate in utility market
transformation collaboratives including the Consortium for Energy
Efficiency, Northeast Energy Efficiency Partnerships and the
Energy Efficiency Procurement Collaborative; and
j. a commitment by LILCO to support the adoption of improved
building codes and standards as an appropriate mechanism for
improving the energy efficiency of buildings and, in particular,
their use of electricity.
COMMENTS AND RESPONSES REGARDING THE EAF AND SEAF
a. NRDC
NRDC's comments on the original EAF raised concerns that the merger might
reduce Brooklyn Union's commitment to developing fuel cell technology; that the
merger might result in a reduction in LILCO's DSM program, expanding electric
sales with resulting pollution impacts; and that the EAF unjustifiably
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<PAGE>
CASE 97-M-0567
relied on the existing regulatory framework as a guarantee that the merger will
have no environmental impact. Subsequent to the filing of NRDC's comments,
Brooklyn Union and LILCO agreed to a series of mitigation measures and
environmental commitments that satisfied NRDC's concerns. Brooklyn Union and
LILCO adopted the mitigation measures and environmental commitments as part of
their application by submitting them for approval as part of the SEAF.
Thereafter, the mitigation measures and environmental commitments, with minor
modifications resulting from the participation of a broader group of parties,
were also incorporated into the Settlement Agreement presented for the
Commission's approval. NRDC's comments on the SEAF express NRDC's satisfaction
that the issues NRDC raised have been favorably resolved.
b. CAP
CAP's comments argue that the Commission must evaluate the potential
adverse environmental impacts of the contemplated transaction between LILCO and
the Long Island Power Authority (LIPA). CAP argues that the Brooklyn Union/LILCO
proposal makes special provision for arrangements that will occur when LIPA
purchases certain of LILCO's assets after the merger, therefore the merger and
the LIPA transaction are related steps in one process. Consequently, CAP
believes, for SEQRA review purposes these activities must be evaluated together
to avoid improper segmentation.
As to the analysis contained in the EAF, CAP believes that it is
non-substantive and superficial, and that the compliance with environmental laws
described in the EAF does not necessarily meet the standard of reducing
environmental harm contained in SEQRA.
c. PETER QUINN
Peter Quinn's comments insist that, as part of the review of the
environmental impacts of the merger, the Commission examine the consequences of
LIPA's proposal to build a cable under Long Island Sound and the various types
of off-island generation that he alleges will be used, the increased use of
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<PAGE>
CASE 97-M-0567
natural gas instead of oil or coal, LIPA's alleged inability to move to
alternate fuels that have less environmental impacts, the viability of LILCO's
1995 Integrated Resource Plan, and the noncompliance status of the Long Island
region with regard to CO2, CO and NOx gases.
d. NYPIRG
NYPIRG's initial comments regarding the SEAF allege that a provision
in the SEAF that certain environmental commitments would end upon consummation
of the LIPA transaction would allow LILCO to end its DSM program to the
detriment of the environment. The end of the DSM program, NYPIRG argues, will
result in greater electricity consumption, increased consumption of the fossil
fuels that LILCO will burn to generate the electricity, and a greater risk of
respiratory diseases associated with emissions caused by burning those fossil
fuels, and therefore an EIS must be prepared to examine those impacts.
e. BROOKLYN UNION AND LILCO
The Companies assert that the proposed business combination will have no
significant adverse impact on the environment because there is no relevant
change to the Companies' operations as the result of the combination. According
to Brooklyn Union and LILCO, the proposed business combination is separate and
independent of the LIPA transaction. The Companies plainly state that if the
LIPA transaction does not occur, Brooklyn Union and LILCO would nonetheless
proceed with the combination and become subsidiaries of a newly created holding
company. They also note that the EAF voluntarily provides information relating
to the LIPA transaction and demonstrates that the LIPA transaction would be
beneficial to the environment, particularly in light of LIPA's statutory mandate
to promote energy conservation and renewable technologies.
In response to CAP, the Companies complain that CAP's comments lack
facts or data which identify, quantify or qualify the alleged negative impacts
on the environment occasioned by the LIPA transaction.
Regarding NRDC's initial comments, the Companies provide detailed
assurances that they will continue Brooklyn Union's commitment to fuel cells,
its R&D programs and related marketing efforts. Likewise, the Companies pledge
to continue
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<PAGE>
CASE 97-M-0567
LILCO's commitment to DSM programs. While the Companies state that they believe
that mitigation efforts are unnecessary, they nevertheless agreed to a series of
mitigation measures and environmental commitments adopted as part of their
application by submitting them for approval as part of the SEAF. As noted above,
the mitigation measures and environmental commitments, with minor modifications
resulting from the participation of a broader group of parties, were also
incorporated into the Settlement Agreement presented for the Commission's
approval.
Regarding the comments of Peter Quinn, the Companies urge the
Commission to reject them as untimely and unrelated to the proposed merger.
Finally, in response to NYPIRG's comments, the Companies argue that
NYPIRG has fundamentally mischaracterized the SEAF in alleging that the SEAF
permits LILCO to terminate its DSM programs. The Companies assert that nothing
in the SEAF allows or proposes the termination or diminution of LILCO's DSM
obligation under the Commission's rules and regulations which continues
regardless of the SEAF.
DISCUSSION
We have reviewed the Companies' initial and supplemental EAFs, the
comments of the parties, the Companies' responses to the comments of the
parties, and the terms of the Joint Petition, Amendments, and Settlement
Agreement presented
for Commission approval.
a. FUEL CELLS
NRDC initially expressed concern about a potential that the merger
would reduce Brooklyn Union's commitment to developing fuel cell technology.
Brooklyn Union and LILCO agreed to mitigation measures and environmental
commitments including the establishment of an internal multi-disciplinary
committee to keep informed of emerging trends regarding renewable and clean
distributed technologies, including fuel cells, as well as pending and
prospective legislation affecting such energy
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<PAGE>
CASE 97-M-0567
technologies; the establishment of a fuel cell demonstration program to further
the use of these technologies on Long Island; the continuation of Brooklyn
Union's R&D program, including alternative and renewable energy programs such as
fuel cells; and a commitment by LILCO to encourage the use of cost-effective
energy efficiency and small distributed generating technologies as alternatives
to conventional power generation additions and new T&D infrastructure. These
measures satisfied NRDC's concern and demonstrate a continuing commitment to the
development of fuel cell technology by Brooklyn Union and LILCO.
b. DEMAND SIDE MANAGEMENT
NRDC initially expressed concern about a potential that the merger
would result in a reduction in LILCO's DSM program, thereby expanding electric
sales with resulting pollution impacts. Brooklyn Union and LILCO agreed to the
continuation of LILCO's DSM program; the establishment of low-income energy
efficiency programs for LILCO including DSM low-income programs and a consumer
affairs program targeted at coordinating energy efficiency packages for
low-income customers; a commitment by LILCO to continue working with the
Commission on various electric ratemaking proposals which will require
evaluation of a number of issues, including energy efficiency, load shifting,
fixed price services, performance-based ratemaking and conservation; a
commitment by LILCO to encourage the use of cost-effective energy efficiency and
small distributed generating technologies as alternatives to conventional power
generation additions and new T&D infrastructure; a commitment by LILCO to
participate in utility market transformation collaboratives including the
Consortium for Energy Efficiency, Northeast Energy Efficiency Partnerships and
the Energy Efficiency Procurement Collaborative; and a commitment by LILCO to
support the adoption of improved building codes and standards as an appropriate
mechanism for improving the energy efficiency of buildings and, in particular,
their use of electricity. These measures again satisfied NRDC's concern and
demonstrate a continuing commitment to DSM by Brooklyn Union and LILCO. LILCO's
DSM budget for 1998 will be
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<PAGE>
CASE 97-M-0567
$10.4 million. There is no reduced DSM associated with the merger and therefore
no expected incremental increase in demand. There is no logical basis for
NYPIRG's contention that LILCO would somehow be permitted to end its DSM program
to the detriment of the environment.
c. SOUND CABLE AND OFF-ISLAND GENERATION
Peter Quinn's suggestion that the Commission must study
the consequences of an alleged LIPA proposal to build an electric transmission
line under Long Island Sound, and the impact of off- island generation that he
alleges will be used, is without merit. No such proposal is part of the
application before the Commission. LIPA is subject to the Commission's Article
VII jurisdiction and any such proposal would engender a full review when made.
d. INCREASED USE OF NATURAL GAS
As the EAF points out, the operations of the Companies
as to generation sources will remain largely unchanged after the merger. While
Peter Quinn raises a concern regarding the status of the Long Island region with
regard to CO2, CO and NOx gases, he admits that pollution on Long Island is
largely a result of transmigration from other regions. The merger of the
Companies will put them in a business position that will tend to encourage more
aggressive marketing and use of clean and efficient natural gas on Long Island
as a replacement for dirtier and less efficient fuels such as oil and coal,
which to the degree that it is actually accomplished, will be beneficial to the
environment. The EAF demonstrates the Companies' compliance with applicable
clean air standards. Compliance with clean air standards is one measure to
demonstrate that environmental harm is being reduced to the legal level given
the broad framework of federal, state and local regulatory and permitting
requirements. However, Brooklyn Union & LILCO have agreed to significant
additional mitigation measures to promote energy conservation, renewable and
clean distributed technologies. The Companies have also made a commitment to
continue participation in the Ozone Transport Region Utility Group as it
monitors and influences industry
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<PAGE>
CASE 97-M-0567
restructuring developments and the Ozone Transport Assessment Group process, and
to join the Ozone Attainment Coalition to influence regulatory policy towards an
equitable solution to the attainment of the present ozone standard in the
Northeast and reducing emissions from upwind sources that are transported into
the Northeast; and a commitment to work with the load serving entities, Staff
and others to develop, where feasible, a meaningful and cost-effective approach
to informing customers of the fuel mix and emission characteristics of the
generation sources relied on by the load serving entity.
f. ELASTICITY OF ELECTRIC CONSUMPTION
Demand elasticity is a measure of the change in
electric consumption resulting from a change in electric rates. The estimated
bill impact of the Settlement, when implemented, will be to reduce the average
electric bill of LILCO's customers by 2.47%. LILCO estimates in its comments
that a 2% bill reduction will have an elasticity effect increasing electric
consumption by 0.25%. The 2.47% estimated reduction of base electric rates would
have a slightly higher effect, increasing consumption by approximately 0.32%.
Such an elasticity effect is small considering that electric usage during peak
seasons typically swings by 3% or more from year to year1 due to changes in
weather patterns and ambient temperature.
An FGEIS2 was recently prepared in connection with the COB case.3 In
the FGEIS, the PROMOD simulation showed that a 1% annual incremental growth due
to rate reductions associated with competition would result in an incremental
2.9% increase in SO2 emissions, a 5.5% increase in NOx and a 12% increase in CO2
by 2012. The Commission determined that, although the FGEIS showed
- --------
1 For example, although rates remained fairly constant, LILCO's electric
revenues (as a result of higher consumption) were 3% higher in the summer
of 1996 ($1.04B) than in the summer of 1995 ($1.01B) due largely to
variations in weather and ambient temperature.
2 Final Generic Impact Statement for Case 94-E-0552 (Issued
May 3, 1996).
3 Case 94-E-0952, et al., Competitive Opportunities Proceeding.
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<PAGE>
CASE 97-M-0567
the possibility of detrimental incremental air quality impacts "consistent with
the social, economic and other essential considerations, from among the
reasonable alternatives available," the Commission's restructuring policy
"avoids or minimizes adverse environmental impacts to the maximum extent
practical."1 Similar conditions apply to this case. A staff elasticity analysis
(Attachment) shows that the annual average incremental increase in demand (over
the same 15 year modeling period used in the FGEIS) associated with the 2.47%
rate decrease would be 0.18%, much less than the 1% annual incremental growth
evaluated by the Commission in the FGEIS.
g. RELATION TO LIPA TRANSACTION
CAP argued that the Settlement Agreement makes special
provision for arrangements that will occur when LIPA purchases certain of
LILCO's assets after the merger; therefore, CAP said, the merger and the LIPA
transaction are related steps in one process and for SEQRA review purposes must
be evaluated together to avoid improper segmentation. CAP's premise and
characterization of the Settlement Agreement is incorrect. The only substantive
provisions of the Settlement Agreement that contemplate LIPA being the owner of
certain LILCO assets are those regarding what the Settlement Agreement
designates as a "Successor Company." A Successor Company is generally defined by
the Settlement Agreement as any subsidiary that provides goods and services to
LIPA or to a jurisdictional utility. A "Utility ServeCo" is defined as a company
that provides service to a jurisdictional utility or to a Successor Company. The
Settlement Agreement allows Successor Companies to participate in the joint
activities of a Utility ServeCo as if the Successor Company were LILCO or
Brooklyn Union. These provisions do not facilitate or effectuate a part of the
LIPA transaction, but merely prevent the Settlement Agreement from becoming an
impediment to the continued electric ratepayer benefits of the Settlement
Agreement and the
- --------
1 Case 94-E-0952 et al., IN THE MATTER OF COMPETITIVE OPPORTUNITIES REGARDING
ELECTRIC SERVICE, Opinion and Order 96-12 (issued May 20, 1996), pg. 81.
-14-
<PAGE>
CASE 97-M-0567
post-merger savings. If these provisions were not included in the Settlement
Agreement, the LIPA transaction would occur, but LIPA's customers could not
continue to participate in the achievement of post-merger savings. Such an
impediment would obviously not be in the public interest and the provisions
removing such an impediment do nothing to change the character of the approvals
sought in this proceeding that are separate and distinct from the LIPA
transaction.
CONCLUSION
Having examined and considered the relevant environmental impacts and
facts disclosed in the EAF and SEAF, the comments of the parties, the Companies'
responses to the comments of the parties, and the terms of the Joint Petition,
Amendments, and Settlement Agreement presented for Commission approval, we have
determined that when balanced with social, economic and other considerations the
action is one that avoids or minimizes adverse environmental impacts to the
maximum extent practicable, and that the actions proposed in this proceeding
will not have a significant effect on the environment. Further, the Settlement
outlines a positive environmental program that, if approved, would sponsor
renewable and clean distributed energy technologies, and public benefit efforts
in the areas of energy efficiency, low-income energy efficiency and R&D.
The Commission is "Lead Agency" and we have determined that the
actions proposed in this proceeding will not have a significant effect on the
environment, therefore, we shall adopt a negative declaration pursuant to SEQRA
and a Draft Environmental Impact Statement will not be prepared.
THE COMMISSION ORDERS:
1. The Commission is "lead agency" for the purposes of environmental
review of the proposed action in this proceeding.
2. The proposed action is an "unlisted" action.
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<PAGE>
CASE 97-M-0567
3. The proposed action will not have a significant effect on the
environment.
4. The attached negative declaration is adopted and a Draft Environmental
Impact Statement will not be prepared.
5. This proceeding is continued.
By the Commission,
(SIGNED)
JOHN C. CRARY
Secretary
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<PAGE>
CASE 97-M-0567
STATE ENVIRONMENTAL QUALITY REVIEW
NEGATIVE DECLARATION
NOTICE OF DETERMINATION OF NON-SIGNIFICANCE
PROJECT NUMBER CASE 97-M-0567
This notice is issued pursuant to Part 617 of the implementing
regulations pertaining to Article 8 (State Environmental Quality Review Act) of
the Environmental
Conservation Law.
The New York State Public Service Commission, as lead agency, has
determined that the proposed action described below will not have a significant
effect on the environment and a Draft Environmental Impact Statement will not be
prepared.
NAME OF ACTION:
Joint Petition of Long Island Lighting Company (LILCO) and The
Brooklyn Union Gas Company (Brooklyn Union for Authorization under Section 70 of
the Public Service Law to transfer ownership to an unregulated holding company
and other related approvals.
SEQR STATUS: Type 1 ___
Type 2 ___
Unlisted X
CONDITIONED NEGATIVE DECLARATION: ___ Yes
X No
DESCRIPTION OF ACTION:
LILCO and Brooklyn Union seek approval of a Joint Petition and
Settlement proposing a business combination of LILCO and KeySpan Energy Corp.
(KeySpan) - - Brooklyn Union's parent company - - in a holding company form to
be effectuated in a share exchange between the new holding company (HoldCo) and
LILCO, and a merger between KeySpan and a to-be-formed subsidiary of HoldCo,
such that LILCO and KeySpan become subsidiaries of HoldCo. The combination of
Brooklyn Union and LILCO proposes to enable the consolidation and integration of
similar functions and processes and create opportunities for cost reduction or
cost avoidance, such as the elimination of duplicative functions and positions,
streamlining corporate activities, aggregating purchases of goods and services
and avoiding planned capital expenditures. The proposed Settlement contains a
number of safeguards related to cost allocation, affiliate transactions, the
separation of the operations of unregulated affiliates from utility operations,
access to the books and records of unregulated affiliates, safety and
reliability, and customer
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<PAGE>
CASE 97-M-0567
service quality. The Settlement also provides proposed standards of competitive
conduct that govern the relationship among the utility subsidiaries, the holding
company, and energy services affiliates, and a dispute resolution mechanism.
For LILCO gas customers, the Settlement proposes immediate rate
reductions averaging 3.66% (bill reductions averaging 2.18%) as a result of
negotiated rate-case-type adjustments. Upon consummation of the business
combination, it is proposed that LILCO gas customers will receive additional
rate reductions and estimated fuel savings bringing their total savings pursuant
to the Settlement up to 5.25% in average rate reductions, and 1.74% in average
estimated fuel cost reductions (total bill reductions averaging 3.85%). It is
proposed that the new lower rates will remain in effect until at least November
30, 2000. The proposed Settlement also provides for a limited revenue
reallocation on December 1, 1999 and the imposition of certain new charges.
Upon consummation of the business combination, it is proposed that
LILCO electric customers will receive rate reduction credits and estimated fuel
savings bringing their total savings pursuant to the Settlement to 3.21% in
average rate reduction credits, and 0.63% in average estimated fuel cost
reductions (total bill reduction credits averaging 2.47%).
Upon consummation of the business combination, it is proposed that
Brooklyn Union customers will receive rate reductions and estimated fuel savings
bringing their savings pursuant to the Settlement to 3.74% in average rate
reductions, and 1.94% in average estimated fuel cost reductions (total bill
reductions averaging 3.00%). It is proposed that the new lower rates will remain
in effect until at least September 30, 2002.
In addition, the Settlement proposes financial disincentives for the
failure to maintain system safety, reliability and customer service; proposes to
establish or maintain low income programs for all gas customers; proposes
environmental and public benefit programs; and proposes the elimination of
appliance repair services.
LOCATION:
Service territories of The Brooklyn Union Gas Company and Long Island
Lighting Company, New York City (Brooklyn & Queens) and Nassau and Suffolk
counties.
REASONS SUPPORTING THIS DETERMINATION:
1. The organizational restructuring components of the business combination are
not expected to have environmental impacts
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<PAGE>
CASE 97-M-0567
as there will be no material change in the way the Companies' operations
are conducted. Except for common administrative and general functions that
will be performed by the holding company or a service company to realize
post-merger savings, LILCO and Brooklyn Union will continue to conduct
their respective utility operations as they do now.
2. The business combination will not have a material effect on the demand for
electricity and accordingly there will be no need for new electric
transmission or distribution facilities. The level of electric generation
is not expected to increase as a result of the combination beyond small
elasticity effects and growth levels projected by LILCO without the
combination. The estimated bill impact of the Settlement, when implemented,
will be to reduce the average electric bill of LILCO's customers by 2.47%.
LILCO estimates in its comments that a 2% bill reduction will have an
elasticity effect increasing electric consumption by 0.25%. The 2.47%
estimated reduction of base electric rates would have a slightly higher
effect, increasing consumption by approximately 0.32%. Such an elasticity
effect is small considering that electric usage during peak seasons
typically swings by 3% or more from year to year1 due to changes in weather
patterns and ambient temperature. An FGEIS2 was recently prepared in
connection with the COB case.3 In the FGEIS, the PROMOD simulation showed
that a 1% annual incremental growth due to rate reductions associated with
competition would result in an incremental 2.9% increase in SO2 emissions,
a 5.5% increase in NOx and a 12% increase in CO2 by 2012. The Commission
determined that, although the FGEIS showed the possibility of detrimental
incremental air quality impacts "consistent with the social, economic and
other essential considerations, from among the reasonable alternatives
available," the Commission's restructuring policy "avoids or minimizes
adverse environmental impacts to the maximum extent practical."4 Similar
conditions apply to this case. A staff elasticity analysis (Attachment)
shows that the annual average incremental increase in demand (over the same
15 year
- --------
1 For example, although rates remained fairly constant, LILCO's electric
revenues (as a result of higher consumption) were 3% higher in the
summer of 1996 ($1.04B) than in the summer of 1995 ($1.01B) due
largely to variations in weather and ambient temperature.
2 Final Generic Impact Statement for Case 94-E-0552 (Issued May 3,
1996).
3 Case 94-E-0952, et al., Competitive Opportunities Proceeding.
4 Case 94-E-0952 et al., IN THE MATTER OF COMPETITIVE OPPORTUNITIES
REGARDING ELECTRIC SERVICE, Opinion and Order 96-12 (issued May 20,
1996), pg. 81.
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<PAGE>
CASE 97-M-0567
modeling period used in the FGEIS) associated with the 2.47% rate decrease
would be 0.18%, much less than the 1% annual incremental growth evaluated
by the Commission in the FGEIS.
3. The merger of Brooklyn Union and LILCO will put the combined company in a
business position that will tend to encourage more aggressive marketing
and use of clean and efficient natural gas on Long Island as a replacement
for dirtier and less efficient fuels.
4. The proposed Settlement requires positive environmental
initiatives including:
a. the establishment of an internal multi- disciplinary committee to
keep informed of emerging trends regarding renewable and clean
distributed technologies, including fuel cells and photovoltaics
("PVs"), as well as pending and prospective legislation affecting
such energy technologies;
b. the establishment of a fuel cell and PV demonstration program to
further the use of these technologies on Long Island;
c. the continuation of LILCO's DSM and R&D programs and the
continuation of Brooklyn Union's R&D program, including
alternative and renewable energy programs such as fuel cells and
PVs;
d. the establishment of low-income energy efficiency programs for
LILCO including DSM low-income programs and a consumer affairs
program targeted at coordinating energy efficiency packages for
low-income customers;
e. a commitment by LILCO to continue working with the Commission on
various electric ratemaking proposals which will require
evaluation of a number of issues including energy efficiency,
load shifting, fixed price services, performance-based ratemaking
and conservation;
f. a commitment by LILCO to continue with its participation in the
Ozone Transport Region Utility Group as it monitors and
influences industry restructuring developments and the Ozone
Transport Assessment Group process, and to join the Ozone
Attainment Coalition (a group of Northeast utilities and
environmental advocacy groups, including NRDC) to influence
regulatory policy towards an equitable solution to the attainment
of the present ozone standard in the
-4-
<PAGE>
CASE 97-M-0567
Northeast and reducing emissions from upwind sources that are
transported into the Northeast;
g. a commitment by LILCO to encourage the use of cost-effective
energy efficiency and small distributed generating technologies
as alternatives to conventional power generation additions and
new T&D infrastructure;
h. a commitment by LILCO to work with the load serving entities and
others to develop, where feasible, a meaningful and
cost-effective approach to informing customers of the fuel mix
and emission characteristics of the generation sources relied on
by the load serving entity;
i. a commitment by LILCO to participate in utility market
transformation collaboratives including the Consortium for Energy
Efficiency, Northeast Energy Efficiency Partnerships and the
Energy Efficiency Procurement Collaborative; and
j. a commitment by LILCO to support the adoption of improved
building codes and standards as an appropriate mechanism for
improving the energy efficiency of buildings and, in particular,
their use of electricity.
5. The positive environmental initiatives listed above demonstrate a
continuing commitment to the development of fuel cell technology by
Brooklyn Union and LILCO.
6. LILCO's Integrated Electric Resource Plan (IERP) forecasts are unchanged
due to the combination. Pursuant to the Settlement, LILCO will continue
with its Demand Side Management (DSM) and Research and Development (R&D)
programs after the business combination. LILCO's DSM budget for 1998 will
be $10.4 million. The positive environmental initiatives listed above
demonstrate a continuing commitment to DSM by Brooklyn Union and LILCO.
There is no reduced DSM associated with the merger and therefore no
expected incremental increase in demand. LILCO would not be permitted to
end its DSM program to the detriment of the environment.
7. No proposal by the Long Island Power Authority (LIPA) to build an electric
transmission line under Long Island Sound is part of the application
before the Commission. LIPA is subject to the Commission's Article VII
jurisdiction and any such proposal would engender a full review when made.
8. The merger of the Companies will put them in a business position that will
tend to encourage more aggressive marketing and use of clean and efficient
natural gas on Long
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<PAGE>
CASE 97-M-0567
Island as a replacement for dirtier and less efficient fuels such as oil
and coal, which to the degree that it is actually accomplished, will be
beneficial to the environment. The Companies are in compliance with
applicable clean air standards. Compliance with clean air standards is one
measure to demonstrate that environmental harm is being reduced to the
legal level given the broad framework of federal, state and local
regulatory and permitting requirements. However, Brooklyn Union & LILCO
have agreed to significant additional mitigation measures to promote
energy conservation, renewable and clean distributed technologies. The
Companies have also made a commitment to continue participation in the
Ozone Transport Region Utility Group as it monitors and influences
industry restructuring developments and the Ozone Transport Assessment
Group process, and to join the Ozone Attainment Coalition to influence
regulatory policy towards an equitable solution to the attainment of the
present ozone standard in the Northeast and reducing emissions from upwind
sources that are transported into the Northeast; and a commitment to work
with the load serving entities, Staff and others to develop, where
feasible, a meaningful and cost-effective approach to informing customers
of the fuel mix and emission characteristics of the generation sources
relied on by the load serving entity.
FOR FURTHER INFORMATION:
Contact Person: PETER ISAACSON
Address: N.Y.S. Department of Public Service
Three Empire State Plaza
Albany, New York 12223-1350
Telephone Number: (518) 486-2875
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<PAGE>
CASE 97-M-0567
CASE 97-M-0567 ATTACHMENT
Page 1 of 2
BUG/LILCO PRICE ELASTICITY
IMPACT OF POSSIBLE RATE DECREASE
ON SALES GROWTH
The following tables (developed by the Office of Regulatory
Economics) consider both short-run elasticity (the increase in sales which
occurs immediately after the rate reduction) and long-run elasticity (increases
which occur in subsequent years). The first step in the calculation (the second
table) is to determine the weighted average elasticities based on the
elasticities for each sector (industrial, commercial and residential) and the
fraction of the utility's load in each sector (sales weight). Also, the average
price reduction per year is calculated based on the expected rate decrease for
each sector and the sales weight.
The first table then calculates the year by year increase in sales
due to competition (short-run, long-run and total), the cumulative change in
sales, and the annual average rate of sales growth. Residential Delta (Res
Delta) is the possible residential rate reduction considered in the table;
Percent Total Impact per Year (%TI/Yr) is the average price reduction per year
from the second table. The end of the 15 year modeling period is highlighted.
<PAGE>
CASE 97-M-0567
CASE 97-M-0567 ATTACHMENT
Page 2 of 2
LONG ISLAND LIGHTING COMPANY
Sales ch = (price elasticity * % price ch) + lambda * (sales ch lag 1)
%Res Delt %Tl/ Yr Lambda SR Elas LR Elas
2.5 2.47 0.71 0.32 1.12
CUMU-
YEAR SR SALES LR SALES TOTAL LATIVE RATE
1998 0.789 0.000 0.789 0.789 0.79
1999 0.000 0.564 0.564 1.354 0.67
2000 0.000 0.404 0.404 1.757 0.58
2001 0.000 0.289 0.289 2.046 0.51
2002 0.000 0.206 0.206 2.252 0.45
2003 0.000 0.147 0.147 2.400 0.40
2004 0.000 0.105 0.105 2.505 0.35
2005 0.000 0.075 0.075 2.580 0.32
2006 0.000 0.054 0.054 2.634 0.29
2007 0.000 0.039 0.039 2.673 0.26
2008 0.000 0.028 0.028 2.700 0.24
2009 0.000 0.020 0.020 2.720 0.22
2010 0.000 0.014 0.014 2.734 0.21
2011 0.000 0.010 0.010 2.744 0.19
2012 0.000 0.007 0.007 2.752 0.18
WGTED PRICE
IND COM RES AVG PER YR
Sales Weights 0.31 0.23 0.46
SR Price Elas 0.43 0.31 0.25 0.32
LR Price Elas 1.28 1.17 0.99 1.12
2.47 2.47 2.47 2.47 2.47
Lambda (1 - SR Elasticity / LR Elasticity): 0.71
<PAGE>
Exhibit D-4.4
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
OPINION NO. 98-9
CASE 97-M-0567 - Joint Petition of Long Island Lighting Company
and The Brooklyn Union Gas Company for
Authorization under Section 70 of the Public
Service Law to Transfer Ownership to an
Unregulated Holding Company and Other Related
Approvals.
OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT
SUBJECT TO CONDITIONS AND CHANGES
<PAGE>
CASE 97-M-0567
Issued and Effective: April 14, 1998
<PAGE>
CASE 97-M-0567
TABLE OF CONTENTS
Page
APPEARANCES
BACKGROUND 1
Settlement Terms 1
Procedural History 4
CONSIDERATIONS FAVORING THE SETTLEMENT 6
Benefits Generally 6
Merger Criteria 9
OPPOSITION TO THE MERGER 10
Effects on Competition 11
1. Merger Effects 11
2. Recognition of the LIPA Transaction 12
Quantification of Merger-Related Benefits 13
1. Exclusion of "Efficiencies" 14
2. Uncertainty of LIPA Transaction 15
3. LIPA Transaction and Shoreham Risks 15
4. Overstatement of Net Benefit to
Electric Customers 16
Jurisdictional and Enforcement Concerns 18
1. Non-PSC Jurisdiction 18
2. Cost Misallocations; Affiliate Transactions 19
Long Island Progressive Coalition 20
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<PAGE>
CASE 97-M-0567
TABLE OF CONTENTS
Page
OTHER OPPOSITION 20
Synergy Imputations and Earnings 20
Discrimination 22
1. Uncertainty of Electric Rate Reductions 22
2. Preferential Treatment of Gas Customers 23
a. Mismatch of Electric Rate
Costs and Savings 24
b. Merger Costs Reconciliation for Gas Only 25
Fuel Deliveries to Gas-Fired Generators 25
1. Open Access Transportation Tariffs 25
2. Roseton Contract 27
3. Complaints Under Holding Company Agreement 27
Discovery Restrictions 28
Gas Rate Design Changes 29
Service Quality 30
Appliance Repair 31
1. OP's Arguments 31
2. Conclusions as to Appliance Repair 34
Environmental Review 36
CONCLUSION 36
ORDER 37
APPENDICES
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<PAGE>
CASE 97-M-0567
APPEARANCES
FOR DEPARTMENT OF PUBLIC SERVICE STAFF:
Paul Agresta, Esq., Three Empire State Plaza, Albany,
New York 12223-1350
FOR ASSOCIATION FOR ENERGY AFFORDABILITY, INC.:
David Hepinstall, 505 Eighth Avenue, Suite 1801,
New York, New York 10018
FOR THE BROOKLYN UNION GAS COMPANY:
Cullen & Dykman (by Steven L. Zelkowitz, Peter M.
Metzger, Deborah M. Franco and Brenda L. Gill, Esqs.),
177 Montague Street, Brooklyn, New York 11201
FOR CENTRAL HUDSON GAS & ELECTRIC CORPORATION:
Gould & Wilkie (by Robert J. Glasser, William P. Reilly
and Steven V. Lant, Esqs.), One Chase Manhattan Plaza,
58th Floor, New York, New York 10005-1401
FOR CITIZENS ADVISORY PANEL:
Gordian Raacke, Newman Village, Suite G, 2316 Main
Street, P.O. Box 789, Bridgehampton, New York 11932
Ward, Sommer & Moore (by Michael J. Moore, Esq.), Plaza
Office Center, 122 South Swan Street, Albany,
New York 12210
Scott J. Rubin, Esq., Three Lost Creek Drive,
Selinsgrove, Pennsylvania 17870
FOR CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.:
Edwin W. Scott, Marc Richter, Martin F. Heslin and
John F. Gallagher, III, Esqs., 4 Irving Place, New
York, New York 10003-3589
FOR ENRON CAPITAL & TRADE RESOURCES AND CANADIAN MARKETERS:
Bracewell & Patterson (by Tracey L. Bradley, Betsy
Carr, Randall S. Rich, and Charles H. Shoneman, Esqs.),
2000 K Street, N.W., Suite 500, Washington, DC 20006
FOR IN-NOVO ENGINEERING & DEVELOPMENT COMPANY:
Howard Rapaport, 210-09 67th Avenue, Bayside,
New York 11364
<PAGE>
CASE 97-M-0567
-i-
APPEARANCES
FOR INTERNATIONAL BROTHERHOOD OF ELECTRIC WORKERS, LOCAL 1049:
Ralph A. Ranghelli and Ellen A. Balzarini, 745 Kings
Highway, Hauppauge, New York 11788
FOR LOCAL 101, UTILITY DIVISION, TRANSIT WORKERS UNION, AFL/CIO:
Karen S. Burstein, Esq., 258 Broadway, Room 2C,
New York, New York 10007
Kennedy, Schwartz & Cure (by Arthur Z. Schwartz, Esq.)
113 University Place, New York, New York 10003
FOR LONG ISLAND LIGHTING COMPANY:
Leonard P. Novello and Richard A. Visconti, Esq.,
175 East Old Country Road, Hicksville, New York 11801
FOR LONG ISLAND PROGRESSIVE COALITION:
Peter Quinn, 90 Pennsylvania Avenue, Massapequa,
New York 11758
FOR NASSAU COUNTY ASSOCIATION OF PLUMBING, HEATING & COOLING
CONTRACTORS:
Krainin & McKenzie (by Harold L. Krainin, Esq.),
880 Third Avenue, New York, New York 10022-4730
FOR NASSAU COUNTY ATTORNEY'S OFFICE:
Daniel McLane, Esq., One West Street, Mineola,
New York 11501
FOR NATURAL RESOURCES DEFENSE COUNCIL AND PACE ENERGY PROJECT:
Katherine Kennedy, Esq., 40 West 20th Street, New York,
New York 10011
FOR NEW YORK CITY DEPARTMENT OF BUSINESS SERVICES:
Scott Butler, Esq., 110 William Street, 2nd Floor,
New York, New York 10038
FOR NEW YORK CITY LAW DEPARTMENT:
John R. Low-Beer, Esq. 100 Church Street, New York,
New York 10007
<PAGE>
CASE 97-M-0567
-ii-
APPEARANCES
FOR NEW YORK PUBLIC INTEREST RESEARCH GROUP:
Larry Shapiro, Esq., 9 Murray Street, New York,
New York 10007
FOR NEW YORK POWER AUTHORITY:
William Ernsthaft, Esq., 1633 Broadway, New York,
New York 10019
FOR NEW YORK STATE CONSUMER PROTECTION BOARD:
Timothy S. Carey, Ann Kutter, Esq., Kevin M. Bronner,
and Alfred Levine, Esq., 5 Empire State Plaza,
Suite 2101, Albany, New York 12223
FOR NEW YORK STATE DEPARTMENT OF LAW:
Dennis C. Vacco, Attorney General (by Pamela Jones
Harbour, Shirley F. Sarna, Charlie Donaldson and
Richard W. Golden, Esqs.), 120 Broadway, New York,
New York 10271
FOR OIL HEAT INSTITUTE OF LONG ISLAND, ALLIANCE FOR FAIR COMPETITION AND COUNTY
OF SUFFOLK:
Roland, Fogel, Koblenz & Petroccione (by Usher
Fogel, Esq.), One Columbia Place, 5th Floor, Albany,
New York 12207
FOR PUBLIC UTILITY LAW PROJECT OF NEW YORK:
Gerald Norlander, Esq., 90 State Street, Suite 601,
Albany, New York 12207
FOR SEF COGEN CORPORATION:
Cohen, Dax & Koenig (by Richard B. Miller, Esq.),
90 State Street, Suite 1030, Albany, New York 12207
FOR STRATEGIC POWER MANAGEMENT, INC.:
Daniel P. Duthie, Esq., 51 Greenwich Avenue, Goshen,
New York 10924
FOR SUFFOLK COUNTY:
<PAGE>
CASE 97-M-0567
Scott Hempling, Esq., 417 St. Lawrence Drive,
Silver Spring, Maryland 20901
-iii-
APPEARANCES
FOR SUFFOLK COUNTY DEPARTMENT OF LAW:
Robert L. Garfield and Neil Talbot, Esqs.,
Building 158, North Complex, Veterans Memorial Highway,
Hauppauge, New York 11788
FOR TOWN OF BROOKHAVEN:
Murphy, Bartol & O'Brien (by Jeffrey P. Sharkey, Esq.),
22 Jericho Turnpike, Mineola, New York 11501
FOR TRIGEN-NASSAU ENERGY CORPORATION:
King & Spalding (by Bernays T. Barclay, Andrew D.
Schifrin and Wendy B. Warren, Esqs.), 1185 Avenue of
the Americas, New York, New York 10036-4003
<PAGE>
CASE 97-M-0567
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<PAGE>
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
COMMISSIONERS:
John F. O'Mara, Chairman
Maureen O. Helmer
Thomas J. Dunleavy
CASE 97-M-0567 - Joint Petition of Long Island Lighting Company
and The Brooklyn Union Gas Company for
Authorization under Section 70 of the Public
Service Law to Transfer Ownership to an
Unregulated Holding Company and Other Related
Approvals.
OPINION NO. 98-9
OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT
SUBJECT TO CONDITIONS AND CHANGES
(Issued and Effective April 14, 1998)
BY THE COMMISSION:
We recently issued an abbreviated order approving a settlement
(the Settlement) which authorizes The Brooklyn Union Gas Company (Brooklyn
Union) to merge with the Long Island Lighting Company (LILCO) and establishes
rate plans for the two companies.1 This Opinion and Order explains our reasons
for that decision.
BACKGROUND
Settlement Terms
The Settlement was filed December 12, 1997 by Brooklyn Union,
LILCO, staff of the Department of Public Service (Staff), and other parties. It
allows Brooklyn Union and LILCO to merge by creating a new parent holding
company (HoldCo) whose subsidiaries will include KeySpan Energy Corporation (the
parent of Brooklyn Union and other subsidiaries) and LILCO. HoldCo's
- --------
1 Case 97-M-0567, Order Adopting Terms of Settlement Subject to Conditions
and Changes (issued February 5, 1998). The Settlement accompanies this
Opinion and Order as Appendix A.
<PAGE>
CASE 97-M-0567
subsidiaries also will include utility service companies created to provide
services to the utility operations, and corporate service companies that will
support both utility and non-utility operations. Insofar as necessary to enable
HoldCo and the service companies to conduct their business, Brooklyn Union and
LILCO may transfer utility assets to them.
The Settlement provides for rate reductions and credits,
derived from projected savings associated with the merger and from other
ratemaking adjustments. For LILCO gas customers, the Settlement provides base
rate reductions averaging 3.66% (for total bill reductions averaging 2.18%)1
immediately; and, at the time of the merger, additional rate reductions and
estimated fuel cost savings, resulting in total savings of 5.25% in average rate
reductions and 1.74% in average estimated fuel cost savings (for total bill
reductions averaging 3.85%). The new rates will remain in effect at least
through November 2000, subject to revenue-neutral rate design changes in
December 1999.
For LILCO electric customers, at the time of the merger, the
Settlement will provide savings of 3.21% in base rate reduction credits and
0.63% in average estimated fuel cost savings (for total bill reduction credits
averaging 2.47%). These credits will be used whenever new electric rates are
determined for LILCO.
For Brooklyn Union customers, at the time of the merger, the
Settlement will provide savings of 3.74% in base rate reductions and 1.94% in
average estimated fuel cost savings (for total bill reductions averaging 3.00%).
These rates will remain
- --------
1 Each of the base rate reductions described here and in the
succeeding paragraphs is larger, in percentage terms, than the
resulting reduction in bills. The base rate reductions are
diluted in this manner because base rates determine only a
limited portion of the overall bill. A substantial portion of
the bill is determined instead by fuel costs (i.e., gas
----
pipeline and commodity costs, or electric generating fuel
costs). As the text describes, fuel costs are projected to
decrease less, in percentage terms, than base rates.
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<PAGE>
CASE 97-M-0567
in effect at least through September 2002, subject only to revenue-neutral rate
design changes.
The Settlement states that, for Brooklyn Union, earnings
initially would be shared with customers insofar as they exceeded a 14.0% return
on common equity; over six years, the sharing threshold would be lowered
gradually to 13.25%. (As noted below, we have approved the Settlement on
condition that these terms be modified.) For LILCO gas operations, the sharing
threshold will be fixed at 11.1%. For Brooklyn Union as well as LILCO gas, the
first 100 basis points of earnings exceeding the threshold will be shared 60% by
customers and 40% by shareholders; any additional excess beyond 100 basis points
will be shared 50:50.1 The Settlement establishes various mechanisms to secure
the utility companies' financial integrity, including provisions that limit the
proportion of debt in their capital structures and prohibit HoldCo from
investing more than half its capital in non-utility enterprises.
As additional protections for utility customers, the
Settlement includes rules governing cost allocations and transactions among
affiliates; access to the books and records of unregulated affiliates; and
standards of competitive conduct for the utilities, HoldCo, and the service
companies. The rules and standards include (among others) provisions whereby
prices of goods and services bought and sold between regulated and unregulated
affiliates are linked to cost or fair market value; a transfer fee for utility
employees who are moved to unregulated affiliates; restrictions on service
companies' access to utility customer information; mandatory posting of contract
terms (e.g., gas transportation rate agreements) negotiated between regulated
and unregulated affiliates; and rules implementing the
- --------
1 For LILCO electric operations, excess earnings will remain subject to the
company's present electric rate plan reviewed most recently in Case
93-E-1123, Long Island Lighting Company - Rates, Opinion No. 95-8 (issued
July 3, 1995), or whatever formula may be adopted when LILCO electric rates
are next determined.
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<PAGE>
CASE 97-M-0567
regulated companies' withdrawal from the gas appliance repair
business.
To ensure that utility management remains focused on service
quality, the Settlement establishes penalties for inadequacies in reliability
and customer service. Dividend payments may be conditioned on service quality
improvements, if necessary. The Settlement also provides assistance programs for
low-income gas customers, and environmental and public benefit programs. An
amendment to the Settlement, executed on or about December 30, 1997 by the
companies, International Brotherhood of Electrical Workers Local 1049 (IBEW),
Staff (with qualifications), and other parties, essentially preserves
pre-existing collective bargaining agreements or controls the designation of
bargaining agents should the merger occur.1
Procedural History
The Settlement represents a negotiated modification of a
merger proposal filed by Brooklyn Union and LILCO in March 1997. That proposal
was the subject of six public statement hearings at five sites,2 each preceded
by a Staff-sponsored educational and informational forum. About 60 customers
participated in the six events. Matters they addressed included the structure of
the proposed merger, its impact on current and future rates, the degree of
likelihood that customers will benefit from the arrangement, the competitive gas
and electric markets on Long Island, and rate changes upon expiration of any
rate agreements. We also have received letters and petitions, addressing similar
matters as well as competitive issues in the gas appliance repair business.
After the Settlement was submitted in December 1997,
position statements supporting it were filed by Association for
- --------
1 The amendment is set forth as Appendix B.
2 The hearings were held in May 1997 in Hempstead, Riverhead,
Huntington, Brooklyn, and Queens. Administrative Law Judge
William L. Bouteiller presided.
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CASE 97-M-0567
Energy Affordability (AEA), Brooklyn Union and LILCO jointly, IBEW, Natural
Resources Defense Council, New York State Consumer Protection Board (CPB),
Staff, and Trigen-Nassau Energy Corporation (Trigen). "Opposing" statements,
either opposing the Settlement outright or seeking modifications, were filed by
Citizens Advisory Panel (CAP); Long Island Progressive Coalition (LIPC); New
York City Law Department (NYC); New York Public Interest Research Group
(NYPIRG); New York State Department of Law (DOL); Oil Heat Institute of Long
Island, New York Alliance for Fair Competition, and County of Suffolk
(self-styled "the Opposing Parties," hereafter OP); and SEF Cogen Corporation
(SEF Cogen).
In addition to the supporting and opposing statements,
supporting testimony was filed by Brooklyn Union, LILCO, CPB, and Staff; and
opposing testimony was filed by Central Hudson Gas & Electric Corporation
(Central Hudson), OP, and SEF Cogen. Evidentiary hearings followed.1 A single
round of post-hearing briefs was filed by Brooklyn Union and LILCO jointly,
Central Hudson, CAP, CPB, Staff, OP, and SEF Cogen.
In the order approving the Settlement, we required that the
Settlement be modified to lower the thresholds above which Brooklyn Union's
earnings will be subject to sharing with customers. Brooklyn Union and LILCO
accepted that proviso2 and the Settlement took effect accordingly, resulting in
immediate base rate reductions for LILCO gas customers.
- --------
1 The hearings were held in New York City, on January 5 and 6,
1998 before Administrative Law Judge Rafael A. Epstein. The
record comprises 918 transcript pages and 17 exhibits. The
Judge subsequently denied a motion, by the Oil Heat Institute
of Long Island and the New York Alliance for Fair Competition,
to reopen the record. (Procedural Ruling issued February 6,
1998.)
2 Letter dated February 9, 1998 to Secretary Crary from Steven L. Zelkowitz
and Richard A. Visconti, Esqs., for Brooklyn Union and LILCO respectively,
and accompanying affidavits.
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CASE 97-M-0567
CONSIDERATIONS FAVORING THE SETTLEMENT
Benefits Generally
We find that the Settlement satisfies our Settlement
Guidelines1 in that it balances the parties' interests, complies with relevant
public policy, approximates a litigated result,2 and reflects agreement among
ordinarily adversarial parties. More specifically, these conclusions are
justified by the public benefits inherent in the various Settlement provisions
summarized above.3
The companies and other proponents emphasize foremost the
synergies to be expected from the merger and flowed through to customers as base
rate reductions or credits. Following the rate reductions, the Settlement
perpetuates the current freeze on Brooklyn Union's base rates in accordance with
the rate plan initiated in September 1996; and it enhances the September 1996
plan, from the customer's perspective, by adding the provision for sharing of
excess earnings. Similarly, the Settlement
- --------
1 Cases 90-M-0255 et al., Procedures for Settlements and Stipulation
Agreements, Opinion No. 92-2 (issued March 24, 1992), Appendix B, p. 8.
2 SEF Cogen says the proponents have failed to satisfy this
criterion because Staff successfully asserted a privilege
against cross-examination as to what its litigating position
might have been if the Settlement had not superseded the
companies' March 1997 merger proposal. In fact, however, the
companies have addressed the relation between the Settlement
and a litigated outcome. (Companies' Position Statement,
p. 14.) Moreover, the Settlement Guidelines expressly
contemplate that "[s]ince settlements are generally arrived at
through negotiation involving compromise, it is likely that
the true litigating positions of the settling parties will not
have been fully tested" in hearings held, as here, to examine
a settlement's reasonableness. (Cases 90-M-0255 et al.,
-- ---
supra, Opinion No. 92-2, loc. cit.) In any event, the
----- --- ----
Settlement's modifications of the initial March 1997 proposal
adequately indicate the areas where the Settlement proponents
would have challenged the initial proposal.
3 The position statements of the companies, CPB, and Staff, for example,
offer comprehensive summaries of the Settlement's benefits which best
describe why the Settlement is in the public interest.
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CASE 97-M-0567
establishes a LILCO gas rate plan that reduces base rates, generally freezes
them, and initiates a new earnings sharing provision.
The proponents note that the Brooklyn Union gas rate design
methodologies approved in September 1996 will remain unchanged. Meanwhile, the
only upward pressure on LILCO's gas rates--an increase in the residential
minimum charge--will be postponed to December 1999 and will be accompanied by
measures to assist low-income customers. Although the Settlement does not set
electric rates for LILCO, it creates rate reduction credits representing a
guaranteed allocation of merger-related cost savings to be flowed through to
electric customers through rate reductions after the merger.
The Settlement also fortifies the present service quality
incentives, currently consisting of a 40-basis-point penalty for Brooklyn Union,
by extending that formula to LILCO and adding a 12-point penalty related to a
new set of safety and reliability measures.
As the proponents observe, the Settlement provides these
public benefits undiluted by any new risk for customers or the public generally.
For example, since Brooklyn Union and LILCO will remain mutually independent
within the HoldCo structure, their respective business and financial risks will
not spill over from one utility (and its customers) to the other. Similarly, the
Settlement's restrictions on affiliate transactions provide assurance that
customers will not be required to support cross-subsidies or cost misallocations
among subsidiaries.
The Settlement will have environmentally beneficial effects
insofar as it commits the companies to undertake measures in a number of areas,
such as renewable and clean distributed energy technologies, planning, and
pricing; public benefits programs; environmental comparability and disclosure;
market transformation collaborative efforts; and building codes. We
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<PAGE>
CASE 97-M-0567
expect the Settlement also will benefit the environment by encouraging the use
of gas as a substitute for oil.
As a source of protection for customers and shareholders
alike, the proponents cite those Settlement provisions intended to preserve the
merged utilities' financial integrity and their access to capital at reasonable
cost. These include, for example, provisions generally requiring the utilities
to raise their non-equity capital from sources other than HoldCo; requiring
suspension of dividends if the utility's debt ratio exceeds a specified level;
and imposing a 50% limitation on HoldCo's non-utility investments.
As evidence that the Settlement reasonably protects
shareholders' interests, the proponents cite investment bankers' endorsement of
the merger. The companies, for their own part, express an expectation that the
Settlement's rate plans will provide them a reasonable opportunity to recover
their cost of service, including a fair return on investment.
We expect that, as the proponents predict, the combination of
the merged utilities' financial resources and complementary expertise will
facilitate the companies' adaptation to new competitive conditions, thus
benefiting shareholders. The combination also should enable the companies to
provide innovative products and services that might not otherwise exist, to the
benefit of customers. The resulting enhancement of customer choice will provide
an economic stimulus benefiting both companies' service territories and the
customers who reside or do business there. The Settlement also will stimulate
economic development insofar as it enables the utilities and HoldCo to make
energy- and non-energy-related investments that might not otherwise occur in the
service territory.
The broad range of benefits summarized above is asserted
primarily by Brooklyn Union and LILCO, Staff, and CPB. In addition, other
proponents anticipate that the Settlement will provide benefits of particular
interest to them. Thus, AEA endorses the Settlement because it commits LILCO to
an energy
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<PAGE>
CASE 97-M-0567
efficiency program for low-income customers. IBEW expects that the Settlement
will protect its members' job security. NRDC endorses the resolution of the
environmental concerns noted above. Trigen specifically supports the affiliate
transaction provisions, particularly the posting requirement for individually
negotiated transportation contracts. The Settlement's satisfaction of these
diverse objectives reinforces our conclusion that its approval is in the public
interest.
Merger Criteria
In connection with the Settlement Guidelines' criterion that a
settlement should comport with relevant public policy, Staff argues that the
merger satisfies the U.S. Department of Justice's Horizontal Merger Guidelines
(DOJ Guidelines). On the basis of Staff's analysis, we conclude that the merger
is in the public interest as required by Public Service Law (PSL) ss.70.
Pursuant to the DOJ Guidelines, Staff examined (1) whether the
merger will significantly increase market concentration, (2) whether the merger
raises concerns about potential adverse effects on competition, (3) whether
those effects will be prevented by other competitors' entry into the market, and
(4) whether the merger will produce efficiency gains not otherwise achievable.1
For purposes of that analysis, Staff identified the relevant markets as (1)
retail gas; (2) gas in competition with fuel oil; (3) gas in competition with
electricity; (4) gas transportation to electric generators; and (5) electric
generation.
In the first three of these markets, it appears that the
merger will increase market concentration; and that this concentration effect,
as well as the merged companies' vertical control of the gas distribution
system, raises concerns regarding possible adverse effects on competition. As
Staff observes, however, concerns about market concentration are adequately
- --------
1 The fifth factor in the DOJ approach, not relevant here, is whether a firm
would fail absent a merger.
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CASE 97-M-0567
mitigated by the likelihood that competitors will enter these markets.
Competitive issues related to control of the distribution system are addressed
by the Settlement's affiliate transaction rules and standards of competitive
conduct, which prohibit tying of products or services, maintain separate gas
purchasing functions for the utilities' sales versus the unregulated affiliates'
sales, prevent favoritism toward affiliates in prices and terms offered by the
merged companies, and provide for transparency in transportation rates. We
expect these provisions will adequately restrict the merged companies'
opportunities for using their control of the distribution system to benefit
their affiliates at competitors' expense.1
The combined companies' control of the distribution system is
a potential issue in the fourth market (transportation) as well. Here again,
however, the Settlement's rules and standards provide adequate safeguards for
competitors. Additionally, as explained below ("Open Access Transportation
Tariffs"), issues surrounding transportation to non-affiliated electric
generators are being examined in two other proceedings. Finally, the efficiency
gains achievable through the merger should, under the DOJ Guidelines, be deemed
a factor that tends to negate competitive concerns.
In the fifth market (electric generation), we conclude that
the merger has no potential adverse effects on competition, because Brooklyn
Union's divestiture of its electric generating investment will give the merged
companies a combined share of the generation market no greater than LILCO's
present share.
- --------
1 Such abuses arguably might involve commodity pricing in which the lowest
cost gas is arbitrarily allocated to the affiliate; or charging excessive
gas transportation rates to a non-affiliate. The Settlement's rules and
standards are designed to prevent such practices.
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CASE 97-M-0567
OPPOSITION TO THE MERGER
Among the parties listed above as opponents, only some oppose
the Settlement completely, primarily because of its provisions authorizing the
merger. These parties argue generally that the merger will discourage
competition and will undermine our authority in matters requiring continued
regulatory oversight. Meanwhile, all the opponents ask at least that we impose
some limited modifications before approving the Settlement, even if we approve
the merger. As a convenience for discussion purposes, this section of the
opinion addresses the outright opposition to the merger. To the extent possible
(although the distinction is imperfect), the opponents' more limited issues are
reserved for the following section ("Other Opposition," below).
Effects on Competition
OP argues that the Settlement is unreasonable, and does not
satisfy the Settlement Guidelines, because the merger allegedly will stifle
competition.1 OP says this conclusion is dictated by the DOJ Guidelines, which
it claims have been misapplied by Staff. OP's analysis (shared by other parties
as indicated) proceeds along the following lines.
1. Merger Effects
OP and NYPIRG say the merger is anti-competitive because it
allegedly will preclude competition in the market for retail commodity sales of
gas and electricity in the New York City metropolitan area. The merged companies
will attain market dominance unachievable absent the merger, it is argued,
because
- --------
1 In OP's analysis, a settlement that authorized an anti-
competitive merger might not meet the test of furthering state
and Commission policies, which favor competition; or it might
not reasonably balance customer and shareholder interests, if
the rate reduction opportunities lost through impairment of
competition would exceed the rate reductions achieved through
the settlement.
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CASE 97-M-0567
competitors will be excluded by "the marriage of [Brooklyn Union]'s unregulated
marketing expertise and dominant market position with LILCO's $1.7 billion cash
war chest and electric industry knowledge" (Tr. 341). The asserted $1.7 billion
cash infusion to LILCO would result from the proposed stock transaction
(independent of the Settlement) whereby LILCO would transfer assets to the Long
Island Power Authority (LIPA).1
We reject this argument. As discussed above, other
competitors' entry and the Settlement's prohibitions and safeguards will
adequately protect competition in the retail markets. And, notwithstanding
LILCO's possible financial reserves, the relevant markets will be subject to
entry by competitors that will have sufficient assets, expertise, and
opportunities comparable to LILCO's.2
2. Recognition of the LIPA Transaction
A related issue is whether we can or should consider the LIPA
transaction in this docket. The Settlement proponents have argued that the
merits of that agreement are beyond the scope of this proceeding. The opponents
dispute this. They say the LIPA transaction must be considered because it will
accord Brooklyn Union and LILCO an unreasonable competitive advantage by giving
them a monopoly of Long Island's desirable electric generating sites, the most
efficient generating capacity as new plant is installed, and a cash infusion to
support marketing and new plant investment.
The proponents are correct that the intrinsic merits of the
LIPA transaction itself are not properly an issue in this case. At the same
time, we agree with the opponents that we
- --------
1 The arrangement consists of a March 19, 1997 agreement in principle among
Brooklyn Union, LILCO, and LIPA.
2 If OP is correct that a firm's competitive success may depend on its
ability to market retail gas and electricity in combination, marketers
other than Brooklyn Union and LILCO can be expected to pursue that strategy
as well.
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CASE 97-M-0567
cannot proceed as if no LIPA transaction will occur; indeed, the proponents' own
uncontradicted testimony says that it will. We therefore acknowledge not only
that the LIPA transaction may go forward but also, as OP asserts, that it may
affect LILCO's cash position and the nature of the merged companies' future
electric generating facilities.
Nevertheless, for the reasons previously stated, OP's
predictions about the LIPA transaction's effects on Brooklyn Union and
LILCO--even if they prove correct--do not make a case for disapproving the
Settlement or the merger. If anything, the LIPA transaction's enhancement of
LILCO's financial reserves would increase the likelihood that the merged
companies would open a large, untapped market for retail gas sales in their
combined service territories, thus creating enhanced customer choice, an
economic stimulus, and new opportunities for competition.
In a separate argument, OP and NYPIRG claim not only that the
LIPA transaction must be acknowledged in this proceeding; but that the record on
that subject is so deficient that it precludes a decision on the merger of
Brooklyn Union and LILCO. We disagree. The information available concerning the
LIPA transaction may not be adequate under the opponents' theories of the case.
In our analysis, however (as just noted), the opponents' assertions about the
LIPA transaction's effects--even if we accept their accuracy--provide no sound
argument against approval of the merger. Thus, the record adequately supports
our decision regardless of whether parties could have provided additional
predictions about the LIPA transaction.
Quantification of Merger-Related Benefits
Staff describes the Settlement's rate reductions as an
imputation of cost savings made possible by synergies resulting from the merger.
Although Brooklyn Union and LILCO accede to the rate reductions and excess
earnings limitations, they do not accept Staff's forecast of savings. The
opponents, similarly,
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CASE 97-M-0567
claim that Staff has overstated the Settlement's economic benefits; they say
that such benefits do not compare favorably with those to be expected as a
result of competition absent a merger. We disagree with that conclusion.
1. Exclusion of "Efficiencies"
OP argues that the Settlement proponents, in seeking to prove
that the merger's benefits outweigh its anticompetitive effects, have
exaggerated the merger-related savings by crediting the merger with benefits
that in fact would occur regardless of the merger. OP says Brooklyn Union and
LILCO must grow more efficient in response to competition even if they do not
merge.
Thus, according to OP, the proponents have failed to
distinguish between inevitable "efficiencies" and genuinely merger-related
"synergies." OP says the projected cost savings are mere efficiencies--i.e.,
savings that cannot be deemed merger-related--insofar as the proponents
attribute the savings to (a) procurement and management improvements, such as
outsourcing, insourcing, streamlining of corporate activities, and improved
management techniques, which reasonably could be expected to proceed absent a
merger; or (b) gas cost savings, which assertedly would occur in greater
magnitude absent a merger because robust competition would enable the utilities
to acquire adequate supplies without incurring fixed capacity costs.
This line of argument is incorrect for several reasons. First,
even if the savings captured in the Settlement reflect efficiencies that would
have occurred absent the merger, there is no assurance that those efficiencies
would have materialized immediately or even in the next few years. The
Settlement is comparatively advantageous for customers because its rate
reductions capture imputed merger-related savings immediately.
Second, absent the Settlement, efficiencies that might occur
even without a merger would be captured by shareholders rather than customers
until we determined new rates.
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CASE 97-M-0567
Finally, even if OP rejects the proponents' premise that all
the forecast savings represent genuinely merger-related synergies, there is no
dispute that the Settlement's rate reductions are derived from such synergies at
least in part. And, under our interpretation of the DOJ Guidelines, synergies
are only one of a number of elements (described above) tending to negate
concerns about the merger's competitive effects. Therefore the quantification of
savings attributable to merger-related synergies, as distinct from mere
efficiencies, is not as critical an issue as OP assumes.
2. Uncertainty of LIPA Transaction
CAP makes an argument different from OP's, but to the same
effect: CAP says the proponents' forecast of economic benefits from the merger
is exaggerated insofar as the proponents assume completion of a LIPA transaction
that might not actually occur. To the extent that the Settlement's electric rate
reductions are attributable to the LIPA transaction rather than the merger, CAP
observes, they will remain unattainable should the LIPA transaction fail.
CAP's argument is misplaced in this proceeding because it
assumes facts not presented. The LIPA transaction undoubtedly was an element
that the parties had in mind as they negotiated the Settlement. Nevertheless,
the Settlement does not invoke the LIPA transaction as a precondition of the
Settlement's rate plans. And, on the contrary, the companies have stated their
intention to proceed with the merger even if the LIPA transaction does not go
forward.1
Thus, as long as the LIPA transaction remains unresolved,
there would be no purpose in our adopting CAP's "no-LIPA" scenario as a
perspective from which to review the Settlement. Should the LIPA transaction
fail, a party is always free to file a petition demonstrating why the failure is
relevant
- --------
1 LILCO's and Brooklyn Union's Brief, pp. 60-61.
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CASE 97-M-0567
to the matters we will have decided in this case and, if relevant, why some
further Commission action is appropriate.
3. LIPA Transaction and Shoreham Risks NYC takes issue with the
Settlement insofar as it
allows the merger to proceed even if the LIPA transaction does not materialize.
NYC says the merger should instead be contingent on completion of the LIPA
transaction, particularly LIPA's acquisition of the regulatory asset
representing the Shoreham nuclear generating project. Otherwise, NYC argues, the
merged companies' customers may incur financial burdens related to Shoreham.
In response, the proponents note that the Settlement preserves
Brooklyn Union and LILCO as distinct entities for accounting and ratemaking
purposes. The proponents argue that Brooklyn Union customers therefore will
incur none of LILCO's Shoreham-related risks, regardless of whether the LIPA
transaction goes forward and thereby mitigates Shoreham-related burdens for
LILCO customers. They deny NYC's assertion that, despite the formal separation
between the two utilities, an increase in LILCO's risks will translate into
increased capital costs for Brooklyn Union and its monopoly service customers.
Without determining whether the LIPA transaction will occur
and whether its non-occurrence would increase Brooklyn Union's risk in the
merger with LILCO, we do not agree with NYC that such hypothetical issues must
be resolved now. The proponents are correct that the Settlement, on its face,
fully insulates Brooklyn Union customers from Shoreham-related risks. As noted
previously, if the LIPA transaction fails, arguments that the Settlement must
therefore be modified can be considered at that time.
4. Overstatement of Net Benefit to Electric Customers The
Settlement (Appendix O) shows a specified amount of
savings available as electric rate reduction credits for each of
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CASE 97-M-0567
eight rate years (totaling $412.9 million), starting with a rate year that runs
through November 1998 ("rate year 1998"). For that year, the credits shown are
$10.1 million. The same appendix also shows an allocation to electric customers
of $16.7 million in merger-related costs in each of the same eight years. CAP
relies on this presentation to argue that the Settlement overstates, by
approximately $60 million, the total amount of credits that will become
available as rate reductions.1 CAP's argument is mistaken.
One element of the supposed $60 million gap is the $10.1
million of savings for rate year 1998. CAP argues that customers will forfeit
this item if the merger is not effected by the end of rate year 1998. The other
element, $50.0 million, represents three years' worth of the approximately $16.7
million annual allocation of merger costs. CAP counts this as a hidden cost to
customers, in the sense that, if the merger is not effected in rate year 1998,
the $16.7 million annual cost will persist for three years (rate years 2006,
2007, and 2008)2 beyond the eighth and final year shown in Appendix O (viz.,
rate year 2005). CAP observes that Appendix O does not depict 2006, 2007, and
2008, and therefore shows no savings that would mitigate the $50.0 million of
costs implied by Appendix F for the three final years 2006 through 2008.
The $60 million shortfall is wholly illusory. It is simply
incidental to the Settlement proponents' decision, as a matter of convenience,
to tabulate the annual savings for the
- --------
1 CAP also says there is no adequate assurance that any of the credits will
be used to reduce rates. This argument is discussed separately, and
rejected, under the heading "Uncertainty of Electric Rate Reductions"
(below).
2 Appendix F of the Settlement, based on the ten-year
amortization of merger costs prescribed inP. VII.A.2, shows
the annual $16.7 million cost continuing from rate year 1998
through rate year 2007. Again, CAP's calculations are
premised on a possible delay of the merger past 1998. Hence,
CAP's argument envisions the $16.7 million annual cost as
persisting through rate year 2008.
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CASE 97-M-0567
eight years 1998 through 2005 for purposes of Appendix O and to tabulate the
annual costs for the ten years 1998 through 2007 for purposes of Appendix F.
Even if a postponement of the merger prevents the savings from materializing in
1998 as depicted in Appendix O, the $412.9 million savings amount shown in
Appendix O will remain unaffected.1 Similarly, if a delay of the merger prevents
the annual $16.7 million amortization from starting in 1998, the annual amount
shown in Appendix F will remain unchanged despite the postponement of the
starting date. Thus, while CAP is correct that the proponents' attribution of
dollar amounts of costs and savings to specific years should change if the
merger schedule changes, this ultimately would not diminish the total $412.9
million amount of customer savings.
As for Appendix O's omission of out years that are shown in
Appendix F, this likewise has no effect. Appendix O correctly presents the total
amount of savings to be achieved under the Settlement. When electric rates are
set, the savings may be flowed through to customers over eight years as assumed
in Appendix O, or over some shorter or longer period; but such choices will not
affect the validity of Appendix O's calculation of the total savings as $412.9
million.
Jurisdictional and Enforcement Concerns
1. Non-PSC Jurisdiction
The Settlement recites that we are expected to enforce
it, using sanctions up to and including a forced divestiture of
the jurisdictional utility companies. OP raises an issue whether
we could prevent violations of the Settlement if LILCO's electric
operations became subject to the jurisdiction of another agency not party to the
Settlement, presumably LIPA.
- --------
1 Customers are guaranteed the $412.9 million in the form of electric rate
reduction credits if the LIPA transaction proceeds. Absent a LIPA
transaction, we would set LILCO electric rates reflecting the same $412.9
million savings amount, even if a postponement of the merger caused the
savings to occur later than assumed in Appendix O.
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CASE 97-M-0567
Without passing on its merits, we find that OP's argument has
no bearing on the desirability of the Settlement. To the extent that the
Settlement binds LILCO to its provisions governing LILCO's rendition of
regulated gas service (including the provisions concerning competitive conduct
and affiliate transactions), the LIPA transaction will have no jurisdictional
consequences. Conversely, should a LIPA transaction affect our jurisdiction over
LILCO's electric service, that would be entirely a consequence of the LIPA
transaction or the legislation that authorizes it;1 our acceptance or rejection
of the Settlement would not alter the result.
Again, there is no inevitable linkage between this merger and
the LIPA transaction as a practical matter, and certainly no such linkage is
enunciated in the Settlement. Thus, just as the Settlement may be implemented in
the absence of a LIPA transaction, the reverse also is true. OP's concerns about
the jurisdictional consequences or other merits of the LIPA transaction
therefore have no relevance in deciding whether we should approve the Settlement
or the merger.
2. Cost Misallocations; Affiliate Transactions
Another jurisdictional issue is that the Settlement
allows the merged companies to create and obtain support services from various
unregulated service affiliates. OP says, first, that this will undermine our
regulatory efforts, by cloaking opportunities for cost misallocations and other
practices that would disadvantage HoldCo's jurisdictional utility subsidiaries.
Second, OP questions whether we can prevent the gas procurement service company
from assigning the lowest cost gas to LILCO's successor in the electric
generation business, rather than to customers of the merged companies' regulated
retail gas service.
These concerns are legitimate, but they are fully
resolved by the affiliate transaction rules and competitive
- --------
1 Public Authorities Law ss.ss.1040 et seq.
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CASE 97-M-0567
standards written into the Settlement. OP has not suggested why these Settlement
provisions, effective on their face, might nonetheless be defective or
unenforceable.
Long Island Progressive Coalition
LIPC's position statement opposing the Settlement broadly
attacks this proceeding and the merger, criticizing both as elements of a
politically orchestrated program to preserve utility shareholders' interests at
customers' expense throughout New York.
We will not reach the merits of LIPC's statement, because it
was filed simultaneously with post-hearing briefs, nine days after the due date
for position statements. The delay is prejudicial. The Administrative Law Judge
had ruled that post-hearing briefs must be limited to matters that could not
have been anticipated and addressed in earlier pleadings; that replies to
post-hearing briefs would not be authorized; and, therefore, that arguments
exceeding the prescribed scope of the post-hearing brief would be disregarded.
LIPC's statement exceeds the scope of a post-hearing brief as prescribed in
those rulings. Thus, in fairness to the other parties, who relied on the Judge's
directives instead of seeking leave to file replies, LIPC's statement should not
be accepted either as a late filed position statement or in lieu of a
post-hearing brief. In any event, to the extent that the statement goes beyond
political interpretation and raises issues specific to the Settlement (e.g.,
competitive effects and the relevance of the LIPA transaction), these topics are
addressed elsewhere in this opinion.
OTHER OPPOSITION
Synergy Imputations and Earnings
The Settlement's rate reductions and credits capture for
customers all the merger-related cost savings projected by Brooklyn Union and
LILCO, plus 38% of further savings projected
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CASE 97-M-0567
only by Staff and not by the companies. In addition, some of the savings
projected by Staff, if not captured through reductions and credits, will instead
flow to customers through the Settlement's provisions for sharing of excess
earnings.
NYC, apparently under the misapprehension that reductions and
credits will provide customers only 38% of all Staff's projected savings,
criticizes this trade-off. NYC argues that more of the merger-related savings
should be captured through larger rate reductions rather than through sharing of
excess earnings, especially considering that Brooklyn Union's earned return on
equity assertedly will have exceeded 14% in fiscal year (FY) 1997 and 16% in FY
1998. Accordingly, NYC urges that Brooklyn Union customers get a base rate
reduction of 5.25% (rather than the 3.74% prescribed in the Settlement), as do
LILCO gas customers under the Settlement as proposed. Without responding to
NYC's earnings projections specifically, the Settlement proponents urge
rejection of NYC's rate proposal on the ground that it would disturb both the
September 1996 Brooklyn Union rate plan and the integrated package of negotiated
results embodied in the Settlement.
Our own analysis of Brooklyn Union's expected earnings through
FY 2002 is consistent with NYC's projection of earnings exceeding 14% (although
we do not share NYC's expectation of a 16% return, and we expect earnings to
decline as the company exhausts the potential productivity gains characteristic
of its recent, aggressive cost-cutting efforts).1 Rather than respond to these
relatively strong earnings prospects by reducing Brooklyn Union's base rates as
NYC proposes, we conditioned our
- --------
1 In reviewing Brooklyn Union's expense reductions, we observed
that a major component was a 1997 early retirement plan
(implemented under the company's September 1996 rate
settlement) which may have been funded from excess accruals
for pensions and other post-employment benefits (OPEBs).
Therefore, in adopting the Settlement, we notified the
companies that Brooklyn Union's accounting for pensions and
OPEBs is subject to further examination by Staff.
Case 97-M-0567, Order, supra, p. 3.
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CASE 97-M-0567
approval of the Settlement on a modification that would lower the prescribed
thresholds for sharing of excess earnings.
Under the Settlement as proposed, earnings were to have been
shared insofar as they exceeded an after-tax common equity return of 14.0% for
FY 1998 and FY 1999, 13.75% for FY 2000, 13.5% for FY 2001, and 13.25% for FY
2002 and subsequent years. As explained in our order adopting the Settlement, we
conditioned our approval on an adjustment of these caps to 13.75% for FY 1998,
and 13.5% for FY 1999 and 2000 (while accepting, without modification, the
Settlement's formula for FY 2001 and beyond).1 We expect this modification will
preserve the Settlement's sound balance between shareholder and customer
interests, by creating a robust incentive for continued efficiency gains and
reserving for customers much of the resulting savings.
In arriving at the Settlement's rate formula, the parties were
aware that (as one might expect) Brooklyn Union's earnings would be highest in
the initial years of the multi-year rate plan adopted in September 1996.
However, the Settlement benefits customers by adjusting the 1996 rate plan to
capture synergies, in excess of those forecast by the companies. The Settlement
also flows through to customers as much as a 60% share of Brooklyn Union's
excess earnings; the pre-existing rate plan, in contrast, allowed no such
sharing. Thus, the Settlement, after our adjustment of the sharing thresholds,
adequately benefits Brooklyn Union customers without the additional base rate
reduction sought by NYC.
Discrimination
1. Uncertainty of Electric Rate Reductions
OP and CAP claim that the Settlement discriminates
against LILCO's electric customers, in a manner prohibited by PSL ss.ss.65(2)
and (3), because the savings realized through the merger are translated into
rate reductions for the merged
- --------
1 Case 97-M-0567, Order, supra, p. 3.
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CASE 97-M-0567
companies' gas customers but only credits for LILCO's electric customers. The
Settlement provides no assurance, it is argued, that the credits ever will be
flowed through to customers in their electric rates.
This is not a valid criticism. The Settlement expressly
guarantees that the stated amount of credits will be held for the electric
customers' benefit. Absent a LIPA transaction, we inevitably would set electric
rates that would fully reflect the credits. Alternatively, assuming that the
LIPA transaction goes forward, LIPA will set electric rates that reflect the
credits, and indeed the opponents have cited no valid reason that LIPA would
seek to do otherwise.
In addition to CAP's argument, OP's post-hearing brief seems
to claim that the electric rate reductions are uncertain because LIPA, in its
Power Supply Agreement (PSA) with LILCO, uncritically accepted LILCO's estimate
of operating costs; and that these allegedly inflated costs will reduce the
credits actually available to electric customers. In fact, however, the
Settlement's savings reserved for customers are not subject to reduction because
of PSA costs.1
Thus, in either a LIPA or a non-LIPA scenario, the lack of
specific electric rates in the Settlement provides no reason to doubt the
validity of the Settlement's guarantee that the credits will be flowed to
customers when LILCO electric rates ultimately are determined.
- --------
1 Savings under the Settlement are reflected partly as a
reduction in PSA costs to $301.8 million, in lieu of a $327.6
million allowance which LILCO originally sought before the
Federal Energy Regulatory Commission (FERC). The lower
figure, provisionally accepted by the FERC, was negotiated
between LILCO and LIPA. The FERC may further reduce this
item, producing yet more savings for LILCO electric customers.
Thus, LILCO's cost estimates are not uncritically accepted by
LIPA as OP alleges, and they are subject to regulatory review
and adjustment in other proceedings.
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CASE 97-M-0567
2. Preferential Treatment of Gas Customers Aside from the alleged
uncertainty of rate reductions
for electric customers, CAP argues that the Settlement's rate plans irrationally
favor gas customers over electric customers in other respects. We reject these
contentions as well.
a. Mismatch of Electric Rate Costs and Savings
First, CAP notes that the Settlement appendices use
forecasts of gas-related cost savings, which start at their highest level in the
initial years and decline in the out years, to calculate a levelized or constant
annual amount of gas rate savings (Appendices G and K). Further, CAP observes,
the Settlement also uses a projection of electric-related cost savings, in which
the savings start at a low level and increase in the out years, to fund an
increasing annual amount of electric rate savings (Appendix O). CAP says that
gas customers deserve full recognition of the cost savings on a current (rather
than levelized) basis. Meanwhile, CAP advocates rate levelization for electric
customers; otherwise, CAP argues, the Settlement will unjustly reward
shareholders by denying electric customers the full benefit of the Settlement's
potential rate reductions in the early years.
Second, CAP says the Settlement is unfair in assigning
electric customers most of their share of the merger-related costs starting in
the first year although, for the reasons just described, electric customers will
not fully realize their share of the merger-related rate savings until the out
years.
CAP's arguments are incorrect. The Settlement is a complex
assortment of diverse benefits and risks for the various affected parties. In
such circumstances, the levelization of gas rates does not render the Settlement
unreasonable when considered as part of the Settlement's overall balance of
customer and shareholder interests. And, even if CAP were correct in its
allegation of a detriment to electric customers, fairness would
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CASE 97-M-0567
not necessarily be achieved through strictly symmetrical
treatment of gas and electric customers.
More particularly, however, CAP's objection to levelized
savings for gas customers is misguided, because the levelization provides rate
stability. If the rate plan provided gas customers a declining amount of savings
each year as CAP suggests, gas rates would tend to increase accordingly
throughout the Settlement period. Nor does levelization of gas savings enrich
shareholders, as CAP claims. Since the savings recognized in rates are levelized
while the actual savings decline from year to year, the under-recognition of
savings in the early years is fully offset by the corresponding over-recognition
in the later years.
As for CAP's criticism of the electric rates, it is based on
nothing more than the proponents' choice of a presentation method for
illustrative purposes in Appendix O of the Settlement. CAP's advocacy of
levelized electric rates is out of place, since neither the Settlement nor this
proceeding will establish specific electric rates. For the same reason, it is
meaningless whether Appendix O presents electric customers' costs as
front-loaded or levelized for rate setting purposes.
b. Merger Costs Reconciliation for Gas Only CAP says the
Settlement is unfair insofar as it
provides gas customers the benefit of a reconciliation if actual merger-related
costs fall short of the projections used in setting rates, yet provides no
analogous true-up for electric customers. But, again, fairness does not consist
in like treatment of gas and electric customers. The reconciliation for gas
exclusively must be viewed as part of a negotiated settlement package, in which
the respective treatment of gas and electric customers may reasonably differ in
many other respects as well. The balance of interests under the Settlement does
not become suspect merely because there are disparities between its gas and
electric provisions.
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CASE 97-M-0567
Fuel Deliveries to Gas-Fired Generators
1. Open Access Transportation Tariffs
SEF Cogen says it intends to build electric generation plant
in the New York metropolitan area. It therefore testified extensively on its
views, similar to those raised by OP, that the merger creates market power
concerns. Regarding gas-fired electric generation in particular, SEF Cogen says
the merged companies could squeeze competing generators out of the market either
by suppressing the electricity prices that the merged companies offer to end
users, or by forcing competing generators to accept disadvantageous
transportation rates. SEF Cogen adds that the Settlement proponents bear a
comparatively heavy burden of proof because the Settlement here, in contrast to
those in other Competitive Opportunities proceedings, assertedly tends to reduce
competition rather than enhance it.
The Settlement contemplates that gas-fired electric
generators, competing with the electric generation business of LILCO or its
successors, will continue to enjoy open access to transportation of generator
fuel gas as they do now. SEF Cogen says this is inadequate to protect
competition because the Settlement also assumes that transportation rates will
continue to be set through individually negotiated contracts. SEF Cogen asks us
to require instead that the merged companies file tariffs for gas transportation
to electric generating units (of 50 megawatts or greater), with uniform stated
rates based on the marginal cost of service. Pending a cost of service analysis,
SEF Cogen advocates a placeholder rate of 19(cent) per dekatherm, the same as
the transfer price currently imputed or "charged" to LILCO's electric department
by its gas department.
The Settlement proponents respond that non-negotiable tariff
rates would not adequately reflect differences among the costs of serving
different customers, and would not fulfill our intent that transportation rates
be negotiated to maximize utility revenues for the benefit of core customers.
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CASE 97-M-0567
We will not condition our approval of the Settlement as SEF
Cogen requests, because the merits of SEF Cogen's tariff proposals can better be
examined in other proceedings. Some issues raised here are being considered in
another docket, Case 97-G-0388, on a complaint against Brooklyn Union by the SEF
Cogen generating affiliate known as New York City Energy Group (NYCEG). Other,
more general issues related to the pricing of transportation service to electric
generators will be reviewed in a generic proceeding.1 Those proceedings will
adequately address the pricing of transportation to NYCEG, the broader
competitive issues cited by SEF Cogen, and the pricing of gas transferred from a
combination utility's gas department to its electric department.
2. Roseton Contract
Central Hudson asks that approval of the Settlement be
conditioned on an affirmation of the merged companies' obligation to continue
gas deliveries to Central Hudson's Roseton generating station in accordance with
pre-existing agreements. The companies, CPB, and Staff oppose Central Hudson's
request on the ground that it has no relevance to the merger proposal. Indeed,
they say, this is a private contractual dispute and should be resolved through
negotiations or litigation outside this agency.
We agree with the proponents that we should not attempt to
resolve the dispute as part of our evaluation of the Settlement. As Central
Hudson virtually concedes, the company has intervened in an attempt to hold the
merger hostage to a determination of the Roseton controversy. We reject Central
Hudson's proposed linkage between the merger and the Roseton deliveries, because
the facts surrounding Roseton have no relevance to the merits of the merger or
the Settlement.
- --------
1 Case 98-G-0122, Bypass Policy Relating to the Pricing of Gas Transportation
for Electric Generation, Order Instituting Proceeding and Technical
Conference (issued January 30, 1998).
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CASE 97-M-0567
3. Complaints Under Holding Company Agreement
In Case 97-G-0388, as noted, SEF Cogen's NYCEG
affiliate is litigating a complaint against Brooklyn Union concerning gas
transportation service to a proposed independent electric generating station.
The complaint alleges that Brooklyn Union has violated its June 1996 Holding
Company Agreement (HCA).1 SEF Cogen asks us to declare that a violation of the
HCA will constitute a violation of the Settlement.
SEF Cogen says its proposed interpretation is necessary
because the Settlement otherwise might be construed as superseding and negating
the HCA's penalty provisions for purposes of Case 97-G-0388. We find the
requested determination unnecessary, as we do not share SEF Cogen's concern that
the Settlement might retroactively determine the penalties applicable to alleged
violations of the HCA occurring before the merger. As the companies and Staff
assert, an HCA violation that antedates the merger will remain subject to the
penalties available pursuant to the HCA at the time of the violation. SEF Cogen
has not suggested that any express terms of the Settlement require a contrary
result.
Discovery Restrictions
SEF Cogen reports that, in the NYCEG complaint proceeding,
Brooklyn Union has refused to produce certain documents on the ground that they
are held by an unregulated affiliate. SEF Cogen says Brooklyn Union has relied
on the theory that the HCA deems such material to be within Brooklyn Union's
control, and therefore subject to discovery by other parties, only if Staff or
CPB has actually obtained the document. The Settlement adopts the same formula.
SEF Cogen seeks a modification of the Settlement to clarify that all parties may
obtain an unregulated affiliate's documents even if Staff and CPB
- --------
1 The HCA is entitled "June 25, 1996 Stipulation and Agreement
Resolving Corporate Structure Issues and Establishing Multi-
Year Rate Plan in Case 95-G-0671."
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CASE 97-M-0567
have not chosen to do so. The companies and Staff oppose the
request.
We will not require SEF Cogen's proposed modification. We do
not wish to encourage resistance to discovery on purely technical grounds, and
we do not necessarily share the proponents' perception--implicit in the
Settlement, apparently--that the issue of access to an unregulated affiliate's
data is best resolved by allowing discovery by some parties and not others.
Nevertheless, the fact remains that discovery directed to an unregulated
affiliate is not a matter of right under our Rules of Procedure, and therefore
should be available only to the extent that it was negotiated in the Settlement.
Since the Settlement limits such discovery to documents obtained by Staff and
CPB, we will not intercede to loosen a restriction for which the parties
bargained.
Gas Rate Design Changes
DOL advocates modification of the Settlement to completely
preclude bill increases for LILCO gas customers for the duration of the
Settlement. In particular, DOL would strike the provision that allows up to a
10% increase in the minimum monthly charge (to $8.94 from $8.13) in December
1999, and allows further increases if justified by evidence to be offered
thereafter. Alternatively, DOL says the 1999 increase should be contingent on
proof of cost justification, to be submitted by LILCO at that time. In response,
Brooklyn Union and LILCO accuse DOL of overreaching by seeking further
adjustments to the negotiated outcome embodied in the Settlement.
We deny DOL's request. Cost of service studies in past cases,
as well as Staff's uncontradicted testimony here, establish beyond question that
even the 10% increase will not come close to eliminating subsidization of the
minimum charge. For example, in LILCO's last rate case we noted that Staff
estimated the monthly cost of service to minimum use customers as $12.79,
although we limited the increase in the monthly charge to
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CASE 97-M-0567
10% (to $8.13 from $7.37) because of customer impact considerations.1 Similarly,
in this proceeding, the companies initially sought to raise the charge to a
cost-justified level by increasing it 10% annually five times in succession.
We must take this opportunity to move toward elimination of
interclass subsidies, in the interests of economic efficiency and effective
competition. In greater or lesser degree, all service classifications can choose
fuels other than gas, so we should not continue to distort the competition among
fuels by pricing gas service above or below cost. Further, to the extent that
those adversely affected by increasing minimum charges may be low-income
customers, the Settlement offers other benefits in the form of a consumer
education and arrears forgiveness program. This will assist LILCO's most
vulnerable customers in paying their bills and will provide information about
measures to reduce energy bills.
Given the inevitability of a finding that the cost of service
exceeds the $8.94 charge resulting from a single 10% increase, there is no
reason to postpone a decision until 1999. And, since there already is adequate
evidence of cost justification for a 10% increase, DOL's alternative
proposal--to require such evidence later--has no practical significance.
Service Quality
NYC seeks to strengthen the sanctions for substandard gas
service quality, by imposing a penalty of up to 100 basis points of common
equity return instead of the 52-basis-point maximum disallowance permitted under
the Settlement. We find this modification unnecessary. As the companies observe,
service quality has not deteriorated even under Brooklyn Union's present service
quality formula, with its maximum penalty of only 40 basis points. The
Settlement's penalty provisions are adequate,
- --------
1 Case 93-G-0002, Long Island Lighting Co. - Gas Rates, Opinion
No. 93-23 (issued December 23, 1993), mimeo pp. 25-26.
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CASE 97-M-0567
and consistent with penalties available under comparable service quality plans
for other utilities.
Appliance Repair
The Settlement supersedes a plan filed by Brooklyn Union in
June 1997 pursuant to our directive that utilities transfer their appliance
repair business to separate, unregulated subsidiaries.1 Under the Settlement, as
in the June 1997 plan, Brooklyn Union will transfer its appliance repair
business to an affiliate known as KeySpan Appliance Service, Inc. (KAS). OP
acknowledges that our prior directive requires Brooklyn Union to withdraw from
the appliance repair business. Nevertheless, OP objects that the Settlement
arranges the withdrawal in such a way as to hinder competition, by letting KAS
unfairly achieve dominance in the appliance repair market. OP's arguments do not
warrant modification of this aspect of the Settlement.2
1. OP's Arguments
OP says the Settlement's provisions regarding LILCO's repair
service are preferable to those governing Brooklyn Union. Under the Settlement,
LILCO will simply cease its repair service to all customers on the same date,
after giving sufficient notice so customers may consider new arrangements with
other service providers. In LILCO's case, this approach is unobjectionable
- --------
1 Case 93-G-0804, Gas Utility Marketing/Appliance Service Programs, Order
Concerning Gas Appliance and Repair Service (issued April 4, 1997). The
order, and our decision here, do not pertain to minor adjustments or
emergency and safety-related repairs; these remain the utilities'
responsibility.
2 Two of OP's constituents--Oil Heat Institute of Long Island,
and New York Alliance for Fair Competition--petitioned for
rehearing of the February 5, 1998 Order approving the
Settlement (Case 97-M-0567, Order, supra), on grounds related
-----
to the appliance repair issues discussed in the accompanying
text. We have responded to the petition elsewhere.
Case 97-M-0567, Order to Show Cause Regarding Appliance
Service Transfers (issued March 26, 1998); Confirming Order
and Clarification (issued April 9, 1998).
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CASE 97-M-0567
because LILCO (unlike Brooklyn Union) offers no repair contracts that run for a
specified term.
In contrast, Brooklyn Union customers with unexpired service
contracts as of the date of transfer to KAS (no later than June 1998, according
to the Settlement) will get 45 days' notice that they may either (1)
affirmatively cancel the contract and, if the customer wishes, have Brooklyn
Union forward the customer's name to other potential service providers; or (2)
have the contract transferred to KAS, if the customer either chooses that option
affirmatively or does nothing.1 Under option (1), the customer may receive a pro
rata refund of the contract payment, but only if no repair service has occurred
during the contract term.
One controversy arises from Staff's assertion that the
contracts are properly assignable to an unregulated subsidiary because Brooklyn
Union obtained them "under a [regulatory] regime sanctioned by the Commission"
(Tr. 543A). This prompts a counterargument by OP that the contracts are assets
funded by customers, who therefore have a claim upon the contracts' value if the
contracts are transferred. Brooklyn Union and LILCO correctly note that the
dispute between Staff and OP is irrelevant. The contracts' value effectively was
transferred to shareholders when Brooklyn Union's repair service was converted
into an unbundled, below-the-line activity, on terms we reviewed in 1996 when we
approved the HCA.2 Other elements of the HCA, notably the reduction and freeze
of base rates, provided correlative benefits to customers.
Thus, the allocation of the contracts' value between
shareholders and customers was fully resolved long before the
- --------
1 Brooklyn Union also will give the customer a list of providers that have
expressed interest in offering appliance repair service in lieu of Brooklyn
Union, and will inform the customer that additional firms may be found in
the classified telephone directory.
2 Case 95-G-0761, Brooklyn Union Gas Co., Opinion No. 96-26 (issued September
25, 1996).
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CASE 97-M-0567
merger proposal. Instead, the salient issue posed by OP is whether the
Settlement is fair insofar as it allows KAS repair service to be marketed to KAS
repair customers in a package with gas commodity sales from KeySpan Energy
Services, Inc. (KES, Brooklyn Union's marketing affiliate).1 OP criticizes this
arrangement as advantageous to KAS yet unavailable to independent repair service
providers.
Further, OP claims, the Settlement's options for Brooklyn
Union repair customers are calculated to deny customers a real choice, and they
enable KAS or KES to capture nearly all Brooklyn Union's 138,000 contractual
repair customers. OP predicts that in almost all cases, a rational customer with
a Brooklyn Union repair contract would reject option (1) and thus would not
become accessible to competing providers independent of Brooklyn Union.
OP says the repair customers that might end their association
with Brooklyn Union are limited to those who have become disenchanted with their
contract and never used the contractual repair service, and those who found the
service so unsatisfactory that they would rather seek a different and less
familiar provider. These two groups, in OP's view, must be so small and atypical
that they cannot represent a significant potential market for independent repair
service providers. Therefore, OP says, the Settlement provisions frustrate our
intention of creating an effectively competitive market for gas appliance repair
service.
As evidence that Brooklyn Union will indeed pursue
illegitimate advantages if given the opportunity, OP cites the company's
December 1997 letter inviting indications of interest from potential appliance
service providers. According to OP, the
- --------
1 Until May 2000, the firm that might market the combined commodity and
repair service hypothesized by OP would be either KAS or KES, depending on
whether the customer chose KAS affirmatively or through the default option.
Starting in May 2000, either or both firms could market the combined
service regardless of how the customer chose KAS.
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CASE 97-M-0567
timing of the invitation discouraged responses because it occurred during a
holiday season, and the invitation was hedged with intimidating warnings about
registration and insurance requirements.
For these reasons, OP proposes that Brooklyn Union simply
phase out its service contracts by letting each contract lapse as it expires,
after giving adequate notice to the departing customer. OP also proposes that
Brooklyn Union auction off batches of contracts to other service providers;
transfer to the winning bidder the contracts and the pro rata balances prepaid
by customers for the periods remaining on those contracts; and flow the auction
proceeds through to utility service customers. OP says only its proposals will
assure customers real choice and an orderly transition, while providing
financial protection for Brooklyn Union.
2. Conclusions as to Appliance Repair
Brooklyn Union's customers' expectation of contractual service
greatly complicates the task of removing Brooklyn Union as the service provider,
and we would not suggest that the Settlement represents the only reasonable
solution to the problems thus created. Nevertheless, we find the Settlement
clearly preferable to OP's recommendations.
First, regarding Brooklyn Union's invitation to alternative
providers, we accept the companies' explanation that the poor timing of the
letter was an unintended result of a schedule prescribed in the Settlement. The
companies also note that the response time was extended after OP objected, with
the result that, of 1200 service providers solicited, over 300 responded with
expressions of interest in competing for Brooklyn Union's repair customers.
These facts adequately dispel OP's allegation of an incipient pattern of abuse
on the companies' part.
As to more basic issues of competitive fairness, OP's
opposition presupposes that customers will be unreceptive to
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CASE 97-M-0567
independent providers' marketing efforts unless the customer has terminated the
contract prematurely (rather than switch to KAS). OP takes an unjustifiably
restrictive view of the potential for competition. A customer's pre-existing
contract with Brooklyn Union or KAS need not preclude effective competitive
overtures by other providers, as they will have a full opportunity to offer a
package of price, service, and other terms potentially more attractive than
KAS's. This is especially true insofar as the pre-existing contracts are of
limited duration, generally expiring within one year.
Thus, there is no persuasive objection to the Settlement
provisions. OP's proposed plan, on the other hand, would create a number of
serious problems. First, we agree with the companies that OP's proposal would be
unreasonably inefficient because it would perpetuate Brooklyn Union's repair
operations until the very last of a dwindling number of contracts had expired.
Second, OP's approach would require a customer information effort which, no
matter how effective, would inevitably leave at least some Brooklyn Union repair
customers unaware of the imminent lapse of their contractual privileges. If a
customer discovered that situation only when an appliance broke down and he or
she called Brooklyn Union for contractual service, which was thereupon denied
because the contract had lapsed, the customer would be seriously inconvenienced
in the midst of a potentially critical appliance failure. OP's proposal to
auction unexpired contracts to competing providers would not improve customer
acceptance: it would put service providers and regulators in the position of not
merely allowing Brooklyn Union contracts to lapse, but actively reassigning
unexpired contracts to other providers regardless of the customer's preferences.
Finally, the repair service contract is, to the best of our knowledge, an option
not widely offered by providers other than Brooklyn Union. If all the contracts
were to end on a date certain, as OP proposes, there is no assurance that other
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CASE 97-M-0567
providers would be able and willing to fill the gap by providing contracts to
all customers that chose not to enroll with KAS.
In sum, the Settlement reasonably resolves the issues created
by the pendency of unexpired Brooklyn Union contracts, and the Settlement better
serves the objectives of effective competition and customer choice than OP's
proposed alternatives.
Environmental Review
NYPIRG, in arguments endorsed by OP, says the Settlement
requires additional analysis pursuant to the State Environmental Quality Review
Act (SEQRA). NYPIRG concedes that the merger itself has been addressed in an
Environmental Assessment Form (EAF) and in a Supplement to the EAF, and that
LIPA's acquisition of Shoreham may be exempt from SEQRA review. Nonetheless,
NYPIRG asserts, this proceeding must include an Environmental Impact Statement
regarding those provisions of the LIPA transaction whereby LILCO's successor in
the electric generation business would create affiliates to supply power and
management services to LIPA.
We have rejected NYPIRG's contention, in a decision adopted
after NYPIRG submitted its arguments but before we approved the merger.1 As that
decision explains, the creation of affiliates merely would assure LIPA customers
the rate benefits of the LIPA transaction; contrary to NYPIRG's theory, it would
have no environmental effects distinct from those of the LIPA transaction
itself. Thus, the creation of affiliates requires no independent environmental
analysis.
CONCLUSION
This Settlement, as modified pursuant to our initial order
approving it, creates a corporate structure that will serve
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1 Case 97-M-0567, Order Adopting Negative Declaration (issued January 29,
1998). See also Case 98-M-0074, Long Island Lighting Company, Order
Adopting Negative Declaration (issued February 6, 1998).
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CASE 97-M-0567
the best interests of customers and shareholders in the emerging competitive
energy market. As its most immediate and tangible benefit, the Settlement
already has provided significant rate reductions. As a result of the cost
savings achievable through the merger, additional rate reductions and credits
will ensue when the merger is consummated and when electric rates are determined
for LILCO. Meanwhile, the two utilities' combined strengths will enhance their
ability to offer their customers a more diverse choice of products and services
than would otherwise be available.
The Settlement achieves these objectives while preserving the
merged companies' financial integrity, shielding customers from the risks
associated with the utilities' unregulated affiliates, and providing continued
incentives for efficient management and reliable utility service. The Settlement
promotes fair and effective competition, to the benefit of competitors and the
public at large. Its environmental effects will be positive, in that it
encourages the development of new markets for natural gas and prescribes a
variety of environmentally beneficial projects and policy initiatives.
For these reasons, and others discussed above, we conclude
that the Settlement is in the public interest.
The Commission orders:
1. Ordering clauses one through five contained in the Order
Adopting Terms of Settlement Subject to Conditions and Changes (issued in this
proceeding February 5, 1998) are adopted in their entirety and are incorporated
as part of this opinion
and order.
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CASE 97-M-0567
2. This proceeding is continued.
By the Commission,
(Signed) JOHN C. CRARY
Secretary
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<PAGE>
Exhibit D-4.5
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
At a session of the Public Service
Commission held in the City of
Albany on April 29, 1998
COMMISSIONERS PRESENT:
Maureen O. Helmer, Chairman
Thomas J. Dunleavy
James D. Bennett, not participating
CASE 98-M-0074 - Petition of Long Island Lighting Company for Approval to:
(a) under Section 70 of the Public Service Law to transfer
certain assets from LILCO to newly formed subsidiaries of a
new holding company; (b) for the subsidiaries receiving the
assets to assume certain liabilities associated with those
transferred assets; and (c) under PSL Section 69 for the
issuance of promissory notes by those same subsidiaries.
ORDER APPROVING ASSET TRANSFERS,
ASSUMPTION OF LIABILITIES AND
ISSUANCE OF PROMISSORY NOTES
(Issued and Effective May 1, 1998)
BY THE COMMISSION:
INTRODUCTION AND BACKGROUND
The Long Island Lighting Company (LILCO) is an electric and gas
corporation. It holds franchises and furnishes electric and gas service to
consumers in the Counties of Nassau and Suffolk and on the Rockaway Peninsula in
the Borough of Queens of the City of New York.
The Petition
This proceeding commenced upon the filing on January 20, 1998 of a
Petition by LILCO for authorization under Section 70 of the Public Service Law
(PSL) to transfer certain assets from LILCO to newly formed subsidiaries of a
new holding
<PAGE>
CASE 98-M-0074
company (HoldCo);/1/ for the subsidiaries receiving the assets to assume certain
liabilities associated with those transferred assets; and under PSL Section 69
for the issuance of promissory notes by those same subsidiaries.
The purpose of the actions is to leave the LILCO corporate entity with
ownership of only those assets that the Long Island Power Authority (LIPA)
wishes to acquire in a separate transaction. To accomplish this, the assets that
LIPA does not intend on acquiring, i.e., the assets currently employed by LILCO
to conduct its gas distribution business, its non-nuclear electric generating
facilities and its common plant used to provide operational and management
services in the conduct of LILCO's current gas distribution and electric
generation and distribution business, must be transferred out of the LILCO
corporate entity to certain HoldCo subsidiaries. Then, LILCO, with the retained
assets desired by LIPA, can merge with a subsidiary of LIPA to complete the LIPA
Transaction.
According to the Petition, this sequence of events is necessary to
ensure that LIPA's acquisition of the retained assets is accomplished via a
stock transaction to avoid a tax on the assets which LIPA acquires. The
incurring of such tax liability would negate certain rate savings sought by
LIPA. Therefore, this sequence of events is necessary for the transaction by
LIPA to be of maximum benefit to consumers on Long Island.
In addition to HoldCo, it is proposed in the Petition that assets
and/or liabilities be transferred to several to-be-created HoldCo subsidiaries
(the "transferee subsidiaries"). They include "GasCo," a regulated gas company,
"GenCo," an electric generation company, "Corporate ServeCo" and "Utility
ServeCo 1 and 2," unregulated companies providing mainly corporate
administrative services for GasCo and subsidiaries set up to serve LIPA, "T&D
ManageCo," an unregulated company providing electric transmission and
distribution system management services for LIPA, and "Energy ManageCo," an
unregulated company providing energy management services for GasCo and
subsidiaries set up to serve LIPA. Generally, LILCO's current gas plant would be
transferred to GasCo, LILCO's current non-nuclear generation plant would be
transferred to GenCo, most
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1 More specifically, LILCO will transfer to assets to HoldCo, which will then
transfer the assets to the subsidiaries.
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CASE 98-M-0074
of LILCO's current common plant would be transferred to Corporate ServeCo, and
some inventory of materials, supplies and tools would be transferred to T&D
ManageCo. The other transferee subsidiaries would not receive any assets.
GasCo will conduct the gas distribution business currently conducted by
LILCO pursuant to LILCO's Schedule for Gas Service, P.S.C. No 3-Gas ("Gas
Tariff"). Accordingly, GasCo will adopt the Gas Tariff effective on the closing
date of the transfers and will file such notices and supplements and reissue the
Gas Tariff as required under section 270.47 of the Commission's Regulations.
GasCo also will agree to be bound by and subject to all rules, regulations,
policy statements, accounting instructions and orders of the Commission
currently applicable to LILCO's gas operations.
LILCO's Petition, at page 6, states that "[t]he vast majority, if not
all" of the transferred assets will be transferred at their net book value, but
that "[o]ther [t]ransferred [a]ssets, if any, shall be identified and valued
according to Commission practice." The Petition and all workpapers provided did
not identify any such "other transferred assets" that are to be valued at other
than book value.
In addition to the assets to be transferred, LILCO proposes that the
HoldCo subsidiaries also assume certain liabilities of LILCO that are associated
with the conduct of LILCO's gas distribution and non-nuclear generation
businesses and common plant assets, including certain current liabilities.
Moreover, LILCO proposes to retain $3,576 million in LILCO debt, subject to
adjustment, and proposes that HoldCo and its subsidiaries issue promissory notes
to LILCO in an amount equal to LILCO's actual debt at closing minus the retained
debt amount. Generally, liabilities would be transferred to match the assets
being transferred, except that HoldCo and each of the transferee subsidiaries
would be jointly and severally liable for the proposed promissory notes to be
issued. LILCO submits that the proposed transfers, assumption of liabilities,
and issuance of notes are exempt from the need
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CASE 98-M-0074
for Commission approval under the PSL, but "[n]evertheless, in order to avoid
any claim that such approval should have been obtained, and the pursuit of any
such claim in a manner that might delay or otherwise interfere with the timely
consummation of the LIPA Transaction, LILCO is requesting that the Commission
grant approval" as may be subject to the Commission's jurisdiction. However, in
requesting that the Commission make such determination, LILCO does not seek a
Commission ruling on any aspect of the LIPA Transaction itself.
In its petition, LILCO does not seek Commission approval of the
specific asset transfers, liability assumptions and debt issuances. Instead,
LILCO seeks general approval of the "type" of asset transfers, liability
assumptions and debt issuances proposed, subject to LILCO submitting to the
Commission further descriptions of the assets, liabilities and notes at least
forty-five (45) days prior to any such transfer, assumption or issuance. Because
workpapers provided by LILCO provide sufficient detail to support the transfers,
we shall approve the transfers now.
Notice and Comment
Notice of the filing of the Petition was published in the State
Register. The required comment period has expired. No comments have been
received.
Jurisdiction
Section 70 of the Public Service Law (PSL) prohibits gas and electric
corporations from transferring any part of their works or system without the
written consent of the Commission, with the exception that "[n]o consent,
permission or approval otherwise required under this section shall be necessary
for the sale of the franchise, works, system, stocks or bonds by a gas or
electric corporation to a duly constituted authority of the state." LILCO
questions whether the asset transfers proposed in the Petition require the
Commission's consent because the asset transfers are "a highly significant
component of the LIPA transaction" (Petition, p. 6). The "LIPA Transaction" is
to be a purchase by LIPA of all of the stock of what remains of the LILCO
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<PAGE>
CASE 98-M-0074
corporate entity after the transfer of assets (i.e., the assets currently
employed by LILCO to conduct its gas distribution business, its non-nuclear
electric generating facilities and its common plant used to provide operational
and management services in the conduct of LILCO's current gas distribution and
electric generation and distribution business) out of LILCO is accomplished.
LIPA's purchase of LILCO's stock is an exempt transaction under PSL
Section 70 because LIPA is a "duly constituted authority of the state." However,
LIPA is not a party to the transfer of assets from LILCO to GasCo, GenCo,
Corporate ServeCo and T&D ManageCo. As no "duly constituted authority of the
state" is a party to such transfers, the exemption in PSL Section 70 does not
apply. Accordingly, the Commission has jurisdiction over the transfers to
non-LIPA entities and its consent is required.
Section 69 of the PSL permits gas and electric corporations to issue
notes or other evidence of indebtedness payable at periods of more than twelve
months "provided and not otherwise that there shall have been secured from the
[C]ommission an order authorizing such issue, and the amount thereof, and
stating the purposes to which the issue or proceeds thereof are to be applied,
and that, in the opinion of the [C]ommission, the money, property or labor to be
procured or paid for by the issue of such . . . notes or other evidences of
indebtedness is or has been reasonably required for the purposes specified in
the order, and that except as otherwise permitted in the order in the case of .
. . notes and other evidences of indebtedness, such purposes are not in whole or
in part reasonably chargeable to operating expenses or to income."
LILCO questions whether the issuance of the promissory notes proposed
in the Petition requires an order of authorization by the Commission because
"through the issuance of the Notes, the Transferee Subsidiaries are merely
changing the form (but not the substance) of the debt to which they are already
obligated and the incurrence of which the Commission has previously approved"
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<PAGE>
CASE 98-M-0074
(Petition, p. 7). There is nothing in PSL Section 69 that would allow LILCO to
restructure its debt by issuing promissory notes, regardless of prior
authorizations, without an express order from the Commission giving
authorization. The promissory notes are long-term in nature, will include a
sinking fund, and will have terms similar to some of the debt LILCO currently
has outstanding. Accordingly, the Commission has jurisdiction over the issuance
of the notes and a Commission order authorizing such issuance is required.
SAFETY AND RELIABILITY
The continued reliability and safety of LILCO's electric and gas
systems is of paramount concern in considering the proposed transfer of assets
from LILCO to affiliates. Electric reliability and gas safety incentive
mechanisms are in place that require LILCO, or any successor GasCo, to ensure it
maintains its electric reliability and gas safety performance at certain levels
of quality or suffer economic disincentives. Further, the agreements between
LILCO and LIPA set post-LIPA Transaction electric service reliability standards
and performance targets comparable to those standards currently required by the
Commission and in existence today at LILCO. Regarding pool-wide reliability,
LIPA has indicated its intent to join in the establishment of an independent
system operator (ISO), as soon as it can feasibly do so, and to cooperate with
the ISO through transitional arrangements until certain tax issues unique to
LIPA can be resolved./2/ With regard to the transfer of generation assets to
GenCo, although federal law does preclude rate regulation by the Commission of
wholesale sales, the operation of electric plant by GenCo will be subject to
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2 FERC Docket Nos. ER97-1523-000, OA97-470-000 and ER97- 4234-000, Long
Island Power Authority, Motion for Leave to File Comments and Comments of
the Long Island Power Authority (February 27, 1998).
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<PAGE>
CASE 98-M-0074
Commission regulation under a "lightened regulatory regime."/3/
With regard to the transfer of assets to Corporate ServeCo, a prior
Commission Order/4/ requires that all asset transfers be accomplished in a
manner that does not at any time jeopardize the ability to provide safe,
adequate, and reliable service to customers. Such an obligation shall be
extended to apply as well to the proposed transfer of assets to GasCo, GenCo and
T&D ManageCo. GasCo and the future entity that manages the electric transmission
and distribution (T&D) system must have the ability to call on all of the
personnel and assets of all of their affiliates as may be necessary to operate
the electric and gas systems in a safe and reliable fashion, including the
ability to respond to and remedy emergencies. We believe this requirement to be
consistent with the intent of LILCO's plan to continue to operate the electric
and gas systems as it does today and with the prior Commission Order (in Case
97-M-0567) noted above. To ensure such obligations are fulfilled, staff shall
monitor progress during the transition engendered by the proposed corporate
reorganization and the LIPA transaction.
Regarding gas safety, one week prior to the closing of the asset
transfers, GasCo officials shall meet with staff to introduce personnel
responsible for the safe and reliable operation of the gas distribution system
and to outline operational and emergency procedures; and within 60 days of the
closing of the asset transfers GasCo shall demonstrate in writing to the
Director of the Gas and Water Division that it has ownership or contractual
control of personnel and physical assets sufficient to operate the gas system in
a safe and reliable manner, and to respond to and remedy emergencies.
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3 See: Case 91-E-0350, Wallkill Generating Company L.P., Declaratory Ruling
on Regulatory Policies Affecting Wallkill Generating Company and Notice
Soliciting Comments (Issued August 21, 1991).
4 Case 97-M-0567, Opinion No. 98-9, Opinion and Order Adopting Terms of
Settlement Subject to Conditions and Changes (issued April 14, 1998).
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CASE 98-M-0074
Regarding electric reliability, one week prior to the closing of the
asset transfers, T&D ManageCo officials shall meet with staff and LIPA to
introduce personnel responsible for the safe and reliable operation of the
electric distribution system and to outline operational and emergency
procedures; and within 60 days of the closing of the asset transfers T&D
ManageCo shall demonstrate in writing to the Director of the Electric Division
that it has ownership or contractual control of personnel and physical assets
sufficient to operate the electric system in a safe and reliable manner, and to
respond to and remedy emergencies.
ASSET TRANSFERS
LILCO's proposal to transfer assets and liabilities to HoldCo and the
transferee subsidiaries triggers the need to determine several issues. First,
the approval given in Case 97- M-0567 gave LILCO permission to form HoldCo and
Corporate ServeCo, and to transfer assets to such entities "as required . . . to
conduct their businesses," but did not address separation of the gas business,
the electric T&D business and the electric generation business into separate
subsidiaries. Second, a determination needs to be made as to whether the
proposed allocation of assets and liabilities among the subsidiaries is in the
public interest. Finally, a determination needs to be made as to whether it is
in the public interest to allow the assets to be transferred at net book value,
and if so, whether gain should be realized on such assets as if they were
transferred at market value, with a sharing of any gain, to ensure that
ratepayers are fairly compensated.
Subsidiaries
The Petition makes it clear that the main purpose of the transfer of
assets and liabilities to HoldCo and the transferee subsidiaries is to establish
a corporate structure to facilitate the LIPA Transaction. Implicit in LILCO's
Petition is a request for consent to LILCO's plan to have HoldCo form the
transferee subsidiaries and to separate the gas business, the electric T&D
business and the electric generation business into
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<PAGE>
CASE 98-M-0074
those separate subsidiaries. In light of the pending LIPA Transaction, LILCO's
proposal to create GasCo, GenCo, T&D ManageCo and the other transferee
subsidiaries and to separate and transfer the various businesses, as proposed,
is reasonable and shall be approved. However, if there were to be no LIPA
Transaction, the proposed separation would not be in the public interest because
it would leave unresolved issues regarding stranded costs and market power.
Without the LIPA Transaction, those issues would have to be addressed as they
were for the other electric and gas utilities in New York in Case 94-E-0952, the
Competitive Opportunities proceeding. Therefore, the approvals given in this
proceeding shall be conditioned upon the successful consummation of the LIPA
Transaction. If the LIPA Transaction is not consummated, the approvals shall be
void and LILCO should proceed to submit a restructuring plan in the Competitive
Opportunities proceeding.
Allocation of Assets and Liabilities
In its Petition, LILCO proposes to transfer assets and liabilities that
can be generally categorized as electric plant, gas plant, common plant,
accumulated depreciation, regulatory assets, non-utility plant and other
investments, current assets, and deferred assets. The only asset transfers
proposed are to GasCo, GenCo, Corporate ServeCo and T&D ManageCo.
The "Mineola Property" (LILCO Parcel Nos. 26, 148 & 279) consists of an
approximately 100,000 square foot office building and ancillary parking
facilities in the Village of Mineola, Nassau County. The Mineola Property is
carried on LILCO's books as common plant and it is proposed in the Petition to
transfer the property to Corporate ServeCo at net book value. It is unclear at
this time as to whether the Mineola Property is surplus property for which a
gain should be realized or would be more valuable to ratepayers as an asset put
to greater use in their service. The Mineola Property shall be transferred at
net book value to the subsidiary that will remain subject to full rate
regulation by the Commission to reside in a utility account until such time as a
more definite determination as to its
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CASE 98-M-0074
disposition can be made.
The "Jamesport Property" (LILCO Parcel No. 461, consisting of 551 acres
of undeveloped land in the Towns of Riverhead and Southold, Suffolk County) is
in a somewhat different category because it is carried on LILCO's books as
non-utility property. It is proposed in the Petition to transfer the property to
Corporate ServeCo at net book value. Pursuant to a settlement approved by the
Commission on April 5, 1988,5 the Jamesport Property was removed from rate base
and put in a non-utility account, subject, among other things not relevant here,
to a sharing of any gains on the property. According to the Jamesport Order,
"[u]pon the sale of the property, LILCO common stockholders may retain the
[then] current fair market value of $14 million plus actual property taxes and
maintenance expenses, AFC for the period in which the property and associated
expenses reside in a non-utility account, the reasonable and necessary expenses
associated with the sale of the property, and any actual tax liabilities
resulting from the sale. If the property is sold for a greater amount, 10
percent of the excess would be retained by LILCO and 90 percent would be flowed
through to ratepayers". The Jamesport Property shall be transferred at net book
value to the subsidiary that will remain subject to full rate regulation by the
Commission to reside in a non-utility account as envisioned by the Jamesport
Order so that all of the terms of the Jamesport Order can be preserved and
realized at some future date.
The proposed transfer of assets and liabilities out of the LILCO
corporate entity is necessary to facilitate the LIPA transaction, and should be
approved. LIPA has established an audit mechanism to ensure that it receives all
of the assets it intends to purchase. The allocation of those assets and
liabilities among HoldCo and the transferee subsidiaries appears
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5 Case 28757, Long Island Lighting Company, Opinion No. 88- 10, Opinion and
Order Approving Settlement Agreements (issued April 5, 1988), 28 NY PSC 457
(1988) (the "Jamesport Order").
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<PAGE>
CASE 98-M-0074
generally reasonable, and is approved, except for the transfers of the Mineola
and Jamesport Properties which shall be transferred as noted above, but such
allocations shall not be binding for future ratemaking purposes.
Valuation of Assets
A key issue presented by the Petition is the disposition of potential
gains associated with assets that may be transferred to entities that will no
longer be subject to rate regulation by the Commission. As noted above, LILCO
proposes to transfer "[t]he vast majority, if not all" of the transferred assets
at their net book value, but states that "[o]ther [t]ransferred [a]ssets, if
any, shall be identified and valued according to Commission practice."
The Commission's policy regarding the allocation of gains or losses
between ratepayers and shareholders is that ratepayers are generally responsible
for losses and entitled to some benefit of gains associated with sales or
transfers of utility property. This policy was most recently applied by the
Commission in the Spring Valley case./6/ In that case the Commission directed
that the utility's rate base be reduced to reflect the entire capital gain that
should have been realized upon the transfer of vacant land. The Commission's
decision was upheld by the Appellate Division of the New York Supreme Court/7/
(Court held that PSC action did not constitute a taking).
Applying the Commission's established policy to this case, we shall
require that the gain associated with the transfer of assets of significant
value that are no longer to be used for ratepayer benefit be captured for the
benefit of ratepayers. Most of the assets that are being transferred to GasCo
and
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6 Case 88-W-049, Spring Valley Water Company, Inc. Opinion 90-28, Opinion and
Order Adopting Recommended Decision (issued October 3, 1990.
7 Spring Valley Water Co. v. Public Service Com., 176 A.D.2d 95, 580 N.Y.S.2d
107 (3d Dep't 1992), appeal dismissed, 80 N.Y.2d 825, 587 N.Y.S.2d 907, 600
N.E.2d 634 (1992), leave to appeal denied, 80 N.Y.2d 758, 589 N.Y.S.2d 308,
602 N.E.2d 1124 (1992).
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CASE 98-M-0074
Corporate ServeCo (i.e., gas plant and most common assets) will be needed to
carry out LILCO's continuing statutory obligation to provide gas service. In
addition, synergies (associated with the realignment of most common assets due
to the merger of LILCO and The Brooklyn Union Gas Company) and royalties have
already been captured for ratepayer's benefit in the merger proceeding (Case
97-M-0567). Similarly, most of the assets that are being transferred to GenCo
and T&D ManageCo (i.e., electric generation plant and materials, supplies and
tools) will be needed to fulfill contractual obligations running to the benefit
of future LIPA customers./8/
We have identified several parcels of land that likely have a current
fair market value greater than net book value. Gain shall be realized as if
these assets were being transferred at market value and subject to the condition
that electric ratepayers share in 90% of the net gains on the transfer by way of
a credit to the electric fuel adjustment clause (FAC) and gas adjustment clause
(GAC) mechanisms, as appropriate. A chart is attached identifying the relevant
properties, their market values, and the calculation of net gain and ratepayer
share (Attachment 1). The market value of such properties was estimated by staff
after consideration of property maps and surveys, zoning information, and
government data regarding assessed values, equalization rates, and actual sales.
A share of net gain in the amount of $11,896,781 shall be flowed through the FAC
to electric ratepayers, and a share of net gain in the amount of $194,255 shall
be flowed through the GAC to gas ratepayers.
ISSUANCE OF DEBT
In deciding whether it is in the public interest to authorize the
issuance of long-term notes or other evidence of indebtedness, Section 69 of the
PSL requires the Commission to
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8 Because the generating facilities are subject to a long-term cost-based
contract, the assets are effectively dedicated to ratepayers at net book
value.
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CASE 98-M-0074
consider (a) the amount; (b) the purposes to which the issue or proceeds thereof
are to be applied; (c) whether the debt is reasonably required for the purposes
specified; and (d) that such purposes are not reasonably chargeable to operating
expenses or to income. In addition, due to the unique circumstances of the
proposed restructuring of LILCO and the pending LIPA Transaction, the Commission
should also consider the reasonableness of the allocation of the proposed debt
among HoldCo and its various subsidiaries.
Currently LILCO has approximately $4.4 billion in long-term debt
obligations. These include $1.2 billion in eight different series of General and
Refunding Bonds, four series of Pollution Control Notes amounting to $215
million, eight different series of Electric Facility Revenue Bonds totaling $725
million, two Industrial Development Notes for $2 million, and $2.3 billion in
Debentures comprised of ten different issues.
Among the transfers of liabilities to facilitate the LIPA Transaction,
it is proposed that two series of debentures amounting to $667 million will be
transferred out of the LILCO corporate entity and become the obligation of
HoldCo through an exchange of HoldCo debentures for LILCO debentures. These
include $397 million of 7.3% debentures due in 1999, and $270 million of 8.2%
debentures due in 2023. For the bondholders of these issues that did not agree
to exchange their liability to HoldCo, a promissory note will be issued by
HoldCo and the transferee subsidiaries to the LILCO corporate entity (such
entity to be merged with a subsidiary of LIPA) with terms and conditions
corresponding to the existing debt issue.
It is also proposed that either approximately $300 million of electric
facilities bonds be transferred out of the LILCO corporate entity to become the
primary obligation of GenCo, or GenCo will issue a promissory note of
approximately $300 million to the LILCO corporate entity (such entity to be
merged with a subsidiary of LIPA) with terms and conditions similar to the
existing debt issue.
Finally, it is proposed that promissory notes be issued
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CASE 98-M-0074
by either HoldCo and the transferee subsidiaries or the LILCO corporate entity
(such entity to be merged with a subsidiary of LIPA) to cover any variance in
the LILCO corporate entity's net worth at the time of closing from the net worth
estimated by the parties prior to the closing. If the LILCO corporate entity's
net worth is less than the estimate, HoldCo and the transferee subsidiaries
would issue a promissory note for the difference to the LILCO corporate entity.
If the LILCO corporate entity's net worth exceeds the estimate, the LILCO
corporate entity would issue a promissory note for the difference to HoldCo.
The promissory notes will provide no new incremental cash flow for the
LILCO corporate entity, HoldCo or the transferee subsidiaries. The promissory
notes will have rates, terms, maturities, and call provisions to correspond to
each portion of the underlying debt associated with the assets transferred to
HoldCo and the transferee subsidiaries, with only minor adjustment to require
payment by HoldCo 30 days prior to the corresponding payment dates on the
underlying debt.
Currently LILCO's debt obligations are paid directly to the holders of
the debt. Once the reorganization and the LIPA Transaction are implemented, the
structure of assets and liabilities will be different from the current
structure. The purpose of the proposed promissory notes (with the exception of
the promissory note to balance the final purchase price to actual net worth) is
simply to provide a financing mechanism to service bond requirements that
already exist while allowing the debt to be allocated among different corporate
entities. The use of promissory notes in the manner proposed is a reasonable
tool to facilitate closure of the restructuring and the LIPA Transaction.
The existing LILCO debt that underlies the proposed promissory notes
has been approved by the Commission in a series of cases that determined that
the debt was not chargeable to operating expenses or to income. The $1.3 billion
in General and Refunding bonds were approved in a series of nine financing cases
from 1991 to 1994. The $214 million in Pollution Control Notes were approved by
the Commission in four cases from 1976 to 1985,
-14-
<PAGE>
CASE 98-M-0074
while the $2 million in Industrial Development Notes were approved by the
Commission in 1976. The $1.6 billion in debentures were approved by the
Commission in 9 separate financing cases from 1992 to 1994. The justification
shown in those cases remains applicable to restructuring of the debt proposed in
this case, and need not be re-examined by the Commission. The new promissory
note issue necessary to balance the difference between the net worth estimate
and the actual net worth as of the date of the closing is not chargeable to
operating expenses or income because it is not in the nature of an operating
expense or an income transaction.
After the proposed transfer of assets and liabilities, the LILCO
corporate entity will retain approximately $3.4 billion (approximately 77.3%) of
LILCO's current debt. This includes the entire $1.2 billion of General and
Refunding Bonds, $167 million in Pollution Control Notes, $1.6 Billion in
Debentures, and $475 million in Electric Facility Revenue Bonds. It will also
retain approximately 77 percent of LILCO's currently existing assets. This
parity between liabilities and assets indicates a reasonable allocation that
should be extended to HoldCo and the transferee subsidiaries to prevent any
unintended shifting of costs, particularly any shifting of costs that would
adversely affect customers. For example, if GasCo is allocated 10% of LILCO's
liabilities, GasCo should be allocated at least 10% of LILCO's assets. The terms
of the LIPA Transaction require that all of the promissory notes be issued
jointly in the name of HoldCo and each of the transferee subsidiaries. The
consequence of issuance in such a manner is that HoldCo, GasCo, GenCo, Corporate
ServeCo, Utility ServeCo 1 and 2, T&D ManageCo and Energy ManageCo will each be
jointly and severally liable for the promissory note obligations. However, it is
intended that the primary obligation to pay the promissory notes, or portions
thereof, will be allocated among HoldCo and the transferee subsidiaries in a
manner such that each corporation's allocation will match the underlying debt
associated with the assets they have received. Therefore, we shall require that
as a condition of this approval
-15-
<PAGE>
CASE 98-M-0074
that the allocation of the primary obligation to pay the promissory notes, or
portions thereof, match the underlying debt associated with the assets received.
Any new debt that will be created because of a difference between actual and
estimated net worth shall be allocated to HoldCo only to ensure that the new
debt, which is unrelated to the provision of gas or electric service, is not
chargeable, directly or indirectly, to ratepayers, or to LIPA. HoldCo may
reallocate this new debt to its subsidiaries, including GasCo, to the extent
each reallocation is associated with the transfer of assets and/or the infusion
of capital from from HoldCo to such subsidiary or subsidiaries. If for any
reason one of the corporate entities defaults on its primary obligation to pay
the promissory notes, and the creditor is forced to look to one or more of the
other corporate entities that are jointly and severally liable for payment, for
ratemaking purposes the Commission shall treat the payment as not being
chargeable to customers.
To ensure compliance with the terms of the Commission's approval, the
promissory notes should not be issued until LILCO files a draft of the notes and
any related agreements with the Commission for review. Upon review, if the
documents are acceptable, a non-abrogation letter shall be issued by the
Director of the Office of Accounting and Finance, or his designee, finding the
notes in compliance. The non-abrogation process should occur before the
promissory notes are actually issued, when substantial drafts of the documents
are completed. Since the use of the promissory notes is dependent on the outcome
of restructuring of LILCO and the closing of the LIPA Transaction, HoldCo should
provide a further compliance filing after the closing showing the form, the rate
and the amount of the notes outstanding, and the purposes for which they were
issued, as well as proof that the allocation of the primary obligation to pay
the promissory notes, or portions thereof, matches the underlying debt
associated with the assets received, or was otherwise allocated to HoldCo as
required herein.
-16-
<PAGE>
CASE 98-M-0074
CONCLUSION
The petition is approved subject to certain modifications. The proposed
transfer of assets and liabilities out of the LILCO corporate entity is
necessary to facilitate the LIPA transaction, and shall be approved. The
allocation of those assets and liabilities among the new corporate entities of
GasCo, GenCo, Corporate ServeCo and T&D ManageCo appears generally reasonable,
and shall be approved with two exceptions (the Mineola and Jamesport
Properties), but such allocations shall not be binding for future ratemaking
purposes. In addition, gain on transferred assets of significant value no longer
to be used for ratepayer benefit should be realized as if the assets were being
transferred at market value as estimated by staff and 90% of the net gain
realized on such assets should be shared with customers. Customers shall be
credited with their share of the gain through either the FAC or GAC mechanisms,
as appropriate. The proposed issuance of promissory notes is necessary to
facilitate the LIPA transaction, and should be approved, subject to the
condition that the primary obligation for promissory notes issued to balance the
estimated and actual net worth of the LILCO corporate entity shall not be
chargeable, directly or indirectly, to customers.
The Commission Orders:
1. The proposed transfer of assets and liabilities out of the Long
Island Lighting Company (LILCO) corporate entity and the allocation of those
assets and liabilities among HoldCo and the transferee subsidiaries is approved,
with the exceptions that the Mineola Property and the Jamesport Property shall
be transferred to GasCo pending future disposition.
2. The Petition is modified to require that the gain on transferred
assets that are no longer to be used for ratepayer benefit be realized as if
such assets were being transferred at market value as estimated by staff and
subject to the condition that ratepayers share in 90% of the net gains prior to
the transfer date by way of a credit to the electric fuel adjustment clause
(FAC) mechanism of $11,896,781 and a credit to the gas
-17-
<PAGE>
CASE 98-M-0074
adjustment clause (GAC) mechanism of $194,255.
3. LILCO's proposal to create GasCo, GenCo, and the other transferee
subsidiaries and to separate and transfer the various businesses, as proposed,
is approved, conditioned upon the successful consummation of the LIPA
Transaction.
4. The use of promissory notes in the manner proposed is approved
subject to condition that the allocation of the primary obligation to pay the
promissory notes, or portions thereof, match the underlying debt associated with
the assets received. Any new debt that will be created because of a difference
between actual and estimated net worth shall be allocated to HoldCo only to
ensure that the new debt, which is unrelated to the provision of gas or electric
service, is not chargeable, directly or indirectly, to ratepayers, or to LIPA.
HoldCo may reallocate this new debt to its subsidiaries, including GasCo, to the
extent each reallocation is associated with the transfer of assets and/or the
infusion of capital from from HoldCo to such subsidiary or subsidiaries. If for
any reason one of the corporate entities defaults on its primary obligation to
pay the promissory notes, and the creditor is forced to look to one or more of
the other corporate entities that are jointly and severally liable for payment,
for ratemaking purposes the Commission shall treat the payment as not being
chargeable to customers.
5. The promissory notes shall not be issued until LILCO files a draft
of the notes and any related agreements with the Commission for review.
6. LILCO shall provide a further compliance filing after the closing
showing the form, the rate and the amount of the notes outstanding, and the
purposes for which they were issued, as well as proof that the allocation of the
primary obligation to pay the promissory notes, or portions thereof, matches the
underlying debt associated with the assets received, or was otherwise allocated
to HoldCo as required herein.
7. All asset transfers shall be accomplished in a manner that does not
at any time jeopardize the ability to provide safe,
-18-
<PAGE>
CASE 98-M-0074
adequate, and reliable service to customers.
8. One week prior to the closing of the asset transfers, GasCo
officials shall meet with staff to introduce personnel responsible for the safe
and reliable operation of the gas distribution system and to outline operational
and emergency procedures; and within 60 days of the closing of the asset
transfers GasCo shall demonstrate in writing to the Director of the Gas and
Water Division that it has ownership or contractual control of personnel and
physical assets sufficient to operate the gas system in a safe and reliable
manner, and to respond to and remedy emergencies.
9. One week prior to the closing of the asset transfers, T&D ManageCo
officials shall meet with staff and LIPA to introduce personnel responsible for
the safe and reliable operation of the electric distribution system and to
outline operational and emergency procedures; and within 60 days of the closing
of the asset transfers T&D ManageCo shall demonstrate in writing to the Director
of the Electric Division that it has ownership or contractual control of
personnel and physical assets sufficient to operate the electric system in a
safe and reliable manner, and to respond to and remedy emergencies.
10. LILCO is directed to submit a written statement of unconditional
acceptance of all of the terms and conditions of this order, signed and
acknowledged by a duly authorized officer by May 6, 1998. If such acceptance of
this order is not so filed, the adoption of the terms of the order may be
revoked. The statement shall be filed with the Secretary to the Commission.
11. This proceeding is continued.
By the Commission,
(SIGNED) JOHN C. CRARY
Secretary
-19-
<PAGE>
ATTACHMENT 1
LONG ISLAND LIGHTING COMPANY
CASE 98-M-0074
CALCULATION OF NET GAIN ON SIGNIFICANT ASSETS TO BE TRANSFERRED
<TABLE>
<CAPTION>
VACANT MARKET BOOK GROSS INCOME
SITE NAME PARCEL # MUNICIPALITY ACRES VALUE VALUE GAIN TAXES
- --------- -------- ------------ ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Brookhaven 397 Town of 599 $15,146,000 $3,580,476 $11,565,524 $4,047,933
Brookhaven
East Hampton 384 Town of 13.1 $270,000 $38,926 $231,074 $80,876
East Hampton
Northport 350 Town of 15 *$0 $0 $0 $0
Huntington
Southampton 383 Town of 7 $100,000 $28,842 $71,158 $24,905
Southampton
E.F. Barret 246 Town of 16 $200,000 $178,305 $21,695 $7,593
Hempstead
Far Rockaway 307 City of 6 $240,000 $155,085 $84,915 $29,720
New York - Queens
Newbridge 74 Town of 31 $7,500,000 $35,781 $7,464,219 $2,612,477
Huntington
Bridgehampton 385 Town of 10 $275,000 $134,146 $140,854 $49,299
Southampton
Riverhead 449 Town of 5 $525,000 $525,000 $0 $0
Riverhead
Yaphank 462 Town of 37.7 $1,800,000 $711,000 $1,089,000 $381,150
Brookhaven
- --------------------------------------------------------------------------------------------------------------------------
TOTALS $26,056,000 $5,387,561 $20,668,439 $7,233,954
</TABLE>
<TABLE>
<CAPTION>
NET COMPANY ELECTRIC GAS
SITE NAME PARCEL # MUNICIPALITY GAIN SHARE RATEPAYERS RATEPAYERS
- --------- -------- ------------ ---- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Brookhaven 397 Town of $7,517,591 $751,759 $6,765,832 $0
Brookhaven
East Hampton 384 Town of $150,198 $15,020 $135,178 $0
East Hampton
Northport 350 Town of $0 $0 $0 $0
Huntington
Southampton 383 Town of $46,253 $4,625 $41,627 $0
Southampton
E.F. Barret 246 Town of $14,102 $1,410 $12,692 $0
Hempstead
Far Rockaway 307 City of $55,195 $5,519 $49,675 $0
New York - Queens
Newbridge 74 Town of $4,851,742 $485,174 $4,366,568 $0
Huntington
Bridgehampton 385 Town of $91,555 $9,156 $60,152 $22,248
Southampton
Riverhead 449 Town of $0 $0 $0 $0
Riverhead
Yaphank 462 Town of $707,850 $70,785 $465,057 $172,008
Brookhaven
- ------------------------------------------------- -----------------------------------------------------
TOTALS $13,434,485 $1,343,449 $11,896,781 $194,255
</TABLE>
*Assumes Northport property will be used for municipal recreation
purposes and will not be sold.
<PAGE>
D-6.3
NUCLEAR REGULATORY COMMISSION
[Docket No. 50-410]
In the Matter of Long Island Lighting Company; (Nine Mile Point Nuclear Station
Unit No. 2); Order Approving Application Regarding Acquisition of Long Island
Lighting Company by Long Island Power Authority
Monday, January 12, 1998
I
Long Island Lighting Company (LILCO) is licensed by the U.S. Nuclear Regulatory
Commission (NRC or Commission) to own and possess an 18-percent interest in Nine
Mile Point Nuclear Station, Unit 2 (NMP2), under Facility Operating License No.
NPF-69, issued by the Commission on July 2, 1987. In addition to LILCO, the
other owners who may possess, but not operate, NMP2 are New York State Electric
& Gas Corporation with an 18-percent interest, Rochester Gas and Electric
Corporation with a 14-percent interest, and Central Hudson Gas & Electric
Corporation with a 9-percent interest. Niagara Mohawk Power Company (NMPC) owns
a 41-percent interest in NMP2, is authorized to act as agent for the other
owners, and has exclusive responsibility and control over the operation and
maintenance of NMP2. NMP2 is located in the town of Scriba, Oswego County, New
York.
The Long Island Power Authority (LIPA) is a corporate municipal instrumentality
of New York State, created by State legislation in 1986 with authority to
acquire all or any part of LILCO's securities or assets.
II
Under cover of a letter dated September 8, 1997, from its counsel, LILCO
submitted an application for consent by the Commission, pursuant to 10 CFR
50.80, regarding two proposed restructuring actions, each of which would result
in the indirect transfer of the operating license for NMP2 to the extent held by
LILCO. LILCO revised the application on October 8, 1997, such that the pending
request for consent now involves only a proposed acquisition of LILCO by LIPA.
LILCO modified and supplemented the application on November 7, 1997, to indicate
that subsequent to the proposed acquisition by LIPA, LILCO would provide
notification to the NRC regarding any future transfer of significant LILCO
assets.
According to the application, LIPA proposes to acquire LILCO by purchasing its
stock through a cash merger, at a time when LILCO consists of its electric
transmission and distribution system, its retail electric business,
substantially all of its current electric regulatory assets, and its 18-percent
share in NMP2. LILCO thereby would become a subsidiary of LIPA. After this
restructuring, LILCO would continue to exist as an "electric utility" as defined
in 10 CFR 50.2, providing the same electric utility services it did immediately
preceding the restructuring. LILCO would continue to be a licensee of NMP2, and
no direct transfer of the operating license or interests in the station would
<PAGE>
result from the proposed restructuring. The transaction would not involve any
change to either the management organization or technical personnel of NMPC,
which has exclusive responsibility under the operating license for operating and
maintaining NMP2, and which is not involved in the proposed restructuring.
Notice of this application for approval was published in the Federal Register
on November 7, 1997 (62 FR 60286), and an Environmental Assessment and Finding
of No Significant Impact was published in the Federal Register on December 18,
1997 (62 FR 66400).
Under 10 CFR 50.80, no license shall be transferred, directly or indirectly,
through transfer of control of the license, unless the Commission shall give its
consent in writing. Upon review of the information submitted in the application
of September 8, as modified and supplemented by submittals dated October 8 and
November 7, 1997, the NRC staff has determined that the acquisition and
restructuring of LILCO as a subsidiary of LIPA will not affect the
qualifications of LILCO as a holder of the license, and that the transfer of
control of the license for NMP2, to the extent effected by the acquisition and
restructuring, is otherwise consistent with applicable provisions of law,
regulations, and orders issued by the Commission, subject to the conditions set
forth herein. These findings are supported by a safety evaluation dated December
29, 1997.
III
Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic
Energy Act of 1954, as amended, 42 U.S.C. ss.ss.2201(b), 2201(i), 2201(o), and
2234, and 10 CFR 50.80, it is hereby ordered that the Commission approves the
application regarding the proposed acquisition of LILCO by LIPA, subject to the
following: (1) LILCO shall provide the Director of the Office of Nuclear Reactor
Regulation a copy of any application, at the time it is filed, to transfer
(excluding grants of security interests or liens) from LILCO to LIPA, or to any
other affiliated company, facilities for the production, transmission, or
distribution of electric energy having a depreciated book value exceeding 10
percent (10%) of LILCO's consolidated net utility plant, as recorded on LILCO's
books of account, and (2) should the acquisition and restructuring of LILCO by
LIPA not be completed by December 31, 1998, this Order shall become null and
void, provided, however, on application and for good cause shown, such date may
be extended.
IV
By February 5, 1998, any person adversely affected by this Order may file a
request for a hearing with respect to issuance of the Order. Any person
requesting a hearing shall set forth with particularity how that interest is
adversely affected by this Order and shall address the criteria set forth in 10
CFR 2.714(d).
If a hearing is to be held, the Commission will issue an Order designating the
time and place of the hearing.
The issue to be considered at any such hearing shall be whether this Order
should be sustained.
Any request for a hearing must be filed with the Secretary of the Commission,
U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, Attention:
Rulemakings and Adjudications Staff, or may be delivered to 11555 Rockville
Pike, Rockville, Maryland, between 7:45 a.m. and
<PAGE>
4:15 p.m. Federal workdays, by the above date. Copies should be also sent to the
Office of the General Counsel, and to the Director, Office of Nuclear Reactor
Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555, and to
John D. Leonard, Jr., Vice President Special Projects, Long Island Lighting
Company, 1800 Old Walt Whitman Road, Melville, New York 11747.
For further details with respect to this Order, see the application for
approval dated September 8, 1997, as modified and supplemented by letters dated
October 8 and November 7, 1997, which are available for public inspection at the
Commission's Public Document Room, the Gelman Building, 2120 L Street, NW.,
Washington, DC, and at the local public document room located at the Reference
and Documents Department, Penfield Library, State University of New York,
Oswego, New York 13126.
Dated at Rockville, Maryland, this 29th day of December 1997.
For the Nuclear Regulatory Commission.
Samuel J. Collins,
Director, Office of Nuclear Reactor Regulation.
<PAGE>
D-6.4
NUCLEAR REGULATORY COMMISSION
[Docket No. 50-410]
Long Island Lighting Company Nine Mile Point Nuclear Station, Unit 2;
Environmental Assessment And Finding Of No Significant Impact
Thursday, December 18, 1997
The U.S. Nuclear Regulatory Commission (the Commission) is considering the
issuance of an Order approving, under 10 CFR 50.80, an application regarding a
proposed indirect transfer of control of ownership and possessory rights held by
Long Island Lighting Company (LILCO) under the operating license for Nine Mile
Point Nuclear Station, Unit No. 2 (NMP2). The indirect transfer would be to the
Long Island Power Authority (LIPA), a corporate municipal instrumentality of New
York State. LILCO is licensed by the Commission to own and possess an 18 percent
interest in NMP2, located in the town of Scriba, Oswego County, New York.
Environmental Assessment
Identification of the Proposed Action
The proposed action would consent to the indirect transfer of control of the
license to the extent affected by LILCO becoming a subsidiary of LIPA. This
restructuring of LILCO as a subsidiary of LIPA would result from LIPA's proposed
purchase of LILCO stock through a cash merger at a time when LILCO consists of
its electric transmission and distribution system, its retail electric business,
substantially all of its electric regulatory assets, and its 18 percent share of
NMP2. LILCO would continue to exist as an "electric utility" as defined in 10
CFR 50.2 providing the same electric utility services it did immediately prior
to the restructuring. No direct transfer of the operating license or interests
in the station would result from the proposed restructuring. The transaction
would not involve any change to either the management organization or technical
personnel of Niagara Mohawk Power Corporation (NMPC), which is responsible for
operating and maintaining NMP2 and is not involved in the LIPA acquisition of
LILCO. The proposed action is in accordance with LILCO's application dated
September 8, 1997, as modified and supplemented October 8, 1997, and November 7,
1997.
The Need for the Proposed Action
The proposed action is required to enable LIPA to acquire LILCO as described
above.
Environmental Impacts of the Proposed Action
The Commission has completed its evaluation of the proposed corporate
restructuring and concludes that there will be no physical or operational
changes to NMP2. The corporate restructuring will not affect the qualifications
or organizational affiliation of the personnel who operate and maintain the
facility, as NMPC will continue to be responsible for the maintenance and
operation of NMP2 and is not involved in the acquisition of LILCO by LIPA.
<PAGE>
The change will not increase the probability or consequences of accidents, no
changes are being made in the types of any effluents that may be released
offsite, and there is no significant increase in the allowable individual or
cumulative occupational radiation exposure. Accordingly, the Commission
concludes that there are no significant radiological environmental impacts
associated with the proposed action.
With regard to potential nonradiological impacts, the restructuring would not
affect nonradiological plant effluents and would have no other environmental
impact. Accordingly, the Commission concludes that there are no significant
nonradiological environmental impacts associated with the proposed action.
Alternatives to the Proposed Action
Since the Commission has concluded there are no significant environmental
effects that would result from the proposed action, any alternatives with equal
or greater environmental impact need not be evaluated.
As an alternative to the proposed action, the staff considered denial of the
proposed action. Denial of the application would result in no change in current
environmental impacts. The environmental impacts of the proposed action and the
alternative action are similar.
Alternative Use of Resources
This action does not involve the use of any resources not previously considered
in the Final Environmental Statements Related to the Operation of Nine Mile
Point Nuclear Station, Unit No.
2, (NUREG-1085) dated May 1985.
Agencies and Persons Contacted
In accordance with its stated policy, on December 10, 1997, the staff consulted
with the New York State official, Mr. Jack Spath, regarding the environmental
impact of the proposed action. The State official had no comments.
Finding of No Significant Impact
Based upon the environmental assessment, the Commission concludes that the
proposed action will not have a significant effect on the quality of the human
environment. Accordingly, the Commission has determined not to prepare an
environmental impact statement for the proposed action.
For further details with respect to the proposed action, see LILCO's
application dated September 8, as modified and supplemented by letters dated
October 8 and November 7, 1997, which are available for public inspection at the
Commission's Public Document Room, the Gelman Building, 2120 L Street, NW.,
Washington, DC, and at the local public document room located at the Reference
and Documents Department, Penfield Library, State University of New York,
Oswego, New York 13126.
Dated at Rockville, Maryland, this 9th day of December 1997.
<PAGE>
For the Nuclear Regulatory Commission.
Darl S. Hood,
Senior Project Manager, Project Directorate I-1, Division of Reactor Projects--
I/II, Office of Nuclear Reactor Regulation.
<PAGE>
Exhibit D-7.1
PUBLIC SERVICE COMMISSION
STATE OF NEW YORK
- -------------------------------------------------------------x
Petition of Long Island Lighting Company :
Under Sections 69 and 70 of the Public Service :
Law for Approval of Transfers of Assets and :
Assumption of Liabilities and Debt to Affiliate :
or Affiliates :
- -------------------------------------------------------------x
PETITION OF LONG ISLAND LIGHTING COMPANY
Leonard P. Novello
Senior Vice President and
General Counsel
Long Island Lighting Company
175 East Old Country Road
Hicksville, New York 11801
By Richard A. Visconti
Assistant General Counsel
(516) 545-5586
Hicksville, New York
January 19, 1998
<PAGE>
PUBLIC SERVICE COMMISSION
STATE OF NEW YORK
- -------------------------------------------------------------x
Petition of Long Island Lighting Company :
Under Sections 69 and 70 of the Public Service : Case No.
Law for Approval of Transfers of Assets and : PETITION
Assumption of Liabilities and Debt to Affiliate :
or Affiliates :
- -------------------------------------------------------------x
TO THE PUBLIC SERVICE COMMISSION
OF THE STATE OF NEW YORK:
1. Correspondence regarding this Petition should be addressed to the
following:
Joseph E. Fontana Richard A. Visconti
Vice President-Controller Assistant General Counsel
Long Island Lighting Company Long Island Lighting Company
175 East Old Country Road 175 East Old Country Road
Hicksville, New York 11801 Hicksville, New York 11801
(516) 545-4746 (516) 545-5586
2. Long Island Lighting Company ("LILCO") is an electric and gas corporation,
incorporated in 1910 under the Transportation Corporations Law of the
State of New York and has its principal place of business at 175 East Old
Country Road, Hicksville, New York 11801.
3. A certified copy of LILCO's Certificate of Incorporation and each
amendment or restatement of such Certificate has been heretofore duly
filed with the Commission.
4. Attached hereto as Appendix "A" and made a part hereof is LILCO's
Statement of Financial Condition for the period ending September 30, 1997.
5. LILCO holds franchises to lay conductors for gas and electricity in the
streets, highways and public places of, and furnishes electric and gas
service to consumers in, the Counties of Nassau and Suffolk and on the
Rockaway Peninsula in the Borough of Queens of the City of New York.
<PAGE>
6. In accordance with the terms and conditions of the "Agreement and Plan of
Merger by and among BL Holding Corp., Long Island Lighting Company, Long
Island Power Authority and LIPA Acquisition Corp." dated as of June 26,
1997 (the "LIPA Agreement"), a subsidiary ("LIPA Sub") of the Long Island
Power Authority ("LIPA") shall be merged with and into LILCO ("LIPA
Transaction"), such merger enabling LIPA to acquire control over certain
assets currently owned by LILCO, e.g., LILCO's electric transmission and
distribution system, its 18% ownership interest in the Nine Mile Point 2
Nuclear Plant and its regulatory assets associated with its electric
operations (defined in the LIPA Agreement as "Retained Assets"). In order
to effect this transfer of assets to LIPA's control in a tax efficient
manner: (a) LIPA will form LIPA Sub, (b) LILCO will form a holding company
("HoldCo"), (c) HoldCo will form certain subsidiaries (which may be limited
liability companies), (d) LILCO will transfer those assets that LIPA does
not intend on acquiring, i.e., the assets currently employed by LILCO to
conduct its gas distribution business, its non- nuclear electric generating
facilities and its common plant used to provide operational and management
services in the conduct of LILCO's current gas distribution and electric
generation and distribution businesses (the "Transferred Assets") to
certain HoldCo subsidiaries ("Transferee Subsidiaries"). Then, LILCO, with
the Retained Assets, can merge with LIPA Sub to complete the LIPA
Transaction. As described more fully below, should the business combination
between The Brooklyn Union Gas Company ("Brooklyn Union") and LILCO be
consummated, HoldCo will be the entity that also will own the stock of
KeySpan Energy Corporation ("KeySpan"), the parent company of Brooklyn
Union. (The LIPA Transaction is not contingent on the business combination
of Brooklyn Union and LILCO, and the business combination of
<PAGE>
Brooklyn Union and LILCO is not contingent on the LIPA Transaction. Each
can occur independent of the other. As contemplated in the agreement
between Brooklyn Union and LILCO, Brooklyn Union has expressly consented
to the execution by LILCO of the agreement with LIPA as described herein.)
7. This sequence of events is necessary in order to ensure that LIPA's
acquisition of the Retained Assets is accomplished via a stock transaction
in order to avoid a tax on the assets which LIPA acquires in the LIPA
Transaction. The incurring of such tax liability would negate certain rate
savings sought by LIPA. Accordingly, this sequence of events is necessary
for the LIPA Transaction to be of maximum benefit to consumers on Long
Island.
8. In addition to the Transferred Assets, the Transferee Subsidiaries also
will be assuming certain liabilities of LILCO that are associated with the
conduct of LILCO's gas distribution and non-nuclear generation businesses
and common plant assets, including certain current liabilities ("Assumed
Liabilities"). Moreover, under the LIPA Agreement, LILCO will retain $3.576
billion in LILCO debt, subject to adjustment if LILCO's net worth on the
closing date varies from its net worth used to calculate the purchase price
as reflected in the LIPA Agreement ("Retained Debt Amount"). Pursuant to
the LIPA Agreement, HoldCo and the Transferee Subsidiaries will issue
promissory notes ("Notes") to LILCO in an amount equal to LILCO's actual
debt at closing minus the Retained Debt Amount. The Notes will have such
rates and maturities as shall correspond to each portion of debt underlying
the indebtedness of LILCO on the closing date of the LIPA Transaction.
<PAGE>
9. Therefore, the effect of the LIPA Transaction is that, through a stock
acquisition following the transfer of the Transferred Assets to, and the
assumption of the Assumed Liabilities and issuance of the Notes by, the
Transferee Subsidiaries, LIPA will acquire a portion of LILCO's assets and
assume a portion of LILCO's long term debt and other liabilities.
10. Under the LIPA Act (Pub. Authorities L. ss.ss. 1020 ET SEQ., (McKinney
1994, Supp. 1997)), LIPA has the power to acquire, by purchase or
condemnation, all or any part of the securities or assets of LILCO after a
determination by LIPA that the rates projected to be charged after such
acquisition will not be higher than the rates charged by LILCO if the
acquisition had not occurred. Pub. Authorities L. ss. 1020-h(2). LIPA
previously publicly announced its intention to consider exercising its
condemnation power to acquire the securities or assets of LILCO if a
negotiated transaction were not achieved.
11. Pursuant to Section 70 of the Public Service Law, "no consent, permission
or approval otherwise required under this section shall be necessary for
the sale of the franchise, works, system, stocks or bonds by a gas or
electric corporation to a duly constituted authority of the state." Pub.
Service L. ss. 70 (McKinney 1989, Supp. 1997).
12. Pursuant to the Legislature's delegation of authority to reduce electric
rates on Long Island, LIPA has determined to acquire, through a stock
transaction, certain assets of LILCO, as described herein, in accordance
with the terms and conditions of the LIPA Agreement rather than by exercise
of its power to condemn. Furthermore, the LIPA Agreement specifically
provides that the Transferred Assets will be transferred to the Transferee
Subsidiaries. Accordingly, petitioner respectfully submits that the LIPA
Transaction in the aggregate which includes the necessary transfer of the
Transferred Assets to, and the assumption of the Assumed Liabilities and
issuance of the Notes by,
<PAGE>
the Transferee Subsidiaries in order to avoid the incurrence of an amount
of tax that would make the transaction less economic, is exempt from the
need for Commission approval under Section 70 of the Public Service Law.
Nevertheless, in order to avoid any claim that such approval should have
been obtained, and the pursuit of any such claim in a manner that might
delay or otherwise interfere with the timely consummation of the LIPA
Transaction, LILCO is requesting that the Commission grant approval of the
transfer of the Transferred Assets to the Transferee Subsidiaries and the
assumption of the Assume Liabilities and the issuance of the Notes by such
Transferee subsidiaries as may be subject to the Commission's jurisdiction
under the Public Service Law.
13. As described above, the Transferee Subsidiaries will be owned by HoldCo.
Should the LILCO-Brooklyn Union business combination be consummated, HoldCo
will be the entity that will be formed to hold the stock of KeySpan
pursuant to the terms of the Amended and Restated Agreement and Plan of
Exchange and Merger dated as of June 26, 1997 between LILCO and Brooklyn
Union ("LILCO/Brooklyn Union Agreement"), approval of which is pending
before the Commission in Case 97-M-0567. If the LIPA Transaction is not
consummated, pursuant to the LILCO/Brooklyn Union Agreement, HoldCo also
will own the stock of LILCO. Accordingly, the Transferred Assets will be
owned by the same ultimate parent company (HoldCo) whether or not the LIPA
Transaction is consummated, and the transfer of such assets as part of the
LIPA Transaction raises no public interest concerns beyond the transfer of
stock of LILCO and Brooklyn Union being considered in Case 97-M-0567.
<PAGE>
14. Moreover, the Legislature's delegation of authority to LIPA (found in the
LIPA Act) is a determination that the terms and conditions negotiated by
LIPA in the transaction by which it acquires all or part of the securities
or assets of LILCO is in the public interest, when the conditions set forth
in the statute are satisfied. Therefore, Petitioner respectfully submits
that the transfer of the Transferred Assets to, and the assumption of the
Assumed Liabilities and issuance of the Notes by, the Transferee
Subsidiaries, which is designed to minimize the tax implications of the
transaction, and is a highly significant component of the LIPA Transaction,
satisfies any public interest standard that the Commission may be required
to apply in making its determination on this Petition. However, in
requesting that the Commission make such determination, the Petitioner does
not seek a Commission ruling on any aspect of the LIPA Transaction itself.
15. The Transferred Assets will be those assets described in Schedules A and B
of the LIPA Agreement, which schedules are attached hereto as Appendix "B."
Schedule A provides a general description of the type of assets to be
transferred, and Schedule B provides the "Principles and Procedures for
Finalizing the Transferred Asset Schedule." The vast majority, if not all,
of the Transferred Assets will be transferred to HoldCo subsidiaries that
are Successor Companies, ServeCos, or LILCO, as each of those three terms
are defined in the Settlement Agreement submitted in Case 97-M-0567, and
will be transferred at their net book value. Other Transferred Assets, if
any, shall be identified and valued according to Commission practice.
16. The Assumed Liabilities will consist of (i) the Notes that are to be
issued by the Transferee Subsidiaries and (ii) those liabilities described
in the "Liabilities Undertaking and Indemnification Agreement," which is
attached hereto as Appendix "C."
<PAGE>
17. As described above, the Notes will be issued by the Transferee Subsidiaries
to LIPA in order to reimburse LIPA for the difference in the net worth of
LILCO from the net worth used to calculate the purchase price of LILCO to
which LIPA and LILCO agreed. Essentially, through the issuance of the
Notes, the Transferee Subsidiaries are merely changing the form (but not
the substance) of the debt to which they already are obligated and the
incurrence of which the Commission has previously approved. For this reason
and because the issuance of these Notes is incidental to the asset transfer
that LILCO submits is exempt from Commission review, it is LILCO's position
that Commission approval under Section 69 of the Public Service Law is not
required. Nevertheless, for the reasons described above, LILCO hereby
requests such approval.
18. LILCO proposes that the Commission approve the type of asset transfers,
liability assumptions and debt issuances described in Appendices "B" and
"C" subject to LILCO submitting to the Commission further descriptions of
the assets, liabilities and notes to be transferred to and assumed and
issued by each Transferee Subsidiary at least forty-five (45) days prior
to any such transfer, assumption or issuance.
19. In addition, the Transferee Subsidiary to which LILCO's gas assets and
liabilities are to be transferred ("GasCo") will conduct the gas
distribution business currently conducted by LILCO and will do so pursuant
to the terms and conditions contained in LILCO's Schedule for Gas Service,
P.S.C. No 3-GAS ("Gas Tariff"). Accordingly, GasCo will adopt the Gas
Tariff effective on the closing date of the LIPA Transaction and will file
such notices and supplements and reissue the Gas Tariff as required under
section 270.47 of the Commission's Regulations (16 N.Y.C.R.R.ss.270.47).
GasCo also will agree to be bound by and subject to all rules, regulations,
policy statements, accounting instructions and orders of the Commission
currently applicable to LILCO's gas operations.
<PAGE>
21. LILCO respectfully submits that there is no requirement for the Commission
to conduct an environmental review of the transfers described herein under
the New York State Environmental Quality Review Act ("SEQRA") because (i)
Commission approval of the transfers, as stated above, is not required and
(ii) as a highly significant component of the LIPA Transaction, the
transfers described herein are expressly exempt for SEQRA review under
Section 1020-s(2) of the LIPA Act. Nevertheless, in order to avoid any
claim that such approval should have been obtained and the pursuit of any
such claim in a manner that might delay or otherwise interfere with timely
consummation of the LIPA Transaction, LILCO is filing herewith an
Environmental Assessment Form ("EAF") that demonstrates there are no
adverse environmental impacts as a consequence of the requested transfer.
Wherefore, for the foregoing reasons, LILCO respectfully requests that the
Commission promptly and expeditiously issue an order approving (a) the transfer
of the Transferred Assets, (b) the assumption of the Assumed Liabilities, and
(c) the issuance of the Notes by any Transferee Subsidiary that may be subject
to the Commission's jurisdiction under section 69 of the Public Service Law, and
granting to LILCO such other and further relief to which LILCO may be entitled.
Respectfully submitted,
Leonard P. Novello
Senior Vice President and
General Counsel
Long Island Lighting Company
175 East Old Country Road
Hicksville, New York 11801
By /S/ RICHARD A. VISCONTI
Richard A. Visconti
Assistant General Counsel
Hicksville, New York
January 19, 1998
<PAGE>
VERIFICATION
STATE OF NEW YORK )
:
COUNTY OF NASSAU )
JOSEPH E. FONTANA, being duly sworn, deposes and says: that he is Vice
President and Controller of Long Island Lighting Company, the Petitioner in this
proceeding; that he has read the foregoing Petition and knows the contents
thereof; and that the same is true to the best of his knowledge, information and
belief.
/S/ JOSEPH E. FONTANA
---------------------
JOSEPH E. FONTANA
Vice President and Controller
Long Island Lighting Company
Sworn to before me this
19th day of January 1998
/S/ JOANNE S. CARR
Notary Public
<PAGE>
CASE 98-M-0074
Exhibit D-7.2
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
At a session of the Public Service
Commission held in the City of
Albany on February 4, 1998
COMMISSIONERS PRESENT:
John F. O'Mara, Chairman
Maureen O. Helmer
Thomas J. Dunleavy
CASE 98-M-0074 - Petition of Long Island Lighting Company for
Approval to: (a) under Section 70 of the Public
Service Law to transfer certain assets from
LILCO to newly formed subsidiaries of a new
holding company; (b) for the subsidiaries
receiving the assets to assume certain
liabilities associated with those transferred
assets; and (c) under PSL Section 69 for the
issuance of promissory notes by those same
subsidiaries.
ORDER ADOPTING NEGATIVE DECLARATION
(Issued and Effective February 6, 1998)
BY THE COMMISSION:
BACKGROUND AND DESCRIPTION OF THE ACTION
This proceeding commenced upon the filing on January 20, 1998 of a Petition
by Long Island Lighting Company (LILCO) for authorization under Section 70 of
the Public Service Law (PSL) to transfer certain assets from LILCO to newly
formed subsidiaries of a new holding company (HoldCo); for the subsidiaries
receiving the assets to assume certain liabilities associated with those
transferred assets; and under PSL Section 69 for the issuance of promissory
notes by those same subsidiaries.
The purpose of the actions is to leave the LILCO corporate entity with
ownership of only those assets that the Long Island Power Authority (LIPA)
wishes to acquire in a separate transaction. To accomplish this, the assets that
LIPA does not intend on acquiring, i.e., the assets currently employed
-1-
<PAGE>
CASE 98-M-0074
by LILCO to conduct its gas distribution business, its non-nuclear electric
generating facilities and its common plant used to provide operational and
management services in the conduct of LILCO's current gas distribution and
electric generation and distribution business, must be transferred out of the
LILCO corporate entity to certain HoldCo subsidiaries. Then, LILCO, with the
retained assets desired by LIPA, can merge with a subsidiary of LIPA to complete
the LIPA Transaction.
According to LILCO, this sequence of events is necessary in order to
ensure that LIPA's acquisition of the retained assets is accomplished via a
stock transaction in order to avoid a tax on the assets which LIPA acquires. The
incurring of such tax liability would negate certain rate savings sought by
LIPA. Therefore, this sequence of events is necessary for the transaction by
LIPA to be of maximum benefit to consumers on Long Island.
In addition to the assets to be transferred, LILCO proposes that the
HoldCo subsidiaries also assume certain liabilities of LILCO that are associated
with the conduct of LILCO's gas distribution and non-nuclear generation
businesses and common plant assets, including certain current liabilities.
Moreover, LILCO proposes to retain $3,576 million in LILCO debt, subject to
adjustment, and proposes that HoldCo and its subsidiaries issue promissory notes
to LILCO in an amount equal to LILCO's actual debt at closing minus the retained
debt amount.
LILCO submits that the proposed transfers, assumption of
liabilities, and issuance of notes are exempt from the need for Commission
approval under the PSL, but "[n]evertheless, in order to avoid any claim that
such approval should have been obtained, and the pursuit of any such claim in a
manner that might delay or otherwise interfere with the timely consummation of
the LIPA Transaction, LILCO is requesting that the Commission grant approval" as
may be subject to the Commission's jurisdiction. However, in requesting that the
Commission make such determination, the Petitioner does not seek a Commission
ruling on any aspect of the LIPA Transaction itself.
-2-
<PAGE>
CASE 98-M-0074
In addition, LILCO submits that there is no requirement for the
Commission to conduct an environmental review of the transfers described herein
under the New York State Environmental Quality Review Act ("SEQRA") because (i)
Commission approval of the transfers, as stated above, is not required and (ii)
as a highly significant component of the LIPA Transaction, the transfers
described herein are expressly exempt from SEQRA review under Section 1020-s(2)
of the LIPA Act. Nevertheless, in order to avoid any claim that such approval
should have been obtained and the pursuit of any such claim in a manner that
might delay or otherwise interfere with timely consummation of the LIPA
Transaction, LILCO has filed an Environmental Assessment Form ("EAF").
THE ENVIRONMENTAL ASSESSMENT
LILCO has submitted a full EAF in this proceeding along with a
supplementary narrative. The EAF was filed on January 20, 1998 as an attachment
to the Petition. LILCO asserts in the EAF that the proposed transfer will not
cause any short term, long term or incremental adverse environmental impacts
because there will be no material or relevant change in the way the transferred
assets are used or operated. HoldCo and all of its subsidiaries will continue to
be subject to the application of the existing broad environmental regulatory
framework and will continue established compliance programs and policies as
before the transfer.
DISCUSSION
We have reviewed LILCO's EAF and the terms of the Petition presented
for Commission approval. We agree that the proposed transfer and related
approvals, if granted, will not cause any short term, long term or incremental
adverse environmental impacts because there will be no material or relevant
change in the way the transferred assets are used or operated. HoldCo and all of
its subsidiaries will continue to be subject to the application of the existing
broad environmental
-3-
<PAGE>
CASE 98-M-0074
regulatory framework and will continue established compliance programs and
policies as before the transfer.
In making this evaluation we have not examined the potential
environmental impacts of the proposed LIPA Transaction. LILCO, the Petitioner,
does not seek a Commission ruling on any aspect of the LIPA Transaction itself.
The Legislature, in enacting Section 1020-s(2) of the Public Authorities Law has
determined that the LIPA Transaction is not a "state action" within the meaning
of SEQRA and therefore no environmental review of such transaction by the
Commission is necessary or contemplated by the statute.
The Commission is "Lead Agency" and having examined and considered
the relevant environmental impacts and facts disclosed in the EAF and the terms
of the Petition presented for Commission approval, we have determined that when
balanced with social, economic and other considerations the action is one that
avoids or minimizes adverse environmental impacts to the maximum extent
practicable, and that the action proposed in this proceeding will not have a
significant effect on the environment, therefore, we shall adopt a negative
declaration pursuant to SEQRA and a Draft Environmental Impact Statement will
not be prepared.
THE COMMISSION ORDERS:
1. The Commission is "lead agency" for the purposes of environmental review
of the proposed action in this proceeding.
2. The proposed action is an "unlisted" action.
3. The proposed action will not have a significant effect on the
environment.
4. The attached negative declaration is adopted and a Draft Environmental
Impact Statement will not be prepared.
5. This proceeding is continued.
By the Commission,
(SIGNED) JOHN C. CRARY
Secretary
STATE ENVIRONMENTAL QUALITY REVIEW
NEGATIVE DECLARATION
NOTICE OF DETERMINATION OF NON-SIGNIFICANCE
PROJECT NUMBER CASE 98-M-0074
This notice is issued pursuant to Part 617 of the implementing
regulations pertaining to Article 8 (State Environmental Quality Review Act) of
the Environmental
Conservation Law.
The New York State Public Service Commission, as lead agency, has
determined that the proposed action described below will not have a significant
effect on the environment and a Draft Environmental Impact Statement will not be
prepared.
NAME OF ACTION:
Petition of Long Island Lighting Company (LILCO) for Approval to:
(a) under Section 70 of the Public Service Law to transfer certain assets from
LILCO to newly formed subsidiaries of a new holding company; (b) for the
subsidiaries receiving the assets to assume certain liabilities associated with
those transferred assets; and (c) under PSL Section 69 for the issuance of
promissory notes by those same subsidiaries.
SEQR STATUS: Type 1 ___
Type 2 ___
Unlisted X
CONDITIONED NEGATIVE DECLARATION ___ Yes
X No
DESCRIPTION OF ACTION:
LILCO seeks approval of a Petition for authorization under Section
70 of the Public Service Law (PSL) to transfer certain assets from LILCO to
newly formed subsidiaries of a new holding company (HoldCo); for the
subsidiaries receiving the assets to assume certain liabilities associated with
those transferred assets; and under PSL Section 69 for the issuance of
promissory notes by those same subsidiaries.
LILCO proposes to transfer out of the LILCO corporate entity to certain
HoldCo subsidiaries the assets currently employed by LILCO to conduct its gas
distribution business, its non-nuclear electric generating facilities and its
common plant used to provide operational and management services in the conduct
of LILCO's current gas distribution and electric generation and distribution
business. In addition to the assets to be transferred, LILCO proposes that the
HoldCo subsidiaries also assume certain liabilities of LILCO that are associated
with the conduct of LILCO's gas distribution and non-nuclear generation
businesses and common plant assets, including certain current liabilities.
Moreover, LILCO proposes to retain $3,576 million in LILCO debt, subject to
adjustment, and proposes that HoldCo and its subsidiaries issue promissory notes
to LILCO in an amount equal to LILCO's actual debt at closing minus the retained
debt amount.
LOCATION:
Service territory of Long Island Lighting Company, Nassau and Suffolk
counties and a portion of New York City (Rockaway Peninsula in Queens).
REASONS SUPPORTING THIS DETERMINATION:
The proposed transfer and related approvals, if granted, will not
cause any short term, long term or incremental adverse environmental impacts
because there will be no material or relevant change in the way the transferred
assets are used or operated. HoldCo and all of its subsidiaries will continue to
be subject to the application of the existing broad environmental regulatory
framework and will continue established compliance programs and policies as
before the transfer.
FOR FURTHER INFORMATION:
Contact Person: PETER ISAACSON
Address: N.Y.S. Department of Public Service
Three Empire State Plaza
Albany, New York 12223-1350
Telephone Number: (518) 486-2875
-1-
<PAGE>
EXHIBIT E-2
LILCO
ESTIMATED BALANCE SHEET FOR TRANSFERRED ASSETS
12/31/97
(IN MILLIONS)
<TABLE>
<CAPTION>
LILCO Sale to Transferred
(Historical) LIPA Assets
======================================================================
ASSETS
Property
Utility Plant
<S> <C> <C> <C>
Electric $4,005.9 2,911.4 1,094.5
Gas 1,218.7 0.0 1,218.7
Common 286.4 0.0 286.4
Construction work in progress 116.1 42.0 74.1
Nuclear fuel in process and in reactor 16.2 16.2 0.0
Less - Accumulated depreciation 0.0 0.0 0.0
and amortization (1,847.8) (933.3) (914.5)
---------- -------- ---------
Total Net Utility Plant 3,795.5 2036.3 1,759.2
Gas exploration and production, at cost 0.0 0.0 0.0
Less - Accumulated depletion 0.0 0.0 0.0
---------- --------- ---------
Total Net Plant 3,795.5 2,036.3 1,759.2
---------- --------- ---------
Cost In Excess of Net Assets Acquired 0.0 0.0 0.0
---------- --------- ---------
Regulatory Assets
Base financial component (less accumulated
amortization of $858.2) 3,180.6 3,180.6 0.0
Rate moderation component 385.5 385.5 0.0
Shoreham post-settlement costs 1,003.6 1,003.6 0.0
Regulatory tax asset 1,746.9 1,724.4 22.5
Postretirement benefits other than pensions 346.1 0.0 346.1
Other 422.1 347.8 74.3
--------- -------- ---------
Total Regulatory Assets 7,084.8 6,641.9 442.9
--------- -------- ---------
Nonutility Property and Other Investments 49.9 17.7 32.2
--------- -------- ---------
Current Assets
Cash and cash equivalents 180.0 0.0 180.0
Deferred tax asset 11.3 0.0 11.3
Accounts receivable and accrued revenues 463.4 314.0 149.4
Other Current Assets 252.6 55.1 197.5
-------- -------- ---------
Total Current Assets 907.3 369.1 538.2
Deferred Charges 70.2 46.8 23.4
--------- -------- ---------
Contractual receivable from LIPA 0.0 0.0 0.0
--------- -------- ---------
Total Assets 11,907.7 9,111.8 2,795.9
========= ======== =========
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareowners' Equity 2,608.5 2,500.8 107.7
Long-term debt, includes current maturities 4,482.7 3,359.1 1,123.6
Preferred stock 701.0 338.0 363.0
-------- -------- ---------
Total Capitalization 7,792.2 6,197.9 1,594.3
------- ------- -------
Regulatory Liabilities 407.0 385.8 21.2
-------- -------- ---------
Current Liabilities
Accounts payable and accrued expenses 288.6 101.7 186.9
Accrued taxes (including Federal income tax) 54.5 54.5
Other current liabilities 336.6 54.0 282.6
--------- --------- --------
679.7 155.7 524.0
--------- --------- ---------
Deferred Credits
Deferred federal income tax 2,506.9 2,355.9 151.0
Other 77.4 18.6 58.8
--------- --------- ---------
Total Deferred Credits 2,584.3 2,374.5 209.8
------- ------- ---------
Operating Reserves 444.5 (2.1) 446.6
-------- ---------- ---------
Commitments and Contingencies 0.0 0.0 0.0
--------- --------- ----------
Minority Interest in Subsidiary Company 0.0 0.0 0.0
--------- ---------- ----------
Total Capitalization and Liabilities 11,907.7 9,111.8 2,795.9
========= ========== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements
<PAGE>
Exhibit F-1 -- Opinion of Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, N.Y. 10022 - 3852
(212) 715 - 9100
Fax
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212) 715-9164
May 12, 1998
VIA EDGAR
- ---------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Form U-1 Application (File No. 070-09157)
BL Holding Corp.
-----------------------------------------
Ladies and Gentlemen:
We have acted as special counsel for BL Holding Corp. (the "Company"),
a New York corporation and for the Long Island Lighting Company ("LILCO"), a New
York corporation, in connection with the Company's Application on Form U-1, as
amended (the "Application") with the Securities and Exchange Commission (the
"Commission") under the Public Utility Holding Company Act of 1935, as amended
(the "Act"). Capitalized terms used but not defined herein have the respective
meanings assigned thereto in the Application.
The Application seeks the authorization of:
(a) the acquisition by the Company of all the issued and
outstanding common stock of (i) KeySpan Energy Corporation
("KeySpan"), a New York corporation, and (ii) LILCO; and
(b) the acquisition by the Company of the equity interests in one
or more subsidiaries of the Company (one or more of which may
be limited liability companies), and the transfer to such
subsidiaries of certain assets by LILCO if a proposed merger
of LILCO into a subsidiary of LIPA occurs.
In connection therewith, the Company has filed a Registration Statement
on Form S- 4, as amended (the "Registration Statement") with the Commission
under the Securities Act of 1933, as amended registering 173,048,739 shares of
the Company's Common Stock, par value $0.01 per share, and 14,520,000 shares of
the Company's AA Preferred Stock, par value $25 per share, which are issuable
upon the consummation of, and subsequent to the
<PAGE>
KRAMER, LEVIN, NAFTALIS & FRANKEL
Securities and Exchange Commission
May 11, 1998
Page 2
share exchange contemplated by the Exchange and Merger Agreement between LILCO
and KeySpan filed as Annex A to the Registration Statement.
As counsel to the Company, we are generally familiar with its corporate
proceedings and have examined the Application, the Registration Statement and
the Exchange and Merger Agreement and such other documents as we have deemed
relevant and necessary as a basis for the opinion hereinafter set forth. In
addition, we have made such other and further investigations as we have deemed
relevant and necessary as a basis for the opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.
Based on the foregoing and upon such further examination of corporate
records and documents and matters of law as we have considered necessary or
desirable for the purposes of this opinion, it is our opinion that:
(a) the Company is validly organized and duly existing under the laws
of the State of New York;
(b) when all necessary regulatory approvals shall have been obtained,
when the Company's Common Stock shall have been issued and exchanged in
accordance with the terms of the Exchange and Merger Agreement as
proposed in the Application and the Registration Statement, and when
the Certificate of Exchange shall have been filed by the Department of
State of the State of New York or become effective as may be specified
in the Certificate of Exchange, (i) all governmental approvals required
under the laws of the State of New York applicable to the participation
by the Company, LILCO and KeySpan Energy Corporation in the
transactions described in the Application will have been complied with;
(ii) the Company's Common Stock will be legally issued, fully paid and
non-assessable, and the holders thereof will be entitled to the rights
appertaining thereto set forth in the Company's Certificate of
Incorporation; and (iii) the consummation of the transactions proposed
in the Application will not violate the legal rights of the holders of
any securities issued by the Company, LILCO or any associate company
thereof.
<PAGE>
KRAMER, LEVIN, NAFTALIS & FRANKEL
Securities and Exchange Commission
May 11, 1998
Page 3
The opinion expressed herein is limited to the laws of the State of New
York and to applicable United States federal law and we express no opinion as to
the laws of any other jurisdiction.
For purposes of the opinion expressed in clause (i) of paragraph (b)
above, we have relied upon the opinion of Richard A. Visconti, Assistant General
Counsel of LILCO, as to the issuance by the New York State Public Service
Commission (the "NYSPSC") of orders approving the transactions described in the
Application. Such opinion states in pertinent part, that all NYSPSC approvals
required for the consummation of such transactions have been obtained and are
currently in force and effect. Please note that our opinion expressed in clause
(i) of paragraph (b) above does not address the status of any local franchises
or permits relating to the assets to be transferred by LILCO to the Company.
We hereby consent to the filing of this opinion as Exhibit F-1 to the
Application.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
------------------------------------
Kramer, Levin, Naftalis & Frankel
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
EXHIBIT G. This schedule contains summary financial information extracted from
the Statement of Income and Balance Sheet, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 3,153,300
<OTHER-PROPERTY-AND-INVEST> 577,700
<TOTAL-CURRENT-ASSETS> 3,677,900
<TOTAL-DEFERRED-CHARGES> 100,800
<OTHER-ASSETS> 762,600
<TOTAL-ASSETS> 8,272,300
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,786,800
0
438,000
<LONG-TERM-DEBT-NET> 1,808,700
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 6,000
<COMMERCIAL-PAPER-OBLIGATIONS> 34,300
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,198,500
<TOT-CAPITALIZATION-AND-LIAB> 8,272,300
<GROSS-OPERATING-REVENUE> 2,524,300
<INCOME-TAX-EXPENSE> 122,100
<OTHER-OPERATING-EXPENSES> 2,071,700
<TOTAL-OPERATING-EXPENSES> 2,193,800
<OPERATING-INCOME-LOSS> 330,500
<OTHER-INCOME-NET> 2,000
<INCOME-BEFORE-INTEREST-EXPEN> 332,500
<TOTAL-INTEREST-EXPENSE> 140,100
<NET-INCOME> 192,400
34,900
<EARNINGS-AVAILABLE-FOR-COMM> 157,500
<COMMON-STOCK-DIVIDENDS> 279,638
<TOTAL-INTEREST-ON-BONDS> 111,539
<CASH-FLOW-OPERATIONS> 0
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income and Balance Sheet, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,394,100
<OTHER-PROPERTY-AND-INVEST> 545,500
<TOTAL-CURRENT-ASSETS> 523,700
<TOTAL-DEFERRED-CHARGES> 154,300
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,617,600
<COMMON> 17,000
<CAPITAL-SURPLUS-PAID-IN> 563,600
<RETAINED-EARNINGS> 433,500
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,014,100
0
0
<LONG-TERM-DEBT-NET> 760,100
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 6,000
<COMMERCIAL-PAPER-OBLIGATIONS> 34,300
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 803,100
<TOT-CAPITALIZATION-AND-LIAB> 2,617,600
<GROSS-OPERATING-REVENUE> 1,483,500
<INCOME-TAX-EXPENSE> 58,600
<OTHER-OPERATING-EXPENSES> 1,275,500
<TOTAL-OPERATING-EXPENSES> 1,334,100
<OPERATING-INCOME-LOSS> 149,400
<OTHER-INCOME-NET> 21,600
<INCOME-BEFORE-INTEREST-EXPEN> 171,000
<TOTAL-INTEREST-EXPENSE> 44,500
<NET-INCOME> 126,500
200
<EARNINGS-AVAILABLE-FOR-COMM> 126,300
<COMMON-STOCK-DIVIDENDS> 74,391
<TOTAL-INTEREST-ON-BONDS> 36,939
<CASH-FLOW-OPERATIONS> 233,646
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income and Balance Sheet, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 1,759,200
<OTHER-PROPERTY-AND-INVEST> 32,200
<TOTAL-CURRENT-ASSETS> 3,154,200
<TOTAL-DEFERRED-CHARGES> 23,400
<OTHER-ASSETS> 423,500
<TOTAL-ASSETS> 5,392,500
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,572,300
0
438,000
<LONG-TERM-DEBT-NET> 1,048,600
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,333,600
<TOT-CAPITALIZATION-AND-LIAB> 5,392,500
<GROSS-OPERATING-REVENUE> 1,040,800
<INCOME-TAX-EXPENSE> 63,500
<OTHER-OPERATING-EXPENSES> 790,200
<TOTAL-OPERATING-EXPENSES> 853,700
<OPERATING-INCOME-LOSS> 187,100
<OTHER-INCOME-NET> (19,600)
<INCOME-BEFORE-INTEREST-EXPEN> 167,500
<TOTAL-INTEREST-EXPENSE> 95,600
<NET-INCOME> 71,900
34,700
<EARNINGS-AVAILABLE-FOR-COMM> 37,200
<COMMON-STOCK-DIVIDENDS> 215,507
<TOTAL-INTEREST-ON-BONDS> 74,600
<CASH-FLOW-OPERATIONS> 0
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income and Balance Sheet, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,795,500
<OTHER-PROPERTY-AND-INVEST> 49,900
<TOTAL-CURRENT-ASSETS> 907,300
<TOTAL-DEFERRED-CHARGES> 70,200
<OTHER-ASSETS> 7,084,800
<TOTAL-ASSETS> 11,907,700
<COMMON> 606,633
<CAPITAL-SURPLUS-PAID-IN> 1,094,702
<RETAINED-EARNINGS> 907,209
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,608,544
637,450
63,562
<LONG-TERM-DEBT-NET> 4,381,694
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 101,000
1,050
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,114,400
<TOT-CAPITALIZATION-AND-LIAB> 11,907,700
<GROSS-OPERATING-REVENUE> 3,147,700
<INCOME-TAX-EXPENSE> 224,500
<OTHER-OPERATING-EXPENSES> 2,174,600
<TOTAL-OPERATING-EXPENSES> 2,399,100
<OPERATING-INCOME-LOSS> 748,600
<OTHER-INCOME-NET> (4,300)
<INCOME-BEFORE-INTEREST-EXPEN> 744,300
<TOTAL-INTEREST-EXPENSE> 410,300
<NET-INCOME> 334,000
51,800
<EARNINGS-AVAILABLE-FOR-COMM> 282,200
<COMMON-STOCK-DIVIDENDS> 215,507
<TOTAL-INTEREST-ON-BONDS> 353,698
<CASH-FLOW-OPERATIONS> 703,044
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.33
</TABLE>
