As filed with the Securities and Exchange Commission on December 3, 1999
File No. 70-9537
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
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AMENDMENT NO. 1 TO
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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New England Electric System Eastern Utilities Associates
Massachusetts Electric Company Blackstone Valley Electric Company
Granite State Electric Company Eastern Edison Company
The Narragansett Electric Company Montaup Electric Company
Nantucket Electric Company Newport Electric Corporation
New England Power Company One Liberty Square, PO Box 2333
New England Hydro-Transmission Corporation Boston, MA 02109
New England Hydro-Transmission Electric
Company
New England Electric Transmission Corporation
Research Drive LLC
New England Power Service Company
New England Energy Incorporated
25 Research Drive
Westborough, MA 01582
(Name of companies and top registered holding company
parents filing this statement and addresses of
principal executive offices)
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Michael E. Jesanis Donald G. Pardus
Kirk L. Ramsauer Clifford J. Hebert, Jr.
New England Electric System Eastern Utilities Associates
25 Research Drive One Liberty Square, P.O. Box 2333
Westborough, MA 01582 Boston, MA 02109
(Name and addresses of agents for service)
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The Commission also is requested to send copies of any communications
in connection with this matter to:
Clifford M. Naeve, Esq. Arthur I. Anderson, P.C.
Judith A. Center, Esq. David A. Fazzone, P.C.
W. Mason Emnett, Esq. Amy J. Gould, Esq.
William C. Weeden McDermott, Will & Emery
Skadden, Arps, Slate, Meagher & 28 State Street
Flom LLP Boston, MA 02109-1775
1440 New York Avenue, N.W.
Washington, D.C. 20005
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New England Electric System ("NEES"), a registered public utility
holding company organized as a voluntary association in the Commonwealth of
Massachusetts, and Eastern Utilities Associates ("EUA"), a registered public
utility holding company organized under a Declaration of Trust in the
Commonwealth of Massachusetts (collectively, the "Applicants"), hereby amend
their Application/Declaration on Form U-1 in File No. 70-9537 as follows:
1. By amending and restating the first paragraph in Item 1.A. as follows:
"This Form U-1 Application/Declaration
("Application/Declaration") seeks approvals relating to the proposed
combination of New England Electric System ("NEES"), Eastern Utilities
Associates ("EUA"), and Research Drive LLC ("LLC"), a Massachusetts limited
liability company1 (the "Merger"). Pursuant to the merger, LLC will merge
with and into EUA, with EUA as the surviving entity, and, therefore, a
wholly-owned subsidiary of NEES. EUA subsequently will be merged with and
into NEES, with NEES as the surviving entity (together with the Merger, the
"Transaction"). Subsequent to the Transaction, NEES will remain a
registered holding company pursuant to the Public Utility Holding Company
Act of 1935 (the "Act"). This Application/Declaration is filed by NEES on
behalf of itself and its electric utility subsidiaries: Massachusetts
Electric Company ("Mass. Electric"); Granite State Electric Company
("Granite State"); The Narragansett Electric Company ("Narragansett");
Nantucket Electric Company ("Nantucket"); New England Power Company
("NEP"); New England Hydro-Transmission Corporation ("N.H. Hydro"); New
England Hydro-Transmission Electric Company ("Mass. Hydro"); New England
Electric Transmission Corporation ("NEET"), and non-utility subsidiaries:
LLC; New England Power Service Company ("Service Company"); New England
Energy Incorporated ("NEEI"), and by EUA on behalf of itself and its
electric utility subsidiaries: Blackstone Valley Electric Company
("Blackstone"); Eastern Edison Company ("Eastern Edison"); Montaup Electric
Company ("Montaup"); and Newport Electric Corporation ("Newport")."
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1 NEES owns ninety-nine percent of the voting securities of LLC and NEES
Global, Inc. ("NEES Global") owns the remaining one percent. NEES Global is
wholly-owned by NEES.
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2. By amending and restating the fifth paragraph in Item 1.A. as follows:
"The Transaction which is the subject of this
Application/Declaration is not contingent upon consummation of the NEES/NGG
Merger. However, the instant Transaction has the full support of NGG. It is
expected that the joint effect of this Transaction and the NEES/NGG Merger
will be the creation of a new registered holding company, NGG, which will
own a stronger, more efficient U.S. electric utility business formed
through the consolidation of NEES and EUA.3 In any event, the timing of the
Commission's action on the Merger and the NEES/NGG Merger is uncertain.
Should the Commission approve the NEES/NGG Merger first, NGG has committed
to joining NEES as an applicant to this Application/Declaration. Applicants
also note that, should the Commission approve the Transaction first, NEES
and NGG have requested in the Application/Declaration seeking approval of
the NEES/NGG Merger (Amendment No. 4 to File 70-9473, filed October 8,
1999) that such Application/Declaration be deemed a request for the
acquisition of an indirect interest in the EUA subsidiaries and operations
acquired by NEES."
3. By amending and restating the paragraph describing the acquisition of
common shares, located under the heading "1. General Request" in Item 1.A.1. as
follows:
o "The mergers of Eastern Edison and Mass. Electric, with Mass. Electric
being the surviving entity; NEP and Montaup,4 with NEP being the
surviving entity; and Blackstone, Newport, and Narragansett, with
Narragansett being the surviving entity; (the 6 5/8% Preferred Stock
of Eastern Edison to be mandatorily exchanged for a new issue of
preferred stock of Mass. Electric with the same par value, divided
rate, and redemption provisions; the 5 7/8% Pollution Control Revenue
Bonds of Eastern Edison to be assumed by Mass. Electric; the parties
currently intending that all of the other outstanding publicly held
securities of Eastern Edison, Montaup, Blackstone, and Newport will be
either redeemed, retired, or defeased);"
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3 The effects of the merger of NEES and NGG in conjunction with the Trans
action are addressed at various points in this Application/Declaration.
4 See note 9, infra.
2
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4. By amending and restating the paragraph describing the merger of EUA
Service Corporation into New England Power Service Company, located under the
heading "1. General Request" in Item 1.A.1. as follows:
o "The merger of EUA Service Corporation ("EUA Service") into Service
Company, with Service Company being the surviving service company, and
the former EUA companies entering into service agreements with Service
Company in the authorized form;"
5. By amending and restating the third paragraph in Item 1.A.1, describing the
regulatory approvals required by the merger of NEES, EUA and LLC, as follows:
"The Merger also requires receipt of the approval of: (i) the
Commission under the Act; (ii) the Federal Energy Regulatory Commission
("FERC"), which approval was granted on September 29, 1999 in New England
Power Company, 88 FERC para. 61,292 (1999), attached hereto as Exhibit
D-1.A; (iii) the Nuclear Regulatory Commission ("NRC"); (iv) the Federal
Communications Commission ("FCC"); (v) the Vermont Public Service Board
(the "VPSB"); and (vi) the Connecticut Department of Public Utility Control
(the "CDPUC"), which approval was granted on October 27, 1999 in
Application of Montaup Electric Company, Docket Nos. 99-08-11, 99-08-12,
99-08-13 (Oct. 27, 1999), attached hereto as Exhibit D-5.A.5 Additionally,
pursuant to Chapter 247 of the Acts of 1999 of the General Assembly of the
State of Rhode Island and the Providence Plantations (99-H 6374 am),
enacted July 1, 1999, the Rhode Island Division of Public Utilities and
Carriers ("RIDIV") must approve a merger of public utilities. Therefore,
the RIDIV has jurisdiction to approve the merger of Blackstone and Newport
into Narragansett."
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5 In mid-November 1999, Montaup sold its ownership interest in the Seabrook
Nuclear Plant located in New Hampshire and is no longer regulated by the
New Hampshire Public Utilities Commission ("NHPUC"). Therefore, NHPUC
approval of the Transaction would not be required. The NHPUC, however, has
asserted jurisdiction over the acquisition by NGG of all of the common
shares of NEES. The NHPUC has approved this acquisition, concluding that
the acquisition of NEES by NGG will not result in any net harm to New
Hampshire ratepayers. New England Electric System, Order No. 23,308, DE
99-035 (Oct. 4, 1999) (attached hereto as Exhibit D-6.A).
3
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6. By amending and restating the fourth paragraph in Item 1.B.1.a. as follows:
"NEES owns all of the voting securities of the following four
distribution subsidiaries: Mass. Electric, Narragansett, Granite State, and
Nantucket (collectively, the "Electricity Delivery Companies"). NEES also
owns 99.97 percent of the outstanding voting securities of its principal
transmission subsidiary, NEP. Together, the Electricity Delivery Companies
and NEP constitute a single integrated electric utility system (the "NEES
System") that is directly interconnected with other utilities in New
England and New York State, including EUA, and indirectly interconnected
with utilities in Canada. The NEES System covers more than 4,500 square
miles with a population of approximately 3,000,000. At December 31, 1998,
NEES and its subsidiaries had approximately 3,540 employees. A map marking
the entire NEES service area is attached as Exhibit E-4."
7. By amending and restating the tenth paragraph in Item 1.B.1.a. as follows:
"NEET is a wholly-owned subsidiary of NEES. NEET owns and
operates a direct current/alternating current converter terminal facility
for the first phase of the Hydro-Quebec and New England interconnection
(the "Interconnection") and six miles of high voltage direct current
transmission line in New Hampshire. NEET, Mass. Hydro (described below) and
N.H. Hydro (described below) together own and operate, on behalf of New
England Power Pool ("NEPOOL") participants in the second phase of the
Interconnection, a 450 kV direct current transmission line and related
terminals. As of December 31, 1998, NEET had total assets of $35.2 million,
operating revenues of $9.6 million and net income of $813,000."
8. By amending and restating the eleventh paragraph in Item 1.B.1.a. as
follows:
"N.H. Hydro, in which NEES holds 53.97 percent of the common
stock, operates 121 miles of high-voltage direct current transmission lines
in New Hampshire for the second phase of the Interconnection, extending to
the Massachusetts border. At the end of 1998, N.H. Hydro had total assets
of $131.0 million, operating revenues of $31.7 million and net income of
$4.8 million."
4
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9. By amending and restating the twelfth paragraph in Item 1.B.1.a. as
follows:
"Mass. Hydro, 53.97 percent of the voting stock of which is held
by NEES, operates a direct current/alternating current terminal and related
facilities for the second phase of the Interconnection and 12 miles of
high-voltage direct current transmission lines in Massachusetts. At the end
of 1998, Mass. Hydro had total assets of $160.0 million, operating revenues
of $37.0 million and net income of $7.9 million."
10. By amending and restating the eighth paragraph in Item 1.B.1.b. as follows:
"Montaup, a subsidiary of Eastern Edison9, is a generation and
transmission company that supplies electricity at wholesale to Eastern
Edison, Blackstone, Newport, and two unaffiliated utilities. Consistent
with the electric utility industry restructuring legislation passed in
Massachusetts and Rhode Island and settlement agreements approved by
regulators in those states and at the FERC, Montaup has agreed to sell all
of its generating assets and transfer its non-nuclear power purchase
contracts. Montaup has minority ownership interests in Vermont Yankee,
Connecticut Yankee, Maine Yankee, and Yankee Atomic. Montaup also owns
minority interests in Millstone 3. As noted above, Yankee Atomic,
Connecticut Yankee and Maine Yankee permanently have shut down operations.
In addition, Montaup continues to attempt to sell its interests in Vermont
Yankee and Millstone 3. At the end of 1998 Montaup had total assets of
$641.0 million, operating revenues of $324.7 million and net income of
$15.5 million. Montaup is subject to the regulation of the FERC, and the
NRC, and to limited regulation by the MPUC, the CDPUC, the VPSB, and the
MDTE."
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9 Montaup currently is a subsidiary of Eastern Edison. However, on July 14
1999, EUA filed an application (File No. 70-9527) with the Commission
seeking authority for Eastern Edison to transfer to EUA, and for EUA to
acquire from Eastern Edison, all of Eastern Edison's investment in
Montaup's capitalization, so that EUA will become the direct parent of
Montaup.
5
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11. By amending and restating the heading of and paragraph in Item 1.B.3.a.v.
as follows:
"v. AllEnergy Marketing Company, L.L.C.
AllEnergy Marketing Company, L.L.C. ("AllEnergy") is an indirect,
wholly-owned subsidiary of NEES. NEES Energy owns 100 percent of the voting
securities of AllEnergy. AllEnergy, a member of NEPOOL, markets energy
commodities (natural gas, propane, and oil) and provides a wide range of
energy-related services, including but not limited to, marketing, brokering
and sales of energy, audits, fuel supply, repair, maintenance,
construction, operation, design, engineering, and consulting to customers
in the competitive power markets of New England and New York. AllEnergy
also owns Texas Liquids LLC, which is principally a propane and natural gas
marketer with its home office in New Jersey. On February 12, 1999, NEES and
AllEnergy acquired Griffith Consumers Company, a full service distributor
of residential and commercial heating oil in Washington, D.C., and in parts
of Maryland, Delaware, Virginia, and West Virginia. On July 1, 1999,
AllEnergy acquired Texas-Ohio Gas, Inc., a unit of Denver-based New Century
Energies that sells gas to about 3,000 commercial and industrial customers
in the Northeast of the United States."
12. By amending and restating the heading of and paragraph in Item
1.B.3.a.viii. as follows:
"viii. NEEI
As part of NEES' plan to divest its generating business, NEEI,
wholly-owned by NEES, sold its oil and gas properties in February 1998.
NEEI is currently inactive."
13. By amending and restating the second paragraph in Item 3.A.1.b.ii. as
follows:
"The Commission has concurrent jurisdiction in assessing the
competitive impacts of the Transaction with the DOJ, the FTC, and the FERC.
Additionally, the MDTE may inquire into the effects of competition.
Applicants filed Notification and Report Forms with the DOJ and the FTC,
which contain a description of the Transaction's effects on competition, as
6
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required by the HSR Act, and received clearance under the HSR Act on April
30, 1999. In addition, the FERC has concluded in its order approving the
Transaction under Section 203 of the FPA, attached hereto as Exhibit D-1.A,
that the proposed merger of NEES and EUA "does not raise competitive
concerns." New England Power Company, 88 FERC para. 1,292 at 12 (1999)
(mimeo). In particular, the FERC found the NEES system following the
acquisition of EUA's assets would have only small interests in, and no
operational control over, jointly-owned generating resources within NEPOOL.
This lack of control over generation resources, combined with the market
rules imposed by the ISO New England, would preclude any ability of NEES to
exercise market power by withholding output from the energy market.
Additional, detailed discussions and testimony explaining that the
Transaction will not have any adverse effect on competition are contained
in Applicant's FERC application, attached to Exhibit D-1 hereto."
14. By amending and restating the third paragraph in Item 3.B.1.b.iv. as
follows:
"The Transaction will not impair the effectiveness of state
regulation. Following the Transaction, NEES and its subsidiaries will
continue to be regulated by the same state commissions which currently
regulate them, including those of Massachusetts and Rhode Island, which now
regulate EUA's utility activities. The Transaction has been approved by the
CDPUC, which found the Transaction does not adversely affect electric
service in Connecticut. Application of Montaup Electric Company, Docket
Nos. 99-08-11, 99-08-12, 99-08-13 (Oct. 27, 1999) (attached hereto as
Exhibit D-5.A). The Transaction also is subject to the approval of the VPSB
and the RIDIV. In addition, Applicants are seeking rate plan approval from
the MDTE and the RIPUC."
15. By amending and restating the paragraph in Item 4 as follows:
"In addition to required Commission approvals, the following have
jurisdiction over various aspects of the Transaction (and related
subsidiary company consolidations): the FERC, the NRC, the FCC, the VPSB,
the CDPUC, the MDTE, and the RIDIV. In addition, Applicants are seeking
approval from the MDTE and the RIPUC for a rate plan that allows recovery
of the costs of the acquisition and the acquisition premium.
7
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As discussed above, on September 29, 1999, the FERC conditionally
approved the Transaction under Section 203 of the FPA. New England Power
Company, 88 FERC para. 61,292 (1999) (attached hereto as Exhibit D-1.A). On
October 27, 1999, the CDPUC also approved Transaction. Application of
Montaup Electric Company, Docket Nos. 99-08-11, 99-08-12, 99-08-13 (Oct.
27, 1999) (attached hereto as Exhibit D-5.A). In addition, Applicants filed
notification and report forms under the HSR Act with the DOJ and the FTC
with respect to the Merger. On April 30, 1999, Applicants received
clearance for the Merger under the HSR Act."
16. By filing the following exhibits:
A. Exhibits
D-1.A Order of the Federal Energy Regulatory Commission
D-5.A Order of the Connecticut Department of Public Utility Control
D-6.A Order of the New Hampshire Public Utilities Commission
8
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Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned Applicants have duly caused this Application to be
signed on their behalf by the undersigned thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM*
By: /s/ Kirk L. Ramsauer Date: 12/2/99
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Title: Deputy General Counsel
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* The name "New England Electric System" means the trustee or trustees
for the time being (as trustee or trustees but not personally) under
an Agreement and Declaration of Trust dated January 2, 1926, as
amended, which is hereby referred to, and a copy of which, as amended,
has been filed with the Secretary of the Commonwealth of
Massachusetts. Any agreement, obligation, or liability made, entered
into, or incurred by or on behalf of New England Electric System binds
only its trust estate, and no shareholder, director, trustee, officer,
or agent thereof assumes or shall be held to any liability therefor.
EASTERN UTILITIES ASSOCIATION**
By: /s/ Donald G. Pardus Date: 12/2/99
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Title: Chairman / CEO
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** The name "Eastern Utilities Associates" is the designation of the
Trustees of EUA for the time being in their collective capacity but
not personally, under a Declaration of Trust dated April 2, 1928, as
amended, a copy of which amended Declaration of Trust has been filed
in the office of the Secretary of The Commonwealth of Massachusetts
and elsewhere as required by law; and all persons dealing with EUA
must look solely to the trust property for the enforcement of any
claim against EUA, as neither the Trustees nor the officers or
shareholders of EUA assume any personal liability for obligations
entered into on behalf of EUA.
9
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
Linda Breathitt, and Curt Hebert, Jr.
New England Power Company
Massachusetts Electric Company
Narragansett Electric Company
New England Electric Transmission Corporation
New England Hydro-Transmission Corporation
New England Hydro-Transmission Electric Docket No. EC99-70-000
Company, Inc.
AllEnergy Marketing Company, L.L.C.
Montaup Electric Company
Blackstone Valley Electric Company
Eastern Edison Company
Newport Electric Corporation
Research Drive LLC
New England Power Company Docket No. ER99-2832-000
Montaup Electric Company (Not Consolidated)
ORDER CONDITIONALLY AUTHORIZING MERGER, CONDITIONALLY
ACCEPTING PROPOSED JOINT TARIFF AND NOTICES OF
CANCELLATION FOR FILING, AND DIRECTING COMPLIANCE FILINGS
(Issued September 29, 1999)
On May 5, 1999, as supplemented on May 26, 1999, and July 1, 1999, in
Docket No. EC99-70-000, New England Power Company (NEP) and its affiliates
(Massachusetts Electric Company, Narragansett Electric Company, New England
Electric Transmission Corporation, New England Hydro-Transmission Corporation,
New England Hydro-Transmission Electric Company, Inc., AllEnergy Marketing
Company, L.L.C., and Research Drive LLC) (collectively, NEES Companies), and
<PAGE>
Montaup Electric Company (Montaup) and its affiliates holding jurisdictional
assets (Blackstone Valley Electric Company, Eastern Edison Company, Newport
Electric Corporation) (collectively, EUA Companies) (collectively, Applicants)
filed a joint application pursuant to section 203 of the Federal Power Act
(FPA)1 for approval of the disposition of jurisdictional facilities involved in
the merger of New England Electric System (NEES), the parent company of NEES
Companies, with Eastern Utilities Associates (EUA), the parent company of EUA
Companies. In addition, Applicants request approval for the subsequent mergers
and consolidations of the complementary operating companies of the two systems
that hold jurisdictional assets. Also, Applicants request approval, if required,
of the acquisition by the National Grid Group plc (National Grid) of EUA
Companies resulting from the merger of National Grid and NEES in Docket No.
EC99-49-000.2
On May 5, 1999, in Docket No. ER99-2832-000, in a related filing,
Applicants filed: (1) an open access transmission tariff for the merged system
(Joint Tariff); (2) a notice of cancellation for Montaup's open access
transmission tariff; and (3) notices of cancellation for rate schedules between
Montaup and NEP which are no longer needed as a result of the merger.
As discussed below, the Commission concludes that the proposed merger, as
conditioned herein, will not adversely affect competition, rates, or regulation.
Therefore, we will conditionally approve the merger, as consistent with the
public interest. Further, the Commission will conditionally accept Applicants'
proposed Joint Tariff and notices of cancellation for filing, without hearing or
suspension, subject to the outcome of various dockets and subject to Applicants'
revising the transmission rates to reflect the currently effective rates for
both Local Network Service and Regional Network Service in NEPOOL during the
transition period over which the full Regional Network Service rate is phased
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1 16 U.S.C. 824b (1994).
2 By order issued June 16, 1999, the Commission approved the merger of NGG
Holdings LLC, a subsidiary of National Grid, into NEES. Through that
merger, NEES, the surviving entity, and the NEES Companies became indirect
subsidiaries of National Grid. New England Power Co., et al., 87 FERC
61,287 (1999) (National Grid/NEES).
<PAGE>
into the NEPOOL Tariff. Additionally, Applicants are directed to file a revised
Joint Tariff within 30 days of consummation of the merger.
I. Background
A. Description of the Parties to the Merger
1. NEES
NEES is a registered public utility holding company headquartered in
Westborough, Massachusetts whose affiliates own and operate electric
transmission and distribution assets and market electric energy and related
services in New England. The affiliates that deliver electric energy serve about
1.3 million customers in Massachusetts, Rhode Island, and New Hampshire. Other
NEES subsidiaries offer telecommunications and other services. NEES does not
directly own any facilities subject to the Commission's jurisdiction.
a. NEP
NEES's wholly-owned subsidiary NEP is a public utility organized and
operated under the laws of Massachusetts. NEP owns and operates about 2,600
miles of transmission facilities located in Massachusetts, New Hampshire, and
Vermont. NEP has disposed of almost all of its non-nuclear generating assets.3
b. NEP Affiliates - The NEES Distribution and Transmission
Companies
NEES wholly owns the following distribution companies: Massachusetts
Electric, Granite State Electric Company (Granite State), Nantucket Electric
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3 NEP still owns a 9.3 percent share in an oil-fired generating unit, which
it is attempting to sell. See Application at 8; Attachment 1 at 6. NEP
still holds minority, non-operating interests in three nuclear generating
companies (Connecticut Yankee, Maine Yankee, and Yankee Atomic) with
retired nuclear facilities and in three other operating nuclear units
(Millstone 3, Seabrook, and Vermont Yankee). Applicants state that NEP has
agreed to attempt to divest these nuclear entitlements pursuant to its
restructuring settlements approved by this Commission and the state
commissions regulating its affiliates. Application at 8-9.
<PAGE>
Company (Nantucket), and Narragansett.4 Other NEES affiliates own and operate
transmission facilities interconnecting New England and Quebec. These affiliates
include New England Electric, New England Hydro, and New England
Hydro-Electric.5
c. AllEnergy Marketing Company, L.L.C.
NEES, through its subsidiary, NEES Energy, Inc., owns 100 percent of the
voting stock of AllEnergy Marketing Company, L.L.C., a power marketer that sells
electric energy, natural gas and heating oil to commercial, industrial and
residential consumers in the Northeast and markets propane, fuel oil and other
liquid fuels through its subsidiary, Texas Fluids. AllEnergy also sells fuel oil
through its PAL and Griffith operating divisions.
d. Research Drive LLC
Research Drive LLC, a Massachusetts company, is owned by NEES and NEES
Global, Inc., and was formed for the express purpose of effectuating the
consolidation of EUA into NEES (HoldCo Merger).
2. EUA
EUA is an energy services holding company in Massachusetts whose affiliates
are engaged in the transmission and distribution of electricity to about 305,000
consumers in Massachusetts and Rhode Island. Non-utility subsidiaries of EUA
market energy efficiency services nationwide and invest in other non- regulated
businesses.
a. EUA Affiliates - Distribution and Transmission Companies
EUA wholly owns the following distribution companies: Eastern Edison;
Blackstone Valley; and Newport Electric. Eastern Edison, together with Montaup,
owns approximately 4,600 miles of transmission and distribution lines;
Blackstone Valley owns approximately 1,700 miles of transmission and
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4 Neither Granite State nor Nantucket owns any jurisdictional facilities.
Application at 10, n.15.
5 NEES wholly owns New England Electric and owns majority interests in
New England Hydro and New England Hydro-Electric.
<PAGE>
distribution lines; and Newport Electric owns approximately 800 miles of
transmission and distribution lines.6
Montaup, a subsidiary of Eastern Edison, provides interstate transmission
service to its retail distribution affiliates (Eastern Edison, Blackstone Valley
and Newport Electric) and to two non-affiliated municipal electric utilities.7
Montaup has sold or signed purchase and sale agreements for all of its
non-nuclear generation assets.8
b. EUA Ocean State Corporation
EUA wholly owns EUA Ocean State Corporation (EUA Ocean State), which owns a
29.9 percent partnership interest in the Ocean State Power generating station in
Rhode Island. EUA Ocean State does not market the power produced from this
plant. All rights to the power produced are committed to long-term contracts.
B. Description of the Proposed Merger, the Joint Tariff and Other Filings
1. The Proposed Merger
Applicants seek authorization for a two-phase merger. Phase I involves the
merger of EUA into Research Drive, which will make EUA a subsidiary of NEES,
with EUA subsequently being consolidated into NEES (the HoldCo Merger). Phase II
involves the subsequent mergers and consolidations of the complementary
operating companies of the two systems, to the extent such mergers involve
companies holding jurisdictional assets (the OpCo Merger). Applicants state that
the OpCo Merger will take place as soon as practicable after the completion of
the HoldCo Merger.
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6 Application at 12-13.
7 Montaup has a small ownership interest in New England Hydro-Transmission
Corporation and New England Hydro-Electric Transmission Electric Company,
Inc. Application at 13, n.16.
8 Montaup currently has minority non-operating interests in the same nuclear
generating companies as NEP, including those with retired nuclear
facilities and those with operating units (see supra note 3). Application
at 14. Montaup has signed an agreement to sell its share of Seabrook, for
which it is seeking regulatory approval, and it is attempting to divest
itself of its remaining nuclear ownership interests.
<PAGE>
Applicants further state that it is possible that the National Grid/NEES
merger will be completed before the OpCo Mergers, in which case Commission
approval would be required for the acquisition of the EUA Companies by National
Grid as a result of the National Grid/NEES merger. Applicants request that the
Commission grant such approval in this proceeding.9
2. The Joint Tariff and Other Filings
In support of the proposed merger, NEP and Montaup have submitted in Docket
No. ER99-2832-000: (1) an open access transmission tariff for the merged system
(Joint Tariff); (2) a notice of cancellation of Montaup's open access
transmission tariff; and (3) notices of cancellation of rate schedules between
Montaup and NEP which are no longer needed as a result of the merger. NEP and
Montaup propose a two-phased approach (intended to mirror the phases of the
merger) for implementation of the Joint Tariff. During Phase I, NEP's currently
effective open access tariff will be amended (and Montaup's open access tariff
will be canceled) to form a Joint Tariff for service over both NEP and Montaup
facilities at zonal rates. Under the zonal rates, current rates for service
under NEP's tariff would continue to apply to customers connected to NEP while
current rates under Montaup's tariff would continue to apply to customers
connected to Montaup. NEP and Montaup propose to charge a single system formula
rate applicable to all customers for Phase II based on the total transmission
investment of the combined company, subject to an exception designed to hold
Montaup's existing transmission customers harmless.
II. Notices of Filing, Interventions, and Answers
A. The Merger
Notice of Applicants' merger application was published in the Federal
Register, 64 Fed. Reg. 27,766 (1999), with motions to intervene or protests due
on or before July 6, 1999. Notice of Applicants' May 28 supplemental filing was
published in the Federal Register, 64 Fed. Reg. 30,506 (1999), with motions to
intervene or protest due on or before July 6, 1999. Notice of Applicants' July 1
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9 Applicants request that the necessary supporting information for the
acquisition of the EUA Companies by National Grid be incorporated by
reference from the application in the National Grid/NEES proceeding in
Docket No. EC99-49-000.
<PAGE>
supplemental filing was published in the Federal Register, 64 Fed. Reg. 37,525
(1999), with motions to intervene or protests due on or before August 2, 1999.
Timely motions to intervene and protests were filed by: Taunton Municipal
Lighting Plant, Middleborough Gas and Electric Department and Pascoag Fire
District (Taunton); and the Energy Council of Rhode Island (TEC-RI).10 The
Massachusetts Department of Telecommunications and Energy (Massachusetts
Department) filed a notice of intervention. Timely motions to intervene were
filed by: the Office of the Attorney General of the Commonwealth of
Massachusetts (MassAG); the Attorney General of Rhode Island and the Rhode
Island Division of Public Utilities and Carriers (Rhode Island); National Grid;
PG&E Generating Company (PG&E Gen); and Cambridge Electric Light Company, Canal
Electric Company, and Commonwealth Electric Company (COM/Electric Companies).
On June 21, 1999, Applicants filed an answer to Taunton's protest. On June
28, 1999, Applicants filed an answer to TEC-RI's protest.
On September 3, 1999, Massachusetts Municipals filed a late motion to
intervene and protest.11 On September 20, 1999, Applicants filed an answer.
B. Joint Tariff and Other Filings
Notice of Applicants' filing in Docket No. ER99-2832-000 was published in
the Federal Register, 64 Fed. Reg. 27,776 (1999), with motions to intervene or
protests due on or before May 25, 1999.
Hydro-Quebec and HQ Energy Services (US) Inc. (Hydro-Quebec) filed a timely
motion to intervene and protest.
The Massachusetts Department filed a notice of intervention. COM/Electric
Companies and Taunton, filing only on its own behalf, filed timely motions to
intervene.
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10 TEC-RI is a group of large electricity users in Rhode Island. TEC-RI's
motion to intervene is timely, because it was filed by the intervention
date established in the notice of Applicants' July 1 supplemental filing.
11 Massachusetts Municipals consist of 22 municipal utilities.
<PAGE>
Rhode Island and Middleborough Gas Department and Pascoag Fire District
(Middleborough and Pascoag) filed late motions to intervene.
Massachusetts Municipals filed a late motion to intervene and protest. PG&E
Gen, USGen New England, Inc., and PG&E Energy Trading-Power, L.P. (PG&E Gen
Companies) filed a late motion to intervene and comments.
On June 9, 1999, Applicants filed an answer to Hydro-Quebec's protest. On
July 2, 1999, Applicants filed an answer to Massachusetts Municipals' protest
and PG&E Gen Companies' comments.
III. Discussion
A. Procedural Matters
1. The Merger
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,12
the notice of intervention and timely, unopposed motions to intervene serve to
make those who filed them parties to this proceeding.
We will also grant Massachusetts Municipals' late motion to intervene in
light of the early stage of the proceeding and the absence of undue prejudice or
delay.
We will also permit Applicants' answers. They have aided us in
understanding the issues.
2. Joint Tariff and Notices of Cancellation
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,13
the notice of intervention and timely, unopposed motions to intervene serve to
make those who filed them parties to this proceeding.
We will also grant the late motions to intervene to those who filed them in
light of the early stage of the proceeding and the absence of undue prejudice or
delay.
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12 18 C.F.R. 385.214 (1999).
13 18 C.F.R. 385.214 (1999).
<PAGE>
We will permit Applicants' answers. They have aided us in understanding the
issues.
B. The Merger
1. Standard of Review
Section 203(a) of the Federal Power Act (FPA)14 provides, in relevant part,
as follows:
No public utility shall sell, lease, or otherwise dispose of the whole of
its facilities subject to the jurisdiction of the Commission, or any part
thereof of a value in excess of $50,000, or by any means whatsoever,
directly or indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire, or take any
security of any other public utility, without first having secured an order
of the Commission authorizing it to do so.
Under section 203(a), the Commission must approve a proposed merger if it finds
that the merger "will be consistent with the public interest."15
In 1996, the Commission issued its Merger Policy Statement updating and
clarifying its procedures, criteria and policies applicable to public utility
mergers.16 The Merger Policy Statement provides that the Commission will
generally take account of three factors in analyzing proposed mergers: (a) the
effect on competition; (b) the effect on rates; and (c) the effect on
regulation.
For the reasons discussed below, we find that Applicants proposed merger,
as conditioned herein, is consistent with the public interest. Accordingly, we
will conditionally approve the merger.
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14 16 U.S.C. 824b (1994).
15 16 U.S.C. 824b(a) (1994).
16 Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC
Statutes and Regulations 31,044 (1996), reconsideration denied, Order No.
592-A, 62 Fed. Reg. 33,341 (1997), 79 FERC 61,321 (1997) (Merger Policy
Statement).
<PAGE>
2. Effect on Competition
a. Applicants' Analysis
Applicants state that the proposed merger will not have an adverse effect
on competition. In support, Applicants note that as a result of restructuring
legislation and restructuring agreements approved by the Commission and state
regulators, the subsidiaries of NEES and EUA have divested virtually all of
their generation and power purchase contracts. What remaining generation
resources they own are in the form of minority interests. As a result, neither
company has operational control over any generation resources and would not have
the ability to exercise market power by restricting output.17 Moreover,
Applicants state that they are planning to divest the remainder of their
interests in generation facilities and that New England has experienced the
entry of new generators and expansion of existing generation, demonstrating that
the merged company will possess no market power. As a result of the foregoing,
Applicants reason that it is not necessary to define relevant markets and assess
market concentration. Nevertheless, Applicants' analyze three existing market
power studies involving NEPOOL to confirm their conclusion that the merger poses
no competitive concerns.18 They conclude that using economic capacity and total
capacity, the post-merger market (in all three studies) is moderately
concentrated and pre- to post-merger increases in concentration are less than
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17 In support, Applicants note that the proposed merger would consolidate
NEP's 400 MW of minority interests in generating capacity with Montaup's
131 MW of minority interests in generating capacity, and that this amount
is de minimis (approximately 2 percent) when compared to the 24,000 MW of
total generating capacity in New England. NEP's and Montaup's minority
interests in nuclear facilities include 12.1 percent and 4.01 percent
shares in Millstone 3, respectively; and 17.98 percent and 2.25 percent
shares in Vermont Yankee, respectively. NEP also has a 9.96 percent share
in Seabrook 1 and a 9.27 percent share of Wyman 4, an oil-fired stream
turbine. Montaup has a purchased power agreement with Entergy for the
output of 11 percent of the Pilgrim nuclear plant.
18 Consistent with the studies they analyze, Applicants assume that NEPOOL is
the relevant geographic market because: (1) the pool-wide transmission
tariff in New England permits the delivery of power from anywhere in the
region covered by ISO New England to a given location for one price and (2)
dispatch in NEPOOL is generally unconstrained by transmission.
<PAGE>
nine HHI points well below the thresholds specified in the Department of
Justice/Federal Trade Commission Horizontal Merger Guidelines (DOJ/FTC Merger
Guidelines).19
Finally, Applicants conclude that the merger raises neither (1)
transmission market power concerns because transmission service is available
under the NEPOOL open access transmission tariff and Applicants do not compete
for the sale of transmission services, nor (2) vertical concerns relating to the
consolidation of electric and fuel delivery assets because Applicants have no
interests other than their electricity transmission and distribution assets.
b. Discussion
In the Merger Policy Statement, the Commission adopted the DOJ/FTC Merger
Guidelines as our basic framework for analyzing the effect on competition of a
proposed horizontal merger.20 The Merger Policy Statement adopted a five- part
analytic screen and set forth the conditions under which the Commission would
set the issue of competition for hearing.21 The Commission also explained in the
Merger Policy Statement that merger applicants would not need to perform the
screen analysis set forth in Appendix A in cases where the merging firms do not
have facilities or sell relevant products in common geographic markets.22 At the
same time, however, we explained that while the screen analysis would be a
valuable analytical tool in evaluating the effect of mergers on competition, it
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19 The three studies analyzed by Applicants include the: (1) February 1999
Appendix A analysis provided in the merger application of Boston Edison and
Commonwealth Energy; (2) September 1997 market power analysis provided in
the application of NEP and Narragansett Electric to divest their
non-nuclear generation resources to USGen New England; and (3) February
1997 market power study submitted by NEPOOL related to its restructuring
and request for market-based rates. Applicants adjust the results of the
three studies to reflect divestitures (recent and pending) and the effect
of combining NEP's and Montaup's remaining generation.
20 Merger Policy Statement at 30,117-18.
21 Id. at 30,119. Appendix A of the Merger Policy Statement provides a
detailed illustrative description of the analytic screen.
22 Id. at 30,136.
<PAGE>
was intended to be somewhat flexible and that while it set out a general method,
we would consider other methods and factors where applicants properly support
them.23
As noted above, Applicants have relied primarily on the fact that they have
no operational control over generation resources to conclude that the proposed
merger will not adversely affect competition. They buttress this conclusion with
the results of previously filed market power studies, modified to reflect the
proposed merger. Aside from the results of Applicants' modified market power
analyses, we note that there are factors -- not related to market definition and
concentration -- that bear materially and significantly on the issue of whether
the proposed merger poses competitive concerns. Specifically, we note that the
merged company would have small interests in, and no operational control over,
jointly-owned generating resources in NEPOOL. Given these particular
circumstances, we believe that the merged company would not have control over
generating resources, and, therefore, would not be able to exercise market power
by withholding output. We note that NEPOOL market rules and procedures do not
allow the individual owners of jointly-owned resources to separately bid (or not
bid) into the energy market.24 We also note, in any event, that the requirements
of ISO New England prevent the physical withholding of output from the energy
market and, were it to occur, the problem would be identified and remedied by
the ISO's market power monitoring and mitigation measures approved by the
Commission.25 For these reasons, and because no intervenor argues to the
contrary, we find that the proposed merger does not raise competitive concerns.
3. Effect on Rates
a. Background
The Merger Policy Statement explains our concern that there be adequate
ratepayer protection from adverse rate effects as a result of a merger. It
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23 Id. at 30,119.
24 Filing of Market Rules, submitted by NEPOOL Executive Committee, FERC
Docket No. ER99-1374, January 19, 1999, Attachment 1 at 10.
25 Revised Market Rules, submitted by NEPOOL Executive Committee, FERC Docket
No. ER99-1374, April 29, 1999, Attachment 1 at 4-5.
<PAGE>
describes various commitments that may be acceptable means of protecting
ratepayers, such as hold harmless provisions, open seasons for wholesale
customers, rate freezes, and rate reductions.26
According to the application, the proposed merger will have no adverse
effect on rates. With respect to wholesale rates, Applicants maintain that no
adverse effects will occur because both NEP and Montaup have divested virtually
all of their generation assets (and plan to sell the remainder). In addition,
NEP and Montaup currently make only limited wholesale sales (with Montaup's
sales terminating by 2000) and the arrangements governing those sales are
unaffected by the merger.
Before discussing Applicants' proposed hold harmless provision as it
relates to transmission rates, we provide a brief description of the rate
structure for network transmission service offered in New England about which
intervenors complain. During the transition period (discussed below) network
transmission customers in New England pay two transmission rates; (1) a Local
Network Service (LNS) rate for service that utilizes the low voltage facilities
(known as non-Pool Transmission Facilities or non-PTF) in the region; and (2) a
Regional Network Service (RNS) rate for service that utilizes the high voltage
facilities (PTF) in the region. LNS is provided under individual company open
access transmission tariffs on file with the Commission. RNS is provided under
the NEPOOL Open Access Transmission Tariff (NEPOOL Tariff). The LNS rate is
based on the costs of the individual company while the RNS rate is based on the
costs of the combined pool-wide high voltage system. However, in order to lessen
the impact of cost-shifting that would result from the immediate blending of the
individual Participant rates into a single pool-wide RNS rate, the NEPOOL Tariff
provides for an eleven-year transition period over which the full RNS rate is
gradually phased in.
Applicants propose a hold harmless provision for their local transmission
rates that applies to the two phases of the merger. Phase I extends from the
effective date of the HoldCo merger until the effective date of the OpCo
mergers. During this period, transmission customers will see no change in the
formula or cost elements included in their local transmission charge. During
Phase II, a single formula transmission rate will become effective for local
transmission service on the combined system. Applicants note, however, that
blending the two local transmission rates will cause NEP's transmission
customers to experience a slight decrease in rates while Montaup's transmission
customers will experience a slight increase in rates. Therefore, in order to
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26 Merger Policy Statement, FERC Stats. and Regs. at 30,123-24.
<PAGE>
hold Montaup's transmission customers harmless from any adverse rate effects
associated with the merger, Applicants propose to freeze Montaup's local
transmission rates for non-affiliated transmission customers at the existing
level for at least 5 years. However, Applicants offer no protection for their
affiliated transmission customers or for RNS customers.27
In addition, Applicants note that there will be an acquisition premium and
transaction costs associated with the proposed merger which may be pushed down
to the operating companies. However, Applicants commit not to attempt to recover
these merger-related costs through rates without first receiving specific
regulatory approval to do so. For these reasons, Applicants assert that their
ratepayers will be held harmless, and thus, the Commission's ratepayer
protection goals are met.
Intervenors Taunton, TEC-RI and Massachusetts Municipals dispute
Applicants' claim that their ratepayer protection proposal is adequate. Taunton
argues that in addition to the protection offered regarding LNS rates, it should
also be insulated from merger-related cost increases in its RNS rates under the
NEPOOL Tariff. Taunton states that the RNS rate it pays under the NEPOOL Tariff,
pre- merger, is lower than it will be following consolidation of the revenue
requirements of NEP and Montaup after the merger,28 and that Applicants'
proposed hold harmless provision does not address this outcome. Accordingly,
Taunton argues that the Commission should condition its approval of the merger
on the requirement that Applicants hold Taunton harmless from increases in RNS
rates resulting from the merger.
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27 Applicants maintain that it is unnecessary to provide ratepayer protection
for Montaup's affiliated customers because the slight increase in the
transmission component of the retail rates will be more than offset by the
blending of NEP's lower Contract Termination Charge (CTC) with Montaup's
higher CTC. The CTC is explained more fully below in connection with the
discussion of TEC-RI's concerns.
28 As previously noted, the NEPOOL Tariff contains a transition period
designed to mitigate against cost increases for transmission service that
would result if the RNS rate were not phased in. The RNS transition rate is
based, in part, on the individual Participant's PTF costs as a percentage
of pool-wide PTF costs. Taunton argues that consolidation of NEP's
relatively high individual PTF costs with Montaup's relatively low
individual PTF costs (for purposes of calculating the RNS transition rate)
increases Taunton's rates for RNS.
<PAGE>
TEC-RI contends that Applicants' proposed ratepayer protection plan does
not adequately protect the retail ratepayers of Narragansett (NEP's distribution
affiliate in Rhode Island) from merger-related cost increases. Specifically,
TEC-RI asserts that Narragansett's retail ratepayers will face a $117 million
increase in stranded cost charges as a result of Applicants proposal to blend
NEP's lower CTC with Montaup's higher CTC.29 To prevent this cost- shifting,
TEC-RI requests that the Commission condition its approval of the merger on the
requirement that Applicants hold ratepayers of Narragansett harmless from
increases resulting from the merger of the CTCs of NEP and Montaup.
Massachusetts Municipals argue that Applicants' plan to phase in a single,
blended LNS rate only upon consummation of the OpCo Mergers constitutes an
adverse effect on their LNS rates during Phase I of the merger. Massachusetts
Municipals maintain that because a blended LNS rate would result in a rate
decrease, the blended rate should become effective at the earliest possible
moment; i.e., upon consummation of the HoldCo Merger. Massachusetts Municipals
state that Applicants have not specified a date certain for the consummation of
the OpCo Mergers and argue that no delay (especially one of unknown length)
should be permitted before Massachusetts Municipals are able to realize benefits
from the proposed merger. Massachusetts Municipals request that approval of the
proposed merger be conditioned on the filing of a blended rate effective upon
consummation of the HoldCo Merger or, alternatively, effective no later than 60
days after consummation of the HoldCo Merger.
In response to Taunton, Applicants argue that Taunton's concerns fall
outside of the scope of this proceeding because Applicants do not have
unilateral authority to modify the transition mechanism or other rate design
elements of the NEPOOL Tariff. Applicants argue that the Merger Policy Statement
requires ratepayer protection for customers under Applicants' rate schedules and
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29 As part of the industry restructuring proceedings in Rhode Island and
Massachusetts, NEP and Montaup have executed settlement agreements with
their wholesale requirements customers allowing those customers to
terminate their existing agreements on short notice should they wish to
participate in the competitive market. In exchange, these customers have
agreed to pay CTCs based on the stranded costs associated with expenditures
made to provide them with requirements service.
<PAGE>
tariffs, not under tariffs which are not controlled by Applicants.30 Applicants
also argue that Taunton's request would deter the formation of Regional
Transmission Organizations (RTOs) and the consolidation of transmission
utilities within already-formed RTOs. Finally, Applicants argue that Taunton's
request for ratepayer protection for nine years under the NEPOOL Tariff is
unreasonably long.
In response to TEC-RI, Applicants state that TEC-RI has incorrectly
characterized their proposal. Applicants maintain that they are not proposing
any modification of the wholesale CTCs that are paid by the NEES and EUA
distribution companies to NEP and Montaup, respectively. Rather, Applicants
explain that their distribution companies have made a proposal before the Rhode
Island Public Utilities Commission (Rhode Island Commission) to blend the retail
transition charges which they assess their customers based on the wholesale CTCs
they pay. Applicants argue the retail rate plan is a state matter, and that
TEC-RI, which is a party to the state proceeding, will have ample opportunity to
present its concerns to the Rhode Island Commission.
In response to Massachusetts Municipals, Applicants argue that in another
case,31 the Commission denied an intervenor's request to order Atlantic City
Electric Company and Delmarva Power and Light Company to form one rate zone
under the PJM regional tariff in connection with their merger.32 Applicants
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30 As further support, Applicants cite Northeast Utilities Service Company, 56
FERC 61,269 (1991), reh'g denied, 58 FERC 61,070 (1992), aff'd in relevant
part, Northeast Utilities Service Co. v. FERC, 993 F.2d 937,951 (1st Cir.
1993), cert. denied, 498 U.S. 73 (1992) (NU), where the Commission affirmed
an Administrative Law Judge's decision to allow single participant status
under the NEPOOL Agreement for merging entities, which resulted in a $364
million cost shift from the merger applicants to other NEPOOL members.
Applicants' Answer to Taunton at 5.
31 See Atlantic City Electric Co., 86 FERC 61,318 (1999) (Atlantic City
Electric).
32 Applicants cite the following excerpt from Atlantic City Electric:
[W]e already had ordered [PJM] to develop a uniform, single
system rate for the entire PJM control area (which included
Atlantic City Electric and Delmarva) within 5 years.
[citation omitted] At [that] time, . . ., we believed it
reasonable to try to avoid abrupt cost shifting that would
occur in the interim if we ordered Atlantic City Electric
and Delmarva to convert to a single system-wide rate.
[citation omitted] The circumstances have not changed, and
neither has our view of this matter.
Id. at 62,142-43.
<PAGE>
contend that the circumstances in this case are essentially similar to those in
Atlantic City Electric and that Applicants' proposal will avoid the kind of
abrupt cost-shifting that concerned the Commission in Atlantic City Electric.
Applicants further state that in BEC Energy and Commonwealth Energy Systems,33
the Commission approved the disposition of jurisdictional facilities by the
public utility subsidiaries of BEC Energy and Commonwealth Energy as part of the
proposed merger of BEC Energy and Commonwealth Energy even though the Applicants
in that case retained separate transmission rates and tariffs for their
operating affiliates. Applicants further argue that their proposal to retain the
two existing rate formulas for a short period is consistent with the
Commission's approach, in the Notice of Proposed Rulemaking on Regional
Transmission Organizations,34 of maintaining flexibility in allowing the
recovery of transmission costs through mechanisms other than single region-wide
rates, including the "license plate" approach under which transmission access
fees are paid by load serving entities based on the fixed transmission costs of
the local utility. Finally, Applicants contend that the hold harmless provision
of the Merger Policy Statement, does not entitle Massachusetts Municipals to a
rate reduction.
b. Discussion
At the outset, we note that Applicants do not dispute Taunton's claim that
Taunton's cost of purchasing RNS would increase as a result of the consolidation
of NEP's and Montaup's revenue requirements under the NEPOOL Tariff after the
merger. However, for the reasons discussed below, we decline to adopt the narrow
approach to ratepayer protection advocated by Taunton, but instead will require
Applicants to develop a mechanism to maintain the status quo with respect to
transmission rates, both LNS and RNS, in NEPOOL during the transition period.
As NEPOOL has previously explained, its restructuring proposal was the
product of over two years of intensive discussions, deliberations, and
negotiations among NEPOOL Participants, Non-Participants and state regulators.
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33 88 FERC 61,002 (1999).
34 87 FERC 61,173 (1999).
<PAGE>
According to NEPOOL, its proposal reflects an historic agreement on broad
ranging issues, including rates for transmission service in the region.35 The
Commission, showing great deference to the bargain of the parties, conditionally
approved the proposed restructuring,36 including the proposed transition period
which governs rates for RNS in NEPOOL.37 After consideration, we find that this
merger, if left unconditioned, will unjustifiably upset that bargain. Therefore,
because the merger involves two companies that are members of a regional ISO
with a Commission-approved phase-in of ISO-wide rates and whose formation was a
collaborative process involving all stakeholders, we will require Applicants to
devise a mechanism that will maintain the bargain that was struck with regard to
transmission rates in NEPOOL during the transition period.
With respect to TEC-RI's protest, we agree with Applicants that TEC-RI's
concerns involve state ratemaking issues that can be, and are properly addressed
at the state level, since Applicants are not proposing to modify the wholesale
CTC payments. Accordingly, we will not condition the merger as TEC-RI requests.
Finally, we will not condition the merger as Massachusetts Municipals
request. Because the proposed merger, as conditioned above, will not effect
transmission rates in NEPOOL, the merger will not adversely effect Massachusetts
Municipals' rates.
4. Effect on Regulation
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange Commission
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35 See NEPOOL's December 31, 1996 Transmittal Letter in Docket Nos.
ER97-1079-000 and OA97-237-000.
36 New England Power Pool, 83 FERC 61,045 (1998), reh'g pending.
37 Under the transition period approved by the Commission, a composite
pool-wide rate for RNS is phased in over 11 years. The phase-in is intended
to mitigate cost shifting that would occur absent the phase-in.
<PAGE>
(SEC). We are also concerned with the effect on state regulation where a state
does not have authority to act on a merger.38
Applicants state that the proposed merger will have a very limited impact
on federal regulation. Applicants note that both NEES and EUA are currently
registered holding companies under the Public Utility Holding Company Act of
1935 (PUHCA),39 and that both have existing Standards of Conduct (Standards) on
file with the Commission which, among other things, govern the sale of non-power
goods and services between franchised and non-franchised affiliates. Applicants
commit to continue to adhere to these Commission- approved Standards.40
Applicants further contend that the proposed merger will have no adverse effect
on state regulation. Applicants maintain that the affected state commissions
(Massachusetts and Rhode Island) have direct jurisdiction over the consolidation
of the operating companies, thus meeting the Commission's requirements in this
area.41
Intervenors, including the public utility commissions of the states of
Massachusetts and Rhode Island, raise no issues of adverse impact on regulation.
We note that Applicants sell power at market-based rates and are affiliated
with power marketers, and, as discussed above, Applicants propose to abide by
their existing Standards after the merger. However, for the purposes of
administering market-based rate tariffs and implementing Standards of Conduct,
the Commission requires that merging utilities treat one another as affiliates
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38 Merger Policy Statement at 30,124-25.
39 We note that in connection with its earlier acquisition of NEES, National
Grid also indicated that it would seek registered holding company status
under PUHCA.
40 Specifically, Applicants propose to follow EUA's Standards following the
HoldCo merger and to switch to NEES's Standards following the OpCo mergers.
41 Applicants indicate that the state commissions in New Hampshire and Vermont
may also need to approve the transaction.
<PAGE>
pending (and following) consummation of their merger.42 Accordingly, Applicants
and their marketing affiliates are directed to file revised Standards within 15
days of the date of this order that recognize the pre-merger relationship and
post-merger affiliation.
In addition, we note that in National Grid/NEES, we conditioned our
approval of that merger, in part, on National Grid's commitment to provide
access to its books and records pursuant to section 301(c) of the FPA.43 Because
National Grid (through its acquisition of NEES) is also acquiring EUA, our
approval of this transaction is similarly conditioned. With these conditions, we
find that the proposed merger will have no adverse effect on regulation.
4. Accounting Issues
Applicants state that the Merger will be recorded using the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16. We
have no basis to dispute Applicants' use of the purchase method of accounting
and therefore approve its use.
Applicants state that the acquisition premium, totaling approximately $231
million, and transaction costs, estimated at approximately $64 million,44 may be
pushed down to (i.e., recorded on the books of) the EUA operating companies, and
then moved to the appropriate NEES operating companies upon conclusion of the
OpCo Mergers. Consistent with Commission precedent,45 we will approve
Applicants' proposal to use push down accounting.
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42 See, e.g., New Century Services, Inc., 86 FERC 61,307, at 62,065-66 (1999),
reh'g pending; Western Resources, Inc., 83 FERC 61,110, at 61,533 (1998);
Central and South West Services, Inc., 82 FERC 61,001, at 61,003, order on
reh'g, 85 FERC 61,444 (1998).
43 87 FERC at 62,147.
44 See M.E. Jesanis Testimony, Ex. MEJ-6 at 1.
45 See El Paso Electric Co. and Central and South West Services, Inc., 68 FERC
61,181 at 61,918 (1994).
<PAGE>
C. Joint Tariff and Notices of Cancellation
Prior to the merger of NEP and Montaup, Applicants propose zonal rates
under which current rates for LNS service under NEP's tariff would continue to
apply to customers connected to NEP while current rates under Montaup's tariff
would continue to apply to customers connected to Montaup. The Commission
generally requires that affiliated systems adopt a single system rate reflecting
the combined costs of the affiliated system.46 The Applicants state that, "as
soon as practicable" after the closing of the NEES/EUA merger, the operating
companies, e.g., Montaup and NEP will merge and will charge a single system rate
based on the formula now used in NEP's individual open access tariff. The
formula is based on the cost of the combined company, but is designed to hold
Montaup's existing transmission dependent non-affiliated wholesale customers
harmless.47 Only in the interim would NEP and Montaup continue to charge zonal
rates.
Hydro-Quebec and HQ Energy Services, Inc. (collectively Hydro-Quebec) filed
a protest in which they reiterate concerns raised in NEP's and Montaup's various
pending open access dockets regarding rates, terms and conditions of NEP's open
access tariff, Docket Nos. ER98-4409-000 and ER98-4598-000 and Montaup's open
access tariff, Docket No. ER99-1663-000.
Many aspects of the formulas are not being filed for the first time in this
proceeding, but are carried over from previous Montaup and NEP filings which are
pending before the Commission. For instance, Applicants carry over NEP's return
on equity (ROE) of 10.25% and Montaup's ROE of 11.1% which were adopted in prior
settlements. Applicants further propose to reduce Montaup's depreciation expense
to match the depreciation rates approved for NEP in Docket No. ER95-267-000.
However, there are certain changes that are dependent on the timing of the
merger. For example, Montaup's revenue requirement formula is based on the
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46 See Promoting Wholesale Competition Through Open Access Non-discriminatory
Transmission Services by Public Utilities and Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, Order No. 888, FERC Stats. &
Regs. 31,036 at 31,729 (1996), order on reh'g, Order No. 888-A, FERC Stats.
& Regs. 31,048 (1997), order on reh'g, Order No. 888-B, 81 FERC 61,248
(1997), order on reh'g, Order No. 888-C, 82 FERC 61,046 (1998). See El Paso
Electric Co. and Central and South West Services, Inc., 68 FERC 61,181 at
61,918 (1994).
47 As noted earlier, the switch to an average single system rate would result
in an increase to Montaup's customers and a decrease to NEP's customers.
<PAGE>
capital structure of EUA for the purpose of determining overall return.
Depending on the timing of the holding company merger, such capital structure
may be based on a locked-in EUA capital structure as last calculated prior to
the holding company merger. In addition, the outcomes of other proceedings could
also affect the rates. For example, Montaup has recently filed revisions to its
ancillary service rates in Docket No. ER99-2941-000, some elements of the
existing tariffs are pending before the Commission in other proceedings, and
Montaup's formula rate may need to be revised to reflect its ongoing generation
divestiture.
Because issues concerning the proposed transmission rates are the subject
of ongoing proceedings, we will conditionally accept the proposed rates, subject
to Applicants submitting within 30 days of this order a mechanism to maintain
the status quo with respect to LNS and RNS rates in NEPOOL during the transition
period. Applicants filing should also reflect any resolution of ongoing
proceedings in Docket Nos. ER98-4409-000, ER98-4598-000 and Docket No.
ER99-1663-000. Finally, Applicants are directed to file a single-system rate
proposal at the end of the NEPOOL transition period.
3. Non-Rate Terms and Conditions
Applicants state in their testimony that both NEP's and Montaup's current
tariffs follow the Commission's pro forma transmission tariff. NEP and Montaup
are proposing to implement in the Joint Tariff a single set of non-rate terms
and conditions which are based on NEP's and Montaup's open access transmission
tariff for Phase I and NEP's open access transmission tariff for Phase II.
Applicants have made minor changes in order to reflect consistency between NEP
and Montaup, e.g., formula rates for interconnection agreements in lieu of
section 205 filings, contract termination provisions reflecting settlement
language, transfer of rights and obligations regarding the Hydro-Quebec High
Voltage Direct Current (HVDC) facilities (currently pending before the
Commission in Docket No. ER99-1663-000) and consistent cost treatment for
interconnection of generation for local transmission into NEPOOL. Such revisions
are identical to deviations from the pro forma tariff which were already
accepted for either NEP or Montaup and merely accommodate practices already in
place to reflect the need for consistency between NEP and Montaup.
<PAGE>
4. Other Issues
Massachusetts Municipals state that they are studying two cost issues
regarding NEP's revenue requirement calculations. First, Massachusetts
Municipals state that they find NEP's calculation of the "Yankee Adjustment" for
return on common equity unclear. However, Massachusetts Municipals further state
that they have received information from NEP, but need more time before
concluding whether they object to the adjustment. Massachusetts Municipals do
not raise any specific objections or seek any particular remedies regarding this
issue. However, to the extent they may be seeking to delay the proceeding until
they decide whether to supplement their protest, we deny that request. Their
protest was already almost one month out of time, and it is speculative whether
they will ultimately have any objections regarding this issue.
Second, Massachusetts Municipals argue that NEP has failed to support an
amortization of $3,700 for the month of December 1998 for an acquisition premium
paid by NEP for the Quincy-Namath line. Applicants respond that the $3,700
monthly amortization was part of a settlement approved by the Commission in New
England Power Co., Docket No. ER95-237-000. Applicants argue that Massachusetts
Municipals' objection is a collateral attack on the previously approved
settlement and that amortization has nothing to do with the NEES/EUA merger or
the tariff changes proposed in this proceeding. Because Massachusetts
Municipals' proffer no support for their argument against the acquisition
premium amortization and do not state how their argument relates to this
proceeding, we reject their argument.
PG&E Gen Companies state that they seek assurance that the Joint Tariff
does not result in transmission providers, rather than those such as PG&E Gen
Companies who supply VAR support, receiving payment for this generator-provided
service. They request modification of Schedule 2 to clarify that neither NEP nor
Montaup intends to charge separately for VAR support under Schedule 2 of the
Joint Tariff. Applicants respond that no modification of Schedule 2 is necessary
because they will not recover VAR support charges under Schedule 2 after the
Second Effective Date, i.e., the date on which the NEPOOL markets commence
operation. In light of Applicants' response that the companies will not recover
VAR charges after the Second Effective Date, we find that PG&E Gen Companies'
concern is moot. Therefore, we deny PG&E Gen Companies' request.
<PAGE>
The Commission orders:
(A) Applicants' proposed merger is hereby approved, as consistent with the
public interest, subject to the commitments and conditions discussed in the body
of this order.
(B) The proposed use of the purchase method of accounting for the business
combination, including pushing down the acquisition premium and transaction
costs to the operating companies, is approved. Applicants must inform the
Commission of any change in circumstances that would reflect a departure from
the facts the Commission has relied upon in approving the merger accounting.
(C) Applicants shall submit their proposed accounting for the merger
consistent with the body of this order within six months of the date of
consummation of the merger.
(D) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, services,
accounts, valuation, estimates or determinations of cost, or any other matter
whatsoever now pending or which may come before the Commission.
(E) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost or any valuation of property claimed or
asserted.
(F) The Commission retains authority under section 203(b) of the FPA to
issue supplemental orders as appropriate.
(G) Applicants shall make appropriate filings under section 205 of the FPA,
as necessary, to implement the transaction.
(H) Applicants are hereby directed to notify the Commission of consummation
of the merger within ten days of the date the merger is consummated.
(I) The proposed Joint Tariff is hereby conditionally accepted for filing
without hearing or suspension, to become effective on the date of the NEES/EUA
merger, subject to the outcome of Docket Nos. ER98-4409-000 and ER98-4598-000
and Docket No. ER99-1663-000, and subject to Applicants filing a mechanism to
maintain the status quo for LNS and RNS rates in NEPOOL during the transition
period, as discussed in the body of this order.
<PAGE>
(J) The notices of cancellation are hereby accepted for filing without
hearing or suspension, to become effective on the date of the NEES/EUA merger.
(K) Applicants are hereby directed to file a revised Joint Tariff within 30
days of the NEES/EUA merger.
(L) Applicants will be informed of rate schedule designations at a later
date.
By the Commission.
(SEAL)
/s/ Linwood A. Watson, Jr.
----------------------------------------
Linwood A. Watson, Jr.
Acting Secretary
[SEAL] STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051
Docket No. 99-08-11 99-08-11 Application of Montaup Electric Company for
the Transfer of Ownership From Eastern Edison
Company to Eastern Utilities Affiliates
Application of Montaup Electric Company for
the Transfer of Ownership From Eastern Edison
Company to Eastern Utilities Associates
Docket No. 99-08-12 99-08-12 Application of New England Power Company for
Approval of a Merger with Montaup Electric
Company Application of New England Power
Company for Approval of a Merger with Montaup
Electric Company
Docket No. 99-08-13 99-08-13 Application of New England Electric System
for Approval of a Merger with Eastern
Utilities Associates Application of New
England Electric System for Approval of a
Merger with Eastern Utilities Associates
October 27, 1999
By the following Commissioners:
Glenn Arthur
Linda Kelly Arnold
Jack R. Goldberg
<PAGE>
DECISION
I. Introduction
A. Summary
Pursuant to the Regulations of Connecticut State Agencies section
16-1-9 (Conn. Agencies Regs.), the Department of Public Utility Control
consolidates the three interrelated petitions, Docket No. 99-08-11, Application
of Montaup Electric Company for the Transfer of Ownership from Eastern Edison
Company to Eastern Utilities Associates; Docket No. 99-08-12, Application of New
England Power Company for Approval of a Merger with Montaup Electric Company;
and Docket No. 99-08-13, Application of New England Electic System for Approval
of a Merger with Eastern Utilities Associates.
In this Decision the Department of Public Utility Control considers
these three interrelated petitions, which ultimately result in the mergers of
Eastern Utilities Associates into New England Electric System, and of EUA's
operating subsidiary, Montaup Electric Company into New England Power Company
NEES' operating subsidiary. Prior to these mergers, direct ownership of Montaup
Electric Company will be transferred to Eastern Utilities Associates. The
Department of Public Utility Control joins the three petitions for the purpose
of this Decision and approves the applications for reorganization and mergers.
B. Applicants' Proposal
By application dated August 12, 1999 (Application I), Montaup Electric
Company (Montaup or Company) requests that the Department of Public Utility
Control (Department) either (1) confirm that Department approval is not required
for the transfer of ownership from Eastern Edison Company (Eastern) to Eastern
Utilities Associates (EUA), or (2) if such Department approval is necessary,
grant such transfer. By virtue of Montaup's minority ownership in Millstone Unit
No. 3 located in Connecticut, Montaup, pursuant to the General Statutes of
Connecticut (Conn. Gen. Stat.) section 16-246c(c), is an electric and public
service company for all purposes of Title 16 of the Connecticut General
Statutes.
<PAGE>
By application dated August 12, 1999 (Application II), New England
Power Company (NEP) and Montaup (with NEP, Petitioners) jointly file this
petition with the Department requesting approval for the merger of NEP with
Montaup (NEP Merger), pursuant to section 16-43(a)(1) of the Conn. Gen. Stat. By
virtue of NEP's and Montaup's ownership in Millstone Unit No. 3 located in
Connecticut, NEP and Montaup are both electric companies and public service
companies for all purposes of Title 16 of the Conn. Gen. Stat., pursuant to
Conn. Gen. Stat. section 246c(c).
By application dated August 12, 1999 (Application III), the
Petitioners jointly filed a request with the Department seeking approval for the
merger of NEP's parent company, New England Electric System (NEES), with
Montaup's parent, EUA, (collectively, NEES Merger), pursuant to section
16-43(a)(1) of the Conn. Gen. Stat. By virtue of NEP's and Montaup's ownership
in Millstone Unit No. 3 located in Connecticut, NEP and Montaup are electric
companies and public service companies, pursuant to Conn. Gen. Stat. section
246c(c), for all purposes of Title 16 of Conn. Gen. Stat.
C. Conduct of the Proceeding
There is no statutory requirement for a hearing and none was held.
D. Parties and Intervenors
New England Power Company, 25 Research Drive, Westborough,
Massachusetts 01582; Montaup Electric Company, c/o EUA Service Corporation, 750
West Center Street, West Bridgewater, Massachusetts 02379; and the Office of
Consumer Counsel, Ten Franklin Square, New Britain, CT 06051, were recognized as
parties to this proceeding.
V. Petitioners' Evidence
Montaup is a wholly-owned subsidiary of Eastern Edison, which is
itself a wholly-owned subsidiary of EUA. Montaup is located in Massachusetts and
provides transmission service to its retail distribution affiliates and to two
non-affiliated municipal electric utilities in Massachusetts and Rhode Island.
Montaup is a foreign electric company, as defined in the Conn. Gen. Stat.
section 16-246a. Pursuant to the provisions of Conn. Gen. Stat. section
16-246c(c), Montaup constitutes an electric company and public service company
within meaning of Conn. Gen. Stat. section 16-1 by virtue of its minority,
non-operating interest in Millstone Unit No. 3, a nuclear generating asset
<PAGE>
located in Waterford, Connecticut. Montaup is attempting to divest its interest
in the nuclear generating assets. Application I, pp. 2-3.
Eastern is a wholly-owned subsidiary of EUA. It provides distribution
services to approximately 186,000 customers in non-contiguous territories
covering the southeastern Massachusetts cities of Brockton and Fall River, and
in 20 surrounding towns. Eastern does not directly own any generating or
transmission assets in Connecticut. Application I, p. 2.
NEP, a wholly-owned subsidiary of NEES, is a regulated public utility
company organized and operated under the laws of the Commonwealth of
Massachusetts. It is primarily a transmission company operating over 2,600 miles
of transmission facilities in Massachusetts, Rhode Island, New Hampshire, and
Vermont. NEP currently has a minority ownership interest in Millstone Unit No.
3, a nuclear generating asset located in Connecticut. NEP intends to divest its
interests in the operating nuclear units. Applications II and III, pp. 2-3.
EUA is a public holding company organized as a voluntary association
under Massachusetts law. Its affiliates are engaged in the transmission and
distribution of electricity in Massachusetts and Rhode Island, delivering
service to more than 305,000 customers in southeastern Massachusetts and
northern and coastal Rhode Island. EUA directly owns all common stock of
Eastern, Newport Electric Corporation, and Blackstone Valley Electric Company
and indirectly owns all common and preferred stock of Montaup. EUA does not
directly own any generating or transmission assets located in Connecticut.
Application 1, pp. 1-2.
NEES is a public utility holding company headquartered in Westborough,
Massachusetts. Its subsidiaries are engaged in the transmission and distribution
of electricity and the marketing of energy commodities and services. The
electricity delivery companies serve approximately 1.3 million customers in
Massachusetts, Rhode Island, and New Hampshire. Other NEES subsidiaries offer
telecommunication services. NEES owns the common equity of NEP. Application III,
p. 3.
In Application I, Montaup requests approval of its transfer to EUA all
of Eastern's investment in Montaup's capitalization. Montaup is a second-tier
subsidiary of EUA, and remains a subsidiary of EUA, albeit a direct subsidiary,
after the transfer. Application I, p. 3.
<PAGE>
The Company argues that Conn. Gen. Stat. section 16-47(c), which
applies to holding companies, does not apply in this instance because neither
EUA nor Montaup engages in the business of supplying service within the state.
Application I, pp. 3-4. The Company further argues that Conn. Gen. Stat. section
16-43 also does not apply in this instance because the proposed transaction
involves a transfer of ownership of Montaup, a second tier corporate subsidiary
to its parent holding company, and is not a merger or consolidation, will not
cause issuance of new common stock, and is only a transfer, not the sale, of
Montaup's capitalization from a subsidiary to a parent company. The capital
structure of Montaup is not being altered, and Montaup is not divesting any
property. Application I, p. 5.
The proposed transfer is subject to approval by the Securities and
Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and
the Nuclear Regulatory Commission (NRC). In addition, the Massachusetts
Department of Telecommunications and Energy (MDTE) will retain jurisdiction over
Montaup and Eastern after the transfer. Application I, p. 6.
In Application II, the Petitioners are requesting the Department's
approval of the NEP Merger pursuant to Conn. Gen. Stat. section 16-43(a)(1).
Application II, p. 1. NEP and Montaup constitute "electric companies" and
"public service companies", as defined in Conn. Gen. Stat. section 16-246c(c).
Montaup proposes to merge with and into NEP. Application II, p. 3. NEP and
Montaup intend eventually to divest their interests in their operating nuclear
units. Application III, p. 2. The Petitioners request approval of the merger
pursuant to Conn. Gen. Stat. section 16-43.
The proposed NEP merger transaction is subject to approval by FERC and
MDTE. Approval of the Public Service Board of Vermont, where NEP and Montaup own
property, is also required, and approval from the New Hampshire Public Service
Commission may also be necessary. Application II, p. 4.
In Application III, the Petitioners are requesting the Department's
approval of the NEES Merger pursuant to Conn. Gen. Stat. section 16-43(a)(1).
Application III, p. 1. NEES and EUA are registered holding companies under the
Public Utility Holding Company Act of 1935. It is contemplated that a NEES
affiliate, Research Drive LLC, will merge with and into EUA, with EUA being the
surviving entity that will merge into NEES. Application III, pp. 1 and 3. The
Petitioners request Department approval of this merger pursuant to Conn. Gen.
Stat. section 16-43.
<PAGE>
The proposed NEES merger transaction is subject to approval by the
SEC, FERC, the NRC, and the Rhode Island Public Utilities Commission. In
addition, the proposed transaction is being scrutinized by the MDTE. The
proposed transaction also requires a Hart-Scott-Rodino filing with the U.S.
Justice Department.1 Application III, pp. 5-6.
III. Department Analysis
The Department has reviewed the proposed reorganization and mergers
submitted in Docket Nos. 99-08-11, 99-08-12, and 99-08-13. The proposed transfer
of Montaup from a secondary subsidiary to a first-tier subsidiary of its holding
company, EUA, is not a merger. Montaup is not being absorbed into EUA, but is
retaining its separate identity. Nor is the transfer a consolidation as Montaup
and EUA are not combining to form a new entity. No new common stock in Montaup
is being issued; the existing capitalization of Montaup is being transferred
intact within the holding company's structure. Under the particular set of facts
and circumstances of this docket, the Department finds that the transfer of
Montaup, a subsidiary of EUA's subsidiary Eastern, constitutes a corporate
reorganization. Subsequent to this reorganization, Montaup will merge with NEP,
the new entity being a subsidiary of NEES, and EUA will then merge with NEES,
the resulting entity being NEES.
The Petitioners qualify as foreign electric companies pursuant to the
provisions of Conn. Gen. Stat. section 16-246c by virtue of their minority
interest in Millstone Unit No. 3, a nuclear generating asset located in
Waterford, Connecticut. Pursuant to Conn. Gen. Stat. section 16-246c(c), NEP and
Montaup constitute "electric companies" and "public service companies" within
meaning of Conn. Gen. Stat. section 16-1. The NEP Merger falls under Conn. Gen.
Stat. section 16-43(a), which provides, in pertinent part:
A public service company shall obtain the approval of the Department
. . . to directly or indirectly (1) merge, consolidate or make common
stock with any other company, or (2) sell, lease, assign . . . or
otherwise dispose of any essential part of its franchise, plant
equipment or other property necessary or useful in the performance of
its duty to the public. . . .
- ---------------
1 The Hart-Scott-Rodino Antitrust Improvement Act of 1976, PUB. L. 94-435,
Sept. 30, 1976, requires a filing with the Federal Trade Commission and
Assistant Attorney General prior to the subject transaction. 15 U.S.C.
section 18a.
<PAGE>
Thus, the Petitioners must obtain approval from the Department for the merger of
the public service companies. Although the merger of their holding companies,
EUA and NEES, may be considered under Conn. Gen. Stat. section 16-47, it is
determined that the merger also falls under Conn. Gen. Stat. section 16-43(a)
for approval.
The Department has reviewed the Petitioners' applications and
supporting exhibits, and finds that the proposed mergers will not adversely
affect electric service in Connecticut. NEP and Montaup have no ratepayers in
Connecticut and are regulated by the jurisdiction of Massachusetts, where they
are domiciled. The NEP Merger and the NEES Merger would have no detrimental
effect on Connecticut ratepayers. Therefore, under Conn. Gen. Stat. section
16-43, the Department approves the Petitioners' requests in Docket Nos.
99-08-11, 99-08-12, and 99-08-13, subject to compliance with all applicable
requirements as found in the Petitioners' applications.
IV. Findings of Fact
1. NEP and Montaup are foreign electric companies pursuant to Conn. Gen. Stat.
section 16-246c with minority interests in Millstone Unit No. 3 located in
Waterford, Connecticut.
2. NEP and Montaup each constitute an "electric company" and "public service
company" pursuant to Conn. Gen. Stat. section 16-43.
3. NEP and Montaup have no ratepayers in Connecticut.
4. NEP and Montaup have minority interests in Millstone Unit No. 3 located in
Waterford, Connecticut.
5. EUA and NEES are holding companies of Montaup and NEP, respectively.
V. Conclusion and Order
A. Conclusion
Accordingly, pursuant to Conn. Gen. Stat. section 16-43, the
Department approves the Petitioners' requests for the reorganization and mergers
as discussed above. These transactions would have no adverse impact on electric
service or ratepayers in Connecticut. The Department's approval is subject to
<PAGE>
compliance with all applicable requirements of agencies that intend to exercise
authority over the proposed transaction.
B. Order
1. NEP and Montaup shall file with the Department any decisions issued by the
MDTE relating to the merger of the public service companies and the holding
companies that are the subject of these dockets within 30 days after each
decision becomes available.
Docket No. 99-08-11 99-08-11 Application of Montaup Electric Company for
the Transfer of Ownership From Eastern Edison
Company to Eastern Utilities Affiliates
Application of Montaup Electric Company for
the Transfer of Ownership From Eastern Edison
Company to Eastern Utilities Associates
Docket No. 99-08-12 99-08-12 Application of New England Power Company for
Approval of a Merger with Montaup Electric
Company Application of New England Power
Company for Approval of a Merger with Montaup
Electric Company
Docket No. 99-08-13 99-08-13 Application of New England Electric System
for Approval of a Merger with Eastern
Utilities Associates Application of New
England Electric System for Approval of a
Merger with Eastern Utilities Associates
This Decision is adopted by the following Commissioners:
Glenn Arthur
Linda Kelly Arnold
Jack R. Goldberg
<PAGE>
CERTIFICATE OF SERVICE
The foregoing is a true and correct copy of the Decision issued by the
Department of Public Utility Control, State of Connecticut, and was forwarded by
Certified Mail to all parties of record in this proceeding on the date
indicated.
________________________ 11/04/99
Louise E. Rickard Date
Acting Executive Secretary
Department of Public Utility Control
M. Hoffman
DE 99-035
NEW ENGLAND ELECTRIC SYSTEM
PETITION REGARDING THE PROPOSED MERGER BETWEEN
NEES AND THE NATIONAL GRID GROUP PLC
ORDER APPROVING PETITION
O R D E R N O. 23,308
- - - - - - - ------
OCTOBER 4, 1999
APPEARANCES: Carlos A. Gavilondo, Esq. and Thomas G. Robinson, Esq.
Attorneys for New England Energy System Companies; Scott J. Mueller, Esq. and
Paul Connolly of LeBoeuf, Lamb, Greene & MacRae, LLP for National Grid Group;
Wynn E. Arnold, Esq., Assistant Attorney General, for the Governor's Office of
Energy and Community Services; Michael W. Holmes, Esq. for the Office of
Consumer Advocate, representing residential ratepayers; Dennis A. Hebert for the
Campaign for Ratepayers Rights; Rep. Jeb E. Bradley; Timothy W. Fortier for the
Business & Industry Association of New Hampshire; Larry S. Eckhaus, Esq. for the
Staff of the New Hampshire Public Utilities Commission; and Gary Epler, Esq.,
Commission General Counsel.
I. PROCEDURAL HISTORY
On March 18, 1999, New England Electric System (NEES) and the National
Grid Group plc (NGG) (referred to collectively as the Companies) filed with the
New Hampshire Public Utilities Commission (Commission) certain affidavits,
testimony and related exhibits concerning the proposed acquisition by NGG of all
of the common shares of NEES. The purpose of the filing was to inform the
Commission of the transaction and the Companies' position that the acquisition
would have no adverse effect on New Hampshire ratepayers.
NEES transacts business in New Hampshire through its wholly-owned
subsidiaries Granite State Electric Company (GSEC) and New England Power Company
(NEP). GSEC is a public utility providing retail electric service to
approximately 35,000 customers in New Hampshire. NEP, also a public utility,
provides transmission services to GSEC and other entities within the state. NGG
<PAGE>
is a holding company incorporated in the United Kingdom and upon its acquisition
of NEES will be subject to regulation under the federal Public Utility Holding
Company Act (PUHCA), 15 U.S.C. section 79 et seq.
The Commission issued Order No. 23,202 (April 21, 1999) determining
that the transaction between NEES and NGG may adversely affect the rates, terms,
service or operation of either GSEC or NEP. Based on that determination, the
Commission concluded that it has authority to conduct further proceedings under
RSA 374:33 notwithstanding language in RSA 369:8,II providing that Commission
approval of merger transactions is not required in certain circumstances.
A Prehearing Conference was held on May 4, 1999. On May 20, 1999, the
Companies filed a Motion for Rehearing of Order No. 23,202, and for Deferral of
Decision on Motion Pending Review Under RSA 374:33. On June 4, 1999, the
Commission approved the request for deferral. After a period of discovery,
testimony was filed by the Office of Consumer Advocate (OCA), Rep. Jeb Bradley
and the Commission Staff on June 11, 1999. The Companies filed rebuttal
testimony on June 18, 1999. Hearings were held on June 24 and 25, 1999.
The Commission deliberated on this proceeding at its public meeting of
August 9, 1999 and adopted minutes of those deliberations one week later.
Construing those minutes as a final order of the Commission, OCA filed a motion
for rehearing on September 8, 1999.
Among the issues raised by the NEES/NGG filing is the extent to which
the Commission should make any determination at this time concerning the
acquisition premium, i.e., the extent to which the purchase price paid by NGG
exceeds the book value and/or the market price of NEES shares. NEES and NGG have
represented that they do not presently intend to recover the acquisition premium
from ratepayers. However, the Companies have indicated that NGG intends to
allocate the acquisition premium to its subsidiaries, including GSEC and NEP,
which means that the books of these subsidiaries may, at some point, carry a
portion of the acquisition premium and costs associated with the merger
transaction. They have also stated that NGG may, in the future, seek to reflect
some or all of the acquisition premium in rates.
II. POSITIONS OF THE PARTIES AND STAFF
A. NEW ENGLAND ELECTRIC SYSTEM/NATIONAL GRID GROUP, PLC
NGG and NEES contend that their merger transaction merits Commission
approval because NGG's plan to acquire all outstanding shares of NEES stock
<PAGE>
meets or exceeds the "no net harm" test articulated in Eastern Utilities
Associates, 76 NH PUC 236 (1991). According to the Companies, the merger will
have no adverse impact on rates because the Companies do not seek to recover any
merger-related costs in the instant proceeding. NGG and NEES explicitly reserve
the right to seek recovery in some future Commission proceeding of the
acquisition premium paid by NGG, but aver they will not seek recovery unless
they can demonstrate that any sum so recovered is fully offset by corresponding
savings to ratepayers. The Companies further assert that the merger will have
only a positive impact on service, owing to what they characterize as NGG's size
and experience in the transmission and distribution of electricity, particularly
in a competitive wholesale market. Finally, the Companies contend that the
merger will not adversely affect the Commission's ability to regulate GSEC
because the subsidiary will remain a New Hampshire corporation whose books and
records will be accessible to the agency.
B. GOVERNOR'S OFFICE OF ENERGY & COMMUNITY SERVICE
The Governor's Office of Energy and Community Services
(GOECS) urges Commission approval of the merger in light of what GOECS contends
are NGG's expertise in transmission and distribution, the possibility of savings
and efficiency gains through increased economies of scale resulting from the
merger and the likely consolidation and elimination of redundant operations
following completion of the transaction. GOECS asks the Commission to defer the
issue of whether NGG can recover any portion of its acquisition premium from New
Hampshire ratepayers. GOECS further recommends that the Commission condition its
approval of the merger on NGG and NEES giving assurances that (1) it will grant
the Commission the same access to affiliate records as was granted to the
Federal Energy Regulatory Commission (FERC) in obtaining that agency's approval
of the merger under the Federal Power Act and (2) any portion of NGG's
acquisition premium allocated to GSEC by the Securities and Exchange Commission
(SEC) in connection with that agency's review of the merger will not be binding
on the Commission in any future proceeding.
C. REPRESENTATIVE JEB E. BRADLEY
Representative Jeb E. Bradley of Wolfeboro, Chair of the House
Committee on Science, Technology and Energy, urges Commission approval of the
merger and further takes the position that any determination that NGG may not
recover its acquisition premium is likely both to derail the merger and send an
inappropriate signal to other potential purchasers of New Hampshire utility
properties whose acquisitions may provide significant benefits to the state's
<PAGE>
ratepayers. Representative Bradley further averred that any such determination
would inappropriately circumscribe the Commission's ability to implement a
program of performance-based regulation (PBR) in connection with GSEC. Finally,
Representative Bradley takes the position that a deferral of the
acquisition-premium issue now would have the salutary effect of permitting the
Commission to determine in the future that shareholders and ratepayers should
share the cost of the premium, which he deems to be a laudable objective in
connection with the process of electric industry restructuring in general.
D. BUSINESS & INDUSTRY ASSOCIATION OF NEW HAMPSHIRE
The Business & Industry Association of New Hampshire (BIA) urges
approval of the merger on the grounds that it will benefit ratepayers and
strengthen the regional economy. BIA urges deferral of any issues related to the
acquisition premium on the grounds that avoiding a precedent now will allow for
flexibility in reviewing other mergers and that the Commission retains authority
to deny recovery in connection with NGG in a future proceeding.
E. OFFICE OF THE CONSUMER ADVOCATE
The Office of the Consumer Advocate (OCA) urges the Commission either
to disapprove the merger outright or to impose conditions upon the transaction.
With regard to whether the merger creates any benefits to ratepayers, OCA
contends that NGG brings no unique expertise or experience to the operation of
NEES because NGG's experience is either duplicative of that of NEES, involves
transmission systems that operate at a different voltage level than NEES does
and/or does not involve the operation of a regulated monopoly. Indeed, OCA even
goes so far as to suggest that NEES enjoys a record of performance that is
superior to that of NGG. Moreover, in the opinion of OCA the proponents of the
merger have failed to suggest any standard for measuring the merger's benefits
and, therefore, the Companies have not met their burden of proof.
Assessing the possible harms to ratepayers, OCA contends that NGG's
overestimation of its abilities in the face of unfamiliar operating conditions
may pose a risk to New England electricity consumers. Relying, inter alia, on
testimony from the Companies to the effect that New England's high-cost
utilities appear to be the most profitable in the region, and that investors do
not recognize the difference between high-cost and low-cost companies, OCA
maintains there is no assurance that NGG would maintain, much less improve on,
the cost and quality levels already achieved by NEES. OCA also takes the
position that if NGG incurs additional debt and then seeks to impute that
<PAGE>
debt as equity with regard to its subsidiaries, as suggested on the record, this
will exert upward pressure on NEES rates. OCA expresses concern with the
possibility of future commissions permitting recovery of the acquisition premium
even if this order denies such recovery. Finally, OCA contends NGG's refusal to
abjure ownership of generation facilities in the future suggests that NGG may
not be truly committed to operating in a climate of vigorous competition.
OCA further questions the Companies' underlying premise that NEES'
shareholders should reap the financial benefits of NGG's willingness to pay a
premium for acquiring NEES. In OCA's view, there is no meaningful distinction to
be drawn between the sale of all NEES stock and the sale of its assets. OCA
believes the Commission should treat the instant transaction as an asset sale
because ratepayers have been required to bear the financial burden, through
stranded-cost recovery, of GSEC's sale of other assets, i.e., transmission
facilities and contracts. Thus, in OCA's view, ratepayers should reap the
benefits of a profitable asset sale, albeit one achieved through a stock
transaction, having suffered the adverse financial consequences of an
unprofitable one. OCA also sees a contradiction between the existence of an
acquisition premium and the fact that ratepayers have been paying depreciation
costs on NEES' transmission and distribution assets on the theory that their
value diminishes over time. According to OCA, the Commission should apply the
"balancing of the equities" test reflected in the case law governing asset
sales, determining here that the equities favor allocating the financial gain to
ratepayers. In OCA's view, case law from New Hampshire and other jurisdictions
supports the view that historic book value is the only appropriate basis for
measuring rate base, and established ratemaking principles demonstrate the
illogic of treating assets as depreciating for some purposes but appreciating
for others. OCA separately argues that NGG should be barred from recovering its
acquisition premium because it failed to respond to OCA's data request seeking
the basis of its decision to purchase NEES. According to OCA, this failure
justifies a determination that NGG never had any expectation that it would
recover the premium from ratepayers. Furthermore, OCA contends the record
supports a determination that, based on existing cash flows, earnings and tax
expenses, NGG will generate all the revenue necessary to cover the capital costs
of a $3.2 billion investment made with borrowed funds. OCA is also concerned
about the precedent this case will set in connection with other utilities,
particularly Public Service Company of New Hampshire.
Finally, OCA draws a distinction between a lack of proof that the
public will be harmed by the proposed merger and a lack of proof that the public
will be held harmless. In OCA's view, this case presents the former circumstance
<PAGE>
whereas the Commission should require proof of the latter in order to approve
the transaction under New Hampshire law. Assuming the Commission approves the
merger, OCA proposes several conditions: (1) Direct NEES to offset GSEC's
recoverable stranded costs by an amount equaling GSEC's share of the acquisition
premium, roughly, $16,860,000; (2) decide that NGG is barred from recovering any
acquisition premium, now and in the future, except possibly through a
performance-based regulation mechanism as outlined by Mr. Traum of OCA in his
testimony; and (3) restrict the amount of generating capacity NGG may own,
either directly or indirectly, for possible sale into the New England electric
grid.
F. GRANITE STATE TAXPAYERS, INC.
Granite State Taxpayers, Inc. (GST) seeks approval of the merger
without any conditions beyond those commitments made by NGG and NEES in their
filing. According to GST, establishing a rule concerning recovery of the
acquisition premium would unnecessarily hamstring the Commission in other
proceedings at a time when consolidation in the electric industry should be
encouraged as a means of achieving efficiencies and cost savings.
G. COMMISSION STAFF
The Staff of the Commission urges approval of the NGG/NEES merger
subject to a determination that NGG may not recover its acquisition premium,
whether measured as the difference between the acquisition price and book value
or the difference between the acquisition price and the price of NEES stock
prior to announcement of the merger, now or in the future. Staff's view is that
any recovery of the acquisition premium would transgress the "original cost"
principle as contained in the Uniform System of Accounts. Staff further contends
that any benefits resulting from the merger will be difficult to quantify and
that permitting recovery of the acquisition premium could result in GSEC
ratepayers paying for benefits that actually flow to other NGG customers. With
regard to the Companies' position that they will not seek recovery of the
acquisition premium absent a showing of offsetting benefits to ratepayers,
Staff's view is that the existence of the premium is purely a function of the
accounting method employed by the Companies (the purchase method, as opposed to
pooling-of-interests) and, thus, it would be illogical to conclude that any
benefit to ratepayers is related to the premium in a way that justifies its
recovery. In the opinion of Staff, if ratepayer benefit from any savings
resulting from the merger, performance-based regulation is the appropriate
mechanism to reward NGG and/or NEES for providing such benefits on a
<PAGE>
going-forward basis. The Staff further contends that the purchase price of $3.2
billion can be properly characterized as the sum of the market value of NEES
stock, prior to the merger announcement, plus $600 million to reflect the value
of certain tax benefits (chiefly the deductibility of interest payments) that
would accrue to a previously under-leveraged NGG by virtue of taking on
additional debt to finance the acquisition of NEES. It is also Staff's position
that the Companies have overestimated the acquisition premium by approximately
$1 billion, doing so by calculating it based on NEES' book value as opposed to
its market value prior to the merger announcement. According to Staff, the
difference between the purchase price and the market price prior to the merger
announcement is a more realistic, and therefore more appropriate, measure of the
cost to NGG of acquiring and gaining control of NEES. Staff's point is that,
assuming recoverability of the acquisition premium, it should be limited only to
sums that had not already been factored into NEES' market price and thus could
be deemed to reflect the value of benefits that inure to ratepayers as a direct
result of the merger.
III. COMMISSION ANALYSIS
A. JURISDICTIONAL ISSUES
In considering the proposed acquisition of NEES by NGG, the Commission
is mindful of the statutory framework within which it must act. Our broad
mandate is to assure that all charges made or demanded by a public utility, for
any service rendered or to be rendered, are "just and reasonable." RSA 374:2;
see also RSA 374:3 (vesting commission with "general supervision of all public
utilities"). A public utility holding company such as NGG may not acquire more
than ten percent of the stock of a utility operating in New Hampshire unless we
determine "that such acquisition is lawful, proper and in the public interest."
RSA 374:33. However, as previously noted in Order No. 23,202, the Legislature
has further delineated our authority over significant changes in utility
ownership as follows:
To the extent that the approval of the commission is required by any
other statute for any corporate restructuring, merger, acquisition,
financing, change in long-term or short-term indebtedness, or issuance
of stock involving parent companies of public utilities regulated by
the commission, the approval of the commission shall not be required
if the public utility represents to the commission in writing no less
than 30 days prior to the anticipated completion of the transaction
that the transaction will not adversely affect the rates, terms,
service, or operation of the public utility within the state.
<PAGE>
RSA 369:8, II (Supp. 1998).1
We reiterate here the conclusion we previously stated in Order No.
23,202: We cannot agree with NGG and NEES that the language of RSA 369:8, II
requires us to accept at face value a representation that a proposed transaction
such as the one at issue here will have no adverse impact on rates, terms,
service or operations of a New Hampshire utility.
Our view is grounded in established principles of statutory
construction. The process begins with consideration of "the plain and ordinary
meaning" of the words used in the statute, but this does not "make a fortress
out of the dictionary." Appeal of Ashland Elect. Dep't, 141 N.H. 336, 341 (N.H.
1996) (citation omitted). Thus, a statute is correctly interpreted "not in
isolation, but in the context of the overall statutory scheme." Appeal of HCA
Parkland Medical Ctr., 143 N.H. 92, 94 (1998) (citation omitted). "Where
reasonably possible, statutes should be construed so that they lead to
reasonable results and do not contradict each other." Sprague Energy Corp. v.
Town of Newington, 142 N.H. 804, 806 (1998). An interpretation that renders a
statute "meaningless" is to be avoided, Appeal of Barry, 142 N.H. 284, 287
(1997), and there is a presumption that the Legislature "did not enact
nonsensical and unnecessary provisions," O'Brien v. O'Brien, 141 N.H. 435, 437
(1996).
In addition to the provisions already cited, giving the Commission
general supervisory authority over utilities, requiring us to assure that rates
are just and reasonable, and imposing upon us the obligation to assure the
citizens of this state that transactions such as the one at issue here are
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1 Subsequent to the filing of the instant proceeding, RSA 369:8 II has been
substantially amended, see 199 N.H. Laws ch. 289 section 12, effective on
July 1, 1999 but not applicable to transactions entered into before that
date, see id. At section 16. We therefore apply the former version of the
statute.
<PAGE>
lawful, proper and in the public interest, we are vested with a specific duty to
"keep informed" as to the operation of all public utilities in the state, RSA
374:4, and are empowered to "investigate or make inquiry . . . as to any act or
thing having been done, or having been omitted or proposed by any public
utility," RSA 365:5 (emphasis added). In the context of a merger
transaction, these provisions would be meaningless if RSA 369:8, II were
interpreted so as to require us simply to accept without investigation any
representation that a change in ownership will have no adverse impact.
Considered in isolation, RSA 369:8, II would appear to require
precisely such rubber-stamp regulatory scrutiny. However, because we must view
this provision in the context of the Commission's overall statutory mandate,
which explicitly grants us investigatory powers, we conclude that we are vested
with both the power and the obligation to conduct an inquiry geared toward
verifying the representations made by the putative partners to the merger. In
this instance, we do so largely based on the information contained in the filing
made by NGG and NEES.
Such a focused inquiry, we conclude, is fully consistent with
legislative intent. To hold otherwise would render the statute a virtual
nullity. It would permit parent companies of New Hampshire utilities to merge
without Commission investigation, thus excepting themselves from the consumer
protections contained in RSA 374:33 based on the untested, bare assertion of
compliance with the statutory standard. We presume the Legislature could not
have intended such an absurd and illogical result.
B. "NO NET HARM" STANDARD
We therefore proceed to the results of that inquiry. As already noted,
NGG's proposed acquisition of NEES is governed by the mandate in RSA 369:8 that
the merger will "not adversely affect the rates, terms, service, or operation of
the public utility within the state." We view this inquiry as the same one we
have historically made under RSA 374:33 (authorizing Commission approval of
mergers that are "lawful, proper and in the public interest"), to which we apply
what has come to be referred to as the "no net harm" test, see, e.g., Re
Consumers New Hampshire Water Company, 82 NH PUC 814, 817-18 (1997), first
articulated in Re Eastern Utilities Associates, 76 NH PUC 236, 252-53 (1991)
(rejecting proposed "net benefit" test for review of merger transactions).
"In essence, the 'no net harm' test requires approval of a proposed
transaction if the public interest is not adversely affected." Re CCI
<PAGE>
Telecommunications of N.H., Inc., 81 NH PUC 844, 845 (1996). In that regard,
"our obligation is to ensure that the interests of ratepayers are balanced
against the right of shareholders to be free of regulation which unreasonably
restrains legitimate corporate activities." Re Hampton Water Works Co., 80 NH
PUC 468, 473 (1995). In other words, we must assess the benefits and risks of
the proposed merger and determine what the overall effect on the public interest
will be, giving the transaction our approval if the effect is at worst neutral
from the public-interest perspective.
It is apparent that the transaction at issue in this proceeding is
likely to provide certain benefits to GSEC ratepayers and, indeed, electricity
consumers throughout New England. NGG is the world's largest investor-owned
transmission company and, as such, possesses considerable technical expertise in
the planning and operation of transmission systems. NGG has a record of
improving maintenance programming, introducing improvements to the transmission
system, interconnecting new facilities and reducing transmission costs to
customers in Great Britain when the company took over for the state-owned
transmission system at the time of that nation's electric industry
restructuring. It is of particular relevance to New Hampshire and the rest of
New England, where electric restructuring is in its ascendancy, that NGG brings
experience in managing a transmission system in a competitive market. The
Commission believes this experience may assist ISO New England, which operates
the grid in our region, as well as the New England states themselves as each
implements competition in the regional power market. These advantages more than
offset any lack of expertise NGG has in confronting conditions typical of New
England winters. In so determining, we do not minimize the importance of
maintaining service to the public during adverse weather conditions that
commonly occur in New England. We will hold NGG accountable for the service
record it develops in New Hampshire and we will expect NGG to take advantage of
the expertise it acquires in the transaction.
Similarly, the takeover of a local or regional public utility by a
larger, more remotely-managed and distantly-headquartered company raises
concerns about the successor company's ability to maintain contact with its
customers and remain aware of, and responsive to, local issues. The Commission
is satisfied with the representations of NGG management that the merger will not
have a negative effect on the local operation of GSEC's transmission system or
its customer service. The Commission will continue to monitor operations and
customer service carefully and it will hold the new management to its
commitments.
<PAGE>
In Order No. 23,202, we referred to a potential national security
concern raised by a non-domestic corporation owning part of the transmission
grid. In response to this expressed concern, the Companies have filed a copy of
a letter from the federal Committee on Foreign Investment in the United States,
indicating that the committee deems the proposed merger to raise "no issues of
national security sufficient to warrant an investigation." See 50 U.S.C. App.
section 2170 (providing for investigation by President or President's designee
of proposed mergers with national security implications and authorizing
presidential suspension of such transactions in appropriate circumstances). This
letter adequately addresses the concern previously expressed by the Commission
in this case.
With respect to NGG's refusal to rule out the possibility it may seek
to own generation facilities in the future, we are unable to agree with OCA that
such a refusal is relevant to the "no net harm" calculus. If we adopted the
theory OCA advances in this regard, to the effect that a merger proponent must
prove that the public will be held harmless in the wake of the transaction, we
would put an acquiring entity in the impossible position of refuting every
possibility of adverse consequences. NGG's task here is to prove that the
present circumstances of the proposed transaction, and those reasonably
foreseeable consequences of it, will result in no net harm. In assessing whether
NGG has met that burden, we will not speculate about future possibilities, even
those that the proponent has refused to rule out. The corollary, of course, is
that our approval of the merger sets no precedent as to how we would treat such
consequences, should they arise. If, as OCA suggests, NGG is not committed to
the competitive paradigm this state has embraced in the context of electricity
deregulation, then NGG is consummating its purchase of NEES at its own risk.
Finally, we do not share OCA's view that our statutory mandate to scrutinize
utility mergers permits us to seize on behalf of ratepayers any portion of the
capital gains reaped by the shareholders of the selling entity. This is so even
though we have previously approved a settlement permitting GSEC to recover
certain stranded costs, see Granite State Electric Company, No. 23,041 (Oct. 1,
1998), a decision that presumably made NEES shareholders (as the ultimate owners
of GSEC) the owners of a more valuable investment than they would have had if
GSEC had simply been forced to write off its stranded costs. By definition,
stranded costs are
costs, liabilities, and investments . . . that electric
utilities would reasonably expect to recover if the existing
regulatory structure with retail rates for the bundled
provision of electric service continued and that will not be
<PAGE>
recovered as a result of restructured industry regulation
that allows retail choice of electricity suppliers, unless a
specific mechanism for such cost recovery is provided.
RSA 374-F:2, IV. Thus, recovery of stranded costs is ultimately a
restructuring-driven adjustment of the extent to which a utility's shareholders
may reap a return, ultimately paid to them in dividends, on their investment.
Such recovery will obviously have an impact on the capital gains or losses those
shareholders experience when they sell their right to receive those dividends,
but those transactions take place outside the ratemaking process. We do not
adjust rates with every fluctuation in a utility's share price. Likewise, even
if NGG is willing to compensate NEES shareholders handsomely for the right to
recover on the NEES rate base, that fact is, in itself, of no consequence to our
"no net harm" inquiry. This question may have a different result if the
purchasing utility seeks to recover any of the premiums paid above book value
from customers through rates. See discussion below.
Accordingly, the evidence supports the conclusion that the proposed
merger will itself result in no net harm to New Hampshire ratepayers with
respect to terms, service and operation. The remaining issue is whether we can
reach the same conclusion as to rates -- a question that requires us to confront
the matter of the acquisition premium NGG has agreed to pay in order to acquire
all of NEES' outstanding shares.
C. ACQUISITION PREMIUM
The record before the Commission in this proceeding allows us to make
the following findings on this important issue: First, the acquisition premium
in this case does not represent the cost of property devoted to public service
but, rather, is a cost related exclusively to the price paid by NGG for NEES
stock. Second, to grant recovery of the acquisition premium would effectively
result in the write-up of the valuation of NEES assets simply because of the
financial transaction and the price NGG agreed to pay for control of NEES.
Third, to allow recovery of the acquisition premium would, in effect, put GSEC
ratepayers in the position of compensating NGG/NEES for the mark-up above book
value that NGG paid NEES stockholders for their shares of NEES stock, i.e., the
<PAGE>
difference between the purchase price of $53.75 per share and the book value of
$26.79 per share.2
In urging the Commission not to reach the acquisition-premium question
in this proceeding, either as a general policy question or as a specific aspect
of this proposed merger's impact on the affected New Hampshire ratepayers, the
Companies note their lack of any present intention to recover any acquisition
premium from ratepayers. Essentially, their argument is that in the absence of
any such intention their merger proposal meets the "no net harm" test discussed
supra. However, the Companies have also indicated that NGG intends to allocate
the acquisition premium to its subsidiaries, including GSEC and NEP. Therefore,
the books of GSEC and NEP will likely, at some point in the future, carry a
portion of the acquisition premium and costs associated with the transaction.
The Companies readily and clearly acknowledge that the premium does not
represent the cost of property devoted to public service but, rather, is a cost
related solely to the sale of NEES stock.
As already noted, the Companies further indicate that they will not
seek recovery of any acquisition premium in rates absent a showing of offsetting
savings and benefits to customers. Further, the record shows that NGG did not
rely on the prospect of recovering its acquisition premium when it decided to
purchase NEES. If NGG floats additional debt to finance its purchase, the record
shows that NGG will have sufficient revenues from regulated operations to cover
the cost of the purchase over time. In addition, the experience of NGG with its
own communications subsidiary makes it reasonable to assume that NGG is looking
to the possibility of proceeds from unregulated operations to warrant the
payment to NEES shareholders of a 30 percent premium over market value.
The position of Staff and OCA -- that we should take this opportunity
to deny any present or future recovery of the acquisition premium to be paid by
NGG -- has considerable appeal. We agree, in principle, that the "no net harm"
test could warrant our conditioning our approval of the merger on such a
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2 We further note that, to the extent that the merger agreement calls for the
payment of an acquisition premium, the Companies may have overstated it. As
the Staff contends, comparing the purchase price to the unaffected market
price of NEES stock may be a more appropriate measure of the acquisition
premium than using the stock's book value as the baseline figure. This is
because, at the time of the announcement of the merger, NEES stock was
already trading above book value and, therefore, the merger price only
gives the shareholders additional value to the extent the merger price
exceeds the price at which the stock was previously trading.
<PAGE>
prohibition. See, e.g., Entergy Gulf States, Inc. v. Louisiana Pub. Serv.
Comm'n, 730 So.2d 890, 895 n.1 (1999) (describing utility stipulation to that
effect as precondition to regulatory approval of merger); Appeal of Richards,
134 N.H. 148, 172 (1991) (Brock, C.J. and Bachelder, J., dissenting) (noting
that rate recovery of acquisition premium is "of little solace to a ratepayer
who is forced to contribute to a return on [an] asset which presumably does not
[provide] electricity but merely helps to indemnify" investors). Based on the
present record, we find merit in the argument that NGG and/or its putative
subsidiaries that will serve New Hampshire ratepayers should not recover any
premium paid in connection with the merger transaction.
However, we do not believe it is appropriate to impose a blanket
prohibition at this juncture on any recovery of the acquisition premium paid by
NGG. The electric industry is undergoing rapid change. In such a climate, we
cannot rule out the possibility that circumstances could justify recovery of at
least part of an acquisition premium and still be regarded as imposing "no net
harm" on ratepayers. However, on the present record, we are unable to determine
what precise circumstances, if any, would justify the recovery of the
acquisition premium or any part thereof. Such issues are appropriately
considered in the context of a rate case. See, e.g., Central Illinois Public
Service Co., 180 PUR 4th 185, 208-09 (Ill. Commerce Comm'n 1997) (approving
proposed merger but noting that "ratemaking treatment of . . . merger-related
costs . . . should not be determined outside the context of a general rate
proceeding in which all elements of the utility's cost of service are
examined"); see also WorldCom, Inc., 185 PUR 4th 153, ___ (Minn. PUC, 1998)
(approving merger of long-distance carriers but refusing to rule on
"speculative" claims such as prediction that merger would cause anticompetitive
pricing among major long-distance carriers). The issue can be viewed as one of
ripeness, which "relates to the degree to which the defined issues in a case are
based on actual facts . . . and are capable of being adjudicated on an
adequately developed record." Appeal of State Employees' Assn. of N.H., Inc.,
142 N.H. 874, 878 (1998) (declining to adjudicate claims based on "general
allegations" of actual harm). In the present circumstances, the parties seeking
a determination now that NGG could never recover any portion of its acquisition
premium are in the same position as litigants who seek a declaratory judgment in
court based on "hypothetical facts," and thus are not entitled to such a
determination because the factual bases for their position are not "sufficiently
complete, mature, proximate and ripe" to permit us to decide the issue in a
manner that would be fair to all parties. See Delude v. Town of Amherst, 137
N.H. 361, 363-64 (1993). Thus, we stress that our preliminary determination is
without prejudice to the right of NGG and the subsidiaries it is acquiring to
request recovery of an acquisition premium in the future, assuming that such a
request would address the concerns of the Commission as expressed in this order.
<PAGE>
In that regard, we agree with the Companies that it may be appropriate
in the future to provide NGG and its subsidiaries with incentives for cost
savings through some form of performance-based regulation (PBR). We caution,
however, that we are mindful of Staff's position that implementing a PBR
mechanism post-merger would allow the Companies to make a presentation after the
fact to the effect that savings achieved or to be achieved should be used to
offset the acquisition premium. Using PBR to achieve such a result would not
provide any real incentive for a utility to achieve savings on a going-forward
basis. Although there may be a way to avoid this problem, based on the state of
the law and the industry at some point in the future, we remain skeptical based
upon present knowledge that the PBR paradigm can be applied to the acquisition
premium in a manner that accomplishes the objectives PBR mechanisms are
typically designed to accomplish. See 206.03 (setting forth PBR objectives of
enhanced competition; infrastructure development, investment in technology,
plant or equipment; price reduction or service efficiency). And, in all
likelihood, the level of profits available as a result of a properly structured
PBR scheme would not rise to the level of the acquisition premium called for in
this merger proposal.
To permit any future Commission to have the benefit of the record
developed here, should it become necessary for that Commission to consider a
request for recovery of any part of the acquisition premium, we direct that, in
any such request, NGG or its subsidiaries (1) ask the Commission to take
administrative notice of this docket and (2) discuss how the request addresses
and responds to the concerns expressed by Staff and OCA in this docket and by
the Commission in this order. We are convinced the filings in this docket will
be of assistance to any future Commission that finds itself confronted with the
question whether to allow the recovery of all or part of the NGG acquisition
premium at issue in this proceeding.
IV. CONCLUSION
Based upon the foregoing analysis, the Commission concludes that the
parties to the merger have met the "no net harm" test. We therefore approve the
transaction. We do so with the understanding that the Companies will abide by
the conditions proposed by GOECS and explicitly agreed to by the Companies in
their reply brief. These conditions are: allowing the Commission the same access
to books and records accorded to FERC; a commitment that any SEC or FERC
determination relating to the merger or to the allocation of the acquisition
premium shall not be binding on, or have any precedential effect before, the
Commission; and, as already made clear, that our approval of the merger includes
<PAGE>
no express or implied determination that NGG or its subsidiaries should recover
any part of the acquisition premium paid in connection with the merger
transaction.
VI. OTHER ISSUES
A. PROTECTIVE ORDERS
On July 2, 1999, NGG filed a motion for protective order seeking
confidential treatment of certain information provided in discovery that,
according to NGG, would disclose its confidential business strategies for
considering and implementing potential corporate acquisitions.
Specifically, NGG is seeking protection for a paper prepared by one of
its directors, Stephen Box, concerning the financing and hedging arrangements
made by NGG in connection with the proposed acquisition of NEES. NGG has
furnished this information in response to Record Request No. 16 submitted by the
Office of the Consumer Advocate, which has not opposed the instant motion.
The Commission recognizes that the information contained in the filing
is sensitive commercial information in a competitive market. Thus, based on
NGG's representations, under the balancing test we have applied in prior cases,
e.g., New England Telephone & Telegraph Company (Auditel), 80 NH PUC 437 (1995);
Bell Atlantic, Order No. 22,851 (February 17, 1998); EnergyNorth Natural Gas,
Inc., Order No. 22,859 (February 24, 1998), we find that the benefits to NGG of
non-disclosure in this case outweigh the benefits to the public of disclosure.
The information, therefore, is exempt from public disclosure pursuant to RSA
91-A:5,IV and N.H. Admin. Rules, Puc 204.06.
B. MOTIONS FOR REHEARING
OCA's September 8, 1999 motion for rehearing is denied as premature,
without prejudice to its reassertion in connection with the order herein on the
merits of the case. OCA noted that it made the rehearing motion to protect its
appellate rights in the event the minutes of our August 9, 1999 deliberations
could be deemed a final order within the meaning of RSA 363:17- b; see RSA 541:6
(establishing denial of rehearing motion as prerequisite to appellate
jurisdiction of New Hampshire Supreme Court). Oral deliberations, even when
recorded in the minutes of the Commission's meetings, are not final orders.
Rather, they constitute the Commission's public discussion of the matter in
question prior to the issuance of a final order that meets the specific
<PAGE>
requirements of RSA 363:17-b. See Appeal of Concord Natural Gas Corp., 121 N.H.
685, 692 (1981) (noting that requirements of RSA 363:17-b are touchstone of
whether document issued by Commission is final order regardless of its caption).
The Companies' motion for rehearing of Order No. 23,202 remains
pending, having been deferred pending the issuance of the instant order. For the
reasons already discussed, supra, we cannot agree with the arguments in the
motion for rehearing that RSA 369:8, II precluded the Commission from conducting
a full inquiry into the merger. Accordingly, the motion to reconsider Order No.
23,202 is denied.
BASED UPON THE FOREGOING, IT IS HEREBY
ORDERED, that the acquisition by NGG of NEES, and the resulting merger
of the two entities causing NEES to become a wholly owned subsidiary of NGG, is
for the public good and in the public interest and is therefore APPROVED; and it
is
FURTHER ORDERED, that the Companies' motion for reconsideration of
Order No. 23,202 is DENIED; and it is
FURTHER ORDERED, that NGG's Motion for Protective Treatment filed on
July 2, 1999 is GRANTED; and it is
FURTHER ORDERED, that the determination as to protective treatment
made herein is subject to the ongoing rights of the Commission, on its own
motion or on the motion of Staff, any party or any other member of the public,
to reconsider this Order in light of RSA 91-A, should circumstances so warrant.
By order of the Public Utilities Commission of New Hampshire this
fourth day of October, 1999.
---------------------- ----------------------
Douglas L. Patch Susan S. Geiger
Chairman Commissioner
Attested by:
- -------------------------------------
Thomas B. Getz
Executive Director and Secretary
<PAGE>
DE 99-035
NEW ENGLAND ELECTRIC SYSTEM
PETITION REGARDING THE PROPOSED MERGER BETWEEN
NEES AND THE NATIONAL GRID GROUP PLC
SEPARATE OPINION OF COMMISSIONER BROCKWAY,
CONCURRING IN PART AND DISSENTING IN PART
My colleagues and I agree that generally a merging utility should not
recover an acquisition premium. We differ on whether the record permits us to
determine the acquisition premium issue in this case today. Ultimately, we
differ about whether the merger can be approved absent such a determination. For
the reasons set out below, I believe we can and should determine the issue
finally today. I am unable to conclude that the merger proposal passes the no
net harm test absent a definitive resolution of the acquisition premium issue at
this time.
We should firmly close the door today on the potential for National
Grid Group to move any part of the acquisition premium above the line and
include it in rates for Granite State Electric Company. We should also put NGG
and other New Hampshire electric companies on notice that we will explore
whether it is proper to require the company to share with its customers gains on
the sale of T&D assets when determining stranded costs.
The significant issues in this case include the standard of review of
the proposed merger, the likely benefits and risks of the merger, and the
disposition of the gain on the sale of NEES. With respect to the disposition of
the gain on the sale of NEES, three important issues have been raised. OCA,
alone among the parties, urges that we require NEES as a condition of our
approval to share with consumers the premium above book value that its
shareholders will enjoy upon conclusion of the sale. OCA and staff also urge
that the merger be approved only subject to the condition that NGG not be
permitted to pass on any part of the acquisition premium in rates, now or in the
future. We also must consider whether we would be preempted from denying the
recovery of the acquisition premium by NGG if the Securities and Exchange
Commission ruled that the premium should be reflected on the books of the buyer.
A. STANDARD FOR MERGER APPROVAL
With respect to the standard of review, NGG's proposed acquisition of
NEES is governed by the mandate in RSA 369:8 that the merger "not adversely
<PAGE>
affect the rates, terms, service, or operation of the public utility within the
state." This inquiry is the same as the "no net harm" test. The plain language
of the statute indicates that a proposed merger need not show net benefits to
gain approval. Insofar as we are dealing with a merger governed by this statute,
I agree with the majority as to the standard of review.
B. RELATIVE BENEFITS AND RISKS OF MERGER
In my review of the case as we drafted the written order, I have
re-examined the relative benefits and risks of the merger, to apply the no net
harm test in light of my reconsidered opinion on acquisition-premium issues. As
I note here, I put a different emphasis on some of the questions than do my
colleagues.
As the majority discusses, the transaction at issue in this proceeding
could potentially provide certain benefits to GSEC ratepayers and, indeed,
electricity consumers throughout New England. NGG is the world's largest
investor-owned transmission company and, as such, possesses considerable
technical expertise in the planning and operation of transmission systems.
There was no specific testimony that NGG's capability in this respect
was any better than NEES'. Rather, witnesses gave conclusory statements to this
effect. But it may be of particular relevance to New Hampshire and the rest of
New England, where electric restructuring is in its ascendancy, that NGG brings
experience in managing a transmission system in a competitive market. This
experience may assist ISO New England, which operates the grid in our region, as
well as the New England states themselves as each implements competition in the
regional power market. There may be some marginal benefit to having this
experience among the management ranks, and not simply purchased on a consulting
basis.
On the other hand, these possible advantages may not offset NGG's
relative lack of expertise in providing distribution service or in confronting
operating conditions typical of New England winters. NGG may have to rely
heavily on local management, in which case there would be no particular benefit
from adding NGG management on top of NEES management. This is especially the
case where, as here, the selling utility's management has gained a reputation
over the years as among the best in the country. Also, as Staff observes, there
are few if any synergies likely to exist in operations, given that the two
service areas are an ocean apart, and that management will have to maintain
essentially duplicate operations on both sides of the ocean. Thus, the benefits
to GSEC and its customers are possible, maybe even probable, but certainly not
established.
<PAGE>
As to risks, I continue to have concerns about the importation to the
United States of the culture of consumer transactions typical of the English
utility system. For example, Mr. Urwin, testifying for NGG, expressed his
continued belief that prepayment meters are a positive tool for dealing with
non-payment issues. In grappling with the problems facing payment-troubled
customers, and in distinguishing the "can't pay" customer from the "won't pay"
customer, my regulatory experience and a combined 15 years in working with
access to affordable utility service suggests to me that prepayment meters may
be worse than useless in achieving positive payment patterns and low shut-off
rates. The remoteness of NGG management and corporate culture differences, the
full extent of which we cannot anticipate on the present record, may make
positive resolution of such policy differences more difficult.
The OCA has also argued that risks to the competitive structure we are
building in New England have been brushed aside by NGG, indicating a potential
for backsliding under the new management. NGG does not apparently want to get
into the generation business, but this is only a prediction, and NGG's refusal
to give assurances on this point must be considered.
There is also financial risk to consumers relative to the acquisition
premium, but that is discussed separately below.
Taking all these factors into account, there are not great benefits
coming to GSEC consumers or to New England from this merger, and I do see
certain risks. However, the merger should not simply be denied, despite the
appeal of the OCA's arguments. There is a greater possibility of potential
operational benefits from NGG's participation in the New England grid, and
lesser risk of harm to the competitive structure we are working to build, than
OCA sees. While the evidence is thin in these areas, the companies have shown
that no net harm will be created by the merger, aside from the potential impact
of the merger on rates. The analysis thus turns to the disposition of the
acquisition premium.
C. ACQUISITION PREMIUM
This merger application is unique in that it is the first merger of
electric utilities to come before the Commission in the context of RSA 374-F,
the electric competition mandate for our state. The circumstances of this merger
approval request are also unique in that, while a significant acquisition
premium will be realized as a result of the structure of the transaction, no
request for the recovery of an acquisition premium has been made. Indeed, the
<PAGE>
parties have been careful not to seek recovery of an acquisition premium,
although they readily agree that the merger will provide NEES shareholders with
a premium 100% above the book value of the Company, most of the revenues of
which are derived from regulated utility operations. NGG freely admits that it
will seek recovery at some point (undefined) in the future. Accordingly, the
merging parties have asked us not to deny the possible recovery of the
acquisition premium. But since their intention to seek recovery is clear, we
must address the disposition of the premium in order to determine whether the
merger meets the no net harm standard.
Addressing the acquisition premium at this stage will provide guidance
not only to the parties to this merger, who must decide whether to conclude the
transaction given the conditions imposed by us, but also to utilities that may
be negotiating such mergers in the future. There are indications that other
utilities will increasingly be adopting the same strategy (deferral of the
question to a proceeding beyond the actual approval process) for dealing with
the fundamental problem that seeking recovery of an acquisition premium means
seeking recovery for above-book costs.
To the extent we can set out the mutual rights and expectations of
selling shareholders, acquiring shareholders and customers in this case, parties
seeking to negotiate electric utility mergers will be armed with crucial
information about the regulatory disposition of this and other provisions of the
deals, and can adjust their agreements in light of those policy constraints or
opportunities for maximum economic efficiency. The majority and I essentially
agree on this, and differ only on the extent to which we can now identify the
circumstances that would or would not support moving any of the acquisition
premium above the line.
1. RECAPTURE OF GAIN FROM DISPOSITION OF ASSETS
The Office of Consumer Advocate argues that we should deny the merger,
or at least condition it on the recapture for consumers of the gain that
shareholders will enjoy upon consummation of the merger.
GSEC argued for and received 100% recovery of stranded generation
costs, and then through its parent NEES sought approval of a sale of the
remaining assets for a substantial gain. It is unfair for shareholders to retain
the full increase in the value of a company when it demands that consumers
protect them from all the reduction in the value of the generation part of the
business.
<PAGE>
In its reply brief, NEES disarmingly admits to the asymmetry of
treatment it seeks here. Arguing that OCA's position denies the company its fair
return on investment, in the joint reply brief NEES makes an argument that the
OCA itself could have made in opposing stranded cost relief in 1998:
"Indeed, shareholders are entitled to only the market value of their
interest, whether that market value happens to be above, equal to or below
the book value of the underlying company assets."
That the NEES management had this asymmetric treatment in mind before
agreeing to the GSEC restructuring stipulation can be inferred from the fact
that NEES began discussions with NGG in February of 1998, and with at least one
other company shortly thereafter. Further, the approval of the restructuring
stipulation in Order No. 23,041 was separated from the application for approval
of this merger by no more than six months.
Our Supreme Court has established the principle that, in disposition
of gains on utility property, equity requires symmetry of risk and reward.
Appeal of City of Nashua, 121 N.H. 874 (1981)(removal of plant from utility
service); Pennichuck Water Works, 103 N.H. 49 (1960)(sale of land); Chicopee
Mfg. Co. v. Public Service Co., 98 N.H. 5 (1953)(sale of generating plant). In
all these cases, the gain on the transfer of utility property was awarded to
shareholders, the converse of what OCA seeks in this case. However, as OCA
notes, in those cases the Court observed that had the property been sold at a
loss, shareholders would have been at risk. The present case is parallel, except
that ratepayers were put at risk for the loss on the generating assets, and now
must be able to share in the gain from the sale of the remaining assets.
In order to account for the windfall to the utility shareholders, and
to return equity to the risk/reward balance between consumers and shareholders,
OCA suggests that the acquisition premium could be captured at the moment of
stock transfer, by attaching a lien to the proceeds of the stock transfers. We
have no authority for such a maneuver. Our authority is limited to setting the
rates for GSEC. However, we are not without authority to reflect the increased
value of the GSEC assets in rates.
We could, for example, revisit the stranded cost determination, as
instructed by the legislature, to ensure that stranded costs reflect a proper
allocation of risk and reward. We could require that the acquisition premium be
taken as an offset against stranded costs. Indeed, this would seem to be
required by RSA 374-F:3, XII(c) and(d) which requires that companies continue to
<PAGE>
take all steps to mitigate stranded costs, and that stranded costs be determined
on a NET basis and should be reconciled to actual market conditions from time to
time.1
It would also be appropriate to entertain suggestions for a sharing of
the gain, and to consider the relative impacts of exogenous factors such as
inflation on the gains or losses of generation and remaining assets. Further,
since accounting principles in a purchase such as this require that the
acquisition premium be written off by NGG against earnings over time, we would
have to consider the implications of this zeroing out of the acquisition premium
on the fairness of gain recapture.
Because as a practical matter the only way to accomplish such a
sharing is to affect the revenue stream of the merged company, potential merging
companies should have fair notice of this intention before they decide to
consummate a merger. In this way, should they so choose, they can renegotiate
the terms to protect themselves from being forced to fund the selling company
shareholders' windfall. In the instant docket, we should let NGG know that this
issue may be raised again in the context of a renewed examination of GSEC's
stranded cost recovery.
2. RECOVERY BY NGG OF ACQUISITION PREMIUM
Even if we were not to insist that stockholders share the risks of
restructuring equitably with consumers, we must not require consumers to pay the
acquiring utility for the excess payment it is making over the book value of the
utility.
Under the original cost method in use in New Hampshire in
non-restructuring transactions, rate base is not changed when the fair market
value of utility plant rises above net book or drops below net book. For
decades, and by law in New Hampshire, plant in service has been valued at the
original cost less accumulated depreciation, or so-called "net book value." RSA
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1 Note that this section also states that stranded costs should not include
transmission and distribution assets. I understand that to mean that a
company can not recover stranded costs for T&D plant, but that it is not a
prohibition against including the T&D assets in the calculation of stranded
costs if they were to be sold at a premium.
<PAGE>
378:7; RSA 378:27; RSA 378:28; Appeal of City of Nashua, 121 N.H. 874 (1981).
Investors are able to recover the original funds invested in the utility, and
not more. They are ordinarily denied the opportunity to require customers to pay
rates inflated to current market value. Similarly, they are not obligated to
reduce rates when their assets' current market values are less than net book.2
The Uniform System of Accounts, established by the FERC and adopted for use
in New Hampshire, Puc 308.04, requires that upon sale of utility property the
difference between book value and market value be recorded below the line as
goodwill (or illwill, depending on whether the assets are sold at a gain or at a
loss). This acquisition must be amortized by periodic charges to Account 425,
Miscellaneous Amortization, a below-the-line account. As a non-utility expense,
the amortization of acquisition premiums does not affect the utility's revenue
requirement. Meanwhile, balance sheet Account 114 carries the unamortized
balance of the acquisition premium. It would be an extraordinary event for the
commission to deviate from these accounting principles, and permit amortization
of the acquisition premium above the line.
These accounting rules are maintained to ensure adherence to the
original cost method of valuing rate base. The original cost method, in turn, is
intended to preserve an equitable allocation between consumers and utilities of
the risks and rewards, burdens and benefits, of utility operations. The
utilities argue that it would not harm consumers if the aquisition premium were
moved above the line to the extent only of savings that are attributable to the
merger. There are several problems with this argument.
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2 Note that government can change the basis of utility rate base evaluation,
as long as it does not shift back and forth between various methods simply
to require investors to bear the risk of bad investments while denying them
the benefit of good investments. Duquesne Light Company, 488 U.S. 299, 315
(1989). Lest this reference be misunderstood, it should also be noted that
restructuring of the electricity industry, with its concommitent
deregulation of commodity prices, is not an instance of whipsawing the
utilities; the package of risks and rewards are rearranged in new ways, and
the reduction in plant valuation to market value is accompanied by new
opportunities for company management.
<PAGE>
Despite numerous questions in different forms, NEES and NGG were
unable or unwilling to estimate the likely level of cost savings consumers might
foresee from the merger. But it is possible to estimate the level that would be
necessary to provide net savings to customers if the NEES/NGG acquisition
premium treatment were approved. Applying the accounting principles to the facts
of the NEES/NGG merger, the amount booked to Account 114 and allocated to
Granite State would be roughly 3% of $1.6 billion3, or just under $50 million.
Amortizing this premium to 3 Account 425 over 20 years, as proposed in the
response to Staff Data Request 1-4 (appendix B to Exh. 23) would produce an
annual charge of $2.5 million per year.
What NEES and NGG argue in this case is that if they are able to show
reductions in expenses attributable to the merger, they should be free to seek
recovery of the acquisition premium to the same extent as the savings. Thus, NGG
wishes to retain the option of coming back to the Commission to move up to $2.5
million per year above the line, before being asked to pass any of these savings
on to Granite State consumers.4
To put this concept into context, we must consider that Granite
State's annual revenues before restructuring are only about $54 million.5 Thus,
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3 Using the Staff's method for determining the acquisition premium, the
amount would be closer to 3% of $600 million, or $18 million. Amortized
over 20 years, the annual amount of the premium would be $0.9 million.
Savings of this magnitude would still constitute 7% of post-restructuring
annual revenues.
4 NGG might propose to amortize the entire amount of the acquisition premium
above-the-line until a pre-determined level of estimated savings is
reached, but this approach is unlikely. The timing of recovery, and risk of
non-recovery, would shift in this scenario, but the underlying reversal of
below-the-line treatment would be the same as in the example.
5 Granite State's operation and maintenance expenses, including purchased
power, were $54,202,977 in 1998, per the firm's FERC Form 1 (Accounts 401
and 402, p. 114). Purchased power was $41,615,327 for the same period
(Accounts 555-557, p. 321). Thus, GSEC operating expenses for its residual
T&D operations were $12,587,650 (Accounts 555 through 557 less accounts 401
and 402).
<PAGE>
merger savings would have to exceed 5% of Granite State's pre-divestiture
revenues before consumers would benefit from this merger. More importantly,
post-transition revenue requirements will be greatly reduced. The portion of the
business that is susceptible to cost reduction will be limited to about $13
million in T&D expense per year. Yet the $2.5 million annual savings threshold
will remain, making the percentage of expenditures that must be reduced
equivalent to about 19%, before ratepayers can hope to see any benefit from the
merger. A 5% merger-related gain in efficiency would be remarkable; a 20% gain
in efficiency would be miraculous. This is especially so where NGG cannot look
to all the typical sources of operating synergy as areas of potential savings.
It is not necessary, however, to consider the specific likelihood of
ratepayers enjoying the benefit of merger-related savings in order to appreciate
that the NEES/NGG reservation of rights denies consumers fair treatment. To
illustrate the unfairness of permitting the merging parties to pass shareholder
gains through to consumers in rates, consider the case of the depreciation
allowance. The OCA is correct that, if acquisition premiums were granted in
merger cases, it would require a rethinking of depreciation allowances. If
consumers are asked to pay rates based on plant placed in service at a value
inflated to market levels, then no depreciation expenses should be awarded. In
fact, rates should be reduced by appreciation allowances, as the value of the
plant appreciates. And, should the market value of plant decrease relative to
book value, this process should be reversed.
Since the advent of utility price regulation, utilities have been
permitted the opportunity to recover the return of, and a return on, the fair
value of their assets used and useful to serve customers. They are not entitled
to earn a return of investments above book value. The acquisition premium
amounts to such an investment. They may have perfectly good reasons for paying
more than the net present value of net income based on utility ratemaking (as
for example the tax benefits available in Great Britain from increasing the debt
leverage of National Grid Group), but consumers should not be required to
provide revenues based on any higher base than net book and actual cost of
service.
Further, as Staff testified, there is a moral hazard in not
reaffirming here our policies regarding book value ratemaking; if potential
utility buyers can expect to recover some or all of their above-book payments
from consumers, they will be open to paying more for a utility than they
otherwise would. Correspondingly, a potential seller utility will be encouraged
to seek out merger partners, and force a bidding up of the premium above book,
<PAGE>
in order to reap higher windfall profits from buyers who hope to place the
burden of the purchase on consumers. Seller utilities will also have an
incentive to come in for accelerated depreciation, and then turn around and sell
their companies at a profit, pocketing both the accelerated depreciation and the
above-book price. Such churning should not be encouraged, as it is both unfair
and economically inefficient.
With regard to offsetting merger savings, it should be noted that
consumers under traditional ratemaking bear the risk of operating losses (higher
operating costs) occasioned by the merger. Staff provided an example of just
such an outcome in a recent merger case. NGG does not propose to shield
consumers from this eventuality, and given its inability to suggest areas where
robust cost savings will be possible and the need for dual management teams, the
risk of cost increases cannot be gainsaid. Allowing NGG to offset savings
against an acquisition premium and thereby recover the acquisition premium would
deny to consumers the benefit of the symmetry of cost-based risk and reward.6
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6 It may well be asked why gains on the disposition of the company should be
shared with consumers, a market-value concept,while acquisition premiums
should not be recovered in light of cost-basis principles. But sharing of
the gains, as I discuss above, would merely be an offset to the stranded
costs losses that customers otherwise are asked to bear. And stranded cost
recovery is itself a departure from traditional regulation. Generating
assets are in effect removed from utility rate base when generation prices
are deregulated. Stranded cost recovery amounts to allowing the company to
remove such assets at market price (lower than book), and leaving the
excess of net book over market valuation to be recovered from consumers
through a new regulatory asset, Stranded Cost Recovery. Compare, Appeal of
City of Nashua, supra (standard practice is to remove assets from service
at book value, not market).
Stranded cost recovery reverses the traditional accounting for plant
removed from regulation. Through stranded cost recovery, the consumers have
already guaranteed that GSEC will not suffer any loss relating to the
difference between the market value of its generating assets and the book
value of those assets. NGG did not satisfactorily explain in this docket
why customers should not be restored to parity by a share in part of the
gain on the sale of the remaining assets. On the surface, for them to be
denied such sharing, and then to pay in rates for the inflated value of the
company's assets, would be to add insult to injury.
<PAGE>
Finally, I must address whether these principles can be applied at
this time, given the fact that the company has not sought recovery now. There is
no reason on this record why a regulatory commission should allow the merger to
proceed if there is a risk that NGG will seek to exact from ratepayers the cost
it was willing to pay above the net book value of GSEC assets devoted to utility
service.7 The factors that might hypothetically justify consideration of such
extraordinary treatment are known today, and do not apply to this merger.
This is not a situation where a merger is practically speaking the
only way to ensure adequate service to customers of a struggling small utility
system. This is not a case in which the buying company is replacing inept
management. This is not a case where irreplaceable expertise is lodged only in
the buying company, and is available only via the mechanism of a merger. This is
not the case of a negotiated settlement taking the largest utility in the state
out of bankruptcy. No other extraordinary circumstances justify consideration of
above-book cost recovery to entice a reluctant suitor to come in and take over
NEES.
I cannot conceive of any circumstance, short of a wholesale
rearrangement in the risk/reward balance or mechanism for such utilities, that
could justify a future change in the treatment of the acquisition premium.8
Unlike the majority, I believe we can and should say so today, and leave to a
future legislature or commission the task of determining the equities going
forward upon such hypothetical further sea changes in the basis for utility
ratemaking. Accordingly, I would condition approval of the merger on the absence
of such above-the- line treatment of the acquisition premium.
3. SEC PRE-EMPTION
With regard to the SEC preemption, the company has stated that the
commission would not be so preempted, and that it will not raise such issues. To
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7 Nor, for that matter, of the portion of the acquisition premium
representing the premium above market value of the stock.
8 I would note that incentive regulation does not qualify as such a dramatic
departure from cost-plus ratemaking, in that it merely widens the
boundaries of upside potential and downside reward, but still aims, as with
cost-plus ratemaking, to achieve rates that provide no more than a
reasonable return on prudently-incurred used and useful utility assets.
<PAGE>
the extent such preemption is a jurisdictional question, it may not avail that
the company makes such representations. However, at the least we should
condition the merger on the company's not coming forward at any time in the
future and claiming that our decision on the acquisition premium issues is
preempted by any accounting treatment prescribed at the SEC.
D. CONCLUSION
The potential benefits of this merger are small, and the risks cannot
be discounted. It would be unfair to leave customers paying for stranded costs
while shareholders enjoyed a windfall gain from sale of the remaining assets. It
would also be unfair to allow the National Grid Group to depart from cost-based
ratemaking in the case of the regulated monopoly portion of the GSEC business.
For these reasons, I concur in the conditions placed upon the merger by the
majority, and I would further condition approval of the merger on the following:
(1) That NGG agree it will not claim at any time that our decision on
acquisition premium issues is preempted by any accounting treatment
prescribed by the Securities and Exchange Commission, and
(2) That no portion of the acquisition premium be recovered by NGG from
GSEC consumers.
I would also put NGG on notice that in a future reconciliation of
GSEC's stranded costs, we will consider whether the gain on the sale of NEES'
remaining assets be shared on an equitable basis between the company and the
shareholders, via a reconciliation or adjustment of the stranded cost recovery
approved in Order No. 23,041.
---------------------------
Nancy Brockway
Commissioner
October 4, 1999
Attested by:
- --------------------------------
Thomas B. Getz
Executive Director and Secretary
