EXHIBIT D-2
UNITED STATES OF AMERICA 92 FERC 61,068
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
William L. Massey, Linda Breathitt,
and Curt H, bert, Jr.
NiSource Inc. and
Docket No. EC00-75-000 Columbia Energy Group
ORDER AUTHORIZING MERGER
(Issued July 26, 2000)
I. Introduction
On April 10, 2000, as supplemented on June 19, 2000, NiSource Inc.
(NiSource) and Columbia Energy Group (Columbia), on behalf of their respective
public utility subsidiaries (collectively, Applicants) filed a joint application
under section 203 of the Federal Power Act (FPA) 1 requesting commission
approval of a series of transactions (collectively, the Proposed Merger)
culminating with a new holding company, to be named NiSource Inc., acquiring
NiSource and Columbia and their respective public utility subsidiaries. We will
approve the Proposed Merger as consistent with the public interest.
II. Background
A. The Parties to the Merger
1. NiSource
NiSource is a public utility holding company currently exempt from
registration under section 3(a)(1) of the Public Utility Holding Company Act of
1935 (PUHCA). NiSource wholly owns three public utility subsidiaries, each of
which is described below. NiSource also provides natural gas and water-related
services to the public, as further described below.
(a) Northern Indiana Public Service Company
Northern Indiana Public Service Company (NIPSCO) provides electric
service 2 in the northern part of Indiana to approximately 426,000 wholesale
and retail customers. NIPSCO owns and operates four coal-fired electric
generating stations, two hydroelectric generating plants and four gas-fired
combustion turbine generating units, providing a net capability of 3,392
megawatts (MW).
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1 16 U.S.C. 824b (1994).
2 NIPSCO was granted authority to make power sales at market based rates. See
Northern Indiana Public Service Company, 78 FERC 61,015 (1997).
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NIPSCO is also a member of the East Central Area Reliability Coordination
Agreement (ECAR).
(b) NESI Power Marketing, Inc.
NESI Power Marketing, Inc. (NESI) is a NiSource power marketing affiliate.
It was granted authority to make power sales at market-based rates. 3 NESI owns
no generation or transmission facilities and at present is not active as a power
marketer.
(c) Bay State GPE, Inc.
Bay State GPE, Inc. is an indirect subsidiary of NiSource. It owns an
electric generating facility (2.2 MW) in Massachusetts, which presently is not
operating. Bay State GPE, Inc. was granted authority to make power sales at
market based rates. 4 Bay State GPE, Inc. owns no transmission facilities.
(d) Natural Gas
NiSource distributes natural gas to approximately 751,000 customers in
northern Indiana through three wholly-owned subsidiaries: NIPSCO, Kokomo Gas and
Fuel Company and Northern Indiana Fuel and Light Company.
Market Hub Partners, L.P., a wholly-owned subsidiary of NiSource, is a
developer, owner and operator of natural gas storage facilities.
Crossroads Pipeline Company, a subsidiary of NiSource, is a natural gas
pipeline company which owns and operates a 201-mile, 20-inch pipeline from
Schereville, Indiana to Cygnet, Ohio. Granite State Gas Transmission Company is
a wholly-owned indirect subsidiary of NiSource which owns and operates a
105-mile, 6 to 12 inch pipeline that extends from Haverhill, Massachusetts to
Westbrook, Maine. PNGTS is a 292-mile interstate natural gas pipeline in
northern New England in which NiSource subsidiaries have a 19.06 percent
interest.
2. Columbia
Columbia is a public utility holding company registered under PUHCA. Its
operating companies engage in electric power generation and all phases of the
natural gas business including exploration and production, transmission, storage
and distribution, as well as energy marketing, propane and petroleum product
sales. Columbia's five gas distribution subsidiaries provide natural gas service
to nearly 2.1 million residential, commercial and industrial customers in Ohio,
Pennsylvania, Virginia, Kentucky and Maryland. Columbia owns two interstate
natural gas pipeline subsidiaries, Columbia Gas Transmission Corporation and
Columbia Gulf Transmission Company, which together comprise an approximately
16,250-mile pipeline system.
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3 NIPSCO Energy Services, Inc. 75 FERC 61,213 (1996).
4 Oswego Harbor Power, LLC, 88 FERC 61,219 (1999).
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Subsidiaries of Columbia hold interests in four electric generating
facilities which are qualifying facilities (QFs) under the Public Utility
Regulatory Policies Act of 1978 (PURPA). Columbia plans to relinquish these
ownership interests prior to the closing of the merger.
Columbia also has a subsidiary which is jurisdictional under the FPA,
Columbia Energy Power Marketing Corporation (CEPM). 5
Subsidiaries of Columbia are involved in the development of three
generation projects (each approximately 500 MW) to be built in Pennsylvania,
Kentucky and West Virginia.
III. Notice of Filing and Interventions
Notices of Applicants' filing and supplement were published in the Federal
Register, 6 with motions to intervene and protests due on or before
July 3, 2000. The Indiana Utility Regulatory Commission, the Public Service
Commission of the Commonwealth of Kentucky, and the Maine Public Utilities
Commission filed notices of intervention raising no issues. KNG Energy, Inc.,
the Indiana Office of Utility Consumer Counselor, Mountaineer Gas Company, the
Pennsylvania Office of Consumer Advocate, UGI Utilities, Inc. and Public Service
Company of North Carolina filed timely motions to intervene raising no issues.
Union Intervenors 7 filed a motion to intervene, a protest and a request that
the merger proceeding be set for hearing. NiSource filed an answer to the Union
Intervenors' pleading. Union Intervenors later filed a letter stating that they
have reached agreements with Applicants and now support Applicants' section 203
filing. They requested that their earlier protest and request for hearing be
deemed withdrawn.
IV. Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,
18 C.F.R. 385.214 (1999), the timely notices of intervention and the timely,
unopposed motions to intervene serve to make the entities filing them parties to
this proceeding.
B. Standard of Review
Section 203 (a) of the FPA provides that the Commission must approve a
proposed merger if it finds that the merger "will be consistent with the public
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5 The Commission has approved an application filed by CEPM to transfer all of
its wholesale power contracts to Enron Power Marketing, Inc. CEPM has filed a
notice of cancellation with the Commission that effective on the date of this
transfer, its rate schedule is to be canceled. Because the transfer may not be
effective before the merger closes, Applicants state that the Commission should
consider CEPM's power marketing activities to be ongoing for purposes of
analyzing this section 203 application.
6 65 Fed. Reg. 24,191 and 39,890 (2000).
7 Union Intervenors consists of the Paper, Allied-Industrial, Chemical and
Energy Workers International Union, AFL-CIO-CLC; the United Steelworkers of
America, AFL-CIO-CLC; the Utility Workers Union of America, AFL-CIO; and the
United Association of Plumbers & Pipefitters.
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interest." 16 U.S.C. 824b(a) (1994). The Commission's Merger Policy Statement 8
provides that the Commission will generally take account of three factors in
analyzing proposed mergers: (a) the effect on competition; (b) the effect on
rates; and (c) the effect on regulation. For the reasons discussed below, we
find that Applicants' proposed merger is consistent with the public interest.
Accordingly, we will approve the merger without further investigation.
1. Effect on Competition
(a) Applicants' Analysis
(i) Horizontal Issues
In regard to horizontal competitive issues, Applicants define and evaluate
relevant markets using the approach described in Appendix A of the Merger Policy
Statement. They identify nonfirm energy as the relevant product 9 and use
economic capacity and available economic capacity as proxies for suppliers'
ability to participate in relevant markets. Applicants identify and define
twelve relevant geographic ("destination") markets, two of which are located in
Mid-America Interconnected Network (MAIN), eight are in East Central Area
Reliability Council (ECAR), one is in Southeastern Electric Reliability Council
(SERC), and one is located in Pennsylvania-New Jersey-Maryland Interconnection
(PJM). Applicants evaluate the effect of the merger in relevant markets under a
number of seasonal market conditions (winter, summer, and shoulder
(spring/fall)). 10 The results of the Applicants' analysis using economic
capacity show that there are no merger-induced increases in market concentration
(as measured by the HHI statistic) that exceed the thresholds specified in the
Merger Policy Statement. 11
(ii) Vertical Issues
Applicants state that the proposed merger raises no vertical competitive
issues associated with combining generation and transmission controlled by the
merging companies because Columbia owns no jurisdictional electrical
transmission assets. Therefore, they argue, the merger does not change
Nisource's ability to use transmission to affect electricity prices.
In regard to vertical competitive issues associated with consolidating
delivered gas and electric assets, Applicants analyze relevant markets defined
for the purposes of evaluating horizontal competitive issues. However, they
assign a market share to all gas-fired generation served by a single supplier of
delivered gas. This analysis indicates that concentration in downstream
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8 See Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC Stats. &
Regs. 31,044 at 30,117-18 (1996), order on reconsideration, Order No. 592-A, 62
Fed. Reg. 33,341 (1997), 79 FERC 61,321 (1997) (Merger Policy Statement).
9 Applicants further define peak, off-peak and super-peak energy products.
10 Applicants include planned generation in their analysis if it is scheduled
to come on line during 2000 or 2001 and is under construction, or has secured
financing and necessary permits to begin construction. Thirty-six percent of
planned generation fitting these criteria will be controlled by Applicants
(Columbia will control approximately 2,500 MW of gas-fired generation in
Northern Indiana, 1,500 MW of which is scheduled to come on-line by 2002).
Hieronymus Affidavit at 28-9.
11 In many cases, the merger produces no increase in market concentration. The
NIPSCO market shows the largest increases in concentration, ranging from 23 to
32 HHI with post-merger concentration ranging from 1,752 to 2,784. Applicants
identify no screen failures using available economic capacity.
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electricity markets ranges from 883 in the PJM market (summer off-peak) to 5,568
in the First Energy market (summer offpeak).
Although some of the markets analyzed are highly concentrated, Applicants
assert that they have no ability to exercise vertical market power, even though
they may have the incentive to do so. 12 In support of this argument, they
point out a number of factors. First, they explain that natural gas has a
limited role in generating electricity in ECAR. They indicate that in 1998, gas
was responsible for only 1.1 percent of electricity generation (measured in
BTUs). Second, Applicants explain that natural gas is the marginal fuel in ECAR
and Southwest ECAR less than one percent of the year. Thus, Applicants conclude,
any ability they have to use natural gas to raise electricity prices in relevant
markets, even if it existed, could not be sustained. Finally, Applicants note
that gas-fired generation is approximately eight percent of total capacity in
ECAR and that neither NiSource nor Columbia delivers gas to a significant share
of this generation. They state that Columbia serves less than 900 MW of
generating capacity in all of ECAR, of which all but 102 MW is owned by Cinergy
and Dayton Power and Light, which have multiple pipeline suppliers. Applicants
therefore conclude that only 102 MW of gas-fired generation in ECAR (slightly
more than one percent of total capacity) could be affected by the merger. 13
(b) Commission's Conclusion on Effect of Merger on Competition
and Applicants' RTO Commitment
We find that the horizontal and vertical aspects of the proposed merger do
not raise competitive concerns. No intervenor argues to the contrary. First, the
merger produces no increases in market concentration that exceed the thresholds.
Second, while Applicants' analysis indicates that some relevant electricity
markets are highly concentrated, Applicants have demonstrated that natural gas
has a very limited role in determining prices in those markets. This minimizes
any concern that the merger will create or enhance the ability of the merged
company to adversely affect electricity prices or output by, for example,
raising rivals' costs or foreclosure. Because the merged company must have both
the ability and incentive to adversely affect electricity prices or output, and
the merged company will lack the former, no further findings are necessary.
Regarding Applicants' efforts to join a Regional Transmission Organization
(RTO), NIPSCO is the only entity in Applicants' corporate family that owns
electric transmission facilities. Applicants state that NIPSCO is an active
participant in the Commission's RTO workshop process and that NIPSCO commits to
fully comply with the requirements of Order No. 2000. Applicants point to
NIPSCO's firm commitment to the Public Utilities Commission of Ohio to join a
regional transmission organization, as provided for by FERC Order 2000, within
one year of the close of the merger. 14 We accept Applicants' RTO commitments
and rely upon them in approving this merger.
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12 Applicants state that NIPSCO owns approximately 486 MW of gas-fired
generation.
13 Hieronymus Affidavit at 9 and Exhibit APP-22.
14 Applicants' Answer at 5-6 and Appendix A at 3.
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2. Effect on Rates
In the Merger Policy Statement, the Commission explained that the
protection of wholesale ratepayers and transmission customers is the
Commission's primary concern when it looks at the effects of a section 203
proposal on rates. The Commission has identified several mechanisms that may
afford adequate ratepayer protection, such as an open season for wholesale
customers, a general hold harmless commitment, and a base rate freeze or rate
reduction. 15
NiSource's subsidiary, NIPSCO, is the only traditional electric utility
owned by either applicant. Applicants state that they commit "to hold the
wholesale electric customers and electric transmission customers of NIPSCO
harmless from paying merger costs in excess of merger savings". 16 In addition,
in any future rate proceeding, Applicants commit to identify and account for all
transaction costs and ascertain that any merger costs included in their cost of
service are exceeded by merger savings.
This commitment eliminates concerns that the merger will adversely affect
wholesale rates. Moreover, no wholesale customer of NIPSCO has raised concerns
about the effect of the merger on rates. In this case, the other subsidiaries of
NiSource and Columbia Energy have no customers that pay cost-based rates. 17
There are no rate concerns related to power marketers because they make sales
only under market-based rate schedules. Accordingly, we conclude that the
proposed merger will not adversely affect rates.
3. Effect on Regulation
We explained in the Merger Policy Statement that a proposed merger may
raise issues relating to both federal and state regulation. Federal regulation
may be affected if the merger results in the formation of a registered holding
company that shifts regulation and jurisdiction from this Commission to the
Securities and Exchange Commission (SEC). 18 In the case before us, although
Nisource currently is an exempt holding company under section 3(a)(1) of PUHCA,
after the merger, the new parent holding company will become a registered
holding company. Thus, our regulation could be affected by the proposed merger.
However, Applicants state that they will follow this Commission's policy
regarding treatment of the costs and revenues of affiliated non-power
transactions. 19 Applicants commit that Nisource and its affiliates will not
sell non-power goods and services to NIPSCO at a price in excess of market value
and will purchase non-power goods and services from NIPSCO at the higher of
market value or cost. 20 Applicants assert that this commitment ensures that
their jurisdictional electric subsidiaries will be fully subject to this
Commission's regulation regarding the wholesale ratemaking impacts of affiliated
non-power transactions. Therefore, based on the Applicants' commitment, the
Commission
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15 Merger Policy Statement at 30,123-24.
16 Application at 28. The Applicants commit to hold all electric wholesale
requirements and electric transmission customers harmless from any adverse
effect of the proposed transaction on FERC-jurisdictional rates.
17 NESI Power Marketing, Inc.; Bay State GPE, Inc.; and Columbia Energy Power
Marketing Corporation.
18 Merger Policy Statement at 30,124-25.
19 Id.
20 Application at 29 (n. 19).
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concludes that the proposed merger will not adversely affect its jurisdiction
under the FPA over Applicants public utility affiliates. 21
The Commission also indicated in the Merger Policy Statement that it would
consider setting the issue of a merger's effect on state regulation for hearing
only in instances where the state lacks authority over a merger and raises
concerns about the effect of the merger on its regulation. In this case,
Applicants state that NIPSCO will continue to be subject to the jurisdiction of
the Indiana Utility Regulatory Commission (Indiana Commission). Neither the
Indiana Commission nor any other intervenor has raised concerns in this
proceeding about the effect of the merger on state regulation. Moreover, our
independent review of the application has provided no other information which
indicates that the proposed merger will present regulatory concerns.
Accordingly, we are satisfied that the proposed transaction will not have
an adverse effect on regulation.
C. Accounting Issues
The Applicants indicate that the proposed merger transaction will be
accounted for using the purchase method of accounting. Since the merger is
occurring at the nonjurisdictional holding company level and the Applicants do
not propose any changes to the books and records of the jurisdictional
subsidiaries, we have no objection to the Applicants' proposed merger
accounting.
Because we do not expect the proposed merger to have any effect on the
books and records of the jurisdictional subsidiaries, we will not require the
Applicants to submit their proposed accounting. However, if the merger
(including merger-related costs) should affect the books and records of a
jurisdictional subsidiary, the Applicants should promptly inform the Commission
and provide a full explanation for any proposed adjustments.
The Commission orders:
(A) Applicants' proposed merger is hereby approved subject to the
commitments discussed in the body of this order.
(B) The request for waiver of the requirement to file accounting related
to the merger is hereby granted.
(C) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, services,
accounts, valuation, estimates or determinations of cost, or any other matter
whatsoever now pending or which may come before the Commission.
(D) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost or any valuation of property claimed or
asserted.
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21 See e.g., Atlantic City Electric Co. and Delmarva Power & Light Co., 80 FERC
61,126 at 61,412 (1997).
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(E) The Commission retains authority under section 203(b) of the FPA to
issue supplemental orders as appropriate.
(F) Applicants shall notify the Commission that the merger has occurred
within 10 days of the date the merger is consummated.
By the Commission.
(SEAL)
David P. Boergers,
Secretary
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