Exhibit D-10
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STATE OF MAINE
PUBLIC UTILITIES COMMISSION Docket No. 2000-322
June 30, 2000
NORTHERN UTILITIES, INC., ORDER
Request for Approval of Reorganization
(Merger and Related Transactions)
Welch, Chairman; Nugent and Diamond, Commissioners
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I. SUMMARY OF ORDER
We approve the reorganization of Northern Utilities, Inc. (Northern)
involving the merger of its corporate parent, NiSource, Inc. (NiSource), with
Columbia Energy Group (Columbia), subject to the conditions described in this
order.
We also direct Staff to recommend an appropriate penalty for
Northern's failure to comply with our order in Docket No. 98-216 or to request
modification of that order. Finally, within one year, we will determine whether
to open an investigation into whether Northern's service monitoring criteria are
adequate and whether any service quality assurance mechanisms or penalties
should be imposed.
II. BACKGROUND
A. Corporate Affiliations
----------------------
This reorganization involves the merger of Northern's corporate
parent, NiSource, an Indiana corporation that is exempt from most provisions of
the Public Utility Holding Company Act of 1935 as amended, and Columbia, a
registered public utility holding company that owns no public utilities within
Maine. NiSource wholly-owns Bay State Gas Company (BSG), a Massachusetts natural
gas distribution company, which wholly owns Northern, making these entities
affiliates pursuant to 35-A M.R.S.A. ss. 707. In addition, NiSource owns 19.06
percent of Portland Natural Gas Transmission System (PNGTS), an interstate
pipeline regulated by the Federal Energy Regulatory Commission (FERC). PNGTS is
an affiliate of Northern pursuant to 35-A M.R.S.A. ss.ss. 102 and 707.
NiSource is also the parent company of two utilities providing
gas service in Indiana, Kokomo Gas and Fuel Company and Northern Indiana Fuel
and Light Company, and one utility that provides both gas and electric service
in Indiana, Northern Indiana Public Service Company (NIPSCO).
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ORDER -2- Docket No. 2000-322
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Columbia is a Delaware corporation subject to the regulatory
requirements of the Public Utility Holding Company Act (PUHCA). Columbia's
subsidiaries are engaged comprehensively in the natural gas business, including
exploration and production, transmission, storage, and distribution, as well as
retail energy marketing, propane and petroleum product sales, and electric power
generation. These subsidiaries provide gas utility service in Kentucky,
Maryland, Ohio, Pennsylvania, and Virginia. Columbia also owns a 10 percent
interest in the CEC Rumford Cogeneration Plant in Maine.1 Columbia reportedly
also owns two unregulated business ventures, LewBgas in Lewiston and Farmington
and a facility in Oxford.2
B. Procedural History
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Northern filed a petition on April 10, 2000 requesting approval
of a proposed reorganization pursuant to 35-A M.R.S.A. ss. 708. Additionally, if
required, Northern requests approval pursuant to 35-A M.R.S.A. ss.ss. 1101(3)
and 1103(1). Northern also requested that the Commission exempt PNGTS from any
provisions of the Maine statutes that might apply with respect to this merger
because of FERC jurisdiction. Finally, Northern requested expeditious approval
of its petition, by June 1, 2000 if possible.
On April 14, 2000, the Commission issued a Notice of Proceeding
to the service lists in Northern's last merger proceeding and in its recent rate
design case and published notice in newspapers of general circulation in areas
Northern is serving. Also on that date, Northern prefiled the testimony of Mark
T. Maassel, Vice President, Regulatory and Government Policy for NiSource, and a
copy of the Agreement and Plan of Merger for the proposed NiSource/Columbia
merger.
The Office of the Public Advocate (OPA) filed a petition to
intervene, and Maine Natural Gas, L.L.C. (MNG) filed a petition for limited
intervention. The Hearing Examiner granted both petitions, the latter over
Northern's objection, on May 11, 2000.
The Hearing Examiner granted confidential treatment to
competitively sensitive information, such as presentations to bond rating
agencies or equity analysts, estimated tax effects, and financial analyses of
the merger prepared by NiSource and its legal and financial advisors. See
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1 This plant is defined to be an "excluded electric plant," not a public
utility, under Maine law.
2 This is based on information published in the Lewiston Sun Journal on
6/3/2000.
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ORDER -3- Docket No. 2000-322
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(Temporary) Protective Order Nos. 1 and 2 dated May 19, 2000 and June 2, 2000
respectively.
Parties and Advisory Staff conducted discovery at a technical
conference on May 22 on the following company witnesses: Mark T. Maassel, Vice
President, Regulatory and Government Policy, NiSource; Thomas Sherman, Chief
Financial Officer, Bay State Gas Company; Scott MacDonald, Vice President;
Finance and Strategy, Bay State Gas Company; Rick Cencini, Vice President,
Regulatory Affairs, Northern; Dan Cote, Vice President, Operations, Northern;
and David Deans, Regulatory Policy Specialist, Northern.
On May 31, the OPA and Northern filed comments on what further
process would be necessary in this proceeding.
The Advisory Staff held a second technical conference on June 2
at which company witnesses Dan Cote, Rick Cencini, and Thomas Sherman were
present. Mark Maassel participated as a witness by telephone, as did Marie
Walker and Bob Barnes, Customer Service managers for BSG and Northern. In
addition to further discovery, parties discussed possible conditions for
approval of the merger and the schedule for the remainder of the proceeding.
Northern filed proposed conditions for the merger on June 8. OPA
filed responsive comments on June 9. The Hearing Examiner held a conference of
counsel on June 12 to indicate the remaining conditions that Advisory Staff
would recommend to the Commission and to establish the final process for
presenting this matter for decision. The parties waived their right to a written
Examiner's Report and were allowed until close of business on June 14 to
indicate any further concerns with the Advisory Staff's proposed conditions.
Northern filed proposed modifications for some of Staff's proposed conditions
that it characterized as largely non-substantive. OPA filed a letter urging us
to open a proceeding to establish service quality benchmarks for Northern as a
condition of merger approval.
C. Description of Proposed Merger
------------------------------
The Company's petition indicated that the proposed merger could
have been consummated using either of two possible structures. NiSource referred
to these as the "Preferred" and "Alternative" structures. On June 1 NiSource
shareholders elected to approve the merger agreement as proposed by management,
thereby selecting the "preferred" structure. On June 2 Columbia shareholders
also approved the merger under the preferred structure. The preferred structure
will result in the creation of a new holding company ("New NiSource") that will
be the parent entity for all existing NiSource and Columbia operating companies.
It is expected that New NiSource will be registered as a public utility holding
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ORDER -4- Docket No. 2000-322
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company under PUHCA. The Maine operation will be only a small fraction of the
merged corporation, approximately 0.6% of total revenues.
Current NiSource shareholders will receive one common share of
New NiSource for each existing common share. Individual Columbia shareholders
may choose between two options. The first option allows each common share of
Columbia stock to be converted into $70.00 cash plus a New NiSource SAIL
instrument with a face value of $2.60. A SAIL instrument consists of a
zero-coupon debt security and a forward equity contract, which is similar to a
long-term stock option. The second option allows Columbia shareholders to
receive up to 4.4848 shares of New NiSource common stock calculated by dividing
$74.00 by the average share price of existing NiSource stock for the 30
consecutive trading days ending two trading days prior to closing. This option
is subject to three limitations. First, because Columbia shareholders cannot
receive more 4.4848 New NiSource common shares for each Columbia common share it
is possible that Columbia shareholders could receive less than $74.00 for each
existing Columbia share. This occurs if the price of existing NiSource common
shares drops below $16.50 per share.3 For example, if the market price for
existing NiSource shares fell to $15.00 per share, Columbia shareholders would
receive only $67.27 for each Columbia share ($15 x 4.4848 shares.)
Second, the exchange of Columbia common shares for New NiSource
shares is limited to a maximum of 30% of Columbia's outstanding common shares.
If more than 30% of the outstanding common shares are tendered for exchange by
Columbia shareholders, they will all receive a prorated amount, with the
remainder being paid in cash and SAILs. Finally, if Columbia shareholders as a
group do not make New NiSource stock elections for at least 10% of the
outstanding shares, all Columbia shares will be exchanged for cash and SAILs as
described above. Columbia's shareholders are not required to make their
elections until two business days before the scheduled closing date.
The petition states that the "merger will provide new strategic
and operational opportunities to NiSource through its ownership of a
significantly larger and more diverse group of operating energy companies,"
comprising both regulated and unregulated ventures. Northern further represents
that the merger will not result in any change in the current ownership and
control of Northern, any changes in the management of Northern or Bay State, or
have any material impact on the local operations of Northern. In particular,
Northern asserts that the merger will not cause its rates for service to
increase or cause any acquisition premium to be allocated to Northern.
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3 NiSource's closing price on June 12, 2000 was $18.0625. Its 52-week high was
$27.625 (in June 1999) and its 52-week low was 12.875 (in March 2000).
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ORDER -5- Docket No. 2000-322
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The Company asserts that operational savings are not the primary
reason for the NiSource/Columbia merger. Rather, Northern claims that the merger
will provide a number of affirmative ratepayer benefits including the
acquisition by Northern's parent company of significant assets that will better
enable to Northern to serve the needs of its customers. Specifically, it states
that "the merger will provide the opportunity for Northern's ratepayers to
realize certain long-term advantages through the efficient use of combined
pipeline and storage assets of its parent company, plus the ability to best use
natural gas supplies across time, weather, and geography." Petition at 5. In
addition, Northern asserts that the merger will facilitate the provision of new
products and services to Northern's customers, will enhance Northern's efforts
to maintain operational excellence through technological improvements, process
enhancements, and effective cost management. Id.
III. LEGAL STANDARDS
The proposed merger constitutes a reorganization pursuant to 35-A
M.R.S.A. 708 and thus requires Commission approval. Under this section, the
Commission may approve a reorganization only if the applicant establishes that
approval is consistent with the interests of a utility's ratepayers and
investors.
The Commission has previously found that the approval requirements of
section 708 are met if the rates or services to customers of the former utility
will not be adversely affected by the transaction, See e.g., Consumers Maine
Water Co., Request for Approval of Reorganization Due to Merger with
Philadelphia Suburban Corp., Docket No. 98-648 (Jan. 12, 1999); New England
Telephone & Telegraph Company and NYNEX Corp., Reorganization Intended to Effect
the Merger with Bell Atlantic, Docket No. 96-388 (Feb. 6, 1997); Bangor
Hydro-Electric Company and Stonington and Deer Isle Power Company, Joint
Application to Merge Property, Franchises and Permits and for Authority to
Discontinue Service, Docket No. 87-109, Order Approving Stipulation and Merger
(Nov. 10, 1987); and Greenville, Millinocket and Skowhegan Water Company, Joint
Application to Sell Utility Property to Wanakah Water Company and to Discontinue
Service, Docket No. 92-250, Order Approving Stipulation (Dec. 15, 1992). Thus,
the merger should be approved if the total benefits flowing from the merger are
equal to or greater than the detriments or risks resulting from the transaction
for both ratepayers and shareholders. See Bell Atlantic at 8. The burden of
proof is on the applicant to make this showing. 35-A M.R.S.A. 708(2) (no
reorganization may be approved unless it is established by the applicant that
the reorganization is consistent with the interests of ratepayers and
investors).
Given these standards, we must review the evidence presented by the
petitioners and the other parties and determine whether the benefits of the
merger put forth by the petitioners are at least equal to any likely risks, to
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ORDER -6- Docket No. 2000-322
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ensure no harm to ratepayers and shareholders. Furthermore, section 708 provides
that if we grant approval, we shall impose such conditions as "are necessary to
protect the interests of ratepayers." Thus, in weighing the risks, it is
appropriate for us to consider the mitigating effects of any such conditions.
Finally, because their right to vote to approve the merger protects
shareholders, we will review the impact of the reorganization only on
ratepayers.
V. ISSUES AND ANALYSIS
Four areas of concern were raised at the technical conferences in this
case: 1) the degree of financial risk associated with the merger and the
potential adverse impacts on Northern of that financial risk; 2) the possibility
that the merger could lead to diminished service for Northern's customers; 3)
the possibility that the merger could result in lower system maintenance
expenditures for Northern; and 4) the level of management services charges
assessed to Northern by the other members of the NiSource corporate family under
the new corporate structure.
A. Financial Risk
--------------
The Wall Street analysts that have evaluated the merger focus on
the fact that it will be financed through issuance of between $3 and $6 billion
in new debt, creating a significantly more leveraged combined company.4 In fact,
Standard & Poor's (S&P) predicted that if the merger is completed, Columbia's
current BBB+ credit ratings could be lowered. See Standard & Poor's Utilities
and Perspectives, June 5, 2000 at 5 ("Unfavorable regulatory events").5
The exact amount of new debt, and thus the degree of financial
leverage for New NiSource, depends on the proportion of existing Columbia
shareholders who opt for cash rather than a share exchange, and, to a lesser
degree, NiSource's ability generate cash by selling off certain assets. The
merger prospectus states that if 30% of outstanding Columbia shares are
exchanged for New NiSource shares, and if NiSource is able to raise $900 million
through the sale of assets, then New NiSource will have a capital structure of
28.5% common equity and 66.3% debt (with the remainder in SAILs, preferred stock
and other hybrid securities). This highly leveraged capital structure is also
the most optimistic outcome anticipated by NiSource.
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4 In its response to Staff Data Request No. 1-17, Northern provided numerous
reports from equity and bond rating agencies regarding the NiSource/Columbia
merger.
5 S&P also seems to hold a dim view of the Ohio Public Utilities Commission's
statement to the SEC that the proposed merger would have no effect on its
ability to protect the interests of Ohio ratepayers, reporting it as an
"unfavorable regulatory event." Id.
--
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ORDER -7- Docket No. 2000-322
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The worst-case outcome, where no Columbia shares are exchanged for New NiSource
shares and NiSource is unable to sell any of its assets, results in a capital
structure of approximately 11.3% common equity and 83.9% debt (with the
remainder in SAILs, preferred stock and other hybrid securities).
At the technical conference, Northern asserted that the
worst-case outcome was unlikely and that it expected that at least 30% of
Columbia shares would be exchanged for NiSource stock. Mr. Maassel, on behalf of
Northern, testified that a large portion of the existing NiSource and Columbia
shares are held by institutional investors and that a number of those investors
have indicated a preference for NiSource stock because that option would allow
deferral of the income taxes which would be payable if they opted for a cash
payment.
High levels of financial leverage raise two concerns. First, as
indicated by S&P, high levels of debt will likely lead to lower bond ratings
and, by extension, higher borrowing costs and/or difficulties in accessing
capital markets. High financial leverage can also result in weaker cash flow,
lower levels of interest coverage and, a reduced capacity to withstand
unforeseen contingencies. Offsetting this, NiSource maintains that it will be
able to achieve operating cost savings and revenue enhancements of $98 million
in the first full year after the merger, rising to $185 million in the fifth
year. If for any reason these savings are not obtained, NiSource could face
additional financial stress.
Furthermore, we note that although Mr. Maassel testified that a
number of Columbia's institutional investors would opt for NiSource stock even
if the price dropped below $16.50, he could not predict how far the price would
have to drop before significant numbers of investors switched to opting for the
cash payment. Undoubtedly, there is some price at which investors' interest in
NiSource stock would drop below the 10% threshold. Consequently, Mr. Maassel's
observation does not ensure that the worst-case scenario would not occur.
One possible consequence for a highly leveraged, financially
stressed holding company could be increased pressure to reduce the capital and
operating budgets of Northern (as well as other utility subsidiaries) below
reasonable levels, resulting in inadequate service. While we recognize that such
problems represent risks, rather than certainties, we must consider whether it
is necessary to require certain conditions to protect Northern's Maine
customers.
While we might simply approve this reorganization subject to the
requirement that NiSource maintain a minimum equity level of 28.5% at the
consolidated parent level to ensure at least that degree of financial security,
we recognize that this would be impractical given the complexities it would
present for this transaction. The Company asserts that such a condition
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ORDER -8- Docket No. 2000-322
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would be "a deal breaker" in that the SEC might not look favorably on this
contingency. Northern also argued that such a condition could exceed our
regulatory jurisdiction. Moreover, while it is not a certainty, Northern has
represented that it expects the SEC to impose substantially the same requirement
as part of its own approval process. Finally, Mr. Maassel has testified that
NiSource would not pay any common dividends if its common equity ratio falls
below 28.5%.
Q. How critical is your ability to find one to 200 million
dollars in revenue enhancements and cost savings to get back
down to -- to get up to a 30% equity level?
A. To get to the equity, I don't think that it's particularly
critical. The commitment that we have made is that we will
be there and will make that to the SEC, we've made it to the
rating agencies. There is no doubt we're going to have to be
at 30%. So, what you're asking me is given my choice between
paying a dividend to the shareholder and getting to 30%
equity ratio, I have no choice. We've got to get to the 30%
equity ratio. To the extent we fall short, then, on getting
the synergies, it comes out of the shareholder pocket.
Tr. A at 103-104.
OPA urged us to carefully review the need for financial
conditions and deferred to our Staff's proposed conditions.
In summary, we have two concerns. The first is that at best, New
NiSource will be a heavily leveraged company that could be forced to impose
higher costs on its operating subsidiaries, perhaps forcing them to provide
lower quality of service to their customers. The second is that the degree of
leverage would become extremely high if few or no Columbia shareholders opt for
NiSource shares in lieu of cash, which will depend largely on the price of
NiSource stock shortly before the merger is finalized. While NiSource may well
be able to attain its best-case common equity ratio at closing, there is no
certainty that it will be able to do so. Consequently, we conclude that it is
necessary to impose conditions that are adequate to protect Maine ratepayers
from any adverse effects of high financial leverage at the parent level.
These conditions are as follows:
1. If the new parent corporation's bond rating drops below
investment grade, the Commission may open an investigation to determine whether
it is necessary to modify Northern's capital structure, to restrict dividends,
or to take any other steps that it deems are
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ORDER -9- Docket No. 2000-322
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warranted to protect Northern and its ratepayers from adverse financial or
operational effects of the NiSource/Columbia merger;6
2. Northern is required to maintain a capital structure that
includes a minimum common equity component of 40% (including short-term debt,
current maturities of long-term debt, and capital leases). Common equity shall
be defined as reflected in the PUC annual report, and compliance will be
determined by the lesser of the average common equity ratio for the year or the
common equity ratio at fiscal year end. This requirement shall remain in effect
for five years from the date the merger is consummated unless modified by order
of the Commission;
3. In lieu of prescribed restrictions on Northern's dividend
policy, we require Northern to notify the Commission within 30 days if it pays a
dividend to the Public Utility Holding Company (NiSource) or to any other
affiliate that is more than 100% of income available for common dividends,
calculated on a 2-year rolling average basis beginning with the first quarter
following the closing of the merger. This notice should inform the Commission of
Northern's financial condition and provide justification for the dividend
payment. The Commission reserves the right in the future, should financial
circumstances warrant, to impose limitations on the dividend policy of Northern,
the regulated local distribution company;
4. In recognition of the fact that Northern and Bay State Gas
Company (which wholly owns Northern) function as an integrated borrowing unit
and to protect Northern against adverse impacts of this reorganization, the
Commission may impute a bond rating to Northern equivalent to Bay State Gas
Company's current Standard & Poors (S&P) bond rating (which is A) in any future
rate case or other investigation for Northern, unless the Commission determines
that the change in bond rating does not result from the merger.7 This provision
shall remain in effect for five years from the date the merger is consummated
unless modified by order of the Commission; and
5. Northern shall provide the Commission with copies of any
filings to the Securities and Exchange Commission (SEC) made by or related to
Northern, and any waiver requests made by NiSource or Bay State Gas Company.
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6 We reject Northern's suggestion to modify this provision to require the bond
rating to drop below investment grade for a period of six months because it is
unnecessarily restrictive. Moreover, ratings changes by their nature lag the
course of events. Finally, a drop in bond rating provides a precondition for
regulatory action but does not compel it. We will use our discretion to
determine when action is warranted.
7 The utility has the burden of proof on this point.
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ORDER -10- Docket No. 2000-322
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Finally, we note that we have not incorporated Northern's
suggested language stipulating that our actions under these conditions will be
"subject to Northern's substantive and procedural rights under all applicable
provisions of law" because nothing we would (or could) do by this Order would
have the effect of foreclosing Northern from pursuing its lawful rights.
B. State Regulatory Issues
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1. Corporate Structure
-------------------
Two years ago, we approved a reorganization for Northern that
involved the merger of Northern's corporate parent, Bay State Gas Company, with
NIPSCO Industries, Inc. (NIPSCO).8 Northern Utilities, Inc., Request for
Approval of Reorganization - Merger with NIPSCO Industries, Docket No. 98-216,
Order Approving Stipulation and Merger (June 12, 1998). We approved alternate
merger plans, one in which Northern would exist as a direct subsidiary of NIPSCO
and one in which both Bay State and Northern would be merged into NIPSCO's
largest public utility subsidiary, Northern Indiana, to operate as separate
divisions.9
When the instant reorganization petition was filed, the
Commission learned that Northern had remained a subsidiary of Bay State, and had
not been reorganized as a direct subsidiary of NiSource. Bay State exists
directly under NiSource in the corporate structure. Thus, Northern has two
layers above it in the corporate structure, rather than one as was originally
proposed by Northern and approved by us in Docket No. 98-216.
This circumstance causes two concerns. First, Northern, Bay
State, and NiSource did not carry out the reorganization that was represented to
us and which we approved, nor did they seek modification of our Order to allow
for the current structure. This constitutes a failure both to comply with our
Order and to bring their proposed modification before us. We cannot simply
overlook failures by public utilities to comply with Maine law. It is incumbent
upon us to enforce our orders and to uphold the statutory requirements for
utilities. Chapter 15 of Title 35-A, the laws governing our regulation of public
utilities, establishes that acts, omissions, and failures of public utilities to
------------------------
8 NIPSCO stands for Northern Indiana Public Service Company. NIPSCO Industries,
Inc. was an Indiana corporation owning all of the common stock of several
regulated and unregulated subsidiaries, exempt from most provisions of the
Public Utility Holding Company Act of 1935 as amended. This corporate family is
now called NiSource.
9 Northern Indiana was a public utility operating company supplying natural gas
and electric energy to the public.
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ORDER -11- Docket No. 2000-322
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comply with lawful requirements or orders of the commission are subject to civil
penalties. We find that violations have occurred but reserve the question of
what sanction is warranted pending further review of the matter.
We direct our Staff to present the range of possible penalties
that we may impose and to recommend an appropriate penalty for the Company for
these actions.
Second, because we did not consider the present corporate
structure in the prior reorganization docket, we have not determined whether it
is consistent with the interests of Northern's ratepayers and investors, as
required by statute. We are concerned that the layered corporate structure may
unreasonably increase the number of management service charges that are levied
upon Northern. We are also concerned that the more complicated corporate
structure may limit our ability to effectively assess and limit costs passed
down to Northern from multiple parents, especially where those parents are not
within our regulatory jurisdiction.
The Company states that the reason Northern was not established
as a separate subsidiary of NiSource was that the Company subsequently
discovered that there would be adverse tax consequences of doing so. It
determined that the benefits of setting up Northern as originally proposed do
not outweigh the adverse tax impacts. The Company argues that this structure
retains the historic corporate relationship between Northern and Bay State and
reflects their combined operational and managerial natures. In that regard, they
argue that keeping Northern in its position as a subsidiary of Bay State is in
the interests of Northern's ratepayers and shareholders.
Our review of this aspect of the NiSource family corporate
structure has been limited by Northern's request for an expeditious disposition
of the present reorganization involving primarily the NiSource/Columbia merger.
The Company's failure to report to us that it did not reorganize as it had
proposed and the reasons for changing its approach is troublesome. It is
difficult to make a final determination about the current corporate structure in
the context of an expeditious review of this reorganization. However, while we
might prefer to reserve judgment on the matter to a later time when we have had
an opportunity to gather better information on it, the statute directs that
proposed reorganizations be reviewed and approved to be effective. Thus, we will
address the matter herein.
On the basis of the limited record before us, this corporate
structure does not appear inconsistent with the interests of ratepayers or
shareholders. In fact, Northern's management and operation is, and has long
been, integrally connected with that of Bay State. The primary difference is
that Northern now has a second corporate layer above it. We are concerned that
corporate layering could lead to excessive management service charges upon the
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ORDER -12- Docket No. 2000-322
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utility subsidiary. We believe, however, that we can establish protective
conditions in this order that will work to protect ratepayers against the
possible adverse consequences of this layered corporate structure. These
conditions involve our authority to review and disallow management service fees
if we determine them to be unreasonable, as more fully explained in the next
section of this order. Further, Northern has indicated that it will file revised
management service contracts for our review and approval within the next year.
Northern also asserts that all management service transactions to date are in
accordance with Chapter 820 of our rules because services between affiliates are
billed at cost.10
Finally, our approval of the current corporate structure is
explicitly subject to later revision if upon further information and review we
determine that it is warranted. We reserve our authority to require Northern to
conform to the corporate structure that we approved in Docket No. 98-216 should
we determine it to be warranted.
2. Management Service Contracts and Charges
----------------------------------------
We impose conditions on our approval of the current structure
because this structure could obscure or obstruct our review of the
reasonableness of management service charges between Northern and its
affiliates.
Specifically, we require that the Company request acknowledgement
in any SEC order approving the NiSource/Columbia merger that the Maine
Commission intends to retain the right to review, and to disallow, as warranted,
any service charges rendered by or to Northern in the NiSource corporate system
that may be subject to recovery in rates. The Company has agreed to make this
request of the SEC and has agreed to waive any claim or defense that the
Commission's jurisdiction over affiliate transactions (as defined by Maine law)
and the Commission's rate-making authority, as it relates to cost allocations
among affiliates, is preempted by PUHCA or any other federal statute. These are
protections that we have previously ordered in reorganizations involving
multi-jurisdictional corporate structures. See CMP Group, Inc. et al, Request
for Approval of Affiliated Interest Transactions, Docket No. 99-411, Order (Jan.
4, 2000) (Energy East) at 26-27.
Moreover, Northern and its affiliates acknowledge and agree that
any future management service contracts between Northern and any affiliate must
comply with all applicable provisions of law, including Chapter 820 of the
Commission's regulations.
------------------------
10 We have not had sufficient opportunity to confirm Northern's assertion here
and will reserve that judgment for a future case.
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ORDER -13- Docket No. 2000-322
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With these conditions, we see no reason at this time to require
that Northern be established as a separate subsidiary of NiSource as was
initially proposed and approved in Docket No. 98-216.
3. Access to Books and Records
---------------------------
As with similar reorganizations we have approved, we condition
our approval of this reorganization on having access to the books and records of
NiSource and all of its affiliates whose activities relate to, or in any way
impact, the operations, costs or revenues of Northern in Maine, to the same
extent as the Commission has authority to obtain such information from a utility
pursuant to 35-A M.R.S.A. ss. 112. See Energy East at 26-27. See also, Bell
Atlantic Maine, Notice of Merger with GTE Corp., Docket No. 98-808, (Dec. 2,
1999). The determination of whether the affiliates' activities relate to or in
anyway impact the operation, costs or revenues of Northern will be in the sole
discretion of the Commission. This condition will allow us to monitor activities
and to determine whether any improper affiliate transactions or other abuses are
occurring.
The NiSource affiliates must provide this access in a reasonable
and timely manner. At the Commission's request, this access must be available in
Maine. Detailed information pertaining to any proposed transaction impacting
Northern must be available to us.
4. Operational Safeguards
----------------------
The system operation and maintenance and service quality of a
public utility can suffer when cash that would otherwise be dedicated to these
aspects of the business is diverted to a parent or when capital is depleted. To
hedge against such potential adverse impacts that could result from this merger,
we require the following maintenance and service reporting requirements as
conditions of our approval.
a. System Maintenance
------------------
System maintenance is integral to the provision of safe and
adequate service. Commissions sometimes order utilities to maintain a particular
annual system maintenance spending level in an attempt to ensure that adequate
maintenance will continue into the future. We have rejected spending targets and
recognize that such an approach can create a perverse incentive for the utility
that is ordered to spend those dollars within the allotted time. See Energy East
at 25.
We do not wish to see ratepayer funds needlessly spent so
will not impose such a condition on Northern. Instead, we will require Northern
to work with our Gas Safety Inspector to assess the condition of certain
vulnerable parts of its system, and to develop and implement a reasonable
program for needed replacements.
<PAGE>
ORDER -14- Docket No. 2000-322
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In particular, we require Northern to evaluate the condition
of its bare steel and small diameter (under 8 inches) cast iron pipes. Bare
steel pipe and small diameter cast iron pipes are components of natural gas
pipeline systems that are susceptible to deterioration over time. These
materials, installed years ago, prior to Northern's ownership and during the age
of manufactured gas systems, generally are targeted for replacement with newer,
more recommended materials. For the last several years, Northern has replaced
these materials when necessary or convenient. We wish to determine whether that
program is sufficient; it would be wise to assess these facilities to determine
their condition.
To ensure that this program does not suffer from lack of
attention or diverted funds, we require this evaluation as a condition of this
reorganization. Following the analysis, Northern shall work with our Safety
Inspector to develop a reasonable program to replace bare steel and small
diameter (under 8 inches) cast iron facilities as safety and prudence dictate.
Disagreements with respect to the reasonable terms of such a replacement and
maintenance program and of reporting requirements shall be presented to the
Commission for resolution.11
b. Customer Service Quality
------------------------
Customer service quality can also suffer when utility funds
are short or when management's interest in this aspect of a utility subsidiary
is diluted after a merger. In Bell Atlantic-Maine Notice of Merger with GTE
Corporation, Docket-No. 98-808, Order on Reconsideration (Aug. 25, 1999) (noting
decline in quality of service and management attention), we observed that
service quality may deteriorate when a Maine utility becomes part of a larger,
multi-state firm. Such a decline is unacceptable and we will guard against it.
In other reorganizations, we have implemented service
standards and related penalties to assure that customer service quality is
maintained. See Energy East at 13, 24-25. In Energy East, we extended service
quality benchmarks post-merger. Here, we have no pre-developed service quality
parameters. The short time frame of this case does not allow their development.
We will, then, require Northern to provide to us all
historic records in its possession for the service quality criteria listed
below, and to report to us on these criteria annually thereafter beginning with
------------------------
11 We have incorporated some of Northern's comments filed June 14, 2000 on this
issue but we decline to adopt them in full.
<PAGE>
ORDER -15- Docket No. 2000-322
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2000.12 We will act as necessary should we find that service quality is
inadequate.
Northern shall report annually to the Commission, on a
percentage basis, for the Maine division, the following measures as overall
indicators of service quality:
1) "Service appointments completed on the scheduled day," indicates
how often Northern has made a service or meter call on the same day as the
appointment was scheduled with the customer.
2) "PUC complaints per 1000 customers" indicates the number of
Northern Maine division customer complaint cases per 1000 residential customers
that have been filed with the Commission.
3) "Lost time incidents per 100 employees," a standard OSHA safety
measure, indicates the number of workplace accidents that resulted in lost work
time per 100 employees.
4) "One hour responses to odor calls" indicates how often Northern has
responded within one hour to a telephone call to the Company reporting a gas
leak or odor.13
5) "Main and service damage not the fault of third parties" indicates
how often mains and services are damaged by a third party as a result of
incorrect locating by Northern or its agents, rather than due to the fault of
the third party (such as when an excavator damages correctly-marked facilities
or fails to notify Dig Safe before commencing work).
6) "Actual on-cycle meter reads" indicates how often Northern records
the actual reading of customer meters within the scheduled grouping of meters,
instead of estimating customers' consumption.
7) "Telephone response time for billing and service calls" indicates
how often the Company answers customer calls for billing and service-related
requests within 30 seconds after the call enters the queue.14
------------------------
12 The Company testified that it has approximately two to three years of data
on most of these service quality criteria.
13 This should be expressed as a percentage using as a denominator the total
number of calls reporting a gas odor or leak annually.
14 Due to consolidated call center operations, measures 7 and 8 will be
reported on a Company-wide basis (includes Northern's Maine and New Hampshire
Divisions as well as Bay State Gas Company).
<PAGE>
ORDER -16- Docket No. 2000-322
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8) "Telephone response time for emergency calls" indicates how often
the Company answers customer calls into the emergency leak line within 30
seconds after the call enters the queue.
Any change in reporting criteria must be approved by the
Director of the Consumer Assistance Division, provided that any issues that
cannot be resolved will be presented to the Commission for resolution. At the
end of five years, Northern may petition the Commission to remove this service
criteria reporting requirement.
We recognize that this reporting requirement does not
provide assurance that service to Northern's customers will be adequate. We do
not have an adequate record in this case to determine whether these particular
criteria provide sufficient information to comprehensively monitor Northern's
service quality. Further, we are aware that Northern has been experiencing
billing and call center service problems in recent months.
Consequently, within one year of the date of this order we
will determine whether to open an investigation to review the adequacy of
Northern's service quality reporting criteria and to determine whether we should
adopt any mechanisms, programs, standards, or penalties to ensure that Northern
provides adequate service quality to its customers. Consistent with our general
authority, in the event that Northern's service quality is inadequate, we will
order an appropriate remedy, one that could include financial directives or
instituting a performance based regulatory mechanism.
5. Exemption
---------
Northern requested that we exempt PNGTS, also an affiliate, from
the review and approval requirements of Maine law. While we do not have
authority to waive a statutory requirement, the statute allows us to exempt
reorganizations by rule or order. We have reviewed the transaction for its
impact on the local distribution utility subject to regulation in Maine and have
conditioned our approval to protect the interests of ratepayers. Because the
NiSource/Columbia transaction is also subject to the review and approval of
FERC, the agency with direct jurisdiction over PNGTS as an interstate facility,
we exempt PNGTS from state review in this instance.
Finally, to the extent 35-A M.R.S.A. ss.ss.1101(3) and 1103(1)
are applicable to this transaction, we give our approval.
<PAGE>
ORDER -17- Docket No. 2000-322
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Accordingly, we
O R D E R
1. That Northern Utilities, Inc.'s proposed reorganization involving
the merger of NiSource, Inc. and Columbia Energy Group is approved pursuant to
35-A M.R.S.A. ss.ss.708, 1101(3), and 1103(1), subject to the financial and
operational conditions established in this Order;
2. That Staff shall recommend a penalty for Northern for its failure
to comply with our Order in Docket No. 98-216 dated June 12, 1998 or to propose
a modification of that Order, for our consideration; and
3. That within one year, we will determine whether to open an
investigation on the adequacy of Northern's customer service monitoring criteria
and on what measures or programs we may adopt to ensure that the service
Northern provides its customers is adequate.
Dated at Augusta, Maine, this 30th day of June, 2000.
BY ORDER OF THE COMMISSION
/s/ Dennis L. Keschl
-----------------------------------------
Dennis L. Keschl
Administrative Director
COMMISSIONERS VOTING FOR: Welch
Nugent
Diamond
<PAGE>
ORDER -18- Docket No. 2000-322
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NOTICE OF RIGHTS TO REVIEW OR APPEAL
5 M.R.S.A. ss. 9061 requires the Public Utilities Commission to give
each party to an adjudicatory proceeding written notice of the party's rights to
review or appeal of its decision made at the conclusion of the adjudicatory
proceeding. The methods of review or appeal of PUC decisions at the conclusion
of an adjudicatory proceeding are as follows:
1. Reconsideration of the Commission's Order may be requested under
---------------
Section 1004 of the Commission's Rules of Practice and Procedure
(65-407 C.M.R.110) within 20 days of the date of the Order by filing a
petition with the Commission stating the grounds upon which
reconsideration is sought.
2. Appeal of a final decision of the Commission may be taken to the
--------------------------
Law Court by filing, within 30 days of the date of the Order, a Notice
of Appeal with the Administrative Director of the Commission, pursuant
to 35-A M.R.S.A. ss. 1320(1)-(4) and the Maine Rules of Civil
Procedure, Rule 73, et seq.
3. Additional court review of constitutional issues or issues
-----------------------
involving the justness or reasonableness of rates may be had by the
filing of an appeal with the Law Court, pursuant to 35-A M.R.S.A.ss.
1320(5).
Note: The attachment of this Notice to a document does not indicate
---- the Commission's view that the particular document may be subject to
review or appeal. Similarly, the failure of the Commission to attach a
copy of this Notice to a document does not indicate the Commission's
view that the document is not subject to review or appeal.
